PETITIONER: BURN STANDARD COMPANY LIMITED Vs. RESPONDENT: McDERMOTT INTERNATIONAL INC. AND ANOTHER DATE OF JUDGMENT03/04/1991 BENCH: AHMADI, A.M. (J) BENCH: AHMADI, A.M. (J) RAMASWAMI, V. (J) II FATHIMA BEEVI, M. (J) CITATION: 1991 AIR 1191 1991 SCR (2) 67 1991 SCC (2) 669 JT 1991 (2) 95 1991 SCALE (1)587 ACT: Foreign Exchange Regulation Act 1973 / Foreign Exchange Manual 1978-Section 28(1) Paragraphs 24A.11(1) and 25A.2- Indian Company-Technical Collaboration agreement with foreign corporation-General or special permission of RBI- Colloboration approved by Secretariat for Industrial Approvals-Agreement taken on record by Government-Whether separtate permission of RBI necessary-Decision taken by RBI, but approval not communicated-Whether failure to discharge ministerial duty obliterates conscious decision taken-Non- filing of FNC5 form for grant of permission-Whether erases decision already taken. Arbitration Act, 1940; Sections 14,17,30 and 33-Foreign collaboration agreement-RBI's approval-Whether arbitration clause rendered void by virtue of agreement itself being void ab initio for want of RBI permission under Section 28(1) of Foreign Exchange Regulation Act,1973. Administrative Law: Administrative action-Whether decision becomes binding. HEADNOTE: The appellant, a Government company, entered into a Technical collaboration agreement with the respondent, a foreign corporation, under which the respondent was to provide technical know-how to the appellant, and the appellant was to pay the respondent fee in foreign currency in three installments. The appellant was required to apply for registration and/or Governmental approval and furnish satisfactory evidence of receipt of such approval. The effective date of the agreement was the date on which the notification was received by the respondent that all governmental approvals in that regard had been secured. The agreement was entered into with the approval of the Secretariat for Industrial Approvals. The agreement as well as the supplementary agreement, incorporating certain changes suggested by the Government, were filed with the Government, which took the same on record, by its letter of approval, A copy of the letter of approval and also the 68 collaboration agreement was sent to the RBI. After obtaining the necessary order under Section 195(2) of the Income Tax Act from the Income Tax Officer and the permit from the RBI, the appellant remitted the first installment of fee to the respondent. Thereafter, the respondent, alleging non-payment of subsequent installments, and consequent breach of terms of contract, sought to invoke clause 8.2 of the agreement for terminating the agreement. The appellant questioned respondent's right to invoke clause 8.2. Thereafter the respondent invoked the arbitration clause, clause 12.1 of the agreement, for referring disputes and difference to the arbitration of International Chamber of Commerce and claimed certain amount for the services actually rendered and also informed the ICC accordingly. The appellant challenged the legality and validity of the agreement as void ab initio, and also clause 12.1 as non-est and legally unforceable, and filed an application under Section 33 of the Arbitration Act, contending that the agreement being a contingent one, commencing from the effective date, and necessary approval having not been secured, the agreement had not commenced and, consequently the arbitration clause, being part of the very same agreement, the respondent was not entitled to invoke the said clause, and that in the absence of a valid permission from the RBI under Section 28(1) (b) of the Foreign Exchange Regulation Act, 1973, the agreement was clearly void by the thrust of Section 28(2) of the Act. The respondent contended that the necessary Government approvals were obtained and hence the `effective date' was reached and that under the Exchange Control Manual only the Indian Company could apply to SIA for approval and once such approval was accorded, the foreign collaborator to the contract was not expected to secure the RBI permission under Section 28(1) (b), since under the manual, SIA approval was to be deemed to be RBI's permission also; and therefore, the agreement was legal and valid and the respondent was entitled to seek its enforcement. The High Court held that on a true interpretation of the contract, it must be held to be voidable at the discretion of either party, that even if the contract was terminated or rendered void, the arbitration clause therein did not perish ipso facto, that the application to the Income Tax Officer for making payment of first installment could not have been made unless the necessary approvals were obtained, that the RBI had granted permission to remit the installment money (fee), after the Income Tax Officer had made the order under Section 195(2) of the 69 Income Tax Act, and it was only on account of this payment, that the respondent furnished the technology and provided technical services, and that, on account of appellant's failure to pay subsequent installments, a dispute had clearly arisen which had to be resolved through arbitration. In the appeal before this Court it was contended on behalf of the appellant company that paragraph 25A.2 of