Delhi HC - Federation - of - Associations - of - Maharashtra - Vs - Union - of - India - (Uoi) - and - Ors. - On - 22 - November, - 2004 PDF

Federation Of Associations Of ... vs Union Of India (Uoi) And Ors.
on 22 November, 2004
Delhi High Court

Delhi High Court
Federation Of Associations Of ... vs Union Of India (Uoi) And Ors. on 22 November, 2004
Equivalent citations: 2005 (79) DRJ 426
Author: S K Kaul
Bench: S K Kaul
JUDGMENT
Sanjay Kishan Kaul, J.
1. The liberalization and opening of the Indian economy has seen foreign investment flow into different
sectors. Such inflow is, however, not unregulated and it is restrictive in certain areas of business. The
Government of India ( for short, `GOI' ) has in its wisdom not permitted foreign direct investment ( for short,
`FDI' ) in retail trade. On this, there is no dispute. FDI has been permitted in wholesale trade on cash and carry
basis. Over this also, there is no dispute. The present writ petition, however, involves the question of
interpreting of this concept of `cash and carry wholesale trade'.
2. The petitioners contend that under an amendment to the policy under the garb of a clarification dated
05/10.12.2002, in fact, retail trade has been permitted clothing it with the concept of wholesale cash and carry
trade through business to business sales. On the other hand, the Union of India ( for short, `UOI' ) as well as
the private respondents contend that what has been permitted is only wholesale cash and carry trade as
understood in the international parlance.
3. Petitioner No. 1, who claims to be an apex trade association having membership from retailers and
wholesalers in different parts of India, is seeking to agitate the grievance on behalf of this class of persons.
The respondents, apart from UOI and Foreign Investment Promotion Board ( for short, `FIPB' ) also include
private respondents No. 4 to 8 against whom the grievance of such retail trade is being made by the
petitioners.
4. The policy in question is stated to have been framed in the year 1997 in the form of guidelines meant to
assist FIPB to consider the proposals. In terms of para 8 of the guidelines in respect of trading business, 100%
FDI is permitted in case of trading companies for cash and carry wholesale trading and FDI up to 100% is also
permitted for E-Commerce activities subject to certain conditions, but such companies are to engage only in
business to business ( for short, `B2B sales' ) E-Commerce and not in retail trading. This aspect has been
referred to since the concept of B2B trading is really the main issue, which arises for consideration in the
present dispute. A Press Release is also stated to have been issued on 05.06.2000 stating that the GOI has
received representations from various quarters against permitting FDI in retail trading and that under the
current policy, such FDI in retail trading is not permissible.
5. The petitioners have also relied upon other documents including the report of the Planning Commission
made in May, 2002 recommending against FDI in retail sector. The basis for this is stated to be the fact that
retail sector in India is dispersed, widespread, labour intensive and disorganized.
6. Respondent No. 4 is M/s. Metro Cash & Carry Pvt. Ltd., which is an Indian company; while respondent
No. 5 is M/s. Metro Cash & Carry GmbH, which is a foreign Corporation. This group was granted permission
vide the approval dated 05.12.2000 for establishing a State of the Art Cash and Carry Complex for food and
non-food products at urban locations. The approval was, however, made subject to the condition that the
company would need to ensure that selling of the products stocked by it is to retailers who would possess
sales-tax registration and not to consumers. A Press Release is also stated to have been issued again thereafter
on account of certain reports in a section of the Press dealing with this permission. This Press Release
clarified that there is no retail trade permitted and cash and carry wholesale business is for sale to retailers
having valid sales-tax registration. The press report is as under:
Indian Kanoon - http://indiankanoon.org/doc/837644/
"NO FDI PERMITTED IN RETAIL TRADING - PRESS NOTE

There have been reports in a section of the press recently conveying an impression that FDI in retail trading
has been permitted in some cases. It is clarified that under the present policy, FDI is not permitted to domestic
retail trading, and no such permission has been given recently.
It may be recalled that prior to 1997, when the current policy was laid down, approvals had been given to two
companies for FDI in retail trading. The first approval was given to Nanz Foods Products in 1992, followed
by Spencer and Company Ltd. in 1996. Subsequently a policy decision was taken not to allow FDI in retail
trading and such proposals are not being approved.
The present policy only permits FDI up to 100 per cent in Cash and Carry wholesale trading, which is quite
distinct from retail trading, involving sale to individual customers through normal retail shopping outlets.
In this context, it would be useful to reiterate that cash and carry wholesale business and retail trading are
qualitatively and distinctly different. The wholesale trader sells his goods to retailers and not to consumers,
and retailers are identified as those having a valid Sales Tax Registration. The cash and carry wholesaler
cannot open retail shops to sell to consumers directly. The advantages of cash and carry wholesale business
are quick delivery of goods to retailers and saving of time and money in indenting and maintaining of
warehousing facilities, thus, giving them the benefit of just-in-time supplies.
The approval given to Metro Cash and Carry, GmbH recently, which have received extensive press coverage
is for setting up of state-of-the art cash and carry wholesale complexes. The company is not permitted to have
retail outlets or sell products to consumers directly.
It may be added that approval for cash and carry wholesale trading have been given in the past also. Any
violation of the approval terms renders the company liable to action."
7. The petitioners allege that the aforesaid is being violated in terms of the clarification issued to respondent
No. 4 vide letter dated 05/10.12.2002 on a representation received by the said respondent. One concession,
which was made, was that the retailer may not have only a sales-tax registration, but a valid license would
also suffice. On this aspect, really there is no quarrel, but it is the second aspect of this clarification with
which the petitioners are really aggrieved. The second part of this clarification states that B2B sales is
permissible under the policy, which cannot be termed as retail trade. The said clarification/letter is as under:
" BY SPEED POST / AIR MAIL
Amendment No. : 1
NO. FC.II. : 563(2000)/651(2000)-Amend
Government of India
Ministry of Commerce & Industry
Department of Industrial Policy & Promotion
Secretariat for Industrial Assistance
Foreign Collaboration - II Section
New Delhi, the December 5/10th, 2002
To
M/s. Metro Cash & Carry India Pvt. Ltd.
10th Floor, Vayudooth Chambers,
15/16, M.G. Road,
BANGLORE - 550 001.
SUBJECT : Application for foreign collabotration ( SIA Regn. No. FC.I. 651 dated 25/10/2000 )
REFERENCE: This Ministry's approval letter No. FC.II. : 563(2000)/651/ (2000) dated 05/12/2000.
Dear Sir,
I am directed to refer to your letter dated 22/02/2001, 13.9.2001, 23.7.2002 and 29.10.2002 on the above
mentioned subject with reference to this Ministry's letter referred to above and to clarify that the Company can
supply to distributors, wholesalers and retailers having valid trade licenses / sales-tax registration.
Business-to-business sale is permissible under the extant policy, which cannot be terms as retail trade.
2. Further, it is noted that a new Indian company in the name & style of M/s. Metro Cash & Cary India Private
Limited has been incorporated to implement the project. Accordingly, the approval letter is hereby transferred
in the name of the new company. This new company shall abide by the terms and conditions stipulated in the
above referred approval letter.
3. All other terms and conditions of the letters referred above shall remain unchanged.
4. Kindly acknowledge the receipt of this letter.
Yours faithfully,
sd/( PRAMILA RAGHVENDRAN )
UNDER SECY. TO THE GOVT. OF INDIA"
8. The aforesaid clarification is stated to be really an amendment by the petitioners by reference to the
document itself, which lists the same as Amendment No. : 1. The reference given at the top of the letter is to
the approval No. This B2B sales is alleged by the petitioners to be amounting to a permission to dealing of
goods unconnected with business and sub-version of the policy since this B2B sales concept formed only a
part of the policy in respect of E-Commerce trade specifically. To substantiate this contention, a reference has
also been made to the licenses issued to respondent No. 4 by the Assistant Drug Controller as also for liquor
which are retail licenses.
9. A number of invoices have also been filed to show that respondent No. 4 is, in fact, making sales of
individual items of small numbers not related to the business of the purchasers including to Shoe Wagon. This
is alleged to be not sale to retailers.
10. It was, thus, submitted by learned senior counsel for the petitioners that the concepts of retail and
wholesale trade are totally different, especially as understood in our country and that is this definition, which
would have to apply to the policy. Learned senior counsel referred to the Black's Law Dictionary, Seventh
Edition where the word `retail', `retailer' and `wholesaler' are defined as under:
" retail, n. The sale of goods or commodities to ultimate consumers, as opposed to the sale for further
distribution or processing, - retail, vb. - retail, adj., Cf. WHOLESALE."
" retailer, n. A person or entity engaged in the business of selling personal property to the public or to
consumers, as opposed to selling to those who intend to resell the items."
" wholesaler. One who buys large quantities of goods and resells them in smaller quantities to retailers or
other merchants, who in turn sell to the ultimate consumer."
11. It was, thus, emphasized that the wholesaler is not a consumer, but who buys in large quantities and sells
them in smaller quantities to retailers. Thus, the lack of self-consumption and the quantity of goods were both
stated to be important aspects.
12. A reference was also made to The Concise Commercial Dictionary by P.G. Osborn, First Indian Reprint
1997 where `retail' and `wholesale' businesses were defined as under:
" retail. The sale of goods to the consumer, usually in small quantities in shops, saloons, etc. See also
WHOLESALE"
" wholesale. The selling of articles or goods in large quantities to be sold retail. A wholesale shop is one
occupied by a wholesaler where goods are kept for sale wholesale to customers resorting to the premises.
(Shops Act, 1950)."
13. Learned senior counsel also sought to derive strength from the definition of `wholesaler' in Section 2(x) of
The Monopolies and Restrictive Trade Practices Act, 1969, which is as under: "wholesaler", in relation to the
sale of any goods, means a person who [sells the goods, either in bulk or in the large quantities, to any person
for the purposes of re-sale, whether in bulk or in the same or smaller quantities];"
14. Learned senior counsel emphasized that the Press Release of 07.02.2001 did not carve out any exception
for B2B trade and, in fact, the then Minister for Commerce and Industry in the letter dated 28.03.2001
addressed to a Member of Parliament had emphasized the factum of sale of products to retailers, who possess
sales-tax registration with reference to the case of respondents No. 4 and 5.
15. The representation made dated 13.09.2001 to the Chairman, FIPB had emphasized that the Metro's
business concept was based on selling not to consumers, but to registered business customers and, thus,
sales-tax registration alone should not be applied to the transaction, which would deprive a large section of
small potential beneficiaries of the opportunity to compete more effectively with big players by becoming a
Metro consumer. Thus, it was requested that any other business registration should also be permitted as a
criteria. In the subsequent communication dated 23.07.2002 of respondent No. 4, a further clarification was
sought on the basis that the GOI had allowed B2B trading with 100% foreign participation on the Internet and
this is what precisely Metro intended to do. It is this which has resulted in the impugned clarification /
amendment.
16. Learned senior counsel further sought to rely on an enquiry held by the Karnataka Government, which had
come to the conclusion that there was violation of the original conditions laid down by the Government. This
finding has been arrived at in terms of a communication dated 03.02.2004 addressed to the GOI by the
Government of Karnataka. It may, however, be clarified at this stage that the GOI in the present proceedings
has taken a categorical stand that what the private respondents are doing is permissible under the policy.
17. Learned senior counsel also sought to emphasise the fact that a categorical averment has been made in the
writ petition in sub-para (g) of para 16 that this clarification / amendment had been issued without consulting
the FIPB and has been issued unilaterally by the Under Secretary at the instance of the Chairman, FIPB. This
fact has not been denied in the counter affidavit of UOI specifically and all that has been stated is that B2B
sales concept is within the scope of the approval as sales at wholesale level are permissible under the policy.
18. The GOI also carried out its own enquiry based on certain allegations of violation of conditions by
respondents No. 4 and 5 and a finding was arrived at in favor of the private respondents. It may be noted that
the definition of wholesale and retail trade as adopted by the World Trade Organisation ( for short, `WTO' )
was relied upon. Since this is a finding arrived at by the GOI itself, which has resulted in the stand being taken
in the present proceedings, it is relevant to reproduce the same:
" GOVERNMENT OF INDIA
BRIEF ASSESSMENT BASED ON THE FINDINGS OF THE INQUIRY CONDUCTED INTO THE
ALLEGATIONS OF VIOLATION OF CONDITIONS OF APPROVAL GRANTED TO METRO CASH &
CARRY INDIA LTD.
