PROSECUTION UNDER SERVICE TAX

[Mr. M. GOVINDARAJAN]

                        Initially provisions for prosecution were there.   Sections 87 to 90 provided criminal liabilities for making respective defaults related to service tax.   Section 91 provides that the offences under Sections 87 to 90 would be deemed to be non cognizable, that is, offences for which police officer has no authority to arrest without warrant.   The need to insert section 91 arose because offences punishable under Section 87 to 90 were otherwise classifiable as cognizable offences as per Code of Criminal Procedure, 1973 in which a police officer may arrest without warrant.  Sec. 92 required previous sanction of the Chief Commissioner of Central Excise to initiate proceedings under Section 87 to 90.  All these sections were omitted by the Finance Act, 1998 with effect from16.10.1998 in order to do away with the excessive criminal liabilities under service act.

                        After that prosecution provision was introduced in 2011 as part of a compliance philosophy involving rationalization of penal provisions.  In CBE&C Circular No.140/9/2011-ST, dated 12.5.2011 the Department gives justification for reintroduction of prosecution provision as below:

•              Encouraging voluntary compliance and introduction of penalties based on the gravity of offences are some important principles which guide the changes made this year, in the penal provisions governing service tax;

•              While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations;

•              Accordingly, it is imperative for the field formation, in particular, the sanctioning authority, to implement the prosecution provision keeping in view the overall compliance philosophy;

•              Since the objective of the prosecution provision is mainly to develop a holistic culture among the tax payers, it is expected that the instructions will be followed in letter and spirit.

For this purpose, Section 89 was inserted vide Finance Act, 2011 with effect from 8.4.2011.  The said section is reproduced as below:

89. Offences and penalties.-

(1) Whoever commits any of the following offences, namely,-

     (a) provides any taxable service chargeable to service tax under sub-section (1) of section 68 or receives any taxable service chargeable to tax under subsection (2) of said section, without an invoice issued in accordance with the provisions of this Chapter or the rules made there under; 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 there under 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 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 term of less than six months;

           (ii) in any other case, with imprisonment for a term, which may extend to one year.

(2) If any person convicted of an offence under this section is again convicted of an offence under this section, then, he shall be punishable for the second and for every subsequent offence 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 term less than six months.

(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 section except with the previous sanction of the Chief Commissioner of Central Excise.

The Department issued clarifications for the prosecution provision in Finance Act, 1994 vide CBE&C Circular No. 140/9/2011-ST, dated 12.05.2011.  In terms of Rule 4A of the Service Tax Rules, 1994 invoice is required to be issued within 14 days from the date of completion of the taxable service.   Prosecution is there for non issuance of invoice within the prescribed period rather than non mention of non technical details in the invoice that have no bearing on the determination of tax liability.

     Where the recipient is liable to pay tax on reverse charge basis, similar obligation has been cast on the service recipient though the invoices are issued by the service provider.   It is clarified by that department that the date of provision of service shall be determined in terms of Point of Taxation Rules, 2011.  The date of provision of service shall be the date of payment except in the case of associated enterprises receiving services from abroad where the date shall be earlier of the date of credit in the books of accounts or the date of payment.   The service recipient is required to ensure that the invoice is available at the time the payment is made or at least received within 14 days thereafter and in the case of associated enterprises, invoice should be available at the time of credit in the books of accounts or the date of payment towards the service received.

          It will be an offence if the tax payer avail as well as utilize the credit without having actually received the goods or the service.  It will also covers situations where the value of the service stated in the invoice and/or tax thereon have been altered with a view to avail CENVAT credit in excess of the amount originally stated.  While calculating the monetary limit for the purpose of launching prosecution, the value shall be the amount availed as credit in excess of the amount originally stated in the invoice.

         Sec.89 (1) © is based on similar provision in Central Excise Act.   It should be noted that the offence in relation to maintenance of false books of accounts or failure to supply the required information or supplying of false information, should be in material particulars have a bearing on the tax liability.   Mere expression of opinions shall not be covered by the said clause.   Supplying false information, in response to summons will also be covered under the provision.

        Sec. 89(1)(d) would be attracted  when the amount was reflected in the invoices as service tax, service receiver has already made the payment and the period of six months has elapsed from the date on which the service provider was required to pay the tax to the Central Government.   When the service receiver has made part payment, the service provider will be punishable to the extent he has failed to deposit the tax due to the Government.

     According to Sec. 89(3) the following grounds are not considered special and adequate reasons for awarding reduced imprisonment:

•  the fact that the accused has been convicted for the first time for an offence under Finance Act, 1994;

•   the fact that in any proceeding under the said Act, other than the 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;

•    the fact that the accused was not the principal offender and was acting merely a secondary part in the commission of an offence;

•    the age of the accused.

Sanction for prosecution has to be accorded by the Commissioner of Central Excise in terms of Sec. 89(4).   In accordance with the Notification No.3/2004-ST, dated 11.3.2004, the Director General of Central Excise Intelligence (DGCEI) can exercise the power of Chief Commissioner of Central Excise, throughout India.                             

         Monetary limit of ₹ 10 lakhs has been fixed for initiating prosecution vide Sec. 89(1).  Where an offence involves an amount of less than ₹ 10 lakh such case will not be considered for launching prosecution.   However the monetary limit will be apply in the case of repeat offence.

         The prosecution proceedings are generally initiated after the departmental adjudication of an offence has been completed, although there is no legal bar against launch of prosecution before adjudication.   The Adjudicator should indicate whether a case is fit for prosecution, though this is not a necessary pre condition.   To launch prosecution against top management of the company, sufficient and clear evidence to show their direct involvement in the offence is required.   Once prosecution is sanctioned, complaint should be filed in the appropriate court immediately.