Supreme Court Applies Proportionality Test To Uphold Constitutional Validity Of A Provision In The 2020 MTT Guidelines
A Bench of the Supreme Court consisting of Justice D. Y. Chandrachud, Justice Vikram Nath and Justice B.V. Nagarathna has held the validity of Clause 2(iii) of the Revised Guidelines On Merchanting Trade Transactions dated 23 January, 2020 (2020 MTT Guidelines) as a proportionate measure that passes muster under Articles 14, 19(1)(g) and 21 of the Constitution of India.
Mr Aayush Agarwala appeared for the Appellant, Mr Ramesh Babu M R appeared for the RBI and Additional Solicitor General Mr Vikramjit Banerjee appeared for the Ministry of Commerce and DGFT before the Supreme Court.
Impugned before the Apex Court, was a judgement of the High Court of Madya Pradesh at Indore, by which, the High Court had upheld Clause 2(iii) of the 2020 MTT guidelines issued by the Reserve Bank of India [in short "RBI"], exercising powers under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999 [in short "FEMA"].
The appellant, in his capacity as the managing director of a firm, dealing in varied kinds of products inter alia PPE products entered into an international MTT contract, to act as intermediary qua the sale of the subject PPE products by a supplier in China and a buyer situate in the United States. The appellant, in order to effectuate the transaction, reached out to his bank asking for documents such as letter of credit, however, the bank informed the appellant that the RBI had denied permission for the MTT contract on the basis of Clause 2(iii) of the MTT guidelines. The said provision reads as follows:
"iii. The MTT shall be undertaken for the goods that are permitted for exports/imports under the prevailing Foreign Trade Policy (FTP) of India as on the date of shipment. All rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry) shall be complied with for the export leg and import leg respectively."
At the time in question, the export of PPE goods was prohibited by the Union of India [in short "UOI"] due to the pandemic, via various notifications and hence, the MTT contracts concerning PPE products were termed impermissible under the subject provisions.
The appellant argued, via a letter addressed to the UOI, that under the MTT contract executed by him, there was no "actual export" of PPE products from India and that he was only serving as an intermediary between the two States. As the communication met no response, the appellant knocked the doors of the Madhya Pradesh High Court, by filing a writ petition.
It was argued that the subject provisions are unconstitutional as it violates the rights enshrined under Article 19(1)(g) and Article 21 of the Constitution. Before the High Court, RBI argued that since the UOI had prohibited the export of PPE products, transactions concerning them also stood prohibited as, in essence, such transactions allowed Indian individuals to help others to divert PPE products away from the territory of India in the global market. RBI also argued that subject provisions were general in nature and it had no jurisdiction to exempt the products since the Foreign Trade Policy [in short "FTP"] was only determined by the UOI. The High Court dismissed the writ petition upholding the constitutional validity of the subject provisions.
Hence, the appeal before the Supreme Court.
The Apex Court, at the outset, while relying on State Trading Corporation vs. Commercial Tax Officer, AIR 1963 SC 1811 observed that a corporate body is not entitled to claim an infringement of the rights enshrined under Article 19(1)(g) as the said right is only available to the citizens of the country.
The Court then, went on to note the balance between the reasonable restrictions imposed in the interest of the general public and the tests for determining the "reasonableness". The Court, after extensively discussing various authorities on the subject, proposed to trigger the four-pronged test of proportionality to determine the constitutional validity of the subject provisions. The Court, thus, summarized the issue, on this score, as follows:
"20 Before our analysis proceeds along the above direction, it is important to note that the appellant has challenged the constitutionality of Clause 2(iii) of the 2020 MTT Guidelines by alleging a violation of his rights under Articles 14, 19(1)(g) and 21. Hence, this Court has to determine if the RBI's restriction to prohibit MTTs in PPE products is restrictive of the appellant's right to equality under Article 14 on the ground that it is arbitrary, whether it is a reasonable restriction on the appellant's freedom to conduct trade under Articles 19(1)(g) read with Article 19(6), and if it violates the appellant's liberty and right to livelihood under Article 21."
The Court noted that the authority of the RBI while issuing the MTT guidelines was not under challenge; similar was the case with the legitimacy of the aim of ensuring adequate domestic supplies of PPE products. What was under challenge was the suitability of the measure restricting the MTTs in order to ensure domestic supplies as also its effects qua an intermediary. The Court then proceeded to structure its analysis on the following questions.
"… 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?"
The Court observed that the decision to restrict the import or export of goods is made by the UOI under Section 3(2) of the Foreign Trade Act. The Court also considered the international opinion and held that the same favors the position taken by RBI and UOI that MTTs are analogous to traditional imports and exports and hence, the suitability for the RBI to link the permissibility of the same to the permissibility of their import/export under the FTP.
The Court proceeded to balance the fundamental rights with the aims of the State and also discussed the regulatory role of the RBI. The Court observed that a policy decision of the RBI warrants a deference from the Court while relying upon various judicial pronouncements. The Court held that the RBI is a special, and expert regulatory body which is insulated from the political arena. The Court discussed the compromise between the interests of private commercial actors and the State, while regulating the economy.
The Court came to the conclusion that the RBI has demonstrated a "rational nexus" qua prohibition of MTTs and the public health of citizens of India. The apposite observations of the Court are extracted hereafter.
"… 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. This deference is by no means uncritical. In fact, one of us (Justice D Y Chandrachud), in a three-judge Bench of this Court in Gujarat Mazdoor Sabha v. State of Gujarat had decried the State's tenuous claim of a public health emergency to dilute welfare conditions in labour laws. This Court had stressed that balancing individual rights against measures adopted to combat the public health crisis must continue to satisfy the test of proportionality. … "The Court concluded that democratic interests that aim to secure the well-being of the masses ought not to be judicially stymied to preserve the unfettered freedom to conduct the business, of the few.