LLM Group 2 Business Law Law Relating to Customs and Foreign Exchange 2016 Question Paper with Solutions

For full marks, cover: valuation first and at length, because that is where the litigation and the money are, and the question names it first; section 14 with its conditions, the 2007 Valuation Rules and the sequence they impose; the two decisions that fixed the Indian approach to transaction value; then chargeability, meaning section 12 and the taxable event; then levy, meaning the rate, the date under section 15 and the different duties; and a critical assessment that identifies where the scheme is genuinely open to objection, which is the related-party machinery and the width of Rule 12.

Valuation: section 14 and the transaction value rule

Section 14 was recast in 2007 to bring Indian law into line with Article VII of the General Agreement on Tariffs and Trade and the WTO Customs Valuation Agreement, and the change was from a notional to a real price. Before 2007 the section spoke of the price at which such or like goods are ordinarily sold or offered for sale in the course of international trade, which was a deemed or normal value. Since 2007 the value is the transaction value.

The rate of exchange is fixed by the third proviso and the Explanation: the conversion rate is that notified by the Board, and it is the rate in force on the date the bill of entry is presented under section 46 or the shipping bill under section 50.

The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 supply the machinery, and the sequence is mandatory. Rule 3 makes the transaction value the primary method, subject to Rule 12. Rule 4 provides for the value of identical goods, Rule 5 for similar goods, Rule 7 for the deductive value worked back from the sale price in India, Rule 8 for the computed value built up from cost of production, and Rule 9 for the residual method, applying reasonable means consistent with the principles of the Agreement. Rule 6 allows the importer to request that Rules 7 and 8 be applied in reverse order. The rules must be applied in that order and an officer who jumps to Rule 9 without exhausting the earlier rules acts without jurisdiction.

The critical objection is that Rule 12 gives a general power to disbelieve, which the officer exercises first and justifies afterwards. The Explanation's list is inclusive and its first item, that identical or similar goods were assessed higher elsewhere, effectively permits contemporaneous import data to displace an actual contract. The courts have held repeatedly that the declared transaction value can be rejected only on evidence and after a speaking order, and that a mere comparison with a higher price in another importation, without proof that the goods are identical in quality, quantity, country of origin and commercial level, is not enough. That is the correct position, but it is a position that has to be litigated in every case.

In practice these cases go to the Special Valuation Branch, and the criticism has always been the time such references take. That criticism now has a statutory answer: since 1 May 2025, section 18(1B) requires a provisional assessment to be finalised within two years, extendable by one year by the Principal Commissioner or Commissioner, so a Special Valuation Branch reference can no longer be left open indefinitely.

Chargeability: the charge and the taxable event

Section 12 is the charging section: duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975, or any other law for the time being in force, on goods imported into, or exported from, India. Section 12(2) applies the section to Government goods as to any other.

The constitutional footing is Article 265 and Entry 83 of List I, which gives Parliament exclusive competence over duties of customs including export duties.

Levy: rates, dates and the several duties

Section 15 fixes the rate and the date for imports. For goods entered for home consumption under section 46, the rate and valuation are those in force on the date of presentation of the bill of entry; for goods cleared from a warehouse under section 68, on the date of presentation of the bill of entry for home consumption; and in any other case, on the date of payment of duty. Section 16 is the export counterpart, taking the date of the let export order under section 51.

"Customs duties" is a compound expression and its components should be named. The basic customs duty under section 12 read with the First Schedule to the Customs Tariff Act; the additional duty under section 3 of that Act; since 1 July 2017 the integrated goods and services tax under section 3(7) and the compensation cess under section 3(9), levied on the value determined under section 3(8) which builds duty into the base; safeguard measures under section 8B; countervailing duty on subsidised articles under section 9; anti-dumping duty under section 9A, with refund of the excess over the actual margin under section 9AA; and the social welfare surcharge and, on specified goods, the agriculture infrastructure and development cess.

The second is that the multiplication of duties has made the effective rate opaque. Basic duty, integrated tax computed on a base that already includes basic duty, compensation cess, surcharge and cess, each with its own exemptions, mean that the rate on a given article is a computation rather than a figure, and the tariff no longer discloses on its face what an importer will pay.

The third is that the interaction between the taxable event and the deferment mechanisms is under-appreciated. Because the rate crystallises on removal from a warehouse and not on importation, the warehousing chapter and the Manufacture and Other Operations in Warehouse Regulations are as much a fiscal planning instrument as a logistics one, and the rules governing the warehousing period, interest under section 61 and the consequences of improper removal under section 72 do more work than their obscurity suggests.

The criticism that survives is Rule 12. It permits rejection of a declared value on a "reason to doubt" whose illustrative grounds include nothing more than a higher assessment of comparable goods elsewhere, and although the Explanation says the rule supplies no method of valuation and the courts require a speaking order on evidence, the burden in practice falls on the importer to prove his own contract. Section 18(1B), which since 1 May 2025 requires a provisional assessment to be finalised in two years extendable by one, has cured the delay that made that burden intolerable; it has not changed where the burden lies.

Section 133: obstruction of an officer of customs, punishable with imprisonment up to six months, or fine, or both.

