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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 ..... ure or Wholly Owned Subsidiary engaged in a bona fide business activity. Obviously, if the business activity involves illegal activities say either narcotic trafficking or money laundering such business activity cannot be regarded as bona fide. From such an obvious example it appears that the requirement that the business activity is to be bona fide cannot be restricted to that of the WOS but will also apply to the business activities of the SDS-1 and of the SDS-2. No Indian Party shall make any direct investment in a foreign entity engaged in real estate business or banking business is what is stipulated under Regulation 5 (2) of the ODI Regulations. The definition of Direct Investment outside India under Regulation 2 (e) of the ODI Regulations is investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment. Regulation 2 (q) of the ODI Regulations defines Wholly Owned Subsidiary to mean a foreign entity formed, registered or incorporated in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of trade. The Appellant has argued that the respondent has not produced evidence to show that the property was being used as a Guest House. Such insistence is not warranted in view of the fact that a solitary purchase of real estate abroad does not constitute business. In fact, the respondents have submitted evidence for trade transactions of the SDS-2 which have also been relied upon by the Appellant in the documents enclosed with the Appeal. Since, the SDS-2 did not indulge in the real estate business, question a) raised in paragraph 30 is answered in favour of the respondents. In view of the aforementioned the charge of the contravention of Section 6 (3) (h) FEMA r/w Regulations 5 and 6 (2) (ii) of the ODI Regulations does not hold good. The declarations filed by R-1 with the Authorised Dealer include ODI Forms. As discussed in paragraph 27, R-1 made direct investment of US $ 2.4 million as equity contribution in the WOS registered in Singapore. The investment was made in three tranches. For each of the tranche, Form ODI was filed with the Authorised Dealer. The ODI Form has declaration to the effect that the purpose of forming wholly owned subsidiary in Singapore is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Appellant has also invoked the principle of lifting of the corporate veil. Since, it is admitted fact that the direct investment by R-1 flowed through the WOS and the SDS-1 to the SDS-2 which has also been declared to the Authorised Dealer, the principle of lifting of the corporate veil is not applicable as the factual status of each of the entity has been made patent. In view of the aforementioned discussions question c) raised in par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 charged for diversion of US $ 1,600,000/- (equivalent to Rs. 10,35,20,000/-) from the declared purpose of downstream investment in trading activities to its actual utilization for the purchase of the said residential real estate abroad in contravention of Section 10 (6) of FEMA. M/s. Nirayu Pvt. Ltd. was further charged for acquiring and holding the said residential real estate in UK through its step down subsidiary M/s. Whitefield Global Investments Ltd. BVI in contravention of Section 4 of FEMA. The SCN also charged S/Shri Mitanshu Shah and Rasesh Shah for the aforementioned contraventions of FEMA and its Regulations under Section 42 (1) of FEMA for being Directors of M/s. Nirayu Pvt. Ltd. (erstwhile M/s. Whitefield Chemtech Pvt. Ltd.). The SCN also charged Shri Chirayu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, 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 08.12.2017 seized mutual funds of the said amount. The Seizure Order was confirmed by the Competent Authority vide Order No. 01/MUM-CUSM/FEMA/2018-19 dated 18.05.2018 under Section 37 A (3) of FEMA. The Complaint stated that R-1 vide letter dated 29.06.2018 informed that the property in UK was sold and funds of US $ 1,610,000/- was remitted to India in their Axis Bank Account on 28.06.2018. It is pertinent to mention that R-1, R-2 R-3 filed Appeals No. FPA-FE- 44/MUM/2018, FPA-FE-45/MUM/2018 FPA-FE-46/MUM/2018 respectively against the order dated 18.05.2018 of the Competent Authority before this Tribunal. However, this Tribunal vide order dated 11.09.2018 disallowed the applications of the appellants to set aside the seizure. The Tribunal vide order dated 27.03.2019 allowed the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngapore 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 to the person who has purchased the foreign exchange. 8. Ld. AA in the impugned AO held that the contravention of Section 4 of FEMA has not been established as it is the SDS-2 which is incorporated in the British Virgin Island which purchased the 3BHK apartment in UK. Since, the SDS-2 does not qualify as person resident in India as per Section 2 (v) of FEMA and it is not R-1 which acquired the said property, the charge is not proved. 9. Ld. AA has held that as none of the charges alleged in the SCN has been established against R-1, the contraventions alleged against R-2, R-3 Noticee No. 4 of the SCN also fall through, as the contravention against R-2 and R-3 were invoked under Section 42 (1) of FEMA and against Noticee No. 4 under Section 42 (2) of FEMA. The Ld. AA has revoked the Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent 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 and Regulations thereunder by the respondents. He stated that the case relates to contravention of Section 6 (3) (h) and not Section 6 (3) (a) since there is no transaction relating to Foreign Security and what is being questioned is acquisition of immoveable property outside India. 