Holding

DTA sales are not an integral part of the EOU scheme, so the amendment restricting such sales is a valid and reasonable exercise of governmental power in the public interest.

Summary

The Supreme Court examined the validity of a 2005 circular and notification that amended the Foreign Trade Policy 2004‑2009 to prohibit 100% Export Oriented Units (EOUs) from making Domestic Tariff Area (DTA) sales of finished marble produced from imported rough marble. The petitioners, several marble‑manufacturing EOUs, argued that DTA sales were an essential feature of the EOU scheme, that the amendment was unreasonable, discriminatory, and contrary to public interest and Article 14. The Court held that DTA sales are merely an incidental facility, not an integral part of the EOU scheme, and that the amendment was a reasonable exercise of the government’s power to protect public interest and the mining sector. It found that the EOUs had been misusing the DTA facility, diverting imported marble to the domestic market, thereby defeating the purpose of the restricted‑import policy. Consequently, the amendment was upheld as valid and reasonable. The Court disposed of the appeals and related petitions without costs.

Issues considered

The question whether DTA sales by 100% EOUs constitute an integral part of the Export Oriented Unit scheme.
Whether the circular and notification amending the Foreign Trade Policy are valid exercises of power under the Foreign Trade (Development and Regulation) Act, 1992.
Whether the amendment violates the principles of reasonableness, non‑discrimination and Article 14 of the Constitution.
Whether the amendment is contrary to public interest.
Whether the government may amend the policy without prior hearing to the affected EOUs.

Legislation cited

Foreign Trade (Development and Regulation) Act, 1992s. 5

Subjects

Export Oriented UnitsDomestic Tariff Area salesForeign Trade PolicyPublic interestReasonablenessArticle 14Net Foreign Exchange EarningsRestricted importsMarble industry

Judgment

MIS. HINDUSTAN GRANITES A
v.
UNION OF INDIA AND ORS.

APRIL 3, 2007

[DR. ARITITPASAYAT ANDS. H. KAPADIA, JJ.] B

.... Import-Export:

Foreign Trade Policy 2004-2005-Para 6.8(a) and para 6.8{h)-
Circular dated 30.8.2005 and Notification 24 dated 31.8.2005-By impugned c
circular/Notification, EOU's prevented from making DTA sales of finished
marble from imported rough marble-Validity of circular/Notification-Held,
valid as it fulfils the test ofpublic interest and reasonableness qua restriction
imposed on 100% EOU-DTA sales not an integral part of EOU scheme-
Director General also found that over the years, entire export of marble tiles l)
made out of poor quality indigenous rough marble blocks for achieving
1 NFE-On account of above practice, Restricted Import Policy of marble
during EOU scheme(unamended) circumvented-Marble is in restricted
category because mining industry depends on that resource as it generates
employment-Unamended policy had no correlation between input imported
and finished product exported E
EOU scheme-Object of-Discussed

The challenge in this appeal is to the validity of policy Circular dated
30.8.05 and Notification No. 24 dated 31.8.05 which has the effect of amending
para 6.S(a) and para 6.S(h) of the Foreign Trade Policy 2004-2009. Para 6.S(a) F
of the 2004-2009" provided that goods, upon 50% of FOB Value of exports,
could be sold on payment of concessional rate of duty in the DT A subject to
fulfillment of positive NFE. Under para 6.S(b), sale of finished products could
be made in DTA against payment of full duty, provided the said good was freely
importable under the Policy. Further, under para 6.8(h) sale of by-products
G
and sale of waste beyond the entitlement of para 6.8 was permissible on
payment of full duty.

On 31.8.05, the impugned Notification was issued amending para 6.8(a)
'"' and para 6.8(h) of FTP 2004-2009. By the impugned Notification the EOUs
743 H
744 SUPREME COURT REPORTS (2007] 4 S.C.R.

A were prevented from making DTA sales of the finished marble from imported
rough marble, with immediate effect

The contention of petitioners was that on account of the impugned
notification, the quantity of marble sold by it in the DTA stood reduced; that
the quantity which could be imported by Special Import License Units (SIL
B Units) was arbitrarily increased resulting in unreasonable discrimination
between 100% EOUs and SIL Units; that the quanHty of Marble sold by the
EOUs in the domestic area has been reduced and the quantity of marble sold
by SIL Units from the same imported rough marble stood sfgnificantly
increased which has resulted in the loss to the EOUs; that the impugned
C . circular/notification was against public interest since the SIL Units had no
Export Obligations, they were not Foreign Exchange Earners and they were
required to pay lesser rate of duty; that DTA sales constituted essential feature
of the EOU Scheme since vide para 6.1, 100% EOUs undertook to export their
entire production of goods, except permissible sale in the DTA, and, therefore,
the DTA sales constituted an integral part of EOU Scheme; that in the absence
D ofDTA sales, an EOU would be compelled to sell its entire production in the
export market and that the impugned Circular/Notification has been published
with the view to protect the SIL Units at the cost of 100% EOUs.

