Preparation of Audit

Plan under
EA 2000 - Desk Review
CA B.Ganesh Prabhu B.Com, MFM, F.C.A.,
LL.B, DISA (ICAI)

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 Way to Audit
What is the requirement of law to be complied by
the assessee
What are the commonareas where error is
made Intentional/Non-intentional/accounting
errors
What are the documents/ information available for
the purpose of detecting discrepancies/errors
How to use these documents/ informations
efficiently to ensure compliances
Some documents etc. we get prior to audit
Some documents/information we get during the audit
Some documents/information we may called for post
audit after doing substantive analysis
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like confirmation
Requirements of law to be
complied
Discharge of Service Tax on output service
The value of service shown in the Service Tax Returns may
be less than the actual figures
- In terms of volume of services provided
- In terms of valuation of services

Discharge of Service Tax on input service

Service tax has not been appropriately discharged on all
the services, where reverse charge applies, e.g.
- Import of services
- GTA
- Sponsorship
- Advocates
- Manpower/Rent a cab/works contract
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Requirements of law to be
complied
CENV Credit on servi be
appropriately
AT Input ces should taken
- Eligibility of
input service
- Appropriate
documentati
on
- Ratio with
the output
mix
Whether the services considered as
export/Non-taxable/ Exempt are actually
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 Possibility of Errors
Change in Law
GTA (basic error)
Prior to 01/07/2012 , no declaration regarding non-
availment of CENVAT Credit was required from GTA
service provider.
From 01/07/2012 such declaration is required

Construction of Residential Complex

( substantial error)
Law prior to 01/07/2012 considered a residential
complex as a complex of more than 12 units.
The law from 01/07/2012 considers a residential
complex as a complex of more than 1 unit.
Maximum players in the market
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dealing with less
than 12 units complexes are belongs to
 Possibility of Errors
Change in Law
Exemptions for services in port / airport
Export criteria for various services -
Consignment Agent (01-10- 2014)
Point of Taxation Rules Import of Service (01-10-
2014)
CENVAT Credit Rules definition of Input Service

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 Possibility of Errors
Description/ Classification
Overlapping Law,
Sponsorship vs. BAS
GTA vs. Cargo Handling
Different
CENVAT positions takenServices
on Gardening by judiciary
Statutory
Credit
decision on both
requirements
sides
Commission Agent Services
Intent to Defraud/Error in accounting it
would be most likely designed and one may need to
look at beyond recordings

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What documents could be relevant for
audit
Financial statements, like Profit & Loss Account, Balance
Sheet alongwith their schedules & grouping including Trial
Balance (having opening, Debit, Credit and Closing
Balances)
Usually an assessee submits financial statements to different
statutory bodies like Income Tax, Registrar of Companies /
Bankers / Regulatory authority, (if any)
It is prudent to match the financial statements submitted to
various authorities to authenticate the accuracy of these
statements which would form basis.
Service Tax Records of the assessee Service Tax Returns,
respective ledgers and invoices etc.
Income Tax Records of the assessee Balance Sheet along
with the P&L Account submitted with Income Tax
Authorities, TDS return, Form 3CD
8 ( Tax Audit Report) if
What documents could be relevant for
audit

Bank Statements and the financial details submitted

to Bankers in case of loan etc.
VAT Records Copies of VAT returns/invoices
Any other report/return filed with other tax authorities
like Cost Audit Report, VAT Audit Report, Transfer Pricing
Report
Any return submitted to related regulatory authority,
Like IRDA

