Bombay High Court
Jindal Cocoa Llp vs Reserve Bank Of India on 3 January, 2025
Author: B.P. Colabawalla
Bench: B.P. Colabawalla
2025:BHC-OS:75-DB
F-J- WPL-8980-2024.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION (L) NO. 8980 OF 2024
1. Jindal Cocoa LLP
2. Vijay Jindal
3. Jayshree Vijay Jindal ...Petitioners
Versus
1. Reserve Bank of India
2. Union of India
3. Banking Ombudsman
4. HDFC Bank Limited ...Respondents
Mr. V. Sridharan, Senior Advocate, a/w Gopal Machiraju, Krusha
Maheshwari, Ruchi Wagaralkar, i/b Sriram Sridharan, Advocates
for Petitioners.
Mr. Y.R. Mishra, a/w Upendra Lokegaonkar, Shailendra Y.
Mishra, Advocates for Respondent No.2-UoI.
Mr. Prasad Shenoy, a/w Parag Sharma, Aditi Pathak, Vijay
Salokhe, Kirti Ojha, Megha More, Ankit Upadhyay, i/b BLAC &
Co., Advocates for Respondent No.3.
Mr. Mustafa Doctor, Senior Counsel, a/w Gaurav Mehta,
Chaitanya Mehta, Amir Ali Shaikh, Tanjul Sharma, i/b Dhruve
Digitally
Liladhar & Co., Advocates for Respondent No.4.
signed by
ASHWINI
ASHWINI JANARDAN
JANARDAN VALLAKATI
VALLAKATI Date:
2025.01.03
18:47:25
+0530
Page 1 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on - 03/01/2025 ::: Downloaded on - 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
CORAM : B.P. COLABAWALLA &
SOMASEKHAR SUNDARESAN, JJ.
Reserved on : October 22, 2024
Pronounced on: January 3, 2025
JUDGEMENT:
(Per, Somasekhar Sundaresan J.)
1. Rule. Rule is made returnable forthwith. Respondents waive
service. By consent, heard finally.
Introduction:
2. This Petition essentially challenges the interpretation of the
Reserve Bank of India’s Master Circular on Rupee/Foreign Currency
Export Credit & Customer Service to Exporters , dated July 1, 2015
(“Master Circular”) by the Banking Ombudsman (Respondent No.3)
appointed by the Reserve Bank of India (Respondent No.1, ” RBI”). The
Banking Ombudsman dismissed the Petitioners’ grievance against the
very same interpretation that had been taken by HDFC Bank Limited
(Respondent No.4, “HDFC Bank”).
3. Jindal Cocoa LLP (“Borrower”), is a limited liability
partnership engaged in the business of exporting cocoa and cocoa
Page 2 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
products. HDFC Bank had extended Indian Rupee-denominated pre-
shipment credit by way of a running account facility under the Master
Circular to the Borrower. The Borrower, along with its two partners Mr.
Vijay Jindal and Ms. Jayshree Vijay Jindal, are collectively the
Petitioners.
Regulatory Context and Background:
4. Under the Master Circular, banks extend credit to their
clients who are exporters, at a special interest rate applicable to export
credit, which is lower than the standard interest rates applicable to
normal borrowings by clients. The export credit availed of by the
Borrower was eligible for the benefit of further concessional interest due
to a subvention provided by the Government of India, under an Interest
Equalization Scheme notified by the Ministry of Commerce and
Industry, Government of India (Respondent No. 2) vide Trade Notice
dated December 8, 2015 (“Subvention Scheme”). The Government of
India would bear the value of the further discount on the interest rate,
through a mechanism put in place by the RBI to administer it. The RBI
had issued a circular dated December 4, 2015 (” RBI Circular on
Subvention”) on the subject, with detailed operational modalities.
Page 3 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
5. The maximum tenure of any export credit under the Master
Circular was stipulated at 360 days. On May 23, 2020, owing to the
outbreak of the Covid-19 pandemic, the RBI extended the maximum
permissible tenure of export credit from one year to 15 months i.e. a
further 90 days was allowed, which would lead to the permissible period
expanding from 360 days to 450 days. At the time of the original
sanction of the advances, and at disbursement, differing tenures had
been envisaged between the parties, but the period of the credit was
extended to the maximum permissible limit under the Master Circular.
For all purposes of adjudicating this Petition, the maximum period
applicable under the Master Circular is 450 days (instead of 360 days)
and inter-changeable references are made.
6. At the heart of the dispute is the interpretation of one
paragraph and its implication for the entire Master Circular. It is placed
in the section that deals with tenure of pre-shipment credit – Paragraph
1.1.2 (ii), reads thus:-
(ii) If pre-shipment advances are not adjusted by submission of
export documents within [360]1 days from the date of advance, the
advances will cease to qualify for prescribed rate of interest for
export credit to the exporter ab initio.
[Emphasis Supplied]
1
As stated earlier, this period would be 450 days for all purposes of this Petition
Page 4 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
7. HDFC Bank has argued that in view of the aforesaid
paragraph, whether exports took place within the said timeframe and
whether the export credit was redeemed within the said timeframe are
not sufficiently relevant. What is truly relevant is whether the export
documents were provided within this period, failing which, the advances
given to finance the exports would never be regarded as “export credit”
ab initio i.e. right from the very first date of the advance being made.
Consequently, according to HDFC Bank, since the Subvention Scheme
provides Government-sponsored discount only to “export credit”, the
exporter would not be entitled to any benefit of the Subvention Scheme
where the advance ceases to be “export credit” ab initio.
8. In other words, HDFC Bank’s stance is that (i) exports should
be made; (ii) the advances should be redeemed; and (iii) the documents
proving exports must be delivered; all within 450 days. Under the
Master Circular, HDFC Bank would argue, even a day’s delay in
submission of the export documents (despite exports actually having
been effected within 450 days, and the export proceeds being used to
redeem the credit) would lead to the advances not qualifying as “export
credit” from the date of the advance, thereby losing the benefit of the
Subvention Scheme.
Page 5 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
9. Out of the 107 export orders bagged by the Borrower and
financed be HDFC Bank, the financing of 15 export orders, lies at the
core of the controversy in this Petition. In respect of four export orders
(“First Lot”), admittedly, the Borrower effected the exports within 450
days of the advance. However, delivery of the export documents to
HDFC Bank was delayed by a few days beyond such period. Therefore,
according to HDFC Bank, the entire set of advances that financed the
First Lot ceased to qualify as “export credit” ab initio, and therefore, the
full amount of subvention relating to the First Lot ought to be reversed.
The amount of subvention reversed and therefore charged to the
Borrower under the First Lot is Rs. 4,62,22,602.77 (Rs. ~4.62 crores).
10. In respect of the eleven remaining export orders (” Second
Lot”), admittedly, the exports did not take place within 450 days of the
advance – they indeed materialised well after this period. In fact, before
the exports were effected, the Borrower had asked HDFC Bank to
foreclose the advances relating to the Second Lot, stating that it would
submit proof of the exports as and when they eventually materialise.
The amount of subvention reversed and therefore charged to the
Borrower under the Second Lot is Rs. 3,52,22,945.45 (Rs. ~3.52 crores).
Page 6 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
11. According to the Petitioners, in sharp contrast, under the
Master Circular, there is no requirement at all for exports to materialise
within 450 days – the only requirement is that the exports must actually
materialise at some point of time. It was their submission that where the
exports have materialised within 450 days, the exports documents could
be supplied eventually without having to be given within 450 days. The
Petitioners would go a step further and submit that even where exports
have not materialised within 450 days, but eventually materialise
thereafter, the benefits of the Subvention Scheme ought to be available
for the 450-day period.
12. For reasons recorded in this judgement, we disagree with the
Banking Ombudsman and HDFC Bank in relation to the reversal of
subvention for export credit towards the First Lot. We disagree with the
Petitioners in relation to the Second Lot. We find their respective
positions that are contrary to our findings, unreasonable and arbitrary.
In our opinion, for the reasons articulated in this judgement, the Master
Circular, which is aimed at providing competitively-priced working
capital to help Indian exporters compete with the world, requires
exports to be effected within the stipulated period and the export credit
to be redeemed from permissible sources such as export proceeds and
purchase or discounting of export bills. A mere delay in submission of
Page 7 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
documents despite exports actually having been effected within 450
days, would not result in the credit ceasing to be “export credit”. Where
the export has not materialised at all within the 450-day period, we find
that the credit advanced would get disqualified as export credit. Any
other view, in our opinion, would result in the very objective of the
Master Circular being undermined (in relation to the First Lot) and the
Master Circular becoming a device for availing of long-term cheap debt
with no commitment to timely exports (in relation to the Second Lot).
