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TMI Blog2013 (7) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... m the RBI for 51% foreign equity induction, for trading, by way of export. RBI, on the other hand, granted general permission only for dealing with the activities mentioned in NIC Code 893 and not for any trading activities leading to import or export. Lifting of Corporate Veil - Held that:- in a given situation the authorities functioning under FERA find that there are attempts to over-reach the provision of Section 29(1)(a), the authority can always lift the veil and examine whether the parties have entered into any fraudulent, sham, circuitous or a devise so as to overcome statutory provisions like Section 29(1)(a). It is trite law that any approval/permission obtained by non- disclosure of all necessary information or making a false representation tantamount to approval/permission obtained by practicing fraud and hence a nullity. Whether the company violated the provisions of Section 19(1)(a) and (d) and Section 29(1)(b) r.w Sections 9(1)(e), 49 and 68(1) and (2) of FERA leading to penal consequences – Held that:- The company violated the provisions and thus would be liable for the consequences – premises of the company ordered to be seized – amounts present in various bank acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere also initiated against the other respondents, including 1st respondent, ABN AMRO Bank NV (now called "Royal Bank of Scotland NV") and 4th respondent - M/s Piccadily Invest AG, Zurich, Switzerland (for short "Piccadily"). Respondents, aggrieved by the above mentioned order, preferred four appeals before the Appellate Tribunal for Foreign Exchange, New Delhi and the Tribunal allowed those appeals vide its order dated 10.3.2003 and set aside the order of confiscation and the penalty imposed. 3. Union of India, aggrieved by the said order, preferred Criminal Appeal No. 380 of 2003 before the Delhi High Court under Section 54 of FERA read with Section 35 of the Foreign Exchange Management Act, 1999 which was, however, dismissed, stating that neither any question of law nor any legal infirmity had been found in the impugned order passed by the Tribunal. Aggrieved by the same, Criminal Appeal No. 975 of 2007 has been filed by the Union of India, which is treated as the main appeal and being heard along with Criminal Appeal No. 976 of 2007, which was also filed by the Union of India and another against the order of the High Court dated 12.9.2003 setting aside the order confiscating th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted an application in Form FC (RBI) on 21.5.1998 before the Reserve Bank of India (for short "RBI") for approval of not exceeding 51% foreign investment for Service Sector in Annexure III from the 4th respondent. Permission was sought for, for the foreign collaboration for "Business Management Consultancy for Trading, Marketing and Selling of Goods and Services" with specific reference to NIC Code 893. Details of foreign investment resulting in foreign exchange inflow were also given in para VI of the application. Para VIII (iii) called for the description of products in the case of trading companies primarily engaged in exports, to which the Company replied stating that the same is not applicable. RBI, with reference to that application, allotted Registration No. FC-98 NDR 1005 vide letter dated 29.6.1998 and vide letter dated 29.6.1998 informed the company that it would advise the foreign collaborator that they would obey the laws of the land and there should be no compromise or excuse for the ignorance of the Indian Legal System. 6. The Enforcement Directorate got information that the company had started trading activity in gold coins on 27.5.1998 and signed the first contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... route for trading in gold coins, was incorrect. 9. The Special Director, Enforcement Directorate, on getting various information of the violation of the provisions of FERA, along with other officers, searched the business premises of the company on 2.7.1999, which resulted in the recovery and seizure of various documents and articles and a panchnama dated 2.7.1999 was prepared. The search at the office premises of Group-A Securities at National Highway No. 8, Mahipalpur, New Delhi also resulted in the recovery and seizure of articles as per panchnama dated 3.7.1999. 10. Lambert Kroger, the third respondent herein, in his statements under Section 40 of FERA dated 2/3.7.1999, 5.7.1999, 6.7.1999, 7.7.1999, 8.7.1999 and 24.8.1999, stated that he is a German National and he came to India on 16.12.1997 to give suggestions to Cliff Roy, the power of attorney holder of 4th respondent, as well as the then Director of Maple, who applied to RBI on 21.5.1998 for approval of 51% foreign financial collaboration under the automatic route. Further, it was also stated that A.R. Khan was in possession of 49% of the shares of the company and the seller of those 49% shares V.S. Jafa had entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S-485, GK-II, New Delhi-42 said noticee No. 1, its directors the said noticee No. 2,3 & 6. M/s. Picadily Invest AG, Post FAch 284, 8034, Zurich, Switzerland, Mr. Cliff Roy, Mr. Lambert Kroger & Mr. Paul Singh Clare the said notices No. 4, 3, 2 & 6. Mr.Cliff Roy, Lamber Kroger & Mr. Paul Singh Clare the said notices No. 2, 3 & 6. For failure to comply with the provisions and declarations subject to which approval under automatic route was granted by the RBI and by engaging themselves in the trading activities of imported Maple Leaf Gold Coins in contravention of the