SAFEMA Tribunal Declines ED’s Plea To Increase FEMA Penalty: Discretion In Quantum Of Penalty Reaffirmed

Background Of The Dispute

The matter before the Appellate Tribunal under SAFEMA at New Delhi arose from an appeal filed by the Enforcement Directorate (ED) seeking enhancement of penalty under the Foreign Exchange Management Act, 1999 (FEMA).

The appeal was directed against Order No. ADE/SRO/BGZO/08/2019 dated 19.09.2019 passed by the Additional Director of Enforcement (Adjudicating Authority), whereby monetary penalties were imposed for alleged contraventions connected with foreign exchange remittances purportedly for software imports that never materialised.

The penalties imposed by the Adjudicating Authority were as follows:

  • M/s AGS Infotech Ltd. – Rs. 1 crore 90 lakhs
  • Sh. G. Dhananjaya Reddy – Rs. 3 crores (in aggregate)
  • S.M. Manivannan – Rs. 2 lakhs
  • Sh. Rakesh Joshi – Rs. 20 lakhs
  • Sh. S. Nagaraju – Rs. 2 lakhs

ED did not dispute the finding of contravention but argued that the quantum of penalty was inadequate and ought to have been increased up to the statutorily permissible maximum under Section 13(1) of FEMA.

Factual Matrix: Loan, Remittances And Non-Import Of Software

Investigations against M/s AGS Infotech Ltd., Bengaluru, initially commenced under the Prevention of Money Laundering Act, 2002. During the course of those proceedings, material surfaced indicating misuse of foreign exchange obtained through banking channels.

Loan Sanction And Purpose

  • M/s AGS Infotech Ltd., having its corporate office at Bengaluru, obtained:

    • A term loan of Rs. 18.73 crores, and
    • A cash credit limit of Rs. 5 crores,
      aggregating to Rs. 23.73 crores, from United Bank of India, Electronic City Branch (UBI).

  • The sanctioned purpose: import of software from M/s. Bluetronics FZE LLC, UAE.

Foreign Remittances

From the UBI account of M/s AGS Infotech Ltd. (A/c No. 1238250019974), the company remitted a total of USD 4,141,000, equivalent to Rs. 18,76,34,554, to M/s. Bluetronics FZE LLC, UAE between 16.02.2010 and 23.04.2010 in eight tranches.

However, no software or goods were imported corresponding to these remittances. UBI, through its letter dated 05.02.2015, shared account documentation, statements and details of outward remittances and also expressed doubt that the borrower did not use the loan for the sanctioned purpose.

At the material time:

  • M/s AGS Infotech Ltd. was an Indian-registered company.
  • Shri G. Dhananjaya Reddy was its Managing Director.
  • Shri S. Nagaraju was a Director, as reflected in a Board Resolution dated 12.10.2009.

Flow Of Funds To Nexxoft Infotel Ltd.

Subsequently, the Central Bureau of Investigation (CBI), BS&FC, Bengaluru, vide letter dated 17.12.2014, furnished a copy of Charge Sheet No. 6/2013 filed in FIR No. RC-9(E)/2012.

From that charge sheet it emerged that:

  • M/s. Bluetronics FZE LLC, UAE had remitted a total of Rs. 18,52,46,628 to M/s. Nexxoft Infotel Ltd. (Delhi-based company) in 12 tranches between 22.02.2010 and 30.06.2010.
  • These remittances represented the bulk of the funds received from AGS Infotech Ltd. ostensibly for software purchases.

Oriental Bank of Commerce, Richmond Road, Bengaluru (now amalgamated), via letter dated 25.06.2014, supplied account details and transcripts for Account No. 02074011000203 held in the name of M/s. Nexxoft Infotel Ltd.. These confirmed that the said account received 12 credits aggregating to Rs. 18,52,46,628 from Bluetronics FZE, matching the CBI data.

Statements Of Key Individuals

Statement of Shri S.M. Manivannan

Shri S.M. Manivannan, the then Managing Director of M/s AGS Infotech Ltd., was examined on 18.02.2015 under Section 37(3) of FEMA. Among other points, he stated:

  • He joined M/s AGS Infotech Ltd. as Managing Director in August 2009.
  • Other directors included Shri G. Dhananjaya Reddy, Shri Nagaraja, Shri Venkatesh and Smt. Veena Srinath.
  • He resigned from the company in January 2011 after issues emerged relating to fraudulent land mortgaged as loan security.
  • The company’s Board had authorised him to sign loan applications.
  • He signed applications for remitting funds to vendor M/s. Bluetronics FZE, UAE.
  • Shri G. Dhananjaya Reddy and Shri Nagaraja were authorised signatories for operations on all UBI accounts.
  • He had not seen any software that was supposed to be imported from UAE.

Statement of Shri G. Dhananjaya Reddy

Shri G. Dhananjaya Reddy was examined under Section 37(3) of FEMA and under Section 50(2) and (3) of the Prevention of Money Laundering Act, 2002. In his statement dated 18.06.2014, he stated inter alia that: