PAPER FOR PUBLICATION IN THE SOUVENIR
ADJUDCATION, APPEALS AND AUDIT UNDER SERVICE TAX
BY CA. Ashok Batra
B. Com (Hons), LL.B, FCA.
Adjudication
According to Lax Laxicon the term ‘adjudicate’ means to hear or try and
determine as a court. Thus, the term ‘adjudication’ means process of trying
and determining a case judicially. Like-wise Black’s Law Dictionary defines the
term ‘adjudication’ as ‘the legal process of resolving a dispute. The formal
giving or pronouncing a judgment or decree in a court proceeding’. Central
Excise Authorities have been empowered vide Chapter V of the Finance Act,
1994[hereinafter referred to as ‘Act’] and the Rules made thereunder to
determine description of services, valuation, refund claims and service tax
payable. In addition, the aforesaid Authorities have been empowered to grant
various permissions and impose interest and penalties. Power to adjudicate is
vested in Departmental officers. The orders of the adjudicating authorities have
been made appealable with a view to secure the interest of the assessees.
Further, in terms of section 73(4B) [inserted with 06.08.2014] the adjudicating
authority shall determine the amount of service tax due within six months from
the date of notice where it is possible to do so in respect of cases where show
cause notice has been issued within normal period of 18 months. In case
,where extended period of limitation has been invoked or where the case is
falling under proviso to section 73(4A), the adjudication of show cause notice is
to be done within one year from the date of issue of such notice, where it is
possible to do so.
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The adjudicating authorities are quasi-judicial authorities. The term ‘quasi’
means ‘not exactly’/’almost’/’as it were’. Thus, adjudication is a quasi-judicial
process and principle of natural justice must be followed.
Essential ingredients of principle of natural justice
The essential ingredients of principle of natural justice are as under:(i)Giving full information about charge(s);
(ii)Allowing concerned party /parties to state his/their defence (personal
hearing);
(iii)Unbiased authority; and
(iv) Passing order with reasons.
Powers of adjudication of central excise officers
The powers of adjudication of Central Excise Officers are briefly listed below:(A) Demand of service tax and its recovery[Section 73 read with Section 87]
(B) Rectification of any mistake apparent from the record by amending its
own order[Section 74]
(C) Adjudication of penalty [Section 83A]
(D) Refund of service tax and interest [Section 11B and section 11BB of the
Central Excise Act as made applicable to service tax with effect from
01.07.1994 and 16.10.1998 respectively ]
Restrictions on powers of adjudication
There are no statutory restrictions on powers of adjudication in terms of
section 73 and 74 of the Act. However, powers under section 83A of the Act
may be excised by the Central Excise Officer in accordance with powers
conferred on him by Central Board of Excise & Customs. As far as refund
claims are concerned, the necessary powers are exercised by Assistant
Commissioner of Central Excise or Deputy Commissioner of Central Excise in
accordance with section 11B of the Central Excise Act, 1944.
Monetary limits for the purpose of adjudication of penalty under Section
83A with effect from 08.09.2010[Notification No. 30/2005-S.T. dated
Page 2 of 9
10.08.2005 as amended by Notification No. 48/2010-S.T. dated
08.09.2010]
Sr.
No.
Central Excise Officer
(1)
(1)
(2)
Superintendent
Excise
of
Central
Amount of service tax or CENVAT
Credit specified in a notice for the
purpose of adjudication of penalty
under Section 83A
(3)
Not exceeding rupees one lakh (excluding
the cases relating to taxability of services
or valuation of services and cases
involving extended period of limitation.)
Not exceeding rupees five lakh (except
cases
where
Superintendents
are
empowered to adjudicate.)
Assistant Commissioner of
Central Excise or Deputy
Commissioner of Central
Excise
Joint
Commissioner
of Above rupees five lakh but not exceeding
(3)
Central Excise
rupees fifty lakh
Additional Commissioner of Above rupees twenty lakh but not
(4)
Central Excise
exceeding rupees fifty lakh
Commissioner of Central Without limit.
