Seconded expatriate salary payments in rupees do not breach foreign exchange law where subsidiaries do not remit or acquire foreign exchange.

Payment of the India-based salary component in Indian rupees to expatriate employees seconded to Indian subsidiaries did not amount to a contravention of Section 8(1) of the Foreign Exchange Regulation Act, 1973 where the employees remained on the foreign parent's rolls and the overseas component was paid abroad by that parent. On the record, the subsidiaries did not remit or acquire foreign exchange, and there was no factual basis to treat the parent's foreign payments as having been made on their behalf. The adjudication could not also be sustained on a new Foreign Exchange Control Manual basis not alleged in the notices, and the penalty orders failed for lack of reasons on quantification.

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Issues: Whether payment of salaries to expatriate employees seconded to Indian subsidiaries, with part payment abroad by the foreign parent and part payment in India in Indian rupees, constituted contravention of Section 8(1) of the Foreign Exchange Regulation Act, 1973 and justified penalty under Section 50 of that Act.

Analysis: The expatriate employees remained employees of the foreign parent and were only seconded to the Indian subsidiaries. The material on record showed that the Indian subsidiaries paid only the India-based component of remuneration in Indian rupees, while the foreign parent paid the overseas component abroad. There was no remittance of foreign exchange by the subsidiaries, no acquisition or transfer of foreign exchange by them, and no factual basis to treat the foreign parent's payments as payments made on behalf of the Indian subsidiaries. The allegations in the show-cause notices did not include a violation of the Foreign Exchange Control Manual, and no new basis could be added to sustain the adjudication orders. The penalty orders were also unsustainable because no reasons were recorded for quantifying the penalty.

Conclusion: The alleged contravention of Section 8(1) was not made out and the penalty under Section 50 could not be sustained. The findings of violation and the penalties were set aside, and the appeals succeeded.

Ratio Decidendi: Where seconded expatriate employees continue to remain employees of the foreign parent and the Indian subsidiary does not itself remit or acquire foreign exchange, payment of the India-based salary component in Indian rupees does not amount to a contravention of Section 8(1) of the Foreign Exchange Regulation Act, 1973.

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