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 Some Other Generic
Information
Apart from the above documents, following information should
be asked from the assessee which is more generic in nature
Nature of Business Business Model
If Manufacturing Focus would be more on Input Services
(RCM)
If Service only Need a complete check both from
Input & Output perspective
Service with Sale- To check vis--vis VATABLE
transaction also (Double taxation areas) (Thus the
focus areas for audit are identified)
Principle nature of transactions
GTA vs. Cargo Handling
Flow of transactions
To ascertain nature of service - Selling of Space for
Advertisement
POP/ Incidence of export - Repair
1 & Maintenance of
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 Some Generic
Information
Major Inputs/ Input Services
To ascertain various ratios
From the perspective of
CENVAT Credit
Industry Issues (The Department may
databas
have an industry wise
e)
For example In cable industry it is common that
advance billing is done- the issues related to advance
billing like possibility of frequent adjustments of excess
service tax paid would be an aspect to be checked.
It is frequent in this industry to buy area rights to
operate cable this transaction was not taxable prior
to 01-07-2012 but taxable after that.
Construction Industry Where construction is done on
BOT basis (Build Operate Transfer)
Pharma Industry/ Liquor Industry Definition of
Manufacture & Reimbursement
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How to Use This
Information/Data

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Whether the volume of
output services shown in
the Return
Relevant is correct
data from different sources which can be
considered
Service Tax Return / VAT Return
Revenue figure from Profit & Loss Account
Unbilled revenue in Balance sheet Continuous
services
26ASstatement along with statement
of TDS claimed as per Income Tax Return
Statement of Accounts submitted to the Banker
In case any regulatory authority is related, figures
submitted to the authority like figures of annual
commission submitted by a broker to IRDA
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Whether the volume of
output services shown in
the
TwoReturn is correct
level checking
Whether the figures are matching with the financial
documents available Test of detail
Total of taxable service value in return to be matched
with the value of turnover in the financial statements
(say P&L A/c) verification of all constituents of
revenue it could be sales it could be non taxable
like interest etc.

Whether there is a possibility of not showing

revenue even in the financial statements Ratio
Analysis and other Test of Details

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Ratio Income not chargeable to
Service Tax : Value of Taxable
Services
Source Document: Profit & Loss Account and ST3 return
Compare the ratio over a period of 3-4 years or with the
taxpayers rendering the same services. If the ratio is increasing
over a period of time or it is more as compared to the other
service providers, there is a possibility of under-valuation by
splitting of output service income into non taxable/exempted
service income. For example, income from renting of immovable
property may be incorrectly
Description Year 1 bifurcated into
Year 2 incomeYear
from3 renting
of residential dwelling which is not taxable.
Income not 1,00,000 4,50,000 7,50,000
chargeable to
service tax
Value of Taxable 10,00,000 20,00,000 35,00,000
Services
Ratio 10% 22.5% 21.43%

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Ratio Fixed Assets : Value of Taxable
Services
Source Document : Fixed Assets Schedule and ST3
return
A comparison of this ratio with the rate of growth of the value of
taxable service during the year may be useful in verifying
whether the value of taxable service has been correctly declared
particularly in cases where the additions to plant and machinery/
fixed assets directly impact the volume of sales. For instance, the
installation of additional processing equipment by a photographic
laboratory would normally result in some increase in its value of
taxable service. In theYear
Description same1 manner,
Year 2increase in Year
the number
3 of
computers in an
Value of fixed internet
assets caf would
( 30,00,000 generate
40,00,000 additional
( 33% business
55,00,000
fordirectly
the taxpayer.:
related to up) (37.5%)
revenue)
Value of Taxable 10,00,000 20,00,000 (100% 35,00,000 (75%
Services up) up)

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Ratio Fixed Assets : Value of Taxable
Services

For using this ratio, relationship between Fixed assets vis--

vis the service provided we need to understand their
relation
E.g. In case of Supply of Tangible Goods services the value
of goods purchased, the number and types of goods
available with the assessee have a direct bearing on the
value of service of hiring them.
In cable Industry, number and type of headends/ set top
boxes have a direct bearing on the value of output services