Factual Matrix:
13. Against this backdrop, the specific facts relevant to this
Petition are summarised as follows: –
a) HDFC Bank sanctioned a running account facility for export
credit of Rs.390 crores to the Borrower between January 29,
2020 and June 5, 2020;
b) The Borrower received an upfront interest subvention benefit in
addition to a special interest rate applicable to export credit. The
export credit interest rate was 6% / 7.25%, with the subvention
under the Interest Equalisation Scheme lowering it further;
Page 8 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
c) For every advance at the discounted rate received under the
Master Circular, the Borrower had to create a fixed deposit of an
equivalent amount of cash with HDFC Bank, over which there
would be a charge – this arrangement provided the Borrower with
cheap credit, being at a special borrowing rate for export credit
coupled with the subvention; and it provided HDFC Bank with
full security on the loan as also a cheap cost of funds of the same
amount (at the fixed deposit rate);
d) On October 1, 2021, the Borrower requested HDFC Bank to
liquidate the pre-shipment credit to the extent of Rs. 75 crores,
submitting proof of exports in bulk at the time of requesting the
liquidation. All these exports were admittedly effected within 450
days of the respective advances, but as regards the export orders
of the First Lot, the period of 450 days had expired before October
1, 2021. The Subvention Scheme was scheduled to expire on
September 30, 2021 and no extension was announced;
e) On October 4, 2021, HDFC Bank liquidated the relevant export
credit, and did not disturb the subvention provided for the 450-
day period (the maximum period of entitlement for the
Page 9 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
subvention). However, HDFC Bank charged penal interest of 2%
for the period of the credit beyond 450 days. It is common
ground that the export documents demonstrated that the
underlying exports had been made within the permissible 450-
day period, although these export documents were delivered to
HDFC Bank after the expiry of 450 days. This is the First Lot of
export orders about which the Borrower is aggrieved;
f) HDFC Bank was also the Authorised Dealer under the Foreign
Exchange Management Act, 1999 (“FEMA”), through whom the
export realisation was effected by the Borrower;
g) On February 14, 2022, the Borrower wrote to HDFC Bank stating
that certain exports were delayed beyond the 450-day period for
reasons outside its control. The Borrower expressed its desire to
foreclose the export credit outstanding and liquidate the fixed
deposits lying as cash collateral against such credit. None of the
export credit advances had run the course of 450 days. This is the
Second Lot of export orders about which the Borrower is
aggrieved;
Page 10 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
h) On February 24, 2022, the Borrower expressed its desire to
foreclose all the underlying export credit advances (in the sum of
Rs. 154.75 crores), on maturity of the fixed deposits (in the sum of
Rs. 154.78 crores). The Borrower submitted that documents to
prove the exports and realisation of proceeds would be submitted
in due course, also asserting that the special rate applicable to
export credit along with the benefits of the Interest Equalisation
Scheme should be made available to the Borrower;
i) On February 25, 2022, HDFC Bank reversed a sum of Rs. 3.52
crores under the head ‘miscellaneous debit’ in respect of the
export credit advanced towards exports that had not been
completed within the 450-day period i.e. the Second Lot;
j) On February 28, 2022, HDFC Bank wrote to the Borrower
confirming the specific export credit advances foreclosed and the
specific fixed deposits liquidated, and a computation to show that
applying the interest rate without subvention, export credit to the
extent of Rs. 151,43,75,548.19 (Rs. ~151.43 crores) stood
liquidated and only one contract with a principal amount of Rs.
8.5 crores with interest of Rs.23,05,479/- (Rs. ~23.05 lakhs) was
Page 11 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
due. HDFC Bank stated that in view of the aforesaid debit of
Rs.3.52 crores, there was insufficient balance in the Borrower’s
account to repay the residual export credit loan;
k) On March 8, 2022 (i.e. after the foreclosure of the entire export
credit by the Borrower in February 2022), the Interest
Equalisation Scheme was extended by the Government of India
with retrospective effect from October 1, 2021 to March 31, 2024.
The Borrower then claimed that the interest subvention benefit
that had been denied on the export credit underlying the Second
Lot, since October 1, 2021 should now be returned to the
Borrower;
l) On April 20, 2022, HDFC Bank revisited the treatment it had
accorded on October 4, 2021, to the export credit relating to the
First Lot. Another debit of Rs. 4.62 crores was effected by HDFC
Bank stating that HDFC Bank was required to reverse the interest
subvention amount right from the date of the disbursal of each
underlying export credit on the premise that they were not
“export credit” at all, since the export documents had not been
Page 12 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
submitted within the 450-day period, although the actual export
was done within the said period;
m) Between May 2022 and October 2022, the Borrower submitted
proof of exports under the Second Lot, and demanded that the
subvention reversal in the sum of Rs.3.52 crores be corrected;
n) On May 26, 2022, a complaint was filed by the Borrower with the
Banking Ombudsman against the two subvention reversals in
respect of the First Lot and the Second Lot; and
o) The Banking Ombudsman passed an order dated October 13,
2023 (“Impugned Order”) rejecting the Borrower’s complaint,
and endorsing the position canvassed by HDFC Bank, namely,
that the export documents ought to be filed within the time limit
of 450 days, failing which the credit would cease to be export
credit.
14. Against this backdrop, this Petition has been filed assailing
the Impugned Order as being arbitrary and unreasonable.
Page 13 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
Contentions and Submissions of Counsel:
15. We have heard the Learned Counsel for the parties at
significant length – Mr. V. Sridharan, Learned Senior Counsel on behalf
of the Petitioners, Mr. Prasad Shenoy, Learned Counsel on behalf of the
RBI and Mr. Mustafa Doctor, Learned Senior Counsel on behalf of
HDFC Bank.
16. Mr. Sridharan essentially submitted that the fundamental
requirement of the Master Circular was that the export should
materialise, and that there was no firm mandatory deadline under the
Master Circular for it to materialise. Mr. Sridharan would submit that
so long as the exports indeed materialise, the special rate for export
credit further reduced by the subvention, ought to be available for the
period of 450 days from the advance of the credit. Consequently, he
would submit, the reversal of the subvention amount of Rs. 4.62 crores
in relation to the First Lot and of Rs. 3.52 crores in relation to the
Second Lot were per se contrary to the law. The reversals represent an
arbitrary and unreasonable denial of a statutory entitlement, and the
Impugned Order ought to be set aside.
17. Mr. Shenoy would submit that the object and purpose of the
Master Circular is to ensure that exporters are encouraged to
Page 14 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
manufacture and export within 450 days and to ensure that the banks
are repaid. If the proof of export is not substantiated with documents,
the consequence for the borrower would be that he would lose the
beneficial interest rate right from the date of disbursement of the credit,
forcing the exporter to pay the commercial lending rate. Pointing to
Paragraph 1.1.3(iv) of the Master Circular, Mr. Shenoy would submit
that exporting within 450 days is of the essence of the Master Circular.
He would submit that exports ought to have been actually effected; they
ought to have been proven with export documents; and the credit ought
to have been marked off – all within 450 days of disbursement.
Pointing to Paragraph 2(A)(iii) of the RBI Circular on Subvention, Mr.
Shenoy would point out that the subvention benefit would be available
only between the date of disbursement and the date on which the
redemption is due. Therefore, to qualify for the subvention too, he
would submit, the outer limit is 450 days from the disbursement.
18. Mr. Doctor stoutly defended what he called a bona fide
interpretation of the Master Circular by officials of HDFC Bank,
emphasising that HDFC Bank obtained no benefit from the two
subvention reversals – they simply sent the funds back to the RBI and
thereby the Government of India. He would point to the varying periods
Page 15 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
for the credit as per the agreements and sanctions executed by the
parties, but would agree that for all purposes of this Petition, the overall
time limit for the export and the liquidation of the export credit was the
maximum permissible period of 450 days. The crux of Mr. Doctor’s
contention is that Paragraph 1.1.2(ii) of the Master Circular imposes an
over-arching and clear requirement that not only the export credit ought
to have been liquidated in 450 days, but also it ought to have been done
in the manner stipulated i.e. by submission of export documents within
450 days. He would submit that the Master Circular had made a
conscious choice of words in requiring that the export credit ought to be
adjusted “by submission of the export documents within 360 days from
the date of advance”.
19. Mr. Doctor would submit that the credit extended would ab
initio have to be treated as normal domestic credit and not as “export
credit” since the export documents were not delivered within 450 days.
When asked if HDFC Bank’s stance would remain the same even if the
documents submitted a few days late indeed demonstrate that exports
were truly effected within 450 days of the advance, Mr. Doctor would
submit that HDFC Bank had to follow the stipulation spelt out in
Paragraph 1.1.2(ii) without any room for reading it down or
extrapolating it. He would emphasise that the Master Circular was a
Page 16 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
regulatory directive under the Banking Regulation Act, 1949 (“BR Act“)
and it was as good as subordinate law, and consequently, HDFC Bank
was right in effecting the two reversals and debiting the Borrower’s
account by the amounts of the subvention that had been extended to the
Borrower.
20. In rejoinder, Mr. Sridharan would submit that it is common
ground and evident from the record that in October 2021, HDFC Bank
had reversed only the subvention amount and had not changed the
interest rate charged on the export credit, thereby undermining Mr.
Doctor’s submission that the “export credit” changed ab initio merely
due to delay in submission of the export documents. HDFC Bank
continued to charge interest at the same rate as had been applicable to
the export credit – only the subvention amount was reversed and penal
interest at 2% was added to it. Put differently, Mr. Sridharan would
submit that the very conduct of HDFC Bank contemporaneous with the
decision to reverse the subvention would show that it was not consistent
with the reading of the Master Circular that was now being canvassed on
its behalf.
