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TMI Blog2016 (9) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stered with the Service Tax Department (ST Department) and has been paying service tax since the year 2001. eBIZ describes the services rendered by it of booking of tour packages as that of a 'tour operator'. It has been filing its ST returns regularly. It is stated that in every half-yearly return filed by the Petitioner, exemption available to tour operators under Notification no. 26/2012-ST dated 20th June 2012 has been claimed. eBIZ states that the said returns have been duly verified by the ST Department. 3. It is stated that on 12th January 2007, the ST Department conducted a search in the premises of eBIZ as a result of which eBIZ was compelled to deposit service tax of ₹ 25,55,000/- and interest thereon amounting to ₹ 2,59,000/-. eBIZ further states that consequent upon the said search, the ST Department issued a show cause notice ('SCN') dated 3rd July 2007. Pursuant thereto, an adjudication order was passed and eBIZ paid a penalty amount of ₹ 6,37,500 without prejudice to its right to go in appeal against the said order. By an order dated 29th August 2012, the Commissioner, Service Tax (Appeals) set aside the order passed by the adjudicating aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed eBIZ to provide copies of balance sheet, trial balance and annual financial report for financial years ('FYs') 2010-2011 to 2014-2015 along with all the schedules, tax audit report (Form 3CD), TDS detail (Form 26AS), copies of ST-3 returns submitted for the years 2010-2011 to 2014-2015; value and payment of service tax (service wise/month wise) through cash and credit for the last five years and soft copies of the aforesaid records and documents. All the above information was submitted by eBIZ on 15th December 2015. It is pointed out that since they were audited every year, therefore, it was enclosing copy of balance sheet, P&L account along with all the schedules, tax reports, Form 3CD, TDS details, ST-3; and value and payment of service tax (service wise/month wise) only for the relevant year i.e., 2014-2015. The ST returns filed by eBIZ for all the aforementioned years have been enclosed with the petition. 7. It is pointed out that after conducting the verification audit of eBIZ in 2015, a notice dated 6th January 2016 was issued for examining the admissibility of the exemption claimed under Notification No.26/2012-ST dated 20th June 2012. However, before the records could b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as based only on the change of opinion and illegal search conducted in the premises of eBIZ. 11. It is on the above basis that the present writ petition was filed praying inter alia for a declaration that the action of the DGCEI was arbitrary, malicious and motivated and against the provisions of the FA and to declare the summons dated 19th and 21st January 2016 to be without authority of law. Proceedings before the Court 12. In this writ petition, the Court issued notice to the Respondents on 28th January 2016. At that stage, Mr. Malhan was still in custody and his bail application was to be taken up on 29th January 2016 by the ASJ. Mr. Atul Singh, Deputy Director, DGCEI and Mr. Sunil Joshi, SI-6, DGCEI were present along with the records, which were perused by the Court. This included a note proposing search in the premises of eBIZ and a separate note proposing the arrest of Mr. Malhan. In para 8 of the order passed by the Court on 28th January 2016, it was recorded as under: "8. It is not clear from these notes that prior to going in for the extreme measure of arresting the MD of the Petitioner, the DGCEI examined the entire previous records of the Petitioner and in particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charging their service tax liability properly". When the Court enquired whether the DGCEI had verified such information with the Commissionerate of Service Tax in whose jurisdiction the eBIZ was functioning and had been assessed and paying service tax, Mr. Satish Aggarwala, learned counsel for the DGCEI stated, on instructions, that DGCEI never contacted the Commissionerate of Service Tax at any stage prior to the search, seizure and arrest of Mr. Malhan. He added that the DGCEI was not obliged to do so. When asked what was the 'information' received, Mr. Aggarwala stated that this had been kept in another file in a sealed cover in the custody of Mr. Vivek Pandey, Joint Director, DGCEI. In the circumstances, the Court passed an order on 2nd May 2016, directing Mr. Pandey to remain present in the Court on the next date along with the file which carried the information on the basis of which the decision was taken to arrest Mr. Malhan. 16. In the meanwhile, since the counter affidavit had been filed by the DGCEI and the rejoinder thereto filed by the Petitioner, further permission at the request of Mr. Aggarwala was granted for the DGCEI to file a further short affidavit which would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that eBIZ has obtained service tax registration in respect of following services: i. Tour operator service. ii. Online information and database access or retrieval. 21. It is stated that the Central Excise & Service, Audit-II Commissionerate, Ghaziabad came into existence with effect from 15th October 2014. It is pointed out that the Assessees are selected for audit from time to time as per audit norms specified in the Audit Manual. It is stated that in the year 20142015, for the first time, the Audit Commissionerate, Ghaziabad conducted an audit of eBIZ in terms of Rule 5A of the Service Tax Rules, 1994 ('ST Rules'). It is stated that in response to the letter sent to eBIZ informing them about the scheduled audit and requesting them to produce the relevant documents, eBIZ submitted the balance sheet for FY 2013-2014, half-yearly service tax returns for the same year, registration certificate in Form ST-2, the statement of CENVAT credit etc. Thereafter, the audit team visited the business premises of eBIZ in the months of November and December and conducted the service tax audit. The list of financial records produced before the audit team has also been set out in the counter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such service was booked under the head 'Hotel Holiday accommodation' by eBIZ in their financial accounts and appropriate service tax based on such claims was paid and also shown in the statutory returns submitted to the Department. In that view of the matter, there was no reason for the audit team to challenge the admissibility of the exemption availed by the Petitioner under Notification No.26/2012-ST. 25. Para 11 of the counter affidavit of the ST Department mentions eight audit objections of which five were accepted by eBIZ and these five involved service tax to the tune of ₹ 15.68 lakh. This was deposited by eBIZ on the spot. The remaining objections were not accepted and an SCN dated 2nd November 2015 was issued for recovery of service tax of ₹ 5,33,541/- and the said SCN is stated to be pending adjudication. 