In a recent decision involving Canon India, the Hon’ble Supreme Court (“SC”) had adjudicated about the authority of the officers of Directorate of Revenue Intelligence (“DRI”) to issue a show cause notice (“SCN”) under Section 28 of the Customs Act, 1962 (“Customs Act”) for the recovery of short payment of customs duty.[1] The Hon’ble SC held that a DRI officer does not have the authority to initiate proceedings through SCN issuances, since such an officer was not the person to clear the goods initially.
The Comptroller and Auditor General had reported that litigation proceedings initiated by the DRI and Customs (Preventive) pending before various Courts dealt with a potential tax revenue exposure of INR 170 trillion. Thus, the aforementioned ruling would have wide ramifications on such proceedings, threatening their continuity. Numerous High Courts (“HC”) and CESTAT have followed Cannon India and quashed the proceedings on account of lack of jurisdiction since SCNs were issued without any authority of law.[2] The decision was also followed by the Apex Court in Commissioner of Customs v. Agarwal Metals & Alloys[3].
As massive loss of revenue was at stake, customs authorities tried to utilise all the armoury available to them and undertook all possible remedial measures. They filed a review petition before the SC in one matter[4] and a special review petition in another matter[5], both of which are pending for adjudication as on date.
As far as dealing with the matter in the immediate future, the Central Board of Indirect Taxes and Customs (“CBIC”) mandated that all fresh SCNs under Section 28 of the Customs Act shall be issued by only the jurisdictional Commissionerate from where imports have taken place[6]. Various amendments to the Customs Legislation have also been introduced to negate the decision of the SC in the case of Cannon India.
Amendments made vide Finance Act, 2022
As the appeals are pending with the SC, the Government was constrained to amend the legislation. Finance Act, 2022 had made the following amendments:
- a DRI officer is an officer of customs;
- the CBIC has been empowered to assign functions to officers under the Customs Act;
- DRI has to transfer the relevant records of the investigation to the jurisdictional officer for the issuance of SCN;
- Power to validate the past actions of the DRI as the proposed changes would deem to have been in force from all time.
The Government has also issued fresh notifications under the amended sections to safeguard the interest of Revenue. The changes notified are as follows:
- Power of Audit has been assigned to Additional/ Deputy or Principal Commissioner of Customs.[7]
- DRI officer assigned same power as a customs officer.[8]
- Assignment of pending SCN issued by DRI to Commissioner of Delhi/ Mumbai (Adjudication) in case of involvement of multiple jurisdictions, and other cases to relevant Additional/ Deputy or Principal Commissioner depending on quantum or nature of proceedings.[9]
- Assignment of pending SCN for confiscation of goods to the officer of customs at the customs station where the entry was made; or in case of multiple jurisdictions, to the officer of customs at the customs station having the highest value of goods.[10]
It must be noted that the above referred amendments have far reaching implications and could potentially overrule the aforesaid SC decision in the case of Cannon India.
It must be pointed out that the validation clause itself has certain ambiguities. For example, the explanation to the clause states that any proceeding arising out of any action taken under validation clause and pending on March 30, 2022, shall be disposed of as per the amended legislation. The issue that requires consideration is how could a proceeding be pending on March 30, 2022 when the section was not even introduced.
Closing Remarks
As the Finance Act, 2022 has been promulgated, it is essential that companies assess their ongoing customs disputes and challenge SCNs or any pending proceedings initiated by DRI before the concerned fact finding authority and also verify the officer at the time of adjudication.
It is anticipated that the floodgates of litigation could open once again following the possibility of taxpayers challenging the constitutional validity of these amendments. They could contend that the customs authorities are attempting to retrospectively legalise the past actions of DRI officers who were lacking jurisdiction while issuing SCNs.
However, it is also important to recognise that the objective of this amendment is merely to close the loopholes which were being exploited by the taxpayers. There is no iota of doubt that the SCN, issued by the concerned DRI officer without any jurisdiction, may have mentions of alleged short-payment of duty or wrongful availment of refund. The possibility of the Hon’ble Apex Court passing an order in favour of the tax department cannot be ruled out since significant revenue cannot be forsaken due to procedural lapses.
It would be interesting to see the final decision as it could have a significant impact on thousands of taxpayers. The decision would also impact the role of specialised agencies in their investigations and SCNs even under other legislations. To protect revenue interest under GST legislation, which may be challenged later, the Government has already notified that the Directorate General of GST Intelligence would only issue SCN and not adjudicate the same.[11] It has also been stipulated that the Central Tax Officer under GST would adjudicate such SCNs.[12]
[1] Canon India Private Limited v. Commissioner of Customs, (TS-75-SC-2021-CUST (SC)) (“Cannon India”).
[2] Mohan C. Suvarna v. Principal Commissioner of Customs, [W.P 10773 of 2018, Karnataka HC Order dated July 14, 2021]; Quantum Coal Energy (P.) Ltd. v. Commissioner, Office of the Commissioner of Customs [2021] 125 taxmann.com 378 (Mad).
[3] Commissioner of Customs v. Agarwal Metals & Alloys; [2021] 130 taxmann.com 53
[4] It is listed before a Supreme Court Bench consisting of Chief Justice N.V. Ramana, and Justices A.S. Bopanna and V. Ramasubramanian.
[5] M/s Godrej and Boyce Manufacturing Co. Ltd. v. Union of India, TS-52-SC-2022-CUST
[6] Instruction No. 04/2021-Cus dated March 17, 2021.
[7] Notification No. 22/ 2022 Customs (NT) dated March 31, 2022.
[8] Notification No. 25/ 2022 Customs (NT) dated March 31, 2022.
[9] Notification No. 29/ 2022 Customs (NT) dated March 31, 2022, Notification No. 26/ 2022 Customs (NT) dated March 31, 2022..
[10] Notification No. 30/ 2022 Customs (NT) dated March 31, 2022.
[11] Circular No.169/01/2022-GST dated March 12, 2022.
[12] Notification No. 02/2022-Central Tax dated March 11, 2022.