AKSHAY N PATEL versus RESERVE BANK OF INDIA & ANR.

[2021] 13 S.C.R.231

AKSHAY N PATEL

RESERVE BANK OF INDIA & ANR.

(Civil Appeal No. 6522 of 2021)

DECEMBER 06, 2021

[DR. DHANANJAYA Y CHANDRACHUD,VIKRAM NATH AND B.V. NAGARATHNA, JJ.]

Constitution of India – Art. 14, 19(1)(g) and 21 – ForeignExchange Management Act, 1999 – ss. 10(4), 11(1) – MerchantingTrade Transactions Guildelines, 2020 – Clause 2(iii) –Proportionality of clause 2(iii) – The appellant is the managingdirector of firm that manufactures and trades in pharmaceuticalsand personnel protection equipment products such as masks, gloves,sanitizers, PPE overalls, and ventilators etc. – Appellant obtainedInternational Merchanting Trade Transaction (MTT) contract toserve as an intermediary between the sale of PPE products by asupplier in China to buyer in the United States – Appellantrequested its bank for required documents to execute the MTTcontract – The bank informed the appellant that RBI had deniedpermission for his MTT contract, on the basis of clause 2(iii) of the2020 MTT Guidelines – At the relevant time, the export of PPEproducts were banned by the Government through variousnotifications due to ongoing COVID-19 pandemic – Therefore, MTTcontracts concerning PPE were considered impermissible – Writpetition by the appellant – Appellant challenged the Constitutionalityof clause 2(iii) of 2020 MTT guidelines – High Court upheld theconstitutionality of clause 2(iii) – On appeal, held: The UOI’s policyto ban the export of PPE products reflects their stance on theproduct’s non-tradability during the COVID-19 pandemic – Ithighlights clear policy choice under which Indian entities shallnot be allowed to export these products outside of India, in allprobability to the highest buyers across the globe who may end uphoarding the global supply – Hence, banning MTTs in PPE productswas critical in ensuring that Indian foreign exchange reserves arenot utilized to facilitate the hoarding of PPE products with wealthiernations – mere ban on exports would not regulate the utilisationof Indian foreign exchange – Hence, in order to keep India’s policy

DEF

Aposition consistent across the board, the prohibition of MTTs inrespect of PPE products was necessary and the only alternative ofensuring the realisation of legitimate State interest – The High Courtwas correct in holding that clause 2(iii) of the 2020 MTT Guidelineswas proportionate measure ensuring the availability of sufficientdomestic stock of PPE products – The measure was validly enacted,Bin pursuance of legitimate state interest and did notdisproportionately impact the fundamental rights of the appellant –Hence, Clause 2(iii) passes muster u/Art.14, 19(1)(g) and 21.

Dismissing the appeal, the Court

CHELD: 1. Various principles have been espoused by thisCourt to bring about balance between the perceived interest ofthe state of social control over the economy, with the rights andfreedoms of individuals. The appellant has cited various decisionsto argue for heightened scrutiny of legislative or administrativeaction which places an absolute prohibition on an individual’s rightDto conduct trade or business. The judicial evolution of four-pronged analysis of proportionality displaces the varyingstandards that were prescribed to determine “reasonableness”under Article 19(6). The qualitative nature of right and thecorresponding scrutiny of its violation cannot be sole functionEof the degree of restriction. Every violation of rights, irrespectiveof the degree of the infraction, must be evaluated through auniform principle that promotes culture of justification. Thedecision of nine-judge Bench of this Court in K S Puttaswamyv. Union of India (“K S Puttaswamy (9J)”) prescribed aproportionality analysis for determining violations of fundamentalFrights under Part III. proportionality analysis can adequatelyconsider the constitutionality of prohibitive measures oncommercial activities. Therefore, this Court will structure thejudgment on an analysis of the proportionality of RBI’s decisionto prohibit MTTs in PPE products, in order to determine itsGconstitutionality. [Para 15][248-G; 249-A-C]

2. This Court will be relying on the justification furnishedby the RBI in determining the proportionality of the impugnedmeasure (Clause 2(iii) of the 2020 MTT Guidelines). This analysiswill be structured along with the following questions: (i) Is theHmeasure in furtherance of legitimate aim?; (ii) Is the measure

suitable for achieving such an aim?; (iii) Is the measure necessaryfor achieving the aim?; and (iv) Is the measure adequatelybalanced with the right of the individual?[Para 28][258-B-D]

Legitimacy

3. This prong of the test entails an evaluation of thelegitimacy of an aim that purportedly violates fundamental right.The measure must be designated for proper purpose, i.e., alegitimate goal. Five of the judges in the nine-judge Benchdecision in K S Puttaswamy (9J) adopted the threshold of a“legitimate state interest” as the first prong for assessingproportionality. This state interest must also be of sufficientimportance to override constitutional right or freedom. In thiscase, the ban on exports, imports and MTTs of PPE products isto ensure the availability of adequate domestic supplies during aglobal health pandemic. Adequate stocks of PPE products arecritical for the healthcare system to combat the COVID-19pandemic. The State’s aim of ensuring supplies is in furtheranceof the right to life under Article 21 and the Directive Principlesof State Policy mandating the State’s improvement of public healthas primary duty under Article The appellant has not challengedthe legitimacy of this aim of ensuring adequate PPE in India. TheRBI, at the time of filing its affidavit on 30 January 2021, hadelaborated on the state of the pandemic in the country and thenecessity of ensuring adequate stock of PPE products. Theexecutive’s aim to ensure sufficient availability of PPE products,considering the ongoing pandemic, is legitimate. Accordingly, thisCourt holds that the impugned measure is enacted in furtheranceof legitimate aim that is of sufficient importance to override aconstitutional right of freedom to conduct business. [Paras29][258-E-H; 259-A]

Suitability

4. The RBI is responsible for issuing guidelines toauthorized persons under FEMA. FEMA was introduced as an“Act to consolidate and amend the law relating to foreignexchange with the objective of facilitating external trade andpayments and for promoting the orderly development andmaintenance of foreign exchange market in India”. Hence, therole of the RBI under FEMA is directed towards ensuring that

AIndia’s foreign exchange market is regulated, with view topreserving India’s foreign exchange reserves. On review ofthe guidelines which have been issued by the RBI in respect ofMTTs since 2000, it is clear that most of them are technical innature and seek to regulate the manner in which India’s foreignreserves are traded. Consequently, the RBI has not made theBpolicy decision to classify products for which MTTs areimpermissible but has opted to rely on the decision made by theUOI under the FTP. Such decision, regarding the products inwhich import or export is prohibited in India, is made by the UOIunder Section 3(2) of the Foreign Trade Act. While exercising itsCpowers under Section 3(2), the UOI issued multiple notificationscommencing from 8 February 2020, which prohibited the exportof all PPE products due to the need to maintain their domesticstock during the COVID-19 pandemic. [Paras 36, 37 and 38][262-E-H; 263-A, D]

D5. The International Monetary Fund in its sixth edition ofthe Balance of Payments and International Investment PositionManual defines MTT. It is clear that while the goods involved inan MTT never enter the territory of the intermediary, they arestill recorded as negative and positive exports from the territoryof intermediary during the import and export leg of the MTT,Ewhich is similar to how ordinary imports and exports would berecorded. [Para 42][265-A, F-G]

6. This conclusion is also supported by the IMF’saccompanying Balance of Payments Compilation Guide. It isevident that the role of an intermediary in MTTs was earlier onlyFconsidered as providing service. However, this has now evolved,where the intermediary is considered to be the owner of the goodsduring their transit from the supplier to the buyer. Hence, goodsunder MTTs are recorded as negative and positive exports fromthe intermediary’s resident country, even when they neverGphysically enter their territory. [Para 43][265-G; 266-E-F]

7. Therefore, the international opinion favours the positiontaken by the respondents that MTTs are analogous to traditionalimports and exports. Therefore, it was suitable for the RBI tolink the permissibility of MTT in goods to the permissibility of

their import/export under the FTP. As noted earlier, the appellanthas not challenged notifications prohibiting the export of PPEproducts under the FTP. Hence, the prohibition of their MTTunder Clause 2(iii) of the 2020 MTT Guidelines is also consideredsuitable. [Para 44][266-F-H]

The necessity of the measure

8. Having considered the nature of MTTs, this Court rejectsthe appellant’s arguments for two reasons. First, while MTTs inPPE products may not directly reduce the stock of these productsin India, it still does contribute to their trade between two foreignnations. In doing so, it directly reduces the available quantity ofPPE products in the international market, which may have beenbought by India, if so required. As such, MTTs contribute toreducing the available stock of PPE products in the internationalmarket that India could have acquired. Second, the UOI’s policyto ban the export of PPE products reflects their stance on theproduct’s non-tradability during the COVID-19 pandemic. Ithighlights clear policy choice under which Indian entities shallnot be allowed to export these products outside of India, in allprobability to the highest buyers across the globe who may endup hoarding the global supply. Hence, banning MTTs in PPEproducts was critical in ensuring that Indian foreign exchangereserves are not utilized to facilitate the hoarding of PPE productswith wealthier nations. mere ban on exports would not regulatethe utilisation of Indian foreign exchange. Hence, in order to keepIndia’s policy position consistent across the board, the prohibitionof MTTs in respect of PPE products was necessary and the onlyalternative of ensuring the realisation of legitimate State interest.[Para 47][267-E-H; 268-A-B]

Regulatory Role of the RBI

9. In the instant case, the RBI has demonstrated rationalnexus in the prohibition of MTTs in respect of PPE products andthe public health of Indian citizens. The critical links betweenFTP and MTTs have been established by the respondents.Facilitating MTTs in PPE products between two distinct nationsmay prima facie appear as having no bearing on the availability ofdomestic stocks. However, the RBI has carefully established the

Aconnection between the use of Indian foreign exchange reserves,MTTs and the availability of domestic stocks. As developingcountry with sizeable population, RBI’s policy to align MTTpermissibility with the FTP restrictions on import and export ofPPE products cannot be questioned. Thus, this Court isconstrained to defer to the regulations imposed by RBI and theBUOI, in the interests of preserving public health in pandemic.[Para 57][279-B-D]

10. Thus, it is not this Court’s stance that judicial review isstowed in cold storage until public health crisis tides over. ThisCourt retains its role as the constitutional watchdog to protectCagainst State excesses. It continues to exercise its role indetermining the proportionality of State measure, with adequateconsideration of the nature and purpose of the extraordinarymeasures that are implemented to manage the pandemic.Democratic interests that secure the well-being of the massesDcannot be judicially aborted to preserve the unfettered freedomto conduct business, of the few. [Para 57][280-E-G]

Conclusion

11. Therefore, this Court finds that the judgment of theMadhya Pradesh High Court was correct in holding that ClauseE2(iii) of the 2020 MTT Guidelines was proportionate measurein ensuring the availability of sufficient domestic stock of PPEproducts. The measure was validly enacted, in pursuance oflegitimate state interest and did not disproportionately impactthe fundamental rights of the appellant. Hence, Clause 2(iii)Fpasses muster under Articles 14, 19(1)(g) and 21. [Para 58][280-H; 281-A]

State Trading Corporation v. Commercial Tax OfficerAIR 1963 SC 1811; Chintaman Rao v. State of MadhyaPradesh, AIR 1951 SC 118; K S Puttaswamy v. UnionGof India (2017) 10 SCC 1 : [2017] 10 SCR 569; K SPuttaswamy v. Union of India (2019) 1 SCC 1 : [2018]8 SCR 1; Rustom Cavasji Cooper v. Union of India(1970) 1 SCC 248 : [1970] 3 SCR 530; Shayara Banov. Union of India (2017) 9 SCC 1 : [2017] 9 SCR 797;

Joseph Kuruvilla Vellukunnel v. Reserve Bank of IndiaAIR 1962 SC 1371 – followed.

