Company penalized Rs. 5 lakh for FEMA violations but directors' penalties quashed under Section 42(1)

The Appellate Tribunal SAFEMA, New Delhi held that while the company violated FEMA provisions by failing to submit Exchange Control Copies for 12 outward remittances and not surrendering foreign currency, charges against four directors under Section 42(1) could not be sustained. Three directors were appointed after the contraventions occurred, and the fourth was a non-executive director not involved in daily operations. The company's penalty was reduced from the original amount to Rs. 5,00,000 considering the violations were minimal compared to regular substantial imports. The Rs. 1,00,000 penalty imposed on each director was quashed entirely.

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Issues Involved:

1. Alleged contravention of FEMA provisions by M/s. Akzo Nobel India Ltd. and its Directors.
2. Delay in issuing the Show Cause Notice and its impact on the proceedings.
3. Application of the principle of natural justice and mens rea in the imposition of penalties.
4. Validity of penalties imposed on the company and its directors.

Issue-Wise Detailed Analysis:

1. Alleged Contravention of FEMA Provisions:

The core issue involved the alleged contravention of Section 10(6) read with Section 10(5) of FEMA, along with Regulation 6(1) of the Foreign Exchange Management (Realization, Repatriation, and Surrender of Foreign Exchange) Regulations, 2000. The Enforcement Directorate charged M/s. Akzo Nobel India Ltd. for failing to submit Exchange Control Copies of Bills of Entry for 12 outward remittances totaling Rs. 2,39,90,081.68. The Adjudicating Authority found the company guilty for 10 out of the 12 remittances, imposing a penalty of Rs. 25,00,000/-. The Directors were charged under Section 42(1) of FEMA for their roles in these contraventions.

2. Delay in Issuing the Show Cause Notice:

The appellants argued that the Show Cause Notice was issued after an unexplained delay of 12 years from the initial detection, violating principles of natural justice. However, the Tribunal noted that the Enforcement Directorate initiated inquiries promptly upon receiving information from the RBI in 2002, with directives issued in December 2002, April 2003, and July 2012, which went unanswered by the appellants. The Tribunal found that the appellants' failure to respond to these directives weakened their defense of procedural delay.

3. Principle of Natural Justice and Mens Rea:

The appellants contended that the penalties were unjust due to the absence of mens rea, which they argued was necessary for imposing penalties in quasi-criminal proceedings. The Tribunal, referencing the Supreme Court's decision in SEBI v. Shriram Mutual Fund, clarified that mens rea is not required for imposing penalties under Section 13 of FEMA, as the contraventions are civil obligations. The Tribunal emphasized that the statutory language does not necessitate intention for penalization.

4. Validity of Penalties on the Company and Directors:

The Tribunal acknowledged the company's failure to submit documentary evidence for the remittances but considered the company's history of substantial imports. Consequently, the penalty on the company was reduced to Rs. 5,00,000/-, with the pre-deposit amount adjusted against this reduced penalty. For the Directors, the Tribunal found that the Show Cause Notice did not clearly outline their roles, and three directors were appointed after the transactions occurred. As such, the penalties imposed on the directors were quashed.

In conclusion, the appeals were partly allowed, with the penalty on the company reduced and the penalties on the directors quashed. The Tribunal's decision emphasized adherence to procedural fairness while recognizing the civil nature of FEMA contraventions.

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