Whether Rule 5A(2) of the Service Tax Rules, 1994 read with section 94(2) of the Finance Act 1994 empowers CAG (Comptroller & Auditor General of India) to conduct audit of accounts of any assessee? Matter referred to the Division Bench.

Appellant, a company incorporated under the Companies Act 1956 is engaged in the business of trading in stock and securities and was registered with the service tax authority under the categories of “stock broking”, “banking & other financial service” and “business auxiliary service” from the year 2004. Appellant company was not financed out of the funds or loans from the Central Government or State Government. However, they were served with the notice by the Principal Director of Audit, Central Kolkatta for audit by CERA audit team, an audit team under CAG to audit the service tax records, accounts and other related documents. Appellant challenged the said notice.

Held:

To carry out an audit of a non-governmental company which is neither financed nor run out of loan from Central/State Government by CAG, the condition precedent to such audit is request from the President of India or Governor of State u/s. 20 of the CAG Act, 1971 where it is carrying on its operation. And when such audit is on request of President/Governor, the obligation of the assessee under Rule 5A of the Service Tax Rules, 1994 and Rule 22 of the Central Excise Rules, 2002 is to provide the records to the audit party deputed by CAG. However, it does not oblige the assessee to agree to unauthorised audit of its accounts by CAG. Under Rule 5A(1) of the Service Tax Rules, 1994 an officer authorised by the Commissioner shall have access to the premises for the purpose of carrying out any scrutiny, verification and checks as may be necessary for safeguarding the interest of revenue. Rule 5A(2) of the said Rules requires assessee to make available records to the officer authorised by the Commissioner or CAG on demand for scrutiny of the said officer.

Therefore, the said Rule read with section 94(2) of the Finance Act, 1994 does not empower the CAG to audit the accounts of non-Government assessee, but it casts an obligation to make records and documents as specified therein available to the officer deputed by CAG. However, on being pointed out by the Counself for the Respondent to an unreported judgement and order passed by a Single Judge Bench of the Court in W.P.2762 of 2000 (M/s. Berger Paints India Ltd. & Others vs. Joint Commissioner Audit) Central Excise Calcutta- II where the vires of Rule 173G(6)(c) of Central Excise Rules which is pari materia with Rule 5A of the Service Tax Rules was under challenge, the court deemed it appropriate to refer the matter to a Division Bench for adjudication.