Supreme Court Grants Stay on Delhi High Court Judgement on Service Tax Audit in Travelite India Case Declaring Rule 5A(2) as Ultra Vires

[Naveed S]

Supreme Court Grants Stay on Delhi High Court Judgement on Service Tax Audit in Case UNION OF INDIA AND ORS Versus M/s TRAVELITE (INDIA) 2014 (12) TMI 1099 - SUPREME COURT  Declaring Rule 5A(2) as Ultra Vires

On 18-12-2014, a three judges bench of the Supreme Court headed by Chief Justice has granted Stay on Delhi High Court Judgment ruling that provisions of Rule 5A(2) related to Service Tax Audit are Ultra Vires.

The Delhi High Court in the case of Travelite (India) Versus UOI And Others[2014 (8) TMI 200 - DELHI HIGH COURT] had opined that the said rule amounted to an attempt to include provision for such a general audit through the back-door and accordingly struck down Rule 5A(2) as ultra-vires the rule making power conferred under Section 94(1) of the Finance Act. It held that Parliament had clear intention to provide for only special audit u/s 72A of Finance Act on fulfillment of special circumstances, and it did not contemplate a general audit that “every assessee” may be subjected to “on demand”. It also held that “No Service Tax Audit can be conducted by the Department and only Special Audit within the Statute as mentioned under Section 72A of the Finance Act can be done either by a Chartered Accountant or Cost Accountant only in specified certain circumstances” and that Service Tax Audit as envisaged in Rule 5A(2) of the Service Tax Rules does not have appropriate statutory backing.

Thereafter, department had moved to the Supreme Court against the impugned judgment. The matter was admitted by the court and on 18th Dec’14, Hon’ble Apex Court has granted a Stay on the operation of the judgment made by High Court.

It is also to be noted that the Board vide Circular No. 181/7/2014-ST dated December 10, 2014 has clarified that Rule 5A(2) of the Service Tax Rules has appropriate backing for the purpose of conducting service tax audit and for scrutiny of records by an officer authorised by the Commissioner or the Audit Party deputed by the Commissioner or CAG and such scrutiny essentially constitutes Audit by the Audit Party consisting of the Departmental officers.

In view of above, the judgment of the Hon’ble High Court of Delhi in the Travelite case has now become irrelevant as now the Service Tax Audit can rightly be conducted by the Servie Tax Department. Further, it is also a fact that department has extreme powers to issue summon under Section 14 of Central Excise Act (applicable to Service tax) and to call for records, search and seizure of records of assessee and even arrest the assessee.

To sum up, the decision of the Hon’able Supreme Court granting stay on the order of the Delhi High Court in case of Travelite (India) Versus UOI And Others[2014 (8) TMI 200 - DELHI HIGH COURT] is surely an order in the right direction, especially after issuance of the above Board’s Circular dated 10.12.2014.

A final order in the matter shall surely settle the issue once and for all.