2020 (11) TMI 150 - HC - GST

Power to conduct audit/verification of documents and records under erstwhile service tax law - Jurisdiction authority and legality of the action of the Respondents initiated in terms of Rule 5A of the Service Tax Rules 1994 read with Section 174(2)(e) of the Central Goods and Services Tax Act 2017 - HELD THAT - This Court has rejected the argument that Rule 5A of the Service Tax Rules does not survive the enactment of CGST Act 2017. The Court has extensively examined Section 173 and Section 174 of the CGST Act and come to the conclusion that the intention of the Parliament was clearly to save not only the ongoing but also the initiation of fresh investigation enquiry verification etc. in respect of the acts and omission relating to inter alia the erstwhile service tax regime. This Court has also held that Service Tax Rules 1994 being subordinate legislation would fall within the range of the parent Act that has been specifically saved and it s non-inclusion by title in the saving clause would not have a bearing on the applicability of the saving statute. The Court has come to the conclusion that Section 174 of the CGST Act 2017 expressly seeks to preserve the powers of the central authority to inter alia institute or continue an investigation inquiry etc. and no contrary intention is exhibited from the said provision. The Court purposely delved into the effect of Section 6 of the General Clauses Act and held that the power of the competent authority stood preserved also by virtue of the said provision. JUDGMENTS OF KOLHAPUR CANESUGAR AND AIR INDIA 2000 (2) TMI 823 - SUPREME COURT - HELD THAT - The Air Corporation Act was revoked by way of a repealing Act. Further the Section 8 of the 1994 Act which was the subject matter of the controversy in the said case did not contain a repeal and saving provision as observed in para 10 Section 8 of the 1994 Act does not in express terms save the said Regulations nor does it mention them. The limited saving enacted in Section 8 does not in our opinion extent to the said Regulations. The observation in para 9 are being read completely out of context. There was no contention raised that the Parent Act is saved by the repeal. The argument was that subordinate legislation is saved despite the repeal of the parent statute. In this background the Supreme Court correctly interpreted that because of a lack of any legislative intent to the contrary the new statue envisaged a complete repeal of the prior statute along with all regulations thereunder. They were correct in holding that the old law does not survive as Section 8 of the new Act neither mentions the regulation nor saves it in express terms it is deemed to be repealed in full. However the factual situation in the present case before us is entirely different as Section 174 of the CGST Act is very widely worded which we shall shortly deal with. EFFECT OF SECTION 24 OF THE GENERAL CLAUSES ACT - HELD THAT - The purpose of Section 24 is to uninterruptedly continue the subordinate legislation that may be made under the Central Act which is repealed and re-enacted with or without modification. The repealing Act often comes with saving clauses to preserve certain provisions which if allowed to be obliterated with the repealed Act would not only destroy the continuity of the object and purpose of the repealing Act but wreck great hardship and injustice. Thus general saving statutes such as the General Clauses Act take care of this situation. Section 24 has to be read along with the re-enacted Act in order to comprehend whether the rules framed under the old Act are kept alive even after the repeal of the old Act. If we interpret that the Rules are not saved and kept operative the saving clause as well as applicability of Section 6 of the General Clauses Act would be rendered meaningless. In fact the entire purpose of section 24 is to redress the present situation - the CGST Rules stand on a different footing separate and distinct from the Service Tax Rules 1994. They do not impinge on the same subject matter. Thus for the reasons discussed coupled with absence of a clear legislative intent to supersede then same the mere bringing into force of the CGST Rules 2017 does not mean that the Service Tax Rules 1994 are not saved. JUDICIAL PRECEDENTS ON SAVING OF SUBORDINATE LEGISLATION - HELD THAT - In the instant case the repeal of the old Act and re-enactment of the new Act is simultaneous. According to the legislature the repeal alongwith reenactment was necessary to update the law to make it most suitable to the contemporary concept of indirect taxation. Overnight the nation switched over to the GST system which of course required massive calibrations of the entire accounting system both at the end of the Government as well as the taxpayers. However it did not mean that all investigations enquiries audits assessment proceedings adjudications and other legal proceedings which form the subject matter of the Service Tax Rules stood abrogated the moment the new law was enacted or that the officers carrying out the above exercise were stripped of their power to continue with the same because the Service Tax Rules were purportedly not saved - the CGST Rules 2017 cannot be understood to have superseded the Service Tax Rules 1994. The service tax rules will continue to govern and apply for the purpose of Chapter V of the Finance Act 1994. Any interpretation to the contrary would do violence to the repeal and saving clause and section 6 of the General Clauses Act. AUTHORITY OF CENTRAL EXCISE OFFICERS - HELD THAT - Nothing has been shown by the Petitioner to establish that the officers carrying out the verification and audit are not the Proper Officers except for citing the Notification No. 2/2017-Central Tax. By reading this notification we cannot draw an inference to the contrary in the manner that the Petitioner has conceived. Thus we are of the view that the Petitioner s contention is without substance and if the officer carrying out scrutiny and audit is also vested with the powers under the Central Excise Act he would be well within his powers to do so. SCOPE OF THE AUDIT/VERIFICATION PROCEEDINGS WHETHER SECTION 6 OF GCA OR SECTION 174 OF THE CGST ACT PROHIBITS INVOCATION OF RULE 5A AFTER 01.07.2017? - HELD THAT - The Petitioner may be right to the extent of saying that the audit under Rule 5A is qualitatively and materially different from an audit under section 72A of the Finance Act 1994. However we are not concerned with the scope of the audit. Before us the material question is whether the audit/verification contemplated under Rule 5A is saved despite the repeal of Chapter V. The Petitioner is wrong in contending that no obligation or liability has been accrued or incurred by it. The obligation to pay service tax arose at the time of rendering taxable service which fell during the disputed period at which time Chapter V was very much in force. The service tax is levied on providing of taxable service and is paid by the assessee on self-assessment basis. Therefore the liability and obligation to pay tax accrued in terms of the provisions of the Finance Act whenever a taxable event occurred. If service tax has not been paid or short paid the Service Tax Department would acquire the right to recover the said tax. This is done inter alia on the basis of the best judgment assessment under section 72 and by initiating recovery proceedings under section 73 of the Finance Act 1994. Therefore such duty cannot be construed to mean only that which forms the subject matter of proceedings under section 72 and 73 of the Finance Act. Having regard to the language used in the saving clause of the CGST Act as well as Sections 6 and 24 of the General Clauses Act along with the legislative intent behind the repeal and enactment we hold that Rule 5A of Service Tax Rules 1944 framed under the repealed/omitted chapter V of the Finance Act 1994 is saved. Petition dismissed.

