LLM Group 2 Business Law Law Relating to Customs and Foreign Exchange 2018 Question Paper with Solutions

For full marks, cover: the definition of smuggling in section 2(39) and why it is defined by reference to confiscation rather than by a description of conduct, which is the structural insight the question is built on; the grounds in section 111 grouped rather than recited; the difference between confiscation of goods and penalty on a person; section 124 as the gateway; then section 125 in detail, because the question names it, with the may and shall distinction, the ceiling on the fine, the 2018 time limit, and the continuing duty liability; and section 126 vesting with section 150 sale.

"Smuggling" is defined by its consequence, not by its conduct

Section 2(39) defines "smuggling", in relation to any goods, as any act or omission which will render such goods liable to confiscation under section 111 or section 113. That definition is circular in appearance and deliberate in substance, and an answer that notices this earns its opening marks.

The definition matters outside this Act as well, because the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 borrows the customs concept for its preventive detention jurisdiction, and section 123, which reverses the burden of proof for notified goods, is worded by reference to a reasonable belief that the goods are smuggled goods.

Section 111: the grounds of confiscation of improperly imported goods

Section 111 lists in clauses (a) to (o) the circumstances in which goods brought from a place outside India become liable to confiscation. Grouping them is far better than reciting them.

Group one, the place and manner of arrival. Clause (a) covers goods unloaded or attempted to be unloaded at any place other than a customs port or customs airport appointed under section 7 for the unloading of such goods. Clause (b) covers goods imported by land or inland water through a route other than a route specified under section 7(c). Clause (c) covers dutiable or prohibited goods brought into any bay, gulf, creek or tidal river for the purpose of being landed at a place other than a customs port. Clause (f) covers goods not included in the import manifest or import report where required.

Group four, unauthorised dealing and breach of condition. Clause (j) covers dutiable or prohibited goods removed or attempted to be removed from a customs area or a warehouse without the permission of the proper officer or contrary to the terms of that permission; clause (k) covers goods which do not correspond with the entry where a person has entered them; and clause (o) covers goods exempted, subject to a condition, from duty or a prohibition, in respect of which the condition is not observed unless the non-observance was sanctioned by the proper officer.

The penalty provisions must be distinguished from confiscation and named. Section 112 imposes a penalty on any person who does or omits to do any act rendering goods liable to confiscation under section 111, or who acquires possession of or deals with such goods, and it is quantified by reference to the duty sought to be evaded or the value of the goods.

Section 125: the option to pay a fine in lieu of confiscation

Section 125 is the safety valve of the whole confiscation scheme, and the distinction it draws is its point.

Where the goods are prohibited, the option is discretionary; where they are not, it is mandatory. The section provides that whenever confiscation of any goods is authorised by the Act, the officer adjudging it may, in the case of any goods the importation or exportation whereof is prohibited under this Act or under any other law for the time being in force, and shall, in the case of any other goods, give to the owner of the goods, or where the owner is not known, to the person from whose possession or custody the goods have been seized, an option to pay in lieu of confiscation such fine as the said officer thinks fit.

The reasoning behind the distinction is worth a sentence. Where the goods are not prohibited, the State's interest is fiscal, and forfeiting goods that could lawfully have been imported on payment of duty would be a punishment out of proportion to the wrong; so the owner must be allowed to redeem them. Where the goods are prohibited, the State's interest is regulatory, and to compel redemption would be to allow a person to buy his way into possession of goods the law says may not be here at all; so the officer retains a discretion to refuse.

Section 125(3), inserted with effect from 29 March 2018, fixed a time limit that had been missing for fifty six years. Where the fine is not paid within one hundred and twenty days from the date of the option, the option becomes void, save where an appeal against the order is pending. Before that amendment an option could be left unexercised indefinitely while the goods deteriorated in a customs warehouse and the department could neither release nor dispose of them.

Section 126 completes the sequence. Where goods are confiscated they vest in the Central Government, and the proper officer takes and keeps possession. Section 150 governs sale of the goods and applies the proceeds in a fixed order: first the expenses of sale, then freight and other charges, then duty, then charges due to the person having custody, then any amount due from the owner, and only then is the balance paid to the owner.

Why it bears on this question. Section 2(39) defines smuggling by reference to liability to confiscation under section 111, so a confiscation proceeding must establish the facts that attract one of its clauses. This decision fixes who must do so and how: where section 123 does not apply the burden is on the department, and it is discharged on the totality of the circumstances, unexplained possession of foreign goods being capable of supplying the proof.

The authority on the penalty that accompanies confiscation

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 structure of this part of the Act is easy to miss and it decides the answer. "Smuggling" in section 2(39) is not defined by conduct at all but by consequence: it is any act or omission which renders goods liable to confiscation under section 111 or section 113. That makes the concept far wider than clandestine landing, so that a misdescribed consignment openly presented, or one imported under an exemption whose condition is broken, is smuggled goods for the purposes of the Act and of section 123's reverse burden and of preventive detention under COFEPOSA.

Section 111 then supplies the content in fifteen clauses, which fall into four groups: the place and manner of arrival, prohibition under this or any other law through clause (d) read with section 11, concealment and misdeclaration, and unauthorised removal or breach of an exemption condition. Confiscation under section 111 is directed at the goods; sections 112, 114A and 114AA punish the person separately and cumulatively; and section 124 makes a written notice stating the grounds, a representation and a hearing conditions precedent to either, with section 110(2) fixing a six month window where the goods were seized.

For full marks, cover: the three powers, but organised here around the civil and criminal divide, because the second limb of the question is about a criminal presumption and the answer reads best if that divide is the spine; seizure and confiscation as the civil track, arrest as the criminal track, and the point that a single consignment generates both; then section 138A in full, with sub-section (2), and the two companion presumptions in sections 123 and 139; and a clear answer to the question asked, which is yes, but only in a prosecution, only for an offence requiring a culpable mental state, and only at the standard of proof section 138A(2) fixes.

Section 110(1A) to (1C) allow certified inventory and early disposal of goods notified as perishable, hazardous, prone to depreciation or difficult to store, on an application to a Magistrate for certification of description, quantity and quality, with photographs and samples, and the certified inventory then stands in place of the goods in evidence.

Section 110(2) is the safeguard. 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; the period is extendable by a further six months by the Principal Commissioner or Commissioner for reasons recorded in writing and informed to the person concerned before the expiry of the original period. Both conditions, the recording and the communication in time, are mandatory.

Section 110(3) extends seizure to documents and things useful for or relevant to any proceeding, with a right in section 110(4) to take copies or extracts. Section 110A permits provisional release on bond and security pending adjudication, which is commercially the most used provision in the chapter.

Section 124 governs the procedure and requires a written notice with the prior approval of an officer of at least Assistant Commissioner rank, stating the grounds; an opportunity to represent in writing; and a reasonable opportunity of being heard. Section 125 requires the adjudicating officer to offer a fine in lieu of confiscation where the goods are not prohibited and permits him to do so where they are, capping the fine at market price less duty, and since 2018 requiring payment within one hundred and twenty days. Section 126 vests confiscated goods in the Central Government.

Arrest: the criminal power

Section 104(1) permits 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. The list is exhaustive, and section 134, refusal to be X-rayed, is not in it.

Section 104(2) requires production before a Magistrate without unnecessary delay; section 104(3) gives the officer, for the purpose of releasing on bail, the powers of an officer in charge of a police station.

The controlling decision on how the power must now be exercised is Radhika Agarwal v. Union of India, 2025 INSC 272, decided on 27 February 2025, in which the Supreme Court, hearing about 279 petitions led by Writ Petition (Criminal) No. 336 of 2018, upheld the arrest powers under the Customs Act and the CGST Act while requiring that the 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, drawing the safeguards from Articles 21 and 22 and from D.K. Basu v. State of West Bengal.

Can the culpable mental state be presumed?

The answer is yes, and it is contained in section 138A, but it is subject to four qualifications, each of which carries marks.

The provision. Section 138A(1): in any prosecution for an offence under this Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state, but it shall be a defence for the accused to prove the fact that he had no such mental state with respect to the act charged as an offence in that prosecution. The Explanation defines "culpable mental state" as including intention, motive, knowledge of a fact and belief in, or reason to believe, a fact.

Qualification three, and it is the one most often omitted: section 138A(2) fixes the standard. 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. That cuts both ways. The accused must displace the presumption to that standard; but equally, the prosecution must prove the actus reus, the facts on which the presumption is founded, beyond reasonable doubt before the presumption becomes available. The presumption does not relieve the prosecution of its primary burden.

Qualification four: it is a rebuttable presumption and not a deeming of guilt. The defence is expressly preserved, and the burden it casts is one the accused can discharge from facts within his own knowledge, which is the constitutional justification for a reverse onus. That is the same reasoning which sustains reverse-onus provisions under the Narcotic Drugs and Psychotropic Substances Act, 1985 and section 139 of the Negotiable Instruments Act, 1881.

