2016 (9) TMI 53 - HC - Service Tax

Coercive action including threat of arrest against officials for recovery of alleged service tax dues - power and jurisdiction of DGCEI - it was submitted that, once the Petitioners admit that they collect the service tax, even on behalf of the hotels whose rooms are booked online, it is incumbent on the Petitioners to themselves deposit the entire service tax collected. - The failure to do so, according to the DGCEI, has resulted in violation of various provisions of the FA by the two Petitioners and deliberate evasion of service tax on their part, warranting initiation of the coercive measure of arrest of their respective officials. Held that - The scheme of the provisions of the Finance Act 1994 (FA), do not permit the DGCEI or for that matter the Service Tax Department (ST Department) to by-pass the procedure as set out in Section 73A (3) and (4) of the FA before going ahead with the arrest of a person under Sections 90 and 91 of the FA. The power of arrest is to be used with great circumspection and not casually. It is not to be straightway presumed by the DGCEI, without following the procedure under Section 73A (3) and (4) of the FA, that a person has collected service tax and retained such amount without depositing it to the credit of the Central Government. Where an assessee has been regularly filing service tax returns which have been accepted by the ST Department or which in any event have been examined by it, as in the case of the two Petitioners, without commencement of the process of adjudication of penalty under Section 83 A of the FA, another agency like the DGCEI cannot without an SCN or enquiry straightway go ahead to make an arrest merely on the suspicion of evasion of service tax or failure to deposit service tax that has been collected. Section 83 A of the FA which provides for adjudication of penalty provision mandates that there must be in the first place a determination that a person is liable to a penalty , which cannot happen till there is in the first place a determination in terms of Section 72 or 73 or 73A of the FA. For a Central Excise officer or an officer of the DGCEI duly empowered and authorised in that behalf to be satisfied that a person has committed an offence under Section 89 (1) (d) of the FA, it would require an enquiry to be conducted by giving an opportunity to the person sought to be arrested to explain the materials and circumstances gathered against such person, which according to the officer points to the commission of an offence. Specific to Section 89 (1) (d) of the FA, it has to be determined with some degree of certainty that a person has collected service tax but has failed to pay the amount so collected to the Central Government beyond the period of six months from the date on which such payment is due and further that the amount exceeds ₹ 50 lakhs (now enhanced to ₹ 1 crore). The Court is unable to accept that payment by the two Petitioners of alleged service tax arrears was voluntary. Consequently, the amount that was paid by the Petitioners as a result of the search of their premises by the DGCEI, without an adjudication much less an SCN, is required to be returned to them forthwith. Decided in favor of petitioners.

Issues Involved:
1. Legality of the search conducted by DGCEI.
2. Legality of the summons issued by DGCEI.
3. Legality of the arrest of the Managing Director of eBIZ.
4. Compliance with procedural safeguards under the Finance Act, 1994.
5. Allegation of non-cooperation by eBIZ.
6. Voluntariness of the payment made by eBIZ under coercion.
7. Entitlement of eBIZ to a refund of the amount paid under duress.

Detailed Analysis:

1. Legality of the Search Conducted by DGCEI:
The search conducted by DGCEI on 19th January 2016 was deemed illegal. The court noted that the search was not in compliance with Section 82 of the Finance Act, 1994, which requires the formation of an opinion that documents useful for proceedings are secreted in any place. The notes preceding the search did not specify this requirement, making the search unconstitutional and legally unsustainable.

2. Legality of the Summons Issued by DGCEI:
The summons issued on 19th and 21st January 2016 were challenged as being without authority of law. The court highlighted that the DGCEI bypassed the procedure set out in Section 73A (3) and (4) of the Finance Act, which mandates issuing a show cause notice and determining the amount due before taking coercive actions. The DGCEI's actions were found to be premature and without following due process.

3. Legality of the Arrest of the Managing Director of eBIZ:
The arrest of Mr. Pawan Malhan, Managing Director of eBIZ, was found to be impermissible in law. The court emphasized that the power of arrest under Sections 90 and 91 of the Finance Act should be used with great circumspection and not casually. The DGCEI failed to follow the necessary procedures, including issuing a show cause notice and determining the amount of service tax arrears before arresting Mr. Malhan.

4. Compliance with Procedural Safeguards Under the Finance Act, 1994:
The court found that the DGCEI did not observe statutory or constitutional safeguards. The search and subsequent arrest were undertaken contrary to the legal requirements of the Finance Act. The court stressed the importance of adhering to the guidelines issued for launching prosecution and arrest, which were not followed in this case.

5. Allegation of Non-Cooperation by eBIZ:
The DGCEI's claim of non-cooperation by eBIZ was not justified. The court noted that eBIZ had provided the requested documents and information, but the DGCEI refused to receive them. The court directed eBIZ and its officers to continue cooperating with the DGCEI in the investigation.

6. Voluntariness of the Payment Made by eBIZ Under Coercion:
The court concluded that the payment of ?17 crores by eBIZ was not voluntary but made under coercion and duress. The court noted that the arrest and detention of Mr. Malhan compelled eBIZ to make the payment, which was not in accordance with the law.

7. Entitlement of eBIZ to a Refund of the Amount Paid Under Duress:
The court directed the DGCEI to refund the ?17 crores paid by eBIZ within four weeks. Any delay in the refund would attract simple interest at 6% per annum. The refund would not affect the bail granted to Mr. Malhan. The court also awarded costs of ?1 lakh to be paid by the DGCEI to eBIZ.

Conclusion:
The court issued an interim direction restraining the DGCEI from taking any further coercive action against eBIZ or its officials. The DGCEI was ordered to refund the amount paid under duress, and the actions of the DGCEI were found to be arbitrary, malicious, and in violation of the provisions of the Finance Act, 1994. The court emphasized the need for adherence to procedural safeguards and the importance of credible material before taking coercive actions.

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