Appellate Tribunal Confirmed Penalty Under FEMA for Non-realisation of Export Proceeds, However, Reduced Penalty from INR 75 Lacs to INR 5 Lacs

M/s Ralson Industries Limited (“The Appellant”) was engaged in business of manufacture, sale and export of bicycle tyres and tubes. During 2002 to 2007, the Appellant made export to M/s Emirate Technologies Ltd. LLC, Dubai, UAE. The Appellant received full payment against the exports. However, during 2007, the overseas buyer withheld the payment of INR 3.36 crores on account of defects found in the exports. The Appellant contended that the Managing Director of the Appellant had personally visited the overseas buyer to persuade the overseas buyer to make good the payment. The Respondent held that the Appellant has contravened the provisions of Section 8 of the FEMA Act, 1999  r/w Regulation 3 of the Foreign Exchange Management (Realization, Repatriation & Surrender of Foreign Exchange) Regulation, 2000 and Regulation 8 & 9 of FEMA (Export of Goods and Services) Regulation, 2000. Therefore, penalty of INR 75,00,000/- was imposed on the Appellant company and penalty of Rs.5,00,000/- each was imposed on the 4 Directors.

The Appellant contended that it has taken all reasonable steps to recover the outstanding dues. Further, The application filed by the Appellant before the RBI seeking writing off the outstanding amount is pending before the RBI.  The Respondent contended that neither the Appellant nor RBI informed at any stage that RBI has accepted to write off the amount pending for realisation. Also, the Appellants failed to provide any evidence to show efforts to re-import the goods to India, and any legal step taken against the claim of the buyer. 

Hon’ble Tribunal held that the application to write-off the outstanding export proceeds remains pending before the RBI. Hence, it cannot absolve the Appellants of the statutory obligation to realize the export proceeds within the prescribed period.  The failure to realize the export proceeds amounting to ₹3.36 crores within the stipulated time and to obtain approval for write-off from RBI constitute violation of the statutory mandate. However, Since the amount not recovered is merely about 9% of the value of the exports made and the director of the company has visited Dubai for the realisation of the outstanding export proceeds, the penalty amount is reduced from INR 75 Lacs to INR 5 Lacs. Further, penalty is waived on 2 directors appointed after the event of contravention and penalty on remaining 2 directors was reduced from INR 5 Lacs to INR 2.5 Lacs

1. Brief facts of the case:

• M/s Ralson Industries Limited (“The Appellant”) was engaged in business of manufacture, sale and export of bicycle tyres and tubes. 

• The Appellant held a very good reputation as an export house and had also been awarded certificates and had been facilitated by the Government and its agencies for the outstanding export performance. 

• During 2002, the Appellant received several orders from M/s Emirate Technologies Ltd. LLC, Dubai, UAE for export of Bicycle Tyres and Tubes. The Company exported 426 consignments during the period 2002 to 2007, out of which 8 consignments were found defective. 

• The Appellant had received full payment against the exports. However, during 2007, the overseas buyer withheld the payment against 32 consignments out of a total of 61 consignments exported in the year 2007. 

• This withholding was related to the defects found in the exports made during the preceding years i.e. 2002 to 2006. 

• The amount withheld by the overseas buyer was USD 820090 equivalent to Indian Rs. 3.36 Crores. 

• The Appellant contended that the Managing Director of the Appellant had personally visited the overseas buyer, twice, in the years 2010 and 2013, to persuade the overseas buyer to make good the payment withheld by them since 2007.

• The Assistant Director of Enforcement, Indore filed a Complaint 18.12.2014 alleging that the Appellant company had contravened the provisions of FEMA. The Joint Director, Directorate of Enforcement, Ahmedabad, based on such a complaint, issued an SCN dated 29.12.2014 to the Appellant and its four Directors calling upon them to show cause why the inquiries may be not held against them for contravention of the provisions of FEMA, 1999. 

• Accordingly, the respondent issued the impugned order dated 26th March, 2015 holding that The Appellant has contravened the provisions of Section 8 of the FEMA Act, 1999  r/w Regulation 3 of the Foreign Exchange Management (Realization, Repatriation & Surrender of Foreign Exchange) Regulation, 2000 and Regulation 8 & 9 of FEMA (Export of Goods and Services) Regulation, 2000.

• Penalty under Section 13 (1) of FEMA Act of Rs 75,00,000/- was imposed on the Appellant company and penalty of Rs.5,00,000/- each was imposed on the 4 Directors of the company namely Sh. Rajnish Pahwa, Sh. P. S. Sharma, Sh. Praveen Chawla and Sh. Sham Sunder.

