FEBRUARY 05, 2018

By S Murugappan, Adv.

FINANCE Bill 2018 has proposed several significant changes to the Customs Act, 1962 which have far reaching implications. It will be difficult to discuss such sweeping changes in a single article and in this article I deal only with the proposals for changes in Section 28 of Customs Act, 1962.

The above section contains provisions for issue of demand notices by Customs authorities for recovery of short payment of customs duty or for recovery of erroneous refunds made. Such short payments or erroneous refunds can arise on account of various factors such as incorrect classification, incorrect valuation, wrong application of notification, genuine calculation errors and omissions, wrong practice of the department with regard to classification, misstatement by the importer with regard to the nature and quantity of the goods imported, suppression of value etc. Over a period of more than five decades, Section 28 has undergone several amendments and amputations. As a result, the sub-sections under Section 28 have increased and also the number of provisos and explanations to Section 28.

The main proposals made in the Finance Bill, 2018 with regard to changes in Section 28 of Customs Act cover the following.

i. Pre-notice consultation.

ii. Issue of supplementary notices.

iii. Deemed closure of notices where orders have not been issued within a specified period.

While presenting the Budget 2018, Hon'ble Finance minister has indicated that these proposed changes are to improve ‘ease of doing business' in cross border trade and to align certain provisions with a commitment under the ‘Trade Facilitation Agreement'. Further it is stated that to smoothen dispute resolution processes and reduce litigations, amendments are being made to provide pre-notice consultation and timeline for adjudication and deemed closure of cases .

However, in practice, whether the proposed changes will result in smoothening of dispute resolution processes and help in ease of doing business, is debatable.

First, if we take pre-consultation process, the proposal is to hold a pre-notice consultation with the person chargeable with duty or interest in "such manner as may be prescribed". Thus, in ‘what manner' this is to be done is left to the executive authority and not legislatively decided. Already in respect of provisions relating to service tax under Finance Act, 1994 there were procedures to hold pre-notice consultations. But, in practice, these turned out only to be a formal process, to be gone through before a regular notice is issued. In general, at pre-notice stage when consultations are held, neither the importers nor the department officials are willing to change their respective stands and as a result this becomes one more process or one additional step to be gone through before a formal notice is issued. Rather, even now, informal consultations are held with officials before notices are issued after audit but such consultations are for extraneous reasons. Given the standing of India in the International corruption index, such pre-notice consultations may not actually contribute anything to ease the litigation process.

The second significant proposal relates to issue of supplementary notices. After sub-section (7), sub-section (7A) is proposed to be introduced as mentioned below.

"(7A) Save as otherwise provided in clause (a) of sub-section (1) or in sub-section (4), the proper officer may issue a supplementary notice under such circumstances and in such manner as may be prescribed, and the provisions of this section shall apply to such supplementary notice as if it was issued under the said sub-section (1) or sub-section (4)."

Or in other words, within the time limit stipulated for issue of demands i.e. 2 years or 5 years, the authorities can issue further notices. Again, under what circumstances and in what manner such notices can be issued are left to be regulated by the executive authority. Such supplementary notices will again be subject to all provisions that are applicable to notices issued under sub-sections (1) and (4). This will mean that it is possible to have pre-notice consultation for issue of supplementary notices also thus effectively increasing the documentation work. Further, it is not clear why, first of all, there should be a provision for issue of supplementary notices when the officers are expected to apply their minds and issue notices in accordance with sub-section (1) or sub-section (4) within a period of 2 years or 5 years. A longer period of 5 years is provided under sub-section (4) to issue a notice. Consequently after going through the records and after making in depth investigations notices are to be issued under sub-section (4) by availing the time limit of 5 years. Therefore what factors will give room for a supplementary notice and what additional data will be available at a later date after a thorough investigation initially is a mystery. The only possible explanation is that by an incompetent and inefficient investigation, notices can be issued in a shabby manner at first and then strengthened with supplementary notices at a later date. But such provisions can only regularise and encourage in competency and reward laxity on the part of the officials. The result can be issue of notices in a hurried manner to be only followed with supplementary notices to cover up the lapses at a later date.

The third significant change proposed relates to closure of notices in case orders are not issued within the stipulated time. This is a welcome move. In sub-section (9) after omitting the expression "where it is possible to do so", the following provisos are proposed to be added.

"Provided that where the proper officer fails to so determine within the specified period, any officer senior in rank to the proper officer may, having regard to the circumstances under which the proper officer was prevented from determining the amount of duty or interest under sub-section (8), extend the period specified in clause (a) to a further period of six months and the period specified in clause (b) to a further period of one year.

Provided further that where the proper officer fails to determine within such extended period, such proceeding shall be deemed to have concluded as if no notice had been issued."

As per the above proposal, a senior officer, having regard to the circumstances under which the proper officer was prevented from determining the amount of duty or interest payable by issue of an order within the stipulated time, can extend it for further periods of six months or one year. This presupposes that extensions are to be ordered by the senior officer only in respect of cases where the authority who has to determine the duty amount was prevented from doing so. It is also not clear under what circumstances a government officer can be prevented from determining the duty liability within the stipulated period. The common explanations for such delays can be administrative pre-occupations [which are normally in the form of meetings]. Even now, after a hearing, it takes months and at times, years to get an order. Some times officers go on transfer without passing orders and the same matter is re-heard. It will be possible for a senior officer to always hold that, in any given case, the proper officer was prevented from deciding the case and therefore, the period is to be extended. Thus, practically where the proper officer has slept without taking action, he can be awakened from his slumber by issue of extension orders and thus the fate of the notices revived with further breathing time. Only when the proper officer fails again to pass orders within the extended period, then, the case gets closed.

