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CAG entitled to audit private telecom service providers - SC

DDT in Limca Book of Records - Third Time in a rowTIOL-DDT 2338

CAN the Telecom Service providers be audited by the Comptroller & Auditor General of India? This was the basic question the Supreme Court answered recently.

In Centre for Public Interest Litigation and others v. Union of India and others - 2012-TIOL-07-SC-MISC, the Supreme Court had observed,

The State is empowered to distribute natural resources. However, as they constitute public property/national asset, while distributing natural resources the State is bound to act in consonance with the principles of equality and public trust and ensure that no action is taken which may be detrimental to public interest.

Spectrum has been internationally accepted as a scarce, finite and renewable natural resource which is susceptible to degradation in case of inefficient utilisation. It has a high economic value in the light of the demand for it on account of the tremendous growth in the telecom sector.

As natural resources are public goods, the doctrine of equality, which emerges from the concepts of justice and fairness, must guide the State in determining the actual mechanism for distribution of natural resources.

In the case at hand, the Supreme Court observed,

State actions and actions of its agencies/instrumentalities/licensees must be for the public good to achieve the object for which it exits, the object being to serve public good by resorting to fair and reasonable methods. State is also bound to protect the resources for the enjoyment of general public rather than permit their use for purely commercial purposes. Public trust doctrine, it is well established, puts an implicit embargo on the right of the State to transfer public properties to private party if such transfer affects public interest. Further it mandates affirmative State action for effective management of natural resources and empowers the citizens to question ineffective management.UAS (Unified Access Service) license holders have an obligation to use such resources in a manner as not to impair or diminish the people's right and people's long term interest in that property or resource.

And who can question ineffective management better than the CAG ?

Article 148 of the Constitution states that there shall be a Comptroller and Auditor General, who shall be appointed by the President by warrant under his hand and shall only be removed in like manner and on like grounds as of Judge of the Supreme Court of India. The CAG is, therefore, an important functionary under the Constitution and, it is often said, he is the guardian of the purse and that he should see that not a farthing of it is spent without the authority of the Parliament.

Article 149 deals with the duties and powers of the CAG which reads as under:

"149. Duties and powers of the Comptroller and Auditor General. The Comptroller and Auditor General shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States and of any other authority or body as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States as were conferred on or exercisable by the Auditor General of India immediately before the commencement of this Constitution in relation to the accounts of the Dominion of India and of the Provinces respectively."

CAG - basic structure of the constitution? The Supreme Court noted that Article 149 does confer the power on the CAG to discharge duties and powers in relation to the accounts of the Union and the States or any other authority or body, as may be prescribed under the law made by the Parliament. CAG, therefore, is exercising constitutional powers and duties in relation to the accounts, while the High Court under Article 226 of the Constitution, so also the Supreme Court under Article 32 of the Constitution, is exercising judicial powers. Duties and powers conferred by the Constitution on the CAG under Article 149 cannot be taken away by the Parliament, being the basic structure of our Constitution, like Parliamentary democracy, independence of judiciary, rule of law, judicial review, unity and integrity of the country, secular and federal character of the Constitution, and so on.

Supreme Court is of the considered view that when the executive deals with the natural resources, like spectrum, which belongs to the people of this country, Parliament should know how the nation's wealth has been dealt with by the executive and even by the UAS (Unified Access Service) Licence holders and the quantum of the Revenue generated out of the use of the spectrum and whether the same has been properly assessed, collected and accounted for by the Union and the - UAS Licence holders. When nation's wealth, like spectrum, is being dealt with either by the Union, State or its instrumentalities or even the private parties, like service providers, they are accountable to the people and to the Parliament.

The senior counsel appearing for the service providers, while interpreting Article 149 of the Constitution, questioned the CAG's jurisdiction, stating that so far as the service providers are concerned, it does not extend to them since they are not government companies, nor do they receive any funding from the government. Further, it is also pointed out that they do not fall, rather not covered within the ambit of 'any other authority or body' prescribed under any law made by the Parliament. It was also pointed out that the CAG cannot audit private companies, like the service providers.

The Supreme Court was not impressed and observed,

Parliament has an obligation to ascertain whether the entire receipts by way of licence fee, spectrum charges, have been realized by the Union of India and credited to the Consolidated Fund of India (CFI). Article 266 says, all the public moneys received by or on behalf of the Government of India shall be credited to CFI. CAG can carry out examination into the economy, efficacy and effectiveness with which the Union of India has used its resources, and whether it has realized the entire licencee fee, spectrum charges and also whether the Union of India has correctly carried out the audit under Clauses 22.5 and 22.6 of UAS Licence Agreement. CAG's examination of the accounts of the Service Providers in a Revenue Sharing Contract is extremely important to ascertain whether there is an unlawful gain to the Service Provider and an unlawful loss to the Union of India, because the revenue generated out of that has to be credited to the Consolidated Fund of India.

The subject matter, with which we are concerned, as already indicated, is "spectrum", a natural resource, which belongs to the people, therefore, people of this country, through Parliament should know how its natural resources have been dealt with by the Union, State or its instrumentalities or even by UAS licence holders. Instances are not rare, where even the Executive, at times, acts hand in glove with licence holders, who deal with the natural resources, hence, necessity of proper parliamentary control over the resources.

Section 18 of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 , which deals with the powers of the CAG in connection with the audit of accounts, reads as follows :-

"18. (1) The Comptroller and Auditor-General shall in connection with the performance of his duties under this Act, have authority -

(a) to inspect any office of accounts under the control of the Union or of a State including treasuries, and such offices responsible for the keeping of initial or subsidiary accounts, as submit accounts to him;

(b) to require that any accounts, books, papers and other documents which deal with or form the basis of or an otherwise relevant to the transactions to which his duties in respect of audit extend, shall be sent to such place as he may appoint for his inspection;

(c) to put such questions or make such observations as he may consider necessary, to the person in charge of the office and to call for such information as he may require for the preparation of any account or report which it is his duty to prepare.

(2) The person in charge of any office or department, the accounts of which have to be inspected and audited by the Comptroller and Auditor-General, shall afford all facilities for such inspection and comply with requests for information in as complete a form as possible and with all reasonable expedition."

Section 18(1)(b) delineates the powers of the CAG to call for the books of accounts, papers and other documents which form the basis of various transactions to which his duties extend.

The Supreme Court observed,

Revenue share receivable by the Union being a receipt payable into the Consolidated Fund", the CAG is entitled to seek the records maintained in terms of Rule 3 of Rules of 2002 and the records maintained under clauses 22.1 and 22.2 of the licence agreement. Unless the underlying records which are in the exclusive custody of the Service Providers are examined, it would not be possible to ascertain whether the Union of India, as per the agreement, has received its full and complete share of Revenue, by way of licence fee and spectrum charges.

The Supreme Court held:

++ CAG is entitled to seek the records in terms of Rule 3 of TRAI Rules 2002 read with Clause 22 of the Licence Agreement.

++ CAG, in that process, is not actually auditing the accounts of the UAS Service providers as such, but examining all the receipts to ascertain whether the Union is getting its due share by way of licence fee and spectrum charges, which it is legitimately entitled to, by way of Revenue Sharing. By adopting that process, CAG is not carrying out any statutory audit of the accounts of the service providers, but for the limited purpose of ascertaining whether the Union is getting its legitimate share by way of "Revenue Sharing".

++Service providers are, therefore, bound to provide all the records and documents called for by the CAG.

++ CAG has, therefore, a duty to examine and satisfy himself that all the rules and procedures in that behalf are being met not only by the Union but also the service providers as a whole, since both, the Union, as well as the service providers, are dealing with the natural resources.

++CAG's function is, therefore, separate and independent, which is not similar to the audit conducted by the DoT under Clause 22.5 or special audit under Clause 22.6.

++ CAG's function is only to ascertain whether the Union of India is getting its due share, while parting with the right to deal with its exclusive privilege to the Service Providers, who are dealing with a national wealth, to that extent, Rule 5(1)(ii) has to be read down, but the service providers are bound to make available all the books of accounts and other documents maintained by them under Rule 3, so as to ascertain whether the Union of India is getting its full share of revenue.

Please see 2014-TIOL-49-SC-MISC

What about Central Excise and Service Tax Audit?

NOBODY questions the power, privilege and prerogative of the CAG to audit the taxes flowing into the Consolidated Fund of India - maybe it is his duty to see that the taxes reach the coffers correctly - not a penny more, not a penny less.

And the Act empowers him:

to require that any accounts, books, papers and other documents which deal with or form the basis of or an otherwise relevant to the transactions to which his duties in respect of audit extend, shall be sent to such place as he may appoint for his inspection.

Now the quarrel is while I am required to send my records for his inspection to a place he appoints, can he become my unwelcome guest and say that the appointed place is my office or my bedroom?

So, the question is, can the CAG's Audit Teams visit the factories and premises of service providers for Central Excise and Service Tax Audit?

Several High Courts have already prima facie held that the CAG Audit teams or for that matter the Commissioner's Audit teams have no power to visit the premises of Central Excise and Service Tax assessees for audit.

Maybe this issue will also have to be decided by the Supreme Court eventually.

What really puts off people is not the Audit's power but its pelf.

Disposal by Commissioner (A) - Quantity or Quality?

THERE were some interesting topics discussed in the recently held All India Workshop of Commissioners (Appeals) of CBEC on Appellate Procedures and practices organised by NACEN in Mumbai.

1. Stress on Quantitative disposal - whether it affects the quality of the orders of Commissioners (Appeals)?

Opinion: Yes to some extent in view of the lack of well-trained and efficient support staff.