Internet and Mobile Association of India v. ReserveBank of India (2020) 10 SCC 274 : [2020] 2 SCR 297;Gujarat Mazdoor Sabha v. State of Gujarat (2020) 10SCC 459 2020 (10) JT 307 – relied on.

Shri Sitaram Sugar Co. Ltd. v. Union of India (1990) 3SCC 223 : [1990] 1 SCR 909; Prag Ice & Oil Mills v.Union of India (1978) 3 SCC 459 : [1978] 3 SCR 293;P.T.R. Exports (Madras) (P) Ltd. v. Union of India(1996) 5 SCC 268 : [1996] 2 Suppl. SCR 662; M R FLtd. v. Inspector Kerala Government (1998) 8 SCC 227: [1998] 2 Suppl. SCR 632; M R Ltd. v. InspectorKerala Government (1998) 8 SCC 227 : [1998] 2Suppl. SCR 632; P Sharma v. Union of India (2003)7 SCC 309 : [2003] 2 Suppl. SCR 684; Dwarka Pd. v.State of Uttar Pradesh, AIR 1954 SC 224; ShreeMeenakshi Mills v. Union of India, AIR 1974 SC 366;Saghir Ahmad v. State of U.P., (1955) 1 SCR 707; JalanTrading Co. v. M Aney, AIR 1973 SC 233; IndianHandicrafts Emporium v. Union of India, (2003) 7 SCC589 : [2003] 3 Suppl. SCR 43; Chintaman Rao v. Stateof Madhya Pradesh AIR 1951 SC 118; NarendraKumar v. Union of India, AIR 1960 SC 430; Mohd.Faruk v. State of Madhya Pradesh, (1969) 1 SCC 853: [1970] 1 SCR 156; Cellular Operators Association ofIndia v. Telecom Regulatory Authority of India, (2016)7 SCC 703 : [2016] 9 SCR 1; Internet and MobileAssociation of India v. Reserve Bank of India, (2020)SCC OnLine SC 275; Om Kumar v. Union of India(2001) 2 SCC 386 : [2000] 4 Suppl. SCR 693; ModernDental College and Research Centre v. State of MadhyaPradesh (2016) 7 SCC 353 : [2016] 3 SCR 579;Sukhnandan Saran Dinesh Kumar v. Union of India,AIR 1982 SC 902; Laxmi Khandsari v. State of UttarPradesh, AIR 1981 SC 860; Peerless General Financeand Investment Co. Limited v. Reserve Bank of India(1992) 2 SCC 343 : [1992] 1 SCR 406; R K Garg v.

AUnion of India, (1981) 4 SCC 675; Balco EmployeesUnion v. Union of India, (2002) 2 SCC 333 : [1982] 1SCR 947; Swiss Ribbons (P) Ltd. v. Union of India,(2019) 4 SCC 17 : [2019] 3 SCR 535; Ebix Singaporev. Committee of Creditors of Educomp Solutions (P) Ltd.,(2021) SCC OnLine SC 313 – referred to.B

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6522of 2021.

From the Judgment and Order dated 08.10.2020 of the High CourtHof Madhya Pradesh, Bench at Indore in Writ Petition No. 7902 of 2020.

Aayush Agarwala for M/s PBA Legal, Adv. for the Appellant.Vikramjit Banerjee, ASG, Ms. Swarupama Chaturvedi, P. V.Yogeshwaran, Md. Akhil, Raj Bahadur Yadav, Ramesh Babu M. R.,Ms. Manisha Singh, Ms. Nisha Sharma, Advs. for the Respondents.

The Judgment of the Court was delivered by

DR. DHANANJAYA Y CHANDRACHUD, J.

This judgment has been divided into sections to facilitate analysis.They are:

Factual background

Submissions

Proportionality Analysis

C.1 Legitimacy

C.2 Suitability

C.3 The necessity of the measure

C.4 Balancing fundamental rights with State aims

C.4.1 Regulatory Role of the RBI

Conclusion

Factual background

1. The appeal arises from judgment and order dated 8 October2020 of Division Bench of the High Court of Madhya Pradesh at itsBench at Indore. The High Court upheld Clause 2(iii) of the RevisedGuidelines on Merchanting Trade Transactions[1] dated 23 January 2020[2]issued by the first respondent, Reserve Bank of India[3], in the exercise ofits power under Section 10(4) and 11(1) of the Foreign ExchangeManagement Act 1999[4].

2. The appellant is the managing director of firm thatmanufactures and trades in pharmaceuticals; herbal and skincare

1 “MTT’’

2 “2020 MTT Guidelines’’ - RBI/2019-20/152: A.P. (DIR Series) Circular No 20

3 “RBI’’

4 “FEMA’’

Aproducts; and personnel protection equipment products such as masks,gloves, sanitisers, PPE overalls, and ventilators[5]. The genesis of the caselies in an international MTT contract which the appellant obtained toserve as an intermediary between the sale of PPE products by supplierin China to buyer in the United States. In accordance with the 2020MTT Guidelines, the appellant wrote to his authorised bank on 1 MayB2020 requesting documents (such as letter of credit) that were requiredto execute the MTT contract. The bank informed the appellant on 4May 2020 that RBI had denied permission for his MTT contract, on thebasis of Clause 2(iii) of the 2020 MTT Guidelines. Clause 2(iii) isreproduced below:C“iii. The MTT shall be undertaken for the goods that are permittedfor exports/imports under the prevailing Foreign Trade Policy (FTP)of India as on the date of shipment. All rules, regulations anddirections applicable to exports (except Export Declaration Form)and imports (except Bill of Entry) shall be complied with for theDexport leg and import leg respectively.”

At the relevant time, the export of PPE products had been bannedby the second respondent, the Union Ministry of Commerce and Industryand the Directorate General of Foreign Trade[6], through successivenotifications dated 8 February 2020, 25 February 2020 and 19 MarchE2020, due to the ongoing COVID-19 pandemic. Therefore, MTT contractsconcerning PPE products were considered impermissible under Clause2(iii) of the 2020 MTT Guidelines.

3. Upon receiving the communication from his bank, the appellantwrote an email to the Ministry of Commerce and DGFT on 12 MayF2020, stating that under his MTT contract, there was no actual export ofPPE products from India. The appellant claimed that he was only servingas an intermediary in trade between two other nations. Hence, herequested the Ministry of Commerce and DGFT to issue notification/clarification/circular exempting MTT contracts in relation to PPE productsfrom the requirements of Clause 2(iii). However, the appellant receivedGno response. The appellant then filed writ petition[7] under Article 226before the Madhya Pradesh High Court. The writ petition set up casethat Clause 2(iii) of the 2020 MTT Guidelines is unconstitutional since it

5 Collectively, they are being referred to as “PPE products’’

6 “Ministry of Commerce and DGFT’’

7 Writ Petition No 7902/2020H

violates the appellant’s right to carry on business under Article 19(1)(g)and the right to life and livelihood under Article 21 of the Constitution.

4. In its reply before the Madhya Pradesh High Court, the RBIstated that the Union of India[8] had prohibited the export of PPE productsfrom India by issuing multiple notifications under Section 3 of the ForeignTrade (Development & Regulation) Act 1992[9], through which it amendedthe Foreign Trade Policy 2015-2020[10]. Hence, in accordance with Clause2(iii) of the 2020 MTT Guidelines, MTT transactions concerning PPEproducts were also prohibited since they allowed Indian individuals toassist others in diverting PPE products away from India in the globalmarket. Further, it was clarified that Clause 2(iii) was of general nature,and the RBI had no jurisdiction to exempt products from its application,since only the UOI determined the nation’s FTP.

5. By its judgment dated 8 October 2020, the High Court dismissedthe writ petition. In upholding the constitutionality of Clause 2(iii) of the2020 MTT Guidelines, the High Court held that: (i) Clause 2(iii) onlyprohibits MTTs for goods that cannot be imported/exported into India.The provision is general in its application and does not specifically prohibitMTT in PPE products; (ii) the decision to modify the FTP to prohibitimport/export of goods is policy decision of the Ministry of Commerceand DGFT under the Foreign Trade Act; (iii) the Ministry of Commerceand DGFT prohibited the export of PPE products due to the COVID-19pandemic, and consequently, MTTs are also prohibited under Clause2(iii); and (iv) apart from the fact that the goods do not physically enterIndian territory, an MTT has all the trappings of an import/exporttransaction. Further, it involves India’s foreign exchange. Hence, itsregulation needs to be in conformity with the FTP set by the UOI.

Submissions

6. Mr Aayush Agarwala, learned Counsel for the appellantsubmitted that:

(i)Clause 2(iii) of the 2020 MTT Guidelines prohibits MTTsfor goods whose import/export is banned in India, whichresults in an absolute prohibition. This violates Articles 14,19(1)(g) and 21 of the Constitution;

8 “UOI’’

9 “Foreign Trade Act’’

10 “FTP’’

A(ii)The RBI has provided no cogent reason why it has linkedthe ban on MTTs completely to India’s FTP, instead ofindependently deciding it under FEMA, since the objectivewhile prohibiting goods under the FTP may not be fulfilledby also prohibiting MTTs. This is true in the present case,where the export of PPE products was banned to preserveBstocks in India during the COVID-19 pandemic; however,MTTs in PPE products do not affect domestic stocksbecause the goods traded are from outside of India.Therefore, Clause 2(iii) is manifestly arbitrary and violatesArticle 14;

(iii)There is no entry into or exit of goods from the borders ofIndia in an MTT and the Indian entity only serves as anintermediary in transaction between two foreign countries.Hence, the appellant’s MTT in relation to PPE productswould not affect the quantity of PPE products in India duringDthe pandemic, and is not reasonable restriction. Pertinently,courts should consider the reasonableness of policy morecarefully when it results in an absolute prohibition;

(iv)Further, lesser intrusive policies are possible, such as thefollowing:

a. The RBI can independently decide whether to prohibitan MTT for each product whose import/export has beenbanned under the FTP. This can be done by delinkingthe prohibition on MTT with the prohibition under theFTP;

b. The RBI can prohibit MTTs only for goods whose importhas been prohibited since the lack of import into Indiahighlights policy concern in relation to that product.However, for goods whose export is prohibited, the MTTcan be allowed because it does not reduce the stock ofthat product in India. It is submitted that this was alsothe intent of RBI’s circular dated 24 August 2000 inrelation to MTTs; and

c. Individuals should be allowed to approach the RBI toseek an exemption for conducting MTTs in relation toproducts whose import/export is prohibited under the

FTP. The RBI can then consider each individual productand decide whether its MTT should be permitted, keepingin mind the reasons for its prohibition under the FTP.

