Three years' limitation, or five. Standard penalty, or one hundred percent. Section 73 or Section 74; Section 28(1) or Section 28(4). The officer chooses at the moment of issuing the SCN. Most MNC classification and valuation disputes are interpretational; the same product is legitimately classifiable under two competing HSN headings. Section 74 has been mechanically invoked all the same. The Karnataka High Court in NCS Pearson (July 2025) quashed such an SCN: mistaken classification during pending advance ruling cannot constitute wilful suppression. Where does the institutional leverage sit?
The notice arrives in one of three forms. A customs show cause notice under Section 28 of the Customs Act, 1962 alleging misclassification of HSN code, undervaluation under Section 14 read with the Customs Valuation Rules, 2007, or wrongful availment of an exemption notification. A GST show cause notice under Section 73 or Section 74 of the Central Goods and Services Tax Act, 2017 alleging incorrect rate classification, wrong HSN code in the invoice and GSTR-1, or incorrect input tax credit utilisation. A pre-SCN intimation in Form GST DRC-01A under Rule 142(1A) of the CGST Rules proposing the demand before the formal SCN is served. For the government affairs head receiving the notice, the immediate question is not whether the classification is right; it is whether the notice reflects genuine interpretational disagreement or an allegation of deliberate evasion, because that distinction determines everything that follows.
The classification architecture itself is where most disputes originate. The Customs Tariff Act, 1975 incorporates the Harmonized System of Nomenclature maintained by the World Customs Organization, with India adopting the global six-digit structure and extending it to eight digits for national tariff specificity. Classification follows the General Rules for Interpretation, Rules 1 through 6, which prescribe a hierarchical method: headings, then section and chapter notes, then subheadings, then residual rules. In practice, the same imported article can be argued to fall under two or more competing headings, each defensible under the GRI framework. A stretcher-type device may fit under medical instruments in Chapter 90 or under articles of plastic in Chapter 39. A telecommunications component may fit under Chapter 85 as an electrical apparatus or under a more specific Chapter 85 subheading as a telecommunications apparatus. The same product, under the same law, is legitimately classifiable in two different ways by reasonable professionals. When the Revenue officer and the importer arrive at different classifications, the dispute is not evasion; it is interpretation, and the statutory architecture permits both interpretations until an adjudicating authority resolves the conflict.
The intent question is the institutional fulcrum. Deliberate customs evasion exists and is distinguishable. The Xiaomi India matter of 2022 is the reference case: the Directorate of Revenue Intelligence found that royalty and licence fees paid to Qualcomm USA and to Beijing Xiaomi Mobile Software, a related party, were not being added to the transaction value of imported mobile phones and components, in violation of Section 14 of the Customs Act and the Customs Valuation Rules. The show cause notices demanded duty of approximately Rs. 653 crore for the period April 2017 to June 2020. This was a valuation matter, not a classification matter, and it involved a specific omission of a defined category of payment that the statute required to be included. The Xiaomi pattern is the minority case: a specific, demonstrable, statutorily enumerated omission, distinct from the majority pattern of interpretational dispute. The majority of SCNs served on MNCs allege misclassification where the importer has adopted one defensible HSN and the Revenue officer reads another defensible HSN, or allege valuation questions where the parties genuinely differ on whether a specific payment is part of the transaction value.
