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PETITIONER: BURN STANDARD COMPANY LIMITED

       Vs.

RESPONDENT: McDERMOTT INTERNATIONAL INC. AND ANOTHER

DATE OF JUDGMENT03/04/1991

BENCH: AHMADI, A.M. (J) BENCH: AHMADI, A.M. (J) RAMASWAMI, V. (J) II FATHIMA BEEVI, M. (J)

CITATION:  1991 AIR 1191            1991 SCR  (2)  67  1991 SCC  (2) 669        JT 1991 (2)    95  1991 SCALE  (1)587

ACT:      Foreign Exchange Regulation Act 1973 / Foreign Exchange Manual  1978-Section 28(1) Paragraphs 24A.11(1)  and  25A.2- Indian   Company-Technical  Collaboration   agreement   with foreign  corporation-General or special permission  of  RBI- Colloboration   approved  by  Secretariat   for   Industrial Approvals-Agreement  taken on record  by  Government-Whether separtate permission of RBI necessary-Decision taken by RBI, but  approval not communicated-Whether failure to  discharge ministerial  duty obliterates conscious decision  taken-Non- filing  of FNC5 form for grant of permission-Whether  erases decision already taken.      Arbitration Act, 1940; Sections 14,17,30 and 33-Foreign collaboration  agreement-RBI’s approval-Whether  arbitration clause  rendered  void by virtue of agreement  itself  being void  ab  initio for want of RBI  permission  under  Section 28(1) of Foreign Exchange Regulation Act,1973.      Administrative   Law:   Administrative   action-Whether decision becomes binding.

HEADNOTE:      The  appellant,  a Government company, entered  into  a Technical  collaboration  agreement with the  respondent,  a foreign  corporation,  under  which the  respondent  was  to provide  technical  know-how  to  the  appellant,  and   the appellant was to pay the respondent fee in foreign  currency in three installments.  The appellant was required to  apply for  registration and/or Governmental approval  and  furnish satisfactory  evidence  of receipt of  such  approval.   The effective  date of the agreement was the date on  which  the notification  was  received  by  the  respondent  that   all governmental approvals in that regard had been secured.  The agreement  was  entered  into  with  the  approval  of   the Secretariat for Industrial Approvals.  The agreement as well as   the  supplementary  agreement,  incorporating   certain changes  suggested  by the Government, were filed  with  the Government, which took the same on record, by its letter  of approval, A copy of the letter of approval and also the                                                        68 collaboration agreement was sent to the RBI.

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    After  obtaining  the  necessary  order  under  Section 195(2) of the Income Tax Act from the Income Tax Officer and the  permit from the RBI, the appellant remitted  the  first installment  of  fee  to the  respondent.   Thereafter,  the respondent, alleging non-payment of subsequent installments, and consequent breach of terms of contract, sought to invoke clause  8.2 of the agreement for terminating the  agreement. The appellant questioned respondent’s right to invoke clause 8.2.   Thereafter  the  respondent  invoked the  arbitration clause, clause 12.1 of the agreement, for referring disputes and  difference to the arbitration of International  Chamber of  Commerce  and claimed certain amount  for  the  services actually  rendered  and also informed the  ICC  accordingly. The  appellant challenged the legality and validity  of  the agreement as void ab initio, and also clause 12.1 as non-est and  legally  unforceable, and filed  an  application  under Section  33  of  the Arbitration Act,  contending  that  the agreement  being  a  contingent  one,  commencing  from  the effective  date,  and  necessary approval  having  not  been secured,  the agreement had not commenced and,  consequently the  arbitration  clause,  being  part  of  the  very   same agreement,  the  respondent was not entitled to  invoke  the said  clause, and that in the absence of a valid  permission from the RBI under Section 28(1) (b) of the Foreign Exchange Regulation Act, 1973, the agreement was clearly void by  the thrust of Section 28(2) of the Act.      The respondent contended that the necessary  Government approvals  were obtained and hence the ‘effective date’  was reached and that under the Exchange Control Manual only  the Indian Company could apply to SIA for approval and once such approval  was  accorded,  the foreign  collaborator  to  the contract was not expected to secure the RBI permission under Section 28(1) (b), since under the manual, SIA approval  was to be deemed to be RBI’s permission also; and therefore, the agreement  was  legal  and  valid  and  the  respondent  was entitled to seek its enforcement.      The  High Court held that on a true  interpretation  of the  contract,  it  must  be held  to  be  voidable  at  the discretion  of either party, that even if the  contract  was terminated or rendered void, the arbitration clause  therein did  not  perish  ipso facto, that the  application  to  the Income  Tax Officer for making payment of first  installment could not have been made unless the necessary approvals were obtained,  that the RBI had granted permission to remit  the installment  money (fee), after the Income Tax  Officer  had made the order under Section 195(2) of the                                                        69 Income Tax Act, and it was only on account of this  payment, that  the respondent furnished the technology  and  provided technical  services,  and that, on  account  of  appellant’s failure  to  pay  subsequent  installments,  a  dispute  had clearly arisen which had to be resolved through arbitration.      In  the  appeal before this Court it was  contended  on behalf of the appellant company that paragraph 25A.2 of  the Exchange  Control Manual, 1978, provided  that  applications for permission under Section 28(1)(b) should be made in FNC5 and  since  no such application in FNC5 was  made,  a  clear inference  could  be  raised that the RBI  had  not  granted permission   under  Section  28(1),  and   accordingly   the agreement and the arbitration clause forming part of it were void ab initio by the  thrust of Section 28(2), and that the prescribed form for SIA approval under paragraph 24A.11  was not  the same as FNC5 prescribed under paragraph  25A.2  and administrative   direction  in  paragraph  24A.11  that   no separate permission under Section 28(1) was necessary  could

