Constitution of India – Art. 14, 19(1)(g) and 21 – Foreign Exchange Management Act, 1999 – ss. 10(4), 11(1) – Merchanting Trade Transactions Guildelines, 2020 – Clause 2(iii) – Proportionality of clause 2(iii) – The appellant is the managing director of a firm that manufactures and trades in pharmaceuticals and personnel protection equipment products such as masks, gloves, sanitizers, PPE overalls, and ventilators etc. – Appellant obtained International Merchanting Trade Transaction (MTT) contract to serve as an intermediary between the sale of PPE products by a supplier in China to a buyer in the United States – Appellant requested its bank for required documents to execute the MTT contract – The bank informed the appellant that RBI had denied permission for his MTT contract, on the basis of clause 2(iii) of the 2020 MTT Guidelines – At the relevant time, the export of PPE products were banned by the Government through various notifications due to ongoing COVID-19 pandemic – Therefore, MTT contracts concerning PPE were considered impermissible – Writ petition by the appellant – Appellant challenged the Constitutionality of clause 2(iii) of 2020 MTT guidelines – High Court upheld the constitutionality of clause 2(iii) – On appeal, held: The UOI’s policy to ban the export of PPE products reflects their stance on the product’s non-tradability during the COVID-19 pandemic – It highlights a clear policy choice under which Indian entities shall not be allowed to export these products outside of India, in all probability to the highest buyers across the globe who may end up hoarding the global supply – Hence, banning MTTs in PPE products was critical in ensuring that Indian foreign exchange reserves are not utilized to facilitate the hoarding of PPE products with wealthier nations – A mere ban on exports would not regulate the utilisation of Indian foreign exchange – Hence, in order to keep India’s policy position consistent across the board, the prohibition of MTTs in respect of PPE products was necessary and the only alternative of ensuring the realisation of legitimate State interest – The High Court was correct in holding that clause 2(iii) of the 2020 MTT Guidelines was a proportionate measure ensuring the availability of sufficient domestic stock of PPE products – The measure was validly enacted, in pursuance of legitimate state interest and did not disproportionately impact the fundamental rights of the appellant – Hence, Clause 2(iii) passes muster u/Art.14, 19(1)(g) and 21. Dismissing the appeal, the Court
HELD: 1. Various principles have been espoused by this Court to bring about a balance between the perceived interest of the state of social control over the economy, with the rights and freedoms of individuals. The appellant has cited various decisions to argue for heightened scrutiny of legislative or administrative action which places an absolute prohibition on an individual’s right to conduct trade or business. The judicial evolution of a fourpronged analysis of proportionality displaces the varying standards that were prescribed to determine “reasonableness” under Article 19(6). The qualitative nature of a right and the corresponding scrutiny of its violation cannot be a sole function of the degree of restriction. Every violation of rights, irrespective of the degree of the infraction, must be evaluated through a uniform principle that promotes a culture of justification. The decision of a nine-judge Bench of this Court in K S Puttaswamy v. Union of India (“K S Puttaswamy (9J)”) prescribed a proportionality analysis for determining violations of fundamental rights under Part III. A proportionality analysis can adequately consider the constitutionality of prohibitive measures on commercial activities. Therefore, this Court will structure the judgment on an analysis of the proportionality of RBI’s decision to prohibit MTTs in PPE products, in order to determine its constitutionality. [Para 15][248-G; 249-A-C]
2. This Court will be relying on the justification furnished by the RBI in determining the proportionality of the impugned measure (Clause 2(iii) of the 2020 MTT Guidelines). This analysis will be structured along with the following questions: (i) Is the measure in furtherance of a legitimate aim?; (ii) Is the measure suitable for achieving such an aim?; (iii) Is the measure necessary for achieving the aim?; and (iv) Is the measure adequately balanced with the right of the individual?[Para 28][258-B-D]
Legitimacy
