Prosecution under Service tax laws

[Raginee Goyal]

Specified offences were subjected to prosecution vide Chapter V of the Finance Act, introduced in 1994. The provisions were done away with in 1998 when the net of service tax was substantially expanded and the levy was highlighted as an assessee friendly levy. Amendments were made by Finance Act, 2012 (w.e.f. 28-5-2012) to Section 89 and other provisions relating to prosecution, with a view to make evasion of payment of Service Tax, knowingly committed, a harshly punishable offence. With effect from 8^th April 2011, prosecution provisions were re-introduced vide Budget 2011 and Service tax officers were given immense powers for offences like delay in issuance of invoice beyond a fortnight, and also those offences which are relatively more serious in nature like rendition of services without raising invoices, availment of Cenvat credit without receipt of inputs/ input services, etc. The assessee friendly levy which has gained larger ground and is growing in multiples no longer remains an assessee friendly levy. The prosecution provisions aim at encouraging informed decision-making by the taxpayers at the early stages of investigation or verification by the Department and to punish to discourage stealthy activities by taking advantage of a self assessment mechanism of law.

The Central Board of Excise and Customs has also issued clarification/instructions relating to prosecution provisions vide Circular No. 140/9/2011-TRU dated 12.05.2011 in relation to prosecution provisions with a view to develop a holistic compliance culture among taxpayers and clarify cases where prosecution applies. New provisions have been proposed vide Budget 2013-14 to prescribe revised punishments for offences in section 89 make certain offences cognizable and others non-cognizable and bailable. Circular No. 334/3/2013-TRU dated 28.02.2013 prescribe certain clarifications/instructions.

The provisions of section 89 have come into force from 8-4-2011 and would thus apply in case of offences committed on or after 8-4-2011. Section 89 seeks to provide for offences and penalties to enable prosecution of certain specified offence involving service tax evasion committed wilfully, which are discussed in detail below:

(i) Knowingly evading payment of service tax which was earlier restricted to provision of service without issue of invoice or receiving a service without invoice as per the relevant rules until the scope of this provision was grossly widened to wilful evasion w.e.f. 08-04-2012.

Section 89(1) (a) prior to 08-04-2012 provided that one can be prosecuted in case where services have been provided without issuance of invoice. However the scope of this sub section has been expanded beyond issuance of invoice to cover any act including non issuance of invoice which is enough to establish that wilful evasion of service tax payment has occurred. Invoice is required to be issued within 14 days from the date of completion of the taxable service. However, the offence of non-issuance of invoice ought to cover only material cases which affect determination of tax liability and cases of procedural lapses in the nature of non-mention of technical details in the invoice which do not affect the determination of the tax liability are not prosecutable. In the case of services where the recipient is liable to pay tax on reverse charge basis, is required to ensure that the invoice is available at the time the payment is made or at least received within 14 days thereafter. Similarly, for transactions between associated enterprises, invoice should be available with the service receiver at the time of credit in the books of accounts or the date of payment towards the service received. An ‘invoice’ includes a bill or a challan or “any document” specified in respect of certain taxable services, in the provisos to Rule 4A and Rule 4B of Service Tax Rules, 1994. The date of provision of service shall be determined as per Point of Taxation Rules, 2011. The emphasis was earlier on non issuance of invoice for taxable services provided but this has been amended by Finance Act, 2012 w.e.f. 28-5-2012 to knowingly evasion of payment of Service Tax. Needless to say, that even non registration by liable persons under Service tax can be covered under this provision unless otherwise proved. The burden of proof is thus on the assessee who needs to prove that there was no intent to evade and no evasion was knowingly made and even if it occurred it was without any intent and knowledge.

