Does the sale of a residential building against the payment in free foreign exchange amount to service for the purposes of the grant of a Duty Free Credit Entitlement (DFCE) Certificate (duty free scrip) underthe Served from India Scheme (SFIS) announced

Prepared By:
Rajani Thanvi (ACA),
Bharat Rathore(BCom),
Parag Ghate(BCom),

Case: DLF LTD. Vs. UNION OF INDIA

Citation: 2010-TIOL-823-HC-DEL-EXIM

Issue:

Does the sale of a residential building against the payment in free foreign exchange amount to service for the purposes of the grant of a Duty Free Credit Entitlement (DFCE) Certificate (duty free scrip) underthe Served from India Scheme (SFIS) announced as part of the Foreign Trade Policy 2004-09?
Whether the duty free scrip is a licence within the meaning of Section 2 (g) of the Foreign Trade W.P. (C) No. 48 of 2009 Page 1 of 18 (Development and Regulation) Act 1992?
Whether the duty free scrips can be cancelled on the ground of misrepresentation of facts?

Brief Facts:

Brief facts are that the company is engaged in development and construction of residential and commercial properties in India and selling them to the customers in India and abroad. In terms of para 3.6.4 of the FTP 2004-09 and para 3.18 of the Hand Book of Procedures 2004-09, (HBP 2004-09) the Petitioner applied for the grant of DFCE certificate (or duty free scrip) under the SFIS against the exports made during the years 2003-04 and 2004-05. Pursuant thereto, the Directorate General of Foreign Trade (DGFT) granted the Petitioner two duty free scrips - one dated 4th February 2005 another dated 9th January 2006.
The Petitioner states that it gave a detailed reply dated 16th July 2008 requesting the DGFT to review and reconsider the matter and refer it to the MoC once again. Meanwhile, the Commissioner of Customs, ICG, Tughlakabad issued a show cause notice to the Petitioner on 23rd June 2008 demanding the customs duty. The plea of the Petitioner for issuance of duty free scrips under the SFIS towards exports made for the year 2005-06 was not acceded to. In the circumstances the present writ petition was filed by the Petitioner praying for a declaration that sale of residential buildings against the payment in free foreign exchange amounted to service for the purposes of the grant of a DFCE Certificate under the SFIS; that the communication dated 25/26th June 2008 issued by the JDGFT be directed to be withdrawn; that the adjudication proceedings pursuant to the show cause notices dated 16th July 2007 sent to the Petitioner by the JDGFT be dropped and the Respondents be directed to issue the Petitioner duty free scrip for the year 2005-06.
In response to the notice issued in the writ petition on 7th January 2009, a counter affidavit has been filed by the Respondents on 17th September 2009 reiterating the stand of the Government as contained in the impugned decision dated 25/26th June 2008. It is reiterated that the interpretation given under the General Agreement on Trade in Services (GATS) of the WTO "is not fully relatable" to the SFIS. Trade in these services is not allowed unless an agreement of movement of natural persons is put in place. Once such an agreement is in place, and then Indian Engineer would be allowed in WTO member countries, and similarly for Medical field as well as for Real Estate Services, whereby Indian Real Estate Companies may be permitted to carry on real estate business in such nations.

Appellants Contention:

Appellant first urges that the impugned show cause notices dated 16th July 2007 under Sections 9(2) and 9(4) FTDR Act are misconceived and untenable in law since according to the Petitioner the two DFCE certificates dated 4th W.P. (C) No. 48 of 2009 Page 8 of 18 February 2005 and 9th January 2006 were not licences within the meaning of Section 2(g) FTDR Act. Consequently, Section 9 has no application to the duty free scrips issued to the Petitioner.
It is submitted that even Section 11 FTDR Act, which in any event has not been invoked by the JDGFT, would have no application in the instant case. According to Appellant, all that duty free scrip does is to entitle the Petitioner to avail of duty credit while making imports of other goods subsequently. As such the duty scrip cannot permit import or export. In any event, the duty free scrip could be used only for import of goods which were freely importable.
The next submission of Appellant, is that non-payment of duty or wrongful availment of duty credit W.P. (C) No. 48 of 2009 Page 10 of 18 is really a matter for the Department of Customs and not the DGFT. Therefore, no action could have been taken whatsoever under the FTDR Act by the DGFT. Respondents had countered this argument by pointing out that the scheme of the FTDR Act clearly shows that for an import made contrary to a licence issued under the FTDR Act, the provisions of Section 9 would clearly stand attracted. Even under Section 12, for an import made contrary to the export and import policy, the levy of penalty in terms of Section 11(2) of the FTDR Act does not prevent the imposition of any other punishment to which the person affected thereby is liable under any other law.
Appellants has next submitted that the Petitioners request for issuance of DFCE certificates for the years 2005-06 onwards was not acceded to by the Respondents on an erroneous interpretation of the relevant Clauses of the W.P. (C) No. 48 of 2009 Page 11 of 18 FTP 2004-09 as is evident from the impugned letter dated 25/26th June 2008 which holds that real estate services as mentioned in Appendix 10 of the HBP 2004-09 did not include sale of immovable property. And relied upon the judgment in Mouat v. Betts Motors Ltd. to emphasize that it would be strange if one wing of the MoC is unaware of the position taken by the other wing.
And further submitted that valuable foreign exchange has in fact been earned by the sales made abroad by the Petitioner of immovable property and, therefore, the object of the Exim Policy was served. Therefore even on an application of the rule of purposive construction real estate services in Appendix 10 to the HBP ought to include sale of immovable property. Appellant submitted that the position taken now by the DGFT that the relevant Clauses of the Exim Policy could not be interpreted by referring to the GATS or the UNCPC was erroneous. Appellant further pointed out that a perusal of the Services Sectoral Classification List prepared by the WTO way back on 10th July 1991 showed that while classifying Real Estate Services, it refers to the corresponding UNCPC divisions 821 and 822.
The last submission of Appellant is that the impugned show cause notices dated 16 th July 2007 issued to the Petitioner by the JDGFT proposing cancellation of the licences (duty free scrips) proceed on the footing that the Petitioner had misrepresented the facts while applying for such scrips.
Appellant submitted that this was the only ground cited in the said show cause notices. It is pointed out that it is only W.P. (C) No. 48 of 2009 Page 15 of 18 after seeking a clarification from the MoC that the Petitioner proceeded to avail the duty credit on the second scrip dated 9th January 2006 and, therefore, the Petitioner could not be said to have misrepresented facts. In fact, the communication dated 2nd November 2006 showed that the Petitioner had disclosed the full facts concerning duty credit availment in its Annual Report, which then led to the query raised by the DGFT. There was, therefore, no valid ground on which the show cause notices could have been issued. Moreover, there was no question of cancellation of duty free scrip after the scrip was fully utilised, as in the instant case.

Respondents Contention:

Respondents on the other hand refer to the definition of licence under Section 2(g) FTDR Act and submit that it includes a customs clearance permit and any other permission issued or granted under the FTDR Act. Also points out that the duty free scrip issued to the Petitioner is on the face of it described as a licence. It permits the holder of such licence to avail of duty credit while making subsequent imports of freely importable goods. Reference is made to the averments made in para 2 of the writ petition and para 10 of the rejoinder where the Petitioner itself states that the two DFCE certificates were licences. Reliance is placed on the decision in DKM Cassette Pvt. Ltd. v. Union of India 2010 IX AD (Del) 218.
Respondent, on the other hand submitted that Appendix 10 of the HBP 2004-09 does not expressly refer to either GATS or the UNCPC. It is submitted that even going by the definition of Service Provider in para 9.53 of the FTP 2004-09, the sale of property does not involve supply of any service. And also submitted that service includes all tradable services and in relation to sale of property, it would be the service provided by a commission agent or a broker. The brokerage or commission earned for providing such service would alone qualify for the issuance of a DFCE certificate.
Respondent points out that the claim for issuance of a DFCE certificate on the basis that the Petitioner was providing real estate services would itself amount to misrepresentation of facts by the Petitioner when in fact it was claiming the entire sale consideration of the immovable property for the purposes of DFCE. Therefore, the issuance of the show cause notices was justified, notwithstanding the clarification sought by the JDGFT and later provided on 7th December 2006 by the MoC. The Respondents, after the final hearing concluded, produced a copy of the declaration made by the Petitioner to the JDGFT on 24th December 2004 stating that it had applied for duty free entitlement under the SFIS only against those remittances which had been received by it as service charges and fee charges for Real Estate Services. It was submitted that this document could be discovered from the record only recently. It is submitted that it is only on the basis of the above declaration that the Petitioners application for grant of duty free scrips was allowed. However, the Petitioner in fact claimed amounts constituting the entire sale consideration’

Reasoning:

