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TMI Blog2025 (1) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... Circular on Rupee/Foreign Currency Export Credit & Customer Service to Exporters, dated July 1, 2015 ("Master Circular") by the Banking Ombudsman (Respondent No. 3) appointed by the Reserve Bank of India (Respondent No. 1, "RBI"). The Banking Ombudsman dismissed the Petitioners' grievance against the very same interpretation that had been taken by HDFC Bank Limited (Respondent No. 4, "HDFC Bank"). 3. Jindal Cocoa LLP ("Borrower"), is a limited liability partnership engaged in the business of exporting cocoa and cocoa products. HDFC Bank had extended Indian Rupee-denominated pre-shipment credit by way of a running account facility under the Master Circular to the Borrower. The Borrower, along with its two partners Mr. Vijay Jindal and Ms. Jayshree Vijay Jindal, are collectively the Petitioners. Regulatory Context and Background: 4. Under the Master Circular, banks extend credit to their clients who are exporters, at a special interest rate applicable to export credit, which is lower than the standard interest rates applicable to normal borrowings by clients. The export credit availed of by the Borrower was eligible for the benefit of further concessional interest due to a subven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "export credit", the exporter would not be entitled to any benefit of the Subvention Scheme where the advance ceases to be "export credit" ab initio. 8. In other words, HDFC Bank's stance is that (i) exports should be made; (ii) the advances should be redeemed; and (iii) the documents proving exports must be delivered; all within 450 days. Under the Master Circular, HDFC Bank would argue, even a day's delay in submission of the export documents (despite exports actually having been effected within 450 days, and the export proceeds being used to redeem the credit) would lead to the advances not qualifying as "export credit" from the date of the advance, thereby losing the benefit of the Subvention Scheme. 9. Out of the 107 export orders bagged by the Borrower and financed be HDFC Bank, the financing of 15 export orders, lies at the core of the controversy in this Petition. In respect of four export orders ("First Lot"), admittedly, the Borrower effected the exports within 450 days of the advance. However, delivery of the export documents to HDFC Bank was delayed by a few days beyond such period. Therefore, according to HDFC Bank, the entire set of advances that financed the First ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport has not materialised at all within the 450-day period, we find that the credit advanced would get disqualified as export credit. Any other view, in our opinion, would result in the very objective of the Master Circular being undermined (in relation to the First Lot) and the Master Circular becoming a device for availing of long-term cheap debt with no commitment to timely exports (in relation to the Second Lot). Factual Matrix: 13. Against this backdrop, the specific facts relevant to this Petition are summarised as follows: - a) HDFC Bank sanctioned a running account facility for export credit of Rs.390 crores to the Borrower between January 29, 2020 and June 5, 2020; b) The Borrower received an upfront interest subvention benefit in addition to a special interest rate applicable to export credit. The export credit interest rate was 6% / 7.25%, with the subvention under the Interest Equalisation Scheme lowering it further; c) For every advance at the discounted rate received under the Master Circular, the Borrower had to create a fixed deposit of an equivalent amount of cash with HDFC Bank, over which there would be a charge - this arrangement provided the Borrower w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Interest Equalisation Scheme should be made available to the Borrower; i) On February 25, 2022, HDFC Bank reversed a sum of Rs. 3.52 crores under the head 'miscellaneous debit' in respect of the export credit advanced towards exports that had not been completed within the 450-day period i.e. the Second Lot; j) On February 28, 2022, HDFC Bank wrote to the Borrower confirming the specific export credit advances foreclosed and the specific fixed deposits liquidated, and a computation to show that applying the interest rate without subvention, export credit to the extent of Rs. 151,43,75,548.19 (Rs. ~151.43 crores) stood liquidated and only one contract with a principal amount of Rs. 8.5 crores with interest of Rs. 23,05,479/- (Rs. ~23.05 lakhs) was due. HDFC Bank stated that in view of the aforesaid debit of Rs.3.52 crores, there was insufficient balance in the Borrower's account to repay the residual export credit loan; k) On March 8, 2022 (i.e. after the foreclosure of the entire export credit by the Borrower in February 2022), the Interest Equalisation Scheme was extended by the Government of India with retrospective effect from October 1, 2021 to March 31, 2024. The Bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to the First Lot and of Rs. 3.52 crores in relation to the Second Lot were per se contrary to the law. The reversals represent an arbitrary and unreasonable denial of a statutory entitlement, and the Impugned Order ought to be set aside. 