Service Tax Audit! Audit Me! Audit Me Not!

Service Tax is dead but still the undying ghost of Service Tax Audit approaching the pillars and posts of the assessee, department and the professionals. The department is trying its best to salvage their ground and right of an audit till June 2017 setting aside the numerous judgements against their moves. The department still making bombardment of roving inquiries ignoring objections of the assessee over the frequency of audits and currency of their audit powers. The CGST officials have step in by issuing thousands of letters for the audit. It is known that , the audit of accounts of service tax providers can be done by Central audit parties as per norms prescribed by the department A comprehensive ‘Service Tax Audit Manual 2011’ has been prescribed to provide guidelines to department officers conducting audit –Directorate Service Tax Circular no. 135/4/2011 dated 19-4-2011.

Selective Audit will be done by jurisdictional central excise officer or by an audit party deputed by C&AG vide Circular No. 97/8/2007-ST dated 23-8-2007. Selection of assessee and auditing will be as per guidelines in Service tax Audit Manual.

The Audit selection guidelines, therefore, would apply to the non-mandatory taxpayers, forming part of the discretionary workload. These taxpayers should be selected on the basis of assessment of the risk potential to revenue. This process, which is an essential feature of audit selection, is known as Risk Assessment. It involves the ranking of taxpayers according to a quantitative indicator of risk known as a “risk parameter.” It is also suggested that the taxpayers whose returns were selected for detailed scrutiny, may not be taken up for Audit that year, to avoid duplication of work. Similarly, the taxpayers who have been selected for Audit, may not be taken up for detailed scrutiny of their ST-3 Returns during that year.

TYPE OF SERVICE TAX AUDIT: 

1. EA –2000 AUDIT (DONE BY DEPARTMENT/ C&AG)

Director General of Audit, New Delhi has prepared Service Tax Audit Manual, 2011.  As per the guidelines, frequency norms of audit for service tax assessees tax payers whose annual service tax payment (including cash and CENVAT) was Rs.3 crore or more in the preceding financial year may be subjected to mandatory audit each year.  It is preferable that Audit of all such Units is done by using Computer Assisted Audit Program (CAAP) techniques.  The frequency of audit for other taxpayers would be as per following norms:-

I. Taxpayers with Service Tax payment above Rs.3 crores (Cash + CENVAT) (MANDATORY UNITS) – to be audited every year.

II. Taxpayers with Service Tax payment between Rs.1 crore and Rs.3 crores (Cash + CENVAT) – to be audited once every two years.

III. Taxpayers with Service Tax payment between Rs.25 lakhs and Rs.1 crore (Cash + CENVAT) – to be audited once every five years.

IV. Taxpayers with Service Tax payment upto Rs.25 lakhs (Cash + CENVAT) – 2% of taxpayers to be audited every year.

V. No audit if turnover less than Rs 60 lakhs per annum –

The Finance minister in his budget 2011 speech has announced that there will be no audit of assessee whose turnover is less than Rs 60 lakhs per annum. Num Para 191 of his speech delivered on 28-2-2011 reads as follows:

‘‘the number of assessee in service tax has grown manifold I find that a large number of them comprise individual or sole proprietors with shall turnover Any Audit at their premises tends to dislocate their activities for the duration of the audit I therefore propose to free all individual and sole proprietor taxpayers with a turnover upto 60 lakhs from the formalities of Audit this will give relief to a large number of taxpayers I also intend to give all assesses with turnover uptoRs 60 lakhs benefit points in interest on delayed payment’’

The Audit selection guidelines, therefore, would apply to the non-mandatory taxpayers, forming part of the discretionary workload.  These taxpayers should be selected on the basis of assessment of the risk potential to revenue.  This process, which is an essential feature of audit selection, is known as Risk Assessment.  It involves the ranking of taxpayers according to a quantitative indicator of risk known as a “risk parameter”.  It is also suggested that the taxpayers whose returns were selected for detailed scrutiny, may not be taken up for Audit that year, to avoid duplication of work.  Similarly, the taxpayers who have been selected for Audit, may not be taken up for detailed scrutiny of their ST-3 Returns during that year.

2. Section 72A –Audit (Done by Chartered/Cost Accountant w.e.f. 28-05-2012)

Section 72A of Finance Act, 1994 (as inserted w.e.f 28-5-2012) makes provision for special audit by practicing Chartered/Cost Accountant [earlier, section 14AA of Central Excise Act was made applicable to service tax, this section provided only for special audit of Cenvat credit availed].

Special audit can be ordered by Commissioner of Central Excise. Such audit can be ordered by Commissioner of Central Excise has reason to believe that the any person liable to pay service tax –

-Has failed by to declare or determine the value of a taxable service correctly: or

-Has availed and utilized credit of duty or tax paid –

(a) which is not within the normal limits having regard to the nature of taxable servicer provided the extant of capital goods used or the type of inputs of input services used, or any other relevant factors as he may been appropriate: or

(b) by means of fraud. Collusion or any wilful misstatement or suppression of facts: or

-Has operations spread out in multiple location and it is not possible or practicable to obtain a true to and compete picture of his accounts from the registered premises falling under the jurisdiction of the Commissioner [section 72A(i) of Finance Act. 1994].

