Vivek Goyal Vs Joint Director (Appellate Tribunal Under SAFEMA Delhi)
SAFEMA Tribunal Deletes FEMA Penalty on Technical Director; Mere Designation Does Not Attract Vicarious Liability Under Section 42
The Appellate Tribunal under SAFEMA allowed the appeal filed by Vivek Goyal, setting aside the ₹10 lakh penalty imposed under Section 42 of the FEMA for the failure of Neomagic Semiconductor India Pvt. Ltd. to fulfil export obligations against export advances of US$ 11,13,769 received from its US parent company. The Enforcement Directorate had alleged that, as a Director, the appellant was vicariously liable for the company’s failure to export goods and services as required under Section 7 of FEMA read with Regulation 16 of the FEMA (Export of Goods and Services) Regulations, 2000.
The Tribunal found that the appellant had consistently maintained that he was primarily a salaried Vice-President (Engineering) and was appointed as a Director only for administrative convenience. His responsibilities were confined to technical operations, software and hardware development, recruitment and general administration, while finance, banking, exports and imports were handled by the Managing Director, H.P. Agarwal. The Tribunal noted that the Adjudicating Authority had imposed the penalty without examining or rebutting these specific explanations or recording any finding as to how the appellant was responsible for the export default.
Relying extensively on the Supreme Court’s decision in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, the Tribunal reiterated that vicarious liability cannot be imposed merely because a person holds the designation of Director. Liability under Section 42 of FEMA arises only where it is established that the individual was in charge of and responsible for the conduct of the company’s business, or that the contravention occurred with his consent, connivance or neglect. As the record showed that the appellant’s role was confined to technical functions and only occasional banking work in the Managing Director’s absence, with no responsibility for export-import operations, the Tribunal held that the essential ingredients of Section 42 were absent. It therefore set aside the penalty and allowed the appeal.
Cases Discussed
- S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla And Anr. (SC), 2005 (8) SCC 89
FULL TEXT OF THE JUDGMENT APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI
This Order disposes of the Appeal No. FPA-FE-27/DLI/2021 filed by Shri Vivek Goyal against the Order No. ADJ/01/ FEMA/DLZO-II/2019/JD(NKG)/641 dated 23.07.2019 (Impugned Order) passed by the Joint Director, Directorate of Enforcement, Government of India, Delhi. The Ld. Adjudicating Authority (AA) imposed the penalty of Rs. 10,00,000/- on Shri Vivek Goyal for the contravention of Section 7 of the Foreign Exchange Management Act, 1999 (FEMA) read with Regulation 16 of Foreign Exchange Management (Export of Goods and Services) Regulation 2000 in terms of Section 42 of FEMA.
2. Ld. Counsel for the Appellant submitted that the Company M/s Neomagic Semiconductor India Pvt. Ltd. (NSIL) was issued Show Cause Notice (SCN) No. T-4/07/FEMA/DLZO-II/2018/JD (NKG) dated 14.11.2018 for its failure to make exports against 10 export advances totaling US $ 11,13,769 equivalent to Rs.5,01,86,082/- received between 25.04.2006-19.12.2007 from Neomagic Corporation, USA. The SCN was issued on the basis of the Complaint dated 29.10.2018 under Section 16 (3) of FEMA. The SCN and the Complaint had alleged the contravention of Section 7 of the FEMA read with Regulation 16 of Foreign Exchange Management (Export of Goods and Services) Regulation 2000. The SCN was also issued to Shri H P Agarwal, Managing Director, Shri Deep Puar, Director and Shri Vivek Goyal, Director for the alleged contraventions in terms of Section 42 of FEMA. Ld. Counsel submitted that no penalty has been imposed upon the Company since it has been struck off as confirmed from the website of the Ministry of Corporate Affairs, the Government of India. He further stated that penalty of Rs. 20,00,000/- was imposed on Shri H P Agarwal, and Rs. 10,00,000/- each separately on Shri Vivek Goyal and Shri Deepraj Singh Puar. Ld. Counsel for the Appellant pleaded that the Appellant Shri Vivek Goyal is not liable for any penalty in view of the facts of the case and his role in the Company.
3. Ld. Counsel for the Appellant drew attention to the Impugned Order. He stated that it is on record that the Appellant was inducted as the Director in M/s Neomagic Semiconductor India Pvt. Ltd. after a few months of his joining the Company as Vice-President (Engineering), for administrative convenience. He further stated that he held no shares in M/s Neomagic Semiconductors India Pvt. Ltd. and was paid salary only. On being asked about who was looking after day-to-day responsibilities of the company he stated that ‘Finance’ and ‘Export/Import’ were looked after by Shri H. P. Agrawal and banking was also taken care of by Sh. Hari Prakash Agrawal only, though in his (Mr. Agrawal’s) absence, he used to take care of the same. Ld. Counsel further submitted that the Appellant was known to the CEO of the parent Company, Shri Prakash C Agrawal who was his distant relative. Since he was on the verge of retirement, he (Mr. Prakash C. Agrawal) introduced him to the Company, which was looking for a reliable and trustworthy person to manage the Company in India. Thus, he was made responsible for overall administration. He further said that Sh. Prakash C. Agrawal was the brother-in-law of his younger brother. About his role and responsibility in the Company, he stated that he was responsible for administration, filing of periodical returns to STPI, bank correspondences and all other documentation of the Company related to administration.
