Audit under Service Tax by the Departmental Officers

In the case of M/s Travelite (India) (2014-TIOL-1304-HC-DEL-ST), the Hon’ble High Court of Delhi on 04 August 2014 had quashed Rule 5A (2) of the Service Tax Rules, 1994 on the ground that the powers to conduct audit by the departmental officers conferred in the rule did not have appropriate statutory backing. Therefore, the audit of the service tax assessees could not be done by the departmental officers. Even, the Hon’ble Allahabad High Court in the case of ACL Education Centre Pvt. Ltd. and Ors. Vs. Union of India (2014 (1) TMI 1562 – ALLAHABAD HIGH COURT) has held that the Audit under Service tax is to be conducted by Chartered Accountants/ Cost Accountants only and not by officers of the Department. Further, the Hon’ble Calcutta High Court in the case of SKP Securities Ltd. Vs. DD (RA-IDT) and Ors. 2013 (1) TMI 549 – CALCUTTA HIGH COURT has also held that no Audit of private assessee can be undertaken by CAG under Rule 5A(2) of the Service Tax Rules.

To overcome these judgments, Central Government vide the Finance (No. 2) Act, 2014 has inserted a new clause (k) in sub-section (2) of Section 94 of the Act with effect from 6 August 2014 which is reproduced as below:

“k) 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.”

Thereafter, in exercise of the powers conferred by clause (k) of sub-section (2), read with sub-section (1) of Section 94, Central Government vide Notification No. 23/2014-ST dated December 5, 2014 had substituted Rule 5A(2) of the Service Tax Rules, thereby nominating a Chartered Accountant or a Cost Accountant along with an officer authorised by the Commissioner or the Audit Party deputed by the Commissioner or CAG to conduct Service Tax Audit.

Now, Circular No. 181/7/2014-ST dated 10th December, 2014 is issued by the revenue to clarify the scope of clause (k) newly inserted in sub-section (2) of Section 94. The Circular in point 3 clarified that “It may be noted that the expression “verified” used in section 94(2)(k) of the said Act is of wide import and would include within its scope, audit by the departmental officers, as the procedure prescribed for audit is essentially a procedure for verification mandated in the statute.”