2025 (8) TMI 720 - AT - FEMA

FEMA Section 42 Penalties Reduced for Unauthorized Foreign Remittances Treated as FDI Under SAFEMA

The AT under SAFEMA upheld contraventions of FEMA 1999 and Regulations 2000 against the appellant company and several individuals for unauthorized receipt ... Offence under FEMA - Foreign Direct Investment (FDI) running in crores in the name of grant received - as company is engaged in audit practice which does not permit receipt of the FDI - contravention of provisions of the Act of 1999 and the Regulation 2000 initiated the proceedings which ultimately culminated in the imposition of the penalty. Main allegation against the appellant is for receipt of inward remittance considering it to be investment in view of the dividend in the form of Network Service Charges (NSC). Since there is a purported co-relation between investments and the dividends, it tantamounts to a Capital Account Transactions/CAT. Main thrust of the argument of the appellant is that the receipt of the grants by a Company for commercial purpose is neither prohibited nor regulated under the FCRA. There is no prohibition for receipt of the grants by a private commercial organization - HELD THAT:- Inward remittance of USD 16,43,149 received on 14.04.2016 from PwC, Netherlands was credited to EEFC account based on the information provided by the appellant that it is towards professional services rendered by it to the remitter. Thus, ignoring the issue as to whether inward remittance in this case was ‘earning’ in the hands of the appellant, it could not be clarified to get 100% credit of remittance to EEFC account despite received for meeting the specific obligation. At this stage it should not construe that what could have been credited to EEFC account is not necessarily the ‘earning’, rather the inward remittance could have been credited to EEFC account if it is an earning. If remittance is to meet with specific obligation then it would not be ‘earning’, rather, to tender the charges towards the services. Hence the exclusion of certain items from 100% credit of EEFC account was well mean by the legislature and applies to the case in hand. As per the GA’s entered between the parties, the appellant had received the remittance to meet with specific obligations. It may be true that NSC was paid earlier also but difference of amount could not be clarified by the appellant in term of the documents quoted above and in consonance to the GA to extend the specific services. The reimbursement was made accordingly in the shape of NSC. Therefore, the grant could not qualify for credit to EEFC account. We cannot subscribe the arguments raised by the Counsel for the appellants, rather, find a case for contravention of Sections 6(2), 6(3), 9(b), 10(5), 10(6) of the Act of 1999 read with para 1(1)(i) of the Schedule-I of Regulation 4 of 2000. Penalty imposed on the appellant, M/s Pricewaterhouse Coopers Pvt. Ltd. - As we find the penalty be excessive and disproportionate to the allegations against the appellant. The appellant has received grants under licence and accordingly inward remittance, though it is in contravention of the Act of 1999 and Regulations made therein. Taking overall view, we reduce the penalty from Rs. 230 Crores to Rs. 80.50 Crores on the appellant, M/s PricewaterhouseCoopers Pvt. Ltd.. The appellant Company has furnished a Bank Guarantee in the name of the Registrar of this Tribunal in pursuance to the order dated 20.01.2023 passed on the application for waiver of pre-deposit. The Bank Guarantee would be released so that the reduced amount of penalty is made good by the appellant company. Penalty on individual appellants Shri Deepak Kappor, ex-Chairman and signatory to GA-1 in the capacity of the Director and for GA-2 as Managing Director at the relevant time when the grant agreements were entered. We find contravention of the provisions of the Act of 1999 and Regulations of 2000 - The impugned order, thus, stand modified to that extent in his case and FD of an amount equivalent to 25% to the penalty imposed on him has been furnished to this Tribunal in pursuance to the order dated 20.01.2023 on the application for waiver for pre-deposit. The FD may be transferred in favour of the respondent to make good of the penalty amount. Appellant, Shri Ambrish Dasgupta, Ex- Executive Director since he was the signatory of one Grant Agreement only, the penalty of Rs. 60,000/- was imposed on him and has been deposited but making the penalty to be proportionate and without discrimination it is reduced to Rs. 15,000/- finding contravention of the provisions of the Act of 1999 and Regulation of 2000 read with Section 42 of the Act of 1999. Appellant, Shri Shyamal Mukherjee, Chairman was a signatory of GA-3 in the capacity of the Chairman of the Company and even signatory of addendum to GA-4 in his official capacity - we find the penalty of Rs. 11,00,000/- imposed on him to be disproportionate and accordingly it is reduced to Rs. 2,75,000/- to make it proportionate without discrimination because the appellant has also played role and otherwise the penalty has been imposed with the aid of Section 42 of the Act of 1999. The FD of equivalent amount has been deposited in this Tribunal and would be transferred to the respondent. Appellant Shri Ramesh Rajan, Ex- Chairman was not the signatory of GA-1 and GA-2 but since