The Delhi High Court in the case of M/s Travelite (India) , held that any attempt to include provision for such a general audit through the back-door, such as through the impugned rule, is ultra-vires the rule making power conferred under Section 94(1). Rule 5A(2) was consequently struck down.

To legitimise Rule 5A(2), Section 94 was amended to insert a new clause (k), by Finance Act 2014 with effect from 06.08.2014. So, now the Rule making power includes the power to make rules 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.

But will this clause in Section 94 validate an already existing Rule 5A(2)?

Just a few days ago vide Notification no. 23/2014-Service Tax dated 5th December, 2014, the Government inserted a new and revised Rule 5A(2) (DDT 2491), obviously in exercise of the new clause (k) of Section 94. So the Delhi High Court order is UNDONE. The Board almost says so in a Circular issued yesterday. Board clarifies, "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."

Board further states,

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 .

Board directs the Departmental Officers to audit the Service Tax assessees as provided in the departmental instructions in this regard.