Holding

The RBI had, in substance, granted the permission required under Section 28(1) of FERA, so the agreement was not void under Section 28(2) and the arbitration clause remains valid.

Summary

Burn Standard Company Ltd., a Government undertaking, entered into a technical collaboration agreement with McDermott International Inc. to obtain foreign technical know‑how, requiring RBI permission under Section 28(1)(b) of the Foreign Exchange Regulation Act, 1973 (FERA). The agreement received approval from the Secretariat for Industrial Approvals (SIA) and was taken on record, after which a copy was sent to the RBI, which later permitted the remittance of the first instalment though the formal permission was not communicated. The respondent later invoked the arbitration clause for a dispute over subsequent payments, while the appellant claimed the agreement (and thus the arbitration clause) was void ab initio for lack of RBI permission, arguing that no application was made in the prescribed FNC‑5 form. The High Court held the agreement voidable but the arbitration clause survived; the Supreme Court examined whether substantive RBI permission had been obtained despite procedural lapses. It concluded that the RBI had indeed granted the required permission, rendering the agreement valid and the arbitration clause enforceable. The appeal was dismissed with costs.

Issues considered

The requirement of RBI permission under Section 28(1)(b) of FERA for a technical collaboration agreement and whether such permission was obtained despite the absence of a formal FNC‑5 application.
Whether the failure to file the prescribed form under paragraph 25A.2 of the Exchange Control Manual renders the agreement void under Section 28(2) of FERA.
Whether the arbitration clause in the agreement remains enforceable if the main contract were deemed void for lack of RBI permission.
Whether an administrative lapse in communicating the RBI’s decision affects the validity of the permission and the contract.

Legislation cited

Arbitration Act, 1940s. 14, s. 17, s. 30, s. 33
Foreign Exchange Regulation Act, 1973s. 28(1), s. 28(2), s. 73(4)
Income Tax Act, 1961s. 195(2)

Subjects

Foreign Exchange Regulation ActRBI permissionTechnical collaboration agreementArbitration clauseVoid ab initioExchange Control ManualAdministrative lawContract validitySection 28Supreme Court

Judgment

BURN STANDARD COMPANY LIMITED A"
v.
McDERMOTT INTERNATIONAL INC. AND ANOTHER

APRIL 3, 1991

[A.M. AHMADI, V. RAMASWAMI AND B
M. FATHIMA BEEVI, JJ.]

Foreign Exchange Regulation Act, 1973/ Foreign Exchange
Manual, 1978-Section 28 ( 1) IParagraphs 24A. 11( 1) and 25A. 2-1ndian
Company-Technical Collaboration agreement with foreign corpora-
tion-General or special permission of RBI-Collaboration approved
by Secretariat for Industrial Approvals-Agreement taken on record by
c
Government-Whether separate permission of RBI necessary-Deci-
sion taken by RBI, but approval not communicated-Whether failure to
discharge ministerial duty ob/iterates conscious decision taken-Non-
filing of FNC5 form for grant of permission-Whether erases decision
already taken. D

Arbitration Act, 1940: Sections 14, 17, 30 and 33-Foreign col-
laboration agreement-RBI's approval-Whether arbitration clause
rendered void by virtue of agreement itself being void ab initio for want
of RBI permission under Section 28( 1) of Foregin Exchange Regulation
Act, 1973. E

Administrative Law: Administrative action-Whether decision
becomes binding.

The appellant, a Government company, entered into a Technical
collaboration agreement with the respondent, a foreign corporation, F
under which the respondent was to provide technical know-how to the
appellant, and the appellant was to pay the respondent fee in foregin
currency in three instalments. The appellant was required to apply for
registration and/or Governmental approval and furnish satisfactory
evidence of receipt of such approval. The effective date of the agree'
ment was the date on which the notification was received by the respon- G
• dent that all governmental approvals in that regard had been secured .
The agreement was entered into with the approval of the Secretariat for
Industrial Approvals. The agreement as well as the supplementary
agreement, incorporating certain changes suggested by the Govern-
ment, were filed with the Government, which took the same on record,
by its letter of approval, A copy of the letter of approval and also the H

67
68 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

collaboration agreement was sent to the RBI.
A
After obtaining the necessary order under Section 195(2) of the
Income Tax Act from the Income Tax Officer and the permit from the
RBI, the appellant remitted the first instalment offee to the respondent.
Thereafter, the respondent, alleging non-payment of subsequent instal-
B ments, and consequent breach of terms of contract, sought to invoke
clause 8.2 of the agreement for terminating the agi:eement. The appcl·
Iant questioned respondent's right to invoke clause 8.2. Thereafter the
respondent invoked the arbitration clause, clause 12.1 of the agree-
ment, for referring disputes and difference to the arbitration of Inter-
national Chamber of Commerce and claimed certain amount for the
services actually rendered and also informed the ICC accordingly. The
C appellant challenged the legality and validity of the agreement as void
ab initio, and also clause 12.1 as non-est and legally unforceable, and
filed an application under Section 33 of the Arbitration Act, contending
that the agreement being a contingent one, commencing from the effec-
tive date, and necessary approval having not been secured, the agree-
D ment had not commenced and, consequently the arbitration clause,
being part of the very same agreement, the respondent was not entitled
to invoke the said clause, and that in the absence of a valid permission
from the RBI under Section 28(1) (b) of the Foreign Exchange Regula-
tion Act, 1973, the agreement was clearly void by the thrust of Section
28(2) of the Act.
E
The respondent contended that the necessary Government
approvals were obtained and hence the 'effective date' was reached and
that under the Exchange Control Manual only the Indian Company
could apply to SIA for approval and once such approval was accorded,
the foreign collaborator to the contract was not expected to secure the
F RBI permission under Section 28(l)(b), since under the manual, SIA
approval was to be deemed to be RBl's permission also; and therefore,
the agreement was legal and valid and the respondent was entitled to
seek its enforcement.

