SAGA OF THE ISSUES IN RESPECT OF THE DETENTIONS AND ENCASHMENT OF BANK GUARANTEES

[Navjot Singh]

‘SAGA OF THE ISSUES IN RESPECT OF THE DETENTIONS AND ENCASHMENT OF BANK GUARANTEES ’

1. EXORDIUM

1. Detention/Seizure/Confiscation

• Not allowing access to the owner of the goods by a legal order/notice is called detention. However, the ownership of goods still lies with the owner. It is issued when it is suspected that the goods are liable to confiscation.
• In Law, a seizure is the forcible taking of property by a government law enforcement official from a person who is suspected of violating, or is known to have violated, the law.
• Confiscation of the goods is the ultimate act after proper adjudication. Once confiscation takes place, the ownership as well as the possession goes out of the hands of the original owner and into the hands of the Government Authority.

2. Bank Guarantee

A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.[i]

Generally, there are various types of bank guarantees:

• Financial Guarantee – These guarantees are generally issued in lieu of security deposits. Some contracts may require a financial commitment from the buyer such as a security deposit. In such cases, instead of depositing the money, the buyer can provide the seller with a financial bank guarantee using which the seller can be compensated in case of any loss.
• Performance Guarantee – These guarantees are issued for the performance of a contract or an obligation.
• Unconditional bank guarantee - In an unconditional bank guarantee, the bank/guarantor has to pay the guarantee amount to the beneficiary in whose favor the bank guarantee has been issued on demand, irrespective of any pending disputes.
• Conditional bank guarantee- In a conditional bank guarantee, the bank/guarantor has to pay the guarantee amount to the beneficiary in whose favor bank guarantee has been issued on demand, only after the specific conditions for invocation in the contract are fulfilled.

Now let’s confer it in the light of GST with the recapitulation of a few legal principals.

1. DISCUSSION ON SECTION 67 READ WITH RULE 140

1. In GST Law, the seizure procedures are quite stringent, As per Section 67(1) of the CGST Act, 2017 (hereinafter referred to as ‘Act’), Wherein it is provided that ‘Inspection’ can be carried out by an officer of CGST/SGST only upon a written authorization given by an officer of the rank of Joint Commissioner or above.
2. Further, Section 67(2) of the Act provides that either pursuant to an inspection carried out under Section 67(1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in any place, he may authorize in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things. Now, In the case of ‘Paresh Nathalal Chauhan v. the State of Gujarat’ – 2019 (10) TMI 1184, the GUJARAT HIGH COURT held that Section 67(2) does not empower the officer to record statements of family members through force or coercion or to record their conversations in their mobile phones.  It is not permissible for the authorized officer to use coercive measures against family members to find out whereabouts of the taxable person. The Supreme Court in the case of Gian Chand Versus State of Punjab [1961 (11) TMI 1 - SUPREME COURT] had an occasion to consider the meaning of the word “secreted” within the meaning of section 105 of the Customs Act. In view of the said judgment, even if the authority has reason to believe that the goods liable to be confiscated are likely to be secreted, the authority will have the power to pass an order of prohibition pursuant to the order of seizure.
3. It is important to note that, before initiating such procedures, the officer must have ‘the reason to believe’ that if such person has:-

1. Suppressed any transaction relating to the supply of goods or services or both have acted in contravention of the Acts or Rules with the intention to evade tax.
2. Indulging in contravention of any of the provisions of this Act or the rules made thereunder to evade tax.
3. Transporting or keeping goods which escaped payment of tax or manipulating accounts or stocks which may cause evasion of tax.
4. In the suppression of transaction, if there is a prima facie case of contravention of the Acts or Rules with the intention to evade tax, goods have been transported, accounts or stocks related to such goods have been maintained in such manner so as to cause evasion of tax or escapement of payment of tax liability consciously.

4. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment if the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction.
5. This means that the belief must be of a reasonable and prudent man. It must be based on some relevant material, and not based on suspicion, gossip, or rumor.
6. It is settled law that mere failure to declare does not amount to willful suppression. There must be some positive action from the side of the assessee to find willful suppression.
7. The cases such as Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax, Calcutta 1971 (8) TMI 6 - SUPREME COURT and Chhugamal Rajpal v. S.P. Chaliha 1971 (1) TMI 9 - SUPREME COURT. Such cases arose under the Income-tax law, but the material provisions being in pari materia, they have been applied to proceedings arising under the Act in the case of Mohd. Yakub & Sons v. Sales Tax Officer, Fatehgarh 1972 (7) TMI 85 - ALLAHABAD HIGH COURT. Judging from these principles, the letter received by the Sales Tax Officer was one which would create a mere suspicion on which he may have started an inquiry. It could not form the basis of a reasonable belief required by Section 21 to initiate the proceedings. It is worthwhile noticing that similar information existed at the time of the original assessment but no action was taken thereon. The character of the information is the same, it could not on the second occasion instil a reasonable belief in the Sales Tax Officer, without further inquiry, that turnover has escaped assessment.
8. In furtherance of the above, Section 67(6) states that seized goods shall be released on a provisional basis. The conditions prescribed are

• Execution of bond in such manner as prescribed and
• Furnishing of security, quantum of which is as prescribed.
• Or, such provisional release of seized goods may be made on payment of applicable tax, interest, and penalty.

9. Rule 140 of the CGST Rules, 2017 (hereinafter referred to as ‘Rules’) provides the measures of providing Bond/bank Guarantee and instances when a particular bank guarantee can be encashed. The bare text is produced herein below for your perusal:-

Rule 140. (1) The seized goods may be released on a provisional basis upon execution of a bond for the value of the goods in FORM GST INS-04 and furnishing of a security in the form of a bank guarantee equivalent to the amount of applicable tax, interest, and penalty payable.

Explanation.- For the purposes of the rules under the provisions of this Chapter, the “applicable tax” shall include central tax and State tax or central tax and the Union territory tax, as the case may be and the cess, if any, payable under the Goods and Services Tax (Compensation to States) Act, 2017 (15 of 2017).

(2) In case the person to whom the goods were released provisionally fails to produce the goods at the appointed date and place indicated by the proper officer, the security shall be encashed and adjusted against the tax, interest, and penalty and fine, if any, payable in respect of such goods.

10. Such execution of a bond for the value of the goods will be furnished in the FORM GST INS-04 and furnishing of a security in the form of a bank guarantee equivalent to the amount of applicable tax, interest, and penalty payable.

 

2. DETAILED DISCUSSIONS ON SECTION 129 AND SECTION 130

1. Further, as per Section 68 of the CGST Act, 2017 read with Section 129 of CGST Act, 2017 read with Rule 138B of CGST Rules, 2017 gives the right to the respective officer to intercept the vehicle and check the documents relating to goods being carried in the vehicle.
2. Section 68(3) states that where any conveyance is intercepted by the proper officer at any place, he may require the person in charge of the said conveyance to produce the documents prescribed under the said sub-section and devices for verification, and the said person shall be liable to produce the documents and devices and also allow the inspection of goods.
3. Rule 138B (1) states that the Commissioner or an officer empowered by him may authorize the proper officer to intercept any conveyance to verify the e-way bill in physical or electronic form for all inter-State and intra-State movement of goods.
4. Further, Section 129 of the Central Goods and Service Tax, 2017 starts with a non-obstante clause (“notwithstanding anything contained in this Act”). In Union of India v. G.M. Kokil, 1984 (3) TMI 423 - SUPREME COURT, the Supreme Court, held as follows:

“It is well-known that a non-obstante clause is a legislative device which is usually employed to give overriding effect to certain provision over some contrary provision that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.”

5. On reading the Section carefully it is to be noted that Section 129 provides the person contravening the provisions of the act to pay tax/penalty initially as on the basis of quantum provided in Section 129(1)(a)/129(1)(b). Hence if the assessee pays such amount then contravention should end.
6. Section 129(2) is connected with Section 67(6) in order to streamline the procedure to release the seized goods/Conveyances.
7. Further, Section 130 of the GST Acts can be invoked in the 5 circumstances as envisaged under the said provision which is pertaining to ‘evasion of tax’.
8. Procedure for interception of conveyances for inspection of goods in movement, and detention, release, and confiscation of such goods and conveyances has been clarified vide Circular No. 41/15/2018-GST dated 13^th April 2018.

