Foreign Nationals Qualifying as "Persons Resident in India" Under FEMA — Karnataka High Court Affirms Tribunal's Order in Joy of India Case
Background and Overview
The Karnataka High Court recently pronounced its ruling in a significant matter concerning the interpretation of the term "person resident in India" as defined under the Foreign Exchange Management Act, 1999 (FEMA). The case arose from enforcement proceedings initiated by the Directorate of Enforcement against the respondents, culminating in an adjudication order that imposed penalties and directed confiscation of assets. The High Court ultimately dismissed the appeal preferred by the Special Director and upheld the Appellate Tribunal's order setting aside the said adjudication order.
This judgment carries considerable importance for foreign nationals residing and conducting business in India, as it clarifies the scope and applicability of Section 2(v) of FEMA — the provision that defines who qualifies as a "person resident in India" — and the consequential implications for FEMA compliance obligations.
Genesis of the Dispute
Complaint and Show Cause Notice
The matter originated when the Deputy Director of the Directorate of Enforcement, Bengaluru, filed a complaint on 09.03.2015 under Section 16(3) of the Foreign Exchange Management Act, 1999, alleging that the respondents had contravened several provisions of FEMA along with the applicable regulations then in force.
Acting on this complaint, the Joint Director issued a show cause notice dated 13.03.2015, calling upon the respondents to explain:
- Why adjudication proceedings under
Section 16of FEMA ought not to be initiated against them for the alleged contraventions - Why the assets mentioned in the notice ought not to be confiscated under
Section 13(2)of FEMA
Adjudication Order of 28 June 2016
Following the adjudication proceedings, the Joint Director passed an order dated 28.06.2016 holding the respondents guilty of contravening the provisions of FEMA. Exercising powers under Section 13(1) of FEMA, the Joint Director:
- Imposed various monetary penalties on the respondents
- Ordered confiscation of bank balances (amounting to Rs. 508/- and Rs. 9,499/- respectively in two accounts maintained by the second respondent)
- Directed confiscation of land measuring 3237 sq. ft. at Site Nos. 41 & 56, Khata No. 88, Survey No. 116/2, Challakere Village, K.R. Puram Hobli, Bangalore East Taluk, Bengaluru, along with the building constructed thereon
The cash penalties were required to be deposited with the Directorate of Enforcement within 45 days from the date of receipt of the order.
Proceedings Before the Appellate Tribunal
The respondents challenged the Joint Director's adjudication order before the Appellate Tribunal (SAFEMA, FEMA, PMLA, NDPS, PBPT Act), New Delhi. By its order dated 12.09.2019 passed in Appeal No. FPA-FE-02/BNG/2018, the Appellate Tribunal allowed the appeal and set aside the adjudication order dated 28.06.2016.
Key Findings of the Appellate Tribunal
The Tribunal's reasoning rested on several important factual and legal conclusions:
Residential Status: The respondents had resided in India for more than 182 days during the preceding financial year 2008-2009 at the time of establishing the business and purchasing the property. Accordingly, they satisfied the definition of "person resident in India" under
Section 2(v)of FEMA.RBI Communication: Before purchasing the immovable property, the respondents had proactively approached the Reserve Bank of India (RBI). The RBI communicated that no prior permission was required provided the respondents fulfilled the criteria under
Section 2(v)of FEMA.Lawful Remittance Channels: The purchase consideration for the immovable property was received through authorised banking channels, and the bank had duly issued Foreign Inward Remittance Certificates (FIRCs) evidencing the same.
Income Tax Compliance: The first respondent firm, namely "Joy of India", had been assessed to income tax from Assessment Year 2010-11 onwards and had continued paying income tax through Assessment Year 2017-18, further demonstrating its resident status and lawful conduct.
On the basis of these findings, the Tribunal held that there was no violation of FEMA and accordingly set aside the order of confiscation and penalty.