Availability of SFIS benefit

Case: VODAFONE ESSAR LTD VS. UNION OF INDIA

Citation: 2011 (270) E.L.T. 492 (Bom.)

Issue:- Whether IILDO (Indian International Long Distance Operator) is entitled to SFIS (Served from India Scheme) benefit where an Indian subscriber has received an international incoming call from overseas?

Whether IAP (Indian Access Provider) is entitled to SFIS (Served from India Scheme) benefit where an overseas call is either maid to a foreign overseas destination or received from an overseas destination by a foreign subscriber who is on a roaming facility in India?

Brief Facts:- Petitioners are corporate entities and provide services either as Indian Access Providers (lAP) or as International Long Distance Operators (ILDO) in the Telecommunications sector. Each of the Petitioners had foreign exchange earnings from rendering of Telecommunication services. Consequent to this, they applied for Duty Credit scrips under the SFIS. The First Petitioner and the Third Petitioner received their Duty Credit scrips for financial years 2005-06, 2006-07 and 2007-08 from the Zonal Joint Director of Foreign Trade. The Second Petitioner received its entitlement for financial year 2005-06, 2006-07 and 2007-08 from the Joint Director General of Foreign Trade. The applications of the Fourth Petitioner was pending consideration.

DGFT issued Circular dated 01.01.2008 which sought to restrict the eligibility for SFIS entitlements in respect of services which did not originate from India. The circular clarified that services which did not originate from India would not be entitled to SFIS benefits. According to the circular, paragraph 9.53 of the FTP clearly stipulated that the supply of a service from India was a condition precedent to the availment of benefits under the scheme. The circular further stated that payments which were made by a service provider in India to a Foreign Service provider who has provided some part of the service in a foreign country could not be counted as service originating from India and hence would not be eligible for benefits under the scheme. For instance, telecom service providers earn foreign exchange for providing services that include services not originating from India, such as global roaming charges. Such receipts of foreign exchange, it was stated, would not be eligible for SFIS. The foreign exchange earned was clarified to mean 'receivables' minus 'payables' in a particular year for Telecommunication service.

Petitioners filed writ petition under Article 226 of the Constitution before the High Court challenging the Circular dated 1^st January 2008 to the extent that it impacted upon Telecommunication service providers. Petition was disposed of by the High Court on 12^th August 2009 on a statement by the Petitioners that the grievance of the Petitioners would be met if the Policy Interpretation Committee (PIC) of the DGFT would consider the Petitioners' representation and clarify the position in the matter.

The PIC considered various situations involving the provision of services in the telecom sector and clarified the entitlement to SFIS benefits in each of those situations. Following the meeting of PIC, the DGFT issued Circular dated 15 July 2010 which mandated that all Regional Authorities to review of the previously sanctioned telecom sector SFIS cases according to the Policy circular and the minutes of PIC meeting. It was also mandated that all SFIS cases shall be re-opened in order to re-compute the entitlement in each case in terms of the decision taken on 05.07.2010. RAs were directed to recover and adjudicate the cases wherein a service provider had not provided the required information.

Pursuant to Circular dated 15.07.2010, notices were issued to the Petitioners for revoking the benefit granted to the Petitioners.

Petitioners filed writ petition under Article 226 of the Constitution before the High Court challenging the Circular dated 15.07.2010 to the extent it mandates reopening of existing cases and making of recoveries in relation to three of the situations which are contemplated in the minutes of the PIC meeting dated 05.07.2010.

The minutes of the PIC meeting of 5 July 2010 contemplate amongst the situations envisaged, the following three situations; (i) An Indian subscriber receives an international incoming call from overseas; (ii) A subscriber of a Foreign Access Provider who is "roaming" in India makes an international outgoing call to an overseas destination while in India; (iii) A subscriber of a Foreign Access Provider who is on a roaming facility while in India receives an international incoming call from an overseas destination. These situations are dealt with at serial Nos. 1, 2(a) and 2(b) of the minutes of the PIC meeting. The first case is one where an Indian subscriber has received a call in India from overseas, while the Second and Third involved a foreign subscriber who either makes or receives a call while in India to and from an overseas destination.

The minutes of the PIC meeting dated 5 July 2010 deal with whether SFIS benefits would be available in each of the three situations to which a reference has been made earlier. In the first situation, where an Indian sub-scriber has received an international incoming call from overseas, the minutes provide, that the Indian Service Provider, namely IILDO, who earns foreign ex-change for such a call is not covered by paragraph 9.53 of the FTP and the foreign exchange earnings are not entitled to SFIS benefits. In the second and the third eventualities where an overseas call is either made to a foreign overseas destination or received from an overseas destination by a foreign subscriber who is on a roaming facility in India, the minutes of 5 July 2010 stipulate that while the IAP would be entitled to SFIS benefits in respect of the foreign exchange earnings the Committee has decided that only fifty percent of the foreign exchange earned would be entitled to the benefit of the scheme.

