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PETITIONER: M.G. WAGH & ORS.

       Vs.

RESPONDENT: JAY ENGINEERING WORKS LTD.

DATE OF JUDGMENT13/01/1987

BENCH: THAKKAR, M.P. (J) BENCH: THAKKAR, M.P. (J) SINGH, K.N. (J)

CITATION:  1987 AIR  670            1987 SCR  (1) 798  1987 SCC  (1) 542        JT 1987 (1)   135  1987 SCALE  (1)53

ACT:     Foreign Exchange Regulation Act of 1947, sections 10 and 12  (2)--Scope and Interpretation of--Whether section  12(2) designed to prevent wholesale or partial evasion of repatri- ation  of  earnings from export of goods  covers  only  sale proceeds of goods exported ’for sale’ or to sale proceeds of goods  exported  ’on sale’in the context of  sale  completed before export--Words and phrases--Meaning of the  expression ’No  person  entitled  to self or procure the  sale  of  the goods.’

HEADNOTE:     Section  12(2) of the Foreign Exchange  Regulation  Act, 1947  which  is  designed to prevent  wholesale  or  partial evasion of repatriation of earnings from export of goods  is to the effect that ’where any expert of goods has been  made to  which a notification under sub-section (1)  applies,  no person  entitled  to sell, or procure the sale of  the  said goods  shall,  except  with the permission  of  the  Reserve Bank  .........  ". In R. Venkata Subbu & Ors. v. The Direc- torate of Enforcement, Enforcement Directorate, New Delhi  & Anr.,  ILR Vol 3 Mad 1968 p. 18, the Madras High Court  held that  section 12(2) covers not only sale proceeds  of  goods exported  "for  sale" but also "on sale" in the  context  of sales completed before export, while the Calcutta High Court in  the judgment under appeal held that it covers sale  pro- ceeds  of  goods exported "for sale" only. In  view  of  the conflict of the opinions, the present appeal is by  certifi- cate.     Allowing  the  appeal and remitting the matters  to  the Competent Authority, the Court,     HELD: 1.1 The expression ’no person entitled to sell  or procure  the sale of the said goods’ cannot be  so  narrowly construed  (as  referable to goods which have  already  been exported),  so  as to govern the scope of section  12(2)  in such a truncated manner which renders it virtually  impotent in  so  far as transactions of ’exports on  sale’  are  con- cerned.  Too much is being read into too little for no  more laudable  a  purpose  than to paralyze  the  provision.  The expression does not necessarily induce one to the conclusion that the legislature wanted to prevent abuse in the  context

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of ’export for sale’ only. The expression is mean- 982 ingful,  relevant, and can co-exist in the context of  abuse arising  from ’exports on sale’ from completed  transactions as well. [985H;986B]     1.2 The said expression has been employed by the  Legis- lature merely in order to indentify the accountable  persons and is merely descriptive in that sense. The said expression does  not restrict the operation of the Act to  the  persons who  have not yet sold the goods. One would have to  take  a quantum  jump in order to conclude that persons referred  to in  section 12(2) are the persons who have not yet sold  the goods  but are entitled to sell the goods in  future  merely because the expression ’entitled to sell’ has been employed. The persons who have exported the goods to a foreign  buyer, are not sought to be excluded from the operation of  section 12(2).  Clause  (a) in terms adverts to the  sale  of  goods being  delayed. Clause (b) of section 12(2) adverts to  pay- ment for the goods, otherwise than in the prescribed manner, and also envisions a case where the payment does not  repre- sent the full amount payable by the foreign buyer in respect of  the goods. Clauses (a) and (b) are compatible both  with transactions  of export on sale as also to  transactions  of export  for sale. They are compatible with all  transactions pertaining  to both types of sales. There is no  warrant  to assume  that the Legislature has not made any  provision  in order  to ensure that the full amount of the sale  price  is repatriated  and  foreign exchange earned therefrom  is  not lost to the Nation regardless of whether it is in respect of ’export on sale’ or ’export for sale’. [986F. 987A-C]     1.3  The avowed and the evident object of section 12  is to  ensure  that the Nation does not lose  foreign  exchange which  is very much essential for the economic  survival  of the Nation. The exporter cannot be allowed to syphon away  a part of the foreign exchange or to deprive the Nation of the foreign exchange earned by the exports. Such is the philoso- phy  of  section 12. To take the view  that  the  legitimate National  interest in the sphere of preservation of  foreign exchange  has relevance only in the context of  transactions of  exports  for sales and that  the  Legislature  exhibited total  unconcern  for  the foreign exchange  earned  in  the context  of transactions of completed sales  or  consignment sales, is to attribute to the Legislature irrationality. And to  impute to the Legislature that it did not know  its  job inasmuch as it has tackled the problem only partially  with- out  any  rational basis for excluding the  transactions  of completed  sales from the purview of the  legislation  which would  substantially  erode  or defeat the  purpose  of  the legislation.  When it is equally possible to take  the  view which would be conducive to the conclusion that there is  no lacuna in the legislation, it would be unreasonable to  take the view that the Legislature has left a lacuna eitber by 983 negligence  or  by lack of foresight or because it  did  not know its job. [987B-F]     2.1 Section 10 has no application in respect of  foreign exchange earnings related to export of goods. Section 10  Is designed  primarily to impose an obligation on  persons  who have  a right to receive any foreign exchange from a  person resident outside India. This section has nothing to do  with the  foreign exchange earned by export of goods. The  entire matter  pertaining  to payments for exported goods  and  the foreign  exchange earnings arising therefrom has been  dealt with  in  section  12 which is a complete  Code  in  itself. Section 12 has been very carefully designed. Every  possible

