Karnataka High Court orders Google to give bank guarantee for 50% of Rs 5 crore fine in FEMA violations case

Bengaluru: The Karnataka High Court has directed Google India Private Limited (GIPL) and its officers to pay 50 per cent of the penalty imposed by the authorities for violating the provisions of the Foreign Exchange Management Act (FEMA). The Enforcement Directorate (ED) was before the HC challenging the January 11, 2019 order of the Appellate Tribunal staying the penalties until the disposal of the matter.

The ED submitted that GIPL has not obtained any approval from the Reserve Bank of India (RBI) or the government for availing a commercial loan in the form of supplier’s credit from its fellow subsidiary. It further said that the GIPL has not paid for the fixed assets purchased from its ultimate holding company Google Inc., USA, a non-resident lender, and the purchase of fixed assets is nothing but a commercial loan in the form of supplier’s credit as defined in the ECB guidelines.

According to the ED, Google India and its officers contravened section 6(3)(d) of the FEMA, read with Regulation 3, 5(3), 6(3), and Schedule III of the Regulation of the Foreign Exchange Management (Borrowing or Lending Foreign Exchange) Regulations to the extent of Rs 363,79,49,687 and Rs 1,08,97,416 respectively. The Adjudicating Authority had imposed penalties on GIPL (Rs 5 crore) and its officers; Hari Raju Mahadevu, at present substituted by Vivek Chhabra (Rs 5 lakh), Lloyd Hartley Martin and Kent Walker (Rs 20 lakh).

On the other hand, GIPL argued that the transactions do not involve any borrowings or lending in foreign exchange in any form under Section 6(3)(d) of FEMA. There are no loan agreements stipulating a drawdown and repayment schedule between the parties and also no understanding, express or implied, between the parties for a deferred payment of dues, it was further submitted.

A division bench comprising Justices V Kameshwar Rao and S Rachaiah observed that the order of the Tribunal is only a prima facie view and that the issue before it was whether the Tribunal is justified in staying the penalties.

“The complete stay of the penalties shall not safeguard the interest of the appellant if the appellant finally succeeds in the appeal. So it follows that the Tribunal, even if it dispenses with the pre-deposit, shall impose such a condition to safeguard the realisation. Surely, it can be argued, if the penalty is upheld, the realisation from the GIPL shall not be difficult. But that cannot be the consideration for the Tribunal to stay the order of penalties without imposing conditions. The Tribunal is required to give effect to the Section in letter and spirit, more so when the provision has been interpreted by the Supreme Court in the case of Monotosh Saha (supra), that too in the context of FEMA,” the bench said.

The bench directed to furnish bank guarantees towards the 50 per cent of the penalties in favour of the Assistant Director of the ED within a period of two weeks and to keep the bank guarantees alive till the decision of the appeals before the Tribunal.