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TMI Blog2023 (9) TMI 1570X X X X Extracts X X X X X X X X Extracts X X X X ..... icees against whom the Show Cause Notice was issued and which has been adjudicated by the Ld. Adjudicating Authority. He has further directed the Authorised Officer to release the seized mutual funds of amount Rs. 10,35,20,000/- held by M/s. Whitefield Chemtech Pvt. Ltd. now known as M/s. Nirayu Pvt. Ltd. The seizure had been effected on 08.12.2017 under Section 37 A (1) of Foreign Exchange Management Act 1999 (FEMA). The aforementioned noticees included besides R-1, R-2 and R-3, the fourth noticee Shri Chirayu Amin, Vadodara. However, the appeal presently filed has not made Shri Chirayu Amin as a respondent. 3. The Show Cause Notice No. T-4/12-B/SDE/VA/WR/2018 was issued on 26.09.2018 (SCN) by the Special Director, Western Region, Directorate of Enforcement, Mumbai to the aforementioned four noticees. M/s. Nirayu Pvt. Ltd. was charged for making investment of US $ 1,600,000/- (equivalent to Rs. 10,35,20,000/-) in purchase of residential real estate in UK in contravention of Sections 6 (3) (a) and (h) of FEMA r/w Regulation 5 & 6 (2) (ii) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulation 2004 (ODI Regulations). M/s. Nirayu Pvt. Ltd. was also cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .02.2016 through DKLM LLP, a law firm and balance amount through bank transfers from 01.02.2016 to 03.10.2016. The SDS-2 obtained loan of GBP 2,750,000/- (US $ 3,900,000/-) from M/s. Silverwood Enterprises Ltd. BVI. DKLM LLP was mandated to buy the property in UK and it refunded US $ 230,000, the excess amount after the purchase, to the SDS-2. The SDS-2 purchased the said real estate property in London for USD 5,500,000/- (US $ 3,900,000/- from the loan amount and US $ 1,600,000/- from the transfer by the SDS-1 and by the WOS). The Complaint alleged that the R-1 through transfer of US $ 1,600,000/- in the aforementioned manner through the WOS and the SDS-1 to the SDS-2 purchased residential real estate in UK. Hence the Complaint alleged the contravention of FEMA provisions, as mentioned in the preceding paragraphs by R-1, R-2, R-3 & Shri Chirayu Amin, who is the fourth Noticee in the SCN. 5. The Complaint further stated that since in this case Section 4 of FEMA is contravened to the tune of US $ 1,600,000/- (equivalent to Rs. 10,35,20,000/-) the Directorate of Enforcement (the appellant herein) in pursuance of Section 37 A (1) of FEMA vide Seizure Order No. 01/2017 dated 08.12.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Virgin Island is not a resident in India. The Ld. AA inferred that the charges under Sections 6 (3) (a) & 6 (3) (h) of FEMA r/w Regulations 5 & 6 (2) (ii) of the ODI Regulations are not proved. 7. The Ld. AA in the impugned AO has also held that the charges for contravention of Section 10 (6) of FEMA are not proved. He has found that R-1 in its declaration to the Authorised Dealer in the Form ODI at the time of making remittance and on filing of Annual Performance Report for the financial years 2015-16 and 2016-17 has fully disclosed the purpose of remittance as well as the details of all the subsidiaries. The purpose of remittance has been mentioned as equity contribution. He further observed that R-1 declared in the Form ODI submitted to the Authorised Dealer that the WOS in Singapore was intended to be a Special Purpose Vehicle to make downstream investment in trading activities. He has interpreted the provisions to mean that the ultimate end use of the purchased foreign exchange is not required to be in conformity of the purpose mentioned in the declaration. He further stated that the Section does not regulate the ultimate end users of the foreign exchange and applies only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The Appeal states that the Ld. AA has erred in not noticing an important fact that all these pass-through paper entities were created by the Indian Company (R-1) just to hold and buy the property in London which is evident from the fact that all these transactions were carried out within short span of three months and these Companies abroad have neither explained business nor infrastructure to carry out any business. 11. Final hearings were held on 10.07.2023, 20.07.2023 and 18.08.2023. On 10.07.2023 learned counsel for the appellant argued on the merit of the Appeal. He elaborated on certain statements as well as certain paragraphs of the impugned AO. He pointed out that certain paragraphs of the impugned AO are contrary to the provisions of the statute. 12. Learned counsel for the respondent on that date also argued and explained the distinction between direct investment in real estate business and in bona fide business activity. He explained how wholly owned subsidiary and step down subsidiaries were permissible under the Regulations and RBI Circular. 13. On 20.07.2023, learned counsel for the respondent argued at length to show that there has been no contravention of FEMA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince acquisition of the immovable property in UK was by the step down subsidiary in BVI which is not resident in India. He also stated that the transfer of any immovable property under the Section in view of "Save as otherwise provided in the Act" is permissible if it is so allowed under other provisions of the Act. He argued that the transfer of the immovable property in question by the entity in BVI was not prohibited. He therefore, pleaded that the appeal may not be allowed. 17. Learned counsel for the appellant in his rebuttal stated that the WOS in Singapore and step down subsidiaries in UAE and BVI were nothing but Branch Offices of the Respondent Company in India. He stated that Section 10 (6) is applicable to any person and not only to a person resident in India. In this regard he drew attention to Section 2 (u)(vii) whereby person includes any agency, office or branch owned or controlled by such person. He stated that the BVI entity is controlled by the Respondent Company and therefore, the contraventions of FEMA are established. 18. He also argued that the Instructions relating to submission of Form ODI Part-I at (q) explains step down subsidiary which therefore, implie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 37 of FEMA of Shri Pranav Amin to support his arguments that all decisions relating to the second step down subsidiary in BVI were taken by the respondent here in India. He also drew attention to Questions No. 5, 6, 7 & 8 from the statement dated 08.06.2018 of Shri Mitanshu Shah to state that the decisions by the Respondent had been taken without recording the minutes and communicated on telephone to the BVI unit. He relied at length on the provisions of Section 6 (3) of Income Tax Act 1961 and the earlier Section 4 A of Income Tax Act 1922 to bring out that the place of effective management as defined therein and the de-facto decision making was actually done by the respondent here in India even for the second step down subsidiary. In this regard he cited the judgment of the Hon"ble Supreme Court in Civil Appeal No. 5769 of 2022 in the case of Mansarovar Commercial Pvt. Ltd. (Appellant) vs. Commissioner of Income Tax, Delhi (Respondent). He also finally pleaded that the statements which were recorded under Section 37 of the Act are admissible as evidence. Learned counsel for the appellant filed written submission on 28.08.2023. 23. Learned counsel for the respondent strongly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f contravention against Noticee No. 1, and it has been discovered that Noticee No. 1 has not contravened any of the section and regulations as alleged by the complainant, the contravention against Noticee No. 2, 3 under Section 42 (1) FEMA and Noticee No. 4 under Section 42 (2) are also hereby dropped." Since the appellant has chosen to make R-1, R-2 & R-3 as respondents to the Appeal and have not made the aforementioned Noticee No. 4 as a respondent, it follows that the impugned AO in so far as Noticee No. 4 is concerned has assumed finality. The Ld. AA has made it clear in paragraph 4.22 of the impugned AO that the charges against the Noticees 2, 3 & 4 are consequential to the charges against Noticee No. 1. None of the two parties has chosen to mention about this omission in the Appeal either in the pleadings or during the arguments. Be that as it may, the implications thereof will be required to be re-looked into at the outcome of the disposal of this Appeal. 26. R-1 is an Indian party since it is a Company incorporated in India which has made direct investment in the WOS that is a foreign entity abroad, located in Singapore. The requirements of the definition of Indian Party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on 09.06.2016 in the format which had been prescribed after revision. In this Form ODI in addition to what had been declared earlier there are certain declarations made which pertain to the SDS-1 and to the SDS-2. For the SDS-1, the WOS has been declared as the parent company. The Activity Code for the WOS and for the SDS-1 have been declared as 899.9 which have been explained in the application dated 07.08.2023 as Other Business Services not elsewhere classified or included. In this Form the parent company of the SDS-2 is declared as the SDS-1 and the Activity Code as 820.3 which has been explained as Lessors of real property. 