17. Mr. Shenoy would submit that the object and purpose of the Master Circular is to ensure that exporters are encouraged to manufacture and export within 450 days and to ensure that the banks are repaid. If the proof of export is not substantiated with documents, the consequence for the borrower would be that he would lose the beneficial interest rate right from the date of disbursement of the credit, forcing the exporter to pay the commercial lending rate. Pointing to Paragraph 1.1.3(iv) of the Master Circular, Mr. Shenoy would submit that exporting within 450 days is of the essence of the Master Circular. He would submit that exports ought to have been actually effected; they ought to have been proven with export documents; and the credit ought to have been marked off - all within 450 days of disbursement. Pointing to Paragraph 2(A)(iii) of the RBI Circular on Subvention, Mr. Shenoy would point out that the subvention benefit would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d had not changed the interest rate charged on the export credit, thereby undermining Mr. Doctor's submission that the "export credit" changed ab initio merely due to delay in submission of the export documents. HDFC Bank continued to charge interest at the same rate as had been applicable to the export credit - only the subvention amount was reversed and penal interest at 2% was added to it. Put differently, Mr. Sridharan would submit that the very conduct of HDFC Bank contemporaneous with the decision to reverse the subvention would show that it was not consistent with the reading of the Master Circular that was now being canvassed on its behalf. 21. Mr. Doctor would counter, that HDFC Bank had the fullest commercial discretion on what rate to charge its prime customers who have good creditworthiness. He would submit that the conduct of HDFC Bank based on its own bona fide reading at the relevant time, would be of no consequence to the legal interpretation of the Master Circular by the writ court. Approach to Interpretation: 22. Mr. Sridharan and Mr. Doctor have both attempted to adopt a literal and extreme reading of the specific provisions of the Master Circular in a manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit at a special rate, different from the rates charged for domestic borrowing. The term "pre-shipment/packing credit" is defined to mean2, among others, any loan, advance or other credit provided by a scheduled commercial bank to an exporter for financing the purchase, processing, manufacture or packing of goods prior to their shipment for export. Such credit is to be extended against evidence of an export order placed on the exporter. The tenure of such credit is left to the parties, subject to an outer limit of 360 days from the date of the advance (extended to 450 days on May 23, 2020). 26. The pre-shipment credit could be liquidated by the bank discounting or purchasing the export bills on which receivables would be due from the exporter's clients. In such event, the pre-shipment credit would stand redeemed and the new exposure of the bank to the exporter (having paid the amount towards purchase of the receivables under the bills) would be treated as post-shipment credit. Pre-shipment credit may also be repaid or prepaid out of export proceeds kept in Exchange Earners Foreign Currency Account ("EEFC Account"), an account in which Indian resident exporters may deposit their fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced within such reasonable period of time as decided by the banks. As and when individual export bills are received for discounting, the outstanding credit could be marked off on a 'first-in-first-out' basis - the export credit first advanced would be redeemed first, and so on. In the course of such redemption too, banks are required to ensure that the individual pre-shipment credits advanced to an exporter do not stretch beyond the maximum permissible period (360 days, extended to 450 days, from the date of the advance). Paragraph 1.1.5 (iii) of the Master Circular, which governs a running account facility provides as follows:- 1.1.5 'Running Account' Facility' (i) As stated earlier, pre-shipment credit to exporters is normally provided on lodgment of LCs or firm export orders. It is observed that the availability of raw materials is seasonal in the facts of the present case some cases. In some other cases, the time taken for manufacture and shipment of goods is more than the delivery schedule as per export contracts. In many cases, the exporters have to procure raw material, manufacture the export product and keep the same ready for shipment, in anticipation of receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks. The Government of India would bear a portion of the interest burden by providing funds to the RBI, which would in turn release the funds to banks on a monthly basis to the extent the banks lent cheap to exporters. The introduction of the Subvention Scheme with retrospective effect would play out again at one of its extensions - on March 8, 2022, with retrospective effect from October 1, 2021. It was on October 1, 2021, when the Subvention Scheme had not been extended after its expiry on September 30, 2021, that the Borrower first repaid a bunch of export credits and eventually all the outstanding export credit on February 14, 2022. 32. On December 4, 2015, the RBI Circular on Subvention was issued, with a procedure for reimbursement of interest already borne by the exporters. The special lower rate of interest for export credit would stand further discounted due to the Subvention Scheme. Banks were required to charge the discounted rate of interest and submit their claims to the RBI for reimbursement of the differential attributable to the discounted interest. The RBI would be given funds in advance by the Ministry of Commerce and Industry, on a monthly basis. The Subvention S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o comply with any directions given to it under this section. 35A. Power of the Reserve Bank to give directions.