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situation has been conceived of and appropriate prophylactic measures to ensure the preservation of foreign exchange  and prevention  of syphoning off the foreign exchange, which  is very much essential to the economic life of the Nation  have been  embedded  therein. The entire subject of  foreign  ex- change  earnings relatable to export of goods has been  spe- cifically  and specially dealt with in section 12. It  would therefore  be  futile to search for an alibi in  section  10 merely in order to support the plea that section 12 does not take within its fold the foreign exchange earnings relatable to transactions of completed sales. [988A-E]     2.2  On a plain reading of section 10, the  matter  per- taining  to  the foreign exchange earned by exports  in  the context of completed sales will not directly fall within the ambit of it. It will have to be strained beyond the point of endurance in order to accommodate this aspect. Section 10 is akin to a complementary provision which deals with preserva- tion  of foreign exchange which does not fall within a  spe- cific provision like section 12. What is more, if  completed transactions  are excluded from section 12, the  purpose  of the legislation will not be served, because sub-section  (6) of  section 12 which has been designed to ensure  compliance with the provisions made in section 12(1) to section 12  (5) cannot  be availed of. In that event, in regard to the  per- sons  who  syphon  off foreign exchange earned  out  of  the transactions in the context of a completed sale or export on sale  they cannot be dealt with under section 12(6)  and  no sanction  to  ensure compliance will be available.  The  Act will  be thus rendered toothless to ensure  compliance  with evasion in the context of a completed sale. There is accord- ingly  no compulsions of law, logic, or philosophy to  adopt such a view. [988F; 9B?A-B]      R. Venkata Subba & Ors. v. The Director of Enforcement, Enforcement  Directorate, New Delhi & Anr., ILR Vol. 3  Mad. 1968 P. 18, approved. 984

JUDGMENT:     CIVIL  APPELLATE  JURISDICTION: Civil Appeal No  797  of 1976.     From  the  Judgment  and Order dated  14.7.1972  of  the Calcutta High Court in Appeal No. 59 of 1971     V.C.  Mahajan, Mrs. Subhadra and C.V. Subba Rao for  the Appellants.     Harish N. Salve, Ravinder Narain, P.K. Ram, D.N.  Mishra and K. Sukumaran for the Respondent. The Judgment of the Court was delivered by     THAKKAR,  J. Whether Section 12(2)1 of Foreign  Exchange Regulation  Act of 1947 (Act) designed to prevent  wholesale or  partial evasion of repatriation of earnings from  export of  goods covers only sale proceeds of goods  exported  "for sale*’ as held by the High Court of Calcutta by the judgment under  appeal,  or to sale proceeds of  goods  exported  "on sale" in the context of-sales completed before export  also, as  held by the Madras High Court2 and as contended  by  the appellants is the problem.   1. "12(2) Where any export of goods has been made to which a  notification  under sub-section (1)  applies,  no  person entitled  to  sell, or procure the sale of  the  said  goods shall, except with the permission of the Reserve Bank, do or refrain  from doing anything or take or refrain from  taking any action which has the effect of securing that-- (a)  the sale of the goods is delayed to an extent which  is