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not override the statutory requirement of the Section.      It  was  contended  on behalf of  the  respondent  that requirements  of Section 28(1) were fully complied with  and the RBI’s sanction, being essentially administrative, it was enough  to  show  that the RBI had  granted  permission,  no matter  whether it had followed the procedure  of  paragraph 24A.11(i) or 25A.2 of the Exchange Control Manual.      Dismissing the appeal, this Court,      HELD:  1.1  Section  28(1)  of  the  Foreign   Exchange Regulation  Act, 1973 places restrictions on appointment  of certain individuals and companies as technical or management advisers  in  India unless the RBI approves the  same  by  a general or special permission.  The section is silent on the mode and manner of securing such permission.  However,  sub- section (4) of Section 73 provides that where any  provision of the Act requires the RBI’s permission for doing  anything under such provision, the RBI may specify the form in  which an  application  for such permission shall be  made.   On  a plain  reading of paragraph 24A.11 Exchange Control  Manual, 1978.,  it becomes clear that the intention is to  introduce the single counter or window procedure to avoid  duplication and  hardship  to the foreign collaborators,  and  once  the collaboration  is  approved  by SIA, and  the  agreement  is ‘taken  on  record’ there is no need to  obtain  a  separate permission  from the RBI. Paragraph 9 of the Guidelines  for Industries  stipulates that after the agreement is taken  on record,  a copy thereof has to be sent to the RBI to  enable it to                                                        70 authorise   remittances   to   the   foreign   collaborator. [82E,84C,85A]      1.2  In the instant case, the appellant had sought  the SIA  approval,  which was granted subject to the  terms  and conditions  set out in the letter of approval.  It was  only thereafter  that the agreement was executed.  The  appellant then sent a copy of the agreement to the Government of India which  was  duly  examined in the light  of  the  terms  and conditions on which the approval was granted by the SIA  and certain  discrepancies  were communicated to  the  appellant which necessitated the execution of supplementary agreement. It was only thereafter that the appellant was informed  that the collaboration agreement and the supplementary  agreement ‘have been taken on record.  This was then forwarded to  the RBI.  The matter was processed by the RBI and the remittance of  the  first instalment of the fees took place  after  the income-tax was duly recovered at source.  [85A-D]      1.3 The affidavits filed on behalf of the RBI leave  no doubt  that the remittance was permitted only after the  RBI was  satisfied that all the terms and conditions  were  duly satisfied,  though  the  RBI’s  approval  ‘remained  to   be communicated’ to the appellant company. Failure to discharge the   ministerial  duty  cannot  obliterate  the   conscious decision taken by the RBI after application of mind. [85E,G]      1.4   The RBI had applied its mind to the  question  of grant  of  permission  and  had  only  thereafter  permitted remittance  of the first instalment of the fees  payable  to the  foreign collaborator.  Merely because  application  for such  permission was not made in FNC5 form cannot cloud  the fact that the decision to grant the permission was  actually taken,  but  the ministerial function of  communicating  the same  remained to be done by oversight.  This  lapse  cannot erase the decision already taken. [86H,87A]      2.1  The prescription of the form is merely to aid  the RBI to process the application for permission. Emphasis must be  laid  on substance and not on mere form.  If  there  has

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been  substantial compliance mere lapse on the part  of  the RBI  in failing to communicate its decision should  make  no difference.   Paragraph  25A.2  is  not  in  derogation   of paragraph  24.A.11(i) nor does it dilute the requirement  of Section 28(1).  Factum of permission, and not the  procedure followed, is relevant. [86G]      2.2  The RBI had granted the permission contemplated by Section  28(1) and hence the agreement cannot be  voided  by virtue of Section 28(2) of FERA.  Once the decision to grant the permission is taken,                                                        71 whether through the course charted by paragraph 24A.11(i) or 25A.2,  that  decision  stands  unless  rescinded  and   the authorities are bound to act in aid thereof.[87B-C]      3.  In the circumstances it is unnecessary  to  examine the  question  whether clause 12.1 of  the  agreement  would stand  or  perish if the agreement is  rendered  void  under Section 28(2) for failure to secure permission under Section 28(1).[87D]      M/s.  Dhanrajmal  Gobindram v. M/s.  Shamji  Kalidas  & Co., [1961] 3 SCR 1020; LIC of India v. Escorts Ltd. & Ors., [1986]  1 SCC 264 at 318 and Shri Sitaram Sugar Co.  Ltd.  & Anr.  v. U.P. State Sugar Corporation Ltd. &  Anr.,  [1990]3 SCC 222 at page 246-247, referred to,

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal No.1423  of 1991.      From  the  Judgement  and  Order  dated  6.12.1989   of Calcutta High Court in Case No.5696 of 1988.      Soli  J.  Sorabjee, Deepanker Ghosh,  R.M.  Chatterjee, A.K. Ghose, S. Mandal and Ms. Madhukhatri for the Appellant.      Dipankar Gupta, O.P. Khaitan, A.K. Bhatnagar, Ms. Kiran Choudhary and Ms. B. Gupta for the Respondents.      H.N.  Salve  and H.S. Parihar for the Reserve  Bank  of India.      The Judgement of the Court was delivered by      AHMADI,J. Special leave granted.      The principal question which this Court is called  upon to  answer  in this appeal by special leave is  whether  the arbitration clause contained in Article XII (Paragraph 12.1) of  the  Technical Collaboration Agreement entered  into  at Dubai, United Arab Emirates, on September 25, 1984,  between the  appellant Burn Standard Company Ltd., a  Government  of India    Undertaking,   and   the    respondent    Mcdermott International, Inc., a foreign company, is rendered void  by virtue of the agreement itself being ab-initio void for want of  general  or special permission of the  Reserve  Bank  of India (RBI) under                                                        72 Section  28  of The Foreign Exchange  Regulation  Act.  1973 (FERA).  The  relevant part of the said provision  reads  as under :           "28(1)-Without  prejudice  to  the  provisions  of           Section  47 and notwithstanding any  contained  in           any other provisions of this Act or the  Companies           Act,   1956,  a  person  resident  outside   India           (whether  a citizen of India or not) or  a  person           who  is not a citizen of India but is resident  in           India, or a company (other than a banking company)           which  is not incorporated under any law in  force           in India or in which the non-resident interest  is           more  than  forty percent or any  branch  of  such

