DRI Officers are “proper officers”; can issue show cause notices for recovery of duty under Customs Act: Supreme Court

Supreme Court: While deciding whether the exposition of law propounded by the Court in Canon India (P) Ltd. v. Commr. of Customs, (2021) 18 SCC 563 as regards the power of the DRI to issue show cause notices could be said to be the correct statement of law? The 3-Judge Bench of Dr DY Chandrachud, CJ., JB Pardiwala* and Manoj Misra, JJ., held that Canon India (supra) judgment was rendered without looking into the Circular dated 15-02-1999 issued by the Central Board of Excise & Customs (CBEC) which empowered the officers of Directorate of Revenue Intelligence (DRI) to issue show cause notices under Section 28 of Customs Act, 1962, as well as Notification dated 06-07-2011 which assigned the functions of the ‘proper officer’ for the purposes of Sections 17 and 28 of the Customs Act, respectively to the officers of DRI. This seriously affected the correctness of Canon India (supra).

The Court further held that decision erroneously recorded the finding that since DRI officers were not entrusted with the functions of a proper officer for the purposes of Section 28 in accordance with Section 6, they did not possess the jurisdiction to issue show cause notices for the recovery of duty under Section 28 of Customs Act. This was so because Canon India (supra) failed to consider the statutory scheme of Sections 2(34) and 5 of Customs Act, 1962 respectively.

Allowing the review petition, the Court clarified that it only considered and reviewed the decision in Canon India (supra) to the extent that it pertains to the jurisdiction of the DRI officers to issue show cause notices under Section 28. The observations made by Supreme Court in Canon India (supra) on the aspect of limitation have neither been considered nor reviewed by way of this decision. Thus, this decision will not disturb the findings insofar as the issue of limitation is concerned.

Therefore, it was held that officers of DRI, Commissionerates of Customs (Preventive), Directorate General of Central Excise Intelligence and Commissionerates of Central Excise and other similarly situated officers are proper officers for the purposes of Section 28 of Customs Act and are competent to issue show cause notice thereunder.

Issues before the Court:

• Whether officers of Directorate of Revenue Intelligence (DRI) are the proper officers for the purposes of Section 28 of the Customs Act, 1962?

• What would be the extent, scope and domain of Section 6 of the Customs Act, 1962 vis-à-vis Section 2(34), Section 3, Section 4 and Section 5 of the Customs Act, and whether an entrustment by the Central Government under Section 6 of the Customs Act, 1962 is mandatory to empower the Officers of the DRI for the purpose of issuing show cause notices?

• Whether the power under Section 28 can be exercised only by someone who is empowered to exercise the power under Section 17 of the Act, 1962 for the goods in question? In other words, how best the meaning of the expression “proper officer” should be construed for the purposes of exercise of functions under Section 28?

• Whether “the proper officer” in Section 28 must necessarily be the same proper officer referred to under Section 17 of the Act, 1962? If no, whether the use of the definite article “the” in the expression “the proper officer” in Section 28 is in the context of that proper officer who has been assigned the powers of discharging the functions under Section 28 by virtue of powers conferred under Section 5 of the Act, 1962?

• Whether issuance of show cause notices followed by adjudication under Section 28 of the Act, 1962 is an administrative review as held in Canon India (supra) or a quasi-judicial exercise of power under administrative law?

• Whether the introduction of Section 28(11) vide the Validation Act of 2011 which retrospectively validates the show cause notices issued under Section 28 with effect from 06.07.2011, is discriminatory and arbitrary for not curing the defect highlighted in Commr. of Customs v. Sayed Ali, (2011) 3 SCC 537, and, therefore, is violative of Article 14 of the Constitution?

• Whether the judgment delivered by the High Court of Delhi in Mangali Impex Ltd. v. Union of India, (2016) SCC Online Del 2597 expounds the correct interpretation of Section 28(11)?

• Whether Section 97 of the Finance Act, 2022, which retrospectively validates the show cause notices with effect from 01.04.2023, is manifestly arbitrary and therefore, violative of Article 14 of the Constitution?

Court’s Assessment:

Vis-a-vis power to review, the Court pointed out that if a court is oblivious to the relevant statutory provisions, the judgment would in fact be per incuriam. In such circumstances, a judgment rendered in ignorance of the applicable law must be reviewed. The Court said that, “It is not in dispute that Canon India (supra) is based on the decision of this Court in Sayed Ali (supra). We say so because in Canon India (supra), the petitioner had not questioned the jurisdiction of the officers of DRI either before the departmental authorities or before the Tribunal”.

Decision rendered in Sayed Ali (supra)

The Court in Sayed Ali (supra) after referring to Section 28 of the Customs Act, 1962 as it stood during the period in dispute, had concluded that from a conjoint reading of Section 2(34) and Section 28 of the 1962 Act, it was manifest that only such customs officer was competent to issue notice under Section 28, who has been assigned the specific functions of assessment and reassessment of duty in the jurisdictional area where the import concerned has been effected, either by the Board or the Commissioner of Customs, in terms of Section 2(34) of the Act, 1962.

