RAJNISH BHATNAGAR, J.

1. The present application U/s 438 of Cr.P.C has been preferred by the petitioners challenging the order dated 04.02.2021 passed by the Ld. A.S.J., Patiala House Court, New Delhi by virtue of which anticipatory bail application of the petitioners had been rejected.

2. It is submitted by the Ld. counsel for the petitioners that the investigation against the company M/s KMG Industrial Traders Pvt. Ltd. in BAIL APPLN. 458/2021 Page 1 of 25 Signature Not Verified Digitally Signed By:KAMAL KANT MENDIRATTA Signing Date:14.06.2021 20:20 which the applicants are directors by GST department started in June 2018 and since then the investigation is still continuing. It is further submitted that the investigation in the present case pertains to availment of wrongful ITC to the tune of Rs. 22.42 Crores on the strength of certain invoices received from companies namely Galux International, M/s Shriram Overseas, M/s Delta Agrotech Pvt. Ltd. which were controlled by brothers Sanjay Dhingra and Gulshan Dhingra. It is further submitted that it is alleged against M/s KMG Ltd. that the company did not receive goods and only received invoices against which ITC was wrongly availed and the said invoices were not genuine. Rather, it has been argued that it is the case of the petitioners that they are not the creators of the said alleged documents but are bonafide recipients/purchaser of the said goods as all the payments against the said purchases were made through bank transfers which are duly reflected in the books of accounts. It is further submitted that there is sufficient evidence like Dharamkata slips, stocks in hand of over 7 crores on the business premises of the petitioners which primafacie establishes that during the search of GST department on 28.06.2018 no discrepancy in the stock was found by the officers of GST.

3. It is further submitted that the value of the goods at the time of search was around 7 crores as per the petitioner's books of accounts. It is further submitted that the petitioners were issued summonses U/s 70 of GST Act to appear before the GST department on 06.08.2018. It is further submitted that on the said date Mr. Pawan Goel who was looking after the business of the company, tendered his statement U/s 70 of GST Act and further submitted documents like balance sheets, bank ledger statements etc. to the BAIL APPLN. 458/2021 Page 2 of 25 Signature Not Verified Digitally Signed By:KAMAL KANT MENDIRATTA Signing Date:14.06.2021 20:20 respondent (department). It is further contended that the summonses were duly attended by Sr. accountant, who also submitted more documents which could not be submitted earlier. It is further submitted that the department resorted to coercive measures by blocking the bank account of the petitioners vide order dated 07.08.2020 in terms of Section 83 of CGST Act. It is further submitted that the pending ITC credit of Rs. 1.25 Crores was also blocked with the department which lead to the losses to the petitioners. It is further submitted that the steps were taken by the petitioners to get the bank account defreezed in order to discharge liabilities such as salaries, EMIs, TDS, GST etc. It is further submitted that it was agreed with the respondent (GST Department) that account will only be defreezed on the condition of depositing Rs. 2.5 crores and also credit will be opened.

4. It is further submitted that the said amount was deposited on 08.09.2020. However, bank debit was partially allowed to discharge liabilities towards salary of 70% and also no credit was allowed to be used. It is further submitted by the counsel for the petitioners that the petitioners have co-operated in the investigation and even deposited the amount as agreed but despite that the department is harassing the petitioners with the sole objective of arresting them but no purpose would be served by keeping the petitioners in custody.

5. It is further submitted that other co-accused persons who are the creators of the alleged documents namely Sanjay Dhingra and Gulshan Dhingra are on regular bail and now the investigation has been completed and show cause notice have been issued to them, wherein the amount BAIL APPLN. 458/2021 Page 3 of 25 Signature Not Verified Digitally Signed By:KAMAL KANT MENDIRATTA Signing Date:14.06.2021 20:20 alleged to be wrongly availed by M/s KMG is already sought to be demanded from the said people. It is further submitted that in the case of petitioners no show cause notice or final assessment has been done which could conclusively determine the liability of the company in which the applicants/petitioners are directors.

6. It is further submitted that there has been no investigation of the subsequent manufacturers to whom the said goods have been sold in the normal course of trade and business. It is further submitted by the counsel for the petitioners that the department has wrongly alleged that no goods have been received by the petitioners under the alleged invoices on the strength of which Rs. 22.42 crores have been availed. The entire case is based on documents which are all in the custody of the department. It is further submitted by the counsel for the petitioners that the company M/s KMG is a 40 years old company which is carrying on its trade business of non ferrous metals and there has not been any discrepancy in any of their stocks.

