Special Audits Under GST: Legal Provisions and Judicial Interpretations

Summary: Special audits under the GST framework are designed to address specific discrepancies in taxpayer records and are conducted by professionals appointed by the Commissioner under Section 66 of the CGST Act, 2017, and Rule 102 of the CGST Rules, 2017. This provision enables officers to request audits if there are concerns about incorrect values or irregularities in input tax credits claimed. Courts have clarified these audits in several cases, emphasizing fair procedures and full consideration of taxpayer submissions. For example, in Samsung India Electronics Pvt. Ltd. v. Union of India, the court found unsigned audit documents invalid and ruled that taxpayer responses must be duly considered to uphold natural justice. Similarly, Future Generali Insurance and Malaysia Airlines Berhad cases highlighted the need for authorities to thoroughly review explanations provided by taxpayers before finalizing audit findings. The Tata Motors case further reinforced that special audits should not be executed mechanically but should involve a thoughtful evaluation of taxpayer replies. Courts underscore the importance of complete documentation, transparency, and giving taxpayers fair opportunities to address issues. Through these rulings, it is evident that adherence to these principles is crucial to avoid legal challenges and ensure that audits achieve their intended purpose without unduly burdening taxpayers.

Introduction

Special audits under the Goods and Services Tax (GST) Act serve as a crucial mechanism for the authorities to dig deeper into a taxpayer’s financial records when discrepancies are suspected. Unlike routine audits, special audits are initiated under specific circumstances and are conducted by professionals nominated by the Commissioner. This article explores the legal provisions governing special audits under GST and examines various judicial interpretations to understand the practical implications and issues arising from these audits. Under the Central Goods and Services Tax (CGST) Act, 2017, and the corresponding CGST Rules, 2017, special audits are primarily governed by:

• Section 66 of the CGST Act, 2017: This section empowers an officer, not below the rank of Assistant Commissioner, to direct a registered person to get their books of accounts audited by a chartered accountant or a cost accountant nominated by the Commissioner. The audit is ordered when the officer believes that the value declared is incorrect or the input tax credit (ITC) claimed is not within normal limits.
• Rule 102 of the CGST Rules, 2017: This rule outlines the procedural aspects of a special audit, which includes the issuance of Form GST ADT-03 to direct the audit and Form GST ADT-04 to inform the taxpayer of the audit findings.

Judicial Interpretations and Key Case Laws

Courts have dealt with various issues surrounding special audits under GST, offering crucial insights into how these provisions are applied in practice. Below are some notable case laws highlighting different issues:

1. SAMSUNG INDIA ELECTRONICS PRIVATE LIMITED vs. UNION OF INDIA & ORS.

In this case, Samsung India Electronics Pvt. Ltd. challenged a special audit order issued under Section 66 of the CGST Act, 2017. The company contended that the audit order and related documents were unsigned by the proper officer, which they argued to render them legally invalid. Additionally, Samsung claimed that the proper officer did not adequately consider their detailed reply to the discrepancies identified in the audit. The key issues in this case were:

• Whether the issuance of unsigned audit-related documents is legally valid.
• Whether the proper officer’s failure to consider the taxpayer’s reply constitutes a violation of the principles of natural justice.

The court ruled in favour of Samsung India, holding that the unsigned audit documents were indeed legally problematic, as they did not conform to the statutory requirements. Moreover, the court found that the proper officer failed to adequately consider the petitioner’s detailed reply, violating the principles of natural justice. The audit order was set aside, and the matter was remanded for fresh consideration, with instructions to the authorities to ensure proper documentation and fair evaluation of the petitioner’s submissions.

2. FUTURE GENERALI INDIA INSURANCE COMPANY LIMITED vs. THE ASSISTANT COMMISSIONER (ST)

Here, Future Generali India Insurance Company was subjected to a special audit due to discrepancies between its turnover as declared in its Profit & Loss account and the turnover reported in its GSTR-9 return. The company argued that these discrepancies were due to its Pan India operations, where certain transactions were attributed to different states under GST, leading to variances in the reported turnover. Issues framed here were:

• Whether the discrepancies in turnover reporting were sufficiently explained by the taxpayer.
• Whether the special audit findings were justified in light of the explanations provided by the taxpayer.

