2018 (10) TMI 1000 - HC - Service Tax

Service Tax audit of a private agency - Rule 5A of the Service Tax Rules, 1994 - Held that - Subsection (2) of Section 174 is a Saving Clause and it inter alia provides that the amendment of the Finance Act, 1994 to the extent mentioned in Subsection (1) of Section 173, shall not revive anything not in force or existing at the time of such amendment or repeal. There was no saving of Rule 5A in such manner that fresh proceedings for audit could be initiated in exercise of powers under the said Rule. We, therefore, have serious doubts whether, with the aid of Rule 5A of the Service Tax Rules, 1994, the CAG can carry out compulsory Service Tax audit of private agencies like the petitioner. Interim stay granted. Issue Notice, returnable on 28.11.2018.

Summary

Issues Involved:
Challenge to communication by Comptroller and Auditor General of India for Service Tax audit, validity of Rule 5A of Service Tax Rules, 1994, impact of Goods and Service Tax Act on Service Tax provisions.

Analysis:
The petitioner, a limited company providing material management and logistical services to oil and gas industries, challenged a communication from the Comptroller and Auditor General of India (CAG) regarding a Service Tax audit. The CAG relied on Rule 5A of the Service Tax Rules, 1994, which had been previously struck down by the Delhi High Court as unconstitutional in the case of Travelite (India) v. Union of India. Another case, Sadbhav Engineering Limited v. Union of India, resulted in a stay against further proceedings related to Service Tax audit. The petitioner argued that the amendment of Rule 5A and the introduction of the Goods and Service Tax Act should prevent the initiation of fresh audit proceedings under the old Rule.

The legal controversies surrounding Rule 5A continued as the amended Rule was also challenged and struck down by the Delhi High Court in the case of Mega Cabs Pvt. Ltd. v. Union of India. The petitioner contended that the Saving Clause in the Central Goods and Service Tax Act, 2017, specifically Section 174, did not save Rule 5A of the Service Tax Rules, 1994, thereby questioning the authority of the CAG to conduct a Service Tax audit under the old Rule. Section 174 of the CGST Act repealed certain provisions of the Finance Act, 1994, but the Saving Clause did not explicitly save Rule 5A for initiating fresh audit proceedings.

The Court expressed serious doubts regarding the CAG's authority to conduct compulsory Service Tax audits of private agencies like the petitioner under Rule 5A of the Service Tax Rules, 1994, considering the implications of the Goods and Service Tax Act. Consequently, an ad interim relief was granted, staying the impugned order and preventing the CAG from carrying out further Service Tax audits of the petitioner until the matter was resolved. The Court issued a Notice returnable on a specified date for further proceedings.