In a judgment dated 4 August, in the case of Travelite (India) v Union of India & Ors, Delhi High Court struck down rule 5A(2) of the Service Tax Rules, 1994, which required production of records and documents by an assessee to the audit party, as ultra vires the rule-making power conferred by the Finance Act, 1994. Simultaneously, the court struck down an instruction issued by the Central Board of Excise and Customs, dated 1 January 2008, which stipulated the modalities of conducting the audit, stating that an instruction cannot widen the scope of the law.
Allowing the writ petition, the high court consequently quashed the letter from the Commissioner of Service Tax calling on the assessee to supply records for scrutiny.
Travelite challenged the validity of rule 5A(2), contending that the act does not contain any substantive power to call for records for scrutiny under rule 5A(2) and that such power is available only when a special audit is ordered by recourse to section 72A of the act.
The respondent attempted to justify the introduction of rule 5A by stating that the rule was made pursuant to the power conferred under section 94 and not pursuant to section 72A of the act. The respondent further argued that the Service Tax Audit Manual, 2011, is also a basis for conducting an audit.
The high court observed that section 72A envisages an audit of records only in special circumstances and that the law is well settled that a rule acquires statutory force only when it conforms to the provisions of the statute under which it is framed. The “generality” of the rule-making power conferred under section 94 is thus only to the extent that the rules made in exercise of that power are in conformity with the provisions of the statute. Further, it was held that the Service Tax Audit Manual is merely an instrument of instructions for the service tax authorities and has no statutory force.
The emphatic judgment reiterates the well settled principle that rules (i.e. delegated legislation) can only give effect to the statute’s provisions and intent, and cannot traverse beyond the scope of the statute as was declared by the Supreme Court in Municipal Corporation of Delhi v Birla Cotton Spinning and Weaving Mills (1968).
Other high court views
Allahabad High Court, in a case involving ACL Education Centre, recently found that there is no inconsistency between rule 5A(2) and section 72A, and that rule 5A(2) is not ultra vires and is consistent with section 72A. The court categorically held that rule 5A(2) requires that every assessee shall, on demand, make available to the officer documents to facilitate an audit to examine the correctness of books of accounts and ultimately the audit will be conducted by an audit party headed by a chartered accountant/cost accountant.
Earlier, the court, on being informed of the pending writ petition in Delhi High Court in the Travelite case, had passed an interim order to maintain status quo.
Similarly, in a case involving SKP Securities, a single judge of Calcutta High Court read rule 5A(2) as being in conformity with the provisions of the act and casting an obligation on an assessee to provide documents and records for audit purposes.
These cases upheld rule 5A(2) as being in consonance with section 72A of the act. In addition, there has been some observation that the Comptroller and Auditor General of India (CAG) has no power to audit records of a private assessee. The judgment in SKP Securities has been referred to the division bench.
The Travelite judgment effectively lays down that: (a) parliament did not intend to provide for general audit powers that every assessee may be subjected to, on demand; (b) audit under the act can be conducted only in special circumstances as specified under section 72A; (c) under section 72A, the power to conduct the audit is vested with a chartered accountant/cost accountant and departmental officers are required to collect records and documents for this purpose.
Audits under the now struck down rule 5A(2) have been widespread. Assessees’ premises have also been subject to audits conducted by audit parties deputed by the CAG.
The Travelite judgment gives a significant respite to assessees, which were often subjected to multiple audits and often to frivolous demands and consequential litigation based on such audits.
The Service Tax Department can be expected to carry this matter to the Supreme Court. However, in the interim, assessees can push back any such audit attempts by the department.
Ranjeet Mahtani is an associate partner and Roshni MS is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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