Service Tax Department Cannot Conduct Audits of Assessees

In the Delhi High Court Mega Cabs Pvt. Ltd. filed writ petition (C) No. 5192/2015 [[Mega Cab v UOI and Anr.] challenging the validity of Rule 5A(2) of the Service Tax Rules as substituted by Notification No. 23/2014-ST, dated 05.12.2014, clause (k) of sub-section (2) of section 94 of the Finance Act, 1994 as inserted w.e.f. 06.08.2014 by the Finance Act, 2014 and also the Circular No. 181/7/2014-ST dated 10.12.2014 directing departmental officers to conduct audit of the service tax assessees as provided in the departmental instructions. In the matter, Delhi High Court has entertain the said writ petition and by order dated 22.05.2015 please to issue Notice to the Union of India, Ministry of Finance, and also to the Service Tax (Audit) Department, Delhi. 

Yesterday, (03.06.2016), the Delhi High Court delivered a landmark Judgment [Mega Cab v UOI and Anr. in WP(C) 5192/2015] – no more audit of assesse records by the Central Excise and Service Tax Department and strike down Rule 5A(2) of Service Tax Rules as ultra vires to the Finance Act, 1994.

The Court also held that “verification” in clause (k) of sub-section (2) of section 94 of the Finance Act, 1994 cannot be constructed as  “audit” which is specialized function otherwise clause (k) suffered from the vice of excessive delegation of legislative power by the Parliament.

The Court also strike down the Circular No. 181/7/2014-ST (F. No. 137/46/2014-ST), dated 10-12-2014 regarding Audit of the Service Tax assessees by the officers of Service Tax and Central Excise Commissionerates as well as circular dated Circular No. 995/2/2015-CX (F. No. 206/03/2014-CX.6),dated 27-2-2015 regarding Central Excise and Service Tax Audit norms to be followed by the Audit Commissionerates.

The High Court further held that Audit Manual – 2015 issued by the Department also has no statutory force by observing that earlier Audit Manual 2011 was also declared without any statutory backing Travelite (India) v UOI 2014 (35) S.T.R. 653 (Del.). The Government has not down anything to remove the defect pointed out in Travelite (India) judgment.

The Court also quashed impugned letter C. No. I-26(494)ST/AMR-48B/Mega Cabs/C-IV/gr-1/2013/383 dated 30.04.2015 issued by service tax Department to Mega Cab regarding audit.

It is a general practice of Service Tax Department to conduct audit of service tax assessee for last five years by deputing their own officers of the rank of inspector and Superintendents. Service Tax Department also seeks voluminous details and seeks information in self-specified format/annexures of about 32 pages, which are not prescribed under the law. Service Tax Department without assigning any reasons and routinely conducts audit even when it is not prescribed under the law and not conducting special audit.

It may be noted that earlier Rule 5A(2) was struck down as ultra vires by  the Hon’ble Delhi High Court in the matter of Travelite (India) v UOI 2014 (35) S.T.R. 653 (Del.), after that amendment was made by the Finance Act, 2014 by inserting clause (k) of sub-section (2) of section 94 and on the basis of that sub-rule (2) to Rule 5A has been again enacted. Whereas in Circular No. 181/7/2014-ST dated 10.12.2014, stand has been taken by the Government that Travelite (India)  judgment can be distinguished as a clear statutory backing for the rule now exists in section 94(2)(k) of the said Act.

The High Court has given detailed judgment considering various judgments. Now this judgment made is clear that the officers of the Department has no power to conduct audit at all. Similarly, the CAG officers also have no power to conduct audit of the assesse records.