Sachdev Overseas Fitness Pvt. Ltd. Vs Special Director (Appellate Tribunal under SAFEMA, New Delhi)
FEMA Penalty Cannot Be Based on Mere Extrapolation of Seized Data-Customs Relief Does Not Bar Independent FEMA Proceedings
Background
An allegation of undervaluation of imported fitness equipment resulted in substantial penalties under the Foreign Exchange Management Act, 1999. The adjudicating authority imposed ₹75 crore on the company and ₹25 crore on its director, treating approximately ₹104 crore as the amount involved in contraventions of sections 3(a) and 3(b).
The proceedings originated from searches conducted by the Directorate of Revenue Intelligence in March 2016 at the company’s office and the director’s residence. Documents, hard disks and electronic storage devices were seized. According to the authorities, invoices issued by the supplier in Taiwan showed substantially lower values than invoices issued by the Chinese manufacturers for the same goods.
The Department alleged that the difference represented payments made outside authorised banking channels. The company, however, maintained that its lower purchase prices arose from a commercial discount arrangement and that all payments were made through authorised banking channels.
The Customs proceedings had ended in the company’s favour. The question was whether that outcome also defeated the FEMA proceedings and whether the seized electronic records justified the entire amount alleged by the ED.
Appellants’ Contentions
The appellants argued that once the Customs undervaluation proceedings had failed, the FEMA allegations founded on the same investigation could not survive.
They disputed the ownership and evidentiary value of the pen drive recovered from the director’s residence. Their case was that it probably belonged to the overseas supplier and had been left behind during a visit. They also pointed to differences in the identification particulars of the seized device and the device referred to in the forensic examination.
The appellants further contended that the persons named in the electronic records as alleged intermediaries had neither been identified nor examined. Consequently, the entries could not establish that unauthorised payments had actually been made.
Customs Relief Does Not Automatically End FEMA Proceedings
The Tribunal held that proceedings under the Customs Act and FEMA serve different purposes.
The Customs proceedings concerned the valuation of imported goods and the alleged evasion of Customs duty. The FEMA proceedings concerned whether foreign exchange had been dealt with or transferred, or payments made to a person resident outside India, contrary to the statutory requirements.
Accordingly, the failure of the Customs case did not automatically extinguish the FEMA case. In particular, the FEMA adjudication was not governed by the Customs Valuation Rules applicable to rejection and redetermination of the declared import value.
The Tribunal also noted that the Customs appellate order contained observations adverse to the appellants concerning the electronic records and the explanation of repeated discounts, even though the Department’s appeal ultimately failed.
Seized Electronic Records and the Statutory Presumption
The Tribunal relied on section 39 of FEMA, which provides a rebuttable presumption concerning documents seized from a person’s custody or control under FEMA or another law.
It held that the appellants had not produced sufficient evidence to rebut the presumption concerning the contents of the seized records. A mere denial of ownership or a general challenge to evidentiary value was insufficient in the circumstances.
The objection concerning the identification of the devices was also rejected. The Tribunal examined the forensic report, which recorded receipt of the devices with intact seals and extraction of their contents into a separately marked pen drive. It found no evidence of tampering.
Significantly, the director’s statement acknowledged that the office hard disks were used for business purposes and that the manufacturers’ invoices appearing in them showed values higher than the Taiwan supplier’s invoices.
Statements and the Standard of Proof
Relying on Vinod M. Chitalia v. Union of India, the Tribunal held that statements recorded under section 108 of the Customs Act could be relied upon in FEMA adjudication concerning the same transactions.
It also rejected the contention that the investigating agency had to identify and examine every person named in the electronic records before a contravention could be established. The Tribunal applied the civil adjudication standard, explaining that clandestine transactions need not be proved by establishing every conceivable link with the rigour required in a criminal trial.
However, this approach did not permit the Department to extend the allegation beyond the evidence actually available.
Mere Projections Cannot Establish Additional Contraventions
The decisive relief arose on quantification.
The seized data covered 363 import bills, reflecting a differential amount of USD 14,01,850, equivalent to ₹7,42,27,152. The much larger allegation had been built by projecting or extrapolating the available data to additional transactions.
The Tribunal held that allegations based on mere projections, without corroborative documentary or other evidence, could not be accepted. It therefore sustained the contraventions of sections 3(a) and 3(b) only to the extent of ₹7.42 crore.
The director’s liability under section 42(1) was also upheld to that extent, having regard to his active role and responsibility for the company’s business.
Decision
The appeals were partly allowed. The Tribunal reduced the company’s penalty from ₹75 crore to ₹75 lakh, and the director’s penalty from ₹25 crore to ₹25 lakh.
Thus, the combined penalty fell from ₹100 crore to ₹1 crore, while the contraventions supported by the seized records remained upheld.
Author’s Comments
A statutory presumption can support the contents of a seized record; it cannot supply entries that the record does not contain. This distinction explains the outcome. The appellants failed to dislodge the electronic evidence, but succeeded against the Department’s attempt to enlarge the case through unsupported extrapolation.
The decision also cautions against treating relief under one enactment as an automatic answer to proceedings under another. The relevant enquiry is what issue was decided, why the earlier proceedings failed, and whether the evidence independently establishes the ingredients of the subsequent statutory contravention.
For practitioners, the useful principle is that proof of some unauthorised transactions does not, by itself, establish every other transaction alleged by projection. The Department must substantiate the additional amount; a lower standard of proof does not dispense with evidence.
FULL TEXT OF THE ORDER OF APPELLATE TRIBUNAL UNDER SAFEMA
This Order disposes of the Appeals Nos. FPA-FE-14/CHN/ 2022 filed by M/s Sachdev Overseas Fitness Pvt. Ltd. (SOFPL) and FPA-FE-15/CHN/2022 filed by Shri Prem Kumar Sachdev (Director), against the Order No. SDE/SRO/HYZO/03/2022 dated 08.02.2022 (Impugned Order) passed by the Special Director, Directorate of Enforcement, Government of India, Southern Regional Office, Chennai. The Ld. Adjudicating Authority (AA) imposed the penalty of Rs.75,00,00,000/- on Appellant M/s Sachdev Overseas Fitness Pvt. Ltd. for the contraventions of Sections 3 (a) and 3 (b) of the Foreign Exchange Management Act, 1999 (FEMA) to the extent of USD 17,446,534/- approximately equivalent to Rs. 104 Crores. Further penalty of Rs. 25,00,00,000/- was imposed on the Appellant Shri Prem Kumar Sachdev, Director of M/s Sachdev Overseas Fitness Pvt. Ltd. vide the Impugned Order, for the aforementioned contraventions in terms of Section 42 (1) of FEMA.
