DRAFT SCHEME OF "ON SITE AUDIT”- IN THE CONTEXT OF POST CLEARANCE AUDIT (PCA) FOR IMPORTS
Scheme of Post Clearance Audit (PCA) in Customs
(To elicit response / Comments only)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs
159A, North Block,
10th September, 2010.
As a trade facilitation measure, the Central Board of Excise & Customs (CBEC) is considering introduction of scheme of ‘On Site Post Clearance Audit (PCA)’ for imports in Customs. The contents of said draft Scheme are enclosed herewith (Annexure – ‘A’).
2. CBEC solicits views, comments and suggestions on the draft Scheme of ‘On Site Post Clearance Audit (PCA)’ in Customs from the trade and industry associations, departmental officers and others. The views, comments and suggestions to the draft Scheme may please be sent to Director (Customs), Ministry of Finance, Department of Revenue, Central Board of Excise & Customs, Room No.159-A, North Block, New Delhi – 110001 or at Fax No. (011) 23092173 or at E-mail I.D.: firstname.lastname@example.org latest by 15th October, 2010.
3. It is emphasized that the Draft Scheme has been put up only to elicit public response. No final decision has been taken as yet by the Government / Board, which will proceed further in the matter only after due examination of the response received.
( R. P. Singh )
Encl: Annexure ‘A’.
Annexure - A
DRAFT SCHEME OF "ON SITE AUDIT”
IN THE CONTEXT OF POST CLEARANCE AUDIT (PCA) FOR IMPORTS
Throughout the world, it is the endeavour of all States to find out ways to facilitate trade so that delays can be avoided while taking care to see that interests of revenue and other legal prohibitions are not violated. To ensure this, it becomes necessary to thoroughly examine the Bills of entry or similar documents, by whatever name called, coupled with physical examination of the goods. But all such measures take time, and delay the clearance of imported goods.
2. The object of this discussion paper is to reconcile the two conflicting interests (faster clearance vis-à-vis customs checks) on the basis of best international practices so that trade is facilitated. The solution is post clearance audit. This is clearly brought out in Art VIII, GATT. In particular, Paragraph 1 (c) reads as under:-
'The contracting parties also recognize the need for minimizing the incidence and complexity of import and export formalities and for decreasing and simplifying import and export documentation requirements. The key measures proposed by Member States in the NGTF aiming at expediting the clearance and release of goods at the borders, are inter alia pre-arrival clearance, separate release .from clearance, authorized trader schemes, risk management, and Post Clearance Audit '.
3. The underlying idea is to allow release of the goods on the basis of self assessment without examination of the goods. Verification in such cases is done periodically at the importer's premises by looking at the business records kept by the importer with regard to such imports. Thus, while the importer can have possession of the goods quickly, interests of the government are protected by resorting to post clearance audit at the premises of the imparter, looking at all individual transactions undertaken over a period of time. Trade facilitation and post clearance audit thus go. together. While the importer benefits from reduced clearance time, and can dispose of the goods promptly, thus saving on storage, warehouse and insurance costs, the Customs, on the other hand, by looking at all documents later on in relation to such goods, can make a comprehensive and company oriented checks and thus ensure that imports were in fact as per the declaration.
4. The genesis of Post Clearance audit lies in Kyoto Convention of World Customs Organization (WCO). As per Kyoto Convention "Customs Control" is defined in the WCO Glossary of Customs terms as"Measures applied to ensure compliance with the laws and regulation which Customs are responsible for enforcing". Convention also states "The principle of Customs control is the proper application of Customs laws and compliance with other legal and regulatory requirements, with maximum facilitation of international trade and travel". Customs controls should, therefore, be kept to the minimum necessary to meet the main objectives and should be carried out on a selective basis using risk management techniques to the greatest extent possible.
5. As regards Risk Management in Customs, the Convention states "for Customs administrations there is always an element of risk in facilitating the movement of goods and persons. The extent of controls to ensure compliance with the laws and regulations which the Customs are responsible for enforcing should be proportionate to the level of assessed risk. Customs administrations today are required to provide extensive facilitation while maintaining control over the international movement of goods, means of transport and persons".
