2010 (10) TMI 84 - HC - FEMA

Whether once an Authorised Dealer duly complies with the instructions laid down in the Memorandum of instructions to Full Fledge Money Changer (FFMC), issued by Reserve Bank of India (RBI) under section 73(3) of FERA, while undertaking money changing transactions with another Authorised Dealer, can such Authorised Dealer then be held liable for violation of provisions of section 6(4) and (5) of FERA? Held that - The submission of the learned counsel for the Appellants based on para 9 of the FLM, in our view, is misconceived, though para 9 permits free transaction between two money-changers, the said transaction cannot be carried out in violation of the provisions of FERA but has to keep within the parameters of FERA. Relying upon para 9 of the FLM, a money changer cannot absolve himself or itself of the obligation cast by section 6(4) and 6(5) of FERA. In fact para 9 of the FLM is circumscribed by the provisions of the Act namely section 6(4) and 6(5) as also para 3 of the FLM. The submission of the learned counsel for the Appellants that there was no obligation on the Appellants to check the credentials of the representative of the Hotel Zam Zam in terms of section 6(5) in view of para 9 of the FLM does not commend to us and has to be rejected. Thus we do not find any infirmity or illegality in the order passed by the ATFFE confirming the Order in Original. Resultantly, the question of law would have to be answered in favour of the revenue and against the appellants.

Summary

Issues Involved:
1. Applicability of sections 6(4) and 6(5) of FERA to transactions between authorized dealers/FFMCs.
2. Compliance with RBI's Memorandum of Instructions to Full Fledged Money Changers (FLM).
3. Mens rea requirement in FERA violations.
4. Interpretation of penal provisions under FERA.

Issue-wise Detailed Analysis:

1. Applicability of Sections 6(4) and 6(5) of FERA:
The core issue was whether sections 6(4) and 6(5) of the Foreign Exchange Regulation Act, 1973 (FERA) apply to transactions between authorized dealers/Full Fledged Money Changers (FFMCs). The court noted that both sections impose obligations on authorized dealers. Section 6(4) mandates compliance with RBI directions, while section 6(5) requires dealers to ensure transactions do not contravene FERA provisions. The court concluded that these obligations apply to transactions between FFMCs, including the need to verify the credentials of representatives involved in foreign exchange transactions. The appellants failed to verify the credentials of Hotel Zam Zam's representative, violating sections 6(4) and 6(5).

2. Compliance with RBI's Memorandum of Instructions to Full Fledged Money Changers (FLM):
The appellants argued that para 9 of the FLM allowed free transactions between money changers without additional declarations. However, the court held that para 9 does not override the statutory obligations under FERA. The appellants were required to verify the credentials of the representative from Hotel Zam Zam as per para 3 of the FLM, which they failed to do. This failure facilitated the sale of foreign exchange in the black market, confirming the violation of FERA provisions.

3. Mens rea Requirement in FERA Violations:
The appellants contended that there was no mens rea (criminal intent) in their actions. The court referred to the Supreme Court's judgment in Director of Enforcement v. MCT. M. Corporation (P.) Ltd., which held that mens rea is not necessary for imposing penalties under FERA. The court emphasized that FERA violations are civil obligations, and penalties can be imposed irrespective of the intent. The appellants' argument of lacking mens rea was thus rejected.

4. Interpretation of Penal Provisions under FERA:
The appellants argued for a lenient interpretation of penal provisions, suggesting that if two interpretations are possible, the one favoring the accused should be adopted. The court, however, found the language of section 6(5) clear and unambiguous, imposing duties on both the seller and purchaser of foreign exchange. The court rejected the argument for lenient interpretation, stating that the statutory obligations must be strictly adhered to, especially in foreign exchange transactions.

Conclusion:
The court upheld the concurrent findings of the adjudicating authority and the Appellate Tribunal for Foreign Exchange (ATFFE) that the appellants violated sections 6(4) and 6(5) of FERA by failing to verify the credentials of Hotel Zam Zam's representative. The appeals were dismissed, affirming the penalties imposed. The court emphasized the importance of strict compliance with FERA provisions to prevent misuse of foreign exchange and maintain regulatory integrity.