TaxTMI 
TaxTMI 
2026 (9) TMI 1846
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....Software International Ltd. (iii) A total penalty of Rs. 14,00,000 was imposed on Sh. Mehraj Lanker, Senior Vice-President of M/s Cranes Software International Ltd. Facts in Brief 2. The brief facts of the case are that based on certain reliable information, the Mumbai Zonal Office of the Directorate of Enforcement initiated investigations under the provisions of the FEMA against M/s. Cranes Software International Ltd, situated at No. 29, 7th Cross, 14th-Main, Vasantnagar, Bangalore- 560052. 3. Enquiries made with the Reserve Bank of India in this regard had revealed that M/s Cranes Software International Ltd. had raised Foreign Currency Convertible Bonds (FCCBs) amounting to Euro 42 million and the proceeds thereof were utilized for certain overseas acquisition, repayment of Foreign Currency Loans availed from J & K Bank, purchase of hardware and software, business development and promotion etc. Enquiries had also revealed that the noticee company had violated the provisions of (A)(i) and (v)-(i) of Annex to A.P (DIR Series) Circular No. 5 dated August 1, 2005 regarding eligibility of the borrower under Automatic Route and utilization of ECB for non-permissible e....
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....eeds of the FCCBs to the tune of Rs. 2153.82 million for purposes other than permitted under the said provisions. (iii) 3rd Contravention - section 6(3)(d) of FEMA,1999 read with Regulation (3) and Para 1(iv) A and Para 1(v)(d) (AA) of Schedule 1 to Regulation 6(1) of Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000, to the tune of Rs. 2153.82 million for using the funds representing proceeds of FCCB issue for purposes other than permitted and by using the said amount for purposes which are prohibited. 11. Accordingly, a penalty of Rs. 2.90 crore was imposed on M/s Cranes Software Rs. 25 lakhs on Shri Asif Khader, and Rs. 7 lakhs on Shri Mehraj Lanker in respect of the first Contravention. Further, as the second and third contraventions were found to be interlinked, they were dealt with together, and an additional penalty of Rs. 2.90 crore was imposed on M/s Cranes Software Rs. 25 lakhs on Shri Asif Khader, and Rs. 7 lakhs on Shri Mehraj Lanker in respect thereof. 12. Aggrieved by the said order of the Ld. AA, the appellants have filed these appeals. Submissions for M/s Cranes Software International Ltd. 13. In response to....
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.... Compact Disc (CD) is transformed into software loaded disc constitutes "manufacture or processing of goods" in terms of Section 801A(1) read with Section 801A(12)(b) of the Income Tax Act, 1961. Like the Appellant, the Respondent in that case was involved in the developing, designing, marketing, distributing buying, selling and importing of computer software. The Apex Court observed that if an operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process falls within the meaning of "manufacture". 16. It is submitted that the ED failed to consider that as per these definitions, the Appellant was also engaged in "manufacturing" as its activities included designing, developing, producing, processing, implementing, buying, selling, importing, upgradation, integration, altering and dealing of computer software, thus, making it an eligible borrower under the industrial sector. 17. It is further submitted that the impugned order failed to appreciate the various documents submitted by the Appellant that make it an eligible borrower under the FEMA regulations, including - i) Letters dated 03.04.2007 & 07.07.2009 issued ....
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....were permitted to avail ECB up to US$100 million per financial year for the purpose of import of capital goods under the Approval Route w.e.f. 02.06.2008. However, this is not applicable to the Appellant since it was engaged in the "manufacturing" of software, its activities also fell under the industrial sector. 19. Further, the ED relied on A.P. (DIR Series) Circular No. 46 dated 02.01.2009 to state that entities in the service sector viz, hotels, hospitals and software sector (including the Appellant) were permitted to avail ECB upto US$ 100 million per financial year under the Automatic Route for permissible end-use only w.e.f. 02.01.2009. Here, ED failed to consider that the Appellant was already an eligible borrower under the A.P. (DIR Series) Circular No. 5 dated 01.08.2005 as its activities also fall under the industrial sector. 20. It is submitted that vide its letter dated 30.07.2010, ED requested RBI to clarify whether corporates in the service sector are eligible to avail ECB/FCCB in the Automatic Route in the period prior to 02.06.2008. RBI responded vide Letter dated 17.08.2010 that entities in the service sector were not eligible under the Automatic Route prior....
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....l other authorities. c) Appellant duly sought legal opinion from Rajani Associates, Advocates & Solicitors regarding the issuance of the FCCB bonds. 23. In response to the Contraventions No. 2 & 3, wherein it is alleged that the Appellant utilised the proceeds of FCCB to the tune of Rs. 2153.82 million for purposes other than those permitted under the FEMA, it is submitted that the breakup of utilisation of the amount of Rs. 2153.82 million under different heads of expenditure given in the complaint are as under: Amount Head of Expenditure and the respective utilisation Findings in the Impugned Order Rs. 1364.56 million "Capital Expenditure" for import of capital goods, import of non-capital goods, business expansion, promotion and development, purchase of Capex Software, software of Karna Global Technologies, due diligence charges for acquisition and purchase of NISA software. Software imported by appellant does not fall under definition of "capital goods". Further import of capital goods for investment purpose is only available to entities in the real sector, industrial sector and infrastructure sector. Rs. 666.02 million "Advance to Subsidiari....
