HOW TO FACE AUDIT UNDER CENTRAL EXCISE AND SERVICE TAX?

HOW TO FACE AUDIT
UNDER CENTRAL EXCISE
AND SERVICE TAX?
Hiregange & Associates
Chartered Accountants
08th February, 2014
@ Hotel Ramanashree,
#16, Raja Ram Mohan Roy Road,
Bangalore-560025
Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Programme schedule
Start Time
Duration
Topic
(in min)
Speaker
9.15
35
Registration
9.50
10
Welcome address
10.00
55 + 5
Introduction – Legal Background – Disputes
11.00
15
Tea Break
11.15
60
Major Issues in Central Excise
12.15
60
Common Issues in Service Tax
1.15
45
Lunch
2.00
15
Question & Answer for Central Excise & Service Tax
2.15
60 + 5
How to prepare/ conduct audits
3.20
15
Tea Break
3.35
60 +5
Audit Issues – Resolution
Adv. K.S. Naveen Kumar
CA. C.R. Raghavendra
CA. Roopa Nayak
CA. Madhukar N Hiregange
CA Vinay K.V
Page 2
Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
FOREWORD
“Change is the law of life. And those who look only to the past or present are certain to miss the future” goes
an old adage.
Excise law has more or less settled and clear compared to service tax law which is changing leaps and
bounds. The complexity involved in these laws necessitates everybody the requirement to keep updating and
brushing up about the changes that have occurred in these laws. This is not it! Departmental audits are
increasing day by day and the number of assessees taken up for such audits are also increasing. There is a
vacuum created, for lack of understanding in handling such audits. With this in mind, Hiregange &
Associates has come up with a workshop on How to face Audit under Central Excise and Service Tax. Our
objective through this workshop is to aid the assessees to handle the departmental officers during audit and to
understand the overall impact of the scope of such audits.
Special appreciation to CA. Madhukar N. Hiregange, CA. Roopa Nayak, CA C.R.Raghavendra, Mr. K.S.
Naveen Kumar, CA Vinay K.V, CA Dhanashree Prabhu, CA Abhishek Kotecha, CA Sandesh S Kutnikar,
CA Rajesh Maddi, Ms. Vidhya.R, Ms. Bhakti Shetty, Ms. Rajeshwari, Ms. Nalini for preparing this material
for making the workshop more effective
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Useful links for more information on Indirect Taxes

Cbec.gov.in

Icai.org

Pdicai.org

Caclubindia.com

Hiregange.com

Newsletters @ Hiregange.com
The following could be some articles of relevance which the Partners/ Qualified of our Firm have written and
are published in CA Club India website and official website of Hiregange& Associates:1. Reverse Charge and Joint Charge- Possible way Out
2. Tax Planning tool to reduce cost – Indirect Taxation
3. Guide to interaction with Tax Departments
4. Best Practices- Reply to SCN
5. Impact of Customs on Indirect Taxes
6. Technology Contracts – VAT Vs Service Tax
7. Suggestions to FM- CBEC on VCES
8. Place of Provision of Services- Including Issues
9. Arrest -Prosecution under Central Excise & Service Tax
10. Legal Decision Vs Departmental Circulars in Central Excise.
11. After VCES - Post 1st January 2014- What Next???
12. How to excel in CA examination
13. Eligibility of input service credit – Sales Commission
14. Understanding of “Economic Activity” and “Consideration” in Service Tax- Random Thoughts
15. Impact of Customs on other Indirect Taxes
For more articles click on following links
CA Club India
http://www.caclubindia.com/Articles/article_display_list_by_member.asp?member_id=94337&offset=1
Hiregange& Associates
http://www.hiregange.com/articles.asp
http://www.hiregange.com/updates.asp
Page 4
Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
List of seminars conducted by Hiregange and Associates during September 2012 to December 2013
Sl No
Topic
Date
1
New Era of Service Tax
01.09.2012
2
Impact of taxes – Real Estate
20.10.2012
3
Cenvat credit under Service Tax law @ Bangalore
22.12.2012
4
5
6
7
8
9
10
11
Cenvat credit under Service Tax law @
Hyderabad
KVAT and CST Analysis
Analysis of Union Budget 2013 & Procedural
aspects in ST
Explore the benefits of Exports (Focus on IDT
benefits)
Understanding ST Implication (For Manufacturer
and Service Provider)
ST – Amnesty Scheme, 2013, Departmental
Interaction & How to fill ER-1 & ST-3 Returns
Cost control and Tax Planning for Manufacturing
Industries
VAT & CST Concepts
05.01.2013
09.02.2013
23.03.2013
13.04.2013
25.05.2013
27.07.2013
02.10.2013
14.12 2013
Enhancing Service Tax Compliance &Avoiding
12
Errors/Disputes
18.01.2014
Following articles of CA Anil Kumar Bezawada, working in Hiregange& Associates, Hyderabad are
published in Excise Law Times (ELT) of Centax Publications Pvt Ltd
1. “Prerequisites for drafting an effective stay application” – Vol 289, Part 2 of ELT; 11th March, 2013.
2. “Appeal – Choosing the right form”- Vol 290, Part 5 of ELT; 29th April, 2013.
3. “Overview of National Litigation Policy in Indirect Taxes” -Vole 293, Part 5 of ELT; 29th July, 2013.
A few initiatives of ours which could benefit you:

Training Program for Chartered Accountants Firms – [email protected]

Training Program for industry compliances in H&A – [email protected]

Training Program for industry compliances in your company premises – [email protected]
Page 5
Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Highlights of the above programs
o Focus of indirect taxes in the effective day-to-day working.
o Use of case studies and practical aspects
o To enlighten and empower our Clients / CAs in the field of Indirect Taxation
o Topics for the program will be of your selection
o Programs will be conducted by qualified and experienced staff of Hiregange& Associates
Table of Contents
Introduction-Legal Background-Disputes ...................................................................................................... 7
Major issues in central excise......................................................................................................................... 17
Common issues in service tax-background material ................................................................................... 28
Facing Central Excise and Service Tax Audit .............................................................................................. 42
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Introduction-Legal Background-Disputes
Introduction:
The term audit is derived from the Latin term ‘audire,’ which means to hear. In early
days an auditor used to listen to the accounts read over by an accountant in order to
check them. Auditing is as old as accounting. It was in use in all ancient countries such
as Mesopotamia, Greece, Egypt, Rome, U.K. and India. The Vedas contain reference to
accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and auditing of public
finances.
Features of Auditing:
a. Audit is a systematic and scientific examination of the books of accounts of a business.
b. Audit is undertaken by an independent person or body of persons who are duly qualified for the job.
c. Audit is a verification of the results shown by the profit and loss account and the state of affairs as
shown by the balance sheet.
d. Audit is a critical review of the system of accounting and internal control.
e. Audit is done with the help of vouchers, documents, information and explanations received from the
authorities.
f.
The auditor has to satisfy himself with the authenticity of the financial statements and report that they
exhibit a true and fair view of the state of affairs of the concern.
g. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions and examine correspondence, minute books of shareholders, directors, Memorandum of
Association and Articles of association etc., in order to establish correctness of the books of accounts.
Objectives of Auditing:
There are two main objectives of auditing. The primary objective and the secondary or incidental objective.
a. Primary objective – as per Section 227 of the Companies Act 1956, the primary duty (objective) of
the auditor is to report to the owners whether the balance sheet gives a true and fair view of the
Company’s state of affairs and the profit and loss A/c gives a correct figure of profit of loss for the
financial year.
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
b. Secondary objective – it is also called the incidental objective as it is incidental to the satisfaction of
the main objective. The incidental objective of auditing are:
i.
Detection and prevention of Frauds, and
ii.
Detection and prevention of Errors.
Detection of material frauds and errors as an incidental objective of independent financial auditing flows
from the main objective of determining whether or not the financial statements give a true and fair view. As
the Statement on auditing Practices issued by the Institute of Chartered Accountants of India states, an
auditor should bear in mind the possibility of the existence of frauds or errors in the accounts under audit
since they may cause the financial position to be mis-stated.
Fraud refers to intentional misrepresentation of financial information with the intention to deceive. Frauds
can take place in the form of manipulation of accounts, misappropriation of cash and misappropriation of
goods. It is of great importance for the auditor to detect any frauds, and prevent their recurrence. Errors refer
to unintentional mistake in the financial information arising on account of ignorance of accounting principles
i.e. principle errors, or error arising out of negligence of accounting staff i.e. Clerical errors.
Advantages of Audit:
A. Businessman's point of view
B. Investor's point of view
C. Other Advantages
1. Detection of errors and
1. Protects interest
1. Evaluate financial status
2. Loan from banks
2. Moral check
2. Listing of shares
3. Builds reputation
3. Proper valuation of
3. Settlements of claims
frauds
investments
4. Proper valuation of assets
4 Good security
4 Evidence in court
5. Government acceptance
5. Settlement of accounts
6. Update accounts
6. Facilitates calculation of
Purchase Consideration
7. Suggestions for
7. Facilitates taxation
Improvement
8. Useful for agency
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Limitations of Auditing:
At this stage, it must be clear that the objective of an audit of financial statements is to enable an auditor to
express an opinion on such financial statements. In fact, it is the auditor’s opinion which
Helps determination of the true and fair view of the financial position and operating results of an enterprise.
SA 200 makes it a subtle point that such an opinion expressed by the auditor is neither an assurance to the
future viability of the enterprise nor to the efficiency or effectiveness with which management has conducted
affairs of the enterprise. Further, the process of auditing is such that it suffers from certain inherent
limitations, i.e., the limitation which cannot be overcome irrespective of the nature and extent of an audit
procedure. It is very important to understand these inherent limitations of an audit since understanding of the
same would only provide clarity as to the overall objectives of an audit.
The inherent limitations are:
1. Non-detection of errors/frauds: Auditor may not be able to detect certain frauds which are
committed with malafide intentions.
2. Dependence on explanation by others: Auditor has to depend on the explanation and information
given by the responsible officers of the company. Audit report is affected adversely if the explanation
and information prove to be false.
3. Dependence on opinions of others: Auditor has to rely on the views or opinions given by different
experts viz Lawyers, Solicitors, Engineers, Architects etc. he cannot be an expert in all the fields
4. Conflict with others: Auditor may have differences of opinion with the accountants, management,
engineers etc. In such a case personal judgement plays an important role. It differs from person to
person.
5. Effect of inflation: Financial statements may not disclose true picture even after audit due to
inflationary trends.
6. Corrupt practices to influence the auditors: The management may use corrupt practices to
influence the auditors and get a favourable report about the state of affairs of the organisation.
7. No assurance: Auditor cannot give any assurance about future profitability and prospects of the
company.
8. Inherent limitations of the financial statements: Financial statements do not reflect current values
of the assets and liabilities. Many items are based on personal judgement of the owners. Certain nonmonetary facts cannot be measured. Audited statements due to these limitations cannot exhibit true
position.
9. Detailed checking not possible: Auditor cannot check each and every transaction. He may be
required to do test checking.
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Legislative Background of Audit:
For the first time in 1866, Company Law in India contained elaborate provisions relating to audit of
companies, stock record keeping, receipts and expenditure and annual audit appointed in the general body
meeting of shareholders. Subsequent legislations relating to company law continued the above provisions
with suitable modifications. A special class of accountants came into existence who undertook audit of
corporate entities. A system of Government licensing of auditors was advocated and brought into force in
addition to recognizing auditors who possessed Chartered Accountancy qualifications issued by the Institutes
in England and Wales, Scotland and Ireland which were set up under Royal Charters. Subsequently, the
system of the Government issuing unrestricted and restricted certificates to persons licensed to act as auditors
was brought into force.
The central excise audit conducted by the departmental officials is basically aimed at safeguarding the
interest of revenue and preventing and detecting revenue leakage.
Audit under Central Excise Law:
A healthy practice has been introduced in industrial houses, to have the records relating to manufacturing and
excisable activity audited by a professional, for the purpose of enabling the management and decision making
agency to ascertain whether record-keeping is proper and whether the statutory requirements of excise and
customs laws have been fulfilled. The audits in these cases may be general or area-specific. For e.g., the audit
may be of all excise and customs records and connected transactions for a whole year or for a block of years, or
may relate to audit of a specific area such as refund claims/classification/valuation/Cenvat/drawback etc. for a
period.
The Central Excise Department also frequently undertakes verification of records and other documents of excise
assessees, either as a part of the EA-2000 audit or routine audit employing the EA 2000 model. The officials of
the Office of the Comptroller and Auditor-General of India also visit factories to conduct audit of excise records.
It is however, noteworthy that most of the latter exercises are aimed at detecting leakage of excise revenue, and
not as a system of ensuring checks and balances, more-so as the said exercise is undertaken by the Government
agencies, who are concerned about revenue collections and losses (visible or invisible) to the exchequer. In all
these cases last mentioned, the audit team may not consist of professional auditors possessing accounting
qualifications, and thus the approach to the audit is more likely to be in the nature of a fishing expedition or
voyage of discovery rather than verification and review of records applying scientific, systematic and streamlined
procedures apart from audit tools and techniques.
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Powers of an Auditor:
The Central Excise Act does not provide for any powers in an auditor, but under Companies Act, 1956, it is
provided that auditors have various powers. It would not be correct to say that the powers in the latter statute
would apply to audits under the Central Excise Act, but it may be relevant to note, that the following are the
important and generally recognized powers of an auditor:

Power to call for information and explanation from the officers of the auditee and its officers.

