Allowed

FPA-FE-119/MUM/2011 of Shri D.B. Deshpande v/s The Special Director Directorate of Enforcement, Mumbai

ATFP25 Oct 2018FPA-FE-119/MUM/2011

Case brief

AI extract

What is this about?

Appellant challenged a penalty imposed for alleged contravention of FEMA 1999 relating to unrealized export proceeds under pre-FEMA laws. The Tribunal held that issuing a show cause notice under FEMA after the sunset clause expired was legally impermissible, following the High Court of Delhi's judgment in Bhupinder V. Shah. Consequently, the penalty was set aside.

What did the court decide?

The appeal was allowed; the impugned order and the penalty imposed vide the Adj. order dated 31.5.2011 were set aside as null and void ab-initio.

FPA-FE-119/MUM/2011 of Shri D.B. Deshpande v/s The Special Director Directorate of Enforcement, Mumbai — ATFP (2018) — LawSathi Research

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APPELLATE TRIBUNAL FOR SAFEMA, FEMA, PMLA, NDPS, PBPT Act AT NEW DELHI

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Date of Decision:- 25.10.2018

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FPA-FE-119/MUM/2011

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Shri D.B. Deshpande … Appellant Versus The Special Director Directorate of Enforcement, Mumbai … Respondent

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Advocates/Authorized Representatives who appeared

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For the appellant	: Shri B. Seshagopalan, Advocate
For the respondent	: Shri Prashant Pandey Legal Consultant
CORAM
JUSTICE MANMOHAN SINGH	: CHAIRMAN
SHRI G.C. MISHRA	: MEMBER

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JUDGEMENT

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FPA-FE-119/MUM/2011

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The present appeal has been filed by the appellant against order (original) bearing no. ADJ/16-B/SDE/RAJ/2011/FEMA dated 31.5.2011 (received on 04.07.2011) by the Appellant in view of show cause notice no. T.4/30-B/2005/SDE/FEMA. The Special Director of Enforcement, Mumbai has imposed a penalty of Rs. 55,00,000/- ( Rupee Fifty five lakhs only) by the impugned order on the appellant for alleged contravention of section 8 read with section 42 of FEMA, 1999.

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FPA-FE-119/MUM/2011

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Page 1 of 15

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The present appeal has been filed challenging the said order. As per appellant that impugned order was passed is totally preversed and against the well settled law, particularly by not following the final judgment of the High Court of Delhi, in the case of Bhupinder V. Shah having almost same relevant period of events and legal issue.

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Counsel for the appellant has submitted before us that the judgment of Bhupinder V. Shah, has a direct bearing of the facts of the present case even appellant has a good-case on merit.

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The brief facts are that on the basis of information received from the RBI, Mumbai that M/s Ennore Traders P Ltd have failed to realize their export bills aggregating to Rs.7,76,96,395/-. Further enquiries made with their Bankers namely Indus-lnd Bank, Bandra Br, Mumbai were asked to furnish the details of all the export bills pending realization for more than 180 days against the notice company and in their letter dt.25.6.2003 the Indus Ind Bank intimated the details of the outstanding export bills of the year 1996 to the tune of U.S.$23,23,284.29 ( Eqvt.to Rs.8,06,35,005) and further the company has not submitted any ETX form for the outstanding export bills .

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Thereafter M/s Ennore Traders P. Ltd. was asked under section 37 of FEMA, 1999 to furnish the details of the export bills pending realization, G.R. copies and details of ETX submitted to the RBI and amounts waived by RBI. However, the said communication was returned with remarks closed/not known. Therefore, the said Indus Ind Bank was asked to furnish the copies of GR forms and the present address of the exporters. The said bank vide their letter dt. 29.04.04 submitted the

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FPA-FE-119/MUM/2011

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Page 2 of 15

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copies of GR forms and also informed that Rs. 8,06,35,005/- continued to remain outstanding and also furnished the address of the Appellant. In reply to the directive issued to the said M/s Ennore traders P. Ltd the appellant, Director intimated that since the last 10 years the company had not made any business and since the entire records were destroyed the company could not seek extension from RBI due to lack of details and GR forms and the details of reasonable efforts taken for realizing the pending exports proceeds.

