Full Judgment Text
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 525/2016 & CM 2153/2016
th
Reserved on 16 May 2016
st
Decided on: 1 September, 2016
MAKEMYTRIP (INDIA) PVT LTD ..... Petitioner
Through: Mr. V. Lakshmikumaran, with
Mr. M.P. Devnath, Mr. Abhishek
Anand, Mr. Yogendra Aldak and
Mr. Mukesh Bhutani, Advocates.
versus
UNION OF INDIA & ORS ..... Respondents
Through: Mr. Virender Pratap Singh Charak, Adv.
with Mr. Shubhra Parashar and
Mr. Pushpendev Singh Charak, Advocates
for R-1.
Mr. Satish Aggarwala, Advocate for R-2
With
+ W.P.(C) 1283/2016 & CM 5642/2016
IBIBO GROUP PVT LTD ..... Petitioner
Through: Mr V. Lakshmikumaran, Advocate with
Mr M.P. Devnath, Mr Abhishek Anand,
Mr Yogendra Aldak and Mr Mukesh
Bhutani, Advocates.
versus
UNION OF INDIA & ORS. ..... Respondents
Through: Mr. Virender Pratap Singh Charak, Adv.
with Mr. Shubhra Parashar and
Mr. Pushpendev Singh Charak, Advs. for
W.P. (C) 525/2016 & 1283/2016 Page 1 of 77
R-1.
Mr Satish Aggarwala, Advocate for R-2
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE VIBHU BAKHRU
J U D G M E N T
% 01.09.2016
Dr. S. Muralidhar, J. :
Introduction
1. These writ petitions by two entities operating on-line platforms/web
portals raise important questions involving the powers of the Directorate
General of Central Excise Intelligence (DGCEI) of arrest, investigation
and assessment of service tax under the provisions of the Finance Act,
1994 (‗FA‘).
2. Writ Petition (Civil) No. 525 of 2016 is by MakeMyTrip (India) Private
Limited (‗MMT‘) against Union of India (‗UOI‘) through the Secretary,
Ministry of Finance, [Respondent No. 1], the Director, DGCEI,
[Respondent No. 2], The Additional Director General (‗ADG‘), DGCEI
[Respondent No. 3] and The Senior Intelligence Officer, DGCEI
[Respondent No. 4] seeking to restrain Respondent Nos. 2, 3 and 4 from
taking any coercive action including threat of arrest against MMT and its
officials for recovery of alleged service tax dues in terms of Section
73/73A of the FA. MMT also seeks a declaration that Respondent Nos. 2,
3 and 4 do not have the power to arrest the officials of MMT under Section
91 read with Section 89 of the FA and Section 9AA of the Central Excise
Act, 1944 (‗CE Act‘).
3. Writ Petition (Civil) No. 1283 of 2016 is filed by IBIBO Group Private
W.P. (C) 525/2016 & 1283/2016 Page 2 of 77
Limited (‗IBIBO‘) against the UOI through the Secretary, Ministry of
Finance [Respondent No. 1], the Director and the Senior Intelligence
Officer, DGCEI [Respondent Nos. 2 and 3 respectively]. The prayer in this
writ petition by IBIBO is identical to the prayers in Writ Petition (Civil)
No. 525 of 2016 filed by MMT.
4. In both writ petitions, applications were filed for interim directions to
restrain the DGCEI from taking any coercive steps against the entities and
their officers.
Common issues
5. A common issue that arises in both writ petitions is about the nature of
service rendered by the Petitioners, MMT and IBIBO. The case of MMT
and IBIBO is that they host web portals that facilitate the booking of
rooms in hotels throughout the country and collect a charge for rendering
such service. The two Petitioners characterise themselves as 'tour
operators'. They state that they are registered with the concerned Service
Tax Department (‗ST Department‘), have regularly been filing returns,
have been assessed and are paying the corresponding service tax under the
FA. They state that they collect the room charges inclusive of taxes on the
basis of the invoices raised by the concerned hotel and pass on the amount
so collected to the concerned hotel which in turn pays service tax and other
taxes. What is retained by the Petitioners is only the service tax component
corresponding to the booking service rendered and this is paid by each
Petitioner to the ST Department of the Central Government.
6. The case of the DGCEI, however, is that the two Petitioners are
themselves running hotels online. It is urged that once the Petitioners admit
W.P. (C) 525/2016 & 1283/2016 Page 3 of 77
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.
th
7. The note on the file prepared on 7 January, 2016 by the officer of the
DGCEI in the case of MMT mentions that there could be other similar
online providers viz., (i) M/s. Cleartrip Private Limited ('Cleartrip') at
Mumbai, (ii) IBIBO, and (iii) M/s. Yatra Online Private Limited (‗Yatra‘)
at Gurgaon which were also alleged to be involved in similar service tax
evasion. The investigation as far as MMT is concerned, appears to have
commenced on the basis of an ‗intelligence‘ received by DGCEI.
8. In the case of MMT, the order for arrest of Mr. M.K. Pallai, Vice-
th
President (Finance) of MMT, was issued on 8 January 2016 and the arrest
was made on that date itself. Whereas in the case of IBIBO, a note was
th th
prepared on 12 January, 2016 and on 13 January, 2016 searches were
undertaken of the premises of IBIBO and Yatra. Simultaneously, searches
were also undertaken in the premises of Cleartrip at Mumbai. Thus, there
is a common pattern emerging in both cases and it is in that background
that the scope of powers of DGCEI under Section 91 read with Section 90
and 89 of the FA require to be examined.
9. Another aspect which is required to be adverted to at the outset is that
th
the arrest of Mr. Pallai, Vice President (Finance) of MMT on 8 January,
W.P. (C) 525/2016 & 1283/2016 Page 4 of 77
2016 led to his subsequent release on bail by the Court of Chief
th
Metropolitan Magistrate (‗CMM‘) on 11 January, 2016. While prior to
the said order, a sum of Rs. Rs. 15.33 crores was paid by MMT towards
'admitted' service tax dues (which assertion of the DGCEI is contested by
MMT), a further sum of Rs. 25 crores was paid in terms during and after
the bail proceedings. MMT's Vice President has filed a separate petition in
this Court in its criminal jurisdiction assailing the arrest and initiation of
criminal proceedings. Since the petition is pending, the Court in the
present petition by MMT only proposes to interpret the scope of the
provisions of the FA.
th
10. As far IBIBO is concerned, this Court by its order dated 16 February,
2016 directed that no coercive steps be taken against it and its officers.
11. It also requires to be noted that as far as Cleartrip is concerned, it filed
Writ Petition No. 1088 of 2016 in the High Court of Bombay and by an
th
order dated 26 April, 2016, the High Court of Bombay came to the
conclusion that coercive measures would not straightway be permissible. It
also noted the stand of the DGCEI that they were not proceeding with
further coercive steps in the matter and disposed of the writ petition on that
basis.
12. It is in the above background that the scope of powers of search of
DGCEI under Section 82 of the FA, and power of arrest and of taking
coercive measures for recovery of service tax dues in terms of Section 91
of the FA, without resorting to the issuance of a show cause notice (SCN)
under Sections 73 or 73A of the FA, requires to be examined.
W.P. (C) 525/2016 & 1283/2016 Page 5 of 77
Averments in MMT's writ petition
13. MMT states that it is carrying on the business of a ‗tour operator‘
primarily operating through its website www.makemytrip.com. As a ‗tour
operator‘, MMT has been offering the service of booking rooms in hotels
for its customers for more than a decade. The business of MMT is
described as providing an online platform (website) whereby it makes
available hotel accommodation services to its customers. It is stated that
the customers intending to book a hotel room visit the website and enter
the details. The website then displays a list of hotels along with the tariff,
including taxes and fees, location, facilities etc. Depending on their
preference, the customers book the room and get a voucher showing the
applicable room tariff and the fees and taxes (levied and collected by the
hotels). It is further stated that on booking the hotel room, the customer has
the option of either paying the full amount of the room charges in advance
(inclusive of room tariff, tax and fees) and this amount is remitted by
MMT to the concerned hotel after retaining its commission. The other
option is for the customer to directly make payment to the hotel in which
case the customer is issued a voucher by MMT mentioning room tariff,
taxes and fees. MMT subsequently receives commission from the hotel.
MMT discharges its service tax liability on gross amount paid by the
customer to it in terms of the first option or the commission paid to it by
the hotel concerned as per the second option. MMT states that it is
registered with the ST Department under the provisions of the FA and has
a Service Tax Registration No. AADCM5146RST006. It states that it has
been promptly depositing with the ST Department, the service tax
collected by it corresponding to the service rendered by it.
W.P. (C) 525/2016 & 1283/2016 Page 6 of 77
14. MMT states that in terms of Rule 11 (ii) of Notification No. 26/2012-
th
ST dated 20 June, 2012, it claimed 90% abatement on such gross amount.
st
It states that prior to 1 July, 2012, it was claiming abatement under
st
Notification No. 1/2006-ST dated 1 March, 2006. It is stated that the
officers of the DGCEI visited the office premises of MMT and issued
th rd
summons dated 20 November, 2015. Thereafter summons dated 23
th th th th
November, 2015, 9 , 10 and 14 December, 2015 and 13 January, 2016
were issued to MMT for tendering statements and providing information.
th th
Two of the summons dated 9 December 2015 and 8 January 2016 were
issued to Mr. M.K. Pallai, Vice President (Finance), MMT for tendering
his statement under Section 14 of the CE Act as made applicable to service
tax in terms of Section 83 of the FA.
15. MMT states that during the investigation, the officials of DGCEI
conveyed that some hotels for whom the booking was made by MMT had
not deposited service tax with the Government thus causing loss of
revenue and that such taxes were to be recovered from MMT. The specific
allegation conveyed by the officers of DGCEI to MMT officials was that
the services provided by MMT are not in the nature of tour operator but are
in the nature of hotel services and, therefore, the Petitioner should have
paid service tax on the gross amount as a hotel service. The further
allegation was that since MMT had collected the service tax from the
customers, it was in terms of Section 73A of the FA bound to deposit the
amount with the government exchequer.
th
16. It is stated that Mr. Pallai received a telephone call on 7 January, 2016
from SIO in the Office of the Additional Director General, DGCEI at R.K.
W.P. (C) 525/2016 & 1283/2016 Page 7 of 77
Puram, New Delhi requiring him, along with other officers of MMT who
might possess the relevant information relating to the above transactions,
to appear before the DGCEI. It is further stated that Mr. Pallai duly
appeared before the SIO along with other officials and also met the ADG.
th
17. The case of MMT is that on 8 January, 2016 the officers of DGCEI
compelled MMT to immediately deposit the service tax collected by it
from its customers failing which its officers would be arrested. It is stated
that in the absence of any SCN, MMT did not deposit the amount
demanded.
Arrest of Mr. Pallai
th
18. On 8 January, 2016, the officers of DGCEI arrested Mr. Pallai at the
office of the ADG at R.K. Puram, New Delhi. The grounds of arrest dated
th
8 January, 2016 as communicated to MMT by the DGCEI has been
enclosed as Annexure-3 to the Writ Petition (Civil) No. 525 of 2016.
Therein it is stated that MMT had collected service tax to the tune of Rs.
82.78 crore approximately from the recipients of hotel/short-term
accommodation service during the period October 2010 to September 2015
by way of renting hotel rooms of various hotels with whom they had
agreements, but had paid an amount of Rs. 15.34 crores only to the credit
of the Central Government, by fraudulently treating themselves as tour-
operator/intermediate/agent of such hotels, resulting in loss of government
revenue to the tune of Rs. 67.44 crore approximately. By failing to deposit
the said amount of service tax collected by MMT with the Central
Government, MMT appeared to have contravened the provisions of
Section 68 of the FA, rendering themselves liable to punishment under
W.P. (C) 525/2016 & 1283/2016 Page 8 of 77
Section 89 (1) (d) read with Section 89 (1) (ii) of the FA.
19. The DGCEI rejected the stand of MMT that it was only a ‗tour
operator‘ and that it was the obligation of the concerned hotels to pay the
service tax to the government account. According to the DGCEI, ―the
hotels are mere input service providers to M/s. MMT and M/s. MMT‘s
Service Tax liability cannot be fastened on the hotels.‖ It was further
mentioned in the grounds of arrest that ―besides, a large number of such
hotels are not even registered Service Tax Assessees and do not appear to
have deposited the service tax claimed to have been remitted by M/s.
MMT to such hotels, in the government account.‖ The grounds of arrest
th
then stated that Mr. Pallai, in his statement recorded on 10 December,
th
2015 and 8 January, 2016, had stated that he and Mr. Mohit Kabra,
Director and CFO of MMT were responsible for taking service tax related
decisions in MMT. The grounds stated that Mr. Pallai further admitted that
―they had collected service tax but instead of paying it to the government
account, had remitted such service tax to the hotels.‖ In the grounds of
th
arrest dated 8 January, 2016 communicated to MMT, the liability of
MMT for payment of service tax worked out to Rs. 82.78 crores for the
period from October 2010 to September 2015. It is stated that MMT was
orally directed to immediately deposit Rs. 25 crores failing which the
directors/officials of MMT would be arrested.
20. Mr. Jatinder Singh, SIO, Central Excise Intelligence belonging to the
Ludhiana Regional Unit of DGCEI, having been authorized by the ADG,
DGCEI proceeded to arrest Mr. Pallai under Section 91 of the FA for an
alleged cognizable and non-bailable offence committed by him under
W.P. (C) 525/2016 & 1283/2016 Page 9 of 77
Section 89 (1) (d) read with Section 89 (1) (ii) of the FA read with Section
9AA of the CE Act as made applicable to service tax matters under Section
th
83 of the FA on 8 January, 2016.
Proceedings before the CMM
21. After his arrest, Mr. Pallai was produced before the CMM. The DGCEI
tendered an application seeking remand to judicial custody. The CMM on
th
9 January, 2016 remanded Mr. Pallai to judicial custody. The application
th
for judicial remand submitted by the DGCEI to the CMM on 9 January,
2016 stated inter alia that MMT had agreements with different hotels and
they are paying service tax arbitrarily by treating themselves as ‗agent of
hotels.‘ It was mentioned that in terms of the agreement, they block certain
number of rooms at a certain price. MMT is free to use any mark-up on the
net rate or discount on the published tariff. It was stated that MMT
claiming that they are agents of hotels ―is without any legal basis‖. A
reference was made to Rule 2 (f) of the Place of Provision of Service
Rules, 2012 which defines the intermediary as ―a broker or an agent or any
other person, by whatever name called, who arranges or facilitates a
provision of a service (hereinafter called the ‗main‘ service) or a supply of
goods between two or more persons, but does not include a person who
provides the main service or supplies the goods on his account.‖ A
reference was made to para 5.9.6 of the ‗Taxation of Services: An
Education Guide‘ by CBEC to determine whether a person is acting as an
intermediary or not. One of the factors mentioned therein was that an
intermediary ―cannot alter the nature or value of the service‖ and that ―the
principal must know the exact value at which the service is applied on his
behalf, and any discounts obtained must be passed back to the principal.‖ It
W.P. (C) 525/2016 & 1283/2016 Page 10 of 77
was alleged that MMT was charging their own rate for renting of hotel
room which was shown on the customer voucher and which is different
from the rates negotiated by MMT with the hotels. The customer voucher
was not supplied to hotels. Instead, hotels were given ‗Hotelier‘s
Vouchers‘ on which the amount charged for booking a hotel room was
different from what was charged by MMT from its customers. It was
concluded that in terms of the agreements with the hotels and customers,
MMT was not acting as the agent of hotels. Since it had further rented the
hotel rooms at the price negotiated with the customers, MMT was also
providing the services of renting of hotel rooms to the customers and the
hotels were merely input service providers providing services of renting
hotel rooms to MMT. Thus, MMT was liable to pay service tax on 60% of
the amount charged from the customers for provision of short-term
accommodation services (renting of hotel rooms) in terms of the
th
Notification No. 26/2012-ST dated 20 June, 2012, as amended. It was
noted in the application for judicial remand that MMT had provided data
for the period upto September 2015 in terms of which MMT had not paid
service tax amounting to Rs. 82,78,03,760 and had only arbitrarily paid Rs.
15,33,84,593 (approximately). Thus, MMT had not paid service tax which
they had collected from its customers to the tune of Rs. 67,44,19,167. It
was further mentioned that Mr. M.K. Pallai, Vice President (Finance) was
one of the main persons responsible for MMT's non-payment of service tax
thereby committing a cognizable and non-bailable offence. It is mentioned
in the judicial remand application that Mr. Pallai along with others, who
were/are immediately not available for enquiries had "successfully robbed
India of Rs. more than 67 crores, as detected so far.‖
W.P. (C) 525/2016 & 1283/2016 Page 11 of 77
22. In the bail application of Mr. Pallai, it was explained that MMT had
rd
obtained centralized service tax registration with effect from 3 June, 2010
with the Service Tax Commissionerate, Delhi under the taxable categories
of ‗Air Travel Agent,‘ ‗Business Auxiliary‘, ‗Tour Operator‘ services
under the FA. It was reiterated that MMT itself did not provide any hotel
or other services on its account but merely acted as a travel agent/tour
operator between the hotels/airlines/other services and customers for
bookings the hotel accommodation/air tickets only. It was mentioned that
MMT did not have or own any aircraft/property for provision of air
transportation or hotel accommodation services. It was stated that
customers accessing MMT‘s website themselves made a conscious
decision as to which flight/hotel as well as other preferences of dates of
booking, class of booking, luxury type etc. It was pointed out that the ST
Department itself had recognized MMT as a travel agent or tour operator
over the years and had been assessing the service tax payments of MMT
accordingly. In the bail application it is further pointed out that MMT is
recognized as a tour operator by the Ministry of Tourism, Government of
India. MMT is a member of the Travel Agents Association of India and
Travel Agents Federation of India. MMT states that it was registered with
the International Air Travel Agents Association and had won several travel
agency awards.
23. Mr. Pallai in his bail application further explained that MMT was
allowed to book rooms for the customers through MMT‘s website. It is
legally bound to remit the room rent along with the taxes charged by the
hotels, which is accordingly remitted to these hotels. To the best of
knowledge of Mr. Pallai, the said hotels had already discharged their
W.P. (C) 525/2016 & 1283/2016 Page 12 of 77
service tax liability on the said amount. It is also pointed out that since
March 2011, MMT had contributed huge sums of service tax to the Central
Government exchequer from March 2011 to September 2015 inasmuch as
Rs. 2,99,85,99,891 as service tax. It is further pointed out that the DGCEI
had arbitrarily, and without giving an opportunity of a hearing or an SCN,
considered MMT as a ‗hotel‘ providing renting services to the customers
and not as a tour operator. The DGCEI insisted that MMT should
discharge service tax on the entire amount collected from the customers.
th
24. On 11 January, 2016, a detailed order was passed by the learned
CMM granting bail to Mr. Pallai. The learned CMM recorded inter alia
that out of Rs. 82.78 crores, a sum of Rs. 15.34 crore had already been
deposited and subsequently a further sum of Rs. 15 crores had also been
deposited on that date itself thus making total deposit of Rs. 30.34 crores.
It is noted that the same amount was deposited without prejudice to the
rights and remedies available to MMT. Directions were sought to the
concerned department to furnish the correct calculated amount depicting
the actual liability towards service tax. The CMM noted the submission of
the Investigating Officer (‗IO‘) of the case that he had no objection to the
proposal and was ready to calculate the amount afresh. The CMM also
recorded the undertaking on behalf of the accused that within one week
from that date he would further make payment of Rs. 10 crores towards the
service tax liability and that he would require additional time to make
further payment. The CMM noted that no purpose would be served in
keeping Mr. Pallai behind bars. Mr. Pallai was admitted to interim bail on
furnishing a personal bond in the sum of Rs. 5 lakhs with one surety for the
th
same amount till 11 February, 2016 subject to the condition that he would
W.P. (C) 525/2016 & 1283/2016 Page 13 of 77
not leave the country without the permission of the CMM. He was directed
to neither directly or indirectly induce or threaten the prosecution
witnesses nor tamper with the evidence. He had to join the investigation as
and when required and also surrender his passport in the court.
25. It is stated that MMT had paid a sum of Rs. 25 crores apart from a sum
of Rs. 15,33,84,593 already paid, in the following manner:
th
(i) Rs. 2.5 crores 9 January 2016
th
(ii) Rs. 12.5 crores 11 January 2016
th
(iii) Rs. 10 crores 16 January 2016
26. Thus, out of the total alleged service tax dues of Rs. 67.44 crores, more
than Rs. 40 crores has already been paid and yet an SCN had not been
issued under Section 73A(3) of the FA. In was in those circumstances, this
th
Court by its order dated 20 January 2016 passed an interim order
directing that no further coercive steps shall be taken against MMT or any
of its officers by the DGCEI. It was clarified that this order should not be
read as relieving Mr. M.K. Pallai from complying with the conditions of
th
the bail order dated 11 January, 2016 passed by the learned CMM.
27. It is contended by MMT that with the investigation not having been
completed at that stage, it was erroneous on the part of the DGCEI to treat
MMT as a hotel when it was only facilitating bookings of hotel rooms
through its website. It is contended that there is a clear distinction under
the FA between a 'tour operator' and a hotel service provider. MMT has
enclosed with its writ petition copies of the certificates issued to it by some
of the hotels confirming that they were discharging their service tax
liability on the amount remitted by MMT. It is asserted that MMT has
merely received the gross amount and remitted the same to the hotels. It is
W.P. (C) 525/2016 & 1283/2016 Page 14 of 77
further asserted that MMT has not ‗collected‘ and ‗retained‘ any amount in
any manner as representing service tax. It is asserted that the failure to
consider the above factors, the arrest of Mr. Pallai without issuance of an
SCN and issuance of threats of further coercive action were all in violation
of the requirement of due process under Sections 73/73A of the FA.
Counter affidavit of the DGCEI
28. A counter-affidavit has been filed by Mr. Samanjasa Das, ADG,
DGCEI, Delhi Zonal Unit, New Delhi. A reference is made in the counter
affidavit to the ‗intelligence‘ received in the DGCEI which indicated that
MMT was providing services relating to renting of hotel rooms through its
website www.makemytrip.com and was not discharging its service tax
liability 'properly‘. It is stated that the investigation was thereafter initiated
by visiting the premises of MMT under Rule 5A of the Service Tax Rules,
1994‘ (‗ST Rules‘). It is stated that the investigation conducted till then
revealed that MMT had entered into agreements with several hotels on a
principal-to-principal basis for purchase of hotel rooms for further renting
to the ultimate customers. In terms of the said agreements, MMT
purchased the hotel rooms at the rate negotiated with the hotels on which
MMT was free to add a mark up or offer a discount on the published tariff.
Subsequently, the pre-purchased rooms were rented by MMT to the
ultimate customers at the rates determined by MMT as shown in the
‗customer vouchers‘. The taxes shown on the customer vouchers included
service tax, luxury tax and VAT, as applicable. The amount reflected in the
customer vouchers was different from the base price shown in the hotel
vouchers with the same identification numbers. Therefore, it was
concluded that MMT could not be treated as an 'agent' of the hotels. In the
W.P. (C) 525/2016 & 1283/2016 Page 15 of 77
―Hotelier‘s Voucher‖ issued by MMT, the hotels were referred to as
'partners/vendors' of MMT.
29. The counter affidavit of the DGCEI further states that during the visits
undertaken by the officials of the DGCEI to the premises of MMT in
November/December 2015, MMT supplied the data in respect of the hotel
bookings (India Only) for the period October 2010 to September 2015. The
analysis of the data so supplied revealed that the service tax collected by
MMT had two components; (i) service tax on 60% of the rate negotiated
th
by MMT with hotels, in terms of Notification No. 26/2012-ST dated 20
June, 2012 towards renting of hotel rooms; and (ii) service tax on 10% of
the gross value on the customer vouchers, by treating themselves as tour
operator in terms of Serial No. 11 (ii) of the same notification which they
called as MMT Service Tax. It is then stated that ―though they were
depositing the MMT service tax in the government account, they did not
deposit the service tax collected from the customers towards renting of
hotel rooms on the plea that as agents of the hotels, they had remitted the
same to the hotels by Hotelier Vouchers and that it was the responsibility
of the hotels to deposit the service tax remitted by MMT." It is then stated
that in order to verify the plea of MMT that they were the agents of the
hotels, certain follow-up enquiries were conducted and it was noticed that
hotels had not appointed MMT as their agents and they were providing
services to MMT on the basis of the rates negotiated with MMT for
booking of hotel rooms. It is stated that in the event of cancellation,
MMT‘s customers approached MMT, and not the hotel, for redressal of
their complaints.
W.P. (C) 525/2016 & 1283/2016 Page 16 of 77
30. It is asserted by the DGCEI that there was no statutory provision under
which MMT could collect service tax on behalf of the others. A reference
is made to Rule 4A of the ST Rules which provides that every person
providing any taxable service shall issue an invoice, a bill or a challan
signed by such person in respect of such taxable service. It is further stated
that there is no statutory provision which allowed MMT to shift their
service tax liability in respect of service tax collected from customers and
that any service tax collected from the customer by MMT had to be
deposited in the government exchequer by MMT only. It is stated that
MMT's claim that it had entered into agreements with more than 30,000
hotels in terms of which it was the responsibility of the hotels to pay the
service tax which MMT remitted to the hotels was not in accordance with
Rule 4A of the ST Rules since the hotels were not raising any invoice or
challan on the customers. It is stated that MMT had provided the PAN
details of only 3922 hotels. It is then asserted that when verification was
conducted in respect of these 3922 hotels from the EASIEST/NSDL
website, it was found that 1728 hotels were not even registered with the
service tax authorities. The enquiries conducted with one of the hotels
revealed that although they were registered with the ST department, they
were not paying service tax on the plea that since MMT had collected
service tax, it was the responsibility of MMT to deposit the same. During
the further enquires with some hotels, it had been found that they were not
even registered with the ST Department but MMT was collecting service
tax from the customers against renting of rooms in such hotels.
31. Further, while the FA was not applicable to the state of Jammu &
Kashmir, MMT had collected service tax from the customers for renting of
W.P. (C) 525/2016 & 1283/2016 Page 17 of 77
hotel rooms in Jammu & Kashmir. MMT was also collecting service tax
for renting of hotel rooms having tariff of less than Rs. 1,000 which was
otherwise exempted from service tax. Service tax so collected had not been
deposited in the government account. A reference is then made to the
statement dated 08.02.2016 made by Mr. Deepak Katyal, Manager
(Taxation), MMT, who admitted that the amount negotiated with hotels for
procurement of inventory was shown in the Hotelier‘s Voucher and it was
taken as purchase in its financial accounts. According to the DGCEI, this
rd
fact was also admitted by Mr. Pallai in his statement on 3 February, 2016.
A reference was made to Note 19 titled ‗Revenue from Operations‘ in the
statutorily audited Annual Report for the Financial Year (FY) 2013-14 of
MMT which revealed that MMT had earned revenue from two major
heads i.e., ‗Sale of Services‘ and ‗Other Operating Income‘. The revenue
earned under the head ‗Sale of Services‘ had been shown as earned from
‗Sale of Services - Hotels and Packages‘ and was Rs. 9,13,27,11,294.
Further, Note 21 titled ‗Service Costs‘ in the Annual Report showed that
MMT had incurred an amount of Rs. 7,57,57,68,604 towards ‗Procurement
cost of hotel and packages services during the Financial Year 2013-14‘.
Further, the annual report for FY 2014-15 showed that revenue from sale
of services (hotels and packages) was shown as Rs. 1,07,364 lakh in Note
20 of the Notes to the Financial Accounts, and service costs towards
procurement cost of hotel and package services was shown as Rs. 85,655
lakh in Note 22 of the said Notes. Similes figures were shown for the FY
2012-13. According to the DGCEI, all these entries of booking of revenue
and expenses in relation to sale and purchase of hotel rooms by MMT
clearly showed that MMT had been selling or providing services of
booking of hotel rooms after procuring the same from the hotels against
W.P. (C) 525/2016 & 1283/2016 Page 18 of 77
which they had booked expenses. Therefore, MMT was not acting as an
agent of the hotels.
32. It is stated by the DGCEI that till September 2015, MMT had collected
service tax to the tune of RS. 82,78,03,760 from its customers, out of
which Rs. 67,44,19,167 was not deposited in the government account. It is
further stated that the Vice-President of MMT was arrested under Section
91 of the FA for the cognizable and non-bailable offence covered under
Section 89 (1) (d) of the FA read with Section 89 (1) (ii) and Section 90(1)
of the FA and Section 9AA of the CE Act as was made applicable to the
service tax matters under Section 83 of the FA. It is asserted that the sums
paid by MMT prior to and subsequent to the appellate order were all made
voluntarily.
33. It is pointed out by the DGCEI that Mr. Pallai filed Writ Petition
rd
(Criminal) No. 357 of 2016 in this Court which was listed on 3 February,
th
2016 and the next date of hearing was 28 March, 2016. In para 23 of the
counter affidavit it is stated that the learned CMM ―enforced payment of
Rs. 42,44,19,167 and on payment of this amount, granted regular bail to
Mr. M.K. Pallai subject to the terms and conditions contained in his earlier
th
order dated 11 January, 2016.‖ It is denied in the counter-affidavit that
the DGCEI had forced the MMT to deposit the additional service tax
without following the due process of law. It is repeatedly stated that it was
done voluntarily.
MMT's rejoinder
34. A rejoinder has been filed by MMT in response to the above counter-
affidavit where the assertions in the writ petition are reiterated. It is
W.P. (C) 525/2016 & 1283/2016 Page 19 of 77
submitted that the amount shown in the Hotelier‘s Voucher is after
reduction of MMT‘s commission that can be either by way of fixed
percentage or mark-up. Therefore, there would always be a difference
between the amount shown on the Customer‘s voucher and Hotelier‘s
voucher. The said mark-up or discount would not change the nature of the
relationship between MMT and the hotel and would not make MMT a
hotel. It is stated that MMT cannot own or operate 30,000 hotels and that it
was only acting as a travel agent/tour operator. This was further evident
from the recital-clauses of the agreements entered into by MMT with the
hotels.
35. It is further pointed out by MMT that out of the total booking of hotel
rooms in the country, approximately less than 3% was done by MMT. As
regards the verification of 2278 hotels supposed to have been undertaken
by the DGCEI, it is pointed out that no specific instance had in fact been
stated in the counter affidavit. It is further pointed out that 1039 out of
2278 hotels which are not registered with the ST Department may have
th
been enjoying the benefit of Notification No. 26/2012-ST dated 20 June,
2012 (Serial No. 18). Further, on an inquiry conducted of the 2278 hotels,
only one hotel was enquired and they are supposed to have said that they
were not discharging service tax liability. MMT asserts its right to cross-
examine the officers of the DGCEI who conducted the aforesaid enquiry
and also the hotel which gave such statement. It is stated that close to 2000
hotels had already given their confirmation that they were discharging their
service tax liability on the hotel service provided. Representative copies of
confirmation certificates have been enclosed with the rejoinder affidavit as
Annexure-I. It is further stated that since the FA was not applicable to the
W.P. (C) 525/2016 & 1283/2016 Page 20 of 77
State of Jammu & Kashmir, there was no question of hotels charging
service tax and further there was no collection of service tax. It is pointed
out that DGCEI had wrongly construed ‗hotel taxes‘ as including service
tax. The affidavits from the hotels situated in the State of Jammu &
Kashmir, copies of which are enclosed as Annexure-2 to the rejoinder
affidavit, confirmed that they were not charging service tax from their
customers and further that the 'hotel taxes' did not contain any service tax
element. As regards the hotels having tariffs at less than Rs. 1,000, with its
rejoinder MMT has enclosed as Annexure-3 affidavits of such hotels
confirming that they were not charging service tax from their customers
and further that ‗hotel taxes‘ did not include any service tax.
36. It is pointed out by MMT that para 5.9.6 of the Education Guide, Rule
2(f) of the Place of Provision of Service Rules, 2012 and the provisions
from Chapter X of the Indian Contract Act, 1872 do not apply to the case
on hand. It is pointed out that said Education Guide has no statutory basis
and is, therefore, not binding. A reference is made to the CBEC
th
clarification issued under Notification F.No. 354/311/2015-TRU dated 20
January, 2016 in this regard. It is submitted that even assuming that MMT
was providing hotel services, it would be eligible to claim Cenvat Credit of
service tax paid by the hotels in terms of Serial No. 6 of the Notification
th
No. 26/2012-ST dated 20 June, 2012 and therefore, MMT would be liable
to pay service tax only on the net income. Therefore, the liability as
calculated by the DGCEI would be required to be recomputed. It is further
pointed out that the customer vouchers would be produced by the
customers at the time of check-in and therefore, the hotel concerned would
know at what price the hotel room is booked. Further, the tariff of the hotel
W.P. (C) 525/2016 & 1283/2016 Page 21 of 77
is displayed on MMT‘s website. It is accordingly asserted that MMT was
actually acting as an agent of the hotel concerned and was itself not a hotel
services provider.
37. While referring to the service income and service costs of MMT, it has
set out under Note 2 (iv) of MMT‘s revenue recognition policy which
states that as regards airline and hotel bookings, MMT was acting as an
agent and did not assume any risk of performance of services. A reference
was also made to Note 32 which gives the break-up of gross money
received by MMT and the amount paid to the hotels. Only the service fee
or commission earned by MMT on such booking transactions forms part of
the service income of MMT. It is asserted that throughout the financial
statement, MMT recognizes itself only as an agent and accordingly books
only its service income/commission as its revenue. It is asserted that during
the entire investigation process, the DGCEI had not made an attempt to
understand the obvious facts relating to the business of MMT.
38. MMT points out that it has been registered under the category of ‗Tour
Operator‘ service since 2005. Throughout it has been discharging its
service tax liability as a tour operator by claiming an abatement of 90% in
st
terms of Notification No. 1/2006-ST dated 1 March, 2006 which has since
th
been replaced by Notification No. 26/2012-ST dated 20 June, 2012.
MMT has been audited twice by the ST Department – first in 2007-08 and
for a second time in 2012-13. It is pointed out that every time the ST
Department conducted an audit, MMT had provided a detailed note of its
activities, including the activities of hotel booking. A copy of one such
Note has been enclosed as Annexure-6 to the rejoinder affidavit. It is stated
W.P. (C) 525/2016 & 1283/2016 Page 22 of 77
that in June 2014 an audit was conducted by the Central Excise Regulatory
Authority (‗CERA‘) for the period from FYs 2010-11 to 2013-14. MMT
had been issued the SCN on the basis of CENVAT credit eligibility where
the ST Department had specifically recognized the activities performed by
th th
MMT. A reference is made to the SCN dated 25 October, 2010 and 18
th th
October, 2011. In para 6.1 of the SCNs dated 25 October, 2010 and 18
October, 2011, it is noted that MMT had been availing benefit of
abatement from paying service tax on packaged tour (inbound) and
booking of hotel accommodation in India under Notification No. 1/2006
st
dated 1 March, 2006, as amended. Thus, the ST Department was aware of
the activities undertaken by MMT and the service tax position followed by
th
it. It is further pointed out that the SCN issued on 18 October, 2011 was
after the introduction of service tax on hotel services. However, the ST
Department never challenged the classification of its services adopted by
st
MMT. This was again acknowledged in the SCN dated 21 May, 2014.
39. It is also pointed out that MMT was investigated by the Anti-Evasion
Office of the Commissioner of Service Tax, New Delhi in December 2011
wherein MMT had provided the required information along with a detailed
note on its activities, including the activity of booking of hotels for its
customers. It is pointed out that DGCEI itself had conducted investigations
into MMT‘s operations twice, once in 2010 and second in 2013 but no
dispute with regard to the classification as ‗tour operator‘ services was
raised. Therefore, it is denied that ST Department was not aware of the
activities of MMT.
40. It is pointed out that there was no occasion to arrest Mr. Pallai, since
W.P. (C) 525/2016 & 1283/2016 Page 23 of 77
MMT and its officials were cooperating with DGCEI in its investigation
by supplying all the necessary information whenever demanded. It is
th
submitted that the reason mentioned in the arrest memo dated 8 January,
2016 was not that more information was required. It is pointed out that
MMT is a listed company and its data is audited and finances are disclosed
in the public domain. There was no question of manipulation. It is asserted
that the arrest of Mr. Pallai was entirely without the authority of law.
Additional affidavits
rd
41. At the hearing of W.P. (C) No.525/2016 on 3 March, 2016, a written
note of submissions was handed over in the Court by Mr.
Lakshmikumaran, learned counsel appearing for MMT in which it was
stated that the officers of the DGCEI had on more than one occasion,
―compelled, forced and threatened‖ the officers of the MMT into
depositing the alleged service tax dues under the threat of facing arrest.
Mr. Lakshmikumaran then stated that responsible officers of both MMT
and IBIBO, whose petition was also being heard, would file affidavits
giving the names of the officers of the DGCEI as well as the date and place
of making such threats. The Court then directed that such affidavits be
th st
filed by 11 March, 2016 and the response thereto filed by 21 March,
2016. The said affidavits were filed by Mr. Pallai and Mr. Deepak Katyal
th
on 8 March, 2016. Among the officers named were Mr. Jatinder Singh
(SIO), Mr. Samanjasa Das (ADG), Mr. Ashwani Kapoor (SIO), Mr. Ajay
Kumar (Intelligence Officer), Mr. Praveen (Intelligence Officer), Mr.
Rajeev Dhawan and Mr. Rajesh Arora. Mr. Das, Mr. Jatinder Singh, Mr.
Kapoor, Mr. Ajay Kumar and Mr. Praveen filed their affidavits in response
to the above affidavits. Supplementary affidavits have been filed by Mr.
W.P. (C) 525/2016 & 1283/2016 Page 24 of 77
Pallai and Mr. Kataria to which replies were again filed by the
aforementioned officers. The above affidavits will be discussed further in
examining the contention of MMT and IBIBO that their officers had been
threatened by the officers of the DGCEI during interrogation.
Averments in the petition by IBIBO
42. Turning to the facts of W.P. (C) No.1283/2016 by IBIBO, it is stated
that IBIBO acts as an online travel agent/ tour operator for booking hotels
for its customers and is registered with the ST Department under the
relevant provisions of the FA vide service tax registration number
AAHCP1178LSD001. IBIBO provides an online platform (website/mobile
application) whereby various hotel service providers can make available
hotel accommodation services to customers. Just like in the case of MMT,
it is stated that the customers intending to book a hotel room visit the
website/mobile application and enter the details required for booking a
room upon which the website would display the list of hotels along with its
tariff (including hotel taxes), location, facilities etc. Depending on their
preference, the customers book the room and get a hotel confirmation
voucher showing the amount paid, inclusive of taxes.
43. Identical to the system being followed by MMT, an option is available
to the customers to either directly make the payment to the hotels in which
case the hotels make payment of commission to IBIBO or pay a lump sum
amount to IBIBO, which is remitted to the account of the hotel after
retaining its commission.
44. It is stated that the Intelligence Team of the DGCEI visited the office
th
of IBIBO on 13 January, 2016 and interrogated the officials of IBIBO till
W.P. (C) 525/2016 & 1283/2016 Page 25 of 77
th
4 a.m. on 14 January, 2016. It is alleged that prior to leaving the
th
premises, a summons back-dated to 13 January, 2016, was issued to Mr.
Pankaj Jain, Chief Financial Officer for appearance before the ADG for
th
tendering a statement under Section 14 of the CE Act. Summons dated 13
January, 2016, was also issued to Mr. Sanjay Bhasin, CEO of IBIBO. It is
th
stated that on 14 January, 2016, Mr. Sanjay Bhasin, appeared at 12 noon
and was continuously interrogated. It is further alleged that during such
interrogation he was orally threatened that they (IBIBO) should either
compute and deposit the service tax or face arrest. He was again called on
th
15 January, 2016 and compelled to deposit Rs. 5 crores (Rs. 2.5 crores in
cash and Rs.2.5 crore through CENVAT credit). Since IBIBO was not
nd
having sufficient CENVAT balance, on 22 January, 2016 a sum of Rs.
2.5 crore was paid in cash. Both Mr. Jain and Mr. Bhasin were again
th
called on 5 February, 2016 and again threatened to make immediate
payment towards service tax to avoid coercive action. This was repeated
th th
on telephone on 9 February, 2016 and 11 February, 2016. It is stated that
th
on 12 February, 2016, a further sum of Rs.1.5 crores was paid. It is in the
above circumstances that the writ petition was filed in this Court in which,
th
as already noted, an order was passed on 16 February, 2016, restraining
the DGCEI from taking coercive steps and this order continued.
th
45. With its writ petition, IBIBO enclosed a copy of an order dated 25
January, 2016, passed by the High Court of Bombay in Writ Petition
No.1088/2016 titled Cleartrip Private Limited v. The Union of India
where an ad interim order was passed restraining the Respondents from
taking coercive action against Cleartrip. A reference was also made to the
order passed in MMT‘s case.
W.P. (C) 525/2016 & 1283/2016 Page 26 of 77
Counter affidavit of DGCEI in IBIBO's petition
46. The counter affidavit filed by the DGCEI in W.P. (C) No. 1283/2016,
is on the same lines as the one filed in W.P. (C) No.525/2016. It is asserted
that IBIBO was in the business of running a hotel room booking service
and collecting service tax from their customers and entered into
agreements with more than 25,000 hotels on a ‗Principal-to-Principal
basis‘. It is stated that the service tax could not have been collected on
behalf of the hotels and was required to be deposited with the Central
Government. The allegations of threat and coercion are denied. It is stated
that all the deposits were made voluntarily by IBIBO.
IBIBO's rejoinder
47. In the rejoinder filed by IBIBO it is again pointed out that since 200
hotels have already given confirmation to IBIBO that they were
discharging the liability of service tax with regard to the hotel service
provided, copies of such confirmation certificates were annexed as
Annexure-6 to the writ petition. It is pointed out that IBIBO started
providing services even prior to 2014 and is registered under the category
of Tour Operator/Air Travel Agent service. It is asserted that IBIBO has
always been discharging its service tax liability under the taxable category
of Air Travel Agent/Tour Operator on the commission retained by it. It has
been audited by the ST Department for the period up to March, 2013 in the
erstwhile company IBIBO Web (i.e., prior to demerger of the business). It
is accordingly denied that the ST Department was not aware of the
activities of IBIBO. The allegation that IBIBO was collecting amounts
inclusive of service tax, from customers for providing hotel rooms is not
W.P. (C) 525/2016 & 1283/2016 Page 27 of 77
correct. It is asserted that IBIBO is discharging its service tax liability on
the commission retained by it, which is inclusive of service tax and the
remaining amount is remitted to the hotel.
Supplementary affidavits
48. In support of the allegation that they were subjected to threat and
coercion by the officials of the DGCEI, affidavits have been filed by both
Mr. Sanjay Bhasin and Mr. Pankaj Jain, naming Mr. Yashwant Mahawar,
ADG, Mr. Anil Chandela, Mr. Ashutosh Singh and Mr. Rohit Issar,
Intelligence Officers of the DGCEI. The said officers have filed their
response to the said affidavits. Further, supplementary affidavits have been
filed by Mr. Bhasin and Mr. Jain to which further replies have been filed
by the said officers.
Analysis of the relevant provisions for assessment of service tax
49. The relevant provisions for assessment and recovery of service tax are
Sections 72 and 73 of the FA, which read as under:
― 72. Best judgment assessment
If any person, liable to pay service tax, -
(a) fails to furnish the return under Section 70;
(b) having made a return, fails to assess the tax in accordance with
the provisions of this Chapter or rules made thereunder.
The Central Excise Officer may require the person to produce such
accounts, documents or other evidence as he may deem necessary
and after taking into account all the relevant material which is
available on which he has gathered, shall by an order in writing,
after giving the person an opportunity of being heard, make the
assessment of the value of taxable service to the best of his judgment
and determine the sum payable by the Assessee or refundable to the
Assessee on the basis of such assessment.
W.P. (C) 525/2016 & 1283/2016 Page 28 of 77
73. Recovery of service tax not levied or paid or short-levied or
short-paid or erroneously refunded
(1) Where any service tax has not been levied or paid or has been
short-levied or short-paid or erroneously refunded, the Central
Excise Officer may, within eighteen months from the relevant date,
serve notice on the person chargeable with the service tax which has
not been levied or paid or which has been short-levied or short-paid
or the person to whom such tax refund has erroneously been made,
requiring him to show cause why he should not pay the amount
specified in the notice :
PROVIDED that where any service tax has not been levied or paid
or has been short-levied or short-paid or erroneously refunded by
reason of —
(a) fraud; or
(b) collusion; or
(c) wilful mis-statement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or of
the rules made there under with intent to evade payment of
service tax,
by the person chargeable with the service tax or his agent, the
provisions of this sub-section shall have effect, as if, for the words
―eighteen months‖, the words ―five years‖ had been substituted.
Explanation : Where the service of the notice is stayed by an order
of a court, the period of such stay shall be excluded in computing the
aforesaid period of eighteen months or five years, as the case may
be.
(1A) Notwithstanding anything contained in sub-Section (1) (except
the period of eighteen months of serving the notice for recovery of
service tax), the Central Excise Officer may serve, subsequent to any
notice or notices served under that sub-section, a statement
containing the details of service tax has not levied or paid or short
levied or short paid or erroneously refunded for the subsequent
period, on the person chargeable to service tax, then, service of such
W.P. (C) 525/2016 & 1283/2016 Page 29 of 77
statement shall be deemed to be service of notice on such person,
subject to the condition that the grounds relied upon the subsequent
period are same as are mentioned in the earlier notices.
(1B). Notwithstanding anything contained in sub-section (1), in a
case where the amount of service tax payable has been self-assessed
in the return furnished under sub-section (1) of Section 70, but not
paid either in full or in part, the same shall be recovered along with
interest thereon in any of the modes specified in Section 87, without
service of notice under sub-Section (1).
(2) The Central Excise Officer shall, after considering the
representation, if any, made by the person on whom notice is served
under sub-section (1), determine the amount of service tax due from,
or erroneously refunded to, such person (not being in excess of the
amount specified in the notice) and thereupon such person shall pay
the amount so determined.
(2A) Where any appellate authority or Tribunal or court concludes
that the notice issued under the proviso to sub-section (1) is not
sustainable for the reason that the charge of –
(a) fraud; or
(b) collusion; or
(c) wilful misstatement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or
the rules made thereunder with intent to evade payment of
service tax,
has not been established against the person chargeable with the
service tax, to whom the notice was issued, the Central Excise
Officer shall determine the service tax payable by such person for
the period of eighteen months, as if the notice was issued for the
offences for which limitation of eighteen months applies under sub-
Section (1).
(3) Where any service tax has not been levied or paid or has been
short-levied or short-paid or erroneously refunded, the person
chargeable with the service tax, or the person to whom such tax
refund has erroneously been made, may pay the amount of such
service tax, chargeable or erroneously refunded, on the basis of his
W.P. (C) 525/2016 & 1283/2016 Page 30 of 77
own ascertainment thereof, or on the basis of tax ascertained by a
Central Excise Officer before service of notice on him under sub-
section (1) in respect of such service tax, and inform the Central
Excise Officer of such payment in writing, who, on receipt of such
information shall not serve any notice under sub-section (1) in
respect of the amount so paid.
PROVIDED that the Central Excise Officer may determine the
amount of short payment of service tax or erroneously refunded
service tax, if any, which in his opinion has not been paid by such
person and, then, the Central Excise Officer shall proceed to recover
such amount in the manner specified in this section, and the period
of ―eighteen months‖ referred to in sub-section (1) shall be counted
from the date of receipt of such information of payment.
Explanation 1: For the removal of doubts, it is hereby declared that
the interest under Section 75 shall be payable on the amount paid by
the person under this sub-section and also on the amount of short
payment of service tax or erroneously refunded service tax, if any,
as may be determined by the Central Excise Officer, but for this sub-
section.
Explanation 2: For the removal of doubts, it is hereby declared that
no penalty under any of the provisions of this Act or the rules made
there under shall be imposed in respect of payment of service-tax
under this sub-section and interest thereon.
(4) Nothing contained in sub-section (3) shall apply to a case where
any service tax has not been levied or paid or has been short-levied
or short-paid or erroneously refunded by reason of—
(a) fraud; or
(b) collusion; or
(c) wilful mis-statement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or of
the rules made thereunder with intent to evade payment of
service tax.
(4B) The Central Excise Officer shall determine the amount of
W.P. (C) 525/2016 & 1283/2016 Page 31 of 77
service tax due under sub-Section (2) –
(a) within six months from the date of notice where it is
possible to do so, in respect of cases whose limitation is
specified as eighteen months in sub-section (1);
(b) within one year from the date of notice, where it is
possible to do so, in respect of cases falling under the proviso
to sub-section (1) or the proviso to sub-section (4A);
(5) The provisions of sub-section (3) shall not apply to any case
where the service tax had become payable or ought to have been
th
paid before the 14 day of May, 2003.
(6) For the purposes of this section, ―relevant date‖ means, —
(i) in the case of taxable service in respect of which service
tax has not been levied or paid or has been short-levied or
short-paid —
(a) where under the rules made under this Chapter, a
periodical return, showing particulars of service tax
paid during the period to which the said return relates,
is to be filed by an assessee, the date on which such
return is so filed;
(b) where no periodical return as aforesaid is filed, the
last date on which such return is to be filed under the
said rules;
(c) in any other case, the date on which the service tax
is to be paid under this Chapter or the rules made
thereunder;
(ii) in a case where the service tax is provisionally assessed
under this Chapter or the rules made thereunder, the date of
adjustment of the service tax after the final assessment
thereof;
(iii) in a case where any sum, relating to service tax, has
W.P. (C) 525/2016 & 1283/2016 Page 32 of 77
erroneously been refunded, the date of such refund.
50. In the present case, both Petitioners have been regularly filing service
tax returns and have been paying service tax. It is the admitted case of the
Respondents themselves. None of the Petitioners fall under the category of
a person not filing a return under Section 70 of the FA as envisaged under
Section 72 (a) of the FA. Under Section 72 (b) of the FA, the return filed
by the Assessee can be scrutinized by the Central Excise Officer who has
been assigned his functions in terms of the provisions of the FA read with
CE Act.
51. Proceedings were initiated by the ST Department against each of the
Petitioners in respect of the returns filed by them and SCNs were also
issued to them. In other words, the power of assessment has been and is
continued to be exercised by the concerned designated offices of the ST
Commissionerate in respect of each of the Petitioners. If in terms of
Section 72 of the FA, the Assessing Officer (AO) was of the view that any
of these Petitioners acted in violation of any of the provisions of the FA,
then it was open to the said AO to require the person to produce documents
and other evidence and therefore to make an assessment of the value of the
taxable service ―to the best of his judgment and determine the sum payable
by the Assessee or refundable to the Assessee on the basis of such
assessment‖. Section 72 of the FA requires the AO to give such person an
opportunity of being heard.
52. It is perhaps a peculiar feature of the FA that there is no power of
reopening the assessment like for instance under Sections 147 and 148 of
the Income Tax Act, 1961 (‗IT Act‘). What is provided for is an audit in
W.P. (C) 525/2016 & 1283/2016 Page 33 of 77
terms of Section 72A of the FA. Proceedings for recovery of service tax
not levied or paid, or short-levied or short-paid or erroneously refunded
can be initiated under in Section 73 of the FA Act. Section 73 (1) stipulates
the time limit of eighteen months within the time SCN should be served on
the person who is stated to be liable to service tax which has been not
levied or paid or has been short-levied, or short-paid or to whom the said
tax has been erroneously refunded. Where the failure to levy or short-levy
or payment or short-paid or erroneously refunded has resulted by reason of
(a) fraud; or (b) collusion; or (c) wilful misstatement; or (d) suppression of
facts; or (e) contravention of any of the provisions of this Chapter V of the
FA or the Rules made thereunder ―with intent to evade payment of service
tax‖ the period of limitation is enlarged from 18 months to five years.
Section 73 (2) of the FA envisages adjudication proceedings pursuant to
the SCN being issued. It premised on the fact that it is not possible for an
adjudication officer to determine beforehand the extent of evasion of
service tax.
Analysis of Section 73A of the FA
53. Next, it is necessary to examine in some depth Section 73A of the FA
particularly since the case of the DGCEI is that both Petitioners have
collected service tax from their customers and have not deposited it with
the Central Government. Section 73A of the FA reads thus:
― 73A. Service Tax collected from any person to be deposited
with Central Government:
(1) Any person who is liable to pay service tax under the provisions
of this Chapter or the rules made thereunder, and has collected any
amount in excess of the service tax assessed or determined and paid
on any taxable service under the provisions of this Chapter or the
W.P. (C) 525/2016 & 1283/2016 Page 34 of 77
rules made there under from the recipient of taxable service in any
manner as representing service tax, shall forthwith pay the amount
so collected to the credit of the Central Government.
(2) Where any person who has collected any amount, which is not
required to be collected, from any other person, in any manner as
representing service tax, such person shall forthwith pay the amount
so collected to the credit of the Central Government.
(3) Where any amount is required to be paid to the credit of the
Central Government under sub-section (1) or sub-section (2) and the
same has not been so paid, the Central Excise Officer shall serve, on
the person liable to pay such amount, a notice requiring him to show
cause why the said amount, as specified in the notice, should not be
paid by him to the credit of the Central Government.
(4) The Central Excise Officer shall, after considering the
representation, if any, made by the person on whom the notice is
served under sub- section (3), determine the amount due from such
person, not being in excess of the amount specified in the notice, and
thereupon such person shall pay the amount so determined.
(5) The amount paid to the credit of the Central Government under
sub-section (1) or subsection (2) or sub-section (4), shall be adjusted
against the service tax payable by the person on finalisation of
assessment or any other proceeding for determination of service tax
relating to the taxable service referred to in sub-section (1).
(6) Where any surplus amount is left after the adjustment under sub-
section (5), such amount shall either be credited to the Consumer
Welfare Fund referred to in section 12C of the Central Excise Act,
1944 or, as the case may be, refunded to the person who has borne
the incidence of such amount, in accordance with the provisions of
section 11B of the said Act and such person may make an
application under that section in such cases within six months from
the date of the public notice to be issued by the Central Excise
Officer for the refund of such surplus amount."
54. Section 73A (1) requires any person liable to pay service tax who has
W.P. (C) 525/2016 & 1283/2016 Page 35 of 77
―collected any amount in excess of the service tax assessed or determined
and paid on any taxable service under the provisions of this Chapter or the
rules made thereunder from the recipient of taxable service in any manner
as representing service tax" to forthwith pay the amount so collected to the
credit of the Central Government. The crucial words are ―collected any
amount in excess of the service tax assessed or determined.‖ The other
expression which has significance is: ―in any manner as representing
service tax.‖ The case of the DGCEI is that service tax is being collected
by the Petitioners from the recipient of taxable service ―in any manner as
representing service tax‖.
55. The Petitioners state that as far as they are concerned, they have
collected service tax only to the extent that they are required to pay service
tax on the service charges collected by them and further that they have
paid the service tax so collected to the credit of the Central Government.
They say that as far as the service tax payable by the hotels are concerned,
it is collected from the recipient of the taxable services i.e., the customers
who book the hotel room using the portal of the Petitioners, and pass it on
to the hotels who in turn pay it to the credit of the Central Government.
Therefore, the Petitioners contend that they have not ―collected any
amount‖ from the recipient of taxable service ―in any manner as
representing service tax‖ and have not retained such amount without
passing it on to the Central Government.
56. The case of the DGCEI on the other hand is that irrespective of
whether the hotels have paid the service tax passed on to them by the
Petitioners, since it is the Petitioners who have ‗collected‘ the said
W.P. (C) 525/2016 & 1283/2016 Page 36 of 77
component service tax, it is the Petitioners who are liable to, under Section
73A (1) of the FA, to credit the tax so collected to the account of the
Central Government and their failure to do so results in violation of
Section 73A of the FA.
57. The case of the Petitioners that they have included the service tax to
the extent payable by the hotels in the bills raised on the customers but
have not retained such service tax and have passed it on to the hotels
appears to have not been considered by the DGCEI in the correct
perspective. The understanding of the DGCEI of the transaction of online
booking of hotel rooms using the web portals of the Petitioners appears to
be prima facie incorrect.
58. In the context of Section 73-A (2) of the FA, the person against whom
the proceedings are initiated should be shown to have "collected any
amount, which is not required to be collected, from any other person, in
any manner as representing service tax." (emphasis supplied) In a similar
context while interpreting a provision using the same words in the U.P.
Sales Tax Act, 1948 the Supreme Court in CST v. Mool Chand Shyam
Lal, (1988) 4 SCC 486 observed as under:
"4. Therefore, it is necessary that realisation must be of the sales tax
or purchase tax, secondly, that realisation must be in excess and
thirdly the amount of tax should be legally payable under the Act.
The High Court has construed the expression ―as‖ in the beginning
of the sub-clause as significant. Penalty is leviable for excess
realisation of tax, therefore, realisation of the amount should be as
tax and not in any other manner. Then excess should be over and
above the amount of tax legally payable. This expression obviously
means tax payable under the Act, rules or notification. Therefore,
W.P. (C) 525/2016 & 1283/2016 Page 37 of 77
realisation by the assessee from customers should not be of only
sales or purchases but it should be of the tax legally payable. If the
purchaser realises more money that by itself will not attract the
penal provisions.
6. This is a method of realisation in case of indirect tax. Penalty can
be levied or is leviable for realisation of excess of tax legally
payable and not for contravention of Section 8-A(2)( b ). Realisation
of excess amount is not impermissible but what is not permissible is
realisation of excess amount as tax. .....It has to be borne in mind
that the imposition of a penalty under the Act is quasi-criminal and
unless strictly proved the assessee is not liable for the same."
(emphasis in original)
59. In R.S. Joshi, Sales Tax Officer, Gujarat v. Ajit Mills Limited (1977)
4 SCC 98 , the Supreme Court was analysing what the expression
"collected' meant in the context of the sales tax legislation of Gujarat. It
observed as under:
―Section 37 (1) uses the expressions, in relation to forfeiture,
‗any sum collected by the person - shall be forfeited‘. What
does ‗collected‘ mean here? Words cannot be construed
effectively without reference to their context. The setting
colours the sense of the word. The spirit of the provision lends
force to the construction that ― collected” means “collected
and kept as his” by the trader. If the dealer merely gathered the
sum by way of tax and kept it in suspense account because of
dispute about taxability or was ready to return if eventually it
was not taxable, it is not collected. ―Collected‖, in an Australian
Customs Tariff Act, was held by Griffth C.J., not ‗to include
money deposited under an agreement that if it was not legally
payable it will be returned‘ (Words & Phrases p. 274). We
therefore, semanticise ‗Collected‘ not to cover amounts
gathered tentatively to be given back if found non-exigible from
the dealer.‖ (emphasis supplied)
60. In the present case, the DGCEI fails to make out even a prima facie
case that some portion of the service tax collected by the Petitioners from
W.P. (C) 525/2016 & 1283/2016 Page 38 of 77
the customers 'as representing service tax' or otherwise has been ‗retained'
by them. Without such prima facie conclusion, it cannot be inferred that
the Petitioners have violated Section 73A (1) of the FA.
61. The above determination becomes relevant even for the purpose of
Section 89 (1) (d) which again requires, for the purpose of attracting the
offence, the person concerned to ‗collect any amount as service tax‘ and
‗fails to pay the amount so collected to the credit of the Central
Government‘. Without coming to the above determination in clear terms,
it would not be permissible for the Department to straightway presume that
Section 89 (1) (d) read with Section 73A (1) of the FA is attracted. That
brings us to a discussion of the provisions concerning offences and
penalties.
Offences and penalties
62. There are two kinds of penalties envisaged. Sections 78 of the FA
speaks of imposition of penalty for failure to pay service tax for reasons of
fraud etc. This is as a consequence of proceedings under Section 73 of the
FA. Section 78 A of the FA fastens the liability for the penalty on the
director, manager, secretary of the company evading payment of service
tax as long as they were in charge of or responsible to the company for the
conduct of its business. The adjudication in regard to penalty proceedings
is envisaged in Section 83 A of the FA. Thus this adjudication of penalty is
sequentially subsequent to the assessment of the service tax returns or of
proceedings under Section 73 of the FA.
63. Section 89 of the FA Act prescribes offences and penalties therefor as
W.P. (C) 525/2016 & 1283/2016 Page 39 of 77
'punishment' and is therefore in the criminal jurisdiction. Section 89 reads
as under:
― 89 . Offences and penalties
(1) Whoever commits any of the following offences, namely, -
(a) knowingly evades the payment of service tax under this
Chapter; or
(b) avails and utilizes credit of taxes or duty without actual
receipt of taxable service or excisable goods either fully or
partially in violation of the rules made under the provisions of
this Chapter; or
(c) maintains false books of account or fails to supply any
information which he is required to supply under this Chapter
or the rules made thereunder or (unless with a reasonable
belief, the burden of proving which shall be upon him, that the
information supplied by him is true) supplies false
information; or
(d) collects any amount as service tax but fails to pay the
amount so collected to the credit of the Central Government
beyond a period of six months from the date on which such
payment becomes due.
shall be punishable, -
(i) in the case of an offence specified in clause (a), (b) or (c)
where the amount exceeds fifty lakh rupees, with
imprisonment for a term which may extend to three years:
Provided that in the absence of special and adequate reasons
to the contrary to be recorded in the judgment of the court,
such imprisonment shall not be for a terms of less than six
months;
(ii) In the case of the offence specified in clause (d), where the
amount exceeds fifty lakh rupees, with imprisonment for a
W.P. (C) 525/2016 & 1283/2016 Page 40 of 77
term which may extend to seven years;
PROVIDED that in the absence of special and adequate
reasons to the contrary to be recorded in the judgment of the
court, such imprisonment shall not be for a period of less than
six months;
(iii) in the case of any other offences, which imprisonment for
a term, which may extend to one year.
(2) If any person is convicted of an offence punishable under –
(a) clause (i) or clause (iii), then, he shall be punished for the
second and for every subsequent offence with imprisonment
for a term which may extend to three years;
(b) clause (ii), then, he shall be punished for the second and
for every subsequence offence, with imprisonment for a term
which may extend to seven years.
(3) For the purposes of sub-sections (1) and (2), the following shall
not be considered as special and adequate reasons for awarding a
sentence of imprisonment for a term of less than six months,
namely: -
(i) the fact that the accused has been convicted for the first
time for an offence under this Chapter;
(ii) the fact that in any proceeding under this Act, other than
prosecution, the accused has been ordered to pay a penalty or
any other action has been taken against him for the same act
which constitutes the offence;
(iii) the fact that the accused was not the principal offender
and was acting merely as a secondary party in the commission
of offence;
(iv) the age of the accused.
(4) A person shall not be prosecuted for any offence under this
W.P. (C) 525/2016 & 1283/2016 Page 41 of 77
section except with the previous sanction of the Chief Commissioner
of Central Excise.‖
64. A plain reading of Section 89 reveals that a distinction is sought to be
made in the first instance between the offence where the amount exceeds
Rs. 50 lakhs (raised to Rs. 1 crore by a Circular dated 23rd October, 2015
and now Rs. 2 crore by the 2016 amendment) and where it is less than Rs.
50 lakhs. In the case of the offences under Section 89 (1) (a), (b) and (c),
which are treated as one class of offence and where the amount exceeds
Rs. 50 lakhs, the maximum period of punishment is three years and the
mandatory punishment of six months unless special and adequate reasons
are recorded by the Court which convicts the person. The determination of
commission of the offence has to be made by the Court and not by any of
the officers of the Department. Where in terms of Section 89 (1) (d), a
person collects the due amount of service tax but fails to pay the amount to
the credit of the Central Government beyond a period of six months from
the date on which such payment becomes due, then in terms of Section 89
(1) (d), that person is punishable in the manner indicated in sub-clause (ii)
of Section 89 (1) of the FA Act. Where the amount exceeds Rs. 50 lakh,
the punishment is of imprisonment for a period which may extend to seven
years and not less than six months unless the special and adequate reasons
are recorded by the Court which convicts the person. Where the amount
does not exceed Rs. 50 lakhs, then in terms of Section 89 (1) (iii) the
punishment is of imprisonment for a term which may extend to one year.
Section 89 (2) (b) further states that if a person convicted of an offence
punishable under Section 89 (1) (ii) commits a subsequent offence, the
imprisonment shall be for a period which may extend to seven years.
Section 89 (4) requires previous sanction of the Chief Commissioner of
W.P. (C) 525/2016 & 1283/2016 Page 42 of 77
Central Excise for any prosecution under Section 89 of the FA.
65. It is important to note that determination of the commission of an
offence for the purposes of Section 89 has to be made by the Court. Prior
thereto, there can only be prima facie determination of such commission of
offence. It may also be noted that by the amendments of 2013 the structure
of Section 89 underwent a change. A distinction was drawn between the
offences of the type described under Section 89 (1) (a), (b) and (c) on the
one hand and Section 89 (1) (d) of the FA on the other. The former would
be a non-cognizable whereas the latter was made cognizable and linked to
Section 91 (1) regarding the power of arrest.
66. There are two aspects of the proceedings as far as Section 73A and
Section 89 (1) (d) of the FA is concerned. Section 73A sets out the
procedure for determination whether the situation envisaged thereunder
exists. That procedure requires notice to be served on the person liable to
pay such amount requiring him ―to show cause why the said amount, as
specified in the notice, should not be paid by him to the credit of the
Central Government.‖ Therefore, under Section 73A (4), the Central
Excise Officer concerned shall, after considering the representation made
by such person, determine the amount due from such person, not being in
excess of the amount specified in the notice. Those two steps are essential
before it can be concluded that a person has collected service tax which is
payable to the Central Government and has not paid it.
67. The second part of the procedure concerns the levy of penalty under
Section 89(1) (d) of the FA. Here, two things are necessary apart from first
determining that a person has committed the offence of collecting an
W.P. (C) 525/2016 & 1283/2016 Page 43 of 77
amount of service tax but has failed to pay the amount collected. One is
that it should not be paid beyond a period of six months from the date on
which such payment becomes due. The second aspect is that the sentence
as provided under Section 89 (1) (ii) of the FA, where the amount exceeds
Rs. 50 lakhs, is imprisonment for a term which may extend to seven years.
The proviso thereto suggests that for special and adequate reasons, the
imprisonment can be lesser than six months in such cases. Where the
amount does not exceed Rs. 50 lakhs, the imprisonment is for a term which
may extend to one year. Where the person is again convicted for the
subsequent offence, then the imprisonment is for a term which may extend
to seven years. The above analysis is relevant for considering whether an
offence is cognizable or not and consequently whether the provisions
concerning arrest get attracted.
Power to arrest
68. The power to arrest is specified in Section 91 of the FA, and that is
linked to the question whether a cognizable offence as described in Section
90 of the FA has been committed. Sections 90 and 91 of the FA read as
under:
― 90. Cognizance of offences
(1) An offence under clause (ii) of sub-section (1) of Section 89
shall be cognizable.
(2) Notwithstanding anything contained in the Code of Criminal
Procedure, 1973 all offences, except the offences specified in sub-
section (1), shall be non-cognizable and bailable.
91. Power to arrest
(1) If the Commissioner of Central Excise has reason to believe that
any person has committed an offence specified in clause (i) or clause
(ii) of sub-section (1) of Section 89, he may, by general or special
W.P. (C) 525/2016 & 1283/2016 Page 44 of 77
order, authorize any officer of Central Excise, not below the rank of
Superintendent of Central Excise, to arrest such person.
(2) Where a person is arrested for any cognizable offence, every
officer authorized to arrest a person shall, inform such person of the
grounds of arrest and produce him before a magistrate within
twenty-four hours.
(3) In the case of a non-cognizable and bailable offence, the
Assistant Commissioner, or the Deputy Commissioner, as the case
may be, shall for the purpose of releasing an arrested person on bail
or otherwise, have the same powers and be subject to the same
provisions as an officer in charge of a police station has, and is
subject to, under Section 436 of the Code of Criminal Procedure,
1973 (2 of 1974).
(4) All arrests under this Section shall be carried out in accordance
with the provisions of the Code of Criminal Procedure, 1973 (2 of
1974) relating to arrests.‖
69. Section 90 (1) makes it clear that only an offence which is punishable
in terms of Section 89 (1) (ii) would be cognizable. Section 89 (1) (ii) in
turn refers to Section 89 (1) (d) which refers to a case wherein the amount
involved is more than Rs. 50 lakhs. In other words, it is only the offence
under Section 89 (1) (d), where a person after collection of service tax fails
to pay the amount so collected to the credit of the Central Government
beyond a period of six months from the date from which it is due and
where such amount exceeds Rs. 50 lakhs, which is cognizable under
Section 90 (1) of the FA. All other offences i.e., offences other than
described as Section 89 (1) (ii) of the FA, ―shall be non-cognizable and
bailable‖, notwithstanding anything contained in the Code of Criminal
Procedure 1973 (‗Cr PC‘). It is only when the offence is cognizable that, in
terms of Cr PC, the power of arrest is attracted. In Om Prakash v. Union
W.P. (C) 525/2016 & 1283/2016 Page 45 of 77
of India (2011) 14 SCC 1 , the Supreme Court was considering the very
expression as used in the Cr PC and observed as under:
―41. In our view, the definition of ‗non-cognizable offence‘ in
Section 2(1) of the Code makes it clear that a non-cognizable
offence is an offence for which a police officer has no authority to
arrest without warrant. As we have also noticed hereinbefore, the
expression ‗cognizable offence‘ in Section 2 (c) of the Code means
an offence for which a police officer may, in accordance with the
First Schedule or under any other law for the time being in force,
arrest without warrant. In other words, on a construction of the
definitions of the different expressions used in the Code and also in
connected enactments in respect of a non-cognizable offence, a
police officer, and, in the instant case an excise officer, will have no
authority to make an arrest without obtaining a warrant for the said
purpose. The same provision is contained in Section 4 of the Code
which specifies when a police officer may arrest without order from
a Magistrate or without warrant.‖
70. Consistent with this understanding, Section 91(1) of the FA provides
that where the offence has been committed under Section 89 (1) (ii) of the
FA, the Commissioner of Central Excise may authorize any officer of the
Central Excise not below the rank of Superintendent of Central Excise to
arrest such person. Where the arrest is of a person for any non-cognizable
and bailable offence, the Assistant Commissioner (AC) or the Deputy
Commissioner (DC), as the case may be, has the same powers as an
officer-in-charge of a police station has under Section 436 of the Cr PC for
the purpose of releasing such arrested person on a bail. This contemplates
the offences under Section 89 (1) (d) read with Section 89 (1) (ii) of the
FA as being cognizable and the commission of offences other than that
under Section 89 (1) (d) read with Section 89 (1) (ii) of the FA as being
non-cognizable.
W.P. (C) 525/2016 & 1283/2016 Page 46 of 77
71. Under Section 91 (2), where a person is arrested for any cognizable
offence i.e., the offence prescribed under Section 89 (1)(ii), the officer
making arrest has to inform such person of the grounds of arrest and
produce him before a Magistrate within twenty four hours. Section 91 (4)
is more important. It states that all arrests under Section 91 ―shall be
carried out in accordance with the provisions of the Cr PC relating to
arrests‖. In other words the entire Chapter V of the Cr PC on ‗Arrests‘,
comprising Sections from 41 to 60A would apply to any arrest made of a
person in exercise of the powers under Section 91 of the FA. The
determination by a Court that a person has committed an offence cannot
possibly be arrived at till the completion of the process envisaged under
the Cr PC .
