A large part of the government’s attempt to regain credibility after various tax misadventures including the retrospective taxation legislation have centred around its decision to not appeal decisions that have gone against the taxman in various courts/forum.
A large part of the government’s attempt to regain credibility after various tax misadventures including the retrospective taxation legislation have centred around its decision to not appeal decisions that have gone against the taxman in various courts/forum. Which is why, it comes as a surprise to see the taxman filing an appeal against the Delhi High Court ripping into it in the MakeMyTrip case. In January, the travel portal’s vice-president (finance) was arrested for failing to deposit service tax after allegedly collecting it from those buying hotel room nights from it—MakeMyTrip had argued it had deposited service taxes on the commissions earned by it, but the tax on the room nights would have to be deposited by the hotels to whom it transferred all receipts after deducting its commission. While a two-judge bench ruled in favour of MakeMyTrip, it was so incensed, it awarded costs to the travel portal and ruled that the service tax collected ‘voluntarily’ after the arrest be refunded.
Apart from the issue of whether MakeMyTrip was a commission agent or an actual owner of the rooms—the latter would mean it owned/operated 30,000 hotels!—the two-judge bench’s ire was reserved for the fact that the arrest had taken place without due process—issuing a showcause notice and letting the portal rebut the charges—and without examining whether MakeMyTrip was a habitual offender or in danger of fleeing. The court ruled, fairly reasonably, that before arrest under Section 91 of the Finance Act, the company had to be issued a show cause notice under Sections 72 and 73. The power of arrest, the court ruled, was “to be used with great circumspection and not casually”.
The service tax department is right in appealing the refund provision since, as it argues, the tax deposited after the arrest was with the magistrate’s court and not with it. But the real killer is its statement that “the power of arrest is exercised in the scheme of the Finance Act … there is no other requirement”. The court, the taxman alleges “has read words into Section 89 of the Finance Act, 1994 that do not exist”. If the interpretation given by the High Court is followed, it says, “it will result in the powers of arrest granted to revenue authorities becoming completely redundant and non-exercisable”. The taxman’s special leave petition justifies this arrest-first-show-cause-later by arguing “There is no such stipulation that the procedure as provided under Section 73A of the Act must be complied with, in order to exercise the powers of arrest under Section 91 of the Finance Act. In fact, the CBEC Circular dated 17.09.2013 clearly shows that an arrest can be made during the investigation only”. The purpose of the arrest, it brazenly argues while turning on its head the idea of natural justice, “is to conduct a fair investigation which thereafter, results in the issuance of a Show Cause Notice and adjudication of the amount as contemplated under Section 73A (3) and (4)”. While the taxman has asked the Chief Justice of India “whether, before arresting a person under Section 90 and 91 of the Finance Act, 1994 the procedure prescribed under Sections 72 and 73A (3) and (4) must be complied with?”, this is something the finance ministry should have told it.