Nalini Jewellers vs State Bank Of India And Anr on 11 October, 2022

[Cites 6, Cited by 0]

Delhi High Court - Orders

Nalini Jewellers vs State Bank Of India And Anr on 11 October, 2022

1. Petitioner is aggrieved with State Bank of India / Respondent No. 1 ['SBI']'s unlawful debit/charges in contravention of Respondent No. 2 / Reserve Bank of India ['RBI']'s Circulars on Packing Credit in Foreign Currency ['PCFC'] and seeks recovery of the said amount.

2. The facts leading up to the dispute are as follows:

2.1. The Petitioner-partnership is an exporter of gold jewellery. It has been availing PCFC loans from SBI, Overseas Branch, New Delhi, since 1991.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 1 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

2.2. For the assessment year 2007-2008, Petitioner noticed that SBI had been debiting commission at the rate of 0.5% on all PCFC loans (reflected in its Cash Credit Account statement) that were remitted directly without conversion into INR, in blatant violation of RBI's Circulars dated 18th April 2006 and 14th November 2006. The debits were for PCFC loans raised during the period between 28th November 2006 to 2nd June 2008, sometimes in the guise of a 'commission' and at other times as a 'spread' totalling Rs. 15,69,613/-. 2.3. Petitioner lodged its protest with SBI against such debits, as the same amounted to additional interest on PCFC loan, being commission charged as a percentage of the loan amount. Various representations were made to SBI vide letters dated 02nd July 2007, 27th September 2007 and 13th November 2007. Further, the Petitioner had inter alia pointed out that for similar transactions before 2006, no such commission on remittance was ever charged.

2.4. On 09th May 2008, the Petitioner filed a complaint with Banking Ombudsman against SBI for such illegal debits. On 11th September 2008, after hearing the parties, Petitioner's complaint was referred to the Department of Banking Supervision ['DBS'] of RBI. 2.5. On 30th November 2010, Petitioner received a letter from DBS accepting Petitioner's stance, and further stating that RBI's Circular dated 14th November 2006 advised that in case of export credit in foreign currency, banks could not levy any other charges in any manner under any name other than for recovery towards out-of-pocket expenses incurred. SBI was advised to restore to the Petitioner the commission that was charged in excess.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 2 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

Litigation history:

2.6. Despite requests/representations sent by the Petitioner, none of the Respondents took any steps to redress Petitioner's grievance and the above advisory instructions were not implemented by SBI. Thus W.P.(C.) 3292/2014 titled Nalini Jewellers v. State Bank of India and Ors. was filed by the Petitioner before this court, seeking directions to SBI to follow RBI Circular dated 14th November 2006 and refund the monies deducted from Petitioner's account along with interest. 2.7. When the abovesaid petition came up for hearing on 10th February 2016, RBI was asked to explain why no action had been taken despite its instructions. Thereafter, on 16th February 2016, Court directed the Petitioner and SBI (through its representative) to appear before the General Manager-in-charge, Department of Banking Supervision, RBI on 3rd March 2016, who was directed to hear and pass a reasoned order on the complaint.

2.8. Accordingly, on 1st April 2016, the Impugned Order was passed by the General Manager-in-Charge, Department of Banking Supervision, RBI, rejecting representations made by the Petitioner and holding SBI's act of charging a commission of 0.5% to be permissible as per RBI's directives. It concluded that making a PCFC advance available to a customer by a bank is distinct from the utilisation of the same, whether by sending remittance in foreign currency or converting into INR for credit to the Cash Credit Account or cash credit account;

levying charges on services offered for sending direct remittance or converting into INR does not violate RBI interest rate ceiling on PCFC loan; such charges/commission being charged by a bank would Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 3 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 depend upon the nature/type of transaction and operational costs being incurred by the bank.

2.9. In view of the Impugned Order, W.P.(C.) 3292/2014 was disposed of on 21st April 2016, with liberty to the Petitioner to raise its contentions against same in a fresh writ petition.

2.10. In the afore-noted background, the present petition has been filed. Previous orders:

2.11. On 16th May 2018, this Court heard the matter for some time and ordered as follows:

"1. I have heard learned counsel for the parties for some time.

2. Mr. Jain, who appears for the petitioner, says that the interest @ 1% plus LIBOR is charged only when remittance is made.

3. On the other hand, Mr. Dutt, learned Senior Counsel, who appears for RBI and Mr. Kapur, who appears for SBI, say that the two transactions are different. According to them, interest @ 1% plus LIBOR is charged as and when Packing Credit in Foreign Currency (PCFC) facility is made available and that, once remittance is made under instructions of the customer i.e. the writ petitioner, in this case, an additional charge at the rate of 0.5% is levied.

4. Mr. Jain, on the other hand, refutes the stand taken by the respondents and says that he will file an affidavit along with requisite material in support of the stand taken before me. 4.1 It is ordered accordingly.

5. Likewise, in these circumstances, Mr. Kapur is directed to place SBI's stand on record via an affidavit. The affidavit filed by SBI will be supported by the statement of account for the relevant period wherein debits made qua interest on advance and remittance charge will be highlighted. The affidavit which SBI will file shall set out the breakup of remittance charges levied on the petitioner. The affidavit will also indicate as to whether such like remittance charge was levied by SBI uniformly vis-a-vis all customers. (...)"

2.12. Then, on 02nd December 2019, this court recorded the following observations:

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 4 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

"1. Apart from anything else, in the impugned order, the following has been stated in paragraph "h":-

".... h) Department of Banking Supervision, Reserve Bank of India, New Delhi vide letter dated November 30, 2010 advised State Bank of India that the bank's action of charging additional commission @ 0.50% is not in accordance with the guidelines issued under DBOD. Dir. (Exp.) No. 38/04.02.01/2006-07 dated November 14, 2006, therefore, the bank may take steps to restore additional commission charged by it to the complainant at the earliest. Further, on that very day. Department of Banking Supervision, Reserve Bank of India, New Delhi vide letter dated November 30, 2010 advised M/s Nalini Jewellers that State Bank of India had been advised to restore the additional commission charged to it."

2. A perusal of the said paragraph of the impugned order would show that for levying of 0.5% remittance charges, there should normally be an agreement between the bank and the customer, i.e. in this case the petitioner, as otherwise prima facie it may be contrary to the 14th November 2006 guidelines issues by RBI.

3. Insofar as chargeable rates for the array of service which the bank offers are concerned, rates qua those services are admittedly adverted in the internal schedule of charges which is appended on page 164 of the paper book.

4. Though the argument advanced on behalf of the petitioner is that security charges only refers to PCFC disbursal, for the moment, respondent no. 1 SBI is directed to place on record the agreement, if any, it had with the petitioner which allowed it to levy the remittance charge @ 0.5%.

5. Mr. Kapur says that he will place the agreement on record.

6. Mr. Suhail Dutt is also directed to obtain instructions on this aspect of the matter and place the same before the Court before the next date of hearing."

3. Along these lines, this Court has heard the counsel for the parties, who have made the following submissions.

CONTENTIONS OF PETITIONER:

3.1. RBI Circulars, being statutory in nature, bind all banks including SBI.

As such, SBI could not have levied any charges over and above the prescribed ceiling. The Circular dated 14th November 2006 issued by Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 5 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 RBI pertaining to disbursal/granting loan under PCFC, imposed the condition that "the Bank will not levy any other charges in manner under any name viz. service charge, management charge etc., except for recovery towards. out of pocket expenses incurred by Bank." 3.2. RBI, while fixing the ceiling rates, is assumed to have taken into account all the heads of charges, expenses, etc. incurred by the Banks in providing loans and advances. Therefore, whatever the nature of additional charges, they would be covered in the additional rate of 25 basis points permitted by RBI.

3.3. The Impugned Order is contrary to the earlier view taken by the same department on 30th November 2010 wherein it was held that imposition of commission on PCFC loan by SBI was in violation of RBI Circulars.

3.4. RBI has failed to note that in case the customer chooses to disburse PCFC in foreign currency and not in INR, the said loan can only be used to make an outward remittance. SBI cannot make a distinction between sanction and utilisation of the loan.

3.5. While passing the Impugned Order, RBI failed to appreciate that:

I. SBI's additional commission at the rate of 0.5% on the PCFC loans was violative of its own Circulars.

II. The internal schedule of charges of SBI on PCFC loans itself proceeds on the premise that a commission of 0.5% would be charged only when the interest on the loan charged was 0.75% plus LIBOR. Therefore, by permitting SBI to continue charging a commission of 0.5% even after permitting SBI to increase interest rate to 1% plus LIBOR, RBI was perpetuating unjust enrichment of the bank.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 6 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

Conversely, once SBI had taken advantage of RBI Circular dated 18th April 2006 read with Circular dated 14th November 2006, and increased its PCFC loan rate to 1% plus LIBOR, its schedule of charges, which provided 0.5% commission on remittance stood superseded and could not be given effect to.

