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2016 DIGILAW 1882 (GUJ)

Padmavati Impex Pvt. Ltd. v. Union of India

2016-09-01

A.J.SHASTRI, AKIL KURESHI

body2016
ORDER : AKIL KURESHI, J. 1. The petitioner has challenged an order dated 21.10.2015 passed by the Appellate Authority by which the petitioner's appeal, against the order of the adjudicating authority dated 12.02.2014, came to be rejected. 2. Brief facts are as under: The petitioner is a company registered under the Companies Act. The petitioner was granted later of permission on 08.01.2002 to start a 100% Export Oriented Unit [‘EOU’ for short] at GIDC, Jamnagar. According to the petitioner, the manufacturing activity at the unit started on 28.02.2003 As per the Foreign Trade Policy 2004-09 ['the said policy’ for short], the petitioner was required to achieve positive net foreign exchange earning [‘NFE’ for short] during every block of five years of its existence. It is not in dispute that the petitioner achieved such positive NFE in the first block of five years after commencement of manufacturing. However, during the second block, according to the department, the petitioner fell short by a sum of Rs. 55.73 lacs. On account of such default, the adjudicating authority issued a show-cause notice dated 14/16.08.2013 calling upon the petitioner why penalty in terms of sub section (2) of Section 11 of the Foreign Trade Development and Regulation Act, 1992 ['the Act’ for short] be not imposed. The petitioner filed multiple replies to such show cause notice and disputed any such liability of penalty. Insofar as the foreign exchange earning rate is concerned, there was no dispute between the petitioner and the department. The dispute was only with respect to the period for computing the block of five years for consideration of NFE. According to the petitioner, since the manufacturing activity had commenced on 28.02.2003, the first block of such five years would comprise of financial year 2002-03 to 2006-07. The second block of five years, therefore, would comprise, according to the petitioner, of the financial year 2007-08 to 2011-12. The adjudicating authority, however, held a belief that the first block of five years would commence from 01.04.2003 and end on 31.03.2008 and, therefore, the second block would be the financial year 2008-09 to financial year 2012-2013. It is not in dispute that in this block of five years, the petitioner had not achieved positive NFE. 3. The adjudicating authority in the order dated 12.02.2014 observed that on 29.02.2003, the petitioner had merely made imports of the raw materials. It is not in dispute that in this block of five years, the petitioner had not achieved positive NFE. 3. The adjudicating authority in the order dated 12.02.2014 observed that on 29.02.2003, the petitioner had merely made imports of the raw materials. There was nothing on the record to suggest that the manufacturing activity actually commenced. However, accepting the petitioner's contention that such activity had actually commenced, proceeded to hold that the block periods for consideration of NFE would be the financial years 2003-04 to 2007-08 and thereafter, financial year 2008-09 to 2012-13. On such basis he concluded that the petitioner had negative NFE of Rs. 55.73 lacs in the second block and imposed penalty of Rs. 5.50 lacs under Section 11(2) of the Act. He also noted that the petitioner had discontinued manufacturing activity since last couple of years and the unit had closed down. However, taking note of the petitioner's contention of a possible revival of the unit, he did not take any further penal action in this respect. 4. The petitioner challenged this order before the appellate authority. The appellate authority, was of the opinion that the block period would start from the date of manufacturing activity itself. In his opinion, the first block period would, therefore, comprise of the period between 28.02.2003 to 28.02.2008 and the second block would cover a period between 28.02.2008 to 28.02.2013 However, during this second block period of five years also, the petitioner had such negative NFE. Thus, on slightly different logic, he upheld the order of adjudicating authority and rejected the appeal of the petitioner. These orders the petitioner has challenged in the present petition. 5. Taking us through the foreign trade policy framed by the Central Government under the said Act counsel for the petitioner would contend that the petitioner having commenced the manufacturing activity on 29.02.2003, the first block of five years would commence with the financial year 2002-03. Thus, considered in the second block of five years, the petitioner had achieved the positive NFE. The authorities committed a serious error in imposing the penalty. 6. On the other hand, learned counsel Ms. Patel for the department opposed the petition contending that the adjudicating authority had given correct interpretation to the policy applicable. Since the appellate authority rejected the appeal through different grounds, in any case, the petition should be dismissed. 7. The authorities committed a serious error in imposing the penalty. 6. On the other hand, learned counsel Ms. Patel for the department opposed the petition contending that the adjudicating authority had given correct interpretation to the policy applicable. Since the appellate authority rejected the appeal through different grounds, in any case, the petition should be dismissed. 