Kindly have a look on below-mentioned points carved in by said circular:-

1. As per the circular, the service of notice is required to be served upon the person-in-charge of the conveyance.
2. The officer can directly invoke Section 130 and issue notice for the confiscation of goods and conveyance if he is of the opinion that goods are being carried for evasion of tax.

9. Thereafter, the government itself has clarified by Circular No. 64/38/2018-GST dated 14.9.2018 that in case of technical errors in the documents accompanying the goods, provisions of Section 129 of the GST Acts may not be resorted to but instead goods may be released on payment of nominal penalty under Section 125 of the GST Acts.
10. Section 129 allows detention of goods and subsequent release thereof on payment of applicable tax and penalty equal to 100% of tax payable on such goods if there is a contravention of the provisions of the GST Acts and the Rules made thereunder. Thus the provision is also as such applicable when tax is payable on the transaction.
11. It is worthwhile to note that, whether the doctrine of mens rea will be seen while applying Section 129?

Non-compliance of law under genuine belief or without a guilty mind should not generally invoke penalties. Hence all contravention, intentional or unintentional, knowingly or unknowingly, be it minor or major will be covered to initiate proceeding of detention of goods and conveyance under Section 129.    

12. Hence, at this juncture, the first thing the authorities need to look into the nature of the contravention of the provisions of the Act or the Rules.
13. The second step in the process for the authorities to examine, whether such contravention of the provisions of the Act or the Rules was with an intent to evade the payment of tax. Section 135 provides for the presumption of culpable mental state but such presumption is available to the department only in the cases of prosecution and not for the purpose of Section 130 of the Act.
14. Even if some document such as e-way bill is missing at the time of verification, this would at the most only create a rebuttable presumption that there was the intention to evade payment of tax. If the taxable person is able to establish that there was no intention of evading payment of tax then the provisions of Section 130 of the GST Acts should not be permissible.
15. The major distinction between Section 129 and Section 130 is that the provisions of Section 129 can only be invoked when goods are in transit whereas Section 130 can be invoked at any stage, much after the goods have reached their destination or even during assessment proceedings subject to fulfilling its conditions. Further, while Section 129 covers transporter as well, whereas Section 130 primarily covers the owner of goods.
16. For any violation of the provisions of the Act or rules made thereunder while goods are in transit, straightway, proceedings under section 130 cannot be initiated as has been done by the Revenue. It is only after exhausting this remedy of Section 129 that recourse can be had to Section 130. Considering such provisions, it is emphasized again that the adjudicating authorities/interceptor wing who have detained the goods under Section 129 to give notice for payment of tax and penalty under Section 129(1) and it is only if the owner or transporter fails to pay such tax and penalty within 14 days of the detention or seizure that the learned authorities shall initiate confiscation proceeding under Section 130 of the GST Acts.
17. Direct invocation of Section 130 will manifest Section 129(6) redundant. Though this view has not been appreciated by the Hon’ble High Court of Gujarat in the case of Synergy Fertichem Private limited  V. State of Gujarat [2019 (12) TMI 1213 - GUJARAT HIGH COURT] wherein the court cited that:-

Sections 129 and 130 respectively of the Act are mutually exclusive and independent of each other. If the amount of tax and penalty, as determined under Section 129 of the Act for the purpose of the release of the goods and the conveyance, is not deposited within the statutory time period, then the consequence of the same would be forfeiture of the goods and the vehicle with the Government. This does not necessarily imply that the confiscation proceedings can be initiated only in the event of the failure on the part of the owner of the goods or the conveyance in depositing the amount towards the tax and liability determined under Section 129 of the Act.

…

For the purpose of Section 129(6) of the Act, it would not be necessary for the department to establish any intention to evade payment of tax. If the tax and penalty, as determined under Section 129, is not deposited within the statutory time period, then the goods and the conveyance shall be liable to be put to auction and the sale proceeds shall be deposited with the Government.

