APRIL 09, 2015

By Joseph Prabakar

It was interesting to read a news item in DDT 2574 yesterday about the arrest of a consultant who, instead of paying service tax for and on behalf of his client, had pocketed the tax. It was shocking to read that the department had initiated proceedings against the consultant under Section 89 of the Finance Act, 1994 and could get the consultant arrested under Section 89 (1) (d) of the Finance Act, 1994.

The facts are simple and straightforward. There is a service provider who renders services to his customers and who is liable to pay service tax to the Government. This service provider engages a consultant to make the service tax payment through electronic mode. In the process, the said service provider pays the amount of service tax to the consultant which amount is in turn to be deposited to the Government by the consultant. However, the consultant does not pay the entire amount but pays only a part of the service tax amount to the Government thereby pocketing the difference of service tax. Apparently, this has been done by the consultant without the knowledge of the service provider. Net result is that the Government did not get the service tax which ought to have been paid by the service provider to the Government. In other words, the service provider has not paid the service tax to the Government. Now in this situation, the question is whether the department can proceed against the consultantunder Section 89 of the Finance act 1994.

In this regard the relevant portion of Section 89 is reproduced below.

"Section 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 utilises 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 term 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 term of less than six months;

(iii) in the case of any other offences, with imprisonment for a term, which may extend to one year.... "

On a plain reading of the above, it may be noted that sub-section 1 of Section 89 of the Finance Act, 1994, contains four clauses. On an analysis of each of the clauses, the following points would emerge.

The term "knowingly evades payment of service tax" occurring in Clause (a) of Sub-Section 1 of Section 89 of the Finance Act, 1994, would refer to a service provider. Similarly, the term "avails and utilises credit of taxes or duty without actual receipt of taxable service or excisable goods" occurring in Clause (b) of Sub-Section 1 of Section 89 of the Finance Act, 1994, would again refer to a service provider. Also, the term "maintains false books of account or fails to supply any information which he is required to supply under this Chapter" occurring in Clause (c) of Sub-Section 1 of Section 89 of the Finance Act, 1994, would refer to a service provider only.

Therefore it is simple common sense that the term "collects any amount as service tax but fails to pay the amount so collected to the credit of the Central Government" occurring in Clause (d) of Sub-Section 1 of Section 89 of the Finance Act, 1994, would obviously refer to a service provider only.

In other words, the term "collects any amount as service tax but fails to pay the amount so collected to the credit of the Central Government" occurring in Clause (d) of Sub-Section 1 of Section 89 of the Finance Act, 1994, should be read in the context as follows.

"Service provider who collects any amount as service tax from service receivers or customers but fails to pay the amount so collected to the credit of the Central Government".

If so read, then by no stretch of imagination Section 89 of the Finance Act, 1994, could refer to a person other than a service provider who is liable to get registered under the Finance Act, 1994 or who is already registered under the Finance Act, 1994. Hence, it is incomprehensible as to how the department could be so ignorant and negligent to invoke Section 89 (1) (d)of the Finance Act, 1994 and get a person arrested under this provision.

Of course, the Government would have recourse to filing a complaint against the consultant and there are number of provisions under the Indian Penal Code to deal with such offences but certainly Finance Act, 1994 will not apply to the case on hand.

On the hasty action initiated by the Department, I am only reminded of the observations made by the Supreme Court in the three Judge Bench decision in the case of Union of India Vs K K Dhawan reported as 2002-TIOL-441-SC-MISC, which is reproduced below.

"28. Certainly, therefore, the officer who exercises judicial or quasi-judicial powers acts negligently or recklessly or in order to confer undue favour on a person is not acting as a Judge. Accordingly, the contention of the respondent has to be rejected. It is important to bear in mind that in the present case, we are not concerned with the correctness or legality of the decision of the respondent but the conduct of the respondent in discharge of his duties as an officer. The legality of the orders with reference to the nine assessments may be questioned in appeal or revision under the Act. But we have no doubt in our mind that the Government is not precluded from taking the disciplinary action for violation of the Conduct Rules. Thus, we conclude that the disciplinary action can be taken in the following cases:

(i) Where the officer had acted in a manner as would reflect on his reputation for integrity or good faith or devotion to duty;

(ii) if there is prima facie material to show recklessness or misconduct in the discharge of his duty;

(iii) if he has acted in a manner which is unbecoming of a Government servant;

(iv) if he had acted negligently or that he omitted the prescribed conditions which are essential for the exercise of the statutory powers;

(v) ............

(vi) ...................".

(Author is Chennai based Advocate)