2025 (9) TMI 197 - AT - FEMA

R1 penalty upheld; R2 and R3 fined ?1 crore each for FEMA masterminding causing ?23.64 crore foreign exchange loss

Union of India Versus Sh. M. Padamchand, M/s Emart Digital Limited and Sh. Sreenivasulu

Union of India Versus Sh. M. Padamchand, M/s Emart Digital Limited and Sh. Sreenivasulu - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the respondents contravened Section 10(6) read with Regulation 6(1) of the Realisation, Repatriation and Surrender of Foreign Exchange Regulations, 2000 by purchasing foreign exchange for purported import purposes and failing to use or surrender it within the specified period. 2. Whether the respondents contravened Section 3(b) of FEMA by sending foreign exchange to persons resident outside India in a manner not permitted under FEMA (i.e., remittances without corresponding imports). 3. Whether the respondents contravened Section 3(d) of FEMA by entering into financial transactions in India as consideration for, or in association with, acquisition or creation of assets outside India. 4. Whether the quantum of penalties imposed by the Adjudicating Authority on the respective respondents was appropriate, or required enhancement by the Appellate Tribunal, having regard to relative culpability and available evidence. ISSUE-WISE DETAILED ANALYSIS - Contravention of Section 10(6) read with Regulation 6(1) (realisation/repatriation/surrender) Legal framework: Section 10(6) and Regulation 6(1) require that foreign exchange purchased for specified purposes (e.g., import advance) be used for that purpose or surrendered to the authorised person within prescribed time; failure attracts proceedings under FEMA. Precedent Treatment: No prior judicial authorities were cited or applied in the judgment; the Tribunal decided on the facts and statutory scheme. Interpretation and reasoning: The record showed advance foreign exchange purchases amounting to US$ 3,979,273 wherein declarations were made to authorised persons that funds were for import advances; bank records and the authorised bank's communication established absence of bills of entry for 109 import advance remittances, indicating non-realisation of export proceeds and non-use/surrender for stated import purposes. The Tribunal accepted that the foreign exchange was not used for stated import purposes and that remittances were effected contrary to the regulatory requirement. Ratio vs. Obiter: Ratio - The Tribunal treated the failure to produce requisite import documentation and the outstanding nature of 109 remittances as sufficient to sustain contravention of Section 10(6) read with Regulation 6(1). No obiter dicta relevant to this issue were recorded. Conclusions: The Tribunal maintained the finding of contravention under Section 10(6) and Regulation 6(1) against the respondent whose account was used for the transactions; the penalty imposed on that respondent was maintained (subject to cross-appeal). ISSUE-WISE DETAILED ANALYSIS - Contravention of Section 3(b) (remittance to person resident outside India) Legal framework: Section 3(b) prohibits payments for the credit of a person resident outside India in a manner not provided under FEMA; remittances for imports must correspond to genuine import transactions or follow permitted channels. Precedent Treatment: No precedents were relied upon; the Tribunal applied statutory provisions to facts. Interpretation and reasoning: Evidence showed that funds were credited to a non-resident without corresponding imports; the Adjudicating Authority's finding that foreign exchange was sent outside India in the guise of advance import payments without imports was accepted. The Tribunal noted corroboration from bank records and the absence of import bills for the bulk of remittances. Ratio vs. Obiter: Ratio - Remittance of foreign exchange outside India without corresponding import consignment constitutes contravention of Section 3(b). No obiter statements on broader doctrinal questions were made. Conclusions: The Tribunal upheld the contravention finding under Section 3(b) and maintained the penalty on the account-holder respondent; the Tribunal also found principal responsibility with other respondents (the entities orchestrating the scheme) for causing loss of foreign exchange. ISSUE-WISE DETAILED ANALYSIS - Contravention of Section 3(d) (financial transactions as consideration for acquisition of assets outside India) Legal framework: Section 3(d) prohibits residents from entering into financial transactions in India as consideration for or in association with acquisition/creation of assets outside India unless permitted. Precedent Treatment: None cited; the Tribunal applied statutory text to the factual matrix. Interpretation and reasoning: The Adjudicating Authority found that M/s Emart Digital Limited