LLM Group 2 Business Law Law Relating to Customs and Foreign Exchange 2015 Question Paper with Solutions

Assessment is now self-assessment, and that is the starting point

Section 2(2) defines "assessment" very widely. It means determination of the dutiability of any goods and the amount of duty, cess or any other sum payable, and it expressly includes provisional assessment, self-assessment, re-assessment and any assessment in which the duty assessed is nil. The width matters, because it is what allows a nil assessment and a self-assessment to be treated as assessments for every other purpose in the Act, including appeal and refund.

The 2011 amendment reversed the burden of the exercise. Before it, the importer filed an entry and an officer assessed. Since then, section 17(1) requires the importer or exporter to self-assess the duty, and the officer's role is a verification role. That single change is what the question invites you to be critical about, and it should be stated at the outset rather than buried.

Critical examination: what self-assessment actually did

The first criticism is that the machinery shifted the risk without shifting the expertise. Classification and valuation under an eight-digit tariff are technical exercises. Placing them on the importer in the first instance speeds up clearance, which was the object, but it also converts an error of judgment into a self-inflicted short payment carrying interest under section 28AA and, where the ingredients are made out, penalty. The Act's answer is that a bona fide error is met by re-assessment rather than penalty, but the line between an error and a mis-declaration is drawn by the department in the first instance.

The third criticism concerns who may re-open an assessment, and that is the Canon India story. In Canon India Pvt. Ltd v. Commissioner of Customs, decided on 9 March 2021, digital still image video cameras had been cleared exempt, and the Directorate of Revenue Intelligence later issued notices under section 28 alleging that the exemption had been wrongly claimed. The Supreme Court quashed the notices, reasoning that section 28 speaks of "the proper officer", with the definite article, so only the officer who had assessed, or his successor in that office, could re-open the assessment; the DRI officer had never assessed and therefore could not.

Provisional assessment under section 18, and how it differs

Section 18 exists because clearance cannot always wait for certainty. It permits duty to be assessed provisionally, on the importer or exporter furnishing security, in three situations: where the importer or exporter is unable to produce a document or furnish information necessary for assessment; where the proper officer considers it necessary to subject the goods to a chemical or other test; and where the entries have been made but the officer considers it necessary to make further enquiry. The goods clear, the revenue is protected by a bond and security, and the assessment is completed later.

The Finance Act 2025 has changed this section fundamentally, and this is the currency point on the question. New section 18(1B) imposes a two-year time limit for finalising a provisional assessment, running from the date of the provisional assessment, extendable by one further year by the Principal Commissioner or Commissioner for sufficient cause recorded. For assessments already pending, the period runs from the date the Finance Act 2025 received assent. The proper officer must inform the importer or exporter of the reasons where finalisation does not occur in time. The amendments took effect from 1 May 2025.

Conclusion

Conclusion. Assessment under the Customs Act is now a self-assessment regime with a verification overlay, and its centre of gravity has moved from the officer's desk to the importer's declaration. That shift bought speed at the cost of placing a technical burden on the trade, and the case law that followed made the cost sharper: ITC Ltd held in 2019 that a self-assessment is an appealable order and that no refund lies while it stands, so an importer had to appeal against his own return.

The Act's answers arrived in 2025, and they are the two things a current answer must contain. Section 18A now permits a voluntary post-clearance revision of an entry with interest, which restores a route ITC Ltd had closed; and section 18(1B) at last fixes a two-year outer limit, extendable by one year, on the finalisation of a provisional assessment, ending the practice by which bonds under a free trade agreement or a Special Valuation Branch reference stayed open indefinitely.

For full marks, cover: that the question sets three powers which are legally distinct and must be treated separately, because seizure is interim, confiscation is a proprietary penalty against goods and arrest is a coercive power against a person; the exact sections for each; the safeguards that attach to each; that the arrest power is confined to five offences and that only some offences are cognizable, with the fifty lakh threshold stated accurately; the show cause requirement in section 124 as the gateway to confiscation; the option to pay a fine in lieu under section 125; and, for currency, Radhika Agarwal of 27 February 2025, which is now the leading decision on customs arrest.

Where seizure is not practicable, section 110(1A) to (1C) and the proviso allow the goods to be detained and, for notified goods that are hazardous or perishable, permit disposal after inventory certified by a Magistrate. Section 110(2) contains the safeguard that matters most: if no notice under section 124 is given within six months of the seizure, the goods must be returned to the person from whose possession they were seized, and the period may be extended by a further six months by the Principal Commissioner or Commissioner for reasons recorded and communicated. That is a real limit, and the failure to issue a notice in time has returned many consignments.

Section 110(3) extends the power to documents and things, and section 110A permits provisional release of seized goods pending adjudication on bond and security, which is in practice the provision the trade cares about most.

Confiscation: sections 111 to 115, and the section 124 gateway

Section 111 lists the circumstances in which improperly imported goods are liable to confiscation, in clauses running from (a) to (o), and they are worth grouping rather than reciting: unloading at an unapproved place, goods imported contrary to a prohibition under section 11 or any other law, dutiable or prohibited goods concealed, goods not corresponding with the entry made, goods in respect of which the importer has failed to comply with a condition of exemption, and so on. Section 113 is the export counterpart. Section 114 imposes a penalty for attempted improper export, section 112 a penalty for improper importation, and section 115 provides for confiscation of the conveyance used to carry the goods.

The distinction between goods and penalty must be made explicit. Sections 111 and 113 make goods liable to confiscation, which is action against the thing; sections 112 and 114 impose a penalty on a person concerned with the goods, which is action against the person's purse. The two are cumulative, and the Act intends them to be.

Arrest: section 104, and its limits

Section 104(1) empowers an officer of customs empowered by general or special order of the Principal Commissioner or Commissioner, who has reason to believe that a person has committed an offence punishable under section 132, 133, 135, 135A or 136, to arrest him and to inform him as soon as may be of the grounds of arrest. Two things follow that a careless answer misses. First, the power is confined to those five offences and does not extend to section 134. Second, the duty to inform of the grounds is statutory as well as constitutional under Article 22(1).

Section 104(2) requires the arrested person to be taken to a Magistrate without unnecessary delay, and section 104(3) gives the officer, for the purpose of releasing on bail, the same powers as an officer in charge of a police station.

The current authority, and the one that decides how the power must be exercised, is Radhika Agarwal v. Union of India, 2025 INSC 272, decided on 27 February 2025. The Court heard a batch of about 279 petitions, led by Writ Petition (Criminal) No. 336 of 2018, challenging the powers of arrest under the Customs Act and under the Central Goods and Services Tax Act, 2017. It upheld the arrest provisions, holding that Parliament was competent under Article 246A to enact penal provisions for GST enforcement and rejecting the challenge to sections 69 and 70 of the CGST Act.

But it surrounded the power with safeguards drawn from Article 21 and Article 22 and from D.K. Basu v. State of West Bengal: an arrest for a cognizable and non-bailable offence needs no prior adjudication of liability, but it must rest on credible material, the officer's "reasons to believe" must be recorded in writing, and those reasons must be furnished to the arrested person so that the arrest can be challenged. The Court applied its reasoning in Arvind Kejriwal v. Directorate of Enforcement on the communication of grounds.

Arrest takes liberty, and it is checked most tightly of all. It is available only for the five offences named in section 104(1); only the four categories in section 104(4), each turning on prohibited goods or on a figure exceeding fifty lakh rupees, are cognizable, everything else being non-cognizable under section 104(5); and since Radhika Agarwal on 27 February 2025 the officer must hold credible material, must record his reasons to believe in writing, and must furnish those reasons to the person arrested. Read together, the three powers show a statute that is willing to act quickly against goods and only carefully against persons, and the criticism that remains is not that the powers are too wide but that the safeguards on the first two depend almost entirely on the officer's own record, which the Act requires him to make and which only litigation tests.

The adjudication hierarchy

Adjudication under the Customs Act is the civil or quasi-judicial determination of duty, confiscation and penalty, and it is entirely departmental at the first stage. The proceedings begin with a show cause notice, under section 28 where the dispute is about duty not levied, short levied, short paid or erroneously refunded, and under section 124 where confiscation of goods or a penalty on a person is proposed. Both are conditions precedent, and both require that the grounds be stated in writing.

Section 122 fixes who may adjudge confiscation and penalty, distributing competence by the value of the goods: a Principal Commissioner or Commissioner of Customs without limit, and Joint, Deputy and Assistant Commissioners up to the limits the Board prescribes. Section 122A requires that the adjudicating authority give an opportunity of hearing, and permits not more than three adjournments, each for reasons recorded. Section 28(9) requires the proper officer to determine the amount within six months, or one year in a suppression case, extendable once.

The distinguishing feature of the first stage is that the adjudicator is an officer of the department that issued the notice. That is the standing criticism of the structure, and it is the reason the appellate rungs above it matter so much.

Section 130: appeal to the High Court on a substantial question of law, within one hundred and eighty days. Section 130E: appeal to the Supreme Court, which lies directly from the Tribunal where the dispute relates to the rate of duty or the value of goods for assessment, an important carve-out that takes the largest classification and valuation disputes past the High Court altogether.

Section 129D preserves a departmental review, allowing the Board or the Commissioner to direct that an order be taken in appeal, so the department is not without a remedy against its own adjudicators.

The Settlement Commission has gone, and that changes the map

Chapter XIV-A used to provide an alternative to this hierarchy. Section 127B permitted an importer, exporter or other person to apply, before adjudication, to the Customs and Central Excise Settlement Commission, which could settle the case and, under section 127H, grant immunity from prosecution and from penalty and fine. It was the only route by which a person facing both civil and criminal exposure could buy peace on both at once.

Can civil and criminal proceedings run simultaneously?

The settled answer is yes, and the reasoning has four strands.

First, the two proceedings are directed at different things. Adjudication under sections 28, 111, 112, 124 and 125 determines duty, confiscation and penalty; it is remedial and revenue-protective, and the penalty is a civil consequence attached to the goods and the transaction. Prosecution under sections 132 to 135A punishes the person, and the sanction is imprisonment. Neither excludes the other, and section 127 expressly preserves the position that an award of confiscation or penalty does not prevent the infliction of any other punishment to which the person is liable under the Act or any other law.

