2010 (3) TMI 20 - HC - Customs

Court Quashes Show Cause Notice for FEMA Violation

BHUPENDRA V. SHAH Versus UNION OF INDIA & ORS.

The court quashed the show cause notice issued by the Special Director, ED against the petitioners for contravention of Sections 7 and 8 FEMA. It held ... Contravention of Sections 7 and 8 FEMA read with Regulations 9 and 13 (i) and (ii) of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000 [FEM EGS Regulations 2000] and Section 42 FEMA for non-receipt of export proceeds of hard disk drives exported during 1997-98 during which period the Foreign Exchange Regulation Act, 1973 (FERA) and the Rules framed thereunder were in force. – held that - The Petitioners are right in pointing out that the Section 7 of the FEMA corresponds to Section 12 of the FERA 1947 whereas Section 8 FEMA corresponds to Section 10 FERA 1947. In M.G. Wagh v. Jay Engineering Works Ltd., the Supreme Court held that Section 10 FERA 1947 (which corresponds to Section 8 FEMA) has only to do with receipt of foreign exchange other than realization of export proceeds. The realization of export proceeds is exclusively covered by Section 12 FERA 1947 (which corresponds to Section 7 FEMA). Consequently in the instant case Section 8 FEMA is not applicable. - In order to invoke Section 7 FEMA, the ED will have to show that the petitioners breached the time limits specified in the FEM EGS Regulations. That it simply cannot since the exports were complete, and so was the contravention of non-realisation of the corresponding proceeds, in 1997-98 itself. – The export was made in 1997-98 – old directors ceased to be director from 14.11.1997 - there is nothing in the complaint to explain how they could said to be in charge of the affairs of JTS and responsible to it for conduct of its business at the time of the contravention. Therefore, even on this ground, these two Petitioners are entitled to succeed. Issues Involved:1. Legality of proceedings under Section 16(3) FEMA for contravention of Sections 7 and 8 FEMA.2. Applicability of Section 49(3) FEMA and the 'sunset clause.'3. Invocation of Sections 7 and 8 FEMA against the Petitioners.4. Continuation of contraventions under FERA beyond the 'sunset period.'5. Liability of Directors and Managing Director under Section 42 FEMA.6. Validity of notifications empowering the Special Director, ED.Detailed Analysis:1. Legality of Proceedings under Section 16(3) FEMA:The challenge in these petitions is to the legality of proceedings initiated under Section 16(3) FEMA against the petitioners by the Respondent Enforcement Directorate (ED) by issuance of a show cause notice dated 10th August 2004 for contravention of Sections 7 and 8 FEMA read with Regulations 9 and 13(i) and (ii) of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000 [FEM EGS Regulations 2000] and Section 42 FEMA for non-receipt of export proceeds of hard disk drives exported during 1997-98 when FERA was in force.2. Applicability of Section 49(3) FEMA and the 'Sunset Clause':Section 49(3) FEMA provides that no adjudicating officer shall take notice of the contravention under Section 51 of the FERA after the expiry of the period of two years from 1st June 2000. The impugned show cause notice dated 10th August 2004 by the Special Director, ED purportedly took note of the contravention of Sections 7 and 8 FEMA, which related to a period prior to the coming into force of the FEMA. Therefore, no notice of the contravention of any of the provisions of FERA could have been taken by the Special Director, ED after 31st May 2002.3. Invocation of Sections 7 and 8 FEMA Against the Petitioners:The ED could not have invoked either Section 7 or Section 8 FEMA against the Petitioners. Section 7 FEMA alone deals with non-realisation of proceeds of exports of goods and services. Regulation 9 thereof requires the full export value of the goods to be realized within six months from the date of export. Regulation 13(ii) stipulates that for the failure to realise the export proceeds within the time limit prescribed, proceedings for contravention shall not be instituted till the specified period has expired. Since no export was made after the coming into force of the FEMA, Section 7 and Regulations 9 and 13(ii) of the FEM EGS Regulations do not apply. Section 8 FEMA is a general provision that deals with the realisation and repatriation of foreign exchange, excluding realisation of proceeds of exports of goods and services which are covered exclusively by Section 7 FEMA.4. Continuation of Contraventions under FERA Beyond the 'Sunset Period':The ED argued that the contravention which began when FERA was in force continued even after FEMA was enacted, akin to a continuing offence. However, the court noted that the exports in question were during the period 1997-98 and the contravention of Section 18 FERA due to the non-realisation of the export proceeds also pertained to the same period. Consequently, unless the ED could show that the failure to realise the proceeds of exports for the period 1997-98 'continued' even beyond the `sunset period under Section 49(3) FEMA, the show cause notice issued would be unsustainable in law.5. Liability of Directors and Managing Director under Section 42 FEMA:Section 42(1) FEMA extends the liability only to such Directors who were at the relevant point in time in charge of, and responsible to the company for the conduct of its business. Bhupendra V. Shah and Manohar Lal Tandon ceased to be Directors of JTS from 14th November 1997 onwards. Therefore, at the time when the alleged contravention took place, these persons were not in charge of the affairs of the company and responsible to it for the conduct of its business as required by Section 42 FEMA.6. Validity of Notifications Empowering the Special Director, ED:The petitioners were permitted to challenge the notification dated 23rd March 2005 and another notification dated 26th August 2005 which empowered the Special Director, ED to adjudicate cases of contravention of any of the provisions of the FERA 1973 by virtue of Section 49(4) FEMA. However, the court's decision primarily focused on the first issue regarding the contravention under Section 8 FEMA.Conclusion:For all of the above reasons, the impugned show cause notice No.T-4/8-M/2004 dated 10th August 2004 issued by the Special Director ED to each of the petitioners is hereby quashed. The writ petitions are allowed with costs of Rs. 10,000/- each, to be paid by the Respondents to each of the Petitioners within a period of four weeks from today.