MANAGEMENT OF CENTRAL EXCISE AND SERVICE TAX AUDIT - Central Excise and Service Tax Audit Manual - CBEC - Service Tax

CHAPTER 2 MANAGEMENT OF CENTRAL EXCISE AND SERVICE TAX AUDIT 2.1 Audit management requires planning and effective execution of the audit process. Structurally and functionally, this is to be undertaken at two levels apex level and local level. In order to monitor, co-ordinate and guide the effective implementation of the audit system, the Board has set up the Directorate General of Audit as the nodal agency. At the local level, management of audit is entrusted to Audit Commissionerates, which are supervised by Principal Chief Commissioners/Chief Commissioners. 2.2 Management at Apex level The Directorate General of Audit, Customs, Central Excise and Service Tax, New Delhi (headed by Director General) with its Seven Zonal Units at Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Kolkata and Mumbai (each headed by an Additional Director General) is required to ensure the efficient and effective implementation of the audit system (based on EA 2000 methodology) and also to evolve and improve audit techniques and procedures through a periodic review. With the help of its Zonal units, the Directorate General of Audit regularly monitors Central Excise and Service Tax audits conducted by the Commissionerates to ensure that the coverage of Assessees/Taxpayers is adequate in number and is reflective of their risk profile and to ensure that these audits are conducted in accordance with the letter and spirit of EA 2000 methodology. To achieve this, the Directorate needs to interact closely with Principal Chief Commissionerates/ Chief Commissionerates to eliminate the deficiencies and to improve the Audit performance of the Commissionerates. 2.2.1 As an advisor to the Board, the Directorate General of Audit is required to suggest measures for enhanced tax compliance, to gauge the level of audit standards and to ascertain the views of the Assessees/Taxpayers on the existing audit system. It should also interact with select Assessees/Taxpayers to take a holistic view of the internal audit and to formulate proposals to remove bottlenecks and obviate the scope of irregularities. 2.2.2 The selection of assessees and taxpayers would be done based on the risk evaluation method prescribed by the Directorate General of Audit. The risk evaluation method would be separately communicated to the Audit Commissionerates during the month of May / June of every year. The risk assessment function will be jointly handled by National Risk Managers (NRM) situated in the Directorate General of Audit and Local Risk Managers (LRM) heading the Risk Management section of Audit Commissionerates. It helps the Audit Commissionerates in selection of units for audit during the audit year. 2.3 Role of Zonal Principal Chief Commissioner/Chief Commissioner: 2.3.1 The office of the Principal Chief Commissioner/Chief Commissioner is not an operational formation for the actual conduct of audit, but it provides an important link between the Directorate General of Audit and the Audit Commissionerates of the zone. The role of this office in the overall management of audit is as follows: i. Collection, compilation and analysis of the data received from Audit Commissionerates and communication of the same to the respective Zonal Additional Director General (Audit) and to the Director General (Audit) wherever specifically asked for. ii. Review of performance of the Audit Commissionerates. iii Dissemination of information pertaining to audit to the Audit Commissionerates. iv Resolving problems in implementation of audit system at local level and providing feedback to the Directorate General of Audit. v. Ensuring implementation of guidelines, issued by the Directorate General of Audit, as pertaining to the Audit Commissionerates. vi. Monitoring the training for auditors and the officers of the zone, in techniques of Central Excise and Service Tax audit and accountancy. vii. Arranging assistance and information to officers of the Directorate General (Audit) in regularly examining the conduct of audits and results thereof. viii. Posting/allocating the officers with requisite experience and expertise in conducting audits/analysing financial statements, to the Audit Commissionerates, ensuring equitable distribution of officers for improving coverage. ix. To take a final decision in cases, other than finalisation of audit objection, where there is difference of opinion between Audit Commissioner and Executive Commissioner. x. Also, to resolve issues that may arise between Executive and Audit Commissionerates xi. Also, to provide facility of Appraisers for conducting of OSPCA xii. Assigning the audit of an assessee/ taxpayer, in case of integrated audit, to a particular Audit Commissionerate, within the Zonal jurisdiction, based on payment of Central Excise duty or Service tax whichever is higher. xiii. Selection of theme, planning and execution of Theme based Audit. xiv. Ensuring that the services of a Computer Assisted Audit Programme Centre are available to all Audit Commissionerates in the zone and the officers trained in CAAP techniques are retained for a sufficiently long tenure. 