Fourth, and this is the qualification that earns the marks, exoneration in adjudication may end the prosecution, but only if it is on the merits. Where the adjudicating authority has, after considering the same facts and the same evidence, found that the ingredients of the charge are simply not made out, the continuation of a prosecution on the identical material is an abuse of process, because the department has failed to prove its case on the lower standard and cannot hope to prove it on the higher one. Where the exoneration is on a technical ground, on limitation, or on the benefit of doubt, the prosecution survives. That distinction between an exoneration on merits and one on a technicality is the operative rule, and an answer that states it precisely is doing more than reciting a proposition.

A fifth point of detail is worth adding. Because prosecution requires the previous sanction of the Principal Commissioner or Commissioner under section 137(1), the department itself decides whether to run both tracks, and departmental instructions have for years directed that prosecution be launched only in cases above monetary thresholds and where the evidence is strong. The practical position is therefore that simultaneity is lawful but selective.

Why it bears on this question. Adjudication begins with a notice, and a notice issued by an officer without the function is a nullity however sound its contents. This line of authority, from 2011 through Canon India in 2021 to the review of 7 November 2024, is the answer to the first question any noticee should ask, and it also shows how readily Parliament legislates over a decision that inconveniences recovery.

The authority on the penalty limb

On quantum and on the exercise of the power to penalise at all, the governing authority is Hindustan Steel Ltd v. State of Orissa, (1969) 2 SCC 627, decided on 4 August 1969. A government undertaking sold bricks, steel and cement, which it had procured for its own construction, to the contractors building its factory, and was assessed to sales tax as a dealer and penalised for failing to register. It was held liable to the tax.

But the penalty was set aside, and the reasoning is general. A penalty is quasi-criminal; the authority is not bound to impose one merely because it is lawful to do so; and a penalty should not be imposed for a technical or venial breach, or where the breach flows from a bona fide belief that the person is not liable. What is required is deliberate defiance of the law, contumacious or dishonest conduct, or a conscious disregard of obligation.

Conclusion

Conclusion. The civil side of the Act runs from a show cause notice under section 28 or section 124, through adjudication by an officer whose competence section 122 fixes, without limit by a Principal Commissioner, Commissioner or Joint Commissioner of Customs, and up to such limit as the Board may notify by such officers as it specifies, the value-based tiers having been removed by the Finance Act 2018, to four rungs of appeal: the Commissioner (Appeals) in sixty days, the Tribunal in three months, the High Court on a substantial question of law, and the Supreme Court, which takes rate and valuation disputes directly under section 130E. The pre-deposit of seven and a half and ten per cent under section 129E is the price of entry at the first two rungs, and it is where the structure is most open to criticism, because it makes the independence of the Tribunal conditional on the appellant's liquidity.

For full marks, cover: the historical reason for the change, which is the balance of payments position and the 1991 reforms, not a change of legal fashion; the six axes on which the two Acts differ, each stated as a proposition and then illustrated; the exact figures in sections 13 and 14 of FEMA; the transition machinery in section 49 including the two-year sunset; and, critically, that FEMA itself has been amended so heavily since 1999 that a comparison written from a 2000 textbook is now wrong on the appellate side and on capital account transactions.

Why the change happened

The Foreign Exchange Regulation Act, 1973 was scarcity legislation. It replaced the 1947 Act of the same name and was passed when India's foreign exchange reserves were small, the rupee was not convertible, and the governing assumption was that every unit of foreign exchange was a national resource to be conserved. Its instrument was prohibition subject to permission: anything not expressly permitted was forbidden, and the burden lay on the citizen to show that he was within a permission.

The figures must be exact. Section 13(1) allows a penalty up to thrice the sum involved where the amount is quantifiable, up to two lakh rupees where it is not quantifiable, and where the contravention is continuing, a further penalty up to five thousand rupees for every day after the first day. Section 13(2) permits confiscation of the currency, security or property involved and a direction to bring foreign exchange holdings back into India. Section 14(11) fixes the term of civil imprisonment: up to three years where the demand exceeds one crore rupees, and up to six months in any other case.

Second, the burden of proof was reversed back to where it belongs. FERA contained a presumption of guilt: section 59 of that Act placed the burden on the accused to prove that he had not contravened. FEMA contains no such presumption for the ordinary contravention. The department must prove the contravention, and the accused is not required to establish his innocence. The change is the difference between a statute written on the assumption that the citizen is a suspect and one written on the assumption that he is a trader.

Fifth, FEMA introduced compounding, which FERA did not have. Section 15 allows any contravention under section 13 to be compounded within one hundred and eighty days of receipt of the application, by the Director of Enforcement or by authorised officers of the Directorate and of the Reserve Bank, and section 15(2) bars any further proceeding once a contravention is compounded. Compounding is now governed by the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified on 12 September 2024 in supersession of the 2000 Rules, which raised the application fee from five thousand to ten thousand rupees plus goods and services tax and introduced digital payment. Compounding is the practical heart of FEMA administration: the overwhelming majority of contraventions, most of them reporting delays, end there.

What has changed inside FEMA since 1999, and why the comparison must be updated

The appellate architecture has been dismantled and this is the point at which most answers are out of date. As enacted, FEMA constituted its own Appellate Tribunal for Foreign Exchange under sections 18 to 31. The Finance Act 2017, by section 165 with effect from 26 May 2017, substituted section 18 so that the Appellate Tribunal constituted under section 12(1) of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 is now the Appellate Tribunal for FEMA, and it omitted sections 20, 22, 24, 25, 26, 29, 30 and 31, which had dealt with composition, term of office, vacancies, resignation and removal, a Member acting as Chairperson, distribution of business among Benches, transfer of cases and decision by majority. Sections 21, 23, 27 and 33 were substituted so that they now speak only of the Special Director (Appeals).

Two later insertions closed real gaps. Section 37A, inserted with effect from 9 September 2015, allows an Authorised Officer to seize assets of equivalent value situated in India where foreign assets are suspected to be held in contravention of section 4, with the order to be placed before a Competent Authority of at least Joint Secretary rank within thirty days and disposed of within one hundred and eighty days; and section 37A(6) provides that compounding under section 15 does not apply to it.

Section 13(1A) to (1D), inserted at the same time, restore imprisonment up to five years for holding foreign assets above the section 37A threshold, so the clean civil character of FEMA has been qualified at its edges. Section 44A, inserted with effect from 1 October 2020, removes the International Financial Services Centre from the Reserve Bank's reach and gives those powers to the International Financial Services Centres Authority.

The comparison, tabulated

The case that shows what the civil character is worth in practice

The modern authority on the civil character of a FEMA breach is Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, and it is worth working out because it decides the point in a commercial setting rather than in an enforcement one. The facts are worth setting out because they are a foreign exchange case in commercial dress.

Why it bears on this question. It is the strongest single illustration of how far FEMA has travelled from FERA. Under the 1973 Act a breach was an offence, guilt was presumed by section 59 and arrest was available under section 35; under FEMA the same conduct is a contravention that can be compounded, and the Supreme Court has treated that compoundability as a reason for holding that a breach does not even offend the fundamental policy of Indian law. No comparison of the two Acts is complete without it.

The case that shows what FERA's arrest power actually meant

Directorate of Enforcement v. Deepak Mahajan, (1994) 3 SCC 440, decided on 31 January 1994 is the decision that fixes what an arrest under this branch of the law actually entails. Deepak Mahajan was detained by officers of the Directorate of Enforcement for a contravention of FERA and produced before the Additional Chief Metropolitan Magistrate, who was asked to authorise judicial remand under section 167(2) of the Code of Criminal Procedure, 1973. The question was whether a Magistrate has jurisdiction to remand a person arrested by an officer who is not a police officer and where no First Information Report exists.

The Supreme Court rejected that argument and drew the line that still governs. A proceeding to adjudicate a penalty is a proceeding for the breach of a civil obligation, not a criminal prosecution, and mens rea is therefore not an essential ingredient of it. What has to be shown is blameworthy conduct, and the Court held that the delinquency of the defaulter itself establishes that conduct: once the contravention is proved, the penalty follows without any further proof of a guilty mind. The Court was careful to say that this is not a relaxation of proof but a difference in the nature of the proceeding, so that the two jurisdictions, penalty and prosecution, ask different questions of the same facts.

Conclusion

Conclusion. FERA and FEMA are not two versions of one statute but two answers to two different economic questions. FERA answered scarcity by criminalising the movement of foreign exchange, presuming guilt and prohibiting what it did not permit; FEMA answers sufficiency by permitting what it does not restrict, converting the breach into a civil contravention adjudged under section 13, and providing in section 15 a compounding route through which most contraventions in fact end. The sunset in section 49, which barred cognizance of a FERA offence after 31 May 2002, marks the moment the older philosophy was closed off.

The comparison must, however, be brought up to date, and that is what separates a good answer from a copied one. FEMA in 2026 is not the Act of 1999. Its own Appellate Tribunal was abolished by the Finance Act 2017, sections 20, 22, 24, 25, 26 and 29 to 31 standing omitted and the SAFEMA Tribunal taking over under a substituted section 18. Capital account transactions not involving debt instruments passed from the Reserve Bank to the Central Government on 15 October 2019, section 6(3) being omitted and section 6(2A) inserted.

For full marks, cover: that the question has three parts, the nature of a contravention, the penal consequences and the hierarchy, and that the third is where most answers are now wrong; what makes a FEMA breach a contravention rather than an offence; the substantive prohibitions in sections 3, 4, 6, 7, 8 and 10 whose breach is the contravention; the exact figures in sections 11(3), 13 and 14; the two re-criminalising provisions, sections 13(1A) to (1D) and 37A; compounding under section 15 and the 2024 Rules; and then the hierarchy, stating accurately that FEMA's own Appellate Tribunal was abolished in 2017.