Conclusion

Conclusion. Arrest, seizure and confiscation are not three versions of one power but the operative provisions of two different tracks generated by the same consignment. Seizure under section 110 is interim and possessory, resting on a recorded reason to believe and disciplined by the six month rule in section 110(2) with its single extension for reasons recorded and communicated, relieved in practice by provisional release under section 110A. Confiscation under sections 111 to 121 is final and proprietary, reached only through the notice, representation and hearing that section 124 makes conditions precedent, and softened by section 125, under which the offer of a fine in lieu is mandatory for goods that are not prohibited and discretionary for those that are. Both are decided on preponderance of probabilities.

Arrest under section 104 belongs to the other track. It is available only for offences under sections 132, 133, 135, 135A and 136, and only the four categories in section 104(4), turning on prohibited goods or on figures exceeding fifty lakh rupees, are cognizable; everything else is non-cognizable under section 104(5), which is Parliament's answer to Om Prakash.

The culpable mental state can be presumed, and section 138A says so, but only in a prosecution, only for an offence which requires such a state, and only on the footing that section 138A(2) holds proof at beyond reasonable doubt rather than preponderance, so that the presumption never relieves the prosecution of proving the underlying facts to the criminal standard. Read with section 123's reverse burden for notified goods seized in a reasonable belief, and section 139's presumption about documents, the Act shifts a great deal onto the accused; what keeps that constitutional is that each shift has a precondition the department must first establish, and each is rebuttable.

Union of India v. Indo-Afghan Agencies Ltd, AIR 1968 SC 718, is the starting point. An exporter of woollen goods was promised import entitlements under an export promotion scheme calculated on the value of his exports. Having exported, he was granted an entitlement for a smaller amount. The Supreme Court held that the Government was bound by its representation, notwithstanding that the scheme was executive and not statutory, and that the doctrine of executive necessity was no answer.

Motilal Padampat Sugar Mills Co. Ltd v. State of Uttar Pradesh, (1979) 2 SCC 409, is the high-water mark and must be set out properly. The State announced that new industrial units would be exempt from sales tax for three years. The appellant, relying on that announcement, and after obtaining a specific confirmation from the Chief Secretary, borrowed heavily and set up a vanaspati factory. The State then resiled, first offering a reduced concession and finally none.

Three features of that sub-section decide the estoppel question. The power is exercised by notification, which is legislative in character rather than a promise made to an identified person. It is exercised on a satisfaction as to the public interest, which is a continuing condition, not one spent when the notification issues. And it operates generally, on a class of goods, not on a named importer.

Section 25(2) is the special or ad hoc exemption. The Central Government may, by special order in each case, exempt from duty, under circumstances of an exceptional nature to be stated in such order, any goods on which duty is leviable. Here the act is directed at a particular consignment and is closer to a representation to an individual, though the requirement that the exceptional circumstances be stated keeps it from becoming a dispensing power.

Section 25(4) and (5) govern publication and commencement, and section 25(6) contains a general exemption where the duty is of a small amount. Sections 25A and 25B provide for exemption of goods imported for repair, further processing or manufacture and re-export, and for goods re-imported for those purposes.

Third, public interest is the superior equity which can override individual equity, and the doctrine must yield where it would be inequitable to hold the Government to its representation. Fourth, and this is the sharpest holding, the principle applies even where a period has been indicated for which the notification was to remain in force: the statement of a period does not convert a public-interest exemption into a contract.

Shrijee Sales Corporation v. Union of India, (1997) 3 SCC 398, followed and refined it. The Court held that once public interest is shown to require the withdrawal of an exemption, promissory estoppel cannot be pressed, and that the only question left for the court is whether the change of policy is genuine and made in the public interest, not whether the court agrees with it. The court reviews the existence of the public interest, not its wisdom.

The critical evaluation

The first criticism is that the reconciliation between Motilal Padampat and Kasinka Trading is real but narrow, and it turns on what kind of act is being challenged. Motilal Padampat concerned a specific representation, confirmed in correspondence to an identified party who then borrowed money and built a factory. Kasinka Trading concerned a general notification addressed to the world. The doctrine is at its strongest against an individuated promise and at its weakest against a general legislative or quasi-legislative act. Section 25(1), being exercised by notification and generally, falls on the weak side; section 25(2), being a special order in an individual case, falls closer to the strong side, and that distinction is the most useful thing an answer can offer.

The second criticism is that "public interest" does most of the work and is rarely tested. Motilal Padampat required the Government to place its material before the court; Shrijee Sales limited the court to asking whether the change of policy is genuine. In practice a bare assertion of changed economic circumstances is seldom probed, and the burden the later cases place on the importer, to show that the withdrawal was not in the public interest, is close to impossible to discharge from outside government.

The fifth point is the recent hardening of the interpretative rule, which compounds the importer's difficulty. 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 ambiguity in it must be resolved in favour of the revenue, overruling the earlier line that gave the benefit of doubt to the assessee. So the importer must now bring himself squarely within the words of the notification, and cannot rely on estoppel if the notification is withdrawn. Both halves of his position have moved against him within a generation.

Conclusion

Conclusion. Promissory estoppel in India runs against the Government in its executive and administrative capacity, needs no consideration, is not defeated by executive necessity, and requires the Government to disclose the material on which it says the public interest compelled it to resile: that is Indo-Afghan Agencies and Motilal Padampat, and it remains good law. What has happened since is that the doctrine has been confined at exactly the point where section 25 operates.

For full marks, cover: the four tiers in order, but organised here around the degree of independence at each level, which is the most useful spine for a question that just says "explain"; section 16 in detail, including the four constraints on the Adjudicating Authority; the narrow jurisdiction of the Special Director (Appeals) under section 17; the abolition of FEMA's own Tribunal by the Finance Act 2017 and the list of omitted sections; the pre-deposit in the first proviso to section 19(1) and the revisional power in section 19(6); section 35 to the High Court; section 34's exclusion of civil courts; and the special appeal route in section 37A(5).

Tier one: the Adjudicating Authority, section 16

The Adjudicating Authority is an officer of the Central Government and the least independent link in the chain, so the Act constrains him in four ways.

Constraint three: the person may be represented. Section 16(4) allows the person to appear in person or to take the assistance of a legal practitioner or a chartered accountant of his choice.

Constraint four: he must be timely. Section 16(6) requires him to deal with the complaint as expeditiously as possible and to endeavour to dispose of it finally within one year from the date of receipt of the complaint, with a proviso requiring him to record periodically the reasons in writing where he cannot.

His powers are those of a civil court. Section 16(5) gives him the same powers as are conferred on the Appellate Tribunal by section 28(2): summoning and enforcing attendance and examining on oath, requiring discovery and production of documents, receiving evidence on affidavits, requisitioning public records subject to sections 123 and 124 of the Indian Evidence Act, 1872, issuing commissions, reviewing its decisions, dismissing for default or deciding ex parte, and setting such orders aside. His proceedings are judicial proceedings within sections 193 and 228 of the Indian Penal Code, and he is deemed a civil court for sections 345 and 346 of the Code of Criminal Procedure, 1973.

Section 17(3) fixes the limitation at forty-five days from receipt of the copy of the order, in the prescribed form with the prescribed fee, with a proviso permitting a later appeal on sufficient cause. Section 17(4) allows him, after hearing, to pass such order as he thinks fit, confirming, modifying or setting aside the order appealed against. Section 17(6) gives him the civil court powers of section 28(2) and makes his proceedings judicial proceedings.

His qualifications are fixed by section 21, as substituted in 2017: a person is not qualified unless he has been a member of the Indian Legal Service and has held a post in Grade I of that Service, or has been a member of the Indian Revenue Service and has held a post equivalent to a Joint Secretary to the Government of India. Section 23 leaves his salary and conditions to be prescribed, and section 27 provides him with officers and employees.

Tier three: the Appellate Tribunal, sections 18 and 19

This is where an answer written from a pre-2017 text goes wrong, and the correction is the most valuable thing in this question.

A residue is worth pointing out. Sections 2(d), 2(f) and 2(s) still define "Bench", "Chairperson" and "Member" of an Appellate Tribunal which FEMA no longer constitutes, and section 32, as substituted, now confers the right to be represented by a legal practitioner or chartered accountant only before the Special Director (Appeals), the words "Appellate Tribunal or the" having been substituted out. The statutory right to representation before the Tribunal has therefore quietly gone, and rests on the Tribunal's own procedure and on natural justice under section 28(1).

Section 19 gives the appeal. The Central Government or any person aggrieved by an order of an Adjudicating Authority other than those covered by section 17, or of the Special Director (Appeals), may appeal to the Appellate Tribunal.

The first proviso is the pre-deposit and it is unqualified. Any person appealing against an order levying any penalty shall, while filing the appeal, deposit the amount of such penalty with such authority as may be notified by the Central Government. The second proviso allows the Tribunal, where it is of opinion that the deposit would cause undue hardship, to dispense with it subject to such conditions as it may impose to safeguard realisation of the penalty.