Disposing of the IAs, appeals, transfer petitions and transfer cases, the
Court
E
HELD: 1. Thtre is no merit in the challenge to the impugned Circular/
Notification for the following reasons: Firstly, it is important to note that under
para 6.1 of the unamended FfP 2004-2009, 100% EOUs undertook to export
their entire production except permissible sales in DTA. Therefore, DTA sales
F constituted an exception or an incidental facility. DTA sales were not an
integral part of the EOU Scheme. Para under 6.1, EOUs were allowed to be
set up on the condition that they would export their entire production. It is on
this condition that 100% EOUs should avail of various benefits under Customs
and Excise Act The said DTA sales or sales of rejects were exceptions. DTA
sales were not an integral part of the EOU Scheme in the sense that if for
G reasonable reasons if these exceptions are eliminated, as in this case, the
Scheme would become unworkable. Secondly, 100% EOUs have been
importing rough marble blocks from whkh they are producing marble tiles/
slabs and what they are exporting is the said marble tiles/slabs. However, the
Director General found, in the course of last seven years, that the entire export
H of marble tiles/slabs is made out of the poor quality indigenous rough marble
·' 745
HINDUSTAN GRANITES v. U.O.l.

A
blocks. On the other hand, it is found that the entire sale of marble tiles/
slabs in DTA is from rich good quality imported rough marble blocks.
Therefore, the DT A sales by 100% EOUs are now disallowed under the
impugned Circular/Notification. Thirdly, on account of the above practice, the
Director General has found that four to five 100% EOU have been importing
rough marble ostensibly for export but in effect after slightly polishing the B
same are sold in DT A. Marble is a restricted item. On account of the above
practice, the Director General has found circumvention of the Restricted
--;.
Import Policy of marble during 100% EOU Scheme (unamended). The concept
of Net Foreign Exchange earning is very important. On account of the price
differential, under the impugned practice, there is substitution of imported C
inputs by domestic inputs. The rational behind allowing imports of rough
marble blocks by 100% EOUs was that the raw material would be used for
export production and that it will n~t be diverted in DTA defeating th e very
0

purpose of putting marble in the restricted category. The object behind the
EOU Scheme is consumption of imported raw material for manufacture of
finished products which are to be exported. If that facility leads to substitution D
of imported inputs by domestically procured inputs then the facility has to be
t discontinued. This discontinuation has been done by the impugned Circular/
Notification. Fourthly, marble is an item under restricted category. It is put
in the restricted category since it is not treated as only revenue-generating
resource. It is put in the restricted category because the mining industry E
depends on that resource. It generates employment. Marble is an input
required in the mining industry. As a result of impugned substitution, the
Indian market gets flooded by the imported goods resulting in unemployment
in the mining industry. Fifthly, by the impugned Circular/Notification, the
Government has stopped procurement of domestic rough marble blocks for
achieving NFE earnings. This is the major object behind the impugned F
Circular/Notification. It is true that the unamended Policy had no co-relation
between the in-put imported and the finished product exported. That was the
loophole. To stop the procurement of domestic rough marble blocks for
achieving NFE, the DTA sales had to be prohibited. By the amended Policy
100% EOUs are now required to produce marble tiles/slabs (finished G
.
--...
products) out of imported rough marble blocks and thereby the amended
Policy stops the procurement of domestic rough marble blocks for achieving
NFE by these 100% EOUs. Lastly, there are 20 to 25 SIL Units (found to be
eligible) vis-a-vis 4 to 5 100% EOUs and, therefore, the volume has been
increased from 68,000 MT to 1.30 Lakbs MT.
[Para 20] [755-G-H; 756-A-H; 757-A-B] H
746 SUPREME COURT REPORTS [2007] 4 S.C.R.

A Union ofIndia & Ors. v. Mis. Asian Food Industries, (2006) 12 SCALE
105, held inapplicable.

Bannari Amman Sugars Ltd. v. Commercial Tax Officer & Ors., [2005)
1 SCC 625 and Union of India & Anr. v. International Trading Co. & Anr.,
[2005) 5 sec 437' referred to.
B
2. The impugned amendment fulfills the test of public interest and it
also fulfills the test of reasonableness qua the restrictions imposed on 100%
-'r
EOUs. (Para 22] [757-F)

3. Hand Book of Procedure merely implements the policy. It does not
C prevent the Central Government from changing the policy. Nothing prevents
the Central Government, in public interest, to plug the loophole by tinkering
with the existing policy. [Para 24) [758-B-C]

CIVIL ORIGINAL JURISDICTION : I.A. Nos. 1 & 2.

D IN

T.C. (C}No. 165/2006.

WITH
E I.A. Nos. 2,4,5,6,7,& 10 in TP(C)No. 579 of2006
T.P. (C) No.1067 of2006
I.A. No. l& 2 in T.C. (C) No. 168 of2006
SLP (C) No. 13670 of2006
p SLP (C) No. 13671 of2006
C.A. No. 1802 of2007
C.A. No. 1803 of2007
C.A. No. 1804 of2007
G T.C. (C) No. 166 of2006
W.P. (C) No. 600 of2006
T.C. No. 167 of2006
T.C. No. 1 of2007
G W.P. (C) No. 22of2007
~
HINDUSTAN GRANITES v. U.0.I. [KAPADIA, J.] 747
SLP (C) No. 5376 of2007 A
G.E. Vahanvati, S.G., F.S. Nariman, Gourab K. Banerji, Dr. R.G. Padia,
Chetan Sharma and Dr. A.M. Singhvi, Brijesh Kalappa, Ray Vikram Nath, N.
Ganpathy, Krishan Mahajan, V.K. Verma, A.D.N. Rao, Amit Kumar, Nikhil Goel,
Sheela Goel, Rohit Alex, T. Momo Singh, Dinesh Kumar, Joydeep Mazumdar,
Gautam Jha, Arjun K., Gaurav Agrawal, Saurav Agrawal, Ruby Singh Ahuja, B
P.H. Parekh, Sameer Parekh, Ajay Jha, Deeksha Rai (for P.H. Parekh & Co.),
f Pallav Shishodia, Hemant Sharma, D.N. Mishra, Rahul Kaushik, B. Krishna
Prasad, Priyadarshi Manish, Anjali Manish (for Mahalakshi Balaji & Co.),
" Rajendra Singhvi, M.S. Singhvi, Amit Bhandary, Surya Kant, Madhur Dadlani,
Brij Bhushan, Sanjay R. Hedge, Shamim Hadiar, Amit Kr. Chawla, and Vikrant. c
Yadav for the appearing parties and Deepak Khosla Respondent-in-person.

The Judgment of the Court was delivered by

KAPADIA, J. 1. In this batch of matters, the central question which we
are called upon to decide is regarding the validity of Policy Circular dated D
30.8.05 and Notification No.24 dated 31.8.05 which has the effect of amending
1" para 6.8(a) and para 6.8(h) of the Foreign Trade Policy 2004-2009.

2. This judgment is confined to Domestic Tariff Area sales (DTA sales)
by 100% Export Oriented Unit (EOU).
E
3. Leave granted in special leave petitions filed by Union of India
against various EOUs.

4. The basic issue which we need to decide in this batch of cases is:
whether DTA sales by 100% EOUs form an integral part of EOU Scheme?
F
5. For the sake of convenience we reproduce hereinbelow the facts as
reproduced in the case of Union of India & Ors. v. Mis. Abhishek Exports
[Civil Appeal No. of2007 arising out of S.L.P. (C) No .... (CC9879 of2006)].

6. The concept ofEOU was introduced in 1980 in the EXIM Policy. The
EOU Scheme was framed in order to boost the Indian exports. Under the said G
Scheme, EOU could be located at any place. In 1992, statutory recognition
was given to EXIM Policy vide Section 5 of the Foreign Trade (Development
and Regulation) Act, 1992. In 1991, EOU was permitted to sell rejects upto 5%
r-- and goods in the DTA after obtaining permission ·from the ·Export
,Commissioner. In 1997, under EXIM Policy 1997-2002, EOU was permitted to
' .. H
'
i
748 SUPREME COURT REPORTS (2007] 4 S.C.R.

A sell rejects .as well(llS goods upto 50% of the FOB Value of exports subject
to payment of duty and fulfillment of minimum Net Foreign Exchange Earnings
(NFE). Over and above this limit, EOU could sell finished products which
were freely importable against payment of full duty.

7. On 24.3.2000 M/s. Abhish~k Exports was granted the Letter of
B Permission (LOP) by the Development Commissioner, NOIDA, to manufacture
and export marble tiles and finished marble blocks. In the LOP it was stipulated
that Mis. Abhishek Exports had to maintain NFE percentage and they were
required to achieve minimum Export Obligations. In the said LOP it was further
stipulated that Mis. Abhishek Exports cold make domestic sales as per the
C provisions ofEXIM Policy 1997-2002.
8. Mis. Abhishek Exports started exporting finished marble made out of
rough imported marble and rough indigenous marble. The rough marble so
imported was duty-free. Under the LOP, Mis. Abhishek Exports had the right
to make sales in DTA, subject to payment of concessional and full duty as
D the case may be.
9. On 1.4.04 FTP 2004-2009 came into force. We quote herein below
paras 6.1, 6.5, 6.8(a), 6.8(b), 6.8(d), 6.8(e), 6.8(g) and 6.8(h) of the FTP 2004-
2009 which read as under:

