HC upholds validity of Section 37A of FEMA

NT Correspondent

Bengaluru: Xiaomi Technology India Private Limited petition questioning the constitutional validity of Section 37A of the Foreign Exchange Management Act, 1999 has been rejected by the High Court of Karnataka. Justice M Nagaprasanna in his judgement dated April 21 said, "The challenge to the constitutional validity of Section 37A of the Act is rejected, as Section 37A does not suffer from any manifest arbitrariness on any ground whatsoever."

On 29 - 04 - 2022, the Directorate of Enforcement communicated a mail to the company informing it of seizure of `5551,27,15,824/- under Section 37A of the Act from the current bank account of the petitioner. The seizure order said there were reasons to believe that the royalty paid by the petitioner to Qualcomm, a foreign company, is foreign exchange held outside India by the group.

The reason for seizure was on the ground that the Directorate of Enforcement found during the course of investigation that no agreement or legal basis was available for remitting the money by the petitioner. Royalty was not a part of the product cost. No work order or purchase order was placed. No intellectual property rights were received. Based up on this, seizure order was passed on 29th April 2022 invoking Section 37A(1) of the Act.

Senior advocate, Udaya Holla appearing for the company contended that Section 37A of the Act suffers from manifest arbitrariness as it gives unbridled, uncanalised and unguided power, as mere suspicion can lead to seizure order being passed and there are no guidelines to determine what could be reason to believe, which makes the statute becoming violative of Article 14 of the Constitution of India.

The Additional Solicit or General argued that the intention of the Legislature in bringing in the amendment to the Act in the year 2015 "was to tackle the menace of black money being parked outside the nation, in the garb of business, like how the petitioner has managed and, therefore, it cannot be held to be arbitrary or otherwise. It is only regulatory."

The HC in its judgement said that the Act and the Section does not suffer from unconstitutionality. "On a coalesce of the judgments relied on by the petitioner and others that are quoted hereinabove, as also the reasons rendered by this Court, what would unmistakably emerge is that Section 37A of the Act does not suffer from any manifest arbitrariness for this Court to strike it down on any of the grounds urged by the petitioner.  

The purpose behind the amendment is already quoted, and checks and balances available, under Section 37A are also quoted and analysed. Therefore, the second point that arose for consideration is answered against the petitioner," the HC said. In a related case, the HC had uphed the seizure of Rs.5,551 crore from Xiaomi for FEMA violation in another judgement on April 21.