1979 (10) TMI 236 - HC - FEMA

Summary

Issues Involved:
1. Rescinding of a contract and mutual arrangement regarding compensation.
2. Interpretation of the Foreign Exchange Regulations Act, 1947.
3. Alleged contravention of sections 5(1)(a) and 5(1)(b) of the Foreign Exchange Regulation Act, 1947.
4. Legality of the payment made by the respondent Mills.
5. The role and responsibilities of the Reserve Bank of India in granting permission for the transaction.

Issue-Wise Detailed Analysis:

1. Rescinding of a Contract and Mutual Arrangement Regarding Compensation:
The case arose from the rescinding of a contract between the respondent Mills and a foreign company, leading to a mutual arrangement for compensation. Initially, the Mills agreed to sell 1200 tons of Groundnut Extraction to the foreign company but later repurchased the commodity to sell it to another customer in Czechoslovakia. The foreign company consented to this, and it was agreed that the Mills would pay Rs. 51,000/- as compensation. The payment was to be made to Shri M.G. Mansukhani in Indian currency, as a deposit, and only after obtaining the requisite sanction from the Reserve Bank of India.

2. Interpretation of the Foreign Exchange Regulations Act, 1947:
The main legal question involved the interpretation of sections 5(1)(a) and 5(1)(b) of the Foreign Exchange Regulation Act, 1947. The Act prohibits making payments to or for the credit of any person resident outside India without the Reserve Bank's permission and acknowledging any debt that creates a right to receive a payment for a non-resident. The respondents argued that the payment was a deposit, not a payment to the foreign company, and no debt was acknowledged as the payment was contingent on Reserve Bank approval.

3. Alleged Contravention of Sections 5(1)(a) and 5(1)(b) of the Foreign Exchange Regulation Act, 1947:
The Directorate of Enforcement issued show-cause notices alleging that the Mills contravened sections 5(1)(a) and 5(1)(b) by making a payment to the foreign company and acknowledging a debt. The Mills contended that the payment was a deposit and no right to receive the payment was created until Reserve Bank approval. The Additional Director of Enforcement imposed a penalty of Rs. 25,000/- on the Mills for these alleged contraventions.

4. Legality of the Payment Made by the Respondent Mills:
The Appellate Board found that the payment was indeed a deposit and not a payment to the foreign company or for its credit. The Board held that no debt was acknowledged, and no right was created in favor of the foreign company until the Reserve Bank granted permission. The Board quashed the penalty imposed by the Additional Director of Enforcement, concluding that there was no contravention of sections 5(1)(a) and 5(1)(b).

5. The Role and Responsibilities of the Reserve Bank of India in Granting Permission for the Transaction:
The agreement stipulated that the payment would only be made to the foreign company after obtaining Reserve Bank approval. The Mills initially undertook to secure this permission but later transferred this responsibility to the foreign company. The High Court upheld the Appellate Board's finding that the payment was contingent on Reserve Bank approval, and no right to receive the payment was created until such approval was granted.

Conclusion:
The High Court dismissed the State's appeal, confirming the Appellate Board's order that quashed the penalty imposed on the respondent Mills. The Court held that the payment was a deposit, not a payment to the foreign company or for its credit, and no debt was acknowledged. The transaction was contingent on Reserve Bank approval, and no right to receive the payment was created in favor of the foreign company until such approval was obtained. The Court directed that any penalty already recovered be refunded to the respondent Mills.