TaxTMI 
TaxTMI 
2025 (7) TMI 285
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....hange Management Act, 1999 (for short, the FEMA) to the first respondent, (ii) the show cause notice dated 09.6.2023 issued by the first respondent under Rule 4(1) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (for brevity, the FEMA Rules), (iii) the opinion formed by the first respondent under Rule 4(3) of the FEMA Rules, (iv) the act of proceeding further with the inquiry by informing the petitioners about the contraventions of the provisions of the FEMA, the FEMA Rules and the Regulations, etc., under Rule 4(4) of the FEMA Rules and (v) the denial of inspection of the entire original record of investigation including the unrelied documents and (vi) for a direction to provide the certified copies of the same. 2. Heard the learned Senior Counsel appearing on behalf of the petitioners and the learned Additional Solicitor General assisted by the Special Public Prosecutor appearing for the respondents. FACTS : 3. The case of the petitioners is as follows : (i) The petitioner company is engaged, inter alia, in the business of procurement, supply and distribution of Xiaomi branded products in India. It was incorporated on 07.10.2....
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.... not be imposed in terms of Section 13(1) of the FEMA. In the impugned show cause notice issued by the first respondent, it has been alleged that the petitioners contravened the provisions of Section 3(b) of the FEMA by transferring the funds indirectly to one M/s.Xiaomi Communications Co. Ltd. and also contravened the provisions of Section 4 of the FEMA by acquiring and transferring the foreign exchange to their entities outside India. (vii) The petitioners allege that though they made a request for inspection of the entire records of investigation, based on which, the complaint was given by the second respondent, the said request was rejected. A notice of hearing dated 11.9.2023 was received by the petitioners from the first respondent stating that they formed an opinion that an inquiry should be held in this case in terms of Rule 4(3) of the FEMA Rules and fixed the date of personal hearing on 06.10.2023. (viii) On receipt of the notice of hearing, the petitioners submitted the preliminary objections in terms of Rule 4 of the FEMA Rules and also sought for recalling the notice dated 11.9.2023. Arguments were heard by the first respondent and by order dated 24.1....
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.... accordance with law and in the manner contemplated under the Act and Rules in force." (x) The petitioners were aggrieved by the said common order since the learned Single Judge, after having found that the documents were supplied to the petitioners subsequently after the issuance of the notice under Rule 4(3) of the FEMA Rules, sustained the opinion arrived by the first respondent and directed him to provide an opportunity to the petitioners and form a further opinion. (xi) As against the said common order dated 23.1.2024 rendered in W.P.Nos.35660, 35662, 35664 & 35668 of 2023, the petitioners filed W.A.Nos.588 to 591 of 2024, in which, the First Bench of this Court delivered a common judgment on 22.2.2024 in the following terms : "6. In view of the fact that the learned Single Judge has observed that the principles of natural justice are violated in view of the fact that the documents were not supplied to the appellant, though was given an opportunity to inspect and directed to give an opportunity to the appellant to file its explanation in view of the four documents supplied later on, naturally the opinion to be formed would be based on the explanation....
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....he basis of a final conclusion. But, it must be based on the material evidence available for forming such basis. (iii) These writ petitions are frivolous and have been filed only to drag on the proceedings. Ultimately, the second respondent sought for dismissal of these writ petitions. 5. The learned Senior Counsel appearing on behalf of the petitioners made the following submissions : (a) The corporate structure of the Xiaomi Group is as follows : (b) The SULA dated 27.10.2010 was entered into between the said M/s.Qualcomm Incorporated (a Delaware Corporation) and one M/s.Xiaomi Inc. (a company organized under the laws of the People's Republic of China) so as to enable the said M/s.Xiaomi Inc. to obtain a licence of M/s.Qualcomm Intellectural Property to manufacture and sell the subscriber units in exchange for the licence fees and royalties. The definition of the word "affiliates" is provided under the SULA and the petitioner company will directly fall under this definition since it comes within the same Xiaomi Group and is an indirect subsidiary. (c) He pointed out to the assignment and amendment of the SULA dated 16.10.2023 entered int....
