CBEC-Revised procedures to deal with revenue audit objections of CAG to prevent it mature into Audit Paragrap/report

Circular No. 1023/11/2016-CX

Government of India
Ministry   of   Finance
Department   of   Revenue
(Central Board of Excise & Customs)

New Delhi, the 8th April, 2016


All  Principal  Chief  Commissioners/Chief   Commissioners  of  Customs,  Central  Excise  & Service Tax
All Director Generals/Director s of Customs, Central Excise & Service Tax;
All  Principal  Commissioners/Commissioners   of Customs, Central  Excise & Service Tax holding charge of Chief Commissioners
Webmaster, CBEC

Subject: Adjudication  of  Show  Cause  Notices  issued on the basis of CERA/CRA objection -reg


Central  Board  of  Excise  and  Customs  has  issued  instructions  from  time  to  time regarding  adjudication  of  show  cause  notices  issued  on  the  basis  of  audit  objections  of Central Excise Revenue Audit (CERA) and Customs Revenue Audit (CRA), which is receipt audit wing of the Comptroller and Auditor General of lndia. The pendency position of such notices in the Call-Book has been reviewed and found to be larger than the number of audit objections which have been converted into Audit Paragraphs. After due examination, it was felt that there was  a  need  to  review  the past practices  and  issue revised  consolidated guidelines to provide a clear procedure for the field officers to deal with the CERA/CRA objections.  The  Tax  Administration  Reform  Commission  (TARC)  report,  representations received  form trade and inputs received from field officers also indicated  that there was a need to review past instructions to improve the ease of doing business and bring certainty regarding tax liability of an assessee. Accordingly, all past circulars and instructions on the subject are hereby rescinded  and following procedure  is prescribed  for dealing with audit objections raised by CERA/CRA.

2.  An audit objection may mature into an Audit Paragraph and become part of Audit Report periodically submitted by the office of CAG to the Parliament. Various stages involved in the life cycle of an audit objection and the timeliness prescribed for replying thereto may be noted and strictly adhered to by the departmental officers. These stages and timeliness are as follows:

(i) Half Margin : Half margin/audit memo is issued to the Superintendent of the Range during the course of audit on points noticed by CERA. The half margin is to be replied to immediately and in any case before the end of the audit of Range/Division/ Commissionerate concerned.

(ii) Local Audit Report (LAR) : LAR containing audit paragraphs is generally issued by the headquarters of the local CAG Office to the Assistant/Deputy Commissioner generally within one month of the completion of the audit by the headquarters of the Director  General  or Principal Director  of Audit. The Assistant/Deputy  Commissioner is expected to reply to the LAR within thirty days.

(iii) Statement of Facts (SoF): SoF is issued to the jurisdictional Commissioner Addl. Commissioner on the major audit observations which may feature in Audit Reports. It has been decided that SoF shall be replied within six weeks where the audit objection is not contested. Where the audit objection is contested and the amount of duty involved in the audit objection is rupees fifty lakhs or less, SoF shall be replied with the approval of the Commissioner and for audit objections involving higher amounts of duty, SoF shall be replied with the approval of the Chief Commissioner. Detailed reasons for contesting the audit objection should be recorded in the file quoting relevant case-laws and circulars, if any.

(iv) Draft Audit Para (DAP): Potential audit paragraphs considered fit for inclusion in the Audit Report are issued by the CAG officer to the Ministry (CBEC) as DAPs. CBEC is expected to reply to DAP within four weeks of its receipt.

(v) Audit  Paragraphs : CAG’s  office, after  considering  the  reply  of the CBEC may  convert a DAP into Audit Paragraph. Audit  Paragraphs  are  periodically  compiled  and  are submitted by the office of CAG to the Parliament in the  form  of  a  report  called Audit Report.  CBEC  is expected  to furnish  an Action  Taken  Note  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 PAC. The process of submission  of ATN, due vetting and submission to PAC is  expected  to  be  completed within  four months  of submission of Audit Report. 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.

Coordination Meetings:
3.  One of the reasons for pendency in adjudication of CERA/CRA objection is the lack of mechanism for periodic reconciliation of the status of audit objections. It has, therefore, been decided that a quarterly coordination meeting would be held in each of the Zones by the officers of the revenue department with the officers of CAG to ensure that the list of audit objections, replies given by revenue and final view taken by CERA/CRA can be discussed. Chief Commissioner shall identify a nodal officer, [preferably Additional Commissioner/Joint Commissioner, CCU] to coordinate and attend such meetings. An audit objection is considered 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 Show Cause Notice:

4.1 Audit objection at LAR and SoF Stage : Once an LAR or SOF is received, it should be replied by the department forthwith . Based on the reply sent by the department, they can be divided in following categories.

4.1.1 Where the department has agreed with the audit objection on merits: Audit objections where department has agreed to the merits of the objections constitute a large proportion of the audit objections. In such cases, Show Cause Notices should be issued immediately. Such cases should not be transferred to the Call-Book and should be adjudicated forthwith and revenue realized in cases of confirmed demand at the earliest.

4.1.2 Where the department has not agreed with the audit objection on merits : No show cause notice should be issued in cases where department has not agreed with the audit objection on merits. In such cases audit objection should be replied following the procedure laid in clause (iii) of paragraph 2.

4.2 Show Cause Notice 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 show cause notice and adjudicate the case on merits.

4.3 No transfer to call-book: It may be noted that the procedure of transferring the show cause notice arising out of CAG objection to call-book has been discontinued and in future no such show cause notice should be transferred to the call-book. Circular nos 162/73/95-CX dated 14.12.1995 and 385/18/98-CX dated 30.03.98 on transfer of cases to the call book arising out of CAG objections stands amended accordingly.

Adjudication of Show Cause Notices :

5.1 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 avail able on record.

5.2 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.

5.3 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 subj ect and relevant circulars of the Board, if 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.

5.4 Where an issue was under audit objection and has been subsequently eith er judicially settled, by say judgment of Hon’ble 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 becom e DAPs, is not necessary and such cases may be adjudicated on merits taking into consideration the latest judgments and circulars.

Past Cases :

6.1 All audit objections relating to Central Excise and Service tax issued prior to  3.2014 shall be compared with the pending Action Taken Notes (ATNs), received from the office of CAG, enclosed as Annexure B with the Circular. For Customs, the list shall be separately issued. Show Cause Notices (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 stand finally vetted by CAG Audit with no further comments which means that the reply of the department  has been  accepted  by the CAG office. SCNs relating to these objections may be  taken up for adjudicatio n on merit, including those in the call-book, following the procedure prescribed  in paragraph 5.

6.2 For audit objections raised after 1.3.2014 and till the date of issue of this circular, where SCNs have been issued, list of pending ATNs would be issued in due course. These show cause notices pertaining to these objections may be adjudicated, mutatis-mutandis following the procedure prescribed in paragraph  1 read with paragraph  5.


7. All audit objections in Customs, Central Excise and Service tax received after the issue of this circular or past audit objections where no show cause notice has been issued shall be dealt as per the provisions of this circular.

8. Difficulty, if any, in implementing the circular may be brought to the notice of the Board. Hindi version would follow.

(Shankar Prasad Sarma)
Under Secretary to the Government of India

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