21. Mr. Doctor would counter, that HDFC Bank had the fullest
commercial discretion on what rate to charge its prime customers who
Page 17 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
have good creditworthiness. He would submit that the conduct of
HDFC Bank based on its own bona fide reading at the relevant time,
would be of no consequence to the legal interpretation of the Master
Circular by the writ court.
Approach to Interpretation:
22. Mr. Sridharan and Mr. Doctor have both attempted to adopt
a literal and extreme reading of the specific provisions of the Master
Circular in a manner that would advance their client’s respective
positions. For instance, Mr. Sridharan would submit that the allusion
to exports not materialising “at all” in the Master Circular would mean
that exports may materialise whenever actually feasible. Until it
becomes clear that the export is impossible to materialise, the beneficial
rate and the subvention for the first 450 days could not be disturbed.
Likewise, Mr. Doctor would submit that the only means of a compliant
liquidation of export credit is by delivering the export documents within
450 days and not by the export documents proving that exports took
place within 450 days. Even a day’s delay in submission of documents
that actually prove exports within 450 days would lead to the credit not
being “export credit” ab initio i.e. right from the date of disbursement of
the credit.
Page 18 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
23. In our opinion, the Master Circular and the Subvention
Scheme, are both instruments of law that seek to implement the stated
economic policy objectives. It is not drafted by legislative draftsmen
who would draft subordinate law that would be tabled for review by the
legislature, but by regulatory and government officials, seeking to
propound a bundle of incentives and disincentives to further the State’s
policy choice. Therefore, when such instruments fall for interpretation,
they ought to be read purposively, contextually, and in a manner that
has due regard to the text as well as context, without inflicting violence
on the policy objective. If more than one view is possible in interpreting
such instruments, the interpretation that would further the object and
suppress the mischief sought to be addressed by them, is the one that
Courts should adopt.
24. In our view, these two instruments would need to be
interpreted not only with an “inter-textual” reading (whereby the
consequence under one instrument would have implications for the
other) but also with an “intra-textual” reading (whereby the concepts
covered by various portions within each instrument would draw their
meaning by necessary regard to other portions of the same instrument,
as an integral inter-woven whole). Therefore, to appreciate the issues
Page 19 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
at hand, it would be necessary to examine the overall scope and salient
features of the Master Circular and the Subvention Scheme.
Master Circular on Export Credit:
25. The Master Circular governs the provision of export credit at
a special rate, different from the rates charged for domestic borrowing.
The term “pre-shipment/packing credit” is defined to mean 2, among
others, any loan, advance or other credit provided by a scheduled
commercial bank to an exporter for financing the purchase, processing,
manufacture or packing of goods prior to their shipment for export.
Such credit is to be extended against evidence of an export order placed
on the exporter. The tenure of such credit is left to the parties, subject
to an outer limit of 360 days from the date of the advance (extended to
450 days on May 23, 2020).
26. The pre-shipment credit could be liquidated by the bank
discounting or purchasing the export bills on which receivables would
be due from the exporter’s clients. In such event, the pre-shipment
credit would stand redeemed and the new exposure of the bank to the
2
Defined in Paragraph 1.1.1 of the Master Circular.
Page 20 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
exporter (having paid the amount towards purchase of the receivables
under the bills) would be treated as post-shipment credit. Pre-shipment
credit may also be repaid or prepaid out of export proceeds kept in
Exchange Earners Foreign Currency Account (” EEFC Account”), an
account in which Indian resident exporters may deposit their foreign
exchange earnings. Indeed, rupee resources of the exporter, arising out
of export proceeds actually received, could also be utilized for
liquidating the pre-shipment credit3.
27. The Master Circular recognizes that in respect of export of
agro-based products (the Borrower exported cocoa products), the
exporter must necessarily purchase a larger quantity of raw agricultural
produce and grade it into varieties that are exportable and not
exportable. The non-exportable component would be sold in the
domestic market. The monies advanced as pre-shipment credit would
need to be proportionately bifurcated, with the credit covering the non-
exportable domestically-sold portion being charged at the interest rate
applicable to domestic advances, as opposed to the rates applicable to
export credit4. The relevance of this facet of the Master Circular to the
case at hand is that the interest rate for export credit is special and
3
Paragraph 1.1.4 (i)
4
Paragraph 1.1.4 (ii)
Page 21 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
cheaper, and that rate is not available for normal credit.
28. For clients having a good track record, banks are also
permitted to accept redemption of the pre-shipment credit from
proceeds of any other export order relating to the same commodity.
Such credit may be marked off with proceeds from exports for which no
pre-shipment credit has been drawn from any other bank, or by
ensuring that proceeds of exports on which other pre-shipment credit
had been availed of, are used to liquidate the other pre-shipment credit
as well.
29. The RBI has recognized that since the availability of raw
material could be seasonal in character, time taken for the manufacture
and shipment of goods could be longer than the delivery schedule under
the export orders. Therefore, the exporter may have to procure raw
material and manufacture products, in anticipation of potential export
orders from customers. Therefore, the Master Circular envisages
provision of a ‘running account’ facility5. For such facility, the banks
must not insist on prior lodgment of the export orders for the pre-
shipment credit to be disbursed. Running account facility can only be
5
Paragraph 1.1.5 of the Master Circular.
Page 22 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
granted to Export Oriented Units (” EOU”) and units in Free Trade
Zones, Export Processing Zones, and Special Economic Zones, enjoying
a good track record. In the instant case, the Borrower, being an EOU,
had a running account facility with HDFC Bank.
30. In a running account facility, export orders must be produced
within such reasonable period of time as decided by the banks. As and
when individual export bills are received for discounting, the
outstanding credit could be marked off on a ‘first-in-first-out’ basis –
the export credit first advanced would be redeemed first, and so on. In
the course of such redemption too, banks are required to ensure that the
individual pre-shipment credits advanced to an exporter do not stretch
beyond the maximum permissible period (360 days, extended to 450
days, from the date of the advance). Paragraph 1.1.5 (iii) of the Master
Circular, which governs a running account facility provides as follows:-
1.1.5 ‘Running Account’ Facility’
(i) As stated earlier, pre-shipment credit to exporters is normally
provided on lodgment of LCs or firm export orders. It is observed
that the availability of raw materials is seasonal in the facts of the
present case some cases. In some other cases, the time taken for
manufacture and shipment of goods is more than the delivery
schedule as per export contracts. In many cases, the exporters have
to procure raw material, manufacture the export product and keep
the same ready for shipment, in anticipation of receipt of letters of
credit I firm export orders from the overseas buyers. Having regard
Page 23 of 65
January 3, 2025
Shraddha/Ashwini::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.docto difficulties being faced by the exporters in availing of adequate
pre-shipment credit in such cases, banks have been authorised to
extend Pre-shipment Credit ‘Running Account’ facility in respect of
any commodity, without insisting on prior lodgement of letters of
credit I firm export orders, depending on the bank’s judgement
regarding the need to extend such a facility and subject to the
following conditions:
(a) Banks may extend the ‘Running Account’ facility only to
those exporters whose track record has been good as also to
Export Oriented Units (EOUs)/ Units in Free Trade Zones /
Export Processing Zones (EPZs) and Special Economic Zones
(SEZs)
(b) In all cases where Pre-shipment Credit ‘Running Account’
facility has been extended, letters of credit / firm orders should
be produced within a reasonable period of time to be decided
by the banks.
(c) Banks should mark off individual export bills, as and when
they are received for negotiation / collection, against the
earliest outstanding pre-shipment credit on ‘First In First Out’
(FIFO) basis. Needless to add that, while marking off the pre-
shipment credit in the manner indicated above, banks should
ensure that export credit available in respect of individual pre-
shipment credit does not go beyond the period of sanction or
360 days from the date of advance, whichever is earlier.
(d) Packing credit can also be marked-off with proceeds of
export documents against which no packing credit has been
drawn by the exporter.
(ii) If it is noticed that the exporter is found to be abusing
the facility, the facility should be withdrawn forthwith.
Page 24 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
(iii) In cases where exporters have not complied with the
terms and conditions, the advance will not be treated as
export credit ab initio.
(iv) Running account facility should not be granted to sub-
suppliers.
[Emphasis Supplied]
Subvention Scheme:
31. The Subvention Scheme entailed the Government of India
subsidising Indian Rupee-denominated export credit advanced in
conformity with stipulated criteria. Although introduced on December
8, 2015, it took retrospective effect from April 1, 2015 and was scheduled
to be in place for an initial period of five years. All eligible exporters who
had availed of such credit were entitled to the benefit through their
respective banks. The Government of India would bear a portion of the
interest burden by providing funds to the RBI, which would in turn
release the funds to banks on a monthly basis to the extent the banks
lent cheap to exporters. The introduction of the Subvention Scheme
with retrospective effect would play out again at one of its extensions –
on March 8, 2022, with retrospective effect from October 1, 2021. It was
on October 1, 2021, when the Subvention Scheme had not been
extended after its expiry on September 30, 2021, that the Borrower first
Page 25 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
repaid a bunch of export credits and eventually all the outstanding
export credit on February 14, 2022.