Section 4 forbids a person resident in India from acquiring, holding, owning, possessing or transferring foreign exchange, foreign security or immovable property situated outside India. Section 6 regulates capital account transactions. Section 7 obliges an exporter to declare the full export value. Section 8 obliges a resident to take all reasonable steps to realise and repatriate foreign exchange due to him. Section 10(5) and (6) impose duties on and through the authorised person.

The Explanation to section 3(c) is the hawala provision and deserves separate treatment. It provides that where a person in or resident in India receives a payment by order or on behalf of a person resident outside India through any other person, including an authorised person, without a corresponding inward remittance from any place outside India, that person is deemed to have received the payment otherwise than through an authorised person. That deeming clause is what makes the compensatory or hawala payment a contravention: the vice is not the receipt of money but the absence of a matching inward remittance, because the transaction settles a cross-border obligation without foreign exchange ever crossing the border.

Section 13(2) adds confiscation. The Adjudicating Authority may, in addition to any penalty, direct that any currency, security or other money or property in respect of which the contravention took place be confiscated to the Central Government, and may direct that foreign exchange holdings be brought back into India or retained outside India in accordance with his directions. The Explanation extends "property" to deposits in a bank into which the property was converted, to Indian currency into which it was converted, and to any other property resulting from its conversion, so that a simple change of form does not defeat the order.

Section 11(3) is the special penalty on an authorised person, and it is much smaller: for contravening a direction of the Reserve Bank or failing to file a return, a penalty up to ten thousand rupees, with a continuing penalty up to two thousand rupees for every day. The disparity between that and section 13 reflects that the authorised person is a regulated intermediary rather than the beneficiary of the transaction.

A point of real currency: section 14A has never been brought into force. Section 14A, "Power to recover arrears of penalty", would let the Adjudicating Authority authorise an officer not below the rank of Assistant Director to recover arrears using the powers of an income-tax authority and the procedure of the Second Schedule to the Income-tax Act, 1961. The India Code footnote records that it "shall stand inserted (date to be notified) by Act 28 of 2016, section 229", and no commencement notification has been issued. An answer that lists section 14A as a live recovery power is stating a provision that has never commenced, and pointing that out is exactly the kind of reading an LLM examiner rewards.

Section 37A supplies the seizure machinery for the same class of case. An Authorised Officer with reason to believe, recorded in writing, that foreign assets are held in contravention of section 4 may seize the value equivalent situated within India; the order must be placed before a Competent Authority of at least Joint Secretary rank within thirty days; the Competent Authority must confirm or set it aside within one hundred and eighty days after hearing both sides; an appeal lies to the Appellate Tribunal under section 37A(5); and section 37A(6) expressly excludes compounding under section 15. That last exclusion is the clearest statement in the Act that undeclared foreign wealth is not to be bought off.

Compounding: the route most contraventions actually take

Section 15 allows any contravention under section 13 to be compounded on the application of the person committing it, within one hundred and eighty days of receipt of the application, by the Director of Enforcement or by such other officers of the Directorate and of the Reserve Bank as the Central Government authorises. Section 15(2) provides that once a contravention is compounded, no proceeding or further proceeding shall be initiated or continued in respect of it.

The hierarchy and jurisdiction, stated correctly for 2026

First tier: the Adjudicating Authority under section 16. Officers of the Central Government notified in the Official Gazette, with their jurisdictions specified in the same notification. He may act only on a written complaint by an officer authorised by the Central Government, must give a reasonable opportunity of being heard, may require a bond or guarantee where the person is likely to abscond, has the powers of a civil court under section 28(2), his proceedings are judicial proceedings within sections 193 and 228 of the Indian Penal Code, and he must endeavour to dispose of the complaint within one year, recording reasons periodically if he cannot.

Second tier, and its jurisdiction is narrow: the Special Director (Appeals) under section 17. He hears appeals only against orders of an Adjudicating Authority who is an Assistant Director of Enforcement or a Deputy Director of Enforcement. The limitation is forty-five days from receipt of the order, extendable for sufficient cause. Under section 21 he must have been a member of the Indian Legal Service holding a post in Grade I, or a member of the Indian Revenue Service holding a post equivalent to a Joint Secretary.

Fourth tier: the High Court under section 35. An appeal lies within sixty days of communication of the Tribunal's order, on any question of law, with a further period not exceeding sixty days for sufficient cause. The Explanation identifies the High Court by the place where the aggrieved party resides or carries on business, or, where the Central Government is the appellant, by reference to the respondent.

Section 34 completes the jurisdictional picture by exclusion: no civil court has jurisdiction over any matter which an Adjudicating Authority, the Appellate Tribunal or the Special Director (Appeals) is empowered to determine, and no injunction may be granted in respect of any action taken under the Act.

The authority on what a contravention is worth

The modern authority on the civil character of a FEMA breach is Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, and it is worth working out because it decides the point in a commercial setting rather than in an enforcement one. The facts are worth setting out because they are a foreign exchange case in commercial dress.

Why it bears on this question. It answers the question the stem asks about the nature of a contravention. A contravention under section 13 is not an offence, is not void in its consequences, and is capable of being cured; and the Supreme Court has relied on exactly that to hold that it does not offend the fundamental policy of Indian law. The hierarchy in sections 16 to 19 and 35 exists to determine and correct such contraventions, not to punish crimes.

The authority on quantum

On quantum and on the exercise of the power to penalise at all, the governing authority is Hindustan Steel Ltd v. State of Orissa, (1969) 2 SCC 627, decided on 4 August 1969. A government undertaking sold bricks, steel and cement, which it had procured for its own construction, to the contractors building its factory, and was assessed to sales tax as a dealer and penalised for failing to register. It was held liable to the tax.

Conclusion

Conclusion. The nature of a FEMA contravention is civil, and everything else follows from that. There is no mens rea requirement, no prosecution before a criminal court and no imprisonment for the ordinary breach; there is adjudication by a departmental authority, a penalty measured in multiples of the sum involved, confiscation as an adjunct, and civil imprisonment only as a means of extracting payment from a defaulter who will not pay. The exact figures, thrice the sum or two lakh rupees, five thousand a day continuing, three years above one crore and six months below, are what an examiner checks first.

Two qualifications must be entered against that clean civil picture. Sections 13(1A) to (1D) and section 37A, both from September 2015, restore imprisonment of up to five years, seizure of Indian assets of equivalent value and an express bar on compounding, for undisclosed assets held abroad; and section 14A, the recovery machinery Parliament enacted in 2016, has never been notified into force. On the hierarchy, the answer must not be written from a pre-2017 text.

For full marks, cover: three separate treatments, because the examiner has set three heads worth about eight marks each; for FDI, that the rule-making power moved from the Reserve Bank to the Central Government on 15 October 2019 and that the Non-debt Instruments Rules 2019 now govern, together with the routes, the sectoral position and Press Note 3 of 2020; for exports, section 7 read with section 8 and the realisation obligation, and the customs interface; and for hawala, the Explanation to section 3(c), which is the provision that actually catches it, with the mechanics of a hawala settlement explained so that the legal analysis has something to bite on.

The governing power moved in 2019, and this is the fact that dates an answer. As originally enacted, section 6(3) empowered the Reserve Bank to prohibit, restrict or regulate eleven classes of capital account transaction, and foreign investment was governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, known as FEMA 20. With effect from 15 October 2019, section 6(3) was omitted and section 6(2A) was inserted, giving the Central Government power to prescribe permissible classes of capital account transactions not involving debt instruments, the limits of admissibility and the conditions. Section 6(7) provides that "debt instruments" means such instruments as the Central Government may determine in consultation with the Reserve Bank.

The two routes must be stated. Under the automatic route no prior approval of the Government or the Reserve Bank is needed and the investor reports after the event. Under the Government route prior approval of the administrative ministry is required, obtained through the Foreign Investment Facilitation Portal since the Foreign Investment Promotion Board was abolished in 2017. Sectoral caps and conditions are set out in the Non-debt Instruments Rules and in the consolidated FDI policy.

Prohibited sectors are a short and examinable list: lottery and gambling and betting including casinos, chit funds, Nidhi companies, trading in transferable development rights, real estate business or construction of farm houses, manufacture of cigars and tobacco substitutes, and activities not open to private investment such as atomic energy and railway operations other than the permitted segments.

(b) Export of Goods and Services

Section 7 imposes a declaration obligation on the exporter and it has three limbs. Under section 7(1)(a) every exporter of goods must furnish to the Reserve Bank, or to such other authority as may be specified, a declaration in the specified form containing true and correct material particulars, including the amount representing the full export value or, where the full export value is not ascertainable at the time of export, the value which the exporter, having regard to prevailing market conditions, expects to receive on the sale of the goods in a market outside India.

Under section 7(1)(b) he must furnish such other information as the Reserve Bank requires for ensuring realisation of the export proceeds. Under section 7(2) the Reserve Bank may direct any exporter to comply with such requirements as it deems fit to ensure that the full export value, or such reduced value as it determines having regard to prevailing market conditions, is received without delay. Under section 7(3) every exporter of services must furnish a declaration containing true and correct material particulars in relation to payment for those services.

The customs interface should be drawn, because this is a Customs and Foreign Exchange paper. The export declaration under section 7 is made on the shipping bill, and the customs authorities are the specified authority for receiving it. The Export Data Processing and Monitoring System operated by the Reserve Bank matches shipping bills against realisation, and an unmatched shipping bill is the standard trigger for a caution-listing of the exporter, followed by adjudication if the proceeds are not realised. Section 113(d) and (i) of the Customs Act make goods liable to confiscation where they are attempted to be exported contrary to a prohibition, or where the value stated in the shipping bill differs from the value the exporter intends to receive, which is how over-invoiced and under-invoiced exports are caught on the customs side of the same transaction.

The provision that catches it is the Explanation to section 3(c) of FEMA, and it must be quoted with care. Section 3(c) forbids a person from receiving otherwise than through an authorised person any payment by order or on behalf of any person resident outside India. The Explanation provides that where a person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person, including an authorised person, without a corresponding inward remittance from any place outside India, that person shall be deemed to have received such payment otherwise than through an authorised person.

