LLM Group 2 Business Law Law Relating to Customs and Foreign Exchange 2019 Question Paper with Solutions

A preventive statute exists to stop conduct. Its provisions prohibit, empower officers to search, seize and confiscate, and attach penal consequences. It is construed to make the prohibition effective, and it may legitimately reverse burdens of proof and confer summary powers, because its object is to control an activity rather than to collect a sum.

The Customs Act is both at once, and the proposition in the question is not a rhetorical flourish but a description of its architecture. The same statute levies a duty on lawful trade and suppresses smuggling, and the same officer performs both functions on the same consignment. Most of the difficulties in the subject arise where the two characters point in different directions.

The fiscal character, section by section

The charge. Section 12 levies duties of customs at the rates specified under the Customs Tariff Act, 1975 on goods imported into or exported from India, and Parliament's competence comes from Entry 83 of List I.

The refund. Section 27 with the unjust enrichment test, section 28D's presumption that the incidence was passed on, and the Consumer Welfare Fund, all codifying Mafatlal Industries Ltd v. Union of India, (1997) 5 SCC 536.

The exemption and the concessions. Section 25 for general and special exemptions, section 26 for refund of export duty, section 26A for refund on defective goods, sections 74 and 75 for drawback, and Chapter IX for warehousing, which defers the duty because the rate crystallises on removal and not on importation.

The preventive character, section by section

The prohibition. Section 11 empowers the Central Government, if satisfied that it is necessary to do so for any of the purposes specified, to prohibit either absolutely or conditionally the import or export of goods of any specified description.

Search and seizure. Sections 100 to 103 for search of persons, with the safeguard in section 102 and the Magistrate's direction in section 103; section 105 for premises; section 106 for conveyances, including the power to fire upon a vessel or aircraft that will not stop; section 110 for seizure, with the six-month rule in section 110(2); and section 108 for summoning and examining persons in an inquiry deemed a judicial proceeding.

Confiscation and penalty. Sections 111 and 113 for goods, section 115 for conveyances, sections 118 to 121 for packages, concealing goods, transformed goods and sale proceeds, sections 112, 114, 114A and 114AA for penalties on persons, section 124 for the notice, and section 125 for the option of a fine in lieu.

Reversal of burdens. Section 123 places on the possessor the burden of proving that seized gold, watches or other notified goods are not smuggled, where the seizure was made in a reasonable belief; section 138A requires the court to presume the culpable mental state; section 139 presumes the genuineness and contents of documents.

Collision two: parallel civil and criminal proceedings. Adjudication decides duty, confiscation and penalty on the preponderance of probabilities; prosecution decides guilt beyond reasonable doubt, and section 138A(2) says so expressly. Both may run on the same facts, because the objects differ and departmental adjudication is not a prosecution before a court so Article 20(2) is not attracted. Section 127 puts it beyond doubt, providing that an award of confiscation or penalty does not prevent the infliction of any other punishment. The qualification is that an exoneration in adjudication on the merits, on the same evidence, will not leave a prosecution standing, because the department has failed on the easier standard.

Collision three: interpretation. A charging provision is construed strictly in favour of the subject, because the State must show its authority to tax. A preventive provision is construed to make the prohibition effective. And since Commissioner of Customs v. Dilip Kumar and Company, (2018) 9 SCC 1, a Constitution Bench decision, an exemption notification is construed strictly against the claimant, ambiguity being resolved in favour of the revenue. So the same Act is read three different ways depending on which of its characters the provision serves, and a candidate who applies a single canon throughout will misstate the law.

Second, the preventive apparatus has been reinforced. The cognizable categories in section 104(4) were extended by amendments in 2012, 2013 and 2019 after Om Prakash v. Union of India, (2011) 14 SCC 1; section 135AA was inserted in 2022 to punish publication of import and export data; section 114AA allows a penalty up to five times value for the use of false material particulars; and Radhika Agarwal v. Union of India, 2025 INSC 272, decided on 27 February 2025, upheld the arrest powers of the Act while requiring credible material, recorded reasons to believe and communication of those reasons.

Against that must be set the one significant retreat on the preventive side, which is the abolition of the Settlement Commission on 1 April 2025 by the Finance Act 2025, removing the forum that could grant immunity from prosecution under section 127H and leaving compounding under section 137(3) as the only exit.

The two characters meet at three points and the Act resolves each deliberately. Section 125 makes redemption mandatory for goods that are not prohibited and discretionary for those that are, which is the fiscal interest yielding to the preventive one exactly where the preventive one is engaged. Section 127 and the difference in the standard of proof allow adjudication and prosecution to run together, subject to the rule that an exoneration on the merits ends the prosecution. And the canons of construction differ by function, a charging provision being read in favour of the subject while, since Dilip Kumar in 2018, an exemption is read against him.

If a preponderance has to be named, the preventive character has been gaining. Since the integrated goods and services tax took over the greater part of border taxation on 1 July 2017, much of what is collected is creditable and the border's fiscal significance has narrowed, while the offence and arrest provisions have been widened three times since 2011 and were upheld with new safeguards in Radhika Agarwal in February 2025. The Act of 2026 taxes less and controls more than the Act of 1962 did, and the two characters the question names are no longer in balance.

The frame: what a coercive revenue power must now satisfy

Since Radhika Agarwal v. Union of India, 2025 INSC 272, decided on 27 February 2025, there is a settled modern standard against which every coercive power in this Act can be measured, and using it as the frame is the most efficient way to answer this question. The Supreme Court, hearing about 279 petitions led by Writ Petition (Criminal) No. 336 of 2018, upheld the arrest provisions of the Customs Act and of the Central Goods and Services Tax Act, 2017, holding Parliament competent under Article 246A for the latter.

But it held that the exercise of such a power must satisfy three conditions drawn from Articles 21 and 22 and from D.K. Basu v. State of West Bengal: it must rest on credible material; the officer's "reasons to believe" must be recorded in writing; and those reasons must be communicated to the person affected, so that the action can be challenged. The Court applied its reasoning in Arvind Kejriwal v. Directorate of Enforcement on the communication of grounds.

Three limits confine the section. It operates only in a prosecution, not in departmental adjudication, which decides on preponderance anyway. It operates only where the offence requires a culpable mental state, so it does not touch strict liability offences. And it is rebuttable, the defence being expressly preserved.

Two companion presumptions must be brought in, because their cumulative effect is the real subject of criticism. Section 123 places on the person from whose possession notified goods were seized, or on the owner if he claims to be such, the burden of proving that they are not smuggled goods, but only where the seizure was made in the reasonable belief that they were, and only for gold and manufactures thereof, watches, and other notified classes. Section 139 presumes the genuineness of the signature and handwriting of a document produced or seized and, where seized, the truth of its contents, unless the contrary is proved.

Search of the person: recorded reasons, but a right that depends on being told

Section 100 permits search of a person in transit on a reason to believe that he has secreted about his person goods liable to confiscation or documents relating to them, the section applying to persons landing from or boarding a vessel or foreign-going aircraft, entering or leaving India by land or inland water, or present in a customs area. Section 101 permits search anywhere in India for gold, diamonds, manufactures of gold or diamonds, watches or other notified goods, on the authorisation of an officer not below the rank of Assistant Commissioner.

Section 102 is the safeguard, and it satisfies the first two of the modern conditions but not clearly the third. The officer must, if the person so requires, take him without unnecessary delay to the nearest gazetted officer of customs or Magistrate, who shall discharge him if he sees no reasonable ground for search; the officer must call two or more persons to witness the search; and no female shall be searched by anyone except a female.

Section 105, search of premises, requires the Assistant or Deputy Commissioner to have reason to believe recorded in writing, and applies the search provisions of the Code of Criminal Procedure, 1973 with the Commissioner's sanction substituted for a Magistrate's. The substitution is the standing criticism: an executive sanction replaces judicial authorisation, and the justification offered, that customs work requires speed and specialist knowledge, is a reason for a different procedure and not obviously a reason for removing the judicial check.

Seizure and arrest

Section 110(1) permits seizure on a reason to believe that goods are liable to confiscation, with a constructive seizure by order where actual seizure is impracticable. Section 110(2) requires the section 124 notice within six months, extendable once by six months by the Principal Commissioner or Commissioner for reasons recorded in writing and informed to the person concerned. That extension provision is a rare instance of the Act itself requiring communication of reasons, and it anticipates the Radhika Agarwal standard by decades. Section 110A permits provisional release on bond.

Section 104(5) makes all other offences non-cognizable. Non-bailability is a separate scheme resting on a different list: section 104(6) makes non-bailable only an offence punishable under section 135 relating to evasion exceeding fifty lakh rupees, to prohibited goods notified under section 11 which are also notified under section 135(1)(i)(C), to undeclared goods whose market price exceeds one crore rupees, to fraudulent drawback or exemption exceeding fifty lakh rupees, or to the fraudulent obtaining of an instrument where the relatable duty exceeds fifty lakh rupees; section 104(7) makes every other offence bailable. The two lists do not coincide, and treating cognizability and bailability as one test is a common and costly error.

That structure is Parliament's response to Om Prakash v. Union of India, (2011) 14 SCC 1, decided 30 September 2011, which had held customs and excise offences non-cognizable and bailable and therefore requiring a warrant. The categories were carved out by amendments in 2012, 2013 and 2019, and Radhika Agarwal has now upheld them subject to the three conditions.

The critical response is that the answer is formal rather than real. In the great majority of cases the person summoned is the person the department already suspects and intends to prosecute, and the protection turns on the stage's label rather than on the substance of the compulsion. Section 138B is the only statutory control and it is partial: a statement made before a gazetted officer is relevant for proving the truth of its contents only where the maker is dead, cannot be found, is incapable of giving evidence, is kept out of the way, or cannot be produced without unreasonable delay or expense, or where he is examined as a witness and the court or adjudicating authority records an opinion that the statement should be admitted in the interests of justice.