32. On December 4, 2015, the RBI Circular on Subvention was
issued, with a procedure for reimbursement of interest already borne by
the exporters. The special lower rate of interest for export credit would
stand further discounted due to the Subvention Scheme. Banks were
required to charge the discounted rate of interest and submit their
claims to the RBI for reimbursement of the differential attributable to
the discounted interest. The RBI would be given funds in advance by the
Ministry of Commerce and Industry, on a monthly basis. The
Subvention Scheme was extended from time to time, first until
September 30, 2021, and as stated above, with retrospective effect from
October 1, 2021 by a notification dated March 8, 2022, and thereafter
until March 31, 2024. Suffice it to say, all the export credit transactions
relevant to this Petition were transacted when the Subvention Scheme
was in force.
Analysis and Findings:
33. The Master Circular is explicit in terms of its purpose and
objective. The Master Circular seeks “to make short-term working
capital finance available to exporters at internationally comparable
Page 26 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
interest rates”. The Master Circular has been issued as a regulatory
direction in exercise of the powers of the RBI under Sections 21 and 35A
of the BR Act, which reads thus :
Section 21 Power of Reserve Bank to control advances by banking
companies.
(1) Where the Reserve Bank is satisfied that it is necessary or
expedient in the public interest or in the interests of depositors or
banking policy so to do, it may determine the policy in relation to
advances to be followed by banking companies generally or by any
banking company in particular, and when the policy has been so
determined, all banking companies or the banking company
concerned, as the case may be, shall be bound to follow the policy as
so determined.
(2) Without prejudice to the generality of the power vested in the
Reserve Bank under sub-section (1), the Reserve Bank may give
directions to banking companies, either generally or to any banking
company or group of banking companies in particular, as to–
(a) the purposes for which advances may or may not be made,
(b) the margins to be maintained in respect of secured advances,
(c) the maximum amount of advances or other financial
accommodation which, having regard to the paid-up capital, reserves
and deposits of a banking company and other relevant considerations,
may be made by that banking company to any one company, firm,
association of persons or individual,
(d) the maximum amount up to which, having regard to the
considerations referred to in clause (c), guarantees may be given by a
banking company on behalf of any one company, firm, association of
persons or individual, and
(e) the rate of interest and other terms and conditions on which
Page 27 of 65
January 3, 2025
Shraddha/Ashwini::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.docadvances or other financial accommodation may be made or
guarantees may be given.
(3) Every banking company shall be bound to comply with any
directions given to it under this section.
35A. Power of the Reserve Bank to give directions.–(1) Where the
Reserve Bank is satisfied that–
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in
a manner detrimental to the interests of the depositors or in a manner
prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company
generally,
it is necessary to issue directions to banking companies generally or
to any banking company in particular, it may, from time to time, issue
such directions as it deems fit, and the banking companies or the
banking company, as the case may be, shall be bound to comply with
such directions.
(2) The Reserve Bank may, on representation made to it or on its own
motion, modify or cancel any direction issued under sub-section (1),
and in so modifying or cancelling any direction may impose such
conditions as it thinks fit, subject to which the modification or
cancellation shall have effect.
[Emphasis Supplied]
34. Consequently, the Master Circular partakes the character of
a statutory instrument that furthers the regulatory policy objectives of
Page 28 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
the RBI. The Subvention Scheme too is in the nature of a policy on
providing subsidy on the interest burden shouldered by exporters, by
the Government of India through the Ministry of Commerce and
Industry to help Indian exporters compete in the international markets.
Since banks would have to deal with their own costs of borrowings, the
Government of India took on the burden of the discount on interest.
Therefore, indeed one must read these two instruments in a purposive
manner. Any interpretation that undermines the policy objectives of
these instruments would deserve to be shunned.
35. We find from a careful perusal of the Master Circular that the
Paragraph 1.1.2(ii) is but one of multiple provisions in the finely inter-
woven fabric of the Master Circular. It is indeed correct that the
maximum tenure of export credit is an essential ingredient of the
Master Circular. The very objective of the Master Circular is to provide
“short-term” working capital. The maximum period (360 days,
extended to 450 days due to impact of the Covid-19 pandemic) has been
consciously chosen as the designated period to make this a window for
providing short-term working capital. With this context in mind, it
would be important to examine various ingredients of the Master
Circular.
Page 29 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
36. There is no doubt that Paragraph 1.1.2 deals with the
maximum period of the advance and in doing so, it refers to adjustment
of the advances in 360 days. However, HDFC Bank has argued that this
is a provision that would ensure that even for these 360 days, the credit
would not be export credit, despite exports actually having been
achieved and despite proceeds having been realised (all within 360
days) if there is a delay of even one day beyond 360 days in submission
of export documents that prove these facts. By necessary implication,
according to HDFC Bank and the Banking Ombudsman, if the export is
effected on the 360th day and proceeds are realised on the same day, but
it takes a day more to compile the documents, the financing would
simply stand disqualified for coverage as “export credit” under the
Master Circular.
37. We are unable to agree with such an extreme and absolute
proposition that is patently and manifestly unreasonable and therefore
arbitrary. Such a reading of one of the provisions in the Master Circular
in a manner that effaces the very objective of the instrument, misses the
substance for the form. Such an approach undermines the regulatory
objective of the Master Circular, which is to promote Indian exports,
Page 30 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
make them competitive in the world markets, and aid such exports with
short-term working capital at competitive interest rates.
38. The crux of the Master Circular is that export credit at
competitive interest rates must be made available to exporters in the
form of short-term working capital. The very same Master Circular
requires banks to keep a close watch on the end-use of funds advanced
and to ensure that the credit supplied at special rates under the Master
Circular are genuinely used for the purposes of exports. 6 Banks are also
required to monitor the progress made by exporters in timely fulfillment
of the export orders. Each of these provisions point to the need to
export within the stipulated time being of the essence of the Master
Circular. If all that banks have to do is look for delivery of export
documents within 360 days, there would be no requirement for them to
monitor the performance of export obligations.
39. That apart, the Master Circular has expressed the period in
days (360 days) and not as “one year” which could have then meant 365
days7. However, when the RBI extended this period on May 23, 2020, it
was stated that the “maximum permissible period of pre-shipment and
6
Paragraph 1.1.3(iv) of the Master Circular
7
Section 3(66) of the General Clauses Act, 1897 defines a “year” in terms of the
British calendar year, which would mean 365 days in a non-leap year
Page 31 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
post-shipment export credit sanctioned by banks from one year to 15
months, for disbursements made upto July 31, 2020″ indicating that it
meant “one year” as the maximum period. Likewise, the extension was
to “15 months” and not by “90 days”. All of this indicates that these are
instruments of law that are drafted, not by legislative draftsmen but by
policy draftsmen, and that would necessitate searching for the real
import of the principle expressed and shunning a pedantic, narrow and
literal reading of these instruments. If every single day was so
sacrosanct, the RBI would not have referred to the period in years and
months when extending the period. However, in light of the nature of
the submissions before us, to adopt a conservative approach, for
purposes of adjudicating this Petition, we have treated the period of
“three months” as 90 days and maintained the reference to “one year” as
“360 days” and conservatively adopted the period of 450 days as the
maximum permissible period of export credit.
40. The Master Circular also makes it clear that export credit and
pre-shipment credit may be liquidated out of the export bills being
purchased or discounted by the bank, thereby converting the pre-
shipment credit into post-shipment credit. As noted earlier, even
balances lying in the EEFC Account could be utilized for pre-paying or
Page 32 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
re-paying the export credit. Indeed, rupee resources of the exporter to
the extent such resources are proceeds of exports that had actually taken
place could also be used for repaying the export credit. 8 It is also
evident that under the running account facility 9, it was provided that
pre-shipment credit could be marked off on a first-in-first-out basis in
the manner described earlier in this judgment. So also, the Master
Circular also envisages that where an exporter has been granted
accommodation against cheques and demand drafts and other payment
instruments received from abroad at normal commercial interest rates,
banks may even retrospectively give effect to the special rate applicable
to export credit once it becomes clear that the conditions for availing of
export credit has been complied with. 10 This stipulation yet again makes
it clear that the substance of the Master Circular is incentivising the
performance of export obligations and exporters being given credit at
competitive rates to achieve such performance. Even where the
advances have been made by the bank at standard commercial interest
rates, upon evidence that exports had been effected by the exporter, the
exporter would be entitled to the special interest rate applicable to
export credit. All these features yet again point to the fact that the
8
Paragraph 1.1.4(i) of the Master Circular
9
Paragraph 1.1.5 of the Master Circular
10
Paragraph 1.1.6 of the Master Circular
Page 33 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
Master Circular ought to be interpreted in a purposive manner, and not
in the manner that one would interpret a fiscal statute.