2.4 Functions of an Audit Commissionerate: The Audit Commissionerate comprises of the following sections: i. Planning and coordination section: To schedule and to provide support in conduct of Monitoring Committee Meetings (MCM); to maintain and to keep a copy of assessee master file and update it in coordination with the audit groups of circles; to maintain records/registers; to submit reports; to look after formation/constitution of audit groups; deployment of officers, matching skills with audit requirement; to maintain database of officers profile; to monitor training needs of officers; to plan the audit schedule in such a way as to make optimum use of available resources and ensuring proper desk review before commencement of audit etc., ii. Administration, Personnel Vigilance section: To look after administrative matters, transfer, leave, allowances, budgetary grants, vigilance matters etc. iii.Technical section: To attend to draft show cause notices, audit follow up, court cases, and maintain Board s circulars, instructions etc. iv. Risk Management and Quality Assurance section: To attend to risk based selection of units, use of third party source of information, to maintain Audit database of units to be audited, to identify themes/issues for audit, to evaluate and scrutinize working papers and to look after the work related to performance appraisal and quality assurance etc., and to implement the risk based selection advisory received from DG (Audit) and carrying out selection of units after applying local risk parameters. v. Circles : Actual conduct of audit and subsequent follow up till the logical conclusions of the audit objections approved in MCM by issuance of SCN up to AC/DC level , forwarding of draft SCN of the competency level of above AC/DC along with relied upon documents or by recovery. In case of non-metro cities and in cases where Circles are situated at a distance from Headquarters, one stationary MIS group will look after the work relating to Planning and Co-ordination. 2.5 Role of senior officers of Audit Commissionerate 2.5.1 Commissioner i. To ensure selection of assessees/taxpayers, to be audited during the year, on the basis of risk assessment in consultation with the Directorate of Audit, after applying local risk factors. ii To approve the Desk Review and Audit Plan, in respect of top 5 assessees/taxpayers of each audit circle mentioned in the Annual Plan for audit coverage, after ensuring that all the steps have been completed and review of a few draft plans approved by the ADC/JC to ensure quality of audit. iii. To hold either circle-wise (or any number of circles together as deemed necessary), Monitoring Committee Meeting (MCM), once a month to take decision about the acceptability of all audit objections and to determine as to whether larger period is invokable in respect of the accepted objections. iv. To ensure that MCM is held by using the offline Audit Report Utility and no paper based audit report is prepared.Also to ensure that after the MCM, each Audit Report Utility is uploaded in ACES v. To liase with DG (Systems) to ensure that EDW data and ACES data is available to the auditors vi. To ensure that requisite follow-up action i.e. recovery, issue of show cause notice is taken. vii. To review audit performance and to take steps for improvement. viii.To take remedial measures based on the report of audit group on performance appraisal and quality assurance. ix. To review the performance and participation of the Additional/ Joint Commissioner and Deputy/ Assistant Commissioner of audit circles. x. To interact with the major assessees/trade associations, to obtain feedback on the audit system. xi. To assess the training needs of the auditors and organize training programmes. xii. To submit periodical reports to various formations including Zonal ADG (Audit) or Director General (Audit) as prescribed from time to time. xiii. To order special audit in terms of Section 14AA of the Central Excise Act, 1944, and Section 72A of the Finance Act, 1994, on his own or on the basis of a reference received from the Executive Commissioner. xiv. To send a list containing details of show cause notices issued by the Audit Commissionerate (including Circles), during the month, to each of the Executive Commissionerates, on monthly basis. xv. To ensure CAAP audits are conducted in respect of assessees/taxpayers maintaining records in electronic formats. xvi. In cases where further investigation is required, the matter may be forwarded to the Executive Commissionerates with a self-contained note for further investigation and necessary action like recording statements under summons etc., 2.5.2 Additional / Joint Commissioner i. Co-ordination, planning