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2016 (6) TMI 163 - HC - Service TaxPower to Audit under Service Tax - Scope of Rule 5A(2) of service tax Rules, 1994 r.w.s. 94(1) and 94(2)(k) - Power to demand documents - challenged to the constitutional validity of Section 94(2)(k) of the FA on the ground that it gives plainly unguided and uncontrolled delegated powers to the Central Government for framing rules. It is stated that Section 94(2)(k) of the FA suffers from the vice of excessive delegation. Held that - Rule 5A(2) as amended in terms of Notification No. 23/2014-Service Tax dated 5th December 2014 of the Central Government, to the extent that it authorises the officers of the Service Tax Department, the audit party deputed by a Commissioner or the CAG to seek production of the documents mentioned therein on demand is ultra vires the FA is Unconstitutional and, therefore, strikes it down to that extent. The expression verify in Section 94 (2) (k) of the FA cannot be construed as audit of the accounts of an Assessee and, therefore, Rule 5A(2) cannot be sustained with reference to Section 94(2)(k) of the FA. Circular No. 181/7/2014-ST dated 10th December 2014 of the Central Government declared as ultra vires the FA and strikes it down as such. Letter issued by the Commissioner of Service Tax, Audit-1, New Delhi addressed to the Petitioner declared as being unsustainable in law. CBEC Circular No. 995/2/2015-CX dated 27th February 2015 on the subject Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates and the Central Excise and Service Tax Audit Manual 2015 issued by the Directorate General of Audit of the CBEC declared as ultra vires the FA, do not have any statutory backing and cannot be relied upon by the Respondents to legally justify the audit undertaken by officers of the Service Tax Department.
Issues Involved:
1. Challenge to the constitutional validity of Rule 5A(2) of the Service Tax Rules, 1994. 2. Challenge to the constitutional validity of Section 94(2)(k) of the Finance Act, 1994. 3. Challenge to Circular No. 181/7/2014-ST dated 10th December 2014. 4. Challenge to the letter dated 30th April 2015 issued by the Commissioner of Service Tax, Audit-1, New Delhi. Issue-Wise Detailed Analysis: 1. Challenge to the Constitutional Validity of Rule 5A(2) of the Service Tax Rules, 1994: - Argument by Petitioner: The petitioner argued that Rule 5A(2) of the Service Tax Rules, 1994, as amended, is ultra vires Section 72A of the Finance Act, 1994. They contended that while Section 72A only contemplates a special audit by a Cost Accountant or Chartered Accountant, Rule 5A(2) allows departmental officers or CAG officers to demand documents, which goes beyond the scope of Section 72A. - Court's Analysis: The court noted that Rule 5A(2) permits departmental officers to demand documents without recording reasons to believe that such documents are necessary, unlike the provisions under Section 72, 72A, 73, and 82 of the Finance Act, which have specific safeguards and limitations. The court found that Rule 5A(2) exceeds the scope of the Finance Act and is ultra vires. - Judgment: The court declared Rule 5A(2) to the extent that it authorizes officers of the Service Tax Department, the audit party deputed by a Commissioner, or the CAG to seek production of documents on demand as ultra vires the Finance Act and struck it down. 2. Challenge to the Constitutional Validity of Section 94(2)(k) of the Finance Act, 1994: - Argument by Petitioner: The petitioner argued that Section 94(2)(k) of the Finance Act gives "plainly unguided and uncontrolled" delegated powers to the Central Government for framing rules, thus suffering from the vice of excessive delegation. - Court's Analysis: The court examined the scope of Section 94(2)(k) and found that the expression "verify" cannot be construed to mean "audit." The court held that the power to verify records does not extend to conducting audits by departmental officers. - Judgment: The court held that the expression 'verify' in Section 94(2)(k) cannot be construed as an audit of the accounts of an Assessee and, therefore, Rule 5A(2) cannot be sustained with reference to Section 94(2)(k) of the Finance Act. 3. Challenge to Circular No. 181/7/2014-ST dated 10th December 2014: - Argument by Petitioner: The petitioner challenged the circular stating that it allowed departmental officers to conduct audits based on the amended Rule 5A(2), which they argued was ultra vires. - Court's Analysis: The court found that the circular relied on the amended Rule 5A(2) and Section 94(2)(k) to justify departmental audits, which the court had already found to be ultra vires. - Judgment: The court declared Circular No. 181/7/2014-ST dated 10th December 2014 of the Central Government to be ultra vires the Finance Act and struck it down. 4. Challenge to the Letter Dated 30th April 2015 Issued by the Commissioner of Service Tax, Audit-1, New Delhi: - Argument by Petitioner: The petitioner challenged the letter informing them of an audit by departmental officers, arguing it was based on the ultra vires Rule 5A(2) and circular. - Court's Analysis: The court found that the letter was based on the provisions and circulars it had declared ultra vires. - Judgment: The court quashed the letter dated 30th April 2015 issued by the Commissioner of Service Tax, Audit-1, New Delhi, as being unsustainable in law. Conclusion: - The court declared Rule 5A(2) as amended by Notification No. 23/2014-Service Tax dated 5th December 2014, to the extent that it authorizes officers of the Service Tax Department, the audit party deputed by a Commissioner, or the CAG to seek production of documents on demand, as ultra vires the Finance Act. - The court held that the expression 'verify' in Section 94(2)(k) of the Finance Act cannot be construed as an audit of the accounts of an Assessee. - The court declared Circular No. 181/7/2014-ST dated 10th December 2014 of the Central Government to be ultra vires the Finance Act. - The court quashed the letter dated 30th April 2015 issued by the Commissioner of Service Tax, Audit-1, New Delhi. - The court declared that the CBEC Circular No. 995/2/2015-CX dated 27th February 2015 and the Central Excise and Service Tax Audit Manual 2015 issued by the Directorate General of Audit of the CBEC are ultra vires the Finance Act and cannot be relied upon to legally justify the audit undertaken by officers of the Service Tax Department.
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