LLM Group 2 Business Law Law Relating to Customs and Foreign Exchange 2022 Question Paper with Solutions

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 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.

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.

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.

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.

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 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.

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.

Assessment: the definition and the shift of 2011

Section 2(2) defines assessment very widely. It means determination of the dutiability of any goods and the amount of duty, tax, cess or any other sum payable, and it includes provisional assessment, self-assessment, re-assessment and any assessment in which the duty assessed is nil. The width is deliberate: it allows a nil assessment and a self-assessment to be treated as assessments for every other purpose in the Act, including appeal under section 128 and refund under section 27.

The 2011 amendment reversed the burden of the exercise, and this is where a critical answer must begin. Before it, the importer filed an entry and an officer assessed the duty. Since then section 17(1) requires the importer or exporter to self-assess the duty leviable, and the officer's role has become a verification role. That single change transferred a technical exercise, the classification of goods under an eight-digit tariff and their valuation, from a trained officer to the trade.

The valuation input is section 14, which fixes the value as the transaction value, the price actually paid or payable for delivery at the time and place of importation, where the buyer and seller are not related and price is the sole consideration, with specified additions for commissions, brokerage, engineering, design work, royalties, licence fees, transport, insurance, loading, unloading and handling, and with the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 supplying a mandatory sequence of alternatives. Section 15 fixes the rate and date by reference to the presentation of the bill of entry under section 46, or for warehoused goods the bill of entry for home consumption under section 68.

Section 46 requires the bill of entry to be presented and, importantly, requires the importer to make and subscribe to a declaration as to the truth of its contents and to produce the invoice and other documents. That declaration is what makes a false entry an offence under section 132 and attracts the penalty under section 114AA, and it is the counterpart of the self-assessment obligation.

Section 18(2) provides that when the duty is finally assessed or re-assessed, the amount paid provisionally is adjusted, with the importer paying any deficiency or being entitled to a refund of any excess. Section 18(3) makes the importer liable to interest on any deficiency from the first day of the month in which the duty was provisionally assessed until payment. Section 18(4) entitles him to interest on a delayed refund. Section 18(5) applies the unjust enrichment test, requiring the refundable amount to be credited to the Consumer Welfare Fund unless the claimant establishes that the incidence of the duty was not passed on.

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

Defect two, now largely cured: provisional assessments used to remain open indefinitely. Before 1 May 2025 section 18 contained no outer limit on finalisation. Assessments referred to the Special Valuation Branch in related-party imports, and those turning on a certificate of origin under a free trade agreement, routinely stayed provisional for many years. The importer's working capital sat in a bond and security, his accounts could not be closed, and there was no statutory lever to compel a decision. Section 18(1B) now supplies the lever, with two years extendable by one and a duty to inform. It is the clearest recent instance of the Act being amended in response to a practical grievance rather than to a judgment, and it deserves to be recorded as a genuine improvement.

Parliament amended sections 2(34), 3 and 5 by the Finance Act 2022 with a retrospective validation, and on 7 November 2024 a three-judge Bench allowed the review and reversed the 2021 judgment, holding that section 2(34) must be read harmoniously with section 6, which permits functions to be entrusted to diverse classes of officers, so that DRI officers to whom the function has been validly allocated are competent under section 28. Demands of the order of Rs 20,000 crore were released. An answer stating Canon India as good law in 2026 is stating a recalled judgment.

The distinction, tabulated

Conclusion

Conclusion. Assessment under the Customs Act has since 2011 been the importer's own act, with the officer verifying under section 17(2), re-assessing under section 17(4) and obliged by section 17(5) to pass a speaking order within fifteen days where the re-assessment is not accepted in writing. The base comes from section 14's transaction value with the 2007 Rules behind it, and the rate and date from section 15. That structure buys speed and pays for it by placing a technical burden, and the risk of interest and penalty, on the trade.

Provisional assessment under section 18 is the exception, available only through its stated gateways, secured by such security as the officer deems fit, carrying interest on the deficiency under section 18(3) and subject on refund to the unjust enrichment test in section 18(5). Its historic defect was the absence of any outer limit, which left Special Valuation Branch and free trade agreement references open for years with the importer's capital locked in a bond. Section 18(1B), in force from 1 May 2025, now requires finalisation within two years, extendable by one year by the Principal Commissioner or Commissioner, with a duty to inform where that is not met.

