Legal Framework

FEMA 3/2000-RB dated 3 May 2000 - Regulation 5(3): Deferred payment arrangements including payments beyond a period of six months from date of shipment are treated as External Commercial Borrowings [ECB] / Trade Credits.

Master Direction on Import of Goods and Services - RBI - Updated 2025 + A.P. (DIR Series) Circular No. 25 dated 27 Sept 2002 for delayed payments due to disputes.

FEMA (Borrowing and Lending) Regulations 2018 and Trade Credit Framework: Imports deferred <3 years = Trade Credit, >3 years = ECB.

What is Deferred?

• Normal Import: Remittance against import must be completed not later than 6 months from date of shipment - except where amount < USD 500 or where regulated otherwise.
• Deferred: If you agree to pay seller after 6 months - e.g., 180 days, 1 year, 2 years - it is deferred.

Example: Machinery imported 1 Jan 2026, invoice term 12 months - This is Deferred Payment Import.

Reporting Obligations - 3 Tier

Tier 1: Importer Obligation

1. Before import: If deferred >6 months, obtain Loan Registration Number [LRN] from RBI via AD bank before shipment. Submit Form ECB.
2. Comply with Trade Credit all-in-cost ceiling - benchmark + spread: For trade credit up to 1 year - SOFR + 150 bps etc as per current RBI circular.
3. Submit BoE [Bill of Entry] to AD bank within stipulated time to evidence import.

Tier 2: Authorised Dealer [AD] Bank Obligation - IDPMS

This is where most penalties happen.

IDPMS - Import Data Processing and Monitoring System: Every import remittance is entered in IDPMS. AD must match it with Customs BoE data. If payment not made within 6 months, it remains open.

BEF Statement: Banks are required to report to concerned RBI RO for 100% outstanding cases when import remittances are pending without physical import. And submit separate BEF statement to concerned RBI RO for half-year ending June and Dec - Statement of outstanding import bills not settled.

If import fails: Regulation 12 - Repatriation of advance if goods not imported.

For Trade Credit/ECB: AD must report in ECB-2 Return monthly to DSIM, RBI via AD.

Tier 3: RBI / FIU

• If payment is made through non-banking channel (hawala) to avoid reporting - violation of Sec 3(a) and Sec 4 FEMA.

Case Laws and Penalties

Penalty Framework - Sec 13 FEMA:

• Penalty up to thrice the sum involved where amount is quantifiable, or up to Rs 2 lakh where not quantifiable + Rs 5,000 per day for continuing contravention.

1. Penalty for Using Non-Banking Channel for Deferred Payment -
Enforcement Directorate v. Importer - Hawala Payment for Imports - Admitted ₹7 crore payment through non-banking channels
Statements recorded u/s 37 FEMA showed payments aggregating to about ₹7 crore through non-banking channels for imports. Adjudicating Authority imposed ₹23 crore penalty for contravention, plus ₹50 lakh each for violations of sections 3(a) & 4 (dealing in foreign exchange abroad). Principle: Any deferred payment not routed through AD bank = FEMA violation.

2. Netting-Off Unauthorised Commission - Appellate Tribunal SAFEMA
Shri M. Lakshmi Chand Jain v. ED - FEMA penalty reduced from ₹30 lakh to ₹10 lakh
Appellant claimed to have received foreign commission of ₹1.72 Cr by setting off against value of goods imported from abroad. Tribunal affirmed violation of Sec 8 of FEMA read with Regulation 3 of Realisation & Repatriation Regulations, 2000. You cannot net-off import payables against receivables without RBI approval. Even if commercial, reporting must be separate.

3. Unlawful Outward Remittances without Import - Data from Customs
ED Case - Customs database showed no import had taken place
Outward remittances were shown as import advance but no import in customs database. Adjudicating Authority held contravention of Sec 10(6) FEMA r/w Regulation 6(1) and imposed Rs 21 crore penalty. Doctrine: IDPMS mismatch triggers presumption of no import.

4. Under-Invoicing and NRE Account Misuse - AT Order
Where appellant company was charged for under-invoicing imports under FERA 1973 and using NRE account for foreign payments, Adjudicating Authority imposed Rs 50 lakh penalty. Tribunal reduced it where abetment charges lacked evidence. Establishes that penalty must be proportionate to established charge only.

5. Failure to Realise Export Proceeds vs Import - Sec 8 FEMA
Similar jurisprudence applies to imports. Case reported in 2023: Two individuals behind company that failed to realise about ₹12.4 crore from shipments were each penalised ₹12.5 crore under Sec 13 - three times amount.

Practical Checklist to Avoid Penalty

For Deferred Payment Import >6 Months:

1. At contract stage: Structure as Trade Credit - Ensure tenure, all-in-cost within RBI Trade Credit framework.
2. Apply to AD bank for LRN before shipment with: Supplier contract, BoE estimate, ECB Form.
3. After shipment: Submit BoE to AD within 15 days, ensure IDPMS closure as "Trade Credit".
4. File ECB-2 monthly till repayment.
5. If delay due to dispute / financial difficulty: AD may permit settlement delayed beyond 6 months only if not already classified as ECB, and report in BEF with remarks "dispute". Interest cannot be paid on such withheld amounts without RBI approval.