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unreasonable having regard to the ordinary course of  trade, or (b)  payment  for the goods is made otherwise  than  in  the prescribed  manner  or does not represent  the  full  amount payable  by the foreign buyer in respect of the goods,  sub- ject  to  such deductions if any, as may be allowed  by  the Reserve Bank, or is delayed to such extent as aforesaid. Provided that no proceedings in respect of any contravention of  this  sub-section shall be instituted  unless  the  pre- scribed period has expired and payment for the goods  repre- senting  the full amount as aforesaid has not been  made  in the prescribed manner." 2. R. Venkatasubbu and Ors. v. The Director of  Enforcement. Enforcement  Directorate, New Delhi and Anr., ILR Vol.  3MAD 1968 p.18. 985     The  learned  Single Judge of the  Calcutta  High  Court dismissed  a  Writ Petition instituted  by  the  Respondent- Company  and refused to quash two show cause  notices  dated November  5, 1966 issued under Section 12 (2) of the Act  as it  stood at the material time on taking the view  canvassed by  the appellants in this appeal. A Division Bench  of  the High  Court  however  allowed the appeal  preferred  by  the Respondent-Company, reversed the order of the learned Single Judge  dismissing  the Writ Petition, and issued a  Writ  of Mandamus commanding the competent authorities under the  Act (appellants  herein)  to forbear from giving effect  to  the said  notices and from commencing any  proceedings  pursuant thereto.  The competent authorities under the Act  have  ap- proached  this Court by way of the present appeal by a  cer- tificate  under  Article 133 (1)(a) of the  Constitution  of India.  The hub of the argument addressed by the  respondent company,  which found favour with the Calcutta  High  Court, but failed to impress the Madras High Court, is the  expres- sion "no person entitled to sell or procure the sale of  the said  good" employed by the legislature in the opening  part of  Section 12(2) of the Act, which to the  material  extent deserves to be quoted:- "12(2)  Where any export of goods has’been made to  which  a notification under sub-section (1) applies, no person  enti- tled  to sell, or procure the sale of the said goods  shall, except  with the permission of the Reserve Bank, do  or  re- frain from doing anything or take or refrain from taking any action which has the effect of securing that  ...." The argument runs thus: Section 12 (2) of the Foreign Exchange Regulations Act 1942, on  its  plain  terms, applies only  to  "persons"  who  are "entitled  to sell or procure the sale of the  said  goods." The  word "entitled" governs the word "sell" as well as  the expression  "procure the sale of". Further, both  these  ex- pressions  are used with respect to the "said  goods"--which means  the goods which have already been exported. It is  in these premises submitted that Section 12(2) applies only  to such persons who are entitled to sell or procure the sale of goods which have already been exported.     We are not impressed by this submission that the  afore- said expression can be so narrowly construed so as to govern the scope of Section 12 (2) in such a truncated manner which renders it virtually 986 impotent in so far as transactions of "exports on sale"  are concerned.  Too  much is being read into too little  for  no more  laudable a purpose than to paralyze the provision.  It appears  to  us that this expression  does  not  necessarily induce one to the conclusion that the legislature wanted  to

