3. This presentation covers -
• Enquiries
• Summons
• Handling Departmental Audit
• Special Audit in Service Tax
• Show Cause Notices (SCNs)
3
4. Enquiry
• What is an Enquiry?
• Who can initiate an Enquiry?
• What should you do on being enquired?
• Outcome of an Enquiry?
5. What is an Enquiry ?
Enquiry
an official process to find out the cause of something/ to find out information
about something
an act of asking questions or collecting information or evidence about
somebody/something before taking any further step or action
Investigation
a detailed formal inquiry or systematic examination / study
a careful search or examination in order to discover facts, etc
bigger than a mere enquiry
Verification
comparison of two or more items, or the use of supplementary tests etc.
to ensure the accuracy, correctness, or truth of the information
alternative term for acknowledgement
Establishing / confirming facts
Audit
An examination and verification of a company's financial and accounting
records and supporting documents by a competent professional
6. Who can initiate enquiry / verification ?
• Jurisdictional adjudicating authorities
• Anti evasion wing
• Director General of Central Revenue Intelligence (DGCEI)
• Audit party deputed by Commissioner / CAG of India
• Appellate authorities
• Direct Tax authorities
7. What you should do when facing an enquiry
• Maintain your cool / Don't panic
• Introspection of what you have done / whether actually done something
worth inviting trouble
• Consult internal / external consultant
• Delegate to a reasonable extent
• Reply to letter / notice in time
• Meet the officer concerned/ explain - have first feel of what is brewing up
• Seek time, if required
• Co-operate to the extent possible
• Divert / deflect the enquiry on -
• jurisdiction
• multiple enquiry
• audit already done
• SCN adjudicated / under adjudication
• already filed VCES
• under settlement
• Face it / defend boldly on interpretational grounds / precedents / correct
facts
8. Outcome of an Enquiry
• Detailed investigation
• Departmental Audit
• Special Audit u/s 72A
• Issuance of a SCN / Adjudication (section 73)
• Search & Seizure (section 82)
• Prosecution (section 89)
• Arrest (section 91)
9. Access to Registered Premises (Rule 5A of ST Rules, 1994)
• Only authorized central excise officers / audit party are
empowered to pay visits to the premises of the assessees.
• Purpose-carrying out any scrutiny, verification or checks to safe
guard revenue’s interests
• Such visits will be made only by
officers authorised by the Commissioner or
audit party deputed by the Commissioner
Audit party deputed by Comptroller and Auditor General of
India
10. Access to Registered Premises (Rule 5A of ST Rules, 1994)
Such visits shall be subject to the following :
All visit to the premises of service tax assessees will be made by
central excise officers only after giving a notice in writing
explaining therein the purpose of such visit.
The officers will clearly indicate the documents which may be
required by them during their visits.
Records include records as per Rule 5, trial balance and Income
Tax audit report
No such visits will be made without giving a clear notice of 15
days to the assessee.
Travelite (India) v. Union of India & Others [WP(C) 3774/2013 decided
by Delhi High Court on 04.08.2014]
• Rule 5A (2) is ultra vires the Finance Act, 1994
• Only one type of audit is stipulated in law, i.e. section 72A
• Since parent statute itself does not authorize a general audit of
type envisioned in Rule 5A(2), no audit can be initiated under
Rule 5A(2).
11. • Summon - a tool to conduct an enquiry
• Last resort by Department for non co-operating
assessees
• Sets a coercive dialogue between an Assessee &
Department
• An authoritative invitation to visit Department (not by
choice)
• Seeks personal attendance of person so summoned
• Non-compliance attracts penal provisions u/s 174 and 175
of IPC, 1860
12. • Section 14 of CEA made applicable to Service Tax as per Section 83 of
Finance Act, 1994
• Authorizes any central excise officer empowered by the CG to issue
summons to any person in respect of any enquiry related to Service tax.
• Persons authorised include – Chief Commissioner, Commissioner,
Commissioner (Appeals), Joint Commissioner, Additional / Assistant
Commissioner, Deputy Commissioner, Investigating agencies etc.
• Summons issued, if the assessee does not co-operate or does not
submit the sought information.
• Summons may be issued to registered assessees with the Department
as well as non-registered person for seeking information / evidences.
• Harsh /legal language is generally used in summons to threaten the
person summoned
13.
14. Purpose for Issuance of Summons
• Where personal attendance of a person is necessary either
to give evidence or to produce a document or any other thing
in any enquiry
• Summon can be issued for:
production of specified documents
production of things or articles of a certain description in
the possession
• Recording statements (which may be used against
assessee)
• Gathering evidences on record
15. • All persons summoned shall be bound to attend, either in person or by an
authorised agent and shall be bound to state the truth, make statements,
produce documents and other things as required
• Every person, who fails to furnish information called by officer, or fails to
produce documents called for or fails to appear before the officer when issued
with a summon, shall be liable to a penalty which may extend to Rs. 10,000 or
Rs 200 per day during continuance of default (subject to maximum of Rs
10,000) [Section 77(l)(c)]
• The High Court ought not to exercise its writ jurisdiction at the summons stage
unless there are exceptional reasons. [Commissioner of Customs, Calcutta vs.
M.M. Exports 2007 (212) ELT 165 (SC)].
16. CBEC directions on how to issue summons for seeking information
(F. No. 137/39/2007-CX-4, dated 26.02.2007)
For calling information, mode of communication should be either in the form of a
telephone call or by way of sending a simple letter;
Issuance of summons should be resorted to only when the abovementioned modes
of communication are found to be ineffective or are likely to jeopardize revenue
interest
Summons should be issued after obtaining prior written permission from an officer
not below the rank of DC
Where it is not possible to obtain such prior written permission, oral/telephonic
permission from such officer must be obtained
Officer issuing summons must submit a report on proceedings that took place during
the presence of the taxpayer/person summoned
Officer authorizing issuance of summons must satisfy himself that no harassment
has been caused during the visit of the person summoned to the office.
17. Tips / Handling of Summon
• Check whether summons are issued by authorised officer
• Check whether summon is issued for producing documents /
evidence or for any inquiry
• If documents are asked for, the same can be submitted at the earliest
• If additional time to attend the documents is required – request should
be in writing
• Before attending to summon, assessee should identify the possible
questions/ issue from the Department and be prepared in advance
• In case when statement is recorded, assessee should not accept
demand of service tax or admit any offence.
• In case of surprise questions, diplomatic answer may be given
• Be careful while giving statement. Later retraction is difficult
• Statement should be read before signing the same
• Ask for copy of statement recorded
• Alternately, make your own notes of statement recorded
• Take legal advice
18. Outcome of a Summon
• Departmental letter for further inquiries
• Detailed investigation
• Departmental Audit
• Special Audit u/s 72A
• Issuance of a SCN / Adjudication
• Search & Seizure
• Arrest
19. Types of Audit in Service Tax
U/s 72A - Special audit by CA / CWA at the
instance of Commissioner
Departmental audit under Service Tax Audit
Manual, 2011
Other specific investigations
20. Audit includes –
Preliminary review
Gathering and documenting systems information
Touring the assessee's premises
Evaluating internal controls analyzing risks to revenue and
trends
Developing audit plan
Actual audit
Preparation of audit findings
Reviewing the results with assessee
Draft audit paras
Finalization of the report
Selection of the Assessee for Audit –
Scientific selection after risk analysis
Emphasis on pre-preparation
Scrutinizing of business records against statutory records, and
Monitoring of audit points
21. (Vide CBEC Circular No. 381/145 dated 6.6.2006)
S.
No.
Quantum of annual duty
payment (in cash + CENVAT
Credit)
Frequency of audit
1 Taxpayers paying more than Rs. 50
lakhs
Every year
2 Taxpayers paying between Rs. 25
lakhs and Rs. 50 lakhs
Once in two years
3 Taxpayers paying between Rs. 10
lakhs and Rs. 25 lakhs
Once in five years
4 Taxpayers paying below Rs.10
lakhs
2% of the total number
every year
22. Principles of Audit
• Audit to be conducted in a systematic and comprehensive
manner.
