LEGAL ISSUE: Whether a penalty can be imposed under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992 for non-fulfillment of export obligations under a license.
CASE TYPE: Foreign Trade Law
Case Name: M/S. Embio Limited vs. Director General of Foreign Trade & Ors.
Judgment Date: 13 May 2024
Introduction
Date of the Judgment: 13 May 2024
Citation: (2024) INSC 408
Judges: Abhay S. Oka, J., Ujjal Bhuyan, J.
Can a company be penalized under Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992 (FT Act) for failing to meet export obligations, even if they did not violate any import or export regulations? The Supreme Court of India recently addressed this question in a case involving M/S. Embio Limited. The court clarified that penalties under this section apply only to contraventions of actual import or export activities, not merely the failure to meet export targets. This judgment has significant implications for businesses operating under export promotion schemes.
The Supreme Court bench consisted of Justice Abhay S. Oka and Justice Ujjal Bhuyan. The judgment was authored by Justice Abhay S. Oka.
Case Background
The case revolves around M/S. Embio Limited, formerly known as Emmellen Biotech Pharmaceuticals Limited, which had amalgamated with Karnataka Malladi Biotics Limited. Karnataka Biotics had obtained an Export Promotion Capital Goods (EPCG) license, allowing them to import capital equipment at a reduced customs duty. This license came with the condition that they export finished goods worth US$ 2,59,948 and earn an equivalent amount in foreign currency within five years.
Karnataka Biotics imported the capital goods and began production. However, the Board for Industrial Finance and Reconstruction (BIFR) declared the company a sick unit in 1999. Due to the concessional duty availed, the Commissioner of Customs issued a demand notice for the differential duty. As the company could not pay, a portion of the amount was recovered by enforcing the bank guarantee.
In 2003, the BIFR sanctioned a rehabilitation scheme for Karnataka Biotics. Despite this, in 2004, the third respondent imposed a penalty of Rs. 23,38,882 on Karnataka Biotics for failing to meet the export obligations. This penalty was challenged, and after a series of appeals and a writ petition, the matter eventually reached the Supreme Court.
Timeline
| Date | Event |
|---|---|
| 11th August 1999 | Karnataka Biotics declared a sick unit by BIFR. |
| 3rd April 2002 | Commissioner of Customs issued a demand notice for differential duty. |
| 3rd June 2003 | BIFR sanctioned Karnataka Biotics’ rehabilitation scheme. |
| 16th July 2004 | Penalty of Rs. 23,38,882 imposed on Karnataka Biotics for non-fulfillment of export obligation. |
| 24th March 2009 | Karnataka Biotics amalgamated with Emmellen Biotech Pharmaceuticals Limited. |
| 13th December 2013 | Division Bench of Karnataka High Court allowed withdrawal of writ petition with liberty to file a fresh one. |
| 14th November 2017 | Single Judge of Karnataka High Court dismissed the writ petition filed by the appellant. |
| 13th May 2024 | Supreme Court quashed the penalty. |
Course of Proceedings
Initially, a writ petition was filed by Karnataka Biotics before the High Court of Karnataka challenging the demand for penalty. This petition was allowed by a single judge. However, the respondents appealed, and the Division Bench permitted the withdrawal of the writ petition with the liberty to file a fresh one, considering the amalgamation.
The present appellant, M/S. Embio Limited, then filed a fresh writ petition, which was dismissed by a single judge on the ground that Karnataka Biotics had withdrawn the earlier writ petition without reserving any liberty to re-agitate the same issue. A writ appeal against this order was also dismissed by the Division Bench on the same ground. This led to the appeal before the Supreme Court.
Legal Framework
Relevant Legal Provisions
-
Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992:
This section outlines the penalties for contravening the provisions of the Act, rules, orders, and foreign trade policy. It states:
“Where any person makes or abets or attempts to make any export or import in contravention of any provision of this Act or any rules or orders made thereunder or the foreign trade policy, he shall be liable to a penalty of not less than ten thousand rupees and not more than five times the value of the goods or services or technology in respect of which any contravention is made or attempted to be made, whichever is more.”
Arguments
The appellant argued that the rehabilitation scheme sanctioned by BIFR included a waiver of customs duty related to the non-fulfillment of export obligations. Therefore, no penalty should be imposed. They also contended that the Division Bench of the High Court erred in stating that no liberty was given to file a fresh writ petition when the previous one was withdrawn. Additionally, they argued that Section 11(2) of the FT Act does not apply to cases of non-fulfillment of export obligations but only to contraventions of actual import or export activities.
The respondents argued that the rehabilitation scheme did not waive the penalty for non-fulfillment of export obligations. They maintained that the appellant’s predecessor had contravened the terms of the license, justifying the penalty. They also relied on decisions of the High Courts of Gujarat and Delhi to support their contentions.
| Appellant’s Submissions | Respondent’s Submissions |
|---|---|
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Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section but the issues can be inferred from the judgment:
- Whether the High Court was correct in dismissing the writ petition on the ground that the earlier writ petition was withdrawn without reserving liberty to file a fresh petition?
- Whether the penalty imposed under Section 11(2) of the FT Act for non-fulfillment of export obligation is valid?
- Whether the waiver granted under the rehabilitation scheme included the penalty imposed for non-fulfillment of export obligation?
