Indirect Tax Alert - The DRI has no authority to issue Show Cause Notice (SCN) to demand duties under Customs Act, 1962 (Act) - Madras High Court follows recent Supreme Court Ruling

Facts of the case

M/s. Quantum Coal Energy Private Limited (Taxpayer) is an importer of coal. During the months of March to November 2012, the Taxpayer imported Steam coal.

During the relevant time, the Government had announced concessions and exemptions for import of Steam coal. The Customs authority approved the Taxpayer’s classification and allowed clearance of the imported goods as Steam coal. However, the Additional Director General, Directorate of Revenue Intelligence (DRI), later, issued an SCN dated 21 March 2013 under Section 28 of the Act, calling upon the taxpayer to show cause as to why no action should be taken for misrepresenting Bituminous coal as Steam coal to claim exemption. An order confirming the proposals contained in the SCN was passed by the adjudicating authority.

Aggrieved, the taxpayer filed a Writ petition before the Madras High Court, with a plea to quash the Order-in-Original pertaining to levy of penalty under Section 112(a) or 114AA of the Act.  

Question before the Madras High Court

Whether the DRI has the authority to issue SCN under Section 28(4) of the Act?

Observation and decision by Madras High Court

The Madras High Court applied the ratio contained in the recent Supreme Court judgment, in the case of M/s. Canon India Private Limited Vs. Commissioner of Customs [CA no:1827/2018, dated 9 March 2021] where the Supreme Court had held that the expression “the proper officer” occurring in Section 28 of the Act will only refer to the Assessing Officer who passed the original order, completing the assessment.

The Madras High Court observed that the SCN issued by DRI cannot be said to have been issued by “the proper officer” by exercise of the powers conferred under Section 28(4). Since the entire proceedings were initiated by an authority who lacked the jurisdiction, the impugned order under challenge in the Writ petitions is quashed.

BDO Comments

The Madras High Court has applied the ratio of Canon case, supra.

Section 4 (1) of the Act empowers the Board to appoint such person as it may think fit to be ‘officers of Customs’ and Section 2(34) defines 'proper officer' in relation to any functions to be performed under the Act as the officer of customs who is assigned those functions by the Board or the Principal Commissioner or Commissioner of Customs. Consequently, notification no:17/2002-Cus(N.T) dated 07 March 2002, the DRI officers are appointed as custom officers in exercise of powers in terms of Section 4 of the Customs Act. As a result, the Board or Principal Commissioner or Commissioner can assign specific functions to be carried-out under the Act.

Section 6 of the Act provides powers to the Central Government to entrust the functions of the customs officers on certain other officers. Assigning of such functions to customs officers by the Board or by the Principal Commissioner of Customs or Commissioner of Customs should be an administrative action.

In the Canon case, revenue authorities did not cite the above provisions, especially empowerment under Section 4(1) of the Act and the notification issued thereunder. It is also interesting to see whether that would make any impact on the eventual outcome of the Cannon Case. It will be very interesting to see whether this decision may be reviewed by the Court, basis any revision application that the board may file.

In the meanwhile, the Board has issued Instruction No.04/2021-Customs dated 17 March 2021 with a direction that all the fresh SCNs under Section 28 of the Act in respect of cases presently being investigated by the DRI, are required to be issued by jurisdictional Commissionerate from where imports have taken place. This amply reflects the anxiety of the Board.

There are question marks as to whether the impact of the Canon ruling will reach other tax legislations?

[Quantum Coal Energy Private Limited vs. Commissioner, Office of the Commissioner of Customs, WP (MD) no. 10186/2014, dated 16 March 2021 Madras High Court]

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