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Published on Sat, Jan 30,2016 | 11:54, Updated at Mon, Feb 01 at 19:53Source : CNBC-TV18 |   Watch Video :

Earlier this month, a senior official of travel website ‘’ was arrested for alleged non-payment of service tax dues. He was released on bail but only after promising to pay up some of that amount. Lawyers tell me this is the 29th such arrest! Is this due process or extortion? Joining CNBC TV18’s Menaka Doshi today to talk about it, is Rohan Shah of ELP.

The Case

Revenue claims Rs 67.44 cr in unpaid service tax dues
Senior executive arrested
No show cause notice issued
Senior executive released on bail after paying portion of dues

Doshi: I just want to lay out some of the basic facts of the cases are available. The revenue department made some claim saying makemytrip has not paid service tax dues of about Rs 67.4 crore. I am told the company pays service tax on all the service fees that it charges. These dues pertained to unpaid service tax by hotels bookings for which was done using the portal. officials were summoned to account for these unpaid dues but no show cause notice was issued by the department despite that a senior official of makemytrip was arrested and released only after agreeing to pay some of the disputed amount. I am told he paid about Rs 25 crore or promised to pay that as part of the bail terms. Is this a common occurrence? A senior official or executive of a company being arrested for non-payment of service tax dues?

Shah: As you mentioned, for service tax itself, since they have brought in the set of provisions for arrest which was the May of 2013, they have had 29 arrests, which is almost one a month and that is the sort of recurrence that we are looking at here.

So yes, unfortunately it is common place and without wanting to go into the facts, three things which are important for me in the context of this case -- first you are not supposed to trigger this proceeding unless you have reason to believe and unless you have followed due process. That is what the Supreme Court (SC) has repeatedly said as recently in Tata Chemicals. So the situation here is when you don’t issue a show cause notice, certainly it is not due process.

The second situation is that apparently this was a controversy across the whole industry. So it isn’t that it is bad intent by one entity who is consciously not paying tax. It was an issue of interpretation and it was an issue of interpretation across the industry.

This third issue and that is the one which is worrying is that in every one of these cases, ultimately the resolution whether it is through the court or whether it is through a process of interaction with the department, ultimately leads to a payment of some amount of tax even prior to the issuance of a show cause notice. So it is extortionist and the threshold in terms of their following the rules is getting lower and lower and the one area which is important to clarify is this -- you have two types of situations in which there can be an arrest. One, where you have a show cause, there is an offence which was proven and in addition to this civil proceeding for recovery of tax, you have a criminal process and you go through a whole criminal trial after framing of charges and then there is sentencing. Then there is a distinct situation where in the state of investigation, they want to arrest you for what they would call a custodial investigation. That is the power that they are using. When you use this power, essentially what you are saying is that on the basis of a suspicion, you are going to arrest the person on the label that you think he will interfere the course of investigation, you take him away for a period of time knowing very well that two things will happen. There will be panic across the board in industry so everyone will comply and this particular company to stop this whole process will in any case disgorge a large amount of money. So this whole process of arresting people in the stage of investigation is unusual but unfortunately so recurrent that is now on top of everybody's mind when you talk of service tax.

Delhi HC: Case

‘Mr Satish Aggarwala, learned Standing counsel for the DGCEI (Director General, Central Excise Intelligence) states that the investigation still under progress and there is no obligation on the DGCEI to issue any Show Cause Notice till it is concluded.’

Doshi: It is a telling statistic when you say that it is almost one arrest every month ever since these changes to the Finance Act were introduced. I will go back to the original changes and what prompted them but before that I am a little stuck with this non-issuance of a show cause notice and yet being able to arrest. The reason why I stress on it, I get custodial arrests in that sense, the custodial investigations as you call it but in tax when so much of this is an interpretation issue -- when you are not fully sure that this is a crime that has been committed, you have not paid dues that you were supposed to pay, this is an interpretation matter especially in the case of how portals have been treated, which you laid out, is it fair to be able to exercise this custodial investigation power where you are arresting a senior executive of a company simply because you believe the company ought to have paid more tax. You haven’t yet sent them a show cause notice, you said so in the Delhi High Court that is where the DG of Central Excise says that we have not issued a show cause notice because the matter is still under investigation, which means that you haven’t yet concluded whether the company did anything wrong or not and yet you have gone ahead and arrested an official?

Shah: So in this sort of a situation of custodial investigation -- it is something for example that you hear of grose crimes, murders and the like and you are seeing it in some criminal trials.

