Introduction
Foreign Exchange Management Act, 1999 (‘FEMA’) is the primary legislation governing foreign exchange transactions in India. FEMA was enacted to facilitate external trade and payments, promote the orderly development of the foreign exchange market in India, and manage foreign exchange.
Over a period of time, many Indians amassed wealth outside India, without disclosing the assets or its sources, to Indian Tax and Regulatory Authorities. Such actions primarily violated two laws, the laws relating to taxes on income (the undisclosed income from which the assets were created), and the FEMA (for holding assets abroad in contravention of provisions of FEMA).
In 2015, India adopted certain measures to curb and recover black money[1] held outside India. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘Black Money Act’) was to curb, deter and penalize the menace of tax evasion. Parallelly, new Section 37A was inserted in FEMA to enable seizure and confiscation of property of ‘equivalent’ value situated in India, primarily to recover black money/undisclosed assets lying outside India.
In this article, the authors have discussed the scope, interpretation and applicability of Section 37A in different circumstances and safeguards that are required to avoid potential misuse of these extraordinary powers.
Object and Scope:
Section 4 of FEMA provides that saves as otherwise provided in the FEMA, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property, outside India (in short referred to as ‘Foreign Asset’). Thus, a Foreign Asset can be held by an Indian resident only in accordance with the FEMA. As the Foreign Assets were lying outside India, the officers of Enforcement Directorate (‘ED’) did not have any jurisdiction to seize or confiscate the same. Section 37A of FEMA was introduced to empower the ED to instead seize ‘value equivalent’, available within India, of such Foreign Assets held in contravention.
Process of seizure and confiscation:
For Section 37A of FEMA to be triggered, the aggregate value of foreign exchange, foreign security or immovable property, situated outside India should be more than INR 1 crore[2].
As seizure is an emergency and interim power similar to provisional attachment under PMLA[3], the ED is not required to follow the usual process of search and seizure under Section 37 of FEMA. However, the ED must necessarily have ‘reasons to believe’, which are to be recorded in writing before seizure under Section 37A of FEMA, that certain Foreign Asset is ‘suspected’ to have been held in contravention of Section 4. This requires the ED to first ascertain the nature of the transaction and its permissibility in terms of Section 4 of FEMA and thereafter, to form an opinion that the Foreign Asset is held in contravention.
As per Section 37A(2), after seizure, the seizure order and all relevant material must be placed for confirmation before the Competent Authority by the ED within 30 days. Thereafter, the Competent Authority may either confirm or set aside the seizure order within 180 days from the date of seizure, after considering the submissions by both the parties. Needless to add, the order of the Competent Authority must be a well-reasoned speaking order.
The seizure, if confirmed, will continue till the disposal of the adjudication proceedings under Section 13. However, if at any stage of the proceedings, the aggrieved party discloses the Foreign Asset and brings it back to India, the Competent Authority or the Adjudicating Authority may pass an order setting aside the seizure.
Once seizure is confirmed, the final decision regarding confiscation is to be taken by the Adjudicating Authority during a separate adjudication proceeding under Section 13. If contravention of section 4 is found, the Adjudicating Authority may impose penalty and also order confiscation of the property seized under Section 37A. Further, the Adjudicating Authority may order initiation of prosecution.
The orders of the Competent Authority as well as of the Adjudicating Authority are appealable before the Appellate Tribunal for Foreign Exchange (‘Appellate Tribunal’) in New Delhi. If the Order of the Adjudicating Authority ordering confiscation is passed, any pending appeal against order of the Competent Authority may become infructuous.
Meaning of ‘reasons to believe’
The phrase ‘reasons to believe’ is not defined in FEMA. Various courts have held ‘reason to believe’ entails the following:
- there must be tangible material to form such belief[4];
- there must be due application of mind by the authority based on such material to arrive at a conclusion[5];
- such belief does not merely mean a purely subjective satisfaction on the part of the authority but must arise on examination of objective material and must be held in good faith;
Interestingly, the Appellate Tribunal, in Pradip Burman v. The Special Director, ED[6], had observed that there is no requirement to have reason to believe that property is held in contravention of Section 4 but merely reasons to believe that it is suspected to have been held to invoke provisions Section 37A of FEMA. The Appellate Tribunal held that the threshold for initiating action is low since Section 37A of FEMA provides multiple avenues of redressal to the aggrieved party.
The authors are of the view that the term ‘suspected’ used in the section cannot be read in isolation to mean that the ED can seize property on mere suspicion. As the powers are extraordinary and infringe upon the constitutional right to property, the threshold for invocation must be kept relatively high and the reasons must be based on tangible material and due application of mind.
Meaning of ‘held’:
For a seizure under Section 37A, it is sine qua non that any Foreign Asset is suspected to have been ‘held’ in contravention of Section 4. The term ‘held’ is not defined under FEMA. In K.K Handique v. Board, AIT, Assam[7], the Supreme Court interpreted Sections 12 and 13 of the Assam Agricultural Income Tax Act, 1939 and concluded that the expression ‘holds’ includes a two-fold idea of the actual possession of a thing and of being invested with a legal title. In another judgment of Bhudan Singh & Anr v. Nabi Bux[8], while interpreting the provisions of the U.P Zamindari Abolition & Land Reforms Act, 1950, the Supreme Court held that the word ‘held’ must technically understood to mean possess by legal title ‘lawfully held’ and not merely to possess.
The authors are of the view that the Foreign Asset must be legally held by an Indian resident to invoke Section 37A of FEMA. In other words, a person must have legal title over a Foreign Asset. A person cannot be said to ‘hold’ a Foreign Asset, if he is merely in physical possession, while the ownership belongs to someone else.
Held as ‘beneficial owner’:
In certain cases, an Indian resident may have beneficial ownership of a Foreign Asset. Unlike the Black Money Law[9], Section 37A of FEMA does not provide clarity regarding its applicability in case of a ‘beneficial owner’, who is not a ‘legal owner’. However, in the recent past, the ED has indeed invoked Section 37A based on beneficial ownership.
In Xiaomi Technology India Private Limited v. UOI[10] , certain payments were made by Xiaomi India to Qualcomm USA towards royalty. It was alleged by the ED that the said royalty was, as per contract, payable by Xiaomi China and not by Xiaomi India. The ED seized the bank accounts of Xiaomi India on the ground that such royalty payment resulted in foreign exchange being held outside India (by Xiaomi China) for the benefit of Xiaomi India.
The Authors are of the view that a nexus or link between the India resident and the Foreign Asset must be established for invoking powers under Section 37A of FEMA. Further, the ED must establish that the Indian resident is a beneficial owner by establishing control, use, enjoyment, etc. Otherwise, any seizure will be against the intent and object of the provisions of Sections 4 and 37A of FEMA.
Whether retrospective or prospective application?
Section 37A of FEMA as well as Sections 13(1A) to Section 13(1D) were inserted vide Finance Act, 2015 and came into effect from 9 September 2015[11], without any express retrospective application. The authors believe that these provisions are substantive provisions and penal in nature. Thus, it can be applied only prospectively, i.e. in respect of violations of Section 4 committed on or after the effective date. There may be debate around the applicability of these provisions to a Foreign Asset, which was acquired prior to, but continued to be held after the effective date. But these provisions, clearly, will not apply to Foreign Asset no longer held on or after the effective date.
Extension of powers under PMLA?
The concept of seizure and confiscation of property of ‘equivalent value’ is provided in international conventions[12] and usually used in the context of confiscation of alternate property if the ‘proceeds of crime’ are not available. The United Nations Conventions incorporate this concept of forfeiture of an alternate property in serious crimes involved corruption, money laundering, illicit traffic in narcotic drugs and psychotropic substances, etc. In India, the PMLA contains similar provisions[13].
Section 37A of FEMA uses the word ‘seize’ in context of seizure of ‘value equivalent’ in India. While the ED considers the provision to be conceptually similar to provisional attachment under PMLA’[14], the language of the provisions suggest otherwise. The concept of ‘seizure’ and ‘provisional attachment’ are distinct in eyes of law and both serve different purposes. Even provisions of PMLA contain separate provisions and process for ‘seizure’[15] and ‘provisional attachment’[16].