On receipt of reports alleging non-compliance of the approval conditions by M/s. Metro Cash & Carry India
Pvt. Ltd., the Government of India, Department of Industrial Policy & Promotion, conducted a fact finding
inquiry into the allegations.
2. The Company informed that it has a stringent customer validation process to ensure that only bona fide
business customers purchase goods for their business needs from its distribution centres. The Company also
said that it has a continuous review process for verifying the continuance of the business, checking violations
of terms and conditions of the card, etc. On misuse or irregularities being noticed the card is blocked and the
customer is not allowed entry. The Company has also prescribed minimum buy quantities for different
products.
3. The Inquiry observed that:a) registered businesses which include traders, service providers, offices, restaurants, etc. were enrolled as
Members, and only registered Members were allowed to purchase goods from the wholesale cash and carry
complex.
b) the company is carrying out its operations substantially within the scope of the government approval, which
is according to the prevalent policy governing FDI in trading.
c) by February, 2004, the share of value of sales for transactions below Rs. 1,000/- had fallen to just 0.2% of
total sales. It was 7.5% in October, 2003 when the company commenced operations but gradually stabilised.
4. Based on details analysis of the Inquiry, it was found that a substantial majority of registered members of
Metro Cash & Carry complex would fall in the category of either traders of entities that would use the
purchased goods for further processing (viz. Retailers, mini-marts, super-marts, hotels, restaurants).
5. It was also noted that while there is no clear cut demarcation between wholesale and retail sales, it can be
concluded that direct sales to the ultimate consumer would constitute retail trade whereas sale to an entity
which in turn sells it to the ultimate consumer or to another retailer or uses it for further processing can be
classified as wholesale trade. In fact, sales in larger quantities to consumers would also, as per common
practice, qualify as wholesale. However, the size of quantity would depend on the nature of the product.
6. Department of Commerce, which is the Administrative Ministry for the Metro Cash & Carry Project, have
confirmed the definition adopted by the World Trade Organisation (WTO), according to which:
" Wholesaling consists of the sale of goods/ merchandise to retailers, to industrial, commercial, institutional,
or other professional business users or to other wholesalers and related subordinated services."
" Retailing services consists of the sale of goods/ merchandise for personal or household consumption either
from a fixed location (e.g. Store, kiosk, etc.) or away from a fixed location and related subordinated services."
It is clear from the definition that the quantity of sale is not the detriment for wholesale trade, but it is the type
of customer who determines whether the trade is wholesale or retail. Further, it is apparent that industrial,
commercial, institutional and professional business users are also considered as wholesale customers, even if
they are consumers. This, in fact, was the basis of the clarification issued to Metro Cash & Carry that
business-to-business sale was permissible under the extant policy.
7. Since as per the extant policy FDI in retail trade is prohibited, the company would need to constantly
monitor and regulate its business and membership in such a way that those who do not fulfilll wholesale
criteria are weeded out, and sales are effected only to such customers as fit the definition."
19. Learned senior counsel for the petitioners is aggrieved by the aforesaid finding and specifically referred to
the definition as given by the WTO since that is not a definition under the policy. In fact, it is this definition
which has also resulted in a stand being taken in the counter affidavit of UOI in para 7 that in common
understanding, sales in large quantity even to consumers could also be understood as wholesale. It was
submitted that the stand has been taken without any consultation or finding by FIPB since the guidelines were
meant to assist FIPB to consider the proposals, but the same would not restrict or bind FIPB from considering
the proposal in the totality.
20. The aforesaid concept of cash and carry wholesale trade, especially with reference to B2B sales has also
been explained in the counter affidavits of respondents No. 4 and 5. It has been explained that the approval
granted by the GOI is adopting and absorbing the worldwide concept of cash and carry in India, which is a
modern concept of the traditional wholesale trade, which in turn is clearly opposed to retail. B2B sales are
permissible and it is irrelevant whether the goods are sold to business customer, who conducts retail or to a
business customer conducting operations other than retail such as restaurant or a hotel. Respondent No. 4 is
stated to have set up, in fact, a warehouse facility where businesses purchase for their commercial purposes
and the goods are stored in an industrial storage racks. The entry is restricted on the basis of the prior
registration with the said respondent, which in turn is dependent on sales-tax registration or valid trade
license. Sale is not to consumers, but to businesses. This aspect is further explained by what is known as
business to consumer (B2C) as opposed to B2B trade. Trade to consumer is affected in case of a domestic
trading and such consumer would naturally be a person, who is acting for purposes other than those of his
trade, business or profession. Thus, as distinguished from retail B2C sale, a wholesale trade is sale to a person
for purposes of his trade, business or profession. In the guidelines for FIPB in sub-para (k) of para 8, it has
been emphasized whether the items involve only trading activity and whether it involves export or both export
and import or also includes domestic trading and if domestic trading whether it also includes retail trading.
21. The emphasis of learned senior counsel for the respondents, thus, was that the concept alien to the policy
and as understood in the country was sought to be incorporated.
22. It may be noticed that in so far as the invoices filed by the petitioners are concerned, which show purchase
of smaller quantities of items and that too not directly connected with the business, the explanation given is
that on the same day, the customer has purchased large quantities of the relevant product and the purchases
referred to were only incidental on that date. An illustration of this is the purchases made by M/s. Shamrock,
one of the registered customers, who had purchased 364 jeans under 20 invoices. However, on the same date,
some smaller quantities of daily articles were also purchased. It has been further stated in the counter
affidavits of respondents No. 4 and 5 that further checks and balances have been introduced to prevent any
stray invoices.
23. Learned senior counsel for the petitioners also emphasised the fact that this policy of prohibition of retail
trading has been consistent policy of the GOI, which has been incorporated in the Foreign Exchange
Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations, 2000, which
was amended on 18.06.2003 where retail trading has been specifically mentioned in the list of activities for
which FDI is prohibited.
24. In so far as respondent No. 6 is concerned, M/s. Shoprite Checkers India Pvt. Ltd., it is an Indian
company, while M/s. Shoprite Holdings Ltd. is the foreign company. Incidentally, the name of respondent No.
