2026 (2) TMI 188 - AT - FEMA

Export of fish from Exclusive Economic Zone: FEMA and Customs obligations apply, Regulation 14C breach found but penalties reduced.

Application of the Customs Act to the Exclusive Economic Zone and concurrent applicability of FEMA to export proceeds were affirmed: exports of fish ... Competency of Adjudicating Authority u/s 16 - extension of FEMA to Exclusive Economic Zone - export under FEMA and Regulation 3 - prior approval for countertrade / netting off under Regulation 14C - vicarious liability of managing director u/s 42(1) - penalty u/s 13(1) and absence of mens rea requirement - doctrine of lex non cogit ad impossibilia - HELD THAT:- The doctrine of lex non cogit ad impossibilia has been invoked by the Appellants to contend that they could not have complied with the requirements under the Customs Act, 1962 at the time of the export of the four vessels which were being used as fishing trawlers in the EEZ. The vessels which were mortgaged in favour of the foreign collaborating Company were returned to the collaborating partner because the foreign crew faced difficulties in their engagement when the trawlers were berthed in Indian ports due to regulatory issues raised by different government authorities. Hence, the Letters of Permissions issued by the Ministry of Agriculture for operation of foreign fishing vessels in the EEZ were surrendered. It is established that the Appellant Company was the exporter of the fishes which were caught in the EEZ, over which the sovereign rights of India cannot be questioned in view of the aforementioned Notifications issued for extension of the Customs Act, 1962 to the EEZ. It is also evident that the delivery of these fish consignment were being made to a buyer in Japan. Even though the consignment of fishes were transferred in the High Seas through M/s Ocean Grace which acted as the intermediary in between, the application of the Customs Act, 1962 for such consignment is beyond pale of doubt. It cannot be denied that the said consignments had bearing on foreign exchange transactions and therefore the provisions of FEMA and of Regulation thereunder had to be complied with. The said modus adopted by the Appellants makes it glaring that the retention of the charges of fish baits etc. by the Ocean Grace and the deduction thereof from the proceeds remitted to the Appellants was in contravention of the provisions of FEMA and in particular Regulation 14C of the said Regulations as the Appellants had failed to take prior approval of the RBI. The reasons for failure to take prior approval of the RBI, even though the modus appears to have been well known in advance to the Appellants, is not clear. We therefore find that the charge of contravention of Regulation 14 C is established against the Appellants. Thus, there is nothing in the Section which can indicate directly or indirectly requirement of mens rea. Words like “willful”, “deliberately”, “intentionally” etc. are missing. The Appellants have also pleaded to make the penalties proportionate. Since on evaluation of the gravamen of the charges, it is argued that the penalty has been imposed for the inadvertent failure to obtain the prior approval of the RBI before deducting the payment made for the charges relating to bait etc. from the realization of export proceeds. It is also argued that charge relating to Regulation 6 of the Foreign Exchange Management (Borrowing and Lending) Regulations, 2000 has been compounded for Rs.1,00,000/- by the RBI. Thus, the ends of justice shall be met on reduction of the penalty on the Appellant Company to Rs. 8,00,000/- and the penalty on the individual Appellant is reduced to Rs. 20,000/-. The amounts of pre-deposit already made shall be adjusted towards the reduced penalties. Accordingly, the Appeals, filed by Shri Pentapati Lakshman Swamy, are partly allowed. Issues: (i) Whether the officers of the Enforcement Directorate have competency to enquire and adjudicate contraventions under Section 7 of FEMA and the Regulations thereunder; (ii) Whether the provisions of FEMA can be extended to the Exclusive Economic Zone (EEZ) of India; (iii) Whether vessels operating in the EEZ and fisheries caught within the EEZ, when taken out of the EEZ for destinations abroad, constitute exports under FEMA and its Regulations.Issue (i): Whether the officers of the Enforcement Directorate have competency to enquire and adjudicate contraventions under Section 7 of FEMA and the Regulations thereunder.Analysis: Section 16(1) and (2) of FEMA permit the Central Government to appoint multiple officers of the Central Government as Adjudicating Authorities and to specify their jurisdictions. Notifications issued by the Central Government (including S.O. 4990(E) dated 27.09.2018 and earlier notifications) designate officers of the Enforcement Directorate as adjudicating authorities with monetary limits; no notification restricts those officers from adjudicating contraventions of specified sections. The statutory scheme thus contemplates appointment of several adjudicating authorities across departments and does not confine adjudication exclusively to Customs and Central Excise officers.Conclusion: The officers of the Enforcement Directorate have competency to enquire and adjudicate matters relating to Section 7 of FEMA and the Regulations thereunder.Issue (ii): Whether the provisions of FEMA can be extended to the Exclusive Economic Zone (EEZ) of India.Analysis: The EEZ Act empowers the Central Government to extend enactments to the EEZ by notification. The Customs Act has been extended to designated areas of the EEZ by such notifications, creating a deeming fiction for specified purposes. Section 1(3) of FEMA provides extra-territorial application to contraventions committed outside India by persons to whom FEMA applies. Given the extension of the Customs Act to the EEZ and FEMA's express extra-territorial application, a separate notification specifically extending FEMA to the EEZ is not necessary in the present factual matrix to invoke FEMA where activities have implications for foreign exchange and have been regulated under Customs-related notifications.Conclusion: The provisions of FEMA apply to the EEZ for the facts and purposes of this case; a separate notification extending FEMA to the EEZ was not required to invoke FEMA in the circumstances before the Tribunal.Issue (iii): Whether vessels operating in the EEZ and fisheries caught within the EEZ, when taken out of the EEZ for destinations abroad, constitute exports under FEMA and its Regulations.Analysis: FEMA and its Export Regulations require exporters to furnish declarations and to realize and repatriate export proceeds in prescribed manner (Regulation 3). The Export Regulations and FEMA definitions encompass goods taken out of India and transactions that affect foreign exchange realizations. The records showed filing of bills of entry for import of vessels and subsequent removal of vessels and transfer of fish consignments to foreign buyers with implications for foreign exchange. Regulation 14C mandates prior RBI approval for arrangements adjusting imports against exports; obtaining a Loan Registration Number does not substitute for prior approval under Regulation 14C. Compounding by RBI for certain earlier contraventions reduces the quantification but does not negate liability for remaining contraventions. Mens rea is not required for imposition of civil penalties under Section 13(1) of FEMA.Conclusion: The removal of the vessels and the export of fish consignments as recorded amounted to exports under FEMA and its Regulations; contraventions of Section 7(1) read with Regulation 3 and of Regulation 14C were established against the appellants, with vicarious liability under Section 42(1) for the individual in his capacity as managing director.Final Conclusion: The adjudicatory competence of the Enforcement Directorate is upheld; FEMA applies to the EEZ in the circumstances of this case; export-related contraventions under Section 7(1) read with Regulation 3 and under Regulation 14C are established. Relief is limited to reduction of penalties: penalty on the company reduced to Rs. 8,00,000 and on the individual reduced to Rs. 20,000, with pre-deposits adjusted; appeals are partly allowed.Ratio Decidendi: Where the Customs Act has been extended to designated areas of the EEZ and FEMA contains express extra-territorial application (Section 1(3)), adjudication under FEMA for activities in the EEZ affecting foreign exchange may be sustained without a separate notification extending FEMA to the EEZ; adjudicating authorities designated under Section 16 may include Enforcement Directorate officers unless a notification expressly restricts their competence.