$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: May 25, 2016 Decided on: June 03, 2016 + W.P.(C) 5192/2015 & CM No. 9417/2015 MEGA CABS PVT. LTD. Petitioner Through: Mr. [ENTITY] and Mr. [ENTITY], Advocates. versus UNION OF INDIA & ORS. Respondents Through: Mrs. [ENTITY], Senior Standing counsel with Ms [ENTITY],Advocate for R-2 and R-3. Ms. [ENTITY], CGSC with Ms. [ENTITY], Advocate for UOI/R-1. CORAM: JUSTICE [ENTITY] JUSTICE [ENTITY] JUDGMENT
% 03.06.2016 Dr.[ENTITY], J.: Introduction
1.1 The challenge in this petition by Mega Cabs Private Limited is to [SECTION] of the [ACT]) as amended by the [ACT] made by the Central Government in terms of a Notification No. 23/2014-Service Tax dated 5th December 2014 in exercise of the powers conferred under [SECTION] read with [SECTION] of the [ACT]) to the extent that the amended [SECTION] empowers deputing departmental officers or officers from the Comptroller and Auditor General of India (CAG') to 'demand' documents mentioned therein. It is contended that this is in conflict with [SECTION] of the [ACT] and beyond the rule making power of the Central Government.
1.2 The Petitioner has also challenged the constitutional validity of [SECTION] of the [ACT] on the ground that it gives plainly unguided and uncontrolled delegated powers to the Central Government for framing rules. It is stated that [SECTION] of the [ACT] suffers from the vice of excessive delegation.
1.3 Also challenged is the [CASE NUMBER] dated 10th December 2014 issued by the Central Board of Excise and Customs (CBEC') stating that since a clear statutory backing for conducting audit is available under [SECTION] of the [ACT], the Departmental Officers would be directed to audit service tax Assessee in terms of the departmental instructions already issued.
1.4 Lastly, the petition challenges a letter dated 30 th April 2015 issued by the [ENTITY] (Respondent No.2) informing the Petitioner that a team of officers of Circle-4, Group-1 of the said Commissionerate comprising three Superintendents and an Inspector would be verifying the relevant records of the Petitioner's business in terms of [SECTION] to the [ACT] read with [SECTION], [SECTION] and [SECTION] of the [ACT] as amended, during the first week of May 2015 for the financial years 2010-11 to 2013-14. The Petitioner was asked to cooperate and facilitate the officers in conducting the audit and verification.
Background facts
2. The Petitioner states that it is in the business of running a radio taxi service and is also engaged in selling advertisement space. The Petitioner got registered with the Service Tax Department in Delhi on 27th December 2004. Since then it is stated to be regularly been paying service tax and also filing its service tax returns. The Petitioner changed its name from Mega Cabs Ltd. to [ENTITY] with effect from 27th October 2014.
3. By a Notification dated 28th December 2007, the Central Government in the Ministry of Finance, Department of Revenue inserted [SECTION] in the [ACT]. Consequent thereto, the CBEC also issued an instruction on 1st January 2008 explaining the scope of the powers of the various officers of the Department to carry out audit or scrutiny of the records of service tax payers.
4. [SECTION] as inserted by the aforementioned Notification dated 28th December 2007 reads as under:
[SECTION] Access to a registered premises (1) An officer authorised by the Commissioner 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 authorised under [SECTION] or the audit party deputed by the Commissioner or the Comptroller and Auditor General of India, within a reasonable time not exceeding fifteen working days from the day when such demand is made, or such further period as may be allowed by such officer or the audit party, as the case may be, -
(i) the records as mentioned in [SECTION];
(ii) trial balance or its equivalent; and
(iii) the income-tax audit report, if any, under [SECTION] of the [ACT], for the scrutiny of the officer or audit party, as the case may be.
