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Updates about provision relating to service tax audit- Amended rule 5A also seems to be ultravirse and invalid provision. |
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Updates about provision relating to service tax audit- Amended rule 5A also seems to be ultravirse and invalid provision. |
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References and links:Circular No. 181/7/2014-Service Tax, dt. 10-12-2014 Section72A, 94 of the FA 1994.Rule 5A(2)Recent circular:The Circular No. 181/7/2014-Service Tax, dt. 10-12-2014 vide F. No. 137/46/2014-Service Tax is about audit of the Service Tax assessees by the officers of Service Tax and Central Excise Commissionerates. The Circular is analyzed below:
“(k) imposition, on persons liable to pay service tax for the proper levy and collection of tax, of duty of furnishing information, keeping records and the manner in which such records shall be verified.” New Rule: In exercise of the rule making powers under clause (k) of sub-section (2) of section 94 of the Finance Act, 1994, the Central Government has inserted (sic. Substituted) a new rule 5(A)(2) in the Service Tax Rules, 1994 vide notification no. 23/2014-Service Tax dated 5th December, 2014. This rule, inter alia, provides for scrutiny of records by the audit party deputed by the Commissioner. Such scrutiny essentially constitutes audit by the audit party consisting of departmental officers. Verification: verification of records mandated by the statute is necessary to check the correctness of assessment and payment of tax by the assessee in the present era of self-assessment. Verified: it may be noted that the expression “verified” used in section 94(2)(k) of the said Act is of wide import and would include within its scope, audit by the departmental officers, as the procedure prescribed for audit is essentially a procedure for verification mandated in the statute. Judgment prior to amendment: It may also be noted that the Hon’ble High Court of Delhi in the judgment dated 04.08.2014 in the case of M/s Travelite (India) [2014 (8) TMI 200 - DELHI HIGH COURT] had quashed rule 5A(2) of the Service Tax Rules, 1994 on the ground that the powers to conduct audit envisaged in the rule did not have appropriate statutory backing. This judgment can now be distinguished as a clear statutory backing for the rule now exists in section 94(2)(k) of the said Act. Directions for audit: Departmental officers are directed to audit the Service Tax assessees as provided in the departmental instructions in this regard. Difficulty: difficulty, if any, in implementing the circular may be brought to the notice of the Board. We find that the Government had to come out with an amendment in Rule 5A(2) of Service Tax Rules , 1994 to make it intra virse. The Rule 5 A (2) has been substituted vide Notification No. 23/2014-ST dated 05.12.2014. The said sub-rule, as stand now and as it was prior to amendment are reproduced below with highlights for analysis by underlining or by coloring (green portion means added , blue means deleted, red means modified):
From rule making powers- section 94 of the FA 1994:
**Substituted vide THE FINANCE (No. 2) ACT, 2014, Reasons for strike down of old rule:It is pertinent to note, the Honourable High Court of Delhi in the case of Travelite (India) vs. UOI & Ors, while quashing Rule 5A(2) of the Service Tax Rules and the CBEC Instructions prescribing the manner of an audit and the records that can be called for by the authorities, held that “Section 74A (sic.72A) prescribes the conditions meriting such special audit compels the necessary inference that the Parliament did not intend to provide for a general audit that “every assessee” may be subjected to, “on demand”. This Court is thus of the opinion that any attempt to include provision for such a general audit through the back-door, such as through the impugned rule, is ultra-vires the rule making power conferred under Section 94(1). Rule 5A(2) must consequently be struck down.” New rule makes no change so as to be valid: The new rule is also general authority for audit. The words used are on the same line that is “Every assessee, shall, on demand make available to the officer empowered ….. “ as were in the rule that was struck down. Merely providing for audit through some other agencies does not really make a true sense change to be effective rule. There should be some check and balances and method for ascertaining need for such an audit. Whether audit is by departmental officers, CAG or CA will not make difference. As per opinion expressed by the Court in the case of Travelite (India) the provision of audit on demand by amending Rule still continues to be a general power and such is not intention. Amended Rule also seemd ultravirse: In view of author, before ordering such special audit, there must be substantial reasons and information to suggest need of such a special audit. Audit should not be a routine course and should not be based on suspicion. Therefore, the tax payer must also be given an opportunity to show cause as to why such an audit should not be conducted. There is a special provision for ordering audits in terms of S. 72A. Thus, when a matter is covered by special provisions of the main enactment, how a rule can be made to overcome that provision of to substitute it in an administrative manner or by making a rule. No doubt rules about audit may be made to achieve the purposes of the Act, however, when S.72A is specific provision for audit, the Rules so made about audit must be in conformity with S. 72A. General power to make rules cannot be exercised overlooking specific provisions. Therefore, amendment of S.94A does not affect importance of S.72A so far matters relating to audit are concerned. Therefore, even after amendment the Rule is still ultravirse the Act. Section 72A being special provision about audits will prevail and Rules cannot enlarge scope of ordering audits.
Relevant portions from provisions are reproduced below with highlights for analysis: Statutory ProvisionsChapter V of Finance Act, 19941[Special audit. '72A. (1) If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as ''such person''),–– (i) has failed to declare or determine the value of a taxable service correctly; or (ii) has availed and utilised credit of duty or tax paid- (a) which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or (b) by means of fraud, collusion, or any wilful misstatement or suppression of facts; or (iii) has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner, he may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him, to the extent and for the period as may be specified by the Commissioner. (2) The chartered accountant or cost accountant referred to in sub-section (1) shall, within the period specified by the said Commissioner, submit a report duly signed and certified by him to the said Commissioner mentioning therein such other particulars as may be specified by him. (3) The provisions of sub-section (1) shall have effect notwithstanding that the accounts of such person have been audited under any other law for the time being in force. (4) The person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit under sub-section (1) and proposed to be utilised in any proceeding under the provisions of this Chapter or rules made thereunder. Explanation.— For the purposes of this section,–– (i) "chartered accountant" shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949; (38 of 1949.) (ii) "cost accountant" shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959.'; (23 of 1959).] *****************Notes:
Power to make rules. 94. (1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Chapter. 1[(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely :— (a) collection and recovery of service tax under sections 66 and 68; 2[(aa) the determination of amount and value of taxable service under section 67;] (b) xx. 16[(k) imposition, on persons liable to pay service tax, for the proper levy and collection of the tax, of duty of furnishing information, keeping records and the manner in which such records shall be verified; (m) authorisation of the Central Board of Excise and Customs or Chief Commissioners of Central Excise to issue instructions, for any incidental or supplemental matters for the implementation of the provisions of this Act; (n) any other matter which by this Chapter is to be or may be prescribed.] The judgment of Delhi High Court is reproduced below with highlights added by author:
2014 (8) TMI 200 - DELHI HIGH COURT Other Citation: 2014 (35) S.T.R. 653 (Del.) Travelite (India) Versus UOI And OthersW. P. (C) 3774/2013, C. M. No. 7065/2013 Dated - 04 August 2014 Power to conduct service tax audit / Revenue Audit – Validity of Rule 5A of Service Tax Rules, 1994 - instruction of the Central Board of Excise and Customs (“CBEC”) no. F. No. 137/26/2007-CX.4 dated 1.1.2008 - whether special audit can be ordered by recourse to Section 72-A of the Finance Act, 1994 – Held that:- It is apparent that the only type of audit within the contemplation of the statute is that stipulated for in Section 74A, i.e. a special audit when only certain circumstances are fulfilled. The Parliament thus had a clear intention to provide for only a special audit. The fact that Section 74A prescribes the conditions meriting such special audit compels the necessary inference that the Parliament did not intend to provide for a general audit that “every assessee” may be subjected to, “on demand”. - Decided in favour of assessee. Judgment / Order S. Ravindra Bhat And Vibhu Bakhru,JJ. For the Petitioner : Sh. J. K. Mittal and Sh. Vipul Dubey, Advocates. For the Respondents : Sh. Anuj Aggarwal and Sh. Gaurav Khanna, Advocates, for Resp. No.1. Sh. Rahul Kaushik, Advocate, for Service Tax Department. ORDER Mr. Justice S. Ravindra Bhat 1. The assessee (hereafter “the petitioner”) approaches this Court under Article 226 of the Constitution of India, challenging a letter dated 07-11-2012 of the respondent Commissioner seeking records for the period 2007-08 till 2011-12 for scrutiny of an audit party; Rule 5A (2) is also impugned as ultra vires. 2. The petitioner is a registered service tax assessee. It is aggrieved by the letter of the Commissioner of Service Tax (“CST”) dated 7.11.2012, which sought its records for the years 2007-08 till 2011-12 for scrutiny by an audit party, under Rule 5A(2) of the Service Tax Rules, 1994.The Petitioner also challenges the validity of Rule 5A(2) of the Service Tax Rules, 1994, brought into force by Notification no. 45/2007 dated 28.12.2007 as well as the instruction of the Central Board of Excise and Customs (“CBEC”) no. F. No. 137/26/2007-CX.4 dated 1.1.2008. It is contended that the powers of an assessing officer to call for records in respect of any period during which the respondents seek to intensively scrutinize receipts etc. i.e. a special audit can be ordered by recourse to Section 72-A of the Finance Act, 1994. Barring these, the Finance Act, does not contain any substantive power to call for records for scrutiny as is permissible under Rule 5A(2) or for the purpose of scrutiny by any authority outside of those created under the Act, such as the Comptroller and Auditor General’s office. 