Prosecution provisions (for specified offences) were a part of Chapter V of Finance Act, 1994 (the Act) introduced in 1994. However, with expansion of Service tax laws in 1998, these provisions were deleted.  Budget 2011 (with effect from 8 April 2011) re-introduced prosecution provisions for offences like rendition of services without raising invoices, availment of Cenvat credit without receipt of inputs/ input services, etc.

In order to clarify some important aspects of prosecution provisions, the Government has recently come up with Circular No. 140/9/2011-TRU dated 12 May 2011 (the Circular).

The purpose of this document is to summarise some of the key clarifications issued vide the Circular.


Non-issuance of invoice 9 (Section 89 (1) (a) of the Act)

The offence of non-issuance of invoice would not cover cases of non-mention of technical details in the invoice which have no bearing on determination of the tax liability.

Further, as regards service recipient discharging Service tax under reverse charge mechanism (import of service), it has been clarified that in order to avoid prosecution, the invoice should be available with the service recipient at the time of payment of service or within 14 days thereafter.

Similarly, for transactions between associated enterprises invoice should be available with the service receiver at the time of book adjustment or date of payment.

Further, ‘invoice’ would include consignment note and other documents issued by banks etc., containing particulars as mentioned under the Service Tax Laws.

Availing and utilising Cenvat Credit without receipt of service (Section 89 (1) (b) of the Act)

Prosecution provisions to be triggered only where the taxpayer has both availed and utilised the Cenvat credit without actual receipt of goods or services. It has further been added that such circumstances would not cover situation where invoice has been issued and payment has been made in advance for a service yet to be received.

It may be recalled that Supreme Court of India recently in the case of Union of India Vs M!s Ind-Swift Laboratories Ltd [201 1-TIOL-21-SC-CX], held that in case of irregular availment of Cenvat Credit, interest shall be payable from the date of taking credit and not from the date of utilizing it. Accordingly, though interest liability would be triggered on availment of Cenvat credit, prosecution proceedings would be initiated only on availment and utilization of Cenvat credit.

Further, only fake invoices involving non payment of Service tax by service provider, altered value! tax for availing additional Cenvat credit etc. are meant to be covered under this clause.

Maintenance of false books of accounts (Section 89 (1) (c) of the Act)

Taxpayer would be prosecuted under the said offence only where material particulars having a bearing on the tax liability are false/ incorrect.

The expression ‘material particulars’ has not been defined in the Circular, but it has been clarified that mere ‘expression of opinion’ shall not constitute the particulars as ‘material’.

Non payment of Service tax for more than six months after collection (Section 89 (1) (d) of the Act)

It has been clarified that the said clause would be applicable only where the following conditions are satisfied:

  • Amount is reflected in the invoice as Service tax;
  • Payment is received for the said invoice; and
  • Six months have lapsed from the date when the service provider was required to deposit the tax with respect to said invoice

Thus, the aforesaid clause would not cover any non payment of Service tax which is due. Further, in case of part payment, it has been clarified that the offender would be punishable to the extent he has failed to deposit the tax due.

Other clarifications

  • Each offence covered under the prosecution provisions would have an inherent mens rea (i.e. malafide, intentional guilt). Thus, the burden to prove non existence of mens rea would be on the accused.
  • Prosecution proceedings would not be initiated for offences involving monetary implications of less than Rupees Ten Lakhs. However, such limit would not apply in case of repeated offences
  • Prosecution proceedings can be initiated against any person in charge of the Company and responsible for conduct of the business, unless it is established that the offence was committed without the person’s knowledge or the person had exercised all due diligence to prevent the offence
  • Prosecution could to be launched against top management of the Company only where there is sufficient and clear evidence to show their direct involvement in the offence
  • Prosecution provisions would be exercised with caution and responsibility after considering all facts. Prosecution would not be launched merely on matters of technicalities
  • Prosecution would be generally initiated after final adjudication of an offence by the Tax Department. However, there is no legal bar against launch of prosecution before adjudication

Conclusion- The Circular clarifies that prosecution provisions are intended to be used in cases of exceptional circumstances involving inherent mens rea, to that extent, the Circular comes as a relief to the Industry. Further, the Circular is an indication that the Government is not taking the prosecution provisions lightly and is expecting the same to be implemented by the tax administrators sooner than later.

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June 2021