2025 (9) TMI 196 - AT - FEMA

Appeal seeking enhanced FEMA penalty dismissed as respondents found merely account providers, not masterminds of remittance and false import scheme

AT dismissed the appellant's appeal seeking enhancement of penalty under FEMA, finding respondents were not the masterminds of the outward remittances and ... Enhancement of penalty u/s 19(1) - challenged the impugned order vide their separate appeals to set aside the same - investigation done by ED - Outward remittances through current accounts - false and fabricated import documents in the bank to show imports - contravention of the provisions of Section 3(b) of FEMA, 1999 and Section 10(6) of FEMA, 1999 read with Regulation 6(1) of Foreign Exchange Management (Realisation, Repatriation and Surrender of foreign exchange) Regulations, 2000 - HELD THAT:- Ld. Counsel for the Respondent No. 2 to 4 submitted that they have not remitted any amount to Hong Kong. The amount was transferred to the account of M/s Agna Xport at the instance of Shri Sunil Garg. Shri Sunil Garg requested them that he was importing goods from China and intended to send advance remittances for the said imports. He requested them to open bank accounts in the name of their firms and paid them commission of 20 paisa per one thousand Rupees. They gave him signed cheque books to access the bank accounts. They are not aware about any bank transactions. He contended that no investigation is conducted by the appellant ED to nab and interrogate Shri Sunil Garg. ED even failed to ascertain the identity of Respondent No. 1 Proprietrix of M/s Agna Xport. They are victim of circumstances. They have already challenged the impugned order vide their separate appeals to set aside the same. Under these circumstances, question of allowing the present appeal does not arise as Ms. V. Sundari Proprietor of Agna Xport, one Dharmapal (as revealed by Shri M. Mohan Lal Proprietor of M/s M.M. Finance), Shri Sunil Garg are the real culprits, as revealed during the investigation by ED and they were made scapegoats. We agree with the contention of the Ld. Counsel for the Respondents as mentioned above - they are not the real culprits and the masterminds of the whole game could not be apprehended and traced by appellant ED - question of enhancing the penalty amount does not arise The present appeal is hereby dismissed being devoid of any merits. However, it is made clear that nothing expressed herein will affect the merits of the cross appeals filed by Respondent No. 2 to 4, in any manner whatsoever. ISSUES PRESENTED AND CONSIDERED 1. Whether the appeal for enhancement of penalty under Section 19(1) of FEMA is maintainable on the facts and whether penalty imposed by the Adjudicating Authority requires enhancement. 2. Whether the respondents who remitted funds into the current account of an untraceable exporter, which were later remitted abroad, are liable for contraventions under Section 3(d) and whether the proprietor of the exporter is liable for contraventions under Section 3(b) and Section 10(6) read with Regulation 6(1) of the Realisation, Repatriation and Surrender Regulations. 3. Whether the failure of the Enforcement Directorate to trace and prosecute alleged masterminds or the principal proprietor affects the imposition or enhancement of penalties on the respondents who acted as remitters or account facilitators. 4. Whether the quantum of penalty imposed (aggregate exceeding 100% of contravention amount) is excessive or requires enhancement in light of the circumstances, including inability to trace principal culprits and findings on record. ISSUE-WISE DETAILED ANALYSIS Issue 1: Maintainability and scope of appellate enhancement under Section 19(1) of FEMA Legal framework: Section 19(1) of FEMA permits appeal against orders of the Adjudicating Authority; appellate relief may include enhancement of penalty where justified by record and law. Precedent Treatment: No specific precedents were relied upon in the impugned order or the appeal decision; the Tribunal applied statutory standards and fact-based review. Interpretation and reasoning: The Tribunal examined the factual findings of the Adjudicating Authority, including the amounts of contraventions and the aggregate penalty already imposed. The Tribunal considered whether facts and law supported increasing penalty beyond that fixed by the Adjudicating Authority. The Tribunal noted that the aggregate penalty imposed exceeded 100% of the contravention amount and that principal culprits were untraced. Ratio vs. Obiter: Ratio - appellate enhancement is not warranted where the Adjudicating Authority's penalty, on available findings, already exceeds 100% of the contravention amount and where aggravating culpability of untraced persons cannot justify further enhancement. Conclusion: Appeal for enhancement dismissed as devoid of merit; enhancement not justified on record. Issue 2: Liability of remitters under Section 3(d) of FEMA and of exporter-proprietor under Section 3(b) and Section 10(6) read with Regulation 6(1) Legal framework: Section 3(b) and 3(d) of FEMA proscribe certain contraventions relating to dealings in foreign exchange and current account transactions; Section 10(6) and Regulation 6(1) govern obligations concerning