13 August 2014 | Volume 7 Issue 7
Service tax audit by tax authorities – valid or ultra vires?

This indirect tax update is with respect to service tax audits being undertaken by the tax authorities for selected assessees. Rule 5A(2) of the Service Tax Rules, 1994, and various instructions issued for conducting audits allow the officers to visit the premises of the assessees to collect data, scrutinise transactions, etc.

In this context, recently the validity of Rule 5A of the Service Tax Rules, 1994, was challenged in the case of Travelite (India) vs Union of India and Others W.P.(C) 3774/2013 (Delhi High Court), wherein, the Delhi High Court has held as under:
  • Audit could be conducted only in specified circumstances such as if there is reason to believe that tax has not been paid appropriately, wrong credit has been availed and utilised, there are chances of fraud, etc. as specified under Section 72A of the Finance Act.
  • There is no provision extending the power for a general audit that every assessee may be subjected to on demand.
  • Power stipulated under Rule 5A(2) of Service Tax Rules, 1994, along with the Central Board of Excise and Customs' (CBEC) instructions, to access the premises of the assessees and review documents cannot override the Act. Rules or instructions cannot be issued in contravention of the statutory provisions.
  • Accordingly, as there is no power for conducting such an audit under the Service Tax Act, the High Court held that a service tax audit cannot be undertaken by the tax authorities.
Prior to this judgement, in the case of M/s ACL Education Centre (P) Ltd and others [2014 (1) (Allahabad HC)], the Allahabad High Court had held that the power to conduct the audit is vested with the Chartered/Cost Accountants under Section 72A of the Act and the officer may collect the material and documents required for this purpose, but cannot undertake the audit. Subject to these observations, the validity of Rule 5A(2) of the Service Tax Rules, 1994, was upheld. According to this ruling, the audit can be conducted by Chartered/Cost Accountants but not by tax officers.
SKP's Comments
This ruling of Travelite (India) is crucial as it will impact the ongoing audits being conducted by the tax authorities. However, at present, it is observed that in spite of the aforesaid rulings, the tax authorities are continuing to conduct audits of assessees. 

In view of the aforesaid judgments, which curtail the power of the tax authorities, it is expected that g
oing forward, the Act could be amended to grant them with the power to conduct audits.

You can refer to the judgment by clicking
here. It is worth evaluating whether the tax authorities' ongoing audits should be questioned or challenged in view of the High Court ruling.

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