The High Court held that on a true interpretation of the contract,
G it must be held to be voidable at the discretion of either party, that, even
if the contract was terminated or rendered void, the arbitration clause
therein did not perish ipso facto, that the application to the Income Tax
Officer for making payment of first instalment could not have been
made unless the necessary approvals were obtained, that the RBI had
granted permission to remit the instalment money (fee), after the
H Income Tax Officer bad made the order under Section 195(2) of the
BURN STANDARD v. McDERMOTT INC. 69

Income Tax Act, and it was only on account of this payment, that the
A
respondent furnished the technology and provided technical services,
.... and that, on account of appellant's failure to pay subsequent instal-
ments, a dispute had clearly arisen which had to be resolved through
arbitration.

In the appeal before this Court it was contended on behalf of the B
appellant company that paragraph 25A.2 of the Exchange Control
Manual, 1978, provided that applications for permission under Section
~ 28(1)(b) should be made in FNCS and since no such application in FNCS
was made, a clear inference could be raised that the RBI had not
granted permission under Section 28(1), and accordingly the agreement
and the arbitration clause forming part of it were void ab initio by the
thrust of Section 28(2), and that the prescribed form for SIA approval c
under paragraph 24A.11 was not the same as FNCS prescribed under
paragraph 25A.2 and administrative direction in paragraph 24A.11
that no separate permission under Section 28(1) was necessary could
not override the statutory requirement of the Section.
D
It was contended on behalf of the respondent that requirements of
Section 28(1) were fully complied with and the RBl's sanction, being
essentially administrative, it was enough to show that the RBI had
granted permission, no matter whether it had followed the procedure of
paragraph 24A.ll(i) or 25A.2 of the Exchange Control Manual.
•.
E
Dismissing the appeal, this Court,
-" HELD: 1.1 Section 28(1) of the Foreign Exchange Regulation Act,
1973, places restrictions on appointment of certain individuals and
companies as technical or management advisers in India unless the RBI
approves the same by a general or special permission. The section is F
silent on the mode and manner of securing such permission. However,
sub-section (4) of Section 73 provides that where any provision of the
Act requires the RBl's permission for doing anything under such provi-
sion, the RBI may specify the form in which an application for such
permission shall be made. On a plain reading of paragraph 24A.11
Exchange Control Manual, 1978, it becomes clear that the intention is G
to introduce the single counter or win~ow procedure to avoid duplica-
lion and hardship to the foreign collaborators, and once the collabora-
lion is approved by SIA, and the agreement is 'taken on record' there is
no need to obtain a separate permission from the RBI. Paragraph 9 of
the Guidelines for Industries stipulates that after the agreement is taken
on record, a copy thereof has to be sent to the RBI to enable it to H
70 SUPREME COURT RU'ORTS [1991] 2 S.C.R.

A authorise remittances to the (oreign collaborator. [S2E, S4C, SSA]

1.2 In the instant case, the appellant had sought the SIA
approval, which was granted subject to the terms and conditions set oul
in the letter of approval. It was only thereafter that the agreement was
executed. The appellant then sent a copy of the agreement to the
B Government of India which was duly examined in the light of the terms
and conditions on which the approval was granted by the SIA and
certain discrepancies were communicated to the appellant which neces-
sitated the execution of supplementary agreement. It was only thereaf-
ter that the appellant was informed that the collaboration agreement
and the supplementary agreement 'have been taken on record'. This
was then forwarded to the RBI. The matter was processed by the RBI
C and the remittance of the first instalment of the fees took place after the
income-tax was duly recovered at source. [SSA-DJ

1.3 The affidavits ftled on behalf of the RBI leave no doubt that
the remittance was permitted only after the RBI was satisfied that all
D the terms and conditions were duly satisfied, though the RBl's approval
'remained to be communicated' to the appellant company. Failure to
discharge the ministerial duty cannot obliterate the conscious decision
taken by the RBI after application of mind. [SSE, G]

1.4 The RBI had applied its mind to the question of grant of
E permission and had only thereafter permitted remittance of the first .
instalment of the fees payable to the foreign collaborator . .Merely
becanse application for such permission was mit made in FNCS form
cannot cloud the fact that the dttlsion to grant the permission was
actually taken, but the ministerial function of communicating the same
remained to be done by oversight. This lapse cannot erase the decision
F already taken. [86H, S7A]

2.1 The prescription of the form is merely to aid the RBI to
process the application for permission. Emphasis must be laid on sub-
stance and not on mere form. H there has been substantial compliance,
mere lapse on the part of the RBI in failing to communicate its decision
G should make no difference. Paragraph 25A.2 is not in derogation of
paragraph 24A. ll(i) nor does it dilute the requirement of Section 28(1).
Factum of permission, and not the procedure followed, is relevant. [86G]

2.2 The RBI had granted the permission contemplated by Section
28(1) and hence the agreement cannot be voided by virtue of Section
H 28(2) of FERA. Once the decision to grant the permission is taken,
BURN STANDARD "· McDERMOTT ir>C. [AHMADI. J.[ 71

whether through the course charted hy paragraph 24A.ll(i) or 25A.2, A
that decision stands unless rescinded and the authorities are bound to
act in aid thereof. [87B-C]

3. In the circumstances it is unnecessary to examine the question
whether clause 12.1 of the agreement would stand or perish if the agree-
ment is rendered void under Section 28(2) for failure to secure permis- B
sion under Section 28( 1). [87D]

M/s. Dhanrajmal Gobindram v. Mis. Shamji Kalidas & Co.,
[1961] 3 SCR 1020; LIC of India v. Escorts Ltd. & Ors., [1986] 1 SCC
264 at 318 and Shri Sitaram Sugar Co. Ltd. & Anr. v. U.P. State Sugar
Corporation Ltd. & Anr., [1990] 3 SCC 222 at page 246-247, referred C
to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No.
1423 of 1991.

From the Judgment and Order dated 6.12.1989 of Calcutta High D
Court in Case No. 5696 of 1988.

Soli J. Sorabjee, Deepanker Ghosh, R.M. Chatterjee, A.K.
Ghose, S. Manda! and Ms. Madhukhatri for the Appellant.

Dipankar Gupta, O.P. Khaitan, A.K. Bhatnagar, Ms. Kiran E
Choudhary and Ms. B. Gupta for the Respondents.

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

The Judgment of the Court was delivered by F

AHMADI, J. Special leave granted.