For full marks, cover: the question says "define and describe", so define the officer first, because the powers are conferred on defined classes and not on customs officers generally; then take the three powers in turn and, for each, state precisely what the officer must hold, what he must record, and what he must tell the person, which is the framework the Supreme Court adopted in February 2025; sections 100 to 105, 110 and 104; the constitutional overlay; and Radhika Agarwal.

The relationship between sections 2(34) and 6 was the question in the Canon India litigation and it is now settled. In Canon India Pvt. Ltd v. Commissioner of Customs, decided 9 March 2021, the Supreme Court read "the proper officer" in section 28 as meaning only the officer who had assessed. On 7 November 2024 a three-judge Bench allowed the review and reversed that decision, holding that section 2(34) must be read harmoniously with section 6, so that an officer to whom the function has been validly allocated, including an officer of the Directorate of Revenue Intelligence, is a proper officer. The lesson for this question is that the identity of the empowered officer is a jurisdictional fact in every case.

Search of a person: what must be held, recorded and told

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

What must be told: section 102, and only on request. When an officer is about to search a person under section 100 or 101, he shall, if such person so requires, take him without unnecessary delay to the nearest gazetted officer of customs or Magistrate. That officer or Magistrate shall forthwith discharge the person if he sees no reasonable ground for search, and otherwise direct that a search be made. Before the search the officer shall call upon two or more persons to attend and witness it, and may issue an order in writing to them. No female shall be searched by anyone excepting a female.

The criticism is narrow and precise: the right operates only "if such person so requires", and nothing in the section obliges the officer to tell him it exists. Departmental practice is to record that the person was informed and declined, and that record is the only evidence of compliance. Measured against the modern standard, this is the provision most in need of a statutory duty to inform.

Section 105: search of premises. The Assistant Commissioner or Deputy Commissioner of Customs, or in a border area an officer of lower rank so empowered, may, if he has reason to believe recorded in writing that any goods liable to confiscation, or any documents or things which in his opinion will be useful for or relevant to any proceeding under this Act, are secreted in any place, authorise an officer to search or himself search. Section 105(2) applies the provisions of the Code of Criminal Procedure, 1973 relating to searches, so far as may be, subject to the modification that the sanction of the Principal Commissioner or Commissioner is substituted for that of a Magistrate. The substitution replaces a judicial authorisation with an executive one, which is the standing objection to this section.

Seizure

Section 110(1): where the proper officer has reason to believe that any goods are liable to confiscation under the Act, he may seize them; where seizure is not practicable, the proviso allows a constructive seizure by an order to the owner not to remove, part with or otherwise deal with the goods except with his previous permission.

Section 110(3) extends seizure to documents or things useful for or relevant to any proceeding, with a right in section 110(4) for the person from whom they were seized to make copies or take extracts in the presence of an officer. Section 110A permits provisional release of seized goods, documents or things, or of a provisionally attached bank account, on bond with such security and conditions as the adjudicating authority may require.

Arrest

Section 104(1): an officer of customs empowered in this behalf by general or special order of the Principal Commissioner or Commissioner of Customs, who has reason to believe that any person has committed an offence punishable under section 132, 133, 135, 135A or 136, may arrest him and shall, as soon as may be, inform him of the grounds for such arrest. The list of offences is exhaustive, and section 134, refusal to be X-rayed, is not among them, so a person who refuses an X-ray cannot be arrested for that refusal.

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

The modern standard: Radhika Agarwal

Radhika Agarwal v. Union of India, 2025 INSC 272, was decided on 27 February 2025 on a batch of about 279 petitions led by Writ Petition (Criminal) No. 336 of 2018, challenging the powers of arrest under the Customs Act and under the Central Goods and Services Tax Act, 2017.

The Supreme Court upheld the provisions. It affirmed Parliament's legislative competence under Article 246A to enact penal provisions for goods and services tax enforcement and dismissed the challenge to sections 69 and 70 of the CGST Act. It held that an arrest for a cognizable and non-bailable offence does not require a prior adjudication of the duty liability.

But it made the exercise of the power justiciable on three conditions. The officer must act on credible material; his "reasons to believe" must be recorded in writing; and those reasons must be furnished to the arrested person, so that he is in a position to challenge the arrest. The Court drew the safeguards from Articles 21 and 22 and from D.K. Basu v. State of West Bengal, and applied its reasoning in Arvind Kejriwal v. Directorate of Enforcement on the communication of grounds of arrest.

