AUDIT OF SERVICE TAX ASSESSEES

[Dr. Sanjiv Agarwal]

Audit under service tax is covered by section 14AA of Central Excise Act, 1944 as applicable to service tax and section 72A inserted by the Finance Act, 2012 w.e.f. 28-5-2012. The Central Board of Excise and Customs (CBEC) has issued guidelines for audit of accounts of Service Tax assessees.

According to selection criteria announced vide Circular No. 381/145 dated 6.6.2006 of Office of Director General (Audit) (Refer Annexure 18.1), the revised norms for Service Tax would be as under:

S. No.	Quantum of annual duty payment (in cash + CENVAT Credit)	Frequency of audit
1	Taxpayers paying more than Rs 50 lakhs	Every year
2	Taxpayers paying between Rs. 25 lakhs and Rs. 50 lakhs	Once in two years
3	Taxpayers paying between Rs. 10 lakhs and Rs. 25 lakhs	Once in five years
4	Taxpayers paying below Rs. 10 lakhs	2% of the total number every year

For the categories mentioned at S. No.2 to 4 the selection of assessees would be based on S1 parameter and local risk parameters mentioned in the Service Tax Audit manual.

The revised frequency norms may be implemented with immediate effect. However, units that have already been audited during the first quarter of the financial year need not be audited again even if they are due as per the revised norms. Any difficulties encountered in the implementation of these norms may be brought to the notice of this Directorate. New norms are in force from June 2006 and are applicable to all taxable services. taxmanagementindia.com

Principles of Audit

The purpose of EA 2000 audit is to resolve tax non-compliance issues and corrective action for reasons leading to non-compliance. The key underlying audit principles are ­-

(a) Audit to be conducted in a systematic and comprehensive manner.

(b) Emphasis on scrutiny of records maintained in the normal course of business.

(c) Audit effort based on materiality principle - higher the potential risk, greater the intensity of    scrutiny.

(d) Recording of all audit findings.

(e) Audit is clearly distinct from anti- evasion activity. Audit can uncover non-compliance only to the extent of their reflection in the books of accounts.

(f) Discussing audit findings before finalizing the audit to reduce audit paras as well as legal risks.

(g) Protecting the interest of legitimate revenue.

Audit by Chartered Accountant and Cost Accountant

The Finance Act, 2009 added ‘chartered accountant’ to the cost accountants in section 14A and 14AA of the Central Excise Act, 1944 so as to empower the Chief Commissioner of Central Excise to nominate a chartered accountant or cost account for conducting special audit under the provisions. An explanation was inserted to explain that chartered accountant would mean a chartered accountant as defined in section 2(1)(b) of the Chartered Accountants Act, 1949. Thus, w.e.f. 19.8.2009, a chartered accountant can also be appointed for conducting special audit for the purpose CENVAT credit under service tax. Section 14AA of Central Excise Act, 1944 deals with special audit in cases where credit of duty availed or utilized is not within normal limits etc and is applicable to service tax under section 83 of Finance Act, 1994.

Finance Act, 2012 w.e.f. 28-5-2012 has amended section 83 of the Finance Act, 1994 by omitting section 14AA of Central Excise Act, 1944, while inserting certain other sections in section 83. Section 14AA of Central Excise Act, 1944 deals with special audit in cases where the credit of duty availed or utilized is not within the normal limits etc.

However, a new section 72A has also been inserted by the Finance Act, 2012 w.e.f. 28-5-2012 in Chapter V of the Finance Act, 1994 which provides for ‘special audit’.

According to Notes on Clauses on Finance Bill, 2012, the objective of inserting section 72A is as follows –

“Sub-clause (J) seeks to insert new section 72A with a view to provide for a special audit to be carried out by a chartered accountant or cost accountant nominated by the Commissioner. The special audit shall be ordered where the service tax assessee has failed to declare or determine the value of taxable service or has availed and utilized credit of duty or tax beyond the normal limit or by means of, collusion or willful misstatement or he is having operations spread out in multiple locations. It is further proposed to provide that the chartered accountant or as the case may be, the cost accountant shall submit a report to the Commissioner on completion of the audit and such audit may be ordered even though such accounts had been audited under any other law for the time being in force. Before initiating proceedings on the basis of the report, a reasonable opportunity of being heard shall be given to the service tax assessee so audited.”

Memorandum explaining amendments state that ‘a new section 72A is being inserted to introduce provisions relating to special audit in the service tax law on the lines of section 14A and section 14AA of the Central Excise Act, 1944. Under this newly introduced section, special audit can be ordered under specified circumstances. Consequently, section 14AA is being omitted from section 83.’

Thus, section 72A gives comprehensive powers for special audit for service tax purposes. Accordingly,

(a) Special audit can be conducted on the directions of Commissioner of Central Excise.

(b) Commissioner directing such audit can do so if he has reasons to believe that any person liable to pay tax has committed certain action or deeds.

(c) Audit can be in respect of any person liable to pay service tax.

(d) Such person—

• has filed to declare or determine the value of taxable service correctly.
• has availed and utilized credit of duty or tax paid, which is not in the normal limits compared with the capital, goods, used or other relevant and appropriate factors or by means of fraud, collusion, or any willful misstatement or suppression of facts.
• has operation in multiple location and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises.

(e)  Direction can be given to get his/its accounts audited for the period and scope as specified by the commoner.

(f) Such audit shall be conducted by a chartered accountant or cost accountant as defined in Chartered Accountant’s Act, 1949 and Cost and Works Accountants Act, 1959 respectively.

(g) The audit report, duly signed and certified shall be submitted by the auditor to Commissioner within stipulated time frame.

(h) Audit u/s 72A shall be conducted irrespective of any other audit being carried out of the accounts of such person under any other law in force.

(i) An opportunity of being heard shall be provided to the auditee in respect of material gathered during audit and proposed to be utilized in any proceedings.

The provisions of section 72A are akin to those of section 4A and 14AA of Central Excise Act, 1944. It also covers correct determination and declaration of valuation of service and gathering of desired information in case of multiple location operations of assessee.

Following points are also relevant for special audit

Special audit can be ordered/directed by Commissioner of Central Excise only and not by an officer below that rank.

(a) Audit can be carried out only by a qualified practicing CA/CWA.

(b) Direction of audit may cover all or any unit of the assessee/person sought to be audited. Such unit could be factory, office, warehouse, godown, depot, distributors or any other place as specified in the order.

(c) Show cause notice or pre-decision hearing is a must before any order is pronounced based on special audit.

(d) Direction of special audit is a non- appealable order.

(e) Audit report shall be submitted to the Commissioner and not to the assessee.

(f) Audit report shall be ‘signed’ and ‘certified’ by the auditor.

(g) Audit report shall be submitted within the time allowed unless extension is sought and granted.

(h) Revenue department shall bear the audit expenses and audit fees payable to the special auditor.

(i) Commissioner while directing special audit, may require attention of auditor to following areas -

• Input – out put norms
• Input- output variations
• Correlation of Cenvat credit documents with financial records
• Quantitative financial reconciliations
• Documentation
• Cross verification of invoices
•  Cenvat credit/tax ratios and trends
• Manner of determination of value of services
• Taxability of reimbursement of expenses
• Declaration of figures
• Investigation in special circumstances

(k) There is no prescribed format or manner of audit report but shall vary depending upon scope of audit, terms of reference and audit findings.

(l) Commissioner may decide to accept or reject or consider partly the audit report.

It is expected that various Commissionerates of Central Excise and Service Tax in the country may maintain a panel of chartered accountants and cost accountants for the purpose of special audit u/s 72A.    

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