2008 (12) TMI 843 - AT - FEMA

Issues Involved:
1. Contravention of Section 9(1)(d) and Section 8(1) r/w Section 68 of the Foreign Exchange Regulation Act, 1973.
2. Allegations of unauthorized transfer of US dollars 40,000/-.
3. Applicability of RBI's Circular No. AD (MA) Circular No. 13 dated 12.3.1992.
4. Quantum of penalty imposed.

Detailed Analysis:

1. Contravention of Section 9(1)(d) and Section 8(1) r/w Section 68 of the Foreign Exchange Regulation Act, 1973:
The appellants were penalized for making expenses and payments on behalf of their wholly-owned subsidiary in the USA, M/s. Leela Industries Ltd. The Tribunal noted that the RBI's approval letter dated 14.7.1994 imposed a condition that expenses for representatives visiting abroad for the subsidiary's business should be borne by the subsidiary itself. The appellant Veenu Krishnan's visits to the USA, during which he attended to the subsidiary's work, were funded by the appellant company, violating this condition. The Tribunal concluded that this constituted a contravention of Section 9(1)(d) of the FER Act, 1973, as the expenses were not borne by the subsidiary but by the appellant company.

2. Allegations of Unauthorized Transfer of US dollars 40,000/-:
The Tribunal examined the transfer of US dollars 40,000/- to the USA between February and May 1994, before the subsidiary's incorporation on 19.7.1994. It was argued that these funds were for the Liaison Office, not the subsidiary. However, the Tribunal found that these transfers were closely linked to the establishment of the subsidiary and were taken over by it, thus requiring RBI's permission, which was not obtained. This constituted a violation of Section 8(1) of the FER Act, 1973.

3. Applicability of RBI's Circular No. AD (MA) Circular No. 13 dated 12.3.1992:
The appellants contended that the RBI's Circular No. AD (MA) Circular No. 13 dated 12.3.1992 permitted the remittance. However, the Tribunal found that this circular was not applicable to the transaction involving the transfer of US dollars 40,000/- to the USA for the benefit of the wholly-owned subsidiary established immediately after the transfer. The breach of Condition No. 5 of the RBI's approval letter was evident, and the appellants' argument was rejected.

4. Quantum of Penalty Imposed:
The Tribunal upheld the penalties imposed by the adjudicating officer, finding them not excessive given the amounts involved. The Tribunal referred to the Supreme Court's observations in The Chairman, SEBI v. Sriram Mutual Fund & Anr., emphasizing that penalties under regulatory statutes must be imposed strictly to ensure compliance. The appellants' conduct was deemed contumacious and likely to cause serious economic damage, justifying the penalties.

Conclusion:
The appeals were dismissed, and the penalties imposed by the adjudicating officer were affirmed. The Enforcement Directorate was directed to appropriate the pre-deposited amounts towards the penalties, and the appellants were ordered to deposit the remaining penalty amounts within seven days. The judgment emphasized the seriousness of regulatory compliance under the FER Act, 1973.

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