The deeming is the whole mechanism. Without it, the recipient in India could point to a domestic payment from a domestic payer and say that he had received nothing from abroad at all. The Explanation looks past the form of the payment to the absence of the inward remittance, so the contravention is complete on proof that the payment was made on the instructions of a person resident outside India and that no corresponding foreign exchange came in. It is one of the very few genuinely artificial provisions in FEMA, and it exists because the transaction it targets is designed to look like something else.

The consequences are the severest in the Act. Hawala is a substantive contravention attracting the full section 13(1) penalty of up to thrice the sum involved, with confiscation under section 13(2), and it is the class of case the Directorate of Enforcement, rather than the Reserve Bank, handles. Because the same transaction is almost always the layering stage of a money-laundering chain, it also engages the Prevention of Money-Laundering Act, 2002, where the consequences are criminal, and it engages the customs law where the counter-transaction is an under-invoiced import or an over-invoiced export. A hawala answer that stops at FEMA has described only one of the three statutes that will be applied.

The case in which a capital account transaction was tested in court

The modern authority on the civil character of a FEMA breach is Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, and it is worth working out because it decides the point in a commercial setting rather than in an enforcement one. The facts are worth setting out because they are a foreign exchange case in commercial dress.

Why it bears on this question. It is a rare instance of the Non-debt Instruments regime being litigated to the Supreme Court, and the transaction at its centre, a transfer of shares from residents to a non-resident at a discount, is precisely the kind of foreign direct investment dealing this question is about. It establishes that a pricing breach on such a transfer is remediable and compoundable, not void.

The authority on the consequence of getting it wrong

The second authority is Hindustan Steel Ltd v. State of Orissa, (1969) 2 SCC 627, decided on 4 August 1969, and it governs the exercise of every discretionary power to penalise in an Indian fiscal statute. A government undertaking sold bricks, steel and cement, which it had procured for its own construction, to the contractors building its factory, and was assessed to sales tax as a dealer and penalised for failing to register. It was held liable to the tax.

Conclusion

Conclusion. The three concepts are the three faces of the same statutory scheme. Foreign direct investment is the inbound capital account transaction, and its legal foundation shifted decisively on 15 October 2019 when section 6(3) was omitted, section 6(2A) inserted, and the Non-debt Instruments Rules, 2019 of the Central Government displaced the Reserve Bank's FEMA 20 regulations; Press Note 3 of 2020 then put every investment from a land-border country on the Government route, and reporting failures in Forms FC-GPR and FC-TRS are the commonest contraventions in the whole Act.

Export of goods and services is the outbound obligation, and sections 7 and 8 work as a pair: section 7 compels a true declaration of full export value, section 8 compels reasonable steps to realise and repatriate it, and section 2(y) defines what repatriation means. The purpose is anti-abuse, because under-invoicing an export is capital flight by another name, and the customs law reinforces it through section 113 of the Customs Act.

For full marks, cover: all four notes here, because the three a candidate picks differ, each written to about six marks of substance; for (i) the text of section 138A and the crucial sub-section (2); for (ii) the four requirements of section 124 and the consequence of breach, tied to section 110(2); for (iii) the point of the whole note, that section 43 is an anti-abatement provision and says proceedings shall NOT abate; and for (iv) the IEC under section 7 with its 2010 proviso, and the objects of the Act taken from its long title rather than invented.

Section 138A(2) is the limb that is usually forgotten and it is the one that keeps the section constitutional. It provides that for the purposes of the section a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability. The presumption therefore shifts the burden to the accused, but it shifts it at the highest standard: he must displace it beyond reasonable doubt, and correspondingly the prosecution must establish the actus reus beyond reasonable doubt before the presumption is available at all.

The importance of the section can be stated in four propositions. First, it makes smuggling prosecutions practicable, since without it a professional carrier could always plead ignorance of the contents of the consignment he carried. Second, it does not create an absolute liability: the defence of no culpable mental state is expressly preserved, so the section is a reverse onus and not a deeming of guilt.

(ii) Notice under section 124 of the Customs Act, 1962

Section 124 is the statutory embodiment of audi alteram partem in the confiscation and penalty jurisdiction, and it is a condition precedent, not a formality. It provides that no order confiscating any goods or imposing any penalty on any person shall be made unless the owner of the goods or such person is given a notice and an opportunity.

The section contains four distinct requirements and an answer should list them separately. First, a notice in writing, and the notice must be issued with the prior approval of an officer of customs not below the rank of an Assistant Commissioner of Customs. Second, the notice must inform him of the grounds on which it is proposed to confiscate the goods or to impose a penalty. Third, he must be given an opportunity of making a representation in writing within such reasonable time as may be specified. Fourth, he must be given a reasonable opportunity of being heard in the matter. The first proviso permits the notice and the representation to be oral at the request of the person concerned, which is a concession to small cases and is rarely used.

The consequence of breach is nullity, not irregularity. An order of confiscation or penalty made without the notice, or without a hearing, is void, and the defect is not cured by the availability of an appeal, because the appellate authority would then be hearing the party for the first time on a decision reached without hearing him. That is the same principle stated in the natural justice cases generally: a defect at the original stage is not ordinarily cured at the appellate stage.

Section 124 should finally be distinguished from the section 28 notice. Section 28 governs recovery of duty not levied, short levied, short paid or erroneously refunded, and carries its own time limits of two years, or five where collusion, wilful mis-statement or suppression of facts is alleged. Section 124 governs confiscation and penalty. The two are often issued in one composite document, but they are different powers with different consequences and different limitation, and an answer that treats them as one has missed the structure.

(iii) Provision relating to abatement under section 43 of FEMA

This note is a trap, and the whole of its value lies in seeing that section 43 is not an abatement provision at all: it is an anti-abatement provision.

Four features deserve separate mention. First, the section is confined to section 13, that is to the penalty jurisdiction; it does not carry a criminal liability under section 13(1C) to the legal representative, and it could not, because criminal liability is personal. Second, it covers insolvency as well as death, so a contravener cannot defeat the penalty by going through insolvency, and the official assignee takes the liability with the estate. Third, it covers not only pending proceedings but also appeals, so an appeal filed by a contravener who then dies is continued by his legal representative rather than dismissed as having abated. Fourth, the proviso is the protection: the heir's own property is untouched, and his liability is capped at what he actually received.

The examiner's point is therefore this. A student who sees the word "abatement" in the question and writes about the circumstances in which proceedings abate has stated the exact opposite of the law. The correct opening sentence of this note is that under FEMA, proceedings under section 13 do not abate on death or insolvency, and the section exists precisely to prevent abatement.

Section 5 gives the Foreign Trade Policy its statutory foundation. As substituted with effect from 27 August 2010, it empowers the Central Government to formulate and announce, by notification in the Official Gazette, the foreign trade policy and to amend it in like manner, with a proviso permitting a different application to Special Economic Zones. Before 2010 the section spoke of the "export and import policy"; the renaming matched the practice. Section 6 provides for the appointment of the Director General of Foreign Trade to advise the Central Government in the formulation of the policy and to be responsible for carrying it out.

Section 7 creates the Importer-exporter Code and it is the gateway to the whole regime. No person shall make any import or export except under an Importer-exporter Code Number granted by the Director General or an officer authorised by him, in accordance with the procedure the Director General specifies. The proviso, inserted in 2010, is the qualification most often missed: in the case of import or export of services or technology, the IEC is necessary only when the service or technology provider is taking benefits under the foreign trade policy, or is dealing with specified services or specified technologies. So a software exporter who claims no policy benefit and deals in nothing on the specified list needs no IEC, whereas every exporter of goods does.

The procedure requires a written notice of the grounds, a reasonable opportunity to represent in writing, and a hearing if desired. Under section 8(2) a person whose IEC has been suspended or cancelled may thereafter import or export only under a special licence.

Two further provisions complete the note. Section 11(2) makes a contravention punishable with a penalty of not less than ten thousand rupees and not more than five times the value of the goods, services or technology, whichever is more, and section 11(3) applies the same range to a forged, tampered or materially false declaration. Section 15 gives an appeal within forty-five days, extendable by thirty, but only on pre-deposit of the penalty or redemption charges, subject to a dispensation for undue hardship, and section 16 gives a power of review exercisable within two years where the variation would prejudice a person.

Why it bears on this question. The presumption in section 138A operates on a prosecution in which the department's evidence is very often a statement taken under section 108, and this is the decision that makes such a statement admissible. It also identifies the limit: the statement escapes Article 20(3) only because the maker was not yet an accused, which is the point at which the section is open to criticism.

The authority behind the notice and burden notes

Collector of Customs, Madras v. D. Bhoormull, (1974) 2 SCC 544, decided on 3 April 1974 is the leading decision on where the burden lies and how it is discharged. Acting on information, preventive officers of the Madras Custom House found packages of foreign goods at a shop, about to be despatched to Bangalore. The person in possession gave no account at all of how he had come by them, and the department had no direct evidence of any illicit importation.

The case that fixes the character of a foreign exchange contravention: MCTM Corporation

The decision that settles what kind of wrong a foreign exchange contravention is, is Director of Enforcement v. MCTM Corporation (P) Ltd, (1996) 2 SCC 471. A company had been penalised under section 23(1)(a) of the Foreign Exchange Regulation Act, 1947 for a contravention of section 10 of that Act, and it argued that no penalty could be imposed on it without proof that it had meant to break the law.

The Supreme Court rejected that argument and drew the line that still governs. A proceeding to adjudicate a penalty is a proceeding for the breach of a civil obligation, not a criminal prosecution, and mens rea is therefore not an essential ingredient of it. What has to be shown is blameworthy conduct, and the Court held that the delinquency of the defaulter itself establishes that conduct: once the contravention is proved, the penalty follows without any further proof of a guilty mind. The Court was careful to say that this is not a relaxation of proof but a difference in the nature of the proceeding, so that the two jurisdictions, penalty and prosecution, ask different questions of the same facts.