2. Ld. Counsel for the Appellants submitted that the Impugned Order has been passed without appreciating the facts and circumstances of the case. The entire case was made out on reference from the Directorate of Revenue Intelligence (DRI) which had searched the Office and the residence premises on 03.03.2016. During the course of searches, certain documents were seized by the DRI Officers along with data storage devices viz. hard discs and pen drive, and they also seized 7 containers lying at ICD, Sanathnagar, Hyderabad, containing fitness equipment. After conducting their investigations, a Show Cause Notice bearing No. DRI/HZU/26D/ENQ-01(INT-03)/2016, dated 20.10.2016 was issued by the Additional Director General, DRI, Hyderabad, alleging duty evasion to the extent of Rs.13,00,13,327/- in respect of imports made during the period from October, 2011 to January 2014. The case was adjudicated by the Commissioner of Customs, Hyderabad, vide Order No.HYD-CUS-02-COM-19-2020, dated 19.07.2019, dropping the charges made out in the SCN. The Customs, Excise and Service Tax Appellate Tribunal, Hyderabad vide its Final Order No. A/30053/2022 dated 19.04.2020 in Customs Appeal No. 30546 of 2019 did not interfere with the Order dated 19.07.2019 passed by the Commissioner of Customs, Hyderabad and rejected the Appeal against the said Order filed by the Department. Ld. Counsel pleaded that therefore the contraventions of Sections 3 (a) and 3 (b) of FEMA are also not established.
3. Ld. Counsel submitted that the individual Appellant Shri Prem Kumar Sachdev had clearly stated before the DRI that no payments were made through certain individuals to Durga Prasad @ Rajan Khera of M/s Lucky Partners Investment Ltd., Taiwan. All the payments were made only through authorized banking channel. The individual Appellant had further stated that he had no relationship and had made no payment through S/Shri Maheshji, Palji, Malaysia (Dheeru), Bablu-TR, Gourav, Bittu-Garry, Ballu Seth, Dheeru Bhai and Chunni Bhallu, whose names appeared in the seized pen drive. Moreover, though the pen drive was seized from his residence on 03.03.2016 by the DRI, it did not belong to him. In all probability, it belonged to Durga Prasad @ Rajan Khera of M/s Lucky Partners Investment Ltd., Taiwan, who visited his residence whenever he visited Hyderabad. The pen drive must have been left by him in his house by oversight and hence was found in his house and he was not aware of the presence of the pen drive in his house. When countered by the authority of DRI that the contents of the 2 GB pen drive would be true as it belonged to Durga Prasad @ Rajan Khera of M/s Lucky Partners Investment Ltd., Taiwan, Sh. Prem Kumar Sachdev stated that he did not know anything about the contents of the pen drive and that no payments to individuals were made by him. When asked to comment on the sample sheet reproduced by the DRI authorities in their Show Cause Notice, wherein the words ‘Dear Premji’, is mentioned on the top left-hand corner, Sh. Prem Kumar Sachdev while appending his signature in token of identification, stated that he had no idea about the context in which Shri Durga Prasad @ Rajan Khera had mentioned his name. Ld. Counsel submitted that Shri Sachdev had informed that there was an Agreement entered with M/s Lucky Parters Investment Ltd., Taiwan on 06.04.2010, whereby they were entitled for 35% discount for a turnover of over USD 5 million every year. The supplier gave turnover/quantity discount on his procurement price based on the assured Orders placed for each financial year. The Appellant was not aware as to how much discount the supplier in Taiwan would have received from the manufacturer in China. He asserted that the supplier in Taiwan would have received more discount than given to the Appellant Company. Shri Sachdev denied having knowledge about the invoice of M/s Xiamen K-Power Trading Co. Ltd. Ld. Counsel contended that the total differential value of 728 imports made by SOFPL during the period from October, 2011 to February, 2016 estimated as USD 1,74,46,534 was based on the imagination of the DRI. Ld. Counsel submitted that certificate from Chartered Accountant demonstrates that no cash was generated from the business and hence no payment to the supplier could have been made in cash. Ld. Counsel stated that the individual Appellant did not admit under valuation of goods at the time of Panchnama dated 09.03.2016 and 10.03.2016. The DRI Authority recorded the same in the Panchnama, which however, was not recorded under section 108 of the Customs Act. Moreover, the individual Appellant had merely stated that the invoices of the supplier showed less value than reflected in invoices of the manufacturer.
