Arrest Under GST: Caution Needs To Be Applied

‘Rule of law’ is the soul of a democratic setup and no one is allowed to breach or even shake the golden thread of the same. The supremacy of rule of law cannot be questioned by anybody and the same cannot be threatened even by the state. Personal liberty is largely associated with the concept of rule of law that is to say “liberty of a person cannot be taken away except with the procedure established under the law” [Article 21 of the Indian Constitution]. Nowadays there has been the tremendous rise in arrest under GST Laws. Let it be clarified that the author is not against the arrest under the statute but definitely concerned the manner arrest is being made in complete defiance of the law established under the statute and settled by the judiciary. This paper is a humble attempt to highlight the problem faced by the business as the power to arrest under GST has become a tool to pressurize the business in order to meet the undue and unsustainable demand.

The power of arrest under the GST Act is prescribed under section 69 of the GST Act which reads as under:

“(1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.

……..

So, the power to arrest under GST is depended upon section 132 of the GST Act 2016 and the category for which arrest can be made are as under:

“1. Whoever commits any of the following offences, namely:—

1. supplies any goods or services or both without the issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax;

2. issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax;

3. avails input tax credit using such invoice or bill referred to in clause (b);

4. collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

5. evades tax, fraudulently avails input tax credit or fraudulently obtains refund and where such offence is not covered under clauses (a) to (d);

6. falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due under this Act;

7. obstructs or prevents any officer in the discharge of his duties under this Act;

8. acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with, any goods which he knows or has reasons to believe are liable to confiscation under this Act or the rules made thereunder;

9. receives or is in any way concerned with the supply of, or in any other manner deals with any supply of services which he knows or has reasons to believe are in contravention of any provisions of this Act or the rules made thereunder;

10. tampers with or destroys any material evidence or documents;

11. fails to supply any information which he is required to supply under this Act or the rules made thereunder or (unless with a reasonable belief, the burden of proving which shall be upon him, that the information supplied by him is true) supplies false information; or

12. attempts to commit, or abets the commission of any of the offences mentioned in clauses (a) to (k) of this section

shall be punishable-

in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term which may extend to five years and with fine;

………………..

(4) Notwithstanding anything contained in the code of criminal procedure,1973 (2 of 1974), all offences under this act, except the offences referred to in subsection (5) shall be non-cognizable and bailable.

(5) the offences specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) and punishable under clause (i) of that sub section shall be cognizable and non-bailable.

The GST Act prescribes punishment for contravention of the above-mentioned offences and offences under the GST Act are non-cognizable and bailable except for the offences where the amount exceeds Rs. Five crores.

OFFENCES UNDER FISCAL STATUTE

Fiscal statutes are the backbone of the economy. They are legislated with a sole purpose to recover the due tax from the assessee and the intention of the legislature is not to arrest a person or terrorise the business in the name of investigation. Fiscal statute all together stands on a different pedestal and cannot be equated or enforced with the same vigour. In the fiscal statute before asking for the tax due assessment of the same is the sine qua non and without assessment, no coercive action can be taken as settled in a long line of judgments. There is no quarrel regarding the power of the GST authority to arrest an assessee, they have the power to arrest a person but before the assessment of the tax due to the arrest is completely unjustified. The Hon’ble High Court of Punjab and Haryana in the case of Shri. Akhil Krishan Maggu VS. DGGI [2020 (32) G.S.T.L. 516 (P&H) after relying upon the judgment in the case of Make My Trip vs U.O.I 2016 (44) STR 481(Del) has  held as under:

“ …………another agency like DGCEI cannot without an SCN or enquiry 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.”

The Hon’ble court went ahead and examined the power to arrest under the fiscal statute and held as under

“……. Without even an SCN being issued and without there being any determination of the amount of service tax arrears, the resort to extreme coercive measures of arrest followed by the detention of Mr Pallai was impermissible in law”

“…..123. The arrest should be the last option and it should be restricted to those exceptional cases where arresting the accused is imperative in the facts and circumstances of that case.

1. The court must carefully examine the entire available record and particularly the allegations which have been directly attributed to the accused and these allegations are corroborated by other material and circumstances on record.”