E "CHAPTER-6

EXPORT ORIENTED UNITS (EOUs), ELECTRONICS HARDWARE
TECHNOLOGYPARKS(EHTPs),SOFfWARETECHNOLOGYPARKS
(STPs) AND BIO-TECHNOLOGY PARKS (BTPs)

F Eligibility 6.1 Units undertaking to export their entire production of
goods and ~ervices (except permissible sales in the DTA),
may be set up under the Export Oriented Unit (EOU)
Scheme, Electronic Hardware Technology Park (EHTP)
Scheme, Software Technology Park (STP) Scheme or Bio-
Technology Park (BTP) scheme for manufacture of goods, _
G including repair, re-making, reconditioning, re-engineering,
and rendering of services. Trading units, however, are not
covered under these schemes.
..
Net Foreign 6.5 EOU/EHTP/STP/BTP unit shall be a positive net
~ ..
H Exchange foreign exchange earner. Net Foreign Exchange Earnings
HINDUSTAN GRANITES v. U.O.l. [KAPADIA, J.] 749

Earnings (NFE) shall be calculated cumulatively in blo.cks of five A
(NFE) years, starting from the commencement of production.
DTA Sale of 6.8 The entire production of EOU/EHTP/STP/BTP units
Finished shall be exported subject to the following:
Products/ (a) Units, other than gems and jewellery units, may sell goods
Rejects upto 50% of FOB value of exports subject to fulfillment B
Waste/Scrap/ of positive NFE on payment of concessional duties .
r emnants and Within the entitlement of DT A sale, the unit may sell in
.. By-products DTA its products similar to the goods which are exported
or expected to be exported from the units. No DTA sale
at concessional duty shall be permissible in respect of
motor cars, alcoholic liquors, books and tea (except instant C
tea) or by a packaging/ labeling /segregation/ refrigeration
unit/ compacting/micronisation/pulverization/granulation I
conversion of mono-hydrate form of chemical to·
anhydrous form or vice-versa and such other items as
may be notified from time to time. Sales made to a unit in D
SEZ shall also be taken into account for the purpose of
arriving at FOB value of export by EOU provided payment
for such sales are made from EEFC Account. Sale to DTA
would also be subject to mandatory requirement of
registration of pharmaceutical products (including bulk
drugs). E
(b) For services, including software units, sale in the DTA
in any mode, including on line data communication
shall also be permissible up to 50% of FOB value of
exports and /or 50% of foreign exchange earned, where
payment of such services is received in foreign exchange. F

(d) Unless specifically prohibited in the LOP, rejects may
be sold in the Domestic Tariff Area (DTA) on payment
of duties as applicable to sale under paragraph 6.S(a)
on prior intimation to the Customs authorities. Such
sales shall be counted against DTA sale entitlement. G
Sale of rejects upto 5% of FOB value of exports shall
not be subject to achievement of NFE.
(e) Scrap/ waste/ remnants arising out of production process
or in connection therewith may be sold in the DTA as
per the Standard Input-Output norms notified under the H
750 SUPREME COURT REPORTS (2007) 4 S.C.R.

A Duty Exemption Scheme on payment of concessional
duties as applicable within the overall ceiling of 50% of
FOB value of exports. Such sales shall not, however, be
subject to achievement of positive NFE. In respect of
items not covered by the norms, the Development
Commissioner may fix ad-hoc norms on the basis of
B data for a period of six months and within this period,
he shall get the norms fixed by the BOA. Sale of waste/
scrap/remnants by units not entitled to DTA sale or
sales beyond the DTA sale entitlement, shall be on
payment of full duties. The scrap/waste/remnants may
c also be exported.
(g) By-products included in the LOP may also be sold in
the OTA subject to achievement of positive NFE on
payment of applicable duties within the overall
entitlement of paragraph 6.8(a). Sale of by-products by
D units not entitled to OTA sales or beyond the
entitlements of paragraph 6.8 (a) shall also be permissible
on payment of full duties.
(h) EOU/ EHTP/ STP/BTP units may sell finished products,
which are freely importable under the Policy in the OTA
E under intimation to the Development Commissioner
against payment of full duties provided they have
achieved the positive NFE."

10. To sum up, para 6.8(a) of the FTP provided that goods, upto 50%
of FOB Value of exports, could be sold on payment of concessional rate of
F duty in the DTA subject to fulfillment of positive NFE. The ceiling, therefore,
included sale of rejects under para 6 .8(d) as well as sale of waste under para
6.8(e) and by-products under para 6.8(g). Under para 6.8(h), sale of finished
products could be made in DTA against payment of full duty, provided the
said good was freely importable under the Policy. Further, under para 6.8(h)
sale of by-products and sale of waste beyond the entitlement of para 6.8 was
G permissible on payment of full duty. The above quoted paragraphs are relevant
extracts of FTP 2004-2009 in respect ofEOU.

