DRI Show Cause Notice Quashed for Want of Jurisdiction — Madras High Court Applies Canon India Ruling to Direct Refund of Deposits

Background of the Dispute

The Madras High Court, in the matter of Target Lubricants Pvt. Ltd. Vs Commissioner of Customs, was called upon to adjudicate a significant jurisdictional question concerning the authority of Directorate of Revenue Intelligence (DRI) officers to initiate proceedings under Section 28 of the Customs Act, 1962. The writ petitions filed by the assessee sought quashing of a show cause notice and the consequential return of amounts and bank guarantees deposited during the course of investigation.

The origin of the controversy dates to an import transaction wherein the assessee had brought in mineral oil through a Bill of Entry dated 12.10.2010, consisting of 25 barrels. The DRI's Regional Unit at Coimbatore intercepted and seized the consignment on 21.10.2010, suspecting that the goods were actually base oil rather than rubber processing oil as declared in the import documentation.

The Show Cause Notice and Adjudication History

A show cause notice dated 06.12.2012 was issued to the assessee by the Additional Director General, DRI, Zonal Unit, Chennai. Following adjudication, an order-in-original came to be passed on 20.02.2014. The assessee challenged this before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, which set aside the said order and directed a fresh de novo inquiry.

After the de novo proceedings, a second order-in-original was passed on 21.11.2014. This too was challenged before CESTAT, and once again, the Tribunal found merit in the assessee's objection — specifically that no opportunity for cross-examination of witnesses had been afforded — and accordingly set it aside, remanding the matter afresh.

A noteworthy aspect of the CESTAT's second remand order dated 03.01.2018 was the direction that fresh adjudication should await the outcome of the Supreme Court proceedings in Mangali Impex Ltd. & Others vs. Union of India, which was pending at that time.

Legislative Context: The 2011 Amendment to Section 28

To appreciate the full legal landscape, it is necessary to understand the statutory backdrop. Following the Supreme Court's ruling in Commissioner of Customs vs. Sayed Ali and Another reported in (2011) 3 SCC 537, which had interpreted the phrase "the proper officer" restrictively, Parliament intervened through the Customs (Amendment and Validation Act) 2011 with effect from 16.09.2011. This legislation inserted Sub-Section (11) to Section 28, effectively providing that all officers of Customs appointed under Sub-Section (1) of Section 4 shall be deemed to have been and always had been proper officers for the purposes of that Section.

The Delhi High Court in Mangali Impex Ltd. vs. Union of India reported in 2016 (335) E.L.T. 605 (Del.) examined the effect of this amendment and held that it would operate only prospectively. Accordingly, proceedings initiated prior to the 2011 amendment would remain governed by the pre-amendment position under Section 28. Revenue challenged this view before the Supreme Court by way of Special Leave Petition, and it was this pending matter that CESTAT had in mind when passing its remand order.

The Landmark Canon India Ruling

While the matter remained in a state of legal suspension, a three-judge Bench of the Supreme Court delivered its watershed decision in Canon India Pvt. Ltd. vs. Commissioner of Customs reported in 2021 SCC Online SC 200 on 09.03.2021. The Court authoritatively held that DRI officers do not qualify as "proper officers" within the meaning of Section 28(1) and Section 28(4) of the Customs Act, 1962, and consequently, all show cause notices issued by such officers are invalid and without jurisdiction.

The Court's reasoning centered on the precise statutory language employed in Section 28. Referring to earlier decisions such as Consolidated Coffee Ltd. and Another vs. Coffee Board, Bangalore and Shri Ishar Alloy Steels Ltd. vs. Jayaswals Neco Ltd., the Supreme Court emphasised the significance of the definite article "the" before the words "proper officer." As the Court observed:

"The obvious intention is to confer the power to recover such duties not on any proper officer but only on 'the proper officer'."

The Supreme Court further clarified at paragraph 15 of its decision: