“Audit” – One of the most dreaded consequence of getting registered with the service tax department. Nobody wants to get strangled in the vicious circles of departmental audit and yet, sooner or later, you have to face the dungeon of audit. Times and now, questions have been raised on the qualifications and eligibility of the officers of the department to conduct audit, but the Government has proved to be adamant in continuing the ritual despite of the poor results of such audits. This piece of articulation is on the journey of provisions related to audit in the Chapter V of the Finance Act, 1994 governing the service tax law.
The mysterious provisions
|Rule 5(2) of the Service Tax Rules, 1994||
It requires the Assessee to furnish to the Superintendent of Central Excise a list in duplicate of all the records prepared or maintained by him for accounting of transactions, in regard to providing any service, receipt or procurement of anybody’s service and payment of such service.
|Types of documents that can be asked to be made available “on demand”||The assessee is required to furnish following documents on demand:-
(i) Records mentioned in terms of Rule 5(2);
(ii) Cost Audit Reports, if any, under Section 148 of the Companies Act, 2013;
(iii) Income Tax Audit Report, if any, under Section 44AB of the Income Tax Act, 1961.
|Section 72A of the Finance Act (Special Audit)
It is only where one of the three contingencies as mentioned in Section 72A of the Finance Act 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 82 of the Finance Act (Power to search premises)
This power can be exercised when the officer has a reason to believe that:-
(i) there are documents or books that have been secreted in a place; and
(ii) such documents or books are useful or relevant for any proceedings.
The service tax department undertakes audit at frequent intervals and all the records maintained by the service provider are scrutinized. The outcome is in form of audit paras, some genuine and some issued for procedural lapses, almost all result into issue of show cause notice. As the audit is an unwarranted situation, some of the assessees keep their fingers crossed and some opt for legal way to avoid the same. So, the issue of legality of audit by departmental officers has been commented by various Courts.
Circulars & Notification issued to nullify the HC decisions
Thus, after judicial pronouncements quashing the validity of audit by service tax authority, amendment was made in legal provisions to nullify the effect. Subsequent circulars issued in this respect also indicate that the Revenue is not in mood of giving up the audit powers.
Recently, in the case of Mega Cabs Pvt. Ltd. Vs. Union of India And Ors [2016-TIOL-1061-HC-DEL-ST], the Hon’ble Delhi high Court has delivered a landmark judgment covering the following issues:-
1. Whether Service Tax Department or CAG can conduct Service Tax Audit?
2. 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”)?
In this case, M/s Mega Cabs Pvt. Ltd. (“the Petitioner”) received a letter in which it was intimated that the audit will be done of its service tax records by service tax officers in terms of rule 5(2) of the Finance Act, 1994. Being aggrieved, the Petitioner filed a petition before the Hon’ble High Court of Delhi, challenging the Impugned letter, along with Rule 5A(2) of the Service Tax Rules (as amended) on the grounds that it is beyond the rule making powers of the Central Government. The Petitioner also challenged the constitutional validity of Section 94(2)(k) of the Finance Act on the ground that it gives “plainly unguided and uncontrolled” delegated powers to the Central Government for framing rules and also the Circular No. 181 which clarifies that by virtue of amendments made by notification no. 23/2014-ST, now the audit by service tax department has legal backing.
The Delhi High Court analyzed the provisions of the Finance Act extensively and observed as under:-
It is pretty much clear from the recent decision that the tussle between the courts and the government is a long running drama and the end to it is no way near. On one hand the courts have understood the pain of the assessees to be assessed by ineligible auditors and on the other hand the government does not want to let the assessees breath freely. As of now the situation seems to be in favour of assessees, only until the department does not issue any such letter for audit.
P.S. the situation in favour of assessees can be said only if they opt for suit in the court of law, otherwise no benefit of these decisions is ever available to them and litigation has its own costs.
(Article is been authored by CA. Pradeep Jain, CA. Preeti Parihar and CA. Vaibhav Bothra)