6. Para 7.1 of Kyoto Convention refers to 'movement Control', interalia, covering 'Documentary Examination' and 'Physical Examination '. The 'Document examination' in turn includes 'checking the goods declaration and accompanying documentation '.
7. Para 7.2 talks of 'audit based controls'. It states 'To manage the worldwide increase in trade and to provide traders with greater facilitation, Customs increasingly rely on audit based control, using traders commercial systems. Post Clearance Audit focuses on persons involved in the international movement of goods and this is an effective tool for the Customs control, as this provides for clear and comprehensive picture of the transactions relevant for the Customs as would be reflected in the books of account and records of the traders. At the same time it enables Customs administrations to offer the trader facilitation measures in the form of simplified procedures (e.g. periodic entry system)".
8. The Convention defines 'Audit-based control' as "Measures by which Customs satisfy themselves as to the accuracy and authenticity of declarations through the examination of the relevant books, records, business systems and commercial data held by persons concerned”..
9. Para 8.3 (Procedures) of the convention states 'Customs administrations should develop procedures to implement control methods to ensure uniform application throughout the Customs territory. In doing so, they should try to shift the emphasis from exclusive use of movement controls to greater use of audit-based controls, with a view to:
(a) reducing delays during the movement of goods/persons,
(b) increasing the use of periodic lodgment of declarations,
(c) encouraging trader self-assessment,
(d) enabling retention by the trader (instead of Customs) of accompanying official and commercial documents,
(e) increasing the use of advance information submission and submission by electronic means,
(f) increasing the use of the trader's commercial system and records instead of requiring the maintenance of designated Customs records,
(g) encouraging greater compliance with Customs laws thereby giving the trading community a greater stake in working in partnership with Customs to reduce risk levels.
10. Based on the Kyoto convention, the Central Board of Excise & Custom introduced the Risk Management System in November, 2005 for Accredited Clients and Post Clearance Audit (PCA) and further extended it to certain other category of importers. The purpose of introducing the RMS was to reduce dwell time and provide for speedy clearance of imported goods as a measure of facilitation to the importers. Audit Based Control was introduced in the form of Post Clearance Audit (PCA) to ensure compliance. But the PCA was different from what is envisaged in Kyoto Convention when hassle free trade is accompanied by an onsite audit.
11. While the Board has from time to time relaxed the procedures for reducing the dwell time for imports without insisting on an onsite audit, some controls were exercised by looking at the documents submitted after clearance of the goods. But these documents are no different for what was subrnitted along with the Bills of Entry.
12. As per prevailing international practices, the Indian Customs also would like to facilitate trade further by allowing release of goods on the basis of declaration of the importer without physical examination of the goods. But as it is the concern of any Government that goods imported are as per the declaration, that proper duty has been paid and that when concessional rates have been availed of subject to end use, the conditions have been fulfilled, that no national laws have been violated, such facility has to be accompanied by an onsite audit after the clearance of imported goods. It might increase the compliance costs as audits would be done at importer's premises. But this will be more than compensated by faster clearance of imports with considerable savings on warehousing, insurance, demurrage, faster sale etc. And such a scheme will be in consonance with the Kyoto Convention also.
13. No doubt, under the Accredited Clients Programme (ACP), importers are granted assured facilitation provided they have demonstrated capacity and willingness to comply with the laws, implemented by the Customs department. Further, the ACP clients are also required to maintain reliable systems of record keeping and internal controls and their accounting systems should conform to recognized standards of accounting. They are required to provide the necessary certificate from their Chartered Accountants to the above effect in a prescribed form. However, as of now, there is no requirement of scrutiny mechanism of their internal record keeping system etc. by Customs department before granting the ACP status. Nor are the documents audited on site later on.
14. It is thus obvious that in order to avail of the facility of verification free imports, it is necessary to put in place a system of audit of importer's business documents also, as per international practice and convention. This audit could be more or less akin to the audit being done of the manufacturers as well as service providers when such self assessment system prevails, under the Excise and Service Tax Audit procedure. Once the system of onsite audit is in place, the ACP Client will not be subjected to any risk management module. The system envisaged for on-site audit is outlined later.
