THE SCOPE OF POWERS OF DGCEI UNDER SECTION 91 READ WITH SECTIONS 90 AND 89 OF THE FINANCE ACT, 1994

[Mr. M. GOVINDARAJAN]

DGCEI

Director General of Central Excise Intelligence (DGCEI) is the apex intelligence organization functioning under the CBEC, Department of Revenue, Ministry of Finance entrusted with the task of detection of evasion of duties of central excise and service tax.  It develops intelligence, especially in new areas of tax evasion through its intelligence network across the country and disseminates information, by issuing modus operandi circulars and alert circulars to sensitize the field formations about the latest trends in tax evasion.

An amount of ₹ 36.44 crores has been disbursed by DGCEI as rewards to the informers/officers for the last three financial years for unearthing cases of tax evasion.

Against 511 individuals/firms prosecution has been sanctioned by DGCEI in last two financial years as per the prevailing guidelines who have indulged themselves in offences of tax evasion.

During the last financial year DGCEI recovered an amount of ₹ 1975 crores which was suppressed and unpaid to the Government exchequer.

In this article the scope of powers of DGCEI under Section 91 read with Sections 90 and 89 of the Finance Act, 1994 is to be discussed with reference to decided case laws.

Provisions of Finance Act, 1994

Section 91 provides the powers to arrest.  Section 91(1) provides that if the Principal Commissioner of Central Excise or Commissioner of Central Excise has reason to believe that any person has committed an offence specified in Section 89 (1) (ii), he may, by general or special order, authorize any officer of Central Excise, not below the rank of Superintendent of Central Excise, to arrest such person.  Section 91(2) provides that where a person is arrested for any cognizable offence, every officer authorized to arrest a person shall, inform such person of the grounds of arrest and produce him before a magistrate within twenty-four hours.  Section 91(4) provides that all arrests under this section shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to arrests.

Section 90 provides that an offence under clause (ii) of sub-section (1) of section 89 shall be cognizable.

Section 89(1)(ii) provides that whoever 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, where the amount exceeds  ₹ 2 crores 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.

Case law

In ‘Makemytrip (India) Private Limited V. Union of India’ – 2016 (9) TMI 52 - DELHI HIGH COURT the petitioners host web portals that facilitate the booking of rooms in hotels throughout the country and collect a charge for rendering such service.   The petitioners characterize themselves as ‘tour operators’.  They registered with the department, paid the tax regularly and filed the returns regularly.  They collect the room charges including taxes on the basis of invoices raised by the concerned hotel and pass on the amount so collected to the concerned hotel which in turn pays the service tax.

However the DGCEI is of the view that the petitioners are running hotels online.  Once the petitioners admitted that they collect the service tax, even on behalf of the hotels whose rooms are booked online, it is incumbent on the petitioners to themselves deposit the entire service tax collected.  The failure to do so has resulted in violation of various provisions of the Act by the petitioners.  The petitioners collected service tax to the tune of ₹ 82.78 crores approximately for the period from October 2010 to September 2015.  They treated themselves as tour operator/intermediate/agent of such hotels, resulting in loss of Government revenue to the tune of ₹ 67.44 crore approximately.  The petitioners, therefore, were appeared to have contravened the provisions of Section 68 of the Finance Act, rendering themselves liable to punishment under Section 89(1)(d) read with Section 89(1)(ii) of the Act.

Accordingly the Officers of the petitioners were arrested.  They were released on bail by the Court of Chief Metropolitan Magistrate.  Prior to this the petitioners paid a sum of ₹ 15.33 crores towards admitted service tax dues.  A further sum of ₹ 25 crores was paid in terms during and after the bail proceedings.  The petitioners approached the High Court against the order of DGCEI.  The petitioners submitted the following before the High Court-

• The petitioners are carrying on the business of a ‘tour operator’ primarily operating through its website offering the service of booking rooms in hotels for its customers;
• On booking the hotel room, the customer has the option of either paying the full amount of the room charges in advance and this amount is remitted by the petitioners to the concerned hotel after retaining its commission;
• The other option is for the customer is to directly make payment to the hotel in which the customer is issued a voucher by the petitioners mentioning room tariff, taxes and fees and subsequently the petitioners receives commission from the hotel;
• The petitioner discharges its service tax liability on gross amount paid by the customer to it in terms of the first option or the commission paid to it by the hotel concerned as per the second option;
• The petitioner has been promptly depositing with the ST Department, the service tax collected by it corresponding to the service rendered by it;
• In terms of Rule 11(ii) of Notification No. 26/2012-ST, dated 20.06.2012 the petitioners claimed 90% abatement on such gross amount;
• The officers of the DGCEI compelled the petitioners to immediately deposit the service tax collected by it from its customers failing which its officers would be arrested;
• On 08.01.2016 the officers of DGCEI arrested Mr. Pallai at his office;
• In the communication of the arrest it was informed that the petitioner was liable to pay to the tune of ₹ 67.44 crores; failing which the petitioner appeared to have contravened the provisions of Section 68 of the Finance Act rendering themselves liable to punishment under Section 89(1)(d) read with section 89 (1)(ii) of the Act;
• The petitioners acted as a travel agent/tour operator between the hotels/airlines/other services and customers for bookings the hotel accommodation services;
• The Service Tax Department itself had recognized the petitioner as a travel agent or tour operator over the years and had been assessing the service tax payments of the petitioners;
• The petitioner is a member of the Travel Agents Association of India and Travel Agents Federation of India;
• The DGCEI had arbitrarily and without giving an opportunity of a hearing or a show cause notice considering the petitioner as a ‘hotel’ providing renting services to the customers and not as a tour operator;
• The DGCEI only insisted that the petitioner should discharge service tax on the entire amount collected from the customers;
• With the investigation not having been completed at that stage, it was erroneous on the part of DGCEI to treat the petitioner as a hotel when it was only facilitating bookings of hotel rooms through its website.