26. Respondent No. 3 further states that eBIZ was again selected for audit in 2014-2015 and again asked by a letter dated 13th October 2015 issued by the audit team to submit the relevant documents/records. After some of the information/records were submitted on 15th December 2015, the audit of the Unit was initiated but the same could not be completed. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of the records/documents produced by the party and the exemption under Notification No. 26/2012-ST was found to be admissible to the Petitioner, on the basis of audit of their records produced before the audit". The Audit Department has nothing to say about the SCN issued by the jurisdictional Service Tax Commissionerate, which has been referred to in para 9 of the writ petition and that it pertained to some other issue and the same is not related to the issue of admissibility of exemption under Notification No.26/2012-ST. It is pointed out that under Section 70(1) of the FA, the Assessee has to declare the true and correct nature of the services provided and has to pay service tax due thereon. It is stated that fresh proceedings for recovery of service tax for the same period are warranted, if the issues of classification of services declared by the Assessee are found to be false or different on the basis of facts not disclosed earlier in any of the statutory record by the party. Counter affidavits of Respondent Nos. 1 and 2 30. As earlier mentioned, two separate identically worded counter affidavits have been filed by Respondent Nos. 1 and 2 respectively. The same officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 was written by Dr. Puneeta Bedi, Deputy Director, DGCEI, to Mr. Pawan Malhan, MD of the Petitioner to submit the details requested therein. The abovesaid letter dated 8th April 2016 has been placed on record and it is noted that the following details had been requested by the DGCEI: "i. Name, address & code number of all the associates who availed Education Package, Holiday Accommodation Package-I & II from October 2011 to till date. ii. List of associates who have not availed Holiday Accommodation Package-I & II from Oct 2011 to till date. iii. List of associates who availed Holiday Accommodation Package- I & II from Oct 2011 to till date. iv. List of associates who cancelled their request or who did not check in hotel after submitting request of availment of Holiday Accommodation Package-I & II from Oct 2011 to till date. v. Ledgers of all associates individually who availed Holiday Accommodation Package-I & II from Oct 2011 to till date." 35. It is pointed out in the rejoinder affidavit that the MD of eBIZ and its officers had appeared whenever they were summoned by the DGCEI and also submitted 'original documents' as sought by the DGCEI in respect of all the associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 123 cartons to the office of the DGCEI. 39. The decision to arrest the MD of the Petitioner is sought to be justified by the DGCEI by referring to Section 89 (1) (d) read with Section 90 (1) and 91 (1) of the FA. It is further asserted that in order to satisfy that there has been a commission of the offence of collecting an amount of service tax and the failure to deposit the amount so collected to the credit of the Central Government beyond six months from the date on which such payment is due in terms of Section 89 (1) (d) of the FA, there is no requirement for issuance of SCN as contemplated under Section 73 (1) and 73A (3) of the FA. Submissions of counsel for the Petitioner 40. Mr. J.K. Mittal, learned counsel for the Petitioner, made the following submissions: (i) The search conducted by the DGCEI was arbitrary and in complete breach of the provisions of law inasmuch as it was authorised without placing any material on record and without any application of mind and formation of an 'opinion' which are held to be essential ingredients for authorising search under Section 82 of the FA and arrest under Section 91 of the FA. (ii) The DGCEI, without issuing any SCN, has all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h January 2014, the said amount, which had been deposited under protest by eBIZ, had not been refunded to it. (vii) The arrest memo also did not mention that a second search had taken place on 4th October 2012 of the premises of eBIZ by the Anti-Evasion Wing of the Noida Commissionerate. However, till date no demand has been raised as a result of the said search. (viii) The ST Department has in its counter affidavit admitted to the fact that for the past 10 years it had been regularly conducting audit of eBIZ's books of accounts and records while deputing its officers in exercise of the power under Rule 5A of the Service Tax Rules, 1994. While there was no evidence regarding any tax evasion, the discrepancies pointed out were immediately rectified. Throughout, eBIZ's claim for entitlement of exemption under Notification 29/2006-ST was not disputed. In other words, even during the course of the audit, the ST Department acknowledged that eBIZ was availing of 90% abatement under the said notification. (ix) In every half-yearly service tax return, copies of which have been placed on record, eBIZ disclosed the full receipt of the charges collected for hotel bookings as a 'tour ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of counsel for the Respondents 41. Mr. Satish Aggarwala, learned counsel of the Respondents made the following submissions: (i) eBIZ, in