SERVICE TAX AUDIT UNDER RULE 5A OF SERVICE TAX RULES 1994 IS ULTRAVIRUS (CA SOHRABH JINDAL)

[CA SOHRABH JINDAL]

INTRODUCTION

It is a general practice for Service Tax Department to conduct audit of service tax assessee for the last five years by deputing their own officers of the rank of inspector and superintendent Service Tax Department also seeks voluminous details and seeks information in self-specified format / annexure of about 32 pages, which are not prescribed under the law.

On several occasions, the courts have held that the Department has to give the reason and opportunity of hearing before conducting an audit under the law even when the Parliament has given them the power to conduct special audit.

However, Service Tax Department without assigning any reasons routinely conducts audit even when it is not prescribed under the law and not conducting special audit.

There was a time when the Audit wings of the department were specialised units with senior inspectors. They even used to get a special pay. And many of the assessees happily welcomed these departmental audit officers who were very knowledgeable and could help the assessees in clarifying several doubts. Over the years greed and incompetent arrogance replaced decency and erudition and these officers became a big nuisance and most unwelcome in the premises of the assessees. They became an impediment for the normal work of the assessee's offices and it became prohibitively expensive to entertain these auditors. While Central Excise assessees accept Audit as an unavoidable evil, Service Tax assessees who are relatively new to the vagaries of Audit cannot understand why the Departmental auditors should come to their premises and audit their accounts when no other department does that.

The Notice of audit received from the Service tax department indicates that this audit is required to be done Under Rule 5A of the Service Tax Rules-1994

Rule 5A of the Service Tax Rules-1994 has been reproduced below--

5A . (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, -

(i)		the records as mentioned in sub-rule (2) of rule 5;
(ii)		trial balance or its equivalent; 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 audit party, as the case may be.]

In a recent writ petition by "Travelite (India) Versus UOI And Others" [2014 (8) TMI 200 - DELHI HIGH COURT ], The Hon'ble Delhi High Court has struck down Rule 5A of the Service Tax Rules 1994. (Judgement dated 4-8-2014)

According to HC, The Service Tax department has no authority to conduct audit under Rule-5A of the Service Tax Rules-1994. The Service Tax audit can be done under section 72A of the Finance Act-1994 (known as Service Tax Act).

In this matter, the assessee before approaching to the High Court had approached the Department for seeking reasons and under which law the Department has sent them the number of forms to be filled up; however, the Department did not respond and insisted for all such documents/information even by issuing summons. The assessee has then approached the High Court.

POWER OF SERVICE TAX AUDIT

Now the Hon’ble Delhi HC has made it clear that Service Tax audit can be initiated by the Service Tax Department only under the authority of Section 72A of the Finance Act-1994 (known as Service Tax act) and to initiate this power of audit the commissioner must have reasons to believe that any person liable to pay service tax (herein referred to as "such person"),--

(i)		has failed to declare or determine the value of a taxable service correctly; or
(ii)		has availed and utilised credit of duty or tax paid -

(a)		which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or
(b)		by means of fraud, collusion, or any wilful mis-statement or suppression of facts; or

(iii)

has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner,

he may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him, to the extent and for the period as may be specified by the Commissioner.

CONCLUSION

This Judgement given by Hon’ble Delhi HC is of a great importance and a major relief for the Service Tax assessee all over India specially registered in Delhi.

Now if there is any service tax audit notice is received or any notice is pending with the assessee, then in my opinion by taking the benefit of this Judgement, the assessee can safely argue with the department.

Hope the information will assist you in your Professional endeavors. In case of any query/ information, please do not hesitate to write back to us.

Thanks and Best Regards

CA SOHRABH JINDAL

FCA, DISA(ICAI)

F-14B, Ground Flr, Street No-29,

Madhu Vihar, Patparganj,

Delhi-110092.

Desktel: +91-11-47603624

Mobile: +91 9810216640

Email: sohrabh2006@gmail.com

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the authors nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this document nor for any actions taken in reliance thereon.

Readers are advised to consult the professional for understanding applicability of this newsletter in the respective scenarios. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. No part of this document should be distributed or copied (except for personal, non-commercial use) without our written permission.