2024 (12) TMI 1367 - AT - FEMA

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

Union of India Versus Questnet Enterprises India Pvt. Ltd., Ms. Pushap Appala Naidu

The Appellate Tribunal under SAFEMA at New Delhi dismissed the appeal in a FEMA contravention case involving excessive royalty remittance to overseas ... Contravention of Section 5 of FEMA read with Rule 4 of FEMA (Current Account Transactions) Rules, 2000, for remitting royalty to overseas parties exceeding within the permissible limit of 5% on local sales - HELD THAT:- During the adjudication proceedings, the respondents have filed CST returns and respective State Level Sales Tax Returns in which they have disclosed the actual sale for the purpose of taxation. This has been duly taken into account by the learned Adjudicating Authority, which is also borne out in page 168 of the RUD filed by the respondents. The above provisions clearly reflect that sale price only relates to the consideration of transferring of property in goods with no other abatement other than what is provided in the above provisions. The respondents have filed CST Returns and respective State Level Sales Tax Returns in which they have disclosed the actual sale price for the purpose of taxation and this has been duly taken in the account by the Ld. Adjudicating Authority and thereafter, he passed the detailed and well- reasoned adjudication order. During the arguments Appellant ED also relied upon the judgment in case M/s Jhawar International Overseas Versus ITO [2010 (1) TMI 1277 - ITAT AHMEDABAD] wherein held that the commission was not deducted from the export invoices in an ad-hoc manner and it was clearly under an agreement between the buyer and the seller, as also between the buyer and the agent. Consequently, the assessee was under an obligation to deduct commission from the gross invoice values. In the present case, there was a compulsion to deduct the commission from the export invoices which was clearly indicated in the confirmation letters of the agents, the ingredients which were necessary for such deduction of commission to be treated as diversion of income by overriding title was clearly present. Accordingly, he stressed that the commission of sales of Rs. 269,88,52,221/- needs to be deducted from the gross sale value, for calculating the percentage of royalty. We are not convinced with the submission made by Ld. counsel for the Appellant ED, in view of my observations recorded in para no. 11, coupled with the fact that judgment relied upon by appellant ED pertains to for calculation for net income, but not the net sale price. 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.