order to evade the leviable service tax at the full rate, rechristened its education package as 'eBIZ Holiday Accommodation Packages I and II' and fraudulently claimed exemption at 90% available to 'tour operators' when it was not one. (ii) The Competent Authority had reasonable grounds of belief, on the basis of a thorough examination of the material on file which included the specific information as provided by an informer, that eBIZ was only providing online coaching service and not 'tour operating service'. It is submitted that the decision to go in for a search operation was not arbitrary. The information received is developed by a senior officer and then discussed with superior officers. It is only after a brainstorming exercise by the officers on the information received that the decision was taken. Accordingly, authorisation to search the premises of eBIZ was issued following the due procedure of law as laid down under Section 82 of the FA. Reliance was placed on the decision of the Madras High Court in Chitra Constructio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar/routine audit cannot be construed as immunity against any other action which can be taken on the basis of "some specific information/inputs regarding evasion of tax." (vi) Under Section 73 of FA, the ST Department could make enquiries covering a period of past five years in the event the Assessee had not paid service tax by reason of 'fraud' or 'collusion' or 'wilful misstatement' or 'suppression of facts' or 'contravention of any of the provisions of this Chapter or of the rules made thereunder with an intent to evade payment of service tax'. (vii) While the DGCEI did not contact the Jurisdictional Service Tax or Audit Commissionerate at any stage prior to the search, seizure and arrest of Mr. Malhan since "any such action would lead to the threat to the life of the informer", however, after the case was booked against eBIZ, both the Jurisdictional Service Tax and Audit Commissionerate were contacted to provide various details. (viii) Referring to the note sheets on file, it was submitted that the impugned action of the DGCEI was justified. As regards the past searches undertaken by the officers of Anti-Evasion, Jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guish the decisions in Mahesh Chandra v. Regional Manager, U.P. Financial Corporation (supra) Uniworth Textiles Ltd. v CCE, Raipur (supra) and Parashuram Pottery Works Co. Ltd. v Income-tax Officer and Calcutta Discount Company v ITO (supra). Analysis of the relevant provisions 42. The Court proposes to begin the analysis of the above submissions by first referring to the relevant statutory provisions. For the purposes of the present case, a reference is required to be made to the relevant provisions of the FA. Section 65 (105) (n) of the FA defines 'taxable service' as 'any service provided or to be provided to any person by a 'tour operator' in relation to a tour'. Section 65B (44) defines 'service' as any activity carried out by a person for another for consideration, and includes a declared service. It then proceeds to set out the negative list of those activities that are not covered by the definition. Section 65 (115) defines ' tour operator' thus: "tour Operator" means any person engaged in the business of planning, scheduling, organising or arranging tours (which may include arrangements for accommodation, sightseeing or other similar s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-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 subsection. 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 service tax due un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s wrongly availing exemption as a 'tour operator' or evading service tax, it was open to the said AO to require such person to produce documents and other evidence 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. 45. In a decision rendered today in MakeMy Trip (India) Pvt. Ltd. v. Union of India (decision dated 1st September 2016 in W.P. (C) No. 521 of 2016), this Court has while analysing Sections 72 and 73 of the FA held as under: "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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment 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 sub-section (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 subsection (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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of fraud, collusion, or any wilful misstatement or suppression of facts. In such instances, the Commissioner may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him. 51. The power of the Commissioner to order a search has to be read together with Rule 5 A (1) of the Service Tax Rules 1994 which permits the officer authorised to carry out the search to "have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue." 52. Thus the audit of the accounts can be undertaken by the ST Department but a 'special audit' can be undertaken only by the professionals that are mentioned in Section 72 A of the FA. The above provisions are being referred to in the context of DGCEI seeking to make out a case that scope of the audit carried out on two occasions of the records and accounts of eBIZ by the ST Department was different from the scope of the search carried out by DGCEI. It is sought to be suggested that the audit party accepted at face value the information provided by eBIZ without inquiring f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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." 55. In interpreting the above provision, this Court in MakeMy Trip (India) Pvt. Ltd. v. Union of India (supra) held thus: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 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, with 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mprisonment 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 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 determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (ii) of sub-section (1) of Section 89, he may, by general or special 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 twentyfour 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." 