But to apply it to tax is very unusual globally because tax is ultimately about a civil liability. You cannot impinge on life and liberty, so there is no exception in many countries where you can do this sort of thing where ultimately it is about money. Ought you have paid tax, more or less etc? So the situation is very unusual.

The thresholds are very high and what would be the threshold, if you have concrete evidence that somebody is effectively evaded and that somebody is in the process of destroying evidence related to that then it is that sort of an exceptional circumstance in which you would be able to invoke this power whereas what we are doing is because we have the power, we now invoke it with very low thresholds because the reason to believe test as per the Supreme Court is that you must be absolutely convinced that there is an evasion and somebody is then tying to effectively corrupt the course of evidence but we use it whenever we have a sense that there is a tax evasion and the worst part is before this new provision came in the May of 2013, they used to arrest people till the SC judgement -- to get over that they brought this -- but in that phase we took several of those clients to a full-fledged appeal and of all the cases we were handling, each one of them succeeded in the tribunal on merits.

They won and in a few of those cases when they went to SC and appealed, those appeals were dismissed with observations against the tax department.

2013 Circular

‘To authorize the arrest the Commissioner should have reason to believe that the person proposed to be arrested has committed an offence specified in clause (i) or clause (ii) of sub-section (1) of Section 89. The reason to believe must be based on credible material which will stand judicial scrutiny.’

Finance Act 2013

Introduced 2 new sections 90 & 91
-    Offences under Sec 89 (1) (ii) made cognizable
-    Power of arrest in cases involving evasion of service tax of Rs 50 lakhs and more

Doshi: I want to go back to the actual genesis of this issue. You have pointed out several times that it belongs to the finance act of 2013, two new sections were introduced then section 90 and 91, offences under section 89 specific subsections were made cognizable then and the power of arrest was introduced in cases involving the evasion of service tax of upto Rs 50 lakhs or more. Last year I am told after the industry was represented several times with the finance ministry. They increased that threshold to Rs 1 crore, I don’t know if that has become effective or not but why was this introduced to begin with the Finance Act 2013, was it simply to overcome a SC decision?

Shah: Yes. Effectively the finance act went so far as to say that. So the situation you had is in the period, pre 2013, there was a power of arrest. Two of the controversies was did you need to have a warrant -- cognizable or non-cognizable and once arrested was the offence bailable or non-bailable. All of that in a way culminated in judgement of the SC in Omprakash's case where they said given that it is only a civil issue, you have to issue a warrant and it is always bailable.

To get around that we have got the new set of provisions and they made a demarcation between situations where you must issue a warrant, situations which were bailable, situations which were not-bailable. For example, if you recover taxes but did not pay them over to the government then effectively from their perspective, they did need to issue you a warrant and effectively when they took you in, they will have to produce you before a magistrate for you to get bailed. So they also demarcated what they thought were more enhanced offences and less enhanced offences but all of this in a way was a response to that SC judgement.

Doshi: So basically it was to overwrite what the SC said?

Shah: That is right and then you have a situation where you talked about the Rs 50 lakhs or Rs 1 crore, the provision still says Rs 50 lakhs.

Doshi: It hasn’t been changed to Rs 1 crore?

Shah: So what you now have is an administrative guidance saying Rs 1 crore but look at Rs 1 crore in the context of the businesses that you have today and that could be one month's interpretational issue. So from that perspective, Rs 1 crore is also very low and world over the protection is not from the amount although our amount is very low. The protection is from the conduct. So you say that a commissioner can look at it then you maybe give him a committee of commissioners but the threshold is not just reason to believe, the threshold is your complete conviction based on evidence that something has gone wrong. Reason to believe -- SC has said even in Tata Chemicals is to you have to pitch it so high that in no conceivable situation you could form a different view because this ultimately involves life and liberty. So the threshold is very high. Now legally, the threshold is very high practically people look at either the monetary or very low threshold and by the time this can be corrected, somebody has been arrested, somebody has already paid the tax then SC in its wisdom states this ought not to have been done but you cannot wait that long because the damage has already been done not only to the industry but also to us as a country because this is a sort of thing which unfortunately grabs headlines.

Doshi: Is this due process or is this extortion?

Shah: I don’t think you will find any fair minded tax administrator or judge able to say that this is due process.

Doshi: So this is extortion you are saying?

Shah: This is certainly a bordering on extortion and the fact that it occurs so often and often times you see that an MNC is targeted or a sunrise industry is targeted, in a way it seems to be only a means to get a message out comply or face the most dire consequences and I think extortion one part of it but if you are saying the culture is one amongst to ensure you will stay inline and if somebody has to go to jail for that, that is fine. I think that is a larger issue than even just the extortion.

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