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2019 DIGILAW 802 (GUJ)

FFR Software Pvt. Ltd. v. Union of India

2019-09-12

ALPESH Y.KOGJE

body2019
JUDGMENT : Alpesh Y. Kogje, J. 1. RULE. Learned Advocate Mr. Kshitij Amin waives service of Rule on behalf of respondent No. 1 and learned Advocate Mr. Amar Bhatt waives service of Rule on behalf of respondent No. 3. 2. This petition under Article 226 of the Constitution of India is filed challenging order dated 24.05.2017 passed by respondent No. 3-Reserve Bank of India. By the aforesaid order, application dated 30.12.2016 by the petitioner seeking compounding of contravention of Regulation 7 of FEMA was not entertained and returned to the petitioner. 3. Learned Advocate for the petitioner submitted that the petitioner is engaged in import-export activities and in due course of business, had made sales agreement with overseas buyers which was confirmed by the overseas buyers by purchase contract dated 15.12.2008. Against such purchases, the petitioner had received advance payment from time to time. 4.1. It is submitted that in terms of the purchase contract and the advance money received from the overseas buyer, the petitioner company was ready with the shipment to be exported. However, on various occasions, the overseas buyer requested the petitioner company to hold the shipment against the aforesaid purchase contract till their further instructions, amongst their letter dated 30.12.2008 wherein similar request was made by the overseas buyer to the petitioner company. In response to the aforesaid letter, petitioner company vide letter dated 10.01.2009 informed the overseas buyer that the ordered goods against the purchase contract are lying ready with the petitioner company for export. It is submitted that meanwhile, during the period from 14.09.2009 to 29.10.2009, for executing the aforesaid purchase contract, out of the said export advance money received from the overseas buyer, the applicant purchased 3,94,208 pcs. of men's 100% cotton knitted T-shirts costing Rs. 1,48,77,876/- in addition to the stock lying with the applicant. Thereafter, vide letter dated 24.09.2009, the overseas buyer asked the petitioner company to export 80,400 pcs. at US$ 5,70,840/- on their behalf to their sister concern i.e. one M/s. Palms International FZC. It is submitted that in view of the aforesaid letter, purchase contract No. PI /FSPL/205 dated 12.09.2009 was being entered between the petitioner company and one M/s. Palms International FZC on the terms and conditions mentioned therein. 4.2. at US$ 5,70,840/- on their behalf to their sister concern i.e. one M/s. Palms International FZC. It is submitted that in view of the aforesaid letter, purchase contract No. PI /FSPL/205 dated 12.09.2009 was being entered between the petitioner company and one M/s. Palms International FZC on the terms and conditions mentioned therein. 4.2. It is submitted that in view of the aforesaid purchase contract No. PI/FSPL/205 dated 12.09.2009 and as per the advice of the overseas buyer, the petitioner company on 10.10.2009 vide invoice No. FFR/RXP/001/09-10 dated 07.11.2009 sent the consignment of 80,400 pcs. of readymade garments for a total amount of USD 5,70,840/- to M/s. Palms International FZC, UAE. The shipping documents pertaining to the said exports were submitted to the Kalupur Commercial Cooperative Bank Limited, i.e. the authorised dealer which were accordingly adjusted against the advanced money received to the tune of USD 5,89,880/- by issuing letter No. HO/IBBD/2009-10 dated 11.11.2009. 4.3. It is submitted that thereafter, as per the directions of the overseas buyer, the petitioner company entered into a purchase contract No. TS/FFR/01-09/10 dated 02.11.2009 with one M/s. World Link International FZC of UAE for exporting 5,90,000 pcs. of Men's 100% cotton knitted T-shirts at USD 7.25 per pcs. amounting to USD 4,27,7,500 at various terms and conditions mentioned therein. However, citing bad market conditions, once again, the overseas buyer vide letter dated 12.02.2010 made request to the petitioner company for holding the shipment till their further instructions. 4.4. It is submitted that the petitioner company, left with no option, sold the entire balance stock of 3,31,808 pcs. lying with the petitioner company at Rs. 7 per pc. in local market incurring huge losses. The said losses came to be duly reflected in the annual accounts of the petitioner company. After a long period of one and half year, the overseas buyer by way of letter dated 15.02.2011, requested the petitioner company to export the goods to one M/s. World Link International FZC as per the purchase contract No. TS/FFR/01-09-10 dated 02.11.2009. In response to the same, the petitioner company vide letter dated 05.03.2011 informed the overseas buyer that due to their financial crunch, the petitioner company had already sold the cargo in the local market. At the same time, the petitioner company also requested the overseas buyer that now they would require minimum three months period to make the said amount. 4.5. At the same time, the petitioner company also requested the overseas buyer that now they would require minimum three months period to make the said amount. 