Delhi HC terms 'MakeMyTrip' VP- MK Pallai's arrest by DGCEI illegal: orders refund of Service Tax paid [Read Judgment]

A Division Bench of Delhi Court Today has declared that the scheme of the provisions of the Finance Act 1994 (FA), do not permit the Directorate General of Central Excise Intelligence (DGCEI) or for that matter the Service Tax Department (ST Department) to by-pass the procedure as set out in Section 73A (3) and (4) of the FA before going ahead with the arrest of a person under Sections 90 and 91 of the Finance Act. The Bench has termed the arrest of Mr. MK Pallai, Vice President of MakeMyTrip (India) Private Limited (MMT) contrary to law and it violated his constitutional and fundamental rights under Article 21 of the Constitution.A Division Bench of Justices Dr.S.Muralidhar and Vibhu Bakhru was hearing writ petitions, by MakeMyTrip (India) Private Limited (MMT) and IBIBO Group Private Limited (IBIBO) operating on-line platforms/web portals, which involved important questions relating to the powers of the Directorate General of Central Excise Intelligence (DGCEI) of arrest, investigation and assessment of service tax under the provisions of the Finance Act, 1994.According to Directorate General of Central Excise Intelligence (DGCEI) the Petitioners violated various provisions of the Finance Act by and deliberately committed evasion of service tax on their part, warranting initiation of the coercive measure of arrest of their respective officials. Mr. M.K. Pallai, VicePresident (Finance) of MMT, was arrested on 8th January 2016. Searches were undertaken of the premises of IBIBO 2016 on 13th January, 2016. A sum of Rs. Rs. 15.33 crores was paid by MMT towards 'admitted' service tax dues and a further sum of Rs. 25 crores was paid in terms during and after the bail proceedings.It is in the above background the Court has examined the scope of powers of search of DGCEI under Section 82 of the FA, and power of arrest and of taking coercive measures for recovery of service tax dues in terms of Section 91 of the FA, without resorting to the issuance of a show cause notice (SCN) under Sections 73 or 73A of the Finance Act.The Bench has summarised its Conclusions as follows:(i) The scheme of the provisions of the Finance Act 1994 (FA), do not permit the DGCEI or for that matter the Service Tax Department (ST Department) to by-pass the procedure as set out in Section 73A (3) and (4) of the FA before going ahead with the arrest of a person under Sections 90 and 91 of the FA. The power of arrest is to be used with great circumspection and not casually. It is not to be straightway presumed by the DGCEI, without following the procedure under Section 73A (3) and (4) of the FA, that a person has collected service tax and retained such amount without depositing it to the credit of the Central Government.(ii) Where an assessee has been regularly filing service tax returns which have been accepted by the ST Department or which in any event have been examined by it, as in the case of the two Petitioners, without commencement of the process of adjudication of penalty under Section 83 A of the FA, another agency like the DGCEI cannot without an SCN or enquiry straightway go ahead to make an arrest merely on the suspicion of evasion of service tax or failure to deposit service tax that has been collected. Section 83 A of the FA which provides for adjudication of penalty provision mandates that there must be in the first place a determination that a person is "liable to a penalty", which cannot happen till there is in the first place a determination in terms of Section 72 or 73 or 73 A of the FA. (iii) For a Central Excise officer or an officer of the DGCEI duly empowered and authorised in that behalf to be satisfied that a person has committed an offence under Section 89 (1) (d) of the FA, it would require an enquiry to be conducted by giving an opportunity to the person sought to be arrested to explain the materials and circumstances gathered against such person, which according to the officer points to the commission of an offence. Specific to Section 89 (1) (d) of the FA, it has to be determined with some degree of certainty that a person has collected service tax but has failed to pay the amount so collected to the Central Government beyond the period of six months from the date on which such payment is due and further that the amount exceeds Rs. 50 lakhs (now enhanced to Rs. 1 crore).(iv) A possible exception could be where a person is shown to be a habitual evader of service tax. Such person would have to be one who has not filed a service tax return for a continuous length of time, who has a history of repeated defaults for which there have been fines, penalties imposed and prosecutions launched etc. That history can be gleaned only from past records of the ST Department. In such instances, it might be possible to justify resorting to the coercive provisions straightaway, but then the notes on file must offer a convincing justification for resorting to that extreme measure.(v) The decision to arrest a person must not be...

Delhi HC terms 'MakeMyTrip' VP- MK Pallai's arrest by DGCEI illegal: orders refund of Service Tax paid [Read Judgment]

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