EY Tax Alert. Executive summary

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13 April 2016 EY Tax Alert CBEC prescribes new procedure and timelines for dealing with Audit Objections under CERA and CRA audits covering Central Excise, Service tax and Customs Executive summary

For more information, please contact your EY advisor. This Tax Alert summarizes Circular No.

1 13 April 2016 EY Tax Alert CBEC prescribes new procedure and timelines for dealing with Audit Objections under CERA and CRA audits covering Central Excise, Service tax and Customs Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes Circular No. 1023/11/2016-CX dated 8 April 2016 (Circular) issued by the Central Board of Excise & Customs (CBEC) regarding revised guidelines to be followed by the Department for adjudication of Show Cause Notices (SCNs) issued on the basis of audit objections of Central Excise Revenue Audit (CERA) and Customs Revenue Audit (CRA). The Circular prescribes timelines for submission of replies by the Department at various stages viz. issuance of half margin / audit memo, local audit report, statement of facts, draft audit para and audit paragraphs. Further, the Circular specifies guidelines for quarterly co-ordination meetings, issuance and adjudication of SCNs and discusses how past cases are to be handled. The procedure of transferring SCNs arising out of CAG objection to Call-Book has been discontinued. Procedure prescribed vide the Circular will apply to all audit objections under Customs, Central Excise and Service tax, received after the issuance of this Circular or past audit objections where no SCN has been issued.

2 Background CBEC has issued instructions from time to time regarding adjudication of SCNs issued on the basis of audit objections of CERA and CRA, which is the receipt audit wing of the Comptroller and Auditor General of India (CAG). Recommendations by the Tax Administration Reform Commission report, representations received from trade and inputs from field officers indicated that there was a need to review past instructions issued in this regard. Accordingly, all past circulars and instructions have been rescinded, such that procedures prescribed for dealing with audit objections raised by CERA / CRA as per this Circular will prevail. Key Features The Circular prescribes the various stages involved in the life cycle of an audit objection and the timelines for replying which are to be strictly adhered to by the Departmental officers. The stages and timelines are summarised as follows: Stage (i) Half Margin / Audit memo is issued to the Superintendent of the Range during the course of audit on points noticed by CERA. Half margin is to be replied to Immediately and in any case before the end of the audit of the Range / Division/ Commissionerate concerned. Stage (ii) Local Audit Report (LAR) contains audit paragraphs, generally issued by the headquarters of local CAG office to the Assistant / Deputy Commissioner. 1 (iii) Statement of Facts (SoF) is issued to jurisdictional Commissioner / Additional Commissioner on major audit observations which may feature in Audit Reports. 22 The Assistant / Deputy Commissioner is expected to reply to the LAR within thirty days. SoF is required to be replied: - Within six weeks, objection is not contested. - Currently, there is no prescribed time limit, however it is stated that SoF is to be replied to with the approval of the Commissioner, objection is contested and amount of duty / tax involved is INR 50 lakhs or less. - With the approval of the Chief Commissioner objections involve higher duty / tax, than above. 1 LAR is to be issued generally within one month of the completion of the audit by the headquarters of the Director General or Principal Director of Audit. 2 Detailed reasons for contesting the audit objection should be recorded in the file quoting relevant case laws and circulars, if any, by the Department.