Power to/right of access to books of account and vouchers at all reasonable times (whether kept at the
company’s office or elsewhere).
Duty of an Auditor:
The auditor is commonly understood to be the ‘watchdog’ of the appointing agency and is required to examine
and verify the records relating to accounts and report on any inaccuracies or omissions therein and ensure that the
financial statements audited by him agree with the accounting records verified by him and thereafter report to the
persons appointing him. In order to so report, an auditor is expected to carry out such inquiries as he being
expedient so as to be able to form an opinion on matters which would concern his report. Their duty is to exercise
reasonable skill and care in ascertaining the accuracy of the company’s accounting records, and accuracy and
completeness of its annual accounts.
Legal Provisions relating to Excise Audit:
As per the Constitution the Union or Central Govt. alone has the power to levy Union duties of Central Excise on
manufacture of goods, that are mentioned in entry 84 of the VII th Schedule of the Constitution. This is clear also
from the charging section 3 which reads “there shall be levied and collected in such manner as may be prescribed
duties of excise on all excisable goods which are produced or manufactured in India”. Analysis of Sec. 3 throws
out following conditions for attracting the levy of central excise duty:
i.
The duty is on goods which are movable, marketable and independently exist.
ii.
The goods must be excisable being specified in the Central Excise Tariff.
iii.
The goods must be manufactured or produced in India.
DEMANDS AND APPEALS
Demand and Appeal provisions made under Central Excise are similar to that of Service Tax law.
However, it has been observed that assesses who are new to service tax, dread recovery proceedings and
the thought of having to face a Show Cause Notice from the department. This fear is at times misused by
few unscrupulous officers.
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
The time limit of 18 months and 5 years have been specified in the Act, in order to ensure that the
department is working pro-actively, else if the said time limits were not specified the assessing officers
would have mis used its power, resulting in and creating agony to the assessee.
In order to ensure justice is provided to the appellant, therefore various forums have been specified
under Finance Act, ensuring that if the forum is biased in rendering the decision, and then the aggrieved
person can file an appeal before the appropriate superior authority and seek justice.
Section 72: This section empowers the Central Excise Officer, to assess the tax of the assessee who ha s
failed to furnish the returns and failed to discharge its service tax duty liability. Under such
circumstances the Central Excise Officer can exercise his powers to call for records and based on such
records and best judgment arrive at the tax liability. Under this section the Central Excise officer cannot
arbitrarily arrive at the service tax liability, the Central Excise Officer should also states the basis on
which the tax liability is determined.
This method of assessment will act as a weapon to the assessing officer, wherein if an assessee is inspite
of requesting for information does not provide the required information to the department, then the
assessing officer via section 72, can call for records and information, in order to complete the
assessment.
Section 73 of Chapter V of Finance Act 1994 as amended from time to time deals with a scenario where
there is a short payment of service tax or short levy or non-levy or non- payment or erroneous refund of tax.
In such cases, the Central Excise Officer may within eighteen months from the relevant date, serve a notice
on the assessee/person chargeable with such service tax requiring him to show cause as to why the demand
should not be made /refund amount should not be demanded back from the assessee as may be specified in
the notice. It is mandatory for the department to issue and serve the show cause notice. The period of
eighteen months for issuing such SCN (Show Cause Notice) can be extended up to five years in a case where
such non-levy/short levy/erroneous refund/ short payment was on account of fraud, collusion, wilful mis statement or suppression of facts or contravention of any of the provisions of this Chapter or of the Rules
made there under with the intention to evade payment of service tax. While computing the period of eighteen
months /five years the period for which the service of notice is stayed by an order of a court, shall be
excluded.
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Section 73 governs provisions in respect of demand as summarized in the table
Starting of the proceedings U/s 73
When there is short payment of service tax or short levy or nonlevy or non- payment, proceedings U/s 73 can be initiated.
Show Cause Notice
It is mandatory for the department to serve the show cause
notice on the assessee.
Time Limit for Show Cause
Notice
i. Where
the
issue
involves
fraud
collusion,
willful
misstatement or suppression of facts or contravention of
any provisions with intent to evade payment of duty,
SCN should be served within 5 years from the relevant
date.
ii. In any other case, the SCN should be issued within 18
months from the relevant date
iii. Where the notice is stayed by court order, the period of
such stay by court would be excluded in computing the
time limit
What do you mean by the term
The date from which the time limit would be computed is
relevant date
defined as relevant date, it means:(a) In case of short levy/non-levy or short payment/nonpayment, date on which the ST-3 return is filed, if ST-3
return is not filed the date on which such ST-3 returns
should have been filed.
(b) If there is no such time limit, date of payment of duty
(c) In cases of provisional assessment, the date of adjustment
of duty after final assessment.
(d) In case of erroneous refund, the date of such refund
Dropping of proceedings
When the service tax, interest U/s 75, and 25% of penalty is paid
within 30 days of the receipt of the notice, then entire
proceedings shall be concluded. This provision is done away wef
8.4.2011.
Findings during the course of
When the transaction is recorded in books of accounts and if the
audit,
Assessee pay the demand along with interest and penalty of 1%
about
non
nonpayment of tax.
levy
or
subject to maximum of 25%, and inform the central excise
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
officer, about such payment, in writing, will not serve any
notice.
Voluntary Payment
When the service provider pays the tax along with interest
voluntarily, and informs the department in writing, then no
notice shall be served upon the assessee. Further notice for
penalty can also not be imposed.
Order
It is mandatory for the officer to pass an appropriate order; mere
letter asking for payment cannot be considered as order.
Section 73A sets out that the amount has to be paid to the credit of the central government when person
liable to pay service tax has collected service tax in excess or person has collected the service tax which
was not required to be collected. Where not paid, a SCN can be issued with regard to recovery of such
amounts. This provision would apply in all such cases where the service provider has collected in any
manner from the service receiver, amounts representing service tax. Once the assessments have been
finalized and if the amounts paid have been found to have been paid in excess, a refund claim can be
filed for the same within six months from the date of notice by Central Excise Officer. This provision
was inserted by Finance Act, 2006. Prior to such insertion provisions of Section 11D of Central Excise
Act, 1944 was applicable
The interest rate would have to be adopted in accordance with rate notified u/s 75 an d 73B. The rate for
both scenarios at present is 18% per annum. However where the value of taxable service provided by the
service provider in a preceding financial year or any of the financial year covered under SCN does not
exceed Rs 60 Lakhs, then the rate of interest rate would be 15%.
Section 73B: Where an assessee has collected excess amount of tax from the service receiver, assessed
under this Chapter or rules made thereunder, such service provider is required to deposit such excess
amount along with interest, provided such excess amount is not deposited into the Account of exchequer.
Section 73C: empowers central excise officer with prior approval of Commissioner of Central Excise in
writing, may attach the property of a person on whom the proceedings under Section 73 or 73A is
pending. The attachment shall last only for the period of 6 months from the date of the order but the
same may be extended by the Commissioner of Central Excise for further period up to 2 years subject to
recording the reasons in writing.
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Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Section 74: An order can be amended by the Central Excise Officer within two years from the date of
passing to correct a mistake apparent from the record, u/s 74. Where any matter has been considered and
decided by way of Appeal or Revision relating to the order referred above, any other matter on the order
can be rectified with the exception of the matter that has been so decided. Amendment can be on one’s
own motion or through notice by assessee or CCE/CCE (Appeals). Where the rectification has the effect
of reducing refund due to an assessee or increasing his liability, such assessee shoul d be given a
reasonable opportunity of being heard in the matter.
Section 84: The provisions of erstwhile section 84 of The Finance Act, 1994 as applicable prior to 19 th
August, 2009 provided for revision by the commissioner of the order passed by lower authorities. Such
power of revision has been substituted by power of review & consequent appeal before the CCE
(Appeals) so as to align the provisions of customs, excise & service tax law.
Section 85: As per section 85, the appeals shall be with CCE (Appeals) which should be filed in
duplicate sets, containing, Appeal Memorandum in ST-4, certified copy of order in Original, along with
reply to SCN and SCN and other supporting documents. The Appeal shall be within two months from
the date of receipt of the decision or order of such authority. Where the assessee has reasonable cause for
delay in filing the appeal, the time limit can be extended by CCE (Appeals) for further period of one
month. Beyond the said 1 months there is no provision for condonation of d elay. Supreme Court has
ruled that beyond that period no condonation is possible. Orders would be passed in writing after a
proper hearing.
Further, there is a requirement of making pre-deposit of service tax demanded in the order before
making an appeal. However an application may be made before the same authority seeking waiver of the
said pre-deposit under section 35F of the Central Excise Act, 1944... The Authority concerned may
waive the said pre-deposit either in part or full.
When an appeal is filed in ST-4, the assessee should counter each of the finding given in order- In original, the assessee should ensure the findings are not travelling beyond the SCN. Assessee should also
ensure whether the findings given in the order in original have been reasoned or merely passed without
reasoning, if these accepts are found in the order, then certainly the grounds of appeal of the appellant
should contain each of these arguments.
Commissioner of Central Excise (Appeals) shall call for personal hearing, wherein the Commissioner
would consider the grounds of appeal and submissions made during the personal hearing and pass an
appropriate order.
Page 15
Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Pointer for Practice

Any communication with the department should be in writing and the said letter should be duly
acknowledged by the department with seal and sign.

Whenever the assessee is in doubt, it is always suggested to seek clarification from department in
written letter, disclosing the nature of activity undertaken, understanding of law, and practice
being followed by the assessee, and also seeking advice from the department in respect of assessee
understanding of the law. Ensure such letter is duly acknowledged with seal, sign and date by the
departmental officers.

Ensure the envelope cover under which the order received is preserved.

Ensure that all the relevant documentary evidences are accompanied along with the reply to SCN/
appeal memorandum.

Whenever a case law is relevant upon, ensure whether the same is valid as on date are the said
decision is distinguished by any other decision of a high forum.

New factual grounds cannot be added during the proceedings before tribunal, if the same was not
forming part of reply to SCN before adjudicating authority or appeal memorandum, before first
appellate authority.

Legal grounds can be added at any stage, even thou if some of the legal grounds, where missed out
at adjudication stage or before first appellate authority.

Whenever a reply to SCN is filed an appeal is filed before the first or second appellate authority,
ensure such impugned order is not going beyond the Show Cause Notice.

There is no interest on interest amount demanded and interest on penalty under the provisions of
Finance Act.