provisions of sec. 19(1)(1) & (d), 29(1)(b) read with sec. 49 & 68(1) & (2) of FERA, 1973 and by entering into contracts/agreements in violation of provisions of section 47(1) of FERA, 1973 and by collecting a sum of Rs.25 Crore approx. and placing this amount without any general or special exemption of RBI to the credit of persons resident outside India in contravention of section 9(1)(e) of FERA, 1973 read with section 68(1) & (2) of the said Act. By their carrying out the business of imported Maple Leaf Gold Coins in India in name & style of notice No. 1 without any general or special permission of RBI in contraventi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing order: "In view of my findings that Noticee No. 1 has contravened the provisions of Section 19(1)(d) and 29(1)(b) read with Section 49(1)(a) and Section 47(1) of FERA, 1973 and Noticee NO. 2, 3 and 4 have contravened the provisions of Section 19(1)(a) of FERA, 1973,In am inclined to confiscate these gold coins seized under Panchnama dated 02.07.99 and 03.07.99 because these were acquired/specifically imported against foreign exchange by Noticee No. 1 for an activity which was contrary to the automatic approval route allowed by RBI under Notification No. 180/98-RB dated 13.01.1998 issued under Section 9( 1)(d) and Section 29(1)(b) of FERA, 1973, out of funds generated in violation of Section 29(1)(a) of the said Act and gold coins being also liable to confiscation under Section 63 of FERA, 1973. The route adopted by them was to protect themselves from action as is evident from FAX dated 04.02.98 referred on page 66. The SCN also proposed the confiscation of blocked amounts in bank accounts of Noticee No. 1 and fixed deposits maintained with following banks:- 1) ABN AMRO BANK : DLF Centre, Sansad Marg, New Delhi. 2) HDFC BANK LTD; Greater Kailash, Part II, New Delhi. 3) BANK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the 466 bank drafts/pay orders seized from the business premises of Noticee No. 1 under Panchanama dated 02.07.99 under Section 63 of FERA. However, for 3 drafts/pay orders bearing no. 326191, 326192 and 326193, the order is subject to the outcome of Writ Petition pending before the Hon'ble High Court of Delhi in repaired to these. 4. I also order confiscation of following amounts lying in the following accounts of Noticee No. 3 and 6 with ABN Amro Bank, New Delhi:- NAME ACCOUNT NO. AMOUNTS IN RS. Cliff Roy 000006368697 1,99,666.13 Pau Singh 000006467689 60,104.32 Clare Under Section 63 of the FERA, 1973 on the grounds referred hereinabove. 5. I impose penalty of Rs.15,00,000/- (Rs. Fifteen lakhs only) on M/s. Maple Leaf International Pvt. Ltd., Greater Kailash, Part- II, New Delhi, under Section 50 of FERA, 1973 for the reasons mentioned hereinabove. 6. I also impose penalty of RS.5,00,000 (Rs. Five lakhs only) on M/s. Picadily Invest AG, Switzerland under Section 50 of FERA, 1973 for the reasons mentioned hereinabove. 7. I also impose personal penalty on Noticees No. 2, 3 and 6 under Section 50 of FERA, 1973, as per details below: SL.NO. NAME AMOUNT (IN RS.) 1. Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the High Court has also not examined the scope of Section 29(1)(b) of the Act read with notifications dated 13.1.1998 and 20.1.1998 issued by the RBI. Learned counsel submitted that from the reading of the above mentioned notifications, it is clear that any company whose activities fell within the ambit of the notification dated 13.1.1998 and which claims the benefit of the notification, was required to submit a declaration in Form FC(RBI). Learned Additional Solicitor General also referred to the statement on the Industrial Policy, 1991 with reference to paragraph 39(B) dealing with Foreign Investment and also to the Press Note no. 11 dated 20.8.1991 dealing with changes in procedures for foreign investment approvals and also to paras 3(A), 4, 6 etc.. Reference was also made to the Press Notes dated 13.12.1991 and also 31.12.1991 and stated that, according to the Press Notes, there is no concept of automatic approval for the companies engaged primarily in trading and such companies fulfilling certain conditions have to apply to the RBI for permission. Referring to the judgment of this Court in Hindustan Lever (Infra), it was submitted that this Court had no occasion to conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., 1995 Suppl (1) SCC 499. Learned counsel submitted that respondents 2 to 4 could not be said to have violated the provisions of FERA merely because they sought to arrange the affairs of Maple so as to not to fall foul of Section 29(1)(a) so long as they did not violate any other law. Reliance was also placed on the judgment of this Court in Ghatge and Patil Concerns' Employees' Union v. Ghatge and Patil (Transports) Private Ltd. And another AIR 1968 SC 503 and Landon and Country Commercial Investment Properties Ltd. v. Attorney- General 1953 1 AER 436. 17. Learned counsel submitted that respondents 2 to 4 have not violated the provisions under Section 19(1)(a) and (d), 29(1)(b) and Section 49(i) of FERA. Referring to the notification no. 180/98, learned counsel submitted that the company had issued 51% of its share to 4th respondent in accordance with the general permission granted vide second proviso to paragraph 1 of the notification No. FERA 180/98. Learned counsel also submitted that the notification itself has given general permission to "newly set up trading company primarily engaged in export" and, therefore, no further permission was required by a company before issui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el submitted that the company was misleading the public that it had got RBI permission to carry on the above mentioned activity. Referring to Form FC (RBI), learned senior counsel submitted that the company had specifically sought for permission for foreign investment with regard to NIC Code 893 and with regard to the items mentioned in para IX(iii). The company stated that it was not applicable, therefore, it was not seeking the automatic route, as a trading company primarily engaged in export. 