Measured against the Radhika Agarwal conditions, section 108 fails the third and the first is inapplicable, because there is no requirement that the officer hold credible material before summoning, and no requirement that he tell the person why he is being summoned or what he is suspected of. That is the sharpest available criticism of this part of the Act, and it survives the 2025 judgment untouched, because the judgment was about arrest.

Some meet it partly. Sections 100, 101 and 105 all require a reason to believe, and section 105 requires it in writing; but section 102's right to be taken before a gazetted officer or a Magistrate operates only "if such person so requires", and nothing in the section obliges the officer to tell him that the right exists. Section 105 substitutes the Commissioner's sanction for a Magistrate's, which removes the judicial check rather than adapting it.

The presumptions are defensible because each has a precondition the department must first establish, and section 138A(2) holds proof at beyond reasonable doubt so that the presumption never relieves the prosecution of its primary burden. What remains genuinely unresolved is section 108: a person may be summoned without any threshold of material, compelled to state the truth in a proceeding deemed judicial, and have his statement used against him later, on the footing that he was not yet accused when he made it. Section 138B controls the use of the statement but not the compulsion that produced it, and that is the part of this Act that the modern constitutional standard has not yet reached.

Adjudication

Adjudication begins with a show cause notice and there are two of them. Section 28 governs duty not levied, short levied, short paid or erroneously refunded, within two years, or five where collusion, wilful mis-statement or suppression is alleged, with determination required within six months or one year under section 28(9). Section 124 governs confiscation and penalty, requiring 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. Where goods were seized, section 110(2) requires the section 124 notice within six months, extendable once by six months for reasons recorded and communicated.

Section 122 fixes adjudicating competence by the value of the goods: a Principal Commissioner or Commissioner without limit, and Joint, Deputy and Assistant Commissioners within Board-prescribed limits. Section 122A requires an opportunity of hearing and permits not more than three adjournments, each for reasons recorded. Section 138B controls when a statement made before a gazetted officer may be used without the maker being examined.

Section 130: the High Court on a substantial question of law, within one hundred and eighty days. Section 130E: the Supreme Court, including directly from the Tribunal where the question relates to the rate of duty or the value of goods for assessment, which takes the great majority of significant classification and valuation disputes past the High Court.

Three classes of order of the Commissioner (Appeals) are excluded from the Tribunal by the first proviso to section 129A(1): orders relating to baggage, to drawback, and to goods short-landed. For those the remedy is a revision application to the Central Government under section 129DD. Section 129D preserves a departmental review, allowing the Board or the Commissioner to direct that an order be taken in appeal.

Settlement of cases: what it was, who could apply, and what it could give

Chapter XIV-A of the Act, sections 127A to 127N, provided for the Customs and Central Excise Settlement Commission. It was created on the recommendation of the Wanchoo Committee and modelled on the income-tax settlement machinery, and its purpose was to allow a person who had under-declared to come forward, disclose fully, pay, and buy peace.

Four classes of case were excluded. No application lay in relation to goods to which section 123 applies, that is notified goods carrying the reverse burden; in relation to goods in respect of which no proper officer had issued a show cause notice; in relation to an offence under the Narcotic Drugs and Psychotropic Substances Act, 1985; and where the case was pending before the Appellate Tribunal or a court. The first and third exclusions show the policy: settlement was for revenue disputes, not for the prevention functions of the Act.

Who considered it. The Commission consisted of a Chairman and such Vice-Chairmen and other Members as the Central Government thought fit, appointed from among persons of integrity and outstanding ability having special knowledge of and experience in the administration of customs and central excise law, and it functioned in Benches. It was a quasi-judicial body, and section 127M made its proceedings judicial proceedings within sections 193 and 228 of the Indian Penal Code.

The abolition, and what has replaced it

The Finance Act 2025 discontinued the Settlement Commission, and any answer written after that date must say so. The Commission ceased to receive applications after 31 March 2025 and ceased to operate from 1 April 2025. Chapter XIV-A was amended to transfer pending applications to an Interim Board for Settlement, which takes each application at the stage it had reached. The Interim Board consists of three officers of the rank of Chief Commissioner or above, nominated by the Central Board of Indirect Taxes and Customs. The reason given in the Board's own material was that the graded penalty structure and the compounding provisions had made the Commission redundant.

Two consequences must be spelt out, because they are the analytical content of this limb.

First, the character of the function has changed. The Settlement Commission was a quasi-judicial body whose proceedings were judicial proceedings and which could bind the department. The Interim Board is composed entirely of revenue officers with no judicial member. A power that included the grant of immunity from prosecution has therefore passed from a body with judicial characteristics to one that is wholly executive, and that is a change of kind rather than of form.

A third consequence is worth noting outside this Act. Section 11B of the Foreign Trade (Development and Regulation) Act, 1992 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 a settlement under that Act, for regularising an export obligation default. That provision now points at a body that no longer exists, and the route it provided has been left without a forum.

The authority on who may issue the notice

On who may set the adjudicating machinery in motion, the line of authority begins with Commissioner of Customs v. Sayed Ali, (2011) 3 SCC 537. Notices under section 28 were issued by a Commissioner of Customs (Preventive) who had never assessed the consignments in question, and the importer objected that he was not the proper officer within section 2(34).

The authority on the penalty at the end of it

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

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

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

On the second limb, settlement was available to an importer, exporter or other person, at any stage before adjudication, on a full and true disclosure of a liability not previously disclosed, where an entry had been filed and a show cause notice issued and the additional duty accepted exceeded the threshold, and it was not available for section 123 goods, for narcotics offences, or where no notice had issued. It was considered by the Customs and Central Excise Settlement Commission, a quasi-judicial body sitting in Benches, which could attach property provisionally under section 127D, held exclusive jurisdiction under section 127F once it admitted an application, and could grant immunity from prosecution and from penalty and fine under section 127H.

For full marks, cover: the question asks for a history, so the answer must be chronological and must explain why each statute was passed, not merely when; the wartime origin in the Defence of India Rules; the 1947 Act and its purpose; the 1973 Act and the specific pressures that produced it; the 1991 crisis and the reform decade; the Tarapore Committee and the drafting of FEMA; the changes at commencement; and then the post-2000 evolution of FEMA itself, which is the part that turns a history into a current answer.

The wartime origin, 1939 to 1947

Exchange control in India began not as economic policy but as a war measure. In September 1939, on the outbreak of the Second World War, exchange control was introduced under the Defence of India Rules, administered by the Reserve Bank of India on behalf of the Central Government. Its object was to conserve the sterling area's foreign exchange for the war effort and to prevent a flight of capital.

The Foreign Exchange Regulation Act, 1973

FERA 1973 replaced the 1947 Act, and it was passed in response to specific pressures. The immediate background was the deterioration of the external position at the end of the 1960s, the devaluation of the rupee in 1966, and the perception that the 1947 Act had been evaded on a large scale through under-invoicing of exports, over-invoicing of imports and hawala. The political background was the nationalisation programme of the early 1970s and a general policy of restricting foreign ownership of Indian industry.

The 1973 Act was accordingly both stricter and wider than its predecessor. It ran to eighty-one sections. Its long title spoke of the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country. Its technique was prohibition subject to permission: anything not expressly permitted was forbidden, and the citizen bore the burden of showing that he was within a permission.

The 1991 crisis and the reform decade

By 1990 to 1991 the assumptions behind FERA had collapsed. The balance of payments crisis of that year, in which reserves fell to a few weeks of imports, produced the reform programme of July 1991: devaluation, the dismantling of industrial licensing, the reduction of tariffs and the opening of sectors to foreign investment.

Two steps in the 1990s prepared the ground for FEMA. First, the Foreign Exchange Regulation (Amendment) Act, 1993 relaxed a number of FERA's provisions, including the forty per cent rule in section 29, and reduced the scope of the criminal provisions. Second, and more importantly, India accepted the obligations of Article VIII of the Articles of Agreement of the International Monetary Fund in August 1994, thereby committing itself to current account convertibility, that is to the free availability of foreign exchange for current international transactions. A statute built on prohibition subject to permission was inconsistent with that commitment.

The structural changes were five. The Act was reduced from eighty-one sections to forty-nine. The breach became a civil contravention under section 13, with a penalty up to thrice the sum involved, up to two lakh rupees where not quantifiable, and five thousand rupees a day for a continuing contravention; imprisonment survived only as civil imprisonment under section 14 for a defaulter, capped at three years above one crore rupees and six months below. The presumption of guilt disappeared. Compounding was introduced in section 15. And residence was redefined in section 2(v) by reference to more than one hundred and eighty-two days in the preceding financial year, with purpose-based exclusions, in place of FERA's intention-based test.

Section 49 managed the transition. It repealed FERA, saved appointments, pending proceedings and appeals, and provided that no court shall take cognizance of an offence under the repealed Act after the expiry of two years from the commencement of FEMA, that is after 31 May 2002. The two-year window produced a rush of FERA prosecutions in 2001 and 2002 and then closed the older philosophy for good.

The evolution of FEMA since 2000

This is the part that separates a history from a current answer, and it should be given in four steps.

Step three, 2019: the capital account moved to the Government. With effect from 15 October 2019, section 6(3) was omitted, section 6(2A) was inserted giving the Central Government power to prescribe permissible capital account transactions not involving debt instruments, and section 6(7) defined debt instruments by reference to the Central Government's determination. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 replaced the Reserve Bank's regulations on foreign investment, with section 47(3) saving the older regulations in the meantime.