Search of a person under sections 100 and 101 requires a reason to believe, and section 101 additionally requires the authorisation of an officer of at least Assistant Commissioner rank; the safeguard is section 102, which entitles the person on request to be taken before the nearest gazetted officer or Magistrate, requires two witnesses and forbids the search of a female by anyone but a female, but which operates only if he asks and does not oblige the officer to tell him so. Section 103, the internal search, is the only power in the Act requiring a Magistrate's direction and a registered medical practitioner, and it is correctly the tightest. Section 105 requires the reason to believe to be recorded in writing but replaces the Magistrate's sanction with the Commissioner's.

Seizure under section 110 requires the same reason to believe and is disciplined by section 110(2), which returns the goods after six months unless a section 124 notice issues, and permits one extension only for reasons recorded and communicated before the original period expires, with provisional release available under section 110A.

For full marks, cover: the paper's misprint should be noticed and passed over in a phrase, and the answer written on section 138A; the presumption in full, with sub-section (2) and the two companion presumptions; a genuine critical evaluation, which means asking whether a reverse onus in a fiscal statute is justified and what keeps it constitutional; then the second and quite separate half of the question, the interpretation of customs law, which has two distinct bodies of rule, the statutory General Rules for the Interpretation of the Import Tariff and the general canons for a taxing statute, with Dilip Kumar on exemptions as the most important recent change.

A note on the question as printed

The paper prints "'33Presumption of Culpable Mental State'", with a stray "33" attached to the word Presumption. The provision meant is section 138A of the Customs Act, 1962, which is headed "Presumption of culpable mental state" and is the only provision in the Act bearing that description. The answer proceeds on section 138A.

Section 138A(2) is the limb most often omitted and the one that keeps the section defensible: for the purposes of the section, a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.

Critical evaluation of the presumption

The case for it rests on necessity and on the location of knowledge. A professional carrier can always say that he did not know what was in the consignment. Where the prosecution has proved possession, movement and misdeclaration, the only fact left is one that lies peculiarly within the accused's knowledge, and a rule that requires him to speak to it is not obviously unfair. That is the same reasoning that sustains reverse-onus provisions under the Narcotic Drugs and Psychotropic Substances Act, 1985 and section 139 of the Negotiable Instruments Act, 1881.

First, the presumption does not stand alone, and the cumulative effect is greater than any part. Section 123 places on the possessor of gold, watches or other notified goods, seized in a reasonable belief that they are smuggled, the burden of proving that they are not. Section 139 presumes the genuineness of documents produced or seized and, where seized, the truth of their contents. In a typical prosecution the department proves possession of notified goods; section 123 makes them smuggled unless the accused disproves it; section 139 makes the seized documents true unless he disproves them; and section 138A makes his mind guilty unless he disproves that. The accused is then answering three presumptions at once.

The balanced conclusion on this half is that the reverse onus is justified in principle and safe in law because of the preconditions, and that the objection worth pressing is not to section 138A itself but to the combination of section 138A, section 123, section 139 and section 108, which together leave very little for the prosecution to prove once possession is established.

Interpretation of customs law: two separate bodies of rule

The second half of the question is a different subject and must be organised separately. There are two bodies of interpretative rule and confusing them costs marks.

The first is statutory and applies to classification. The First Schedule to the Customs Tariff Act, 1975 is preceded by the General Rules for the Interpretation of the Import Tariff, which enact in India the international rules accompanying the Harmonised Commodity Description and Coding System. They are applied in strict sequence, and an officer who reaches a later rule without exhausting the earlier ones has misapplied them.

Two aids sit alongside those rules. The Explanatory Notes to the Harmonised System published by the World Customs Organization are persuasive but not binding and are routinely used to resolve heading disputes. And where the tariff uses a word that has a settled meaning in the trade, the trade or commercial parlance test applies in preference to a scientific or dictionary meaning, unless the tariff itself defines the term.

The second body of rule consists of the general canons for a taxing statute, and they differ by function.

A charging provision is construed strictly. If the subject does not fall within the letter of the charge he is not taxed, however clearly he may be within its spirit; there is no equity about a tax; and nothing is to be read in or implied. Article 265 supplies the constitutional reason: no tax may be levied or collected except by authority of law.

A machinery provision is construed so as to make the charge workable, and not so as to defeat it. Where a machinery provision is capable of two readings, the one that gives effect to the charge is preferred.

