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TMI Blog1991 (4) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... special permission of the Reserve Bank of India (RBI) under section 28 of the Foreign Exchange Regulation Act, 1973 (FERA). The relevant part of the said provision reads as under: "28(1). Without prejudice to the provisions of section 47 and notwithstanding anything contained in any other provision of this Act or the Companies Act, 1956, a person resident outside India (whether a citizen of India or not) or a person who is not a citizen of India but is resident in India, or a company (other than a banking company) which is not incorporated under any law in force in India or in which the non-resident interest is more than forty per cent., or any branch of such company, shall not, except with the general or special permission of the Reserve Bank, ( a )act, or accept appointment, as agent india of any person or company, in the trading or commercial transactions of such person or company; or ( b )act, or accept appointment, as technical or management adviser in India of any person or company; or ( c )permit any trade mark, which he or it is entitled to use, to be used by any person or company for any direct or indirect consideration. (2) Where any such person or company (in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval of the agreement in India within 60 days after the agreement is signed by both parties and is delivered to the appellant. A duty is cast on the appellant to furnish satisfactory evidence of receipt of the required Governmental approval. The next important clause in the contract which needs to be noticed at this stage is article 12 which reads as under : 12. Arbitration . (1) Any claim, dispute or controversy arising out of or relating to this agreement, or the breach thereof, shall be finally settled by arbitration, pursuant to and in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three (3) arbitrators appointed in accordance with the said Rules. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The situs of arbitration shall be New Delhi, India, or an alternate location if the parties shall mutually agree and the arbitration proceedings shall be conducted in the English language." Under article 12, the validity, construction and performance of the agreement were to be governed by the Indian laws. The aforesaid agreement was entered into after it was appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms and conditions to be fulfilled for remittances falling due under collaboration agreement remained to be issued to the petitioner-company. Hence, the Bank's approval under section 28(1)( b ) of the Act for rendering technical, etc., services under the collaboration agreement also remained to be communicated to the petitioner-company. Later, when the petitioner-company applied for remittance of the first instalment under the collaboration agreement, the Bank being satisfied that the remittance was strictly in accordance with the terms and conditions approved by the Government, allowed the same." On February 5, 1985, the appellant made an application to the income-tax authorities for determination of income-tax deduction from the payment of the first instalment of fees. The order passed under section 195(2) of the Income-tax Act determining the tax at 40 per cent, of the consideration proceeds on the premise that the agreement was approved by the Government of India. Soon thereafter, the appellant applied on February 14, 1985, to the United Bank of India for remitting the first instalment of fees minus 40 per cent, chargeable as income-tax. The United Bank of India intimated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational Chamber of Commerce informing it of its decision to invoke the arbitration agreement. The appellant responded by its letter dated October 11, 1988, stating that the collaboration agreement dated September 25, 1984, was void ab initio and not binding on the parties thereto and, therefore, clause 12.1 of article XII of the agreement was non est and legally unenforceable. On the other hand, the appellant blamed the respondent for breach of contract, in that, there was failure to comply with clause 3.4 of the agreement, and stated that no disputes or differences of the type which could be referred to arbitration had arisen between the parties. Thus, by challenging the legality and validity of the agreement and branding it as void ab initio , the appellant also challenged the arbitration clause as similarly void. This was followed by the appellant filing an application under section 33 of the Arbitration Act, inter alia , contending ( i ) that the agreement in question being a contingent one which was to commence from the "effective date" and since the necessary approvals had not been secured, the agreement had not commenced and as the arbitration clause was a part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same and, therefore, on a true interpretation of the contract, it must be held to be voidable at the discretion of either party. The High Court further held, on a reading of sections 39 and 56 of the Contract Act, that even if the contract is terminated or rendered void, the arbitration clause therein does not perish ipso facto for even in contingent contracts, there exists a distinction between principal obligation and subsidiary obligations. After referring to the case law in detail, the High Court observed: "In my opinion, the arbitration clause in the instant case is wide enough to include 'any claim, dispute or controversy arising out of or relating to this agreement' so as to mean any dispute as to the interpretation itself including the validity thereof. Therefore, if there is any dispute relating to the interpretation of article 8.1 of the agreement, the same can also be decided by the arbitrator." Pointing out that an agreement of arbitration, though a contract, is different in its nature from the main contract of which it may form a part, the High Court held that the breach of the obligation and liabilities arising under the main contract may bring about terminati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation Act, where permission of the Reserve Bank of India is required under any provision of the said statute for doing anything thereunder, the Reserve Bank of India has to specify the form in which the application for such permission must be made. Paragraph 25A.2 of the Exchange Control Manual, 1978 (Manual), refers to the permission to be obtained under section 28(1)( b ) and provides that applications for such permission should be made in Form FNC5. Indisputably, the respondent had made no such application in the prescribed form seeking Reserve Bank of India permission and, therefore, the question of grant of such permission by the Reserve Bank of India did not arise. The respondent, having failed to secure the Reserve Bank of India permission as required by section 28(1), rendered the agreement void by the thrust of section 28(2). Besides, breach of section 28(1) is made punishable under section 50 of the Foreign Exchange Regulation Act. That being so, the agreement is ab initio void and, as the arbitration clause is a part of the said agreement, it too must fall along with the agreement. The SIA approval is not synonymous with grant of permission under section 28(1) since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to the one contained in