NOVEMBER 01,2011

By Vinayak Y Thakur

SECTION 89 has become part of Chapter V of the Finance Act, 1994 consequent to the enactment of Finance Act, 2011 (No. 8 of 2011)

CBEC TRU has issued Circular F. No. 140 /9/2011-TRU dated 12th May, 2011 explaining some of the important aspects of the prosecution provision.It is also a well known fact that certain sections of C. Excise Act, 1944 have also been made applicable to Service tax vide section 83 of the Finance Act, 1994.

Before discussing the prosecution provision under Service tax law as per Section 89 and the above referred TRU Circular, it is worthwhile to recapitulate the prosecution provision under the C. Excise Act and the relevant CBEC Circulars issued therein as in the Circular dated 12.5.2011, it has been mentioned at para 17 that instructions and guidelines issued by the 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 instruction contained in this Circular for carrying out prosecution under Service tax law.

C. Excise

Section 9, 9a and 9 AA deals with offences and penalties and offences by companies.

++ Earlier CBEC had issued Circular No. 208 /21/2007CX. 6 dated 15.6.2007 reiterating guidelines/instructions regarding launching of prosecution and arrest involving duty amount of Rs. 25 lakh or more with special reference to Section 9 and 9AA of the C. Excise Act, 1944. Attention to Chapter 17Part II of the CBEC's Excise manual of Supplementary Instructions was also drawn with respect to arrest, prosecution and procedure for withdrawal of prosecution.

++ Vide CBEC Circular No. 15 /90-CX. 6, dated 9.8.1990, it was decided to modify the guidelines for prosecution so far issued vide Circular Nos. 208 /6-M/77-CX-6, dated 26.7.1980, 208/10/85CX 6, dated 19.6.1985, 208/20/85-CX. 6, dated 15.10.1985 and 208/19/86-CX. 6, dated 30.9.1986.

++ CBEC Circular dated 9.8.1990 specifically clarified that prosecution should not be launched in cases of technical nature or on account of a difference of interpretation of law, before launching any prosecution, Department to prove with reasonable evidence that the person, company or individual had the guilty knowledge of the offence or fraudulent intention to commit the offence etc.

++ Circular No. 30/30/ 94-CX., dated 4.4.1994 was issued by CBEC giving guidelines for launching and withdrawal of prosecution.

++ Circular No. 35/35/94-CX.,dated 29.4.1994 was issued prescribing prosecution procedure where there is one adjudicating officer for a number of factories located under different Collectorates.

Service Tax

Section 89 deals with offences and penalties on committing any of the following offences:-

++ provision or receipt of any taxable service chargeable to service tax without an invoice issued;

++ availment or utilization of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules;

++ maintenance of false books of account or failure to supply any information;

++ collection of any amount as service tax but failure to pay the amount so collected to the credit of C. Government beyond a period of six months from the date on which such payment becomes due;

On violation of any of the offence mentioned above, person shall be punishable with imprisonment for a term which may extend to 3 years in the case of an offence where the amount exceeds fifty lakh rupees and in any other case , with imprisonment for a term which may extend to one year . Further a person shall not be prosecuted for any of the above offences under this section without obtaining previous sanction of the Chief Commissioner of C. Excise.

CBEC Circular dated 12.5.2011 clarifies as under:-

++ Prosecution is meant to contain and tackle certain specified serious violations.

++ Under the clause (a) of Section 89, the emphasis in the prosecution is on the non-issue of invoice within 14 days and not on the non-mention of the technical details in the invoice which have no bearing on the determination of tax liability.

Similarly, in case of liability under reverse charge mechanism, the date of provision of service shall be the date of payment. The service receiver under reverse charge basis is required to ensure that the invoice is available with him at the time of the payment is made or at least invoice is received within 14 days after making the payment and in case of associated enterprises receiving services from abroad, the date of provision of service 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. Incase 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.

++ To constitute offence under clause (b) of Section 89, the taxpayer must both avail as well as utilize the credit without having actually received the goods or the service . In other words, availment and utilization of credit should be on a fake invoice. It will also cover situations where the value of service as stated in the invoice is altered with intention /motive to avail cenvat credit in excess of the amount originally stated. While calculating monetary limit for launching prosecution, the value to be considered shall be the amount availed as credit in excess of the amount originally stated in the invoice.

++ Clause (c) of Section 89 deals with maintenance of false books of accounts or failure to supply the required information or supplying of false information which has a bearing on the tax liability. Supplying false information, in response to summons, will also attract the prosecutionprovision.

++ Lastly, clause (d) of Section 89 applies to a situation where the amount is collected as Service tax but service provider has failed to pay the tax even after lapse of sixmonths after the collection service tax. Provision will also get attracted when service receiver has made part payment and the service provider shall be punishable to the extent he has failed to deposit tax due to the Government.

Reference to Section 9AA of the C. Excise Act, 1944 has also been made in the above Circular to the effect that in addition the to the offence committed by a company, every person who was in charge of the company and responsible for conduct of the business, at the time when offence was committed, can be deemed guilty of an offence and can be proceeded against. Such a person will have option to prove that offence was committed without his knowledge or that he has exercised all due diligence to prevent the commission of offence.

Asper Section 9C of C. Excise Act, 1944, in any prosecution for an offence, existence of culpable mental state shall be presumed by the court. Burden of proof regarding non-existence of mens rea' is on the accused.

In terms of Section 89(3) of the Finance Act, 1994, few grounds such as the fact that the accused has been convicted for the first time for an offence under Finance Act, 1994, age of accused, that the accused was acting as a secondary party etc. would not be considered special or adequate reasons for awarding reduce imprisonment.

Sanction for prosecution has to be accorded by the Chief Commissioner of C. Excise and as per Notification No. 3/2004-ST dated 11.3.2004, DGCEI can exercise the power of Chief Commissioner of C. Excise, throughout India.

In case of offences specified under Section 89(1), the Board has fixed monetary limit for prosecution to Rs. 10 lakhs. In other words, for an offence involving less that Rs. 10 lakhs, such case will not be considered for launching prosecution. However, this monetary limit will not apply in case of repeat offence.

Board also expects that the provisions relating to prosecution are to be exercised with due diligence, cautionedresponsibility on the part of departmental officers for which there is need to record detailed reasons for its decision to sanction or not to sanction prosecution, on file. To launch prosecution against top management of the company , sufficient and clear evidenceneed to be shown as to their direct involvement in the offence.

Effect of prosecution

Reputation of person is always a matter of great importance to him. Reputation is not built or acquired in a day but it takes long years and sustained good work, conduct and sound integrity, which builds up the reputation of a person. In the business world, the companies or corporates also acquire a reputation by producing good products and fair dealings. The conviction of a company for an offence by itself is bound to affect its reputation and in the long run may affect its business interests. The publication in newspapers about prosecution and conviction of a company is bound to bring a bad name to the company and lower its image before public at large.

Therefore, henceforth, service provider as well as service receiver has to be more vigilant in complying the Service tax provisions so that Departmental authorities do not get chance to use this draconian provision though Board has cautioned to the Departmental authorities to be more diligent and cautioned responsibility.