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August 31, 2020

Is Service Tax Audit under GST permissible?

by CA Shivam Jaiswal in GST, GST Circular Notification

Is Service Tax Audit under GST permissible?

Rule 5A of the Service Tax Rules, 1994 pertains to Access to registered premises. According to Rule 5A(1), An officer authorised by the Principal Commissioner or Commissioner shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.

According to Rule 5A(2), Every assessee shall, on demand make available to the officer empowered under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, or a cost accountant or chartered accountant nominated under section 72A of the Finance Act, 1994,-

  • the records maintained or prepared by him
  • the cost audit reports, if any
  • the income-tax audit report, if any

for the scrutiny of the officer or the audit party, or the cost accountant or chartered accountant, within the time limit specified by the said officer or the audit party or the cost accountant or chartered accountant, as the case may be.

In the case of Aargus Global Logistics Pvt. Ltd. vs. Union of India & Anr (Delhi High Court), where the the issue raised was whether the authorities were empowered to conduct a service tax audit or not under GST?

Petitioner had petitioned to seek directions quashing Rule 5A of the Service Tax Rules, 1994 by declaring that it is in conflict with various provisions of the Finance Act, 1994, and that it was beyond the rule-making power of Respondent. According to the Petitioner, Rule 5A of the Service Tax Rules, 1994 lapsed w.e.f. 01.07.2017 i.e. after introduction of the CGST Act 2017.

Facts of the Case

  • Petitioner was a company engaged in the business of providing freight forwarding services to its clients.
  • For the purpose of service tax, the Petitioner had a centralized registration with the service tax department at Delhi.
  • The Respondents had served a notice on the Petitioner under Rule 5A of the Service Tax Rules, 1994
  • Petitioner wanted Rule 5A of the Service Tax Rules, 1994 be declared in conflict with the provisions of the Finance Act, 1994 and beyond the rule making power of Respondent

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Observations of HC on the contention of the petitioner that Central Government lacked the authority and competence to frame Rule 5A

  • Section 94 of the Finance Act, 1994 contains the rule making power of the Central Government
  • From Section 94 of the Finance Act, 1994 it can be seen that the Central Government has been empowered to make Rules for carrying out the provision of Chapter 5 of the Finance Act, 1994, which contains the provisions in relation to levy of service tax.
  • Therefore, the Central Government is empowered to make rules with a view to enforce and recover service tax.
  • The Parliament while setting out the specific matters, in respect of which Rules may be framed, preserved the general Rule making power of the Central Government.
  • The only statutory limitation placed on the said Rule making power was that the Rule(s) should be framed for the purpose of enforcing the service tax regime.
  • Therefore, the power of the Central Government to frame rules for carrying out the provisions of the service tax regime was exhaustive and there was nothing to suggest that the said power did not cover the power to frame a Rule as Rule 5A.
  • All that Rule 5A does is to empower an Authorized Officer to have access to any premises registered under Service Tax Rules for the purpose of carrying out scrutiny, verification and checks as may be necessary to safeguard the interest of Revenue.
  • It also obliges every assessee to make available to the officer, the audit party, the Comptroller and Auditor General of India, Cost Accountant or Chartered Accountant to produce the enumerated records and documents for scrutiny within the specified time limit.
  • Without such power in the Authorized Officer and corresponding obligation on the assessee, it would be impossible for the officers charged with the responsibility of enforcing the Finance Act, 1994, to effectively enforce the provisions of the said Act.
  • The power vested in the Competent Authorities to recover service tax not levied or paid, or short levied or short paid, or erroneously refunded would remain inoperative, if the Competent Authority under the Act was not empowered in terms of the Rule 5A.
  • Thus, HC rejected the submission of the Petitioner that the Central Government lacked the authority and competence to frame Rule 5A.

Observations of HC on the contention of the petitioner that rule 5A of the Service Tax Rules does not survive the enactment of the CGST Act