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Ratio Consumables/Fuel
value :
Value ofDocument:
Source taxableProfit
services
& Loss Account and ST3
return
Compare this ratio over a period of 3-4 years or with the taxpayers
rendering similar services. This ratio may be useful where consumables,
fuel or power consumption are having relationship with the rendering of
output services.
If the ratio is increasing over a period of time or if the ratio of the
taxpayer is more than other service providers there is a possibility of
rendering of unaccounted output service or
Description Year 1 Year 2 Year 3
undervaluation of the services.
Value of Taxable Services 10,00,000 20,00,000 35,00,000
Value of Consumables 5,00,000 12,00,000 28,00,000
( say diesel in case of
tour operator)
Ratio 50% 60% 80%

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Ratio - Major inputs
service cost : Value of
Taxable Service
Source Document: Profit & Loss Account and ST3
return
Compare the annual ratio for a periodof 3-4years.
If the ratio is increasing, there is possibility of the
following irregularities.
Rendering of unaccounted output services.
Undervaluation
Description of output
Year 1 services.
Year 2 Year 3
Cost
Input Splitting of output service income
1,00,000 into non-taxable
2,00,000 services
6,00,000
income.
(Manpower
hiring)
Value of 4,00,000 6,00,000 10,00,000
Taxable
Service
Ratio 25% 33.33% 60%

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Output Services: Test of
Details if Ratios suggest
some gap
Use Form 26AS along with the statement of TDS
claimed in the Income Tax Return for details of
TDS deducted from the assessees incomes by third
parties
Use Bank Statements to ensure that there is no
netting off of the receipts
In case of data submitted to the regulatory authority,
use the return submitted to the authority for
corroborating the income figure
Look into Accounting and Other Records

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Input Service: Reverse Charge

Import of Services
Notes to Accounts figures of foreign exchange payment made
Summary of Form 15CA used for foreign remittance NSDL site
may provide the same
In case the assessee has SAP/ERP A list of entries can be
generated in which the base currency is other than INR (or we
can say the payments made in foreign currency)
Accounting perspective like capitalized fixed assets
GTA
Manner of accounting of the freight on Inward transportation
and outward transportation need to be checked
In some cases these type of charges are loaded in the
purchase cost directly.
Ask for reconciliation for a particular month taking all the
relevant accounts in which freight
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is booked either regularly
or once in a while. 1
Input Service: Reverse Charge

Sponsorship
Value of Free Issues
Sponsorship/BAS
Advocate/ Manpower/Security/Rent a Cab/Works
contract
Change in law may cause non compliances
Respective ledger accounts would be required to
make verification
Grouping of expenses would need to be seen
particularly from the perspective of works contract
( Trial Balance)
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CENVAT Credit

Wheth credit takenon services is covered

definition
er underthe
of Input service and used for the
business
Whether they are used only for providing taxable
services, if not whether Rule 6 is followed
Whether all Invoices/Bills on which CENVAT Credit
is availed are issued as per Rule 4A of Service
Tax Rules 1994.
Take data of credit from ST3 return and Excise
return ( also from financial statements)
Take complete soft data of CENVAT Credit
availed by the assessee
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Take one sample copy of invoice
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of each
Ratio Credit Availed :
Total Service Tax/Excise
Duty payable
Source Document: ST3 return
This ratio should have some parallel relation with the
ratio of input services with the output. If there is a gap
in these two ratios, there is a need to look into the
reason there could be a situation of wrong credit
availment.
Description Year 1 Year 2 Year 3

