2013 (7) TMI 887 - HC - FEMA

Whether the appellants can be said to have not used the foreign exchange for the purpose for which it was given to them though they admittedly paid it to the aforesaid Switzerland company and therefore not liable for any penalty - Held that - it is sub-section (3) of Section 8 which mandates that when a person other than an authorized dealer or a money changer acquires foreign exchange for any particular purpose, then he has to use it only for that purpose and if he fails to use it, he has to inform the authorities concerned. Then sub-section (4) further clarifies what is meant by not using a foreign exchange when it is obtained by a person for importing goods and it says that even if he fails to import the goods, he will be held to have violated sub-section (3). The burden is imposed upon him to explain to prove the contrary and what is the significance of the expression to prove the contrary will be dealt with a little later. The appellants should have entered into contract with the Switzerland company after making every arrangement with the concerned bank and making it doubly sure that they get the loan and when the bank fails, they cannot be expected to be heard to say that the bank was at fault and plead for exoneration. The learned counsel for the appellants did not cite any authority to show that mens rea is necessary to apply sub-sections (3) and (4) of Section 8 read with Section 50 of the Act and the appellants cannot be proceeded against in a situation like this. - impugned order of the appellate tribunal cannot, in principle, be disturbed though as will be presently seen there is, in my opinion, ground to reduce the penalty. Section 50 says that it cannot exceed five times the foreign exchange involved. It is now well settled that Section 50 provides an outer limit for the penalty prescribed which is not mandatory. Even the Deputy Director and the appellate tribunal did not impose the maximum penalty. In other words, it follows that the authorities under the Act and this court have also the power to impose a lesser penalty. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Validity of the penalty imposed under Section 50 of the Foreign Exchange Regulation Act, 1973.
2. Interpretation of Sections 8(3) and 8(4) of the Foreign Exchange Regulation Act, 1973.
3. Responsibility and fault of the Andhra Bank in not providing the loan.
4. Whether mens rea (intent) is necessary for contravention of Sections 8(3) and 8(4).

Issue-wise Detailed Analysis:

1. Validity of the penalty imposed under Section 50 of the Foreign Exchange Regulation Act, 1973:
The appellants were penalized under Section 50 of the Act for contravening Sections 8(3) and 8(4). The Deputy Director of the Enforcement Directorate imposed a penalty of Rs. 3,00,000/-, which was confirmed by the appellate tribunal. The appellants argued that they did not misuse the foreign exchange and were unable to import the machinery due to the Andhra Bank's failure to provide the necessary finance. The court acknowledged that while the appellants did use the foreign exchange for the intended purpose of paying an advance to the Swiss company, they failed to import the machinery, thus violating Sections 8(3) and 8(4). The court reduced the penalty to Rs. 1,50,000/- considering the circumstances.

2. Interpretation of Sections 8(3) and 8(4) of the Foreign Exchange Regulation Act, 1973:
Section 8(3) mandates that foreign exchange acquired for a particular purpose must be used for that purpose, and if not, the person must inform the authorities and sell the foreign exchange to an authorized dealer. Section 8(4) clarifies that failure to import goods or importing goods of a different kind, quality, or quantity constitutes a violation. The court emphasized that the language of these sections does not require mens rea (intent) for a violation. The mere failure to import the goods, regardless of the reason, constitutes a contravention.

3. Responsibility and fault of the Andhra Bank in not providing the loan:
The appellants contended that the Andhra Bank's refusal to provide the loan was the reason they could not import the machinery. The court noted that the bank's refusal was due to the appellants' failure to clear existing loans and comply with certain conditions. However, the court held that this issue was irrelevant to the examination of whether there was a violation of Sections 8(3) and 8(4). The appellants should have ensured all arrangements with the bank before entering into the contract with the Swiss company.

4. Whether mens rea (intent) is necessary for contravention of Sections 8(3) and 8(4):
The court clarified that mens rea is not necessary for a violation of Sections 8(3) and 8(4). The sections do not require a deliberate intention to misuse the foreign exchange. The mere failure to import the goods, regardless of the reason, is sufficient to constitute a violation. The court rejected the appellants' argument that they should be exonerated due to the bank's breach of promise and the Swiss company's refusal to supply the goods or return the advance.

Conclusion:
The court upheld the appellate tribunal's order in principle, confirming that the appellants violated Sections 8(3) and 8(4) of the Act. However, considering the circumstances, the court reduced the penalty from Rs. 3,00,000/- to Rs. 1,50,000/-. The miscellaneous second appeal was partly allowed, modifying only the penalty while confirming the impugned order in all other respects.