Ensure summary of the case if prepared and submitted during the personal hearings or before
CESTAT during the hearing.
Page 16
Hiregange & Associates
Chartered Accountants
Workshop on How to face audit under
Central Excise and Service Tax.
Major issues in central excise
A. Whether Suo moto credit can be taken?
Background: The assessee may debit / reverse the Cenvat Account either voluntarily or on Departmental
Officers insistence under following cases:
(i) Excise duty is paid twice due to clerical mistake or accounting error
(ii) Reversal of Cenvat credit during Departmental Audit due non-availability of documents or
discrepancy in documentation.
In the above scenarios, if the assessee has taken suo moto credit of the excess duty paid or credit erroneously
reversed, Department could raise an Audit Objection that there is no provision under Central Excise Act,
1944 and Rules for taking suo moto taking of credit or refund of excess duty paid without sanction by proper
officer. This would be based on the decision of Larger Bench of Tribunal in BDH Industries Ltd. Vs. CCE,(
Appeals), Mumbai 2008 (229) E.L.T. 364 (Tri. - LB) which observed that the PLA account and the Cenvat
credit accounts are required to be submitted to the department and any correction carried therein, need to
have department’s sanction.
Clarification: The Audit query regarding non availability of ‘suo moto’ credit by the assessee could be
contended as follows:
(a) Amount paid by mistake in excess of duty cannot be termed as duty. Hence, the assessee is entitled
for ‘suo moto’ credit of duty paid in excess due to accounting error. CCE Vs. Motorola India Pvt
Ltd., 2006 (206) E.L.T. 90 (Kar.)
(b) Hon’ble Tribunal in SOPARIWALA EXPORTS PVT. LTD Vs. CCE 2013 (291) E.L.T. 70 (Tri. Ahmd.) disagreed with Larger Bench decision in BDH Industries case holding that where duty is paid
twice erroneously, suo moto credit can be taken by the assessee since it is not an amount payable to
Government. Further, it was held that Larger Bench decision in BDH Industries is incorrect as it has
been delivered without noticing contrary decision of High Court in Motorola India case.
(c) As regards contentions of the Department that even in suo moto reversal of the entry there is bound
to be an unjust enrichment, Hon’ble Madras High Court in M/s ICMC Corporation Ltd Vs CESTAT
2014-TIOL-121-HC-MAD-CX has disagreed with this contention holding that no refund claim is
required for taking re-credit of amount reversed and upheld the suo moto credit availed by the
assessee.
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(d) Presently, there is no requirement for submission of Cenvat Credit Register or PLA register along
with Excise Returns. Hence, there is no requirement for obtaining Department’s sanction for
correction of the same.
B. Applicability of Rule 6 of CCR, 2004 as regards emergence of bye-product or residuary which are
cleared without payment of duty:
Background: Assessee is engaged in manufacture of ‘sugar’ from sugar cane and during the process,
‘bagasse’ emerges as ‘bye-product’ or ‘residuary waste’. An amount equal to 5%/6%/10% on the value
of bagasse cleared is demanded under Rule 6 of CCR, 2004.
Clarification:
a) Assessee is engaged in manufacture of ‘sugar’ and not engaged in manufacture of ‘bagasse’ since it
is only waste generated in the manufacturing activity.
b) Balrampur Chini Mills Ltd. Vs Union of India, in Civil Misc. Writ Petition No. 11791 of 2010,
(reported in 2013-TIOL-557-HC-ALL-CX) held that bagasse is a waste and Rule 6 would be
applicable only where goods which are dutiable and exempt are manufactured. High Court also
quashed CBEC Circular No. 904/24/2009-CX., dated 28-10-2009
c) Supreme Court in the case of CCEx. Vs. Gas Authority of India, 2008 (232) E.L.T. 7(S.C.) wherein it
was held that payment on presumptive value under Rule 57CC would be applicable only if the
exempted product is a final product.
C. Valuation of finished goods cleared through related person:
Background:
 M/s. M Products is a partnership firm where Mr. A and Mr. B are partners engaged in
manufacture of excisable goods which are cleared on payment of duty.
 They are clearing their entire production through M/s. FM Enterprises where Mrs. A and Mrs. B
are partners.
 Mrs. A and Mrs. B, partners of M/s.FM Enterprises are wives of partners of M/s. M Products,
Mr. A and Mr. B
Differential duty is demanded alleging that the two firms are related to each other and the price charged
by M/s. M Products to M/s. FM Enterprises is undervalued as price at which M/s. FM Enterprises sold to
its customers has to be considered as value for the purpose of payment of excise duty by M/s. M Products
under Rule 9 of Valuation Rules, 2000.
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Clarification:
a) the two firms (M Products and FM Enterprises) are independent firms as they do not satisfy test of
related party as defined in section 4(3)(b) of Central Excise Act, 1944:
(b) persons shall be deemed to be “related” if (i) they are inter-connected undertakings;
(ii) they are relatives;
(iii) amongst them the buyer is a relative and a distributor of the assessee, or a subdistributor of such distributor; or
(iv) they are so associated that they have interest, directly or indirectly, in the business of
each other.
As per clause (ii) of Explanation, the term
“relative” shall have the meaning assigned to it in clause
(41) of section 2 of the Companies Act, 1956 (1 of 1956);
b) Only natural persons can be termed as ‘relative’, even though partners of the two firms are spouses,
M Products and FM Enterprises can never be termed as ‘husband and wife’ or any of the above
referred relationships as per Companies Act, 1956.
Merely on the basis that partners of FM Enterprises are spouses of the partners of M Products, the
definition of ‘relative’ cannot be imposed on 2 partnership firms to deem them as ‘related persons’.
Therefore, Rule 9 of Valuation Rules, 2000 cannot be applied for valuing the goods sold by M
Products through FM Enterprises.
c) Cooling Systems Vs CCEx 1997 (90) E.L.T. 329 (Tribunal) wherein it was held that husband and
wife are related in the general sense of the expression, by marriage. That does not mean that they are
`related persons’ within the ambit of definition in Section 4(4)(c) since show cause notice did not
contain any allegation to show that the spouses had any direct or indirect interest in the business of
each other.
d) Tribunal in Heera Electronics vs. CCE 2006 (205) ELT 381 (Tri. – Chennai), where it is held that
merely because directors/partners of assessee and their two marketing units are related to each other,
they cannot be treated as related person since there is no evidence of mutuality of interest or money
flow back in two units.
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D. Excise duty demanded under Rule 6 of Central Excise (Determination of Price of Excisable Goods)
Rules, 2000 on Design and Engineering work undertaken in Lump sum Turnkey Contract:
Background: Assessee has been granted Lump sum Turnkey Contract for ‘Mounded Storage Vessel’ for
LPG wherein there are separate contracts for ‘supply portion’ and ‘Design Portion’. Assessee has
remitted service tax on ‘Design Charges’ and filed ST-3 returns.
Department has demanded excise duty on the goods manufactured and cleared to site for erection of
Mounded Storage Vessel at site by including the value of ‘Design Charges’ under Rule 6 of Central
Excise (Determination of Price of Excisable Goods) Rules, 2000.
Clarification:
a) As the Design charges are subjected to service tax already, the same cannot be included in the value
for demanding excise duty as it would amount to double taxation.
b) In Rule 6 of Central Excise (Determination of Price of Excisable Goods) Rules, 2000, Explanation 1
clause (iv) includes:
‘Value of engineering, development, art work, design work and plans and sketches undertaken
elsewhere than in the factory of production and necessary for the production of such goods.’
In the present case, assessee has already manufactured the goods at his factory has cleared them to
the site for assembly and erection of Mounded Storage Vessel. The design charges relates to
‘Mounded Storage Vessel’ and not necessary for production of such goods.
c) CCE (Appeals), Hyderabad vs. A.V.U. Engineers Pvt. Ltd., 2006 (199) E.L.T. 863 (Tri. - Bang.)
where the facts were similar to the present, it was held that as the design charges does not pertain to
the goods which have left the factory premises but to different item which comes into existence at
site, therefore, the value of design charges is not includible in the assessable value as per the
provisions of Section 4 of Central Excise Act, 1944.
E. Duty demand on goods which are exported and rejected by foreign customer:
Background:
 Assessee is regularly exporting the finished goods without payment of duty under Rule 19 of Central
Excise Rules, 2002 read with Notification No.42/2001-CE.
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 Certain portions of the export consignments are rejected by the foreign customers. Assessee exports
additional consignments towards replacement of rejected goods, however, the rejected goods have not
been received back due to economic and logistical reasons.
Department has demanded excise duty on the rejected goods which have not been brought back and on
which no consideration is received in foreign exchange alleging the contravention of Rule 4, 8 & 19 of
Central Excise Rules, 2002.
Clarification:
a) There is no provision under Central Excise Act, 1994 or Rules thereunder for demanding duty on
rejection of export consignment
b) The term ‘export’ means ‘taking out of India to a place outside India’ and there is any requirement of
realizing the convertible foreign exchange.
c) Supreme Court in the case of Moriroku UT India (P) Ltd. v. State of U.P., 2008 (224) E.L.T. 365 (S.C.)
observed that excise duty is not concerned with ownership or sale.
F. Cenvat Credit availed on endorsed Bills of Entry:
Background: The assessee is manufacturing goods as ‘Loan Licensee’ for certain Principal
Manufacturers. The raw material was being imported by the Principals and the Bills of Entry were in the
name of Principal (loan licensor) and the assessee being the loan licensee availed Cenvat credit on the
imported inputs on the basis of Bills of Entry on the basis of the declaration given by the Principal which
was attached thereto.
Demand for reversal of Cenvat credit is made on the assessee alleging that Bills of Entry are not in the
name of the manufacturer nor the ‘Loan Licensor’ has issued any eligible document as per Rule 9 of
Cenvat Credit Rules, 2004 and further their name does not appear anywhere or finds a mention in the
Bills of Entry.
Clarification:
a) No Cenvat reversal is required since Rule 3 read with Rule 9 of Cenvat Credit Rules, 2004 as there is
no doubt regarding receipt of goods within the factory of the assessee.
b) The procedure of issuing a declaration by the importer on the reverse of Bill of Entry for availment of
Cenvat credit by the manufacturing unit is permitted by Circular No. 179/13/96-CX, dated 29-21996.
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c) The proviso to Rule 9(2) of CCR, 2004 specifically provides that even if the document does not
contain all the particulars, but contains the details of duty or service tax payable, description of the
goods or taxable service, [assessable value, Central Excise or Service tax registration number of the
person issuing the invoice, as the case may be], name and address of the factory or warehouse or
premises of first or second stage dealers or provider of taxable service.
d) The issue is no more res-integra in view of Supreme Court decision in Union of India vs. Marmgoa
Steel Ltd., 2008 (229) E.L.T. 481 (S.C.) where the goods are transferred directly by importer to unit
of assessee from the port and goods never went to manufacturing unit of importer, then in such case
the relevant document indicating payment of duty in such case would be bill of entry and once bills
of entry produced by assessee indicates that duty paid by importer at the time of import, credit can
not to be denied.
e) Eupec-Welspun Coatings India Ltd. vs. CCE, 2009 (235) E.L.T. 347 (Tri. - Ahmd.) wherein the Bill
of entry had been sent to job worker-appellant with certificate/declaration by importer which was
duly endorsed by proper Customs officer that credit of CVD to be taken by the job worker, Hon’ble
Tribunal held that denial of credit on the basis that the importers is not registered as required under
Rule 9(1) of Cenvat Credit Rules, 2004 and name of assessee is not mentioned on Bill of Entry is not
correct as there is no dispute of receipt of goods by assessee.
Amendments relating to First Stage Dealer (these amendments are effective from 1.3.2014):
a) Importer who sells the goods would be considered to be First stage dealer. Presently the person
who purchases goods from importer was considered as First stage dealer and not importer himself.
b) Presently invoice issued by importer would qualify as valid document for availing credit. The said
provisions would be omitted consequent to the above amendment
c) Consequently, Rule 9 of Central Excise Rules, 2002 (registration provisions) is also amended to
provide that the importer who wish to issue cenvatable invoice shall also get registered.
Source: Notification Nos.17/&18 /2013–CE(NT) both dated 31.12.2013.
G. Whether the goods cleared by the Job worker could be termed as clearance of exempted goods or
provision of exempted service for demanding reversal of Cenvat credit?
Background: Assessee is engaged in manufacture of goods on his own as well as undertaking ‘job work’
operations. As regards job work, assessee receives the materials from the Principal Manufacturer under
Rule 4(5) of CCR, 2004 and undertakes processes amounting to manufacture and not amounting to
manufacture. The job-worked goods are cleared to the Principal Manufacturer without payment of duty
and they raise the bill claiming job work charges.
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As the assessee is availing Cenvat credit on inputs, capital goods and input services, Department has
demanded reversal of Cenvat credit under Rule 6 of CCR, 2004 alleging that the clearance of job worked
goods is termed as ‘exempted goods’.
Clarification: The demand for reversal of Cenvat credit under Rule 6 of CCR, 2004 does not survive
under the following grounds:
a) The clearance of job worked goods under Rule 4(5) of CCR, 2004 or Notification No.214/86-CE
shifts the duty liability from job worker to the principal manufacturer (supplier of inputs). As the
Principal Manufacturer is discharging excise duty on the final products manufactured from the job
worked goods, the goods cleared by the job worker cannot be termed as ‘exempted goods’. In Sterlite
Industries (I) Ltd. v. C.C.E., Pune [2005 (183) E.L.T. 353 (Tri.-L.B.)], the Larger Bench of Tribunal
in the context of Modvat credit of duty paid on inputs used in manufacture of product which are
cleared without payment of duty by the job workers for further utilisation in manufacture of final
product, which are ultimately cleared on payment of duty by the principal manufacturer, is not hit by
the provisions of Rule 57C of erstwhile Central Excise Rules, 1944 (present Rule 6 of CCR, 2004).
This decision is maintained by Bombay High Court in 2009 (244) E.L.T. A89 (Bom.)
b) Conditional Notifications: The restriction in Rule 6(1) does not cover exemptions which are subject
to condition since the tax / duty is recoverable from the supplier if the conditions are not fulfilled.
Reliance is placed on the decision of Bajaj Tempo Ltd. v. C.C.E., Pune [1994 (69) E.L.T. 122 (Tri.Mumbai)] in which a view was taken that even though Notification No. 217/86, dated 2-4-1986 is an
exemption Notification, it cannot be equated with other exemptions and accordingly, it was held that
when finished goods were cleared under Notification No. 217/86, it would not lead to application of
Rule 57C of Central Excise Rules which is similar to the provisions of Cenvat Credit Rules.
c) Supreme Court as reported in Escort v. C.C Ex. [2004 (171) E.L.T. 145 (S.C.)] held that the whole
purpose of the Notification and the Rules is to streamlines the process of payment of duty and to
prevent the cascading effect if duty is levied both on the inputs and the finished goods. Thus in cases
where intermediate product comes into existence, even though no duty has been chargeable to Nil
rate of duty, the credit would still be allowed so long as duty is paid on the final product.
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H. Cenvat credit on the goods rejected & returned by the customers:
Background: Assessee clears the goods to a customer on payment of duty. Due to quality reasons, the
customer rejects the goods (either entirely or partially) and sends them back to assessee’s factory by
raising debit note. Thereafter, assessee avails the Cenvat credit on the basis of his own invoice since debit
note does not have the required details for availing Cenvat credit.
Department demands reversal of Cenvat availed on rejected goods alleging that no Cenvat credit could be
availed on the basis of assessee’s own invoice.
Clarification:
 There is no restriction on availing Cenvat credit on the basis of assessee’s own invoice relating to the
rejected goods.
 Clarified by Board Circular vide Instruction F. No. 267/44/2009-CX. 8, dated 25-11-2009 that “The
Rule 8(2) of the Central Excise Rules, 2002, provides that “the duty of excise shall be deemed to have
been paid for the purposes of these rules on the excisable goods removed in the manner provided under