4. Ld. Counsel for the Appellant submitted that in reply to the SCN the Appellant made it clear that he was merely an employee of NeoMagic Semiconductor (I) Pvt. Ltd. (‘the Company) and his role was limited to the management of the technical operations of the Company. He had no management or decision-making role with respect to the financial or regulatory operations of the Company. He was appointed Director a few months after his employment, only for administrative convenience, and at no time did he hold any shares of the Company. He was employed by the Company on 01.07.2001, as Vice President- Engineering, a position he continued to hold till 23.10.2008, after which his employment was terminated. In fact, he had also resigned from the Board of Directors of the Company and duly intimated the Registrar of Companies about his resignation from the Board. His responsibilities were limited to the planning and management of the technical operations of the Company and technical employees’ recruitment. Occasionally, he may have signed a few salary cheques or instructions to the bank to release employee salaries, if the Managing Director, who normally handed these matters, was unavailable. He was made an authorized signatory for the Company’s bank accounts and a Director solely for administrative convenience only. In these roles, he always acted only under the guidance of the Managing Director. He was never in a decision-making role nor had any oversight responsibilities.
5. Ld. Counsel for the Appellant drew attention to the statement dated 12.02.2013 of the Appellant Shri Vivek Goyal tendered under Section 37 of FEMA. In particular, the Appellant in response to Question No. 3 stated that Shri H P Agarwal handled that work relating to finance, banking and export/import. The Appellant had stated that in the absence of Shri H P Agarwal, he had handled banking. He was also responsible for creation of design files of software and hardware and transmission to the same of the parent Company. Ld. Counsel for the Appellant therefore pleaded to allow the Appeal.
6. Ld. Counsel for the Respondent Directorate submitted that the Appellant did function as the Director of the Company at the relevant time when the Company failed to make exports against the export advance received by it. He further submitted that the Appellant was also substituting for the Managing Director Shri H P Agarwal, as and when Shri Agarwal would be upset. Ld. Counsel stated that there is a finding in the Impugned Order that the Appellant was the person in-charge and responsible to the Company for the conduct of its business. He therefore pleaded to dismiss the Appeal.
7. We have considered the rival submissions and the material on record. We observe that in paragraph 7 of the Impugned Order among the findings made, the Appellant has been held responsible for failure to discharge the export obligation to the tune of US $ 11,13,769 equivalent to Rs. 5,01,86,082/-. We further observe that the reasons for making the said finding have not been specified. In fact, the averments and the explanations given by the Appellant in his statement and reply to the SCN have not been considered and discussed.
8. We reproduce the provisions of Section 42 of FEMA:
“42. Contravention by companies.—(1) Where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder is a company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to punishment if he proves that the contravention took place without his knowledge or that he exercised due diligence to prevent such contravention.
(2) Notwithstanding anything contained in sub-section (1), where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.
Explanation.—For the purposes of this section— (i) “company” means anybody corporate and includes a firm or other association of individuals; and
(ii) “director”, in relation to a firm, means a partner in the firm.”
In terms of the provisions of the Section it is imperative to make a finding that the person concerned was in-charge of and responsible to the Company for the conduct its business. The proviso allows for the said person to prove that the contravention occurred without his knowledge or alternatively had exercised all due diligence to prevent such contravention. The Sub-Section (2) provides for liability for the contravention if the person is proved to have given the consent or had connived in the indulgence of contravention or had been negligent in the discharge of his duties. We find that in spite of denial by the Appellant of any such responsibility which could have caused the contravention, the Impugned Order has culminated in the imposition of penalty on the Appellant without having refuted the denial.
9. In this regard, to better appreciate the liability for penalty of a Director in the Company, we refer to the following paragraphs of the Judgment dated 20.09.2005 of the Hon’ble Supreme Court in the matter of S.M.S. Pharmaceuticals Ltd. vs. Neeta Bhalla And Anr. [2005 (8) SCC 89]:
“The officers responsible for conducting affairs of companies are generally referred to as Directors, Managers, Secretaries, Managing Directors etc. What is required to be considered is: is it sufficient to simply state in a complaint that a particular person was a director of the Company at the time the offence was committed and nothing more is required to be said? For this, it may be worthwhile to notice the role of a director in a company.
