2025 (6) TMI 1030 - HC - Customs

Power to issue SCN - Jurisdiction of Customs Authorities to initiate adjudication proceedings under Section 28 of the Customs Act 1962 - misrepresentation of Regional Value Content (RVC) in imported Tin Ingots from Malaysia despite the existence of a specialized dispute resolution mechanism under Article 24 of the ASEAN-India Free Trade Agreement (AIFTA) - recovery of benefits obtained through misrepresentation or suppression of correct facts - levy of penalty - HELD THAT - In Union of India Vs. Agricas LLP 2020 (8) TMI 705 - SUPREME COURT the Hon ble Supreme Court explained the distinction between direct application of treaties in domestic law and national legal systems that mandate and require act of transformation for an international treaty to apply and be a part of domestic law. Direct application means and mandates that the treaty norms either wholly or to some extent are directly treated as norms of domestic law and enjoy the statutory law status by default in the domestic legal system. The term direct application will also cover situations in which government or different levels of government utilise treaty norms as part of domestic jurisprudence and is not limited to situations in which private parties can sue based on the treaty norms. There is a distinction between direct application and invocability . Act of transformation principle means and implies that an international treaty is not directly applicable in the domestic law system and requires provision in the domestic rules before it is applied. Transformation is a word of wide amplitude and does not refer to mere implementation as it includes the right of the country to adopt amend or modify the treaty language into domestic jurisprudence. The act of transformation is different from direct application as in the former the treaty is not received and treated as part of domestic jurisprudence until it is published and made part of the domestic jurisdiction in the same manner as other law. In Agricas LLP the Hon ble Supreme Court also referred to and explained the principle of invocation or invocability. The Court explained that in simple terms invocability refers to justiciability admissibility of a claim before the national Courts. It is not connected with the defence or merits of the defence. In cases where an act of transformation is required treaties may be partially or entirely incorporated into domestic law. Where the treaty or portion thereof becomes a part of the domestic law by act of transformation it is obvious that only the part incorporated or transformed into domestic law is invocable and justiciable and not the parts that are not codified into domestic law. The Petitioners contention about the enforceability of Article 24 of AIFTA even though the Petitioners were unable to show any statute or even rules by which this treaty provision had been transformed into municipal law is untenable. If accepted this contention would run counter to several decisions of the Hon ble Supreme Court on the subject and the principles of interplay between domestic law and international law as explained by eminent authors and the Hon ble Supreme Court from time to time. In the present case the Customs Authorities are yet to adjudicate the matter and therefore it is not for this Court to make any observations that would even remotely prejudice the interest of the Petitioners or the Respondents. However attempts to stall or prevent the adjudication proceedings as outlined in the impugned show cause notices cannot be encouraged when exercising our extraordinary and equitable jurisdiction under Article 226 of the Constitution - The primary argument that the impugned show cause notices are ultra vires for failing to comply with the provisions of Article 24 of AIFTA lacks merit. Conclusion - The issuance of show cause notices under Section 28 of the Customs Act is valid and within jurisdiction. The specialized dispute resolution mechanism under Article 24 of AIFTA is not enforceable before domestic courts or authorities without incorporation into municipal law. Consequently the Petitioners challenge to the jurisdiction of customs authorities failed. Petition dismissed.

Summary

The core legal questions considered in this judgment revolve around the jurisdiction and applicability of a specialized dispute resolution mechanism under an international treaty vis-`a-vis the powers of domestic customs authorities under national law. Specifically, the issues include:

1. Whether the Customs Authorities have jurisdiction to initiate adjudication proceedings under Section 28 of the Customs Act, 1962, concerning alleged misrepresentation of Regional Value Content (RVC) in imported Tin Ingots from Malaysia, despite the existence of a specialized dispute resolution mechanism under Article 24 of the ASEAN-India Free Trade Agreement (AIFTA).

2. Whether Article 24 of AIFTA, which provides for a special dispute resolution mechanism for disputes concerning origin, classification, or related matters, is directly enforceable or invocable before domestic courts or authorities in India without its incorporation into municipal law.

3. The interplay between international treaty obligations and domestic law, including the principles of direct application, act of transformation, and invocability of treaties in Indian municipal law.

4. Whether the issuance of show cause notices under the Customs Act without resorting to the treaty's dispute resolution mechanism is without jurisdiction and unconstitutional.

5. The legal effect of the Customs Tariff (DOGPTA) Rules 2009 and the Customs Exemption Notification No. 46 of 2011 in relation to the implementation of AIFTA provisions.

6. The impact of the amendment to the Customs Act introducing Chapter VAA and Section 28DA on the jurisdiction of customs authorities to adjudicate disputes concerning Country of Origin criteria.

Issue-wise Detailed Analysis

Issue 1 & 4: Jurisdiction of Customs Authorities vs. Treaty Dispute Resolution Mechanism

The Petitioners contended that the Customs Authorities lacked jurisdiction to proceed under the Customs Act without first resorting to the dispute resolution mechanism under Article 24 of AIFTA. They argued that the issuance of show cause notices alleging misrepresentation of RVC was invalid and ultra vires.

The Court examined the treaty provision, which requires consultation between the contracting parties and, failing a mutually satisfactory solution, the invocation of the ASEAN-India Dispute Settlement Mechanism (DSM). The Petitioners argued that this procedure must precede any domestic adjudication.