60. In MakeMy Trip (India) Pvt. Ltd. v. Union of India (supra) this Court analysed the above provisions and held: "69. Section 90 (1) makes it clear that only an offence which is punishable in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 arrive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses 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 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 50 lakhs and thereby had committed a cognizable offence would be putting the cart before the horse. This is all the more so because 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 large. Arrest at the investigation stage should be resorted to only when it is unavoidable." (emphasis supplied)" Constitutional safeguards 61. 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. This Court in MakeMy Trip (India) Pvt. Ltd. v. Union of India (supra) held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pay sum of ₹ 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsection (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself is not reduced in writing. It is typed. It does not disclose any specific information other than those already set out in the notes prepared by the DGCEI. 64. The note dated 18th January 2016 suggests that 90% rebate is claimed by eBIZ by describing itself as a 'tour operator'. There is a discussion on this wrongful claim of rebate in terms of the Notification No. 26/2012. It proceeds to compute the service tax that would have been payable if the rebate was not availed of and then concludes that there is an evasion of service tax to that extent. Significantly, the note does not acknowledge that eBIZ is regularly filing service tax returns and paying service tax on that basis. There is no mention of the fact that there had been two earlier searches in the premises of eBIZ by the ST Department. Admittedly, at this stage no attempt was made by the DGCEI to even contact the ST Department. That happened later, after the case against eBIZ had been 'booked'. 65. Another note was prepared on 20th January 2016 proposing the arrest of Mr. Malhan. This note again sets out the position of the DGCEI that eBIZ could not have availed of 90% rebate in terms of the above Notificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 2013 which sets out the "Guidelines for arrest and bail in relation to offences punishable under the Finance Act, 1994". 67. It cannot be presumed that merely because there is a reference to the enlarged monetary limit in terms of the circular dated 23rd October 2015, the Officer proposing the arrest and the officers who approved it consciously applied their minds to the requirements of the abovementioned circular dated 17th September 2013. Importantly, there is no determination whether there was any evasion of duty or possibility of evidence being tampered or witnesses being influenced or non-cooperation in the investigation. The above prescriptions spelt out in para 2.2 of the said circular dated 17th September 2013 were not even adverted to. Importantly, for the purposes of deciding whether somebody is a habitual offender or is likely to evade service tax, some enquiry has to be made with the ST Department. There is no other way with the DGCEI to determine if the persons they are dealing with satisfy the profile of the person who should be arrested. 68. In this context, the following passages in the decision of this Court in MakeMy Trip (India) Pvt. Ltd. v. Union of India ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 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-cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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...." 69. Significantly, in the present case, no attempt was made by the DGCEI even to talk to the ST Department before proceeding to search the premises of eBIZ and soon thereafter arrest Mr. Malhan. 70. The explanation offered in Court by Mr. Satish Aggarwala, on instructions, was that these Departments have to act 'secretly' to the extent that the DGCEI will not even tell the ST Department of their proposed actions. To the Court, it seems unacceptable that with the guidelines issued for launching of prosecution and procedure for arrest, the DGCEI or any other agency other than the ST Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is a case of overkill by the officers of the DGCEI. The existence of powers is one thing and its exercise, another. 74. In the circumstances outlined earlier, when the MD of a company is in judicial custody, the offer made to pay the alleged arrears of service tax dues of such company even without an SCN can hardly be characterised as 'voluntary'. The loss of liberty, and more disconcertingly, the loss of reputation, is bound to compel even the most rational person to succumb to the extreme pressure that such circumstance subjects him to. In more or less similar circumstances, this Court in MakeMy Trip (India) Pvt. Ltd. v. Union of India (supra) held: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law that eBIZ should maintain the information in a particular format. Mr. Aggarwala was unable to point out any provision in the FA or the ST Rules that required eBIZ to maintain information in a particular format. 78. It appears to the Court after carefully considering the affidavits on record that the conduct of the officers of the DGCEI in refusing to receive the documents tendered to them and terming the conduct of eBIZ to be noncooperative is not justified in the facts and circumstances. At the same time, the Court would reiterate the direction that eBIZ and its officers including Mr. Malhan will continue to co-operate with the DGCEI in carrying the investigations to their logical end. Summary of Conclusions 79. To summarise the conclusions in this judgment: (i) The scheme of the provisions of the Finance Act 1994 (FA), does 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 pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vincing justification for resorting to that extreme a measure. (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 present case, 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 of Mr. Malhan 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 the present case. The DGCEI cannot possibly come to a conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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