Several Customs Claims Impacted As Supreme Court Redefines DRI Powers 

A Supreme Court bench led by the Chief Justice of India on Mar. 9, pronounced a critical judgment that concerns the jurisdiction of officers in the Directorate of Revenue Intelligence.

The DRI is the apex investigative body in Indian customs law matters and is tasked with “….detecting and curbing smuggling of contraband, including drug trafficking and illicit international trade in wildlife and environmentally sensitive items, as well as combating commercial frauds related to international trade and evasion of Customs duty”. In a large number of cases, duty demands are booked by the officers of the DRI, while carrying out a re-assessment of the import-consignment. More often than not, they involve contentious issues concerning both facts and law.

Section 28(4) of the Customs Act, 1962, mandates that “the proper officer” reassess the bill of entry, filed in respect of imported goods that have been assessed and cleared (by the Customs officers).

In the Canon India case before the Supreme Court, certain imported cameras were cleared after due verification and review of the declarations, by the Deputy Commissioner of Customs. Officers of the DRI however reassessed the claim, i.e. denied the exemption sought, demanded duty with interest, imposed penalty on the importers, and confiscated the offending goods.

The law as clarified by this judgment is that an officer of the DRI is not “the proper officer” for the purposes of undertaking reassessment of imported goods (previously assessed by the jurisdictional authority having superintendence at the import station).

The Supreme Court postulated that the process of empowering these DRI officers was not carried out correctly in the eyes of the law, and called the relevant notification on the strength of which the DRI officers were shown to be empowered as “ill-founded”.

Further, it said that officers of the DRI are not “proper officers” that are duly designated with the requisite powers in terms of Section 6 of the Act.

The Court observed that reassessment should, rationally be a power enjoyed by the same authority that had originally assessed the goods.

In other words, the DRI officers were neither “proper officers” nor empowered, thus lacked jurisdiction to reassess imports previously cleared by another Customs officer.

Along with its finding against the invocation of an extended period of limitation, the Court set aside the show cause notices (which propose demands) of 2012. Hence, officers of the DRI could not reassess the given import consignments, being bereft of jurisdiction.

Judgment Impact

Since the facts involved reassessment proceedings, at the very least, wherever the DRI has sought to reassess the imports, they can be said to not be “proper officers” and lack jurisdiction to carry out these actions. Consequently, importers having DRI proceedings could escape the duty (and other consequences) due to this judgment.

The impact of the Supreme Court ruling is already noticeable.

In a writ petition pertaining to a demand raised by DRI officers, on Mar. 16 the Madras High Court applied the law as declared in Canon India’s case, and held that the DRI was not the “proper officer” and the proceedings (duty demand on imported bituminous coal alleged to have been cleared incorrectly as steam coal) were without authority of law. The High Court allowed the petitioner's case, which simply put means that the demand could not stand.

The judgment does not reveal whether the Supreme Court was shown Section 28(11) of the Act – an overpowering provision introduced by the Customs (Amendment and Validation) Act, 2011 - which by deeming fiction stipulates that all customs officers are “proper officers” for purposes of assessment (which includes reassessment). The verdict could have changed should this provision have been evaluated as well.

In the case of Mangali Impex Ltd. (2016) the Delhi High Court held that Section 28(11) of the Act cannot operate retrospectively (i.e. period prior to April 8, 2011), therefore, recovery proceedings initiated by DRI cannot be validated. The Supreme Court will take up this issue (whether the DRI was empowered after April 8, 2011, and is a “proper officer”) again, when it hears the appeal against the decision of the Delhi High Court.

It is anyone’s guess as to how the Supreme Court will rule given the verdict in Mangali’s case (which essentially allowed DRI officers to raise demands, after April 8, 2011) whereas its own order in Canon India’s case holds contrary.

The Central Board of Indirect Taxes and Customs, displaying remarkable alacrity (Instruction No. 04-2021-Customs, March 17, 2021) directed its officers that show-cause notices issued by the officers of DRI should be kept pending. It advised that where the DRI is conducting investigations, show cause notices in such cases should be issued by the jurisdictional commissionerates where imports took place.

We can safely assume that several demands involving thousands of crores of duty demand (besides statutory interest and penalties) are at stake – these arising in cases booked by officers of the DRI after their investigations and inquiry.

The CBIC / Ministry of Finance can be expected to file a review petition in the Supreme Court, or move a retroactive amendment in the Act, so as to declare officers of DRI as proper officers and always empowered to assess. The Finance Bill, 2021, which has now been passed by both houses of Parliament, did not contain any such amendment.

The bearing of the judgment will be far and wide, including on duty-credit scrips such as the Merchandise Exports from India Scheme (scrip issued by the Directorate General of Foreign Trade, which are transferable) that can be used to make duty free imports.

Cases concerning eligibility and entitlement of these scrips have been registered by the DRI. Section 28AAA(3) stipulates that “the proper officer” make a demand and then recovery of the duty short paid or not paid. DRI officers have been conferred jurisdiction (notification no. 40/2012 dated May 2, 2012) to carry out such actions. Surely parties faced with such show cause notices or pending proceedings will rely on the ratio of the judgment in Canon India to argue that DRI officers do not have jurisdiction and authority, owing to which the proceedings are bad in law, and legally must fail.

Ranjeet Mahtani is Partner at Dhruva Advisors LLP.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.