By Dr. Anup P. Shah
Chartered Accountant
INTRODUCTION
The
Foreign Exchange Management Act, 1999 (FEMA) is a law dealing with foreign
exchange in India with the objective of promoting the orderly development and
maintenance of the country’s foreign exchange market. FEMA, a civil law,
replaced the erstwhile Foreign Exchange Regulation Act, 1973 which provided for
criminal prosecution. While this very important law celebrated its 20th
anniversary this year, in the recent past several Court decisions have analysed
FEMA Regulations and laid down certain important propositions. Through this
article, an attempt has been made to look at some such important decisions and
the principles laid down by them when it comes to imposition of a penalty under
FEMA.
STATUTORY PROVISIONS FOR LEVY OF PENALTY
Section
13(1) of FEMA levies a penalty for offences. It states that when any person
contravenes the Act or any regulation, notification, direction or order issued
in exercise of the powers under this Act, or contravenes any condition subject
to which an authorisation is issued by the RBI, he shall, upon adjudication, be
liable to a penalty up to thrice the sum involved in such
contravention where such amount is
quantifiable, or up to Rs. 2 lakhs where the amount is not quantifiable. Where
such contravention is a continuing one, a further penalty may be levied which
may extend to Rs. 5,000 for every day after the first day during which the
contravention continues.
Section
14 further provides that if any person fails to make full payment of the
penalty imposed on him u/s 13 within a period of 90 days from the date on which
the notice for payment of such penalty is served on him, he shall be liable to
civil imprisonment under this section. If the penalty is above Rs. 1 crore, the
detention period can extend up to three years and in all other cases up to six
months.
JURISPRUDENCE ON THE SUBJECT
In the
case of Shailendra Swarup vs. ED, CA No. 2463/2014
(SC) dated 27th July, 2020 a penalty was levied on the company and its directors for import
violations under the erstwhile Foreign Exchange Regulation Act, 1973 (FERA).
One of the directors contested this penalty stating that he was a professional
and a non-executive director on the Board who was not in charge of day-to-day
affairs. The Supreme Court upheld his contention and held that for any action
under FERA the person charged must be responsible for the affairs of the
company. Merely because a person is a director he does not automatically become
liable. While this decision was under the FERA regime, it would be equally
useful under the FEMA. Section 42(1) of FEMA in relation to contraventions by
companies also states that every person who is in charge of and responsible for
the conduct of the business of the company shall be deemed to be guilty. Hence,
a blanket penalty notice by the Enforcement Directorate to all and sundry,
including independent directors, should be avoided.
Similarly,
in M/s National Fertilisers Ltd. vs. ED, CRL.
M.C. 3003/2002 (Del.) dated 9th March 2016, the Delhi High Court dealt with the issue (under the
erstwhile FERA) of a Government company making full advance payment for import
of certain chemicals without obtaining any prior permission of the Reserve Bank
of India. The Court held that to charge an officer for a default committed by a
company evidence must be brought on record to show that all the petitioners
were in charge and responsible for the day-to-day affairs of the company at the
time when the offence was committed. It held that the Memorandum and Articles
of Association of the company would have pinpointed as to who were the officers
in charge and responsible for the day-to-day affairs of the company at the time
of commission of the said offence. Only the Managing Director or the Executive
Director / Functional Directors are responsible for the conduct and management
of the business of the company. At best, persons having domain over funds or
those who instructed the authorised dealers could be construed to be guilty of
foreign exchange violations.
Again,
in Narendra Singh vs. ED [2019] 111 taxmann.com
360 (Delhi) it was held that while
as a broad proposition the Courts exercising jurisdiction under Article 226 of
the Constitution would not readily interfere with a show cause notice at the
stage of adjudication, this was not an inflexible rule, particularly in a case
where the foundational facts necessary for proceeding with such adjudication
were shown not to exist. In the case of each of the accused, it was shown that
they were only Non-Executive Directors of the accused company and, therefore,
not a person ‘in charge of and responsible for the conduct of its business’.
Hence, the adjudication proceedings under FEMA were quashed.
However,
in Suborno Bose vs. ED, CA No. 6267/2020 (SC)
dated 5th March, 2020, the Supreme Court was faced with the issue of penalty on an M.D. for a
continuing offence by a company. In this case, a penalty was levied on a
company and its M.D. for an offence u/s 10(6) of the FEMA, i.e., not
surrendering foreign exchange to the authorised person / bank within the time
permissible under the Act. In this case, it was alleged that the import of
goods for which the foreign exchange was procured and remitted was not
completed as the Bill of Entry remained to be submitted and the goods were kept
in the bonded warehouse and the company took no steps to clear the same. As a
result, the Court held that section 10(6) of the FEMA was clearly attracted
being a case of not using the procured foreign exchange for completing the
import procedure. Further, the company should have taken steps to surrender the
foreign exchange within the time specified in Regulation 6 of the Foreign Exchange Management (Realisation,
Repatriation and Surrender of Foreign Exchange) Regulations, 2000. The Supreme Court concluded that an offence u/s 10(6) was
a continuing offence as long as the imported goods remained uncleared and the
obligation provided under the Regulations was not discharged. Thus, the
contravention would continue to operate until corrective steps were taken.
