Delhi High Court Ruling quashes Rule 5A(2) of the Service Tax Rules and the Instructions issued by CBEC which prescribes manner of an audit and the records that can be called for by the authorities

We are pleased to release this Tax Update on a recent decision by the Delhi High Court in the case of Travelite (India) vs. UOI & Ors, which quashes the following:

(i) Rule 5A(2) of the Service Tax Rules, 1994 authorising audit; and
(ii) CBEC’s Instruction F. No. 137/26/2007-CX dated 1.1.2008 (clarificatory instruction) regarding maintenance and furnishing of records in Service Tax.

The Delhi High Court has held that with the introduction of Section 72A of the Finance Act, 1994 the legislation provided the circumstances under which “Special audit” can be conducted. However, it did not intend to provide for a general audit to which every assessee may be subjected to, at the discretion of the authorities. The Court has thus struck down Rule 5A(2) treating its provisions as ultra-vires the rule making power conferred under Section 94(1). The Delhi High Court ruling establishes the well-settled principle that the Rules are merely to give effect to the Statute’s provisions and intent and the same cannot travel beyond the Statute.