Coming down heavily on the finance ministry for alleged misuse of the discretionary powers to arrest defaulters of service tax, the Delhi High Court on Thursday said that the companies can’t be forced to cough up tax claims at “gun point”.
A bench of justices S Muralidhar and Vibhu Bakhru while taking strong objection to ‘premature arrest’ of a senior official of online travel company MakeMyTrip without even issuing a show cause notice, asked if the government was “reducing” a fiscal statute (Finance Act) to give police powers to the tax officers.
Stating that there is no indication of MakeMyTrip being a chronic defaulter, the court asked the firm to file an affidavit and name the tax officials who arrested its vice-president (finance) MK Pallai for service tax evasion in January. Pallai is now out on bail.
The court said that the government officers will have to personally file an affidavit explaining reasons for the arrest and it will hold them accountable if procedure was not followed while arresting the top company official.
The judges posted the matter for further hearing on March 30.
Earlier, the HC had restrained the finance ministry from taking any coercive steps towards the online travel company or its officers, including arrest, for alleged service tax evasion of R82.78 crore (the company has since paid R40 cr).
“You should have a consistent pattern. In how many of such cases have you made an arrest?” the court asked additional solicitor general Sanjay Jain, while seeking details of action taken by the department against other service tax defaulters of over R10,000 crore. The court also observed that it can’t allow such arrests under its watch and there was a need to ensure that such things don’t get repeated.
“Department can’t be seen coercing payment on gunpoint… they can’t use police force for collection of service tax… main objective of taxman is to collect taxes, not arrest people,” the bench said, adding that the Budget speech also clarified that arrest only in cases where tax was collected and not paid.
The ASG argued that the department has powers to arrest officials in tax evasion cases to aid probe and the investigation process is still in process against the firm. The department further said that it was not required to issue showcause notice before arrests.
While denying that it has evaded any tax, MakeMyTrip has argued that the arrest has taken place under Section 91 of the Finance Act ? this in turn refers to Section 89(1) ? but these sections cannot apply to an individual; it has relied upon the Sunil Mittal case versus the CBI to say that an individual cannot be seen as the alter ego of a company.
The case, which has larger ramifications for the entire e-commerce industry, revolves around the billing done by Makemytrip. The company argues that the billing done to customers is largely on account of services they avail from either hotels or airlines, so the service tax on this has to be paid by the hotels/airlines and not by it. As far as the money it makes in the transaction as a tour operator, MakeMyTrip says that it has paid all service taxes and there is no dispute over this.
Apart from the fact that a travel portal/tour operator cannot be asked to pay the tax on behalf of either hotels or airlines, there are different taxes applied to hotels and travel portals. If MakeMyTrip was indeed a hotel company and owned the hotels, it would be allowed an abatement of 60%, that is, taxes would be paid on 40% of the billing. As a tour operator, however, the abatement is higher at 90%. So, even if it wanted, MakeMyTrip could not collect taxes on behalf of hotels/airlines.