Allowed

FPA-FE-194/MUM/1991 of Shri A.S. Ganguly v/s The Special Director Directorate of Enforcement, Mumbai

ATFP23 Aug 2019FPA-FE-194/MUM/1991

Case brief

AI extract

What is this about?

The Appellate Tribunal held that payments for manufacturing expenses between two Indian companies do not constitute loans or deposits requiring RBI permission. It ruled that 'body corporate' is not a 'person resident in India' under FERA and directors cannot be held liable without specific averments of responsibility.

What did the court decide?

Penalties imposed on the company and its directors were set aside; pre-deposit amount ordered to be remitted.

FPA-FE-194/MUM/1991 of Shri A.S. Ganguly v/s The Special Director… — Money Laundering | 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: 23.08.2019

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(1) FPA-FE-192/MUM/1991
M/s Hindustan Lever Ltd. & Ors.	…	Appellant
Versus
The Special Director Directorate of Enforcement, Mumbai	…	Respondent
(2) FPA-FE-193/MUM/1991
Shri V. Vaghul	…	Appellant
Versus
The Special Director Directorate of Enforcement, Mumbai	…	Respondent
(3) FPA-FE-194/MUM/1991
Shri A.S. Ganguly	…	Appellant
Versus
The Special Director Directorate of Enforcement, Mumbai	…	Respondent
(4) FPA-FE-195/MUM/1991
Shri A.L. Mudliar	…	Appellant
Versus
The Special Director Directorate of Enforcement, Mumbai	…	Respondent
(5) FPA-FE-196/MUM/1991
Shri C.J. Mahimkar	…	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 appellants	:	Shri Ravinder Narain, Advocate Ms. Mallika Joshi, Advocate Shri Ishan Narain, Advocate
For the respondent	:	Shri Prashant Kumar Pandey, Legal Consultant
FPA-FE-192-196/MUM/1991		Page 1 of 24

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Page 1 of 24

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CORAM JUSTICE MANMOHAN SINGH : CHAIRMAN SHRI G.C. MISHRA : MEMBER

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JUDGEMENT

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FPA-FE-192-196/MUM/1991

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The aforesaid appeals have been filed against Adjudication Order No. SDF/R/II/15-6-90 dated 13.11.1990 whereby penalty has been imposed against the Appellants to the tune of Rs. 25 Lakhs against M/s. Hindustan Lever Ltd.; Rs. 5 Lakhs each against Shri A.S. Ganguly (Chairman), C,J, Mahimkar (Director), A.L. Mudaliar (Director), N. Vaghul (Director) for contravention of Section 26(7)(i) and 26(7)ii) of FERA 1973.

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By this order, we propose to decide the above mentioned appeals.

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The Application for waiver of pre-deposit was disposed off vide order dated 03.05.2010 of the Appellate Tribunal. The said order was compiled by the Appellants.

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In order to decide the present appeals, few facts are necessary to be mentioned which are disclosed on behalf of the appellants.

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(a). In 1983-84 the Appellant Company (HLL) and Lipton India Ltd. (LIL), which was a sister concern, decided that the entire business of manufacture and sale of Vanaspati, which was being carried out by the Appellant company (HLL), would be transferred to LIL. Accordingly, four factories which were only manufacturing „Vanaspati‟ were straightaway transferred to LIL.

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FPA-FE-192-196/MUM/1991

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Page 2 of 24

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However, in respect of two factories which were manufacturing products other than Vanaspati also, it was decided that till all formalities are completed including transfer of license to import the raw material oil and the Industrial license to manufacture Vanaspati etc., the manufacture of Vanaspati as an interim arrangement would be continued to be carried on by the Appellant Company (HLL), but would be done „for and on behalf of LIL‟. All expenses, profits and losses, were thereafter to be, to the account of LIL in relation to the business of Vanaspati. The present appeals relate to these two factories in respect of which the aforesaid interim arrangement was made.

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(b). To meet the running expenses of manufacture of Vanaspati on behalf of LIL in these two factories, advance payments of Rs. 1038.44 Lacs were made by LIL to the Appellant Company (HLL).

