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Ill-served by interpretation : The denial of SFIS benefits
Dr. Ravindran Pranatharthy, Advocate
Interpretation, it is said in jest, should be left to the people who make interpretation as their business, that is, lawyers and judges. The bureaucrats who have so many fats in the fire look like having caught on to them. It may not be very productive to have a wide-ranging foreign trade policy and still have a committee of officials to interpret that policy. The policy apparatus in the department of commerce overseeing the contours of the Foreign Trade Policy has generally not been known for throwing wide surprises. If anything, trade policy requires stability of policy and predictability of administration. However, they broke the mould by announcing that in their interpretation of the Served From India Scheme (SFIS), the scrip benefits cannot be given to service exporters in India if they represented brands “not identified as Indian brand”. As the administration weighed in the prospects of earning sizable revenues by denying adjustments out of SFIS certificates, a tide of shock notices to hundreds of service exporters in India has followed, charging them with using brands “not identified as Indian Brands” and demanding the refund of “benefits” taken from the SFIS certificates already granted and also well after the policy interpretation committee had made known its controversial views. According to reports in the business and tax press, the demands would run into several thousands of crores of rupees. The service exporters have not been taking things lying down. They have knocked at the gates of the judiciary for justice.
A very recent episode in the on-going nation-wide saga is the judgment of the Hon’ble Madras High Court in the case of Adyar Gate Hotel Vs UOI [TS-185-HC-2018(MAD)-FTP]. The esteemed Court relegated the writ petitioners to the unappetising routine of departmental adjudication despite their plea for judicial protection from the stark reality of rubber-stamped outcome in the light of decisions stated to have been taken by officials.
...The availability of an adjudicative & appellate remedy within the law of the agency/department is often the nemesis in writ petitions filed against acts of injustice committed by tax agencies. Any such remedy is required at common law to be an efficacious and alternative remedy but the statutory, quasi-judicial adjudication and appellate process in India is in general, with a few exceptions, neither efficacious nor an alternative to the normal standard of justicing at the Courts. It is perhaps high time for the Courts to consider, against the background of administrative adjudicative apathy and penchant for circumventing established judicial precedents, laying down guidelines when the departmental remedy cannot be said to be an efficacious alternative remedy.
Coming to the denial of SFIS benefits, the action of the DGFT has been based on a view that the service exporters in India possessing brands “not identified as Indian brands” are not entitled to the benefits of SFIS. The demand ground taken in the notices is said to be that the grant of SFIS benefits to companies representing brands “not identified as Indian brands” is not harmonious with the SFIS Scheme and that the brands of companies involved are not identified as Indian brands. Here, it can be shown that the view of the DGFT in turn based on the view of the Policy Interpretation Committee is neither fair nor legally tenable. Let us consider the facts and the law.
Did SFIS really require services to be exported under specific brands at all?
The SFIS framework did not contain any express stipulation as to the use of brand name for service exports. The objective of SFIS was broadly “to accelerate growth in export of services so as to create a powerful and unique served from India brand instantly recognised and respected world over”.
...From this over-arching perspective, it can be seen without much hair-splitting that what the policy meant was an image of India as a service export hub. The aim was noble and laudable. There is nothing in the objective of SFIS put in such festive print in the previous FTP that can be read as an exhortation to provide service exports under particular Indian brand name, whatever that term meant. The policy stated that Indian service exporters exporting eligible services as per the Appendix to the framework could apply for the benefits under SFIS. It is reported in the press that a great part of the DGFT demand pertained to companies with multi-national shareholders which exported services and obtained SFIS benefits. Companies registered in India under the Companies Act of our country are Indian companies and would qualify as Indian service exporters. Of course, the registered office of the company should be in India and its income be liable to be taxed in India. If such legal criteria are met, the India-registered companies will be in law quintessential Indian Companies. Such companies have operated in India for decades and their commercial domicile in this country will be undoubted. In this globalized world, capitalized by lightning-fast finance, it is easy for a local, native company to receive foreign share-holding to become instantly globally connected and equally easy for a globally connected company established with foreign share-holding to witness the exit of such shareholders in favour of locals through divestment and become a local company, that is, with all shareholders being Indian. The definition of Indian Company vide Sec.2(26) of the Income Tax Act reads as follows:
“Section 2(26): "Indian company" means a company formed and registered under the Companies Act, 195610 (1 of 1956);
Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India”;
It is too well-known to repeat that a company has its own distinct legal identity and it is different from its shareholders.
