2025 (10) TMI 183 - HC - FEMA

Penalty under Section 50 not applicable; exporters allowed to write off unrealised export bills under Section 18(1)(a), 18(2), 18(3)

P. Balasubramaniam Versus The Appellate Tribunal for Foreign Exchange, The Special Director of Enforcement, The General Manager, Reserve Bank of India, Chennai. And City Mills Private Limited, (Successor-in-Interest of Erstwhile M/s. City Knitting Company Private Limited) Represented by its Managing Director P. Balasubramaniam Versus The Appellate Tribunal for Foreign Exchange, The Special Director of Enforcement, The General Manager, Reserve Bank of India, Chennai.

HC held that penalty under Section 50 was not applicable and exporters were entitled to write-off unrealised export bills. The court read Section 18(1)(a) ... Legality of penalty under Section 50 - unrealised export proceeds - prescribed manner or delaying payment beyond prescribed period - contravention of Section 18(2) read with Section 18(1)(a) and Section 18(3) - benefit of Duty Drawback under Section 75 - exported consignments of goods to various countries - Write-off of unrealised export proceeds. - HELD THAT:- Under the powers conferred under Section 18(1)(a) of the Foreign Exchange Regulation Act, 1973, the Central Government had also issued Notification No. G.S.R. 78 dated 01.01.1974. Text of the said Notification is an exact reproduction of Section 18(1)(a) of the Foreign Exchange Regulation Act, 1973 with Proviso. However, no proceedings in respect of any contravention of Section 18(2) shall be instituted, unless the prescribed period has expired and payment for the goods representing the full export value has not been made in the prescribed manner within the prescribed period. As per Section 18(2) of the Foreign Exchange Regulation Act, 1973, no person shall, except with the permission of the Reserve Bank, do or refrain from doing anything, or take or refrain from taking any action in relation to goods in respect of any notification under Section 18(1)(a) Foreign Exchange Regulation Act, 1973 has been issued. However, Section 18(2) cannot be read in isolation. It has to be read along other provisions of the Act and the notification and the Rules. Violation of provision to Section 18(2) flows from a violation of contravention in Section 18(1)(a) of Foreign Exchange Regulation Act, 1973 and notification issued thereunder. This is evident that the Appellants have failed to realize the export proceeds as is contemplated under Section 18(2)(A)(a)(ii) of Foreign Exchange Regulation Act, 1973 read with the above notification. However, some amount of business lossess are expected particularly, when exporters have business with strangers from abroad. As per Section 18(3) of the Foreign Exchange Regulation Act, 1973, where in relation to any goods to which a notification under Clause (a) of Sub- Section (1) applies the prescribed period has expired and payment therefor has not been made as aforesaid, it shall be presumed, unless the contrary is proved by the person who has sold or is entitled to sell the goods or to procure the sale thereof, that such person has not taken all reasonable steps to receive or recover the payment for the goods as aforesaid and he shall accordingly be presumed to have contravened the provisions of Sub-Section (2). The economy has been liberalized since 1994. Thus, the Foreign Exchange Regulation Act, 1973 was replaced with Foreign Exchange Management Act,1999. It is precisely for this reason, write-off of the unrealised export bills has been recognized by the Reserve Bank of India vide its A.P (DIR Series) Circular No.61 dated 14.12.2002. The Authorized Dealer, namely, the Indian Overseas Bank, Tiruppur had also sent a communication to the 3rd Respondent to write-off the unrealised amount, the 3rd Respondent has not responded to the same. That apart, the 3rd Respondent Reserve Bank of India has also failed to implement the contentions of the above mentioned Circular No.61 dated 14.12.2002. After the Show Cause Notice was issued on 03.05.2002, the above Circular has been issued. Even if there was a violation of contravention of Section 18(1)(a)(i) read with Section 18(2) and Section 18(3) of the Foreign Exchange Regulation Act, 1973, the Appellants/Exporters are entitled for write-off of the unrealised export bills. Even otherwise, since Section 18(1)(a) of the Foreign Exchange Regulation Act is to be read along with Section 18(2) and Section 18(3) of the Foreign Exchange Regulation Act, penalty under Section 50 of the Foreign Exchange Regulation Act is not applicable to the facts and circumstances of the case as admittedly the Appellants/Exporters had failed to realize approximately 5.45% of the export proceeds. Further, the Appellants/Exporters have also reversed the proportionate Duty Drawback that was paid to the Appellants/Exporters by the Customs Authority as has been captured in Paragraph No.8 of this order. Thus, the Appellants/Exporters have not misused the export incentives. ISSUES PRESENTED AND CONSIDERED 1. Whether imposition of penalty under Section 50 of the Foreign Exchange Regulation Act, 1973 (FERA) was justified for alleged contravention of Section 18(2) read with Section 18(1)(a) and Section 18(3) in respect of unrealised export proceeds. 