Treatment of the Issue by the Court
| Issue | Court’s Decision |
|---|---|
| Whether the High Court was correct in dismissing the writ petition on the ground that the earlier writ petition was withdrawn without reserving liberty to file a fresh petition? | The Supreme Court held that the High Court erred in dismissing the writ petition on this ground as the Division Bench had explicitly granted liberty to file a fresh petition. |
| Whether the penalty imposed under Section 11(2) of the FT Act for non-fulfillment of export obligation is valid? | The Supreme Court ruled that Section 11(2) of the FT Act applies only to contraventions of actual import or export activities, not to non-fulfillment of export obligations. Therefore, the penalty was not valid. |
| Whether the waiver granted under the rehabilitation scheme included the penalty imposed for non-fulfillment of export obligation? | The Supreme Court clarified that the waiver granted under the rehabilitation scheme was specifically for customs duty and interest, not for the penalty imposed for non-fulfillment of export obligation. |
Authorities
| Authority | How it was used |
|---|---|
| Section 11 of the Foreign Trade (Development and Regulation) Act, 1992 | The court interpreted the provision strictly, stating that it applies only to contraventions of actual import or export activities. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| Appellant’s submission that the rehabilitation scheme included a waiver of customs duty related to the non-fulfillment of export obligations. | The Court clarified that the waiver was specifically for customs duty and interest, not for the penalty imposed for non-fulfillment of export obligation. |
| Appellant’s submission that the High Court erred in stating that no liberty was given to file a fresh writ petition. | The Court agreed that the High Court erred, as the Division Bench had explicitly granted liberty to file a fresh petition. |
| Appellant’s submission that Section 11(2) of the FT Act does not apply to cases of non-fulfillment of export obligations. | The Court accepted this submission, ruling that the section applies only to contraventions of actual import or export activities. |
| Respondent’s submission that the rehabilitation scheme did not waive the penalty for non-fulfillment of export obligations. | The Court agreed that the waiver was specific to customs duty and did not include the penalty. |
| Respondent’s submission that there was a contravention of the terms of the license. | The Court acknowledged the contravention but clarified that the penalty under Section 11(2) of the FT Act was not applicable. |
The Court considered Section 11 of the Foreign Trade (Development and Regulation) Act, 1992* and interpreted that the section applies only to contraventions of actual import or export activities, not to non-fulfillment of export obligations.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by a strict interpretation of Section 11(2) of the FT Act. The court emphasized that the provision is penal and must be construed narrowly, applying only to contraventions of actual import or export activities. The fact that the appellant’s predecessor had failed to meet export obligations was not seen as a violation of the import or export policy itself. Additionally, the court gave weight to the fact that the High Court had erred in its assessment of the previous writ petition withdrawal. The court also considered the rehabilitation scheme but clarified that the waiver was specific to customs duty, not the penalty.
| Reason | Percentage |
|---|---|
| Strict interpretation of Section 11(2) of the FT Act | 40% |
| High Court’s error in assessing the previous writ petition | 30% |
| Specific nature of the waiver under the rehabilitation scheme | 30% |
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The court’s decision was more influenced by legal considerations (70%) than factual aspects (30%).
The court’s reasoning was based on a strict interpretation of the law, focusing on the specific wording of Section 11(2) of the FT Act. The court rejected the argument that non-fulfillment of export obligations automatically equates to a contravention of the law. The court also took into account the error by the High Court in assessing the previous writ petition.
The court stated, “In the present case, there is no allegation made by the respondents against the appellant’s predecessor of making or attempting to make any export or import in contravention of the FT Act, any Rules or orders made thereunder, or the foreign trade policy.”
The court further clarified, “Under the license granted to the appellant’s predecessor, there was an obligation to export finished goods by earning foreign exchange equivalent to USD 2,59,948 within a period of five years. The allegation is of the failure to abide by the obligation to export the finished goods within a period of five years. So, there is no allegation of attempting to make an export or import, which is covered by Section 11(2).”
The court also emphasized, “Section 11(2) is a penal provision. It must be strictly construed.”
Key Takeaways
- Businesses operating under export promotion schemes should note that penalties under Section 11(2) of the FT Act are not applicable for mere non-fulfillment of export obligations.
- The provision applies strictly to contraventions of actual import or export activities.
- Rehabilitation schemes providing waivers should be carefully examined to understand the scope of the waiver.
- The judgment highlights the importance of strict interpretation of penal provisions.
Directions
The Supreme Court set aside the impugned judgments of the Single Judge and Division Bench of the High Court. The court also set aside the Order-in-Original dated 16th July 2004, which had imposed the penalty.
Specific Amendments Analysis
There was no discussion on any specific amendments in the judgment.
Development of Law
The ratio decidendi of this case is that Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992, applies only to contraventions of actual import or export activities and not to non-fulfillment of export obligations. This judgment clarifies the scope of the penal provision and provides relief to businesses that may have been penalized for failing to meet export targets without violating import or export regulations. This is a significant clarification of the law.
Conclusion
The Supreme Court’s judgment in M/S. Embio Limited vs. Director General of Foreign Trade & Ors. provides a crucial clarification on the applicability of Section 11(2) of the Foreign Trade (Development and Regulation) Act, 1992. The court held that the penalty under this section cannot be imposed for mere non-fulfillment of export obligations, but only for contraventions of actual import or export activities. This decision provides relief to companies operating under export promotion schemes and emphasizes the need for a strict interpretation of penal provisions.