41. Likewise, the provisions of the Master Circular governing
export credit in foreign exchange are noteworthy. The provisions
governing export credit in Indian Rupees have been mutatis mutandis
applicable to foreign currency-denominated export credit. Paragraph
5.5 of the Master Circular, which deals with the period of foreign
currency-denominated export credit uses the phrase ” if no export takes
place within 360 days” in connection with the obligation to adjust and
mark off the export credit. This is a clear pointer to the substance of the
Master Circular, namely, that exports must take place within the
stipulated 450 days. Such usage severely and firmly counteracts and
reduces the force of Mr. Doctor’s submission that such a phrase has not
been used in Paragraph 1.1.2(ii). There is no plausible reason for the
Master Circular to mean different things by use of the phrase ” if no
export takes place within 360 days” for foreign exchange-denominated
export credit and use of the phrase ” submission of export documents
within 360 days” when it comes to Indian Rupee-denominated export
credit. None of the Counsel have been able to explain the differences
between lending in Indian Rupees and in foreign currency with
Page 34 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
implications having to be different for the specific facet of the maximum
period of the export credit.
42. In our opinion, the objective of both provisions dealing with
tenure (in relation to Indian Rupee and foreign currency lending) is one
and the same. With Indian Rupee-denominated export credit too, the
requirement is that exports must take place within 360 days, which is
what the export documents would have to evidence. There is no
intelligible differentia on the treatment of the loan as export credit, on
the basis of the currency denomination. When export documents are
referred to in the language of Paragraph 1.1.2(ii), it is evidently to
demonstrate that exports have indeed taken place. When Paragraph 5.5
refers to exports having taken place, it is aligned with the same
objective. As stated earlier, while the Master Circular is a regulatory
instrument, it is a policy document that is not drafted by legislative
draftsmen, but by regulatory officials. The most commonsensical,
reasonable and logical meaning ought to be given to its contents in a
manner that furthers the regulatory objective of the instrument.
43. In our opinion, to hold that Paragraph 1.1.2(ii) of the Master
Circular mandates that despite exports actually having materialised
Page 35 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
within 450 days and regardless of the proceeds being realized, even one
day’s delay in submission of the export documents would be fatal to the
very status of “export credit”, inflicts serious violence to the very policy
objective of the Master Circular. It is trite law that in interpreting
beneficial legislation, if two views are possible, the view that advances
the objective of the legislation and suppresses the mischief is the view
that must be adopted. Therefore, we have no hesitation in holding that
the Banking Ombudsman’s endorsement of HDFC Bank’s reading of
Paragraph 1.1.2(ii) of the Master Circular, is untenable and does not
lend itself to acceptance.
44. It is also noteworthy that the Master Circular deals with a
situation where exports do not materialise ” at all”.11 Paragraph 4 of the
Master Circular governs the interest rate applicable to Indian Rupee-
denominated export credit. A ‘Base Rate’ is required to be applied for
the provision of such export credit sanctioned on or after July 1, 2010.
Paragraph 4.2.2(ii) provides that if pre-shipment advances are not
liquidated from: (a) proceeds of purchase or discounting of export bills;
(b) on submission of export documents within 360 days from the date of
the advance; or (c) as stipulated for other means of liquidating pre-
shipment credit, the advances would not be treated as “export credit” ab
11
Paragraph 4.2.2 of the Master Circular
Page 36 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
initio. Paragraph 4.2.2(iii) provides that if exports do not materialise at
all, banks should charge the domestic lending rate plus penal rate of
interest, if any, in terms of a transparent policy adopted by the bank’s
Board of Directors. Mr. Sridharan argued that the use of the words “at
all” would mean that one should wait to see whether it becomes
impossible that the exports would materialise. On the other hand, Mr.
Doctor emphasised the use of the phrase “on submission of export
documents within 360 days” used in Paragraph 4.2.2(ii) to state that it
is a reiteration of the sacrosanct requirement to produce export
documents within 360 days regardless of whether exports have taken
place in that period.
45. In our opinion, the very analysis set out above in relation to
Paragraph 1.1.2(ii) would apply to Paragraph 4.2.2(ii). Any other
reading of Paragraph 4.2.2.(ii) would render Paragraph 4.2.2(iii)
meaningless – that paragraph provides the implications of exports not
materialising at all, which we read as not materialising within 360 days,
disagreeing with Mr. Sridharan’s thesis that one may have to wait until
the export is demonstrably impossible to materialise. These provisions,
read with Paragraph 5.5 and the host of other provisions analysed
above, are a concerted pointer that the crux of the Master Circular is
Page 37 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
that the maximum period of the export credit would be 360 days
(extended to 450 days); one of the multiple means of liquidating it may
be used; and the exports so financed would need to be performed within
360 days (extended to 450 days).
46. If one were to treat the submission of export documents no
later than the 360th day as an all-consuming essential requirement that
renders meaningless the performance of all the other obligations,
instead of looking to the substance of what the export documents are
meant for (to prove that exports indeed took place within 360 days), the
very policy objective of the Master Circular would be turned on its head
and be grossly undermined. From a conjoint intra-textual reading of
the Master Circular and its various provisions, as articulated above, in
our opinion, it is when exports do not materialise within 360 days, that
the domestic lending rate coupled with the penal interest would become
applicable to the amounts advanced. The reference, twice, to the
requirement of submitting export documents within 360 days (first in
Paragraph 1.1.2(ii); and next in Paragraph 4.2.2(ii) of the Master
Circular), in our opinion, relates to articulating the procedural means by
which the export credit advances may be liquidated and marked off, and
Page 38 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
not an all-encompassing stipulation that erodes the very objective of the
Master Circular.
47. The purpose of providing export documents is to prove that
exports indeed took place within 360 days. It is absurd to contend that
even when the export documents indeed prove the same, the fact that
they were delivered a few days after the 360-day period, would lead to
the advances not being “export credit” at all, amounts to saying that in
the eyes of the Master Circular, the exports are deemed to have never
taken place. The substance for which the credit is extended is to finance
exports, and when exports have indeed taken place within 360 days, the
credit would necessarily have to be valid “export credit”. Therefore, we
hold that the requirement to provide the export documents is aimed at
proving that exports indeed materialised within 360 days of the
disbursement of the export credit. The provision of such documents
within 360 days is therefore a directory requirement and not a
mandatory requirement inasmuch as a delay of a few days in submitting
the documents would not be fatal to the fact that exports indeed
materialised and such exports had been financed, and such finance is
“export credit”. The necessary corollary is that for the 360-day period
(extended to 450 days), being the maximum permissible period, the
credit would be export credit (provided exports indeed materialised
Page 39 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
within that period) and for the period thereafter, it would not be export
credit, since the maximum permissible period is 360 days (extended to
450 days). For the subsequent period, until actual redemption of the
credit, the exporter would be liable to pay interest at the normal interest
rate along with penal interest, as applicable under the bank’s policy
(required to be made under the Master Circular).
48. We also note with emphasis that Paragraph 8.3 of the Master
Circular deals with the procedure for delivery of export credit, whether
in foreign currency or in Indian Rupees, and stipulates guidelines with a
view to ensuring timely delivery of export credit to exporters and to
remove procedural hassles that may be faced by exporters. Under these
guidelines, banks have been asked to ensure that the Master Circular
must be implemented both in ” letter and spirit” so as to bring about a
perceptible improvement in credit delivery and related banking services
to the export sector. Therefore, the Master Circular leaves no room for
doubt that a robotic and literal reading of one sentence from the Master
Circular in a manner that undermines the very regulatory objective of
the Master Circular must be shunned. The Master Circular enjoins that
its provisions must be read in the spirit of the document and not just in
a literal manner. The instrument is indeed a beneficial regulatory
Page 40 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
instrument and it is envisaged that situations may emerge which would
require the spirit to be invoked in its implementation and
administration.
49. The spirit of the Master Circular is evident from the terms
noticed above – that short-term working capital must be made available
at competitive rates in a timely manner to exporters. Such export credit
must not exceed the maximum period of 360 days (extended to 450
days). Within such period, if the exports financed have indeed
materialised, banks may purchase the export bills or discount the export
bills, and thereby adhere to the period, simply converting the pre-
shipment credit into a post-shipment credit (which is also another form
of “export credit”). So also, if the exports did not materialise at all in
360 days, the credit extended to the exporter would have to be charged
interest at the domestic lending rate and not at the special rate
applicable to exports, for the entire period of the credit.
First Lot:
50. In the matter at hand, it is common ground that exports
relevant to the First Lot indeed had been effected and that too within
the maximum permissible period under the Master Circular. Evidence
Page 41 of 65
January 3, 2025
Shraddha/Ashwini::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.docof such export was also provided, but with a delay of a few days.
Therefore, in our opinion, the Master Circular having to be read in the
manner we have explained above, the reversal of the subvention by
HDFC Bank in relation to export financing of the First Lot from the very
inception is indeed unreasonable, arbitrary, and liable to be interfered
with.
51. Consequently, we find that HDFC Bank and indeed the
Banking Ombudsman were completely in error in the interpretation of
the Master Circular insofar as export credit relating to the First Lot was
concerned, and basing their reading on their interpretation of
Paragraph 1.1.2(ii) and indeed, Paragraph 4.2.2.(ii). Since it is common
ground that all the underlying exports relating to the First Lot had been
effected within the maximum permissible period under the Master
Circular, there can be no question of disqualifying the advances made
from being regarded as “export credit”. Consequently, there is no
disqualification of such export credit from coverage under the
Subvention Scheme. The miscellaneous debit effected by HDFC Bank to
reverse the interest subsidy in relation to the First Lot is required to be
corrected, which we hereby direct. The Respondents are directed to
take steps to ensure that such subvention reversal in relation to the First
Lot is cancelled and remedied.