- (1) Where the Reserve Bank is satisfied that-- (a) in the public interest; or (aa) in the interest of banking policy; or (b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or (c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. (2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect. [Emphasis Supplied] 34. Consequently, the Master Circular partakes the character of a stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner that effaces the very objective of the instrument, misses the substance for the form. Such an approach undermines the regulatory objective of the Master Circular, which is to promote Indian exports, make them competitive in the world markets, and aid such exports with short-term working capital at competitive interest rates. 38. The crux of the Master Circular is that export credit at competitive interest rates must be made available to exporters in the form of short-term working capital. The very same Master Circular requires banks to keep a close watch on the end-use of funds advanced and to ensure that the credit supplied at special rates under the Master Circular are genuinely used for the purposes of exports.6 Banks are also required to monitor the progress made by exporters in timely fulfillment of the export orders. Each of these provisions point to the need to export within the stipulated time being of the essence of the Master Circular. If all that banks have to do is look for delivery of export documents within 360 days, there would be no requirement for them to monitor the performance of export obligations. 39. That apart, the Master Circular has expressed the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n yet again makes it clear that the substance of the Master Circular is incentivising the performance of export obligations and exporters being given credit at competitive rates to achieve such performance. Even where the advances have been made by the bank at standard commercial interest rates, upon evidence that exports had been effected by the exporter, the exporter would be entitled to the special interest rate applicable to export credit. All these features yet again point to the fact that the Master Circular ought to be interpreted in a purposive manner, and not in the manner that one would interpret a fiscal statute. 41. Likewise, the provisions of the Master Circular governing export credit in foreign exchange are noteworthy. The provisions governing export credit in Indian Rupees have been mutatis mutandis applicable to foreign currency-denominated export credit. Paragraph 5.5 of the Master Circular, which deals with the period of foreign currency-denominated export credit uses the phrase "if no export takes place within 360 days" in connection with the obligation to adjust and mark off the export credit. This is a clear pointer to the substance of the Master Circular, na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, we have no hesitation in holding that the Banking Ombudsman's endorsement of HDFC Bank's reading of Paragraph 1.1.2 (ii) of the Master Circular, is untenable and does not lend itself to acceptance. 44. It is also noteworthy that the Master Circular deals with a situation where exports do not materialise "at all".11 Paragraph 4 of the Master Circular governs the interest rate applicable to Indian Rupee-denominated export credit. A 'Base Rate' is required to be applied for the provision of such export credit sanctioned on or after July 1, 2010. Paragraph 4.2.2 (ii) provides that if pre-shipment advances are not liquidated from: (a) proceeds of purchase or discounting of export bills; (b) on submission of export documents within 360 days from the date of the advance; or (c) as stipulated for other means of liquidating pre-shipment credit, the advances would not be treated as "export credit" ab initio. Paragraph 4.2.2 (iii) provides that if exports do not materialise at all, banks should charge the domestic lending rate plus penal rate of interest, if any, in terms of a transparent policy adopted by the bank's Board of Directors. Mr. Sridharan argued that the use of the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he very objective of the Master Circular. 47. The purpose of providing export documents is to prove that exports indeed took place within 360 days. It is absurd to contend that even when the export documents indeed prove the same, the fact that they were delivered a few days after the 360-day period, would lead to the advances not being "export credit" at all, amounts to saying that in the eyes of the Master Circular, the exports are deemed to have never taken place. The substance for which the credit is extended is to finance exports, and when exports have indeed taken place within 360 days, the credit would necessarily have to be valid "export credit". Therefore, we hold that the requirement to provide the export documents is aimed at proving that exports indeed materialised within 360 days of the disbursement of the export credit. The provision of such documents within 360 days is therefore a directory requirement and not a mandatory requirement inasmuch as a delay of a few days in submitting the documents would not be fatal to the fact that exports indeed materialised and such exports had been financed, and such finance is "export credit". The necessary corollary is that for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the domestic lending rate and not at the special rate applicable to exports, for the entire period of the credit. First Lot: 50. In the matter at hand, it is common ground that exports relevant to the First Lot indeed had been effected and that too within the maximum permissible period under the Master Circular. Evidence of such export was also provided, but with a delay of a few days. Therefore, in our opinion, the Master Circular having to be read in the manner we have explained above, the reversal of the subvention by HDFC Bank in relation to export financing of the First Lot from the very inception is indeed unreasonable, arbitrary, and liable to be interfered with. 51. Consequently, we find that HDFC Bank and indeed the Banking Ombudsman were completely in error in the interpretation of the Master Circular insofar as export credit relating to the First Lot was concerned, and basing their reading on their interpretation of Paragraph 1.1.2 (ii) and indeed, Paragraph 4.2.2.(ii). Since it is common ground that all the underlying exports relating to the First Lot had been effected within the maximum permissible period under the Master Circular, there can be no question of disqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accurate one, which for reasons best known to HDFC Bank, was changed completely in six months. 54. We are in agreement with Mr. Sridharan in his reliance upon a decision of the Supreme Court in the case of Fertilizer Corporation of India Ltd. Vs. State of Bihar 1988 Supp. SCC 73, whereby even in an analysis of the ingredients of a fiscal statute, a purposive reading of provisions that make the machinery of the legislation workable was preferred as opposed to a strictly technical and literal view of the requirements. In that case, the question involved was the entitlement of an assessee to a rebate under the Sales Tax Laws of Bihar, which was to be computed on the basis of the returns filed. The Supreme Court ruled that since the objective of the rebate provision was to confer a benefit to an assessee for a prompt payment of tax, since it was found that the assessee had indeed paid the tax before due dates and there was no dispute that the tax paid was in conformity with the tax due on the basis of the returns filed, a delay in filing the returns was not fatal to the entitlement to the rebate. In this case, the High Court had taken a view that fiscal statutes must be literally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the charge of interest under Section 18-A(8) of the same Act. This provision did reveal a lacuna but reading the provision along with Section 18-A (6), the court gave effect to the intendment of the legislature. It was explained that Section 18-A (8) was not a provision creating a charge of tax but only laying down the machinery for its calculation or procedure for its collection. The dictum of Scott, L.J. in Allen v. Trehearne that machinery provisions should be interpreted largely and generously in order not to defeat the main object of liability laid down by the statute was referred to. The following observations of the Privy Council in CIT v. Mahaliram Ramjidas were also relied upon: "The section, although it is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable...." 10. Though the above decisions arose under a different enactment and on different statutory language, they dealt with somewhat analogous situations and furnish useful guidance here. They do lend support to the assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic lending rate along with penal interest can only come into effect, if exports do not materialise at all within 450 days. Mr. Sridharan would submit that the phrase "not materialized at all" should mean that so long as exports indeed materialise, whenever they do, the special rates applicable to export credit, further reduced by the subvention must flow to the Borrower for the first 450 days. We are unable to agree for the very same reason that we hold in favour of the Borrower in relation to the First Lot. We have already explained above that the term "at all" has to necessarily bear reference to the maximum period of export credit under the Master Circular. Any other reading would entail waiting, arguably for eternity, to see if the exports actually materialise. Such a reading too would make a mockery of the finely-balanced regulatory framework implemented in the Master Circular. 58. In this context, we are in total agreement with Mr. Shenoy's submission that money being fungible, a wait for exports to materialise until eternity would lead to abuse of the Master Circular. In our opinion, such a reading would lead to the Master Circular enabling long-term debt capital to exporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter Circular provides adequate guidance to resolve the controversy. The Master Circular as interpreted in letter and spirit would leave no manner of doubt that if exports do not materialize at all (in our opinion, within the 450-day period), the credit extended to the exporters must be treated as not constituting export credit. 62. We note that HDFC Bank has stoutly defended and justified the charging of the same rate of interest as its sovereign commercial prerogative, taking into account the track record and creditworthiness of the Borrower. In view of this stance taken by HDFC Bank and since HDFC Bank has not at all taken any step to charge a different rate, we refrain from commenting upon or adjudicating what the domestic lending rate ought to be. Such an issue is not the subject matter of this Petition. All that HDFC Bank has done is to reverse the subvention in connection with the export credit underlying the Second Lot. Such reversal was wholly justified since the exports did not materialize at all within 450 days of disbursing the credit. In any case, the Borrower itself effected a foreclosure of the export credit when it realized that it would not be able to demonstrate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n many cases it might be difficult to draw a line of demarcation, it is easy to discern on which side of the borderline a particular case falls. 