3. The petitioner relies on Municipal Corporation v. Birla Cotton, Spinning and Weaving Mills,AIR 1968 SC 1232 and General Officer, Commanding in Chief v. Subhash Chandra Yadav, (1988) 2 SCC 351, and argues that a rule must conform to the statute under which it was framed, and must be within the rule making power of the authority. The submission is that the impugned rule is not only unjustified in the context of the substantive provisions of law in the relevant statute i.e. Chapter V of the Finance Act but also is squarely inconsistent with Section 72-A of the Finance Act, 1994, which empowers the Commissioner of Central Excise to order an audit under special circumstances only. In addition, the rule is not within the rule-making power conferred on the executive under Section 94 of the Act. 4. The petitioner further submits, relying on Pahwa Chemicals P Ltd. CCE, Delhi 2005 (181) ELT 339 (SC) and Collector Central Excise, Bhopal v. Ram Melting & Wire Industries, (2008) 13 SCC 1 that the impugned instruction, which stipulates the modalities for the conduct of the audit, cannot widen the scope of the law. Likewise, a substantive obligation, such as that of handing over records to an audit party, cannot find its basis in a non-statutory instrument like the Service Tax Manual. Finally, the petitioner submits, relying on Sahara India v. CIT (2008) 14 SCC 151 that in any event, an audit, since it carries civil consequences, cannot be ordered without a notice issued to the assessee, indicating reasons for the audit. 5. The respondent justifies the impugned notice and introduction of Rule 5A, arguing that the rule authorizing audit was made pursuant to the power conferred under Section 94 of the Finance Act, 1994 and not pursuant to Section 72A. The rule is also sought to be justified by invoking the Service Tax Audit Manual, 2011 as the basis for ordering an audit. The respondent states that after its initial letter, it had sent repeated reminders to the petitioner (dated 26.12.2012, 30.1.2013, 8.3.2013) before it had issued summons on 17.5.2013. It urges that the petitioner alleged arbitrariness of the rule only on 1.4.2013 for the first time; until then, the petitioner had maintained that it would cooperate with the authorities of the respondent towards completing the audit. These delaying tactics of the petitioner, the respondent argues, betray mala fides. 6. Rule 5A though titled “Access to a registered premises”, directs the assessee, in sub-rule (2), to provide records to an audit party. It reads: “Rule 5A. Access to a registered premises. (1) An officer authorised 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 revenue. (2) Every assessee shall, on demand, make available to the officer authorised 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,- (i) the records as mentioned in sub-rule (2) of rule 5; (ii) trial balance or its equivalent; and (iii) 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. The impugned CBEC instruction reads: “… A new Rule 5A has also been incorporated in the said Rules to prescribe that an officer authorised by the Commissioner shall have access to any premises registered under the Service Tax Rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue and that the assessee shall provide, on demand, the specified records including trial balance or the equivalent. It may be noted that this rule does not envisage issue of any notification by a Commissioner for such authorisation of officers. The requirement of authorisation could be fulfilled by issue of an office order. 2. In this regard, it is clarified that records/documents required to be maintained under various laws such as the Income Tax Act, Companies Law the CENVAT Credit Rules, 2004, VAT and other State legislation would be acceptable, and the amendment made in the rule does not cast any additional responsibility on taxpayers in terms of maintenance of records. 3. The list of records, as required to be provided under said sub-rule (2) should be submitted once only. Once filed, further intimation would be required to be given only in case there is any change in the list (i.e. addition, deletion, modification in the types of records maintained) that had been furnished by the assessee. 4. A copy of the list furnished by the assessee would be sent by the jurisdictional superintendent to the audit section. 5. The audit team or any other officer authorised by the Commissioner to visit the registered premises of an assessee shall give prior intimation to the asseseee along with the list of documents that he requires for the purposes of scrutiny, verification or audit. 