2016 (9) TMI 52 - HC - Service Tax

DGCEI Cannot Arrest Officials Without Following Sections 73A(3), (4), 90, and 91 Procedures of Finance Act

Makemytrip (India) Pvt. Ltd. & IBIBO Group Pvt. Ltd. Versus Union Of India & Ors

The HC held that DGCEI lacks authority to arrest officials without following the procedure under Sections 73A(3) and (4) of the Finance Act, 1994. Arrest ... Scope of powers of the Directorate General of Central Excise Intelligence (DGCEI) of arrest, investigation and assessment of service tax under Section 91 read with Section 90 and 89 of the Finance Act, 1994 (‘FA’) - entities operating on-line platforms/web portals - Nature of service rendered by the Petitioners, MMT and IBIBO - facilitate the booking of rooms in hotels throughout the country and collect a charge for rendering such service - characterise themselves as 'tour operators' - Coercive action including threat of arrest against officials for recovery of alleged service tax dues - power and jurisdiction of DGCEI - it was submitted that, once the Petitioners admit that they collect the service tax, even on behalf of the hotels whose rooms are booked online, it is incumbent on the Petitioners to themselves deposit the entire service tax collected. - The failure to do so, according to the DGCEI, has resulted in violation of various provisions of the FA by the two Petitioners and deliberate evasion of service tax on their part, warranting initiation of the coercive measure of arrest of their respective officials. Held that:- The scheme of the provisions of the Finance Act 1994 (FA), do not permit the DGCEI or for that matter the Service Tax Department (ST Department) to by-pass the procedure as set out in Section 73A (3) and (4) of the FA before going ahead with the arrest of a person under Sections 90 and 91 of the FA. The power of arrest is to be used with great circumspection and not casually. It is not to be straightway presumed by the DGCEI, without following the procedure under Section 73A (3) and (4) of the FA, that a person has collected service tax and retained such amount without depositing it to the credit of the Central Government. Where an assessee has been regularly filing service tax returns which have been accepted by the ST Department or which in any event have been examined by it, as in the case of the two Petitioners, without commencement of the process of adjudication of penalty under Section 83 A of the FA, another agency like the DGCEI cannot without an SCN or enquiry straightway go ahead to make an arrest merely on the suspicion of evasion of service tax or failure to deposit service tax that has been collected. Section 83 A of the FA which provides for adjudication of penalty provision mandates that there must be in the first place a determination that a person is 'liable to a penalty', which cannot happen till there is in the first place a determination in terms of Section 72 or 73 or 73 A of the FA. For a Central Excise officer or an officer of the DGCEI duly empowered and authorised in that behalf to be satisfied that a person has committed an offence under Section 89 (1) (d) of the FA, it would require an enquiry to be conducted by giving an opportunity to the person sought to be arrested to explain the materials and circumstances gathered against such person, which according to the officer points to the commission of an offence. Specific to Section 89 (1) (d) of the FA, it has to be determined with some degree of certainty that a person has collected service tax but has failed to pay the amount so collected to the Central Government beyond the period of six months from the date on which such payment is due and further that the amount exceeds ₹ 50 lakhs (now enhanced to ₹ 1 crore). The Court is unable to accept that payment by the two Petitioners of alleged service tax arrears was voluntary. 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. Decided in favor of petitioners. Issues Involved:1. Nature of service rendered by the Petitioners (MMT and IBIBO).2. Powers of the Directorate General of Central Excise Intelligence (DGCEI) under Sections 73, 73A, 89, 90, and 91 of the Finance Act, 1994 (FA).3. Legality of the arrest and coercive measures taken by DGCEI.4. Legality of the search of premises by DGCEI.5. Voluntariness of the payments made by the Petitioners.6. Constitutional safeguards and compliance with procedural requirements.Issue-wise Detailed Analysis:1. Nature of Service Rendered by the Petitioners:The Petitioners, MMT and IBIBO, argued that they operate as 'tour operators' facilitating hotel bookings through their web portals. They collect room charges inclusive of taxes and pass them to the hotels, retaining only the service tax on the booking service rendered. DGCEI contended that the Petitioners were running hotels online and were required to deposit the entire service tax collected from customers.2. Powers of DGCEI under Sections 73, 73A, 89, 90, and 91 of the FA:The Court examined the provisions for assessment and recovery of service tax under Sections 72, 73, and 73A of the FA. It highlighted that the power of arrest under Sections 90 and 91 is linked to the determination of a cognizable offense under Section 89(1)(d), which requires a prior adjudication process. The Court emphasized that the power of arrest should be used with great circumspection and not casually.3. Legality of the Arrest and Coercive Measures:The Court found that the DGCEI acted prematurely and without following due process by arresting Mr. Pallai, Vice-President (Finance) of MMT, without issuing a show-cause notice (SCN) or completing the adjudication process. The Court held that such actions violated the procedural safeguards and constitutional rights of the Petitioners.4. Legality of the Search of Premises:The search of the Petitioners' premises was found to be contrary to law and unconstitutional. The Court noted that the search was conducted without proper authorization and without forming the requisite opinion that documents or things useful for the proceedings were secreted in any place, as required under Section 82 of the FA.5. Voluntariness of the Payments Made by the Petitioners:The Court rejected the DGCEI's contention that the payments made by the Petitioners were voluntary. It was held that the payments were made under coercion and threat of arrest, and therefore, could not be considered voluntary. The Court directed the DGCEI to refund the amounts paid by the Petitioners.6. Constitutional Safeguards and Compliance with Procedural Requirements:The Court underscored the importance of constitutional safeguards under Articles 21 and 22 of the Constitution, as elaborated in D.K. Basu v. State of West Bengal. It emphasized that the decision to arrest must be based on credible material and must comply with procedural requirements, including the issuance of an SCN and completion of the adjudication process.Conclusion:The Court concluded that the actions of the DGCEI in arresting Mr. Pallai and conducting searches were illegal and unconstitutional. It directed the DGCEI to refund the amounts paid by the Petitioners and awarded costs to the Petitioners. The Court also reserved the right of the Petitioners to seek damages and compensation for the actions of the DGCEI officials.