APRIL 24, 2019

By Vijay Kumar

If, even before the GST regime is put on tracks, someone can exploit the law, without the actual purchase or sale of goods or hiring or rendering of services…

THIS week, let us take a look at a hugely important judgement of the Telangana High Court delivered last week on 18.04.2019.

These are writ petitions in which the facts are similar to a large extent:

1. The petitioner is the Managing Director of a Company. A search was conducted in the premises of the Company by the officials of the GST Commissionerate on 27.02.2019 and a summon dated 27.02.2019 was issued to the petitioner under Section70 of the CGST Act calling upon the petitioner to appear on 28.02.2019, to give evidence truthfully on the matters concerning the enquiry. According to the petitioner, he was traveling on an urgent work on 27.02.2019 and hence, he made a request to grant time for summon dated 01.03.2019; a second summon dated 01.03.2019 was issued directing the petitioner to appear on 05.03.2019. The petitioner admittedly did not appear on 05.03.2019, but gave a letter seeking two weeks time. Therefore, a third summon dated 05.03.2019 was issued calling upon the petitioner to appear for an enquiry on 07.03.2019 with a threat that prosecution would be launched if he failed to do so.

2. The petitioner is the Managing Director of another Public Limited Company A search was conducted in the premises of the said company on 27.02.2019 and a summon under Section 70 of the Act was issued on 27.02.2019 calling upon the petitioner to appear on 27.02.2019 at 5.00 p.m. According to the petitioner, he appeared in the office of the Superintendent (Anti Evasion) at 5.00 p.m. on 27.02.2019 and he was questioned till about 8.00 p.m. Thereafter, he was asked to come back at 9.00 p.m. and it is the case of the petitioner that the enquiry which started at 9.00 p.m. on 27.02.2019 continued till 4.00 a.m. on 28.02.2019. Though he was directed to appear again in the afternoon of 28.02.2019, he could not appear as his health suffered a setback. Therefore, the petitioner claims to have given a letter dated 28.02.2019 seeking time till 04.03.2019. Even according to the petitioner, he did not appear on 04.03.2019, but came up with the writ petition challenging the summon issued on 27.02.2019.

3. The petitioner is a Director of a Private Limited Company, A search of the premises of the company was conducted on 27.02.2019 and a summon dated 27.02.2019 was served. According to the petitioner, the staff of the company appeared for the enquiry and cooperated with the authorities. However, the petitioner claims to have found, after returning to Hyderabad on 07.03.2019, the summon dated 27.02.2019 pasted on the door of his residence.

4. The petitioner is one of the Directors of a Public Limited Company. A search was conducted in the premises of the said company by the officials of the GST Commissionerate on 27.02.2019 and a summon dated 27.02.2019 was issued to him under Section 70 of the Act. According to the petitioner, he appeared in response to the summons on 27.02.2019, but was made to wait till 1.30 p.m. Thereafter, he was questioned from 6.00 p.m. onwards on 27.02.2019 till 3.00 a.m. on 28.02.2019. The petitioner claims that he was harassed without food or water and was coerced to sign a statement at 3.00 a.m. on 28.02.2019, though the date was recorded in the statement as 27.02.2019. This led to the petitioner suffering a setback in his health. According to the petitioner he was admitted in the hospital on 28.02.2019, but he was again served with a summon calling upon him to appear for an enquiry on 01.03.2019. The petitioner claims to have sent a reply seeking time on the ground of ill health. According to the petitioner, the officials of the GST Commissionerate stormed the hospital on 06.03.2019 and threatened him with arrest and prosecution if he did not appear for investigation.

5. A Private Limited Company and three Directors of the said Company have come up with this writ petition. According to the petitioners, a search was conducted on 27.02.2019. The petitioners claim that thereafter a summon dated 07.03.2019 was served on one of the clerical staff of the petitioner Company at about 7.00 p.m. calling upon the petitioner to appear for an enquiry at 4.00 p.m.