Section 73 versus Section 74 of the CGST Act, and the corresponding Section 28(1) versus Section 28(4) of the Customs Act, are where this distinction becomes institutionally consequential. Section 73 applies to non-fraud cases with a three-year limitation from the due date of the annual return and a standard penalty architecture. Section 74 applies to cases involving fraud, wilful misstatement, or suppression of facts with intent to evade tax, carries a five-year limitation, and imposes penalty up to 100% of the tax. Section 74 is increasingly invoked by GST officers for interpretational and classification disputes where the three-year limitation has expired, even when the facts do not support a finding of wilful suppression. The courts have pushed back. In NCS Pearson Inc. v. Union of India (Karnataka High Court, July 2025), the court quashed a Section 74 SCN on the ground that the Revenue had full knowledge of the transactions through Authority for Advance Rulings proceedings, and mistaken classification during pending advance ruling adjudication could not constitute wilful suppression. In J.S. Pigments Pvt. Ltd. v. Commissioner of CGST and Central Tax, Howrah (Calcutta High Court, 2022), the court held that interpretational disputes do not attract the extended period. Appellate authorities now routinely convert Section 74 orders into Section 73 orders where the Revenue has not established tangible evidence of deliberate wrongdoing. The Finance Act, 2024 introduced Section 74A, which unifies the demand architecture for FY 2024-25 onwards and standardises the timelines, but the distinction between fraud and non-fraud cases continues to determine the quantum and rate of penalty, and the jurisdictional fact of intent remains the institutional hinge.
The procedural safeguards are the first leverage points. Under GST, Rule 142(1A) requires the proper officer to issue Form GST DRC-01A before issuing a formal SCN under Section 74. Non-issuance of DRC-01A has been held to be a significant procedural lapse. In New Morning Star Travels v. Deputy Commissioner (Andhra Pradesh High Court, 2023), the court emphasised the procedural importance of the pre-SCN intimation, and subsequent decisions have extended this reasoning. Under customs, the pre-SCN consultation mechanism introduced through CBIC circulars requires consultation with the importer before issuing an SCN in non-preventive matters. The procedural architecture built into the SCN-issuance process is itself the first institutional avenue for challenge, and an SCN issued without compliance with these safeguards is vulnerable at the writ stage. MNCs that treat the pre-SCN stage as a consultation window rather than as a formality consistently achieve better outcomes than those that wait for the formal SCN and then defend reactively.
The response to the SCN is where the adjudication case is effectively won or lost. The detailed written reply must be filed within the period specified in the notice, typically thirty days extendable on request. The reply must address classification on the merits with reliance on HSN Explanatory Notes, WCO rulings, judicial precedents, and Advance Rulings where available; challenge the invocation of extended period where intent is not substantiated; raise procedural objections if DRC-01A or pre-SCN consultation was omitted; challenge "bunching" of multiple assessment years in a single SCN following Titan Company Ltd. v. Joint Commissioner of GST & Central Excise (Madras High Court, December 2023), which struck down the practice where bunching caused certain periods to become time-barred; and assert Revenue's prior knowledge through AAR, earlier audit cycles, or disclosed transactions, following the NCS Pearson reasoning. Personal hearing must be requested and attended. Cross-examination of witnesses whose statements form part of the Revenue case must be sought where applicable. The Order-in-Original issued after adjudication is what the MNC will either accept or appeal, and the reply and hearing submissions are what the Order must engage with.
The voluntary payment route exists for MNCs that assess their position realistically and want to close the matter without protracted litigation. Under Section 28(5) of the Customs Act, an importer who pays the short-levied duty along with interest and 15% penalty before the SCN is issued settles the matter. Under Section 73 of the CGST Act, tax paid along with interest before issuance of the SCN attracts no penalty, and payment within thirty days of SCN or sixty days under the new Section 74A framework similarly eliminates the penalty. Under Section 74, payment within thirty days of the SCN attracts 25% penalty, and within thirty days of the order attracts 50%. Section 128A of the CGST Act, inserted by the Finance Act, 2024, provides for conditional waiver of interest and penalty for demands under Section 73 pertaining to FY 2017-18, 2018-19, and 2019-20 where the taxpayer pays the full tax liability before a notified date. The voluntary payment architecture is institutionally designed to incentivise early closure, and MNCs that assess their exposure realistically at the pre-SCN or SCN stage frequently close cases at significantly reduced penalty exposure relative to those that litigate through the appellate cycle.