Petitioner’s Contention:- Submission of Petitioners is that the Foreign Trade Policy has been framed by the Central Government in exercise of powers delegated to it by Section 5 of the Foreign Trade (Development and Regulation) Act, 1992. A policy circular would be ultra-vires and unlawful where it purports to amend the terms of the policy. According to the Petitioners, in each of the three situations, namely those at serial nos. 1, 2(a) and 2(b) of the circular, the Indian Service Provider is entitled to receive the benefit of SFIS upon the plain terms of the policy. The denial of benefits in the first situation and the restriction of benefits to the extent of fifty percent in the second and the third situations is, it is submitted, an attempt to a breach or modify the terms of the policy.

Petitioner submits that, in a situation where the foreign subscriber makes an outgoing call to an overseas destination while roaming in India, the IAP earns foreign exchange. The IAP in turn would make a payment in Indian ropers to the IILDO and the IILDO, in turn, would make a certain payment in foreign exchange to the FILDO. The benefit OF SFlS is claimed by the IAP Similarly, where a foreign subscriber roaming in India receives a call from an overseas destination, the IILDO receives payment in foreign exchange from the FILDO and would make a payment in Indian rupees to the IAP The IILDO would make a claim for the SFlS benefits in respect of the foreign exchange earned.

Respondent’s Contention:- Respondent submitted that object of SFIS was to create a powerful and unique ‘Served From India’ brand, instantly recognized and respected world over. The minutes of the PIC dated 5 July 2010 constitute no more than a clarification of what is implicit in the Foreign Trade Policy and would, therefore, amount to a lawful exercise of power.

It was submitted that (i) mere earning of foreign exchange is not enough and (ii) the services must originate in and be from India. On the basis of SFIS scheme in FTP, it was submitted that since the whole object of the scheme is to enhance the growth of export of service from India and to create a unique brand identity for services which originate in India.

In first situation, foreign exchange is admittedly earned by the IILDU (Indian International Long Distance Operator), the services are not rendered to any service consumer of another country. The submission is that the flow of service has to be from India to a foreign country and where an overseas call is made by a person stationed abroad to an Indian subscriber, the IILDO does not provide any service to the foreign subscriber.

In second situation, a call which is made from India by a foreign subscriber to foreign destination cannot be put through without the inter-position of the FILDO. While it is true that the IILDO or, as the case may, the IAP earns foreign exchange for the call which is true maid or received by a foreign subscriber while in India a payment is made to the FILDO.

The principle of netting off must be applied because the benefits under the SFlS must be confined to the net foreign exchange that is earned by the country.

Reasoning of Judgment:- The High Court spelled the link through which the call between a caller or receiver in India is established with the receiver or caller as the case may be overseas. The earning in foreign exchange by the Indian service providers forms the basis of the claim for SFIS benefits.

It was noted that minutes of PIC meeting dated 05.07.2010 deal with whether SFIS benefits would be available in each of the three situations: - (1) where an Indian subscriber has received an international incoming call from overseas, the minutes provided that the Indian Service Provider, namely IILDO, who earns foreign exchange for such a call is not covered by paragraph 9.53 of the FTP and the foreign exchange earnings are not entitled to SFIS benefits. (2) In the second and third situations where an overseas call is either made to a foreign overseas destination or overseas call is either made to a foreign overseas destination or received from an overseas destination by a foreign subscriber who is on a roaming facility in India, the minutes of 05.07.2010 stipulate that while the IAP would be entitled to SFIS benefits in respect of the foreign exchange earnings the Committee has decided that only 50% of foreign exchange earned would be entitled to the benefit of the scheme.

The High Court noted that expression “Service Provider” defined in Paragraph 9.53 of FTP contemplates within its purview four situations which are as follows:

- Supply of a 'service' from India to any other country;
- Supply of a 'service' from India to service consumer of any other country in India; and
- Supply of a 'service' from India through commercial or physical presence in territory of any other country
- Supply of a 'service' in India relating to exports paid in free foreign exchange or in Indian Rupees which are otherwise considered as having being paid for in free foreign exchange by RBI."

It was noted that while the first 3 situations speak of a supply of a service from India through commercial or physical presence, in the fourth situation, the supply of services in India relates to exports paid in free foreign exchange or in Indian rupees which are otherwise considered as having ben paid for in free foreign exchange by RBI.