In such cases, the Commissioner 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 [section 72A(2)(i) of Finance Act, 1994 inserted w.e.f. 28-5-2012]

BACKGROUND OF THE SERVICE TAX AUDIT CONTROVERSY:

1. The Hon’ble High Court of Delhi in the case of Travelite (India) Vs. Union of India & Ors. [W.P. (C) 3774/2013, C.M. No. 7065/2013] (“the Travelite case”) held that Rule 5A(2) of the Service Tax Rules ultra vires the provisions of the Finance Act, and “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”. It was further held that Service Tax Audit as envisaged in Rule 5A(2) of the Service Tax Rules does not have appropriate statutory backing of the Finance Act.

•  It may also be noted here that on December 18, 2014, the in the case of Union of India And Ors Vs. M/s Travelite (India) [2014 (12) TMI 1099 – SUPREME COURT] a Hon’ble Apex Court headed by Chief Justice had granted Granted Stay on Delhi High Court Judgment in Travelite India case ruling that provisions of Rule 5A(2) related to Service Tax Audit are Ultra Vires. The 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.

2. Hon’ble Allahabad High Court in the case of ACL Education Centre Pvt. Ltd. & Ors. Vs. Union of India [2014-TIOL-120-HC-ALL-ST] has held that the Audit under Service tax is to be conducted by Chartered Accountants/ Cost Accountants only and not by officers of the Department. Further, the Hon’ble Calcutta High Court in the case of SKP Securities Ltd. Vs. DD (RA-IDT) & Ors. [2013-TIOL-38-HC-KOL-ST] has also held that no Audit of private assessee can be undertaken by CAG under Rule 5A(2) of the Service Tax Rules.

3. Hon’ble Delhi High Court in the case of Mega Cabs Pvt. Ltd. Vs. Union of India And Ors [2016-TIOL-1061-HC-DEL-ST] extensive deliberated  on relevant provisions of the Finance Act and Rules made thereunder otn he following issue:

• Whether Service Tax Department or CAG can conduct Service Tax Audit?
• Whether substituted Rule 5A(2) of the Service Tax Rules, 1994 (“the Service Tax Rules”) is ultra vires the provisions of the Finance Act, 1994 (“the Finance Act”)?

The Hon’ble Delhi High Court took an:

• Declared Rule 5A(2) of the Service Tax Rules, as amended, 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, as ultra vires the Finance Act and, therefore, struck it down to that extent;
• Held that the expression ‘verify’ in Section 94(2)(k) of the Finance Act cannot be construed as audit of the accounts of an Assessee and, therefore, Rule 5A(2) of the Service Tax Rules, cannot be sustained with reference to Section 94(2)(k) of the Finance Act;
• Declared Circular No. 181 as ultra vires the Finance Act and was struck down;
• Quashed the Impugned Letter addressed to the Petitioner as being unsustainable in law;
• Declared Circular No. 995 and the Central Excise and Service Tax Audit Manual 2015 issued by the Directorate General of Audit of the CBEC, as ultra vires the Finance Act, as they do not have any statutory backing and cannot be relied upon by the Department to legally justify the audit undertaken by officers of the Service Tax Department.
  •  It may also be noted here that The Supreme Court has stayed the judgment/decision of the Delhi High Court in the case of Mega Cabs Private Limited. A Division Bench consisting of Justice Madan B. Lokur and Justice D. Y. Chandrachud after hearing the SLP No. 26675/2016 Date of Judgement/Order : 26/09/2016 granted stay on the operation of the judgment of the Delhi High Court. The Delhi High Court had declared ultra vires and struck down that Rule 5A(2) and Service Tax Notification No. 23/2014 to the extent it authorised service tax audit by departmental officers or audit party deputed by the CAG. In the said judgment, the Delhi HC had also struck down Circular No. 181/7/2014-ST and Circular No. 995/2/2015-CX

4. Hon’ble Gujarat High Court in the case of OWS Warehouse Services LLP Vs. Union of India (Gujarat High Court) granted stay on conducting audit of records of taxpayers under 5A of Service Tax Rules, 1994, by Officers of C&AG who were sending communications through CGST officers. Counsel for the petitioner submitted that thereafter, Rule 5A of the Service Tax Rules, 1994 was amended. The amended Rule also came to be challenged before the Delhi High Court in case of Mega Cabs Pvt. Ltd.-v. Union of India. The Delhi High Court again struck down the Rule in judgment reported in 2016 (43) S.T.R. 67 (Del.). Counsel candidly stated that the Supreme Court has stayed the judgment of the Delhi High Court in case of Mega Cabs Pvt. Ltd. by an order dated 26.09.2016.