11. On 16.12.04, the Development Commissioner, NOIDA, approved the ~
Renewal Application made by Mis. Abhishek Exports for next five year that
H is from 2005-2006 to 2009-2010, under LOP dated 24.3.2000.
~-
(
)

HINDUSTAN GRANITES v. U.0.1. [KAPADI~ J.] 751
12. The approval dated 16.12.0.:t stipulated that Mis. Abhishel{ Exports A
should have NFE ofRs.9.90 crores in the next five years. Under the LOP, the
exporter was required to maintain positive NFE.

13. On 31.8.05 the impugned Notification was issued amending para
6.8(a) and para 6.8(h) of FTP 2004-2009. By the impugned Notification the h
EOUs were prevented from making DTA sales of the finished marble from D
imported rough marble, with immediate effect. It. is this Notification which is
.J
I the subject-matter of challenge .

14. According to Mis. Abhishek Exports, an investment ofRs.300 lakhs
had been made; that, it had taken a loan from State Bank of Bikaner & Jaipur C
to the tune of Rs.2.30 lakhs on the basis of the Policy of Government oflndia
and that by making the above investments it had changed its position
substantially. According to Mis. Abhishek Exports, on account of the impugned
Notification, the quantity of marble sold by it in the DTA stood reduced.
According to Mis. Abhishek Exports such an amendment to the FTP 2004-
2009 by the impugned Notification was devoid of any element of public p
interest. According to Mis. Abhishek Exports, the impugned Notification was
against the basic feature of the EOU Scheme.

15. The Notification was challenged before the Rajasthan High Court.
Vide Order dated 29.09.06 the writ petition filed by Mis. Abhishek Exports in
the Rajasthan High Court stands transferred to this Court vide Transfer Case E
(C) No.165 of2006.

16. According to Mis. Abhishek Exports, by the impugned Circular
dated 30.8.2005 the quantity which could be imported by Special Import
License Units (SIL Units) was arbitrarily increased from 80,000 MT to 1.30
Lakh MT. The Circular dated 30.8.05 has been challenged on the ground that F
it discriminates unreasonably between 100% EOUs and SIL Units; that, the
impugned Circular gives benefit to selected importers; that, the effect of the
impugned Circular was to increase the availability of imported rough marble
blocks for use in the domestic market and that for no reason the right to
import has been unreasonably limited only to SIL Units by the impugned G
Notification dated 31.8.05. According to Mis. Abhishek Exports, by reason of
the impugned Circular/Notification the quantity of marble sold by the EOUs
in the domestic area has been reduced and the quantity of marble sold by SIL
Units from the same imported rough marble stood significantly increased
which has resulted in the loss to the EOUs. According to Mis. Abhishek
Exports, the impugned Circular/Notification was against public interest since H
752 SUPREME COURT REPORTS [2007] 4 S.C.R.

_,, A the SIL Units had no Export Obligations, they were not Foreign Exchange
Earners; they were required to pay lesser rate of duty and consequently
according to Mis. Abhishek Exports the impugned Circular/Notification was
not in public interest. Furt_her, according to Mis. Abhishek Exports, DTA sales
constituted essential feature of the EOU Scheme since vide para 6.1, 100%
B EOUs undertook to export their entire production of goods, except permissible
0

sale in the DTA, under the EOU Scheme and, therefore, the DTA sales
constituted an integral part of EOU Scheme. It was submitted that the DTA
sales were permitted only if the EOU fulfilled its Export Obligations and
,
__

achieved positive NFE and, therefore, the intention was to grant benefit to
the EOU on achieving positive NFE and it had no co-relation with the imported
C raw material out of which the exports are made. According to Mis. Abhishek
Exports, in the absence of DTA sales, an EOU would be compelled to sell its
entire production in the export market. According to Mis. Abhishek Exports,
on account of total restriction on DTA sales their inventory of marble tiles
is likely to get accumulated in the factory blocking the working capital and
funds, which otherwise would have been disposed of in the local market.
D According to Mis. Abhishek Exports, the unamended Policy had provided an
insulation/hedge against the fall in the export business in the international
market. According to Mis. Abhishek Exports, an EOU could sell the marble
tiles in the domestic market in the slump season so that production and
business activity of an EOU was not adversely affected. According to Mis.
E Abhishek Exports on account of impugned Circular/Notification an idle capacity
during the slump season would accrue. Further, under the unamended Policy,
in case of loss, an EOU could make good the loss by DTA sales and,
therefore, such sales constituted an essential feature of the EOU Scheme.
According to Mis. Abhishek Exports, DTA sales were essential to run the
plant at maximum capacity, to minimize the cost of production in the competitive
F export market, to deal with export surplus and to provide for disposal of export
products on cancellation of export orders. According to Mis. Abhishek Exports,
the impugned Circular/Notification has been published with the view to protect
the SIL Units at the cost of 100% EOUs. According to Mis. Abhishek Exports,
the impugned amendments would disrupt the business of EOUs and it would
G flood the domestic market with 1.30 Iakhs MT of finished marble product made
from imported rough marble which would not serve the public interest.
According to Mis. Abhishek Exports, the impugned Circular/Notification has
been issued to pro!ect the marble industry of Gujarat which is the primary
beneficiary of the SIL based import policy of marble. Mis. Abhishek Exports
further submitted that Article 14 of the Constitution of India is violated in the
H present case since the impugned Circular/Notification has been issued to give
)

