Controversial and debated issue of whether board (CBEC) has power to conduct service tax audit of assessee has gone into various folds recently, but now it has got finality. Department has initiated and conducted Service Tax Audit of many assessees. However there was no explicit powers given under Finance Act 1994 to conduct the service tax audit by department officials, unlike in case of Central Excise Audit as per Section 37(2)(x) of the Central Excise Act, 1944 to be conducted by Excise Department or Special Audit of Service Tax as per Section 72A of Finance Act 1994 to be conducted by CA/CMA . Hence this issue has put before judiciary to decide the impugned power of department to initiate and conduct the Service Tax Audit. High court wherein said that the issue was under consideration, has stated that department does not have authority to initiate and conduct Service Tax Audit and same is to be carried out as per Section 72A by CA/CMA.
Section 94 of Finance Act 1994 has given power to Central Government to make Rules. Said section was not empowering government to frame the rule to authorize department to conduct service tax audit by departmental officer till 6th August 2014. However Rule 5A of Service Tax Rules 1994 has vested the power to the Commissioner to appoint audit party consisting of departmental officer to conduct verification/scrutiny of records of assesses. Hence judiciary in below mentioned case, decided that Rule 5A of Service Tax Rules 1994 is ultra vires to the provisions of Finance Act 1994 and same is to be quashed away.
TRAVELITE (INDIA) VS. UOI & ORS. [W.P. (C) 3774/2013, C.M. No. 7065/2013] Pronounced on 4th Aug 2014
The Hon'ble High Court of Delhi in the case of Travelite (India) Vs. UOI & ORS. [W.P. (C) 3774/2013, C.M. No. 7065/2013] held that "Rule 5A(2) of the Service Tax Rules, 1994 is ultra vires to the provisions of the Finance Act, 1994. No Service Tax Audit can be conducted by the Department and only Special Audit within the Statute as mentioned under Section 72A of the Finance Act 1994 can be done either by a Chartered Accountant or Cost Accountant only in specified certain circumstances mentioned in said Section 72A. Service Tax Audit as envisaged in Rule 5A(2) of the Service Tax Rules does not have appropriate statutory backing"
ACL Education Centre Pvt. Ltd. & ORS. Vs. UOI [2014-TIOL-120-HC-ALL-ST] Pronounced on 19th Dec 2013
Hon'ble Allahabad High Court in the case of ACL Education Centre Pvt. Ltd. & ORS. Vs. UOI [2014-TIOL-120-HC-ALL-ST] has held that the Audit under Service tax is to be conducted by Chartered Accountants/ Cost Accountants only.
All this back to back judgments has made professional fraternity of CA/CMA happy but this dish of audit was taken away partly by government through statutory amendments. Through Finance Act 2014, government has amended Section 94 of Finance Act 1994 and vested power to Central Government form the rules for conducting audit of Service Tax by departmental official, which is quoted as under:
Section 94(2)(k) of Finance Act 1994, Substituted with effect from 6th Aug 2014:
Section 94(2)(k) – Central government has power to make rules to provide for:
"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"
With this amendment, government has made Rule 5A of Service Tax Rules 1994 alive and given appropriate statutory backing to it. It has also nullified the effect of above mentioned judgments of high courts. Government has also amended Rule 5A(2) of Service Tax Rules 1994 vide Notification No. 23/2014-ST dated December 5, 2014 , in order to make it in line with amendments in Section 94(2)(k) as mentioned above. Rule 5A is quoted below:
Rule 5A of STR 1994 as amended by Notification No 23-2014 ST dated 5th Dec 2014
"Rule 5A (1) An officer authorised by the Principal Commissioner or Commissioner as the case may be, in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue
(2) Every assessee, shall, on demand make available to the officer empowered under sub-rule (1) or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, or a cost accountant or chartered accountant nominated under section 72A of the Finance Act, 1994,-
(i) the records maintained or prepared by him in terms of sub-rule (2) of rule 5;
(ii) the cost audit reports, if any, under section 148 of the Companies Act, 2013; and
(iii) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961,
for the scrutiny of the officer or the audit party, or the cost accountant or chartered accountant, within the time limit specified by the said officer or the audit party or the cost accountant or chartered accountant, as the case may be."