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....umption agreement of Master Software Agreement dated 01.10.2012, the assignment and assumption agreement of Master Software Agreement dated 13.12.2013 in favour of the said M/s.Xiaomi Communications Co.Ltd. and the amendment to the Master Software Agreement dated 01.8.2016 entered into among the said M/s.Qualcomm Technologies Inc., the said M/s.Xiaomi Communications Co.Ltd. and the petitioner company. (i) The further royalty of Rs. 223.73 Crores was paid to the said M/s.Qualcomm Technologies Inc., in this regard. Apart from that, there is an agreement called as the LRAA dated 01.12.2017 entered into between the said M/s.Beijing Xiaomi Mobile Software Company Limited and the petitioner company and towards the same, the petitioners paid a sum of Rs. 877.31 Crores. (j) In the light of the above submissions, the learned Senior Counsel questioned the very complaint given by the second respondent under Section 16(3) of the FEMA, the show cause notice that was issued under Rule 4(1) of the FEMA Rules and also the opinion formed by the first respondent under Rule 4(3) of the FEMA Rules. (k) The petitioners made repeated requests for the inspection of records of i....
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....payment will be covered under 'automatic route'. ● The respondents exceeded in their jurisdiction by initiating a frivolous litigation, which misled the terms of the royalty agreement and it is outside the scope of powers vested with them under the FEMA. In the complaint, there is no clarity as to the actual contravention made since the second respondent was not sure of the allegations being made against the petitioners and conducted the investigation in haste. ● It is not the prerogative of the second respondent to determine the validity of the contracts or make assertions regarding the non payment of taxes and both of them are not the subject matters within the jurisdiction of the second respondent under the FEMA. In short, the second respondent is incompetent to adjudicate or opine on the contractual rights under the Patent Law. The Authority does not have the domain to re-write the agreements, which have been entered into by the petitioner company with the other parties on the basis of commercial expediencies. ● The second respondent failed to see that the mobile phones sold by the petitioner company use SEPs/technology of th....
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....go beyond its ambit. To substantiate this submission, reliance is placed on the decision judgment of the Apex Court in the case of L.Hirday Narain Vs. ITO [reported in 1970 (2) SCC 355]. ● The opinion arrived at by the first respondent would show the non application of mind without considering the objections raised by the petitioners and it is in gross in violation of the principles of natural justice. To substantiate this submission, reliance is placed upon the First Bench judgment of the Bombay High Court in the case of Shashank Vyankatesh Manohar Vs. Union of India [reported in 2013 SCC OnLine Bombay 987 : 2014 (1) Maharashtra LJ 838]. ● The burden of proof to demonstrate the contravention under the FEMA is on the second respondent. However, this burden has not been discharged by the second respondent. Since this onus has not been satisfied, the very complaint itself is bad in law and Section 42 of the FEMA is not satisfied in so far as the proceedings against the Executive of the company is concerned. ● The proceedings initiated by the second respondent is vitiated by bias since he is under a pre-conceived notion that the petitioners....
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.... after the First Bench judgment of the Bombay High Court in Shashank Vyankatesh Manohar, which was confirmed by the Hon'ble Apex Court by dismissing the delay condonation petition in the special leave petition filed at the instance of the Union of India vide order dated 04.7.2014. ● The entire proceedings under the FEMA and the FEMA Rules is structured in such a way that the inquiry against the noticee is yet to commence and that will start only after forming an opinion under Rule 4(3) of the FEMA Rules. At that stage, the Adjudicating Authority is required to given an opportunity to such a person to produce such documents as evidence as he may consider relevant to the inquiry. It is only at that stage, the disclosure of the reports and the evidence that are in possession of the Department will have to be furnished so as to enable the petitioners to effectively defend themselves. Without even reaching that stage, the petitioners cannot be allowed to make the submissions on merits and make this Court adorn the role of the Adjudicating Authority. ● The petitioners have sufficient alternative remedies in terms of a right of appeal under Section 19(1) ....