72. It is difficult to conceive of the DGCEI or for that matter the ST
Department being able 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
Section 90 and 91 of the FA. The power of arrest is, therefore, 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.
73. It is sought to be suggested by the DGCEI that, for the purposes of
arrest, it is not necessary for the adjudication proceedings to have
concluded. However, when the scheme of the provisions in the FA is
carefully analysed, the said submission appears to be legally untenable.
W.P. (C) 525/2016 & 1283/2016 Page 47 of 77
There are statutes concerning both direct and indirect taxes. The Income
Tax Act, 1961 is an example of a direct tax statute. The Customs Act, 1962
and the Central Excise Act, 1944 are two of the many indirect tax statutes.
These statutes have specific provisions which describe offences and the
corresponding punishments. However, the scheme of the Income Tax Act,
1961, in regard to offences and penalties, is distinct from the scheme under
the Central Excise Act, 1944 or the Customs Act, 1962. Under the Income
Tax Act, 1961 there is a detailed procedure for assessment and it is only at
the conclusion of the assessment that the Assessing Officer (‗AO‘) decides
whether penalty proceedings should be initiated. It is only at that stage a
decision is taken on initiating prosecution against the Assessee for the
commission of any of the offences under that statute. It is inconceivable
that an Assessee is straightway sought to be arrested without there being an
assessment and a determination as to evasion of tax.
74. The Customs Act, 1962, has a different approach to the question of
offences. Chapter XVI thereof describes with specificity the types of
offences and the procedure adopted in prosecuting such offences. Section
138A enables the court to draw a presumption, which is rebuttable, of the
culpable mental state of the person charged with an offence under the
Customs Act, 1962 which requires such culpable mental state. Even for the
purposes of confiscation of smuggled goods, Section 123 of the Customs
Act, 1962 shifts the burden of proof in the case of 'smuggling', to the
person from whom the goods are seized to show that they are not
smuggled goods. Powers are given to the Customs Officer under Section
108 to record statements which are admissible in law. The point to be
noted is that coercive powers under taxing statutes are hedged in by limits
W.P. (C) 525/2016 & 1283/2016 Page 48 of 77
on the use of that power by in-built restrictions and limitations.
75. It is for this reason that the powers of a Central Excise Officer under
the FA cannot be compared with the powers exercised by the same officer
either under the Customs Act or the Central Excise Act. Each of those
statutes has a different and distinct scheme which does not bear
comparison with the FA. For example, the FA envisages filing of periodic
returns which is comparable to the Income Tax Act, whereas the
assessment under the Customs Act is of individual bills of entry. AS
noticed earlier, the scheme of the FA provisions points to an assessment,
followed by an adjudication of penalty under Section 83 A of the FA.
There are a separate set of provisions for launching prosecution.
76. The Supreme Court by a 2:1 majority in Radheyshyam Kejriwal v.
State of West Bengal (2011) 3 SCC 581 summarised the law as explained
in Standard Chartered Bank v. Directorate of Enforcement (2006) 4 SCC
278 and the earlier decisions in G. L. Didwania v. Income Tax Officer
1995 Supp (2) SCC 724 and K. C. Builders v. Assistant CIT (2004) 2 SCC
731 and inter alia held that(i) Adjudication proceedings and criminal
prosecution can be launched simultaneously; (ii) Decision in adjudication
proceedings is not necessary before initiating criminal prosecution and (iii)
Adjudication proceedings and criminal proceedings are independent in
nature to each other.
77. In the context of the provisions of the FA 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
W.P. (C) 525/2016 & 1283/2016 Page 49 of 77
of the two Petitioners, it is difficult to imagine that without the
commencement of the process of adjudication of penalty in terms of
Section 83-A of the FA, another agency like the DGCEI can without an
SCN or enquiry or investigation 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. Therefore, 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 Rs. 50
lakhs.
78. Therefore, while the prosecution for the purposes of determining the
commission of an offence under Section 89 (1) (d) of the FA and
adjudication proceedings for penalty under Section 83 A of the FA can go
on simultaneously, both will have to be preceded by the adjudication for
the purposes of determining the evasion of service tax. The Petitioners are,
therefore, right that without any such determination, to straightaway
conclude that the Petitioners had collected and not deposited service tax in
excess of Rs. 50 lakhs and thereby had committed a cognizable offence
would be putting the cart before the horse. This is all the more so because
W.P. (C) 525/2016 & 1283/2016 Page 50 of 77
one consequence of such determination is the triggering of the power to
arrest under Section 90 (1) of the FA.
79. The Court notes that the Bombay High Court in ICICI Bank Ltd. v.
Union of India 2015 (38) S.T.R. 907 (Bom) answered in the negative the
following question: "Whether, without there being any adjudication in any
of the proceedings as provided under Chapter 5 of the Finance Act, 1994
coercive steps can be taken by the Revenue, for recovery of service tax or
penalty or interest." The Court there was dealing with a case where the
Assessee had made payments under protest of alleged service tax dues
under threat by the ST Department of taking drastic action under Section
87 of the FA in the form of sealing of the business premises, attachment of
bank accounts and so on. The Court held that "the amount payable by a
person can be said to be payable only after there is determination as
provided under Section 72 or Section 73 of the Act." It further held, "the
conduct of the Revenue, firstly coercing the Assessee to make payment
and thereafter not deciding the returns under Section 72 or not taking
recourse to Section 73, and asking the Assessee to take recourse to Section
11-B cannot be said to be just fair and reasonable approach."
80. One caveat, however, may be where a person is shown to be a habitual
evader of service tax. Such person would have to be one who has not filed
a service tax return for a continuous length of time, who has a history of
repeated defaults for which there have been fines, penalties imposed and
prosecutions launched etc. That history can be gleaned only from past
records of the ST Department. In such instance, it might be possible to
justify resorting to the coercive provisions straightaway. But then the notes
W.P. (C) 525/2016 & 1283/2016 Page 51 of 77
on file must offer a convincing justification for resorting to that extreme a
measure. What, however, requires reiteration is that the potent power of
arrest should not be lightly and casually exercised to induce fear into an
assessee and the consequential submission to the unreasonable demands
made by officers of the investigating agency during the interrogation and
while in custody. To again quote the Bombay High Court in ICICI Bank
Ltd. v. Union of India ( supra ):
"At the cost of repetition we may say that if a tax payer fraudulently
or with the intention to deprive Revenue of its legitimate dues
evades payment thereof not only that, if the Central Excise Officer is
of the opinion that for the purpose of protecting the interest of the
Revenue it is necessary provisionally to attach any property
belonging to the person on whom the notice is served under Section
73 or Section 73 A of the Act, he is empowered to do so, however
with the previous approval of the Commissioner of Central Excise.
However, at the same time, law enforcers cannot be permitted to do
something that is not permitted within the four corners of law."
81. In Technomaint Contractors Ltd. v. Union of India 2014 (36) S.T.R.
488 (Guj) , the Gujarat High Court held that Section 73 C of the FA cannot
be activated for making a recovery even before adjudication.
82. In the context of the provisions for arrest under the Central Excise Act,
1944, the DGCEI has published a Manual in 2004 containing guidelines to
the CE Officers on when and in what circumstances resort should be had to
the coercive step of arrest. In Chapter X para 7 of the said Manual, it is
stated that arrest can be made prior to the issue of an SCN but only "where
fraudulent intent is clear ( prima facie there is evidence of mens rea ) or
where the evidence is enough to secure a conviction or where the person is
likely to abscond, tamper with evidence or influence the witnesses if left at
W.P. (C) 525/2016 & 1283/2016 Page 52 of 77
large. Arrest at the investigation stage should be resorted to only when
it is unavoidable ." (emphasis supplied)
83. At this stage it also requires to be recalled that since the provisions of
the Cr PC stand attracted in terms of Section 90(2) as well as Section 91(4)
of the FA, all the safeguards that are available to a person under Chapter V
of the Cr PC are also available to a person sought to be arrested by Central
Excise Officer under the provisions of the FA. These safeguards have been
judicially evolved by reading constitutional limitations into the width and
ambit of these powers.
Constitutional safeguards
84.1 The safeguards are traceable to the Constitution of India and in
particular Article 22 which pertains to arrest and Article 21 which
mandates that no person shall be deprived of his life and liberty without
the authority of law. The safeguards pertaining to arrest have been spelt
out in the decision of the Supreme Court in D.K. Basu v. State of West
Bengal (1997) 1 SCC 416 . The directions issued by the Supreme Court
included setting out in the arrest memo – (i) the brief facts of the case, (ii)
the details of the persons arrested, (iii) the gist of evidence against the
person, and (iv) relevant sections of the statute under which the action is
proposed to be taken. The Court mandated that the grounds of arrest must
be explained to the person arrested and this fact be noted in the arrest
memo. Further the nominated person, as per details provided by the person
arrested, should be informed immediately and this fact should also be
mentioned in the arrest memo. The date and time of arrest may be
mentioned in the arrest memo and copy of memo should be given to the
W.P. (C) 525/2016 & 1283/2016 Page 53 of 77
person arrested after obtaining the proper acknowledgment. It must be
mentioned herein that in 2008, the Cr PC was amended by inserting
Sections 41A , 41B, 41C, 41D, 50A, 55A and 60A and amending Sections
41, 46 and 54 to provide for the above safeguards.
84.2 It is significant in the decision in D.K. Basu (supra) , the Supreme
Court did not confine itself to the actions of police officers taken in terms
of powers vested in them under Cr PC but also of the officers of the
Enforcement Directorate including the Directorate of Revenue Intelligence
(‗DRI‘). This also included officers exercising powers under the Customs
Act, 1962 the Central Excise Act, 1944 and the Foreign Exchange
Regulation Act, 1973 (‗FERA‘) now replaced by the Foreign Exchange
Management Act, 1999 (‗FEMA‘) as well. It observed:
"30. Apart from the police, there are several other governmental
authorities also like Directorate of Revenue Intelligence, Directorate
of Enforcement, Costal Guard, Central Reserve Police Force
(CRPF), Border Security Force (BSF), the Central Industrial
Security Force (CISF), the State Armed Police, Intelligence
Agencies like the Intelligence Bureau, R.A.W, Central Bureau of
Investigation (CBI) , CID, Tariff Police, Mounted Police and ITBP
which have the power to detain a person and to interrogated him in
connection with the investigation of economic offences, offences
under the Essential Commodities Act, Excise and Customs
Act. Foreign Exchange Regulation Act etc. There are instances of
torture and death in custody of these authorities as well, In re Death
of Sawinder Singh Grover [1995 Supp (4) SCC 450], (to which
Kuldip Singh, J. was a party) this Court took suo moto notice of the
death of Sawinder Singh Grover during his custody with the
Directorate of Enforcement. After getting an enquiry conducted by
the additional District Judge, which disclosed a prima facie case for
investigation and prosecution, this Court directed the CBI to lodge a
FIR and initiate criminal proceeding against all persons named in the
report of the Additional District Judge and proceed against them.
The Union of India/Directorate of Enforcement was also directed to
W.P. (C) 525/2016 & 1283/2016 Page 54 of 77
pay sum of Rs. 2 lacs to the widow of the deceased by was of the
relevant provisions of law to protect the interest of arrested persons
in such cases too is a genuine need.
.........
33. There can be no gainsaying that freedom of an individual must
yield to the security of the State. The right of preventive detention of
individuals in the interest of security of the State in various
situations prescribed under different statures has been upheld by the
Courts. The right to interrogate the detenues, culprits or arrestees in
the interest of the nation, must take precedence over an individual's
right to personal liberty. The latin maxim salus populi est suprema
lex (the safety of the people is the supreme law) and salus
republicae est suprema lex (safety of the state is the supreme law)
co-exist and are not only important and relevant but lie at the heart
of the doctrine that the welfare of an individual must yield to that of
the community. The action of the State, however must be "right, just
and fair". Using any form of torture for extracting any kind of
information would neither be 'right nor just nor fair' and, therefore,
would be impermissible, being offensive to Article 21. Such a
crime-suspect must be interrogated - indeed subjected to sustained
and scientific interrogation determined in accordance with the
provisions of law. He cannot, however, be tortured or subjected to
third degree methods or eliminated with a view to elicit information,
extract confession or drive knowledge about his accomplices,
weapons etc. His Constitutional right cannot be abridged except in
the manner permitted by law, though in the very nature of things
there would be qualitative difference in the methods of interrogation
of such a person as compared to an ordinary criminal...."
84.3 These constitutional safeguards emphasised in the context of the
powers of police officers under the Cr PC and of officers of central excise,
customs and enforcement directorates, are applicable to the exercise of
powers under the FA in equal measure. An officer whether of the Central
Excise department or another agency like the DGCEI, authorised to
exercise powers under the CE Act and/or the FA will have to be conscious
W.P. (C) 525/2016 & 1283/2016 Page 55 of 77
of the constitutional limitations on the exercise of such power. This has
been implicitly acknowledged in the circulars issued from time to time by
the Central Board of Excise and Customs (‗CBEC‘). Insofar as officers of
the Central Excise are concerned, the Service Tax Wing of the CBEC
th
initially issued Circular No. 171/6/2013-Service Tax dated 17 September,
2013 where specific attention has been drawn to the types of cases covered
under Section 89 (1) (i) and 89 (1) (ii). In the latter case, it has been
mandated that after following the due procedure of arrest, the arrested
person must be produced before the Magistrate without unnecessary delay
and definitely within 24 hours. Para 2 of the said circular specifies
‗conditions precedent‘. Para 2.1 states that, since arrest impinges on the
personal liberty of an individual ―this power must be exercised carefully‖.
It has been mandated that an officer of the Central Excise not below the
rank of the Superintendent can carry out an arrest on being authorised by
the Commissioner of Central Excise. It is further stated that to authorise
the arrest, the ―Commissioner should have reason to believe that the person
proposed to be arrested has committed an offence specified in clause (i) or
clause (ii) of sub-section (1) of Section 89‖ of the FA. Importantly, it
states ―the reason to believe must be based on credible material which will
stand judicial scrutiny‖. The further criterion is spelt out in para 2.3 which
reads thus:
―2.3 Apart from fulfilling the legal requirements, the need to
ensure proper investigation, prevention of the possibility of
tampering with evidence of intimidating or influencing
witnesses and large amounts of service tax evaded are
relevant factors before deciding to arrest a person.‖
85. It is, therefore, plain that the decision to arrest a person must not be
taken on whimsical grounds. To recapitulate, reasons to believe must be
W.P. (C) 525/2016 & 1283/2016 Page 56 of 77
based on ‗credible material‘. The decision must also be conveyed at the
earliest to a superior officer who will constantly monitor the progress in
the investigations. He will ensure that there is no tampering of the
evidence gathered and at the same time ensure that there is no intimidation
or coercion of the suspects and/or witnesses.