The word ‘director’ is defined in Section 2 (13) of the Companies Act, 1956 as under:
” “director” includes any person occupying the position of director, by whatever name called”;
There is a whole chapter in the Companies Act on directors, which is Chapter II. Sections 291 to 293 refer to powers of Board of Directors. A perusal of these provisions shows that what a Board of Directors is empowered to do in relation to a particular company depends upon the role and functions assigned to Directors as per the Memorandum and Articles of Association of the company. There is nothing which suggests that simply by being a director in a Company, one is supposed to discharge particular functions on behalf of a company. It happens that a person may be a director in a company but he may not know anything about day-to-day functioning of the company. As a director he may be attending meetings of the Board of Directors of the Company where usually they decide policy matters and guide the course of business of a company. It may be that a Board of Directors may appoint sub-committees consisting of one or two directors out of the Board of the Company who may be made responsible for day-to- day functions of the Company. These are matters which form part of resolutions of Board of Directors of a Company. Nothing is oral. What emerges from this is that the role of a director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a director of a company is in charge of its everyday affairs. We have discussed about the position of a Director in a company in order to illustrate the point that there is no magic as such in a particular word, be it Director, Manager or Secretary. It all depends upon respective roles assigned to the officers in a company. A company may have Managers or Secretaries for different departments, which means, it may have more than one Manager or Secretary. These officers may also be authorised to issue cheques under their signatures with respect to affairs of their respective departments. Will it be possible to prosecute a Secretary of Department-B regarding a cheque issued by the Secretary of Department-A which is dishonoured ? The Secretary of Department-B may not be knowing anything about issuance of the cheque in question. Therefore, mere use of a particular designation of an officer without more, may not be enough by way of an averment in a complaint. When the requirement in Section 141, which extends the liability to officers of a company, is that such a person should be in charge of and responsible to the company for conduct of business of the company, how can a person be subjected to liability of criminal prosecution without it being averred in the complaint that he satisfies those requirements ? Not every person connected with a Company is made liable under Section 141. Liability is cast on persons who may have something to do with the transaction complained of. A person who is in charge of and responsible for conduct of business of a Company would naturally know why the cheque in question was issued and why it got dishonoured.
xxxxx
While analysing Section 141 of the Act, it will be seen that it operates in cases where an offence under Section 138 is committed by a company. The key words which occur in the Section are “every person”. These are general words and take every person connected with a company within their sweep. Therefore, these words have been rightly qualified by use of the words ” who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence etc.” What is required is that the persons who are sought to be made criminally liable under Section 141 should be at the time the offence was committed, in charge of and responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. It is only those persons who were in charge of and responsible for conduct of business of the company at the time of commission of an offence, who will be liable for criminal action. It follows from this that if a director of a Company who was not in charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable under the provision. The liability arises from being in charge of and responsible for conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. Conversely, a person not holding any office or designation in a Company may be liable if he satisfies the main requirement of being in charge of and responsible for conduct of business of a Company at the relevant time. Liability depends on the role one plays in the affairs of a Company and not on designation or status. If being a Director or Manager or Secretary was enough to cast criminal liability, the Section would have said so. Instead of “every person” the section would have said “every Director, Manager or Secretary in a Company is liable” etc. The legislature is aware that it is a case of criminal liability which means serious consequences so far as the person sought to be made liable is concerned. Therefore, only persons who can be said to be connected with the commission of a crime at the relevant time have been subjected to action. A reference to sub-section (2) of Section 141 fortifies the above reasoning because sub-section (2) envisages direct involvement of any Director, Manager, Secretary or other officer of a company in commission of an offence. This section operates when in a trial it is proved that the offence has been committed with the consent or connivance or is attributable to neglect on the part of any of the holders of these offices in a company. In such a case, such persons are to be held liable. Provision has been made for Directors, Managers, Secretaries and other officers of a company to cover them in cases of their proved involvement.
The conclusion is inevitable that the liability arises on account of conduct, act or omission on the part of a person and not merely on account of holding an office or a position in a company. Therefore, in order to bring a case within Section 141 of the Act the complaint must disclose the necessary facts which make a person liable.”
10. On perusal of the statement of the Appellant and other material on record, it is clear that the Appellant even as Director of the Company was responsible for technical work relating to creation of software and hardware. We also observe that only to the extent of functionality relating to banking that the Appellant substituted Shri H P Agarwal the Managing Director of the Company in his absence. It is on record that the Appellant was not responsible for export and import business of the Company. There is nothing contrary to our observations and findings, which has been produced by the Respondent. Hence, the Appellant cannot be held liable for penalty in terms of Section 42 of FEMA for the aforesaid contraventions.
11. In view of the aforementioned discussions and findings, we set aside the Impugned Order qua the penalty imposed on the Appellant. Therefore, we allow the Appeal No. FPA-FE-27/DLI/2021 filed by Shri Vivek Goyal. Applications pending, if any, are disposed of accordingly.