The 3-Judge Bench in the present case observed that Sayed Ali (supra) proceeds on the assumption that for the “proper officer” to exercise the functions under Section 28 of the Act, 1962, such officer must necessarily possess the power of assessment and reassessment under Section 17. However, a plain reading of Sections 17 and 28 of the Act, 1962 does not bring out any such inter-dependence between the two provisions.

Perusing the statutory scheme, the Court opined that the observations pertaining to the interlinkage between Sections 17 and 28 respectively of the Act, 1962 made in Sayed Ali (supra) do not lay down the correct position of law.

The Court further pointed out that Sayed Ali (supra) could not have been relied upon by the Court in Canon India (supra) as it could not have been applied for the period subsequent to 08-04-2011 because Section 17 of the Act, 1962 has undergone a radical change by virtue of the amendments made by the Finance Act, 2011.

Changes to Section 17 w.e.f. 11.04.2011 — the assessment of bill(s) of entry and shipping bill

Section 17 of the Customs Act, 1962 was amended by Section 38 of the Finance Act, 2011 with effect from 08-04-2011. The amendment altered the method of assessment of bill(s) of entry and shipping bill(s). This change appears not to have been brought to the notice of the Court while Canon India (supra) was heard. The “proper officer” appointed for the purpose of Section 17 of the Act, 1962 under a notification issued under Section 2(34) of the Act, 1962 could only make a re-assessment of the bill(s) of entry and shipping bill(s) in case they did not agree with the self-assessment of the importer or the exporter as the case may be.

The Court pointed out that changes in Section 17 highlight that the competence of the proper officer to conduct “assessment” is completely taken away by the legislature vide the amendment to Section 17. The new Section 17 empowers the proper officer to perform the functions of verification of self-assessment and subsequent re-assessment, if found necessary. However, such re-assessment is not a mandatory function on the same footing as “assessment” under the old Section 17. Therefore, the Court opined that the scope of the functions of the proper officer under the new Section 17 is limited.

Scheme of Sections 17 and 28 of Customs Act, 1962

Section 17 read with Sections 46 and 47 of the Act, 1962 deals with the assessment and reassessment at the first instance, that is, upon entry of the consignments and clearance of bill(s) of entry. The amendment to Section 17 introduces the process of self-assessment and subsequent reassessment upon verification by the proper officer, if so required, for undertaking a check at the first instance. The procedure envisaged under Section 28 is in the nature of a quasi-judicial proceeding with the issuance of the show cause notice by the proper officer followed by adjudication of such notices by the field customs officers.

It was noted that in the case of DRI, the proceedings under Section 28 start only after an investigation has been undertaken by DRI. This is reaffirmed by Circular dated 15-02-1999 and Circular dated 23-11-2011. Therefore, the nature of review under Section 28 is significantly different from the nature of assessment and reassessment under Section 17. The ambit of Section 28 has also been restricted to the review of assessments and re-assessments done under Section 17 for ascertaining if there has been a short-levy, non-levy, part payment, non-payment or erroneous refund.

With the afore-stated statutory scheme, the Court was unable to subscribe to the view taken in both Sayed Ali (supra) and Canon India (supra), namely, that the vesting of the functions of assessment and re-assessment under Section 17 is a threshold, mandatory condition for a proper officer to perform functions under Section 28. The Court thus opined that the scheme of Sections 17 and 28 of the Act, 1962 indicates that there cannot be a mandatory condition linking the two provisions and the interpretation in the cases of Sayed Ali (supra) and Canon India (supra) were patently erroneous.

Use of the article ‘the’ in the expression “the proper officer”

The Court observed that a definite article “the” has been used before “proper officer” with a view to limit the exercise of powers under Section 28 by a specific proper officer and not any proper officer. However, in the absence of any statutory linkage between Sections 17 and 28 of Customs Act, 1962 respectively, there was no legal footing for the Court in Canon India (supra) to hold that “the proper officer” in Section 28 must necessarily be the same proper officer referred to under Section 17 of the Act, 1962.

The use of the article “the” in the expression “the proper officer” should be read in the context of that proper officer who has been conferred with the powers of discharging the functions under Section 28 by conferment under Section 5.

DRI officers as Proper Officers under section 2(34)

The Court emphasised that finding in Canon India (supra) that an officer from the Directorate of Revenue Intelligence (DRI) was not an officer of customs and therefore cannot function as a “Proper Officer” was erroneous.

Section 2(34) of Customs Act, 1962 also stood amended under the Finance Act, 2022. The view that the “Proper Officer” for the purpose of Section 28 and other provisions of the Act, 1962 could only mean the person who cleared the goods or the officer who succeeds such officer and not any other officer from any other department requires reconsideration in view of the changes to the Act, 1962 vide the Finance Act, 2011 and also in the light of Section 4 and the notification issued thereunder. “Court in paragraphs 11 to 15 of Canon India (supra) proceeded on the footing that under the provisions of the Act, 1962, the Board has no power to appoint “Proper Officers”.

Presently, the Court noted that as per Section 4 of the Act, 1962, the Board constituted under the provisions of Central Board of Revenue Act, 1963 is vested with the power to appoint such persons as it thinks fit to be “officers of customs”. Under Section 4(1)(1) of Customs Act the Board may appoint such person as Officers of Customs as it thinks fit. Under Section 4(2) of the Act, 1962 the Board can even authorize a Chief Commissioner of Customs or a Joint or Assistant or Deputy Commissioner of Customs to appoint any officers below the rank of Assistant Commissioner of Customs as an “officer of customs”. It was noted that this aspect was also not brought to the notice of the Court in Canon India (supra).

Observations on the constitutional validity of Section 28(11) of Customs Act, 1962

The Court took of Delhi High Court’s case Mangali Impex Ltd. v. Union of India, (2016) SCC Online Del 2597, wherein the specific challenge was to the constitutional validity of Section 28(11) of the Act which was inserted by the Customs (Amendment and Validation) Act, 2011. Division Bench of the High Court held that Section 28(11) could not validate the show cause notices issued by the DRI officers prior to 08-04-2011, i.e., the date when Section 28 was amended.

Similarly, the afore-stated Validation Act was challenged before Bombay High Court in Sunil Gupta v. Union of India, (2014) SCC Online Bom 1742. Bombay High Cour held that the position dealt with by insertion of Section 28(11) is distinct and that is about competence of the officer. The High Court stated that, “The officers namely those from the DRI having been entrusted and assigned the functions, they are deemed to have been possessing the authority, whether in terms of section 28 unamended or amended and substituted as above”. Since the decision in Sunil Gupta (supra) was anterior in time, the same was relied before the High Court of Delhi during the hearing in Mangali Impex (supra). However, the High Court of Delhi did not agree with the view taken therein.

In the instant case, analysing the modifications made by the Parliament in Section 28, Customs Act, the Court expressed certainty that none of the changes made by the amendments to Section 28 has any impact on the competence of the proper officer for the purposes of fulfilment of functions under Section 28. The Court opined that the only major change that warrants the clarification provided under Explanation 2 is the distinction with respect to the limitation period for the issuance of show cause notices. The Court further stated that there is no overlap in the field of operation of Section 28(11) and Explanation 2, the interpretation of the non-obstante clause in Section 28(11) and the consequent harmonious construction of the two provisions in Mangali Impex (supra) is otiose.

The Court expressed its agreement and thereby affirmed the view taken Bombay High Court in Sunil Gupta (Supra).

Hence, the Court was of the view that enactment of Section 28(11) cures the defect pointed out in Sayed Ali (supra) and the judgment in Mangali Impex (supra) deserves to be set aside as it failed to take into account the policy being followed by the Customs department since 1999 which provides for the exclusion of jurisdiction of all other proper officers once a show cause notice by a particular proper officer is issued. It could be said that this policy provides a sufficient safeguard against the apprehension of the issuance of multiple show cause notices to the same assessee under Section 28 of the Customs Act, 1962. Therefore, Section 28(11) is constitutionally valid, and its application is not limited to the period between 08-04-2011 and 16-09-2011.

Amendments made by the Finance Act, 2022

Section 97 of Finance Act, 2022 inter-alia, retrospectively validated all show cause notices issued under Section 28 of Customs Act. The Court pointed out that it is a settled position of law that the legislature is empowered to enact validating legislations to validate earlier acts declared illegal and unconstitutional by courts by removing the defect or lacuna which led to the invalidation of the law. With the removal of the defect or lacuna resulting in the validation of any act held invalid by a competent court, the act may become valid, if the validating law is lawfully enacted.

The Court found that the ouster of jurisdiction of DRI to issue show cause notices under Section 28 once an assessment has been done under Section 17 is not a defect at all in light of Notification No. 44/2011 dated 06-07-2011 and new Section 17 as amended by the Finance Act, 2011. This notification specifically assigned the functions of the proper officers under Sections 17 and 28 to DRI officers. Such assignment of functions of assessment is sufficient for the DRI officers to fall in the category of “any other officer who has been assigned the function of assessment”.

Therefore, the validating provision under Section 97 of the Finance Act, 2022 was a mere surplusage with respect to validation of the show cause notices issued by DRI officers under Section 28. Hence, the Court held that Section 97 of the Finance Act, 2022 is constitutionally valid. It was clarified that findings in respect of the vires of the Finance Act, 2022 is confined only to the questions raised in the petition seeking review of the judgment in Canon India (supra). The challenge to the Finance Act, 2022 on grounds other than those dealt with herein, if any, were kept open.

The Court further laid down elaborate steps to deal with any challenge to the maintainability of show cause notices issued by DRI, Commissionerates of Customs (Preventive), Directorate General of Central Excise Intelligence and Commissionerates of Central Excise and other similarly situated officers, on ground of lack of jurisdiction.

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