(5)
Excise/Principal*
Commissioner of Service Tax
Note: Reference to Principal
Commissioner
has
been
added with effect from
06.08.2014
It is necessary to clarify here that in terms of Para 12.2. of Circular No
97/8/2007-S.T. dated 23.08.2007 the monetary limits for adjudication of
service tax cases are irrespective of whether or not such cases involve fraud,
collusion, wilful mis-statement, suppression of facts or contravention of any of
the provisions of the Act or rules made thereunder with an intent to evade
payment of service tax and whether or not extended period has been invoked.
(2)
Different cases involving same issue
According to Para 12.3 of Circular No 97/8/2007-S.T. dated 23.08.2007 where
different cases involving the same are due to be adjudicated in a
Commissionerate, all such cases may be adjudicated by the Central Excise
Officer competent to decide the case where the service tax or CENVAT credit
involved is of the highest amount.
Adjudication powers to all Commissioners
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All principal commissioners or Commissioner of Central Excise and
Commissioner of Central Excise (Adjudication) have been vested with powers of
investigation and adjudication of cases throughout the territory of India as may
be assigned by Board in terms of Notification No. 16/2007-Service Tax dated
19.04.2007. Thus, power to adjudicate outside the jurisdiction is available only
when the same is assigned by the Board. It is clarified here that reference to
‘principal commissioner’ has been added with effect from 06.08.2014.
Appeals
Appeals to Commissioner (Appeals)/ First Appeal
According to Section 85(1) of the Act any person aggrieved by any decision or
order passed by an authority subordinate to the Commissioner of Central
Excise [‘CCE’], may appeal to the Commissioner (Appeals). Further, in terms of
Section 85(3A) an appeal shall be presented within two months from the date of
receipt of the decision or order of such adjudicating authority made on or after
28.05.2012. However, in terms of proviso to Section 85(3A), delay in filing the
appeal upto one month can be condoned by the Commissioner (Appeals) on
showing sufficient cause.The appeal has to be filed in Form ST-4.
Mandatory pre-deposit for entertaining appeal with effect from
06.08.2014
Section 35F of the Central Excise Act, 1944 has been substituted by Finance
(No. 2) Act, 2014 with effect from 06.08.2014. In terms of substituted section
35F the Government has prescribed a mandatory fixed pre-deposit amount of
7.5% of the of duty, in case where duty or duty and penalty are in dispute, or
penalty, where such penalty is in dispute, if an assessee is aggrieved by an
order of the Adjudicating Authority and prefers a first appeal. The First Appeal
could either be before Commissioner (Appeals), if the Order has been passed by
an adjudicating authority lower than the rank of Commissioner; or the First
appeal could be before the Custom, Excise and Service Tax Tribunal, if the
Order has been passed by the Commissioner Adjudication.
However, if the assessee prefers a second appeal i.e. an appeal before the
Hon’ble Tribunal against the order of the Commissioner (Appeals), then the
assessee has to make a mandatory fixed pre-deposit of 10% of the duty, in case
where duty or duty and penalty are in dispute, or penalty, where such penalty
is in dispute.
Disposal of the appeals to Commissioner (Appeals)
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According to section 85(4) of the Act CCE (Appeals) shall hear and determine
the appeal and pass the necessary orders (including an order for enhancing the
service tax, interest or penalty].
Appeals to Appellate Tribunal/Second Appeal
According to the provisions of Section 86(1) of the Act any person aggrieved by
an order passed by a CCE under Section 73 or Section 83A or an order passed
by a CCE (Appeals) under Section 85 may appeal to the Appellate Tribunal
against such order within a period of three months of the date of the receipt of
the order with effect from 28.05.2012. The said appeal is also known as
“Second Appeal”. It is worth mentioning here that the right of second appeal is
available both to the assessee as well as to the Department. In terms of Section
86(3) the Department can file an appeal within four months from the date on
which the order sought to be appeal against is received by the Committee of
Chief Commissioners or, as the case may be, the Committee of Commissioners.
