A.C.L. Education Centre (P) Ltd. vs Union of India

Earlier, all the eight writ petitions were filed jointly (Writ Petition No. 8107 (MB) of 2013), but on the preliminary objection, this Hon''ble Court vide order dated 11-9-2013, dismissed the petition with liberty to file separately writ petition of each assessee. In all the present writ petitions, the facts and circumstances are identical. So, all the writ petition are being heard finally with the consent of the Counsel for the parties and are decided by common judgment.

Factual matrix of the cases are that 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 72 of the Service Tax Act.

In order to resolve the dispute, Counsel for the petitioners submits that Writ Petition No. 11954 (MB) of 2013 be treated to be leading petition and in the said petition, the petitioner-assessee has asked for the following relief:--

A. A writ, order or direction in the nature of Certiorari quashing sub-rule (2) of Rule 5A of the Service Tax Rules, 1994, empowering opposite party No. 2 to depute departmental officers as Auditor being arbitrary, illegal and ultra vires to the provisions of the Finance Act, 1994, contained in Annexure No. 9 to the writ petition.

B. A writ, order or direction in the nature of Certiorari quashing the impugned letter contained in Annexure No. 2, issued by the opposite party No. 2 for conducting audit by the departmental officers of petitioner''s records without assigning any reason thereof, by declaring it as illegal and without authority of law.

C. A writ, order or direction in the nature of Mandamus directing opposite parties for regulating audit of service tax of assessee to make specific provision under Finance Act, 1994, and to prescribe norms for eligible category for selection of assessee for the purpose of audit, prescribe minimum qualification for the officers conducting audit for which audit is to be conducted, Format of Audit Report indicating circumstances under which such audit is to be conducted.

D. Any other suitable writ, order or direction as the Hon''ble Court may deem fit and proper in the circumstances of the case.

E. To award costs of the writ petition in favour of the petitioners.

Thus, the petitioners-assessees prayed for declaring the sub-rule (2) of Rule 5A of the Service Tax Rules, 1994, as inserted by Notification No. 45/2007-S.T. to be ultra vires.

Second prayer is regarding quashing of the impugned intimation, whereby certain documents were required for conducting Central Excise Service Tax Audit under EA-2000.

Sri Jai Kumar Mittal, Advocate assisted by Dr. R.S. Pande, learned counsel for the petitioners-assessees, at the strength of written note, submits that each petitioner-assessee is a registered company and engaged in the business activities. It is registered under Service Tax vide Service Tax Certificate whereby Number has been allotted to it. The company is regularly paying Service Tax and filing returns as per provisions of the Finance Act, 1994, and Rules made thereunder.

Learned counsel submits that on 28-12-2007, the Union of India (opposite party No. 1) by Notification No. 45/2007-S.T, amended Service Tax Rules, 1994, and inserted sub-rule (2) under Rule 5A of the Service Tax Rules, 1994, wherein it has been provided that the assessee to provide record for audit to the audit party deputed by the opposite party No. 2 i.e. Commissioner, Service Tax or by the Controller and Auditor General of India (C & AG) for carrying out audit of the records of service of assessee.

On 1-1-2008, the Government of India through its Board issued instructions F. No. 137/26/2007-CX4 in respect of amendment made by Notification dated 28-12-2007, by inserting Rule 5A(2) of the Service Tax Rules and clarified that with effect from 12-5-2007 vide Section 83 of the Finance Act, 2007, that Section 14AA of the Central Excise Act is applicable to the Service Tax, to empower the Commissioner of Central Excise, to order for cost audit by a Cost Accountant to study the abnormal legislation of Cenvat credit u/s 14AA. Hence, with effect from 28-5-2012, Section 72A has been inserted in the Finance Act, 1994, for the purpose of Special Audit under Service Tax.

On perusal of the provisions of Section 94 of the Service Tax Act, it is evident that the Central Government is power to make Rules for carrying out provisions of Chapter V i.e. Rules can only be framed for the provisions which are noted in Chapter V of the Finance Act, therefore, 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 5A 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.

Further, learned counsel for the petitioners-assessees relied on the ratio laid down in the following cases:--

(a) Union of India (UOI) and Others Vs. S. Srinivasan, . In Para 21, it was observed that:

At this stage, it is apposite to state about the rulemaking powers of a delegating authority. If a rule goes beyond the rule-making power conferred by the statute, the same has to be declared ultra vires. If a rule supplants any provision for which power has not been conferred, it becomes ultra vires. The basic test is to determine and consider the source of power which is relatable to the rule. Similarly, a rule must be in accord with the parent statute as it cannot travel beyond it.

(b) Kusum Ingots and Alloys Ltd. Vs. Union of India (UOI) and Another, . In Para 22, it was observed that:

The Court must have the requisite territorial jurisdiction. An order passed on a writ petition questioning the constitutionality of a parliamentary Act, whether interim or final keeping in view the provisions contained in clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject of course to the applicability of the Act.

