Appellate Tribunal upholds penalty for technical FEMA Section 6(3)(b) breach involving incorrect surname on FC-GPR form

The Appellate Tribunal under SAFEMA at New Delhi upheld the penalty imposed by the Adjudicating Authority for contravention of Section 6(3)(b) of FEMA. The case involved a technical breach where respondents submitted the mandatory FC-GPR form within the stipulated time but with an incorrect surname. The Tribunal found the AA's order fair and judicious, noting that respondents demonstrated clear intention to comply with RBI provisions regarding FDI. The respondents accepted their error and deposited the penalty amount. The Tribunal rejected the appellant's request to enhance the penalty, concluding the imposed amount was appropriate for the technical violation.

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The core legal questions considered by the Tribunal in this appeal revolve around the alleged contravention of provisions under the Foreign Exchange Management Act, 1999 (FEMA), specifically Section 6(3)(b) read with Para 9(1)(B) of Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. The primary issues are:

1. Whether the Respondents contravened the mandatory requirement to file Form FC-GPR with the Reserve Bank of India (RBI) within the stipulated time after allotment of shares against foreign inward remittances amounting to Rs. 5,00,09,003/-.

2. Whether the penalty imposed by the Adjudicating Authority (AA) on the Respondents for the contravention was appropriate and commensurate with the gravity of the violation, considering the provisions of Section 13(1) of FEMA, 1999.

3. Whether the Respondents were guilty of any contravention under Section 7 of FEMA, 1999 read with Foreign Exchange Management (Export of Goods and Services) Regulations, 2015, as alleged in the show cause notice.

4. The scope and exercise of discretion by the Adjudicating Authority in imposing penalties in cases of technical or venial breaches under FEMA.

Issue-wise Detailed Analysis:

1. Contravention of Section 6(3)(b) of FEMA and Para 9(1)(B) of Schedule I to the FEMA Regulations:

The legal framework mandates that any person resident in India who issues shares to a person resident outside India must file Form FC-GPR with the RBI through their Authorized Dealer (AD) bank within 30 days of allotment. This requirement ensures regulatory oversight of foreign direct investment (FDI) inflows and compliance with foreign exchange laws.

The AA found that the Respondent No. 1 received foreign inward remittances totaling Rs. 5,00,09,003/- between 13.01.2014 and 17.01.2014 and allotted shares accordingly. The Respondents did file the FC-GPR within the prescribed 30-day period; however, the RBI did not take the form on record due to pending clarifications. Specifically, the RBI sought a revised FC-GPR authenticating deletion in the declaration part and original certificates from Chartered Accountant (CA) and Company Secretary (CS) with the correct name of the investor.

The Tribunal noted that the Respondents' failure to submit these clarifications was a technical contravention rather than a substantive breach. The defect arose because the name of Respondent No. 2 was recorded differently ("M. Ramprasad Varma" instead of "Mavuleti Ramprasad Varma") in the FC-GPR and related documents. The communication regarding this defect was sent only to the AD Bank and not directly to the Respondents, who claimed ignorance of the defect until adjudication proceedings commenced.

Precedents cited by the Respondents emphasized that technical defects or delayed rectifications do not amount to fresh violations or fresh filings, referencing judicial principles from cases concerning limitation and procedural defects. The Tribunal accepted that the Respondents had the intention to comply and had submitted the form within the stipulated time, with the defect being a minor technical issue.

2. Appropriateness of Penalty Imposed:

Section 13(1) of FEMA, 1999 empowers the authority to impose penalties up to three times the sum involved in the contravention. The Appellant contended that the penalty of Rs. 1 lakh each on the Respondents was disproportionately low given the amount involved and the statutory ceiling.

The Respondents argued that since the breach was technical and venial, and there was no malafide intention or economic prejudice caused, the minimum penalty was justified. They cited authoritative judgments holding that discretion to impose penalties must be exercised reasonably and that technical breaches without substantive harm do not warrant harsh penalties.

The Tribunal referred to established case law, including the landmark Supreme Court decision in Hindustan Steel Ltd. v. State of Orissa, which upheld the principle that minimum penalties can be imposed when appropriate and that discretion is not unfettered but must be exercised judiciously. The Tribunal found that the AA's penalty order reflected fairness and judiciousness, considering the nature of the contravention.

3. Alleged Contravention under Section 7 of FEMA read with Export Regulations:

The AA examined the allegation that the company failed to export goods within one year of receiving advance payments amounting to USD 48,498 (Rs. 32,06,196.89). The Respondents submitted that they did not export goods but provided software consultation services, which was accepted by the AA after reviewing documentary evidence.

The Tribunal upheld the AA's finding that the Respondents were not guilty of contravention under Section 7 of FEMA and that this charge was rightly dropped.

4. Discretion in Imposing Penalties for Technical Breaches:

The Tribunal analyzed the discretionary power vested in adjudicating authorities under FEMA to impose penalties. It emphasized that such discretion must be exercised reasonably and justifiably, especially in cases involving technical or venial breaches without malafide intent or economic prejudice.

Judgments cited by the Respondents and accepted by the Tribunal, including recent decisions of the same Appellate Tribunal, established that non-submission of clarifications or rectifications after initial filing within prescribed timelines does not constitute a substantive violation warranting enhanced penalties.

The Tribunal noted that the Respondents' conduct demonstrated an intention to comply, and the failure to submit revised documents was due to miscommunication and lack of direct notification from RBI. The penalty imposed was thus appropriate and proportionate.

Significant Holdings:

The Tribunal upheld the findings of the Adjudicating Authority that the Respondents committed a technical contravention of Section 6(3)(b) of FEMA, 1999 read with Para 9(1)(B) of Schedule I to the FEMA Regulations, 2000, by failing to file a fully compliant Form FC-GPR within the stipulated time. However, the contravention was technical in nature, arising from a minor discrepancy in the investor's name and lack of direct communication from RBI to the Respondents regarding defects.

The Tribunal affirmed the imposition of a penalty of Rs. 1 lakh on each Respondent under Section 13(1) of FEMA, 1999, holding that the penalty was just, fair, and commensurate with the nature of the contravention. It rejected the Appellant's plea for enhancement of penalty, emphasizing the discretionary power of the Adjudicating Authority to impose minimum penalties in cases of technical breaches without malafide intent or economic prejudice.

Regarding the alleged contravention under Section 7 of FEMA related to export obligations, the Tribunal concurred with the AA's finding that the Respondents were not guilty, as the advance payments were for software services, not goods export, and thus the charge was rightly dropped.

The Tribunal reiterated the principle that "the discretion to pass an order of sentence or levy a penalty for breach of any law... is not unfettered and the same has to be used reasonably and justifiably," and found no grounds to interfere with the impugned order.

Consequently, the appeal was dismissed as devoid of merit, and no costs were imposed.

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