7. It is further submitted that the applicants/petitioners are not habitual offenders and have deep roots in the society and they do not have any other case against them. It is further submitted that it will be unfair to arrest the applicants/petitioners after three years when show cause notice has already been issued to the main person. It is further submitted that the petitioners were summoned by the IO on 15.02.2021, 18.02.2021, 26.02.2021, 05.03.2021 and 25.03.2021 and all the above said summonses were duly BAIL APPLN. 458/2021 Page 4 of 25 Signature Not Verified Digitally Signed By:KAMAL KANT MENDIRATTA Signing Date:14.06.2021 20:20 attended by the petitioners and the petitioners have fully co-operated in the investigation.

8. On the other hand, it is submitted by the Ld. Sr. Standing Counsel for the respondent (Department) by relying on the counter affidavit dated 17.03.2021 that the said three firms in relation to which the transactions with the petitioners were found to be non genuine, certain statements of transporters have been recorded to show missing chain of transportation. It is further submitted by the Ld. Sr. Standing Counsel for the respondent (department) that no goods have been received by M/s KMG from the said three firms, therefore, the credit availed by M/s KMG is not admissible. It is further submitted by the Ld. Sr. Standing Counsel that during the investigation one more firm has been unearthed namely M/s Sant Overseas from which ITC credit of Rs. 2.9 crores was availed.

9. It is further submitted by the Ld. Sr. Standing Counsel for the respondent (department) that statement of Pawan Goel was recorded on 18.02.2021 and he was asked about M/s Everest Road Lines and he showed ignorance about the whereabouts of the transporter and stated that the payment of the transporter was done by his vendors and as regard purchase from M/s Sant Overseas, he stated that they deal with Gulshan Dhingra and Sanjay Dhingra. It is further submitted by the Ld. Sr. Standing Counsel that during the course of investigation, statement of one Suresh Bansal of M/s Balaji Roadways was recorded who stated that he has never transported any goods to M/s Sant Overseas, however, he further stated that he had provided bilties to Sanjay Dhingra, who is the owner of M/s Kwality BAIL APPLN. 458/2021 Page 5 of 25 Signature Not Verified Digitally Signed By:KAMAL KANT MENDIRATTA Signing Date:14.06.2021 20:20 Limited who used to pay him transportation commission and after the transfer of money in his bank account, the said Sanjay Dhingra used to take money in cash from him. It is further submitted that as far as Everest Road Lines is concerned, it is a proprietorship concern of M/s Ashok Kumar Dhingra, who runs this proprietorship firm from his residential house and search was conducted but nothing was found in relation to transportation of these supplies.

10. It is further submitted that the relevant statements of the witnesses have been recorded in regard to the premises from where these transport business was run and according to these statements no such transport firms ever existed or goods transported. It is further submitted by the counsel for the respondent that Sant Overseas existed only on papers and the transporters involved in the supply from Sant Overseas to M/s KMG have also denied transportation, which clearly shows that the supplies to M/s KMG and other suppliers are fake and actual movement of goods has not taken place. It is further submitted that the fake ITC availed by M/s KMG now stand at approximately Rs. 2.5 crores. Reliance has been placed on Bharat Raj Punj Vs. Commissioner of CGST, Jaipur, Vimal Yashwantgiri Goswami Versus State of Gujrat and P.V. Ramana Reddy Vs. UOI & Ors. (2019) 104 taxmann.com 407 ( Telangana), Ashish Jain Vs. UOI , 2019 (29) GSTL 6 (Bom.).

11. The Punjab and Haryana High Court passed a judgment in C.W.P. No. 24195 of 2019 (O & M), Akhil Krishan Maggu & Anr. Versus. Deputy Director, Directorate General of GST Intelligence & Ors. which BAIL APPLN. 458/2021 Page 6 of 25 Signature Not Verified Digitally Signed By:KAMAL KANT MENDIRATTA Signing Date:14.06.2021 20:20 has considered the relevant judicial pronouncements from paragraph no.7 onwards which are as follows :-

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 taken on whimsical grounds; it must be based on 'credible material'.

The constitutional safeguards laid out in D.K. Basu's case (supra) in the context of the powers of police officers under the Cr PC and of officers of Central Excise, Customs and enforcement directorates, are applicable to the exercise of powers under the FA in equal measure. An officer whether of the Central Excise department or another agency like the DGCEI, authorised to exercise powers under the CE Act and/ or the FA will have to be conscious of the constitutional limitations on the exercise of such power.

(vi) In the case of MMT, without even an SCN being issued and without there being any determination of the amount of service tax arrears, the resort to the extreme coercive measure of arrest followed by the detention of Mr. Pallai was impermissible in law.

