2025 (11) TMI 1105 - AT - FEMA

Electronic evidence proves hawala and under-valued imports; penalties reduced, principal liable under s.3(b) FEMA; two directors exonerated under s.42 FEMA

Dr. C. Manoharan, M/s Nitish Tools Pvt. Ltd., Smt. M. Thenmozhi and Smt. C. Lakshmi Versus The Special Director, Directorate of Enforcement, Chennai

AT upheld findings that electronic evidence and statements established hawala payments and under-valuation of imports, rejecting subsequent retractions. ... Under valuation of cemented carbide tips, carbide inserts and hollow drill rods imported from China - difference between the actual price and the value declared to Customs, paid to the exporter through Hawala - Imposition of penalty - contravention of Section 3(b) of FEMA read with Section 42 of FEMA - retracted statements - non-compliance to the provisions of Section 138 (C) of the Customs Act 1962 by the DRI Officers and non-adherence of the provisions of Section 65 B of the Evidence Act by the FEMA Authorities - HELD THAT:- On perusal of the records, it is obvious that detailed investigation has been conducted not only under one Act and by one Agency, but investigations entailed by the statutory provisions of other Acts have also revealed incriminating materials and details. It is also pertinent to cite the following Judgments, so as to demonstrate that mere retraction cannot lead to the rejection of the statements voluntarily tendered under various statutes, which have provisions to hold such statements admissible. The Hon’ble Supreme Court in the case of Vinod Solanki Vs Union of India [2008 (12) TMI 31 - SUPREME COURT] has laid down the situations where the retracted statement of the Noticee can be relied upon. The documents recovered from the seized electronic devices have repeatedly been admitted in several statements tendered by Shri C Manoharan. Smt. M. Thenmozhi has not contradicted the statements of Shri C Manoharan. The retractions filed by them subsequently have been without any basis and rejected by us after due consideration. It is also necessary to mention that the application of Section 138 (C) of the Customs Act to these proceedings are doubtful. Moreover, as on today the Adjudication Proceedings under the Customs Act have been decided against the Appellants. Their Appeals before the CESTAT are still pending. Their attempt to get relief by approaching the Settlement Commission has failed. Obtaining the recovered material from the electronic devices through DRI, needs to only meet the provisions of Section 39 of FEMA for the present proceedings. In the facts and circumstances in the present case, we find that such material has been seized from the custody and control of Shri C Manoharan under the provisions of Customs Act, which fulfils the requirements of Section 39 (i) of FEMA. These documents have been introduced in evidence in the Adjudication Proceedings conducted under FEMA. Thus, the requirement of Section 39(b) of FEMA is met. Under such circumstances the Judgments cited by the Appellants in the context of the Customs Act and other Acts would not have applicability. We therefore find that the Appellant Shri C Manoharan, who actually indulged in Hawala Operations for illegal monetary gains is liable for the contravention of Section 3(b) of FEMA. Since, Shri C Manoharan indulged in these transactions, while under valuing the imports made for the Appellant M/s NTPL and the Non-Appellant M/s SSE, the Appellant M/s NTPL is also liable for the contravention of Section 3(b) of FEMA. We believe that the ends of justice will be met with the reduction of penalty under FEMA to Rs. 20,00,000/- on Shri C Manoharan. The pre-deposit made by Shri Manoharan shall be adjusted against the reduced penalty of Rs. 20,00,000/- on him. We also reduce the penalty on the Appellant M/s NTPL to Rs. 15,00,000/- which shall meet the ends of justice in view of the circumstances described afore. We find that it is on record that the other two Appellants Smt. M Thenmozhi and Smt. C Lakshmi have not indulged in the Hawala Operations. They in their statements have categorically stated that all the matters relating to M/s NTPL including transfer of funds was being handled by Shri C Manoharan. We also note that both of them were Directors, who had no say in running the affairs of M/s NTPL. There is nothing contrary which has been produced before us. We therefore find that even the case against them under Section 42 of FEMA fails. Thus, they are not liable to pay any penalty. Thus, we partly allow the Appeals filed by Dr. C. Manoharan and filed by M/s Nitish Tools Pvt. Ltd. We allow the Appeals filed by Smt. M. Thenmozhi, and filed by Smt. C. Lakshmi. Applications pending, if any, are disposed of accordingly. ISSUES PRESENTED AND CONSIDERED 1. Whether documents and electronic material seized and analyzed by the Directorate of Revenue Intelligence (DRI) under the Customs Act can be relied upon in adjudication proceedings under the Foreign Exchange Management Act (FEMA). 2. Whether statements recorded under the Customs Act, PMLA and FEMA, including statements later retracted, are admissible and can constitute reliable evidence in FEMA adjudication proceedings. 3. Whether non-compliance with procedural safeguards under the Customs Act (Section 138C) and the Indian Evidence Act (Section 65B) precludes reliance on electronic evidence recovered from seized electronic devices in FEMA proceedings. 