PROSECUTION IN SERVICE TAX

[Dr. Sanjiv Agarwal]

PROSECUTION IN SERVICE TAX

New Provisions

The Finance Act, 2011 had inserted two new sections in the service tax provisions w.e.f. 8-4-2011. These are in relation to -

• Liability under Act to be first charge (section 88)
• Offences and Penalties (section 89)

Section 88 seeks to provide for liability under Act to be first charge and section 89 seeks to provide for offences and penalties to enable prosecution of certain specified offence involving service tax evasion. The power to prosecute offenders rests with the Chief Commissioner of Central Excise and the prosecution would be done only with the previous sanction of the Chief Commissioner of Central Excise.

Finance Act, 2011 had amended section 83 of Finance Act, 1994 w.e.f. 8-4-2011 with a view to make applicable certain provisions of Central Excise Act, 1944 to service tax—

Section	Relating to
9A	Certain offences to be non-cognizable
9AA	Offences by companies
9B	Power to court to publish name, place of business, etc of persons convicted under the Act
9E	Application of section 562 of the Code of Criminal Procedure, 1898 and of the Probation of Offenders Act, 1958
34A	Confiscation or penalty not to interfere with other punishments.

These provisions, in brief, provide as under -

(a) The offences would be 'non-cognizable' i.e., an offence in which a police officer has no authority to arrest without a warrant. The CCE is also empowered to compound the offences on payment of the compounding amount as may be prescribed (section 9A of CEA). W.E.F. 28-5-2012, Finance Act, 2012 has amended section 9A of the Central Excise Act, 1944 to provide that notwithstanding anything contained in code of criminal procedure, 1973, all offences under that Act except an offence punishable for a term of imprisonment of three years or more under section 9 shall be non-cognizable.

(b) If an offence is committed by a company (which includes a firm and LLP), the person liable to be proceeded against and punished are:

(i) the company;

(ii) every person, who at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business, except where he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence; and

(iii) any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed. (Section 9AA of Central Excise Act)

(c) The Court is empowered to publish the name, place of business, etc. of person convicted under the Act. (Section 9B of Central Excise Act)

(d) In case of a person who is less than 18 years of age, the Court, under certain circumstances, is empowered to release the accused on probation of good conduct u/s 360 of the Code of Criminal Procedure, 1973 or to release the offenders on probation under the Probation of Offenders Act, 1958. (Section 9B of Central Excise Act).

(e) The imposition of penalty would not prevent infliction of other punishment on the offender. (Section 34A of Central Excise Act).

Liability to be First Charge (Section 88)

Section 88 inserted by the Finance Act, 2011 w.ef. 8-4-2011 reads as under –

"Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of ¹[tax], penalty, interest, or any other sum payable by an assessee or any other person under this Chapter, shall, save as otherwise provided in section 529A of the Companies Act, 1956 and the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002, be the first charge on the property of the assessee or the person as the case may be".

The objective of section 88 is to provide for liability under the Finance Act, 1994 to be the first charge over properties of assessee. Section 88 has been Inserted so as to create first charge on the property of the defaulter for recovery of service tax dues from such defaulter subject to provisions of section 529A of the Companies Act, the Recovery of Debt due to Bank and Financial Institutions Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Finance Act, 2012 has amended section 88 to substitute the word 'duty' with the word 'tax'.

Prosecution (Section 89)

Provisions relating to prosecution shall apply in the following situations:

(i) Provision of service without issue of invoice or receiving a service without invoice as per the relevant rules, [w.e.f. 8-4-2012, willful evasion of service tax];

(ii)  Availment and utilization of Cenvat credit of duty or taxes without actual receipt of inputs or input services either fully or partly in violation of CENVAT Credit Rules, 1994;

(iii) Maintaining false books of accounts or failure to supply any information or submitting false information. The burden of proof lies on the assessee;

(iv) Non-payment of amount collected as service tax to the credit of Central Government for a period of more than six months.

