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Judgment
Balakrishna Eradi, J.—These two appeals filed tinder Section 23EE of the Foreign Exchange Regulation Act, 1947 (hereinafter referred to as "the Act") raise common questions and hence were heard together at the request of both sides.
The appellant in M.F.A. No. 39 of 1976 is a firm by name N.A. Paul & Co. conducting the business of export of dried prawns from Cochin. During the year 1970 the appellant firm had exported dried prawns on consignment (account sale) basis to Hong Konk. By a notice dated January 4, 1972, issued by the Deputy Director, Enforcement Directorate, Madras, the appellant was directed to show cause why adjudication proceedings as contemplated u/s 23D of the Act should not be held against it on the ground that the firm failed to repatriate the entire invoice value or the total export proceeds in respect of a consignment of dried prawns sent to Hong Kong during 1970. The charge proceeded to state that even out of the amounts actually realised by the sale of the goods at the foreign port, certain deductions had been made, for which the permission of the Reserve Bank of India had not been obtained and that hence there was a contravention of the provisions of Section 12(2) of the Act. That the transaction of export was by way of consignment sale was not disputed by the department. In reply to the aforesaid notice the appellant submitted that the, firm had been exporting prawns on consignment basis for the past fifty years to its accredited Hong Kong agents and that the usual system recognised and accepted by the customs authorities and the Reserve Bank of India was to allow the goods to be exported on consignment or on account sale basis after making out a provisional invoice whereunder the value will be put at as high a rate as possible. It was further pointed out that the practice was that a substantial portion of the invoice value will be drawn by the firm as advance immediately on the presentation of the documents after shipment. But, this was subject to final settlement of accounts after the goods were actually sold in the foreign country, the amount receivable by the appellant-firm in respect of the goods exported being only the net sale procesds after deduction of expenses and commission at the usual recognised and agreed rates. According to the case put forward by the appellant the practice was that on the arrival of the goods at the foreign country of destination the agents there will effect the sales at the best possible rates and the proceeds less the advance, expenses and the commission for the services rendered, will be repatriated to the appellant. The documents used to be thereafter sent to the Reserve Bank and they were being accepted without any objection during the past many years. On the basis of these facts it was contended by the appellant that there had not been any contravention of the provisions of Section 12(2) of the Act by the firm and hence it was requested that the proceedings may be dropped. The appellant was also served with another notice in 1973 calling upon it to show cause why similar action should not be taken against it for contravention of Section 12(2) of the Act in respect of a second consignment of 65 bags of dried prawns exported to Hong Kong during October, 1970. In reply to this notice also the appellant filed a detailed explanation stating that the exports were effected on consignment basis, that the value shown in the invoice was only provisional and that it had been put at a higher figure with a view to induce the foreign agent to sell the goods at as high a rate as possible in the foreign country, that after the sale of the goods at Hong Kong the foreign party had sent a statement of accounts and that the full amount due to the firm under the said statement of accounts had been repatriated to India and that hence the provisions of Section 12(2) of the Act had not been in any manner contravened.
The Deputy Director took the view that even though the transactions of export had been effected by way of consigment sales or on account sales and the necessary supporting vouchers had been produced by the appellant in respect of all the deductions made by the Hong Kong agents other than the commission of 3% charged by them, the appellant must be held to have contravened Section 12(2) of the Act since the firm had not obtained the prior permission of the Reserve Bank of India for deduction of the sale commission of 3% paid to the consignee at Hong Kong. On the basis of the said conclusion reached by him the Deputy Director passed separate orders in the two cases imposing on the appellant a penalty of Rs. 5,000 in each case u/s 23(1)(a) of the Act. The appellant thereupon preferred two appeals before the Foreign Exchange Regulation Appellate Board reiterating its contention that the firm had not contravened the provisions of Section 12(2) of the Act. The Appellate Board agreed with the contention advanced on the side of the appellant that in the case of consignment sales the value mentioned in the invoice could be only an estimate and that it was open to the exporter to show by appropriate evidence that the money actually realised by the transaction, was less than the figure shown in the invoice. The Board also took note of the fact that vouchers had been produced by the appellant in respect of the items of deductions representing the expenses incurred by the foreign company and that those vouchers had been already shown to the Reserve Bank and the bank had not taken any objection to them. However, since the Reserve Bank had taken objection to the payment of the 3% commission to the foreign consignee on the ground that the previous approval of the bank had not been taken, the Appellate Board was of opinion that this constituted a violation of the provisions of Section 12(2) of the Act in so far as the deduction on account of commission was concerned. Accordingly, the Appellate Board held that a contravention of the aforesaid provision had been proved against the firm only in so far as the payment of the commission was concerned and not in respect of any other matter. In view of the said finding reached by it, the Appellate Board reduced the penalty levied against the appellant to Rs. 2,000 in each case. Being aggrieved by the said decision of the Board in so far as it held the appellant firm guilty of contravention of Section 12(2) in respect of the deduction of commission by the foreign consignee, the appellant has preferred this appeal before this court.
