Allowed

FPA-FE-63/CHN/2017 of M/s. Welcord Component Industries v/s The Joint Director, Directorate of Enforcement, Chennai

ATFP25 Apr 2019FPA-FE-63/CHN/2017

Case brief

AI extract

What is this about?

The Appellate Tribunal allowed appeals filed by a partnership firm and its partners challenging penalties imposed by the Directorate of Enforcement for alleged FEMA violations. The Tribunal set aside the orders, ruling that the department failed to discharge its burden of proof by relying solely on denied cash book entries without corroborative evidence or statements from the actual maintainers of

What did the court decide?

The impugned orders imposing penalties were set aside and all appeals were allowed and disposed of.

FPA-FE-63/CHN/2017 of M/s. Welcord Component Industries v/s… — 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: 25.04.2019

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(1) MP-FE-302/CHN/2018 (Preponement) In MP-FE-32/CHN/2017 (Misc.) MP-FE-33/CHN/2017 (Stay) & FPA-FE-63/CHN/2017
M/s. Welcord Component Industries	…	Appellant
Versus
The Joint Director, Directorate of Enforcement, Chennai	…	Respondent
(2) MP-FE-303/CHN/2018 (Preponement) In MP-FE-34/CHN/2017 (Misc.) MP-FE-35/CHN/2017 (Stay) & FPA-FE-64/CHN/2017
Shri Prasanna Bhautoria	…	Appellant
Versus
The Joint Director, Directorate of Enforcement, Chennai	…	Respondent
(3) MP-FE-304/CHN/2018 (Preponement) In MP-FE-36/CHN/2017 (Misc.) MP-FE-37/CHN/2017 (Stay) & FPA-FE-65/CHN/2017
Shri Rankit Bhautoria Nathan	…	Appellant
Versus
The Joint Director, Directorate of Enforcement, Chennai	…	Respondent
FPA-FE-63-65/CHN/2017		Page 1 of 19

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Advocates/Authorized Representatives who appeared

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For the appellants	:	Shri Rajesh Rawal, Advocate
For the respondent	:	Mrs. Aagam Kaur, Legal Consultant
CORAM
JUSTICE MANMOHAN SINGH	:	CHAIRMAN
JUDGEMENT

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FPA-FE-63-65/CHN/2017

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By this order, I propose to decide above-mentioned three appeals filed against the common order dated 30.06.2017. In the impugned order the Adjudicating Authority has imposed penalties on the Appellants as follows:

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(a) Rs.3 Lakhs on Sh. Prasanna Bhuthoria for alleged contravention of Section 3(a) of FEMA, 1999, as stated above;

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b). Rs.3 Lakhs on Sh. Prasanna Bhuthoria for alleged contravention of Section 6(3)(g) of FEMA, 1999, as stated above;

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c). Rs.25 Lakhs on M/s Welcord Components and Rs. One Lac each on both partners for alleged contravention of Section 3(b) of FEMA, 1999, as stated above;

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FPA-FE-63-65/CHN/2017

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Page 2 of 19

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d). Rs.3 Lakhs on M/s Welcord Components and Rs. Fifty Thousand each on both partners for alleged contravention of Section 10(6) of FEMA, 1999, as stated above;

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M/s. Welcord Components Ind., Pondicherry (a partnership concern) is engaged in exclusively manufacturing and supply of components for „Goodnight‟ liquidator to M/s Godrej Consumer Products Ltd., Pondicherry. Sh. Prasanna Bhautoria and Sh. Rankit Bhautoria are partners of M/s Welcord Components Ind. who procured raw material from the domestic market as well as from international market by way of imports.

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Being aggrieved from the aforesaid impugned Order, Appellants have filed the above appeals on various grounds.

