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TMI Blog2016 (6) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments mentioned therein. It is contended that this is in conflict with Section 72A of the FA and beyond the rule making power of the Central Government. 1.2 The Petitioner has also challenged the constitutional validity of Section 94(2)(k) of the FA on the ground that it gives "plainly unguided and uncontrolled" delegated powers to the Central Government for framing rules. It is stated that Section 94(2)(k) of the FA suffers from the vice of excessive delegation. 1.3 Also challenged is the Circular No. 181/7/2014-ST dated 10th December 2014 issued by the Central Board of Excise and Customs ('CBEC') stating that since a clear statutory backing for conducting audit is available under Section 92(4)(k) of the FA, the Departmental Officers would be directed to audit service tax Assessee in terms of the departmental instructions already issued. 1.4 Lastly, the petition challenges a letter dated 30th April 2015 issued by the Commissioner of Service Tax, Audit-1, New Delhi (Respondent No.2) informing the Petitioner that a team of officers of Circle-4, Group-1 of the said Commissionerate comprising three Superintendents and an Inspector would be verifying the relevant recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... writ petition by Travelite (India). The challenge in the said petition was also to a letter issued by the Commissioner of Service Tax dated 7th November 2012 seeking the records of the said Petitioner Travelite (India) for the years 2007-08 till 2011-12 to be made available for scrutiny by an audit party. 6. In 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. 7. Against the aforementioned judgment of this Court in Travelite (India) v. Union of India (supra), Special Leave Petition No. 34872/2014 was filed in the Supreme Court by the Union of India. By order dated 18th December 2014, 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). 8. To comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 (Respondent No. 3) herein issued the impugned letter dated 30th April 2015 citing the impugned 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. 12. Thereafter the present petition was filed seeking the reliefs as noted hereinbefore. Notice was directed to issue on 22nd May 2015. 13. The Court would like to clarify at the outset that in view of the fact that the decision of this Court in Travelite (India) (supra) has been stayed by the Supreme Court, the Court in the present petition proposes to examine the question of the constitutional validity of the amended Rule 5A(2) of the ST Rules and the circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the decision in K. Satyanarayanan v. Union of India ILR (1996) II Delhi, it is contended that the CAG is not expected to conduct audit of the books of accounts and records of an individual service tax Assessee. The decisions in Inter Continental Consultants v. Union of India 2013 (29) STR 9 (Delhi) and Indian & Eastern Newspaper Society, New Delhi v. Commissioner of Income Tax, New Delhi (1979) 4 SCC 248 were also referred to. (vi) Drawing a comparison with the corresponding provisions of the Companies Act, 1956, the Income Tax Act, 1961 and Central Excise Act, 1944 ('CE Act') it was submitted that the safeguards incorporated in the above provisions are not to be found in Rule 5A(2) and, therefore, it gave a wide unguided powers to the officers of the Department and to the audit parties deputed by the Commissioner to 'demand' the past record of any number of years without explaining the reasons for doing so. (vii) The requirements for an Assessee to have its accounts, records etc. audited in terms of Section 72A of the Finance Act had to be preceded by formation of a belief by the Commissioner that any of the four contingencies listed out in Section 72(1)(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mending Rule 5A(2). (ii) Rule 5A(2) has to be read in continuation of and consequent to Sections 72, 73 and 73A of the FA. Rule 5 A (2) so read cannot be said to be ultra vires the FA. (iii) Section 94 (2) (k) did not suffer from the vice of excessive delegation. It only acted as a check on the general powers under the unamended Rule 5A. 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...". Reliance is placed on the decision in Pandit Banarsi Das Bhanot v. State of M.P. AIR 1958 SC 909. There was enough legislative guidance under Chapter V of the Finance Act for exercise of the rule making power under Section 94(2)(k) of the Act. (iv) The Petitioner has not demonstrated how its rights were prejudiced by the audit party of the Department seeking to inspect the Petitioner's records. Reliance was placed on the decisions in Association of Leasing & Financial Service Companies v. Union of India 2011 (2) SCC 352 regarding the legislative competence of the Parliament to levy and collect service tax. Reliance is also placed on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial which is available or which he has gathered, give an order in writing after complying with the rules of natural justice. The assessment in such circumstance is made on the value of the taxable service "to the best of his judgment". The AO determines the sum payable by the Assessee or refundable to the Assessee on the basis of such assessment. Therefore, even for the purpose of Section 72 a prima facie satisfaction is to be arrived at that the return filed by the Assessee fails to assess the tax in accordance with law. Even in such an instance the calling for the accounts, documents and other evidence is not to be undertaken by an AO mechanically. 18. The second important factor to be noted as far as Section 72 of the FA is concerned is that it is not any or every officer of the service tax department who can exercise the power thereunder. The function of making an assessment has to be assigned to such officer. It is only such officer who is entrusted with such power who can proceed to ask for the documents, records, accounts etc. 19. Section 72 A of the FA, which deals with the special audit, reads as under: "72A. Special Audit: (1): If the Commissioner of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly availed or utilised credit or paid tax beyond the normal rebates having regard to the nature of the taxable services provided or by means of fraud, collusion or any wilful misstatement or suppression of facts; or (iii) operations spread out in multiple locations and it is not practicable to obtain a true and complete picture of the accounts from the registered premises in the jurisdiction of the concerned Commissionerate. 