2025 (10) TMI 796 - AT - FEMA

Company liable under FEMA for delayed filings and share violations; deleted Section 6(3)(b) SCN invalid, penalty reduced

M/s Woosu Automotive India Pvt. Ltd. Versus The Enforcement Directorate, Chennai

The AT held the appellant company guilty of contraventions under FEMA regulations for delayed reporting/filing and quantified share-related violations; ... Levy of penalty - Foreign inward remittances - mens rea - undue delay in finalization of proceedings - loss of foreign exchange - guilty of contravention of the provisions of Para 9(1)(A), Para 9(1)(B), Para 9(2) of Schedule-I to Regulation 5(1) of the Foreign Exchange Management (Transfer or Issue of Any Security by a Person Resident Outside India) Regulations, 2000 and Regulation 13.1(3) of the FEM (Transfer or Issue of Any Security by a Person Resident Outside India) Regulations, 2017 - reasonableness of the quantum of penalty imposed on the appellant company, and penalties on each Director - manufacture of transmission parts used in motor cars and supplying them to the motor car manufacturing companies in India and abroad - HELD THAT:- The delay on the part of the appellant company in complying with the reporting/filing requirements is undisputed and the arguments raised on behalf of the appellants relate to the bona fides of the appellant’s conduct, absence of mens rea on their part, the non-serious nature of the contraventions, lack of any unfair gain to the appellant or loss of foreign exchange to the country as well as the disproportionate quantum of the penalty imposed. With regard to the issue of absence of any loss of foreign exchange, we are in agreement with respondent Directorate that FEMA, 1999 is a compliance-oriented statute where contraventions attract monetary penalties irrespective of whether any quantifiable loss of foreign exchange to the country has occurred or not. Section 13 of FEMA, 1999, which provides for imposition of penalties in cases of contravention of any provision, rule, regulation, direction or order under the Act, does not link it to financial loss to the Government, but rather to the sum involved in the contravention. As such absence of loss of foreign exchange cannot absolve the appellant of liability under the penal provisions of FEMA, 1999. Section 6(3)(b) was deleted by the Finance Act, 2015 and hence the SCN issued under the said provision which stood deleted at the issue of the SCN is illegal - In the present case, the contraventions pertain to the period 2007 onwards and, in respect of non-filing of FLA returns, the same continued upto 2019. Considering this timeline of events and the continuing nature of the contraventions, we do not find that there was such undue delay as to hold the adjudication proceedings to be illegal. Accordingly, this contention of the appellant is also rejected. Regarding the argument that: contravention has been wrongly quantified as the shares were duly issued against the remittances and the issue was only with respect to the timeframe prescribed for issuing the same - We are unable to agree with the appellant that the contravention amount was wrongly quantified. Indeed, it is not disputed even by the appellant that the 3,66,09,499 shares issued in respect of which Para 9(1)(B) of Schedule I of Regulation 5(1) of Foreign Exchange Management (Transfer or Issue of any security by a Person Resident Outside India) Regulations, 2000 read with Section 6(3)(b) of FEMA, 1999 was found to have been contravened were valued. Thus, there was no error in the quantification of the ‘sum involved in the contravention’. In totality of the nature of the contraventions and the conduct of the appellant, we are of the view that on balance, the ends of justice would be met if the quantum of penalty imposed on the company is reduced substantially, by the adjudicating authority. ISSUES PRESENTED AND CONSIDERED 1. Whether failure to timely file Form FC-GPR/FC-GPR(A) and Annual Return on Foreign Liabilities and Assets (FLA) constitutes contravention attracting monetary penalty under FEMA notwithstanding absence of demonstrable loss of foreign exchange. 2. Whether mens rea (criminal intent) is an essential element for imposition of civil penalties under FEMA for procedural non-compliance. 3. Whether reliance on rules/regulations framed under a statutory provision (Section 6(3)(b) of FEMA) that was subsequently deleted renders initiation of proceedings or issuance of SCN invalid where the contraventions occurred while the provision was in force. 