SAFEMA Tribunal Upholds ₹5 Crore Penalty on J.B. Diamonds For FEMA Violation

The Appellate Tribunal under SAFEMA, New Delhi, has upheld a penalty of Rs. 5 crore imposed on J.B. Diamonds Ltd. for failure to realise export proceeds exceeding USD 117 million within the prescribed period under the Foreign Exchange Management Act, 1999, while also affirming the liability of its directors.

The tribunal, however, granted relief to one director—a homemaker holding that she was not involved in the day-to-day affairs of the company.

A coram led by Chairman Justice Munishwar Nath Bhandari with Member G.C. Mishra, held: “In case at hand, the appellant Sh. Vallabhbhai Surani in his statement dated 18.02.2010 admitted that exports were not made against certain advances received from the overseas buyers. In addition to this, no satisfactory explanation has been placed on record as to why exports were not effected within the prescribed period or why the advances were not adjusted against other export obligations. Therefore, the finding of the Adjudicating Authority regarding contravention of Section 7 of FEMA, 1999 read with Regulation 16(1)(i) of Foreign Exchange Management (Exports of Goods & Services) Regulation, 2000 cannot be said to be without basis.”

J.B. Diamonds Ltd., established in 1981 and later converted into a limited company in 2007, is engaged in the business of import and export of rough, cut, and polished diamonds.

The case stems from intelligence gathered by the Directorate of Enforcement indicating that the company failed to realise export proceeds in respect of 417 invoices between 2004 and 2009, with the unrealized amount exceeding USD 117 million. It was also found that the company received advances of approximately Rs. 3.77 crore from overseas buyers but failed to export goods within one year.

The Adjudicating Authority found that the company had failed to take necessary steps to realise export proceeds within the prescribed period under Section 7 of FEMA and the applicable export regulations and imposed a penalty of Rs. 5 crore on the company, along with Rs. 5,000 each on its directors.

The appellants argued that a substantial portion of export proceeds, around Rs. 4,140 crore out of Rs. 4,459 crore, had already been realised, and that the remaining defaults were due to the 2008 global recession, a 30 to 40 percent crash in diamond prices, and the subsequent liquidation of foreign buyers.

They further contended that the statutory framework does not clearly define “reasonable steps” required to be taken by exporters in case of delayed payments. It was also argued that “Violation of this Regulation would take place only when the J.B Diamonds Ltd. was to refund the advance to the respective buyers after a period of one year without seeking RBI approval.”

The Enforcement Directorate, however, argued that the export proceeds remained unrealized beyond the prescribed period and that the appellants had failed to take any reasonable and effective steps for recovery while also failing to produce documentary evidence to substantiate their claims. It further submitted that the directors were liable under Section 42 of FEMA as persons responsible for the conduct of the company's business.

The tribunal noted that the statutory framework places a clear obligation on exporters to realise and repatriate export proceeds within the stipulated period and permits extension only upon sufficient cause being shown to the Reserve Bank of India. It found that the appellants failed to demonstrate that any such extension had been sought or granted.

Rejecting the defence of global recession, the tribunal observed, "Even though the director appellants have attributed the delay to the global recession and financial distress of foreign buyers, the record does not disclose sufficient evidence of concrete recovery measures such as legal proceedings, arbitration, or claims lodged with insolvency authorities abroad in respect of the majority of the outstanding buyers.”

Clarifying the scope of Regulation 16(1)(i), the tribunal held that it imposes a mandatory obligation to ensure shipment within one year from receipt of advance payment, and failure to do so constitutes a contravention.

On the issue of liability, the tribunal held, “The said provision stipulates that where a contravention has been committed by a company, every person who at the time of contravention was in charge of and responsible for the conduct of its business shall be deemed to be guilty unless he proves that the contravention took place without his knowledge or that he exercised due diligence to prevent such contraventions.”

However, it accepted the contention of one director, observing, "However, with respect to the appellant Smt. Kalavati it is held that she was only a housewife and not responsible for the day-to-day affairs of the company. There is nothing on record to show that she had the knowledge of exports and non-realization of export proceeds.”

Accordingly, the tribunal allowed her appeal while upholding the order against the remaining directors.

For Appellant: Senior Advocate Sunil Dalal, Advocates Ajay Chopra, Ankit Rana, Sarthak Malhotra, Shipra Bal

For Respondent: Advocates Varun Mishra, Shreeya Sud,