sub-rule (1) and the credit of such duty is allowed, as provided by or under any rule”. This provision
explains that the invoice of the returned goods, would be a valid document for availing credit and duty
is deemed to have been discharged. Regarding availing credit on its own invoice, Rule 16(1) of the
Central Excise Rules, 2002, allows the assessee to do so. In any case, the whole procedure is revenue
neutral, in the sense as the duty has to be discharged by the 5th of next month.
 The above view is also approved by Tribunal in CCE, Vadodara Vs. PAB organics Pvt Ltd. 2012 (286)
E.L.T. 621 (Tri. - Ahmd.)
I. Goods sent for testing / repair on returnable basis:
Background: Assessee removes certain capital goods on returnable basis for testing / repair purposes.
Department demands reversal of Cenvat credit on capital goods alleging that the removal for testing /
repair is not covered under Rule 4(5) of CCR, 2004.
Clarification:
a) The provisions of Rule 4(5) of CCR, 2004 clearly provides for removal of ‘capital goods’ for any
other purpose as well subject to the condition that the same is returned back within 180 days.
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b) Tribunal in Surya Colour Products P. Ltd., Vs. CCE, 2012 (280) E.L.T. 455 (Tri. – Bang) held that
Rule 4(5)(a) of CCR,2004 allows removal of inputs or capital goods to job worker for any other
purpose.
c) Max India Ltd Vs. CCE, 2008 (227) E.L.T. 328 (Tri. – Del) Tribunal held that capital goods removed
for the purpose of repairs are covered under Rule 4(5) and hence no requirement of reversal of credit.
J. Inputs rejected during manufacture and cost recovered from supplier by way of debit note:
Background:
 Assessee has availed Cenvat credit on inputs received and has been issued for manufacturing.
 During the manufacturing process, some inputs (on which credit is availed) are found to be rejected
due to quality reasons. Such rejects generated during the manufacturing process are scrapped within
the factory and not sent back to the customer.
 However, assessee recovers the cost of such inputs (less of Cenvat credit availed) from the supplier.
Departmental Audit demands reversal of Cenvat credit alleging that
 The scrapped goods are not used in manufacture and hence do not qualify to be inputs.
 Assessee has recovered cost of the goods and hence the value of final product does not include such
cost.
Clarification:
a) As per the definition of ‘input’ in Rule 2(g) read with Rule 3 of CCR, 2004, Cenvat credit on inputs
is allowed after the goods are ‘received’ within the factory. No reversal is required where inputs are
rejected during manufacturing process viz., line rejections. CCEx., Delhi Vs. Life Long Appliances,
2005(191) E.L.T. 593 (Tri.-Delhi)
b) Notwithstanding the absence of provision similar to erstwhile Rule 57D, assessee is entitled to credit
of duty paid on inputs which are contained in waste since there is no provision for denial of such
credit in CCR, 2004. Refer Shree Rama Multitech Ltd. Vs. CCE 2011 (266) E.L.T. 81 (Tri. - Ahmd.)
c) Biddle Sawyer Ltd. Vs. CCEx., Mumbai, 2004(168) E.L.T. 119(Tri.-Mumb.) wherein it was held that
Testing of raw material for quality control is one of processes of manufacture of final product.
Therefore it is submitted that goods if rejected at testing stage would clearly qualify as inputs.
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K. Scrap generated at Job-worker place not brought back:
Background:
 Assessee is sending the inputs / semi-finished goods for job work in terms of Rule 4(5)(a) of
CCR,2004.
 Job worked goods are received back within 180 days. However, scrap is retained by JW. The value of
scrap generated at Job worker’s place is adjusted in the job work charges.
Department demands reversal of Cenvat proportionate to the scrap generated at job worker’s place on the
basis that the entire quantity of goods sent for JW is not received back in contravention of Cenvat Credit
Rules, 2004.
Clarification:
a) There is no provision under Rule 4(5) for return of waste or scrap generated at job worker’s place.
b) The provisions of erstwhile Rule 57D is applicable to the input contained in scrap generated at job
worker’s place.
Tribunal in Forbes Aquatech Ltd. Vs. CCEx., Calicult, 2008(230) E.L.T. 629 (Tri.-Bang.) held that Rule
4(5)(a) during the relevant period refers only to return of the final product within 180 days and it does not
have any specific provision with regard to return of waste/scrap from the job worker.
L. Exempted clearances – liability to pay the amount collected from customer under Rule 6(3) vis-àvis proportionate reversal
Background: Assessee cleared goods to a customer who is claims exemption from duty vide a specific
Notification. The purchase order of the customer specifically adds an amount of 6% (in terms of Rule
6(3)) to the agreed price towards offsetting the fulfilment of obligation under rule 6 of Cenvat Credit
Rules. However, assessee opts to reverse proportionate credit since he has better control over usage of
inputs towards each type of clearance.
Audit objection: Once an amount of 6% is collected from customer the same has to be paid / reversed
from Cenvat records and assessee cannot adopt a different option.
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Clarification:
a) In terms of Rule 6 the assessee could opt for any one of the options among 3 options available.
Department cannot insist on adoption of any particular option
b) Assessee has maintained records to show how much inputs are used for exempt clearance, based on
such records only the reversal has been made. Therefore, question of paying in terms of Rule 6(3)
does not arise
c) 6% of price of exempted goods is not duty of excise.
M. Collection of amount in the nature of duty
Background:
 Assessee is engaged in manufacture pharmaceutical products through loan licensee (job worker) on
sale basis.
 In certain cases, the pharma products are sold to Government and Government agencies against
Purchase Order wherein it is provided that excise duty is inclusive.
 For the purpose of supplying to Government / Government Agencies, the assessee procures the said
goods from loan licensees located in duty free zones (viz., Himachal Pradesh). The finished goods
are procured from loan licensees at a price fixed by Government less agreed percentage of discount.
These goods are further sold to Government / Government agencies either at prices fixed by
Government or at discount over such price.
Audit objections: As the price fixed by Government is inclusive of duty of excise and since the assessee
has charged such price to customer, he has collected amount representing duty of excise and hence is
liable to remit the same in terms of Section 11D of CEA, 1944
Contentions:
a) Amount collected is only price and there is no amount is collected in addition to price as excise duty.
b) As for as this transaction is concern, assessee is only a trader. Section 11D is applicable only to
manufacturers and not to traders.
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Common issues in service tax-background material
Issues relating to Service
Definition of term Service – Section 65B(44)
Section 65B (44) defines service as - "service" means any activity carried out by a person for another for
consideration, and includes a declared service, but shall not include—
(a) an activity which constitutes merely,––
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force.
Can dominant nature test as laid down in BSNL case be viewed on the criterion of value of
materials/services involved in a composite contract? Say materials – 70%, Labour – 30%, Can it be
concluded that dominant nature is sale?
Comments: The answer would be ‘No’. However, this can be taken as one of the yard stick for deciding the
issue. This is for the reason that there are some activities, which both are important and neither of them is
incidental to the other.
This test would be valid in case of a Consultant issuing an opinion where the issue of the document would be
incidental and consequential to the giving of the advice or in case of sale of a Television/ Refrigerator where
some minor installation/training may be imparted.
Another illustration could be photos provided by a studio. In this case the material involved could be around
70% of the final price. However as on date this s understood as a service and the paper is said to be consumed
in provision of the service.
In the above example assume a composite contract where the dominant nature is service, whether the
service provider needs to charge service tax on the entire consideration even it involves the value of
materials?
Comments: Yes, the service provider should charge service tax on the entire value despite the contract
includes the value towards materials consumed. However, the Cenvat credit of the value of materials would
be available.
An example of this could be a case of blasting of rocks contracts the consumption of explosives in the
provision of services would require differentiation. Here the dominant test would indicate a service.
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In the above example assume a composite contract where the dominant nature is not clear, whether the
service provider needs to charge service tax on the entire consideration even it involves the value of
materials?
Comments: No. In this case the VAT would be payable on the value of goods transferred and service tax on
the value of service. In both cases if the value of goods is clear or the value of service is clear, the other could
be calculated and both taxes discharged without difficulty. However at times the value may not be available
and other options taken as available. Then valuation of the balance can create a challenge and may be
disputed by the revenue.
Transfer of title in goods and immovable property:
Can the Agreement to sell be a transfer of Immovable Property?
Comments: As per the Apex court no, it only creates a right. However the deduction for the land and
building should be available as on the date of the agreement as the same is a matter relating to the State. In
our neighbouring State at that stage the property is registered. The liability under VAT on the balance value
has recently been confirmed by the SC in L&T decision. The same analogy should apply to ST. The value of
land however can be deducted as long as there is a reasonable basis.
Employer employee relationship
Whether the following category of person can be regarded as employee and services provided by them
are in the course of employment?
Salary to Whole Time Director (WTD) : WTD are responsible for looking after the affairs and overall
supervision of the company. Generally there is contractual agreement between the director and the company
establishing employer and employee relationship. Remuneration (in any form) paid to them would be in the
course of employment. However if any amount has been paid over and above the normal agreed
compensation, which not in the nature of salary then such amount would attract service tax.
Remuneration to casual workers: The services provided by casual worker to his employer who gives wages
on daily basis are in the course of employment and accordingly not liable to service tax. Sometimes, casual
workers are employed by a contractor, like a building contractor or a security service agency, who deploys
them for execution of a contract, or for provision of security services to a client. Services provided by the
workers to the contractor are services in the course of employment and hence not taxable. However, services
provided by the contractor to his client, by deploying such workers would not be a service provided by the
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workers to the client in the course of employment. The consideration received by the contractor would
therefore be taxable if other conditions of taxability are present. (TRU DOF No. 334/1/2012/-TRU dated
16.03.2012)
Issue relating to declared service
Declared Services – Service has been defined to include declared services. Declared Services are defined
under Section 65B (22) of the Finance Act, 1994 to mean any activity carried out by a person for another
person for consideration and declared as such under Section 66E of the Finance Act, 1994. It means for a
service to come under the category of declared services, it has to satisfy two basic conditions conjunctively
It must be an activity by one person to another for consideration
It must be specified(i.e. declared) under section 66E
Renting of immoveable property service:
In case the landlords have not paid service tax on renting for the past period whether the service tax
Has to be paid from the beginning?
Comments: Yes, since the law is retrospective the demand could be made for past; however waiver of
penalty and interest protection under Article 20 of the Indian constitution is also available. It is relevant to
note that Hon’ble Supreme court in case of J.K.Spinning and Weaving Mills Ltd., and Another Vs. UOI &
Other 1987 (32) ELT 234 (SC), It is held that when retrospective amendment is brought in the law extended
period of limitation cannot be invoked.
Further as the clarity has emerged recently when Apex Court upheld the levy of service tax on rentals from
October 2011. Consequently landlord could opt to pay from that date.
Alternately, in light of the negative list, it has declared services entry for renting wef July 2012. The landlord
could possibly pay service tax for last 18 months. Following the same, past demands may be asked to be
confined only within the normal period of limitation.
Construction services:
Whether Composite contract of sale of land and building where any part of consideration received before
completion certificate is liable to service tax?
Some Developers were entering into single agreement of a future sale of the apartment on the basis of the
view that, amounts received by them prior to the completion of the flat would be in the nature of advance
monies for the future conveyance of immovable property and consequently, cannot be treated as ‘works
contracts' under the sales tax/VAT law.
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There was a similar view in Magus Constructions (2008 (11) STR 225) where High Court observed that
where the agreement indicated that the transaction is one of sale and purchase of premises and not for
carrying out construction activity on behalf of prospective buyer. The documents treated as agreement for
sale of flat/premises by registering authorities and stamp duty levied on sale consideration and advance
amount given by prospective buyer is against sale consideration of flat/building and not for obtaining service
i.e. the construction linked payments are to be made in stages by the buyer towards flat allotted. The delivery
of the flat is given to buyer only after all the installments are paid to the vendor.
It was in this background that the Apex Court delivered its historic verdict in the K Raheja case, in 2005
(2005-TIOL-77-SC-CT), under the then prevailing Karnataka Sales Tax Act, 1957. It was held that the no
works contract if agreement made after construction. Held that the agreement made before completion of
construction is works contract. This view has been upheld in recent decision in L&T case (2013-TIOL-46SC-CTLB) by Supreme Court.
Most transactions involving construction and sale of flats would also get covered under Section 66E(b) of the
Finance Act, 1994, which reads as under:
(b) construction of a complex, building, civil structure or a part thereof, including a complex or building
intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance
of completion certificate by the competent authority.
Service tax might have to be paid on the entire construction value, including the value of the construction
attributable to the period, prior to the date of the agreement, subject, of course to abatement.
Note: This allows one to pay VAT + ST on smaller amount as the construction progresses. Maybe save upto
50% in this time of slow pick up of stocks of built apartments.
Whether service tax is leviable on the construction done for landlords by developer under JD
agreement?
The service tax is leviable on value of services provided by one person to another for a consideration. As per
the declared services entry, the activity of the construction of complex for sale would be deemed to be service
only if consideration has been received prior to issuance of completion certificate by the competent
authority. Consideration includes any amount that is payable for the taxable services where land is included
in amount charged from service receiver.
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The ST Edu Guide also clarified in Guidance Note 6-para 6.2.1 as follows:
Construction service provided by the builder/developer is taxable in case any part of the
payment/development rights of the land was received by the builder/ developer before the issuance of
completion certificate and the service tax would be required to be paid by builder/ developers even for the
flats given to the land owner.
Though there is a possibility of challenge, there could be a demand of service tax on land owner’s share of
constructed area by revenue as the law stands presently after 1.7.2012.
Whether landlord is leviable to service tax on his share of building which he sells to end buyer?
The land owner is entitled to certain portion of built up area. When the land owner enters agreement with the
interested buyer and he receives payment prior to completion of construction, he is liable to service tax.
However if the builder has paid the ST on landlords share [ though not clear] the credit of the same would be
available to the landlord.
