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2014 (1) TMI 1348 - SC - FEMAViolation of FEMA - Imposition of penalty - Sale of foreign currency at higher value - Held that - there was no scope to allege a violation of paragraph 3 of the FLM or for that matter Sections 6(4) and 6(5) of FERA, 1973. Based on the interpretation of Sections 6(4), 6(5) of FERA, 1973 and paragraphs 3 & 9 of the FLM, we have held that the Original Authority, the Appellate Tribunal as well as the Division Bench of the High Court failed to appreciate the issue in the proper perspective while holding the appellant guilty of the violation alleged - sale of foreign currency at higher value was not the basis for the contravention and imposition of the penalty as against the Appellants. Sale effected by the Appellants on a rate higher than the rate prevailing in the market was not the basis for the alleged violation of paragraph 3 of the FLM read with Sections 6(4), 6(5) and 7 of FERA. In the confiscation order passed by the Customs Authorities, where again the Appellants were also one of the noticees, no fault was found as against the Appellants on that ground - impugned orders by which the Appellants were found guilty of the violation of paragraph 3 of FLM read with Sections 6(4), 6(5) and 7 of FERA and the consequential imposition of penalty of Rs.50,000/- was wholly unjustified. The impugned orders are liable to be set aside and they are accordingly set aside. If the Appellants have parted with the penalty amount imposed under the impugned orders, the Respondent is directed to refund the same to the Appellants along with simple interest at the rate of 6% per annum, within two months from the date of this judgment - Decided in favour of assessee.
Issues Involved:
1. Alleged violation of Sections 6(4), 6(5), 7, and 8 of the Foreign Exchange Regulation Act, 1973 (FERA). 2. Compliance with Paragraph 3 of the Memorandum of FLM issued by the Reserve Bank of India (RBI). 3. Imposition of penalties under Section 50 of FERA read with Section 49(3) & (4) of the Foreign Exchange Management Act (FEMA). 4. Validity of transactions between licensed Full Fledged Money Changers (FFMCs). 5. Interpretation of statutory provisions and directions under FERA and FLM. Detailed Analysis: 1. Alleged Violation of Sections 6(4), 6(5), 7, and 8 of FERA: The core contention was whether the appellants violated Sections 6(4), 6(5), and 8(2) of FERA. Section 6(4) mandates authorized dealers to comply with RBI directions and prohibits unauthorized foreign exchange transactions. Section 6(5) requires dealers to verify transactions to prevent contraventions. Section 8(2) restricts foreign exchange dealings to authorized rates. The Supreme Court concluded that the appellants, being licensed FFMCs, conducted transactions within the scope of their authorization and did not engage in unauthorized activities. The transactions were verified, and the foreign exchange was sold at rates agreed upon by both parties, thus not violating the statutory provisions. 2. Compliance with Paragraph 3 of the Memorandum of FLM: Paragraph 3 of the FLM requires money changers to transact only through authorized representatives and report any changes to the RBI. The appellants conducted transactions with M/s Hotel Zam Zam, another licensed FFMC, and verified the latter's RBI license before proceeding. The transactions were carried out by authorized representatives of both parties. The Supreme Court found no evidence of unauthorized persons conducting the transactions, thus ruling out any violation of Paragraph 3. 3. Imposition of Penalties under Section 50 of FERA read with Section 49(3) & (4) of FEMA: The penalties were imposed based on the alleged contraventions of FERA and FLM provisions. The Original Authority, Appellate Tribunal, and High Court upheld the penalties. However, the Supreme Court determined that the transactions were legitimate and within the authorized scope, and the appellants complied with the statutory requirements. Consequently, the penalties were deemed unjustified and were set aside. 4. Validity of Transactions between Licensed FFMCs: The appellants argued that transactions between licensed FFMCs are authorized under FERA and FLM. The Supreme Court agreed, noting that Paragraph 9 of the FLM allows FFMCs to purchase foreign currency from each other, provided the payment is made through negotiable instruments and not cash. The transactions in question adhered to this requirement, confirming their validity. 5. Interpretation of Statutory Provisions and Directions under FERA and FLM: The Supreme Court emphasized the importance of interpreting statutory provisions in their proper context. It highlighted that Paragraph 3 of the FLM aims to ensure transactions are conducted by authorized representatives within the premises of money changers. The Court found that the appellants complied with this requirement, as the transactions were conducted by authorized representatives and were properly documented. The Court also clarified that variations in exchange rates were not the basis for the alleged contraventions. Conclusion: The Supreme Court concluded that the appellants did not violate Sections 6(4), 6(5), and 8 of FERA or Paragraph 3 of the FLM. The transactions were legitimate, conducted by authorized representatives, and complied with statutory requirements. The penalties imposed were unjustified and were set aside. The Court directed the refund of any penalty amounts paid by the appellants, with interest. Judgment: The appeals were allowed, and the impugned orders were set aside. The respondent was directed to refund the penalty amounts with interest within two months.
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