Bombay High Court
Vodafone Essar Ltd vs Union Of India on 17 June, 2011
Author: D. Y. Chandrachud
Bench: D.Y. Chandrachud, Anoop V. Mohta
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dgm
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 2357 OF 2010
1 Vodafone Essar Ltd.
2 Vodafone Essar Cellular Ltd.
3 Vodafone Essar Gujarat Ltd.
4 Vodafone Essar South Ltd.
ig .... Petitioners
vs
1 Union of India
2 Director General of Foreign Trade
3 Zonal Joint Director General of Foreign Trade
4 Joint Director General of Foreign Trade .... Respondents
Mr. J. J. Bhat, Sr. Advocate with Mr. Rohan Shah, Mr. Nitya Bagadiya
and Mr. Udayan Choksi i/by Mr. Madhur R. Baya for the petitioners.
Mr. D. J. Khambata, Additional Solicitor General with Mr. Nikhil
Sakhardande, Ms. Deepti B. Mistry i/by M/s. Vaibhav Mehta &
Associates for the respondents.
CORAM: DR. D.Y. CHANDRACHUD &
ANOOP V. MOHTA, JJ.
DATE : June 17, 2011
ORAL JUDGMENT (Per Dr. D. Y. Chandrachud,J.):
Rule, by consent, returnable forthwith. With the consent of the Counsel and at their request, the Petition is taken up for hearing and final disposal.
::: Downloaded on - 09/06/2013 17:22:07 :::2 wp-2357-10.sxw 2 The four Petitioners before the Court are corporate entities and provide services either as Indian Access Providers (IAP) or as International Long Distance Operators (ILDO) in the Telecommunications sector. The Petitioners applied for Duty Credit Scrips under the Served From India Scheme (SFIS) of the Foreign Trade Policy for 2004-09. The benefit of the scheme was allowed to the First, Second and Third Petitioners, while the application of the fourth Petitioner is pending. The challenge in these proceedings under Article 226 of the Constitution is to a Circular dated 15 July 2010 issued by the Office of the Directorate General of Foreign Trade and to several notices issued by the Zonal Joint Director and by the Joint Director General, revoking the benefit granted to the Petitioners.
Since the issue before the Court arises out of the provisions of the Served From India Scheme of the Foreign Trade Policy for 2004-09, it would, at the outset, be necessary to set-forth the salient aspects of the scheme.
Served from India Scheme (SFIS).
3 Paragraph 3.6.4 of the Foreign Trade Policy comprises of the provisions of the scheme. The objective of the scheme has been laid ::: Downloaded on - 09/06/2013 17:22:07 ::: 3 wp-2357-10.sxw down in paragraph 3.6.4.1 as follows :
"3.6.4.1 Objective Objective is to accelerate growth in export of services so as to create a powerful and unique `Served From India' brand, instantly recognized and respected world over."
Paragraph 3.6.4.2 defines "eligibility" thus:
"All Service Providers, of services listed in Appendix-10 of HBP v1, who have a total free foreign exchange earning of at least Rs. 10 lakhs in preceding financial year shall qualify for Duty Credit scrip. For Individual Service Providers, minimum would be Rs. 5 lakhs."
Paragraph 3.6.4.3 defines the entitlement of an eligible service provider and is to the following effect:
"All Service Providers (except Hotels, Restaurants and other Service Providers in Tourism Sector) shall be entitled Duty Credit scrip equivalent to 10% of free foreign exchange earned during preceding financial year. However services and service providers as listed in Paragraph 3.18.1 of HBP v1 shall not be entitled."
4 Under paragraph 3.6.4.5 a Duty Credit Scrip may be used for the import of capital goods including spares, office equipment and professional equipment, office furniture and consumables; that are otherwise freely importable. The imports are required to relate to any service sector business of the applicant. The utilisation of the ::: Downloaded on - 09/06/2013 17:22:07 ::: 4 wp-2357-10.sxw Duty Credit scrips is also permitted for the payment of excise duty in terms of the relevant notifications.
