Partly allowed

FPA-FE-100/DLI/2008 of Shri R.K. Gambhir v/s The Special Director, Directorate of Enforcement, Delhi

ATFP7 May 2019FPA-FE-100/DLI/2008

Case brief

AI extract

What is this about?

The Tribunal dismissed the appeals filed by a company and its director against penalty orders under FEMA. Holding that remitting an advance without completing the import was a contravention, the Member upheld the penalty but reduced it to Rs. 50 lakhs for the company and Rs. 25 lakhs for the director.

What did the court decide?

Penalty reduced to Rs. 50,00,000 on appellant company and Rs. 25,00,000 on Shri R.K. Gambhir; other appeals dismissed.

FPA-FE-100/DLI/2008 of Shri R.K. Gambhir v/s The Special… — Company and Corporate | ATFP (2019)

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

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DATE OF DECISION: 07.05.2019

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1. FPA-FE-99/DLI/2008 M/s. Nova Steel (India) Ltd. … Appellant 2. FPA-FE-100/DLI/2008 Shri R.K. Gambhir … Appellant Versus The Special Director, Directorate of Enforcement, Delhi … Respondent

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Advocates/Authorized Representatives who appeared

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For the appellants	:	Ms. Pooja M. Saigal, Advocate
For the respondent	:	Shri Kaushlesh Pandey, Legal Consultant
CORAM
SMT. ANANYA RAY	:	MEMBER
JUDGMENT

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FPA-FE-99/DLI/2008 & FPA-FE-100/DLI/2008

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These are appeals filed by the above two appellants against the order in original No. SDE/SKP/III/04/2008 dated 11.02.2008 wherein penalties of Rs. 3,00,000,00/- (Rupees Three Crores) and Rs. 50,00,000/- (Rupees Fifty Lakhs) have been levied on the two appellants respectively.

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Briefly, the case is that the appellant company entered into an agreement dated 13.09.1994 with Morgardshammar AB Sweden for procurement of high specification equipments i.e. Bar/Wire Rod Mill. The appellant company made an advance payment of 35% of the contractual

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FPA-FE-99/DLI/2008 FPA-FE-100/DLI/2008

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amount, in foreign exchange and these payments were made under the permit issued by the Reserve Bank of India. In terms of this agreement, the appellant company was required to open a letter of credit in favour of the supplier which was eventually extended upto 15.10.1995 by the supplier i.e. Morgardshammar AB Sweden. The supplier in extending the time period for opening of the letter of credit had made it clear that in the event of the appellant company not opening the letter of credit within the time agreed, the agreement would be treated as null and void and the advance given will be appropriated. The appellant company was not able to honour its part of the agreement and eventually had to forfeit the advance amount to the supplier. The case of the ED is that since the company had failed to utilise the acquired foreign exchange for the purpose for which it was permitted by RBI and had used it for purpose otherwise than for which it was meant, the company had contravened the provisions of Section 8(3) read with Section 8(4) of FERA, 1973 as also liable to penalty under Section 50 of the said Act.

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The following pleadings have been made on behalf of the appellants both in their appeal as well as during the hearing granted to them by me;

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i. That there has been no contravention of the FERA in as much as they had the permission of the RBI to procure and use the said foreign exchange.

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ii. That the said foreign exchange was meant for remittance abroad as an advance which they have done and hence the purpose for which the FE was released has been fulfilled.

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iii. The machineries/equipments were meant for their Bilaspur Plant where an expansion plan was underway. However, during the said period there was a case going on in the Supreme Court which finally directed for their Shahdra unit (Delhi) to close

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down which eventually closed down in November, 1996. Because of this they had to take a massive financial hit and it was the commercial decision taken by the management of the appellant company to not to proceed with the procurement/agreement with Morgardshammar AB Sweden.

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iv. They also stated that it was the company’s decision to source certain equipments indigenously with a view to economise on costs, that the power connection sanctioned by the Madhya Pradesh Electricity Board (MPEB) for their plant at Bilaspur was put in abeyance by the MPEB and as the project was inordinately delayed the viability of the project was adversely affected.

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v. That they had taken the advice/opinion of many legal luminaries all of whom had advised against taking any legal action against the foreign supplier.

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They therefore stated that it was the commercial decision of the company not to go ahead with the agreement, that they had used the foreign exchange for the purpose it was taken i.e. it was given as advance to the supplier and hence there was no contravention of FERA, and pleaded for their appeals to be allowed.

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With regard to the penalty levied on the second appellant i.e. Shri R.K. Gambhir who was the Director of the company at the relevant time they pleaded that it was illegal and relied on (i) Rajasthan High Court judgment in the case of Rajasthan Udyog vs. Assistant Director, Enforcement Director, (ED), S.B. Civil Misc. Appeal No. 692/2004 decided on 18.01.2011, (ii) Bombay High Court judgment in the case of M/s. Overseas Textile Corporation

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FPA-FE-99/DLI/2008 FPA-FE-100/DLI/2008

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& Ors. vs. Special Director, Enforcement Directorate (ED) in FERA Appeal Nos. 56-57-58-59-60-61 of 2009.

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In reply, the respondent have submitted the following arguments:

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a. That it is a misnomer that the appellants have fulfilled the purpose for which the FE remittance was made abroad as claimed by the appellants. The remittance was made as a part of the agreement between the appellants and Morgardshammar AB Sweden for procurement of Bar/Wire Rod Mill. The advance was only a temporary measure which should have culminated in the opening of the LC (letter of credit) and procurement/import of the equipments/machinery into the country as per the terms of the agreement. Apparently, a fact which is not denied by the appellants, that except for the advance payment they did not go ahead in fulfilling the other terms of the agreement.

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b. It might have been a commercial decision on the part of the company to not to proceed with the agreement further after having remitted the advance payment, but that cannot absolve them of their statutory obligations. They have not complied with the stipulations of the FERA.

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c. That the legal opinions taken by the company from various legal luminaries is their internal matter and cannot hold good where statutory obligations are concerned.

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d. Non-opening of the LC was the critical factor and in spite of the supplier writing to them clearly and cautioning them as to the fallout of non-opening of the LC, the appellants did not take any measure to fulfil the same. He referred to the letter of the

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supplier addressed to Mr. R.K. Gambhir, Director dated February 10, 1999, apart from the various provisions of the agreement of 1994.

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e. That penalty has been levied only on one director and the rest of them have been absolved in the impugned order. This director i.e. Shri R.K. Gambhir was the active director and was involved in all the negotiations and dealings pertaining to this project and agreement.

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They therefore pleaded that the impugned order needs to be upheld.

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I have carefully examined all the records placed before me as well as heard both the parties at length. The moot point that needs to be examined is whether there has been any contravention of FERA and whether they are liable to penalty. As has been brought out in the brief facts of the case supra as well as the pleadings recorded above, the appellant company did not pursue to fulfil the agreement with the foreign supplier Morgardshammar AB Sweden after remitting an advance amount of 35% of the cost because of which the supplier company appropriated this amount to itself and also reserved the right to charge additional cost not covered by the payments already made. This is apparent from the letter of the supplier company addressed to Shri R.K. Gambhir, Director of the appellant company dated February 10, 1999.

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This issue needs to be seen in the context of the FERA, 1973. Section 8(3) of FERA, 1993 reads as under:

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“(3) Where any foreign exchange is acquired by any person, other than an authorised dealer or a money-changer, for any particular purpose, or where any person has been permitted conditionally to acquire foreign exchange, the said person shall not use the foreign exchange so acquired otherwise than for that purpose or, as the case may be, fail to comply with any

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condition to which the permission granted to him is subject, and where any foreign exchange so acquired cannot be so used or the conditions cannot be complied with the said person shall, within a period of thirty days from the date on which he comes to know that such foreign exchange cannot be so used or the conditions cannot be complied with, sell the foreign exchange to an authorised dealer or to a moneychanger.”

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The State Bank of Indore which was the appellant’s banker, had vide its letter dated 19.10.1995 categorically mentioned that the prescribed period to submit the evidence of import pursuant to the advance payment in 1994 had passed and they (appellants) were directed to immediately submit the said evidence to the bank for their onward confirmation to the RBI. This clearly shows that the purpose for which the foreign exchange was procured was the completion of the import and not merely the advance payment as pleaded by the appellants. It is a fact which is not denied by the appellants that no imports took place and hence the contravention of Section 8(3) is clear.

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Further, Section 8(4) of FERA states as follows:

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“(4) For the avoidance of doubt, it is hereby declared that where a person acquires foreign exchange for sending or bringing into India any goods but sends or brings no such goods or does not send or bring goods of a value representing the foreign exchange acquired, within a reasonable time or sends or brings any goods of a kind, quality or quantity different from that specified by him at the time of acquisition of the foreign exchange, such person shall unless the contrary is proved, be presumed not to have been able to use the foreign exchange for the purpose for which he acquired it or, as the case may be, to have used the foreign exchange so acquired otherwise than for the purposes for which it was acquired.”