7. As noted, the following aspects are not in dispute: (i) If the block period for consideration of NFE are reckoned from the 1stday of April of the year following which the manufacturing activity commenced, in the second block of five years, the petitioner failed to achieve positive NFE. (ii) The petitioner has not argued that the penalty of Rs. 5.50 lacs was grossly disproportionate. (iii) Though the petitioner had discontinued the manufacturing activity for over one year, the adjudicating authority did not take any penal action in connection with such lapse. 8. In view of such facts, the short question that calls for consideration is, which would be the relevant block period of five years for computing NFE? The Government of India, in exercise of powers under Section 5 of the Act, had framed foreign trade policy 2004-09 by issuing a notification in this respect. Para 6.5 of the policy reads as under: “6.5 Net Foreign Exchange Earnings: EOU/EHTP/STP/BTP unit shall be a positive net foreign exchange earner except for sector specific provision of Appendix 14-I-C of HBP v 1, where a higher value addition shall be required. NFE Earnings shall be calculated cumulatively in blocks of five years, starting from commencement of production. Whenever a unit is unable to export due to prohibition/restriction imposed on export of any product mentioned in LOP, the five year block period for calculation of NFE earnings may be suitably extended by Boa. Boa may also consider extension of block period by another one year, for calculation of NFE on case of case basis, for those units which complete 5 years block period in between 30.09.2008 and 30.09.2009 keeping in view the decline in exports in that particular unit, due to economic slow down only. 9. This policy contained guidelines for monitoring the performance of EOU/SEZ etc. 9. This policy contained guidelines for monitoring the performance of EOU/SEZ etc. units in the Appendix 14-I-G. Relevant portion of these guidelines reads as under: “(1) The annual review of performance of each operational unit and its compliance with the conditions of approval shall be undertaken by the Development Commissioner before the end of the first quarter of the following financial year; (2) A summary of annual performance review will be sent by each Development Commissioner to the Ministry of Commerce for information under the three formats indicated below latest by 30thSeptember every year; Proforma I: Comparative statement of performance and monitoring as compared to previous year; Proforma II: Summary of annual performance of the EOU/SEZ units, sector wise with sectoral sub-totals. Proforma III: Unit wise statement of NFE showing the result of review. PART (A) 3. CRITERIA FOR ANNUAL MONITORING: This criteria for keeping the unit under watch or initiating penal action in respect of EOU/SEZ units would be as follows: (i) Watch-If there is shortfall in achieving the NFE as per norms in EOU/SEZ Scheme at the end of 1st and IInd year; (ii) Issue of show cause notice-At the end of 3rd or subsequent year if positive NFE is not achieved as per EOU/SEZ Scheme, Show cause notice will be issued. After the completion of first five years, if it is noted that the unit has not achieved positive NFE, as per EOU/SEZ Scheme the Development Commissioner would initiate penal action under the FT(D & R) Act, 1992; (iii) For failure to achieve positive NFE during the course of 5 years after completion of one year from the date of commencement of commercial production, a cautionary letter may be issued.” 4. METHOD OF MONITORING: (i) In all cases of exit from the Scheme where the unit has imported inputs and failed to fulfill the conditions of LOP with regard to NFE, appropriate steps are to be taken for penal action after issuing show cause notice to the units. Steps may also be initiated for cancellation of LOP/LOA of units, which is not operating for more than a year; (ii) NFE is to be calculated, as per para 6.10.1 to 6.10.1 of the Chapter 6 and Para 7.12.1 to 7.12.4 of the Chapter 7 of the Handbook of Procedures (Vol-I). For purpose of uniformity, guidelines for calculation of NFE is given in EOU/SEZ Scheme may be followed. 5. For purpose of uniformity, guidelines for calculation of NFE is given in EOU/SEZ Scheme may be followed. 5. MONITORING PERIOD: Units which have not completed one year, from the date of commencement of commercial production, will not be monitored in case a unit has completed less than five years from the date of commencement of commercial production it will be monitored for the number of completed years. Annual monitoring in the cases of old units which have completed more than five years will be undertaken for only such number of years which fall in the second block of five years.” 