'
t·
·- j

HINDUSTAN GRANITES v. U.0.1. [KAPADIA, J.] 753
~
~
concession to SIL importers at the cost of EOUs. A
17. On 10 .1.07 when the above matters came for hearing before this
Court, the following order was passed:

"Ban on DTA sales by 100% EOU under OGL licence and limiting
the issuance of licences to those applicants who have imported crude B
marble between 1999-2001 under SIL scheme vide impugned policy
r circulars Nos. 24 dated 30.8.2005, No. 34 dated 30.11.2005 and
... notification Nos. 23 and 24 dated 31.8.2005 (hereinafter referred to as
the impugned new policy) was the subject matter of challenge vide
writ petitions filed in various High Courts.
c
By order dated 29.9.2006, the said writ petitions stood transferred
to this Court.

Having regard to the arguments advanced before us and in view
of the fact that the entitlement of Domestic Users for financial year
2005-06 is going to lapse on 31.3 .2007 the following interim order is D
'f-- passed.
.,,,
DGFT would be entitled to grant licences to the applicants who
are so entitled under policy circular No. 24 dated 30.8.2005. To that
extent our order dated 29.9.2006 stands vacated.
E
In T.P. (C) No. 579/06 filed by the Director General of Foreign
Trade it has been inter alia stated that on account of representations
received from the traders and the material (including complaints)
gathered by DGFT, the impugned new policy came to be enacted. This
was after detailed discussions with the Trade. The broad features of
the new policy and the reasons for enacting the policy are given in F
t paragraphs 15, 16 and 17 of T.P. (C) No. 579/06. However, it appears
that the requisite material was not supplied to the affected 100%
EOUs. who have complained before us that the changes have been
made in FTP vide the impugned policy without giving any opportunity
to the affected Units. At this stage we may point out that learned
G
Solicitor General of India stated before us that the impugned policy
decision is taken on certain material (including complaints/
representations received) which he is prepared to disclose to the
y.
concerned EOUs. Accordingly, we direct DGFT to supply the material
in its possession to the affected EOUs., who have filed the writ
--(
petitions, on or before 15.1.2007. The said petitioners (EOUs.) who H
A
754 SUPREME COURT REPORTS [2007] 4 S.C.R.

have. filed writ petitions in the High Court shall thereafter make
representations to the DGFT within 10 days on and from the receipt
-
of the material (including complaints) from DGFT. Thereafter, DGFT
will decide the matter iil accordance with law. We make it clear that
it will be open to DGFT to equitably work out the matter, if possible.
One point, however, needs to be mentioned. It is stated on behalf of
B Mis Hindustan Granites that they have accumulated wastes which
they are entitled to sell in DTA under the unamended policy. It is
contended on behalf of Mis Hindustan Granites that they have fulfilled
the benchmark of Net Foreign Exchange earnings and, therefore, they
,'
were entitled to sell the accumulated wastes in the domestic market
c (DTA) under para 6.8 (h) on payment of full duty. On this point,
Mis Hindustan Granites can also make the representation giving facts
and figures regarding the quantity of waste which has accumulated
and it will be open to DGFT if possible to decide the question regarding
sale of the said waste in the DTA. .

D The question as to whether the impugned circulars/notifications
constitutes a change in the policy or whether it is a matter of detail
within the existing policy is the question which will be decided on the
next date of hearing when we will examine the merits of the case.

On receiving the report from DGFT, we shall hear the matter on
E merits on the next occasion. In the meantime, the ban on EOU Units
undertaking DT A sales shall continue to remain in operation.
Consequently, interim order of the Rajasthan High Court dated
26.10.2005 in DB Civil Writ Petition No. 5811/05 shall remain stayed.

Stand over to 31.1.2007."
F
18. On 7.2.07, the Director General of Foreign Trade after hearing the
parties and after considering their representations passed an order rejecting
the various representations made by Mis. Hindustan Granites Ltd, Mis.
Abhishek Exports, Mis. Pacific Industries Limited, Mis. Jain Grani Marmo
Pvt. Limited, Mis. Marble Art (all 100% EOUs). The said order is also under
G challenge before us.