Accordingly, the person in charge of managing the affairs of the company would
be liable to corrective steps.
The
observations made by the Bombay High Court in Shashank Vyankatesh Manohar vs. Union of India, 2014 (1)
Mh. L.J 838 are also very relevant.
Here, it was held that due caution and care must be taken before adjudicating a
penalty under FEMA, otherwise the noticee on failure to pay the penalty would
be presented with dire penal consequences of being imprisoned for six months,
apart from other liabilities and adverse consequences. Merely because the
imprisonment would be in a civil prison and not in a criminal prison would be
no consolation to the person who was not responsible for contravention of FEMA.
The Court held that since the provisions of section 42 of the Act were in pari materia with the provisions of section 141 of the Negotiable Instruments Act,
1881, the principles laid down by the Supreme Court in S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla
and another (2005) 8 SCC 89, were
required to be applied to FEMA cases also. That is why even in the case of a
person holding the position of M.D., he was not liable if he had no knowledge
of the contravention when the contravention took place, or if he had exercised
all due diligence to prevent the contravention of the Act. The liability was
thus cast on those persons who had something to do with the transactions
complained of. The conclusion was inevitable that the liability arises on
account of conduct, act or omission on the part of a person and not merely on
account of holding an office or a position in a company.
An
interesting penalty matter was considered by the Appellate Tribunal for SAFEMA,
FEMA, NDPS, PMLA and PBPT Act in the case of M/s Jaipur IPL Cricket Pvt. Ltd. vs. Special Director, ED,
FPA-FE-9/Mum./2013 (AT-PMLA), dated 11th July, 2019. In this case, the Enforcement Directorate had levied a
penalty u/s 13 of Rs. 98 crores (being thrice the sum involved of Rs. 33
crores) for violation of various FEMA Regulations in relation to Foreign Direct
Investment in the Rajasthan Royals IPL Franchisee.
The
Appellate Tribunal (AT) held that it was a settled principle of law that even
though proceedings initiated u/s 13 of FEMA did not result in criminal
conviction or sentence, the consequences were equally penal and disastrous.
Further, section 14 clearly provided that in case the penalty imposed was not
paid within the time period provided, it would result in civil imprisonment. It
held that a bare perusal of FEMA established that its provisions were onerous
in nature and wide in scope and statutes which imposed onerous obligations,
were wide in scope and ambit and envisaged penal consequences must be construed
strictly. It also considered section 42 of FEMA which governs the imposition of
penalty upon persons in charge of, and responsible to, the company for the
conduct of the business of the company. In order to invoke the said provision,
two conditions were required to be satisfied cumulatively; firstly, it must be
established that the company has violated FEMA, and secondly, it must be
established that the person sought to be made liable to penalty was in charge
of, and responsible to, the company for the conduct of the business of the
company at the time the contravention was committed and not conducted its
diligence in relation to the transaction. The burden of proof to establish and
substantiate both the above requirements for imposition of penalty u/s 42(1) of
FEMA was upon the Enforcement Directorate in the first instant. Thereafter, it
shifted to the private party who was liable to discharge the same.
The
proceedings under FEMA in which a penalty was sought to be imposed for
contravention of a statutory obligation were ‘quasi criminal
proceedings’. Section 13 of FEMA was couched in discretionary terms and vested
the regulatory authorities with discretion to impose a penalty up to three
times the sum involved in the contravention. It noted that the imposition of penalty in quasi criminal proceedings must be guided by the well-established principles of proportionality. Imposition of a penalty of Rs. 98.35 crores as against
the total value of remittances of Rs. 33.22 crores in respect of alleged
contraventions which could at best be treated as technical and venial was untenable
and unsustainable. The factors which weighed with the AT in imposition of
penalty were that ~ no loss has been caused to the exchequer; the remittances
had come into India and continued to remain in India; this was not a case where
foreign exchange has gone out of India; the remittances were utilised for the
purposes for which they were intended; no allegation of misutilisation of the
monies for extraneous purposes; entities which made the said remittances had
not gained any benefit whatsoever and instead had suffered considerable
financial detriment as shares having beneficial interest were not issued
against the inward remittances to the foreign investors for 11 years; the
country has not lost any revenue. Hence, considering all factors, the AT held
that imposition of an exorbitant penalty of Rs. 98.35 crores should be reduced
to Rs. 15 crores.