Section 43 of FEMA is the note that decides whether a candidate has read the section or the heading, because it provides that proceedings under section 13 shall not abate on death or insolvency, devolving the liability on the legal representative or official assignee, with the proviso confining the heir's exposure to the estate he actually takes. And the Importer-exporter Code under section 7 of the 1992 Act is the single identifier that ties a trader to customs, to his banker under FEMA and to the Director General at once, which is why section 8 permits it to be suspended for a contravention of the customs or foreign exchange law and not merely of the trade law, and why suspension is in practice a heavier sanction than the monetary penalty in section 11.

For full marks, cover: the three words in the question in the order the Act deals with them, because levy, assessment and exemption are three successive stages in the life of a customs charge and the examiner has set them in that order; the charging section 12 and the constitutional foundation in Article 265 and Entry 83; the taxable event and the decisions that fixed it; section 14 valuation and section 15 for the rate and date; the different duties in the Customs Tariff Act; then section 25 exemption, general and special, and the promissory estoppel question that section 25 always brings with it.

Levy: the charge, and the taxable event

The constitutional foundation should be stated first. Article 265 provides that no tax shall be levied or collected except by authority of law, and Entry 83 of List I of the Seventh Schedule gives Parliament exclusive competence over duties of customs including export duties. The Customs Act, 1962 and the Customs Tariff Act, 1975 are the two statutes made under that entry, the first supplying the machinery and the second the rates.

Section 15 fixes the rate and the date, and it is the operative provision in every classification dispute about timing. For goods entered for home consumption under section 46, the relevant date is the date of presentation of the bill of entry; for goods cleared from a warehouse under section 68, the date on which the bill of entry for home consumption is presented; and in any other case, the date of payment of duty. Section 16 is the export counterpart, fixing the date by reference to the let export order under section 51.

The different duties should be named, because "customs duties" in the question is not one tax. The basic customs duty is levied under section 12 read with the First Schedule to the Customs Tariff Act. Section 3 of the Customs Tariff Act levies the additional duty, and since 1 July 2017 the integrated goods and services tax and the compensation cess are levied on imports under sections 3(7) and 3(9) of that Act.

Section 8B provides for safeguard measures, section 9 for countervailing duty on subsidised articles, and section 9A for anti-dumping duty, each with its own investigative machinery under the Directorate General of Trade Remedies. Section 9AA provides for refund of anti-dumping duty paid in excess of the actual margin of dumping. A social welfare surcharge and, on specified goods, an agriculture infrastructure and development cess sit on top.

Valuation is governed by section 14 and it is where most of the money is. The value of imported and export goods is the transaction value, that is the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be for export from India for delivery at the time and place of exportation, where the buyer and seller are not related and price is the sole consideration for the sale, subject to such other conditions as may be specified in the Customs Valuation Rules.

The section requires inclusion of costs and services such as commissions, brokerage, engineering, design work, royalties and licence fees, transport, insurance and handling charges. Where transaction value cannot be accepted, the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 supply a hierarchy: identical goods, similar goods, deductive value, computed value and finally a residual method, to be applied in that sequence and not at choice.

Recovery of duty is coupled with the unjust enrichment rule on the way back. Section 27 governs refund and requires the claimant to establish that the incidence of duty has not been passed on, failing which the amount goes to the Consumer Welfare Fund under section 27(2); section 28D raises a presumption that the full incidence of duty has been passed on to the buyer unless the contrary is proved. Those two provisions codify Mafatlal Industries Ltd v. Union of India, (1997) 5 SCC 536.

Exemption: section 25 and the discipline on it

Section 25(1) empowers the Central Government, if satisfied that it is necessary in the public interest, by notification in the Official Gazette, to exempt generally, either absolutely or subject to conditions, goods of any specified description from the whole or any part of the duty leviable. The conditions are jurisdictional: the exemption must be by notification, it must be in the public interest, and it operates generally, that is on a class of goods and not on a named person.

The interpretative rule governing an exemption notification changed in 2018 and this must be stated. In Commissioner of Customs v. Dilip Kumar and Company, (2018) 9 SCC 1, a Constitution Bench of five judges held that an exemption notification must be construed strictly, and that any ambiguity in it must be resolved in favour of the revenue and against the assessee, expressly overruling the contrary line that had allowed the benefit of doubt to the subject. The distinction the Court drew is that ambiguity in a charging provision is resolved in favour of the assessee, whereas ambiguity in an exemption is resolved against him, because he is claiming a benefit and must bring himself squarely within its four corners. Every pre-2018 textbook states the opposite, and an answer that reproduces the old rule is stating law that a Constitution Bench has overruled.

Withdrawal of an exemption raises promissory estoppel, and Kasinka Trading v. Union of India, (1995) 1 SCC 274, decided on 18 October 1994, is the leading case. An exemption notification under section 25(1) on the import of PVC resin had been issued and expressed to remain in force until a stated date; it was withdrawn before that date, and importers who had entered into commitments on the faith of it invoked promissory estoppel.

Conclusion

Conclusion. Levy, assessment and exemption are three stages of one charge, and the Act keeps them separate. The levy arises under section 12 read with the Customs Tariff Act, on the taxable event of the goods crossing the customs barrier, with the rate and date fixed by section 15 for imports and section 16 for exports, and with additional duty, integrated tax, anti-dumping, countervailing and safeguard duties layered above the basic rate.

Assessment quantifies that charge, and since 2011 the importer performs it himself under section 17(1), with the officer verifying, re-assessing under section 17(4) and giving a speaking order under section 17(5). Valuation under section 14 is the transaction value where the parties are unrelated and price is the sole consideration, with the 2007 Rules supplying a fixed sequence of fallbacks. Section 18 allows provisional assessment on bond, and since 1 May 2025 must be finalised within two years, extendable by one, while section 18A now permits a voluntary post-clearance revision.

For full marks, cover: that this question is about powers exercised against a person, so the organising idea is the constitutional protection of the individual and the extent to which the Act displaces it; the presumption in section 138A together with the two other presumptions in sections 123 and 139, which most answers miss; the personal search provisions 100 to 103 and the section 102 right; arrest under section 104 with the exact cognizability rule; the Article 20(3) question and the status of a statement under section 108; and Radhika Agarwal of 27 February 2025 as the controlling modern authority.

Section 123 presumes that seized goods are smuggled, and it is the harsher of the two. Where goods to which the section applies are seized in the reasonable belief that they are smuggled goods, the burden of proving that they are not smuggled goods lies on the person from whose possession they were seized, or, if he claims to be the owner, on the owner. The section applies to gold and manufactures thereof, watches, and any other class of goods notified by the Central Government. Its limits are what a critical answer should emphasise: it applies only to notified goods, and only where the seizure was made in the reasonable belief that the goods were smuggled, so the department must first establish the reasonable belief as a jurisdictional fact before the burden shifts at all.

Section 139 presumes the genuineness of documents. Where a document produced or seized is tendered in evidence, the court shall presume, unless the contrary is proved, the truth of its contents and the genuineness of the signature and handwriting. Taken with sections 123 and 138A, the effect is that the department may in a notified-goods case prove possession, rely on the documents it seized, and leave the accused to disprove both the smuggled character of the goods and his own guilty mind.

Section 102 is the safeguard and it is a real one. When an officer is about to search a person under section 100 or section 101, he must, if such person so requires, take him without unnecessary delay to the nearest gazetted officer of customs or Magistrate. That officer or Magistrate may discharge the person if he sees no reasonable ground for search, and if he does not, a search shall be made. A female may be searched only by a female. The critical point is that the right is meaningless unless the person is told of it, and the practice of recording that the person was informed and declined is the only evidence that the section was complied with.

Section 103 governs the case where a person is suspected of having secreted goods inside his body. The proper officer may detain him and produce him without unnecessary delay before the nearest Magistrate, who if satisfied may direct an X-ray or the taking of other suitable action by a registered medical practitioner. The insistence on a Magistrate before any intrusion into the body is the Act's recognition that this power is of a different order from a pat-down.

Section 104(4) must be stated exactly. Notwithstanding the Code of Criminal Procedure, an offence is cognizable only where it relates to prohibited goods, or to evasion or attempted evasion of duty exceeding fifty lakh rupees, or to fraudulently availing of or attempting to avail drawback or an exemption exceeding fifty lakh rupees, or to fraudulently obtaining an instrument under this Act or under the Foreign Trade (Development and Regulation) Act, 1992 where the duty relatable to its utilisation exceeds fifty lakh rupees. Section 104(5) makes every other offence non-cognizable.

That structure is the answer to Om Prakash v. Union of India, (2011) 14 SCC 1, decided 30 September 2011, which had held offences under the Customs Act and the Central Excise Act to be non-cognizable and bailable, requiring a warrant. Parliament carved out the cognizable categories by amendments in 2012, 2013 and 2019.

The requirement of section 138B that a statement be admitted only where the maker is examined as a witness and the adjudicating authority forms an opinion that it should be admitted in the interests of justice, or where the maker is dead, cannot be found, or is incapable of giving evidence, is the statutory answer, and it is a partial one.

The controlling modern decision is Radhika Agarwal v. Union of India, 2025 INSC 272, decided on 27 February 2025. A batch of about 279 petitions, led by Writ Petition (Criminal) No. 336 of 2018, challenged the arrest powers under the Customs Act and under the Central Goods and Services Tax Act, 2017. The Supreme Court upheld the provisions, holding Parliament competent under Article 246A to enact penal provisions for GST enforcement and rejecting the challenge to sections 69 and 70 of the CGST Act. But it made the exercise of the power conditional.

Conclusion

Conclusion. The Act deals with the person by displacing three ordinary rules and compensating for each. It reverses the burden of proof three times over, in section 138A on the guilty mind, in section 123 on the smuggled character of notified goods, and in section 139 on documents, and the compensation is that each presumption has a jurisdictional precondition the department must establish first, and that section 138A(2) holds the standard at beyond reasonable doubt. It permits revenue officers to search the body and the premises, and the compensation is section 102's right to be taken before a gazetted officer or a Magistrate, section 103's insistence on a Magistrate before any internal search, the rule that a female may be searched only by a female, and section 105's requirement of a recorded reason to believe.