5. Both the Notification dated 28th December 2007 inserting [SECTION] as well as the CBEC Instruction dated 1st January 2008 were challenged before this Court in a writ petition by Travelite (India). The challenge in the said petition was also to a letter issued by the Commissioner of Service Tax dated 7th November 2012 seeking the records of the said Petitioner Travelite (India) for the years 2007-08 till 2011-12 to be made available for scrutiny by an audit party.
6. In Travelite (India) v. [ENTITY] 2014 (35) STR 653 (Delhi), a Division Bench of this Court struck down [SECTION] as being ultra vires [SECTION] read with [SECTION] of the [ACT]. The consequent Circular of CBEC Instruction dated 1st January 2008 was also struck down. It was clarified that [ACT] was merely an instrument of instructions for the Service Tax authorities and has no statutory force.
7. Against the aforementioned judgment of this Court in Travelite (India) v. [ENTITY] (supra), [CASE NUMBER] was filed in the Supreme Court by the [ENTITY]. By order dated 18th December 2014, the Supreme Court while directing notice in the said Special Leave Petition directed that there would be a stay of the operation of the decision of this Court in Travelite (India) v. [ENTITY] (supra).
8. To complete the factual narration, following the decision in Travelite (India) (supra), an amendment was made to [SECTION] of the [ACT] by the [ACT] with effect from 6th August 2014 by inserting clause (k) of sub-section (2) which read as under:
"94. Power to make rules.-(1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Chapter.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely
(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"
9. An amendment was also made to the [ACT] by replacing [SECTION] with a new [SECTION] by the aforementioned central government notification dated 5th December 2014. Soon thereafter on 10th December 2014, the impugned [CASE NUMBER] was issued by the CBEC clarifying that in view of the insertion of [SECTION], the officers of the Service Tax Departments could proceed with conducting audits as before. It was stated that that expression 'verified' used in [SECTION] of the [ACT] was of wide import and would include within its scope audit by the departmental officers.
10. Thereafter [CASE NUMBER] dated 27th February 2015 was issued by the CBEC on the subject [ACT] to be followed by the Audit Commissionerates and this too contemplated the Department's officers themselves undertaking audits. A [ACT] was also issued by the Directorate General of Audit of the CBEC in this regard.
11. Meanwhile on 9th July 2013, the Additional Commissioner (Audit) issued a letter with 6 annexures to the Petitioner seeking information for conducting audit of the records of the Petitioner under [SECTION] of the [ACT] as it then stood for the years 2008-09 to 2012-13. The Petitioner in a reply sought deferment of the audit in view of the challenge to [SECTION] of the [ACT] as it then stood in the petition filed before this Court by Travelite (India). After the insertion of [SECTION] (2)
(k) of the [ACT], the Assistant Commissioner of Service Tax Department issued a letter dated 25th September 2014 stating that the Department has deputed its officers to conduct the verification/scrutiny of the records of the Petitioner. By a reply dated 8th October 2014, the Petitioner referred to the decision in Travelite (India) (supra) and took the stand that the Department had no power to conduct an audit. Thereafter the Deputy Commissioner Audit-I (Respondent No. 3) herein issued the impugned letter dated 30th April 2015 citing the impugned notification dated 5th December 2014, [SECTION] of the [ACT] as amended, and Circular dated 10th December 2014, and informed that its officers had been deputed to conduct the audit/verification of the Petitioner's records for the period from 2010-11 to 2013-14.
12. Thereafter the present petition was filed seeking the reliefs as noted hereinbefore. Notice was directed to issue on 22nd May 2015.
13. The Court would like to clarify at the outset that in view of the fact that the decision of this Court in Travelite (India) (supra) has been stayed by the Supreme Court, the Court in the present petition proposes to examine the question of the constitutional validity of the amended [SECTION] of the [ACT] and the circulars and letter in question independent of the decision in Travelite (India) (supra).
Submissions of counsel for the Petitioner
14. The submissions of Mr. [ENTITY], learned counsel for the Petitioner, could be summarised as under:
(i) Although [SECTION] of the [ACT] has purportedly been amended to overcome the defect pointed out by the Court in Travelite (India), the amended [SECTION] continues to be ultra vires [SECTION] of the [ACT].