20. Shri Ganguly's insistence, however, serves to recall the pertinent observations of an eminent author on the point. It was said : "A common form of argument used by counsel in legal cases is to suggest that if the court decides in favour of the opposing counsel's arguments, it will become necessary to draw lines which may be very difficult or impossible to draw. "Where will you draw the line?" is, of course, a question which must be faced by a legislator who is actually proposing to lay down lines for all future cases, but it is not a question which needs in general to be faced by common law courts who proceed in slow stages, moving from case to case..." The learned Author recalls Lord Lindley's "robust answer" to the question - Where will you draw the line? "Nothing is more common in life than to be unable to draw the line between two things. Who can draw the line between plants and animals? And yet, who has any difficulty in saying that an oak-tree is a plant and not an animal?" Again, Lord Coleridge in Mayor of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court was clear that it did not intend to lay down any absolute proposition of law obviating the need to look to the substance of the provision to discern whether it warranted substantial compliance or strict compliance. In the Court's words:- "64. In Hari Chand case [CCE v.Hari Chand Shri Gopal, (2011) 1 SCC 236], as already discussed, the question was whether a person claiming exemption is required to comply with the procedure strictly to avail the benefit. The question posed and decided was indeed different. The said decision, which we have already discussed supra, however, indicates that while construing an exemption notification, the Court has to distinguish the conditions which require strict compliance, the non-compliance of which would render the assessee ineligible to claim exemption and those which require substantial compliance to be entitled for exemption. We are pointing out this aspect to dispel any doubt about the legal position as explored in this decision. 65. As already concluded in paras 53 to 55 and 63, above, we may reiterate that we are only concerned in this case with a situation where there is ambiguity in an exemption notification or exemption cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Master Circular. Consequently, it is upon the export credit becoming overdue that the subvention would become unavailable. Therefore, in our opinion, even if we were to treat the Subvention Scheme as an instrument of fiscal law, Dilip Kumar does not undermine our opinion expressed in this judgement. Dilip Kumar requires us to necessarily distinguish conditions that require strict compliance, and conditions of which substantial compliance would suffice. We have done so and held that exports materialising within 450 days requires strict compliance unless other forms of liquidating export credit are adopted (such as discounting of the export bills to convert into post-shipment credit). We have also held the submission of export documents in 450 days requires substantial compliance - the submission is meant to demonstrate the substance that exports materialising has been strictly complied with. 70. Mr. Doctor would also rely on the decision of the Supreme Court in Government of Kerala and Another v. Mother Superior Adoration Convent (2021) 5 SCC 602, where Dilip Kumar was cited and relied on. In this judgement, the Supreme Court indeed held that Dilip Kumar did not result in a li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hewed. We must first ask ourselves what is the object sought to be achieved by the provision, and construe the statute in accord with such object. And on the assumption that if any ambiguity arises in such construction, such ambiguity must be in favour of that which is exempted. Consequently, for the reasons given by us, we agree with the conclusions reached by the impugned judgments of the Division Bench and the Full Bench. [Emphasis Supplied] 71. Mr. Shenoy too cited a number of judgements, but again, all of them deal with interpretation of fiscal statutes. To avoid prolixity, for the very reasons articulated above, we are not burdening this judgement any further with a judgement-wise differentiation of each of such judgements on fiscal statutes. Suffice it to say, in our opinion, neither is the Master Circular a fiscal statute making the application of the principles of interpreting fiscal statutes relevant, nor do any of these judgements turn the needle on the true import of the Master Circular, which we have articulated above. Summary of Conclusions and Directions: 72. In the result, the Writ Petition is disposed of with the following conclusions and directions: a) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Second Lot; i) HDFC Bank shall rectify the reversal of the subvention pertaining to the First Lot within a period of four weeks from the date this judgement is uploaded on this Court's official website; j) Consequently, the RBI and the Ministry of Commerce and Industry shall reimburse HDFC Bank with the funds that correspond to the subvention reversal in relation to the First Lot having been corrected as above; k) HDFC Bank shall within a period of four weeks from today, provide to the Borrower, a detailed statement of account and the computation of the manner in which it has worked out the dues owed and owing between them, in accordance with the declaration of the law in this judgement; l) There shall be no change to the reversal of subvention in relation to the advances made in connection with the Second Lot. 73. Rule is made absolute in the aforesaid terms and the Writ Petition is also disposed of in terms thereof. However there shall be no order as to costs. 74. In view of the disposal of the Writ Petition, nothing would survive in any interim applications connected to this Writ Petition and the same shall also be treated as finally disposed of. 75. This order wil ..... X X X X Extracts X X X X X X X X Extracts X X X X
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