Service tax audit by dept u/s 94(2)(k)

1. For the period on or after 6th of August 2014 after Amendment of Finance Act 1994 by central Govt. by inserting section 94(2)(k) by section 114(J) of the Finance Act, 2014 dated 6th  August 2014,following to be noted

Section 94 of the Finance Act, 1994 deals with rule making powers of the Central Government in relation to Service Tax. Sub-section (2) of section 94, dealing with specific purposes for which rules can be made, was amended with effect from 06.08.2014, vide Section 114(J) of the Finance Act, 2014 dated 6th August 2014, and a new clause (k) was added to sub-section (2) of section 94, which is reproduced below –

1. “(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”

Further Dept. has clarified that the word “verified” used in Sec.94(2)(k) includes Audit also, by issuing Circular No. 181/7/2014-Service Tax Dated 10th December, 2014 & the judgment on Travelite (India) Vs. Union of India & Ors. [W.P. (C) 3774/2013, C.M. No. 7065/2013 has been distinguished with clear statutory backing for the rule 5A by introducing section 94(2) (k) of the said Act.

1. Finance Act 1994 being substantive law & section 94(2) (k) of Finance Act 1994 is silent about the retrospective applicability presumed to be prospective effect only. With reference to the Section 94(2)(k) introduced vide section 114(j) of the Finance Act 2014 w.e.f 06.08.2014, it is to be noticed  that, Finance Act being substantive law & since the said  section doesn’t contain any retrospective applicability cannot be applied retrospectively for a period before 6th August 2014.In order to justify this outlooks we have to reiterate some of the judgment’s decisions by the different Honorable Courts of India and the correct interpretation of the statute.

1. In Hitendra Vishnu Thakur v. State of Maharashtra, the Honorable  Supreme Court stated that the ambit and scope of an amending Act and its retrospective operation as follows :

"(i) A statute which affects substantive rights is presumed to be prospective in operation unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible, is presumed to be retrospective in its application, should not be given an extended meaning and should be strictly confined to its clearly defined limits.

(ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal even though remedial is substantive in nature.

(iii) Every litigant has a vested right in substantive law but no such right exists in procedural        law.

(iv) the procedural statute should not generally speaking be applied retrospectively where the result would be to create new disabilities or obligations or to impose new duties in respect of transactions already accomplishe

(v) A statute which not only changes the procedure but also creates new rights and liabilities shall be construed to be prospective in Operation unless otherwise provided, either expressly or by necessary implication."

1. In Garikapati Veeraya v. N. Subbiah Choudhry, the Honorable Supreme Court stated that "The golden rule of construction is that, in the absence of anything in the enactment to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act was passed."

Further

1. In the Maxwell’s Interpretation of Statutes, 12th Edn. the statement of law relating to its operation is stated as: "Perhaps no rule of construction is more firmly established than thus - that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matters of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only. The rule has, in fact, two aspects, for it, "involves another and subordinate rule, to the effect that a statute is not to be construed so as to have a greater retrospective operation than its language renders necessary”.

1. The Cardinal Principle of construction of a statute is that every statute was prima facie a prospective “unless it is expressly or by necessary implication made to have retrospective operation”. When a procedural law is considered it is always retroactive i.e. came into effect from past date so the question of retrospective operation shall arise in substantive laws only.

1. And in a criminal case of  Ratan Lal Vs.State of Punjab  The Honorable Supreme Court by a majority of 2 to 1 held that the rule of beneficial interpretation required that an ex-post facto law which beneficial to the accused is not prohibited by clause (1) of Article 20.

So by observing the opinions of Supreme Judiciary in India on prospective and retroactive laws, a conclusion may be drawn in such a way that only substantive civil laws can be operated retrospectively if the statute specifically prescribes it or there exists large interest of the public as whole otherwise all statutes shall be operated retroactively.

Finance Act being substantive law any amendment or addition to the said law implication made to have only prospective operation unless specifically stated. Issue of any notice, circular, guideline etc., contrary to statutory laws cannot be enforced since the parent statute doesn’t authorized for that period in this regard, hence any audit intimation letter under Sec 94(2)(k) of the Finance Act 1994 for a period before the power confirmed by the statute is void ab-initio. It cannot be treated as irregular exercise of power, it is the power exercised for a period in which doesn’t have power at all.

1. In the view of the above mentioned cases and interpretation of the statute we herewith summaries the reply to the audit initiation letter as follows:

1. For the period up  to 5th August 2014 Audit under Rule 5A can be enforced only under Section 72A & Section 94(2)(k) cannot be invoke.

1. For the period from 6th August 2014 to September 2014 are open for Audit by the dept.

1. Further It was also to be noted on relying on the decision in case of Sahara India v. CIT (2008) 14 SCC 151 that an audit carries civil consequences, hence the same cannot be ordered without indicating the reasons for the audit to the assesse.