7. Opposing the above submissions, Mr Ramesh Babu M R,learned Counsel for the RBI submitted that:

(i)The appellant cannot challenge Clause 2(iii) of the 2020 MTTGuidelines without challenging the notifications amending theFTP to prohibit the export of PPE products. Clause 2(iii) isgeneral in its application and was introduced on 23 January2020, while the first notification prohibiting the export of PPEproducts was issued by the UOI on 8 February 2020;

(ii)Clauses similar to Clause 2(iii) of the 2020 MTT Guidelineshave existed in all previous circulars issued by the RBI toregulate MTTs. These clauses substantially stipulate thatMTTs would only be allowed in respect of products whoseimport/export is allowed in India;

(iii) MTTs are analogous to import/export transactions, exceptfor the fact that the goods never physically enter India. Thereis an outflow of foreign exchange during the import leg ofthe MTT and an inflow of foreign exchange during the exportleg. Hence, MTTs affect India’s foreign reserves, which theRBI has to manage and harmonise with the UOI’s FTP.Therefore, the RBI cannot permit MTTs in respect of goodswhose import/export has been prohibited by the UOI underthe Foreign Trade Act;

(iv) Export of PPE products was prohibited by the UOI in orderto ensure that adequate stocks are present in India duringthe COVID-19 pandemic. Hence, prohibition of MTTs inrespect of PPE products is also important because when anIndian entity facilitates the trade of these products to anothernation, it takes away from India’s possible stock in the globalmarket; and

(v) Courts should be wary of interfering in the economic policiesof the State, which should be left to expert bodies. Thisproposition is supported by the decisions of this Court in ShriSitaram Sugar Co. Ltd. v. Union of India[11], Prag Ice &11 (1990) 3 SCC 223

AOil Mills v. Union of India[12] and P.T.R. Exports (Madras)(P) Ltd. v. Union of India[13].

8. Supporting the submissions of the RBI on behalf of the Ministryof Commerce and DGFT, Mr Vikramjit Banerjee, Additional SolicitorGeneral[14] submitted that:

(i)The UOI has prohibited the export of PPE products througha series of notifications issued between 31 January 2020 to16 May 2020, so as to ensure that there is adequate stockin India during the COVID-19 pandemic;

(ii)The appellant cannot be allowed to facilitate transactionCfor PPE products between two foreign countries throughMTTs since it would be against India’s national interest.Given the COVID-19 pandemic, such restriction isreasonable;

(iii)There is no complete prohibition under Clause 2(iii) of theD2020 MTT Guidelines since the appellant is free to conductMTTs in respect of goods whose import/export is notprohibited under India’s FTP; and

(iv)By notification dated 25 August 2020, the export of PPEMasks and N-95/FFP 2 Masks or equivalent has beenEcategorized as “Restricted” (instead of “Prohibited”) whilemedical coveralls of all classes/categories (including PPEoveralls) are now under the “Free” category.

9. The rival submissions will now be analysed.

Proportionality Analysis

10. The appellant is citizen of India. He is also the ManagingDirector of Anzalp Herbal Products Private Limited, corporate bodywhich inter alia, engages in MTTs. In State Trading Corporation v.GCommercial Tax Officer[15], nine-judge Bench of this Court has settledthe question that corporations are not considered as “citizens” under theConstitution. corporation cannot claim an infringement of rights under

12 (1978) 3 SCC 45913 (1996) 5 SCC 26814 “ASG’’H15 AIR 1963 SC 1811

Article 19(1)(g), as this fundamental right is only available to citizensand not to juristic persons. Over the years, shareholders and businesspersons have filed petitions in their individual capacity, to allegeinfringement of their fundamental right to carry on business or professionof their choice[16]. The appellant argues that the RBI and UOI’s prohibitionof MTTs in respect of PPE products infringes his fundamental rightsand freedoms under Articles 14, 19(1)(g) and 21 of the Constitution.

11. The appellant has contended that this Court has beencircumspect of legislative provisions or executive policies that impose atotal prohibition on citizen’s right to conduct business. Since the appellantis engaged in MTTs which facilitate import and export between twodifferent countries, he urges that complete prohibition on MTTs inrelation to PPE products, without rational distinction of prohibiting theirexports alone, is constitutionally suspect infringement of his freedomto conduct his business. In order to test this claim, we will begin byanalysing the precedents of this Court on the ambit of the freedomenvisaged under Article 19(1)(g). The relevant freedoms and restrictionswith respect to trade under the Indian Constitution are as follows:

“19. Protection of certain rights regarding freedom of speech,etc.-(1) All citizens shall have the right –

(g) to practise any profession, or to carry on any occupation, tradeor business.

(6) Nothing in sub-clause (g) of the said clause shall affect theoperation of any existing law in so far as it imposes, or preventthe State from making any law imposing, in the interests of thegeneral public, reasonable restrictions on the exercise of the rightconferred by the said sub-clause, and, in particular, nothing in thesaid sub-clause shall affect the operation of any existing law in so

far as it relates to, or prevent the State from making any lawrelating to,—

(i) the professional or technical qualifications necessary forpractising any profession or carrying on any occupation, trade orbusiness, or

16 M P Jain, Citizenship, in INDIAN CONSTITUTIONAL LAW (7th edn, Lexis Nexis, 2014)

A(ii) the carrying on by the State, or by corporation owned orcontrolled by the State, of any trade, business, industry or service,whether to the exclusion, complete or partial, of citizens orotherwise.”

12. The text of the Constitution clarifies that the right to carry onBtrade or business is subject to reasonable restrictions which are imposedin the interests of the general public. This Court has propounded severaltests for determining “reasonableness” for the purpose of Article 19(1)(g).These have ranged from testing restrictions for arbitrariness[17],excessiveness[18] and discerning their objective of compliance with theCDirective Principles of State Policy[19]. In Chintaman Rao v. State ofMadhya Pradesh,[20] Constitution Bench noted the importance ofstriking the right balance between social control and individual freedom.Justice K Das Gupta articulated the limitation under Article 19(6) inthe following terms:

D“6. The phrase “reasonable restriction” connotes that the limitationimposed on person in enjoyment of the right should not bearbitrary or of an excessive nature, beyond what is required in theinterests of the public. The word “reasonable” implies intelligentcare and deliberation, that is, the choice of course which reasondictates. Legislation which arbitrarily or excessively invades theEright cannot be said to contain the quality of reasonableness andunless it strikes proper balance between the freedom guaranteedin Article 19(1)(g) and the social control permitted by clause (6)of Article 19, it must be held to be wanting in that quality.”

13. In M R Ltd. v. Inspector Kerala Government,[21] twoFjudge Bench of this Court consolidated the body of precedent of thisCourt on Article 19(1)(g). Justice S Saghir Ahmed noted the followingprinciples that govern the restrictions under Article 19(6):

17 Dwarka Pd. v. State of Uttar Pradesh, AIR 1954 SC 224; Shree Meenakshi MillsGv. Union of India, AIR 1974 SC 366

18 Chintaman Rao v. State of Madhya Pradesh, AIR 1951 SC 118

19 Saghir Ahmad v. State of U.P., (1955) 1 SCR 707; Jalan Trading Co. v. M Aney,AIR 1973 SC 233; M R Ltd. v. Inspector Kerala Government, (1998) 8 SCC 227;Indian Handicrafts Emporium v. Union of India, (2003) 7 SCC 589

20 AIR 1951 SC 118H21 (1998) 8 SCC 227

“13. […]

(1) While considering the reasonableness of the restrictions, thecourt has to keep in mind the Directive Principles of State Policy.

(2) Restrictions must not be arbitrary or of an excessive nature soas to go beyond the requirement of the interest of the generalpublic.

(3) In order to judge the reasonableness of the restrictions, noabstract or general pattern or fixed principle can be laid downso as to be of universal application and the same will vary fromcase to case as also with regard to changing conditions, values ofhuman life, social philosophy of the Constitution, prevailingconditions and the surrounding circumstances.

(4) just balance has to be struck between the restrictions imposedand the social control envisaged by clause (6) of Article 19.

(5) Prevailing social values as also social needs which are intendedto be satisfied by restrictions have to be borne in mind. (See:State of U.P. v. Kaushailiya [AIR 1964 SC 416 : (1964) 4 SCR1002] .)

(6) There must be direct and proximate nexus or reasonableconnection between the restrictions imposed and the object soughtto be achieved. If there is direct nexus between the restrictionsand the object of the Act, then strong presumption in favour ofthe constitutionality of the Act will naturally arise. (See:Kavalappara Kottarathil Kochuni v. States of Madras and Kerala[AIR 1960 SC 1080 : (1960) 3 SCR 887] ; O.K. Ghosh v. E.X.Joseph [AIR 1963 SC 812 : 1963 Supp (1) SCR 789 : (1962) 2LLJ 615] .)”

14. This Court has also consistently held that restrictions on thefreedom to carry on trade and business can take the form of completeprohibition[22]. However, in P Sharma v. Union of India,[23] two judgeBench of this Court has espoused higher threshold for imposition of aprohibitive restriction. legitimate object and prejudice to the generalpublic by non-imposition of such prohibition has to be demonstrated by

22 Narendra Kumar v. Union of India, AIR 1960 SC 430

23 (2003) 7 SCC 309

DEF

Athe State, to discharge its burden of demonstrating reasonableness underArticle 19(6). Justice Brijesh Kumar held:

“15. The freedom under Article 19(1)(g) can also be completelycurtailed in certain circumstances e.g. where the profession chosenis so inherently pernicious that nobody can be considered to haveBa fundamental right to carry on such business, trade, calling orprofession like gambling, betting or dealing in intoxicants or anactivity injurious to public health and morals. It may be useful torefer to few decisions of this Court on the point at this stage viz.in Saghir Ahmad v. State of U.P. [AIR 1954 SC 728 : (1955) 1SCR 707] and J.K. Industries Ltd. v. Chief Inspector of FactoriesCand Boilers [(1996) 6 SCC 665]. The main purpose of restrictingthe exercise of the right is to strike balance between individualfreedom and social control. The freedom, however, as guaranteedunder Article 19(1)(g) is valuable and cannot be violated on groundswhich are not established to be in public interest or just on theDbasis that it is permissible to do so. For placing completeprohibition on any professional activity, there must existsome strong reason for the same with view to attain somelegitimate object and in case of non-imposition of suchprohibition, it may result in jeopardizing or seriouslyaffecting the interest of the people in general. If it is notEso, it would not be reasonable restriction if placed onexercise of the right guaranteed under Article 19(1)(g). Thephrase “in the interest of the general public” has come to beconsidered in several decisions and it has been held that it wouldcomprise within its ambit interests like public health and morals….”

(emphasis supplied)

15. Various principles have been espoused by this Court to bringabout balance between the perceived interest of the state of socialcontrol over the economy, with the rights and freedoms of individuals.The appellant has cited various decisions to argue for heightened scrutinyGof legislative or administrative action which places an absolute prohibitionon an individual’s right to conduct trade or business[24]. The judicial

24 Mohd. Faruk v. State of Madhya Pradesh, 1969 (1) SCC 853; Cellular OperatorsAssociation of India v. Telecom Regulatory Authority of India, (2016) 7 SCC 703;Internet and Mobile Association of India v. Reserve Bank of India, 2020 SCCOnLine SC 275H

evolution of four-pronged analysis of proportionality displaces thevarying standards that were prescribed to determine “reasonableness”under Article 19(6). The qualitative nature of right and the correspondingscrutiny of its violation cannot be sole function of the degree ofrestriction. Every violation of rights, irrespective of the degree of theinfraction, must be evaluated through uniform principle that promotesa culture of justification. The decision of nine-judge Bench of thisCourt in K S Puttaswamy v. Union of India[25] (“K S Puttaswamy(9J)”) prescribed proportionality analysis for determining violations offundamental rights under Part III. proportionality analysis canadequately consider the constitutionality of prohibitive measures oncommercial activities. Therefore, we will structure the judgment on ananalysis of the proportionality of RBI’s decision to prohibit MTTs inPPE products, in order to determine its constitutionality.

