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PETITIONER:

BURN STANDARD COMPANY LIMITED

Vs.

RESPONDENT:

McDERMOTT INTERNATIONAL INC. AND ANOTHER

DATE OF JUDGMENT03/04/1991

BENCH:

AHMADI, A.M. (J)

BENCH:

AHMADI, A.M. (J)

RAMASWAMI, V. (J) II

FATHIMA BEEVI, M. (J)

CITATION:

1991 AIR 1191 1991 SCR (2) 67

1991 SCC (2) 669 JT 1991 (2) 95

1991 SCALE (1)587

ACT:

Foreign Exchange Regulation Act 1973 / Foreign Exchange

Manual 1978-Section 28(1) Paragraphs 24A.11(1) and 25A.2-

Indian Company-Technical Collaboration agreement with

foreign corporation-General or special permission of RBI-

Colloboration approved by Secretariat for Industrial

Approvals-Agreement taken on record by Government-Whether

separtate permission of RBI necessary-Decision taken by RBI,

but approval not communicated-Whether failure to discharge

ministerial duty obliterates conscious decision taken-Non-

filing of FNC5 form for grant of permission-Whether erases

decision already taken.

Arbitration Act, 1940; Sections 14,17,30 and 33-Foreign

collaboration agreement-RBI's approval-Whether arbitration

clause rendered void by virtue of agreement itself being

void ab initio for want of RBI permission under Section

28(1) of Foreign Exchange Regulation Act,1973.

Administrative Law: Administrative action-Whether

decision becomes binding.

HEADNOTE:

The appellant, a Government company, entered into a

Technical collaboration agreement with the respondent, a

foreign corporation, under which the respondent was to

provide technical know-how to the appellant, and the

appellant was to pay the respondent fee in foreign currency

in three installments. The appellant was required to apply

for registration and/or Governmental approval and furnish

satisfactory evidence of receipt of such approval. The

effective date of the agreement was the date on which the

notification was received by the respondent that all

governmental approvals in that regard had been secured. The

agreement was entered into with the approval of the

Secretariat for Industrial Approvals. The agreement as well

as the supplementary agreement, incorporating certain

changes suggested by the Government, were filed with the

Government, which took the same on record, by its letter of

approval, A copy of the letter of approval and also the

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collaboration agreement was sent to the RBI.

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After obtaining the necessary order under Section

195(2) of the Income Tax Act from the Income Tax Officer and

the permit from the RBI, the appellant remitted the first

installment of fee to the respondent. Thereafter, the

respondent, alleging non-payment of subsequent installments,

and consequent breach of terms of contract, sought to invoke

clause 8.2 of the agreement for terminating the agreement.

The appellant questioned respondent's right to invoke clause

8.2. Thereafter the respondent invoked the arbitration

clause, clause 12.1 of the agreement, for referring disputes

and difference to the arbitration of International Chamber

of Commerce and claimed certain amount for the services

actually rendered and also informed the ICC accordingly.

The appellant challenged the legality and validity of the

agreement as void ab initio, and also clause 12.1 as non-est

and legally unforceable, and filed an application under

Section 33 of the Arbitration Act, contending that the

agreement being a contingent one, commencing from the

effective date, and necessary approval having not been

secured, the agreement had not commenced and, consequently

the arbitration clause, being part of the very same

agreement, the respondent was not entitled to invoke the

said clause, and that in the absence of a valid permission

from the RBI under Section 28(1) (b) of the Foreign Exchange

Regulation Act, 1973, the agreement was clearly void by the

thrust of Section 28(2) of the Act.

The respondent contended that the necessary Government

approvals were obtained and hence the `effective date' was

reached and that under the Exchange Control Manual only the

Indian Company could apply to SIA for approval and once such

approval was accorded, the foreign collaborator to the

contract was not expected to secure the RBI permission under

Section 28(1) (b), since under the manual, SIA approval was

to be deemed to be RBI's permission also; and therefore, the

agreement was legal and valid and the respondent was

entitled to seek its enforcement.

The High Court held that on a true interpretation of

the contract, it must be held to be voidable at the

discretion of either party, that even if the contract was

terminated or rendered void, the arbitration clause therein

did not perish ipso facto, that the application to the

Income Tax Officer for making payment of first installment

could not have been made unless the necessary approvals were

obtained, that the RBI had granted permission to remit the

installment money (fee), after the Income Tax Officer had

made the order under Section 195(2) of the

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Income Tax Act, and it was only on account of this payment,

that the respondent furnished the technology and provided

technical services, and that, on account of appellant's

failure to pay subsequent installments, a dispute had

clearly arisen which had to be resolved through arbitration.

In the appeal before this Court it was contended on

behalf of the appellant company that paragraph 25A.2 of the

Exchange Control Manual, 1978, provided that applications

for permission under Section 28(1)(b) should be made in FNC5

and since no such application in FNC5 was made, a clear

inference could be raised that the RBI had not granted

permission under Section 28(1), and accordingly the

agreement and the arbitration clause forming part of it were

void ab initio by the thrust of Section 28(2), and that the

prescribed form for SIA approval under paragraph 24A.11 was

not the same as FNC5 prescribed under paragraph 25A.2 and

administrative direction in paragraph 24A.11 that no

separate permission under Section 28(1) was necessary could

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not override the statutory requirement of the Section.

It was contended on behalf of the respondent that

requirements of Section 28(1) were fully complied with and

the RBI's sanction, being essentially administrative, it was

enough to show that the RBI had granted permission, no

matter whether it had followed the procedure of paragraph

24A.11(i) or 25A.2 of the Exchange Control Manual.