14. He referred to Regulation 5 (2) of The Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (ODI Regulations) under which the respondents have been charged. He stated that there are three requirements under Regulation 5 (2). Firstly, it relates to Indian Party. Secondly, it relates to direct investment in foreign entity. Thirdly, it relates to real estate business. He explained that direct investment outside India, Indian Party and real estate business are defined in Regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion 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, implies that the ODI Regulations covers the step down subsidiary. 19. He further argued that the statement dated 17.08.2017 of Shri Mitanshu Shah brings out that the entities in Singapore, UAE BVI formed the group of the Respondent Company to explore trading opportunities outside India (Question No. 5, 6 7). He further drew attention to the statement dated 19.03.2018 of Shri Paresh P Shah the Chartered Accountant whereby he admitted that Mr. Chirayu Amin had purchased property in London in the name of the BVI entity for which he had advised to purchase through LRS route. (Questions No. 29 30). He also drew attention to statement dated 08.06.2018 of Shri Mitanshu Shah that the trading which the BVI entity was engaged in related to Oil and Gas business (Question No. 3). He therefore, concluded that the group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal 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 refuted the applicability of the provisions of the Income Tax Act to that of FEMA. He also stated that there is distinction between the branches, offices and agencies as mentioned under Section 1 (3) of FEMA from Wholly Owned Subsidiary and step down subsidiary. He emphasized that FEMA and its Regulations lay down separate framework for Wholly Owned Subsidiary and step down subsidiary. He pleaded that the framework of FEMA provides for the formation and working of the Wholly Owned Subsidiary and step down subsidiary and no other law or its provisions can be brought in as to define new parameters for their existence or functioning. He also pleaded that the seizure made should be released because the foreign exchange involved has been remitted to India and the provisions of Section 37 (A) (4) should come into effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments. 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 under Regulation 2 (k) of the ODI Regulation are met by R-1. Direct investment of US $ 2.4 million was made by R-1 in three tranches in M/s. Techno Global Holdings Pvt. Ltd. in Singapore (the WOS). The WOS in turn invested US $ 2,063,625 in M/s. Techno Global Trade Investments Ltd. UAE (the SDS-1). The SDS-1 invested US $ 1,954,767 and the WOS invested US $ 150,000 in M/s. Whitefield Global Investments Ltd. BVI (the SDS-2). The SDS-2 availed loan of US $ 3.9 million from one M/s. Silverwood Enterprises Ltd., BVI. These facts are not disputed by both the parties. 27. Regulation 5 (2) of the ODI Regulations requires that no Indian party shall make any direct investment in a foreign entity engaged in real estate business or banking business, unless otherwise provided for or with prior approval of the Reserve Bank. Regulation 6 (1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 investment was made in the guise of doing trading activity which was never undertaken and the foreign exchange was diverted to the real estate business. The Appeal also challenges the contention of the respondents that the real estate property was used as a guest house to facilitate trading activities. While admitting that US $ 3.9 million was taken by the SDS-2 as loan from a foreign entity, the Appeal emphasizes that US $ 1.6 million was diverted from the direct investment made by R-1 so as to buy real estate property in UK for US $ 5.5 million. It therefore, alleges that this was the true purpose of making direct investment. 29. From the documentary evidences which have been relied upon by the Appellant as mentioned in paragraph 27, the respondents appear to have fulfilled the procedural requirements for making direct investment abroad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 provisions of the Act and of the Regulation are applicable to the given facts. 31. The word bona fide has not been defined under FEMA, however, as mentioned in the impugned AO, bona fide means in good faith; without fraud or deception; honestly, as distinguished from bad faith; openly; sincerely . Regulation 6 (2) (ii) of the ODI Regulations reads as, The direct investment is made in an overseas Joint Venture or Wholly Owned Subsidiary engaged in a bona fide business activity. Obviously, if the business activity involves illegal activities say either narcotic trafficking or money laundering such business activity cannot be regarded as bona fide. From such an obvious example it appears that the requirement that the business activity is to be bona fide cannot be restricted to that of the WOS but will also apply to the business activities of the SDS-1 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulations. 