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2019 (2) TMI 1039
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....he pending applications for dispensation of depositing the penalty imposed to the above-mentioned Appellants by the common impugned order dated 07.08.2013. The said order has been challenged before this Tribunal on various grounds. 2. The said penalty was imposed in exercise of the powers conferred on me under sec. 13(1) of the Foreign Exchange Management Act, 1999, I pass the following order:- i. Penalty of Rs. 2,00,00,000/- (Rupees Two Crores only) on Shri Balkrishna Goenka. ii. Penalty of Rs. 7,50,00,000/- (Rupees Seven Crores Fifty Lakhs only) on M/s. Welspun Corporation Ltd. (Formerly known as M/s Welspun Gujarat Stahl Rohren Ltd.). iii. Penalty of Rs. 28,00,00,000/- (Rupees Twenty Eight Crores Only) on M/s Krishiraj Trading Ltd. iv. Penalty of Rs. 14,00,00,000/- (Rupees Fourteen Crores only) on M/s Welspun Wintex Ltd. v. Penalty of Rs. 1,00,00,000/- (Rupees One Crores only) on Shri Balkrishna Goenka, Director of M/s. Welspun Corporation Ltd. M/s Welspun Wintex Ltd. and M/s. Krishiraj Trading Ltd. vi. Penalty of Rs. 75,00,000/- (Rupees Seventy Five Lakhs only) on Rajesh R. Mandawewala, Director of M/s. Welspun Corporatio....
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....outside India) 19.89% .......... 2. Shri B.K. Goenka 31.10% (560 shares of Euro 1 each) ......... 3. Welspun Gujrat Stahl Rohren Ltd. 25% (450 shares of Euro 1 each) USD 14 Mn. 4. Welspun Wintex Ltd. 12% (216 shares of Euro 1 each) USD 27 Mn. 5. Krishiraj Trading Ltd. 12% (216 shares of Euro 1 each) USD 56 Mn. (b) The RBI further informed that the companies at Sl No. 2, 3, 4 and 5 above had not sent remittance for subscription of equity shares in the JV RLLC, and therefore, the information of the JV RLLC at Cyprus was not taken on record by the RBI. The JV RLLC at Cyprus had availed credit facility for USD 52 million from ICICI Bank, London for certain purposes. The credit facility was extended on the condition that liability of credit facility shall be secured by joint and several corporate guarantee of the Indian partners of JV RLLC subject to maximum commitment as tabulated above. The RBI opined that the Bank guarantee was issued in favour of the JV RLLC, an overseas concern, where the Indian companies had no equity stake. Three entities at S. No. 3, 4 & 5 of the table at para 2(a) had filed separate compounding appl....
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....as "KTL") were holding shares in RLLC and are therefore owners of the company jointly with Intech Metal SA. He further stated that the shares of RLLC have already been allotted to the respective shareholders and he submitted copy of a certificate from the Ministry of Commerce, Industry and Tourism, Department of Registrar of Companies and Official Receiver, Nicosia, Republic of Cyprus, showing that the Welspun Group is holding shares in RLCC as follows:- Shri B.K. Goenka (Chairman of Welspun Group - 560 shares of 1 Euro each M/s. Welspun Gujrat Stahl Rohren Ltd. - 450 shares of 1 Euro each M/s. Welspun Wintex Ltd. - 216 shares of 1 Euro each M/s. Krishiraj Trading Ltd. - 216 shares of 1 Euro each Intech Metal SA- - 358 shares of 1 Euro each He also submitted a copy of the certificate from RSM Syllanou, Auditor showing that the books of RLCC showed that the shareholders owe the company the amount of its share capital. He stated that the amount is still outstanding in the Books of Accounts of RLLC, however, this doesn't affect the rights of the shareholders in the company and their status as owners of the company by virtue of their shareholding. He fu....
