IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE A.K.BASHEER & THE HONOURABLE MR. JUSTICE P.Q.BARKATH ALI THURSDAY, THE 17TH JUNE 2010 / 27TH JYAISTHA 1932 MFA.No. 176 of 2004() --------------------- A.NO..500/2003 of APPELETTE TRIBUNAL FOR FOREIGN EXCHANGE, NEW DELHI .................... APPELLANT(S): ACCUSED NO.1: --------------------------- M/S/CHOICE TRADING CORPORATION P.LTD., PRSENTLY HAVING ITS OFFICE AT CHOICE HOUSE, ATLANDIS, M.G.ROAD, KOCHI 15, REP. BY ITS MANAGING DIRECTOR, MR.JOSE THOMAS. BY ADV. SRI.SREELAL N.WARRIER RESPONDENT(S): RESPONDENT/COMPLAINANT; -------------------------------------- SPECIAL DIRECTOR OF ENFORCEMENT, ENFORCEMENT DIRECTORATE, MINISTRY OF FINANCE, GOVERNMENT OF INDIA, LOK NAYAK BHAVAN, 6TH FLOOR, KHAN MARKET, NEW DELHI 110 003. BY C.G.C. SRI.P.J.PHILIP THIS MISC. FIRST APPEAL HAVING COME UP FOR ADMISSION ON 17/06/2010 ALONG WITH MFA NO. 186 OF 2004 MFA NO. 191 OF 2004, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: A.K.BASHEER & P.Q.BARKATH ALI, JJ. - - - - - - - - - - - - - - - - - - - - - M.F.A. Nos.176, 186 and 191 OF 2004 - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 17th day of June, 2010 JUDGMENT Basheer, J. These three appeals have been filed by a Private Limited Company, its Managing Director and Executive Director respectively, under Section 35 of the Foreign Exchange Management Act, impugning the orders passed by the Appellate Tribunal for Foreign Exchange, New Delhi. 2. The short question that has been raised before us is whether the penalty imposed on the appellants is justified in the facts and circumstances of the case. 3. Relevant facts, which led to the initiation of proceedings against the appellants, may be briefly noticed. Appellant company was granted permission by the Reserve Bank of India under Section 16 of the Foreign Exchange Regulation Act to start a “ Wholly owned Subsidiary ( WOS)” in the United States of America with two specific conditions; namely that the company shall : MFA.Nos.176,186 & 191 of 2004 2 a) declare annual dividend of 50% of profits after tax or 20% of the accumulated reserves whichever is higher. The company was further directed that the earnings shall be repatriated to India in free Foreign Exchange through normal banking channels as soon as the company became entitled thereto, b) submit Annual Performance Reports ( APR) and Audited reports after finalisation of accounts and entitlements as per host country regulations. 4. A true copy of the licence issued by the RBI dated December 14, 1992 is available on record. 5. It is beyond controversy that the company faced certain hurdles in complying with the conditions stipulated by the RBI at the initial stages. Therefore, proceedings were initiated by the Enforcement Directorate against the appellants under Section 13 of the Foreign Exchange Management Act 1999 for violation of the MFA.Nos.176,186 & 191 of 2004 3 provisions contained in Section 16(1) A and also Section 49 of the Foreign Exchange Regulation Act. In fact, it is the admitted position that the Directorate commenced investigation in the year 1999 and a show cause notice was issued to the appellants in the year 2001. In response to the notice issued by the Adjudicating Authority, it was contended by the appellants that the charges levelled against them were wholly unsustainable. It was specifically pointed out that the company had been apprising the RBI from time to time about the financial constrains of the WOS and explain the reasons for the inability to comply with the directives issued by the RBI at the time of grant of licence. It was also pointed out that the company had made a specific request to the RBI seeking for certain relaxations to grant some more time for retention of the amount. In fact, it was brought to the notice of the authority that a favourable order was expected from the RBI. 6. However, the Adjudicating Authority after considering the above and other contentions raised by the appellants and the Directorate, took the view that the appellants had contravened the provisions contained in Section 16(1) of FERA 1973 and accordingly MFA.Nos.176,186 & 191 of 2004 4 directed the company to pay a penalty of Rs. 5 lakhs for the said violation. The Managing Director and Executive Director were imposed with a penalty of Rs. 2 lakhs each. However, the Adjudicating Authority found that the appellants were not guilty of the charge levelled against them under Section 49 of the Act . 7. The above order was challenged by the appellants before the Appellate Tribunal for Foreign Exchange, New Delhi. The Tribunal while concurring with the finding entered by the Adjudicating Authority however took the view that in the interest of justice and fairness, it would be appropriate to reduce the penalty to the tune of 40%. With that modification, the appeals were partly allowed. The above orders passed by the Tribunal are under challenge in these appeals. 8. Sri.Sreelal Warrier, learned counsel for the appellants submits that the two authorities concerned have committed serious illegality and irregularity in glossing over the vital fact that Reserve Bank of India had, by its order dated March 28, 2002, permitted the appellant company to retain its profits till the Wholly Owned MFA.Nos.176,186 & 191 of 2004 5 Subsidiary achieve its net worth to the tune of US$.4,00,000/-. 9. A perusal of the order passed by the Adjudicating Authority will show that there is considerable force in the above contention raised by the learned counsel. It is also on record that even thereafter, the RBI enhanced the above limit to US$.30,00,000/- by its order dated October 31,2002. 10. However, Sri.P.J.Philip, learned standing counsel, who appears for the respondents, submits that the proceedings initiated against the appellants cannot be faulted even though the Reserve Bank of India had subsequently granted some concession in the matter of retention of profits by Wholly Owned Subsidiary. It is pointed out by him that in the year 1992, when the Reserve Bank issued licence to the appellants, it was specifically made clear that the licence was subject to satisfaction of the conditions imposed by it. Any violation of the above conditions could have attracted penal consequences as contemplated under Section 49 and 50 of FERA. It is further pointed out that the Directorate had initiated action against the appellants way back in the year 1999 ,when it was noticed that the appellants had failed to comply MFA.Nos.176,186 & 191 of 2004 6 with the directions issued by the RBI. Ultimately, proceedings commenced before the Adjudicating Authority only after conducting a full fledged enquiry, which took nearly 2 years. The appellants were given sufficient opportunity of hearing before the proceedings were initiated. It may be true that the company might have approached the licencing authority seeking some relaxation in the matter of conditions imposed by it. But still, going by the provisions contained in the Act, the Directorate was justified in initiating action against the appellants. 11. Having considered the rival contentions of the parties and having perused the materials available on record, we are of the view that the order issued by the RBI on March 28, 2002 and subsequently on October 31, 2002 will have to be given due credence and weight. 12. It is conceded by learned counsel for the respondents that the Reserve Bank is the final authority as far as these matters are concerned. However, according to him, once the appellants were found to have violated the directions governing the grant of licence, it was incumbent on the Directorate to initiate action as mandated under law. That may be so, but in the facts and circumstances of the case, we are MFA.Nos.176,186 & 191 of 2004 7 satisfied that the penalty imposed on the appellants cannot be justified. Therefore, the order passed by the Appellate Tribunal, which is under challenge under these appeals, is set aside. The amount deposited shall be refunded to the appellants. The Appeals are allowed in the above terms. A.K.BASHEER, JUDGE P.Q.BARKATH ALI, JUDGE sv. MFA.Nos.176,186 & 191 of 2004 8