(ii) While [SECTION] of the [ACT] only contemplates a special audit to be got done by the Assessee on the direction of the Commissioner, by a Cost Accountant or a Chartered Accountant (CA'), [SECTION] permits any officer of the Department or an audit party deputed by the Commissioner or the CAG (in addition to the Cost Accountant and the CA undertaking the special audit) to ask for production by the Assessee for books of accounts etc. on demand. Apart from the fact that [SECTION] expands the list of persons who could seek production of records and that too on demand, none of the safeguards spelt out in [SECTION] require to be observed by the persons making such demand under [SECTION] of the Rules.
(iii) Relying on the decisions in [PRECEDENT], [ENTITY] v.
S. Srinivasan (2012) 7 SCC 683, [PRECEDENT] and [PRECEDENT], it is submitted that the essential conditions for a validity of a subordinate legislation viz., that it (a) must conform to the provision of the statute under which it is framed (b) must be within the scope and purview of the rule making power of the authority, are not fulfilled in the present case.
(iv) Relying on the decision in [PRECEDENT], it is submitted that even the circulars and instructions issued by the CBEC would have to conform to the [ACT]. Such circulars issued on the understanding of the Central or State Governments of the statutory provisions are not binding on the Courts.
(v) The provisions of the CAG's [ACT]) and the provisions of [SECTION] and [SECTION] of the [ACT] do not envisage the CAG performing audit of private entities. Referring to the decision in K. Satyanarayanan v. [ENTITY] ILR (1996) II Delhi, it is contended that the CAG is not expected to conduct audit of the books of accounts and records of an individual service tax Assessee. The decisions in Inter Continental Consultants v. [ENTITY] 2013 (29) STR 9 (Delhi) and [PRECEDENT] were also referred to.
(vi) Drawing a comparison with the corresponding provisions of the [ACT], the [ACT] and [ACT]) it was submitted that the safeguards incorporated in the above provisions are not to be found in [SECTION] and, therefore, it gave a wide unguided powers to the officers of the Department and to the audit parties deputed by the Commissioner to 'demand' the past record of any number of years without explaining the reasons for doing so.
(vii) The requirements for an Assessee to have its accounts, records etc. audited in terms of [SECTION] of the [ACT] had to be preceded by formation of a belief by the Commissioner that any of the four contingencies listed out in [SECTION] prima facie exist. That function cannot be performed without putting the Assessee to notice i.e. at a stage prior to the Commissioner deciding to direct the Assessee to get its accounts audited. Reliance was placed on the decisions in [PRECEDENT], [PRECEDENT] (supra), [PRECEDENT]), A.C.L. Education Centre (P) Ltd. v. [ENTITY] 2014 (33) STR 609(All) and Sadbhav Engineering Ltd. v. [ENTITY] (decision dated 3rd December 2014 of the Gujarat High Court in Special Civil Application No. [SECTION]28/2014). Reference is also made to the decision of this court in Larsen & Toubro Ltd. v. Commissioner of Value Added Tax (2014)[SECTION] VST 190 (Delhi).
(viii) Even assuming the information was being sought pursuant to the powers of assessment of the service tax under [SECTION] of the [ACT], considering that the Petitioner has been regularly filing service tax returns and regularly paying service tax, there was no occasion for a special audit to be ordered.
(ix) The recent [CASE NUMBER] dated 27th February 2015 issued by the CBEC on the subject [ACT] to be followed by the Audit Commissionerates contemplated the Department's officers themselves undertaking the audit and had no statutory basis. The recent [ACT] issued by the Directorate General of Audit of the CBEC again did not take in to account the statutory scheme of the [ACT] which did not permit such exercise to be undertaken.
(x) [SECTION] of the [ACT] did not permit Rules to be made in respect of examination of accounts and records by any officer of the Service Tax Department. If the provision were so interpreted it would suffer from the vice of excessive delegation.