Summary

Issues Involved:
1. Jurisdiction and authority of the Respondents under Rule 5A of the Service Tax Rules, 1994.
2. Applicability of Section 174 of the CGST Act, 2017.
3. Validity of the audit/verification proceedings.
4. Authority of officers conducting the audit.
5. Interpretation of judicial precedents on saving of subordinate legislation.

Issue-wise Analysis:

1. Jurisdiction and Authority of the Respondents:
The petitioner challenged the jurisdiction and authority of the Respondents under Rule 5A of the Service Tax Rules, 1994, arguing that with the advent of the CGST Act, 2017, the Respondents could not rely on a subordinate legislation (Rule 5A) framed under the Finance Act, 1994, which stands omitted by Section 173 of the CGST Act. The petitioner contended that Section 174 does not specifically save Rule 5A, and the saving provision and Section 6 of the General Clauses Act, 1897, only save obligations or liabilities incurred prior to the repeal date.

2. Applicability of Section 174 of the CGST Act, 2017:
The court examined the applicability of Section 174 of the CGST Act, which provides for the saving of rights, privileges, obligations, and liabilities accrued or incurred under the repealed Act. The court held that Section 174(2)(e) expressly empowers authorities to initiate fresh proceedings under the omitted Chapter V of the Finance Act, 1994, and the rules framed thereunder, despite the omission by Section 173 of the CGST Act. The court emphasized that the saving clause is framed in the widest possible language and includes the continuation of investigations, inquiries, verifications, assessments, adjudications, and other legal proceedings.

3. Validity of the Audit/Verification Proceedings:
The petitioner argued that the audit under Rule 5A of the Service Tax Rules, 1994, cannot result in any tax becoming due and is qualitatively different from an audit under Section 72A of the Finance Act, 1994. The court rejected this contention, stating that the audit/verification is a process prior to adjudication, and if it leads to any tax not paid or short paid, the adjudicatory process would follow. The court held that the obligation to pay service tax arose at the time of rendering taxable service, and the liability and obligation to pay tax accrued in terms of the provisions of the Finance Act whenever a taxable event occurred.

4. Authority of Officers Conducting the Audit:
The petitioner contended that the officers conducting the audit were not the proper officers as envisaged in the Act and Rules. The court referred to the proviso to Section 3 of the CGST Act, which stipulates that officers appointed under the Central Excise Act are deemed to be officers under the CGST Act. The court noted that the officers carrying out the verification and audit are also vested with powers under the Central Excise Act and are thus authorized to conduct the audit.

5. Interpretation of Judicial Precedents on Saving of Subordinate Legislation:
The petitioner relied on the Supreme Court judgments in Kolhapur Canesugar Works v. Union of India and Air India v. Union of India to argue that subordinate legislation is saved only if the saving provision expressly mentions the title of the subordinate legislation. The court examined these judgments and concluded that they do not support the petitioner's contention. The court emphasized that Section 174 of the CGST Act and Section 6 of the General Clauses Act save the institution of verification and audit proceedings, and Section 24 of the General Clauses Act ensures the continuation of subordinate legislation made under the repealed Act.

Conclusion:
The court dismissed the petition, holding that Rule 5A of the Service Tax Rules, 1994, is saved by Section 174 of the CGST Act, 2017, and Section 6 of the General Clauses Act, 1897. The court also held that the officers conducting the audit are authorized to do so, and the audit/verification proceedings are valid and can result in tax becoming due.