2025 (7) TMI 82 - AT - FEMA

Misdeclaration and gross undervaluation of imported goods of reprocessed plastic granules - remittance of the differential value through unauthorized/hawala channels - confiscation of the foreign exchange - Failed to surrender the foreign currencies - Quantification of undervaluation - Violation of Section 3(d) of the Foreign Exchange Management Act 1999 (FEMA 1999) - principle of preponderance of probability - penalty for non-surrender of foreign exchange - contravention of the provisions of Section 4 of FEMA 1999 - HELD THAT - Having perused the email communications in question we do find supporting evidence in respect of the allegation that the overseas suppliers were asked by the appellant in certain instances to misclassify the goods or to mention lower values than the actual agreed price. We have also perused the statements of Sh. M. Kannan proprietor of M/s RKS Plast Chem and Sh. D. Sathish proprietor of M/s Yes Jay Exports in which they have stated unequivocally that Sh. Vivek R. Mardia/Sh. Rasik Mardia (father of Sh. Vivek Mardia) approached them with the proposal for utilizing the name of their respective proprietary concerns to import plastic granules against payment of commission to them; With regard to the evidentiary value of the aforesaid statements we find ourselves in agreement with the submissions made on behalf of the respondent Directorate placing reliance on judicial precedent including the judgment of the Hon ble Supreme Court in KTMS Mohd. Vs. Union of India 1992 (4) TMI 6 - SUPREME COURT and the judgment of the Hon ble Delhi High Court in Amrik Singh Saluja vs. Union of India Anr. 2009 (5) TMI 472 - DELHI HIGH COURT and also in Pyarelal v. State of Rajasthan 1962 (10) TMI 66 - SUPREME COURT The position emerging from the said judgments is that a statement recorded under FERA/FEMA can be relied upon as evidence and even a retracted statement could be relied upon if the court is satisfied that it was true and voluntarily made. Upon combined consideration of the email correspondences the statement of the appellant statements of Sh. Kannan and Sh. Satish we are of the view that material has been brought on record by the Respondent Directorate to prove contravention of the provisions of FEMA 1999 by the appellant on the test of preponderance of probabilities. Quantification of the sum - It is evident from the record that the quantification of undervaluation has been done by the respondent Directorate by taking into consideration the case of one M/s Shami Impex investigated by the DRI wherein the facts were similar and similar goods had been imported during nearly the same period from the same countries of origin. Further it is evident from the Worksheets annexed to the said Complaint that the quantum of undervaluation has been calculated on the basis of an average percentage of under invoicing which has been taken to be 45% or 55% across the board for all consignments during a particular period based on the statement of the appellant himself though later retracted. We are of the view that while the Directorate s case against the appellant stands proved on the test of preponderance of probabilities the quantum of penalty imposed appears to be considerably higher than is warranted in the facts and circumstances of the case. Accordingly we are of the view that the ends of justice will be met if the quantum of penalty imposed for contravening the provisions of Section 3(d) is reduced to half of the amount imposed i.e. an amount of Rs. 30, 00, 000/-. Penalty for non-surrender - We find that the said rule required an individual resident in India to surrender the received/ realized/ unspent/ unused foreign exchange whether in the form of currency notes coins and travelers cheques etc. to an authorized person within a period of 180 days from the date of such receipt/ realization/ purchase/ acquisition or date of his return to India as the case may be. Thus even if the money was acquired by lawful means from authorized dealers the same was clearly not surrendered within the stipulated time period. Accordingly we uphold the said penalty of Rs. 10, 000/-. Contravention of the provisions of Section 4 - The Ld. Adjudicating Authority has noted that the appellant had not produced any documents for the licit possession of US 780 Malaysian Ringgit 2360 Singapore Dollar 280. Accordingly he held him guilty of contravention of section 4 of FEMA. 1999 and hence liable for imposition of penalty under Section 13(1) of FEMA 1999 and also liable for confiscation of the said foreign exchange under section 13(2). The appellant has advanced a bland contention that these were purchased for business purpose. No further explanation has been advanced. Thus we do not find any reason to interfere with the order of the Ld. Adjudicating Authority imposing a penalty of Rs. 10, 000/- and also confiscating the foreign currency in question. In the result the impugned order shall stand modified as above.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(a) Whether the appellant engaged in misdeclaration and gross undervaluation of imported goods in violation of Section 3(d) of the Foreign Exchange Management Act, 1999 (FEMA, 1999) and related provisions;

