By TIOL News Service

NEW DELHI, SEPT 01, 2016: THE Delhi High Court has decided the case today.

And it went into the root of the issue and held -

(a) 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 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.

(b) 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 73 A of the FA.

(c) 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 Rs. 50 lakhs (now enhanced to Rs. 1 crore).

(d) A possible exception could be where a person is shown to be a habitual evader of service tax. Such person would have to be one who has not filed a service tax return for a continuous length of time, who has a history of repeated defaults for which there have been fines, penalties imposed and prosecutions launched etc. That history can be gleaned only from past records of the ST Department. In such instances, it might be possible to justify resorting to the coercive provisions straightaway, but then the notes on file must offer a convincing justification for resorting to that extreme a measure.

(e) 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 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.

(f) 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.

(g) 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 conclusion that an Assessee is a habitual offender if there is no discussion by the DGCEI with the ST Department regarding the history of such Assessee. Assuming that for whatever reasons if the DGCEI does not talk to ST Department, certainly it needs to access the service tax record of such Assessee. Without even requisitioning that record, it could not have been possible for the DGCEI to arrive at a reasonable conclusion whether there was a deliberate attempt of evading payment of service tax.

(h) The search undertaken by the DGCEI of the premises of eBIZ on 19th January 2016 was illegal. For the exercise of powers of search under Section 82 of the FA, (i) 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, and (ii) the note preceding the search of a premises has to specify the above requirement of the law. The search in the present case was in violation of Section 82 of the FA. It is unconstitutional and legally unsustainable.

(i) 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.

(j) The payment of Rs. 17 crores by eBIZ was not 'voluntary' but under coercion and duress and is required to be returned to eBIZ by the DGCEI forthwith and in any event not later than four weeks from today. It is clarified that this will not in any manner affect the bail already granted to Mr. Malhan. Those proceedings will be taken to their logical end.

(k) 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 non- cooperative 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.

The interim directions issued on 28th January 2016 were made absolute. It is further directed that the DGCEI will refund to eBIZ forthwith the sum of Rs 17 crores deposited by it towards alleged dues of service tax and in any event not later than four weeks; that any delay in refund beyond the said period will make the DGCEI liable to pay simple interest at 6 % per annum on the said amount from the date on which it becomes due in terms of this order till the date of payment; that the refund will not affect the bail granted to Mr. Malhan.

(See 2016-TIOL-1958-HC-DEL-ST)