18. However, the Court gave a remark that,

The legislature should once again, look into both the provisions, i.e, Sections 129 and 130 of the Act, and amend the sections accordingly so as to remove certain inconsistencies in the two provisions. Let this aspect be looked into by the State Government in accordance with the law. Now, If there is any inappropriateness in sections 129 and 130 of Act then why should not position favorable to the assessee, be followed as already decided by the apex court in the case of COMMISSIONER OF CUSTOMS (IMPORT) , MUMBAI VERSUS M/S. DILIP KUMAR AND COMPANY & ORS. [2018 (7) TMI 1826 - SUPREME COURT]

19. The Hon’ble High Court of Kerala in the case of THE ASSISTANT STATE TAX OFFICER, ERNAKULAM AND STATE TAX OFFICER (INTELLIGENCE) O/O. INSPECTING ASST. COMMISSIONER (INT.) , VERSUS M/S. INDUS TOWERS LIMITED [2018 (7) TMI 1181 - KERALA HIGH COURT], had held that the provision Section 129 entitles the officers to levy tax and penalty even on a transaction which is not otherwise taxable and there is no need for any the existence of Mens rea or the intention to evade tax before levying penalty.
20. However, in the above-said case, since there was no challenge to the constitutional validity of Section 129(1), the division bench did not look into the reasonableness of the provisions in the light of the constitutional provisions.

3. CONCEPT OF AUTREFOIS CONVICT

1. Autrefois means once or formerly. Accordingly, autrefois acquit and convict means formerly or once acquitted or convicted. Both terms relate to the concept of double jeopardy. Double jeopardy prosecution or punishment for the person twice for the same offense.

Article 20(2) of Constitution

2. Article 20(2) of the Constitution of India states that no person shall be prosecuted and punished for the same offense more than once. This is a remedy against the conviction of a person twice for the same offense.
3. The constitutional right guaranteed by Article 20(2) against prosecution is often successfully invoked only where the prior proceedings on which reliance is placed must be of a criminal nature instituted or continued before a Court of law or a Judicial Tribunal in accordance with the procedure prescribed in the statute which creates the offense and regulates the procedure.
4. There is no punishment within the meaning of Article 20(2) unless it’s preceded by prosecution within the sense explained above. In the case of  MAQBOOL HUSSAIN VERSUS STATE OF BOMBAY [1953 (4) TMI 19 - SUPREME COURT], it was held that the rule of double jeopardy will apply only when the prior conviction was given by a similar authority or a judicial authority. The punishment given by any other authority such customs authority will not be taken into consideration by the court while deciding the same case.
5. Thus, you cannot be tried and punished for the same crime twice. When a person has been assessed to tax and penalty under section 129 and also the same was paid by him, then the same person how can be assessed to fine in lieu of confiscation of goods and conveyance under section 130 of Act.

4. WHEN ENCASHMENT OF THE ‘BANK GUARANTEE’ COMES INTO PICTURE

1. 1. As per Rule 140(2) of the Rules, which provides the provision for encashment of the bank guarantee in a specific situation, the bare perusal is hereunder as:-

 (2) In case the person to whom the goods were released provisionally fails to produce the goods at the appointed date and place indicated by the proper officer, the security shall be encashed and adjusted against the tax, interest, and penalty and fine, if any, payable in respect of such goods.

It is very strange to see the taxpayer, who got the release of the consignment on furnishing bank guarantee towards tax and penalty under section 129 has to produce the goods seized, whatever it may be, before the adjudicating authority on a decided date, failing which the security furnished is liable to be encashed by the authorities. Now, such a requirement is unreasonable, arbitrary, and travels beyond the legislative competence

1. 2. Further, an Excerpt of Circular No. 41/15/2018-GST dated 13th April 2018 is produced stating procedural obligation for Bank Guarantee:-

Where the owner of the goods, or the person authorized by him, or any person other than the owner of the goods comes forward to get the goods and the conveyance released by furnishing security under clause (c) of sub-section (1) of section 129 of the CGST Act, the goods and the conveyance shall be released, by an order in FORM GST MOV-05, after obtaining a bond in FORM GST MOV-08 along with a security in the form of bank guarantee equal to the amount payable under clause (a) or clause (b) of sub-section (1) of section 129 of the CGST Act. The finalization of the proceedings under section 129 of the CGST Act shall be taken up on priority by the officer concerned and the security provided may be adjusted against the demand arising from such proceedings’.