Two further canons complete the answer. A penal provision in a fiscal statute is construed strictly in favour of the accused, so section 135 is not extended by analogy. And a beneficial or procedural amendment may be applied to pending matters, whereas a provision creating or enlarging a liability operates prospectively unless expressly made retrospective, which is why the retrospective validation enacted by the Finance Act 2022 in relation to notices under section 28 had to be spelt out in terms.

The decision behind the material the presumption operates on

Romesh Chandra Mehta v. State of West Bengal, AIR 1970 SC 940 is the decision that governs the standing of a customs officer and of a statement taken by him. Persons intercepted with smuggled goods made statements to customs officers under sections 107 and 108 and later objected that those statements had been extracted from them in a proceeding declared to be judicial, and were therefore hit by Article 20(3), which protects a person accused of an offence from being compelled to be a witness against himself.

The decision behind the burden the presumption sits on

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

The Supreme Court held that where section 123 does not apply, the burden of proving that goods are smuggled lies on the department, that being the ordinary rule in a quasi-criminal proceeding; but that the burden is discharged on the totality of the circumstances, and the department is not required to prove its case with mathematical precision or to establish the actual act of smuggling. The unexplained possession of goods of foreign origin, coupled with the possessor's refusal to disclose his source, may itself supply the proof.

Judged alone it is a defensible reverse onus, resting on the fact that the mental element lies peculiarly within the accused's knowledge. Judged together with section 123's reverse burden for notified goods, section 139's presumption about documents and section 108's compelled statements, the accumulation is heavy, and the honest criticism is directed at the combination rather than at section 138A by itself.

The interpretation of customs law runs on two tracks that must not be merged. Classification is governed by the statutory General Rules for the Interpretation of the Import Tariff, applied in sequence: headings and binding section and chapter notes first, then incomplete, unassembled and mixed goods, then the tie-breakers of most specific description, essential character and last numerical heading, then akin goods, packing and sub-headings compared at the same level, with the World Customs Organization's Explanatory Notes as persuasive material and the trade parlance test where the tariff uses a commercial word.

For full marks, cover: the word is "critically evaluate", so the definitions must be stated and then tested; the two definitions verbatim, and the fact that the current account is defined residually so that the capital definition governs; the operative asymmetry between sections 5 and 6; the 2019 restructuring; then the criticism, which has four genuine limbs, the residual drafting, the borderline cases the definitions do not resolve, the split regulator, and the fact that current account freedom is qualified by rules that are not always reasonable; and a verdict.

The two definitions, and why one governs the other

Section 2(e): a capital account transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India, or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6.

The test works well in the clear cases. A resident buying shares in a foreign company alters his assets outside India: capital. A non-resident subscribing to Indian equity alters his assets in India: capital. A resident borrowing abroad alters his liabilities outside India: capital. A guarantee given for a foreign subsidiary is caught because contingent liabilities are expressly included. Payment for imported goods alters nothing: current. Interest on a loan is current; repayment of the principal is capital, because it discharges a liability.

The Act then makes the classification matter through an asymmetry. Section 5: any person may sell or draw foreign exchange to or from an authorised person if such sale or drawal is a current account transaction, subject to the proviso that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. Section 6: a capital account transaction is permitted only to the extent the regulator has specified it as permissible. Current is free unless restricted; capital is restricted unless permitted.

Sections 6(4) and (5) grandfather assets acquired, held or owned, or inherited, while the holder was on the other side of the residence line, and section 6(6) empowers the Reserve Bank to regulate the establishment in India of a branch, office or other place of business by a person resident outside India.

The instruments are the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 of the Central Government, the Foreign Exchange Management (Debt Instruments) Regulations, 2019 of the Reserve Bank, and the Mode of Payment and Reporting of Non-Debt Instruments Regulations, 2019, with section 47(3) saving the Bank's earlier regulations on capital account transactions until amended or rescinded by the Central Government.

The critical evaluation

Criticism one: the residual definition places the entire weight on one clause, and that clause is not self-executing. Because section 2(j) says only "a transaction other than a capital account transaction", every borderline question becomes a question about section 2(e). The four inclusive limbs in section 2(j) do not help, because they are illustrations and because they were drawn from Article XXX(d) of the Articles of Agreement of the International Monetary Fund rather than from any analysis of Indian transactions. A definition that operates by subtraction is only as good as the definition it subtracts from.

