Holding

Clause (b) of Section 12(2) applies only to the actual amount payable by the foreign buyer, i.e., the agreed price, and not to any inflated amount shown in the exporter’s invoice.

Summary

The Enforcement Directorate imposed a Rs. 3 lakh penalty on two exporters for over‑invoicing export values to obtain import licences under an export promotion scheme. The exporters pleaded guilty and challenged the penalty before the High Court, which held that Section 12(2)(b) of the Foreign Exchange Regulation Act, 1947, is triggered only when the foreign buyer is obliged to pay the amount shown in the invoice and fails to do so. The High Court therefore quashed the penalty, reasoning that the inflated invoice amounts were not the "full amount payable" by the foreign buyer. On appeal, the Supreme Court examined the meaning of "full amount payable by the foreign buyer" and held that it refers solely to the price actually agreed and payable, not any fictitious or inflated figure. Consequently, the exporters’ over‑invoicing did not constitute a contravention of Section 12(2)(b), and the Director's appeal was dismissed, leaving the penalty in force.

Issues considered

Whether over‑invoicing of export values to obtain import licences amounts to a contravention of clause (b) of sub‑section (2) of Section 12 of the Foreign Exchange Regulation Act, 1947.
Whether the expression "full amount payable by the foreign buyer" includes inflated invoice amounts or is limited to the price actually agreed and payable by the foreign buyer.

Legislation cited

Foreign Exchange Regulation Act, 1947s. 12(1), s. 12(2)(b), s. 19(2)

Subjects

Foreign Exchange Regulation ActSection 12Export over‑invoicingImport licencePenaltyExport promotion schemeContravention

Judgment

1092

DIRECTOR, ENFORCEMENT DIRECTORATE,
MINISTRY OF FINANCE AND ANOTHER
V. I
K. 0. KRISHNASWAMY
October 26, 1979
B
[N. L. UNTWALIA, P. N. SHINGHAL AND A D. KosHAL, JJ.]

Foreign Exchange Regulation Act, 1947.,...-Section 12(2)(b)-Scope of-
Exporter over invoicing for the purpose of obtaining import licence-If violt>
five of section· 12(2)(1>).
c An exporter exporting goods outside India is required to furnish a declara-
tion under section 12(1) of the Foreign Exchange Regull>tion Act, 1947 affim1..
ing that the full export value of the goods had been or would be paid in the
prescribed manner. Sub-section (2) of this .section provides that no person
entitled to sell the said goods shall do so or refrain from doing anything which
bas the el!ect of securing that .... (b) "payment for the goods is made other·
wise than in the. prescribed manner or does not represent the /nil amount
D payable by the foreign buyer in respect of the goods.'"

An J-i.xport Promotion Scheme for textile goods and handicrafts promulga-
ted by the Government of India envisaged the 'issuance of import licences to
the exporters solely on the basis of the decl~rcd value of the exported goods.
On receiving the impo~t licences the exporters were able to sell them at a
profit ranging from 200 to 300 per cent of their face value. This encouraged
the exporters to prepare invoices showing the value far above the market or
contractual price for obtaining import licences for the inflated amounts.

Against the invoice value of Rs. 21.97 lakhs, one of the appellants received
only Rs. 1.01 Jakhs, while against the invoice yalue of Rs. 17.06 lakhs in the
F case of goods exported by the other appellant the amount repatriated was
Rs. 38,000 odd. Both the appellants pleaded guilty to the charge levelled
against them.

Finding them guilty under section 12(2) of the Foreign Exchange Regula-
tion Act, the Director imposed a penalty of Rs. 3 lakhs on each of them.

G
In a petition under Article 226 of the Constitution the High Court q~hed
the order on the view that there would be contravention of section 12(2)'{ll) J

only \Vhen the foreign buyer was under an obligation to pay a certain sum o~
money and there was non-payment of that amount or part thereof in conse-
quence of son1ething done by the exporter and that if the contractual value
of the goods had been realised by the exporter, he could not be held guilty
H· of any contravention merely by reason of fact that he had shown an inflated
price in the invoice and thus received undeserved benefit in· the form of import
licence.
DJRECTOR ENFORCEMENT V. K. 0. k'RISHNASWAMY (Koshal, J.)J093