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prevent abuse in the context of exports for sale’ only.  The expression is meaningful, relevant, and can co-exist in  the context  of abuse arising from ’exports on sale’  from  com- pleted  transactions  as  well. The  expression  "no  person entitled to sell, or procure the sale of the said goods"  is merely  descriptive of the person who is  accountable  under the  said  provisions as has been held by  the  Madras  High Court in R. Venkata Subbu’s case, I.L.R. Vol. 3 Madras  1968 Page 18, which has made a correct meaningful, and purposeful approach  with  which  we unhesitatingly  agree.  The  whole purpose is to ’identify’ the accountable persons to  prevent malpractises  and ensure compliance. It is conceivable  that the  exports  might be made in the name of  or  through  the agency  of a person other than the ’owner of goods’  or  the person entitled to sell the goods arising out of an  ’export on  sale. In our view, Anantaraman, C J, who spoke  for  the Madras High Court in Venkatasubbu’s  case (supra) was  right in  taking  the view that the words "no person  entitled  to sell or procure the sale of the goods" are descriptive words which  refer to the person in the capacity of the seller  of the goods or the person entitled to procure the sale of  the goods  after the export of the goods has been made and  that this  expression does not necessarily imply that the  export must  be to a nominee of the consignor at the other  end  in pursuance  to  a contemplated transaction of  sale.  We  are therefore unable to accede to the submission urged on behalf of  the Respondent Company (original Writ  Petitioner)  that Section 12 (2) can apply only to such persons who are  enti- tled to sell or procure the sale of goods which have already been exported for sale and not to the exports made in pursu- ance to sales which have already been effected to a  foreign buyer  before the exports. In our opinion, the said  expres- sion has been employed by the Legislature merely in order to identify  the accountable persons and is merely  descriptive in  that  sense. The said expression does not  restrict  the operation  of the Act to the persons who have not  yet  sold the goods. One would have to take a quantum jump in order to conclude that persons referred to in Section 12 (2) are  the persons who have not yet sold the goods but are entitled  to sell  the  goods  in future merely  because  the  expression ’entitled  to sell’ has been employed. The persons who  have exported the goods to a foreign buyer, in our view, are  not sought to be excluded from the operation of section 12  (2). This  conclusion  is reinforced if clauses (a)  and  (b)  of Section  12(2) are taken into account. Clause (a)  in  terms adverts  to the sale of goods being delayed. Clause  (b)  of Section  12(2) adverts to payment for the  goods,  otherwise than in the 987 prescribed  manner,  and  also envisions a  case  where  the payment  does not represent the full amount payable  by  the foreign  buyer in respect of the goods. Clauses (a) and  (b) are  compatible both with transactions of export on sale  as also to transactions of export for sale. They are compatible with  all  transactions pertaining to both types  of  sales. There  is no warrant to assume that the Legislature has  not made  any provision in order to ensure that the full  amount of the sale price is repatriated and foreign exchange earned therefrom is not lost to the Nation regardless of whether it is  in respect of export on sale’ or ’export for sale’.  The avowed  and  the evident object of Section 12 is  to  ensure that that the Nation does not lose foreign exchange which is very much essential for the economic survival of the Nation. The exporter cannot be allowed to syphon away a part of  the foreign  exchange  or to deprive the Nation of  the  foreign

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exchange  earned by the exports. Such is the  philosophy  of Sec.  12.  To  take the view that  the  legitimate  National interest  in the sphere of preservation of foreign  exchange has relevance only in the context of transactions of exports for sales and that the Legislature exhibited total unconcern for  the foreign exchange earned in the context of  transac- tions  of  completed sales or consignment sales, is  to  at- tribute  to the Legislature irrationality. And to impute  to the Legislature that it did not know its job inasmuch as  it has tackled the problem only partially without any  rational basis for excluding the transactions of completed sales from the  purview  of the legislation which  would  substantially erode  or defeat the purpose of the legislation. When it  is equally  possible to take the view which would be  conducive to  the conclusion that there is no lacuna in  the  legisla- tion,  it  would be unreasonable to take the view  that  the Legislature  has  left a lacuna either by negligence  or  by lack  of  foresight or because it did not know its  job.  In order to escape from the clutches of this answer less  argu- ment  learned counsel for the Respondent  Company  contended that in so far as completed sales are concerned, they  would be  governed  by Section 10 1and that  the  lacuna  argument would 1. "10. Duty of persons entitled to receive foreign exchange etc.--(1)  No person who has a fight to receive any  foreign exchange or to receive from a person resident outside  India a  payment in rupees shall, except with the general or  spe- cial  permission  of the Reserve Bank, do  or  refrain  from doing  anything  or take or refrain from taking  any  action which has the effect of securing- (a)  that  the receipt by him of the whole or part  of  that foreign exchange or payment is delayed, or, (b) that the foreign exchange or payment ceases in whole  or in  part  to be receivable by him.   (2) Where a person has failed to comply with the  require- ments of sub-section(1) in relation to any foreign  exchange or payment in rupees, the Reserve Bank may give to him  such directions  as  appear to be expedient for  the  purpose  of securing  the receipt of the foreign exchange or payment  as the case may be." 988 accordingly  lose significance. It is our firm opinion  that Sec.  10 has no application in respect of  foreign  exchange earnings related to export of goods. Section 10 is  designed primarily  to  impose an obligation on persons  who  have  a right to receive any foreign exchange from a person resident outside  India.  This  section has nothing to  do  with  the foreign  exchange  earned  by export of  goods.  The  entire matter  pertaining  to payments for exported goods  and  the foreign  exchange earnings arising therefrom in our  consid- ered  opinion, has been dealt with in Section 12 which is  a complete Code in itself. It would be an irrational  approach to  make to hold that while Section 12 deals  with  payments for  exported  goods and foreign exchange  earnings  arising therefrom  in all situations, it excludes from  its  purview one particular situation namely that arising in the  context of failure to repatriate the sale proceeds of goods exported pursuant  to  a  completed transaction  of  sale.  Evidently Section 12 has been very carefully designed. Every  possible situation has been conceived of and appropriate prophylactic measures to ensure the preservation of foreign exchange  and prevention  of syphoning off the foreign exchange, which  is very much essential to the economic life of the Nation, have been embeded therein. The entire subject of foreign exchange earnings relatable to export of goods has been  specifically

