2014 (8) TMI 200 - HC - Service Tax

Court Invalidates Service Tax Rule Allowing General Audit, Emphasizes Statutory Compliance

Travelite (India) Versus UOI And Others

The court held that Rule 5A(2) of the Service Tax Rules, 1994, which allowed for a general audit, was ultra vires the Finance Act, 1994, as it exceeded ... Power to conduct service tax audit / Revenue Audit – Validity of Rule 5A of Service Tax Rules, 1994 - instruction of the Central Board of Excise and Customs (“CBEC”) no. F. No. 137/26/2007-CX.4 dated 1.1.2008 - whether special audit can be ordered by recourse to Section 72-A of the Finance Act, 1994 – Held that:- It is apparent that the only type of audit within the contemplation of the statute is that stipulated for in Section 72A, i.e. a special audit when only certain circumstances are fulfilled. The Parliament thus had a clear intention to provide for only a special audit. The fact that Section 72A prescribes the conditions meriting such special audit compels the necessary inference that the Parliament did not intend to provide for a general audit that “every assessee” may be subjected to, “on demand”. - Decided in favour of assessee. 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) must consequently be struck down. - Decided in favour of assessee. Likewise the CBEC instruction dated 1.1.2008, being in furtherance of Rule 5A(2), which rule is ultra-vires the Finance Act, 1994, is void for the same reasons. - Decided in favour of assessee. 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. - Decided in favour of assessee. Issues Involved:1. Challenge to the letter dated 07-11-2012 seeking records for audit.2. Validity of Rule 5A(2) of the Service Tax Rules, 1994.3. Extent of the rule-making power under Section 94 of the Finance Act, 1994.4. Validity of the CBEC instruction no. F. No. 137/26/2007-CX.4 dated 1.1.2008.5. Requirement of prior notice for audit under Section 72A of the Finance Act, 1994.6. Validity of the Service Tax Audit Manual, 2011.Detailed Analysis:1. Challenge to the letter dated 07-11-2012 seeking records for audit:The petitioner, a registered service tax assessee, challenged the letter from the Commissioner of Service Tax dated 07-11-2012, which sought records for the years 2007-08 till 2011-12 for scrutiny by an audit party under Rule 5A(2) of the Service Tax Rules, 1994. The petitioner argued that the Finance Act, 1994 does not contain any substantive power to call for records for scrutiny, except under Section 72-A, which pertains to a special audit under specific circumstances.2. Validity of Rule 5A(2) of the Service Tax Rules, 1994:The petitioner contended that Rule 5A(2) is ultra vires the Finance Act, 1994, as it is inconsistent with Section 72-A, which only allows for a special audit under certain conditions. The court observed that Section 72A envisages an audit only in special circumstances and that the Finance Act does not justify a general audit as contemplated by Rule 5A(2). Consequently, Rule 5A(2) was struck down as ultra vires.3. Extent of the rule-making power under Section 94 of the Finance Act, 1994:The court examined the rule-making power under Section 94 of the Finance Act, 1994, which allows the Central Government to make rules for carrying out the provisions of the Chapter. However, the court emphasized that rules must conform to the statute and cannot create substantive rights, obligations, or liabilities beyond the statute's contemplation. The court held that Rule 5A(2) exceeded the bounds of the statute and was thus ultra vires.4. Validity of the CBEC instruction no. F. No. 137/26/2007-CX.4 dated 1.1.2008:The petitioner argued that the CBEC instruction, which outlines the modalities for conducting an audit, cannot widen the scope of the law. The court found that since Rule 5A(2) was ultra vires, the CBEC instruction, being in furtherance of Rule 5A(2), was also void. Executive instructions without statutory force cannot override the law, and thus, the CBEC instruction was quashed.5. Requirement of prior notice for audit under Section 72A of the Finance Act, 1994:The petitioner submitted that an audit, which carries civil consequences, cannot be ordered without prior notice to the assessee, indicating reasons for the audit. The court agreed, noting that Section 72A provides for a special audit under specific conditions and requires that the person liable to pay tax be given an opportunity to be heard in respect of any material gathered during the audit.6. Validity of the Service Tax Audit Manual, 2011:The court noted that the Service Tax Audit Manual, 2011, is merely an instrument of instructions for the service tax authorities and does not have statutory force. Therefore, Rule 5A(2) cannot be justified based on the Service Tax Audit Manual. The writ petition was allowed, and the impugned letter, Rule 5A(2), and the CBEC instruction were quashed with no order as to costs.