Understanding The Scope Of ‘Undue Hardship’: Deputy Director v. Google India

Brief Facts: 

Google India Pvt. Ltd. (“GIPL”) owed Rs.3.64 crore to Google Ireland Ltd. as distributor fees under the ‘Ad Words Program’ for marketing online advertising space to Indian advertisers, outstanding for over four years as of May 2014. In FY 2007, GIPL also owed INR 1.09 mn to its holding company Google Inc. USA, for fixed assets purchased in FY 2007-08, outstanding for over seven years as of January 2014. The Adjudicating Authority imposed penalties of Rs.5 crores on GIPL, Rs.20 lakhs of each of the Foreign Directors Mr. Kent Walker and Mr.Lloyd Hartley Martin, and Rs.5 lakhs on the Indian director Mr. Hari Raju Mahadevu (later substituted by Mr.Vivek Chhabra), for contravening Section 6(3)(d) of Foreign Exchange Management Act (“FEMA”) read with Regulations 3, 5(3), 6(3) and Schedule III of FEM (Borrowing/Lending in Foreign Exchange) Regulations, 2000, viewing delays in the above stated amounts payable to Google Ireland Ltd. and Google Inc. USA as supplier’s credit akin to External Commercial Borrowings(“ECB”) without RBI (“Reserve Bank of India”) / government approval.  

GIPL secured post-facto RBI permissions via its AD bank (Citibank) on 27 May, 2014, after verifying no interest, no pecuniary gain, and genuine delay reasons, allowing remittances under FEMA for current account transactions per Master Circular on Imports. The Appellate Tribunal on January 11, 2019, granted full stay on penalties pending appeals, finding prima facie merit, balance of convenience, and undue hardship absent pre-deposit. 

Issue for Consideration: 

The key issue was whether the Tribunal correctly waived pre-deposit under the proviso of Section 19(1)  of FEMA without imposing conditions to safeguard the Revenue’s interests, or if it failed to balance undue hardship against revenue protection as mandated by preceding Supreme Court judgements. The Directorate argued RBI permissions to AD banks did not regularize GIPL’s contraventions, no undue hardship existed, and full stay on pre-deposit led to prejudiced recovery. GIPL contended the transactions at hand were not ECBs as it lacked loan terms/interest/gain and further, the RBI permissions post-facto validated delays under Para B.5 of the Master Circular on Imports for Goods and Services. GIPL submitted that there has been no prima facie violation and further, the pre-deposit would create undue hardships.  

Judgement: 

The Division Bench of the Karnataka High Court set aside the Appellate Tribunal’s unconditional stay of penalties under FEMA Section 19, directing respondents to furnish bank guarantees for 50% of the levied penalties (₹5 crores on GIPL, ₹20 lakhs each on foreign directors Kent Walker and Lloyd Hartley Martin, ₹5 lakhs on Indian director Hari Raju Mahadevu) within two weeks to the Assistant Director balance the statutory pre-deposit mandate with revenue safeguards. Emphasizing the Appellate Tribunal’s failure to apply Supreme Court precedents, the High Court Court held that “undue hardship” under the provision of Section 19 demands claimant-specific evidence of disproportionate economic burden exceeding circumstances warranted and not mere assertion or prima facie merit alone. While mandating proactive conditions to secure penalty realization even if partially waived, rejecting blanket hardship absent disproportionality proof despite GIPL’s scale implying financial capacity.  

Drawing directly from Benara Valves Ltd. v. Commissioner of Central Excise¹ , the twin tests require: (1) evidential establishment of excessive hardship unwarranted by conduct (beyond ordinary strain); and (2) Tribunal-imposed protections (e.g., partial guarantees) safeguarding revenue, as complete waiver risks non-recovery given substantial dues. 

Our Thoughts: 

The Karnataka High Court’s ruling in Deputy Director v. Google India reinforces the judiciary’s calibrated approach to FEMA penalty stays under Section 19(1), striking a pragmatic balance between taxpayer relief and revenue protection by mandating 50% bank guarantees rather than unconditional waivers. This is seen as a timely course-correction against Appellate Tribunals’ over-reliance on prima facie merit, emphasizing claimant-specific evidence of “undue hardship” that transcends mere assertions particularly, for financially robust entities like GIPL where capacity to pay negates blanket exemptions. Drawing from Supreme Court precedents like Benara Valves, the decision underscores twin imperatives: rigorous hardship substantiation beyond ordinary strain, and proactive safeguards like partial guarantees to mitigate non-recovery risks on substantial dues. 

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1. AIRONLINE 2006 SC 339 ↩︎