Manual for the Scrutiny of Central Excise Returns 2008

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4.1 SELECTION GUIDELINES4.1A The Board vide its circular No.818/15/2005-CX dated 15 July 2005 directed that for agiven period, say, a month or quarter, the selection for detailed scrutiny should not normallyexceed 5 per cent of the total returns received. As large units with total duty payment of morethan Rs 3 crores are subject to mandatory audit every year, detailed return scrutiny couldfocus on the returns of non-mandatory units.4.1B It was visualized that the returns would be selected centrally and be available invarious Divisions. It would be the responsibility of the jurisdictional Joint Commissioner/Additional Commissioner to finalize the list of returns to be scrutinized by the Range Officerfrom the assessment of returns centrally selected up by the system. This final selection wouldbe based on his assessment of available staff in the Range and also the objective of ensuringthat the units selected exclude those that were mandatorily audited in the previous financialyear or are likely to be audited in the current year. This would avoid duplication of effort andoptimize the use of administrative resources available in the Range. In selecting the final listof units, the Additional Commissioner could also direct the scrutiny of the earlier returns ofunits which are stop-filers as this, in itself, would be an indicator of risk. Finally, the JointCommissioner/Additional Commissioner could also select the returns of declarant dealersfor scrutiny identified on the basis of large volume of CENVAT credit passed on to variousmanufacturers, as these units are not normally audited.4.1C Once the return to be scrutinized is selected, the specific aspects to be scrutinizedwould be identified (whether classification or valuation or CENVAT availment) based onsome of the criteria indicated in 4.1B above. For example, if the return has been selected onaccount of increase in exempted clearances, the scrutiny of assessment would have to focusespecially on whether the exemption notification has been correctly availed. Similarly, if thereturn is selected on account of reduction in the value per unit of clearance, then correctnessof the value declared under Section 4 of the Central Excise Act, read with Valuation Rules,2000 would have to be evaluated. This is important to provide focus to the scrutiny effort,optimize the use of administrative resources, and achieve the best revenue outcome.4.2 SCRUTINY GUIDELINES4.2A Once a return is selected for scrutiny, such a unit should normally not be selected fordetailed scrutiny in the twelve months that follow unless the present scrutiny throws upcertain non-compliance or their selection is otherwise warranted by other local risk factors.4.2B Scrutiny has to be conducted on the basis of specific checklists which have beencompiled and appended to this chapter. This would facilitate scrutiny on the basis of astructured format. Some of the features of the checklists for scrutiny of ER1, ER2 and ER3Returns and of dealers are explained below:MANUAL FOR THE SCRUTINY OF CENTRAL EXCISE RETURNS 2008 31
4.2.1 Checklist for Scrutiny of ER 1/ ER 2 and ER 34.2.1A The guidelines for scrutiny of the ER 1, ER 2, and ER 3 returns are contained inchecklists (see Annexes 4.1 and 4.2). The scrutiny guidelines specify the checks to becarried out in the areas of classification, valuation and CENVAT credit availment, and alsoindicate the documents that should be examined in order to complete the scrutiny. Thechecks have been designed in a manner that makes a visit to the unit unnecessary, and byand large, obviates the need to peruse financial records (which is in the domain of an auditexercise). The documents to be scrutinized are those relating to information furnished tothe Range and also those provided at the time of registration such as Registration Certificate,copies of the project report, product catalogues, sample sales invoices, and informationextracted from the assessee profile like pattern of sales and past compliance record ofthe unit. In some cases, such as those related to verification of MRP, market enquiries mayalso be necessary.4.2.2 Checklist for Scrutiny of Quarterly Returns Submitted by Declarant Dealers4.2.2A The dealer declarant category represents first stage and second stage dealers whotransfer the CENVAT credit in respect of the duty paid by the manufacturer to anothermanufacturer using the said goods.4.2.2B All dealers declarant units (with value of clearances greater than Rs 40 lakh) whopass on the CENVAT credit to other dealers or manufacturers are required to register and filethe declaration under Notification 14/2005 - CE (NT) dated 1 March 2005 as amended fromtime to time. As far as dealers are concerned, although they do not pay any duty it isimportant to ensure that the CENVAT Credit has been correctly passed on to other dealers ormanufacturers in terms of the CENVAT Credit Rules, 2004. In the legal scheme under theCentral Excise Rules and CENVAT Credit Rules, the responsibility for correct availment ofCENVAT lies with the user manufacturer rather than the dealer.4.3 DOCUMENTATION OF FINDINGS FLOWING FROM THE SCRUTINYOF ASSESSMENTS4.3A The guidelines given to verify ER 1, ER 2, and ER 3 returns seek to ensure correctnessof assessment in terms of classification, valuation, and CENVAT availment. One of theimportant features of the scrutiny process is documentation of the results of the scrutiny. Acolumn for recording observations is built into the checklist. It is important that the RangeOfficers record their observations in this column, along with suggested action points. Someindicative comments have been incorporated which illustrate some of the typical actionpoints that could emerge from the scrutiny. This will help to guide the Range Officers. Theentire checklist alongwith the comments recorded in the column for observations must beperiodically submitted to the Divisional Assistant Commissioner.4.3B The documentation of scrutiny findings has many advantages. First of all, some of thefindings/ observation of the Range officer may have an immediate revenue implication32 MANUAL FOR THE SCRUTINY OF CENTRAL EXCISE RETURNS 2008
Page 3 and 4: 2 MANUAL FOR THE SCRUTINY OF CENTRA
Page 5: 3.1.3 When is a Return Marked for R
Page 8 and 9: Chapter 1: Introduction tothe Retur
Page 10 and 11: Select units could be chosen depend
Page 12 and 13: Chapter 2: Policy Guidelines2A In t
Page 14 and 15: 10 Every six months, the Deputy/Ass
Page 16: Action if answer is No: Reconciliat
Page 19 and 20: ANNEXE 2.1: CHECKLIST FOR THE PRELI
Page 21: ANNEXE 2.2: CHECKLIST FOR SELECTION
Page 25 and 26: (Continued from previous page)Type
Page 27 and 28: (Continued from previous page)Code
Page 29 and 30: 3.1.4A Once these returns are ident
Page 31: discussed in Chapter 3. Chapter 4 l
Page 35 and 36: ANNEXE 4.1 CHECKLIST FOR ER1 AND ER
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Manual for the Scrutiny of Central Excise Returns 2008

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