The principal question which this Court is called upon to answer
in this appeal by special leave is whether the arbitration clause con-
tained in Article XII (Paragraph 12.1) of the Technical Collaboration G
Agreement entered into at Dubai, United Arab Emirates, on
September 25, 1984, between the appellant Burn Standard Company
Ltd., a Government of India Undertaking, and the respondent
Mcdermott International Inc., a foreign company, is rendered void by
virtue of the agreement itself being ab-initio void fqr want of general
or special permission of the Reserve Bank of India (RBI) under H
72 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

Section 28 of The Foreign Exchange Regulation Act, 1973 (FERA).
A
The rele~ant part of the said provision reads as under:

"28(1)--Without prejudice to the provisions of Section 47
and notwithstanding anything contained in any other provi-
sion of this Act or the Companies Act, 1956, a person
B resident outside India (whether a citizen of India or not) or
a person who is not a citizen of India but is resident in
India, or a company (other than a banking company) which
is not incorporated under any law in force in India or in
which the non-resident interest is more than forty per cent,
or any branch of such company, shall not, except with the
general or special permission of the Reserve Bank,- I
c
(a) act, or accept appointment, as agent in India or any
person or company, in the trading or commercial transac-
tions of such person or company; or

D (b) act, or accept appointment, as technical or manage-
ment adviser in India or any person or company; or

(c) permit any trade mark, which he or it is entitled to use,
to be used by any person or company for any direct or
indirect consideration.
E
(2) Where any such person or company (including its
branch) as it referred to in sub-section ( 1) acts or accepts
appointment as such agent, or technical management
adviser, or permits the use of any such trade mark, without
the permission of the Reserve Bank, such acting, appoint-
F ment or permission, as the case may be. shall be void.

The petitioner is a Government company incorporated under the
Companies Act, 1956, having its registered office at IOC. Hungerford
Street, Calcutta, whereas the respondent is a Corporation organised
and existing under the laws of the Republic of Panama with its execu-
G tive office at P.O. Box 61961, 1010 Common Street, New Orleans,
Louisiana 70161, U.S.A., with a branch office at P.O. Box 3098,
Dubai, UAE. On 25th September, 1984 the said parties entered into
an agreement, styled "Technical Collaboration Agreement", for the
fabrication of off-shore platform structure, including but not limiied fo
Jackets, Piles, Decks, Modules, Platform & pipeline components,
H including their sub-components, for the oil and gas industry which
BURN STANDARD v. McDERMOTT INC. [AHMADI, J.J 73

required the high degree of expertise and experience as well as the A
technical know-how possessed by the respondent. The duration of the
agreement was fixed under Article VIII to be five years from the
effective date or five years after commencement of commercial pro-
duction, whichever is greater, or until otherwise terminated earlier
under the Agreement. The expression 'effective date' as defined in
Article I means the date on which notification is received by the B
respondent that all Governmental approvals relating to the agreement
have been secured; provided that if such approvals are not secured
wiihin 180 days from the signing of the agreement. the agreement,
upon notice pursuant to Article XVII of the agreement by either party
may be made ineffective whereupon the agreement shall be treated as
null and void. Obviously the purpose of the agreement was to establish
the basis whereunder the respondent was to provide and the appellant
c
was to receive technology and special technical services related to the
establishment and operation of Fabrication Yard for fabricating off-
shore platform structures and additional special technical services for
any contracts related to marine construction activities that are
awarded to the appellant. Article X of the agreement en joins upon the D
appellant to apply for necessary registration and/or governmental
approval of the agreement in India within 60 days after the agreement
is signed by both parties and is delivered to the appellant. A duty is
· cast on the appellant to furnish satisfactory evidence of receipt of the
required governmental approval.. The next important clause in the
contract which needs to be noticed at this stage is Article XII which E
reads as under:

"Article XII-Arbitration

12.1 Any claim, dispute or controversy arising out of or
relating to this Agreement, or the breach thereof, shall be F
finally settled by arbitration, pursuant to and in accordance
with the Rules of Conciliation and Arbitration of the Inter-
national Chamber of Commerce by three (3) arbitrators
appointed in accordance with said Rules. Judgment upon
the award rendered by the Arbitrators may be entered in
any court having jurisdiction thereof. The situs of Arbitra- G
tion shall be New Delhi, India or an alternate location if
the parties shall mutually agree and the arbitration pro-
ceedings shall be conducted in the English language."

Under Article XII the validity, construction and performance of the
agreement was to be governed by the Indian laws. H
74 SUPREME COURT REPOR rs [ 1991] 2 S.C.R.

A The aforesaid agreement was entered into after it was approved
by the Secretariat for Industrial Approvals (SIA) by their letter dated
18th June, 1984. After the execution of the agreement it was filed with

13
the Government of India on 5th October. 1984. By the letter dated 15th
December, 1984 of the Ministry of Industry, Department of Heavy
Industry, New Delhi, addressed to the appellant it was pointed out
that clauses 3.2 and 4.2 of the agreement were not consistent with the
terms and conditions of collaboration approved by Secretariat letter
,
dated 18th June, 1984, in that, clause 3.2 should contain a clause that
any additional payment made for specific Technical Services would be
subject to prior approval of Government of India and in clause 4.2 the
payment expressed in U.S. dollars 298,200 should be 298,500 and the
c figure of the 3rd instalment should be 99,450 instead of 99,400 U.S
dollars. To carry out these changes, the parties entered into a sup-
plementary agreement on 29th December, 1984 and filed it with the
Government of India on 9th January, 1985.