4. Ld. Counsel for the Appellants dwelt at length on the evidentiary significance of the seized pen drive. While the Panchnama showed the recovery from the house of the individual Appellant, however, its exact location was not mentioned. The data as certified by CFSL was not handed over to Shri Sachdev. The authenticity of the contents of the pen drive was not established by the Author of such data. The pen drive was left by Shri Rajan Khera inadvertently long time back. Ld. Counsel submitted that while the recovery of certain documents and pen drive and flash drive is not denied, the allegation of misdeclaration and under valuation of goods imported are vehemently refuted. The contents of the pen drive were not part of books of account or documents recovered from the office computers of SOFPL. Ld. Counsel submitted that while the pen drive seized in his absence from the residence of the Appellant was “Kingston 1GB SL No. KF041608” as per Panchanama dated 03.03.2016, the pen drive from which the Statement of Account was allegedly retrieved, was “Kingston No.04235-328, capacity 01 GB” as per Examination Report of CFSL dated 10.05.2016. The source of recovery of the pen drive, contents of which have been heavily relied upon by the Department, is not known. As such, the entire observation based on the contents of aforesaid pen drive are not sustainable. It is also pertinent to mention that Complaint filed by the Ld. Assistant Director, Directorate of Enforcement on the basis of which present penalty proceeding has been initiated, mentions about 2 GB pen drive seized from the residential premises of the Appellant, however, it is evident from the Panchnama drawn at the residential premises, during the course of search by the DRI that no pen drive of 2GB was resumed/seized from the residential premises of the Appellant. Ld. Counsel submitted that the Ld. Adjudicating Authority stated in Paragraph 5.8 of the Impugned Order that the recovery of the pen drive from the residential premises of Shri Prem Kumar Sachdev was not disputed. In this regard, Ld. Counsel further submitted that the pen drive recovered from the residence of Shri Prem Kumar Sachdev on 03.03.2016 was not the one that was deciphered by CSFL. While the Pen drive seized from the residence of Shri Prem Kumar Sachdev on 03.03.2016 was “Kingston 1GB SL No. KF041608” as per Panchanama dated 03.03.2016, the pen drive from which the alleged statement of account was retrieved was “Kingston No.04235-328, capacity 01 GB” as per Examination Report dated 10.05.2016 of CFSL. As such the entire adjudication proceedings based on the contents of the aforesaid pen drive are not sustainable. Ld. Counsel for the Appellants pleaded to allow the Appeals.
5. Ld. Counsel for the Respondent Directorate submitted that the examination of live consignment, imported by SOFPL at ICD, Sanath Nagar, Hyderabad vide Bill of Entry No. 4244143 dated 13.02.2016 was conducted on 09.03.2016. During the course of recording of Panchnama, Shri Prem Kumar Sachdev admitted that the goods under import have been undervalued in range of 32% to 35%. Scrutiny of the documents seized from SOFPL revealed that though the goods imported under the invoices scrutinized by the Customs were same in description, quantity and also the container number, but differed in value. The values shown in the invoices of the Taiwan supplier were much lower than the values shown in the invoices raised by the Chinese Manufacturer. The reduced values were in the range of 30% to 40%. Scrutiny of data recovered by CFSL from the Hard Disks and Pen Drive found in the residential premises of Shri Prem Kumar Sachdev revealed that the invoices raised by the Chinese Manufacturer were much higher than the values shown in the invoices of Taiwan Supplier. Ld. Counsel argued that even though the DRI Show Cause Notice was dropped by the Commissioner of Customs, one should bear in mind that though the genesis of information was the document collected by the DRI, the proceedings under the Customs Act and the Foreign Exchange Management Act are separate and distinct. It would be pertinent to clarify that the DRI Show Cause notice was concerned with violations of the provisions of the Customs Act, 1962, whereas the subject proceedings are concerned with the contraventions under Sections 3(a) and 3(b) of FEMA. In view of the above, the argument that since the Show Cause Notice issued under the Customs Act was dropped, proceedings under FEMA should also not continue, does not hold any merit. The Hon’ble High Court of Bombay in the Judgment dated 28.03.2012 in the case of Vinod M. Chitalia Vs. Union of India observed the following:
“20. The statements made to DRI can be used in the present proceeding as they pertain to the same transaction. It must be borne in mind that under Section 108 of the Customs Act, 1962 the statements recorded before the DRI are deemed to be in a judicial proceeding within the meaning of Section 193 and 228 of the Indian Penal Code, 1860. The solemnity and sanctity attached to the statement made in a judicial proceeding therefore attaches to the statement made under the Customs Act to the DRI. Therefore, there is no prohibition in relying upon statements made under the Customs Act 1962 for the purposes of the adjudication proceeding under the FEMA, more so when reliance is placed upon documents to the complaint made to the Adjudicating Authority.”
Ld. Counsel submitted that it was contended by the Appellants that the contents of the pen drive seized from the residential premises of individual Appellant has no evidentiary value. In this regard, it is seen that no dispute regarding the recovery and seizure of the pen drive from the residential premises of the individual Appellant, during the search operation conducted by the
Directorate of Revenue Intelligence on 03.03.2016 has been raised by the Appellants. However, the Appellants have joined the issue with respect to the admissibility of the contents of the said pen drive submitting that the contents of the seized pen drive were not admissible. Ld. Counsel contended that the contents of the pen drive were examined by the Central Forensic Science Laboratory, Hyderabad and examination report was issued by the CFSL on 10.05.2016. Therefore, there cannot be any dispute regarding the contents of the said pen drive as the contents have been certified by the CFSL, Hyderabad.
6. Ld. Counsel for the Respondent Directorate submitted that regarding the admissibility of the seized pen drive, it is necessary to reproduce Section 39 of FEMA, which states that:
“39. Presumption as to documents in certain cases.—Where any document—
(i) is produced or furnished by any person or has been seized from the custody or control of any person, in either case, under this Act or under any other law; or
(ii) has been received from any place outside India (duly authenticated by such authority or person and in such manner as may be prescribed) in the course of investigation of any contravention under this Act alleged to have been committed by any person,
and such document is tendered in any proceeding under this Act in evidence against him, or against him and any other person who is proceeded against jointly with him, the court or the Adjudicating Authority, as the case may be, shall—
(a) presume, unless the contrary is proved, that the signature and every other part of such document which purports to be in the handwriting of any particular person or which the court may reasonably assume to have been signed by, or to be in the handwriting of, any particular person, is in that person’s handwriting, and in the case of a document executed or attested, that it was executed or attested by the person by whom it purports to have been so executed or attested;
(b) admit the document in evidence notwithstanding that it is not duly stamped, if such document is otherwise admissible in evidence;
(c) in a case falling under clause (i), also presume, unless the contrary is proved, the truth of the contents of such document.”