The notings on file
86. The Court has perused the records produced in both the petitions in
order to examine whether the decision to go in for an arrest in these cases
satisfies the requirement of the law.
87. As far as MMT is concerned, a copy of the arrest memo furnished to its
Vice-President (Finance), Mr. Pallai has been placed on record. Preceding
the said arrest memo was a handwritten note prepared on the file by Mr.
th
Ashwani Kapoor on 9 January, 2016. It refers to ‗intelligence received‘
which indicated that MMT ―were not paying service tax properly‖ and that
the credible information revealed that MMT generated revenues through
two lines of business; air ticketing and hotel business. Under the sub-
heading ‗Hotel Business‘ in para 2.2 of this note, it is mentioned that in
terms of the agreements entered into with the hotels, MMT blocks a certain
number of rooms at a certain price but MMT is free to use any mark-up on
the net rate or discount the published tariff.
88. The agreement between MMT and Hotel Maharaja Regency (P) Ltd.
has been referred to in the said note. It is stated that the claim of MMT that
they are agents of hotels is without any legal basis and MMT is paying
service tax arbitrarily on that basis. Reference is then made to Rule 2(f) of
the Place of Provision of Service Rules, 2012 which defines ‗intermediary‘
W.P. (C) 525/2016 & 1283/2016 Page 57 of 77
and para 5.9.6 of the Education Guide referred above which helps to
determine whether a person is acting as an intermediary. Para 2.2.3 of the
said note then gives the reasons why MMT is not acting as a hotel agent
but is itself providing services of renting hotel rooms. Thus, it is stated that
they were liable to pay service tax on the renting of hotel rooms at a value
of 60% of the amount charged. Para 2.2.4 then states that MMT is not
paying service tax to the government which they have collected for the
service provided by them. The reference is made with the help of the data
provided by MMT for the period from October 2010 to September 2015
and the calculations showed that they had not paid service tax amounting
to Rs.82,78,03,760 and paid service tax only to an extent of
Rs.15,33,84,593. Para 2.3.4 of the note is critical since it states that Mr.
th
M.K. Pallai, Vice President (Finance) of MMT, in a statement dated 10
December, 2015, has stated that in case of service tax matters they took a
legal opinion and that based on such legal opinion, he and Mr. Mohit
Kabra, CFO of MMT, took the decision on taxation issues.
89. From the above it is concluded in para 3 that Mr. Pallai and Mr. Kabra
were the main persons responsible for non-payment of service tax by
MMT to the tune of Rs. 67 crores for the period from October 2010 to
September 2015, which a cognizable and non-bailable offence under
Section 89 (1) (d) of the FA read with Section 89 (1) (ii) and Section 90 (1)
of the FA and Section 9AA of the CE Act. Para 4 is interesting inasmuch
as it states as under:
―4. Further, it is also apprehended that some of other similar
online service providers namely (1) M/s. Cleartrip Private
Limited, Unit No. 001, Ground Floor, DTC Building,
Sitaram mills, Derise Road, NM Joshi Marg, Mumbai (2)
W.P. (C) 525/2016 & 1283/2016 Page 58 of 77
th
Ibibo Group (P) Ltd., Pearl Tower, 4 Floor, Plot No. 51,
Sector 32, Gurgaon (3) M/s. Yatra Online Private Limited
th
1101-1103, 11 Floor Unitech Cyber Park, Tower B,
Sector-39, Gurgaon, may also be involved in similar service
tax evasion. Hence, investigation against these service
providers may also be initiated through summons
proceedings.‖
90. It is, therefore, apparent that the decision to go in for the extreme
coercive step of arrest of the key persons of MMT as well as two others
viz., ‗Cleartrip‘ and ‗Yatra Online‘ were more or less taken at the same
time and for the same reasons. This is also why separate teams were
constituted around the same time and took the same action. What is
significant in this note for arrest is that there is no reference whatsoever to
th
the circular dated 17 September, 2013.
91. In the said note, Mr. Samanjasa Das, Additional Director General,
th
DGCEI made a further note on 8 January, 2016 authorising Mr. Jatinder
Singh, SIA to place Mr. Pallai under arrest stating that he had reason to
believe that Mr. Pallai has committed an offence under Section 89 (1) (ii)
of the FA.
92. At this stage, it is required to be noticed that it had to be first satisfied
that MMT itself had committed an offence and, therefore, Mr. Pallai, being
in charge of the affairs of the MMT, had committed an offence.
Significantly, with there being no reference whatsoever to the circular
th
dated 17 September, 2013 or the further amendment brought out to the
rd
said circular by the Circular No. 1010/17/2015 dated 23 October, 2015,
rd
there was a clear non-application of mind. The circular dated 23 October,
2015 prescribes the revised monetary limit in Central Excise and Service
W.P. (C) 525/2016 & 1283/2016 Page 59 of 77
Tax cases. This is issued by the CBEC and refers in turn to Circular No.
1009/16/2015-CX of the same date where monetary limits have been
prescribed for launching prosecution. It has been decided that prosecution
should be launched where the evasion of the central excise duty was more
than Rs. 1 crore. Henceforth, arrest of a person for the offence under
Section 89 (1) (d) read with 89 (1) (ii) of the FA would be made only in
cases where the service tax evasion is equal to or more than Rs.1 crore.
93. It appears that a decision to launch prosecution and a decision to arrest
have to be taken more or less simultaneously. In other words, without a
decision to launch prosecution there cannot be a decision taken to arrest a
person. The decision to launch prosecution must be informed by the
rd
safeguards spelt out in Circular No. 1009/16/2015-CX dated 23 October,
2015. This circular, apart from raising monetary limit, also talks of
‗habitual evaders‘. Para 4.2 of this circular states that prosecution can be
launched ―in the case of a company/assessee habitually evading tax/duty or
misusing Cenvat Credit facility. A company/assessee would be treated as
habitually evading tax/duty or misusing Cenvat Credit facility if it has
been involved in three or more cases of confirmed demand (at the first
appellate level or above) of Central Excise duty or Service Tax or misuse
of Cenvat Credit involving fraud, suppression of facts etc. in the five years
from the date of the decision such that the total duty or tax evaded or total
credit misused is equal to or more than Rs. One Crore. Offence register
(335J) may be used to monitor and identify assessees who can be
considered to be habitually evading duty.‖
94. The circular also acknowledges at para 4.3 that sanction of prosecution
W.P. (C) 525/2016 & 1283/2016 Page 60 of 77
has ―serious repercussions for the assessee and therefore along with the
above monetary limits the nature of evidence collected during the
investigation should be carefully assessed. The evidences collected should
be adequate to establish beyond reasonable doubt that the person, company
or individual had guilty mind, knowledge of the offence, or had fraudulent
intention or in any manner possessed mens-rea (guilty mind) for
committing the offence.‖
95. There is a detailed procedure set out in para 6 regarding procedure to
sanction a prosecution. Para 6.2, 6.3 and 6.4 of this circular are significant
and read as under:
―6.2 Prosecution should not be launched in cases of
technical nature, or where the additional claim of duty/tax is
based totally on a difference of opinion regarding
interpretation of law. Before launching any prosecution, it is
necessary that the department should have evidence to
prove that the person, company or individual had guilty
knowledge of the offence, or had fraudulent intention to
commit the offence, or in any manner possessed mens rea
(guilty mind) which would indicate his guilt. It follows,
therefore, that in the case of public limited companies,
prosecution should not be launched indiscriminately against
all the Directors of the company but it should be restricted
to only against persons who were in charge of day-to-day
operations of the factory and have taken active part in
committing the duty/tax evasion or had connived at it.
6.3 Prosecution should not be filed merely because a
demand has been confirmed in the adjudication proceedings
particularly in cases of technical nature or where
interpretation of law is involved. One of the important
considerations for deciding whether prosecution should be
launched is the availability of adequate evidence. The
standard of proof required in a criminal prosecution is
higher as the case has to be established beyond reasonable
W.P. (C) 525/2016 & 1283/2016 Page 61 of 77
doubt whereas the adjudication proceedings are decided on
the basis of preponderance of probability. Therefore, even
cases where demand is confirmed in adjudication
proceedings, evidence collected should be weighed so as to
likely meet the test of being beyond reasonable doubt for
recommending prosecution. Decision should be taken on
case-to-case basis considering various factors, such as,
nature and gravity of offence, quantum of duty/tax evaded
or Cenvat credit wrongly availed and the nature as well as
quality of evidence collected.
6.4 Decision on prosecution should be normally taken
immediately on completion of the adjudication proceedings.
However, Hon‘ble Supreme Court of India in the case of
Radheyshyam Kejriwal [2011 (266) ELT 294 (SC)] has
inter alia , observed the following (i) adjudication
proceedings and criminal proceedings can be launched
simultaneously; (ii) decision in adjudication proceedings is
not necessary before initiating criminal prosecution; (iii)
adjudication proceedings and criminal proceedings are
independent in nature to each other and (iv) the findings
against the person facing prosecution in the adjudication
proceedings is not binding on the proceeding for criminal
prosecution. Therefore, prosecution may even be launched
before the adjudication of the case, especially where offence
involved is grave, qualitative evidences are available and it
is also apprehended that party may delay completion of
adjudication proceedings.‖
96. What this circular again underscores is that there should be a
comprehensive analysis of the evidence gathered before deciding to go in
for prosecution. Importantly, prosecution should not be launched merely
because a demand has been confirmed or particularly where the cases are
of technical nature or where interpretation of law is involved. It is also not
to be launched where additional claim of duty/tax is only based on
difference of opinion regarding interpretation of law. Importantly, it has to
W.P. (C) 525/2016 & 1283/2016 Page 62 of 77
be normally taken only ―immediately upon completion of adjudication
proceedings‖.
97. There is a reason behind this stipulation that prosecution should
normally be launched only after the adjudication is complete. The
'adjudication' in this context is the adjudication of the penalty under
Section 83 A of the FA. That 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. Till that point, the entire case proceeds
on the basis that there must be an apprehended evasion of tax by the
Assessee. This apprehension hinges upon the analysis of the evidence
gathered by the investigating agency. 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. 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 both in cases of MMT
and IBIBO. A reference will be made to that shortly.
98. Turning to the grounds of the arrest that were communicated to Mr.
Samanjasa Das, it appears that Mr. Jatinder Singh, who was delegated the
authority to arrest by the former, himself added certain paragraphs in the
grounds of arrest which were not mentioned in the notes prepared and
sanctioned by Mr. Samanjasa Das, the Additional Director General of the
W.P. (C) 525/2016 & 1283/2016 Page 63 of 77
DGCEI. Importantly, the paragraphs added by him in the grounds of arrest
read as under:
―Whereas the contention of M/s. MMT that since they have
remitted the Service Tax collected by them to the concerned
hotels, it is the obligation of the hotel to pay Service Tax to
the Government account, does not appear acceptable in
view of the fact that as the provider of renting of hotel room
service/short-term accommodation service, it is the statutory
obligation of M/s MMT to discharge their due Service Tax
liability. The hotels are mere input service providers to M/s
MMT and M/s MMT‘s Service Tax liability cannot be
fastened on the hotels. Besides, a large number of such
hotels are not even registered Service Tax assesses and do
not appear to have deposited the Service Tax claimed to
have been remitted by M/s MMT to such hotels, in the
Government account.‖
99. This is a significant addition to the so-called reasons why it is decided
to arrest Mr. Pallai. The conclusion in this paragraph that ―a large number
of such hotels are not even registered Service Tax assessees and do not
appear to have deposited the Service Tax‖ is on the unilateral searches
conducted on the website by Mr. Jatinder Singh and his team which were
obviously not confronted to Mr. Pallai at that stage. It now transpires from
the pleading that the DGCEI officers were perhaps mistaken about the
large number of hotels that were not found registered because the reasons
why they may have failed to have been registered have been examined.
100. In terms of CBEC's own procedures, for the launch of prosecution
there has to be a determination that a person is a habitual offender. There is
no such determination in any of these cases. There cannot be a habitual
offender if there is no discussion by the DGCEI with the ST Department
regarding the history of such Assessee. Assuming that, for whatever
W.P. (C) 525/2016 & 1283/2016 Page 64 of 77
reasons, if the DGCEI does not talk to ST Department, certainly it needs to
access the service tax record of such Assessee. Without even requisitioning
that record, it could not have been possible for the DGCEI to arrive at a
reasonable conclusion whether there was a deliberate attempt of evading
payment of service tax. The failure by the DGCEI to look into the service
tax records of these entities has led to a totally erroneous conclusion that
they are habitual offenders. In fact, both these Assessees have been
regularly paying service tax. It is also not that the ST Department was not
aware that rebate may be availed by these Assessees in their respective
returns. It is also not as if the ST Department has not been examining the
books of accounts or records of these Assessees. In the case of MMT, there
were SCNs issued in the past which were adjudicated.
101. In these circumstances, to go in for extreme step of launching
prosecution and going for arrest without issuing an SCN under Section 73
or 73-A (3) of the FA, appears to be totally unwarranted.
Search of the premises
102. The Court would at this stage like to comment on the decision to
search the premises. This is governed by Section 82 of the Act which reads
as under:
― 82. Power to search premises
(1) Where the Joint Commissioner of Central Excise or
Additional Commissioner of Central Excise or such
other Central Excise Officer as may be notified by the
Board has reasons to believe that any documents or
books or things, which in his opinion shall be useful
for or relevant to any proceedings under this Chapter,
are secreted in any place, he may authorise in writing
any Central Excise Officer to search for and seize or
W.P. (C) 525/2016 & 1283/2016 Page 65 of 77
may himself search and seize such documents or books
or things.
(2) The provisions of the Code of Criminal Procedure,
1973, relating to searches, shall, so far as may be,
apply to searches under this section as they apply to
searches under that Code.‖
103. It is seen that there are two essential requirements as far as Section 82
of the FA is concerned. An opinion has to be formed by the Joint
Commissioner or Additional Commissioner or other officers notified by
the Board that ―any documents or books or things‖ which are useful for or
relevant for any proceedings under this Chapter are secreted in any place.