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The said M/s Ennore Traders P Ltd. started the export business of Towels in the year 1994 and exports were made till 1996. The Company in all exported goods worth Rs. 22 Crores and realized about Rs. 14 crores only. However, on account of world wide recession, sluggish market condition, devaluation of currency of East Asian countries in 1996 the company had been closed down in 1997 due to heavy losses. The name of the said company was deleted from the Register under Companies Act under section 560 of the Companies Act, 1956 since the Registrar was satisfied that there was no business since the last export made in January, 1996 due to heavy financial loss and the requisite further formalities have been duly complied by the Asst. Registrar.

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On the basis of the above information/investigation a show Cause notice dt. 5.10.2005 was issued by the Respondent under the provisions of section 8 of the FEMA, 1999 r/w Regulations 9 and 13 of FEM ( Export of goods and services) Regulations 2000 and section 42 of the FEMA, 1999 to M/S Ennore Traders P Ltd , Shri. Sandeep

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FPA-FE-119/MUM/2011

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Page 3 of 15

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Agarwal and the Appellant in the capacity of Directors of the said defunct Company.

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The Appellant in his letters dt. 27.10.2005 and 24.1.2006 submitted that he could not file his reply to the show cause notice since the entire records of the closed company was destroyed during the heavy rain in Mumbai in July, 2005 and the required details are being retrieved from other sources. In his letter dt. 27.4.2010 (along with copies of various efforts made) and 6.12.2010 the Appellant has also submitted that their request to write off in the matter is pending with R.B.I .

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His authorized representative vide this letter dt, 27.04.2011 submitted the exhaustive reasonable efforts made, as expected under the statute both orally and by written submission (which do not contain all oral submissions) by the Appellant in the capacity of one of the Directors of the company and also submitted during the course of unconcluded hearing held on 17.02.2011 as mentioned below:-

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a) that the buyers made payments regularly but after sometime started defaulting in the payments raising quality dispute and other reasons such as recession and flooding of cheap materials from other countries.

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b) that in all there were 4 buyers viz. Genimpex Sarl, AOZT TRIO, Moscow Tan Tekstil and Kings Electronics to whom the goods were exported.

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i) Genimpex Sarl:- the buyer after sending initial payments promptly started faulting in their payments. Similarly other exporters such as M/s Modern Terry

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FPA-FE-119/MUM/2011

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towels Ltd. (who was for the same reasons as the buyer was not raceable despite court summons & who exported goods to this buyer were also cheated by the one S. Natarajan, Director of the said company. On the basis of complaint he was arrested by Lome Police and he jumped bail and his present whereabouts and unknown and the Ministry of External Affairs, new Delhi is seized of the matter. Moreover exhaustive enquiries made by the appellant in Lome revealed that the said buyer company is not in existence and has been liquidated which was also confirmed by the report of M/s Dun & Bradstreet India P. Ltd vide their business Report dt,5.12.2005. In such circumstances the appellant was advised by the attorneys in Lome that the chance of recovery of any money even if suit is filed in court is remote besides it would result in heavy expenditure on professional fee without any chance for success. In other words the cost of recovery would be more than the actual possible recovery

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ii) AOZT ‘TRIO’ MOSCOW :- The buyer has not only

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cheated M/s Ennore Industries Ltd. but also so many companies in Mumbai and has also been absconding. The said company was liquidated following the collapse of USSR and devaluation of Rouble. As the whereabouts of Russian company and the persons concerned were not traceable, which being the first step before blindly launching any proceedings in court in Russia which inturn would result in spending money

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FPA-FE-119/MUM/2011

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without any scope that too when the company has been liquidated.

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iii) Tan Tekstil Turkey :- The goods in question were exported under D/P basis and the buyer did not clear the goods as the quota restrictions for textile goods were imposed by the Govt. of Turkey and did not take delivery of the goods. During the course of personal hearing on 17.02.2011 the authorized representative brought to the notice of the Respondent that the Govt. of Turkey suddenly implemented the quota system with effective from 01.01.1996 and even the Govt. Of India separately sought consultations with Trukey under ART. XXII of the GATT the Govt. of Turkey did not yield. In short even the Govt., of India could not solve the issue and in the mean time demurrage were mounting. It is further submitted that the goods were finally auctioned by the Port authorities which was the reasons why the export realization were pending. The legal advise given by the attorneys in Turkey and India were that since the goods were not taken delivery by the buyer for no fault of his the suit wont sustain in the courts of Turkey and the cost of overseas litigation could not be borne by the sinking company without any ray of hope of recovery.