Dismissing the appeal, this Court,

HELD: 1.1 Section 28(1) of the Foreign Exchange

Regulation Act, 1973 places restrictions on appointment of

certain individuals and companies as technical or management

advisers in India unless the RBI approves the same by a

general or special permission. The section is silent on the

mode and manner of securing such permission. However, sub-

section (4) of Section 73 provides that where any provision

of the Act requires the RBI's permission for doing anything

under such provision, the RBI may specify the form in which

an application for such permission shall be made. On a

plain reading of paragraph 24A.11 Exchange Control Manual,

1978., it becomes clear that the intention is to introduce

the single counter or window procedure to avoid duplication

and hardship to the foreign collaborators, and once the

collaboration is approved by SIA, and the agreement is

`taken on record' there is no need to obtain a separate

permission from the RBI. Paragraph 9 of the Guidelines for

Industries stipulates that after the agreement is taken on

record, a copy thereof has to be sent to the RBI to enable

it to

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authorise remittances to the foreign collaborator.

[82E,84C,85A]

1.2 In the instant case, the appellant had sought the

SIA approval, which was granted subject to the terms and

conditions set out in the letter of approval. It was only

thereafter that the agreement was executed. The appellant

then sent a copy of the agreement to the Government of India

which was duly examined in the light of the terms and

conditions on which the approval was granted by the SIA and

certain discrepancies were communicated to the appellant

which necessitated the execution of supplementary agreement.

It was only thereafter that the appellant was informed that

the collaboration agreement and the supplementary agreement

`have been taken on record. This was then forwarded to the

RBI. The matter was processed by the RBI and the remittance

of the first instalment of the fees took place after the

income-tax was duly recovered at source. [85A-D]

1.3 The affidavits filed on behalf of the RBI leave no

doubt that the remittance was permitted only after the RBI

was satisfied that all the terms and conditions were duly

satisfied, though the RBI's approval `remained to be

communicated' to the appellant company. Failure to discharge

the ministerial duty cannot obliterate the conscious

decision taken by the RBI after application of mind. [85E,G]

1.4 The RBI had applied its mind to the question of

grant of permission and had only thereafter permitted

remittance of the first instalment of the fees payable to

the foreign collaborator. Merely because application for

such permission was not made in FNC5 form cannot cloud the

fact that the decision to grant the permission was actually

taken, but the ministerial function of communicating the

same remained to be done by oversight. This lapse cannot

erase the decision already taken. [86H,87A]

2.1 The prescription of the form is merely to aid the

RBI to process the application for permission. Emphasis must

be laid on substance and not on mere form. If there has

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been substantial compliance mere lapse on the part of the

RBI in failing to communicate its decision should make no

difference. Paragraph 25A.2 is not in derogation of

paragraph 24.A.11(i) nor does it dilute the requirement of

Section 28(1). Factum of permission, and not the procedure

followed, is relevant. [86G]

2.2 The RBI had granted the permission contemplated by

Section 28(1) and hence the agreement cannot be voided by

virtue of Section 28(2) of FERA. Once the decision to grant

the permission is taken,

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whether through the course charted by paragraph 24A.11(i) or

25A.2, that decision stands unless rescinded and the

authorities are bound to act in aid thereof.[87B-C]

3. In the circumstances it is unnecessary to examine

the question whether clause 12.1 of the agreement would

stand or perish if the agreement is rendered void under

Section 28(2) for failure to secure permission under Section

28(1).[87D]

M/s. Dhanrajmal Gobindram v. M/s. Shamji Kalidas &

Co., [1961] 3 SCR 1020; LIC of India v. Escorts Ltd. & Ors.,

[1986] 1 SCC 264 at 318 and Shri Sitaram Sugar Co. Ltd. &

Anr. v. U.P. State Sugar Corporation Ltd. & Anr., [1990]3

SCC 222 at page 246-247, referred to,

JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No.1423 of

1991.

From the Judgement and Order dated 6.12.1989 of

Calcutta High Court in Case No.5696 of 1988.

Soli J. Sorabjee, Deepanker Ghosh, R.M. Chatterjee,

A.K. Ghose, S. Mandal and Ms. Madhukhatri for the Appellant.

Dipankar Gupta, O.P. Khaitan, A.K. Bhatnagar, Ms. Kiran

Choudhary and Ms. B. Gupta for the Respondents.

H.N. Salve and H.S. Parihar for the Reserve Bank of

India.

The Judgement of the Court was delivered by

AHMADI,J. Special leave granted.

The principal question which this Court is called upon

to answer in this appeal by special leave is whether the

arbitration clause contained in Article XII (Paragraph 12.1)

of the Technical Collaboration Agreement entered into at

Dubai, United Arab Emirates, on September 25, 1984, between

the appellant Burn Standard Company Ltd., a Government of

India Undertaking, and the respondent Mcdermott

International, Inc., a foreign company, is rendered void by

virtue of the agreement itself being ab-initio void for want

of general or special permission of the Reserve Bank of

India (RBI) under

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Section 28 of The Foreign Exchange Regulation Act. 1973

(FERA). The relevant part of the said provision reads as

under :

"28(1)-Without prejudice to the provisions of

Section 47 and notwithstanding any contained in

any other provisions of this Act or the Companies

Act, 1956, a person resident outside India

(whether a citizen of India or not) or a person

who is not a citizen of India but is resident in

India, or a company (other than a banking company)

which is not incorporated under any law in force

in India or in which the non-resident interest is

more than forty percent or any branch of such

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company, shall not, except with the general or

special permission of the Reserve Bank,-

(a) act, or accept appointment, as agent in India

or any person or company, in the trading or

commercial transactions of such person or company;

or

(b) act, or accept appointment, as technical or

management adviser in India or any person or

company; or

(c) permit any trade mark, which he or it is

entitled to use, to be used by any person or

company for any direct or indirect consideration.

