Service Tax Audit - Again in Delhi High Court - Notice Issued to UOI
TILL 2007, there was actually no provision to audit Service Tax assessees at their premises. By Notification No. 45/2007, dated 28.12.2007, a new Rule 5A was inserted in the Service Tax Rules. Rule 5A(2) mandated the assessees to make available the records to the audit party deputed by the Commissioner or the CAG.
The Board in F. No. 137/26/2007-CX.4 dated 1.1.2008 clarified that these amendments have been made in the service tax rules to enable the duly authorised offices to carry out audit or scrutiny as may be necessary to safeguard the interest of revenue.
But has the Government the power to frame such rules or the Board the power to issue such instructions?
The Delhi High Court in the case of M/s Travelite (India) - , held that any attempt to include provision for such a general audit through the back door, such as through the impugned rule, is ultra-vires the rule making power conferred under Section 94(1). Rule 5A(2) was consequently struck down.
To legitimise Rule 5A(2), Section 94 was amended to insert a new clause (k), by Finance Act 2014 with effect from 06.08.2014. So, now the Rule making power includes the power to make rules for 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.
But could this clause in Section 94 validate an already existing Rule 5A(2)?
By Notification No. 23/2014-Service Tax dated 05.12.2014, the Government inserted a new and revised Rule 5A(2) (), obviously in exercise of the new clause (k) of Section 94.
So the Delhi High Court order was UNDONE. The Board almost said so in Circular No. 181/7/2014-ST, dated 10.12.2014. Board clarified, "the Hon'ble High Court of Delhi in the judgment dated 04.08.2014 in the case of M/s Travelite (India) - had quashed rule 5A(2) of the Service Tax Rules, 1994 on the ground that the powers to conduct audit envisaged in the rule did not have appropriate statutory backing. This judgment can now be distinguished as a clear statutory backing for the rule now exists in section 94(2)(k) of the said Act. "
Board further stated,
Verification of records mandated by the statute is necessary to check the correctness of assessment and payment of tax by the assessee in the present era of self-assessment. It may be noted that the expression "verified" used in section 94(2)(k) of the said 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.
Board directed the Departmental Officers to audit the Service Tax assessees as provided in the departmental instructions in this regard.
First they made the Rule; then they made the Act; then they again made the rule - after litigation in several High Courts.
The issue is back in the High Court.
Mega Cabs Pvt. Ltd. has filed a writ petition in the Delhi High Court challenging the validity of -
1. Rule 5A(2) of the Service Tax Rules as substituted by Notification No. 23/2014-ST, dated 05.12.2014,
2. clause (k) of sub-section (2) of section 94 of the Finance Act, 1994 as inserted w.e.f. 06.08.2014 by the Finance Act, 2014 and
3. the Circular No. 181/7/2014-ST dated 10.12.2014 directing departmental officers to conduct audit of the service tax assessees as provided in the departmental instructions.
The Delhi High Court by order dated 22.05.2015 has issued Notice to the Union of India, Ministry of Finance, and also to the Service Tax (Audit) Department, Delhi.
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