A contravention of provisions of FEMA, including that of Section 4, is not a scheduled offence under PMLA. Therefore, contravention of Section 4 of FEMA cannot per se lead to an offence of money laundering.
Though the powers of attachment under the PMLA may not be available for FEMA contraventions, the authors believe that the ED has been entrusted with similar powers under Section 37A of FEMA.
Seizure of immovable property?
The power of seizure is understood and applied usually in respect of movable properties. The Supreme Court in case of Nevada Properties Private Limited v. State of Maharashtra and Ors[17] held that an immovable property cannot be, in the strict sense, seized. However, documents of tile of immovable property can be seized and taken into possession. The Court further held that in context of immovable property, seizure will require taking over possession of the property. Thus, the validity of any action by ED, which tantamount to ‘attachment’ of immovable, as against ‘seizure’, is liable to be legally challenged.
Seizure of property of directors/shareholders/key personnels of a company?
In certain cases, properties of directors/ shareholders/ key management personnel are sought to be seized under Section 37A, even though the alleged contravention of Section 4 of FEMA is by the company. It is very clear that the seizure can be only of a property of the company (a separate legal entity), which has contravened section 4, and not of properties of the directors/shareholders/ key personnel of such legal entity. The directors/key personnel, in the worst-case scenario, may only be exposed to penalty under Section 13 read with Section 42 of FEMA.
Burden of proof:
The burden of proof is on the ED to establish that a contravention of section 4 has been committed. There is no reverse burden of proof under FEMA and therefore, the ED must adduce evidence. The power available under Section 37A of FEMA is a stringent measure and the ED must discharge its burden of proof by establishing the nature of asset (foreign exchange, foreign security, immovable property), its form, location etc., and the link/connection with the Indian resident whose Indian property is sought to be seized under Section 37A.
Substitution of property – Whether permissible?
Even if a property is not a tainted property, the ED may attach the same ‘value equivalent’. Considering the wide powers, the ED may seize a property which may be an operating or trading asset or personal asset or residential property. In such cases, a question arises whether the aggrieved party can offer a bank guarantee or fixed deposit as a substitute in order to secure release of seized property. In the absence of clear provisions regarding substitution, the issue remains a subject matter of litigation.
Conclusion
Section 37A of FEMA was enacted to serve as a deterrent against holding of unaccounted wealth abroad, and to recover black money stashed overseas. However, there are still grey areas regarding the scope and ambit of seizure. Section 37A of FEMA needs to be interpreted and applied in a manner to balance the interests of all stakeholders and to ensure the constitutional right to property is not infringed upon without following due process of law. Seizure must be resorted to only when there is cogent evidence. Any action which fails to meet the requirements discussed above will be amenable to challenge before the court of law.
[The authors are Associate Partner, Principal Associate and Associate, respectively, in Direct Tax practice at Lakshmikumaran and Sridharan]
[1] Monies and assets belonging to Indian residents kept in foreign countries, source of earning of which cannot be explained by the owner of the money or assets.
[2] Notification GSR 701 E dated 16.09.2015
[3] Section 5(1) of Prevention of Money Laundering Act, 2002
[4] Income Tax Officer v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC)
[5] Well trans Logistics India (P.) Ltd. v. ACIT (2024) 166 taxmann.com 72 (Delhi), Mudra Exports v. DCIT (2024) 161 taxmann.com 811 (Allahabad)
[6] [2024] 165 taxmann.com 726 (SAFEMA - New Delhi)
[7] [1966] 60 ITR 216 (SC)
[8] (1969) 2 SCC 481
[9] Section 2(11); Section 42; Section 43; Section 49; Section 50
[10] 2023 (6) TMI 250
[11] Notification No. 2454(E) dated 8th September 2015.
[12] United Nations Convention against Corruption, Article 31; United Nations Convention against Transnational Organized Crime, Article 12; United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, Article 5.
[13] Section 2(1)(u) of PMLA.
[14] Annual Report of Directorate of Enforcement for FY 2024-24, Pg. 128.
[15] Section 17(1) of PMLA.
[16] Section 5(1) of PMLA.
[17] AIR 2019 SC 4554.