(2) Where any such person or company (including

its branch) as it referred to in sub-section (1)

acts or accepts appointment as such agent, or

technical management adviser, or permits the use

of any such trade mark, without the permission of

the Reserve Bank, such acting, appointment or

permission, as the case may be, shall be void.

The petitioner is a Government Company incorporated under

the Companies Act, 1956, having its registered office at

10C, Hungerford Street, Calcutta, whereas the respondent is

a Corporation organized and existing under the laws of the

Republic of Panama with its executive office at P.O. Box

61961, 1010 Common Street, Near Orleans, Louisiana 701610,

U.S.A., with a branch office at P.O. Box 3098, Dubai, UAE.

On 25th September,1984 the said parties entered into an

agreement, styled "Technical Collaboration Agreement", for

the fabrication of off-shore platform structure, including

but not limited to Jackets, Piles, Decks, Modules, Platform

& pipeline components, including their sub-components, for

the oil and gas industry which

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required the high degree of expertise and experience as well

as the technical know-how possessed by the respondent. The

duration of the agreement was fixed under Article VIII to be

five years from the effective date or five years after

commencement of commercial production, whichever is greater,

or until otherwise terminated earlier under the Agreement.

The expression `effective date' as defined in Article 1

means the date of which notification is received by the

repondent that all Governmental approvals relating to the

agreement have been secured; provided that if such approvals

are not secured within 180 days from the signing of the

agreement, the agreement, upon notice pursuant to Article

XVII of the agreement by either party may be made

ineffective whereupon the agreement shall be treated as null

and void. Obviously the purpose of the agreement was to

establish the basis whereunder the respondent was to provide

and the appellant was to receive technology and special

technical services related to the establishment and

operation of Fabrication Yard for fabricating off-shore

platform structures and additional special technical

services for any contracts related to marine construction

activities that are awarded to the appellant. Article X of

the agreement enjoins upon the appellant to apply for

necessary registration and/or governmental approval of the

agreement in India within 60 days after the agreement is

signed by both parties and is delivered to the appellant. A

duty is cast on the appellant to furnish satisfactory

evidence to receipt of the required governmental approval.

The next important clause in the contract which needs to be

noticed at this stage is Article XII which reads as under:

"Article XII-Arbitration

12.1 Any claim, dispute or controversy arising out

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of or relating to this Agreement, or the breach

thereof, shall be finally settled by arbitration,

pursuant to and in accordance with the Rules of

Conciliation and Arbitration of the International

Chamber of Commerce by three(3) arbitrators

appointed in accordance with said Rules. Judgement

upon the award rendered by the Arbitrators may be

entered in any court having jurisdiction thereof.

The situs of Arbitration shall be New Delhi, India

or an alternate location if the parties shall

mutually agree and the arbitration proceedings

shall be conducted in the English language."

Under Article XII the validity, construction and performance

of the agreement was to be governed by the Indian laws.

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The aforesaid agreement was entered into after it was

approved by the Secretariat for Industrial Approvals (SIA)

by their letter dated 18th June, 1984. After the execution

of the agreement it was filed with the Government of India

on 5th October, 1984. By the letter dated 15th December,

1984 of the Ministry of Industry, Department of Heavy

Industry, New Delhi, addressed to the appellant it was

pointed out that clauses 3.2. and 4.2 of the agreement were

not consistent with the terms and conditions of

collaboration approved by Secretariat letter dated 18th

June, 1984. in that, clause 3.2 should contain a clause that

any additional payment made for specific Technical Services

would be subject to prior approval of Government of India

and in clause 4.2 the payment expressed in U.S. Dollars

298,200 should be 298,500 and the figure of the 3rd

instalment should be 99,450 instead of 99,400 U.S. dollars.

To carry out these changes, the parties entered into a

supplementary agreement on 29th December, 1984 and filed it

with the Government of India on 9th January, 1985.

Under Article IV of the agreement, in consideration of

the respondent having agreed to transfer technology to the

appellant, the latter undertook to pay a lump sum of

$298,200 in three installments, the first payment of U.S. $

99,400 within thirty (30) days of the signing of the

agreement or receipt of approval from the Government of

India, whichever is later; the second payment of U.S. $

99,400 upon completion of items 1 to 10 of clause 3.4 of

Article III and the third payment of U.S. $ 99,400 upon the

commencement of commercial production of the Fabrication

Yard or four years after the effective date, whichever is

earlier. As stated earlier the figure `298,200' was

replaced by the figure `298,250' and the amount of the third

instalment was raised from U.S.$99,400 to U.S.$99,450 under

the supplementary agreement dated 9th January, 1985. After

this suuplementary agreement was filed with the Govt., of

India, the latter took the collaboration agreement on record

under the communication dated 15th January,1985. A copy of

the Govt. of India's letter along with a copy of the

collaboration agreement was received by the RBI on 21st

January, 1985. In para 7 of its affidavit dated 18th

September, 1990, the RBI has clarified as under:

"However, the Bank's letter of authorization

indicating the terms and conditions to be

fulfilled for remittances falling due under

collaboration agreement remained to be issued to

the petitioner company. Hence the Bank's approval

under Section 28(1) (b) of the Act for rendering

technical etc. services under the collaboration

agreement also re-

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mained to be communicated to the petitioner

company. Later, when the petitioner company

applied for remittance of the first instalment

under the collaboration agreement, the Bank being

satisfied that the remittance was strictly in

accordance with the terms and conditions approved

by the Government, allowed the same."

