TaxTMI 
TaxTMI 
2026 (7) TMI 658
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....by the Special Director, Enforcement Directorate, Government of India, Chennai. The Ld. Adjudicating Authority (AA) imposed penalty of Rs. 5,00,00,000/- on the Appellant Company M/s Google India Pvt. Ltd. for the contraventions of Section 6 (3) (d) of the Foreign Exchange Management Act, 1999 (FEMA), read with Regulations 3, 5 (3), Regulations 6 (3) and Paragraph 1 of the "Schedule-III" of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000. Penalty of Rs. 20,00,000/- was imposed on Shri Lloyd Hartley Martin, penalty of Rs. 20,00,000/-was imposed on Shri Kent Walker and penalty of Rs. 5,00,000/-was imposed on Shri Hari Raju Mahadevu, vide the Impugned Order, for the aforementioned contraventions in terms of Section 42 of FEMA. 2. Ld. Counsel for the Appellant submitted that the Impugned Order is entirely non-speaking and does not consider many submissions of the Appellant made before the Respondent. Furthermore, the Impugned Order is silent on vital submissions made by the Appellant on both factual as well as legal issues. At the outset, it is submitted that the Impugned Order has been issued after an inordinate, unexplained and unreasona....
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....ng explicit clauses in the Distributor Agreement which require the Appellant to adhere to all compliances as required under the local laws. (e) Ignoring the invoices raised by Google Ireland on a Quarterly basis on the Appellant for payment of Distributor Fee. The aforesaid invoices were annexed to the Appellant's reply collectively at Exhibit B thereunder and also presently annexed to the present Appeal as Exhibit B. (f) Ignoring the invoices raised by Google USA on the Appellant. The aforesaid invoices were annexed to the Appellant's reply and also presently annexed to the present Appeal as Exhibit M. (g) Ignoring the various evidences provided by the Appellant demonstrating that it had no advantage, pecuniary or otherwise resulting from the delay in payments. The said evidences were annexed to the Appellant's reply at Exhibits H & G thereunder and are also presently annexed to this Appeal as Exhibits N. (h) Wrongly holding that there was no evidence to the effect that the Petitioner was under financial difficulty. (Para 7.11 of the Impugned Order). 3. Ld. Counsel for the Appellants submitted that the Appellant was required to ma....
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....d to be set aside. 5. Ld. Counsel for the Appellants further contended that the pending remittances cannot in any manner be construed to fall under a "Borrowing or Lending in Foreign Exchange in whatever form or by whatever name called" as provided under Section 6(3)(d) of the FEMA in as much as Google Ireland and Google USA have not lent and the Appellant has not borrowed any amount in foreign exchange in any form. Therefore, the finding that the transactions in question are Capital Account Transactions that alter the assets and liabilities of Google Ireland is unsustainable. It is submitted that the Respondent has wrongly held that in the present case the pending dues is a form of ECB/Trade Credit/supplier credit/buyer credit which is subject to the provisions under the Regulations. The Respondent has failed to consider that availing of an ECB/ trade credit/buyer credit/supplier credit necessarily involves that the transaction must be related to obtaining cross border commercial loan by an Indian resident entity from the overseas entity. The Indian entity and foreign entity must execute a loan agreement along with draw down and repayment schedule which must be filed with the R....
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....sion obtained from the RBI would validate the prior action of purchase of shares by the person residing outside India. The Respondent has also not considered that the provisions of Regulation 5(3) has no application in the present facts and circumstances since no foreign currency credit has been extended by Google Ireland to the Appellant. At the cost of repetition, it is submitted that there was no understanding, implied or explicit, between Google Ireland and the Appellant for availing any foreign currency credit. The Distributor Agreement and the invoices raised are testament to the same. Therefore, assuming without admitting and for the sake of arguments only that Regulation 5(3) is applicable to services, it yet does not have any application in the present facts and circumstances. So also the Respondent has erred in holding that the Appellant has contravened Regulation 6(3) read with para 1 of Schedule III of the Regulations. As aforesaid, Regulation 6(3) read with Paragraph 1 of Schedule III has no application inasmuch as there is no buyer's credit and/or trade credit and/or supplier's credit taken by the Appellant. Assuming without admitting for the sake of arguments....