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It has come to record that the officers of DGCEI based on certain information searched the factory premises of the firm on 8.12.2014 and seized certain documents in relation to alleged violation of Central Excise provisions. The said seized record included two volumes of cash book, which allegedly contained details of transactions of the firm and also foreign exchange dealings along with ledger extract of cash book. The said cash books were handed over to Directorate of Enforcement and based on and without perusing other documents or without conducting any independent investigation and without recording statement of key persons, the Directorate filed complaint before the Adjudicating Authority, FEMA, 1999, Chennai. Based on the said complaint, department issued FPA-FE-63-65/CHN/2017 Page 3 of 19

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Show Cause Notice dated 4.4.2016 to the Appellants calling upon the Appellants to show cause as to why penal action be not taken against them under Section 13 of FEMA, 1999.

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The allegations leveled against the Appellants are to the following: (a) Shri Prasanna Bhutoria had dealt in foreign exchange in USD 41,000/- (equivalent to Rs.33,79,460/-) by procuring the same from grey market and thereby contravened the provisions of Section 3(a) of FEMA, 1999 and accordingly he had rendered himself liable for penalty under Section 13(1) of FEMA, 1999.

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(b) Shri Prasanna Bhutoria during his travel abroad had carried in person the aforesaid foreign currency of USD 41,000 and thereby contravened provisions of Section 6(3)(g) of FEMA, 1999 and accordingly he had rendered himself liable for penalty under Section 13(1) of FEMA, 1999.

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(c) Shri Prasanna Bhutoria had procured the aforesaid foreign currency and had carried the same abroad in person in order to pay the overseas supplier to square off the alleged difference in value arising on account of alleged undervaluation of imports made by Appellant firm.

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(d) That the M/s. Welcord Component and its partners viz. Sh. Prasanna Bhutoria and Sh. Rankit Bhutoria had made payments to

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FPA-FE-63-65/CHN/2017

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Page 4 of 19

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the tune of Rs.2,67,09,260/- to the overseas suppliers through other than by banking channels and thereby contravened the provisions of Section 3(b) of FEMA, 1999 and rendered themselves liable for penalty under Section 13(1) read with Section 42 of FEMA, 1999.

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The basis for the aforesaid allegations are that the aforesaid amounts were paid through non-banking channels to the overseas suppliers of M/s. Welcord on instructions of Shri Prasanna Bhutoria towards the alleged difference in value arising on account of alleged under valuation of imports.

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(e) M/s. Welcord through their Authorized Bank had remitted a total amount of Rs.3.44 crore to its overseas suppliers as “advance payment towards import” and had imported goods to the tune of Rs.2.49 crore and had thus made excess payment of Rs.95 lacs towards advance import remittances without actual import and accordingly contravened provisions of Section 10(6) of FEMA, 1999 and had rendered itself liable for penal action under Section 13(1) of FEMA, 1999 and further its partners were also liable for penal action under Section 13(1) of FEMA, 1999.

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The basis for the aforesaid allegations is that M/s Welcord was transferring excess funds on account of alleged difference in value of goods supplied by overseas supplier arising on account of alleged undervaluation of imports so made.

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FPA-FE-63-65/CHN/2017

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Page 5 of 19

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During the course of investigation by the department statements were recorded of Shri Prasanna Bhutoria on 20.7.2015 and that of Shri Rankit Bhutoria on 14.8.2015. The relevant extracts are mentioned as under:-

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(a) Statements of Shri Prasanna Bhutoria dated 20.7.2015.

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In the said statement, interalia, Shri Prasanna Bhutoria had stated that he was managing the entire affairs of the company and that his son Shri Rankit Bhutoria had recently joined. Further on subject cash book having been shown to him, Shri Prasanna denied the same and amongst others, stated that he did not know the contents of the cash book as the same was not maintained by him. The said cash book was maintained by one Shri Pankaj employee of M/s. Welcord and by Shri Dinesh Gaud who was doing metal sheet pending job work for M/s. Welcord. Further Shri Prasanna had stated that all payments for import were routed through proper banking channel. Further it was stated that besides the subject issue, M/s. Welcord had not been issued with any show cause notice by any department till date for any offence.

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Statements of Shri Rankit Bhutoria dated 14.8.2015.