28. The Appellant has not disputed the filing of the said documents, however, it has contested the veracity of the declarations made therein in so far as the purpose of the direct investment is concerned. The Appellant in its appeal has stated that the three companies abroad were setup within three months with neither explained business nor infrastructure to carry out any business. The Appeal alleges that these foreign entities were created by R-1 as paper entities for buying and holding the property in London. It is further alleged that in fact the inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 26.09.2018 and in the Appeal dated 25.04.2019. What is under challenge is the amount of US $ 1.6 million which has admittedly been utilized for the purchase of the residential real estate. Undoubtedly, the said amount of US $ 1.6 million flowed from the direct investment made by R-1 in the WOS. Part of the said amount flowed through the SDS-1 to the SDS-2 and part directly from the WOS to the SDS-2, which in turn used it to purchase the said real estate property in UK. The moot questions therefore, are the following: a) Whether the fact of the purchase by the SDS-2 of the residential real estate in UK, make the purpose of the direct investment by R-1 in the WOS as not being bona fide? b) Whether the declarations and the procedural requirements met by R-1 are invalidated in view of the aforementioned purchase of the residential real estate in UK by the SDS-2? c) Whether the purchase of the residential real estate in UK by the SDS-2 located in BVI was actually by R-1, the Indian Party, which is a company resident in India? Necessary caution is to be exercised in answering the three aforementioned mixed questions of law and of fact for determining as to what extent the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the host country, however, there is no insistence that either the entire capital be held by the Indian Party or the Indian Party makes direct investment therein. Regulation 13 of the ODI Regulations is enabling provision for setting up of a step down subsidiary by a wholly owned subsidiary provided the Indian Party reports about this to RBI in the Annual Performance Report. Reporting through APRs is an obligation cast upon the Indian Party in addition to its obligations which have been cast upon it for setting up a wholly owned subsidiary. In the present case the SDS-2 is wholly owned subsidiary of the SDS-1, which is wholly owned subsidiary of the WOS wherein 100 per cent Direct Investment has been made by R-1. In view of this factual matrix a step down subsidiary also need to have bona fide business as stipulated under Regulation 5 (2) of the ODI Regulations. The argument of the learned counsel for the respondents that the provisions of the ODI Regulations are not applicable to step down subsidiaries and can only be applied to a Wholly Owned Subsidiary cannot be sustained as the ODI Regulations are to be read as a whole. The requirement of having bona fide business activity w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the other of the said transaction that the requirements as to business postulated by the definition would be satisfied. If this element of the definition is ignored, it would be rendering the use of the word "business" redundant and meaningless. " Learned counsel for the respondent has cited another Judgment dated 24.04.1967 of the Hon'ble Supreme Court in Director of Supplies and Disposals, Calcutta vs. Member, Board of Revenue, West Bengal, Calcutta [(1967) 3 SCR 778]. The judgment in paragraph 7 states the following: "..... There was an organized course of activity, it was systematic and it was with a set purpose of making profit. The tests of frequency, continuity and system which are generally employed in determining whether an activity for the disposal of goods owned by a person indicates an intention to carry on business are satisfied in this case. ...." It therefore follows that any activity in order to constitute business must be systematic and continuous. The Appellant has failed to produce any evidence as to show that the solitary purchase of the real estate abroad by the SDS-2 was not merely the only one in the dealing of real estate by the SDS-2. The Respondents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y outside India. The respondents have submitted in the synopsis dated 25.08.2023 that Section 10 (6) FEMA does not regulate the ultimate end use of foreign exchange purchased but only the immediate purpose, as the purchaser of foreign exchange only has control over the immediate purpose for which such foreign exchange may be utilized. This plea of the respondents has to be rejected. The direct investment from R-1, at least to the extent of US $ 1.6 million has flowed through the WOS and the SDS-1 to the SDS-2. The original funds acquired by R-1, from the Authorised Dealer, to the extent of US $ 1.6 million was put to use for the first time by the SDS-2 in purchase of the real estate property. 