Arrest - Prosecution Under Central Excise & Service Tax

The recent announcement on arrest has seen a flurry of activity to those who have heard of the same to comply and avoid attracting them. However for those who have already committed the specified offences in the past few years, the sword hangs above their head. Maybe the option to go for the Voluntary Compliance Encouragement Scheme is a possible option which could save interest as well as penalty if eligible for the scheme.

This article provides some basic information to get an understanding of what the new provisions entail.

Background:

Meaning of Arrest:

An arrest is the act of depriving a person of his or her liberty usually in relation to the purported investigation or prevention of crime and presenting (the arrestee) to a procedure as part of the criminal justice system. The term is Anglo-Norman in origin and is related to the French word ‘arrêt’, meaning "stop".

Arrest provisions in Central Excise and Service Tax.

“Arrest” which commonly used in criminal proceedings like murders etc., is now applicable for the person who does not pay tax liability. In central Excise the arrest provision is applicable from 2003 onwards.

Recently the same provisions has been inserted in the service tax from 2013 onwards by way of inserting section 91 to Finance Act, 1994 which provides arrest provision for the offences mentioned in section 89 and others.

Why was arrest provision required?

In case of Om Prakash 2011-TIOL-95-SC-CX-LB held that all offences under the customs and central excise act are bailable. To overcome with the said decision Finance Act, 2013 brings back the arrest provisions. Finance Act states “that Failure to pay excise duty and service tax could lead to arrest of defaulters, as per the provisions proposed in the Finance Bill 2013 introduced by Finance Minister P Chidambaram in the Lok Sabha”.

As per the said provisions, offences relating to excise and customs duty evasion of over Rs.50 lakh would be made cognizable and non-bailable.

Similarly in case of service tax, the failure to deposit the tax amount exceeding Rs 50 lakh with the government would result in imprisonment up to seven years. The Finance Bill has proposed to introduce Section 91 to provide for power to arrest a person for specified offences, particularly non-payment of collected service tax, by an officer not below the rank of Superintendent of Central Excise.

Going by the content of this proposal, it is unmistakably clear that the Government intends to book mainly those who collect service tax in excess of Rs 50 lakhs but do not deposit the same with the Treasury or those who deal and avail services of “fake bills”. The large tax payment evaders first cheat other taxpayers by collecting service tax and not paying same to the department. Ultimate suffers will be small taxpayers who avail cenvat credit on the invoices issued by the bigger tax evaders who collects but not pay. In this background, any defensive stance taken either by the CBEC or the Government may give the impression to the common taxpayers that the Government is siding with the abusers of the exchequer's interests. Ultimately, a simple analysis of lax tax administration and heightened tax evasion only mean greater 'subsidy burden' on honest taxpayers.

Provisions dealing with arrest:

1.   Central Excise Act – Section 13 and 18 deals with power to arrest. Section 9 deals with offences.

a. Section 9A deals with non-cognizable offences.

b. Section 9AA deals with offences by companies.   

2. Finance Act (Service Tax) – Section 91 provides power to arrest – section 89 deals with offences and penalties.

Further to the above provisions the next question comes to mind is what is cognizable and non-cognizable and bailable and non-bailable:

As defined by first schedule of Code of Criminal Procedure in criminal justice system of India, a cognizable offence is a criminal offence in which the police is empowered to register an FIR, investigate, and arrest an accused without a court issued warrant. 

A non-cognizable offence is an offence where the police can neither register an FIR, nor effect arrest without the express permission or directions from the court.

Bailabe and non-bailable

Section 2(a) of the Cr PC defines both bailable and non-bailable offence which reads as under;

“Bailable offence” means an offence which is shown as bailable in the First Schedule or which is made bailable by any other law for the time being in force; and “non-bailable offence “means any other offence”

Table II of the First schedule to the code of Criminal procedures 1973 is shown below for ready reference.