To clarify the intent of above amendments, board has issued circular No 181/7/2014 dated 10th Dec 2014gv cxv:
Circular No 181/7/2014 Dated 10th Dec 2014
Board Clarified that:
1) In exercise of the rule making powers under Section 94(2)(k) of the Finance Act, 1994, the Central Government has inserted a new rule 5(A)(2) in the Service Tax Rules, 1994 vide notification no. 23/2014-Service Tax dated 5th December, 2014. This rule, interalia, provides for scrutiny of records by the audit party deputed by the Commissioner. Such scrutiny essentially constitutes audit by the audit party consisting of departmental officers.
2) Verification of records mandated by the statute is necessary to check the correctness of assessment and payment of tax by the assessee in the present era of self-assessment. 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.
3) It may also be noted that the Hon'ble High Court of Delhi in the judgment dated 04.08.2014 in the case of M/s Travelite (India) [2014-TIOL-1304-HC-DEL-ST] had quashed rule 5A(2) of the Service Tax Rules, 1994 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.
4) Departmental officers are directed to audit the Service Tax assessees as provided in the departmental instructions in this regard.
♣ Conclusion: So now law as on date is –
1) Commissioner has power to direct for Service Tax Audit of assessee by audit team consisting of Departmental officer.
2) Special Audit under special circumstances as mentioned u/s 72 of Finance Act 1994 may be directed by Principal Commissioner/ Commissioner to be conducted by Chartered Accountant/ Cost Accountant
♣ Arising Issues:
Whether Service Tax Audit initiated and conducted by departmental officer before amendment to Section 94(2)(k) that is before 6th Aug 2014 are void, in terms of various judgments of high court ? It is well settled law that unless stated expressly, any amendment to law will be prospective and will not have retrospective impact.
MUMBAI, DEC 15, 2014: THE issue before the Bench is - Whether redemption fine paid to the Customs is compensatory in nature and thus, allowable as legitimate business expenditure. YES is the answer.
Facts of the case
The assessee is engaged in the business of import and sale of goods. The assessee entered into an agreement with Export House for import of certain goods. The assessee entered into agreement with the Export House and imported a consignment of "Almonds in Shell". After the order of the Supreme Court that dry fruits could not be imported against the additional licences issued to Export Houses. The Collector of Customs, Madras confiscated the goods. The assessee made a payment of Rs. 75 lacs to Customs Authorities for releasing the goods and claimed the same as business expenditure. While making assessment of the assessee, the A.O. disallowed the payment of Rs. 75 lacs u/s 69-C on the plea that the source of expenditure was not explained. The A.O. also held that the expenditure was in the nature of fine for infraction of law.
On appeal, the CIT(A) confirmed the action of the A.O. In an appeal filed by the assessee before the Tribunal, the Tribunal allowed the appeal and restored the entire issue for reconsideration to the file of the CIT(A). In the second round, the CIT(A) confirmed the disallowance.
Before the Tribunal, the Counsel of the Assessee submitted that the amount so paid was not in the nature of penalty but was in the nature of redemption fine. It was further submitted that other consignments of almonds imported by other export houses were cleared by the Bombay Customs under identical under similar import licences. It was contended that import of almond in shell could not be said to have been prohibited goods, hence redemption fine cannot be said to have been in the nature of penalty but it was merely payment for redeeming the goods or buying back the goods from Customs. The DR submitted that as per the order, additional licences produced by the assessee were not valid for the import of dry fruits viz. almond in shell and the import had correctly been held to be unauthorized. Therefore, redemption fine cannot be said to be incurred wholly and exclusively for the purpose of business. He further contended that penalty was paid by the assessee because of his own fault.