2. Whether the Appellants/Exporters were entitled to write-off of unrealised export bills under the Reserve Bank of India (RBI) A.P. (DIR Series) Circular No.61 dated 14.12.2002 (and subsequent relaxations) and related FED Master Directions, thereby negating or limiting enforcement action. 3. Whether the Writ Court possessed jurisdiction under Article 226 of the Constitution to entertain the petitions instead of challenging the Appellate Tribunal's order by way of appeal under Section 54 of FERA (and whether such choice affects relief). 4. Whether relevant precedents relating to issuance of show cause notices shortly before repeal of FERA (and the transition to FEMA) were applicable to the facts, and to what extent such precedents influence the outcome. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of penalty under Section 50 for alleged contravention of Section 18(2) (and related provisions) Legal framework: Section 18(1)(a) empowers the Central Government to require exporters to furnish prescribed declarations including export value; Section 18(2) prohibits acts effecting payment otherwise than in prescribed manner or delaying payment beyond prescribed period, and provides that proceedings shall not be instituted until the prescribed period expires; Section 18(3) creates a presumption that the exporter failed to take reasonable steps to recover payment unless the contrary is proved. Section 50 prescribes penalty for contraventions of the Act (with specified exceptions). Precedent treatment: The Court noted authorities cited by parties (including decisions dealing with show cause notices and the transitional period to FEMA) but did not overrule established statutory scheme; rather, it applied statutory interpretation and administrative practice. Interpretation and reasoning: Section 18 provisions must be read together with the notification and rules. Contravention under Section 18(2) arises only after the prescribed period has expired and, under Section 18(3), the burden shifts to the exporter to prove reasonable steps were taken. However, the existence of statutory/regulatory mechanisms permitting write-off of unrealised export bills (post-liberalisation RBI circulars) is relevant to assessing whether penalty under Section 50 should be imposed. The Court examined percentage shortfall year-wise and found the shortfall to be low (overall approx. 5.45% against export realisations) and within or close to RBI write-off thresholds applicable under RBI circulars and subsequent master directions. The Appellants had surrendered proportionate export incentives (duty drawback reversal) and produced evidence of efforts to trace buyers and seek Embassy assistance; the authorized dealer recommended write-off. Ratio vs. Obiter: Ratio - Where, in the factual matrix, unrealised export proceeds are negligible in percentage terms and relevant RBI policies permit write-off subject to conditions (which are satisfied or capable of satisfaction), imposition of maximum penalty under Section 50 is not justified; administrative relief (write-off) and compliance with surrender of export incentives are material and can preclude penalty. Obiter - Historical exposition of foreign exchange law and background need not be treated as binding ratio but supports context. Conclusion: The penalty under Section 50 was quashed. The Court held that, on the facts (small shortfall percentage, evidence of efforts to realize dues, reversal of export incentives, recommendation by authorised dealer), enforcement action by way of penalty was unsustainable. Issue 2 - Entitlement to write-off under RBI circulars and effect on enforcement Legal framework: RBI A.P. (DIR Series) Circular No.61 (14.12.2002) and earlier Circulars (A.P. DIR Series Nos.12/2000 and 30/2001) permit authorised dealers to permit write-off of unrealised export dues subject to conditions (surrender of incentives, documentary evidence of efforts, limits such as 5% of average annual realisations or other specified ceilings). Later relaxations (A.P. DIR Series Circular No.88/12.03.2013 and FED Master Direction No.16/2015-16) liberalised and simplified write-off limits and conditions (including categories such as buyer not traceable, insolvency, auction/destruction of goods, disproportionate cost of litigation), and set higher ceilings for status/non-status exporters. Precedent treatment: The Court treated the RBI circulars and master directions as relevant and operative administrative policy that must inform enforcement under FERA, particularly in the liberalised/post-1994 context and transitional period to FEMA. Interpretation and reasoning: The Court found the Appellants' shortfalls fell within the permissive ambit of write-off (percentage-wise negligible