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....onsolidated by the RBI in its Master Circular on Import of Goods and Services dated 01.07.2014 ("Master Circular on Imports"). The Impugned order passed by wrongly placing reliance on provisions that are not applicable to the Appellant in the present case is therefore bad in law and required to be set aside. The Respondent has failed to consider that the aforesaid Circular No. 9 dated 24.08.2000 was reviewed and revised by the RBI by issuance of A. P. (DIR Series) Circular No. 106 dated 19.06.2003. Subsequently, the RBI has consolidated the instructions on Import of Goods and Services under the Master Circular on Imports. The very fact that an older and inapplicable circular has been relied upon by the Respondent itself renders the Impugned Order bad in law and is therefore required to be set aside. Under Para B.5.1(ii), the AD Banks are allowed to permit settlement of any delayed payments when such delays are due to disputes, financial difficulties etc. Thus, the Master Circular on Imports allows the AD Banks to permit payments to be made beyond a period of 6 months for import of services. The Respondent has completely ignored the aforesaid provision and has wrongly relied upon Ci....
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....Appellant was contractually required to make multiple payments at fixed intervals in one year. The finding that Clause 6.1 means that payments would only be made beyond a period of 6 months is absolutely contrary to the explicit terms and conditions between the Appellant and Google Ireland. Therefore, the Impugned Order is required to be set aside. The finding in the Impugned Order that Clause 6.1 provided for payments against the provisions under FEMA are also unsupported inasmuch there are specific clauses in the Distributor Agreement that mandate the Appellant to comply with all local laws. This is specifically stipulated under Clause 2.4 and 2.5 of the Distributor Agreement which has been completely ignored by the Respondent. The Respondent has erred in its finding that the Appellant ought to have approached the RBI immediately on the completion of the 3rd year from the date of corresponding invoice of FY 2006-07 i.e. 2009-10 and taken its approval for continuing to delay the remittances. The Respondent has not considered that the Petitioner is not required under law to approach the RBI for any approvals under the Regulations as the pending Distributor Fee was on account of a s....
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.... party either acted deliberately in defiance of law or was guilty of conduct contumacious or acted in conscious disregard of its obligation. Reliance is placed on the decision of Hindustan Steel Ltd. v. State of Orissa 1969 (2) SCC 627 at para 8. 11. Ld. Counsel for the Appellants argued that the Appellants Shri Lloyd Hartley Martin and Shri Kent Walker are foreign nationals and non-residents. The Appellants were Directors of M/s Google India Private Limited for the Financial Years 2007-08, 2008-09 and 2009-10. The Appellants had resigned from the Board of Directors of GIPL on 28.03.2012 and are not part of GIPL since then. Even when the Appellants were part of the Board of GIPL, they were not involved with the day-to-day functioning of the Appellant Company during the aforesaid time period. Ld. Counsel further submitted that under Section 42 of FEMA, it is only when there is a contravention by the Company that the person who is responsible for the conduct of the business of the Company is deemed to be guilty of the contravention. In the present case, the findings of the Respondent that GIPL has contravened the provisions under FEMA itself is unsustainable. Therefore, the questi....
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....ct of its business during the period of dispute, no penalty ought to be imposed under Section 42 of the FEMA. Without prejudice to any of the aforesaid, the Respondent has erred in holding that no arguments or evidence has been produced showing exercise of due diligence by the Appellant inasmuch as the Appellant was not in charge of the day to day running of the affairs of GIPL prior to 22.09.2010. Once the Appellant was duly appointed as a Director of the GIPL, he duly approached the AD Bank for making such payment within the next quarter vide it is letter dated 01.03.2011. In light of the aforesaid, the finding that there was no argument or evidence produced by the Appellant regarding the exercise of due diligence is divorced from the factual scenario at hand and is required to be set aside. In any event, the Respondent has failed to consider that there was no mens rea on the part of the Appellant in the present case. In the absence of mens rea, there is no justification for the Respondent to impose the huge penalty on the Appellant. The Respondent has failed to consider that the bona fides are established by the fact that due approval was sought for making the remittances in the....