The appellate architecture is where matters that cannot be closed at adjudication eventually resolve. Under customs, an appeal against the Order-in-Original lies to the Commissioner (Appeals) within three months, with a pre-deposit of 7.5% of the duty demanded. An appeal against the Commissioner (Appeals) order lies to the Customs, Excise and Service Tax Appellate Tribunal, with a cumulative pre-deposit of 10% subject to a cap of Rs. 10 crore. CESTAT operates through the Principal Bench at New Delhi and eight regional benches, and is the final authority on questions of fact; its decisions can be appealed to the High Court only on substantial questions of law, within 180 days. The final appeal lies to the Supreme Court in cases involving substantial questions of law of general importance. Under GST, the parallel pathway runs through the Commissioner (Appeals), the GST Appellate Tribunal, the High Court, and the Supreme Court. The GSTAT is now being constituted after substantial delay; its principal bench and state benches are being operationalised. Pre-deposit at each stage, the stay application strategy during pendency, and the pre-deposit cap at the Rs. 10 crore threshold are the cash-flow architecture of an appellate strategy that an MNC's government affairs and finance functions must plan together. The pathway is traversable within defined statutory windows, and an MNC that misses a filing window loses the remedy regardless of the merits.
For MNCs importing from related foreign parties, the Special Valuation Branch operates as a parallel institutional track alongside the classification architecture. SVB examines whether the declared transaction value between related parties reflects arm's length pricing, and whether royalty, licence fee, or other payments made as conditions of sale are being correctly included in the assessable value. The SVB unit at the importer's jurisdictional Custom House (Mumbai, Chennai, Kolkata, Delhi, Bengaluru) issues a questionnaire, examines the intercompany agreements, transfer pricing studies, and financial statements, and issues an Investigation Report that binds assessment at all Indian ports. Provisional assessment under Section 18 of the Customs Act continues during the inquiry, typically with an extra duty deposit that has been rationalised by recent CBIC guidance. Any change in the pricing formula, royalty structure, or commercial terms requires fresh SVB examination. The SVB track is where customs valuation and transfer pricing intersect, and MNCs with substantial intercompany imports must maintain the two documentation sets as a unified compliance architecture, not separate workstreams.
The penalty architecture varies by statute and by the specific provision invoked. Under customs, Section 114A imposes a mandatory penalty equal to the duty where extended period is invoked and sustained; Section 112 imposes penalty for improper importation; Section 111 provides for confiscation of goods in addition to duty demand. Under GST, the graduated structure under Sections 73, 74, and 74A provides for reduced penalty on early payment and enhanced penalty on post-order payment. Interest at 18% per annum applies throughout under Section 50 of the CGST Act, with 24% per annum for ITC wrongly availed and utilised. The penalty architecture, read together with the voluntary payment windows, creates a tapering incentive structure: the earlier the matter is resolved, the lower the penalty exposure, and the later it is resolved, the higher.
The institutional posture that closes cases most efficiently runs through everything above: precedent-anchored responses at the pre-SCN and SCN stages, vigorous challenge to extended-period invocation where intent is unsupported, procedural objections where the safeguards were skipped, advance rulings used prospectively rather than litigated retrospectively, unified documentation for related-party imports, a realistic voluntary-payment assessment where the position is weak, and disciplined window and pre-deposit management where appeal is the path. Most MNC classification and valuation disputes close within adjudication or Commissioner (Appeals) when the response is detailed, precedent-anchored, and procedurally disciplined; matters that reach CESTAT or GSTAT typically do so because one of these disciplines was not observed.
The deeper institutional observation for the MNC regulatory head is that the Indian classification and valuation architecture is not adversarial by design; it is interpretational by design, and the procedural safeguards built into it are meant to accommodate interpretational differences without criminalising them. The Section 74 pattern, where extended period is mechanically invoked, is an institutional friction that the courts are actively correcting. The Xiaomi pattern, where deliberate omission of royalty from transaction value attracts enforcement, is the genuine minority case. Between the two sits the vast majority of MNC classification and valuation matters, which resolve when the institutional response is proportionate to the dispute: robust on merits, disciplined on procedure, realistic on voluntary payment where warranted, and strategic on appellate timing where not.