TaxTMI 
TaxTMI 
2013 (7) TMI 505
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....r Foreign Exchange, New Delhi and the Tribunal allowed those appeals vide its order dated 10.3.2003 and set aside the order of confiscation and the penalty imposed. 3. Union of India, aggrieved by the said order, preferred Criminal Appeal No. 380 of 2003 before the Delhi High Court under Section 54 of FERA read with Section 35 of the Foreign Exchange Management Act, 1999 which was, however, dismissed, stating that neither any question of law nor any legal infirmity had been found in the impugned order passed by the Tribunal. Aggrieved by the same, Criminal Appeal No. 975 of 2007 has been filed by the Union of India, which is treated as the main appeal and being heard along with Criminal Appeal No. 976 of 2007, which was also filed by the Union of India and another against the order of the High Court dated 12.9.2003 setting aside the order confiscating the drafts deposited by few investors in the 2nd company. FACTS: 4. M/s Maple Leaf Trading International Pvt. Ltd., the 2nd respondent, was formed with the assistance of M/s J. C. Bhalla and Company, a Chartered Accountant firm having its office at New Delhi, in the following circumstances. One Lambert Kroger, Stefen Mayer and Clif....
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....d Selling of Goods and Services" with specific reference to NIC Code 893. Details of foreign investment resulting in foreign exchange inflow were also given in para VI of the application. Para VIII (iii) called for the description of products in the case of trading companies primarily engaged in exports, to which the Company replied stating that the same is not applicable. RBI, with reference to that application, allotted Registration No. FC-98 NDR 1005 vide letter dated 29.6.1998 and vide letter dated 29.6.1998 informed the company that it would advise the foreign collaborator that they would obey the laws of the land and there should be no compromise or excuse for the ignorance of the Indian Legal System. 6. The Enforcement Directorate got information that the company had started trading activity in gold coins on 27.5.1998 and signed the first contract for trading in Maple Leaf Gold Coins, which it was noticed, was contrary to the declaration made by the company in its application Form FC (RBI) dated 21.5.1998 under NIC Code 893. RBI also got information from the Economic Offences Wing of the Crime Branch, Delhi that the Company was collecting money from the public on the pretex....
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....les and a panchnama dated 2.7.1999 was prepared. The search at the office premises of Group-A Securities at National Highway No. 8, Mahipalpur, New Delhi also resulted in the recovery and seizure of articles as per panchnama dated 3.7.1999. 10. Lambert Kroger, the third respondent herein, in his statements under Section 40 of FERA dated 2/3.7.1999, 5.7.1999, 6.7.1999, 7.7.1999, 8.7.1999 and 24.8.1999, stated that he is a German National and he came to India on 16.12.1997 to give suggestions to Cliff Roy, the power of attorney holder of 4th respondent, as well as the then Director of Maple, who applied to RBI on 21.5.1998 for approval of 51% foreign financial collaboration under the automatic route. Further, it was also stated that A.R. Khan was in possession of 49% of the shares of the company and the seller of those 49% shares V.S. Jafa had entered into with an understanding with 4th respondent to transfer the share of 49% under the direction of the Swiss company and he had also signed on that agreement. Anil Bhalla also gave statements under Section 40 of FERA on 12.7.1999, 13.7.1999 and 14.7.1999, stating that he had explained the procedure for applying for setting up 100% trad....
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....or failure to comply with the provisions and declarations subject to which approval under automatic route was granted by the RBI and by engaging themselves in the trading activities of imported Maple Leaf Gold Coins in contravention of the provisions of sec. 19(1)(1) & (d), 29(1)(b) read with sec. 49 & 68(1) & (2) of FERA, 1973 and by entering into contracts/agreements in violation of provisions of section 47(1) of FERA, 1973 and by collecting a sum of Rs.25 Crore approx. and placing this amount without any general or special exemption of RBI to the credit of persons resident outside India in contravention of section 9(1)(e) of FERA, 1973 read with section 68(1) & (2) of the said Act. By their carrying out the business of imported Maple Leaf Gold Coins in India in name & style of notice No. 1 without any general or special permission of RBI in contravention of the provisions of section 29(1)(a) of FERA, 1973 and by the unlawful trading collected a sum of Rs.25 crores approximately in the account of M/s. Mapl Leaf Trading International (P) Ltd. By opening bank accounts with repatriation facility without prior permission of RBI and engaging in the trading of imported Maple leaf gold ....
