Prosecution can be initiated only with prior approval of the Chief Commissioner of Central Excise (CCCE).
Central Excise Sections provisions made applicable to Service tax
The provisions of sections 9A 9AA, 9B, 9E and 34A of CEA which have been made applicable to Service tax are briefly explained as under:
(a) The offences would be ‘non-cognisable’ i.e., an offence in which a police officer has no authority to arrest without a warrant. Further the CCCE is also empowered to compound the offences on payment of the compounding amount as may be prescribed (section 9A of CEA).
(b) If an offence is committed by a company (which includes a firm), the persons 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 CEA)
(c) The Court is empowered to publish the name, place of business, etc. of person convicted under the Act (section 9B of CEA)
(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 CEA)
(e) The imposition of penalty would not prevent infliction of other punishment on the offender. (section 34A of CEA)
Dept. clarifications vide Circular No. 140/9/2011-TRU, dated 12-5-2011
Relevant extracts from the Dept. Circular are given hereafter for reference:
Para 2
Prosecution provision was introduced this year, in Chapter V of the Finance Act, 1994, as part of a compliance philosophy involving rationalisation of penal provisions. 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. Since the objective of the prosecution provision is mainly to develop a holistic compliance culture among the taxpayers, it is expected that the instructions will be followed in letter and spirit.
Para 4
Clause (a) of section 89(1) of the Finance Act, 1994 is meant to apply, inter alia, where services have been provided without issuance of invoice in accordance with the prescribed provisions. In terms of Rule 4A of the Service Tax Rules, 1994, invoice is required to be issued inter alia within 14 days from the date of completion of the taxable service. Here, it should be noted that the emphasis in the 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 of tax liability.
Para 5
In the case of services where the recipient is liable to pay tax on reverse-charge basis, similar obligation has been cast on the service recipient, though the invoices are issued by the service provider. It is clarified that the date of provision of service shall be determined in terms of the Point of Taxation Rules, 2011. In the case of persons liable to pay tax on reverse-charge basis, the date of provision of service shall be the date of payment, except in the case of associated enterprises receiving services from abroad where the date shall be earlier of the date of credit in the books of accounts or the date of payment. It is at this stage that the transaction must be accounted for. Thus 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 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.
Para 7
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 under this clause 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 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.
Para 8
Clause (c) of section 89(1) of the Finance Act, 1994 is based on similar provision in the Central Excise law. It should be noted that 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 said clause. Supplying false information, in response to summons, will also be covered under this provision.
Para 9
Clause (d) of section 89(1) of the Finance Act, 1994 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. 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.
Para 11
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. Thus “burden of proof regarding non-existence of ‘mens rea’ is on the accused.
Para 13
Sanction for prosecution has to be accorded by the Chief Commissioner of Central Excise in terms of the section 89(4) of the Finance Act, 1994. In accordance with Notification 3/2004 -ST dated 11th March 2004, the Director General of Central Excise Intelligence (DGCEI) can exercise the power of the Chief Commissioner of Central Excise, throughout India.
Para 14
The Board has decided that monetary limit for prosecution will be Rupees Ten Lakh in the case of offences specified in section 89(1) of the Finance Act, 1994 to ensure better utilisation of manpower, time and resources of the field formations. 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.
Para 15
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. 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.
Para 16
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 prosecution 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. 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.
Para 17
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 this Circular for carrying out prosecution under Service tax law.
4. Guidelines for launching prosecution issued by CBEC under Central Excise (Circular No. 33/80 CX 6. Dated 26-7-1980 read with CBEC Circular No. 15/90 – CX 6, dated 9-8-1990.)
(i) Prosecution should be launched with the final approval of the Principal Collector after the case has been carefully examined by the Collector in the light of the guidelines.