4.5. It is submitted that on 02.05.2011, the petitioner company intimated the overseas buyer that they would not be in a position to export the goods at old contracted price as the price of cotton has been increased to an extent of 200%. In spite of understanding the situation of the petitioner company, the overseas buyer vide letter dated 10.05.2011 threatened the petitioner company of taking legal action and that they would inform the said dispute to the Indian Embassy and also ensure that the petitioner company's name is put in blacklist in Embassy of UAE. 4.6. It is submitted that the petitioner company, with no other alternative but to amicably settle the issue, addressed letter dated 17.05.2011 offering other commodities for shipment against the aforesaid purchase contract No. TS/FFR/01-09/10 dated 02.11.2009 as well as also agreeing to bear the loss which would occur in their business. In this regard, contract dated 09.07.2011 was entered between the petitioner company and the overseas buyer to export cut and polished diamond for an amount of USD 10,00,000/- on various terms and conditions mentioned therein. To comply with the said contract and looking towards the past record of the overseas buyer, without requesting for the advance money, during the period 07.07.2011 to 15.07.2011, the applicant made investment of Rs. 4,41,30,493/- and purchased cut and polished diamond from M/s. Maruti Enterprises. 4.7. It is submitted that pursuant to the aforesaid contract, the petitioner company exported cut and polished diamond amounting to USD 9,08,919.50 in three different consignments bearing Invoice Nos/FFR/B/DMD/01-2011-12 dated 18.07.2011, FFR/B/DMD/02-2011-12 dated 22.07.2011 and FFR/B/DMD/03-2011-12 dated 03.08.2011. 4.8. It is submitted that in view of the aforesaid circumstances, the petitioner had to comply with Regulation 16 of FEMA and for that reason, sought permission from RBI to send export document directly to overseas buyer and fulfill his export obligations. Such request was denied by RBI by letter dated 25.10.2011 on the ground that investigation is undertaken by the Directorate of Enforcement, Ahmedabad. 4.9. It is submitted that the petitioner addressed letters dated 15.07.2013 and 19.11.2013 to respondent No. 2-RBI for regularizing export done to overseas buyer and as no decision was taken on the aforementioned letters, the petitioner filed SCA No. 17973 of 2013. 4.9. It is submitted that the petitioner addressed letters dated 15.07.2013 and 19.11.2013 to respondent No. 2-RBI for regularizing export done to overseas buyer and as no decision was taken on the aforementioned letters, the petitioner filed SCA No. 17973 of 2013. This Court by order dated 19.12.2016 issued direction to the authority to take a decision on its own merits within a period of 180 days provided under the Rules. It is submitted that as the direction of this Court was to take decision on merits, still respondent No. 2, instead of deciding the application on merits, returned the application only on the ground that proceedings are initiated by Enforcement Directorate under the Prevention of Money Laundering Act, 2002 ("the Act" for short). 4.10. It is submitted that Rule-8 of the Foreign Exchange (Compounding Proceedings) Rules, 2000 ("the Rules" for short) prescribes procedure for compounding. Rule-4 provides for power of RBI to compound contravention. As the case of the petitioner fell under Rule-4, the application was made to respondent No. 3 and therefore, application for compounding ought to have been considered as provided under Rule-8. It is submitted that Rule-8 provides for an opportunity of being heard and therefore, application ought to have been decided after affording hearing to the petitioner, more particularly in view of the direction of this Court in the previous petition. It is submitted that no such opportunity of hearing has been given. However, by relying upon notification dated 20.02.2017, by which proviso was added to sub-rule (2) of Rule 8 of the Rules, the application of the petitioner was rejected. 4.11. It is submitted that the application of the petitioner was prior to coming into effect proviso to sub-rule (2) of Rule 8 of the Rules. The said proviso came into effect on 20.02.2017 whereas application of the petitioner is of 30.12.2016. The amended proviso cannot be given retrospective effect unless specifically provided for. 4.12. It is also submitted that the reason for returning the application mentioned in the impugned communication is amended proviso and the information of the Directorate of Enforcement, Mumbai that the proceedings have been initiated under the Act against the petitioner and its three directors. However, under specific instructions, learned Advocate for the petitioner states that till date, insofar as the present transactions are concerned, no proceedings under the provisions of the Act are initiated. However, under specific instructions, learned Advocate for the petitioner states that till date, insofar as the present transactions are concerned, no proceedings under the provisions of the Act are initiated. It is also submitted that even if any proceedings under the Act are initiated against the petitioner or his directors and if the same are not pertaining to the very transaction, still, proviso will not be applicable to the facts of the present case. Hence also, the case of the petitioner deserves consideration. 