Section 134: refusal to be X-rayed, that is refusal to allow a radiologist to screen the body or to submit to the taking of an X-ray picture under section 103, punishable with imprisonment up to six months, or fine, or both. Note that section 134 is not among the offences for which section 104(1) permits arrest, which is a detail examiners test.

Section 135 is the principal smuggling offence and carries the graded punishment. Knowingly concerning oneself in misdeclaration, or in any fraudulent evasion or attempt at evasion of any duty, or in a prohibition, or acquiring possession of or dealing with goods which one knows or has reason to believe are liable to confiscation under section 111 or section 113, or in the fraudulent availing of drawback or an exemption, is punishable with imprisonment up to seven years and with fine where the goods are those specified in the section, principally goods whose market price exceeds one crore rupees, such categories of prohibited goods as the Central Government may specify by notification, evasion exceeding fifty lakh rupees, fraudulent drawback or exemption exceeding fifty lakh rupees, or fraudulently obtaining an instrument where the duty relatable exceeds fifty lakh rupees.

Section 135AA, inserted in 2022: publishing information relating to the value of imported or export goods or the identity of the importer or exporter contrary to section 135AA, punishable with imprisonment up to six months, or fine up to fifty thousand rupees, or both. It protects the confidentiality of import and export data.

Section 136: offences by officers of customs, covering collusion in fraudulent export or evasion, and requiring sanction of the Central Government or of the Principal Commissioner or Commissioner depending on the officer's rank.

Section 137: sanction and compounding. No court may take cognizance of an offence under section 132, 133, 134, 135, 135A or 135AA except with the previous sanction of the Principal Commissioner or Commissioner of Customs; and by section 137(3) any offence under the chapter may be compounded, either before or after the institution of prosecution, by the Principal Chief Commissioner or Chief Commissioner on payment by the accused of such compounding amount and in such manner as may be specified by rules, subject to provisos excluding certain classes of person.

Section 108, which empowers a gazetted officer to summon any person to give evidence or produce a document in an inquiry declared to be a judicial proceeding within sections 193 and 228 of the Indian Penal Code, supplies the material. Statements recorded under it are the backbone of most customs prosecutions, and section 138B controls their use, making such a statement relevant only where the maker is examined as a witness and the court or adjudicating authority forms an opinion, recorded, that it should be admitted in the interests of justice, or where the maker is dead, cannot be found, is incapable of giving evidence, is kept out of the way, or where his presence cannot be obtained without unreasonable delay or expense.

The third point is that compounding drains the criminal docket, and that this is both the scheme's efficiency and its weakness. Section 137(3) allows an offence to be compounded before or after prosecution, on payment of the amount fixed by the Customs (Compounding of Offences) Rules. From the department's point of view compounding realises revenue immediately and avoids the risk of acquittal. From the point of view of deterrence, it converts a criminal sanction into a price, and the person who can pay it escapes conviction while the person who cannot faces trial.

Everything else remains non-cognizable under section 104(5). Non-bailability is a separate scheme resting on a different list: section 104(6) makes non-bailable only an offence punishable under section 135 relating to evasion exceeding fifty lakh rupees, to prohibited goods notified under section 11 which are also notified under section 135(1)(i)(C), to undeclared goods whose market price exceeds one crore rupees, to fraudulent drawback or exemption exceeding fifty lakh rupees, or to the fraudulent obtaining of an instrument where the relatable duty exceeds fifty lakh rupees; section 104(7) makes every other offence bailable.

The two lists do not coincide, and treating cognizability and bailability as one test is a common and costly error. Then, in Radhika Agarwal v. Union of India, 2025 INSC 272, decided on 27 February 2025, the Supreme Court, hearing about 279 petitions led by Writ Petition (Criminal) No. 336 of 2018, upheld those arrest powers and the corresponding provisions of the CGST Act, holding Parliament competent under Article 246A, while requiring that an arrest rest on credible material, that the officer's reasons to believe be recorded in writing, and that those reasons be furnished to the arrested person.

Its effectiveness must be judged against the fact that it was never intended to carry the main burden. The Act's primary sanctions are civil and quick; prosecution is screened by the Commissioner's sanction under section 137(1), is slow, and is very often compounded under section 137(3) at a price fixed by rules. Two developments in 2025 changed the balance. Radhika Agarwal on 27 February upheld the arrest power while making its exercise justiciable, requiring credible material, recorded reasons to believe and communication of those reasons. And the abolition of the Settlement Commission on 1 April removed the only forum that could grant immunity from prosecution under section 127H, replacing it with an Interim Board of three revenue officers with no judicial member and leaving compounding as the sole exit.

The honest conclusion is that customs prosecution is effective as a threat and rarely as a punishment, that its practical function is to support settlement rather than to secure convictions, and that the deterrent work in serious smuggling has largely passed to the Prevention of Money-Laundering Act and to preventive detention under COFEPOSA, where the consequences follow faster than a trial under section 135 ever does.

The journey of a consignment, and where each power sits

A consignment moves through four legal stages and each has its own provision. Suspicion authorises a search; a reason to believe that the goods are liable to confiscation authorises seizure, which is possessory and interim; a notice under section 124 followed by adjudication produces confiscation, which is proprietary and final; and confiscation is followed by vesting in the Central Government under section 126 and disposal under section 150. Keeping those four apart is what gives this answer its shape.