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It is not denied by the appellants that in respect of the amount paid in advance by LIL to HLL, an entry was made in the annual accounts and balance sheet of LIL setting out the amount advanced by LIL to HLL under the Heading „Loans and Advances‟ together with an Explanatory Note no. 18(i) forming part of the accounts. The aforesaid annual accounts and balance sheet is filed in the compilation of „Additional affidavit dated 29.3.2010 at Sr. No. 18, the entry at page-106 of the Additional Affidavit sets out the amount of Rs.1038.44 lakhs under the Heading „Loans and Advances‟ and Explanatory note is on the next page 106A as Note No.18(i). This note refers to the aforesaid transaction and states that as a transitory arrangement HLL continues to carry out the manufacture/sales operations from these facilities (Re: Domestic Edibles – Vanaspati) in trust and on behalf of LIL. For Convenience of

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FPA-FE-192-196/MUM/1991

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Page 3 of 24

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Reference copies of the aforesaid pages 106 & 106A of the Additional Affidavit marked as Enclosure-I .

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The entire case is based on the aforesaid entry which refers to both „Loans‟ and „advances‟. The said entry read with the Explanatory Note clearly shows that it relates to “advances” made for running the operations of Vanaspati, so that the expenses incurred by HLL on behalf of LIL could be met from these “advances”. It is wrong to presume that the amount mentioned therein relates to any “Loan”. The Explanatory Note to the Entry clearly sets out the interim arrangement and shows that the amount mentioned therein relates to “advances” given from time to time to meet the expenses for operating the Vanaspati Unit.

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7. The case of the respondent

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(i) M/s. Lipton India Ltd. is an Indian Company incorporated under Indian Companies Act, 1977 wherein M/s. Unilever Plc. London was holding 40% share shares. M/s. Unilever Plc. was also holding 51% shares of M/s. Hindustan Lever Ltd. as is an admitted position of facts.

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(ii) In the annual report and accounts of M/s. Lipton India Ltd., it was revealed that the company had given a sum of Rs. 1038.44 lakhs to M/s. Hindustan Lever Ltd. without obtaining prior approval of RBI as stated in Section cited above.

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(iii) M/s. Lipton India Ltd. had admitted in its letter dated 13.02.1987 that they had not obtained the permission of the RBI as required under Section 26(7)(i) and 26(7)(ii) of FERA 1973.

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FPA-FE-192-196/MUM/1991

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(iv) Section 26 of FERA, 1973 was enacted to prohibit any transaction wherein foreign exchange was travelling outside the country. The requisites to attract the said Section are:

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(a) lending or depositing money

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(b) To a firm or company having more than 40% non-resident share capital.

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It is submitted on behalf of the respondent that on bare reading of the said provision, it is aptly clear that M/s. Hindustan Lever Ltd. in which the foreign entity had share holding of 51% received money from M/s. Lipton which is an Indian Company. Therefore the lending or deposit will attract any form of money exchanged without the approval of RBI i.e. loan or advance for that matter as the word deposit has been used and even assumed without prejudice to the case of the Department that the sum given was an advance still for that purpose a deposit was made in the account of M/s. Hindustan Lever which satisfies the condition for contravention of 26(7)(i) and 26(7)(ii) of FERA, 1973. Thus, what is essentially requires that the transaction wherein a party transfers to other a sum of money, which could be utilized by the borrower for any purpose whether specified or unspecified. It is stated on behalf of respondent that from the letter dated 13.02.1987 purported to have written by Chief Accountant of M/s. Lipton India Ltd. that the aforementioned amount was advanced by M/s. Lipton and therefore a transfer of the amount was involved to the account of Hindustan Lever Ltd. The Exchange Control Manual (Vol. 1) 1987 Edition issued by RBI states that “person resident in India” includes any office or branch situated in India of any business whether carried on by body corporate or companies, firms etc.

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FPA-FE-192-196/MUM/1991

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Page 5 of 24

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In the light of above, it is submitted by the Counsel for the Respondent that all the appeals are liable to be dismissed.

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We have heard learned Counsels for both parties. The real issue in the matter involved is as to whether the appellants are guilty of contravention of the provisions of Section 26(7)(i)(ii) of FERA 1973 or nor in the light of facts available in the matters. Section 26(7)(i)(ii) are reproduced thereunder:-

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Section 26 (7) Except with the general or special permission of the Reserve Bank (i) no person resident in India shall lend any money to or deposit any money with, a firm or company (other than a banking company) in which the non-resident interest is more than forty percent., and

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(ii) no firm or company (other than a banking company) in which the non-resident interest is more than forty percent., shall borrow money from a person resident in India, or accept a deposit of money form such person.