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....y records that for the years 2005-2009, large sums remained outstanding and unpaid. Ld. Counsel submitted that this is not a case of short delay or inadvertent omission. The dues in question, running into hundreds of crores, were consciously allowed to remain unpaid for years. This created a clear situation of "trade credit" in favour of the foreign group entity, which is a borrowing under FEMA. It is only much later, on 28.03.2012, that the Appellant approached the AD Bank seeking permission to remit the accumulated dues. The AD Bank, recognizing that such remittances required RBI approval, forwarded the request to the RBI on 05.02.2013. The RBI, instead of granting blanket approval, raised pointed queries vide its letter dated 10.04.2013. The RBI asked the Appellant to clarify the genuineness of the delay, confirm tax compliance, and disclose whether any pecuniary gain accrued from foreign exchange fluctuation. In response, the Appellant furnished a Chartered Accountant's Certificate dated 31.07.2013 and a self-confirmation letter dated 02.09.2013, both asserting that no forex gain had accrued. These documents, far from exonerating the Appellant, actually confirm that dues we....
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....verseas supplier of goods, provided the import is in compliance with the Export Import Policy of the Government of India in force." In continuation of the above Circular, the RBI issued AP (DIR Series) Circular No.25 dated 27.09.2002, which simplified the procedure for imports into India wherein it was decided to have uniform Regulations and procedures to both categories of short-term credit viz., Suppliers Credit as well as Buyer's Credit. As per the said Circular the provision relating to prior approval of the Reserve Bank was delegated to the AD Banks and AD Banks were given the power to approve proposals received in Form ECB for short term credit for financing by way of either Supplier's credit or Buyer's credit of import of goods into India. However, the said power to the AD Bank to grant approvals are with conditions that the credit is being extended for a period of less than three years & and that the amount of credit does not exceed USS 20 Million per import transaction. 18. Ld. Counsel further submitted that the RBI in exercise of the powers conferred by clause (d) of sub-section (3) of Section 6, and sub section (2) of Section 47 of the Foreign Exchange ....
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....ndment during 2004 as mentioned above, clearly indicates that the credit facilities under automatic route, envisages that such credit extended by the Service provider for import of service into India shall be only for period of 3 years. In other words, during the extant period of executing the agreement i.e. on 10.08.2006 the provisions of law clearly mandated taking M/s GIPL to take permission from RBI in case the payments are delayed for more than three years. Alternatively, upon completion of three years in respect of the first financial year of receipt of service viz., 2006-07 to an extent of Rs. 42,57,53,347/-, M/s. GIPL ought to have approached the Reserve Bank immediately on completion of the 3rd year from the date of corresponding invoice of FY 2006-07 i.e. during 2009-10, appraised the RBI about the existing agreement, intimate the delay in payment after the mandated period of three years and should have taken approval for continuing to delay the remittances. Similar is the case for the further period also." (b) "I find from the records, that it was only on 28th March 2012, M/s GIPL intimated their AD Bank about the pendency of payments since 2006-07 and covering ....
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.... make themselves eligible for making delayed payments. Further, from the records, I find that there is no dispute between M/s GIPL and M/s Google Ireland which necessitated the delay in making remittances. In view of the above, I am unable to accept the argument of M/s GIPL that the reason for the delayed remittances was on account of "financial difficulties". I am also not convinced about the reasoning of pending tax assessments, as there is no order from the concerned departments not to remit such amounts to M/s Google Ireland." (d) "I find that the said permission of the RBI and the intention of the RBI in according permission has been totally misplaced and misconstrued by M/s GIPL. In response to the request of M/s GIPL to make payments, the Reserve Bank permitted the same and intimated that the said communication is issued under the provisions of FEMA, 1999. The letter of the Reserve Bank is a communication of the permission granted to them under FEMA angle for making payments. I find from the said correspondence that RBI has nowhere indicated about condoning any contravention that has arisen consequent to the delayed payments. During the investigation when a referenc....
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.... for the Respondent Directorate argued that the current account transactions deals with normal payment mechanism with regard to foreign trade and services and short-term credit facilities in the ordinary course of business. In the instant case, as evident from the records and admitted, the payments towards the current account transactions have been delayed for a period ranging between 4 years to 7 years and satisfying the definition of "Trade Credits" provided by the supplier of service viz., Google Ireland and considering the facts of the case and the documents available on record, it has to be construed as per the extant laws that the supplier of service viz., Google Ireland, through the Agreement dated 10.08.2006 by not insisting on the payments to be made within the period permitted by the law and by agreeing to receive payments at mutually agreed intervals have provided Credit facilities which in the instant case has extended beyond 3 years (viz., 4 to 7 years). Thus, the transactions of the Appellant, though satisfy the ingredients of a current account transactions, on account of Receipt of taxable service from a person located outside India/Import of Service and on account o....
