S. No.

Area of examination

Reason of differences and suggested course of action

1.

Difference between value of services shown in ITR and ST-3

·            Exempted services provided but not shown in ST-3

·            Abatement services shown net of abatement

·            Advances from customer shown in ST-3 but not in ITR

·            Works contract etc. not properly disclosed in ST-3 (only taxable part shown)

·            Services liable under RCM not shown

·            And many more………..

Suggested to give exhaustive disclosure in ST-3. Allegation of suppression could be avoided. (minimum penalty 15%. Ranges upto 100%)

Wherever genuine difference, develop proper SOP for reconciliation statement

2.

Cross verification with the 26AS

·            Classification of services to be cross checked with the section under which TDS deducted

·            Where tax paid under concessional rate under service tax but category mentioned in the list of services specified under respective TDS section is different, could be difficult to convince to superintendent/inspectors

3

Cross verification of exempted service

·            May be possible that exempted services not disclosed and to that extent difference between ST-3 and ITR

·            During verification, dept may ask for invoices and agreement. May be possible that agreement not available or terms of agreement contradict with invoice or invoice not properly prepared or tax clause mentioned in the agreement. Could land up with problem

4

Verification of services claimed to be exported

·            Mere receipt of consideration in foreign currency not determinative criterion for export

·            Need to see Place of provision of service rules

·            Also see if consideration received within RBI stipulated time period

·            Proper disclosure in the return very important

5

Verification of abatement eligibility

·            Certain services eligible for abatement subject to conditions of non availment of credit on input/input service/capital goods

·            If any abatement taken, make sure conditions complied with.

·            Become very crucial in case service provider engaged in providing multiple services where few services are taxable rate while few are conditionally abated

·            Condition of exemption notification to be complied with literally. Small non compliance may result in very large trouble.

·            If by mistake credit availed with abatement, could be reversed under Rule 6

·            Nexus of input service to output service very important

6

Value of Taxable services

·            This is going to be very hot area for examination. Especially after reimbursement becoming taxable

·            Dept going to check each and every condition (out of 8+4)  literally in case tax not paid claiming pure agent

·            Pure agent agreement is must. In case pure agent exclusion claimed, no credit against expenditure incurred for that eligible.

·            Whether valuation made as per Valuation Rules, wherever applicable. Especially in case of works contract

·            Free supply by service receiver also going to be examined minutely

7

Credit eligibility on capital goods

·            Before availing credit on capital goods, always cross check the same with the definition of capital goods. Exclusion clause of motor vehicle very crucial

·            Many times assets capitalised for Income Tax but assessee treating it capital goods, avail the credit. May be possible that it may fall outside definition of capital goods under CCR

·            Removal of capital goods on which credit availed earlier require reversal of credit based on usages. If sale of assets appear in ITR/Capital assets schedule, make sure credit availed is reversed proportionate to the time of usage.

·            If capital goods partly used for taxable activity and partly for exempted activity, full credit is available

·            See proper treatment for location of capital goods, leasing, capital goods sent to job worker etc.

·            Correctness of invoice in all aspects especially rule 9 of CCR

·            Availment of credit on capital goods to be shown under column I3.1.2.2 of the ST-3 return

8

Credit eligibility on Input

·            Before availment of credit, refer definition of credit of input

·            Exclusion clause of the definition very crucial

·            Specifically keep in mind in case of works contract where credit on input allowed under CCR but restricted in the valuation rule

·            If item not falling in the definition of capital goods, see if could be covered in input

·            Availment of credit on input to be shown under column I3.1.2.1 of the ST-3 return

·            Whether time limit of one year followed in availment of credit

9

Credit on input service

·            Most relevant and sought after area of department. Will verify each of the input service credit availed

·            Construction, renting of vehicle, personal consumption etc. credit not eligible

·            Services used exclusively in exempted/negative list services not eligible credit

·            Also keep in mind services used for providing conditional abated services

·            Availment of credit on input service to be shown under column I3.1.2.3 of the ST-3 return

·            Whether time limit of one year followed in availment of credit

10

Use of input and input services commonly for taxable as well as exempted services

·            If service provider providing both taxable/exempted service, would be again most sought after area of department

·            If engaged in trading as well as rendering of service, remember to reverse the credit pertaining exempted portion in trading activity

·            Evaluate different option available to see which option is most feasible/beneficial/cost effective based on assessee profile

·            Strictly comply with the conditions associated with each of the options. File all necessary declaration with the department wherever required

·            Make proper disclosure in the ST-3 Return in Part I of the Return. Make sure that proper disclosure is made under each of the column i.e. whether exempted goods/services cleared, value of exempted goods/services provided, amount paid under Rule 6 provisionally, amount paid at the end of year and so on…

·            Input services used exclusively for taxable services + common input services, dept could ask for applying rule 6 on all input service especially in light of recent decision

11

Adjustment of credit under Rule 6 (3) of STR

·            Tax paid earlier but credit note issued subsequently could be eligible for set off subject to conditions set out in Rule 6(3) of STR

·            Going to examine all credit notes to see if they comply with the conditions of Rue 6 (3)

·            Adjustment against Rule 6(3) to be disclosed properly in the return. Can not be taken in input service

·            Especially important to note where tax paid in one return period while credit note issued in different return period. To that extent there could be difference in the revenue of ITR and ST-3

12

Adjustment of advance tax paid: Rule 6 (4A) of STR

·            Erroneously excess tax paid in earlier period can be adjusted in future period. Whether proper disclosure made in the ST-3 Return.

·            Proper calculation sheet to be maintained for extra tax paid along with its reasons and the manner of adjustment

13

Reverse Charge on Import of Service

·            All foreign currency payment would be monitored closely to see if liability arises under RCM

·            If TDS deducted under section 195, this could be verified from TDS Return. Will be cross examined if RCM liability paid

·            Also see if TDS included for calculation of liability under RCM

·            Very crucial to see exchange rate used for discharging of liability. Exchange rate as used in the books of account on the date of payment would be relevant. Not necessary to take Customs notified rate

·            All foreign payment need not be covered by RCM. If payment made in foreign currency but place of provision falls outside India, very important to have proper documentary evidence of nature of transaction to justify that its non taxability in India.

14

Other Reverse Charges

·            Grouping of expenditure in the P&L very important.

o    E.g. legal and professional charges include professional fees from other than advocate also. Dept could ask to pay RCM on all expenditure booked in the ledger. Else prepare reconciliation statement.

o    Expenditure booked in transportation/freight charges but services not availed from Goods Transportation Agency

o    Purchase of material for repair purpose booked under repair and maintenance charges

o    Manpower supply on professional basis booked under head labour charges

o    Advertisement expenditure booked as business promotion expenses

o    Company owned vehicle used but driver salary booked under conveyance charges

·            Department likely to take total of expenditure based on nomenclature used in P&L and based on that may ask for payment under RCM.

·            Service Tax paid under RCM needs to be properly disclosed in the Return.

·            If abatement available on service liable under RCM, see if conditions of abatement satisfied fully.

·            Section under which TDS is deducted also relevant.

·            Services liable under RCM need to be registered in registration certificate. Taxes must also be paid under correct accounting code

·            Point of Taxation of service tax liability under RCM to coincide with 26AS. Will be cross checked with that.