TULIP STAR HOTELS LTD. vs. SPECIAL DIRECTOR OF ENFORCEMENT

Reportable IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 680 OF 2014 (@ SLP (C) No.7655 OF 2011) Tulip Star Hotels Ltd. ….Appellant VERSUS Special Director of Enforcement .…Respondent With CIVIL APPEAL NO. 681 OF 2014 (@ SLP (C) No.7657 OF 2011) Peter Kerkar ….Appellant VERSUS Special Director of Enforcement .…Respondent JUDGMENT J U D G M E N T Fakkir Mohamed Ibrahim Kalifulla, J. 1. Leave granted. 2. In these two appeals, the challenge is to a common judgment of the Division Bench of the High Court of Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 1 of 23 Page 1 Judicature at Bombay in FEMA Appeal Nos.3 & 4 of 2008, th dated 14 October 2010.

No.7655 of 2011 is the company and the Appellant in SLP No.7657 of 2011 was also proceeded against as the Executive Director of the company. The Respondent issued a show cause notice against the Appellants dated th 29 April 2002, wherein it was alleged that the Appellant in SLP No.7655 of 2011 sold foreign currency to the value of 1,47,000 US$ and 1000 Sterling £ of UK between 29.4.1997 to 5.6.1997 through unauthorized persons deputed by M/s Hotel Zam Zam in violation of Sections JUDGMENT 6(4), 6(5), 7 & 8 of the Foreign Exchange Regulation Act, 1973 (hereinafter called “ FERA ”) as well as paragraph 3 of the Memorandum of FLM issued by RBI. The Appellants were called upon to show-cause why penalty should not be imposed against them under Section 50 of FERA read with Section 49 (3) & (4) of Foreign Exchange Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 2 of 23 Page 2 Management Act (hereinafter called “ FEMA ”). Subsequently, by order dated 28.10.2004 the Respondent imposed a penalty of Rs.50,000/- each on both the

Appellate Tribunal for Foreign Exchange in Appeal Nos.1259 and 1260 of 2004, which were also dismissed by order dated 2.7.2008. The above said orders of the Original Authority, as well as the Appellate Authority, were the subject matter of challenge before the Division Bench of the High Court in FEMA Appeal Nos.3 & 4 of 2008. The Division Bench having confirmed the orders of the lower authority, as well as the tribunal, the Appellants have come forward with these appeals. JUDGMENT 4. We heard Mr. H.N. Salve, learned Senior Advocate for the Appellants and Mr. S.K. Bagaria, learned Addl. Solicitor General for the Respondent. We also perused the written submissions filed on behalf of the appellant as well as the respondent. We also perused the order of the Original Authority, the Tribunal, as well as the Division Bench and Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 3 of 23 Page 3 having heard the counsel for the respective parties we proceed to decide these appeals. 5. Mr. Salve, learned senior counsel, appearing on behalf of

there was no violation at all in the matter of Sale and Purchase by the Appellant company to M/s Hotel Zam Zam in relation to the sale of 1,47,000 US$, as well as 1000 Sterling £ of UK in between 29.4.1997 and 5.6.1997, inasmuch as both the Appellant company, as well as M/s Hotel Zam Zam are duly licensed Full Fledged Money Changers, in short FFMC. According to the learned senior counsel, such transactions as between the licensed FFMCs are wholly authorized under the provisions of FERA, as JUDGMENT well as the Memorandum of FLM of the Reserve Bank of India. The learned senior counsel further contended that in the confiscation proceedings initiated against the Appellants, as well as M/s Hotel Zam Zam, as per the order dated 21.8.1998 it was found that no statutory violation can be attributed to the Appellants and therefore, the imposition of penalty as against the Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 4 of 23 Page 4 Appellants by the Original Authority and the confirmation of the same by the Tribunal and the Division Bench are therefore liable to be set aside.

Addl. Solicitor General would contend that by virtue of the statutory stipulations contained in sub-sections (4) and (5) of Section 6, Section 7 and 8 of FERA read along with paragraph 3 of the Memorandum of FLM of the RBI, there was a clear violation of the statutory provisions committed by the Appellants, hence the penalty imposed by the Original Authority as confirmed by the Appellate Authority, as well as the High Court cannot be faulted. It was also submitted that the Original Authority, the Appellate JUDGMENT Tribunal and the High Court have reached a concurrent finding based on documents, materials, as well as statements on record and the said conclusions are not perverse and therefore, the same do not call for interference. Reliance was placed upon the decisions in Collector of Customs vs. Swastic Woollens Pvt. Ltd. Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 5 of 23 Page 5 - 1988 (Supp) SCC 796, Commissioner of Central Excise vs. Charminar Non-Wovens Ltd. – (2009) 10 SCC 770 and Ghisalal vs. Dhapubai (dead) by LRs &