36. However, the allegation made by the Appellant about the contravention of Section 10 (6), is also not sustainable. Neither the WOS nor the SDS-1 has purchased any immovable property outside India. The charge of the Appellant is therefore confined to the purchase of the immovable property by the SDS-2. As already stated, the respondents have maintained that the residential real estate purchased in London was to use it as Guest House to facilitate trading. In the absence of evidence to eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d BVI transferred US $1.6 million for purchase of the immovable property 46 Campden Hill in London UK. Section 4 of FEMA 1999 is as follows: Holding of foreign exchange, etc.- Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India. In view of the Special Provisions of Section 37 A (1) of FEMA, the Authorised Officer, on the prima facie belief that R-1 has contravened the provisions of Section 4 ibid, through purchase of an immovable property abroad for which US $ 1.6 million was transferred from India, effected seizure of mutual funds owned by R-1 of equivalent value of Rs. 10,35,20,000/- vide Seizure Order No. 01/2017 dated 08.12.2017. The Competent Authority in accordance with Section 37 A (3) ibid confirmed the seizure vide Order No. 01/MUM-CUSM/FEMA/2018-19 dated 18.05.2018. The impugned immovable property in UK was sold and funds amounting to US $ 1,610,000 /- was remitted to India on 28.06.2018. The learned AA in the impugned AO has set aside the seizure and directed the release of the seized mutual funds. 38. Learned counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel for the Appellant has relied upon the statements made under Section 37 of FEMA to state that the SDS-2 was controlled by R-1. He has argued from the statement of Shri Pranav Amin to state that all decisions relating to the SDS-2 was taken by R-1. He has further argued from the statement of Shri Mitanshu Shah (R-2) that the decisions were taken without recording the minutes and that the decisions were communicated on telephone to the SDS-2. On reading of the said statement it is observed that while R-2 has stated that the proposal for purchase of property was received telephonically and concurrence for the proposal was conveyed telephonically without drawing any minutes, the said proposal for the purchase of Guest House accommodation in UK to facilitate trading operation was received by R-1 for validation purpose. In fact, this brings out that the proposal to purchase the said property was of the Director of the SDS-2. It is an admitted fact that the SDS-2 is 100 per cent subsidiary of the SDS-1 which in turn is 100 per cent subsidiary of the WOS. R-1 made 100 per cent investment in the WOS. It is pertinent to observe here that in the aforementioned statement of R-2, tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e test is where the sole right to manage and control of the company lies." There is no documentary evidence to corroborate that either de jure control and power, or de facto control and power was with R-1 with regard to conduct of the affairs of the SDS-2. In fact, there is documentary evidence on record that the SDS-2 is registered in the British Virgin Island and has Board of Directors which demonstrate that the de-jure control and power was with the SDS-2. The Bank account statement of the SDS-2 showing debits and credits relating to trading business in Annexure VII to the present Appeal, the list of items traded by the SDS-2 with the names of parties and the value of such items, and the statement of R-2 listing transactions relating to trading business in oil and gas equipment without any intervention by R-1 go on to show that the de-facto control and power was with the SDS-2. The evidence about the circumstances under which the solitary purchase of the immovable property in UK was made, as discussed in paragraph 39, does not lead to conclusion that the SDS-2 was under the "control" of R-1. 41. The learned counsel for the Appellant has also invoked the principle of lifting of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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