and overall management of the audit sections and circles including supervision of work relating to theme based audit, audit of MLUs/MLSPs etc. ii. To approve the desk review and audit plan, in respect of all the large and medium units, other than the top 5 units that are to be approved by the Commissioner, after ensuring that all the steps have been completed. iii. To review audit plans approved by the Deputy/Assistant Commissioners of circles, in respect of small units. iv. To interact with large assessees/taxpayers at the time of audit in order to share major audit findings and compliance issues. v. To organize training programmes for auditors. vi. To review the follow-up action. vii. To make correspondence with Executive Commissionerate for follow up of pending audit paras admitted in writing. viii. To ensure selection of units for audit as per the risk based list received from DG (Audit) and to provide justification for tweaking the lists. ix. To ensure that the Audit Report Utility is used in MCM and the reports are uploaded in ACES and no paper based audit reports are prepared. x. To ensure scrutiny of NIL DARs in the audit circle 2.5.3 Deputy/Assistant Commissioners in-charge of Sections of Audit Commissionerate Headquarters To supervise the work relating to the respective sections of Headquarters viz., Planning and Co-ordination Section, Administration, Personnel and Vigilance Section, Technical Section and Risk Management and Quality Assurance Section and theme audit. To ensure that the Audit Report Utility is used in MCM and the reports are uploaded in ACES and no paper based audit reports are prepared 2.5.4 Deputy/Assistant Commissioners in-charge of Circles: i. Co-ordination, planning and overall management of the audit circle. ii. To monitor maintenance of assessee master files and registers. iii.To approve the desk review and audit plan, in respect of all the small units, after ensuring that all the steps have been completed. iv. To interact with assessees/taxpayers at the time of audit in order to share major audit findings and compliance issues. v. To issue show cause notices answerable to Deputy/ Assistant Commissioner of the Executive Commissionerate under intimation to Audit Commissionerate Hqrs. vi.To prepare and forward draft show cause notices, answerable to Joint/Additional Commissioner and Commissioner, to Audit Commissionerate Headquarters. vii.To approve and issue draft audit reports before attending the MCM meeting. viii. To issue final audit reports after approval in the MCM meeting. 2.6 Role of Executive Commissionerate: i. To represent inMCM; ii. To respond to the audit objections, within 15 days of receipt of the minutes of the MCM; iii. To provide detailed comments with a justification on the disputed audit paras including the details of Board s Circulars, case laws (if any) or any point of law; iv. To attend to the litigation after adjudication proceedings and to defend the order before the appellate fora viz., Commissioner (Appeals)/ Tribunals/ Courts, with the help of inputs from Audit Commissionerates, wherever required; v. To attend to the work related to pre-audit, post audit of refunds, rebates and brand rate fixation of drawback; vi. To attend to the work related to CERA; vii. To send proposal to the Audit Commissioner, for special audit of an assessee, in terms of Section 14AA of the Central Excise Act, 1944 and Section 72A of the Finance Act, 1994 in deserving cases; viii. To pursue recovery of amounts in respect of pending paras admitted by the party (in writing), basing on the reference received from the Audit Commissionerate. ix. To carry out investigation and necessary action like recording statements under summons etc in respect of cases forwarded by Audit Commissionerates. x. To ensure immediate intimation to the jurisdictional Audit Commissionerates regarding any cases booked/investigation carried out by Anti-Evasion wing of the Executive Commissionerate or by DGCEI and any audit conducted by CERA. A copy of the CERA objection shall also be sent. xi. To ensure timely adjudication of show cause notices issued by the Audit Commissionerates. 2.7 Staffing norms for Audit Commissionerate: i. Headquarters shall be headed by one Commissioner with the assistance of two Additional or Joint Commissioners and three or four Deputy Commissioners. ii. Normally, officers selected and posted to the Audit Commissionerate should be allowed to continue to function in the Commissionerate for a minimum period of two years and maximum of four years. iii. The supervising officer of the rank of Assistant Commissioner / Deputy Commissioner must frequently (especially in important and sensitive units) associate with the actual audit and attend to the areas of risks identified during desk-review. iv. Each audit circle shall be headed by a Deputy or an Assistant Commissioner v. Deputy/Asst. Commissioner of the circles should be associated with all major audits. Senior Officers of the