2014 (2) TMI 783 - HC - FEMA

Contravention of Section 8 (1) of the Foreign Exchange Regulation Act, 1973 ( FERA ) - whether the expatriated employees seconded by the parent corporation to its branch or liaison office in India are required to be paid salaries by such liaison or branch office and further whether the payment made by the parent corporation to its expatriated employees abroad creates any liability on the liaison or branch office to repay the said amount to the parent corporation. Held that - AOs have erroneously concluded that the expatriate employees of the parent corporation were borrowed employees of the Appellants when there was no factual basis for such a conclusion. With the AOs holding that the case of the ED regarding violation of Section 9 (1) (c) FERA was not made out against any of the Appellants, the case regarding violation of Section 8 (1) FERA was untenable since the SCNs in all these cases set out the same allegations to justify the case under both provisions. The question of the Appellants acquiring or otherwise transferring any foreign exchange as a result of the parent corporation remitting funds to the Appellants for disbursal of the salaries of the employees seconded to them did not arise. Further, the question of the Appellants having to repay the parent corporation the sum paid abroad also did not arise. Factually, there was no attempt made by any of the Appellants to repay any such amount to the foreign corporation. Also, no reasons have been given in any of the AOs for the penalty imposed in terms of Section 50 FERA. Consequently, in all these cases, the determination of the penalty amount by the AOs is also held to be untenable in law. - Decided in favor of appellant.

Summary

Issues:
- Interpretation of Section 8 (1) of the Foreign Exchange Regulation Act, 1973 (FERA) regarding payment of salaries to expatriated employees.
- Liability of liaison or branch office in India to repay salaries paid abroad by parent corporation.
- Violation of Sections 8 (1) and 9 (1) (c) of FERA.
- Applicability of previous judgment in Mitsubishi Corporation case.
- Imposition of penalties under Section 50 of FERA.

Analysis:

1. Interpretation of Section 8 (1) of FERA:
The judgment addresses the question of whether expatriated employees seconded by a parent corporation to its branch or liaison office in India need to be paid salaries by the Indian office. The court clarifies that the liability to pay salaries remains with the parent corporation, and there is no obligation on the liaison or branch office to repay the amount paid abroad. The court refers to the provisions of FERA and emphasizes the lack of privity of contract between the Indian office and the expatriated employees, concluding that no violation of Section 8 (1) of FERA occurred.

2. Liability to Repay Salaries Paid Abroad:
The court examines the issue of whether the liaison or branch office in India is liable to repay the salaries paid abroad by the parent corporation. It is established that since there was no contractual relationship between the Indian office and the expatriated employees, the obligation to pay salaries remained with the parent corporation. Consequently, the court rules that there is no liability on the Indian office to repay the sums paid abroad, as clarified in the Mitsubishi Corporation case.

3. Violation of Sections 8 (1) and 9 (1) (c) of FERA:
The judgment highlights that the show cause notices alleged violations of Sections 8 (1) and 9 (1) (c) of FERA by the appellants. However, it is determined that the findings of the Adjudicating Officers (AOs) were erroneous, as there was no factual basis to conclude that the expatriated employees were "borrowed employees" of the appellants. The court concludes that the allegations of violation of Section 8 (1) of FERA were unfounded, leading to the setting aside of the impugned orders.

4. Applicability of Previous Judgment:
The court references the previous judgment in the Mitsubishi Corporation case, where similar issues were addressed and a decision was made regarding the interpretation of FERA provisions in the context of expatriated employees. The court finds that the facts of the present appeals align with the Mitsubishi Corporation case, and therefore, the principles established in that judgment are applicable to the current situation.

5. Imposition of Penalties under Section 50 of FERA:
The judgment also scrutinizes the imposition of penalties under Section 50 of FERA by the AOs. It is observed that no reasons were provided for the penalty imposition, rendering the determination of penalty amounts untenable in law. Consequently, the court sets aside the penalties imposed by the AOs and upholds the appeals, directing the refund of any deposited amounts along with accrued interest and discharging any bank guarantees furnished by the appellants.