5 The expression "Service Provider" is defined in clause 9.53 of the FTP as follows:
"9.53 "Service Provider" means a person providing
(i) Supply of a `service' from India to any other country;
(ii) Supply of a `service' from India to service consumer of any other country in India; and
(iii) Supply of a `service' from India through commercial or physical presence in territory of any other country
(iv) Supply of a `service' in India relating to exports paid in free foreign exchange or in Indian Rupees which are otherwise considered as having being paid for in free foreign exchange by RBI."
6 Appendix-10 to the Handbook of Procedures provide a list of services in respect of which the SFIS benefit was available. Amongst them, at serial no.2-C is Telecommunications services. The scheme is no longer available to the Telecommunications sector in respect of foreign exchange earned with ::: Downloaded on - 09/06/2013 17:22:07 ::: 5 wp-2357-10.sxw effect from 27 August 2009. The dispute in the present case relates to the period prior to the discontinuation of the scheme in relation to the Telecommunications sector.
7 As Indian Access Providers or, as the case may, International Long Distance Operators, who provide services in the Telecommunications sector, each of the Petitioners had foreign exchange earnings from the rendering of Telecommunication services.
Consequent to this, the Petitioners applied for Duty Credit scrips under the SFIS. The First Petitioner and the Third Petitioner received their Duty Credit scrips for financial years 2005-06, 2006-07 and 2007-08 from the Zonal Joint Director of Foreign Trade. The Second Petitioner received its entitlement for financial year 2005-06, 2006-07 and 2007-08 from the Joint Director General of Foreign Trade. The applications of the Fourth Petitioner were pending consideration.
8 The Director General of Foreign Trade (DGFT) had, from time to time, issued several policy circulars interpreting the provisions of the scheme. On 6 October 2004, DGFT clarified that the benefit of Duty Credit scrips under SFIS would be available only to those remittances which were received as service charges and fees levied for specific ::: Downloaded on - 09/06/2013 17:22:07 ::: 6 wp-2357-10.sxw services. The circular also provided a list of services for which the benefit under SFIS would not be available.
9 On 8 June 2005 a clarification was issued by DGFT to the effect that the words "relating to exports" under SFIS actually meant "relating to exports of services by service provider under the GATT Agreement". The circular also clarified that services rendered within India can be considered as exported and that the only way that a provider of services rendered within India could export his services would be by earning free foreign exchange as provided in paragraph 9.53(iv) of the FTP.
10 On 1 January 2008 a further circular was issued by the Office of the DGFT. The policy circular sought to restrict the eligibility for SFIS entitlements in respect of services which did not originate from India.
The circular clarified that services which did not originate from India would not be entitled to SFIS benefits. According to the circular, paragraph 9.53 of the FTP clearly stipulated that the supply of a service from India was a condition precedent to the availment of benefits under the scheme. The circular further stated that payments which were made by a service provider in India to a foreign service ::: Downloaded on - 09/06/2013 17:22:07 ::: 7 wp-2357-10.sxw provider who has provided some part of the service in a foreign country could not be counted as service originating from India and hence would not be eligible for benefits under the scheme. For instance, telecom service providers earn foreign exchange for providing services that include services not originating from India, such as global roaming charges. Such receipts of foreign exchange, it was stated, would not be eligible for SFIS. The foreign exchange earned was clarified to mean `receivables' minus `payables' in a particular year for Telecommunication service.
11 A writ petition under Article 226 of the Constitution was filed before the Delhi High Court challenging the policy circular dated 1 January 2008 to the extent that it impacted upon Telecommunication service providers. The Petition was disposed of by the Delhi High Court on 12 August 2009 on a statement by Counsel for the Petitioners that the grievance of the Petitioners would be met if the Policy Interpretation Committee (PIC) of the DGFT would consider the Petitioners' representation and clarify the position in the matter.