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         company,  shall  not, except with the  general  or           special permission of the Reserve Bank,-           (a) act, or accept appointment, as agent in  India           or  any  person  or company,  in  the  trading  or           commercial transactions of such person or company;           or           (b)  act, or accept appointment, as  technical  or           management  adviser  in  India or  any  person  or           company; or           (c)   permit  any trade mark, which he  or  it  is           entitled  to  use,  to be used by  any  person  or           company for any direct or indirect consideration.           (2)   Where any such person or company  (including           its  branch) as it referred to in sub-section  (1)           acts  or  accepts appointment as  such  agent,  or           technical  management adviser, or permits the  use           of any such trade mark, without the permission  of           the  Reserve  Bank, such  acting,  appointment  or           permission, as the case may be, shall be void. The  petitioner is a Government Company  incorporated  under the  Companies  Act, 1956, having its registered  office  at 10C, Hungerford Street, Calcutta, whereas the respondent  is a  Corporation organized and existing under the laws of  the Republic  of  Panama with its executive office at  P.O.  Box 61961,  1010 Common Street, Near Orleans, Louisiana  701610, U.S.A.,  with a branch office at P.O. Box 3098, Dubai,  UAE. On  25th  September,1984 the said parties  entered  into  an agreement,  styled "Technical Collaboration Agreement",  for the  fabrication of off-shore platform structure,  including but not limited to Jackets, Piles, Decks, Modules,  Platform &  pipeline components, including their sub-components,  for the oil and gas industry which                                                        73 required the high degree of expertise and experience as well as the technical know-how possessed by the respondent.   The duration of the agreement was fixed under Article VIII to be five  years  from  the effective date or  five  years  after commencement of commercial production, whichever is greater, or  until otherwise terminated earlier under the  Agreement. The  expression  ‘effective date’ as defined  in  Article  1 means  the  date of which notification is  received  by  the repondent  that all Governmental approvals relating  to  the agreement have been secured; provided that if such approvals are  not  secured within 180 days from the  signing  of  the agreement,  the agreement, upon notice pursuant  to  Article XVII   of  the  agreement  by  either  party  may  be   made ineffective whereupon the agreement shall be treated as null and  void.   Obviously the purpose of the agreement  was  to establish the basis whereunder the respondent was to provide and  the  appellant was to receive  technology  and  special technical   services  related  to  the   establishment   and operation  of  Fabrication Yard  for  fabricating  off-shore platform   structures  and  additional   special   technical services  for any contracts related to  marine  construction activities that are  awarded to the appellant.  Article X of the  agreement  enjoins  upon the  appellant  to  apply  for necessary  registration and/or governmental approval of  the agreement  in  India within 60 days after the  agreement  is signed by both parties and is delivered to the appellant.  A duty  is  cast  on the  appellant  to  furnish  satisfactory evidence  to receipt of the required governmental  approval. The next important clause in the contract which needs to  be noticed at this stage is Article XII which reads as under:           "Article XII-Arbitration           12.1 Any claim, dispute or controversy arising out

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         of  or relating to this Agreement, or  the  breach           thereof, shall be finally settled by  arbitration,           pursuant  to  and in accordance with the Rules  of           Conciliation and Arbitration of the  International           Chamber   of  Commerce  by  three(3)   arbitrators           appointed in accordance with said Rules. Judgement           upon the award rendered by the Arbitrators may  be           entered in any court having jurisdiction  thereof.           The situs of Arbitration shall be New Delhi, India           or  an  alternate location if  the  parties  shall           mutually  agree  and the  arbitration  proceedings           shall be conducted  in the English language." Under Article XII the validity, construction and performance of the agreement was to be governed by the Indian laws.                                                        74      The  aforesaid agreement was entered into after it  was approved  by the Secretariat for Industrial Approvals  (SIA) by their letter dated 18th June, 1984.  After the  execution of  the agreement it was filed with the Government of  India on  5th October, 1984.  By the letter dated  15th  December, 1984  of  the  Ministry of  Industry,  Department  of  Heavy Industry,  New  Delhi,  addressed to the  appellant  it  was pointed out that clauses 3.2. and 4.2 of the agreement  were not   consistent   with   the  terms   and   conditions   of collaboration  approved  by Secretariat  letter  dated  18th June, 1984. in that, clause 3.2 should contain a clause that any additional payment made for specific Technical  Services would  be subject to prior approval of Government  of  India and  in  clause 4.2 the payment expressed  in  U.S.  Dollars 298,200  should  be  298,500  and  the  figure  of  the  3rd instalment should be 99,450 instead of 99,400 U.S.  dollars. To  carry  out  these changes, the parties  entered  into  a supplementary agreement on 29th December, 1984  and filed it with the Government of India on 9th January, 1985.      Under Article IV of the agreement, in consideration  of the respondent having agreed  to transfer technology to  the appellant,  the  latter  undertook  to pay  a  lump  sum  of $298,200 in three installments, the first payment of U.S.  $ 99,400  within  thirty  (30)  days of  the  signing  of  the agreement  or  receipt of approval from  the  Government  of India,  whichever  is later; the second payment  of  U.S.  $ 99,400  upon  completion of items 1 to 10 of clause  3.4  of Article III and the third payment of U.S. $ 99,400 upon  the commencement  of  commercial production of  the  Fabrication Yard  or four years after the effective date,  whichever  is earlier.   As  stated  earlier  the  figure  ‘298,200’   was replaced by the figure ‘298,250’ and the amount of the third instalment was raised  from U.S.$99,400 to U.S.$99,450 under the  supplementary agreement dated 9th January, 1985.  After this  suuplementary agreement was filed with the  Govt.,  of India, the latter took the collaboration agreement on record under  the communication dated 15th January,1985. A copy  of the  Govt.  of  India’s  letter along with  a  copy  of  the collaboration  agreement  was received by the  RBI  on  21st January,  1985.    In  para 7 of its  affidavit  dated  18th September, 1990, the RBI has clarified as under:           "However,  the  Bank’s  letter  of   authorization           indicating   the  terms  and  conditions   to   be           fulfilled   for  remittances  falling  due   under           collaboration  agreement remained to be issued  to           the petitioner company.  Hence the Bank’s approval           under  Section 28(1) (b) of the Act for  rendering           technical  etc. services under  the  collaboration           agreement also re-                                                        75

