Calcutta High Court
Bata India Ltd. vs Special Director, Enforcement ... on 12 March, 1996
Equivalent citations: [1999]95COMPCAS101(CAL), 1998(60)ECC278
Author: Ruma Pal
Bench: Ruma Pal
JUDGMENT Ruma Pal, J.
1. The question involved in this appeal which has been preferred under Section 54 of the Foreign Exchange Regulation Act, 1973, is whether the appellant is entitled to the benefits of Notification No. FERA 6/74-RB, dated January 1, 1974 (see [1974] 44 Comp Cas (St.) 212), issued by the Reserve Bank of India. The notification in question had been issued by the Reserve Bank of India in exercise of powers under Section 9(1)(d) of the Act.
2. Section 9(1)(d) paraphrased, provides for an absolute embargo on any person resident in India from making any payment to any person consequent upon any order or on behalf of any person resident outside India. This embargo may be lifted by any general or special exemption by the Reserve Bank of India. Pursuant to this power the exemption notification in question was issued. The exemption notification provides :
"In pursuance of Clause (d) of Sub-section (1) of Section 9 of the Foreign Exchange Regulation Act, 1973 (46 of 1973), the Reserve Bank is pleased to permit the making of any payment in rupees by order or on behalf of a person resident outside India out of rupee funds provided by sale of foreign exchange, by such person, to an authorised dealer in India."
3. The basic facts of the case are not in dispute. The appellant manufactures shoes. It was approached by Fabrics Internationals, Djibouti. (In short FI) for supply of a specified number of sandals to a customer in Somalia. The appellant specified the rates for supplying shoes. The rate was stated by FI to be too high. The appellant agreed to a reduction. In the meantime, however, the Somalian customer had opened a letter of credit covering the price for all the shoes to be sold by the appellant at the rates quoted. FI then informed the appellant of this fact and also stated that the commission as shown in the letter of credit should be 3 per cent, instead of 2 per cent. The appellant informed FI that it would not be possible for the appellant to refund the differential amount. The appellant, however, offered to underdraw the letter of credit to the extent of the reduction and modification of the price. FI then wrote to the appellant-stating that such underdrawing might create problems in negotiating the letter of credit. It was stated by FI that the difference by reason of the subsequent modification of the price could be paid to FI's local representatives at Bombay. This suggestion was accepted by the appellant but it was made clear that the local agent in Bombay could only be paid in rupees. This was agreed to by FI. The appellant accordingly withdrew the entire amount of foreign exchange under the letter of credit and paid the difference out of the rupees from the sale of foreign exchange so earned amounting to Rs. 12,472 to FI's local agent at Bombay. About five years later, in 1985, a show-cause notice was issued by the respondent authorities to the appellant. It was alleged that by making payment of the amount of Rs. 12,472 there was a contravention of Section 9(1)(d) of the Act. The facts, as noted above, were stated in detail by the appellant in its reply to the show-cause notice. The relevant documents were also annexed to the reply.
On June 30, 1986, the Special Director passed an order in which it was stated :
"In the reply dated April 9, 1986, to this show-cause notice, Bata India Limited have not disputed the payment. They have explained that their agent, Fabrics Internationale, Djibouti, were negotiating with them one of the orders and the company was inclined to reduce the price for Boys Sandal Model 360 from US $2.80 per pair to US $2.75 per pair."
4. In fact nowhere in their answer to the show-cause notice had the appellant referred to FI as their agent. This was an assumption which was unwarranted in the facts of the case.
5. However, on this basis the Special Director held that the person who remitted the foreign exchange was the Somalian customer but the payment was made pursuant to the order of FI. This was, according to the Special Director in contravention of Section 9(1)(d) of the Act.
6. The Special Director having found the appellant guilty of having contravened the provision of Section 9(1)(d) of the Act, in exercise of the powers conferred on him imposed a penalty of Rs. 3,000 for the contravention.
7. The appellant preferred an appeal before the Foreign Exchange Regulation Appellate Board ("the board"). In the memorandum of appeal generalised grounds of appeal were taken. However, in the notes submitted before the Board by the appellant it was stated that the order had been placed by the appellant through FI and that there was nothing wrong or illegal in making payment to an agent who received the same on behalf of his principal.
8. It was also urged before the Tribunal that even if there was a violation, it was purely of a technical nature and that the appellant had always acted bona fide without any intention to violate any provisions of law. It is also pleaded that the entire foreign exchange had come into the country and that there was no question of any loss being suffered or of any foreign exchange which should have come into the country not doing so. Reliance was placed on the decision of the Supreme Court in Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26, to contend that where violation was of a technical nature and bona fides were not in question, there should be no imposition of any penalty.
9. By its decision dated August 8, 1988, the Board without any discussion proceeded to consider the case on the basis that FI was the agent of the appellant. It was, therefore, held that since payment was made by the appellant under instructions of the appellant's agent, there was a contravention of Section 9(1)(d) of the Foreign Exchange Regulation Act, 1973. As such, the penalty of Rs. 3,000 was confirmed.
10. In the grounds of appeal, filed before this court, the appellant has clearly taken the ground that the contracting party, as far as the appellant was concerned, was FI and that any remittance of the foreign exchange was made pursuant to such agreement and that there was nothing wrong in making payment at FI's behest to its agent in Bombay.
11. Before us the appellant has contended first that there was no violation of the terms of the notification and, secondly, even if there was, the violation was of a venial nature and that the Board had erred in not considering this aspect of the matter while confirming the imposition of penalty imposed by the Special Director. Diverse decisions have been cited in support of its submission which will be considered at a subsequent stage of the judgment.
