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Law Relating to Customs and Foreign Exchange
Previous Year Question Paper with Solution
LLM · Group 2 Business Law
2022 Examination
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LLM Group 2 Business Law Law Relating to Customs and Foreign Exchange 2022 Question Paper with Solutions
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First published on munotes.in on 12 August 2026.
Published by munotes.in, Mumbai.
Model answers written and edited by the munotes.in editorial desk.
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The University does not publish an official answer key for this paper. The answers in this volume are model answers, written to show how a full-mark answer is built. They are a study aid, not an authority on what an examiner marked.
The question paper reproduced here is the paper as set by the University of Mumbai at the 2022 examination.
The answers in this volume state the law as it stands today, not as it stood when the paper was set, and four changes alter answers here. The Customs and Central Excise Settlement Commission ceased to accept applications after 31 March 2025 and ceased to operate from 1 April 2025 under the Finance Act 2025, its work passing to an Interim Board for Settlement of three revenue officers with no judicial member, so immunity from prosecution under section 127H is no longer obtainable. FEMA has had no Appellate Tribunal of its own since 26 May 2017, the SAFEMA Tribunal serving under a substituted section 18 with sections 20, 22, 24, 25, 26 and 29 to 31 omitted. Section 6(3) was omitted on 15 October 2019, moving non-debt capital account transactions to the Central Government. And from 1 May 2025 section 18(1B) requires a provisional assessment to be finalised in two years and section 18A allows a voluntary post-clearance revision of an entry.
Contents
The questions below are the paper as the University of Mumbai set it at the 2022 examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2022 examination, reproduced as the University of Mumbai set them, in the order it set them. Nothing has been reworded, added or left out. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 7 questions answered
Instructions printed on the paper
- N.B: Please read the Instructions carefully. Do not disclose your identity or mark any inscriptions, signages etc. anywhere on the answer sheets. Use Examples / Citations / Case Laws references, wherever required.
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
SECTION I
Form 20090. Attempt any four questions, all questions carry 25 marks
any four of seven · 100 Marks
1.Discuss in elaborate details, the nature of contraventions, penalties and compounding as provided under the Foreign Exchange Management Act.[25]
Answer
For full marks, cover: the three words in the question in that order, because they are three successive stages; what makes a FEMA breach a contravention rather than an offence, and the four consequences of that classification; the substantive obligations whose breach is the contravention, so the answer has content and not only labels; section 13 with exact figures and the 2015 special class; section 11(3) as a separate penalty; section 14 as enforcement rather than punishment; then compounding in full, with the 2024 Rules, the compounding authorities, what compounding does and does not extinguish, and the single case where it is excluded.
The nature of a contravention
FEMA does not create offences for the ordinary breach; it creates contraventions, and everything else in this answer follows from that classification. Section 13(1) attaches liability to a person who contravenes any provision of this Act, or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or any condition subject to which an authorisation is issued by the Reserve Bank.
Four consequences follow and they should be stated at the outset. There is no mens rea requirement: the section attaches to the fact of contravention, not to an intention to contravene. There is no prosecution before a criminal court for the ordinary breach and no power of arrest, the Directorate of Enforcement investigating under section 37 with the powers of an income-tax authority. Liability arises "upon adjudication" by an Adjudicating Authority under section 16, so it is not self-operating. And the standard of proof is the preponderance of probabilities, not proof beyond reasonable doubt.
The contrast with FERA makes the classification vivid. Under the Foreign Exchange Regulation Act, 1973 a breach was a criminal offence, section 59 presumed guilt, and section 35 gave the Enforcement Directorate a power of arrest. FEMA removed all three. That was the central purpose of the 1999 reform.
The obligations whose breach is a contravention
A contravention is only meaningful by reference to an obligation, and the obligations in this Act are few enough to list.
Section 3 forbids, save as otherwise provided or with the general or special permission of the Reserve Bank, (a) dealing in or transferring any foreign exchange or foreign security to any person not being an authorised person; (b) making any payment to or for the credit of any person resident outside India in any manner; (c) receiving otherwise than through an authorised person any payment by order or on behalf of any person resident outside India; and (d) entering into any financial transaction in India as consideration for or in association with the acquisition or creation or transfer of a right to acquire any asset outside India.
The Explanation to section 3(c) is the anti-hawala provision and deserves separate treatment. Where a person in, or resident in, India receives any payment by order or on behalf of a person resident outside India through any other person, including an authorised person, without a corresponding inward remittance from any place outside India, he is deemed to have received such payment otherwise than through an authorised person. The deeming is what catches a compensatory payment, because the vice is not the receipt of rupees but the absence of a matching inward remittance.