(b) Whether the appellant remitted the differential value of imports through unauthorized/hawala channels, thereby contravening Section 4 of FEMA, 1999;

(c) Whether the appellant failed to surrender foreign currency within the stipulated time under Section 10(6) read with Regulation 6A of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000;

(d) The correctness and sustainability of the quantification method adopted for undervaluation and the imposition of penalty under Section 13(1) of FEMA, 1999;

(e) Whether the confiscation of seized foreign currencies under Section 13(2) of FEMA, 1999 was justified and whether the discretion to confiscate was exercised judiciously;

(f) Whether the appellant is entitled to refund of Indian currency seized during the search operation;

(g) The evidentiary value of statements recorded under Section 37 of FEMA, especially when such statements were retracted;

(h) Whether principles of natural justice were complied with during adjudication, including opportunity to cross-examine witnesses and rebut evidence.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Misdeclaration and Undervaluation of Imports (Section 3(d) of FEMA, 1999)

The legal framework involves Section 3(d) of FEMA, which prohibits contraventions relating to foreign exchange transactions including undervaluation of imports. The Directorate of Enforcement (ED) relied on seized emails, documents, and statements to establish that the appellant requested overseas suppliers to under-invoice imported goods, specifically reprocessed plastic granules, to reduce Customs duty liability. The appellant used the Import-Export Codes (IECs) of other firms to execute imports, further complicating the scheme.

The Court examined the appellant's own statement dated 02.06.2009, where he admitted to under-invoicing ranging from 40-50% initially and 50-60% subsequently, and paying the differential in Indian currency to local agents who facilitated unauthorized foreign exchange transfers abroad. Although the appellant retracted this statement the next day, the statements of other proprietors whose IECs were misused remained unretracted and corroborated the modus operandi.

Seized emails demonstrated negotiations to misclassify goods (e.g., from 'LDPE White' to 'Reprocessed LDPE') and to mention lower invoice values. The Court found these communications persuasive evidence of deliberate undervaluation.

The appellant challenged the quantification of undervaluation, arguing that it was based on ambiguous documents and his own retracted statement, lacking independent corroboration. The ED justified the quantification by reference to a similar case investigated by the Directorate of Revenue Intelligence (DRI) involving similar goods and suppliers, where actual market prices were established and used as contemporaneous price evidence. The methodology involved applying average undervaluation percentages (45% and 55%) based on available evidence and the appellant's admissions.

The Court accepted the ED's approach as reasonable on the preponderance of probabilities, given the nature of evidence and the similarity to the DRI case. It rejected the appellant's argument that suspicion or assumption cannot substitute for proof, noting that the average percentage method was a practical necessity due to destruction of some records and lack of specific price data for each consignment. The Court also held that the appellant's retraction did not nullify the evidentiary value of his initial admissions, relying on Supreme Court precedent that retracted statements can be relied upon if found true and voluntary.

Accordingly, the Court concluded that the appellant contravened Section 3(d) of FEMA by misdeclaring and undervaluing imports and remitting differential payments through unauthorized channels.

(b) Unauthorized Remittance of Foreign Exchange (Section 4 of FEMA, 1999)

Section 4 prohibits unauthorized dealings in foreign exchange. The appellant was found to have possessed foreign currency (US$, Malaysian Ringgit, Singapore Dollar) without authorization and failed to produce satisfactory evidence of lawful acquisition. The appellant contended that the foreign currencies were purchased for business purposes and accounted for, but failed to substantiate this claim with documents.

The Court upheld the adjudicating authority's finding that the appellant was guilty of contravening Section 4 of FEMA and liable for penalty and confiscation of the foreign currency seized. The Court noted that possession without proper documentation and failure to surrender or account for foreign currency is a clear violation.

(c) Failure to Surrender Foreign Currency within 180 Days (Section 10(6) r/w Regulation 6A)

The appellant and his wife had acquired certain foreign currencies during 2008 but failed to surrender them to authorized persons within 180 days as mandated. The Court observed that this requirement is mandatory and applies even if the foreign exchange was acquired lawfully from authorized dealers.

The Court upheld the penalty imposed for this contravention, emphasizing the statutory obligation to surrender foreign currency within the prescribed timeframe.

