The camera feature that launched thousands of tax notices dating back 18 years, for ₹20,000-23,000 crore

The apex court has begun hearings following a government petition to review its own ruling, delivered in 2021, that clipped the DRI's powers to issue notices.

A three-judge bench comprising Chief Justice D.Y. Chandrachud, Justice J.B. Pardiwala and Justice Manoj Mishra, has started hearing a review petition filed by the Union government's revenue department seeking these show cause notices to be revalidated.

Additional Solicitor General N. Venkatraman told the court that the case has significant implications for the revenue department, noting that Delhi alone has around 800 of these pending cases, with the list extending across various tribunals. 

He sought the top court's review of a previous judgment, arguing that it had erred in its assessment and seeking relief for the department.

“We need to resolve the fate of 18 years' worth of show-cause notices. The stakes are difficult to quantify, with the estimated value between ₹20,000 crore and ₹23,000 crore, although we lack complete visibility," said Venkatraman.

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The case going back to 2006 involves major companies such as Canon, Sony, Samsung, Vodafone Idea, and Adani Enterprises. However, the review petition is around just one ruling, delivered in 2021, where the Supreme Court ruled that the DRI was not the "proper officer" to conduct tax investigations. This ruling led to the quashing of many such notices by various courts and tribunals.

In 2006 the Finance Act, 2006 amended the Customs Act, 1962 giving more powers to various officers including the DRI. Earlier the authority to the DRI officer to issue show cause notice was not ambiguous. The ruling in Canon India’s judgment invalidated many show cause notices issued by the DRI post 2006.

According to experts, the 2021 case, involving Canon, jeopardized the DRI's authority and weakened its position in pending litigation and its ability to defend its show-cause notices.

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The so-called Canon case pertains to a customs dispute.

On 15 March, 2012, a consignment of cameras arrived in Delhi, and the importer submitted a Bill of Entry five days later, accompanied by the product literature. After verifying the documents, Customs cleared the cameras on 24 March, under Notification No. 15/2012, which provided a duty exemption.

But two years later, on 19 August, 2014, a show cause notice was issued by DRI under Section 28 (4) of the Customs Act. It alleged that the clearance was obtained through “wilful mis-statement and suppression of facts". 

Specifically, it claims that the cameras were capable of recording multiple video sequences of less than 30 minutes each, a detail that was not evident in the submitted literature. The notice therefore seeks to recover any duties that may have been evaded due to this alleged misrepresentation. 

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The Customs Excise and Service Tax Appellate Tribunal (CESTAT) upheld these penalties, prompting the companies to appeal to the Supreme Court.

In March 2021, the Supreme Court ruled in favour of the companies, finding that the DRI lacked the authority to challenge the customs clearance of their digital cameras. The Court ruled that only the original customs officer could review the assessment and invalidated the notifications extending customs functions to DRI officers.

The ruling found no evidence of deliberate misstatement or suppression of facts by the companies, overturning the penalties and confiscation.

Following this ruling, many High Courts and Tribunals across India quashed proceedings undertaken by DRI officers based on these notices, leading to a backlog of appeals in the Supreme Court. The Central Board of Indirect Taxes and Customs (CBIC) subsequently directed its officers to keep show-cause notices issued by DRI on hold.

In response to the ruling, the Finance Bill, 2022, made amendments to the Customs Act to clarify the role of DRI officers. The new amendment aimed to update the definition of "proper officer" to include DRI officers and validate actions taken before the amendment. 

The amendment is also under consideration in the case, which may have wide repercussions.

According to Jitendra Motwani, partner at Economic Laws Practice, “the total tax exposure related to DRI-issued show-cause notices over time could exceed ₹75,000 crore". 

Ramifications on pending cases

“The Supreme Court's decision will have wide-ranging ramifications on pending cases. If the review is dismissed and the retrospective amendment is deemed unconstitutional, the show cause notices issued by the DRI pending at various adjudication stages will be invalidated without considering the merits of the cases," he added.

SR Patnaik, Partner (Head - Taxation) at Cyril Amarchand Mangaldas, said the Supreme Court's ruling could also impact GST laws. The role of 'Proper Officer' under the Central Goods and Services Tax Act, 2017, is similar to that under the Customs Act. Since only the Proper Officer can issue notices under both laws, it could be argued, based on the Canon India decision, that the Directorate General of Goods and Services Tax Intelligence lacks the authority to issue notices under GST law.

Major financial losses feared

Experts said if the Supreme Court dismisses the government’s review petition, it could result in major financial losses, including refunds for duties collected under invalid notices. The government might appeal to a larger bench, seek other judicial remedies, or introduce retrospective legislative amendments to validate the DRI's actions. However, such amendments might be viewed as an afterthought and could only be applied prospectively, as noted by Alay Razvi, Partner at Accord Juris.

Kishore Kunal, Advocate on Record at the Supreme Court of India, added, “The validity of the 2022 amendment has also been challenged by importers in several High Courts and the Supreme Court. The Court is likely to address the validation provisions of the 2022 amendment. Importers argue that this amendment attempts to invalidate the Supreme Court judgment, and while Parliament can rectify defects prospectively, it cannot alter the basis of the original judgment."

The Directorate of Revenue Intelligence (DRI) is India's premier anti-smuggling agency, operating under the Central Board of Indirect Taxes & Customs, Ministry of Finance, Government of India. 

The DRI is responsible for detecting and curbing smuggling activities, including drug trafficking, illicit international trade in wildlife, and environmentally sensitive items, as well as combating commercial frauds related to international trade and customs duty evasion. With the increase in import and export activities, the role of DRI officers has expanded from information collection and investigation to include broader customs enforcement duties. They are recognized as "Officers of Customs" under Section 3 of the Customs Act, 1962.

In 2006 the Finance Act, 2006 amended the Customs Act, 1962 giving more powers to various officers including the DRI. Earlier the authority to the DRI officer to issue show cause notice was not ambiguous. The ruling in Canon India’s judgment invalidated many show cause notices issued by the DRI post 2006.