DECEMBER 07, 2014

By Kanagaraj R, B.Com., ACA., CS, CWA

CBEC has come out with the Service Tax (Third amendment) Rules, 2014 to amend the provisions of Rule 5A - sub rule (2).  The amended rule is as below:

"(2)   Every assessee, shall, on demand make available to the officer empowered 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 72A of the Finance Act, 1994,-

(i)   the records maintained or prepared by him in terms of sub-rule (2) of rule 5;

(ii)   the cost audit reports, if any, under section 148 of the Companies Act, 2013 (18 of 2013); 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 the audit party, or the cost accountant or chartered accountant, within the time limit specified by the said officer or the audit party or the cost accountant or chartered accountant, as the case may be."

A Verbatim comparison

Following points could be observed on the comparison of the above amendment with the erstwhile provision.

++ Earlier the persons having right to demand the records as per Rule 5A were:

+ Officer authorized by the commissioner

+ Audit party deputed by the CAG

Now, the amendment seeks to include the ‘Cost accountant or chartered accountant' nominated u/s 72A for special audit to demand the records from the assesse.

++ Earlier the records to be furnished include:

+ Records under Rule 5(2) - All financial records maintained by the assesse

+ Trial balance or its equivalent

+ Income tax audit report

Now, the amendment seeks to add the ‘Cost audit report' to the above list and specifically ‘trial balance or its equivalent' is removed from the list [Probably the reason could be the mention of trial balance is redundant as the records under rule 5(2) covers all the financial records].  

++ The word ‘authorised' in the start of the rule is replaced with the term ‘empowered' - What will this portend since the fact of the matter is that rule 5A(1) speaks of an "officer authorised" & not an "officer empowered"?

++ Erstwhile rule prescribes the time limit of 15 days or such further extended period as allowed by the officer or audit party.  Whereas, the amended rule does not have any such time-limit, however it has left the time-limit to be specified by the person who demands the records.

Analysis of the amendment with the judicial pronouncements on Rule 5A of STR, 1994.

          It is pertinent to note the following rulings in respect of the service tax audits:

a) Hon'ble Delhi High Court - M/s Travelite (India) - 2014-TIOL-1304-HC-DEL-ST

Audit by Departmental officers/CAG - Rules only give effect to statute's provisions & intent and cannot be used to create substantive rights, obligations or liabilities that are not within the contemplation of the statute. Further, the only audit within the Statute is as mentioned under Section 72A of the Finance Act, i.e. a Special Audit, when only certain circumstances are fulfilled.

Held: Rule 5A is ultra-vires and be struck down.

b) Hon'ble Kolkata High Court - M/s SKP Securities Ltd - 2013-TIOL-38-HC-KOL-ST

Service Tax - CAG has no power to audit records of a private assessee: there is no provision in Chapter V of the Finance Act, 1994 or for that matter in the CAG Act which empowers the CAG to audit the accounts of an assessee which is a non-government company, not in receipt of aid or assistance from any government or government entity. There can be no doubt that statutory rules, framed in exercise of power conferred by statute cannot introduce something not contemplated in the statute, from which it derives its rule making power.

Held:  Rule 5A is ultra-vires

c) Hon'ble High Court of Allahabad - M/s ACL Education - 2014-TIOL-120-HC-ALL-ST

Rule 5A stipulates that the assesse shall make available the records on demand to the officers or audit party.  So here, the officer will demand the documents just to facilitate the correctness of books of accounts.  But, audit will be performed onlyby the Chartered Accountant /Cost Accountant, as the case may be, deputed by the Commissioner.  During the course of arguments, the Additional Solicitor General of India has assured thatthe audit will be performed by a qualified Chartered Accountant and as per accounting standard. After the audit report, the assessee will get the copy of the report, as per law.

Held:  Rule 5A is NOT ultra-vires as the same is in consonance with Sec 72A and was enacted by competent authority

d) Hon'ble High Court of Gujarat - M/s SADBHAV ENGINEERING LTD - 2014-TIOL-2136-HC-AHM-ST

Audit by CAG - Prima facie, if Rule 5A is not valid, a serious question of the powers of the authority to issue the impugned communication would arise. Subsidiary question would be, Whether such authorized persons can be an outsider of the organization of the Commissioner would also be an issue.

Held:  Interim Stay granted against the communication given by CAG

Presently there are contradictory judgments on Rule 5A (more particularly on the power of CAG to audit private companies) and its validity, as there is no explicit section in the Finance Act for conducting audit (other than special audit) and hence a rule cannot give substantive rights.

In my view, the present amendment is for the following objectives:

++ To include the Chartered accountant / Cost Accountant under Rule 5A so as to provide them a right to demand the records from the assesse.

++ In the case of M/s ACL Education, Hon'ble Allahabad High Court observed that the records could be demanded by the officer or CAG Audit party.  However, the audit will only be performed by the CA / Cost Accountant, which was assured by the Additional Solicitor General of India in the High court and was recorded in the final order.  Therefore, the present amendment puts into practice the assurance made.

++ Inclusion of the cost audit report in the records u/r 5A.

The industry at large should represent collectively to CBEC on the multiple audit/inspection of the records by various agencies (i.e., Department officials, CAG Team & Chartered Accountant/Cost Accountant- Special Audit) under a single statute, as the same tantamount to duplicating the resources both by the Government as well as Industry.

(The author is Asst. Manager - Indirect taxes, Larsen & Toubro Limited)