THE AG's Audit is one single agency to which tax consultants should be ever indebted to. In Central Excise matters, the moment AG's Audit raises an objection, the Department is ready with a Show Cause Notice, even when the objection is silly and against the Law, judgements, Notifications and Board Circulars. Audit can come up with strange objections and they are a law unto themselves and have no respect for the Parliament, Supreme Court and in any case certainly not the Board. They believe that they know more about Central Excise and Service Tax than the combined wisdom of the Revenue Department, the Legislature and the highest Court in the country!

In Circular No. 5/83-CX.6 (F.No. 210/29/81-CX.6) dated 10-3-1983, CBEC had directed, inter alia , that immediately on receipt of objection from the Accountant General's Audit Party, demand-cum-show-cause-notice should be issued without any loss of time even if the Central Excise Officers do not agree with the Audit's point of view and such demand-cum-show-cause notice may be withdrawn where Department's stand is ultimately accepted by the Accountant General's Office and the objection is settled.

In Circular No. 444/10/99-CX., dated 12-3-1999, Board clarified that that the Assessing Officer should not raise protective demands pursuant to the Audit Objections contrary to the Orders issued by the Board under Section 37B of the Central Excise Act, 1944. Circular No. 5/83-CX.6, dated 10-3-1983 was modified to that extent.

In Circular No. 674/65/2002-CX, dated 1-11-2002, Board clarified that wherever Board's instructions or circulars (whether issued under Section 37B or not) exist on a particular issue, no protective demands should be raised on the basis of CERA objection if the objection is contrary to such Board's instructions or circulars. However, in all such cases, the matter should be immediately referred to PAC section of the Board for resolving the issue with the C&AG of India.

In Circular No. 698/14/2003-CX., dated 3-3-2003, twenty years after the first circular, Board took a volte face and directed “in the meantime, till the time written instructions from the Board for not raising protective demands are received in reply to the reference, the protective demands should be raised/continued to be raised.”

But in 2007, CBEC took a bold step and issued a Section 37B order pertaining to Service Tax on GTA and emphatically held, “no demand notice may be issued on the basis of objection raised by the C&AG office, and all pending matters may be decided accordingly.” – refer 37B Order No 5/1/2007-ST dated the 12th March, 2007.

Now Board has come up with a new clarification.

Explaining the position, Board states, “during audit by C&AG officers, Local Audit Paras (LAR) are initially raised, some of them are converted to Statement of Facts (SOF). A few SOF are made into Draft Audit Para (DAP). Generally, a LAR is converted into SOF within a period of 6 months. In some cases, it has been noticed that objections raised in LAR is not accepted by the department but the reply given by the department is also not accepted by AG's office. Further, if the said LAR is not converted to SOF/ DAP, the said objection remain unsettled and these show cause notices are transferred to Call Book. For these cases, jurisdictional Commissioners are required to hold meeting with local DAGs to settle the objection. However, in many cases, these issues are not settled for a long period.”

So Board clarifies, “in cases where a LAR has not been admitted by the department, and the same is not converted into SOF/ DAP by CERA, then the SCNs issued on account of said LAR may be adjudicated after a period of one year from the date of sending the reply to the LAR. However, before adjudication, it must be ensured that the LAR has not been converted into SOF/ DAP.”

Incidentally LAR means Local Audit Report, not Local Audit Para.

Adjudication is a quasi judicial function and it should not be biased by Audit paras – otherwise why can't we just ask the Audit to adjudicate? Why can't the Department tell the Audit that its objection is wild and stupid and the Adjudicating Authority has adjudicated the case, as per law? [if there is any such adjudication order].

Should a statutory Board administering a large tax base bow down before Audit?

CBEC F. No. 206/02/2010-CX.6 Dated: February 03, 2010

Should AG's Audit be allowed to visit factories and Premises of Service Tax Assessees?

THERE is a mistaken belief that CAG's Audit has a constitutional mandate and power to visit factories and other premises to audit for Central Excise and Service Tax. In fact the AG's Audit gets its power to visit the offices of the Central Excise and Service Tax assessees by virtue of the power given under the Central Excise Rules and Service Tax Rules and these rules are made by the Government means Board. So the Board has simply invited the AG Audit to come and act like a bull in its China shop!

In fact the Kelkar Committee had recommended that “Rule 22(3) of the Central Excise Rules, 2002 may be amended to exclude reference to audit party deputed by the CAG so that they need not visit the tax payer's premises.”

For the assessees it is a regular nuisance to attend to the periodic visits of the Auditors from the AG's office. The long history of trouble starts with picking up the auditors for the great audit work. Once this preliminary courtesy is extended, neither the assessee nor the Central Excise officer can rest. After a few days of continuous audit, the Audit party issues half margin memos to the Superintendent of Central Excise in charge of the factory listing out their objections and the Superintendent is required to give his replies. Whatever be his reply, the objection is not closed. The Audit party goes and in due course the Local Audit Report arrives and this time the AC/DC of the Division is expected to answer which means the paras will be sent to the ranges and the Superintendent will be required to answer, which means the paras will be sent to the assessees and he will be asked to answer the Audit paras. Even before the AC/DC sends his reply, in most cases the objection is converted into an SOF( Statement of Facts) and now the Commissioner is involved and before you can say AG, it becomes a DAP ( Draft Audit Para) and now the Board is involved, which means, the Commissioner, DC, Superintendent and assessee are involved. By this time the files become bulky in all offices and with frequent transfers of officers within the department, nobody has any idea as to what the original objection was and then it is converted into a PAC matter and a group of Hon'ble Members of Parliament will summon the Commissioner and other officers to discuss the issue and things will revert to stage 1. In the mean time whether the department agrees with the audit objection or not, Show Cause Notices will be issued and they will be in different stages of adjudication, appeal or hibernation. Mountains of papers are created and thousands of man hours engaged in the great audit chase – finally nothing may happen and usually nothing does.