• Therefore, the Appellant filed the appeal.

2. Relevant Legal Extract

Relevant legal provisions are reiterated below for ready reference:

1. Section 8 of the FEMA Act, 1999 is reiterated below:

“Realisation and repatriation of foreign exchange.—

Save as otherwise provided in this Act, where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. “

3. Contention of the Appellant

The Appellant contended that:

• The Appellant has taken all reasonable steps to recover the outstanding dues.

• The application filed by the Appellant before the Reserve Bank of India (“RBI”) seeking writing off the outstanding amount in terms of the RBI and FEMA policies is pending before the RBI. 

• Also, the Appellant was entitled to a "self-write off" to the extent of 10% of the FOB value of exports each year. 

4. Contention of the Respondent

The Respondent contended that:

• Neither the Appellant nor RBI informed at any stage that RBI has accepted to write off the amount pending for realisation. 

• Further, the Appellants have failed to provide any evidence to show efforts to re-import the goods to India, and any legal step taken against the claim of the buyer. 

• The Appellant has unrealised export proceeds amounting to Rs.3.36 crores, which does not come within 10% of unrealized export proceed limit for the period 2002-2006. 

• By this act of omission, they have contravened the provisions of FEMA.

5. Analysis by the Hon’ble Appellate Tribunal

Hon’ble Tribunal made following analysis:

• The Appellants have failed to establish that they had taken all reasonable steps for realization of the export proceeds as mandated under Section 8 of FEMA, 1999 read with Regulation 9 of the FEMA (Export of Goods and Services) Regulations, 2000. 

• The application to write-off the outstanding export proceeds remains pending before the RBI. Hence, it cannot absolve the Appellants of the statutory obligation to realize the export proceeds within the prescribed period. 

• The argument regarding the defective nature of goods and withholding of payments by the foreign buyer, though plausible but cannot override the mandatory foreign exchange realization requirements under FEMA. 

• The Appellant placed reliance on the Judgement of the Hon’ble Supreme Court in the matter Shailendra Swarup versus Deputy Director, Enforcement Directorate [(2020) 16 SCC 561]. We find merit in this contention to the limited extent that the said judgment clarifies the principle of personal liability under Section 42 of FEMA. 

• Applying the ratio of the Apex Court, and considering the factual matrix of the present case, it is observed that:
  
  • Shri Sham Sunder and Shri Praveen Chawla: Appointed as director subsequent to the period during which the alleged contraventions occurred. Therefore, it would be incorrect and unjust to hold them liable for violations which took place prior to their appointment. 
  • Sh. Rajnish Pahwa: In-charge of marketing and exports;
  • Sh. P. S. Sharma: Looking after production and management. 

• Hence, the responsibility for the contravention, if any, can reasonably be attributed only to those who were in charge of and responsible for the conduct of the company’s business during the relevant period.

• Therefore, contravention of Section 8 of FEMA, 1999 and aforementioned Regulations stands duly established against the Appellant. 

• The failure to realize the export proceeds amounting to ₹3.36 crores within the stipulated time and to obtain approval for write-off from RBI constitute violation of the statutory mandate.

• The Appellant exported goods of value $ 97,25,987.51 and against such value the Company had realised US $ 88,45,230.75. The amount of export proceeds which was not realised during the material period was US $ 8,80,756.76 which is merely about 9% of the value of the exports made. 

• Further, the director of the company has visited Dubai for the realisation of the outstanding export proceeds. 

• Therefore, the penalty imposed is on the higher side. 

6. Final Order

Hon’ble Appellate Tribunal held that:

• The Penalty on the Appellant Company is redacted to Rs.5,00,000/-. 

• Shri Sham Sundar and Shri Praveen Chawla were appointed as Directors after the period during which the contravention occurred and, therefore, they cannot be held liable for the acts or omissions of the Company committed prior to their appointment. Accordingly, such a penalty is set aside.

• Shri Rajnish Pahwa and Shri P. S. Sharma are liable for penalty. However, the penalty amount is reduced to Rs. 2,50,000/- for each of the two Directors. 

7. Conclusion

The FEMA provisions are an integral part of every business who is in any manner engaged in any transaction across the border. Many people are under the impression that since we don’t have any foreign holding or foreign funding we are not governed by the FEMA provisions. However, any person doing merely export of goods is also governed by the FEMA provisions. Therefore, every business needs to seek professional assistance to ensure FEMA compliance. Any non-compliance under FEMA shall attract huge penalties. Our team at V J M Global hold expertise in FEMA Compliances and ensure that FEMA provisions are complied with to avoid any legal consequences.