Service tax Audit by Department Officers-Detailed Analysis by CA Ankit Gulgulia narratting date-wise legal provisions and recent judicial rulings
Major Issues to be Decided:-
(a) Whether Section 94(1) read with Section 94 (2)(k) of the Finance Act, 1994 (‘FA’) to the extent that the amended Rule 5A(2) empowers deputing departmental officers or officers from the Comptroller and Auditor General of India (‘CAG’) to ‘demand’ documents mentioned therein is in Conflict with Section 72A of the FA?
(b) Constitutional validity of Section 94(2)(k) of the FA
(c) Sanctity of Circular No. 181/7/2014-ST dated 10th December 2014 authorising the Departmental Officers to audit Service Tax Assessee in terms of the departmental instructions already issued
Background of the Judgment and Chronological movement of this Issue:-
|Key Dates||Legal Build-up|
|28th December, 2007||The Central Government in the Ministry of Finance, Department of Revenue inserted Rule 5A in the Service Tax Rules, 1994 (“ST Rules”)|
|1st January, 2008||CBEC also issued an instruction explaining the scope of the powers of the various officers of the Department to carry out audit or scrutiny of the records of service tax payers.|
|Date of Appeal of Travelite||Both the Notification dated 28th December 2007 inserting Rule 5A as well as the CBEC Instruction dated 1st January 2008 were challenged before this Court in a writ petition by Travelite (India)|
|26th September, 2012||SKP SECURITIES LTD. / INFINITY INFOTECH PARKS LTD. Versus DEPUTY DIRECTOR (RA-IDT) & ORS 2013 (29) S.T.R. 337 (Cal.) it was held by Hon’ble Calcutta HC that CAG is not empowered to conduct audit of nongovernmental-company pursuant to the provisions of service tax laws. Rule 5A was held ultra vires to section 94 in context to nongovernmental company audit by CAG while referring the case to chief justice for divisional bench adjudication.|
|30th April, 2014||Above Judgement of SKP (Supra) was again upheld in the case of INFINITY INFOTECH PARKS LTD. Versus UNION OF INDIA 2014 (36) S.T.R. 37 (Cal.)|
|4th August, 2014||Travelite (India) v. Union of India 2014 (35) STR 653 (Delhi), a Division Bench of this Court struck down Rule 5A(2) as being ultra vires Section 72A read with Section 94(2) of the FA. The consequent Circular of CBEC Instruction dated 1st January 2008 was also struck down. It was clarified that Service Tax Audit Manual, 2011 was merely an instrument of instructions for the Service Tax authorities and has no statutory force|
|6th August, 2014||94(2)(k) was inserted vide Finance Act, 2014|
|5th December, 2014||New Rule 5A(2) Substituted|
|10th December, 2014||Circular No. 181/7/2014-ST was issued by the CBEC clarifying that in view of the insertion of Section 94(2)(k), the officers of the Service Tax Departments could proceed with conducting audits as before. It was stated that that expression ‘verified’ used in Section 94(2)(k) of the FA was of wide import and would include within its scope audit by the departmental officers.|
|18th December, 2014||Special Leave Petition No. 34872/2014 was filed in the Supreme Court by the Union of India vide order of the Supreme Court while directing notice in the said Special Leave Petition directed that there would be a stay of the operation of the decision of this Court in Travelite (India) v. Union of India (supra)|
|27th February, 2015||Circular No. 995/2/2015-CX was issued by the CBEC on the subject “Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates” and this too contemplated the Department’s officers themselves undertaking audits. A Central Excise and Service Tax Audit Manual, 2015 was also issued by the Directorate General of Audit of the CBEC in this regard.|
|3rd June, 2016||Delhi HC Again Strikes Down (In the Present Case) the Amended Rule 5A (2) to the extent of Department’s authority to Conduct ‘Audit’ of Assessees registered under Service Tax.|
Erstwhile Rule 5A of ST Rules, 1994
“Rule 5A. Access to a registered premises (1) An officer authorised by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.
(2) Every assessee shall, on demand, make available to the officer authorised under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be, -……
Amended Rule 5A(2) of ST Rules, 1994:
“Rule 5A. (2) Every assessee, shall, on demand make available to the officer empowered under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, or a cost accountant or chartered accountant nominated under section 72A of the Finance Act, 1994,–
(i) the records maintained or prepared by him in terms of sub-rule (2) of rule 5;
(ii) the cost audit reports, if any, under section 148 of the Companies Act, 2013 (18 of 2013); and
(iii) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961 (43 of 1961),
for the scrutiny of the officer or the audit party, or the cost accountant or chartered accountant, within the time limit specified by the said officer or the audit party or the cost accountant or chartered accountant, as the case may be”
Section 94(2)(k) of the FA,1994
“94. Power to make rules.-(1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Chapter.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely (k) “imposition, on persons liable to pay service tax, for the proper levy and collection of tax, of duty of furnishing information, keeping records and the manner in which such records shall be verified”
Contentions of Appellant and Respondent (Vis – a – Vis Analysis)
|Appellant (Mega Cabs)||Respondent (UOI)|
|Issues||Law Referred||Law Referred||Issues|
|Although Rule 5A(2) of the ST Rules has purportedly been amended to overcome the defect pointed out by the Court in Travelite (India), the amended Rule 5A(2) continues to be ultra vires Section 72A of the FA||Travelite (India)Rule 5A
|Special Leave Petition No. 34872/2014 was filed in the Supreme Court by the Union of India||Travelite Judgement Referred is of no avail since the matter has been stayed by Hon’ble SC.|
|Rule 5A(2) expands the list of people who could seek production of records and that too on demand, none of the safeguards spelt out in Section 72A require to be observed by the people making such demand under Rule5A(2) of the Rules.||Rule 5ASection 72A||Rule 5A(2) has to be read in continuation of and consequent to Sections 72, 73 and 73A of the FA.|
|Essential Conditions of Subordinate Legislations not confirmed by Rule 5A(2)||Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills AIR 1968 SC 1232,
Union of India v. S. Srinivasan (2012) 7 SCC 683,
General Officer Commanding-in-Chief v. Subhash Chandra Yadav AIR 1988 SC 876 and
Sahara India (Firm) v. Commissioner of Income Tax (2008) 14 SCC 151
|Pandit Banarsi Das Bhanot v. State of M.P. AIR 1958 SC 909||Section 94 (2) (k) did not suffer from the vice of excessive delegation.