Section 4 forbids a person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India. Section 6 regulates capital account transactions. Section 7 requires the export declaration of full value. Section 8 requires all reasonable steps to realise and repatriate foreign exchange due or accrued. Section 10(5) and (6) impose duties on and through the authorised person.
Contraventions divide in practice into three classes and saying so shows familiarity with how the Act works. Reporting or procedural contraventions, principally delay in filing Form FC-GPR or FC-TRS on an inward investment, are far the commonest and almost always end in compounding. Substantive contraventions, such as receiving investment in a prohibited sector or beyond a sectoral cap, go to adjudication. Contraventions involving undisclosed foreign assets are dealt with separately and severely under sections 13(1A) to (1D) and 37A.
The penalties
Section 13(1) fixes the general penalty and the figures must be exact. On adjudication the person is liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, a further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.
Two points about the drafting deserve comment. The words are "up to", so the maximum is a ceiling and not a tariff; the Adjudicating Authority must apply his mind to quantum and give reasons, taking account of whether the contravention was technical or substantive, whether any gain accrued, and whether it was voluntarily disclosed. And the two lakh rupee figure applies only where the sum involved is not quantifiable, which in practice is confined to reporting failures where no amount can be attributed.
Section 13(2) adds confiscation. The Adjudicating Authority may, in addition to any penalty, 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 further direct that the person's foreign exchange holdings be brought back into India or retained outside India in accordance with directions. The Explanation extends "property" to deposits in a bank where the property was converted into such deposits, Indian currency where it was converted into that currency, and any other property which has resulted out of the conversion of that property, so that a change of form cannot defeat the order.
Sections 13(1A) to (1D), inserted with effect from 9 September 2015, create the special class. Where a person is found to have acquired foreign exchange, foreign security or immovable property situated outside India of aggregate value exceeding the threshold prescribed under the proviso to section 37A(1), he is liable under section 13(1A) to a penalty up to three times the sum involved and confiscation of the value equivalent situated in India; under section 13(1C) he is, in addition, punishable with imprisonment which may extend to five years and with fine; under section 13(1B) the Adjudicating Authority may, on reasons recorded in writing, recommend prosecution, which the Director of Enforcement may direct on reasons recorded; and under section 13(1D) no court may take cognizance except on a complaint in writing by an officer not below the rank of Assistant Director.
Section 11(3) is a separate and much smaller penalty against an authorised person. For contravening a direction of the Reserve Bank or failing to file a return as directed, the Reserve Bank may, after a reasonable opportunity of being heard, impose a penalty up to ten thousand rupees, with an additional penalty up to two thousand rupees for every day of a continuing contravention. The disparity with section 13 is deliberate: the authorised person is a regulated intermediary, not the beneficiary of the transaction.
Section 14 is enforcement and not punishment, and the distinction is worth insisting on. A person who fails to make full payment of the penalty within ninety days from the date on which the notice for payment is served is liable to civil imprisonment, but only after a show cause notice and a satisfaction recorded in writing either that he has, after the notice, dishonestly transferred, concealed or removed property to obstruct recovery, or that he has the means to pay and refuses or neglects to do so.
Section 14(11) fixes the term at up to three years where the demand exceeds one crore rupees and up to six months in any other case; section 14(12) provides that release does not discharge the liability but bars a second arrest under the same certificate; and the Explanation to section 14(6) deems the karta to be the defaulter where the defaulter is a Hindu undivided family.
Section 14A has never been brought into force. It would authorise an officer of Enforcement not below the rank of Assistant Director to recover arrears with the powers of an income-tax authority under the Second Schedule to the Income-tax Act, 1961, but the India Code footnote records that it "shall stand inserted (date to be notified) by Act 28 of 2016, section 229", and no commencement notification has issued.
Compounding
Section 15 is the provision through which the overwhelming majority of contraventions actually end, and an elaborate answer must give it as much space as the penalty.
Section 15(1): any contravention under section 13 may, on an application made by the person committing such contravention, be compounded within one hundred and eighty days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank as may be authorised in this behalf by the Central Government, in such manner as may be prescribed.
Section 15(2): where a contravention has been compounded, no proceeding or further proceeding, as the case may be, shall be initiated or continued against the person committing such contravention in respect of the contravention so compounded.
The governing rules are the Foreign Exchange (Compounding Proceedings) Rules, 2024, notified by the Department of Economic Affairs on 12 September 2024 in supersession of the Foreign Exchange (Compounding Proceedings) Rules, 2000, made under section 46 read with section 15. They set out the compounding authorities and their monetary competence, the powers of those authorities, the procedure on an application and the post-compounding procedure. The application fee was raised from five thousand to ten thousand rupees plus goods and services tax, and digital payment of the fee and of the compounding amount was introduced.