12. The respondent has submitted that unless the appellant's case came within the purview of the notification quoted above, there could be no doubt that the appellant had contravened Section 9(1)(d) of the said Act. According to the respondent, the case of the appellant did not fall within the notification. It was submitted that the finding that FI was the agent of the appellant had not been specifically challenged either before the Board or before this court. That being the case, it is submitted, the finding of guilt and the imposition of penalty could not be interfered with. It is further added that the penalty could be imposed under Section 50 of the said Act and that it was a matter which was wholly within the discretion of the concerned authority. It is submitted that the question of mens rea was not at all relevant. Reliance has been placed on the decision in the case of State of Maharashtra v. Mayor Hans George, , in this connection.
13. On the factual aspect of the matter we are of the view that the assumption that FI was acting as the agent of the appellant is not at all borne out from the records. That was never the appellant's case either in answer to the show-cause notice or before the Board. But both the authorities seemed to have proceeded on this basis. Having regard to the correspondence exchanged and which have not been called in question by the respondent at any stage, it is clear that the appellant was dealing with FI either on "principal to principal" basis or, at the most, as the agent of the Somalian customer. There is no material whatsoever to suggest that the appellant had appointed FI as its agent. The commission was admittedly included as part of the price and was, therefore, payable by the Somalian purchaser.
14. Reading the notification in question with Section 9(1)(d) of the said Act it would appear that the notification is issued for the benefit of the person who has been restricted under Section 9 of the said Act from making any payment pursuant to the direction of a person resident abroad. The extent of the benefit is that a person resident in India is by virtue of the notification permitted to make payment in rupees out of the rupee funds provided by the sale of foreign exchange by order or on behalf of a person resident outside India. The object behind Section 9(1)(d) of the said Act is to prevent the loss of foreign exchange in India by forbidding transactions where in return for an amount of foreign exchange, not remitted to India, payments are made within the country in rupees. This object is protected by the notification by allowing payments in rupees at the instance of a person resident outside India, provided that the rupee payment is backed up by the equivalent amount of foreign exchange. The words "such person" must refer to the person for whose benefit the notification was issued, namely, the person resident in India.
15. Applying the notification to the facts of this case, it is clear that the appellant was entitled to make payment in rupees at the instance of a person resident outside India out of the sale proceeds of the foreign exchange received by it. Both the Special Director and the Tribunal have also proceeded on this basis. Their only objection was that the person ordering remittal was not the person providing the foreign exchange. If it is found that the person ordering remittal was the same as the person making the foreign exchange available, there would be no contravention of the notification.
16. Having regard to the facts, as already found by us, we are of the view that no distinction could be drawn in the facts of this case between FI in the capacity as representative of the person providing the foreign exchange and the person ordering the payment to be made in rupees in India. That being so, the finding of guilt by the authorities concerned cannot be sustained.
17. Grounds have been sufficiently taken before the authorities to enable us to go into the question at this stage. It has not been argued that if the ground is taken, this court would be incompetent to deal with the point. The decision in Director of Enforcement v. Central Jute Mills Co, Ltd., , clearly states that the High Court being the second appellate authority under Section 54 of the Foreign Exchange Regulation Act, 1973, has the same power as conferred on the first appellate authority.
18. We are also of the view that in any event both the authorities under the said Act erred in not specifically considering the question of propriety of imposing penalty in the facts of the case. Decisions are legion in support of the proposition that penalty will not be imposed in quasi-criminal proceedings merely because it is lawful to do so. Whether penalty should be imposed or not is a matter of discretion to be exercised judicially and on a consideration of all the relevant circumstances. In this connection reference may be made to the decisions in Hindustan Steel Ltd. v. State of Orissa , Anantharam Veerasing-haiah and Co. v. CIT , and in Cement Marketing Co. of India Ltd. v. Asst. CST, AIR 1960 SC 346. There was no such consideration in this case at all.
19. That the proceedings for imposition of penalty under the Act are of quasi-criminal nature follows from the nature of the proceedings itself. It is also settled law that where proceedings are penal in nature, they are quasi-criminal proceedings. (See the decisions in CIT v. Anwar Ali , and Shanti Prasad Jain v. Director of Enforcement, ). The consequence of this is two fold, first is the question of mens rea before finding of guilt and second is the question of mens rea once guilt has been established. The decision in State of Maharashtra v. Mayor Hans George, , is an authority for the proposition that mens rea is not required to be established in respect of an offence under Section 8(1) of the Foreign Exchange Regulation Act, 1973, and that it was an offence which creates absolute liability. The decision is not apposite. We are not concerned with the pre-guilt finding of mens rea in this case. What is important is whether the appellant had any mala fide intention of violating the law.
20. Our enquiry is only limited to the question of quantum of punishment. In this case it has not been argued that mens rea is necessary to be proved for finding of guilt. What is argued is that the lack of mens rea was a relevant consideration in determining the quantum of penalty. In view of the authorities on the point, the argument must be accepted.
There is no claim on the part of the respondent that the appellant had ever acted in a manner which was not bona fide.
21. Therefore, even if the appellant was to be held guilty under Section 9(1)(d) of the said Act, in view of the facts of the case, having regard to the trivial and venial nature of the offence, imposition of penalty should not have been made.
In the circumstances arid for all the reasons stated above, the appeal is allowed. The orders under appeal are set aside.
There will be no order as to costs.
All parties concerned are to act on a xeroxed signed copy of this judgment and order on the usual undertaking.
22. Let a xerox copy of this judgment, duly signed by the Assistant Registrar of this court, be given to the parties upon their usual undertaking to apply for the certified copy of the judgment and on payment of usual charges.