the Exchange Control Manual, 1978, provided that applications for permission under Section 28(1)(b) should be made in FNC5 and since no such application in FNC5 was made, a clear inference could be raised that the RBI had not granted permission under Section 28(1), and accordingly the agreement and the arbitration clause forming part of it were void ab initio by the thrust of Section 28(2), and that the prescribed form for SIA approval under paragraph 24A.11 was not the same as FNC5 prescribed under paragraph 25A.2 and administrative direction in paragraph 24A.11 that no separate permission under Section 28(1) was necessary could not override the statutory requirement of the Section. It was contended on behalf of the respondent that requirements of Section 28(1) were fully complied with and the RBI's sanction, being essentially administrative, it was enough to show that the RBI had granted permission, no matter whether it had followed the procedure of paragraph 24A.11(i) or 25A.2 of the Exchange Control Manual. Dismissing the appeal, this Court, HELD: 1.1 Section 28(1) of the Foreign Exchange Regulation Act, 1973 places restrictions on appointment of certain individuals and companies as technical or management advisers in India unless the RBI approves the same by a general or special permission. The section is silent on the mode and manner of securing such permission. However, sub- section (4) of Section 73 provides that where any provision of the Act requires the RBI's permission for doing anything under such provision, the RBI may specify the form in which an application for such permission shall be made. On a plain reading of paragraph 24A.11 Exchange Control Manual, 1978., it becomes clear that the intention is to introduce the single counter or window procedure to avoid duplication and hardship to the foreign collaborators, and once the collaboration is approved by SIA, and the agreement is `taken on record' there is no need to obtain a separate permission from the RBI. Paragraph 9 of the Guidelines for Industries stipulates that after the agreement is taken on record, a copy thereof has to be sent to the RBI to enable it to 70 authorise remittances to the foreign collaborator. [82E,84C,85A] 1.2 In the instant case, the appellant had sought the SIA approval, which was granted subject to the terms and conditions set out in the letter of approval. It was only thereafter that the agreement was executed. The appellant then sent a copy of the agreement to the Government of India which was duly examined in the light of the terms and conditions on which the approval was granted by the SIA and certain discrepancies were communicated to the appellant which necessitated the execution of supplementary agreement. It was only thereafter that the appellant was informed that the collaboration agreement and the supplementary agreement `have been taken on record. This was then forwarded to the RBI. The matter was processed by the RBI and the remittance of the first instalment of the fees took place after the income-tax was duly recovered at source. [85A-D] 1.3 The affidavits filed on behalf of the RBI leave no doubt that the remittance was permitted only after the RBI was satisfied that all the terms and conditions were duly satisfied, though the RBI's approval `remained to be communicated' to the appellant company. Failure to discharge the ministerial duty cannot obliterate the conscious decision taken by the RBI after application of mind. [85E,G] 1.4 The RBI 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 FNC5 form 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. [86H,87A] 2.1 The prescription of the form is merely to aid the RBI to process the application for permission. Emphasis must be laid on substance and not on mere form. If there has been substantial compliance mere lapse on the part of the RBI in failing to communicate its decision should make no difference. Paragraph 25A.2 is not in derogation of paragraph 24.A.11(i) nor does it dilute the requirement of Section 28(1). Factum of permission, and not the procedure followed, is relevant. [86G] 2.2 The RBI had granted the permission contemplated by Section 28(1) and hence the agreement cannot be voided by virtue of Section 28(2) of FERA. Once the decision to grant the permission is taken, 71 whether through the course charted by paragraph 24A.11(i) or 25A.2, that decision stands unless rescinded and the authorities are bound to act in aid thereof.[87B-C] 3. In the circumstances it is unnecessary to examine the question whether clause 12.1 of the agreement would stand or perish if the agreement is rendered void under Section 28(2) for failure to secure permission under Section 28(1).[87D] M/s. Dhanrajmal Gobindram v. M/s. Shamji Kalidas & Co., [1961] 3 SCR 1020; LIC of India v. Escorts Ltd. & Ors., [1986] 1 SCC 264 at 318 and Shri Sitaram Sugar Co. Ltd. & Anr. v. U.P. State Sugar Corporation Ltd. & Anr., [1990]3 SCC 222 at page 246-247, referred to, JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No.1423 of
1991.
From the Judgement and Order dated 6.12.1989 of
Calcutta High Court in Case No.5696 of 1988.
Soli J. Sorabjee, Deepanker Ghosh, R.M. Chatterjee,
A.K. Ghose, S. Mandal and Ms. Madhukhatri for the Appellant.