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Explanation I.- The companies referred to in subsection(1) are companies not incorporated under any law in force in India in the case of which any of the following conditions is fulfilled.-

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(a) that the company is one in which the nonresident interest is forty-nine percent., or less; or (b) that more than one-half of the sums which, on a liquidation there of, would be receivable by holders of share or loan capital, would be receivable directly or indirectly by, or for the benefit of, is forty-nine percent., or less; or

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(c ) that more one-half of the assets which, on a liquidation there of, would be available for distribution after the payment to creditors, would be receivable directly or indirectly, by, or for the benefit or, person resident in India; or

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(d) that more than one-half(i) of interest payable on its loans and loan capital, if any, or

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(ii) of the dividends payable on its preference share capital, if any, not being preference share capital, is receivable

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FPA-FE-192-196/MUM/1991

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directly or indirectly, by or for the benefit of, persons resident in India.

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Explanation II.-Where the identity of the persons by whom, or for whose benefit, any sum assets, interests or dividends are directly or indirectly receivable depends on the exercise by any person resident in India, of a power vested in him in that behalf, the sum, assets, interest or dividends shall, for the purposes of Cl. (b) of Expln. I, be deemed to be receivable directly or indirectly by, or for the benefit of, persons, resident in India.

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Explanation III.- For the purposes of this Section and Secs. 28,29 and 31, “non-resident interest” means participation in the share capital by, or entitlement to the distributable profits of, any individual or company resident outside in India, or any company not incorporated under any law in force in India, or any branch of such company whether resident outside India or not.”

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It is evident that Section 26(7)(i) and 26(7)(ii) of FERA 1973 provides that no person resident in India shall without general or special permission of the RBI shall “ lend any money to or deposit any money with, a firm or company (other than a banking company) in which the non-resident interest is more than forty percent, and no firm or company (other than a banking company) in which the non-resident interest is more than forty percent, shall borrow money from a person resident in India, or accept a deposit of money from such person.”

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It is submitted on behalf of the appellant that the violation contemplated under Section 26(7)(i) of FERA does not refer to „advances‟ made from time to time to meet the expenses for running any operation. Since the said entry refers to „advances‟ and the Explanatory Note clearly brings out the interim arrangement under which such advances are made to meet the expenses, there could be no question of treating the said entry, with reference to the payment made by LIL to HLL, as a „Loan‟. The said payment was made only towards „advances‟. The entry

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FPA-FE-192-196/MUM/1991

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together with the Explanation, which is the sole basis for initiating action, must be read as a whole and so read, it clarifies that the payments are towards „advances‟ for meeting the expenses of the Vanaspati operation. The payment referred to in the said entry does not relate to any „Loan‟.

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It is also submitted that the concept of „Loan‟, which is the subject matter of the said Section 26(7)(i) FERA, 1973 and the basis of imposition of penalty under the impugned order passed by the Special Director dated 13.11.1990, is totally inapplicable to the facts as set out in the said entry read with the Explanatory Note and the impugned order erroneously presumes that the aforesaid payment is made as a „Loan‟ and therefore falls within the ambit of Section 26(7)(i) of FERA, 1973. In the said order it is erroneously held that the said amount was borrowed by HLL from LIL, thus contravening Section 26(7)(ii) of FERA. A penalty is imposed in the sum of Rs.25 lakhs on the Company HLL and Rs. 5 lakhs on each of the Directors.

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In order to justify their arguments, it is submitted on behalf of appellant that since reliance was placed solely on the aforesaid entry relating to „loans and advances‟ read with the Explanatory Note, the Special Director ought to have considered that the facts set out therein referring to the interim arrangement, clearly related to „advances‟ for carrying out the operating expenses. Apart from the said entry, the only other document which also clearly explains the transaction is the letter dated 13.02.1987 sent by LIL to Dy. Director, ED, in answer to the query raised. This letter also clearly shows that the amount was paid as an „advance‟ to meet the expenses under the interim arrangement. Although reliance is placed on this letter, the Special Director has FPA-FE-192-196/MUM/1991 Page 8 of 24

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Page 8 of 24

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completely ignored the explanation set out therein. On the basis of the said entry, explanatory note and the aforesaid letter dated 13.2.1987, the Special Director ought to have held that the payment in question was only towards „advances‟ to meet the operating costs and capital expenditure for running the Vanaspati operation in trust, for and on behalf of LIL. Ignoring this important aspect, which goes to the root of the matter, the impugned order stands vitiated.