Under Article IV of the agreement, in consideration of the
D respondent having agreed to transfer technology to the appellant, the
latter undertook to pay a lump sum of$ 298,200 in three instalments,
the first payment of U.S.$ 99,400 within thirty (30) days of the signing
of the agreement or receipt of approval from the Government of India,
whichever is later; the second payment of U.S. $ 99,400 upon comple-
tion of items 1 to 10 of clause 3.4 of Article III and the third payment •
E of U.S. $ 99,400 upon the commencement of commercial production
of the Fabrication Yard or four years after the effective date,
whichever is earlier. As stated earlier the figure '298,200' was replaced L
by the figure '298,250' and the amouilt of third instalment was raised
from U.S.$ 99,400 to U.S.$ 99,450 under the supplementary agree-
ment dated 9th January, 1985. After this supplementary agreement
F was filed with the Govt. of India, the latter took the collaboration
agreement on record under the communication dated 15th January,
1985. A copy of the Govt. of India's letter along with a copy of the
collaboration agreement was received by the RBI on 21st January,
1985. In para 7 of its affidavit dated 18th September, 1990, the RBI has
clarified as under:
G
"However, the Bank's letter of authorisation indicating the
terms and conditions to be fulfilled for remittances falling
due under collaboration agreement remained to be issued
to the petitioner company. Hence the Bank'a approval
under Section 28( I )(b) of the Act for rendering technical
H etc. services under the collaboration agreement also re-
BURN STANDARD " McDERMOTT INC. [AHMADI, J.] 75

mained to be communicated to the petitioner company.
A
Later, when the petitioner company applied for remittance
of the first instalment under the collaboration agreement,
the Bank being satisfied that the remittance was strictly in
accordance with the terms and conditions approved by the
Government, allowed the same."
B
On 5th February, 1985, the appellant made an application to the
income tax authorities for determination of income tax deduction for
the payment of the first instalment of fees. The order passed under
Section 195(2) of the Income-Tax Act determining the tax at 40% of
the consideration proceeds on the premise that the agreement was
approved by the Government of India. Soon thereafter the appellant
applied on 14th February, 1985 to the United Bank of India for remit- c
ting the first instalment of fees minus 40% chargeable as income tax.
The United Bank of India intimated the rate of exchange on the very
next date. The Income-tax Officer issued the 'No-objection certificate'
on 19th February, 1985 whereupon the RBI issued the permit dated
6th March, 1985 for remittance of U.S.$ 59,640 ($ 99,640-40%=$ D
59,640). By the appellant's letter dated 18th March, 1985 the appellant
enclosed a draft for the said amount to the respondent.

After the payment in respect of the first instalment was thus
made, the respondent wrote a letter dated 16th September, 1986
invoking clause 8.2 of the agreement. That clause reads thus: E

"In the event of any breach of this Agreement not cured
within sixty (60) days after notification thereof, in addition
to all other rights and remedies which either party may
have in law or equity, the party not in default may at its
option terminate this Agreement by written notice. Such F
termination shall become effective on the date set forth in
such notice of termination, but in no event shall it be
earlier than sixty (60) days from the mailing thereof. Any
waiver of the right of termination for default shall not con-
stitute a waiver of the right to claim damages for such
default or the right to terminate for any subsequent G
breach."

By the said letter the respondent laments Jack of payment of instal-
ments due from the appellant and consequential breach of the terms of
the contract. The respondent then puts the appellant to nutice as per
clause 8.2 reproduced above of its right to terminate the agreement if H
76 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

the appellant fails to cure the breach within 60 days of the receipt of
A
the communication. The appellant by its reply dated 12th December,
1986 questioned the respondent's right to invoke clause 8.2 of the
agreement since in its view there was no breach of agreement and
called upon the respondent to discharge its obligations under clause
3.4 of the agreement and receipt payment of the seco!ld instalment
ll thereafter. On receipt of this reply, the respondent by their Advocate's
letter date 27th September, 1988 invoked the arbitration clause
extracted earlier for referring the disputes and differences to the arbit-
ration of International Chamber of Commerce. At the same time the
respondent claimed that it was entitled to recover U.S.$ 621,777.09
with 15% per annum interest from the appellant for services actual'v
rendered. On the same day the respondent wrote to the International
c Chamber of Commerce informing it of its decision to invoke the arbit-
ration agreement. The appellant responded by its letter dated 11th
October, 1988 stating that the collaboration agreement dated 25th
September, 1984 was void ab-initio and not binding on the parties
thereto and therefore, clause 12. l of Article XII of the agreement was
D non-est and legally unenforceable. On the other hand the appellant
blamed the respondent for breach of contract, in that, there was
failure to comply with clause 3.4 of the agreement. and stated that no
disputes or differences of the type which could be referred to arbitra-
tion had arisen between the parties. Thus by challenging the legality
and validity of the agreement and branding it void ab-initio the appel-
E lant also challenged the arbitration clause as similarly void. This was
followed by the appellant filing an application under Section 33 of the
Arbitration Act inter alia contending (i) that the agreement in question
being a contingent one which was to commence from the 'effective
date' and since the necessary approvals had not been secured, the
agreement had not commenced and as the arbitration clause was a part
F of the very same agreement it too had not commenced and hence the
respondent was not entitled to invoke the said clause and (ii) since
under the agreement the respondent was appointed as Technical or
Management Adviser in India within the meaning of Section 28( l)(b)
of FERA, in the absence of a valid permission from the RBI, the
agreement was clear void by the thrust of Section 28(2) of the said
G enactment. The respondent countered these contentions (i) by point-
ing out that the necessary Government approvals were obtained and
hence the 'effective date' was reached and (ii) under the Exchange
Control Manual.(1978 Edition) only the Indian company could apply
to SIA for approval and once such approval was accorded as in the
present case, the foreign collaborator to the contract was not expected
H to secure the RBI permission under Section 28( 1)(b) since under the
BURN STANDARD v. McDERMOTT INC. [AHMADI. J.l 77

manual SIA approval was to be deemed to be RB I's permission also. It A
was, therefore, contended that the agreement was legal and valid and
the respondent was entitled to seek its enforcement. The arbitration
clause being a part of the agreement, it was imperative on the part of
the respondent to follow that course in the event of a dispute or diffe-
rence arising between the parties concerning any matter covered by
the agreement. B