The appellant in M.F.A. No. 44 of 1976 is another firm by name Universal Trades Corporation, which is also engaged in the business of export of dried prawns on consignment basis to Hong Kong and other places. By two notices dated April 24, 1973 and May 9, 1973, the appellant-firm was called upon to show cause why action should not be taken against it for contravention of Section 12(2) of the Act in respect of two consignments of dried prawns of 25 bags and 20 bags sent by the appellant on March 16, 1970, and April 9, 1970, respectively. The value shown, in the invoice in respect of the first consignment was HK $ 7,500 and that in respect of the second consignment was HK $ 7,000. The charge against the appellant was that the full invoice amount had not been repatriated to this country and that even out of the amount actually realised by way of proceeds of the sale of the goods effected in the foreign country deductions by way of expenses, commission, etc., had been made for which prior permission of the RBI had not been obtained and that this constituted a violation of the provisions of Section 12(2) of the Act. The appellant submitted a detailed explanation stating that the transactions were consignment sales and that the full amount actually realised by sale of the goods in the foreign country less the expenses incurred by the consignee and the commission agreed to be paid to the consignee had been repatriated to India and that hence there was no contravention of Section 12(2) of the Act. These contentions were rejected by the Deputy Director and by two separate orders he imposed on the appellant-firm a penalty of Rs. 2,500 in each case. The appellant took up the matter in appeal before the Foreign Exchange Regulation Appellate Board reiterating its contention that the firm had not in any manner contravened the provisions of Section 12(2) of the Act. The appeals filed by the appellant were heard by the Board along with the appeals filed by M/s. N.A. Paul & Co. (the appellant in M.F.A. No. 39 of 1976) and the Board found that the facts in both sets of cases were exactly similar. In respect of the above transactions of the appellant firm also, the Board found that they were only consignment sales. However, in view of the conclusion reached by it in the appeals filed by N.A. Paul & Co. (disposed of by order dated 29th March, 1976), that the failure to obtain prior permission of the Reserve Bank for the deduction in respect of commission paid to the foreign party constituted contravention of Section 12(2) of the Act, the said offence must be held to be established in this case also. The Board, however, reduced the penalty levied against the appellant to Rs. 1,500 in each case. It is against the said order passed by the Board that the appellant has preferred M.F.A. No. 44 of 1976.
We shall read Sub-sections (1) and (2) of Section 12 of the Act as they stood at the relevant time, the rest of the section not being material for our present purpose:
" 12(1) The Central Government may, by notification in the Official Gazette, prohibit the taking or sending out by land, sea or air (hereinafter in this section referred to as ''export'') of all goods or of any goods or class of goods specified in the notification from India directly or indirectly to any place so specified unless the exporter furnishes to the prescribed authority a declaration in the prescribed form supported by such evidence as may be prescribed of so specified and true in all material particulars which, among others, shall include the amount representing--
(i) the full export value of the goods; or
(ii) if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in the course of the international trade, and affirms in the said declaration that the full export value of the goods (whether ascertainable at the time of export of not) has been, or will within the prescribed period be, paid in the prescribed manner.