II- Classification of Offences Against Other laws

Looking at the above definition and table II of the First schedule the Code of Criminal Procedure 1973 we are able to differentiate between cognizable offence which is non-bailable and non-cognizable offence which is bailable. 

Non-bailable does not mean that the person would be put behind bars to never be released as many of us might understand. It means, the police have to produce the accused before the nearest Judicial Magistrate to obtain police custody remand. Bailable offences are offences wherein after arrest the accused can apply for bail to the police station officer or the Commissioner and need not go to the Court. Thus the release from police custody in case of bailable is faster, almost immediate and the arrest of the assessee may not come to light in the eyes of the society.

This provision could give wide powers to the officers to arrest even the innocent tax payers on the pretext of purported evasion of tax. Again, since the assessee has to go to the court to obtain bail, he is bound to remain in police custody for a while at least. Take an instance of a case where the arrest happens on a Friday night and Saturday is a public holiday. The hearing to obtain the bail would happen only on Monday at the earliest and the entire procedure of obtaining the bail would make it at least Tuesday. The “offender” has to remain in the police custody for 3 days.

Arrest provision in Central Excise Act, 1944

As discussed above section 13 gives power to arrest for the offences mentioned in Section 9 of the said Act. The offence under Section 9(1)(i) of Central Excise is punishable with imprisonment for a term which may extend to seven years and with fine and would fall under Entry 1 and Entry 2 of Table II of First Schedule above and once it falls in any one of these entries, it becomes cognizable and non-bailable.

Offences provided/given in Section 9(1)(i)

1. Section 9(1)(b) “whoever evades the payment of any duty payable under this Act”

2. Section 9(1)(bbbb) “whoever contravenes any of the provisions of this Act or the rules made thereunder in relation to credit of any duty allowed to be utilized towards payment of excise duty on final products.”

If any body contravenes the above provisions i.e., to any excisable googds, the duty leviable thereon under this Act exceeds ‘50 Lakhs’ of rupees (before to budget the monitory limit was 30 Lakhs), shall be punishable with imprisonment for a term which may extend to seven years and with fine.

Provided that 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 less than six months.

In any other case, the imprisonment may extend to three years or with fine or with both.

If a person convict the offences of the above referred section i.e., Section 9(1)(i) another time  the punishment will be as follows:

With regard to duty leviable exceeding 50 Lakhs, every subsequent offence there shall be an imprisonment for a term which may extend to seven years and with fine.

In case of absence of special and adequate reasons to the contrary to be recorded in the judgment of the Court in such case imprisonment shall be less than a term of six months.

The following may not be considered as an adequate reason for awarding less than six months imprisonment.

1. The fact that the accused convicted the offence for the first time

2. If accused is already asked to pay penalty or the goods in relation to such proceedings have been ordered to be confiscated or any other action has been taken against him for the same act which constitutes the offences.

3. The fact that accused was acting merely as a carrier of goods or otherwise was a secondary party in the commission of the offence.

4. The age of the accused.

Offence by companies Section 9AA deals with offence offences committee by a company, every person who is in charge of or responsible to the conduct of the business of the company shall be deemed to be guilty and shall be liable to be proceeded against and punished accordingly. If he does not proves that the offence was committed without his knowledge or that he had exercised al due diligence to prevent the commission of such offence.

Compounding of Offences:

Compounding of offences is possible when there is more than one offence the same can be compounded by the Chief Commissioner of Central Excise before or after the initiation of prosecution on payment, by the person accused of the offence to the Central Government, as may be prescribed.

Who can arrest?

As per the provision of Section 13 of the Act, any Central Excise Officer not below the rank of Inspector of Central Excise may, with prior approval of the Commissioner of Central Excise arrest any person whom he has reason to believe to be liable to punishment under the act or rules made there under.

Prosecution under Central Excise

Prosecution means Legal proceedings in which a person accused of a criminal offense is tried in a  court by the government (state) appointed public prosecutor called district attorney (US) or public prosecutor.

How to launch Prosecution?

Let us understand same with example. You have arrested a person, got the sanction of the Chief Commissioner to prosecute him. The prosecution starts with filing a complaint. Now for an offence under Central Excise, who is to file the complaint? Neither under the Central Excise Act nor under the Customs Act, any officer has been specified as one authorised to file a complaint.

Under the Drugs and Cosmetics Act, an Inspector has been authorised to institute prosecution. Under the Companies Act, the Registrar is authorised to file a complaint. In our related Acts, under the FERA, the Director of Enforcement and certain other officers were authorised to file a complaint. Even under the old Sea Customs Act, the complaint had to be filed by the Chief Customs Officer or an Officer authorised by him not below the rank of Assistant Collector.

Instructions regarding launching of prosecution and arrest under the Central Excise Act, 1944.

Any Central Excise Officer not below the rank of Inspector with prior approval of the Commissioner can arrest any person under section 13 whom he has reason to believe is liable to punishment under the Central Excise Act or the rules made thereunder. Further prosecution can be launched under section 9 for the offences covered under section 9(1) of the Act. As per provisions of section 9AA, prosecution may be launched against any person, Director, Manager or any other person who is responsible for conduct of business of the company/firm and is found guilty of the offences under the Act/Rules. It has been provided that prosecution may be launched in cases involving duty amount of Rs. 25 lakh or more. However, prosecution can be considered in case of habitual offenders irrespective of monetary limit prescribed, if circumstances so warrant. As per the procedure laid down for launching of prosecution, the Commissioner of Central Excise should process and forward the proposal to the Chief Commissioner (or the Director General of Central Excise Intelligence as the case may be) in cases which are fit for launching of prosecution. As per the instructions issued in this regard, the Chief Commissioner or DG, (CEI) has power to sanction prosecution. It is also mentioned that the decision to launch prosecution should be taken by the adjudicating authority immediately after the passing of adjudication order.

In the regard, there cannot be two opinion, that the provisions regarding arrest, prosecution etc. are effective tools in the hands of the department to tackle the problem of evasion of duty and to raise the level of compliance to tax laws. There is need that best possible uses of these provisions are made by the departmental officers in appropriate cases. Therefore, it is once again reiterated that the guidelines regarding arrest and launching prosecution issued by the Board from time-to-time are followed scrupulously. All the cases involving duty amount of more than Rs. 25 lakhs should be examined from the point of view of launching prosecution. Further, once the prosecution is sanctioned, the compliant should be filed in court immediately.

The prosecution proceedings are generally initiated in serious cases having substantial revenue involvement.

If as a result of the trial the charges made in the complaint against the accused are proved the court may award the following punishments

a. imprisonment up to 7 years depending upon the gravity of the case;

b. imposition of fine as per the provisions;

c. forfeiture of any goods in respect of which the court is satisfied that an offence has been committed - this may include vehicle used for carrying such goods, packages used for packing such goods and implements or machinery used in the manufacture of such goods; and

d. Publication of name, place of business etc. of persons convicted under the Act.

General Points:

i. An applicant may, either before or after the institution of prosecution, make an application under sub-section (2) of section 9A of Excise Act, made applicable to service tax vide section 83 of the Act, in the form appended to these rules, to the compounding authority to compound the offence.

ii. “compounding authority” means the Chief Commissioner of Central Excise, having jurisdiction over the place where the offence under the Act, have been or alleged to have been committed;

iii. Where an offence under the Act has been committed at more than one place falling under the jurisdiction of more than one compounding authority, then the Chief Commissioner of Central Excise having jurisdiction over such place where the amount of service tax evaded is more than the others, shall be the competent authority.

iv. On receipt of an application under rule 3, the compounding authority shall call for a report from the reporting authority with reference to the particulars furnished in the application, or any other information, which may be considered relevant for examination of such application.