Criticism three, and the sharpest: section 2(e) now contains a cross-reference to a provision that does not exist. The definition "includes transactions referred to in sub-section (3) of section 6", and section 6(3) was omitted with effect from 15 October 2019. That is not merely untidy. The omitted sub-section contained the eleven enumerated classes, and the definition therefore no longer incorporates any enumeration at all; the residue of the definition is the abstract balance-sheet test alone. Parliament omitted the sub-section without consequential amendment to section 2(e), and the point survives in the Act today.

Criticism four: the split regulator has produced two rulebooks for one concept. Since 15 October 2019 a capital account transaction is governed by the Central Government's rules if it does not involve a debt instrument and by the Reserve Bank's regulations if it does, with the boundary between the two fixed by section 6(7), that is by the Central Government's own determination of what a debt instrument is. So the Government defines the category that determines which regulator has jurisdiction. There is a real institutional objection here: the definitional power and the substantive power over the larger half of the field are in the same hands, and the Reserve Bank's role is residual and dependent.

What can be said in the concept's favour, and it is considerable. The distinction is not an Indian invention; it follows the Articles of Agreement of the International Monetary Fund, under which India accepted the obligations of Article VIII in August 1994 and thereby committed itself to current account convertibility while retaining freedom on the capital account. The Tarapore Committee on Capital Account Convertibility, which reported in 1997, recommended a phased approach to the capital account subject to preconditions on fiscal consolidation, inflation and financial sector health. FEMA's asymmetry is therefore a considered policy choice and not an accident of drafting, and the crises of other emerging economies in the 1990s, where sudden capital account reversals did the damage, are the reason for it.

The boundary tested on real facts

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 was a transfer of shares by residents to a non-resident, unarguably a capital account transaction, and the complaint was about its price. The Supreme Court's answer, that a contravention of the rules governing such a transfer is remediable and compoundable, is the best authority available on what follows when the capital account rules are broken.

The authority on the consequence of getting it wrong

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

Conclusion

Conclusion. The two concepts are the architecture of the whole Act. Section 2(e) defines a capital account transaction by the alteration of cross-border assets or liabilities including contingent liabilities, section 2(j) defines a current account transaction as everything else with four illustrative limbs, and the asymmetry between section 5, which frees the current account subject to reasonable restrictions, and section 6, which permits capital account transactions only to the extent specified, is what makes the classification worth litigating.

Evaluated critically, the concept has four defects and one strong justification. It is defined by subtraction, so all the weight falls on section 2(e). It does not decide the transactions that matter most, long-term trade credit, the timing of a guarantee, and a Liberalised Remittance Scheme remittance whose character depends on its use, all of which are resolved by administrative instrument rather than by the definition. Section 2(e) still incorporates by reference section 6(3), which was omitted on 15 October 2019, so the definition points at nothing and only the abstract test survives.

For full marks, cover: that "refund" in this Act is four different provisions and not one, and separating them is what earns the marks; section 26 for export duty; section 26A for defective imported goods; section 27 as the general provision with its limitation and its exceptions; section 18(4) and (5) on finalisation of a provisional assessment; then the unjust enrichment machinery which qualifies all of them, with Mafatlal Industries; the ITC Ltd obstacle and its cure in section 18A from 1 May 2025; interest on delayed refund under section 27A; and drawback under sections 74 and 75, which is a refund in substance and should be distinguished.

Section 26A: refund of import duty on defective goods. This is a more modern and more useful provision. Where imported goods are found to be defective or otherwise not in conformity with the specification agreed upon between the importer and the supplier, the import duty paid is refundable, subject to conditions: the goods must not have been worked, repaired or used after importation except where such use was indispensable to discover the defect or non-conformity; they must be identified to the satisfaction of the Assistant or Deputy Commissioner as the goods imported; the importer must not have claimed drawback; and the goods must be exported, or the importer must relinquish his title to them and abandon them to the customs, or they must be destroyed or rendered commercially valueless in the presence of the proper officer, within thirty days of clearance for home consumption, extendable by the Principal Commissioner or Commissioner up to three months.

The application must be made within six months of the relevant date. The section does not apply to perishable goods or to goods which have exceeded their shelf life or their recommended storage-before-use period.