On appeal, the Tribunal held that,
++ the import of almond was not in contravention of law in force, the goods were imported under Import Licence issued by Government authorities. It is also clear from the order of Customs Tribunal who has waived the penalty stating that the circumstances of the case do not reveal any malafides considering that there was certain amount of vagueness in the policy itself. It was further observed by the Customs Tribunal that Bombay Custom Authorities in similar instance had not imposed any penalty on the importer. The payment was made to release the goods, therefore, the same can be said to be compensatory as the Customs Authorities were recovering the difference between the market price and import cost;
++ the amount paid by the assessee to the Customs Authorities in terms of order was in the nature of redemption fine and not penalty and accordingly the same was allowable as business expenditure which enhances the cost of goods. So far as the explanation of the source of fund is concerned, we found that the payment was made by sister concern of the assessee namely through Account Payee cheque/DD. The certificate/confirmation from M/s Mangla Bros. was also given to the lower authorities. There is no reason to doubt the source of payment. The fact that the assessee is challenging the disallowance of payment made to Customs Authority clearly establishes that the same was recorded in the books of account and therefore claimed as business expenditure.
Mere decline in gross profit rate and uneven increase in exp. won't be a valid ground to reject audited book-result
December 15, 2014[2014] 51 taxmann.com 515 (Ahmedabad - Trib.)/[2014] 33 ITR(T) 230 (Ahmedabad - Trib.)
IT : Where assessee maintained regular books of account which were duly audited, decline in gross profit and disproportionate increase in expenses in certain heads cannot, by itself, be ground to reject book results
IT : Variation in consumption of fuel in relevant year does not, by itself, empower Assessing Officer to assume some undisclosed production so as to make addition to book result
IT : Electric installations that were part of plant and machinery, are eligible to depreciation as plant and machinery
CIT(A) directed to pass order after hearing assessee and examining additional evidence on violation of sec. 269SS
December 15, 2014[2014] 51 taxmann.com 507 (Panaji - Trib.)
IT : Where Commissioner (Appeals) admitted additional evidence but not called for remand report or had not examined said evidence matter was to be restored back
No reassessment due to change of opinion of AO when he failed to interpret materials disclosed during assessment
December 15, 2014[2014] 51 taxmann.com 568 (Gujarat)
IT : Reassessment to disallow exercise depreciation allowed on reappreciation of facts not justified
The issue regarding the levy of service tax on film industry with regard to the distribution and exhibition of films was examined by the Board and a Circular No. 148/17/2011-ST dated 13.12.2011 was issued wherein it was specifically clarified that wherever distributors enter into an agreement with the exhibitor or theatre owner to share revenue or profit, a new entity emerges. The said new entity either in the form of Joint Venture (JV) or Association of Persons (AOP) will be recognized as a 'person' and any service provided to or by such JV/AOP will be liable to tax as in the case of any other independent person. As per the said circular:
- Where a theatre owner exhibits a movie on his account, the copyrights are temporarily transferred and the distributors (who transfer such copy rights) are required to pay service tax on copyright services.
- Whereas if a theatre owner exhibits a movie on account of a distributor, either for a fixed consideration or on revenue sharing basis, service tax would apply in the category of renting of immovable property or business support service, as the case may be.
It has also been emphasized in the said circular that the taxability of the services involved in these transactions needs to be decided in view of the facts and circumstances of each case.
Board, in a letter to the Chief Commissioner, Hyderabad further clarifies:
++ The activity of temporary transfer of copyright was given exemption with effect from 01.07.2012. Hence during the period after 01.07.2012, in cases involving temporary transfer of copyright, service tax is not leviable on the distributors/sub-distributors for providing such service. Moreover exhibitors/ theatre owners are also not leviable to service tax for exhibiting such movies on their own account under support service.++ In case of revenue sharing arrangements between the theatre owners (service provider) and the distributors/sub-distributors/joint venture (service recipient), as the case may be, service tax will be leviable in accordance with the circular dated 13.12.2011.++ For determining the leviability of service tax on film industry with regard to the distribution & exhibitions of the films, the facts and circumstances in each case should be examined in the light of circular dated 13.12.2011 and action taken accordingly.
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