Issue relating to Software license
Whether the software licenses are covered?
Comments: If the software works on the license basis, then it would be transfer of right to use goods and the
same is taxable under another declared service entry namely “transfer of goods by way of hiring, leasing,
licensing or in any such manner without transfer of right to use such goods.” However this issue is debatable
and requires judicial clarity on this.
Issues relating to Negative list
Negative list
SECTION 66D. Negative list of services. - The negative list shall comprise of the following services,
namely:(a) services by Government or a local authority excluding the following services to the extent they are not
covered elsewhere(i) services by the Department of Posts by way of speed post, express parcel post, life insurance and
agency services provided to a person other than Government;
(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
(iii) transport of goods or passengers; or
(iv) support services, other than services covered under clauses (i) to (iii) above, provided to business
entities;
(b) services by the Reserve Bank of India;
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(c) services by a foreign diplomatic mission located in India;
(d) services relating to agriculture or agricultural produce by way of(i) agricultural operations directly related to production of any agricultural produce including
cultivation, harvesting, threshing, plant protection or testing;
(ii) supply of farm labour;
(iii) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying,
cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and
such like operations which do not alter the essential characteristics of agricultural produce but make
it only marketable for the primary market;
(iv) renting or leasing of agro machinery or vacant land with or without a structure incidental to its use;
(v) loading, unloading, packing, storage or warehousing of agricultural produce;
(vi) agricultural extension services;
Services by any Agricultural Produce Marketing Committee or Board or services provided by a
commission agent for sale or purchase of agricultural produce;
(e) trading of goods;
(f) any process amounting to manufacture or production of goods;
(g) selling of space or time slots for advertisements other than advertisements broadcast by radio or
television;
(h) service by way of access to a road or a bridge on payment of toll charges;
(i) betting, gambling or lottery;
(j) admission to entertainment events or access to amusement facilities;
(k) transmission or distribution of electricity by an electricity transmission or distribution utility;
(l) services by way of(i) pre-school education and education up to higher secondary school or equivalent;
(ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time
being in force;
(iii) education as a part of an approved vocational education course;
(m) services by way of renting of residential dwelling for use as residence;
(n) services by way of(i)
extending deposits, loans or advances in so far as the consideration is represented by way of
interest or discount;
(ii)
inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign
exchange or amongst banks and such dealers;
(o) service of transportation of passengers, with or without accompanied belongings, by(i) a stage carriage;
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(ii) railways in a class other thanA. first class; or
B. an air-conditioned coach;
(iii) metro, monorail or tramway;
(iv) inland waterways;
(v) public transport, other than predominantly for tourism purpose, in a vessel between places located in
India; and
(vi) metered cabs, radio taxis or auto rickshaws;
(p) services by way of transportation of goods(i) by road except the services ofA. a goods transportation agency; or
B. a courier agency;
(ii) by an aircraft or a vessel from a place outside India to the customs station of clearance in India; or
(iii) by inland waterways;
(q) funeral, burial, crematorium or mortuary services including transportation of the deceased.
Whether the activity amounting to manufacture of exempted goods is covered in negative list?
Comments: Where a process is carried out and on it a duty of excise is leviable, it would be covered by this
negative list entry. Here it is important to note that the word used is leviable, not levied. Therefore where a
process is carried out on which duty of excise is leviable but is not actually levied because some exemption
notification is in force still it appears that it would be covered by the definition of “process amounting to
manufacture or production of goods” and would not be liable to service tax.
In case a person provides a composite service of providing space for advertisement that is covered in
the negative list entry coupled with taxable service relating to design and preparation of the
advertisement how would its taxability be determined?
Comments: This would be a case of bundled services taxability of which has to be determined in terms of
the principles laid down in section 66F of the Act. The services rendered by advertisement, as given in the
question, are in the nature of naturally bundled services. If the preparation of advertisement is incidental or
ancillary for displaying on the space, it would be in the nature of sale of space or time for advertisement and
would be exempted. However, if the sale of space or time is part of the entire agreement for advertisement
support without any segregation towards such charges, it could be in the nature of advertisement services and
liable to service tax.
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Whether transportation service provided by the truck owner and truck operator to end user directly is
liable to service tax?
Comments: Services provided by truck owner directly to end user is covered by the negative list entry and is
not liable to service tax.
Could the recipient of the GTA service who pays the service tax avail and utilize the CENVAT credit
for making the payment towards this liability?
Comments: The CENVAT credit rules are clear that the recipient of services is not a provider of taxable
services and therefore would not be admissible for the adjustment. Therefore the service receiver who is
neither a manufacturer of excisable goods nor a taxable service provider would have to pay the service tax as
receiver in cash.
Issues relating to mega exemption
Exemption to canteen
Whether this exemption is available even if the AC facility is available for few days in year?
Comments: If the canteen in factory had AC facility even for few days in this year, then it could be said to
be covered in said exemption at SL no19A discussed earlier. It is even sufficient if there is AC facility, it is
not mentioned that it should be used to be covered in this exemption.
Exemption to RWA:
Whether the exemption is available to RWA if the contribution in excess of Rs 5,000 per month per
member?
Comments: The recent circular no. 175/01/2014-ST has clarified as follows- If the per month per member
contribution of any or some members of a RWA exceeds Rs 5000, the entire contribution of such members
whose per month contribution exceeds Rs 5000 is not exempted from service tax.
We examine the validity of this circular as it appears to be purely a revenue augmentation exercise of the tax
administration. This circular has clarified that if the contribution exceeds Rs 5,000/- per month per member
the entire contribution is liable. On the other hand, in our considered view it exempts the contribution upto Rs
5,000/- pm per member for sourcing goods and services from third party for common use of members. It has
nowhere mentioned in the notification that the exemption benefit upto Rs 5000 pm is not available to member
where the contribution per month for member exceeds Rs 5,000/-.
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Issues relating to valuation
Whether reimbursement of expenses is includable in the taxable value?
Comments: In terms of Rule 5 all expenditure or cost incurred by the service provider in the course of
providing taxable service and borne by the recipient is includable in the taxable value. However in the
opinion of authors the provision relating to inclusion of all the costs/expenditure is not in line with the
provisions of section 67 as the said amount is not charged for such services. Further also there is no such
deeming fiction for the same. The same should be confined only to the costs and expenditure incurred to the
extent the same is attributable to the amount charged for the services.
In Intercontinental Consult & Tech (P) Ltd Vs UOI [2012-TIOL-966- HC-Del-ST] held that by including the
expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.
Whether the value of free supplied goods to be used for providing the services has to be included in the
value of taxable services?
Comments: In the opinion of the author the same is not includable as the same is not consideration for the
services unless the services is that of service element in works contract, where value is being computed based
on fixed percentage. However if the total consideration agreed includes such value and later the same is
supplied free of cost, then there is possibility of being considering that the said amount is to be included in
the total value on which service tax has to be paid.
Further recently LB in Bhayana Builders Pvt Ltd Vs CST2013-TIOL-1331-CESTAT-DEL-LB held that for
the purpose of Service Tax valuation, the value of goods and materials supplied free of cost by a service
recipient to the provider of the taxable construction service, would be outside the taxable value or the gross
amount charged.
How to compute the value of land in an agreement for sale of apartment or commercial complex?
Comments: Where the sale of build property has clearly 2 components mentioned clearly in the agreement
(in some states the agreement to sell immovable property and construction is different) relating to land and
construction then the construction amount ONLY could be considered as the value of works contract. That on
that amount the opinion noted above could be decided on.
Issues relating to Cenvat Credit
Whether CENVAT Credit on the services paid under reverse charge is available?
Comments: The service tax paid under reverse charge mechanism is paid similar to service provider. If the
service for which the tax is paid on reverse charge is falling within the scope of input service definition, the
credit of the same would be eligible in terms of rule 3 of CNEVAT credit rules. The credit on the same may
be availed on the basis of GAR 7challan.
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Whether the credit of the service tax can be taken prior to registration?
Comments: the provision of Rule 3 of the CCR states that service tax paid on the input service which is used
for providing the service is eligible for credit. Hence as long as the liability for the prior registration is paid
the credit of the same is also available.
Issues relating to Reverse charge/Joint charge
Whether service tax liability arises to specified service receivers in respect of services of transportation
of goods by individual truck operator?
Comments: The finance minister had made it clear that there is no intention to levy service tax on truck
owner or truck operator. The intention of the legislation as set out in the budget speech was brought into the
statute by defining ‘Goods Transport Agency’ wherein issue of consignment note was made an essential
document. In fact this is a differentiating factor between the truck owner/operator as against the transport
booking agent.
The “REPORT OF THE COMMITTEE FOR THE PURPOSES OF LOOKING INTO APPROPRIATE
MECHANISM/MODALITIES FOR COLLECTION AND PAYMENT OF SERVICE TAX ON GOODS
TRANSPORT AGENCY” based on which the levy was finalised explained the meaning of the term Goods
Transport Agency as follows :
“Any commercial concern which (is common carrier under the Carriers Act, 1865 and) books the goods for
transportation by road, issues consignment note and provides value added services over and above the mere
carriage of the goods be called the goods booking agency.”
Further to this the said committee explained the meaning of the terms ‘Truck Operators or Truck Owners’
used in the Finance Speech as follows :
“Any organization/person who possesses the vehicle by virtue of ownership, under lease/hire agreement etc
and is responsible only for affecting the carriage of goods and is not required to issue the consignment note.
The truck owner can alternatively be called the truck operator also.”
In other words, it was clearly clarified that merely booking agency is liable and truck owners are not within
the scope of levy. There is no liability on the service recipient to pay service tax when the transportation is
done through individual truck operators
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Whether GTA has to pay service tax when the services are provided to persons other than specified
persons?
Comments: Yes, for the case of individual/HUF that are not covered by above, the GTA would be liable to
discharge service tax.
What is extent of service tax payable by the company which is receiving services from GTA under
reverse charge mechanism?
Comments: When services are provided by GTA, the service tax liability to be discharged on 25% of total
amount charged to specified persons[being persons liable to pay freight]
Sponsorship service:
Whether sponsorship provided to an individual is liable in hands of service recipient under reverse
charge mechanism?
Comments: As the specified service receivers under reverse charge mechanism for sponsorship services is
firm/body corporate. There is no service tax liability on such a service receiver under reverse charge.
Whether services other than legal services which is provided by an advocate to business entity liable to
service tax?
Comments: The service tax liability arises to service recipient business entity under reverse charge
mechanism only in respect of legal services. Legal services is defined as follows in notification no.25/2012ST- 2(w)"legal service" means any service provided in relation to advice, consultancy or assistance in any
branch of law, in any manner and includes representational services before any court, tribunal or authority; In
other words, if any other services such as coaching classes is done by advocate to LLB students is not liable
in hands of recipient under reverse charge mechanism
Whether services provided by Police agencies to companies taxable in hands of service receiver under
reverse charge mechanism?
Comments: Yes. Security services provided by government agencies are covered as a support service which
is outsourced by private entities. The tax is payable by the recipient payable on reverse charge mechanism.
Whether services by whole time director to company is liable in hands of company?
Comments: The services by director who are Whole time employees of companies is not liable in hands of
company. As the payments which is done by employer to employee in course of employment is excluded
from service tax levy.
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From which date the service tax liability arises to company under reverse charge mechanism in respect
of sitting fees which was paid to the directors?
Comments: The service tax liability arises to the company only for services received from director’s wef
7.8.2012 onwards.
Whether the service tax needs to be deposited by company on the architect services provided to
company by the director who is a qualified as a B Arch?
Comments: In view of the authors, the service tax liability arises to company under reverse charge only in
respect of services received from directors in their capacity as directors. Though this is not clarified explicitly
in the law. There is a possibility the revenue could take a view company has to pay service tax on such
payments also under reverse charge mechanism.
Whether the Commission for the year 2011-12 paid to the Directors on 01.08.2012 is liable to Service
tax, considering the fact that the service in this regard was provided by the Directors prior to
01/07/2012, when the 1st Notification i.e., Notification no. 30/2012-ST came into effect?
Comments: As the services for which the commission is paid on 1.08.2012 to the directors is not taxable
based on the well settled principle that when there is no levy at the time of taxable event occurrence, there
cannot be any tax liability later. No need to pay under reverse charge.
Whether the service tax liability can be paid on the specified services such as GTA services,
sponsorship service by the service recipient out of Cenvat credits?
Comments: No, the service tax liability has to be paid by the service receivers liable under reverse charge in
Cheque/e-payment. There is a specific restriction in input services definition in Cenvat Credit Rules for
utilization of Cenvat credits to pay off the service tax liability by recipients of service wef 1.7.2012. For past
could examine making such an adjustment. But it is risk prone and could lead to litigation.
Whether liability arises to the service recipient company only if the service provider firm providing
the security services mentions that liability of 75% total liability to be paid by receiver in invoice
raised?
Comments: The liability arises to company under joint charge on services provided wef 7.8.2012 whether or
not security services firm has specified in bill liability of service receiver company or not.
Whether the service tax liability can be deducted from amounts payable to the service provider
individual/firm by the service recipient company?