16. An analysis of legitimate social control for the purpose ofArticle 19(6) has been streamlined by this Court through the lens ofproportionality. two-judge Bench of this Court in Om Kumar v. Unionof India[26] introduced the test of proportionality for determining thereasonableness of restrictions on freedoms guaranteed under Article19(1). Justice M Jagannadha Rao traced the historical application of theprinciple in this Court’s precedent and in comparative context. Thejudgment defined the concept in the following terms:

“28. By “proportionality”, we mean the question whether, whileregulating exercise of fundamental rights, the appropriate or least-restrictive choice of measures has been made by the legislatureor the administrator so as to achieve the object of the legislationor the purpose of the administrative order, as the case may be.Under the principle, the court will see that the legislature and theadministrative authority “maintain proper balance between theadverse effects which the legislation or the administrative ordermay have on the rights, liberties or interests of persons keeping inmind the purpose which they were intended to serve”. Thelegislature and the administrative authority are, however, given anarea of discretion or range of choices but as to whether thechoice made infringes the rights excessively or not is for the court.That is what is meant by proportionality.”

25 (2017) 10 SCC 1, para 325

26 (2001) 2 SCC 386

AThe test was made applicable to testing the validity of legislationas well as administrative action:

“53. Now under Articles 19(2) to (6), restrictions on fundamentalfreedoms can be imposed only by legislation. In cases where suchlegislation is made and the restrictions are reasonable yet, if theBstatute concerned permitted the administrative authorities toexercise power or discretion while imposing restrictions in individualsituations, question frequently arises whether wrong choice ismade by the administrator for imposing restriction or whether theadministrator has not properly balanced the fundamental right andthe need for the restriction or whether he has imposed the least ofCthe restrictions or the reasonable quantum of restriction etc. Insuch cases, the administrative action in our country, in our view,has to be tested on the principle of “proportionality”, just as it isdone in the case of the main legislation. This, in fact, is being doneby our courts.”D17. Constitution Bench, in Modern Dental College andResearch Centre v. State of Madhya Pradesh[27] (“Modern DentalCollege”), validated the test of proportionality for determining thereasonableness of restriction under Article 19(6). Justice K Sikriaccepted the Canadian Supreme Court’s analysis of the doctrine ofEproportionality and held it to be applicable to constitutional rights in India.The Court noted:

“63. In this direction, the next question that arises is as to whatcriteria is to be adopted for proper balance between the twofacets viz. the rights and limitations imposed upon it by statute.FHere comes the concept of “proportionality”, which is propercriterion. To put it pithily, when law limits constitutionalright, such limitation is constitutional if it is proportional.The law imposing restrictions will be treated as proportionalif it is meant to achieve proper purpose, and if themeasures taken to achieve such purpose are rationallyGconnected to the purpose, and such measures arenecessary. This essence of doctrine of proportionality is beautifullycaptured by Dickson, C.J. of Canada in R. v. Oakes [R.v. Oakes,(1986) 1 SCR 103 (Can SC)] , in the following words (at p. 138):

“To establish that limit is reasonable and demonstrably justifiedin free and democratic society, two central criteria must besatisfied. First, the objective, which the measures, responsible fora limit on Charter right or freedom are designed to serve, mustbe “of” sufficient importance to warrant overriding constitutionalprotected right or freedom … Second … the party invoking Section1 must show that the means chosen are reasonable anddemonstrably justified. This involves “a form of proportionalitytest…” Although the nature of the proportionality test will varydepending on the circumstances, in each case courts will berequired to balance the interests of society with those of individualsand groups. There are, in my view, three important componentsof proportionality test. First, the measures adopted must be …rationally connected to the objective. Second, the means … shouldimpair “as little as possible” the right or freedom in question …Third, there must be proportionality between the effects of themeasures which are responsible for limiting the Charter right orfreedom, and the objective which has been identified as of“sufficient importance”. The more severe the deleterious effectsof measure, the more important the objective must be if themeasure is to be reasonable and demonstrably justified in freeand democratic society.”

64. The exercise which, therefore, is to be taken is to findout as to whether the limitation of constitutional rights isfor purpose that is reasonable and necessary in ademocratic society and such an exercise involves theweighing up of competitive values, and ultimately anassessment based on proportionality i.e. balancing ofdifferent interests.”

(emphasis supplied)

18. The decision in K S Puttaswamy (9J)[28] (supra) introducedthe proportionality standard in determining violations of fundamental rights,particularly the right to privacy. This doctrine was affirmed in thejudgments of five out of the nine judges on the Bench. Subsequently, aConstitution Bench in K S Puttaswamy v. Union of India[29] (“Aadhar(5J)”) fleshed out the contours of proportionality analysis and applied

28 Para 32529 (2019) 1 SCC 1

ABCDEF

Ait to determine the constitutionality of the Aadhar Scheme and the AadharAct 2016. Justice K Sikri conducted comparative analysis of thetypes of proportionality analysis globally and elucidated four-prongedapproach that could be suitable for the Indian Constitution. This test waslaid down in the following terms:

B“319. …This discussion brings out that following four sub-components of proportionality need to be satisfied:

319.1. measure restricting right must have legitimate goal(legitimate goal stage).

319.2. It must be suitable means of furthering this goal (suitabilityCor rational connection stage).

319.3. There must not be any less restrictive but equally effectivealternative (necessity stage).

319.4. The measure must not have disproportionate impact onDthe right holder (balancing stage).”19. This Court has thus propounded four-pronged test ofproportionality. This can now be utilised to determine the constitutionalityof Clause 2(iii) of the 2020 MTT Guidelines.

20. Before our analysis proceeds along the above direction, it isEimportant to note that the appellant has challenged the constitutionalityof Clause 2(iii) of the 2020 MTT Guidelines by alleging violation of hisrights under Articles 14, 19(1)(g) and 21. Hence, this Court has todetermine if the RBI’s restriction to prohibit MTTs in PPE products isrestrictive of the appellant’s right to equality under Article 14 on theground that it is arbitrary, whether it is reasonable restriction on theFappellant’s freedom to conduct trade under Articles 19(1)(g) read withArticle 19(6), and if it violates the appellant’s liberty and right to livelihoodunder Article 21.

21. Allegations involving violation of each of these rights areoften considered independently and within the framework of their ownGprescribed limitation by the precedents of this Court. However, thesubstance of the enquiry behind each of the limitations under theseArticles is similar to proportionality analysis. In essence, the rights’limitation is considered justified if it pursues legitimate aim, has rationalnexus to the objective and there is balance between the limitation ofHthe right and the public interest which the rights-limitation aims to achieve.

This analysis has been considered similar to proportionality inquiry,with the “necessity” prong being considered missing[30].

22. Some academic commentators have suggested that the Courtscan adopt the proportionality analysis, even when considering rights withdifferent limitations. They state this for three reasons: (i) litigation ofrights can often be open-ended, which risks the analysis becominginconsistent across different cases. Hence, formal balancing procedure,such as the proportionality analysis, is useful in providing structure tothe arguments; (ii) in multiple jurisdictions, the provision of the rightitself contains limitation clause (such as Article 19 in the IndianConstitution) and even then, the courts have opted to use theproportionality analysis. In such circumstances, the courts use theproportionality analysis to test the application of the limitation clause;and (iii) the proportionality analysis is particularly helpful when the disputebetween right and its limitation is recast as one between right and ameasure which limits that right but only to promote different right[31].

23. On the other hand, in an illuminating article in the Yale LawJournal, Professor Vicki Jackson has pointed out that there are structuraldifferences between various rights, due to which proportionality analysismay not be suitable for some of them. While Professor Jackson agreeswith the principle of balancing that underlies proportionality as principle,she issues note of caution that the protection of certain rights may bebetter suited to categorical rules. Even so, Professor Jackson supportsthe use of proportionality analysis wherever possible and notes its benefitsin the following passage[32]:

“Using proportionality to define violations, of course, does notdictate remedies or exclude definitions of rights based on separatedeontological or historical questions. However, greater use ofproportionality, as principle and as structured form of review,has several potential benefits. It could enhance judicial reasoningby clarifying justifications for limitations on freedoms.Proportionality might also improve the outcomes of adjudication

30 Aparna Chandra, “Proportionality in India: Bridge to Nowhere” (2020) 3(2)University of Oxford Human Rights Hub Journal 55

31 Alec Stone Sweet and Jud Mathews, “Proportionality Balancing and GlobalConstitutionalism” (2008-2009) 47 Columbia Journal of Transnational Law 72

32 Vicki Jackson, “Constitutional Law in an Age of Proportionality” (2015) 124(8)Yale Law Journal 3094

Aby bringing…constitutional law closer to…conceptions of justice,in ways consistent with the demands of effective government.Finally, proportionality may be democracy-enhancing, both inproviding shared discourse of justification for action clamed tolimit rights and in providing more sensitivity to serious process-deficiencies reflecting entrenched biases against particularBgroups.”24. Adopting the proportionality analysis not only provides formalstructure through which abstract rights litigations can be analysed, but italso (when applied properly) has the potential to improve the quality ofjudicial reasoning while protecting individual rights. As noted in AadharC(5J) (supra), the use of proportionality analysis reflects the shift from aculture of authority to culture of justification[33] where State action isbest held accountable for its violation of fundamental rights. Justice AlbieSachs, judge of the Constitutional Court of South Africa, in his memoirThe Strange Alchemy of Life and Law[34], also described this shift fromDa culture of authority to culture of justification in South Africa with theintroduction of their Constitution:“The negotiated revolution which saw South Africa move frombeing an authoritarian, racist state to becoming constitutionaldemocracy led Professor Etienne Mureinik to make memorableEstatement as far as the character of legal adjudication wasconcerned. He pointed out that we were crossing bridgefrom culture of authority to culture of justification…Theimplications for the judicial function turned out to be enormous.And it was our Court that was made responsible for guiding thelegal community to embrace and internalize the necessary changes.FMuch more was involved than simply making technical shiftfrom what the lawyers call literalist to purposive approach tointerpretation. The Constitution brought about seachange in thevery nature of the judicial function…[It] necessitated movingbeyond an approach based on the application of purportedlyGinexorable rules towards accepting the duty in most mattersfor the judges to exercise constitutionally-controlleddiscretion. The transformation involved journey frompreoccupation with classification and strict adherence to

33 Para 1276H34 Albie Sachs, The Strange Alchemy of Life and Law (Oxford University Press, 2009)

formal rules to focussing on principled modes of weighingup the competing interests as triggered by the facts of thecase and assessed in the light of the values of an open anddemocratic society…”

(emphasis supplied)

Therefore, this Court must unhesitatingly use the proportionalityanalysis while assessing the violation of the appellant’s rights underArticles 14, 19(1)(g) and 21.

25. The present case poses another issue, which is whether anintegrated proportionality analysis can be undertaken for assessing theviolation of all three rights. It is settled principle that fundamental rightsin Part III are not understood in silos, but as an inter-related enunciationof rights and freedoms that uphold the basic rubric of human rights. Aneleven-judge Bench of this Court in Rustom Cavasji Cooper v. Unionof India[35], speaking through Justice J Shah, had observed:

“52…it is necessary to bear in mind the enunciation of theguarantee of fundamental rights which has taken different forms.In some cases it is an express declaration of guaranteed right:Articles 29(1), 30(1), 26, 25 and 32; in others to ensure protectionof individual rights they take specific forms of restrictions on Stateaction — legislative or executive — Articles 14, 15, 16, 20, 21,22(1), 27 and 28; in some others, it takes the form of positivedeclaration and simultaneously enunciates the restriction thereon:Articles 19(1) and 19(2) to (6); in some cases, it arises as animplication from the delimitation of the authority of the State, e.g.Articles 31(1) and 31(2); in still others, it takes the form of ageneral prohibition against the State as well as others: Articles 17,23 and 24. The enunciation of rights either express or byimplication does not follow uniform pattern. But onethread runs through them: they seek to protect the rightsof the individual or groups of individuals againstinfringement of those rights within specific limits. Part IIIof the Constitution weaves pattern of guarantees on thetexture of basic human rights. The guarantees delimit theprotection of those rights in their allotted fields: they donot attempt to enunciate distinct rights.”