Submissions of counsel for the Respondents
15. Countering the above submissions, Mrs. [ENTITY], learned Senior Standing counsel appearing for Respondent Nos. 2 and 3 and Ms. [ENTITY] learned counsel appearing for Respondent No. 1 submitted as under:
(i) that the decision of this Court in Travelite (India) (supra) is of no avail to the Petitioner since the said decision has been stayed by the Supreme Court.
It is submitted that the defect pointed out in [SECTION] by this Court in Travelite (India) (supra) has been rectified by amending [SECTION].
(ii) [SECTION] has to be read in continuation of and consequent to [SECTION], [SECTION] and [SECTION] of the [ACT]. [SECTION] so read cannot be said to be ultra vires the [ACT].
(iii) [SECTION] did not suffer from the vice of excessive delegation. It only acted as a check on the general powers under the unamended [SECTION] [SECTION] of the [ACT] was not in conflict with [SECTION] of the [ACT] since [SECTION] begins with the words In particular and without prejudice to the generality of the foregoing power Reliance is placed on the decision in Pandit Banarsi Das Bhanot v. State of M.P. AIR 1958 SC
909. There was enough legislative guidance under [SECTION] of the [ACT] for exercise of the rule making power under [SECTION] of the Act.
(iv) The Petitioner has not demonstrated how its rights were prejudiced by the audit party of the Department seeking to inspect the Petitioner's records. Reliance was placed on the decisions in Association of Leasing & Financial Service Companies v. [ENTITY] 2011 (2) SCC 352 regarding the legislative competence of the Parliament to levy and collect service tax. Reliance is also placed on the decision in [PRECEDENT] to urge that a mere fact that a hardship would be caused to the Assessee as a result of the fiscal statute, would not invalidate such statute.
(v) The amendment was in the nature of a 'validating' law which was only to plug a loophole and correct the defects pointed out by this Court. Relying on the decision in R.K. Garg v. [ENTITY] 1981(4) SCC 675 it was submitted that greater play in the joints had to be allowed to the legislature and that too in the field of economic regulation. The Court should grant greater deference to legislative wisdom.
Analysis of the provisions of the [ACT]
16. At the outset it requires to be noticed that unlike the [ACT] or even the [ACT] there is no provision in the [ACT] for re-assessment of a service tax return. There can be a self- assessment in which case the return filed by the Assessee is accepted as such and the tax amount indicated therein is accepted as being correct. However under [SECTION] of the [ACT] two scenarios are envisaged. [SECTION] reads as under:
72. Best judgement assessment:-
If any person, liable to pay service tax,-
(a) fails to furnish the return under [SECTION];
(b) having made a return, fails to assess the tax in accordance with the provisions of this Chapter or rules made there under, the Central Excise Officer, may require the person to produce such accounts, documents or other evidence as he may deem necessary and after taking into account all the relevant material which is available or which he has gathered, shall by an order in writing, after giving the person an opportunity of being heard, make the assessment of the value of taxable service to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment.
17. Under [SECTION] of the [ACT], one scenario is where a person who is liable to pay service tax fails to furnish a return under [SECTION]. The second is where such person has filed a return but "fails to assess the tax in accordance with the provisions of this Chapter or rules thereunder. The Assessing Officer (AO) is in the either scenario empowered to require the production of such accounts, documents or other evidence as he may deem necessary and after taking into account all the relevant material which is available or which he has gathered, give an order in writing after complying with the rules of natural justice. The assessment in such circumstance is made on the value of the taxable service to the best of his judgment. The AO determines the sum payable by the Assessee or refundable to the Assessee on the basis of such assessment. Therefore, even for the purpose of [SECTION] a prima facie satisfaction is to be arrived at that the return filed by the Assessee fails to assess the tax in accordance with law. Even in such an instance the calling for the accounts, documents and other evidence is not to be undertaken by an AO mechanically.
