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CAG not authorised to visit factory of assessee in private sector

JANUARY 23, 2012

By Prasad Suryakant Tendulkar, Consultant

RECENTLY I was requested by a big corporate organization to become member of their recruitment panel for the post of head, Indirect Taxes which gave me some insight about "Gross Misunderstanding" about the visits to the factories under Private Sector by audit party deputed by the Comptroller and Auditor General of India for audit. All the highly qualified high profile candidates already working at senior position were proudly stating that they have successfully conducted (or managed?) "CERA Audit� but nobody was able to let me know under which provisions of Central Excise Act, 1944 they were authorized to visit factories in private sector.

The Comptroller and Auditor General of India (CAG), who is the head of the Supreme Audit Institution of India (SAI) derives his duties and powers mainly from Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service)Act, 1971. The Articles 149 to 151 of Constitution of India gives powers to officers of CAG to conduct Audit of Factories and Companies which are having any Central or State Government control or share holding. But neither the said Articles 149 to 151 of Constitution of India nor The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 empower officers of CAG to conduct Audit of Factories and Companies in private sector which are not having any Central or State Government control or share holding.

The officers of CAG cannot perform any work assigned to them beyond powers given under Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. The officers of CAG cannot usurp powers from any other Act and conduct audit beyond the funcations prescribed under Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. The procedures prescribed / instrcutions issued to officers of CAG which are beyond the provisions made under Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 will become extralegal & invalid.

++ Further invaluable time of officers of CAG cannot be utilised for the work asigned beyond the provisions made under Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971, as per legal mandate drawn from referred provision. The mandate of CAG includes audit of:

++ Receipts and expenditure from the Consolidated Fund of India and of the State and Union Territories.
++ Transactions relating to the Contingency Funds and Public Accounts.
++ Trading, manufacturing, profit and loss accounts and balance sheets, and other subsidiary accounts kept in any Government department.
++ Accounts of stores and stock kept in Government offices or departments.
++ Government companies as per the provisions of the Companies Act, 1956.
++ Corporations established by or under laws made by Parliament in accordance with the provisions of the respective legislation.
++ Authorities and bodies substantially financed from the Consolidated Funds.
++ Any Body or Authority even though not substantially financed from the Consolidated Fund, the audit of which may be entrusted to SAI.
++ Grants and loans given by Government to Bodies and Authorities for specific purposes.
++ Panchayati Raj Institutions and Urban Local Bodies

The above mandate of C&AG does not even speak about conducting Audit of which are not having any Central or State Government control or share holding.

All the senior persons have more that 15-20 years experience were referring to Rule 22 of Central Excise Rules 2002 which reads as under

RULE 22. Access to a registered premises. -
(1) An officer empowered by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue.
[(2)� �. �.. �� ..
(i)
(ii) �. �. �. �.. �.. �..
(iii) � � � �
(3) [Every assessee, and first stage and second stage dealer] 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, -
(i) �. �. �� ..
(ii) �. �. �� ..
(iii) �. �. �.. � �..
for the scrutiny of the officer or audit party, as the case may be.

However the officers of CAG cannot be considered as an officer empowered by the Commissioner of Central Excise in his behalf who is working under Central Government, Ministry of Finance, Department of Revenue where as C&AG is functioning as per the provisions of Articles 149 to 151 of the Constitution of India & the Comptroller & Auditor General's (Duties, Powers & Conditions of Service) Act, 1971. Further Rule 22 of Central Excise Rules 2002 does not speak about "Visit to Premises.�

In fact the Kelkar Committee also might not have verified the powers of officers of CAG, under Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 and further went to recommend 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.� Whereas Rule 22(3) of the Central Excise Rules, 2002 speaks only about "on demand make available the records maintained or prepared�.

But everybody was unaware about the " Regulations on Audit & Accounts" issued by Comptroller and Auditor General of India 2007 C&AG is empowered to audit of Government companies and corporations and bodies and authorities in accordance with the laws made by the legislature and rules made there under as per Chapter2 of said Regulation on Audit & Accounts 2007 which is as under:-

CHAPTER 2

GENERAL

3. Role of the C&AG in regard to audit
The Comptroller and Auditor General is the sole authority prescribed in the Constitution entrusted with the responsibility of audit of accounts of the Union and of the States. It is the duty of the Comptroller and Auditor General to audit receipts and expenditure of the Union and each State and the Union Territory Governments. The audit reports of the Comptroller and Auditor General are placed before Parliament or the legislature of the State or the Union Territory, as the case may be.
The duties of the Comptroller and Auditor General also extend to audit of Government companies and corporations and bodies and authorities in accordance with the laws made by the legislature and rules made there under.

A company in "Private Sector" neither having any government funds nor having any shareholding of Government of India or any State Government, under the circumstances, Audit Team of CAG is not at all having any authority to conduct Audit of Records maintained by company in private sector. The Audit Team of CAG is not at all having any authority to conduct Audit of company in private sector hence cannot visit any company in private sector for the said purpose.

Any internal procedures prescribed by C&AG to their officers, which are beyond the provisions made under Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 will be "Ultra Vires" to the Constitution of India.

The ITRA conducting IT Audit of Income Tax department has (to the best of my knowledge) never visited any assessee's premises which also functions under same authority i.e. C&AG and never visited premises of any company in private sector to conduct Audit of Direct Tax records. Under the circumstances any visit by officers of C&AG (CERA in common parlance) to premises in private sector undertakings are totally beyond powers and constitutional mandate.

Further the latest decision of High Court of Calcutta in the case of SKP Securities Ltd Vs Union of India & Ors 2012-TIOL-50-HC-KOL-ST confirms the said position wherein an interim stay has been granted and Honourable High Court directed that "no audit be conducted by the authorities till 16 th March 2012 or until further orders"

For the few and rare cases wherein poor assessee cannot avoid visit by officers of C&AG or CERA; I am reproducing below valuable tips about how to handle visits & audits by team of C&AG which I have read in TIOL's DDT 1298 dated 12-02-2010

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.

My personal experience with Audit by CERA started somewhere in Oct 1995 when my organization received "Audit Objections� of 16 pages with no substance compelling us for continuous correspondence with Central Excise Range & Division which took almost next two years to settle even though my predecessor followed almost all guidelines of TIOL's DDT 1298 dated 12-02-2010 referred above in 1995 but surprisingly when in 1996 I did not even provide audit team of CERA auditors any conveyance to visit our factory and they were compelled to travel on their own by �Auto�, my organization received "Audit Objections� of just one & half page; which reveals ground realities of CERA's field formation.

So it is my humble request to all netizens who are working in private sector to take note of the above and ask officer of CERA or C&AG to show the legal provision empowering them to visit the premises of undertakings in private sector which would be a positive step in building future India strictly abiding to the law.