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 will also need to be complied by the step down subsidiaries as well. 33. There is nothing on record to show that the WOS and the SDS-1 indulged in real estate business. No allegation has also been made to this effect. The entire controversy relates to the purchase of the residential real estate in UK by the SDS-2. It is true that out of US $ 5.5 million paid for the purchase of the said property, US $ 1.6 million was the fund which came from the SDS-1 and the WOS wherein direct investment was made by R-1. The charge made against R-1 is that the Indian Party in contravention of Section 6 (3) (h) of FEMA r/w Regulations 5 and 6 (2) (ii) of the ODI Regulations was not engaged in bona fide business activity. In this regard, the second limb of the argument of the learned counsel for the respondent is with regard to the definition of the real estate business. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 have maintained that the real estate abroad was purchased to use as a Guest House for facilitating their business of trade. The Appellant has argued that the respondent has not produced evidence to show that the property was being used as a Guest House. Such insistence is not warranted in view of the fact that a solitary purchase of real estate abroad does not constitute business. In fact, the respondents have submitted evidence for trade transactions of the SDS-2 which have also been relied upon by the Appellant in the documents enclosed with the Appeal. Since, the SDS-2 did not indulge in the real estate business, question a) raised in paragraph 30 is answered in favour of the respondents. In view of the aforementioned the charge of the contravention of Section 6 (3) (h) FEMA r/w Regulations 5 and 6 (2) (ii) of the ODI Regulations does not hold good. 34. The declarations file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 either corroborate or reject this contention it is necessary to examine whether the SDS-2 indulged in trading activities. It is already evident that the said solitary purchase cannot be regarded as real estate business. On the direction dated 23.05.2023 of this Tribunal the respondents have filed on 07.06.2023, a copy of Memo of Appeal bearing No. FPA-FE-44-46/MUM/2018 along with annexures which was earlier filed by them in the Tribunal against the Order No. 01/MUM- CUSM/FEMA/2018-19 dated 18.05.2018 of the Competent Authority confirming the Seizure Order No. 01/2017 dated 08.12.2017. In the annexures, the respondents have enclosed the list of items traded by the SDS-2 with the names of the parties and the value of such items. Moreover, bank account statement of the SDS-2 is also available as relied upon document viz Annexure VII to the present Appeal. The statement shows the amounts de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/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 for the respondent has argued that Section 4 has not been contravened since acquisition of the immovable property in UK was by the step down subsidiary in BVI which is not a resident in India. Learned counsel for the appellant has on the other hand argued that the SDS-2 is nothing but a branch / office / agency owned and controlled by R-1 which is a person resident in India. He further argued that in accordance with the definition given in Section 2 (v) (ii) of FEMA, R-1 is a body registered / incorporated in India and hence is person resident in India. Since, R-1 owns / controls the SDS-2, it is also a person resident in India in accordance with the definition Section 2 (v) (iv) of FEMA. He argued that in view of Section 1 (3) of FEMA, the provisions of the Act are applicable to the SDS-2. Among the documents submitted by the respondent on 07.08.2023 there is a copy of the Certificate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, transactions which relate to trading business in oil and gas equipment have also been listed. There is no evidence placed on record which shows that such transactions have been undertaken by the Directors of the SDS-2 with validation of R-1. It therefore follows, that while each of the subsidiary abroad is a separate entity, the aforementioned ownership structure may give scope to the influence of R-1 in certain decisions of the subsidiaries. Moreover, if the buying of the immovable property in UK is regarded as one such decision which required the validation of R-1, there is no evidence on record as to show that R-1 exercised control on the SDS-2 to obtain loan of US $ 3.9 million for the purchase of the said property. Limited influence of such kind cannot be regarded as control to deem the step down subsidiaries as branch / office / agency of R-1. 40. Learned counsel for the Appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the corporate veil. Since, it is admitted fact that the direct investment by R-1 flowed through the WOS and the SDS-1 to the SDS-2 which has also been declared to the Authorised Dealer, the principle of lifting of the corporate veil is not applicable as the factual status of each of the entity has been made patent. In view of the aforementioned discussions question c) raised in paragraph 30 is to be answered in negative. Therefore, there is no contravention of Section 4 by the respondents. In view of the aforementioned findings the seizure of mutual funds valued at Rs. 10,35,20,000/- cannot be sustained. 42. In view of the aforementioned findings that none of the charges of contravention invoked under FEMA and Regulation is established against the three Respondents (R-1, R-2 R-3), the issue raised in paragraph 25 with regard to the fourth Noticee to the SCN Shri Chirayu Amin, also gets closed. Since, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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