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....chnama dated 02.07.99 and 03.07.99 because these were acquired/specifically imported against foreign exchange by Noticee No. 1 for an activity which was contrary to the automatic approval route allowed by RBI under Notification No. 180/98-RB dated 13.01.1998 issued under Section 9( 1)(d) and Section 29(1)(b) of FERA, 1973, out of funds generated in violation of Section 29(1)(a) of the said Act and gold coins being also liable to confiscation under Section 63 of FERA, 1973. The route adopted by them was to protect themselves from action as is evident from FAX dated 04.02.98 referred on page 66. The SCN also proposed the confiscation of blocked amounts in bank accounts of Noticee No. 1 and fixed deposits maintained with following banks:- 1) ABN AMRO BANK : DLF Centre, Sansad Marg, New Delhi. 2) HDFC BANK LTD; Greater Kailash, Part II, New Delhi. 3) BANK OF AMERICA: Barakhamba Road, New Delhi. The evidence on record reveals that Noticee No. 1 collected amounts from various individuals known as business partners in accordance with the contracts executed with them for purchase of Maple Leaf gold coins in accordance with terms of such contracts. Since the activity under the contract....
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....fore the Hon'ble High Court of Delhi in repaired to these. 4. I also order confiscation of following amounts lying in the following accounts of Noticee No. 3 and 6 with ABN Amro Bank, New Delhi:- NAME ACCOUNT NO. AMOUNTS IN RS. Cliff Roy 000006368697 1,99,666.13 Pau Singh 000006467689 60,104.32 Clare Under Section 63 of the FERA, 1973 on the grounds referred hereinabove. 5. I impose penalty of Rs.15,00,000/- (Rs. Fifteen lakhs only) on M/s. Maple Leaf International Pvt. Ltd., Greater Kailash, Part- II, New Delhi, under Section 50 of FERA, 1973 for the reasons mentioned hereinabove. 6. I also impose penalty of RS.5,00,000 (Rs. Five lakhs only) on M/s. Picadily Invest AG, Switzerland under Section 50 of FERA, 1973 for the reasons mentioned hereinabove. 7. I also impose personal penalty on Noticees No. 2, 3 and 6 under Section 50 of FERA, 1973, as per details below: SL.NO. NAME AMOUNT (IN RS.) 1. Cliff Roy 10,00,000/- (Rs. Ten lakh only) 2. Lambert Kroger 10,00,000/- (Rs. Ten lakh only) 3. Paul Singh Clare 5,00,000/-(Rs. Five lakh only) I also direct Mr. Cliff Roy and Mr. Paul Singh Clare to bring back to India the foreign exchange indicated below which was remit....
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....ctivities fell within the ambit of the notification dated 13.1.1998 and which claims the benefit of the notification, was required to submit a declaration in Form FC(RBI). Learned Additional Solicitor General also referred to the statement on the Industrial Policy, 1991 with reference to paragraph 39(B) dealing with Foreign Investment and also to the Press Note no. 11 dated 20.8.1991 dealing with changes in procedures for foreign investment approvals and also to paras 3(A), 4, 6 etc.. Reference was also made to the Press Notes dated 13.12.1991 and also 31.12.1991 and stated that, according to the Press Notes, there is no concept of automatic approval for the companies engaged primarily in trading and such companies fulfilling certain conditions have to apply to the RBI for permission. Referring to the judgment of this Court in Hindustan Lever (Infra), it was submitted that this Court had no occasion to consider the scope of various clauses of Section 29 and hence the observations made in that judgment are only obiter. Shri Malhotra also submitted that the grant of permission under the automatic route is an "activity specific" and under the policy only those trading companies primar....