4. Whether undue delay in initiating proceedings (lapse of time between alleged contraventions and SCN) vitiates the legality of adjudication when no specific limitation period is provided under FEMA and contraventions are continuing in nature. 5. Whether the adjudicating authority erred in quantifying the 'sum involved in the contravention' and, relatedly, whether where the amount is not quantifiable a nominal statutory alternative penalty ought to have been applied. 6. Whether the quantum of penalty imposed by the adjudicating authority was unreasonable or disproportionate in view of the nature, duration and consequences of contraventions and the conduct of the respondent. 7. (Related) Whether directors are separately liable for the company's contraventions under Section 42(1) of FEMA and whether such liability/penalty required modification on appeal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability for delayed/non-filing of FC-GPR/FLA under FEMA Legal framework: Regulatory scheme under FEMA mandates reporting/filing obligations (FC-GPR/FC-GPR(A), FLA returns) under Regulations framed for transfer/issue of securities to non-residents; Section 13 provides for monetary penalties measured by the 'sum involved in the contravention'. Precedent treatment: Tribunal relied on subsequent Supreme Court authority (e.g., SEBI v. Shriram Mutual Fund and related decisions) and its own earlier orders holding that civil penalty follows on establishment of contravention without requirement of intent. Interpretation and reasoning: The Tribunal found the factual delays and non-filing undisputed. It held FEMA to be compliance-oriented; procedural contraventions impede regulatory management of foreign exchange and therefore attract civil penalties irrespective of loss. Thus, the failure to file timely FC-GPR and FLA returns constituted established contraventions under the applicable regulations. Ratio vs. Obiter: Ratio - procedural failures to file mandatory forms under FEMA attract penalties once contravention is established; absence of loss does not absolve liability. Observational/obiter remarks relate to policy aims of FEMA (macro-stability) supporting this position. Conclusion: Contraventions for delayed/non-filing were established and liable to monetary penalty under FEMA. Issue 2 - Necessity of mens rea for imposing civil penalties under FEMA Legal framework: Distinction between criminal/quasi-criminal provisions and civil/regulatory penalty provisions; FEMA penalty provisions are civil/regulatory. Precedent treatment: Earlier judgments (Hindustan Steel) involving quasi-criminal statutes were distinguished; subsequent apex-court authority (e.g., SEBI jurisprudence and Suborno Bose in FEMA context) established that mens rea is not required to impose civil penalties. Interpretation and reasoning: Tribunal reasoned that treating absence of mens rea as a defense would render FEMA's penalty regime ineffective. Since statutory language does not require proof of intent, penalty is attracted upon establishment of contravention. Procedural compliance provisions are intended to be enforced irrespective of subjective intent to ensure regulatory objectives. Ratio vs. Obiter: Ratio - mens rea is not an essential element for imposition of civil penalties under FEMA; reliance on Hindustan Steel (quasi-criminal context) is inapposite. Conclusion: Absence of mens rea does not absolve the appellant from civil liability for the established contraventions. Issue 3 - Validity of proceedings when underlying statutory provision later deleted Legal framework: Rules/regulations can be validly invoked for acts done while parent statutory provision was in force; retrospective deletion does not invalidate past contraventions. Precedent treatment: Tribunal referred to timelines and held that where contraventions occurred when the provision was in force, subsequent deletion does not negate liability. Interpretation and reasoning: The contraventions dated from 2007 onwards, when Section 6(3)(b) was in force; deletion in 2015 (effective 2019) does not invalidate SCN issued for prior acts. No specific limitation period is prescribed under FEMA for initiation of penalty proceedings. Ratio vs. Obiter: Ratio - invocation of rules framed under a statutory provision is valid for acts occurring during the provision's operation notwithstanding later repeal. Conclusion: SCN and proceedings were legally maintainable; deletion of Section 6(3)(b) post-dates the contraventions and does not render proceedings invalid. Issue 4 - Effect of delay in initiation of proceedings; limitation and continuing contraventions Legal framework: No statutory limitation period under FEMA for initiation of penalty proceedings; continuing contraventions may justify later action. Precedent treatment: Tribunal relied on facts showing continuation of non-filing till 2019 and rejected contention that lapse of time rendered adjudication illegal. Interpretation and reasoning: Given the continuing nature of non-filing (FLA returns continued up to 2019) and absence of prescribed limitation, the Tribunal found no undue delay that would vitiate the proceedings. Ratio vs. Obiter: Ratio - where contraventions are continuing and statute prescribes no limitation, delay in initiation does not per se invalidate proceedings. Conclusion: Delay in issuing SCN did not render the adjudication illegal. Issue 5 - Quantification of 'sum involved in the contravention' and applicability of nominal penalty Legal framework: Section 13 contemplates penalty up to thrice the sum involved in contravention; where amount is unquantifiable the statute contemplates a fixed sum alternative. Precedent treatment: Tribunal examined whether the amount was quantifiable and whether the adjudicating authority erred in quantification. Interpretation and reasoning: Appellant admitted valuation of the shares (3,66,09,499 shares valued at INR 36,60,94,990) in respect of which para 9(1)(B) was contravened; therefore the 'sum involved' was properly quantifiable and the adjudicating authority's quantification was not erroneous. The statutory nominal alternative (Rs. 2,00,000) applies only when amount is not quantifiable. Ratio vs. Obiter: Ratio - where the monetary value of transactions in respect of which contraventions occurred is ascertainable, the sum involved may be used for penalty calculation; nominal fixed penalty applies only if amount is unquantifiable. Conclusion: Quantification of INR 36.60 crore as sum involved was justified; nominal penalty was inapplicable. Issue 6 - Reasonableness and proportionality of penalty; appellate reduction Legal framework: Adjudicating authority has discretion within statutory ceiling; appellate forum may re-evaluate proportionality considering nature, duration, conduct and impact. Precedent treatment: Tribunal balanced statutory ceiling (up to thrice the sum involved) against mitigating factors invoked by appellant (rectification, lack of unfair gain, company's financial stage, subsequent compliance) and authority's findings. Interpretation and reasoning: While contraventions were established and civil penalty was warranted, the Tribunal found mitigating factors and the overall conduct warranted reduction. Considering totality - nature of contraventions, lack of unfair gain, rectification steps and subsequent compliance - the Tribunal deemed substantial reduction appropriate to meet ends of justice. Ratio vs. Obiter: Ratio - appellate reduction of penalty is permissible where proportionality and mitigating circumstances justify it, even if contravention is established; imposition within statutory ceiling is not immune from proportionality review. Conclusion: Quantum of penalty imposed on the company reduced from Rs. 4,00,00,000 to Rs. 50,00,000; appeal partially allowed and adjudicating authority's order modified accordingly. Issue 7 - Liability of directors under Section 42(1) and disposition on appeal Legal framework: Section 42(1) deems directors responsible for company's contraventions in certain circumstances; adjudicating authority imposed token penalties on each director. Precedent treatment: Tribunal's order as recorded reduced company penalty but does not expressly modify directors' penalties in the text of final directions beyond general modification 'as above.' Interpretation and reasoning: The judgment affirms company liability and reduces the corporate penalty; text does not explicitly alter director-level penalties, while recording that company penalty is modified. Ratio vs. Obiter: Observational - directors were found liable under statutory provision; appellate order's explicit modification pertains to corporate penalty, with no express alteration of directors' individual penalties stated. Conclusion: Company penalty modified to Rs. 50,00,000; appeal partially allowed. Directors' penalties remain as recorded in the adjudicating authority's order unless otherwise specifically modified (no explicit modification recorded in the appellate order).