(ii) Prosecution should not be launched in cases of technical nature, or where in the additional claim of duty is based totally on a difference of interpretation of law. Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual had guilty knowledge of the offence, or had fraudulent intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt. It follows, therefore, that in the case of public limited companies, prosecution should not be launched indiscriminately against all the Directors of the company but it should be restricted to only against such of the Directors like the Managing Director, Director in charge of Marketing and Sales, Director (Finance) and other executives who are in charge of day-to-day operation of the factory. The intention should be to restrict the prosecution only to those who have taken active part in commit-ting the duty evasion or connived at it. For this purpose, the Collectors should go through the case file and satisfy themselves that only those Chairman/Managing Directors/Directors/Partners/ Executives/Officials against whom reasonable evidence exists of their involvement in duty evasion, should be proceeded against while launching the prosecution. For example, Nominee Directors of financial institutions, who are not concerned with day-to-day matters, should not be prosecuted unless there is very definite evidence to the contrary. Prosecution should be launched only against those Directors/Officials, etc., who are found to have guilty knowledge, fraudulent intention, or mens rea necessary to bind them to criminal liability.
(iii) In order to avoid prosecution in minor cases, a monetary limit of Rs. 10,000 was prescribed in the instructions contained in Board’s letter F. No. 208/6/M-77-CX 6, dated 26-7-1980. Based on experience, and in order not to fritter away the limited man-power and time of the Department on too many petty cases, it has now been decided to enhance this limit to Rs.1 lakh. (See Note Below) But in the case of habitual offenders, the total amount of duty involved in various offences may be taken into account while deciding whether prosecution is called for. Moreover, if there is evidence to show that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.
(iv) One of the important considerations for deciding whether prosecution should launched is the availability of adequate evidence. Prosecution should be launched against top management when there is adequate evidence/ material to show their involvement in the offence.
(v) Persons liable to prosecution should not normally be arrested unless their immediate arest is necessary. Arrest should be made with the approval of the Assistant Collector or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Collector, who will consider whether the case is a fit one for prosecution.
(vi) Decision on prosecution should be taken immediately on completion of the adjudication proceedings.
(vii) Prosecution should normally be launched immediately after adjudication has been completed. However, if the party deliberately de-lays completion of adjudication proceedings, prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.
(viii) Prosecution should not be kept in abeyance on the ground that the party has gone in appeal/revision. However, in order to ensure that the proceedings in appeal/revision are not unduly delayed because the case records are required for purposes of prosecution, a parallel file containing copies of the essential documents relating to adjudication should be maintained. It is necessary to reiterate that in order to avoid delays, the Collector should indicate at the time of passing the adjudication order itself whether he considers the case is fit for prosecution so that it should be further processed for being sent to the Principal Collector for sanction.
Applicability of prosecution provisions
Section 89 of the Act has become operative upon enactment of the Finance Act, 2011 on 8-4-2011. Hence, it would appear that prosecution provisions would apply to offences committed on or after 8-4-2011.
In this regard, useful reference can be made to precedents under income tax. In the context of section 276C which was inserted w.e.f. 1-10-1975, it has been held in a number of cases that the said section would not apply to an offence committed prior to that date.
Time limit for launching prosecution
The Economic Offences (Inapplicability of Limitation) Act provides that there is no time limit for launching prosecution in case of offences under some specified Acts. Further, limitation bar contained in Criminal Procedure Code, is not applicable to offences under Central Excise, Service Tax and Customs Law.
It would appear that there is no time limit for launching prosecution under Service tax.
Note: The monetary limit has been enhanced to Rs.25 lakh vide CBEC Circular dated 12-12-1997.
Few judicial considerations are as under:
? In Devchand Kalyan Tandel v. State of Gujarat, 89 ELT 433 (SC) it was held that in case of economic offences, the Courts should not take lenient view, as stringent measures are necessary in case of economic offences. (In this case, there was lapse of 13 years between the occurrence and the date of judgment.)
? In V. K. Agarwal v. Vasantraj, (1988) 3 SCC 467 and A. A. Mulla v. State of Maharashtra, 1997 AIR SCW 63, the Supreme Court declined to stop further proceedings on the matter though the matters had become very old. (In this case, the case was already filed long ago i.e., in 1969).
Procedures relating to prosecution
The CBE&C has clarified that prosecution can be approved only by the CCCE in terms of section 89(4) of CEA throughout India.