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The meaning and scope of „loan‟ is well settled. The Hon'ble High Court of Delhi in the case of Motia Rani Bhatia Vs. The Additional Director of Enforcement & Ors. 23 (1983) DLT 74 has held in para25 that-

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„what is essential to prove in a case of borrowing and lending is delivery by one party and receipt by another party of money on agreement, express or implied, to repay money with or without interest. There must be an advance of money with an absolute promise to repay …….In other words the borrowers promise to repay has to be proved’ .

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In the present case, the facts clearly show that under the interim arrangement certain amounts are paid in advance from time to time by LIL to enable the Appellant HLL to meet the expenses for manufacture of Vanaspati by it for and on behalf of LIL and to enable it to purchase raw material – edible oil as well as packing material and other manufacturing expenses. The amounts are given not as a „loan‟ to be repaid but only to utilize the amounts for meeting the expenses for carrying on the manufacturing activity, in trust and on behalf of LIL.

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It is stated on behalf of appellants that without referring to the „advances‟ made for the aforesaid purpose, the Special Director

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FPA-FE-192-196/MUM/1991

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proceeded to consider the question of „loans and borrowings‟, and that too without realizing the correct scope and meaning of „loans and borrowings‟ as laid down by the Hon‟ble Courts. The findings in paras 22 & 23 of the impugned order is totally contrary to and in violation of the meaning and scope of „loan‟ as held by the Hon'ble Delhi High Court in the aforesaid decision. The essential test to determine whether the amount paid can be said to be a „loan‟ is whether there is an absolute promise on the part of HLL to „repay the said amount to LIL‟. This essential requirement for constituting a loan has not even been considered in the impugned order.

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On the contrary, in para-22 of the impugned order while dealing

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with „lending‟ and „borrowing‟ , it is held that –

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„what essentially it requires is, that there must be a transaction where in a party transfer to the other the sum of money , which could be utilized by the borrower for any purpose, whether specified or unspecified in terms of an agreement between the two parties‟.

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These observations relied upon by the Spl. Director, in fact shows that the amount given for this purpose cannot be treated as a „loan‟ ipso facto. There is nothing to show that there was an „absolute promise to repay‟. Further, in order to conclude that the aforesaid amount was given as a „loan‟ it is held that – „in this case, the monies had been transferred to M/s. Hindustan Lever Limited, for financing a particular

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operation. ‟ From the aforesaid extracts from para-22 of the impugned order, it is clear that the ingredients of „loan‟ as adopted by the Special Director are totally contrary to the law laid down by the Hon'ble Delhi High Court.

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FPA-FE-192-196/MUM/1991

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We are clear in our mind that once it is clear from the material placed on record that the said amount was loan or deposit of money and no permission is sought from RBI, the case of contravention is made out.

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The Counsel for the Respondent has not denied the factum of relied upon documents on the basis of which the show cause notice was issued. The relevant entries shown in its annual report are reproduced hereunder:

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B. Due from Hindustan Lever Ltd., a Company under the same management (includes Rs. 951.67 lakhs-Previous Year Rs. 510.59 lakhs- on account of the domestic edibles business operations at HLL‟s multi-product factories at Shamnagar (West Bengal) and Sewri (Bombay)-refer note 18(i); Maximum amount due at any time during the year Rs. 1038.44 lakhs

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C. Pursuant to the agreement dated 23^rd November, 1983 between the Company and Hindustan Lever Limited (H.L.L), transactions together with the attributable profits of the domestic business of edibles at HLL‟s multi-product factories at Shamnagar (West Bengal) and Sewri (Bombay) for the period 1^st July, 1985 to 30^th June, 1986 have been transferred to the Company as it was implicit in the arrangements and always in the contemplation of the parties that turnover, costs, overheads etc. relating to the said business at the multi-product factories with effect from 30^th September, 1983 would be on account of Lipton India Limited. The Company has entered into an arrangement with HLL with effect from 11^th May, 1984 for part leasing facilities for the manufacture of domestic edibles at these multi-product factories. Pending allocation of imported oils and endorsement of industrial licence to the Company, HLL, as a transitory arrangement, continued to carry out the manufacture/sales operations from these facilities in trust and on behalf of the Company.

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Consequent upon these arrangements, under which HLL continued to operate these facilities, various items of sales, stocks etc. for the purpose of these accounts have been dealt with.

