Delhi High Court Upholds Power of Service Tax Department to Conduct Service Tax Audits

Delhi High Court Upholds Power of Service Tax Department to Conduct Service Tax Audits

The Delhi High Court on 3rd November, 2020, two judges bench comprising of, Hon'ble Justices Sanjeev Narula and Manmohan dismissed the petition in the case of Vianaar Homes Private Limited vs Assistant Commissioner, Central Goods & Services Tax. The Delhi High Court observed that Section 17(2)(e) of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017) empowers the authorities to institute any investigation, inquiry, verification, assessment proceedings, adjudication, etc. under Rule 5A of the Service Tax Rules.

In the present petition, a challenge was laid for the jurisdiction, authority and legality of the action of the Respondents initiated in terms of Rule 5A of the Service Tax Rules, 1994, read with Section 174(2)(e) of the CGST Act, for conducting audit/verification of documents and records at the business premises of the Petitioner.

The Petitioner, Vianeer Homes Pvt. Ltd is a company which was engaged in the business of construction of residential complexes since its incorporation.

The officers of Central Goods and Service Tax, Audit-II visited the business premises of the petitioner and had directed to produce certain documents upon which information in relation to the disputed period were sought. Further, the officers had also demanded information relating to several group companies of the petitioner, however despite petitioner's compliance the officers visited the premise again.

The petitioner had challenged the letter by virtue that respondents have commenced the audit, on the ground that same the is void ab initio, being wholly without jurisdiction as well as without any statutory or legal authority. The petitioner contended that, respondents exercising powers under Rule 5A of the Service Tax Rules, 1994 are not the proper officers. Therefore, the respondents are exercising powers beyond the purview of Rule 5A of the Service Tax Rules.

The primary concern of the petitioner was that the action of respondent was found on the premise that, they cannot take recourse to a sub-ordinate legislation i.e. Rule 5A Service Tax Rules, 1994 framed under Chapter V on the Finance Act, 1994, which by virtue of Section 173 of CGST Act stood omitted. Therefore, the petitioner asserted that, the repeal and saving provision in relation to Section 174 does not specifically save Rule 5A of the Service Tax Rules, 1994. In addition to this the petitioner contended that the saving provision and Section 6 of the General Clauses Act, 1897 saves only those cases where the obligation or liability stood incurred or accrued prior to the date of repeal.

The court after examining the facts noted, the obligation to pay service tax arose at the time of rendering taxable service, which fell during the disputed period, at which time Chapter V was very much inexistence and was in force.

The court for the effect of General Clauses Act stated, "the law empowers the Government to notify a person other than the service provider to pay the service tax. Service tax was originally levied only on a few services, but w.e.f. 01.07.2012, the service tax regime was based on the concept of "Negative List", which meant that all services, except those which found mention in the list were amenable to service tax. Besides service tax, the indirect taxes in our tax system included excise duty, value added taxes, etc. Recently, the centre and the states jointly decided to revamp the indirect tax structure."

The court reasoned with the concept of legislative intent of the saving provision. The CGST laws thus re-enact the indirect taxes, including service tax and excise duty, but in a fundamentally altered form. The concepts of service tax, excise duty or VAT, no longer exist in their original form under the new system of taxation.

The Court further stated, "after the repeal of the erstwhile legislations, with effect from the date of commencement of GST laws, most of the indirect taxes (including service tax), have ceased to exist and have resurrected in the unique form of GST. As we moved into a new system, the legislature ensured that the repealed laws are saved for a smooth transition. It provided an extensive saving clause under the CGST Act. Despite the elaborate saving clause, the Parliament in its wisdom also added a subsection (3) to section 174."

Thus, the court having regard to the language used in the saving clause of the CGST Act as well as Section 6 and 24 of the General Clauses Act, along with legislative intent behind the repeal and enactment, held that Rule 5A of Service Tax Rules, 1944 framed under the repealed or omitted chapter V of the Finance Act, 1994 was saved and dismissed the petition accordingly.

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