1978 (10) TMI 124 - HC - Companies Law

Summary

Issues Involved:
1. Whether the appellant firms contravened Section 12(2) of the Foreign Exchange Regulation Act, 1947, by failing to obtain prior permission from the Reserve Bank of India (RBI) for the deduction of commission by foreign consignees.
2. Whether the transactions in question were bona fide consignment sales and if the deductions made by the consignee were commercially reasonable.

Detailed Analysis:

1. Contravention of Section 12(2) of the Foreign Exchange Regulation Act, 1947:

The primary issue was whether the appellant firms violated Section 12(2) of the Act by not obtaining prior RBI permission for the deduction of commission by the foreign consignees. The Deputy Director and the Foreign Exchange Regulation Appellate Board both concluded that the appellant firms had indeed contravened the Act. The Deputy Director imposed penalties, which were later reduced by the Appellate Board, but the Board still held that the firms were guilty of contravention due to the lack of prior RBI approval for the 3% commission deducted by the consignees.

2. Bona Fide Consignment Sales and Commercial Reasonableness of Deductions:

The appellant firms contended that the transactions were bona fide consignment sales and that the deductions for expenses and commissions were commercially reasonable and customary in such transactions. The firms provided detailed explanations and supporting vouchers for the deductions, which were accepted by the Reserve Bank without objections. The Appellate Board acknowledged that the transactions were indeed consignment sales and that the value mentioned in the invoices was provisional. However, it still held that the failure to obtain prior RBI approval for the commission deduction constituted a violation of Section 12(2).

Court's Judgment:

The court examined sub-sections (1) and (2) of Section 12 of the Act. It noted that in consignment sales, the exporter can only provide an estimated value at the time of export, and the actual value is determined after the sale in the foreign market. The court referred to the Supreme Court's observations in Union of India v. Shreeram Durga Prasad (P.) Ltd., AIR 1970 SC 1597, and the Business Encyclopaedia and Legal Adviser by W.S.M. Knight, which explained the nature of consignment sales and the role of consignees in such transactions.

The court concluded that in bona fide consignment sales, the "full amount payable by the foreign buyer" under Section 12(2)(b) of the Act is the net proceeds after deducting expenses and agreed commissions. Since the transactions were found to be genuine consignment sales and the deductions were commercially reasonable, the court held that the firms did not need prior RBI permission for the commission deductions. Therefore, the court ruled that the appellants had not contravened Section 12(2) of the Act.

Conclusion:

The court allowed the appeals, setting aside the Appellate Board's orders that held the appellants guilty of contravention of Section 12(2) and imposed penalties under Section 23(1)(a) of the Act. The court directed the parties to bear their respective costs in the appeals.