2025 (11) TMI 1034 - AT - FEMA

Penalty reduced to Rs.10,00,000 for FEMA contraventions under Section 8 and Section 13(1) after partial appeal allowed

Shri M. Lakshmi Chand Jain Versus The Joint Director, Directorate of Enforcement, Bangalore

The AT upheld findings that the appellant evaded customs duty and improperly netted export receivables against import payables without using an Authorised ... Levy of penalty - Non realization (receipt) of Value of commission in foreign exchange - Setting-off the commission receivable against the import payables for the goods imported - Application for waiver of the pre-deposit of the penalty - contravention of Section 8 of the FEMA read with Regulation 3 of FEMA, 2000 - HELD THAT:- The copies of the Order-in-Original dated 12.12.2011, issued by the Additional Commissioner of Customs, Headquarters, Bangalore and Final Order No. 11/2012-CUS dated 01.05.2012 of the Customs and Central Excise Settlement Commission, Chennai are on record. These Orders corroborate the fact that the Customs Duty were evaded by the Appellant. We therefore reject the contention of the Appellant that the netting off the import payables by the export receivables was mere procedural lapse. The perusal of the RBI Circular No. 47 dated 17.11.2011 clearly brings out that the Authority to deal with the cases of “set-off” of export receivables against import payables was delegated by the RBI to the Authorised Dealer Banks of Category-I only. There is no provision as to permit the importers/exporters to do the set off on their own. Moreover, we are not satisfied that the conditions mentioned in the Circular were met by the Appellant, in view of its mis-declarations of the value of the imported goods to the Customs Authority. The present appeal deals with provisions which are strictly civil obligations and penalty for the contraventions of these provisions are imposable under Section 13(1) of FEMA which provides for penalty only, up to thrice the sum involved in such contravention. We do find that the prayer of the Appellant to make the penalty commensurate to offences involved has merit in it. We also note that the Appellant has already been laden with certain liabilities under the Customs Act, 1962. We therefore reduce the penalty to Rs. 10,00,000/- on the Appellant. The pre-deposit of the penalty amount made by the Appellant shall be adjusted against the reduced penalty. We partly allow the Appeal filed by Shri M. Lakshmi Chand Jain. ISSUES PRESENTED AND CONSIDERED 1. Whether the practice of 'netting off' commission receivables abroad against import payables without obtaining Reserve Bank of India (RBI) permission contravenes Section 8 of FEMA and Regulation 3 of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000. 2. Whether the RBI A.P. (DIR Series) Circular No. 47/17.11.2011 (delegating 'set-off' approval powers to AD Category-I banks subject to conditions) validates or renders the unpermitted self-help 'set-off' by an importer/exporter a mere procedural lapse. 3. Whether mens rea is a necessary element for adjudicating penalty under FEMA Section 13(1), and if not, the appropriate quantum of penalty in the facts of the case. 4. Whether dishonest or evasive conduct before Customs (suppressed declared values leading to evasion of customs duty) bears on the characterization of the FEMA contravention and on the assessment of bona fides. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Netting off commission without RBI permission: Legal framework Legal framework: Section 8 of FEMA requires a person resident in India to take all reasonable steps to realize and repatriate foreign exchange due to him; Regulation 3 of the Realisation/ Repatriation Regulations places the onus to realize and repatriate foreign exchange and prohibits acts that delay or prevent receipt. Section 13(1) prescribes penalty up to thrice the sum involved for contraventions. Precedent treatment: The Tribunal relied on FEMA provisions and related jurisprudence distinguishing civil penalty regimes (no mens rea requirement) in analogous contexts (as discussed in Issue 3). Interpretation and reasoning: The Tribunal found as an admitted fact that foreign-exchange equivalent to the specified sum accrued to the person as commission and was netted off against import payables without RBI permission. The Regulations and Section 8 impose an affirmative duty to realize and repatriate foreign exchange or obtain RBI permission for any departure. Unilateral netting off by the resident affects repatriation and indexing of foreign-exchange flows central to monetary policy and was contrary to the objectives of FEMA and its regulatory regime. Ratio vs. Obiter: Ratio - Unauthorised self-netting off of export receivables against import payables, when RBI permission or adherence to delegated AD bank procedures is required, constitutes contravention of Section 8 and Regulation 