1.35     Query

Treatment Regarding Provision in the Books of Accounts for the Import

Duty Payable on Goods Stored in Customs-Bonded Warehouse.

We are importing our Raw Materials in bulk and these materials are kept in the bonded warehouse till import duty on the same is paid. The duty is payable only when we exbond the same. The duty payable is at rate prevailing at the time of exbonding the materials.  If the goods are re-exported directly from the bonded warehouse, the import duty is not payable.  The bonded warehouses is under the control of customs authorities.  We are normally treating the import duty on cash basis.  Therefore, provision for duty payable on goods lying in the bonded warehouse is not made at the time of finalising the accounts.  Our auditors are of the opinion that the provision has to be made for duty payable and closing stock in bonded warehouse has to be valued at the cost including import duty.  Even though this does not affect the  Profit & Loss Account of the Company, the disclosure of the liabilities and closing stock will be different.  According to our auditors, the duty is payable as soon as the goods are imported and the bonded warehouse is only a facility for delayed payment of duty.

They have relied upon the following case laws.

                        (1)        In Madras High Court

                                    Deputy Commissioner of Commercial Tax Vs.

                                    Caltex India Limited,

                                    Madras : reported in Volume 13 STC 1962 Page No. 1663.

                        (2)        Supreme Court of India,

                                    George Oakes Pvt. Ltd., Vs.

                                    State of Madras

                                    Madras : reported in Volume 12 STC Page No. 476.

                                              Opinion                                                               November 1, 1976

 Two practices are prevalent in accounting for import duty payable on goods stored in customs bonded warehouse.  One method is to provide for import duty payable on goods lying in bonded warehouse and to value stock lying in the warehouse at year end at lesser of cost including the appropriate import duty or market value, if available.

  According to Section 5 of the Customs Act, 1962, “the rate of duty and tariff valuation, if any, applicable to any imported goods, shall be the rate and valuation in force :

 (b)        in the case of goods cleared from a warehouse under Section 68, on the date on which the goods are actually removed from the warehouse……….”

  Thus, rates of duties actually paid on removal of goods on different dates may be somewhat different from the rate considered for the purpose of provision.  This would necessitate an adjustment in the books of accounts.

  The other method is to account for import duty on a cash basis i.e. the basis followed by the querist.

Many concerns follow the latter method on account of two reasons viz. (a) as a going concern liabilities need not be created until such time the liabilities crystalised and (b) liability to Import Duty arise only at the point of removal of the goods from the bonded warehouses at the rate then prevailing.

Whichever method is adopted should be followed consistently.

The issues raised in the cases cited are relating to the incidence of sales tax liability rather than deciding the fact as to what point of time liability arises.  In the case Deputy Commissioner of Commercial Tax Vs. Caltex India Limited, it has been held that simply because certain imported goods are kept in bonded warehouse they may not escape sales tax liability.  The decision in the aforesaid case does not appear to be a deciding factor as to the point of time the liability to import duty should be accounted for.

_____________________________