2023 (12) TMI 787 - HC - FEMA

Digital lending platform's challenge to FEMA Section 37A seizure order dismissed for bogus foreign remittances

The Delhi HC dismissed a petition challenging a seizure order under Section 37A(1) of FEMA. The petitioner, operating a digital lending platform, was ... Offence under FEMA - petitioner had made foreign remittances to different foreign companies under the guise of payments against the bogus import of services and that these amounts are held outside India by the related foreign companies of the petitioner - petitioner is engaged in the business of providing unsecured short-term loans to its customers/borrowers in India via its Digital Application based platform called the ‘CashBean’ - As contended that the petitioner had engaged a Hong Kong based Company, for procurement of an IP licence and had entered into a Software Licence Agreement with it for providing IP and Digital Lending Software Licence, that is, the CashBean App to the petitioner for the Indian digital micro-lending market. As alleged petitioner had made foreign remittances to different foreign companies under the guise of payments against the bogus import of services and that these amounts are held outside India by the related foreign companies of the petitioner HELD THAT:- Section 37A(1) of the Act states that if the Authorised Officer prescribed by the Central Government has reason to believe that any Foreign Exchange, Foreign Security, or any Immovable Property, situated outside India, is suspected to have been held in contravention of Section 4 of the Act, he may, after recording the reasons in writing, by an order, seize value equivalent thereto situated within India. It need not be emphasised that the power of seizure is of far-reaching consequences and, therefore, the pre-conditions stipulated in Section 37A(1) of the Act must be scrupulously complied with. The ‘reason to believe’ must be based on tangible material, and as held by the Supreme Court in Radha Krishan Industries [2021 (4) TMI 837 - SUPREME COURT] should not be based on the ‘imaginary grounds, wishful thinking, howsoever laudable that may be’ The foreign exchange transactions can be bifurcated into ‘Current Account Transactions’ and ‘Capital Account Transactions’, as defined in Section 2(j) and 2(e) of the Act respectively. The transactions in question, which have been made the basis of the seizure order, can be categorised as ‘Current Account Transactions’. As alleged petitioner has contravened the provisions of Section 4 of the Act, inasmuch as it holds foreign exchange outside India through its group entities and such foreign exchange has been transferred to such accounts by way of bogus transactions with its group companies - Violation of Section 10(6) of the Act cannot be alleged merely because, according to the respondents, the commercial arrangement entered into by the declarant under Section 10(5) of the Act does not appear to be commercially prudent to the respondents, but at the same time, the respondents in the present case are using the above assertions in support of their conclusion that the amount of foreign currency has been clandestinely transferred by the petitioner in the name of licence fees and other charges to the foreign entities and are, in fact, being held by the petitioner itself in the bank accounts of such foreign companies which are related to the Opera Group. In this manner, the respondents alleged violation of Section 4 r.w.s.10(6) of the Act and claim to satisfy the condition set out in Section 37A of the Act, which requires the foreign exchange to be held outside India and which is suspected to have been so held in contravention of Section 4 of the Act. The Impugned Order is to be based merely on ‘reason to believe’ that any foreign exchange situated outside India is suspected to have been held in contravention of Section 4 of the Act by the person against whom the order under Section 37A of the Act is being passed. At the stage of passing the order under Section 37A(3) of the Act, the Competent Authority is not to arrive at a conclusive finding on the above. Though it may be true that the ‘reason to believe’ must also be based on certain tangible material and should be reasonable and not be arbitrary or whimsical, at the same time, the Court in the exercise of its powers under Article 226 of the Constitution of India cannot act as an appellate authority and substitute its own opinion for that of the Competent Authority. In the present case petitioner has been unable to make out such a case which would warrant an interference of this Court with the Impugned Order. The allegations of the respondents and the defence of the petitioner would need to be tested by the Adjudicatory Authority. On facts, it cannot be said that the action of the respondents is ultra vires the Act or so whimsical as to warrant an interference of this Court at this stage, when the proceedings are pending before the Adjudicatory Authority. This Court is also cognizant of the fact that pursuant to the Impugned Order, the respondents have also filed a complaint before the Adjudicating Authority. This Court has been informed that substantial hearings have already taken place before the Adjudicating Authority on such complaint, and the same is likely to be disposed of in near future. This adds as a further reason for this Court not to exercise its discretionary powers under Article 226 of the Constitution of India. Petition dismissed. Issues Involved:1. Legality of Seizure Orders under the Foreign Exchange Management Act (FEMA), 1999.2. Classification of foreign exchange transactions as 'Current Account Transactions' or 'Capital Account Transactions'.3. Alleged contravention of Section 4 of FEMA by holding foreign exchange outside India.4. Jurisdiction and discretion of the High Court under Article 226 of the Constitution of India.Summary:1. Legality of Seizure Orders:The petitioner sought quashing of the Impugned Order dated 04 February 2022 and Seizure Orders dated 26 August 2021, 30 September 2021, and 15 December 2021, which froze their bank accounts. The petitioner argued that these orders were based on a misunderstanding of their business operations and lacked material evidence.2. Classification of Transactions:The petitioner contended that the foreign remittances in question were 'Current Account Transactions' incurred in the ordinary course of business and thus permitted under FEMA. They argued that these transactions were legitimate payments for a licensed Intellectual Property and services provided by foreign companies.3. Alleged Contravention of Section 4 of FEMA:Respondent No. 1 alleged that the petitioner made foreign remittances under the guise of payments for bogus import of services, thereby holding foreign exchange outside India in contravention of Section 4 of FEMA. The petitioner countered that all transactions were legitimate, supported by Transfer Pricing Documentation, and compliant with tax regulations.4. Jurisdiction and Discretion of the High Court:The High Court examined whether the 'reason to believe' for the seizure was based on tangible material. It emphasized that the power of seizure under Section 37A of FEMA must be scrupulously complied with and should not be based on arbitrary or whimsical grounds. However, the Court found that the petitioner's case did not warrant interference under Article 226 as the allegations and defense needed to be tested by the Adjudicating Authority.Conclusion:The petition was dismissed, with the Court noting that the proceedings before the Adjudicating Authority were ongoing and substantial hearings had already taken place. The Court clarified that its observations would not bind or prejudice the Adjudicating Authority's decision on the complaint filed by Respondent No. 1.