The High Court on a proper construction of clause 8.1 of the
agreement held that the principal duties and obligations incorporated
in clauses 1. 3 and 1. 4 commence after governmental approvals are
obtained. The obligation to secure necessary registration and govern-
mental approvals is cast by virtue of clause JO. 1 on the appellant. Obvi-
ously the said clause comes into operation immediately on the execu-
c
tion of the agreement since clause 1.2 clearly contemplates that if
governmental approvals are not obtaine.d within 180 days, the parties
will be entitled to put an end to the agreement. It is thus manifest from
the terms of the agreement that some of its provisions come into effect
on the execution of the agreement and remain in force for 180 days till D
the contract is terminated by either party. But if the parties choose to
continue the contract even beyond the period of 180 days notwith-
standing the right to terminate the same, there is nothing in the agree-
ment prohibiting the same and, therefore, on a true interpretation of
the contract it must be held to be voidable at the discretion of either
party. The High Court further held on a reading of Sections 39 and 56 E
of the Contract Act that even if the contract is terminated or rendered
void the arbitration clause therein does not perish ipso facto for even
in contingent contracts there exists a distinction between principle
obligation and subsidiary obligations. After referring to the case law in
detail, the High Court observed:
F
In my opinion the arbitration clause in the instant case is
wide enough to include "any claim, dispute or controversy
arising Out of or relating to this agreement" so as to mean
any dispute as to the interpretation itself including the
validity thereof. Therefore, if there is any dispute relating
to. the interpretation of Article 8.1 of the agreement the G
same can also be decided by the arbitratoL"

Pointing out that an agreement of arbitration, though a contract, is
different in its nature from the main contract of which it may form a
part, the High Court held that the breach of the obligation and
liablities arising under the main contract may bring about termination H
78 SUPREME COURT REPORtS t 19911 2 $.C.R.

A of the main contrac! but 11ot of the arbitration agreement. Indeed, tha
arbitration agree111ent would be l11Voked 011ly when dlsjJutes atise
under the h1ain c(jnitact Including a re1>udiaiion of tlie maitt contract
by any of the parties aiid in that sense the arbiitati(jli 1tgteemettt fa
remedial while the maili contract is substantive. The High ttllift,
therefore, held that in law the jurisdiction of the arbitrator under the
B arbitration clause would cover the decision as to voidability of the
hlain co11tract also. The High tour! then concluded as tthder:

''It is apparent from the sequence of events appearing ftotn
the list of dates already noted hereitlbefore that the
petitio11er really made llh ltpjJlkation to the secretariltt for
lndusttial Apjjrovals, De1>artment of lhdustrial !Jevelo!J·
t ment and il letter of apjJtoval was issued. thereafter tht~
agreement dated September 25, 1984 was executed. the
Government pointed out certain defitienties as a result tlf
which the supplehlentaty agreement dated September 28,
1984 was executed. the said documents were nll filed with
the Govt. and thereafter the Government took the tlgree-
ment on record and nothing was really required to be do11e
by the respondent. In fact the paragraph 11 at Chapter HI
of Guidelines for industries of the Government of India
provide for such a procedure for taking the agreement on
record after the approval is given for Foreign Collaboration."
E
After quoting paragraph 11 of the said guidelines the High Cuutt
tefetred to the appe1Iant's application to the Income-tax Officer for
payment of the first instalment under clause 4.1 of the agree1ne11t and
concluded that such all ajjplication tould nut have bee11 made unles~
the necessary approvals were obtained. After the lhco111e-ta~ Officer
fl tnade the order, the RBI granted permission to remit the instalment
111oney (fee) on 6th March, 1985. It was only on account of this pay-
ment that the respo11dent furnished the technology and provided the
technical services to the appellant in pursuance of Article lii of the
contract. The High Court dismissed the application holding that on the
appellant's failure to pay ihe subsequent instalments, a dispute had
O clearly arisen between the parties which had to be restilved through
arbitration.

Mr. Soli Sorabjee, learned counsel for the appellant. placed the
appellant's case thus: Under Section 73(4) of FERA, where pettnis-
sion of RBI is required under any provision of the said statute for
H tltiing anything therennder, the RBI has to specify the form in which
BURN STANDARD " McDERMOTT INC. [AHMADI, J.] 79

the application for such permission must be made. Paragraph 25A.2 of
A
the Exchange Control Manual, 1978, (Manual) refers to permission to
be obtained under Section 28( 1)(b) and provides that applications for
such permission should be made in form FNC5. Indisputably the
respondent had made no such application in the prescribed form seek-
ing RBI permission and, therefore, the question of grant of such
permission by RBI did not arise. The respondent having failed to B
secure the RBI permission as required by Section 28(1) rendered the
agreement void by the thrust of Section 28(2). Besides breach of
Section 28( 1) is made punishable under Section 50 of FERA. That
being so, the agreement is ab-initio void and as the arbitration clause is
a part of the said agreement, it too must fall along with the agreement.
The SIA approval is not synonymous with grant of permission under
Section 28( 1) since the two operate in different fields and it is, there-
c
fore, erroneous to think that such approval satisfies the requirement of
Section 28( 1). Paragraph 24A.11 of the Manual is not referable to
permission under Section 28(1) and must be read harmoniously with
the statutory provisions, for if it runs counter to the said provisions, it ,
would have to be ignored for the obvious reason that it cannot override D
the requirement of law being merely in the nature of administrative
instructions. Nor can the letter of 15th January, 1985 be read to convey
the grant of permission urider Section 28(1). So also the permit issued
by the RBI dated 6th March, 1985 for remittance of the first instalment
payable under Clause 4.1 of the agreement is referable to the exemp-
tion contemplated by Section 9 and has no relevance whatsoever to the E
permission envisaged by Section 28( 1) of FERA. Thus the permission
contemplated under Section 28( 1) is an express permission and it
would be an entire wasteful exercise to find out from the correspon-
dence and documents placed on record if a permission can be culled
out or be deemed to have been granted. In the absence of a permis-
sion, Section 28(2) declares the agreement or contract to be void and,
therefore, the said agreement or any part thereof cannot be enforced
in a court of law. The High Court was, therefore, clearly wrong in the
view it took in upholding the respondent's effort to invoke the arbitra-
tion clause.

Mr. D.P. Gupta, learned counsel for the respondent countered: G
The RBI has published the Manual to detail the procedure for entering
into such Technical Collaboration Agreements; paragraph 24A. ll lays
down the procedure for securing the RBI permission contemplated by
Section 28(1) and where the situation does not stand covered there-
under the application has to be made under paragraph 25A.2 of the
said manual which lays down a different procedure and prescribes the 1-i
80 SUPREME COURT REPORTS [1991] 2 S.C.R.

