Meaning of Group Company under para 9.28 of the FTP

[CA Sumit Aggarwal]

Foreign Trade (Development and Regulation) Act, 1992 (Act 22 of 1992) was made with an objective to facilitate imports and augment export. The policy sets out Government agenda to promote foreign trade. Accordingly Central Government has Notified Foreign Trade Policy (FTP) with a view to continuously increasing the percentage share of global trade and expanding employment opportunities. To achieve its goal the government has announced certain special focus initiatives, which have been identified/continued for Market Diversification, Technological Upgradation, Support to status holders, Agriculture, Handlooms, Handicraft, Gems and Jewellery, Leather, Marine, Electronics and IT Hardware manufacturing Industries, Green products, Exports of products from North-East, Sports Goods and Toys sectors. Accordingly, various incentives incorporated in Chapter 3.

Chapter 3 deals with promotional measures. As part of promotional measures, Served from India Scheme (SFIS) was launched. Objective of the scheme is to accelerate growth in export of services to create powerful and unique Served From India brand. Person qualified to avail the SFIS is entitled to Duty Credit concessions equivalent to 10 % of free foreign exchange earmarked during the financial year. Duty credit concessions can be utilised for import of certain capital goods/for payment of duty on import of certain vehicles/ for import of consumables /for payment of excise duty for procurement from domestic sources in respect of items permitted for import under SFIS duty credit scrip. This duty credit scrip is transferable to its group companies.

Para 9.28 of Chapter 9 defines Group Company as under:

“9.28 Group Company : Group company means two or more enterprises which, directly or indirectly, are in a position to:-

(a) Exercise twenty six percent, or more of voting rights in other enterprise; or

(b) Appoint more than fifty percent of members of board of directors in the other enterprise.

For group companies to claim benefits or have their exports counted for benefits to be claimed by another member of group, the group company should have been in existence at least 2 years prior to date of application under any of export promotion schemes notified in Foreign Trade Policy.”

From the plain reading of above para it is clear that to transfer the duty credit scrip within its group company, it is not necessary that only, the duty credit scrip holder (who earned that duty credit scrip) should have to satisfy the aforementioned conditions. That is to say that the company which earned Duty Credit Scrip alone need not to hold 26 % or more voting rights or should have power to appoint more than 50 % of Board of Directors in the other company.

However, in the matter of GMR Hotels And Resorts Ltd, the policy interpretation committee of DGFT interpret the para 9.28 in other way and reject the transfer of the SFIS with a view that the company which earned Duty Credit Scrip is not holding more than 26 % of the shares in transferee company. Aggrieved thereby, SFIS holder file a writ petition before the High Court of Andhra Pradesh. The Hon’ble High Court decided in the favour of GMR Hotels And Resorts Ltd by concluding the appeal. I am hereby reproducing the brief facts in the case of GMR Hotels And Resorts Ltd Vs The Union of India 2015 (1) TMI 708 - ANDHRA PRADESH HIGH COURT:

GMR Hotels And Resorts Ltd (petitioner) is a 100% subsidiary of GMR Hyderabad International Airport Limited (GHIAL) and seeking to transfer the duty credit to holding company. the petitioner was asked to furnish documentary evidence as per para 9.28 of the Foreign Trade Policy for the years 2009-2014 duly attested by Registrar of Companies to process the case further. On application, the Registrar of Companies, informed that no such certificate can be issued. Therefore, a certificate from Chartered Accountant of GHIAL was obtained and submitted in lieu of requirement of certificate of attestation from the Registrar of Companies. By proceedings, petitioner was informed that request for transferability of Duty Credit Scrip under the Served From India Scheme to GHIAL was rejected on the ground that petitioner is not holding more than 26 % of the shares in GHIAL, which is a mandatory requirement as per policy. Aggrieved thereby, this writ petition is instituted.

The Hon’ble Andhra Pradesh High Court held that para 9.28 only deals with definition of term Group Company. On reading of this definition, it would mean that to qualify to be a group company, an enterprise must have minimum of 26% or more voting rights or in a position to appoint more than 50% of Board of Directors in another company. It does not envisage that the company which earned Duty Credit Scrip alone should hold 26 % or more voting rights or has power to appoint more than 50 % of Board of Directors in the other company. On a plain reading, neither the provision in para 3.12.7 nor definition in para 9.28 seeks to restrict transfer of Duty Credit Scrip from a group company to another company based on holding capacity as understood by the Director General of Foreign Trade. Chapter 3 and more particularly para 3.12 deals with incentive scheme for export of services and is a beneficial scheme. Such beneficial scheme must receive liberal construction. The petitioner company availed the SFIS and earned Duty Credit Scrip. When relevant provision does not impose any restriction on transferability of Duty Credit Scrip by invoking power of interpretation, Director General of Foreign Trade cannot introduce something which is not envisaged and impose an additional restriction. The Director General of Foreign Trade has only power to interpret the existing clauses but cannot seek to amend or alter the Foreign Trade Policy terms. The impugned decision amounts to altering the terms of Served From India Scheme and is in excess of power and jurisdiction vested in him. For the foregoing reasons, the impugned proceedings is set aside and second respondent is directed to receive served from India Duty Credit scrip and transfer the same in favour of GMR Hyderabad International Airport Limited in terms of Foreign Trade Policy 2009-2014, if necessary by extending the period of validity for a further period of six months from 3.1.2015.

From the above case law it is apparent that the view taken by policy interpretation committee was not only leads to unwarranted dispute but also defeat the objective of the FTP to facilitate import and augment the export.