• Emphasis on scrutiny of records maintained in the normal course
of business.
• Audit effort based on materiality principle — higher the potential
risk, greater the intensity of scrutiny.
• Recording of all audit findings.
• Audit is clearly distinct from anti-evasion activity. Audit can
uncover non-compliance only to the extent of their reflection in
the books of accounts.
• Discussing audit findings before finalizing the audit to reduce
audit paras as well as legal risks.
• Protecting the interest of legitimate revenue.
23. Effective Handling of Audit
• The audited financial statements, directors’ reports, cost audit
report, Income tax audit reports, and the notes to accounts may be
asked.
• Assessee should not refuse to produce books and records as this
could lead to penal action going beyond limitation period citing
suppression.
• The advance intimation of same is generally given by department.
The written confirmation of timeline of audit is also given.
• The responsible team should be formed in office to answer to the
queries of audit team.
• The access to books and records may be allowed only during office
hours.
24. Effective Handling of Audit
• No books should be allowed to be removed from premises. If they seek to
take records, it should be done under a written request and
acknowledgement.
• Documents should be furnished only for the period under audit.
• The delivery of books and records to them should be acknowledged by
departmental officers.
• No SCN / summons can be issued or demand raised nor assessment can be made
during audit.
• The assessee can make his views known to the audit team in advance prior to
raising audit objections.
• The audit team can only make factual observations and should not draw
conclusion on points of law.
25. Effective Handling of Audit
• After audit is over, auditor may be discouraged from coming to auditee's
premises.
• Questioning for long hours under stress and duress should be brought to the
notice of higher authorities.
• Trade formulas and secrets should be given only on written request from
auditors.
• Assessees should not panic and react blindly by complying with the
departmental officer’s instructions during audit.
• The auditee could refer the matters to a professional, and seek advice, when
the audit team is raising a number of issues or verify claims made by audit
team.
• When a number of records are continuously asked by audit team, it is better to
get an internal review of records done so that auditee knows where it stands as
far as compliances are concerned.
26. Special Audit (Section 72A)
• Special audit can be conducted on the directions of Commissioner
of Central Excise (not by an officer below that rank)
• Commissioner directing such audit can do so if he has reasons to
believe that any person liable to pay tax has committed certain
action or deeds.
• Such person-
Has failed to declare or determine the value of taxable service
correctly.
Has availed and utilized credit of duty or tax paid, which is not
in the normal limits compared with the capital, goods, used or
other relevant and appropriate factors or by means of fraud,
collusion, or any willful misstatement or suppression of facts.
Has operation in multiple locations and it is not possible or
practicable to obtain a true and complete picture of his
accounts from the registered premises.
27. Special Audit (Section 72A)
• Audit can be in respect of any person liable to pay service tax.
• Direction can be given to get his/its accounts audited for the
period and scope as specified by the Commissioner.
• Such audit shall be conducted by a practicing chartered
accountant or cost accountant.
• The audit report, duly signed and certified shall be submitted
to Commissioner (not to assessee) within stipulated time frame
unless extension is sought and granted.
• Audit u/s 72A shall be conducted irrespective of any other audit
being carried out of the accounts of such person under any
other law in force.
• An opportunity of being heard shall be provided to the auditee.
• Such audit covers all or any unit (i.e. factory, office,
warehouse, godown, depot, distributors or any other place ) of
the assessee/person.
28. Special Audit (Section 72A)
• Show cause notice or pre-decision hearing is a must before any
order is pronounced based on special audit.
• Direction of special audit is a non- appealable order.
• Audit report shall be singed and certified by the auditor
• Revenue department shall bear the audit expenses and audit fees
payable to the special auditor.
• There is no prescribed format or manner of audit report but shall
vary depending upon scope of audit, terms of reference and audit
findings.
• Commissioner may decide to accept or reject or consider partly
the audit report.