Therefore, the note preceding the search of the premises has to specify the
above requirement of the law. In Mapsa Tapes Pvt. Ltd. v. Union of
India 2006 (201) E.L.T. 7 (P&H) it was held in the context of the power of
search under Section 105 of the Customs Act 1962, which is similar to
Section 82 of the FA, is that: " while existence power of seizure may be
justified but its exercise will be liable to be struck down unless 'reasons to
believe' were duly recorded before action of search and seizure is taken."
In none of the present cases does the note on file mention the fact that any
document has been secreted away and is relevant for the proceedings.
There appears to be no application of mind to the circulars and Section 82
of the FA at all. The officers of the DGCEI, without referring to the
requirements of the FA, have entered the premises and made the Assessees
agree to pay the alleged service tax dues without even an SCN. This
conduct, in the considered view of the Court, is wholly unacceptable. Not
only is this in clear violation of the mandate of Section 82 of the FA, but is
also unconstitutional since it impinges on the life and liberty of the
W.P. (C) 525/2016 & 1283/2016 Page 66 of 77
employees of the entities involved. The Court, therefore, finds that the
search of the premises of the two Petitioners in the instant case was
contrary to law and, therefore, legally unsustainable.
Payments were not 'Voluntary'
104. It is repeatedly urged by Mr. Satish Aggarwala that in the bail
proceedings before the Magistrate, the Senior counsel representing Mr.
Pallai volunteered that MMT would make payment of the arrears of
service tax dues and, therefore, it cannot be said that there was any
coercion or compulsion on MMT to make such payment. At the same time,
he urged that such payment was not a pre-condition for the grant of bail
and that in principle the DGCEI would oppose grant of bail in criminal
proceedings only because an offer is made to pay the arrears of service tax
dues in such proceedings.
105. In the first place, the Court is unable to accept that when an offer is
made in the circumstances outlined before a criminal court for payment of
alleged service tax arrears without even a show cause notice in this regard
being issued, it is plain that the offer is made only to avoid the further
consequences of continued detention. Such a statement can hardly be said
to be voluntary even though it may be made before a Court. Secondly,
there appears a contradiction because the DGCEI did not decline to receive
the offer of payment of alleged service tax arrears.
106. In a different context, while interpreting the provisions of the Delhi
Value Added Tax Act, 2004 (‗DVAT Act‘), this Court in Capri Bathaid
Pvt. Ltd. v. Commissioner of Trade & Taxes 2016 (155) DRJ 526 (DB)
took exception to the officials of the Department of Trade and Taxes
W.P. (C) 525/2016 & 1283/2016 Page 67 of 77
collecting arrears of sales tax from dealers at the time of survey and search.
The Court pointed out that the said practice was illegal and there could be
no collection without there being an assessment. The same principle would
apply here as well. 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. It is clarified that since the payment was collected by the
DGCEI illegally, the refund in terms of this order will not affect the bail
already granted to Mr. Pallai.
Conduct of the officers of the DGCEI
107. The Court was not a little surprised that the DGCEI did not think it
appropriate to check with the ST Department whether the Petitioners were
regular in filing their returns and whether such returns had been assessed.
In the present case, both the Petitioners have been filing returns. The ST
Department has a record of the filing of returns and the corresponding
assessments. Whatever may be the secret nature of the operation, it was
imperative for the DGCEI to first check whether the entity whose
employees are sought to be arrested has regularly been filing service tax
returns or is a habitual offender in that regard. It is only after checking the
entire records and seeking clarification where necessary, that the
investigating agency can possibly come to a conclusion that Section 89 (1)
(d) is attracted.
W.P. (C) 525/2016 & 1283/2016 Page 68 of 77
108. None of the above safeguards were observed in the present case.
There are presumptions drawn on the documents seized and are without
appropriate notice to the Petitioners under Section 73A (3) of the FA
asking them to explain why they should not be proceeded against under
Section 89 (1) (d) of the FA. There was no consultation with the ST
Department. Even the records of the ST returns filed by the two Petitioners
were not called for and examined. The Court is, therefore, satisfied that in
the present case the DGCEI acted with undue haste and in a reckless
manner.
Additional and supplementary affidavits
109. The conduct of the officials of the DGCEI in undertaking the entire
exercise of searching the premises of the Petitioner and then proceeding to
arrest Mr. Pallai are the subject matter not only of the writ petition itself
but the supplementary affidavits and the replies to those supplementary
affidavits of Mr. Pallai and Mr. Deepak Katyal of MMT by the officials of
the DGCEI. Detailed charts have been presented to the Court in regard to
the specific aspects of these affidavits.
110. The Court is of the view that with there being no meeting point or
common ground in the versions presented by these affidavits, it is difficult
to adjudicate this aspect in the present proceedings. There will have to be
an enquiry in which an opportunity is granted for cross-examination of the
deponents of the various affidavits. Consequently, the Court grants liberty
to officials of MMT to institute appropriate proceedings in accordance
with law in which the affidavits filed in these proceedings can be relied on.
This holds good for the officials of the DGCEI as well when called upon to
W.P. (C) 525/2016 & 1283/2016 Page 69 of 77
defend those proceedings in accordance with law. The Court accordingly
refrains from examining that aspect of the matter any further.
Pendency of separate criminal proceedings not a bar
111. At this stage, the Court also deals with another objection raised by
Mr. Satish Aggarwala. He urges that as proceedings have been separately
instituted by the Assessees in the criminal jurisdiction to challenge the
arrest and detention of the officers, this Court should not deal with that
aspect of the matter at all.
112. The case of the Petitioners has been that the decision to arrest was
based on a wrong interpretation of law and which is why they have come
to the Court seeking interpretation of the scope and ambit of the powers
under Sections 89, 90 and 91 of the FA. This is clearly within the realm of
powers of this Court. The Court cannot decline to exercise its jurisdiction
and must clarify the legal position so that future errors and exercise of such
powers of the officers of the DGCEI or, as the case may be, the ST
Department can be prevented. This Court decided, therefore, to proceed
with these petitions notwithstanding that petitions may be pending in the
criminal jurisdiction of this Court.
113. The possibility of misuse of statutory powers by officers was
commented upon noticed by the Supreme Court in Dabur India Limited v.
State of Uttar Pradesh (1990) 4 SCC 113 in the following passage:
―31. Before we part this case, two aspects have to be adverted to –
one was regarding the allegation of the Petitioner that in order to
compel the Petitioners to pay the duties which the Petitioners
contended that they were not liable to pay, the licence was not being
renewed for a period and the Petitioners were constantly kept under
W.P. (C) 525/2016 & 1283/2016 Page 70 of 77
threat of closing down their business in order to coerce them to
make the payment. This is unfortunate. We would not like to hear
from a litigant in this country that the government is coercing
citizens of this country to make payment of duties which the litigant
is contending not to be leviable. Government, of course, is entitled
to enforce payment and for that purpose to take all legal steps but
the government, Central or State, cannot be permitted to play dirty
games with the citizens of this country to coerce them in making
payments which the citizen were not legally obliged to make. If any
money is due to the government, the government should take steps
but not take extra legal steps or manoeuvre. Therefore, we direct that
the right of renewal of the Petitioner of licence must be judged and
attended to in accordance with law and the occasion not utilized to
coerce the Petitioners to a course of action not warranted by law and
procedure.....‖
114. The Bombay High Court in the context of abuse of the powers vested
in officers under the Customs Act, 1962 observed in Vodafone Essar
South Limited v. Union of India 2009 (237) ELT 35 (Bom) , as under:
―22. In these circumstances, we are clearly of the opinion that in the
present case, the conduct of the DRI Officers is not only high
handed but it is in gross abuse of the powers vested in them under
the Customs Act. It is apparent that the DRI officers in utter
disregard to the order passed by the Commissioner of Customs (A),
Mumbai have forced the Petitioners to pay the amount by threat and
coercion which is not permissible in law. Thus, the conduct of the
DRI officers in the present case in collecting the amount from the
Petitioners towards the alleged differential duty is wholly arbitrary,
illegal and contrary to law. Having terrorised the Petitioners with the
threat of arrest, it is not open to the DRI Officers to contend that the
amount has been paid by the Petitioners voluntarily. We strongly
condemn the high handed action of the DRI Officers in totally
flouting the norms laid down under the Customs Act in relation to
reassessment proceedings and purporting to collect the amount even
before reassessment. We hope that such incidents do not occur in the
future.‖
115. The Court is satisfied that in the present case the action of the DGCEI
W.P. (C) 525/2016 & 1283/2016 Page 71 of 77
in proceeding to arrest Mr. Pallai was contrary to law and that Mr. Pallai‘s
constitutional and fundamental rights under Article 21 of the Constitution
have been violated. The Court is conscious that Mr. Pallai has instituted
separate proceedings for quashing of the criminal case and, therefore, this
Court does not propose to deal with that aspect of the matter.
Summary of conclusions
116. To summarise the conclusions in this judgment:
(i) 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.
(ii) 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
W.P. (C) 525/2016 & 1283/2016 Page 72 of 77
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.
(iii) 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 Rs. 50 lakhs (now enhanced to Rs.
1 crore).
(iv) A possible exception could be where a person is shown to be a
habitual evader of service tax. Such person would have to be one who has
not filed a service tax return for a continuous length of time, who has a
history of repeated defaults for which there have been fines, penalties
imposed and prosecutions launched etc. That history can be gleaned only
from past records of the ST Department. In such instances, it might be
possible to justify resorting to the coercive provisions straightaway, but
then the notes on file must offer a convincing justification for resorting to
that extreme measure.
W.P. (C) 525/2016 & 1283/2016 Page 73 of 77
(v) The decision to arrest a person must not be taken on whimsical
grounds; it must be based on ‗credible material‘. The constitutional
safeguards laid out in D K. Basu's case ( supra ) in the context of the
powers of police officers under the Cr PC and of officers of central excise,
customs and enforcement directorates, are applicable to the exercise of
powers under the FA in equal measure. An officer whether of the Central
Excise department or another agency like the DGCEI, authorised to
exercise powers under the CE Act and/or the FA will have to be conscious
of the constitutional limitations on the exercise of such power.
(vi) In the case of MMT, 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 the detention
of Mr. Pallai was impermissible in law.
(vii) In terms of CBEC's own procedures, for the launch of prosecution
there has to be a determination that a person is a habitual offender. There is
no such determination in any of these cases. There cannot be a habitual
offender if there is no discussion by the DGCEI with the ST Department
regarding the history of such Assessee. Assuming that, for whatever
reasons, if the DGCEI does not talk to ST Department, certainly it needs to
access the service tax record of such Assessee. Without even requisitioning
that record, it could not have been possible for the DGCEI to arrive at a
reasonable conclusion whether there was a deliberate attempt of evading
payment of service tax. In the case of MMT, the decision to go in for the
extreme step of arrest without issuing an SCN under Section 73 or 73A (3)
of the FA, appears to be totally unwarranted.
W.P. (C) 525/2016 & 1283/2016 Page 74 of 77
(viii) For the exercise of powers of search under Section 82 of the FA, (i)
an opinion has to be formed by the Joint Commissioner or Additional
Commissioner or other officers notified by the Board that ―any documents
or books or things‖ which are useful for or relevant for any proceedings
under this Chapter are secreted in any place, and (ii) the note preceding the
search of a premises has to specify the above requirement of the law. The
search of the premises of the two Petitioners is in clear violation of the
mandate of Section 82 of the FA. It is unconstitutional and legally
unsustainable.
(ix) 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.
(x) It was imperative for the DGCEI to first check whether the entity
whose employees are sought to be arrested has regularly been filing
service tax returns or is a habitual offender in that regard. It is only after
checking the entire records and seeking clarification where necessary, that
the investigating agency can possibly come to a conclusion that Section 89
(1) (d) is attracted. None of the above safeguards were observed in the
present case. The DGCEI acted with undue haste and in a reckless manner.
(xi) Liberty is granted to the officials of MMT and IBIBO to institute
appropriate proceedings in accordance with law against the officers of the
DGCEI in which the supplementary affidavits filed in these proceedings
W.P. (C) 525/2016 & 1283/2016 Page 75 of 77
and the replies thereto can be relied on. This holds good for the officials of
the DGCEI as well when called upon to defend those proceedings in
accordance with law.
(xii) The Court cannot decline to exercise its jurisdiction and clarify the
legal position as regards the interpretation of the scope and ambit of the
powers under Sections 89, 90 and 91 of the FA. This is clearly within the
powers of this Court. That is why this Court has decided to proceed with
these petitions notwithstanding that the criminal petitions may be pending
in the criminal jurisdiction of this Court.
(xiii) The Court is satisfied that in the present case the action of the
DGCEI in proceeding to arrest Mr. Pallai, Vice-President of MMT, was
contrary to law and that Mr. Pallai‘s constitutional and fundamental rights
under Article 21 of the Constitution have been violated. The Court is
conscious that Mr. Pallai has instituted separate proceedings for quashing
of the criminal case and, therefore, this Court does not propose to deal with
that aspect of the matter.
117. The interim directions issued in the two writ petitions are made
absolute. It is directed that the DGCEI will refund to each of the
Petitioners forthwith the respective amounts deposited by them towards
alleged dues of service tax forthwith and in any event not later than four
weeks from today. Any delay in refund beyond the said period will make
the DGCEI liable to pay simple interest at 6 % per annum on the respective
amounts from the date on which they became due in terms of this order till
the date of payment. The refund in terms of this order will not affect the
bail granted to Mr. Pallai of MMT.
W.P. (C) 525/2016 & 1283/2016 Page 76 of 77
118. The Court clarifies that it has in this decision examined and
determined the legality of the DGCEI in proceeding to search the premises
of the two Petitioners and then deciding to arrest senior officials of the two
Petitioners. The observations made by the Court on the merits of the
contentions of either party is in the above context. This is not intended to
influence the adjudication proceedings that might ensue if an SCN is
issued in accordance with law by the DGCEI to either Petitioner. Further,
the right of the Petitioners and any of their officials aggrieved by the
actions of the officials of the DGCEI to institute appropriate proceedings
in accordance with law to recover damages and/or compensation is
reserved.
119. The writ petitions are disposed of in the above terms with costs of Rs.
1 lakh in each petition which will be paid by the DGCEI to each Petitioner
within four weeks.
S.MURALIDHAR, J
VIBHU BAKHRU, J
SEPTEMBER 1, 2016
Rm/b’nesh/dn
W.P. (C) 525/2016 & 1283/2016 Page 77 of 77