By This Logic Supply Of Sniper Riffles From USA To Pakistan Will Have To Be Permitted By RBI: Madhya Pradesh HC Upholds Restrictions On Merchanting Trade Transactions As Per Import/ Export Policy

The order was passed recently with respect to MTT contract entered by the Petitioner for supply of PPE Kits from China to USA.

The Petitioner had submitted that prohibition on export of PPE kit amid the Coronavirus had imposed an automatic prohibition on execution of his MTT contract.

He had submitted that under the MMT contract, the goods in question shall neither enter, nor exit, India and therefore prohibition on the same is unwarranted and amounts to interreference with Right to Trade under Article 19(1)(g) of the Constitution.

Declining his plea for supply of PPE kits from China to US however, the Bench comprising of Justice SC Sharma and Justice Shailendra Shukla held,

"Even though the goods are not coming to India at any point of time under the Merchanting Trade Transactions, only those goods which are permitted for export or for import are eligible for Merchanting Trade Transactions. The circular issued by the Reserve Bank of India is in no way violating the petitioner's right guaranteed under Article 19(1)(g) of the Constitution of India."

Background

Under MTT, an Indian Citizen facilitates the export of any goods or material from a Company or individual of an export country (other than India) and then import / supply of the said goods to a Company in another country, which is also other than India. Thus, in short their contention is that goods are neither manufactured in India nor imported to India at any point of time, however, the profit comes to India in various currencies.

The Petitioner had executed a MTT contract for supply of PPE Kits from China to USA.

He was aggrieved by Clause 2(iii) contained in Merchanting Trade Transactions regulations dated 23/01/2020. This clause permits MTT transactions of goods only which are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India as on the date of shipment.

Thus, when the Central Government imposed a ban on export of PPE Kits on account of shortage in the country, there was an automatic prohibition on the MTT contract executed by the Petitioner.

Petitioner's Arguments

Seeking permission o supply PPE kits from China to USA, the Petitioner had submitted:

• Restrictions imposed by the Director General of Foreign Trade does not come in way of the petitioner as the petitioner on account of MTT Contract which has been executed with a buyer in America is exporting goods from China to America. There is no export out of India.
• MTT contracts in PPE products such as the present one does not affect the stock or availability of PPE products within India and it does not fall within the prohibition on export of PPE products imposed by the Respondents.

It was also argued that the prohibition imposed by RBI is a total prohibition which violates petitioner's fundamental rights guaranteed under Section 19(1)(g) and 21 of the Constitution of India and therefore, Clause 2(iii) deserves to be struck down by this Court.

Reliance on Internet & Mobile Association of India v. RBI, 2020 SCC OnLine SC 275, whereby the Top Court quashed the total prohibition of virtual currencies.

Nevertheless, the Petitioner submitted that the latest briefings of the Central Government fairly informs that adequate quantity of PPE products is presently available across India and therefore, in light of the fact that the object has been substantially achieved, further restrictions on any trade activities relating to PPE would be disproportionate in nature for want of requirements.

RBI's Arguments

The RBI had argued that in times of global shortage, developed countries have far greater financial clout than developing countries to draw scarce medical supplies to themselves, since they can afford to pay higher prices for them. Thus, prohibited export of lifesaving equipment such as Ventilators, PPE kits and Gloves from India, is in larger public interest.

It was further submitted:

• It will be wholly inappropriate and contrary to the national interest for Union of India to permit India's foreign exchange reserve to be engaged in enabling Indian entities, through Merchanting Trade Transactions, to preferentially divert lifesaving supplies to overseas countries rather than to India, merely for higher profits
• Merchanting trade transactions are very closely analogous to, and have all the trappings of, export as well as import except the fact that the goods are physically not located in India.
• It is well settled that the Courts do not normally interfere with State policy, particularly in financial matters, unless fraud or lack of bona-fides is alleged and established. In the present case, the petitioner has neither pleaded, nor proved either of such grounds.

Findings

The Court observed that the clause restricting MTT transactions of goods which are not permitted to be imported / exported under the prevailing Foreign Trade Policy is in existence since the year 2000.

It held that this clause cannot be struck down because, as submitted by RBI, MTT are analogous to import/ export. It observed,

"The Merchanting Trade Transactions involves foreign exchange and issuance of a Letter of Credit in India from a banker as well as Reserve Bank of India through its authorised dealer in foreign exchange. The banker as well as Reserve Bank of India are located in India and therefore, there is a clear nexus between the transactions and the involvement of foreign exchange reserves of Reserve Bank of India."

So far as the argument on 'total prohibition' put forth by the Petitioner is concerned, the Court observed that the Supreme Court's verdict in the cryptocurrency case is "distinguishable on facts."

"There is no absolute ban imposed by Reserve Bank of India in respect of the Merchanting Trade Transaction contracts," the Bench said.

Reliance was placed on Krishna Kumar v. Municipal Corporation, (2005) 8 SCC 612, whereby the Supreme Court had held that prohibition with respect to the exercise of a right referable only in a particular area of activity, or relative to only particular matters, does not amount to a total prohibition but only a restriction.

"In the present case the petitioner is free to import (but not export) PPE kits into India. The petitioner is also free to carry on Merchanting Trade Transactions in respect of all other goods where the export and import of which is permitted under the country's Foreign Trade policy," the Court illustrated.

The Court then proceeded to observe that the Foreign Trade Policy is framed by Government of India in exercise of powers conferred under the Foreign Trade (Development & Regulation) Act, 1992.

It held that the same is purely a "policy decision" taken by Government of India in larger public interest as there is an acute shortage of PPE Kits, and the Courts normally do not interfere with the State policy, particularly in financial matters unless fraud or lack of bona-fides is alleged and established.

"In our country keeping in view the COVID-19 Pandemic large number of frontline health workers and Doctors have succumbed to Corona Virus on account of inadequate Personal Protective Equipment Kits. The Ventilators are also in short supply and therefore, the Government of India is the best judge either to ban export of the aforesaid items or to place the aforesaid items under the restricted categories," the Court remarked.

The Court further remarked that if the Petitioner's analogy is accepted and prevailing FTP is not made applicable to MTT, then by that logic, RBI will have to grant permission for MTT in respect of "Sniper Riffles".

"The petitioner on the basis of reasoning assigned by Shri Malhotra, even though he is procuring Sniper Riffles from United States of America and is supplying to Pakistan will have to be granted permission by Reserve Bank of India and Government of India and therefore, the analogy and the arguments canvased by Shri Malhotra are illogical and does not have support of statutory provisions," the Bench explained.

Case Title: Akshay N. Patel v. RBI & Anr.

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