TIOL-DDT 2411
06.08.2014
Wednesday

MORE than ten years ago I wrote an article for a print journal that CAG had no great authority to audit the assessees at their premises; that CAG is supposed to audit the Government and not private citizens or commercial concerns; that the power to audit a private factory has been derived from a mere delegated legislation namely the CE Rules and certainly not the Constitution.

I almost ended up losing my job with the Central Excise Department because the CAG took strong objection and for any audit objection, the department immediately issues a notice.

Audit of factories by Central Excise Officers has been an accepted practice for ages and it was naturally extended to Service Tax. There was a time when the Departmental auditors were respected and welcomed, because they were senior and knowledgeable officers who were helpful to the assessees in detecting their mistakes and they used to advise the assessees properly. Managements used to be grateful to the Central Excise auditors for being a check on their own employees and an annual audit by the department was most welcome. Audit in those days did not always result in an immediate Show Cause Notice.

All this changed over the years. Auditors became avaricious and arrogant, corruption levels skyrocketed and docility of the assessee was taken for fear and harassment reached unmanageable limits. All atrocities have to end one day.

Day before yesterday the Delhi High Court emphatically held that the Department had no power to audit the Service Tax assessees routinely.

The assessee petitioner challenged before the High Court a letter dated 07-11-2012 of the respondent Commissioner seeking records for the period 2007-08 till 2011-12 for scrutiny of an audit party; Rule 5A (2) of the Service Tax Rules is also impugned as ultra vires .It is contended that the powers of an assessing officer to call for records in respect of any period during which the respondents seek to intensively scrutinize receipts etc. i.e. a special audit can be ordered by recourse to Section 72-A of the Finance Act, 1994. Barring these, the Finance Act, does not contain any substantive power to call for records for scrutiny as is permissible under Rule 5A(2) or for the purpose of scrutiny by any authority outside of those created under the Act, such as the Comptroller and Auditor General's office.

The petitioner also challenged the CBEC instruction in F. No. 137/26/2007-CX.4 dated 1.1.2008.

Rule 5A directs the assessee, in sub-rule (2), to provide records to an audit party. It reads:

"Rule 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 CBEC instruction in F. No. 137/26/2007-CX.4 dated 1.1.2008, states:

"… A new Rule 5A has also been incorporated in the said Rules to prescribe that an officer authorised by the Commissioner shall have access to any premises registered under the Service Tax Rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue and that the assessee shall provide, on demand, the specified records including trial balance or the equivalent. It may be noted that this rule does not envisage issue of any notification by a Commissioner for such authorisation of officers. The requirement of authorisation could be fulfilled by issue of an office order.

2. In this regard, it is clarified that records/documents required to be maintained under various laws such as the Income Tax Act, Companies Law the CENVAT Credit Rules, 2004, VAT and other State legislation would be acceptable, and the amendment made in the rule does not cast any additional responsibility on taxpayers in terms of maintenance of records.

3. The list of records, as required to be provided under said sub-rule (2) should be submitted once only. Once filed, further intimation would be required to be given only in case there is any change in the list (i.e. addition, deletion, modification in the types of records maintained) that had been furnished by the assessee.

4. A copy of the list furnished by the assessee would be sent by the jurisdictional superintendent to the audit section.

5. The audit team or any other officer authorised by the Commissioner to visit the registered premises of an assessee shall give prior intimation to the assessee along with the list of documents that he requires for the purposes of scrutiny, verification or audit.

6. That taxpayer shall provide the records as required by the authorized officer within a period of fifteen days from the date of request. In case, the taxpayer is unable to produce any of the records called for within the stipulated time, he shall intimate the same along with reasons, for non-production of records, and the officer may also further time for production of such records keeping in view the overall facts into account.

7. These amendments have been made in the service tax rules to enable the duly authorised offices to carry out audit or scrutiny as may be necessary to safeguard the interest of revenue. However, it may be ensured that only such records are demanded which are necessary for conducting such audit scrutiny or verification."

The only provision in Chapter V of the Finance Act on scrutiny and audit of records of the assessee is Section 72Aof the Finance Act, 1994, which reads:

"72A. (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 utilised 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 wilful 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.