(emphasis supplied)

DEFG

26. Conceptualising constitutional rights is incomplete withoutanalysing their corresponding limitations. This Court has also noticedthat an underlying thread of reasonableness defines fundamental rightsin Part III of the Constitution. Constitution Bench in Shayara Bano v.Union of India[36] disavowed the view that challenges under every Articlemust strictly be considered in disjoint, water-tight fashion. Justice KurianBJoseph had observed:

84. The second reason given is that challenge under Article14 has to be viewed separately from challenge underArticle 19, which is reiteration of the point of view of A.K.Gopalan v. State of Madras [A.K. Gopalan v. State ofCMadras, 1950 SCR 88 : AIR 1950 SC 27 : (1950) 51 Cri LJ1383] that fundamental rights must be seen in watertightcompartments. We have seen how this view was upset byan eleven-Judge Bench of this Court in Rustom CavasjeeCooper v. Union of India[Rustom Cavasjee Cooper v. UnionDof India, (1970) 1 SCC 248] and followed in Maneka Gandhi[Maneka Gandhi v. Union of India, (1978) 1 SCC 248].Arbitrariness in legislation is very much facet of unreasonablenessin Articles 19(2) to (6), as has been laid down in several judgmentsof this Court, some of which are referred to in Om Kumar [OmKumar v. Union of India, (2001) 2 SCC 386 : 2001 SCC (L&S)E1039] and, therefore, there is no reason why arbitrariness cannotbe used in the aforesaid sense to strike down legislation underArticle 14 as well.

F87. The thread of reasonableness runs through the entirefundamental rights chapter. What is manifestly arbitrary isobviously unreasonable and being contrary to the rule oflaw, would violate Article 14. Further, there is an apparentcontradiction in the three-Judge Bench decisionin McDowell [State of A.P. v. McDowell and Co., (1996) 3 SCCG709] when it is said that constitutional challenge cansucceed on the ground that law is “disproportionate,excessive or unreasonable”, yet such challenge would failon the very ground of the law being “unreasonable,unnecessary or unwarranted”. The arbitrariness doctrine

H36 (2017) 9 SCC 1

when applied to legislation obviously would not involve thelatter challenge but would only involve law beingdisproportionate, excessive or otherwise being manifestlyunreasonable. All the aforesaid grounds, therefore, do notseek to differentiate between State action in its variousforms, all of which are interdicted if they fall foul of thefundamental rights guaranteed to persons and citizens inPart III of the Constitution.”

(emphasis supplied)

27. The Constitution Bench in Aadhar (5J) (supra) also undertookan integrated proportionality analysis to determine the proportionality ofthe State’s interference in the rights to privacy, dignity, choice and accessto basic entitlements[37]. Hence, the Court can adopt an integratedproportionality analysis where the limitation on each of the rights iscommon andaffects them in similar way. In the present case, thelimitation (i.e., Clause 2(iii) of the 2020 MTT Guidelines) is what affectsthe appellant’s rights under Articles 14, 19(1)(g) and 21. Further, theappellant has submitted that the limitation is arbitrary, not reasonablerestriction and violative of his liberty because the RBI has, withoutapplication of mind, linked the prohibition on import/export of productto the prohibition of MTTs in relation to that product. It is thus clear thatthe appellant’s submissions for challenging the constitutionality of Clause2(iii) rest on similar grounds, and hence an integrated proportionalityanalysis can be adopted. However, this Court must issue note of caution– while an integrated proportionality analysis has been adopted forassessing the limitation on rights (under Articles 14, 19(1)(g) and 21) inthis case, it may not be true for all cases where such limitations occurbecause the alleged violation of rights may be characteristically differentor the alleged limitation may affect the rights in different ways.28. The appellant has submitted that the precedents of this Courtindicate that once the citizen can demonstrate that the restriction directlyor proximately interferes with the exercise of their freedom of trade orto carry on business, it is the State’s burden to demonstrate thereasonableness of the restriction and that it is in the interest of the generalpublic[38]. The authority of the RBI in issuing the impugned notification is

37 Para 1277

38 Sukhnandan Saran Dinesh Kumar v. Union of India, AIR 1982 SC 902; LaxmiKhandsari v. State of Uttar Pradesh, AIR 1981 SC 860

ABC

Anot in challenge. Additionally, the legitimacy of the aim – of ensuringadequate domestic supplies of PPE products – is also not in challenge.The appellant assails the suitability of the measure restricting MTTs inensuring domestic supplies and for being overbroad in its ambit, since anIndian entity acting as an intermediary in an MTT between two differentcountries does not impact the availability of PPE products in India. Thus,Bthis Court will be relying on the justification furnished by the RBI indetermining the proportionality of the impugned measure (Clause 2(iii)of the 2020 MTT Guidelines). This analysis will be structured along withthe following questions:

(i) Is the measure in furtherance of legitimate aim?;

(ii) Is the measure suitable for achieving such an aim?;

(iii) Is the measure necessary for achieving the aim?; and

(iv) Is the measure adequately balanced with the right of theindividual?D

C.1 Legitimacy

29. This prong of the test entails an evaluation of the legitimacy ofan aim that purportedly violates fundamental right. The measure mustEbe designated for proper purpose, i.e., legitimate goal. Five of thejudges in the nine-judge Bench decision in K S Puttaswamy (9J)(supra)adopted the threshold of “legitimate state interest” as the first prongfor assessing proportionality. This state interest must also be of sufficientimportance to override constitutional right or freedom[39]. In this case,the ban on exports, imports and MTTs of PPE products is to ensure theFavailability of adequate domestic supplies during global health pandemic.Adequate stocks of PPE products are critical for the healthcare systemto combat the COVID-19 pandemic. The State’s aim of ensuring suppliesis in furtherance of the right to life under Article 21 and the DirectivePrinciples of State Policy mandating the State’s improvement of publicGhealth as primary duty under Article 47. The appellant has not challengedthe legitimacy of this aim of ensuring adequate PPE in India. The RBI,at the time of filing its affidavit on 30 January 2021, had elaborated onthe state of the pandemic in the country and the necessity of ensuringadequate stock of PPE products. The executive’s aim to ensure sufficient

availability of PPE products, considering the ongoing pandemic, islegitimate. Accordingly, we hold that the impugned measure is enactedin furtherance of legitimate aim that is of sufficient importance tooverride constitutional right of freedom to conduct business.

C.2 Suitability

30. In examining the aim of ensuring adequate supplies in India,we will now evaluate the suitability of the prohibition of MTTs in relationto PPE products. This would entail an analysis of whether the proposedmeasure can further the stated objective. To understand whether theprohibition of MTTs in relation to PPE products was suitable, we mustfirst analyse the framework under which the RBI regulates MTTs inIndia.

31. MTTs are regulated by the RBI under FEMA, which cameinto force on 1 June 2000. Under FEMA, it is the duty of the RBI tomanage, regulate and supervise the foreign exchange in India. Section3[40] of FEMA provides, inter alia, that no person can deal in foreignexchange without the permission of the RBI. In accordance with Section10(1)[41], the RBI can grant permission to an entity to become an “authorized40 3. Dealing in foreign exchange, etc.—Save as otherwise provided in this Act, rules orregulations made thereunder, or with the general or special permission of the ReserveBank, no person shall—(a) deal in or transfer any foreign exchange or foreign securityto any person not being an authorised person;

(b) make any payment to or for the credit of any person resident outside India in anymanner;

(c) receive otherwise through an authorised person, any payment by order or on behalfof any person resident outside India in any manner;Explanation.—For the purpose of this clause, where any person in, or resident in, Indiareceives any payment by order or on behalf of any person resident outside Indiathrough any other person (including an authorised person) without correspondinginward remittance from any place outside India, then, such person shall be deemed tohave received such payment otherwise than through an authorised person;(d) enter into any financial transaction in India as consideration for or in associationwith acquisition or creation or transfer of right to acquire, any asset outside India byany person.

Explanation.—For the purpose of this clause, “financial transaction” means makingany payment to, or for the credit of any person, or receiving any payment for, by orderor on behalf of any person, or drawing, issuing or negotiating any bill of exchange orpromissory note, or transferring any security or acknowledging any debt.41 10. Authorised person.—(1) The Reserve Bank may, on an application made to it inthis behalf, authorise any person to be known as authorised person to deal in foreignexchange or in foreign securities, as an authorised dealer, money changer or off-shorebanking unit or in any other manner as it deems fit.

Aperson” who can deal in foreign exchange. Further, Section 10(4) providesthat such authorized persons shall comply with all directions issued bythe RBI while dealing in foreign exchange. Section 10(4) reads as follows:

“10. Authorised person.—… (4) An authorised person shall, inall his dealings in foreign exchange or foreign security, complyBwith such general or special directions or orders as the ReserveBank may, from time to time, think fit to give, and, except with theprevious permission of the Reserve Bank, an authorised personshall not engage in any transaction involving any foreign exchangeor foreign security which is not in conformity with the terms of hisauthorisation under this section.”CThe RBI is granted the power to issue directions to authorizedpersons under Section 11(1). Section 11(1) provides:

“11. Reserve Bank’s powers to issue directions toauthorised person.—(1) The Reserve Bank may, for the purposeDof securing compliance with the provisions of this Act and of anyrules, regulations, notifications or directions made thereunder, giveto the authorised persons any direction in regard to making ofpayment or the doing or desist from doing any act relating to foreignexchange or foreign security.”

E32. It is in the exercise of its powers under Section 10(4) readwith Section 11(1), that the RBI issued circular[42] dated 24 August2000, which provided guidance to authorized dealers in relation to FEMA.The relevant part of the circular in relation to MTTs is extracted below:

“Part - Merchanting TradeFAuthorised dealers may take necessary precautions inhandling merchant trade transactions or intermediary tradetransactions to ensure that (a) goods involved in thetransaction are permitted to be imported into India, (b) suchtransactions do not involve foreign exchange outlay for periodexceeding three months, and (c) all Rules, Regulations andGDirections applicable to export out of India are compliedwith by the export leg and all Rules, Regulations andDirections applicable to import are complied with by theimport leg of merchanting trade transactions. Authorised

dealers are also required to ensure timely receipt of payment forthe export leg of such transactions.”

(emphasis supplied)

From the above, it is clear that an MTT could only be in respectof goods whose import was permitted into India. similar direction wasretained in the circular[43] dated 19 June 2003.

33. Thereafter, the RBI issued circular[44] dated 17 January 2014titled “Merchanting Trade Transactions”, which revised the MTTguidelines in light of the recommendations of the Technical Committeeon Services/Facilities to Exporters. Clause 2(i) of the circular noted:

“i) Goods involved in the merchanting or intermediary tradetransactions would be the ones that are permitted for exports/imports under the prevailing Foreign Trade Policy (FTP) of India,at the time of entering into the contract and all the rules, regulationsand directions applicable to exports (except Export DeclarationForm) and imports (except Bill of Entry) are complied with forthe export leg and import leg respectively;”

Hence, the circular modified the earlier requirement and nowclarified that MTTs could not be conducted in respect of goods whoseimport andexport are prohibited under the FTP. It is important to notethat this was based on suggestion made by the Technical Committeeon Services/Facilities to Exporters, which stated as follows:

“Issues Associated with Merchanting Trade

4.9 Goods covered under Merchanting trade should be allowed tobe exported/imported into the country as per the prevailing ForeignTrade Policy (FTP) at the time of entering into the contract withthe overseas suppliers, in order to avoid entering into tradingcontracts that are not permitted to be imported/exported underthe FTP. To safeguard the interest of the exporter, the export legof the transaction can be recommended to be covered by Letterof Credit (or) through insurance from ECGC.”

