AUDITOR’S RESPONSIBILITY AND AUTHORITY - Central Excise and Service Tax Audit Manual - CBEC - Service Tax

Chapter 3 AUDITOR S RESPONSIBILITY AND AUTHORITY 3.1 Definition of Auditor : Auditor means a Central Excise officer entrusted with the responsibility of conducting an audit . 3.2 Role of the auditor: 3.2.1 While conducting audit, the auditor is required to carry out his duties with utmost sincerity, integrity and diligence. The auditor has immense responsibility in detection of non-compliance, procedural irregularities and leakage of revenue due to deliberate action or ignorance on the part of the assessee/taxpayer. At the same time, the auditor should keep in view, the prevalent trade practices, the economic realities as also the industry and business environment in which the assessee/taxpayer operates. Therefore, the auditor should take a balanced and rational approach while conducting the audit. Besides, the auditor is expected to play a key role in promoting voluntary compliance by the assessees/taxpayers. During the course of the audit, if certain technical infractions, without any revenue implications, arising due to bona fide oversight or ignorance of the assessee/taxpayer, are noticed, the assessee/taxpayer should be guided for immediate correction. Such cases should also be mentioned in working papers. The auditor should also apprise the assessee/taxpayer of the provisions of the Central Excise Act, 1944 and Finance Act 1994 relating to applicability of interest and encourage him to take advantage of those provisions in order to avoid disputes and litigation. The auditor should apprise the assessee/tax payer of the provisions of Section 11A (1) (b) [Section 11 AC (1) (c)] of the Central Excise Act, 1944/Section 73(3) (Section 78(1)) of the Finance Act, 1994 and encourage the assessee/tax payer to make payment of the duty/tax dues before issue of show cause notice. 3.2.2 The audit process should be transparent and all the findings should be intimated to the assessee/taxpayer in writing and an opportunity be given to the assessee/taxpayer to give his explanation before an objection is finalised and consequential action is initiated. 3.2.3 The auditor should take into account the explanation from the assessee/taxpayer regarding all points of dispute, before taking the final view. If necessary, the auditor should contact his supervising Assistant/Deputy Commissioner to ensure that the views taken by him are consistent with the law and the latest instructions. 3.2.4 An auditor is responsible for conduct of audit and should endeavour to take a final view on all issues raised by him during that audit. The auditor should document all of his audit findings in the working papers so that a record of steps leading to an audit point is available. The working papers for each of the step of audit should be filled in as soon as that step is completed . They should be speaking documents that clearly explain why a particular area was included in the audit plan as well as the basis for arriving at every objection that goes into the draft audit report after audit verification. The documentary evidence which has been relied upon in arriving at certain conclusion should invariably be cited and included. 3.3 Dealing with the public: 3.3.1 The objective of the Central Excise Department is to collect correct amount of duties/taxes levied under the Central Excise/Service Tax Law in a cost effective, responsive, fair and transparent manner and also to maintain public confidence in the system of tax collection. This should be reflected in the auditor s conduct and attitude. The auditor should bear in mind that he is one of the critical channels of communication between the department and the assessee/taxpayer after the liberalisation of procedural controls. 3.3.2 The auditor should establish and maintain a good professional relationship with the assessee/taxpayer. The auditor should recognise the rights of the assessee/taxpayer, such as, the right to impartial, uniform and transparent application of law and the right to be treated with courtesy and consideration. The auditor should explain that the tax compliant assessees/taxpayers stand to gain from such an audit in as much as: - i. they will be better equipped to comply with the Laws and the relevant Procedures; ii. the preparation of prescribed returns and self-assessment of Central Excise duties and Service Tax will be focussed better, correct and complete; iii. the scrutiny of business accounts and returns submitted to various agencies, made in the course of audit will remove any deficiencies in their accounting and internal control systems; iv. disputes and proceedings against them would be substantially reduced or even eliminated. 3.3.3 The auditor should be tactful to gain the goodwill and confidence of the assessee/taxpayer. Where there is lack of co-operation or deliberate failure to provide information and records by the assessee/taxpayer or in case of other exigency, the auditor should inform his superiors and follow it up by a written report, if necessary. 3.3.4 Confidentiality should be maintained in respect of sensitive and confidential information furnished to an auditor during the course of audit. All records submitted to the audit parties in an electronic or manual format, should be used only for verification of levy of excise duty/service tax or for verification of the tax compliance. These shall not be used for any other purposes without the written consent of the assessee. Maintaining the confidentiality is necessary to secure the trust and co-operation of the assessee/taxpayer. 3.4 Authority for an auditor: 3.4.1 There is no separate cadre known as `Auditor' either under the Central Excise Law or under the Service Tax law. The departmental audit is conducted by the Central Excise officers and all the powers vested in the Central Excise Officers under the Central Excise Act, 1944, the Finance Act, 1994 and the Rules made there under are available to the officers conducting the audit. Thus, the auditor is also a proper officer . 3.4.2 The auditor, for conducting audit, has to mainly rely on the records maintained by the assessee/taxpayer in the ordinary course of business. 