2026 (2) TMI 1160 - AT - FEMA

Understated FOB valuation: exporter and officers liable; penalties payable but reduced due to mitigation and prior deposits.

Understated FOB valuation by omitting agent commissions was held to breach disclosure and realisation obligations under FEMA and export regulations; 12 of ... Obligation to declare full export value - undervaluation/under invoicing of FOB value - realisation and repatriation of export proceeds - admissions recorded u/s 37 - liability of directors for company contraventions u/s 42 - penalty for contraventions u/s 13 - evidential weight of customs settlement and deposit as admission by conduct - proviso to Section 16(6) FEMA - recording reasons for delay in adjudication - HELD THAT:- The term FOB (Free on Board) is typically used so as to define the responsibility, risk and costs for goods which are being consigned from the seller to the buyer, as to what elements of the value of the goods are to be borne by the seller and by the buyer. Generally, the FOB is calculated as the cost of the goods plus all expenses incurred up to the moment the goods are loaded on to the ship. These expenses would not only include ex-factory price of the goods, but also transportation charges from the factory to the port and the packing charges. The expenses relating to loading charges and commission/brokerage charges are also included in the FOB value of the goods. The buyer takes over the costs and the expenses after the goods have been loaded on the ship. Thus, the Ocean Freight charges from the port of loading to the destination, the insurance during the transit and the import duties on arrival are to be borne by the buyer. The commission charges which are in dispute before us relate to payments made with respect to the services provided by the protective agents for testing and analysis of the Iron Ore, both at the ports of loading and discharge and in case of any dispute, help in mediation and resolution of the dispute. The Appellants have accepted the facts of the engagement of the protective agents. They have also not disputed the charter of work for which the protective agents were paid the fees. It is on record that the engagement of the protective agents was mutually agreed upon by the buyer and the seller. It cannot be denied that the FOB price was the basis for determining the amount of export duty which was required to be paid by the seller/exporter. Therefore, any deduction from the FOB price would have direct bearing on the amount of the export duty which was to be paid for each of the consignments. We observe that the provisions of the Sub-Section only urge the Ld. AA to dispose of the Complaint under Sub-Section 3 of Section 16 as expeditiously as possible. The Sub-Section in its proviso allows for disposing off the Complaint even after one year and for the purpose, the Ld. AA has to record periodically the reasons for such delay. We observe that the Ld. AA has already recorded his finding that the submissions made by the Appellants in this regard are not acceptable, in view of the said proviso. As such there is no basis to challenge the findings of the Ld. AA, since it is the same Authority which is supposed to have recorded the reasons for not having disposed of the Complaint within the recommended timeline in which it had to only make endeavours to dispose of. The provisions of Section 42(1) of FEMA are clear and hence we hold Shri Ambar Timblo to be responsible for the conduct of the Company and liable for penalty. Nothing has been produced before us to show that the contravention occurred without the knowledge of either of the two individual Appellants. There is also nothing before us to show that all due diligence was exercised by the two individual Appellants. In so far as Shri Apoorva Misra is concerned, his own statements that he was responsible for the final negotiated price along with other personnel of the Company and his admission that the discounts were given cannot lead to his exoneration. 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 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. The Appellants have also pleaded that they have already suffered by virtue of the aforementioned Order of the Customs Settlement Commission. They pleaded for taking that into account to make the penalty proportionate, if in case the Appellants are found liable for penalty. Taking into consideration the facts and the circumstance of the present case, the ends of justice shall be met on imposition of penalty of Rs. 30,00,000/- on the Appellant Company and Rs. 3,00,000/- each on the two individual Appellants. Pre-deposit of penalty amount paid by the Appellants shall be adjusted against the penalty imposed. Appeals partly allowed. Issues: (i) Whether the Appellant exported consignments at understated FOB value by giving discounts to accommodate commissions to overseas protective agents and thereby contravened the disclosure and realization obligations under FEMA and the Export Regulations; (ii) Whether the individual directors are liable for the contraventions of the company; (iii) What is the appropriate quantum of penalty having regard to the findings, the Settlement Commission deposit and the nature of the consignments.Issue (i): Whether the Appellant under invoiced export value by giving discounts to cover overseas agents' fees and thereby breached the disclosure and realization obligations under FEMA and related regulations.Analysis: The Tribunal examined the recorded statement of the company director admitting negotiated prices lower than initial offers for the 18 disputed consignments, the Settlement Commission's finding and the company's voluntary deposits of differential duty, interest and penalty. The Tribunal analysed the commercial nature of FOB valuation (expenses up to loading on board inclusive of commissions for services at load/discharge ports) and the RBI-prescribed method for declaring full export value and showing commission as permissible deduction. The Tribunal considered appellants' submissions on long term formulaic pricing and spot contract bidding records for some consignments and balanced these against admissions and the conduct of voluntarily depositing sums with the Settlement Commission.Conclusion: The Tribunal held that for 12 of the 18 consignments the export value was understated and that the arrangement effectively kept part of the consideration offshore, resulting in contravention of the disclosure and realization obligations; charges relating to 6 consignments executed under long term contracts were dropped.Issue (ii): Whether the individual directors (the managing director and the director/CFO) are liable for the company's contraventions.Analysis: The Tribunal applied the statutory principle that where a company commits a contravention its officers in charge are deemed liable unless they prove lack of knowledge or exercise of due diligence. The Tribunal reviewed the appellants' pleadings, the absence of evidence showing due diligence or lack of knowledge, and the director's admitted role in finalizing negotiated prices.Conclusion: The Tribunal held both individual appellants liable under the statutory provisioning and not entitled to exoneration on the facts; penalties were therefore maintainable against them.Issue (iii): What penalty is appropriate having regard to the nature of contravention, prior Settlement Commission deposit and mitigating considerations.Analysis: The Tribunal considered the statutory ceiling for penalty in civil contraventions, the absence of mens rea as a prerequisite for penalty, the voluntary payment to the Settlement Commission (treated as admission by conduct), and the limited scope for price variation under long term contracts. The Tribunal exercised discretion to reduce the quantum from that imposed by the Adjudicating Authority, taking into account prior deposits and proportionality.Conclusion: The Tribunal reduced the penalties to Rs. 30,00,000 on the company and Rs. 3,00,000 on each of the two individual appellants and directed adjustment of any pre deposits against the imposed penalty; the appeals were partly allowed to this extent.Final Conclusion: The Tribunal affirmed contraventions in respect of selected consignments, imposed reduced penalties on the company and its directors, and disposed of the appeals partly in favour of the appellants while dismissing other reliefs sought.Ratio Decidendi: Where an exporter's declarations omit integral components of FOB value and the omissions are corroborated by admissions and conduct (including voluntary deposits), a civil penalty under FEMA is payable irrespective of mens rea, though the quantum of penalty is subject to proportionality and mitigating considerations such as prior settlement and limited scope of contractual price variation.