43 A.P. (DIR Series) Circular No 106

44 A.P. (DIR Series) Circular No. 95

A34. These guidelines were soon revised through circular[45] dated28 March 2014. However, there was no material change to therequirement that MTTs cannot be conducted in respect of goods whoseimport/export is prohibited under the FTP. The relevant clause of thecircular is extracted as follows:B“ii) Goods involved in the merchanting trade transactions wouldbe the ones that are permitted for exports/imports under theprevailing Foreign Trade Policy (FTP) of India, as on the date ofshipment and all the rules, regulations and directions applicable toexports (except Export Declaration Form) and imports (exceptBill of Entry), are complied with for the export leg and import legCrespectively;”

35. Subsequently, this circular was modified by the 2020 MTTGuidelines which introduced the impugned Clause 2(iii). On an analysisof the above circulars, it is clear that the RBI has never attempted topermit/prohibit MTTs into specific goods. Rather, from the very firstDcircular, it has relied upon the goods’ position under India’s FTP to regulateMTTs. Till 2013, MTTs were prohibited in relation to goods whose importwas not allowed under the FTP. Since 2013, they have also beenprohibited in relation to goods whose export is not allowed under theFTP.E

36. The RBI is responsible for issuing guidelines to authorizedpersons under FEMA. FEMA was introduced as an “Act to consolidateand amend the law relating to foreign exchange with the objective offacilitating external trade and payments and for promoting the orderlydevelopment and maintenance of foreign exchange market in India”.FHence, the role of the RBI under FEMA is directed towards ensuringthat India’s foreign exchange market is regulated, with view topreserving India’s foreign exchange reserves. On review of theguidelines which have been issued by the RBI in respect of MTTs since2000, it is clear that most of them are technical in nature and seek toregulate the manner in which India’s foreign reserves are traded.GConsequently, the RBI has not made the policy decision to classifyproducts for which MTTs are impermissible but has opted to rely on thedecision made by the UOI under the FTP.

H45 A.P. (DIR Series) Circular No.115

37. Such decision, regarding the products in which import orexport is prohibited in India, is made by the UOI under Section 3(2) ofthe Foreign Trade Act. Section 3(2) provides as follows:

“3. Powers to make provisions relating to imports andexports.—… (2) The Central Government may also, by Orderpublished in the Official Gazette, make provision for prohibiting,restricting or otherwise regulating, in all cases or in specified classesof cases and subject to such exceptions, if any, as may be madeby or under the Order, the import or export of goods or servicesor technology:

Provided that the provisions of this sub-section shall be applicable,in case of import or export of services or technology, only whenthe service or technology provider is availing benefits under theforeign trade policy or is dealing with specified services or specifiedtechnologies.”

38. While exercising its powers under Section 3(2), the UOI issuedmultiple notifications commencing from 8 February 2020, which prohibitedthe export of all PPE products due to the need to maintain their domesticstock during the COVID-19 pandemic. Mr Vikramjeet Banerjee, learnedASG appearing on behalf of the Ministry of Commerce and DGFT, haspointed out that the notification[46] dated 25 August 2020 now categorizesthe export of PPE Masks and N-95/FFP 2 Masks as “Restricted” (insteadof “Prohibited”) and limits their export to 50 lakh units per month, whilemedical coveralls of all classes/categories (including PPE overalls) arecategorized under the “Free” category, i.e., they are freely exportable.

39. The appellant has challenged the suitability of the RBI’sdecision to link the MTT of goods with their prohibition under India’sFTP by arguing that the objectives behind the two are entirely different.To support their argument, the appellant has relied on the nature of anMTT, where the goods do not enter or leave Indian territory and theIndian entity acts as an intermediary in an exchange between two foreigncountries.

40. In its affidavit, the RBI has explained the genesis of MTTs inthe following terms:

A“7. It is submitted that under the Merchanting Trade Transactions(hereinafter referred to as “MTT”) an Indian Citizen facilitatesthe export of good or material from Company or individual of anexporting country (other than India) and then import/supply thesaid good or material to Company or individual in another country,which is also other than India. In short, by MTT the Indian citizenBwhile acting as intermediary, facilitates an international tradebetween two different countries. It is submitted that the MTTsare very closely analogous to, and have all the elements of, exportas well as import except the fact that the goods are physically notlocated in India. The first leg of the transaction, known as importCleg, requires outlay of foreign exchange by the entity located inIndia carrying on the transaction, for the purpose of makingpayment for the goods being purchased overseas. The paymentis made by the Indian Entity by drawing foreign exchange orobtaining letter of credit in India from its banker, authoriseddealer of foreign exchange (i.e. authorised dealer bank) alsoDlocated in India. Thus, there is clear nexus of the first leg of thetransaction to India and the involvement of its foreign exchangereserves. It is further submitted that in successful trade, theIndian entity so purchasing the goods overseas recovers its moneyin the second leg of transaction, known as export leg, by sellingEthe goods to its buyer, also located overseas, but the money isunder the law to be repatriated to India to the credit of Indianentity, which is located in India, within strict time frame.”

From the above extract, the following salient features of MTTsemerge: (i) the original supplier and ultimate buyer of the goods areFforeign entities, with the Indian entity acting as an intermediary betweenthem; (ii) the goods do not enter the territory of India while shiftinghands between the supplier and the buyer; (iii) Indian foreign reservesare implicated when payment is remitted outside India when the Indianentity initially pays the supplier for the goods; and (iv) foreign exchangeis remitted to India when the Indian entity receives the payment fromGthe buyer of the goods.

41. The respondents have argued that the above features makeMTTs analogous to imports/exports, while the appellant has attemptedto differentiate them by noting that the goods never enter India’s territoryduring an MTT. To resolve this, we must understand how MTTs areHconsidered internationally.

42. The International Monetary Fund[47] in its sixth edition of theBalance of Payments and International Investment Position Manual[48]defines MTT in the following terms:

“10.41 Merchanting is defined as the purchase of goods by aresident (of the compiling economy) from nonresident combinedwith the subsequent resale of the same goods to anothernonresident without the goods being present in the compilingeconomy. Merchanting occurs for transactions involving goodswhere physical possession of the goods by the owner isunnecessary for the process to occur.”

Thereafter, it considers how MTTs should be recorded by noting:

“10.44 The treatment of merchanting is as follows:

(a) The acquisition of goods by merchants is shown under goodsas negative export of the economy of the merchant;

(b) The sale of goods is shown under goods sold under merchantingas positive export of the economy of the merchant;

(c) The difference between sales over purchases of goods formerchanting is shown as the item “net exports of goods undermerchanting.” This item includes merchants’ margins, holding gainsand losses, and changes in inventories of goods under merchanting.As result of losses or increases in inventories, net exports ofgoods under merchanting may be negative in some cases; and

(d) Merchanting entries are valued at transaction prices as agreedby the parties, not FOB.”

This makes it clear that while the goods involved in an MTT neverenter the territory of the intermediary, they are still recorded as negativeand positive exports from the territory of intermediary during the importand export leg of the MTT, which is similar to how ordinary imports andexports would be recorded.

43. This conclusion is also supported by the IMF’s accompanyingBalance of Payments Compilation Guide[49], which notes:

47 “IMF’’

48 Pages 157-159, available at <https://www.imf.org/external/pubs/ft/bop/2007/pdf/BPM6.pdf> accessed on 25 November 2021

49 Page 184, available at <https://www.imf.org/external/pubs/ft/bop/2014/pdf/BPM6_11F.pdf> accessed on 25 November 2021

A“Merchanting

11.29 Merchanting transactions—that is, the purchase ofgoods by resident (of the compiling economy) from anonresident combined with the subsequent resale of thesame goods to another nonresident without the goods beingBpresent in the compiling economy—should be recorded inthe balance of payments as transactions in goods. This achange from the BPM5, where merchanting was to berecorded as service. The change in treatment is in linewith the change of ownership rule that underpins the balanceof payments conceptual framework. If there is change in theCphysical form of the goods during the period they are owned bythe merchant, as result of manufacturing services, then thetransaction should be classified as general merchandise, and notas merchanting.

11.30 For the economy of the merchant, goods acquired underDmerchanting should be recorded as negative credit in the balanceof payments in the period the merchant acquires the goods, andwhen they are sold they should be recorded in that period as goodssold under merchanting as positive credit…”

(emphasis supplied)

It is evident that the role of an intermediary in MTTs was earlieronly considered as providing service. However, this has now evolved,where the intermediary is considered to be the owner of the goods duringtheir transit from the supplier to the buyer. Hence, goods under MTTsare recorded as negative and positive exports from the intermediary’sFresident country, even when they never physically enter their territory.

44. Therefore, the international opinion favours the position takenby the respondents that MTTs are analogous to traditional imports andexports. Therefore, it was suitable for the RBI to link the permissibilityof MTT in goods to the permissibility of their import/export under theGFTP. As noted earlier, the appellant has not challenged notificationsprohibiting the export of PPE products under the FTP. Hence, theprohibition of their MTT under Clause 2(iii) of the 2020 MTT Guidelinesis also considered suitable.

C.3 The necessity of the measure

45. The prong evaluating necessity is often conflated with theprong evaluating the suitability of measure. The analysis of necessityis an extension of evaluating the suitability of restriction, coupled withan analysis of whether the proposed measure is the least restrictivemanner of arriving at the intended legitimate State interest. This pronghas traces of the “narrowly tailored” state interest[50] that has often beenused by this Court in evaluating claims of infringement of fundamentalrights under Part III.46. The appellant has contended that prohibition of exports inPPE products was sufficient to achieve the objective of ensuring adequatesupplies, and it was not necessary to also prohibit MTTs. Further, it isargued that the appellant facilitating an MTT of PPE products betweentwo countries does not impact their stock in India. In any event, theappellant has argued that less-intrusive alternative would be to banMTTs only for goods whose imports have been prohibited under theFTP or allow individuals to seek exemptions from the RBI in relation togoods whose import/export has been prohibited by the FTP where theRBI can assess, on case-by-case basis, whether their MTT shouldalso be prohibited. While these measures have been suggested on ageneral basis, the appellant has limited his challenge in the present caseonly to the prohibition of PPE products. Hence, we shall be limiting ouranalysis in relation to that.

47. Having considered the nature of MTTs in Section C.2, wereject the appellant’s arguments for two reasons. First, while MTTs inPPE products may not directly reduce the stock of these products inIndia, it still does contribute to their trade between two foreign nations.In doing so, it directly reduces the available quantity of PPE products inthe international market, which may have been bought by India, if sorequired. As such, MTTs contribute to reducing the available stock ofPPE products in the international market that India could have acquired.Second, the UOI’s policy to ban the export of PPE products reflectstheir stance on the product’s non-tradability during the COVID-19pandemic. It highlights clear policy choice under which Indian entitiesshall not be allowed to export these products outside of India, in allprobability to the highest buyers across the globe who may end up hoardingthe global supply. Hence, banning MTTs in PPE products was critical in

50 Aadhar (5J) (supra), paras 420 and 424

CDE

Aensuring that Indian foreign exchange reserves are not utilized to facilitatethe hoarding of PPE products with wealthier nations. mere ban onexports would not regulate the utilisation of Indian foreign exchange.Hence, in order to keep India’s policy position consistent across theboard, the prohibition of MTTs in respect of PPE products was necessaryand the only alternative of ensuring the realisation of legitimate StateBinterest.

C.4 Balancing fundamental rights with State aims

48. The fourth and final prong of the proportionality analysisCinvolves the crucial task of conducting balancing exercise. The Courtis called upon to legitimise the “social importance of the limitation on aconstitutional right”[51]. measure that fails to justify its existence on thisprong is considered to have disproportionate impact on the right-holder[52].

