Case: Pheroze Kudianavala Consultants Private Limited Vs. Foreign Exchange Regulation Appellate Board

To understand the controversy, it is necessary to set out facts which gave rise to the filing of these appeals. M/s. Pheroze Kudianavala Consultants Private Limited is a Company incorporated under the provisions of the Companies Act, 1956 with the object of providing services of consultancy in India and abroad in the architectural and Engineering disciplines involved in building industry and the planned development of towns. The Company was incorporated on October 18, 1972 and at the relevant time, there were five Directors, Shri Pheroze hormusji Kudianavala being the Managing Director. In the year 1974, M/s. Tata Exports and M/s. Shapporji Pallonji and Company requested the managing Director to meet His Highness Khalifa Houtubas, Sheikh of Abu. Dhabi, as several projects were in the offing in U. A E. for which the Company could render appropriate guidance and expertise. For exploration of business, the Reserve Bank of India granted foreign exchange on September 20,1975. The Chairman of the Company visited United Arab Emirates and oman and found encouraging response from the authorities concerned. The company thereupon decided to establish a local office to undertake consultancy jobs. An application to open a branch office in United Arb Emirates was made on December 5, 1975 and the Reserve Bank of India granted permission on January 29, 1976 The Company started functioning at Abu dhabi from February, 1976. The goodwill secured by the Company Abu dhabi brought new contracts and enquiers from Behrain, Kuwait and the sultanate Oman. The Company sought permission of Reserve Bank of india for opening office in Oman, Dubai, Sharjah, Behrain and Kuwait and reserve Bank of India granted permission on August 31, 1976 to open office at Muscat. In regard to opening offices at other places, the Company was advised that unless the proposed contracts were approved by the ministry of Finance, Government of India, permission could not be granted. The Company, in the mean while, had entered into contracts to be executed at Behrain and especially a project for construction of an Indian School under the auspices of Indian community in Behrain. The Indian Embassy in Behrain had given effective encouragement and support for project of an indian School. The Company thereupon decided to supply technical know how and consultancy services for construction of an Indian School. The company applied to the Reserve Bank of India and the Government of india seeking permission under Section 27 of Foreign Exchange Regulation act 1973 (hereinafter referred to as the act) for rendering technical services, but was informed by the Government of India on January 15, 1978 that there is no need for a specific Government approval under Section 27 of the act. During years 1978 to 1981, the Companys Middle East Brach Offices handled as many as 1989 consultancy services Jobs and many of them directly with Government Departments of Sheikhdoms and from these jobs, the company earned foreign exchange of the Indian equivalent of Rs. 2. 75 crores. The projects undertaken were worth Rs. 90 Crores and to complete these projects, the Company had imported from India building material worth rs. 35 Crores. The projects undertaken by the Company generated innumerable jobs for the Indian Labour and at least Rs. 25 Crores were remitted to india by the labour employed.( 2 ) THE Chief Enforcement Officer, Bombay, Foreign Exchange Regulation branch, recorded statement of the Chairman of the Company on January 30, 1980. A further statement was recorded on December 2, 1980. These statements were in respect of certain projects undertaken by the Company and the foreign exchange earned therefrom. The Directorate of Enforcement took no steps for a period of 5 years from the date of recording the statements and only on March 30, 1985, six show cause notices were issued to the Company and the Directors for the breaches committed by the Company between year 1976 to 1982. The first show cause notice alleges that the company without permission of the Reserve Bank of India opened a branch office at Dubai and contravened the provisions of Section 73 (3) of the Act. The secondnotice alleges that the Company had opened a branch office at Muscat without obtaining the permission of Reserve Bank of India and thereby contravened the provisions of Section 73 (3) of the Act. The thirdnotice was in respect of opening of overseas branch at kuwait without prior permission of Reserve Bank of India. Thenotice No. VI was in respect of the complaint that the Company had borrowed funds from Indian Banks in foreign exchange without the permission of Reserve Bank of India and contravened the provisions of Sections 8 (1) and 9 (1) (c) of the Act. Show Cause Notices Nos. IV and V are required to be set out in detail as the controversy in this group of appeals is in respect of the decisions recorded in respect of contraventions alleged in these two Show Cause notices. Show Cause Notice No. IV sets out that during year 1977, the company was appointed Architect for the Indian School at Bahrain and the final bill amount of the contract was Behrain Dinars 6,86,070/and the Company was entitled to receive Behrain Dinars 41,164,20 at 6% from the Indian school, Behrain. The Show Cause Notice alleges that the Company received only 29,000/Behrain Dinars and forgo 12,164. 