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...., which was relied upon on the side of the petitioners will not apply to the facts of the present case since that judgment arose out of disciplinary proceedings, which required recording of reasons while passing the order of discharge. According to the learned Additional Solicitor General, the ratio in a case has to be understood only based on the actual issue that is involved in the case based on facts. The ratio in that judgment cannot be applied in the proceedings under the FEMA where the language used under Rule 4(3) of the FEMA Rules does not contemplate assignment of reasons while forming the opinion. ● In so far as the documents sought for by the petitioners were concerned, that stage has not yet reached and while forming the opinion, the first respondent applies his mind only to those documents that have been relied upon by the second respondent and the copies of those documents are available with the petitioners. The question of calling for the non RUDs will arise only at the stage of defence. ● Reliance is also placed on a common judgment of the Three Judges' Bench of the Hon'ble Apex Court in the case of Sarla Gupta Vs. Directorate o....
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....titioners remitted royalty payments to their group entities and to the Qualcomm Entities without obtaining prior approval from the RBI, thereby contravening certain provisions of the FEMA. Pursuant to an investigation conducted by the of Enforcement Directorate (ED), proceedings were commenced, which culminated in the filing of a complaint dated 02.6.2023 by the second respondent under Section 16(3) of the FEMA before the first respondent and the issuance of a show cause notice dated 09.6.2023 by the first respondent. 11. The petitioners have assailed different stages of the adjudication proceedings through a series of writ petitions filed before this Court, specifically: (i) the complaint dated 02.6.2023 filed by the second respondent has been challenged in W.P.Nos.16000 and 16002 of 2024; (ii) the notice of hearing dated 04.4.2024 and the formation of opinion by the first respondent under Rule 4(3) of the FEMA Rules have been challenged in W.P.Nos.15996 and 15998 of 2024; (iii) the show cause notice dated 09.6.2023 issued by the first respondent has been challenged in W.P.Nos.15999 and 16001 of 2024; and (iv) the order dated 10.2.2025 reject....
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.... said M/s.Xiaomi Inc. provided subscriber units and components. 16. Pursuant to the execution of the SULA, the MSA dated 19.11.2010 was executed between the said M/s.Qualcomm Incorporated and the said M/s.Xiaomi Inc., governing the development, manufacture and sale of wireless subscriber equipment. Thereafter, by way of an Assignment and Assumption Agreement dated 01.10.2012, the said M/s.Qualcomm Incorporated assigned its rights and obligations under the MSA to the said M/s.Qualcomm Technologies Inc., which is a wholly owned subsidiary, thereby effecting a transfer of the contractual relationship to the said M/s.Qualcomm Technologies Inc. 17. Subsequently, the rights under the SULA were further assigned by the said Xiaomi Technology Co.Ltd. to the said M/s.Xiaomi Communications Co.Ltd. through an Assignment and Amendment Agreement dated 16.10.2013. The said agreement was executed among the said M/s.Qualcomm Incorporated, the said M/s.Xiaomi Technology Co. Ltd., the said M/s.Xiaomi Communications Co.Ltd. and the said M/s.Xiaomi Corporation. Through this agreement, the said M/s.Xiaomi Corporation was recognised as the parent entity of the said M/s.Xiaomi Communications Co.Ltd.....
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....ted 01.10.2017 was entered into among the said M/s.Qualcomm Incorporated, the said M/s.Xiaomi Corporation and the said M/s.Xiaomi Communications Co.Ltd. This agreement conferred upon the licensees the right to use the Qualcomm's intellectual property in connection with specific categories of products, including CDMA and LTE Semi Knockdown Kits ("SKDs") in consideration of royalty payments. d) The MPLA-2 was executed on 01.1.2018 between the said M/s.Qualcomm Incorporated and the said M/s.Xiaomi Communications Co.Ltd. This agreement extended sublicensing rights to the licensee and its affiliates, including the petitioner company in respect of certain covered products. It was subsequently amended on 01.3.2019 to include branded CDMA and LTE single-mode complete terminals and further amended on 01.4.2020 to incorporate new definitions. (e) It is also relevant to note that by way of a communication dated 18.5.2018, the said M/s.Qualcomm Incorporated expressly instructed the petitioner company to directly remit the royalty payments on behalf of the said M/s.Xiaomi Communications Co.Ltd. due under the SULA framework to them. This appears to be the only contemporaneo....
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.... said confirmation order is presently under challenge before the High Court of Karnataka. 25. On 02.6.2023, the second respondent filed a complaint before the first respondent under Section 16(3) of the FEMA alleging that the petitioner company had contravened the provisions of Sections 3(b), 4, and 42(1) of the FEMA. The complaint also relied on Paragraph 3 of the AP (Dir Series) Circular No.52 dated 13.5.2010 read with Paragraph 4.9 of the RBI FED Master Direction No.8/2015-16 dated 01.1.2016. Pursuant thereto, a show cause notice dated 09.6.2023 was issued by the first respondent under Rule 4 of the FEMA Rules calling upon the petitioners to show cause on or before 09.7.2023 as to: I. why an inquiry should not be held under the FEMA Rules; II. why penalty under Section 13(1) of THE FEMA should not be imposed; and III. why the seized amount should not be confiscated under Section 13(1-A) of the FEMA. 26. The petitioners received the copies of the complaint, the show cause notice and the set of RUDs on 15.6.2023. It is the case of the petitioners that several documents referred to in the complaint were not furnished and that various materials submi....
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....hat a fresh and independent opinion should be arrived at without being influenced by the previous exercise. This Court further held that the earlier opinion was non est in the eye of law. 30. In the interregnum, the petitioners submitted detailed preliminary objections on 21.2.2024 to the show cause notice. In purported compliance with the directions issued by the Hon'ble First Bench of this Court, the first respondent is stated to have formed a fresh opinion dated 04.4.2024. However, this opinion was not issued as a formal order and was merely conveyed to the petitioner company via email dated 18.4.2024 bearing the subject line as "Xiaomi Opinion" without disclosing the reasons or basis for the decision. 31. By letter dated 20.4.2024, the petitioners sent a reply to the first respondent through an advocate seeking a copy of the formal order recording the opinion along with reasons after making a reference to Technical Circular No.11/2014. The first respondent, vide email dated 25.4.2024, responded stating that the opinion had been completed and formed part of the note sheet of adjudication. 32. During the personal hearing held on 07.10.2024, the petitioners reiterated....
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....ts of the petitioners in effectively defending themselves during the adjudication proceedings till the stage of formation of opinion?" DISCUSSIONS : Issue No.1 : 35. Before this Court ventures to deal with the issues that have been framed for consideration, it will be apposite to take a close look at the manner, in which, the FEMA and the FEMA Rules are structured. 36. The Hon'ble Apex Court, in the case of Natwar Singh, went into this aspect and ultimately held as follows : "22. That a bare reading of the relevant provisions of the Act and the Rules makes it abundantly clear that the manner, method and procedure of adjudication are completely structured by the statute and the Rules. The Authority is bound to follow the prescribed procedure under the statute and the Rules and is not free and entitled to devise its own procedure for making inquiry while adjudicating under Section 13 of the Act since it is under legislative mandate to undertake adjudication and hold inquiry in the prescribed manner after giving the person alleged to have committed contravention against whom a complaint has been made, a reasonable opportunity of being heard for the purpose of ....
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....hat it provides for a complete network of provisions adequately structuring the rights and remedies available to a person, who is aggrieved by any adjudication under the FEMA. 38. Useful reference can also be made to the judgment of the Gauhati High Court in the case of Sunita Agarwal wherein the relevant portions read thus : "106. Rule 4(1) of the FEMA Rules, 2000 provides that for the purpose of adjudicating under Section 13 of the Foreign Exchange Regulation Act, 1973, the Adjudicating Authority shall issue notice to such person requiring him to show cause within such period as to why an enquiry should not be held against him. Rule 4(3) of the FEMA Rules, 2000 provides that after considering the cause if any shown by such person, the Adjudicating Authority is of the opinion that an enquiry should be held, a notice fixing a date for appearance of that person, either personally or through lawyer or authorised chartered accountant, be issued. 107. While interpreting of the provisions of Rule 4(1) and 4(3) of the FEMA Rules, 2000, the Supreme Court in Natwar Singh v. Directorate of Enforcement, [(2010) 13 SCC 255] arrived at its conclusion in paragraph 23 of its....