20. Shri V. Giri, learned senior counsel appearing for 1st respondent, submitted that the Bank had imported the gold on its own behalf and sold the same to the company and that the bank was engaged in that activity as an authorized dealer, for which it had obtained permission from RBI. Learned senior counsel submitted that in order to attract Section 6(5) of FERA, 1973, it is necessary that an authorized dealer must have conducted a transaction in foreign exchange and it had only imported gold and sold the same to the company incorporated in India against Indian currency, consequently, there is no violation of Section 6(5). Learned senior counsel submitted that "reasonable satisfaction" co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalties will be governed by the general policy applicable to other domestic units, the payment of dividends would be monitored through the Reserve Bank of India so as to ensure that outflows on account of dividend payments are balanced by export earnings over a period of time. iii) Other foreign equity proposals, including proposals involving 51% foreign equity which do not meet the criteria under (i) above, will continue to need prior clearance. Foreign equity proposals need not necessarily be accompanied by foreign technology agreements. iv) To provide access to international markets, majority foreign equity holding upto 51% equity will be allowed for trading companies primarily engaged in export activities. While the thrust would be on export activities, such trading houses shall be at par with domestic trading and export houses in accordance with Import-Export Policy. v) A Special Empowered Board would be constituted to negotiate with a number of large international firms and approve direct foreign investment in select areas. This would be a special programme to attract substantial investment that would provide access to high technology and world markets. The investment pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue necessary permission for equity investment under FERA and that permission would include exemption from the operation of Sections 26(7), 28, 29 and 31 of FERA, 1973. Trading Companies primarily engaged in Export 25. Paragraph 4 of the above mentioned Press Note dealt with 'Foreign Investment in Trading Companies' which provided that foreign investment in trading companies upto 51%, primarily engaged in export activities, were required to file applications with the RBI in the prescribed form. Para 6 of Press Note dealt with Other Foreign Investment Proposals, those paragraphs are relevant for the purpose, hence given below: "4. FOREIGN INVESTMENT IN TRADING COMPANIES Under the provisions of para 39B(iv) foreign equity holdings upto 51% equity will be allowed in trading companies primarily engaged in export activities. Applications for foreign investment under this clause will be filed with the Reserve Bank of India in the form to be prescribed by the RBI. Such trading houses shall be at par with the domestic trading and export houses and shall operate in accordance with the Import Export Policy. 6. OTHER FOREIGN INVESTMENT PROPOSALS All other foreign investment proposals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatement on Industrial Policy lays down that "majority foreign equity holding upto 51% equity will be allowed for trading companies primarily engaged in export activities. While the thrust would be on export activities, such trading houses shall be at par with domestic trading and export houses in accordance with the Import Export Policy". 3. This Press Note sets out the principles and procedures for approval of foreign equity holding upto 51 per cent in trading companies primarily engaged in export activities. 4. The criteria for grant of Export House, Trading House or Star Trading House certificates are laid down in paragraphs 218 and 226 of the Import Export Policy, 1990-93. As amended by the Ministry of Commerce, Import Trade Control Public Notice No. 242-ITC(PN)/90-93 dated November 8, 1991, effective from April 1, 1992, the average net foreign exchange earnings in the three preceding licensing years should not be less than Rs.6crore for Export House Certification; Rs.30 crore for Trading House Certification; Rs.125 crore for Star Trading House certification. Further, such certification will also be granted if the minimum net foreign exchange earning in the immediate precedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sections 26(7), 28, 29 and 31 of FERA. 7. Dividend Balancing: The outflow of foreign exchange on account of dividend payments are to be balanced by export earning over a period of time in respect ;of all approvals given under the provisions outlined in para 5 above. Monitoring will be done by the Reserve Bank of India. The balancing will be done on the following basis: i) The balancing of dividend would be over a period of 7 years reckoned from the date of recognition as Export House/Trading House/Star Trading House for new companies, and from the date of allotment of the shares raising the level of foreign equity to the approved level in the case of existing companies. ii) The amount of dividend payment should be covered by export earnings recorded in years prior to the payment of dividend in years prior to the payment of dividend or in the year of payment of dividend. The Reserve Bank of India will issue appropriate instructions to give effect to these provisions." 