20 Behrain Dinars and by doing so, did something without the permission of Reserve Bank of India and contravened the provisions of Section 16 (l) (b) of the Act. The Show Cause notice is also issued to the Directors of the Company for alleged breach of provisions of Section 68 (1) of the Act on the ground that the Directors were in charge of and responsible to the Company for the conduct of the business at the time of contravention. Show Cause Notice No. V alleges that during June, 1982, the Company completed certain contracts of M/s. Shebra Bin Arab, M/s. AH Chied Al fazari, M/s. Said Khamis and M/s. Gaith Mohanna Saeed, all of United arab Emirates and whereby payments on account of fees amounting to 82,332. 61 Dhs. became due to the Company. The notice alleges that without general or special permission from the Reserve Bank of India, the Company refrained from taking action which had the effect of securing that the receipt of the fees was delayed and thereby provisions of Section 16 (1) (a) of the Act were violated. The Show Cause Notice further alleges that the Directors were in charge of and responsible to the Company for the conduct of the business at the relevant time and, therefore, liable under Section 68 (1) of the Act.( 3 ) THE Company and the Directors filed their replies to all the six show Cause Notice and by order dated March 29, 1989, the Special Director enforcement Directorate (Foreign Exchange Regulation Act. 1973), Bombay, held that charges in respect of Show Cause Notice Nos. I,ii, III and VI were not proved. The adjudicating authority held that the charges levelled under show Cause Notices Nos. IV and V were proved both against the Company and the Directors. In respect of Show Cause Notice No. IV, the adjudicating authority imposed penalty of Rs. 2,75,000/on the Company and Rs.on five Directors As regards the charges levelled under Show cause Notice No. V, the adjudicating authority imposed penalty of Rs. 2,00,000/on the Company and Rs.each on the Directors The company and the Directors preferred appeals before the Foreign Exchange regulation Appellate Board as prescribed under Section 52 (1) of the Act, pending these appeals, the Assistant Director of Enforcement Directorate issued six opportunity notices on November 9, 1989 in exercise of powers under proviso to Section 61 of the Act calling upon the Company and its directors to explain why prosecution as contemplated under Section 56 of the Act should not be filed. The Company and the Directors filed their replies on November 16, 1989 pointing out that the adjudicating authority had found that the Company and the Directors were not responsible for the alleged contravention of charges levelled under Show Cause Notices Nos. I, ii III and VI and in so far as the imposition of penalty in respect of charges under Show Cause Notice Nos. IV and V, the Company and the Directors have preferred appeals, The Company and the Directors did not receive any reply from the Assistant Director and thereupon instituted Writ Petition No. 3368 of 1989 on November 29, 1989 on the Original Side of this Court under article 226 of the Constitution of India to restrain the Assistant Director from launching dismissed by the learned Single Judge but the statement of the Counsel for the Enforcement Directorate that prosecution will not be launched in respect of charges levelled by Show Cause Notices Nos. I, II, III and VI was recorded. The Company and the Directors feeling aggrieved by summary rejection of Writ Petition have preferred Appeal No 4 of 1990. The appeal was admitted by the Division Bench and the Director of Enforcement was restrained front launching any prosecution against the Company and the Directors. ( 4 ) THE appeals preferred by the Company and the Directors against the order of adjudicating authority holding the Company and the Directors responsible and levying penalty in respect of charges covered by Show Cause notices Nos IV and V were heard by Foreign Exchange Regulation Appellate board and by order, dated August 28, 1990, the appellate authority came to the conclusion that the charges levelled by Show Cause Notice No. V were not proved both against the Company and the Directors and the order of the adjudicating authority levying penalty could not be sustained. As regards violation alleged by Show Cause Notice No. IV, the appellate authority held that the breach under Section 16 (1) (b) was established against the Company and the order of imposition of penalty against the Company by the adjudicating authority could not be faulted. The appellate authority further held that the Chairman and the other Directors of the Company could not be held responsible in accordance with the provisions of Section 68 (1) of the Act and thereupon exonerated the Directors and set aside the order of imposition