Rule 5A(2) Service Tax Rules, 2004 is Ultra Vires
On June 3 2016, High Court of Delhi in Mega cabs Pvt. Ltd. v. Union of India &Ors. W.P. (C) 5192/2015 & CM No. 9417/2015 decided the issue of Rule 5A(2) Service Tax (Third Amendment) Rules, 2014 made by the Central Government in terms of a Notification No. 23/2014-Service Tax dated 5th December 2014 in exercise of the powers conferred under Section 94(1) read with Section 94 (2)(k) of the Finance Act, 1994. It was contended that this is in conflict with Section 72A of the FA and beyond the rule making power of the Central Government.
Issue- Whether Rule 5A(2) of Service Tax Rules,2004 as introduced under Notification No. 23/2014-ST dated 05.12.2014 is unconstitutional and is in direct conflict with Section 72A of Finance Act.
Analysis- Under Section 72A of Finance Act,194, Delhi High Court held that there has to be a ‘prime facie’ case in order to demand documents, records, accounts etc by the Assessing officer. The section mandates only 3 conditions under which the AO can demand such documents. The court iterated:
“20. The scheme of Section 72A is that in the first instance the Commissioner has to record ―’reasons to believe’ that the person who is liable to pay service tax has:
i) failed to correctly declare or determine the value of the taxable service; or
ii) wrongly availed or utilised credit or paid tax beyond the normal rebates having regard to the nature of the taxable services provided or by means of fraud, collusion or any wilful misstatement or suppression of facts; or
iii) operations spread out in multiple locations and it is not practicable to obtain a true and complete picture of the accounts from the registered premises in the jurisdiction of the concerned Commissionerate.
It is only where one of the above three contingencies exists that the Commissioner may direct the Assessee to ―get his accounts audited either by a Chartered Accountant or a Cost Accountant nominated by such ‘Commissioner’. The extent of the audit and the period for which it should be conducted is also to be specified by the Commissioner.”
Section 72A further demands the requirement of pre- decisional hearing in case of a special audit. Having a post decisional hearing does not outset the requirement of pre decisional hearing. Hence, in situations where special audit is demanded by the Assessing officer, the assesse should be heard before the order is passed to show his facts of his side. Thus, denial of such hearing would be in violation of natural justice principles.
In light of the aforesaid observations , the High court held that
“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 Rule 5A(2) of the ST Rules, as amended.”
Rule 5A prescribes the requirements on access to a registered premises wherein the officer for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue. Further, Rule 5A(2) (2014 Amendment) prescribes 3 kind of documents that can be demanded for inspection by the officer.
The view of the court is that Rue 5A(2) is contrary to Section 72(2) of the FA, as the three documents demanded under rule 5A(2) is not prescribe under Section 72(2). Thus the amended rule has gone far beyond its scope.
“30. In the first instance it requires to be noticed that there are three distinct types of documents that can be asked to be made available ― “on demand” by an Assessee:
i)the records mentioned in terms of Rule 5(2).
ii)cost audit reports, if any, under Section 148 of the Companies Act, 2013
(iii) the income tax audit report, if any, under Section 44AB of the Income Tax Act, 1961.
Interestingly, Rule 5A(2) does not restrict itself to such records as mentioned in Rule 5(2) but also required production of cost audit reports under Section 148 of the Companies Act, 2013 and the Income Tax Audit report under Section 44AB of the Income Tax Act 1961. These documents are not envisaged to be produced under Rule 5(2) and definitely not under any of the provisions of the FA. This is, therefore, going far beyond the FA itself.”
The submissions were made to the effect that Section 92(2)(k) was introduced by Finance Act 2014, with words -“keeping records and the manner in which such records shall be verified”. With this effect CBEC on 10th December 2014 issued a circular explaining that word “verified” has a wide import and would include within its scope audit by the Department officers.
The court disagreed to this view and held that:
“…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 by the officers of the Department provided such officers are authorised to undertake an assessment of a return or of adjudication for the purposes of Section 73 of the FA. It is not any and every officer of the Department who could be entrusted with the power to demand production of records of an Assessee. Therefore, the Court does not agree with the submission that the expression ‘verify’ is wide enough to permit the audit of the accounts of the Assessee by any officer of the Service Tax Department.
There is a distinction between auditing the accounts of an Assessee and verifying the records of an Assessee. Audit is a special function which has to be carried out by duly qualified persons like a Cost Accountant or a CA. It cannot possibly be undertaken by any officer of the Service Tax Department.
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 which pertains to adjudication or even Section 82which relates to searches. Under the garb of the rule making power, the Central Government cannot arrogate to itself powers which were not contemplated to be given it by the Parliament when it enacted the FA. This is an instance of the Executive using the rule making power to give itself powers which are far in excess of what was delegated to it by the Parliament.”
With respect to validity of circulars, manuals and the impugned letter, the court held that manual issued by CBEC in 2015 in light of Travelite decision issued by this court did not set things right. The manual sets out the manner in which units would be selected for audit in a year. However, the manual failed to acknowledge the powers of department officers enumerated in Section 72 and 73 of the Finance Act,2004.
The court further held that
43…a circular or a manual cannot travel beyond the scope of the statute itself. It will have no binding effect if it does so. In the present case inasmuch as Section 94(2)(k) does not permit the exercise of audit to be undertaken by an officer of the Department, the attempt in the circular to recognise such powers in the officers of the Central Excise and Service Tax Departments is held to be ultra vires the FA and, therefore, legally unsustainable.”
The court finally concludes and declare that:
Rule 5A(2) is ultra vires the Finance Act,1994 and, the officers are not empowered to carry out audit of records of an asessee;
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.
the CBEC Circular No. 181/7/2014-ST dated 10th December 2014 of the Central Government to be ultra vires the FA and strikes it down as such.
the 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 are 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.