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TMI Blog2019 (9) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case and on proper appreciation of the aforesaid entry read with the explanatory note and the letter dated 13.2.1987 sent by LIL to the Dy. Director, ED, as well as the interpretation of Section 2(p) of FERA dealing with person resident in India , the Appellant also sought opinion from Shri M. Hidayatullah (Hon'ble Chief Justice of India- Retd.) annexed to the Additional Affidavit dated 29.3.2010 as Annexure D. At pg. 81 onwards, it is opined that in the facts and circumstances of the case referred to therein, the amount given by LIL to HLL can neither be treated as a loan or deposit . As such, Section 26(7) cannot be invoked and where it is opined that since the arrangement in the present case is between two bodies corporate and the two clauses of sub-section (7) of Section 26 contemplates dealing between a FERA Company and a Person resident in India (which could only be an individual), the said sub-section would not apply. The impugned order is also not sustainable with regard to the penalty imposed on directors as it is settled law that in order to invoke Section 68 to proceed vicariously against the Directors of the Company for an offence committed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. Mishra Member For the Appellants : Shri Ravinder Narain, Advocate, Ms. Mallika Joshi, Advocate, Shri Ishan Narain, Advocate For the Respondent : Shri Prashant Kumar Pandey, Legal Consultant JUDGEMENT FPA-FE-192-196/MUM/1991 1. The aforesaid appeals have been filed against Adjudication Order No. SDF/R/II/15-6-90 dated 13.11.1990 whereby penalty has been imposed against the Appellants to the tune of ₹ 25 Lakhs against M/s. Hindustan Lever Ltd.; ₹ 5 Lakhs each against Shri A.S. Ganguly (Chairman), C,J, Mahimkar (Director), A.L. Mudaliar (Director), N. Vaghul (Director) for contravention of Section 26(7)(i) and 26(7)ii) of FERA 1973. 2. By this order, we propose to decide the above mentioned appeals. 3. The Application for waiver of pre-deposit was disposed off vide order dated 03.05.2010 of the Appellate Tribunal. The said order was compiled by the Appellants. 4. In order to decide the present appeals, few facts are necessary to be mentioned which are disclosed on behalf of the appellants. (a). In 1983-84 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said entry read with the Explanatory Note clearly shows that it relates to advances made for running the operations of Vanaspati, so that the expenses incurred by HLL on behalf of LIL could be met from these advances . It is wrong to presume that the amount mentioned therein relates to any Loan . The Explanatory Note to the Entry clearly sets out the interim arrangement and shows that the amount mentioned therein relates to advances given from time to time to meet the expenses for operating the Vanaspati Unit. 7. The case of the respondent (i) M/s. Lipton India Ltd. is an Indian Company incorporated under Indian Companies Act, 1977 wherein M/s. Unilever Plc. London was holding 40% share shares. M/s. Unilever Plc. was also holding 51% shares of M/s. Hindustan Lever Ltd. as is an admitted position of facts. (ii) In the annual report and accounts of M/s. Lipton India Ltd., it was revealed that the company had given a sum of ₹ 1038.44 lakhs to M/s. Hindustan Lever Ltd. without obtaining prior approval of RBI as stated in Section cited above. (iii) M/s. Lipton India Ltd. had admitted in its letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt with the general or special permission of the Reserve Bank (i) no person resident in India shall lend any money to or deposit any money with, a firm or company (other than a banking company) in which the non-resident interest is more than forty percent., and (ii) no firm or company (other than a banking company) in which the non-resident interest is more than forty percent., shall borrow money from a person resident in India, or accept a deposit of money form such person. Explanation I.- The companies referred to in subsection( 1) are companies not incorporated under any law in force in India in the case of which any of the following conditions is fulfilled.- (a) that the company is one in which the nonresident interest is forty-nine percent., or less; or (b) that more than one-half of the sums which, on a liquidation there of, would be receivable by holders of share or loan capital, would be receivable directly or indirectly by, or for the benefit of, is forty-nine percent., or less; or (c ) that more one-half of the assets which, on a liquidation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of treating the said entry, with reference to the payment made by LIL to HLL, as a Loan . The said payment was made only towards advances . The entry together with the Explanation, which is the sole basis for initiating action, must be read as a whole and so read, it clarifies that the payments are towards advances for meeting the expenses of the Vanaspati operation. The payment referred to in the said entry does not relate to any Loan . 