(ii)  Availment and utilization of Cenvat credit of duty or taxes without actual receipt of inputs or input services either fully or partly in violation of CENVAT Credit Rules, 1994

Section 89(1) (b) provides that the availment and utilization of the credit of taxes paid without actual receipt of taxable service or excisable goods is a prosecutable offence. It may be noted that in order to constitute an offence under this clause, the taxpayer must both avail as well as utilize the credit without having actually received the goods or the service. Supreme Court of India recently in the case of Union of India v. M/s Ind-Swift Laboratories Ltd [2011 (2) TMI 6 - Supreme Court ], held that in case of irregular availment of Cenvat Credit, interest shall be payable from the date of taking credit and not from the date of utilizing it. However, though interest liability would be triggered on availment of Cenvat credit, prosecution proceedings would be initiated only on availment and utilization of Cenvat credit.

To put it straight, no prosecution lies for credit availed but not utilized. Situations where invoice has been issued and payment has been made in advance for a service yet to be received are clearly ruled out from prosecution and logical exaggeration of such customary commercial practice could make one guilty on such count. It is clearly meant for such invoices that are typically known as “fake” where the tax has not been paid at the service provider’s end or taxable service or tax value has been altered for availing credit or where the provider stated in the invoice is actually non-existent. An assessee who acts in good faith is however burdened with the onus to prove as such.

(iii) Maintaining false books of accounts or failure to supply any information or submitting false information. The burden of proof lies on the assessee.

Section 89 (1) (c) of Finance Act, 1994, is based on similar provision in the central excise law. 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. Taxpayer would be prosecuted under the said offence where material particulars having a bearing on the tax liability are false/ incorrect. The expression ‘material particulars’ has not been defined, but it stands clarified that mere ‘expression of opinion’ shall not constitute the particulars as ‘material’. The materiality is a proposition to be established and backed with evidence and facts of the case. Supplying false information, in response to summons, will also be covered under provision of prosecution.

(iv) Non-payment of amount collected as service tax to the credit of Central Government for a period of more than six months.

Section 89(1) (d) of Finance Act, 1994, will apply only when the amount has been collected as service tax. This provision 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 due date of payment of Service Tax. It has been clarified that the said clause would be applicable only where the following conditions are satisfied:

• Amount is reflected in the invoice as Service tax;
• Payment is received for the said invoice; and
• Six months have lapsed from the date when the service provider was required to deposit the tax with respect to said invoice

The provision would not cover any non-payment of Service tax which is due but not paid unless all above conditions are met. In case of part payment, the offender would be punishable to the extent he has failed to deposit the tax due. The proportionate prosecution is more or less a subjective provision which is understood to have a basis none other than human decision.

Section 88 provide for liability under the Finance Act, 1994 to be the first charge over properties of the defaulter assesses for recovery of service tax dues subject to provisions of section 529A of the Companies Act, the Recovery of Debt due to Bank and Financial Institutions Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

The power to prosecute offenders rests with the Chief Commissioner of Central Excise. Prosecution would be generally initiated after final adjudication of an offence by the Tax Department. However, there is no legal bar against launch of prosecution without adjudication though prosecution would be done only with the previous sanction of the Chief Commissioner of Central Excise.

Power is complemented by responsibility and the provisions relating to prosecution are to be exercised only with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched on matters of mere technical or petty procedural lapses. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The objective of the prosecution provisions is mainly to develop a holistic compliance culture among the tax payers, and not to cause panic or distress and the application of the provisions should be in such spirit.

Offences under Section 89 where the amount exceeds fifty lakhs rupees shall be punishable with imprisonment for a term which may extend to three years. However, 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. However, where an offence specified in section 89(1), involves an amount of less than rupees ten lakhs, such cases cannot be considered for launching prosecution to save skin of small service providers and give them the benefit of ignorance to some extent. Except cases in the above circumstances, punishment would be with imprisonment for a term, which may extend upto one year. But, the monetary limit does not apply in the case of repeat offence as the bliss of ignorance can only be limited.

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 and in no case less than six months.