Section 106 permits stopping and searching a conveyance. Where the proper officer has reason to believe that any aircraft, vehicle or animal in India, or any vessel in India or within the Indian customs waters, has been, is being or is about to be used in the smuggling of any goods or in the carriage of any smuggled goods, he may stop it, or in the case of a vessel signal it to stop, and search it. If it does not stop, he may use all lawful means to compel it, and if those means fail, the vessel or aircraft may be fired upon, which is one of the very few provisions in Indian fiscal law authorising force of that order.

Section 106A obliges specified persons to furnish information, and section 107 empowers an officer to require production of documents and to examine persons during an enquiry. Section 108 empowers a gazetted officer to summon any person to give evidence or produce documents, and declares the inquiry to be a judicial proceeding within sections 193 and 228 of the Indian Penal Code.

Section 110(1A) to (1C) provide for certified inventory and early disposal. The Central Government may notify goods which, having regard to their perishable or hazardous nature, depreciation in value with passage of time, constraints of storage space or any other relevant consideration, should be disposed of; the proper officer must then prepare an inventory, apply to a Magistrate for certification of the description, quantity and quality, and take photographs and draw samples, and the certified inventory is thereafter admissible in evidence in place of the goods.

Section 110(2) is the safeguard that gives seizure a time limit. Where no notice under section 124 is given within six months of the seizure of the goods, the goods must be returned to the person from whose possession they were seized. The period may be extended by a further six months by the Principal Commissioner or Commissioner of Customs, for reasons to be recorded in writing and informed to the person concerned before the expiry of the original period. The requirement that the reasons be communicated, and communicated in time, is what stops the extension being a formality, and a failure on either count entitles the owner to return of the goods.

Group one, place and manner of unloading: goods unloaded or attempted to be unloaded at a place other than a customs port or airport appointed under section 7; goods imported by land or inland water otherwise than by a route specified under section 7(c); dutiable or prohibited goods brought into a bay, gulf, creek or tidal river for the purpose of being landed at a place other than a customs port.

Group two, prohibition and concealment: any goods imported or attempted to be imported or brought within the Indian customs waters contrary to any prohibition imposed by or under this Act or any other law for the time being in force; dutiable or prohibited goods found concealed in any manner in any conveyance; and goods concealed in a package either before or after unloading.

Group three, declaration and documents: goods which do not correspond in respect of value or in any other particular with the entry made under the Act, or in the case of baggage with the declaration made under section 77; goods not included, or in excess of those included, in the manifest or in the bill of entry.

Sections 115 and 118 extend confiscation beyond the goods themselves. Section 115 makes conveyances liable to confiscation, subject to a proviso protecting a conveyance used as a means of transport for hire where the owner proves that it was used without his knowledge or connivance or that of his agent and the person in charge, and permitting the owner to pay a fine not exceeding the market price of the smuggled goods in lieu. Section 118 makes the package and its other contents liable where goods liable to confiscation are found in it, and section 119 makes goods used for concealing smuggled goods liable, while section 120 deals with smuggled goods that have changed form and section 121 with the sale proceeds of smuggled goods.

Sections 112 and 114 impose penalties on persons, and it is worth insisting that they are separate from confiscation: section 112 for improper importation, calculated by reference to the duty sought to be evaded or the value of the goods, and section 114 for attempted improper exportation. Section 114A provides for a penalty equal to the duty or interest determined where the short levy is by reason of collusion, wilful mis-statement or suppression, and section 114AA for a penalty up to five times the value of the goods for knowingly using a false or incorrect material particular in the transaction of any business.

Section 125 is the option to pay a fine in lieu of confiscation, and the distinction it draws is the point of the section. Where the goods confiscated are goods the importation or exportation of which is prohibited, the adjudicating officer may give the owner, or where the owner is not known the person from whose possession the goods were seized, an option to pay a fine in lieu of confiscation. Where the goods are not prohibited, the officer shall give that option. The fine may not exceed the market price of the goods less the duty chargeable, and by section 125(2) the owner remains liable to duty and charges payable in respect of the goods in addition to the fine. Section 125(3), inserted in 2018, requires the fine to be paid within one hundred and twenty days of the option, failing which the option lapses unless an appeal is pending.

Section 126 vests confiscated goods in the Central Government and requires the officer to take and keep possession of them, and section 150 governs the procedure for sale, providing for the application of the sale proceeds first to the expenses of sale, then to freight and other charges, then to duty, then to any charges due to the person having custody, and then to any amount due from the owner, with the balance paid to the owner.

Why it bears on this question. It is the decision that fixes the evidential position behind the whole chapter. A power to seize under section 110 rests on a reason to believe that the goods are liable to confiscation, and at the adjudication that follows, where section 123 does not apply, the department must prove that they are smuggled, though it may do so from unexplained possession and the conduct of the possessor rather than by direct evidence of an importation.

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. The Act deals with goods through four sequential powers and gives each a control proportionate to what it takes. Search is authorised by section 105 for premises and section 106 for conveyances, in each case on a recorded reason to believe, and the Code of Criminal Procedure's search provisions are applied with the Commissioner's sanction substituted for a Magistrate's. Seizure under section 110 requires the same reason to believe and is checked by the six-month rule in section 110(2), which returns the goods if no section 124 notice issues, allows a single six-month extension only for reasons recorded and communicated, and is relieved in practice by provisional release under section 110A.

