2014 (1) TMI 1348 - SC - FEMA

Supreme Court overturns penalties on Money Changers, orders refunds with interest.

The Supreme Court found that the appellants, licensed Full Fledged Money Changers, did not violate FERA provisions or the Memorandum of FLM. Transactions ... Violation of paragraph 3 of the Memorandum of FLM (Authorized Officials) - Obligations of authorised dealers/FFMCs under Sections 6(4) and 6(5) of FERA - Permissibility of inter FFMC purchases under paragraph 9 of the Memorandum of FLM - Liability for subsequent contraventions by the purchasing money changer - Imposition of penalty under Section 50 of FERA read with transitional provisionsViolation of paragraph 3 of the Memorandum of FLM (Authorized Officials) - Obligations of authorised dealers/FFMCs under Sections 6(4) and 6(5) of FERA - Whether the Appellants contravened paragraph 3 of the FLM and Sections 6(4) and 6(5) of FERA by selling foreign currency to M/s Hotel Zam Zam through its representative and without verifying authorization - HELD THAT: - The Court examined the statutory scheme and the FLM. Paragraph 3 requires money changers to transact money changing business through listed authorised officials; Sections 6(4) and 6(5) require authorised dealers (FFMCs) to comply with RBI directions and to verify that transactions are not designed to contravene FERA. The admitted facts established that both parties were licensed FFMCs, payment was made by banker's instruments, a Xerox of Hotel Zam Zam's RBI licence was produced before the transactions, and the transactions were negotiated by branch managers or named representatives (Ms. Pinky and the Branch Manager). There was no contention that the persons negotiating the transactions were not authorised representatives of their respective FFMCs. The Court held that paragraph 3's requirement applies to transactions conducted at a money changer's premises through its authorised representatives and, on the facts, the Appellants had no failure of the kind that paragraph 3 and Sections 6(4)/6(5) prohibit. Liability cannot be fastened on the Appellants for any subsequent contraventions by Hotel Zam Zam after the concluded transactions. The concurrent findings of the authorities were found to be a misappreciation of the statutory provisions as applied to these facts and therefore unsustainable. [Paras 14, 15, 16, 17, 18]The Appellants did not contravene paragraph 3 of the FLM or Sections 6(4) and 6(5) of FERA in the transactions with M/s Hotel Zam Zam; the findings of contravention were set aside.Permissibility of inter FFMC purchases under paragraph 9 of the Memorandum of FLM - Imposition of penalty under Section 50 of FERA read with transitional provisions - Whether the higher rate at which foreign currency was sold to Hotel Zam Zam or related market rate considerations justified imposition of penalty on the Appellants - HELD THAT: - Paragraph 9 permits FFMCs to purchase from other money changers provided payment is by negotiable instrument and not cash. The original finding of contravention did not rest on the rate at which the currency was sold; moreover, the confiscation order recorded that market rates fluctuate and sales at higher prices do not ipso facto establish culpable knowledge or unlawful purpose. The Court found that the sale at a higher rate was not the basis for the penalty and that reliance on precedents involving different facts was misplaced. Consequently, the imposition of penalty for the alleged higher pricing was unjustified. [Paras 14, 19, 20, 21, 22]The higher sale rate did not justify the penalty; the penalty imposed on the Appellants was unjustified and set aside.Final Conclusion: The appeals are allowed: the orders holding the Appellants guilty of contravening paragraph 3 of the FLM read with Sections 6(4), 6(5) and 7 of FERA and imposing penalty are set aside; if the penalty was paid it must be refunded with simple interest at 6% per annum within two months. Issues Involved:1. Alleged violation of Sections 6(4), 6(5), 7, and 8 of the Foreign Exchange Regulation Act, 1973 (FERA).2. Compliance with Paragraph 3 of the Memorandum of FLM issued by the Reserve Bank of India (RBI).3. Imposition of penalties under Section 50 of FERA read with Section 49(3) & (4) of the Foreign Exchange Management Act (FEMA).4. Validity of transactions between licensed Full Fledged Money Changers (FFMCs).5. Interpretation of statutory provisions and directions under FERA and FLM.Detailed Analysis:1. Alleged Violation of Sections 6(4), 6(5), 7, and 8 of FERA:The core contention was whether the appellants violated Sections 6(4), 6(5), and 8(2) of FERA. Section 6(4) mandates authorized dealers to comply with RBI directions and prohibits unauthorized foreign exchange transactions. Section 6(5) requires dealers to verify transactions to prevent contraventions. Section 8(2) restricts foreign exchange dealings to authorized rates. The Supreme Court concluded that the appellants, being licensed FFMCs, conducted transactions within the scope of their authorization and did not engage in unauthorized activities. The transactions were verified, and the foreign exchange was sold at rates agreed upon by both parties, thus not violating the statutory provisions.2. Compliance with Paragraph 3 of the Memorandum of FLM:Paragraph 3 of the FLM requires money changers to transact only through authorized representatives and report any changes to the RBI. The appellants conducted transactions with M/s Hotel Zam Zam, another licensed FFMC, and verified the latter's RBI license before proceeding. The transactions were carried out by authorized representatives of both parties. The Supreme Court found no evidence of unauthorized persons conducting the transactions, thus ruling out any violation of Paragraph 3.3. Imposition of Penalties under Section 50 of FERA read with Section 49(3) & (4) of FEMA:The penalties were imposed based on the alleged contraventions of FERA and FLM provisions. The Original Authority, Appellate Tribunal, and High Court upheld the penalties. However, the Supreme Court determined that the transactions were legitimate and within the authorized scope, and the appellants complied with the statutory requirements. Consequently, the penalties were deemed unjustified and were set aside.4. Validity of Transactions between Licensed FFMCs:The appellants argued that transactions between licensed FFMCs are authorized under FERA and FLM. The Supreme Court agreed, noting that Paragraph 9 of the FLM allows FFMCs to purchase foreign currency from each other, provided the payment is made through negotiable instruments and not cash. The transactions in question adhered to this requirement, confirming their validity.5. Interpretation of Statutory Provisions and Directions under FERA and FLM:The Supreme Court emphasized the importance of interpreting statutory provisions in their proper context. It highlighted that Paragraph 3 of the FLM aims to ensure transactions are conducted by authorized representatives within the premises of money changers. The Court found that the appellants complied with this requirement, as the transactions were conducted by authorized representatives and were properly documented. The Court also clarified that variations in exchange rates were not the basis for the alleged contraventions.Conclusion:The Supreme Court concluded that the appellants did not violate Sections 6(4), 6(5), and 8 of FERA or Paragraph 3 of the FLM. The transactions were legitimate, conducted by authorized representatives, and complied with statutory requirements. The penalties imposed were unjustified and were set aside. The Court directed the refund of any penalty amounts paid by the appellants, with interest.Judgment:The appeals were allowed, and the impugned orders were set aside. The respondent was directed to refund the penalty amounts with interest within two months.