2026 (3) TMI 987 - AT - FEMA

Preponderance of probabilities: contemporaneous records and admissions suffice to establish foreign-directed payments; penalties must be proportionate.

Adjudicatory findings that the corporate respondent contravened prohibitions on payments for or on behalf of persons resident outside India and that its ... Foreign exchange - purchase of Gold from Dubai illegally through several persons and made payments in Cash - contravention of foreign exchange regulations - payments for or on behalf of persons resident outside india - contemporaneous entries in a seized spiral pad, WhatsApp chats, and voluntary statements recorded under Section 37 - Evidentiary value of admissions corroborated by contemporaneous records - requirement of authorised banking channels for permitted INR payments for imports - judicial restraint and proportionality in quantification of penalty under FEMA. Admissibility and sufficiency of spiral-pad entries, WhatsApp chats and voluntary statements to establish contravention of FEMA - HELD THAT: - The Tribunal held that the spiral-pad entries are not uncorroborated loose sheets because they are substantially corroborated by the voluntary statements of the director recorded under Section 37 of FEMA and by WhatsApp chats; therefore, these materials together suffice on the preponderance of probabilities in adjudicatory proceedings under FEMA to establish that the payments recorded were connected with persons resident outside India. [Paras 17, 18] The entries, statements and WhatsApp chats together establish the contraventions; the evidentiary material is sufficient to support the finding of contravention. Prohibition on payments to persons resident outside India otherwise than through an authorised person - wide ambit of 'in any manner' in payments to persons outside India - HELD THAT: - The Tribunal construed Section 3(b) as covering payments made in India to agents acting on behalf of persons resident outside India because the phrase 'in any manner' includes such transfers; the appellant's contention that payments in INR to local persons cannot amount to dealing in foreign exchange was rejected since the material showed payments were made for and on behalf of persons resident outside India and involved conversion into USD equivalents. [Paras 19] Payments made in India to agents on instructions of foreign dealers fell within the mischief of Section 3(b) and supported findings of contravention under Sections 3(a) and 3(b). Applicability of Regulation 6(2)(ii) of the FEM (Manner of Receipt and Payment) Regulations, 2016 to payments made in the case - HELD THAT: - The Tribunal held that Regulation 6(2)(ii) permits payment in INR for imports only in accordance with prescribed banking channels and regulatory compliance; since the admitted mode of payment was cash handed to agents outside authorised channels, the regulation did not apply to absolve the appellants' conduct. [Paras 20] Regulation 6(2)(ii) does not validate the cash payments made outside authorised channels and cannot be relied upon to negate contraventions. Liability of persons in charge for contraventions by the company - HELD THAT: - The Tribunal found that the director was a promoter, major shareholder and person in charge of day-to-day affairs and that the contraventions were committed with his knowledge and active involvement as reflected in his statements; on that basis invocation of Section 42(1) was held to be justified. [Paras 21] The director is liable under Section 42(1) for the contraventions committed by the company. Appropriateness of the quantum of penalty imposed by the Adjudicating Authority - HELD THAT: - While affirming that contraventions were established, the Tribunal observed that the Adjudicating Authority had not explained the basis for quantifying maximum penalties and that discretion under Section 13 must be exercised judiciously considering amount involved, nature of contravention and proportionality; applying that principle the Tribunal reduced the company's penalty to an amount equivalent to the established contravention and reduced the director's penalty on the same grounds. [Paras 22] Penalty on the company reduced to amount equivalent to the contravention and penalty on the director reduced correspondingly. Final Conclusion: The Tribunal upheld the finding of contravention by the company and its director based on corroborated contemporaneous records and admissions, rejected the appellants' statutory defenses, but reduced the penalties for lack of satisfactory quantification by the Adjudicating Authority; the appeals were disposed with the penalties reduced as indicated. Issues: (i) Whether M/s Zaveri Exports Pvt. Ltd. and its director contravened Sections 3(a), 3(b) and 42(1) of the Foreign Exchange Management Act, 1999; (ii) Whether the penalties imposed under Section 13(1) of the Foreign Exchange Management Act, 1999 required reduction.Issue (i): Whether M/s Zaveri Exports Pvt. Ltd. and its director contravened Sections 3(a), 3(b) and 42(1) of the Foreign Exchange Management Act, 1999.Analysis: The decision examines contemporaneous entries in a seized spiral pad, WhatsApp chats, and voluntary statements recorded under Section 37 of the Foreign Exchange Management Act, 1999. The entries in the company records are corroborated by admissions that payments were made in cash to agents on instructions of Dubai-based dealers and by electronic contemporaneous material identifying a specific payment. The standard of proof applicable to adjudicatory proceedings under the Foreign Exchange Management Act, 1999 is preponderance of probabilities. The phraseology of Section 3(b) of the Foreign Exchange Management Act, 1999 covers payments made in India to agents acting on behalf of persons resident outside India, and such payments fall within the prohibition unless routed through an authorised person. Evidence of unaccounted sales and unexplained excess stock buttress the inference that the transactions were not conducted through authorised import channels. The director's position as promoter, major shareholder, and person in charge, together with his admissions, establishes knowledge and involvement relevant to liability under Section 42(1) of the Foreign Exchange Management Act, 1999.Conclusion: The contraventions of Sections 3(a) and 3(b) of the Foreign Exchange Management Act, 1999 by M/s Zaveri Exports Pvt. Ltd. and the imposition of liability on Shri Sunil Kumar Tayal under Section 42(1) of the Foreign Exchange Management Act, 1999 are upheld.Issue (ii): Whether the penalties imposed under Section 13(1) of the Foreign Exchange Management Act, 1999 require reduction.Analysis: While the adjudicatory finding of contravention is maintained, the record does not contain an adequate, reasoned quantification explaining exercise of discretion to impose maximum penalties. Principles of proportionality andreasoned exercise of discretion in penalty imposition require that the quantum be related to the amount of contravention, nature of the contravention, and admissions on record. Having regard to established contraventions quantified from the material on record, a reduction of penalty to an amount equivalent to the proved contravention on the corporate respondent and a proportionate reduction for the director is warranted.Conclusion: The penalty on M/s Zaveri Exports Pvt. Ltd. is reduced to Rs. 13,00,00,000 and the penalty on Shri Sunil Kumar Tayal is reduced to Rs. 3,00,00,000; the remainder of the penalties as originally imposed are set aside.Final Conclusion: The adjudicatory findings of contravention under the Foreign Exchange Management Act, 1999 are affirmed while the penalties are moderated on grounds of proportionality and inadequate quantification by the Adjudicating Authority; the appeals are disposed of accordingly.Ratio Decidendi: Admissions recorded under Section 37 of the Foreign Exchange Management Act, 1999 together with contemporaneous business records and electronic communications can constitute sufficient corroborative evidence under the preponderance of probabilities to establish payments made for or on behalf of persons resident outside India, and penalties under Section 13(1) of the Foreign Exchange Management Act, 1999 must be quantified by a reasoned exercise of discretion proportionate to the established contravention.