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CAG's Audit should be of Revenue Departments, not of Assessees!
JANUARY 20, 2014 By B N Gururaj, Advocate THE recently delivered judgment of the High Court of Delhi, in Association of the Unified Telecom Service Providers of India and others vs. UOI and others, 2014-TIOL-31-HC-DEL-MISC, ((AUTSPI case for short) may be a cause of much concern to the Central Excise and Service Tax Assessees who face plethora of audits every now and then – Revenue audits of the Central Excise and Service Tax departments, CAG’s audit, Valuation Audit under Section 14A of the Central Excise Act, 1944, and Section 72A of the Finance Act, 1994, and the CENVAT Audit under Section 14AA of the Act of 1944. In some instances, the assessees have strongly challenged the right of the CAG to visit their office and audit the records. However, in the context of challenges by the assessees to the CAG audit, the final judicial verdict is not yet out. In the meantime, however, the aforesaid judgment of Delhi High Court upholds the powers of CAG to audit the receipts of Telecom companies who have been licensed by the Central Government under the Telegraphs Act, 1885, who provide telecom services to the public. After a thorough examination of the judgment of the High Court of Delhi, it would seem that the law laid down in the judgment of AUTSPI’s case cannot be extended to the assessees who pay the taxes. The taxpayers and the Telecom Service Providers do not stand on the same footing. From paragraph 26 of the AUTSPI judgment, it is evident that the Court recognized Central Government’s pecuniary interest in the books of accounts maintained by the Telecom licensees. Besides the license fee, the Central Government was also entitled to receive annual fee of 6% of the Adjusted Gross Revenue as determined in terms of the provisions of the agreement entered into with the Central Government. The agreement also prescribes the manner of maintaining the books of accounts. The Court notices that under the License Agreement, the Central Government has reposed confidence in the integrity of the licensees, because, the revenue which would be generated and its source are within the exclusive knowledge and control of the licensees. The licensees would be duty bound to act with utmost good faith. According to the Court, the role of the licensee as that of an accountant under the agreement cannot to be glossed over. The Court noted that in a very real sense the licensees are the accountants of the Central Government with respect to maintenance of complete, accurate and honest books of accounts for any transactions involving revenue. After examining Section 16 of the CAG (Duties, Powers and Conditions of Service) Act, 1971, the Court concluded that the Accountants of the Revenue receipts of the telecom licensees can be said to be the accounts of the Central Government and are thus subject to Revenue audit as per Section 16 of the Act. Keeping these observations of the High Court, if one were to examine the facts and circumstances in which the assessees are placed, it will be clear that the assessees do not stand in the same position as the telecom licensees. They do not maintain the accounts of the Revenue in which the Central Government has pecuniary interest. The sums accounted by them do not go to the Consolidated Fund of India. The assessees are not financed or given any grant by the Governments, which would clothe the CAG to assume jurisdiction for auditing the books of accounts of the assessees. In fact, this position of law was noted by the High Court of Calcutta in SKP Securities Ltd., vs. DD (RA-IDT), 2013-TIOL-38-HC-KOL-ST. In this case, the petitioner had successfully challenged the power of CAG to audit the records in terms of Rule 5A of the Service Tax Rules, 1994 [pari material with Rule 22(3) of the Central Excise Rules, 2002]. According to the Court what the CAG is obliged to do, is to audit all the receipts which are payable into Consolidated Fund of India (CFI). In this judgment, the High Court of Calcutta also noticed from the scope of Section 16 that the condition precedent for audit of a non-Government body is a request from the President of India, Governor of the State concerned, or the Administrator of Union Territory after consultation with the CAG. In the absence of satisfaction of such conditions, the learned Single Judge concluded that CAG’s audit of assessees’ accounts is not permissible in law. The Court observed that under Rule 5A(2) of the Service Tax Rules, 1994, the obligation to make records and documents available does not oblige an assessee to agree to unauthorized audit of its account by the Audit Team from the office of the CAG. It may be noted here that even though Rule 5A and Rule 22 provide for audit by CAG’s Auditors, these rules being delegated legislations, cannot empower the CAG to do something for which he has no authority under the CAG Act, 1971. Thus, the Rules would be of no avail for someone who wants to argue that CAG has the power to audit assessee’s accounts. Nevertheless, the learned single Judge referred the matter to the Division Bench in view of another judgment of the same Court while examining Rule 173G(6)(c) of the erstwhile Central Excise Rules, 1944, which is pari materia with Rule 5A. In the case of Berger Paints India Ltd., vs. Joint Commissioner of Central Excise (Audit), Writ Petition No. 2762/2000, 2006-TIOL-466-HC-KOL-CX, another learned Judge held that there can be concurrent audit of the assesses records by both CAG and the Auditors deputed by the Commissioner. In view of reference to the Division Bench, the last word has not yet been said in the matter. But the reasons given in SKP Security’s case are powerful and would commend themselves for consideration. Thus, when the judgment in SKP Security case is read in conjunction with the judgment of the High Court of Delhi, in the case of AUTSPI, it would be evident that the ratio of the latter judgment cannot be blindly applied to the assessees who are now exposed to CAG audit. On the other hand, it is the Revenue departments such as Central Excise, Customs and Service Tax, which should be audited. They, in fact have a duty to ensure correct realization of revenue which will be credited to the Consolidated Fund of India. The assessees are merely payers of revenue but do not owe any fiduciary duty to the Central Government either under a contract or under law. Therefore, audit of records of the assessees by the CAG Auditors at assessee’s place is an uncalled interference in the conduct of the business of the assessees. It is also unauthorized, as noted by the High Court of Calcutta. Therefore, it would be a grievous error to leap to the conclusion that the ratio of AUTSPI’s judgment will clothe the CAG to audit records of the assessees. All governments have tendency to arrogate more power to themselves through laws. Especially in India, it is unknown that any government has given up its power, having acquired it once. This is contrary to the adage that the best government is the one which governs the least. When the government departments too engage in creeping acquisition of powers the taxpayers must stand up and be counted.
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