A FNC5 form. In other words. if the case is governed under paragraph
24A. ll when it is unnecessary to resort to paragraph 25A.2 which
prescribes the FNC5 form. The Government policy for dealing with
such foreign collaboration agreements is generally set out in the
industrial policy document entitled 'Guidelines for Industries•, Chap-
ter IV whereof sets out a procedure identical to the one contained in
B the manual. The appellant had made an application under paragraph
24A. 11 to SIA for approval of the technical collaboration arrangement
with the respondent which was granted on 18th June, 1984 subject to
certain terms and conditions. Certain discrepancies were pointed out
by the Government of India and on the appellant having drawn the
respondent's attention thereto by the letter of 21st September, 1984, a
supplementary agreement was immediately executed and filed with the
c Government of India on 9th January, 1985. It was thereafter that the
Government of India informed the appellant that the agreement was
'taken on record', an expression which has special significance as exp-
lained in paragraph 9 of Part I of Guidelines for Industries. Copies of
the letter of 15th January, 1985 were forwarded to RBI authorities as
D well. It was only thereafter that the appellant applied for determina-
tion of the Income-tax amount under Section 195(2) of Income-Tax
Act which determination was made by an order dated 11th February,
1985. The appellant then applied for permission to remit the first
instalment of fees and on receipt thereof enclosed a draft for U.S. $
59.640 (after deducting 40% income tax) under letter dated 18th
E March, 1985 addressed to the respondent. It was only when the subse-
quent payment was not forthcoming that the respondent gave notice
under clause 8.2 of the agreement and thereafter sought to resort to
arbitration. Thus the requirements of Section 28(1) were fully comp-
lied with.

F Mr. Salve, the learned counsel for the RBI, placed on record an
additional affidavit dated 24th January, 1991 sworn by Shivaji
D. Kadam, Deputy Controller, Exchange Control Department of the
RBI explaining what steps the bank had taken after it received the
Government of India's letter of approval together with a copy of the
collaboration agreement dated 21st January, 1985. Since the said letter
G was only a covering letter taking on record the said agreement, the
bank had by its letter dated 7th February, 1985 sought copies of the
earlier letters from the Government as they were of vital importance
because without those letters it was not possible for the RBI to pro-
ceed under paragraph 24A.11 of the manual. Thereafter on 14th
February, 1985 the appellant reminded the RBI to forward its
H approval to enable payment of the fees to the respondent. Again on
...
BURN STANDARD v. McDERMOTT INC. [AHMADI, J.J 81

20th February, 1985 the appellant approached the RBI for sanciion to
A
remit the fees and enclosed therewith the Government of India letters
dated 18th June, 1984 and 4th August, 1984 along with an application
in A-2 form. The Government of India also forwarded copies of the
said two letters by a covering letter dated 1st March, 1985 which was
delivered to the RBI on 4th March, 1985. On the same day a note was
put up to the Staff Officer, Grade A, who observed: B

"In view of the Government letter having now been
received, we may allow the remittance of U.S. $ 59.640
being the !st instalment of technical know-how fees."

The Exchange Control Officer then said:
c
"We may allow the remittance of U.S. $59.640 being !st
instalment of know-how fees."

This final note of the Exchange Control Officer was countersigned by
the Assistant Controller on 6th March, 1985. The deponent fairly D
clarifies that "as per the RBI practice, the permission under para
24A.11, that is, grant of sanction under Section 28(1}(b) as well
as permission under Section 9 for allowing remittances are generally
authorised by the Assistant Collector." It becomes clear from this
statement that the permission under Section 28(1} and the exemption
under Section 9 are generally granted by one and the same officer. E

In the backdrop of the said facts we may now proceed to consider
the main submission placed before us by counsel for the appellant,
namely, the agreement is rendered void ab-initio for want of permis-
sion under Section 28(1) of FERA. It is only if we accept the conten-
tion that in fact the RBI had not granted any permission under Section F
28( 1) that the question of the agreement having been rendered void by
the thrust of Section 28(2} would arise. And the question of survival of
the arbitration clause contained in the agreement notwithstanding the
agreement having been rendered void by Section 28(2), would arise
thereafter.
G
On a plain reading of Section 28( 1) it is clear that it opens with
the words "without prejudice to the provisions of Section 47", which
in turn says that "no person shall enter into any contract or agreement
which would directly or indirectly evade or avoid in any way the opera-
tion of any provisions of the Act or of any rule, direction or order
made thereunder." Contravention of any provision of the Act (other H
SUPREME COURT REPORTS [1991] 2 S.C.R.

A than Section 13, 18(i)(a) and 19(J)(a) or of any rules directions or
order made thereunder, is made penal by Section 50. Secondly, the
said Section 28(1) places an embargo on a resident outside India or a -,,
person who is resident in India but is not a citizen of India or a com-
pa11y (other than a banking company) which is not incorporated under
any law in force in India or in which the non-resident interest is more
B than 40% or any branch of such company to (a) act or accept appoint-
ment, as agent in India or any person or company, in the trading or
commercial transactions of such person or company; or (b) act or
.accept appointment, as a technical or management adviser in India of
any person or company except with the general or special permission
of tJ:ie Reserve Bank. Admittedly there existed no general permission
C and, therefore, special permission must be shown to prove satisfaction
of the requirement of the said provision. Under Sub-section (2) where
any person mentioned in sub-section (1) acts or accepts appointment
as such agent or technical/management adviser without the permission
of the R.BI, such acting or appointment shall be void. Therefore, let us
first focus our attention on the question whether or not the RBI's
p permission was obtained in regard to the collaboration agreement in >-
qµestiop?