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....some of the documents submitted by the Bank, he clarified that Bouchard Secretarial Services Corp is a promoter of Intech Metals SA. In the letter Shri Girish Nayak further contended that ICICI Bank, UK Plc. had taken a capacity and enforceability opinion from Jyoti Sagar and Associates, a legal counsel on 31.12.2007 in relation to USD 52 Mn foreign currency term loan facility to RLLCC. On examination of the various documents received from the RBI, the ICICI Bank and the concerned parties the Investigating Officer found as under:- I. The RBI vide its letter No. FE.CO.OID.2185/19.34.02/2007- 2008 dated 18th March, 2008 called for the explanation of the concerned AD i.e. the Punjab National Bank, Sir P.M. Road Branch, for non-reporting of the equity stake in the joint venture by the Indian companies. The Chief Manager, PNB vide letter No. BIH:WGSRL:OID:08 replied to the RBI stating that till date no amount has been remitted by the Indian entities towards payment of shares. It was further informed that the amount towards respective shares would be paid only after receipt of the UIN from the RBI. II. From ODI, in Section D relating to funding for JV/WOS showed full....
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....hat FEMA 120/2004 and Master Circular No. 1/2007-08 dated 02.07.2007 on Direct investment by Residents in JV/WOS abroad are mutually inconsistent and on reconsideration they believed that there has been no contravention by them. Vide their letter dated 02.04.2009 addressed to the RBI the Indian parties submitted as under:- It has been brought to your attention that the relevant provision of the Master Circular No. 1/2007-08 dated 1st July,2007 on Direct Investments by Resident in JV/WOS abroad (the "Master Circular") read as follows: - 3(a) The Indian entity may extend loan/guarantee to an overseas concern only in which it has equity participation. Indian entities may offer any form of guarantees-corporate or personal/primary or collateral/guaranteed by the promoter company/guarantee by the group company, sister concern or associate company in India. As per the sub-paragraph above, the loan/guarantee can be extended only to a company in which the Indian entity has equity participation. The Master Circular also consolidates all the relevant FEMA notifications including Regulation 6(4) of the Regulation. Consequently, as per the guarantee norms app....
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.... "a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment. Indian Party The term 'Indian Party' has been defined to mean "a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 making investment in a Joint Venture or Wholly owned Subsidiary abroad, and includes any other entity in India as may be notified by the Reserve Bank. 5. It is stated on behalf of all the appellants as under:- (a) Subsequent to incorporation of one Red Lebondal Ltd. ("RLL"), a company incorporated under the Cypriot Laws a company named CCY Services Ltd. ("CCY") was the single member and subscriber to its Memorandum of Association and consequently subscribed to 1800 shares @ 1 Euro per share. Thereafter, the shares were transferred from CCY to Welspun Corp Ltd., Welspun Wintex Ltd. (Now MGN Agro Properties Pvt. Limited.), Krishiraj Trading Limited (Now MGN Agro Properties Pvt. Ltd.), Shri Balkrishan Goenka and a foreign company named Intech Metals SA which then acquired shares ....
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..... Ltd. requested PNB to remit the share subscription amount to RLL. However, PNB denied the request stating that the remittance cannot be made till the issuance of UIN by RBI. 6. RBI vide letter dated 22.04.2009 directed the Directorate of Enforcement ("ED") to investigate the matter. Pursuant to the investigation under the FEMA Act by the ED, Show-Cause Notice dated 21.10.2011 was issued. 7. Thereafter, adjudication proceedings were initiated by ED and the Appellants made their respective reply submissions. The ED by the Impugned Order dated 07.08.2013, imposed total penalty of Rs. 55.25 crores. 8. Aggrieved by the Impugned Order, writ petition bearing no. 2489/2013 was filed before the Hon'ble Bombay High Court wherein vide Order dated 26.09.2013, the Hon'ble High Court admitted the same and granted interim stay against Order dated 07.08.2013. In addition, the Hon'ble High Court allowed Indian Persons to make an application for ex- post facto approval in terms of Circular No. 96 dated 28.03.2012. It is pertinent to note that the Directors also filed a separate writ petition wherein the Hon'ble High Court passed a similar order extending the benefit of stay and tagged the....
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....hase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment." 13. Regulation 5 of the FEMA (Transfer or Issue of Any Foreign Security) Regulations, 2004 ("FEMA 120/2004") prohibits direct investment outside India. Regulation 6 of FEMA 120/2004 provides that an Indian party may make direct investment in a JV/Wholly Owned Subsidiary ("WOS") subject to the conditions specified therein. Regulation 6 of FEMA 120/2004 is reproduced hereinbelow for ready reference: "Regulation 6. Permission for Direct Investment in certain cases (1) Subject to the conditions specified in sub-regulation (2), (and Regulation 7 in case investment in financial services sector) an Indian party may make direct investment in a Joint Venture or Wholly Owned Subsidiary outside India. (2) (i) The total financial commitment of the Indian party in Joint Ventures/Wholly Owned Subsidiaries shall not exceed 100% of the net worth of the Indian Party as on the date of the last audited balance sheet;.............. ... ... (ii) The direct investment is made in an ove....