6 was not correctly stated. Respondent No. 7 has stated that it owns a wholly-owned subsidiary in India called
Megasave Trading Pvt. Ltd. and respondent No. 6 is stated to be non-existent. This mistake is admitted by the
petitioners and in view thereof, leave is granted to file amended memo of parties incorporating the correct
name. M/s. Shoprite Holdings Ltd., respondent No. 7 has also been given permission for wholesale cash and
carry trade and no domestic retail trading in any form is permitted. Respondent No. 7 is stated to have
finalised a franchise agreement with Nirmal Super Markets in return for payment of royalty. It is stated that
there is no investment in the form of equity by respondent No. 7 and the persons manning the same are
completely unrelated to the Shoprite Group. It is Nirmal Super Markets, which carries on retail activities and
such franchise arrangement is stated not to require any regulatory approval if the royalty is payable under the
same do not exceed certain limits. Since royalties are within the limit, no permission is stated to be required.
The petitioners allege that, however, no such agreements have been produced and, thus, the policy relied upon
by the said respondents should not be permitted to be relied upon. It may be noticed that the policy in question
deals with automatic approvals and where payment of royalty up to 2% for exports and 1% for domestic sale
is allowed under automatic approval and use of trademarks and brand-names of the foreign collaborator
without technology transfer, there is such automatic approval. There are, of course, certain other conditions on
the total quantum of the royalty.
25. In terms of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 notified in
terms of the notification dated 03.05.2000 in exercise of powers conferred by Section 5 and sub-section (1)
and clause (a) of sub-section (2) of Section 46 of the Foreign Management Act, 1999, Schedule II has been
provided with reference to rule 4, which puts the limit on a person to draw foreign exchange without prior
approval of the GOI. Column 8 of the Schedule II deals with remittances under technical collaboration
agreements whose payment of royalty exceeds 5% of local sales and 8% of export and lump sum payment
exceeds US $ 2 million. The foreign technical agreement is stated not to have been produced.
26. Respondent No. 8 is M/s. Marks & Spencers and respondent No. 9 is M/s. Planet Sports Pvt. Ltd. The
allegation is about a franchise agreement, but the stand taken by the said respondents is that there is no FDI
and the Government's stand is also that on verification, there is no flow of foreign exchange involved and,
thus, there is no requirement of the permissions.
27. Learned counsel for all the respondents have opposed the petition and learned senior counsel for
respondent No. 4 emphasised that the concept of cash and carry business is a species of wholesale trading,
which requires building a chain of large distribution infrastructure and provides a platform to facilitate
manufacturers to increase the efficiency of the length of supply chain by dealing with the dispersed
community of resellers, processors and other business customers like bakeries, caterers, restaurants, industrial
and commercial users. This method of trading is stated to be advantageous even to the medium-sized
businesses like retailers, traders, etc. who purchase their business requirements from the Metro wholesale
distribution centre on a daily basis. Thus, under one roof at a convenient time and in convenient quantities
wholesale levels are available on cash and carry basis, which in turn reduces the requirement of inventories
and, thus, lower costs are incurred. The benefits of such business are stated to have been recognised
internationally and one such decision referred to was of the EC Commission dated 20.11.1996 in Kesko /
Tuko (Case No. IV/M-784) where in para 26 of the said judgment, it was observed as under: " 26. Both Kesko
and Tuko achieve significant turnovers from their sales in cash-and-carry outlets. As the term implies, cash
and carry, as a means of wholesaling, is different from 'classic wholesaling'. In that customers provide the
transport themselves and pay for the goods in cash rather than on credit. Cash and carry is therefore
advantageous for customers who are less able to predict long-term demand, who do not have the physical
facilities to hold large stocks for a period of time, who do not have the financial resources to guarantee the
credit required for large bulk purchases and who therefore prefer to buy smaller quantities on a more frequent
basis. Such customers are generally smaller companies, whereas larger customers tend to use wholesaling, as
Kesko itself has confirmed in its reply to the Commission's Statement of Objections."
28. Another judgment referred to by learned senior counsel for respondent No. 4 was of U.S. Supreme Court
in Roland Elec. Co. v. Walling, 326 U.S. 657 (1946) to emphasise that the distinction between retail and
wholesale is not merely between size and volume of sales, but between the types of purchasers. In
wholesaling, the purchaser is actuated solely by a profit or business motive in making the purchase; while in
retailing, the purchaser is actuated solely by a desire to satisfy his own personal wants or those of his own
family and friends through personal use of the commodity or service purchased.
29. The judgment of the Supreme Court of New South Wales in Wollworths Ltd. v. Campbells Cash & Carry
P/L & Ors., (1996) 92 LGER 244 was also referred to which also emphasise that the word 'wholesale' or its
derivative is not to be wholly determined either by reference to the quantity of goods sold or to the identity of
the buyer. The essence of wholesale business was held to be the nature and purpose of activity. It would be
relevant to extract the following portion: " These cases show that, while usually a wholesaler sells in large
quantities, the meaning of the word 'wholesale' or of its derivatives is not to be wholly determined either by
reference to the quantity of goods sold or to the identity of the buyer; a wholesaler, as part of its business,
buys and sells merchandise to retailers and other merchants and to industrial, institutional and commercial
users;
a wholesaler does not sell in significant amounts to ultimate customers;
an ordinary incident of conducting a wholesale warehouse is the sale and delivery on the premises to retailers
of any goods held there and in any quantity; and
sales to consumers are not ordinarily made in a wholesale warehouse nor is it a place to which members of the
public - that is consumers - ordinarily come or are invited to resort.
By contrast retail sales usually are of goods in comparatively small quantities to ultimate consumers who are
ordinary members of the public, although this may not always be so. In Collector of Customs v. Chemark
(1993) 42 FCR 585 at 591, the Full Federal Court said: " The weight of authority seems to us to support a
conclusion that the words 'retail sale' have generally acquired a specialised meaning of a sale to an ultimate
consumer. We do not think that the usage of the term limits such consumers to ordinary members of the
public. The fact that in the present case almost all of the goods imported by the respondent were directly sold
to professional horticulturalists and not ordinary gardeners as ultimate consumers. Thus in our opinion the
learned primary judge erred in his interpretation of the meaning of 'retail sale' within the meaning of heading
3808."