For full marks, cover: the life of a single dispute from notice to Supreme Court, which is the clearest way to organise this answer; the two distinct notices, section 28 and section 124, and why they are different powers; who adjudicates and by what competence under section 122, which since the Finance Act 2018 no longer turns on the value of the goods; the quasi-judicial duties on the adjudicator; the four appellate rungs with their limitation periods; the pre-deposit under section 129E and the criticism it attracts; the departmental review under section 129D; and the abolition of the Settlement Commission on 1 April 2025, which has removed a whole branch from this diagram.

The dispute begins with a notice, and there are two of them

Adjudication under this Act is quasi-judicial, and it begins with a show cause notice. Which notice depends on what the department wants.

Section 124 is the confiscation and penalty notice. No order confiscating goods or imposing a penalty may be made unless the owner or the person concerned is given a notice in writing with the prior approval of an officer of at least Assistant Commissioner rank, informing him of the grounds, an opportunity to make a representation in writing, and a reasonable opportunity of being heard. Where goods have been seized, section 110(2) requires that this notice issue within six months, extendable by a further six months by the Principal Commissioner or Commissioner for reasons recorded and communicated, failing which the goods must be returned.

The two are often combined in one document, but they are different powers. Section 28 recovers money the exchequer should have had; section 124 forfeits goods and punishes a person. They have different limitation, different consequences and different defences, and an adjudication order that confiscates on the strength of a section 28 notice alone is bad.

The structural criticism is unavoidable and should be made rather than avoided. The adjudicator at the first stage is an officer of the same department that issued the notice, often reporting within the same hierarchy as the investigating unit. The Act's answer is that the appellate rungs above are independent, but that answer is only as good as the accessibility of those rungs, which is where section 129E bites.

The four rungs of appeal

Section 128: Commissioner (Appeals). Any person aggrieved by a decision or order passed by an officer of customs lower in rank than a Principal Commissioner or Commissioner may appeal within sixty days of communication, extendable by a further thirty days on sufficient cause. Section 128A governs the procedure: the Commissioner (Appeals) must give an opportunity of hearing, may make such further inquiry as is necessary, and may confirm, modify or annul the decision, but may not enhance a penalty or confiscate goods of greater value without notice and hearing. He has no power of remand in most cases, having to decide the appeal himself.

Section 130: appeal to the High Court on a substantial question of law, within one hundred and eighty days. Section 130E: appeal to the Supreme Court, which lies from a judgment of the High Court certified as fit, and, importantly, directly from an order of the Tribunal relating to the determination of any question having a relation to the rate of duty of customs or to the value of goods for purposes of assessment. That carve-out removes classification and valuation disputes, which are the great majority of significant customs litigation, from the High Court altogether and sends them straight to the Supreme Court.

Section 129D preserves a review in favour of the department. The Board may direct the Principal Commissioner or Commissioner to apply to the Tribunal for determination of points arising from an order of a Commissioner as adjudicating authority, and a Principal Commissioner or Commissioner may direct a subordinate officer to apply to the Commissioner (Appeals). The department is thus not bound by an adjudication order it considers wrong.

The Finance Act 2025 ended it. The Settlement Commission ceased to receive applications after 31 March 2025 and ceased to operate from 1 April 2025, and Chapter XIV-A was amended to transfer pending applications to an Interim Board for Settlement, which takes them at the stage they had reached and is composed of three officers of the rank of Chief Commissioner or above nominated by the Central Board of Indirect Taxes and Customs. The stated reason was that graded penalties and the compounding provisions had made the Commission redundant.

Two consequences belong in this answer. First, the Interim Board has no judicial member, so what was a quasi-judicial settlement forum has become an executive one. Second, immunity from prosecution can no longer be obtained through settlement, and compounding under section 137(3), by the Principal Chief Commissioner or Chief Commissioner under the Customs (Compounding of Offences) Rules, is the only route left, one that is priced by rules and closed to the classes of person excluded by the provisos to that sub-section.

Why it bears on this question. Every adjudication depends on the competence of the officer who issued the notice, and this is the decision that made that a live question. Its afterlife, a retrospective section 28(11), then Canon India in 2021, then the review of 7 November 2024 holding that section 2(34) must be read with section 6, is the clearest example in the subject of the interaction between adjudication, appeal and legislative correction.

The authority on the penalty at the end of it

The second authority is Hindustan Steel Ltd v. State of Orissa, (1969) 2 SCC 627, decided on 4 August 1969, and it governs the exercise of every discretionary power to penalise in an Indian fiscal statute. A government undertaking sold bricks, steel and cement, which it had procured for its own construction, to the contractors building its factory, and was assessed to sales tax as a dealer and penalised for failing to register. It was held liable to the tax.

Conclusion

Conclusion. Adjudication under the Customs Act is quasi-judicial in form and departmental in personnel. It begins with one of two notices, section 28 for duty within two years or five where collusion, wilful mis-statement or suppression is alleged, and section 124 for confiscation and penalty, which must state the grounds and be issued within the six-month window of section 110(2) where goods have been seized. Section 122 allows a confiscation or penalty to be adjudged without limit by a Principal Commissioner, Commissioner or Joint Commissioner of Customs, and up to such limit as the Board may notify by such officers as it specifies, the value-based tiers having been removed by the Finance Act 2018, section 122A caps adjournments at three, and section 138B controls when a statement may be used without the maker being examined.

The appeal structure then supplies the independence that the first stage lacks: sixty days to the Commissioner (Appeals), three months to the Tribunal, one hundred and eighty days to the High Court on a substantial question of law, and a direct route to the Supreme Court under section 130E for rate and valuation disputes, with baggage, drawback and short-landing cases going instead to the Central Government in revision. The department has its own remedy in section 129D.

For full marks, cover: the point that decides this question, that FEMA contains no power of arrest for an ordinary contravention at all, so the answer must explain what it does contain and why; the contrast with section 35 of FERA; civil imprisonment under section 14 in full detail, since that is the imprisonment the Act does provide; the exact thresholds in section 14(11); the two exceptions where criminal liability and imprisonment do return, sections 13(1C) and 37A; the fact that section 14A has never been notified; and the position of a FEMA contravener arrested under the Prevention of Money-Laundering Act, which is how arrest actually happens in practice.

The central proposition: FEMA has no arrest power for a contravention

The first sentence of this answer must be that FEMA contains no power to arrest a person for contravening it. A breach of sections 3, 4, 6, 7, 8 or 10 is a civil contravention under section 13, adjudged by an Adjudicating Authority under section 16, and visited with a monetary penalty and confiscation. There is no offence, no First Information Report, no charge sheet and no arrest.

Civil imprisonment under section 14: what the Act does provide

Section 14 is headed "Enforcement of the orders of Adjudicating Authority", and it is a recovery provision, not a penal one. The distinction matters: a person is not imprisoned for contravening FEMA, he is imprisoned for failing to pay a penalty he has been adjudged to owe, in the same way a judgment debtor may be detained under Order XXI of the Code of Civil Procedure, 1908.

The trigger is default for ninety days. Subject to section 19(2), if a person fails to make full payment of the penalty imposed on him under section 13 within ninety days from the date on which the notice for payment is served on him, he is liable to civil imprisonment.

The procedure is deliberately elaborate and every step is a safeguard. Under section 14(2) no order for arrest and detention may be made unless the Adjudicating Authority has issued and served a notice calling upon the defaulter to appear and show cause why he should not be committed to civil prison, and is satisfied, for reasons recorded in writing, either that the defaulter, with the object or effect of obstructing recovery, has after the issue of the notice dishonestly transferred, concealed or removed any part of his property, or that he has, or has had since the notice, the means to pay the arrears or a substantial part of them and refuses or neglects to pay.

Sections 14(7) to (10) govern the inquiry. The defaulter must be given an opportunity of showing cause why he should not be committed; pending the inquiry the Adjudicating Authority may detain him in custody or release him on security; on conclusion he may order detention; and the proviso to section 14(9) allows a period not exceeding fifteen days, in custody or on security, to give the defaulter a last opportunity to satisfy the arrears. If no detention order is made, section 14(10) requires his release.

Section 14(11) fixes the term, and the two figures must be exact. A person detained in civil prison in execution of the certificate may be detained up to three years where the certificate is for a demand of an amount exceeding one crore rupees, and up to six months in any other case, with a proviso releasing him on payment of the amount in the warrant to the officer in charge of the civil prison.

Where imprisonment does return: the 2015 amendments

Sections 13(1A) to (1D), inserted with effect from 9 September 2015, restore criminal liability for one class of case. Where a person is found to have acquired foreign exchange, foreign security or immovable property situated outside India of aggregate value exceeding the threshold prescribed under the proviso to section 37A(1), he is liable under section 13(1A) to a penalty up to three times the sum and to confiscation of the value equivalent situated in India; under section 13(1C) he is punishable with imprisonment for a term which may extend to five years and with fine, in addition to the penalty; under section 13(1B) the Adjudicating Authority may recommend prosecution in writing and the Director of Enforcement may direct it; and under section 13(1D) no court may take cognizance except on a complaint in writing by an officer not below the rank of Assistant Director.

How arrest actually happens in a foreign exchange case

The practical answer, and one an examiner will reward, is that the arrest comes from another statute. A serious foreign exchange contravention, particularly hawala, is almost always also a scheduled offence under the Prevention of Money-Laundering Act, 2002, and section 19 of that Act gives the Director, Deputy Director, Assistant Director or an authorised officer the power to arrest on material in his possession and reason to believe, recorded in writing, with the grounds to be informed to the arrestee and production before a Special Court within twenty-four hours. The same officers of the Directorate of Enforcement administer both statutes.

So the correct statement of the law is that FEMA does not permit arrest, but a person who has contravened FEMA may be arrested under the Prevention of Money-Laundering Act, or under section 104 of the Customs Act where the same transaction is a smuggling offence. The civil character of FEMA is real, but it does not confer immunity, and an answer that stops at "FEMA is civil" without saying where the arrest comes from has described the statute rather than the position.

