CORPORATE KNOWLEDGE FOUNDATION

Presents

Workshop

On

Understanding the Amended Law of Service Tax

Conducted by

Dr. Sanjiv AgarwalFCA, FCS

Wednesday, 3rd September, 2014 @ Mumbai © Dr. Sanjiv

Agarwal

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Session – III

Enquiries

&

Audit in Service Tax

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ENQUIRIES & AUDIT IN SERVICE TAX

This presentation covers -

• Enquiries

• Summons

• Handling Departmental Audit

• Special Audit in Service Tax

• Show Cause Notices (SCNs)

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ENQUIRY

Enquiry

• What is an Enquiry?

• Who can initiate an Enquiry?

• What should you do on being enquired?

• Outcome of an Enquiry?

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ENQUIRY 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

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ENQUIRY

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

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ENQUIRY

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 -• Jurisdictional ground

• On going multiple enquiry

• Audit already done / under process

• SCN adjudicated / under adjudication

• Already filed VCES

• Under settlement

• Face it / defend boldly on interpretational grounds / precedents / correct facts

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ENQUIRY

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)

• May invoke Arrest (section 91)

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VISITS BY OFFICERS UNDER SERVICE TAX

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 (not audits)

• 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

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VISITS BY OFFICERS UNDER SERVICE TAX

• 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.

Officers to 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. under 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).

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SUMMONS

What is a Summon?

• 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

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SUMMONS

Statutory Provisions

• 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 persons for seeking information / evidences / examination on oath.

• Harsh /legal language is generally used in summons to threaten the person

summoned

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SAMPLE SUMMON

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SUMMONS

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

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SUMMONS

• All persons summoned shall be bound to attend, either in person or by

an authorised agent

• 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

[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)].

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SUMMONSCBEC 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.

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SUMMONS Handling of Summons• 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

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SUMMONS

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

• Recovery Proceedings

• Arrest

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AUDIT IN SERVICE TAX

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

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AUDIT

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

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SELECTION CRITERIA FOR AUDIT

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

(Vide CBEC Circular No. 381/145 dated 6.6.2006)

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AUDIT UNDER SERVICE TAX

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.

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AUDIT UNDER SERVICE TAXEffective 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 as well as going beyond limitation

period citing suppression.

• The advance intimation of audit is generally given by department.

The written confirmation of time-line of audit is also given.

• A responsible team should be formed in office to answer to the

queries of audit team.

• Access to books and records may be allowed only during office

hours.

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AUDIT UNDER SERVICE TAX

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.

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AUDIT UNDER SERVICE TAXEffective 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 illogical 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.

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AUDIT UNDER SERVICE TAX

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 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.

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AUDIT UNDER SERVICE TAX

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 liable .

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AUDIT UNDER SERVICE TAX

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 signed 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.

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AUDIT UNDER SERVICE TAX

• The Service Tax audit will cover the following documents, statements or jobs —Manner of preparation of business recordsFinancial statementsAccounting of Service Tax transactionsList of major clients, volume of business and

services providedIdentification of other revenuesScrutiny of modified or cancelled bill, credit notes,

excess or short payment, etc.Legal non-compliances relating to Service Tax

Contd…….

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AUDIT UNDER SERVICE TAX

Service Tax audit will cover the following documents, statements or jobs —

Physical inspection of premisesScrutiny of high value transactionsEvaluation of internal checks and controlsThe 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.

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AUDIT UNDER SERVICE TAX

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

Contd…

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AUDIT UNDER SERVICE TAX

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…

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AUDIT UNDER SERVICE TAX

Information / Documents which may be sought by the Department –

List of show 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.

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CAG AUDIT 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.

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AUDIT UNDER SERVICE TAX

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).

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AUDIT UNDER SERVICE TAX

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).

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AUDIT UNDER SERVICE TAX

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.

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AFTER AUDIT

• 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)]

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