Dipankar Gupta, O.P. Khaitan, A.K. Bhatnagar, Ms. Kiran
Choudhary and Ms. B. Gupta for the Respondents.
H.N. Salve and H.S. Parihar for the Reserve Bank of
India.
The Judgement of the Court was delivered by
AHMADI,J. Special leave granted.
The principal question which this Court is called upon
to answer in this appeal by special leave is whether the
arbitration clause contained in Article XII (Paragraph 12.1)
of the Technical Collaboration Agreement entered into at
Dubai, United Arab Emirates, on September 25, 1984, between
the appellant Burn Standard Company Ltd., a Government of
India Undertaking, and the respondent Mcdermott
International, Inc., a foreign company, is rendered void by
virtue of the agreement itself being ab-initio void for want
of general or special permission of the Reserve Bank of
India (RBI) under
72
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 any contained in
any other provisions 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 percent 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 in India
or 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 or 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 (including
its branch) as it referred to in sub-section (1)
acts or accepts appointment as such agent, or
technical management adviser, or permits the use
of any such trade mark, without the permission of
the Reserve Bank, such acting, appointment or
permission, as the case may be, shall be void.
The petitioner is a Government Company incorporated under
the Companies Act, 1956, having its registered office at
10C, Hungerford Street, Calcutta, whereas the respondent is
a Corporation organized and existing under the laws of the
Republic of Panama with its executive office at P.O. Box
61961, 1010 Common Street, Near Orleans, Louisiana 701610,
U.S.A., with a branch office at P.O. Box 3098, Dubai, UAE.
On 25th September,1984 the said parties entered into an
agreement, styled “Technical Collaboration Agreement”, for
the fabrication of off-shore platform structure, including
but not limited to Jackets, Piles, Decks, Modules, Platform
& pipeline components, including their sub-components, for
the oil and gas industry which
73
required the high degree of expertise and experience as well
as the technical know-how possessed by the respondent. The
duration of the agreement was fixed under Article VIII to be
five years from the effective date or five years after
commencement of commercial production, whichever is greater,
or until otherwise terminated earlier under the Agreement.
The expression `effective date’ as defined in Article 1
means the date of which notification is received by the
repondent that all Governmental approvals relating to the
agreement have been secured; provided that if such approvals
are not secured within 180 days from the signing of the
agreement, the agreement, upon notice pursuant to Article
XVII of the agreement by either party may be made
ineffective whereupon the agreement shall be treated as null
and void. Obviously the purpose of the agreement was to
establish the basis whereunder the respondent was to provide
and the appellant was to receive technology and special
technical services related to the establishment and
operation of Fabrication Yard for fabricating off-shore
platform structures and additional special technical
services for any contracts related to marine construction
activities that are awarded to the appellant. Article X of
the agreement enjoins upon the appellant to apply for
necessary registration and/or governmental approval 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 to receipt of the required governmental approval.
The next important clause in the contract which needs to be
noticed at this stage is Article XII which reads as under:
“Article XII-Arbitration
12.1 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 said Rules. Judgement
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 XII the validity, construction and performance
of the agreement was to be governed by the Indian laws.
74
The aforesaid agreement was entered into after it was
approved by the Secretariat for Industrial Approvals (SIA)
by their letter dated 18th June, 1984. After the execution
of the agreement it was filed with the Government of India
on 5th October, 1984. By the letter dated 15th December,
1984 of the Ministry of Industry, Department of Heavy
Industry, New Delhi, addressed to the appellant it was
pointed out that clauses 3.2. and 4.2 of the agreement were
not consistent with the terms and conditions of
collaboration approved by Secretariat letter dated 18th
June, 1984. in that, clause 3.2 should contain a clause that
any additional payment made for specific Technical Services
would be subject to prior approval of Government of India
and in clause 4.2 the payment expressed in U.S. Dollars
298,200 should be 298,500 and the figure of the 3rd
instalment should be 99,450 instead of 99,400 U.S. dollars.
To carry out these changes, the parties entered into a
supplementary agreement on 29th December, 1984 and filed it
with the Government of India on 9th January, 1985.