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and  specially dealt with in Section 12. It would  therefore be  futile  to search for an alibi in Section 10  merely  in order  to  support the plea that Section 12  does  not  take within  its fold the foreign exchange earnings relatable  to transactions of completed sales. Pray what is the reason  or the  purpose for doing so? Why take care to deal with  ’all’ matters  pertaining to export of goods and foreign  exchange earnings  therefrom in Section 12, but even so exclude  for- eign exchange earnings arising out of completed  transaction of  sale from its scope and ambit? When there is a  specific provision which can reasonably be interpreted to cover  this aspect  of  foreign exchange earnings also, be  embodied  in Section  12,  which appears to us to be a complete  Code  in itself.  why  leave this important vital matter of  no  less importance to be dealt with by section 10 which  essentially deals with foreign exchange receivable from individuals  and has  nothing to do with export of goods? On a plain  reading of Section 10, the matter pertaining to the foreign exchange earned by exports in the context of completed sales will not directly  fail  within the ambit of it. It will have  to  be strained beyond the point of endurance in order to  accommo- date  this  aspect. Section 10 is akin  to  a  complementary provision which deals with preservation of foreign  exchange which does not fall within a specific provision like Section 12.  What  is more, if completed transactions  are  excluded from Section 12, the purpose of the legislation 989 will  not be served, because sub-section (6) of Section  121 which has been designed to ensure compliance with the provi- sions  made  in Section 12 (1) to Section  12(5)  cannot  be availed  of.  In that event, in regard to  the  persons  who syphon  off foreign exchange earned out of the  transactions in  the context of a completed sale or export on  sale  they cannot be dealt with under Section 12 (6) and no sanction to ensure  compliance will be available. The Act will  be  thus rendered toothless to ensure compliance with evasion in  the context of a completed sale. There is accordingly no compul- sion of law, logic, or philosophy, to adopt such a view.     We accordingly allow this appeal and set aside the order of  the High Court quashing the show cause notices  impugned in  the Writ Petition by the original Writ  Petitioner.  The matter  will  now  go back to the  competent  authority  for proceeding  in accordance with law. The competent  authority will  extend the time for showing cause to  the  Respondent- Company  and  after affording a  reasonable  opportunity  of hearing,  proceed to pass appropriate orders  in  accordance with  law as may be called for by the relevant  records  and the  material and such materials as may have been  produced, before  him in the light of the cause shown by the  Respond- ent-Company on merits in response to the show cause  notice. It will be open to the competent authority to pass appropri- ate  order  uninhibited by any observations which  may  have been made by the High Court touching the facts or merits  of the  case or in regard to the incidental matters.  We  issue this direction having regard to the fact that it was in  the first instance for the competent authority to form an  opin- ion  on merits on the basis of the relevant material  in  so far  as  the factual aspect was concerned.  Since  the  High Court  was  quashing the notice on  a  jurisdictional  issue there  was no occasion for making any  observation  touching the facts of the case or the merits of the other contentions incidental  thereto. We also wish to make it clear that  the question  regarding the validity or otherwise of  the  views expressed  by the High Court in regard to points other  than the  aforesaid point regarding the applicability of  Section

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12(2) have been kept open for decision in future as and when an occasion arises. 12(6)  "For  the  purpose of ensuring  compliance  with  the provisions of this section and any orders or directions made thereunder,  the Reserve Bank may require any person  making any  export of goods to which a notification under  sub-sec- tion (1) applies to exhibit contracts with his foreign buyer or  other evidence to show that the full amount  payable  by the  said  buyer in respect of the goods has been,  or  will within  the  prescribed period be, paid  in  the  prescribed manner." 990 We  should not be understood as having pronounced  on  these matters one way or the other.     We,  therefore, allow this appeal, set aside  the  order passed  by  the  High Court and dismiss  the  Writ  Petition instituted  by the Respondents, with liberty to the  parties to  raise all contentions on facts and law barring the  con- tention  that Section 12(2) of the Act is not attracted.  No order as to costs. Appeal allowed. 991