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2014 (4) TMI 585 - HC - FEMAViolation of Section 8(1), 16(1), 9(1)(a) and 9(1)(c)of the Foreign Exchange Regulation Act, 1973 - Special Director purportedly issued a Corrigendum stating that paragraph No. 87 is deleted and in paragraph No. 88 in line No.2 after the words Noticee No.1 and before the name Mr. Stephen John Michie, the name Shri Raman Narula-Noticee No.2 is inserted - Held that - no prior notice was issued to Mr. Narula by the SD when the Corrigendum was issued nearly one month after the original AO was passed. The Court has no hesitation in holding the action of the SD in issuing the Corrigendum dated 7th March 2005 to be in violation of Section 65 FERA. The said Corrigendum is, therefore, illegal. In the first place, it must be noticed that Section 68 applies only to companies. Club Med India was certainly not a company or a firm under any law in India. Secondly, if it is taken to be an association of individuals apart from the SCN stating that Mr. Narula was in-charge of and responsible to Club Med India for the conduct of its business, no documents or material have been referred to which could constitute the basis of such an allegation. In para 9 of the SCN a reference is made to the statement of Mr. Narula that he was given the authority to open accounts and operate them. It is pointed out that Mr. Narula was permitted to hold accounts only for the needs of Club Med India and he was not otherwise in-charge of its affairs which were being directly controlled by Club Med Hong Kong. It is seen that for the purposes of Section 68 FERA, it was necessary for the ED to have laid a factual basis for alleging that Mr. Narula was in-charge of and responsible to Club Med Indiafor the conduct of its business. The reply of Mr. Narula to the SCN stated that the affairs of Club Med India were controlled by Club Med Hong Kong and in fact Club Med India was not a separate entity. Its accounts were also maintained under the supervision and control of Club Med Hong Kong. It is not possible, therefore, to accept the reasoning of the SD that Mr. Narula could be held liable for the activities of Club Med India under Section 68 FERA - case against Mr. Narula by the ED was not sustainable in law and that both the AO as well as the impugned order of the AT are erroneous. As regards violation by it of Sections 16(1), 9(1)(a) and 9(1)(c) FERA - explanation offered by Club Med India that it was to receive 15% commission, but in fact, it was only issued credit notes as regards the bookings directly made by customers abroad was a plausible one. Further, there was no obligation on Club Med Hong Kong to pay Club Med India 15% commission on such bookings directly made by the customers abroad. The question of Club Med India seeking permission from the RBI would arise only if it claimed payment of the said 15% commission. As it turned out, the said commission was in fact adjusted against the payments which were to be repatriated to Club Med Hong Kong. It turned out to be only an accounting adjustment because in fact no amounts were remitted by Club Med India to Club Med Hong Kong. The explanation offered by Club Med India in reply to the SCN, as explained by its accounts which was available with the ED ought not to have been rejected by the SD. When, in fact, no foreign exchange has been utilised for making any remittance abroad, and the so-called payments which were to be received were in fact not owed to Club Med India, the question of a violation of Section 16 or Section 9(1)(a) and 9(1)(c) did not arise. It does appear that even in respect of the debit notes, the adjustments were part of an accounting procedure. The fact remains that the Indian branch neither remitted nor intended to remit the amount mentioned in the debit notes - Decided in favour of appellant.
Issues Involved:
1. Legality of the Corrigendum issued by the Special Director (SD) 2. Liability of Mr. Narula under Section 68 of FERA 3. Liability of Club Med India under Sections 16(1), 9(1)(a), and 9(1)(c) of FERA Detailed Analysis: 1. Legality of the Corrigendum issued by the Special Director (SD) The SD issued a Corrigendum on 7th March 2005, deleting paragraph 87 of the original adjudication order (AO) dated 4th February 2005, which had exonerated Mr. Narula. The court held that this action was violative of Section 65 of the Foreign Exchange Regulation Act (FERA). Section 65 allows only the correction of clerical or arithmetical mistakes and does not permit a review of the AO. The court stated, "There is no provision in the FERA that authorises the adjudicating officer or the SD to review an AO, and in any event, suo moto." The SD's action was deemed illegal as it was not a clerical error and Mr. Narula was not given a reasonable opportunity to make a representation, thus violating Section 65 FERA. 2. Liability of Mr. Narula under Section 68 of FERA The court found that the case against Mr. Narula was unsustainable. Section 68 FERA applies to "companies," and Club Med India was not a company or firm under Indian law. The court noted that no documents or material were referred to in the Show Cause Notice (SCN) to substantiate the allegation that Mr. Narula was in charge of and responsible for the conduct of Club Med India's business. The court stated, "It is not possible, therefore, to accept the reasoning of the SD that Mr. Narula could be held liable for the activities of Club Med India under Section 68 FERA." The court also highlighted the inconsistency in the AO, where one paragraph exonerated Mr. Narula while another imposed penalties on him. Consequently, the court set aside the AO and the impugned order of the Appellate Tribunal (AT) as they pertained to Mr. Narula. 3. Liability of Club Med India under Sections 16(1), 9(1)(a), and 9(1)(c) of FERA The court found that the explanations provided by Club Med India were plausible. Club Med India argued that it was entitled to a 15% commission on bookings made directly by customers abroad, but this was adjusted against payments to be repatriated to Club Med Hong Kong. The court stated, "The explanation offered by Club Med India in reply to the SCN, as explained by its accounts which was available with the ED ought not to have been rejected by the SD." The court concluded that no foreign exchange had been utilized for making any remittance abroad, and the amounts mentioned in the debit notes were part of an accounting procedure. Therefore, the question of violating Sections 16(1), 9(1)(a), and 9(1)(c) did not arise. The court set aside the AO and the impugned order of the AT as they pertained to Club Med India. Conclusion The court allowed the appeals filed by Mr. Narula and Club Med India, setting aside the AO and the impugned order of the AT. The court found that the SD's issuance of the Corrigendum was illegal, and the allegations against Mr. Narula and Club Med India were not substantiated by sufficient evidence.
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