Service tax Department can not audit under rule 5A(2)-Delhi High Court quashes/Strikes down Rule 5A2 and Notification 23/2014 Circular 181/7/2014 Ultra Vires to Finance Act.
Case Law Details:
W.P.(C) 5192/2015 & CM No. 9417/2015
Mega Cabs Pvt. Ltd (Petitioner) vs. UOI and Ors (Respondents)
Date of Judgment: 03/06/2016
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru
With effect from 28.05.2012, Section 72A has been inserted in the Finance Act, 1994, providing for the Special Audit under Service Tax to be conducted by a chartered accountant or cost accountant as nominated by Commissioner. Whereas the Rule 5A(2) provided for production of records by the assessee to the authorised officer or the audit party deputed by the Commissioner or C&AG.
On 19-12-2013, the Allahabad High Court rejected a writ petition objecting to an intimation issued by Central Excise Department under Rule 5A(2) demanding documents from the assessee for making a reference to conduct an Audit, the petition challenged the vires of Rule 5A(2) on the ground that the provision of Rule 5(A)(2) as inserted by Notification No.45/2007-ST to be ultra vires and contrary to the provision of Section 72 of the Service Tax Act. Hon’ble Allahabad High Court held that Rule 5A of the Service Tax Rules, 1994 was just to facilitate the provisions of section 72A
Later, on 4th August, 2014, the Hon’ble Delhi High Court in Travelite India case had ruled that the Finance Act, 1994 does not authorise a general audit of the type envisioned by Rule 5A(2) of the Service Tax Rules, 1994 and has declared rule 5A(2) as ultra vires of the rule making powers. The Court had also quashed the CBEC circular dated 1.1.2008 to the extent it provides clarifications on Rule 5A(2).
Against the aforementioned judgment of Delhi High Court in Travelite, a Special Leave Petition No. 34872/2014 was filed in the Supreme Court by the Union of India wherein the Supreme Court by order dated 18th December 2014, stayed of the operation of the decision of Delhi High Court in Travelite case.
However, on 05-12-2014, CBEC issued the service tax notification no. 23/2014 substituting the rule 5A and provided for Service Tax Audits by the parties deputed by the Commissioner. Further the Circular 181/7/2014 dated 10-12-2014 was issued by the CBEC clarifying that such parties essentially include departmental officers.
Later CBEC also issued a circular no. 995/2/2015-CX dated 27/02/2015 laying down Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates-reg
Brief Facts of the Case:
The Petitioner was in the business of running a radio taxi service and was also engaged in selling advertisement space. On 9th July 2013, the Additional Commissioner (Audit) issued a letter with 6 annexures to the Petitioner seeking information for conducting audit of the records of the Petitioner under Rule 5A of the ST Rules, 1994 as it then stood for the years 2008-09 to 2012-13. The Petitioner in a reply sought deferment of the audit in view of the challenge to Rule 5A of the ST Rules as it then stood in the petition filed before this Court by Travelite (India). After the insertion of Section 94 (2) (k) of the FA, the Assistant Commissioner of Service Tax Department issued a letter dated 25th September 2014 stating that the Department has deputed its officers to conduct the verification/scrutiny of the records of the Petitioner. By a reply dated 8th October 2014, the Petitioner referred to the decision in Travelite (India) (supra) and took the stand that the Department had no power to conduct an audit. Thereafter the Deputy Commissioner Audit-I issued the letter dated 30th April 2015 citing the notification dated 5th December 2014, Rule 5A(2) of the ST Rules as amended, and Circular dated 10th December 2014, and informed that its officers had been deputed to conduct the audit/verification of the Petitioner’s records for the period from 2010-11 to 2013-14.
The present petition was filed against the said letter dated 30/04/2015.
The Hon’ble Delhi High Court while delivering its judgment clarified that in view of the fact that the decision of this Court in Travelite (India) (supra) had been stayed by the Supreme Court, the Court in the present petition proposed to examine the question of the constitutional validity of the amended Rule 5A(2) of the ST Rules and the circulars and letter in question independent of the decision in Travelite (India).
While disposing off the petition, the Delhi High Court held as under :
45. Resultantly, the Court:
i) declares 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 the FA and, therefore, strikes it down to that extent;
(ii) holds that the 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.
(iii) declares the Circular No. 181/7/2014-ST dated 10th December 2014 of the Central Government to be ultra vires the FA and strikes it down as such.
(iv) 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.
(v) 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 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.