2025 (10) TMI 1040 - AT - FEMA

Appeal dismissed; penalty under Section 13(1) FEMA upheld as reasonable and within discretionary limits despite being below statutory maximum

Union of India Versus M/s. KPH Dream Cricket Pvt. Ltd. & Anr.

The AT dismissed the appeal and upheld the Adjudicating Authority's penalty under Section 13(1) of FEMA, finding the imposed penalty-though below the ... Enhancement of penalty - penalty imposed by the Adjudicating Authority is low and is not proportionate to the quantified amounts of contravention - scope of provisions of Section 13(1) of FEMA which provides for imposition of penalty up to thrice the sum involved in the contraventions. HELD THAT:- The question as to when a penalty is to be regarded as either low or high is at best answered subjectively. In the facts and circumstances of the present case, it is seen that the Adjudicating Authority has not only taken notice of the facts of the case, but also has evaluated the evidence on record. In any case, there is no such requirement under the statute as to impose maximum penalty. The reading of the Adjudication Order, therefore, reflects objectivity and judiciousness on the part of the Adjudicating Authority. As decided in State of MP and Ors. Vs. Bharat Heavy Electricals [1997 (8) TMI 252 - SUPREME COURT] in its order held that in a statute prescribing the provision for penalty equal to ten times the amount of entry tax, the statute prescribed only a maximum limit and did not prescribe an irreducible amount depriving the assessing authority of any discretion in this regard. The stand of the State in the case supra conceded that the assessing authorities are not bound to levy fixed penalty equal to ten times the amount of entry tax. In fact, in the present case the statute (FEMA) itself provides for a penalty up to thrice the sum involved in such contravention and thereby gives explicit scope to the Adjudicating Authority to exercise its discretion, albeit judiciously, for imposition of penalty. In view of the Appeal having failed to bring out the reasons that why the penalty imposed is low and as to how the Adjudicating Authority has not exercised its discretion judiciously, we observe that the order of the Adjudicating Authority cannot be interfered with. In view of the aforementioned discussions and observations, the Appeal fails and is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Adjudicating Authority erred in law by exercising its discretion to impose the impugned penalties at the levels imposed rather than enhancing them up to the statutory maximum under Section 13(1) of FEMA. 2. Whether the Adjudicating Authority acted arbitrarily in 'clubbing' two alleged contraventions arising from the same transaction (delay in reporting FDI and issuance of shares without fair valuation) for the purpose of imposing a single penalty on the company and a separate penalty on its director. 3. Whether the contraventions complained of were 'technical' or 'sensitive/material' - specifically (a) delay in reporting FDI (one and a half year delay) and (b) issuance of 10,000 shares at par instead of at fair value - and whether that classification required a harsher penalty. 4. Whether the Appeal was maintainable and whether the Adjudicating Authority followed the required procedure and provided adequate reasons in the Impugned Order. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Discretion under Section 13(1) FEMA: quantum of penalty and scope of appellate interference Legal framework: Section 13(1) of FEMA authorises imposition, upon adjudication, of penalty up to thrice the sum involved where the amount is quantifiable (or up to Rs. 2 lakh where not quantifiable), and further daily penalties for continuing contraventions. Precedent Treatment: The Tribunal relied on authoritative precedent holding that a statutory ceiling for penalty is not a mandatory quantum to be imposed; the maximum is a limit and does not oust adjudicatory discretion to fix a lower amount. Interpretation and reasoning: The statutory language confers discretion to the Adjudicating Authority to assess and impose an appropriate penalty up to the maximum. The Tribunal examined the Impugned Order and found it to be reasoned and speaking, showing evaluation of facts and evidence. No statute prescribes a minimum or fixed penalty; therefore, mere assertion that the Adjudicating Authority did not impose the maximum does not, by itself, establish error. Ratio vs. Obiter: Ratio - Where a statute prescribes a maximum penalty but not a minimum, the adjudicatory authority retains judicial discretion to impose a proportionate penalty based on facts; appellate interference requires demonstration of arbitrary or indiscriminate exercise. Conclusions: The Adjudicating Authority did not err in law in fixing the penalties at the amounts imposed; absent clear demonstration of irrationality, the Tribunal will not enhance the penalty merely because the State sought a higher figure within the statutory ceiling. Issue 2 - Clubbing of contraventions arising from same transaction and alleged arbitrariness Legal framework: Adjudicatory discretion in determining penalties for contraventions occurring in or arising out of the same transaction; principles of proportionality and reasoned decision-making govern assessment of whether contraventions may be treated together. Precedent Treatment: The Adjudicating