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....eferred to the proposition laid down in paragraph 23 of Natwar Singh v. Directorate of Enforcement, [(2010) 13 SCC 255]. In paragraph 35, the conclusion arrived was that the notice under Rule 4 (1) of the PR-1995 is not for the purpose of making an adjudication into the alleged contravention, but only for deciding whether an enquiry must be conducted. It was also held that the stage when an enquiry is held is subsequent to the initial stage contemplated by Rule 4(1). In paragraph 36 of T.Takano v. Securities and Exchange Board of India, reported in (2022) 232 Comp Cas 136 (SC); 2022 SCC OnLine SC 210, it had been held that the Court distinguishes between the initial stage under Rule 4(1) which is only for the purpose of deciding whether an enquiry has to be held and the subsequent stage of adjudication into the allegations of contravention." 39. The above judgment lucidly explains the scope of inquiry into the allegations of contravention against any person, against whom, a complaint has been received, at every stage, till an opinion is formed under Rule 4(3) of the FEMA Rules. The stage under Rule 4(1) of the FEMA Rules is structured only for deciding as to whether an inquiry m....
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.... into by the petitioner with the other companies. The show cause notice dated 09.6.2023 issued by the first respondent has also been challenged on the ground that it went beyond the scope of Rule 4(1) of the FEMA Rules, which confines itself only to decide as to whether an inquiry is to be held. According to him, the first respondent crossed that boundary and also called upon the petitioners to show cause as to why penalty should not be imposed under Section 13(1) of the FEMA. 45 In the considered view of this Court, it is not necessary for this Court to now venture at this stage into the legality or otherwise of both the complaint of the second respondent as well as the show cause notice issued by the first respondent since the petitioner company is now before this Court for the second time after the stage of formation of opinion by the first respondent under Rule 4(3) of the FEMA Rules. 46. In the first round, the petitioner company filed W.P.Nos. 35654 of 2023 etc. cases questioning the show cause notice issued under Rule 4(1) of the FEMA Rules and also the opinion formed under Rule 4(3) of the FEMA Rules. When the earlier writ petitions were disposed of on 23.1.2024 by a ....
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....was), in the case of Ramakrishna Setty, held as follows : "9. A careful look at the provisions of Sub- Rules (1) to (12) of Rule 4 would show that the enquiry by the respondent, comprises of five stages, which are as follows:- '1. The issue of show cause notice of a duration of not less than ten days, calling upon the person to show cause as to why an enquiry should not be held for any contravention. 2. The issue of a notice fixing the date for the appearance of the person, if after considering the cause shown by the person to the show cause notice, the adjudicating authority is of the opinion that an enquiry should be held. 3. The explanation by the adjudicating authority in person, either to the noticee or to his authorised representative, the contravention committed by the noticee with reference to the provisions of the Act or the Rules or the Regulations. 4. Giving of an opportunity to the noticee to produce such documents or evidence and the summoning and enforcing of the attendance of any person. 5. Passing of the orders.' 10. Therefore, the scheme of Section 4 actually provides opportunities at the every ....
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....n his possession, that' 27. Whenever a statute requires a particular thing to be done in a particular manner, it is a trite position of law that it should be done in that manner alone and not otherwise. The provisions of Sub-Rule 3 of Rule 4 in contra distinction to the provisions of the Section 5(1) of the Prevention of Money-Laundering Act, 2002, do not require the reasons to be recorded in writing. If we are to read into the provision, such a requirement, the same, in our considered opinion, would lead to disastrous results, where notices under various enactments which provide for enquiry on the basis of a subjective satisfaction of the adjudicating Authority or the enquiry officer or the Disciplinary Authority would take a stand that those Authorities should also record their reasons for forming an opinion and communicate the same." 52. It is also relevant to take note of another order passed by a learned Single Judge of this Court (S.M.Subramaniam,J) in the case of Citi Bank N.A. Vs. Directorate of Enforcement [W.P.No.374 of 2024 dated 30.4.2024]. The said case arose out of a challenge to the formation of opinion under Rule 4(3) of the FEMA Rules. While dealing....
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....pinion is the point, where the enquiry commences and such an opinion formed would not be a ground to penalize a person. The opinion is formed by the adjudicating authority to proceed with the personal hearing and not for any other purposes. Therefore, intimating such an opinion formed by the adjudicating authority to the persons are unnecessary and not contemplated under Rule 4(3). Therefore, Rule 4(3) cannot be interpreted beyond its scope and the procedures contemplated under Rule 4 in entirety are to be considered holistically to understand whether a fair opportunity has been provided to the persons or not. 19. Rule 4(4) stipulates that "on the date fixed, the Adjudicating Authority shall explain to the person proceeded against or his legal practitioner or the chartered accountant, as the case may be, the contravention, allowed to have been committed by such person indicating the provisions of the Act or of Rules, Regulations, Notifications, directions or orders or any condition subject to which an authorisation is issued by the Reserve Bank of India in respect of which contravention is alleged to have taken place." Therefore, the adjudicating authority is duty bound to....