Ld. Counsel submitted that the Hon’ble Supreme Court in the Judgment dated 15.11.2006 passed in P. R. Metrani vs. Commissioner of Income Tax, Bangalore observed that “A presumption is an inference of fact drawn from other known or proved facts. It is a rule of law under which courts are authorized to draw a particular inference from a particular fact.” Presumption can be of three types, (i) “may presume” (ii) “shall presume” and (iii) “conclusive proof”. “May presume” leaves it to the discretion of the court to make the presumption according to the circumstances of the case. “Shall presume” leaves no option with the court not to make the presumption. The Court is bound to take the fact as proved until evidence is given to disprove it. The words in Section 39 of FEMA relating to presumption are “shall presume”. This, as observed by the Hon’ble Apex Court, leaves the Adjudicating Authority with no option but to make the presumption regarding the truth of the contents of the Pen drive seized from the premises of the individual Appellant. Although this is a rebuttable presumption, the Appellants have to produce sufficient evidence in this regard to rebut the presumption. Merely stating that contents of the seized pen drive have no evidentiary value would not be sufficient enough to rebut the presumption under Section 39 of FEMA. As such, contention of the Appellants regarding the admissibility of the contents of the pen drive seized from the residential premises of the individual Appellant cannot be accepted.
7. Ld. Counsel for the Respondent Directorate further submitted the following observations made in the Impugned Order:
“5.12 ………It is irrational to believe that Supplier is giving a discount to the Noticee Company while paying the full price to the manufacturer himself. If the supplier has received equivalent or more compensation from the manufactures, no evidence in this respect has been produced by the Noticees. The so called agreement says that 35% discount would be given on CIF, if the slab is $5 million or above. Just to take one example, in Invoice No 11KTE283 dated 16.12.2011, the manufacturer has invoiced US $ 27,768.90 whereas the supplier has given an invoice for US $ 16,812/-. It is absurd to believe that the supplier would take loss of more than $ 10,000/- just to have the privilege of supplying goods to the Noticee Company. It is also seen that 35% discount on CIF of US $27,768.90 would give an invoice value of $ 18050/- and not $ 16,812/- thus, very clearly proving that the agreement dated 06.04.2010 was not the basis for the massive under invoicing of the goods imported by the Noticee company. In this regard, it is important to point out that the Noticee had accepted the fact that even if 35% discount is taken in to account, there was still under valuation to the extent of US $ 14,01,850/- equivalent to Rs. 7,42,27,152/- in respect of 363 import bills figuring in the seized pen drive. This alone proves the fact that the so called agreement dated 06.04.2010 is nothing but a sham agreement prepared solely to hoodwink the authorities.
5.13 In addition, the said agreement dated 06.04.2010 was entered between M/s Sachdev Overseas, a partnership firm and M/s Lucky Partners Investments Ltd/Argain Company Ltd stating that 35% discount would be given for purchase of US $ 5.00 million and above for the financial year and supposed to be valid for 10 years. On 30.03.2012, the said agreement was extended by the overseas supplier and the said extension of the agreement dated 06.04.2010 entered between the overseas supplier and M/s Sachdev Overseas was signed by the Noticee Company and the Overseas supplier even though no such purported agreement was entered between the overseas supplier and the Noticee Company. This in itself shows that the agreement was nothing but a sham agreement executed to hoodwink customs authorities. It is also interesting to note that in a letter dated 02.04.2012 addressed to the overseas supplier, M/s Sachdev Overseas committed to achieve a turnover of more than US $ 5 million. Further, the commitment made to M/s Lucky Partners Investments Ltd/Argain Company Ltd was extended to include M/s Best Crown Industrial Ltd and M/s S Power Company Ltd which does not appear to be a prudent practical business decision. Moreover, the overseas supplier does not have any such agreement granting discount of 35% with any entity, not controlled by Noticee No 2, for import of fitness equipment. Merely producing an agreement with the overseas supplier, especially if the agreement is an unsupported, standalone document, would not allow the importer to escape from the charges under FEMA, 1999, if the charges are well supported by the recovery of documents, bank statements, manufacturer’s invoices, packing lists, supplier’s invoices etc. Therefore, as already held by me, the agreement between the overseas supplier and the Indian entities cannot be taken into consideration and it has to be considered as a sham agreement.
5.14 From the pen drive seized from the residential premises of Noticee no 2 (individual Appellant herein), one excel file titled 2012-13 PS containing several sheets numbered from sheet 54 to 65 was retrieved. The contents of the seized pen drive contains details in respect of the invoice number raised by the overseas supplier based in Taiwan, goods imported, actual invoice value of the supplier in US $, the handling charges in US $, Name of the Manufacturer and the previous balance in US $. These details are given in the section marked as debit. It begins with “Dear Premji”. In this context, it is useful to note that the name of Noticee No 2 is Prem Kumar Sachdev. In the credit section, details in respect of amounts credited in US $ through banking channels against the said invoices, Amounts paid in Indian Rupees and its US $ equivalent and the balance amount to be paid in US $. Just to take one example, against SH-901 it is mentioned in the seized pen drive that “2”40′ AF-Multi Orb.+AF- Regular Orb.+Spare+Fright”. SH-901 is the invoice dated 19.04.2013 drawn by M/s Lucky Partners Investments Ltd, Taiwan on M/s Sachdev Overseas, Secunderabad. In the said invoice bearing no SH-901 dated 19.04.2013, description of the goods are given as AF-Multi Orbitrec, Af-Regular Orbitrec and Spare Parts. This exactly matches with the description given against SH-901 in the seized pen drive. The invoice SH-901 dated 19.04.2013 corresponds with the Commercial invoice bearing no 13KTE0015 dated 15.04.2013 drawn by the Manufacturer, namely M/s Xiamen K-Power Trading Co Ltd, China on Argain Company Ltd Lucky Parteners Investments Ltd but shipped directly to M/s Sachdev Overseas, India. The correlation between supplier’s and manufacturer’s invoices can be made on the basis of the fact that Commercial invoice no SH-901 contains Container No OOLU8160450 and OOLU8908795 which figure in the Weight/Packing List for the Invoice no 13KTE0015 dated 15.04.2013. Both the aforesaid Containers, as can be seen from the Packing List, were 40′ High- Cube Shipping Containers and hence the notations 2°40′ in the pen drive against the entry of Invoice no SH-901.
