Central Excise Department enjoyed enormous control over the Service Tax assessees by conducting audit of their accounts, by deputed officers, empowered by the provisions contained in Section 94 of the Finance Act. Accordingly, Department conducted audit of the assessees on routine basis, without giving any reasons for the same.
The said power of the Department was challenged by a writ petition in the Delhi High Court, in the case of Mega Cabs Pvt. Ltd vs. UOI & Ors. vide writ petition W.P. (C) 5192/2015 & CM No. 9417/2015. The said writ petition challenged the validity of Rule 5A(2) of the Service Tax Rules, 1994, which directs the Department under Section 94 (2) of the Finance Act, along with Circular No. 181/7/2014-ST dated 10.12.2014. The Hon’ble Delhi High Court dispensed a landmark judgement in said case declaring that, the Central Excise and Service Tax Department is no more authorised to conduct audits of the assessees. The decision declared the Service Tax Rule 5A (2) to be ultra vires to the Finance Act, 1994.
The Court has very specifically held that the words ‘keeping records and the manner in which such records shall be verified’ as occurring in the Section 94 (2) (k) of the Finance Act, 1994 will not include audit in its scope. Therefore, the Court does not agree that the expression ‘verify’ is wide enough to permit the audit of the accounts of the assessee by any officer of the Service Tax Department. Court held that there is a distinction between auditing the accounts of an assessee and verifying their records. Audit is a special function, which has to be carried out by duly qualified persons like Cost Accountant or a Chartered Accountant, and it cannot possibly be undertaken by any officer of the Service Tax Department.
The Delhi High Court relied on the principles elucidated in case of General Officer Commanding-In-Chief vs. Dr. Subhash Chandra Yadav, which said that it is well settled law that rules framed under the provisions of a statute form part of the statute. It was established in the said case that Rules have a statutory force only when, it confirms to the provisions of the statute under which it is framed and it must also come within the scope and purview of the rule making power of the authority framing the rule. Both of the conditions have to be complied with, otherwise rule so framed would be void.
Based on the above based principles, Court concluded that Rule 5A (2) exceeds the scope of provisions under the Finance Act and therefore it is ultra vires. Thus, it was struck down to this extent. Expression ‘verify’ cannot be construed as audit of accounts of assessee and therefore Rule 5A (2) cannot be sustained with reference to Section 94(2)(k) of Finance Act. Circular No. 181/7/2014-ST dated 10.12.2014, 995/2/2015-CX dated 27.02.2015 and Service Tax Audit Manual 2015 issued by DG of Audit was declared to be ultra vires to Finance Act and was struck down as having no statutory backing. In view of the above judgement, Delhi High Court declared the power to conduct audit of accounts of the Service tax assessees as unconstitutional in eyes of law.