(a) On rule-making powers of the Central Government and demand for records of the Assessee for scrutiny:
Section 94 of the Finance Act, 1994 deals with the rule-making powers of the Central Government in relation to Service Tax.Sub-section (2) of Section 94 deals with specific purposes for which rules can be made. Sub-section (2) was amended vide Section 114(J) of the Finance Act, 2014, inserting a new clause (k) therein effective from 06.08.2014 which reads as under:
"(k) imposition, on persons liable to pay service tax, for the proper levy and collection of service tax, of duty of furnishing information, keeping records and the manner in which such records shall be verified".
Board clarifies that the aforesaid Notification No. 23/2014-ST substituting a new Rule 5 A(2) [and not "inserting a new Rule 5A(2) as has been wrongly stated in the Circular] &replacing the existing Rule 5A(2) has been issued in exercise of the powers vested in the Central Government vide the new clause (k) of Section 94 (2) of the Act. Board further clarifies that this rule i.e. new rule 5A(2), inter alia , provides for the scrutiny of records by the audit party deputed by Commissioner and such scrutiny essentially constitutes audit by the Audit party consisting of the departmental officers.
Comment:
"It's better late than never" – Isn't it?
(b) On the purpose and scope of the amendment:
Explaining the purpose behind this amendment, Board clarifies that in the present era of self-assessment, verification of records mandated by the statute is necessary to check the correctness of the assessment and payment of tax by the Assessee. The amendment is aimed at this exercise.
Comment:
The million-dollar question here is "Isn't the 'self-assessment' is a 'self-trap' for the unsuspecting assesses and 'self-protection' for the comfortably-placed departmental officers ?"
Interestingly, on the "scope of the powers", Board clarifies that the expression " verified" used in Section 94(2)(k) of the 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.
Comment:
Black's Law Dictionary (Sixth Edition) explains the meaning of the term 'verify' as under:
"To prove to be true; to confirm or establish the truth or truthfulness of; to check or test the accuracy or exactness of; to confirm or establish the authenticity of; to authenticate; to maintain; to affirm; to support; second; back as a friend. Macneil v. Maddox, 194 Ga. 802, 22 S.E.2d 653, 654."
The term 'audit', on the other hand, has been explained as under:
"Systematic inspection of accounting records involving analyses, tests and confirmations.
The hearing and investigation had before any auditor. An audience; a hearing; an examination in general.A formal or official examination and authentication of accounts, with witnesses, vouchers, etc. Green-Boots Const.Co. v. State Highway Commission, 165 Okl. 288, 25 P.2d 783."
The term 'tax audit' is defined as under:
"An examination of books, vouchers and records, or other transactions possessing tax consequences, of a tax payer conducted by agents of the I.R.S."
The Board appears to have done its homework very well this time!
(c) On the applicability of the Delhi High Court's judgment:
Finally, the Board clarifies that the Hon'ble Delhi High Court, in Travelite (India) Ltd's case (supra) had quashed Rule 5 A(2) of the STR on the ground that the powers to conduct audit envisaged in the rule did not have appropriate statutory backing.
Board then states that the judgement can now be distinguished as a clear statutory backing for the rule now exists in Section 94 (2)(k) of the said Act.
Comment:
At last the Board has acknowledged that the erstwhile Rule 5A(2) stood struck down by the Hon'ble Delhi High Court since being ultra vires . The lacunae in the law was, according to the Board, stood corrected with the insertion of clause (k) in Section 94 (2) of the Act vide the Finance Act, 2014. Needless to say, even if the powers vested in the departmental officers to conduct audit of the service tax assessees vide the above amendments can be traced to Section 94(2), clause (k) and the consequential Notification No. 23/2014-ST dated 05.12.2014 substituting sub-rule (2) of Rule 5A are effective only prospectively from their respective dates of insertion or issue, as the case may be. Therefore, notwithstanding that clause (k) inserted in Section 94 came into effect on 06.08.2014, the departmental officers can be said to have the powers to conduct the service tax audit only from 05.12.2014.
Consequently, any service tax audit conducted by the departmental officers prior to 05.12.2014 purportedly under the erstwhile Rule 5A(2) of STR, 1994 was certainly invalid and without authority of law in view of the aforesaid judgement of the Hon'ble Delhi High Court. Since the judgment has reportedly been challenged before the Hon'ble Supreme Court, the fate of the erstwhile Rule 5A(2) and the validity of the service tax audits conducted by the departmental officers all across the country and the action initiated in pursuance thereof against the assessees hang in balance !
Is another battle royale in the offing?