The fact that the accused has been convicted for the first time for an offence under this Chapter; or the fact that in any proceeding other than prosecution under this Act, 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; or that the accused was not the principal offender and was acting merely as a secondary party in the commission of offence; and even the age of the accused are not considered as special and adequate reasons for awarding a sentence of imprisonment of less than six months. Confiscation or penalty is not to interfere with other punishments.

Finance Act, 2011 had also amended section 83 of Finance Act, 1994 w.e.f. 8-4-2011 with a view to make applicable certain provisions of Central Excise Act, 1944 to service tax. Section 9AA of the Central Excise Act provides that where an offence has been committed by a company, in addition to the company, every person who was in charge of the company and responsible for conduct of the business, at the time when offence was committed, can be deemed guilty of an offence and can be proceeded against Section 9C of Central Excise Act, 1944, provides that in any prosecution for an offence, existence of culpable mental state shall be presumed by the court. Delinquency by the defaulter of service tax itself establishes his ill will and guilt. Therefore if the accused claims that he did not have guilty mind, it is for him to prove the same beyond reasonable doubt. Burden of proof regarding non existence of ‘mens rea’ is on the accused.

Prosecution proceedings can be initiated against any person in charge of the Company and responsible for conduct of the business, unless it is established that the offence was committed without the person’s knowledge or the person had exercised all due diligence to prevent the offence. Prosecution could to be launched against top management of the Company only where there is sufficient and clear evidence to show their direct involvement in the offence (Section 9AA of the Central Excise Act). The Court is also empowered to publish the name, place of business, etc. of person convicted under the Act. (Section 9B of Central Excise Act)

In case of a person who is less than 18 years of age, the Court, under certain circumstances, is empowered to release the accused on probation of good conduct u/s 360 of the Code of Criminal Procedure, 1973 or to release the offenders on probation under the Probation of Offenders Act, 1958. (Section 9B of the Central Excise Act) The imposition of penalty does not prevent infliction of other punishment on the offender. (Section 34A of the Central Excise Act)

Section 9C of the Central Excise Act, 1944, which is made applicable to the Finance Act, 1994, provides that in any prosecution for an offence, existence of culpable mental state shall be presumed by the Court. Therefore, each offence described in section 89(1) of the Finance Act, 1994, has an inherent mens rea. Delinquency by the defaulter of service tax itself establishes his 'guilt'. If the accused claims that he did not have guilty mind, the burden of proof is on the defaulter to prove beyond reasonable doubt.

Application of Section 562 of the Code of Criminal Procedure and of the Probation of Offenders Act, 1958 provide that the offences would be 'non-cognizable'. Non cognizable offences are those in which a police officer has no authority to arrest without a warrant.

W.E.F. 29-5-2012. Finance Act, 2012 has amended section 9A of the Central Excise Act, 1944 to provide that notwithstanding anything contained in the Code of Criminal Procedure, all offences under that Act, except an offence punishable for a term of imprisonment of three years or more under Section 9 shall be non-cognizable. The CCE is also empowered to compound the offences with regard to Service tax evasion on payment of the compounding amount as may be prescribed (section 9A of CEA). The compounding amount shall be as under:

S. No.	Offence	Compounding amount
(1)	(2)	(3)
1.	Offence specified under Section 89(1)(a) of the Act	Up to fifty per cent of the amount of Service tax evasion, subject to minimum of ten per cent. of amount of tax evaded.
2.	Offence specified under Section 89(1)(b) of the Act	Upto fifty per cent of the amount of CENVAT Credit wrongly taken or utilised, subject to minimum of ten per cent. of said amount.
3.	Offence specified under Section 89(1)(c) of the Act	Rupees fifty thousand for the first offence and to be increased by hundred per cent of this amount of each subsequent offence.
4.	Offence specified under Section 89(1)(d) of the Act	Upto twenty five per cent of the amount of Service tax not deposited subject to a minimum of two per cent. for each month for which the amount has not been so deposited

Provided that if a person has committed offences falling under more than one category specified above and where the amount of service tax evasion or amount of CENVAT Credit wrongly taken or utilised is the same for all such offences, the compounding amount, in such cases, shall be the amount as determined for the offence for which a higher compounding amount has been prescribed.

