GUEST COLUMN

Power of Audit by Departmental Officers or CAG – Ghayal Once Again

By Debasish Bandyopadhyay, B.Com, LL.B, PGDFM

Few days back replying to the discussion in the Rajya Sabha, making an emotional plea to safeguard the Parliament's powers, our Finance Minister has said that

“………….… with the manner in which encroachment of legislative and executive authority by India’s judiciary is taking place, probably financial power and budget making is the last power that you have left. Taxation is the only power which states have.”

Perhaps, the FM has been commenting keeping in his mind the outcome of the judgments on the NJAC and indictment of Centre and states' handling of the drought situation by the apex court. Now, this power struggle took a new turn again with the judgment by the Hon’ble High Court of Delhi in the matter of Mega Cabs Pvt. Ltd. Vs. Union of India & Ors. 2016-VIL-282-DEL-ST wherein it was held that Service Tax Department or the audit party deputed by a Commissioner or the Comptroller and Auditor General of India ('CAG') has no legal power to audit Service Tax assessees at their premises. So, again the departmental ego has been badly hit by the judiciary.

Let us have a look at the background of the issue, Hon’ble Delhi High Court in the matter of Travelite (India) Vs. UOI & Ors. 2014-VIL-209-DEL-ST order dt. 04-08-2014 held that Rule 5A (2) of the Service Tax Rules 1994 is ultra vires for the purpose of audit by the departmental authority. The Finance Act, does not contain any substantive power to call for records for audit as is permissible under Rule 5A(2) of Service Tax Rules, 1994 or for the purpose of scrutiny by any authority outside of those created under the Act.

Further, it was held that “Since the parent statute in this regard, the Finance Act, 1994 itself does not authorise a general audit of the type envisioned by the impugned Rule 5A (2), and furthermore only stipulates that a special audit can be undertaken if the circumstances outlined in Section 72A are fulfilled, this Court finds that the impugned CBEC circular is not only an attempt to widen the scope of the law impermissibly but also is patently contrary to the statute. The impugned circular, to the extent it provides clarifications on a Rule 5A (2) audit, is hereby quashed; consequently, the impugned letter is quashed and set aside.

The Service Tax Audit Manual, 2011 is merely an instrument of instructions for the service tax authorities; it is but obvious that it is not a statutory instrument and has no statutory force. Thus, Rule 5A (2) cannot be sought to be justified as against it.”

Consequent to the above judgment, in order to validate Rule 5A(2)of Service Tax Rules, 1994, Section 94 of Finance Act, was amended to insert a new clause (k), by Finance Act 2014 made effecting from 06.08.2014. The Board also vide Circular No. 181/7/2014-Service Tax, Dated: 10-12-2014 clarified that

“In exercise of the rule making powers under clause (k) of sub-section (2) of section 94 of the Finance Act, 1994, the Central Government has inserted a new rule 5(A)(2) in the Service Tax Rules, 1994 vide notification no. 23/2014-Service Tax dated 5th December, 2014. This rule, inter alia, provides for scrutiny of records by the audit party deputed by the Commissioner. Such scrutiny essentially constitutes audit by the audit party consisting of departmental officers.”

Further, the Board proudly declared that the judgment of the Hon'ble High Court of Delhi in the matter of M/s Travelite (India) can now be distinguished as a clear statutory backing for the rule now exists in section 94(2)(k) of the said Act and directed the Departmental Officers to conduct audit as specified in the departmental instructions.

The saga of long battle has given rise to the question, ‘audit or not to audit’ that is the question? But the story does not end here, since Mega Cabs Pvt. Ltd. had challenged the validity of Rule 5A(2) of the Service Tax Rules, 1994 as amended by Notification No. 23/2014-Service Tax dated 05-12-2014 empowering departmental officers or CAG to audit service tax assessees. The said Petitioner has 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. Moreover, it was also challenged the validity of Circular No. 181/7/2014-ST dated 10^th December, 2014 issued by CBEC stating that a clear statutory backing for conducting audit is available under Section 92(4)(k) of the Finance Act.

Delhi High Court through the judgment dated 03-06-2016 inter alia, held the following:

Rule 5A(2) as amended in terms of Notification No. 23/2014-Service Tax dated 5th December 2014 of the Central Government, 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 is ultra vires the Finance Act and, therefore, struck it down to that extent;

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) cannot be sustained with reference to Section 94(2)(k) of the Finance Act.

The Circular No. 181/7/2014-ST dated 10^th December, 2014 to be ultra vires the Finance Act and struck it down as such.

It is pertinent to note that on striking down the Rule 5A(2) of Service Tax Rules, 1994, the Hon’ble Delhi High Court has made an important observation as follows;

“…………..This Court in K. Satyanarayanan v. Union of India (supra) explained that the essential function of the CAG is to audit the accounts of public sector undertakings. Although in Association of Unified Tele Services Providers v. Union of India AIR 2014 SC 1984 the Supreme Court has, in the context of the functioning of telecom companies accepted the plea that their accounts can be subjected to scrutiny by the CAG, to expect the CAG to undertake an audit of the records of every service tax Assessee would indeed be extraordinary. Importantly, as far as the telecom service providers are concerned they are subjected to conditions of their licence which envisage their making available all their accounts for scrutiny. As far as the service tax Assessees are concerned one would still have to turn to the provisions of the FA to examine whether this kind of an access to the books of accounts etc. of an Assessee can be given to the CAG or just about any officer of the Department. With there being no such authorisation under the FA, the answer has to be in the negative.”

It was also observed that “……………………..Under the garb of the rule making power, the Central Government cannot arrogate to itself powers which were not contemplated to be given it by the Parliament when it enacted the FA. This is an instance of the Executive using the rule making power to give itself powers which are far in excess of what was delegated to it by the Parliament.”

In view of the above judgment, now practically there should not be any audit of service tax assessees by the departmental officers or CAG but considering the track record of the Indian bureaucracy and arrogance of Executive Authority, the matter is surely to be taken to the Supreme Court to keep the exercise of such auditing active. At this point, it may be relevant to ask few questions, like as to why do the Government plays such game of hide and seek in rule making! How much revenue do they collect by conducting such service tax audit? Is it absolute necessity to continue with the exercise of audit by departmental Officers or CAG to safeguard interest of the revenue?

Whatever may be the reason for the Govt. to stick to such auditing exercise, clear mandate under law and simple rule making are the cornerstone of a successful tax administration. Moreover, tussle between executive authority and judiciary is as old as the Constitution of the country. This tug-of-war between executive and judiciary on the issue of audit of service tax assesse by the departmental Officers or CAG may only add insult to the injury of the tax payers across the country. Government may be working overtime to counter the above setback inflicted by the judiciary at the expense of apprehensions and confusions reigning over the trade on this issue.

Does Mr. FM still believe that Taxation is the only power which states have! And for the common assessees, the show must go on……

Disclaimer: Views expressed are strictly personal. The content of this document are solely for informational purpose, it doesn’t constitute professional advice or recommendation.