Section 28( 1) places restrictions on the appointment of certain
individuals and companies as technical or management advisers in
India unless the RBI approves the same by a general or special permis-
E sion. The section is silent on the mode and manner of securing such
permission. However, sub-section (4) of Section 73 provides that
where any provision of the Act requires the RBI's permission for doing ..i.
anything under such provision, the RBI may specify the form in which
an application for such permission shall be made. In this connection it
is essential that we notice paragraphs 24A.1 l and 25A.2 at this stage.
F Tnese two paragraphs read as under:

"24A.ll. Persons, firms and companies wishing to estab-
lish new industrial units or expand/diversify existing units
with foreign technical collaboration should apply on pre-
scribed form to the Secretariat for Industrial Approvals
G (SIA), Department of Industrial Development, Govern-
ment of India, New Delhi, for approval. In case where
proposal for collaboration is approved by Government,
Government will issue its letter of approval to the applicant
indicating the terms. The applicant may thereafter execute
the collaboration agreement with the collaborators strictly
H in accordance with the approved terms and furnish requis-
llW!l.N ~TM!PARP v J\1cPERMOTT !Nf:. IAHMP,P), J.) /l3

ite lll!m!ier pf cppjes of the agreement 10 Governm~nl·
Oovernment will ta!<e the agreement 011 record if ii is in
conformity with the approved terms and advise the applic-
ant accordingly under intimation to Reserve Baqk.
Reserve Ban!< will thereafter iss4e its formal authorisation
mider Fonoign Excliange Regµlalion Act, 19n, tP !lie ap-
p!icant. 1\lthoµgh lh~ ren<!ning of technic11l advisory
&ervices by foreign col!abpr11tors !lnder foreign cp!!aborn-
!ion agreemel)ts approved by Governme!lt attracts Sectjpp
28(i)(b) of Foreign Excl!ange Regulation Act, 1973, it wjll
not be necessary for the foreign collaporators to see!<
Reserve Bank permission under the Section separately.
Accordingly, while granting approval for foreign co!labora-
tiQ!l, Reserve Bimk will confirm that the approval will also
!Je <!eeme<! to be the j:!aµ!<'s pennissiqn to ihe foreigl) c.ol-
!l!!>ofi!lprs !mder this sectimi for remlering technjca! ser-
yjces to the ll!<!ian company pqµcemed l!l!der the cnl!11-
bora!in!l iigreemel!t· Permissjoµ given IJJ!der this Section
is, hnwever, wi!hqµt preilldice !P tile c!ecision that tlw
)3;m!< may ta!<e o!l the foreilln company's aPplicatimi, jf
any, µm:!er section 280)(c) of the Act for use by !Im h!!lian
c()mPallY of fqreign trnfle mar!<(s) i11yqlving 4irect gr imli-
re~t ~op.sideratiori." ·

"25A.2. l.111<\er Section 28(1)(b) of Foreign Exch,ange Jl.e- i;:
gulation A.ct, J973, jt is q!Jligatory fqr foreign cgmpapies to
obtain permission of Reserve Bank for acting Pr .accep!jpg
-·· appointment, as technicll.l or management adviser il! I11!lia
pf a!1y person pf company, Reserve Bank's permissinP is
also necessary uµder · Sectioq 28(3) of the Act in cases
wflere appojntments a> 1ecfl11ical/mapagement i!dYisers fi
were held py sµch foreigq companies since pfiqr tp tlw
corni11g intn force of the Act j.e. )st Ja11uary, 1974 1m<! are
CC!!ltiQuiqg therea~er. Applications for pennissi()!J in either
case should be submitted lo Reserve Bank in form ffi~!l.
These proyisioµs are also applicable to foreign colJaborn-
!ors renc\erjpg (ecflpical advice to Indian firms .and com- Q
panies under collabor11tion agreements .apprnv.ei:! by
.OC!vemmeqt of Indja. Wl]ile, however, coiiimu11icalim1
a,pprpyal fqr new col)abor.ation agreements between Jn4illJl
compi!mes aP!I 9verseas coll'!!:>Orators, Reserye I!aJ!!< wm
specifically inc\icatl' tl!M 01e approval also permits tlJ!l
fornig11 Cfl!l!lhPrntnr tg ren~er te~lmic11! i'dvice m thl' H
84 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

Indian company and separate approval need not be sought
A
by the former from Reserve Bank under Section 28(1)(b)
of the Act."

The appellant's contention that the application for permission under
Section 28(1) ought to have been made in the prescribed form FNC5
B and since admittedly no such application was made by either party
there was no valid permission approving the contract and hence by
virtue of Section 28(2) the contract was rendered void ab-initio. On a
plain reading of paragraph 24A. l 1 it becomes clear that the intention ;.
is to introduce the single counter or window procedure to avoid dupli-
cation and hardship to the foreign collaborators. Once the collabora-
C tion is approved by SIA, as in the present case, and the agreement is
'taken on record' there is no need to obtain a separate permission from
the RBI. Paragraph 9 of the Guidelines for Industries explains what is
meant by the expression 'Taking of Agreements on Record' and its
import thus:

D ''The approvals given for foreign collaboration are valid for
a period of six months from the date of issue. In case the
terms of collaboration approved by Government are
acceptable to the Indian party, an intimation in this regard
has to be sent by him to the concerned administrative
Ministry. The Indian party can then execute the collabora-
E tion agreement with the collaborator which should be
strictly in accordance with the terms approved by the
Goverpment. Ten copies of the collaboration agreement so
executed. all of which should be signed by both the col-
laborating parties are to be furnished to the administrative
Ministry. The collaboration agreement is scrutinised by the
F administrative Ministry and is found to be in accordance
with the terms specifically approved by Government is
taken on record and an intimation is sent to the party. A
copy of the agreement is then transmitted to the Reserve
Rank of India through the Ministry of Finance (Depart-
ment of Economic Affairs) on the basis of which remit-
G tances to the foreign collaborator are authorised by the
Reserve Bank of India. Representations against the terms .
and conditions of collaboration approved by lhe Govern-
ment are sent by the SIA to the administrative Ministry/
Department concerned with the item of manufacture who
will continue to deal with such representations and take
H appropriate action."
BURN STANDARD v. McDERMOH INC. [AHMADI, J.J 85