3. This prong of the test entails an evaluation of the legitimacy of an aim that purportedly violates a fundamental right. The measure must be designated for a proper purpose, i.e., a legitimate goal. Five of the judges in the nine-judge Bench decision in K S Puttaswamy (9J) adopted the threshold of a “legitimate state interest” as the first prong for assessing proportionality. This state interest must also be of sufficient importance to override a constitutional right or freedom. In this case, the ban on exports, imports and MTTs of PPE products is to ensure the availability of adequate domestic supplies during a global health pandemic. Adequate stocks of PPE products are critical for the healthcare system to combat the COVID-19 pandemic. The State’s aim of ensuring supplies is in furtherance of the right to life under Article 21 and the Directive Principles of State Policy mandating the State’s improvement of public health as a primary duty under Article The appellant has not challenged the legitimacy of this aim of ensuring adequate PPE in India. The RBI, at the time of filing its affidavit on 30 January 2021, had elaborated on the state of the pandemic in the country and the necessity of ensuring adequate stock of PPE products. The executive’s aim to ensure sufficient availability of PPE products, considering the ongoing pandemic, is legitimate. Accordingly, this Court holds that the impugned measure is enacted in furtherance of a legitimate aim that is of sufficient importance to override a constitutional right of freedom to conduct business. [Paras 29][258-E-H; 259-A]
Suitability
4. The RBI is responsible for issuing guidelines to authorized persons under FEMA. FEMA was introduced as an “Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”. Hence, the role of the RBI under FEMA is directed towards ensuring that India’s foreign exchange market is regulated, with a view to preserving India’s foreign exchange reserves. On a review of the guidelines which have been issued by the RBI in respect of MTTs since 2000, it is clear that most of them are technical in nature and seek to regulate the manner in which India’s foreign reserves are traded. Consequently, the RBI has not made the policy decision to classify products for which MTTs are impermissible but has opted to rely on the decision made by the UOI under the FTP. Such a decision, regarding the products in which import or export is prohibited in India, is made by the UOI under Section 3(2) of the Foreign Trade Act. While exercising its powers under Section 3(2), the UOI issued multiple notifications commencing from 8 February 2020, which prohibited the export of all PPE products due to the need to maintain their domestic stock during the COVID-19 pandemic. [Paras 36, 37 and 38][262E-H; 263-A, D]
5. The International Monetary Fund in its sixth edition of the Balance of Payments and International Investment Position Manual defines MTT. It is clear that while the goods involved in an MTT never enter the territory of the intermediary, they are still recorded as negative and positive exports from the territory of intermediary during the import and export leg of the MTT, which is similar to how ordinary imports and exports would be recorded. [Para 42][265-A, F-G]
6. This conclusion is also supported by the IMF’s accompanying Balance of Payments Compilation Guide. It is evident that the role of an intermediary in MTTs was earlier only considered as providing a service. However, this has now evolved, where the intermediary is considered to be the owner of the goods during their transit from the supplier to the buyer. Hence, goods under MTTs are recorded as negative and positive exports from the intermediary’s resident country, even when they never physically enter their territory. [Para 43][265-G; 266-E-F]
7. Therefore, the international opinion favours the position taken by the respondents that MTTs are analogous to traditional imports and exports. Therefore, it was suitable for the RBI to link the permissibility of MTT in goods to the permissibility of their import/export under the FTP. As noted earlier, the appellant has not challenged notifications prohibiting the export of PPE products under the FTP. Hence, the prohibition of their MTT under Clause 2(iii) of the 2020 MTT Guidelines is also considered suitable. [Para 44][266-F-H]
The necessity of the measure
8. Having considered the nature of MTTs, this Court rejects the appellant’s arguments for two reasons. First, while MTTs in PPE products may not directly reduce the stock of these products in India, it still does contribute to their trade between two foreign nations. In doing so, it directly reduces the available quantity of PPE products in the international market, which may have been bought by India, if so required. As such, MTTs contribute to reducing the available stock of PPE products in the international market that India could have acquired. Second, the UOI’s policy to ban the export of PPE products reflects their stance on the product’s non-tradability during the COVID-19 pandemic. It highlights a clear policy choice under which Indian entities shall not be allowed to export these products outside of India, in all probability to the highest buyers across the globe who may end up hoarding the global supply. Hence, banning MTTs in PPE products was critical in ensuring that Indian foreign exchange reserves are not utilized to facilitate the hoarding of PPE products with wealthier nations. A mere ban on exports would not regulate the utilisation of Indian foreign exchange. Hence, in order to keep India’s policy position consistent across the board, the prohibition of MTTs in respect of PPE products was necessary and the only alternative of ensuring the realisation of legitimate State interest. [Para 47][267-E-H; 268-A-B]