3. Conclusion: The practice of netting off commission without obtaining RBI permission violated Section 8 and Regulation 3 and therefore constituted a contravention attracting adjudicatory consequences under FEMA. Issue 2 - Effect of RBI Circular No. 47 (17.11.2011) on the characterization of the contravention Legal framework: RBI Circular delegates power to AD Category-I banks to deal with set-off of export receivables against import payables subject to specified conditions; the Circular contemplates compliance via AD banks and remains without prejudice to other law. Precedent treatment: The Circular was considered by the Tribunal but treated as an administrative scheme delegating authority to banks, not as conferring a right on parties to self-execute set-offs without following the specified process. Interpretation and reasoning: The Circular requires AD banks to assess and ensure fulfillment of conditions (e.g., export/import documents, same overseas buyer/supplier consent, reporting in 'R' returns). It does not empower importers/exporters to effectuate set-off unilaterally. The Tribunal was not satisfied that the Circular's conditions were met (particularly given mis-declarations to Customs and absence of AD bank involvement). Consequently, the Circular could not transform the admitted absence of RBI/AD bank authorization into a mere procedural lapse. Ratio vs. Obiter: Ratio - Compliance with the Circular requires formal engagement of AD Category-I banks and satisfaction of enumerated conditions; failure to obtain such institutional approval is not cured by the Circular and remains a substantive contravention. Conclusion: The Circular does not validate unilateral netting off; the contravention could not be characterized as mere procedural lapse where AD bank procedures and conditions were not followed. Issue 3 - Mens rea and imposition/quantum of penalty under Section 13(1) of FEMA Legal framework: Section 13(1) prescribes penalty up to thrice the sum involved for quantifiable contraventions; the provision does not mention willful or intentional conduct. Precedent treatment: The Tribunal relied on Supreme Court authority holding that, for civil penalty regimes of similar statutory schemes, mens rea is not required; breach attracting penalty is established upon proof of contravention unless statute indicates otherwise. Interpretation and reasoning: The Tribunal noted absence of mens rea language in Section 13(1) and followed authoritative precedent that penalties under civil regulatory schemes can be imposed irrespective of intention. However, sentencing/quantum may consider mitigating factors (e.g., concurrent liabilities under other statutes, bona fide contentions) although the liability to penalty remains once contravention is established. Ratio vs. Obiter: Ratio - Mens rea is not an essential element for imposing penalty under Section 13(1); proof of contravention suffices to attract penalty subject to adjudicatory discretion on quantum. Conclusion: Penalty may be imposed despite absence of deliberate intention; nevertheless, the Tribunal reduced the penalty from the originally imposed sum to a lower amount after exercising discretion in view of mitigating factors and existing liabilities under Customs law. Issue 4 - Relevance of customs mis-declaration and bona fides Legal framework: FEMA obligations operate alongside other statutory regimes (Customs Act), and conduct under one statute may inform findings of bona fides and aggravation/mitigation under FEMA adjudication. Precedent treatment: The Tribunal referred to concurrent orders of Customs authorities establishing evasion and treated such findings as corroborative of improper practice. Interpretation and reasoning: The Tribunal found that suppression of import values before Customs and orders confirming customs duty evasion undermined the appellant's claim of mere procedural lapse or bona fide inadvertence. Such deceptive declarations indicated substantive impropriety and militated against finding mere technicality. Ratio vs. Obiter: Ratio - Proven mis-declarations to Customs bearing on the same transactions are relevant in assessing the nature of FEMA contraventions and preclude characterization as purely procedural lapses. Conclusion: Customs findings of evasion supported the Tribunal's view that the netting off was not a mere inadvertent procedural omission but part of conduct inconsistent with bona fides, reinforcing the finding of contravention under FEMA. Remedial and Dispositional Conclusions The Tribunal held there was contravention of Section 8 read with Regulation 3 and imposed penalty powers under Section 13(1). Exercising discretion in quantum and considering mitigating facts including existing Customs liabilities, the Tribunal reduced the penalty originally imposed to a lesser amount and adjusted the pre-deposit accordingly. The appeal was partly allowed to that limited extent.