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In this statement Shri Rankit, amongst others, had stated that he was not actively participating in the business activities of M/s. Welcord and the entire affairs of the firm were being managed by his father Shri

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FPA-FE-63-65/CHN/2017

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Page 6 of 19

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Prasanna Bhutoria. Further in answer to question no. 5 at page 159 it was stated that Shri Pankaj was working as accounts manager and he had left the firm during the interrogation by DGCI and had registered case against M/s Welcord Component. On being shown the subject cash book, he denied the same and it was stated that he did not know the contents of the same as the same was not maintained by him and that the cash book was maintained by Shri Pankaj and Sh. Dinesh Gaud.

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Appellants contested the impugned show cause notice by filing common reply dated 29.9.2016. In reply it was refuted by the appellants all the allegations leveled in the impugned Show Cause Notice after reply granted personal hearing which was attended upon on behalf of Appellants.

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SUBMISSIONS ON MERITS

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It is contended on behalf of the appellant that the said cash books were handed over to Directorate of Enforcement. It is the case of the appellant that solely based on aforesaid select records and without conducting any independent investigation the impugned show cause notice was issued to the Appellants. It is submitted by the appellants that the show cause notice was based on presumptions as there is no corroborative evidence available on record or admission from any person.

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It is submitted that cash book is not a statutory document and that the same was not maintained by the firm or either of its partners.

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FPA-FE-63-65/CHN/2017

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Page 7 of 19

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Admittedly the alleged cash book was maintained by Shri Pankaj and Shri Dinesh and statement was not recorded of either of them. It is submitted that no independent investigation was done by the department either in India or abroad to substantiate the allegations leveled against the Appellants, which allegations are unsubstantiated. The alleged cash book cannot be considered as substantive evidence of violation much less as has been held by the Ld. Respondent.

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The partners had denied the cash book and had stated that they had no knowledge about the contents of the alleged cash book and that the same was maintained by Shri Pankaj and Shri Dinesh. As stated above, Shri Pankaj was the one responsible for registration of the subject case against the Appellants.

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In regard to alleged contravention of Section 3(a) and Section 6(3)(g) of FEMA, 1999 by Shri Prasanna Bhutoria, the basis for the aforesaid allegations are that Shri Prasanna Bhutoria had procured the aforesaid foreign currency from grey market and had carried the same abroad in person in order to pay the overseas supplier to square off the alleged difference in value. The Respondent held (in the impugned order) that Shri Prasanna Bhutoria had acquired USD 41,000 as mentioned in the cash book from other than authorized persons and in as much as such acquisition tallied with the travel dates to overseas countries, it is evident that Shri Prasanna Bhutoria had carried the said currency in person during the said travel.

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FPA-FE-63-65/CHN/2017

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Page 8 of 19

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There was no seizure of foreign currency either from the premises of the Appellant firm or its partners or from the person of Shri Prasanna Bhutoria during any of his travel abroad. Thus, the findings are result of reading and analyzing the cash book entries by assumptions and presumptions to the effect that these entries were factual, without there being available on record any corroborative evidence in that regard. There is no evidence available to establish that the payments so made were to square of the alleged differential amount arising on account of alleged under invoicing of imports made by the Appellant firm. The entries allegedly made in the cash book are not substantive evidence to prove any violation, much less as has been held by the Respondent.

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It was submitted by the appellant that the amount of USD 41,000/has been considered twice as the said amount has also been included in sum of Rs.2,67,09,260/- for which separate penalty has been imposed by impugned order, the same is erroneous and impugned order on said count cannot be sustained. Even the calculation of the alleged figure of USD 41,000/- is wrong.

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It is submitted on behalf of appellant that why someone will do hawala transaction through banking channel, as is being alleged by the department as it is a continuous regular business and the appellant company has a goodwill and reputation.

