EXPORT ORIENTED UNIT(EOU) Audit

What registers/returns/documents are to be seen and their importance

ER-2 Return
Annual/Quarterly Performance Report -
Letter of Permission (LOP)
Letter of Intend (LOI)
Permission for DTA sale,
Broad banding,
B-17 Bond.
DTA and Export Invoices
Balance Sheet
Warehousing licence files
Bill of entry/Shipping bill register
CT-3 register
Bank Realization Certificates.

Linking of various registers/returns/documents and their significance with audit
view


ER-2 Return This is a monthly return submitted by 100% EOU unit every month
latest by 10
th
day of following month and it is to be verified to ascertain:
Manufacture and clearance of finished goods (in quantity and value)
DTA sale and Deemed export along with duty details
Details of physical exports
Details of total duty payments and mode of duty payments (Cenvat/PLA)
Details of Duty free indigenous/imported raw material and duty free capital goods
received at factory.
Details of cenvat credit availed and utilized.

Annual/Quarterly Performance Report - This return is required to be submitted by
every 100% EOU unit every quarter/yearly to the Development Commissioner (DC).
This return provides all details regarding physical export, deemed export and import of
raw/capital goods etc by EOU unit. The details regarding outstanding foreign exchange
realization by EOU for more than 1 year are also indicated in this return. The NFE
calculation can be verified through the APR. Other information provided in the APR may
be compared through other documents ER-2 Return and Balance Sheet, etc.

Letter of Permission (LOP) Permission given by DC for setting up of EOU, indicate
the goods permitted to be manufactured, period of validity etc. Letter of Intend (LOI) also
provides list of capital/raw material which can be procured by an EOU without payment
of duty. Various other permissions given by DC viz, permission for DTA sale, Broad
banding, etc. were also available with EOU units may also be called for verification.
Check the unit is functioning as per the conditions of the permission and all other
permissions are timely sought and obtained form DC.

B-17 Agreement - Every EOU units should approach Customs/Central Excise for
obtaining the facilities of duty free import and excise - duty free procurement of
indigenous goods of the raw material and capital goods required for the manufacture of
finished products in Bonded warehouse u/s 58 & 65 of Customs Act, 1962 for the
purpose of 100% export out of India, for this they should submit a B-17 Bond. which,
inter alia, covers an undertaking by the unit to pay on demand an amount equal to the
duty leviable on the goods imported duty free. Verify the bonded amount is as per the
provisions of the Act, whether the duty free goods procured are warehoused or not, etc.
DTA invoices are to be checked to find out whether the duty is correctly levied or
not. Total of at least one month DTA sale may be compared with ER-2 return.

Grey areas where major emphasis should be exercised

1. DTA sale is the main area in getting audit points. The classification of goods,
duty calculation, etc is to be checked in accordance with the Customs Tariff /Central
Excise Tariff. If the duty is paid at concessional rate, it may be verified whether the
permission are obtained and the not exceeding their eligibility in terms of value. Special
duty @ 4% is leviable when Sales Tax/VAT is exempted.
2. Aspect of Fulfillment of net foreign exchange earnings is also required to be
checked thoroughly.

3. Procurement of Imported/indigenous goods and its utilization is also verified in
detail. If any imported goods utilized in manufacturing of final goods, duty structure in
DTA sales will be affected and the duty paid on DTA clearances to be checked.

Types of possible audit objections and how they can be found

Normally some good points were noticed in DTA sale and duty payment at the time of
debonding etc.
If imported raw materials are removed/sold as such, the duty is required to be paid
in the cash and not to be debited in Cenvat account.
The duty structure may be verified in detail. Levy of third time Education cess in
DTA sale may be verified from DTA sales Invoice. Special duty @ 4% leviable when
Sales Tax is exempted, Sales Tax Return or original Invoice can be verified for it..
Payment of duty through Cenvat/PLA may be verified. If duty free exported/indigenously
procured goods are transferred as such in DTA duty shall be paid through PLA. Various
captions of objections are as under :
1. Short levy of excise duty in DTA sales
2. Non levy of education cess (third time) to be levied after calculating total duty of
customs
3. Non fulfillment of export obligation
4. Overvaluation of exported goods resulting in shortfall of NFT
5. Non receipt of re-warehousing certificates
6. Allowance of advance DTA Sale in case achievement of negative NFE
7. Short/non levy of excise duty on debonding
8. Non follow up of Boars guidelines for taking insurance resulting loss of revenue
9. Incorrect information in APRs
10. Non levy of SAD even though goods are exempted from Sales tax/vat
11. Non recovery/short recovery of MOT charges
12. Non utilization of inputs/capital goods within stipulated time resulting incorrect
grant of exemption (3 years for raw materials/ 5 years for C.G.)
13. Non payment of duty on inputs utilized in duty free goods cleared in DTA
14. Counting of ineligible exports for achieving NFT (Appendix-14-F may please be
referred which stipulates prescribed formula for calculation of NFE)
15. Non payment of Service tax on Business auxiliary Service or any other services
which attracts Service Tax
16. Inclusion of figure of trading activities in APR for NFE calculation
17. Non levy of excise duty on goods destroyed in fire accidents
18. Insufficient safeguard due to short execution of B-17 Bond
19. Incorrect debit of duty foregone amount in respect of B-17 Bond account
20. Levy of excise duty instead of customs duty on clearance of goods (debonding
time) originally procured from other EOUs
21. Excess allowance of depreciation on capital goods (i.e. from the date of
procurement instead of counting from the date of putting into for production)
22. Non clearance of goods in DTA which is similar to exported goods
23. Non realization of export proceeds (within 12 months)
24. Undervaluation of goods cleared as such in DTA (original value prevailing at
the time of import to be adopted)


Other important area of examination

Balance sheet, this provides all information about manufacture, foreign exchange
realization, foreign exchange outflow (Service tax is paid or not can be verified), total
sales. It also provides information on any additional income received by the company
and on which Service Tax is leviable. Detailed scrutiny of other income/misc. income is
to be done. Many figures shown in the balance sheet can be cross verified through other
documents/return of the EOU. Cenvat credit availment/utilization is an additional area
which requires audit checks.