29. • The Service Tax audit will cover the following documents,
statements or jobs —
Manner of preparation of business records
Financial statements
Accounting of Service Tax transactions
List of major clients, volume of business and services
provided
Identification of other revenues
Scrutiny of modified or cancelled bill, credit notes,
excess or short payment, etc.
Legal non-compliances relating to Service Tax
Contd…….
30. Service Tax audit will cover the following documents,
statements or jobs —
Physical inspection of premises
Scrutiny of high value transactions
Evaluation of internal checks and controls
The Cenvat credit balance unutilized at the
end of the year as per the service tax returns
should tally with the amount shown under the
head current assets in the balance sheet.
Details of Cenvat credit may be solicited.
31. Information / Documents which may be sought by the Department –
Copy of registration certificate or centralized registration, as the case
may be
List of branches/offices
List of records and books maintained by the assessee
Copy of list of records as submitted by the assessee to the department
Copies of Service Tax returns for past period (3 to 5 years or since last
audit)
Copies of annual report comprising balance sheet, profit and loss
account, director's report & auditor's report.
Copy of trial balance
Copies of internal audit reports, if any
Copy of tax audit report, if applicable
32. Information / Documents which may be sought by the
Department –
Details of joint ventures, collaborations, franchisees, depots etc.
A note on accounting system and billing procedure alongwith
accounting policies followed.
Copy of cost auditor's report
Particulars of registration with other Government
departments/regulators
Copies of income tax returns
Copies of VAT returns
List of general ledger accounts
List of suppliers, vendors, customers, capital goods suppliers etc.
Contd…
33. Information / Documents which may be sought by the
Department –
List of show cause cause notices and pending adjudications
List of pending appeals/stay orders
Details of refund/rebate filed and their status
Details about valuation of services, exemptions and abatements
availed.
Details of Service Tax calculation and payment
Details of Cenvat Credit account, opening balance, availed, utilized
and balance
Copy of bank account statement
Certain reconciliations/data sheets.
34. Audit of Private Parties by CAG Officers
• Authorized CAG officers have right to visit the premises of the
assessee
• CAG officers have right to demand any document / information
• Such information can only be demanded with prior notice to the
assessee
• No visit can be made without prior notice of 15 days
• CAG has no power to audit the books of accounts of the private
assessees.
35. Audit of Private Parties by CAG Officers
In SKP Securities Ltd. v. Deputy Director (RA- IDT) (2013) 29 STR 337;
(2013) 39 STT 327 (Calcutta), it was held that -
• Scope of Rule 5A includes members of audit team, auditor or accountant
authorized by Commissioner
• Rule 5A(2) does not empower the CAG to audit accounts of any assessee.
• Section 94(2) does not empower the Central Government to frame rules for
such audit.
• Condition precedent to order for special audit is reason to believe that person
liable to Service Tax is within circumstances stipulated in section 72A (wrong
declaration of value of taxable service, misutilisation of credit of tax etc).
36. Audit of Private Parties by CAG Officers
In Travelite (India) v. Union of India & Ors. W.P. (C) 3774
/2013 dated 04.08.2014, Delhi High Court has strike down
rules empowering audit by CAG and has held as under –
• Audit Manual of Department has no statutory force
• Circulars cannot possible override the Statue or be
contrary to the Statue.
• CAG has no right to audit under rule 5A(2).
37. Audit of Private Parties by CAG Officers
In M/s Aditya Housing & Infrastructure Development
Company Pvt. Ltd. v. The Comptroller & Auditor General
of India, New Delhi [WP No. 26799 of 2013 and WP No.
21872 of 2013], Delhi High Court has held that the visit of
the officers of CAG is highly illegal, improper, unjust,
arbitrary violation of principles of natural justice and
violation of fundamental rights and to pass.
38. • Audit cannot confirm demand
• Show cause notices are required to be issued by field formations
whenever audit objections are received from C&AG / Audit party
• SCN is mandatory to adjudicate demand based on audit objections
• Audit team cannot issue SCN
• If assessee pays Service Tax during the course of audit, no audit
para is raised
• Even if Service Tax is paid after audit para is raised, no SCN can
be issued [Section 73(3)]