- CA Roopa Nayak

 The term audit is derived from the Latin term audire, which means to
hear.

It was in use in all ancient countries such as Mesopotamia, Greece, Egypt,

Rome, U.K. and India.

What?
It involves:

Scrutiny of the records of assessee.

Verification of the actual payments and receipts

Check whether ST provisions are followed correctly.

Why?

Assesses can maintain records in any form, requiring verification by auditors.

Self-assessment era warrants departmental audit

To check whether:
assessee is paying correct amount of service tax.

procedures are properly followed

to avoid revenue leakage for the Government

Selection of
Assessee

Desk Review

Documenting
Information

Visiting
Premises

Audit Report

Audit
Objection &
Audit Para

Verification

Audit Plan

Departmental
Perspective
As assessees follow the
system of self-assessment

Government dues are

recovered to its maximum

Assessee Perspective
errors committed whether
knowingly or unknowingly
are found out by the audit.

work of accounting always

remains current and correct

proof of the books of

accounts.

facilitates the provision of

advice.
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Start
Audit Plan
Test/Assess the Control Risk
AAR/PDR
Substantive Test

Audit Report
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Service tax payment (Cash + CENVAT)

Above 50 Lakhs

Every Year

25 50 Lakhs

Once in 2 years

10 25 Lakhs

Once in 5 years

Upto 10 Lakhs

2% of total no. of
assessees every
year

 Obligation to be honest fundamental requirement for

operation of tax system.
Obligation to be cooperative voluntary compliance
Obligation to provide accurate information and documents
on time
Obligation to keep adequate records to verify tax / credits
Obligation to pay taxes/ file returns on time

 Shall not disclose any of the sensitive

information learned in his official capacity

Officers to issue SCN before imposing penalty,

demand & arrest
Officers to visit in business hours only

 Search, seizure, prosecute and arrest under

commissioners instructions
Issue summons to authorized persons of the
company
Detain & give evidences as per CPC
Commissioner has power to appoint CA,CWA, CS

for conducting an audit

 E-Mail Recognized in Information Tech. Act 2005. Only if

official ID. Maybe used as additional mode or where time short
Telephone - Use this mode as additional as no trace or evidence
of what transpired. Record by way of written communication
what was discussed/ understood.

Letters /notices from dept. - Reply to letters within 15 -30 days

under RPAD.

 Letters to dept - Communicate at appropriate time at

appropriate levels including giving voluntary initial declarations.
Period of Limitation

Visits by dept. Official or Unofficial? Should be handled by a

knowledgeable persons. Put on record what happened by way of
written communication.
Visits to dept. - Record in register kept. Record by way of
written communication with explanations & evidences provided.

 When insisted to make ST payment,

attach a written letter explaining the understanding of taxability
why ST is paid or not paid.
If discussions are finalized by Department, without consulting the

assessee, the same shall be communicated clearly.

Such communications provide for evidence for future
negotiations.
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 Rule making power under ST is conferred upon executive in Section

94 of the Finance Act.
In the past the - scrutiny and audit of records of the assessee is
Section 72A of the Finance Act, 1994.

A special audit could be undertaken if the circumstances outlined in

Section 72A are fulfilled.

As per Rule 5A(2) of STR, 1994 - every assessee was required to

make available on demand specified documents to the authorized
officer or audit party deputed by the Commissioner or to C&AG
within 15 days from date of demand.
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 In ACL Education Centre Private Limited v. UOI - 2014-TIOL-120-HC-ALL-

ST-.The audit can only be undertaken by an authorized Chartered

Accountant or Cost Accountant, as provided in Section 72A
The Calcutta HC in SKP Securities Limited v. Deputy Director - 2013-TIOL38-HC-KOL-ST - no provision in Chapter V of the Finance Act, 1994 or the
CAG Act, 1971 empowers the CAG to undertake audit of accounts of a
non-governmental assessee
Travelite (India) Vs. UOI &Ors. 2014-TIOL-1304-HC-DEL-ST - Rule 5A(2) of
the Service tax Rules is ultra vires the provisions of the Finance Act and

the rule has been struck down. Rule 5A(2) must consequently be struck
down.
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The CBEC circular no.137/26/2007-CX 4 which sought to put

in place a mechanism for department of audit and scrutiny of
documents, was not only an attempt to widen the scope of
the law impermissibly but also contrary to the statute.

The said circular, to the extent it provides clarifications on a

Rule 5A(2) audit, was also quashed by the Delhi High Court in
the Travelite decision 2014-TIOL-1304-HC-DEL-ST.

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 In the Service Tax Rules, 1994, in rule 5A, for sub-rule (2),
the following sub-rule shall be substituted, namely:-

(2) Every assessee, shall, on demand make available to

the officer empowered under sub-rule (1) or the audit
party deputed by the Commissioner or the Comptroller
and Auditor General of India, or a cost accountant or
chartered accountant nominated under section 72A of
the Finance Act, 1994,
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 In Travelite (India) Vs. UOI &Ors. (2014-TIOL-1304-HC-DEL-ST)

on the Service Tax Audit issue, Rule 5A(2) of the ST Rules was
held ultra vires the provisions of the Finance Act and struck
down.
On 18-12-2014, a three judges bench of the Supreme Court

headed by Chief Justice has granted stay on HC judgment

in 2014-TIOL-101-SC-ST-LB. As of now, Service Tax Audit can

be conducted by the Service Tax Department.

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 As of date there is no clarity as to the powers of conducting

audit of private parties under service tax law.
Notwithstanding the legality of audit, sufficient checks and
balances to be put in place to ensure that the mandate to the
CA/CMA to undertake audit is done by competent persons
with requisite knowledge of service tax provisions.

This is also a landmark opportunity for professionals to be

able to contribute to the country and uphold the high ethical
standards of the profession.
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 Assessees are not aware of the fact that they are not complying with the
legal provisions till such time when they are called upon by the department
for an audit.

They should consider the uncertain nature of the law frequent amendments
by way of notification, clarifications.

Proper framework to train employees and seeking professional opinions.

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 Thorough in his knowledge of the subject

Ascertaining scope of the assignment
Knowledge of the business and the activities performed
Obtaining relevant information for a preliminary review and risk analysis
Desk review of the information obtained and preliminary meeting
Devising the audit programme for carrying out compliance and substantive tests
Documentation and proper supervision of audit effort
Formulation of the draft report and discussions with the management
Finalising the draft and ensuring audit follow up
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Types of errors:
Conceptual Errors: Common errors, once committed, continued to be
practiced. If no issue arises, it gets accepted over a period of time.
Systems Errors: Errors due to improper systems or weakness in internal
control, not detected or corrected.
Compliance Procedures Omissions: Procedural deficiencies like failing to

file returns or delayed/ no communication to Department, etc.

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 Services that are not specified as per the definition of taxable

service not being liable but suffering the tax.

Service tax paid depending on whether the client/customer pays or

not.
Services provided and received outside India being considered as
taxable and provided in India.
Services provided from outside India received in India not further

examined for taxability based on location, performance.

Services provided in India considered as provided outside India
since the service provider is outside India.
.many more
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 The system of double check on credits whether short/excess

availed.
Inquiry of instances of inordinate time gap between the bill date
and the credit date.
The registration number not mentioned on the invoices.
The system of raising of invoice much prior to or after the date of
service especially during year ends.
Lack of reconciliation system.

many more
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 Failure to intimate the Department within 30 days of change in the

constitution of the firm or company.

Failure to amend the registration certificate when any service is

imported on which service tax is payable.
The system of acting on departmental views/oral instructions,
which are not provided in writing.
Failure to obtain registration for the branches or place of providing

the service.
Failure to intimate the addition of new branches in case of
centralized registration
Failure to intimate the authorized signatories
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 The available records are not complete in the sense that the service
tax payable and input service credits cannot be arrived at from the
records.
The system of reconciliation of credit figures as per accounts and

the figures as per Service tax returns not done.

