Court Emphasizes Doctrine of Proportionality and Reasoned Discretion in Imposing Penalties under Section 50 of FERA
In a significant judgment dated September 8, 2026, the Delhi High Court (Division Bench comprising Justice Navin Chawla and Justice Ravinder Dudeja) partially allowed the appeal filed by M/s Intersales and its proprietor challenging a penalty imposed under the Foreign Exchange Regulation Act, 1973 (FERA). The Court reduced the penalty imposed on the appellant firm from Rs. 25,00,000 (25 lakhs) to Rs. 3,00,000 (3 lakhs), underscoring the necessity for reasonable and proportionate exercise of discretion by adjudicating authorities when levying penalties.
The case arose from enforcement proceedings initiated by the Directorate of Enforcement alleging non-realisation of export proceeds by M/s Intersales and its partners, amounting to US$ 62,256.50 under various Guaranteed Remittance Forms (G.R.s). The appellants were charged with contravention of Sections 18(2) and 18(3) read with Section 68(1) of FERA for failure to secure export proceeds within prescribed timelines or obtain RBI permissions for extensions.
Following investigations, the Adjudicating Authority imposed penalties of Rs. 25 lakhs on M/s Intersales and Rs. 2.5 lakhs each on its partners. However, the appellants challenged the penalty, contending it was excessive, disproportionate, and failed to consider a prior adjudication wherein a penalty of Rs. 1 lakh was imposed for related contraventions involving lesser export proceeds.
The Appellate Tribunal partly upheld the penalty on M/s Intersales but set aside penalties on the individual partners. Aggrieved, the appellants approached the Delhi High Court.
Justice Navin Chawla, delivering the judgment, highlighted that Section 50 of FERA confers discretion on authorities to impose penalties up to five times the value involved in contravention but mandates that such discretion be exercised judiciously, reasonably, and proportionately. The Court emphasized the doctrine of proportionality, which requires balancing the gravity of the contravention against the penalty quantum, warning against arbitrary or excessive penalties that could discourage legitimate business activities.
The Court noted that the prior adjudication imposed a penalty of Rs. 1 lakh for contraventions involving US$ 17,460. Applying the same yardstick, the Court reasoned that the penalty for the current contravention involving US$ 44,796.50 should be proportionately Rs. 3 lakhs. The absence of any reasoned basis or explanation by the Appellate Tribunal for maintaining the higher penalty rendered the original penalty unsustainable.
The Court further observed that proceedings under FERA are adjudicatory and not criminal, and mens rea is not essential for imposing penalties. However, the imposition must be based on relevant facts and sound legal principles.
With over 15 years having elapsed since the original orders, the Court opted to determine the appropriate penalty itself rather than remanding the matter, thereby bringing finality to the dispute.
The appeal was thus allowed in part, modifying the penalty payable by M/s Intersales to Rs. 3,00,000, while upholding the rest of the Tribunal's order. No costs were imposed.
This ruling reinforces judicial scrutiny over penal actions under FERA, insisting on proportionality and reasoned decisions, and serves as a precedent for adjudicating authorities and appellate forums to exercise their discretion in a fair and transparent manner.
Bottom Line:
Under Section 50 of the Foreign Exchange Regulation Act, 1973, the discretion to impose a penalty must be exercised reasonably, proportionately, and with reasons. The penalty imposed must not be arbitrary, excessive, or disproportionate to the contravention. The doctrine of proportionality and judicial discretion must be adhered to when determining the quantum of penalty.
Statutory provision(s):
Section 50 of Foreign Exchange Regulation Act, 1973; Sections 18(2), 18(3), 68(1) of Foreign Exchange Regulation Act, 1973; Section 54 of FERA; Section 35 of Foreign Exchange Management Act, 1999
M/s Intersales v. Union of India, (Delhi)(DB) : Law Finder Doc Id # 2974450