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         mained  to  be  communicated  to  the   petitioner           company.   Later,  when  the  petitioner   company           applied  for  remittance of the  first  instalment           under the collaboration agreement, the Bank  being           satisfied  that  the remittance  was  strictly  in           accordance with the terms and conditions  approved           by the Government, allowed the same." On 5th February, 1985, the appellant made an application  to the  income tax authorities for determination of income  tax deduction  for the payment of the first instalment of  fees. The order passed under Section 195(2) of the Income-Tax  Act determining the tax at 40% of the consideration proceeds  on the   premise  that  the  agreement  was  approved  by   the Government of India.  Soon thereafter the appellant  applied on  14th  February,1985  to the United  Bank  of  India  for remitting the first instalment of fees minus 40%  chargeable as income tax. The United Bank of India  intimated the  rate of  exchange on the very next date.  The Income-tax  Officer issued  the  ‘No-objection certificate’ on  19th   February, 1985  whereupon the RBI issued the permit dated  6th  March, 1985 for remittance of U.S. $ 59,640 ($ 99,640-40%=$59,640). By  the  appellant’s  letter  dated  18h  March,  1985   the appellant  enclosed  a  draft for the  said  amount  to  the respondent.      After  the payment in respect of the  first  instalment was  thus  made, the respondent wrote a  letter  dated  16th September, 1986 invoking clause 8.2 of the agreement.   That clause reads thus :           " In the event of any breach of this Agreement not           cured  within sixty (60) days  after  notification           thereof,  in  addition  to  all other  rights  and           remedies  which  either party may have in  law  or           equity, the party not in default may at its option           terminate this Agreement by written notice.   Such           termination shall become effective on the date set           forth  in  such notice of termination, but  in  no           event  shall  it be earlier than sixty  (60)  days           from the mailing thereof.  Any waiver of the right           of termination for default shall not constitute  a           waiver  of  the right to claim  damages  for  such           default   or  the  right  to  terminate  for   any           subsequent breach." By the said letter the respondent laments lack of payment of installments due from the appellant and consequential breach of the terms of the contract.  The respondent then puts  the appellant  to notice as per clause 8.2 reproduced  above  of its right to terminate the agreement if                                                        76 the appellant fails to cure the breach within 60 days of the receipt  of the communication.  The appellant by  its  reply dated 12th December, 1986 questioned the respondent’s  right to  invoke  clause 8.2 of the agreement since  in  its  view there  was  no  breach  of agreement  and  called  upon  the respondent to discharge its obligations under clause 3.4  of the agreement and  receipt payment of the second  instalment thereafter.  On  receipt of this reply,  the  respondent  by their  Advocate’s letter date 27th September,  1988  invoked the  arbitration clause extracted earlier for referring  the disputes and differences to the arbitration of International Chamber  of  Commerce.   At the  same  time  the  respondent claimed  that it was entitled to recover U.S.  $  621,777,09 with 15% per annum interest from the appellant for  services actually rendered.  On the same day the respondent wrote  to the  International Chamber of Commerce informing it  of  its decision to invoke the arbitration agreement.  The appellant

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responded  by its letter dated  11th October,  1988  stating that the collaboration agreement dated 25th September,  1984 was  void ab-initio and not binding on the  parties  thereto and  therefore, clause 12.1 of Article XII of the  agreement was  non-est and legally unenforceable.  On the  other  hand the appellant blamed the respondent for breach of  contract, in that, there was failure to comply with clause 3.4 of  the agreement, and stated that no disputes or differences of the type  which  could  be referred to  arbitration  had  arisen between  the parties.  Thus by challenging the legality  and validity of the agreement and branding it void ab-initio the appellant   also  challenged  the  arbitration   clause   as similarly  void.  This was followed by the appellant  filing an application under Section 33 of the Arbitration Act inter alia  contending (i) that the agreement in question being  a contingent  one  which was to commence from  the  ‘effective date’  and  since  the  necessary  approvals  had  not  been secured,  the  agreement  had  not  commenced  and  as   the arbitration clause was a part of the very same agreement  it too  had  not  commenced and hence the  respondent  was  not entitled to invoke the said clause and (ii) since under  the agreement  the  respondent  was appointed  as  Technical  or Management  Adviser in India within the meaning  of  Section 28(1) (b) of FERA, in the absence of a valid permission from the  RBI,  the  agreement was clear void by  the  thrust  of Section  28(2)  of  the  said  enactment.   The   respondent countered  these  contentions (i) by pointing out  that  the necessary  Government approvals were obtained and hence  the ‘effective  date’  was reached and (ii) under  the  Exchange Control Manual (1978 Edition) only the Indian company  could apply  to  SIA  for  approval and  once  such  approval  was accorded as in the present case, the foreign collaborator to the contract was not expected  to secure the RBI  permission under Section 28(1) (b) since under the                                                         77 manual SIA approval was to be deemed to the RBI’s permission also.   It was, therefore, contended that the agreement  was legal and valid and the respondent was entitled to seek  its enforcement.   The  arbitration clause being a part  of  the agreement,  it was imperative on the part of the  respondent to  follow  that  course  in  the  event  of  a  dispute  or difference arising between the parties concerning any matter covered by the agreement.      The  High Court on a proper construction of clause  8.1 of  the  agreement  held  that  the  principal  duties   and obligations  incorporated  in clauses 1.3 and  1.4  commence after governmental approvals are obtained. The obligation to secure necessary  registration and governmental approvals is cast  by virtue of clause 10.1 on the  appellant.  Obviously the  said  clause comes into operation  immediately  on  the execution   of  the  agreement  since  clause  1.2   clearly contemplates that if governmental approvals are not obtained within 180 days, the parties will be entitled to put an  end to the agreement.  It is thus manifest from the terms of the agreement  that some of its provisions come into  effect  on the  execution of the agreement and remain in force for  180 days  till the contract is terminated by either party.   But if  the parties choose to continue the contract even  beyond the  period  of  180  days  notwithstanding  the  right   to terminate  the  same,  there is  nothing  in  the  agreement prohibiting   the   same   and,   therefore,   on   a   true interpretation  of  the  contract  it must  be  held  to  be voidable at the discretion of either party.  The High  Court further  held  on  a reading of Sections 39 and  56  of  the Contract  Act  that even if the contract  is  terminated  or