v. Such report shall be furnished by the reporting authority within a period of one month or within such extended period as may be allowed by the compounding authority, from the date of receipt of communication from the compounding authority. 

vi. The compounding authority, after taking into account the contents of the said application, may, by order, either allow the application indicating the compounding amount in terms of rule 5 and grant him immunity from prosecution in terms of rule 6 or reject such application:

vii. Provided that application shall not be rejected unless an opportunity has been given to the applicant of being heard and the grounds of such rejection are mentioned in such order:

viii. Provided further that application shall not be allowed unless the service tax, penalty and interest liable to be paid have been paid for the case for which application has been made.

ix. A copy of every order under sub-rule (3) shall be sent to the applicant.

Arrest Provision under Service Tax:

Recently i.e., in budget 2013-14 arrest provisions has been inserted in service tax. Power to arrest has been given in section 91 of the Finance Act, 1994 and offences under section 89 divided as cognizable and non-cognizable the words are already discussed above. Even bailable and non-bailable are discussed supra with regard to central excise and same will be applicable for the service tax also.

Power to arrest under service tax:

The ‘power to arrest’ could have significant ramifications. It is interesting to note that in 1998, prosecution provisions were removed from the statute as service tax was a new law. It remains to be seen whether the existence of such provisions will result in better tax compliance or may lead to harassment of the existing tax compliant payers. It is hoped that this power is not used by Revenue to coerce taxpayers to admit disputed tax liabilities in order to avoid arrest. It is important for taxpayers to prepare for this new ‘normal’.

Section 91 provides power to arrest which empowers the Commissioner of Central Excise to arrest a person for an offence committed under the Act, does not augur well in regime where trust and confidence is the foundation stone of the Act. The power of arrest shall be exercised by the Commissioner through an officer not below the rank of the Superintendent of Central Excise.

How and when a person will be arrest and when such person will be presented before a magistrate is also provided in the section 91 of the Act, which is given below:

i. If the Commissioner of Central Excise has reason to believe that any person has committed an offence specified in clause (i) or clause (ii) of sub-section (1) of section 89, he may, by general or special order, authorise any officer of Central Excise, not below the rank of Superintendent of Central Excise, to arrest such person.

ii. Where a person is arrested for any cognizable offence, every officer authorised to arrest a person shall, inform such person of the grounds of arrest and produce him before a magistrate within twenty-four hours.

iii. In the case of a non-cognizable and bailable offence, the Assistant Commissioner, or the Deputy Commissioner, as the case may be, shall, for the purpose of releasing an arrested person on bail or otherwise, have the same powers of a police in the police station.

iv. All arrests under this section shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 relating to arrests.” Chapter V of Code of Criminal Procedure, 1973 deals with arrest of persons.

Offences which are non-cognisable and bailable:

The following offences are to be treated as non-cognizable and bailable offences, where the amount exceeds fifty lakhs rupees, with imprisonment for a term which may extend to three years.

Provided that 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;

1.   Knowingly evades the payment of service tax.

2.   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 Finance Act.

3.   Maintain false books of account or fails to supply any information which he is required to supply, supplies false information.

Offences which are cognisable and non-bailable:

The following offences are to be treated as cognizable and non-bailable offences, where the amount exceeds fifty lakhs rupees, with imprisonment for a term which may extend to seven years.

Provided that 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;

1. Collects any amount as service tax but fails to pay the amount so collected to the credit of central government beyond a period of six months from the date on which such payment becomes due.

Conviction of offences more than onces

If any person convicted any offences of section 89 for more than once, then he shall be punishable for the second and for every subsequent offence with imprisonment for a term which may extend to three years.

