TIOL-DDT 2283
30.01.2014
Thursday

'AUDIT' is a very misunderstood word. For a long time, I used to believe that audit is in the exclusive domain of a qualified auditor like a Chartered Accountant. Then I saw officers of the Central Excise Department who did not know the difference between credit and debit 'auditing' the accounts of mega corporate entities. But 'Audit' remains a terror word among assessees and the visit of the Audit party either from the Central Excise Department or from the CAG, is not exactly welcomed by the assessee.

In recent times, writs have been filed in High Courts challenging the power of the CAG to visit the premises of the assessees and the High Courts of Calcutta, Delhi and Karnataka have given favourable interim orders. Within the mortal limits of modesty, I would claim to be a pioneer of sorts on this issue, as I am the first person to raise this issue in an article in ELT more than 10 years ago - Can/should CAG's Audit visit factories for Excise Audit?. I had jocularly mentioned that an "Accountant General" is an accountant getting the salary of a General. The CAG was so angry that I almost lost my job.

According to a recent judgement of the Lucknow Bench of the Allahabad High Court, the Service Tax officers have no power to audit the assessees and Audit can be done only by Chartered Accountants and in the case of PSUs by the CAG.

Here is the Bomb!

Will Department close down its Audit wing? No more Audit by Departmental Officers; they can only collect documents - Bonanza for CAs?

THE entire case in the High Court ran on a wrong assumption. Some assessees challenged the vires of Rule 5A(2) of the Service Tax Rules, 1994 inter alia on the ground that the provision of Rule 5(A)(2) are contrary to the provision of Section 72A of the Finance Act 1994.

As per Section 72A of the Act, the Commissioner can order Special Audit of the accounts of the assessee, by a chartered accountant or a cost accountant.

As per Rule 5A(2) of the Service Tax Rules, 1994, the assessee is required to produce certain records to the 'Audit Party' deputed by the Commissioner or CAG. Obviously the 'Audit' by the Commissioner's party or the CAG is not the same as the 'Special Audit' by the Chartered Accountant ordered by the Commissioner under Section 72A. This important aspect was lost sight of in the arguments before the High Court.

In the field, what happens is - the assessees are audited by the audit parties of the Commissioner as well as the CAG - these auditors visit the premises of the assessees, raise audit objections, which result in issue of Show Cause Notices and that is how our litigation industry is born and thriving. Every visit by an audit party invariably results in a Show Cause Notice, which would travel at least up to the Tribunal.

Whenever the Commissioner has any special love for an assessee, he would direct the assessee to get his books audited by a chartered accountant or a cost accountant and this may also lead to Show Cause Notices. But there is hardly any nexus between Service Tax officers and chartered accountants - so audits by chartered accountants on the orders of the Commissioner are rare and far in between.

Back to the case: In the High Court, the Department committed a blunder, nay virtually a hara-kiri.

The Additional Solicitor General of India who appeared for the Department on the strength of a written note submitted that:

++ The purpose of Sub-Rule (2) of Rule 5A is to get the account audited by an Auditor deputed by the Commissioner.

++ In case, it is undertaking of Government of India, then Comptroller and Auditor General of India was authorized to conduct the audit.

++ The purpose of impugned notice is to collect the information from the petitioners-assessees to assess the correct tax and if the Commissioner is satisfied, then he may appoint a Chartered Accountant for the purpose of audit.

++ The audit will not be done by any officer or on his behalf. The audit will be performed by a qualified Chartered Accountant.

As you know all the above submissions are patently wrong.

1. The 'auditor' deputed by the Commissioner is a departmental officer - usually from Inspector to Assistant Commissioner.

2.There is absolutely no rule or procedure that a Government undertaking is audited by the CAG. The CAG's Audit party also audits the private assessees.

3. The purpose of the notice to produce the records under Rule 5A(2) is not to collect documents to be handed over to a chartered accountant for doing the audit. No Service Tax officer would collect documents and hand them over to a chartered accountant to do audit. Even as per Section 72A, the Commissioner does not collect documents and hand them over to a CA for audit - he directs the assessee to get his accounts audited by a nominated chartered accountant.

4. The Department's audit will be done by the officers of the department ONLY and not by a chartered accountant. This audit is popularly known as EA 2000 with elaborate procedures and instructions on conducting the audit, prescribed in Audit Manual.

It is not known under what circumstances and under whose instructions, the learned Additional Solicitor General of India made such a blatantly incorrect submission before the High Court. It seems he had a written note - was this note prepared /approved by the Department?

Based on the ASG's submissions, the High Court concluded that:

In case of private assessee, the Commissioner will refer the matter to an officer to collect the material or Chartered Accountant for the purpose of audit. Thus, for the purpose of audit, the material can be collected either by the officer authorized by the Commissioner or by the Auditor himself. But, audit will be performed only by the Chartered Accountant.

The High Court specifically mentioned that, "During the course of arguments, learned Additional Solicitor General of India has assured that the audit will be performed by a qualified Chartered Accountant and as per accounting standard. After the audit report, the assessee will get the copy of the report, as per law."

In the light of the above statement of the ASG, the High Court dismissed the writ petition.