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Comments: The service receiver company cannot deduct the amount of service tax payable by it under joint
charge mechanism out of the amounts which is payable, for instance Rs 10000[billed] by the rent a cab
operator service provider. The payment of service tax liability under joint charge mechanism is not a TDS
which is to be deducted and paid by the service receiver. It is a liability which is independent of the service
provider liability.
Whether the service tax liability has to be paid to the account of the service provider by the service
recipient company in respect of say, security services received from individual?
Comments: The service tax liability has to be paid on the account of the service receiver company. As
liability paid by service receiver under joint charge is his own liability which has to be paid under such
company’s service tax registration alone.
What is document based on which the service receiver company which had paid service tax liability on
security services received from an individual can avail Cenvat credits of such a liability paid under
joint charge mechanism?
Comments: The Cenvat credits can be availed on the basis of payment challan by the service receiver
company.
Whether the individual providing renting of motor vehicle to company has to be under abatement
option, to enable the service receiver to pay service tax on 40% of total amount charged?
Comments: The liability of service receiver company is restricted to 40% of total service tax payable on
amount charged, whether specified service provider is opted for abatement option or not. The service
receiver company can go ahead and pay service tax of 40% of total service tax payable.
Whether Cenvat credits can be availed on the service tax paid by service receiver on renting of vehicle
for pick and drop of employees company under reverse charge mechanism?
Comments: It is better not to avail such credits due to specific restriction on availing employee related
credits which is mainly intended for personal use or consumption of employees in definition of input services
under CCR, 2004.
Whether the cleaning services provided by a firm to a company by sending its staff to company
premises are a manpower supply services?
Comments: The responsibility for deliverables whether with service provider or receiver has to be examined.
If merely persons are being supplied to company by the firm, who are working as per directions of company
and firm is not responsible for executing of cleaning services. Then it is manpower supply services. Where
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liability arises to the company to extent of 75% of total service tax payable wef 1.7.2012. When the contract
is for executing cleaning services by firm, and firm is responsible to execute the cleaning works. Then it is a
cleaning contract and not a manpower supply contract. Company is not liable under joint charge mechanism.
Whether the security services provided by one company to another company are liable in hands of
such other company?
Comments: No, when both service providers and service receivers are companies the service tax liability
does not arise to recipient company under joint charge mechanism.
What is service tax liability of the service recipient company under joint charge in case of works
contract executed by sole proprietary concern?
Comments: In case of the service provider being an individual , HUF or partnership firm which is executing
works contract and the recipient is a body corporate, then the service recipient company is made liable to
discharge 50% of the tax liability vide notification 15/2012-ST. The service tax only to the extent of 50% of
service tax payable has to be paid by the service provider and balance 50% has to be paid by the service
recipient.
Whether pure labour jobs of brick laying/pit digging done by individual contractor is liable in hands of
Construction Company?
Comments: The service tax liability does not arise on pure labour jobs done in relation to construction by
individual/firm to a company. The service tax liability would arise only when a comprehensive material plus
labour job is being executed by the contractor individual to the company.
How to determine liability on material plus labour AMC of repair of AC when the firm providing such
services is raising bill for gross amount without material and labour break up?
Comments: When the service portion is not specifically indicated in the invoices raised by the repairs
contractor, the service tax liability at 50% *12.36% can be paid on 70% of total amount charged by the
service receiver company. This is as per valuation mechanism for valuing service portion of works contract
set out in Valuation rules which is prescribed in this regards.
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Facing Central Excise and Service Tax Audit
Introduction:
Though the law and procedures under both service tax and central excise are made user friendly,assessee are
still finding many difficulties in having interaction with the department officials. This may be because of lack
of awareness of related lawor the psychological image about the department. Sometime because of the fear in
the minds of assessee about the probable disputes, they tend to hesitate to approach the department at right
time, which will in turn create many more unexpected problems for assessee leading to unnecessary litigation
which may also include attracting penal provisions under both laws.
Audit is a set procedure to check, verify and scrutinize documents and records with a specific purpose,
conducted either by a qualified and competent person or by the officers of the tax department, both under the
Central and State Governments.
It is a very important tool employed by the tax authorities to detect tax
evasion, to verify proper compliance with the tax laws and also to ensure correct availment of credits and
refunds.
In this material we have highlighted the need for an audit, its benefit both to the department and also to the
assessees. We have also touched upon how to get ready to face audits with the do’s and don’ts in connection
with the same.
Global trends Vs India Vs State:
The main focus of the Central and State Governments have been to increase tax collections by increasing tax
rates, doing away with exemptions and also increasing the tax base. This was being achieved by increasing
Central Excise and Service Tax rates from 10% to 12%,VAT rates from 12.50% to 14.50%, introduction of
negative list for taxing services and also removing most of the exemptions. The rates under GST are also
likely to be pegged at around 20%. The main contributors towards the exchequer are indirect taxes which
contribute 12 L crores, direct taxes contributing 5 L Crores. The states’ share of revenue mainly comes from
commercial taxes. Tax department have been focusing mainly on tax compliance and tax avoidance
with the use of technology. This is done through Audits which helps the tax authorities to ensure that all
transactions are recorded and reported in the tax returns, proper valuation of goods, correctness of
credits/refunds, availment of export benefits etc. The key objective of audit is to plug loop holes in revenue
collection.
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Purpose of the Audit –
Department Perspective
The necessity of conducting tax audit by the department emerges out of the fact that the assessees follow the
system of self-assessment and files periodic returns in the prescribed form. Though periodic returns are
scrutinized by the tax authorities to elicit cases of short payments but such scrutiny is just limited to checking
of arithmetical accuracy. Such scrutiny does not help in in plugging the revenue loss which may be caused
due to the assessee, with a view to evade tax, disclosing incorrect figures. Sometimes, this may be purely
unintentional due to lack of awareness about the tax laws. Audit of the records of the assessee helps the
department to ensure, to a considerable extent, that the government dues are recovered to its maximum. It
therefore plays an important role in the achievement of the objectives of the department which are to collect
the taxes imposed by law through the encouragement of voluntary compliance and to maintain public
confidence in the integrity of the tax system.
Assessee perspective:
In general assessees don’t show interest in audits. However the following advantages are there for the
assessees in spite of audit.
The errors committed whether knowingly or unknowingly are found out by the audit and its occurrence is
prevented in future because errors are placed at an early stage and no attempt is made to commit such errors
and mistakes. Just like errors, the frauds are discovered by audit and its recurrence in future can be avoided.
Due to the fear of audit the work of accounting always remains current and correct in all respects.
Proof of Books: Another advantage of audit is the proof of the books of accounts; this helps in maintaining
the records up to date at all times.
An audit facilitates the provision of advice that can have real financial benefits for a business.
Powers of an auditor:
The Central Excise Act does not provide for any powers in an auditor, but under Companies Act, 1956, it is
provided that auditors have various powers. It would not be correct to say that the powers in the latter statute
would apply to audits under the Central Excise Act, but it may be relevant to note, that the following are the
important and generally recognized powers of an auditor:
Power to call for information and explanation from the officers of the auditee and its officers
Power to/right of access to books of account and vouchers at all reasonable times (wherever kept at the
company’s office or elsewhere)
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Duties of an auditor:
The Central Excise Act does not contain any provisions on this subject. However, it would be important to
note that there are a plethora of cases under the common law and company jurisprudence which deal with the
duties of auditors. The auditor is commonly understood to be the ‘watchdog’ of the appointing agency and is
required to examine and verify the records relating to accounts and report on any inaccuracies or omissions
therein and ensure that the financial statements audited by him agree with the accounting records verified by
him and thereafter report to the persons appointing him. In order to so report, an auditor is expected to carry
out such inquiries as he being expedient so as to be able to form an opinion on matters which would concern
his report. Their duty is to exercise reasonable skill and care in ascertaining the accuracy of the company’s
accounting records, accuracy and completeness of its annual accounts.
In the light of the decision in Derry Vs Peek (1889) 14 App. Cas. 337, an auditor will be liable in tort to the
member, creditor, debenture or loan security holder or to a prospective investor in the company or a person
who proposes to give credit to it if the auditor knowingly gives him false information about the company’s
financial position. Thus, an auditor appointed under Sections 14A or 14AA would owe his statutory duty and
responsibility to the appointing authorities and would be answerable to the charge of negligence.
Traditional audit Vs Risk based audit
The traditional methodology of audit could be called procedure-driven audit approach. The expectation of the
users over time has been increasingly demanding and auditors are expected to keep pace with the same. They
are also expected to fulfill their responsibilities for detecting material errors and irregularities. The proceduredriven audit had two major weakness where over-verification of low risk areas and under-verification of high
risk areas, which reduce the probability of detecting errors and irregularities. The increase in the number of
transaction of large assessees where millions of numbers are involved makes the traditional audit impossible
without use of technology based audit tools, which at present may not be in the reach of all auditors. The
relevant accounting standards enjoins on the auditor\r the responsibility of reigning the audit to provide
reasonable assurance of decting errors and irregularities that are material. To reduce the gap as also to
safeguard themselves, the risk driven audit approach has been the viable alternative. This approach to audit
would also increase the audit effectiveness and reduce audit failures.
The methodology of audit has been illustrated below:
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Start
Audit Plan
Test/Assess the Control Risk
AAR/PDR
Substantive Test
Audit Report
Audit Risk:
Audit risk is the risk that an auditor may unknowingly fail to appropriately opine on the financial statements
that embody material misstatements. Material Misstatement are a result of errors and irregularities, deliberate
or otherwise. The audit risk is to be evaluated and considered while planning the substantive test of controls,
balances and transactions. The audit program requires to be suitably altered to mitigate the risk in some areas
of suspected/known vulnerabilities. Audit risk is a combination of inherent risk and control risk. There is also
a detection risk of the audit exercise itself not being adequate leading to an error/irregularity not being
noticed. This can happen due to the quality of personnel assigned the audit or due to the sampling techniques
adopted in the audit exercise. A misstatement identified in a sample cannot be extrapolated to the population
if the distribution is not normal.
A brief discussion on the relevant types of audit risks follows:
Inherent Risk:
The susceptibility\probability of errors and irregularities of a class of transactions on account balance that
could be material. There are some risks, which exists in a business depending on some factors as under,
The audit complexity is increasing day by day with global businesses, geographically distributed divisions,
national and international barriers falling and the number of transactions in millions. The higher the
complexity the higher would be the risk.
Dishonest management is a reality. Enron in the international scene and CRB capitals in the local scene are
prime examples. An auditor would have to detect the same as dishonesty would increase the audit risk
generally.
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Falling EPS or liquidity: The competitive forces of the global village are affecting the erstwhile blue chips
leading to decline in industry/businesses and economies themselves. The method of raising profits artificially
in such cases would be high. In such a circumstance the audit risk would increase.
The fraud/material misstatement in the financial statements may also be caused by a wide variety of reasons,
the detective of which should be part of the audit procedure.
Control Risk:
This can be defined to be the risk that the controls in place will prevent, detect and consequently correct the
errors or irregularities. This risk is directly related to the effectiveness of the internal control. At the
preliminary stage the internal control structure may be examined which would be evaluated as to its probable
effectiveness. The testing of the controls in place within the management framework would have to be
evaluated. The criterion for evaluation of the controls would be based on the judgement of the auditor along
with the procedures in place with regard to certain internal control principles. Some of the main principles are
discussed as under,
Competence of the personnel: The choosing of appropriate person for the job with regard to qualification,
experience and character is an important preventive control. The background check and an assessment of the
adjustability into the management ethos may also be relevant. This would be more important is an IS
environment.
Separation of duties: The principle of having segregation between the compatible functions is necessary in
each job. With the rapid growth of computers this may not always be possible. In such cases segregation
could be on the principle that the program verification is by a different person than the programmer (User,
Analyst). The program modifications should be yet another person from another department. This would lead
to incompatible duties being assigned to one person. If no such control exists, a grave risk exists and
manipulation if any may not be possible to be detected at all.
Standard Operating Procedure or SOP: The written SOP based on the policies of the top management to
reach the business objectives is vital in larger organisations. This may even be integrated to the ISO if any.
This should be communicated and understood by the personnel. A lack of the same may lead to errors and
irregularities.
Authorisation: This could be in the form of a standard operating procedure manual where the authority is
based on the likelihood of error/irregularity. Generally the divisional head would be responsible. Budgeting
and performance monitoring meeting are other controls in this area.
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Measures to safeguard assets: This refers to all the assets in the concern including the physical assets
(machinery, software, hardware, stocks, debtors, investments, cash/bank balances etc.) and others (know
how, brand value, patents, people etc.). the assets safeguarding is linked to the responsibility fixation on
designated personnel.
Periodic physical verification and reconciliation: The verification at intervals of time is a self-verification
routine, which every organization should build in. the actions could be perpetual inventory, creditors and
