Penalty Under FERA Cannot Be Justified Merely Because It Falls Within Statutory Maximum: Delhi High Court

The Delhi High Court has held that a penalty cannot be justified merely because it falls within the statutory maximum provided under Foreign Exchange Regulation Act, 1973 (FERA).

The authority imposing the penalty must give reasons for the amount imposed and ensure that it is proportionate to the contravention.

"We are, therefore, of the opinion that merely because the imposed penalty falls within the maximum limit prescribed under Section 50 of the FERA, does not, by itself, validate it. The learned Adjudicating Authority/Appellate Authority is required to determine the penalty in a reasonable manner and give at least some reasons for the exercise of the discretion in imposing such penalty and for determination of the quantum thereof.", a division bench of Justices Navin Chawla and Ravinder Dudeja held.

The Court set aside the March 25, 2009 order of the Appellate Tribunal for Foreign Exchange, New Delhi, insofar as it upheld the ₹25 lakh penalty imposed on Intersales and reduced the penalty to ₹3 lakh.

The case arose from alleged non-realization of export proceeds under Guaranteed Remittance Forms (G.Rs.) totalling US$62,256.50. The Adjudicating Authority imposed a ₹25 lakh penalty on Intersales on February 4, 2004 while the Appellate Tribunal for Foreign Exchange sustained it on March 25, 2009. The RBI had granted a write off for G.R. No. AJ 238446 while the Tribunal had excluded G.Rs. 2 and 3 from the contravention.

Before the Delhi High Court, the appellants argued that the remaining contravention was US$44,796.50 and that the penalty was excessive particularly when a ₹1 lakh penalty had earlier been imposed for US$17,460.

The Court noted that the Tribunal had already set aside the finding concerning G.Rs. 2 and 3, reducing the contravention by US$14,797.35, while the RBI had granted a write-off for G.R. 4. Despite this, the Tribunal retained the ₹25 lakh penalty without giving reasons for its quantum.

"We may note that the Adjudicating Authority, in its order dated 04.02.2004, while imposing a penalty of Rs.25,00,000/- on the appellant no. 1, had found the appellant to be in contravention of Section 18 of the FERA, even with respect to G.Rs. at serial nos. 2 and 3. However, this finding has been set aside by the learned Tribunal in its Impugned Order. The amount of contravention, therefore, stood reduced by US$ 14797.35.", the Court said.

The appellants also pointed out that a previous order dated May 17, 2001 had imposed only ₹1 lakh for a US$17,460 contravention. The Court found merit in the submission that the ₹25 lakh penalty was disproportionate, particularly in the absence of reasons for its quantification.

The Bench emphasised that Section 50 confers discretion to impose a penalty up to five times the amount or value involved. Such discretion must however, be exercised reasonably and supported by reasons.

The Court further applied the principle of proportionality, noting that penalty is discretionary and relevant factors must be considered while determining its quantum.

The court, however, declined to remand the matter, noting that the Adjudicating Authority's order was from 2004 and the Tribunal's order from 2009, with more than 15 years having elapsed.

Accordingly, applying the earlier ₹1 lakh penalty as the yardstick, the court determined the penalty for the surviving US$44,796.50 contravention at ₹3 lakh, replacing the ₹25 lakh penalty imposed on Intersales.

For Appellants: Ashim Vachher, Sr. Advocate along with Advocate Saiba M. Rajpal

For Respondent: Advocates Annirudh Sharma and Akanksha Tyagi