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The contents of letter issued by LIT dated 13.02.1987 are also reproduced:

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FPA-FE-192-196/MUM/1991

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Page 11 of 24

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February 13, 1987

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Deputy Director Enforcement Directorate 8 Lindsay Street Calcutta 700 016

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Dear Sir,

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In respect of your query as to whether any prior permission from Reserve Bank of India was obtained by Lipton India Limited under Sec.26(7) of the Foreign Exchange Regulation Act in respect of

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(a) Rs. 1,038.44 lakhs under Loans and Advances given to HLL, and

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(b) Also a further sum of Rs. 220.83 lakhs due from HLL under Sundry Debtors as at 30-6-86.

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We have to state that the aforesaid amount of Rs. 1,038.44 lakhs was advanced by our company to HLL in the context of manufacturing operations of vanaspati at the multi-product factories of HLL at Bombay and Shamnagar which have been transferred to LIL by way of part lease on and from 11-5-84. Pending transfer of allocation of imported oils, a key raw material for the manufacture of vanaspati and endorsement of industrial licence in respect of these facilities in favour of our company, as a transitory arrangement HLL has continued to carry out the manufacture and sales operations from these facilities in trust and on behalf of our company.

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Since this business was being carried out in trust for us and costs, expenses and profits for these operations were being transferred to us, we advanced, in the normal course of our business, sums required for these operations to HLL so as to enable them to carry out these operations for our benefit. It would have been unfair for us to expect HLL to finance these operations from their funds apart from the fact that such an approach would have adversely affected the profitability of this business, because of enhanced interest cost we would have to reimburse HLL if they had to finance this operation. Since the money was advanced for working capital needs of the above referred business in the normal course of our operations and was for our own benefit, and not for the benefit of HLL, it was neither in the nature of a „deposit‟ nor a „loan‟ requiring approval under Sec. 26(7) of FERA and as such no such approval was obtained from RBI.

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In so far as the amount of Rs. 220.83 lakhs appearing under Sundry Debtors is concerned. It predominantly represents the recoveries due, but not realised, as of 30-0686 in respect of service charges for exports of packet teas by HLL and are therefore again not in the nature of loans or deposits but in the nature of trade debtors which are settled periodically. This again does not require any approval or permission under Sec. 26(7) of FERA under RBI.

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FPA-FE-192-196/MUM/1991

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We trust this adequately answers yours queries.

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Yours faithfully, for LIPTON INDIA LIMITED

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S K CHAKRAVORTI CHIEF ACCOUNTANT

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It is settled law that the burden of proof is on the authority which alleges that the aforesaid transaction amounts to “lending” or “borrowing”. Apart from a mere reference to the aforesaid Entry in the annual accounts and balance sheet of LIL, no further material or evidence is placed on record to show how the aforesaid transaction amounts to „lending‟ or „borrowing‟ and that the transaction is such that the amount is given „with an absolute promise to repay‟.

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It is true that in the annual report, the said amount was shown in the category of loan. But when the matter is examined on legal-side, we have also to see the actual purpose and the contents of the documents and intention of the parties in view of deciding the appeals on FERA which is admittedly draconian law and now ceased to exist.

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In the present matter, it is admitted position that the amount was paid for the purpose of utilization in order to manufacture the product on behalf of LIL. The said fact is admitted in the impugned order. The request of return of any money toward loan and deposit does not arise as prescribed under Section 26(7)(1)(iii) of the Act.

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It is evident that the amounts were transferred by LIL to HLL „for meeting the expenses of financing operations for Vanaspati‟, have not been disputed. In view of these admitted facts, applying the principle laid

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down by Hon'ble Delhi High Court, it cannot even be suggested that the amounts were given with an „obligation or absolute promise to repay the entire amount‟ . On the contrary, the amounts were not to be repaid and were to be utilized in trust and on behalf of LIL for carrying out the manufacturing activity of Vanaspati, by HLL. The findings given by the Special Director in the impugned order that the aforesaid amount was given as a „loan‟ is not correct and does not fall within the purview of section 26(7) of FERA. The presumption cannot be drawn merely on the basis of heading mentioned in the annual report. The conduct and intention of parties are to be examined in order to determine the issue of contravention. The said amount was never treated either as a loan or deposit. Only in the heading, such expression is used.

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With regard to objection on behalf of respondent about the exchange control manual vol.-1 issued by the RBI that the person resident in India include any offence or branch in order to invoke Section 26(7)(i) & (ii) of FERA, apart from establishing that the transaction amounts to „lending‟ or „borrowing‟, another essential ingredient of the Section is that the alleged „loan‟ should be given to a “Person resident in India” as defined in Section 2(p) of FERA . In the present case, since the amount which is alleged to be given as a „loan‟ to a „body corporate‟ which cannot be a “Person resident in India”, the said Sections are inapplicable. “a person resident in India” as defined in Section 2(p) can only relate to an „individual‟ and not to a „body corporate‟.

