AUDIT UNDER SERVICE TAX

[Dr. Sanjiv Agarwal]

Audit under service tax is covered by section 14AA of Central Excise Act, 1944 as applicable to service tax and section 72A inserted by the Finance Act, 2012 w.e.f. 28-5-2012. The Central Board of Excise and Customs (CBEC) has issued guidelines for audit of accounts of Service Tax assessees.

Objectives of audit in Service Tax

section 72A was inserted with a view to provide for a special audit to be carried out by a chartered accountant or cost accountant nominated by the Commissioner. The special audit shall be ordered where the service tax assessee has failed to declare or determine the value of taxable service or has availed and utilized credit of duty or tax beyond the normal limit or by means of, collusion or willful misstatement or he is having operations spread out in multiple locations. It is further proposed to provide that the chartered accountant or as the case may be, the cost accountant shall submit a report to the Commissioner on completion of the audit and such audit may be ordered even though such accounts had been audited under any other law for the time being in force. Before initiating proceedings on the basis of the report, a reasonable opportunity of being heard shall be given to the service tax assessee so audited.

Scope of Audit provisions

section 72A gives comprehensive powers for special audit for service tax purposes. Accordingly,

a)  Special audit can be conducted on the directions of Commissioner of Central Excise.

b)  Commissioner directing such audit can do so if he has reasons to believe that any person liable to pay tax has committed certain action or deeds.

c)  Audit can be in respect of any person liable to pay service tax.

d)  Such person—

• has filed to declare or determine the value of taxable service correctly.
• has availed and utilized credit of duty or tax paid, which is not in the normal limits compared with the capital, goods, used or other relevant and appropriate factors or by means of fraud, collusion, or any willful misstatement or suppression of facts.
• has operation in multiple location and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises.

e)  Direction can be given to get his/its accounts audited for the period and scope as specified by the commoner.

f)    Such audit shall be conducted by a chartered accountant or cost accountant as defined in Chartered Accountant’s Act, 1949 and Cost and Works Accountants Act, 1959 respectively.

g)  The audit report, duly signed and certified shall be submitted by the auditor to Commissioner within stipulated time frame.

h)  Audit under section 72A shall be conducted irrespective of any other audit being carried out of the accounts of such person under any other law in force.

i)    An opportunity of being heard shall be provided to the auditee in respect of material gathered during audit and proposed to be utilized in any proceedings.

In SKP Securities Ltd. v. Deputy Director (RA-IDT) 2013 (1) TMI 549 - CALCUTTA HIGH COURT, it was held that condition precedent to order for special audit is reason to believe that person liable to Service Tax is within circumstances stipulated in section 72A (wrong declaration of value of taxable service, mis-utilization of credit of tax etc). Such insinuation of wrongful act affects citizen in his social life, and comes within scope of civil consequences. In that view such an order has to comply with principle of natural justice.

Reference in this context be made to the judgment of the Supreme Court in Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central-I and Another 2008 (4) TMI 4 - Supreme Court. The Supreme Court held that the expression “civil consequences” encompasses infraction of not merely property or personal rights but of civil liberties, material deprivations and non-pecuniary damages. Anything which affects a citizen in his civil life comes under its wide umbrella.

The condition precedent for special audit under Section 72A of the Finance Act, 1994, as amended, is reason to believe that any person liable to pay Service Tax, has failed to declare or determine the value of a taxable service correctly, or has availed and utilized credit of duty or tax paid in excess of entitlement by means of fraud, collusion or any wilful misstatement or suppression of facts or has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of its accounts from the registered premises falling under the jurisdiction of the said Commissioner.

Visit by Officers

In SKP Securities Ltd. v. Deputy Director (RA-IDT) 2013 (1) TMI 549 - CALCUTTA HIGH COURT, it was held that scope of Rule 5A includes members of audit team, auditor or accountant authorized by Commissioner, and they would all have access to registered premises of assessee for carrying scrutiny, verification and checks as might be necessary, including auditing of accounts, to safeguard interest of revenue. Rule 5A (2) does not empower the CAG to audit accounts of any assessee. It is more so as it is framed under power from section 94(2) of the Finance Act, 1994 which does not empower the Central Government of frame rules for such audit. It only casts obligation on assessee to make records and documents as specified therein available to officer authorized by the commissioner, or audit party deputed by the Commissioner or CAG.

Taxability of Audit Fee Collected by CAG

Comptroller and Auditor General (CAG) conducts audit of corporations directly and also collect audit fees. Such audit fee shall not be subject to levy of Service Tax under any category. CBEC has clarified vide Circular No. 159/10/2010-ST dated 19.6.2012 that CAG audit is not covered under practicing chartered accountant’s services as CAG is not covered under the definitions of chartered accountant. Also CAG is a constitutional authority and not a ‘concern’. Such services are also not covered under support services of business and commerce as CAG audit is not an outsourced function.

It may be noted that the Office of Comptroller and Auditor General of India (CAG) cannot audit the books of accounts of private business entities. Calcutta High Court in SKP Securities Ltd. v. Deputy Director (RA-IDT) 2013 (1) TMI 549 - CALCUTTA HIGH COURT, held that there is no provision under Central Excise Act, 1944 or the Finance Act, 1994 empowering CAG to undertake audit of private enterprises which are not funded or grants given by the Government. The High Court further held that Rule 5A(2) of the Service Tax Rules, 1994 is ultra vires to the extent of its directing every assessee to provide records to audit party of CAG.

Thus, only in case of special audit as envisaged under section 72A of the Finance Act, 1994 or section 14A or 14AA of the Central Excise Act, 1944, assessee is required to provide records, and not otherwise, to the audit party. Similar view has been taken in W.P. No. 20517/2012 of Infinity InfoTech Park Ltd, Calcutta by the Calcutta High Court.