LIABILITY FOR FAILURE TO REALISE AND REPATRIATE EXPORT PROCEEDINGS UNDER SECTION 7 AND 8 OF ‘FEMA’

[DR.MARIAPPAN GOVINDARAJAN]

Export of goods and services

Section 7 of the Foreign Exchange Management Act, 1999 (‘Act’ for short) provides that every exporter of goods shall-

•  furnish to the Reserve Bank of India (‘RBI’ for short)  or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India;
• furnish to the RBI such other information as may be required by the RBI for the purpose of ensuring the realisation of the export proceeds by such exporter.

The RBI may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the RBI determines, having regard to the prevailing market conditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit.  Every exporter of services shall furnish to the RBI or to such other authorities a declaration in such form and in such manner as may be specified, containing the true and correct material particulars in relation to payment for such services.

Realisation and Repatriation of export proceeds

Section 8 of the Act provides that where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank.  Regulation 9 of FEM (Export of goods and Services) Regulations, 2000 (‘Regulations’ for short) provides that the amount representing the full export value of goods / software/ services exported shall be realised and repatriated to India within nine months (6 months at the relevant period of the present case) or within such period as may be specified by the Reserve Bank, in consultation with the Government, from time to time  from the date of export, provided.

Penalty

Section 13 of the Act provides penalty for contravention of the provisions of FEMA.  This section provides that the person who contravenes the provisions of FEMA shall  be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to Rs.2 lakhs where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to Rs.5,000/- for every day after the first day during which the contravention continues.  The penalty shall be imposed only after adjudication process is over.

Case law

In SHRI MEHUL R. SHAH VERSUS THE JOINT DIRECTOR DIRECTORATE OF ENFORCEMENT, MUMBAI AND SHRI ASHWIN H. SHAH VERSUS THE JOINT DIRECTOR DIRECTORATE OF ENFORCEMENT, MUMBAI - 2025 (3) TMI 1140 - APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI, the appellants are the partners of Rosecut Diamonds (‘Firm’ for reference).   The firm was engaged in export of cut and polished diamonds to various countries.   The Department initiated proceedings against the appellant and the Firm for non-realisation of export proceedings of certain bills of the Firm beyond the stipulated period. 

The Adjudicating Authority, Special Director, Enforcement Directorate, New Delhi imposed penalty of Rs.50 lakhs on the appellants for the contravention of Section 7 and Section 8 of the Foreign Management Act, 1999 read with Regulations 8, 9 and 13 of FEM (Exports of goods & Services) Regulations, 2000 (‘Regulations’ for short), vide their order dated 20.08.2010. The appellants filed the present appeal before the Appellate Tribunal.

The appellants submitted the following before the Tribunal-

• The Adjudicating Authority had wrongly proceeded against the Appellants as the Appellants were not responsible for day-to-day affairs since they retired from the partnerships.
• As per Family Arrangement cum Compromise Deed and Indemnity (“Arrangement”) dated 31.08.2000, the appellants had retired from the Partnership Firm w.e.f. with effect from 01.09.2000, and therefore they could not be held liable for any alleged contravention of the Act.
• As per clause 3 of the said arrangement, the appellants were estopped from acting directly or indirectly in the affairs of the partnership firm.
• One of the partners, Ketan A. Shah all the steps to recover the proceeds pending against the Export Bills from the foreign buyers through letters, faxes, contacting the buyers through telephones etc.
• Ketan initiated legal proceedings in Hong Kong to recover the outstanding amount, however, the said proceedings could not be pursued due to prohibitive legal costs.

The appellants prayed the Tribunal to allow the appeals and set aside the impugned order.

The respondents submitted the following before the Appellate Tribunal-

• The period of 6 months for the realization and repatriation of export proceeds in respect of seven Guaranteed Receipts (‘GR’ for short) amounting US$ 3,93,094 out of 19 GRs, had expired before the retirement of the 2 Appellants.
• The Appellants were the partners responsible for day-to-day affairs at the time when the contraventions occurred. 
• Their resignation with effect from 01.09.2000 could not take away their responsibility during the relevant time.

The respondents prayed the Tribunal to dismiss the appeal.

The Tribunal heard both of the appellants and the respondents.  The Tribunal observed that a sum of Rs.4.52 crores were pending for 19 GRs beyond the statutory period of 6 months for the exports made by the Firm.  The details of the same are as below-

• An amount of Rs 2,61,75,000/- was pending for realization beyond the stipulated statutory period with respect to 9 GRs. 
• 10 GRs pertaining to the free bills of the amount of Rs 1,90,63,000/-  was pending realization beyond the statutory period.

The Appellate Tribunal further observed that the goods exported under 4 GRs were re-imported into India, which have been duly accounted for in the Impugned Order by the Ld. Adjudicating Authority.  The Tribunal that the appellants did not take reasonable steps to realisation and repatriation of the proceeds.  The appellants contended before the Adjudicating Authority that they have taken legal action at Hong Kong Court.  The Adjudicating Authority considered this as not an effect step to recover the proceeds of the Export.   Till such time the Export proceeds are realized and repatriated, the persons responsible for the conduct of the business of a Company or a Firm continue to remain responsible for all the actions and inactions in relation to the realization and repatriation of the Export proceeds. Therefore, the present appellants who were in charge of the affairs of the firm are found to be held to be responsible for the contraventions of the Act and Regulations. 

The Appellate Tribunal observed that export proceeds have not been recovered beyond 6 months period fell before the retirement date of the appellants.  In regard to the actions by the appellants and the Firm the Appellate Tribunal was of the view that they have failed to produce material available to corroborate that they had taken effective steps to recover /repatriate the foreign exchange dues.  Therefore, the Appellate Tribunal found that the two Appellants from Rosecut Diamonds would not absolve them from the charge of contraventions of the Act read with Section 42 of the Act with respect to the 07 GRs totalling USD 3,93,094.63.

The Appellate Tribunal is in agreement with the order of Adjudicating Authority which held that the responsibility of realization and repatriation of the export proceeds starts from the date of export and not after the expiry of the six months period which is the maximum period subject to any extensions granted by the Reserve Bank of India.  The appellants are responsible for their failure to take steps to realize and repatriate the export proceeds.

The Appellate Tribunal observed that the Adjudicating Authority has imposed penalty of Rs. 1,50,00,000/- on Rosecut Diamonds for the contravention of Section 7 and  8 of the Act read with the Regulations 8, 9 and 13 for failure to realise and repatriate the proceeds of exports.  Considering the facts of the case the Appellate Tribunal reduced the penalty to Rs.10 lakhs from Rs.1.50 crores.  The Appellate Tribunal further directed to adjust Rs.5 lakhs pre-deposit made by the appellant against the reduced penalty of Rs.10 lakhs.  The Appellate Tribunal partly allowed the appeal.