In case of gross method of accounting purchases where duty
portion is not shown separately, the method and accuracy of
making monthly entries for the credit.
The system of value based authorisation in place for various
transactions relating to service tax not being in place.
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 CENVAT Credit missed out due to lack of knowledge on admissibility/ as per

clarification by revenue officials

Adequate updation and training to concerned personnel in the organization regarding
CENVAT rules is the need of the hour.
Credits reversed on oral instructions of departmental officers/audit parties
without validating the same with consultants

Taking legal backing for any issue is always advisable rather than following informal
or oral instructions from the department.

 CENVAT Credit availed on the input services without making the payment to
the service provider within 3 months
Rule 7 of CCR 2004, CENVAT credit in respect of input service shall be allowed on
the receipt of tax invoice provided that the payment of the full value of input service
along with service tax is made within three months of the date of invoice.
CENVAT credit availed on inputs before the receipt of the material in the
premises
Rule 4(1) of CCR 2004 specifies the conditions for allowing CENVAT credit
wherein it requires the inputs/materials to be received in the factory of the
manufacturer so as to avail CENVAT credit.

 Availing CENVAT credit of the branches without centralized registration or

Input service distributor invoice

Availing credit on the invoices raised on the branches which are not registered as
per STR 1994 tantamount to availing of wrong credit which may result in future
interest liability.
Input Credits not proportionately reduced for rejection of inputs/ short
payment for service provider

Proviso to Rule 4(7) to CCR provides that in case of any refund or raising of credit
notes, the assessee shall pay an amount equal to CENVAT credit availed in respect
of the amount so refunded or credited.

 Credits availed for inputs not used for manufacture of excisable items and non
taxable services

As per Rule 6 of CCR 2004, the CENVAT credit shall not be allowed on input or
input services used in or in relation to the manufacture of exempted goods or for
provision of exempted services.

Claiming the CENVAT credit on inputs used for manufacture of goods cleared
for direct exports or EOU units or SEZ developers/units contended by

department
Goods cleared for direct export, EOU units or SEZ units are not considered as
exempt. (Rule 6 of CCR)

 Utilization of SAD (Special additional duty charged under Customs

provisions) credit for payment of service tax on output services.

Credit on SAD is available only to manufacturers.

Utilization of CENVAT credit for payment of service tax on import of services,

which is not permissible under the service tax provisions.
Permitted till 01.07.2012
Credits on differential duty charged by the supplier by way of supplementary
invoice taken as the same is not accompanied by inward material movement
Rule 9(b) of CCR 2004 allows for the same

 Whether the service receiver who has paid the service tax alone and not value of
services in respect of import of services received from outside India under
reverse charge mechanism can avail such credit?
No, the service receiver who has paid the service tax on import of services cannot
avail such credits of service tax paid. It has to be noted that the service tax has to be
paid along with value of services as well, in order to be eligible to avail such credits.
What is the document based on which the service receiver company which paid
service tax on security services received from an individual, can avail credit?
The Cenvat credit can be availed on the basis of payment challan by the service
receiver company

 Whether Cenvat credit 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?
It is advisable 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

 Short payment of Service Tax noticed upon scrutiny of S.T. 3 returns

Re-compute the ST liability. If short paid make the payment of the balance
amount. If correctly discharged, share the workings with reply to the audit notice
requesting for dropping the audit para.
Irregular availment of Cenvat credit
The Cenvat credits scheme is a beneficial scheme the benefit of which cannot be

denied based on technical grounds. Accordingly all the eligible credits cannot be
denied. If any ineligible credits were availed, then should reverse to that extent.

 Non-reversal of proportionate cenvat credit amount under Rule 6(3A) of

Cenvat credit rules, 2004

Verify the calculations, and confirm the excess availment. Reverse the same and
pay interest if the excess availment has been utilized. Communicate the reversal

to the department.
Payment of Service tax made under the Category of Real Estate Agent

services, without registration of the said services with the Department

Take steps to obtain registration by making an application in ST 1 and
regularizing the lapse.

 Irregular availment of Cenvat Credit on invoices addressed to some other

premises other than the registered premises

This is a procedural lapse. Cenvat credit can be availed but it should be ensured
that such premises should be included in the registration certificate.
Non-payment of service tax on web hosting charges paid to foreign customer
under reverse charge

If liability is confirmed make remittance of ST with interest and avail Cenvat

credit of tax thus paid.

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- roopa@hiregange.com