he was holding the post of Chairman thus, penalty has been imposed with the aid of Section 42 of the Act 1999 towards the vicarious liability. However, the amount of the penalty of Rs. 5,00,000/- is reduced to Rs. 1,25,000/- in the peculiar facts and circumstances of the case to make the penalty to be proportionate without discrimination. Appellant, Ms. Satyavati Berera, who was the signatory of GA-5 in the capacity of authority signatory, the penalty of Rs. 1,00,000/- has been imposed on her which we find to be disproportionate to the contravention of the provisions of the Act of 1999 and Regulations of 2000 and to make it proportionate it is reduced to Rs. 25,000 /-. The FD of equivalent amount has been deposited with the Tribunal and would be transferred in favour of the respondent to make good of the penalty amount. The appellant, Shri Shivam Dubey was an employee of the company and penalty on him is of Rs. 10,000/-. We do not find any reason for imposing penalty on him because he had carried direction of the Company in the capacity of an employee and thus could not have been held responsible for vicarious liability having no independent position to be carried out for contravention of the Act of 1999 and the Regulations of 2000. Accordingly, Section 42 of the Act of 1999 is not invocable against him and therefore, his appeal is allowed. ISSUES: Whether non-refundable grants under various Grant Agreements qualify as Capital Account Transactions (CAT) under Section 2(e) of the Foreign Exchange Management Act, 1999 (FEMA, 1999).Whether receipt of such grants amounts to Foreign Direct Investment (FDI) and contravenes provisions of FEMA, 1999 and related Regulations.Whether crediting inward remittances received as grants into Exchange Earners Foreign Currency (EEFC) Account violates the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2000 (Regulations 2000) and its amendments.Whether the adjudicating authority complied with Rule 4(3) and 4(4) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (Adjudication Rules 2000) in issuing show-cause notice and conducting inquiry.Whether the penalty imposed under FEMA, 1999 and Regulations 2000 is excessive and disproportionate.Whether individuals holding positions of authority can be held liable under Section 42 of FEMA, 1999 for contraventions by the company. RULINGS / HOLDINGS: Grants under GA-1 and GA-2 containing clauses imposing contingent liability to return funds if conditions are unmet qualify as Capital Account Transactions under Section 2(e) of FEMA, 1999, because they 'alter the assets or liabilities, including contingent liabilities' of a person resident in India.The receipt of such Capital Account Transactions without prior approval of the Reserve Bank of India (RBI) constitutes contravention of Sections 6(2), 6(3), and 10(6) of FEMA, 1999.Credits of inward remittances received as grants into the EEFC account contravened Regulation 4 of the Foreign Currency Account Regulations, 2000, as amended, because such remittances were not 'earnings' but amounts received 'for meeting specific obligations by the account holder,' which are excluded from permissible credits to EEFC accounts.The adjudicating authority complied with Rule 4(3) and 4(4) of the Adjudication Rules, 2000 as the show-cause notice specified the nature of contraventions and applicable provisions, and the appellant's failure to timely respond did not invalidate the proceedings.The penalty of Rs. 230 Crores imposed on the company was found excessive and disproportionate; accordingly, it was reduced to Rs. 80.50 Crores.Penalties imposed on individual appellants under Section 42 of FEMA, 1999 for vicarious liability were upheld but reduced to amounts proportionate to their involvement; penalty on an employee without independent authority was set aside. RATIONALE: The legal framework applied includes FEMA, 1999, particularly Sections 2(e), 6(2), 6(3), 9(b), 10(5), 10(6), and 42; the Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2000 and its amendments in 2002, 2007, and 2015; and the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000.Section 2(e) defines Capital Account Transactions as those altering assets or liabilities, including contingent liabilities, outside India of persons resident in India. The contingent liability clauses in GA-1 and GA-2 triggered this classification.The Regulations 2000 and its amendments allow credits to EEFC accounts only for foreign exchange 'earnings,' excluding remittances received for specific obligations or investments, which the grants in question constituted.The adjudicating authority's procedural compliance was assessed against the requirements of Rule 4(3) and 4(4) of the Adjudication Rules, 2000, with the Tribunal holding that written reasons for issuing show-cause notice are not mandated, and the appellant's delayed response did not vitiate the process.The Supreme Court's prior observations and directions, including constitution of a Committee of Experts to examine the statutory framework concerning multinational accounting firms, were noted but did not preclude adjudication on the merits by the Tribunal.The Tribunal recognized the need for proportionality in penalty imposition, reducing penalties where found excessive relative to the contraventions and individual roles, consistent with principles of natural justice and fairness.