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TMI Blog2016 (6) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - W.P.(C) 5192/2015 & CM No. 9417/2015 - - - Dated:- 3-6-2016 - S. MURALIDHAR VIBHU BAKHRU JJ. For the Appellant: Mr. J.K. Mittal and Mr. Rajveer Singh, Advocates. For the Respondent: Mrs. Sonia Sharma, Senior Standing counsel with Ms Neha Chugh,Advocate for R-2 and R-3. Ms. Jyoti Dutt Sharma, CGSC with Ms. Nimisha Gupta, Advocate for UOI/R-1. Dr. S. Muralidhar, J.: Introduction 1.1 The challenge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is stated to be regularly been paying service tax and also filing its service tax returns. The Petitioner changed its name from Mega Cabs Ltd. to Mega Cabs Pvt. Ltd. with effect from 27th October 2014. 3. By a Notification dated 28th December 2007, the Central Government in the Ministry of Finance, Department of Revenue inserted Rule 5A in the ST Rules. Consequent thereto, the CBEC also issued an instruction on 1st January 2008 explaining the scope of the powers of the various officers of the Department to carry out audit or scrutiny of the records of service tax payers. 4. Rule 5A as inserted by the aforementioned Notification dated 28th December 2007 reads as under: 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, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide for all or any of the following matters, namely (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 9. An amendment was also made to the ST Rules by replacing Rule 5 A (2) with a new Rule 5A(2) by the aforementioned central government notification dated 5th December 2014. Soon thereafter on 10th December 2014, the impugned Circular No. 181/7/2014-ST was issued by the CBEC clarifying that in view of the insertion of Section 94 (2) (k), the officers of the Service Tax Departments could proceed with conducting audits as before. It was stated that that expression 'verified' used in Section 94 (2) (k) of the FA was of wide import and would include within its scope audit by the departmental officers. 10. Thereafter Circular No. 995/2/2015-CX dated 27th February 2015 was issued by the CBEC on the subject Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates and this too contemplated the Department's officers themselves undertaking audits. A Central Excise and Service T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 72A of the FA only contemplates a special audit to be got done by the Assessee on the direction of the Commissioner, by a Cost Accountant or a Chartered Accountant ('CA'), Rule 5A(2) permits any officer of the Department or an audit party deputed by the Commissioner or the CAG (in addition to the Cost Accountant and the CA undertaking the special audit) to ask for production by the Assessee for books of accounts etc. on demand . Apart from the fact that Rule 5A(2) expands the list of persons who could seek production of records and that too on demand, none of the safeguards spelt out in Section 72A require to be observed by the persons making such demand under Rule5A(2) of the Rules. (iii) Relying on the decisions in Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills AIR 1968 SC 1232, Union of India v. S. Srinivasan (2012) 7 SCC 683, General Officer Commanding-in-Chief v. Subhash Chandra Yadav AIR 1988 SC 876 and Sahara India (Firm) v. Commissioner of Income Tax (2008) 14 SCC 151 , it is submitted that the essential conditions for a validity of a subordinate legislation viz., that it (a) must conform to the provision of the statute und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India 2014 (33) STR 609(All) and Sadbhav Engineering Ltd. v. Union of India (decision dated 3rd December 2014 of the Gujarat High Court in Special Civil Application No. 14928/2014). Reference is also made to the decision of this court in Larsen Toubro Ltd. v. Commissioner of Value Added Tax (2014)73 VST 190 (Delhi). (viii) Even assuming the information was being sought pursuant to the powers of assessment of the service tax under Section 72 of the FA, considering that the Petitioner has been regularly filing service tax returns and regularly paying service tax, there was no occasion for a special audit to be ordered. (ix) The recent Circular No. 995/2/2015-CX dated 27th February 2015 issued by the CBEC on the subject Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates contemplated the Department's officers themselves undertaking the audit and had no statutory basis. The recent Central Excise and Service Tax Audit Manual, 2015 issued by the Directorate General of Audit of the CBEC again did not take in to account the statutory scheme of the FA which did not permit such exercise to be undertaken. (x) Section 94 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. Relying on the decision in R.K. Garg v. Union of India 1981(4) SCC 675 it was submitted that greater play in the joints had to be allowed to the legislature and that too in the field of economic regulation. The Court should grant greater deference to legislative wisdom. Analysis of the provisions of the FA 16. At the outset it requires to be noticed that unlike the Income Tax Act, 1961 or even the Delhi Value Added Tax Act, 2004 there is no provision in the FA for re-assessment of a service tax return. There can be a self-assessment in which case the return filed by the Assessee is accepted as such and the tax amount indicated therein is accepted as being correct. However under Section 72 of the FA two scenarios are envisaged. Section 72 reads as under: 72. Best judgement assessment:- If any person, liable to pay service tax,- (a) fails to furnish the