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. It is paid to the applicant only where he falls within one of the exceptions, and those exceptions must be listed: where the duty was paid by the importer and he had not passed on the incidence to any other person; where the goods were imported by an individual for his personal use; where the duty or interest was borne by a buyer who had not passed on the incidence; where it is a refund of export duty under section 26; where it is a refund of drawback; and where the duty was paid under protest and the amount is found refundable, in the circumstances the section provides.

Section 28D raises the presumption. Every person who has paid duty on any goods shall, unless the contrary is proved, be deemed to have passed on the full incidence of that duty to the buyer. The burden therefore lies on the claimant from the beginning.

Section 28C supplies the mechanism by which the passing on is later proved or disproved. A person selling goods on which duty has been paid must prominently indicate in all documents relating to assessment, sales invoice and other like documents the amount of such duty which will form part of the price at which the goods are sold.

The procedural obstacle, and its cure

In ITC Ltd v. Commissioner of Central Excise, Kolkata IV, decided on 18 September 2019, 2019 INSC 1049, the assessee had cleared goods on self-assessed bills of entry, paid additional customs duty, and claimed a refund of about Rs 35.89 crore under section 27 without appealing against any bill of entry. The Supreme Court held the claim not maintainable. A self-assessment under section 17 is itself an order of assessment; it is appealable under section 128; and the officer deciding a refund application cannot sit in appeal over an assessment that stands, since the refund authority is not an appellate authority.

The consequence was severe and counter-intuitive. An importer who had assessed himself at the wrong rate had to appeal against his own return, within the sixty-day appellate limitation, before he could reach the refund question at all.

Interest, and the distinction from drawback

Section 27A provides for interest on a delayed refund. Where a refund ordered under section 27(2) is not made within three months from the date of receipt of the application, interest is payable at the rate fixed by the Central Government, not below five per cent and not exceeding thirty per cent per annum, from the date immediately after the expiry of three months until the date of refund. The provision is the counterpart of section 28AA, under which the assessee pays interest on delayed duty at a rate between ten and thirty-six per cent, and the asymmetry between the two ranges is a standing and fair criticism.

Drawback is a refund in substance but a different provision in law, and the distinction should be drawn. Section 74 provides for drawback on the re-export of goods which were imported and are identifiable as the same goods, at up to ninety-eight per cent of the duty paid, reduced according to the period for which the goods were used in India, on the goods being entered for export within two years of payment of duty, extendable.

Section 26A returns import duty on goods found defective or not in conformity with the agreed specification, provided they were not worked, repaired or used except to discover the defect, no drawback was claimed, and they are exported, abandoned or destroyed within thirty days of clearance, extendable to three months, with the section excluded for perishables and goods past their shelf life. Section 27 is the general provision, requiring an application within one year of payment, or of purchase in the case of a buyer, with no limitation where the duty was paid under protest. And section 18(4) and (5) govern the excess arising when a provisional assessment is finalised.

Every one of them is qualified by unjust enrichment. Section 27(2) sends the money to the Consumer Welfare Fund unless the claimant proves he bore the burden, section 28D presumes that he did not, section 28C requires the duty element to be shown on the invoice so that the question can be answered from documents, and Mafatlal Industries, decided by nine judges in 1996, is the source of all three, holding that the statutory route is exclusive, that no civil suit lies, and that only a claimant who did not pass on the tax may be repaid.

For full marks, cover: the paper asks for any two of five, so each note a candidate writes is worth about twelve and a half marks and must be substantial; all five are written here because the two chosen differ; note (a) is the trap of the whole folder, because section 43 provides that proceedings do NOT abate; note (c) is a policy question and must be answered with measures and not with generalities; note (e) must be built provision by provision and must record that the Bank's powers have been narrowed twice since 2019.

The rule it displaces. At common law a personal action dies with the person, actio personalis moritur cum persona. Applied to a penalty, that would mean that a contravener who died while adjudication was pending escaped entirely and his estate passed to his heirs undiminished; and an insolvency would extinguish the penalty along with his other liabilities. Section 43 removes both results by two devices: a declaration that the proceeding does not abate, and a provision for devolution so that there is a party against whom it can continue.

Five features deserve statement.

First, the section is tied to section 13. It applies to any right, obligation, liability, proceeding or appeal arising in relation to the provisions of section 13, that is to the civil penalty jurisdiction. It does not and could not carry a criminal liability under section 13(1C) to a legal representative, because criminal liability is personal and dies with the accused.

