2024 (12) TMI 1367 - AT - FEMA

Appellate Tribunal upholds penalty for excessive royalty remittance violating Section 5 FEMA and Rule 4 limits

The Appellate Tribunal under SAFEMA at New Delhi dismissed the appeal in a FEMA contravention case involving excessive royalty remittance to overseas ... Calculation of royalty percentage on gross sales versus net sales - permissible royalty limit under Foreign Exchange Management (Current Account Transactions) Rules - admissibility and evidentiary value of financial statements filed after initiation of investigation - use of documents obtained from Registrar of Companies as evidence in adjudication - application of generally accepted accounting principles regarding deduction of commission from turnoverCalculation of royalty percentage on gross sales versus net sales - permissible royalty limit under Foreign Exchange Management (Current Account Transactions) Rules - application of generally accepted accounting principles regarding deduction of commission from turnover - Whether the royalty remitted by the respondent company exceeded the permissible limit of 5% of local sales and whether the percentage must be computed on gross sales or on sales after deduction of commission and rebates. - HELD THAT: - The Tribunal accepted the Adjudicating Authority's factual finding that the correct sales figure for the relevant period is the gross sales figure disclosed in the company's accounts and tax returns rather than the net figure arrived at after deducting commission. Citing the Guidance Note on terms used in financial statements and statutory definitions of sale, the Tribunal held that commissions on sales are not deductible from turnover for the purpose of computing the permissible royalty percentage unless such deduction falls within accepted trade-discount principles. The Adjudicating Authority relied upon financial statements, CST and state sales tax returns and documents obtained from the Registrar of Companies to conclude that applying gross sales (or net sales after returns and rebates but before commission) yields a royalty percentage within the 5% ceiling; accordingly the alleged contravention under Section 5 of FEMA read with Rule 4 of the Current Account Rules was not made out. The Tribunal rejected the appellant's reliance on authorities concerned with calculation of net income rather than net sale price and concluded that the adjudicatory conclusion that royalty payments were within permissible limits was justified. [Paras 9, 11, 13, 14]The royalty payments were within the permissible 5% limit when computed on the proper sales figure; therefore no contravention was established and the charges were dropped.Admissibility and evidentiary value of financial statements filed after initiation of investigation - use of documents obtained from Registrar of Companies as evidence in adjudication - Whether financial statements filed by the respondent after initiation of enforcement proceedings could be relied upon by the Adjudicating Authority, and whether the Adjudicating Authority erred in admitting and acting upon documents obtained from the Registrar of Companies. - HELD THAT: - The Tribunal found no basis to discard the financial statements merely because they were filed after the investigation commenced. The Adjudicating Authority sought and obtained the same financial statements directly from the Registrar of Companies to verify their authenticity and relied also on statutory returns and tax filings. The appellant's contention of possible fabrication was unsupported by any contradictory document on record; the Auditor's qualifications relating to inability to verify certain records did not impeach the specific sales figures relied upon for computing the royalty percentage. The Tribunal held that in absence of any material to contradict or discredit the ROC records and other documents, the Adjudicating Authority was entitled to treat those documents as evidence and reach a factual conclusion. [Paras 5, 8]The financial statements and documents obtained from the Registrar of Companies were admissible and could be relied upon; the Adjudicating Authority did not err in admitting and acting upon them.Final Conclusion: The appeal is dismissed. The Tribunal upholds the Adjudicating Authority's findings that the royalty payments were within the permissible limit when correctly computed on the appropriate sales figure and that the financial statements and ROC documents were admissible and properly relied upon; charges against the respondents were therefore rightly dropped. Issues Involved:1. Whether the remittance of royalty by M/s Questnet Enterprises India Pvt. Ltd. exceeded the permissible limit of 5% of local sales as per the Foreign Exchange Management (Current Account Transactions) Rules, 2000.2. Whether the financial statements submitted by the respondent were manipulated or fabricated.3. Whether the commission on sales should be deducted from the gross sales for calculating the percentage of royalty remittance.Issue-wise Detailed Analysis:1. Permissible Limit of Royalty Remittance:The core issue was whether M/s Questnet Enterprises India Pvt. Ltd. remitted royalty exceeding the permissible limit of 5% of local sales, as stipulated in the Foreign Exchange Management (Current Account Transactions) Rules, 2000. The Enforcement Directorate (ED) alleged that the remittance of Rs. 15,68,88,739 was in excess of 5% of the local sales of Rs. 155,37,29,278 for the year 2007-08, thereby contravening the provisions of Section 5 of the Foreign Exchange Management Act (FEMA), 1999. However, the respondent contended that the gross sales were Rs. 428,65,31,544, and after deducting returns and rebates, the net sales were Rs. 415,25,81,499. The royalty paid constituted only 3.66% of the gross sales and 3.78% of the net sales, both within the permissible limit of 5%. The Adjudicating Authority concluded that the royalty paid was within the permissible limit, thus not requiring any approval from the Government of India.2. Allegations of Fabrication of Financial Statements:The appellant, ED, argued that the financial statements submitted by the respondent were fabricated, as they were prepared and filed after the investigation commenced. The ED claimed that the authenticity of these statements was doubtful, as the audit report raised concerns about the completeness of the financial records. However, the respondent's counsel argued that the financial statements were crucial evidence, and the ED's reliance on these statements in their complaint contradicted their claim of fabrication. The Adjudicating Authority found no evidence to contradict the financial statements, which were also corroborated by documents obtained from the Registrar of Companies. Thus, the allegations of fabrication were not substantiated.3. Deduction of Commission from Gross Sales:A significant point of contention was whether the commission on sales should be deducted from the gross sales for calculating the percentage of royalty remittance. The ED argued that the commission of Rs. 259,88,52,221 should be deducted, thereby reducing the sales figure used to calculate the permissible royalty limit. The respondent, however, maintained that commission should not be deducted from sales as per generally accepted accounting principles. The Adjudicating Authority, relying on the Guidance Note issued by the Institute of Chartered Accountants of India, concluded that sales should not be reduced by commission, as it is not covered under any clause for deduction from turnover. Consequently, the royalty payment was calculated based on gross sales, confirming it was within the permissible limit.Conclusion:The appeal was dismissed, with the Tribunal affirming the Adjudicating Authority's decision that the royalty remittance was within the permissible limit and that the financial statements were valid. The Tribunal also rejected the ED's argument regarding the deduction of commission from gross sales, thereby upholding the original order to drop the charges against the respondents.