2025 (12) TMI 107 - AT - FEMA

Firm Penalised Under Section 10(6) FEMA for Lapses in Remittance Due Diligence; Penalty Reduced, Deceased Appellant Exonerated

AT held the appellant firm liable for contravention of Section 10(6) FEMA read with Regulation 6(1) of the 2000 Regulations, noting failure to exercise ... Remittance abroad - import of copper wire scrap - empty containers with forged pre-shipment inspection report - failed to surrender the Foreign Exchange to the Authorised Dealer - contravention of Section 10 (6) of the Foreign Exchange Management Act, 1999 (FEMA) - condition of the pre-deposit of penalty - instead of getting the fixed deposit in the name of the Respondent Directorate, it was made in the name of one of the Appellant - reduction in penalty - Penalty imposed upon the Appellant on the aforementioned contravention read with Section 42 (1) of FEMA - HELD THAT:- While it is true that M/s Koya International in Sierra Leone sent empty containers with forged pre-shipment inspection report, it cannot be ignored that the Appellant firm had sold the consignment supposedly of copper wire scrap to M/s Maruti Metal Industries on High Sea Sale Basis. It therefore appears that the Appellant firm had mitigated its losses even before the empty containers reached the Indian shore. It is also observed that the terms of the transactions were such as to allow the entire remittance to be made abroad even before the consignment had reached the Indian Port. The person deputed to Sierra Leone was one Shri Kailash Upadhaya from M/s Jams Exim Pvt. Ltd. None of the partners of the Firm travelled to get the amount remitted back. It has also been observed in the Final Order of this Tribunal [2024 (12) TMI 1311 - APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI] that, “We do not find serious efforts to recover the amount from M/s Koya International, rather for that, the appellant should have lodged the claim to recover the amount through Court of Law. The appellant failed to do so.” We therefore find that the Appellant firm is liable for imposition of penalty. If in case the Respondent Directorate is in position to encash the FDRs, then the same shall be adjusted towards the penalty. We are of the view that on one hand the Appellant firm failed to exercise due diligence in entering the aforementioned transaction and in making serious efforts to realise the remittances sent abroad, on the other hand the firm does appear to have been cheated. Therefore, the firm did contravene the provisions of Section 10 (6) of FEMA read with paragraph 6 (1) of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulation, 2000. However, as pleaded, the reduction in penalty, which is 25% of the penalty imposed under the Impugned Order, will meet the ends of justice. The pre-deposit of penalty in the form of FDRs in the name of Shri Madhu Sudan Jhanwar, received by the Directorate of Enforcement, if realizable shall be adjusted towards the reduced penalty. We also find that the demised Appellant Shri Natwarlal Jhanwar is in the same position as the Appellant Shri Madhu Sudan Jhanwar in Appeal No. FPA-FE-121/MUM/2010 which was disposed of by this Tribunal through its Final Order [2024 (12) TMI 1311 - APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI] in which the penalty imposed vide the Impugned Order was set aside. We therefore set aside the penalty on Late Shri Natwarlal Jhanwar, being represented through his LR. We partly allow the Appeal No. FPA-FE-118/MUM/2010 filed by M/s G. Tex Inc. and we allow the Appeal No. FPA-FE-120/MUM/2010 filed by Late Shri Natwarlal Jhanwar. ISSUES PRESENTED AND CONSIDERED 1. Whether the remittance of foreign exchange abroad for purported import of goods that never arrived constitutes contravention of Section 10(6) of FEMA read with paragraph 6(1) of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulation, 2000. 2. Whether the trading firm and/or specified individual(s) are liable for penalty for such contravention - specifically, liability of the firm that arranged the remittance and liability of persons 'in-charge' or responsible for conduct of business. 3. Whether mitigation of penalty is warranted having regard to (a) efforts made to recover the remitted amount abroad, (b) the fact the consignment was sold on 'High Seas Sale Basis' prior to arrival, and (c) evidence of fraud by the overseas consignor. 4. Whether a penalty imposed on a deceased appellant (represented by legal representatives) should be sustained or set aside when those legal representatives were belatedly brought on record. 5. Whether belated compliance with a pre-deposit direction (including deposit in form of fixed deposit receipts/FDRs) and subsequent restoration of appeal justifies adjustment/reduction of penalty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Contravention under Section 10(6) FEMA and paragraph 6(1) RRR Regulations Legal framework: Section 10(6) of FEMA prohibits contraventions relating to dealings in foreign exchange/foreign security and payments without required compliances; paragraph 6(1) of the RRR Regulations governs realisation/repatriation/surrender of foreign exchange and prescribes obligations where imports do not materialise. Precedent treatment: The Tribunal relied on its earlier Final Order (26.11.2024) in related matters to assess similar facts; no authority was overruled or distinguished. Interpretation and reasoning: The Tribunal found indisputable fact that US$6,56,000 was remitted though the imported copper wire scrap never arrived; regardless of forged inspection certificates and fraud by the foreign seller, the firm permitted remittance before goods reached port and therefore failed regulatory safeguards. The Tribunal applied the statutory/regulatory provisions literally to hold that non-arrival of goods coupled with remittance abroad amounted to contravention. Ratio vs. Obiter: Ratio - remittance abroad prior to due realisation and without effective safeguards when imports do not occur constitutes contravention of Section 10(6) FEMA read with paragraph 6(1) RRR Regulations. Obiter - observations on the nature of forged documents and foreign fraud as factual aggravation/mitigating context. Conclusion: The firm contravened Section 10(6) FEMA read with paragraph 6(1) RRR Regulations. Issue 2 - Liability of the Firm versus Individuals 'In-Charge' Legal framework: Penalty provisions attach to entities