2025 (7) TMI 285 - HC - FEMA

Scope of formation of an opinion and the interference under Rule 4(3) of the FEMA Rules - Necessity of inquiry - Denial of inspection of the entire original record of investigation including the unrelied documents - issuance of a show cause notice - contraventions of the provisions of the FEMA the FEMA Rules and the Regulations etc. under Rule 4(4) of the FEMA Rules - furnishing copies of all the documents including the non RUDs - conflicting views of two High Courts - Adjudication proceedings initiated under the FEMA against the petitioner namely M/s.Xiaomi Technology India Private Limited a wholly-owned Indian subsidiary of the Xiaomi Group - royalty payments to their group entities and to the Qualcomm Entities without obtaining prior approval from the RBI. HELD THAT - The learned Senior Counsel appearing on behalf of the petitioners has questioned the complaint made by the second respondent under Section 16(3) of the FEMA dated 02.6.2023 on the ground that the complaint itself is misconceived owing to a skewed understanding of the commercial agreements entered into by the petitioner with the other companies. The show cause notice dated 09.6.2023 issued by the first respondent has also been challenged on the ground that it went beyond the scope of Rule 4(1) of the FEMA Rules which confines itself only to decide as to whether an inquiry is to be held. According to him the first respondent crossed that boundary and also called upon the petitioners to show cause as to why penalty should not be imposed under Section 13(1) of the FEMA. In the considered view of this Court it is not necessary for this Court to now venture at this stage into the legality or otherwise of both the complaint of the second respondent as well as the show cause notice issued by the first respondent since the petitioner company is now before this Court for the second time after the stage of formation of opinion by the first respondent under Rule 4(3) of the FEMA Rules. This Court is not inclined to go into the challenge made by the petitioners against both the complaint filed by the second respondent as well as the show cause notice issued by the first respondent at this stage. Considering the earlier orders passed by this Court it will suffice to go into the legality or otherwise of the opinion formed under Rule 4(3) of the FEMA Rules. The Hon ble Apex Court in the case of Natwar Singh 2010 (10) TMI 156 - SUPREME COURT held that the Adjudicating Authority is required to form an opinion as to whether an inquiry is necessary to be held into the allegations of contravention and it is only then the real and substantial inquiry into the allegations of contravention begins. It is also relevant to take note of another order passed by a learned Single Judge of this Court (S.M.Subramaniam, J) in the case of Citi Bank N.A. Vs. Directorate of Enforcement 2024 (4) TMI 1284 - MADRAS HIGH COURT The said case arose out of a challenge to the formation of opinion under Rule 4(3) of the FEMA Rules. A combined reading of the above decisions of this Court on the scope of challenging an opinion arrived at under Rule 4(3) of the FEMA Rules is consistent and hence it will be a binding precedent for this Court while dealing with the same issue in these writ petitions. This Court in no uncertain terms held that the provisions of Sub-Rules (3) and (4) of Rule 4 of the FEMA Rules do not require reasons to be recorded in writing for forming an opinion. The only consequence that falls out of the decisions of this Court is that such forming of opinion under Rule 4(3) of the FEMA Rules is the starting stage for proceeding further with the adjudication and that the reason that impelled the Adjudicating Authority to form such an opinion cannot be a subject matter of challenge in a writ petition. All the above decisions of this Court took note of the First Bench judgment of the Bombay High Court in the case of Shashank Vyankatesh Manohar 2013 (8) TMI 435 - BOMBAY HIGH COURT . The First Bench of the Bombay High Court has taken a different view and it was held that the Adjudicating Authority must apply his mind to the objections given by the noticee to the show cause notice and record his reasons to proceed further and such recorded reasons should be furnished to the noticee. The First Bench also made it clear that such recording of reasons will give the noticee a chance during the adjudication proceedings to meet the reasons which led the Adjudicating Authority to form an opinion that he must proceed further with the inquiry against the noticee. It is not necessary for this Court to go deep into the reasons arrived at by the first respondent while forming an opinion. This Court only wanted to satisfy itself as to whether the first respondent had applied his mind and formed an opinion. Prima facie there is application of mind on the part of the first respondent and at that stage since it is the commencement of the proceedings towards actual adjudication even a strong suspicion is enough to form an opinion. To understand it from the stand point of view of Criminal Jurisprudence it is more in the nature of taking cognizance of a complaint or a police report where strong suspicion is enough to proceed further with the trial. In cases of this nature the Courts must be wary while interfering with the further proceedings since the adjudication proceedings is at the nascent stage and only after formation of the opinion the noticees are provided with an opportunity of personal hearing to defend themselves. While exercising jurisdiction as a Single Judge this Court is bound by the consistent view that has been taken both by the Division Bench as well as the learned Single Judges of this Court. This Court believes that the Courts must speak in a univocal voice. As a Single Judge I cannot disregard the consistent view taken by this Court since the First Bench judgment of the Bombay High Court in the case of Shashank Vyankatesh Manohar was considered by the Division Bench of this Court and a different view was taken. In the light of the above findings the reliance placed by the learned Senior Counsel appearing on behalf of the petitioners on the judgment of the Hon ble Apex Court in the case of Amarendra Kumar Pandey 2022 (7) TMI 1326 - SUPREME COURT which talks about the scope of formation of an opinion and the interference thereto cannot be applied in this case. Similarly the reliance placed by him on the scope and the meaning of the word affiliate the understanding of the concept of group of companies doctrine the interpretation of commercial contracts and the decisions taken on commercial expediencies the extent to which an Adjudicating Authority can tinker upon the same and the scope of mandatory requirement of payment of royalty even for entities outside India under the Patents Act need not be dealt with by this Court since those are matters which have to be agitated before the first respondent during the adjudication proceedings by way of defence. The upshot of the above discussions is that this Court is not inclined to interfere with the opinion formed by the first respondent under Rule 4(3) of the FEMA Rules. It is not necessary for this Court to render a finding on the related issues covered under Issue No.3. Furnishing copies of all the documents including the non RUDs - In none of the judgments there is insistence for furnishing of the documents even those which were not relied upon at the stage under Section 207 of the Criminal Procedure Code. Hence the petitioners have the right of receiving even those materials which were not relied upon but not at the stage of forming an opinion and they will reach that stage only after they receive the notice of hearing and they are heard by the first respondent in the proceedings under the FEMA. That is where the noticee enters upon the defence. However no decision was taken regarding the copies of the reply given by the other noticees to the show cause notice and the documents submitted by them. The further grievance on the side of the petitioners is that many pages were missing and that the specified documents were not available citing administrative reasons. Thus the case has now reached the stage under Rule 4(4) of the FEMA Rules which is the stage of defence and therefore the petitioners will be entitled to all the documents sought for by them including the non RUDs. Only if those documents are furnished to the petitioners they will be able to effectively defend themselves during the adjudication proceedings. Hence the missing documents from the entire record of investigation shall also be traced and furnished to the petitioners. For the foregoing reasons W.P. are disposed of in the above terms. Consequently all connected pending WMPs are closed.