Why it bears on this question. It is the authority on the very power the question asks about, and it comes from the statute FEMA replaced. Under FERA, arrest under section 35 was followed by judicial remand under section 167(2); FEMA retains no power of arrest at all, and its section 14 provides only civil imprisonment of a defaulter, after ninety days, on a recorded satisfaction and capped at three years above one crore rupees.

The authority on the penalty that section 14 enforces

On quantum and on the exercise of the power to penalise at all, the governing authority is Hindustan Steel Ltd v. State of Orissa, (1969) 2 SCC 627, decided on 4 August 1969. A government undertaking sold bricks, steel and cement, which it had procured for its own construction, to the contractors building its factory, and was assessed to sales tax as a dealer and penalised for failing to register. It was held liable to the tax.

But the penalty was set aside, and the reasoning is general. A penalty is quasi-criminal; the authority is not bound to impose one merely because it is lawful to do so; and a penalty should not be imposed for a technical or venial breach, or where the breach flows from a bona fide belief that the person is not liable. What is required is deliberate defiance of the law, contumacious or dishonest conduct, or a conscious disregard of obligation.

What FEMA does provide is civil imprisonment under section 14, and it is enforcement of a debt rather than punishment of a wrong. It arises only on default for ninety days after service of the demand; it requires a show cause notice and a recorded satisfaction either of dishonest disposal of property or of means and refusal; it carries a twenty-four hour production rule, a fifteen-day last chance to pay, and terms of up to three years where the demand exceeds one crore rupees and up to six months otherwise; and under section 14(12) release neither discharges the debt nor permits a second arrest on the same certificate. Section 14A, the intended recovery alternative, has never been notified.

Two qualifications complete the picture. Sections 13(1A) to (1D) and 37A, both from September 2015, restore imprisonment of up to five years, seizure of Indian assets of equivalent value and an express exclusion of compounding for undisclosed foreign assets, so the civil character of the Act ends where undeclared foreign wealth begins. And in practice a serious foreign exchange contravener is arrested not under FEMA but under section 19 of the Prevention of Money-Laundering Act, 2002, by the same Directorate of Enforcement, which is why the statement that FEMA has decriminalised foreign exchange must always be qualified by the statutes that sit alongside it.

Section 42(1) fastens liability on the person in charge. Where the person committing a contravention is a company, then every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company itself, is deemed guilty and is liable to be proceeded against and punished accordingly. The proviso supplies the defence: nothing renders such a person liable if he proves that the contravention took place without his knowledge, or that he exercised all due diligence to prevent it.

Two points about section 42(1) are examinable. First, the words "in charge of, and responsible to" are conjunctive, so a person must satisfy both; a director who holds office but has no role in the conduct of the business is not automatically caught, and the complaint must contain specific averments to that effect. Second, the burden of the proviso is on the person seeking to escape, and "due diligence" means a system of compliance actually in place and operating, not a general assertion of good faith.

The practical significance is that section 42 is the provision under which the Adjudicating Authority issues notices to directors alongside the company in almost every case of an unreported foreign investment or an unrealised export bill, and the standard defence, that a particular director was not in charge of the day-to-day business, is a defence under sub-section (1) but is no answer at all to a properly pleaded case under sub-section (2).

(b) Capital account transactions: section 6, as it now stands

The definition is in section 2(e). A capital account transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6. The closing words are now a dead cross-reference, because section 6(3) has been omitted, and pointing that out shows that the section has actually been read.

The division of labour that results is clean and should be stated as such. Equity and other non-debt instruments are the Central Government's field, governed by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019; debt is the Reserve Bank's field, governed by the Foreign Exchange Management (Debt Instruments) Regulations, 2019; and mode of payment and reporting are covered by a third instrument of 2019. Section 46(2)(aa) and (ab) were amended to give the Central Government the corresponding rule-making power, section 47(1)(a) was recast for the Reserve Bank's residual regulation-making power over debt, and section 47(3) saves all regulations made by the Reserve Bank before that date until amended or rescinded by the Central Government, which is what prevented a legal vacuum on 15 October 2019.

Sections 6(4) and 6(5) contain the grandfathering rules. A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or immovable property outside India if it was acquired, held or owned when he was resident outside India, or inherited from a person who was resident outside India; and section 6(5) is the mirror image for a person resident outside India holding Indian assets. Those two sub-sections are what allow a returning non-resident Indian to retain assets abroad without contravening section 4.

The operative words are that any right, obligation, liability, proceeding or appeal arising in relation to the provisions of section 13 shall NOT abate by reason of the death or insolvency of the person liable under that section, and that upon such death or insolvency such rights and obligations shall devolve on the legal representative of such person, or the official receiver or the official assignee, as the case may be. The proviso provides that a legal representative of the deceased shall be liable only to the extent of the inheritance or estate of the deceased.

The rule it displaces is actio personalis moritur cum persona. At common law a personal action dies with the person, so a penalty proceeding pending against a contravener who died would simply end, and his estate would pass to his heirs undiminished. Section 43 reverses that for FEMA penalties by two devices: a declaration that the proceeding does not abate, and a provision for devolution so that there is a party against whom it can continue.

The case that decided the effect of a breach of the capital account rules

The modern authority on the civil character of a FEMA breach is Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, and it is worth working out because it decides the point in a commercial setting rather than in an enforcement one. The facts are worth setting out because they are a foreign exchange case in commercial dress.

An Italian cable manufacturer and its Indian joint venture partners fell out; the London Court of International Arbitration made awards directing the Indian shareholders to sell their shares to the foreign party at a discount to fair market value. Enforcement in India was resisted under section 48 of the Arbitration and Conciliation Act, 1996 on the ground that a sale to a non-resident at a discounted price offends the exchange control law, then the pricing guidelines and now the Non-debt Instruments Rules, and so is contrary to the public policy of India.

The authority on the consequence of getting it wrong

The second authority is Hindustan Steel Ltd v. State of Orissa, (1969) 2 SCC 627, decided on 4 August 1969, and it governs the exercise of every discretionary power to penalise in an Indian fiscal statute. A government undertaking sold bricks, steel and cement, which it had procured for its own construction, to the contractors building its factory, and was assessed to sales tax as a dealer and penalised for failing to register. It was held liable to the tax.

But the penalty was set aside, and the reasoning is general. A penalty is quasi-criminal; the authority is not bound to impose one merely because it is lawful to do so; and a penalty should not be imposed for a technical or venial breach, or where the breach flows from a bona fide belief that the person is not liable. What is required is deliberate defiance of the law, contumacious or dishonest conduct, or a conscious disregard of obligation.

Why it bears on this question. Every one of these provisions ends, if it ends adversely, in a penalty imposed under a discretion expressed as a maximum. This decision states how such a discretion must be exercised: a penalty is quasi-criminal, is not to be imposed merely because it is lawful to do so, and is not for a technical or venial breach or one flowing from a bona fide belief.

Section 43 answers what happens when the person liable dies or becomes insolvent, and the answer is that nothing happens to the proceeding: it does not abate, the liability devolves on the legal representative or the official assignee, and the only concession is the proviso confining the heir's liability to the estate he takes. A candidate who reads the word "abatement" and writes about when proceedings come to an end has stated the exact reverse of the section.

The criticism is that the object has been honoured on the current account and only partly on the capital account. Section 5 makes current account transactions free subject to reasonable restrictions; but section 6 keeps capital account transactions under permission, and the Non-debt Instruments Rules, the sectoral caps, the Government route and Press Note 3 of 2020, which puts every investment from a land-border country on the Government route, mean that a large part of the inbound investment field is still administered rather than free. The Act facilitates trade; it manages capital.

Feature two: the breach is a civil contravention, not a crime. Section 13 provides for a penalty adjudged by an Adjudicating Authority, and there is no imprisonment for an ordinary contravention.

Feature four: the definitions were rewritten for an open economy. Section 2(v) fixes residence primarily by a stay of more than one hundred and eighty-two days in the preceding financial year, with two purpose-based exclusions; section 2(e) and section 2(j) define capital and current account transactions; section 2(n) defines foreign exchange in three limbs.

The criticism is that the residence test produces anomalies. Because the test looks to the preceding financial year, a person who leaves India permanently in April becomes a non-resident under the exclusion in sub-clause (A) at once by reason of purpose, while a person whose purpose is unclear may be resident for a year after he has gone. The purpose limb was introduced to solve exactly that, and the result is a test that is arithmetical on its face and intentional in its provisos, which is not a model of certainty.

Here the criticism is at its sharpest, and it is a criticism of what has been done to the Act rather than of what it enacted. The Finance Act 2017, section 165, with effect from 26 May 2017, substituted section 18 so that the Appellate Tribunal constituted under section 12(1) of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 became the Appellate Tribunal for FEMA, and omitted sections 20, 22, 24, 25, 26, 29, 30 and 31, which had governed composition, term of office, vacancies, resignation and removal, a Member acting as Chairperson, distribution of business among Benches, transfer of cases and decision by majority.

The Tribunal that now hears FEMA appeals also hears appeals under SAFEMA, the Narcotic Drugs and Psychotropic Substances Act, the Prevention of Money-Laundering Act and the Prohibition of Benami Property Transactions Act, and its workload under the last two is heavy.

Two structural residues worth noticing

The Act carries visible scars from its amendments, and pointing them out is the mark of a careful reading. Section 2(e) still defines a capital account transaction as including transactions referred to in section 6(3), a sub-section that has been omitted. Sections 2(d), 2(f) and 2(s) still define "Bench", "Chairperson" and "Member" of an Appellate Tribunal that FEMA no longer constitutes. And section 14A, the power to recover arrears of penalty enacted by Act 28 of 2016, has never been notified into force, so the recovery alternative to civil imprisonment that Parliament provided a decade ago does not exist.

