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No Service Tax Audit by the Service Tax Department or CAG

Service Tax - By: - Bimal jain - Dated:- 7-6-2016 Last Replied Date:- 8-6-2016 - Dear Professional Colleague, We are sharing with you an important judgement of the Hon ble Delhi High Court in the case of Mega Cabs Pvt. Ltd. Vs. Union of India And Ors 2016 (6) TMI 163 - DELHI HIGH COURT] on the following issue: Issue: Whether Service Tax Department or CAG can conduct Service Tax Audit? Whether substituted Rule 5A(2) of the Service Tax Rules, 1994 ( the Service Tax Rules ) is ultra vires the provi .....

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5A(2) of the Service Tax Rules ultra vires the provisions of the Finance Act, and No Service Tax Audit can be conducted by the Department and only Special Audit within the Statute as mentioned under Section 72A of the Finance Act can be done either by a Chartered Accountant or Cost Accountant only in specified certain circumstances . It was further held that Service Tax Audit as envisaged in Rule 5A(2) of the Service Tax Rules does not have appropriate statutory backing of the Finance Act. Even, .....

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be undertaken by CAG under Rule 5A(2) of the Service Tax Rules. Thereafter, in the background of the Travelite case, the Central Board of Excise and Customs ( CBEC or the Board ) vide Circular No. 986/10/2014-CX dated October 9, 2014 had clarified that judgment under the Travelite case does not deal with the issue of audit in the Central Excise. It was further clarified that there is adequate statutory backing for Audit by the Central Excise officers by virtue of Section 37(2)(x) of the Central .....

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No. 181/7/2014-ST dated December 10, 2014 ( Circular No. 181 ), in an attempt to remove the mist surrounding the power of the Departmental officers to conduct Service Tax Audit, had clarified that Rule 5A(2) of the Service Tax Rules, interalia, provides for scrutiny of records by an officer authorised by the Commissioner or the Audit Party deputed by the Commissioner or CAG and such scrutiny essentially constitutes Audit by the Audit Party consisting of the Departmental officers. It was further .....

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rthermore, it was clarified that the expression verified used in Section 94(2)(k) of the Finance Act is of wide import and would include within its scope, Audit by the Departmental officers, as the procedure prescribed for Audit is essentially a procedure for verification mandated in the Statute. Thereafter Circular No. 995/2/2015-CX dated February 27, 2015 ( Circular No. 995 ) was issued by the CBEC on the subject - Central Excise and Service Tax Audit norms to be followed by the Audit Commissi .....

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. Facts of the instant case: Mega Cabs Pvt. Ltd. ( the Petitioner ) received a letter dated April 30, 2015 issued by the Commissioner of Service Tax, New Delhi informing that a team of officers 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 Service Tax Rules read with Section 94(1), 94(2)(k) and 94(2)(n) of the Finance Act as amended, during the first week of May 201 .....

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the Central Government for framing rules and also the Circular No. 181 . Landmark judgment of the Hon ble Delhi High Court: The Hon ble Delhi High Court took an extensive deliberation on relevant provisions of the Finance Act and Rules made thereunder, as under: Analysis of the provisions of the Finance Act: At the outset it requires to be noticed that unlike the Income Tax Act, 1961 or even the Delhi Value Added Tax Act, 2004, there is no provision in the Finance Act for re-assessment of a Serv .....

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d other evidence is not to be undertaken by an Assessing Officer mechanically; Moreover, it is not any or every officer of the Service tax department who can exercise the power under Section 72 of the Finance Act. 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.; Section 72A of the Finance Act (i.e. Special Audit) It is only where one of the three cont .....

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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. Therefore even the power under Section 82 cannot be said to be totally without guidelines or restrictions. Analysis of the amended Rule 5A(2) of the Service Tax Rules: There are three distinct types of documents that can be asked to be made available on demand by an Assessee: Records mentioned in terms of Ru .....

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estingly, Rule 5A(2) of the Service Tax Rules does not restrict itself to such records as mentioned in Rule 5(2) but also required production of Cost Audit Reports and the Income Tax Audit Report mentioned supra. These documents are not envisaged to be produced under Rule 5(2) and definitely not under any of the provisions of the Finance Act. This is, therefore, going far beyond the Finance Act itself; Rule 5A(2) of the Service Tax Rules lists out the following persons who can make a demand for .....

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le 5A(1) of the Service Tax Rules, 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 documents without any requirement of recording reasons to believe that the production of such document is necessary. There is also no requirement of such officer hav .....

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of India read with the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971. This Court in K. Satyanarayanan Vs. Union of India [1995 (12) TMI 390 - DELHI HIGH COURT] explained that the essential function of the CAG is to audit the accounts of public sector undertakings. Although in Association of Unified Tele Services Providers Vs. Union of India [2014 (4) TMI 1136 - SUPREME COURT], the Hon ble Supreme Court has, in the context of the functioning of telecom .....

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ch authorisation under the Finance Act, the answer has to be in the negative. Analysis of the CBEC Instructions and Manual: In Circular No. 995, there is no requirement that any of the mentioned officers should be duly authorised to carry out an assessment for the purpose of Section 72 of the Finance Act or adjudication for the purposes under Section 73 thereof. The entire instruction appears to be without any reference to the applicable provisions in the Finance Act or the Rules; Earlier Audit .....

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de import and would include within its scope audit by the Department officers, the Court is unable to agree; The expression verified has to be interpreted in the context of what is permissible under the Finance Act itself. The verification of the records can take place by the officers of the Department provided such officers are authorised to undertake an assessment of a return or of adjudication for the purposes of Section 73 of the Finance Act. It is not any and every officer of the Department .....

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r a CA. It cannot possibly be undertaken by any officer of the Service Tax Department. Rule 5A(2) of the Service Tax Rules is ultra vires the Finance Act: Tested on the legal principles as laid down in the case of Municipal Corporation of Delhi Vs. Birla Cotton Spinning and Weaving Mills [1968 (2) TMI 118 - SUPREME COURT]; General Officer Commanding-in-Chief Vs. Dr. Subhash Chandra Yadav [1998 (2) TMI 462 - SUPREME COURT OF INDIA], the Court has no hesitation in concluding that Rule 5A(2) of the .....

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in Ratan Melting & Wire Industries [2008 (10) TMI 5 - SUPREME COURT OF INDIA], 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) of the Finance Act, does not permit the exercise of audit to be undertaken by an officer of the Department, and the attempt in the circular to recognise such powers in the hands of officers of the Central Excise and Service Tax Departments is h .....

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arty deputed by a Commissioner or the CAG to seek production of the documents mentioned therein on demand, as ultra vires the Finance Act and, therefore, struck it down to that extent; Held that the expression verify in Section 94(2)(k) of the Finance Act cannot be construed as audit of the accounts of an Assessee and, therefore, Rule 5A(2) of the Service Tax Rules, cannot be sustained with reference to Section 94(2)(k) of the Finance Act; Declared Circular No. 181 as ultra vires the Finance Act .....

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