2025 (6) TMI 602 - AT - FEMA

Violation of the provisions of FEMA 1999 - short-realization of export proceeds as against the invoiced value of the exports - penalties arose from two export transactions HELD THAT - First transaction i.e. the export made through M.V. Vincentia we are of the view that while there has undoubtedly been short-realization of export proceeds as against the invoiced value of the exports the same was for reasons completely outside the control of the appellant company. Furthermore the appellant company made appropriate efforts to mitigate the loss by moving the Hon ble High Court and succeeding in obtaining relief in the matter. As regards the unrealized amount the Appellant company on 17.03.2012 submitted REX form with the AD Bank to obtain necessary approval from RBI. Further since there was no communication by the AD Bank regarding to the acceptance of REX application by RBI and closure of the transaction M/s BEML issued letter dated 10.12.2012 once again requesting the AD Bank to follow the matter up with RBI and close the transaction at the earliest. Evidently the said application remained pending and as late as in 2018 the AD Bank vide its letter dated 20.03.2018 informed the Ld. AA that the RBI had requested to resubmit the whole set of documents once again for their perusal and that SBI would submit the same to the RBI shortly. The above facts in our view adequately establish the bona fide of the appellants herein insofar as the first transaction is concerned. No doubt existence of mens rea is not an essential element of penalties under FEMA 1999 which are leviable for failure to adhere to procedural and technical compliances which do not necessarily involve contumacious conduct. However the language of the statute read together with the rules framed thereunder does not indicate that there is an absolute bar on non- realisation of full export proceeds under all circumstances. Rather in an appropriate case the RBI has been empowered to authorise short- realization or non-realization of full export value of goods. Under the circumstances we are of the view that no penalty was imposable on the appellant in respect of this transaction. The respondents have not been able to point out any specific provision of the Act rule or any guideline issued by the RBI which makes the levy of penalty mandatory in each and every case where full value of export proceeds was not realized and even where the appellant had acted bona fide and taken all necessary steps as per law. Furthermore we find that the impugned order does not record the reasons for the decision to impose penalty. It appears that the authority was of the view that the very fact of short realisation of export proceeds invites a mandatory penalty. For the reasons discussed hereinabove we are unable to agree with the Ld. AA and are of the view that no penalty was imposable on the appellants in respect of the first transaction. Coming to Transaction No. 2 i.e. export through MV Riva the submission of the appellant company is that based on the analysis report issued at the discharge port it was only entitled to receive USD 17, 59, 154.09 against which it had already received advance payment of USD 33, 20, 464.11 which amounts to an excess receipt of USD 15, 61, 310.02. It is claimed that because of the business relationship between the appellant company and the Buyer the latter could be persuaded not to claim refund of the excess paid from the appellant company. We do not wish to comment on these claims made on behalf of the appellants which have otherwise not been disputed by the respondents on facts. However respondents have asserted that there was a huge loss of foreign exchange on account of negligence and inaction on the part of the appellants without specifying the nature of such alleged negligence and how the appellant company could have realised value in in contravention of the terms of the contract with the Buyer and the LC. Thus no penalty was imposable on the company even in respect of the second transaction. The penalties imposed on the individual appellants herein were in consequence of the finding of contravention by the company. Consequently we find that the facts on record do not make out a case for imposition of penalty on the individual appellants either.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the appellants, including the company and its senior officials, contravened the provisions of Section 7 of the Foreign Exchange Management Act, 1999 (FEMA) read with Regulations 8, 9, and 13 of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000, by allowing short-realization of export proceeds without prior approval of the Authorized Dealer (AD) bank or Reserve Bank of India (RBI).

- Whether the reduction in invoice value due to demurrage charges and quality/weight adjustments was permissible without prior RBI approval.

- Whether the appellants acted in bona fide compliance with FEMA and related regulations, including submission of requisite applications (Form REX) to RBI for approval of short realization or write-off.

- Whether the individual appellants, as persons in charge of and responsible for the conduct of business of the company, can be held liable for penalties under Section 42 of FEMA.

- Whether the adjudicating authority (AA) followed principles of natural justice and procedural requirements under the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000.

- Whether the penalties imposed were proportionate and justified given the facts and circumstances.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Contravention of FEMA provisions by short-realization of export proceeds without prior approval

Relevant legal framework and precedents: Section 7 of FEMA prohibits any person from making any payment or receiving any payment in foreign exchange except as permitted by the Act or RBI. Regulations 8, 9, and 13 of the Export Regulations require realization of export proceeds within prescribed time and prior approval for reduction in invoice value or non-realization. RBI Master Circular No. 10/2011-12 and No. 14/2012-13 lay down procedures for write-off and approval of short realization.

Court's interpretation and reasoning: The Court noted that short-realization occurred in two export transactions involving iron ore exports through vessels M.V. Vincentia and M.V. Riva. The first transaction involved demurrage charges of USD 10,58,789.68 due to a court injunction delaying shipment, which the appellants contended was outside their control and contractually the seller's liability. The appellants had submitted Form REX to the AD Bank seeking RBI approval for the reduction, but the application remained pending for years. The Court observed that the appellants acted bona fide by applying for approval and taking steps to mitigate loss, including successfully vacating the injunction. The Court emphasized that mens rea is not essential for penalty under FEMA but the statute does not mandate automatic penalty for every short realization especially where bona fide efforts were made.

Key evidence and findings: The appellants submitted documentary evidence including contract clauses, court orders, Form REX applications, correspondence with AD Bank and RBI, and invoices showing acceptance of demurrage charges as per contract terms. The AD Bank's letter confirmed the pending status of the application with RBI. The respondents failed to identify any provision mandating penalty in such circumstances.

