Supreme Court restores DRI’s power, revives ₹23,000 crore notices against major firms

New Delhi: The Supreme Court on Thursday revived Directorate of Revenue Intelligence's (DRI) tax notices seeking as much as ₹20,000-23,000 crore, pending against leading companies including Vedanta Ltd, Vodafone Idea Ltd, Adani Enterprises and the Indian units of Sony, Samsung and Canon since 2006.

A three-judge bench comprising Chief Justice D.Y. Chandrachud, justice J.B. Pardiwala and justice Manoj Mishra on Thursday said the Customs Act empowers DRI officers to issue show-cause notices and recover duties. The court ruled that DRI officers are “proper officers” to issue show-cause notices under Section 28 of the Customs Act. The tax notices have been pending since 2006.

Mint had earlier reported that the Supreme Court had begun hearing these tax notices which have been pending since 2006 worth an estimated ₹23,000 crore.

The ruling followed a review petition filed by the government against a 2021 judgment that limited the DRI's powers.

Calling the previous ruling as flawed, additional solicitor general N. Venkatraman pressed for a review. He said Delhi alone has around 800 pending cases, with with the list extending across various tribunals.

“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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Smita Singh, a partner at S&A Law Offices, explained the immediate fallout of the judgement: “DRI now has the authority to issue show-cause notices and recover unpaid, short-levied or erroneously refunded duties under the Customs Act, without needing to consult the jurisdictional customs department.”

However, Singh noted that it remains to be seen whether previously quashed DRI notices will be reopened, as the limitation period for issuing fresh notices may have expired. Given the substantial revenue at stake, recovery notices are likely to be issued to businesses.

The review petition specifically concerns a 2021 ruling where the Supreme Court had ruled that the DRI was not the “proper officer” to issue tax investigation notices. This judgement led to the quashing of several notices by various courts and tribunals.

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In 2006, the Finance Act amended the Customs Act, empowering DRI officers with greater authority. Prior to this amendment, there had been ambiguity regarding the powers of DRI officers to issue show-cause notices.

However, a 2021 Canon judgment invalidated many DRI notices issued after the 2006 amendment.

Legal experts previously told Mint that the Canon ruling undermined the DRI’s authority, weakening its position in pending litigation and affecting its ability to defend show-cause notices.

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, the customs department 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 the DRI under Section 28 (4) of the Customs Act. It alleged that the clearance was obtained through “wilful mis-statement and suppression of facts.”

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Specifically, it claimed 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, sought to recover any duties that may have been evaded due to this alleged misrepresentation.

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 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 the DRI on hold.

In response to the ruling, the Finance Bill 2022 amended the Customs Act to clarify the DRI’s role, redefining “proper officer” to include DRI officers and validating actions taken before the amendment.

The DRI is India’s premier anti-smuggling agency, operating under the CBIC. The DRI is responsible for tackling smuggling, illicit international trade and commercial frauds related to customs duties.