2013 (7) TMI 505 - SC - FEMA

FDI - foreign investment for Service Sector - Nature and business of the company - whether the company was a trading company and also whether it was primarily engaged in export for availing of the automatic route - Held that - If a new trading company indulging in export primarily also will have to make an application to the RBI for automatic approval for foreign investment upto 51% foreign equity and the thrust would be on export activities. - Registration of the company as an exporter / importer with the Ministry of Commerce and registration of an export house is also a pre-requisite - according to the Notification then in existence and the Press Note upto 31.12.1991 the companies engaged primarily in trading activities whether new or existing will have to fulfill certain conditions by applying to the RBI for permission for foreign investment up to 51% - No permission was obtained by the respondent company from the RBI for 51% foreign equity induction for trading by way of export. RBI on the other hand granted general permission only for dealing with the activities mentioned in NIC Code 893 and not for any trading activities leading to import or export. Lifting of Corporate Veil - Held that - in a given situation the authorities functioning under FERA find that there are attempts to over-reach the provision of Section 29(1)(a) the authority can always lift the veil and examine whether the parties have entered into any fraudulent sham circuitous or a devise so as to overcome statutory provisions like Section 29(1)(a). It is trite law that any approval/permission obtained by non- disclosure of all necessary information or making a false representation tantamount to approval/permission obtained by practicing fraud and hence a nullity. Whether the company violated the provisions of Section 19(1)(a) and (d) and Section 29(1)(b) r.w Sections 9(1)(e) 49 and 68(1) and (2) of FERA leading to penal consequences Held that - The company violated the provisions and thus would be liable for the consequences premises of the company ordered to be seized amounts present in various bank accounts confiscated personal penalties were also imposed. Permission and Registration with RBI - Held that - The company stated in the application as Business Management Consultancy for Trading Marketing and Selling of Goods and Services . Even there also there is no indication whatsoever that the company was set up for trading but only indicated consultancy for trading . Further Para IX (iii) called for the description of the products for export trading wherein the company has stated as not applicable . Resultantly it is clear that the purpose for which the company had sought for foreign collaboration was not for trading in gold coins either for export or domestic purpose but for the activities mentioned in the NIC Code 893. - The High Court in our view has committed an error in holding that no questions of law arose for its consideration under Section 54 of FERA and has completely misread and misinterpreted the Industrial Policy Press Notes and Section 19(1)(a) and (b) Section 29(1)(a) and (b) etc. - Decided against the company. Whether the above Bank has contravened Section 6(5) of FERA and misused the permission granted to it by RBI for importing gold coins - The Bank it is seen had imported the gold on its own behalf and sold the same to the company and if the Bank was acting as an agent of the company it would not have sold the gold to the company but would have charged the commission for acting as an agent. No materials have been placed before us to show that the Bank was acting as an agent of the company. On facts the Tribunal as well as the High Court took the view that the Bank had not misused the permission granted by the RBI for importing gold coins. We do not find any reason to interfere with those finding of facts. - Decided in favor of Bank.

Summary

Issues Involved:
1. Violation of FERA provisions by M/s Maple Leaf Trading International Pvt. Ltd. and other respondents.
2. Confiscation and penalties imposed by the Adjudicating Officer.
3. Interpretation of Section 29(1)(a) of FERA and lifting the corporate veil.
4. Applicability of automatic route for foreign investment under Notification No. 180/98.
5. Role and liability of ABN AMRO Bank NV (Royal Bank of Scotland NV) under Section 6(5) of FERA.

Issue-wise Detailed Analysis:

1. Violation of FERA Provisions:
The Special Director of Enforcement initiated proceedings against M/s Maple Leaf Trading International Pvt. Ltd. and others for violations of Sections 19(1)(a) and (d), 29(1)(b), 47(1), and 49(i)(a) read with Section 68 of FERA. The company was accused of engaging in trading activities of imported Maple Leaf Gold Coins without the requisite permissions from the RBI, misleading the public, and collecting significant sums of money in violation of FERA provisions. The Adjudicating Officer found that the company and its directors had established business activities in India without proper permissions and imposed penalties and confiscations.

2. Confiscation and Penalties:
The Adjudicating Officer ordered the confiscation of gold coins, blocked amounts in bank accounts, and bank drafts, totaling significant sums. Penalties were imposed on M/s Maple Leaf Trading International Pvt. Ltd., Piccadily Invest AG, and individual directors. The Tribunal later set aside these orders, but the Supreme Court reinstated the Adjudicating Officer's decision, allowing the authority to proceed in accordance with the law.

3. Interpretation of Section 29(1)(a) and Lifting the Corporate Veil:
The Supreme Court examined whether the respondents had violated Section 29(1)(a) of FERA by establishing a place of business in India without RBI permission. The Court upheld the Adjudicating Officer's decision to lift the corporate veil, revealing that the company was effectively controlled by foreign nationals and entities. The Court clarified that the liberalization of foreign investment did not remove the requirement for RBI permission for foreign companies and individuals to establish business in India.

4. Automatic Route for Foreign Investment:
The Court analyzed whether the company had obtained general permission under Section 29(1)(b) through the automatic route as per Notification No. 180/98. It was found that the company had not applied for or obtained permission for trading activities, as required by the notification and relevant Press Notes. The company's declaration in Form FC (RBI) pertained only to NIC Code 893 (Business and Management Consultancy Activities) and did not cover trading in gold coins. The Court concluded that the company could not claim the benefit of automatic approval for trading activities.

5. Role and Liability of ABN AMRO Bank NV:
The Bank was accused of selling gold coins to the company without ensuring that the company had the requisite permissions from RBI. The Adjudicating Officer found the Bank liable under Sections 6(4) and (5) of FERA. However, the Tribunal and the High Court found no evidence that the Bank acted as an agent of the company or violated FERA provisions. The Supreme Court upheld these findings, dismissing the appeal against the Bank.

Conclusion:
The Supreme Court allowed the appeals filed by the Union of India, setting aside the Tribunal and High Court's orders that had favored the respondents. The Adjudicating Authority's original findings and penalties were reinstated, except for the proceedings against ABN AMRO Bank NV, which were dismissed. The judgment emphasized the need for strict compliance with FERA provisions and the importance of obtaining necessary permissions for foreign investments and business activities in India.