(vii) In terms of C.B.E. & C.'s own procedures, for the launch of prosecution there has to be a determination that a person is a habitual offender. There is no such determination in any of these cases. There cannot be a habitual offender if there is no discussion by the DGCEI with the ST Department regarding the history of such assessee. Assuming that, for whatever reasons, if the DGCEI does not talk to ST Department, certainly it needs to access the service tax record of such assessee. Without even requisitioning that record, it could not have been possible for the DGCEI to arrive at a reasonable conclusion whether there was a deliberate attempt of evading payment of service tax. In the case of MMT, the decision to go in for the extreme step of arrest without issuing an SCN under Section 73 or 73A(3) of the FA, appears to be totally unwarranted.

(viii) For the exercise of powers of search under Section 82 of the FA, BAIL APPLN. 458/2021 Page 9 of 25 Signature Not Verified Digitally Signed By:KAMAL KANT MENDIRATTA Signing Date:14.06.2021 20:20

(i) an opinion has to be formed by the Joint Commissioner or Additional Commissioner or other officers notified by the Board that "any documents or books or things" which are useful for or relevant for any proceedings under this Chapter are secreted in any place, and (ii) the note preceding the search of a premises has to specify the above requirement of the law. The search of the premises of the two petitioners is in clear violation of the mandate of Section 82 of the FA. It is unconstitutional and legally unsustainable.

(ix) The Court is unable to accept that payment by the two petitioners of alleged service tax arrears was voluntary. Consequently, the amount that was paid by the petitioners as a result of the search of their premises by the DGCEI, without an adjudication much less an SCN, is required to be returned to them forthwith.

(x) It was imperative for the DGCEI to first check whether the entity whose employees are sought to be arrested has regularly been filing service tax returns or is a habitual offender in that regard. It is only after checking the entire records and seeking clarification where necessary, that the investigating agency can possibly come to a conclusion that Section 89(1)(d) is attracted. None of the above safeguards were observed in the present case. The DGCEI acted with undue haste and in a reckless manner.

(xi) Liberty is granted to the officials of MMT and IBIBO to institute appropriate proceedings in accordance with law against the officers of the DGCEI in which the supplementary affidavits filed in these proceedings and the replies thereto can be relied on. This holds good for the officials of the DGCEI as well when called upon to defend those proceedings in accordance with law.

(xii) The Court cannot decline to exercise its jurisdiction and clarify the legal position as regards the interpretation of the scope and ambit of the powers under Sections 89 , 90 and 91 of the FA. This is clearly within the powers of this Court. That is why this Court has decided to proceed with these petitions notwithstanding that the criminal petitions may be pending in the criminal jurisdiction of this Court.

(xiii) The Court is satisfied that in the present case the action of the DGCEI in proceeding to arrest Mr. Pallai, Vice President of MMT, was contrary to law and that Mr. Pallai's Constitutional and Fundamental Rights under Article 21 of the Constitution have been violated. The Court is conscious that Mr. Pallai has instituted separate proceedings for quashing of the criminal case and, therefore, this Court does not propose to deal with that aspect of the matter.

Delhi High Court in Para 80-82 has carved out exceptions where power of arrest may be resorted. Para 80-82 are extracted below:

81. In Technomaint Contractors Ltd. v. Union of India- 2014 (36) S.T.R. 488 (Guj.), the Gujarat High Court held that Section 73C of the FA cannot be activated for making a recovery even before adjudication.

82. In the context of the provisions for arrest under the Central Excise Act, 1944 , the DGCEI has published a Manual in 2004 containing guidelines to the CE Officers on when and in what circumstances resort should be had to the coercive step of arrest. In Chapter X Para 7 of the said Manual, it is stated that arrest can be made prior to the issue of an SCN but only "where fraudulent intent is clear (prima facie there is evidence of mens rea) or where the evidence is enough to secure a conviction or where the person is likely to abscond, tamper with evidence or influence the witnesses if left at large. Arrest at the investigation stage should be resorted to only when it is unavoidable."

(Emphasis supplied) Concededly, Hon'ble Supreme Court vide order dated 23.01.2019 has upheld aforesaid decision of Delhi High Court.

7.1 Relying upon decision of Delhi High Court, in the case of Jayachandran Alloys (P) Ltd. Vs. Superintendent of GST & C. Ex., Salem 2019 (25) G.S.T.L. 321 (Mad.), Madras High Court has concluded, in the relevant Paras as below:

(Emphasis Supplied ) 7.2 Gujarat High Court in the case of VIMAL YASHWANTGIRI GOSWAMI Vs STATE OF GUJARAT 2019-TIOL-1746-HC- AHMGST has concluded in relevant Para as below:

RAJNISH BHATNAGAR, J JUNE 04, 2021 Sumant BAIL APPLN. 458/2021 Page 25 of 25 Signature Not Verified Digitally Signed By:KAMAL KANT MENDIRATTA Signing Date:14.06.2021 20:20