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 parties. The respondents were charged with violating Section 5 of FEMA and Rule 4 of FEMA (Current Account Transactions) Rules, 2000, for remitting royalty exceeding the 5% limit on local sales. The Tribunal upheld the Adjudicating Authority's decision, finding that actual sale prices disclosed in CST and State Sales Tax Returns were correctly considered for calculating royalty percentage. The Tribunal rejected the Enforcement Directorate's argument to deduct commission from gross sale value, distinguishing the cited precedent as relating to net income calculation rather than net sale price determination.

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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.

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