DECEMBER 19, 2014

By Geetika Srivastava

GENERAL audits conducted by departmental officers and the Comptroller and Auditor General of India (CAG) have been in controversy for quite a sometime.On the one hand, the assessees have been objecting to such general audits by departmental officers and CAG as there is no provision in the Finance Act, 1994 empowering them to carry out such audits and scrutiny. On the other hand, the department has been compelling the assessees to face such audits and intimidating them to transfer their cases to DGCEI for scrutiny in case of non-cooperation from their side.

This conflict between the assessees and the department continued for a long time and finally travelled to various High Courts. To an extent the issue got settled by the Hon'ble Delhi High Court in the case of Travelite (India) - 2014-TIOL-1304-HC-DEL-ST wherein,in the absence of any authorization under parent statute i.e., the Finance Act, 1994, Rule 5A(2) of Service Tax Rules, 1994 providing for general audit by Departmental officers or CAG was struck down. According to the High Court, the Finance Act, 1994 only stipulates conduct of a special audit in the circumstances outlined in section 72A and hence, any attempt to include such provision through the back-door is ultra-vires the rule making power conferred under section 94(1) of the Finance Act, 1994. Before the pronouncement of above decision of the Delhi High Court, the Calcutta High Court in the case of SKP Securities Ltd. - 2013-TIOL-38-HC-KOL-ST had held that section 16 of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 (hereinafter referred to as the CAG Act) did not authorize the CAG or any audit team under the control of CAG to audit the accounts of a non-government company except where there is a request for such audit either from the President of India or the Governor of the State. Similar view was taken by the Calcutta High Court in the case of Infinity Infotech Parks Ltd. - 2013-TIOL-38-HC-KOL-ST.

The above decisions of the High Court srestrained departmental officers and CAG from carrying out the general service tax audits of the assessees. The doubts in this regard were also raised on the powers of central excise officers to conduct general excise audits of the assessees. However, such doubts were resolved by the CBEC vide its Circular No. 986/10/2014-CX dated 09.10.2014 wherein it was clarified that central excise law had adequate backing of the statutory provisions which empowers the Central Excise Officers to conduct such general excise audits. The statutory provisions relevant for audit were contained in clause (x) of section 37(2) of Central Excise Act, 1944 and rule 22 of the Central Excise Rules, 2002 and therefore the above decision of Delhi High Court will not have any impact on them.

Recently, an amendment has been made to section 94 of the Finance Act, 1994 effective from 01.10.2014, by way of introducing clause (k) to sub section (2) which empowers the Central Government to make rules for imposing on assessees, the duty of furnishing information, keeping records and the manner in which such records shall be verified. In furtherance to the above amendment, the sub-rule (2) to rule 5A of Service Tax Rules, 1994 was substituted vide notification No. 23/2014-S.T. which grants powers to the audit party deputed by the Commissioner or CAG, or a cost accountant or chartered accountant nominated under section 72A of the Finance Act, 1994 to demand the relevant records and documents for conducting the scrutiny or audit.

Here, it would be relevant to note that the powers granted to Central Government under section 94(2)(k) of the Finance Act, 1994 are akin to the powers granted to Central Government for the purpose of excise under  clause (x) of Section 37(2) of the Central Excise Act, 1944. Further, similar to rule 22 of the Central Excise Rules, 2002, rule 5A(2) of Service Tax Rules, 1994 grants power to the Commissioner to depute an audit party for carrying out the scrutiny of the records of the assessee. In sum and substance, like central excise, after the aforesaid amendments in the provisions of the Finance Act, 1994 and Service Tax Rules, 1994, the departmental officers have been granted the powers to conduct verification of the records of the assessee in case of service tax as well.

It emerges that the aforesaid amendments have been brought in order to overcome the decision of the Delhi High Court in the case of Travelite Ltd. which restricted the powers of the departmental officers or CAG to conduct general audits of the assessee in service tax. Henceforth, the departmental officers will be empowered to verify the accounts of the assessee. At this juncture, the primary issue that needs attention is whether the powers granted to such departmental officers to verify the records of assessee are wide enough to cover the general audits within their scope. For this, one must appreciate the meaning of the expression "verification". CBEC vide its clarification dated 09.10.2014 in case of excise audits has clarified that  the expression "verification" used in the section is of wide import and would include within its scope, audit by the departmental officers, as the procedure prescribed for audit is essentially a procedure for verification mandated in the statute. Similar clarification has been issued by CBEC in respect of service tax as well vide Circular No. 181/7/2014-Service Tax, dated 10.12.2014.

The above view of the department that verification would also include audit has not yet been tested before the court of law. Hence, whether such a view of the department is realistic or idealistic remains a matter of concern for all. Consequently, the issue whether or not the general audit conducted by the department can be covered within the ambit of verification and hence is permissible in the light of powers granted to Central Government under section 94(2)(k) of the Finance Act, 1994 and rule 5A(2) of Service Tax Rules, 1994does not appear to be free from doubt.

Nevertheless, the above amendments have not been able to resolve the controversy relating to powers of the CAG or any audit team under the control of the CAG to conduct general audit of the private entities and hence remains an issue open for deliberation.In such a scenario, the ratio laid by the Calcutta High Court in the cases of SKP Securities Ltd. and Infinity Infotech Parks Ltd.(supra) may continue to be applicable in case of the service tax audits conducted by CAG.

Moreover, an issue that still remains unresolved is whether rule 5A(2) is still travelling beyond the parent statute to the extent it allows the audit party deputed by the CAG to call for the records of the private entities for conducting such general audits in the absence of such provision in the Finance Act, 1994 and more specifically when CAG itself does not have any power to conduct such audits of private entities. Or, can it be said that this part of the new rule will be applicable only in case of government entities as per the decisions of the Calcutta High Court.

Hence, one can see that the above amendments have not been able to settle the controversy relating to conduct of general audits by CAG. As far as power to conduct general audit by departmental officers is concerned, the coverage of general audit within the expression verification is still a matter for deliberation.

(The author is a Principal Associate with Lakshmikumaran & Sridharan, New Delhi.)