The High Court observed,

Section 72A envisages an audit of an assessee's records only in special circumstances, namely, when there is a failure to declare or compute the value of the taxable service, when the utilization of CENVAT credit in excessive of the limit permissible or by fraud etc., and when the business operations of the assessee are dispersed across multiple locations. Apart from Section 94, the Revenue could not show any other substantive provision which justifies a probe into the records of the assessee, under conditions akin to those contemplated by Rule 5A(2). The Revenue was also unable to show the compulsion of arming authorities with such sweeping powers, under the Rules.

It is well known that if the legislature contemplates a situation and enacts or provides for a part of it, the other parts are deemed to have been excluded. The law is also well settled that a rule acquires statutory force, so long as it first, conforms to the provisions of the statute under which it is framed and second, it must be within the rulemaking power of the executive authority charged with framing the rules.

The mere fact that a rule-making power is phrased in terms that indicates a general delegation of power, cannot lead to the inference that such power may be exercised to make rules that exceed the bounds of the statute. Rules may only give effect to the statute's provisions and intent and cannot be used to create substantive rights, obligations or liabilities that are not within the contemplation of the statute.

It is apparent that the only type of audit within the contemplation of the statute is that stipulated for in Section 74A, i.e. a special audit when only certain circumstances are fulfilled. The Parliament thus had a clear intention to provide for only a special audit. The fact that Section 74A prescribes the conditions meriting such special audit compels the necessary inference that the Parliament did not intend to provide for a general audit that "every assessee" may be subjected to, "on demand". This Court is thus of the opinion that any attempt to include provision for such a general audit through the back-door, such as through the impugned rule, is ultra-vires the rule making power conferred under Section 94(1). Rule 5A(2) must consequently be struck down.

Likewise, this Court finds that the impugned CBEC instruction, being in furtherance of Rule 5A(2), which rule is ultra-vires the Finance Act, 1994, is void for the same reasons. Executive instructions without statutory force, cannot possibly override the law; consequently, any notice, circular, guideline etc. contrary to statutory laws cannot be enforced.

The impugned circular seeks to put in place a mechanism for audit and scrutiny of documents with the objective of safeguarding the interests of the Revenue, in furtherance of the amendments made in the Service Tax Rules, as indicated in paragraph 7 of the circular. Since the parent statute in this regard, the Finance Act, 1994 itself does not authorise a general audit of the type envisioned by the impugned Rule 5A(2), and furthermore only stipulates that a special audit can be undertaken if the circumstances outlined in Section 72A are fulfilled, this Court finds that the impugned CBEC circular is not only an attempt to widen the scope of the law impermissibly but also is patently contrary to the statute. The impugned circular, to the extent it provides clarifications on a Rule5A(2) audit, is hereby quashed; consequently, the impugned letter is quashed and set aside.

The Service Tax Audit Manual, 2011 is merely an instrument of instructions for the service tax authorities; it is but obvious that it is not a statutory instrument and has no statutory force. Thus, Rule 5A(2) cannot be sought to be justified as against it.

So, now there is no Rule 5A -the Commissioner or the CAG cannot authorize his officers to barge into the premises of the assessee and demand records and documents for auditing. The assessee is not required to entertain any such demands.

Even earlier, the Allahabad High Court had in 2014-TIOL-120-HC-ALL-ST held that the Departmental officers had no power to audit.

We bring you the judgement today. Please see 2014-TIOL-1304-HC-DEL-ST

Please also see

1. Should AG's Audit be allowed to visit factories and Premises of Service Tax Assessees? (DDT 1298 )

2. AG's Audit Visit to Factories and Premises of Assessees? (DDT 1776 )

3. CAG not authorised to visit factory of assessee in private sector

4. No Audit of Private Enterprises by AG's Audit - Calcutta High Court (DDT 1951 )

5. Karnataka High Court grants Interim Stay against CAG Audit of Service Tax Assessee - (DDT 2103)

6. Audit under Service Tax only by Chartered Accountants - not by officers of Department: HC - (DDT 2283)

7. CAG's Audit should be of Revenue Departments, not of Assessees!

Judgement applicable throughout the country: JK Mittal, the Advocate who argued the case on behalf of the assessee says that this judgement has force throughout the country as statutory Rule was under challenge and the same is struck down. He adds, "Throughout India, members of trade and industry have been subject to serious harassment for the last several years as central excise officers routinely for conducting audit issuing letters seeking voluminous records for the last 5 years as well numerous information in self specified formats which are not there under the law and these officers visits assessee's premises for audit. Similarly, officers of Comptroller & Audit General of India also visit the assessee's premises for conducting audit of Service Tax and Central Excise Assessees. All this being done on the basis of so called Rule 5A(2) and internal audit manual of the Department. This has led to serious resentment among members of the trade and industry as this practice has been followed all around the country without any check which was not only breeding large scale corruption and frivolous demands and unnecessary litigation across the country. The matter was taken up several times with Ministry of Finance at highest level but all in vain.