Under Article IV of the agreement, in consideration of
the respondent having agreed to transfer technology to the
appellant, the latter undertook to pay a lump sum of
$298,200 in three installments, the first payment of U.S. $
99,400 within thirty (30) days of the signing of the
agreement or receipt of approval from the Government of
India, whichever is later; the second payment of U.S. $
99,400 upon completion of items 1 to 10 of clause 3.4 of
Article III and the third payment of U.S. $ 99,400 upon the
commencement of commercial production of the Fabrication
Yard or four years after the effective date, whichever is
earlier. As stated earlier the figure `298,200′ was
replaced by the figure `298,250′ and the amount of the third
instalment was raised from U.S.$99,400 to U.S.$99,450 under
the supplementary agreement dated 9th January, 1985. After
this suuplementary agreement was filed with the Govt., of
India, the latter took the collaboration agreement on record
under the communication dated 15th January,1985. A copy of
the Govt. of India’s letter along with a copy of the
collaboration agreement was received by the RBI on 21st
January, 1985. In para 7 of its affidavit dated 18th
September, 1990, the RBI has clarified as under:
“However, the Bank’s letter of authorization
indicating the 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 re-
75
mained 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 5th February, 1985, the appellant made an application to
the income tax authorities for determination of income tax
deduction for 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% of the consideration proceeds on
the premise that the agreement was approved by the
Government of India. Soon thereafter the appellant applied
on 14th February,1985 to the United Bank of India for
remitting the first instalment of fees minus 40% chargeable
as income tax. The United Bank of India intimated the rate
of exchange on the very next date. The Income-tax Officer
issued the `No-objection certificate’ on 19th February,
1985 whereupon the RBI issued the permit dated 6th March,
1985 for remittance of U.S. $ 59,640 ($ 99,640-40%=$59,640).
By the appellant’s letter dated 18h March, 1985 the
appellant enclosed a draft for the said amount to the
respondent.
After the payment in respect of the first instalment
was thus made, the respondent wrote a letter dated 16th
September, 1986 invoking clause 8.2 of the agreement. That
clause reads thus :
” In the event of any breach of this Agreement not
cured within sixty (60) days after notification
thereof, in addition to all other rights and
remedies which either party may have in law or
equity, the party not in default may at its option
terminate this Agreement by written notice. Such
termination shall become effective on the date set
forth in such notice of termination, but in no
event shall it be earlier than sixty (60) days
from the mailing thereof. Any waiver of the right
of termination for default shall not constitute a
waiver of the right to claim damages for such
default or the right to terminate for any
subsequent breach.”
By the said letter the respondent laments lack of payment of
installments due from the appellant and consequential breach
of the terms of the contract. The respondent then puts the
appellant to notice as per clause 8.2 reproduced above of
its right to terminate the agreement if
76
the appellant fails to cure the breach within 60 days of the
receipt of the communication. The appellant by its reply
dated 12th December, 1986 questioned the respondent’s right
to invoke clause 8.2 of the agreement since in its view
there was no breach of agreement and called upon the
respondent to discharge its obligations under clause 3.4 of
the agreement and receipt payment of the second instalment
thereafter. On receipt of this reply, the respondent by
their Advocate’s letter date 27th September, 1988 invoked
the arbitration clause extracted earlier for referring the
disputes and differences to the arbitration of International
Chamber of Commerce. At the same time the respondent
claimed that it was entitled to recover U.S. $ 621,777,09
with 15% per annum interest from the appellant for services
actually rendered. On the same day the respondent wrote to
the International Chamber of Commerce informing it of its
decision to invoke the arbitration agreement. The appellant
responded by its letter dated 11th October, 1988 stating
that the collaboration agreement dated 25th September, 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 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 the very same agreement it
too had not commenced and hence the respondent was not
entitled to invoke the said clause and (ii) since under the
agreement the respondent was appointed as Technical or
Management Adviser in India within the meaning of Section
28(1) (b) of FERA, in the absence of a valid permission from
the RBI, the agreement was clear void by the thrust of
Section 28(2) of the said enactment. The respondent
countered these contentions (i) by pointing out that the
necessary Government approvals were obtained and hence the
`effective date’ was reached and (ii) under the Exchange
Control Manual (1978 Edition) only the Indian company could
apply to SIA for approval and once such approval was
accorded as in the present case, the foreign collaborator to
the contract was not expected to secure the RBI permission
under Section 28(1) (b) since under the
77
manual SIA approval was to be deemed to the RBI’s permission
also. It was, therefore, contended that the agreement was
legal and valid and the respondent was entitled to seek its
enforcement. The arbitration clause being a part of the
agreement, it was imperative on the part of the respondent
to follow that course in the event of a dispute or
difference arising between the parties concerning any matter
covered by the agreement.