6. This writ petition is filed by a lady, who claims to be a sleeping partner (her husband is the only other partner) in a Partnership Firm. According to the petitioner, her husband is the Managing Partner of the Firm. On 27.02.2019 a search of the residential premises of the petitioner was conducted by the officials of the GST Commissionerate, on the basis of a search warrant. After the search, an undated summon under Section 70 of the Act was served calling upon the petitioner to appear on 27.02.2019 at 17.00 hours. According to the petitioner, she appeared for the enquiry and was detained under the guise of investigation till 1.30 a.m. on 28.02.2019 without providing food or water. The petitioner claims that a statement was forcibly extracted from her at 1.00 a.m. on 28.02.2019, with the date 27.02.2019. Thereafter, she was allowed to go at 2.00 a.m. on 28.02.2019. According to the petitioner, a second summon was issued on 28.02.2019 asking her to appear at 3.30 p.m. The petitioner duly complied with the same and was again detained till 2.00 a.m. on the next day. During this period, the petitioner's husband was out of station and as soon as he returned to Hyderabad and appeared before the authorities, he was arrested and remanded to judicial custody. Therefore, apprehending that the same fate would fall on her, the petitioner has come up with the above writ petition, when a third summon dated 06.03.2019 was issued calling upon her to appear for the enquiry at 6.00 p.m. on 06.03.2019.

7. The Chief Financial Officer of a company is the petitioner. He was issued summons for the appearance of the petitioner on 28.02.2019; His plea is that when he appeared at 2.00 p.m., on 28.02.2019, he was detained till 6.30 a.m. on 01.03.2019; that during this period he was made to sign a statement under coercion; that on 05.03.2019, the petitioner sent a letter retracting from the statement; that on 11.03.2019 he received summons for appearance on 12.03.2019; that fearing ill-treatment, he absconded himself; that again he received summons on 15.03.2019 for appearance on 18.03.2019; that the officers of the respondents are harassing all the employees of the company; that through one of the Directors of the Company, the petitioner was again summoned to appear on 01.04.2019 and that repeated summoning and the extraction of statements under threat of arrest are contrary to law.

8. The Managing Director of a company, has come up with writ petition contending that a search was conducted in the godown of the company on 02.04.2019; that he was served with a summon on the spot on 02.04.2019 and was whisked away in the vehicle brought by the 3rd respondent, to his office; that in the office a statement was recorded and he was released at 6.00 p.m. on 03.04.2019, after 26 hours; that a statement was extracted under coercion to the effect as though the petitioner created fake invoices in the names of five proprietary concerns run by him and through such fake invoices, without actual movement of goods, ITC claims were passed on; that the petitioner was again summoned to appear on 05.04.2019; and that since he apprehended arrest, he was compelled to file the writ petition.

Contentions on the side of the petitioners:

(i) that the maximum punishment that could be imposed under Section 132 of the CGST Act, 2017 is only an imprisonment for 5 years; a person cannot be arrested so long as such person complies and continues to comply with the notice for his appearance;

(ii) that though Section 41A (3) of the Code confers discretion upon the police officer to arrest a person despite such person complying with the notice, the same has to be done only for reasons to be recorded;

(iii) that since it is always open to the respondents to scrutinise the books of accounts and pass orders of assessment reversing the input tax credits availed by the dealers under the Act, there is no necessity to arrest the petitioners, especially when no adjudication has taken place under the Act;

(iv) that since the officers under the CGST Act, 2017 are not police officers and they are not entitled to seek custody of the persons arrested under the Act, the arrested person will only be remanded to judicial custody and hence there is no chance for the officers to conduct any enquiry with him after arrest.

(v) that the power to order arrest, conferred upon the Commissioner under Section 69 (1) of the Act is available only in cases where he has reason to believe;

(vi) that since the power under section 69(1) is made, under sub- Section (3), subject to the provisions of the Cr.P.C., the phrase "reason to believe" is to be understood in the context of how the said phrase is defined in Section 26 of the Indian Penal Code; and

(vii) that in any case, all the offences under the Act are compoundable under section 138 of the CGST Act and hence arrest is wholly unnecessary.

Contentions of the Additional Solicitor General:

(1) that Sections 41 and 41-A of Cr.P.C. will have no application to the cases on hand, since the stage at which the provisions of the Cr.P.C. 1973 would apply, is only after arrest, in view of Section 69(3),

(2) that the summons for appearance issued under Section 70 and the authorization for arrest issued under Section 69 (1) of the CGST Act 2017 do not come within the purview of the expression "Criminal Proceedings", since it is only after the launch of prosecution that criminal proceedings would commence,

(3) that persons like the petitioners herein are not described as accused anywhere in the CGST Act, 2017 so as to enable them to invoke the protection under Article 20 (3) of the Constitution of India,

(4) that the Commissioner exercising power under Section 69(1) is not a police officer,

(5) that Section 132 (1) lists out about 12 different types of offences under Clauses (a) to (l),

(6) that 5 out of these 12 offences are cognizable and non-bailable in view of Section 132(5) of CGST Act,

(7) that under Section 136 of the CGST Act, a statement made and signed by a person on appearance in response to any summons issued under Section 70 of the Act shall be relevant, to the extent indicated therein, and

(8) that the petitioners are not entitled to convert the writ Court into a Court of anticipatory bail.