Dismissing the appeal, A
HELD : The expression "full amount payable by the foreign. buyer in
respect of the goods" occurring in clause· (b) \vould ·mean n1crcly the total
amount which is due froni the. fereign buyer in respect of the goods actually
exported, and 'Nhat would be due from a foreign buyer has to be merely the
price which he has agreed to pay and not any fanciful, un-real or inflated
price which the exporter may choose to. falsely incorporate in the invoice with B
aJJY ulterior n1otives. The foreign buyer cannot be held to be liable to pay
any amount O\'er and above the price which he has promised to pay for the
{l;oods receiYed by him and any .difference between that price and the price
given in the invoice can, therefore, not have the attribute of having become
payable by hi1n. If the price agreed upon had been paid to the exporter, clause
(b) does not come into operation. [1096F-G]
c
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2595 and
2596 of 1969. ·
From the Judgment and Order dated 4-6-1969 of the Mysore High
Court in Writ Petition Nos. 441 and 443/66.
M. K. Banerjee, Additional Sol. Gen], R. B. Datar and Girish D
Chnndra for the Appellants:
Shyama/a Pappu, Vincet Kumar and A. K. Srivastava for the
Respondents.
The Judgment of the Court was delivered by
E
KosHAL, J. By this Judgment we shall dispose of Civil Appeals
Nos. 2595 and 2596 of 1969 in each one· of which the Director,
Enforcement Directorate, Ministry of Finance, Department of Revenue,
Government of India (hereinafter referred to as the 'Director') cnal-
Jenges an order of the Mysore High Couru dated the 4th of June, 1969,
allowing two petitions preferred by the respondents for the issuance of F
writs under article 226 of the Constitution of India.
2. The facts giving rise to the two appeals may be briefly stated.
The Government of India promulgated an Export Promotion Scncme
under which exporters of textile goods and handicrafts were issued
li\'('iices for import of raw materials on the basis of their export G
performance. The Scheme envisaged the issuance of import licences
solely on the basis of the declared value of the exported goods. Since
exporters were able to earn a handsome profit (ranging in some c:ises
between 200 and 300 per cent of the face value) by sale of such
import licences, the Schem~ brought into existenclli a mushroom growth
of textile exporters and parties acting benami on behalf of establiSbed H
exporters. Most of the exporters had abroad their own branches or
representatives who acted as consignees of the good$ exported froni
1094 SUPREME COURT REPORTS [1980] 1 S.C.R..

A, India~ 'fl1e easy-profit motive led numerous exporters to prepare in-
voices showing the value of exported goods far above the market or
contractual price thereof in order to obtain in1port licences for th..e ~~
inflated amounts. Getting scent of the practice the Enforcement Direc-
torate carried out a surprise search of the premises of one of the·
leading textile exporters of Madras State in March, 1965. The
I: documents seized as a result thereof and the statement of the exporter
confirmed the information earlier received by the Directorate. In·
consequence notices were issued to almost all the textile and handi-
crafts exporters in the State of Madras calling upon them to explain.
the reasons for not realising the entire amount sljown in the invctices
C submitted by them as th<:l price of the goods exporled to various parties
cutside India. Two of such exporters were M/~. K. O. Krishn:iswamy
(the respondent in Civil Appeal No. 2595 of 1969) and M/~ .. Nagaraja
Overseas Trade.rs (respondent in Civil Appeal No. 2596 of 1969)
and the proceedings held against them under section 19(2) oj' the
Foreign Exchange Regulation Act, 1947, (hereinafter referred to
D as the 'Act') by the Director revealed that in between them they
had exported 53 consignments of textile goods and handicrafts to
Singapore and other places as per details given below

Name Value of export No.of Amount Amount
as shown in ship- repatriated outstanding
E the GR. 1. fonns ments

!. M/s.K.O. 21,97,04, ·62 31 1,01,165 ·70 20,95,880 ·92
Krisbnliswami
2. M/s, Nagaraja 17,06,159 ·00 22 38,510 ·25 16,67,648 ·7S
Overseas Traders
F
The Director arrived at the finding :
"From the above statement, it will be clear that, as re-
gards the first two firms, the total sum shown as outstand-
ing (which is non-existent) and hence non-repatriable, due
to deliberate over-invoicing, is Rs 37,63,529.67''.
G
He added that in their confessional statements dated the 7th of April,
1965 (made in reply to the show cause notices served on them) an1Hn
their pleas at the hearing, the two firms had pleaded guilty to "the
charges framed against them". Finding both of them guilty under sec-
. tion 12(2) of the Act, the Director, by his order dated the 27th May,
B 1965, imposed on each of them a penalty of Rs. 3 lakhs and it was
that order which each of the two convicted firms challenged as illegal
in a petition under article 226 of the Constitution of India.
DIRECTOR ENFORCEMENT V. K. 0. KRISHNASWAMY (Koshal, l.)J 095

The Division Bench of the lligh Court accepted the two petitions
through the impugned order holding that on the facts as found by the
Director, no offence under sub-section (2) of section 12 of the Act
was made out. The relevant portion of that section is reproduced
below:

"12(1) The Central' Government may, by notification 8
in the Official Gazette, prohibit the taking or sending out
by land, sea or air (hereinafter in this .section referred to as
export) of all goods or of any goods or class of goods speci-
fied in the notificatiqn from India directly or indirectly to
any place so specified ·unless the exporter furnishes to the
prescribed authority a. declaration in the prescribed form sup- c '
ported by such evidence as may be prescribed or so speci-
fied and true in all material particulars which, among others.
shall include the amount representing-
(i) the full export value of the goods; or
(ii) if the full export value of the goods is not ascertain-
. able at the time of export the value which the ex-
porter, having regard to the prevailing market condi-
tions, expects to receive on the sale of the goods in
the course of international trade;
E
and affirms in the said declaration that the full export value
of the goods (whether ascertainable at the time of export or
not) has been, or will within the prescribed period be, paid
in the prescribed manner.

(2) Where any export of goods has been made to which y
a notification under sub-section ( 1) applies, no person en-
titled to sell, or procure the sale of, the said goods shall,
except with the permission of the Reserve Bank, do or re-
frain from doing anything or take or refrain from taking
any action which has the effect of securing that-
G
(a) the sale of the goods is delayed to au extent which
is unreasonable having regard to the oroinary course
,of trade, or

(b) payment for the goods is made otherwise than in the
prescribed manner or does not represent the full 'H
amount payable by the foreign buyer in respect of the
goods, subject to such deductions, if any, as may be
SUPREMI) COURT REPORTS [1980] 1 S.C.R.

J
A allowed by the Reserve Bank, or is delayed to such
"' extent as aforesaid :
Provided that no proceedings in respect of any contra-
vention of this sub-section shall be instituted unless the
prescribed period has expired and payment for the goods

• representing the full amount as aforesaid has not been made
in the prescribed manner."
.

The argument raised on behalf of the Director befoce the High
Court was that the two firms, by "over-invoicing". thei price of the goods
exported had been guilty of taking action whic\l had the effect of secur-
ing that payment for the expo1ted goods did not represent the fuJl.
\
c amount payable by the foreign buyer in respect thereof and that there-
fore they had contravened clause (b) of sub-section (2) of section 12
of the Act. The argument was repelled by the Bigh Court after a
full discussion of the findings arrived at by the Di;ector in his order
dated the 27th of May, 1965, and all the ingredients of sub-section (2)
D of section 12. It was of the opinion that the said clause (b) would
be contravened only when the foreign buyer was under an obligation
to pay a certain sum of money and there wa8 iion-pilyment of that
sum or a part thereof in consequence of something done by the! exporter
and that if the contractual value of the good~ had1 been realized by the
exporter he could not be held guilty of any such contravention meEely
by reason of the fact that he had shown an inflated price in the invoice
and thus received undeserved benefits in the form of an import licence
for the invoiced amount. The High Court, therefore, while accepting
both the petitions, quashed the order of the Director dated the 27th
May, 1965.
3. The argument advanced on behalf of the Director before 'the
High Court has been .reiterated before us, and we are clearly of the
opinion, after hearing learned counsel for both the parties, that the
interpretation placed upon sub-section (2) of section 12 by the High'
Court is unexceptionable. The expression "the full amount payable
by the foreign buyer in respect of the goods" occurring in clause (b)
G would mean,merely the total amount which is due from the f.areign
buyer in respect of the goods actually exported; and what would be
due from a foreign buyer has to be merely the price which he has -~
agreed to pay and not any fanciful, unreal or inflated price which the
exporter may choose to falsely incorporate in the invoice with any ulte-
rior motives. The foreign buyer cannot, by any stretch of imagi-
H nation, be held to be liable to pay any amount over and above the
price which he has prom!sed to pay for the goods received by him anti
any difference between that price and the' price given in the invoice can
DIRECTOR ENFORCEMENT v. K. 0. KRISHNASWAMY (Koshal, J.) 1097

therefore not have the attribute of having become 'payable' by him. A
And if that be so and the price actually agreed upon has. been paid
to the exporter, clause (b) does not come into operation in the case
of the latter.
4. Sub-section ( 1) of section 12 no doubt makes it imperative for
the exporter to specify in his declaration the full (and true) export B
value of the goods but then a breach of this mandate is not covered by
the contraventions embraced by sub-section (2). It may be that the
false declarations made by the respondent-fii:ms in the invoices sub-
mitted by them in respect of the goods exported make them liable under
some provision (other than section 12(2) of the Act) of th« penal law
of the country, but that is an aspect of the case wit]J which we are not C
!!ere concerned.
5. In the result" the appeals fail and are dismissed but with_ no
order as to costs. '

D
P.B.R. Appeals dismissetf.

..