and its director caused acquisition/creation of assets outside India by utilising funds routed through the account-holder; the Tribunal accepted that sum of Rs. 4,89,69,850 was used as consideration in connection with assets outside India. The Tribunal evaluated documentary production - the director produced nine (or six in the adjudication) bills of entry claimed to corroborate imports - but the authorised bank's report indicating non-submission of bills for 109 remittances undermined the claim of genuine import transactions for the majority of transfers. Ratio vs. Obiter: Ratio - Where funds routed through domestic transactions are shown to have been used as consideration for acquisition of assets outside India, Section 3(d) is contravened; the mere production of some bills of entry did not negate the finding in respect of the outstanding remittances. Observation that documentary production by the director partially corroborated aspects of the defence is ancillary and does not amount to acquittal on the specific sums found to be used outside India. Conclusions: The Tribunal upheld contraventions under Section 3(d) against the company and its director but concluded that the penalties originally imposed were inadequate relative to culpability, warranting enhancement (see penalty analysis below). ISSUE-WISE DETAILED ANALYSIS - Appropriateness and enhancement of penalties Legal framework: Penalties under FEMA are imposed for contraventions; appellate authority may enhance penalties where appropriate, considering extent of contravention, culpability, and evidence. Precedent Treatment: No judicial precedents on penalty augmentation were cited; Tribunal followed principles of parity and relative culpability derived from case facts. Interpretation and reasoning: The Tribunal examined pleadings and evidence: (a) the account-holder pleaded he was a name-lender and ceased operating his account upon learning of irregularities; (b) authorised representative of the company produced bills of entry for some transactions which lent some support to the account-holder's contention that others orchestrated the scheme; (c) the investigating agency did not probe the role of a named third party alleged to be the operator; (d) the company and its director were found to have remitted/used significant sums abroad and to have purchased assets outside India amounting to Rs. 4,89,69,850 while causing larger loss of foreign exchange (Rs. 23,63,89,843) through the account-holder. On these facts the Tribunal deemed the company and its director the principal culprits and applied parity and proportionality to conclude that the penalties on those respondents were disproportionately low. Ratio vs. Obiter: Ratio - Where a respondent is found to be the mastermind or primary beneficiary of contraventions, the appellate authority may enhance penalties for parity and to reflect culpability; maintenance of penalty on a less culpable name-lender is appropriate if the evidence supports limited involvement. The observation that the investigating agency did not investigate certain individuals is factual and obiter to the extent it identifies gaps but does inform the penalty outcome. Conclusions: The Tribunal maintained the penalty on the account-holder (subject to cross-appeal) but enhanced the penalties on the company and its director to Rs. 1,00,00,000 each on grounds of parity and greater culpability, concluding that original penalties for those respondents were insufficient given the quantum and nature of contraventions. PROCEDURAL AND EVIDENTIARY OBSERVATIONS 1. Ex parte proceedings were conducted against the respondents due to lack of effective service and unknown whereabouts; the Tribunal proceeded on available record and submissions of the appellant. 2. Documentary evidence: bank communication confirming non-submission of bills of entry for multiple remittances was treated as significant evidence of non-realisation/non-usage for import purposes; limited production of bills of entry by the company's representative partially corroborated activity but did not negate findings regarding large-scale outstanding remittances. 3. Investigation gaps: The Tribunal noted absence of investigation into the role of an alleged operator, which affected allocation of culpability but did not preclude enhancement of penalties against the respondents demonstrably involved. FINAL CONCLUSIONS 1. Contraventions of Section 10(6) read with Regulation 6(1), Section 3(b) and Section 3(d) of FEMA were upheld as supported by bank records and documentary analysis. 2. Penalty on the account-holder respondent was maintained; penalties on the company and its director were enhanced to Rs. 1,00,00,000 each on grounds of parity and greater culpability as the principal orchestrators/beneficiaries of the contraventions.