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rendered void the arbitration clause therein does not perish ipso facto for even in contingent  contracts there exists  a distinction  between  principle  obligation  and  subsidiary obligations.  After referring to the case law in detail, the High Court observed:           In  my  opinion  the  arbitration  clause  in  the           instant case is wide enough to include "any claim,           dispute or controversy arising out of or  relating           to this agreement" so as to mean any dispute as to           the  interpretation itself including the  validity           thereof.   Therefore,  if  there  is  any  dispute           relating  to the interpretation of Article 8.1  of           the agreement the same can also be decided by  the           arbitrator." Pointing  out  that an agreement of  arbitration,  though  a contract, is different in its nature from the main  contract of  which it may form a part, the High Court held  that  the breach  of the obligation and liabilities arising under  the main contract may bring about termination                                                        78 of  the main contract but not of the arbitration  agreement. Indeed, the arbitration agreement would be invoked only when disputes   arise  under  the  main  contract   including   a repudiation  of the main contract by any of the parties  and in  that sense the arbitration agreement is  remedial  while the   main  contract  is  substantive.   The   High   Court, therefore,  held  that  in  law  the  jurisdiction  of   the arbitrator  under  the arbitration clause  would  cover  the decision  as to voidability of the main contract also.   The High Court then concluded as under:           "It  is  apparent  from  the  sequence  of  events           appearing  from the list of dates already    noted           hereinbefore  that the petitioner really  made  an           application  to  the  secretariat  for  Industrial           Approvals,   Department of Industrial  Development           and  a letter of approval was issued.   Thereafter           the   agreement  dated  September  25,  1984   was           executed.   The  Government  pointed  out  certain           deficiencies   as   a   result   of   which    the           supplementary  agreement dated September 28,  1984           was  executed.  The said documents were all  filed           with the Govt. and thereafter the Government  took           the  agreement  on record and nothing  was  really           required to be done by the repondent.  In fact the           paragraph  11  at Chapter III  of  Guidelines  for           industries of the Government of India provide  for           such  a  procedure  for taking  the  agreement  on           record  after  the approval is given  for  Foreign           Collaboration." After  quoting paragraph 11 of the said guidelines the  High Court referred to the appellant’s application to the Income- tax Officer for payment of the first instalment under clause 4.1 of the agreement and concluded that such an  application could not have been made unless the necessary approvals were obtained.  After the Income-tax Officer made the order,  the RBI  granted permission to remit the instalment money  (fee) on 6th March, 1985.  It was only on account of this  payment that the repondent furnished the technology and provided the technical services to the appellant in pursuance of  Article III   of  the  contract.   The  High  Court  dismissed   the application  holding that on the appellant’s failure to  pay the  subsequent installments, a dispute had  clearly  arisen between  the  parties  which  had  to  be  resolved  through arbitration.      Mr.  Soli Sorabjee, learned counsel for the  appellant,

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placed  the  appellant’s case thus: Under Section  73(4)  of FERA,  where  permission  of  RBI  is  required  under   any provision of the said statute for doing anything thereunder, the RBI has to specify the form in which                                                        79 the application for such permission must be made.  Paragraph 25A.2  of the Exchange Control Manual, 1978 (Manual)  refers to  permission  to be obtained under Section 28(1)  (b)  and provides  that  applications for such permission  should  be made in form FNC5.  Indisputably the respondent had made  no such   application  in  the  prescribed  form  seeking   RBI permission  and, therefore , the question of grant  of  such permission by the RBI did not arise.  The respondent  having failed  to secure the RBI permission as required by  Section 28(1)  rendered the agreement void by the thrust of  Section 28(2).   Besides breach of Section 28(1) is made  punishable under  Section 50 of FERA.  That being so, the agreement  is ab-initio  void and as the arbitration clause is a  part  of the  said  agreement,  it  too  must  fall  along  with  the agreement.  The SIA approval is not synonymous with grant of permission under Section 28(1) is  since the two operate  in different  fields  and it is, therefore erroneous  to  think that  such  approval satisfies the  requirement  of  Section 28(1)  . Paragraph 24A.11 of the Manual is not referable  to permission under Section 28(1) and must be read harmoniously with the statutory provisions, for if it runs counter to the said provisions, it would have to be ignored for the obvious reason that it cannot override the requirement of law  being merely in the nature of administrative instructions. Nor can the letter of 15th January, 1985 be read to convey the grant of permission under Section 28(1). So also the permit issued by   the  RBI dated 6th March, 1985 for  remittance  of  the first  instalment payable under Clause 4.1 of the  agreement is referable to the exemption contemplated by Section 9  and has no relevance whatsoever to the permission envisaged by Section  28(1)  of FERA.  Thus the  permission  contemplated under Section 28(1) is an express permission and it would be an   entire   wasteful  exercise  to  find  out   from   the correspondence   and  documents  placed  on  record   if   a permission  can  be  culled out or be deemed  to  have  been granted.   In  the absence of a  permission,  Section  28(2) declares   the  agreement  or  contract  to  be  void   and, therefore, the said agreement or any part thereof cannot  be enforced  in a court of law.  The High Court was, therefore, clearly  wrong  in  the  view  it  took  in  upholding   the respondent’s effort to invoke the arbitration clause.      Mr.  D.P.  Gupta, learned counsel  for  the  respondent countered:  The RBI has published the Manual to  detail  the procedure  for  entering into such  Technical  Collaboration Agreements;  paragraph  24A.11 lays down the  procedure  for securing  the RBI permission contemplated by  Section  28(1) and  where the situation does not stand  covered  thereunder the application has to be made under paragraph 25A.2 of  the said  manual  which  lays down  a  different  procedure  and prescribes the                                                   80 FNC5  form.  In other words, if the case is  governed  under paragraph  24A.11  when  it  is  unnecessary  to  resort  to paragraph  25A.2  which  prescribes  the  FNC5  form.    The Government   policy   for   dealing   with   such    foreign collaboration  agreements  is  generally  set  out  in   the industrial   policy   document  entitled   ‘Guidelines   for Industries’,  Chapter  IV  whereof  sets  out  a   procedure identical to the one contained in the manual.  The appellant had  made  an application under paragraph 24A.11 to SIA  for