Broad propositions of law: The High Court noted the following broad propositions of Law

(1) that officers under various tax laws such as the Central Excise Act etc., are not police officers to whom Section 25 of the Indian Evidence Act, 1872 would apply,

(2) that the power conferred upon the officers appointed under various tax enactments for search and arrest are actually intended to aid and support their main function of levy and collection of taxes and duties,

(3) that a person against whom an enquiry is undertaken under the relevant provisions of the tax laws, does not automatically become a person accused of an offence, until prosecution is launched,

(4) that the statements made by persons in the course of enquiries under the tax laws, cannot be equated to statements made by persons accused of an offence, and

(5) that as a consequence, there is no protection for such persons under Article 20(3) of the Constitution of India [ No person accused of any offence shall be compelled to be a witness against himself], as the persons summoned for enquiry are not persons accused of any offence within the meaning of Article 20(3) of the Constitution of India.

Anticipatory Bail in GST - Whether Article 226 can be used as a substitute to section 438,Cr.P.C

What the petitioners seek in these cases is a direction to the respondents not to arrest them in exercise of the power conferred by Section 69(1) of the CGST Act, 2017. This in essence, is akin to a prayer for anticipatory bail.

Since no first information report gets registered before the power of arrest under Section 69(1) of the CGST Act, 2017 is invoked, the petitioners cannot invoke Section 438 of the Code of Criminal Procedure for anticipatory bail. Therefore, the only way they can seek protection against pre-trial arrest (actually pre-prosecution arrest) is to invoke the jurisdiction of this Court under Article 226 of the Constitution of India.

Incongruities in section 69 and 132, CGST Act: The High Court noticed some incongruities in the CGST Act:

Under sub-Section (1) of Section 69, the power to order arrest is available only in cases where the Commissioner has reasons to believe that a person has committed any offence specified in clauses (a) to (d) of sub-Section (1) of Section 132 CGST Act, 2017. The offences specified in clauses (a) to (d) of sub-Section (1) of Section 132 CGST Act, 2017 are made cognizable and non- bailable under Section 132(5) of the CGST Act, 2017.

Therefore, it is clear from sub-Section (1) of Section 69 of the CGST Act that the power of the Commissioner to order the arrest of a person, can be exercised only in cases where such a person is believed to have committed a cognizable and non- bailable offence. The offences specified in clauses (a) to (d) of sub- Section (1) of Section 132 are declared cognizable and non-bailable under sub-Section (5) of Section 132 CGST Act, 2017. All the other offences specified in clauses (f) to (l) of sub-Section (1) of Section 132 of the CGST, 2017 Act are declared as non-cognizable and bailable under sub-Section (4) of Section 132 of CGST Act, 2017.

But the incongruity between Section 69(1) and sub-Sections (4) and (5) of Section 132 of CGST Act, 2017 is that when the very power to order arrest under Section 69(1) is confined only to cognizable and non-bailable offences, we do not know how an order for arrest can be passed under Section 69(1) in respect of offences which are declared non-cognizable and bailable under sub-Section (4) of Section 132 of CGST Act.

But, interestingly, clauses (a) and (b) of sub-Section (3) of Section 69 of the CGST Act, 2017 deal in entirety only with cases of persons arrested for the offences which are indicated as non- cognizable and bailable.

In other words, even though Section 69(1) of the CGST Act, 2017 does not confer any power upon the Commissioner to order the arrest of a person, who has committed an offence which is non-cognizable and bailable, sub-Section (3) of Section 69 of the CGST Act, 2017 deals with the grant of bail, remand to custody and the procedure for grant of bail to a person accused of the commission of non-cognizable and bailable offences. Thus, there is some incongruity between sub-Sections (1) and (3) of Section 69 read with section 132 of the CGST Act, 2017.

The Board should immediately take cognizance of this incongruity pointed by the High Court and take steps to amend the law as soon as possible.

Anticipatory Bail?

In essence, the main allegation of the Department against the petitioners is that they are guilty of circular trading by claiming input tax credit on materials never purchased and passing on such input tax credit to companies to whom they never sold any goods. The Department has estimated that fake GST invoices were issued to the total value of about Rs.1,289 crores and the benefit of wrongful ITC passed on by the petitioners is to the tune of about Rs.225 crores.