...A company being an entity registered under the Indian Companies Act cannot be considered as ‘not an Indian company’ just because some of the shareholders happen to be foreign companies. Foreign companies are those that are incorporated outside India. It reflects a split outlook and a contradictory policy mindset to expect such companies to contribute to the national export cause but seek to deny them the SFIS benefits accruing from their export performances on the peculiar thinking that they are not Indian. It bears keeping in view that the SFIS legal apparatus does not stipulate that foreign shareholding in Indian companies would disentitle them from enjoying the fruits of their export performance. In the absence of such a bar, it does not stand to reason that the Commence Ministry could seek to deny such benefits under law.
The legal effect of brands registered under The Trademarks Act:
Many of the affected service exporters would have brand names registered in India under the Trademarks Act. These would by virtue of such registration become entitled to legal validity as any other local, native brand so registered. This would apply to local trade as well as for export of goods and services. Even if it is assumed for the sake of argument that branding is mandatory under SFIS for service exports, the validity of Indian registration of such trademarks would be a spanner in the works for the demands issued by the DGFT. It is interesting to read what section 56 of the Trademarks Act 1999 says in this regard:
Use of Trade Mark for Export Trade and Use When Form of Trade Connection Changes
56.-(1) The application in India of trade mark to goods to be exported from India or in relation to services for use outside India and any other act done in India in relation to goods to be so exported or services so rendered outside India which, if done in relation to goods to be sold or services provided or otherwise traded in within India would constitute use of a trade mark therein, shall be deemed to constitute use of the trade mark in relation to those goods or services for any purpose for which such use is material under this Act or any other law.
...(2) The use of a registered trade mark in relation to goods or services between which and the person using the mark any form of connection in the course of trade subsists shall not be deemed to be likely to cause deception or confusion on the ground only that the mark has been or is used in relation to goods or services between which and the said person or a predecessor in title of that person a different form of connection in the course of trade subsisted or subsists”.
The New policy SEIS differs from SFIS and is more liberal:
The Government of India have not accepted the restrictive view of the Policy Interpretation Committee as evidenced by the new Foreign Trade Policy 2015-20 in which there is no requirement of favouring only so-called Indian service exporters whatever the term meant in the mind of the said Committee. The SFIS was re-born as SEIS (Service Exports from India Scheme) in the new FTP in which the benefits are applicable to all service exporters located in India irrespective of their constitution or profile. The new norm should in fairness apply equally to the grey period of FY 2014-15 when there was no proper policy, with the FTP 2009-14 having ended on 31.03.2014 and the Government of India clearly indicating through the delay that a new FTP with new norms was in the offing.
Legal basis of the denial notices
It is reported that DGFT demands have been issued even as the SFIS scrips as issued and utilized stand untouched and uncancelled. It would be anomalous that the DGFT has acted to deny the benefits under the SFIS certificate without seeking to cancel the SFIS certificates.
...It means that the certificates are valid but not the use of the certificates by the holders. The demands are known to cite no legal provision in the the Foreign Trade (Development & Regulation) Act to establish purported contravention and for the proposal to recover the benefits taken. The demand in the notice may also be seen as an indirect attempt to recover taxes & duties adjusted out of relevant SFIS scrips. Power to recover tax is not present within the jurisdiction of the DGFT.
Conclusion
Since the new policy governing service exports from India (SEIS) has abandoned the kind of interpretation that has to led to the present imbroglio concerning SFIS and unreservedly allows all service exporters in India regardless of their profile and constitution to apply for the prescribed benefits under SEIS, a sensible solution to the crisis in the SFIS is for the government to withdraw all the notices and demands confirmed as a good will gesture and as an incentive to ramp up service exports. At the very least, it could offer parity with the present benefits under the SEIS without applying coercive and penal action including demand of interest. Even this mitigation would still be unjust to the service exporters who laboured under an unclear policy and struggle now to cope with huge demands. It is not a reasonable proposition that the same service exporter is eligible at present under SEIS but is deemed ineligible under the previous scheme, for achieving exports not too long ago against great odds, all because of an anomalous interpretation and nothing more.