10. As noted, para 6.5 of the foreign trade policy provided that an EOU would be a positive net foreign exchange earner except where for sector specific provision, a higher value addition would be specified. It is further provided that such net NFE shall be calculated cumulatively in blocks of five years starting from the commencement of production. This requirement of para 6.5 would have to be appreciated and interpreted bearing in mind the guidelines for monitoring the performance of such units. In clause (1) it is provided that the annual review of performance of each unit and its compliance with the conditions of approval shall be undertaken by the Development Commissioner “before end of the first quarter of the financial year”. As per clause (2) a summary of annual performance review would be sent by each Development Commissioner to the Ministry of Commerce latest by 30th September every year in prescribed proforma which would include unit wise statement of NFE showing the result of review. Clause (3) provides for criteria for annual monitoring. Under sub clause (i) if a unit falls short in achieving NFE at the end of the 1st and IInd year the same will be kept under watch. In case, such default occurs at the end of third or subsequent year, a show cause notice will be issued. After completion of five years if it is noted that the unit has not achieved positive NFE, the Commissioner would initiate penal action under the Act. 11. Clause (4) of guidelines prescribes method of monitoring. As per sub clause (i) thereof in cases of units which exit from the scheme but has failed to fulfill condition of NFE, appropriate steps would be taken for penal action. 12. 11. Clause (4) of guidelines prescribes method of monitoring. As per sub clause (i) thereof in cases of units which exit from the scheme but has failed to fulfill condition of NFE, appropriate steps would be taken for penal action. 12. Clause (5) of the guidelines is also important and pertains to monitoring period which provides that units which have not completed one year from the date of commencement of commercial production will not be monitored. In case, a unit has completed less than five years from the date of commencement of commercial production, it will be monitored for the number of completed years. 13. At first blush Clause 6.5 of the foreign trade policy may suggest that the block of five years for computing NFE would commence immediately upon commencement of the production, a view which was favoured by the appellate authority. However, when we appreciate this provision in conjunction with the guidelines for monitoring the performance of such unit, it becomes clear that the period envisaged would be the financial year immediately starting the manufacturing activity. For example, as noted, under Clause (1) of the guidelines the Development Commissioner has to undertake the annual review of performance of each operational unit before the end of the first quarter of te following financial year. The examination of the performance therefore, is related to the financial year and quarterly performance is to be judged. Even in Clause (3) which refers to criteria for annual monitoring, there is a reference to keeping a watch if there is shortfall in achieving NFE by a unit at the end of first and second year which must be read in conjunction with clause (1) of the guidelines which has reference to the financial year. Clause (5), which prescribes monitoring period, would make commencement further clear. It provides that the unit which has not completed one year from the date of commencement of commercial production will not be monitored. Further, a unit which has completed less than five years from the date of commencement of the commercial production, it would be monitored only for the number of completed years. The reference to completed years must be for a broken period between the date of commencement of production and the commencement of financial year. 14. As per the guidelines, the unit would be required to submit its quarterly performance report in prescribed format. The reference to completed years must be for a broken period between the date of commencement of production and the commencement of financial year. 14. As per the guidelines, the unit would be required to submit its quarterly performance report in prescribed format. We have perused one such format produced by the petitioner at Annexure K to the petition. It has reference to the quarterly period of a financial year viz. April-June, July-September, October-December and January-March. Thus, the computation of NFE would be financial year wise and which would be the beginning of the financial year following the year under which the manufacturing activity commences. Under no circumstances such period would be the period anterior with the date of manufacturing activity. Even if we take a literal interpretation of expression used in Clause 6.5 of the foreign trade policy, it refers to the calculation of NFE cumulatively in block of five years “starting from the commencement of production.” 15. The purpose of framing such a policy can be easily appreciated. All imports, exports and settlement of accounts would largely relatable to the financial years. Providing guidelines for ignoring a part of financial year during which the manufacturing activity might have commenced, is a way of granting moratorium for a new industry whose performance during the early months would not reflect while considering a block of five years for ascertaining net NFE. It may be that, in the present case, considering the entire financial year during which only for a short period, the petitioner had undertaken manufacturing activity would be beneficial to the petitioner since the industry's later performance, due to whatever reason, was poor. Ordinarily, it can be appreciated that the new industry would struggle in the initial period to achieve a net growth. 16. Be that as it may, when the interpretation of the policy does not favour one which the petitioner canvasses, we see no reason to interfere. Petition is, therefore, dismissed. Notice is discharged.