30. Learned senior counsel for respondent No. 4 submitted that cash and carry wholesale business and retail
trading are equitably and fundamentally different and the WTO definition adopted by the GOI correctly
explains the concept. A reference was also made to the definition of `cash and carry wholesale', defined in
1993 by the Statistical Office of the European Communities (Eurostat), which is as under: "Cash & Carry is a
form of trade in which goods are sold from a wholesale warehouse operated either on a self-service basis, or
on the basis of samples (with the customer selecting from specimen articles using a manual or computerized
ordering system but not serving himself) or a combination of the two. Customers (retailers, professional users,
caterers, institutional buyers, etc.) settle the invoice on the spot and in cash, and carry the goods away
themselves."
It was, thus, submitted that the only decisive characteristic of wholesale is whether the offer is made to
business or professionals or to private consumer.
31. Learned senior counsel for respondent No. 4 also referred to Beckman and Engle on Wholesaling
Principles and Practice (1937) p.25, which states as under:
" Wholesaling includes all marketing transactions in which the purchaser is actuated solely by a profit or
business motive in making the purchase."
" Retailing includes all marketing transactions in which the purchaser is actuated solely by a desire to satisfy
his own personal wants or those of his family or friends through the personal use of the commodity or service
purchased."
32. The definition given in the Encyclopedia of Social Sciences, Vol. 3 at page 246 is stated to be as under:
"The distinguishing feature of the retail trade ... consists in selling merchandise to ultimate consumers'
whereas wholesaling is said to cover sales 'to a retailer, a wholesaler, or an industrial consumer so long as the
purpose of the customer in buying such goods is to resell them in one form or another or to use them for
business needs as supplies or equipment."
33. Learned senior counsel for respondent No. 4 further emphasised that the clarification is really the
understanding of the GOI of its own policy and it is not for the petitioners to contend as to what the
Government should understand by its own policy. These matters, especially being in the domain of economic
policy, the same are not subject to challenge. This concept has been recognised by the Supreme Court in
BALCO Employees' Union (Regd.) v. Union of India & Ors., , where it was observed as under:
" 36. ... ... ... ... ... ...
What we said in that case in regard to legislation relating to economic matters must apply equally in regard to
executive action in the field of economic activities, though the executive decision may not be placed on as
high a pedestal as legislative judgment insofar as judicial deference is concerned. We must not forget that in
complex economic matters every decision is necessarily empiric and it is based on experimentation or what
one may call 'trial and error method' and, therefore, its validity cannot be tested on any rigid 'a priori'
considerations or on the application of any strait-jacket formula. The Court must while adjudging the
constitutional validity of an executive decision relating to economic matters grant a certain measure of
freedom or `play in the joints' to the executive. ... ...
... ... ... ... ... ... ...
47. Process of disinvestment is a policy decision involving complex economic factors. The courts have
consistently refrained from interfering with economic decisions as it has been recognised that economic
expediencies lack adjudicative disposition and unless the economic decision, based on economic
expediencies, is demonstrated to be so violative of constitutional or legal limits on power or so abhorrent to
reason, that the courts would decline to interfere. In matters relating to economic issues, the Government has,
while taking a decision, right to " trial and error" as long as both trial and error are bona fide and within limits
of authority. There is no case made out by the petitioner that the decision to disinvest in BALCO is in any
way capricious, arbitrary, illegal or uninformed. Even though the workers may have interest in the manner in
which the Company is conducting its business, inasmuch as its policy decision may have an impact on the
workers' rights, nevertheless it is an incidence of service for an employee to accept a decision of the employer
which has been honestly taken and which is not contrary to law. Even a government servant, having the
protection of not only Articles 14 and 16 of the Constitution but also of Article 311, has no absolute right to
remain in service. For example, apart from cases of disciplinary action, the services of government servants
can be terminated if posts are abolished. If such employee cannot make a grievance based on Part III of the
Constitution or Article 311 then it cannot stand to reason that like the petitioners, non-government employees
working in a company which by reason of judicial pronouncement may be regarded as a State for the purpose
of Part III of the Constitution, can claim a superior or a better right than a government servant and impugn its
change of status. In taking of a policy decision in economic matters at length, the principles of natural justice
have no role to play. While it is expected of a responsible employer to take all aspects into consideration
including welfare of the labour before taking any policy decision that, by itself, will not entitle the employees
to demand a right of hearing or consultation prior to the taking of the decision.
... ... ... ... ... ... ...
92. In a democracy, it is the prerogative of each elected Government to follow its own policy. Often a change
in Government may result in the shift in focus or change in economic policies. Any such change may result in
adversely affecting some vested interests. Unless any illegality is committed in the execution of the policy or
the same is contrary to law or mala fide, a decision bringing about change cannot per se be interfered with by
the court.
93. Wisdom and advisability of economic policies are ordinarily not amenable to judicial review unless it can
be demonstrated that the policy is contrary to any statutory provision or the Constitution. In other words, it is
not for the courts to consider relative merits of different economic policies and consider whether a wiser or
better one can be evolved. For testing the correctness of a policy, the appropriate forum is Parliament and not
the courts. Here the policy was tested and the motion defeated in the Lok Sabha on 1-3-2001."
34. A reference was also made to the subsequent judgment in Federation of Railway Officers Association &
Ors. v. Union of India, wherein it was observed as under:
" 18. Even if we assume that there is force in the material placed by the petitioners that by forming new
railway zones efficiency in the Railway Administration would not enhance, the reasons given by the
Government and material placed by them in support of forming new railway zones is no less or even more
forceful. Further, when technical questions arise and experts in the field have expressed various views and all
those aspects have been taken into consideration by the Government in deciding the matter, could it still be
said that this Court should re-examine to interfere with the same. The wholesome rule in regard to judicial
interference in administrative decisions is that if the Government takes into consideration all relevant factors,
eschews from considering irrelevant factors and acts reasonably within the parameters of the law, courts
would keep off the same. Even on the test suggested by Dr. Pal, we cannot travel outside this principle to sit
in appeal on the decision of the Government."