Second, it covers insolvency as well as death. The official receiver or the official assignee takes the liability with the estate, so a contravener cannot defeat a penalty by an insolvency, and the penalty ranks against the estate along with his other debts.

A comparison completes the note. The Customs Act contains no equivalent general provision, and the position on the death of a person against whom a penalty is proposed is governed by general principle. FEMA legislated expressly because a foreign exchange penalty may be very large, is often adjudicated years after the transaction, and is frequently sought against persons whose estates would otherwise pass free of it.

(b) Provisions related to warehouse under the Customs Act

Chapter IX, sections 57 to 73A, permits imported goods to be deposited without payment of duty. Its rationale is that the taxable event for the rate is removal from the warehouse and not importation, so the duty is deferred and, for goods re-exported, avoided altogether.

Custody and control. Section 60 governs the order permitting deposit. Section 73A places warehoused goods in the custody of the licensee, who is responsible for them until they are cleared and is liable, where goods are removed in contravention of section 71, to pay duty, interest, fine and penalties. The Warehouse (Custody and Handling of Goods) Regulations, 2016 and the Special Warehouse (Custody and Handling of Goods) Regulations, 2016 prescribe security, digital record-keeping, appointment of a warehouse keeper and insurance.

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

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.

Improper removal. Section 71 forbids removal from a warehouse except as provided. Section 72 deals with improperly removed goods, entitling the proper officer to demand the full amount of duty chargeable with all penalties, rent, interest and other charges where goods are removed in contravention of section 71, or have not been removed at the expiration of the warehousing period, or have been taken as a sample without payment of duty; and, on failure to pay, to detain and sell so much of the goods as is sufficient. Section 73 provides for cancellation and return of the bond.

Measure two: reduce the compliance friction that generates contraventions. The commonest FEMA proceeding is not an impermissible investment but a late Form FC-GPR or FC-TRS. Simplifying and consolidating reporting through the Single Master Form, extending timelines, and providing a low-cost regularisation route reduce the number of investors who acquire a compounding order in their first year in India. The Foreign Exchange (Compounding Proceedings) Rules, 2024 move in that direction by rationalising the compounding authorities and permitting digital payment, although they also raised the fee to ten thousand rupees plus goods and services tax.

Measure three: shorten and make predictable the approval process on the Government route. Since the Foreign Investment Promotion Board was abolished in 2017 approvals are processed by the administrative ministry through the Foreign Investment Facilitation Portal, with standard operating procedure timelines. The measure that matters is adherence to those timelines and the giving of reasons for refusal, because an unexplained refusal is worse for investor confidence than a clear prohibition.

Measure six: infrastructure, logistics and the cost of trading across borders. Because most foreign direct investment in manufacturing depends on importing inputs and exporting output, customs facilitation is an investment measure. Faceless assessment, the Authorised Economic Operator programme, section 65 and the Manufacture and Other Operations in Warehouse Regulations, 2019 which permit duty-free manufacture in a bonded warehouse, and now section 18(1B), which since 1 May 2025 requires a provisional assessment to be finalised within two years, all reduce the working capital an investor must commit.

Measure seven, and it must be stated honestly, is the recognition that some restrictions will remain. Press Note 3 of 2020, dated 17 April 2020, requires an entity of a country sharing a land border with India, or one whose beneficial owner is in such a country, to invest only under the Government route. That is a deliberate restriction on a source of capital, taken for reasons of national economic security, and no honest answer on increasing foreign direct investment can pretend it is not a cost. The measure that mitigates it is clarity: a defined and quickly administered approval process for investments that are in fact benign.

The import procedure, in sequence. Section 29 requires the person in charge of a vessel or aircraft to call only at a customs port or customs airport. Section 30 requires delivery of the import manifest or import report. Section 31 forbids the master from permitting unloading until an entry inwards is granted. Section 32 forbids unloading of goods not mentioned in the manifest. Sections 33 and 34 confine unloading to approved places and to the supervision of the proper officer. Section 45 places imported goods in the custody of the approved custodian until cleared.

Section 46 requires the importer to present a bill of entry for home consumption or for warehousing, to make and subscribe a declaration as to the truth of its contents, and to produce the invoice and supporting documents. Section 47 provides for clearance for home consumption where the goods are not prohibited and the duty and charges have been paid, with interest under section 47(2) where payment is delayed beyond the permitted period. Section 48 permits goods not cleared within thirty days to be sold by the custodian with the permission of the proper officer.