Hotel Zam Zam purchased the foreign exchange from the appellant at a higher rate than the exchange rate fixed by the RBI and on this ground as well the proceedings initiated against the appellant and the imposition of penalty was justified. To support the said contention, reliance was placed upon the decision in P.V. Mohammad Barmay Sons vs. Director of Enforcement – 1992 (61) ELT 337 . 7. When we consider the submissions of the respective JUDGMENT counsel we find Sections 6(4), 6(5), 8(2) of FERA and Para 3 and 9 of the Memorandum of FLM of RBI, are required to be noted which are as under: “ Section 6 Authorised dealers in foreign exchange:- 6(4) An authorized dealer shall, in all his dealings in foreign exchange and in the exercise and discharge of the powers and of the functions Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 6 of 23 Page 6

6(5) An authorized dealer shall, before undertaking any transaction in foreign exchange on behalf of any person, require that person to make such declaration and to give such information as will reasonably satisfy him that the transaction will not involve, and is not designed for the purpose of, any contravention or evasion of the provisions of this Act or of any rule, notification, direction or order made thereunder, and where the said person refuses to comply with any such requirement or makes only unsatisfactory compliance therewith, the authorized dealer shall refuse to undertake the transaction and shall, if he has reason to believe that any such contravention or evasion as aforesaid is contemplated by the person report the matter to the Reserve Bank. JUDGMENT Section 8: Restrictions on dealings in foreign exchange:- (2) Except with the previous general or special permission of the Reserve Bank, no person, whether an authorized dealer or a money-changer or otherwise, shall enter into any transaction which provides for the conversion of Indian currency into foreign currency or foreign currency into Indian currency at rates of exchange other Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 7 of 23 Page 7 than the rates for the time being authorized by the Reserve Bank. Paragraphs 3 and 9 of the FLM

Purchases from other Money-changers and Authorized Dealers:- 9. Money-changers may freely purchase from other money-changers and authorized dealers in foreign exchange or their exchange bureau, any foreign currency notes and coins tendered by the letter. Rupee equivalent of the amount of foreign currency purchased should, however, be paid by way of a cross cheque drawn on their bank account or if made by way of a bankers’ cheque/pay order/demand draft, it should be accompanied by a certificate from the bank issuing the relative instrument certifying that the funds for the instrument have been received by it by debit to the applicants bank account. In no circumstances should payments in respect of such sale be made in cash.” JUDGMENT Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 8 of 23 Page 8 8. Under Section 6(4) it is stipulated that a full fledged money changer (FFMC) as an authorized dealer in foreign

the RBI and that except with the previous permission of the RBI, authorized dealers should not engage in any transaction involved in any foreign exchange, which is not in conformity with the terms of his authorization. Under Section 6(5) it is stipulated that an authorized dealer should before undertaking any transaction in foreign exchange should ensure verification on certain aspects in order to ensure that there is no contravention of the provisions of FERA and if the FFMC has any reason to JUDGMENT believe that any such contravention or evasion is contemplated by a person who seeks to indulge in any transaction in foreign exchange, the FFMC should report the matter to the RBI. 9. Section 8 of FERA imposes restrictions on dealings in foreign exchange. The said provision imposes restriction Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 9 of 23 Page 9 to the effect that no person other than the authorized dealer in India, shall purchase or otherwise acquire or borrow any foreign exchange. Under sub section 2, it is

permission of RBI, an authorized dealer or a money changer should enter into any transaction providing conversion of Indian currency into foreign currency or vice versa, at rates of exchange other than the rates for the time-being authorized by RBI. 10. De hors the above provisions, the other relevant provisions are paragraphs 3 & 9 of the Memorandum of FLM issued by the RBI. A close scrutiny of paragraph 3 JUDGMENT disclose that the said paragraph has been issued by the RBI to state as to who can be called as ‘ authorized officials’ of money changers. The said paragraph also imposes a restriction to the effect that other than an authorized representative, nobody else should be allowed to transact money changing business on behalf of the money changer. Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 10 of 23 Page 10 11. Paragraph 9 virtually gives a free hand for the money changers to indulge in purchase of foreign currency etc.,

of an instrument and not by way of cash. 12. Keeping the above provisions in mind, when we refer to the nature of transaction that had taken place as between the Appellants and M/s Hotel Zam Zam, the following facts are not JUDGMENT Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 11 of 23 Page 11 in controversy: (a) The Appellants, as well as M/s Hotel Zam Zam, are licensed FFMC.