12 Pursuant to the orders of the Delhi High Court, various meetings were held by the Policy Interpretation Committee (PIC). The PIC at its ::: Downloaded on - 09/06/2013 17:22:07 ::: 8 wp-2357-10.sxw final meeting dated 5 July 2010 dealt with a case involving Bharati Hexacom Limited. While formulating the minutes of the meeting, the PIC considered various situations involving the provision of services in the telecom sector and clarified the entitlement to SFIS benefits in each of those situations. Following the meeting, the DGFT issued a policy circular on 15 July 2010. The circular mandated that all Regional Authorities would review the previously sanctioned telecom sector SFIS cases in accordance with the circular and the minutes of the PIC meeting held on 5 July 2010. The circular mandated that all SFIS cases shall be reopened in order to re-compute the entitlement in each case in terms of the decision taken on 5 July 2010. The Regional Authorities were directed to make recoveries and adjudication in the event that it was found that SFIS benefits in excess of what is permissible was granted or in the event that a service provider had not provided the required information.
13 The grievance of the Petitioners, in the challenge to the circular dated 15 July 2010, is to the extent that it mandates the reopening of the existing cases and the making of recoveries in relation to three of the situations which are contemplated in the minutes of the PIC meeting dated 5 July 2010. In order to appreciate the nature of the ::: Downloaded on - 09/06/2013 17:22:07 ::: 9 wp-2357-10.sxw challenge, it would be necessary for the Court to dwell briefly on the three situations which form the subject matter of the challenge.
14 The minutes of the PIC meeting of 5 July 2010 contemplate amongst the situations envisaged, the following three situations; (i) An Indian subscriber receives an international incoming call from overseas; (ii) A subscriber of a Foreign Access Provider who is "roaming" in India makes an international outgoing call to an overseas destination while in India; (iii) A subscriber of a Foreign Access Provider who is on a roaming facility while in India receives an international incoming call from an overseas destination. These situations are dealt with at serial Nos. 1, 2(a) and 2(b) of the minutes of the PIC meeting. The first case is one where an Indian subscriber has received a call in India from overseas, while the Second and Third involve a foreign subscriber who either makes or receives a call while in India to and from an overseas destination.
15 In order to appreciate the nature of the controversy, it would be necessary to spell out the link through which the call between a caller or receiver in India is established with the receiver or caller as the case may be overseas. The call between a person who makes a call and the ::: Downloaded on - 09/06/2013 17:22:07 ::: 10 wp-2357-10.sxw person who receives the call from an overseas destination is facilitated by four entities; (i) the Indian Access Provider (IAP), (ii) the Indian International Long Distance Operator (IILDO); (iii) the Foreign International Long Distance Operator (FILDO) and (iv) the Foreign Access Provider (FAP). A person who makes a call from an overseas destination, would place that call through a Foreign Access Provider.
The call would be routed through the Foreign International Long Distance Operator (FILDO) and in turn, through the Indian International Long Distance Operator (IILDO) and the Indian Access Provider (IAP) before it is received by the Indian subscriber. The IILDO receives the payment in foreign exchange from the FILDO in respect of which a claim is made for the grant of SFIS benefits.
Similarly, in the second situation, where a foreign subscriber is using a roaming facility in India and has placed an outgoing call to an overseas destination, the Indian Access Provider (IAP) would receive payment in foreign exchange from the Foreign Access Provider (FAP).
In the third situation, where a foreign subscriber who is on a roaming facility in India receives an incoming call from an overseas destination, the ILLDO would receive a payment in foreign exchange from the FILDO. The earning in foreign exchange by the Indian service providers forms the basis of the claim for SFIS benefits.
::: Downloaded on - 09/06/2013 17:22:07 :::11 wp-2357-10.sxw 16 The minutes of the PIC meeting dated 5 July 2010 deal with whether SFIS benefits would be available in each of the three situations to which a reference has been made earlier. In the first situation, where an Indian subscriber has received an international incoming call from overseas, the minutes provide, that the Indian Service Provider, namely IILDO, who earns foreign exchange for such a call is not covered by paragraph 9.53 of the FTP and the foreign exchange earnings are not entitled to SFIS benefits. In the second and the third eventualities where an overseas call is either made to a foreign overseas destination or received from an overseas destination by a foreign subscriber who is on a roaming facility in India, the minutes of 5 July 2010 stipulate that while the IAP would be entitled to SFIS benefits in respect of the foreign exchange earnings the Committee has decided that only fifty percent of the foreign exchange earned would be entitled to the benefit of the scheme.
