2016 (9) TMI 52 - HC - Service Tax

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

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 ... Power of arrest under Section 91 of the Finance Act, 1994 - requirement of show cause notice and adjudication under Section 73A(3)-(4) of the Finance Act, 1994 - cognizable offence under Section 89(1)(d) of the Finance Act, 1994 - search powers under Section 82 of the Finance Act, 1994 - meaning of 'collected' for the purposes of Section 73A and Section 89 - constitutional safeguards on arrest (Article 21 and D.K. Basu principles) - CBEC guidelines on prosecution, monetary limits and criteria for prosecution - exception for habitual evaders as justification for immediate coercive actionRequirement of show cause notice and adjudication under Section 73A(3)-(4) of the Finance Act, 1994 - cognizable offence under Section 89(1)(d) of the Finance Act, 1994 - power of arrest under Section 91 of the Finance Act, 1994 - Whether DGCEI could arrest officials of the petitioners without first following the procedural steps under Section 73A(3)-(4) and related adjudicatory process before invoking the arrest provisions. - HELD THAT: - The Finance Act's scheme requires determination under Section 73A (and, where relevant, under Sections 72/73) before concluding that a person has collected service tax and retained it such as to attract Section 89(1)(d). Only an offence falling within Section 89(1)(d) (and exceeding the prescribed monetary threshold) is cognizable under Section 90(1) and thereby potentially attracts arrest under the authorization mechanism in Section 91. The Court held that the DGCEI cannot bypass the Section 73A(3)-(4) show-cause/adjudication process and straightaway proceed to arrest merely on suspicion. Arrest power must be exercised with circumspection, on the basis of credible material and after giving the person an opportunity to explain the materials relied upon; adjudication (or at least the Section 73A procedure) is a necessary precursor except in narrowly defined situations of habitual evasion where convincing reasons are recorded. [Paras 68, 72, 76, 78, 116]DGCEI could not lawfully arrest without first following the Section 73A(3)-(4) procedure and making the requisite prima facie determination that Section 89(1)(d) was attracted; arrest power under Section 91 must be exercised only on credible material and after affording opportunity, subject to narrow exception for established habitual evaders supported by convincing notes on file.Meaning of 'collected' for the purposes of Section 73A and Section 89 - interpretation of Section 73A(1) - Whether the petitioners had, as a matter of law on the material before DGCEI, 'collected' and 'retained' service tax so as to attract liability under Section 73A(1) and criminality under Section 89(1)(d). - HELD THAT: - The Court applied established authorities on the phrase 'collected' and the statutory language of Section 73A(1) and concluded that DGCEI had not established even prima facie that amounts shown on customer vouchers and passed on to hotels were amounts 'collected' and 'retained' by the petitioners as service tax. Without a prima facie finding that the petitioners had kept amounts as tax (and not merely passed them on), Section 73A(1) and Section 89(1)(d) could not be said to be attracted. The DGCEI's unilateral conclusions about non-registration of hotels and non-deposit by hotels were not confronted or supported so as to displace petitioners' case that they acted as intermediaries/agents and passed on amounts. [Paras 56, 58, 59, 60, 61]On the available material, DGCEI did not make out a prima facie case that the petitioners 'collected' and 'retained' service tax within the meaning of Section 73A(1) or that Section 89(1)(d) was attracted.Search powers under Section 82 of the Finance Act, 1994 - requirement to record 'reasons to believe' before search - Whether the searches of the petitioners' premises complied with Section 82 and related requirements. - HELD THAT: - Section 82 requires a specified officer to form an opinion that documents/books/things useful or relevant to proceedings are secreted and the file note preceding search must reflect that requirement. The Court found no adequate recording of such reasons on the file; the notes did not demonstrate formation of the requisite opinion or application of mind to Section 82. By entering premises, compelling payments and conducting searches without satisfying the statutory preconditions and without proper notes or reference to applicable guidance, the searches were held to be contrary to law and constitutionally unsustainable. [Paras 90, 100, 102, 103, 116]The searches under Section 82 were unlawful; the DGCEI failed to record requisite reasons and did not comply with statutory requirements.CBEC guidelines on prosecution, monetary limits and criteria for prosecution - exception for habitual evaders as justification for immediate coercive action - Whether the DGCEI's resort to coercive measures (arrest, threats and compelled payments) without engaging the ST Department, without assessing habit of evasion, and without following CBEC prosecution criteria was justified. - HELD THAT: - The Court examined CBEC circulars prescribing monetary thresholds, evidence standards and the concept of 'habitual evader'. Those guidelines require credible material, analysis of service tax records and normally decision on prosecution immediately upon completion of adjudication; prosecution should not be launched in technical cases or mere differences of opinion. Here DGCEI did not consult ST Department, did not requisition service tax records, and failed to show habit of evasion or adequate evidence of mens rea. The notes on file did not justify extreme measures; payments extracted were the product of coercion. The Court recognised a narrow exception permitting immediate coercive action only in cases of established habitual evasion demonstrated from ST Department records and convincing file notes, which was absent here. [Paras 95, 96, 97, 100, 116]DGCEI's coercive conduct was unjustified; CBEC criteria and consultation with ST Department were not followed and the 'habitual evader' exception did not apply on the materials.Constitutional safeguards on arrest (Article 21 and D.K. Basu principles) - payments extracted under coercion not voluntary - Whether payments made by the petitioners to DGCEI and the arrest of the MMT official were voluntary and constitutionally valid. - HELD THAT: - Arrest and detention engage Article 21 and the safeguards in D.K. Basu; arrests under the FA are subject to CrPC safeguards and must be based on credible material. The Court found that payments were made under threat of arrest and while searches and arrests were conducted without the statutory procedure and without opportunity to be heard; such payments cannot be treated as voluntary. The arrest of MMT's Vice-President was held to be contrary to law and violative of Article 21. Given illegality of searches and coercion, sums collected as a result must be refunded. [Paras 105, 106, 115, 116, 117]Payments extracted under threat were not voluntary; the arrest violated Article 21 and the sums obtained by DGCEI as a result of the searches/compulsion must be refunded forthwith with interest as directed.Final Conclusion: The High Court held that DGCEI acted unlawfully in searching the petitioners' premises and in arresting the MMT official without following the procedural safeguards of Sections 73A(3)-(4), Section 82 and the CBEC prosecution guidelines; arrest powers under Section 91 can be exercised only on credible material after required procedures (except in narrowly proven habitual evader cases). Payments obtained under threat were not voluntary and must be refunded forthwith (with interest for delay); interim directions were made absolute and costs were awarded to the 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.