III. RBI has assumed that 0.5% commission charged by SBI on PCFC loans, was a "charge on forex remittance" ignoring the fact that SBI had not provided any documentary evidences, such as SBI's own internal schedule of charges and the bank account statement (of the Petitioner's account issued by SBI) narrations, all of which point to the fact that charges were related to PCFC disbursal and were in no way connected to Forex remittance charges. The Impugned Order wrongly proceeds on the assumption that any remittance would be outside the purview of RBI's own Circulars.

IV. The Impugned Order simply accepted SBI's claim that these are remittance charges without testing whether they actually were remittance charges or PCFC disbursal charges. V. SBI's claim that 0.5% remittance is an "import payment" is false especially as no import is involved. As per special provision in the EXIM and Foreign Trade Policy (specifically laid out in Clause 4A.24 of Handbook of Procedures 2004-09), exporters were permitted to make dollar remittance to MMTC's EEFC account for purchase of gold for export.

VI. The 'Spread Charge' of 2% is just the tip of the iceberg and SBI can be asked to furnish the total amount that it debited all its customers Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 7 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 under this head, the amount will run into several crores, if not hundreds of crores.

VII. Lastly, as per SBI's own submission, there was an automated retrospective debit of ₹ 7,56,780/- to Petitioner's account, after the Petitioner reported the matter to the Banking Ombudsman. No such retrospective debits were made to any other customer.

CONTENTIONS OF RBI:

4.1. The Impugned Order is a reasoned order, passed after giving full opportunity to the Petitioner to put forth its case and after due consideration of all arguments and entire facts and circumstances of the case as well as the true scope of the Circulars and banking practices.

4.2. The sole issue raised in the present petition is whether a bank can levy/charge commission at the rate of 0.5% on PCFC disbursements/forex remittance in view of RBI Circulars dated 18 th April 2006 & 14th November 2006. A plain reading of two Circulars makes it clear that ceiling cost interest rate on Export Credit in Foreign Currency was LIBOR plus 100 basis points, and the banks will not levy any other charges in any manner except for recovery towards out-of-pocket expenses incurred by banks. It is further clear that the aforesaid ceiling is applicable on making the PCFC advance available to the customer by a bank.

4.3. Making a PCFC advance available to a customer by a bank is distinct from its utilization by the customer. Providing direct remittance or utilization of loan amount is a service distinct from providing such Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 8 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 loan amount to the customer. One is an act of providing the loan and other is utilization. Since RBI Circulars deal only with charges leviable on providing of a PCFC advance, these Circulars will have no application on the act of utilization of PCFC advance. 4.4. In the present case, commission at the rate of 0.5% was debited by SBI only on utilization of PCFC loans and thus the same was outside the ambit of the Circulars. Restrictions on charges other than out of pocket expenses shall not apply on the service of utilization of PCFC funds.

4.5. RBI's interpretation is based on the rationale that in case of currency conversion, banks earn exchange commission on the conversion of foreign currency to INR. Since in the present case there was no conversion, banks would charge commission as per its own internal schedule of charges to cover the operational cost.

4.6. Applying the aforesaid, it is the way in which RBI has understood the Circular which is relevant and determining factor and in the present case and not the interpretation which is sought to be given by the Petitioner.1 The apex Court has also held that even if two views are possible, it will not be proper for the courts to substitute their judgment for that of RBI.2 Thus, the interpretation of the Circulars given by RBI was correct, and charges on utilization of the PCFC funds was not covered or prohibited by the Circulars.

Reliance was placed on: State of U.P. and Ors v. S. K. Theatre Productions &. Ors., (2007) 10 SCC 198, at Para 11, which read as follows: "It is well settled that a relevant factor for interpretation if there is some ambiguity in a Circular is how the Circular has been understood by the department itself which issued it. This is particularly so when there are two interpretations possible, as is in the present case."

Reliance was placed on: Ganesh Bank of Kurundwad Ltd. & Ors. v. UOI & Ors., (2006) 10 SCC 646, at paragraph 36.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 9 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

4.7. RBI, in the Impugned Order has also differentiated between EEFC and PCFC accounts, holding that EEFC account allows a bank to enjoy the balance in the account as float funds, whereas PCFC account is in the nature of a loan account where the funds can be used by customers at any time and hence a bank is not able to use them. From the aforesaid it is clear that conclusions arrived by RBI were based on strong reasons and the correct interpretation of the Circulars.

CONTENTIONS OF SBI:

5.1. SBI has a right to charge for services rendered by it as and when Petitioner has utilized proceeds of PCFC amount for settlement of other import bills, which are forex related charges and not advance related charges. RBI Circular relates to disbursal of PCFC loan and not its usage; retirement of import bills is a separate set of transactions.