According to Section 86(5) the Tribunal may admit an appeal or permit the
filing of a memorandum of cross-objections after the expiry of the relevant
period on showing sufficient cause. If the assessee files the appeal then
depending upon the amount of service tax and interest demanded and penalty
levied by any Central Excise Officer, appeal must be accompanied with fees as
prescribed in Section 86(6) of the Act. Further, in terms of section 86(6A) every
application made before the Appellate Tribunal in an appeal for rectification of
mistake or for any other purpose or for restoration of an appeal or an
application shall be accompanied by a fee of Rs. 500/-. Further, the appeal of
the assessee should be in prescribed form ST-5 in quadruplicate and should be
accompanied by equal number of copies of order appealed against. One of the
copies should be certified copy of order in terms of Rule 9(1) of Service Tax
Rules, 1994.Further, if one party files an appeal then the other party can file a
memorandum of cross-objections within 45 days of the receipt of the relevant
notice regarding filing of appeal in accordance with provisions of Section 86(4)
of the Act. However, Section 86(5) empowers Tribunal to condone delay in filing
appeal or cross objection, if sufficient cause is shown. Further, if the counsel is
a chartered accountant, power of attorney is to be submitted on a stamp paper
of Rs. 50/-. On the other hand, if the counsel is an advocate, Vakalatnama
(with court fee of Rs. 1.25 and stamp of Rs. 5/- towards Welfare Fund) to be
filed.
Audit
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Audit of Service Tax Assessees
Service tax liability is computed by an assessee under self assessment scheme
of the Act. In order to ensure whether the Service Tax liability has been
correctly computed by an assessee, it becomes essential for the Department to
conduct an audit of Service Tax Records maintained by an assessee. Besides
the Departmental Audit, there is another Service Tax Audit which is conducted
by the Comptroller and Auditor General of India [‘CAG Audit’ in short].
Normally, CAG Audit is conducted in respect of those Service Tax Assessees
which discharge Service Tax liability [either in cash or through availment of
CENVAT Credit] in excess of the yearly limits fixed by CAG.
Provision with regard to records is provided in Rule 5(2) of Service Tax Rules,
1994. However, duty to produce such records before the authorised officer to
carry any scrutiny, verification or check to safeguard the interest of revenue
has been provided in Rule 5A of STR Rules, 1994. Rule 5A(2) of Service Tax
Rules, 1994,inter alia, provides that it is duty of every assessee to make
available ,on demand, to the audit party deputed by the Commissioner or
Comptroller and Auditor General of India, within a reasonable time not
exceeding fifteen working days from the date such demand is made, or such
further period as may be allowed by such officer or the audit party, the
following records for the purpose of scrutiny:
1. The Records mentioned under Rule 5(2) of Service Tax Rules, 1994 [STR,
1994 in short] which are given in the following box for ready reference:
Records mentioned under Rule 5(2) of STR, 1994
(2) Every assessee shall furnish to the Superintendent of Central
Excise at the time of filing of return for the first time or the 31st
day of January, 2008, whichever is later, a list in duplicate, of(i) all the records prepared or maintained by the assessee for
accounting of transactions in regard to,(a) providing of any service;
(b) receipt or procurement of input services and payment for
such input services;
(c) receipt, purchase, manufacture, storage, sale, or delivery, as
the case may be, in regard of inputs and capital goods;
(d) Other activities, such as manufacture and sale of goods, if
any.
(ii) All other financial records maintained by him in the normal
course of business.”
2. The Trial Balance or its equivalent; and
3. The Income Tax Audit Report, if any, under Section 44AB of the Income-Tax
Act, 1961
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Service Tax Audit by the Department
Service Tax assessees are subject to audit by the service tax department. The
department has issued extensive guidelines along with Service Tax Audit
Manual for audit team, which requires a lot of information to be kept ready by
the assessee before the audit commences. The audit is required to be
completed in respect of each assessee in not more than 10 working days.
