2025 (6) TMI 535 - AT - FEMA

Company wins partial relief in FEMA violation case involving unauthorized foreign remittances and reporting failures

M/s Free Space Resorts Pvt. Ltd. Versus The Special Director, Directorate of Enforcement, Mumbai

The Appellate Tribunal under SAFEMA at New Delhi partly allowed the appeal by a company that violated FEMA, 1999 provisions in a Goa land deal involving ... Noticee Company (present appellant) had entered into a land deal in Goa violating the provisions of FEMA, 1999 - foreign remittances received by the appellant Company - orders for confiscation of the land and also imposed penalties of Rs. 17 lakhs on the appellant HELD THAT:- In the State of Goa, permission is required for every kind of development whether for residential, commercial, public utilities and services award for recreational purposes. Just because a person applied for Sanad/permission does not amount that the purchased land was not located in a settlement zone. In the absence of any contravention on the above aspect, the penalty of Rs. 10 Lakh imposed on the appellant company is hereby, set-aside and be refunded. In continuation of this issue, the Adjudicating Authority ordered for the confiscation of land on the presumption that the same is an agriculture land. As this issue is reversed, the order for the confiscation of land situated in plot no. 313/1, Village Siolim measuring 8075 sq. mtr. is hereby also set aside. Contravention of Section 6(3)(b) of FEMA, 1999 r.w. Para 8 of Schedule 1 of Regulation 5(1) of Foreign Exchange Management (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000 - Admittedly, the appellant company received sum of Rs. 1,27,32,113/- from M/s Avitar Holding Group and M/s Oceania Transit Corp., but not in the name of Mr. Vladimir Koveshnikov and Mr. Andrey Kiriyanon. The contention of appellant the said two companies in fact belongs to the aforesaid, previous Directors is without any merit as the companies and the said two Directors are different persons in the eyes of law. Therefore, fine imposed on the appellant company qua the second contravention is hereby maintained. Contravention for not submitting the statement within 30 days to RBI is an admitted fact, though the shares were already stated to be allotted in favour of the previous Directors, namely, Mr. Vladimir Koveshnikov and Mr. Andrey Kiriyanon, on 19.04.2006 (500 shares each) and M/s Avitar Holding Group and M/s Oceania Transit Corp., on 30.05.2011 (1, 27, 119 and 202 shares). Thereby, the share capital of the company increased to 128321. Later on, the shares of the appellant company were purchased by Pankaj Madan on 15.06.2012, and 27.03.2017 and by Rashmi Bakshi on 12.01.2017. However, the contravention of the provision being an admitted fact, the quantum of penalty under this head is also hereby maintained. In sequel to discussion in the para no. 5 above, pertaining to contravention no. 1 being decided in favour of appellant company, the present appeal is hereby, partly allowed. Appeal Partly Allowed. The core legal questions considered in this appeal under Section 19 of the Foreign Exchange Management Act, 1999 (FEMA) are as follows:1. Whether the appellant company contravened Section 6(3)(b) of FEMA read with Item 6 of List B of Annexure A to Schedule 1 of Regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, by purchasing agricultural land in Goa using foreign direct investment (FDI) funds, thereby warranting confiscation of the land and imposition of penalty.2. Whether the appellant company violated Section 6(3)(b) of FEMA read with Para 8 of Schedule 1 of Regulation 5(1) of the said Regulations by failing to issue shares to the foreign investors corresponding to the foreign remittances received, thus constituting a contravention attracting penalty.3. Whether the appellant company contravened Section 6(3)(b) of FEMA read with Clause 9(1)(A) of Schedule 1 to Regulation 5 by failing to submit the required report to the Reserve Bank of India (RBI) within 30 days of receipt of foreign investment, thereby justifying imposition of penalty.4. Whether the confiscation order and penalties imposed by the Adjudicating Authority were justified and lawful in light of the facts and applicable legal provisions.Issue 1: Contravention relating to purchase of agricultural land using FDI fundsLegal framework and precedents: Section 6(3)(b) of FEMA authorizes the Reserve Bank of India to regulate or prohibit transfer or issue of any security by a person resident outside India. Item 6 of List B of Annexure A to Schedule 1 of Regulation 5(1) prohibits foreign direct investment in agricultural land and plantations. Section 13(2) of FEMA empowers confiscation of property involved in contraventions.Court's interpretation and reasoning: The Adjudicating Authority found that the appellant company purchased agricultural land in Goa using FDI funds, thereby violating the prohibition under the Regulations. The land at survey no. 313/1, Siolim Village, was treated as agricultural land as no conversion Sanad was obtained from the Collector for change of land use.The appellant contended that the purchased land was not agricultural but located in a 'settlement zone' as per the Regional Plan for Goa and the Goa Land Revenue Code, 1968. The land contained residential houses and was zoned for residential and other non-agricultural uses, for which permission/Sanad is required under Sections 30 and 32 of the Goa Land Revenue Code. The appellant argued that mere application for conversion does not render the land agricultural and that the land was never classified as agricultural land under the law.The Tribunal examined the sale deed, site plans, and official zoning letters from the Town & Country Planning Department, which confirmed the land was in a settlement zone permitting residential and commercial uses. The Tribunal relied on para 6.1.1 of the Goa Land Development and Building Construction Regulations, 2010, which defines settlement zones as areas that can be developed for various non-agricultural uses.Accordingly, the Tribunal held that the land could not be presumed agricultural merely because conversion Sanad was not issued. The land's classification as settlement land meant the appellant did not contravene the prohibition on purchase of agricultural land by persons