between April 1997 to June 1997 to M/s Hotel Zam Zam. (c) The purchase value of the above foreign currency was at a higher rate than the existing retail rate that prevailed in the market. (d) The purchase value was paid by M/s Hotel Zam Zam by way of Pay Orders. (e) Prior to the transaction, at the instance of the Appellants, a Xerox copy of the RBI license of M/s Hotel Zam Zam was produced and based on which the transaction was effected. (f) The transactions were effected on 29.04.1997, JUDGMENT 06.05.1997, 29.05.1997 and 05.06.1997 and the amounts transacted were 7,000 US$, 1000 Sterling £ of UK, 40,000 US$ and 1,00,000 US$ on the respective dates. In all 1,47,000 US$ and 1000 Sterling £ of UK were sold by the Appellants to M/s Hotel Zam Zam. (g) All the above transactions were made and the foreign currency was handed over to Shri Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 12 of 23 Page 12 Rakesh Mahatre, a representative of M/s Hotel Zam Zam. 13. Based on the above undisputed facts relating to the

Zam, the Original Authority reached a conclusion that the Appellants failed to verify the authorization in favour of the persons concerned to buy/sell foreign exchange on behalf of the said money changers as contemplated under the relevant provisions. In other words, it was concluded that it was incumbent upon the Appellants by virtue of the terms of instructions contained in paragraph 3 of the Memorandum of FLM issued by RBI to have verified the bonafides of the persons deputed to them by M/s Hotel JUDGMENT Zam Zam before handing over the foreign currencies to such persons. It was, therefore, ultimately concluded that the said failure on the part of the Appellants resulted in contravention of the directions contained in paragraph 3 of the Memorandum of FLM read with Section 6(4), 6(5) and 7 of FERA. Ultimately the Appellants were found guilty for the said contraventions and the penalty came to be Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 13 of 23 Page 13 imposed. The said order of the Original Authority was confirmed by the Tribunal, as well as the Division Bench of the High Court.

violation or contravention related to the stipulations contained in paragraph 3 read with Section 6(4) and 6(5) of FERA. It will be relevant to note that the variation in the rates of purchase value of the foreign currency was not the basis for the ultimate conclusion about the contravention held against the Appellants. Therefore, keeping aside the said aspect, when we examine the contravention held proved against the Appellants, we feel it appropriate to make a reference to paragraph 9 in the JUDGMENT forefront. Under paragraph 9 of the FLM as between the money changers, a free hand has been given for purchase and sale of any foreign currency notes etc. in rupee value. The only restriction imposed therein is that the Indian rupee value of the foreign currency should not be paid by way of cash, but should always be paid in the form of an Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 14 of 23 Page 14 instrument such as banker’s cheque/pay-order/demand draft etc., or by debiting to the purchasers’ bank account. Therefore, if under paragraph 9 such a free hand has been

matter of purchase of foreign currency etc., by making payments in the form of negotiable instruments under the relevant statutes, the question that would arise for consideration would be whether in a case of this nature where such a transaction had taken place in between two licensed FFMCs and the said transaction was carried on by exchange of foreign currency by way of payment in the form of pay-orders and that the sale effected by the Appellants and the purchase made by the other FFMC, JUDGMENT namely, M/s Hotel Zam Zam was not disputed, can it still be held that there was any violation at all in order to proceed against the Appellants for imposing a penalty? When we examine the said issue, we are unable to accede or countenance the stand of the Respondent that the foreign currencies to the values mentioned in the earlier paragraphs were handed over to the representative of M/s Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 15 of 23 Page 15 Hotel Zam Zam by one Mr. Rakesh Mahatre and, therefore, the whole transaction was in contravention of Sections 6(4) and 6(5) of FERA and paragraph 3 of FLM.

the caption of the said paragraph is “ Authorized Officials ”. The purport of the said paragraph was to ensure that any licensed money changers should allow transaction of its money changing business in its premises only through such persons who are the listed authorized officials as certified by the office of the Reserve Bank under whose jurisdiction such money changers operate their business. The last part of paragraph 3 makes the position a little more clear which states that “ no person other than the JUDGMENT authorized representative should be allowed to transact money-changing business on behalf of the money- changer ”. Apparently when a money changer operates its business from its premises, any transaction by way of sale or purchase as part of its money changing business should be carried out only through an authorized representative. Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 16 of 23 Page 16 16. When we extend the application of the said stipulation to the case of present nature, it can only be said that if such transaction had taken place as between the

should have been carried on only through their respective authorized representatives. The statement of Mr. Peter Kerkar, the Appellant in SLP (C) No.7657 of 2011, disclose that on each occasion the transaction was negotiated by the Branch Manager of the Appellant with one Ms. Pinky of M/s Hotel Zam Zam. It is not the case of the Respondent that neither of these two persons who indulged in the transaction of money changing business were not the authorized officials of their respective establishments. If JUDGMENT the said factum relating to the business transactions, which had taken place as between the Appellants and M/s Hotel Zam Zam is not in controversy, we fail to see how a violation of paragraph 3 can be alleged as against the Appellants. Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 17 of 23 Page 17 17. It is stated that after the transaction as between the Appellants and M/s Hotel Zam Zam concluded, M/s Hotel Zam Zam stated to have indulged in some transaction,