For full marks, cover: three heads, organised here around a single idea, namely who answers for a contravention, who decides it and what survives the contravener; for (a) section 42 with both sub-sections, the proviso and the Explanation; for (b) the four tiers with their limitation periods, and above all the fact that FEMA's own Appellate Tribunal was abolished in 2017 and that sections 20, 22, 24, 25, 26 and 29 to 31 stand omitted; for (c) section 43 and its anti-abatement effect.

(a) Contravention by companies: section 42

Section 42 answers the first question, who answers for a contravention committed by an entity.

Section 42(2) creates a fault-based liability in the culpable officer. Notwithstanding sub-section (1), where a contravention has been committed by a company and it is proved that it has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, that officer is also deemed guilty and liable. There is no proviso here, and none is needed, because the sub-section itself requires the department to prove consent, connivance or neglect. The distribution of the burden between the two sub-sections is the structural point of the section.

The Explanation gives the section a reach well beyond companies. For its purposes "company" means any body corporate and includes a firm or other association of individuals, and "director", in relation to a firm, means a partner in the firm. A partnership that fails to report an inward remittance therefore exposes its partners under sub-section (1), subject to the same defence, and an unincorporated association exposes those in charge of it.

Tier one: the Adjudicating Authority under section 16. For the purpose of adjudication under section 13, the Central Government may, by order published in the Official Gazette, appoint as many of its officers as it thinks fit as Adjudicating Authorities, specifying their jurisdictions in the same order. Four conditions constrain him. He may hold an inquiry only upon a complaint in writing made by an officer authorised by a general or special order of the Central Government, so he cannot act suo motu. He must give the person a reasonable opportunity of being heard. The person may appear in person or through a legal practitioner or a chartered accountant of his choice. And he must endeavour to dispose of the complaint within one year, recording the reasons in writing periodically if he cannot.

Tier two: the Special Director (Appeals) under section 17, whose jurisdiction is narrow and is the detail most often got wrong. He hears appeals only against orders of an Adjudicating Authority who is an Assistant Director of Enforcement or a Deputy Director of Enforcement. The appeal must be filed within forty-five days of receipt of the order, extendable on sufficient cause. He may confirm, modify or set aside the order, and he has the civil court powers of section 28(2). Under section 21, as substituted in 2017, 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 to the Government of India.

Tier three: the Appellate Tribunal under section 18, and this is where the answer must be current. As enacted, FEMA constituted its own Appellate Tribunal for Foreign Exchange. The Finance Act 2017 (Act 7 of 2017), by section 165 with effect from 26 May 2017, substituted section 18 to provide that the Appellate Tribunal constituted under sub-section (1) of section 12 of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 shall, on and from the commencement of Part XIV of Chapter VI of that Finance Act, be the Appellate Tribunal for the purposes of this Act.

Tier four: the High Court under section 35. Any person aggrieved by a decision or order of the Appellate Tribunal may appeal to the High Court within sixty days of communication, on any question of law arising out of such order, with a further period not exceeding sixty days for sufficient cause. The Explanation identifies the High Court by reference to where the aggrieved party ordinarily resides, carries on business or personally works for gain, and where the Central Government is the aggrieved party, by reference to the respondent.

Section 34 closes the field. No civil court has jurisdiction to entertain any suit or proceeding in respect of 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 or to be taken under the Act.

Section 43, headed "Death or insolvency in certain cases", provides 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 confines the exposure: a legal representative of the deceased shall be liable only to the extent of the inheritance or estate of the deceased.

The rule the section displaces is actio personalis moritur cum persona. Left to the common law, a penalty proceeding against a person who died would end and his estate would pass undiminished. Section 43 prevents that by two devices: a declaration that the proceeding does not abate, and a provision for devolution so that there is someone against whom it may continue.

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 Supreme Court enforced the awards. It held that a contravention of a provision of an enactment is not synonymous with a contravention of the fundamental policy of Indian law, and that a breach of FEMA or of the rules made under it does not reach that threshold. The reason given is the one that matters for this answer: a FEMA contravention is remediable, because permission may be granted after the event and the contravention may be compounded under section 15, so the transaction is not void and the law is not defied by enforcing the award.

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.

Why it bears on this question. It supplies the contrast that makes the present position intelligible. Under FERA an officer of Enforcement could arrest and then obtain judicial remand under section 167(2) of the Code of Criminal Procedure while the investigation continued; FEMA gives the Directorate the powers of an income-tax authority under section 37 and nothing more, and confines imprisonment to civil imprisonment of a defaulter under section 14.

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.

Why it bears on this question. The nature of a contravention is the whole of this question, and this is the case that answers it. Because section 13 creates a civil liability, the Adjudicating Authority need not find that the person meant to contravene: proof of the contravention is proof of the blameworthy conduct. That explains the features that otherwise look severe, the civil standard of proof, the absence of any presumption of innocence and the availability of a penalty of up to three times the sum involved, and it explains equally why the consequences stop where they do. The corollary an examiner looks for is that the same reasoning bars the Directorate from importing criminal-law advantages into an adjudication: the proceeding is civil, and it must be conducted as a civil proceeding throughout.