5. As against this, learned Advocate for the respondent-RBI submitted that the amendment, adding proviso to sub-rule (2) of Rule 8 of the Rules will apply in full force to the facts of the present case. He placed reliance on the judgment of Division Bench of the Bombay High Court in case of New Delhi Television Limited Vs. Reserve Bank of India & Ors., to submit that in identical set of circumstances, the Bombay High Court has given a decision that it is not open for the RBI to adjudicate upon the decision taken by the Enforcement Directorate to initiated proceedings against the party under the provisions of the Act. He also relied upon judgments of the Apex Court in cases of Tikaram & Sons Ltd. Vs. Commissioner of Sales Tax, UP, reported in AIR 1968 SC 1286 , Gurbachan Singh Vs. Satpal Singh & Ors., reported in AIR 1990 SC 209 , United Bank of India, Calcutta Vs. Abhijit Tea Co. Pvt. Ltd. & Ors., reported in (2000) 7 SC, 357, in support of his argument for retrospective applicability of the amended provisions. 6. Learned Counsel for the Union has produced in sealed cover for perusal communication of the Enforcement Directorate with regard to proceedings under the provisions of the Act. 7. Having heard learned Advocates for the parties and having perused documents on record, it appears that the issue revolves around following of procedure laid down under Rule 8 of the Rules. Due to facts narrated in the preceding paras, the petitioner filed application dated 30.12.2016 for compounding of contravention of Regulation-7 of the Foreign Exchange Management Act, 1999. The compounding proceedings are governed by the Foreign Exchange (Compounding Proceedings) Rules, 2000. Rule-3 defines "Compounding Authority" to be a person authorized by the Central Government, be it an officer of Enforcement Directorate or an officer of RBI. The compounding proceedings are governed by the Foreign Exchange (Compounding Proceedings) Rules, 2000. Rule-3 defines "Compounding Authority" to be a person authorized by the Central Government, be it an officer of Enforcement Directorate or an officer of RBI. In the instant case, the compounding authority is an officer of RBI not below the rank of Assistant General Manager, i.e. respondent No. 3. Rule-4 provides for power of Reserve Bank to compound contravention. 8. It appears that after application to respondent No. 3 on 30.12.2016, there was no decision by the respondent authorities on such application and hence, petition being SCA No. 17973 of 2013 came to be filed, wherein by order dated 19.12.2016, following directions were issued:- "2. Without expressing any opinion on merits, it is provided that in case if the petitioner Company and its Director/s file an independent application under the provisions of the Foreign Exchange Management Act, 1999 and/or the Foreign Exchange (Compounding Proceedings) Rules, 2000, before respondent No. 2-Authority, the same shall be considered on their own merits, within a period of 180 days statutorily provided under the Rules. The order that may be passed and communicated to the petitioner Company or its Director/s should be a reasoned order." 8.1. The directions issued by this Court appear to be to consider the independent application filed under the provisions of the Foreign Exchange Management Act, 1999 and/or the Foreign Exchange (Compounding Proceedings) Rules, 2000 and to consider the same on merits within stipulated period. It appears that thereafter the impugned decision is taken on 24.05.2017, wherein it is communicated to the petitioner as under:- "2. In this connection, please refer to the proviso to Rule 8(2) of the FEM (Compounding Proceedings) Rules, 2000, which states that "any proceeding initiated under rule 4, if the DoE is of the view that the said proceedings relates to a serious contravention suspected of money Laundering, terror financing or affecting sovereignty and integrity of the nation, the compounding authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating for adjudicating contravention under section 13". The Directorate of Enforcement, Mumbai has since informed us that proceedings have already been initiated under PMLA Act 2002, against your organization and its three directors, and hence they have strong objection against entertaining any compounding application from your organization and /or its directors. The Directorate of Enforcement, Mumbai has since informed us that proceedings have already been initiated under PMLA Act 2002, against your organization and its three directors, and hence they have strong objection against entertaining any compounding application from your organization and /or its directors. We are, therefore, constrained to return your compounding application together with all related documents and compounding application fees. 3. Further, the compounding application fee received with the above application has been credited to your A/c No. 524011027455 with Kotak Mahindra Bank Ashram Road branch, Ahmedabad-380009 through NEFT on May 24, 2017." 