the Appellants were not in any way concerned. It can also be safely held that for any violation or contravention of the provisions of FERA or FEMA at the instance of M/s Hotel Zam Zam after the money changing transaction as between the Appellants and the said concern had come to an end, the Appellants cannot in any way be held responsible or proceeded against. 18. In our considered opinion that in the peculiar facts of this case and having regard to the nature of transactions JUDGMENT which had taken place as between the Appellants and M/s Hotel Zam Zam in the manner in which it has been narrated in the impugned order of the Original Authority as noted by the Tribunal, as well as the Division Bench of the High Court, we are convinced that there was no scope to allege a violation of paragraph 3 of the FLM or for that Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 18 of 23 Page 18 matter Sections 6(4) and 6(5) of FERA, 1973. Based on the interpretation of Sections 6(4), 6(5) of FERA, 1973 and paragraphs 3 & 9 of the FLM, we have held that the

Division Bench of the High Court failed to appreciate the issue in the proper perspective while holding the appellant guilty of the violation alleged. Therefore, none of the judgments relied upon by the respondents for the proposition that concurrent findings of fact should not be interfered with does not apply to the facts of this case . 19. Once we steer clear of the above position, we come to the question of the higher value at which the foreign currency was alleged to have been sold by the Appellants JUDGMENT to M/s Hotel Zam Zam. As pointed out by us earlier, the said act was not the basis for the contravention and imposition of the penalty as against the Appellants. To rule out any controversy, the conclusion of the Original Authority as recorded in its order for finding the Appellants guilty of paragraph 3 of the FLM read with Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 19 of 23 Page 19 Sections 6(4), 6(5) and 7 of FERA, can be usefully extracted which reads as under: “ …….Thus by not insisting on the authorization

persons deputed by them for purchasing foreign exchange from M/s Cox and Kings Travel & Finance Ltd., the said M/s Cox and Kings Travel & Finance Ltd. has contravened the directions contained in para 3 of the Memorandum FLM R/w SEC. 6(4), 6(5) and 7 of the FERA, 1973. I, therefore hold them guilty for the said contraventions. ” 20. This apart, when we refer to the confiscation order passed by the Commissioner of Customs in its order dated 21.08.1998, it has been specifically stated as under: JUDGMENT “ The statements of Mr. Chitrang Mehta, Manager of M/s LKP dated 06/7-08-97 indicated that there is transaction at prices higher than those prevailing market rates. However, it is also a known fact that the rates for the foreign exchange can be fluctuating and there is hardly any transaction effected at the rates which are recorded for that day to be prevailing in the market not only for the Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 20 of 23 Page 20 foreign currency but also for to be other goods e.g. shares in the stock market or the metals and other commodities being traded in the specific markets. It is also to be considered that large

would not ipso facto induce me to conclude that the mere fact of sales at higher prices would be a preconcerted knowledge that the dollars sold are to be smuggled out of India. I find that the price at which Ms. Pinky Jaisinghani was purchasing the dollars from other FFMCs were settled between her mentor Shri Suleman Tajuddin Patel and not considerations of any other kind. ” 21. Therefore, in the impugned orders of the Original Authority, as well as the Tribunal and the Division Bench, JUDGMENT the sale effected by the Appellants on a rate higher than the rate prevailing in the market was not the basis for the alleged violation of paragraph 3 of the FLM read with Sections 6(4), 6(5) and 7 of FERA. In the confiscation order passed by the Customs Authorities, where again the Appellants were also one of the noticees, no fault was found as against the Appellants on that ground. In the Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 21 of 23 Page 21 light of our above conclusions, as regards the higher value at which foreign currency alleged to have been sold by the appellant to Hotel Zam Zam, the reliance placed upon

has also no application. The said decision came to be rendered entirely under different facts which cannot be applied to the facts of the present case. 22. Having reached the above conclusions, we are convinced that the impugned orders by which the Appellants were found guilty of the violation of paragraph 3 of FLM read with Sections 6(4), 6(5) and 7 of FERA and the consequential imposition of penalty of Rs.50,000/- was wholly unjustified. The impugned orders are liable to be JUDGMENT set aside and they are accordingly set aside. If the Appellants have parted with the penalty amount imposed under the impugned orders, the Respondent is directed to refund the same to the Appellants along with simple interest at the rate of 6% per annum, within two months Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 22 of 23 Page 22 from the date of this judgment. The appeals are allowed with the above directions.

……………. ………………………………J. [Fakkir Mohamed Ibrahim Kalifulla] New Delhi; January 16, 2014 JUDGMENT Civil Appeal No………. of 2014 @ SLP© No. 7655 of 2011 Page 23 of 23 Page 23