5.2. Remittance charges of 0.5% were levied uniformly to all customers of SBI who had taken its facility of remittance for import using PCFC. Bank's Forex Manual stipulates commission of 0.5% of amount of remittance, which is not disputed by Petitioner.

5.3. Petitioner is confused between two different account types viz. EEFC (Exchange Earner's Foreign Currency Account) which is a deposit account in foreign currency and PCFC account (Preshipment Credit in Foreign Currency) which is a loan account in foreign currency. The two types of accounts are distinct from each other - one is provision of a loan and the other is loan utilization. 0.5% is levied as per Bank's instant instructions of settlement of import bills (obligation).

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 10 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

5.4. The Petitioner has made payment directly in foreign currency;

whereby, SBI has lost exchange profit as there is no conversion, hence it charges 0.5% of amount on remittance in lieu of exchange profit. 5.5. SBI has charged 0.5% in CC account as and when Petitioner has utilized proceeds of PCFC amount for settlement of import bill by making payment in foreign currency with respect to other import transaction and not when funds are drawn from EEFC account. 5.6. With reference to para (f) of affidavit filed by Petitioner on 05th September 2018 qua transaction with MMTC; whereby, it is clarified that SBI has charged commission at the rate of 0.5%. The commission of Rs 31,189/- (i.e. 0.5%) was made on direct remittance of PCFC disbursal of 94,000 euros ($ 138942.97) and not on total amount of $150,542.93 ($ 139842.97 from PCFC and $ 11599.96 from EEFC account). Therefore, SBI has not levied any additional charges while granting export credit in foreign currency.

5.7. Remittance charges are outside the scope of RBI Circular dated 14th November 2006 and SBI has charged commission of 0.5% of amount on remittance (in lieu of exchange profit) as per scheduled of charges. 5.8. Petitioner was very well aware of rate of charges towards commission in lieu of exchange profit, as same has been filed by Petitioner along with petition.

5.9. SBI has filed statement of account of Petitioner which has been marked as 'IA' (Interest on Advances) and 'RC' (Remittance Charges) in order to establish that two charges are distinct. Breakup of remittance charges on Petitioner has also been filed from period 28th November 2006 till 26th May 2008 along with affidavit dated 07th Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 11 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 September 2018. From bare perusal of aforesaid statement, it is established that as and when proceeds of PCFC loan were used for making payment of import bills in foreign currency, SBI has charged 0.5% on amount of remittance.

5.10. SBI earlier followed its Master Module, wherein there was no system for recovering usage charges on PCFC account automatically, and it had to be recovered manually. However, after implementation of Core Banking Solution (CBS), a system which was started for recovery towards usage charges on PCFC account automatically; accordingly, recovery was made of Rs. 7,54,780/-.

5.11. Charges of 0.5% were being recovered for services rendered as and when Petitioner has utilized proceeds of PCFC for settlement of other import bills which are in nature of services offered by SBI towards operational cost viz. draft charges, TIs, operational cost, swift charges, follow up for bill of entry, technology charges, loss of exchange of profit etc., which is outside scope of RBI Circular. 5.12. PCFC is an advance provided by SBI to exporter for financing purchase, processing, manufacturing, or packing of goods prior to shipment/ working capital expenses which is settled by export proceeds. However, in present case, PCFC was not settled with export. proceeds, rather it was utilized for making payment for import transaction, which is permitted by RBI, for which SBI is entitled to charge 0.5% towards remittance charges.

ANALYSIS:

6. What is FCPS and how is it regulated?

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 12 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

6.1. Packing Credit in Foreign Currency ["PCFC"] is a form of pre-

shipment credit facility, extended by certain banks to exporters in foreign currency, at internationally competitive rates, upon evidence of a confirmed order for export, for the purpose of procuring inputs required for purchase, processing, manufacturing or packing of goods which would ultimately be exported by them. For availing this facility, an exporter has to approach SBI with a confirmed order and the loan is then granted in a foreign currency of the choice of exporter. The purpose of this facility is to boost export, as it provides low interest rate and assures that the exporter does not suffer due to paucity of funds. PCFC also shields an exporter from price fluctuation in foreign currency, for the period between the import payment and the export realization. Repayment of PCFC loan is done when the final product is to be exported and an export bill is raised in foreign currency. The loan is repaid directly from export proceeds in the same foreign currency, and interest on the PCFC loan is debited from the current account of the exporter.