17 The submission which has been urged on behalf of the Petitioners is that the minutes of the PIC meeting of 5 July 2010 and the consequential circular that was issued on 15 July 2010 enforcing ::: Downloaded on - 09/06/2013 17:22:07 ::: 12 wp-2357-10.sxw them amount to an amendment of the Foreign Trade Policy and are not capable of being sustained as a clarification or as an interpretation. The submission of the Petitioners is that the Foreign Trade Policy has been framed by the Central Government in exercise of powers delegated to it by Section 5 of the Foreign Trade (Development and Regulation) Act, 1992. A policy circular would be ultra-vires and unlawful where it purports to amend the terms of the policy. According to the Petitioners, in each of the three situations, namely those at serial nos. 1, 2(a) and 2(b) of the circular, the Indian Service Provider is entitled to receive the benefit of SFIS upon the plain terms of the policy. The denial of benefits in the first situation and the restriction of benefits to the extent of fifty percent in the second and the third situations is, it is submitted, an attempt to a breach or modify the terms of the policy. On the other hand, it has been urged on behalf of the Respondents by the learned Additional Solicitor General that the minutes of the PIC dated 5 July 2010 constitute no more than a clarification of what is implicit in the Foreign Trade Policy and would, therefore, amount to a lawful exercise of power.
18 The rival submissions would now fall for consideration.
::: Downloaded on - 09/06/2013 17:22:07 :::13 wp-2357-10.sxw 19 The object of the Served From India Scheme was to accelerate growth in the export of services. The purpose of doing so, the policy states in paragraph 3.6.4.1, is to "create a powerful and unique `Served From India' brand, instantly recognized and respected world over.". The learned Additional Solicitor General postulates in his submission that (i) mere earning of foreign exchange is not enough and (ii) the services must originate in and be from India. The submission finds basis in the scheme since the whole object of the scheme is to enhance the growth of export of services from India and to create a unique brand identity for services which originate in India.
That, in a sense, is the very notion underlying the attempt to create a `Served From India' brand.
20 Paragraph 9.53 of the FTP defines the ambit of the expression "Service Provider". The definition contemplates within its purview four situations. The first is a supply of a service from India to any other country. The second is the supply of a service from India to a service consumer of any other country in India. The second situation places emphasis on the situs within India of a service consumer of any other country to whom a service is provided. The third situation ::: Downloaded on - 09/06/2013 17:22:07 ::: 14 wp-2357-10.sxw involves the supply of a service from India through commercial or physical presence in the territory of any other country. While the first three situations speak of a supply of service from India, the fourth situation contemplates supply of service in India. In the fourth situation, the supply of service in India relates to exports paid in free foreign exchange or in Indian rupees which are otherwise considered as having been paid for in free foreign exchange by the RBI.
21 The conditions of eligibility for availing of benefits under the scheme are spelt out in paragraph 3.6.4.2. In order to meet the conditions of eligibility, the applicant must firstly be a service provider within the meaning of that expression in clause 9.53. Secondly, the applicant must have provided services listed in Appendix-10 of the Handbook of Procedures. Thirdly, the applicant must have a total free foreign exchange earning of at least ` 10,00,000/- in the preceding financial year (` 5,00,000/- for individual service providers). While defining the eligibility of a service provider the third condition stipulates that there should be a total free foreign exchange earning of the stipulated value. In so far as the entitlement of an eligible service provider is concerned, paragraph 3.6.4.3 provides that all service providers shall be entitled to Duty Credit scrips equivalent to ten ::: Downloaded on - 09/06/2013 17:22:07 ::: 15 wp-2357-10.sxw percent of free foreign exchange earned during the preceding financial year. The meaning and content of the expression "total free foreign exchange earning" in paragraph 3.6.4.2 which defines eligibility cannot be any different from the meaning of the expression "free foreign exchange earned", while defining entitlement in paragraph 3.6.4.3 of the policy. The learned ASG has, during the submissions, accepted this position and in our view rightly so. What the policy postulates while defining eligibility and entitlement is that a service provider of a service listed in Appendix-10 who has a free foreign exchange earning of at least the stipulated amount, would be entitled to a Duty Credit scrip of ten percent of that earning. The earning of the foreign exchange provider is the amount which is received by him in free foreign exchange in India.