responsible for contraventions and may extend to persons in charge of, or responsible for, conduct of business per Section 42(1) FEMA (as applied in the Impugned Order). Precedent treatment: The Tribunal applied its prior assessment in related appeals to distinguish persons who undertook active control from those not responsible for business conduct. Interpretation and reasoning: The Tribunal examined conduct: the firm authorised remittance and did not demonstrate that partners personally undertook recovery steps abroad; a broker's representative (not the firm's partners) was deputed; the firm sold goods on High Seas Sale Basis before arrival, suggesting partial mitigation but not negating responsibility. For the deceased appellant, the Tribunal held that his role mirrored another appellant whose penalty was previously set aside on finding no responsibility for conduct of business or making remittance. Ratio vs. Obiter: Ratio - firm-level liability established where the firm authorised remittance and failed due diligence; Ratio - individual liability requires proof of being in-charge/responsible for the act of remittance; Obiter - commentary on appropriateness of deputing non-partner agents to pursue recovery abroad. Conclusion: The firm is liable; persons not shown to be in-charge or responsible for remittance are not liable and penalties on such persons (including the deceased appellant represented by LR) were set aside where record shows lack of responsibility. Issue 3 - Sufficiency of Efforts to Recover Remitted Amount and Effect on Penalty Legal framework: Penalty assessment under FEMA permits consideration of mitigating or aggravating facts, including bona fide efforts to recover foreign exchange and whether the person exercised due diligence. Precedent treatment: Tribunal relied on earlier findings (26.11.2024) criticizing lack of serious recovery efforts and failure to pursue civil remedies. Interpretation and reasoning: The Tribunal found that though some recovery steps were taken (letters to banks/consulate, engagement of an agent, contact with inspection agency), those steps were limited: partners did not travel to recover amounts; the broking intermediary's role was suspicious and due diligence on broker selection was inadequate; no civil suit was filed to recover funds. While the firm appears to have been cheated, its post-remittance actions were insufficient to absolve it from penalty. Ratio vs. Obiter: Ratio - partial and insufficient recovery efforts do not negate contravention and may not prevent penalty; Obiter - recognition that fraud by overseas party may mitigate quantum but cannot wholly absolve regulatory breach absent substantial bona fide recovery measures. Conclusion: Recovery attempts were inadequate to extinguish liability; they constitute mitigating circumstances but do not eliminate penalty liability. Issue 4 - Quantification and Reduction of Penalty; Effect of FDRs and Belated Compliance with Pre-deposit Direction Legal framework: Tribunal has discretion to reduce penalty in view of facts and to accept pre-deposit/security; pre-deposit conditions must be complied with but belated compliance may be considered for restoration. Precedent treatment: The Tribunal applied its discretion consistent with earlier reduction in related appeals (reducing penalty to 25% in a related matter) and considered submitted FDRs as potential realization mechanisms. Interpretation and reasoning: While imposition of penalty was warranted, the Tribunal balanced aggravating (lack of due diligence) and mitigating (firm cheated, some recovery steps, belated FDRs) factors. It reduced the firm's penalty from Rs.30,00,000 to Rs.7,50,000 (25%). It treated the submitted FDRs (in the name of another appellant) as potential pre-deposit realizable by the Directorate and ordered adjustment if encashable. The Tribunal also allowed restoration where pre-deposit had ultimately been complied with belatedly and considered overall facts in exercising discretion to restore and reduce penalty. Ratio vs. Obiter: Ratio - Tribunal may reduce penalty to a proportionate amount in light of mitigation even where contravention established; Ratio - belated but eventual compliance with pre-deposit conditions can justify restoration and adjustment of amounts via FDRs if realizable; Obiter - recommended practice that appellants should pursue civil remedies to recover funds abroad. Conclusion: Penalty on the firm reduced to 25% of original amount; realizable FDRs to be adjusted against reduced penalty; belated pre-deposit compliance warranted restoration of appeal. Issue 5 - Substitution of Legal Representatives and Effect on Appeal of Deceased Appellant Legal framework: Procedural rules permit substitution of legal representatives for deceased appellants if brought on record within reasonable time; prolonged failure can lead to dismissal but substitution may be allowed where justified. Precedent treatment: The Tribunal distinguished a previously dismissed appeal for prolonged non-substitution but accepted a later substitution application where the record and related findings supported setting aside penalty. Interpretation and reasoning: An appeal dismissed earlier for non-substitution was later revisited on substitution application. On merits and by parity with a related appellant found not responsible, the Tribunal set aside penalty on the deceased appellant now represented by LR. Ratio vs. Obiter: Ratio - substitution of LRs allowed where justified and, if coupled with merits showing lack of responsibility, penalty may be set aside; Obiter - procedural default is not an absolute bar to relief where substantive justice and parity with co-appellants require corrective action. Conclusion: Penalty on the deceased appellant set aside following substitution and on merits; restoration/substitution permitted in present circumstances. Overall Disposition (Court's Conclusions) The firm contravened Section 10(6) FEMA read with paragraph 6(1) RRR Regulations; firm-level penalty reduced to 25% of original amount (quantified reduction to Rs.7,50,000) to meet ends of justice; submitted FDRs, if realizable by the Enforcement Directorate, to be adjusted against the reduced penalty. Penalties on persons not shown to be in-charge or responsible for the remittance were set aside; substitution of legal representatives and restoration were permitted consistent with these findings.