The DGCEI put forth the following arguments before the High Court-

• The investigation conducted revealed that the petitioner had entered into agreements with several hotels on a principal-to-principal basis for purchase of hotel rooms for further renting to the ultimate customers;
• In terms of the said agreement the petitioner purchased the hotel rooms at the rate negotiated with the hotels on which the petitioner was free to add a mark up or offer a discount on the published tariff;
• The pre purchased rooms were rented out by the petitioners to the ultimate customers at the rates determined by the petitioner as shown in ‘customer vouchers’;
• The taxes shown on the customer vouchers included service tax, luxury tax and VAT, as applicable;
• The amount reflected in the customer vouchers are different from the base price shown in the hotel vouchers with the same identification numbers;
• In the event of cancellation the customers of the petitioners approached the petitioner only and not the hotel for the redressal of their complaints;
• Therefore it was concluded that the petitioner could not be treated as the agent of the hotels;
• Though the petitioner was depositing the service tax in the government account, the petitioner did not deposit the service tax collected from the customers towards renting of hotel rooms on the pela that as agents of the hotels, they had remitted the same to the hotels by Hotelier vouchers and that it was the responsibility of the hotels to deposit the service tax remitted by the petitioner;
• There is no statutory provision which allowed the petitioner to shift their service tax liability in respect of service tax collected from customers and that any service tax collected from the customer by the petitioner had to be deposited in the government exchequer by the petitioner only;
• Many of the hotels, making agreements with the petitioners, did not even registered with the Department;
• One of the hotels revealed that although they were registered with the Department, they were not paying service tax on the plea that since the petitioner had collected service tax, it was the responsibility of the petitioner to pay the same;
• The DGCEI did not force the petitioner to deposit the service tax without following the due process of law.The payment has been done voluntarily.

The High Court analyzed the provisions of Finance Act, 1994 regarding to the collection of service tax,  investigation, arrest etc.,  The High Court found that there is no power of reopening the assessment like that of Income Tax Act.  The case of the DGCEI is that service tax being collected by the petitioners from the recipient of taxable service is representing service tax.  Irrespective whether the hotels have paid the service tax passed on to them by the petitioners, since it is petitioners who have collected the said component service tax, it is the petitioners who are liable to, under Section 73A (1) of the Act to credit the tax so collected to the account of the Central Government and their failure to do so results in violation of Section 73A of the Act.  The High Court held that the DGCEI fails to make out even a prima facie case that some portion of the service tax collected by the petitioners from the customers as representing service tax or otherwise has been retained by them.  Without such prima facie conclusion, it cannot be inferred that the petitioners have violated Section 73A of the Act.

The High Court further observed that there are two aspects of the proceedings as far as Section 73A and Section 89(1)(d) of the Act is concerned.  Section 73A sets out the procedure for determination whether the situation envisaged there under exists.  That procedure requires notice to be served on the person liable to pay such amount requiring him to show cause why the said amount, as specified in the notice, should be paid by him to the credit of the Central Government.  Therefore, under Section 73A(4), the Central Excise Officer concerned shall, after considering the representation made by such person, determine the amount due from such person, not being in excess of the amount specified in the notice.  These two steps are essential before it can be concluded that a person has collected service tax which is payable to the Central Government and has not paid it.

Section 90(1), the High Court observed, makes it clear that only an offence which is punishable in terms of Section 89 (1)(ii) would be cognizable.  It is only the offence under Section 89(1)(d) where a person after collection of service tax fails to pay the amount so collected to the credit of the Central Government beyond a period of six months from the date from which it is due and where such amount exceeds ₹ 50 lakhs (now it is ₹ 2 crores), which is cognizable under Section 90(1) of the Act.  All other offences shall be non cognizable and bailable.  It is only when the offence is cognizable the power of arrest is attracted.

It is difficult to conceive of the DGCEI or for that matter the service tax department being able to by pass the procedure as set out in Sections 73A(3) and (4) of the Act before going ahead with the arrest of a person under Section 90 and 91 of the Act.  The power of arrest is, therefore, to be used with great circumspection and not casually.   It is not to be straightaway presumed by the DGCEI without following the procedure under Section 73A (3) and (4).  The High Court held that it is inconceivable that an assessee is straightaway sought to be arrested without there being an assessment and a determination as evasion of tax.  The High Court held that in the present case the action of DGCEI in proceeding to arrest the officers of the petitioner was contrary to law and that the officer’s constitutional and fundamental rights under Article 21 of the Constitution have been violated.   The High Court directed that the DGCEI will refund to the petitioner forthwith the amount deposited by them towards alleged dues of service tax.  The High Court also directed DGCEI to pay ₹ 1 lakh to the petitioner towards cost.

Conclusion

The Department filed appeal against the order of the High Court before the Supreme Court.  The Supreme Court stayed the order of High Court and issued notice to the petitioners.  The Supreme Court is to decide in this issue.