The High Court on a proper construction of clause 8.1
of the agreement held that the principal duties and
obligations incorporated in clauses 1.3 and 1.4 commence
after governmental approvals are obtained. The obligation to
secure necessary registration and governmental approvals is
cast by virtue of clause 10.1 on the appellant. Obviously
the said clause comes into operation immediately on the
execution of the agreement since clause 1.2 clearly
contemplates that if governmental approvals are not obtained
within 180 days, the parties will be entitled to put an end
to the agreement. It is thus manifest from the terms of the
agreement that some of its provisions come into effect on
the execution of the agreement and remain in force for 180
days till the contract is terminated by either party. But
if the parties choose to continue the contract even beyond
the period of 180 days notwithstanding the right to
terminate the same, there is nothing in the agreement
prohibiting 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 principle 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 termination
78
of the main contract but not of the arbitration agreement.
Indeed, the arbitration agreement would be invoked only when
disputes arise under the main contract including a
repudiation of the main contract by any of the parties and
in that sense the arbitration agreement is remedial while
the main contract is substantive. The High Court,
therefore, held that in law the jurisdiction of the
arbitrator under the arbitration clause would cover the
decision as to voidability of the main contract also. The
High Court then concluded as under:
“It is apparent from the sequence of events
appearing from the list of dates already noted
hereinbefore that the petitioner really made an
application to the secretariat for Industrial
Approvals, Department of Industrial Development
and a letter of approval was issued. Thereafter
the agreement dated September 25, 1984 was
executed. The Government pointed out certain
deficiencies as a result of which the
supplementary agreement dated September 28, 1984
was executed. The said documents were all filed
with the Govt. and thereafter the Government took
the agreement on record and nothing was really
required to be done by the repondent. In fact the
paragraph 11 at Chapter III of Guidelines for
industries of the Government of India provide for
such a procedure for taking the agreement on
record after the approval is given for Foreign
Collaboration.”
After quoting paragraph 11 of the said guidelines the High
Court referred to the appellant’s application to the Income-
tax Officer for payment of the first instalment under clause
4.1 of the agreement and concluded that such an application
could not have been made unless the necessary approvals were
obtained. After the Income-tax Officer made the order, the
RBI granted permission to remit the instalment money (fee)
on 6th March, 1985. It was only on account of this payment
that the repondent furnished the technology and provided the
technical services to the appellant in pursuance of Article
III of the contract. The High Court dismissed the
application holding that on the appellant’s failure to pay
the subsequent installments, a dispute had clearly arisen
between the parties which had to be resolved through
arbitration.
Mr. Soli Sorabjee, learned counsel for the appellant,
placed the appellant’s case thus: Under Section 73(4) of
FERA, where permission of RBI is required under any
provision of the said statute for doing anything thereunder,
the RBI has to specify the form in which
79
the application for such permission must be made. Paragraph
25A.2 of the Exchange Control Manual, 1978 (Manual) refers
to 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 RBI
permission and, therefore , the question of grant of such
permission by the RBI did not arise. The respondent having
failed to secure the RBI 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 FERA. 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) is since the two operate in
different fields and it is, therefore erroneous to think
that such approval satisfies the requirement of Section
28(1) . Paragraph 24A.11 of the Manual is not referable to
permission under Section 28(1) and must be read harmoniously
with the statutory provisions, for if it runs counter to the
said provisions, it would have to be ignored for the obvious
reason that it cannot override the requirement of law being
merely in the nature of administrative instructions. Nor can
the letter of 15th January, 1985 be read to convey the grant
of permission under Section 28(1). So also the permit issued
by the RBI dated 6th March, 1985 for remittance of the
first instalment payable under Clause 4.1 of the agreement
is referable to the exemption contemplated by Section 9 and
has no relevance whatsoever to the permission envisaged by
Section 28(1) of FERA. Thus the permission contemplated
under Section 28(1) is an express permission and it would be
an entire wasteful exercise to find out from the
correspondence and documents placed on record if a
permission can be culled out or be deemed to have been
granted. In the absence of a permission, Section 28(2)
declares the agreement or contract to be void and,
therefore, the said agreement or any part thereof cannot be
enforced in a court of law. The High Court was, therefore,
clearly wrong in the view it took in upholding the
respondent’s effort to invoke the arbitration clause.
