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Rule 5A(2) related to Service Tax Audit is ultra-vires and is set asided by Delhi High Court in Travelite India Case

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The Hon’ble Delhi High Court in Travelite India case has set aside and quashed the letter of Commissioner of Service Tax seeking the records of the petitioner for scrutiny by an audit party under Rule 5A(2) of the Service Tax Rules, 1994. Quashing the letter, The Hon’ble Delhi High Court has also ruled that the Finance Act, 1994 does not authorise a general audit of the type envisioned by Rule 5A(2) and has declared rule 5A(2) as ultra viresof the rule making powers. The Court also quashed the CBEC circular dated 1.1.2008 to the extent it provides clarifications on Rule 5A(2).

It is notable that earlier, Allahabad High Court has ruled that Rule 5A(2) is just to facilitate Section 72A.

In the present case, the Petitioner who was a registered service tax assessee challenged the letter of the Commissioner of Service Tax seeking its records for the years 2007-08 till 2011-12 for scrutiny by an audit party under Rule 5A(2) of the Service Tax Rules,1994. The Petitioner also challenged the validity of Rule 5A(2) of the Service Tax Rules, 1994, brought into force by Notification no. 45/2007 dated 28.12.2007 as well as the instruction of the Central Board of Excise and Customs (“CBEC”) no. F. No. 137/26/2007-CX.4 dated 1.1.2008.

The petitioner approached the Delhi High Court under Article 226 of the Constitution of India. ( Power of High Courts to issue certain writs ) The main contention of the Petitioner   was that the powers of an assessing officer to call for records in respect of any period during which the respondents seek to intensively scrutinize receipts etc. i.e. a special audit can be ordered by recourse to Section 72-A of the Finance Act, 1994. Barring these, the Finance Act,does not contain any substantive power to call for records for scrutiny as is permissible under Rule 5A(2) or for the purpose of scrutiny by any authority outside of those created under the Act.

The relevant excerpts of the judgement of the Hon'ble court's are as under:

  “The only provision in Chapter V of the Finance Act on scrutiny and audit of records of the assessee is Section 72A of the Finance Act, 1994............”

“Section 72A envisages an audit of an assessee’s records only in special circumstances,namely, when there is a failure to declare or compute the value of the taxable service, when the utilization of CENVAT credit in excessive of the limit permissible or by fraud etc., and when the business operations of the assessee are dispersed across multiple locations.....”

“Apart from Section 94, the Revenue could not show any other substantive provision which justifies a probe into the records of the assessee, under conditions akin to those contemplated by Rule 5A(2). The Revenue was also unable to show the compulsion of arming authorities with such sweeping powers, under the Rules....”

Power delegated by an enactment does not enable the authority by regulations to extend the scope or general operation of the enactment but is strictly ancillary. It will authorise the provision of subsidiary means of carrying into effect what is enacted in the  statute itself and will cover what is incidental to the execution of its specific provision”

“It is apparent that the only type of audit within the contemplation of the statute is that stipulated for in Section 74A, i.e. a special audit when only certain circumstances are fulfilled. The Parliament thus had a clear intention to provide for only a special audit. The fact that Section 74A prescribes the conditions meriting such special audit compels the necessary inference that the Parliament did not intend to provide for a general audit that “every assessee” may be subjected to, “on demand”. This Court is thus of the opinion that any attempt to include provision for such a general audit through the back-door, such as through the impugned rule, is ultra-vires the rule making power conferred under Section 94(1). Rule 5A(2) must consequently be struck down.”

“Likewise, this Court finds that the impugned CBEC instruction, being in furtherance of Rule 5A(2), which rule is ultra-vires the Finance Act, 1994, is void for the same reasons. Executive instructions without statutory force, cannot possibly override the law; consequently, any notice, circular, guideline etc. contrary to statutory laws cannot be enforced.”

“The impugned circular seeks to put in place a mechanism for audit and scrutiny of documents with the objective of safeguarding the interests of the Revenue, in furtherance of the amendments made in the Service Tax Rules, as indicated in paragraph 7 of the circular. Since the parent statute in this regard, the Finance Act, 1994 itself does not authorise a general audit of the type envisioned by the impugned Rule 5A(2), and furthermore only stipulates that a special audit can be undertaken if the circumstances outlined in Section 72A are fulfilled. this Court finds that the impugned CBEC circular is not only an attempt to widen the  scope of the law impermissibly but also is patently contrary to the statute. The impugned circular, to the extent it provides clarifications on a Rule 5A(2) audit, is hereby quashed; consequently, the impugned letter is quashed and set aside.”

Read the text of Rule 5A of the Service Tax Rules, 1994 Click Here >>

Read the text of section 72A Click Here >>

Download the copy of the Judgement Click Here >>

Copy of Judgement of Allahabad High Court Click Here >>

CBEC Notification 23/2014 dated 5-12-2014 amending Rule 5A2 to provide audit by Departmental Officers Click Here >>

CBEC Circular 181/7/2014 dated 10/12/2014 Clarifying audit by Departmental Officers   Click Here >>

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