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approval of the technical collaboration arrangement with the respondent  which was granted on 18th June, 1984 subject  to certain  terms and conditions.  Certain  discrepancies  were pointed out by the Government of India and on the  appellant having  drawn  the  respondent’s attention  thereto  by  the letter of 21st September, 1984 a supplementary agreement was immediately executed and filed with the Government of  India on  9th  January,  1985.  It   was   thereafter   the   that Government   of  India  informed  the  appellant  that   the agreement  was  ‘taken on record’, an expression  which  has special  significance as explained in paragraph 9 of Part  I of  Guidelines for Industries. Copies of the letter of  15th January, 1985 were forwarded to RBI authorities as well.  It was   only  thereafter  that  the  appellant   applied   for determination of the Income-tax amount under Section  195(2) of  Income-Tax Act which determination was made by an  order dated  11th February, 1985.  The appellant then applied  for permission  to  remit the first instalment of  fees  and  on receipt  thereof enclosed a draft for U.S. $ 59,640 (  after deducting  40%  income tax) under letter dated  18th  March, 1985  addressed  to the respondent.  It was  only  when  the subsequent  payment was not forthcoming that the  respondent gave notice under clause 8.2 of the agreement and thereafter sought  to resort to arbitration.  Thus the requirements  of Section 28(1) were fully complied with.      Mr.Salve,  the learned counsel for the RBI,  placed  on record  an  additional affidavit dated  24th  January,  1991 sworn  by  Shivaji  D. Kadam,  Deputy  Controller,  Exchange Control Department of the RBI explaining what steps the bank had taken after it received the Government of India’s letter of  approval  together  with a  copy  of  the  collaboration agreement  dated 21st January, 1985.  Since the said  letter was  only  a  covering  letter  taken  on  record  the  said agreement,  the bank had by its letter dated  7th  February, 1985   sought  copies  of  the  earlier  letters  from   the Government as they were of vital importance because  without those  letters  it was not possible for the RBI  to  proceed under  paragraph 24A.11 of the manual.  Thereafter  on  14th February, 1985 the appellant reminded the RBI to forward its approval  to  enable payment of the fees to  the  respondent. Again on                                                        81 20th  February, 1985 1985 the appellant approached  the  RBI for  sanction to remit the fees and enclosed  therewith  the Government  of india letters dated 18th June, 1984  and  4th August,  1984  along with an application in  A-2  form.  The Government  of india also forwarded copies of the  said  two letters by a covering letter dated 1st March, 1985 which was delivered  to the RBI on 4th March, 1985. On the same day  a note was put up to the Staff Officer, Grade A, who observed:           ‘‘In view of the Government letter having now been           received,  we  may allow the remittance  of  U.S.$           59.640 being the 1st instalment of technical know-           how fees.’’ The Exchange Control Officer then said :           ‘‘We  may  allow the remittance  of  U.S.$  59.640           being 1st instalment of know-how fees’’. This  final  note  of  the  Exchange  Control  Officer   was countersigned by the Assistant Controller on 6th March, 1985 The  deponent  fairly  clarifies  that  ‘‘as  per  the   RBI practice,  the permission under para 24A.11, that is,  grant of  sanction  under Section 28(1)(b) as well  as  permission under  section  9  for allowing  remittances  are  generally authorised  by the Assistant Collector.’’ It  becomes  clear from this statement that the permission under Section  28(1)

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and  the exemption under Section 9 are generally granted  by one and the same officer.      In the backdrop of the said facts we may now proceed to consider the main submission placed before us by counsel for the  appellant, namely, the agreement is rendered  void  ab- initio  for want of permission under Section 28(1) of  FERA. It is only if we accept the contention that in fact the  RBI had not granted any permission under Section 28(1) that  the question  of the agreement having been rendered void by  the thrust  of  Section 28(2) would arise. And the  question  of survival   of  the  arbitration  clause  contained  in   the Agreement notwithstanding the agreement having been rendered void by Section 28(2), would arise thereafter.      On a plain reading of Section 28(1) it is clear that it opens  with the words ‘‘without prejudice to the  provisions of  Section 47’’, which in turn says that ‘‘no person  shall enter into any contract or agreement which would directly or indirectly  evade or avoid in any way the operation  of  any provisions  of  the Act or of any rule, direction  or  order made thereunder.’’ Contravention of any provision of the Act (other                                                        82 than  Section  13,  18(1)(a) and 19(1)(a) or  of  any  rules directions  or  order  made thereunder,  is  made  penal  by Section  50.  Secondly,  the said Section  28(1)  places  an embargo  on  a  resident outside India or a  person  who  is resident in india but is not a citizen of India or a company (other  than  a banking company) which is  not  incorporated under any law in force in India or in which the non-resident interest  is more than 40% or any branch of such company  to (a)  act or accept appointment, as   agent in india  or  any person or company, in the trading or commercial transactions of such person or company; or (b) act or accept appointment, as a technical or management adviser in India of any  person or company except with the general or special permission  of the  Reserve  Bank.  Admittedly  there  existed  no  general permission and, therefore, special permission must be  shown to  prove  satisfaction  of  the  requirement  of  the  said provision. Under Sub-section (2) where any person  mentioned in sub-section (1) acts or accepts appointment as such agent or  technical/management adviser without the  permission  of the   RBI,  such  acting  or  appointment  shall  be   void. Therefore, let us first focus our attention on the  question whether  or not the RBI’s permission was obtained in  regard to the collaboration agreement in question ?      Section 28(1) places restrictions on the appointment of certain individuals and companies as technical or management adviser  in  India  unless the RBI approves the  same  by  a general or special permission. The section is silent on  the mode  and manner of securing such permission. However,  sub- section (4) of Section 73 provides that where any  provision of the Act requires the RBI’s permission for doing  anything under such provision, the RBI may specify the form in  which an  application for such permission shall be made.  In  this connection it is essential that we notice paragraphs  24A.11 and 25A.2 at this stage. These two paragraphs read as  under :           ‘‘24A.11. Persons, firms and companies wishing  to          establish new industrial units or  expand/diversify          existing units with foreign technical collaboration          should apply on prescribed form to the  Secretariat          for  Industrial  Approvals  (SIA),  Department   of          Industrial  Development, Government of  India,  New          Delhi,  for  approval. In case where  proposal  for          collaboration is approved by Government, Government