Mr. D.P. Gupta, learned counsel for the respondent
countered: The RBI has published the Manual to detail the
procedure for entering into such Technical Collaboration
Agreements; paragraph 24A.11 lays down the procedure for
securing the RBI permission contemplated by Section 28(1)
and where the situation does not stand covered thereunder
the application has to be made under paragraph 25A.2 of the
said manual which lays down a different procedure and
prescribes the
80
FNC5 form. In other words, if the case is governed under
paragraph 24A.11 when it is unnecessary to resort to
paragraph 25A.2 which prescribes the FNC5 form. The
Government policy for dealing with such foreign
collaboration agreements is generally set out in the
industrial policy document entitled `Guidelines for
Industries’, Chapter IV whereof sets out a procedure
identical to the one contained in the manual. The appellant
had made an application under paragraph 24A.11 to SIA for
approval of the technical collaboration arrangement with the
respondent which was granted on 18th June, 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 the
letter of 21st September, 1984 a supplementary agreement was
immediately executed and filed with the Government of India
on 9th January, 1985. It was thereafter the that
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 Guidelines for Industries. Copies of the letter of 15th
January, 1985 were forwarded to RBI authorities as well. It
was only thereafter that the appellant applied for
determination of the Income-tax amount under Section 195(2)
of Income-Tax Act which determination was made by an order
dated 11th February, 1985. The appellant then applied for
permission to remit the first instalment of fees and on
receipt thereof enclosed a draft for U.S. $ 59,640 ( after
deducting 40% income tax) under letter dated 18th March,
1985 addressed to the respondent. It was only when the
subsequent payment was not forthcoming that the respondent
gave notice under clause 8.2 of the agreement and thereafter
sought to resort to arbitration. Thus the requirements of
Section 28(1) were fully complied with.
Mr.Salve, the learned counsel for the RBI, placed on
record an additional affidavit dated 24th January, 1991
sworn by Shivaji D. Kadam, Deputy Controller, Exchange
Control Department of the RBI explaining what steps the bank
had taken after it received the Government of India’s letter
of approval together with a copy of the collaboration
agreement dated 21st January, 1985. Since the said letter
was only a covering letter taken on record the said
agreement, the bank had by its letter dated 7th February,
1985 sought copies of the earlier letters from the
Government as they were of vital importance because without
those letters it was not possible for the RBI to proceed
under paragraph 24A.11 of the manual. Thereafter on 14th
February, 1985 the appellant reminded the RBI to forward its
approval to enable payment of the fees to the respondent.
Again on
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20th February, 1985 1985 the appellant approached the RBI
for sanction to remit the fees and enclosed therewith the
Government of india letters dated 18th June, 1984 and 4th
August, 1984 along with an application in A-2 form. The
Government of india also forwarded copies of the said two
letters by a covering letter dated 1st March, 1985 which was
delivered to the RBI on 4th March, 1985. On the same day a
note was put up to the Staff Officer, Grade A, who observed:
“In view of the Government letter having now been
received, we may allow the remittance of U.S.$
59.640 being the 1st instalment of technical know-
how fees.”
The Exchange Control Officer then said :
“We may allow the remittance of U.S.$ 59.640
being 1st instalment of know-how fees”.
This final note of the Exchange Control Officer was
countersigned by the Assistant Controller on 6th March, 1985
The deponent fairly clarifies that “as per the RBI
practice, 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 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, the agreement is rendered void ab-
initio for want of permission under Section 28(1) of FERA.
It is only if we accept the contention that in fact the RBI
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 in any way the operation of any
provisions of the Act or of any rule, direction or order
made thereunder.” Contravention of any provision of the Act
(other
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than Section 13, 18(1)(a) and 19(1)(a) or of any rules
directions or order made thereunder, is made penal by
Section 50. Secondly, the said Section 28(1) places an
embargo on a resident outside India or a person who is
resident in india but is not a citizen of 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 40% or any branch of such company to
(a) act or accept appointment, as agent in india or any
person or company, in the trading or commercial transactions
of such person or company; or (b) act or accept appointment,
as a technical or management adviser in India of any person
or company except with the general or special permission of
the Reserve Bank. Admittedly there existed no general
permission and, therefore, special permission must be shown
to prove satisfaction of the requirement of the said
provision. Under Sub-section (2) where any person mentioned
in sub-section (1) acts or accepts appointment as such agent
or technical/management adviser without the permission of
the RBI, such acting or appointment shall be void.
Therefore, let us first focus our attention on the question
whether or not the RBI’s permission was obtained in regard
to the collaboration agreement in question ?