What the Directorate must prove when it relies on a statement: Vinod Solanki

On the use of a statement that the maker later takes back, the governing decision is Vinod Solanki v. Union of India, (2008) 16 SCC 537, decided on 18 December 2008. A penalty had been imposed under FERA on the strength of an inculpatory statement which the maker afterwards retracted, saying that it had been obtained from him under threat.

Conclusion

Conclusion. The three heads answer three successive questions about a single contravention. Section 42 answers who is liable when the contravener is an entity: sub-section (1) deems liable every person who at the relevant time was in charge of and responsible to the company for the conduct of its business, subject to a defence of no knowledge or due diligence which he must prove; sub-section (2) adds any director, manager, secretary or officer with whose consent or connivance, or by whose neglect, the contravention occurred, and there the department must prove fault. The Explanation carries the whole section into firms and unincorporated associations, making a partner a director.

Adjudication and appeal answer who decides, and the answer must be given as the law stands in 2026. The Adjudicating Authority under section 16 acts only on a written complaint, must hear the party, has civil court powers and must endeavour to decide within a year. An appeal lies to the Special Director (Appeals) under section 17 only from an Assistant or Deputy Director, within forty-five days.

For full marks, cover: the comparison compactly, because the second half of the question is the part most candidates neglect and it carries as many marks; then the Reserve Bank's role built up provision by provision, sections 10, 11, 12, 47, 6(2) and 7(2); and then an evaluation, which means saying honestly that the Bank's position under this Act has been reduced twice since 2019, once by the shift of capital account powers to the Central Government and once by the carve-out of the International Financial Services Centre.

FEMA against FERA, stated compactly

The two Acts answer two different economic questions and the comparison should be built on that. The Foreign Exchange Regulation Act, 1973 was scarcity legislation, passed when reserves were small and the rupee inconvertible, and its instrument was prohibition subject to permission. FEMA, Act 42 of 1999, in force from 1 June 2000, is sufficiency legislation, and its long title speaks of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India.

The figures should be given once and correctly. Section 13(1): penalty up to thrice the sum involved where quantifiable, up to two lakh rupees where not, and up to five thousand rupees a day for a continuing contravention. Section 14(11): civil imprisonment up to three years where the demand exceeds one crore rupees and up to six months otherwise. Section 49 repealed FERA and barred any court from taking cognizance of a FERA offence after two years from the commencement of FEMA, that is after 31 May 2002.

The Reserve Bank's role, built from the provisions

The Reserve Bank is the operational regulator of the foreign exchange market and its powers come from five places.

Section 10(4) and (5) impose duties that make the authorised person the front line of compliance. He must comply with the Bank's general or special directions and must not, except with previous permission, engage in a transaction not in conformity with his authorisation. Before undertaking any transaction on behalf of a person, he must require that person to make such declaration and give such information as will reasonably satisfy him that the transaction will not involve, and is not designed for the purpose of, any contravention or evasion, and where the person refuses or complies unsatisfactorily, the authorised person shall refuse in writing to undertake the transaction and, if he has reason to believe that a contravention is contemplated, report the matter to the Reserve Bank.

Section 10(6) closes the loop on the customer. A person other than an authorised person who acquires foreign exchange for a declared purpose and does not use it for that purpose, or does not surrender it within the specified period, or uses it for an impermissible purpose, is deemed to have contravened the Act.

Fourth, regulation-making: section 47. The Reserve Bank may make regulations to carry out the Act and the rules, and section 47(2) lists the subjects: permissible classes of capital account transactions involving debt instruments and their limits and conditions, the form and manner of the export declaration under section 7(1)(a), the period and manner of repatriation under section 8, the limits in section 9 for possession of foreign currency, foreign currency accounts and exempted acquisitions, and the export, import or holding of currency or currency notes under clause (ga).

Fifth, operational powers scattered through the Act. Under section 6(2) the Bank specifies the permissible classes of capital account transactions involving debt instruments. Under section 7(2) it may direct any exporter to comply with requirements so that the full export value is realised without delay, and it determines any reduced value having regard to prevailing market conditions. Under section 8 it specifies the period and manner of realisation and repatriation. Under section 2(h) it may notify further instruments as "currency", and under section 2(za) further instruments as "security". Under section 15 its authorised officers are among the compounding authorities.

The first cut-back came on 15 October 2019, and it is substantial. Section 6(3), which had given the Reserve Bank the power to prohibit, restrict or regulate eleven classes of capital account transaction, was omitted; section 6(2A) was inserted, giving the Central Government power to prescribe permissible classes of capital account transactions not involving debt instruments; and section 6(7) was inserted, leaving the definition of "debt instruments" to the Central Government in consultation with the Bank. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 were made by the Government under that power, and foreign direct investment thereby passed out of the Bank's regulation-making hands. Section 47(3) saves the Bank's earlier regulations until the Government amends or rescinds them, which is what prevented a vacuum.