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        will issue its letter of approval to the  applicant          indicating the terms. The applicant may  thereafter          execute   the  collaboration  agreement  with   the          collaborators  strictly  in  accordance  with   the          approved terms and furnish requisite                                                        83          number  of copies of the agreement  to  Government.          Government will take the agreement on record if  it          is in conformity with the approved terms and advise          the  applicant  accordingly  under  intimation   to          Reserve  Bank. Reserve Bank will  thereafter  issue          its  formal  authorization under  Foreign  Exchange          Regulation  Act, 1973, to the  applicant.  Although          the  rendering  of technical advisory  services  by          foreign  collaborators under foreign  collaboration          agreements approved by government attracts  Section          28(1)(b) of Foreign Exchange Regulation Act,  1973,          it   will  not  be  necessary   for   the   foreign          collaborators to seek Reserve Bank permission under          the Section separately. Accordingly, while granting          approval  for foreign collaboration,  Reserve  Bank          will confirm that the approval will also be  deemed          to   be  the  Bank’s  permission  to  the   foreign          collaborators  under  this  section  for  rendering          technical services to the Indian company  concerned          under the collaboration agreement. Permission given          under  this Section is, however, without  prejudice          to  the  decision  that the Bank may  take  on  the          foreign company’s application, if any under section          28(1)(c)  of the Act for use by the Indian  company          of  foreign  trade  mark(s)  involving  direct   or          indirect consideration.’’           ‘‘25A.2.   Under  Section  28(1)(b)   of   Foreign           Exchange  Regulation Act, 1973, it  is  obligatory           for  foreign  companies to  obtain  permission  of           Reserve Bank for acting or accepting  appointment,           as technical or management adviser in India of any           person  or company. Reserve Bank’s  permission  is           also  necessary under Section 28(3) of the Act  in           case  where appointments  as  technical/management           advisers were held by such foreign companies since           prior to the coming into force of the Act i.e. 1st           January,  1974  and  are  continuing   thereafter.           Applications for permission in either case  should           be  submitted to Reserve Bank in form FNC5.  These           provisions   are   also  applicable   to   foreign           collaborators rendering technical advice to Indian           firms and companies under collaboration agreements           approved  by Government of India. While,  however,           communication   approval  for  new   collaboration           agreements  between Indian companies and  overseas           collaborators,  Reserve  Bank  will   specifically           indicate  that  the  approval  also  permits   the           foreign collaborator to render technical advice to           the                                                        84          Indian  company and separate approval need  not  be          sought  by  the  former  from  Reserve  Bank  under          Section 28(1)(b) of the Act.’’ The   appellant’s  contention  that  the   application   for permission  under Section 28(1) ought to have been  made  in the  prescribed  form  FNC5 and  since  admittedly  no  such application  was  made by either party there  was  no  valid permission  approving  the contract and hence by  virtue  of Section 28(2) the contract was rendered void ab-initio. On  a

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plain reading of paragraph 24A.11 it becomes clear that  the intention  is  to  introduce the single  counter  or  window procedure  to avoid duplication and hardship to the  foreign collaborators. Once the collaboration is approved by SIA, as in the present case, and the agreement is ‘taken on  record’ there  is no need to obtain a separate permission  from  the RBI.  Paragraph 9 of the Guidelines for Industries  explains what  is  meant by the expression ‘Taking of  Agreements  on Record’ and its import thus:           ‘The approvals given for foreign collaboration are          valid  for a period of six months from the date  of          issue. In case the terms of collaboration  approved          by  Government are acceptable to the Indian  party,          an intimation in this regard has to be sent by  him          to  the  concerned  administrative  Ministry.   The          Indian  party  can then execute  the  collaboration          agreement  with  the collaborator which  should  be          strictly  in accordance with the terms approved  by          the  Government.  Ten copies of  the  collaboration          agreement  so  executed   all of  which  should  be          signed by both the collaborating parties are to  be          furnished  to  the  administrative  Ministry.   The          collaboration  agreement  is  scrutinised  by   the          administrative  Ministry  and  is found  to  be  in          accordance with the terms specifically approved  by          Government is taken on record and an intimation  is          sent to the party. A copy of the agreement is  then          transmitted  to the Reserve Bank of  India  through          the  Ministry  of Finance (Department  of  Economic          Affairs)  on the basis of which remittances to  the          foreign collaborator are authorised by the  Reserve          Bank  of India. Representations against  the  terms          and  conditions  of collaboration approved  by  the          Government   are   sent   by   the   SIA   to   the          administrative  Ministry/Department concerned  with          the  item of manufacture who will continue to  deal          with  such  representations  and  take  appropriate          action.’’                                                        85 It  will be seen from the above that after the agreement  is taken on record a copy thereof has to be sent to the RBI  to enable   it   to  authorise  remittances  to   the   foreign collaborator.  In the present case the appellant had  sought the  SIA  approval  which was granted  on  18th  June,  1984 subject to the terms and conditions set out in the letter of approval.  It  was only thereafter that  the  agreement  was executed on 25th September, 1984. The appellant then sent  a copy  of  the agreement to the Government of  India  by  the letter  of 5th October, 1984 which was duly examined in  the light of the terms and conditions on which the approval  was granted  under  the letter of 18th June,  1984  and  certain discrepancies  were  communicated  to the  appellant  by  he Ministry  of Industry, Department of Heavy  Industry,  which necessitated the execution of the supplementary agreement of 29th  December,  1984.  It  was  only  thereafter  that  the said  department by the letter of 15 January  1985  informed the  appellant  that  the collaboration  agreement  and  the supplementary  agreement ‘have been taken on  record’.  This was  then  forwarded to the RBI which the bank  received  on 21st  January, 1985. We have already indicated  earlier  how the matter was processed by the RBI before the remittance of the first instalment of the fees of U.S. $ 59,640 could take place  after  the income-tax was duly recovered  at  source. Paragraph  7  of the RBI’s affidavit dated  18th  September, 1990  extracted earlier and the details of the action  taken

