VALIDITY OF RULE 5A (2) OF SERVICE TAX RULES, 1994 - Revenue Audit / Scrutiny of Return

[Mr. M. GOVINDARAJAN]

Vide notification No. 45/2007-ST, Rule 5A was inserted in Service Tax Rules, 1994 which gives powers to an officer authorized by the Commissioner to have access to a registered premises.  Rule 5A is reproduced as below:

5A. Access to a registered premises. – (1)  An officer authorized by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of the revenue.

(2) Every assessee shall, on demand, make available to the officer authorized under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be,-

1. The records as mentioned in sub-rule (2) of Rule 5;
2. Trial balance or its equivalent; and
3. The income tax audit report, if any, under Section 44AB of the Income Tax Act, 1961 (43 of 1961), for the scrutiny of the officer or audit party, as the case may be.

On 1.1.2008 the Board issued instructions clarified with effect from 15.2.2007 vide Section 83 of the Finance Act, 2007, Section 14AA of the Central Excise Act, 1944 is applicable to the service tax, to empower the Commissioner of Central Excise to order for cost audit by a Cost Accountant to study the abnormal legislation of CENVAT credit under Section 14AA.  With effect from 28.5.2014 Section 72A has been inserted in the Finance Act, 1994 for the purpose of special audit under Service tax.

In this article the validity of Rule 5A(2) is going to be discussed with reference to the decided case law.  Generally if a rule goes beyond the rule making power conferred by the statute, the same has to be declared ultra vires.  If a rule supplants any provision for which power has not been conferred, it becomes ultra vires.  It is well settled that the rules framed under the provisions of a statute form part of the statute.  Thus the rules have statutory force.  But before a rule can have the effect of statutory provision, two conditions must be fulfilled as held by the Supreme Court in ‘General Officer Commanding-in-Chief & another V. Dr. Subbash Chandra Yadav & another’ – 1988 (2) TMI 462 - SUPREME COURT OF INDIA

• It must conform to the provisions of the statute under which it is framed; and
• It must also come within the scope and purview of the rule making power of the authority framing the rule.

If either of the two conditions is not fulfilled, the rule so framed would be void.

In ‘A.C.L. Education Centre (P) Limited V. Union of India’ – 2014 (1) TMI 1562 - ALLAHABAD HIGH COURT the Central Excise Department sent intimation to the petitioner under Rule 5A(2) for making a reference to conduct an Audit under EA-2000 for which the Department demanded necessary documents from the petitioner.   The petitioner objected for the same and filed a writ petition and prayed for the following:

• A writ, order or direction in the nature of Certiorari quashing Rule 5A(2) of Service Tax Rules, 1994, empowering the Departmental officers as Auditor being arbitrary , illegal and ultra vires to the provisions of the Finance Act, 1994;
• A writ, order or direction in the nature of Certiorari quashing the impugned letter issued by the Department for conducting audit by the departmental officers of petitioner’s records without assigning any reason thereof, by declaring it as illegal and without authority of law;
• A writ, order or direction in the nature of mandamus directing department for regulating the audit of service tax of assessee to make a specific provision under Finance Act, 1994 and to prescribe norms for eligible category for selection of assessee for the purpose of audit, prescribe minimum qualification for the officers conducting audit for which audit is to be conducted, format of audit report indicating circumstances under which such audit is to be conducted.

The petitioner submitted the following before the High Court:

• The petitioner is paying regularly service tax and filing returns as per rules;
• There is no provision in the Finance Act, 1994 for framing of rules in respect of audit of the accounts of private person or companies or firms who are paying service tax by self assessment;
• The rule empowering service tax officials to carry out scrutiny, verification, checks and for making available information as mentioned in Rule 5A(2) by audit party and as such the said Rule is without any authority.  Thus it is ultra vires;

The Department put forth the following submissions before the High Court:

• The Rule is not inconsonance to Section 72A of the Finance Act, 1994;
• The purpose of the said rule is to get the accounts audited by an Auditor deputed by the Commissioner; in case it is undertaking of Government of India, then Comptroller and Auditor General of India is authorized to conduct the audit;
• The purpose of the impugned letter is to collect the information from the assessee to assess the correct tax and if the Commissioner is satisfied, then he may appoint a Chartered Accountant for the purpose of audit;
• The audit will not be done any officer or on his behalf;
• The audit will be performed by a qualified Chartered Accountant and therefore the reference to the Audit Manual 2011 for the Department is valid;
• After completion of the audit a copy of the report is always available to the assessee;
• Before making the assessment, the assessee can also the copy of the audit report under the Right to Information Act, 2005. 

The High Court analyzed the provisions of Section 72A of the Act.  The said section is applicable where the assessee is not maintaining the books of account properly to ascertain the liability of the service tax.   To determine the correct tax books will have to be examined and if need be audited by a qualified Chartered Accountant.  The Auditor appointed by the Commissioner will submit his report duly signed  and certified by him to the Commissioner.  The said section further provided that reasonable opportunity will be given to the assessee.  The Court directed that a copy of the audit report may be made to the assessee and a proper opportunity will be also be provided to him as per law.

The High Court further analyzed the provisions of Rule 5A (2).  The High Court held that in case of private assessee the Commissioner will refer the matter to an officer to collect the material or Chartered Accountant for the purpose of audit.   Thus for the purpose of the audit the material can be collected either by the officer authorized by the Commissioner or by the Auditor himself, but the audit will be performed only by the Chartered Accountant.  It is the pious duty of the assessee to make available the record as mentioned in Rule 5A (2) for the scrutiny of the officer or the Audit party, as the case may be.

The High Court found no inconsistency in Rule 5A (2) and Section 72A of the Act.  The said provisions are not arbitrary.  The manner for conducting the audit is as per the accounting standard provided by the Institute of Chartered Accountants of India and the audit report will be made available to the assessee as per law.   The Audit manual is for the departmental use and just to facilitate the classification of the material collected from the assessee.   In view of the above Rule 5A(2) is not ultra vires, as the same is in consonance with Section 72A of the Finance Act, 1994 and the same was enacted by the competent authority.

Discussions to this article

[Rajagopalan Ranganathan]

There is no infirmity in authorizing the departmental officers to audit the accounts maintained by a service tax assessee.  The departmental officers are well trained to conduct the audit.  A Charted Accountant can examine the records provided by the assessee.  The departmental officer is empowered to call for any further records to satisfy himself that the assessee has discharged his service tax liability in accordance with law.  A Charted Accountant is to conduct audit on the basis of information and records provided by the assessee.  If the departmental officer has the authority to refer the matter to anti-evasion wing for further investigation if he is satisfied that no reasonable conclusions can be arrived at on the basis of records provided by the assessee.  This cannot be done by a Charted Accountant.