CENVAT Credit 50,000 1,50,000 2,50,000

Total Service 4,00,000 6,00,000 14,00,000

Tax Payable
Ratio 12.5% 25.00 % 17.85%

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 CENVAT Credit Eligibility
& Time of Taking CENVAT
Credit
Possibility of Error as to eligibility of input service credit
Changes in Eligibility due to change in the definition of input
service like the major changes made w.e.f. 01-04-2011
Industry Issue like non availability of credit of construction
services for specified purposes
Where output mix includes both for taxable and non taxable
component
Possibility of Error as to the time of taking credit
Since 01-04-2011, Rule 4(7)of the CCR, 2004 allows
CENVAT Credit to be taken on the basis of Invoice without
reference to the date of payment of respective value of
service and service tax thereon.
How to examine this: List of invoices along
with date of invoice and payment , ledger of
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vendors and bank statements 5
CENVAT Credit Eligibility
& Time of Taking CENVAT
Credit
(1) Uptill when credit of input service and inputs can be
taken:
- Prior to 01-09-2014 : The credit could be taken on the basis of
services providers invoice till upto unlimited time.
- From 01-09-2014 : The credit can be taken with in Six months from
of date of issue of invoice/ bill or challan etc.
- From 01-03-2015 : The credit can be taken with in one year from
of date of issue of invoice/ bill or challan etc.

(2)In case 100% service tax is payable by Service recipient:

- Prior to 01-09-2014, credit could be taken only after payment of
Service Tax and value of service both .
- From 01-09-2014, credit can be taken after making payment of
service Tax.

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CENVAT Credit Eligibility
& Time of Taking
Credit..cont..
(3)In case part of service tax is to payable by Service
recipient:
- Prior to 01-09-2014, No special dispensation.
- From 01-09-2014, credit of service tax paid on entire
input service under partial reverse charge can be
taken only after the service recipient makes
payment of value of service.
- From 01-04-2015, credit of service tax can be taken
to the extent
the it is paid by the
assesse takesservicethe
recipient even
credit
before the to
reference value
the of service is paid.
Normally without making any
()Points to
payment be considered
In case ofdate.
adhoc payments made to service providers
there may be a big issue of reconciliation of a
particular vendor to mark the payment of their
invoices.
In some cases, they can consider adjustments
from some other accounts as 2
payment need to
check both accounts 7
Whether the services
considered as export/ Non-
taxable/ Exempt are actually so
Take a flowchart/ note on process of the
transaction
Understand the position of law vis--vis the
transaction/ process

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B.2 : Classification of Services

Verification of Correctness of Service Category

Minor Code in GAR Challan to be crossed check with
Form 26AS
This form contain following details
Name of the Deductor
TAN of the Deductor
Section under which deduction is made
TDS deducted and deposited

The section under which deduction is made reflects

service category.

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 Service Category as per 26AS
SN Nature of Corresponding Taxable service
payment where
TDS is deducted
1. Payment Works Contract Service;
made to Construction of Commercial
Contractors/S Complex; Construction of
ub- Residential Complex; Repair
Contractors and Maintenance Service;
Erection, Commissioning and
Relevant Installation Service; Site Preparation
Section Service;
194C Mining Service;
Survey and
Exploration; Cleaning
Services; Transport
Services; Advertising
Service;
Broadcasting Service;
Business Auxiliary
Services; Business
 Service Category as per 26AS
SN Nature of Corresponding Taxable service
payment where
TDS is deducted
Insurance Insurance Auxiliary Services (General
2. Commission Insurance) Insurance Auxiliary
Relevant Section - Services (Life Insurance)
194D
Payments to Non- Sponsorship Service
resident Business Auxiliary
3. Sportsmen/ Sports Services
Association

Relevant Section
194E
Commission on Business Auxiliary Service
sale of Lottery
4.
tickets
Relevant Section
ARX
194G 03/12/2015
Service Category as per 26AS
SN Nature of Corresponding Taxable service
payment where
TDS is deducted
Rent Renting of immovable Property
6. Relevant Section -
194I
Fees for Consulting Engineer
professional or Services Architect
technical services Service
Relevant Section Practicing CAs/Cost
7. 194J Accountant IPR Services
(Royalty)
Scientific & Technical
Consultancy Management
Consultancy
IT Services
Business Auxiliary
Services.
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B.3 : Verification of Exempted Services