Petition Dismissed - Huge gain for petitioner and his tribe - Irreparable damage to respondent Revenue.

THIS is a very strange case where the losers are the winners and the winners are the losers.

The petitioners had challenged the intimation from the department asking for documents prior to audit. The petition is dismissed, but the ASG has committed before the High Court that:

1. Department will only collect documents

2. Actual Audit will be done by qualified chartered accountants.

3. After the audit report, the assessee will get the copy of the report

This means THE DEPARTMENTAL OFFICERS CANNOT PERFORM AUDIT OF THE ASSESSEES. Curtains down - no more audit by the Department.

This case is sure to go the Supreme Court, but until then, assessees can relax and politely tell the departmental auditors from the Service Tax department - sorry Sir, you cannot audit us.

We bring you this very important judgement today. Please see Breaking News.

Please also see:

1. Should AG's Audit be allowed to visit factories and Premises of Service Tax Assessees? ( DDT 1298 )

2. AG's Audit Visit to Factories and Premises of Assessees? ( DDT 1776 )

3. CAG not authorised to visit factory of assessee in private sector

4. No Audit of Private Enterprises by AG's Audit - Calcutta High Court ( DDT 1951 )

5. Karnataka High Court grants Interim Stay against CAG Audit of Service Tax Assessee - DDT 2103 - 13.05.2013

Jurisprudentiol - Friday's cases

Service Tax

Whether appellant, being a sub-contractor, is not liable to pay service tax prior to 23/08/2007 in view of the clarification issued by the Revenue - Difference of Opinion - Matter referred to Third Member: CESTAT

THE following difference of opinion is therefore referred to the Third Member -

(1) Whether the sub-contractor of a main contractor is liable to discharge the service tax liability on the services provided by him as held by the Ld. Member (Technical) relying on the decision of the Larger Bench of this Tribunal in the case of Vijay Sharma & Co. 2010-TIOL-1215-CESTAT-DEL-LB and the decision of this Tribunal in the case of Sew Construction Ltd. 2011-TIOL-61-CESTAT-DEL

OR

The appellant being a sub-contractor is not liable to pay service tax prior to 23/08/2007 in view of the clarification issued by the Revenue vide Master Circular No. 96/7/2007 dated 23/08/2007.

(2) Whether the appellant is liable to penalty under the provisions of Section 76 & 78 of the Finance Act, 1994 as held by the Ld. Member (Technical) relying on the decisions of the Hon'ble High Court of Kerala in the case of Krishna Poduval 2006-TIOL-77-HC-KERALA-ST, and of the Hon'ble Apex Court in the case of Chairman SEBI Vs. Shriram Mutual Fund & Another [2006-TIOL-72-SC-SEBI] and Rajasthan Spinning & Weaving Mills 2009-TIOL-63-SC-CX

OR

The appellant is not liable to penalty under Section 76 & 78 of the Finance Act, inasmuch as the appellant had paid the tax with interest before issue of show-cause notice as held by the Ld. Member (Judicial).

Income Tax

Whether loss claimed is to be allowed even if assessee fails to produce documents on pretext that same were seized by Central Excise Department - NO: ITAT

THE assessee was processed u/s 143(1) accepting the returned loss of Rs.38,75,670/- as claimed by the assessee. Subsequently, on the basis of the information from the Central Excise Department, the case of the assessee was reopened. In response to the notice u/s 148, the assessee submitted that the original filed return may be treated as having been filed in response to the issued notice. Thereafter, a notice u/s 143(2) was duly served on the assessee, however, the assessee failed to be present on several occasions and finally the assessment was completed on the best judgment method.

The issue before the Bench is - Whether loss claimed by the assessee can be allowed, when its documents were seized by the Central Excise department and could not be produced even though the assessee was provided a reasonable time period. And the answer goes against the assessee.

Central Excise

Classification - Programmable Logic Controllers are correctly classifiable under CETH 8537 and not under CETH 9032 or CETH 8471 as claimed by the assessee - Demand confirmed, however, since issue concerns classification dispute, penalty set aside: CESTAT

THE appellants a manufacturer of 'Programmable Logic Controllers' and they sought classification of the said goods a 'automatic data processing machines' falling under CETH 84.71 of the Central Excise Tariff, or in the alternative they contended that the goods manufactured by them would be classifiable under CETH 9032. However, it is Revenue's contention that the goods are classifiable under CETH 8537 and duty is payable on such goods under that heading.

Earlier, the matter was remanded to the Commissioner(A) by the CESTAT.

And in remand, the impugned order was passed by holding that -

++ the impugned goods do not measure or control parameters such as flow level, pressure, temperature or other variables of liquids or gases and hence they do not merit classification under CETH 9032 as the said entry pertains to automatic controlling and regulating instruments and apparatus.

++ the equipment manufactured by the assessee also is not useful for automatic data processing but are used as a programmable controllers and, therefore, they merit classification under CETH 85.37.

See our Columns Tomorrow for the judgements

Until Tomorrowwith more DDT

Have a nice day.

Mail your comments to vijaywrite@taxindiaonline.com