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by  the  RBI as disclosed in the further affidavit  of  24th January,  1991  leave  no  doubt  that  the  remittance  was permitted  only  after the RBI was satisfied  that  all  the terms  and  conditions  were duly satisfied.  To  place  the matter beyond the pale of doubt, the further affidavit field on behalf of the RBI carries the following statement.           ‘‘As  per the practice of the RBI, the  permission           under  para  24A.11, that is,  grant  of  sanction           under Section 28(1)(b) as well as permission under           Section  9 for allowing remittances are  generally           authorised by the Assistant Controller.’’ This  statement places the question regarding the  grant  of permission under Section 28(1) beyond doubt. The  affidavits file  on  behalf of the RBI show that  the  RBI’s  approval ‘remained  to  be communicated’ to  the  appellant  company. Failure to discharge the ministerial duty cannot  obliterate the conscious decision taken by the RBI after application of mind.      But counsel for the appellant stressed that  the  facts placed  on  record clearly reveal that  no  application  for permission  under Section 28(1) was made in  the  prescribed FNC5 as contemplated by paragraph                                                        86 25A.2 of the manual. It is indeed true that the record  does not disclose making of an application in the said prescribed form  by either party to the agreement. Counsel,  therefore, submitted  that  once it is found that  no  application  for permission  was  ever  made  in  the  prescribed  form,  the provisions of sub-section (2) and (3) of Section 47 of  FERA cannot  save  the  agreement declared void  by  the  statute itself.  He further submitted that the case was governed  by paragraph  25A.2  and  not 24A.11 and  hence  making  of  an application  in the prescribed FNC5 form was imperative  and failure  to do so raised a clear inference that the RBI  had not  granted  permission under Section 28(1)  since  it  had never  been  approached for such permission.  he  emphasised that the prescribed form for SIA ‘approval’ under  paragraph 24A.11 is not the same as FNC5 and hence the  administrative direction  in  the  said  paragraph that  ‘it  will  not  be necessary for the foreign collaborators to seek Reserve Bank permission  under this section separately’  cannot  override the  statutory requirement of Section 28(1).  The  statutory duty cast on the RBI by Section 28(1) cannot be abdicated by the  RBI  by  the  deeming  clause  contained  in  paragraph 24A.11(i)  extracted  earlier. To  buttress  the  submission counsel  invited our attention to two cases,  viz.,  (i)M/s. Dhanrajmal Gobindram v. M/s. Shamji Kalidas & Co., (1961)  3 SCR 1020 and (ii) LIC of India v. Escorts Ltd. & Ors. [1986] 1  SCC  264 at 318 (Para 69) wherein this  Court  held  that paragraph  24A.  I was merely an  explanatory  statement  of guideline for the benefit of the authorised dealers and  was neither  a statutory direction nor a mandatory  instruction. On the other hand counsel for the respondent argued that the RBI’s action in regard to grant of permission under  Section 28(1)  being  essentially  administrative=see  Shri  Sitaram Sugar Co. Ltd. & Anr. v. U.P.State Sugar Corporation Ltd.  & anr.  [1990] 3 SCC 223 at page 246-247 it is enough to  show that the RBI had granted the permission no matter whether it had  followed the procedure of paragraph 24A.11(i) or  25A.2 of the manual. We think there is considerable force in  this contention for the simple reason that we are concerned  with the  factum of permission and not the procedure followed  by the RBI for granting the same. The prescription of the  form is  merely  to aid the RBI to process  the  application  for permission.  Emphasis must be laid on substances and not  on

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mere  form. If there has been substantial compliance, as  in this case, the mere lapse on the part of the RBI in  failing to  communicate  its  decision should  make  no  difference. Paragraph 25A.2 is not in derogation of paragraph  24A.11(i) nor  does it dilute th requirement of Section 28(1). In  any case  the facts of the present case clearly reveal that  the RBI  had  applied  its  mind to the  question  of  grant  of permission  and had only thereafter permitted remittance  of the  first  instalment of the fees payable                                                        87 to the foreign collaborator. Merely because application  for such  permission was not made in FNC5 form cannot cloud  the fact that the decision to grant the permission was  actually taken but the ministerial function of communicating the same remained  to be done by oversight. This lapse  cannot  erase the  decision  already  taken. We  are,  therefore,  of  the opinion that the RBI had granted the permission contemplated by Section 28(1) and hence the agreement cannot be voided by virtue  of Section 28(2) of FERA. It is not the case of  RBi that it at any time had second thoughts about its action. It never contemplated withdrawal of the permission at any point for  time  thereafter.  Once  the  decision  to  grant   the permission is taken, whether through the course  charted  by paragraph  24A.11(i) or 25A.2, that decision  stands  unless rescinded  and  the  authorities are bound  to  act  in  aid thereof.      In  the view that we take it is unnecessary to  examine the  question  whether clause 12.1 of  the  agreement  would stand  or  perish if the agreement is  rendered  void  under Section 28(2) for failure to secure permission under Section 28(1).  Since  we have come to the conclusion that  the  RBI permission  was  in fact secured under  Section  28(1),  the second  question recedes in the background.  We,  therefore, need not examine the same.      Before  we part we are constrained to observe  that  we were  pained  at  the  attitude  of  the  appellant  company attempting  to thwart a valid agreement, part  performed  by the  payment  of  the first  instalment,  on  hypertechnical grounds,  an attitude which would scare  away  collaborators and  tarnish the image and credibility of our  entrepreneurs abroad.  We  do hope the appellant company will  honour  its obligations  under the agreement and settle its  differences with  the  respondent across the table  in  a  business-like manner rather than litigate.      For  the aforesaid reasons we dismiss this appeal  with cost. Cost quantified at Rs.5000. N.P.V.                                 Appeal dismissed                                                        88