Service Tax Audit (Department refers it as internal audit as per service tax audit manual) is conducted by Office of the Commissioner of Central Goods & Service Tax – Audit according to the provisions of rule 5A of Service Tax Rules, 1994 and follow Service Tax Audit Manual to process the service tax audit proceedings of service tax assessees.
Hon’ble Delhi High Court already declared rule 5A (2) of Service Tax Rules, 1004 to be ultra vires the provisions of Finance Act, 1994 in the case of Mega Cabs Pvt Ltd vs. Union of India 2016 (43) S.T.R. 67 (Del.). However, Hon’ble Supreme Court has stayed the operation of this Court Order and final decision in this respect is still awaited from Apex Court.
|The God knows, what will happen if final decision of Hon’ble Supreme Court come in favour of assessees? A number of questions come in our mind like :
– Service tax audit conducted, between 2016 to till the final decision, will become invalid?
– Will assessees get refund of service tax, if deposited during the course of service tax audit?
– Will demand be deleted, raised in consequence to such audit?
– Will adjudication or appellate proceedings be dropped accordingly?
In view of stay order of Apex Court, it is unfair to discuss here the constitutional validity of rule 5A of Service Tax Rules, 1994.
Now in new era of GST regime, the department has made a assumption that they are duly authorized to initiate service tax audit as per the saving clauses of section 174 of CGST Act, 2017 and for the administration of service tax audit, special Service Tax Audit Commissionerate has been established.
W.e.f. 1st July, 2017, CGST Act, 2017 was introduced and Chapter V of Finance Act, 1994 omitted vide Section 173 of CGST Act, 2017 with an exception “ save as otherwise provided in CGST Act, 2017”.
Relevant clause and sub-section are reproduced hereinbelow:-
(2) The repeal of the said Acts and the amendment of the Finance Act, 1994 (hereafter referred to as “such amendment” or “amended Act”,) to the extent mentioned in the sub-section (1) or section 173 shall not –
e) affect any investigation, inquiry, verification (including scrutiny and audit), assessment proceedings, adjudication and any other legal proceedings or recovery of arrears or remedy in respect of any such duty, tax, surcharge, penalty, fine, interest, right, privilege, obligation, liability, forfeiture or punishment, as aforesaid, and any such investigation, inquiry, verification (including scrutiny and audit), assessment proceedings, adjudication and other legal proceedings or recovery of arrears or remedy may be instituted, continued or enforced, and any such tax, surcharge, penalty, fine, interest, forfeiture or punishment may be levied or imposed as if these Acts had not been so amended or repealed;
Department assumes that rule 5A of Service Tax Rules, 1994 read with clause (e) along with other clauses of Section 174(2) give authority for conducting service tax audit.
However, clause (e) along with other clauses of Section 174(2), prima facie, show that there is no saving of rule 5A in respect of initiating fresh proceedings of service tax audit. Hence, fresh audit proceedings can’t be initiated on or after 01st July 2017.
Service tax audits which were under process on 01st July, 2017 is undoubtedly valid as there is saving in present CGST Act, 2017. However, department is sending notices in bulk to service tax assessees for conducting service tax audit as per rule 5A of the Service Tax Rules, 1994 along with a long questionnaire.
In case assessee agrees to co-operate in conducting service tax audit, the department is only authorized to ask for the documents that have already been prepared or maintained by the assessee as per rule 5(2) of the Service Tax Rules, 1994 along with the cost auditor’s report and tax audit report u/s 44AB of the Income Tax Act, 1961. However, without having authority in law, department generally asks to submit :-
However, inspite of these restrictions, the department regularly asks assessee to submit the aforesaid details and information, out of which around 50% details are irrelevant.
Department has separate Commissionerate for supervision of Service Tax Audits and they strongly believe about their authorization for conducting and completing audits. However, there are lot of ambiguities in the previous service tax law as well as current GST laws w.e.t. conducting service tax audit read with a lot of judicial pronouncements.
Where the assessee wants to challenge the service tax audit, the assessee can either approach the department to submit their views or alternatively knock the doors of the Court.
Article is Authored by CA. Lalit Kr. Gupta & Co-Authored by CA. Neha Gupta. Author Can be reached:- [email protected]
Disclaimer:- Views expressed in the Article are the personal views of the Author based on his interpretation of Law. Views expressed should not be construed as professional advice or legal opinion. Article needs to be revised and revisited on any clarifications, circulars or notifications released after the date of article. The author will not be responsible for any error, omission, commission and result of any action taken by a participant or anyone on the basis of this presentation.