21. It is only where one of the above three contingencies exists that the Commissioner may direct the Assessee to "get his accounts audited either by a Chartered Accountant or a Cost Accountant nominated by such Commissioner". The extent of the audit and the period for which it should be conducted is also to be specified by the Commissioner. 22. Although Section 72A of the FA itself does not expressly provide for giving the Assessee a hearing prior to passing of an order thereunder, the implied necessity for doing so has been explained by the Supreme Court in Sahara India (Firm) v. Commissioner of Income Tax (supra) in the context of Section 142 (2A) of the Income Tax Act, 1961 which also envisages the Assessee having to get its accounts audited by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to itself undertake audit of the Petitioner's accounts is also not denied. 27. Section 82 of the FA is relevant since it authorises search of the premises. It reads as under: "82. Power to search premises:- (1) Where the Joint Commissioner of Central Excise or Additional Commissioner of Central Excise or such other Central Excise Officer as may be notified by the Board has reasons to believe that any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Chapter, are secreted in any place, he may authorise in writing any Central Excise Officer to search for and seize or may himself search and seize such documents or books or things. (2) The provisions of the Code of Criminal Procedure, 1973, relating to searches, shall, so far as may be, apply to searches under this section as they apply to searches under that Code." 28. What is immediately relevant is that the above power to search the premises is also hedged in by certain limitations. One is the requirement of the officer to record reasons to believe that (i) there are documents or books that have been secreted in a place (ii) such documents or books ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to providing any service receipt or procurement of anybody's service and payment of such service. 32. Interestingly, Rule 5A(2) does not restrict itself to such records as mentioned in Rule 5(2) but also required production of cost audit reports under Section 148 of the Companies Act, 2013 and the Income Tax Audit report under Section 44AB of the Income Tax Act 1961. These documents are not envisaged to be produced under Rule 5(2) and definitely not under any of the provisions of the FA. This is, therefore, going far beyond the FA itself. 33. Now turning to the persons who can make a demand for such documents from an Assessee, Rule 5A(2) lists out the following persons: (i) officer empowered under Rule 5A(1). (ii) the audit party deputed by the Commissioner. (iii) the CAG (iv) a Cost Accountant (v) a Chartered Accountant. 34. It must straightway be noted that as far as a Cost Accountant or a Chartered Accountant (CA) is concerned, Mr. Mittal made it clear that the Petitioner would have no objection to producing before a Cost Accountant or a CA the documents of accounts, records etc. but only if such Cost Accountant or CA has been nominated by the Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manual 36. The instructions issued by the CBEC in this regard justify the above apprehension regarding the indiscriminate use of the powers under Rule 5A (2) of the ST Rules. The latest instruction is contained in Circular No. 995/2/2015-CX dated 27th February 2015. It is a very detailed instruction regarding the norms to be followed by the Audit Commissionerates. It sets out the manner in which units would be selected for audit in a year. Para 5.1 of the said circular states that audit groups would be deployed to cover the large, medium and small units and their composition would be of two or three Superintendents and three to five Inspectors for conducting audit of large assesses/tax payers, two Superintendents for medium size Assessee and one to two for small size Assessees. There is no requirement that any of these officers should be duly authorised to carry out an assessment for the purpose of Section 72 of the Act or adjudication for the purposes under Section 73 of the FA. The entire instruction appears to be without any reference to the applicable provisions in the FA or the Rules. 37. A recent Manual has been issued by the CBEC in 2015, in replacement of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following principles appear to be well-settled: (i) Under the Constitution the legislature has plenary powers within its allotted field; (ii) Essential legislative function cannot be delegated by the legislature, that is, there can be no abdication of legislative function or authority by complete effacement, or even partially in respect of a particular topic or matter entrusted by the Constitution to the legislature; (iii) Power to make subsidiary or ancillary legislation may however be entrusted by the legislature to another body of its choice, provided there is enunciation of policy, principles, or standards either expressly or by implication for the guidance of the delegate in that behalf. Entrustment of power without guidance amounts to excessive delegation of legislative authority; (iv) Mere authority to legislate on a particular topic does not confer authority to delegate its power to legislate on that topic to another body. The power conferred upon the legislature on a topic is specifically entrusted to that body, and it is a necessary intendment of the constitutional provision which confers that power that it shall not be delegated without laying down princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... informing it of the appointment of an audit team to inspect all the records, books and accounts by the officers cannot be sustained in law. Conclusion 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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