2014 (2) TMI 976 - HC - FEMA

Foreign exchange remittance - liaison office ( LO ) in India - salaries and emoluments of the empaloyees are payable by the Head Office ( HO ) - contravention of Section 8(1) of the Foreign Exchange Regulation Act ( FERA ), 1973 - Held that - The Court finds that both the AO and the AT erred in proceeding on the basis that the employees of the parent corporation, seconded to the Appellant, were borrowed employees. There is no question of the Appellant being an agent of Mitsubishi, Japan. The Appellant, as a LO, is not permitted to undertake any commercial activity. The letter dated 30th January 1976, issued by the RBI under Section 29(2) of the FERA granting permission to the LO to operate clearly states that the LO would only undertake the liaison activities relating to import/export trade, collection of commercial, industrial and other business information in Tokyo etc. and that Excepting the said promotional work, the Indian offices will not undertake any activity of a trading commercial or industrial nature without the prior permission of the Reserve Bank of India. Significantly, with the AO itself finding the Appellant not liable under Section 9(1)(c) of the FERA on the ground that there was no debt owed by the Appellant to the parent company, it could not have held that there was a liability owed by the LO to the parent company for the purposes of Section 8 (1) (b). AO dated 10th February 2004 and the impugned order dated 30th October 2007 of the AT set aside - Decided in favor of appellant.

Summary

Issues Involved:
1. Contravention of Section 8(1) of the Foreign Exchange Regulation Act (FERA), 1973.
2. Imposition of penalty under Section 50 of FERA.
3. Status and liability of the liaison office (LO) and expatriated employees.
4. Interpretation of "person resident in India" under Section 2(p)(iii) and Section 73 of FERA.
5. Applicability of RBI permissions and notifications.

Detailed Analysis:

1. Contravention of Section 8(1) of FERA:
The primary issue was whether the Appellant contravened Section 8(1) of FERA by arranging for a part of the salaries of expatriated employees to be paid outside India by the Head Office (HO) without RBI's permission. The Appellant, a liaison office (LO) of Mitsubishi Corporation, Japan, argued that the expatriated employees remained employees of the HO, and their salaries were paid by the HO. The Enforcement Directorate (ED) alleged that this arrangement violated FERA as the LO was responsible for repaying the HO for these salaries. The Court found that the expatriated employees were not "borrowed employees" of the LO and that the LO did not acquire any foreign exchange from the HO, thus there was no violation of Section 8(1).

2. Imposition of Penalty under Section 50 of FERA:
The Special Director, ED, imposed a penalty of Rs. 2,00,00,000 on the Appellant under Section 50 of FERA. The Court noted that the Adjudicating Officer (AO) did not provide a basis for this penalty amount, deeming it arbitrary. The Appellate Tribunal (AT) erred in concurring with this determination without ensuring judicial application of mind. Consequently, the penalty determination was unsustainable in law.

3. Status and Liability of the LO and Expatriated Employees:
The Court examined whether the LO was liable to pay the salaries of expatriated employees seconded to it by the HO. It concluded that the expatriated employees continued to be employees of the parent corporation, and there was no privity of contract between the LO and these employees. Therefore, the LO had no liability to pay their salaries, and the remittance of funds by Mitsubishi, Japan, for this purpose did not constitute "acquisition" of foreign exchange by the LO.

4. Interpretation of "Person Resident in India" under Section 2(p)(iii) and Section 73 of FERA:
The AT held that the LO and expatriated employees were "persons resident in India" under Section 2(p)(iii) read with Section 73 of FERA. The Appellant contested this but was willing to assume this status for argument's sake. The Court found that even if the LO was considered a person resident in India, there was no violation of Section 8(1) given the factual circumstances.

5. Applicability of RBI Permissions and Notifications:
The Court referred to various RBI notifications and clarifications, including Notification No. FERA 1/74 and Para 11.A.13 of the Foreign Exchange Control Manual (FECM), which exempted foreign nationals resident in India from certain restrictions. The RBI's letter dated 3rd December 1999 clarified that entire remuneration could be paid abroad by the overseas company if the Indian entity was not required to pay any remuneration except for local expenses. These provisions supported the Appellant's case that there was no contravention of FERA.

Conclusion:
The Court set aside the AO dated 10th February 2004 and the impugned order dated 30th October 2007 of the AT. It allowed the appeal and ordered the refund of any amount deposited with the AT or ED, together with interest, within eight weeks.