Major Issues to be Decided:-
a) Whether Section 94(1) read with Section 94 (2)(k) of the Finance Act, 1994 (‘FA’) to the extent that the amended Rule 5A(2) empowers deputing departmental officers or officers from the Comptroller and Auditor General of India (‘CAG’) to ‘demand’ documents mentioned therein is in Conflict with Section 72A of the FA?
b) Constitutional validity of Section 94(2)(k) of the FA
c) Sanctity of Circular No. 181/7/2014-ST dated 10th December 2014 authorising the Departmental Officers to audit Service Tax Assessee in terms of the departmental instructions already issued.
Background of the Judgment and Chronological movement of this Issue:-
| Key Dates | Legal Build-up |
|---|---|
| 28th December, 2007 | The Central Government in the Ministry of Finance, Department of Revenue inserted Rule 5A in the Service Tax Rules, 1994 (“ST Rules”) |
| 1st January, 2008 | CBEC also issued an instruction 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. |
| Date of Appeal of Travelite | Both the Notification dated 28th December 2007 inserting Rule 5A as well as the CBEC Instruction dated 1st January 2008 were challenged before this Court in a writ petition by Travelite (India) |
| 26th September, 2012 | SKP SECURITIES LTD. / INFINITY INFOTECH PARKS LTD. Versus DEPUTY DIRECTOR (RA-IDT) & ORS 2013 (29) S.T.R. 337 (Cal.) it was held by Hon’ble Calcutta HC that CAG is not empowered to conduct audit of nongovernmental-company pursuant to the provisions of service tax laws. Rule 5A was held ultra vires to section 94 in context to nongovernmental company audit by CAG while referring the case to chief justice for divisional bench adjudication. |
| 30th April, 2014 | Above Judgement of SKP (Supra) was again upheld in the case of INFINITY INFOTECH PARKS LTD. Versus UNION OF INDIA 2014 (36) S.T.R. 37 (Cal.) |
| 4th August, 2014 | Travelite (India) v. Union of India 2014 (35) STR 653 (Delhi), a Division Bench of this Court struck down Rule 5A(2) as being ultra vires Section 72A read with Section 94(2) of the FA. The consequent Circular of CBEC Instruction dated 1st January 2008 was also struck down. It was clarified that Service Tax Audit Manual, 2011 was merely an instrument of instructions for the Service Tax authorities and has no statutory force |
| 6th August, 2014 | 94(2)(k) was inserted vide Finance Act, 2014 |
| 5th December, 2014 | New Rule 5A(2) Substituted |
| 10th December, 2014 | 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. |
| 18th December, 2014 | Special Leave Petition No. 34872/2014 was filed in the Supreme Court by the Union of India vide order of the Supreme Court while directing notice in the said Special Leave Petition directed that there would be a stay of the operation of the decision of this Court in Travelite (India) v. Union of India (supra) |
| 27th February, 2015 | Circular No. 995/2/2015-CX 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 Tax Audit Manual, 2015 was also issued by the Directorate General of Audit of the CBEC in this regard. |
| 3rd June, 2016 | Delhi HC Again Strikes Down (In the Present Case) the Amended Rule 5A (2) to the extent of Department’s authority to Conduct ‘Audit’ of Assessees registered under Service Tax. |
Erstwhile Rule 5A of ST Rules, 1994
“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, -……
Amended Rule 5A(2) of ST Rules, 1994
“Rule 5A. (2) Every assessee, shall, on demand make available to the officer empowered 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 72A 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 of 2013); 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 the audit party, or the cost accountant or chartered accountant, within the time limit specified by the said officer or the audit party or the cost accountant or chartered accountant, as the case may be
Section 94(2)(k) of the FA,1994
“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 (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”
Contentions of Appellant and Respondent (Vis – a – Vis Analysis)