6.2. The PCFC advance, disbursed into the PCFC account of the exporter, can be utilized by the exporter in two ways: (a) By conversion into INR by the customer/exporter and credited into current account/cash credit account of the customer who can then use it to make local payments as well as reconvert it into foreign currency and send remittance outside, or, (b) without conversion into INR, whereby the customer/exporter can directly make outward remittance in foreign currency to the customer's overseas party/importer. (Admittedly, Petitioner's case was the latter).

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 13 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

6.3. For PCFC facility, RBI has, from time to time, issued Circulars to all Scheduled Commercial Banks including SBI, prescribing ceiling rate that is to be charged by Banks for granting PCFC loan. Such ceiling is linked to the international benchmark LIBOR (i.e. London Interbank Offered Rate), which is the average of interest rates estimated by each of the leading banks in London, that it would charge, in case, it was to borrow from other banks.

6.4. On 18th April 2006, in respect of the PCFC loans, RBI issued one such Circular [being DBOD.Dir.(Exp.) No. 78/04.02.01/2005-06)], binding on all scheduled banks, which provided for an increase in the ceiling rate on PCFC [termed "Export Credit in foreign currency" in the Circular] by 25 basis points to LIBOR +100 basis points (1%), from the earlier ceiling rate of LIBOR +75 basis points (0.75%), with immediate effect. The said Circular reads as under:

"RBI/2005-06/362 DBOD. DIR (Exp). No. 78/04.02-01/2005-06 April 18, 2006 All Commercial Banks Dear Sir, Interest Rates on Export Credit in Foreign Currency Please refer to paragraph 113 of the Annual Policy Statement for the year 2006-07 enclosed to the Governor's letter No. MPD.BC.279/07.01.279/2005-06 dated April 18, 2006 relating to export credit in foreign currency.

2. On the basis of the recommendation of the Working Group to Review Export Credit, it has been decided to revise the ceiling rate on export credit in foreign currency by banks to LIBOR plus 100 basis points from the present ceiling rate of LIBOR plus 75 basis points with immediate effect. Similar changes may be effected in interest rates in cases where EURO LIBOR/EURIBOR have been used as the benchmark. The rates of interest applicable have been incorporated in the Annex to the DBOD.DIR. BC. No. 77/04.02.01/2005-06 dated April 18, 2006 enclosed to this Circular.

3. The revision in the rates of interest would be applicable not only to fresh advances but also to the existing advances for the remaining period.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 14 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

4. Please acknowledge receipt.

Yours faithfully, (P. Vijaya Bhaskar) Chief General Manager"

6.5. Subsequently, on 14th November 2006, RBI issued another Circular [being DBOD.Dir.(Exp.) No. 38/04.02.01/2006-07], binding on all scheduled banks, wherein while explaining the rationale behind the earlier Circular dated 18th April 2006, it clarified that the increase in ceiling rate on export credit in foreign currency to LIBOR plus 100 basis points was subject to the condition that banks would not levy any other charges, in any manner or under any name viz. service charge, management charge, etc. except for recovery towards out of pocket expenses incurred by banks. The said Circular reads as under:

"RBI/2006-07/151 DBOD. DIR (Exp). No. 38/04.02-01/2006-07 November 14, 2006 23 Kartika 1928(S) All Scheduled Commercial Banks (excluding RRBs) Dear Sir, Interest Rates on Export Credit in Foreign Currency As you are aware, it was proposed in Annual Policy statement for the year 2006-07 (para 113) on the basis of the recommendation of the Working Group to Review Export Credit, to increase the ceiling rate on Export Credit in Foreign Currency by 25 basis points to LIBOR plus 100 basis points from the earlier ceiling rate of LIBOR plus 75 basis points with immediate effect. Accordingly in terms of instruction issued vide our Circular DBOD.DIR(Exp.)78/04.02.01/2005-06 5PIeaikpriI l8,''202^'w¥s decided to revise the ceiling rate on Export Credit in Foreign Currency to LIBOR plus 100 basis points with effect from April 18, 2006. As stated at para 5 B recommendation (i) of the Working Group, rise is subject to the condition that banks will not levy any other charges, if any. manner under any name viz. service charge management charge etc. except for recovery towards out of pocket expenses incurred by banks. It has however been represented to us by some exporters/export organizations that some banks are levying service charges in addition to the revised interest rate ceiling prescribed by the RBI.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 15 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

2. Hence, it is hereby advised that in the case of Export Credit in Foreign Currency, banks should not levy any other charges in any manner under any name viz. service charge, management charge etc. except for recovery towards out of pocket expenses incurred.

