CBEC releases Central Excise and Service Tax Audit Manual, 2015

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1 15 February 2016 EY Tax Alert CBEC releases Central Excise and Service Tax Audit Manual, 2015 Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert provides an update on the integrated Central Excise and Service Tax Audit Manual, 2015 (CESTAM 2015) which was released recently on the CBEC website 1. The purpose of the CESTAM 2015 is to outline the principles and policies of audits conducted under Central Excise and Service tax. Audit Commissionerates have started functioning with powers to conduct integrated audits subsequent to the implementation of cadrerestructuring in October Accordingly, having two separate manuals will defeat the concept of such integrated audits and hence both the Central Excise and Service tax manuals have been merged. The annexures containing lengthy information to be filled in by assessees have been discontinued by replacing the old annexures with new ones. 1

2 Background Excise and Service tax audit manuals were last updated in 2008 and 2011, respectively. With the implementation of cadrerestructuring in October 2014, Audit Commissionerates (ACs) started functioning with powers to conduct integrated audits. Since the department was conducting integrated audits, two separate manuals would defeat the concept of such integrated audits. Therefore, it was decided that both the Central Excise (CE) and Service tax (ST) Manuals should be merged together and for the purpose of separate statute-wise compliance verification, separate set of annexures should be provided for CE and ST. The CESTAM 2015 contains 9 chapters and 11 annexures for CE and 12 annexures for ST. Key Features (Chapter wise) 1. Introduction 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 (DGA) as the nodal agency. At the apex level DGA, along with Additional Director General of seven Zonal Units 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. At the local level, management of audit is entrusted to ACs, which is supervised by PCC / CC. Further, this chapter at length discusses the roles and functions of various officers and includes auditors profile. 3. Auditor s responsibility and authority Role of auditor: While conducting audit, the auditor is required to carry out his duties with utmost sincerity, integrity and diligence. The purpose of the manual is to outline the principles and policies of audits conducted under the Central Excise Act, 1944 (CEA) and the Finance Act, 1994 (FA) and the Rules made thereunder. The manual does not deal with legal interpretations and rulings on CE and ST matters. The Principal Chief Commissioners (PCC) and Chief Commissioners (CC) have been authorized to issue appropriate instructions, to be valid for temporary periods, to remove any difficulty in conduct of audits, which are important from the perspective of augmentation of revenue. 2. Management of Excise and Service Tax Audit Audit management requires planning and effective execution of the audit process. The auditor should take a balanced and rational approach while conducting the audit. 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, are noticed, the assessee should be guided for immediate correction. Such cases should also be mentioned in working papers. The audit process should be transparent and all the findings should be intimated to the assessee in writing and an opportunity be given to the assessee to give his explanation before an objection is finalised and consequential action is initiated. Dealing with public: Auditor is considered as one of the critical channels of communication between the department

3 and the assessee after the liberalisation of procedural controls. The auditor should establish and maintain a good professional relationship with the assessee. Where there is lack of co-operation or deliberate failure to provide information and records by the assessee or in case of other exigency, the auditor should inform his superiors and follow it up by a written report, if necessary. Authority for an auditor: There is no separate cadre known as Auditor either under the Excise or Service tax law. The departmental audit is conducted by the CE officers and all the powers vested in the CE Officers under the CEA, FA and the Rules made there under are available to the officers conducting the audit. Thus, the auditor is also a proper officer. Summons: The auditor may issue summons with the approval of Deputy / Assistant Commissioner of Circle, only for the purpose of obtaining records or documents which are necessary for conducting audit, where the assessee is not volunteering to submit the same on the basis of letter issued by the auditor. 4. Principles of audit should extend up to the last completed Financial Year preceding the date of commencement of the audit. Duration of audit: The indicative duration for conduct of audit (inclusive of desk review, preparation and approval of audit plan, actual audit and preparation of audit report) for one year period would be as under: o LTUs 8 to 10 working days o Large taxpayers 6 to 8 working days o Medium taxpayers 4 to 6 working days o Small taxpayers 2 to 4 working days In case audit coverage is for 5 years, the number of days may be increased to maximum of 16/12/8 days for large, medium and small tax payers respectively. In exceptional cases, the above mentioned period may be extended with the approval of Deputy / Assistant Commissioner (Audit). 5. Selection of assessee for audit The selection of assessees would be done based on the risk evaluation method prescribed by the DGA. This method would be separately communicated to the ACs during the month of May / June of every year. Objective of audit of assessees is to measure their level of compliance in light of the provisions of the CEA and the FA and rules made thereunder. It should be consistent with departmental instructions and should make use of professional audit methodology and procedures. Preparation of audit schedule: The annual plan for the audit coverage would be from 1 July to 30 June. The AC would release an annual plan by 31st May, indicating the names of assessees proposed to be audited during the course of the year. Integrated audits: Coordinated and integrated audit covering two or more duties / taxes for assessee i.e. CE, ST and Customs having common PAN shall be carried out instead of individual audit for each tax separately. Period to be covered during an audit: Every audit should invariably cover the retrospective period up to the previous audit by the departmental audit group or of the last 5 years, whichever is less and The assessees shall be categorized into three categories namely large, medium and small units. Integrated audits: An assessee who is registered under CE, ST and Customs need not be subjected to three separate audits. In case of ACP importers, comprehensive audit is required to be conducted only when the said assessee is also selected

