Background:The Hon’ble High Court of Delhi in the case of Travelite (India) Vs. Union of India & Ors. [W.P. (C) 3774/2013, C.M. No. 7065/2013] (“the Travelite case”) while holding Rule 5A(2) of the Service Tax Rules, 1994 (“the Service Tax Rules”) as ultra vires the provisions of the Finance Act, 1994 (“the Finance Act”), clearly held that “No Service Tax Audit can be conducted by the Department and only Special Audit within the Statute as mentioned under Section 72A of the Finance Act can be done either by a Chartered Accountant or Cost Accountant only in specified certain circumstances”. It was further held that Service Tax Audit as envisaged in Rule 5A(2) of the Service Tax Rules does not have appropriate statutory backing.
Even, the Hon’ble Allahabad High Court in the case of ACL Education Centre Pvt. Ltd. & Ors. Vs. Union of India [2014-TIOL-120-HC-ALL-ST] has held that the Audit under Service tax is to be conducted by Chartered Accountants/ Cost Accountants only and not by officers of the Department.
Further, the Hon’ble Calcutta High Court in the case of SKP Securities Ltd. Vs. DD (RA-IDT) & Ors. [2013-TIOL-38-HC-KOL-ST] has also held that no Audit of private assessee can be undertaken by CAG under Rule 5A(2) of the Service Tax Rules.
Thereafter, in the background of the Travelite case, the Central Board of Excise and Customs (“CBEC” or “the Board”) vide Circular No. 986/10/2014-CX dated October 9, 2014 had clarified that judgment under the Travelite case does not deal with the issue of audit in the Central Excise. It was further clarified that there is adequate statutory backing for Audit by the Central Excise officers by virtue of Section 37(2)(x) of the Central Excise Act, 1944 and Rule 22 of the Central Excise Rules, 2002 for conducting Central Excise Audit.
Recently, the Central Government vide Notification No. 23/2014-ST dated December 5, 2014 (“Notification No. 23”) had substituted Rule 5A(2) of the Service Tax Rules, thereby nominating a Chartered Accountant or a Cost Accountant along with an officer authorised by the Commissioner or the Audit Party deputed by the Commissioner or CAG to conduct Service Tax Audit. Further, the time limit of 15 days for making available the requisite documents by the Assessee was dispensed with.
Clarification by the CBEC:
The Board vide Circular No. 181/7/2014-ST dated December 10, 2014 (“the Circular”) has tried to remove the mist surrounding the power of the Departmental officers to conduct Service Tax Audit and had clarified that Rule 5A(2) of the Service Tax Rules, interalia, provides for scrutiny of records by an officer authorised by the Commissioner or the Audit Party deputed by the Commissioner or CAG and such scrutiny essentially constitutes Audit by the Audit Party consisting of the Departmental officers.
It has been further clarified that Rule 5A(2) of the Service Tax Rules has appropriate statutory backing for conducting Service Tax Audit by the Departmental officers by virtue of Section 94(2)(k) of the Finance Act as amended by Section 114(J) of the Finance Act, 2014 w.e.f. August 6, 2014 which reads as under:
"(k) 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."
Furthermore, it has been clarified that the expression "verified" used in Section 94(2)(k) of the Finance 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.
Therefore, the judgment of the Hon’ble High Court of Delhi in the Travelite case has now been refuted by the Board by way of amendment made under Rule 5A(2) of the Service Tax Rules by virtue of power derived under Section 94(2)(k) of the Finance Act, as the Service Tax Audit can be conducted by the Departmental officers as well.
But, following open questions are not answered in the Circular and requires attention of the Board for the clarification at the earliest:
- Whether the amendment made in Rule 5A(2) of the Service Tax Rules vide Notification No. 23 are effective only w.e.f December 5, 2014 for the Departmental officers to conduct the Service Tax Audit?
- What would be legal fate of Service Tax Audits initiated/ conducted prior to August 6, 2014, can it be declared as void in the light of the Travelite case?
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