Regulatory Role of the RBI
9. In the instant case, the RBI has demonstrated a rational nexus in the prohibition of MTTs in respect of PPE products and the public health of Indian citizens. The critical links between FTP and MTTs have been established by the respondents. Facilitating MTTs in PPE products between two distinct nations may prima facie appear as having no bearing on the availability of domestic stocks. However, the RBI has carefully established the connection between the use of Indian foreign exchange reserves, MTTs and the availability of domestic stocks. As a developing country with a sizeable population, RBI’s policy to align MTT permissibility with the FTP restrictions on import and export of PPE products cannot be questioned. Thus, this Court is constrained to defer to the regulations imposed by RBI and the UOI, in the interests of preserving public health in a pandemic. [Para 57][279-B-D]
10. Thus, it is not this Court’s stance that judicial review is stowed in cold storage until a public health crisis tides over. This Court retains its role as the constitutional watchdog to protect against State excesses. It continues to exercise its role in determining the proportionality of a State measure, with adequate consideration of the nature and purpose of the extraordinary measures that are implemented to manage the pandemic. Democratic interests that secure the well-being of the masses cannot be judicially aborted to preserve the unfettered freedom to conduct business, of the few. [Para 57][280-E-G] Conclusion
11. Therefore, this Court finds that the judgment of the Madhya Pradesh High Court was correct in holding that Clause 2(iii) of the 2020 MTT Guidelines was a proportionate measure in ensuring the availability of sufficient domestic stock of PPE products. The measure was validly enacted, in pursuance of legitimate state interest and did not disproportionately impact the fundamental rights of the appellant. Hence, Clause 2(iii) passes muster under Articles 14, 19(1)(g) and 21. [Para 58][280H; 281-A] State Trading Corporation v. Commercial Tax Officer AIR 1963 SC 1811; Chintaman Rao v. State of Madhya Pradesh, AIR 1951 SC 118; K S Puttaswamy v. Union of India (2017) 10 SCC 1 : [2017] 10 SCR 569; K S Puttaswamy v. Union of India (2019) 1 SCC 1 : [2018]
8 SCR 1; Rustom Cavasji Cooper v. Union of India (1970) 1 SCC 248 : [1970] 3 SCR 530; Shayara Bano v. Union of India (2017) 9 SCC 1 : [2017] 9 SCR 797; Joseph Kuruvilla Vellukunnel v. Reserve Bank of India AIR 1962 SC 1371 – followed.
Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274 : [2020] 2 SCR 297; Gujarat Mazdoor Sabha v. State of Gujarat (2020) 10 SCC 459 2020 (10) JT 307 – relied on.
Shri Sitaram Sugar Co. Ltd. v. Union of India (1990) 3 SCC 223 : [1990] 1 SCR 909; Prag Ice & Oil Mills v. Union of India (1978) 3 SCC 459 : [1978] 3 SCR 293; P.T.R. Exports (Madras) (P) Ltd. v. Union of India (1996) 5 SCC 268 : [1996] 2 Suppl. SCR 662; M R F Ltd. v. Inspector Kerala Government (1998) 8 SCC 227 : [1998] 2 Suppl. SCR 632; M R F Ltd. v. Inspector Kerala Government (1998) 8 SCC 227 : [1998] 2 Suppl. SCR 632; B P Sharma v. Union of India (2003)
7 SCC 309 : [2003] 2 Suppl. SCR 684; Dwarka Pd. v. State of Uttar Pradesh, AIR 1954 SC 224; Shree Meenakshi Mills v. Union of India, AIR 1974 SC 366; Saghir Ahmad v. State of U.P., (1955) 1 SCR 707; Jalan Trading Co. v. D M Aney, AIR 1973 SC 233; Indian Handicrafts Emporium v. Union of India, (2003) 7 SCC
589 : [2003] 3 Suppl. SCR 43; Chintaman Rao v. State of Madhya Pradesh AIR 1951 SC 118; Narendra
Kumar v. Union of India, AIR 1960 SC 430; Mohd. Faruk v. State of Madhya Pradesh, (1969) 1 SCC 853 : [1970] 1 SCR 156; Cellular Operators Association of India v. Telecom Regulatory Authority of India, (2016)
7 SCC 703 : [2016] 9 SCR 1; Internet and Mobile Association of India v. Reserve Bank of India, (2020) SCC OnLine SC 275; Om Kumar v. Union of India (2001) 2 SCC 386 : [2000] 4 Suppl. SCR 693; Modern Dental College and Research Centre v. State of Madhya Pradesh (2016) 7 SCC 353 : [2016] 3 SCR 579; Sukhnandan Saran Dinesh Kumar v. Union of India, AIR 1982 SC 902; Laxmi Khandsari v. State of Uttar Pradesh, AIR 1981 SC 860; Peerless General Finance and Investment Co. Limited v. Reserve Bank of India (1992) 2 SCC 343 : [1992] 1 SCR 406; R K Garg v. Union of India, (1981) 4 SCC 675; Balco Employees Union v. Union of India, (2002) 2 SCC 333 : [1982] 1 SCR 947; Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 : [2019] 3 SCR 535; Ebix Singapore v. Committee of Creditors of Educomp Solutions (P) Ltd., (2021) SCC OnLine SC 313 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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