‘Arrest’ under service tax law - Dr Sanjiv Agarwal - Article published in Business Advisor, dated October 10, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVII Part 1 October 10, 2016 14 Business Advisor
„Arrest‟ under service tax law
Dr Sanjiv Agarwal
The Finance Act, 2013 had inserted new provisions to
make certain offences cognisable and certain others as
non-cognisable and bailable. Accordingly, the following
new provisions were inserted w.e.f. 10.05.2013 –
 Section 90 - Cognisance of offences;
 Section 91 - Power to arrest.
Section 90 seeks to provide that an offence under
section 89(1)(ii) shall be cognisable and all other offences shall be non-
cognisable and bailable. Thus, section 90 specifies and differentiates
cognisable offences from non-cognisable and bailable offence. The provisions
contained in this section shall prevail over the provisions of the Code of
Criminal Procedure, 1973.
Offences under section 89
a) Knowingly evades payment of service tax;
b) Wrongly avails/ utilises credit of taxes;
c) Maintains false books of accounts/ fails to supply any information
supplies false information;
d) Collects tax but fails to pay within 6 months of due date.
Relevant provisions of section 89 of the Act relating to offences and penalties
were substituted to align with the newly-inserted provisions under section
90 and 91.
Punishments under section 89
 For (a), (b) & (c) and amount > Rs 50 lakh – imprisonment from 6 months
to 3 years;
 For (d), if amount > Rs 50 lakh - imprisonment from 6 months to 7 years;
 For any other offence– imprisonment up to 1 year;
 For second or subsequent conviction

2. Volume XVII Part 1 October 10, 2016 15 Business Advisor
- For (a), (b), (c), other offences – imprisonment up to 3 years;
- For (d) – imprisonment up to 7 years.
Amendment made by the Finance Act, 2016 (w.e.f. 14.05.2016)
The Finance Act, 2016 substituted the words „fifty lakh rupees‟ with the
words „two hundred lakh rupees‟. This shall result in increasing the
monetary limit of Rs 50 lakh to Rs 2 crore for the provisions of section 89 in
relation to filing of complaints for punishable offences.
This amendment enhances the limit for imprisonment from Rs 50 lakh to Rs
2 crore for the person who commits the following offences under Section 89
(1):
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.
In the case of an offence specified in clauses (a), (b) or (c) where the amount
exceeds two hundred lakh rupees, it will be punishable with imprisonment
for a term which may extend to three years. 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.
In the case of the offence specified in clause (d), where the amount exceeds
two hundred lakh rupees, it will be punishable with imprisonment for a
term which may extend to seven years. 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.

3. Volume XVII Part 1 October 10, 2016 16 Business Advisor
In Rajender Singh v. Union of India (2015) 58 taxmann.com 245; 51 GST 540
(Punjab & Haryana), it was held that Department cannot arrest an assessee
before issuance of show-cause notice and even before quantifying/
adjudicating service tax due from him, as that would amount to „putting
cart before horse‟, which is impermissible in law.
Recently, Delhi High Court has delivered judgments in the following two
cases, coming down heavily on the Revenue against highhandedness of
Revenue officials in arresting taxpayers or their employees without proper
adjudication:
a) makemytrip (India) Pvt. Ltd. v. Union of India (2016) 44 STR 481 (Delhi);
b) eBiz.com Pvt. Ltd. v. Union of India (2016) 44 STR 526 (Delhi).
In makemytrip case (supra), the assessees (makemytrip.com and IBIBO
Group Pvt. Ltd.) were engaged in services of booking tickets for journey by
various modes and hotel booking through web portal.
In makemytrip and IBIBO case, high court observed/ held as under, which
is noteworthy:
(1) Power to arrest under sections 90 and 91 of the Finance Act, 1994 are
to be used with circumspection and not in a casual manner.
(2) Service Tax Department or Director General of Central Excise
Intelligence (DGCEI) cannot presume or suspect that assessee has
collected service tax but not deposited it with the Central Government
without following the procedure as per sections 73 and 73A of the
Finance Act, 1994.
(3) To ascertain as to whether the assessee is a habitual offender, DGCEI is
expected to check with Service Tax Department. In the case of habitual
defaulters, resort to coercive steps straightaway can be made by making
convincing justification in „note‟ on file.
Recently, Delhi High Court delivered judgments in two cases,
coming down heavily on the Revenue against
highhandedness of Revenue officials in arresting taxpayers or
their employees without proper adjudication…

