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2020 (1) TMI 544 - AT - FEMAContravention of FEMA - Investment in three step-down subsidiaries through Wholly Owned Subsidiary (WOS) without the permission of the RBI - Penalty imposed - HELD THAT - As provided that if any person contravened any provision of this act or contravened any rules, regulation, notification, direction or order issued in exercise of the powers under this Act be liable to penalty upto thrice the sum involved in such contravention where such amount is quantifiable. In the present case the sum involved are quantifiable. During the course of argument the learned counsel for the appellants submitted, on query by the Bench, submitted that more than six crores of INR were invested in the step-down subsidiaries. If it is so the imposition of ₹ 70 lakhs on the appellant company and ₹ 20 lakhs on the Managing Director is not disproportionate. In my view the Adjudicating Authority has taken a lenient view and has imposed penalty lessor than the proportionate penalty. In the present fact and circumstances of the case the judgments stated by the appellant is not helpful to the case of the appellant. There is no illegality in the impugned order passed by the Special Director, (Appeals).There are contravention of the provisions of section 6(3)(a) of the FEMA and Regulations 5, 6 13. The Adjudicating Authority has also rightly held that Mr. Taurani has violated the aforesaid provisions in terms of Section 42(1) of FEMA.
Issues Involved:
1. Violation of Section 6(3)(a) of FEMA, 1999 and Regulations 5, 6, and 13 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000. 2. Alleged lack of prior approval from the RBI for investments in step-down subsidiaries. 3. Proportionality of the penalties imposed. 4. Personal liability of the Managing Director, Mr. Kumar S. Taurani. Detailed Analysis: 1. Violation of Section 6(3)(a) of FEMA, 1999 and Regulations 5, 6, and 13 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000: The main allegation against the appellant company was that it made investments in three step-down subsidiaries without the permission of the RBI, violating Section 6(3)(a) of FEMA, 1999, and Regulations 5, 6, and 13 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000. The appellant company acquired shares in its Wholly Owned Subsidiary (WOS), Dashmesh International Ltd., Mauritius (DILM), which then invested in the step-down subsidiaries. The company argued that the investments were made to comply with local legislations in the USA and South Africa, but the tribunal found that neither prior approval nor post-facto approval from the RBI was obtained for these investments. 2. Alleged Lack of Prior Approval from the RBI for Investments in Step-down Subsidiaries: The appellant contended that the investments were made during the pendency of their application for approval from the RBI. They claimed that the RBI had granted clearance for the investments and loans by a letter dated 22.11.2001. However, the tribunal noted that the RBI's letter dated 14.10.2003 did not constitute post-facto approval, as it explicitly mentioned that the acquisitions were made without prior approval and that the company had failed to provide satisfactory clarifications. Consequently, the tribunal concluded that the appellant company had indeed contravened the relevant provisions by not obtaining the necessary approvals. 3. Proportionality of the Penalties Imposed: The appellant argued that the penalties imposed were disproportionate to the alleged contravention. The tribunal referred to Section 13 of FEMA, 1999, which allows for penalties up to thrice the sum involved in the contravention. The tribunal noted that the total investment in the step-down subsidiaries exceeded six crores INR, making the penalties of ?70,00,000 on the appellant company and ?20,00,000 on the Managing Director not disproportionate. The tribunal held that the Adjudicating Authority had taken a lenient view and imposed penalties less than the proportionate amount. 4. Personal Liability of the Managing Director, Mr. Kumar S. Taurani: Mr. Kumar S. Taurani argued that he was not responsible for the day-to-day affairs of the company and that the Adjudicating Authority had not substantiated why he was penalized. However, the tribunal found that Mr. Taurani had signed the ODA form submitted to the RBI, indicating his involvement in the company's activities. The tribunal concluded that there was sufficient evidence to hold Mr. Taurani responsible for the contraventions and upheld the penalty imposed on him. Conclusion: The tribunal dismissed the appeals, holding that the appellant company and Mr. Kumar S. Taurani had contravened the provisions of Section 6(3)(a) of FEMA and Regulations 5, 6, and 13. The tribunal found no grounds to reduce the penalties imposed by the Adjudicating Authority and rejected the alternate reliefs sought by the appellants.
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