Section 28(1) places restrictions on the appointment of
certain individuals and companies as technical or management
adviser in India unless the RBI approves the same by a
general or special permission. The section is silent on the
mode and manner of securing such permission. However, sub-
section (4) of Section 73 provides that where any provision
of the Act requires the RBI’s permission for doing anything
under such provision, the RBI may specify the form in which
an application for such permission shall be made. In this
connection it is essential that we notice paragraphs 24A.11
and 25A.2 at this stage. These two paragraphs read as under
:
“24A.11. Persons, firms and companies wishing to
establish new industrial units or expand/diversify
existing units with foreign technical collaboration
should apply on prescribed form to the Secretariat
for Industrial Approvals (SIA), Department of
Industrial Development, Government of India, New
Delhi, for approval. In case where proposal for
collaboration is approved by Government, 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 requisite
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number of copies of the agreement to Government.
Government will take the agreement on record if it
is in conformity with the approved terms and advise
the applicant accordingly under intimation to
Reserve Bank. Reserve Bank will thereafter issue
its formal authorization under Foreign Exchange
Regulation Act, 1973, to the applicant. Although
the rendering of technical advisory services by
foreign collaborators under foreign collaboration
agreements approved by government attracts Section
28(1)(b) of Foreign Exchange Regulation Act, 1973,
it will not be necessary for the foreign
collaborators to seek Reserve Bank permission under
the Section separately. Accordingly, while granting
approval for foreign collaboration, Reserve Bank
will confirm that the approval will also be deemed
to be the Bank’s permission to the foreign
collaborators under this section for rendering
technical services to the Indian company concerned
under the collaboration agreement. Permission given
under this Section is, however, without prejudice
to the decision that the Bank may take on the
foreign company’s application, if any under section
28(1)(c) of the Act for use by the Indian company
of foreign trade mark(s) involving direct or
indirect consideration.”
“25A.2. Under Section 28(1)(b) of Foreign
Exchange Regulation Act, 1973, it is obligatory
for foreign companies to obtain permission of
Reserve Bank for acting or accepting appointment,
as technical or management adviser in India of any
person or company. Reserve Bank’s permission is
also necessary under Section 28(3) of the Act in
case where appointments as technical/management
advisers were held by such foreign companies since
prior to the coming into force of the Act i.e. 1st
January, 1974 and are continuing thereafter.
Applications for permission in either case should
be submitted to Reserve Bank in form FNC5. These
provisions are also applicable to foreign
collaborators rendering technical advice to Indian
firms and companies under collaboration agreements
approved by Government of India. While, however,
communication approval for new collaboration
agreements between Indian companies and overseas
collaborators, Reserve Bank will specifically
indicate that the approval also permits the
foreign collaborator to render technical advice to
the
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Indian company and separate approval need not be
sought by the former from Reserve Bank under
Section 28(1)(b) of the Act.”
The appellant’s contention that the application for
permission under Section 28(1) ought to have been made in
the prescribed form FNC5 and since admittedly no such
application was made by either party there was no valid
permission approving the contract and hence by virtue of
Section 28(2) the contract was rendered void ab-initio. On a
plain reading of paragraph 24A.11 it becomes clear that the
intention is to introduce the single counter or window
procedure to avoid duplication and hardship to the foreign
collaborators. Once the collaboration is approved by SIA, as
in the present case, and the agreement is `taken on record’
there is no need to obtain a separate permission from the
RBI. 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 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 is found to be in
accordance with the terms specifically approved by
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 through
the Ministry of Finance (Department of Economic
Affairs) on the basis of which remittances to the
foreign collaborator are authorised by the Reserve
Bank of India. Representations against the terms
and conditions of collaboration approved by the
Government are sent by the SIA to the
administrative Ministry/Department concerned with
the item of manufacture who will continue to deal
with such representations and take appropriate
action.”
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It will be seen from the above that after the agreement is
taken on record a copy thereof has to be sent to the RBI to
enable it to authorise remittances to the foreign
collaborator. In the present case the appellant had sought
the SIA approval which was granted on 18th June, 1984
subject to the terms and conditions set out in the letter of
approval. It was only thereafter that the agreement was
executed on 25th September, 1984. The appellant then sent a
copy of the agreement to the Government of India by the
letter of 5th October, 1984 which was duly examined in the
light of the terms and conditions on which the approval was
granted under the letter of 18th June, 1984 and certain
discrepancies were communicated to the appellant by he
Ministry of Industry, Department of Heavy Industry, which
necessitated the execution of the supplementary agreement of
29th December, 1984. It was only thereafter that the
said department by the letter of 15 January 1985 informed
the appellant that the collaboration agreement and the
supplementary agreement `have been taken on record’. This
was then forwarded to the RBI which the bank received on
21st January, 1985. We have already indicated earlier how
the matter was processed by the RBI before the remittance of
the first instalment of the fees of U.S. $ 59,640 could take
place after the income-tax was duly recovered at source.
