Appellate Tribunal Refused to Enhance Penalty Amount and Held that Section 13(1) Only Specifies Maximum Amount of Penalty

Held by Appellate Tribunal under SAFEMA

In the matter of 

M/s Union of India Vs M/s. KPH Dream Cricket Pvt. Ltd. & Anr. (FPA-FE-123/CHD/2020)

M/s KPH Dream Cricket Private Limited (“The Company”) received FDI of INR 5.12 Crores and issued 4,47,700 shares at the rate of INR 114.27 on 30.06.2008 and 10,000 shares at the face value of INR 10 each on 08.05.2008. The Company filed the form FC-GPR on 30.09.2009. 

10,000 shares were not issued at fair market value, and FC-GPR is required to be filed within 30 days from the date of receipt of FDI. Therefore, Ld. AA imposed a penalty of INR 50 Lacs on the Company and its directors. 

The Appeal is filed by the Director of Enforcement, praying for enhancement of the penalty as the contravention is sensitive and not merely technical. The AA has erred in law and facts by taking a lenient view in matters relating to sensitive contravention. The AA has ignored the provisions of Section 13 (1) of FEMA, which provides for the imposition of

penalty up to 3 times the sum involved in the contraventions.

Hon’ble Appellate Tribunal held that Section 13 (1) of the FEMA provides that the maximum penalty which can be imposed. The Section has not prescribed either a fixed amount of penalty or a minimum amount of penalty.  Therefore, the amount of the penalty that is to be imposed by the AA is a matter of discretion that is to be exercised judiciously. In the given case, we do not find that the Impugned Order is indiscreet. In fact, it is well reasoned and well spoken. In any case, there is no such requirement under the statute to impose a maximum penalty. As no reasons are reported as to how the AA has not exercised its discretion judiciously, we observe that the order of the AA cannot be interfered with.  The Appeal fails and is dismissed.

1. Brief Facts of the case:

• M/s KPH Dream Cricket Private Limited (“The Company”) received Foreign Direct Investment (FDI) of US $ 12,85,572.84 in three tranches from M/s Colway Investment Ltd., Mauritius, for the purpose of taking equity in the Company.

• These three tranches were received through Banking channels between April 2008 and June 2008. 

• As per provisions of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation 2000, the FDI received was to be reported to the RBI within 30 days of receipt. 

• The Company reported the Foreign Inward Remittances in Form FC-GPR on 30.09.2009, and a Certificate of Chartered Accountant dated 14.01.2010 was submitted through the Authorised Dealer (AD) Bank, viz HDFC Bank, in January 2010. 

• The Company issued:
  
  • 4,47,700/- shares on 30.06.2008 at Rs. 114.27 each, 
  • 10,000 shares on 08.05.2008 at par value of Rs. 10 each. 

• A Show Cause notice was issued to the company vide notice dated 27.02.2020 under the provisions of FEMA. 

• The Adjudication Order was passed by the Joint Director, Directorate of Enforcement, Chandigarh Zonal Office, wherein the following penalties were imposed:
  
  • Rs. 40,00,000/- upon the company for the contravention of the provisions of Section 6(3)(b) of FEMA Act read with Regulation 5(1) terms and conditions provided in its Schedule-I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation 2000, for not reporting the FDI received (Rs. 5,12,58,773.69) to Reserve Bank of India (RBI) within stipulated time period and for issuing shares to M/s Colway Investment Ltd., Mauritius without fair valuation of shares to the tune of Rs.1,50,000/-.
  • Rs. 10,00,000/- upon Shri Mohit Burman, Director of the Company, for the aforementioned contraventions in terms of Section 42 of FEMA.

2. Grounds for Filing an Appeal

The Appeal was filed by the Directorate of Enforcement against the impugned order, praying for enhancement of penalty in view of the contravention not being merely technical but as being sensitive, since the matter relates to transfer/issuance of shares to a Foreign Company. 

3. Relevant Legal Extract

Relevant provisions of the Act are reiterated below for ready reference:

Section 13 (1) of FEMA, 1999 is as follows:

“(1) If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the  amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.”

4. Contention of the Appellant

The Appellant contended that:

• The contravention is sensitive in nature and not merely technical as the same is related to the transfer/issuance of shares to a Foreign Company. 

• The Ld. Adjudicating Authority has erred in law and fact by taking a lenient view in the matter relating to a sensitive contravention. The imposition of a penalty by clubbing of the contraventions is erroneous. 

• While it is true that the imposition of a penalty is an exercise of discretionary power, such discretion cannot be arbitrary.

• Further, the Adjudicating Authority has ignored the provisions of Section 13 (1) of FEMA, which provides for the imposition of a penalty up to 3 times of sum involved in the contraventions.

5. Contention of the Respondent

The Respondent contended that:

• The Impugned Order has been issued after following the proper procedure of law and after having given elaborate reasons. 

• The Order is not arbitrary since reasoning has been provided in the Order, both for holding the contraventions and for imposition of the penalty amounts.

6. Findings and Analysis by the Hon’ble Appellate Tribunal

The Ld. Appellate Tribunal made the following analysis:

• While imposing penalties, the Ld. The Adjudicating Authority has taken note of the fact that the contravention of non-reporting of the FDI was a delay of only 1.5 years.

• The impugned order discussed when to classify the contraventions as technical or material, or sensitive. Therefore, it is evident that after appreciation of such distinctions that the penalties have been imposed.

• Further, 4,47,700 shares were issued in accordance with the provision for fair valuation. Merely 10,000 shares, which were issued at Rs. 10 per share which should have been issued at Rs. 25 per share.

• Therefore, the contravention was merely of the amount Rs. 1,50,000/-, which is an insignificant percentage of the amount of contravention of Rs. 5.12 Crores

• Therefore, there is no proof to show that the Adjudicating Authority acted arbitrarily in imposing a total penalty of Rs. 40,00,000/- and Rs. 10,00,000/-.

• Further, Section 13 (1) of the FEMA provides that the maximum penalty which can be imposed under the Section is 3 times the amount of contravention involved. 

• The Section has not prescribed either a fixed amount of penalty or a minimum amount of penalty. 

• Therefore, the amount of the penalty which is to be imposed by the Adjudicating Authority is a matter of discretion which, of course, is necessarily required to be exercised judiciously after taking into account the facts of the case and the evidence placed before it. 

• In the given case, we do not find that the Impugned Order is indiscreet. In fact, it is well reasoned and well spoken.

• The Adjudicating Authority has not only taken notice of the facts of the case, but also has evaluated the evidence on record. 

• In any case, there is no such requirement under the statute to impose a maximum penalty. 

• Further, in the matter of the State of MP and Ors. Vs. Bharat Heavy Electricals [(1997) 7 Supreme Court Cases 1], The Hon’ble Supreme Court held that:
  
  • In a statute prescribing the provision for a penalty equal to 10 times the amount of entry tax, the statute prescribed only a maximum limit and did not prescribe an irreducible amount, depriving the assessing authority of any discretion in this regard. 

• The stand of the State is conceded that the assessing authorities are not bound to levy a fixed penalty equal to ten times the amount of entry tax. 

• In the present case, FEMA itself provides for a penalty up to 3 times the sum involved in such contravention and thereby gives explicit scope to the Adjudicating Authority to exercise its discretion, albeit judiciously, for the imposition of a penalty.

7. Final Order

Hon’ble Appellate Tribunal held that:

• As no reasons are reported as to why the penalty imposed is low and as to how the Adjudicating Authority has not exercised its discretion judiciously, we observe that the order of the Adjudicating Authority cannot be interfered with. 

• The Appeal fails and is dismissed.