(c) General Officer Commanding-in-Chief and Another Vs. Dr. Subhash Chandra Yadav and Another, . In Para 14, it was observed that:--

This contention is unsound. It is well settled that rules framed under the provisions of a statute form part of the statute. In other words, rules have statutory force. But before a rule can have the effect of a statutory provision, two conditions must be fulfilled, namely, (1) it must conform to the provisions of the statute under which it is framed; and (2) it must also come within the scope and purview of the rule making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void. The position remains the same even though sub-section (2) of Section 281 of the Act has specifically provided that after the rules are framed and published they shall have effect as if enacted in the Act. In other words, in spite of the provision of sub-section (2) of Section 281, any rule framed under the Cantonment Act has to fulfil the two conditions mentioned above for their validity. The observation of this Court in Jestamani Gulabrai Dholkia and Others Vs. The Scindia Steam Navigation Company, Bombay and Others, , relied upon by Mr. Aggarwal, that a contract of service may be transferred by a statutory provision, does not at all help the appellants. There can be no doubt that a contract of service may be transferred by statutory provisions, but before a rule framed under a statute is regarded a statutory provision or a part of the statute, it must fulfil the above two conditions. Rule 5C was framed by the Central Government in excess of its rule making power as contained in clause (c) of Sub-section (2) of Section 280 of the Cantonment Act before its amendment by the substitution of clause (c); it is, therefore, void.

Learned counsel also informs to the Hon''ble Court that the Hon''ble Delhi High Court in Writ Petition No. 3774 of 2013 has granted interim order to maintain the status-quo in the identical case.

Learned counsel submits that whether the order is interim or final, it will have the effect throughout the territory of India. The petitioners-assessees also referred the judgment dated 26-9-2012 of the Calcutta High Court in Writ Petition No. 21053 (W) of 2011 SKP Securities Ltd. Vs. Deputy Director (Ra-IDT), on the similar issue, wherein it was held that CAG has no power to conduct Service Tax audit of private enterprises, which is not funded by Government. Lastly, he made a request that the impugned Rule may kindly be declared as ultra vires to the statute and he also made a request to set aside the impugned notice.

On the other hand, Sri K.C. Kaushik, learned Additional Solicitor General of India; Sri Alok Mathur, Advocate and Sri A.K. Chaturvedi, Advocate, for the Union of India as well as Sri Rajesh Singh Chauhan, learned counsel for the opposite parties No. 2 to 4 has argued the case.

Sri K.C. Kaushik, learned Additional Solicitor General of India, at the strength of written note, submits that the Rule is not inconsonance to Section 72A 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 Controller 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.

It is also a submission of the learned 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. So, the arguments advanced by the learned counsel for the petitioners-assessees is vague.

Further, he submits, at the strength of written note, that the audit will be conducted by a qualified Chartered Accountant registered with the Institute of Chartered Accountant of India and as per law.

We have heard both the parties at length and gone through the material available on record.

Section 72A of the Finance Act, 1994, on reproduction, read as under:--

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 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.

(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.

Explanation.--For the purposes of this section,--

(i) "chartered accountant" shall have the meaning assigned to it in clause (b) of sub-section (1) of Section 2 of the Chartered Accountants Act, 1949; (38 of 1949);

(ii) "cost accountant" shall have the meaning assigned to it in clause (b) of sub-section (1) of Section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959).

(Emphasis Added)

The above-mentioned section is applicable, where the assessee is not maintaining the books of account properly to ascertain the liability of the Service Tax. To determine the correct tax, books will have to be examined and if need be, audited by a qualified Chartered Accountant.

It may be mentioned that the accounts will be audited by a Chartered Accountant or a Cost Accountant to be appointed by the Commissioner. In Clause (2) to Section 72A of above, it is mentioned that the Chartered Accountant or Cost Accountant will submit a report duly signed and certified by him to the said Commissioner. In Clause (4), it is mentioned that "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". Copy of the audit report may be made available to the assessee and a proper opportunity will also be provided to him, as per law.

Rule 5A of the Service Tax Rules, 1994 is just to facilitate the above-mentioned provisions. On reproduction, it read as under:--

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, u/s 44AB of the income tax Act, 1961 (43 of 1961), for the scrutiny of the officer or audit party, as the case may be.

(Emphasis Added)

Rule 5A, 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.

From the above, 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, u/s 142(2A) of the Income Tax Act, 1961, for the scrutiny of the officer or the Audit Party, as the case may be.

Thus, we find that there is no inconsistency in Rule 5A and Section 72A 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.

Needless to mention that identical provision i.e. special audit is also available in the Income Tax Act, 1961. The Audit Manual, 2011 is for the departmental use and just to facilitate the classification of the material collected from the assessee.

In view of above, 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.

In the light of above discussion, the prayer for challenging the vires is hereby dismissed.

Regarding setting aside of the impugned intimation, it may be mentioned that through the impugned intimation, the Commissioner has asked its officer to collect the material from the assessee for the purpose of audit. The books of accounts/records of the assessee are required by the Chartered Accountant.

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. Moreover, against the intimation, this Court is not inclined to interfere under Article 226 of the Constitution of India, specially, when the final assessment order will be a subject matter to an appeal. Hence, the second limb of the argument has no merit and the same is hereby rejected. In the result, all the writ petitions filed by the petitioners are hereby dismissed.