The foreign exchange interface should be drawn, because this is a combined paper. Section 113 makes export goods liable to confiscation where the value stated in the shipping bill or the declaration under section 50 differs from the proceeds of sale or the value the exporter intends to receive, and the same transaction is a contravention of section 7 of FEMA, which requires a declaration of the full export value, and of section 8, which requires all reasonable steps to realise and repatriate. The shipping bill therefore serves two statutes at once, which is why a mis-stated export value is prosecuted under both.

Two special regimes complete the note. Section 20 governs re-importation of goods produced or manufactured in India, which are liable to duty as if they were imports, subject to the exemptions notified. Section 74 provides drawback on re-export of identifiable imported goods at up to ninety-eight per cent of the duty, and section 75 drawback on imported materials used in exported goods. Chapter XI deals with goods in transit and transhipment, and Chapter XII with goods imported or exported by post, courier and stores.

(e) Powers of the Reserve Bank of India under FEMA

The Bank's powers come from six places and should be built up in order.

Three, inspection: section 12. The Bank may at any time cause an inspection of the business of any authorised person, by an officer specially authorised in writing, for verifying the correctness of any statement, information or particulars furnished, obtaining information which the authorised person has failed to furnish, or securing compliance; and every authorised person, and where it is a company or firm every director, partner or officer, must produce books, accounts and documents and furnish statements within the time and manner directed.

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

The note must end by recording that the Bank's position has been narrowed twice, and that this is the analytical content. On 15 October 2019, section 6(3) was omitted and section 6(2A) gave the Central Government power over capital account transactions not involving debt instruments, so foreign direct investment passed out of the Bank's regulation-making hands to the Non-debt Instruments Rules, 2019, with section 47(3) saving its earlier regulations until the Government amends or rescinds them.

On 1 October 2020, section 44A provided that the Bank's powers under FEMA do not extend to an International Financial Services Centre set up under section 18(1) of the Special Economic Zones Act, 2005, and are exercisable instead by the International Financial Services Centres Authority. And section 41 has always obliged the Bank, in discharging its functions under the Act, to comply with such general or special directions as the Central Government may give.

The authority behind the foreign exchange notes

A second authority is Vijay Karia v. Prysmian Cavi e Sistemi SRL, (2020) 11 SCC 1, the leading modern decision on what follows when the foreign exchange rules are broken. The facts are worth setting out because they are a foreign exchange case in commercial dress. An Italian cable manufacturer and its Indian joint venture partners fell out; the London Court of International Arbitration made awards directing the Indian shareholders to sell their shares to the foreign party at a discount to fair market value. Enforcement in India was resisted under section 48 of the Arbitration and Conciliation Act, 1996 on the ground that a sale to a non-resident at a discounted price offends the exchange control law, then the pricing guidelines and now the Non-debt Instruments Rules, and so is contrary to the public policy of India.

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

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

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

The Supreme Court held that the initial burden of proving that a confession is voluntary lies on the Department and not on the person who made it. An authority or court that proposes to act on a retracted statement as a voluntary one must apply its mind to the retraction and reject it in writing, with reasons; it cannot pass over the retraction in silence. The Court balanced that with a qualification which is as important for the answer: a bald assertion of coercion or duress, unsupported by any material, will not be enough to have the statement discarded, so the person retracting must give the authority something to act on.

Why it bears on this question. Adjudication under section 13 rests very largely on statements recorded in the course of an investigation, and this case is the answer to the objection that a civil standard of proof leaves the person before the authority without protection. It does not. The burden of establishing that a statement was voluntary sits on the Directorate, and a reasoned rejection of the retraction in writing is a condition of using the statement at all. Read with the civil character of the proceeding, the position is that the Directorate has the lighter standard of proof but not a free hand with its evidence.

Increasing foreign direct investment is a matter of widening the automatic route and raising caps under the Non-debt Instruments Rules, reducing the reporting friction that produces most contraventions, keeping approvals under the Government route timely and reasoned, securing tax certainty after the 2021 withdrawal of retrospective indirect-transfer taxation, improving contract enforcement and insolvency resolution, and cutting the cost of trading across borders through faceless assessment, the Authorised Economic Operator scheme, section 65 manufacture and the new two-year limit on provisional assessment; while acknowledging honestly that Press Note 3 of 2020 is a deliberate restriction on one source of capital.