1984 (11) TMI 284 - HC - Companies Law

Foreign Exchange Appeal Dismissed: Violation of Regulations, Upheld Fine

K. Ramabrahmam & Sons (P) Ltd. Versus Foreign Exchange Regulation Appellate Board

The court dismissed the appeal, ruling that the appellant's payments to foreign ship captains without Reserve Bank permission violated section 5(1)(a) of ... Persons resident outside India, Restrictions on payments Issues Involved:1. Whether the payment of Rs. 1,23,240 by the appellant to captains and other officers of foreign vessels contravenes section 5(1)(a) of the Foreign Exchange Regulation Act, 1947.2. Whether captains of foreign ships can be considered as persons resident in India during their stay at Indian ports.3. Whether the Exchange Control Manual of the Reserve Bank of India can be referred to for defining 'resident outside India.'4. Whether the payment of 'hat money' is an accepted international trade practice and thus exempt from the provisions of the Foreign Exchange Regulation Act.5. Whether the fine of Rs. 25,000 imposed on the appellant is excessive.6. Whether the payment of 'hat money' without the Reserve Bank's permission affects Indian trade and economy.Detailed Analysis:1. Contravention of Section 5(1)(a) of the Foreign Exchange Regulation Act, 1947:The court held that the appellant company made payments totaling Rs. 1,23,240 to captains of foreign vessels without the necessary permission from the Reserve Bank of India, thereby contravening section 5(1)(a) of the Act. The section prohibits any person in India from making payments to persons resident outside India without the Reserve Bank's permission.2. Residency Status of Foreign Ship Captains:The court rejected the appellant's argument that captains of foreign ships should be considered residents of India because their ships were berthed at Indian ports at the time of payment. The court emphasized that simply berthing at an Indian port does not change the residency status of these captains, who remain residents outside India. The court referred to the Reserve Bank of India's Exchange Controls Manual, which states that persons normally resident outside India, including Indian citizens who have made their permanent homes abroad, are considered residents outside India even during their visits to India.3. Reference to the Exchange Control Manual:The court acknowledged that the Exchange Control Manual does not have the force of law but serves as a guide. However, in the absence of a statutory definition of 'resident outside India,' the court found it appropriate to refer to the Manual. The court held that foreign citizens who come to India for a short stay cannot be treated as residents in India simply because they are on Indian soil at the time of payment.4. Payment of 'Hat Money' as an International Trade Practice:The appellant argued that the payment of 'hat money' is a normal and accepted international trade practice in the shipping business. The court acknowledged this practice but held that once regulations are in place restricting such payments, the practice cannot override the law. The court emphasized that the Foreign Exchange Regulation Act aims to conserve foreign exchange, and any payment without the Reserve Bank's permission contravenes the Act.5. Fine of Rs. 25,000:The court found that the fine of Rs. 25,000 imposed by the Director of Enforcement was not excessive. Section 23 of the Foreign Exchange Regulation Act, 1947, prescribes a penalty not exceeding three times the foreign exchange involved or Rs. 5,000, whichever is more. Given that the foreign exchange involved was Rs. 1,23,240, the fine could have been much higher. Therefore, the court held that the fine was reasonable and proportionate to the offence committed.6. Impact on Indian Trade and Economy:The appellant argued that prohibiting the payment of 'hat money' would adversely affect Indian trade and economy. The court dismissed this argument, stating that there is no absolute bar on such payments under the Foreign Exchange Regulation Act. Firms can seek prior permission from the Reserve Bank of India for such payments. If the Reserve Bank is convinced that prohibiting such payments would harm Indian trade, it would allow them. Therefore, the court found this argument to be without merit.Conclusion:The court dismissed the appeal, holding that the appellant's payments to foreign ship captains without the Reserve Bank's permission contravened section 5(1)(a) of the Foreign Exchange Regulation Act, 1947. The court found no merit in the appellant's arguments regarding the residency status of the captains, the relevance of the Exchange Control Manual, the practice of paying 'hat money,' the reasonableness of the fine, and the impact on Indian trade and economy. The appeal was dismissed with costs.