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The Supreme Court's ruling in the Canon India Pvt. Ltd. v. Commissioner of Customs has sent ripples through the customs law landscape in India. In this pivotal judgment, the apex court revisited the powers of the Directorate of Revenue Intelligence (DRI). It delivered a verdict that redefined the scope of DRI's authority and underscored the importance of due process in taxation.
This article traces the dispute's origins, delves into the intricacies of the judgment, and analyzes its implications for taxpayers, tax authorities, and the broader legal framework governing customs in India.
Under the framework of the Customs Act, the proper officer is empowered to issue SCNs for recovery of customs duty not levied, short-levied, or erroneously refunded. The term' proper officer' became central to the debate, as the Customs Act does not explicitly state whether DRI officers are included within its scope. Historically, DRI officers were extensively involved in investigation proceedings and issuing SCNs to recover duties. The CBEC reinforced the enforcement role by clarifying that DRI officers are authorized to issue SCNs, though the jurisdictional customs officers will still adjudicate these. However, these powers were challenged as lacking a statutory basis, mainly because DRI officers were not directly involved in the assessment or reassessment under Customs.
The controversy, thus, began with the Supreme Court's ruling in Commissioner of Customs v. Sayed Ali, where the Apex Court had held that only those customs officers assigned the specific functions of assessment and reassessment in the jurisdictional area could issue SCNs under the Customs Act. This ruling raised doubts about the authority of DRI officers, who were not traditionally involved in the original assessment of imports, to issue SCNs. The judgment, being the law of the land, invalidated numerous SCNs issued by DRI officers, disrupting customs enforcement and thereby necessitating legislative intervention.
In the aftermath of the SC's judgment, immediate and pivotal amendments were introduced through the Finance Act 2011, which retrospectively validated the authority of officers, including the DRI officers, to issue SCNs. This was specifically aimed at removing the procedural barriers the Sayed Ali judgment created and effectively nullifying the impact.
The constitutional validity of the retrospective validation of SCNs issued by customs officers, including DRI officers, was challenged before jurisdictional HCs. On the one hand, the Delhi High Court in Mangali Impex Ltd. v. Union of India found the retrospective amendments unconstitutional. At the same time, the Bombay HC in Sunil Gupta v. Union of India upheld the retrospective validation by recognizing the parliament's power to legislate and cure jurisdictional defects. These precedents set the stage for the judgment in the case of Canon India, where the Supreme Court revisited the scope of DRI officers' powers.
Canon India Pvt. Ltd. imported digital multifunction devices under the claim that these were exempt from customs duty. However, the DRI issued a show-cause notice alleging misclassification and evasion of customs duties. The notice was issued under Section 28(4) of the Customs Act, 1962, which empowers "the proper officer" to demand duties not levied or short-levied. Canon India challenged the notice, arguing that the DRI officials were not the "proper officers" as per the statutory scheme. The case eventually reached the Supreme Court, which provided a definitive interpretation of the term "proper officer" and examined whether DRI had the authority to issue such notices.
The SC ruled in favor of Canon India, declaring the DRI's actions ultra vires. The Apex Court categorically held that DRI officers were not 'the' proper officers as they were neither involved in the original assessment of the imported good nor were explicitly assigned powers to reassessment or duty recovery by a valid notification. The judgment reverberated the findings in Sayed Ali. It had invalidated the CBEC Notification, which designated DRI officers as proper officers, premised on the fact that post-facto assignment of powers through notification is legally untenable. The judgment was hailed as a watershed moment in Customs law.
Some of the key highlights of the judgment were:
To address the enforcement vacuum created by the judgment in Canon India, once again, through the Finance Act 2022, a similar retrospective cure was introduced, ensuring the validity of SCNs already issued by DRI officers. All SCNs issued by DRI officers or other officers of customs before 01 April 2023 were retrospectively validated, which ensured that SCNs invalidated due to jurisdictional defects (as in Canon India) were treated as legally issued. This amendment restored the legitimacy of DRI officers' enforcement actions, aiming to resolve the contradictions by overriding all prior judgments. The retrospective amendment was criticized for violating Article 14 of the Indian Constitution, as it retrospectively validated actions invalidated by Canon India. These retrospective amendments came to be challenged before the SC in the case of Daikin Air Conditioning India and Dish TV India Ltd.
In November 2024, the three-judge bench of the Supreme Court revisited its judgment in Canon India pursuant to a review petition filed by the revenue. Accepting the review petition, the SC reversed its earlier stance in light of the retrospective amendment brought in by the Finance Act 2022. The Court addressed several critical issues, including the statutory scheme of the Customs framework, particularly under Sections 17 and 28, the validity of legislative amendments, and the powers of the DRI under the Customs Act.
It was clarified that the erstwhile circular and notification empowered DRI officers to issue SCNs. The assumed interlinkage between Sections 17 and 28 empowering officers assessing/reassessing to issue SCNs for recovery was deemed erroneous. The Supreme Court upheld the validity of Section 97 of the Finance Act 2022. It concluded that DRI and other designated officers can issue notices under Section 28, thus settling jurisdictional uncertainties. Thus, the initial Canon India (P.) Ltd. (supra) judgment was overruled for being per incuriam as it failed to consider key legislative amendments.
Given that the SC has held that the retrospective amendments are constitutionally valid, it seems that all pending challenges will become irrelevant now. In addition, the judgment is likely to cause financial hardships for many businesses with the revival of past SCNs issued by the DRI.
The judgment also emphasizes the need for officers' jurisdiction to issue SCNs explicitly defined and backed by appropriate notifications and circulars. This principle can be extended to GST and requires the clear establishment of officers' authority to issue notices and carry out assessments.
The Canon India saga highlights the evolving dynamics between judicial interpretations and legislative actions. While the initial judgment underscored the importance of judicial oversight in enforcement, the review judgment reinstates the legislature's intent to empower DRI officers. The judgment has become a cornerstone in the interpretation of customs law. It is a testament to the dynamic interplay between legislative intent, judicial interpretation, and administrative efficiency in India's tax framework.
Contributed by – Ajay Jha, Assistant Manager – Tax, Grant Thornton Bharat.
This article first appeared in Taxmann on 24 December 2024.
[1] Circular No.4/99-Cus dated 15 February 1999
[2] 2011 (3) SCC 537
[3] Section 28 of the Customs Act
[4] Section 28(11) of the Customs Act and Notification No. 44/2011 dated 06 July 2011
[5] W.P.(C) 441/2013; Order dated 03 May 2016
[6] Writ Petition No. 12153/2012; Order dated 03 November 2014
[7] Section 97 of the Finance Act amended Section 28 of the Customs Act
[8] Circular dated 15 February 1999 & Notification dated 06 July 2011
