2014 (1) TMI 1562 - HC - Service Tax

Court upholds Rule 5A(2) of Service Tax Rules, 1994 & audit procedures under Finance Act, 1994

The court upheld the validity of Rule 5A(2) of the Service Tax Rules, 1994, and the impugned intimation for conducting the audit, finding them in ... Validity of delegated rule-making - Ultra vires challenge to subordinate legislation - Special audit under Section 72A of the Finance Act, 1994 - Power to require production of records for audit - Role of chartered accountant/cost accountant in special audit - Availability of audit report and opportunity of hearingSpecial audit under Section 72A of the Finance Act, 1994 - Validity of delegated rule-making - Ultra vires challenge to subordinate legislation - Challenge to vires of Sub rule (2) of Rule 5 A of the Service Tax Rules, 1994 as being ultra vires Section 72A of the Finance Act, 1994. - HELD THAT: - The Court examined Section 72A which authorises the Commissioner to direct an assessee to get accounts audited by a chartered accountant or cost accountant nominated by him where reasons to believe exist. Section 72A(2) requires the nominated professional to submit a signed report to the Commissioner and Section 72A(4) guarantees the assessee an opportunity of being heard in respect of material gathered by the audit. Rule 5A(2) requires an assessee to make available specified records to the officer authorised by the Commissioner or to the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time. The Court held that Rule 5A(2) merely facilitates the statutory scheme in Section 72A by enabling collection of material and access to records so that the audit (to be performed by the nominated chartered/cost accountant) can be carried out. The rule does not supplant or travel beyond the parent statute, does not authorise the performance of the audit by departmental officers in place of the qualified auditor, and is consistent with the statutory safeguards including provision of the audit report to the assessee and opportunity to be heard. Reference to departmental Audit Manual was held to be a facilitative measure for classification and departmental use and did not render the rule arbitrary. Applying the principle that rules must conform to and be within the rule making power conferred by the statute, the Court found no inconsistency between Rule 5A(2) and Section 72A and concluded that the rule is intra vires.Sub rule (2) of Rule 5 A of the Service Tax Rules, 1994 is not ultra vires Section 72A of the Finance Act, 1994; the vires challenge is dismissed.Power to require production of records for audit - Availability of audit report and opportunity of hearing - Challenge to the impugned intimation/demand for documents to facilitate a Service Tax audit under EA 2000. - HELD THAT: - The impugned intimation sought production of records so that material could be collected for the audit to be performed by a chartered accountant or cost accountant nominated by the Commissioner. The Additional Solicitor General assured the Court that the audit would be conducted by a qualified chartered accountant in accordance with accounting standards and that the assessee would be provided a copy of the audit report and afforded opportunity as required by law. Given that the intimation only directed collection of material and that objections to such a pre assessment collection are amenable to challenge after final assessment, the Court was not persuaded to exercise extraordinary relief under Article 226. In view of the statutory scheme and assurances, interference with the impugned intimation was declined.The writ petitions seeking to set aside the impugned intimation are dismissed; no interference is made with the intimation.Final Conclusion: All writ petitions are dismissed: Rule 5 A(2) of the Service Tax Rules, 1994 is held to be intra vires Section 72A of the Finance Act, 1994, and the impugned intimation seeking production of records for audit is not interfered with by this Court. Issues Involved:1. Challenge to the vires of Rule 5A(2) of the Service Tax Rules, 1994.2. Quashing of the impugned intimation for conducting Central Excise Service Tax Audit under EA-2000.3. Request for mandamus to regulate the audit process under the Finance Act, 1994.4. Request for costs of the writ petition.Detailed Analysis:1. Challenge to the vires of Rule 5A(2) of the Service Tax Rules, 1994:The petitioners-assessees challenged the vires of Rule 5A(2) on the grounds that it is contrary to Section 72 of the Service Tax Act and beyond the rule-making power conferred by the statute. They argued that the rule is ultra vires as it allows departmental officers to conduct audits, which should be done by a qualified Chartered Accountant as per Section 72-A of the Finance Act, 1994. The court examined the rule-making power under Section 94 of the Finance Act, 1994, and concluded that Rule 5A(2) is not ultra vires. The court found that the rule facilitates the audit process by allowing officers to collect necessary documents, but the actual audit is conducted by a Chartered Accountant, ensuring compliance with Section 72-A.2. Quashing of the impugned intimation for conducting Central Excise Service Tax Audit under EA-2000:The petitioners-assessees sought to quash the impugned intimation, arguing that it was issued without authority and required them to provide documents for an audit by departmental officers. The court found that the intimation was issued to collect documents necessary for the audit, which would be conducted by a qualified Chartered Accountant. The court held that there was no reason to interfere with the impugned intimation as it was in accordance with the law and necessary for facilitating the audit process.3. Request for mandamus to regulate the audit process under the Finance Act, 1994:The petitioners-assessees requested a mandamus directing the authorities to regulate the audit process by prescribing specific provisions, norms for selection, qualifications for officers, and the format of the audit report. The court found that the existing provisions under Section 72-A and Rule 5A(2) were sufficient to regulate the audit process. The court noted that the audit would be conducted by a qualified Chartered Accountant as per accounting standards, and the audit report would be made available to the assessee, ensuring transparency and fairness.4. Request for costs of the writ petition:The petitioners-assessees requested the court to award costs in their favor. However, the court dismissed all the writ petitions, including the request for costs, as it found no merit in the arguments presented by the petitioners-assessees.Conclusion:The court dismissed all the writ petitions, upholding the validity of Rule 5A(2) of the Service Tax Rules, 1994, and the impugned intimation for conducting the audit. The court found that the rule and the intimation were in consonance with Section 72-A of the Finance Act, 1994, and necessary for ensuring proper audit and assessment of service tax. The audit process was found to be regulated adequately by existing provisions, and the petitioners-assessees were assured that the audit would be conducted by a qualified Chartered Accountant, with the audit report made available to them as per the law.