During the course of audit, the service tax department generally asks for final
accounts of the assessee and identifies various revenue receipts of the assessee
If the Service Tax Audit pertains to a period prior to 01.04.2011/01.07.2011
[depending upon the date on which the assessee switched to Point of Taxation
Rules, 2011] the concerned Audit Team then reconciles the amount of gross
receipts /turnover with the “value of taxable service” charged or billed as per
the service tax returns to ascertain whether service tax has been paid as per
the provisions of the Finance Act, 1994. In case service tax has not been paid
on some of the revenue receipts, explanation for non-payment of service tax is
sought for from the assessee. In case assessee claims any exemption/
deduction/abatement, the audit team scrutinizes, whether the assessee is
eligible to the said exemption/deduction/abatement and whether the
conditions
and
stipulations
subject
to
which
such
exemption/deduction/abatement is availed have been compiled with by the
assessee. The department also scrutinizes the expenditure incurred under
various heads. This is done basically for following reasons:
1. To ascertain the correctness of claim of CENVAT Credit, if any;
2. To ascertain the correct Valuation of taxable services
(i) To ascertain whether reimbursements claimed in
Invoices/Bill/Challans have actually been incurred and eligible for
deduction from taxable value of service;
(ii) To ascertain whether deduction claimed for value of goods or materials
sold during the course of provision of service is supported by proper
evidence.
3. Whether provisions of reverse charge have been complied with?
To ascertain whether there are any services received by the assessee on
which he is liable to pay tax under reverse charge as per Rule 2(1) (d) read
with Section 68(2) of The Finance Act, 1994. Similarly, to ascertain whether
there are any services received by the assessee on which he is liable to pay
tax under Joint charge as per proviso to Section 68(2) of the Act read with
Notification No. 30/2012-Service Tax dated 20.06.2012.
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4. Whether assessee was complying with the provisions of Section 66A read
with Taxation of Services (Provided from Outside India and Received in
India) Rules, 2006 until 30.06.2012.Since foregoing Rules have been
substituted with Place of Provision of Services Rules, 2012 with effect from
01.07.2012, the compliance of latter Rules i.e. Place of Provision of Services
Rules, 2012 has to be ensured if the audit is conducted for a period on or
after 01.07.2012
Audit Norms for Service Tax Assessees
S.No. Quantum of annual total service tax payment Frequency of Audit
in (cash + CENVAT Credit)
1
Tax payers paying more than Rs 3 Crore
Every year
2
Tax payers paying between Rs 1 crore and Rs3 Once in 2 years
crore
3
Tax payers paying between Rs 25 Lakh and Rs 1 Once in 5 years
Crore
4
Tax payers paying below Rs 25 Lakh
2% of the total no.
every year
Service Tax Audit to be conducted only by Chartered Accountants
A recent judgement dated 04.08.2014 by the Hon’able Delhi High Court in case
of Travelite (India) v. Union of India and others reported as 2014-TIOL-1304-HCDEL-ST clearly states that audit under service tax should be conducted only
by Chartered Accountants and not by the department officials. The judgement
clearly states that the Service Tax officers have no power to audit the assessees
and Audit can be done only by Chartered Accountants and in the case of PSUs
by
the
CAG'.
The
High
Court
observed
as
under:
In case of private assessee, the Commissioner will refer the matter to an officer to
collect the material or Chartered Accountant for the purpose of audit. Thus, for
the purpose of audit, the material can be collected either by the officer authorized
by the Commissioner or by the Auditor himself. But, audit will be performed only
by
the
Chartered
Accountant.
Special Audit – Section 72A As Introduced With Effect from 28.05.2012
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Circumstances under which special audit can be directed –Section 72A(1)
In terms of section 72(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 utilised 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.
Submission of report of special audit-Section 72A(2)
The nominated chartered accountant or cost accountant shall submit a report
duly signed and certified by him to the said Commissioner within the period
specified period. The aforesaid report may include such other particulars as
may be specified.
Overriding effect of Section 72A(1)
According to section 72A(3), the provisions of section 72A(1) shall have effect
notwithstanding that the accounts of such person have been audited under
any other law for the time being in force.
*******
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