Finance Act 2022 Amendments Upheld: Supreme Court Validates Retrospective Customs Authority for DRI

In a significant decision impacting India’s customs and revenue enforcement framework, the Supreme Court on November 7, 2024, ruled that officers of the Directorate of Revenue Intelligence (DRI) possess valid authority to issue show cause notices (SCNs) under Section 28 of the Customs Act, 1962. This ruling partially overturns the 2021 Supreme Court decision in Canon India Pvt. Ltd. v. Commissioner of Customs and clarifies the jurisdiction of DRI officers, who were previously deemed unauthorized to issue such notices based on the Canon India ruling. The recent judgment also upholds the constitutionality of the retrospective amendments introduced in Section 97 of the Finance Act, 2022, ensuring the legitimacy of SCNs issued by DRI officers and other authorities.

In 2021, the Supreme Court in Canon India held that only officers directly involved in the original assessment of goods under Section 17 could issue SCNs for non-payment or underpayment of duty under Section 28. The Court ruled that DRI officers did not qualify as “proper officers” for these purposes under the Customs Act. This interpretation jeopardized numerous cases and questioned the DRI’s authority to initiate customs proceedings.

In response, the Finance Act, 2022, amended the Customs Act, confirming the powers of various customs authorities, including DRI officers, as “proper officers” under Section 28, thereby retrospectively validating pending SCNs and restoring administrative continuity.

The Supreme Court clarified that DRI officers are duly empowered to issue SCNs under Section 28 of the Customs Act, setting aside the Canon India judgment’s interpretation. The Court pointed out that Canon India misinterpreted the statutory scheme by overlooking notifications like Circular No. 4/99-Cus, dated February 15, 1999, and Notification No. 44/2011, which assigned assessment and recovery functions to DRI officers. According to the Court, these notifications vested DRI officers with the requisite authority to act as “proper officers” under Section 28.

In its 2021 ruling, Canon India argued that only Section 6 of the Customs Act provided for entrusting customs functions to officers from other departments, implying that DRI officers could not perform functions designated to proper officers without an explicit Section 6 notification. However, the Supreme Court disagreed, finding that Section 5 authorizes the Central Government to assign customs duties to officers by issuing specific notifications. This interpretation enables the DRI, already an empowered agency under the Central Board of Excise and Customs (CBEC), to conduct recovery proceedings without requiring additional Section 6 delegation.

The Supreme Court upheld Section 97 of the Finance Act, 2022, which retrospectively validated all SCNs issued by DRI and similar agencies under Section 28. According to the Court, the Finance Act was a legitimate exercise of legislative authority intended to cure ambiguities created by Canon India, ensuring that past SCNs issued by the DRI and other customs authorities would not be invalidated due to jurisdictional concerns. The Court emphasized that retrospective validation by the legislature is lawful, particularly when aimed at addressing specific judicial interpretations that could disrupt essential government functions.

The Court also clarified that assessment (under Section 17) and recovery (under Section 28) are distinct functions within the Customs Act framework. While assessment is the initial determination of duties due, recovery proceedings under Section 28 can involve officers other than the original assessing officer. Therefore, the DRI’s recovery actions do not require reassessment by the initial assessing officer, as previously suggested by Canon India. This distinction supports DRI’s authority to issue SCNs under Section 28 even if it was not involved in the initial assessment.

The Court rejected the Delhi High Court’s decision in Mangali Impex v. Union of India, which limited the retrospective effect of Section 28(11), an amendment introduced in 2011 to validate past SCNs issued by officers like the DRI. The High Court had ruled that Section 28(11) could not retroactively validate SCNs due to potential administrative “chaos” and overlapping authority among customs officers. The Supreme Court, however, found this interpretation erroneous, affirming that Section 28(11) was a clear legislative intent to validate prior SCNs issued by various customs officers, including those outside the original jurisdiction.

To streamline the impact of this decision on pending cases, the Supreme Court outlined specific procedural safeguards:

Pending High Court Writ Petitions: High Courts are directed to dispose of writ petitions challenging SCNs issued by DRI on jurisdictional grounds in line with this judgment, restoring SCNs for adjudication.
CESTAT Appeals: Cases before the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) regarding DRI-issued SCNs are to proceed on merits, with jurisdictional challenges now dismissed.
Appeals in the Supreme Court: Civil appeals pending in the Supreme Court will be resolved based on this decision, restoring the authority of DRI-issued SCNs for further adjudication.
The Court rejected claims that Section 97 of the Finance Act, 2022 violated constitutional provisions under Article 14 by retrospectively validating past SCNs. The judgment emphasized the principle that economic and revenue-related policies are largely within the purview of the legislature, particularly when enacted to prevent disruption in essential revenue administration functions. The Court found that these amendments were consistent with legislative authority and public interest, as they ensured stability and clarity for enforcement agencies and businesses alike.

This judgment is pivotal for the customs and revenue administration landscape, affirming the authority of DRI and similar agencies to issue SCNs under Section 28 and reinforcing the Finance Act, 2022 amendments as a legitimate legislative intervention. It restores certainty to the DRI’s jurisdictional powers and resolves conflicting high court interpretations on the issue.

In addition, the ruling clarifies procedural paths for pending cases, ensuring continuity in customs enforcement activities and providing clarity for businesses subject to customs duty recovery actions. The Supreme Court’s decision effectively re-establishes the legislative and executive intent behind the Customs Act and its recent amendments, closing a major chapter in India’s customs law and enforcement framework.