4. Volume XVII Part 1 October 10, 2016 17 Business Advisor
(4) Arrest of officers of assessee without safeguards is reckless and violates
their fundamental rights under Article 21 of the Constitution of India.
(5) DGCEI did not observe the required safeguards by way of checking or
verifying the records or seeking clarification from the Service Tax
Department.
(6) Power of arrest and levy of penalty, both can go on simultaneously but
both have to be preceded by adjudication to determine evasion of service
tax.
(7) Person sought to be arrested has to be given opportunity to explain
materials and circumstances gathered against him, which point to
commission of offence. It has to be determined with some certainty that
person has collected service tax beyond prescribed limit and failed to
pay it to Central Government beyond prescribed period. Without such
determination, conclusion that assessee committed cognisable offence
would be like putting cart before horse.
(8) There is a reason behind the stipulation that prosecution should
normally be launched only after the adjudication is complete. 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 analyse the
evidence that has been gathered.
(9) 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.
(10)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 was
impermissible in law. 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.

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(11)For cognisable offence prescribed under section 89(1)(ii) of Finance Act,
1994, officer making arrest has to inform arrested person of grounds of
arrest and produce him before the magistrate within twenty-four hours.
As stipulated in section 91(4) of the Finance Act, 1994, all arrests under
section 91 have to be in accordance with Chapter V of the Code of
Criminal Procedure, 1973 on „Arrests‟ and judicial safeguards evolved by
reading constitutional limitations into these powers. Arrests have to be
based on credible evidence. Determination by court that the person has
committed offence cannot possibly be arrived at till completion of
process envisaged under Cr. P.C.
(12)The decision to launch prosecution, and decision to arrest have to be
taken more or less simultaneously. Further, without a decision to
launch prosecution, there cannot be a decision to arrest any person.
Decision to launch prosecution is required to be informed with due
safeguards.
(13)Consequent to search, payment of service tax was made without show
cause notice to avoid further consequences of continued detention, and
such amount paid by assessee during detention without adjudication,
much less the SCN, is to be returned forthwith to assessee.
The judgment of makemytrip was applied to eBiz.com case too and both
were decided on the same date (01.09.2016). In eBiz case, following
additional observations are relevant:
(1) Payment of service tax during bail proceedings of arrested person
(managing director of assessee company), while in judicial custody, and
that too without show cause notice is under coercion and duress and it
cannot be said to be voluntary. Loss of liberty and reputation is bound
to compel even the most rational person to succumb to extreme
pressure. In this case also, amount collected from detained assessee by
the DGCEI was ordered to be returned to assessee.
(2) For search at assessee‟s unit, it was held that when audit has already
been carried out by Anti-Evasion Wing of Service Tax Commissionerate,
it cannot be brushed off by DGCEI as either insignificant or of lesser
scope for determining whether there has been evasion of service tax.
Plea that audit party accepts at face value information provided by
assessee without further inquiry was rejected in view of wide powers
available to auditing officer to search under Rule 5(1) of Service Tax
Rules, 1994. Without examining records of past searches and audits, it
is lack of application of mind to relevant material for DGCEI to have

6. Volume XVII Part 1 October 10, 2016 19 Business Advisor
reason to believe that there is evasion of tax. The Finance Act, 1994,
read with the Central Excise Act, 1944, has application to service tax.
Consequent upon both the aforementioned judicial pronouncements, CBEC
has issued Circular No. 201/11/2016-ST dated 30.09.2016. It states that
the reason to believe that a person has committed the specified offence
which is rendering the person liable for arrest must be based on credible
material which will stand judicial scrutiny. The relevant factors before
deciding to arrest a person must be, apart from fulfillment of the legal
requirements, the need to ensure proper investigation and prevention of the
possibility of tampering with evidence or intimidating or influencing
witnesses. It further clarifies that once the legal ingredients of the offence
are made out, the Commissioner must then determine if the answer to the
following questions is in the affirmative -
 Is the alleged offender likely to hamper the course of further investigation
by his unrestricted movement?
 Is the alleged offender likely to tamper with evidence or intimidate or
influence witnesses?
If the answer to both the questions is yes, then the decision to arrest can be
made.
It has been clarified that if the alleged offender is assisting in the
investigation and has deposited at least half of the evaded tax, then the
need to arrest may not arise. Further, since an arrest impinges on the
personal liberty of an individual, this power should be exercised with great
responsibility and caution and only after a careful examination of the legal
and factual aspects.
It can only be hoped that the Departmental officials will follow this new
Circular in letter and spirit.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur.)
It has been clarified that if the alleged offender is assisting in
the investigation and has deposited at least half of the evaded
tax, then the need to arrest may not arise.