Step four, 2020 and 2024: a carve-out and a rewrite of the compounding machinery. Section 44A, inserted with effect from 1 October 2020, removed the International Financial Services Centre from the Reserve Bank's reach and vested those powers in the International Financial Services Centres Authority. And the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified on 12 September 2024 in supersession of the 2000 Rules, restructured the compounding authorities and their monetary competence, raised the fee to ten thousand rupees plus goods and services tax, and permitted digital payment.

Why it bears on this question. A history of FERA that does not explain how its enforcement felt is incomplete. This case shows the machinery in operation: arrest by an officer of Enforcement, production before a Magistrate, and judicial remand under section 167(2) during investigation. It is the concrete reason the 1999 Act removed the power of arrest and replaced prosecution with adjudication.

The decision that measures how far the evolution went

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 closes the historical account. Twenty years after FEMA came into force, the Supreme Court treated a contravention of it as remediable and compoundable and therefore not a breach of the fundamental policy of Indian law. That is the end point of an evolution which began with a wartime control under the Defence of India Rules in September 1939.

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

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

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

The premise collapsed in 1991. The reform programme, the 1993 amendment, and above all India's acceptance of Article VIII of the IMF Articles in August 1994 committed the country to current account convertibility, which a prohibition-based statute could not deliver; and the Tarapore Committee of 1997 supplied the intellectual case for treating the current and capital accounts differently. FEMA followed as Act 42 of 1999 and came into force on 1 June 2000: forty-nine sections, a civil contravention under section 13, civil imprisonment only under section 14, no presumption of guilt, compounding under section 15, a day-count residence test in section 2(v), a free current account under section 5 and a regulated capital account under section 6, with section 49 closing the FERA book by barring cognizance after 31 May 2002.

For full marks, cover: the word "new" means new as against FERA, so every concept must be introduced by saying what it replaced; ten concepts, each defined from the section and each contrasted; the concepts that are new because FERA had no equivalent at all, principally compounding, the two classes of transaction and the authorised person regime; and a closing observation that some of the newest concepts in FEMA today were not in the Act of 1999 either, having been inserted in 2015, 2019 and 2020.

Concept one: management in place of regulation

The first new concept is in the title. FERA's long title spoke of the conservation of the foreign exchange resources of the country and the proper utilisation thereof; FEMA's speaks of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India. The change from "regulation" to "management" signals a change from allocating a scarce resource to maintaining a market, and every other new concept follows from it.

Section 2(e) defines a capital account transaction as one 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. Section 2(j) defines a current account transaction as a transaction other than a capital account transaction, adding four inclusive limbs covering payments due in connection with foreign trade and short-term banking and credit facilities in the ordinary course of business, interest on loans and net income from investments, remittances for the living expenses of parents, spouse and children residing abroad, and expenses of foreign travel, education and medical care of parents, spouse and children.

The operative consequence is the new concept. Section 5 makes every current account transaction permissible, subject only to reasonable restrictions the Central Government may prescribe in the public interest in consultation with the Reserve Bank, contained in the Current Account Transactions Rules, 2000. Section 6 keeps capital account transactions regulated. That reversal, from "forbidden unless permitted" to "permitted unless restricted", is the single most important new idea in the Act.

Concept five: the authorised person

FERA spoke of authorised dealers; FEMA introduces the wider concept of an "authorised person". Section 2(c) defines it as an authorised dealer, money changer, off-shore banking unit or any other person for the time being authorised under section 10(1) to deal in foreign exchange or foreign securities. Section 10 allows the Reserve Bank to authorise any person in any manner it deems fit, and section 10(3) allows revocation in the public interest or for a failure to comply, after a reasonable opportunity of representation on the second ground.

Concept six: compounding

FERA had no compounding at all, and this is the most practically important new concept in FEMA. Section 15 permits any contravention under section 13 to be compounded, on the application of the person committing it, within one hundred and eighty days of receipt of the application, by the Director of Enforcement or such other officers of the Directorate of Enforcement and of the Reserve Bank as the Central Government authorises; and section 15(2) provides that once compounded, no proceeding or further proceeding shall be initiated or continued.

It is now governed by the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified on 12 September 2024 in supersession of the 2000 Rules, which restructure the compounding authorities and their monetary competence, raise the application fee to ten thousand rupees plus goods and services tax, and permit digital payment. The overwhelming majority of FEMA matters, most of them reporting delays on inbound investment, end here.

Concept eight: an adjudicatory hierarchy with a route to the High Court

FERA had an Appellate Board; FEMA created a graded structure ending in a constitutional court. Section 16 provides for Adjudicating Authorities who may act only on a written complaint by an authorised officer, must give a reasonable opportunity of being heard, have the powers of a civil court and must endeavour to decide within one year. Section 17 provides an appeal to the Special Director (Appeals) from an Assistant or Deputy Director within forty-five days. Section 19 provides an appeal to the Appellate Tribunal within forty-five days on deposit of the penalty, with a dispensation for undue hardship. Section 35 provides an appeal to the High Court within sixty days on any question of law. Section 34 excludes the civil courts.

Concept nine: the wide definition of "person"

Section 2(u) defines "person" in seven limbs, including an individual, a Hindu undivided family, a company, a firm, an association of persons or body of individuals whether incorporated or not, every artificial juridical person, and any agency, office or branch owned or controlled by such person. The seventh limb is new and is what makes a cross-border transaction between a head office and its own branch a transaction between two persons.

A split capital account, 2019. With effect from 15 October 2019, section 6(3) was omitted, section 6(2A) gave the Central Government power over capital account transactions not involving debt instruments, and section 6(7) left the definition of "debt instruments" to the Central Government in consultation with the Reserve Bank. The concept of a "debt instrument" as a statutory category is itself new, and the Non-debt Instruments Rules, 2019 are made under it.

A regulatory carve-out, 2020. Section 44A, inserted with effect from 1 October 2020, provides that the powers of the Reserve Bank under FEMA do not extend to an International Financial Services Centre and are exercisable instead by the International Financial Services Centres Authority. That is the first time FEMA has recognised a geographical area within India in which its principal regulator does not operate.

The newest concept tested in court: a contravention that can be cured

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 shows a new concept doing work. Compounding under section 15 did not exist under FERA, and the Supreme Court has now made its availability the reason for a substantive holding: because a FEMA contravention can be permitted after the event or compounded, it does not offend the fundamental policy of Indian law.

The decision that shows what the civil model replaced

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

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

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

From that follow: management rather than regulation in the long title; a civil contravention under section 13 with a penalty up to thrice the sum, up to two lakh rupees where unquantifiable and five thousand rupees a day if continuing, and civil imprisonment under section 14 only for a defaulter; the first statutory definitions of a capital and a current account transaction in sections 2(e) and 2(j), with section 5 freeing the current account and section 6 regulating the capital account; a day-count test of residence in section 2(v); an authorised person under section 2(c) and section 10 who is made the front line of compliance by the duty in section 10(5) to satisfy himself, refuse in writing and report; compounding under section 15, which FERA did not have at all and through which most contraventions now end; repatriation defined in section 2(y) to include discharge of a foreign currency liability; an adjudicatory hierarchy running from section 16 to the High Court under section 35; and a definition of "person" in section 2(u) wide enough to make a branch a separate person.

For full marks, cover: three heads of about eight marks each; for (a) sections 7 and 8 with section 2(y) and the customs interface, since this is a Customs and Foreign Exchange paper; for (b) the penalty first and then the machinery, with the 2017 abolition of FEMA's Tribunal; for (c) section 6 as restructured in 2019, the two routes and Press Note 3 of 2020.

(a) Export of goods and services

The meaning starts with the definition. Section 2(l) defines "export", with its grammatical variations and cognate expressions, as (i) the taking out of India to a place outside India any goods, and (ii) provision of services from India to any person outside India. The second limb was essential in 1999, because India's exports were already shifting to services and FERA had been written for goods.

Section 8 supplies the realisation duty. Where any amount of foreign exchange is due or has accrued to a person resident in India, he must take all reasonable steps to realise and repatriate it to India within the period and manner specified by the Reserve Bank. The words "due or has accrued" fix the obligation at the moment the debt arises rather than at receipt, and "all reasonable steps" is the standard against which an exporter's conduct is judged, so an exporter who has pursued his buyer, invoked his contract and taken credit insurance is in a different position from one who has done nothing.

Section 2(y) defines repatriation as bringing the realised foreign exchange into India and either selling it to an authorised person for rupees or holding it in an account with an authorised person to the extent notified, including use of the realised amount to discharge a debt or liability denominated in foreign exchange. Section 9 exempts specified holdings from sections 4 and 8.

(b) Adjudication, appeals and penalties

The penalty comes first because everything else is machinery for imposing it. Section 13(1): on adjudication, a penalty up to thrice the sum involved where quantifiable, up to two lakh rupees where not, and up to five thousand rupees for every day after the first day of a continuing contravention. Section 13(2) permits confiscation of the currency, security, money or property involved and a direction to bring foreign exchange holdings back into India, the Explanation extending "property" to bank deposits, Indian currency and any other property into which it has been converted.

Section 11(3) provides a separate and much smaller penalty against an authorised person, up to ten thousand rupees with a continuing penalty up to two thousand rupees a day. Sections 13(1A) to (1D) add, for foreign assets above the section 37A threshold, a penalty of three times the sum with confiscation of equivalent Indian assets and imprisonment up to five years with fine.

Appeals run through three further stages. Section 17: to the Special Director (Appeals) within forty-five days, but only from an order of an Assistant Director or Deputy Director of Enforcement. Section 19: to the Appellate Tribunal within forty-five days, with the first proviso requiring deposit of the penalty on filing and the second permitting dispensation for undue hardship, an endeavour to dispose within one hundred and eighty days, and a suo motu revisional power in section 19(6) over any section 16 order. Section 35: to the High Court within sixty days on any question of law, extendable by a further sixty.