Some judicial and other considerations are as under:
? Appeal against sanction of prosecution cannot be filed with CEGAT — [Jagatjit Industrial Ltd. v. CCE, (1993) 67 ELT 878 (CEGAT)]
? Decision to grant sanction for prosecution is merely an administrative act. No hearing is necessary. Prima facie, authority sanctioning prosecution should be satisfied that an offence is committed. Even exoneration by disciplinary authority (in excise and customs matters, it means departmental adjudication) is also not relevant [Supdt. of Police (CBI) v. Deepak Chowdhary, (1995) 6 SCC 225, the same view in State of Maharashtra v. Ishmal Piraji Kalpatri, AIR 1996 SC 722.]
? Opportunity of personal hearing is not required to be given before grant of sanction of the Commissioner to file criminal prosecution — [Assistant Commissioner v. Velliappa Textiles, (2003) 157 ELT 369 (SC 3-member Bench).]
? Decision to prosecute does not involve ex-ercise of any quasi-judicial power, [Praveen Kumar R. Jain v. Chief Judicial Magistrate, Dindigul, 1995 (79) ELT 353 (Mad. HC).]
? Specific approval for launching prosecution is required. Mere signing on file by the Chief Commissioner would not mean that he has applied his mind and granted approval. If prior approval of the Chief Commissioner is not obtained, prosecution cannot continue and accused has to be acquitted. – [UOI v. Greaves Ltd., (2002) 139 ELT 34 (CEGAT)].
? In CIT v. Camco Colour Co., (2002) 254 ITR 565 (Bom. HC), it was held that monetary limit prescribed is a policy decision with a view to reduce litigation and the same is binding on the Revenue.
? The CBE&C has clarified that when action is launched under the Central Excise Act, action under Indian Penal Code, 1860 should also be launched, wherever found feasible — [CBE&C Circular No. 178/12/1996, dated 28-2-1996.]
Compounding of offences
Section 9A(2) of CEA, provides that any offence under CEA can be compounded by the CCCE. Such compounding can be done either before or after the institution of prosecution. Procedure for compounding has been prescribed in the Central Excise (Compounding of Offences) Rules, 2005 and Guidelines for Compounding have been issued vide MF (DR) Circular No. 54/2005-Cus, dated 30-12-2005. Since, section 9A of CEA has been made applicable to Service tax, the Rules/Guidelines and precedents under Central Excise would be relevant for Service tax.
Some judicial considerations are as under:
? In Vinod Kumar Agarwal v. UOI, (2008) 223 ELT 19 (Bom HC DB), it was held that compound-ing under the Customs Act cannot result in discharge of offences under other Acts like IPC.
? In Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Company, (2004) 52 SCL 224 (Bom HC DB), it was held that if the offence is compounded, it is as if no offence had even been committed in the first place.
? In P. P. Varkey v. STO, (1999) 114 STC 251 (Ker. HC), it was held that once the offence is compounded, penalty or prosecution proceedings cannot be taken for the same offence.
? In S. Viswanathan v. State of Kerala, (1999) 113 STC 182 (Ker HC DB), it was held that once the matter is compounded, neither the Department nor the assessee can challenge the compounding order.
? A person having agreed to the composition of offence is not entitled to challenge the said proceedings by filing appeal. [S. V. Bagi v. State of Karnataka, (1992) 87 STC 138 (Karn HC FB) — followed in Sakharia Bandhu v. ADCCT (1999) 112 STC 449 (Karn HC DB).]
9. Conclusion
Service tax law has evolved as a law based on voluntary compliance. In this backdrop, re-introduction of prosecution provisions is a retrograde step. One does understand that there may have been many cases of tax evasion detected by the Tax Dept. However, the same is no justification for re-introduction of prosecution provisions, inasmuch as there are wide powers for the tax administration under the existing tax structure and other laws to deal with such cases and impose stiff penalties.
Overall, the provisions are too harsh, and are likely to be misused by the authorities causing severe harassment to taxpayers. In particular, non-issue of tax invoice by a service provider being specified as an offence, is totally unjustified. Further, non-issue of tax invoice as per the Service Tax Rules by a service provider based outside and its non-issue to be treated as an offence at the end of service recipient in India, is unprecedented and needs to be done away with.
It is suggested that a monetary limit of tax evaded amount of Rs. 1 crore need to be prescribed for a judicious implementation of prosecution provisions and minimise hardships to small and medium taxpayers.