3 Stage (iv) Draft Audit Para (DAP) are the potential audit paragraphs that are considered fit for inclusion in the Audit Report. They are issued by the CAG officer to the Ministry (CBEC). (v) Audit Paragraphs Post consideration of CBEC s reply, CAG s office may convert DAP into an Audit Paragraph, which may form the part of report called Audit Report. 33 Co-ordination meetings CBEC is expected to reply to DAP within four weeks of its receipt. Currently, there is no prescribed time limit, however it is stated that CBEC is expected to furnish an Action Taken Note (ATN) on each of the paragraphs in the Audit Report. The ATNs received are examined by the office of CAG and duly vetted ATNs are submitted to the Public Accounts Committee (PAC). The process of submission of ATN to PAC is expected to be completed within four months of submission of Audit Report. Quarterly co-ordination meetings are to be held in each of the Zones by the officers of the Revenue Department with the CAG officers, to ensure that the list of audit objections, replies given by Revenue and final view taken by CERA / CRA can be discussed. In this regard, Chief Commissioner shall identify a nodal officer (preferably Additional Commissioner / Joint Commissioner, CCU) to co-ordinate and attend such meetings. An audit objection is considered as settled when the views of CERA / CRA and Revenue converge due to either CERA / CRA dropping the audit objection or Revenue admitting the audit objection. Issue of SCN On receipt of a LAR or SoF, replies sent by the Department can be categorised as follows Where the Department has agreed with the audit objection on merits: Audit objections, where the Department has agreed to the merits of the objections, SCNs should be issued immediately. Such cases should not be transferred to the Call-Book and should be adjudicated forthwith. Where the Department has not agreed with the audit objection on merits: No SCN should be issued. In such cases, audit objection should be replied following the procedure as per para (iii) i.e. SoFs stage indicated in the table above. SCN at the direction of the Board: Where a contested audit objection has become DAP and on examination it is found by the Commissioner (PAC) or Joint Secretary (Customs) in CBEC that the objection should have been admitted, they may give necessary directions to the field to issue SCN and adjudicate the case on merits. No transfer to Call-Book: The procedure of transferring the SCN arising out of CAG objection to Call-Book has been discontinued At both the DAP and Audit para stages, it is essential that field formations concerned give a detailed reply including the present status of the objection to facilitate a meaningful reply by CBEC. 41 CBEC Circulars on transfer of cases to the Call- Book arising out of CAG objections are amended accordingly viz.[circular Nos. 162/73/95-CX dated 14 Dec 1995 and 385/18/96-CX dated 30 Mar 1998 amended accordingly]

4 Adjudication of SCN Adjudication of SoFs / LARs not converted into DAP: SoFs / LARs are replied by the Commissionerate and therefore these cases may be adjudicated after ensuring that the reply given by the Commissionerate is available on record. Adjudication of admitted DAPs / APs: DAPs are replied by the Ministry (CBEC) and therefore adjudication of DAPs should be undertaken after ensuring that the reply given by the Ministry (CBEC) is available on record. SCNs relating to audit objections figuring in the list should not be adjudicated and further action may be taken on them in consultation with the Commissioner (PAC). The rest of the objections finally vetted by CAG Audit with no further comments would mean that the reply of the Department has been accepted by the CAG office. SCNs relating to these objections may be taken up for adjudication on merit, including those in the Call-Book, following the procedure prescribed in paragraph relating to Adjudication of SCN, as discussed above. Adjudicating authority is a quasi-judicial authority and is legally bound to adjudicate the case independently and judiciously taking into consideration the audit objection by CERA / CRA, reply of the Department as referred above, reply of the party, relevant legal provisions, case laws on the subject and relevant Circulars of the Board, if any. It is expected that the factum of SCN being a consequence of CERA / CRA objection, would be incorporated in the brief facts of the case in the adjudication order. For audit objections issued after 1 March 2014 till the date of issuance of this Circular i.e. 8 April 2016: Where SCNs have been issued, list of pending ATNs would be issued in due course. These SCNs pertaining to these objections may be adjudicated, mutatis mutandis following the procedure prescribed for cases prior to 1 March Application Where an issue was under audit objection and has been subsequently either judicially settled, by say judgement of Supreme Court or where a Circular of the Board has been issued on the subject, further correspondence with the Board on the audit objections, even if they have become DAPs, is not necessary and such cases may be adjudicated on merits taking into consideration the latest judgements and circulars. Past Cases For audit objections issued prior to 1 March 2014: Central Excise and Service tax audit objections shall be compared with the pending ATNs, received from the office of CAG (as enclosed in Annex. B of the Circular). For Customs, list shall be separately issued. Provisions of the Circular will apply to all audit objections in Customs, Central Excise and Service tax received after the issuance of the Circular or past audit objections where no SCN has been issued. Comments Although the Circular clarifying audit procedures is issued for field formations, they are also significant from the taxpayers perspective. The modified process contained in the Circular is not only expected to provide fair, transparent and hassle free audits for taxpayers but will also facilitate reduction in unwarranted litigation. However, to achieve the given objective, timelines prescribed will need to be adhered to by the Revenue.

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