9. The aforesaid decision appears to have been based on the proviso to sub-rule (2) of Rule-8 of the Rules. Rule-8 reads as under:- "8. Procedure for compounding-(1) The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings. (2) The Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to all the concerned as expeditiously as possible as and not later than 180 days from the date of application: [Provided that with respect to any proceeding initiated under rule 4, if the Enforcement Directorate is of the view that the said proceeding relates to a serious contravention suspected of money Laundering, terror financing or affecting sovereignty and integrity of the nation, the compounding authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating for adjudicating contravention under section 13]" 10. The amendment providing for proviso to sub-rule (2) of Rule-8 of the Rules has come into effect by notification dated 20.02.2017 in exercise of powers conferred under Section 46 read with sub-section (III) of Section 15 of the Foreign Exchange Management Act, 1999. The said proviso reads as under:- "Provided that with respect to any proceeding initiated under rule 4, if the Enforcement Directorate is of the view that the said proceeding relates to a serious contravention suspected of money Laundering, terror financing or affecting sovereignty and integrity of the nation, the compounding authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under section 13" 11. The Court is inclined to consider the first and foremost argument of the learned Advocate for the petitioner that the decision which is taken under the impugned communication is required to be passed after providing an opportunity of hearing to the petitioner whereas this contention is opposed by learned Advocate for the respondent-RBI on the ground that in view of the proviso to sub-rule (2), moment the Enforcement Directorate is of the view of such proceeding relating to a serious contravention suspected of money laundering, etc., the compounding authority is not to proceed with the matter and to remit the case to the appropriate adjudicating authority for adjudicating contravention. Without entering into the issue of retrospective applicability of the amended sub-rule (2), on the ground of statutory requirement of providing an opportunity of hearing, the Court is inclined to consider the case of the petitioner. The contention of learned Advocate for the respondent-RBI that with the coming into force of the amended proviso to sub-rule (2), moment the Enforcement Directorate communicated information about existence of serious proceeding under the Prevention of Money Laundering Act, 2002, jurisdiction of the RBI to exercise its power to compound would cease. This contention cannot be upheld as the amended proviso to sub-rule (2) does not in any way affect obligation of the respondent-RBI under sub-rule (2) to take a decision after providing an opportunity of hearing. When the information is brought to the notice of the RBI, before remitting the case to the appropriate adjudicating authority under the amended proviso, exercise of taking decision under sub-rule (2), does not get diluted in any manner. It is open for the compounding authority, after considering the objections received from the Enforcement Directorate and affording an opportunity of hearing, to take a decision to remit the case to the appropriate adjudicating authority so that requirement of sub-rule (2) of Rule-8 is complied with fully. In the instant case, merely coming into existence of the proviso will not render requirement of sub-rule (2) of Rule-8 nugatory. The proviso is in addition to sub-rule (2) and has to be read through sub-rule (2) and not otherwise as canvassed by learned Advocate for the respondents, that is to say what is provided under sub-rule (2), cannot be read through the amended proviso to sub-rule (2) under the subsequent notification dated 20.02.2017. 12. The proviso is in addition to sub-rule (2) and has to be read through sub-rule (2) and not otherwise as canvassed by learned Advocate for the respondents, that is to say what is provided under sub-rule (2), cannot be read through the amended proviso to sub-rule (2) under the subsequent notification dated 20.02.2017. 12. The Bombay High Court in the judgment in case of New Delhi Television Limited (supra), in paras-76 to 79 has held as under:- "76. A perusal of Rule 4, therefore, leaves us in no manner of doubt that the applicant cannot seek compounding of the contravention as of right, but the law permits him to make an application to the Compounding Authority and the Compounding Authority has to exercise the power of compounding subject to the directions, control and supervision of the Governor of the RBI. The power to compound is not unbridled, unchecked, much less unregulated. It has to be exercised in accordance with the Act and the Rules and subject to the directions, control and the supervision of the Governor of RBI. The law eschews every possibility of unguided exercise of this power. As far as the power of the Enforcement Directorate to compound contravention is concerned, that is to be found in Rule 5. In that case as well, the Director of