SAFEMA Tribunal Reduces Garg Iron FEMA Penalty To ₹5.5 Lakh, Holds Customs Exoneration No Bar

The Appellate Tribunal under SAFEMA on 7 May held that Garg Iron & Energy Pvt. Ltd. violated Foreign Exchange Management Act (FEMA), 1999 by failing to repatriate unutilised foreign exchange and by relying on post-facto third-party adjustments without RBI approval. It also reiterated that Customs exoneration does not bar proceedings under FEMA.

A Bench comprising Members Balesh Kumar and Rajesh Malhotra partly allowed the appeal and reduced the penalty from Rs. 11 lakh to Rs. 5.5 lakh, while rejecting the appellant's reliance on post-facto adjustments and noting the absence of RBI approval. It held:

“We also do not find on record any permission from the RBI as to adjust the defaults in the imports for the remittance already sent against forthcoming and future import consignments from third party, particularly so, when third party payment was not permissible before 08.11.2013.”

The Enforcement Directorate (ED) alleged that Garg Iron & Energy engaged in manufacturing and trading iron and steel products, remitted US$ 637,981.06 to Metal Worldwide Inc. for importing shredded steel scrap. It alleged that the supplier failed to deliver several consignments or supplied unusable material, after which the company abandoned the consignments at the port.

The ED further stated that the company received only partial refunds or adjustments, while it failed to repatriate approximately US$ 472,416.96 (around Rs. 2.18 crore), thereby violating Section 10(6) of FEMA and the applicable regulations. On this basis, the Adjudicating Authority imposed a penalty of Rs. 11 lakh.

Garg Iron & Energy argued that it recovered the amounts through subsequent shipments, refunds, and adjustments routed via TCC Wireless Inc., an entity linked to the supplier's network. It also contended that the transactions remained commercial in nature and did not amount to a FEMA violation.

The Tribunal rejected this defence, observing:

“The argument of the Appellant that no penalty was imposed by the Commissioner of Customs (Seaport-Import), Chennai, in the Adjudication Order No. 19826 of 2012 dated 30.11.2012 on the Appellant, and hence, the Appellant is not liable for penalty under FEMA, cannot be accepted. The proceedings under the Customs Act, 1962, are independent and separate from that under FEMA. Moreover, the Appellant having abandoned the consignments which were imported led to imposition of penalty under the Customs Act, 1962 on the steamer agent, for not having made a true declaration in the import manifest and not having truly accounted for shredded steel Scrap.”

The Bench held that adjustments routed through third parties such as TCC Wireless Inc. and TCC Metal could not be treated as valid compliance in the absence of RBI permission during the relevant period. It further found that the appellant continued transactions with the same supplier despite disputed consignments and failed to properly regularise earlier remittances.

It concluded that Garg Iron & Energy contravened Section 10(6) of FEMA and Regulation 6(1) of the Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000. However, the Bench held that reduction of the penalty to Rs. 5.5 lakh would meet the ends of justice.

Accordingly, the Tribunal partly allowed the appeal.

For the Appellant: Mr N. Vishwanathan, Advocate

For the Respondent: Mr Varun Mishra, Advocate