JUDGEMENT

FPA-FE-10-11/MUM/2007 The present appeals have been filed against the common impugned order dated 27.11.2006 passed by the Special Director, Directorate of Enforcement, Mumbai imposing a penalty of Rs. 70,00,000/- (Rupees Seventy Lakh Only) on Tips Industries Ltd. and penalty of Rs. 20,00,000/- (Rupees Twenty Lakh Only) on Shri Kumar S. Taurani for violation of Section 6(3)(a) of FEMA, 1999 r/w Regulations 5, 6 & 13 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000.

2. The main allegation against the appellant company is that it had made investment in three step-down subsidiaries, by name Dashmesh International Ltd. New Jersey (incorporated on 04.02.2000 ), Dashmesh International Ltd. California (incorporated on 19.05.2000) & Dashmesh International Music S.A., South Africa (incorporated on 15.12.1999), through its Wholly Owned Subsidiary (WOS) Dashmesh International Ltd., Mauritius (DILM) without the permission of the RBI.

3. The appellant company acquired the shares of DILM on 13.03.2001. The DILM had acquired the entire equity in the two American Step-down subsidiaries on 22.08.2001 & the South Africans step-down subsidiary on 01.08.2001. The investment made by DILM in the step down subsidiaries during the period of May, 2001 to February, 2002.

4. In the list of dates & events filed by the appellant company, it is stated that the appellant company filed an application in form ODA (for investments in DILM to the RBI on 07.06.2001 and RBI granted clearance by letter dated 22.11.2001.

Thus, even when there application was pending with the RBI, the appellant company through its WOS (DILM) made further investment totaling US $ 7,54,100 in the three step-down subsidiaries.

5. Following are the main contention of the appellant:-

(i) That DILM was engaged in International Trading in blank and pre-recorded audio cassettes and CD-ROMs and in the course of expansion of operation into USA and South Africa, for compliance with local legislations, Dashmesh International Ltd., New Jersey, Dashmesh International CA Ltd., California and M/s. Dashmesh International Music S.A. (Proprietary) Ltd. South Africa wherein corporated on 04.02.2000, 19.05.2000 and 15.12.1999.

(ii). DILM acquired the entire equity in Dashmesh International Ltd., New Jersey on 22.08.2001, Dashmesh International CA Ltd., California on 22.08.2001 and M/s. Dashmesh International Music SA (Proprietary) Ltd., South Africa on 01.08.2001.

(iii). On 22.11.2001 the Reserve Bank of India, by its letter, granted the clearance to Company to make the investments and loan as aforesaid.

(iv) On a query from the Reserve Bank of India, the Company, by its letter dated 18.04.2003 clarified the position in respect of the investments made by the Company in DILM and its step-down WOSs. It was explained that the omission to give particulars of the Step-down WOSs was unintentional and occasioned only for the reason that though the Company had disclosed the business plans of DILM, including the plan to set up shop in California, New Jersey and South Africa, the local laws in the said places prevented the Company from doing so save and except through the above-named step-down WOSs.

(v). On 14.11.2003, the WOS, accordingly, remitted a sum of US $ 37599, towards the interest on the loans prior to their conversion into equity.

(vi) On 22.11.2001, for the purpose of the business of the WOS, the Company made remittance of US $ 5,00,000 in terms of the Reserve Bank of India approval and a further sum of US $

2,00,000 on 09.02.2002.

(vii). DILM, in its turn, for the purpose of the working capital of the step-down WOSs, remitted a sum of RS $ 3,49,925 to Dashmesh International Ltd., New Jersey and a sum of US $ 3,50,000 to Dashmesh International CA Ltd., California from out of the remittances made by the Company. A further sum of US $ 50,000 was remitted by DILM to Dashmesh International Music SA (Proprietary) Ltd., South Africa from out of DILM’s internal a