Page 42 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
52. There is also considerable force in the submission that in the
matter at hand, each of the exports underlying the First Lot was indeed
processed by the none other than HDFC Bank (in its capacity as an
authorized dealer under FEMA), which is also a legislation invoked by
the Master Circular. The Master Circular iterates the need to ensure
compliance with FEMA. HDFC Bank in its role as an authorized dealer
under FEMA was indeed aware of the exports having materialised
within the maximum permissible time limit. Yet, on a hyper-technical
reading of Paragraph 1.1.2(ii), ignoring the scheme emerging from
various other provisions referred to above, HDFC Bank has sought to
erode the very status of the credit advanced by arguing that it had
ceased to be “export credit”.
53. It is reasonably evident to any reader of the material on
record that HDFC Bank had indeed adopted the correct approach in
October 2021, when it reversed the subvention benefit only for the
period after the expiry of the maximum permissible tenure of export
credit. It is only on April 20, 2022, that HDFC Bank developed second
thoughts on the subject and purported to read Paragraph 1.1.2(ii) as an
entitlement to treat the entire advance as not constituting “export
credit” for the entire period. It is truly noteworthy that even at this
Page 43 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
stage, HDFC Bank did not charge the domestic lending rate for the
entire period despite purporting that the advances were not “export
credit” at all right from their disbursement. If HDFC Bank’s argument
that the phrase ‘ab initio’ used in Paragraph 1.1.2(ii) is to be read as
simply disqualifying the credit as export credit, the natural corollary
would be that such credit would have to be treated as normal domestic
credit. Indeed, the conduct of HDFC Bank cannot be the basis of the
Court’s opinion on the interpretation, but we would be remiss in not
noticing that HDFC Bank’s first reaction was the accurate one, which for
reasons best known to HDFC Bank, was changed completely in six
months.
54. We are in agreement with Mr. Sridharan in his reliance upon
a decision of the Supreme Court in the case of Fertilizer Corporation of
India Ltd. Vs. State of Bihar12, whereby even in an analysis of the
ingredients of a fiscal statute, a purposive reading of provisions that
make the machinery of the legislation workable was preferred as
opposed to a strictly technical and literal view of the requirements. In
that case, the question involved was the entitlement of an assessee to a
rebate under the Sales Tax Laws of Bihar, which was to be computed on
the basis of the returns filed. The Supreme Court ruled that since the
12
1988 Supp. SCC 73
Page 44 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
objective of the rebate provision was to confer a benefit to an assessee
for a prompt payment of tax, since it was found that the assessee had
indeed paid the tax before due dates and there was no dispute that the
tax paid was in conformity with the tax due on the basis of the returns
filed, a delay in filing the returns was not fatal to the entitlement to the
rebate. In this case, the High Court had taken a view that fiscal statutes
must be literally and strictly construed and if the returns had not been
filed in time, there can be no benefit of the rebate that could be made
available to the assessee. The Supreme Court reversed the decision of
the High Court, and ruled as follows :
8. Learned counsel for the assessee also suggests a different
kind of approach to the issue before us. He submits that all that
Section 15 aims at is to grant a tax rebate of 1 per cent of the
amount of tax admitted to be due as per the return filed by the
assessee. The further words used in Section 15 to describe the
return, namely, that it should be a return filed in the prescribed
manner and within the prescribed or extended period are merely
words descriptive of the procedure of filing a return. The basic
condition necessary for claiming the tax rebate is only that there
should be a valid return and that the tax on the basis of the valid
return should have been paid by the assessee. He submits that while
the substantive part of the condition should be strictly construed by
insisting upon the presence of a valid return, the procedural aspect
referred to can well receive a liberal construction. In the present
case, he points out, there is no dispute that the returns filed by the
assessee were valid. In fact the assessments have been made on the
basis of the returns filed. The tax has been paid even before the
submission of the returns. There is no suggestion that the tax paid
fell short of the tax due on the return. This is also not a case where
Page 45 of 65
January 3, 2025
Shraddha/Ashwini::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.docthe assessed tax is much higher than the tax admitted on the basis of
the returns. In these circumstances, he argues, the assessee must be
held to have fulfilled the conditions prescribed in Section 15.
9. Learned counsel for the assessee referred to certain
decisions in support of such a rule of construction. In CIT v. Kulu
Valley Transport Co. Pvt. Ltd. the court had to construe a provision
intended to benefit the assessee. Under Section 22(2-A) of the
Income Tax Act, 1922, a return of loss had to be filed within the
time prescribed for return under Section 22(1) if the assessee
wanted to carry forward the loss claimed. It was not so filed but was
nevertheless treated as a valid return by reading the provisions of
Section 22(1) and 22(3) of the Act jointly and giving a liberal
interpretation to Section 22(2-A). In the case of Gursahai Saigal v.
CIT the question was regarding the charge of interest under Section
18-A(8) of the same Act. This provision did reveal a lacuna but
reading the provision along with Section 18-A(6), the court gave
effect to the intendment of the legislature. It was explained that
Section 18-A(8) was not a provision creating a charge of tax but
only laying down the machinery for its calculation or procedure for
its collection. The dictum of Scott, L.J. in Allen v. Trehearne that
machinery provisions should be interpreted largely and generously
in order not to defeat the main object of liability laid down by the
statute was referred to. The following observations of the Privy
Council in CIT v. Mahaliram Ramjidas were also relied upon:
“The section, although it is part of a taxing Act, imposes no
charge on the subject, and deals merely with the machinery
of assessment. In interpreting provisions of this kind the rule
is that that construction should be preferred which makes the
machinery workable….”
10. Though the above decisions arose under a different enactment and on
different statutory language, they dealt with somewhat analogous
situations and furnish useful guidance here. They do lend support to the
assessee’s contention. It does seem that the condition in Section 15
referring to a return has a substantive as well as procedural content and it
may not be inappropriate to construe the latter somewhat liberally and
Page 46 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
generously so long as the principal object of the provision is not
frustrated.
[Emphasis Supplied]
55. In our opinion, the aforesaid principle would squarely apply
to interpreting the provisions of the Master Circular. Since the objective
of the Master Circular is to provide competitively-priced short-term
working capital to Indian exporters, and enjoins a maximum tenure of
credit (360 days, extended to 450 days), Paragraph 1.1.2(ii) stipulating
submission of export documents within 360 days is a machinery
provision to make the larger objective work. The larger essence is that
exports must be financed and be completed within the stipulated time.
When export documents in fact prove the same, and only have
submitted a few days after the said period, such machinery provisions
must be purposively construed, and a literal construction in a manner
that erodes the very purpose of the statutory instrument should always
be avoided.
56. In the result, we hold that the advances that financed the
exports forming part of the First Lot clearly constitute “export credit”
and are fully eligible for the subvention under the Subvention Scheme.
Page 47 of 65
January 3, 2025
Shraddha/Ashwini::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.docAny subsequent period of the credit before its redemption i.e. the period
of delay in submission of the export documents after the expiry of the
maximum period of export credit, would be the period for which the
Borrower enjoyed subvention despite the expiry of the maximum
permissible period under the Master Circular. The Subvention Scheme
is very clear that the subvention would be available only until the date
on which the export credit becomes overdue. Reversal of any
subvention for such period of delay would be a natural requirement, and
we hold that HDFC Bank’s first reaction on October 4, 2021 i.e. of
reversing the subvention only for such delayed period was the correct
approach that would get support under the Master Circular. HDFC Bank
must compute the precise period of delay under each of the underlying
exports and charge and effect the reversal of the subvention only for
such period of delay insofar as export credit that financed the First Lot
is concerned.
Second Lot:
57. We also hold that the application of the domestic lending rate
along with penal interest can only come into effect, if exports do not
materialise at all within 450 days. Mr. Sridharan would submit that the
phrase “not materialized at all” should mean that so long as exports
Page 48 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
indeed materialise, whenever they do, the special rates applicable to
export credit, further reduced by the subvention must flow to the
Borrower for the first 450 days. We are unable to agree for the very
same reason that we hold in favour of the Borrower in relation to the
First Lot. We have already explained above that the term “at all” has to
necessarily bear reference to the maximum period of export credit under
the Master Circular. Any other reading would entail waiting, arguably
for eternity, to see if the exports actually materialise. Such a reading too
would make a mockery of the finely-balanced regulatory framework
implemented in the Master Circular.
58. In this context, we are in total agreement with Mr. Shenoy’s
submission that money being fungible, a wait for exports to materialise
until eternity would lead to abuse of the Master Circular. In our
opinion, such a reading would lead to the Master Circular enabling long-
term debt capital to exporters at special rates coupled with subvention,
which is not at all the policy objective evident from the two instruments
in question. Such an interpretation too would undermine the objective
of the Master Circular and further the mischief sought to be curtailed,
instead of furthering the objective and suppressing the mischief.