The Make My Trip supra was also followed by Madras High Court in Jaychandran Alloys (P) Ltd. VS Superintendent of GST and C. Ex., Salem 2019 (25) GSTL 321 (Mad) which concurred the view taken by Hon’ble high court of Delhi regarding the power of arrest in fiscal matters. The relevant para is as follows:

“….. Though the discussions and conclusions herein have been rendered in the context of chapter V of the Finance Act,1994, levying service tax, I am of the view that they are equally applicable to the provisions of the CGST Act as well.”

ARREST ONLY IN EXCEPTIONAL CIRCUMSTANCES:

Though under the GST Act 2016 there is a provision which empowers the authority to arrest a person for the offences committed under section 132 of the CGST Act 2017. But being a fiscal statute arrest of a person is an exception than the rule. Without assessing the actual liability of the assessee the arrest is onerous and must be avoided. The division bench of Delhi High Court in Make My Trip supra has settled the ratio regarding the power to arrest under the fiscal statute and clearly held that without assessing the liability arrest is bad in law.

The Make My trip supra was challenged before the Hon’ble Apex Court by the revenue authority without any success [Civil appeal no 8080/2018 reported in 2019 (22) GSTL J159].

The Bombay High Court was of the same view and stamped the ratio in clear trip Pvt. Mumbai and Ors VS. U.O.I [2016 (42) STR (BOM)] and held as under:

“….16. We are clear in our minds and from the scheme of the act and the law as a whole that coercive measures, including effecting any arrest, would arise only when the investigation has been completed and on launching the prosecution.”

The Bombay High Court further followed the ratio of Make My Trip (supra) as well as clear trip supra in Prasad Purshottam Mantri Vs. U.O.I [2019 (29) GSTL (BOM)] and granted the bail to the person arrested under GST law.

The Punjab and Haryana High Court in Akhil Krishan Maggu supra analyzed the entire scheme of the GST Law and after following the ratio of MakeMyTrip and the clear trip has held in no uncertain terms that the provision of arrest should be invoked rarely and not in a routine and casual manner. While explaining the exceptional circumstances the Hon’ble Court in Akhil Krishan Maggu (supra) held as follow:

“….. The persons who are having established manufacturing units and paying a good amount of direct or indirect taxes; persons against whom there is no documentary or otherwise concrete evidence to establish direct involvement in the evasion of huge amounts of tax, should not be arrested prior to the determination of liability and imposition of penalty.”

The Hon’ble Court in Akhil Krishan Maggu (supra) also prescribed the exceptional circumstances in the following terms:

“….. Taking a cue from the judgment of Delhi High Court in the case of Make My Trip (supra) followed by Madras High Court in the case of Jayachandran Alloys (P) Ltd (supra), the law laid down by Hon’ble Supreme Court in the case of Siddharam Satlingappa Mhetre (supra) as well keeping in mind Section 69 and 132 of CGST Act which empowers Proper Officer to arrest a person who has committed any offensive involving evasion of tax more than Rs. 5 crores and prescribed maximum sentence of 5 years which falls within the purview of section 41A of CrPC,

We are of the opinion that power of arrest should not be exercised at the whims and caprices of any officer or for the sake of recovery or terrorising any businessman or create an atmosphere of fear, whereas it should be exercised in exceptional circumstances during the investigation:

• A person is involved in evasion of the huge amount of tax and is having no permanent place of business,
• A person is not appearing in spite of the repeated summons and is involved in a huge amount of evasion of tax,
• A person is a habitual offender and has been prosecuted or convicted on an earlier occasion,
• A person is likely to flee from the country,
• A person is the originator of fake invoices i.e. invoices without payment of tax,
• When direct documentary or otherwise concrete evidence is available on file/record of active involvement of a person in tax evasion.”

All the ratios mentioned above are being followed widely by almost all High Courts in the country but have been defied with contemptuous attitude by the revenue authorities and urgent attention is required in this regard.

SECTION 41 A OF THE CRPC IS APPLICABLE

Now let us delve in another area that is whether section 41A of the CrPC is applicable in the GST matters or not.

Section 41 A of the CrPC read as follows:

41A. Notice of appearance before a police officer. —

 (1) [The police officer shall], in all cases where the arrest of a person is not required under the provisions of sub-section (1) of section 41, issue a notice directing the person against whom a reasonable complaint has been made, or credible information has been received, or a reasonable suspicion exists that he has committed a cognizable offence, to appear before him or at such other place as may be specified in the notice.