of penalty levied by the adjudicating authority. The Company, feeling aggrieved by the order of the appellate authority holding that the breach under Section 16 (1) (b) of the Act in respect of charges covered by Show Cause Notice No. IV was proved, has filed First appeal No. 13 of 1992 in accordance with Section 54 of the Act. The enforcement Directorate has filed First Appeal Nos. 722 to 727 of 1991 to challenge the order of the appellate authority exonerating the Directors in respect of charges covered by Show Cause Notice No. IV and exonerating the company and the Directors of charges covered by Show Cause Notice No. V. All these appeals as well as Original Side Appeal No. 41 of 1990 are placed on board for final hearing andexamining the contention urged by Shri Nariman, learned Counsel appearing for the Company, it is necessary to briefly set out the nature of allegation made by Show Cause Notice No IV. The Show cause Notice alleges that the Company was appointed Architects for construction of an Indian School at Behrain and the contract was for Behrain dinarsThe Company was to receive Behrain Dinars, 41,164. 20 at the rate of 6% of the final bill amount. The Company actually received 29,000/Dinars and forgo 12,164. 20 Dinars and thereby did something which resulted into the Company ceasing to receive an amount due thereby contravened section 16 (1) (b) of the Act. The reply filed by the Company before the adjudicating authority claims that the Company was never entitled to receive fees amounting to 6% of the cost of the contract amount as consultancy fees. The Company claimed that the minutes of the Board of Governors of the School and which were forwarded to Shri Srinivasan,of the Companys Dubai Branch establishes that the Company was entitled to receive only 3% of the contract value. The Company relied upon certain correspondence and the documents to claim that it was agreed that the Company would donate 50% of the consultancy fees to the Indian School. The company, therefore, claimed that it was incorrect to suggest that the Company was to receive 6% of the contract value and consequently, the complaint that the Company violated provisions of Section 16 (1) (b) of the Act was not justified. The adjudicating authority held that the Company was to receive emoluments at the rate of 6% and no satisfactory evidence was produced to establish that the Company was to receive only 3% of the total amount of the contract and, therefore, the Company had contravened provisions of section 16 (1) (b) of the Act. The appellate authority, after examining the contentions urged on behalf of the Company held that the documents relied upon do not conclusively prove that the Company had no enforceable claim for 6% of the total amount of the contract as consultancy fees. The appellate authority record conclusion in the following words:"in view of the above, we feel that the contention that the Company had no "right to receive" 6% of the fees is a debatable one and the ground urged by Shri Nariman that the Company would not have been able to successfully claim 6% even in a legal action, hypothetical. "

Reasoning: It is not in dispute that the contract between the Company and the Governing board of the Indian School for construction of School is not by a written document but is to be gathered from the correspondence. The first letter from Indian School, Behrain is dated April 13, 1977 and was addressed to the Chairman of the Company. The letter, inter alia, recites that the Indian school confirms the design prepared by the Company and also confirms the appointment of the Company as consulting Architects. The letter further recites that the professional services in contention with the project will be at the rate of 6% of the total cost of the project excluding the value of the land. The next letter is dated, September 22, 1977 from the Chairman of the board of Governors of the Indian School to the State Bank of India who were the Companys Bankers in Behrain. The letterrecites that under the terms of the agreement, the Company is entitled to 6% of the project cost. The next letter is dated January 6, 1978 from the Chairman of the Board to Shri Srivasan, Vice President of the Company and the letter notes the gesture made by the Vice President at the Board meeting of September 9, 1977 to contribute to the worthy cause of School by donating an amount almost equal to 50% of the Companys fees. The next letter is dated march 30, 1978 from the Chairman of the Board of Governors of Indian school, Behrain to the Vice President of the Company andrecites that the Vice President desired a letter from the Chairman of the Board to facilitate opening of Bank account and which would givefacility the letter notes that the Vice President desired that the consultancy fees should be mentioned at the rate of 6% of the total amount of the project in order not to lower the standing of the Company in the business world although the Company will ultimately make a donation to the school almost equal to 50% of the fees charged. Thereafter on December 16, 1980, a telex message was forwarded by Dubai