The court is of the view that it is not possible to place a narrow interpretation on the word licence while interpreting Section 2(g) of the FTDR Act. The DFCE certificates issued under the SFIS would indeed qualify as licences since they permit the holders of such certificates to avail of duty credit while making subsequent imports of freely importable goods. To this extent, this Court negatives the submission of the Petitioner that the two DFCE certificates dated 4th February 2005 and 9th January 2006 are not licences within the meaning of Section 2(g) of the FTDR Act.
As regards the second submission of the Petitioner, this Court is of the view that the action taken by the DGFT under the FTDR Act for an import that is contrary to the export and import policy is independent of the action that can be taken by the Customs Department under the Customs Act for any wrongful availment of duty arising out of the same transaction. It is possible that same cause of action can give rise to distinct consequences under two different enactments. It is not possible to agree with the learned counsel for the Petitioner that no action could have been taken under the FTDR Act by the DGFT, if it was of the view that the licence issued under the FTDR Act was not properly utilised by the Petitioner.
The above submissions have been considered. Appendix 10 to the HBP 2004-09 lists out in Serial No. 1(D) real estate services which could include service in relation to "owned or lease property" or "on a fee or contract basis." While it is correct that there is no express reference to the W.P. (C) No. 48 of 2009 Page 13 of 18 GATS or UNCPC in Appendix 10, it appears that a reference is made to those documents during the course of market access negotiations under the GATS of the WTO.
In the considered view of Court, the stand now taken in the counter- affidavit by the Respondents that it is only such service that is relatable to the sale of immovable property that would be eligible for issuance of DFCE certificate under the SFIS is a plausible one to take. While it does not completely repudiate the reference to the definition contained in the UNCPC, it contextualizes the services relatable to sale of immovable property, for which alone the entitlement would be available. In a sense, it harmonizes the Clause at Serial No. 1(D) in Appendix 10 of the HBP 2004- 09 with the sub-sector definition of real estate services under the UNCPC. The title of the scheme, which is Served from India Scheme, emphasizes the service component of the transaction. The emphasis has to be at all times on services as understood under the FTP 2004-09 and in particular Para 9.53 thereof. The foreign exchange receipts realised for rendering such services alone would qualify for the DFCE certificate under the SFIS. Consequently this Court finds merit in the contention of the Respondents that although real estate service has been shown in the UNCPC to include W.P. (C) No. 48 of 2009 Page 14 of 18 sale of immoveable property, such service have to be contextualized in the light of the benefit under the SFIS.
Consequently, Court negatives the submission of the Petitioner on the interpretation to be placed on Serial No. 1(D) of the Appendix 10 to the HBP 2004-09. It is held that sale of immovable property is as such not included within the expression real estate services involving owned or lease property. The purport of the inclusion of sale of immoveable property within the expression real estate services in Division 821 of the UNCPC is only to emphasized that only the amounts corresponding to the earnings by way of brokerage or commission on such sales, and not the entire sale consideration, will qualify for the issuance of the DFCE certificate.
Resultantly, the position is that the Respondents are justified in not entertaining applications of the Petitioner for issuance of DFCE certificates under the SFIS for years 2005-06 onwards on the ground that the Petitioner is claiming the entire sale consideration, and not just the commission or brokerage if any on such sales, for the purposes of the DFCE.
Thus Court finds that the document did not figure in any of the letters dated 13th April 2007 or the show cause notices dated 16th July 2007. Indeed it was not even produced during the hearing to enable the counsel for the Petitioner to reply to it.
There is no decision yet taken by the JDGFT on the show cause notices issued to the Petitioner to which the Petitioner has replied. In the circumstances it is directed that the Respondents shall not proceed to take any decision on the said show cause notices dated 16th July 2007 but issue within a period of four weeks to the Petitioner a supplementary show cause notice enclosing the documents forming part of the record of the Respondents including the declaration dated 24th December 2004 and give the Petitioner sufficient opportunity to reply to the same. A decision will be taken thereon only after giving the Petitioner an opportunity of being heard. Conclusion
For the above reasons, Court upholds the view of the DGFT as expressed in the impugned communication dated 25th/26th June 2008 negating the claim of the Petitioner for issuance of the DFCE certificates for the years 2005-06 onwards based on the entire sale consideration of residential flats received by it from buyers abroad. This Court further holds that a DFCE certificate (duty free scrip) is a licence within the meaning of W.P. (C) No. 48 of 2009 Page 17 of 18 Section 2(g) of the FTDR Act 1992. Further, it is directed that the Respondents will not pass final orders on the show cause notices dated 16th July 2007 issued to the Petitioner but will follow the procedure as directed by this Court in para 30 of this judgment.

Judgment:

The writ petition is disposed of in the above terms. Application also stands disposed of.

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