The feature tested in court: compoundability as the mark of a civil statute

The modern authority on the civil character of a FEMA breach is Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, and it is worth working out because it decides the point in a commercial setting rather than in an enforcement one. The facts are worth setting out because they are a foreign exchange case in commercial dress.

Why it bears on this question. It supplies judicial confirmation of the Act's central noteworthy feature. The Supreme Court did not merely observe that FEMA is civil; it made the compoundability of a contravention the reason for a substantive holding about the enforcement of a foreign award. A feature that decides litigation is a feature worth listing first.

The decision that shows what the civil model replaced

A second authority, and one that comes from the statute this Act replaced, is Directorate of Enforcement v. Deepak Mahajan, (1994) 3 SCC 440, decided on 31 January 1994. Deepak Mahajan was detained by officers of the Directorate of Enforcement for a contravention of FERA and produced before the Additional Chief Metropolitan Magistrate, who was asked to authorise judicial remand under section 167(2) of the Code of Criminal Procedure, 1973. The question was whether a Magistrate has jurisdiction to remand a person arrested by an officer who is not a police officer and where no First Information Report exists.

The Supreme Court held that he has. Section 35(2) of FERA and section 104(2) of the Customs Act, which require an arrested person to be taken to a Magistrate without unnecessary delay, substantially fulfil the conditions of section 167(1), so the Magistrate may authorise detention and the officer may seek remand.

The Supreme Court rejected that argument and drew the line that still governs. A proceeding to adjudicate a penalty is a proceeding for the breach of a civil obligation, not a criminal prosecution, and mens rea is therefore not an essential ingredient of it. What has to be shown is blameworthy conduct, and the Court held that the delinquency of the defaulter itself establishes that conduct: once the contravention is proved, the penalty follows without any further proof of a guilty mind. The Court was careful to say that this is not a relaxation of proof but a difference in the nature of the proceeding, so that the two jurisdictions, penalty and prosecution, ask different questions of the same facts.

Feature eight: the Act governs conduct outside India, and that is unusual

Section 1(3) gives FEMA an extraterritorial operation that ordinary commercial legislation does not have, and it is a noteworthy feature in its own right. The Act extends to the whole of India; it also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India; and it applies to any contravention thereunder committed outside India by any person to whom this Act applies.

The reason is structural rather than ambitious. A foreign exchange contravention almost always has a foreign limb: the payment is received abroad, the asset is held abroad, the export proceeds are retained abroad. A statute confined to Indian territory would be evaded simply by placing the operative act on the other side of the border, which is precisely what the hawala mechanism does.

That limitation is exactly what section 37A was inserted in 2015 to answer, by permitting the seizure of the value equivalent situated within India instead of pursuing the foreign asset itself, with a Competent Authority not below the rank of Joint Secretary deciding within one hundred and eighty days and compounding excluded by section 37A(6). Seizing a domestic asset of equal value is the practical substitute for a jurisdiction India does not possess abroad, and it is the clearest illustration of how the Act's extraterritorial ambition and its territorial capacity have been reconciled.

The features that have weakened are the institutional ones. The Reserve Bank has lost capital account rule-making to the Central Government since 15 October 2019 and the International Financial Services Centre to the IFSCA since 1 October 2020. The Act's own Appellate Tribunal was abolished by the Finance Act 2017, with sections 20, 22, 24, 25, 26 and 29 to 31 omitted and the SAFEMA Tribunal absorbing the jurisdiction; section 32 was cut back so that the statutory right to representation now applies only before the Special Director (Appeals); and the first proviso to section 19(1) still requires the whole penalty to be deposited before the appeal is heard.

The fair overall assessment is that FEMA succeeded completely in what it set out to do in 1999, and that the pressure of the last decade, on undisclosed foreign wealth and on tribunal rationalisation, has quietly returned some of the sharpness the Act was written to remove.

The first is the set of statutory rules for classification. The First Schedule to the Customs Tariff Act, 1975 is preceded by the General Rules for the Interpretation of the Import Tariff, which are the Indian enactment of the international rules accompanying the Harmonised System. They are applied in sequence. Rule 1: classification is determined by the terms of the headings and any relative section or chapter notes, which are legally binding and not mere guidance. Rule 2(a): a heading covers an article presented incomplete or unfinished if it has the essential character of the complete article, and also an article presented unassembled.

Rule 2(b): a reference to a material includes mixtures and combinations of that material with others. Rule 3 resolves competition between headings: 3(a) the most specific description prevails over a general one; 3(b) where that fails, classification is by the material or component giving the goods their essential character; 3(c) where that fails, the heading occurring last in numerical order prevails. Rule 4 provides for classification by akin goods, Rule 5 for cases and packing, and Rule 6 for sub-headings, which are compared only at the same level.

Two further aids deserve mention. The Explanatory Notes to the Harmonised System published by the World Customs Organization are persuasive but not binding, and are routinely used to resolve heading disputes. And a trade or commercial parlance test applies to words used in the tariff that have a settled meaning in the trade, in preference to a scientific or dictionary meaning, unless the tariff itself defines the term.

(ii) Refund of customs duties

There are three refund provisions and they should be distinguished.

Section 26 provides for refund of export duty where goods are returned to the exporter otherwise than by way of resale, are re-imported within one year, and an application is made within six months of the order permitting clearance.

The unjust enrichment machinery is the substance of the topic. Under section 27(2) the amount found refundable is to be credited to the Consumer Welfare Fund established under section 12C of the Central Excise Act, 1944, and is paid to the applicant only where he establishes that he falls within one of the exceptions, principally that the incidence of the duty had not been passed on to any other person, or that it is a refund of duty paid on imports made by an individual for his personal use, or a refund of export duty under section 26, or of drawback. Section 28D raises a presumption that the full incidence of the duty has been passed on to the buyer unless the contrary is proved.

That machinery codifies Mafatlal Industries Ltd v. Union of India, (1997) 5 SCC 536, decided on 19 December 1996 by a Bench of nine judges. The Court held that every claim for refund, except where the levy is held unconstitutional, must be made and adjudicated under section 11B of the Central Excise Act or section 27 of the Customs Act and nowhere else; that a civil suit for refund does not lie; and that the claimant must establish that he has not passed on the burden of the duty, because to refund a tax whose burden was borne by the consumer is to enrich the claimant unjustly at the consumer's expense. The doctrine is not a technicality: it identifies who actually lost the money.

The seventh limb is the one that matters and it is usually skipped. By bringing in an agency, office or branch owned or controlled by a person, the definition makes a branch of an Indian company abroad, and a branch of a foreign company in India, a "person" in its own right, so that a transaction between a head office and its own branch across a border can be a transaction between two persons for the purposes of the Act. That is essential, because without it inter-branch dealings would fall outside sections 3 and 4 entirely.

The definition must be read with section 2(v) and section 2(w). A person resident in India is defined primarily by residence for more than one hundred and eighty-two days during the course of the preceding financial year, but is expressly not to include a person who has gone out of or stays outside India for or on taking up employment, for carrying on a business or vocation, or for any other purpose in circumstances indicating an intention to stay outside India for an uncertain period; nor a person who has come to or stays in India otherwise than for those purposes.

(iv) Export of goods and services under FEMA

Section 7 imposes the declaration obligation. Under section 7(1)(a) every exporter of goods must furnish to the Reserve Bank, or such other authority as may be specified, a declaration in the specified form containing true and correct material particulars, including the amount representing the full export value, or where that value is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India.

Under section 7(1)(b) he must furnish such other information as the Reserve Bank requires for ensuring realisation of the export proceeds. Under section 7(2) the Reserve Bank may direct any exporter to comply with such requirements as it deems fit so that the full export value, or such reduced value as the Reserve Bank determines having regard to prevailing market conditions, is received without any delay. Under section 7(3) every exporter of services must furnish a declaration containing true and correct material particulars in relation to payment for those services.

Enforcement runs through the banking system. The exporter's declaration is made on the shipping bill, the authorised dealer bank follows the outstanding bill, and the Reserve Bank's Export Data Processing and Monitoring System matches shipping bills against realisation. Persistent non-realisation leads to caution-listing and then to adjudication under section 13, while an over- or under-invoiced export is simultaneously an offence on the customs side under section 113 of the Customs Act, which makes goods liable to confiscation where the value stated in the shipping bill differs from the value the exporter intends to receive.

(v) Importer-exporter Code number and licence

The question sets two different instruments and the note should turn on the difference between them.

The Importer-exporter Code is an identity, and section 7 of the Foreign Trade (Development and Regulation) Act, 1992 requires it. No person shall make any import or export except under an Importer-exporter Code Number granted by the Director General or an officer authorised by him, in accordance with the procedure specified.

The 2010 amendment substituted that composite expression for the single word "licence" throughout the section, which is what brought duty credit scrips and similar instruments within the statutory framework rather than leaving them to policy alone. Section 9(3) requires a licence to be in the prescribed form, to be valid for the period specified and to be subject to prescribed terms; section 9(4) permits suspension or cancellation for good and sufficient reasons recorded in writing, after a reasonable opportunity of being heard; and section 9(5) gives an appeal in the same manner as under section 15.

Section 8 links the two by making the code liable to suspension or cancellation, on notice and hearing, where the holder has contravened the Act, the rules or the foreign trade policy, or any other law relating to central excise, customs or foreign exchange, or has committed a notified economic offence, or has made an import or export prejudicial to India's trade relations or to the interests of other traders or bringing disrepute to the country's goods. Under section 8(2) a person whose code stands suspended or cancelled may import or export thereafter only under a special licence.

On the foreign exchange side, "person" in section 2(u) is deliberately wide and its seventh limb, covering an agency, office or branch, is what allows a cross-border transaction between a head office and its own branch to be caught. Export of goods and services is governed by section 7's declaration of full export value and section 8's duty to take all reasonable steps to realise and repatriate, with section 2(y) defining repatriation to include discharge of a foreign currency liability. And the Importer-exporter Code under section 7 of the 1992 Act is an identity while a licence under section 9 is a permission, the two being tied together by section 8, under which a contravention of the customs or foreign exchange law can cost a trader the code itself and leave him able to trade only under a special licence.