49. Before we commence our analysis on the balancing of thisDright, we think it is critical for the Court to elaborate on the purpose andduties of the RBI, in order to better appreciate the objective behind itsseemingly onerous restrictions and regulations.

C.4.1 Regulatory Role of the RBIE

50. The RBI was established by the Reserve Bank of India Act1934[53]. By way of an amendment in 2016[54], the preamble of the statutewas amended to reflect the importance of modern monetary policyframework in an increasingly complex economy. The RBI has beenentrusted with the exclusive authority to operate the monetary policyFframework of India[55].

51. Constitution Bench in Joseph Kuruvilla Vellukunnel v.Reserve Bank of India[56] considered challenge to certain statutoryprovisions introduced in the Banking Companies Act 1949 which vestedthe RBI with the powers to file an application for winding-up of any

51 Aadhar (5J) (supra), paras 335 and 36952 Ibid53 “RBI Act’’54 Act 28 of 201655 Sections 45Z to 45Zo of the RBI Act56 AIR 1962 SC 1371H

company. Before conducting an analysis of the constitutional challengeunder Articles 14 and 19, the Constitution Bench prefaced its analysiswith the raison d’etre and importance of the RBI as regulatory body.Justice M Hidayatullah (as the learned Chief Justice then was) observedthe following:

“16. Before we consider the arguments of the two sides in detail,we wish to say few words about the position of the ReserveBank in the financial affairs of India and also about its place in thescheme of the law. The Reserve Bank of India was establishedon April 1, 1935 by the Reserve Bank of India Act, 1934. Evenbefore the establishment of the Reserve Bank, suggestions weremade that there should be central bank in India, and the RoyalCommission on Indian Currency and Finance had recommendedin 1926 that the currency and credit of the country could only beput on firm foundation, if central bank was established. Thefirst Bill introduced in 1927 by Sir Basil Blackett was dropped.The Indian Central Banking Inquiry Committee, however, reportedin 1931 that there was need for central banking institution inIndia “for securing the development of the Indian banking andcredit system on sound and proper basis”. The Committee pointedout that some of the Provincial Committees had also suggestedthe establishment of the Reserve Bank. The Committee ended bysaying:

“We accordingly consider it to be matter of supremeimportance from the point of view of the development of bankingfacilities in India, and of her economic advancement generally,that Central or Reserve Bank should be created at the earliestpossible date. The establishment of such bank would bymobilization of the banking and currency reserves ofIndia in one hand tend to increase the Vol. of creditavailable for trade, industry and agriculture and tomitigate the evils of fluctuating and high charges for theuse of such credit caused by seasonal stringency.” (Vol.I, Part I. Chap. XXII, para 605)

The White Paper on Indian Constitutional Reforms alsorecommended the establishment of Reserve Bank “freefrom political influence”. As result of these findings, when afresh Bill was introduced by Sir George Schuster on September

8, 1933 it was accepted and received the assent of the Governor-General on March 6, 1934.

17. The functions of the Reserve Bank were generallyindicated in the preamble as the regulation of the issue ofthe Bank notes and the keeping of the reserves with viewBto securing monetary stability in India and generally tooperate the currency and credit system of the country toits advantage. But to enable the Reserve Bank to functionin this manner, it had to be given other powers, so that itmay function effectively as central bank. To this end, theReserve Bank was given the right to hold the cash balances ofCimportant commercial banks, right to transact Governmentbusiness in India which was also its obligation, and to enter intoagreements with State Governments to transact their business.

D18. But the most important function of the Reserve Bankis to regulate the banking system generally. The ReserveBank has been described as Bankers’ Bank. Under theReserve Bank of India Act, the scheduled banks maintaincertain balances and the Reserve Bank can lend assistanceto those banks “as lender of the last resort”. The ReserveEBank has also been given certain advisory and regulatoryfunctions. By its position as central bank, it acts as an agencyfor collecting financial information and statistics. It advisesGovernment and other banks on financial and banking matters,and for this purpose, it keeps itself informed of the activities andFmonetary position of scheduled and other banks, and inspects thebooks and accounts of scheduled banks and advises Governmentafter inspection whether particular bank should be included inthe Second Schedule or not. […..]”

(emphasis supplied)

G52. two-judge Bench of this Court in Peerless General Financeand Investment Co. Limited v. Reserve Bank of India[57] consideredan alleged constitutional infringement of Article 19(1)(g) in the contextof RBI’s regulation of savings schemes run by Residuary Non-BankingCompanies. The thrust of the impugned regulation was to regulate deposit

H57 (1992) 2 SCC 343

investment schemes issued by Residuary Non-Banking Companies, inorder to ensure the security of deposits made by consumers. Justice NM Kasliwal elaborated on the role of the Courts with specific referenceto the regulatory powers of the RBI. The decision highlighted theimportance of judicial abstinence from matters of economic policyrequiring expertise:

“30. Before examining the scope and effect of the impugnedparagraphs (6) and (12) of the directions of 1987, it is also importantto note that Reserve Bank of India which is bankers’ bank is acreature of statute. It has large contingent of expert advice relatingto matters affecting the economy of the entire country and nobodycan doubt the bona fides of the Reserve Bank in issuing theimpugned directions of 1987. The Reserve Bank plays animportant role in the economy and financial affairs of Indiaand one of its important functions is to regulate the bankingsystem in the country. It is the duty of the Reserve Bankto safeguard the economy and financial stability of thecountry [….]

31. The function of the Court is to see that lawful authority is notabused but not to appropriate to itself the task entrusted to thatauthority. It is well settled that public body invested with statutorypowers must take care not to exceed or abuse its power. It mustkeep within the limits of the authority committed to it. It must actin good faith and it must act reasonably. Courts are not tointerfere with economic policy which is the function ofexperts. It is not the function of the courts to sit in judgmentover matters of economic policy and it must necessarily beleft to the expert bodies. In such matters even experts canseriously and doubtlessly differ. Courts cannot be expectedto decide them without even the aid of experts.”

(emphasis supplied)

In his concurring opinion, Justice V Ramaswamy noted thestatutory importance of the RBI and held that directions validly issuedby the RBI are in the nature of statutory regulations:

“51. This Court in Joseph Kuruvilla Vellukunnel v. Reserve Bankof India [1962 Supp 3 SCR 632 : AIR 1962 SC 1371 : (1962) 32Comp Cas 514] held that the RBI is “a bankers’ bank and lender

Aof the last resort”. Its objective is to ensure monetary stability inIndia and to operate and regulate the credit system of the country.It has, therefore, to perform delicate balance between the needto preserve and maintain the credit structure of the country bystrengthening the rule as well as apparent creditworthiness of thebanks operating in the country and the interest of the depositors.BIn underdeveloped country like ours, where majority populationare illiterate and poor and are not conversant with bankingoperations and in underdeveloped money and capital market withmixed economy, the Constitution charges the State to preventexploitation and so the RBI would play both promotional andCregulatory roles. Thus the RBI occupies place of “pre-eminence” to ensure monetary discipline and to regulatethe economy or the credit system of the country as an expertbody. It also advices the government in public finance andmonetary regulations. The banks or non-bankinginstitutions shall have to regulate their operations inDaccordance with, not only as per the provisions of the Actbut also the rules and directions or instructions issued bythe RBI in exercise of the power thereunder. Chapter 3-Bexpressly deals with regulations of deposit and financereceived by the RNBCs. The directions, therefore, areEstatutory regulations.

65. No one can have fundamental right to do any unregulatedbusiness with the subscribers/depositors’ money. [….]Thusthere is reasonable nexus between the regulation and the publicFpurpose, namely, security to the depositors’ money and the rightto repayment without any impediment, which undoubtedly is inthe public interest.

(emphasis supplied)

GJustice V Ramaswamy further articulated the role of judicialreview in matters of economic legislation and the democratic necessityof judicial abstinence:

68. It is well settled that the court is not tribunal from thecrudities and inequities of complicated experimentaleconomic legislation. The discretion in evolving economicH

measures, rests with the policy makers and not with thejudiciary. Indian social order is beset with social andeconomic inequalities and of status, and in our socialistsecular democratic Republic, inequality is an anathema tosocial and economic justice. The Constitution of Indiacharges the State to reduce inequalities and ensure decentstandard of life and economic equality. The Act assigns thepower to the RBI to regulate monetary system and theexperimentation of the economic legislation, can best beleft to the executive unless it is found to be unrealistic ormanifestly arbitrary. Even if law is found wanting on trial,it is better that its defects should be demonstrated andremoved than that the law should be aborted by judicialfiat. Such an assertion of judicial power deflectsresponsibilities from those on whom democratic societyultimately rests. The Court has to see whether the scheme,measure or regulation adopted is relevant or appropriate to thepower exercised by the authority. Prejudice to the interest ofdepositors is relevant factor. Mismanagement or inability to paythe accrued liabilities are evils sought to be remedied. The directionsare designed to preserve the right of the depositors and the abilityof RNBC to pay back the contracted liability. It is also intended toprevent mismanagement of the deposits collected from vulnerablesocial segments who have no knowledge of banking operations orcredit system and repose unfounded blind faith on the companywith fond hope of its ability to pay back the contracted amount.Thus the directions maintain the thrift for saving and streamlineand strengthen the monetary operations of RNBCs.”

(emphasis supplied)

53. three-judge Bench of this Court in Internet and MobileAssociation of India v. Reserve Bank of India[58] (“Internet &Mobile Association”) recently considered challenge to the RBI’sban of trading in cryptocurrencies. In examining this challenge, the Courtdetailed the regulatory importance of the RBI through historical andtextual analysis of the RBI Act. Justice V Ramasubramanian, speakingon behalf of the Court, observed that the RBI assumes special role,compared to other statutory bodies. Its decisions are reflective of its

Aexpertise and guide the monetary policy of the country. Hence, policydecision of the RBI warrants deference from this Court. The Courtheld:

“84. careful scan of the RBI Act, 1934 in its entirety wouldshow that the operation/regulation of the credit/financial systemBof the country to its advantage, is thread that connects all theprovisions which confer powers upon RBI, both to determine policyand to issue directions.

189. It is contended by Shri Ashim Sood, learned CounselCfor the petitioners that the impugned Circular does not haveeither the status of legislation or the status of an executiveaction, but is only the exercise of power conferred bystatute upon statutory body corporate. Therefore, it ishis contention that the judicial rule of deference asDarticulated in R.K. Garg v. Union of India [R.K. Garg v.Union of India, (1981) 4 SCC 675 : 1982 SCC (Tax) 30] ,Balco Employees’ Union v. Union of India [BalcoEmployees’ Union v. Union of India, (2002) 2 SCC 333]and Swiss Ribbons (P) Ltd. v. Union of India [Swiss Ribbons(P) Ltd. v. Union of India, (2019) 4 SCC 17] will not applyEto the decision taken by statutory body like RBI. If, alegislation relating to economic matters is placed at the highestpedestal, an executive decision with regard to similar matters willbe placed only at lower pedestal and the decision taken by astatutory body may not even be entitled to any such deference orFreverence.190. But given the scheme of the RBI Act, 1934 and theBanking Regulation Act, 1949, the above argument appearsonly to belittle the role of RBI. RBI is not just like anyother statutory body created by an Act of legislature. It is aGcreature, created with mandate to get liberated even fromits creator. This is why it is given mandate — (i) under thePreamble of the RBI Act, 1934, to operate the currency and creditsystem of the country to its advantage and to operate the monetarypolicy framework in the country; (ii) under Section 3(1), to takeover the management of the currency from the CentralHGovernment; (iii) under Section 20, to undertake to accept monies

for account of the Central Government, to make payments up tothe amount standing to the credit of its account and to carry outits exchange, remittance and other banking operations, includingthe management of the public debt of the Union; (iv) under Section21(1), to have all the money, remittance, exchange and bankingtransactions in India of the Central Government entrusted with it;(v) under Section 22(1), to have the sole right to issue bank notesin India and (vi) under Section 38, to get rupees into circulationonly through it, to the exclusion of the Central Government.Therefore, RBI cannot be equated to any other statutorybody that merely serves its master. It is specificallyempowered to do certain things to the exclusion of eventhe Central Government. Therefore, to place its decisionsat pedestal lower than that of even an executive decision,would do violence to the scheme of the Act.