The Tribunal must be identified correctly, and this is the currency point. The Finance Act 2017, section 165, with effect from 26 May 2017, substituted section 18 so that the Tribunal constituted under section 12(1) of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 is the Appellate Tribunal for FEMA, and omitted sections 20, 22, 24, 25, 26, 29, 30 and 31. Section 32, as substituted, now confers the right to a legal practitioner or chartered accountant only before the Special Director (Appeals).

Its legal foundation moved on 15 October 2019 and that is the fact that dates an answer. Section 6(3) was omitted; section 6(2A) gave the Central Government power to prescribe permissible capital account transactions not involving debt instruments; and section 6(7) left the definition of debt instruments to the Central Government in consultation with the Reserve Bank. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 made by the Central Government now govern equity investment, the Debt Instruments Regulations, 2019 made by the Reserve Bank govern debt, and the Mode of Payment and Reporting of Non-Debt Instruments Regulations, 2019 govern payment and reporting. Section 47(3) saves the Bank's earlier regulations until the Government amends or rescinds them.

The scope is defined by three things: route, sector and beneficial ownership.

Route. Under the automatic route no prior approval of the Government or the Reserve Bank is required and the investee 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.

Reporting is the compliance burden and the source of most contraventions: reporting of the receipt of consideration and filing of Form FC-GPR on allotment, Form FC-TRS on a transfer between a resident and a non-resident, and the annual return on foreign liabilities and assets, all through the Single Master Form. Delay is a contravention under section 13 and is ordinarily compounded under section 15.

The case that tested the second and third heads together

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. The transaction in it was a foreign direct investment dealing, a transfer of shares to a non-resident at a discount, and the objection was that it broke the pricing rules; so it bears both on the third head and, through the Court's reasoning about compounding, on the second. It establishes that such a contravention is remediable rather than void.

The authority on the consequence of getting it wrong

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

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.

Adjudication, appeals and penalties supply the consequence. The penalty under section 13 is up to thrice the sum where quantifiable, up to two lakh rupees where not, and five thousand rupees a day if continuing, with confiscation under section 13(2). Adjudication under section 16 requires a written complaint, a hearing, representation and a decision endeavoured 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, 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 on a question of law. Most matters never reach any of this, because section 15 permits compounding within one hundred and eighty days.

Foreign direct investment is the capital account transaction the whole apparatus exists to police. Its legal basis moved from the Reserve Bank to the Central Government on 15 October 2019 with the omission of section 6(3) and the insertion of sections 6(2A) and 6(7); it is delivered through the automatic and Government routes; it is closed in a defined list of sectors; and since Press Note 3 of 2020 it requires Government approval wherever the beneficial owner sits in a country sharing a land border with India.

Section 137(1) is the sanction requirement. No court shall take cognizance of any offence under section 132, section 133, section 134 or section 135 or section 135A, or section 135AA, except with the previous sanction of the Principal Commissioner of Customs or Commissioner of Customs. The purpose is to interpose a senior departmental judgment between an investigating officer and a criminal court, so that prosecution is a considered decision and not an automatic consequence of a seizure. Departmental instructions have long confined prosecution to cases above monetary thresholds and with strong evidence, and the sanction is where that filter is applied.

Section 137(2) deals with offences by officers of customs under section 136. Where the offence is alleged against an officer not lower in rank than an Assistant Commissioner or Deputy Commissioner, the sanction of the Central Government is needed; where the officer is lower in rank, the sanction of the Principal Commissioner or Commissioner. The higher sanction for senior officers reflects the seriousness of a charge against an officer with adjudicating powers.

The provisos exclude classes of person, and they are the substance of the sub-section. Compounding is unavailable to a person who has been allowed to compound once in respect of an offence under the specified sections; to a person accused of an offence under this Act which is also an offence under the Narcotic Drugs and Psychotropic Substances Act, 1985, the Chemical Weapons Convention Act, 2000, or the Arms Act, 1959; to a person convicted by a court under this Act on or after 30 December 2005; and to a person against whom proceedings for a preventive detention order under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 have been initiated.

The importance of section 137(3) has grown sharply and the reason must be stated. Until 31 March 2025 a person could apply to the Customs and Central Excise Settlement Commission under section 127B and obtain, under section 127H, immunity from prosecution and from the imposition of penalty and fine on 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 with no judicial member. Compounding under section 137(3) is now the only route to immunity from prosecution, and its provisos make that route narrower than the one that has closed.

Section 2(m) defines "foreign currency" simply as any currency other than Indian currency, and section 2(q) defines "Indian currency" as currency expressed or drawn in Indian rupees, but not including special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934.

Section 2(h) defines "currency" very widely and inclusively. It includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank. Two points deserve mention. The inclusion of credit cards is what brings card transactions abroad within the Act. And the closing words give the Reserve Bank a power to notify further instruments, which is how the definition has been kept current as payment instruments have changed; without it the definition would have been overtaken by electronic payment mechanisms.

Section 2(i) defines "currency notes" as meaning and including cash in the form of coins and bank notes, a narrower expression used where the Act is dealing with physical cash, as in section 47(2)(ga), which empowers the Reserve Bank to make regulations on the export, import or holding of currency or currency notes.

(c) Unjust enrichment

The principle is that a person should not be enriched at another's expense without legal justification, and in customs law it decides who is entitled to a refund of duty wrongly collected. Because an indirect tax is designed to be passed on, the importer who paid it may not be the person who bore it, and refunding him would give him a windfall at the consumer's expense.

Section 27 requires a refund application within one year of payment, the limitation not applying where the duty was paid under protest, with documentary evidence that the incidence was not passed on. Section 27(2) requires the amount 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 had not been passed on, or the claim is for refund of export duty under section 26 or of drawback, or the duty was borne by an individual on goods for his personal use.

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

The Act replaced the Imports and Exports (Control) Act, 1947, and the change of name states the change of purpose: the older Act controlled, this one develops and regulates. Almost the whole of it was rewritten by the Foreign Trade (Development and Regulation) Amendment Act, 2010 (Act 25 of 2010) with effect from 27 August 2010.

Chapter II, the powers. Section 3 empowers the Central Government by order to make provision for the development and regulation of foreign trade by facilitating imports and augmenting exports, and to prohibit, restrict or regulate imports and exports of goods, services or technology. Section 5, as substituted in 2010, empowers it to formulate and announce the foreign trade policy by notification, with a proviso for Special Economic Zones. Section 6 creates the Director General of Foreign Trade.

Chapter IV, the sanctions. Section 10 search and seizure; section 11(2) a penalty of not less than ten thousand rupees and not more than five times the value, whichever is more, extending to abetment and attempt; section 11(3) the same range for forged or materially false declarations; section 11(4) settlement on admission; section 11(5) recovery, including through an officer of customs as if payable under the Customs Act; section 11A credit of penalties to the Consolidated Fund of India; and sections 14A to 14E, the non-proliferation controls, with section 14E(1) routing the penalty for specified goods to the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005.

Chapter V, the remedies. Section 13 Adjudicating Authority; section 15 appeal within forty-five days extendable by thirty, on mandatory pre-deposit with an undue-hardship dispensation; section 16 review, with a show cause notice required within two years before any prejudicial variation.

One provision is now spent. Section 11B deems a settlement by the Settlement Commission constituted under section 32 of the Central Excise Act, 1944 to be a settlement under this Act for regularising an export obligation default; that Commission ceased to function on 1 April 2025.

Against a customs exemption the doctrine is very largely unavailable, and Kasinka Trading v. Union of India, (1995) 1 SCC 274, decided 18 October 1994, is why. A notification under section 25(1) exempting PVC resin, expressed to remain in force until a stated date, was withdrawn before that date. The Supreme Court held that such a notification is not a promise to any individual but the exercise of a statutory power on a satisfaction of public interest which may lawfully change; that the doctrine cannot be invoked in the abstract; that public interest is the superior equity which overrides individual equity; and that the principle applies even where a period has been indicated for which the notification was to remain in force.

Shrijee Sales Corporation v. Union of India, (1997) 3 SCC 398, confirmed that once public interest is shown, the only question is whether the change of policy is genuine, not whether the court agrees with it; and MRF Ltd v. Assistant Commissioner (Assessment) Sales Tax, (2006) 8 SCC 702, restated that the doctrine is equitable and must yield, that the Government cannot be compelled to act contrary to law or the public interest, and that the burden of showing the change was not in the public interest lies on the party asserting the estoppel.

Conclusion

Conclusion. The five notes cover the machinery of both statutes and the doctrine that connects them to administrative law. Section 137 restricts the criminal jurisdiction at the front, requiring the Commissioner's sanction before cognizance of the principal offences, and opens an exit at the back, allowing compounding by the Principal Chief Commissioner or Chief Commissioner before or after prosecution at a price fixed by the 2005 Rules, subject to provisos excluding 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. That exit matters more since 1 April 2025, because the Settlement Commission and with it section 127H immunity have gone.

Chapter I, Preliminary: extraterritorial reach and the defining sections

Section 1(3) contains a feature that is usually overlooked. The Act extends to the whole of India and also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India, and to any contravention committed outside India by any person to whom the Act applies. FEMA is therefore extraterritorial in a way ordinary commercial legislation is not, and it has to be, because a foreign exchange contravention is by definition an act with a foreign limb.

Section 2 supplies definitions that were new in 1999 and are the Act's real architecture. Section 2(e) defines a capital account transaction as one altering assets or liabilities, including contingent liabilities, outside India of residents or in India of non-residents. Section 2(j) defines a current account transaction as everything else, with four inclusive limbs. Section 2(v) defines a person resident in India by a stay of more than one hundred and eighty-two days in the preceding financial year, with purpose-based exclusions and three deeming limbs.