realisation, repatriation and surrender of foreign exchange and related compliance. Precedent Treatment: The Tribunal did not cite or distinguish specific judicial precedents; it assessed liability on the basis of admitted factual matrix and statements recorded u/s 37 of FEMA. Interpretation and reasoning: The Adjudicating Authority found that outward remittances were made by the exporter-proprietor on the basis of false import documents and that certain respondents had transferred funds into the exporter's account which were subsequently remitted abroad. The Tribunal observed that the exporter-proprietor was not traceable and that three remitters responded and gave statements; remitters contended they acted at the instance of a third party and received small commissions, denied knowledge of onward remittances, and indicated facilitation by other untraced persons. Ratio vs. Obiter: Ratio - where remittance records and bank disclosures link transfers to an account used to remit foreign exchange abroad, the remitters can be proceeded against under Section 3(d); however, culpability assessment requires evidence of knowledge or intent and may be mitigated where credible explanation and absence of direct involvement in outbound remittances are established. Obiter - references to untraced masterminds and alleged facilitators (commission agents) as the 'real culprits' are factual observations that inform culpability allocation but do not absolve established contraventions without record support. Conclusion: The Adjudicating Authority's findings of contravention against the exporter-proprietor and the remitters were sustained in part by the record; however, the Tribunal recognized mitigating explanations by the remitters and the inability to trace masterminds, affecting appetite for further penalty enhancement. Issue 3: Effect of enforcement agency's inability to trace principal culprits on penalties imposed on tracing remitters Legal framework: SANCTION and penalty assessment under FEMA require consideration of individual culpability, knowledge, participation, and available evidence; equitable and proportional application of penalty is mandated. Precedent Treatment: No precedents invoked; Tribunal applied principles of proportionality and evidentiary sufficiency. Interpretation and reasoning: The Tribunal accepted respondents' contention that key persons (exporter-proprietor and alleged facilitators) remained untraced despite investigation. It treated that fact as relevant in evaluating whether increasing penalties on the traced remitters was appropriate, particularly where remitters proffered that they acted at the instance of an intermediary and received nominal commission. The Tribunal noted that the Adjudicating Authority had already imposed aggregate penalties exceeding the contravention amount, and that absent tracing of masterminds, enhancing penalties on peripheral participants was unwarranted. Ratio vs. Obiter: Ratio - inability of the enforcement agency to apprehend or establish culpability of principal offenders can bear on the quantum of penalty imposed on other participants; absence of full investigation or failure to trace key actors is a relevant factor weighing against enhancement. Obiter - suggestion that untraced facilitators are the 'real culprits' is a factual inference rather than a legal rule. Conclusion: Failure to trace principal culprits militated against increasing penalties on the traced respondents; the Tribunal declined enhancement for this reason. Issue 4: Proportionality of penalty quantum where aggregate penalty exceeds 100% of contravention amount Legal framework: Penalties under FEMA are to be imposed in accordance with statutory maxima and principles of proportionality; appellate courts/tribunals may reassess quantum to ensure fairness and not to exceed justified punitive or compensatory aims. Precedent Treatment: No authorities were cited; Tribunal applied proportionality considerations to the numerical relationship between contravention amounts and imposed penalties. Interpretation and reasoning: The Tribunal computed that against a contravention quantified at Rs. 17,56,17,255/-, the Adjudicating Authority imposed an aggregate penalty of Rs. 19,88,00,000/- on all respondents, which the Tribunal characterized as 'more than 100% penalty.' Given that aggregate exceeded the contravention amount and that principal actors were untraced, the Tribunal concluded that further enhancement would be inappropriate and unjustified. Ratio vs. Obiter: Ratio - an aggregate penalty exceeding the quantified contravention amount is a material factor counseling against appellate enhancement absent compelling aggravating evidence; proportionality may curtail upward revision. Obiter - numerical threshold of '100%' used as a pragmatic benchmark in this factual matrix rather than a fixed legal ceiling for all cases. Conclusion: The Tribunal held the existing penalty quantum to be excessive enough to preclude enhancement and dismissed the enhancement appeal accordingly. Cross-references Refer to Issue 2 and Issue 3 for interplay between individual culpability, failure to trace masterminds, and effect on penalty quantum; refer to Issue 4 on how numerical proportionality informed the denial of enhancement under Issue 1.