Expert Advisory Committee

1.70 Query

Presentation in company accounts—supplementary cash assistance received

inlieu of customs duty drawback for supplies to projects under IDA Credit.

Our company is supplying manufactured equipment to projects financed under IDA Credit and is using imported materials also for manufacturing such items. However, the value of such supplies differs materially from year to year.

As per Government directives, the company is entitled for supplementary cash assistance in lieu of duty drawback for goods manufactured with imported materials and supplied to projects financed under IDA credit. This supplementary cash assistance in the lieu of duty drawback facility available to exporters and is in addition to the cash assistance which is in the nature of subsidy. Rates regarding supplementary cash assistance are determined by Government in respect of each case separately. However, in all the cases decided so far, Government has allowed 100% refund of customs duty paid on imported materials used in manufacturing the equipments.

The accounting procedure followed by the company is as follows:

(i) Materials imported for use in the manufacture of equipments to be supplied to projects financed under IDA credit are not loaded with customs duty paid on such materials.

(ii) Customs duty paid on such materials is booked under the head “Advances—Others”.

(iii) Amount received towards supplementary cash assistance in lieu of duty drawback is adjusted against amount lying under “Advances—Others.”

The Government auditors have commented on existing procedure and have suggested the following modifications: -

(i) Materials imported for use in the manufacture of equipments to be supplied to projects financed under IDA Credit must be loaded with customs duty.

(ii) Amounts towards supplementary cash assistance in lieu of duty drawback should be taken as receipts for the year and should be routed through profit and loss account for the year in which the amount is received.

The company holds the view that the procedure followed is not a contravention of the sound accounting principles because of the following reasons:

(i) Import licences are obtained specifically for import of materials to be used in manufacturing of equipments to be supplied to the projects under IDA Credit.

(ii) Even though the rates of supplementary cash assistance are determined for each case separately, the amount receivable can be ascertained precisely on the basis of past cases where 100% refund of customs duty was allowed.

(iii) Value of the supplies to projects financed under IDA credit varies materially from year to year and therefore procedure suggested by the auditors would result in understatement of losses for the year of sale and unnecessary over statement of revenue for the year of receipt of supplementary cash assistance and consequently would vitiate the true and fair view of the profit and loss account.

Kindly let us have the Committee’s opinion on the procedure followed by the company.

Opinion May 5, 1981

The querist has not indicated how many cases in all of such imports of raw materials have occurred to date and what percentage thereof both in number and value, has been decided by the Government allowing supplementary cash assistance equivalent to 100% of the custom duty earlier paid. This is relevant in forming an opinion as to whether or not in practice, the supplementary cash assistance in lieu of duty drawback is invariably quantified by Government at the same amount as the customs duty paid so that, in substance, the effective rate of customs duty incurred on the raw materials in NIL.

The querist has also not given particulars of the IDA credit scheme and the terms of the Government’s directives thereunder for supplementary cash assistance in lieu of duty drawback. This information is essential for deciding whether, under the scheme and the Government directives relating thereto, supplementary cash assistance in lieu of duty drawback is, in substance, a 100% refund of the customs duty paid on the imported raw materials and the querist’s company is in fact, entitled to the refund by the very fact of its entering into the transaction of import of raw materials, manufacture of equipment therefrom, and supply of that equipment to projects financed under the IDA Credit.

If the entire operations represent one continuing transaction and the import of raw material is conditional on their use in the manufacture of equipment to be supplied to IDA credit financed projects, in the opinion of the Expert Advisory Committee, the effect would be that a deposit of customs duty has to be made at the time of importing the raw materials, somewhat in the nature of a security that the querist’s company will, in due course, complete the transaction of manufacturing and supply to the relevant projects of the equipments manufactured with the use of such imported raw materials. In that event, the accounting procedure adopted by the company would appear to be reasonable and acceptable under the facts and circumstances of the case. If, however, under the terms of the scheme, and Government’s directives, the customs duty paid represents expenditure necessarily to be incurred as part of the cost of the imported raw materials, and the subsequent supplementary cash assistance in lieu of duty drawback represents a separate and unconnected receipt of revenue nature which is not related to the import of the raw materials, then in the opinion of the Expert Advisory Committee, it would be necessary to include the customs duty paid or payable on accrual basis in the cost of the raw materials imported, both for purposes of valuing the raw materials consumption to be debited in profit and loss account for the relevant period as well as for the purpose of valuation of any closing stock of raw material or equipments manufactured with the use thereof and held in stock as at the relevant balance sheet date.

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