Workshop on Understanding the Amended law of Service Tax dated 29.08.2014 Session 3
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Transcript of Workshop on Understanding the Amended law of Service Tax dated 29.08.2014 Session 3
CORPORATE KNOWLEDGE FOUNDATION
Presents
Workshop
On
Understanding the Amended Law of Service Tax
Conducted by
Dr. Sanjiv AgarwalFCA, FCS
Friday, 29th August, 2014 @ New Delhi © Dr. Sanjiv Agarwal
1
Session – III
Enquiries
&
Audit in Service Tax
2
ENQUIRIES & AUDIT IN SERVICE TAX
This presentation covers -
• Enquiries
• Summons
• Handling Departmental Audit
• Special Audit in Service Tax
• Show Cause Notices (SCNs)
3
ENQUIRY
Enquiry
• What is an Enquiry?
• Who can initiate an Enquiry?
• What should you do on being enquired?
• Outcome of an Enquiry?
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
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
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 -• 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
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)
• Arrest (section 91)
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
• 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
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.
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).
SUMMONS
• 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
SUMMONS
• 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
SAMPLE SUMMON
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
SUMMONS
• 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)].
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.
SUMMONS 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
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
• Arrest
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
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
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)
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.
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 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.
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.
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 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.
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 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.
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.
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 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.
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…….
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.
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
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…
AUDIT UNDER SERVICE TAX
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.
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.
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).
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).
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.
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)]