12. It is also submitted that the concept of Loan , which is the subject matter of the said Section 26(7)(i) FERA, 1973 and the basis of imposition of penalty under the impugned order passed by the Special Director dated 13.11.1990, is totally inapplicable to the facts as set out in the said entry read with the Explanatory Note and the impugned order erroneously presumes that the aforesaid payment is made as a Loan and therefore falls within the ambit of Section 26(7)(i) of FERA, 1973. In the said order it is erroneously held that the said amount was borrowed by HLL from LIL, thus contravening Section 26(7)(ii) of FERA. A penalty is imposed in the sum of ₹ 25 lakhs on the Company HLL and ₹ 5 lakhs on each of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for carrying on the manufacturing activity, in trust and on behalf of LIL. 15. It is stated on behalf of appellants that without referring to the advances made for the aforesaid purpose, the Special Director proceeded to consider the question of loans and borrowings , and that too without realizing the correct scope and meaning of loans and borrowings as laid down by the Hon ble Courts. The findings in paras 22 23 of the impugned order is totally contrary to and in violation of the meaning and scope of loan as held by the Hon'ble Delhi High Court in the aforesaid decision. The essential test to determine whether the amount paid can be said to be a loan is whether there is an absolute promise on the part of HLL to repay the said amount to LIL . This essential requirement for constituting a loan has not even been considered in the impugned order. On the contrary, in para-22 of the impugned order while dealing with lending and borrowing , it is held that what essentially it requires is, that there must be a transaction where in a party transfer to the other the sum of money , which could be utilized by the bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic edibles at these multi-product factories. Pending allocation of imported oils and endorsement of industrial licence to the Company, HLL, as a transitory arrangement, continued to carry out the manufacture/sales operations from these facilities in trust and on behalf of the Company. Consequent upon these arrangements, under which HLL continued to operate these facilities, various items of sales, stocks etc. for the purpose of these accounts have been dealt with. 19. The contents of letter issued by LIT dated 13.02.1987 are also reproduced: February 13, 1987 Deputy Director Enforcement Directorate 8 Lindsay Street Calcutta 700 016 Dear Sir, In respect of your query as to whether any prior permission from Reserve Bank of India was obtained by Lipton India Limited under Sec.26(7) of the Foreign Exchange Regulation Act in respect of (a) ₹ 1,038.44 lakhs under Loans and Advances given to HLL, and (b) Also a further sum of ₹ 220.83 lakhs due from HLL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled law that the burden of proof is on the authority which alleges that the aforesaid transaction amounts to lending or borrowing . Apart from a mere reference to the aforesaid Entry in the annual accounts and balance sheet of LIL, no further material or evidence is placed on record to show how the aforesaid transaction amounts to lending or borrowing and that the transaction is such that the amount is given with an absolute promise to repay . 21. It is true that in the annual report, the said amount was shown in the category of loan. But when the matter is examined on legal-side, we have also to see the actual purpose and the contents of the documents and intention of the parties in view of deciding the appeals on FERA which is admittedly draconian law and now ceased to exist. 22. In the present matter, it is admitted position that the amount was paid for the purpose of utilization in order to manufacture the product on behalf of LIL. The said fact is admitted in the impugned order. The request of return of any money toward loan and deposit does not arise as prescribed under Section 26(7)(1)(iii) of the Act. 23. It is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is so as a body corporate cannot come to, or stay in India . 26. It cannot be said that LIL which is a body corporate incorporated in India, had or could come to or stay in India. The Explanation which relates to clause (iii) also further clarifies and provides that the person resident in India as contemplated in clause (iii) shall, during any period in which he is outside India , be deemed to be non-resident in India. A body corporate cannot be referred to as he . The entire language of clause (iii) read with the Explanation also clearly indicates that clause (iii) also only relates to an individual and not a body corporate. 