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The phrase „A person resident in India‟ is defined in Section 2(p) of the Act, which is an exhaustive definition. All the 4 clauses (i) to (iv) of Section 2(p) clearly indicate that the said definition only relates to „individuals‟, who may either be citizens of India, as specifically referred

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to in clauses (i), (ii) & (iv) or a person not being a citizen of India, who has “come to or stays in India”, for the purposes set out in clauses (a) and (b) of clause (iii), which also applies only to „individuals‟ and not to „bodies corporate‟. This is so as a body corporate cannot „come to, or stay in India‟.

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It cannot be said that LIL which is a „body corporate‟ incorporated in India, had or could „come to or stay in India.‟

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The „Explanation‟ which relates to clause (iii) also further clarifies and provides that the person resident in India as contemplated in clause (iii) shall, during any period in which “he” is outside India‟, be deemed to be non-resident in India. A body corporate cannot be referred to as „he‟ . The entire language of clause (iii) read with the Explanation also clearly indicates that clause (iii) also only relates to an „individual‟ and not a body corporate.

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Thus, all the four clauses (i) to (iv) of Section 2(p) relate to „individuals‟ and a body corporate does not fall within the definition of „person resident in India‟ as defined in Section 2(p). In the present case, LIL being a „body corporate‟ cannot be treated as a „Person resident in India‟ and as such Section 26(7) is not applicable to LIL. In the present case, the transaction is between two bodies corporate, which is not contemplated in section 26(7).

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As a matter of fact and even as per relied upon documents by the respondent, it is clear that the arrangement in the present case is between two bodies corporate viz. LIL and HLL. The two clauses of subsection (7) of section 26 contemplate dealings between a FERA company and „a person resident in India‟. Though the word „person‟ is defined in

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the General Clauses Act to include bodies corporate but in this Section the word is not „person‟, simpliciter as in many other sections of the FERA, but a composite phrase „a person resident in India‟ and that phrase is defined in section 2(p).

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Therefore, the definition of „person‟ in Section 2(43) of the General Clauses Act cannot be called in aid because that definition is subject to the context in which it is used. In the present case a whole phrase is the context to begin with and the definition of the whole phrase is very precisely set out in Section 2(p).

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The definition stipulates that all the clauses refer only to an „individual‟ i.e. a living human being and not to bodies corporate. In accordance with Section 3 of the General Clauses Act, it is pertinent to note that the General Clauses Act is not applicable in the event of repugnancy of the subject or context with any legislation as in the present case, wherein not only is the expression “person resident in India” under FERA different in context/subject than “person” simpliciter under General Clauses Act but has also been defined specifically in FERA. Therefore the General Clauses Act in the present case cannot be used as an aid to interpret “Person resident in India”.

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The interpretation of „person resident in India‟ the Special Director has relied upon the clarification set out in the Exchange Control Manual. It purports to indicate that by virtue of clauses (c) and (d) of subsection (1) of section 73 of the Act, any office or branch situated in India of any business, whether carried on by a body corporate, is treated for all purposes of the Act as a „Person resident in India‟. On the basis of this purported clarification, the Spl. Director has held that even a „body

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corporate‟ can be a “Person resident in India”. This findings on his issue were not correct.

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Exchange Control Manual is only in the nature of an administrative clarification. It cannot bind the Courts, Tribunals or the Assessees. It cannot modify the language of the Act. It is settled law that though such administrative clarification may be binding on the Government Department, it would neither be binding on the assessee or the Courts/Tribunals, who are required to interpret the law. If the correct interpretation of the law is contrary to the administrative clarification, such clarification will have no binding effect.

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In division 1 of the Exchange Control Manual relating to “Exchange Control Direction and Instruction, the „object of the manual‟ is set out in para 1.8 at pg. 1.4. It is stated therein that –

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“This manual is a compendium of various statutory directions, Administrative Instructions, Explanatory Notes, etc., issued by the Reserve Bank from time to time in connection with the administration of Exchange Control……”

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Thus, the aforesaid clarification contained in the Exchange Control Manual is only in the nature of an “administrative instruction” issued by way of clarification by RBI, which at best, is based on its own view and does not have any legal or binding effect and cannot override the express language of Section 26(7) of the Act.