4 for audit, based on the risk evaluation method. In case an assessee is having ST registration in the jurisdiction of an exclusive ST Commissionerate under a ST CC Zone and CE registration with a CE Commissionerate of a different CE CC Zone in the same premise, then both such registrants should be audited simultaneously. The CC Zone in whose jurisdiction the highest duty / taxpaying assessee falls shall co-ordinate the audit. 6. Audit - Preparation and verification Profiling of assessee: Some of the relevant data for assessee profiling can be collected during the course of audit. Further, data can also be extracted from the registration documents and returns filed by the assessee, annual report, Income tax returns, contracts with his clients, earlier period audit reports, etc. Assessee Master File: It should contain all the useful information about an assessee in the form of statistical data as well as in narrative form as required in Annexure CE-I/ST-I of CESTAM Further, this chapter at length discusses the procedure of audit verification and records to be maintained by the auditor viz; o Preparing working papers in prescribed format. o Conducting desk review. o Maintaining cost accounting records. o Reconciling data with third party information etc. 7. Export oriented units (EOU) There are no general exemptions to EOU / EHTP / STP / BTP units from the payment of Service tax. However, they are eligible for a number of exemptions both from customs and excise duties on fulfilling the conditions prescribed in the relevant notifications. Owing to the options available to EOUs under the Foreign Trade Policy (FTP) and the nature of goods manufactured, each unit is expected to have a unique pattern of inflow (of duty free or exempted goods) and outflow (of exempted or dutiable goods). Evaluation on internal controls would be useful in identifying potential risks to revenue for each of these movements. In addition to the usual checks, it has been prescribed that the auditors should examine the following points: o Approval of Board of Approval / Development Commissioner / prescribed authority has been obtained. o Capacity of the unit to achieve the volume of production indicated in the LOP. o Benefits of Customs / Central Excise exemptions have been availed only on admissible items. o Goods covered under all the CT-3 forms issued during the period of audit have been received and duly accounted for. o Whether any goods are imported in violation of the FTP. o Whether any goods, procured free of duty, are removed in an unauthorized manner. o Permission for Domestic Tariff Area (DTA) sales has been obtained. o Whether goods under the DTA sales have been valued correctly in terms of Customs Act and Valuation Rules. o Whether duty on DTA sales is short paid by under-invoicing the value or mis-classification. o Facility of partial conversion of DTA unit into EOU is being misused. o Whether any imported goods / inputs attracting anti-dumping duty have been used in the manufacture of goods cleared into DTA.

5 o Any fudging and concealing of nonfulfilment of conditions by resorting to large scale inter-unit transfer. 9. Guidelines for conducting audit of Multi Location Units and Multi Location Service Providers o Value of exports are being misdeclared for showing fulfilment of export obligation incorrectly. o Whether CENVAT credit has been availed in accordance with the CENVAT credit Rules, Further, guidelines to conduct audit verification have been prescribed under the following situations: o Duty free imports o Procurement of indigenous goods o Sub-contracting job work o Inter unit transfer from EOU to EOU o Exports o DTA sales o Destruction of rejected goods / scrap / waste / packing material o B-17 Bond o De-bonding of goods procured duty free o Payment of cost recovery / supervision charges o Others 8. Preparation of audit report and follow up Situation under which co-ordination of audit is to be done i. Only 1 AC in the PCC / CC zone ii. Multiple ACs in the PCC / CC zone iii. Registrants falling in multiple PCC / CC zones Guidelines for conducting audit: Category (i): Procedure laid down for standalone audit should be followed. Units selected based on revenue risk and covered in the annual schedule, should only be covered and audited simultaneously. Category (ii): Units / service providers selected based on revenue risk and figured in annual plan), audit should be completed simultaneously, in coordination with the nodal AC. Category (iii): The ACs should ensure that the Audit Group, to whom the audit of assessee in their jurisdiction is assigned, completes the Desk Review and prepares the draft Audit Plan. Based on the decision of the Monitoring Committee Meetings, the draft audit report should be finalised within 30 days from the date of meeting. Planning and Co-ordination Sections of AC shall upload the Final Audit Report using Audit Report Utility in ACES 2 and issue report. Copy of such audit report, even if it is a Nil report, should be sent to the assessee by . After the issuance of the said report, wherever further action such as issue of Show Cause Notice is required, the Audit Group should prepare the Draft SCN. Comment The modified process contained in the manual will go a long way in providing fair, transparent and hassle free audits for tax payers if implemented in the right spirit and aligned to the objective of efficient tax administration. It will also facilitate effective compliances and reduce litigation. 2 Automation of Central Excise and Service tax

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