Karnataka High Court Sets Aside Tribunal's Stay Order in FEMA Penalty Case, Emphasizes Need for Bank Guarantees to Safeguard Revenue

Karnataka High Court Orders Google India to Furnish Bank Guarantees in FEMA Penalty Appeal

Bengaluru, Karnataka – March 20, 2025 – The Karnataka High Court has set aside an order by the Appellate Tribunal for SAFEMA , FEMA , PMLA, NDPS and PBPT Act, which had granted a stay on penalties imposed on Google India Pvt. Ltd. and its directors by the Directorate of Enforcement (ED). The High Court, comprising Justices V Kameswar Rao and S Rachaiah , ruled that while dispensing with pre-deposit of penalty amounts during appeals is permissible under the Foreign Exchange Management Act ( FEMA ), it must be balanced with measures to safeguard revenue interests.

Case Background: FEMA Violation Allegations

The case arises from appeals filed by the ED against the Tribunal’s decision to stay penalties levied on Google India and its directors – Mr. Kent Walker , Mr. Hari Raju Mahadevu (since expired, represented by Sri. Vivek Chhabra), and Mr. Lloyd Hartley Martin . The penalties, totaling ₹50,000,00,000 for Google India , ₹5,00,000 for Mr. Mahadevu, ₹20,00,000 for Mr. Martin , and ₹20,00,000 for Mr. Walker , were imposed for alleged contraventions of Section 6(3)(d) of FEMA read with related regulations.

The ED contended that Google India had outstanding payments to Google Ireland and Google USA for distributor fees and purchased fixed assets, amounting to ₹363,79,49,687 and ₹1,08,97,416 respectively, for periods exceeding permissible limits under FEMA . The ED argued these outstanding amounts constituted "commercial loans" in the form of supplier's credit, requiring prior RBI approval, which Google India allegedly failed to obtain.

Google India , represented by Advocates Sri. Naresh Thacker and Sri. Udit Jain , countered that the transactions were current account transactions, not borrowings or lendings under FEMA . They argued there were no loan agreements, deferred payment understandings, or interest charged. They further submitted that the dues were ultimately settled with permission from the Reserve Bank of India (RBI), regularizing any potential delay.

High Court's Rationale: Balancing Hardship and Revenue Protection

The High Court, analyzing Section 19 of FEMA concerning appeals and pre-deposit requirements, emphasized the Supreme Court’s rulings in Benera Valves Ltd. v. Commissioner of Central Excise and Monotosh Saha v. Special Director, Enforcement Directorate . These precedents highlight the twin considerations for waiving pre-deposit: "undue hardship" to the appellant and measures to "safeguard the realization of penalty".

The court observed that the Tribunal, in its stay order, primarily focused on the "prima facie case" and "hardship" to Google India , concluding that the chances of the appeals succeeding were high. However, the High Court found that the Tribunal had failed to adequately consider the aspect of safeguarding revenue interests if the ED ultimately wins the appeals.

Referring to the Supreme Court in Benera Valves Ltd. , the High Court reiterated that "undue hardship" means a hardship "greater than the circumstances warrant". While acknowledging arguments of a strong prima facie case potentially constituting undue hardship, the court stressed the equal importance of securing revenue, especially in cases involving substantial penalties.

Key Excerpt from the Judgment:

> "The Tribunal has not considered the ratio of the judgments in the case of Benera Valves Ltd. (supra) and Monotosh Saha (supra). 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 Tribunal even if dispenses with the pre-deposit, it shall impose such condition to safeguard the realization."

Decision and Way Forward

Ultimately, the Karnataka High Court set aside the Tribunal's order solely to the extent of the unconditional stay. It directed Google India and the concerned directors to furnish bank guarantees for 50% of the imposed penalties within two weeks. These bank guarantees will remain in effect until the Tribunal delivers its final judgment on the substantive FEMA appeals.

This decision underscores the judiciary's stance on balancing procedural reliefs in appeals with the necessity of protecting potential government revenue, particularly in financial regulatory matters. The case will now revert to the Appellate Tribunal for adjudication on the merits of the FEMA violation allegations.