15. Jurisdiction of audit
Deciding on the jurisdiction of the officers which will carry out the Audit is important. Importers can broadly be divided in four categories - manufacturers, service provider, trader, individual consumer. The fourth one does not require any elaborate scrutiny. So far as manufacturers and service providers are concerned, most of them are likely to be registered with the Commissionerates and in these cases, audits will be undertaken by the Commissionerate in whose jurisdiction and the manufacturer or the service provider is located. If these units are being audited at present by the Central Excise or Service Tax, the Customs on site audit will be combined with such audit. Such importers thus will not have any difficulty. That leaves the importers who are basically traders and units which are exempted/not registered. It is seen that all importers need to have an Importer Exporter Code Number as per para 2.9 of the Foreign Trade Policy (FTP). This IEC Code Number is a unique number issued on the basis of PAN of the importer. Since IEC Code is a unique number with a unique address (registered office in case of Iimited companies and Head Office for others) of the importer, this address would decide the jurisdiction of the concerned audit party.
16. It is quite possible that an importer manufacturer may have more than one factory in different Commissionerates. In such cases, the on site audits will be done at the factory premises as well as the business premises of the importer. Similar would be the case in respect of service providers.
17. Documents to be furnished
For the purpose of such on site audit, the importer will have to keep certain records and make these available to the audit team. In particular, all relevant records relating to importation and their disposal will have to be maintained by the importer for at least five years from the date of importation. Amongst other documents connected with the importation and sale of goods, the importer needs to maintain import documents like:
Bills of Entry
Airway Bill/Bill of lading
Bond Records, if any
Duty Paying Documents etc.
l) IE Code (allotted by DGFT) and the application form furnished while applying for the IE Code.
These documents may also be called for prior to undertaking audit on site.
18. The importer shall also be required to produce on demand the following documents / records to the extent they are maintained and relevant:
(a) Annual Financial Statements, like Annual Report containing Balance Sheet, Profit and Loss Account and, Cash Flow Statement.
(b) Auditor's Report under the provisions of the Companies Act 1956.
(c) Cost Audit Report, if any, under Section 233(13) of the Companies Act 1956.
(d) Disclosure of Foreign Currency Transactions in the format as desired under Indian Accounting Standards (Number eleven) where importer is to furnish a schedule under Statement of Expenditure for Foreign Currency Transactions.
(e) Trial Balance - which gives the account number, description of accounts, credit amount or debit amount and balance (Cr or Dr) - Debit entry in import purchase account may indicate additional payments (may be relevant from valuation angle).
(f) Credit notes, which may indicate additional payments which may be relevant for import valuation.
(g) Journal vouchers through which adjustment entries and or rectification entries are passed.
(h) Quarterly/Annual Returns filed by EOU/EHTP/STP/BTP units in the form Annexure to Appendix-14-I-F with the Development Commissioner as per para 6.11.1-6.11.2 of Foreign Trade Policy-Hand Book of Procedures 2004 2009 or 6.10.1 & 6.10.2 of FTP - Hand Book of Procedures 2009-2014.
(i) ER-2 returns filed by EOU/EHTP/STP units with Central Excise or Customs Office.
(j) Accounts maintained by the manufacturer importer in terms of para 9 of Circular No.46/96-Cus dated 30.08.1996 issued in terms of Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1966.
(k) Any other relevant documents relating to receipt, purchase, manufacture, consumption, storage, sale, delivery or payment, as the case may be, in regard to imported goods.
(l) Details of the Bankers with whom the Importer/Dealer is having the Account for import / export transactions.
(m) To furnish DGFT Yield Norms for raw material vis-à-vis finished products if the importer is also a manufacturer;
19. Sections 92A to 92F of the Income Tax Act 1961 deal with international transactions between the associated enterprises which, inter alia, relate to the computation of income from an international transaction having regard to the arm's length price, determination of the arm's length price, meaning of associated enterprise, meaning of information and documents to be kept and maintained by the persons entering into international transactions etc. Section 92 E of the Act provides that every person who has entered into an international transaction during a previous year shall obtain a report from a Chartered Accountant giving factual information relating to the international transaction entered into, the arm's length price as determined by the assessee, and the method applied in such determination. In cases where international transactions between the associated persons exceeds Rs. 1 Crore in a financial year, Chartered Accountant Report in Form No. 3CEB should also be seen as regards to arm's length price and Transfer Pricing documents maintained by the assessee. A copy of assessment order, if any, for the last five years issued by Income Tax Department/ Vat Department, for any negative remarks in the assessment order as regards to under invoicing/unaccounted transactions, in relation to purchase and sale of goods may also have to be submitted by the importer.