35. Learned senior counsel for respondent No. 4 also emphasised that B2B sales form part of the wholesale
trading and cannot be termed as retail trade. They are permitted according to the GOI's own understanding of
the matter in issue, which must be given great weight and it should be accepted. It was submitted that though
the matter in the present case is of an executive policy, the principles would be same as applicable while
construing a statue. In this regard, learned senior counsel referred to judgment of the Supreme Court in
Collector of Central Excise v. Andhar Sugar Ltd., 1989 Supp. (1) SCC 144 where it was emphsised that in
matters of interpreting or construing a statute, the courts would give much weight to the interpretation put
upon it at the time of its enactment and by those whose duty has been to construe, execute and apply the same
enactment. On the same principles, another judgment of the Supreme Court in State of Tamil Nadu v. Mabi
Traders, was referred to the effect that understanding by the Department fully conversant with this branch of
trade and in the context of the provisions of the statute must be given weightage and such interpretation
10
should be shown to be clearly wrong before it is overturned. The cash and carry wholesale trading being a
term of art is stated to have acquired specialised meaning in international trade and commerce and that is what
the GOI seeks to emphasise in the subsequent clarification.
36. The very concept of the Metro Distribution Cetnres is stated to be distinguishable from a super market.
These distribution centres are located in the outskirts of Banglore city and entry to the same is restricted to
cardholders of the registered businesses. No member of the public can enter the Metro Distribution Centres
nor any children is allowed. The cardholders are also supposed to be two per each of the businesses. There are
also quantitative and monetary restrictions imposed regarding the items.
37. The procedure followed before issuance of the identity cards to the businesses is stated to be stringent. The
consultant of Metro visits the business premises of the proposed customer and verifies the trade licenses /
sales-tax registration, the customer registration form is signed and one of the pre-conditions is as under: "
Metro sells goods to the customer on the condition that they are for resale, commercial, business or industrial
use only. The customer agrees not to purchase goods at the Metro distribution center for personal
consumption. Purchases are not allowed by persons as private individuals for personal use."
38. After registration, the customer is issued a magnetic plastic photo identity card, which are, thus, persons
specific and the person must come personally to present the card at the main entry. The entry is permitted only
after the customer card has been swiped at the entrance control to ensure that it is still valid apart from the
visual check. The card is again swiped at the cash counter before an invoice can be generated by the computer
system and the invoice is raised only in the name of the business entity.
39. As a customer selection process, on random basis, checks are done whereby the customer is asked to state
particulars of the nature of business and the requirement of his visit to the premises of the said respondent and
the bona fide of business organisations and their transactions are constantly monitored.
40. It is specifically submitted that a business house could well require certain articles for its business
purposes, which are not directly in the line of its business and illustration of this is stated to be business
establishment selling jewellery requiring a refrigerator, an air conditioner, food products, cold drinks, coffee,
etc. for its own clients/customers or cloth for their employees for uniform.
41. In so far as the issue of retail liquor and drug license are concerned, the same are stated to have been
obtained by the private respondents for the reason that the wholesale drug license as well as wholesale liquor
license permits the license-holder to make sales only to other license-holders as such the wholesale license
would not have permitted the respondent to make sales to some of its business customers for their commercial
use. Thus, drugs may be required by a hotel for its resident guest or by any factory or business establishment
that maintains a first aid kit. The crux is that the same is sold for business purposes. The same is stated to be
the position for wines and liquors and it is emphasised that for the period from January to September, 2004,
sale under retail drug license and retail liquor license are 0.20% and 2.64% respectively of the total sales.
Thus, B2B sales are stated to be totally in the nature of wholesale trade apart from the sales in large quantities
to individual customers for personal or household consumption or to retailers for further sale. The report of
the Karnataka Government is stated to be based on the misconception of the very concept of what is wholesale
trade, especially with reference to B2B sales. In this behalf, the report of GOI is emphasised apart from the
fact that another report of the Department of Industries and Commerce of the Government of Karnataka had
concluded that the said respondent was working in conformity with th clarifications.
42. Learned senior counsel for respondent No. 5 has, apart from emphasising the submissions advanced by
learned senior counsel for respondent No. 4, laid stress on the fact that the investment was made by the said
respondent after obtaining the clarification and the said respondent did not proceed further until the
clarification was issued. In so far as the role of FIPB is concerned, it was submitted that the same is an
internal Government departmental matter and the role is recommendatory to the Government. It was
11
submitted that, in fact, if the Government had changed its policy after giving the clarification to the said
respondent, the plea of promissory estoppel would have been available since the change of policy could only
have been prospective. It was, thus, submitted that what the Government could not have done, the petitioner
can hardly persuade the Court to do by judicial pronouncement making out a case of is own grievance on the
issue of interpretation of the policy. The judgment of the Supreme Court in State of Punjab v. Nestle India
Ltd. & Anr., (2004) 269 ITR 97 where the observations of Chandrasekhara Aiyar, J. in Collector of Bombay
v. Municipal Corporation of the City of Bombay, (1952) 3 SCR 43 were referred to, which are as under: " ...
The invalidity of the grant does not lead to the obliteration of the representation. ... Can the Government be
now allowed to go back on the representation, and if we do so, would it not amount to our countenancing the
perpetration of what can be compendiously described as legal fraud which a court of equity must prevent
being committed. If the resolution can be read as meaning that the grant was of rent-free land, the case would
come strictly within the doctrine of estoppel enunciated in Section 115 of the Indian Evidence Act. But even
otherwise, that is if there was merely the holding out of a promise that no rent will be charged in the future,
the Government must be deemed in the circumstances of this case to have bound themselves to fulfilll it. ...
Courts must do justice by the promotion of honesty and good faith, as far as it lies in their power."
43. Learned senior counsel for respondent No. 5 further referred to judgment of the Supreme Court in Rai
Sahib Ram Jawaya Kapur & Ors. v. The State of Punjab, while dealing with the issue of the role of different
Government branches, it was observed as under:
"12. ... ... ... ... ... ...
The Indian Constitution has not indeed recognised the doctrine of separation of powers in its absolute rigidity
but the functions of the different parts or branches of the Government have been sufficiently differentiated and
consequently it can very well be said that our Constitution does not contemplate assumption, by one organ or
part of the State, of functions that essentially belong to another. The executive indeed can exercise the powers
of departmental or subordinate legislation when such powers are delegated to it by the legislature."