On 5th February, 1985, the appellant made an application to

the income tax authorities for determination of income tax

deduction for the payment of the first instalment of fees.

The order passed under Section 195(2) of the Income-Tax Act

determining the tax at 40% of the consideration proceeds on

the premise that the agreement was approved by the

Government of India. Soon thereafter the appellant applied

on 14th February,1985 to the United Bank of India for

remitting the first instalment of fees minus 40% chargeable

as income tax. The United Bank of India intimated the rate

of exchange on the very next date. The Income-tax Officer

issued the `No-objection certificate' on 19th February,

1985 whereupon the RBI issued the permit dated 6th March,

1985 for remittance of U.S. $ 59,640 ($ 99,640-40%=$59,640).

By the appellant's letter dated 18h March, 1985 the

appellant enclosed a draft for the said amount to the

respondent.

After the payment in respect of the first instalment

was thus made, the respondent wrote a letter dated 16th

September, 1986 invoking clause 8.2 of the agreement. That

clause reads thus :

" In the event of any breach of this Agreement not

cured within sixty (60) days after notification

thereof, in addition to all other rights and

remedies which either party may have in law or

equity, the party not in default may at its option

terminate this Agreement by written notice. Such

termination shall become effective on the date set

forth in such notice of termination, but in no

event shall it be earlier than sixty (60) days

from the mailing thereof. Any waiver of the right

of termination for default shall not constitute a

waiver of the right to claim damages for such

default or the right to terminate for any

subsequent breach."

By the said letter the respondent laments lack of payment of

installments due from the appellant and consequential breach

of the terms of the contract. The respondent then puts the

appellant to notice as per clause 8.2 reproduced above of

its right to terminate the agreement if

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the appellant fails to cure the breach within 60 days of the

receipt of the communication. The appellant by its reply

dated 12th December, 1986 questioned the respondent's right

to invoke clause 8.2 of the agreement since in its view

there was no breach of agreement and called upon the

respondent to discharge its obligations under clause 3.4 of

the agreement and receipt payment of the second instalment

thereafter. On receipt of this reply, the respondent by

their Advocate's letter date 27th September, 1988 invoked

the arbitration clause extracted earlier for referring the

disputes and differences to the arbitration of International

Chamber of Commerce. At the same time the respondent

claimed that it was entitled to recover U.S. $ 621,777,09

with 15% per annum interest from the appellant for services

actually rendered. On the same day the respondent wrote to

the International Chamber of Commerce informing it of its

decision to invoke the arbitration agreement. The appellant

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responded by its letter dated 11th October, 1988 stating

that the collaboration agreement dated 25th September, 1984

was void ab-initio and not binding on the parties thereto

and therefore, clause 12.1 of Article XII of the agreement

was non-est and legally unenforceable. On the other hand

the appellant blamed the respondent for breach of contract,

in that, there was failure to comply with clause 3.4 of the

agreement, and stated that no disputes or differences of the

type which could be referred to arbitration had arisen

between the parties. Thus by challenging the legality and

validity of the agreement and branding it void ab-initio the

appellant also challenged the arbitration clause as

similarly void. This was followed by the appellant filing

an application under Section 33 of the Arbitration Act inter

alia contending (i) that the agreement in question being a

contingent one which was to commence from the `effective

date' and since the necessary approvals had not been

secured, the agreement had not commenced and as the

arbitration clause was a part of the very same agreement it

too had not commenced and hence the respondent was not

entitled to invoke the said clause and (ii) since under the

agreement the respondent was appointed as Technical or

Management Adviser in India within the meaning of Section

28(1) (b) of FERA, in the absence of a valid permission from

the RBI, the agreement was clear void by the thrust of

Section 28(2) of the said enactment. The respondent

countered these contentions (i) by pointing out that the

necessary Government approvals were obtained and hence the

`effective date' was reached and (ii) under the Exchange

Control Manual (1978 Edition) only the Indian company could

apply to SIA for approval and once such approval was

accorded as in the present case, the foreign collaborator to

the contract was not expected to secure the RBI permission

under Section 28(1) (b) since under the

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manual SIA approval was to be deemed to the RBI's permission

also. It was, therefore, contended that the agreement was

legal and valid and the respondent was entitled to seek its

enforcement. The arbitration clause being a part of the

agreement, it was imperative on the part of the respondent

to follow that course in the event of a dispute or

difference arising between the parties concerning any matter

covered by the agreement.

