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Tax discrepancy at RCom subsidiary
December, 21st 2009

The service tax liability of a company is reduced by around 95%from Rs637.8 crore to Rs32.69 crorein three months, the time taken for a draft report of Mumbais service tax department to become a final audit report. Surprisingly, there is no change in the observations of the department, part of the Central Board of Excise and Customs, or CBEC, in the reports.

The company in question is Reliance Webstore Ltd, a subsidiary of Reliance Communications Ltd, or RCom, and a month-long investigation by Mint has highlighted several curious things about the original service tax claim, one of which is that it exceeds the revenue of the company.

An internal audit by the department in Mumbai has found that Reliance Webstore has a service tax liability of Rs32.69 crore and interest on this amount.

The note, written in October by K.V. Somnath, assistant commissioner (audit), service tax, Mumbai, mentions this amount along with the summary of the departments final audit results. But the departments draft audit results in July, prepared by K.H. Agarwal, another assistant commissioner (audit), pegged the amount at Rs637.8 crore plus interest.

Mint has reviewed both the draft report as well as the final report. The agency carried out an audit of the firm between April and July for two financial years2006-07 and 2007-08. Such audits are conducted by the department to improve compliance.

Reliance Webstores taxable services include online information and data, Internet cafes, business auxiliary services, maintenance or repair, transport of goods by road, franchise services, business support services, air travel agency, management consultants, construction services and manpower recruitment services.

B. Ravichandran, commissioner, service tax, declined to comment last week.

In response to a Mint query on the downward revision of the service tax liabilities, Atul Saxena, joint commissioner of service tax, said in November: We have sent the report to the divisional assistant commissioner for verification. I think it is a decimal error. However, we are verifying the report and will take necessary steps to safeguard government revenue.

In an email response in November, a Reliance Webstore spokesman said allegations of non-payment or outstanding payments were incorrect. The company has centralized service tax registration since 2003. All applicable service tax payments have been made as per rules after availing appropriate input credits available, and within the given time frame, the spokesman said.

It is surprising and shocking to hear that the outstanding service tax liability as per the draft audit report in your possession is in excess of the total revenues earned by the company which by no stretch of imagination can ever be higher than the revenues. It has been observed that our known corporate rivals use various tactics including circulation of mass emails from bogus IDs with incorrect documents, spreading false information to malign the reputation of our group and harm the interest of millions of shareholders. This seems to be part of the tactic used by such known corporate rivals, the spokesman said in an email.

The draft report has alleged that the company changed its name from Reliance Webstore Pvt. Ltd to Reliance Webstore Ltd in December 2004 but did not inform the service tax department.

It says the firm has multilocational outlets in the name of Reliance Web World but has not declared the locations to the department, nor produced centralized registration for (the) audit period.

It also carries the companys point of view. The summary of the draft audit report quotes the firm, saying it has taken centralized registration in 2003 and there is no requirement to submit the list of branches for those assessees who have obtained the centralized registration prior to 1 April 2005.

It alleges that on verification of Cenvat credit documents the service tax department found that the firm has availed of input credit on invoices which are not in its registered name and address. Therefore, credit availed in respect of all the input service invoices/bills addressed on their branches/outlets/locations are inadmissible. It says these are required to be reversed from 2004-05 onwards.

Cenvat (Central value-added tax) credit is the set-off of the duty paid on inputs and capital goods against the excise duty on final products. Firms are allowed to claim Cenvat credit for service tax incurred for procuring goods and services that are extended to customers, who are charged for it.

According to the draft report, the department had requested the firm to submit branch and location-wise details of Cenvat credit availed from 2004-05 onwards in a letter on 23 July. But the company did not do so.

Another report, prepared by the planning cell of the service tax agency in August, reiterated that the firm owed Rs637.8 crore to the department.

The latest report by the monitoring committee of the agency, however, has reduced the service tax liability of the firm to Rs32 crore. This was presented to the service tax commissioner on 8 September.

Audit process

Explaining the audit process, a senior official of the department said the inspector and superintendent of service tax who conduct an audit under the supervision of the assistant commissioner of the audit wing prepare the draft audit report.

At the next stage, the draft audit report is sent to the planning cell of the department, which compiles all reports for the monitoring committee of the agency.

The monitoring committee then prepares a case brief and presents it before the commissioner for approval. The department issues show-cause notices to firms only after the commissioners approval.

The department has neither sent the final audit report nor a show-cause notice to Reliance Webstore, the official said. He did not want to be identified as he is not authorized to speak to the media.

Reliance Webstore operates a chain of 234 Reliance World stores and sells handsets designed for RComs wireless services. According to the company spokesman, gross revenue for 2007-08 and 2008-09 is Rs972 crore, and the service and other operational revenue is Rs444 crore.

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