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2016 (6) TMI 163 - DELHI HIGH COURT

2016 (6) TMI 163 - DELHI HIGH COURT - 2016 (43) S.T.R. 67, [2016] 91 VST 499 (Del) - Power to Audit under Service Tax - Scope of Rule 5A(2) of service tax Rules, 1994 r.w.s. 94(1) and 94(2)(k) - Power to demand documents - challenged to 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 .....

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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 declared as ultra vires the FA and strikes it down as such. - Letter issued by the Commissioner of Service Tax, Audit-1, New Delhi addressed to the Petitioner declared as being unsustainable in law. - CBEC Circular No. 995/2/2015-CX dated 27th February .....

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U BAKHRU JJ. For the Appellant: Mr. J.K. Mittal and Mr. Rajveer Singh, Advocates. For the Respondent: Mrs. Sonia Sharma, Senior Standing counsel with Ms Neha Chugh,Advocate for R-2 and R-3. Ms. Jyoti Dutt Sharma, CGSC with Ms. Nimisha Gupta, Advocate for UOI/R-1. Dr. S. Muralidhar, J.: Introduction 1.1 The challenge in this petition by Mega Cabs Private Limited is to Rule 5A(2) of the Service Tax Rules, 1994 ('ST Rules') as amended .....

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nded 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. .....

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ent 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 records of the Petitioner's business in terms of Rule 5A to the ST Rules read with Section 94(1), 94 (2)(k) and 94(2)(n) of the FA as amended, during the first week of May 2015 for the financial years 2010-11 to 2013-14. The Petitioner was asked to cooperate and facilitate the officers in conducting the a .....

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er 2014. 3. By a Notification dated 28th December 2007, the Central Government in the Ministry of Finance, Department of Revenue inserted Rule 5A in the ST Rules. Consequent thereto, the CBEC also issued an instruction on 1st January 2008 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. 4. Rule 5A as inserted by the aforementioned Notification dated 28th December 2007 reads as .....

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itor 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 p .....

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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 judgme .....

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, an amendment was made to Section 94 of the FA by the Finance Act 2014 with effect from 6th August 2014 by inserting clause (k) of sub-section (2) which read as under: "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 matter .....

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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. 10. Thereafter Circular No. 995/2/2015-CX dated 27th February 2015 was issued by the CBEC on the subject "Central Excise and Service T .....

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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 th .....

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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 .....

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(India), the amended Rule 5A(2) continues to be ultra vires Section 72A of the FA (ii) While Section 72A of the FA only contemplates a special audit to be got done by the Assessee on the direction of the Commissioner, by a Cost Accountant or a Chartered Accountant ('CA'), Rule 5A(2) permits any officer of the Department or an audit party deputed by the Commissioner or the CAG (in addition to the Cost Accountant and the CA undertaking the special audit) to ask for production by .....

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C 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, it is submitted that the essential conditions for a validity of a subordinate legislation viz., that it (a) must conform to the provision of the statute under which it is framed (b) must be within the scope and purview of the rule making power of the authority, are not fulfilled in the present case. (iv) Relying on the decision i .....

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dia do not envisage the CAG performing audit of private entities. Referring 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 .....

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aining 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) to 72(1)(d) prima facie exist. That function cannot be performed without putting the Assessee to notice i.e. at a stage prior to the Commissioner deciding to direct the Assessee to get its accounts au .....

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ner of Value Added Tax (2014)73 VST 190 (Delhi). (viii) Even assuming the information was being sought pursuant to the powers of assessment of the service tax under Section 72 of the FA, considering that the Petitioner has been regularly filing service tax returns and regularly paying service tax, there was no occasion for a special audit to be ordered. (ix) The recent Circular No. 995/2/2015-CX dated 27th February 2015 issued by the CBEC on the subject "Central Exci .....

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of examination of accounts and records by any officer of the Service Tax Department. If the provision were so interpreted it would suffer from the vice of excessive delegation. Submissions of counsel for the Respondents 15. Countering the above submissions, Mrs. Sonia Sharma, learned Senior Standing counsel appearing for Respondent Nos. 2 and 3 and Ms. Jyoti Dutt Sharma learned counsel appearing for Respondent No. 1 submitted as under: (i) that the decision o .....

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t 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 f .....

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in Government of Andhra Pradesh v. P. Laxmi Devi 2008 (4) SCC 720 to urge that a mere fact that a hardship would be caused to the Assessee as a result of the fiscal statute, would not invalidate such statute. (v) 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. Relying on the decision in R.K. Garg v. Union of India 1981(4) SCC 675 it was submitted that greater play in the joints had to b .....

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h and the tax amount indicated therein is accepted as being correct. However under Section 72 of the FA two scenarios are envisaged. Section 72 reads as under: "72. Best judgement assessment:- If any person, liable to pay service tax,- (a) fails to furnish the return under section 70; (b) having made a return, fails to assess the tax in accordance with the provisions of this Chapter or rules made there under, the Central Excise Officer, may require the pe .....