22 The learned ASG sought to submit that for the purposes of clause 3.6.4.3 the amount earned must refer to the net amount earned. Ex-facie, this would not be a permissible interpretation. For one thing, the amount earned cannot be different while defining entitlement and for determining eligibility. The amount earned can only mean the same thing, while applying the conditions of eligibility and for defining the extent of the entitlement. Secondly, where the ::: Downloaded on - 09/06/2013 17:22:07 ::: 16 wp-2357-10.sxw Foreign Trade Policy postulates that a net foreign exchange earning should be computed, express provisions to that effect have been made by the Policy. For instance, in paragraph 6.5 of Chapter VI which relates interalia to export oriented units and paragraph 7.4 of Chapter VII which deals with Special Economic Zones, the policy has made a reference to net foreign exchange (NFE). Similarly, an NFE criterion has been provided for in paragraph 7.A.7 of Chapter VII.A which deals with free trade and warehousing zones. Clause 9.4(1) of Chapter IX defines NFE to mean net foreign exchange earning. Advisedly, the policy has not used the expression "net foreign exchange earning"
either while defining the conditions of eligibility or the conditions of entitlement for the Served From India Scheme. Where the same policy document employs two distinct phrases, each of those phrases must be given a separate meaning according to its plain and natural interpretation. For the purposes of defining eligibility and entitlement under SFIS, the words that have been used are `total free foreign exchange earning' and `free foreign exchange earned'. The Central Government while defining the extent of the entitlement has confined it to ten per cent of the free foreign exchange earned. If the Government intended to restrict the entitlement to ten per cent of the net foreign exchange earned, it could have so stipulated. The concept ::: Downloaded on - 09/06/2013 17:22:07 :::
17 wp-2357-10.sxw of net foreign exchange earned was present to the mind of the Union Government when it formulated the policy since it had adopted that concept in other parts of the policy. Not having adopted that concept in formulating eligibility and entitlement under the SFIS, it would not be possible to restrict the benefits of SFIS with reference to the concept of net foreign exchange earning. Any action to that effect would not amount to an interpretation of the policy, but would involve a modification, amendment or change of the policy.
23 What is equally significant is that the impugned circular requires all existing cases of the grant of SFIS to be reopened with reference to a decision which was taken by the Policy Interpretation Committee only in July 2010.
24 In the first situation envisaged in serial no.1 of the minutes of the PIC, the minutes of the meeting seek to provide justification for disallowing a grant of SFIS benefit in respect of the foreign exchange earned by an IILDO from an international call placed by an overseas customer to an Indian subscriber.
25 The learned ASG submitted that though in such a situation, ::: Downloaded on - 09/06/2013 17:22:07 ::: 18 wp-2357-10.sxw foreign exchange is admittedly earned by the IILDO, the services are not rendered to any service consumer of another country. The submission is that the flow of service has to be from India to a foreign country and where an overseas call is made by a person stationed abroad to an Indian subscriber, the IILDO does not provide any service to the foreign subscriber. This submission clearly ignores the links through which a call placed by an overseas subscriber to an Indian subscriber materialises. The call would not materialise, but for the contractual arrangements which are put in place between the IILDO and the FILDO. The IILDO provides a service to the FILDO as part of the chain through which an international call made by a person overseas to a subscriber in India is completed. Clause 9.53 (i) brings within the definition of expression "service provider" the supply of service from India to any other country. The service provided by the IILDO to the FILDO is indeed a supply of service from India to any other country for which the IILDO receives payment in free foreign exchange. That payment would entitle the IILDO to the grant of SFIS benefits.
