2025 (11) TMI 379 - AT - FEMA

Appellant held liable under s.3(b) and s.3(d) FEMA for diversion of duty-free silk yarn; penalty cut to Rs.6,00,000

M/s Amisha International Versus The Joint Director, Directorate of Enforcement, Bangalore

AT found the EOU diverted duty-free imported silk yarn to the domestic market and exported bricks and silk waste instead of declared powder-grade silk ... Non speaking Order - EOU indulged in fraudulently diverting the imported duty - free silk yarn to the domestic market and in exporting bricks and silk waste in place of the declared product ‘powder grade silk yarn’ - contravention of Section 3(b) of FEMA - Tribunal on the grounds of economic condition and poor health of the representative of the Appellant, completely waived off the pre-deposit of the penalty amounts - Held That:- It is obvious from the facts that there was misuse of being 100% EOU, which entitled the Appellant to receive duty free imports of silk yarn which in turn were diverted to the domestic market rather being put to use as input for the product to be exported so as to illegally make earnings available for enabling M/s Seven Star Trading Co., Ajman to remit proceeds against fraudulent trash exports, would have serious bearings for the contraventions under FEMA. Payment of the proceeds for exports of junk, from M/s Seven Star Trading Co., Ajman through banking channel necessitated acquisition of Foreign Exchange abroad by it. It thus follows that for the modus operandi to succeed the Appellant paid consideration to residents in India, for the Foreign Exchange acquired abroad. Hence, the Appellant becomes liable for the contraventions of both the Sections 3(b) and 3 (d) of FEMA. We take note of the Order of this Tribunal allowing complete waiver of the pre-deposit of the cumulative penalty amount of Rs. 12,00,000/- and the reasons thereof. We therefore reduce the cumulative penalty amount to Rs. 6,00,000/- comprising of Rs. 3,00,000/- for each of the contravention of Section 3(b) and 3(d) of FEMA. Thus, we partly allow the Appeal No. FPA-FE-02/BNG/2017. ISSUES PRESENTED AND CONSIDERED 1. Whether the Adjudicating Authority properly found contraventions of Section 3(b) and Section 3(d) of FEMA based on facts of diversion of duty-free imports, fraudulent exports and corresponding inward remittances. 2. Whether statements recorded by DRI (including retracted statements) and other materials from Customs/DRI proceedings could be relied upon in FEMA adjudication proceedings. 3. Whether the corrigendum to the complaint required issuance of a corrigendum to the Show Cause Notice (SCN) and whether the impugned order is a non-speaking order. 4. Whether foreign exchange or money acquired abroad qualifies as an 'asset' for the purposes of Section 3(d) of FEMA. 5. Whether interception of an export consignment (Shipping Bill No. 01073) prior to actual export precluded use of that consignment as material in establishing FEMA contraventions and calculating the amount involved. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability under Sections 3(b) and 3(d) of FEMA based on diversion of duty-free imports and fraudulent exports Legal framework: Section 3(b) prohibits making payments to/for credit of persons resident outside India in any manner in contravention of FEMA; Section 3(d) prohibits entering into financial transactions in India as consideration for or in association with acquisition/creation/transfer of a right to acquire any asset outside India. Adjudication standard: civil/adjudicatory standard (preponderance of probabilities) applies, not criminal standard. Precedent Treatment: Reliance on High Court reasoning (Vinod M. Chitalia) accepting that clandestine transactions may be proved on common-sense appraisal and that the burden in adjudication is less than criminal proof was followed. Interpretation and reasoning: The Tribunal accepted factual findings that duty-free imported silk yarn was diverted to the domestic market, cash receipts were admitted with no accounts maintained, and at least one intercepted export container contained bricks and textile waste instead of declared product. Those facts, together with admitted inward remittances and payments routed to persons in India to enable foreign counterparties to remit proceeds, form a consistent modus operandi: diverted inputs sold domestically generated proceeds paid to residents which were used to facilitate inward remittances from abroad in respect of fraudulent exports. The Court applied a 'robust and common sense' assessment appropriate to adjudication proceedings and concluded that the material establishes contraventions of both Sections 3(b) and 3(d). Ratio vs. Obiter: Ratio - the Tribunal's finding that diversion of duty-free imports combined with matching inward remittances and unauthorised outward transfers constitutes contravention of Sections 3(b) and 3(d) on preponderance of probabilities. Obiter - tactical observations about the illegality affecting 'serious bearings' for FEMA beyond Customs violations. Conclusion: The Tribunal upheld liability under Sections 3(b) and 3(d) based on the totality of documentary and physical evidence showing misuse of EOU benefits, diversion of imports, fraudulent exports and corresponding financial transactions. Issue 2 - Reliance on statements recorded by DRI (including retracted statements) and Customs/DRI materials in FEMA proceedings Legal framework: Statements recorded under the Customs Act/DRI have statutory sanctity and may be admissible; adjudicatory authorities must consider voluntariness and any subsequent retraction. Precedent Treatment: The Tribunal relied on Supreme Court authority (Vinod Solanki; K.T.M.S. Mohamed) and High Court reasoning to the effect that retracted confessions/statements can be used as