SPECIAL AUDIT BY A COST ACCOUNTANT UNDER SECTION 72A OF CHAPTER V OF FINANCE ACT, 1994

INTRODUCTION:

 

                        Special Audit provisions were for the first time introduced under the excise law as far back as 1995. Section 14A of the Central Excise Act was introduced vide Section 76 of the Finance Act, 1995 which provided for special audit in respect of valuation of excisable goods. Special audit could be ordered in cases as set out in sub-section (i) of section 14A i.e. where the central excise officer was of the opinion that the value was not correctly declared or determined by the manufacturer or any other person.    Thereafter, scope of special audit was expanded by introducing Section 14AA in the Central Excise Act vide Section 83 of the Finance Act, 1997. Section 14AA of the Central Excise Act, 1944 deals with special audit in cases where credit of duty availed or unutilized is not within the normal limits etc., by Cost Accountant or Cost Accountant.  Until the year 2009, special audits could be conducted only by cost accountants. It was only vide sec. 105(i) and section 106(i) of the Finance Act, 2009, that section 14A and 14AA were amended to provide that special audits could also be conducted by chartered accountants.  Service tax provisions have no separate provision for special audit.   But Section 14AA of the Central Excise Act is also applicable to the output service provider by virtue of Section 83 of Chapter V of Finance Act, 1994, with effect from 08.04.2011.

 

APPLICABILITY OF CENTRAL EXCISE ACT PROVISIONS:

 

If Section 14AA of the Central Excise Act, 1944 is substituted for service tax the same may be read as below:

 

Section 14AA

 

(1)   If the Commissioner of Central Excise has reason to believe that the credit of duty/service tax availed or utilized under the rules made under this Act by a service provider of any output service-

 

(a)    Is not within the normal limits having regard to the nature of services provided by the output service provider, the type of input services used and other relevant factors, as he may deem appropriate;

(b)   Has been availed of or utilized by reason of fraud, collusion or any willful mis-statement or suppression of facts, he may direct such output service provider to get the accounts of his office, premises or any other place, as may be specified by him, audited by a Cost Accountant or Chartered Accountant nominated by him.

 

(2)   The Cost Accountant or Chartered Accountant so nominated shall, within the period specified by the Commissioner of Central Excise, submit a report of such audit duly signed and certified by him to the said Commissioner mentioning therein such other particulars as may be specified.

(3)   The provisions of sub section (1) shall have effect notwithstanding that the accounts of the said service provider of any output service aforesaid have been audited under any other law for the time being in force or otherwise;

(4)   Omitted;

(5)   The service provider of any output service shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit under sub section (1) and proposed to be utilized in any proceeding under this Act or rules made there under.

 

Explanation1 – For the purpose of this section ‘Cost Accountant’ shall have the meaning assigned to it in clause (b) of sub section (1) of Section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959).

 

Explanation 2 – For the purpose of this Section, ‘Chartered Accountant’ shall have the meaning assigned to clause (b) of sub section (1) of Section 2 of the Chartered Accountants Act, 1949 (38 of 1949).

 

The bare analysis of the above it can be inferred that the special audit on the service provider of output service will be only in case of reasonable belief of the Commissioner of Central Excise having jurisdiction regarding wrongful availment and utilization of the CEVAT credit of service tax by the service provider of any output service.

 

NEW SECTION:

 

Now the Finance Act, 2012 inserted a new section 72A after Section 72, with effect from 28.05.2012, which reads as follows:

 

Special audit.

 

72A. (1) If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax (herein referred to as ”such person”),––

 

(i)                 has failed to declare or determine the value of a taxable service correctly; or

 

           (ii)       has availed and utilized credit of duty or tax paid-

 

(a)    which is not within the normal limits having regard to the nature of taxable service provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or

 

                (b) by means of fraud, collusion, or any willful misstatement or suppression of facts; or

 

(iii)             has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner, he may direct such person to get his accounts audited by a chartered accountant or cost accountant nominated by him, to the extent and for the period as may be specified by the Commissioner.

 

      (2) The chartered accountant or cost accountant referred to in sub-section (1) shall, within the period specified by the said Commissioner, submit a report duly signed and certified by him to the said Commissioner mentioning therein such other particulars as may be specified by him.

 

      (3) The provisions of sub-section (1) shall have effect notwithstanding that the accounts of such person have been audited under any other law for the time being in force.

 

      (4) The person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on the basis of the audit under sub-section (1) and proposed to be utilized in any proceeding under the provisions of this Chapter or rules made there under.

 

          Explanation. — For the purposes of this section,––

 

                (i) “Chartered accountant” shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949; (38 of 1949)

                (ii) “Cost accountant” shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959).

 

ANALYSIS:

 

                        Section 14AA of the Central Excise Act, 1944 which is made applicable to service tax provision does not cover the valuation part.   It deals only with the availment or utilization of CENVAT by means of fraud, collusion or any willful misstatement or suppression of facts.   For causing special audit the Commissioner of Central Excise is to satisfy that he had reason to believe that the CENVAT credit was availed wrongly for any of the reasons mentioned by the assessee.  Another ground for causing special audit is that the CENVAT credit availed or utilized was not within the normal limits having regard to the nature of service provided etc., the type of input services used and other relevant factors as he deemed appropriate.