The evaluation of that change should be balanced. In its favour, foreign investment policy is announced by the Government and it was anomalous for the legal instrument to be made by the central bank. Against it, the Reserve Bank is insulated from the political cycle in a way a ministry is not, and a regime in which the Bank still administers the transactions but no longer writes the rules divides responsibility from authority.

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 Supreme Court enforced the awards. It held that a contravention of a provision of an enactment is not synonymous with a contravention of the fundamental policy of Indian law, and that a breach of FEMA or of the rules made under it does not reach that threshold. The reason given is the one that matters for this answer: a FEMA contravention is remediable, because permission may be granted after the event and the contravention may be compounded under section 15, so the transaction is not void and the law is not defied by enforcing the award.

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.

Why it bears on this question. It bears on the evaluation of the Reserve Bank's role by showing what the alternative looked like. Under FERA the operative institution in a serious case was the Directorate of Enforcement with a power of arrest and of judicial remand; under FEMA the operative institution in the ordinary case is the Bank, acting through Master Directions, authorised dealers and compounding orders.

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.

Why it bears on this question. This is the authority for saying that the move from FERA to FEMA was a change of kind and not of degree. FERA already knew the distinction between a penalty adjudicated for a civil breach and a prosecution, and MCTM is where the Supreme Court articulated it; FEMA then made that distinction the whole architecture of the statute. Section 13 creates a contravention, not an offence, adjudicated by an Adjudicating Authority on the balance of probabilities; section 14 knows only civil imprisonment, and only for failure to pay a penalty already imposed. An answer that says FEMA "decriminalised" foreign exchange regulation is saying, in the language of this case, that every contravention under FEMA is now a breach of a civil obligation for which no guilty intention need be shown and for which no criminal consequence follows.

But the honest evaluation is that its statutory position has narrowed twice in six years. On 15 October 2019 the capital account for non-debt instruments passed to the Central Government with the omission of section 6(3) and the insertion of section 6(2A), so the Bank administers foreign investment under rules it no longer writes. On 1 October 2020 section 44A removed the International Financial Services Centre from its reach altogether in favour of the IFSCA. Read with section 41, which obliges the Bank to comply with the Central Government's directions, the trend is towards a regulator that retains the supervisory machinery while the policy instruments move elsewhere.

The architecture: why these three belong together

FEMA divides every foreign exchange transaction into two and only two classes, and the division is exhaustive. A current account transaction is defined in section 2(j) as a transaction other than a capital account transaction, and then by an inclusive list. So the definition of the capital account governs, and everything left over is current. That structure is what allows the Act to say, in section 5, that the residue is free, and in section 6, that the defined class is regulated.

Exports are where the foreign exchange enters the system. Sections 7 and 8 are not a third category of transaction but the obligations attaching to the commonest source of inward foreign exchange, and they exist to make sure that what is earned abroad is declared honestly and brought home.

(a) Capital account transactions

Section 2(e) defines a capital account transaction as 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.

Section 6(1) permits any person to sell or draw foreign exchange for a capital account transaction subject to section 6(2), and the machinery of sub-sections (2) and (2A) is what the answer must state correctly for 2026. Section 6(2) empowers the Reserve Bank, in consultation with the Central Government, to specify the permissible classes of capital account transactions involving debt instruments, the limits of admissibility, and the conditions. Section 6(2A), inserted with effect from 15 October 2019, empowers the Central Government, in consultation with the Reserve Bank, to prescribe the permissible classes not involving debt instruments, the limits 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 proviso to section 6(2) is a genuine protection and is often forgotten. Neither the Reserve Bank nor the Central Government may impose any restriction on the drawal of foreign exchange for payment due on account of amortisation of loans or for depreciation of direct investments in the ordinary course of business. Those two items are treated as beyond restriction because they are the servicing of capital already lawfully raised.

(b) Current account transactions

Section 2(j) defines a current account transaction as a transaction other than a capital account transaction, and then adds, without prejudice to the generality of the foregoing, four inclusive limbs: (i) payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business; (ii) payments due as interest on loans and as net income from investments; (iii) remittances for living expenses of parents, spouse and children residing abroad; and (iv) expenses in connection with foreign travel, education and medical care of parents, spouse and children.

The inclusive limbs are not the definition; they are examples. The definition is residual, and a transaction is current simply because it is not capital. The limbs were included because trade payments, interest and investment income, family maintenance and travel, education and medical expenses are the four categories the drafters were most concerned to place beyond doubt, following Article XXX(d) of the IMF Articles of Agreement.

The Liberalised Remittance Scheme is the practical face of section 5 and should be mentioned: a resident individual may remit up to a specified limit in a financial year for any permissible current or capital account transaction, and the scheme is the mechanism through which the freedom in section 5 is actually exercised by individuals.

The relationship with section 6 should be stated as a single sentence of contrast. Current account transactions are free and restricted only by exception; capital account transactions are restricted and free only by permission. Because the current account definition is residual, the boundary is settled by asking whether the transaction alters a cross-border asset or liability position, and if it does not, section 5 applies.

Section 8 supplies the realisation and repatriation duty. Where any amount of foreign exchange is due or has accrued to a person resident in India, he shall take all reasonable steps to realise and repatriate it to India within the period and in the manner specified by the Reserve Bank. The words "due or has accrued" fix the obligation from the moment the debt arises, not from receipt.