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.... or Lending in Foreign Exchange) Regulations, 2000, limits the purpose (end-use) of borrowing in foreign exchange for investment i.e., import of capital goods, new projects, modernization/expansion of existing production units in real-sector industrial sector and infrastructure sector. Hence, the impugned order recorded that the Appellant not being engaged in the real sector, cannot claim this benefit. 27. It is argued that in light of the submissions made in the preceding paragraphs, the activities of the Appellant fall under the definition of "manufacturing" and therefore, it is eligible to the benefits available to an entity engaged in the real-sector industrial sector. 28. Further, all overseas investments made by the Appellant were duly reported to the RBI through share certificates of the overseas acquired company, purchase agreements with NISA/EMRC/SSI and 1-Capella, ODA form submitted to the RBI, quarterly ECB returns submitted to the RBI & regular correspondence of the Appellant with Jammu and Kashmir Bank. 29. Vide A.P. (DIR Series) Circular No. 75 dated 23.02.2004, the permitted end-use for ECB was enlarged to include overseas direct investment in Joint Ventures....
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....5. The contentions on behalf of these two individuals have been dealt together. Sh. Asif Khader was the director of the company M/s Cranes Software International Limited while Sh. Mehraj Lanker was the Senior Vice-President. 36. It is also argued that the Ld. AA failed to take into consideration FEMA (Adjudication and Appeal) Rules, 2000, relevant documents, RBI letters, notifications, circulars and the submissions made by the appellant and thus wrongly came to the conclusion that the appellant was responsible to and for the conduct of the business of the company, M/s Cranes Software International Ltd. and acted in violation of the FEMA, 1999 and regulations thereof. 37. It is also argued that the complainant has nowhere in the complaint made any allegations that the appellant was in-charge of and responsible for conducting the alleged transactions nor there is any such allegation in any of the relied upon documents. Further, there is no statement of any person to show that the appellant was in-charge and was responsible for conducting the alleged transactions. 38. Among the relied-on documents, except for the statements of the appellant recorded by the complainant, there ....
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....ryana (AIR 1989 SC 1982), wherein, it was held that it is for the prosecution to establish that the particular person was responsible for carrying on business and was during the relevant time, in charge of the business. 45. The case of Girdhari Lal Gupta v. D.N Mehta (AIR 1971 SC 2162) is also cited wherein, it was held that a person in-charge should be in overall control of the company. 46. It is further argued that the Ld. AA passed the impugned order in a mechanical manner without considering and appreciating the documents and evidences on record. The penalty imposed on the appellant is arbitrary, exorbitant, too harsh as there was no mala fide intention of the appellants as all since all the transactions were through authorised dealer and within knowledge of the RBI. The appellants have exercised the necessary due diligence. Submissions for the Respondent 47. The Respondent Directorate has strongly contested the arguments raised on behalf of the appellant. It is submitted that the impugned adjudication order is legal, reasoned and has been passed after due consideration of the entire material available on record. The Learned Adjudicating Authority has duly considere....
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....es and other supporting documents has been duly considered but does not establish compliance with the prescribed end-use restrictions. The contention that software constitutes "capital goods" is specifically denied, as the relevant FEMA Regulations permitted such utilisation only for eligible entities engaged in the real sector. Similarly, repayment of earlier foreign currency loans and other expenditures relied upon by the appellants were not permissible without the requisite approvals. The Ld. AA has, therefore, rightly concluded that the utilisation of FCCB proceeds violated the applicable FEMA provisions. It is also argued that the appellants' reliance upon STPI registration, R&D recognition, VAT and excise registrations, overseas investment documents, share certificates, purchase agreements, legal opinions, bankers' opinions, awards, certifications, press reports and similar documents is misplaced. Such documents may establish the nature of the appellant's business activities but do not determine eligibility under the FEMA framework nor validate utilisation of FCCB proceeds contrary to the applicable statutory provisions. The Ld. AA has duly considered these materi....
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....n raised on behalf of the appellants: • That the mandatory provisions of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (in short, "Adjudication Rules") were not complied with by the ld. adjudicating authority. In this regard, reference is made to the judgment of the Hon'ble Bombay High Court, in Shashank V. Manohar (W.P. No. 5305 of 2013) dated 07.08.2013 wherein it was held that the aforementioned Adjudicating Rules provide for a two-tier adjudication procedure wherein the adjudicating authority must first form its opinion, after recording reasons, whether to proceed against the petitioner with regard to the show cause notice, and, if the opinion so formed is adverse to the petitioner, such opinion along with the reasons so recorded shall be furnished so as to reach the petitioner at least 15 days prior to the date of personal hearing. This is necessary to meet the requirements of Rule 4(3) of the Adjudication Rules. It is further pointed out that the SLP filed by the Directorate before the Hon'ble Supreme Court challenging the aforesaid order was dismissed by the Apex Court, whereafter, Technical Circular No. 11/2014 dated 26.09.20....