2014 (12) TMI 417 - HC - Service Tax

Court grants interim relief to petitioner challenging audit authority under Rule 5A of Service Tax Rules

SADBHAV ENGINEERING LTD. Versus UNION OF INDIA AND 2

The court granted interim relief to the petitioner, preventing the audit communication until further proceedings. The case revolves around the challenge ... Validity of Rule 5A - power to audit of service tax records - Validity of communication dated 24.09.2014 as at Annexure¬B to the petition under which the Assistant Audit Officer of Principal Director Auditor (Central) has communicated the petitioner that the audit of service tax revenue records of the petitioner's unit would be conducted by a party from the office of the Principal Director Auditor (Central), Gujarat, Ahmedabad in the last week of September 2014 - Held that:- Delhi High Court in case of Travelite (India) Ltd. (2014 (8) TMI 200 - DELHI HIGH COURT) has struck down Rule 5A as unconstitutional. However, Allahabad High Court in case of A.C.L. Education Centre (P.) Ltd. v. Union of India reported in [2014 (1) TMI 1562 - ALLAHABAD HIGH COURT], upheld the vires of the Rule on a concession being made by the counsel for the Union that for the purpose of collecting the information from the assessee to assess the correct tax, the Commissioner may appoint a Chartered Accountant for the purpose of audit and that audit will not be done by any other officer on his behalf. Prima facie, therefore, if Rule 5A is not valid, a serious question of the powers of the authority to issue the impugned communication would arise. Subsidiary question would be, even if Rule 5A is valid, would the communication in question be covered within the powers of the Commissioner as envisaged under sub¬rule (1) of Rule 5A, which empowers the Commissioner to authorize any person to carry out the inquiry with respect to the accounts of an assessee. Whether such authorized persons can be an outsider of the organization of the Commissioner would also be an issue. - Learned Standing Counsel Shri Qureshi waived rule on behalf of the Union of India. - respondents are prevented from proceeding further in connection with the impugned communication - Application disposed of. Issues:Challenge to communication for audit of service tax revenue records based on Rule 5A validity and authority of audit party.Analysis:1. The petitioner challenged a communication regarding the audit of their service tax revenue records, arguing that the authority conducting the audit lacked the power to do so. The petitioner cited the unconstitutionality of Rule 5A of the Service Tax Rules, 1994, as declared by the Delhi High Court in a previous case. The petitioner contended that Rule 5A did not authorize an audit party from the C.A.G. to conduct a special audit. Reference was made to a decision by the Calcutta High Court to support this argument.2. The Delhi High Court had previously invalidated Rule 5A as unconstitutional, while the Allahabad High Court upheld its validity based on a concession by the Union's counsel. The Union of India relied on Regulation 169 of the Regulations of Audit and Accounts, 2007, and referred to observations by the Supreme Court in a separate case regarding the role of the C.A.G. in ensuring compliance with rules and procedures by both the Union and service providers.3. The court noted that the observations regarding the C.A.G.'s role were specific to a different context involving the selling of broadband rights, and may not extend to authorizing a special audit. The validity of Rule 5A was crucial to determining the authority of the communication for the audit. The question of whether an authorized person under Rule 5A could be from outside the Commissioner's organization was also raised.4. The court scheduled a returnable date for further proceedings and granted interim relief preventing the respondents from proceeding with the audit communication. The issue of the authority of the audit party and the validity of Rule 5A remained central to the case, with implications for the powers of the Commissioner and the role of external agencies in conducting audits.