per year; cumulative figures within or close to ceiling; documentary evidence of attempts to recover, Embassy assistance sought, and surrender of duty drawback). The authorised dealer's recommendation to write-off was persuasive. Even though some circulars post-dated the show cause notice, the Court considered them relevant to the interpretation of regulatory expectations and to the equities of the case. The Court concluded that the machinery and policy of write-off were intended to avoid penalising exporters for bona fide commercial losses where prescribed conditions are met. Ratio vs. Obiter: Ratio - Regulatory provisions permitting write-off, where their conditions are satisfied, can operate to preclude or mitigate penal consequences under FERA; administrative recommendation by authorised dealer and surrender of export incentives are strong indicia for permitting write-off. Obiter - Discussion of later circulars (post-dating show cause) is used for interpretive assistance and is persuasive rather than strictly binding on the statutory regime contemporaneous with alleged contraventions. Conclusion: The Appellants were entitled to write-off of the unrealised export bills in terms of RBI circulars and FED Master Directions; the failure or delay of the Reserve Bank to act on the authorised dealer's recommendation did not justify sustaining penalty. Consequential relief to effect write-off was warranted. Issue 3 - Jurisdiction under Article 226 versus appellate remedy under Section 54 of FERA Legal framework: Section 54 of FERA provided an appellate remedy (civil miscellaneous appeal) against orders of the Appellate Tribunal on substantial questions of law; Article 226 of the Constitution confers writ jurisdiction for enforcement of fundamental rights and other legal wrongs; availability of an alternative remedy may affect exercise of writ jurisdiction. Precedent treatment: The Court noted the statutory appeal route but observed that Article 226 may be invoked when no substantial question of law arises or when equitable relief is warranted. Interpretation and reasoning: The Appellants elected to invoke writ jurisdiction on the basis that no substantial question of law arose under Section 54. The Court observed that although an appeal under Section 54 could have been filed, the availability of that statutory remedy did not preclude exercise of writ jurisdiction where appropriate relief was sought and the matter concerned statutory/regulatory policy (write-off) and administrative action (RBI non-action). The Court exercised its discretion to entertain the writ petitions and grant relief. Ratio vs. Obiter: Ratio - Where no substantial question of law arises and the relief sought concerns administrative policy and factual assessment amenable to writ relief, Article 226 can be permissibly invoked despite availability of a statutory appellate forum. Obiter - General observations on procedural elections are illustrative. Conclusion: The Court entertained the writ petitions under Article 226 and granted relief despite the existence of Section 54; this procedural choice did not bar relief on merits. Issue 4 - Relevance of precedents on issuance of show cause notices near repeal of FERA Legal framework and precedent treatment: Authorities were cited where show cause notices issued shortly before the sunset of FERA and transition to FEMA were set aside. The Court considered such precedents but did not base its decision solely on the 'timing' ground. Interpretation and reasoning: Although timing precedents (e.g., show cause notices issued just before repeal) can afford a ground for quashing proceedings, the Court resolved the matter primarily on statutory/regulatory grounds (write-off entitlement, small percentage shortfall, surrender of incentives, authorised dealer recommendation). The historical discussion of foreign exchange law and the transition from FERA to FEMA furnished context but was not determinative here. Ratio vs. Obiter: Obiter - While timing precedents are persuasive, the Court's disposition rested on merits and administrative policy rather than the temporal ground alone. Conclusion: Precedents concerning show cause notices at the verge of repeal were noted but not dispositive; relief was granted on the substantive ground that write-off and regulatory considerations made penalty unsustainable. Final Disposition (Court's Conclusion) The Court quashed the impugned orders imposing penalties and allowed the writ appeals. The Appellants/Exporters were held entitled to write-off of the unrealised export bills in accordance with RBI circulars and FED Master Directions, having satisfied the relevant conditions (documentary evidence of efforts, surrender/reversal of export incentives, authorised dealer recommendation and negligible percentage shortfall). The Court exercised its writ jurisdiction under Article 226 notwithstanding the availability of a statutory appeal under Section 54 of FERA and granted consequential relief; no costs were awarded.