19. The said order has re-affirmed the decision taken on 31.8.05 qua
100% EOUs and qua SIL Units without any change. In this connection, it is
submitted on behalf of Mis. Abhishek Exports that the Director General had
H erred in holding that.the-~OUs were misusing the DTA facility by making
HINDUSTAN GRANITES v. U.0.1. [KAPADIA, J.] 755

finished products from indigenous marble and exporting the said finished A
products rather than making finished products from the imported marble and
exporting the same. According to Mis. Abhishek Exports, FTP 2004-2009
specifically allow EOUs to sell finished products made from imported marble
in the DTA, upto 50% of FOB value on payment of concessional rate of duty
vide para 6.8(a). That, the said Policy permitted EOUs to sell anything above B
50% of the FOB value of exports in the DTA on payment of full duty [para
6.8(h)] subject to the EOUs maintaining a positive NFE. According to Mis.
Abhishek Exports, the above system operated for seven years. According to
Mis. Abhishek Exports, the above system is allowed in the Hand Book of
Procedure under which there was no requirement to co-relate every import
consignment with exports. According to Mis. Abhishek Exports, for last C
seven years the Implementing Authority has not objected to the manufacture
of finished goods from indigenous marble and that the said Authority has
never objected to such finished goods being exported as breach or misuse
of the Policy. According to Mis. Abhishek Exports, the Director General had
erred in holding that the impugned amendment was to protect the domestic
marble industry. According to Mis. Abhishek Exports, on account of change D
in Policy the EOUs which were previously buying rough marble from the
domestic market to make finished products and exporting the same would not
be now able to do so. That, under the amended Policy the EOUs are now
required to export finished products made from imported marble. According
to Mis. Abhishek Exports, on account of change in Policy qua SIL Units Ei
permitting them imports of marble to the order of 1.30 Lakhs MT as compared
68,000 MT would effect the domestic mining industry. According to Mis.
Abhishek Exports, the Director General had erred in holding that there was
diversion of the imported rough marble in DTA which defeated the very
purpose of putting marble as under the restricted category. In this connection,
Mis. Abhishek Exports contend that there was no diversion because DTA F
sales was specifically permitted under paras 6.8(a) and 6.8(h) ofFTP 2004-2009
prior to its amendment on 31.8.05 and, therefore, there was no misuse as
found by the Director General of Foreign Trade.

20. We find no merit in the challenge to the impugned Circular/Notification
for the following reasons. Firstly, it is important to note that under para 6.1 G
of the unamended FTP 2004-2009, 100% EOUs undertook to export their entire
production except permissible sales in DTA. Therefore, DTA sales constituted
an exception or an incidental facility. DTA sales were not an integral part of
the EOU Scheme. Under para 6.1, EOUs were allowed to be set up on the
condition that they would export their entire produc.tion. It is on this condition H
756 SUPREME COURT REPORTS [2007] 4 S.C.R.

A that 10::.1% EOUs could avail of various benefits under Customs and Excise
Act. The said DTA sales or sales of rejects were exceptions. DTA sales were
not an integral part of the EOU Scheme in the sense that if for reasonable
reasons if these exceptions are eliminated, as in this case, the Scheme would
become unworkable. In fact, Mis. Hindustan Granites even today after the
B impugned amendment works without use of domestic raw material. Hence,
DTA sales is not an integral part of the EOU Scheme. Secondly, it is important
to note that l 00% EOUs have been importing rough marble blocks from which
they are producing marble tiles/slabs and what they are exporting is the said
marble tiles/slabs. However, the Director General found, in the course of last
seven years, that the entire export of marble tiles/slabs is made out of the poor
C quality indigenous rough marble blocks. On the oth~r hand, it is found that
the entire sale of marble tiles/slabs in DTA is from rich good quality imported
rough marble blocks. Therefore, the DTA sales by 100% EOUs are now
disallowed under the impugned Circular/Notification. Thirdly, on account of
the above practice, the Director General has found that four to five I 00%
EOUs have been importing rough marble ostensibly for export but in effect
D after slight polishing the same are sold in DTA. Marble is a restricted item.
On account of the above practice, the Director General has found circumvention
of the Restricted Import Policy of .marble during I 00% EOU Scheme
(unamended). As ,stated above, the concept of Net Foreign Exchange earning
is very important. On account of the price differential, under the impugned
E practice, there is substitution of imported inputs by domestic inputs. The
rational behind allowing imports ofrough marble blocks by 100% EOUs was
that the raw material would be used for export production and that it will not
be diverted in DTA defeating the very purpose. of putting marble in the
restricted category. The object behind the EOU Scheme is consumption of
imported raw material for manufacture of finished products which are to be
F exported. If that facility leads to substitution of imported inputs by domestically
· procured inputs then the facility has to be discontinued. This discontinuation
has been done by the impugned Circular/Notification. Fourthly, as stated
above, marble is an item under restricted category. It is put in the restricted
category since it is not treated as only revenue-generating resource. It is put
G in the restricted category because the mining industry depends on that
resource. It generates employment. Mining generates employment. Marble is
an input required in the mining industry. As a result of impugned substitution,
the Indian market gets flooded by the imported goods resulting in
unemployment in the mining industry. Fifthly, by the impugned Circular/ ""'f
Notification, the Government has stopped procurement of domestic rough
H marble blocks for achieving NFE earnings. This is the major object behind the
~
HINDUSTAN GRANITES v. U.0.1. [KAPADIA, J.] 757