Section 94(2)(k) of the FA was not in conflict with Section 72A of the FA since Section 94(2) begins with the words “In particular and without prejudice to the generality of the foregoing power…”.
|Circulars and Notifications issued by CBEC also must conform to FA.||CCE v. Ratan Melting and Wire Industries 2008 (12) STR 416 (SC)||Government of Andhra Pradesh v. P. Laxmi Devi 2008 (4) SCC 720||The Petitioner has not demonstrated how its rights were prejudiced by the audit party of the department seeking to inspect the Petitioner’s records|
|CAG cannot Audit Books of Private Assessee’s||K. Satyanarayanan v. Union of India ILR (1996) II Delhi
Inter Continental Consultants v. Union of India 2013 (29) STR 9 (Delhi)
Indian & Eastern Newspaper Society, New Delhi v. Commissioner of Income Tax, New Delhi (1979) 4 SCC 248
|Safeguards for Audit in Companies Act, 1956, the Income Tax Act, 1961 and Central Excise Act, 1944 (‘CE Act’) do not Exist under Rule 5A(2) – Therefore Wide and Unguided Powers to Officers|
|No Notice requirement under Rule 5A(2) before deciding whether to audit or not which is essence of Section 72(1)(a) to 72(1)(d)||Sahara India (Firm), Lucknow v. Commissioner of Income Tax
SKP Securities Ltd. v. Deputy Director 2013 (29) STR 337 (Cal.)
Sadbhav Engineering Ltd. v. Union of India (Special Civil Application No. 14928/2014)
Larsen & Toubro Ltd. v. Commissioner of Value Added Tax (2014)73 VST 190 (Delhi).
|The recent Central Excise Circular & Manual issued by the Directorate General of Audit of the CBEC again did not take in to account the statutory scheme of the FA which did not permit such exercise to be undertaken.||
Circular No. 995/2/2015-CX dated 27th February 2015
|Section 94(2)(k) of the FA did not permit Rules to be made in respect of examination of accounts and records by any officer of the Service Tax Department.||Section 94(2)(k)|
|R.K. Garg v. Union of India 1981(4) SCC 675||The amendment was in the nature of a ‘validating’ law which was only to plug a loophole and correct the defects pointed out by this Court.|
Held by Hon’ble Delhi HC:
- Rule 5A(2) as amended in terms of Notification No. 23/2014-Service Tax dated 5th December 2014 of the Central Government, to the extent that it authorises the officers of the Service Tax Department, the audit party deputed by a Commissioner or the CAG to seek production of the documents mentioned therein on demand is ultra vires to the FA and, therefore, strikes it down to that extent;
- Expression ‘verify’ in Section 94(2)(k) of the FA cannot be construed as audit of the accounts of an Assessee and, therefore, Rule 5A(2) cannot be sustained with reference to Section 94(2)(k) of the FA.
- Circular No. 181/7/2014-ST dated 10th December 2014 of the Central Government is ultra vires to the FA and strikes it down as such.
- Quashes the letter dated 30th April 2015 issued by the Commissioner of Service Tax, Audit-1, New Delhi addressed to the Petitioner as being unsustainable in law.
- Declares that the CBEC Circular No. 995/2/2015-CX dated 27th February 2015 on the subject “Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates” and the Central Excise and Service Tax Audit Manual 2015 issued by the Directorate General of Audit of the CBEC are ultra vires to the FA, do not have any statutory backing and cannot be relied upon by the Respondents to legally justify the audit undertaken by officers of the Service Tax Department.
It is clearly evident from the chronological Build-up on the matter that the Issue will keep pondering from one goal post to another in Judicial Hinges. The matter has serious concern and stake for both the revenue and assessee since audit helps in locating a lot of non –compliances and recoveries on one side but is also a big harassment for most of assessee’s even in genuine cases and in light of unguided and uncontrolled powers of officials.
It is thus necessary to streamline the law and introduce necessary safeguards to the Audit in the Act / Rules itself to ensure more fluent Audit process. Further, it is critical that the law itself provides that once an audit is conducted by one of any agencies of Government that rests the matter and same period will not be subjected to any further audits / enquiries. This will be in line with government’s policy of Promoting ‘Ease of Business’.
About the Author:
CA Ankit Gulgulia
Author is Practicing Chartered Accountant in New Delhi/NCR and specialising in Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at firstname.lastname@example.org or at +91-9811653975
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