Whether DGFT has power to interpret the Foreign Trade Policy to exclude the ‘Indian Service Providers’ from the benefit of the SFIS

[CA Sumit Aggarwal]

In my previous article ‘Meaning of Group Company under para 9.28 of the FTP’; I discussed the issue in respect of rejection of application by the DGFT and Policy Interpretation Committee to transfer the Served From India duty credit scrip within group companies and thereafter on filing the writ petition by aggrieved party the Hon’ble HC decided the case in favour of the petitioner company by uttering that ‘…..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.’ [GMR Hotels and Resorts Ltd. Versus The Union of India Rep by Director General of Foreign Trade Govt. of India New Delhi and another- 2015 (1) TMI 708 - Andhra Pradesh High Court].

Recently, the Hon’ble Delhi HC also take the similar view while deciding the issue arise to interpret the term “Indian Service Providers”, in the case of M/s Yum Restaurants (I) Pvt. Ltd. And ANR, Nokia Solutions And Networks India Pvt. Ltd. and ANR and EI Dupont India Pvt Ltd and ANR Versus Union of India and ORS - 2015 (1) TMI 1127. Before discussing the case law it is necessary to discuss the relevant paras laid down under the FTP. Para 2.3 of chapter 2 and para 3.12.2 of chapter 3.

Para 2.3 of deals with the powers delegated to the DGFT and PIC to interpret the policy or provision. The same is reproduced herewith for reference:

‘The decision of DGFT shall be final and binding on all matters relating to interpretation of Policy, or provision in HBP v1, HBP v2 or classification of any item for import / export policy in the ITC (HS). A Policy Interpretation Committee (PIC) may be constituted to aid and advice DGFT.’

Para 3.12.2 states the eligibility provision to apply for served from India duty credit scheme. The said provision is as follow:

‘Indian Service Providers, of services listed in Appendix 41 of HBPv1, who have free foreign exchange earning of at least ₹ 10 lakhs in current financial year will be eligible for Duty Credit Scrip. For Individual Indian Service Providers, minimum free foreign exchange earnings would be ₹ 5 Lakhs.’

The SFIS was introduced with an objective to accelerate growth in export of services and also to create a unique ‘Served From India’ brand, instantly recognized and respected world over. From the para 3.12.2 it is evident, to apply for SFIS it is mandate that the specified services must be provided by Indian Service Providers, receipt against the provision of service must be in free convertible foreign currency subject to a minimum earning of ₹ 10 lakhs and for individual service provider the minimum limit is ₹ 5 lakhs. There is no condition regarding ‘Indian Brand’ that is to say that SFIS is available only to those Indian service providers having ‘Indian Brand’ only.

Initially, the DGFT granted the SFIS to M/s Yum Restaurants (I) Pvt. Ltd., Nokia Solutions And Networks India Pvt. Ltd. and EI Dupont India Pvt Ltd but thereafter DGFT rejected their claims for SFIS benefits for the reasons that they were subsidiaries of foreign companies and brands not identified as Indian Brands. Accordingly, directed to submit the original licences. The DGFT and policy interpretation committee interpret that the objective of the scheme inter alia is to accelerate growth in export of services so as to create a powerful and unique ‘served from India brand’ instantly recognized and respected worldwide. However, the PIC wrongly termed ‘Served from India’ brand as ‘Served from India Brand’ and PIC framed another condition to become eligible for getting the benefit of SFIS instead of interpret the provisions. Also, the expression “Indian Service Providers” would include all Indian entities including individual nationals. The decision of the DGFT/PIC to exclude Indian subsidiaries of foreign companies, from the scope of ‘Indian service providers’, is based on their interpretation of the stated objective of SFIS. Moreover, as stated above, in my view the ‘Served from India’ brand used in the context of accelerating growth of services does not refer or allude to any trade name or trade mark which is ‘Indian Brand’.

The petitioners are companies incorporated under the Companies Act, 1956 and are governed by the provisions of the statute (currently Companies Act, 2013). Insofar as the domicile of the petitioners is concerned, no distinction can be drawn between the petitioners and other companies incorporated under the said Act. It is also well established that the situs of shares is located in the country in which the register upon which they are registered is kept. (R. Viswanathan v. R.S. Abdul Wajid: [1962 (5) TMI 25 - SUPREME COURT], Vodafone International Holdings BV v. Union of India and Anr.: [2012 (1) TMI 52 - SUPREME COURT OF INDIA]. Companies incorporated under the laws of India and having their registered offices in India would undeniably be Indian companies.

Para 16 to the order states that the DGFT/PIC has introduced a completely new concept in the eligibility criteria as specified under the FTP 2009-14, that is, to limit the incentives only to companies with trade names, which reflect their association with India. The expression “Served from India brand” must be read in the context of the object to accelerate growth in export of services from India. The purpose of granting incentive to Indian Service Providers is to incentivize export from India in order to strengthen such exports and to ensure that larger quantum of services are outsourced or procured from India. Clearly, the objective is to establish ‘India’ as a brand; a recognized destination for outsourcing of services. The objective as specified under paragraph 3.12.1 of FTP 2009-14 contains no reference to trade names of Indian companies.

The Hon’ble Delhi HC in aforementioned case held that it cannot be disputed that DGFT is empowered to interpret the foreign trade policy, such powers can be exercised only when the plain language of the policy presents an ambiguity. It would not be open for DGFT to introduce new conditions and criteria under the guise of interpreting the policy as that would, clearly, amount to amending the provision of the foreign trade policy. The words used in paragraph 3.12.2 of FTP 2009-14 are “Indian Service Providers”. There is no scope to read into these words the condition that for service providers to be Indian, its shareholders must also be Indian. This, clearly, would amount to introducing an additional eligibility condition which is extraneous to the eligibility criteria as spelt out in paragraph 3.12.2 of the FTP 2009-14. Introduction of such condition would, in effect, amount to amend the FTP 2009-14. The conclusion of DGFT that Indian companies having foreign equity cannot be considered as Indian, militates against well-established canons of company law. It is established law that a company is a juristic entity and the identity of the company is different from its shareholders.

Form the above discussion it is clear that where there is no ambiguity in language of policy and an interpretation in wrong way leads to baseless dispute. Such kind of interpretation not only defeat the whole objective of that scheme but also the main objective of trade policy to upsurge the export.