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iv) Kings Electronics, UAE :- This buyer had

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purchased terry towel and paid U.S. $ 7111/- against bill of U.S. 66,895.33 but later stated that due to cheaper supply from Eat Asian counties and flooding of

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FPA-FE-119/MUM/2011

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Page 6 of 15

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terry towel in USA markets they could not sell the goods and did not pay the balance despite so many follow ups as M/s Ennore foundries ltd. could not take any legal action due to exorbitant legal fees and the company being sick could not find the initial legal fees.

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(c) Since the Company has not been doing any business since 1997 due to heavy losses incurred due to quota system and the buyer going under ground and the Asst. Registrar of Companies after the due process under the Companies Act, 1956. The Appellant was under earnest belief that the liability of himself as Director of the Company is coexistent with that of the defunct company (which is an ultimate beneficiary) as after liquidation no communications can be undertaken in his individual capacity, which peculiar facts were never considered by the Ld. Respondent.

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d) The authorized dealer though was fully briefed of the true circumstances and without any legal basis even after knowing the sorry state of affairs chose not to bring the real picture of affairs of the company while forwarding the request to write off to R.B.I. The request sent to RBI vide letter dated. 27.12.2007 is still pending and the role of R.B.I. is highly arbitrary for the simple reason that they had accorded permission to some of the local exporters who have exported the goods to the above mentioned buyers and who also did not receive their export proceeds for the same reasons as that of the Appellant’s company. It is submitted that when the request to write off is still pending with R.B.I. and has not been rejected the Ld. Respondent has no jurisdiction to conclude the hearing as R.B.I may either agree for write off or may not. The Ld. Respondent’s conclusion FPA-FE-119/MUM/2011 Page 7 of 15

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that R.B.I. did not agree to write off is purely hypothetical as on the date of adjudication and nothing but presumption without any basis.

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The Appellant submits that the Respondent, ignoring all the judicial dictum and in highly arbitrary manner without even taking the crucial submissions with regard to reasonable steps taken in the back drop of precarious financial condition imposed an unreasonable penalty of Rs.55,00,000/- on the Appellant vide his order dt. 31.5.2011 (received on 4.7.2011).

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Aggrieved with the impugned order the Appellant has filed the present appeal inter alia amongst various grounds.

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a) The Appellant submits that the hearing in the instant adjudication took place on 17.2.2011 and the impugned order has been placed on 31.5.2011 (i.e. After clear three months) and as per the judicial dictum of the Apex Court in the case of Anil Rai which was duly relied on in the Appeal No.82 and 83/1999 of M/s. Bhagyalakshmi Pharma Lab Vs Special Director of Enforcement, Mumbai by the Tribunal vide its order dt.13.12.2010 while remanding the matter. The Appellant submits that being binding precedent the present impugned order cannot be sustained as being in violation of principle of natural justice The appellant further submits that as per the decision of the Apex court in State of Orissa Vs. Mamata Mohantty 2011 AIRSCW 1332 that if an order is bad in its inception it does not sanctified at later stage and also if an order at the initial stage is bad in law then all further proceedings consequent thereto will be non est and to be necessarily set aside. The Appellant therefore submits that the impugned order being bad in law, being in

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FPA-FE-119/MUM/2011

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violation of principle of natural justice and non application of mind, passed after considerable delay is bad in law since its inception and therefore all subsequent action including the imposition of penalty is bad and non est in the eyes of law.

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b) The Appellant submits that imposition of penalty is quasi criminal proceedings and in the absence of any proceedings against the Company ( which is the ultimate beneficiary ) and imposition of penalty there can never be imposition of any penalty of Directors under FERA/ FEMA as per the statutory ingredients of both sections 8 and 42 of FEMA, 1999 for the simple reason that person who has allegedly contravened the provisions of section 8 of FEMA , 1999 is none other than M/s. Ennore Industries Ltd. The Ld. Respondent chosen not to impose any penalty on the company and in the process there is a inconsistency cropped in being that the exporter is not found to be guilty but the Director is found to be guilty which is against the principle of finding guilty against the Directors of the Company by the Apex court.

