Single property purchase by subsidiary doesn't constitute real estate business under FEMA requires systematic continuous activity

The Appellate Tribunal under SAFEMA ruled in favor of respondents in a FEMA contravention case. The tribunal found that a single purchase of residential real estate in UK by a step-down subsidiary did not constitute real estate business, as business requires systematic and continuous activity. The respondents had properly declared their investments through ODI forms and Annual Performance Reports, which were not questioned by authorities. The tribunal rejected the lifting of corporate veil principle since the investment structure was transparently disclosed. Consequently, charges under Sections 4, 6(3)(h), and 10(6) of FEMA were not established, and the seizure of mutual funds worth Rs. 10.35 crores could not be sustained.

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Issues Involved:

1. Contravention of Sections 6 (3) (a) and (h) of FEMA and related ODI Regulations.
2. Alleged contravention of Section 10 (6) of FEMA.
3. Alleged contravention of Section 4 of FEMA.
4. Validity of the procedural requirements and declarations made by the respondents.
5. Seizure of mutual funds under Section 37 A of FEMA.

Issue-wise Detailed Analysis:

1. Contravention of Sections 6 (3) (a) and (h) of FEMA and Related ODI Regulations:

The core issue was whether the direct investment by R-1 in its Wholly Owned Subsidiary (WOS) was in violation of the FEMA provisions. The Ld. Adjudicating Authority (AA) determined that the investment by R-1 into its WOS was in accordance with Regulation 5 of the ODI Regulations. The WOS was declared as a Special Purpose Vehicle to make downstream investments in trading activities, and it was not engaged in real estate business or any fraudulent activity. The purchase of a single residential property by the second step-down subsidiary (SDS-2) in the UK was not considered real estate business as per Regulation 2 (p) of the ODI Regulations. The Tribunal upheld these findings, emphasizing that the solitary purchase did not constitute a real estate business, thereby dismissing the charges under Sections 6 (3) (a) & (h) of FEMA.

2. Alleged Contravention of Section 10 (6) of FEMA:

The Tribunal examined whether R-1 contravened Section 10 (6) of FEMA by not adhering to the declared purpose of remittance. The Ld. AA found that R-1 had fully disclosed the purpose of remittance as equity contribution in the Form ODI and Annual Performance Reports, and the ultimate end use of foreign exchange is not required to conform to the declared purpose. The Tribunal agreed with this interpretation, noting that the SDS-2 engaged in trading activities, and the purchase of the real estate was not the primary business activity. Thus, the charge under Section 10 (6) was not sustained.

3. Alleged Contravention of Section 4 of FEMA:

The charge under Section 4 of FEMA was based on the allegation that R-1 indirectly acquired immovable property in the UK through its subsidiaries. The Tribunal found that the SDS-2, incorporated in the British Virgin Islands, was not a person resident in India, and the property purchase did not constitute a violation by R-1. The Tribunal emphasized that the SDS-2's purchase was independent, and there was no evidence of R-1's control over the SDS-2's decisions. Therefore, the charge under Section 4 was not established.

4. Validity of the Procedural Requirements and Declarations Made by the Respondents:

The Tribunal reviewed the procedural compliance by R-1, including the filing of Form ODI and Annual Performance Reports. The Tribunal noted that these documents were not questioned by the Authorised Dealer or the RBI, and the procedural requirements were met. The Tribunal concluded that the declarations made by R-1 were valid and did not get invalidated due to the SDS-2's purchase of real estate.

5. Seizure of Mutual Funds under Section 37 A of FEMA:

The seizure of mutual funds was based on the alleged contravention of Section 4 of FEMA. Since the Tribunal found no contravention of Section 4, the basis for the seizure was invalidated. The Tribunal upheld the Ld. AA's decision to revoke the seizure order and directed the release of the seized mutual funds.

In conclusion, the Tribunal dismissed the appeal, upholding the findings of the Ld. AA that none of the charges against the respondents were established. The procedural requirements were met, and the transactions did not contravene the provisions of FEMA. The appeal was disposed of, and the seized mutual funds were ordered to be released.

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