resident outside India under FEMA and the Regulations.Key evidence and findings: Sale deed showing residential house on the property; site plan indicating constructed sites; official zoning letter confirming settlement zone classification; provisions of Goa Land Revenue Code and Goa Land Development Regulations.Application of law to facts: Since the land was not agricultural land within the meaning of the Regulations, the purchase did not violate the prohibition on acquisition of agricultural land by foreign investment. The confiscation order and penalty of Rs. 10 lakhs imposed for this contravention were therefore set aside.Treatment of competing arguments: The respondent's reliance on absence of conversion Sanad was rejected in light of the statutory zoning classification and regulatory framework. The appellant's detailed documentary evidence and legal provisions were accepted as determinative.Conclusion: No contravention of Section 6(3)(b) of FEMA read with Item 6 of List B of Annexure A to Schedule 1 of Regulation 5(1) occurred in respect of the land at survey no. 313/1, Siolim Village. The confiscation and penalty on this ground were quashed.Issue 2: Contravention relating to non-issuance of shares against foreign remittanceLegal framework and precedents: Para 8 of Schedule 1 to Regulation 5(1) mandates that shares issued to persons resident outside India must be paid for by inward remittance through normal banking channels or debit to NRE/FCNR accounts. Section 6(3)(b) empowers RBI to regulate such transfers.Court's interpretation and reasoning: The appellant company received foreign remittances totaling approximately Rs. 1.28 crores from two foreign entities, M/s Avitar Holding Group and M/s Oceania Transit Corp., but issued shares only to two foreign nationals, the then directors, for Rs. 100,000. The remittances were not in the names of these directors but from separate foreign companies, which are distinct legal entities.The Tribunal held that the appellant failed to issue shares corresponding to the entire foreign remittance received, thereby violating the requirement that shares be issued to the person from whom consideration is received. The appellant's contention that the foreign companies were owned by the directors was rejected as irrelevant since the companies and directors are separate persons in law.Key evidence and findings: Bank statements showing remittances from foreign companies; share allotment records showing shares issued only to directors; legal distinction between foreign companies and individual directors.Application of law to facts: The appellant's failure to issue shares against the full amount of foreign remittance contravened the provisions of FEMA and the Regulations. The penalty imposed under this head was upheld.Treatment of competing arguments: The appellant's argument of technical lapses and lack of intentional contravention was not accepted as the statutory requirement is mandatory and non-compliance is a clear contravention.Conclusion: The penalty imposed for failure to issue shares against foreign remittance was justified and maintained.Issue 3: Contravention for delay in reporting receipt of foreign investment to RBILegal framework and precedents: Clause 9(1)(A) of Schedule 1 to Regulation 5 requires an Indian company issuing shares to persons resident outside India to submit a report to RBI within 30 days of receipt of funds, detailing investor information, date and amount of remittance, authorized dealer details, and government approvals.Court's interpretation and reasoning: The appellant admitted delay in submitting the requisite report to RBI regarding receipt of foreign investment. Although shares were allotted to the previous directors and subsequently transferred, the failure to comply with the reporting requirement was an admitted contravention.Key evidence and findings: Admission of delay in replies to show cause notice; records of share allotment and transfers; statutory timelines under the Regulations.Application of law to facts: The admitted delay constituted a contravention attracting penalty. The Tribunal upheld the penalty imposed under this head.Treatment of competing arguments: The appellant's argument that the amount involved was small and the lapse was technical was noted, but the statutory obligation to report is mandatory and non-compliance warrants penalty.Conclusion: Penalty for delay in reporting foreign investment to RBI was upheld.Issue 4: Validity of confiscation and penalty ordersThe confiscation order related solely to the land at survey no. 313/1, Siolim Village, which was held not to be agricultural land and thus not subject to confiscation under Section 13(2) of FEMA. The Tribunal set aside the confiscation order and the penalty of Rs. 10 lakhs imposed for this contravention.However, penalties imposed for the other two contraventions-non-issuance of shares against foreign remittance and delay in reporting to RBI-were maintained as lawful and justified.Significant holdings and core principles established:'The said purchased plot being in the settlement zone area, it cannot be presumed to be agricultural land by any stretch of any imagination.''Being a settlement land, appellant has not contravened the provisions of Section 6(3)(b) of FEMA, 1999 read with item 6 of List B of Annexure A to Schedule 1 of Regulation 5(1) of Foreign Exchange Management (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000.''The remittances received from foreign companies and shares issued to different persons cannot be equated; the companies and directors are separate legal entities; failure to issue shares against full remittance is a contravention.''Delay in submission of report to RBI under Clause 9(1)(A) of Schedule 1 to Regulation 5 is an admitted contravention attracting penalty.''Confiscation of immovable property under Section 13(2) of FEMA is justified only when the property is involved in contravention as defined under the Act and Regulations.'Final determinations:- The appeal is partly allowed.- The confiscation order and penalty of Rs. 10 lakhs imposed for purchase of agricultural land are set aside, as the land was held to be settlement land, not agricultural land.- Penalties imposed for failure to issue shares against foreign remittance and delay in reporting to RBI are upheld.