Tier four: the High Court, section 35

Section 35 gives the final appeal. Any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court within sixty days of communication, on any question of law arising out of such order, with a proviso allowing a further period not exceeding sixty days where the appellant was prevented by sufficient cause.

The Explanation identifies the High Court: the High Court within whose jurisdiction the aggrieved party ordinarily resides or carries on business or personally works for gain; and where the Central Government is the aggrieved party, the High Court within whose jurisdiction the respondent, or any of them, so resides, carries on business or works for gain.

Note the limit. The appeal lies only on a question of law, so the Tribunal is the final fact-finding authority, and a finding of fact reached on evidence is not open to challenge in the High Court unless it is perverse or based on no evidence.

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.

Why it bears on this question. This is the case that supplies the procedural content of a FEMA adjudication, which a question on adjudication or on the appellate structure cannot be answered without. It fixes what the person is entitled to before the inquiry begins, relied-upon documents and no more, and it fixes the point at which the authority's duty of disclosure becomes a full one, which is the inquiry itself. It also explains why appeals from these authorities matter: the safeguards at the first stage are deliberately limited, so the correction of an adjudication is expected to come from the appellate tiers rather than from an expanded hearing below.

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. FEMA's adjudication and appeal structure has four tiers and they can be read as a scale of increasing independence. The Adjudicating Authority under section 16 is a departmental officer, and the Act therefore hedges him about: he may act only on a written complaint by an authorised officer, must give a reasonable opportunity of being heard, must allow representation by a legal practitioner or chartered accountant, must endeavour to decide within a year and record reasons if he does not, and exercises the powers of a civil court under section 28(2) in proceedings that are judicial proceedings for the purposes of the penal law.

The Special Director (Appeals) under section 17 is the first appellate tier and his jurisdiction is deliberately narrow, extending only to orders of an Assistant Director or a Deputy Director, on a forty-five day limitation, and section 21 requires him to come from the Indian Legal Service in Grade I or from the Indian Revenue Service at Joint Secretary level.

For full marks, cover: the three heads as one sequence, because the first two define what may lawfully be done and the third is what happens when the line is crossed, and saying so at the start gives the answer a spine; the definitions verbatim from sections 2(e) and 2(j), including the dead cross-reference in 2(e); section 6 as restructured on 15 October 2019 and section 5 with the Current Account Transactions Rules; then section 13 with exact figures, section 13(1A) to (1D), section 11(3), section 14 and compounding under section 15 with the 2024 Rules.

The closing words are now a dead cross-reference. Section 6(3) was omitted with effect from 15 October 2019 by section 139 of Act 20 of 2015, so the definition incorporates a sub-section that no longer exists. The substantive test in the opening words is unaffected, and it is the alteration of a cross-border balance-sheet position: a resident acquiring shares abroad, a non-resident acquiring shares in India, a resident borrowing abroad, or a guarantee given for a foreign subsidiary, which is caught expressly because contingent liabilities are included.

Section 6(1) permits any person to sell or draw foreign exchange to or from an authorised person for a capital account transaction, subject to sub-section (2).

The rule-making power is now split and that split is the whole of the modern law. Section 6(2): the Reserve Bank, in consultation with the Central Government, may specify the permissible classes of capital account transactions involving debt instruments, the limits of admissibility and any conditions. Section 6(2A), inserted with effect from 15 October 2019: the Central Government, in consultation with the Reserve Bank, may prescribe the permissible classes not involving debt instruments, the limits and the conditions. Section 6(7): "debt instruments" means such instruments as the Central Government may determine in consultation with the Reserve Bank.

(b) Current account transactions

Section 2(j): a current account transaction means a transaction other than a capital account transaction and, without prejudice to the generality of the foregoing, such transaction includes (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 four limbs are illustrations, not the definition. The definition is residual, and the limbs were included because those four categories, which follow Article XXX(d) of the Articles of Agreement of the International Monetary Fund, were the ones the drafters wished to place beyond argument.

The line between the two classes is drawn by asking whether the transaction alters a cross-border asset or liability. A payment for imported goods does not; a subscription to shares does. Interest on a loan is current; the repayment of the principal is capital. That single test decides almost every borderline case.

(c) Contraventions and penalties

Section 13(1) is the general provision and the figures must be exact. If any person contravenes any provision of this Act, or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or any condition subject to which an authorisation is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where the contravention is a continuing one, a further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.

Sections 13(1A) to (1D), inserted with effect from 9 September 2015, create a severe special regime for undisclosed foreign assets. 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 involved and to confiscation of the value equivalent situated in India; under section 13(1C) he is punishable with imprisonment up to five years and with fine, in addition to the penalty; under section 13(1B) the Adjudicating Authority may, on reasons recorded, recommend prosecution, 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.

Section 11(3) is the separate supervisory penalty on an authorised person, for contravening a direction of the Reserve Bank or failing to file a return: up to ten thousand rupees, with a continuing penalty up to two thousand rupees for every day. It is far smaller than the section 13 penalty because the authorised person is a regulated intermediary and not the beneficiary of the transaction.

Section 15(2) provides that once compounded, no proceeding or further proceeding shall be initiated or continued in respect of that contravention. Compounding is now governed by the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified on 12 September 2024 in supersession of the 2000 Rules, which fix the compounding authorities and their monetary competence, raise the application fee from five thousand to ten thousand rupees plus goods and services tax, and permit digital payment.

One exclusion must be stated. Section 37A(6) provides that nothing in section 15 applies to section 37A, so a seizure of equivalent Indian assets for undisclosed foreign holdings cannot be compounded at all.

Section 42 supplies vicarious liability where the contravener is a company, catching the person in charge of and responsible for the conduct of the business under sub-section (1), subject to a defence of no knowledge or due diligence, and any director, manager, secretary or officer with whose consent or connivance or by whose neglect the contravention occurred under sub-section (2), with the Explanation making a firm a company and a partner a director. Section 43 provides that proceedings under section 13 do not abate on the death or insolvency of the person liable.

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.

Why it bears on this question. The transaction in it was a capital account transaction, the objection was that it broke the pricing rules, and the answer turned on the character of the resulting contravention. It therefore bears on each head of this question: it identifies a share transfer to a non-resident as capital account, and it holds that a contravention of the rules governing it is remediable and compoundable rather than void.

Conclusion

Conclusion. The three expressions form a single sequence. A capital account transaction under section 2(e) is one that alters cross-border assets or liabilities including contingent liabilities, and it is regulated under section 6, whose architecture changed on 15 October 2019 when section 6(3) was omitted, section 6(2A) gave non-debt instruments to the Central Government and section 6(7) left the definition of debt instruments to it, leaving the Reserve Bank with debt under section 6(2) and section 47(3) saving its older regulations. A current account transaction under section 2(j) is defined as everything that is not capital, with four illustrative limbs, and section 5 makes it free subject only to the reasonable restrictions in the Current Account Transactions Rules, 2000 with their three schedules.

For full marks, cover: that the question asks how these two instruments help regulate, so the answer must be functional and not merely descriptive; the statutory basis of each, sections 7 and 9 of the 1992 Act; the four regulatory functions the code performs, identification, gatekeeping, linkage across three statutes and sanction; the four functions the licence performs, quantity control, sectoral control, conditionality and benefit delivery; the enforcement machinery in sections 8, 11 and 15; and a candid assessment of the limits of the system.

The two instruments and their statutory basis

The Importer-exporter Code is an identity; a licence is a permission. Keeping that distinction at the front of the answer is what turns a descriptive answer into an analytical one.

Section 5 supplies the policy under which both operate, empowering the Central Government to formulate and announce the foreign trade policy by notification and to amend it in like manner, and section 6 creates the office of the Director General of Foreign Trade to advise on the policy and to be responsible for carrying it out.

How the code regulates: four functions

Function one: identification. The code is a single ten-digit number, now aligned with the Permanent Account Number, issued electronically and held by every person who imports or exports goods. It converts an anonymous flow of consignments into a set of identified traders, and every bill of entry and shipping bill carries it. Without a single identifier the rest of the regulatory apparatus, which depends on aggregating a trader's activity over time, could not function at all.

Function two: gatekeeping. Because section 7 makes the code a condition precedent to any import or export, the State controls entry into foreign trade at a single point. A person who has been excluded cannot trade, and the exclusion is effective the moment the code is suspended, without any need to intercept individual consignments.

Function four: sanction. Section 8 is what gives the code teeth, and its width is deliberate. The code may be suspended or cancelled where the holder has contravened the Act, the rules or orders or the foreign trade policy, or any other law for the time being in force relating to central excise or customs or foreign exchange, or has committed any other notified economic offence; or where the Director General has reason to believe that he has made an export or import prejudicial to the trade relations of India with any foreign country, or to the interests of other persons engaged in imports or exports, or has brought disrepute to the credit or the goods of, or services or technology provided from, the country.

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 code is suspended or cancelled may thereafter trade only under a special licence.

The regulatory point about section 8 is that it makes a customs or FEMA contravention cost the trader his ability to trade at all, which is a far heavier consequence than the monetary penalty in section 11, and it is the reason the code is the most effective single instrument in this Act.