20. As Central Excise Audit is done in line with EA-2000, similar procedure will be
followed for the purpose of On-site Audit also. For the information of the importers who will be subjected to onsite audit, this is what is required of them. The steps in brief are mentioned below:-
(I) Selection of Assessee
The process of Onsite PCA will start with identification of the importer to be audited. All ACP clients will be subjected to onsite audit. In addition, a certain percentage of non ACP clients will also be subjected to onsite audit. ACP clients will be able to clear their goods on the basis of their declaration without any pre checks.
(II) Preliminary or Desk Review & Gathering Information about the Importer and the Systems followed by him.
At this stage, the auditor will review all the information available about the Importer's Profile, Annual Report, Trial Balance, Cost Audit Report and Income Tax Audit Report etc. and other information from the system wherever such information is available. Before conducting the audit, the auditor will gather information about various activities of the importer like tax accounting, procurement of raw materials, production, marketing, stocks and sales. This information will be gathered through discussions with the senior management of the importer for which prior notice will be given. This may also be accompanied by a brief preparatory visit to the importer's premises.
(III) Evaluation of the Internal Controls
Internal Controls form a basis for reliability of the company's own accounting records. The auditor will evaluate the internal controls to see that these are well designed and working properly and whether it is possible to rely on the books maintained by the assessee. The scope and the extent of the audit may be reduced in such a case. The reverse would be true if the internal controls are not reliable. The auditors will test the application of internal controls in practice to judge and form an opinion about how effectively the prescribed procedures are actually followed. The importer is expected to help the auditor to assess the level of compliance and level of reliability of the prevalent internal control system.
One of the ways of evaluating internal control is to do a 'Walk through'. 'Walk-through' is a process by which the auditor would select certain transactions by sampling method and trace its movement from the beginning through various sub systems. The auditor would verify this transaction in the same sequence as it had moved. The auditor can undertake walk through process of sales, purchase, excise, account adjustment systems etc.
(V) Revenue Risk analysis
Having assessed the reliability of company's accounting records, the auditor will assess the "potential" risk to the revenue. If the risk is low, i.e. accounting records are accurate and no discrepancy is noticed, extensive tests may not be required.
(VI) Developing the Audit Plan
The auditor first assesses all the information gathered about the importer and develops a plan to examine detailed records related to the areas where material problems are indicated or foreseen.
(VII) Tour of the Premises I Plant
This is used to gather information about the systems. A physical tour provides confirmation of much of the information gathered during previous steps and it also helps to resolve issues noted earlier. Often, the tour brings out operations and technical details about inputs used and products/by-products/wastes manufactured, some of which may not have been taken up during the discussions. It provides clues about important aspects of the operations of the unit. If necessary, the auditor speaks to the Plant manager or Foreman during the tour, in the case of manufacturing units.
This is the detailed verification as per Audit Plan worked out. Here the auditors will actually conduct the audit in the premises of the importer.
(IX) Summarizing Audit Findings
This step involves putting together all of the audit findings in one place to be placed in the audit file.
(X) Reviewing results with the Assessee
The auditor will inform the importer of all the objections before preparing draft Audit Report. The importer will be given the opportunity to know the objections and to offer clarifications with supporting documents. This process resolves potential disputes early and avoids unnecessary disputes.
(XI) Compliance of Audit objections
Where the importer is in agreement with the audit Endings, in part or in full, the auditor would request that payments be made promptly to stop accrual of interest. Voluntary compliance will be encouraged.
(XII) Future Compliance
This is the final step before the auditor leaves the importer's premises. The auditor will discuss with the importer and suggest steps to improve compliance including systemic improvement and modifications. The purpose of the audit is to ensure compliance and it will be in importer's interest to make available all documents relevant to the imports to the auditors. And as explained, importer will have every opportunity to discuss with the audit team the objections, if any, raised by them.