5.15 The entry against the invoice no SH-901 also contained the amount $56,803.20 and handling charges of $ 2840.15 and the name K-Power under the Debit section. It is seen that K-Power signifies the manufacturer M/s Xiamen K-Power Trading Co Ltd, China. Handling charges of $2840.15 is 5% of the amount $ 56,803.20. It is seen from the manufacturer’s Invoice no 13KTE0015 dated 15.04.2013 that the invoice amount is $53,203.22. Adding the profit margin of the supplier, the figure is enhanced to $56,803.20 and the addition of 5% handling charges of $2840.15 together gives $59,643.35. In the credit section, the entry against SH-901 states “Bank Documents 10.06.13 $32,827.00.” It is seen from the commercial invoice no SH-901 dated 19.04.2013 that invoice amount is US$32,827.00. Therefore, it is clear that the aforesaid entry signifies the receipt of US$ 32,827/- through banking channels. Thus, contents of the seized pen drive are true and correct as can be seen from the fact that it is fully corroborated by supplier’s invoices, banking transactions, manufacturer’s invoices and packing lists.
5.16 It has been contended by the Noticees that the entries in the seized pen drive pertain to the period up to 21.10.2014 and that percentage of under valuation worked out from the entries in the pen drive was adopted for a later period without any corroborative evidence. However, it is seen that for the subsequent period too, the under invoicing continued as before. In this regard, it is seen that documents recovered from the office premises of M/s Sachdev Overseas Fitness Pvt Ltd, Secunderabad under Panchanama dated 03.03.2016 contained certain invoices of the Chinese Manufacturer pertaining to the period after 21.10.2014. Commercial Invoice bearing number 14KTE0885E-2 dated 17.12.2014 drawn by M/s Xiamen K-Power Trading Co Ltd, China on Argain Company Ltd Lucky Partners Ltd has invoice value of US $ 53,344.29 whereas the Supplier’s corresponding invoice bearing number SV-045 dated 19.12.2014 drawn on the Noticee Company has the invoice value of US $36,246/. Thus, it is seen that pattern of under invoicing continued for the period after 21.10.2014. Similarly, Manufacturer’s invoice bearing no 15KTE0490 dated 26.06.2015 has invoice value of US$ 54,318.38 whereas the Supplier’s corresponding invoice bearing no BC-167 dated 29.06.2015 has invoice value of 38348/-. Just to take one more example, Manufacturer’s invoice bearing no 15KTE1393A dated 26.01.2016 has invoice value of US$ 79326.06 whereas the Supplier’s corresponding invoice bearing no BC-353 dated 02.2.2016 has invoice value of US $ 56094/-. Therefore, it is seen that the under invoicing had continued unabated even after 21.10.2014. Further, from the data of the seized pen drive it is seen that account is a running account not confined to the period 2011-14. The debit section begins with the previous balance and invoice amounts are added to that. Similarly, Credit sections end with the Balance Amount to be paid to the Supplier which is then carried forward to the next Debit section. The contents of the pen drive ends with the Balance Amount to be paid to the Supplier which is given as $ 8,00,205.40. Thus, it is very clear that it is a running account not confined to a specified period. As such, the method to adopt percentage of under valuation worked out from the entries in the pen drive for a later period is perfectly justified.”
8. Ld. Counsel for the Respondent Directorate submitted that the Appellant Company is a private limited Company incorporated on 13.04.2011. An Agreement dated 01.04.2014 was entered between the Appellant Company and M/s Sachdev Overseas, which was a partnership firm between the wife and son of the individual Appellant, whereby the Appellant Company took over the business and all the assets of the partnership firm for a sum of Rs. 1 Crore. Thus, M/s Sachdev Overseas was converted into a private limited Company by the name of M/s Sachdev Overseas Fitness Pvt. Ltd. Therefore, it is clear that for any possible FEMA violation committed by M/s Sachdev Overseas, proceedings can be initiated against the Appellant Company. In this regard, it is pertinent to refer to the Judgment of the Hon’ble High Court of Bombay dated 28.03.2012 passed in case of Vinod M Chitalia vs. Union of India wherein it was observed that:
“The burden which is cast upon the adjudicating authority to establish a violation must be assessed from a robust and common-sense perspective. Clandestine violations take place under the cloak of secrecy. To impose a burden of establishing in an adjudication proceeding, every conceivable link of an unlawful transaction would result in a manifest failure of justice and would defeat the underlying purpose of the Act.”
Ld. Counsel contended that not only the Appellant Company indulged in contraventions of Sections 3 (a) and 3 (b) of FEMA, but also the individual Appellant being in-charge of Company and having run its affairs is also liable for penalty for the said contraventions in terms of Section 42 (1) of FEMA. Ld. Counsel therefore pleaded to dismiss the Appeals.
9. We have considered the rival submissions and the material on record. Ld. Counsel for the Appellants strongly pleaded that the Customs, Excise and Service Tax Appellate Tribunal, Hyderabad vide its Final Order No. A/30053/2022 dated 19.04.2022 in Customs Appeal No. 30546 of 2019 did not interfere with the Order dated 19.07.2019 passed by the Commissioner of Customs, Hyderabad and dismissed the Appeal against the said Order dated 19.07.2019 filed by the Department. Ld. Counsel submitted that the Tribunal, Hyderabad has made a finding that while there was a difference between the two sets of invoices, without questioning anyone or investigating as to why there was a difference, it cannot be a sufficient ground to reject the transaction value and to redetermine as per the invoice of the manufacturer and to recover differential duty. Ld. Counsel stated that it was argued before the Customs Tribunal that the case of the DRI was based mainly on a Statement of Accounts (SOA) found on a pen drive which was seized during the search of the house of Shri Sachdev. The Pen Drive did not belong to the Appellants herein. No investigation was conducted to find out as to whom the Pen drive belonged to and who authored the entries in the file saved in it. The SOA also contained some names against which cash payments were shown to have been made to Shri Khera which formed the basis of the allegation of the DRI that additional cash payments were made to Shri Khera. Ld. Counsel for the Appellants argued that neither were the persons named in the file identified nor were they questioned to establish that cash payments were indeed made and if so, at whose behest. Even if the invoice value was rejected on suspicion based on the entries in the pen drive, valuation had to be done sequentially as per the Valuation Rules. This was not done on the ground that there were no imports of Identical or similar goods during the relevant period, which was a wrong claim since the Appellants disproved it by producing evidence of imports of similar goods. This evidence had not been rebutted.
