Rule 5-A(2) of Service Tax Rules, 1994 struck down as ultra vires the Finance Act, 1994

Delhi High Court: Disposing of the petition, wherein the challenge was to Rule 5-A(2) of the Service Tax Rules, 1994 [as amended by the Service Tax (Third Amendment) Rules, 2014] to the extent that the amended Rule 5-A(2) empowered departmental officers or audit party deputed by the Commissioner or the Comptroller and Auditor General of India to “demand” production of documents mentioned therein, which is in conflict with Section 72-A of the Finance Act beyond the rule-making power of the Central Government, in a landmark judgment the Court held that the Central Government cannot arrogate to itself powers which were not contemplated to be given to it by Parliament, in the garb of rule-making power.
The petitioner also challenged the constitutional validity of Section 94(2)(k) of the Finance Act and the Circular issued by CBEC as ultra vires. Mr J.K. Mittal, petitioner’s counsel contended that firstly, Rule 5-A(2) expands the list of officers who could seek production of records and none of the safeguards spelt out in Section 72-A are required to be made by the officers under Rule 5-A(2) giving “wide unguided powers” to the officers. Secondly, Section 94(2)(k) of the Finance Act “suffers from the vice of excessive delegation”. Thirdly, the CBEC Circular had no statutory basis. To which Senior Counsel Mrs Sonia Sharma for the respondents contended that Rule 5-A(2) had to be read in continuation with Sections 72, 73, 73-A of the Act and that Section 94(2)(k) only acts as a check on the general powers under unamended Rule 5-A.
Both the notification dated December 28, 2007 inserting Rule 5-A as well as the CBEC Instructions dated January 1, 2008 were challenged in Travelite (India) v. Union of India, 2014 SCC Online Del 3943, whereby the Division Bench of the Delhi High Court struck down Rule 5-A(2) as being ultra vires Section 72-A read with Section 94(2) of the Finance Act. This decision was subsequently stayed by the Supreme Court in a SLP preferred by the Union of India. In the meanwhile the Rules were amended. The Court however in the present petition, examined the constitutional validity of amended Rule 5-A(2) and the circulars and leter in question independent of the decision in Travelite.
The Division Bench comprising of S. Muralidhar and Vibhu Bakhru, JJ. held that Rule 5-A(2) cannot be sustained with reference to Section 94(2)(k) of the Finance Act as the expression “verify” in Section 94(2)(k) cannot be construed as audit of the accounts of an assessee. The Court observed that there is a distinction between auditing the accounts of an assessee and verifying the records of an assessee. Audit is a special function which has to be carried out by duly qualified persons like a Cost Accountant or a Chartered Accountant. It cannot possibly be undertaken by any officer of the Service Tax Department.
The Court categorically held that it had no hesitation in concluding that Rule 5A(2) exceeds the scope of the provisions under the Finance Act. This is the result whether Rule 5-A(2) is tested vis-à -vis Section 72-A of the Finance Act which pertains to special audit or Section 72 which pertains to assessment or Section 73 which pertains to adjudication or even Section 82 which relates to searches. Under the garb of the rule-making power, the Central Government cannot arrogate to itself powers which were not contemplated to be given it by Parliament when it enacted the Finance Act. This is an instance of the Executive using the rule-making power to give itself powers which are far in excess of what was delegated to it by Parliament.
The CBEC Circular No. 995/2/2015-CX dated February 27, 2015 on the subject, Central Excise and Service Tax Audit Norms to be followed by the Audit Commissionerates and the Central Excise and Service Tax Audit Manual, 2015 issued by the Directorate General of Audit of the CBEC was held ultra vires the Act and held to be without statutory backing which cannot be relied upon to legally justify the audit by the officers of the Service Tax Department. [Mega Cabs Pvt. Ltd. v. Union of India, 2016 SCC Online Del 3630, decided on 03.06.2016]