Foreign buyer commission not export proceeds absent exporter's receivable entitlement; FEMA penalty fails on that basis.
A foreign buyer's commission paid directly to a foreign agent was not treated as export proceeds of the Indian exporter because it was not shown to be legally due to the exporter or part of its receivable export value. The RBI Master Circular on agency commission was held inapplicable where the exporter itself made no commission payment. On that basis, the alleged FEMA contravention and penalty could not stand absent proof of recoverable foreign exchange entitlement or under-realisation. The prior customs settlement did not bar FEMA proceedings, but it did not alter the result on the merits under FEMA.
Issues: (i) Whether the commission paid by the overseas buyer to the overseas agent formed part of the appellants' export value and was required to be repatriated under FEMA. (ii) Whether the appellants were bound by the RBI Master Circular governing payment of agency commission when no commission payment was made by them. (iii) Whether the penalty for alleged contravention of the export declaration and repatriation obligations could be sustained in the facts of the case. (iv) Whether the prior customs settlement order barred FEMA proceedings on the same facts.
Issue (i): Whether the commission paid by the overseas buyer to the overseas agent formed part of the appellants' export value and was required to be repatriated under FEMA.
Analysis: The export contracts and surrounding materials showed that the appellants were entitled only to the invoice value of the iron ore and not to the commission paid by the foreign buyer to the foreign agent. The commission was not established to be a sum due to, or accruing in favour of, the appellants. On the record, the amount was an overseas payment between non-residents and did not represent foreign exchange receivable by the exporter. The Tribunal also treated the statement of the witness relied upon by the department as hearsay to the extent it concerned transactions predating his appointment and found no reliable basis to include the commission in the export value for FEMA purposes.
Conclusion: The issue was answered in favour of the appellants; the commission was not required to be repatriated by them as part of export proceeds.
Issue (ii): Whether the appellants were bound by the RBI Master Circular governing payment of agency commission when no commission payment was made by them.
Analysis: The Master Circular was framed to regulate remittance or deduction of agency commission by an exporter. On the facts found, the appellants had not made the commission payment, and the payment was made directly by the overseas buyer to the overseas agent. In such a situation, the compliance conditions in the Master Circular were held inapplicable to the appellants' case. The Tribunal accepted that the circular could not be used to convert a non-recipient sum into export proceeds of the exporter.
Conclusion: The issue was answered in favour of the appellants; the Master Circular did not govern the transaction in the manner contended by the department.
Issue (iii): Whether the penalty for alleged contravention of the export declaration and repatriation obligations could be sustained in the facts of the case.
Analysis: The Tribunal held that the alleged under-realisation of export proceeds on the commission component was not established because the amount was not due to the appellants in the first place. It further noted that the realisation shown in the bank certificates matched the final invoices and that the adjudicating authority had itself dropped the second charge regarding the remaining export consignments. In the absence of proof of any loss of foreign exchange or legally recoverable export proceeds, the foundation for penalty under FEMA was not made out.
Conclusion: The issue was answered in favour of the appellants; the penalty could not be sustained.
Issue (iv): Whether the prior customs settlement order barred FEMA proceedings on the same facts.
Analysis: The Tribunal held that the enforcement authorities were entitled to proceed on the basis of independent evidence collected in the FEMA investigation and were not disabled merely because of the earlier customs settlement. However, it clarified that the customs settlement did not by itself determine the FEMA controversy, and the present case had to be decided on the evidence and obligations arising under FEMA. The earlier settlement therefore did not create a bar to adjudication under FEMA, although the appellants still succeeded on merits.
Conclusion: The issue was answered against the appellants on maintainability, but it did not affect the final result in their favour.
Final Conclusion: The impugned penalty order was set aside and the appeals were allowed, as the alleged commission component was not shown to be foreign exchange due to the appellants and no sustainable contravention warranting penalty was established.
Ratio Decidendi: A sum paid by a foreign buyer directly to a foreign agent does not become export proceeds of the Indian exporter unless it is shown to be legally due to the exporter or part of the exporter's receivable export value; FEMA penalty cannot rest on a notional inclusion of such amount absent proof of a recoverable foreign exchange entitlement.
TaxTMI 
AI Drafter ✕
TaxTMI 