6. That taxpayer shall provide the records as required by the authorized officer within a period of fifteen days from the date of request. In case, the taxpayer is unable to produce any of the records called for within the stipulated time, he shall intimate the same along with reasons, for non-production of records, and the officer may also further time for production of such records keeping in view the overall facts into account. 7. These amendments have been made in the service tax rules to enable the duly authorised offices to carry out audit or scrutiny as may be necessary to safeguard the interest of revenue. However, it may be ensured that only such records are demanded which are necessary for conducting such audit scrutiny or verification. 7. The rule making power conferred upon the executive in Section 94 of the Finance Act reads in the following terms: “94. Power to make rules. - (1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Chapter. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely: - xxx xxx xxx” 8. The only provision in Chapter V of the Finance Act on scrutiny and audit of records of the assessee is Section 72A of the Finance Act, 1994, which reads: “72A. (1) If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as ''such person''),–– (i) has failed to declare or determine the value of a taxable service correctly; or (ii) has availed and utilised credit of duty or tax paid- (a) which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or (b) by means of fraud, collusion, or any wilful misstatement or suppression of facts; or (iii) has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner, he may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him, to the extent and for the period as may be specified by the Commissioner. (2) xxx xxx xxx (3) xxx xxx xxx (4) The person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit under subsection (1) and proposed to be utilised in any proceeding under the provisions of this Chapter or rules made thereunder. Explanation.xxx 9. Section 72A envisages an audit of an assessee’s records only in special circumstances, namely, when there is a failure to declare or compute the value of the taxable service, when the utilization of CENVAT credit in excessive of the limit permissible or by fraud etc., and when the business operations of the assessee are dispersed across multiple locations. Apart from Section 94, the Revenue could not show any other substantive provision which justifies a probe into the records of the assessee, under conditions akin to those contemplated by Rule 5A(2). The Revenue was also unable to show the compulsion of arming authorities with such sweeping powers, under the Rules. 10. It is well known that if the legislature contemplates a situation and enacts or provides for a part of it, the other parts are deemed to have been excluded. The law is also well settled that a rule acquires statutory force, so long as it first, conforms to the provisions of the statute under which it is framed and second, it must be within the rulemaking power of the executive authority charged with framing the rules. Ref. General Officer, Commanding-in-Chief v. Dr. Subhash Chandra Yadav, (1988) 2 SCC 351 and Dr.Mahachandra Prasad Singh v. Honourable Chairman, Bihar Legislative Council and Ors., (2004) 8 SCC 747. The “generality” of the rule-making power conferred under Section 94(1) is thus only to the extent that rules made in exercise of that power are in conformity with the provisions of the statute. The reasoning for this is stated in simple terms in Mahachandra Prasad Singh (supra): “The rules being delegated legislation are subject to certain fundamental factors. Underlying the concept of delegated legislation is the basic principle that the legislature delegates because it cannot directly exert its will in every detail. All it can in practice do is to lay down the outline. This means that the intention of the legislature, as indicated in the outline (that is the enabling Act), must be the prime guide to the meaning of delegated legislation and the extent of the power to make it. The true extent of the power governs the legal meaning of the delegated legislation. The delegate is not intended to travel wider than the object of the legislature. The delegate's function is to serve and promote that object while at all times remaining true to it. That is the rule of primary intention. Power delegated by an enactment does not enable the authority by regulations to extend the scope or general operation of the enactment but is strictly ancillary. It will authorise the provision of subsidiary means of carrying into effect what is enacted in the statute itself and will cover what is incidental to the execution of its specific provision. But such a power will not support attempts to widen the purposes of the Act to add new and different means of carrying them out or to depart from or vary its ends. ( see Section 59 in chapter Delegated Legislation in Francis Bennion's Statutory