Kumar Visalaksh and Arihant Tater of Economic Laws Practice (ELP) look at several amendments in the Finance Bill 2022 which effectively nullify the judgment of the Indian Supreme Court in Canon India and may now cause a wave of litigation by taxpayers challenging the constitutional validity of the amendments.
One of the most anticipated amendments in India's Union Budget of 2022–23 has been the retrospective overriding of the Supreme Court ruling in Canon India (March 2021), whereby a three-judge bench, while hearing a batch of customs appeals arising out of an investigation by the Directorate of Revenue Intelligence (DRI), held that an officer of the DRI is not a "proper officer" to issue show cause notices or raise a customs duty demand against importers.
It was held that under section 28 of the Customs Act, it is the officer who had originally assessed the imported goods, or his successor, who would be the "proper officer" to issue show cause notices and demand customs duty. The Supreme Court also held that the relevant notifications, relied on by the tax department as purportedly being issued to designate DRI officers as customs officers, were issued under an illegitimate source of power and therefore invalid.
The ruling opened a floodgate for challenges to the investigations initiated by the DRI. As the Canon ruling is binding on lower courts (under Article 141 of the Constitution of India), High Courts and tribunals in India proceeded to quash customs duty demands and proceedings arising out of show cause notices issued by DRI officials on the primary ground of lack of jurisdiction, hence the entire proceeding and consequential demand being non est.
Interestingly, immediately after the pronouncement of the Canon ruling, and fully aware that it could jeopardise hundreds of cases involving thousands of crores of Indian rupees, the government moved a review petition (May 2021) in the Supreme Court.
However, the government's review did not deter the Appellate Courts from entertaining petitions and quashing DRI proceedings. The Supreme Court once again in Agarwal Metals (August 2021), following Canon, proceeded to quash proceedings initiated by the DRI. The Supreme Court and the Appellate Courts rightly proceeded on the basis that a pending review petition cannot be the basis for not giving effect to the binding Supreme Court ruling.
Given the approach of the Appellate Courts, comment had grown louder in the last few months that an amendment to override Canon was in the offing. In the past, the Indian government has indiscriminately resorted to overcoming unfavourable rulings through retrospective amendments.
Amendments in the Finance Bill
The Finance Bill of 2022 has now introduced a clutch of amendments to effectively nullify the judgement of the Supreme Court in Canon India:
- it amends various provisions of the Customs Act to specifically provide that a DRI officer is an officer of customs;
- the CBIC (i.e. the nodal agency for implementing indirect taxes in India) has been specifically provided with the power of assignment of functions to officers under the Customs Act; and
- a validation clause has also been introduced to validate all the past actions of the DRI.
It has also been provided that, going forward, the DRI would not issue show cause notices but would transfer the relevant records of the investigation to the jurisdictional officer.
History Repeating Itself
This is not the first time that the issue regarding the powers of the DRI has been raised by importers. Around a decade back, the question of jurisdiction of customs authorities was first answered by the Supreme Court in the case of Sayed Ali (2011): it was held that the Collector of Customs (Preventive) is not the "proper officer" to issue a show cause notice under customs law. The Supreme Court held that there necessarily has to be an assignment of specific functions of assessment of duty in customs officers to act as "proper officer" and issue show cause notices.
Even then, finding Sayed Ali's ruling unfavourable, in 2011 the government swiftly introduced a specific validation clause in section 28, to validate all the past actions of the officers concerned, including the DRI officials.
The amendment was promptly challenged in various High Courts. The Delhi High Court (Mangali Impex, 2014) struck down the retrospective amendment, whereas the Bombay High Court (Sunil Gupta, 2014) upheld the authority. The issue is presently pending before the Supreme Court awaiting hearing.
Going Forward
If the past is anything to go by, the amendments made in the Union Budget of 2022-23 will see another round of litigation. Importers are likely to challenge the constitutional validity of these amendments as they seek to retrospectively validate the past actions of DRI officers which are bad in law and without jurisdiction.
It is worrying that despite a clear commitment of the present government to offer a stable and predictable taxation regime and not to resort to any retrospective amendments, the moment high stakes revenue is involved, they inevitably do so.
This is not only a setback for the government's commitment but also a recipe for further dispute. In the end, it is the Indian tax and business ecosystem which suffers.
Originally published by Bloomberg Tax.
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