By TIOL News Service

NEW DELHI, JAN 20, 2014: THE Appellant in SLP No.7655 of 2011 is the company and the Appellant in SLP No.7657 of 2011 was also proceeded against as the Executive Director of the company. The Respondent issued a show cause notice against the Appellants dated 29th April 2002, wherein it was alleged that the Appellant in SLP No.7655 of 2011 sold foreign currency to the value of 1,47,000 USD and 1000 Sterling £ of UK between 29.4.1997 to 5.6.1997 through unauthorized persons deputed by M/s Hotel Zam Zam in violation of Sections 6(4), 6(5), 7 & 8 of the Foreign Exchange Regulation Act, 1973 ( FERA  ) as well as paragraph 3 of the Memorandum of FLM issued by RBI. The Appellants were called upon to show-cause why penalty should not be imposed against them under Section 50 of FERA read with Section 49 (3) & (4) of Foreign Exchange Management Act ( FEMA ). Subsequently, by order dated 28.10.2004 the Respondent imposed a penalty of Rs.50 ,000 /- each on both the Appellants. The Appellants preferred appeals before the Appellate Tribunal for Foreign Exchange, which were also dismissed by order dated 2.7.2008. The above said orders of the Original Authority, as well as the Appellate Authority, were the subject matter of challenge before the Division Bench of the High Court in FEMA Appeal Nos.3 & 4 of 2008. The Division Bench having confirmed the orders of the lower authority, as well as the tribunal, the Appellants have come forward with these appeals before the Supreme Court.

Mr. Salve, senior counsel, appearing on behalf of the Appellants in his submissions mainly contended that there was no violation at all in the matter of Sale and Purchase by the Appellant company to M/s Hotel Zam Zam in relation to the sale of 1,47,000 USD , as well as 1000 Sterling £ of UK in between 29.4.1997 and 5.6.1997, inasmuch as both the Appellant company, as well as M/s Hotel Zam Zam are duly licensed Full Fledged Money Changers, in short FFMC . According to the senior counsel, such transactions as between the licensed FFMCs are wholly authorized under the provisions of FERA , as well as the Memorandum of FLM of the Reserve Bank of India. The senior counsel further contended that in the confiscation proceedings initiated against the Appellants, as well as M/s Hotel Zam Zam , as per the order dated 21.8.1998 it was found that no statutory violation can be attributed to the Appellants and therefore, the imposition of penalty as against the Appellants by the Original Authority and the confirmation of the same by the Tribunal and the Division Bench are therefore liable to be set aside.

As against the above submissions, Mr. Bagaria , the Addl. Solicitor General would contend that by virtue of the statutory stipulations contained in sub-sections (4) and (5) of Section 6, Section 7 and 8 of FERA read along with paragraph 3 of the Memorandum of FLM of the RBI, there was a clear violation of the statutory provisions committed by the Appellants, hence the penalty imposed by the Original Authority as confirmed by the Appellate Authority, as well as the High Court cannot be faulted.

After analyzing the legal provisions, the Supreme Court observed that the following facts are not in controversy:

a) The Appellants, as well as M/s Hotel Zam Zam , are licensed FFMC .

b) The Appellants sold foreign exchange of 1,47,000 US $ and 1,000/- sterling £ of UK as between April 1997 to June 1997 to M/s Hotel Zam Zam .

c) The purchase value of the above foreign currency was at a higher rate than the existing retail rate that prevailed in the market.

d) The purchase value was paid by M/s Hotel Zam Zam by way of Pay Orders .

e) Prior to the transaction, at the instance of the Appellants, a Xerox copy of the RBI license of M/s Hotel Zam Zam was produced and based on which the transaction was effected.

f) The transactions were effected on 29.04.1997, 06.05.1997, 29.05.1997 and 05.06.1997 and the amounts transacted were 7,000 USD , 1000 Sterling £ of UK, 40,000 USD and 1,00,000 USD on the respective dates. In all 1,47,000 USD and 1000 Sterling £ of UK were sold by the Appellants to M/s Hotel Zam Zam .

g) All the above transactions were made and the foreign currency was handed over to Shri Rakesh Mahatre , a representative of M/s Hotel Zam Zam.

Based on the above undisputed facts relating to the transaction as between the Appellants and M/s Hotel Zam Zam , the Original Authority reached a conclusion that the Appellants failed to verify the authorization in favour of the persons concerned to buy/sell foreign exchange on behalf of the said money changers as contemplated under the relevant provisions. In other words, it was concluded that it was incumbent upon the Appellants by virtue of the terms of instructions contained in paragraph 3 of the Memorandum of FLM issued by RBI to have verified the bonafides of the persons deputed to them by M/s Hotel Zam Zam before handing over the foreign currencies to such persons. It was, therefore, ultimately concluded that the said failure on the part of the Appellants resulted in contravention of the directions contained in paragraph 3 of the Memorandum of FLM read with Section 6(4), 6(5) and 7 of FERA . Ultimately the Appellants were found guilty for the said contraventions and the penalty came to be imposed. The said order of the Original Authority was confirmed by the Tribunal, as well as the Division Bench of the High Court .

The Supreme Court noted that on each occasion the transaction was negotiated by the Branch Manager of the Appellant with one Ms. Pinky of M/s Hotel Zam Zam . It is not the case of the Respondent that neither of these two persons who indulged in the transaction of money changing business were not the authorized officials of their respective establishments. If the said factum relating to the business transactions, which had taken place as between the Appellants and M/s Hotel Zam Zam is not in controversy, the Supreme Court failed to see how a violation of paragraph 3 can be alleged as against the Appellants.

In its considered opinion that in the peculiar facts of this case and having regard to the nature of transactions which had taken place as between the Appellants and M/s Hotel Zam Zam in the manner in which it has been narrated in the impugned order of the Original Authority as noted by the Tribunal, as well as the Division Bench of the High Court, the Supreme Court is convinced that there was no scope to allege a violation of paragraph 3 of the FLM or for that matter Sections 6(4) and 6(5) of FERA , 1973. Based on the interpretation of Sections 6(4), 6(5) of FERA , 1973 and paragraphs 3 & 9 of the FLM , the Court held that the Original Authority, the Appellate Tribunal as well as the Division Bench of the High Court failed to appreciate the issue in the proper perspective while holding the appellant guilty of the violation alleged. Therefore, none of the judgments relied upon by the respondents for the proposition that concurrent findings of fact should not be interfered with does not apply to the facts of this case.

Sale on a higher rate: in the impugned orders of the Original Authority, as well as the Tribunal and the Division Bench, the sale effected by the Appellants on a rate higher than the rate prevailing in the market was not the basis for the alleged violation of paragraph 3 of the FLM read with Sections 6(4), 6(5) and 7 of FERA . In the confiscation order passed by the Customs Authorities, where again the Appellants were also one of the noticees , no fault was found as against the Appellants on that ground.

The Supreme Court was convinced that the impugned orders by which the Appellants were found guilty of the violation of paragraph 3 of FLM read with Sections 6(4), 6(5) and 7 of FERA and the consequential imposition of penalty of Rs.50 ,000 /- was wholly unjustified. The impugned orders are liable to be set aside and they are accordingly set aside. If the Appellants have parted with the penalty amount imposed under the impugned orders, the Respondent is directed to refund the same to the Appellants along with simple interest at the rate of 6% per annum, within two months from the date of this judgment. The appeals are allowed with the above directions.

(See 2014-TIOL-02-SC-FEMA)