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2019 (2) TMI 1039 - AT - FEMAOffence under FEMA - Penalty imposed in exercise of the powers conferred u/s 13(1) of the Foreign Exchange Management Act, 1999 - HELD THAT - The term bona fide would be used in contradistinction with mala fide ; i.e., where an activity is not mala fide , it would be bona fide . A business activity would be mala fide if the business activity itself is fraudulent and conducted with a fraudulent intent as in the present case, RLL was engaged in bona fide business activity for exploring opportunities in steel and other specified sectors globally including India. The appellants have made out a strong prima-facie case. There are many issues which have not been decided strictly as per law and facts of the matter in the impugned order. The appellants have raised many important legal issues which have to be gone into. The balance of convenience is also in favour of the appellants. The issue of penalty (being totally disproportionate) as raised by the appellant i.e. grossly arbitrary has also resulted in causing irreparable harm loss and injury to the appellants are to be considered at the time of hearing the appeal on merit. The appeals are pending for the last more than 4 years so as the stay applications. The same have been adjourned one on reason or the other. The appeals could not be decided on merit as the respondent was insisting that before deciding the appeals, the pending application under the provisions of section be decided at the first in stance. Even otherwise the earlier tribunal is merged with the present tribunal in July, 2017 and many files were not transferred on time. In order to strike out the balance between the parties at this stage, direct that without prejudice, the appellants shall deposit ₹ 2 Crores lump-sum with the respondent within eight weeks from today. The hearing of the appeal is expediated. The appeals are listed on 1st July, 2019. All pending applications are disposed of accordingly.
Issues Involved:
1. Legality of penalties imposed under FEMA. 2. Compliance with Regulation 6(4) of FEMA 120/2004. 3. Bona fide business activity under FEMA regulations. 4. Applicability of Regulation 7 of FEMA 120/2004. 5. Adherence to natural justice principles. 6. Proportionality of penalties. 7. Liability of directors under Section 42(1) of FEMA. Detailed Analysis: 1. Legality of Penalties Imposed under FEMA: The Tribunal examined the penalties imposed on various appellants by the Adjudicating Authority under Section 13(1) of FEMA, 1999. The penalties ranged from ?25,00,000 to ?28,00,00,000, totaling ?55,25,00,000. The appellants challenged the penalties on the grounds of non-compliance with FEMA regulations, particularly regarding the issuance of guarantees without equity participation in the joint venture (JV) Red Lebondal Ltd., Cyprus (RLLC). 2. Compliance with Regulation 6(4) of FEMA 120/2004: The appellants argued that they had equity participation in RLLC as evidenced by share certificates and the register of members. They contended that the transfer of shares was valid under Cypriot law, even though the share capital was unpaid. The Tribunal noted that the term "direct investment" under Regulation 2(e) includes contribution to equity capital, and the appellants' acquisition of shares in RLLC qualified as such. The Tribunal found that the appellants had complied with Regulation 6(4) by providing corporate guarantees after acquiring shares. 3. Bona Fide Business Activity under FEMA Regulations: The appellants asserted that RLLC was engaged in bona fide business activities, including investments in Welspun Power and Steel Ltd. (WPSL). The Tribunal considered the definition of "bona fide business activity" and concluded that RLLC's investment in WPSL constituted a legitimate business activity under FEMA regulations. 4. Applicability of Regulation 7 of FEMA 120/2004: The Tribunal addressed the respondent's argument that the appellants violated Regulation 7, which pertains to financial services sector investments. The appellants argued that they were not engaged in the financial services sector, and Regulation 7 was inapplicable. The Tribunal agreed, stating that Regulation 7 was not relevant to the case and the impugned order exceeded the scope of the show-cause notice. 5. Adherence to Natural Justice Principles: The Tribunal found that the impugned order violated principles of natural justice by raising issues not mentioned in the show-cause notice. The appellants were not given an opportunity to address these new issues, resulting in procedural unfairness. 6. Proportionality of Penalties: The appellants argued that the penalties imposed were grossly disproportionate to the alleged contraventions, particularly given the minimal remittance of 1442 Euros. The Tribunal noted that penalties should consider the gravity of the offense and any illegal gain. Since there was no illegal gain, the penalties appeared arbitrary and disproportionate. 7. Liability of Directors under Section 42(1) of FEMA: The Tribunal examined the liability of directors, noting that several directors were non-executive or independent and not involved in day-to-day operations. The Tribunal found no evidence of personal gain or mens rea on the part of the directors, concluding that they acted in good faith based on legal advice. Conclusion: The Tribunal found that the appellants had made a strong prima facie case, with several legal and factual issues requiring further examination. The balance of convenience favored the appellants, and the penalties imposed appeared disproportionate. The Tribunal directed the appellants to deposit ?2 Crores as a lump sum with the respondent within eight weeks and expedited the hearing of the appeal. All pending applications were disposed of accordingly. The Tribunal clarified that its observations were tentative and would not influence the final outcome of the appeals.
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