Interim restraint on proposed service tax audit amid challenge to Rule 5A authority and special audit powers

A serious prima facie question arose over the authority to proceed with the proposed audit communication, given the challenge to Rule 5A of the Service Tax Rules, 1994 and the conflicting High Court views on that rule. The Court also noted that reliance on Regulation 169 of the Regulations of Audit and Accounts, 2007 and the cited Supreme Court observations did not, at this stage, clearly establish power to conduct the special audit. Interim protection was therefore granted, and the respondents were restrained from taking further action on the impugned audit communication.

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Issues: Whether the respondents should be restrained, at the interim stage, from proceeding with the proposed audit communication in view of the challenge to the audit power under Rule 5A of the Service Tax Rules, 1994.

Analysis: The petition raised a prima facie challenge to the legality of the proposed audit on the footing that Rule 5A of the Service Tax Rules, 1994 had been struck down by one High Court, while another High Court had upheld the rule on a limited concession. The order also noted reliance on Regulation 169 of the Regulations of Audit and Accounts, 2007 and considered that the observations in the cited Supreme Court decision were made in a different context and did not, prima facie, establish a power to conduct the special audit in question. On that basis, the Court found a serious question regarding the authority to issue the impugned communication and the scope of the power under Rule 5A.

Conclusion: Interim protection was granted and the respondents were restrained from proceeding further with the impugned audit communication.

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