30. Press Note mentioned above has, therefore, dealt with para 39B(iv) and stated that majority of foreign equity holding upto 51% equity would be allowed for trading companies primarily engaged in export acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions and also on the principle of lifting the corporate veil. 34. Mr. Amit Sibal, as already indicated, submitted that by the Foreign Exchange Regulation Amendment Act 29 of 1993 the bar to having more than 40% shares in an Indian Company by a non-resident has been removed with a view to invite foreign persons to invest in India and / or Indian Companies and allow them to do business in India and to deal with assets in India with greater freedom and therefore by virtue of the amendment, Indian company in which non-resident interest is more than 40% can carry on business in India without any permission from RBI. Learned counsel also laid considerable stress on paragraphs 74 to 76 of the judgment of this Court in Hindustan Lever (supra). 35. Shri P.P. Malhotra, on the other hand, submitted that section 29(1)(a) puts an injunction on the foreign companies and foreign nationals from establishing or carrying on any business in India or opening any branch in India without obtaining the permission of the RBI. Learned senior counsel also submitted that by virtue of the amendment restrictions were removed only with regard to FERA companies, however, with regard to the foreigners and fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to a foreign company, the Scheme cannot be said to be against public interest. The foreign Exchange Regulation Act has been amended specifically to encourage foreign participation in business in India. The bar to having more than 40% shares in an Indian company by a non resident has been lifted. The Amending Act 29 of 1973 is not under challenge. In order to give greater freedom to the companies for doing business in India, the MRTP Act has been amended. Prior approval of Government of India is not necessary for amalgamation of companies any more. In fact, it is in public interest that TOMCO with its 60,000 shareholders and also a very large workforce does not deteriorate into a sick company." 37. Above mentioned paragraphs cannot be read out of context. Hindustan Lever was a case dealing with disputes between the employees of Hindustan Lever and the company. The question was with regard to the amalgamation of two companies namely Hindustan Lever Ltd. and Tata Oil Mills Company Ltd. giving specific reference to the scheme of amalgamation of a company with a subsidiary of a multiple level company. Observation referred to in paragraphs 74 and 76 have to be seen in that context and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole or any part of undertaking in India of any person or company, trade or industry or purchase of shares in India of any such company except with the general or special permission of RBI. Even after the amendment under Section 29, the restrictions continued to apply post amendment to foreign companies and foreign nationals as set out in Section 29(1)(a). 39. We, therefore, find no error in the views expressed by the adjudicating authority on the interpretation of Section 29(1)(a) and the observation made in Hindustan Lever is of no assistance to the company and made on different facts/ situations and not to be understood in the way that company sought to interpret. Lifting of Corporate Veil 40. Shri P.P. Malhotra submitted that the adjudicating authority was justified in reaching the conclusion that Noticees No. 2, 3 and 4 i.e. Lambert Kroger, Cliff Roy and Picadly Invest AG had established a place of business in India in the name and style of Maple Leaf to carry on business activities in India and they fell within the ambit of Section 29(1)(a) for which they required general or special permission from the RBI. Reference was made to the various correspondence and statements exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties have entered into any fraudulent, sham, circuitous or a devise so as to overcome statutory provisions like Section 29(1)(a). It is trite law that any approval/permission obtained by non- disclosure of all necessary information or making a false representation tantamount to approval/permission obtained by practicing fraud and hence a nullity. Reference may be made to the judgment of this Court in Union of India and Others v. Ramesh Gandhi (2012) 1 SCC 476. 43. Even in Escorts case (supra), this court has taken the view that it is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depends on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc. In Escorts case (supra), this Court held as follows: "Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent state is sought to be evaded or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k, a. take or send any security to any place outside India; d. issue, whether in India or elsewhere, any security which is registered or to be registered in India, to a person resident outside India;" Restrictions on establishment of place of business in India 29. (1) Without prejudice to the provisions of section 28 and section 47 and notwithstanding anything contained in any other provisions of this Act or the provisions of the Companies Act, 1956, a person resident outside India (whether a citizen of India or not) or a person who is not a citizen of India but is resident in India or a company (other than a banking company) which is not incorporated under any law in force in India or any branch of such company, shall not, except with the general or special permission of the Reserve Bank, - (a)----------- (b) acquire the whole or any part of any undertaking in India of any person or company carrying on any trade, commerce or industry or purchase the shares in India of any such company. 