Section 4 forbids a person resident in India from acquiring, holding, owning, possessing or transferring foreign exchange, foreign security or immovable property situated outside India, save as otherwise provided.

Section 5 is the freedom: any person may sell or draw foreign exchange for a current account transaction, subject only to reasonable restrictions the Central Government may prescribe in the public interest, contained in the Current Account Transactions Rules, 2000.

Section 6 is the regulation. Section 6(2) leaves debt instruments with the Reserve Bank; section 6(2A), inserted with effect from 15 October 2019, gives the Central Government power over transactions not involving debt instruments; section 6(7) defines debt instruments by the Central Government's determination; section 6(3) stands omitted. The proviso to section 6(2) forbids any restriction on drawal for amortisation of loans or depreciation of direct investments in the ordinary course of business; sections 6(4) and (5) grandfather assets lawfully acquired on the other side of the residence line; section 6(6) lets the Bank regulate branch and office establishment in India.

Section 10(5) obliges the authorised person, before undertaking any transaction, to require a declaration and information reasonably satisfying him that the transaction is not designed for a contravention or evasion, to refuse in writing if not satisfied, and to report to the Reserve Bank if he has reason to believe a contravention is contemplated. Section 10(6) deems a person who misuses or fails to surrender foreign exchange obtained for a declared purpose to have contravened the Act. Section 11 gives the Bank power to direct and, in section 11(3), to penalise an authorised person up to ten thousand rupees with two thousand rupees a day continuing. Section 12 gives the power of inspection.

Chapter IV, Contravention and Penalties: the civil sanction

Section 13(1) provides, on adjudication, a penalty up to thrice the sum involved where quantifiable, up to two lakh rupees where not, and up to five thousand rupees for every day after the first day of a continuing contravention. Section 13(2) permits confiscation of the currency, security, money or property involved and a direction to bring foreign exchange holdings back into India, with an Explanation extending "property" to whatever it has been converted into.

Section 17 provides an appeal to the Special Director (Appeals) within forty-five days, but only from an Assistant Director or Deputy Director of Enforcement. Section 19 provides an appeal to the Appellate Tribunal within forty-five days, with the first proviso requiring deposit of the penalty and the second allowing dispensation for undue hardship, an endeavour to dispose within one hundred and eighty days, and a suo motu revisional power in section 19(6). Section 35 provides an appeal to the High Court within sixty days on any question of law. Section 34 excludes the civil courts and forbids injunctions.

The Tribunal itself is no longer FEMA's own, and this is the feature most textbooks state wrongly. The Finance Act 2017, section 165, with effect from 26 May 2017, substituted section 18 so that the Tribunal constituted under section 12(1) of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 is the Appellate Tribunal for FEMA, and omitted sections 20, 22, 24, 25, 26, 29, 30 and 31. Section 32, as substituted, confers the statutory right to a legal practitioner or chartered accountant only before the Special Director (Appeals).

Section 37A, inserted with effect from 9 September 2015, is the exception and the harshest provision in the Act. An Authorised Officer with reason to believe recorded in writing may seize the value equivalent situated within India of foreign assets suspected to be held in contravention of section 4; the order is placed before a Competent Authority not below Joint Secretary rank within thirty days; disposal is within one hundred and eighty days; an appeal lies direct to the Appellate Tribunal under section 37A(5); and section 37A(6) excludes compounding under section 15 altogether. The proviso permits the seizure to be set aside where the person discloses the asset and brings it back into India, which is an incentive rather than a pure sanction.

The salient feature judicially confirmed

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 salient feature seen against what it replaced

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

The Supreme Court 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 shows the feature by contrast. Under FERA an officer could arrest and obtain judicial remand under section 167(2); FEMA gives the Directorate the powers of an income-tax authority under section 37 and no power of arrest, and section 14 provides only civil imprisonment of a defaulter.

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

Chapter IV supplies a purely civil sanction, a penalty of up to thrice the sum, up to two lakh rupees where unquantifiable and five thousand rupees a day if continuing, with confiscation, civil imprisonment only for a defaulter capped at three years above one crore rupees, and compounding within one hundred and eighty days through which most contraventions in fact end. Chapter V provides the hierarchy from the Adjudicating Authority to the High Court on a question of law, with the civil courts excluded.

Chapter VI gives the Directorate income-tax powers and no power of arrest, subject to the section 37A seizure of equivalent Indian assets which cannot be compounded. Chapter VII holds the provisions that decide hard cases: contravention by companies and firms under section 42, non-abatement on death or insolvency under section 43, and the carve-out of the International Financial Services Centre under section 44A.

For full marks, cover: the distinction that organises the whole answer, that "penalty" and "offence" are two different tracks in this Act, the first civil and adjudicated by an officer and the second criminal and tried by a court; the penalty provisions in sections 112, 114, 114A, 114AA and 117; the offences in sections 132 to 135AA with the exact punishments and the proviso to section 135; sanction and compounding under section 137; the evidentiary provisions; and the interaction between the two tracks, with Radhika Agarwal on arrest and the abolition of the Settlement Commission on the exit.

The quantum is graded: in the case of prohibited goods, a penalty not exceeding the value of the goods or five thousand rupees, whichever is greater; in the case of dutiable goods other than prohibited goods, not exceeding ten per cent of the duty sought to be evaded or five thousand rupees, whichever is greater, with a reduction to twenty-five per cent where the duty, interest and penalty are paid within thirty days; and where the value declared is higher than the value assessed, a penalty by reference to the difference.

Section 114 is the export counterpart, penalising any person who does or omits to do any act rendering goods liable to confiscation under section 113 or abets it, with a similar grading by reference to prohibited goods, the duty sought to be evaded, and the value declared.

Section 117 is the residual penalty, for contravention of any provision or abetment of a contravention for which no express penalty is provided, and for failure to comply with any provision with which it was the person's duty to comply, subject to a monetary ceiling.

Section 28AA imposes interest on duty not paid, short paid or erroneously refunded, at a rate fixed by the Central Government not below ten per cent and not exceeding thirty-six per cent per annum, and section 28AAA allows recovery from a person who obtained an instrument by collusion, wilful mis-statement or suppression, even where an innocent importer used it.

The offences

Section 132: false declaration and false documents. Knowingly or intentionally making, signing or using, or causing to be made, signed or used, any declaration, statement or document which is false or incorrect in any material particular in the transaction of any business relating to customs is punishable with imprisonment up to two years, or fine, or both.

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

The punishment is graded and the figures must be exact. Where the offence relates to goods the market price of which exceeds one crore rupees, or to such categories of prohibited goods as the Central Government may specify by notification, 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 where the duty relatable to its utilisation exceeds fifty lakh rupees, the punishment is imprisonment up to seven years and a fine. In any other case it is imprisonment up to three years, or fine, or both.

The proviso to section 135 restricts judicial discretion and is regularly examined. In the absence of special and adequate reasons to the contrary to be recorded in the judgment of the court, the sentence shall not be less than one year. And the section then excludes four matters from being special and adequate reasons: that the accused has been convicted for the first time; that in any proceeding under the Act, other than a prosecution, he has been ordered to pay a penalty or the goods have been confiscated; that he was not the principal offender and was acting merely as a carrier or otherwise on behalf of another; and the age of the accused.

Procedure, evidence and the exits

Section 137(1) requires the previous sanction of the Principal Commissioner or Commissioner of Customs before a court takes cognizance of an offence under section 132, 133, 134, 135, 135A or 135AA. Section 138 makes offences other than those under sections 132 and 135 triable summarily. Section 140 deals with offences by companies, making the person in charge of and responsible to the company liable along with the company, subject to the defence of no knowledge or due diligence, and adding liability for a director, manager, secretary or officer with whose consent or connivance or by whose neglect the offence occurred.

The evidentiary provisions make prosecution workable. Section 138A requires the court to presume the culpable mental state, with section 138A(2) fixing proof at beyond reasonable doubt. Section 123 places on the possessor of notified goods seized in a reasonable belief the burden of proving they are not smuggled. Section 139 presumes the genuineness of documents. Section 108 empowers a gazetted officer to summon and examine, in an inquiry deemed a judicial proceeding within sections 193 and 228 of the Indian Penal Code, and section 138B controls when such a statement may be used.

The exits have narrowed. Section 137(3) permits compounding by the Principal Chief Commissioner or Chief Commissioner before or after prosecution, at a price fixed by the Customs (Compounding of Offences) Rules, 2005, subject to provisos excluding 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. Until 31 March 2025 the Settlement Commission could also grant immunity from prosecution and from penalty and fine under section 127H; the Finance Act 2025 discontinued it from 1 April 2025, transferring pending applications to an Interim Board for Settlement of three officers of Chief Commissioner rank with no judicial member, so compounding is now the only route.

Criminal offences are tried by a court and require sanction under section 137(1). Section 132 punishes false documents with up to two years, sections 133 and 134 obstruction and refusal of an X-ray with up to six months, section 135 smuggling and evasion with up to seven years where the goods are prohibited or the market price exceeds one crore rupees or the amounts exceed fifty lakh rupees and up to three years otherwise, section 135A preparation with up to three years, and section 135AA publication of trade data with up to six months. The proviso to section 135 fixes a floor of one year unless special and adequate reasons are recorded, and forbids four common mitigating circumstances from being those reasons.

The two tracks meet at the evidentiary provisions and at the exits. Sections 123, 138A and 139 shift burdens so that prosecution is practicable, and section 108 supplies the material subject to section 138B's control. Arrest under section 104 is confined to five offences and four cognizable categories keyed to prohibited goods or fifty lakh rupees, and since Radhika Agarwal on 27 February 2025 requires credible material, recorded reasons and their communication. And the exit has narrowed: since the Settlement Commission ceased to operate on 1 April 2025, compounding under section 137(3), with all its exclusions, is the only way to extinguish the offence.

The rule-making power moved on 15 October 2019, and this is the fact that dates any answer. Section 6(3), which had listed eleven classes of capital account transaction the Reserve Bank could prohibit, restrict or regulate, was omitted; section 6(2A) was inserted, empowering the Central Government, in consultation with the Reserve Bank, to prescribe permissible classes of capital account transactions not involving debt instruments; and section 6(7) was inserted, providing that "debt instruments" means such instruments as the Central Government may determine in consultation with the Reserve Bank.

Three instruments of 2019 now govern. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019, made by the Central Government, cover equity and other non-debt instruments and are the operative FDI instrument. The Foreign Exchange Management (Debt Instruments) Regulations, 2019, made by the Reserve Bank, cover debt. The Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 cover payment and reporting. Section 47(3) saves the Reserve Bank's earlier regulations on capital account transactions until amended or rescinded by the Central Government, which prevented a legal vacuum on the changeover.

Reporting and enforcement. The receipt of consideration is reported and Form FC-GPR filed on allotment; Form FC-TRS is filed on a transfer between a resident and a non-resident; and an annual return on foreign liabilities and assets is due each July, all through the Single Master Form. A delay is a contravention under section 13 and is ordinarily compounded under section 15 and the Foreign Exchange (Compounding Proceedings) Rules, 2024. Section 42 exposes the company's directors, and the Explanation carries the section into firms.

The impact: what the regime has and has not done

The first observable impact is on volume and on composition. India moved from a position in which foreign investment required case-by-case approval to one in which the great majority of sectors are on the automatic route, and inflows grew accordingly across the two decades after 2000. But the composition matters as much as the total: a large share of inflows has historically been routed through jurisdictions with favourable tax treaties, notably Mauritius and Singapore, which means that the country of the immediate investor has frequently not been the country of the ultimate capital. That is the fact behind the beneficial ownership test in Press Note 3 of 2020, which looks past the immediate investor.

The fourth impact is on sectors where the caps do the work. Where a cap is set below full ownership, as it has been at various times in insurance, defence, print media and multi-brand retail, the practical consequence is a joint venture structure with contractual arrangements about control, and the recurring legal question is whether such arrangements are consistent with the sectoral cap. The Non-debt Instruments Rules address it through the concepts of ownership and control, and through the rule that an investment by an Indian entity owned or controlled by non-residents is treated as indirect foreign investment. That indirect-investment rule is the single most technical part of the regime and the one that most often catches a domestic transaction unexpectedly.

(b) 'Person' and 'person resident in India'

Section 2(u): "person"

"Person" is defined inclusively in seven limbs: (i) an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an association of persons or a body of individuals, whether incorporated or not; (vi) every artificial juridical person, not falling within any of the preceding sub-clauses; and (vii) any agency, office or branch owned or controlled by such person.

The definition has two parts, an arithmetical rule with exclusions, and three deeming limbs.

The arithmetical rule. A person resident in India means a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year. Two details matter. The period is more than 182 days, so exactly 182 does not qualify. And it looks to the preceding financial year, not the current one, so residence in any year is determined by conduct in the year before.

Exclusion (A): a person who has gone out of India or who stays outside India. He is not resident where he has done so (a) for or on taking up employment outside India, or (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

Exclusion (B): a person who has come to or stays in India. He is not resident where he has done so otherwise than (a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.

The three deeming limbs. The definition then includes (ii) any person or body corporate registered or incorporated in India; (iii) an office, branch or agency in India owned or controlled by a person resident outside India; and (iv) an office, branch or agency outside India owned or controlled by a person resident in India. Limb (ii) makes an Indian company resident regardless of where its shareholders or directors are, so a wholly foreign-owned Indian subsidiary is a resident, which is why an investment into it is inbound and its own investment abroad is outbound. Limbs (iii) and (iv) work with section 2(u)(vii) to place branches on both sides of the line correctly.

Section 2(w) completes the pair, defining a person resident outside India simply as a person who is not resident in India, so the two categories are exhaustive and there is no third status.

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

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

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

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

Conclusion

Conclusion. The two notes are connected: the second decides who the first applies to. Foreign direct investment is regulated as a capital account transaction, and since 15 October 2019 the power to prescribe permissible non-debt transactions has belonged to the Central Government under section 6(2A), section 6(3) standing omitted and the Non-debt Instruments Rules, 2019 having displaced the Reserve Bank's earlier regulations, with section 47(3) saving those regulations in the meantime.

The three deeming limbs then fix an Indian-incorporated company as resident whoever owns it, and place branches on the correct side of the line in both directions. Since section 2(w) defines a person resident outside India as anyone who is not resident in India, the two categories are exhaustive, and every substantive obligation in the Act turns on which of them a party falls into.

Before the process starts: four conditions

Condition one: an investigation. Section 37 provides that the Director of Enforcement and officers of Enforcement not below the rank of Assistant Director shall take up for investigation the contravention referred to in section 13, and that the Central Government may authorise other officers not below the rank of an Under Secretary. By section 37(3) they exercise the like powers as are conferred on income-tax authorities under the Income-tax Act, 1961, subject to the limitations of that Act. Those are powers of summons, survey, search and seizure of documents; there is no power of arrest, in contrast to section 35 of FERA.

Condition two: an appointed authority with jurisdiction. Section 16(1) allows the Central Government, by order published in the Official Gazette, to appoint as many of its officers as it thinks fit as Adjudicating Authorities for holding an inquiry, and section 16(2) requires the same order to specify their respective jurisdictions. An officer acting outside the jurisdiction specified for him acts without authority.

Security where the person may abscond. The proviso to section 16(1) permits the Adjudicating Authority, where he is of opinion that the person is likely to abscond or likely to evade in any manner the payment of penalty if levied, to direct him to furnish a bond or guarantee for such amount and subject to such conditions as the Authority may deem fit. It is a rare pre-emptive power in a civil proceeding and its exercise must be supported by material.

Representation. Section 16(4) provides that the person may appear either in person or take the assistance of a legal practitioner or a chartered accountant of his choice for presenting his case. The inclusion of a chartered accountant reflects the fact that most contraventions are documentary and accounting questions rather than questions of law.

A point of currency. Those references are to the Indian Penal Code, the Code of Criminal Procedure, 1973 and the Indian Evidence Act, 1872, all replaced with effect from 1 July 2024 by the Bharatiya Nyaya Sanhita, 2023, the Bharatiya Nagarik Suraksha Sanhita, 2023 and the Bharatiya Sakshya Adhiniyam, 2023. FEMA has not been amended to follow, and the references are carried by section 8 of the General Clauses Act, 1897.

Evidence and standard of proof. The proceeding is civil, so the standard is the preponderance of probabilities and not proof beyond reasonable doubt. Section 39 assists the department by providing that where a document is produced or seized under the Act, or received from a place outside India duly authenticated, and is tendered in evidence, the Adjudicating Authority shall presume the genuineness of the signature and handwriting, shall admit it notwithstanding that it is not duly stamped, and, in the case of a document produced or seized, shall also presume the truth of its contents, unless the contrary is proved.

Confiscation. Section 13(2) permits the Adjudicating Authority, in addition to any penalty, to direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government, and to direct that foreign exchange holdings be brought back into India or retained outside India in accordance with his directions. The Explanation extends "property" to deposits in a bank into which the property was converted, Indian currency into which it was converted, and any other property resulting from that conversion.

The special class. Where the contravention concerns foreign exchange, foreign security or immovable property situated outside India above the threshold prescribed under the proviso to section 37A(1), section 13(1A) attaches a penalty of up to three times the sum with confiscation of the value equivalent situated in India, and section 13(1B) permits the Adjudicating Authority, on reasons recorded in writing, to recommend the initiation of prosecution, which the Director of Enforcement may then direct.

Appeal follows it. Section 17 gives an appeal to the Special Director (Appeals) within forty-five days, but only where the Adjudicating Authority was an Assistant Director or Deputy Director of Enforcement. Section 19 gives an appeal to the Appellate Tribunal within forty-five days, with the first proviso requiring the penalty to be deposited on filing and the second permitting dispensation for undue hardship; section 19(5) requires an endeavour to dispose within one hundred and eighty days; and section 19(6) gives the Tribunal a suo motu revisional power to call for the record of any section 16 proceeding and examine its legality, propriety or correctness. Section 35 gives an appeal to the High Court within sixty days on any question of law. Section 34 excludes the civil courts.

Enforcement follows the appeal. Section 14 permits civil imprisonment where the penalty is not paid within ninety days of the demand, on a show cause notice and a recorded satisfaction of dishonest disposal or of means and refusal, with production within twenty-four hours, a fifteen day last chance, and terms of up to three years above one crore rupees and up to six months otherwise. Section 14A, the recovery provision enacted in 2016, has never been notified.

Fourth, section 32, as substituted by the Finance Act 2017, now confers the right to 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 gone, and rests on that Tribunal's own procedure and on natural justice under section 28(1).

What the adjudication process exists to do

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 characterises the jurisdiction the process serves. Because a contravention is remediable and compoundable, the adjudication under section 16 is a corrective proceeding, which explains why section 15 can remove a matter from the Adjudicating Authority entirely and why section 16(6) sets a disposal target rather than a limitation.

The principle that governs the order at the end of the process

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.

The inquiry itself is conducted under the Adjudication Proceedings and Appeal Rules, 2000, with a reasonable opportunity of being heard, a right to appear in person or through a legal practitioner or chartered accountant, civil court powers borrowed from section 28(2), proceedings deemed judicial for the purposes of the penal law, a presumption as to documents under section 39, a civil standard of proof, and an endeavour to conclude within one year with reasons recorded if that fails. The order may impose a penalty under section 13(1) of up to thrice the sum, up to two lakh rupees where unquantifiable, or five thousand rupees a day if continuing, and may confiscate under section 13(2), the Explanation following the property into whatever it has become.

For full marks, cover: that this is a proposition to be tested, so the answer must be argued in two directions and must reach a conclusion; the case for stringency in five limbs, each anchored to a provision, covering reversed burdens, summary powers, cumulative sanctions, penalties keyed to value and preventive detention; the case against in five limbs, covering the safeguards, the redemption right, the appellate structure, the narrowness of the arrest power and the fact that most cases are settled rather than punished; then the honest verdict, which is that stringency is unevenly distributed, and that it has been increasing in one direction and decreasing in another since 2017.

What "stringent" has to mean for the statement to be testable

A law is stringent if it makes liability easy to establish, sanctions heavy, and escape difficult. Each of those three can be tested against provisions, and the answer is organised accordingly. It is not enough to say that customs officers have wide powers; every revenue statute gives wide powers. The question is whether this one gives more than the ordinary and, if so, whether the counterweights are proportionate.

Second, the definition of the central prohibited concept is exceptionally wide. Section 2(39) defines "smuggling" not by conduct but by consequence, as any act or omission which will render goods liable to confiscation under section 111 or section 113. Because section 111 runs to fifteen clauses including misdeclaration of value or any other particular, unmanifested goods, and breach of an exemption condition, a consignment openly presented but wrongly described is "smuggled goods" within the Act. A concept most people associate with clandestine landing therefore covers routine commercial error.

Third, the powers are summary and some are extraordinary. Section 105 permits search of premises on the Commissioner's sanction in place of a Magistrate's. Section 106 permits a vessel or aircraft that will not stop to be fired upon. Section 108 permits a gazetted officer to summon any person, compel him to state the truth in a proceeding deemed judicial within sections 193 and 228 of the Indian Penal Code, and use the statement later, subject only to section 138B. Section 110 permits seizure on a reason to believe, and although section 110(2) requires a notice within six months it permits a further six-month extension.

Fifth, the customs law does not stand alone. The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 permits preventive detention on a satisfaction that a person should be prevented from smuggling; the Prevention of Money-Laundering Act, 2002 treats customs offences above thresholds as scheduled offences with attachment of property and stringent bail conditions; and section 8 of the Foreign Trade (Development and Regulation) Act, 1992 allows the Importer-exporter Code to be cancelled for a customs contravention, which ends the person's ability to trade. Judged as a system rather than as a single Act, the regime is severe.

The case against the statement

First, every reversed burden has a precondition the department must first establish. Section 123 operates only for notified goods and only where the seizure was made in a reasonable belief, which is a justiciable jurisdictional fact and the ground on which many seizures fail. Section 138A operates only in a prosecution, only where the offence requires a culpable mental state, and, by section 138A(2), only on the footing that proof means beyond reasonable doubt and not preponderance of probability, so it never relieves the prosecution of its primary burden. Section 139 is displaced by proof to the contrary.

Fourth, the criminal power is narrower than it appears. Arrest under section 104(1) is available only for offences under sections 132, 133, 135, 135A and 136, and not for section 134. Only four categories are cognizable under section 104(4), each turning on prohibited goods or on figures exceeding fifty lakh rupees; section 104(5) makes every other offence non-cognizable. Non-bailability is a separate scheme resting on a different list: section 104(6) makes non-bailable only an offence punishable under section 135 relating to evasion exceeding fifty lakh rupees, to prohibited goods notified under section 11 which are also notified under section 135(1)(i)(C), to undeclared goods whose market price exceeds one crore rupees, to fraudulent drawback or exemption exceeding fifty lakh rupees, or to the fraudulent obtaining of an instrument where the relatable duty exceeds fifty lakh rupees.

Two developments that cut in opposite directions

Since 2017 the Act has become more stringent in one respect and less in another, and a current answer should say so.

More stringent on the criminal and information side. Section 135AA, inserted in 2022, punishes the publication of information relating to the value of imported or export goods or the identity of the importer or exporter with imprisonment up to six months or a fine up to fifty thousand rupees. The cognizable categories in section 104(4) were widened again in 2019. And Radhika Agarwal has confirmed the constitutional validity of the arrest power, while disciplining its exercise.

The law is stringent where the goods are prohibited or the figures are large. For prohibited goods, redemption is discretionary under section 125, the offence is cognizable under section 104(4) whatever the value, the punishment under section 135 rises to seven years with a one-year floor, section 123 may reverse the burden if they are notified, and COFEPOSA and the Prevention of Money-Laundering Act stand behind the customs law. In that zone the description is accurate and deliberate, because the Act is functioning as a preventive statute.

The law is not stringent where the goods are ordinary and the error is commercial. There the importer self-assesses under section 17, may correct himself under section 18A, receives a mandatory redemption offer under section 125, faces a penalty graded to ten per cent of the duty under section 112 with a further reduction for prompt payment, can close a fraud notice under section 28(5) for fifteen per cent, and faces a non-cognizable offence he can compound. In that zone the Act is functioning as a fiscal statute and behaves like one.

There is an equally strong case against it. Every presumption has a justiciable precondition and section 138A(2) holds proof at beyond reasonable doubt. Section 102 gives a right to be taken before a gazetted officer or Magistrate, section 103 requires a Magistrate before any internal search, section 110(2) returns goods after six months unless reasons for extension are recorded and communicated, and section 124 makes notice, representation and hearing conditions precedent. Section 125 makes the offer of a fine in lieu of confiscation mandatory for goods that are not prohibited. Arrest reaches only five offences and four cognizable categories keyed to prohibited goods or fifty lakh rupees, and since 27 February 2025 requires credible material, recorded reasons and their communication. And most matters end in payment under sections 28(1)(b), 28(5) or 137(3) rather than in conviction.

For full marks, cover: three notes of about eight marks each, since the question sets exactly three; for (i) the offences with punishments, sanction, the presumptions and the compounding exit; for (ii) the several duties by name with their charging provisions, which is a question about the Customs Tariff Act as much as the Customs Act; for (iii) the FEMA definitions in sections 2(n), 2(m), 2(h) and 2(o), with the reason the definition is drawn as it is.

(i) Criminal prosecution under the Customs Act, 1962

Chapter XVI, sections 132 to 140A, contains the offences, and prosecution is deliberately a residual jurisdiction: the Act's primary sanctions are civil.

Section 135, the principal smuggling and evasion offence, imprisonment up to seven years and fine where the goods are prohibited, or their market price exceeds one crore rupees, or the duty evaded or the drawback or exemption fraudulently availed exceeds fifty lakh rupees, and up to three years otherwise. Section 135(2) deals with the repeat offender: a person convicted under section 135 or under section 136(1) who is again convicted under section 135 is punishable for the second and for every subsequent offence with imprisonment which may extend to seven years and with fine, and in the absence of special and adequate reasons recorded in the judgment that imprisonment shall not be less than one year. Section 135A, preparation to commit an offence under section 135, up to three years. Section 135AA, inserted in 2022, publication of import or export value or trader identity, up to six months or fifty thousand rupees or both. Section 136, offences by officers of customs.

The evidentiary machinery. Section 138A requires the court to presume the culpable mental state, with sub-section (2) fixing proof at beyond reasonable doubt. Section 123 reverses the burden for notified goods seized in a reasonable belief. Section 139 presumes the genuineness of documents. Section 108 supplies the statements, in an inquiry deemed a judicial proceeding, and section 138B controls their use. Section 138 makes offences other than those under sections 132 and 135 triable summarily, and section 140 deals with offences by companies.

Arrest and its limits. Section 104(1) permits arrest only for offences under sections 132, 133, 135, 135A and 136; section 104(4) makes an offence cognizable only where it relates to prohibited goods or to amounts exceeding fifty lakh rupees in the four listed categories; section 104(5) makes every other offence non-cognizable. Non-bailability is a separate scheme resting on a different list: section 104(6) makes non-bailable only an offence punishable under section 135 relating to evasion exceeding fifty lakh rupees, to prohibited goods notified under section 11 which are also notified under section 135(1)(i)(C), to undeclared goods whose market price exceeds one crore rupees, to fraudulent drawback or exemption exceeding fifty lakh rupees, or to the fraudulent obtaining of an instrument where the relatable duty exceeds fifty lakh rupees.

The exit. Section 137(3) permits compounding by the Principal Chief Commissioner or Chief Commissioner, before or after the institution of prosecution, on payment of the amount fixed by the Customs (Compounding of Offences) Rules, 2005, subject to provisos excluding a person allowed to compound once in respect of an offence under sections 135 or 135A; a person accused of an offence which is also an offence under the Narcotic Drugs and Psychotropic Substances Act, 1985, the Chemical Weapons Convention Act, 2000, the Arms Act, 1959 or the Wild Life (Protection) Act, 1972; a person involved in smuggling SCOMET items, goods prohibited for import or export under the ITC (HS) Classification, or goods affecting friendly relations with a foreign State; a person allowed to compound once where the value of the goods exceeded one crore rupees; and a person convicted under the Act on or after 30 December 2005. Since the Settlement Commission ceased to operate on 1 April 2025, compounding is the only route to immunity from prosecution.

Prosecution and adjudication may run together, because their objects and standards of proof differ and departmental adjudication is not a prosecution before a court, so Article 20(2) is not attracted; but an exoneration in adjudication on the merits, on the same evidence, will not leave a prosecution standing.