debtors balance confirmation, monthly Cenvat credit to returns reconciliation, production record and excise
returns compared to sales tax returns or income tax returns and differences reconciled.
All the above have to be applied in the testing of controls relating to the various cycles (cash receipts,
payable, receivable, expenditure etc). The testing of the controls will indicate the areas of weakness and also
enable the auditor to arrive at his assessment of the control risk. He would also be able to determine the
extent to which he can rely on the controls and extent of substantive testing of the transactions and balances
required for him to provide an opinion. The methods could include use of questionnaires/flowchart of process
of documents and controls, tracing of transaction from the start to the finish (Raising of PO to the payment
stage).
Detection risk:
This is the risk assessment based on the competence of the audit staff, considering the inherent risks and the
controls risks in place. The risk is that the audit procedures would not result in an appropriate conclusion.
Normally the basis of the level of detection risk is dependent on the levels of the inherent risk and control
risks. If the latter risks are high- the detection risk would be lower. If both are low then it would be high.
However this would be decided on the basis of the auditor’s judgement. The next step in the risk based audit
approach is to arrive at the acceptable risk. This is the measure of the willingness of the auditor to accept that
the financial statements maybe materially misstated. Here the auditor accepts that there is a level of
uncertainty in performing the audit function. He could also fix the planned audit risk he is willing to take.
This can be calculated as under:
PDR = AAR/IR*CR
AAR = IR*CR*DR
PDR – Planned Detection Risk, IR – Inherent Risk, CR – Control Risk, DR – Detection Risks
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Audit under Section 14A and 14AA
Special Audit provisions were for the first time introduced under the excise law as far back as 1995. Section
14A of the Central Excise Act was introduced vide Section 76 of the Finance Act, 1995 which provided for
special audit in respect of valuation of excisable goods. Special audit could be ordered in cases as set out in
sub-section (i) of section 14A i.e. where the central excise officer was of the opinion that the value was not
correctly declared or determined by the manufacturer or any other person.
Thereafter, scope of special audit
was expanded by introducing Section 14AA in the Central Excise Act vide Section 83 of the Finance Act,
1997.
Section 14AA of the Central Excise Act, 1944 deals with special audit in cases where credit of duty availed
or unutilized is not within the normal limits etc., by Cost Accountant or Cost Accountant. Until the year
2009, special audits could be conducted only by cost accountants. It was only vide sec. 105(i) and section
106(i) of the Finance Act, 2009, that section 14A and 14AA were amended to provide that special audits
could also be conducted by chartered accountants. Service tax provisions have no separate provision for
special audit. But Section 14AA of the Central Excise Act is also applicable to the output service provider
by virtue of Section 83 of Chapter V of Finance Act, 1994, with effect from 08.04.2011.
14A. SPECIAL AUDIT IN CERTAIN CASES
If at any stage of enquiry, investigation or any other proceedings before him, any Central Excise Officer not
below the rank of an Assistant Commissioner of Central Excise, having regard to the nature and complexity
of the case and the interest of revenue, is of the opinion that the value has not been correctly declared or
determined by a manufacturer or any person, he may, with the previous approval of the Chief Commissioner
of Central Excise, direct such manufacturer or such person to get the accounts of his factory, office, depots,
distributors or any other place, as may be specified by the said Central Excise Officer, audited by a cost
accountant, nominated by the Chief Commissioner of Central Excise in this behalf.
The cost accountant, so nominated shall, within the period specified by the Central Excise Officer, submit a
report of such audit duly signed and certified by him to the said Central Excise Officer mentioning therein
such other particulars as may be specified: Provided that the Central Excise Officer may, on an application
made to him in this behalf by the manufacturer or the person and for any material and sufficient reason,
extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the
period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and
eighty days from the date on which the direction under sub-section (1) is received by the manufacturer or the
person.
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The provisions of sub-section (1) shall have effect notwithstanding that the accounts of the manufacturer or
person aforesaid have been audited under any other law for the time being in force or otherwise.
The expenses of, and incidental to, such audit (including the remuneration of the cost accountant) shall be
determined by the Chief Commissioner of Central Excise (which determination shall be final) and paid by the
manufacturer or person and in default of such payment, shall be recoverable from the manufacturer or the
person in the manner provided in section 11 for the recovery of sums due to the Government.
The manufacturer or the person shall be given an opportunity of being heard in respect of any material
gathered on the basis of audit under sub-section (1) and proposed to be utilized in any proceedings under this
Act or rules made there under.
14AA. SPECIAL AUDIT IN CASES WHERE CREDIT OF DUTY AVAILED OR UTILISED IS NOT
WITHIN THE NORMAL LIMITS, ETC.
If the Commissioner of Central Excise has reason to believe that the credit of duty availed of or utilized under
the rules made under this Act by a manufacturer of any excisable goods –
Is not within the normal limits having regard to the nature of the excisable goods produced or manufactured,
the type of inputs used and other relevant factors, as he may deem appropriate;
Has been availed of or utilized by reason of fraud, collusion or any willful mis-statement or suppression of
facts,
He may direct such manufacturer to get the accounts of his factory, office, depot, distributor or any other
place, as may be specified by him, audited by a cost accountant nominated by him.
The cost accountant so nominated shall, within the period specified by the Commissioner of Central Excise,
submit a report of such audit duly signed and certified by him to the said Commissioner mentioning therein
such other particulars as may be specified.
The provisions of sub-section (1) shall have effect notwithstanding that the accounts of the said manufacturer
aforesaid have been audited under any other law for the time being in force or otherwise.
The expenses of, and incidental to, such audit (including the remuneration of the cost accountant) shall be
determined by the Commissioner of Central Excise (which determination shall be final) and paid by the
manufacturer and in default of such payment shall be recoverable from the manufacturer in the manner
provided in section 11 for the recovery of sums due to the Government.
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The manufacturer shall be given an opportunity of being heard in respect of any material gathered on the
basis of the audit under sub-section (1) and proposed to be utilized in any proceeding under this Act or rules
made there under.
Audit by department
As per the guidelines, tax payers whose annual service tax payment (including cash and CENVAT) is more
than Rs.50 lakhs in the preceding financial year may be subjected to mandatory audit each year. It is
preferable that Audit of all such Units is done by using Computer Assisted Audit Program (CAAP)
techniques.
The frequency of audit for other taxpayers would be as per following norms:(i) Taxpayers with Service Tax payment above Rs.50 lakhs (Cash + CENVAT) (MANDATORY
UNITS) – to be audited every year.
(ii) Taxpayers with Service Tax payment between Rs.25 lakhs and Rs.50 lakhs (Cash + CENVAT) – to
be audited once every two years.
(iii) Taxpayers with Service Tax payment between Rs.10 lakhs and Rs.25 lakhs (Cash + CENVAT) – to
be audited once every five years.
(iv) Taxpayers with Service Tax payment upto Rs.10 lakhs (Cash + CENVAT) – 2% of the total number
every year.
The Audit selection guidelines, therefore, would apply to the non-mandatory taxpayers, forming part of the
discretionary workload. These taxpayers should be selected on the basis of assessment of the risk potential to
revenue. This process, which is an essential feature of audit selection, is known as Risk Assessment. It
involves the ranking of taxpayers according to a quantitative indicator of risk known as a “risk parameter”. It
is also suggested that the taxpayers whose returns were selected for detailed scrutiny, may not be taken up for
Audit that year, to avoid duplication of work. Similarly, the taxpayers who have been selected for Audit,
may not be taken up for detailed scrutiny of their ST-3 Returns during that year.
Procedure of Excise Audit:
Selection of the assessee:
The process of EA 2000 begins with identification of a unit to be audited. Normally, there are about 1000 to
1500 assessees under the jurisdiction of a Central Excise Commissionerate. It is not possible for the audit
staff to conduct audits of all the units every year. Therefore, depending upon the manpower availability,
about 300 to 400 units are selected for conducting audit during a financial year. Under the conventional
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system of audit the units were picked up randomly without any scientific basis of selection. Under EA 2000,
the selection of the unit is based taking into account in the 'risk-factors'. This means that the assessees who
have a bad track record (having past duty evasion cases, major audit objections, past duty dues etc.) are given
priority for conducting audit over those having clean track record.
Desk Review :
The auditors are assigned the assessees to be audited at the beginning of the financial year. The auditors are
required to gather as much information about the assessee as possible. They can gather information from the
departmental records, published documents like balance sheets annual statements etc., and through market
Enquirer. Since this can be done without interacting with the assessee, this step called as 'desk-review'.
Documenting Information:
At the stage of ‘Desk Review’ the auditors may have already identified certain areas, which warrant closer
examination. The auditor may also require certain documents or information from the assessee to complete
his preliminary investigation. For this he may write letter to the assessee or send him a questionnaire to
obtain this information. This step is called 'gathering and documenting assessee information'.
Touring:
The auditor then visits the unit of the assessee to see the actual running of the unit, the systems that are
followed for maintaining records in various sections and the system of movement of goods and the related
documents within the unit. This step is called 'touring of the premises'. This gives the auditors a general
overview about the procedure adopted by the assessee and the possible loopholes through which revenue
leakage can take place.
Audit Plan:
Based on his experiences and the information gathered so far about the assessee, the auditor now makes a
'audit plan'. The idea of developing audit plan is to list the areas which, as per the auditor are the vulnerable
areas from the revenue point of view. Since number of documents/records maintained by assessee is huge in
number, it also necessary that the auditor should select only some of them for the actual verification. The
preparation of audit plan helps him to do that. It must be remembered that audit plan is not rigid but a
dynamic concept. During the course of audit if the auditor notices certain new facts or new aspects of the
planned area of audit, he can always alter the audit plan accordingly, with the approval of his supervisor.
Similarly, in case during the actual audit, if the auditor is convinced that any area which was earlier planned
for verification does not require in-depth scrutiny, he may alter the plan midway after obtaining approval of
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the superior officers. Preparation of audit plan is one of the most important steps of EA 2000. A well thought
audit plan generally increases the success of audit result manifolds.
Verification:
The most important step of audit is the conduct of actual audit, which in technical parlance is called
'Verification'. The auditors visit the unit of the assessee on a scheduled date (informed to the assessee in
advance) and carry out the scrutiny of the records of the assessee as per the audit plan. The auditor is required
to compare the documentation of a fact from different documents. For example, the auditor may check the
figures of clearance of finished goods showed by the assessee in central excise return with the sales figures of
the said goods in Balance Sheet, Sales Tax Returns, Bank statements etc. The auditor may also enquire about
the entries which appear vague (say an entry like 'Misc. Income') in various records and documents. The idea
behind conduct of verification is to reasonably ensure that no amount, which as per the Central Excise law is
chargeable to duty, escapes taxation. The process of verification is always carried out in presence of the
assessee so that he can clarify the doubts and provide required information to the auditor.
Audit Objection and Audit Para:
Where the auditor finds instances of short payment of duty or non-observance of Central excise procedures,
he is required to discuss the issue with the assessee. After explanation provided by the assessee, if the auditor
is satisfied that such non-tax compliance has occurred, he records the same as an 'Audit Objection' or 'Audit
Para' of the 'draft audit report' that he would be preparing at the end of the verification process. Auditor is
advised not to take formal objections to mere procedural lapses/ infractions/ adoption of wrong procedures,
which do not result in any short payment of duty or do not have bearing upon the duty payment. In such cases
the auditor is required to discuss the matter with the assessee and advise him to follow the correct procedure
in future. Further, while making an audit para, attempt should be made to tabulate the duty short paid by the
assessee at the spot and incorporate it in the para itself. However, if this is not possible for the paucity of time
or for the want of some information not available at that time, the auditor should make a note of the same in
his report.
Chartered Accountants only can conduct Audit under Service Tax not the Dept. Officers : HC\
Rule 5-A, sub-rule (2) states that every assessee shall, on demand, make available to the officer authorised or
the audit party, records, trial balance and income-tax audit report, if any. So here, the officer will demand the
documents just to facilitate the correctness of books of accounts and ultimately, the audit will be conducted
by the Audit Party headed by the Chartered Accountant/Cost Accountant, as the case may be, deputed by the
Commissioner.
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It is Commissioner on whose behalf, the officer will collect the material and the Auditor will perform the
audit. In any case, the final report duly signed by the Chartered Accountant will be submitted to the
Commissioner. In case of Government Autonomous Body, the function of the audit has been assigned to the
Comptroller of Auditor General of India.
From the above, it is crystal clear that in case of private assessee, the Commissioner will refer the matter to
an officer to collect the material or Chartered Accountant for the purpose of audit. Thus, for the purpose of
audit, the material can be collected either by the officer authorized by the Commissioner or by the Auditor
himself. But, audit will be performed only by the Chartered Accountant.
Further, learned counsel for the petitioners-assessees relied on the ratio laid down in the following cases :Union of India &Ors. vs. S. Srinivasan, (2012) 7 SCC 683. In Para-21 – “a rule must be in accord with
the parent statute as it cannot travel beyond it.”
General Officer Commanding-in-Chief & Anr. vs. Dr. Subhash Chandra Yadav&Anr., (1988) 2 SCC
351. In Para-14, it was observed that “Rules have statutory force. But before a rule can have the effect of a
statutory provision, two conditions must be fulfilled, namely,
1) it must conform to the provisions of the statute under which it is framed; and
2) it must also come within the scope and purview of the rule making power of the authority framing
the rule. If either of these two conditions is not fulfilled, the rule so framed would be void.
The assessee is bound by law to produce the books and records to the auditor or Chartered Accountant
authorized/appointed by the Commissioner and Section 72(A) governing special audit by the Commissioner
or Rule 5(A)(2) of the Service Tax Rules are perfectly valid and not ultra vires. The result is that the writ
petition filed by the assessees challenging Section 72(A) of the Finance Act and Rule 5(A)(2) of the ST Rule
was dismissed by the Hon'ble High Court. The petitioners/assessees opined that the Rules framed for carrying
out special audit is not covered under Chapter V of the Finance Act for carrying out audit of private
companies or assessees.
Diligence Do’s

