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Authored by
Rajat Jain, Advocate
Vaish Associates Advocates
Email id: rajatjain@vaishlaw.com
Mobile No. 9953887311
LinkedIn: https://www.linkedin.com/in/rajat-jain-75772398/
In Directorate of Enforcement v. Joy of India & Ors., Writ Petition No. 698 of 2018, the Karnataka High Court reaffirmed the statutory test for determining whether a person qualifies as a "person resident in India" under Section 2(v) of the Foreign Exchange Management Act, 1999 ("FEMA"). Upholding the order of the Appellate Tribunal, the Court held that where foreign nationals had resided in India for more than 182 days during the preceding financial year, had come to India on business visas for carrying on business, and did not fall within the statutory exceptions contained in Section 2(v), they were "persons resident in India" for the purposes of FEMA. Consequently, the FEMA Regulations governing transactions by persons resident outside India had no application to them.
Brief Facts
The Directorate of Enforcement initiated adjudication proceedings against the respondents alleging contravention of various provisions of FEMA and the regulations framed thereunder in relation to establishment of a partnership firm and acquisition of immovable property in India.
The Joint Director, Directorate of Enforcement imposed penalties under Section 13 of FEMA and ordered confiscation of the immovable property on the ground that the respondents, being foreign nationals, had acquired the property and established the partnership firm without obtaining prior permission under the applicable FEMA Regulations.
The Appellate Tribunal set aside the adjudication order. The Tribunal found that the respondents had entered India on business visas, had continuously carried on business in India, had stayed in India for more than 182 days during the preceding financial year, had approached the Reserve Bank of India ("RBI") before purchasing the property and were informed that no prior permission was required if they satisfied the requirements of Section 2(v) of FEMA. The Tribunal also noted that the purchase consideration had been remitted through authorised banking channels, supported by two Foreign Inward Remittance Certificates (FIRCs), and that the partnership firm had been regularly assessed to income tax.
Aggrieved thereby, the Directorate of Enforcement preferred an appeal before the Karnataka High Court.
Interpretation of "Person Resident in India" Under Section 2(v) of FEMA
The principal issue before the Court was whether the respondents qualified as "persons resident in India" within the meaning of Section 2(v) of FEMA.
Examining Section 2(v)(i)(B) of FEMA, the Court observed that a person residing in India for more than 182 days during the preceding financial year would qualify as a "person resident in India" if such person had come to India for taking up employment, carrying on business or vocation, or for any other purpose indicating an intention to stay in India for an uncertain period.
The Court further observed that the definition under Section 2(v) must be understood by reading Part (B) in juxtaposition with Part (A), noting that the statutory exceptions contained therein were inapplicable to the respondents. Since it was undisputed that the respondents had resided in India for more than 182 days, had entered India on business visas for carrying on business, and did not fall within the statutory exceptions, the Tribunal was justified in holding that they were "persons resident in India".
FEMA Regulations Applicable to Non-Residents Held Inapplicable
Having upheld the finding that the respondents were "persons resident in India", the Court held that the FEMA Regulations governing transactions by persons resident outside India had no application to them.
The Court specifically held that Regulation 3 of the Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations, 2000, the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000, as well as the Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000, were inapplicable in the facts of the case.
RBI Clarification Supported the Respondents' Stand
An important circumstance relied upon by both the Tribunal and the High Court was that the respondents had approached the RBI before purchasing the immovable property.
The RBI had informed the respondents that no prior permission was required provided they fulfilled the requirements of Section 2(v) of FEMA.
The High Court held that the Tribunal had rightly relied upon the RBI's communication while concluding that no prior approval was required on the date the property was purchased.
Purchase Through Authorised Banking Channels Demonstrated Compliance
The Court also noticed that the entire purchase consideration had been received through authorised banking channels.
The Tribunal had relied upon two Foreign Inward Remittance Certificates issued by the bank evidencing that the inward remittances had been received through legal channels and that the purpose of remittance had been duly disclosed. The respondents had also been regularly assessed to income tax in India.
These contemporaneous records reinforced the Tribunal's conclusion that the transaction had been carried out in accordance with law.
No Ground to Interfere with the Tribunal's Findings
Finding no substantial question of law warranting interference, the High Court upheld the Tribunal's order setting aside the adjudication order passed by the Joint Director and dismissed the appeal.
Conclusion
The judgment reiterates that determination of residential status under FEMA must be based on the statutory requirements contained in Section 2(v). Where a person has resided in India for more than 182 days during the preceding financial year, has come to India for carrying on business, and does not fall within the statutory exceptions, the regulatory restrictions applicable to persons resident outside India cannot be invoked. The decision also underscores that enforcement proceedings under FEMA cannot be sustained where the findings of the Appellate Tribunal are supported by the statutory framework, RBI clarification and contemporaneous documentary evidence, and no perversity is demonstrated in such findings.
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