26 The second and the third situations (Sr. nos. 2(a) & 2(b) of the PIC Minutes) involve the presence within India of a foreign subscriber ::: Downloaded on - 09/06/2013 17:22:07 ::: 19 wp-2357-10.sxw who is on a roaming facility while in India. In the second situation, the foreign subscriber makes an outgoing call overseas to an overseas destination, while in the third situation, she receives a call from an overseas destination. The minutes of the meeting of 5 July 2010 acknowledge that this would meet the definition of the expression "service provider". Sub-clause (ii) of Clause 9.53 brings within that definition supply of a service in India to a service consumer of any other country in India. The foreign subscriber is a consumer of `any other country' who is physically present in India and utilises a roaming facility while in India. A supply of service to such a person falls within the definition of the expression "service provider" in clause 9.53 (ii).
However, the minutes of the PIC seek to restrict the grant of SIFS benefits only to the extent of fifty percent of the foreign exchange that is earned. The submission of the learned ASG is that a call which is made from India by a foreign subscriber to a foreign destination cannot be put through without the inter-position of the FILDO. The learned ASG submits that while it is true that the IILDO or, as the case may, the IAP earns foreign exchange for the call which is thus made or received by a foreign subscriber while in India a payment is made to the FILDO. Hence it is urged that it is necessary to net off what is earned by the IILDO against the payment which is made to the FILDO.
::: Downloaded on - 09/06/2013 17:22:07 :::20 wp-2357-10.sxw 27 Counsel appearing on behalf of the Petitioners submits that in a situation where the foreign subscriber makes an outgoing call to an overseas destination while roaming in India, the IAP earns foreign exchange. The IAP, in turn, would make a payment in Indian rupees to the IILDO and the ILLDO, in turn, would make a certain payment in foreign exchange to the FILDO. The benefit of SFIS is claimed by the IAP. Similarly, where a foreign subscriber roaming in India receives a call from an overseas destination, the IILDO receives payment in foreign exchange from the FILDO and would make a payment in Indian rupees to the IAP. The IILDO would make a claim for the SFIS benefits in respect of the foreign exchange earned. The submission of the learned ASG is that the principle of netting off must be applied because the benefits under the SFIS must be confined to the net foreign exchange that is earned by the country. The difficulty in accepting the submission of the learned ASG is that this would amount to a substantial modification and amendment to the policy.
The document must be interpreted as it stands. The policy document has defined both the eligibility and the entitlement with reference to foreign exchange earned. The foreign exchange earned cannot be defined as the remittance of foreign exchange less an outflow.
::: Downloaded on - 09/06/2013 17:22:07 :::21 wp-2357-10.sxw Where the policy intended that the concept of the net foreign exchange should be applied it has stipulated so expressly. In the absence thereof, it was wholly impermissible for the DGFT, by means of a policy circular, to direct the implementation of what constitutes clearly an amendment of the policy.
28 For the reasons which we have indicated above, we are of the view that the circular dated 15 July 2010 in so far as it directs the implementation of the decision taken in the meting of the Policy Interpretation Committee dated 5 July 2010 is ultravires the Foreign Trade Policy for 2004-09. However, we clarify that the challenge in the present case is confined only to the decisions taken at serial nos. 1, 2(a) and 2(b) of the PIC meeting on 5 July 2010. Hence, the striking down of the circular would operate only in respect of the direction contained therein to implement the decisions which have been taken at serial nos. 1, 2(a) and 2(b).
29 Consequently, the directions contained in para 3 of the Circular dated 15 July 2010 to reopen the SFIS cases and to make recoveries in accordance with the decision taken at the PIC meeting on 5 July 2010 is quashed and set aside as regards the implementation of the decision ::: Downloaded on - 09/06/2013 17:22:07 ::: 22 wp-2357-10.sxw at serial nos.1, 2(a) and 2(b).
30 All consequential actions shall follow in accordance with the directions contained hereinabove.
31 Rule is made absolute in the aforesaid terms. There shall be no order as to costs.
(ANOOP V. MOHTA, J.) (DR.D.Y. CHANDRACHUD,J.)
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