4. Whether the material on record establishes contravention of Section 3(b) of FEMA by the principal accused and by the corporate entity, and the extent of monetary contravention. 5. Whether the two director-appellants who disclaimed involvement are liable under Section 42 of FEMA. 6. Whether the quantum of penalty imposed should be sustained or reduced in the exercise of adjudicatory discretion. ISSUE-WISE DETAILED ANALYSIS Issue 1: Reliance on DRI/Customs evidence in FEMA proceedings Legal framework: FEMA contains a self-contained adjudicatory scheme and includes Section 39 which presumes authenticity and, in certain cases, the truth of documents produced or seized under FEMA or any other law when tendered in proceedings under FEMA. Rule 4 of the FEMA Adjudication Rules prescribes inquiry procedure and permits the adjudicating authority to take evidence without strict adherence to the Indian Evidence Act. Precedent treatment: The Court considered authorities holding that statements and documents obtained under Customs/DRI can be used in FEMA proceedings where they relate to the same transactions; earlier judgments disallowing cross-use of material were distinguished based on the presence of independent FEMA inquiries and statutory presumptions. Interpretation and reasoning: The Court found investigations had been conducted under FEMA (statements under Section 37 recorded) and that seized electronic documents were taken from the custody and control of the respondent whose devices were examined in the presence of the respondent and witnesses. Section 39(i) and (ii) of FEMA were held to be satisfied, enabling the presumption in favour of authenticity and admissibility. The Court held that FEMA's self-contained code and statutory presumptions mean that material seized under other laws can be admitted in FEMA adjudication when requisites of Section 39 are met. Ratio vs. Obiter: Ratio - Section 39 of FEMA permits admission and presumptions as to documents seized under other laws when produced in FEMA proceedings; therefore reliance on DRI/Customs material was permissible where requirements are met. Obiter - comments distinguishing particular earlier authorities on factual grounds. Conclusion: The DRI/Customs evidence and documents recovered from seized devices were admissible and properly relied upon in the FEMA adjudication. Issue 2: Reliance on statements recorded under various statutes and effect of retraction Legal framework: Statements recorded under Section 108 of the Customs Act, Section 37 of FEMA and statements under PMLA/other statutes; legal propositions on voluntariness, retraction and corroboration; standard of proof in adjudication (preponderance of probabilities) as distinct from criminal standard. Precedent treatment: The Court reviewed authorities holding that retracted statements are not ipso facto inadmissible but require substantial corroboration by independent evidence before being relied upon; reliance on decisions recognizing admissibility of statements recorded under Customs Act for related proceedings. Interpretation and reasoning: The Court found repeated, consistent admissions by the principal accused across multiple statutes and dates, corroborated by independent documentary material recovered from electronic devices, bank analysis, third-party statements and commercial records. Retraction was given little weight because statements had been reiterated on multiple occasions and because the alleged coercion/duress was not substantiated. The Court applied the principle that in adjudicatory proceedings the proof required is on preponderance and clandestine transactions may be within peculiar knowledge of parties, so strict criminal standards are inapposite. Ratio vs. Obiter: Ratio - Retracted statements may be relied upon in adjudication if substantially corroborated by independent and cogent evidence; retraction alone does not render a statement involuntary. Obiter - observations on the scope of clandestine transactions and the burden of proof in administrative adjudication. Conclusion: Statements recorded under Customs, FEMA and PMLA, including those initially retracted but repeatedly reaffirmed and corroborated by independent material, were competent and admissible for establishing the contravention under FEMA. Issue 3: Effect of alleged non-compliance with Section 138C (Customs) and Section 65B (Evidence Act) on admissibility of electronic evidence Legal framework: Section 138C Customs prescribes mahazar and other procedures for seizure; Section 65B Evidence Act governs admissibility of electronic records; FEMA's Section 39 grants presumptions about documents seized under other laws. Precedent treatment: Authorities were cited by appellants to challenge electronic evidence where statutory procedures were not strictly followed; Court distinguished those precedents on facts and on application of Section 39 FEMA. Interpretation and reasoning: The Court observed that DRI examined and seized devices in the presence of the principal accused and independent witnesses under mahazar proceedings and that seized electronic documents were repeatedly admitted by the accused in his statements. Given the custody and control of the devices by the accused and satisfaction of Section 39(i), the Court found Section 65B objections and Section 138C applicability to be doubtful as a bar in the present FEMA proceedings. FEMA's self-contained adjudicatory regime and the statutory presumption in Section 39 obviated the inapplicability arguments advanced. Ratio vs. Obiter: Ratio - Non-compliance with certain procedural safeguards under other statutes does not automatically exclude electronic evidence in FEMA proceedings where Section 39 conditions are met and custody/control of devices plus corroboration exist. Obiter - detailed comparative discussion of procedural compliance in seizures under Customs. Conclusion: The electronic material recovered from the seized devices was admissible in the FEMA adjudication despite the appellants' objections regarding Section 138C and Section 65B, because Section 39 FEMA and the factual circumstances supported reliance on those documents. Issue 4: Establishing contravention of Section 3(b) of FEMA and quantification Legal framework: Section 3(b) prohibits making any payment to or for the credit of a person resident outside India in any manner except as permitted; liability under Section 13 for contraventions. Precedent treatment: The Court applied prior decisions indicating that clandestine or hawala remittances evidencing payments to overseas persons without lawful consideration constitute contraventions under Section 3(b), assessed on a preponderance standard. Interpretation and reasoning: The Court accepted the factual matrix showing under-valuation of imports, fabrication of invoices, bifurcated payment terms, banking records, hawala receipts and email correspondence. The principal accused's admissions about routing differential payments through an agent (hawala) and documentary corroboration (two sets of invoices, TT acknowledgments, bank analysis, third-party confirmations) led to the finding that payments were made to the credit of overseas suppliers by channels other than banking, amounting to specific quantified contraventions. The adjudicating authority and appellate Tribunal treated the evidence as sufficient to attribute specified monetary extents to the principal and the corporate importer. Ratio vs. Obiter: Ratio - The combination of admissions, documentary evidence from seized devices, bank analysis and third-party records on a preponderance standard suffices to establish contravention of Section 3(b) and to quantify the extent of contravention. Obiter - remarks on market dynamics and suppliers' complicity in issuing parallel invoices. Conclusion: The material established contraventions of Section 3(b) to the quantified extents against the principal and the corporate entity; both were held liable though the quantum of penalty was addressed separately. Issue 5: Liability of non-executive directors under Section 42 of FEMA Legal framework: Section 42 addresses liability of officers/agents/certain persons for contraventions when contravention was committed by a company and the person was in charge of, or responsible for, the conduct of business. Precedent treatment: The Court considered principles that mere directorship without active participation or control does not attract liability absent evidence of involvement. Interpretation and reasoning: The two director-appellants consistently stated matters relating to the business and fund transfers were handled by the principal accused; records did not show their active involvement or control. No independent evidence contradicted their disclaimers. The Court found absence of material to establish that they participated in hawala operations or were responsible for the contraventions. Ratio vs. Obiter: Ratio - Directors who credibly demonstrate lack of involvement in the conduct of the contravening activities are not liable under Section 42. Obiter - procedural observations about burden to prove control and involvement. Conclusion: The claims under Section 42 against the two director-appellants failed and penalties were quashed for them. Issue 6: Quantum of penalty and exercise of discretion Legal framework: Section 13 of FEMA empowers adjudicating authorities to impose penalties appropriate to the contravention; appellate authorities have power to modify penalties in the interests of justice. Precedent treatment: The Court cited principles allowing reduction of penalties where ends of justice and equities warrant, including consideration of pre-deposits and the economic viability of the corporate appellant. Interpretation and reasoning: Although finding substantial monetary contraventions, the Court exercised discretion to reduce penalties significantly in view of circumstances: closure and economic non-viability of the corporate appellant, quantum of pre-deposits, and fairness. The principal's penalty was reduced to a modest sum with adjustment of the bank guarantee; the corporate appellant's penalty was reduced to a higher but limited sum; corporate directors were absolved. Ratio vs. Obiter: Ratio - Appellate authority may reduce penalty imposed under FEMA where justifiable circumstances exist, taking into account fairness, pre-deposits and viability. Obiter - specifics of mitigation rationale. Conclusion: Penalties were substantially reduced for the principal and the corporate appellant; director penalties were set aside.