(2) Where such a notice is issued to any person, it shall be the duty of that person to comply with the terms of the notice.

(3) Where such person complies and continues to comply with the notice, he shall not be arrested in respect of the offence referred to in the notice unless, for reasons to be recorded, the police officer is of the opinion that he ought to be arrested.

In the CGST Act 2017, the maximum punishment prescribed under section 132 is 5 years. Being so section 41 A of the CrPC is squarely applicable. Section 41A of the CrPC was brought in the statute in the year 2010 through an amendment on the basis of several recommendations to restrict reckless power of arrest as done by the police authorities. The section 41A of the CrPC contemplates that so long a person responds to the notice issued by the authorities “he shall not be arrested in respect of the offence referred in the notice”. In most of the cases, it has come to the notice of the author that section 41A of the CrPC is overlooked by the authorities. It seems that either the GST officials are ignorant of this provision or intentionally they ignore it because this section curtails their power to arrest.

  The issue of section 41A was argued in P V Ramana Reddy VS U.O.I [2019 (25) GSTL 185 (Telangana)] and the Hon’ble court though refused to grant anticipatory bail in a writ proceeding clearly held that section 41 A CrPC is applicable in the GST matters. The relevant para is as follows:

“…..61. In view of the above, despite our finding that the writ petitions are maintainable and despite our finding that the protection under section 41 and 41A of CrPC may be available to the person said to have committed cognizable and non-bailable offences under this Act and despite our finding that there are incongruities within section 69 and between section 69 and section 132 of the CGST Act,2017, we do not wish to grant relief to the petitioner against arrest, in view of the special circumstances which we have indicated above. ”

The Hon’ble High Court of Punjab and Haryana while relying on the Telangana High Court in PV Ramana supra concurred the view regarding the applicability of section 41A of the CrPC in GST matters concerning the arrest.

There cannot be any doubt that like any statute the goods and service tax has the power to penalize but this power has to be exercised with caution and certainly not to be used in a rampant fashion. In Jayachandran Alloy's supra the Hon’ble Madras High Court has cautioned the arbitrary exercise of power by the GST officials and clearly held “before quantification of the tax liability through assessment procedure the arrest is bad in law”. The relevant para is as follows:

“…… 41.I draw support in this regard from the decision of the Division Bench of the Delhi High Court in the case of Make My Trip (India) (supra), as confirmed by the Supreme Court reiterating that such action, as in the present case, would amount to a violation of Constitutional rights of the petitioner that cannot be countenanced.”

The courts in India have always deprecated the arbitrary use of the power of arrest and it affects the liberty of a person directly. On few occasions now even after considering PV Ramana Reddy supra case, the Hon’ble High Court of Karnataka, Madhya Pradesh as well as the Hon’ble High Court of Telangana in the matter of Hanumanthappa Pathrera Lakshmana, Nitesh Wadhwani VS State of M.P and in G. Bhaskar Rao granted anticipatory bail in the alleged violation of section 132. The Hon’ble High Court in G.Bhaskar Rao supra was cautious of the fallout of the arrest and observed as follows:

“ ……. 9. In the instant case as per the submission made by Learned Special Public Prosecutor, there is no prima facie case against this petitioner yet, directly indulging in evasion of tax to the tune of 36 crores. Learned Special Public Prosecutor submits that in the course of the investigation, if it is found that this petitioner is guilty of evasion of tax, on compliance of section 70 of the GST Act, the petitioner would be arrested and the release of the petitioner under section 438 of the CrPC would hinder the investigation. It is evident from the record and the submissions made by both sides that there is the apprehension of the arrest of the petitioner for the non-bailable offences alleged in the subject crime. The main accused in the case is the corporate body. The financial matters are being dealt with by the Chief Financial Officer. Furthermore, the petitioner is not liable to pay the taxes imposed by the government from time to time. There is no record to substantiate the prima facie involvement of the petitioner in the subject criminal case. The arrest and detention of the petitioner would damage his reputation.”

The arrest is a stigma on one’s reputation. It affects not only the business of a person rather it ruins the person mentally and physically. The power of arrest is given in the statute to recover the legitimate dues of the government and certainly not intended to be used as a recovery tool by terrorising the business with the threat of arrest. A suitable guideline for arresting of a person is expected from the government urgently otherwise the rampant use of arresting power will only lead in collapsing of the business environment, which is already at receiving end during this pandemic period.