18. The second important factor to be noted as far as [SECTION] of the [ACT] is concerned is that it is not any or every officer of the service tax department who can exercise the power thereunder. The function of making an assessment has to be assigned to such officer. It is only such officer who is entrusted with such power who can proceed to ask for the documents, records, accounts etc.
19. [SECTION] of the [ACT], which deals with the special audit, reads as under:
72A. Special Audit: (1): If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as such person )
(i) has failed to declare or determine the value of a taxable service correctly; or
(ii) has availed and utilised credit of duty or tax paid-
(a) which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or
(b) by means of fraud, collusion, or any wilful misstatement or suppression of facts; or
(iii) has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner, he may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him, to the extent and for the period as may be specified by the Commissioner.
(2) The chartered accountant or cost accountant referred to in sub-section (1) shall, within the period specified by the said Commissioner, submit a report duly signed and certified by him to the said Commissioner mentioning therein such other particulars as may be specified by him.
(3) The provisions of sub-section (1) shall have effect notwithstanding that the accounts of such person have been audited under any other law for the time being in force.
(4) The person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit under sub- section (1) and proposed to be utilised in any proceeding under the provisions of this Chapter or rules made thereunder.
Explanation. For the purposes of this section
(i) "chartered accountant" shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the [ACT];
(ii) "cost accountant" shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the [ACT].
20. The scheme of [SECTION] is that in the first instance the Commissioner has to record reasons to believe that the person who is liable to pay service tax has:
(i) failed to correctly declare or determine the value of the taxable service;
(ii) wrongly availed or utilised credit or paid tax beyond the normal rebates having regard to the nature of the taxable services provided or by means of fraud, collusion or any wilful misstatement or suppression of facts; or
(iii) operations spread out in multiple locations and it is not practicable to obtain a true and complete picture of the accounts from the registered premises in the jurisdiction of the concerned Commissionerate.
21. It is only where one of the above three contingencies exists that the Commissioner may direct the Assessee to get his accounts audited either by a Chartered Accountant or a Cost Accountant nominated by such Commissioner. The extent of the audit and the period for which it should be conducted is also to be specified by the Commissioner.
22. Although [SECTION] of the [ACT] itself does not expressly provide for giving the Assessee a hearing prior to passing of an order thereunder, the implied necessity for doing so has been explained by the Supreme Court in [PRECEDENT] (supra) in the context of [SECTION] of the [ACT] which also envisages the Assessee having to get its accounts audited by a special auditor appointed therein.
23. Under [SECTION] of the [ACT], the Assessee is given a hearing in respect of any material gathered on the basis of the audit under [SECTION]. [SECTION] of the [ACT] also contemplates such post-decisional hearing. However the Supreme Court was of the view that such post-decision hearing is no substitute for pre-decisional hearing. It emphasised in para 32 of the decision as under:
32. The upshot of the entire discussion is that the exercise of power under [SECTION] of the Act leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre- decisional hearing to an assessee and in the absence of any express provision in [SECTION] barring the giving of reasonable opportunity to an assessee, the requirement of observance of principles of natural justice is to be read into the said provision. Accordingly, we reiterate the view expressed in [ENTITY] case.
24. The Court is of the view that [SECTION] would also envisage such a pre-decisional hearing which acts as an additional safeguard against the arbitrary exercise of the power of the Commissioner of Service Tax to order a special audit. The statutory limitation on the exercise of the powers of the Commissioner to order a special audit will have to be kept in view while analysing [SECTION] of the [ACT], as amended.
25. To complete the analysis of the provisions of the [ACT], notice must also be taken of [SECTION] of the [ACT] which talks of recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded. Relevant to the present discussion is the requirement in [SECTION] of issuing a show cause notice (SCN') to the person who is suspected of having not paid or short-paid or having obtained erroneously a refund of service tax.
26. In the said proceedings it is possible that the Assessee may be required to produce records, documents, accounts etc. Even here there is no question of the Assessee being asked to produce records simply on demand without being given an opportunity of explaining the Assessee's version of the case. In the present case, it is not denied by the Respondents that the Petitioner has been filing ST returns and paying service tax on that basis regularly. The fact that the Department has sought to itself undertake audit of the Petitioner's accounts is also not denied.
