In a significant ruling, the division of bench of Delhi High Court declared that Rule 5A(2) as amended in terms of Notification No. 23/2014- Service Tax dated 5 th December 2014 of the Central Government, to the extent that it authorizes the officers of the Service Tax Department, the audit party deputed by a Commissioner or the CAG to seek production of the documents mentioned therein on demand is ultra vires to the Finance Act, 1994.
The petitioner Mega Cabs Private Limited has challenged the validity of Rule 5A(2) of the Service Tax Rules, 1994 as amended by the Service Tax (Third Amendment) Rules, 2014 made by the Central Government in terms of a Notification No. 23/2014-Service Tax dated 5 th December 2014 in exercise of the powers conferred under Section 94(1) read with Section 94 (2)(k) of the Finance Act, 1994 (‗FA‘) to the extent that the amended Rule 5A(2) empowers deputing departmental officers or officers from the Comptroller and Auditor General of India (‗CAG‘) to ‘demand’ documents mentioned therein. It is contended that this is in conflict with Section 72A of the FA and beyond the rulemaking power of the Central Government.
The Petitioner has also challenged the constitutional validity of Section 94(2)(k) of the Finance Act on the ground that it gives plainly unguided and uncontrolled‖ delegated powers to the Central Government for framing rules. It is stated that Section 94(2)(k) of the FA suffers from the vice of excessive delegation.
Thirdly petitioner challenged the Circular No. 181/7/2014-ST dated 10th December 2014 issued by the Central Board of Excise and Customs stating that since a clear statutory backing for conducting audit is available under Section 92(4)(k) of the FA, the Departmental Officers would be directed to audit service tax Assessee in terms of the departmental instructions already issued.
Lastly, the petitioner challenged the letter dated 30th April 2015 issued by the Commissioner of Service Tax, Audit-1, New Delhi (Respondent No.2) informing the Petitioner that a team of officers of Circle-4, Group-1 of the said Commissionerate comprising three Superintendents and an Inspector would be verifying the relevant records of the Petitioner‘s business in terms of Rule 5A to the ST Rules read with Section 94(1), 94 (2)(k) and 94(2)(n) of the Finance Act as amended, during the first week of May 2015 for the financial years 2010-11 to 2013-14.
The bench comprising of Justice S Muralidhar and Justice Vibhu Bakhru held that “Rule 5A(2) exceeds the scope of the provisions under the Finance Act. This is the result whether Rule 5A(2) is tested vis-a-vis Section 72A of the FA which pertains to special audit or Section 72 which pertains to assessment or Section 73 which pertains to adjudication or even Section 82 which relates to searches. Under the garb of the rulemaking power, the Central Government cannot arrogate to itself powers which were not contemplated to be given it by the Parliament when it enacted the FA. This is an instance of the Executive using the rulemaking power to give itself powers which are far in excess of what was delegated to it by the Parliament”.
The Court also observed that Section 94(2)(k) does not permit the exercise of audit to be undertaken by an officer of the Department, the attempt in the circular to recognize such powers in the officers of the Central Excise and Service Tax Departments is held to be ultra vires the FA and, therefore, legally unsustainable.
The bench also held that the expression verify‘ in Section 94 (2) (k) of the FA cannot be construed as audit of the accounts of an Assessee and, therefore, Rule 5A(2) cannot be sustained with reference to Section 94(2)(k) of the FA.
Read the full text of the Judgment here.