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.... practice of prolonging and protracting the enquiry proceedings by approaching the High Court at each stage cannot be appreciated. Once the proceedings are commenced, the adjudicating authorities are expected to follow the procedures scrupulously and the persons concerned are bound to cooperate and defend their case by availing the opportunities to be provided in accordance with the Rules in force. 22. In view of the fact that the judgement of the Division Bench of the Madras High Court, in the case of India Cements Limited cited supra, is the latest judgement, wherein the interpretation of Rule 4(3) offered by the Bombay High Court was considered, this Court is bound by the decision of the Division Bench of High Court of Madras. 23. When the interpretation offered by the Bombay High Court in Shashank Vyankatesh Monohar case has not been followed by the Division Bench of Madras High Court, the validity of the circular lapses automatically. Therefore, the Enforcement Directorate has to issue suitable orders cancelling the circular." 53. A combined reading of the above three decisions of this Court on the scope of challenging an opinion arrived at under Rule 4(3)....
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.... with principles of natural justice." 56. The First Bench of the Bombay High Court has taken a different view and it was held that the Adjudicating Authority must apply his mind to the objections given by the noticee to the show cause notice and record his reasons to proceed further and such recorded reasons should be furnished to the noticee. The First Bench also made it clear that such recording of reasons will give the noticee a chance during the adjudication proceedings to meet the reasons, which led the Adjudicating Authority to form an opinion that he must proceed further with the inquiry against the noticee. 57. It is brought to the notice of this Court that the appeal filed against the First Bench judgment of the Bombay High Court in the case of Shashank Vyankatesh Manohar was dismissed on 04.7.2014 at the stage of admission of the special leave petition and thereby it became final. Pursuant to the above development, a technical circular in Circular No.11/2014 dated 26.9.2014 came to be issued. On carefully reading this circular, it is seen that a decision was taken by the Directorate of Enforcement to comply with the First Bench judgment of the Bombay High Court. It ....
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....ld that formation of opinion under Rule 4(3) of the FEMA Rules does not, per se, penalise a person and that is only the starting point for proceeding with the adjudication after affording an opportunity to the parties concerned. 62. The impugned notice of hearing dated 04.4.2024 contains reasons for the first respondent to form an opinion to proceed further with the adjudication. Since those reasons are available, this Court thought it fit to apply its mind on the reasons available in the notice of hearing. Apart from going through the terms of various agreements, the first respondent has also considered the statements recorded from the officers belonging to the authorized dealers and has, prima facie, satisfied himself to proceed further with the adjudication after affording an opportunity to the petitioners. 63. Two major issues that loomed large in the mind of the first respondent are as follows : (i) The outflow of nearly Rs. 5,551 Crores that went out of the country in terms of payment of royalty, out of which, nearly Rs. 877 Crores went into the account of one of the companies that formed part of the Xiaomi Group and the first respondent has formed an opinion t....
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.... above discussions is that this Court is not inclined to interfere with the opinion formed by the first respondent under Rule 4(3) of the FEMA Rules. It is not necessary for this Court to render a finding on the related issues covered under Issue No.3. Issue Nos.2 and 3 are answered accordingly. Issue No.4 : 67. This Court will now move on to the last issue on the request made by the petitioners for furnishing copies of all the documents including the non RUDs. 68. At the time of forming an opinion, what is required for the first respondent is to apply his mind on the show cause notice issued, the documents relied upon therein and the reply given by the other noticees to the show cause notice. At this stage, the first respondent does not apply his mind on all conceivable documents falling under the category of the RUDs and the non RUDs. Therefore, no prejudice will be caused to the petitioners if all the documents sought for by them are not furnished at this stage. This is in view of the fact that the petitioners have not entered the defence stage till the proceedings reach the stage under Rule 4(4) of the FEMA Rules. 69. All the judgments pointed out by the learned ....