The contention of the petitioners is that the CGST Act, 2017 prescribes a procedure for assessment even in cases where the information furnished in the returns is found to have discrepancies and that unless a summary assessment or special audit is conducted determining the liability, no offence can be made out under the Act. Therefore, it is their contention that even a prosecution cannot be launched without an assessment and that therefore, there is no question of any arrest.

But, to say that a prosecution can be launched only after the completion of the assessment, goes contrary to Section 132 of the CGST Act, 2017. The list of offences included in sub-Section (1) of Section 132 of CGST Act, 2017 have no co-relation to assessment. Issue of invoices or bills without supply of goods and the availing of ITC by using such invoices or bills, are made offences under clauses (b) and (c) of sub-Section (1) of Section 132 of the CGST Act. The prosecutions for these offences do not depend upon the completion of assessment. Therefore, the argument that there cannot be an arrest even before adjudication or assessment, is not correct.

Why arrest a person for the alleged commission of an offence which is compoundable ?

The High Court answered:

(i) Any offence under CGST Act, 2017 is compoundable both before and after the institution of prosecution. This is in view of the substantial part of sub-section (1) of Section 138 of the CGST Act, 2017. But, the petitioners have not offered to compound the offence, though compounding is permissible even before the institution of prosecution.

(ii) Under the third proviso to sub-Section (1) of 138, compounding can be allowed only after making payment of tax, interest and penalty involved in such cases. Today, the wrongful ITC allegedly passed on by the petitioners, according to the Department is to the tune of Rs.225 Crores. Therefore, we do not think that even if we allow the petitioners to apply for compounding, they may have a meeting point with the Department as the liability arising out of the alleged actions on the part of the petitioners is so huge. Therefore, the argument that there cannot be any arrest as long as the offences are compoundable, is an argument of convenience and cannot be accepted in cases of this nature.

Why arrest when no investigation can be conducted?

An argument advanced by the Counsel for the petitioners is that since the Proper Officer under the CGST Act, 2017, even according to the respondents is not a Police Officer, he cannot and he does not seek custody of the arrested person, for completing the investigation/enquiry. Section 69(2) obliges the Officer authorized to arrest the person, to produce the arrested person before a Magistrate within 24 hours. Immediately, upon production, the Magistrate may either remand him to judicial custody or admit the arrested person to bail, in accordance with the procedure prescribed under the Code of Criminal Procedure. There is no question of police custody or custody to the Proper Officer in cases of this nature. Therefore, it is contended that the arrest under Section 69, does not advance the cause of investigation/enquiry, but only provides a satisfaction to the respondents that they have punished the arrested person even before trial. According to the Counsel, the arrest of a person which will not facilitate further investigation, has to be discouraged, since the same has the potential to punish a person before trial.

The High Court answered:

The aforesaid contention proceeds on the premise as though the only object of arresting a person pending investigation is just to facilitate further investigation. However, it is not so. The objects of pre-trial arrest and detention to custody pending trial, are manifold as indicated in section 41 of the Code. They are:

(a) to prevent such person from committing any further offence;

(b) proper investigation of the offence;

(c) to prevent such person from causing the evidence of the offence to disappear or tampering with such evidence in any manner;

(d) to prevent such person from making any inducement, threat or promise to any person acquainted with the facts of the case so as to dissuade him from disclosing such facts to the Court or to the police officer;

Therefore, it is not correct to say that the object of arrest is only to proceed with further investigation with the arrested person.

Why no bail? The High Court noted,

If, even before the GST regime is put on tracks, someone can exploit the law, without the actual purchase or sale of goods or hiring or rendering of services, projecting a huge turnover that remained only on paper, giving rise to a claim for input tax credit to the tune of about Rs.225.00 crores, there is nothing wrong in the respondents thinking that persons involved should be arrested. Generally, in all other fiscal laws, the offences that we have traditionally known revolve around evasion of liability. In such cases, the Government is only deprived of what is due to them. But in fraudulent ITC claims, of the nature allegedly made by the petitioners, a huge liability is created for the Government. Therefore, the acts complained of against the petitioners constitute a threat to the very implementation of a law within a short duration of its inception.

Though the High Court held that

1. writ petitions are maintainable,

2. the protection under Sections 41 and 41-A of Cr.P.C., may be available to persons said to have committed cognizable and non-bailable offences under this Act, and

3. there are incongruities within Section 69 and between Sections 69 and 132 of the CGST Act,

the court did not grant relief to the petitioners against arrest, in view of the special circumstances.

Please see 2019-TIOL-873-HC-TELANGANA-GST for the full judgement

Until next week