192. But as we have pointed out above, RBI is not just any otherstatutory authority. It is not like stream which cannot be greaterthan the source. The RBI Act, 1934 is pre-constitutionallegislation, which survived the Constitution by virtue of Article372(1) of the Constitution. The difference between other statutorycreatures and RBI is that what the statutory creatures can do,could as well be done by the executive. The power conferredupon the delegate in other statutes can be tinkered with, amendedor even withdrawn. But the power conferred upon RBI underSection 3(1) of the RBI Act, 1934 to take over the managementof the currency from the Central Government, cannot be takenaway. The sole right to issue bank notes in India, conferred bySection 22(1) cannot also be taken away and conferred upon anyother bank or authority. RBI by virtue of its authority, is memberof the Bank of International Settlements, which position cannotbe taken over by the Central Government and conferred uponany other authority. Therefore, to say that it is just like anyother statutory authority whose decisions cannot invite duedeference, is to do violence to the scheme of the Act. Infact, all countries have Central banks/authorities, which, technicallyhave independence from the Government of the country. To ensuresuch independence, fixed tenure is granted to the Board of

AGovernors, so that they are not bogged down by politicalexpediencies. […..]Therefore, we do not accept the argumentthat policy decision taken by RBI does not warrant anydeference.

(emphasis supplied)

In further analysing the wide-ranging powers entrusted with theRBI, the Court noted that its regulatory powers would be tested againstthe cornerstone of proportionality:

“224. It is no doubt true that RBI has very wide powers notonly in view of the statutory scheme of the three enactmentsCindicated earlier, but also in view of the special place androle that it has in the economy of the country. These powerscan be exercised both in the form of preventive as well ascurative measures. But the availability of power is differentfrom the manner and extent to which it can be exercised.DWhile we have recognised elsewhere in this order, thepower of RBI to take pre-emptive action, we are testingin this part of the order the proportionality of such measure,for the determination of which RBI needs to show at least somesemblance of any damage suffered by its regulated entities. Butthere is none. When the consistent stand of RBI is that they haveEnot banned VCs and when the Government of India is unable totake call despite several committees coming up with severalproposals including two draft Bills, both of which advocated exactlyopposite positions, it is not possible for us to hold that the impugnedmeasure is proportionate.”

(emphasis supplied)

54. Thus, it is settled that the RBI is special, expert regulatorybody that is insulated from the political arena. Its decisions are reflectiveof its expertise in guiding the economic policy and financial stability ofthe nation. Adverting to the facts of this case, the RBI is empowered byGFEMA to manage, regulate, and supervise the foreign exchange of India.It is trite law that courts do not interfere with the economic[59] orregulatory[60]policy adopted by the government. This lack of interference59 R K Garg v. Union of India, (1981) 4 SCC 675; Balco Employees Union v. Unionof India, (2002) 2 SCC 333

60 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17; Ebix Singapore v.HCommittee of Creditors of Educomp Solutions (P) Ltd., 2021 SCC OnLine SC 313

is in deference to the democratically elected government’s wisdom,reflecting the will of the people. As held by three-judge Bench of thisCourt in Internet & Mobile Association (supra), the regulationsintroduced by RBI are in the nature of statutory regulation and demanda similar level of deference that is accorded to executive and Parliamentarypolicy.

55. This Court must be circumspect that the rights and freedomsguaranteed under the Constitution do not become weapon in the arsenalof private businesses to disable regulation enacted in the public interest.The Constituent Assembly Debates had carefully curated restrictionson rights and freedoms, in order to retain democratic control over theeconomy. Regulation must of course be within the bounds of the statuteand in conformity with executive policy. regulated economy is criticalfacet of ensuring balance between private business interests and theState’s role in ensuring just polity for its citizens. The ConstitutionBench in Modern Dental College (supra) had remarked on the roleof regulatory mechanisms in liberalized economies. Speaking for theBench, Justice K Sikri had observed:“87. Regulatory mechanism, or what is called regulatoryeconomics, is the order of the day. In the last 60-70 years, economicpolicy of this country has travelled from laissez faire to mixedeconomy to the present era of liberal economy with regulatoryregime. With the advent of mixed economy, there wasmushrooming of the public sector and some of the key industrieslike aviation, insurance, railways, electricity/power,telecommunication, etc. were monopolised by the State. Licence/permit raj prevailed during this period with strict control of theGovernment even in respect of those industries where privatesectors were allowed to operate. However, Indian economyexperienced major policy changes in early 90s on LPG Model i.e.liberalisation, privatisation and globalisation. With the onset ofreforms to liberalise the Indian economy, in July 1991, newchapter has dawned for India. This period of economic transitionhas had tremendous impact on the overall economic developmentof almost all major sectors of the economy.

88. When we have liberal economy which is regulated by themarket forces (that is why it is also termed as market economy),prices of goods and services in such an economy are determined

Ain free price system set up by supply and demand. This is oftencontrasted with planned economy in which Central Governmentdetermines the price of goods and services using fixed pricesystem. Market economies are also contrasted with mixedeconomy where the price system is not entirely free, but undersome government control or heavily regulated, which is sometimesBcombined with State led economic planning that is not extensiveenough to constitute planned economy.

89. With the advent of globalisation and liberalisation, though themarket economy is restored, at the same time, it is also felt thatmarket economies should not exist in pure form. Some regulationCof the various industries is required rather than allowing self-regulation by market forces. This intervention through regulatorybodies, particularly in pricing, is considered necessary for thewelfare of the society and the economists point out that suchregulatory economy does not rob the character of marketDeconomy which still remains market economy. Justification for

regulatory bodies even in such industries managed by privatesector lies in the welfare of people. Regulatory measures are feltnecessary to promote basic well being for individuals in need. It isbecause of this reason that we find regulatory bodies in all vitalindustries like, insurance, electricity and power,Etelecommunications, etc.”

56. Regulating the economy is reflective of the compromisebetween the interests of private commercial actors and the democraticState that represents and protects the interests of the collective. Scholarsacross the world have warned against the judiciary constitutionalising anFunregulated marketplace[61]. This Court must be bound by similarobligation, in order to preserve its fidelity to the Constitution. With thetransformation in the economy, the Courts must also be alive to the socio-economic milieu. The right to equality and the freedom to carry on one’strade cannot inhere right to evade or avoid regulation. In liberalizedGeconomies, regulatory mechanisms represent democratic interests ofsetting the terms of operation for private economic actors. This Courtdoes not espouse shunning of judicial review when actions of regulatorybodies are questioned. Rather, it implores intelligent care in probing the

61 Robert Post & Amanda Shanor, Adam Smith’s First Amendment, 128 HARVARD LAWREVIEW FORUM 165, 167 (2015), available at <https://harvardlawreview.org/2015/03/Hadam-smiths-first-amendment/>

bona fides of such action and nuanced deference to their expertise informulating regulations. casual invalidation of regulatory action in thegarb of upholding fundamental rights and freedoms, without carefulevaluation of its objective of social and economic control, would harmthe general interests of the public.

57. In the instant case, the RBI has demonstrated rational nexusin the prohibition of MTTs in respect of PPE products and the publichealth of Indian citizens. The critical links between FTP and MTTs havebeen established by the respondents. Facilitating MTTs in PPE productsbetween two distinct nations may prima facie appear as having nobearing on the availability of domestic stocks. However, the RBI hascarefully established the connection between the use of Indian foreignexchange reserves, MTTs and the availability of domestic stocks (asnoted in Sections C.2 and C.3). As developing country with sizeablepopulation, RBI’s policy to align MTT permissibility with the FTPrestrictions on import and export of PPE products cannot be questioned.Thus, this Court is constrained to defer to the regulations imposed byRBI and the UOI, in the interests of preserving public health in apandemic. This deference is by no means uncritical. In fact, one of us(Justice Y Chandrachud), in three-judge Bench of this Court inGujarat Mazdoor Sabha v. State of Gujarat[62] had decried the State’stenuous claim of public health emergency to dilute welfare conditionsin labour laws. This Court had stressed that balancing individual rightsagainst measures adopted to combat the public health crisis must continueto satisfy the test of proportionality. Justice Y Chandrachud noted:

“30. Even if we were to accept the respondent’s argument at itshighest, that the pandemic has resulted in an internal disturbance,we find that the economic slowdown created by the Covid-19Pandemic does not qualify as an internal disturbance threateningthe security of the State. The pandemic has put severe burdenon existing, particularly public health, infrastructure and has led toa sharp decline in economic activities. The Union Governmenthas taken recourse to the provisions of the Disaster ManagementAct, 2005. [Ministry of Home Affairs, Order No. 40-3/2020-DM-I(A) dated 24-3-2020.] However, it has not affected the securityof India, or of part of its territory in manner that disturbs thepeace and integrity of the country. The economic hardships caused

by Covid-19 certainly pose unprecedented challenges togovernance. However, such challenges are to be resolved by theState Governments within the domain of their functioning underthe law, in coordination with the Central Government. Unless thethreshold of an economic hardship is so extreme that it leads todisruption of public order and threatens the security of India or ofa part of its territory, recourse cannot be taken to such emergencypowers which are to be used sparingly under the law. Recoursecan be taken to them only when the conditions requisite for avalid exercise of statutory power exist under Section 5. That isabsent in the present case.

40. The need for protecting labour welfare on one hand andcombating public health crisis occasioned by the pandemic onthe other may require careful balances. But these balances mustaccord with the rule of law. statutory provision which conditionsthe grant of an exemption on stipulated conditions must bescrupulously observed. It cannot be interpreted to provide freereign for the State to eliminate provisions promoting dignity andequity in the workplace in the face of novel challenges to theState administration, unless they bear an immediate nexus toensuring the security of the State against the gravest of threats.”

Thus, it is not this Court’s stance that judicial review is stowed incold storage until public health crisis tides over. This Court retains itsrole as the constitutional watchdog to protect against State excesses. Itcontinues to exercise its role in determining the proportionality of StateFmeasure, with adequate consideration of the nature and purpose of theextraordinary measures that are implemented to manage the pandemic.Democratic interests that secure the well-being of the masses cannotbe judicially aborted to preserve the unfettered freedom to conductbusiness, of the few.

Conclusion

58. Therefore, we find that the judgment dated 8 October 2020 ofthe Madhya Pradesh High Court was correct in holding that Clause2(iii) of the 2020 MTT Guidelines was proportionate measure in ensuringHthe availability of sufficient domestic stock of PPE products. The measure

was validly enacted, in pursuance of legitimate state interest and did notdisproportionately impact the fundamental rights of the appellant. Hence,Clause 2(iii) passes muster under Articles 14, 19(1)(g) and 21. For thereasons noted in this judgment, we see no need to interfere.

59. For the above reasons, we find no merit in the appeal. Theappeal accordingly stands dismissed.

60. Pending application(s), if any, shall stand disposed of.

Ankit Gyan

Appeal dismissed.