Function two: sectoral and strategic control. The Indian Trade Classification (Harmonised System) schedule classifies every item as free, restricted, prohibited or canalised, and licensing is the instrument that operates the second of those categories. The strategic end of it is sections 14A to 14E, inserted in 2010, which impose controls on the export of specified goods, services and technology, transfer controls, catch-all controls and a power to suspend or cancel a licence for specified goods, with section 14E(1) routing the penalty for a contravention relating to specified goods to the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005. That is India's non-proliferation export control regime, and it sits inside a trade statute.

Function three: conditionality. A licence can carry conditions that a duty rate cannot. The advance authorisation scheme permits duty-free import of inputs against an export obligation, and the Export Promotion Capital Goods scheme permits duty-free import of capital goods against an obligation to export a multiple of the duty saved. The instrument that makes these work is the licence and the bond that accompanies it, and the sanction for default is the recovery of duty with interest and action under section 11.

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, with a show cause notice required within two years where the variation would prejudice a person.

The assessment should be honest and it has three parts. The system's strength is the code, because a single identifier running through three statutes makes conduct visible that would otherwise be invisible, and section 8 makes the consequence of misconduct proportionate to the trader's dependence on trade. The system's weakness is that licensing is a quantity instrument in a tariff world: since the dismantling of import licensing in the 1990s, the great majority of goods are free, and the licence now does most of its work not as a restriction but as a vehicle for conditional duty exemption and for incentives, which is a different function from the one the Act was drafted for.

Why it bears on this question. The code and the licence both operate under the foreign trade policy, which section 5 allows the Central Government to announce and amend by notification. This decision establishes that such a scheme is not a mere administrative indulgence: a trader who has acted on it may hold the Government to it, and executive necessity is no answer.

The authority on how far a trade policy may be relied on

The second authority is Kasinka Trading v. Union of India, (1995) 1 SCC 274, decided on 18 October 1994, which decides how far a trader may rely on a policy announced to him. A notification under section 25(1) of the Customs Act exempting PVC resin from duty was expressed to remain in force up to and inclusive of 31 March 1981. Importers entered into contracts and opened letters of credit on the faith of it. The exemption was withdrawn on 16 October 1980, before the stated date.

The Supreme Court refused to hold the Government to it. A notification issued in the public interest is not a promise or representation made to any individual; the doctrine of promissory estoppel cannot be invoked in the abstract; public interest is the superior equity which overrides individual equity; and the principle applies even where a period has been indicated for which the notification was to remain in force.

Licensing under section 9 is a permission, and it performs four functions: controlling quantity, most formally through the safeguard machinery of section 9A with its three and nine per cent developing-country thresholds and its ten-year outer limit; controlling sectors and strategic goods, through the Indian Trade Classification and the catch-all controls of sections 14A to 14E which route penalties to the Weapons of Mass Destruction Act of 2005; imposing conditions, which is how advance authorisation and the Export Promotion Capital Goods scheme tie duty-free imports to export obligations; and delivering benefits, since the 2010 amendment brought certificates, scrips and other instruments bestowing fiscal benefit within the same section.

Behind both stand section 11's penalty of not less than ten thousand rupees and up to five times value, section 15's appeal on pre-deposit within forty-five days, and section 16's two-year review. The candid assessment is that the code has grown in importance and the licence has changed its function: in a largely tariff-based trade regime the licence now works mainly as a conduit for conditional exemption and incentive rather than as a restriction, and one of the Act's own provisions for default, section 11B, now refers to a Settlement Commission that ceased to exist on 1 April 2025.

(i) Unjust enrichment

The principle is that a person should not be enriched at another's expense without legal justification, and in customs law it identifies who actually lost the money when duty was wrongly collected. If the importer recovered the duty from his buyer in the price, refunding it to him leaves him better off than if the duty had never been levied, at the expense of the consumer who bore it.

Two provisions embody it. Section 27(2) requires duty and interest found refundable to be credited to the Consumer Welfare Fund established under section 12C of the Central Excise Act, 1944, and paid to the applicant only in the excepted cases, principally where the incidence of the duty has not been passed on to any other person, or where the duty was paid by an individual on goods imported for his personal use, or the claim is for 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 refunds arising on the finalisation of a provisional assessment.

(ii) Compounding of offences under section 137(3)

Section 137(3) permits any offence under Chapter XVI to be compounded, either before or after the institution of prosecution, by the Principal Chief Commissioner of Customs or Chief Commissioner of Customs, on payment by the person accused of the offence to the Central Government of such compounding amount and in such manner of compounding as may be specified by rules.

Four features should be stated. The power sits at a high level, with the Principal Chief Commissioner or Chief Commissioner and not the adjudicating officer, which keeps it away from the officer investigating the case. It is available before or after prosecution has begun, so an accused may compound even at trial. It is exercised on payment of an amount fixed by rules, so it is not a bargain struck case by case. And it operates on the offence, extinguishing the criminal liability, while leaving the civil consequences of duty, confiscation and penalty untouched.

The rules are the Customs (Compounding of Offences) Rules, 2005, which prescribe the application, the report of the reporting authority, the opportunity of being heard, and the compounding amounts, calculated as percentages of the duty evaded or the market value of the goods depending on the offence.

The abolition of the Settlement Commission has made compounding the only exit, and that is the currency point. Until 31 March 2025 a person exposed to both adjudication and prosecution could apply under section 127B to the Customs and Central Excise Settlement Commission and obtain, under section 127H, immunity from prosecution and from the imposition of penalty and fine on making a full and true disclosure. The Finance Act 2025 discontinued the Commission from 1 April 2025, transferring pending applications to an Interim Board for Settlement of three officers of the rank of Chief Commissioner or above nominated by the Board, with no judicial member. Immunity from prosecution can therefore no longer be obtained by settlement, and compounding under section 137(3), with its exclusions, is what remains.

(iii) Assessment

Assessment is defined very widely by section 2(2): determination of the dutiability of any goods and the amount of duty, cess, interest, penalty, fine or any other sum payable, and it includes provisional assessment, self-assessment, re-assessment and any assessment in which the duty assessed is nil.

Section 18 permits provisional assessment on bond and security where a document or information is missing, a chemical or other test is required, or further enquiry is necessary. Since 1 May 2025, section 18(1B) requires finalisation within two years, extendable by one year by the Principal Commissioner or Commissioner for sufficient cause recorded, and the officer must inform the importer where finalisation does not occur in time. Section 18A, of the same date, permits a voluntary revision of an entry after clearance.

Section 28 governs re-opening: two years ordinarily, five years where the non-levy or short levy is by reason of collusion, wilful mis-statement or suppression of facts, with determination required within six months or one year respectively under section 28(9). Whether the Directorate of Revenue Intelligence may issue such a notice was answered against the department in Canon India Pvt. Ltd v. Commissioner of Customs, 9 March 2021, and in its favour on review on 7 November 2024, the three-judge Bench holding that section 2(34) must be read harmoniously with section 6, so that officers to whom the function has been validly allocated are proper officers under section 28.

Four features are worth stating. It is confined to section 13, the civil penalty jurisdiction, and cannot carry a criminal liability under section 13(1C) to a representative, since criminal liability is personal. It covers insolvency as well as death, so the official assignee takes the liability with the estate. It expressly covers appeals, so an appeal filed by a person who dies is continued rather than treated as abated. And the proviso is a genuine protection, capping the heir's exposure at what he actually receives so that his own property is untouched.

The examiner's point is the one to end on. Several papers in this folder ask about "abatement under FEMA", and section 43 is always the provision meant. It is an anti-abatement provision, and an answer describing when proceedings abate states the reverse of the law.

(v) Foreign Direct Investment in India

Foreign direct investment is a capital account transaction within section 2(e), because a non-resident's subscription to the equity of an Indian company alters that non-resident's assets in India.

Prohibited sectors are a short 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 sectors not open to private investment such as atomic energy and railway operations other than the permitted segments.

Press Note 3 of 2020, issued on 17 April 2020, is the most important recent restriction. An entity of a country sharing a land border with India, or where the beneficial owner of an investment is situated in or is a citizen of such a country, may invest only under the Government route, and the same applies to a transfer of ownership resulting in such beneficial ownership. It was made part of the Non-debt Instruments Rules by amendment and was introduced to guard against opportunistic acquisitions when valuations fell at the start of the pandemic.

Reporting is where contraventions arise. Receipt of consideration is reported and Form FC-GPR filed on allotment through the Reserve Bank's Single Master Form; a transfer between a resident and a non-resident is reported in Form FC-TRS; and an annual return on foreign liabilities and assets is due each July. Delay is a contravention under section 13 and is ordinarily compounded under section 15 and the Foreign Exchange (Compounding Proceedings) Rules, 2024.

Assessment is now self-assessment under section 17 with verification, re-assessment and a speaking order, provisional assessment under section 18 with a two-year finalisation limit since 1 May 2025, voluntary revision under section 18A, and re-opening under section 28 within two or five years by a proper officer whose identity Canon India settled in 2021 and unsettled again on review in 2024.

