[2016-TIOL-1061-HC-DEL-ST] Mega Cabs Pvt. Ltd vs. Union of India and ORS

Rule 5A(2) of the Service Tax Rules, 1994 and the Circulars issued by the CBEC exceed the scope of the Finance Act, 1994 and are therefore ultra vires.

Facts
In this petition, Rule 5A(2) of the Service Tax Rules, 1994 empowering deputation of officers from the Comptroller and Auditor General of India to demand documents was challenged. Further validity of section 94(2)(k) of the Finance Act, 1994 was also challenged which gives uncontrolled delegated powers to the Central Government to frame rules. Lastly a letter issued by the Commissioner of Service Tax informing that the records of the petitioner would be verified by a team of officers was challenged. Pursuant to the decision in the case of Travelite (India) vs. Union of India [2014 (35) STR 653 (Delhi)] wherein a division bench of this Court struck down Rule 5A(2) as being ultra vires section 72A read with section 94(2) of the Act, an amendment was made to the said rule and section 94(2)(k) was inserted in the Act. Circular No. 181/7/2014- ST dated 10/12/2014 clarified that the department officers could now proceed with the Audit as before and thereafter norms for conducting audit were issued vide circular no. 995/2/2015-CX dated 27/02/2015 followed by an Audit Manual 2015. It was contended that the amendment continues to be ultra vires section 72A of the Act which contemplates only a special audit by a cost accountant or a chartered accountant whereas Rule 5A(2) permits any officer of the Government to ask for production of books on demand and without observing any safeguards spelt out in section 72A of the Act.

Held
The Court noted the provisions of section 72 of the Finance Act and observed that for invocation of the said section it has to be established that the return filed is not in accordance with the law without which the records cannot be called for mechanically. Further section 72A also requires the Commissioner to record the “reasons to believe” that any of the three contingencies as required in the said section exists. Only after such ascertainment the records can be audited only by a chartered accountant or a cost accountant nominated by the Commissioner. Section 73 also requires the issuance of a show cause notice to the person who has short paid or not paid the service tax. Even the powers to search the premises under section 82 are not without any guidelines or restrictions.

Thus the Court was of the view that before the records is called for, the assessee should be provided with a predecisional hearing to explain his case. Further Rule 5A(2) of the Rules require production of records in addition to those mentioned in Rule 5(2) of Rules which is not envisaged under any provisions of the Act and itself is beyond the Finance Act. Further it was noted that there is no authorization under the Finance Act provided to the officers of the department or the CAG to examine the books of accounts of the assessee and if any such officer is deputed it will result in harassment of the assessees. It was noted that the term ‘verify’ in section 94(2)(k) is not wide enough to include the audit of accounts of an assessee.

Further the Circular issued by the CBEC appears to be without any reference to the applicable provisions in the Act or the Rules and thus the lacuna pointed out in Travelite India (supra) has not been set right. It was held that audit is a special function which has to be carried out by duly qualified persons like a cost accountant or a chartered accountant and cannot be undertaken by any officer of the department. Thus Rule 5A(2) and the circulars exceeds the scope of the Act tested vis-à-vis sections 72, 72A,73 and 82 and is therefore ultra vires.