SAFEMA Tribunal Confirms FEMA Violation in Software Import Transaction, Grants Major Penalty Relief

Background of the Dispute

The Appellate Tribunal under SAFEMA, New Delhi, dealt with two connected appeals:

Appeal No. FPA-FE-04/CHN/2021 filed by M/s IGNIS Technology Solutions Pvt. Ltd. (ITSPL)
Appeal No. FPA-FE-05/CHN/2021 filed by Shri Nihar Ranjan Samantara, CEO and Director of the company

These appeals challenged Order No. SDE/SRO/BGZO/07/2020(SK) dated 30.06.2020 passed by the Special Director, Enforcement Directorate, Chennai, under the Foreign Exchange Management Act, 1999 (FEMA).

Under the impugned order:

The company was saddled with a penalty of Rs. 7,00,00,000/- for contravention of Section 10(6) of FEMA read with Regulation 6(1) of the Foreign Exchange Management (Realization Repatriation and Surrender of Foreign Exchange) Regulations, 2000.
A separate penalty of Rs. 70,00,000/- was imposed on Shri Nihar Ranjan Samantara under Section 42(1) of FEMA on the ground of vicarious liability for the same contravention.

The core allegation was that the company failed to substantiate actual import of software against substantial foreign remittances aggregating USD 75,25,000 (Rs. 33,42,10,330/-) to a UAE entity, M/s Supreme Software Technologies FZC, Sharjah.

Appellants’ Case and Main Defences

Link with PMLA/CBI Proceedings

The assessee’s counsel submitted that FEMA proceedings stemmed from an investigation launched in connection with Shri G. Dhananjaya Reddy under the Prevention of Money Laundering Act, 2002 (PMLA). According to the assessee:

The same individual, Shri G. Dhananjaya Reddy, had allegedly defrauded the company and its Director.
The company maintained that it was itself a victim of the fraudulent schemes and not a wilful violator of FEMA.

Business Profile and Need for Software

The assessee emphasized that it was engaged in legitimate IT-related business activities and relied on a year-wise revenue break-up of its dealings with M/s Warner Chappel Music Inc. to show genuine commercial operations.

During its business expansion, the company identified a need for a specialized IT product described as “Project Help Desk Suite”, a helpdesk and IT request management solution.

While scouting for a suitable software provider, the company claimed to have identified M/s Supreme Software Technologies FZC, UAE, which purportedly had developed a software product meeting these specifications.

The assessee argued that:

It carried out appropriate due diligence before finalizing procurement.
It entered into a purchase agreement dated 15.02.2010 with M/s Supreme Software Technologies FZC, Sharjah, UAE.
Subsequent to this agreement, software was allegedly supplied electronically, and USD 75,25,000 was remitted in multiple tranches.

Dealings with Authorised Dealer Bank and Loan Sanction

The company explained that:

All relevant correspondence about the proposed software purchase, its specifications, and commercial terms was shared with the Authorised Dealer (AD) Bank, namely United Bank of India, Electronic City Branch, Bangalore.
It sought and obtained a term loan of Rs. 25 Crores and cash credit facility of Rs. 5 Crores from the same bank.
According to the assessee, the bank sanctioned these facilities only after detailed scrutiny of the software project, including supporting documents and proposed utilisation.

The assessee claimed that the AD Bank was kept fully updated about the software procurement process and mode of supply.

Documentation Claimed as Proof of Import

To evidence import of software through non-physical means, the assessee referred to:

Intimation to Customs
- An “Intimation of Software received via Data Communication Channel” dated 16.11.2010, allegedly issued under “Ref. RBI Circular No. 9 dated 24.08.2006”, submitted to the Commissioner of Customs, Air Cargo Complex, Bangalore International Airport.
- This intimation, bearing the Customs Department receipt stamp dated 29.11.2010, listed nine modules with invoice particulars dated 30.09.2010 and corresponding values (though the copy on record was barely legible).
CA Valuation Certificate
- A report dated 31.03.2010 issued by M/s S. Janardhan & Associates, Chartered Accountants, which certified, based on inputs and information allegedly provided, a “fair value” of USD 7.5 million for the product described as “Project Help Desk Suite – an IT Request Management System, a Proprietary Software IP of Techstar Inc, Dallas, Texas, USA.”
Technical Expert’s Report
- A report dated 28.11.2014 by Shri Sanjaya Swain, IT Architect, IBM India Pvt. Ltd., certifying that:
  - A CD labeled “Help Desk-Original” contained .NET-based program files that were functional.
  - Another CD labeled “Help Desk + Plus” was not working and could not add any additional benefit.
Correspondence with Bank and Customs
- A letter from the company to the AD Bank forwarding:
  - Telegraphic Transfer Receipts,
  - Copies of agreements with M/s Supreme Software Technologies FZC,
  - Purchase invoices, and
  - Copy of the intimation submitted to Customs.

The assessee argued that these materials, taken together, demonstrated genuine import of software in compliance with FEMA and RBI guidelines for non-physical imports.

Alleged Hindrance due to CBI Seizure of Records

The assessee contended that its ability to defend itself before the Adjudicating Authority was severely hampered because:

The CBI had seized original documents in connection with criminal proceedings involving Shri G. Dhananjaya Reddy.
Efforts to obtain copies through the CBI Court allegedly did not succeed as the documents were under forensic or expert examination.
A written request was made to the Adjudicating Authority to exercise powers to requisition documents from CBI; however, this was not accepted.

The assessee criticised the Adjudicating Authority for:

Refusing further time and closing the opportunity to produce documents by imposing a strict 15-day deadline.
Passing the order allegedly in violation of principles of natural justice due to inadequate opportunity and non-summoning of relevant records.

No FEMA Violation and Reliance on RBI Master Circular