 

Sec. 14A of the Central Excise Act, 1944 covers the valuation part.  This aspect has been incorporated in Section 72A of Finance Act, 1994.  But there is difference between Sec. 44A of the Central Excise Act, 1944 and Section 72A of the Finance Act, 1994.  In Section 44A of the Central Excise Act, for conducting special audit the following shall apply to the said section:

 

  • nature and complexity of the case and the interest of the Revenue;
  • any Central Excise Officer not below the rank of an Assistant Commissioner of Central Excise, or Deputy Commissioner of Central Excise         is of the opinion that the value has not been correctly declared or determined by a manufacturer or any person;
  • with the previous approval of the Chief Commissioner of Central Excise, direct such manufacturer or such person to get the accounts of his factory, office, depots, distributors or any other place, as may be specified by the said Central Excise Officer, audited by a cost accountant  or Chartered accountant, nominated by the Chief Commissioner of Central Excise in this behalf.

But in Section 72A of the Finance Act, no such conditions prescribed in Section 44A of the Central Excise Act are prescribed.   Special audit may be conducted if the Commissioner of Central Excise has reason to believe that any person liable to pay service tax (both service provider and service receiver by reverse charge mechanism) has failed to declare or determine the value of a taxable service correctly.    By this provision possibilities are there for conduct of many special audits on service providers and service receivers who are liable to pay tax under reverse charge mechanism.  Hence this part of Section 72A of the Finance Act, 1994 is to be brought on line of Section 44A of the Central Excise Act, 1944.

 

Section 72A(1) (iii) is the unique feature incorporated which has not been found place in Section 44A and Section 44AA of the Central Excise Act, 1944.  The said clause provides that if the Commissioner of Central Excise has reason to believe that any person liable to pay service tax has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises falling under the jurisdiction of the said Commissioner, he may direct such person to get his accounts audited.   This provision is unwanted since it may create much practical problems for the big industries having operations in various states in the country.  The Department, being the payment of service tax is made electronically and the returns are to be filed electronically, is having no problem in getting every information of the service provider.  In case of centralized registration the Department can get all information from the office of centralized registration.  In case of non centralized registration, each unit is to be registered and to submit returns.   Thus there may be no difficult in getting information of the service provider by the Department.  In all cases the Department is having all the information including the balance sheet, tax audit report, cost audit report etc., at the time of excise audit.

 

The author is of the opinion that Section 72A of the Finance Act, 1994 is to be amended suitably in consultation with our Institute and stakeholders for the smooth functioning.

 

Next to consider is the role of Cost Accountants in special audits.   As mentioned in introduction part, in the earlier period special audit was done by Cost Accountants only.  During 2009 Chartered Accountants are allowed to conduct special audit for the reason at that time there was no sufficient number of Cost Accountants.   Now the number of Cost Accountants is in the increase.   Therefore the Institute is to take steps that this work shall be entrusted only to the Cost Accountants.

The author also wants to point out judgment of the Supreme Court in ‘Commissioner of Central Excise, Belapur, Mumbai V. RDC Concrete (India) Limited’ – 2011 – TMI -204921 – (Supreme Court of India).  The Supreme Court, in this case, held that the Department Officer, who is the member of the Institute, can be appointed as Cost Accountant for the purpose of Sec.14A of the Central Excise Act.  By virtue of the said judgment it may be possible to appoint-

  • A practicing Cost Accountant;
  • An Executive of the Private Company, who is a member of the Institute;
  • Officer of the Government who is a member of the Institute; (which has already been done)
  • Other professionals such as Advocates, Company Secretaries who are also member of the Institute

for special audit under Section 72A of the Finance Act, 1994.

Members may in the hope that such type of audit work should be carried out by the Cost Accountant in practice.   The Institute shall get the terms ‘Cost Accountant’ in the said sections to be amended as ‘Cost Accountant in Practice’ and try to get this type of work as the exclusive work of Cost Accountant in practice.

CONCLUSION:

                        As discussed the suitable amendment for Section 72A of the Finance Act, 1994 is highly required.    It is suggested that in case of  provider of output service who avails more than Rs.25 lakhs (the amount may be fixed by the Government) in a year as CENVAT credit the Department may require to the Cost Accountant in practice who will scrutinize all the bills used for CENVAT credit and audited the accounts and submitted to the report to the Department as to the correctness of compliance of the CENVAT Credit Rules, 2004.  Being expertise in the field the Cost Accountant in practice may done this job in a better way by which the time of the Departmental Officers will be saved on auditing and the revenue will be assured in case of wrong taking and the litigation will be much reduced.  The Department in consultation with the Institute may keep a panel of Cost Accountant in Practice for this purpose and may utilize their services in a better way.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posted in Service Tax

TaxnLaw Newsletter

Facebook

Web Design BangladeshDomain & Hosting Bangladesh

News1

December 29, 2013December 29, 2013
this is the news