The High Court on a proper construction of clause 8.1

of the agreement held that the principal duties and

obligations incorporated in clauses 1.3 and 1.4 commence

after governmental approvals are obtained. The obligation to

secure necessary registration and governmental approvals is

cast by virtue of clause 10.1 on the appellant. Obviously

the said clause comes into operation immediately on the

execution of the agreement since clause 1.2 clearly

contemplates that if governmental approvals are not obtained

within 180 days, the parties will be entitled to put an end

to the agreement. It is thus manifest from the terms of the

agreement that some of its provisions come into effect on

the execution of the agreement and remain in force for 180

days till the contract is terminated by either party. But

if the parties choose to continue the contract even beyond

the period of 180 days notwithstanding the right to

terminate the same, there is nothing in the agreement

prohibiting the same and, therefore, on a true

interpretation of the contract it must be held to be

voidable at the discretion of either party. The High Court

further held on a reading of Sections 39 and 56 of the

Contract Act that even if the contract is terminated or

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rendered void the arbitration clause therein does not perish

ipso facto for even in contingent contracts there exists a

distinction between principle obligation and subsidiary

obligations. After referring to the case law in detail, the

High Court observed:

In my opinion the arbitration clause in the

instant case is wide enough to include "any claim,

dispute or controversy arising out of or relating

to this agreement" so as to mean any dispute as to

the interpretation itself including the validity

thereof. Therefore, if there is any dispute

relating to the interpretation of Article 8.1 of

the agreement the same can also be decided by the

arbitrator."

Pointing out that an agreement of arbitration, though a

contract, is different in its nature from the main contract

of which it may form a part, the High Court held that the

breach of the obligation and liabilities arising under the

main contract may bring about termination

78

of the main contract but not of the arbitration agreement.

Indeed, the arbitration agreement would be invoked only when

disputes arise under the main contract including a

repudiation of the main contract by any of the parties and

in that sense the arbitration agreement is remedial while

the main contract is substantive. The High Court,

therefore, held that in law the jurisdiction of the

arbitrator under the arbitration clause would cover the

decision as to voidability of the main contract also. The

High Court then concluded as under:

"It is apparent from the sequence of events

appearing from the list of dates already noted

hereinbefore that the petitioner really made an

application to the secretariat for Industrial

Approvals, Department of Industrial Development

and a letter of approval was issued. Thereafter

the agreement dated September 25, 1984 was

executed. The Government pointed out certain

deficiencies as a result of which the

supplementary agreement dated September 28, 1984

was executed. The said documents were all filed

with the Govt. and thereafter the Government took

the agreement on record and nothing was really

required to be done by the repondent. In fact the

paragraph 11 at Chapter III of Guidelines for

industries of the Government of India provide for

such a procedure for taking the agreement on

record after the approval is given for Foreign

Collaboration."

After quoting paragraph 11 of the said guidelines the High

Court referred to the appellant's application to the Income-

tax Officer for payment of the first instalment under clause

4.1 of the agreement and concluded that such an application

could not have been made unless the necessary approvals were

obtained. After the Income-tax Officer made the order, the

RBI granted permission to remit the instalment money (fee)

on 6th March, 1985. It was only on account of this payment

that the repondent furnished the technology and provided the

technical services to the appellant in pursuance of Article

III of the contract. The High Court dismissed the

application holding that on the appellant's failure to pay

the subsequent installments, a dispute had clearly arisen

between the parties which had to be resolved through

arbitration.

Mr. Soli Sorabjee, learned counsel for the appellant,

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placed the appellant's case thus: Under Section 73(4) of

FERA, where permission of RBI is required under any

provision of the said statute for doing anything thereunder,

the RBI has to specify the form in which

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the application for such permission must be made. Paragraph

25A.2 of the Exchange Control Manual, 1978 (Manual) refers

to permission to be obtained under Section 28(1) (b) and

provides that applications for such permission should be

made in form FNC5. Indisputably the respondent had made no

such application in the prescribed form seeking RBI

permission and, therefore , the question of grant of such

permission by the RBI did not arise. The respondent having

failed to secure the RBI permission as required by Section

28(1) rendered the agreement void by the thrust of Section

28(2). Besides breach of Section 28(1) is made punishable

under Section 50 of FERA. That being so, the agreement is

ab-initio void and as the arbitration clause is a part of

the said agreement, it too must fall along with the

agreement. The SIA approval is not synonymous with grant of

permission under Section 28(1) is since the two operate in

different fields and it is, therefore erroneous to think

that such approval satisfies the requirement of Section

28(1) . Paragraph 24A.11 of the Manual is not referable to

permission under Section 28(1) and must be read harmoniously

with the statutory provisions, for if it runs counter to the

said provisions, it would have to be ignored for the obvious

reason that it cannot override the requirement of law being

merely in the nature of administrative instructions. Nor can

the letter of 15th January, 1985 be read to convey the grant

of permission under Section 28(1). So also the permit issued

by the RBI dated 6th March, 1985 for remittance of the

first instalment payable under Clause 4.1 of the agreement

is referable to the exemption contemplated by Section 9 and

has no relevance whatsoever to the permission envisaged by

Section 28(1) of FERA. Thus the permission contemplated

under Section 28(1) is an express permission and it would be

an entire wasteful exercise to find out from the

correspondence and documents placed on record if a

permission can be culled out or be deemed to have been

granted. In the absence of a permission, Section 28(2)

declares the agreement or contract to be void and,

therefore, the said agreement or any part thereof cannot be

enforced in a court of law. The High Court was, therefore,

clearly wrong in the view it took in upholding the

respondent's effort to invoke the arbitration clause.

