TaxTMI 
TaxTMI 
TaxTMI 
2026 (3) TMI 204
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....nagement (Transfer or issue of any Foreign Security) Regulation, 2004 (hereinafter referred to as 'Regulation, 2004'). 2. The brief facts of the case are that appellant M/s Avantha Holdings Ltd. (previously known as M/s New Quest Corporation Ltd.) was incorporated in the year 1998. The appellant M/s Avantha Holdings Ltd. was not registered with any Regulatory Authority in India or elsewhere to carry out any Financial Services Activity. Regulation 6(2)(ii) of the Regulation, 2004 permits Indian Companies to make direct investment in any Joint Venture or Wholly Owned Subsidiary engaged in a bona fide activity. The appellant company opened two Wholly Owned Subsidiaries in Mauritius in the name of M/s NQC International (Mauritius) Ltd. and M/s NQC Global (Mauritius) Ltd. Both the Wholly Owned Subsidiary companies were established with an investment of US$ 10,000 each and there exists no allegation for contravention of the provisions of the Act of 1999 and Regulation, 2004 for it. It is stated that the two Wholly Owned Subsidiary companies were not engaged in financial service activity. In fact, the subsidiaries were opened for legitimate purpose to promote the business activity of t....
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.... & US$ 10 million through their SPVs viz M/s NQC International (Mauritius) Ltd. from ICICI Bank, Canada. M/s NQC Global (Mauritius) Ltd. had also taken loan from ICICI Bank, UK and invested in India through FDI route. 6. The RBI informed to the respondents that ICICI Bank was financing SPVs of Indian corporate incorporated abroad and the funds lent by the bank were in turn reinvested by these SPVs in India through the FDI. The reference of the loan taken by the subsidiaries was given with further reference that it was reinvested in the Group companies in India. The two companies at Mauritius were step down subsidiaries of the appellant company which were later on utilized for investment in India which was not the bona fide business activity as per the Regulation of 2004. It was with the further allegation that SPVs were set up by the appellant company with the sole intention of raising funds overseas and to bring back these funds to India for reinvestment in the redeemable cumulative, non-cumulative preference shares and cumulative fully convertible preference shares of their Group companies. This amounts to "round tripping". The reported business activities of the SPVs cannot b....
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.... took notice and finding irregularities, sent an information to the respondent about irregularities and accordingly, the respondents caused notice after finding further details under Section 37 of the Act of 1999. 9. The learned counsel for the appellants submitted that the allegation against the appellants is for violation of Section 6(3)(a) of the Act of 1999 read with Regulations 6(2) and 7 of the Regulation, 2004. It was submitted that the allegations of violation of the provisions of the Act and Regulation have been made without analyzing the case, rather the Special Director passed the order in a mechanical manner based on the information of the RBI. It was not an order passed after analyzing the rival submissions and penalties have been imposed treating it to be a case of "round tripping" of the funds without any basis and even ignoring the judgments on the issue referred while filing reply to the notice. The "round tripping" of the funds has not been defined under the Act of 1999 and, therefore, it was all the more necessary for the respondents to analyze the issue after taking proper definition of the "round tripping" of the funds. 10. The learned counsel for the app....
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....of Vodafone International Holdings B.V. (supra), a case of "round tripping" is not made out. The facts on record shows all the transactions through the authorized dealer and in the knowledge of RBI. It is also when the establishment of two Wholly Owned Subsidiaries cannot be said to be in contravention of any provision and so as the borrowing by those companies from ICICI Bank, Canada and ICICI Bank, UK. The amount so borrowed was invested in different companies and even repayment of US$ 9 million was made against the aforesaid borrowing. In the light of the aforesaid, the impugned order would not be sustainable having been passed largely based on the observation of the RBI. The finding could not have been recorded by the Special Director only on the basis of observation of the RBI but with independent application of mind which is missing in this case. 13. The learned counsel for the appellants further submitted that Master Circular on External Commercial Borrowings (ECB) and Trade Credits dated 02.07.2007 was not applicable to the facts of this case. The respondents have recorded a portion of Circular which prohibits use of ECB proceeds for on-lending, investment in capital mar....