Section 2(y) defines "repatriate to India" more richly than "remit". It means bringing into India the realised foreign exchange and either selling it to an authorised person in India in exchange for rupees, or holding the realised amount in an account with an authorised person to the extent notified by the Reserve Bank, and it includes use of the realised amount for discharge of a debt or liability denominated in foreign exchange. That last limb permits set-off against a foreign currency obligation rather than a physical inflow.

Section 9 provides the exemptions from sections 4 and 8, including possession of foreign currency and coins within limits, foreign currency accounts of specified classes of persons, foreign exchange acquired before 8 July 1947, and foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts or inheritance within specified limits.

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 Supreme Court enforced the awards. It held that a contravention of a provision of an enactment is not synonymous with a contravention of the fundamental policy of Indian law, and that a breach of FEMA or of the rules made under it does not reach that threshold. The reason given is the one that matters for this answer: a FEMA contravention is remediable, because permission may be granted after the event and the contravention may be compounded under section 15, so the transaction is not void and the law is not defied by enforcing the award.

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 6 keeps the capital account regulated, and it must be stated as it now stands. Section 6(3) was omitted on 15 October 2019, leaving section 2(e) with a cross-reference to nothing; section 6(2) leaves debt instruments with the Reserve Bank and section 6(2A) gives non-debt instruments to the Central Government, which made the Non-debt Instruments Rules, 2019, while section 47(3) saved the older regulations in the meantime. The proviso to section 6(2) puts amortisation of loans and depreciation of direct investments beyond restriction, and sections 6(4) and 6(5) grandfather assets lawfully acquired while the holder was on the other side of the residence line.

Exports are the transaction that feeds the whole system, and sections 7 and 8 work as a pair: a true declaration of full export value, and all reasonable steps to realise and repatriate what is due or has accrued, with repatriation defined in section 2(y) to include discharge of a foreign currency liability. Because the same shipping bill serves both statutes, a mis-declared export value is at once a contravention under section 13 of FEMA and a ground of confiscation under section 113 of the Customs Act, and that overlap is the practical reason this subject is taught as one paper rather than two.

(i) Unjust enrichment

The doctrine holds that a person should not be enriched at the expense of another without a legal justification, and in customs law it answers a specific question: when duty has been collected unlawfully, who has actually lost the money? If the importer has recovered the duty from his buyer in the price, refunding it to him puts him in a better position than if the duty had never been levied, at the expense of the consumer who really bore it.

The Act embodies the doctrine in two provisions. Section 27(2) requires that duty and interest found refundable be credited to the Consumer Welfare Fund established under section 12C of the Central Excise Act, 1944, and paid to the applicant only where he falls within one of the exceptions, principally where the incidence of the duty had not been passed on to any other person, or where the claim is for duty paid by an individual on goods imported for his personal use, or is 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. Section 18(5) applies the same test to a refund arising on the finalisation of a provisional assessment.

The procedural refinement came in ITC Ltd v. Commissioner of Central Excise, Kolkata IV, decided 18 September 2019, 2019 INSC 1049. A refund of about Rs 35.89 crore of additional customs duty was claimed on self-assessed bills of entry which had never been appealed against. The Court held the claim not maintainable: a self-assessment under section 17 is an order of assessment, it is appealable under section 128, and the refund authority cannot sit in appeal over it. Section 18A, inserted by the Finance Act 2025 with effect from 1 May 2025, now permits a voluntary revision of an entry after clearance, which restores a route that decision had closed.

(ii) The Foreign Trade (Development and Regulation) Act, 1992

The Act replaced the Imports and Exports (Control) Act, 1947, and the change of name states the change of purpose: the 1947 Act controlled, the 1992 Act develops and regulates. It is a short Act of twenty sections, and almost the whole of it was rewritten by the Foreign Trade (Development and Regulation) Amendment Act, 2010 (Act 25 of 2010), with effect from 27 August 2010, so anything written from an older text is wrong on the machinery.

Section 8: suspension or cancellation of the code for contravention of the Act, the policy, or any law relating to central excise, customs or foreign exchange, or a notified economic offence, or an import or export prejudicial to India's trade relations or to other traders or bringing disrepute, on notice and hearing, with section 8(2) permitting trade thereafter only under a special licence. Section 9: grant, renewal, refusal, suspension and cancellation of a licence, certificate, scrip or any instrument bestowing financial or fiscal benefits, the composite expression substituted for "licence" in 2010, with reasons in writing and an appeal under section 15.

Section 9A, inserted in 2010, is the safeguard provision. Where goods are imported in such increased quantities and under such conditions as to cause or threaten serious injury to domestic industry, the Central Government may impose quantitative restrictions. The proviso exempts goods originating from a developing country whose share of imports does not exceed three per cent, or, where several developing countries are involved, whose aggregate share does not exceed nine per cent. Restrictions cease after four years unless extended, and may never continue beyond ten years.

Chapter V is the remedy. Section 13 makes the Director General or a notified officer the Adjudicating Authority; section 15 gives an appeal within forty-five days, extendable by thirty, subject to a mandatory pre-deposit of the penalty or redemption charges with a dispensation for undue hardship; and section 16 gives a power of review exercisable suo motu or otherwise, with a show cause notice required within two years where the variation would prejudice a person.