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.... September 27, 2002 read with regulations 5(3) of Notification No. FEMA 3/2000-RB dated 3rd May 2000. (ii) Authorised dealers may permit settlement of import dues delayed due to disputes, financial difficulties etc. Interest in respect of such delayed payments may be permitted in terms of the directions in para A.7 below. NOTE: Remittances against import of books may be allowed without restriction as to time limit, provided, interest payment, if any, is as per the instructions in para A.7." Ld. Counsel argued that the RBI in the aforementioned provisions convers not only the deferred payments, but also delayed payments made for imports. Hence, the present case is covered by the said Circular. The ADs are permitted to bring about settlement of the import dues delayed because of financial difficulties. However, the Appellants have failed to demonstrate financial difficulties as reasons for delay in making the payments. Ld. Counsel further stated that the RBI Master Circular on Import of Goods and Services (2004-05, updated 2008) expressly provides in Para 2.2: "All import payments must be completed within a period of six months from the date of shipment.....
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....e Inc., USA worth Rs. 1,08,97,416/- in 2007-08. It is not disputed that M/s GIPL had a total outstanding of Rs. 363,79,49,687/- as on May, 2014 to Google Ireland Ltd. for the distribution fee. The said outstanding had arisen since Rs. 42,57,53,347/- was payable for the year 2006-07 Rs. 119,82,61,982/- was payable for the year 2007-08 Rs. 166,58,00,133/- was payable for the year 2008-09 and Rs. 34,81,34,225/- was payable for the period between April and June 2009-10. It is also not disputed that Rs. 1,08,97,416/- had been pending as on June 2015 for payment to the Holding Company Google Inc., USA for almost seven years. The Appellants have contended that these outstandings were in the nature of current account transactions. While the nature of transactions for purchase of services and goods have been acknowledged as current account transactions in the Impugned Order, findings have been made in the Order that since the payments arising out of such transactions were kept pending for over three years, there arose suppliers credit/trade credit in contraventions of Section 6 (3) (d) of the FEMA, read with Regulations 3, 5 (3), Regulations 6 (3) and Paragraph 1 of the "Schedule-III" of th....
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....ions are hence reproduced below: Prohibition to Borrow or Lend in Foreign Exchange: "3. Save as otherwise provided in the Act, Rules or Regulations made there under, no person resident in India shall borrow or lend in foreign exchange from or to a person resident in or outside India: Provided that the Reserve Bank may, for sufficient reasons, permit a person to borrow or lend in foreign exchange from or to a person resident outside India. Borrowing and Lending in Foreign Exchange by persons other than authorised dealer: 5 (3) An importer in India may, for import of goods into India, avail of foreign currency credit for a period not exceeding six months extended by the overseas supplies of goods, provided the import is in compliance with the Export Import Policy of the Government of India in force. Other borrowings in foreign exchange under Automatic Route or with prior approval of Reserve Bank of India under the Approval Route or as Trade Credit: 6 (3) Trade Credit not exceeding USD 20 million per import transaction shall be raised by borrowings subject to the terms specified in Schedule III hereto; provided that this s....
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....f goods and services by the Appellant Company. However, it has been termed as borrowing in the form of trade credit because such payment remained due for over three years. 24. The Appellants have cited Paragraph B.5.1 (ii) of Master Circular No. 13/2014-15 dated 01.07.2014 (as amended up to 30.04.2015) on Import of Goods and Services which specifically provides for the AD Banks to permit payments due for more than 6 months provided they are pending due to genuine reasons. The relevant provisions of the cited paragraph is as follows: B.5. Time Limit for Settlement of Import Payments B.5.1. Time limit for Normal Imports (i) In terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc. (ii) AD Category-I banks may permit settlement of import dues delayed due to disputes, financial difficulties, etc. Interest in respect of delayed payments, usance bills or overdue interest for a period of less than three years from the date of shipment may be permitted in terms of the directions in para C.2 of....