DDT's Comments: The Commissioner (A) is expected to pass about 70 orders per month that is about three orders per day. A High Court judge or a Tribunal Member passes nearly 10 times more orders and they don't have any support staff, let alone well trained ones. Every Commissioner(A) has a couple of Superintendents and inspectors to assist him in writing his orders.

2. Whether Commissioners (Appeals) can modify his own pre-deposit order?

Opinion: Yes: On filing of a miscellaneous application by the appellant and on showing additional grounds. Another view is that once the Commissioner (Appeals) passes an order he becomes a functus officio and he cannot review his own order.

DDT's Comments : Some Commissioners (A) refuse to touch with a barge pole the orders passed by them, while they liberally grant more time to make the pre-deposit. If more time can be granted why less pre-deposit cannot be ordered?

3. Whether the Appeals can be kept pending in Call Book?

Opinion: Yes. If the case cannot be disposed for the next six months. For Instance if the said matter or similar matter is sub-judice

DDT's Comments : No Commissioner(A) would like to keep an appeal in 'call book'. He would rather dispose it of mostly against the assessee. Of course one problem is what goes into the call book is never recalled.

Jurisprudentiol - Thursday's cases

Legal Corner IconService Tax

Once CESTAT had held demand to be time barred, entering into merits of case and passing an order would amount to an illegality: HC

AGAINST the CESTAT order, both, the appellant and the Revenue have filed appeals before the Allahabad High Court.

The Tribunal held that the extended period of limitation of five years could not have been invoked by the Revenue u/s 73 of the FA, 1994 on the ground that there was no suppression of facts by the assessee. Having held that the demand beyond a period of one year was time barred, the Tribunal entered into the merits of the appeal filed by the assessee and came to the conclusion that since storage of goods in the cold storage was an essential part of the clearing and forwarding operations of the assessee, cold storage charges are required to be added in the taxable value of services rendered.

So, as mentioned, Revenue is against the portion of the order holding the demand time barred and the appellant assessee contends that once the Tribunal had held that the demand was barred by time, there was no occasion for the Tribunal to enter into the merits and, hence, that part of the reasoning of the Tribunal which deals with the merits of the dispute would have to be set aside.

Income Tax

Whether when land is taken on lease for longer period against lumpsum payment and transfer is in perpetuity, such expenditure can still be construed as revenue in nature - NO: HC

THE assessee is engaged in the manufacture of Automotive Ancillary Products. They took land on lease from MIDC and paid a sum of Rs.20,00,000/-, pursuant to the agreement. The assessee claimed the sum as payment of rental in lumpsum and therefore, it was treated as revenue expenditure. The AO rejected the stand holding that the amount paid by the assessee was for the purpose of acquiring the land for a period of 80 years, which rendered enduring advantages to the assessee. The AO also took note of the fact that the assessee had paid further amount of Rs.5.04 lakhs towards the enhancement cost to the land. Therefore, the AO found the expenditure to be of a capital expenditure.

The CIT(A) confirmed the view taken by the AO that the transfer in favour of the assessee was in effect a transfer in perpetuity and therefore, the expenditure incurred, was a capital expenditure. The Tribunal held that to decide whether the expenditure was capital or revenue, one had to look at the expenditure from a commercial point of view and the fact that the payment made in lump sum for the entire duration of the lease did not alter the character of revenue expenditure and allowed the Assessee's appeal.

The issue before the Bench is - Whether when a land is taken on lease for longer period against lumpsum payment and the transfer is in perpetuity, such expenditure can still be construed as revenue in nature. And the verdict goes against the assessee.

Central Excise

Activity of de-coiling sheets, cutting to length, shearing and other activity like de-greasing, cleaning, etc. and clearing same on payment of duty by utilizing CENVAT credit - Revenue alleging that activity does not amount to manufacture and hence credit availed should be reversed - Once duty on final products has been accepted by department, CENVAT credit availed need not be reversed -Appeals allowed: CESTAT

THE appellant is a registered manufacturer of colour coated steel coils and sheets and aluminium colour coated coils and sheets. Some of the inputs used by the appellant are GP coils, Galvanised coils, CR/HR coils, aluminium coils, paint and other pre-treatment chemicals.

During the month of March 2010 there was shortage of iron and steel rolled products and there was an upswing in the prices of MS flat rolled products in sheet form. Accordingly, since the appellant had available stock of MS/GP in coil form, they decided to liquidate/reduce the stock. They converted the said MS/GP coils into cut to size sheets as per customers' specifications by subjecting the same to degreasing, cleaning, de-coiling and cutting to sheet as per size. This job was done by using the existing line of production for the third line meant for cut to length and the fourth line for slitting within the factory premises. The appellant cleared such cut to size sheets on payment of excise duty. Such activity was also done during the month of October 2010 and January 2011.

The CCE, Raigad was more than pleased to confirm the demands and impose equivalent penalties etc.

See our Columns Tomorrow for the judgements

Until Tomorrow with more DDT

Have a nice day.

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