Somebody once remarked that an Accountant General is an accountant who gets the salary of a General.

When CAG does not audit assessees under Income Tax, Customs, VAT, State Excise, Municipal taxes, why only Central Excise and Service Tax assessees should be subject to this torture by CAG Audit?

CBEC should have followed Kelkar's advice and removed the power of AG Audit to visit factories and the entire industry would have been grateful to the Board!

If you look deep, you will realise that the AG is responsible for all the pendency. Look at this real example. The AG raised an objection about a particular exemption which is crystal clear to everyone except the AG. The department has issued SCNs and is continuing to issue SCNs. They are not able to adjudicate the issue as they all know that the Audit objection is outright stupid. And they hope that one day wisdom will dawn on the portals of Audit Bhavan and the objection will be dropped. No such chance. AG makes it a Draft Audit Para and now nobody in the department will touch the case with a barge pole. The assessee continues to get SCNs for the last twenty years. And the latest objection from the AG- SCNs are pending for the last twenty years involving Crores of rupees. Why? Because of the AG!

Tips on how to deal with Audit

AN experienced assessee gave me the following tips on how to deal with Audit – Departmental or AG's.

1. They expect you to arrange a car to pick them up and bring them to your factory/office – ensure that the car reaches them as late as possible. Never allow them to hire the cab; you arrange it for them.

2. As soon as they arrive, receive them with all humility and show great respect to them.

3. Arrange for snacks, coffee/tea etc and indulge them in small talk.

4. Tell them that you are there to take care of all their needs – just ask and it will be provided.

5. Immediately after snacks and coffee, take them out for lunch at the farthest hotel and ensure that they take as much time as possible to finish the lunch. Take your own time in clearing the bill and ensure that the taxi driver is not available after the lunch. By this time it should be evening and you can tell the Auditors that they could start their work in earnest ‘from tomorrow'

6. ‘Tomorrow' and the next few days repeat the procedure in 1 to 5.

7. If they still find time to be in your factory, be very nice to them - if they ask for coffee, tea, newspapers, telephone, internet – be very prompt in providing these services.

8. If they ask for files, tell them politely and nicely that you will get them in a minute and don't appear before them for the next couple of hours. By that time it is pack up time for them.

9. Repeat 8 for the next few days, but do give them some unimportant files.

10. Always ensure that their ego is kept high - praise them for their wonderful observations and behave as if you are an idiot and you find them as super intelligent species. You behave as an idiot not because you are, but because they are!

11. For any issue they raise, ask them for their advice and express deep gratitude for the piece of wisdom.

12. After the Audit is over, present them with small packets containing the easily recognised pieces of paper with the Reserve Bank Governor's signature on them.

You may still get the Show Cause Notice from your Central Excise officer, but the damage will be less and you have to accept it as fact of life.

Jurisprudentiol – Monday's cases

Central Excise

Any fact necessary to support the legal plea should be raised at time of filing reply to the show cause notice - Without this support of fact, legal plea has no leg to stand on - Plea of limitation raised before Tribunal for first time which involves mixed questions of fact and law, cannot be entertained – CESTAT

THE original adjudicating authority confirmed the demand of Rs.2.49 lakhs issued for denial of MODVAT credit and imposed a penalty of Rs.20,000/-. The assessee subsequently paid this amount Under Protest through the PLA account and went in appeal. The Commissioner(A) set aside the order of the lower authority and the assessee suo motu took credit of the amount paid by them of Rs.2.49 lakhs. This was objected by the jurisdictional authorities and the demand was confirmed along with imposition of penalty. In appeal, the first appellate authority held against the party in respect of 'suo motu MODVAT credit' but vacated the penalty. So, the assessee went in appeal to the CESTAT.

Income Tax

Depreciation is allowable on entire block even if some of the assets of block have not been used - It is duty of everyone who has anything to do with taxing business-people to understand what principles of commercial expediency are.  ITAT

THE sole ground raised in the appeal is in respect of disallowance of proportionate depreciation of Rs. 7,27,249/- on account of closure of one unit out of two units of the assessee. The assessee was carrying on two businesses having one division at Dombivili and the other at Surat. Division at Surat was meant for yarn texturising in the name and style of M/s Swati Polyester and division at Dombivilli carried on the business of dyeing by the name of Swati Dyeing. The division of Surat had been closed since two/three years. The AO noticed that the assessee had claimed depreciation on the assets of Surat Division, which was closed. He disallowed the claim of depreciation of the assessee and the same has been confirmed by the CIT(A) observing that the assets were not used during the relevant accounting year as the Division at Surat was closed.

Customs

Appellant is an employee of CHA firm and was merely doing documentation work as per instructions received – since CHA has not been imposed any penalty, no cause for imposition of penalty on employee –CESTAT

THE lower authority has not imposed any penalty on the CHA firm, where the appellant was mere an employee, who was working under the instruction of the CHA firm. In the absence of any knowledge and holding that penal action cannot be taken against the CHA firm, penalty against the appellant is also not sustainable.

See our columns Monday for the judgements

Until Monday with more DDT

Have a nice Weekend.

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