cadre of Joint/Additional Commissioners should interact with the senior management staff of large units before conducting audit.In case of LTUs, the Principal Commissioner/ Commissioner should interact with the management of the unit. vi. Audit circle comprises of one stationary audit group (MIS) to look after the work relating to planning and co-ordination section of Hqrs Office, such as MCM, maintenance of Assessee Master Files, processing of draft show cause notices, attending to follow up work etc. and deployment of audit groups for conduct of audit. vii. The Audit Groups deployed for audit of large units may comprise of 2-3 Superintendents and 3-5 Inspectors. For medium units, the audit group may include 1 - 2 Superintendents and 2 - 3 Inspectors. For small units, the Audit Group may include 1 Superintendent and 1 - 2 Inspectors. viii. Groups for large units, medium units and small units should be in such numbers that the following distribution of manpower deployment in audit groups is achieved. a. 40% of manpower for large units including audits of MLUs, MLSPs and theme based audits b. 25% of manpower for medium units c. 15 % of manpower for small units d. 20% of manpower for planning, coordination and follow up. 2.8 Auditors Profile: Profile of each of the auditor posted in the groups should be available in the Audit Planning and Coordination Cell of Circle, in the following proforma. i. Name of the officer. ii. Designation. iii. Experience in the department. iv. Professional qualification, if any. v. Experience in Central Excise Range/ Service Tax formation or Divisional office (in years). vi. Whether undergone training in audit. vii. Experience in audit wing. viii. Number of major audit points raised by him on his own (to be taken from working papers) in his career. Amounts involved in such cases. ix. Any commendation/awards, rewards, etc. received. 2.8.1 Each auditor should furnish a self-appraising resume containing the above information immediately upon joining the audit section, which should be upgraded on yearly basis so long as the officer continues to be posted in the Audit Groups.Auditors profile facilitates effective deployment of auditors to units by taking into account appropriate skill levels, training, educational background of the auditor etc . 2.8.2 The formation of audit groups is a critical component of audit management. The cadre controlling authority in-charge of the Audit Commissionerate shall ensure that the officers with the requisite skill and experience are posted to Audit Commissionerates depending on the availability and other administrative constraints.Audit Commissioners should ensure that the skill and experience available is evenly distributed across the audit groups. As far as possible there should be at least one officer with commerce or accounts background in each party. It is also useful to assign officers with computer skills to each party to deal with units that keep computerized accounts.For efficient functioning of the MIS section of Audit Commissionerate/Circle, officers with computer skills and some prior audit experience are required. Similarly, the skill sets and experience available with an audit group should govern the size and complexity of audits that it handles. For optimal results, there should be matching of these two factors. 2.8.3 While forming the groups in Service Tax audits, posting of the officers with specialised skills will help achieve better results.For the above purpose, the services may be divided into groups by aggregating similar services. A suggested list of such groups is provided in ANNEXURE ST - XI. This grouping would facilitate cultivating specialization amongst the Audit Officers and would also lead to uniformity in the type of objections that are raised to particular service providers. Basing on the said grouping, the audit of services pertaining to particular group can be allocated to the specific team(s), depending upon the requirement so that the services of the team which has specialised skills can be optimally utilised. However, Audit teams can be reconstituted in accordance with the local needs. 2.8.4 Officers, when posted to the Audit Commissionerate for the first time, should invariably be sent for training in EA 2000 and financial accounting so that they have the basic skills to handle audit work. Compulsory in-house training programmes could also be organized in the Audit Commissionerates for the benefit of new entrants soon after the annual transfers. The Audit Commissioner should also ensure to organise special training programmes for major industrial sectors in the jurisdiction of an Audit Commissionerate so that auditors have the necessary specialization and sufficient number of auditors specializing in major industries are available. Officers, who have worked in audit sections earlier, should also be imparted with refresher course on the latest techniques of audit and changes in the statutory provisions, if any.