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FPA-FE-63-65/CHN/2017

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Page 9 of 19

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With regard to alleged violation of Section 3(b) of FEMA 1999, again the Respondent relied upon the alleged cash book and held that the entries made therein clearly suggest that payments have been made to overseas supplier and such payments have been made through foreign currencies acquired through other than authorized persons and carried illegally. It was held that payments were made to the tune of Rs. 2,67,09,260/- as detailed in para 5.6 of the complaint to the overseas suppliers and /or their representatives through other than banking channels and accordingly there was contravention of section 3(b) of FEMA 1999.

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There no evidence on record to substantiate the said findings. There is no statement or document or admission on record to substantiate the said allegations. In this regard, no investigation was done by the department in India or abroad. No show cause notice has been issued for alleged under valuation by the customs authorities and there is no dispute on this aspect. If department wished to prove the aforesaid allegations. As per department they had all information in this regard, which fact is apparent from the impugned complaint however department did not do anything in this regard, who only interpreted the cash book entries and come to the conclusion that these entries were factual and held against the Appellants, without any corroborative evidence available on record.

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Pertaining to violation of Section 10(6) of FEMA, the basis of the said allegation is that the Appellant firm had made remittance to its

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FPA-FE-63-65/CHN/2017

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Page 10 of 19

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foreign suppliers towards import advance payment of Rs.3.44 crores through proper banking channel but have made actual import of Rs. 2.49 crores and excess payment of Rs.95 lacs was made to square off alleged differential value arising on account of alleged under valuation of the imported goods. In this regard the Respondent held that there was no doubt that “advance remittances” for imports are permissible under law, however the Respondent held against the Appellants on this count only on the ground that there was no co-relation between the said advance remittances and imports although Appellants produced different details to establish the said co-relation, accordingly it was held that Appellants were guilty of contravention of section 10(6) of FEMA 1999.

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The Respondent did agree that advance remittance is permissible in law against imports. Appellant had produced different evidence / details to establish the co-relation between the advance remittance and imports, however the Respondent was not convinced and only on that ground held Appellants guilty of violation of Section 10(6) of FEMA, 1999. One is failed to understand why a person would make alleged hawala transactions through banking channel. The business of Appellant firm was on-going business and Appellant had and continued to import electronic components from various suppliers. It is alleged on behalf of the Appellant that they had imported the goods against the aforesaid advance payments so made over period of time. In this regard, along with typed written submissions filed during arguments, Appellant had placed on record chart showing the co-relation between the advance remittances of Rs. 95 lacs,

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FPA-FE-63-65/CHN/2017

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Page 11 of 19

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therefore the allegation in regard to alleged undervaluation have been made herein above and the same are reiterated.

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The provisions of Section 39 of FEMA, 1999 are not applicable to the fact of the present case and the respondent was merely presuming the cash book as documents for the purpose of investigation under FEMA, 1999. The said cash book was not seized from the custody / control of the Appellants, the same was not seized from the personal computers of either of the partners. The alleged cash books were denied and it was stated that neither of the partners were aware of the contents of the same and that the said alleged cash book was maintained by Shri Pankaj/Shri Dinesh. No statement of either of them was ever recorded by the department. Thus, in the absence thereof, said cash book cannot be held to be substantive evidence to establish alleged violation by the Appellants. Even in a strong matter against the accused parties, it is still the duty of the department to prove the case beyond any doubt for each charge by discharging the burden.

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It is the admitted position that the department chose not to record statement of Shri Pankaj or Shri Dinesh Gaud. The department has also not called upon the Appellants to produce Shri Pankaj and/or Shri Dinesh. It is submitted on behalf of the appellant that the failure of the department to summon there who were authors of the alleged entries made in the cash book.

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FPA-FE-63-65/CHN/2017

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Page 12 of 19

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It is evident that the entire basis of the case of the department is that the Appellants had made alleged violations in order to square off the alleged difference in value of the imported goods / components viz. under valuing the same and paying the alleged difference in value to its overseas supplier through non-banking channels. There no evidence on record to substantiate the said allegations. There is no statement or document or admission on record to substantiate the said allegations. No independent investigation was done by the department in India or abroad. No show cause notice has been issued in this regard viz. for under valuation by the Customs Authorities.