Should produce books and records: the assesse cannot refuse to produce books and records, that
would violate the rule 22, and would invite penalties. The assessee should be ready with all
information, documents and supporting evidence before audit is commenced. This would also
enhance regard for the assessee by the auditor.
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A separate venue, within the office/factory should be tidied up and kept ready for use by the audit
team with good ventilation, drinking water and toilet access

Stationery, such as blank files, paper, pencils, pen, erasers, staplers etc. could be made available for
use by auditors

A set of responsible dealing personnel, conversant with excise matters should be readily available, to
answer and attend to the queries of the audit team during the audit tenure, which can be attended to
on a periodic basis, since the staff may be otherwise required to attend to normal duties

In order for the audit team to perform their job efficiently and diligently it is imperative to facilitate
their transport and food needs by arranging for cabs and providing them with good and healthy
refreshments

In order to face the audit more confidently and with lesser apprehensions, it would be better to have
an audit carried out by an independent chartered accountant to ensure that all basic compliances have
been met. Appropriate corrective actions can be taken to set right areas of concern which could
result in probable litigations.

The audit team must be provided with stand-alone systems with internet connectivity, if possible, to
help them study and analyze the data provided by the assessees during audit

The assesse must provide to the audit team the details of backups of the tally system taken at periodic
intervals and also provide the backup data for any relevant period when called for by them

The assesse must provide the data/information sought in the format prescribed by the audit team and
also ensure that proper acknowledgement of the same is obtained and stored for future reference

When pointed out by the audit party that the assesse has availed excess credit or has erroneously
availed ineligible credits, it is important to reverse the same to the satisfaction of the audit team

It is important to provide written explanations so that the same will act as sufficient proof at a later
date and will help avoiding unwanted disputes on what was told or explained. It is also important to
share with the audit party correspondences and reports of the earlier audits which will facilitate
smooth and easy conduct of the audit

The assesse must prepare a detailed note to clearly address the issues raised in the audit note. This
will go a long way in avoiding raising of unwanted issues by the department which could lead to
litigation.
Diligence Don’ts

It is to be ensured that unless genuine circumstances exist, or occur, the audit team should not be
asked to postpone their visit. The auditors should be informed in advance, if there is a request for
deferring the audit on the side of the assesse.
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Staff of the concern, who were holding the excise related portfolio, during the period relevant to the
audit, should not be given permission to go on leave during the audit, as this factor leads to a great
deal of inconvenience to both parties.

Fabrication of books and accounts is punishable under IPC

As assesse is not expected by law to provide any material comforts to the auditors, except furniture,
lighting, ventilation and toilet facilities in addition to access to records and documents. This is
implied by the term ‘access to premises’ under rule 22. The obligation does not go beyond this rule
of the CE Rules. Food, drinking water and accommodation, may however be provided, as a matter of
courtesy, on working days.

The assesse should be allowed to carry on his normal business activity, without stopping production.

Irresponsible, negligent and careless staff should be kept out of the bounds of the audit venue, and
should not be made responsible to answer audit queries. This suggestion if not followed, would
sometimes result in embarrassing and inconvenient situations for both the auditor and the concern
Liability and obligations upon departmental officers:
Officers would be liable for a fine of Rs 2000 for searching, causing to be searched without reasonable
grounds, unnecessary detaining, searching and arresting any person, unnecessary seizing movable property
and committing an injury without having any reasons to believe that such act is required for execution of his
duty. Further officers also liable for 3 months imprisonment or fine of 3 months’ pay, if he refuses to perform
or withdraws himself from the duties of his office.
Further to mention about departmental officers that,
(i) Such officer shall not disclose information learned in his official capacity. However sharing of
financial information to other taxing authorities is allowed.
(ii) Officers to issue SCN before imposing demand, penalty or confiscation of property.
(iii) Officers to search at reasonable times that is to say, conduct any enquiry in business hours of day
time.
How to interact with department appropriately for better compliance and smooth functioning of the
statutory proceedings
Assessee under the service tax and central excise many times faces interaction with the revenue officers
whether in writing or otherwise. At the same time, it is important to make some initial declarations and
important specified communication with the department.
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Here are few suggestive approaches which could be useful while interacting with the Department officials,
the given approaches may not be new to the assessee, but using of the said techniques appropriately at the
right time in a proper way, would certainly bring in confidence in the assessee while interacting with the
department.
1) Email
In increasing tendency of usage of email by the present generation, it is one of the most important modes of
communication to have with the department, which has got the legal recognition as well. Email is very quick
and fast means of communication. In fact at the time of registration as well as e – filing, department uses
email as means of communication to interact with the assessee. But some more time may be required to work
more effectively through E Mail and to cover more bases in Indian taxation system in an efficient manner.
2) Telephone
Though with the large expansion of the telecommunication users of both cell phone and fixed line phone, it is
not a preferable mode of communication with the department. Especially in case of tax payers who expect
some general queries, just because its inherent limitation of non-evidence means of correspondence.
3) Letters and notices from the department
All letters received are to be marked with date of receipt and especially for Show Cause
Notice/Adjudication/Appeal Order; the envelope cover should be retained as evidence for date of receipt.
All letters from the department should invariably be replied within one month (unless otherwise specified),
by way of registered post with acknowledgement due. If required, the assessee should seek extension of time
in replying to the letter received from the department.
All communications should be perused to see which are in the direction of the enquiry. If the communication
is with respect to possible Show Cause Notice, Assessee may take legal advice wherever required and file a
comprehensive reply providing the facts clearly along with the reasonable justifications and related legal
grounds. This could avoid the issues of the Show Casual Notice (SCN), which consumes time, effort and
money. In the case if irrelevant details of sensitive nature have been asked for, the query as to the purpose
maybe addressed with a copy to Higher Officer.
Under no circumstances should back dated acknowledgements be given, as the communication may be with
respect to a demand.
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4) Letters to department
All correspondences to the departmental officers be duly acknowledged and if not done, a copy to be sent by
RPAD (Registered Post with Acknowledgement Due). RPAD can be used as a better alternative to hand
delivery, where the assessee may be forced to put up with delays and refusals not to mention the traffic and
distances today.
All the information provided should be factually correct and therefore it is recommended to recheck again
before communicating the same. In the case of reply to SCN – All evidences and grounds for justification of
action shall be indicated along with copies of documents relied on. This could be crucial in higher levels of
litigation.
The normal period for reply for departmental letter could be between 15 days to 30 days. The time limit
specified in the departmental correspondences should generally be followed, unless it requires more time to
provide sufficient details. In such cases a normal extension of time may be requested by the assessee.
Where the assessee are making initial disclosures and declarations with the departments, as per law it is
advisable to seek a counsel advise in this regard for vetting the letters and declarations for better usage of
words with legal provisions.
5) Visits by department
In normal course, the officers are not supposed to visit the assessee at his premises even for verification of the
address. Therefore in case of any visit, the identity of the officer maybe verified preferably by the security
personnel who need not let them enter unless the same is produced.
The visiting officers are required to record their visit in the Visit Register with the purpose. Insistence on
recording will lead to purposeful visits or avoid future visits. This restriction is also applicable for vigilance
and internal audit party. The officers sometimes take offence and refuse to do so. The same information may
be recorded with the remark that the same was refused. In case of repetitive visits a note to higher officer of
the facts of visit maybe advisable.
Any document provided should be on a written request and duly acknowledged. The type of document
provided may also be considered prior to handing over. A report to higher officer/for record wherever there is
any doubt as to the straight forwardness of the inquiry is also advisable.
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Further it is advisable that, fully knowledgeable persons from the organization should answer to the queries
raised by the departmental officers. Especially in case of inspection visits by the range officers for
registration under central excise law. This formula evenly followed during the time of visits by the officers
for conducting audits and enquiry. Giving vague and unnecessary information shall be strictly avoided and
keep the relevant data and details ready for answering the likely probable questions.
It is also advisable to assessee not to follow the Oral instructions of departmental officers as that may not be
in accordance with the law. Instead they can approach written statements if required.
6) Visit to department
After introduction of E – Governance projects in tax departments the assessee are no longer required to visit
to department except in few exceptional cases where detailed explanations are required for understanding. All
the statutory requirements can be fulfilled online itself like registrations, submissions of returns, forms and
making payments. This would save the precious time of the officers as well as the assessee.
Conclusion:
A key success to having an effective interaction with department is appropriate communication,
proper maintenance of books of accounts as per law, better compliance with the law, and awareness of selfduties as well as duties of officials, sound knowledge of powers of Department officials and the applying the
knowledge at right time in proper way.
This will pave the way for facing audit party with lesser
apprehensions, providing good co-operation to the audit party and avoiding unnecessary litigations.
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