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This provision therefore clarifies unequivocally that the ‘purpose’ can only be completion of the import and not the remittance towards advance payment only. Hence, the position as it stands is that they were allowed to draw and remit foreign exchange towards fulfilment of the agreement and completion of the contract which would have culminated in the importation of

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the contracted equipment/machinery/mill. There is no dispute that this importation has not taken place. The pleading of the appellant that it was a commercial decision because of the financial constraints that the company was going through cannot be any ground under FERA. Moreover, they have never approached the RBI who had permitted the advance remittance to exempt them from the said importation at any stage. The provisions of Section 8(3) and 8(4) quoted above makes it amply clear that the appellants have not followed these and contravened the said provisions.

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At this stage, certain facts needs to be highlighted as is apparent from the documents on record as well as pleadings of the appellant. They had entered into an agreement with Morgardshammar AB Sweden in 1994 when the matter of closure of units in Delhi was pending in the Supreme Court. Supreme Court announced its directions to close such units in Delhi soon thereafter [which included the appellant company’s Delhi (Shahdra) Unit] and eventually this unit had to shut shop in November, 1996. Notwithstanding the above, the appellant company went ahead and signed the agreement with the foreign supplier and remitted the advance amount knowing fully well the effect and repercussions of both, the non-adherence to the terms of the agreement and of the Supreme Court’s decision. Hence, later on taking the plea of commercial decision or financial constraint cannot be a ground. Moreover, apparently the machineries etc. to be imported were meant for their Bilaspur plant which was not hit by the Supreme Court’s order. Hence, taking the shelter of the Supreme Court’s order to justify their non-performance is far too stretched an argument which cannot be accepted.

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Coming to the second appellant Shri R.K. Gambhir the contention that the levy of penalty on him was illegal, I find from the records that it was Shri R.K. Gambhir who was actively involved in the entire process. The agreement FPA-FE-99/DLI/2008 Page 7 of 9 FPA-FE-100/DLI/2008

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of 1994 signed with the company Morgardshammar AB Sweden has been signed by him for and behalf of Nova Steels. All the correspondences between the company and the supplier were addressed to him or addressed by him. For instance, there is a letter dated January 25, 1999 written and signed by Shri R.K. Gambhir addressed to the supplier. There is also a correspondence from Delphi & Company, Stockholm dated 13.10.1999 who has given advice on the case, has also referred to the discussions with Mr. Gambhir. Hence, Mr. Gambhir cannot absolve himself of the responsibility and duties which he discharged as an active director of the company in the present case. In this background, the reliance on the judgment of the Rajasthan High Court and the Bombay High Court by the appellant is misplaced since the facts of both the cases are entirely different. Even there, in the case of Rajasthan Udyog as quoted supra, the Rajasthan High Court placed reliance on the decision of the Supreme Court in the case of SMS Pharmaceuticals Ltd. vs. Neeta Bhalla quoting as below:

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“It is necessary to specifically aver in a complaint under Section 141 (of the Negotiable Instruments Act, 1881) that at the same time the offence was committed, the person accused was in charge of and responsible for the conduct of business of the company. This averment is an essential requirement of S. 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of S. 141 cannot be said to be satisfied. Merely being a Director of a company is not sufficient to make the person liable under Section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for the conduct of its business. The requirement of S. 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time.” In the present case, the role of the director Shri R.K. Gambhir

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has been brought out as discussed above wherein he was in charge of the entire proceedings right from signing of the agreement and onto all further correspondences/actions relating to the same.

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On the basis of discussions and findings above, I do not find any infirmity in the impugned order and uphold the same. Both the appeals are dismissed as rejected. I am however inclined to reduce the penalty which I feel is on the higher side, to Rs. 50,00,000/- (Rupees Fifty lakhs only) on M/s. Nova Steel India Ltd. and Rs. 25,00,000/- (Rupees Twenty five lakhs only) on Shri R.K. Gambhir.

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(Ananya Ray) Member

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New Delhi, 7^th May, 2019

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‘A’

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FPA-FE-99/DLI/2008 FPA-FE-100/DLI/2008

FPA-FE-100/DLI/2008 of Shri R.K. Gambhir v/s The Special Director, Directorate of Enforcement, Delhi

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FPA-FE-100/DLI/2008 of Shri R.K. Gambhir v/s The Special Director, Directorate of Enforcement, Delhi

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