SKP Tax Alert
17 December 2014 | Volume 7 Issue 14
CBEC Circular clarifying that Service Tax audits by Department officers has statutory backing

This is in continuation of our Tax Alert Volume 7 Issue 10 dated 20 October 2014 with respect to Audits conducted by Department officers. Circular No. 986/10/2014-CX dated 9 October 2014 clarified that under Central Excise provisions, there is adequate statutory backing for audits by Central Excise officers. This tax alert talks about the recent developments in this regard.
Since the above Circular was issued under Central Excise provisions, there was ambiguity as to whether Service Tax audits could be conducted by Department officers by drawing reference to it. Though, in the case of Travelite (India) vs Union of India and Others W.P.(C) 3774/2013 (Delhi High Court) dated 4 August 2014, it was held that an audit cannot be conducted by Department officers under Rule 5A(2) of the Service Tax Rules, 1994 (ST Rules) as the same is ultra vires the provisions and lacks statutory backing.
Following the aforesaid Circular, the Central Board of Excise and Customs (CBEC) issued Circular No. 181/7/2014-Service Tax dated 10 December 2014 along similar lines, clarifying the statutory provisions relevant for audits as under:
  • Section 94(2)(k) of the Finance Act, 1994:
    Empowers the Central Government to make rules in relation to Service Tax to provide for 'imposition, on persons liable to pay service tax, for the proper levy and collection of tax, of duty of furnishing information, keeping records and the manner in which such records shall be verified'. (introduced w.e.f. 6 August 2014)

    Emphasis is laid on the word "verified" in the aforesaid Circular stating that the same is of wide import and would include within its scope, audit by Department officers, as the procedure prescribed for audit is essentially a procedure for verification mandated in the statute.
  • Accordingly, Delhi High Court's ruling on the case of Travelite (India) would now be refuted.
  • Futher, the Government has amended Rule 5A(2) in the ST Rules, vide Notification No. 23/2014-Service Tax dated 5 December 2014, inter alia, that provides for scrutiny of records by the audit party deputed by the Commissioner or Comptroller and Auditor General of India. This rule has been substituted to incorporate the following:
  1. Reference of Chartered Accountants/Cost Accountants nominated under Section 72A of the Act is inserted, to conduct an audit under Rule 5A(2) of the ST Rules.
  2. Records to be verified would include cost audit reports, if any, under Section 148 of the Companies Act, 2013; the same was not specified earlier
  3. The time limit for making submissions of documents requested for can be ascertained by the officer or audit party conducting the audit as opposed to the mandatory time limit of 15 working days specified before.
SKP's Comments
Through the said Circular, authorities have clarified that audits by Department officers has statutory backing and the provisions of Rule 5A(2) of the ST Rules cannot be held ultra vires as per the judgment of Travelite (India), as it has been negated.
However, the following ambiguities related to Service Tax audit still need to be addressed:
  • With Rule 5A(2) of the ST Rules being substituted and the new rule taking effect on 5 December 2014, are the powers vested to conduct audits by Department officers are valid only post the amendment?
  • What is the legal fate of Service Tax audits initiated or conducted before 6 August 2014 ie before the power being granted by the Central Government to request for information and other records, and the specified process of verification? Would it be void as per the judgment of Travelite (India) or be considered valid?
  • Would an assessee have the right to challenge the validity of a Service Tax audit report issued before 6 August 2014?
We hope you find the above information useful. Please feel free to get in touch with us if you need any assistance.

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