Application of law to facts: The Court applied the statutory provisions and RBI guidelines, noting that RBI has discretionary power to authorize short realization or write-off. Since the appellants had filed the necessary applications and the matter was pending with RBI, no penalty was warranted.

Treatment of competing arguments: The respondents argued that the demurrage charges were paid without prior approval and caused loss of foreign exchange, warranting penalty. The appellants countered that the charges were contractually payable and the reduction was approved internally and notified to the AD Bank. The Court found the appellants' arguments more persuasive, highlighting the absence of any loss to the country or deliberate contravention.

Conclusions: No penalty was imposable for short realization in the first transaction.

Issue 2: Legitimacy of reduction in invoice value and non-realization in the second transaction

Relevant legal framework and precedents: Same as Issue 1, with emphasis on contractual terms and RBI regulations regarding export proceeds realization.

Court's interpretation and reasoning: The second transaction involved provisional payment of 98% of invoice value with balance 2% payable upon receipt of inspection certificates at discharge port. The CIQ certificate showed lower iron content and higher moisture than contracted, entitling the buyer to withhold the balance 2%. The appellants argued they had already received excess payment (USD 15,61,310.02) over the final invoice value and the buyer waived refund claims to maintain business relations. The respondents claimed loss due to negligence but did not specify how the contract terms were violated.

Key evidence and findings: Contract clauses, inspection certificates, invoices, and payment records were produced. The AD Bank's records indicated no outstanding dues for the 2% amount. The respondents did not dispute the factual accuracy of the CIQ certificate or the contractual terms.

Application of law to facts: The Court found that the reduction was contractually justified and the appellants had no obligation to realize the withheld 2%. The excess payment received further negated any loss. Thus, no contravention of FEMA provisions was established.

Treatment of competing arguments: The respondents' assertion of loss was unsubstantiated and contradicted by documentary evidence. The appellants' submissions were accepted as credible and consistent with contractual and regulatory framework.

Conclusions: No penalty was imposable for the second transaction.

Issue 3: Liability of individual appellants under Section 42 of FEMA

Relevant legal framework and precedents: Section 42 of FEMA holds persons in charge of business responsible for contraventions committed by the company unless they prove lack of knowledge or due diligence.

Court's interpretation and reasoning: The appellants contended that they were not solely responsible for the transactions, decisions were taken with approvals of competent authorities, and they exercised due diligence. The Court noted that penalties on individuals flowed from the company's alleged contraventions, which were not established. Therefore, individual liability could not be sustained.

Key evidence and findings: The appellants' roles, delegation of powers, and procedural compliance were documented. No evidence showed individual complicity or negligence.

Application of law to facts: Since no contravention by the company was found, individual liability under Section 42 did not arise.

Treatment of competing arguments: The respondents relied on designation and responsibility but failed to prove actual involvement or negligence.

Conclusions: Penalties on individual appellants were not justified.

Issue 4: Compliance with principles of natural justice and procedural fairness

Relevant legal framework and precedents: Principles of natural justice require notice, opportunity to be heard, and fair adjudication. Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 prescribe procedural safeguards including service of show cause notices and recording of statements.

Court's interpretation and reasoning: The appellants argued that show cause notices were not served timely, statements were not recorded, and the adjudicating authority proceeded mechanically without examining evidence from the AD Bank or RBI. The Court observed that appellants had participated in hearings and submissions were recorded. However, the Court did not find it necessary to delve deeply into procedural issues given the factual findings on merits.

Key evidence and findings: Hearing notices, appearance records, and submissions were on record. No evidence of denial of opportunity was established.

Application of law to facts: The Court found no substantial violation of natural justice warranting interference.

Treatment of competing arguments: The respondents maintained procedural propriety; the appellants raised procedural lapses but failed to show prejudice.

Conclusions: No procedural infirmity invalidating the order was found.

Issue 5: Proportionality and quantum of penalty

Relevant legal framework and precedents: Penalties under FEMA must be proportionate to the contravention and not punitive beyond statutory limits.

Court's interpretation and reasoning: The appellants contended the penalty was disproportionate, especially on individuals, some of whom had retired. The Court found the penalty unjustified as no contravention was established.

Key evidence and findings: Penalty amounts were large relative to alleged violations and personal remuneration of individual appellants.

Application of law to facts: Since no contravention was found, penalty quantum was irrelevant but would have been excessive.

Treatment of competing arguments: Respondents justified penalties based on statutory provisions but did not address proportionality.

Conclusions: Penalties were set aside.

3. SIGNIFICANT HOLDINGS

"The language of the statute, read together with the rules framed thereunder, does not indicate that there is an absolute bar on non-realisation of full export proceeds under all circumstances. Rather, in an appropriate case, the RBI has been empowered to authorise short-realization or non-realization of full export value of goods."

"The appellants acted bona fide by filing the requisite Form REX applications with the Authorized Dealer bank seeking RBI approval for the short realization and took all necessary steps to mitigate loss, including obtaining judicial relief to vacate injunctions delaying shipment."

"No penalty was imposable on the appellants in respect of either of the two export transactions as the short realization was due to factors beyond their control and the necessary applications for approval were pending with RBI."

"Penalties imposed on individual appellants under Section 42 of FEMA cannot be sustained in the absence of established contravention by the company or evidence of their personal complicity or negligence."

"The adjudicating authority failed to assign reasons for imposing penalties and proceeded on the assumption that short realization automatically attracts penalty, which is not supported by the statutory framework."

"The appeals are allowed and the impugned order imposing penalties on the appellants is set aside."