Office to the Company in Bombay and where the fact of reducing the fees to 3% of the cost of the project was referred to. On October 2, 1979, the Chairman of the Company informed the Vice President Shri Srinivasan that reducing the rate of agreed fees in connection with the Indian School at Behrain would cause a pecuniary loss and would face acute embarrassment as the Reserve Bank of India will never believe that the fees were reduced and that too without anything in writing. Thereafter, the statement of the Chairman was recorded on January 30, 1980 and December 2, 1980 by the Chief Enforcement Officer, Bombay in respect of the reduction of fees and the Chairman clearly stated that the reduction was agreed because the Indian community in Behrain, the Bankers of the company and the Indian Embassy staff requested to reduced the fees. On this material, it was contended that it is impossible to conclude that the company has right to receive 6% of the total amount of the cost of the project. The appellate authority declined to accept the claim of the Company on three counts. The first reason is that there was no written agreement between the parties altering the original rate, the second ground is that the wording of the Minutes of the meeting of the Board of Governors does not equivocally state that the Company agreed to reduce the rate. The third reason is that the intention of the Company to honour the promise of giving concession to the School as reflected in the minutes do not go to the extent of pinning down to a 50% concession. In our judgment, each of the reason is unsustainable. The appellate authority overlooked that the original contract was not reduced to writing but was reflected only in the correspondence and consequently alteration in respect of quantum of fees need not be by separate written agreement. The Minutes of the meeting did not unequivocally state that the Company is agreeable to reduce the quantum of fees is also not accurate The Minutes establish that the School authorities appreciated the gesture of the Company to reduce the fees by assuring to give donation of the amount equivalent of 50% of the consultancy fees The third reason that the Minutes do not go to the extent of pinning down to a 50% concession cannot establish that the Company had a right to receive 6% of the fees. It cannot be overlooked that the Company was trying to secure contracts in a foreign country and while undertaking the project of an Indian School in a foreign country was justified in giving concession and that too at the behest of the Indian community, the staff of the Indian Embassy and the Bankers of the Company. In these circumstances, the claim of the Company that the provisions of Section 16 (1) (b) of the Act are not attracted deserves acceptance. The contravention under Section 16 (1) of the Act can arise only when the Company has a right to receive foreign exchange Once, it is found that the Company had a right to receive only 3% of the total cost of the project of constructing School, then the charge levelled under Show Cause Notice no IV must fall to thethe present case, the Company had assured to donate before completion of the project and before determination as to what quantum of consultancy fees could be recovered The Company bad agreed to give 50% of the fees to the Indian School or in other words, to charge only 3% of the total cost of the project as fees. This agreement prior to the date of completion of the project, in our judgment, clearly establishes that the right to receive was only at 3% and not 6% as assumed by the department. In these circumstances, the appellate authority also found that the claim of the Company is a debatable one. In our judgment, once the appellate authority came to that conclusion, then it was not proper to uphold the order of adjudicating authority which was passed in quasi criminal jurisdiction. In these circumstances, the appeal preferred by the Company is required to be allowed and the levy of penalty on the Company in respect of violation of Section 16 (1) (b) of the Act in respect of charge covered by show Cause Notice No. IV is required to be setour judgment, on the facts and circumstances of the case, it is clear that the Directors cannot be treated as a person committing contravention because the liability is only of person who at the time of the contravention was in charge of and responsible for the Company. The plain reading of(1) of Section 68 of the Act makes it clear that the expression "other person" does not necessarily mean only the Directors. The Legislature contemplated that a person whether he is Director or otherwise will be liable provided such person was in charge of and responsible for the Company at the time of contravention. The claim of the Department is that the contravention took place when on behalf of the Company. Shri Srinivasan agreed to reduce the fees from 6% to 3%. It is not the claim of the department that any of the Directors of the Company were in charge of the affairs of the Company at Behrain at the time of contravention, but on the other hand, the evidence on record clearly