return under section 70; (b) having made a return, fails to assess the tax in accordance with the provisions of this Chapter or rules made there under, the Central Excise Officer, may require the person to produce such accounts, documents or other evidence as he may deem necessary and after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act, 1961 also contemplates such post-decisional hearing. However the Supreme Court was of the view that such post-decision hearing is no substitute for pre-decisional hearing . It emphasised in para 32 of the decision as under: 32. The upshot of the entire discussion is that the exercise of power under Section 142(2-A) of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee and in the absence of any express provision in Section 142(2-A) barring the giving of reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in Rajesh Kumar case. 24. The Court is of the view that Section 72A would also envisage such a pre-decisional hearing which acts as an additional safeguard against the arbitrary exercise of the power of the Commissioner of Service Tax to order a special audit. The statutory limitation on the exercise of the powers of the Commissioner to order a special audit will have to be kept in view while analysing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch in exercise of powers under Section 82 of the FA. Therefore even the power under Section 82 cannot be said to be totally without guidelines or restrictions. Analysis of the amended Rule 5A(2) 29. It is in the above background that a scrutiny is now undertaken of Rule 5A(2) as amended by Notification No. 23/2014-Service Tax of the Central Government. The amended Rule 5A reads as under: 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, or a cost accountant or chartered accountant nominated under section 72 A of the Finance Act, 1994 (i) the records maintained or prepared by him in terms of sub-rule (2) of rule 5; (ii) the cost audit reports, if any, under Section 148 of the Companies Act, 2013 (18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an officer of the Department was concerned, he submitted, and rightly, that although under Rule 5A(1) such officer is authorised by the Commissioner to have access to unregistered premises for the purposes of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interests of the Revenue , such officer can, in terms of Rule 5A(2) simply demand the production of such documents without any requirement of recording reasons to believe that the production of such document is necessary. There is also no requirement of such officer having to be authorised to carry out a search under Section 82 of the FA or an assessment under Section 72 of the FA. If any and every officer is going to be deputed for that purpose it would result in harassment of the Assessees. 35. Rule 5A(2) envisages that even the CAG can require production of documents from an individual service tax Assessee 'on demand'. This appears to have no rational basis. As rightly pointed out by Mr Mittal, the powers and functions of CAG flow from Articles 148 and 149 of the Constitution of India read with the Comptroller and Auditor-General's (Duties, Powers and Conditions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Travelite (India) to not have any statutory force. This 2015 Manual again fails to acknowledge that there is no statutory backing for the officers of the Department to themselves undertake an audit of the Assessee's accounts and records. This lacuna pointed out by the Court in Travelite (India) has not been set right. Section 94 (2) (k) of the FA 38. The main plank of the defence of the Respondents in the present case to justify the amendment to Rule 5A(2) is Section 94(2)(k) of the FA introduced by the Finance Act of 2014 with effect from 6th August 2014. Considerable reliance is placed on the expression keeping records and the manner in which such records shall be verified occurring in the above provision. Although in the circular issued consequent upon the amendment by the CBEC on 10th December 2014 it is asserted by the Department that the expression 'verified' is of wide import and would include within its scope audit by the Department officers, the Court is unable to agree. The expression 'verified' has to be interpreted in the context of what is permissible under the FA itself. The verification of the records can take place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles, policy, standard or guidance to another body unless the Constitution expressly permits delegation; and (v) the taxing provisions are not exception to these rules. 41. In General Officer Commanding-in-Chief v. Dr. Subhash Chandra Yadav (supra) the following principles were elucidated: 14. ....It is well settled that rules framed under the provisions of a statute form part of the statute. In other words, rules have statutory force. But before a rule can have the effect of a statutory provision, two conditions must be fulfilled, namely, (1) it must conform to the provisions of the statute under which it is framed; and (2) it must also come within the scope and purview of the rule making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void. 42. Tested on the above legal principles, the Court has no hesitation in concluding that Rule 5A(2) exceeds the scope of the provisions under the FA. This is the result whether Rule 5A(2) is tested vis-a-vis Section 72A of the FA which pertains to special audit or Section 72 which pertains to assessment or Section 73 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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