Relevant Documents/ Information

1. Take figures from Master fro ST-
returns
Information prepared m 3
2. Take copies of Invoices,
Agreements/Contracts

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B.4: Verification of Service Exported

Relevant Provisions
1. Place of Provisions Rules, 2012
2. Rule 6A of Service Tax Rules, 1994

Relevant Documents
3. Take figures from Master data prepared from
ST-3 returns
4. Take copies of Invoices and FIRC related
thereto
5. Relevant copies of Agreements/Contracts

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B.5: Verification of Abatement from Value of
Service
Relevant Documents
1. Identify the nature of Service
2. Take figures from Master data prepared from ST-3
returns
3. Take copies of Invoices and Agreements/Contracts
Relevant Provisions
1. Conditions of regardi availment
Abatement
Credit, Inclusion
specially
of free issue ng
material etc. of
2. Rule 6(3) of Cenvat Credit Rules,
2004
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B.6: Verification of Other Deductions

Relevant Documents
1. Take figures from ST-3 returns (Point B.12)
2. Take copies of Invoices and Agreements/Contracts
3. Take reason/ nature of deductions

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C : Issues relating to Valuations

1. Issues relating to non-inclusion

of cost and expenditures
in taxable value considering Pure Agent
a. Take copies of Invoices, agreements/ Contracts
b. Take copies of invoices raised by third party to Service
provider to identify the nature of expense

2. Non Inclusion of any cost/ expenditure in the

taxable value while providing taxable service

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D : Issues relating to CENVAT Credit

1. Eligibility of the credit, considering definition of

Inputs, Input Services and Capital Goods
2. Use of Common Inputs for Taxable
as well as Non- Taxable output
a) Take the List of taxable / non-taxable services provided
separately.
b) Take the list of services used for provision of services.
c) Check Rule 6 of CENVAT Credit Rules, 2004 applied or not

3. Availment of Credit on services used in exclusively

exempted services
a. Check whether credit on the services used for non-taxable/
Exempted services availed or not.
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E: Miscellaneous Issues

1. Adjustment of Service Tax under Rule 6(3) of

Service Tax Rules
a)Take figures from Sl. No. - D4, E4, F4 of ST-3 returns
b)Take Copies of Credit notes and other communications
regarding the adjustment in the value of service tax.

2. Adjustment of Service Tax under Rule

6(4A) of Service Tax Rules
a) Take figures from Sl. No. - D4, E4, F4 of ST-3 returns
b) Take explanation from the assessee on the excess deposit
of services tax
c) Verify whether Rule 4(B) of STR is complied with or not

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Miscellaneous Issues

E.3 Payment of Service Tax on Advances

a) Check the figures shown in the lability side of Balance
Sheet as advance received
b) Check as per POT on advances service tax was paid or
not
E.4: Reverse Charge on import of Services

Relevant Documents
1. Take the figure from Profit & Loss Account of ITR-4/5/6
a) Figures from Entry 22 Column (i) : Commission- Paid outside
India, or paid in India to a non-resident other than a company
or a foreign company
b) Figures from Entry 23 Column (i) : Royalty : Paid outside India,
or paid in India to a non-resident other than a company or a
foreign company
c) Figures from Entry 24 Column (i) : Professional/ Consultancy
Fees/ Fee for Technical Services - Paid outside India, or paid in
India to a non-resident other than a company or a foreign
company
2. Copies of Invoice, agreements/ Contract

Relevant Provisions
3. Place of Provision Rules, 2012 41
E.5 : Reverse Charge other than import of
Services
Relevant Information/ Documents
1. Take figures from master data prepared from ST-3
returns
2. Take figures from the expenses
debitedas per Profit & Loss Account
3. Take sample copy of invoices

Relevant Provisions
4. Notification No 30/2012-ST
5. Section 68 (2) of the Finance Act, 1994

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THANK YOU !!!
CA. B.Ganesh Prabhu
+91 98404 71139
ganeshprabhu.b@gmail.com

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