Integrated goods and services tax is levied on imports under section 3(7) of the Customs Tariff Act, at the rate applicable to a like supply of goods in India, and compensation cess under section 3(9). Section 3(8) fixes the value for those levies as the value determined under section 14 of the Customs Act plus the basic customs duty and any other duty chargeable, so integrated tax is computed on a base that already includes duty. That cascading is deliberate and is the reason the effective rate on an import is always higher than the headline tariff.

Trade remedy duties. Section 8B of the Customs Tariff Act provides for safeguard measures where increased imports cause or threaten serious injury to domestic industry. Section 9 provides for countervailing duty on subsidised articles. Section 9A provides for anti-dumping duty where an article is exported to India at less than its normal value, with section 9AA allowing refund of duty paid in excess of the actual margin of dumping. Each is preceded by an investigation by the Directorate General of Trade Remedies and is imposed for a limited period subject to sunset review.

Cesses and surcharges. A social welfare surcharge is levied on the aggregate of customs duties, and on specified goods an agriculture infrastructure and development cess and, where applicable, a road and infrastructure cess are levied.

(iii) Foreign exchange

"Foreign exchange" is defined by section 2(n) of FEMA and the definition is drawn to follow the cross-border character of an obligation rather than the currency printed on the instrument.

Section 2(n): "foreign exchange" means foreign currency and includes three further limbs: (i) deposits, credits and balances payable in any foreign currency; (ii) drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency; and (iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.

The second and third limbs are the ones that matter and must be explained. Limb (ii) catches an instrument denominated in rupees but payable in foreign currency; limb (iii) catches an instrument drawn abroad but payable in rupees. If the definition had stopped at "foreign currency", either form of instrument could have been used to move value across a border without touching the Act, and the two limbs close that route.

The definitions fix the reach of the two principal prohibitions. Section 3 forbids dealing in or transferring foreign exchange or foreign security to a person who is not an authorised person, making a payment to or for the credit of a person resident outside India, receiving a payment on behalf of such a person otherwise than through an authorised person, and entering into a financial transaction in India as consideration for acquiring an asset outside India. Section 4 forbids a person resident in India from acquiring, holding, owning, possessing or transferring foreign exchange, foreign security or immovable property situated outside India. Section 10 confines dealing to an authorised person, and section 2(c) defines that expression as an authorised dealer, money changer, off-shore banking unit or any other person authorised under section 10(1).

Duties levied on import are not one tax but a stack: basic customs duty under section 12 of the Customs Act and the First Schedule, additional duty under section 3 of the Customs Tariff Act, integrated goods and services tax and compensation cess under sections 3(7) and 3(9) computed under section 3(8) on a base that already includes duty, safeguard, countervailing and anti-dumping duties under sections 8B, 9 and 9A after an investigation by the Directorate General of Trade Remedies, and the surcharges and cesses above them. Against that stand exemptions under section 25, now strictly construed after Dilip Kumar, deferment through Chapter IX warehousing and section 65, and drawback under sections 74 and 75.

Foreign exchange under section 2(n) of FEMA is foreign currency plus three limbs, and the two that catch instruments drawn in rupees but payable abroad, and drawn abroad but payable in rupees, are what prevent the Act from being defeated by the choice of currency on the face of a draft. Read with the wide inclusive definition of currency in section 2(h), which reaches credit cards and whatever the Reserve Bank notifies, those definitions fix the reach of the prohibitions in sections 3 and 4 and of the monopoly conferred on the authorised person by section 10.

The closing words are a dead cross-reference, because section 6(3) was omitted with effect from 15 October 2019 by section 139 of Act 20 of 2015. Noticing that shows the section has been read rather than copied.

The substantive test is the alteration of a cross-border balance-sheet position, and four illustrations make it concrete: a resident acquiring shares in a foreign company alters his assets outside India; a non-resident subscribing to Indian equity alters his assets in India; a resident borrowing abroad alters his liabilities outside India; and a corporate guarantee given for a foreign subsidiary is caught because contingent liabilities are expressly included.

The contrast with the current account is what gives the definition its work. Section 2(j) defines a current account transaction as a transaction other than a capital account transaction, with four inclusive limbs; section 5 makes it free subject only to reasonable restrictions prescribed in the Current Account Transactions Rules, 2000. Capital is regulated and current is free, so the boundary decides whether permission is needed. The working test is whether the transaction alters a cross-border asset or liability: interest on a loan is current, repayment of the principal is capital.

(ii) Warehousing of goods

Chapter IX of the Customs Act, sections 57 to 73A, permits imported goods to be deposited without payment of duty, and its whole point is deferment: because the taxable event for the rate is removal and not importation, duty is postponed and, for goods that are re-exported, avoided.

Three kinds of warehouse. A public warehouse licensed under section 57, in which any importer may deposit dutiable goods; a private warehouse licensed under section 58, for the deposit of dutiable goods imported by or on behalf of the licensee; and a special warehouse licensed under section 58A, for goods notified by the Board, which is locked by the proper officer, no person entering or removing goods without his permission. Section 58B provides for cancellation of a licence, and the licensing conditions are in the Public, Private and Special Warehouse Licensing Regulations, 2016.

The bond. Section 59 requires the importer to execute a bond in a sum equal to three times the amount of duty assessed, binding himself to comply with the conditions, to pay the duty with interest, and to pay all penalties and fines, with a general bond permitted for repeated transactions.

Manufacture in the warehouse. Section 65 permits, with the sanction of the Principal Commissioner or Commissioner and subject to prescribed conditions, any manufacturing process or other operations to be carried on in relation to warehoused goods in a warehouse. It is the statutory basis of the Manufacture and Other Operations in Warehouse Regulations, 2019, under which a manufacturer imports inputs and capital goods without paying duty, manufactures inside the bonded warehouse, and pays duty on the imported inputs only when the resulting goods are cleared into the domestic market, or none at all if they are exported. That converts a storage facility into a duty-deferred manufacturing regime and is the most commercially significant provision in the chapter.

Clearance. Section 68 permits clearance for home consumption on presentation of a bill of entry, payment of the import duty, interest, fine and penalties, and an order of clearance by the proper officer; its proviso permits the owner to relinquish his title to the goods at any time before an order for clearance, in which case he is not liable to pay the duty, except where an offence appears to have been committed. Section 69 permits clearance for export on a shipping bill or bill of export, payment of export duty and charges, and an order of the proper officer.

Feature one: a statutory basis for the foreign trade policy. Section 5, as substituted in 2010, empowers the Central Government to formulate and announce, by notification in the Official Gazette, the foreign trade policy, and to amend it in like manner, with a proviso permitting a different application to Special Economic Zones. Before 2010 the section spoke of the "export and import policy". Section 3 gives the underlying power to prohibit, restrict or regulate the import or export of goods, services or technology, and section 4 continues existing orders.

Feature two: a statutory regulator. Section 6 provides for the appointment of the Director General of Foreign Trade, to advise the Central Government in the formulation of the policy and to be responsible for carrying it out.

Feature three: the Importer-exporter Code as a gate. Section 7 provides that no person shall make any import or export except under an Importer-exporter Code Number granted by the Director General or an authorised officer, with a proviso, inserted in 2010, confining the requirement in the case of services or technology to a provider taking benefits under the foreign trade policy or dealing with specified services or specified technologies.

Feature six: a safeguard power. Section 9A, inserted in 2010, permits quantitative restrictions where goods are imported in such increased quantities and under such conditions as to cause or threaten serious injury to domestic industry, with a proviso exempting a developing country whose share does not exceed three per cent, or several such countries whose aggregate does not exceed nine per cent; the restriction ceases after four years unless extended and may never continue beyond ten years.

Feature seven: penalties keyed to value. Section 11(2) imposes a penalty of not less than ten thousand rupees and not more than five times the value of the goods, services or technology, whichever is more, extending to abetment and attempt; section 11(3) applies the same range to a knowingly forged, tampered or materially false declaration; section 11(4) permits settlement on admission; section 11(5) permits recovery, including by requiring an officer of customs to deduct the amount as if it were payable under the Customs Act, 1962; and section 11A requires all penalties to be credited to the Consolidated Fund of India.

One provision is now spent. Section 11B deems a settlement by the Settlement Commission constituted under section 32 of the Central Excise Act, 1944 to be a settlement under this Act for regularising an export obligation default; that Commission ceased to function on 1 April 2025 under the Finance Act 2025.

The authority the warehousing note turns on

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 Supreme Court held that goods not removed within the permitted period are deemed to have been improperly removed under section 72 on the day the period expired, so that is the date by reference to which the rate of duty is determined, and the date on which the duty is in fact demanded or the goods physically taken away is irrelevant.

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. It is the decision in which a capital account transaction was actually litigated to the Supreme Court, a transfer of shares by residents to a non-resident at a discount said to break the pricing rules, and it settles what follows: the contravention is remediable and compoundable rather than void.

Why it bears on this question. For a note-length answer the case supplies the one proposition that ties the FEMA definitions together. Every one of these concepts is a civil category. Because the liability created by section 13 is a breach of a civil obligation for which no guilty intention need be shown, the definitions are drafted as tests of fact, a day count for residence, a balance-sheet test for a capital account transaction, an enumerated list for a person, and the adjudication asks only whether the facts fall within them.

Conclusion

Conclusion. The three notes run from the foreign exchange side to the customs side to the trade policy that connects them. A capital account transaction under section 2(e) is one altering cross-border assets or liabilities including contingent liabilities, and the definition still points at the omitted section 6(3); its regulation was split on 15 October 2019, debt instruments staying with the Reserve Bank under section 6(2) and everything else passing to the Central Government under section 6(2A), with the Non-debt Instruments Rules, 2019 as the operative instrument and section 47(3) saving what went before.