10. We have gone through the Final Order dated 19.04.2022 of the Ld. Tribunal and cite the following from Paragraph 12 of the Final Order:
“In this case, the DRI Officers found that the invoice which was presented along with the Bill of Entry was a trader’s Invoice for a value which was substantially lower than the price at which the trader himself had purchased the goods. Both the manufacturer’s invoice on the trader and the trader’s invoice on the Importer were for exactly the same consignment with the same details, as they were back to back orders. In other words, the respondent (Appellants herein) placed an order for X quantity of goods on the trader in Taiwan and the trader placed an order for the same goods on the manufacturer in China. The goods were shipped directly by the manufacturer from China to the respondent (Appellants herein). According to the Revenue, the trader’s invoices are fraudulent and manipulated Invoices. Insofar as the first part of the demand indicated in paragraph 10 (a) above is concerned, the EXCEL sheets in the pen drive as well as the invoices recovered during the searches form the basis for the doubt. As far as the second and third parts of the demand indicated in paragraphs 10 (b) and 10 (c) are concerned, the doubt is based on projections.”
Ld. Customs Tribunal has gone on to further observe in Paragraph 24 of its Order (supra) the following:
“As may be seen, the proposal to reject the transaction value in respect of those imports listed in WORKSHEET II to the SCN [indicated in paragraph 10 (a) above] is based on the EXCEL sheet recovered from the Pen drive recovered from the residence of Shri Sachdev of the respondent (Appellant herein) and the copies of invoices recovered from the office of the respondent. As for the imports listed in WORKSHEET IIIA to the SCN [Indicated in paragraph 10(b) above] and WORKSHEET IV to the SCN [Indicated in paragraph 10(c) above], they are based on projections and extrapolations. Since the officers found some reason to reject the transaction value in imports covered by WORKSHEET II, it is also proposed to be rejected in the Imports covered by the other two worksheets. We do not find any legal provision by which the transaction value can be rejected by extrapolation. As we explained above, each import is an assessment by itself and is appealable and if there are a hundred imports at different transaction values, duty on each import must be determined based on the transaction value of that import. If the transaction value is higher in any one case, that, by itself cannot form the basis for assessment of other imports. Conversely, if the transaction value in any one case is lower, the importer cannot ask for that to be the basis for assessment of all other imports. A single value has to be reckoned for assessment of all imports only if it is a tariff value fixed by the Board under Section 4 (2).”
Ld. Customs Tribunal has therefore gone on to disallow the redetermination of the transaction values of the imports covered in Worksheets IIIA and IV of the SCN, finding no legal basis for doing the same on extrapolation.
11. However, the Ld. Customs Tribunal has observed the following in paragraph 26 of its Order (supra):
“As far as the consignments covered by WORKSHEET II of the SCN are concerned, the rejection of the transaction value and its re- determination is based on the EXCEL file retrieved by the CFSL from the pen-drive seized from the residence of Shri Sachdev of the importer as well as copies of manufacturer’s invoices recovered from the office of the respondent (Appellants herein). The undisputed facts are that the respondent (Appellants herein) placed import orders on Shri Khera’s companies in Taiwan who placed back-to-back orders on the manufacturers in China. The consignment was shipped directly from China by the Chinese manufacturer to the respondent (Appellants herein).”
Ld. Customs Tribunal has further observed in paragraph 27 of its Final Order (supra):
“What is unusual about this case is that the trader companies in Taiwan have been buying at a higher price from the manufacturer and selling to the respondent (Appellants herein) importer at a price about 30% lower. This is not a one-time concession given in a particular case for any business reasons but it is a repeated process. In other words, the trader companies in Taiwan are in the business of running their business so as to incur a loss of 30% in every transaction. This is sufficient reason to doubt the truth and accuracy of the invoices issued by them as no prudent man will run his business so as to lose 30% on each and every transaction more so, when they are back-to-back deals and not where the trader has some old stock left which he clears selling at a price below his purchase price. The submission of the learned counsel for the respondent (Appellants herein) before us is that they are getting a quantity discount as per the agreement with the trader in Taiwan whereby they get the goods at a price 30% lower than the manufacturer’s price. Trade discount is a common business practice to encourage larger purchases. The seller gives a discount in the price so as to increase volumes of sale. Trade discount can take various forms but all have one objective- increase the sales so that even though the seller loses some profit on each item sold, the overall profits are higher because of larger volumes and he also increases his market share. However, the trade discount is not given so as to lose money on each transaction. Greater volumes in such a case will result in larger losses and no prudent business will run its business so that it can increasingly lose money on transactions. Thus, the submission of the learned counsel does not provide any satisfactory answer as to how the trader is buying at a higher price and selling at a lower price again and again and again so as to enhance its losses.”
Ld. Customs Tribunal goes on to further make the following observations in paragraph 29 of its Order (supra):
“………From the facts of the case, it is evident that the pen-drive was recovered from the residence of Shri Sachdev who was asked by the officers about the authorship of the EXCEL file and he said in his statement that he does not remember as to who the author of the statement was. The authorship of the EXCEL file is under the exclusive knowledge of Shri Sachdev from whose residence the pen-drive was seized and if he refuses to explain as to who the author was, the officers cannot be faulted for it. It is impossible for the officers to establish the authorship of the EXCEL file when it is in the exclusive knowledge of Shri Sachdev. It also does not matter whether the pen-drive belongs to Shri Sachdev or not. He may have owned it or borrowed it from someone. Learned counsel’s submissions that the pen drive does not belong to the respondent cannot be accepted. It is undisputedly, recovered from Shri Sachdev’s residence by the officers. In his statement, Shri Sachdev said that he does not remember who the author of the EXCEL file was. He did not say that it was not recovered from his residence or that it belonged to somebody else and was only found in his home during search for some reason. It is inconceivable that the pen-drive belongs to someone else. We can think of no reason for someone else to keep a meticulous record of the transactions of the respondent in an EXCEL file and also leave the pen-drive in the residence of the respondent (Appellant herein).”