Hon’ble High Court held that Sub-section (2) of Section 174 and other clauses would, prima facie, show that there was no saving of Rule 5A in such manner that fresh proceedings for audit could be initiated in exercise of powers under the said Rule. We, therefore, have serious doubts whether, with the aid of Rule 5A of the Service Tax Rules, 1994, the CAG can carry out compulsory Service Tax audit of private agencies like the petitioner.

•  Hon’ble High Court further held that Under the circumstances, issue Notice, returnable on 28.11.2018. By way of ad-interim relief, the impugned order dated 09.10.2018 is stayed. In other words, the CAG shall not carry out any further Service Tax audit of the petitioner. Direct service permitted. 

5. Hon’ble Calcutta High Court M/s. Infinity BNKe Infocity Pvt. Ltd. Vs Union of India & Ors. (Calcutta High Court) granted stay on conducting audit of records of taxpayers under 5A of Service Tax Rules, 1994, by Officers of C&AG who were sending communications through CGST officers. Appeal Number : W.P. No.29554 (W) of 2017 Date of Judgement/Order : 30/08/2018

The petitioner seeks a declaration that sub-rule (2) of Rule 5A of the Service Tax Rules, 1994 as substituted by notification no. 23/24/ST dated December 5, 2014 is arbitrary and in conflict with provisions of Section 72A of the Finance Act, 1994. The petitioner also seeks a declaration that, the provisions of clause (k) of subsection (2) of Section 94 of the Finance Act, 1994 is unguided and gives uncontrolled power of delegation. The third prayer is with regard to a notice dated February 16, 2015.

Learned advocate for the petitioner submits that, the issue of vires of similar provisions of the Finance Act, 1994 initially came up for consideration before the Delhi High Court in 2014 (35) S.T.R. 653 (Travelite (India) Vs. Union of India). Such provisions were held to be ultra vires. He submits that, an appeal is pending against such judgment and order of the Delhi High Court before the Hon’ble Supreme Court of India. Subsequently, the provisions as impugned in the present writ petition were introduced. The same was struck down by the Delhi High Court in 2016 (43) STR 67 (Mega Cabs Pvt. Ltd. Vs. Union of India). He submits that, since the provisions have been struck down, the notice impugned herein issued on such basis needs to be quashed also.

• Learned Additional Solicitor General appearing for the respondent no.1 seeks direction for filling affidavits. Since sub-rule 2 of Rule 5A of the Service Tax Rules, 1994, as substituted by notification dated December 25, 2014 was declared ultra vires by Mega Cabs Pvt. Ltd. (supra), it would be appropriate to grant interim stay of the proceedings. Such stay will continue till November 30, 2018 or until further orders whichever is earlier.

DEPARTMENT DEFENSIVE MOVE THROUGH CIRCULARS

• Thereafter, in the background of the Travelite case, the Central Board of Excise and Customs (“CBEC” or “the Board”) vide Circular No. 986/10/2014-CX dated October 9, 2014 had clarified that judgment under the Travelite case does not deal with the issue of audit in the Central Excise. It was further clarified that there is adequate statutory backing for Audit by the Central Excise officers by virtue of Section 37(2)(x) of the Central Excise Act, 1944 and Rule 22 of the Central Excise Rules, 2002 for conducting Central Excise Audit.
• Further, the Central Government vide Notification No. 23/2014-ST dated December 5, 2014 (“Notification No. 23”) had substituted Rule 5A(2) of the Service Tax Rules, thereby nominating a Chartered Accountant or a Cost Accountant along with an officer authorised by the Commissioner or the Audit Party deputed by the Commissioner or CAG to conduct Service Tax Audit.
• Later on, the Board vide Circular No. 181/7/2014-ST dated December 10, 2014 (“Circular No. 181”), in an attempt to remove the mist surrounding the power of the Departmental officers to conduct Service Tax Audit, had clarified that Rule 5A(2) of the Service Tax Rules, interalia, provides 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.
• It was further clarified that Rule 5A(2) of the Service Tax Rules has appropriate statutory backing for conducting Service Tax Audit by the Departmental officers by virtue of Section 94(2)(k) of the Finance Act as amended by Section 114(J) of the Finance Act, 2014 w.e.f. August 6, 2014 which reads as under:

“(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.”

• Furthermore, it was clarified that the expression “verified” used in Section 94(2)(k) of the Finance Act is of wide import and would include within its scope, Audit by the Departmental officers, as the procedure prescribed for Audit is essentially a procedure for verification mandated in the Statute.
• Thereafter Circular No. 995/2/2015-CX dated February 27, 2015 (“Circular No. 995”) 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 of 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.

(About the Author– Author was Member of ICAI- Capacity Building Committee 2010-11 and ICAI- Committee For Direct Taxes 2011-12 and can be reached at email amresh_vashisht@yahoo.com or on phone Phone: 0121-2661946. Cell: 9837515432 having office at 115, Chappel Street, Meerut Cantt, UP, INDIA)