Authority and the Tribunal applied standard administrative-law principles requiring reasoned appreciation of facts; no precedent was overruled or distinguished beyond reliance on general principles of discretion and proportionality. Interpretation and reasoning: The Tribunal found that both contraventions - delayed reporting of FDI and issuance of shares at incorrect valuation - arose in the course of the same transaction and that the Adjudicating Authority addressed material distinctions (quantum, timing, and materiality) in the Impugned Order. The Tribunal noted that the large majority of shares were issued at fair value and that only a small tranche (10,000 shares) had valuation variance resulting in a quantifiable shortfall of Rs. 1,50,000. Given the relative magnitudes (Rs. 1.5 lakh versus over Rs. 5.12 crore involved in late-reported remittances), the Adjudicating Authority's treatment was not shown to be arbitrary. Ratio vs. Obiter: Ratio - Clustering of related contraventions for assessment of penalty is permissible where the authority records reasons and evaluates material distinctions; arbitrariness cannot be inferred merely because separate heads of contravention exist. Conclusions: Clubbing of the contraventions and fixation of the impugned penalties was not arbitrary; the adjudicatory exercise displayed objectivity and reasoned appreciation of relative culpability and quantums involved. Issue 3 - Classification of contraventions as technical versus sensitive/material; assessment of materiality of delay and valuation breach Legal framework: Distinctions between technical and material/sensitive contraventions inform proportional penalty assessment; factors include delay length, magnitude of sum involved, and substantive prejudice to regulatory objectives (e.g., honesty of reporting, fair valuation in FDI). Precedent Treatment: The Adjudicating Authority addressed the technical-versus-sensitive distinction in its reasoned order; the Tribunal accepted that framework and evaluated the facts against it. The Tribunal cited the established principle that discretion must be exercised judiciously in light of the nature and consequences of contraventions. Interpretation and reasoning: The Tribunal accepted the Adjudicating Authority's factual findings: (a) foreign remittances were received in three tranches (Apr-Jun 2008) and reported in Form FC-GPR only on 30.09.2009 with CA certificate in Jan 2010 - a delay of about one and a half years; (b) 4,47,700 shares were issued at fair valuation on 30.06.2008 whereas 10,000 shares issued on 08.05.2008 were issued at Rs. 10 instead of the fair value of Rs. 25, producing an incorrect issuance amounting to Rs. 1,50,000. The Tribunal treated the delay as not sufficiently prejudicial to warrant an enhanced penalty beyond the reasoned quantum fixed, and treated the valuation breach as minor in proportion to the total funds involved. Ratio vs. Obiter: Ratio - Materiality assessment is fact-specific; a short-term or limited-amount valuation error forming a small percentage of the total contravention may be treated as less severe, and does not automatically convert the overall transaction into a highly sensitive breach mandating maximum penalty. Conclusions: The contraventions were properly classified for penalty purposes; the delay and the small valuation shortfall did not, on the facts, justify enhancement of penalty to the statutory maximum. Issue 4 - Maintainability and procedural adequacy of the Impugned Order Legal framework: Adjudicatory process under FEMA requires issuance of show-cause notice, consideration of replies, and reasoned adjudication; appeals require maintainability under statutory scheme and cannot be dismissed absent proper consideration. Precedent Treatment: The Tribunal noted the Respondents' maintainability objection but proceeded to consider merits; it required adequate reasons and procedure to be followed by the Adjudicating Authority. Interpretation and reasoning: The Tribunal examined the record and found the Impugned Order to be issuing after due procedure, addressing the show-cause material, and providing elaborate reasons for findings of contravention and for the quantum of penalty. Payment of penalties was recorded by way of DDs. No specific statutory bar to maintainability was identified by the Appellant that invalidated appellate review. Ratio vs. Obiter: Ratio - An appeal may be entertained where procedural requirements have been observed and where the Impugned Order contains reasoned findings; mere assertion of non-maintainability without statutory basis is insufficient. Conclusions: The Appeal was maintainable for adjudication on merits; procedural requirements were satisfied and the Impugned Order contained adequate reasoning, thus barring interference on maintainability grounds. Cross-references and final synthesis All issues converge on the central administrative-law principle that where a statute prescribes a maximum penalty but not a mandatory quantum, the adjudicating authority must exercise discretion judiciously, with reasons and proportionality. The Tribunal found that the Adjudicating Authority did so: it evaluated material distinctions between the contraventions, quantified the relative shortfall, and imposed proportionate penalties. Absent demonstration of arbitrariness or illegality in reasoning, appellate enhancement of penalty is unwarranted.