44. In so far as respondents No. 8 and 9 are concerned, they washed their hands of the matter on the basis that
there is no flow of foreign exchange. The question of RBI approval is stated not to be arisen as there are no
remittances for use of the franchisee in India and this has been even enquired into by the GOI. There was no
payment of royalty and the website had only referred to the trademark use on franchise arrangement.
45. The defense of respondents No. 6 and 7 is on slightly different footing as there is a flow of royalty for the
brand-name. The franchise agreement is for the know-how to be given, but there is no financial contribution.
The super market retail premises are opened and operated by Nirmal Lifestyle and there is wholesale / cash
and carry business in respect of the relevant facility. The provision for automatic approval earlier referred to
was emphasised as also the fact that the respondents have categorically stated that the royalty is within the
limits provided for such automatic approval.
46. It is also emphasised that the regime itself stand amended on 24.02.2004 in terms whereof there is no need
for registration and remittances under the franchise agreement can be made where the trademark is not sold.
The rules framed in the year 2000 require prior approval of Reserve Bank of India under rule 5 and Schedule
III specifies such remittances where prior approval is required. Item No. 16 deals with remittances for use
and/or purchase of trademark/franchise in India, which is not so in the present case and, thus, regulation 4
requiring no prior approval would apply since it is only a case of payment of royalty under para 2 of Schedule
II.
47. Learned ASG supported the stand of respondents No. 4 and 5 by emphasising that the executive power is
with the UOI under Article 53 of the Constitution of India and Article 77(3) provides for making rules for the
more convenient transaction of the business of the GOI and for allocation of the said business. The last
allocation of business of 15.10.1999 was referred to submit that FIPB is actually a part of the concerned
12
Ministry of Commerce and Industry. Thus, the whole matter fall within the domain of a policy decision.
48. The clarification was stated to have been issued by the concerned Ministry on the basis of what it
understood by the wholesale cash and carry trade. There was no interpretation of law involved, but of the
policy by the parent Department, which created the policy. It was emphasised that nothing precluded the
Government from considering and relying on WTO definition, especially taking into consideration the era of a
liberal regime and the expansion of international trade and commerce. It was, thus, emphasised that what was
done was consistent with the norms and understanding of the phrasology internationally. Learned counsel
referred to judgment of the Supreme Court in BALCO Employees' Union (Regd.)'s case (supra) and
Federation of Railway Officers Association's case (supra), which have been quoted above to emphasise that in
such matters falling within the economic domain of the Government's decision-making policy, it should be the
Government which decides what policy to make and what is meant by that policy.
49. Learned ASG referred to a number of dictionaries for the meaning and effect of wholesaling.
50. The definition of `wholesaling' in The New Encyclopedia Britannica, Vol. 23 at page 549 was referred to,
which is as under:
" Wholesaling. Wholesaling consists of selling to other business firms either for resale or for business use,
usually in bulk and at less than retail prices. A wholesaler is an independent merchant operating one or more
wholesale establishments. Manufacturers may engage in wholesaling through their sale branches and retailers
may also do so internally through chain-store warehouses, although they are not classed as wholesalers."
51. In The New Encyclopedia Britannica, Vol. 12, `wholesaling' has been defined at page 644 as under:
" Wholesaling, the selling of merchandise by anyone other than a retail customer, merchandise may be sold to
a retailer, wholesaler, or to an enterprise that will use it for business, rather than individual, purpose.
Wholesaling usually, but not necessarily involves sales in quantity and almost always at a cost that is
significantly lower than the brokerage retail price."
52. In Words and Phrases, Permanent Edition, Vol. 45, `wholesaling' has been defined as under:
" `wholesaling' covers sales to a retailer or an industrial consumer so long as purpose of customer in buying
goods is to resell them or to use them for business needs as supplies or equipment. Roland Elec. Co. v.
Walling, Md., 66 S.Ct. 413, 421, 326 U.S. 657, 90 L.Ed. 383."
53. In rejoinder, learned senior counsel for the petitioners read out from a compilation filed of the
submissions. In my considered view, however, it is not necessary to go into depth on this issue since a
rejoinder must be restricted to rebuttal of any argument advanced in response by the respondents and cannot
amount to a fresh submissions to be again made. In fact, both the sides have made elaborate oral arguments
running into almost eight hours between themselves. The controversy, however, in my considered view, falls
in a very narrow compass.
54. The aforesaid is apparent from the fact that no one is disputing the right of the Government to lay down its
policy. There is no dispute that FDI is not permitted in retail trade. FDI in cash and carry wholesale trade is
permitted and the petitioners do not have a real dispute with the clarification / amendment to the extent that
the requirement of sales-tax registration was not replaced, but supplemented with a valid trade license. The
petitioners are aggrieved by the concept of B2B sales, which has been permitted as part of cash and carry
wholesale trade.
55. Learned senior counsel for the petitioners had submitted that the Government has a right to amend the
policy, but so long as the policy exists, it has to be followed and the same cannot be changed through the
13
circuitous method of clarification (which is actually an amendment).

56. The aforesaid plea, in my considered view, is spacious in its very nature because once it is recognised that
the Government can amend its policy, nothing precludes the Government from issuing a clarification even if it
is read in the nature of an amendment of the policy. The policy was formulated and the question arose as to
how the Government would understand the policy. Representations were made by the FDI investors for the
said purpose and after examining the matter, clarification was issued. The original records in this behalf have
been produced and a perusal of the same shows that the matter has been discussed at length at various levels.
It is not, thus, a hurried response without application of mind or where the discussion and consultation has not
taken place at the highest level. It is not important that the letter dated 05/10.12.2002 has been issued by the
Under Secretary to the GOI. The Under Secretary to the GOI has only issued the letter on behalf of the
Ministry of Commerce and Industry, which is the parent Ministry. I fail to appreciate how the Government
can be precluded from clarifying or amending its policy which by its very nature is executive in character.
57. The matter in issue is not even of any statutory interpretation, but of the policy. The policy-framer is the
concerned Ministry which itself has issued the clarification / modification. The learned ASG is right in his
submissions that the matter is one of policy decision and allocation of businesses and FIPB functions as part
of the concerned Ministry. It is the said concerned Ministry which has issued the clarification and, thus, the
aspect is one of the internal functioning of the Government. The final decision has been communicated after
due deliberations.
