Supreme Court: In a case where an intermediary between the sale of PPE products by a supplier in China to a buyer in the United States, challenged the prohibition of the export of PPE products from India, the bench of Dr. DY Chandrachud*, Vikram Nath and BV Nagarathna, JJ held that as a developing country with a sizeable population, banning MTTs in PPE products was critical in ensuring that Indian foreign exchange reserves are not utilized to facilitate the hoarding of PPE products with wealthier nations.
The Court held that,
“Democratic interests that secure the well-being of the masses cannot be judicially aborted to preserve the unfettered freedom to conduct business, of the few.”
What was under challenge and why?
The appellant is the Managing Director of Anzalp Herbal Products Private Limited, a corporate body which inter alia, engages in Merchanting Trade Transactions (MTTs) that manufactures and trades in pharmaceuticals; herbal and skincare products; and personnel protection equipment products such as masks, gloves, sanitisers, PPE overalls, and ventilators. The appellant obtained an international MTT contract to serve as an intermediary between the sale of PPE products by a supplier in China to a buyer in the United States.
At the relevant time, the export of PPE products had been banned by the Union Ministry of Commerce and Industry and the Directorate General of Foreign Trade, through successive notifications dated 8 February 2020, 25 February 2020 and 19 March 2020, due to the ongoing COVID-19 pandemic. Therefore, MTT contracts concerning PPE products were considered impermissible under Clause 2(iii) of the 2020 MTT Guidelines that stated,
“iii. The MTT shall be undertaken for the goods that are permitted for exports/imports under the prevailing Foreign Trade Policy (FTP) of India as on the date of shipment. All rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry) shall be complied with for the export leg and import leg respectively.”
The appellant challenged the RBI and UOI’s prohibition of MTTs in respect of PPE products infringes his fundamental rights and freedoms under Articles 14, 19(1)(g) and 21 of the Constitution. It was submitted that the precedents of this Court indicate that once the citizen can demonstrate that the restriction directly or proximately interferes with the exercise of their freedom of trade or to carry on a business, it is the State’s burden to demonstrate the reasonableness of the restriction and that it is in the interest of the general public.
Since the Union of India had prohibited the export of PPE products from India, RBI submitted that in accordance with Clause 2(iii) of the 2020 MTT Guidelines, MTT transactions concerning PPE products were also prohibited since they allowed Indian individuals to assist others in diverting PPE products away from India in the global market. Further, it was clarified that Clause 2(iii) was of a general nature, and the RBI had no jurisdiction to exempt products from its application, since only the UOI determined the nation’s FTP.
Since the appellant had assailed the suitability of the measure restricting MTTs in ensuring domestic supplies and for being overbroad in its ambit, since an Indian entity acting as an intermediary in an MTT between two different countries does not impact the availability of PPE products in India, the Court answered four crucial questions that finally led to upholding the validity of the impugned policy decision.
Is the measure in furtherance of a legitimate aim?
“Adequate stocks of PPE products are critical for the healthcare system to combat the COVID-19 pandemic. The State’s aim of ensuring supplies is in furtherance of the right to life under Article 21 and the Directive Principles of State Policy mandating the State’s improvement of public health as a primary duty under Article 47.”
The Court noticed that the appellant had not challenged the legitimacy of the aim of ensuring adequate PPE in India. Also, the RBI, at the time of filing its affidavit on 30 January 2021, had elaborated on the state of the pandemic in the country and the necessity of ensuring adequate stock of PPE products.
It was, hence, found that the executive’s aim to ensure sufficient availability of PPE products, considering the ongoing pandemic, is legitimate. Accordingly, it was held that the impugned measure is enacted in furtherance of a legitimate aim that is of sufficient importance to override a constitutional right of freedom to conduct business.
Is the measure suitable for achieving such an aim?
The Court considered the definition of MTT as defined in the International Monetary Fund in its sixth edition of the Balance of Payments and International Investment Position Manual which states:
“10.41 Merchanting is defined as the purchase of goods by a resident (of the compiling economy) from a nonresident combined with the subsequent resale of the same goods to another nonresident without the goods being present in the compiling economy. Merchanting occurs for transactions involving goods where physical possession of the goods by the owner is unnecessary for the process to occur.”
Hence, it was noticed that while the goods involved in an MTT never enter the territory of the intermediary, they are still recorded as negative and positive exports from the territory of intermediary during the import and export leg of the MTT, which is similar to how ordinary imports and exports would be recorded.
Therefore, MTTs are analogous to traditional imports and exports and hence, it was suitable for the RBI to link the permissibility of MTT in goods to the permissibility of their import/export under the FTP.
Is the measure necessary for achieving the aim?
While MTTs in PPE products may not directly reduce the stock of these products in India, it still does contribute to their trade between two foreign nations. In doing so, it directly reduces the available quantity of PPE products in the international market, which may have been bought by India, if so required. As such, MTTs contribute to reducing the available stock of PPE products in the international market that India could have acquired.
Also, the UOI’s policy to ban the export of PPE products reflects their stance on the product’s non-tradability during the COVID-19 pandemic. It highlights a clear policy choice under which Indian entities shall not be allowed to export these products outside of India, in all probability to the highest buyers across the globe who may end up hoarding the global supply.
Hence, banning MTTs in PPE products was critical in ensuring that Indian foreign exchange reserves are not utilized to facilitate the hoarding of PPE products with wealthier nations. A mere ban on exports would not regulate the utilisation of Indian foreign exchange. Hence, in order to keep India’s policy position consistent across the board, the prohibition of MTTs in respect of PPE products was necessary and the only alternative of ensuring the realisation of legitimate State interest.
Is the measure adequately balanced with the right of the individual?
In the instant case, the RBI has demonstrated a rational nexus in the prohibition of MTTs in respect of PPE products and the public health of Indian citizens. The critical links between FTP and MTTs have been established by the respondents. Facilitating MTTs in PPE products between two distinct nations may prima facie appear as having no bearing on the availability of domestic stocks. However, the RBI has carefully established the connection between the use of Indian foreign exchange reserves, MTTs and the availability of domestic stocks. As a developing country with a sizeable population, RBI’s policy to align MTT permissibility with the FTP restrictions on import and export of PPE products cannot be questioned.
The Court noticed that the right to equality and the freedom to carry on one’s trade cannot inhere a right to evade or avoid regulation. In liberalized economies, regulatory mechanisms represent democratic interests of setting the terms of operation for private economic actors.
“This Court does not espouse shunning of judicial review when actions of regulatory bodies are questioned. Rather, it implores intelligent care in probing the bona fides of such action and nuanced deference to their expertise in formulating regulations. A casual invalidation of regulatory action in the garb of upholding fundamental rights and freedoms, without a careful evaluation of its objective of social and economic control, would harm the general interests of the public.”
The Court, however, clarified that it was not its stance that judicial review is stowed in cold storage until a public health crisis tides over and said,
“This Court retains its role as the constitutional watchdog to protect against State excesses. It continues to exercise its role in determining the proportionality of a State measure, with adequate consideration of the nature and purpose of the extraordinary measures that are implemented to manage the pandemic.”
[Akshay N. Patel v. Reserve Bank of India, 2021 SCC OnLine SC 1180, decided on 06.12.2021]
For Appellant: Advocate Aayush Agarwala
For RBI: Advocate Ramesh Babu M R
For Ministry of Commerce and DGFT: Vikramjit Banerjee, Additional Solicitor General
*Judgment by: Justice DY Chandrachud