1.13     Query

Accounting for benefit received on imports

under Advance Licence.

2.In this context, the querist has raised the following issues for the opinion of the Committee:

(a) How the export benefit is to be treated and disclosed in the profit and loss account for the year ended on 31.12.1988?

(b) At what value the stocks should be valued for the balance sheet purpose as on 31.12.1988?

                                                                                   Opinion                                           November 30, 1989

1.The Committee notes that Accounting Standard 2 (AS 2) on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, defines ‘Cost of Purchase’ of various inventory items as below:

“‘Cost of Purchase’ consists of the purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition, less trade discounts, rebate, duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase.”

2.The Committee also notes para 13.16 of the ‘Guidance Note on Terms Used in Financial Statements’, issued by the Institute of Chartered Accountants of India, which recommends, inter alia:

            “Prudence

A concept of care and caution used in accounting according to which (in view of the uncertainty attached to future events) profits are not anticipated, but recognised only when realised, though not necessarily in cash. Under this concept, provision is made for all known liabilities and losses, even though the amount can not be determined with certainty and represents only a best estimate in the light of available information.”

3.The Committee notes paras 220, 235, 243 and 244 of Chapter XIX of the Import Policy for the period 1988-91, which inter alia state:

220 …..Advance licences are issued to Registered Exporters for import of duty free materials in terms of Department of Revenue Notification No. 44 – Customs dated 19^th February, 1987 (as reproduced in appendix 13-A) as amended, for manufacture and export of the resultant products or to replenish the materials which have gone into the production of the resultant products already exported in anticipation of the grant of Advance licence……

235 A licence issued under this scheme shall bear a suitable export obligation. The export obligation period will commence from the expiry of 30 days from the date of import of first consignment. Initially, on a provisional basis, the date of execution of bond/legal undertaking will be treated as the date from which export obligation begins. The exact date of commencement of export obligation will, however, be determined on submission of the actual Bill of Entry or the DEEC book.

243 If a licence holder fails to discharge the prescribed export obligation within the permitted time, the licensing authority shall initiate action against the licence-holder on the lines indicated in Chapter XIX of the Handbook of Procedures, 1988-91. This shall, however, be without prejudice to any other action that may be initiated by the Customs authorities for recovery of Customs duty or other duties and interest thereon under section 142 of the Customs Act, 1962.

244 (1) Exempt materials imported against a licence under this scheme shall be utilised for the manufacture of the resultant products specified in the DEEC except where it is by way of replenishment. The replenishment would be on account of exports/supplies made between the date of receipt of application by the licensing authorities and the date of first import. The exempt materials shall not be loaned, sold, or transferred or disposed of otherwise under any circumstances. In cases where the export obligation has been partially or fully met before making any import against the licence, the manufacturer exporter after fulfilment of export obligation imposed against the licence, may utilised the replenished materials for further export/domestic production and subject to actual user conditions. Similarly, the licensing authority………”

  4.The Committee notes that where Advance Licence under the Duty Exemption Scheme is issued, there are two types of duty free imports, namely:

                        (i)            Imports which bear an export obligation.

                        (ii)            Imports which do not bear an export obligation.

5.The querist has stated that exports have been made in the year 1988 and imports have been made in the same year. The Committee’s opinion is based on the presumption that the imports have been made against the export obligation already completed before the grant of Advance Licence and as such the imports do not bear any export obligation.

6.The Committee notes that where the exporter has made certain exports between the date of application for Advance Licence and the date of grant of Advance Licence, he is entitled to import raw materials free of duty in respect of such exports after the Advance Licence has been issued. These imports are in form of replenishment of material that would have gone into production of goods already exported. These imports do not bear any export obligation but are subject to ‘actual user conditions’. 

7. Committee is of the view that since in the case of imports which do not bear any export obligation and the imported goods are subject to ‘actual user conditions’, the benefit of the exemption of customs duty will not materialise unless and until the products manufactured from such imports are sold out. Thus, the amount of benefit of exemption of customs duty cannot be related to the cost of materials that have been consumed for the purpose of exports.

8.The Committee also notes that one of the major considerations governing the selection and application of accounting policies is ‘prudence’, according to which profits are not anticipated but recognised only when realised in view of uncertainty attached to future events (AS1, ‘Disclosure of Accounting Policies’). The benefit arising out of import of material free of customs duty can be realised only when goods manufactured from these are sold. If the company keeps the imported raw material in its stock for a period of say ten years, then the company will not realise any benefit from non-payment of customs duty for the period of ten years.

9. The present case can be compared with a quantity discount situation. For example, a supplier agrees to supply goods to a purchaser at the terms that first 1 lakh tonnes of a material will be supplied at Re. 1/- and goods purchased above 1 lakh tonnes but upto 2 lakh tonnes will be supplied at Re. 0.90. In this case, the benefit of reduction in price of goods purchased beyond 1 lakh tonnes is resulting because of the purchase of first one lakh tonnes. If the purchase of first one lakh tonnes is made in one year and the purchase of next one lakh tonnes is made in a subsequent year, then it will not be prudent to account for the benefit of Rs. 1,000/- (being discount on next 1 lakh tonnes) in the year in which first one lakh tonnes are purchased.

10.The Committee is accordingly of the view that although the benefit of non-payment of customs duty, which is on account exports made before the grant of Advance Licence, can be quantified at the time when imports are made, yet the benefit is not realised unless and until the goods manufactured from these imported materials are sold out. The Committee is, therefore, of the view that by valuing the stock of imported material at cost, the benefit will automatically get accounted for as and when the goods manufactured from these imported materials are sold out.

11.The Committee is also of the view that the saving made by the exporters as a result of non-payment of customs duty is not in the nature of revenue but is in the nature of reduction in the cost of purchase of raw material. The cost of purchase of imported material should, therefore, be shown net of customs duty, i.e., the actual price paid for the import.

12.Based on the above, the opinion of the Committee is as below:

(a) The benefit arising out of non-payment of customs duty on imported material, which does not bear any export obligation, should not be recorded specifically. The benefit itself gets accounted for as and when the goods manufactured from the imported material are sold out.

(b) The closing stock should be valued at actual cost, i.e., without accounting for saving in customs duty.

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