Mr. D.P. Gupta, learned counsel for the respondent

countered: The RBI has published the Manual to detail the

procedure for entering into such Technical Collaboration

Agreements; paragraph 24A.11 lays down the procedure for

securing the RBI permission contemplated by Section 28(1)

and where the situation does not stand covered thereunder

the application has to be made under paragraph 25A.2 of the

said manual which lays down a different procedure and

prescribes the

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FNC5 form. In other words, if the case is governed under

paragraph 24A.11 when it is unnecessary to resort to

paragraph 25A.2 which prescribes the FNC5 form. The

Government policy for dealing with such foreign

collaboration agreements is generally set out in the

industrial policy document entitled `Guidelines for

Industries', Chapter IV whereof sets out a procedure

identical to the one contained in the manual. The appellant

had made an application under paragraph 24A.11 to SIA for

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approval of the technical collaboration arrangement with the

respondent which was granted on 18th June, 1984 subject to

certain terms and conditions. Certain discrepancies were

pointed out by the Government of India and on the appellant

having drawn the respondent's attention thereto by the

letter of 21st September, 1984 a supplementary agreement was

immediately executed and filed with the Government of India

on 9th January, 1985. It was thereafter the that

Government of India informed the appellant that the

agreement was `taken on record', an expression which has

special significance as explained in paragraph 9 of Part I

of Guidelines for Industries. Copies of the letter of 15th

January, 1985 were forwarded to RBI authorities as well. It

was only thereafter that the appellant applied for

determination of the Income-tax amount under Section 195(2)

of Income-Tax Act which determination was made by an order

dated 11th February, 1985. The appellant then applied for

permission to remit the first instalment of fees and on

receipt thereof enclosed a draft for U.S. $ 59,640 ( after

deducting 40% income tax) under letter dated 18th March,

1985 addressed to the respondent. It was only when the

subsequent payment was not forthcoming that the respondent

gave notice under clause 8.2 of the agreement and thereafter

sought to resort to arbitration. Thus the requirements of

Section 28(1) were fully complied with.

Mr.Salve, the learned counsel for the RBI, placed on

record an additional affidavit dated 24th January, 1991

sworn by Shivaji D. Kadam, Deputy Controller, Exchange

Control Department of the RBI explaining what steps the bank

had taken after it received the Government of India's letter

of approval together with a copy of the collaboration

agreement dated 21st January, 1985. Since the said letter

was only a covering letter taken on record the said

agreement, the bank had by its letter dated 7th February,

1985 sought copies of the earlier letters from the

Government as they were of vital importance because without

those letters it was not possible for the RBI to proceed

under paragraph 24A.11 of the manual. Thereafter on 14th

February, 1985 the appellant reminded the RBI to forward its

approval to enable payment of the fees to the respondent.

Again on

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20th February, 1985 1985 the appellant approached the RBI

for sanction to remit the fees and enclosed therewith the

Government of india letters dated 18th June, 1984 and 4th

August, 1984 along with an application in A-2 form. The

Government of india also forwarded copies of the said two

letters by a covering letter dated 1st March, 1985 which was

delivered to the RBI on 4th March, 1985. On the same day a

note was put up to the Staff Officer, Grade A, who observed:

``In view of the Government letter having now been

received, we may allow the remittance of U.S.$

59.640 being the 1st instalment of technical know-

how fees.''

The Exchange Control Officer then said :

``We may allow the remittance of U.S.$ 59.640

being 1st instalment of know-how fees''.

This final note of the Exchange Control Officer was

countersigned by the Assistant Controller on 6th March, 1985

The deponent fairly clarifies that ``as per the RBI

practice, the permission under para 24A.11, that is, grant

of sanction under Section 28(1)(b) as well as permission

under section 9 for allowing remittances are generally

authorised by the Assistant Collector.'' It becomes clear

from this statement that the permission under Section 28(1)

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and the exemption under Section 9 are generally granted by

one and the same officer.

In the backdrop of the said facts we may now proceed to

consider the main submission placed before us by counsel for

the appellant, namely, the agreement is rendered void ab-

initio for want of permission under Section 28(1) of FERA.

It is only if we accept the contention that in fact the RBI

had not granted any permission under Section 28(1) that the

question of the agreement having been rendered void by the

thrust of Section 28(2) would arise. And the question of

survival of the arbitration clause contained in the

Agreement notwithstanding the agreement having been rendered

void by Section 28(2), would arise thereafter.

On a plain reading of Section 28(1) it is clear that it

opens with the words ``without prejudice to the provisions

of Section 47'', which in turn says that ``no person shall

enter into any contract or agreement which would directly or

indirectly evade or avoid in any way the operation of any

provisions of the Act or of any rule, direction or order

made thereunder.'' Contravention of any provision of the Act

(other

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than Section 13, 18(1)(a) and 19(1)(a) or of any rules

directions or order made thereunder, is made penal by

Section 50. Secondly, the said Section 28(1) places an

embargo on a resident outside India or a person who is

resident in india but is not a citizen of India or a company

(other than a banking company) which is not incorporated

under any law in force in India or in which the non-resident

interest is more than 40% or any branch of such company to

(a) act or accept appointment, as agent in india or any

person or company, in the trading or commercial transactions

of such person or company; or (b) act or accept appointment,

as a technical or management adviser in India of any person

or company except with the general or special permission of

the Reserve Bank. Admittedly there existed no general

permission and, therefore, special permission must be shown

to prove satisfaction of the requirement of the said

provision. Under Sub-section (2) where any person mentioned

in sub-section (1) acts or accepts appointment as such agent

or technical/management adviser without the permission of

the RBI, such acting or appointment shall be void.

Therefore, let us first focus our attention on the question

whether or not the RBI's permission was obtained in regard

to the collaboration agreement in question ?