3.4.3 CENTRAL EXCISE : Under sub rule (2) of rule 22 of Central Excise Rules, 2002 the assessee is required to furnish a list in duplicate of the following: i. all the records prepared and maintained for accounting of transactions in regard to receipt, purchase, manufacture, storage, sales or delivery of the goods including inputs and capital goods, as the case may be; ii. all the records prepared and maintained for accounting of transactions in regard to the payment for input services and their receipt or procurement iii. all the financial records and statements including trial balance or its equivalent. 3.4.3.1 Sub rule (3) of rule 22 of Central Excise Rules, 2002 further provides that the assessee, on demand shall make available the following documents for scrutiny to the audit parties: i. the records maintained or prepared by him in terms of sub rule (2); ii. the cost audit reports, if any, in terms of Section 148 of Companies Act, 2013. 3.4.3.2 As any other officer of Central Excise, the auditor is empowered to access any registered premises for carrying out verifications and checks for conduct of audit when authorised by the Commissioner under rule 22 of the Central Excise Rules 3.4.3.3 Rule 22 of the Central Excise Rules, 2002 provides that the Commissioner may empower an Officer or depute an audit party for carrying out scrutiny or verification of records of the assessee. The rule also obliges an assessee to make available records for such scrutiny. The statutory backing for rule 22 flows from clause (x) of section 37(2) and the general rule making powers under section 37(1) of the Central Excise Act, 1944. Clause (x) of section 37(2) empowers the Central Government to make rules for verification of records and returns to check the correctness of levy and collection of duty, which, in the present regime of self-assessment would mean verification of correctness of self-assessment and payment of duty by the assessee. It may be noted that the expression verification used in the section is of wide import and would include within its scope, audit by the departmental officers, as the procedure prescribed for audit is essentially a procedure for verification mandated in the statute. 3.4.4 SERVICE TAX 3.4.4.1 Service providers of taxable services in the entire country are required to be audited. The relevant enabling provisions for this are,- i. Section 65(121) of the Finance Act, 1994 provides that words and expressions used but not defined in Chapter V of the said Finance Act and defined in the Central Excise Act, 1944 or the rules made there under, shall apply, so far as may be in relation to Service Tax as they apply in relation to a duty of excise. ii. Rule 2(2) of the Service Tax Rules, 1994 lays down that all words and expressions used but not defined in Service Tax Rules but defined in the Central Excise Act, 1944 and the rules made there under shall have the meanings assigned to them in that Act and Rules. [Notification No.2/94-ST, dated 28.06.1994] The definition of Central Excise Officer as contained in the Section 2(b) of the Central Excise Act, 1944 will also apply to the Central Excise officers conducting Service Tax audit and shall also include Service Tax officers. Thus, a Central Excise officer, who is assigned the duties of audit in Service Tax, is the proper officer for conduct of Service Tax audit. 3.4.4.2 The Service Tax Law through the Finance Act, 1994 and Service Tax Rules, 1994 do not prescribe any specific records to be maintained by the assessee/taxpayer. However, Rule 5 of the said Rules deals with records. In this regard the following provisions are relevant: i. In exercise of the rule making powers under clause (k) of sub-section (2) of section 94 of the Finance Act, 1994, the Central Government has inserted a new rule 5(A)(2) in the Service Tax Rules, 1994 vide notification no. 23/2014-Service Tax dated 5th December, 2014. This rule, inter alia, provides for scrutiny of records by the audit party deputed by the Commissioner. Such scrutiny essentially constitutes audit by the audit party consisting of departmental officers - Refers Circular No. 181/7/2014-ST dated 10.12.2014. ii. Verification of records mandated by the statute is necessary to check the correctness of assessment and payment of tax by the assessee/taxpayer in the present era of self-assessment. It may be noted that the expression verified used in section 94(2)(k) of the said Act is of wide import and would include within its scope, audit by the departmental officers, as the procedure prescribed for audit is essentially a procedure for verification mandated in the statute - Refers Circular No. 181/7/2014-ST dated 10.12.2014. iii. For carrying out integrated audits in exclusive Service Tax Commissionerates, necessary legal enablement has been made in the Jurisdictional Notifications No. 20/2014-ST and 21/2014-ST, both dated 16.09.2014. iv. Besides, Rules 9(5) and 9(6) of the CENVAT Credit Rules, 2004 provides for maintenance of records by a provider of output servicewith respect to receipt and consumption of inputs, capital goods and input services, in addition to submission of periodical returns prescribed under rule 9(9) to rule 9(11) ibid, in respect of credit availed. 3.4.5 SUMMONS : The auditor may issue summons with the approval of Deputy/Assistant Commissioner of Circle, only for the purpose of obtaining records/documents which are necessary for conducting audit, where the assessee/taxpayer is not volunteering to submit the same on the basis of letter issued by the auditor. However, where it is felt necessary that recording of the statement of the taxpayer/assessee is necessary, the Audit Commissioner may forward such cases to the jurisdictional Executive Commissioner, with a selfcontained note for taking appropriate/necessary action like carrying out further investigation, issue of show cause notice etc., as deemed fit. In this regard, in case of difference of opinion between the Audit Commissioner and the Executive Commissioner the Principal Chief Commissioner/Chief Commissioner may decide the issue.