The Court, however, emphasized the distinction between international treaty obligations and their enforceability in domestic law. It noted that unless the treaty provisions are transformed into municipal law, they cannot be invoked to oust or restrict statutory powers under domestic legislation. The Customs Act confers express powers under Section 28 to investigate and adjudicate cases of misrepresentation or suppression, which include allegations related to RVC.

The Court held that the Customs Authorities acted within their jurisdiction in issuing show cause notices based on prima facie material. The treaty's dispute resolution mechanism does not preclude or suspend the operation of domestic law enforcement powers unless incorporated into domestic law.

Issue 2 & 3: Enforceability and Invocability of Article 24 of AIFTA in Domestic Law

The Court undertook a detailed analysis of the principles governing the relationship between international treaties and domestic law, relying heavily on the Supreme Court's decision in Union of India v. Agricas LLP and other precedents. It distinguished between:

• Direct application of treaties, where treaty provisions automatically become part of domestic law;
• Act of transformation, where treaty provisions require legislative enactment or incorporation into domestic law before they can be enforced;
• Invocability, referring to the admissibility or justiciability of treaty provisions in domestic courts.

The Court observed that India follows a dualist system where international treaties do not automatically become part of domestic law unless transformed by legislation. Article 24 of AIFTA has not been incorporated or transformed into Indian law by any statute or subordinate legislation. The Customs Tariff (DOGPTA) Rules 2009, enacted to implement AIFTA provisions, do not reference or incorporate Article 24.

Therefore, the Court concluded that Article 24 cannot be invoked before domestic courts or authorities to challenge or restrain the exercise of statutory powers under the Customs Act. The Petitioners' attempt to enforce Article 24 directly is untenable and contrary to established legal principles.

Issue 5: Effect of Customs Tariff (DOGPTA) Rules 2009 and Customs Exemption Notification No. 46 of 2011

The Court acknowledged that these rules and notifications were issued to give effect to the preferential tariff treatment under AIFTA. However, the absence of any reference to Article 24 in these rules indicates that the special dispute resolution mechanism was not incorporated into domestic law. The rules empower customs authorities to act under the Customs Act, including investigating and adjudicating cases of misrepresentation or fraud.

The Court relied on the Gujarat High Court's decision in Trafigura India Pvt. Ltd., which had rejected similar contentions and upheld the jurisdiction of customs authorities to proceed with adjudication despite the treaty provisions.

Issue 6: Impact of Amendment Introducing Chapter VAA and Section 28DA

The Petitioners argued that the introduction of Chapter VAA and Section 28DA in the Customs Act, effective from March 27, 2020, which specifically addresses disputes concerning Country of Origin criteria, implies that prior to this amendment, customs authorities lacked jurisdiction over such disputes.

The Court rejected this argument, noting that the amendment confers additional powers but does not negate or restrict the existing powers under Section 28. The Customs Authorities had jurisdiction to investigate misrepresentation or fraud even before the amendment. The amendment does not have retrospective effect and does not invalidate prior actions taken under Section 28.

Application of Law to Facts and Treatment of Competing Arguments

The Court carefully considered the factual background, including the investigation by the Director of Revenue Intelligence revealing prima facie evidence of misrepresentation of RVC in imported Tin Ingots. It noted that the Petitioners had valid Certificates of Origin issued by Malaysian authorities but that domestic complaints and investigations suggested collusion and fraud.

The Petitioners' reliance on the treaty's dispute resolution mechanism to restrain domestic adjudication was rejected on the basis that the treaty provision was not part of domestic law. The Court emphasized that the Customs Authorities' powers under Section 28 were statutory and validly exercised.

The Respondents' arguments that treaty provisions cannot override domestic laws unless transformed were accepted. The Court also declined to follow the Petitioners' criticism of the Gujarat High Court's Trafigura decision, finding it consistent with established legal principles.

The Court refrained from delving into the merits of the allegations in the show cause notices, noting that adjudication was yet to take place and that the Petitioners had the opportunity to contest the allegations during the proceedings.

Conclusions

The Court concluded that the issuance of show cause notices under Section 28 of the Customs Act was valid and within jurisdiction. The specialized dispute resolution mechanism under Article 24 of AIFTA is not enforceable before domestic courts or authorities without incorporation into municipal law. Consequently, the Petitioners' challenge to the jurisdiction of customs authorities failed.

The Court dismissed the Petitions and discharged the Rule, vacating any interim relief.

Significant Holdings

"The provisions of international treaties can never be diluted by any delegated legislation, such as rules etc." (para 13)

"Unless the treaty provisions are transformed into municipal law, they cannot be invoked to oust or restrict statutory powers under domestic legislation." (para 56)

"Article 24 of AIFTA cannot be invoked before domestic courts or authorities to challenge or restrain the exercise of statutory powers under the Customs Act." (para 51)

"India follows a dualist system where international treaties do not automatically become part of domestic law unless transformed by legislation." (para 37-38)

"The Customs Authorities acted within their jurisdiction in issuing show cause notices based on prima facie material alleging misrepresentation and suppression." (para 56)

"The introduction of Chapter VAA and Section 28DA does not imply that prior to the amendment, customs authorities lacked jurisdiction to investigate misrepresentation or fraud." (para 58)

"The Petitioners' attempt to suspend the provisions of the national law i.e. the Customs Act and denude the customs authorities of their statutory powers based on an unincorporated treaty provision is impermissible." (para 54)