By TIOL News Service

NEW DELHI, JUNE 04, 2016: THE Petitioner challenges Rule 5A(2) of the STR, 1994 as amended by Notification No. 23/2014-Service Tax dated 05.12.2014 and which empowers deputing departmental officers or officers from the Comptroller and Auditor General of India ('CAG') to 'demand' documents mentioned therein. It is contended that this is in conflict with Section 72A of the FA, 1994 and beyond the rule making power of the Central Government. The petitioner has also challenged the constitutional validity of Section 94(2)(k) of the FA, 1994 on the ground that it gives "plainly unguided and uncontrolled" delegated powers to the Central Government for framing rules. Inasmuch as it suffers from the vice of excessive delegation.

Without stopping at the above, the petitioner has also challenged the Board Circular No. 181/7/2014-ST dated 10th December 2014 which states that since a clear statutory backing for conducting audit is available under Section 92(4)(k) of the FA, 1994, the Departmental Officers would be directed to audit service tax Assessee in terms of the departmental instructions already issued.

Lastly, the petitioner also challenges a letter dated 30th April 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 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.

A brief history on the subject matter would do no harm and this has been encapsulated in our DDT column Episode 2494. Do visit the link and come back!

After considering the elaborate submissions made by both sides, the High Court observed thus -

Analysis of the provisions of the FA

+ Even for the purpose of Section 72, a prima facie satisfaction is to be arrived at that the return filed by the Assessee fails to assess the tax 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.

+ As far as Section 72 of the FA is concerned 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 can proceed to ask for the documents, records, accounts etc.

+ It is only where one of the three contingencies [mentioned in section 72A [Special Audit]] exists that the Commissioner may direct the Assessee to "get his accounts audited either by a Chartered Accountant or a Cost Accountant nominated by such Commissioner". The extent of the audit and the period for which it should be conducted is also to be specified by the Commissioner.

+ The power to search the premises (section 82) is also hedged in by certain limitations.

Analysis of the amended Rule 5A(2)

+ 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.

+ Rule 5(2) requires the Assessee to furnish to the Superintendent of Central Excise a list in duplicate of all the records prepared or maintained by the Assessee for accounting of transactions, in regard to providing any service receipt or procurement of anybody's service and payment of such service.

+ Interestingly, Rule 5A(2) does not restrict itself to such records as mentioned in Rule 5(2) but also required production of cost audit reports under 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.

+ Rule 5A(2) lists out the following persons who can make a demand for such documents from an Assessee:(i) officer empowered under Rule 5A(1), (ii) the audit party deputed by the Commissioner, (iii) the CAG,(iv) a Cost Accountant, (v) a Chartered Accountant.

+ Petitioner would have no objection to producing before a Cost Accountant or a CA the documents of accounts, records etc. but only if such Cost Accountant or CA has been nominated by the Commissioner for the purpose of special audit under Section 72A of the Act.

+ As far as an officer of the Department was concerned, 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 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 having to be authorised to carry out a search under Section 82 of the FA or an assessment under Section 72 of the FA. If any and every officer is going to be deputed for that purpose, it would result in harassment of the Assessees.

+ Rule 5A(2) envisages that even the CAG can require production of documents from an individual service tax Assessee 'on demand'. This appears to have no rational basis.

++ This Court in K. Satyanarayanan v. Union of India (ILR (1996) II Delhi) 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 v. Union of India - 2014-TIOL-49-SC-MISC the Supreme Court has, in the context of the functioning of telecom companies accepted the plea that their accounts can be subjected to scrutiny by the CAG, to expect the CAG to undertake an audit of the records of every service tax Assessee would indeed be extraordinary.

+ As far as the service tax Assessees are concerned one would still have to turn to the provisions of the FA, 1994 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, 1994, the answer has to be in the negative.

Analysis of the CBEC Instructions and Manual

+ Circular No. 995/2/2015-CX dated 27th February 2015 [Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates], Para 5.1 of the said circular states that audit groups 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 be without any reference to the applicable provisions in the FA or the Rules.

+ Earlier Audit Manual of 2011 was held by this Court in Travelite (India) to not have any statutory force. 2015 Manual again fails to acknowledge that there is no statutory backing for the officers of the Department to themselves undertake an audit of the Assessee's accounts and records. This lacuna pointed out by the Court in Travelite (India) - 2014-TIOL-1304-HC-DEL-ST has not been set right.

Section 94 (2) (k) of the FA

+ Although in the Circular 181/7/2014-ST issued consequent upon the amendment by the CBEC on 10th December 2014 it is asserted by the Department that the expression 'verified' is of wide 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 FA 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 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.

+ There is a distinction between auditing the accounts of an Assessee and verifying the records of an Assessee. Audit is a special function which has to be carried out by duly qualified persons like a Cost Accountant or a CA. It cannot possibly be undertaken by any officer of the Service Tax Department.

Rule 5A (2) is ultra vires the FA

+ Tested on the legal principles [spelt out in Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills (AIR 1968 SC 1232); General Officer Commanding-in-Chief v. Dr. Subhash Chandra Yadav (AIR 1988 SC 876)] the Court has no hesitation in concluding that Rule 5A(2) exceeds the scope of the provisions under the FA, 1994. This is the result whether Rule 5A(2) is tested vis-a-vis Section 72A of the FA which pertains to special audit or Section 72 which pertains to assessment or Section 73 which pertains to adjudication or even Section 82 which relates to searches. Under the garb of the rule making power, the Central Government cannot arrogate to itself powers which were not contemplated to be given it by the Parliament when it enacted the FA. This is an instance of the Executive using the rule making power to give itself powers which are far in excess of what was delegated to it by the Parliament.

Validity of circulars, the manual and the impugned letter

+ As pointed out in Ratan Melting & Wire Industries - 2008-TIOL-194-SC-CX-LB, 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 officer of the Department, the attempt in the circular to recognise such powers in the officers of the Central Excise and Service Tax Departments is held to be ultra vires the FA and, therefore, legally unsustainable.

Conclusion

(i) Rule 5A(2) as amended in terms of Notification No. 23/2014-Service Tax dated 5th December 2014, to the extent that it authorises the officers of the Service Tax Department, the audit party deputed by a Commissioner or the CAG to seek production of the documents mentioned therein on demand is ultra vires the FA and, therefore, strikes it down to that extent;

(ii) Expression 'verify' in Section 94 (2) (k) of the FA 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.

(iii) Circular No. 181/7/2014-ST dated 10th December 2014 is ultra vires the FA and is struck down.

(iv) Letter dated 30th April 2015 issued by the Commissioner of Service Tax, Audit-1, New Delhi addressed to the Petitioner is quashed as being unsustainable in law.

(v) CBEC Circular No. 995/2/2015-CXdated 27.02.2015 and the Central Excise and Service Tax Audit Manual 2015 issued by the Directorate General of Audit of the CBEC are ultra vires the FA, does not have any statutory backing and cannot be relied upon by the Respondents to legally justify the audit undertaken by officers of the Service Tax Department.

The petition was disposed of.

(See 2016-TIOL-1061-HC-DEL-ST)