(d) Quantification of Undervaluation and Penalty Imposition

The appellant challenged the quantification method, arguing that it was based on assumptions and his retracted statement, and that no independent documentary evidence linked the undervaluation precisely to each consignment. He also pointed out inconsistencies between the valuation adopted by Customs and the Enforcement Directorate.

The Court acknowledged the appellant's concerns but found that the ED's method was justified by reference to a closely analogous DRI case with similar goods, suppliers, and import periods. The Court noted that exact quantification was difficult due to destruction of evidence and incomplete records, and that the average percentage method was a reasonable approach.

However, the Court found the penalty of Rs. 60,00,000/- imposed under Section 13(1) of FEMA to be disproportionately high relative to the facts and circumstances. Exercising its discretion, the Court reduced the penalty to Rs. 30,00,000/- while upholding the finding of contravention.

(e) Confiscation of Foreign Currencies and Exercise of Discretion

The appellant contended that confiscation of foreign currencies was not mandatory under Section 13(2) of FEMA and that the adjudicating authority failed to exercise discretion judiciously or provide reasons for confiscation. He also claimed that the foreign currencies were properly accounted and purchased for business purposes.

The Court held that confiscation under Section 13(2) is discretionary and not mandatory. However, given the appellant's failure to provide satisfactory evidence for lawful possession and surrender, the Court found no error in confiscation. The Court noted that mere production of bills without corroborative evidence was insufficient to negate the contravention.

(f) Seizure and Refund of Indian Currency

The appellant argued that Indian currency of Rs. 11,60,000/- seized during the search was not subject to confiscation as no such proposal was made in the show cause notice and that the adjudicating authority was silent on its disposal. He sought refund with interest.

The Court observed that the adjudicating authority did not confiscate this amount but also did not return it. The Court directed that this amount, along with the pre-deposited penalty of Rs. 4,00,000/-, be adjusted towards the penalty amount payable by the appellant, implying that the seized Indian currency should be returned or accounted for accordingly.

(g) Evidentiary Value of Statements under Section 37 of FEMA and Retraction

The appellant retracted his statements recorded under Section 37 of FEMA, alleging coercion and improper means. The Court relied on Supreme Court precedent which holds that a retracted statement may still be relied upon if found to be voluntary and true, and that the authority must consider the retraction and record reasons if it rejects it.

The Court found that the appellant's retraction was immediate and unsubstantiated, while other statements by proprietors of firms whose IECs were misused remained intact and corroborated the appellant's admissions. The Court thus accorded evidentiary value to the statements despite retraction.

(h) Compliance with Principles of Natural Justice

The appellant contended that he was denied opportunity to cross-examine witnesses and rebut evidence, and that notices were not issued to other firms whose IECs were used. The Court noted these submissions but found that the adjudication proceedings complied with natural justice principles. The appellant appeared and gave statements, and the adjudicating authority considered all evidence on record. The presumption of truth under Section 39 of FEMA was applied appropriately.

3. SIGNIFICANT HOLDINGS

"The statements made by the appellant under Section 37 of FEMA, even if retracted, can be relied upon if found to be true and voluntarily made, and the authority must consider the retraction and record reasons before rejecting it."

"Quantification of undervaluation based on average percentage determined through contemporaneous evidence from a similar case and appellant's own admissions is a reasonable and sustainable method on the preponderance of probabilities in the absence of exact documentary evidence."

"Confiscation of foreign currency under Section 13(2) of FEMA is discretionary, and the exercise of such discretion must be judicious; however, in the absence of satisfactory proof of lawful possession and surrender, confiscation is justified."

"Failure to surrender foreign currency within 180 days under Section 10(6) read with Regulation 6A of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000, attracts penalty even if the currency was acquired lawfully."

"Penalty imposed under Section 13(1) of FEMA for contravention of Section 3(d) must be proportionate to the facts and circumstances; an excessive penalty can be reduced in exercise of appellate discretion."

Final determinations:

(i) The appellant was found guilty of contravening Section 3(d), Section 4, and Section 10(6) of FEMA, 1999;

(ii) The penalty of Rs. 60,00,000/- under Section 13(1) for undervaluation was reduced to Rs. 30,00,000/-;

(iii) Penalties of Rs. 10,000/- each under Section 13(2) for failure to surrender foreign currency and unauthorized possession were upheld;

(iv) Confiscation of foreign currencies seized was upheld;

(v) The Indian currency seized but not confiscated was to be adjusted towards penalty payable or returned accordingly.