The division of work between the two regulators should be stated. The Reserve Bank compounds the ordinary contraventions, principally the reporting and investment failures under the Non-debt Instruments Rules and the export realisation defaults, and publishes its orders, which in practice function as the working guidance of the field. The Directorate of Enforcement deals with the serious contraventions, including hawala under section 3 and cases involving section 4.
Four features of compounding deserve emphasis. It is voluntary and applicant-driven: no authority can compound of its own motion. It is available before or during adjudication, and an application suspends the adjudication in practice. It extinguishes the contravention, not merely the penalty, so section 15(2) closes the matter completely. And it produces a priced administrative order rather than a reasoned adjudication, which is efficient but is the reason this branch of the law has developed very little case law.
One exclusion is absolute. Section 37A(6) provides that nothing contained in section 15 shall apply to section 37A, so where an Authorised Officer has seized the value equivalent situated in India of foreign assets suspected to be held in contravention of section 4, the matter cannot be compounded at all. Read with section 13(1C), which makes the same conduct punishable with imprisonment up to five years, the message is that undeclared foreign wealth is the one thing FEMA will not allow to be bought off.
The case that fixes the nature of a contravention
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 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 strongest modern authority on the first word of the question. The Supreme Court treated a FEMA breach as remediable and compoundable, and made that the reason for holding that it does not offend the fundamental policy of Indian law. A contravention is therefore a curable irregularity in a regulated market, not a wrong against the State.
The case that governs the second
On quantum and on the exercise of the power to penalise at all, the governing authority is Hindustan Steel Ltd v. State of Orissa, (1969) 2 SCC 627, decided on 4 August 1969. A government undertaking sold bricks, steel and cement, which it had procured for its own construction, to the contractors building its factory, and was assessed to sales tax as a dealer and penalised for failing to register. It was held liable to the tax.
But the penalty was set aside, and the reasoning is general. A penalty is quasi-criminal; the authority is not bound to impose one merely because it is lawful to do so; and a penalty should not be imposed for a technical or venial breach, or where the breach flows from a bona fide belief that the person is not liable. What is required is deliberate defiance of the law, contumacious or dishonest conduct, or a conscious disregard of obligation.
Why it bears on this question. Section 13(1) gives a ceiling of thrice the sum involved, not a tariff, and this decision supplies the principle behind the discretion: a penalty is quasi-criminal, is not automatic, and is not for a technical or venial breach or for a breach flowing from a bona fide belief.
Conclusion
Conclusion. The nature of a FEMA breach is civil, and the classification determines everything that follows. Section 13 attaches liability to a contravention without any requirement of mens rea, adjudged on the preponderance of probabilities by a departmental Adjudicating Authority, with no prosecution and no power of arrest, in deliberate contrast to FERA's criminal offence, presumption of guilt in section 59 and arrest power in section 35.
The obligations whose breach is the contravention are few: sections 3 and 4 on dealing and holding, with the Explanation to section 3(c) deeming a payment received on a non-resident's instructions without a corresponding inward remittance to have been received otherwise than through an authorised person, which is how hawala is caught; section 6 on capital account transactions; sections 7 and 8 on export declaration and repatriation; and section 10 on the authorised person.
The penalty is up to thrice the sum where quantifiable, up to two lakh rupees where not, and up to five thousand rupees a day if continuing, with confiscation under section 13(2) following the property into whatever it has been converted into, and a much smaller supervisory penalty of ten thousand rupees with two thousand rupees a day against an authorised person under section 11(3). Section 14 supplies civil imprisonment only against a defaulter after ninety days, capped at three years above one crore rupees and six months below, and section 14A, enacted in 2016, has never been notified.
Compounding under section 15 is what the system actually runs on. Any contravention may be compounded on the applicant's own application within one hundred and eighty days of its receipt, by the Director of Enforcement or authorised officers of the Directorate and the Reserve Bank, under the Foreign Exchange (Compounding Proceedings) Rules, 2024 notified on 12 September 2024 in supersession of the 2000 Rules; and section 15(2) then bars any proceeding or further proceeding in respect of that contravention. The single exception is the one that shows where the Act still means to be severe: section 37A(6) excludes compounding altogether for a seizure of equivalent Indian assets in respect of undisclosed foreign holdings, which sections 13(1A) to (1D) also make punishable with imprisonment up to five years.
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