1. 3. Now, in case of M/S Safa Mill Stores Versus The Assistant State Tax Officer, Karukutty, The State Tax Officer, Karukutty, And The Deputy Commissioner (Appeals) State Goods And Service Taxes, Tax Complex, Kochi. [2018 (10) TMI 1519 - KERALA HIGH COURT] Wherein Kerala High Court pronounced by restraining the authorities from invoking the bank guarantee till the petitioner exhausts the statutory remedy or till the appeal gets barred by limitation.
   4. In a landmark judgment by the Apex Court in case of Mahindra and Mahindra Ltd. v. Union of India 1992 (4) TMI 42 - BOMBAY HIGH COURT, wherein the court held that no coercive action shall be taken till the expiry of appeal period against the said order is over.
   5. The Bombay High Court in the case of Castrol India Ltd.v. Union of India [2006 (12) TMI 6 - BOMBAY HIGH COURT] agreed on the petitioner’s contention that:-

‘’The petitioner has a remedy of filing an appeal under Section 35 of the Central Excise Act, 1944 which it can file within 60 days and also apply for a stay of the impugned order in original. Section 35F provides that a party against whom such duty is levied can apply for an order not to insist on this deposit on the ground of undue hardship. Mr. Patil submits that this remedy will become infructuous if the bank guarantee is allowed to be encashed in the meantime. He has drawn our attention to the Excise Manual published by the Central Board of Excise & Customs and particularly instructions contained in Rule 1.3 of part 3 thereof which is on the recovery of duty. It provides that if a stay application is filed by the assessee against the order in original, no coercive action shall be taken to realize the dues till the disposal of the stay application. If the bank guarantee is encashed even before filing of the stay application, there will be no occasion for the petitioner to file any such stay application. It appears that the Officer has moved rather too fast and that led the petitioner to file this petition. The petitioner, therefore, has prayed in this petition that this communication/order dated 29th November 2006 issued by the respondent No. 3 be quashed and set aside.”

 

6. In the case of TATA TELESERVICES MAHARASHTRA LTD. Versus M.F., DEPARTMENT OF REVENUE [2014 (2) TMI 249 - BOMBAY HIGH COURT]. the Hon’ble Court of Bombay held as below:-

10. In case, the Revenue is allowed to adopt coercive measures and/or if the assessee is required to pay tax determined immediately, it would lead to injustice to an assessee, as his opportunity to obtain a stay from the appellate authority would stand foreclosed. Moreover, the inherent right of an appellate authority to stay the order being appealed against would be rendered futile. In fact, this Court in MAHINDRA & MAHINDRA LTD. Versus UNION OF INDIA - 1992 (4) TMI 42 - BOMABY HIGH COURT had directed the Revenue to return the amounts recovered by encashing the bank guarantee of the assessee as it was done before the expiry of three months to file an appeal.

CONCLUSION

In our view, the officers should be ‘duty conscious rather than power charged’. In the matter of  Mahesh Chandra vs Regional Manager, U.P. Financial Cororation,1992 (2) TMI 367 - SUPREME COURT, categorically observed that whatever wide is conferred by statute on public functionaries, the same is subject to the inherent limitation that it must be exercised in just, fair and reasonable manner, bonafide and in good faith; otherwise it would be arbitrary. In such a case the test of reasonableness is stricter. Therefore the authors have their view that the provision related to the encashment of the “Bank Guarantee/Security” should be followed with utmost reasonableness and within the parameters of the power as envisaged by the legal statute and any contrary action exercised to the purpose for which it was authorized will be deemed with malafide intention and the same is bad in law.  

Further, many High Court Writs are pending in respect of challenging the constitutional validity for said section. The government must act upon the resolution of the fracas that arose due to inconsistencies and ambiguities in said Sections and practical aspects of the same. 

[i] Defination as per Investopedia

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CA ARCHANA JAIN (ca.archanajain11@gmail.com)

CA NAVJOT SINGH (canavjotsinghbrar@gmail.com)