There shall be no power of arrest and the prosecution can be launched only with the prior approval of Chief Commissioner.

The provisions of section 89 have come into force from 8-4-2011. It appears that the prosecution provisions would apply in case of offences committed on or after 8-4-2011.

Amendment made by Finance Act, 2012 (w.e.f. 28-5-2012)

Finance Act, 2012 has amended section 89, with a view to make evasion of payment of Service Tax, knowingly committed, a punishable offence. Thus, prosecution for non issue of invoice has been replaced with the phrase 'knowingly evades payment of Services Tax'. It implies that w.e.f. 28-5-2012, mere non-issue of invoices shall not be made a punishable offence with prosecution, while giving a comprehensive coverage to offences and also aligning with other indirect tax laws.

CBEC has issued clarification/instructions on prosecution vide Circular No. 140/9/2011-TRU dated 12.05.2011 in relation to prosecution provisions with a view to develop a holistic compliance culture among taxpayers and Circular No. 140/2011-ST dated 12.05.2011 prescribes certain clarifications/instructions. The emphasis has been on non issuance of invoice for taxable services provided but this has been amended by Finance Act, 2012 w.e.f. 28-5-2012 to knowingly evasion of payment of Service Tax. The date of provision of service shall be determined as per Point of Taxation Rules, 2011.

The service receiver, liable to pay tax on reverse-charge basis is required to ensure that the invoice is available at the time the payment is made or at least received within 14 days thereafter and in the case of associate enterprises, invoice should be available with the service receiver at the time of credit in the books of accounts or the date of payment towards the service received.

Clause (b) of section 89(1) of the Finance Act, 1994 refers to the availment and utilisation of the credit of taxes paid without actual receipt of taxable service or excisable goods. It may be noted that in order to constitute an offence, the taxpayer must both avail as well as utilise the credit without having actually received the goods or the service. The clause is not meant to apply to situations where an invoice has been issued for a service yet to be provided which due tax has been paid.

The offence in relation to maintenance of false books of accounts or failure to supply the required information or supplying of false information, should in material particulars have a bearing on the tax liability. Mere expression of opinions shall not be covered by the clause (c) of section 89(1).

Clause (d) of section 89(1) will apply only when the amount has been collected as Service tax. It is not meant to apply to mere non-payment of Service tax when due. This provision would be attracted when the amount was reflected in the invoices as Service tax, service receiver has already made the payment and the period of six months has elapsed from the date on which the service provider was required to pay the tax to the Central Government.

Section 9C of the Central Excise Act, 1944, which is made applicable to the Finance Act, 1994, provides that in any prosecution for an offence, existence' of culpable mental state shall be presumed by the Court. Therefore, each offence described in section 89(1) of the Finance Act, 1994, has an inherent mens rea. Delinquency by the defaulter of service tax itself establishes his 'guilt'. If the accused claims that he did not have guilty mind, it is for him to prove the same beyond reasonable doubt

Where an offence specified in section 89 (1) involves an amount of less than Rupees ten lakh, such case need not be considered for launching prosecution. However, the monetary limit will not apply in the case of repeat offence.

Provisions relating to prosecution are to be exercised with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched merely on matters of technicalities.

Prosecution proceedings in a Court of law are to be generally initiated after departmental adjudication of an offence has been completed, although there is no legal bar against launch of prosecut ion before adjudication. Generally, the adjudicator should indicate whether a case is fit for prosecution, though this is not a necessary pre-condition. To launch prosecution against top management of the company, sufficient and clear evidence to show their direct involvement in the offence is required. taxmanagementindia.com

Instructions and guidelines issued by the Central Board of Excise and Customs (CBEC) from time to time, regarding prosecution under Central Excise law, will also be applicable to Service tax, to the extent they are harmonious with the provisions of the Finance Act, 1994 and instructions contained in the Circular for carrying out prosecution under Service tax law. 

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