Yours faithfully, (P. Vijaya Bhaskar) Chief General Manager"

6.6. Section 21 and 35-A of the Banking Regulation Act, 1949 enables RBI to issue directives in public interest to regulate the charging of interest on loans or advances made. It is in exercise of this power that RBI had issued Circulars dated 18th April 2006 and 14th November 2006 increasing the ceiling rate on export credit in foreign currency to LIBOR plus 100 basis points from the earlier rate of LIBOR plus 75 basis points, subject to condition that banks would not levy any other charges except for recovery of out-of-pocket expenses incurred by SBI.

7. The purpose behind PCFC credit must also be underscored, as the same has been completely ignored by Respondents for the reasons discussed later in the judgment. This facility has been extended to aid and facilitate exports. The exporter needs to buy foreign currency to procure raw materials from foreign suppliers and thus needs foreign currency for the said purpose. It is only on realization of export proceeds, that an exporter receives the foreign currency against the export bill. This exposes exporter to fluctuation in the foreign currency price for the period between import payment and export realization. PCFC loan ensures that there are no foreign currency conversions, which acts as a protection for exporters from foreign currency fluctuations by hedging the exposure. This feature of PCFC credit facility is integral to the instant case.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 16 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

8. Petitioner was alerted by debits made by SBI in its Cash Credit Account, at the rate of 0.5% on all PCFC loans, that were remitted directly without conversion into INR, made during November, 2006 to June, 2008, which were termed as 'commission' or 'spread' totalling to an amount of Rs. 15,69,613/-. The letter dated 30th November 2010 from DBS to the Petitioner stated that RBI Circular advised that in case of export credit in foreign currency, banks would not levy any other charge in any manner, under any name other than for recovery towards out-of-pocket expenses incurred by them. DBS advised SBI to restore the additional commission that it had charged, back to the Petitioner. However, that instruction was never implemented and instead, SBI thereafter changed its position by contending that debits made in the account of Petitioner were not on account of PCFC disbursement, but were instead remittance charges. SBI thus, refused to refund the commission, taking a stand that the nature of debit was on account of commission on PCFC disbursements as per SBI's own internal Schedule of Charges.

9. Further, as detailed in the facts, on 01st April, 2016, the Impugned Order came to be passed by RBI, holding that the commission/spread charged by SBI did not contravene RBI's directives.

10. Before this court today, SBI as well as RBI, have both taken a united stand supporting the view taken in the Impugned Order dated 01st April, 2016. They have strongly asserted that PCFC advance available to the customer is distinct from utilization by the customer. They have contended that providing a direct remittance of loan amount is a service which is distinct from the service of providing such loan to customers for their utilization. For this reason, they have contended that the debit of 0.5% Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 17 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 commission is only on utilization of PCFC loans, which is outside the ambit of Circular dated 08th April, 2006 and the restriction charges would therefore not apply on the service of utilization of PCFC funds.

11. In the opinion of the Court, SBI as well as RBI have proceeded on a wrong assumption. This distinction is artificial, and if accepted, would defeat the entire purpose of PCFC loan. Both SBI and RBI are well aware that PCFC loan is taken in foreign currency. Both RBI as well as SBI, in their stand before this Court acknowledged that the customer/exporter can directly make an outward remittance in foreign currency to the overseas importer/client. It can be utilized for making remittances for the purpose of executing the export order. To this extent, in fact, there is no quarrel. It must also be remembered that SBI has not controverted that the payments made by Petitioner were outside the purview of fulfilling the export order for which PCFC facility was extended to Petitioner. It has also not been disputed that in the event the Petitioner would have converted the amount into INR and then re-converted into foreign currency and sent a remittance outside, this commission was not to be levied. Thus, merely because the Petitioner has chosen to exercise an option of outward remittance in foreign currency, should not render the transaction to be beyond the purview of RBI's Circular dated 18th April, 2006. Such remittances are inherently part of PCFC loan scheme and cannot be considered as a separate transaction, particularly when characteristic feature of PCFC facility is to facilitate customers to avail loan in foreign currency, without conversion into INR. The timing of remittance coincides with time of disbursement of PCFC, especially in the instant case. Therefore, terming the commission as a Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 18 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 'remittance charge', only to give a semblance of a transaction which is beyond the purview of the Circular, cannot be countenanced.