58. The complete emphasis of learned senior counsel for the petitioners was that the GOI was wrongly
interpreting the terminology of 'cash and carry wholesale trade'. The question which, thus, arises is how is this
term to be interpreted and by whom? The relevant authority is the Government itself which had framed the
policy. It is for the Government to interpret the terminology in question. It has so interpreted the terminology,
which facilitates what the private respondents are doing. The petitioners can hardly have a complaint about
the same.
59. The interpretation of the Government is also not out of thin hair. It is trite to say that with the expansion of
international commerce and trade, there are certain internationally understood concepts, which have come into
play. Is the Court to look to the traditional definition of what may be wholesale or retail as may be considered
in the dictionaries and in the country earlier or is the Court to accept the definition adopted by the
Government on international practice? The Government's view is based on the WTO definition of wholesale
trade. The Government can hardly be faulted on this account and it is not for the Court to go into this
question.
60. It has to be appreciated that B2B sales is a concept which internationally today carries a different meaning
as is apparent from the various judgments and definitions given. This has also an impact on what is meant by
wholesale trade and retail trade in the international parlance. Thus, B2B trade forming a part of wholesale
trading was a later development to the traditional concept of what is understood by retail and wholesale trade.
The traditional concept of wholesale trade was, thus, expanded and the emphasis on the quantity of sale went
down. What has been emphasised is the purpose for which the transaction takes place. The concept of B2B
trade is that the goods are purchased by the business for further resale or for use in house or for its customers.
Thus, the contention of the respondents is correct that a specialised meaning has been acquired to this concept.
The concept of setting such wholesale outlets is also different.
61. The nature of such wholesale trade through these centres has been explained extensively to submit that
they are not in the nature of retail trading outlets located within the city where the customers can walk in with
the family to purchase any item. Thus, checks and balances are provided to qualify for B2B sales. It is only a
recognised and registration business house, which meets with the parameters, which would be capable of
purchasing goods from such wholesale centres. The centres are not based in the town and have been created
with the object of having one place buy for the retailers to cover the whole substratum of purchases. Thus, if a
14
customer of a retailer requires a particular good, the retailer can go to such centres for purchasing it rather
than keeping a large inventory of all the goods. It is, thus, more a world concept of wholesale business. The
agreements are entered into with the businesses after verifying that they have a sales-tax registration or a valid
trade license. Anyone cannot walk into the wholesale centres, but it is the people with photo identity cards of
the businesses, which are normally two in number, who would be entitled to go and purchase the relevant
goods. In this process of purchase, it is open for the businesses not only to purchase goods which have to be
further sold, but also utilise for requirements and promotion of its business. The agreement itself clearly
stipulates that the purchase made is for resale, commercial business or industrial use only. Checks and
balances have been provided for this purpose. Thus, business sales are included in this irrespective of the
quantity of sales. The EC Commission had also the occasion to consider this concept in Kesko / Tuko's case
(supra), which emphasises the importance of such wholesale trade on cash and carry basis. This is
distinguishable from retail trade for personal or household consumption. The Eurostat also defined the
concept of `cash and carry wholesale trade' and the important factor is the characteristics of the wholesale
trade as to whether it is an offer made to business / professional or to private consumers. The nature of
transaction cannot be for family need requirements.
62. The examples given of the requirements are cogent. Thus, a factory or establishment require a first-aid kit,
medicines may be purchased. Can this be said to be retail business? The answer would be in the negative
taking into consideration the modern and internationally understood definition of wholesale trade including
B2B sales, which has been adopted by the GOI. Interestingly, these natures of sales are very small percentage
of the total sales.
63. The importance of a larger play to the Government in making its own policy, especially in matters falling
in economic domain have been emphasised repeatedly including in BALCO Employees' Union (Regd.)'s case
(supra) and Federation of Railway Officers Association's case (supra). Thus, even while dealing with the issue
of privatisation, it was held that it is for the Government to frame its own policy in the matter. The role of the
Court would be limited in such a case.
64. A number of definitions have been given by both the sides, which have been referred to above. The reason
why the same are not dealt with in detail is the fact that what is material is not how the petitioner or private
respondents understand this concept and support the same from various definitions incorporated in different
dictionaries, but as to how the GOI understands this concept. It is not also merely GOI's understanding of the
concept, but this understanding is based on certain internationally accepted norms and definitions. The
petitioners cannot be permitted to seek to contend that the Government must adopt the traditional definition of
wholesale trade and retail trade and is precluded from adopting the international definition whether it be of
WTO or otherwise. This being the position, it is the stand of the Government, which has to be given the
greatest weight in such matters. There cannot be any knit-picking on this issue of the definition when the
stand of the Government has come clearly in its affidavit as enunciated by its clarification. The Government
wants B2B sales to form a part of wholesale cash and carry business. So be it.
65. In so far as the issue of franchise agreements are concerned, respondents No. 6 and 7 have already
explained that there is automatic clearance system where the royalty is below a certain level and even that has
been subsequently amended in 2004. The said respondents have stated that the real business has started, in
fact, after that.
66. Respondents No. 8 and 9 have since categorically stated that there is no fund flow and this has been
verified by the GOI. The petitioners can, thus, have no grievance in respect of the same.
67. There seems to be some force in the contention of the respondents that it is not the small retailer, which is
really worried or bothered by this Government policy, but possibly the competing wholesale traders, who may
find a more competitive situation as the goods may be available at a more competitive price to the retailers.
There is really no larger public good also involved in such a case, which has been pleaded by the petitioners.
15
68. I find absolutely no merit in the writ petition and the same is dismissed with costs quantified at Rs.
10,000/- for respondents No. 1 to 3 and Rs. 5,000/- each for respondents No. 4 to 9, totalling to Rs. 40,000/-.
16

Delhi HC - Federation - of - Associations - of - Maharashtra - Vs - Union - of - India - (Uoi) - and - Ors. - On - 22 - November, - 2004 PDF

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"NO FDI PERMITTED IN RETAIL TRADING - PRESS NOTE

Indian Kanoon - http://indiankanoon.org/doc/837644/

circuitous method of clarification (which is actually an amendment).

Indian Kanoon - http://indiankanoon.org/doc/837644/

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