The court sided with Future Generali, finding that the assessing officer had not adequately considered the company’s explanation regarding its Pan-India operations and the allocation of turnover across states. The court emphasized that proper consideration of the taxpayer’s submissions is essential in special audits. Consequently, the special audit findings were set aside, and the matter was remanded for a fresh audit, with directions to take the taxpayer’s explanations into account.

3. MALAYSIA AIRLINES BERHAD vs. COMMISSIONER OF DELHI GOODS AND SERVICES TAX DEPARTMENT OF TRADE AND TAXES & ANR.

In this case, Malaysia Airlines Berhad was subject to a special audit under the GST. The airline company argued that the special audit report was incomplete and did not take into consideration the detailed explanations and replies they had submitted. The company contended that this incomplete audit report led to an unfair assessment of tax liabilities. Here, the key issues were:

• Whether the special audit report was complete and adequately considered the taxpayer’s submissions.
• Whether the audit findings were justified in light of the alleged incomplete consideration of the taxpayer’s responses.

The court ruled in favour of Malaysia Airlines, finding that the special audit report was indeed incomplete and did not adequately incorporate the taxpayer’s detailed submissions. The court noted that a thorough and unbiased audit process is essential to ensure justice. The court set aside the audit findings and remanded the case for a fresh audit, instructing the authorities to ensure that all relevant submissions from the taxpayer were fully considered.

4. FUTURE GENERALI INDIA INSURANCE COMPANY LIMITED vs. GOODS AND SERVICE TAX OFFICER & TATA MOTORS LIMITED VERSUS GOODS AND SERVICE TAX OFFICER

Tata Motors Limited was issued a Show Cause Notice by the GST Officer based on findings from a special audit conducted under Section 66 of the CGST Act. The SCN included allegations such as late filing of GSTR-1, inaccurate declaration of turnover, discrepancies between GSTR-1 and GSTR-3B, excessive input tax credit (ITC) claimed, and unreported GST liabilities under reverse charge. The key issues in this case were:

• Whether the GST Officer properly considered the detailed reply submitted by Tata Motors before issuing the impugned order.
• Whether the special audit report was applied mechanically without due application of mind by the Proper Officer in issuing the SCN.
• Whether the impugned order was sustainable in law considering the alleged lack of proper consideration of Tata Motors’ response.

Here, the court found that the Proper Officer did not apply their mind to the detailed reply submitted by Tata Motors, as the impugned order merely stated that the reply was ‘not satisfactory’ without providing any reasoning or consideration of the merits of the reply.

The court held that the failure to consider the Petitioner’s reply, or to request further clarification or documentation if needed, was a violation of the principles of natural justice.

The impugned order was deemed unsustainable and was set aside by the court.The court remitted the SCN back to the Proper Officer for re-adjudication, instructing that a fresh, reasoned order be passed after considering any additional reply submitted by Tata Motors and after providing an opportunity for a personal hearing.

Key Takeaways from Judicial Interpretations

• Fairness and Transparency: Courts have consistently emphasized the need for fairness and transparency in the conduct of special audits. Tax authorities are required to provide taxpayers with adequate opportunities to present their cases and must consider these submissions judiciously.
• Proper Documentation: The validity of documents issued during a special audit, such as audit reports or directives, is critical. Unsigned or incomplete documents can render the audit process legally vulnerable.
• Consideration of Taxpayer’s Explanations: Special audits often lead to the identification of discrepancies in tax returns or financial statements. However, courts have stressed the importance of considering the taxpayer’s explanations and justifications before arriving at any conclusions.
• Limits on Retrospective Application: While special audits can uncover past discrepancies, applying findings retrospectively, especially in the absence of clear evidence of fraud or suppression, has been frowned upon by courts.

Conclusion

Special audits under GST play a vital role in ensuring compliance and protecting revenue. However, as highlighted by various judicial rulings, the process must be carried out with due diligence, fairness, and transparency. The legal framework provides clear guidelines for conducting special audits, but it is the judicial interpretations that offer a more refined understanding of how these audits should be executed. Tax authorities must adhere to these principles to avoid legal challenges and ensure that audits serve their intended purpose without causing undue hardship to taxpayers.

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