Provided that 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;

The following cannot be treated as adequate reason for reducing the imprisonment for a term of less than six months;

i. The fact that the accused convicted the offence for the first time

ii. If accused is already asked to pay penalty or the goods in relation to such proceedings have been ordered to be confiscated or any other action has been taken against him for the same act which constitutes the offences.

iii. The fact that accused was acting merely as a carrier of goods or otherwise was a secondary party in the commission of the offence.

iv. The age of the accused.

Compounding of Offences under Service Tax

Service Tax (Compounding of Offences) Rules, 2012 introduced through Notification No. 17/2012 ST dated 29.05.2012.

Fixation of the compounding amount - For the purpose of compounding of offences under the provisions of the Act, the compounding amount shall be as provided in the following Table, namely:-

Provided that if a person has committed offences falling under more than one category specified above and where the amount of service tax evasion or amount of CENVAT Credit wrongly taken or utilised is the same for all such offences, the compounding amount, in such cases, shall be the amount as determined for the offence for which a higher compounding amount has been prescribed.

Prosecution provision in Finance Act, 1994

Section 89 which provides prosecution of specified offences, prosecution was introduced mainly to develop a holistic compliance culture among the tax payers. Encouraging voluntary compliance and introduction of penalties based on the gravity of offences are some important principles which guide the changes made this year, in the penal provisions governing service tax. While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations. Accordingly, it is imperative for the field formations, in particular the sanctioning authority, to implement the prosecution provision keeping in view the overall compliance philosophy.

Some important aspects of prosecution provisions are given below:

1. In case of issuance of invoice – prosecution provision is on the non-issuance of invoice within the prescribed period rather than non-mention of the technical details in the invoice that have no bearing on the determination on the tax liability

2. In case of recipient is liable to pay service tax on reverse charge - 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 associated 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.

3. Availment and utilization 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 under this clause the taxpayer must both avail as well as utilize 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 on which due tax has been paid. It is only meant for such invoices that are typically known as “fake” where the tax has not been paid at the so called service provider’s end or where the provider stated in the invoice is non-existent. It will also cover situations where the value of the service stated in the invoice and/or tax thereon have been altered with a view to avail Cenvat credit in excess of the amount originally stated. While calculating the monetary limit for the purpose of launching prosecution, the value shall be the amount availed as credit in excess of the amount originally stated in the invoice.

4. The offence in relation to maintenance of false books of accounts or failure to supply the required information or supplying of false information, should be in material particulars have a bearing on the tax liability. Mere expression of opinions shall not be covered by the said clause. Supplying false information, in response to summons, will also be covered under this provision.

5. 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. Where the service receiver has made part payment, the service provider will be punishable to the extent he has failed to deposit the tax due to the Government.

6. Therefore, 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.

7. Prosecution should not be launched merely on matters of technicalities. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The sanctioning authority should record detailed reasons for its decision to sanction or not to sanction prosecution, on file.

8. To launch prosecution against top management of the company, sufficient and clear evidence to show their direct involvement in the offence is required. Once prosecution is sanctioned, complaint should be filed in the appropriate court immediately. If the complaint could not be filed for any reason, the matter should be immediately reported to the authority that sanctioned the prosecution.

9. Prosecution under Central Excise law will also be applicable to service tax, to the extent they are harmonious with the provisions of Finance Act, 1994 and instructions contained in this Circular for carrying out prosecution under service tax law.

Conclusion:

Finally, to avoid unnecessary invoking of these arrest provisions, the assessee requires comply with the provisions of Service Tax & Central Excise Act promptly. Further all the details of the transactions should be intimated to the department at regular intervals to avoid the suppression or limitation points from department side. In case of demand which is real the possibility of approaching the settlement commission could be an option.

The professional who wishes to advise in this segment maybe advised to read up the constitutional provisions which guarantees liberty to all and also those where one cannot be forced give evidence against oneself. The understanding of CRPC/ CPC may also become important. The apex court judgments in these regard could also provide a better idea of the protection for the citizens.

By: CA Madhukar N Hiregange & CA G.K.Lakshmi

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