27. [SECTION] of the [ACT] is relevant since it authorises search of the premises. It reads as under:
"82. Power to search premises:-
(1) Where the Joint Commissioner of Central Excise or Additional Commissioner of Central Excise or such other Central Excise Officer as may be notified by the Board has reasons to believe that any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Chapter, are secreted in any place, he may authorise in writing any Central Excise Officer to search for and seize or may himself search and seize such documents or books or things.
(2) The provisions of the Code of Criminal Procedure, 19[SECTION], relating to searches, shall, so far as may be, apply to searches under this section as they apply to searches under that Code.
28. What is immediately relevant is that the above power to search the premises is also hedged in by certain limitations. One is the requirement of the officer to record reasons to believe that (i) there are documents or books that have been secreted in a place (ii) such documents or books are useful or relevant for any proceedings. A third safeguard is that the provisions of the Code of Criminal Procedure, 19[SECTION] (Cr PC) pertaining to searches apply in toto to any search in exercise of powers under [SECTION] of the [ACT]. Therefore even the power under [SECTION] cannot be said to be totally without guidelines or restrictions.
Analysis of the amended [SECTION]
29. It is in the above background that a scrutiny is now undertaken of [SECTION] as amended by Notification No. 23/2014-Service Tax of the Central Government. The amended [SECTION] reads as under:
"[SECTION] Access to a registered premises.
(1) An officer authorised by the Commissioner 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 authorised under [SECTION] 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] A of the [ACT]
(i) the records maintained or prepared by him in terms of [SECTION];
(ii) the cost audit reports, if any, under [SECTION] of the [ACT]); and
(iii) the income-tax audit report, if any, under [SECTION] AB of the [ACT], 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 maybe."
30. In the first instance it requires to be noticed that there are three distinct types of documents that can be asked to be made available on demand by an Assessee:
(i) the records mentioned in terms of [SECTION].
(ii) cost audit reports, if any, under [SECTION] of the [ACT],
(iii) the income tax audit report, if any, under [SECTION] of the [ACT].
31. [SECTION] requires the Assessee to furnish to the Superintendent of Central Excise at the time of filing of return for the first time or on 31 st January 2008 whichever is later a list in duplicate of all the records prepared or maintained by the Assessee for accounting of transactions, in regard to providing any service receipt or procurement of anybody's service and payment of such service.
32. Interestingly, [SECTION] does not restrict itself to such records as mentioned in [SECTION] but also required production of cost audit reports under [SECTION] of the [ACT] and the Income Tax Audit report under [SECTION] of the [ACT]. These documents are not envisaged to be produced under [SECTION] and definitely not under any of the provisions of the [ACT]. This is, therefore, going far beyond the [ACT] itself.
33. Now turning to the persons who can make a demand for such documents from an Assessee, [SECTION] lists out the following persons:
(i) officer empowered under [SECTION].
(ii) the audit party deputed by the Commissioner.
(iii) the CAG
(iv) a Cost Accountant
(v) a Chartered Accountant.
34. It must straightway be noted that as far as a Cost Accountant or a Chartered Accountant (CA) is concerned, Mr. [ENTITY] made it clear that the Petitioner would have no objection to producing before a Cost Accountant or a CA the documents of accounts, records etc. but only if such Cost Accountant or CA has been nominated by the Commissioner for the purpose of special audit under [SECTION] of the Act. As far as an officer of the Department was concerned, he submitted, and rightly, that although under [SECTION] such officer is authorised by the Commissioner to have access to unregistered premises for the purposes of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interests of the Revenue, such officer can, in terms of [SECTION] simply demand the production of such documents without any requirement of recording reasons to believe that the production of such document is necessary. There is also no requirement of such officer having to be authorised to carry out a search under [SECTION] of the [ACT] or an assessment under [SECTION] of the [ACT]. If any and every officer is going to be deputed for that purpose it would result in harassment of the Assessees.
