ENHANCEMENT OF PENALTY UNDER FEMA – POSSIBLE?

Penalties

Section 13 of the Foreign Exchange Management Act, 1999 (‘Act’ for short) provides for imposing penalties on those contravene the provisions of the Act. Section 13(1) of the Act provides that if any person contravenes any provision of this Act, or contravenes any rule, 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 Reserve Bank, 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, and where such contravention is a continuing one, further penalty which may extend to Rs.5000/- for every day after the first day during which the contravention continues.

Issue

The issue to be discussed in this article is as to whether the penalty imposed under Section 13(1) of the Act can be imposed less than that prescribed in that section and as to whether on appeal this amount can be enhanced with reference to decided case law.

Case law

In Union of India Versus M/s AGS Infotech Ltd., Sh. G. Dhananjaya Reddy, Sh. S.M. Manivannan, Sh. Rakesh Joshi and Sh. S. Nagaraju - 2026 (3) TMI 661 - APPELLATE TRIBUNAL UNDER SAFEMA, NEW DELHI, during the course of investigation against AGS Infotech Limited, Bengaluru, under the provisions of Prevention of Money Laundering Act, it was found that the company had taken a loan of Rs.18.73 crores and cash credit limit of Rs.5 crores from the United Bank of India, Bengaluru for import of software products from Bluetronics FZE LLC, UAE.  The bank observed that AGS Infotech Limited had remitted an amount of Rs.18.73 crores in 8 tranches between 16.02.2010 to 23.04.2010. The bank suspected that the borrower has not utilised the loan amount sanctioned by the Bank for the purpose it was sanctioned.

The charge sheet filed by CBI head office revealed that Bluetronics FZE LLC, UAE had remitted a sum of Rs.18,52,46,628/- to Nexxoft Infotech, Delhi in 12 tranches between 22.02.2010 to 30.06.2010 in the context of remittance for the purchase of software from them.

During the course of enquiry, as per the request of investigating agency, the Oriental Bank of Commerce furnished the details of the account in the name of Nexxoft Infotech showing the above payment in 12 tranches to the tune of Rs.18,52,46,628/-.

The then Managing Director of AGS Infotech company, S.M. Manivannan was examined on 18.02.2015 under Section 37(3) of the Act.. The said Manivannan deposed that he joined the company as Managing Director in August 2009. The bank reported that the land mortgaged as security for the loan was fraudulent. Thereafter he resigned from the post of Managing Director in January, 2011. He further deposed that he was authorised to sign the loan application on behalf of the AGS Infotech company and sign the application for the remittance to Bluetronics FZE LLC, UAE. He also deposed that Shri G. Dhananjaya Reddy and Sri Nagaraja, the Directors of the company were authorised to sign for the all accounts with Union Bank of India. He was not aware of the import of software from the UAE company to their own company.

Shri Dhananjaya Reddy was examined under FEMA and also under the Prevention of Money Laundering Act. He deposed that he was the Managing Director of Nexxoft Company, Bengaluru. He was also the directors of AGS Infotech Limited, GDR Media Limited and Blue Stream Infotech Limited. The said companies were not in existence at that time. He further deposed that Nexxoft Company was maintaining a cash credit account with Oriental Bank of Commerce and a current account with United Bank of India. They had paid back Rs. 577 lakhs to the United Bank of India out of the funds received in AGS Infotech Ltd.

During the course of investigation, the Bank of Baroda called for the accounts of Bluetronics opening in the said bank. The Bank of Baroda furnished the same to the authorities. From the perusal of the said accounts, it was made clear that  the Bluetronics FSC had received the aforesaid payments from AGS Infotel and the same were transferred to Nexxoft immediately.

From the above course of investigation, the Assistant Director, Directorate of Enforcement, Bengaluru made the following allegations against the AGST Infotech-

• AGS Infotech Limited have contravened the provisions of Section 10(6) of Act read with Regulation 6(1) of Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 by not utilizing foreign exchange so acquired from the authorised dealer for the purpose for which it was acquired and/or using the foreign exchange so acquired for a purpose for which acquisition of foreign exchange is not permissible under the provisions of the Act, to the extent of USD 4141000 equivalent to Rs. 18,76,34,554.
• Shri S.M. Manivannan, The then Managing Director of AGS Infotech Limited and Shri G. Dhananjaya Reddy, and Shri S. Nagaraju were the Directors of AGS Infotech Limited during the relevant period, have contravened the provisions of Section 10(6) of Act read with Regulation 6(1) of Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 by not utilizing foreign exchange so acquired from the authorised dealer for the purpose for which it was acquired and/or using the foreign exchange so acquired for a purpose for which acquisition of foreign exchange is not permissible under the provisions of the Act, to the extent of USD 4141000 equivalent to 18,76,34,554 in terms of section 42 of Act.
• Shri G. Dhananjaya Reddy, and Shri Rakesh Joshi, Manager Bluetronics FZE, UAE have contravened the provisions of Section 4 of the Act by acquiring, holding and transferring foreign exchange of USD 4141000 in UAE.

A complaint was filed by the Assistant Director under Section 16(3) of Foreign Exchange Management Act, 1999. A show cause notice was also issued by the Adjudicating Authority, Special Director, Directorate of Enforcement, Chennai, for contravening the provision of Section 10(6) of the Act read with Regulation 6(1) of the Foreign Exchange (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 and Section 4 of the Act to the extent of Rs. 18,76,34,554/-. 

The Adjudicating Authority, Additional Director of Enforcement, held the noticees guilty of the charges contained in the Show Cause Notice for contravening the provisions of Section 10(6) of the Act read with Regulation 6(1) of the Foreign Exchange (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 and Section 4 of Act to the extent of Rs. 18,76,34,554/- and imposed penalty totalling to Rs. 5,14,00,000/-.

Being aggrieved against the order of Adjudicating Authority the company filed an appeal before the Appellate Tribunal. The Department also filed an appeal before the Appellate Tribunal for enhancement of penalty amount.  

The appellant, in the present appeal, submitted the following before the Appellate Tribunal-

• The Adjudicating Authority failed to appreciate the language and significance of Section 13(1) of the Act, which narrates the contravention and penalties.
• Section 13(1) of the Act provides that if any person contravenes any provision of the Act or contravenes any rules, regulation, notification, direction or order issued in exercise of the powers under the Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank of India, he shall, upon adjudication, be liable to a penalty up to thrice a sum involved in such contravention where such amount is quantifiable, or up to Rs. 2 lakhs.
•  If the amount is non-quantifiable, and where such contravention is continuing one, further penalty which may extend to Rs.5000/- for every day after the first day during which the contravention continues. 
• Once the Adjudicating Authority decided that the Respondents have contravened the provisions of the Act, the maximum penalty might have been imposed within the ambit of section 13(1) of the Act.

The respondents submitted the following before the Appellate Tribunal-

• The Adjudicating Authority has already imposed the huge penalty to the extent of 27.39% to the amount of alleged contravention.
• The imposition of penalty is a discretion of the Adjudicating Authority seeing the facts and circumstances of the case and the mitigating circumstances.
• The appeal of respondent Rakesh Joshi was dismissed as withdrawn on account of his death.
• No useful purpose will be served by enhancing the penalty amount.

The Appellate Tribunal heard the submissions of both the parties. The Appellate Tribunal analysed the provisions of Section 13(1) of the Act. The Appellate Tribunal observed that the said Section has not prescribed either a fixed amount of penalty or minimum amount of penalty. It therefore, follows that the amount of the penalty which is to be imposed by the Adjudicating Authority is a matter of discretion which, of course, is necessarily required to be exercised judiciously after taking into account the facts of the case and the evidence placed before him.In the present case the Appellate Tribunal observed that the Adjudicating Authority has not only taken notice of the facts of the case but also has evaluated the evidence on record to infer for imposing penalty on the lower side. The reading of the Adjudication Order, therefore, reflects objectivity and judiciousness on the part of the Adjudicating Authority. The Act itself provides for a penalty up to thrice the sum involved in such contravention and thereby gives explicit scope to the Adjudicating Authority to exercise his discretion, albeit judiciously, for imposition of penalty.

The Appellate Tribunal observed that the Adjudicating Authority has already imposed the huge penalty to the extent of 27.39% to the amount of alleged contravention seeing the facts and circumstances of the case and the mitigating circumstances. On the death of the respondent, the appeal filed by him to set aside the impugned over was dismissed. The Appellate Tribunal agreed with the contentions of the respondent respondents that it will serve no useful purpose by enhancing the penalty amount. 

On the above circumstances, the Appellate Tribunal dismissed the appeal filed by the Department.

Conclusion

From the above said discussions it can be inferred that the imposition of maximum penalty provided under Section 13(1) of the Act is not mandatory and penalty may be imposed by the Adjudicating Authority lower than that prescribed under that Section which is at the discretion of the Adjudicating Authority. By virtue of this observation the penalty once imposed cannot be enhanced without any reasons and justifications.