Summary

The core legal questions considered by the Court in these writ petitions are as follows:

(1) Whether the complaint dated 02.6.2023 filed under Section 16(3) of the Foreign Exchange Management Act, 1999 (FEMA) and the show cause notice dated 09.6.2023 issued under Rule 4(1) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (FEMA Rules) suffer from any illegality and are liable to be interfered with by the Court;

(2) Whether the formation of opinion under Rule 4(3) of the FEMA Rules by the Adjudicating Authority suffers from any illegality and is liable to be interfered with by the Court;

(3) Whether the adjudication proceedings up to the stage of formation of opinion under Rule 4(3) were based on an improper understanding of the contractual agreements entered into by the petitioner company with other parties and whether the respondents proceeded further on a fundamental misconception of law;

(4) Whether the refusal or non-furnishing of the petitioners' request for full disclosure of the investigation records has prejudiced their rights to effectively defend themselves during the adjudication proceedings up to the stage of formation of opinion.

Issue-wise Detailed Analysis

Issue 1: Legality of the complaint and show cause notice

The legal framework governing these proceedings is the FEMA and the FEMA Rules, which prescribe a structured adjudication process. The Apex Court's judgment in Natwar Singh clarified that the Adjudicating Authority must follow the prescribed procedure, issuing a show cause notice under Rule 4(1) to decide whether an inquiry should be held, and only after considering the cause shown is the opinion formed under Rule 4(3). The show cause notice is not for adjudicating the alleged contravention but to decide the necessity of inquiry.

The Court noted that the petitioners challenged both the complaint and the show cause notice on grounds of illegality, including that the show cause notice improperly combined the inquiry and penalty stages. However, the Court declined to examine these challenges at this stage, as the matter had already been before the Court previously where the legality of the show cause notice was not examined. The Court held that the focus at this juncture should be on the formation of opinion under Rule 4(3), not on the complaint or show cause notice. Thus, the Court refrained from interfering with the complaint and show cause notice, answering Issue 1 accordingly.