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c) The appellant submits that the blame worthy conduct by which imposition of penalty in the case of non realization of export proceeds is totally different from other contraventions under FEMA,1999. The Appellant submits that all that he is required to demonstrate in the event of non realization of export proceeds is to submit that he has taken all reasonable steps expected out of prudent business man which was duly demonstrated in the details furnished vide letter dt. 27.4.2010 (though the date has been wrongly mentioned as 27.4.2011 in the impugned order ). The Appellant submits that the judicial decision in imposing penalty in

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FPA-FE-119/MUM/2011

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the event of buyer closing office or going underground without any trace, cost of litigation would be more than that of chance of recovery and the Govt of importing country suddenly imposing conditions of import which was not in force on the date of export and goods have been auctioned for no fault of the exporter no penalty can be imposed on the simple ground that initiation of legal action is not always a perquisite.

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d) The Appellant submits that the Respondent has acquitted was Modern Terry Towels Ltd ( Dt. of order 28.6.2002) probably on the ground the exports made to Aozt Trio, Moscow were written off . The Appellant submits that the ground of write off is nothing but the exports proceeds were not recoverable for the same reason as that of the M/s. Ennore Traders Pvt. Ltd. The only fault is that while the bankers of M/s Modern Terry Towels have recommended the bankers of M/s Ennore Industries Ltd did not recommend for the reasons best known to them as at no point of time they reverted back. The appellant submits that the appellant cannot be visited with the penalty for no fault of theirs and infact the duty of the bankers co-exist in the alleged contravention.

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e) The Appellant submits that as per the categorical judgment of the High Court of Delhi in the case of Ganesh Polytex Ltd. have categorically held that when the exporter had taken all reasonable steps the contravention of non realization of export proceeds cannot lie legally. The Appellant respectfully submits that the Respondent did not properly taken into account the circumstances of loss of documents in the floods of Mumbai in 2005 and the oral and documents available submitted vide letter dt. 27.4.2010. The pith and substance of the non realization of export proceeds is the FPA-FE-119/MUM/2011 Page 10 of 15

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reasonable steps taken by the Exporter in the circumstances of RBI allowing Modern Terry towel (which was allowed by the Ld. Respondent) and the appellant’s company and the said company are equals and two equals are to be treated equally failing which the impugned order need to be treated as the one passed in contravention of principle of natural justice and therefore in violation of Article of 14 of Constitution of India.

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The appellant has filed all relevant annexures referred in the facts of the appeal in support of its submission.

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We have gone through the facts of the present appeal as well as with the relevant dates and facts in the matter of Bhupinder V. Shah in which the similar has been finally decided in favour of the appellants. The same are almost identical.

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14. COMPARATIVE CHARTS OF FACTS AND SETTLED LEGAL POSITION (INSTANT CASE AND THE JUDGEMENT OF HIGH COURT OF DELHI IN BHUPINDER V.SHAH)

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S.No	FACTS/ SETTLED LEGAL ISSUE	JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF BHUPINDER V.SHAH	IN THE INSTANT APPELLANT’S CASE
1	DATE OF SHOW CAUSENOTICE	10.8.2004 ( Ref.para 10 of judgement) SCN issued after sunset clause after 1.6.2002 follwing the Repeal of FERA	5.10.2005 (Ref. page No.26 of compilation of Appeal ) .In this case also SCN issued after sunset clause after 1.6.2002 following the Repealof FERA
2	Extent of violation	Rs.1073 million or Rs.107.3 Crores	8.06 crores
3	Section of FEMA under which the SCN was issued	7 and 8 of FEMA, 1999 r/w Reg. 9 and 13 (i) & (ii) of FEM(Export of	8 of FEMA r/w Regulation No.9 and 13 of FEM (Export ofGoods

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FPA-FE-119/MUM/2011

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		Goods and Services) Regulations 2000 and section 42 of FEMA,1999 ( Ref.Para.No.1 of Judgement)	and Services Regulations 2000 and section 42 of FEMA, 1999 ( Ref. Page No.26 of compilation of Appeal
4	Period of unrealised exports	1997-1998 ( Ref. para 2 of judgment)	Dec95-Dec 96 ( Reference to page No. 28 and 29 of the compilation of Appeal)
5	Status of the Company	JTS has become defunct and closed down operations since 1998-1999 ( Ref. para No.10 of the judgement)	The Company M/s Ennore Traders P Ltd has become defunct and closed down operations since 1995-96. The Company was dissolved and that is why no penalty was imposed on the company ( Ref. page No.123 of compilation of Appeal and para No.15 of Adjudication order)
6	Intimation about non receipt of export proceeds	20.6.2002 ( para No.7 of judgement /	28.3.2003 /3.7.2003 ( Para No.2 and Page no.27 and page No.33 of of compilation of documents of Appeal)
7	Efforts made to realise export proceeds	No details available in the judgement	Page N0.53, 73 and 112 of the compilation of theAppeal
8	Arbitrary treatment among similarly situated exporters by the adjudicating authority		P.No.99 – modern Terry towels Ltd
9	Any write off of export proceeds by the Bankers of Exporters	No details available in the judgement	10 items ( out of 19 items mentioned in the Adj,order- Ref.

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FPA-FE-119/MUM/2011

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p.No.118 of compilation of Appeal ) of
export totalling
to
U.S.$8,01,095.78
( submitted during the course of hearing
in the Appellate
Tribunal for Foreign
Exchange , New
Delhi in2014.

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It is evident as seen from the Comparative that chart M/s Ennore Traders P Ltd of which the Appellant was the M.D exported textiles to Cos in Russia, Turkey, UAE, Togo Sari during the period December 1995-1996 ( i.e. during the FERA regime ). The points involved in the present appeal are identical.

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During the course of hearing of the Appeal it was argued on behalf of the appellant that the Directorate has no jurisdiction to issue of the offences allegedly committed during the FERA regime after the repealing of FERA after the expiry of sunset clause on 31.5.2002.

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It was submitted that the case of Appellant is squarely covered by the judgement dt.26.3.2010 of High Court of Delhi in the case of Bhupinder V.Shah Vs UOI ( a copy of which was already submitted ).

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Admittedly the Company through which exports were made during 95-96 and as the company has become defunct no exports were made thereafter besides the buyers had gone under ground , auction at the Turkey port following change in the quota system etc.( i.e. letters dt.27.4.2010 and 6.12.2010 as replies to the show cause notice. These FPA-FE-119/MUM/2011 Page 13 of 15

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replies were not at all considered as could be seen from the findings and order of the Adjudication order.

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Mr. Prashant Pandey Ld. Consultant appearing for the Directorate submitted that since it is the continuing offence the Directorate has jurisdiction under FEMA. The however learned counsel appearing on behalf of appellant has pointed the same arguments made by the respondent before the High Court in the case of Bhupinder V. Shah by its ASG Mr. Chandok who appeared in the High Court of Delhi and submitted but the same were rejected duly dismissed by the Honourable Judge of High court of Delhi in para No.13 of the above judgement in the case of Bhupinder V.Shah Vs UOI. The said factual position has not denied by Mr. Pandey. It was not denied on behalf of respondent that the said judgement has attained finality as the same was not carried to Apex Court.

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The final judgment rendered by the Hon’ble High Court of Delhi is totally covered with the facts of the present case. The said decision is binding effect to this tribunal. Thus, the impugned order is liable to be set-aside.

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In the present appeal both the parties had made their submissions on 16^th May, 2018 and the order was reserved. On the said date, two weeks time was granted to the parties to file their written submissions. The written argument of the appellant was received however no written submissions has been filed by the respondent. Even after waiting for the considerable period for the written submissions on behalf of the respondent, when the same was not filed, we proceeded to pass the

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FPA-FE-119/MUM/2011

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present order on the basis of the written arguments filed by the appellant and the materials available on record.

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Once the issue of SCN of the offence completed in FERA regime no SCN can be issued after 1.6.2002 under FEMA,1999 because of the statutory bar under FEMA, 1999.

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Accordingly, in the light of the above, the appeal is allowed.

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The entire proceedings based on the illegally issued SCN (assuming jurisdiction under FEMA, 1999) is null and void ab-initio and therefore the penalty imposed vide the Adj. order dt. 31.5.2011 is untenable by the force of law.

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