2014 (2) TMI 883 - HC - FEMA

Court rules in favor of Indian subsidiaries, overturning penalties for foreign exchange transactions.

Marubeni India P. Ltd. And Others Versus The Special Director of Enforement And Others

The court overturned the orders of the Foreign Exchange Appellate Tribunal and the Special Director, Enforcement Directorate, finding Indian subsidiaries ... Contravening Section 8 (1) of the Foreign Exchange Regulation Act, 1973 (‘FERA’) - remittance of foreign exchange without prior permission of RBI - Held that:- The question of the Appellants “acquiring” or “otherwise transferring” any foreign exchange as a result of the foreign holding company remitting funds to the Appellants for disbursal of the salaries of the employees seconded to them did not arise. Further, the question of the Appellants having to repay the foreign holding company the sum paid abroad also did not arise. Factually, there was no attempt made by any of the Appellants to repay any such amount to the foreign holding company. Also, no reasons have been given in any of the AOs for the penalty imposed in terms of Section 50 FERA. Consequently, in all these cases, the determination of the penalty amount by the AOs is also held to be untenable in law. - order against the appellant set aside - Decided in favor of appellant. Issues Involved:- Appeal against orders passed by the Foreign Exchange Appellate Tribunal dismissing appeals against adjudication orders by the Special Director, Enforcement Directorate under FERA.- Interpretation of Section 8 (1) of the Foreign Exchange Regulation Act, 1973.- Distinction between Indian subsidiaries and foreign parent corporations in terms of liability for foreign exchange transactions.- Examination of show cause notices issued by the Enforcement Directorate.- Analysis of Foreign Exchange Control Manual of 1999 and its relevance to the case.- Determination of whether expatriate employees' salaries paid by foreign corporations abroad on behalf of Indian subsidiaries require RBI permission.- Assessment of liability and privity of contract in the context of expatriate employees seconded to Indian subsidiaries.- Justification of penalties imposed under Section 50 FERA.Detailed Analysis:1. The appeals challenged the orders of the Foreign Exchange Appellate Tribunal affirming the adjudication orders by the Special Director, Enforcement Directorate, finding the appellants guilty of contravening Section 8 (1) of FERA and imposing penalties. The issue revolved around the liability of Indian subsidiaries for foreign exchange transactions compared to foreign parent corporations.2. The court examined the show cause notices issued by the Enforcement Directorate, which alleged that payments made abroad by foreign corporations to expatriate employees in foreign exchange were essentially the liability of Indian subsidiaries, necessitating RBI permission. The distinction between Indian subsidiaries and foreign parent corporations in terms of liability was a critical aspect of the case.3. The interpretation of Clause 11D.3 of the Foreign Exchange Control Manual of 1999 was crucial in determining whether there was a violation of Section 8 (1) FERA. The court analyzed the manual and submissions made by the learned counsel to ascertain the applicability of the clause to the present case.4. The court scrutinized the factual position where expatriate employees' salaries were paid by foreign corporations abroad, while Indian subsidiaries only disbursed a portion in Indian rupees for living expenses in India. The lack of remittance of foreign exchange and the absence of RBI approval raised questions regarding the alleged violations.5. The judgment highlighted the misconception by the Enforcement Directorate regarding the status of expatriate employees and the assumption that payments made by foreign corporations were on behalf of Indian subsidiaries. The court emphasized the lack of factual basis for such assumptions and the absence of privity of contract between Indian subsidiaries and expatriate employees.6. The court referenced previous judgments to emphasize the distinction between liability for foreign exchange transactions and the absence of grounds for penalties imposed under Section 50 FERA. The decisions in Mitsubishi Corporation and Fuji Bank Ltd. were instrumental in setting aside the impugned orders and penalties imposed on the appellants.