Section 28(1) places restrictions on the appointment of

certain individuals and companies as technical or management

adviser in India unless the RBI approves the same by a

general or special permission. The section is silent on the

mode and manner of securing such permission. However, sub-

section (4) of Section 73 provides that where any provision

of the Act requires the RBI's permission for doing anything

under such provision, the RBI may specify the form in which

an application for such permission shall be made. In this

connection it is essential that we notice paragraphs 24A.11

and 25A.2 at this stage. These two paragraphs read as under

:

``24A.11. Persons, firms and companies wishing to

establish new industrial units or expand/diversify

existing units with foreign technical collaboration

should apply on prescribed form to the Secretariat

for Industrial Approvals (SIA), Department of

Industrial Development, Government of India, New

Delhi, for approval. In case where proposal for

collaboration is approved by Government, Government

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will issue its letter of approval to the applicant

indicating the terms. The applicant may thereafter

execute the collaboration agreement with the

collaborators strictly in accordance with the

approved terms and furnish requisite

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number of copies of the agreement to Government.

Government will take the agreement on record if it

is in conformity with the approved terms and advise

the applicant accordingly under intimation to

Reserve Bank. Reserve Bank will thereafter issue

its formal authorization under Foreign Exchange

Regulation Act, 1973, to the applicant. Although

the rendering of technical advisory services by

foreign collaborators under foreign collaboration

agreements approved by government attracts Section

28(1)(b) of Foreign Exchange Regulation Act, 1973,

it will not be necessary for the foreign

collaborators to seek Reserve Bank permission under

the Section separately. Accordingly, while granting

approval for foreign collaboration, Reserve Bank

will confirm that the approval will also be deemed

to be the Bank's permission to the foreign

collaborators under this section for rendering

technical services to the Indian company concerned

under the collaboration agreement. Permission given

under this Section is, however, without prejudice

to the decision that the Bank may take on the

foreign company's application, if any under section

28(1)(c) of the Act for use by the Indian company

of foreign trade mark(s) involving direct or

indirect consideration.''

``25A.2. Under Section 28(1)(b) of Foreign

Exchange Regulation Act, 1973, it is obligatory

for foreign companies to obtain permission of

Reserve Bank for acting or accepting appointment,

as technical or management adviser in India of any

person or company. Reserve Bank's permission is

also necessary under Section 28(3) of the Act in

case where appointments as technical/management

advisers were held by such foreign companies since

prior to the coming into force of the Act i.e. 1st

January, 1974 and are continuing thereafter.

Applications for permission in either case should

be submitted to Reserve Bank in form FNC5. These

provisions are also applicable to foreign

collaborators rendering technical advice to Indian

firms and companies under collaboration agreements

approved by Government of India. While, however,

communication approval for new collaboration

agreements between Indian companies and overseas

collaborators, Reserve Bank will specifically

indicate that the approval also permits the

foreign collaborator to render technical advice to

the

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Indian company and separate approval need not be

sought by the former from Reserve Bank under

Section 28(1)(b) of the Act.''

The appellant's contention that the application for

permission under Section 28(1) ought to have been made in

the prescribed form FNC5 and since admittedly no such

application was made by either party there was no valid

permission approving the contract and hence by virtue of

Section 28(2) the contract was rendered void ab-initio. On a

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plain reading of paragraph 24A.11 it becomes clear that the

intention is to introduce the single counter or window

procedure to avoid duplication and hardship to the foreign

collaborators. Once the collaboration is approved by SIA, as

in the present case, and the agreement is `taken on record'

there is no need to obtain a separate permission from the

RBI. Paragraph 9 of the Guidelines for Industries explains

what is meant by the expression `Taking of Agreements on

Record' and its import thus:

`The approvals given for foreign collaboration are

valid for a period of six months from the date of

issue. In case the terms of collaboration approved

by Government are acceptable to the Indian party,

an intimation in this regard has to be sent by him

to the concerned administrative Ministry. The

Indian party can then execute the collaboration

agreement with the collaborator which should be

strictly in accordance with the terms approved by

the Government. Ten copies of the collaboration

agreement so executed all of which should be

signed by both the collaborating parties are to be

furnished to the administrative Ministry. The

collaboration agreement is scrutinised by the

administrative Ministry and is found to be in

accordance with the terms specifically approved by

Government is taken on record and an intimation is

sent to the party. A copy of the agreement is then

transmitted to the Reserve Bank of India through

the Ministry of Finance (Department of Economic

Affairs) on the basis of which remittances to the

foreign collaborator are authorised by the Reserve

Bank of India. Representations against the terms

and conditions of collaboration approved by the

Government are sent by the SIA to the

administrative Ministry/Department concerned with

the item of manufacture who will continue to deal

with such representations and take appropriate

action.''

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It will be seen from the above that after the agreement is

taken on record a copy thereof has to be sent to the RBI to

enable it to authorise remittances to the foreign

collaborator. In the present case the appellant had sought

the SIA approval which was granted on 18th June, 1984

subject to the terms and conditions set out in the letter of

approval. It was only thereafter that the agreement was

executed on 25th September, 1984. The appellant then sent a

copy of the agreement to the Government of India by the

letter of 5th October, 1984 which was duly examined in the

light of the terms and conditions on which the approval was

granted under the letter of 18th June, 1984 and certain

discrepancies were communicated to the appellant by he

Ministry of Industry, Department of Heavy Industry, which

necessitated the execution of the supplementary agreement of

29th December, 1984. It was only thereafter that the

said department by the letter of 15 January 1985 informed

the appellant that the collaboration agreement and the

supplementary agreement `have been taken on record'. This

was then forwarded to the RBI which the bank received on

21st January, 1985. We have already indicated earlier how

the matter was processed by the RBI before the remittance of

the first instalment of the fees of U.S. $ 59,640 could take

place after the income-tax was duly recovered at source.

