Reverse Burden upon Exporters under FERA

(The following post has been contributed by Venugopal Mahapatra and Gautam Bhatia)

A recent judgment of the Supreme Court addressed a few important questions with regard to the imposition of reverse burden under the Foreign Exchange Regulation Act (FERA). In the case of Seema Silk and Sarees and Anr. v. Directorate of Enforcement and Ors., decided in June 2008, the constitutional validity of Sections 18(2) and 18(3) of the FERA was challenged as being discriminatory and violative of Article 14 of the Constitution.

Seema Silk and Sarees, a garment-exporting firm, failed to repatriate the full export value of goods to the tune of Rs. 16.5 crores. Accordingly, a notice was issued by the Directorate of Enforcement under Sections 18(2) and 18(3) of the FERA. In the proceedings initiated by the authorized dealer, Canara Bank, before the Debt Recovery Tribunal, the Enforcement Director imposed penalties upon the firm for violation of the aforementioned provisions. The appellants then preferred an appeal before the Supreme Court. The impugned provision was Section 18 of the FERA.

Section 18(1) of the FERA imposes a mandatory precondition on the exporter to furnish a declaration of the ‘full export value’ of the goods notified by the Central Government. It also requires an affirmation to repatriate the proceeds of the exports, if the exporter directly or indirectly wants to export the specified goods. It further provides a mechanism for grant of exemption by the Reserve Bank of India, the prescribed authority, to export such goods.

Section 18(2) lays down certain procedural requirements pertaining to the mode and method of the payment for goods, the timing of such payment, and the permissibility of deductions in the export value. Section 18(3) states that where in relation to any of the goods notified Clause (a) of Sub-Section (1) applies, and when the prescribed period has expired and the payment not been made, it shall be presumed that the requirements of Section 18(2) have not been complied. The Appellants contended, inter alia, that his provision was harsh inasmuch as it imposed a reverse burden upon the exporter, and also violative of Article 14, as it discriminated against exporters as opposed to domestic traders.

Responding to the Article 14 argument, the Court observed, first, that the Act in question was placed in the Ninth Schedule of the Constitution, and therefore could not be held to be ultra vires even if it did abridge or abrogate fundamental rights under Part III. The Court did not refer to the judgment in I.R.S. Coelho; however, this part of the judgment is relatively less important, as the Court decided to go into the substance of the contention in any event.

The Court referred to the cases of Ajoy Kumar Banerjee v. Union of India and Southern Petrochemical Industries Co. Ltd. v. Electricity Inspector & ETIO to extract the principle that a factual foundation must exist to prove the ground of inequality. No such factual foundation had been demonstrated in the instant case. The Court then went on to make a very important observation: it held that a domestic trader and an exporter stand on different footings. Going into the legislative intent behind the Section, the Court observed further that these provisions were made at the time of a “severe foreign exchange crunch,” with the objective of preventing fraud. In this manner, both the intelligible differentia and the rational nexus tests under Article 14 were satisfied, and the provisions in question were constitutionally valid.

A contention was also raised that the validity of the Act must be judged “on the touchstone of commercial considerations inasmuch as whether an exporter may not be able to repatriate the export proceeds.” Reference to the Income Tax Act and the provisions for a bad debt were also made. The Court held, however, that commercial expediency or auditing of books of accounts could not be a ground for striking down a statute as constitutionally invalid.

It was contended, lastly, that Sections 18(2) and 18(3), which placed the burden of proof upon the accused, were of a ‘draconian nature’ and hence unconstitutional. Rejecting this submission, the Court observed that a ‘legal provision does not become unconstitutional only because it provides for a reverse burden.’ Moreover, the reverse burden only establishes a rebuttable presumption, which can be refuted by the accused if he establishes that the provisions of the Act have not been violated. The Court cited the examples of statutes such as the Negotiable Instruments Act, Prevention of Corruption Act etc. to buttress its holding that an imposition of reverse burden could not, in itself, render a statute unconstitutional.

This case, therefore, provides authority for the proposition that exporters under the FERA form a separate and unique class, upon whom reverse burden can and may be imposed.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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