27. Thus, all the four clauses (i) to (iv) of Section 2(p) relate to individuals and a body corporate does not fall within the definition of person resident in India as defined in Section 2(p). In the present case, LIL being a body corporate cannot be treated as a Person resident in India and as such Section 26(7) is not applicable to LIL. In the present case, the transaction is between two bodies corporate, which is not contemplated in section 26(7). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urts, Tribunals or the Assessees. It cannot modify the language of the Act. It is settled law that though such administrative clarification may be binding on the Government Department, it would neither be binding on the assessee or the Courts/Tribunals, who are required to interpret the law. If the correct interpretation of the law is contrary to the administrative clarification, such clarification will have no binding effect. 32. In division 1 of the Exchange Control Manual relating to Exchange Control Direction and Instruction, the object of the manual is set out in para 1.8 at pg. 1.4. It is stated therein that This manual is a compendium of various statutory directions, Administrative Instructions, Explanatory Notes, etc., issued by the Reserve Bank from time to time in connection with the administration of Exchange Control Thus, the aforesaid clarification contained in the Exchange Control Manual is only in the nature of an administrative instruction issued by way of clarification by RBI, which at best, is based on its own view and does not have any legal or binding effect and cannot override the express languag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se clearly relates to advances for carrying out the Vanaspati operation by HLL, in trust and for and on behalf of LIL and the payment made referred to in the entry in question is not for repayment as is required in the case of Loan , no case of penalty can be made out under Section 26(7) of FERA. 35. Even while dealing with the allegation of Loan , it is significant that in para 24 of the impugned order of the Special Enforcement Directorate (see typed copy) that I have borne in mind that the entire investigation do not reveal outflow of foreign exchange or any other acts or omissions and commissions by the said company which had led to the siphoning off of precious foreign exchange 36. In view of the above specific finding in the impugned order assuming without admitting that there is contravention of Section 26(7) of the Act, there is no case for imposition of Penalty. 37. It is settled law that in such cases no penalty ought to be imposed. Reference is made to the decision of the Hon'ble Supreme Court in the case of M/s. Hindustan Steel Ltd. Vs. State of Orissa - 1978(2) E.L.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case and on proper appreciation of the aforesaid entry read with the explanatory note and the letter dated 13.2.1987 sent by LIL to the Dy. Director, ED, as well as the interpretation of Section 2(p) of FERA dealing with person resident in India , the Appellant also sought opinion from Shri M. Hidayatullah (Hon'ble Chief Justice of India- Retd.) annexed to the Additional Affidavit dated 29.3.2010 as Annexure D. At pg. 81 onwards, it is opined that in the facts and circumstances of the case referred to therein, the amount given by LIL to HLL can neither be treated as a loan or deposit . As such, Section 26(7) cannot be invoked and where it is opined that since the arrangement in the present case is between two bodies corporate and the two clauses of sub-section (7) of Section 26 contemplates dealing between a FERA Company and a Person resident in India (which could only be an individual), the said sub-section would not apply. 40. The impugned order is also not sustainable with regard to the penalty imposed on directors as it is settled law that in order to invoke Section 68 to proceed vicariously against the Directors of the Company for an offenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) National Small Industries Corp. Ltd. Vs. Harmeet Singh Paintal Anr. (2010) 3 SCC 330 (paras 13, 15, 17, 18, ) In para 24 reference is also made to the decision in the case of Saroj Kumar Poddar referred to above. 41. One of the Directors Mr. N. Vaghul (Appeal No. 193/91) joined the Board of Directors of the Appellant Company only in 1987 and prior thereto he was working with ICICI. Since the entry relating to the amount given by LIL to HLL, on the basis of which proceedings were initiated in the present case relates to the year 1985-86 before he joined the Appellant Company, in any event he cannot be held vicariously liable under Section 68 in respect of the alleged contravention by the Appellant Company. 42. Dr. A.S Ganguly, who was the Chairman of the Board of Directors was in any event not concerned with the day-to-day functioning of the Appellant Company and was not concerned with the transaction in question and as such he could not be held vicariously responsible under Section 68. 43. All other Directors were Non-executive Directors and not Whole-time Directors and as such were not respo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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