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Dr. Sanjiv Agarwal, FCA, FCS

Sanjiv Agarwal PhotoRecently, Delhi High Court has delivered judgments in following two cases coming down heavily on the Revenue against high handedness of Revenue officials in arresting tax payers or their employees without proper adjudication –

a) makemytrip (India) Pvt. Ltd. v. Union of India (2016) 44 STR 481 (Delhi)

b) e-bizcom Pvt. Ltd. v. Union of India (2016) 44 STR 526 (Delhi)

In makemytrip case (supra), the assessees (makemytrip.com and IBIBO Group Pvt. Ltd.) were engaged in services of booking tickets for journey by various modes and hotel booking through web portal.

In makemytrip and IBIBO case, high court observed / held as under which are noteworthy:

(1) Power to arrest under sections 90 and 91 of the Finance Act, 1994 are to be used with circumspection and not in a casual manner.

(2) Service Tax Department or Director General of Central Excise Intelligence (DGCEI) can not presume or suspect that assessee has collected Service Tax but not deposited it with the Central Government without following the procedure as per section 73 and 73A of the Finance Act, 1994.

(3) To ascertain as to whether the assessee is a habitual offender, DGCEI is expected to check with Service Tax Department. In case of habitual defaulters, resort to coercive steps straight way can be made by making convincing justification in ‘note’ on file.

(4) Arrest of officers of assessee without safeguards is reckless and violates their fundamental rights under article 21 of the Constitution of India.

(5) DGCEI did not observed the required safeguards by way of checking or verifying the records or seeking clarification from the Service Tax Department.

(6) Power of arrest and levy of penalty, both can go on simultaneously but both have to be preceded by adjudication to determine evasion of Service Tax.

(7) Person sought to be arrested has to be given opportunity to explain materials and circumstances gathered against him, which point to commission of offence. It has to be determined with some certainty that person has collected Service Tax beyond prescribed limit and failed to pay it to Central Government beyond prescribed period. Without such determination, conclusion that assessee committed cognizable offence would be like putting cart before horse.

(8) There is a reason behind the stipulation that prosecution should normally be launched only after the adjudication is complete. It is possible that the officer will take a different view because he has the opportunity of hearing both the sides and to more carefully analyze the evidence that has been gathered.

(9) Where prosecution is sought to be launched even before the adjudication of the penalty, it has to be shown that –

(a) the offence involved is grave,

(b) qualitative evidence is available, and

(c) it is apprehended that the assessee may delay the completion of adjudication proceedings.

This underscores the importance of obtaining sanction for prosecution.

(10) Without even an SCN being issued and without there being any determination of the amount of Service Tax arrears, the resort to the extreme coercive measure of arrest followed by detention was impermissible in law. Consequently, the amount that was paid by the Petitioners as a result of the search of their premises by the DGCEI, without an adjudication, much less an SCN, is required to be returned to them forthwith.

(11) For cognizable offence prescribed under Section 89(1)(ii) of Finance Act, 1994, Officer making arrest has to inform arrested person of grounds of arrest and produce him before Magistrate within twenty four hours. As stipulated in Section 91(4) of the Finance Act, 1994, all arrests under Section 91 have to be in accordance with Chapter V of Code of Criminal Procedure, 1973 on ‘Arrests’ and judicial safeguards evolved by reading constitutional limitations into these powers. Arrests have to be based on credible evidence. Determination by court that person has committed offence cannot possibly be arrived at till completion of process envisaged under Cr. P.C.

(12) The decision of launch of prosecution and decision to arrest have to be taken more or less simultaneously. Further, without a decision to launch prosecution, there can not be a decision to arrest any person. Decision to launch prosecution is required to be informed with due safeguards.

(13) Consequent to search, payment of Service Tax made without show cause notice was made to avoid further consequences of continued detention and such amount paid by assessee during detention without adjudication, much less the SCN, is to be returned forthwith to assessee.

The judgment of makemytrip was applied to eBiz.com case too and both were decided on the same date (01.09.2016). In eBiz case, following additional observations are relevant-

(1) Payment of Service Tax during bail proceedings of arrested person (managing director of assessee company), while in judicial custody and that too without show cause notice is under coercion and duress and it can not be said to be voluntary. Loss of liberty and reputation is bound to compel even most rational person to succumb to extreme pressure. In this case also, amount collected from detained assessee by the DGCEI was ordered to be returned to assessee.

(2) For search at assessee’s unit, it was held that when audit has already been carried out by Anti-Evasion Wing of Service Tax Commissionerate, it cannot be brushed off by DGCEI as either insignificant or of lesser scope for determining whether there has been evasion of Service Tax. Plea that audit party accepts at face value information provided by assessee without further inquiry was rejected in view of wide powers available to auditing officer to search under Rule 5(1) of Service Tax Rules, 1994. Without examining records of past searches and audits, it is lack of application of mind to relevant material for DGCEI to have reason to believe that there is evasion of tax. Finance Act, 1994 read with Central Excise Act, 1944 as application to Service Tax.

Consequent upon both the aforementioned judicial pronouncements, CBEC has issued Circular No. 201/11/2016-ST dated 30.09.2016. It states that the reason to believe that a person has committed the specified offence which is rendering the person liable for arrest must be based on credible material which will stand judicial scrutiny. The relevant factors before deciding to arrest a person must be, apart from fulfillment of the legal requirements, the need to ensure proper investigation and prevention of the possibility of tampering with evidence or intimidating or influencing witnesses. It further clarifies that once the legal ingredients of the offence are made out, the Commissioner must then determine if the answer to the following questions is in the affirmative –

  • Is the alleged offender likely to hamper the course of further investigation by his unrestricted movement?
  • Is the alleged offender likely to tamper with evidence or intimidate or influence witnesses?

If the answer to both the questions is yes, then the decision to arrest can be made.

It has been clarified that if the alleged offender is assisting in the investigation and has deposited at least half of the evaded tax, then the need to arrest may not arise. Further, since an arrest impinges on the personal liberty of an individual, this power should be exercised with great responsibility and caution and only after a careful examination of the legal and factual aspects.

It can only be hoped that the Departmental officials will follow this new Circular in letter and spirit.

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July 2024