2026 (1) TMI 859 - AT - FEMA

Under-invoicing and parallel non-bank remittances found to contravene Section 3(d); company and directors held liable, penalties reduced

Dominant issue: whether under-invoicing and parallel non-bank remittances constituted contravention of Section 3(d) of FEMA and attracted officer ... Foreign exchange to the bank accounts of the overseas suppliers - authenticity of the evidence obtained from the seized pen drive - veracity of the documents retrieved from the pen drive, as well as which corroborated the statements - Contravention of Section 3(d) of FEMA - Admissibility of electronic evidence as primary evidence and requirements of Section 65B of the Indian Evidence Act - Presumption as to documents under Section 39 of FEMA - Liability of officers and directors under Section 42(1) and 42(2) of FEMA - Proportionality and quantum of penalty - pre-deposits of the penalties - HELD THAT:- From the record of the case that the actual financial arrangement for credit of amounts to the overseas suppliers through the non-banking channel was made by not only Shri T Gopi, but also by Shri D Madanraj the Marketing Director of the Appellant Company. In fact, both of them have admitted having submitted the invoices to the Bank (Authorised Dealer) of the amounts less than the true value. Therefore, the financial transactions had been indulged in by the two aforementioned individual Appellants to transfer foreign exchange to the overseas suppliers over and above the payments made through the Bank. The individual Appellant Shri T Gopi was not only responsible for the conduct of the business of the Company, but was also active in indulging in the contravention. Thus, the charge under Section 3(d) of FEMA, in terms of Section 42(1) and (2) of FEMA is established against him. With respect to the individual Appellant Shri D Madanraj, the investigations have revealed that he indulged in working out arrangements with the overseas suppliers, so as to suppress the true value of the goods imported from them and then to accept the unauthorized payments made through the financial transactions worked out in India. Therefore, the charge of the contravention of Section 3(d) of FEMA, in terms of Section 42(2) of FEMA is established against him. The Ld. AA has made a finding in the Impugned Order that the individual Appellant Shri S Murugadoss, the Technical Director of the Appellant Company was not responsible for the day-to-day conduct of the business of the Company, but he has admitted possessing knowledge about the under invoicing and remittance of the balance amount to the overseas suppliers through the unauthorized channel. Therefore, the charge of the contravention of Section 3(d) of FEMA, in terms of Section 42(2) of FEMA is also established against him. The penalty imposed is too harsh and may be made proportionate. To meet the ends of justice, we reduce the penalty amount on the Appellant Company to Rs. 13,00,000/- and also reduce the penalty amount on the individual Appellants Shri T. Gopi (Managing Director), Shri D. Madanraj (Director) and Shri S. Murugadoss (Director) to Rs. 2,50,000/- each. The amounts paid as pre-deposits of the penalties shall be adjusted towards the reduced penalties. Thus, we partly allow the Appeals. Issues: (i) Whether the contraventions fall within Section 3(d) of the Foreign Exchange Management Act, 1999 and are established against the appellant company and individual directors; (ii) Whether electronic data retrieved from the seized pen drive is admissible and can be relied upon as evidence; (iii) Whether the penalties imposed by the Adjudicating Authority are excessive and require reduction.Issue (i): Whether the transactions constitute financial transactions in India in consideration for acquisition of assets outside India within the meaning of Section 3(d) of FEMA, and whether Section 42(1) and (2) liability is established against the individual directors.Analysis: The arrangements involved payments in Indian currency to an intermediary in India who caused foreign exchange to be credited to overseas suppliers; the Explanation to Section 3(d) treats such transactions as financial transactions relating to acquisition of foreign exchange (an asset). Admissions and corroborating material show invoices were under-stated and parallel remittances effected through the non-bank channel. Individual directors either managed the business and participated in the arrangements or had knowledge and accepted the conduct; due diligence to disprove knowledge was not shown.Conclusion: Section 3(d) contraventions are established against the appellant company and Section 42(1) and (2) liability is established against the individual directors. This conclusion is against the assessee.Issue (ii): Whether the electronic records retrieved from the seized pen drive are admissible and authentic evidence.Analysis: The pen drive was seized from premises, was produced as primary evidence, and its contents were confirmed in the presence of persons from whose custody it was seized. The requirements of Section 65B of the Indian Evidence Act for secondary electronic evidence are not necessary where the electronic device itself is produced as primary evidence. Section 39 of FEMA gives a presumption as to documents seized or produced in proceedings, and corroborative statements and procedural steps at seizure support authenticity.Conclusion: The electronic data from the seized pen drive is admissible and may be relied upon as evidence. This conclusion is against the assessee.Issue (iii): Whether the penalties imposed by the Adjudicating Authority require reduction for proportionality.Analysis: Having found contraventions established but considering proportionality and ends of justice, the penalty amounts were reassessed and reduced from the amounts originally imposed by the Adjudicating Authority, with adjustments of pre-deposits already made.Conclusion: Penalties are reduced in favour of the assessee: company penalty reduced to Rs.13,00,000 and individual penalties reduced to Rs.2,50,000 each. This conclusion is in favour of the assessee.Final Conclusion: The appeals are partly allowed: contraventions under Section 3(d) of FEMA and individual liability under Section 42 are upheld, the electronic evidence is held admissible, and the penalties imposed are reduced as specified, resulting in partial relief to the appellants.Ratio Decidendi: Electronic records seized from a party's premises constitute primary evidence admissible without a Section 65B certificate and, where corroborated and produced in accordance with seizure procedure, attract the presumption in Section 39 of FEMA; such admissible evidence can sustain findings of contravention under Section 3(d) and consequent liability under Section 42, subject to judicial reduction of penalties for proportionality.