Section 43 of FEMA prevents a penalty proceeding from abating on death or insolvency, devolving it on the legal representative or official assignee subject to the estate limit. And foreign direct investment is the capital account transaction whose legal basis moved from the Reserve Bank to the Central Government on 15 October 2019, is delivered through the automatic and Government routes, is closed in a short list of sectors, and since Press Note 3 of 2020 requires Government approval for every investment beneficially owned in a land-border country.

For full marks, cover: the powers in the order in which they are exercised on a real interception, which is the clearest spine for a question about a person; section 106 stopping a conveyance, sections 100 to 103 searching the person, section 105 searching premises, section 110 seizing, section 108 summoning and questioning, and section 104 arresting; the safeguard attached at every stage; the constitutional overlay of Articles 20(3), 21 and 22; and Radhika Agarwal of 27 February 2025 as the controlling authority on the last step.

The sequence of an interception

A customs officer acting against a person moves through six statutory stages, and every one of them carries its own precondition. The Act is best explained by following that sequence rather than by listing powers.

Stage two: searching the person, sections 100 to 103

Section 100 permits search of a person in transit. Where the proper officer has reason to believe that any person to whom the section applies has secreted about his person any goods liable to confiscation or any documents relating thereto, he may search him. The section applies to a person who has landed from or is about to board, or is on board, a vessel within Indian customs waters; who has landed from or is about to board, or is on board a foreign-going aircraft; who is entering or about to leave India by land or inland water; or who is in a customs area.

Section 101 permits search anywhere in India for notified goods. Where an officer of customs empowered by the Principal Commissioner or Commissioner, and not below the rank of an Assistant Commissioner, has reason to believe that any person has secreted about his person gold, diamonds, manufactures of gold or diamonds, watches, or any other class of goods notified by the Central Government, he may search him. The narrower authorisation is the safeguard, because the power is not confined to ports and borders.

Section 103 governs the internal search and is the most tightly controlled power in the Act. Where the proper officer has reason to believe that a person has any goods liable to confiscation secreted inside his body, he may detain him and shall produce him without unnecessary delay before the nearest Magistrate. The Magistrate, if satisfied that there is reasonable ground, may direct that the suspect be taken to a registered medical practitioner for an X-ray or other examination, and where the practitioner reports that goods are secreted, the Magistrate may direct suitable action for bringing them out. The section also provides for the person's rights before the Magistrate and for his discharge where the Magistrate sees no reasonable ground.

Stage five: summoning and questioning, section 108

Section 108 empowers a gazetted officer of customs to summon any person whose attendance he considers necessary either to give evidence or to produce a document or any other thing in any inquiry which the officer is making. All persons so summoned are bound to attend, to state the truth upon any subject respecting which they are examined, and to produce such documents as may be required, and every such inquiry is deemed to be a judicial proceeding within the meaning of sections 193 and 228 of the Indian Penal Code.

The constitutional question this raises is the hardest in this area. Article 20(3) protects a person accused of any offence from being compelled to be a witness against himself. The reconciliation has been that a customs officer is not a police officer, that a summons under section 108 is issued in an inquiry and not in a prosecution, and that the person summoned is not, at that stage, a person accused of an offence. The criticism is that the distinction is formal, because the person summoned is very often the person the department intends to prosecute, and the protection then turns on the label attached to the stage rather than on the reality of the compulsion.

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

Section 104(4) fixes cognizability. 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 the Foreign Trade (Development and Regulation) Act, 1992 where the duty relatable to its utilisation exceeds fifty lakh rupees. Section 104(5) makes all other offences non-cognizable, and section 104(6) and (7) classify offences as bailable or non-bailable accordingly.

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

Conclusion

Conclusion. Followed in sequence, the Act's powers against a person show a consistent pattern: each power is conditioned on a state of mind the officer must actually hold and, at the sharper end, record, and each carries a safeguard proportioned to what it takes away. A conveyance may be stopped under section 106 on a reason to believe it is being used in smuggling, and may in the last resort be fired upon. A person may be searched under section 100 in transit or under section 101 anywhere in India for notified goods on the authorisation of at least an Assistant Commissioner, and section 102 gives him the right, on request, to be taken before a gazetted officer or a Magistrate, requires two witnesses, and forbids any male from searching a female. An internal search under section 103 needs a Magistrate's direction and a registered medical practitioner.

For full marks, cover: the doctrine's general foundation, including sections 68 to 72 of the Indian Contract Act, 1872, so that the customs application is seen as a species of a wider principle; the constitutional problem it answers, which is the tension between Article 265 and the fact that an indirect tax is passed on; Mafatlal Industries worked in full, including its exceptions; the statutory codification in sections 27, 28D and 18(5) and the Consumer Welfare Fund; then the critical evaluation, which must identify the real difficulties, namely the impossibility of proof in many cases, the treatment of capital goods and of provisional assessment, and the ITC Ltd obstacle now partly cured by section 18A.

The constitutional problem is real and should be stated. Article 265 provides that no tax shall be levied or collected except by authority of law, so a duty collected without authority must, in principle, be returned. But an indirect tax is by its nature designed to be passed on: the importer is the taxable person, the consumer is the economic bearer. If the tax comes back to the importer, the person who actually paid it gets nothing, and the importer receives a windfall equal to a tax he never bore. The doctrine of unjust enrichment is the law's answer to that mismatch between the legal incidence and the economic incidence of the tax.

Mafatlal Industries: the decision that settled it

Mafatlal Industries Ltd v. Union of India, (1997) 5 SCC 536, was decided on 19 December 1996 by a Bench of nine judges, convened to resolve a long line of conflicting decisions on refund of indirect taxes and to reconsider earlier authority which had allowed refunds without regard to the passing on of the burden.

The reasoning is not a technicality and should be presented as principle. The Court reasoned that the object of a refund is to restore the loss to the person who suffered it. Where the manufacturer or importer has recovered the duty in his price, he has suffered no loss; refunding him would give him twice over and would leave the consumers, who cannot practically be identified or repaid, uncompensated. The Consumer Welfare Fund is the legislature's answer to the question of where the money should go instead: not to the trader, and not retained by the State as ordinary revenue, but to a fund applied for the benefit of consumers.

The statutory codification

Section 27 provides for refund of duty and interest, requiring an application before the expiry of one year from the date of payment, with the limitation not applying where the duty was paid under protest, and requiring the applicant to furnish documentary or other evidence to establish that the amount was paid by him and that the incidence had not been passed on.

The critical evaluation

The first and strongest criticism is the practical impossibility of proof in many cases. Where goods are sold at a uniform market price, or where the importer's price list did not change when the duty was imposed or withdrawn, the importer may be quite unable to show that the duty was not built into his price, even though economically he may have absorbed it. Certificates from chartered accountants and evidence that the duty was carried in the books as "duty receivable" rather than as an expense are the usual proof, and their acceptance varies. The result is that a levy admitted to be unlawful is very often not refunded to anybody, and the money reaches the Consumer Welfare Fund, whose disbursements bear no relation to the consumers who bore the particular tax.

The second criticism concerns capital goods and inputs. Where the duty was paid on capital goods used in the claimant's own manufacture, or on inputs consumed in a product whose price is set by competition, the passing on is diffuse and cannot sensibly be traced. Applying a presumption designed for traded goods to that situation produces arbitrary results, and the courts have had to soften the presumption by treating the question as one of fact in each case, which reintroduces the uncertainty the presumption was meant to remove.

Parliament has now partly cured that, and the cure is the currency point. Section 18A, inserted by the Finance Act 2025 with effect from 1 May 2025, permits a voluntary revision of an entry after clearance within the prescribed time and manner, so that an importer who discovers an error may correct it, paying the differential with interest under section 28AA where he has short paid and claiming the excess where he has overpaid, without having to appeal against himself. The sequence, a judicial hardening in 2019 followed by a legislative softening in 2025, is the clearest illustration in this subject of how the law in this area actually develops.

The fifth point is one of fairness in the other direction, and it should be conceded. The doctrine is not merely a device to help the revenue keep money it collected unlawfully. Before Mafatlal Industries there were genuine instances of traders recovering very large sums of duty which their customers had paid, and the windfall was indefensible. A critic who attacks the doctrine wholesale has to explain what should happen to money that the claimant demonstrably did not bear, and the Consumer Welfare Fund, imperfect as it is, is a better answer than a windfall.

The criticisms are real and should be made. Proof of non-passing on is often impossible where prices are set by the market rather than by cost, so a levy conceded to be unlawful is frequently refunded to nobody. The presumption fits traded goods and fits capital goods and inputs badly. It applies with full force to provisional assessments under section 18(5), where the importer could not have priced for a duty not yet determined.

And until 2025 the procedural obstacle from ITC Ltd required an importer to appeal against his own self-assessment before the question could even be reached, an obstacle section 18A has now largely removed by permitting a voluntary post-clearance revision. What survives all of that is the core of the doctrine, which is sound: a person who has already recovered a tax from his customers has lost nothing, and a rule that refuses to pay him twice is not an injustice but the avoidance of one.

Feature one: a civil contravention in place of a criminal offence. Section 13 attaches a 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, adjudged by an Adjudicating Authority under section 16. There is no imprisonment for the ordinary contravention; section 14 provides only civil imprisonment of a defaulter, capped by section 14(11) at three years where the demand exceeds one crore rupees and six months otherwise.

Feature two: the burden of proof restored to the department. FERA's section 59 presumed guilt; FEMA contains no such presumption for an ordinary contravention.

Feature three: a free current account and a regulated capital account. Section 5 permits any person to sell or draw foreign exchange for a current account transaction, subject only to reasonable restrictions prescribed by the Central Government in the public interest, contained in the Current Account Transactions Rules, 2000. Section 6 regulates capital account transactions, with the Reserve Bank specifying permissible debt-instrument transactions under section 6(2) and, since 15 October 2019, the Central Government prescribing non-debt transactions under section 6(2A), section 6(3) having been omitted.

Feature seven: the Reserve Bank as the operational regulator, authorising persons under section 10, directing and penalising them under section 11, inspecting under section 12 and making regulations under section 47, subject to the Central Government's directions under section 41.

How far has it contributed? Four channels, and what must be discounted

The honest starting point is that a statute does not by itself improve a country's foreign exchange position. India's reserves grew from about 38 billion United States dollars at the end of the 1990s to figures many times that; but the drivers were the liberalisation of 1991, the software and services export boom, remittances from the Indian diaspora, the opening of sectors to foreign investment, and the global cost of capital. To attribute that growth to FEMA would be to mistake a framework for a cause. What can properly be claimed is that the Act removed obstacles, reduced friction and made the market usable, and the answer should be argued through the channels by which it did so.

Channel three: the machinery for realising export proceeds was made workable. Section 7 requires a declaration of the full export value and section 8 requires all reasonable steps to realise and repatriate what is due or has accrued, with section 2(y) defining repatriation to include discharge of a foreign currency liability. Because the declaration is made on the shipping bill filed under section 50 of the Customs Act, the Reserve Bank's Export Data Processing and Monitoring System can match every shipping bill against its realisation, and the authorised dealer bank follows the outstanding bill. That system is the reason under-invoicing and non-realisation are detectable at all, and it is a direct product of the way sections 7 and 8 are drafted.

Channel four: the framework for inbound investment became predictable. Section 6 and the regulations and rules made under it converted foreign investment from a permission-based process into a largely automatic one with published sectoral caps and defined reporting. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and the Single Master Form with Forms FC-GPR and FC-TRS give an investor a set of rules he can read in advance. Predictability is what a capital exporter values most, and the Act supplied it.

Third, the institutional architecture has been weakened rather than strengthened. The Finance Act 2017 abolished FEMA's own Appellate Tribunal and transferred the jurisdiction to the SAFEMA Tribunal, which also carries the Prevention of Money-Laundering Act and Benami Property docket; section 32 as substituted now gives a statutory right of representation only before the Special Director (Appeals); and the first proviso to section 19(1) requires the whole penalty to be deposited before an appeal is heard. Those are not improvements.

Fourth, the regulator's position has narrowed twice. Capital account rule-making for non-debt instruments passed to the Central Government on 15 October 2019, and section 44A, inserted with effect from 1 October 2020, removed the International Financial Services Centre from the Reserve Bank's reach in favour of the International Financial Services Centres Authority.

The judicial measure of what FEMA achieved

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 best available evidence for the second limb of the question. The improvement FEMA made is not measurable in reserves, which the Act did not cause; it is measurable in how a breach is treated, and the Supreme Court has now held that a FEMA breach is so far from being a fundamental wrong that it does not even prevent the enforcement of a foreign award.

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 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. FEMA's salient features are the six or seven that follow from a single change of premise: foreign exchange stopped being a scarce national resource to be conserved and became a market to be developed. Hence a civil contravention under section 13 instead of an offence, the burden of proof on the department, a free current account under section 5 and a regulated capital account under section 6, compounding under section 15, definitions written in days and in classes of transaction rather than in intention, an appeal structure ending in the High Court on a question of law, and the Reserve Bank as the operational regulator under sections 10 to 12 and 47.

Against that, three things must be conceded. The civil model did not deter undeclared foreign assets, which is why sections 13(1A) to (1D) and 37A restored imprisonment, equivalent-value seizure and a bar on compounding in 2015. Section 14A, enacted in 2016, has never been brought into force. And the Act's institutions have been reduced rather than reinforced since 2017, its own Tribunal abolished, its right of representation before the Tribunal removed, its capital account powers transferred to the Government in 2019 and its writ over the International Financial Services Centre removed in 2020. FEMA improved the legal environment for foreign exchange decisively; the improvement in the foreign exchange position itself belongs to the economy, and the Act's honest claim is that it stopped standing in the way.

The statutory setting

The Foreign Trade (Development and Regulation) Act, 1992 replaced the Imports and Exports (Control) Act, 1947, and its penal chapter was substantially rewritten by the Foreign Trade (Development and Regulation) Amendment Act, 2010 (Act 25 of 2010) with effect from 27 August 2010. Section 11 was substituted entire, sections 11A and 11B were inserted, and sections 14A to 14E were added, so the penal law of foreign trade as it now stands is essentially of 2010 vintage.

The obligations whose breach constitutes a contravention should be identified before the penalties. They are: section 7, no import or export except under an Importer-exporter Code Number; section 9, no import or export of restricted goods except under a licence, certificate, scrip or other instrument; section 11(1), no export or import except in accordance with the Act, the rules and orders made under it and the foreign trade policy for the time being in force; section 3 orders prohibiting, restricting or regulating import or export; and sections 14A to 14C, the controls on specified goods, services and technology.

Three points about that formula deserve comment. It sets a floor as well as a ceiling, which is unusual in Indian fiscal legislation and reflects a policy that no contravention should be treated as trivial. The ceiling is expressed as a multiple of value rather than of duty, which makes it far heavier than the customs penalty in section 112 for the same consignment. And the closing words "whichever is more" resolve the case where five times the value is less than ten thousand rupees, so that the floor always operates. The penalty attaches to abetment and attempt as well as to the completed act.

Section 11(3) covers false and forged documents. Where a person signs or uses, or causes to be made, signed or used, any declaration, statement or document submitted to the Director General or any authorised officer, knowing or having reason to believe that it is forged or tampered with or false in any material particular, he is liable to the same range of penalty. The mental element is "knowing or having reason to believe", so constructive knowledge suffices.

Sections 11(6) to (9) deal with confiscation. Goods, materials, equipment, plant or conveyance used in the contravention may be confiscated by the Adjudicating Authority, subject to the person being given an option to pay redemption charges equivalent to the market value of the goods; and section 11(9) provides that the penalty or redemption charges may be adjudged notwithstanding the confiscation. Section 12 makes clear that a penalty or confiscation under this Act does not interfere with other punishments to which the person is liable under any other law.

Section 11A, inserted in 2010, requires all sums realised by way of penalties under the Act to be credited to the Consolidated Fund of India.

The special regime for specified goods: sections 14A to 14E

This is the part of the Act that most answers miss, and it is where the heaviest sanctions are. Sections 14A to 14E were inserted in 2010 to give statutory force to India's export control obligations in relation to dual-use and strategic items, the list known as SCOMET, Special Chemicals, Organisms, Materials, Equipment and Technologies.

The structural point to make is that this Act now has two penal regimes: a monetary, civil regime under section 11 for ordinary trade contraventions, and a criminal regime routed to the 2005 Act for strategic goods. An answer that describes only the first has described half the law.

Adjudication, appeal and review

Section 13 makes the Adjudicating Authority the Director General or, subject to such limits as may be specified, such other officer as the Central Government may by notification authorise. Section 14 requires that the owner of the goods be given an opportunity of being heard before confiscation or penalty. Section 17 gives the Adjudicating and other authorities the powers of a civil court in respect of summoning, requiring production of documents and receiving evidence on affidavit.

Section 16 provides for review. The Central Government, in the case of a decision or order of the Director General, or the Director General in the case of a decision or order of a subordinate officer, may on its or his own motion or otherwise call for and examine the records of any proceeding, to satisfy itself as to the correctness, legality or propriety of the decision, and make such order as is deemed fit. The proviso protects the citizen: no decision may be varied so as to prejudicially affect any person unless he has, within a period of two years from the date of the decision or order, received a show cause notice, and has been given a reasonable opportunity of representation and hearing. Before 2010 the marginal heading of section 15 was "REVISION"; the 2010 amendment reorganised the two remedies into an appeal in section 15 and a review in section 16.

A provision that is now out of date should be noticed. Section 11B, inserted in 2010, provides that a settlement of customs duty and interest ordered by the Settlement Commission constituted under section 32 of the Central Excise Act, 1944 shall be deemed to be a settlement under this Act, for the regularisation of an export obligation default. That Commission ceased to function on 1 April 2025 under the Finance Act 2025, its pending applications passing to an Interim Board for Settlement of three officers of the rank of Chief Commissioner or above with no judicial member. Section 11B therefore now refers to a body that no longer exists, and the route it provided for regularising an export obligation default has, so far as the statute is concerned, been left hanging.

The authority on the penalty discretion

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.

The authority on the policy the penalties enforce

Union of India v. Indo-Afghan Agencies Ltd, AIR 1968 SC 718 is the decision that gave a trade scheme legal force against the Government that announced it. An exporter of woollen goods was promised import entitlements under an export promotion scheme, calculated on the value of what he exported. Having exported, he was granted an entitlement for a smaller amount, the authorities taking the view that the scheme bound nobody because it was executive and not statutory.

The Supreme Court held the Government bound by its representation. A scheme announced to traders, on the faith of which they act, cannot be departed from at will merely because it is administrative in form, and the plea of executive necessity is no answer. The decision is the origin of the modern law that a trade policy, though made by notification and amendable by notification, is not a licence to disappoint those who have already acted on it.

Why it bears on this question. Section 11(1) requires trade to be in accordance with the foreign trade policy, so the policy is the norm the penalty enforces. This decision establishes that such a scheme binds the Government as well as the trader, and that a person who has acted on it may hold it to its terms.

The other half is the strategic regime in sections 14A to 14E, covering specified goods, transfer controls and the catch-all control that reaches unlisted items intended for weapons of mass destruction, with section 14E(1) routing the penalty to the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005, which carries imprisonment. Any answer confined to section 11 has described only the commercial half of the Act.

The remedies are adjudication by the Director General or a notified officer under section 13 after a hearing under section 14; an appeal under section 15 within forty-five days, extendable by thirty, but only on a mandatory pre-deposit of the penalty or redemption charges with a discretionary dispensation for undue hardship; and a review under section 16, exercisable suo motu but requiring a show cause notice within two years before any variation prejudicial to a person.

The sanction that actually disciplines traders, however, is not monetary at all: section 8 allows the Importer-exporter Code to be suspended or cancelled for a contravention of the customs or foreign exchange law, leaving the trader able to act only under a special licence. And section 11B, the Act's own route for regularising an export obligation default, now points at a Settlement Commission abolished on 1 April 2025.

Section 4 forbids a person resident in India from acquiring, holding, owning, possessing or transferring foreign exchange, foreign security or immovable property outside India. Section 6 regulates capital account transactions; section 7 requires the export declaration; section 8 requires realisation and repatriation; section 10(5) and (6) impose duties on and through the authorised person.

Detection is usually not by the Directorate but by the reporting system. The authorised dealer bank reports inward investment through the Single Master Form and Forms FC-GPR and FC-TRS; the Reserve Bank's Export Data Processing and Monitoring System matches shipping bills filed under section 50 of the Customs Act against realisation; and an unmatched bill or an unfiled form is what generates most proceedings. Section 10(5) obliges the authorised person to satisfy himself, by declaration and information, that a transaction is not designed for a contravention, to refuse in writing if he is not satisfied, and to report the matter to the Reserve Bank if he has reason to believe that a contravention is contemplated.

Stage two: the penalty

Section 13(1) fixes the general penalty: on adjudication, a penalty up to thrice the sum involved where the amount is quantifiable, up to two lakh rupees where it is not, and where the contravention is continuing, a further penalty up to five thousand rupees for every day after the first day. There is no mens rea requirement, and the words "up to" mean that the maximum is a ceiling requiring the Authority to apply his mind to quantum.

Section 13(2) adds confiscation, of any currency, security or other money or property in respect of which the contravention took place, together with a direction that foreign exchange holdings be brought back into India or retained outside in accordance with directions. The Explanation extends "property" to bank deposits into which it was converted, to Indian currency into which it was converted, and to any other property resulting from the conversion.

Section 11(3) is a separate and much smaller penalty on an authorised person, up to ten thousand rupees with a continuing penalty up to two thousand rupees a day, for contravening a direction of the Reserve Bank or failing to file a return.

Stage four: adjudication

Section 16(1) allows the Central Government, by order published in the Official Gazette, to appoint officers as Adjudicating Authorities, holding an inquiry in the prescribed manner after giving the person a reasonable opportunity of being heard, with a proviso permitting a direction to furnish a bond or guarantee where the person is likely to abscond or evade payment. Section 16(2) requires the same order to specify jurisdictions.

Section 16(3) is the jurisdictional foundation: no Adjudicating Authority shall hold an enquiry except upon a complaint in writing made by any officer authorised by a general or special order by the Central Government. Section 16(4) permits the person to appear in person or through a legal practitioner or chartered accountant. Section 16(5) gives the same civil court powers as the Appellate Tribunal has under section 28(2), and makes the proceedings judicial proceedings within sections 193 and 228 of the Indian Penal Code, the Authority being deemed a civil court for sections 345 and 346 of the Code of Criminal Procedure, 1973. Section 16(6) requires an endeavour to dispose of the complaint within one year, with reasons recorded periodically if not.

Section 19: the appeal. The Central Government or any person aggrieved by an order of an Adjudicating Authority other than those covered by section 17, or of the Special Director (Appeals), may appeal. The first proviso requires deposit of the penalty while filing; the second proviso permits the Tribunal to dispense with it on undue hardship, on conditions. The limitation is forty-five days, extendable. Section 19(5) requires an endeavour to dispose within one hundred and eighty days. Section 19(6) gives a suo motu revisional power over the legality, propriety or correctness of any section 16 order.

Section 28 governs procedure: not bound by the Code of Civil Procedure, 1908, guided by natural justice, with civil court powers, and orders executable as a decree. Section 32, as substituted in 2017, now gives the right to a legal practitioner or chartered accountant only before the Special Director (Appeals), the words "Appellate Tribunal or the" having been removed.

Section 35: the High Court, within sixty days, on any question of law, with a further period not exceeding sixty days for sufficient cause. Section 34 excludes the civil courts and forbids injunctions.

Section 42 supplies vicarious liability for companies and, through its Explanation, for firms; section 43 prevents abatement of a section 13 proceeding on death or insolvency, subject to the estate limit.

The case that fixes the character of the whole scheme

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 penalty stage

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.

Why it bears on this question. Section 13 gives a ceiling and not a tariff, and this decision states the principle that governs the discretion: a penalty is quasi-criminal, is not automatic, and is not for a technical or venial breach or one flowing from a bona fide belief.

Where the matter is adjudicated, section 16 requires a written complaint by an authorised officer, a hearing, representation by counsel or a chartered accountant, and an endeavour to decide within a year. Appeal lies to the Special Director (Appeals) under section 17 only from an Assistant or Deputy Director, then to the Appellate Tribunal under section 19 on deposit of the penalty unless undue hardship is shown, that Tribunal being since 26 May 2017 the SAFEMA Tribunal under a substituted section 18 with sections 20, 22, 24, 25, 26 and 29 to 31 omitted, and finally to the High Court under section 35 within sixty days on a question of law alone, with section 34 excluding the civil courts.

Enforcement is by civil imprisonment under section 14, capped at three years above one crore rupees and six months below, section 14A having never been brought into force. Running outside the whole of that is the section 37A track for assets held abroad in contravention of section 4, where equivalent Indian assets may be seized, a Competent Authority of Joint Secretary rank decides within one hundred and eighty days, an appeal lies straight to the Tribunal, imprisonment up to five years is available under section 13(1C), and compounding is expressly excluded.

Section 28(1) is the ordinary limb. Where any duty has not been levied or not paid, or has been short levied or short paid, or erroneously refunded, or where interest payable has not been paid, part paid or erroneously refunded, for any reason other than the reasons of collusion or any wilful mis-statement or suppression of facts, the proper officer shall, within two years from the relevant date, serve a notice on the person chargeable requiring him to show cause why he should not pay the amount specified.

Section 28(4) is the extended limb. Where the non-levy, short levy or erroneous refund is by reason of collusion, or any wilful mis-statement, or suppression of facts by the importer or exporter or his agent or employee, the notice may be served within five years from the relevant date.

The voluntary payment routes

Section 28(1)(b) permits payment before notice. The person chargeable may, before the service of notice, pay on the basis of his own ascertainment or the amount ascertained by the proper officer, the duty with interest under section 28AA, and inform the proper officer in writing. Where he does so, the proper officer shall not serve any notice in respect of the amount so paid, and the proceedings are deemed concluded, subject to a proviso allowing a notice for any amount that falls short.

Section 28(5) is the parallel route in a suppression case, and its terms are stricter. Where a notice has been served under section 28(4), the person may pay the duty in full or in part as accepted by him, the interest payable, and a penalty equal to fifteen per cent of the duty specified in the notice or the duty accepted by him, within thirty days of receipt of the notice, and inform the proper officer in writing. On such payment, the proceedings in respect of the person and other persons to whom the notice is served under sections 135, 135A and 140 shall be deemed to be concluded. The fifteen per cent penalty is the price of closing a fraud case without adjudication, and the concomitant closure of the criminal proceedings against the noticee and others is the real inducement.

Section 28(9A) suspends the running of that period where the proper officer is unable to determine the amount because a stay has been granted by a court or tribunal, or the Board has issued a direction under section 151A, or the Settlement Commission has admitted an application. The suspension is significant because the third of those grounds has been overtaken by events: the Settlement Commission ceased to operate on 1 April 2025 under the Finance Act 2025, its work passing to an Interim Board for Settlement, so a reference in section 28(9A) that mattered for twenty-five years is now spent for new cases.

Section 28(10) provides that where the officer does not determine within the period, the proceedings are deemed to have concluded as if no notice had been issued, which is a genuine sanction on delay and one of the few in the Act.

Section 28B requires a person who has collected any amount in excess of the duty assessed or determined, representing it as duty, to pay it over to the Central Government, which prevents an importer from keeping a sum he has recovered from his buyer as duty but never paid.

Who may issue the notice: the Canon India question

The identity of "the proper officer" in section 28 was the most litigated question in this area between 2011 and 2024, and the sequence must be given accurately.

In Commissioner of Customs v. Sayed Ali, (2011) 3 SCC 537, the Supreme Court held that only an officer assigned the function of assessment could be the proper officer under section 28, and that a Collector of Customs (Preventive) who had not been so assigned could not issue a notice. Parliament responded by inserting section 28(11) with retrospective effect, declaring all persons appointed as officers of customs under section 4(1) before 6 July 2011 to be proper officers.

The relief provision

Section 28A is a genuine and often forgotten protection. If the Central Government is satisfied that a practice was, or is, generally prevalent regarding the levy of duty on any goods, including a practice under which such goods were not levied or were short levied, it may, by notification, direct that the whole of the duty payable on such goods, but for that practice, shall not be required to be paid in respect of the goods on which the duty was not levied or was short levied in accordance with that practice. It is the statutory recognition that an assessee who followed a settled departmental practice should not be penalised when the practice is later found to be wrong.

Interest is automatic under section 28AA at a rate between ten and thirty-six per cent, section 28AAA reaches the person who obtained an instrument by fraud even where an innocent importer used it, and section 28B requires an excess collected as duty to be paid over. On who may issue the notice, Sayed Ali in 2011 and Canon India in 2021 both restricted the power, Parliament twice legislated to restore it, and the review judgment of 7 November 2024 finally settled that an officer to whom the function is validly allocated under section 6, including an officer of the Directorate of Revenue Intelligence, is a proper officer under section 28. Against all of that, section 28A remains as the one provision that protects an assessee who did no more than follow a generally prevalent practice.

(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. The closing words are a dead cross-reference, because section 6(3) was omitted with effect from 15 October 2019.

The substantive test is the alteration of a cross-border balance-sheet position: a resident buying shares abroad, a non-resident subscribing to Indian equity, a resident borrowing abroad, or a guarantee given for a foreign subsidiary, the last being caught because contingent liabilities are expressly included.

Section 6(1) permits any person to sell or draw foreign exchange for a capital account transaction, subject to sub-section (2). Section 6(2) leaves debt instruments with the Reserve Bank, which may specify permissible classes, limits and conditions in consultation with the Central Government. Section 6(2A), inserted on 15 October 2019, gives the Central Government power to prescribe permissible classes not involving debt instruments. Section 6(7) leaves the definition of "debt instruments" to the Central Government in consultation with the Bank.

Two routes. Under the automatic route no prior approval is needed and the investee company 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.

Prohibited sectors include 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 sectors closed to private investment such as atomic energy and railway operations other than the permitted segments.

Press Note 3 of 2020, dated 17 April 2020, requires an entity of a country sharing a land border with India, or one whose beneficial owner is situated in or is a citizen of such a country, to invest only under the Government route, and applies the same rule to a transfer of ownership resulting in such beneficial ownership. It was introduced against opportunistic acquisitions when valuations fell at the onset of the pandemic and has become a permanent feature.

The machinery. Section 127C governed the procedure on receipt of an application, including admission, the calling of a report from the Principal Commissioner or Commissioner, and the passing of an order of settlement. Section 127D gave power to order provisional attachment to protect the revenue. Section 127F gave the Commission the powers of the Customs officers and exclusive jurisdiction once an application was admitted. Section 127H was the reason applications were made at all: power to grant immunity from prosecution and from the imposition of penalty and fine, wholly or in part, subject to conditions and liable to be withdrawn where the applicant had not co-operated or had concealed particulars. Section 127I allowed a case to be sent back to the proper officer, and section 127M made the proceedings judicial proceedings.

Why it mattered. It was the only forum that could resolve a person's civil and criminal exposure in one proceeding. Adjudication could settle duty, confiscation and penalty; only the Commission could also close the prosecution, because compounding under section 137(3) is available on different terms and to fewer people.

The two consequences to state. A quasi-judicial settlement forum has become an executive one, and immunity from prosecution can no longer be obtained by settlement, leaving compounding under section 137(3) as the only route, subject to the provisos that exclude one allowed to compound once in respect of an offence under sections 135 or 135A, one accused of an offence which is also an offence under the narcotics, chemical weapons, arms or wild life protection legislation, one involved in smuggling SCOMET items, ITC (HS) prohibited items or goods affecting friendly relations, one allowed to compound once where the value exceeded one crore rupees, and one convicted under the Act on or after 30 December 2005. Section 11B of the Foreign Trade (Development and Regulation) Act, 1992, which deemed a settlement by that Commission to be a settlement under that Act for regularising an export obligation default, now refers to a body that no longer exists.

The discretion under the "may" limb must be exercised judicially, having regard to the nature of the prohibition, whether it is absolute or conditional, and the conduct of the importer. Goods prohibited for public health or safety are rarely released; goods restricted for trade policy reasons, where a licence could have been obtained, frequently are.

The ceiling is in the first proviso: the fine shall not exceed the market price of the goods confiscated, less in the case of imported goods the duty chargeable thereon. Section 125(2) provides that the owner is liable, in addition to the fine, to pay any duty and charges payable in respect of the goods, so redemption is an alternative to forfeiture and not to duty. Section 125(3), inserted with effect from 29 March 2018, provides that where the fine is not paid within one hundred and twenty days of the option, the option becomes void, except where an appeal against the order is pending.

Section 126 vests confiscated goods in the Central Government, and section 150 governs sale, applying the proceeds to the expenses of sale, then freight and charges, then duty, then charges of the custodian, then dues from the owner, and the balance to the owner.

Section 59 requires a bond in a sum equal to three times the duty assessed, with an undertaking to comply with the conditions, to pay the duty with interest, and to pay all penalties and fines. Section 60 governs the order permitting deposit.

Section 61 fixes the periods. For capital goods intended for use in a hundred per cent export oriented undertaking, an electronic hardware technology park unit, a software technology park unit or a warehouse where manufacture is permitted under section 65, until clearance; for other goods in such units, until consumption or clearance; and for any other goods, one year from 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.

Section 64 gives the owner the right, with the sanction of the proper officer and on payment of fees, to inspect the goods, separate damaged or deteriorated goods, sort or change their containers, deal with them to prevent loss or deterioration, show them for sale and take samples.

Sections 71 to 73A close the chapter: section 71 forbids removal except as provided; section 72 deals with improperly removed goods, permitting the proper officer to demand the full duty with interest, fine and penalties 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 warehoused goods in the custody of the licensee, who is responsible for them until clearance and liable, where goods are removed in contravention of section 71, to pay duty, interest, fine and penalties.

The authority on what happens when the warehousing period runs out

Kesoram Rayon v. Collector of Customs, (1996) 5 SCC 576 decides the question the warehousing chapter most often throws up in practice. Goods were warehoused and were not cleared within the period permitted under section 61. The rate of duty rose before they were eventually removed, and the importer argued that duty should be charged at the rate current when the warehousing period expired rather than at the higher rate.

The authority behind the foreign exchange notes

A second authority is Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, the leading modern decision on what follows when the foreign exchange rules are broken. 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 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.

Under the Customs Act, the Settlement Commission is the note that must be answered as history. It offered, uniquely, immunity from prosecution and from penalty and fine under section 127H on a full and true disclosure, and it was the only forum that could dispose of civil and criminal exposure together. It ceased to accept applications after 31 March 2025 and ceased to operate from 1 April 2025, its pending work passing to an Interim Board of three officers of Chief Commissioner rank with no judicial member, so compounding under section 137(3) is now the only route to immunity.

Section 125 remains the safety valve of the confiscation scheme, requiring the offer of a fine in lieu where the goods are not prohibited and permitting it where they are, capped at market price less duty, with duty payable in addition and the option lapsing after one hundred and twenty days since 29 March 2018. And Chapter IX with the 2016 licensing and custody Regulations makes the warehouse a duty-deferment device, at its most valuable in section 65 and the Manufacture and Other Operations in Warehouse Regulations, 2019, under which goods can be made in India from duty-free imported inputs and the duty paid only if the product is sold here.