35. [SECTION] envisages that even the CAG can require production of documents from an individual service tax Assessee 'on demand'. This appears to have no rational basis. As rightly pointed out by Mr [ENTITY], the powers and functions of CAG flow from [SECTION] and [SECTION] of the [ACT] read with the [ACT]. This Court in K. Satyanarayanan v. [ENTITY] (supra) explained that the essential function of the CAG is to audit the accounts of public sector undertakings. Although in Association of Unified Tele Services Providers v. [ENTITY] AIR 2014 SC 1984 the Supreme Court has, in the context of the functioning of telecom companies accepted the plea that their accounts can be subjected to scrutiny by the CAG, to expect the CAG to undertake an audit of the records of every service tax Assessee would indeed be extraordinary. Importantly, as far as the telecom service providers are concerned they are subjected to conditions of their licence which envisage their making available all their accounts for scrutiny. As far as the service tax Assessees are concerned one would still have to turn to the provisions of the [ACT] to examine whether this kind of an access to the books of accounts etc. of an Assessee can be given to the CAG or just about any officer of the Department. With there being no such authorisation under the [ACT], the answer has to be in the negative.
Analysis of the CBEC Instructions and Manual
36. The instructions issued by the CBEC in this regard justify the above apprehension regarding the indiscriminate use of the powers under [SECTION] of the [ACT]. The latest instruction is contained in [CASE NUMBER] dated 27th February 2015. It is a very detailed instruction regarding the norms to be followed by the Audit Commissionerates. It sets out the manner in which units would be selected for audit in a year. Para 5.1 of the said circular states that audit groups would be deployed to cover the large, medium and small units and their composition would be of two or three Superintendents and three to five Inspectors for conducting audit of large assesses/tax payers, two Superintendents for medium size Assessee and one to two for small size Assessees. There is no requirement that any of these officers should be duly authorised to carry out an assessment for the purpose of [SECTION] of the Act or adjudication for the purposes under [SECTION] of the [ACT]. The entire instruction appears to be without any reference to the applicable provisions in the [ACT] or the Rules.
37. A recent Manual has been issued by the CBEC in 2015, in replacement of the earlier Manual of 2011 which was by this Court in Travelite (India) to not have any statutory force. This 2015 Manual again fails to acknowledge that there is no statutory backing for the officers of the Department to themselves undertake an audit of the Assessee's accounts and records. This lacuna pointed out by the Court in Travelite (India) has not been set right.
[SECTION] of the [ACT]
38. The main plank of the defence of the Respondents in the present case to justify the amendment to [SECTION] is [SECTION] of the [ACT] introduced by the [ACT] with effect from 6 th August 2014. Considerable reliance is placed on the expression keeping records and the manner in which such records shall be verified occurring in the above provision. Although in the circular issued consequent upon the amendment by the CBEC on 10th December 2014 it is asserted by the Department that the expression verified' is of wide import and would include within its scope audit by the Department officers, the Court is unable to agree. The expression verified' has to be interpreted in the context of what is permissible under the [ACT] itself. The verification of the records can take place by the officers of the Department provided such officers are authorised to undertake an assessment of a return or of adjudication for the purposes of [SECTION] of the [ACT]. It is not any and every officer of the Department who could be entrusted with the power to demand production of records of an Assessee. Therefore, the Court does not agree with the submission that the expression verify' is wide enough to permit the audit of the accounts of the Assessee by any officer of the Service Tax Department.
39. 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 CA. It cannot possibly be undertaken by any officer of the Service Tax Department.