Paragraph 7 of the RBI's affidavit dated 18th September,

1990 extracted earlier and the details of the action taken

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by the RBI as disclosed in the further affidavit of 24th

January, 1991 leave no doubt that the remittance was

permitted only after the RBI was satisfied that all the

terms and conditions were duly satisfied. To place the

matter beyond the pale of doubt, the further affidavit field

on behalf of the RBI carries the following statement.

``As per the practice of the RBI, the permission

under para 24A.11, that is, grant of sanction

under Section 28(1)(b) as well as permission under

Section 9 for allowing remittances are generally

authorised by the Assistant Controller.''

This statement places the question regarding the grant of

permission under Section 28(1) beyond doubt. The affidavits

file on behalf of the RBI show that the RBI's approval

`remained to be communicated' to the appellant company.

Failure to discharge the ministerial duty cannot obliterate

the conscious decision taken by the RBI after application of

mind.

But counsel for the appellant stressed that the facts

placed on record clearly reveal that no application for

permission under Section 28(1) was made in the prescribed

FNC5 as contemplated by paragraph

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25A.2 of the manual. It is indeed true that the record does

not disclose making of an application in the said prescribed

form by either party to the agreement. Counsel, therefore,

submitted that once it is found that no application for

permission was ever made in the prescribed form, the

provisions of sub-section (2) and (3) of Section 47 of FERA

cannot save the agreement declared void by the statute

itself. He further submitted that the case was governed by

paragraph 25A.2 and not 24A.11 and hence making of an

application in the prescribed FNC5 form was imperative and

failure to do so raised a clear inference that the RBI had

not granted permission under Section 28(1) since it had

never been approached for such permission. he emphasised

that the prescribed form for SIA `approval' under paragraph

24A.11 is not the same as FNC5 and hence the administrative

direction in the said paragraph that `it will not be

necessary for the foreign collaborators to seek Reserve Bank

permission under this section separately' cannot override

the statutory requirement of Section 28(1). The statutory

duty cast on the RBI by Section 28(1) cannot be abdicated by

the RBI by the deeming clause contained in paragraph

24A.11(i) extracted earlier. To buttress the submission

counsel invited our attention to two cases, viz., (i)M/s.

Dhanrajmal Gobindram v. M/s. Shamji Kalidas & Co., (1961) 3

SCR 1020 and (ii) LIC of India v. Escorts Ltd. & Ors. [1986]

1 SCC 264 at 318 (Para 69) wherein this Court held that

paragraph 24A. I was merely an explanatory statement of

guideline for the benefit of the authorised dealers and was

neither a statutory direction nor a mandatory instruction.

On the other hand counsel for the respondent argued that the

RBI's action in regard to grant of permission under Section

28(1) being essentially administrative=see Shri Sitaram

Sugar Co. Ltd. & Anr. v. U.P.State Sugar Corporation Ltd. &

anr. [1990] 3 SCC 223 at page 246-247 it is enough to show

that the RBI had granted the permission no matter whether it

had followed the procedure of paragraph 24A.11(i) or 25A.2

of the manual. We think there is considerable force in this

contention for the simple reason that we are concerned with

the factum of permission and not the procedure followed by

the RBI for granting the same. The prescription of the form

is merely to aid the RBI to process the application for

permission. Emphasis must be laid on substances and not on

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mere form. If there has been substantial compliance, as in

this case, the mere lapse on the part of the RBI in failing

to communicate its decision should make no difference.

Paragraph 25A.2 is not in derogation of paragraph 24A.11(i)

nor does it dilute th requirement of Section 28(1). In any

case the facts of the present case clearly reveal that the

RBI had applied its mind to the question of grant of

permission and had only thereafter permitted remittance of

the first instalment of the fees payable

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to the foreign collaborator. Merely because application for

such permission was not made in FNC5 form cannot cloud the

fact that the decision to grant the permission was actually

taken but the ministerial function of communicating the same

remained to be done by oversight. This lapse cannot erase

the decision already taken. We are, therefore, of the

opinion that the RBI had granted the permission contemplated

by Section 28(1) and hence the agreement cannot be voided by

virtue of Section 28(2) of FERA. It is not the case of RBi

that it at any time had second thoughts about its action. It

never contemplated withdrawal of the permission at any point

for time thereafter. Once the decision to grant the

permission is taken, whether through the course charted by

paragraph 24A.11(i) or 25A.2, that decision stands unless

rescinded and the authorities are bound to act in aid

thereof.

In the view that we take it is unnecessary to examine

the question whether clause 12.1 of the agreement would

stand or perish if the agreement is rendered void under

Section 28(2) for failure to secure permission under Section

28(1). Since we have come to the conclusion that the RBI

permission was in fact secured under Section 28(1), the

second question recedes in the background. We, therefore,

need not examine the same.

Before we part we are constrained to observe that we

were pained at the attitude of the appellant company

attempting to thwart a valid agreement, part performed by

the payment of the first instalment, on hypertechnical

grounds, an attitude which would scare away collaborators

and tarnish the image and credibility of our entrepreneurs

abroad. We do hope the appellant company will honour its

obligations under the agreement and settle its differences

with the respondent across the table in a business-like

manner rather than litigate.

For the aforesaid reasons we dismiss this appeal with

cost. Cost quantified at Rs.5000.

N.P.V. Appeal dismissed

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