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A, one scenario is where a person who is liable to pay service tax fails to furnish a return under Section 70. The second is where such person has filed a return but "fails to assess the tax in accordance with the provisions of this Chapter or rules thereunder . The Assessing Officer (AO) is in the either scenario empowered to require the production of such accounts, documents or other evidence as he may deem necessary and after taking into account all the relevant material whic .....

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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 ca .....

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f 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 misstatement 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 comp .....

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y him to the said Commissioner mentioning therein such other particulars as may be specified by him. (3) The provisions of sub-section (1) shall have effect notwithstanding that the accounts of such person have been audited under any other law for the time being in force. (4) The person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit under sub- section (1) and proposed to be utilised in any procee .....

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e of Section 72A is that in the first instance the Commissioner has to record "reasons to believe that the person who is liable to pay service tax has: (i) failed to correctly declare or determine the value of the taxable service; or (ii) wrongly 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 .....

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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 .....

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shot of the entire discussion is that the exercise of power under Section 142(2-A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in Section 142(2-A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision. Accordingly, we .....

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. To complete the analysis of the provisions of the FA, notice must also be taken of Section 73 of the FA which talks of recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded. Relevant to the present discussion is the requirement in Section 73 of issuing a show cause notice ('SCN') to the person who is suspected of having not paid or short-paid or having obtained erroneously a refund of service tax. 26. In the said proceedings it is .....

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itioner'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 proceeding .....

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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 are useful or relevant for any proceedings. A third safeguard is that the provisions of the Code of Criminal Procedure, 1973 (Cr PC) pertaining to searches apply in toto to any search in exercise of powers under Section 82 of the FA. Therefore even the power under Section 82 cannot be said to be totall .....

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se 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, or a cost accountant or chartered accountant nominated under section 72 A of the Finance Act, 1994 (i) the records maintained or prepared by him in terms of sub-rule (2) .....

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In the first instance it requires to be noticed that there are three distinct types of documents that can be asked to be made available "on demand by an Assessee: (i) the records mentioned in terms of Rule 5(2). (ii) cost audit reports, if any, under Section 148 of the Companies Act, 2013 (iii) the income tax audit report, if any, under Section 44AB of the Income Tax Act, 1961. 31. Rule 5(2) requires the Assessee to furnish to the Superintend .....

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der 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).< .....

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Commissioner for the purpose of special audit under Section 72A of the Act. As far as an officer of the Department was concerned, he submitted, and rightly, that although under Rule 5A(1) such officer is authorised by the Commissioner to have access to unregistered premises for the purposes of carrying out any "scrutiny, verification and checks as may be necessary to safeguard the interests of the Revenue , such officer can, in terms of Rule 5A(2) simply demand the production of such docume .....

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ice tax Assessee 'on demand'. This appears to have no rational basis. As rightly pointed out by Mr Mittal, the powers and functions of CAG flow from Articles 148 and 149 of the Constitution of India read with the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971. This Court in K. Satyanarayanan v. Union of India (supra) explained that the essential function of the CAG is to audit the accounts of public sector undertakings. Although in .....

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available all their accounts for scrutiny. As far as the service tax Assessees are concerned one would still have to turn to the provisions of the FA to examine whether this kind of an access to the books of accounts etc. of an Assessee can be given to the CAG or just about any officer of the Department. With there being no such authorisation under the FA, the answer has to be in the negative. Analysis of the CBEC Instructions and Manual 36. The instructions issued by the .....

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um 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 .....

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Travelite (India) has not been set right. Section 94 (2) (k) of the FA 38. The main plank of the defence of the Respondents in the present case to justify the amendment to Rule 5A(2) is Section 94(2)(k) of the FA introduced by the Finance Act of 2014 with effect from 6th August 2014. Considerable reliance is placed on the expression "keeping records and the manner in which such records shall be verified occurring in the above provision. Although in the circular issu .....

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ke an assessment of a return or of adjudication for the purposes of Section 73 of the FA. It is not any and every officer of the Department who could be entrusted with the power to demand production of records of an Assessee. Therefore, the Court does not agree with the submission that the expression 'verify' is wide enough to permit the audit of the accounts of the Assessee by any officer of the Service Tax Department. 39. There is a distinction between auditing the accounts .....

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on of Delhi v. Birla Cotton Spinning and Weaving Mills (supra) as under: "89. On a review of the cases the 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 particul .....

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te 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 principles, policy, standard or guidance to another body unless the Constitution expressly permits delegation; and (v) the taxing provision .....

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statute under which it is framed; and (2) it must also come within the scope and purview of the rule making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void. 42. Tested on the above legal principles, the Court has no hesitation in concluding that Rule 5A(2) exceeds the scope of the provisions under the FA. This is the result whether Rule 5A(2) is tested vis-a-vis Section 72A of the FA which perta .....

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Validity of the circulars, the manual and the impugned letter 43. The decision in Ratan Melting & Wire Industries (supra) is relevant in the context of the circulars issued and the Manual prepared by the CBEC. As pointed out in that decision, a circular or a manual cannot travel beyond the scope of the statute itself. It will have no binding effect if it does so. In the present case inasmuch as Section 94(2)(k) does not permit the exercise of audit to be undertaken by an o .....

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