2019 (3) TMI 1517 - AT - FEMA

Violation of S.18 of the FERA - non-recovery of the export proceeds relating to various items of exports made to Iraq, USSR etc. - waiver applications pending - penalty imposed on the Appellant Company for the alleged violation - personal penalty on directors - Held that - No penalty could be imposed in respect of outstanding recovery from Iraq for which extension of time had already been granted and the extended time was not yet over. No penalty could also have been imposed for outstanding amounts from other 5 countries in respect of which waiver application was pending. The appeal filed in the appellant-Hindustan Lever Ltd. is allowed in the light of above said facts. Personal penalty on directors - As mentioned a penalty of ₹ 25 Lakhs was also imposed in respect of each of the 3 Directors - NO PENALTY COULD BE IMPOSED ON THE DIRECTORS The penalty of ₹ 25 Lakhs each imposed in respect of the 3 Directors are also liable to be set aside. Firstly, the appellants have filed an affidavit in this regard. In para 5 of the said Affidavit, at pg. 4 it is clarified that the 3 Directors were not in-charge of Exports. Mr. Buckle the 3rd Director was not even a Director during the relevant period. (He took charge of the office with effect from 1.1.93 when the exports are within the period 1982 to 1991.) (See para 3(i) at pg. 2 of the said affidavit). The details regarding the other two Directors are also set out in the said Affidavit. In the Show Cause Notice dated 25.11.1993 only the names of the aforesaid 3 Directors are mentioned. Their names are included only on account they being Directors. No further allegation or statement is made as to how they were in-charge and were responsible to the Company for the conduct of business of the Company in relation to such exports and the recovery of the amounts in relation thereto, as contemplated under Section 68. It is settled law that mere repetition of the language of the Section in the Show Cause Notice is not enough. Unless it is specifically stated as to how the said Directors are responsible and in-charge of, as contemplated in Section 68. In the light of settled law, the impugned order with regard to penalty imposed to three directors is also set-aside. Appeal allowed.

Summary

Issues Involved:
1. Penalty imposition on the appellant company for non-recovery of export proceeds.
2. Personal penalties on the directors of the appellant company.
3. Adequacy of the steps taken by the appellant company to recover export proceeds.
4. Validity of the penalties imposed in light of extensions and waivers granted by the Reserve Bank of India (RBI).
5. Legal responsibility and vicarious liability of the directors.

Detailed Analysis:

1. Penalty Imposition on the Appellant Company for Non-Recovery of Export Proceeds:
The appellant company, M/s. Hindustan Lever Ltd., was penalized ?1.25 crores for failing to recover export proceeds amounting to ?295.34 lakhs from exports to Iraq, USSR, etc. The company argued that the outstanding amount constituted only 0.3% of its total export turnover of ?967 crores for the period 1982-1991. They contended that the non-recovery was due to unavoidable circumstances, such as international embargoes and the disintegration of the USSR, which were beyond their control.

2. Personal Penalties on the Directors of the Appellant Company:
Personal penalties of ?25 lakhs each were imposed on three directors, Mr. D.M. Buckle, Mr. K.B. Dadiseth, and Mr. S.M. Dutta. The directors argued that they had no personal involvement in the export transactions and that the export department managed these matters. They claimed that no specific allegations were made against them in the show cause notice, and thus, they could not be held vicariously liable under Section 68 of FERA.

3. Adequacy of the Steps Taken by the Appellant Company to Recover Export Proceeds:
The appellant company asserted that they had taken all reasonable steps to recover the export proceeds, including continuous follow-ups with customers and banks, and seeking assistance from the Indian government. They highlighted that the UN embargo on Iraq and the collapse of the USSR's state-run enterprises made recovery efforts futile. The company also received partial compensation from the Export Credit Guarantee Corporation of India (ECGC).

4. Validity of the Penalties Imposed in Light of Extensions and Waivers Granted by the RBI:
The appellant company received extensions from the RBI for recovering export proceeds from Iraq until 31.12.2000. They also applied for GR waivers for the outstanding amounts, which were still pending at the time of the adjudication order. The tribunal noted that the RBI had granted extensions and waivers for some amounts, and the authorized dealers had approved write-offs for certain amounts. The tribunal concluded that no penalty could be imposed when extensions or waiver applications were pending.

5. Legal Responsibility and Vicarious Liability of the Directors:
The tribunal emphasized that mere designation as directors did not automatically make them liable for the company's actions. Specific allegations and evidence were required to establish their responsibility for the conduct of the company's business. The tribunal referred to judicial precedents, including Sunil Bharti Mittal vs. CBI and Saroj Kumar Poddar vs. State, which held that vicarious liability could not be imputed without specific acts attributed to the directors.

Conclusion:
The tribunal allowed the appeals, setting aside the penalties imposed on both the appellant company and the directors. It held that the company had taken reasonable steps to recover the export proceeds and that the penalties were not justified given the extensions and waivers granted by the RBI. The tribunal also found that the directors could not be held vicariously liable in the absence of specific allegations and evidence of their involvement in the export transactions.