(2) Where any export of goods has been made to which a notification under Sub-section (1) applies, no person entitled to sell, or procure the sale of, the said goods shall, except with the permission of the Reserve Bank, do or refrain from doing anything or take or refrain from taking any action which has the effect of securing that--
(a) the sale of the goods is delayed to an extent which is unreasonable having regard to the ordinary course of trade, or
(b) payment for the goods is made otherwise than in the prescribed manner or does not represent the full amount payable by the foreign buyer in respect of the goods, subject to such deductions, if any, as may be allowed by the Reserve Bank, or is delayed to such extent as aforesaid:
Provided that no proceedings in respect of any contravention of this sub-section shall be instituted unless the prescribed period has expired and payment for the goods representing the full amount as aforesaid has not been made in the prescribed manner. "
It is not disputed that dried prawns is a category of goods covered by the notification issued by the Central Govt. under Sub-section (1) and that hence the provisions of Sub-section (2) are applicable in these cases. The question to be decided is whether in respect of consignment sales effected by an exporter the prior permission of the Reserve Bank is necessary for allowing the consignee to deduct the agreed commission from out of the proceeds realised by the sale of the goods in the foreign country. As pointed out by the Supreme Court in Union of India (UOI) and Others Vs. Rai Bahadur Shreeram Durga Prasad (P) Ltd. and Others, , in the case of goods exported on consignment basis, the exporter can give at the time of making the declaration under Sub-section (1) only an estimated value because it will not be possible for him to know the exact value for which the goods will ultimately be sold in the foreign market. The incidents of such corisignment sales have been succinctly stated as follows in the Business Encyclopaedia and Legal Adviser by W.S.M. Knight, Vol. I, at pp. 328 and 329 :
"When goods are forwarded to a merchant or broker for sale on behalf of a principal they are said to be forwarded on consignment......The usual instances of consignments are those of imported goods from a consignor abroad, the opposite form of consignment--that of export--being rarely resorted to unless the merchant at home finds it impossible to obtain a market for his goods otherwise, for export consignments invariably result in a loss to the consignor......Whether the consignment is one of importation or exportation it is always accompanied by an invoice known as a consignment invoice, directed to the consignee. This invoice, except as to its heading, is practically the same in form as a ''loco'' invoice, but is really only a pro forma invoice for the purpose of satisfying the requirements of the customs, and of serving as a guide for the sale of the goods. The invoice does not purport to charge the consignee with the price of the goods, nor does the consignor debit him therewith......The consignee having received the invoice and the bill of lading, proceeds to obtain a DELIVERY ORDER from the shipping agents wherewith he can get possession of the goods. His duty is then, after payment of all liabili ties in respect thereof, to sell the consignment either by private sale or public auction at the highest price he can obtain. The sale being effected, he must prepare and forward to the consignor a statement of account known as an account sales, in which he will credit the consignor with the price obtained for the consignment, and debit him with all the proper payments he may have made in respect thereof, and with the brokerage and commission. Whilst an invoice is an account of goods bought, an account sales is conversely an account of goods sold. The balance, which in the case of a consignment, is called the ''net proceeds'', is then debited or credited to the consignor according to the result of the transaction. This balance is either settled for in a bill attached to the account sales, or where there is a running account between the parties it is entered in the account."
In the case of transactions bona fide effected as consignment sales the "full amount payable by the foreign buyer in respect of the goods" under Clause (b) of Sub-section (2) of Section 12 of the Act, can, therefore, .be only the amount due to the consignor under the statement of account (account sales) by way of the balance of sale proceeds after deduction of expenses and the agreed commission. It is not contended on the side of the department that the case put forward by the appellants regarding the rate of commission agreed as between them and the consignee is not bona fide and true. Inasmuch as it has been found by the Appellate Board that the transactions in question were truly consignment sales and there being nothing to show that the deductions made by the consignee in respect of expenditure and commission were not factually true and not commercially reasonable, it cannot, in our opinion, be said that the payments received in India by way of repatriation did not represent the full amount payable to the appellants by the foreign buyer in respect of the goods. In our opinion, the permission of the Reserve Bank is necessary under Clause (b) only if any deduction is to be made from out of the amount payable to the consignor by the foreign buyer. In the case of consignment sales the amount payable to the consignor can be only the net proceeds left after deducting the expenses incurred by the consignee as well as his commission. The amount payable to the consignor being thus only the balance left after appropriation of the commission, the deduction of the commission is not from out of "the full amount payable by the foreign buyer" in respect of the goods and hence there is no necessity for the exporter to obtain the prior permission of the Reserve Bank for entering into such a transaction of consignment sale involving the payment of commission to the consignee which is a necessary incident of such a transaction. We are supported in this view by the observations of a Division Bench of the Mysore High Court in Krishnaswamy v. Government of India AIR 1970 Mys 3 with which we are in respectful agreement.
In the light of the above discussion it must follow that the Appellate Board was not right in its conclusion that the appellants had contravened the provisions of Section 12(2) of the Act, in having failed to obtain the prior permission of the Reserve Bank for payment of commission at 3% to their consignees in the foreign country. The appeals are, therefore, allowed and the impugned orders holding the appellants guilty of contravention of Section 12(2) and levying penalty against them u/s 23(1)(a) of the Act are hereby set aside. We direct the parties to bear their respective costs in these appeals.