At last the Court has given relief as rule 5A(2) has been struck down as ultra vires, and CBEC instruction is also declared void and it was declared audit manual of department has no statutory force."

What will happen to proposed ‘Audit' Commissionerates?

IN the Cadre restructuring CBEC has proposed 45 Commissionerates exclusively for Audit. Now that they do not have the power to audit, what will happen to these Commissionerates and about 10,000 personnel who are to man these Commissionerates? Now will the Department recruit an army of Chartered Accountants and Cost Accountants to do the Audit job?

What will the Department do now? Appeal to the Supreme Court? Bring in retrospective legislation to validate Rule 5A(2)?

And in the meantime is the Audit wing being closed down? As the advocate says, the judgement has All India effect and assessees are no more obliged to entertain the Departmental auditors.

Jurisprudentiol - Thursday's cases

Service Tax

Conversion of steel plates into partially finished and fully finished boiler components - Prima facie case for waiver of demand of service tax under Business Auxiliary Service - CESTAT.

THE applicant is a job worker of M/s. Bharat Heavy Electricals Ltd. (BHEL). The nature of process involved is cutting, drilling, pressing, welding etc., as per the drawings of conversion of steel plates into partially finished and fully finished boiler components. According to the Revenue, the process undertaken by the applicant, would not amount to manufacture under Section 2(f) of the Central Excise Act, 1944 and, therefore, they are liable to pay service tax under “Business Auxiliary Service". Adjudicating authority confirmed the demand along with interest and penalty.

Income Tax

Whether if Tribunal has duly considered notings made in seized record and has given finding that remuneration received is in excess, it can be accepted that addition made on such basis has been sustained on estimate basis - NO: ITAT

THE assessee is an actress by profession. The Revenue conducted a search of her premises u/s 132. The assessee filed her block return declaring undisclosed income of Rs.26,17,283/-. The AO, however, determined the amount of undisclosed income at Rs.1,58,41,635/-. The assessee had shown the remuneration received for a film at Rs.27.00 lakhs. Based on the seized material, the AO held that the assessee had received Rs.48.00 lakhs as remuneration for the above said film and accordingly added the difference to the undisclosed income of the assessee. The same was confirmed by the CIT(A). The Tribunal, however, gave a finding that the remuneration for the film was Rs.36.00 lakhs and accordingly restricted the addition to Rs.9.00 lakhs. Against this addition, the AO levied penalty u/s 158BFA(2).

The issue before the Bench is - Whether if the Tribunal has duly considered the notings made in seized record, surrounding circumstances and finally has given a finding that the remuneration received is in excess, it can be accepted that addition made on such basis has been sustained on estimate basis. And NO is the answer of the Tribunal.

Central Excise

Asceptic packaging paper is correctly classifiable under CETH 4811 90 92 and not CETH 7607 2090 - assessee is entitled to benefit of exemption notification 4/2006-CE - Revenue appeal dismissed: CESTAT

THE CCE, Pune-I classified “asceptic packaging paper" manufactured by the respondent under CETH 4811 90 92 and allowed exemption under Notification 4/2006-CE dated 01/03/2006 as amended. The adjudicating authority relied upon the test report of the product given by M/s. ARAI wherein it was confirmed that the paper content was 80.12%, plastic content 15.40% and aluminium content 4.48%.

It is the contention of the Revenue that the adjudicating authority has overlooked Note 2(n) to Ch. 48 which specifically provides that the said Chapter does not cover “metal foil backed with paper or paperboard" and the correct classification should be under CETH 7607 2090 as aluminium and articles thereof.

See our Columns Tomorrow for the judgements

Until Tomorrow with more DDT

Have a nice day.

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