Issue 2 and 3: Legality of formation of opinion under Rule 4(3) and correctness of understanding of contractual agreements

Rule 4(3) of the FEMA Rules contemplates a two-step process: the Adjudicating Authority considers the objections to the show cause notice and forms an opinion whether an inquiry should proceed. The Apex Court in Natwar Singh emphasized that only after this opinion is formed does the substantive inquiry begin.

The Court relied on several precedents from this High Court, including Ramakrishna Setty and India Cements Ltd., which held that there is no statutory requirement for the Adjudicating Authority to record reasons in writing while forming the opinion under Rule 4(3). The opinion is a preliminary, prima facie satisfaction to proceed with inquiry and is not appealable or challengeable as a final order. The Court distinguished this from the Bombay High Court's contrary view in Shashank Vyankatesh Manohar, noting that the Division Bench of this Court had rejected that view and directed the Enforcement Directorate to cancel the circular based on that judgment.

In the present case, the Adjudicating Authority had recorded reasons and furnished them to the petitioners, but the Court held that even if reasons were not recorded, the opinion could not be challenged. The Court found that the Adjudicating Authority had applied his mind, considered the contractual agreements, statements from authorized dealers, and the large outflow of funds to group entities without prior RBI approval. The Court analogized the formation of opinion to the cognizance of a complaint in criminal law, where strong suspicion suffices to proceed further.

The Court declined to delve into the petitioners' contentions regarding the interpretation of the term "affiliate," the group company doctrine, the validity of the contracts, and the applicability of Patent Law or royalty obligations. These matters were held to be appropriate for the adjudication stage, where the petitioners can raise their defenses. Consequently, the Court did not find any illegality in the formation of opinion or fundamental misconception of law, answering Issues 2 and 3 against the petitioners.

Issue 4: Non-furnishing of full records and prejudice to the petitioners' defense

The petitioners sought inspection and certified copies of the entire investigation records, including documents not relied upon (non-RUDs). The Court analyzed the procedural stages under Rule 4 of the FEMA Rules and noted that at the stage of forming opinion under Rule 4(3), the Adjudicating Authority considers only the show cause notice, relied upon documents, and the reply to the notice. The petitioners have not yet entered the defense stage, which begins at Rule 4(4).

The Court referred to Apex Court judgments (Manish Sisodia and Sarla Gupta) which require disclosure of all documents, including exculpatory evidence, to enable effective defense, but only at the defense stage, not at the opinion formation stage. The Court held that non-furnishing of all documents at the opinion stage does not cause prejudice.

However, since the matter has now reached the defense stage under Rule 4(4), the petitioners are entitled to all documents, including non-RUDs, to effectively defend themselves. The Court directed that missing documents be traced and furnished to the petitioners. Thus, Issue 4 was answered in favor of the petitioners to the extent of entitlement at the defense stage.

Significant Holdings

"The Rules do not provide and empower the Adjudicating Authority to straight away make any inquiry into allegations of contravention against any person against whom a complaint has been received by it. Rule 4 of the Rules mandates that for the purpose of adjudication whether any person has committed any contravention, the Adjudicating Authority shall issue a notice to such person requiring him to show cause as to why an inquiry should not be held against him... After taking the cause, if any, shown by such person, the Adjudicating Authority is required to form an opinion as to whether an inquiry is required to be held into the allegations of contravention. It is only then the real and substantial inquiry into allegations of contravention begins." (Extract from Natwar Singh)

"The adjudicating Authority is not under any statutory obligation to communicate his reasons for forming an opinion to conduct an enquiry under Sub-Rule 3 of Rule 4... Such forming of opinion under Rule 4(3) of the FEMA Rules is the starting stage for proceeding further with the adjudication... The reason that impelled the Adjudicating Authority to form such an opinion cannot be a subject matter of challenge in a writ petition." (Extract from this Court's decisions)

"When the case has reached the stage under Rule 4(4) of the FEMA Rules, which is the stage of defence, the petitioners will be entitled to all the documents sought for by them including the non RUDs. Only if those documents are furnished to the petitioners, they will be able to effectively defend themselves during the adjudication proceedings." (This Court)

The Court's final determinations are:

- The complaint and show cause notice are not liable to be interfered with at this stage.

- The formation of opinion under Rule 4(3) is a preliminary step and cannot be challenged on grounds of absence of reasons or alleged misconstruction of law; the Adjudicating Authority applied mind and formed a valid prima facie opinion.

- The Court will not adjudicate on the complex contractual and legal issues raised by the petitioners at this stage; these are to be addressed during the adjudication proceedings.

- The petitioners are entitled to full disclosure of all documents, including non-RUDs, at the defense stage to effectively defend themselves, and the respondents must furnish all missing documents accordingly.