FEMA Can Be Invoked For EEZ Exports With Foreign Exchange Implications: SAFEMA Tribunal, New Delhi

The Appellate Tribunal under SAFEMA at New Delhi has held that, in the facts of the case, activities carried out in India's Exclusive Economic Zone (EEZ) that have foreign exchange implications can be proceeded against under the Foreign Exchange Management Act (FEMA), even in the absence of a specific notification extending FEMA to the EEZ.

Rejecting the argument that FEMA could not apply without such a notification, the tribunal held:

“We do not find it necessary in the set of facts and circumstances of the present case, that the issuance of a Notification is required to extend the provisions of FEMA to the EEZ.”

It further observed that “the Notification issued for the extension of the Customs Act to EEZ is found sufficient.”

Explaining the foreign exchange impact of such transactions, the Tribunal added,

"The occurrence of the export and the import, as defined under the Customs Act, 1962, cannot but have implications for the foreign exchange balance for India. It cannot be that the activities within whole of India including the Territorial Waters with implications for the foreign exchange balance, are covered by the provisions of the Foreign Exchange Management Act; those activities which arise out of and for the purpose of the exploitation of resources within the EEZ and have implications for FEMA cannot be acted upon under FEMA."

The ruling was delivered by a bench comprising Members Balesh Kumar and Rajesh Malhotra while deciding appeals filed by Dove Marine Exports Pvt. Ltd. and its Managing Director against penalties imposed by the Special Director of the Enforcement Directorate under FEMA.

The proceeding arose from agreements entered into in 2004 between the company and a Singapore-based entity for the sale of fish caught by fishing vessels operated by the Indian company.

Under the arrangement, the foreign entity financed the purchase of four fishing vessels and also met operating expenses such as fuel, crew salaries, and vessel maintenance. These amounts were to be adjusted against the value of fish sold abroad.

With government permission, the company imported four fishing vessels and operated them for fishing in the EEZ between 2004 and 2009. The fish caught was sold to overseas buyers, including through high-seas transactions.

In March 2009, the company handed back the vessels to the foreign supplier after running into financial difficulties.

During the investigation, the Enforcement Directorate found that a portion of the export earnings had been set off against operating costs. It alleged that this was a breach of several FEMA provisions relating to foreign borrowing, export declarations, and the adjustment of export proceeds.

In September 2019, penalties totaling Rs 1.23 crore were imposed on the company, along with separate penalties on its managing director.

Before the Tribunal, the company argued that the EEZ is not part of India for the purposes of FEMA. It contended that no export from India had taken place since the fish were caught in the EEZ and sold on the high seas, and that FEMA could not apply without a notification extending it to the EEZ under the Maritime Zones Act.

The Enforcement Directorate opposed the plea, pointing out that the Customs Act and the Customs Tariff Act had already been extended to the EEZ through statutory notifications. It argued that the import and export of vessels and fisheries caught in the EEZ for sale abroad were governed by the Customs Act and had direct implications for India's foreign exchange.

The ED also relied on Section 1(3) of FEMA, which gives the Act extra-territorial application to contraventions committed outside India by persons resident in India.

Accepting this position, the tribunal held that it could not be accepted that activities within India, including territorial waters, that affect foreign exchange are regulated by FEMA, while similar activities in the EEZ would fall outside its scope. It clarified that this conclusion was reached on the facts of the present case.

While upholding the findings of contravention, the tribunal took note of the nature of the violations. It held that the ends of justice would be met by treating the amounts already deposited during the appeal as a sufficient penalty. It accordingly treated the pre-deposit of Rs 12 lakh by the company and Rs 50 thousand by the Managing Director as sufficient and disposed of the appeals.