corroborative evidence if substantially corroborated by independent and cogent material; mere retraction does not automatically render a statement involuntary. Interpretation and reasoning: The Tribunal found no material to show coercion or inducement in the recorded statements; even if retracted, the statements were corroborated by physical interception of the container, admissions about shipments, absence of accounting for cash sales, and other documentary evidence. The Tribunal also accepted that statements recorded under Customs/DRI proceedings relate to the same transactions and may be relied upon in FEMA adjudication, subject to assessment of voluntariness and corroboration. Ratio vs. Obiter: Ratio - DRI/Customs statements, including retracted ones, may be acted upon in FEMA proceedings if there is independent corroboration and no evidence of coercion; authorities must apply their mind to retraction. Obiter - procedural admonitions about recording reasons when acting upon retracted statements, drawn from precedents. Conclusion: Reliance on the DRI statements and related Customs materials in the FEMA adjudication was proper because those statements were corroborated by independent physical and documentary evidence and no coercion was shown. Issue 3 - Effect of corrigendum to complainant documents on the SCN and requirement for a speaking order Legal framework: SCNs must adequately inform noticees of allegations; corrigenda to pleadings/complaints may require corresponding clarity in the SCN where material alterations affect charges. Precedent Treatment: The Tribunal accepted the Adjudicating Authority's order as speaking and well-reasoned; it did not find a necessity to remit the SCN merely because a corrigendum to the complainant's documents was considered by the AA. Interpretation and reasoning: The Tribunal examined the Impugned Order and found it to be reasoned and to address relevant evidence (physical interception, admissions, diversion). Consideration of corrigendum by the AA did not render the SCN defective where the substance of allegations and supporting material were communicated and adjudicated upon. Ratio vs. Obiter: Ratio - an adjudicating order will not be invalidated for being non-speaking where the order contains adequate reasoning and addresses material evidence; corrective documents relied upon by the AA do not automatically necessitate a fresh SCN when the core allegations remain the same. Obiter - procedural best practice for issuing corrigenda was noted but not necessary to the decision. Conclusion: The Impugned Order was a speaking order; no separate corrigendum to the SCN was required given the AA's consideration and addressing of the evidence. Issue 4 - Whether foreign exchange/money qualifies as an 'asset' under Section 3(d) of FEMA Legal framework: Section 3(d) covers financial transactions in India as consideration for acquisition/creation/transfer of rights in assets outside India; definition of 'asset' must be applied sensibly. Precedent Treatment: The Tribunal endorsed reasoning in prior authorities (including High Court consideration) that money/foreign exchange constitutes an asset. Interpretation and reasoning: The Tribunal rejected the contention that money cannot be an asset, observing that money is the most liquid form of asset and convertible into other assets with minimal cost; acquisition of foreign exchange abroad therefore amounts to acquisition of an asset and falls within Section 3(d). Ratio vs. Obiter: Ratio - foreign exchange/money acquired abroad qualifies as an asset for the purposes of Section 3(d) and thus financial transactions in India made as consideration in relation to such acquisition can attract liability. Obiter - none significant beyond this clarification. Conclusion: The challenge that money is not an 'asset' under Section 3(d) was rejected; Section 3(d) liability on the facts stands. Issue 5 - Use of intercepted export consignment (Shipping Bill No. 01073) that was seized before reaching destination in establishing FEMA contraventions and amount involved Legal framework: Physical interception/seizure after shipment but before destination is material evidence of fraudulent export practices; relevance for establishing the chain of transactions and quantification of contraventions. Precedent Treatment: The Tribunal followed the logical approach that interception after shipment does not negate the intent and would-be effect of the fraudulent export had it not been intercepted. Interpretation and reasoning: The Tribunal held that the container was intercepted at Cochin Port after having been shipped for export; but for interception, fraudulent consignments would have reached foreign destination, thus the intercepted consignment is admissible and probative of the modus operandi and of the amounts involved in the contraventions. Ratio vs. Obiter: Ratio - interception of a shipped consignment prior to arrival at destination does not preclude its use as evidence of fraudulent export practice in FEMA adjudication and may be relied upon to determine amounts involved. Obiter - none beyond this application. Conclusion: The intercepted consignment could properly be taken into account in adjudicating FEMA contraventions and assessing corresponding amounts. Penalty and Outcome (connected to Issues 1-5) Reasoning: Having upheld contraventions on the preponderance of evidence and having considered mitigating factual circumstances (economic/health matters previously addressed as to pre-deposit), the Tribunal exercised its remedial power to reduce the cumulative penalty while affirming liability. Conclusion: Liability under Sections 3(b) and 3(d) of FEMA affirmed on the facts; cumulative penalty reduced (quantum exercise specific to the facts) - Appeal partly allowed to that extent.