Case Note & Summary
The appeal arose from a judgment of the Madhya Pradesh High Court upholding Clause 2(iii) of the Revised Guidelines on Merchanting Trade Transactions (MTT) dated 23 January 2020 issued by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act, 1999 (FEMA). The appellant, Akshay N Patel, managing director of a firm dealing in pharmaceuticals and PPE products, obtained an MTT contract to act as an intermediary between a Chinese supplier and a US buyer for PPE products. However, his bank informed him on 4 May 2020 that RBI denied permission under Clause 2(iii), which prohibits MTTs for goods whose import/export is banned under India's Foreign Trade Policy (FTP). At that time, the export of PPE products was banned by the Ministry of Commerce and DGFT through notifications dated 8 February, 25 February, and 19 March 2020 due to the COVID-19 pandemic. The appellant filed a writ petition under Article 226 before the Madhya Pradesh High Court, arguing that Clause 2(iii) violates his fundamental rights under Articles 14, 19(1)(g), and 21 of the Constitution. The High Court dismissed the petition, holding that the provision is general in nature and that the prohibition on MTTs follows from the FTP ban. The appellant appealed to the Supreme Court. The Supreme Court framed the issue as whether Clause 2(iii) is unconstitutional. The appellant argued that the provision is manifestly arbitrary and disproportionate because MTTs do not involve physical entry or exit of goods from India, and thus do not affect domestic PPE stocks. He suggested less intrusive alternatives, such as delinking MTT prohibition from FTP or allowing exemptions. The RBI and the Union of India argued that MTTs affect foreign exchange reserves and that facilitating trade in banned goods undermines the national interest during the pandemic. The Supreme Court applied a proportionality analysis, examining legitimacy, suitability, necessity, and balancing. It held that the measure has a legitimate aim of preserving domestic PPE stocks during the pandemic. The measure is suitable as it directly addresses the risk of diverting PPE products away from India. It is necessary because no less intrusive alternative exists; delinking MTT prohibition from FTP would create regulatory gaps. The balance tilts in favor of the State's interest in public health over the appellant's right to carry on MTT business. The court also noted that corporations cannot claim Article 19(1)(g) rights, but the appellant as an individual citizen could. The court dismissed the appeal, upholding the constitutionality of Clause 2(iii).
Headnote
A) Constitutional Law - Right to Freedom of Trade and Commerce - Article 19(1)(g) - Reasonable Restriction - Clause 2(iii) of the 2020 MTT Guidelines prohibits MTTs in goods banned for import/export under FTP - The court held that the restriction is reasonable under Article 19(6) as it serves the legitimate aim of preserving domestic PPE stocks during the COVID-19 pandemic and is not manifestly arbitrary (Paras 10-30). B) Constitutional Law - Article 14 - Manifest Arbitrariness - The court held that Clause 2(iii) is not manifestly arbitrary as it is a general provision linked to FTP, and the RBI has no jurisdiction to exempt products; the provision is rationally connected to the objective of regulating foreign exchange and trade (Paras 15-20). C) Constitutional Law - Article 21 - Right to Life and Livelihood - The court held that the appellant's right to livelihood under Article 21 is not infringed as the restriction is reasonable and in public interest during the pandemic (Paras 25-30). D) Constitutional Law - Proportionality - Legitimate Aim - The court applied the proportionality test and found that the measure has a legitimate aim of ensuring adequate domestic supply of PPE products during the pandemic (Paras 12-14). E) Constitutional Law - Proportionality - Suitability - The court held that the measure is suitable as it directly addresses the risk of diverting PPE products away from India in the global market (Paras 15-17). F) Constitutional Law - Proportionality - Necessity - The court held that the measure is necessary as there is no less intrusive alternative; delinking MTT prohibition from FTP would undermine the regulatory framework (Paras 18-22). G) Constitutional Law - Proportionality - Balancing - The court held that the balance tilts in favor of the State's interest in public health during the pandemic over the appellant's right to carry on MTT business (Paras 23-30).
Issue of Consideration
Whether Clause 2(iii) of the 2020 MTT Guidelines, which prohibits merchanting trade transactions in goods whose import/export is banned under India's Foreign Trade Policy, violates Articles 14, 19(1)(g), and 21 of the Constitution.
Final Decision
The Supreme Court dismissed the appeal, upholding the constitutionality of Clause 2(iii) of the 2020 MTT Guidelines. The court held that the restriction is reasonable under Article 19(6) and not manifestly arbitrary. The appeal was dismissed with no order as to costs.
Law Points
- Proportionality analysis
- Reasonable restriction under Article 19(6)
- Manifest arbitrariness
- Deference to economic policy
- Fundamental rights of corporations
