Karnataka High Court
M/S Such Silk International Ltd vs The Development Commissioner on 11 June, 2024
Author: Hemant Chandangoudar
Bench: Hemant Chandangoudar
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NC: 2024:KHC:20505
WP No. 37315 of 2010
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 11TH DAY OF JUNE, 2024
BEFORE
THE HON'BLE MR JUSTICE HEMANT CHANDANGOUDAR
WRIT PETITION NO. 37315 OF 2010 (GM-RES)
BETWEEN:
M/S. SUCH SILK INTERNATIONAL LTD.,
PLOT NO.45,
KIABD INDUSTRIAL AREA,
KATIHALLI, ARASIKERE ROAD,
HASSAN-573 201,
REP. BY MANAGING DIRECTOR.
...PETITIONER
(BY SRI. ROHAN KORIA, ADVOCATE FOR
SRI. RAVI RAGHAVAN, ADVOCATE)
AND:
1. THE DEVELOPMENT COMMISSIONER,
COCHIN SPECIAL ECONOMIC ZONE,
KAKKANAD,
COCHIN-682 030.
Digitally signed by B
K 2. JOINT SECRETARY,
MAHENDRAKUMAR
Location: HIGH
MINISTRY OF COMMERCE & INDUSTRY,
COURT OF
KARNATAKA
DEPARTMENT OF COMMERCE,
UDYOG BHAWAN, NEW DELHI-110 001.
3. UNION OF INDIA,
THROUGH ITS PRINCIPAL SECRETARY,
MINISTRY OF FINANCE,
NORTH BLOCK,
NEW DELHI-110 001
...RESPONDENTS
(BY SRI. JAGADISH CHANDRA HULSOOR, ADVOCATE FOR R1;
SRI.H.SHANTHI BHUSHAN, DSGI FOR R2 AND R3)
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NC: 2024:KHC:20505
WP No. 37315 of 2010
THIS W.P. IS FILED UNDER ARTICLE 226 OF THE
CONSTITUTION OF INDIA PRAYING TO QUASH THE APPELLATE
ORDER ISSUED UNDER SECTION 11 OF THE FOREIGN TRADE
(DEVELOPMENT AND REGULATION) ACT, 1992 BY R2 VIDE
ANNEXURE-A TO THE W.P.;F.NO.12013/9/2008-ADJ/AC DATED
7.9.10 AND ETC.
THIS PETITION, COMING ON FOR ORDERS, THIS DAY, THE
COURT MADE THE FOLLOWING:
ORDER
The petitioner is a company incorporated under the Indian Companies Act, 1956. It entered into a Joint Venture Agreement dated October 6, 1999, with M/s. Speciality Engineering (USA) Company Limited, which has its registered office in Washington. According to the terms of the Joint Venture Agreement, the foreign partner committed to buying back at least 75% of the goods manufactured by the petitioner. Additionally, the foreign company held a 25% share in the equity.
2. The petitioner's proposal to establish a 100% export- oriented unit was approved by the Secretariat for Industrial Approvals, Department of Industrial Policy and Promotion, Ministry of Finance, Government of India, via a letter dated October 6, 1997, for the manufacture of silk neckties and silk fabric. The letter of permission granted to the petitioner was subject to various conditions, including the stipulation that the petitioner achieve a minimum level of Net Foreign Exchange Earning as a Percentage of Export (NFEP). The petitioner was required to import capital goods worth US $14,290,000 for their project and committed to an export turnover of US $42,240,000 over five years.
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3. In accordance with the Letter of Permission (LOP), the petitioner entered into a Letter of Undertaking (LOU). As per the terms of the undertaking, the petitioner was required to earn a minimum of US $42,240,000 by exporting its entire production. In the event of failing to meet the terms and conditions of the LOP/LOU, including the export obligation, or the conditions required for exemption from customs duty under the Export and Regulation Policy, the petitioner would be liable for payment of customs duty applicable at the relevant time. Furthermore, the petitioner would also be subject to penal action under the provisions of the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act, 1992), and the Rules and orders made thereunder, without prejudice to other actions such as cancellation or revocation of the LOP/LOU/industrial license.
