2018 (10) TMI 1008 - HC - Service Tax

Court questions CAG's audit power under Rule 5A, halts Service Tax audits

The Court expressed doubts regarding the Comptroller and Auditor General of India's authority to conduct compulsory Service Tax audits under Rule 5A. It ... Validity of Rule 5A of the Service Tax Rules, 1994 - Power of the Comptroller and Auditor General to conduct Service Tax audit - Saving clause in Section 174 of the Central Goods and Services Tax Act, 2017 - Interim stay of administrative actionValidity of Rule 5A of the Service Tax Rules, 1994 - Power of the Comptroller and Auditor General to conduct Service Tax audit - Saving clause in Section 174 of the Central Goods and Services Tax Act, 2017 - Interim stay of administrative action - The petitioner was granted interim relief staying the CAG's communication dated 09.10.2018 requiring a Service Tax audit; the Court recorded prima facie doubts on the CAG's power under Rule 5A and on whether Section 174(2)(e) of the CGST Act preserves a power to initiate fresh audits under the repealed Service Tax Rules. - HELD THAT: - The Court noted prior judicial decisions striking down Rule 5A in the Delhi High Court and interim treatment in this High Court's earlier order in Sadbhav Engineering Ltd., and observed conflicting proceedings in different fora including a stay by the Supreme Court in related matters. The Court examined Section 173 and the saving clause in Section 174(2)(e) of the CGST Act and concluded prima facie that the saving clause does not plainly preserve a power to initiate fresh audits under Rule 5A after the repeal/amendment consequent to GST. In view of these legal controversies and the petitioner's objections, the Court found it appropriate to issue notice and grant ad interim protection against further conduct of the Service Tax audit by the CAG, until the next date of hearing.Notice issued returnable 28.11.2018; the impugned communication dated 09.10.2018 is stayed and the CAG is restrained from carrying out any further Service Tax audit of the petitioner in the meantime; direct service permitted.Final Conclusion: Interim relief granted: the CAG's communication directing Service Tax audit of the petitioner is stayed; the High Court issued notice and listed the matter for further consideration on 28.11.2018 after recording prima facie doubts on the applicability of Rule 5A and the saving provision in Section 174(2)(e) of the CGST Act. Issues:Challenge to communication by Comptroller and Auditor General of India for Service Tax audit; Validity of Rule 5A of Service Tax Rules, 1994; Effect of amendment to Rule 5A; Repeal and saving clauses under Central Goods and Service Tax Act, 2017.Analysis:The petitioner, a limited liability partnership firm providing services to polymer industries, challenged a communication from the Comptroller and Auditor General of India (CAG) for a Service Tax audit. The CAG relied on Rule 5A of the Service Tax Rules, 1994, which was previously struck down by the Delhi High Court as unconstitutional in the case of Travelite (India) v. Union of India. The petitioner highlighted a stay granted by the Gujarat High Court in a similar case involving Sadbhav Engineering Limited, questioning the authority of CAG for such audits. The Court raised concerns about the validity of Rule 5A and the powers of the Commissioner to authorize such audits, especially by external parties.The petitioner's counsel noted that Rule 5A was subsequently amended and challenged in the case of Mega Cabs Pvt. Ltd. v. Union of India, where the Delhi High Court again struck down the rule. However, the Supreme Court stayed the Delhi High Court's judgment in the Mega Cabs case. Additionally, the petitioner argued that with the introduction of the Goods and Service Tax Act, the Service Tax provisions stand repealed, citing Section 174 of the Central Goods and Service Tax Act, 2017. The counsel contended that the Saving Clause in the CGST Act would not save Rule 5A to enable fresh audit proceedings.The Court analyzed Section 174 of the CGST Act, which contains Repeal and Saving Clauses. It noted that the Saving Clause does not specifically save Rule 5A in a manner that allows for initiating fresh audit proceedings under the said Rule. The Court expressed serious doubts about the CAG's authority to conduct compulsory Service Tax audits of private agencies like the petitioner under Rule 5A. Consequently, the Court issued a Notice returnable on 28.11.2018 and stayed the impugned order dated 09.10.2018, preventing further Service Tax audits by the CAG on the petitioner until further proceedings.