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....y other law. Reliance was also placed on the judgment of this Court in Ghatge and Patil Concerns' Employees' Union v. Ghatge and Patil (Transports) Private Ltd. And another AIR 1968 SC 503 and Landon and Country Commercial Investment Properties Ltd. v. Attorney- General 1953 1 AER 436. 17. Learned counsel submitted that respondents 2 to 4 have not violated the provisions under Section 19(1)(a) and (d), 29(1)(b) and Section 49(i) of FERA. Referring to the notification no. 180/98, learned counsel submitted that the company had issued 51% of its share to 4th respondent in accordance with the general permission granted vide second proviso to paragraph 1 of the notification No. FERA 180/98. Learned counsel also submitted that the notification itself has given general permission to "newly set up trading company primarily engaged in export" and, therefore, no further permission was required by a company before issuing shares to a foreign investor. Learned counsel submitted that 2nd respondent squarely falls within the category of "primarily engaged in export" and its business plan had all along been to export various products made in India, attain export stock/trading/star trading house ....
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....ard to NIC Code 893 and with regard to the items mentioned in para IX(iii). The company stated that it was not applicable, therefore, it was not seeking the automatic route, as a trading company primarily engaged in export. 20. Shri V. Giri, learned senior counsel appearing for 1st respondent, submitted that the Bank had imported the gold on its own behalf and sold the same to the company and that the bank was engaged in that activity as an authorized dealer, for which it had obtained permission from RBI. Learned senior counsel submitted that in order to attract Section 6(5) of FERA, 1973, it is necessary that an authorized dealer must have conducted a transaction in foreign exchange and it had only imported gold and sold the same to the company incorporated in India against Indian currency, consequently, there is no violation of Section 6(5). Learned senior counsel submitted that "reasonable satisfaction" contemplated under Section 6(5) does not impose an obligation on the authorized dealer to require a person on whose behalf the authorized dealer is entering into the said transaction to furnish information and declarations to satisfy itself that the transaction will not contrave....
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..... iii) Other foreign equity proposals, including proposals involving 51% foreign equity which do not meet the criteria under (i) above, will continue to need prior clearance. Foreign equity proposals need not necessarily be accompanied by foreign technology agreements. iv) To provide access to international markets, majority foreign equity holding upto 51% equity will be allowed for trading companies primarily engaged in export activities. While the thrust would be on export activities, such trading houses shall be at par with domestic trading and export houses in accordance with Import-Export Policy. v) A Special Empowered Board would be constituted to negotiate with a number of large international firms and approve direct foreign investment in select areas. This would be a special programme to attract substantial investment that would provide access to high technology and world markets. The investment programmes of such firms would be considered in totality, free from pre-determined parameters or procedures." 22. Policy referred above would show that it was focusing on foreign equity on high priority industries as per para 39B(i) and for other foreign equity proposals includi....
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....th 'Foreign Investment in Trading Companies' which provided that foreign investment in trading companies upto 51%, primarily engaged in export activities, were required to file applications with the RBI in the prescribed form. Para 6 of Press Note dealt with Other Foreign Investment Proposals, those paragraphs are relevant for the purpose, hence given below: "4. FOREIGN INVESTMENT IN TRADING COMPANIES Under the provisions of para 39B(iv) foreign equity holdings upto 51% equity will be allowed in trading companies primarily engaged in export activities. Applications for foreign investment under this clause will be filed with the Reserve Bank of India in the form to be prescribed by the RBI. Such trading houses shall be at par with the domestic trading and export houses and shall operate in accordance with the Import Export Policy. 6. OTHER FOREIGN INVESTMENT PROPOSALS All other foreign investment proposals will be subject to the existing procedures. Applications will be made to the Secretariat of industrial Approvals in the Department of Industrial Development in the prescribed form. These proposals will be considered according to usual procedures. This will include proposals in....
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.... and export houses in accordance with the Import Export Policy". 3. This Press Note sets out the principles and procedures for approval of foreign equity holding upto 51 per cent in trading companies primarily engaged in export activities. 4. The criteria for grant of Export House, Trading House or Star Trading House certificates are laid down in paragraphs 218 and 226 of the Import Export Policy, 1990-93. As amended by the Ministry of Commerce, Import Trade Control Public Notice No. 242-ITC(PN)/90-93 dated November 8, 1991, effective from April 1, 1992, the average net foreign exchange earnings in the three preceding licensing years should not be less than Rs.6crore for Export House Certification; Rs.30 crore for Trading House Certification; Rs.125 crore for Star Trading House certification. Further, such certification will also be granted if the minimum net foreign exchange earning in the immediate preceding licensing year is not less than Rs.12crore for Export House; Rs.60 crore for Trading House and Rs.150 crore for Star Trading House. 5. Provisions for approval (i) New Companies In the case of a new company, the Reserve Bank of India will give automatic approval for forei....