4. The petitioner commenced production in March 2001, importing capital goods valued at Rs.1054 lakhs and raw materials valued at Rs.39 lakhs. The petitioner made exports amounting to only Rs.10.47 lakhs, prompting the first respondent to issue a show-cause notice dated April 30, 2007, questioning why action should not be taken for the shortfall in obligations and value addition, and why a penalty should not be imposed under Section 11(2) of the FTDR Act, 1992. In response, the petitioner sent a reply dated March 10, 2008, explaining that due to the terrorist attacks on the World Trade Centre in the USA in 2001, the foreign partner withdrew from the joint venture agreement. Consequently, -4- NC: 2024:KHC:20505 WP No. 37315 of 2010 all purchases from US customers ceased, resulting in a shortfall in the export of manufactured goods. After considering the petitioner's reply and providing an opportunity for a hearing, the first respondent passed an order dated March 31, 2008, imposing a penalty of Rs.2 crores on the petitioner under Section 11 of the FTDR Act, 1992. The petitioner's challenge to the order was dismissed by the second respondent in an appeal filed under Section 15 of the FTDR Act, 1992, leading to the filing of this petition.
5. The learned counsel for the petitioner argued that the non-fulfillment of the obligations stated in the letter of permission/letter of undertaking, specifically not exporting the minimum quantity of finished goods, does not constitute a contravention of the provisions of the FTDR Act, 1992. He asserted that Section 11(2) of the FTDR Act, 1992, can only be invoked if the petitioner had attempted to make any export or import in violation of the provisions of the Act, Rules, or export and import policy. Therefore, in the absence of the petitioner contravening the provisions of the Rules or the export and import policy, the penalty imposed under Section 11(2) of the FTDR Act, 1992, lacks authority. In support, he cited the decision of the Apex Court in the case of M/S. EMBIO LIMITED vs. DIRECTOR GENERAL OF FOREIGN TRADE & ORS (CIVIL APPEAL NO.6394/2024).
6. In contrast, Sri H. Shanthi Bhushan, the learned Deputy Solicitor General of India representing the Union of India, argued that the petitioner admittedly did not fulfill the obligations -5- NC: 2024:KHC:20505 WP No. 37315 of 2010 specified in the Letter of Permission/Letter of Undertaking (LOP/LOU). The clauses in the LOP/LOU stipulate the imposition of penalties in accordance with the provisions of the Act and Rules if the petitioner fails to fulfill these obligations. Therefore, the impugned order passed by the first respondent and confirmed by the second respondent is in conformity with the provisions of the Act and does not warrant interference.
7. The arguments presented by the learned counsel for the parties are duly considered.
8. Section 11 of the FTTR Act reads thus:
"11. Contravention of provisions of this Act, rules, orders and foreign trade policy. (1) No export or import shall be made by any person except in accordance with the provisions of this Act, the rules and orders made thereunder and the foreign trade policy for the time being in force.
1. (2) 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.
(emphasis added)
9. A reading of the provision makes it clear, Sub-section (2) can be invoked only when a person attempts to or succeeds in making an import or export in contravention of the provisions of the FTDR Act, the associated Rules and Orders, or the Foreign Trade Policy. In the present case, there is no allegation that the petitioner -6- NC: 2024:KHC:20505 WP No. 37315 of 2010 attempted to make any export or import in violation of the FTDR Act of 1992, or the Rules, Orders made thereunder, or the Foreign Trade Policy.
10. In similar circumstances, the Supreme Court in the case of M/S. EMBIO LIMITED ruled that when the allegation pertains to the failure to fulfill the obligation to export goods within a specified period of five years, and there is no allegation of attempting to make an export or import, the imposition of a penalty under Section 11(2) of the FTDR Act of 1992 cannot be sustained.
11. Considering the specific provisions contained in Section 11(2) of the FTDR Act, 1992, and the legal principles established by the Hon'ble Supreme Court in relation to the said provision, I am of the considered view that in the absence of any contravention of the provisions of the Act, the Rules, Orders made thereunder, or the Foreign Trade Policy, the impugned order passed by the first respondent imposing a penalty of Rs. 2 crore on the grounds of a shortfall in the export of manufactured goods is without authority.
12. Accordingly, the Petition is allowed. The impugned order dated 07.09.2010 passed by the 2nd respondent at Annexure-A and the impugned order dated 31st March 2008 passed by 1st respondent at Annexure-L are hereby quashed.
Sd/-
JUDGE BNV