It will be seen from the above that after the agreement is taken on
A
record a copy thereof has to be sent to the RBI to enable it to authorise
remittances to the foreign collaborator. In the present case the appel-
lant had sought the SIA approval which was granted on 18th June,
1984 subject to the terms ·and conditions set out in !hf. letter of
approval. It was only thereafter that the agreement was executed on
25th September, 1984. The appellant then sent a copy m' the agree- B
ment to the Government of India by the letter of 5th October, 1984
which was duly examined in the light of the terms and conditions on
which the approval was graP.ted under the letter of 18th June, 1984 and
certain discrepancies were communicated to the appellant by the
Ministry of Industry, Department of Heavy Industry, which necessi-
tated the execution of the supplementary agreement of 29th
December, 1984. It was only thereafter that the said department by the
c
letter of 15th January, 1985 informed the appellant that the collabora-
tion agreement and the supplementary agreement 'have been taken on
record'. This was then forwarded to the RBI which the bank received
on 21st January, 1985. We have already indicated earlier how the
matter was processed by the RBI before the remittance of the first D
instalment of the fees of U.S. $ 59,640 could take place after the
income-tax was duly recovered at source. Paragraph 7 of the RBI's
affidavit dated 18th September, 1990 extracted earlier and the details of
the action taken by the RBI as disclosed in the further affidavit of 24th
January, 1991 leave no doubt that the remittance was permitted only
after the RBI was satisfied that all the terms and conditions were duly E
satisfied. To place the matter beyond the pale of doubt, the further
affidavit filed on behalf of the RBI carries the following statement:

"As per the practice of the RBI, the permission under para
24A. l l, that is, grant of sanction under Section 28(!) (b) as
well as permission under Section 9 for allowing remittances F
are generally authorised by the Assistant Controller."

This statment places the question regarding the grant of permission
under Section 28(1) beyond doubt. The affidavits filed on behalfofthe
"' RBI show that the RBI's approval 'remained to be communicated' to
the appellant company. Failure to discharge the ministerial duty can- G
not obliterate the conscious decision taken by the RBI after applica-
tion of mind.

But counsel for the appellant stressed t~at the facts placed on
record clearly reveal that no application for permission under Section
28(!) was made in the prescribed FNC5 as contemplated by paragraph H
86 SUPREME COURT REPORTS [ 1991] 2 S.C.R.

25A.2 of the manual. It is indeed true that the record does not disclose
A
making of an application in the said prescribed form by either party to
the agreement. Counsel, therefore, submitted that once it is found that ~

no application for permission was ever made in the prescribed form,
the provisions of sub-section (2) and (3) of Section 47 of FERA cannot
save the agreement declared void by the statute itself. He further
B submitted that the case was governed by paragraph 25A.2 and not
24A.11 and hence making of an application in the prescribed FNC5
form was imperative and failure to do so raised a clear inference that
the RBI had not granted permission under Section 28( 1) since it had A /
never been approached for such permission. He emphasised that the
prescribed form for SIA 'approval' under paragraph 24A.11 is not the
same as FNC5 and hence the administrative direction in the said
c paragraph that 'it will not be necessary for the foreign collaborators to
seek ReseI:Ye Bank permission under this section separately' cannot
override the statutory requirement of Section 28(1). The statutory
duty cast on the RBI by Section 28(1) cannot be abdicated by the RBI
by the deeming clause contained in paragraph 24A. ll(i) extracted
() earlier. To buttress the submission counsel invited our attention to two c'-

cases, viz., (i) M/s. Dhanrajmal Gobindram v. M/s. Shamji Kalidas &
Co., [1961] 3 SCR 1020 and (ii) LJC of India v. Escorts Ltd. & Ors.
[ 1986] 1 SCC 264 at 318 (Para 69) wherein this Court held that
paragraph 24A. l was merely an explanatory statement of guideline for
the benefit of the authorised dealers and was neither a statutory direc-
E tion nor a mandatory instruction. On the other hand counsel for the
respondent argued that the RBJ's action in regard to grant of permis-
sion under Section 28( 1) being essentially administrative= see Shri ~·-
Sitaram Sugar Co. Ltd. & Anr. v. U.P. State Sugar Corporation Ltd. & ~

Anr. [1990] 3 SCC 223 at page 246-247 it is enough to show that the
RBI had granted the permission no matter whether it had followed the
F procedure of paragraph 24A.1 l(i) or 25A.2 of the manual. We think
there is considerable force in this contention for the simple reason that
we are concerned with the factum of permission and not the procedure
followed by the RBI for granting the same. The prescription of the
form is merely to aid the RBI to process the application for permis-
~
sion. Emphasis must be laid on substances and not on mere form. If
G there has been substantial compliance, as in this case, the mere lapse
on the part of the RBI· in failing to communicate its decision should
make no difference. Paragraph 25A.2 is not in derogation of para-
graph 24A. ll(i) nor Cloes it dilute the requirement of Section 28(1). In
any case the facts of the present case clearly reveal that the RBI had
applied its mind to the question of grant of permission and had only
H thereafter permitted remittance of the first instalment of the fees pay-
•
BURN STANDARD v. McDERMOTT INC. [AHMADI. J.J 87

able to the foreign collaborator. Merely because application for such A
permission was not made in FNCS form cannot cloud the fact that the
decision to grant the permission was actually taken but the ministerial
function of communicating the same remained to be done by oversight.
This lapse cannot erase the decision already taken. We are, therefore,
of the opinion that the RBI had granted the permission contemplated B
by Section 28( 1) and hence the agreement cannot be voided by virtue.
of Section 28(2) of FERA. It is not the case of RBI that it at any time
had second thoughts about its action. It never contemplated with-
drawal of the permission at any point of time thereafter. Once the
decision to grant the permission is taken, whether through the course
charted by paragraph 24A. ll(i) or 25A.2, that decision stands unless
rescinded and the authorities are bound to act in aid thereof. C

In the view that we take it is unnecessary to examine the ques-
tion whether clause 12.1 of the agreement would stand or perish if the
agreement is rendered void under Section 28(2) for failure t? secure
permission under Section 28(1). Since we have come to the conclusion
0
~ that the RBI permission was in fact secured under Section 28(1), the
second question recedes in the background. We, therefore, need not
examine the same.

Before we part we are constrained to observe that we were
pained at the attitude of the appellant company attempting to thwart a
E
valid agreement, part performed by the payment of the first instal-
ment, on hypertechnical grounds, an attitude which would scare away
collaborators and tarnish the image and credibility of our entre-
preneurs abroad. We do hope the appellant company will honour its
obligations under the agreement and settle its differences with the·
respondent across the table in a business-like manner rather than
F
litigate.

For the aforesaid reasons we dismiss this appeal with costs. Cost
quantified at Rs.5000.

"" N.P.V. ·Appeal dismissed.