establishes that Shri Srinivasan, the Vice President posted at Behrain was in sole charge of the affairs of the Company at behrain and if any contravention has takes place, only Shri Srinavasan could be held liable. Shri Zaiwala had no explanation why the show cause notice was not served against Shri Srinivasan but Shri Nariman submitted that the reason was that Shri Srinivasan was removed from service and at his behest the Enforcement Directorate had commenced proceedings. In our judgment, the appellate authority was not accurate in holding that the Chairman and the Director was liable under(1) of Section 68 of the Act but was entitled to be relieved because of the proviso toIn our judgment, on the facts and circumstances of the case,(1) is not attracted and, therefore, it was unnecessary to turn to the proviso. Even otherwise, we are unable to find any infirmity in the conclusion recorded by the appellate authority that the Directors could not be held responsible in view of proviso to sub section (1) as the Directors were not aware of the contravention and had exercised all due diligence to prevent such occurrence. In our judgment, the appeal preferred by the Department to challenge the order of the appellate authority holding that the Directors are not responsible for the contravention referred to in Show Cause Notice No. IV is not required to bewe heard Shri Zaiwala and shri Nariman on merits of the charge covered by Show Cause Notice No. V. In our judgment, the charge covered by Show Cause Notice No. V cannot be sustained. The charge was tried to be sustained by the Department by merely relying upon the statement of the Chairman recorded on March 4, 1983. The perusal of the statement leaves on manner of doubt that the company was not guilty of delaying the recovery of amount which was due. The contravention under Section 16 (1) (a) takes place when a person has a right to receive foreign exchange and intentionally delays the receipt thereof. The contravention cannot be assumed even if there is no intention and the delay occurs for reasons which are beyond the control of the person. Shri Nariman submitted that the statement of the Chairman recorded by the enforcement Directorate clearly pointed out the steps taken for realisation of dues from parties based at Behrain and the inability to recover the same. The learned Counsel further pointed out that the Company was indebted to Bank of Baroda in respect of the projects undertaken in Behrain and other countries and that debt was discharged inspite of the fact that the company could not recover anything from the parties based at Behrain. There is considerable merit in the submission of the learned counsel that the company cannot be faulted because though the Company had right to receive, the payment could not be recovered. The delay on the facts and circumstances of the case cannot be because of any inaction and that too intentionally on the part of the Company. The company was to recover a substantial amount from the Defence Forces of behrain Government and the other debtors were also residents of Behrain. The statement of the Chairman indicates that the Defence Forces were not even willing to meet the representative of the Company. The statement further establishes that the Government of India as well as the Reserve Bank of India declined to give any assistance. It is not difficult to imagine that the Company could not have instituted any legal action at Behrain without the requisite foreign exchange and even if the foreign exchange is available, it would be extremely difficult to prosecute actions on a foreign soil. Shri Zaiwala could not dispute the accuracy of the statements made by the Chairman before the enforcement authorities and, therefore, it is impossible to hold that the company had contravened the provisions of Section 16 (1) (a) of the Act by intentionally delaying recovery of the amount which the Company had a right to receive. It is impossible on facts relied upon by the Department to bold that the Company was liable to penalty for contravention. As the Company was not liable, the question of holding the Directors liable does not arise. In our judgment, on merits, the charge levelled by Show Cause Notice No. V is not, at all, sustainable. Shri Zaisvala was unable to explain why the Enforcement department waited almost for more than three years to serve Show Cause notices in respect of alleged violation in the year 1982. In these circumstances, in our judgment, the order of the appellate authority in respect of Show Cause notice No. V is not required to be disturbed, though for different reasons. 9. Shri Nariman very fairly stated that the Original Side Appeal No 41 of 1990 will not survive in view of the disposal of the remaining appeals. This appeal was preferred to challenge the order of summary dismissal of Writ petition and which was filed due to the apprehension that the Enforcement directorate will launch prosecution against the Company and the Directors. The apprehension no longer survives as all the Show Cause Notices stand discharged and, therefore, Appeal No. 41 of 1990 does not survive.