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The department at least should have recorded statement of Shri Pankaj and Dinesh Goud to this effect from the sellers of the Appellant or other persons in India or abroad who were allegedly paid money being alleged differential value on behalf of overseas suppliers of Appellant. The Respondent only read and interpreted the cash book entries and it was the violation of various provisions against the appellant without there being any corroborative evidence available on record. Either said witnesses would have been summoned after obtaining the address or the appellants should have been directed to produce them. There is no evidence on record to show that any exercise is done.

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The Adjudicating Authority erred holding that the Appellants should have produced Shri Pankaj/Shri Dinesh for recording their statement rather than finding fault with the department for not interrogating that the

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FPA-FE-63-65/CHN/2017

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Page 13 of 19

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said two persons. It was submitted that the onus to prove the alleged charges against the Appellants is on the department and it was for the department to record the statements of Shri Pankaj/Shri Dinesh to corroborate the alleged entries made in the cash books and the said burden cannot be shifted by finding fault with the Appellants.

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As stated above Shri Pankaj and Shri Dinesh had left the firm during investigation by DGCEI and it is not the case of department that Appellants had any role in that regard, rather Shri Pankaj was the person who got the case registered against the Appellants as alleged and it was duty of department to prove its case. Department has therefore was unable to discharge the said onus.

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The Appellants had made specific request for cross-examination of the officers of department and that of Shri Pankaj and Shri Dinesh. However the Ld. Respondent did not acceded to the said request of the Appellants.

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Judgments relied upon on behalf of Appellants

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S.K. Jain vs Union of India – 2016 (341) ELT 197 (Del.)

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In this case Show Cause Notice was issued while relying on spiral note book/ diary and it was alleged by department that from the entries made in the said diary it was apparent that payments were made to different persons through hawala channels. The Hon‟ble Delhi High Court held that

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FPA-FE-63-65/CHN/2017

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Page 14 of 19

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the entries so made per se cannot constitute substantive evidence to establish the alleged violation. The Hon‟ble Court held that the department had not gathered credible evidence through independent investigation in India and abroad. In this case also the noticee either declined to answer or gave answer which did not help the case of the department, as the noticee claimed that he had no knowledge of entries in the diary. The Hon‟ble Court held that the onus to establish charge against the noticee was on the department, which onus could have been discharged by the department by gathering substantive evidence through independent investigation in India and abroad and further held that the entries made in the diary by itself were not sufficient to prove the allegations against the noticee. Accordingly the Hon‟ble Court held that the impugned order was based on improper appreciation of the probative value of evidence produced by the department in support of its allegations and accordingly the impugned order was set aside being unsustainable in law.

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Being aggrieved, department had filed SLP before the Hon. Apex Court against the aforesaid judgment rendered by Hon. Delhi High Court and the said petition was dismissed by Hon. Apex Court vide Order dated 23.11.2015.

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25.1 Mittal Ispat vs Enforcement Directorate – 2017 (349) ELT 513

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(ATFE)

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In this case also the basic allegation which was leveled by the department was that hawala payments were made to overseas suppliers to square off

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FPA-FE-63-65/CHN/2017

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Page 15 of 19

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the differential amount arising out of under valuation of imports made by the Appellant Company, accordingly show cause notice was issued. In this case there was admission by two employees of the company, however said statements were retracted the very next day. It was held that Custom Authorities had not issued any show cause notice on the aspect of alleged under invoicing. Further it was held that no foreign currency had been recovered and that there was no corroborative evidence of the fact that payments allegedly made by the Appellants were made as per the instructions from abroad towards the differential amount of alleged under invoicing of the imports made by the company. Accordingly the impugned order was set aside.

