Service Tax - Audit by CAs - Solution worse than Problem · TIOL-DDT 2491

Service Tax - Audit by CAs - Solution worse than Problem

By Vijay Kumar

IT is said that:

For every problem, there is one solution that is simple, neat, and wrong.

The more directives you issue to solve a problem, the worse it gets.

There is a solution to every problem; the only difficulty is finding it.

There is no problem, however complicated, which, when you look at it in the right way, did not become still more complicated.

By using your intelligence you can sometimes make your problems twice as complicated.

The issue is - Audit of Service Tax assessees by the departmental officers or CAG's Audit Party or Chartered Accountants/Cost accountants. Rule 5A(2) of the Service Tax Rules, mandates the assessees to provide records to the Departmental officers/CAG Audit. In recent times, this provision has been challenged in several High Courts and several High Courts have granted interim relief by barring audit.

It was only on Friday that DDT mentioned about the latest decision of the Gujarat High Court preventing the CAG from conducting the audit of the Service Tax assessees. ()

As is well known the Delhi High Court in the case of Travelite (India) - held that there is only provision in Chapter V of the Finance Act on scrutiny and audit of records of the assessee and that is Section 72A of the Finance Act, 1994 according to which the audit can be conducted only by Chartered Accountants or Cost Accountants in the circumstances specified therein.

The CBEC seems to have reconciled to the fact that there is some lacuna in the law and in a Circular No. 986/10/2014-CX., dated, October 9, 2014 clarified that the Delhi High Court order quashed the Service Tax rule but it did not deal with the issue of audit in Central Excise at all. So, the Board tacitly admitted that because of the Delhi High Court order Service Tax audit cannot be done. But in spite of Rule 5A(2) being quashed by the Delhi High Court, Commissionerates and CAG's Audit continued to do their audit. And the Government also did not keep quiet. The Delhi High Court decision is challenged in the Supreme Court.

And suddenly, in a flash of wisdom, the Board has amended Rule 5A(2). The rule as it existed prior to the amendment and after amendment is tabulated below. The portions marked in red are deleted from the existing rule and the portions marked in green are added.

The Rule before amendment	The Rule after amendment
(2) Every assessee shall, on demand, make available to the officer authorised under sub-rule(1) or the audit party deputed by the Principal Commissioner or 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,- (i) the records as mentioned in sub-rule (2) of rule 5; (ii) trial balance or its equivalent; 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 audit party, as the case may be.	(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.

The Rule before amendment

The Rule after amendment

(2) Every assessee shall, on demand, make available to the officer authorised under sub-rule(1) or the audit party deputed by the Principal Commissioner or 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,-

(i) the records as mentioned in sub-rule (2) of rule 5;
(ii) trial balance or its equivalent; 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 audit party, as the case may be.

(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.

Does this solve the problem?

Rule 5A was silent about audit by the CAs and Cost Accountants. May be the Board thought at least to include the CAs and Cost Accountants in Rule 5A before any assessee could get the audit notice under Section 72A quashed on this ground.

When the High Court says that Rule 5A(2) itself is not valid, will adding another set of auditors to the present set of illegal auditors, solve the problem? Until the Delhi High Court order is stayed or set aside, this Rule 5A(2) does not exist and the Government cannot amend a rule that does not exist.

And they forgot the Principal Commissioner in the amendment. A retrospective amendment in the making in the 2015 budget?

Please see more details in our ST se GST tak column.

Please also see:

1. Should AG's Audit be allowed to visit factories and Premises of Service Tax Assessees? (DDT 1298)
2. AG's Audit Visit to Factories and Premises of Assessees? (DDT 1776)
3. CAG not authorised to visit factory of assessee in private sector
4. No Audit of Private Enterprises by AG's Audit - Calcutta High Court (DDT 1951)
5. Karnataka High Court grants Interim Stay against CAG Audit of Service Tax Assessee - DDT 2103 - 13.05.2013
6. Audit under Service Tax only by Chartered Accountants - not by officers of Department - High Court - DDT 2283 - 30.01.2014
7. Even if Service Tax Audit cannot be done, there is no hurdle for Central Excise Audit - CBEC - DDT 2453 10.10.2014

Notification No. , Dated: December 05, 2014