Case Note & Summary
The case involves an appeal under Section 35 of the Foreign Exchange Management Act, 1999 (FEMA) against an order of the Appellate Tribunal for Foreign Exchange dated 27 April 2010. The appellant, Vinod M. Chitalia, was a director of Arch Pharmalabs Ltd. (APL). The Directorate of Enforcement issued two show cause notices on 5 August 2008 alleging violations of Sections 3(b) and 3(d) of FEMA. The first notice related to 261 transactions where APL received inward remittances of Rs.75.39 crores without any actual export of goods, based on fabricated export documents. The second notice concerned 14 transactions involving Rs.3.84 crores. The modus operandi involved declaring export of Azithromycin but actually exporting Paracetamol of negligible value, or no goods at all. The Special Director in the Enforcement Directorate, by order dated 12 May 2009, held the appellant guilty and imposed a penalty of Rs.2 crores under the first notice and Rs.3 lakhs under the second. The Appellate Tribunal sustained this order. The appellant challenged the order on the ground that he was not directly involved in the day-to-day affairs and that the company was the principal offender. The court considered the legal issue of vicarious liability of directors under FEMA. The appellant argued that he was only a director and not responsible for the exports. The respondent contended that the appellant was a noticee and failed to rebut the presumption of knowledge. The court analyzed the provisions of FEMA and held that a director in charge of the company's business is liable unless he proves lack of knowledge or due diligence. The court found that the appellant did not discharge this burden and that the penalties were proportionate. The appeal was dismissed, upholding the Tribunal's order.
Headnote
A) Foreign Exchange Law - Violation of FEMA - Sections 3(b) and 3(d) of Foreign Exchange Management Act, 1999 - Bogus Exports - The appellant, a director of Arch Pharmalabs Ltd., was held liable for receiving foreign exchange remittances against fabricated export documents where no goods were actually exported. The court upheld the penalty of Rs.2 crores and Rs.3 lakhs imposed by the adjudicating officer and affirmed by the Appellate Tribunal, holding that the appellant failed to rebut the presumption of knowledge and involvement in the company's affairs. (Paras 1-20) B) Corporate Liability - Vicarious Liability of Directors - Sections 3(b) and 3(d) of Foreign Exchange Management Act, 1999 - The court held that a director who is in charge of and responsible for the conduct of the company's business is liable for violations under FEMA, even if not directly involved in the specific transactions, unless he proves lack of knowledge or due diligence. The appellant, being the fifth noticee and a director, did not discharge this burden. (Paras 4-15) C) Penalty - Quantum of Penalty - Section 13 of Foreign Exchange Management Act, 1999 - The court upheld the penalty of Rs.2 crores under the first show cause notice and Rs.3 lakhs under the second, noting that the quantum was proportionate to the gravity of the violation involving huge amounts of foreign exchange. (Paras 16-20)
Issue of Consideration
Whether the appellant, as a director of the company, was liable for violation of Sections 3(b) and 3(d) of FEMA for receiving foreign exchange against bogus exports without actual export of goods.
Final Decision
The appeal is dismissed. The order of the Appellate Tribunal for Foreign Exchange dated 27 April 2010 is upheld. The penalty of Rs.2 crores under the first show cause notice and Rs.3 lakhs under the second is sustained.
Law Points
- Liability under FEMA for receiving foreign exchange against bogus exports
- vicarious liability of directors for company's acts
- mens rea not essential for civil penalty under FEMA