It was noted that the conditions of eligibility for availing of benefits under the scheme are spelt out in paragraph 3.6.4.2. In order to meet the conditions of eligibility, the applicant must firstly be a service provider within the meaning of that expression in clause 9.53. Secondly, the applicant must have provided services listed in Appendix-10 of the Procedures. Thirdly, the applicant must have a total free foreign exchange earning of at least Rs. 10, 00, 000/- in the preceding financial year (Rs. 500000/- for individual service providers.) While defining the eligibility of a service provider the third condition stipulated that there should be a total free foreign exchange earning of the stipulated value. In so far as the entitlement of an eligible service provider is concerned, paragraph 3.6.4.3 provides that all service providers shall be entitled to Duty Credit scrips equivalent to ten per cent of free foreign exchange earned during the preceding financial year. The meaning and content of the expression "total tree foreign ex-change earned" in paragraph 3.6.4.2 which defines eligibility cannot be any different from the meaning of the expression "free foreign exchange earned", while defining entitlement in paragraph 3.6.4.3 of the policy. The earning of the foreign exchange provider is the amount which is received by him, in free foreign exchange in India.

The High Court held that for calculating the entitlement under SFIS the amount earned cannot be held to be referring to net amount earned. The reasons given were that the amount earned cannot be different while defining entitlement and for determining eligibility. The amount earned can only mean the same thing, while applying eligibility. For both the situations i.e. for applying conditions of eligibility and for defining the extent of entitlement, the amount earned can only mean the same thing. The second reason given was that where the FTP postulates that a net foreign exchange earning should be computed, express provisions to that effect have been made by the Policy. It was held that the FTP has not used the expression ‘net foreign exchange earning’ either while defining the conditions of eligibility or the conditions of entitlement for the SFIS. Where the same policy document employs two distinct phrases, each of those phrases must be given a separate meaning according to its plain and natural interpretation. For the purposes of defining eligibility and entitlement under SFIS, the words used are “total free foreign exchange earning” and “free foreign exchange earned”.

It was observed that intention of the Government was to confine the extent of entitlement under SFIS to 10% of free foreign exchange. If intention was otherwise, they would have expressly provided so and any interpretation contrary to this interpretation would amount to amendment, modification or change of the policy.

It was noted that the impugned circular which was issued in July, 2010 required that all existing cases of grant of SFIS be reopened with reference to a decision taken by the Policy Interpretation Committee.

In the first situation, the IILDO provides a service to FILDO as part of the chain through which an international call maid by a person overseas to a subscriber in India is completed. Clause 9.53 (i) bring within the definition of expression “Service Provider” the supply of service from India to any other country. The service provided by the IILDO to the FILDO is indeed a supply of service from India to any other country for which the IILDO receives payment in free foreign exchange. That payment would entitle the IILDO to the grant of SFIS benefits.

It was held that the second and third situations involve the presence within India of a foreign subscriber who is on a roaming facility while in India. In the second situation, the foreign subscriber makes an outgoing call overseas to an overseas destination, while the third situation, she receives a call from an overseas destination. The minutes of PIC acknowledge that this would meet the definition of the expression “service provider”. Sub-clause (ii) of Clause 9.53 brings within that definition supply of a service in India to a service consumer of any other country in India. The foreign subscriber is a consumer of ‘any other country’ who is physically present in India and utilizes a roaming facility while in India. A supply of service to such a person falls within the definition of the expression “service provider” in clause 9.53 (ii). However, the minutes of PIC meeting seek to restrict the grant of SFIS benefits only to the extent of 50% of the foreign exchange that is earned.

It was held that the acceptance of submission of Revenue would amount to substantial modification of and amendment of policy. It was held that the document must be interpreted as it stands. The FTP has defined both the eligibility and the entitlement with reference to foreign exchange earned. The foreign exchange earned cannot be defined as the remittance of foreign exchange earned. The foreign exchange earned cannot be defined as the remittance of foreign exchange less an outflow. Where the policy intended that the concept of the net foreign exchange should be applied it has stipulated so expressly. In the absence thereof it was wholly impermissible for the DGFT, by means of a policy circular, to direct the implementation of what constitutes clearly an amendment of the policy.

Accordingly, it was held that the Circular dated 15.07.2010 so far as it directs the implementation of the decision taken in the meeting of PIC dated 05.07.2010 is ultra vires the FTP, 2004-09. It is also clarified that the present case is confined only to the decisions taken at serial no. 1, 2(a) and 2(b) of PIC meeting on 05.07.201. Consequently, the direction in Circular dated 15.07.2010 to reopen the SFIS cases is quashed ad set aside.

Decision:- Rule made absolute.

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PJ/Case Laws/2011-12/1396

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