12. From the aforementioned observations, we find that the Ld. Customs Tribunal has concluded from the fact that since the pen drives having been seized from the residence of the individual Appellant, it cannot be denied that these did not belong to the individual Appellant. In fact, the Ld. Tribunal has rejected the idea that someone else would prepare such meticulous record and leave it at the house of the individual Appellant. The Ld. Customs Tribunal rejected the explanation of the Appellants that repeated trade discounts were granted by the Supplier in Taiwan to them in spite of having obtained the goods from the manufacturer in China at higher price. In such eventuality, repeated trade discounts would only result in losses as nothing was produced to show increase in sales and in profits due to trade discounts. Moreover, paragraphs 5.12 and 5.13 of the Impugned Order has discussed at length, how the agreement dated 06.04.2010 entered between the overseas supplier and M/s Sachdev Overseas, which was extended by the Appellant Company was nothing, but a sham agreement. These paragraphs have been reproduced by the Ld. Counsel for the Respondent Directorate in paragraph 7 of this Order.
13. The Ld. Customs Tribunal however, did not accept under valuation in those transactions, which were worked out by the DRI on the basis of projections and extrapolations. While accepting that the pen drive did show the names of the persons, through whom the alleged additional cash payments were made to the supplier in Taiwan, the Ld. Customs Tribunal rejected such claim on the grounds that no other evidence had been recorded. The Ld. Tribunal went on to further reject the evidence of the pen drive on the grounds that the procedure prescribed under Section 138C of the Customs Act, 1962 was not followed, the person who had control over the seized pen drive did not give a testimony on oath and that the report of the CFSL, Hyderabad was not shared with the Appellants.
14. We agree with the observation made in the Impugned Order that the proceedings under the Customs Act, 1962 and those under FEMA are separate and distinct. While the Adjudication Order dated 19.07.2019 passed by the Commissioner of Customs and the Final Order dated 19.04.2022 passed by the Ld. Customs, Excise and Service Tax, Appellate Tribunal dealt with the valuation of the imported goods, so as to ascertain whether the Customs duty was evaded or not, the Impugned Order passed under FEMA was to ascertain whether the Appellants dealt in or transferred any foreign exchange and made payment to any person resident outside India. The aforesaid Orders issued under the Customs Act had to also get into the details of whether the Customs Valuation Rules were adhered in rejection of the value declared by the importer. However, the proceedings under FEMA are not bound by the requirement of adherence to the Customs Valuation Rules. The focus of investigation and the proceeding under FEMA is to establish the illegal transfer of funds abroad and not the assessment of Customs duty. Besides the statements of the individual Appellant recorded under Section 108 of the Customs Act, we also take note of the recovery of the digital devices from the office and the residential premises of the individual Appellant. The admissibility of the statements recorded under Section 108 of the Customs Act has already been dealt with in detail in the Impugned Order citing the Judgment dated 28.03.2012 of the Hon’ble Bombay High Court in the matter of Vinod M. Chitalia vs. Union of India. To look at the evidential significance of the recovered electronic devices we first consider certain observations made by the Customs Tribunal. It is significant that the Ld. Customs Tribunal has made a specific finding that the electronic devices belonged to the Appellants herein. Moreover, from the kind of details meticulously provided therein, it has been inferred that the information in these devices including the pen drive could not have been provided by anyone else other than the individual Appellant. Ld. Customs Tribunal has also rejected that the difference in value between the invoices submitted to Customs and the value at which the Chinese manufacturer issued the invoices was attributable to the trade discounts. It is also noted that the names of the individuals appear in the pen drive, who allegedly paid in cash to Shri Rajan Khera, the supplier in Taiwan. However, for certain reasons as mentioned in the preceding paragraph, the evidential value of the pen drives has been rejected by the Ld. Customs Tribunal. On perusal of the statement dated 07.03.2016 of the individual Appellant of Shri Prem Kumar Sachdev recorded under Section 108 of the Customs Act, 1962, it is clear that the individual Appellant would place the import orders detailing the model number, the sources i.e. the Chinese manufacturer, the quantity of goods, the delivery schedule, the delivery address, the port of discharge etc. on Shri Rajan Khera, who in turn place the order on the Chinese manufacturer and thereupon the goods were directly shipped from China to India. The individual Appellant has also admitted in the said statement that he had seen the invoices raised by the Chinese manufacturer and that raised by the supplier in Taiwan. Sh. Sachdev further admitted that while both the invoices had the same details, the values in the invoice of the supplier in Taiwan was lower by 35% to 40% to the values in the invoices of the Chinese manufacturer. He admitted, as well that the goods which were intercepted by the DRI at ICD, Hyderabad and in the Customs Public Bonded Warehouse, also had value lower by 32% to 35%. The statement under Section 108 of the Customs Act, 1962 cannot be ignored for the proceedings under the FEMA as held in Vinod M. Chitalia case (supra). We also do not find evidence so as to challenge the veracity of the contents of the electronic devices and note in particular that the these were recovered from the premises of the individual Appellant.