	RECENT DISCUSSION(S)		POST YOUR COMMENTS


Sub: Ignorance is bliss Dear Mr. Tendulkar, At the outset I would like to state that I have nothing personal against you (and I am reading your article or seeing your picture for the first time on TIOL) but would like to mention that my critical comments hereunder on your article are meant only to stimulate your intellect and not hurt your sentiments or personal reputation as a �consultant�. Your article on the CAG's power to visit the premises of assessees registered with Central Excise and Service Tax and audit their accounts is at best half baked and lacks depth of knowledge. You almost dismissed the level of knowledge of the high profile candidates you interviewed for some position of 'Head, Indirect taxes' for some large corporate/organization and tried to justify your level of knowledge on this subject by quoting the Constitution of India and the mandate given to CAG under the Constitution as well as Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. Unfortunately, it appears from your article that you did undertake proper research before belittling the knowledge of other experts. It appears that you visited the website of the CAG at www.cag.gov.in and did some quick research on the CAG's mandate before compiling your article. After reading your article, I also paid a visit to the website of CAG. I do not know where to begin my comments after dissecting your article but I would start with Rule 22 of Central Excise Rules, 2002. The sub-rule (3) thereof stipulates that every assessee shall, on demand make available to the officer empowered under sub-rule (1) or the audit party deputed by the CAG the documents and records prescribed therein. In your article you interpreted this sub-rule and stated, �However the officers of CAG cannot be considered as an officer empowered by the Commissioner of Central Excise in his behalf who is working under Central Government, Ministry of Finance, Department of Revenue where as C&AG is functioning as per the provisions of Articles 149 to 151 of the Constitution of India & the Comptroller & Auditor General's (Duties, Powers & Conditions of Service) Act, 1971. Further Rule 22 of Central Excise Rules 2002 does not speak about "Visit to Premises.� You may note that the sub-rule (3) ibid uses the conjunction �or� between the words �to the officer empowered under sub-rule (1), �the audit party deputed by the CAG�. So the above statement extracted from your article clearly highlights the eagerness on your part to dismiss the knowledge of other experts and assert your own intellectual brilliance without even caring to read what this Rule or its sub-rules state/stipulate. You must note that the CAG derives his powers independent of Rule 22 of Central Excise Rules, 2002 to depute his staff for �Audit�. And coming to powers of �Audit� conferred on CAG, in your article you made the following remark, �The above mandate of C&AG does not even speak about conducting Audit of which are not having any Central or State Government control or share holding.� And further you referred to extracts of Chapter 2 of �Regulations for Audit and Accounts� formulated by the CAG in the year 2007, in exercise of the powers conferred under section 23 of Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. It appears that your impatience to condemn the rest of the experts whom you interviewed did not allow you to read up the entire �Regulations�. You also probably did not read the entire statute which deals with the duties and powers of CAG viz., Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. In fact I am herewith providing a few extracts of the duties and powers of CAG from our Constitution, Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 and the Regulations for Audit and Accounts formulated by the CAG. Art. 149. Duties and Powers of the Comptroller and Auditor-General :- The Comptroller and Auditor-General shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States and of any other authority or body as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States as were conferred on or exercisable by the Auditor-General of India immediately before the commencement of this Constitution in relation to the accounts of the Dominion of India and of the provinces respectively. Sections 16 and 18 of Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971 Audit of Receipts of Union or of States 16. It shall be the duty of the Comptroller and Auditor-General to audit all receipts which are payable into the Consolidated Fund of India and of each State and of each Union territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make for this purpose such examination of the accounts as he thinks fit and report thereon. Powers of Comptroller and Auditor-General in connection with audit of accounts 18. (1) The Comptroller and Auditor-General shall in connection with the performance of his duties under this Act, have authority- (a) to inspect any office of accounts under the control of the union or of a State, including treasuries, and such offices responsible for the keeping of initial or subsidiary accounts, as submit accounts to him; (b) to require that any accounts, books, papers and other documents which deal with or form the basis of or an otherwise relevant to the transactions to which his duties in respect of audit extend, shall be sent to such place as he may appoint for his inspection; (c) to put such questions or make such observations as he may consider necessary, to the person in charge of the office and to call for such information as he may require for the preparation of any account or report which it is his duty to prepare. (2) The person in charge of any office or department, the accounts of which have to be inspected and audited by the Comptroller and Auditor-General, shall afford all facilities for such inspection and comply with requests for information in as complete a form as possible and with all reasonable expedition. From the above extracts, it is abundantly clear that CAG has the power to �audit� of accounts of all entities and not restricted to only Government departments/companies/corporations. CAG also derives the powers to visit the places of assessees (section 18(b) ibid states that CAG has the authority to require any accounts, books, papers etc to be sent to such place as he may appoint for his inspection. Now, if he can direct the �auditee� to send the records to any place appointed by CAG for inspection, he can as well depute his staff to the premises of the auditee for conducting audit. You may also refer to the following link which will take you to the Regulations for Audit and Accounts formulated by the CAG in the year 2007 in exercise of his powers under s. 23 of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 http://saiindia.gov.in/english/home/about_us/mandate/Regulations/Regulation2007.pdf And I would request you to read Chapter 6 (c) which deals with �Audit of Receipts� to enlighten yourself about the �auditing� powers of CAG. Also read Chapters 12 and 13 of the said Regulations which provide in detail the scope of powers of auditor to access information and data required for audit. Also, the order of High Court of Calcutta in granting stay on the visit of CAG to the premises of the petitioner is only an interim direction and the matter is yet to be decided finally. I must state that I am not a great fan of CAG Audit myself because of the manner in which they interpret certain provisions of law and raise objections which defy law and logic. During my tenure in the customs and excise department I worked closely with the CAG auditors during my tenure in the Ranges/Divisions. It is another matter that many of the experts and consultants in this field are blissfully unaware of the trouble CAG audit creates for an assessee (SCNs issued based on their objections refuse to die). Some of them may not be aware of Rule 22 of CER, 2002 as well. But I would sincerely advise you that no one is an expert in any field and there will be deficiencies in every person, which a person will learn and correct himself over the years. I only wonder how many of the interviewees lost their chance to grab that position because they could not tackle your question in the interviews conducted by you. Lastly, my sincere advice to you is that before you state or write something please undertake a certain amount of research and do not write anything with half baked information, which may mislead netizens into undertaking something adventurous (like that Kolkata assessee did) which only foments more litigation and trouble all around. Best regards, Santosh Hatwar Advocate
Posted by santosh hatwar


Sub: Sochiye- 'Pl think' Reading the relevant material provided in the article above and the first comment on it, as a bystander, it appears that the CAG Audit has the power to audit the accounts even for the Central Excise assessees. For the same they have to call for the records.If they calls for the records in their office it will be a difficult for both,them and the assessees. As to complete the audit it is not possible for any one to know that what all record is required to be seen in those circumstances and contexts. Hence multiple visits of the asessee in view of incomplete information is a clear possibility. Therefore, it appears better if they visit the factory. Even if there is no express provision for the 'visit to the factory' by CAG team it does look practical and easier approach to allow them to visit and finish the audit work until and unless there is a bar on it for what ever reasons. Now, the audit. When the glass is 'half full' it can always be said 'half empty'. The audit report will be the out come of both these pulls. Tips about how to handle visits of audit teams are in fact part of 'the 'pull concept'. Remaining is the national ailment for which no end appears in sight despite all trying hard for thousands of years.
Posted by A N

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