[SECTION] is ultra vires the [ACT]
40. This brings up the issue of excessive delegation of powers and whether [SECTION] is ultra vires the [ACT]? The basic rules as regards subordinate legislation have been spelt out in [PRECEDENT] (supra) as under:
89. On a review of the cases the following principles appear to be well-settled:
(i) Under the [ACT] the legislature has plenary powers within its allotted field;
(ii) Essential legislative function cannot be delegated by the legislature, that is, there can be no abdication of legislative function or authority by complete effacement, or even partially in respect of a particular topic or matter entrusted by the [ACT] to the legislature;
(iii) Power to make subsidiary or ancillary legislation may however be entrusted by the legislature to another body of its choice, provided there is enunciation of policy, principles, or standards either expressly or by implication for the guidance of the delegate in that behalf. Entrustment of power without guidance amounts to excessive delegation of legislative authority;
(iv) Mere authority to legislate on a particular topic does not confer authority to delegate its power to legislate on that topic to another body. The power conferred upon the legislature on a topic is specifically entrusted to that body, and it is a necessary intendment of the constitutional provision which confers that power that it shall not be delegated without laying down principles, policy, standard or guidance to another body unless the [ACT] expressly permits delegation; and
(v) the taxing provisions are not exception to these rules.
41. In [PRECEDENT] (supra) the following principles were elucidated:
14. It is well settled that rules framed under the provisions of a statute form part of the statute. In other words, rules have statutory force. But before a rule can have the effect of a statutory provision, two conditions must be fulfilled, namely, (1) it must conform to the provisions of the statute under which it is framed; and (2) it must also come within the scope and purview of the rule making power of the authority framing the rule. If either of these two conditions is not fulfilled, the rule so framed would be void.
42. Tested on the above legal principles, the Court has no hesitation in concluding that [SECTION] exceeds the scope of the provisions under the [ACT]. This is the result whether [SECTION] is tested vis-a-vis [SECTION] of the [ACT] which pertains to special audit or [SECTION] which pertains to assessment or [SECTION] which pertains to adjudication or even [SECTION] 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 the Parliament when it enacted the [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 the Parliament.
Validity of the circulars, the manual and the impugned letter
43. The decision in Ratan Melting & Wire Industries (supra) is relevant in the context of the circulars issued and the Manual prepared by the CBEC. As pointed out in that decision, a circular or a manual cannot travel beyond the scope of the statute itself. It will have no binding effect if it does so. In the present case inasmuch as [SECTION] does not permit the exercise of audit to be undertaken by an officer of the Department, the attempt in the circular to recognise such powers in the officers of the Central Excise and Service Tax Departments is held to be ultra vires the [ACT] and, therefore, legally unsustainable.
44. For all of the above reasons, the impugned communication dated 30th April 2105 issued to the Petitioner by Respondent No.2 informing it of the appointment of an audit team to inspect all the records, books and accounts by the officers cannot be sustained in law.
Conclusion
45. Resultantly, the Court:
(i) declares [SECTION] as amended in terms of Notification No. 23/2014-
Service Tax dated 5th December 2014 of the Central Government, to the extent that it authorises the officers of the Service Tax Department, the audit party deputed by a Commissioner or the CAG to seek production of the documents mentioned therein on demand is ultra vires the [ACT] and, therefore, strikes it down to that extent;
(ii) holds that the expression verify' in [SECTION] of the [ACT] cannot be construed as audit of the accounts of an Assessee and, therefore, [SECTION] cannot be sustained with reference to [SECTION] of the [ACT].
(iii) declares the [CASE NUMBER] dated 10th December 2014 of the Central Government to be ultra vires the [ACT] and strikes it down as such.
(iv) quashes the letter dated 30th April 2015 issued by the [ENTITY] addressed to the Petitioner as being unsustainable in law.
(v) Declares that the CBEC [CASE NUMBER] dated 27th February 2015 on the subject [ACT] to be followed by the Audit Commissionerates and the [ACT] issued by the Directorate General of Audit of the CBEC are ultra vires the [ACT], do not have any statutory backing and cannot be relied upon by the Respondents to legally justify the audit undertaken by officers of the Service Tax Department.
46. The petition and the application are disposed of in the above terms with no order as to costs.
[ENTITY], J [ENTITY], J JUNE 03, 2016 dn