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25.2 Harbhajan Singh vs Director of Enforcement – 2013 (298) ELT 142

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(ATFE)

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In this case certain lose sheets and diary were seized and on the basis of entries made therein it was alleged that there was violation. In this case after appreciating the evidence on record it was held that charge against the Appellant was partly established since there were statements of persons who corroborated the entries made in the diary. However it was further held that there was no evidence on record to show that the Appellant had disbursed a sum of Rs.1,35,28,275/- as the loose papers and diary recovered from the house of the Appellant do not fall within the scope of Section 34 of the Evidence Act. It was held that the entries in the diary cannot be said to be account kept in regular course of business and

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FPA-FE-63-65/CHN/2017

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Page 16 of 19

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therefore the same is not admissible in evidence, accordingly on this part the appeal was allowed.

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25.3 Commissioner vs Mahesh Silk Mills – 2015 (319) ELT A52 (Guj.)

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In this case also the Hon‟ble High Court approved the judgment of the Ld. Tribunal whereby it was held that there was no sufficient evidence to establish clandestine removal of goods by the Respondent even though a diary was recovered from the premises of the Respondent alleged to contain entries to establish clandestine removal. The Hon‟ble Court held that the said charge was established for want of corroborative evidence.

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25.4 CCE vs Mohammed Farookh – 2010 (259) ELT 179 (Guj.)

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In this case the Hon‟ble Gujarat High Court upheld the order of the Ld. Tribunal whereby it was held that separate penalty cannot be imposed on the partners of a Partnership Firm. It was held that under the law of partnership a firm has no legal existence apart from its partners and the same is merely a compendious name to describe its partners as distinguish from a company which stands as a separate juristic entity. It was held that unless there is intention of the legislature to treat the firm and partners as distinct entities, no separate penalty can be imposed and in this regard reference was made to Income Tax Act where there was such intent. It is submitted that as per Section 3(u) of FEMA, 1999, which defines “person” as appearing in Section 13 of Act, there is no

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FPA-FE-63-65/CHN/2017

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intention to treat the firm and its partners as distinct entities. Hence separate penalty cannot be imposed on partners on the partnership firm.

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25.5 Vinod Kumar Gupta vs CCE – 2013 (287) ELT 54 (P&H)

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In this case also, as above, it was held that partnership firm in mercantile usage is the firm in its own, strictly in the eye of law, it is not a legal entity like a natural person. Hence it was held that no separate penalty can be imposed on the partners of the firm.

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Copies of the aforesaid judgments were handed over at the time of hearing.

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Learned counsel for the respondent has relied upon the following judgements:-

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(a) Gian Chand & Brothers Vs Rattan Lal

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It is submitted that instant judgment has no application to the facts of the instant case. It is apparent from the para 16 of the judgment that the disputed signatures/acknowledgments of the defendant were proved by the witnesses and the same had been exhibited without any objection from defendant. Further the defendant had not raised any plea regarding the denial of signature or any kind of forgery or fraud. Accordingly reliance placed by the Ld. Counsel on para 21 of the judgment especially that the defendant had only made bald denials of the averments and nothing else, is totally misplaced and out of context.

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(b) Commissioner of Income Tax, Delhi Vs Woodward Governor India

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Pvt. Ltd.

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FPA-FE-63-65/CHN/2017

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The Ld. Counsel for the Respondent had placed reliance on only two lines from in para 14 of the judgment, which are totally out of context. The instant judgment has no application to the facts of the instant case as the same only deals with the aspects of method of accounting to be followed.

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(C ) SMS Pharmaceuticals Ltd. Vs Neeta Bhalla – AIR 2005 SC 3512

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The Ld. Counsel for the Respondent has placed reliance on this judgment to allege that the Managing Director of the Company is responsible for the conduct of the business and is vicariously liable for the acts and omission of the same. However it is submitted that the instant judgment has no application to the facts of the present case. This judgment deals with the issue that in a case under Negotiable Instrument Act for bouncing of cheque it is mandatorily required to plead that at the time of offence who all (whether Managing Director or otherwise) were incharge and responsible for conduct of business of Company. Hence reliance on this judgment is totally out of context.

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