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....oring will be done by the Reserve Bank of India. The balancing will be done on the following basis: i) The balancing of dividend would be over a period of 7 years reckoned from the date of recognition as Export House/Trading House/Star Trading House for new companies, and from the date of allotment of the shares raising the level of foreign equity to the approved level in the case of existing companies. ii) The amount of dividend payment should be covered by export earnings recorded in years prior to the payment of dividend in years prior to the payment of dividend or in the year of payment of dividend. The Reserve Bank of India will issue appropriate instructions to give effect to these provisions." 30. Press Note mentioned above has, therefore, dealt with para 39B(iv) and stated that majority of foreign equity holding upto 51% equity would be allowed for trading companies primarily engaged in export activities while the thrust would be on export activities. Such trading houses, it was also stated, should be at par with domestic trading and export houses in accordance with the Import-Export Policy. 31. Press Note also indicated that no general permission for investment under ....
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....ith a view to invite foreign persons to invest in India and / or Indian Companies and allow them to do business in India and to deal with assets in India with greater freedom and therefore by virtue of the amendment, Indian company in which non-resident interest is more than 40% can carry on business in India without any permission from RBI. Learned counsel also laid considerable stress on paragraphs 74 to 76 of the judgment of this Court in Hindustan Lever (supra). 35. Shri P.P. Malhotra, on the other hand, submitted that section 29(1)(a) puts an injunction on the foreign companies and foreign nationals from establishing or carrying on any business in India or opening any branch in India without obtaining the permission of the RBI. Learned senior counsel also submitted that by virtue of the amendment restrictions were removed only with regard to FERA companies, however, with regard to the foreigners and foreign companies restrictions remained to exist even after the amendment made in the year 1993 and they also required prior approval of the RBI for the purpose of establishing place of business in India. 36. We may examine whether the judgment in Hindustan Lever concludes the is....
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....dent has been lifted. The Amending Act 29 of 1973 is not under challenge. In order to give greater freedom to the companies for doing business in India, the MRTP Act has been amended. Prior approval of Government of India is not necessary for amalgamation of companies any more. In fact, it is in public interest that TOMCO with its 60,000 shareholders and also a very large workforce does not deteriorate into a sick company." 37. Above mentioned paragraphs cannot be read out of context. Hindustan Lever was a case dealing with disputes between the employees of Hindustan Lever and the company. The question was with regard to the amalgamation of two companies namely Hindustan Lever Ltd. and Tata Oil Mills Company Ltd. giving specific reference to the scheme of amalgamation of a company with a subsidiary of a multiple level company. Observation referred to in paragraphs 74 and 76 have to be seen in that context and this Court has not ruled that no permission whatsoever is required from RBI by an Indian Company where non-resident interest is more than 40%. The language used in Section 29(1)(a) in our view is unambiguous and plain and calls for no interpretation or explanation. Section 29....
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....dment to foreign companies and foreign nationals as set out in Section 29(1)(a). 39. We, therefore, find no error in the views expressed by the adjudicating authority on the interpretation of Section 29(1)(a) and the observation made in Hindustan Lever is of no assistance to the company and made on different facts/ situations and not to be understood in the way that company sought to interpret. Lifting of Corporate Veil 40. Shri P.P. Malhotra submitted that the adjudicating authority was justified in reaching the conclusion that Noticees No. 2, 3 and 4 i.e. Lambert Kroger, Cliff Roy and Picadly Invest AG had established a place of business in India in the name and style of Maple Leaf to carry on business activities in India and they fell within the ambit of Section 29(1)(a) for which they required general or special permission from the RBI. Reference was made to the various correspondence and statements exchanged between the parties which according to the learned senior counsel would indicate that they had established the place for business in India without obtaining permission from the RBI. Shri Malhotra also submitted that the second respondent company is virtually a foreign c....
