By TIOL News Service

LUCKNOW, JAN 30, 2014: THE Central Excise Department on various dates has issued intimation under Rule 5A(2), to assessees for making a reference to conduct an Audit under EA-2000. For the said purpose, the necessary documents were demanded from the petitioners-assessees.

The petitioners-assessees objected and also challenged the vires of Rule 5A(2) of the Service Tax Rules, 1994 inter alia on the ground that the provision of Rule 5(A)(2) are contrary to the provision of Section 72A of the Finance Act 1994.

To understand the issue better let us have a look at the provisions:

Section 72A:

Section 72A: Special audit. -(1) If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as "such person"),-

(i) has failed to declare or determine the value of a taxable service correctly; or

(ii) has availed and utilized credit of duty or tax paid-

(a)which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or

(b) by means of fraud, collusion, or any willful misstatement or suppression of facts; or

(iii) has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner,

he may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him, to the extent and for the period as may be specified by the Commissioner.

(2) The chartered accountant or cost accountant referred to in sub-section (1) shall, within the period specified by the said Commissioner, submit a report duly signed and certified by him to the said Commissioner mentioning therein such other particulars as may be specified by him.

(3) The provisions of sub-section (1) shall have effect notwithstanding that the accounts of such person have been audited under any other law for the time being in force.

(4) The person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit under sub-section (1) and proposed to be utilized in any proceeding under the provisions of this Chapter or rules made thereunder.

Rule 5-A of the Service Tax Rules, 1994 :

"5A. Access to a registered premises. -(1) An officer authorised by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

(2) Every assessee shall, on demand, make available to the officer authorised under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be,-

(i) the records as mentioned in sub-rule (2) of rule 5; (ii) trial balance or its equivalent; and

(iii) the income-tax audit report , if any, under section 44AB of the Income-tax Act, 1961 (43 of 1961), for the scrutiny of the officer or audit party, as the case may be."

The Petitioners have prayed for declaring the Sub Rule (2) of Rule 5-A of the Service Tax Rules, 1994, to be ultra vires. Second prayer is regarding quashing of the impugned intimation, whereby certain documents were required for conducting Central Excise and Service Tax Audit under EA-2000.

Petitioners' Contention : No rule can be framed by the Central Government in respect of any provision of the Act which is not specified in the Chapter V of the Finance Act, 1994. There is no provision in the Finance Act, 1994 for framing of Rules in respect of the audit of the accounts of private person or Companies or Firms who are paying service tax by self assessment, therefore, Rule which empowers service tax officials to carryout scrutiny, verification, checks and for making available information as mentioned in Sub Rule (2) of Rule 5-A by audit party and as such the said Rule so framed is without any authority. Thus, it is ultra vires.

The impugned Rule is totally arbitrary and without specifying the period for conducting the special audit. Qualification and manners in which audit will be conducted has not been defined anywhere. There is no provision to provide the audit report to the petitioner-assessee. Audit Manual, 2011 is exclusively meant for the departmental use. But, petitioners-assessees was asked to fill up certain forms.

Department's Defence : The Additional Solicitor General submits that the Rule is not inconsonance to Section 72-A of the Finance Act, 1994. The purpose of Sub-Rule (2) of Rule 5A is to get the account audited by an Auditor deputed by the Commissioner. In case, it is undertaking of Government of India, then Comptroller and Auditor General of India was authorized to conduct the audit. The purpose of impugned notice is to collect the information from the petitioners-assessees to assess the correct tax and if the Commissioner is satisfied, then he may appoint a Chartered Accountant for the purpose of audit. The audit will not be done by any officer or on his behalf. The audit will be performed by a qualified Chartered Accountant. So, the reference to the Audit Manual, 2011 for the Department is valid. Asking the petitioners-assessees for filling up certain forms, is just to facilitate the audit, which is to be carried out, as per law. [ This is not factually correct - TIOL ] It is also a submission of the Additional Solicitor General of India that after completing the audit, a copy of the report is always available to the petitioner-assessee. Before making the assessment, the petitioner-assessee can also ask the copy of the audit report under the Right to Information Act, 2005.

High Court Findings : Rule 5-A, sub-rule (2) states that every assessee shall, on demand, make available to the officer authorised or the audit party, records, trial balance and income-tax audit report, if any. So here, the officer will demand the documents just to facilitate the correctness of books of accounts and ultimately, the audit will be conducted by the Audit Party headed by the Chartered Accountant/Cost Accountant, as the case may be, deputed by the Commissioner.

It is Commissioner on whose behalf, the officer will collect the material and the Auditor will perform the audit. In any case, the final report duly signed by the Chartered Accountant will be submitted to the Commissioner. In case of Government Autonomous Body, the function of the audit has been assigned to the Comptroller of Auditor General of India.

It is crystal clear that in case of private assessee, the Commissioner will refer the matter to an officer to collect the material or Chartered Accountant for the purpose of audit. Thus, for the purpose of audit, the material can be collected either by the officer authorized by the Commissioner or by the Auditor himself. But, audit will be performed only by the Chartered Accountant.

It is pious duty of the assessee to make available the record as mentioned in Rule 5A i.e. trial balance or its equivalent; and the income-tax audit report, if any, under Section 142(2A) of the Income Tax Act, 1961, for the scrutiny of the officer or the Audit Party, as the case may be.

There is no inconsistency in Rule 5A and Section 72-A of the Finance Act, 1994. The said provision is not arbitrary. The manner for conducting the audit is as per the accounting standard provided by the Institute of Chartered Accountant of India. The audit report will be made available to the assessee, as per law.

We find no inconsistency. Rule 5A (2) is not ultra vires, as the same is in consonance to Section 72A of the Finance Act, 1994 and the same was enacted by the competent authority.

During the course of arguments, learned Additional Solicitor General of India has assured that the audit will be performed by a qualified Chartered Accountant and as per accounting standard. After the audit report, the assessee will get the copy of the report, as per law.

In the light of above statement made by the learned Additional Solicitor General of India, we find no reason to interfere with the impugned intimation.

(See 2014-TIOL-120-HC-ALL-ST)