Page 49 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
59. It is common ground that the exports under the Second Lot
had not materialized within the maximum period stipulated under the
Master Circular. In fact, the Borrower wrote to HDFC Bank on
February 14, 2022 stating that the Borrower was unable to export for
reasons outside its control and consequently wanted to close the
outstanding loans by making payment in Rupees. On February 24,
2022, the Borrower actually listed the fixed deposits that constituted
cash collateral to be liquidated and marked off against the export credit.
This action is adequate to deal with the Second Lot – if the export credit
itself had been foreclosed, it evidences that even within the stipulated
period, the Borrower had no hope of exports materialising.
60. It is another matter that the Borrower hedged its stance by
stating that it would eventually provide export documents as and when
they materialise, and that the subvention ought to be kept available to
the Borrower. That would not further the case of the Borrower since
even such a request is untenable for the reason that although the 450-
day period had not expired in relation to any of the export orders in the
Second Lot when the export credit was foreclosed, even thereafter, the
exports did not materialise at all within the 450-day period. With no
subsisting credit continuing after February 24, 2022, and no export
Page 50 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
having materialised within the 450-day period, there is no occasion to
monitor and keep examining if the exports actually materialised at an
even later date. We are conscious that these exports indeed
materialised eventually. However, that is of no consequence for
interpreting the Master Circular, which has picked a specific period
(360 days, extended to 450 days) as the maximum period for which
“export credit” assistance is to be provided. We have already explained
above that if the exports are not effected within the stipulated period,
there would be no question of the export credit and the subvention
being available.
61. Here again, we must point out that the objective and spirit of
the Master Circular provides adequate guidance to resolve the
controversy. The Master Circular as interpreted in letter and spirit
would leave no manner of doubt that if exports do not materialize at all
(in our opinion, within the 450-day period), the credit extended to the
exporters must be treated as not constituting export credit.
62. We note that HDFC Bank has stoutly defended and justified
the charging of the same rate of interest as its sovereign commercial
prerogative, taking into account the track record and creditworthiness
Page 51 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
of the Borrower. In view of this stance taken by HDFC Bank and since
HDFC Bank has not at all taken any step to charge a different rate, we
refrain from commenting upon or adjudicating what the domestic
lending rate ought to be. Such an issue is not the subject matter of this
Petition. All that HDFC Bank has done is to reverse the subvention in
connection with the export credit underlying the Second Lot. Such
reversal was wholly justified since the exports did not materialize at all
within 450 days of disbursing the credit. In any case, the Borrower itself
effected a foreclosure of the export credit when it realized that it would
not be able to demonstrate that the exports materialised, and such
foreclosure in respect of the entire export credit was effected before the
expiry of the maximum permissible period.
63. Consequently, the special rate applicable to export credit, and
the benefits flowing from the Subvention Scheme would not be available
to the Borrower in relation to the Second Lot. In any case, HDFC Bank
had cash collateral in the form of the fixed deposits for the entire
amount, and on the instructions of the Borrower, the cash collateral was
to be liquidated and the loan was to be closed out. Any effect of the
subvention becoming inapplicable would indeed need to be charged to
the Borrower. It was the subvention reversal on the First Lot that led to
a mismatch of figures between the two parties. Consequently, we are of
Page 52 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
the opinion that just as the subvention ought to be made available to the
Borrower in relation to the First Lot, HDFC Bank was justified in
reversing the subvention amount applicable to the exports underlying
the Second Lot. We are unable to agree with Mr. Sridharan, who
moulded his argument to submit that as and when the export eventually
took place, at least the subvention for the first 450 days ought to be
available.
Principle for Drawing a Line:
64. Before parting with the matter, we must mention that in the
course of the hearing, we had requested the counsel for the parties to
address us on where one should draw the line on the period of delay –
both in terms of delay in submitting the export documents and in terms
of delay in effecting the exports. To deal with the issue, Mr. Sridharan
would draw reference to a judgment of the Supreme Court in Collector
of Central Excise, New Delhi Vs. Ballarpur Industries Ltd. 13 to state that
it is neither necessary nor wise to enunciate principles of any general
validity that should cover all cases. According to him, the Court must
examine the facts of each case before it and rather than drawing a line of
demarcation, the Court should decide which side of a border-line, the
13
(1989) 4 SCC 566
Page 53 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
case before the court would fall in. The following extracts in the
judgment are noteworthy :
19. We are afraid, in the infinite variety of ways in which these
problems present themselves it is neither necessary nor wise to
enunciate principles of any general validity intended to cover all
cases. The matter must rest upon the facts of each case. Though in
many cases it might be difficult to draw a line of demarcation, it is
easy to discern on which side of the borderline a particular case falls.
20. Shri Ganguly’s insistence, however, serves to recall the pertinent
observations of an eminent author on the point. It was said :
“A common form of argument used by counsel in legal
cases is to suggest that if the court decides in favour of
the opposing counsel’s arguments, it will become
necessary to draw lines which may be very difficult or
impossible to draw. “Where will you draw the line?” is,
of course, a question which must be faced by a legislator
who is actually proposing to lay down lines for all future
cases, but it is not a question which needs in general to
be faced by common law courts who proceed in slow
stages, moving from case to case…”
The learned Author recalls Lord Lindley’s “robust answer” to the
question — Where will you draw the line?
“Nothing is more common in life than to be unable to
draw the line between two things. Who can draw the line
between plants and animals? And yet, who has any
difficulty in saying that an oak-tree is a plant and not an
animal?”
Again, Lord Coleridge in Mayor of Southport v. Morriss said:
“The Attorney General has asked where we are to draw
the line. The answer is that it is not necessary to draw it at
Page 54 of 65
January 3, 2025
Shraddha/Ashwini::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.docany precise point. It is enough for us to say that the
present case is on the right side of any reasonable line that
could be drawn.”
[Emphasis Supplied]
65. The principles enunciated above are emphatic. In their
application to the matter at hand, we find that they are useful to affirm
our analysis. The Master Circular itself draws a line for the maximum
tenure of the export credit (360 days, extended to 450 days). The
controversy is only about whether the export documents should be
submitted within 450 days and whether the exports should materialize
within 450 days.
66. We have articulated above that in our view, considering the
objective of the Master Circular, the core requirement is for exports to
have materialised within 450 days and the export documents evidencing
the same ought to be submitted. If the export documents, even if
submitted later, demonstrate that the exports indeed took place within
450 days, the fact that they were filed a few days late would not be fatal.
One would be compelled to hold that the First Lot reasonably falls on
the right side of the line. However, where not only have the exports not
taken place at all within 450 days, but also the exporter himself has
Page 55 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
foreclosed the export credit within the 450-day period stating that it is
unlikely to be completed within the period, we have no hesitation in
holding that Second Lot does not reasonably fall on the right side of the
line.
Other Case Law Cited:
67. Mr. Doctor would rely on a Five-Judge Bench judgment of
the Supreme Court in Commissioner of Customs (Import), Mumbai v.
Dilip Kumar and Company and Others 14 (Dilip Kumar) to submit that if
there is an ambiguity in a tax exemption provision then the
interpretation must lie in favour of the Revenue, which is the direct
opposite of the rule of interpretation for charging provisions, where
ambiguity in the provision must be interpreted in favour of the
Assessee. However, the Supreme Court has hastened to explicitly clarify,
in Dilip Kumar, that even when interpreting exemption provisions, the
Court has to distinguish between conditions that require strict
compliance to avail of the exemption, and those that require substantial
compliance to avail of the said exemption. The Supreme Court was clear
that it did not intend to lay down any absolute proposition of law
obviating the need to look to the substance of the provision to discern
14
(2018) 9 SCC 1
Page 56 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
whether it warranted substantial compliance or strict compliance. In
the Court’s words:-
“64. In Hari Chand case [CCE v.Hari Chand Shri Gopal, (2011) 1
SCC 236], as already discussed, the question was whether a person
claiming exemption is required to comply with the procedure strictly
to avail the benefit. The question posed and decided was indeed
different. The said decision, which we have already discussed supra,
however, indicates that while construing an exemption notification, the
Court has to distinguish the conditions which require strict
compliance, the non-compliance of which would render the assessee
ineligible to claim exemption and those which require substantial
compliance to be entitled for exemption. We are pointing out this
aspect to dispel any doubt about the legal position as explored in this
decision.
65. As already concluded in paras 53 to 55 and 63, above, we may
reiterate that we are only concerned in this case with a situation
where there is ambiguity in an exemption notification or exemption
clause, in which event the benefit of such ambiguity cannot be
extended to the subject/assessee by applying the principle that an
obscure and/or ambiguity or doubtful fiscal statute must receive a
construction favouring the assessee. Both the situations are different
and while considering an exemption notification, the distinction
cannot be ignored.”
