2015 (4) TMI 968 - HC - Service Tax

Competence of the Controller and Auditor General of India CAG / Departmental Audit Committee to look into the accounts of a private assessee - Validity of Rule 5A - Held that - CAG has a duty to examine and satisfy itself that all the Rules and procedures, in respect of Telecom Service Providers in revenue sharing contracts with the State, are being met by the service providers as a whole. - although in the context of cases involving natural resources, a right was recognized in the CAG to audit the accounts of private persons who were obliged to make payments to the Central Government pursuant to contracts entered into with the Central Government. In the light of the said judgment, I am not inclined to stay the operation of Rule 5A of the Service Tax Rules, for the time being. However, as the petitioners want to have the said issue examined before this Court, the writ petitions are admitted solely for the purposes of examining, in detail, the contentions regarding the validity of Rule 5A of the Service Tax Rules. - prayer of the petitioners to grant a stay of further proceedings, pursuant to the show cause notices issued to them by the respondents, is not granted and the petitioners are relegated to the alternate remedy of pursuing the show cause notices before the authorities under the Finance Act, 1994, as amended. The writ petitions are admitted only for the purpose of examining the issue of validity of Rule 5A of the Service Tax Rules - Decided partly in favour of assessee.

Summary

Issues:
Challenge against Rule 5A of the Service Tax Rules, 1994 as ultra vires to the Finance Act, 1994, as amended.

Analysis:
The petitioners challenge Rule 5A of the Service Tax Rules, 1994 as ultra vires to the Finance Act, 1994, as amended, primarily on the grounds that the audit it entails contradicts Section 72A of the Finance Act, 1994. They question the authority of the Controller and Auditor General of India (CAG)/Departmental Audit Committee to scrutinize the accounts of a private assessee. Reference is made to judgments from the Delhi High Court and Calcutta High Court, which have deemed Rule 5A to exceed the rule-making power conferred under Section 94 of the Finance Act, 1994. However, the Department argues that the Supreme Court has stayed the Delhi High Court's judgment pending appeal. Additionally, a Supreme Court ruling in a different case clarified that the CAG has the right to audit the accounts of private entities involved in contracts with the government, especially in cases concerning natural resources. Despite this, the Court decides not to stay the operation of Rule 5A at the moment but admits the writ petitions to examine the validity of the rule in detail.

The Court acknowledges the differing views on the issue but chooses not to grant a stay on the operation of Rule 5A. Instead, it admits the writ petitions solely for the purpose of scrutinizing the validity of the rule. The petitioners' request for a stay on further proceedings following show cause notices is denied, and they are directed to pursue the notices through the appropriate channels under the Finance Act, 1994. The interim order is vacated, emphasizing that the writ petitions are only accepted for the specific purpose of evaluating the validity of Rule 5A of the Service Tax Rules.