In fact, as mentioned earlier, various sub-clauses contained in Section 28 have undergone several additions and deletions and at one point, sub-section (9) provided specifically that the proper officer shall determine the amount of duty or interest within 6 months from the date of notice in respect of cases where notices were issued under the normal period and within one year from the date of notices in respect of cases where notices were issued by invoking the extended period. This was later, in 2016, amended and the expression "where it is possible to do so" was added. Thus, the specific time limit stipulated earlier was diluted by having the escape route with the expression "where it is possible to do so" and now, after deleting that expression, new provisions are being added. The dilution made earlier is now qualified with conditions.

One interesting aspect to be noted is that as per explanation (4) proposed to be added to Section 28, notices issued between 14.5.2015 and the date the Finance Bill, 2018 is going to receive the assent of the President will be governed by the provisions of Section 28 as they stood before the date of such assent. To put it simply, the provisions with regard to such deemed closures will apply only to notices that may be issued after the date the Finance Bill 2018 receives the assent of the President.

Under Article 7 of the Trade Facilitation Agreement, which came into force from 22.2.2017, the following provisions are mentioned with regard to release and clearance of goods.

"3 Separation of Release from Final Determination of Customs Duties, Taxes, Fees and Charges

3.1 Each Member shall adopt or maintain procedures allowing the release of goods prior to the final determination of customs duties, taxes, fees, and charges, if such a determination is not done prior to, or upon arrival, or as rapidly as possible after arrival and provided that all other regulatory requirements have been met."

Again under the same Article under the heading "Post-clearance Audit", the following is provided for.

"5 Post-clearance Audit

5.1 With a view to expediting the release of goods, each Member shall adopt or maintain post clearance audit to ensure compliance with customs and other related laws and regulations.

5.2 Each Member shall select a person or a consignment for post-clearance audit in a risk-based manner, which may include appropriate selectivity criteria. Each Member shall conduct post clearance audits in a transparent manner. Where the person is involved in the audit process and conclusive results have been achieved the Member shall, without delay, notify the person whose record is audited of the results, the person's rights and obligations, and the reasons for the results."

On the contrary, the proposed amendments, hedged with provisos and explanations may not advance the simplification process or ease of doing business.

In the United States, the assessment and completion of assessment procedures which are called "Liquidation of Duties" are kept simple. A Customs entry is filed with the US Customs and Border Protection (CBP) for immediate delivery of the goods. The data entered electronically can lead to a paperless release or a review of the entry documents by customs authorities and if the entry complies with the rules and regulations the shipment is released. After such release, within 10 working days the importer or his customs broker is required to submit an entry summary which will contain calculation of customs duties and taxes. Actual payment of duties is made at this point of time. Customs have a one-year time limit to review this entry and question or confirm the classification, valuation etc. and within that period the duty is liquidated or in other words, the assessment is closed. If an entry is not liquidated within the one-year period, it will get automatically liquidated by operation of law based on the data given in the entry summary. In select cases the liquidation can be extended by CBP where proposals for levy of anti-dumping duty or countervailing duties are under consideration or review. Thus, the normal period for closure of any import assessment is one year.

U.K. follows a longer period where demands for short payments can be issued upto three years from the date an import document was accepted. In cases where the arrears result from an act that has or could have given rise to criminal proceedings, this three-year limit will not apply. However, at the same time, there are provisions for write off or not for pursuing a case, where it is clearly established that the short payment is based on errors committed by customs or based on a longstanding practice followed by Customs.

Thus there are better practices followed elsewhere, to achieve trade facilitation and encourage cross border trade. But Section 28 of our Customs Act has expanded over the years with more sub-sections, more provisos and more explanations. In fact, sub-section (11) of Section 28 holds that all persons appointed as officers of customs shall be proper officers for the purpose of this section. Therefore, it is quite possible that a regular notice may be issued by an officer from the port where the goods were cleared and a supplementary notice is issued by another officer from another port for the very same consignment with one more notice, by invoking the extended period, issued by an investigating agency from another place. This is practically not only possible but highly probable as Section 28 does not provide for any coordinated action for issue of a notice and proper officers are spread across the country.

There is also a proposal for addition of sub-section 10B to the effect that the notice issued under sub-section (4) shall be deemed to have been issued under sub-section (1) if such notice demanding duty is held as not sustainable for invocation of the extended period. In respect of such cases, judicial authorities, even otherwise, allow such notices to survive for the normal period.

With all these changes, now, more documentation work will be involved and the importers and traders have to grapple with regular notices, pre-consultation notices / hearings, supplementary notices, pre-notice hearings for supplementary notices and deemed notices. The trading community has to wait with bated breath for five years since different notices can spring from different places keeping their tax liabilities uncertain and undecided.

To sum up, these measures under section 28, will be one step forward and two steps backward.