[Emphasis Supplied]
68. That apart, while there can be no scope for ambiguity on the
declaration of the law by a Five-Judge Bench in Dilip Kumar, it ought to
be noted that it is a judgement on interpretation of a fiscal statute. The
Master Circular, far from being tax statute, is in fact an instrument of
banking regulation aimed at providing the benefit of competitive short-
Page 57 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
term working capital towards the welfare of exporters. The principles of
interpretation of a fiscal statute are of no assistance to the interpretation
of economic policy legislation or welfare legislation. We do note that
Mr. Doctor’s reliance on a judgement dealing with a tax statute is driven
by the fact that the Subvention Scheme partakes the characters of a
subsidy, which is typically seen as a fiscal measure. However, what falls
for interpretation in the instant case is not the Subvention Scheme so
much as the interpretation of the Master Circular. By interpreting the
Master Circular in the manner it has, HDFC Bank has sought to hold
that the credit advanced to the Borrower got disqualified from being
“export credit”. Based on such disqualification, HDFC Bank would
extrapolate such interpretation into determining the implications under
the Subvention Scheme, to reverse the subvention provided. However,
there is no ambiguity that emerges from the Subvention Scheme that
requires adjudication in this Petition. What falls for interpretation is the
Master Circular, which its own authors have mandated must be
interpreted and implemented in letter and spirit.
69. If anything, Clause 2(A)(iii) of the RBI Circular on
Subvention makes it clear that the subvention benefit would only be
available from the date of disbursement until the date of repayment, or
Page 58 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
the date beyond which the export credit become overdue. The necessary
implication of the aforesaid provision in the RBI Circular on Subvention
is that the benefit under the Subvention Scheme would be available for
the life of the export credit. The maximum life of export credit is
stipulated in the Master Circular. Consequently, it is upon the export
credit becoming overdue that the subvention would become unavailable.
Therefore, in our opinion, even if we were to treat the Subvention
Scheme as an instrument of fiscal law, Dilip Kumar does not undermine
our opinion expressed in this judgement. Dilip Kumar requires us to
necessarily distinguish conditions that require strict compliance, and
conditions of which substantial compliance would suffice. We have
done so and held that exports materialising within 450 days requires
strict compliance unless other forms of liquidating export credit are
adopted (such as discounting of the export bills to convert into post-
shipment credit). We have also held the submission of export
documents in 450 days requires substantial compliance – the
submission is meant to demonstrate the substance that exports
materialising has been strictly complied with.
70. Mr. Doctor would also rely on the decision of the Supreme
Court in Government of Kerala and Another v. Mother Superior
Page 59 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
Adoration Convent15, where Dilip Kumar was cited and relied on. In this
judgement, the Supreme Court indeed held that Dilip Kumar did not
result in a literal formalistic interpretation being applied, without
regard to the facts of the case. The following extracts are noteworthy:-
25. A recent five-Judge Bench judgment was cited by Shri Gupta in
Commr. of Customs v. Dilip Kumar & Co.. The five-Judge Bench was
set up as a three-Judge Bench in Sun Export Corpn. v. Collector of
Customs was doubted, as the said judgment ruled that an ambiguity in
a tax exemption provision must be interpreted so as to favour the
assessee claiming the benefit of such exemption. This Court after
dealing with a number of judgments relating to exemption provisions
in tax statutes, ultimately concluded as follows : (Dilip Kumar & Co.
case, SCC p. 37, para 66)
“66. To sum up, we answer the reference holding as under:
66.1. Exemption notification should be interpreted strictly; the
burden of proving applicability would be on the assessee to show that
his case comes within the parameters of the exemption clause or
exemption notification.
66.2. When there is ambiguity in exemption notification which
is subject to strict interpretation, the benefit of such ambiguity cannot
be claimed by the subject/assessee and it must be interpreted in favour
of the Revenue.
66.3. The ratio in Sun Export case is not correct and all the
decisions which took similar view as in Sun Export case stand
overruled.”
26. It may be noticed that the five-Judge Bench judgment did not refer
to the line of authority which made a distinction between exemption
provisions generally and exemption provisions which have a
beneficial purpose. We cannot agree with Shri Gupta’s contention that
sub silentio the line of judgments qua beneficial exemptions has been
done away with by this five-Judge Bench. It is well settled that a
decision is only an authority for what it decides and not what may15
(2021) 5 SCC 602
Page 60 of 65
January 3, 2025
Shraddha/Ashwini::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doclogically follow from it (see Quinn v. Leathem as followed in State of
Orissa v. Sudhansu Sekhar Misra, SCR at pp. 162-63 : AIR at pp. 651-
52, para 13).
27. This being the case, it is obvious that the beneficial purpose of the
exemption contained in Section 3(1)(b) must be given full effect to, the
line of authority being applicable to the facts of these cases being the
line of authority which deals with beneficial exemptions as opposed to
exemptions generally in tax statutes. This being the case, a literal
formalistic interpretation of the statute at hand is to be eschewed. We
must first ask ourselves what is the object sought to be achieved by the
provision, and construe the statute in accord with such object. And on
the assumption that if any ambiguity arises in such construction, such
ambiguity must be in favour of that which is exempted. Consequently,
for the reasons given by us, we agree with the conclusions reached by
the impugned judgments of the Division Bench and the Full Bench.
[Emphasis Supplied]
71. Mr. Shenoy too cited a number of judgements, but again, all
of them deal with interpretation of fiscal statutes. To avoid prolixity, for
the very reasons articulated above, we are not burdening this judgement
any further with a judgement-wise differentiation of each of such
judgements on fiscal statutes. Suffice it to say, in our opinion, neither is
the Master Circular a fiscal statute making the application of the
principles of interpreting fiscal statutes relevant, nor do any of these
judgements turn the needle on the true import of the Master Circular,
which we have articulated above.
Page 61 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
Summary of Conclusions and Directions:
72. In the result, the Writ Petition is disposed of with the
following conclusions and directions:
a) The Master Circular is required to be read purposively, and is
to be implemented in letter and spirit, in a manner that does
not undermine its very objective and reason for introduction.
It must not be read in a narrow, technical and literal sense and
that too with one of its many provisions being read in a
manner that undermines its objective;
b) The maximum tenure of pre-shipment credit under the Master
Circular is 360 days (extended to 450 days during the Covid-19
pandemic) and exports have to materialise within such period;
c) If exports materialise within such period and export
documents demonstrate that the exports have materialised,
the credit advanced to the exporter would indeed not be
disqualified for being treated as “export credit”, merely on the
ground that the export documents that prove the timely
materialisation of exports were submitted late;
d) The period of delay in submission of export documents would
not be fatal to the treatment of the advances as “export credit”
– what is vital is that the export documents ought to prove that
exports took place within the stipulated period;
Page 62 of 65
January 3, 2025
Shraddha/Ashwini::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
e) The credit enjoyed after the maximum permissible period of
export credit i.e. during the period of the delay in submitting
the export documents, would attract interest at the normal
interest rate along with penal interest in terms of the bank’s
policy (published pursuant to the Master Circular);
f) If exports did not materialise within the stipulated period (360
days, extended to 450 days), for purposes of the Master
Circular, it would be treated as exports not materialising at all.
In such event, the very purpose of providing short-term
working capital to finance successful exports would be
undermined if the credit extended were to be treated as export
credit despite exports not having materialised. Therefore, the
credit advanced ought not to be treated as “export credit”. In
our opinion, any other reading of the position would enable
contrivances and devices that convert the short-term working
capital available under the Master Circular into a long-term or
even perpetual supply of cheap credit, abusing the Master
Circular;
g) Consequently, subvention would be available to the Borrower
in respect of the finance provided in relation to the First Lot;
h) Subvention would not be available to the Borrower in respect
of the finance provided in relation to the Second Lot;
i) HDFC Bank shall rectify the reversal of the subvention
pertaining to the First Lot within a period of four weeks from
Page 63 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
the date this judgement is uploaded on this Court’s official
website;
j) Consequently, the RBI and the Ministry of Commerce and
Industry shall reimburse HDFC Bank with the funds that
correspond to the subvention reversal in relation to the First
Lot having been corrected as above;
k) HDFC Bank shall within a period of four weeks from today,
provide to the Borrower, a detailed statement of account and
the computation of the manner in which it has worked out the
dues owed and owing between them, in accordance with the
declaration of the law in this judgement;
l) There shall be no change to the reversal of subvention in
relation to the advances made in connection with the Second
Lot.
73. Rule is made absolute in the aforesaid terms and the Writ
Petition is also disposed of in terms thereof. However there shall be no
order as to costs.
74. In view of the disposal of the Writ Petition, nothing would
survive in any interim applications connected to this Writ Petition and
the same shall also be treated as finally disposed of.
Page 64 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::
F-J- WPL-8980-2024.doc
75. This order will be digitally signed by the Private Secretary/
Personal Assistant of this Court. All concerned will act on production by
fax or email of a digitally signed copy of this order.
[SOMASEKHAR SUNDARESAN, J.] [B.P. COLABAWALLA]
76. After the judgment was pronounced, the Learned Advocates
appearing on behalf of the Reserve Bank of India as well as Union of India,
both requested for a stay of the operation of this judgment. Considering that
we have directed HDFC Bank to rectify the reversal of the subvention within a
period of four weeks from the date of this judgment being uploaded on this
Court’s official website, any party aggrieved by this order has sufficient time to
challenge the same. Hence, there is no question of granting any stay to the
operation of judgment and order passed today.
[SOMASEKHAR SUNDARESAN, J.] [B.P. COLABAWALLA]
Page 65 of 65
January 3, 2025
Shraddha/Ashwini
::: Uploaded on – 03/01/2025 ::: Downloaded on – 04/01/2025 10:18:47 :::