12. In the Impugned Order dated 01st April, 2016, DBS of RBI itself acknowledges that PCFC advance can be utilized in two ways, as extracted below:

"(B) Remittance related charges emanating from utilization of loan amount:

Case I: If PCFC (Amount in Foreign Currency) is converted to INR as part of utilization. Commission relating to remittance (usage): Nil (The Bank earns exchange income on conversion of Foreign Currency into INR, hence commission is waived) Case II: If PCFC (Amount in Foreign Currency) is utilized as Foreign currency Commission relating to remittance (usage): 0.50% in lieu of exchange income accruing to the bank under Case I, where foreign currency amount is converted into Indian Rupees. Therefore, interest cost recovered from the firm was always within the RBI stipulated ceiling of LIBOR +1% and thereby clearly showing that the bank abided by the RBI guidelines and have charged the firm the interest on their PCFC loans within the stipulated ceiling."

13. Unmistakably, a borrower is free to choose any of the two modes of taking PCFC loan. In the instant case, Petitioner chose the second one, where Petitioner elected not to convert PCFC loan into INR. This would not render the loan to be purely a 'remittance transaction', so as to enable banks to impose additional charges. Since the second mode opted by Petitioner allowed utilization of the loan only by way of remittance (as there was no conversion or re-conversion of foreign currency), PCFC disbursements cannot be separated from remittance. It still remains a PCFC disbursement. The imposition of commission, treating the said transaction to be a subsequent remittance, is therefore a contravention of the spirit of the RBI Circulars. It cannot be deemed to be a loan given to customer, for the purpose of justifying levy of additional charges. Since the source of outward remittances is PCFC loan, which is not converted into INR, it is nothing but Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 19 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 'additional charges/ interest' on PCFC loan itself, which is not permissible under the Circular.

14. The Court therefore does not find that the interpretation given by RBI was based on sound reasoning. In fact, the rationale behind PCFC facility has been completely ignored by both SBI as well as RBI.

15. Respondents have argued that since there was no conversion, banks were entitled to charge commission as per their own internal Schedule of Charges to cover the operational cost. SBI as well as RBI have thus tried to justify levy of debits by contending that these are commission charges, which would cover operational cost viz. swift charges/ follow up for bill of entries/ technology charges etc. SBI also contended that they have levied commission of 0.5%, which is in line with the usual industry practice/ internal guidelines without any violation of RBI Circulars. Commission of remittance is not part of PCFC disbursal, but for the exchange loss of remittance. At the same time, SBI has admitted that if PCFC is converted intoINR, SBI does not charge 0.5% commission, however it is contended that if remittance is made directly into foreign currency, then the commission of 0.5% is charged, due to loss of exchange profit.

16. In the opinion of the Court, the above stand is the Respondents are only circumventing the issue. Remittance, as discussed above, does not fall outside the scope of the RBI Circulars. This is purely a PCFC disbursement covered by the Circulars noted above and cannot be a subject matter of internal Schedule of Charges. Since SBI could not have levied any additional charge under RBI Circulars in case Petitioner had opted for the first mode, it cannot be allowed to mean that levy of commission could be levied if the Petitioner opted for the second mode. The stand taken to justify Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 20 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 commission as a charge in lieu of exchange income, would contradict RBI Circular itself. In case where a party chooses not to convert PCFC advance from foreign currency into INR, there just being for one transaction of disbursement of foreign currency directly to the supplier of customer of Bank, all the charges, commissions, profits etc., should be included in the amount being charged as interest by Bank, on such loan. Therefore, SBI cannot be permitted to charge an amount over and above the ceiling prescribed by RBI.

17. Further, assuming SBI was entitled to charge commission on PCFC loan to compensate for loss of exchange commission, yet it cannot justify the charge of 0.5% commission. In case of conversion into INR, bank exchange profits are to the tune of Rs. 0.01/$. The 0.5% commission where the amount is not converted into INR, thus would work out to be Rs. 0.20 per dollar. This is 20 times the exchange profit which SBI would have made in case of conversion of PCFC loan into INR. Thus, even if charge of commission on PCFC loan is to be permitted, SBI cannot sustain the claim of out of pocket expenses to the exchange of 0.5% commission, in lieu of exchange profit. In this regard, it must be noted that when the Petitioner purchased dollars from the open market (at a commission of Rs. 700/- and Rs 500/- as postage), and from Petitioner's EEFC account (at a commission of Rs 700 and Rs 500 as postage), and remitted the amounts together in dollars to MMTC's EEFC account, in both the cases the remittance charges were ₹700. It is only when the Petitioner took a PCFC loan and remitted the dollars to the same MMTC EEFC account that they were charged 0.5% commission on the PCFC loan amount. For all three modes of payments, Petitioner submitted the same form to the bank, which specifically was "For Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 21 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 payments other than imports and remittance covering intermediary trade"

for which flat remittance charged was ₹700, but in case of PCFC loans, this charge went up to ₹50,000 per remittance.