the manual. The appellant had made an application under paragraph 24A.11 to the SIA for approval of the technical collaboration arrangement with the respondent which was granted on June 18, 1984, subject to certain terms and conditions. Certain discrepancies were pointed out by the Government of India and, on the appellant having drawn the respondent's attention thereto by its letter of September 21, 1984, a supplementary agreement was immediately executed and filed with the Government of India on January 9, 1985. It was, thereafter, that the Government of India informed the appellant that the agreement was "taken on record", an expression which has special significance as explained in paragraph 9 of Part I of the Guidelines for Industries. Copies of the letter of January 15, 1985, were forwarded to the Reserve Bank of India authorities as well. It was only thereafter that the appellant applied for determination of the income-tax amount under section 195(2) of the Income-tax Act which determination was made by an order dated February 11, 1985. The appellant then applied for permission to remit the first instalment of fees and, on receipt thereof, enclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 9 for allowing remittances are generally authorised by the Assistant Collector." It becomes clear from this statement that the permission under section 28(1) and the exemption under section 9 are generally granted by one and the same officer. In the backdrop of the said facts, we may now proceed to consider the main submission placed before us by counsel for the appellant, namely, that the agreement is rendered void ab initio for want of permission under section 28(1) of the Foreign Exchange Regulation Act. It is only if we accept the contention that, in fact, the Reserve Bank of India had not granted any permission under section 28(1) that the question of the agreement having been rendered void by the thrust of section 28(2) would arise. And the question of survival of the arbitration clause contained in the agreement notwithstanding the agreement having been rendered void by section 28(2), would arise thereafter. On a plain reading of section 28(1), it is clear that it opens with the words "without prejudice to the provisions of section 47", which in turn says that "no person shall enter into any contract or agreement which would directly or indirectly evade or avoid i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed form to the Secretariat for Industrial Approvals (SIA), Department of Industrial Development, Government of India, New Delhi, for approval. In a case where the proposal for collaboration is approved by the Government, the Government will issue its letter of approval to the applicant indicating the terms. The applicant may thereafter execute the collaboration agreement with the collaborators strictly in accordance with the approved terms and furnish the requisite number of copies of the agreement to the Government. The Government will take the agreement on record if it is in conformity with the approved terms and advise the applicant accordingly under intimation to the Reserve Bank. The Reserve Bank will thereafter issue its formal authorisation under the Foreign Exchange Regulation Act, 1973, to the applicant. Although the rendering of technical advisory services by foreign collaborators under the foreign collaboration agreements approved by the Government attracts section 28(1)( b ) of the Foreign Exchange Regulation Act, 1973, it will not be necessary for the foreign collaborators to seek the Reserve Bank permission under the section separately. Accordingly, while grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, and the agreement is "taken on record", there is no need to obtain separate permission from the Reserve Bank of India. Paragraph 9 of the "Guidelines for Industries" explains what is meant by the expression "Taking of Agreements on Record" and its import thus: "The approvals given for foreign collaboration are valid for a period of six months from the date of issue. In case the terms of collaboration approved by the Government are acceptable to the Indian party, an intimation in this regard has to be sent by him to the concerned administrative Ministry. The Indian party can then execute the collaboration agreement with the collaborator which should be strictly in accordance with the terms approved by the Government. Ten copies of the collaboration agreement so executed, all of which should be signed by both the collaborating parties are to be furnished to the administrative Ministry. The collaboration agreement is scrutinised by the administrative Ministry and if found to be in accordance with the terms specifically approved by the Government is taken on record and an intimation is sent to the party. A copy of the agreement is then transmitted to the Reserve Bank of India th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "As per the practice of the Reserve Bank of India, the permission under para 24A.11, that is, grant of sanction under section 28(1)( b ) as well as permission under section 9 for allowing remittances are generally authorised by the Assistant Controller." This statement places the question regarding the grant of permission under section 28(1) beyond doubt. The affidavits filed on behalf of the Reserve Bank of India show that the Reserve Bank of India's approval 'remained to be communicated' to the appellant-company. Failure to discharge the ministerial duty cannot obliterate the conscious decision taken by the Reserve Bank of India after application of mind. But, counsel for the appellant stressed that the facts placed on record clearly reveal that no application for permission under section 28(1) was made in the prescribed Form FNC5 as contemplated by paragraph 25A.2 of the manual. It is indeed true that the record does not disclose the making of an application in the said prescribed form by either party to the agreement. Counsel, therefore, submitted that once it is found that no application for permission was ever made in the prescribed form, the provisions of sub-sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case, the mere lapse on the part of the Reserve Bank of India in failing to communicate its decision should make no difference. Paragraph 25A2 is not in derogation of paragraph 24A11( i ) nor does it dilute the requirement of section 28(1). In any case the facts of the present case clearly Reveal that the Reserve Bank of India had applied its mind to the question of grant of permission and had only, thereafter, permitted remittance of the first instalment of the fees payable to the foreign collaborator. Merely because application for such permission was not made in Form FNC5 cannot cloud the fact that the decision to grant the permission was actually taken but the ministerial function of communicating the same remained to be done by oversight. This lapse cannot erase the decision already taken. We arc, therefore, of the opinion that the Reserve Bank of India had granted the permission contemplated by section 28(1) and hence the agreement cannot be voided by virtue of section 28(2) of the Foreign Exchange Regulation Act. It is not the case of the Reserve Bank that it, at any time, had second thoughts about its action. It never contemplated withdrawal of the permission at any point ..... X X X X Extracts X X X X X X X X Extracts X X X X
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