Enforcement has to direct, control and supervise the exercise of power to compound contravention. Rule 6 is important and it says that where any contravention is compounded before the adjudication of any contravention under section 16, no inquiry shall be held for adjudication of such contravention in relation to such contravention against the person in relation to whom the contravention is so compounded. However, Rule 7 says that where the compounding of any contravention is made after making of a complaint under sub-section (3) of section 16, such compounding shall be brought by the authority specified in rule 4 or rule 5 in writing, to the notice of the Adjudicating Authority and on such notice of the compounding of the contravention being given, the person in relation to whom the contravention is so compounded shall be discharged. Rule 8, after its amendment reads as under:- "8. Procedure for compounding.-(1) The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings. Rule 8, after its amendment reads as under:- "8. Procedure for compounding.-(1) The Compounding Authority may call for any information, record or any other documents relevant to the compounding proceedings. (2) The Compounding Authority shall pass an order of compounding after affording an opportunity of being heard to all the concerned as expeditiously as possible and not later than 180 days from the date of application. Provided that with respect to any proceeding initiated under rule 4, if the Enforcement Directorate is of the view that the said proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation, the Compounding Authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under section 13." 77. A bare perusal of Rule 8, therefore, would indicate that procedure of compounding is that the Compounding Authority has a discretion to call for any information, record or any other documents relating to the compounding proceedings and there is an outer limit to pass an order of compounding a contravention and that order has to be passed not later than 180 days from the date of the application. 78. It is not, therefore, right to urge that the Compounding Authority has to proceed only on the materials brought by the person seeking contravention, but the authority is free to call for any information, record or any other document relevant to the compounding proceedings. That information or record or any other document so long as it is relevant to the compounding proceedings, the Compounding Authority has a discretion to call for it and that may include anything in relation to adjudication as well. Therefore, absent the proviso, does not mean that the Compounding Authority cannot call for the relevant information, but in its discretion, it is free to call for it. Secondly, there being an outer limit for the exercise of the power that the authority is expected to adhere to that time limit. 79. All that the proviso does is to enable the Enforcement Directorate to communicate its view with regard to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation. Secondly, there being an outer limit for the exercise of the power that the authority is expected to adhere to that time limit. 79. All that the proviso does is to enable the Enforcement Directorate to communicate its view with regard to a serious contravention suspected of money laundering, terror financing or affecting sovereignty and integrity of the nation. Once that view is recorded and communicated, it is the bounden duty of the Compounding Authority and namely the RBI in this case not to proceed with the matter, but to remit the matter to the adjudicating authority for adjudication of the contravention. Therefore, no compounding is then permissible. In any event, if the compounding results in making payment, but that payment is not made, then, no compounding can come into effect. No contravention can be compounded if an appeal stands filed under sections 17 and 19 of the Act." 13. The Court has perused the communications of the Enforcement Directorate which are addressed to the Special Director, Directorate of Enforcement, Western Region, Mumbai, which refer to the proceedings of justification to the export obligation by the petitioner regarding cut and polished diamond under three separate purchase contracts. However, as the Court is not entering into the merits of the impugned decision, no further reference is made to such communication, leaving it upon respondent No. 2, in exercise of powers under sub-rules (1) and (2) to take a decision after affording an opportunity of hearing to the petitioner to contend that the so called proceedings of the Enforcement Directorate are not pertaining to the transaction in question. After hearing the petitioner, it is open for respondent No. 3 to take a decision in accordance with law. 14. The impugned communication dated 24.05.2017 is set aside accordingly. Respondent No. 3 is directed to take a fresh decision in accordance with law, particularly follow requirement of sub-rule (2) of Rule 8 of the Rules. The petition stands allowed to the aforesaid extent. Rule is made absolute. No order as to costs. 15. The sealed cover is directed to be returned to learned Advocate Mr. Kshitij Amin forthwith.