  • Provisions under the Service Tax Law stood omitted by Section Sections 173 of the CGST Act. Section 174 of the CGST Act pertains to repeal and savings provisions
  • The submission of the Petitioner was that Chapter V of the Finance Act, 1994 (which brought in the service tax regime) stood omitted. Thus, the provisions of Chapter V of the Finance Act, 1994 did not survive the enactment of the CGST Act.
  • However, what was not affected by the omission of Chapter V of the Finance Act, 1994, was the “duty, tax, surcharge, fine, penalty, interest” which were due, or may become due even after the enactment of the CGST Act and the omission of Chapter V of the Finance Act, 1994.
  • Section 194(e) expressly empowered the Competent Authorities to initiate and institute fresh proceedings under the omitted chapter V of the Finance Act, 1994 and the rules framed there under, despite the said omission by Section 173 of CGST Act.
  • There was nothing to suggest that the “duty, tax, surcharge” etc. should relate to proceedings initiated under Chapter V of the Finance Act, 1994 before the coming into force of the CGST Act, and not to proceedings initiated under the enactments after the coming into force of the CGST Act.
  • If the submission of the Petitioner were to be accepted, it would mean that all evasions of service tax and all infractions of the provisions of the Finance Act, 1994 which remained suppressed and uninvestigated up to the point of time when the said Chapter V of the Finance Act was omitted and when CGST Act was enacted, would go uninvestigated without the violators of the law being brought to justice.
  • According to the HC, that was clearly not the intent and there was nothing to show that the Parliament intended to grant blanket immunity to all assessees whose past acts and omissions may, otherwise, fall foul of the provisions of Chapter V of Finance Act, 1994.
  • On the contrary, it was clear that the intention of the Parliament was clearly to save not only ongoing investigation, inquiry, verification etc. but also to specifically enable the initiation of fresh investigation, inquiry verification etc. in respect of acts and omissions relating to inter alia, the erstwhile service tax regime.

Observations of HC on the contention of the petitioner that there was no provision in Section 174 to save the Service Tax Rules

  • The failure of the Parliament to mention the word “Rules”, along with the Finance Act, 1994 in Section 174 (2), according to the Petitioner, meant that the Service Tax Rules were not saved even for the purpose of enforcing the saving provisions.
  • HC found this submission to be completely meritless.
  • The Parliament had omitted Chapter V of the Finance Act, 1994 by amending the same. Chapter V of the Finance Act, 1994 remained on the statute book till the enforcement of the CGST Act.
  • To the extent the provisions of Chapter V of the Finance Act, 1994 are saved, they do not stand omitted by amendment of the Finance Act, 1994.
  • Rules under Chapter V of the Finance Act, 1994, were framed to carry out the provisions of Chapter V of the Finance Act, 1994. Without the said Rules, the provisions of Chapter V of that Act itself could not be worked.
  • The Service Tax Rules were framed under Chapter V of the Finance Act, 1994. Those rules are, therefore, saved by Section 174 (2)(b) which states that, anything duly done under the Chapter V of the Finance Act, 1994 shall not be affected by the amendment of the Finance Act, 1994. Thus, the amendment of the Finance Act, 1994 does not affect the Service Tax Rules.
  • Section 6 of the General Clauses Act which deals with “effect of repeal”. According to Section 6, the repeal shall not-
  • revive anything not in force or existing at the time at which the repeal takes effect; or
  • affect the previous operation of any enactment so repealed or anything duly done or suffered there under; or
  • affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed; or
  • affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or
  • affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid,
  • and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed.
  • Section 174 of the CGST Act expressly seeks to preserve the powers of the Competent Authorities to institute investigation, inquiry etc.
  • In fact, even if Section 174 (2) of the CGST Act were not to expressly so provide, the said power of the Competent Authorities stood preserved by virtue of Section 6 of the General Clauses Act.

Observations of HC on the contention of the petitioner that under Rule 5A(2) only specified documents could be called for and not the documents as sought by the Respondents

  • HC did not find any merit in this submission as well. Rule 5A(2) of the Service Tax Rules, as noticed hereinabove, empowers the Competent Officer to demand records maintained or prepared in terms of Rule 5(2).
  • The assessee was required to maintain and provide all the records prepared or maintained by it for accounting of transactions with regard to providing of any service, receipt or procurement of input services and payment for such input services, receipt, purchase, manufacture, storage, sale or delivery, as the case may be, in regard to inputs and capital goods, other activities such as manufacture and sale of goods, if any and all other financial records maintained by him in the normal course of business.
  • The Respondents had called for records which the Petitioner was obliged to maintain in terms of Rule 5 of the Service Tax Rules. Therefore, HC set aside that submission also.

The Delhi High Court thus ruled that the Service Tax Audit under Goods and Service Tax (GST) is permissible as Section 174(2)(e) of the Central Goods and Service Tax (CGST) Act, 2017, specifically empowers the authorities to institute any inquiry, investigation, verification, assessment proceedings, adjudication, etc. under Rule 5A of the Service Tax Rules.

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