2023 (7) TMI 1529 - AT - FEMA

Company penalized Rs. 5,00,000 for FEMA violations under Section 10(6) but directors' penalties quashed entirely

The Appellate Tribunal under SAFEMA upheld FEMA violations against the company for failing to submit proof of imports for 10 remittances abroad, ... Contravention of the provisions of Section 10 (6) r/w 10 (5) of FEMA - charges for 10 remittances made abroad - HELD THAT:- Contravention of the provisions of Section 10 (6) r/w 10 (5) of FEMA further r/w Regulation 6(1) of Foreign Exchange Management (Realization, Repatriation and Surrender of Foreign Exchange) Regulations 2000 by M/s. Akzo Nobel India Ltd. earlier known as M/s. ICI India Ltd. are established. In so far as the three Directors viz Sarv/Shri Nihal Kaviratne, Amit Jain & Sanjiv Mishra are concerned the Learned Counsel for the Appellants has submitted Form 32 under the Companies Act which clearly show their appointments have been made in 2009 & 2010 that is much after the impugned transactions had occurred. Form 32 in the case of Shri R. Gopalakrishnan shows that he vacated office as an Additional Director and reappointed as a Director w.e.f. 22.07.1999. In the appeal, pleading has been made that Shri R. Gopalakrishnan was nonexecutive and independent Director who was not involved in the day to day affairs of the Company. Adjudicating Authority has acknowledged that the Show Cause Notice has failed to spell out clearly the role of the Directors. Therefore, the aforementioned charges established for the Company fail to hold good under Section 42 of FEMA 1999 against the aforementioned four Directors of the Company. While the charges against the Appellant Company stand established, in view of the fact that the Company has been making regular imports of substantial amounts and it is only in miniscule percentage of cases that the Company failed to submit proof of imports against 10 remittances, in the interest of justice the penalty under Section 13(1) of FEMA 1999 is reduced to Rs. 5,00,000/- (Rupees Five Lakhs Only). The amount already paid by the Appellant Company as pre-deposit of penalty vide demand draft dated 27.02.2018 is to be fully adjusted against the reduced penalty. Since, the charges under Section 42 of FEMA 1999 do not hold good against the four aforementioned Directors of the Appellant Company, the penalty of Rs. 1,00,000/- imposed on each of them under the impugned Adjudication Order dated 30.01.2015 is quashed. 1. ISSUES PRESENTED and CONSIDEREDThe judgment primarily revolves around the following core legal issues:Whether the appellants contravened the provisions of Section 10(6) read with Section 10(5) of the Foreign Exchange Management Act (FEMA) and Regulation 6(1) of the Foreign Exchange Management (Realization, Repatriation, and Surrender of Foreign Exchange) Regulations 2000. Whether the delay in issuing the Show Cause Notice constitutes a violation of the principles of natural justice, thereby invalidating the proceedings. Whether the penalties imposed on the directors of the company were justified given their roles and the timing of their appointments. Whether the principle of mens rea is applicable in the imposition of penalties under FEMA.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Contravention of FEMA ProvisionsRelevant Legal Framework and Precedents: The case involves alleged contraventions of Section 10(6) read with Section 10(5) of FEMA and Regulation 6(1) of the relevant regulations. These provisions mandate the submission of documentary evidence for foreign remittances. Court's Interpretation and Reasoning: The Tribunal found that the company failed to submit necessary documentation for 10 out of 12 remittances, thus establishing contravention. Key Evidence and Findings: The lack of response to directives issued by the Enforcement Directorate and failure to provide alternative documentation for the majority of remittances were critical in establishing the contravention. Application of Law to Facts: The Tribunal applied the statutory obligations under FEMA, noting that the appellants did not provide sufficient evidence to counter the charges. Treatment of Competing Arguments: The appellants argued the absence of mens rea, but the Tribunal held that intention is irrelevant for civil penalties under FEMA. Conclusions: The Tribunal upheld the contravention charges against the company.Issue 2: Delay and Natural JusticeRelevant Legal Framework and Precedents: The appellants argued that the delay in issuing the Show Cause Notice violated principles of natural justice. Court's Interpretation and Reasoning: The Tribunal noted that the appellants were notified of the investigation early on and failed to respond to multiple directives, weakening their argument of procedural unfairness. Key Evidence and Findings: The Tribunal highlighted the appellants' inaction despite receiving multiple communications from the Enforcement Directorate. Application of Law to Facts: The Tribunal found that the delay did not prejudice the appellants' ability to respond to the charges. Treatment of Competing Arguments: The appellants' reliance on laches was dismissed due to their failure to act on earlier notices. Conclusions: The delay did not invalidate the proceedings.Issue 3: Penalties on DirectorsRelevant Legal Framework and Precedents: Section 42 of FEMA pertains to the liability of directors for company contraventions. Court's Interpretation and Reasoning: The Tribunal acknowledged that three directors were appointed after the transactions and the Show Cause Notice did not specify their roles. Key Evidence and Findings: The Tribunal accepted evidence of the directors' appointment dates, which were post-transaction. Application of Law to Facts: The Tribunal found no basis for penalizing the directors under Section 42 of FEMA. Treatment of Competing Arguments: The appellants successfully argued the directors' lack of involvement during the relevant period. Conclusions: Penalties against the directors were quashed.Issue 4: Mens Rea in FEMA PenaltiesRelevant Legal Framework and Precedents: The applicability of mens rea in civil penalties under FEMA was contested. Court's Interpretation and Reasoning: Citing precedents, the Tribunal concluded that mens rea is not required for imposing penalties under FEMA. Key Evidence and Findings: The Tribunal referred to Supreme Court judgments affirming that intention is irrelevant in civil penalty contexts. Application of Law to Facts: The Tribunal applied this principle to uphold the penalty against the company. Treatment of Competing Arguments: The appellants' argument for the necessity of mens rea was dismissed based on statutory interpretation. Conclusions: The absence of mens rea does not preclude penalty imposition under FEMA.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'Penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulation is established and hence the intention of the parties committing such violation becomes wholly irrelevant.' Core Principles Established: The Tribunal reinforced the principle that mens rea is not a requisite for civil penalties under FEMA, and procedural delays do not necessarily invalidate proceedings if the parties were adequately notified. Final Determinations on Each Issue: The Tribunal upheld the penalty against the company but quashed penalties against the directors due to lack of involvement during the relevant period. The penalty amount for the company was reduced in consideration of its compliance history.