18. In fact, this Court vide order dated 16th August, 2018, noticing that charges levied by SBI were exorbitant (considering the nature of transaction does not change with the source of the funds for the remittance), had directed SBI to file an affidavit giving complete break up of these charges to ascertain if they are indeed remittance charges. SBI has filed an affidavit along with ledger statements, however, it was unable to substantiate its claim that such charges were remittance charges. On the other hand, Petitioner has shown that the charges in question were indeed PCFC disbursement charges, as is evident from the following facts:

a. SBI's document titled "Advice for PCFC Disbursal" clearly show these charges as a "commission" on PCFC.

b. Since every PCFC disbursal has a unique number, the notations in the account statement against 0.5% commission mention this unique PCFC disbursal number.

c. In one peculiar case, where the remittance amount and the PCFC disbursal amounts were different, a 0.5% commission was taken only on PCFC disbursal amount and not on the remittance amount, thus proving that commission was only linked to the PCFC amount and not the remittance amount.

d. On 16th April 2008, PCFC was disbursed with direct remittance. The "Debit advice for Outward Remittance" mentions the commission as "Rs 700". The remittance message report mentions the remittance no.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 22 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

0480308TS0065621. This amount is debited to Petitioner's account on the same day with the same remittance number mentioned against it. A commission of Rs 46,190/- was debited as commission on the PCFC taken remittance no. 0480308PB0303056.

CONCLUSION

19. The purpose of extending a loan facility is inextricably linked to its disbursal by the bank and utilization by the borrower. Disbursal and utilization of a loan, thus, cannot be called independent transactions, but are two steps of a single transaction. It also cannot be said that disbursal can exist independent of utilization, for without utilization, a loan has no purpose. Disbursal of loan by a bank, and utilization thereof by the borrower, are not dissociated from one another and rather are two facets of the same transaction. If the disbursal is considered independent of utilization, any restriction/imposition on the disbursal can easily be circumvented by applying it on all modes of utilization. It is evident in the current case that SBI was not making exchange profit in the case of direct remittance after PCFC disbursal, and hence, has loaded the same to block its usage. As SBI realized that a rupee loan gave them more income in comparison to a foreign currency loan, it started loading the only other form of utilization. SBI started charging an extra 2% under the name of "spread" in this case, thereby forcing all exporters to stop taking loans in foreign currency. The Impugned Order has not addressed the case where SBI has charged extra amount of 2% under the name of "spread" even in case where PCFC was converted into INR but no remittance was sent. SBI, in a further brazen manner, started charging a 2% spread charge on PCFC disbursal in Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 23 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45 place of the 0.5% commission, and on PCFC disbursals that were converted to INR (not even remitted outside India). In this PCFC disbursal, there was not even any remittance but a "Spread Charge of 2%" was debited to Petitioner's account. Merely because a particular mode is less beneficial for SBI, it cannot be allowed to make it less viable for borrowers to deter them from opting for it. The DBS of RBI, instead of implementing RBI's own Circulars, has sided with SBI, and given an interpretation contrary to the same. The action of SBI and its affirmation by RBI by way of the Impugned Order, are thus arbitrary, irrational and violative of Article 14 of the Constitution of India, and are liable to be set aside.

DIRECTIONS

20. In view of the above, this court is of the considered opinion that SBI's deduction of monies from the account of the Petitioner as 'commission on PCFC' falls fowl of RBI Circular No. DBOD DIR (Exp) 38/04.02.01/2006- 07 dated 14th November 2006. Accordingly, the Order dated 1st April 2016 passed by General Manager-in-Charge, Department of Banking Supervision, Reserve Bank of India, cannot sustain, and the same is set aside.

21. State Bank of India shall refund the monies deducted from the Petitioner's account, amounting to Rs. 15,69,613.00 within 15 days from the date of the release of this order, along with interest at the rate of 9% p.a., calculated from the deductions till the date of payment.

22. Considering the fact that the Petitioner also had to undergo several years of litigation to finally succeed in the present petition, he shall also be entitled to cost of Rs. 25,000/-, which SBI is directed to pay within the same timelines as above.

Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 24 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

22. The present petition is allowed in the above terms.

SANJEEV NARULA, J OCTOBER 11, 2022 d. negi (Corrected and released on 23rd October 2022) Signature Not Verified Digitally Signed W.P.(C) 8733/2016 Page 25 of 25 By:NITIN KAIN Signing Date:23.10.2022 12:11:45

Unlock Advanced Research with PRISMAI

Delhi High Court - Orders