One provision is now out of date and it is worth saying so. Section 11B empowers the Settlement Commission constituted under section 32 of the Central Excise Act, 1944 to regularise an export obligation default, a settlement by that Commission being deemed a settlement under this Act. That Commission ceased to function on 1 April 2025 under the Finance Act 2025, its pending work passing to an Interim Board for Settlement, so section 11B now refers to a body that no longer exists.

A person arrested under a warrant must be brought before the Authority within twenty-four hours; the proviso to section 14(9) allows a period of not more than fifteen days to satisfy the arrears before a detention order; and section 14(11) fixes the term at up to three years where the demand exceeds one crore rupees and up to six months otherwise. Section 14(12) provides that release does not discharge the liability but bars a second arrest under the same certificate, and the Explanation to section 14(6) deems the karta to be the defaulter where the defaulter is a Hindu undivided family.

Section 14A has never come into force. It would let an officer of Enforcement not below the rank of Assistant Director recover arrears with income-tax powers under the Second Schedule to the Income-tax Act, 1961, but the India Code footnote records that it "shall stand inserted (date to be notified) by Act 28 of 2016, section 229", and no notification has issued.

(iv) Definition of 'person' under FEMA

Section 2(u) defines "person" inclusively in seven limbs: an individual; a Hindu undivided family; a company; a firm; an association of persons or a body of individuals, whether incorporated or not; every artificial juridical person not falling within the preceding sub-clauses; and any agency, office or branch owned or controlled by such person.

The seventh limb is the operative one and it is what most notes miss. By treating an agency, office or branch owned or controlled by a person as itself a person, the Act makes an Indian company's foreign branch and a foreign company's Indian branch separate persons, so that a transfer between a head office and its own branch across the border is a transaction between two persons and can be a contravention of sections 3 or 4. Without that limb, inter-branch dealings would fall outside the Act.

The interaction of the arithmetical test and the purpose exclusions is what generates the litigation. A person may have been in India for more than 182 days in the preceding year and yet be a non-resident, because he has since left to take up employment abroad; and a person may have been in India for fewer than 182 days and yet be a resident, because he has come to India to take up employment here. The day-count is the starting point, not the answer.

Liability attaches to a "person", so the width of section 2(u) means a firm, an unincorporated association or a branch may be proceeded against in its own name, and section 42, whose Explanation makes a firm a company and a partner a director, then reaches the individuals behind it.

(v) Warehousing of goods

Chapter IX of the Customs Act, sections 57 to 73A, allows imported goods to be deposited in a warehouse without payment of duty, and the point of the chapter is deferment: the taxable event for the rate is the removal from the warehouse, not the importation.

Section 60 governs the permission for removal to a warehouse, section 61 the period for which goods may remain warehoused. For capital goods intended for use in any hundred per cent export oriented undertaking, electronic hardware technology park unit, software technology park unit or any warehouse where manufacture or other operations are permitted under section 65, the period is until clearance; for goods other than capital goods in such units, until consumption or clearance; and for any other goods, one year from the date of the order under section 60, extendable by the Principal Commissioner or Commissioner, on sufficient cause being shown, by not more than one year at a time, and reducible where the goods are likely to deteriorate. Interest is payable under section 61(2) where goods remain beyond ninety days, at the rate fixed under section 47.

Clearance is governed by sections 68 and 69. Section 68 permits clearance for home consumption on presentation of a bill of entry, payment of duty, interest, fine and penalties, and an order of clearance by the proper officer; the proviso permits relinquishment of title to the goods before an order for clearance, in which case the owner is not liable for duty, though not where an offence appears to have been committed. Section 69 permits clearance for export on a shipping bill or bill of export, payment of the export duty and charges, and an order of the proper officer.

Sections 71 to 73A close the chapter. Section 71 forbids removal except as provided; section 72 deals with improperly removed goods, entitling the proper officer to demand the full amount of duty with interest, fine and penalties from the owner and, on failure, to detain and sell so much of the goods as is sufficient; section 73 provides for cancellation and return of the bond; and section 73A places the warehoused goods in the custody of the licensee and makes him responsible for them until they are cleared, with a liability, where goods are removed in contravention of section 71, to pay duty, interest, fine and penalties.

FEMA has no arrest power at all; section 14 provides civil imprisonment for a defaulter after ninety days, capped at three years above one crore rupees and six months below, with section 14A never notified and imprisonment returning only for undisclosed foreign assets under section 13(1C). "Person" in section 2(u) is deliberately wide, and its seventh limb, covering an agency, office or branch, is what makes a cross-border transaction between a head office and its own branch a transaction between two persons.

Warehousing under Chapter IX is the deferment mechanism that follows from the taxable event being removal rather than importation: three kinds of warehouse under sections 57, 58 and 58A, a triple-duty bond under section 59, periods and interest under section 61, the owner's rights under section 64, clearance for home consumption or export under sections 68 and 69, and, most significantly, section 65 and the Manufacture and Other Operations in Warehouse Regulations, 2019, which turn a bonded warehouse into a place where goods can be made from duty-free inputs and the duty paid only if and when they enter the Indian market.