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Similar instructions, from time to time are issued by various departments like Central Board of Excise & Custom (CBEC). The Hon'ble Supreme Court has laid down the law with regard to such administrative FPA-FE-192-196/MUM/1991 Page 17 of 24

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instructions/clarifications in the case of UOI Vs. Arviva Industries (I) Ltd. - 2007(209)ELT 5 (S.C.) The relevant extracts there from is given below:

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“ 5. This Court in Commissioner of Customs, Calcutta & Others v. Indian Oil Corporation Limited & Another, (2004) 3 SCC 488, after examining the entire case law, culled out the following principles:

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“1. Although a circular is not binding on a court or an assessee, it is not open to the Revenue to raise a contention that is contrary to a binding circular by the Board. When a circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid nor that it is contrary to the terms of the statute.

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2. Despite the decision of this Court, the Department cannot be permitted to take a stand contrary to the instructions issued by the Board.

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3. A show cause notice and demand contrary to the existing circulars of the Board are ab initio bad.

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4. It is not open to the Revenue to advance an argument or file an appeal contrary to the circulars.”

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6. In this particular case, the Board‟s Circular No. 39/99-Cus., dated 25^th June, 1999 extends the benefit of Brand Rate of Drawback to compensate exporters for the re-rolled steel products and processed fabrics The High Court has rightly come to the conclusion that the circular issued by the Board are binding on the department. An effort was made by the learned Solicitor General to get this case referred to a larger Bench. We do not accept this contention in view of number of decisions and especially the Constitution Bench decision in Dhiren Chemical Industries (I) (supra).”.

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FPA-FE-192-196/MUM/1991

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As such, reference to the "Exchange Control Manual" by the Special Director while passing the impugned order, as if it has a legal binding effect, is contrary to settled law. Section 26(7) cannot be invoked when the transaction of giving and taking money is between two bodies corporate.

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Even otherwise as the present case clearly relates to „advances‟ for carrying out the Vanaspati operation by HLL, in trust and for and on behalf of LIL and the payment made referred to in the entry in question is not for repayment as is required in the case of „Loan‟, no case of penalty can be made out under Section 26(7) of FERA.

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Even while dealing with the allegation of „Loan‟, it is significant that in para 24 of the impugned order of the Special Enforcement Directorate (see typed copy) that –

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“I have borne in mind that the entire investigation do not reveal outflow of foreign exchange or any other acts or omissions and commissions by the said company which had led to the siphoning off of precious foreign exchange ”

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In view of the above specific finding in the impugned order assuming without admitting that there is contravention of Section 26(7) of the Act, there is no case for imposition of Penalty.

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It is settled law that in such cases no penalty ought to be imposed. Reference is made to the decision of the Hon'ble Supreme Court in the case of M/s. Hindustan Steel Ltd. Vs. State of Orissa - 1978(2) E.L.T. (J 159) (S.C.) wherein it is held that –

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“7.Under the Act penalty may be imposed for failure to register as a dealer: Section 9(1) read with Section 25(1)(a) of the Act. But the

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FPA-FE-192-196/MUM/1991

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liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest , or acted in conscious disregard of its obligation . Penalty will not also be imposed merely because it is lawful to do so . Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the company in failing to register the Company as a dealer acted in the honest and genuine belief that the Company was not a dealer. Granting that they erred, no case for imposing penalty was made out.”

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In view of the factual findings recorded in the impugned order itself (extracted above) and the aforesaid judgments clarifying the meaning and scope of „loan‟ and the submissions regarding the meaning and scope of “person resident in India”, it cannot be held that the amount given by LIL to HLL in the aforesaid circumstances was not „bonafide‟ and that the Company did not act under an „honest and genuine belief‟ that it was permissible to do so. Nor can it be said that the company „acted deliberately in defiance of law‟ or were „guilty of conduct contumacious or dishonest‟ or „acted in conscious disregard of its obligation‟. Assuming without admitting that there is a technical or venial breach, there is no justification for imposition of Penalty.

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FPA-FE-192-196/MUM/1991

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Page 20 of 24

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Apart from the bonafide belief of the Appellant that in the facts and circumstances of the case and on proper appreciation of the aforesaid entry read with the explanatory note and the letter dated 13.2.1987 sent by LIL to the Dy. Director, ED, as well as the interpretation of Section 2(p) of FERA dealing with „person resident in India‟, the Appellant also sought opinion from Shri M. Hidayatullah (Hon'ble Chief Justice of IndiaRetd.) annexed to the Additional Affidavit dated 29.3.2010 as Annexure D. At pg. 81 onwards, it is opined that in the facts and circumstances of the case referred to therein, the amount given by LIL to HLL can neither be treated as a „loan‟ or „deposit‟. As such, Section 26(7) cannot be invoked and where it is opined that since the arrangement in the present case is between two bodies corporate and the two clauses of sub-section (7) of Section 26 contemplates dealing between a FERA Company and „a Person resident in India‟ (which could only be an individual), the said sub-section would not apply.