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....o approval/permission obtained by practicing fraud and hence a nullity. Reference may be made to the judgment of this Court in Union of India and Others v. Ramesh Gandhi (2012) 1 SCC 476. 43. Even in Escorts case (supra), this court has taken the view that it is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depends on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc. In Escorts case (supra), this Court held as follows: "Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent state is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern." 44. In Vodafone judgment (supra), this court has taken the view that once the transaction is shown to be fraudulent, sham circuitous or a device designed to defeat the interests....
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....out prejudice to the provisions of section 28 and section 47 and notwithstanding anything contained in any other provisions of this Act or the provisions of the Companies Act, 1956, a person resident outside India (whether a citizen of India or not) or a person who is not a citizen of India but is resident in India or a company (other than a banking company) which is not incorporated under any law in force in India or any branch of such company, shall not, except with the general or special permission of the Reserve Bank, - (a)----------- (b) acquire the whole or any part of any undertaking in India of any person or company carrying on any trade, commerce or industry or purchase the shares in India of any such company. 48. Section 19(1)(a) was intended to regulate export and transfer of securities. Section 19 states that no person shall except with the general or special permission of the Reserve Bank take or send any security to any place outside India or to issue whether in India or elsewhere any security which is registered or to be registered in India to a person resident outside India. Section 19 while intending to regulate export and transfer of securities, Section 29 plac....
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....r trading house status before they could remit dividends to the foreign investors. 51. Learned counsel pointed out until January 1998, an application for prior clearance from RBI was required for issuance of shares by companies like the second respondent to the foreign investor and the above mentioned notification had further simplified the procedure by stating that prior clearance was no longer required instead within thirty days of the issuance of shares, the issuer was required to file certain documents listed in para 3(viii) of the above mentioned notification. 52. Shri Sibal submitted that the company fell squarely within the category of "newly setup trading company primarily engaged in export" which fell within the purview of the general permission granted by RBI under the automatic route hence there was no contravention under Sections 19(1)(a) and (d), 29(1)(b) or 49(i)(a) of FERA. 53. Learned counsel also submitted that there was no mistake or omission in Form FC [RBI] and submitted that the notification only required companies that conduct activities covered under Annexure III to fill in Form FC [RBI] which did not require trading companies to fill out Form FC [RBI]. Re....
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....iled and benefit of the general permission through automatic route could be obtained only for the activity specified in Form FC [RBI] and there was no automatic approval for any activity not specified in the above-mentioned form. Reading Section 19(1)(a), (b) and 29(1)(b) read with the notifications and the Press Notes show that the intention of the Legislature was to permit company incorporated in India which is engaged or proposing to engage in an activity specified in Annexure III or an Indian Company which is a trading company, primarily engaged in export and is registered as an export/trading/star trading house with the Ministry of Commerce, Government of India to issue equity shares, subject to the conditions mentioned in paragraph 3 of the Notification dated 13.1.1998. The first proviso to Notification states that a company existing on the date of the notification, which was not engaged in Annexure III activity would be eligible to issue shares if it had embarked upon expansion programme, predominantly in Annexure III activities, subject to the condition that foreign equity raised by issue of equity shares to the foreign investors was utilized for such expansion. The first p....
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....ond category i.e. "a trading company primarily engaged in export". To get the benefit of the general permission in the automatic route a trading company should be primarily engaged in export, even if it is a newly set up company. A newly set up company also could demonstrate the same by specifying the same in Form FC[RBI] that it is a trading company, whether new or old, and is at least intended to be engaged primarily in export. A reference to the Form FC (RBI) duly submitted by the 2nd respondent is useful. 58. FC[RBI] form specifically directs the applicants to "carefully tick" the "appropriate" box. In the box dealing with the application for approval for foreign investment not to exceed 51% for "service sector in Annexure III", the company has put a tick mark which would indicate that it sought to avail of the automatic route for service sector only as indicated in Annexure III. Noticeably no tick mark was put in the next box referring to "not exceeding 51% of the trading companies engaged in exports. Para VII deals with the "existing activities" which the 2nd respondent indicated as "not applicable" and no supplementary sheet was also attached explaining as to whether it was....