Officers given statutory powers to conduct audit

Updated: February 03, 2015 2:59 PM

'We are a private limited company providing marketing services and registered with the service tax department'...

We are a private limited company providing marketing services and  registered with the service tax department. We have received a notice dated 15 December 2014 from the service tax department, asking us to furnish certain documents/information. We understand that the Delhi High Court has in the case of M/s Travelite (India) v UOI held that departmental officers do not have the power to conduct an audit. Please let us know if our understanding is correct and whether we are required to submit copies of the documents/provide the information mentioned in the audit notice.

Vide the Judgment in the case of M/s Travelite (India) vs UOI reported as 2014-TIOL-1304-HC-DEL-ST, the Delhi High Court while holding Rule 5A(2) of the Service Tax Rules, 1994 as ultra vires the Finance Act, 1994, held that the Finance Act does not authorise a general audit of the type envisaged in Rule 5A(2) of the service tax rules and only special audit can be undertaken if the circumstances outlined in Section 72A of the Finance Act are fulfilled. It was further held that Service Tax Audit as envisaged in Rule 5A (2) of the service tax rules does not have appropriate statutory backing of the Finance Act.

Section 94 of the Finance Act, which deals with the rule-making power of the central government, was amended vide the Finance Act, 2014. Section 94(2)(k), which reads as under, was inserted in the Finance Act, “(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.”

In exercise of the power granted under the said Sec 94 (2)(k) of the Finance Act, the Centre has issued Notification No. 23/2014 dated December 5, 2014 vide which Rule 5(A)(2) has been inserted in the Service Tax Rules. As per Rule 5(A)(2), every assessee is required to make available on demand certain specified documents to the officer empowered/audit party deputed by the Commissioner or the Comptroller or Auditor General of India or a Cost Accountant/Chartered Accountant nominated under Section 72A of the Finance Act.

Therefore, in light of the said changes, the departmental officers have been empowered to demand certain specified documents from the assessees. These documents are as under: Records maintained or prepared under Rule 5(2) of the Service Tax Rules; Cost audit reports under Section 148 of the Companies Act, 2013; and Income tax audit report, if any, under Section 44B of the Income Tax Act, 1961.

Circular 181/7/2014-service tax dated December 10, which states that in case of Travelite India, the High Court had quashed Rule 5A(2) of the Service tax rules on the ground that the powers to conduct audit envisaged in the rule did not have appropriate statutory backing. This judgment can now be distinguished as a clear statutory backing for the rule now exists in section 94(2)(k) of the said Act.

Therefore, it is advisable that the information/documents as mentioned above, should be furnished to the department, as the decision of the Delhi High Court has been overcome by the introduction of Section 94(2)(k) of the Finance Act and insertion of Rule 5A(2) in the Service Tax Rules.

Service tax burden on intermediaries still holds

This refers to your reply in this column on Dec 5, ‘Liability to collect tax is on service provider.’ It appears you are not aware of the judgement given in the Microsoft case recently, where the commission earned by the Indian unit is freed from the levy of any service tax (ST). There is no jurisdiction for such a levy on a foreign entity. Representations have already been made to quash the service tax amendment to ‘place of provision’ vide notification no.14/2014_ST dated 11th July 2014. This notification is clearly a bureaucratic lapse and untenable. Industry has made representation to the concerned minister in this regard.

The authors seem to be confused in their reply and why should any foreign supplier pay an Indian tax and ipso facto will any government establishment when importing any equipment pay a ST to the supplier if that country levies such a quixotic ST. The latest info is that the ministry is quashing the order referred here.

The decision of the larger bench of the CESTAT, in the case of Microsoft India, is in the context of statutory provisions existing prior to the introduction of the Place of Provision of Services Rules, 2012 (including amendments thereto). Thus, in the authors’ view, the said decision may have limited or no relevance in the present scenario. Practically, it is correct that the amendment made recently in the Place of Provision of Services Rules  has led to an additional service tax burden of 12.36% on the intermediaries (or indirectly, on the foreign customer, where the customer agrees to bear the same), and the industry has been making strong representations to concerned government authorities, including the CBEC, to delete the provisions which deem the place of provision of services by intermediaries (such as indenting marketers) to foreign clients to be in India. However, prima facie, the government has the powers to make such rules under Sec 94 of the Finance Act, 1994 and hence, till the time the said statutory provisions are not amended/deleted, the levy of service tax on intermediaries appears to be legally enforceable.

The replies do not constitute professional advice. Neither EY nor FE is liable for any action taken on the basis of these replies.

Sarika Goel and Neha Kishore

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