Interpretation 3rd Edn. ).” (emphasis added) 11. The mere fact that a rule-making power is phrased in terms that indicates a general delegation of power,cannot lead to the inference that such power may be exercised to make rules that exceed the bounds of the statute. Rules may only give effect to the statute’s provisions and intent and cannot be used to create substantive rights, obligations or liabilities that are not within the contemplation of the statute. (Ref. Kunj Behari Lal v. State of H.P, (2000) 3 SCC 40 and Global Energy Ltd. v. Central Electricity Regulatory Commission, (2009)15SCC570. It is apparent that the only type of audit within the contemplation of the statute is that stipulated for in Section 74A(sic. 72A) , i.e. a special audit when only certain circumstances are fulfilled. The Parliament thus had a clear intention to provide for only a special audit. The fact that Section 74A (sic. 72A) prescribes the conditions meriting such special audit compels the necessary inference that the Parliament did not intend to provide for a general audit that “every assessee” may be subjected to, “on demand”. This Court is thus of the opinion that any attempt to include provision for such a general audit through the back-door, such as through the impugned rule, is ultra-vires the rule making power conferred under Section 94(1). Rule 5A(2) must consequently be struck down. 12. Likewise, this Court finds that the impugned CBEC instruction, being in furtherance of Rule 5A(2), which rule is ultra-vires the Finance Act, 1994, is void for the same reasons. Executive instructions without statutory force, cannot possibly override the law; consequently, any notice, circular, guideline etc. contrary to statutory laws cannot be enforced. (See Rajasthan State Industrial Development and Investment Corporation v. Subhash Sindhi Cooperative Housing Society Jaipur (2013) 5 SCC 42; B.N. Nagarajan v. State of Mysore, AIR 1966 SC 1942. As observed in B.N. Nagarajan (supra): “It was settled by this Court in Ram Jawaya Kapur v. The State of Punjab: [1955] 2 SCR 225 that it is not necessary that there must be a law already in existence before the executive is enabled to function and that the powers of the executive are limited merely to the carrying out of these law. ….…It is hardly necessary to mention that if there is a statutory rule or an act on the matter, the executive must abide by that act or rule and it cannot in exercise of the executive power under art. 162 of the Constitution ignore or act contrary to that rule or act.” (emphasis added) 13. It is clear that Section 83 of the Finance Act, 1994 authorises that Section 37B, inter alia, of the Central Excise Act, 1944 “shall apply, so far as may be, in relation to service tax, as they apply in relation to a duty of excise”. Section 37B of the Central Excise Act, 1944 reads: “Section 37B. Instructions to Central Excise Officers. The Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963), may, if it considers it necessary or expedient so to do for the purpose of uniformity in the classification of excisable goods or with respect to levy of duties of excise on such goods, issue such orders, instructions and directions to the Central Excise Officers as it may deem fit, and such officers and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the said Board : xxx xxx xxx” 14. It is clear that the CBEC, under the power vested in it by Section 37B of the Central Excise Act, 1944 read with Section 83 of the Finance Act, 1994 issues these circulars as instructions with respect to the levy of service tax. Consequently, such circulars cannot possibly override the statute, or be contrary to the statute. The impugned circular seeks to put in place a mechanism for audit and scrutiny of documents with the objective of safeguarding the interests of the Revenue, in furtherance of the amendments made in the Service Tax Rules, as indicated in paragraph 7 of the circular. Since the parent statute in this regard, the Finance Act, 1994 itself does not authorise a general audit of the type envisioned by the impugned Rule 5A(2), and furthermore only stipulates that a special audit can be undertaken if the circumstances outlined in Section 72A are fulfilled, this Court finds that the impugned CBEC circular is not only an attempt to widen the scope of the law impermissibly but also is patently contrary to the statute. The impugned circular, to the extent it provides clarifications on a Rule5A(2) audit, is hereby quashed; consequently, the impugned letter is quashed and set aside. 15. The Service Tax Audit Manual, 2011 is merely an instrument of instructions for the service tax authorities; it is but obvious that it is not a statutory instrument and has no statutory force. Thus, Rule 5A(2) cannot be sought to be justified as against it. 16. The writ petition is accordingly allowed with no order as to costs.
By: CA DEV KUMAR KOTHARI - December 29, 2014
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