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....already appeared in the Register of Members and therefore, there is no violation of Regulation 6(4) read with Section 6 of FEMA. It is further submitted that all the different terminology, namely, "contribution, "participation" or "subscription" in the context of investments outside India must take color and must be given an interpretation based on the commercial sense in which the same are used, having regard to the law of the country in which the investment is made. In the present case, the law of Cyprus, in which the investment was made, conclusively recognized the four Appellants to be the shareholders of RLL as on 22nd November, 2007. Hence, the execution of the guarantee in favour of ICICI Bank, UK, for the loan given to RLL is permissible and valid at any time subsequent to 22nd November, 2007. Post the acquisition of shares, the Indian Persons provided corporate guarantees to ICICI Bank, UK on behalf of RLL in compliance with the terms of sanctioned credit facility to RLL. In this manner, the conditions provided in Regulation 6(4) of FEMA 120/2004 has been duly complied by the Indian Persons and therefore, the Impugned Order deserves to be set aside by this Hon'ble Tr....
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....s to undertake financial commitments in JV/WOS abroad without any actual equity contribution or outward remittance since there are various jurisdictions around the world which permit incorporation without any equity participation, supports the interpretation of the Master Circular on which the Indian Persons relied upon at the time of issuance of the corporate guarantees. It is pertinent to note that the Master Circular, issued by RBI, consolidated all the circulars issued by it and thus presents the complete picture for compliance under FEMA 120/2004. It is stated that the Respondents failed to appreciate that the corporate guarantees issued were, in any case, conditional and subject to the provisions of the Act and the Exchange Control Manual and therefore since Regulation 6(4) does not cover conditional guarantees which are subject thereto, there is no contravention thereof in such circumstances. Consequently, as there is no contravention of such regulation 6(4) by giving conditional guarantee, no penalty can be imposed on the Appellants under Section 13 of the Act. 19. Bona fide business activity as per appellants It is submitted on behalf of appellant that Regulati....
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....t they are suffering from undue hardship. The Supreme Court also stated in paragraph 15 that the second aspect while deciding the application for waiver of pre-deposit and stay is Court "The other aspect relates to imposition of condition to safeguard the realization of penalty. This is an aspect which the Tribunal has to bring into focus. It is for the Tribunal to impose such conditions as are deemed proper to safeguard the realization of penalty. Therefore, the Tribunal while dealing with the application has to consider materials to be placed by the assessee relating to undue hardship and also to stipulate condition as required to safeguard the realization of penalty." 23. In the second submission of the respondent it is submitted by the respondent that the appellant had applied for compounding proceedings before the RBI after which the RBI vide order dated 11.4.2016 has levied a compounding penalty of Rs. 21,11,00,000/-, Rs. 2,50,00,000/- Rs. 5,53,000/- and Rs. 10,66,00,000/- respectively. (Letter on RBI dated June 23, 2014 placed on page 177 of paper book in Appeal No. 41 of 2014). The said amount was not paid by the appellants as stated in the said letter and also admitt....
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....; without fraud or deception; honestly, as distinguished from bad faith. The term "bona fide" would be used in contradistinction with "mala fide"; i.e., where an activity is not "mala fide", it would be "bona fide". A business activity would be "mala fide" if the business activity itself is "fraudulent" and conducted with a fraudulent intent as in the present case, RLL was engaged in bona fide business activity for exploring opportunities in steel and other specified sectors globally including India. RLL was acquired with an intention to pursue any opportunity available in the market across the world, and WSL was a good investment opportunity in the steel sector in India at the relevant point in time. Other than itself manufacturing steel, the next most popular and recognized method of participating in any industry, is to invest in a company that is engaged in such manufacture. It is submitted that this does not compromise the bone fide nature of the business of RLL in any manner. 26. It is submitted that the that the penalty imposed is grossly disproportionate having regard to the fact that the total value of remittance is merely 1442 Euros. It is submitted that the Respo....