CONTRAVENTION OF SECTION 10(6) OF FOREIGN EXCHANGE MANAGEMENT ACT, 1999

[DR.MARIAPPAN GOVINDARAJAN]

Declaration

Section 10(5) of the Foreign Exchange Management Act, 1999 (‘Act’ for short) provides that an authorised person shall, before undertaking any transaction in foreign exchange on behalf of any person, require that person to make such declaration and to give such information as will reasonably satisfy him that the transaction will not involve, and is not designed for the purpose of any contravention or evasion of the provisions of this Act or of any rule, regulation, notification, direction or order made thereunder, and where the said person refuses to comply with any such requirement or makes only unsatisfactory compliance therewith, the authorised person shall refuse in writing to undertake the transaction and shall, if he has reason to believe that any such contravention or evasion as aforesaid is contemplated by the person, report the matter to the Reserve Bank.

Contravention

Section 10(6) of the Act provides that  any person, other than an authorised person, who has acquired or purchased foreign exchange for any purpose mentioned in the declaration made by him to authorised person under sub-section (5) does not use it for such purpose or does not surrender it to authorised person within the specified period or uses the foreign exchange so acquired or purchased for any other purpose for which purchase or acquisition of foreign exchange is not permissible under the provisions of the Act or the rules or regulations or direction or order made thereunder shall be deemed to have committed contravention of the provisions of the Act for the purpose of this section.

Penalty

Section 42(1) of the Act provides that where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.  Nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention took place without his knowledge or that he exercised due diligence to prevent such contravention.

Case law

In SHRI RAJESH JHANWAR, SHRI MADHUSUDAN JHANWAR VERSUS THE SPECIAL DIRECTOR DIRECTORATE OF ENFORCEMENT MUMBAI - 2024 (12) TMI 1311 - APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI, the two appellants, in this case, are the partners of G. Tex Inc., and are fully in charge of the affairs of the partnership firm.  The said firm imported copper scrap in 10 containers from Koya International, Freetown, Sierra Leon.  The firm sold the copper scrap on ‘high seas sales basis’ to Maruti Metal Industries.   Maruti Metal Industries filed five bills of entries dated 09.05.2006 with the Customs Authorities at Jawahar Customs House, Nava Sheva for clearance of the copper scrap.  G. Tex inc. remitted US$ 6,56,864 through the FPA-FE-119&121/MUM/2010, Bank of India, Bangaluru.   G. Tex Inc. vide their letter dated 23.08.2006 confirmed to have effected the remittance of US$ 6,56,864/- to the company.

On the arrival of the said consignment, the Customs Authorities found that the containers are not having any copper scrap and they were empty.  The remittance made by G. Tax Inc. was without the actual receipt of consignment.  The scrap was not received by G. Tex Inc. or by Maruti Metal Industries.  Therefore, both the partners were charged in terms of Section 42(1) the Act of 1999 for contravention of Section 10(6) of the Act of 1999.  The Special Director of Enforcement imposed penalty on G. Tax Inc. and also imposed penalty of Rs.7.5 lakhs on the partners on 25.02.2010.  The penalty was imposed finding contravention of Section 10(6) of the Act of 1999 read with Para 6(1) of the Foreign Exchange Management (Realization, Repatriation and Surrender of Foreign Exchange) Regulation, 2000. 

Against the order of Special Director of Enforcement, the partners field the present appeal before the Appellate Tribunal.  The appellants submitted the following before the Appellate Tribunal-

• G. Tex Inc. entered into transaction for the copper scrap with Koya International.
• When the containers were received, they were found empty. 
•  The bank made remittance from time to time and it was even after the receipt of the empty containers.
• The appellants made all the efforts to recover the amount remitted to Koya International.  Due to non-availability of the firm M/s Koya International, the recovery could not be made.
• They approached the police at Sierra Leon  for the fraud played by Koya International, apart from the Chambers of Commerce to seek recovery of the amount paid to the company who sent empty containers.
• The appellant Madhusudan Jhanwar was not having knowledge of the transaction for the reason that it was looked after by the appellant Rajesh Jhanwar. 
• However, penalty was imposed on Madhusudan Jhanwar without showing the role of him in this case.
• It was thought at the initial stage to have effected on account of the theft of copper scrap.
• After getting the information, he verbally requested Mr. Mahendra Rana of Maruti Metal Industries to get a joint verification with shipping liner and Customs authorities. 
• One Kailash Upadhya was sent to Sierraleon to trace out the firm M/s Koya International. He lodged police complaint with Sierraleon Police and tried to freeze the amount.
• The imposition of penalty of Rs. 7,50,000/- on both the partners is illegal. 
• The remittance was made in anticipation of the receipt of the containers of copper scrap, the appellant has not made any contravention, rather fraud was committed against them by sending empty containers by Koya International.

The appellants prayed the Tribunal to set aside and if it is not set aside, finding contravention of Section 10(6) of the Act of 1999, the penalty may be reduced proportionately.

The Department contended that the foreign exchange was remitted to Koya International going contrary to the terms and conditions of the Agreement.  The Department supported the orders of the Special Director, Enforcement.

The Appellate Tribunal considered the facts of the case and also the arguments put forth by them before the Appellate Tribunal.  The Appellate Tribunal found that the appellants did not take efforts to recover the amount from Koya International, rather for that, the appellant should have lodged the claim to recover the amount through Court of Law.  As far as the appellant Madhusudan Jhan Waris concerned, he was not responsible for conduct of the business and in charge under which foreign remittance was made by the appellant. The penalty of Rs. 7,50,000/- has been imposed without showing his role in the transaction.   The Appellate Tribunal found no reasons to impose penalty on appellant Madhusudan Jhanwar when he was not responsible for conduct of the business for import of copper scrap or for remittance of money. The penalty imposed on him was set aside by the Appellate Tribunal.

The Appellate Tribunal also observed that the appellant Rajesh Jhanwar made efforts to recover the amount though it cannot be said to be serious efforts to recover the amount because he did not lodge a claim for recovery of the amount.  Therefore, the Appellate Tribunal held that there was a contravention of Section 10(6) of the Act of 1999.  However, the Appellate Tribunal found reasons to reduce the penalty which on the facts of the case seems to be excessive. Therefore, the Appellate Tribunal reduced the penalty to 25% of the penalty and modified the impugned order accordingly.