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....mit for Settlement of Import Payments (i) In terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment except in cases where amounts are withheld towards guarantee of performance etc. Deferred payment arrangements including payments beyond a period of six months from date of shipment are treated as External Commercial Borrowings (ECBs). For deferred or delayed payment imports, authorised dealers may adhere to the instructions issued vide A.P. (DIR Series) Circular No.25 dated September 27, 2002 read with regulations 5(3) of Notification No. FEMA 3/2000-RB dated 3rd May 2000. (ii) Authorised dealers may permit settlement of import dues delayed due to disputes, financial difficulties etc. Interest in respect of such delayed payments may be permitted in terms of the directions in para A.7 below. NOTE: Remittances against import of books may be allowed without restriction as to time limit, provided, interest payment, if any, is as per the instructions in para A.7." The Circular dated 19.06.2003 is unambiguous in stating that deferred payment arrangements including payments beyond a ....
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.... 2.5 Compliance with United States and Other Applicable Law; Conduct of Business. Distributor will comply with all United States and local laws and regulations applicable to the distributor of the goods and services, including but not limited to the Foreign Corrupt Practices Act and U.S. regulations of international boycotts. Distributor shall (a) conduct business in a manner that reflects favorably at all times on the AdWords Program and on Google's goodwill and reputation, and (b) agrees to adhere to the minimum levels of service as specified in Exhibit C. Breach of this Section 2.5 will constitute a material breach of this Agreement. 6 Payment of Fees 6.1 Distributor shall make payments at mutually agreed intervals during the year and make the final trued-up payment on the basis of duly audited accounts to Google." We observe that the Clauses 2.4 and 2.5 of the Distributor Agreement have cast responsibility on the Appellant Company to satisfy all formalities and to perform its obligations in accordance with the prevailing Law and Regulations to make payments. It is obvious from the reading of Clause 6.1 of the Payments Terms and Conditions that ....
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.... on the reasons for delay in payment of distribution fee, M/s GIPL and the AD Bank (on the basis of the reply of GIPL) have intimated that GIPL had been running intercompany accounts, which included other reimbursements apart from "distribution fee"; that it took time for the company to segregate and reconcile on invoice to invoice basis for ensuring settlement of the payments on invoice basis. Thus, here-again M/s GIPL have not indicated about the "financial difficulties" in making payments. Further, the context of the letter dated 10.04.2013 in response to the letter of AD Bank is in the line with the conditions laid down in the RBI Circular wherein AD Banks were permitted to make remittances for granting time to make settlement of import dues, delayed due to disputes, financial difficulties etc., subject to the conditions that the AD Bank is satisfied about the genuineness of the circumstances leading to the delay in payment and no payment of interest is involved. Further, while addressing the clarification of RBI on issue of proposed remittance of interest, M/s GIPL have admitted that the amount due to be paid in 2006-07 to 2008-09, were kept in current account earning no inter....
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....ation of the failure in not having remitted the amount even beyond three years in contravention of RBI Circular read with the Borrowing or Lending in Foreign Exchange Regulations. On perusal of the letter dated 05.02.2013 from the Citi Bank (AD Bank) to the RBI, letter dated 31.07.2013 of the Chartered Accountant of the Appellant Company to the Citi Bank, and letter dated 02.09.2013 from the Appellant Company to the Citi Bank, the findings made in afore cited paragraph 7.11 of the Impugned Order that the delay in making the payments was not due to financial difficulties and there was no dispute with the trading partners abroad, are confirmed. In fact, the reference from the AD Bank to the RBI in itself shows that the case of the Appellant Company could not be covered under paragraph (ii) of A.5 of A. P. (DIR Series) Circular No. 106 dated 19.06.2003. 28. We do not find any merit in the pleadings made by the Appellants that the unreasonable and substantial delay in passing the Impugned Order had resulted in crucial facts and submissions not even being considered or completely mis-construed by the Respondent, leading to findings which are wrong in both fact and law. In fact, the p....
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....t of the affairs of the Company. We therefore find that all the three individual Appellants are also liable for penalty since the Appellant Company has been found to have contravened the provisions of FEMA. 30. The Appellants have also pleaded that no penalty is liable since failure to comply with a statutory obligation cannot ordinarily be imposed unless the Appellants were guilty of contumacious conduct. They placed reliance on the decision in Hindustan Steel Ltd. vs. State of Orissa 1969 (2) SCC 627. The Appellants have also pleaded to make the penalties proportionate. Since on evaluation of the gravamen of the charges, they have argued that the impugned payment amounts was remitted even though with delay and with the permission of the RBI. In this regard, the provisions of Section 13 (1) of FEMA are reproduced below: "If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorisation is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in suc....