Conversely,
in Tips Industries Ltd. vs. Special Director, ED
[2020] 113 taxmann.com 318 [(PMLA-AT), New Delhi] the AT was faced with the issue of penalty on the M.D. of
a company for FEMA violations in relation to overseas direct investment in
foreign subsidiaries. It was the argument of the accused M.D. that he was not
responsible for the day-to-day affairs of the company and that the adjudicating
authority had not been able to substantiate why he should be penalised. The AT
observed that Form ODA (seeking approval of the RBI for the overseas direct
investment) had been filed before the RBI along with a declaration and the same
was signed by the accused as Managing Director of the foreign company and the
Indian investing company. This was held to be evidence that he was indeed
responsible for the activities of the appellant company. Besides, neither the
company nor the MD was able to show any other document to prove that somebody
else was the person responsible for the day-to-day affairs of the company.
The AT also dealt with the
issue of pre-deposit of the penalty amount in the case of Google India (P) Ltd. vs. Special Director, ED [2020] 116
taxmann.com 622 (ATFFE – New Delhi). In this
case, Google India entered into an agreement with Google Ireland and Google USA
under which, for a distributor fee, Google Ireland granted a right to it to
distribute / sell online advertisement space under the ‘Ad Words Program’ to
advertisers in India. The dues to Google Ireland and Google USA were
outstanding beyond a period of six months and hence permission of the AD Bank
was sought explaining the reasons for delay. The AD Bank, out of abundant
caution, sought permission of RBI for allowing the remittances in question. The
RBI permitted the AD Bank to allow the remittances. The said permissions were
granted from ‘the foreign exchange angle under the provisions of FEMA’.
The ED
held that this was tantamount to borrowing by the Indian company and it levied
a penalty of Rs. 5 crores on the Indian company and Rs. 20 lakhs on each of its
foreign directors. It opposed the delay and stated that RBI could not condone
it and the appellant would be guilty of breach of provisions of FEMA as the
same were not paid within the prescribed period of time.
It was
contended on behalf of the appellant that there were no FEMA violations as the
permissions were granted by the RBI only after considering the following
aspects ~ expressly requiring the AD Bank to verify the genuineness of the
reasons for delay and whether there was any pecuniary gain to the appellant; a
specific confirmation by the appellant that there was no pecuniary gain to it
and a confirmation by the appellant that the amounts to be paid were not
utilised for any other purpose and that there was no interest paid on the same.
It was further submitted that the RBI has not treated the two transactions as
ECB / deferred payment arrangements. It is also submitted that nothing contrary
has been discovered by the respondent after independent investigation. Thus,
the decision taken by the RBI was as per law and the question of violations of
any provisions does not arise.
The AT
relying on LIC vs. Escorts Ltd.
[1986] 1 SCC 264 held that it
is a settled law that FEMA being a special act no authority has the
jurisdiction to reinterpret and / or restrict the permissions granted by the
RBI in exercise of its jurisdiction u/s 3 read with section 11 of FEMA.
Further, the ED had no jurisdiction to reinterpret the terms of the agreement
between Google Ireland and Google India. It was settled law that the Court
should proceed on the basis that the apparent tenor of the agreement reflects
the real state of affairs – UOI
vs. Mahindra & Mahindra Ltd. [1995] 76 ELT 481 (SC). Its prima
facie view was that once the permission has been
granted by the RBI, the delay stood regularised and there were no violations of
the provisions of FEMA. The presumption was in favour of the appellant that RBI
must have been satisfied while condoning the delay. It held that the contention
by the ED that amounts due for more than six months automatically makes the
same a deferred payment arrangement / ECB was incorrect. A stringent law could
only be applied in the Master Circular on Imports where there was no such
condition mandated. Further, the circular expressly provided for settlement of
dues by the AD banks beyond a period of six months.
Hence,
it held that the appellants had prima
facie demonstrated that there was no violation of
the provisions of the FEMA / the Master Circular on Imports. Even if there was
a violation, then the RBI had regularised the same by granting the permissions
to settle the dues specifically from a ‘FEMA angle’. The RBI permission expressly
stated that the permission was issued from a foreign exchange angle under FEMA.
The limitation of the permission was only in respect of any other applicable
laws other than FEMA. The ED was not seeking to impose a penalty for violation
of any other laws. It concluded that in the light of the prima facie case made out by the appellant, it would suffer hardship if asked to
deposit the penalty amount. The AT was of the opinion that the chances of
success of the appeal were more than of the failure of the appeal. Accordingly,
it stayed the payment of the penalty.
CONCLUSION
In
spite of being a 20-year-old law, FEMA is an evolving law since the
jurisprudence on it is taking shape only now. One reason for this is that often
cases under FEMA drag on, reaching finality after a long duration. It is
heartening to note that the judiciary has been taking a very balanced approach
towards cases under FEMA.
You may have a fresh start any moment you choose, for
this thing that we call ‘failure’ is not the falling down, but the staying down
— Mary Pickford
A man can only attain knowledge with the help of those
who possess it. This must be understood from the very beginning. One must learn
from him who knows
— George
Gurdjieff