Paragraph 7 of the RBI’s affidavit dated 18th September,
1990 extracted earlier and the details of the action taken
by the RBI as disclosed in the further affidavit of 24th
January, 1991 leave no doubt that the remittance was
permitted only after the RBI was satisfied that all the
terms and conditions were duly satisfied. To place the
matter beyond the pale of doubt, the further affidavit field
on behalf of the RBI carries the following statement.
“As per the practice of the RBI, 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
file on behalf of the RBI show that the RBI’s approval
`remained to be communicated’ to the appellant company.
Failure to discharge the ministerial duty cannot obliterate
the conscious decision taken by the RBI 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
FNC5 as contemplated by paragraph
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25A.2 of the manual. It is indeed true that the record does
not disclose 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-section (2) and (3) of Section 47 of FERA
cannot save the agreement declared void by the statute
itself. He further submitted that the case was governed by
paragraph 25A.2 and not 24A.11 and hence making of an
application in the prescribed FNC5 form was imperative and
failure to do so raised a clear inference that the RBI had
not granted permission under Section 28(1) since it had
never been approached for such permission. he emphasised
that the prescribed form for SIA `approval’ under paragraph
24A.11 is not the same as FNC5 and hence the administrative
direction in the said paragraph that `it will not be
necessary for the foreign collaborators to seek Reserve Bank
permission under this section separately’ cannot override
the statutory requirement of Section 28(1). The statutory
duty cast on the RBI by Section 28(1) cannot be abdicated by
the RBI by the deeming clause contained in paragraph
24A.11(i) extracted earlier. To buttress the submission
counsel invited our attention to two cases, viz., (i)M/s.
Dhanrajmal Gobindram v. M/s. Shamji Kalidas & Co., (1961) 3
SCR 1020 and (ii) LIC of India v. Escorts Ltd. & Ors. [1986]
1 SCC 264 at 318 (Para 69) wherein this Court held that
paragraph 24A. I was merely an explanatory statement of
guideline for the benefit of the authorised dealers and was
neither a statutory direction nor a mandatory instruction.
On the other hand counsel for the respondent argued that the
RBI’s action in regard to grant of permission under Section
28(1) being essentially administrative=see Shri Sitaram
Sugar Co. Ltd. & Anr. v. U.P.State Sugar Corporation Ltd. &
anr. [1990] 3 SCC 223 at page 246-247 it is enough to show
that the RBI had granted the permission no matter whether it
had followed the procedure of paragraph 24A.11(i) or 25A.2
of the manual. We think there is considerable force in this
contention for the simple reason that we are concerned with
the factum of permission and not the procedure followed by
the RBI for granting the same. The prescription of the form
is merely to aid the RBI to process the application for
permission. Emphasis must be laid on substances and not on
mere form. If there has been substantial compliance, as in
this case, the mere lapse on the part of the RBI in failing
to communicate its decision should make no difference.
Paragraph 25A.2 is not in derogation of paragraph 24A.11(i)
nor does it dilute th requirement of Section 28(1). In any
case the facts of the present case clearly reveal that the
RBI 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
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to the foreign collaborator. Merely because application for
such permission was not made in FNC5 form 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 are, therefore, of the
opinion that the RBI had granted the permission contemplated
by Section 28(1) and hence the agreement cannot be voided by
virtue of Section 28(2) of FERA. It is not the case of RBi
that it at any time had second thoughts about its action. It
never contemplated withdrawal of the permission at any point
for time thereafter. Once the decision to grant the
permission is taken, whether through the course charted by
paragraph 24A.11(i) or 25A.2, that decision stands unless
rescinded and the authorities are bound to act in aid
thereof.
In the view that we take it is unnecessary to examine
the question whether clause 12.1 of the agreement would
stand or perish if the agreement is rendered void under
Section 28(2) for failure to secure permission under Section
28(1). Since we have come to the conclusion that the RBI
permission was in fact secured under Section 28(1), the
second question recedes in the background. We, therefore,
need not examine the same.
Before we part we are constrained to observe that we
were pained at the attitude of the appellant company
attempting to thwart a valid agreement, part performed by
the payment of the first instalment, on hypertechnical
grounds, an attitude which would scare away collaborators
and tarnish the image and credibility of our entrepreneurs
abroad. We do hope the appellant company will honour its
obligations under the agreement and settle its differences
with the respondent across the table in a business-like
manner rather than litigate.
For the aforesaid reasons we dismiss this appeal with
cost. Cost quantified at Rs.5000.
N.P.V. Appeal dismissed
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