....... impugned Circular/Notification. It is true that the unamended Policy had no A
co-relation between the input imported and the finished product exported.
That was the loophole. To stop the procurement of domestic rough marble
blocks for achieving NFE, the DTA sales had to be prohibited. By the amended
Policy 100% EOUs are now required to produce marble tiles/slabs (finished
products) out of imported rough marble blocks and thereby the amended
B;
Policy stops the procurement of domestic rough marble blocks for achieving
NFE by these 100% EOUs. Lastly, there are 20 to 25 SIL Units (found to be
,.. eligible) vis-a-vis 4 to 5 100% EOUs and, therefore, the volume has been
.... increased from 68,000 MT to 1,30 Lakhs MT .

21. Before concluding, we would like to refer to the authority cited on
behalf of 100% EOUs.
c
Ir-
22. In the case of Bannari Amman Sugars Ltd. v. Commercial Tax
Officer and Ors., [2005] l SCC 625, the Division Bench of this Court speaking
through one of us, Pasayat, J., has held that exemption from purchase tax on
sugarcane granted in favour of sugar mills established in public sector whose o:
production exceeded Rs.300 Iakhs was entitled to tax benefit and that the
...t Government was not right in withdrawing that benefit, particularly, when the
industry stood established on basis of representation made by the Government.
While explaining the doctrine of promissory estoppel it has been observed
vi de paras ' 16' and ' 17' that if the State acts within the bounds of
reasonableness to be decided in an objective manner and from the stand point E
of public interest then the restriction cannot be said to be unreasonable,
merely because it ope. ates harshly. In our view, on the facts of the present
case, we are satisfied that the impugned amendment fulfills the test of public
interest and it also fulfills the test of reasonableness qua the restrictions
imposed on l 00% EOUs. F.
r- 23. Similarly, in the case of Union of India and Anr. v. International
Trading C:o. and Anr., (2003] 5 SCC 437, the Division Bench of this Court
speaking through one of us, Pasayat, J., has held that if State acts reasonably
keeping in mind national priority and good trade policies then it cannot be
said that the restrictions imposed in economic interest are unreasonable even G
though they operate harshly [See: paras '22' and '23'].

24. In the case of Union of India & ors. v. Mis. Asian Food Industries,
~ (2006) 12 Scale 105, on which reliance is placed by counsel for Mis. Abhishek
Exports, the Division Bench of this Court has held that Foreign Trade Policy
under Foreign Trade (Development and Regulation) Act, 1992 along with the H
758 SUPREME COURT REPORTS [2007) 4 S.C.R.
-,
A Hand Book of Procedure constituted a composite Scheme. We do not dispute
with this proposition. Hand Book of Procedure merely implements the policy.
It does not prevent the Central Government from changing the policy. Vide
paras '29' and '30' of the said judgment it has been held specifically that the
Central Government can, in exercise of its powers under Section 5 of the 1992
B Act, prohibit exports. In that case, this Court was concerned with the question
of banning of exports. It is not so in this case. In the matter before us there
was an incidental. Facility given to 100% EOUs to hedge the losses which
may arise on account of changes in foreign exchange rates which facility is
removed. In our view, nothing prevents the Central Government, in public
-.
interest, to plug the loophole by tinkering with the existing policy as is done
C in the present case. Disallowing DTA sales by 100% EOUs for above reasons
cannot be compared with total ban on export of pulses which was the case
in the matter of Mis. Asian Food Industries (supra). As held hereinabove,
DTA sales did not constitute an integral part of the EOU S_cheme, hence the
above judgment has no application.

D 25. For the above reasons, we do not see any merit in the challenge to
the impugned Circular dated 30.8.05 and ll:he Notificatiop dated 31.8.05 by the
--'(
above 100% EOUs. Accordingly, we uphold the validity of the Circular dated
30.8.05 and the Notification dated 31.8.05. Interlocutory Applications, civil
appeals, transfor petition, writ petition and transfer cases are disposed of
E accordingly with no order as to costs.

26. As stated above, this judgment is confined to the challenge to the
impugned Circular/Notification by 100% EOUs and has nothing.to do with the
challenge by SIL Units who have instituted separate petitions which will be
heard in normal course.
F
D.G. I.As, Appeals, Transfer Petition Writ Peition &

Transfer cases disposed of.