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....the Act of 1999 and Regulation 6(2) and 7 of Regulation, 2004. It was along with the violation of Master Circular on External Commercial Borrowings (ECB) and Trade Credits. The learned counsel submitted that the two companies were the step down subsidiaries of the appellant company which were later on utilized for re- investment in India, which was not a bona fide business activity as per the provisions of Regulation, 2004. The sole intention of the appellant company for establishing two subsidiaries abroad was to raise funds overseas and to bring those funds in India for re-investment in the redeemable cumulative, non-cumulative preference shares of their Group companies. This amounts to "round tripping" and, therefore, the Special Director rightly imposed the penalty on the company as well as on the individuals. 17. The learned counsel for the respondents reiterated the facts narrated by the appellants in regard to the transactions taking it to be the case of "round tripping" and in that regard, statement recorded under Section 37 of the Act of 1999 was also referred. Referring to the statement of one of the Director of the Company, it was submitted that when he was asked the ....
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.... and scanned the record carefully. 21. The appellants were served with the show cause notice alleging contravention of Section 6(3)(a) of the Act of 1999 and Regulations 6(2)((ii) and 7 of the Regulation, 2004. It is on the ground that two Wholly Owned Subsidiaries established by the appellant company were not involved in bona fide business activity abroad, rather it was established to secure the borrowing from the bank abroad to make reinvestment in the appellant company which amounts to "round tripping" and accordingly penalty of Rs. 10 Crores has been imposed on the appellant company and Rs. 1 Crore each on the 4 Directors appellants. We need not to reiterate the facts about the establishment of two Wholly Owned Subsidiaries for which US$ 10,000 were invested by the appellant company. The two Wholly Owned Subsidiaries secured the loan from ICICI, Canada and ICICI, UK with its investment in the Group companies in India and even in one company in USA. Since allegation has been made for contravention of Section 6(3)(a) of the Act of 1999 and Regulations 6(2)((ii) and 7 of the Regulation, 2004, it would be gainful to quote those provisions hereunder: "Section 6(3) of the....
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....on. (g) Hundred per cent of the value of the bank guarantee issued by a resident bank on behalf of an overseas JV/WOS of the Indian party, which is backed by a counter guarantee/ collateral by the Indian party. Overseas direct investment by an Indian party in Pakistan shall henceforth be considered under the approval route under regulation 9 of this Notification.] (ii) The direct investment is made in an overseas Joint Venture or Wholly Owned Subsidiary engaged in a bona fide business activity. Regulation 7 of the Regulation of 2004 Investment by Indian Party engaged in Financial Services Sector 7. (1) Subject to the Regulations in Part I, an Indian Party engaged in financial services sector in India may make investment in an entity outside India: Provided that the Indian party (i) has earned net profit during the preceding three financial years from the financial services activities; (ii) is registered with the regulatory authority in India for conducting the financial services activities; (iii) has obtained approval from the concerned regulatory authorities both in India and abroad, for vent....
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....idiary companies of the appellant were not having bona fide business activity. The Special Director has recorded its finding to this effect. The reference of detailed reply has been given in the impugned order, rather it has been quoted in Para 14 of the impugned order. After reproducing the reply verbatim, the finding has been recorded in Para 17 onwards. The Special Director has noted that two Wholly Owned Subsidiary companies were opened by remitting US$ 10,000 each as a contribution to the equity of those subsidiaries. The remittance was made through the authorized person. It was with the report to the RBI through the authorized person thus allowed by the RBI. The fact aforesaid has been mentioned in Para 17 of the order. 24. The learned Special Director thereupon took note of letter of the RBI dated 04.03.2010 where it was mentioned that SPVs were set up to raise funds overseas and to bring back those funds in India for the purpose of re-investment in the redeemable cumulative, non-cumulative preference shares of their Group companies. It is not treated to be bona fide business activity as this circumvents the ECB guidelines and not in conformity with Regulation 7 of Regula....