48. Section 19(1)(a) was intended to regulate export and transfer of securities. Section 19 states that no person shall except with the general or special permission of the Reserve Bank take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said notification. Further, it is also pointed out by the learned counsel that the UOI has failed to consider the second proviso to the notification which related to a third category companies namely newly setup trading companies which might acquire export/trading house/star trading house status before they could remit dividends to the foreign investors. 51. Learned counsel pointed out until January 1998, an application for prior clearance from RBI was required for issuance of shares by companies like the second respondent to the foreign investor and the above mentioned notification had further simplified the procedure by stating that prior clearance was no longer required instead within thirty days of the issuance of shares, the issuer was required to file certain documents listed in para 3(viii) of the above mentioned notification. 52. Shri Sibal submitted that the company fell squarely within the category of "newly setup trading company primarily engaged in export" which fell within the purview of the general permission granted by RBI under the automatic route hence there was no contravention under Sections 19(1)(a) and (d), 29(1)(b) or 49(i)(a) of FERA. 53. Learned counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y primarily engaged in export and is registered as an Export/Trading/Star Trading House with the Ministry of Commerce, Government of India. To claim the benefit of the above-mentioned notifications, it was essential that a true declaration in Form FC [RBI] was required to be filed and benefit of the general permission through automatic route could be obtained only for the activity specified in Form FC [RBI] and there was no automatic approval for any activity not specified in the above-mentioned form. Reading Section 19(1)(a), (b) and 29(1)(b) read with the notifications and the Press Notes show that the intention of the Legislature was to permit company incorporated in India which is engaged or proposing to engage in an activity specified in Annexure III or an Indian Company which is a trading company, primarily engaged in export and is registered as an export/trading/star trading house with the Ministry of Commerce, Government of India to issue equity shares, subject to the conditions mentioned in paragraph 3 of the Notification dated 13.1.1998. The first proviso to Notification states that a company existing on the date of the notification, which was not engaged in Annexure III ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined only when it remits dividend cannot be accepted. The expression "further" used in the second proviso makes it more explicit. "Further" as means "additional" meaning thereby a newly set up trading company is not a third category as such but it goes along with second category i.e. "a trading company primarily engaged in export". To get the benefit of the general permission in the automatic route a trading company should be primarily engaged in export, even if it is a newly set up company. A newly set up company also could demonstrate the same by specifying the same in Form FC[RBI] that it is a trading company, whether new or old, and is at least intended to be engaged primarily in export. A reference to the Form FC (RBI) duly submitted by the 2nd respondent is useful. 58. FC[RBI] form specifically directs the applicants to "carefully tick" the "appropriate" box. In the box dealing with the application for approval for foreign investment not to exceed 51% for "service sector in Annexure III", the company has put a tick mark which would indicate that it sought to avail of the automatic route for service sector only as indicated in Annexure III. Noticeably no tick mark w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above Bank has contravened Section 6(5) of FERA and misused the permission granted to it by RBI for importing gold coins. Proceedings were initiated against the company and others as per directions given by RBI dated 8.6.1999 and it was noticed that the bank had also sold gold coins to the company without being reasonably satisfied about the nature of the business of the company. The adjudicating authority took the view that the Bank as an authorized dealer, should have ascertained whether the company had got necessary permission from the RBI in dealing with the gold coins. The Bank, it is seen, had imported the gold on its own behalf and sold the same to the company and if the Bank was acting as an agent of the company, it would not have sold the gold to the company, but would have charged the commission for acting as an agent. No materials have been placed before us to show that the Bank was acting as an agent of the company. On facts, the Tribunal as well as the High Court took the view that the Bank had not misused the permission granted by the RBI for importing gold coins. We do not find any reason to interfere with those finding of facts. 62. In such circumstances, we fin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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