The compounding authority, if he is satisfied that any person who has made the application for compounding of offence under these rules has co-operated in the proceedings before him and has made full and true disclosure of facts relating to the case, grant such person, subject to such conditions as he may think fit to impose, immunity from prosecution for any offence under the Act, with respect to the case covered by the compounding of offence.

An immunity granted to a person under rule 6 shall stand withdrawn if such person fails to pay any sum specified in the order of compounding passed by the compounding authority within the time specified in the order or fails to comply with any other condition subject to which the immunity was granted and thereupon the provisions of the Act, shall apply as if no such immunity had been granted.

Settlement : Possible remedy and rescue from prosecution:

W.e.f. 29-05-2012, provisions of Settlement of Cases by enacting the Service Tax (Settlement of Cases) Rules 2012 have been implemented to enable assessees who have been issued show cause notices to get immunity from penalty and prosecution if they admit true liability and agree to co operate with revenue and act in good faith. Section 83 was amended to make Settlement Commission provisions applicable to service tax in line with the similar provisions contained in Sections 31, 32, 32A to 32P of the Central Excise Act, 1944. An assessee can apply in prescribed manner to the Settlement Commission for settlement of any case relating to him, before adjudication by disclosing and admitting full and true service tax liability which has not been disclosed earlier, with the manner in which such liability has been derived, the additional amount of excise duty accepted to be payable by him and such other particulars including the particulars of taxable services in respect of which he admits short levy on account of under-valuation, inapplicability of exemption notification or Cenvat credit [or otherwise] and evasion in any manner whatsoever. However, an application can only be made if a show cause notice has been issued to the defaulting assessee and the admitted tax liability in addition to what already stood paid before the show cause notice was issued, is at least rupees three lakhs and the admitted amount of tax is paid by the assessee with due interest and immunity from penalty and prosecution may be sought which the Settlement Commission has powers to grant if the defaulting assessee co-operates and acts in good faith. Needless to quote, Settlement of cases can be applied for in course of proceedings under adjudication also. However, cases which are pending before the Appellate Tribunal or any court or where an adjudication order already stands passed cannot be applied for settlement. Even in cases where any books of accounts, other documents have been seized, the assessee shall not be entitled to make an application for settlement, before the expiry of one hundred and eighty days from the date of the seizure.

Budget 2013-14 has aimed to steepen the prosecution ladder and proposed to make the following amendments to the prosecution provisions under Service tax law to pull the harnesses harder and establish the mandate of this indirect tax levy on a louder note.

In the case of an offence specified in clauses (a), (b) and (c) of sub-section (1) where the amount exceeds fifty lakhs rupees, punishment shall be for a term which may extend to three years, but shall not, in any case, be less than six months, but in the case of failure to pay service tax collected, to the credit of the Central Government within six months, an offence specified in section 89(1)(d), if such non-payment exceeds fifty lakhs rupees, punishment shall be imprisonment for a term which may extend upto seven years but not less than six months. In the case of any other offence, the punishment shall be imprisonment for a term which may extend to one year (Section 89)

The power to issue search warrant under Section 82 is at the level of Joint Commissioner and the execution of search warrant at the level of Superintendent. There is at present no power of arrest in case of the offences being non cognizable. Section 90 is proposed to be introduced to specify and differentiate cognizable offences from non-cognizable and bailable offences to discourage evasion further.

Section 91 is proposed to be introduced to provide for power to arrest; where Commissioner of Central Excise would be empowered to authorize any officer of Central Excise not below the rank of Superintendent of Central Excise, to arrest a person for specified offences particularly non-payment of collected service tax.

There is enough reason to hope that after all these changes are brought in, the prosecution and arrest provisions would be harsh enough to bring terror to the minds of the liable persons and ensure larger revenue and increase compliance to the trendiest tax in the country.