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The impugned order is also not sustainable with regard to the penalty imposed on directors as it is settled law that in order to invoke Section 68 to proceed vicariously against the Directors of the Company for an offence committed by the Company, it is not enough to merely allege & set out the contents of Section 68 in the Show Cause Notice /Memorandum. It is necessary to make specific factual averments against the particular director as to how he is alleged to be incharge of and responsible to the Company for the conduct of business of the Company. In the absence of any such factual averments, no action can be taken with reference to Section 68 against any Director. In the present case, apart from merely repeating the language of Section 68, no factual averment is made against any director as to how he is incharge of and was responsible to the Company for the conduct of its export FPA-FE-192-196/MUM/1991 Page 21 of 24

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business and was responsible for the recovery of the export proceeds in question. In the absence of any such factual averments, the Show Cause

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Notice /Memorandum is bad and the proceedings stand vitiated.

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See the Hon'ble Supreme Court‟s decisions in the cases of :

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(i) Sunil Bharti Mittal Vs. Central Bureau of Investigation (2015) 4 SCC 609-

¶155

In para 39 , it is held that –

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“When the company is the offender, vicarious liabilities of the Director cannot be imputed automatically…… there has to be a specific act attributed to the Director or any other person allegedly in control and management of the Company, to the effect that such a person was responsible for the act committed by or on behalf of the Company.”

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Reference in para 39 is also made to the decision in the case

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of Keki Hormusji Gharda Vs. Mehervan Rustom Irani

¶159

[2009] 6 SCC 475 and para 17 thereof is quoted in which it is held that –

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“The Managing Director or the Directors of the Company thus cannot be said to have committed an offence only because they are holders of office.”

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(ii) Ashoke Mal Bafna v. Upper Steel Mfg. and Engg. Company Ltd. – MANU/SC/0836/2017- Paras 8-10.

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(iii) Saroj Kumar Poddar Vs. State (2007) 3 SCC 693 paras 13 & 14.

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In para 14 it is held that –

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“ there is no averment in the complaint petition as to how and in what manner the appellant was responsible for the conduct of the business of the company or otherwise responsible to it in regard to its functioning.”

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FPA-FE-192-196/MUM/1991

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The complaint was thereupon set aside.

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(iv) National Small Industries Corp. Ltd. Vs. Harmeet Singh

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Paintal & Anr. (2010) 3 SCC 330 (paras 13, 15, 17, 18, ) In para 24 reference is also made to the decision in the case of Saroj Kumar Poddar referred to above.

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One of the Directors Mr. N. Vaghul (Appeal No. 193/91) joined the Board of Directors of the Appellant Company only in 1987 and prior thereto he was working with ICICI. Since the entry relating to the amount given by LIL to HLL, on the basis of which proceedings were initiated in the present case relates to the year 1985-86 before he joined the Appellant Company, in any event he cannot be held vicariously liable under Section 68 in respect of the alleged contravention by the Appellant Company.

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Dr. A.S Ganguly, who was the Chairman of the Board of Directors was in any event not concerned with the day-to-day functioning of the Appellant Company and was not concerned with the transaction in question and as such he could not be held vicariously responsible under Section 68.

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All other Directors were „Non-executive Directors‟ and not „Whole-time Directors‟ and as such were not responsible or concerned with the day-to-day functioning of the Appellant Company and as such Section 68 could, in any event, not be invoked in respect of such Nonexecutive Directors. The penalty imposed against all the Directors is liable to be set aside.

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FPA-FE-192-196/MUM/1991

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The view of an eminent Jurist also establishes the bonafide of the Appellant. Keeping in view the principles laid down in the aforesaid decision of Hindustan Steels, there could be no case for imposition of penalty.

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It is submitted that in view of the above, the appeal of the Appellant Company and the Directors be allowed and the penalties imposed by the impugned order of the Special Director dated 13.11.1990, be set-aside. The appellants are entitled to receive the pre-deposit amount from the respondent who shall remit the same within two months from today.

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