15. Ld. Counsel for the Respondent Directorate has already argued that Section 39 of FEMA requires mandatory presumption about the truth of the contents of such documents, which are seized from the custody or control of any person under this Act or under any other law. We also agree with the observations made in the Impugned Order that the Appellants have failed to produce sufficient evidence to rebut the presumption. The Appellants have attempted to challenge such presumption by submitting that while the pen drive seized from the residence of the Appellant was “Kingston 1GB SL No. KF041608” as per Panchnama dated 03.03.2016, the Pen Drive from which the Statement of Account was allegedly retrieved, was “Kingston No.04235-328, capacity 01 GB” as per Examination Report of CFSL dated 10.05.2016. We do not agree with the said argument, in view of the examination report No. CFSL(H)/396/DOC/150/CCH-20/2016 dated 10.05.2016 of CFSL which is placed on record. The first page of report categorically mentions the four exhibits comprising of two Hard Disks with separate model numbers and a Kingston Pen Drive with capacity 1GB and a Kingston SD with capacity 2 GB. The page also states that the seals were intact and tallied with the specimen. The detailed report follows thereafter with categorical statements that the contents of the four devices were marked as Q1HD, Q2HD, Q3PD and Q4SD which were provided in Pen Drive marked CCH2016PD. We therefore observe that there is no evidence as to suspect tampering of the contents of the seized devices as stored in the Pen Drive marked CCH2016PD. We also reject the contention that any prejudice was caused to the Appellants by not handing over the data as certified by CFSL to the individual Appellant. We note that even the Ld. Customs Tribunal has attributed the data in the seized electronic devices to the individual Appellant and the truth thereof is established by virtue of presumption under Section 39 of FEMA. In any case there is nothing to show any tampering of the data retrieved by the CFSL. Moreover, the Panchnama dated 03.03.2016 of the search at the office premises of the Appellant Company shows that besides three made up files, two hard disks with detailed description about their make and capacity were seized. Further, the Panchnama dated 03.03.2016 of the residential premises of the individual Appellant that shows besides the made up file there were seizure of one pen drive of make Kingston 1GB and one flash drive of make Kingston 2GB. In this regard, the statement of Shri Prem Kumar Sachdev under Section 108 of the Customs Act, 1962 tendered on 22.09.2016, which is part of the record is revealing and therefore the following part of it is reproduced:
“As per the panchanama, one pen drive of make Kingston 1GB Sl. No. KF.041608 and one flash drive of make Kingston 2 GB were recovered from my residence along with certain other documents placed in file titled as made-up file. I have also been shown ‘Appendix-1 – Forwarding Note’ in F. No. DRI/HZU/ 26D/Enq-1(Int-Nil)/2016 under which the said pen drive and flash drive along with two hard disks seized from the office of M/s. Sachdev Overseas Fitness Pvt. Ltd., Hyderabad were forwarded to the Director, Central Forensic Science Laboratory, Hyderabad on 08-03-2016 and I have appended my dated signature in token of having seen the same. I have been shown the examination report No. CFSL(H)/396/DOC/150/CCH-20/2016 dated 10- 05-2016 and I have signed on the same in token of having read the same. The digital evidence files contained in the two hard disks, one pen drive and flash drive have been provided in a pen drive marked ‘CCH2016PD’. I have been shown Certain invoices of the Chinese manufacturers who raised invoice on the companies of Shri Rajan Khera that were recovered from the office premises of M/s. Sachdev Overseas Fitness Pvt. Ltd., Secunderabad are also available in the hard disks recovered from my office premises. These hard disks are put in use in our office for our business purpose and the data contained therein are also captured by our office. The values mentioned in the manufacturers’ invoices are higher than the values mentioned in the invoices raised by our supplier in Taiwan. I have already given a statement on 07.03.2016 on this aspect and I abide by the same.”
16. The argument advanced by the Appellants that the EXCEL sheets bearing certain names, who allegedly made cash payments to Shri Khera are not substantiated as neither were the persons identified nor were they questioned to establish that cash payments were indeed made and if so, at whose behest. We cite the following from the Judgment of the Hon’ble High Court of Bombay dated 28.03.2012 passed in case of Vinod M Chitalia vs. Union of India wherein it was observed that:
“The burden which is cast upon the adjudicating authority to establish a violation must be assessed from a robust and common-sense perspective. Clandestine violations take place under the cloak of secrecy. To impose a burden of establishing in an adjudication proceeding, every conceivable link of an unlawful transaction would result in a manifest failure of justice and would defeat the underlying purpose of the Act. The standard of proof in an adjudication proceeding cannot be equated with the rigorous standard in a criminal trial. The proof required in an adjudication proceeding is on a preponderance of possibilities. The Department has discharged the burden cast upon it of proving the breach of Sections 3(b) and 3(d).”
The very fact that these names were retrieved from the documents recovered from the premises of the individual Appellant and in voluntary statement of his, he had no explanation as to the identification of the person mentioned therein the onus cannot shift to the investigating agency to identify these persons. No burden can be imposed on the investigating agency to establish every conceivable link of an unlawful transaction particularly when such transaction occurs clandestinely.
17. We find that the data in the seized pen drive covered 363 import bills showing under-valuation to the extent of US $ 14,01,850 equivalent to Rs. 7,42,27,152/- as recorded in paragraph 5.12 of the Impugned Order. Even the Appellants in their reply dated 02.06.2021 to the SCN under FEMA stated that the pen drive covered entries for the period from 20.10.2011 to 21.10.2014. However, the Ld. AA in paragraph 5.16 of the Impugned Order has held that the data of the seized pen drive shows the account to be running and not confined to the period between 2011-2014. In this regard, Ld. Customs Tribunal has outrightly rejected those import entries, which have been considered on the basis of extrapolation of the data in the seized pen drive. We believe that the allegations made on the basis of mere projections of data without any corroboratory evidence documentary or otherwise cannot be accepted. We therefore uphold the contraventions of Sections 3 (a) and 3 (b) of FEMA by the Appellant Company to the extent of US $ 14,01,850 equivalent to Rs. 7,42,27,152/-. Since, there is no denial as to the active role of the individual Appellant in the Company as he was in-charge and was responsible for the conduct of the business of the Company, we hold him liable for penalty for the aforementioned contraventions to the same extent, in terms of Section 42(1) of FEMA.
18. In view of the aforementioned discussions and analysis, we reduce the penalty on the Appellant Company to Rs. 75,00,000/- and on the individual Appellant to Rs. 25,00,000/-. Accordingly, the Appeals Nos. FPA-FE-14/CHN/ 2022 filed by M/s Sachdev Overseas Fitness Pvt. Ltd. (SOFPL) and FPA-FE-15/CHN/2022 filed by Shri Prem Kumar Sachdev (Director) are partly allowed. Applications pending, if any, are disposed of accordingly.
