1.8 Query
Accounting for customs duty and excise duty.
1.A company is importing certain components for the purpose of manufacturing vehicles for export. The imports made by the company bear an export obligation. The querist has supplied a copy of the letter from ‘Directorate General of Technical Development’, Government of India, which requires that the components imported shall be used for export production only. The customs duty paid on such imports is available as a drawback against export of the vehicles. Generally, such imports are related to specific export orders.
2.The querist has stated that the vehicles manufactured from imported components cannot be sold in the domestic market, and have actually been sold in the foreign market only.
3.While clearing Bill of Entries, the company is stamping them with the declaration which says that it intends to avail credit of duty under Rule 56A/57A of Central Exercise Rules in respect of goods covered by the Bill of Entry. Credit is taken for the counter-veiling duty portion mentioned in the Bill of Entry at the time import takes place under Rule 57A. Basic and auxiliary duty paid in the Bill of Entry is available as duty drawback after the physical export of vehicles. In addition to duty drawback, cash compensatory support is also available from the Government against export of such vehicles.
4.At the year-end, there are some vehicles which have been manufactured and are ready for export and are lying in finished stock. Similarly, some components imported for this purpose, are also available in stock. The problem relates to valuation of inventories of such vehicles and components and the accounting treatment to be given for customs duty paid. The company accounts for duty drawback and CCS on accrual basis, i.e., when export sales are affected. Reference is made to Accounting Standard No. 2, on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, which defines ‘cost of purchase’ as consisting of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition less trade discount, rebates, duty draw back and subsidies in the year in which they are accounted whether immediate or deferred in respect of such purchase. Reference is also made to an earlier Query No. 1.7 on similar issues reported on page no. I-135 in Volume No. I of Compendium of Opinions (3rd Edition, 1988).
5.The querist has referred the following issues for the opinion of the Expert Advisory Committee:
(a) Whether, on the basis of the facts stated above, the activity of export of vehicles and import of components for exports could be construed as one continuing transaction.
(b) If the answer to (a) above is in the affirmative, whether the following accounting treatment is correct:
(i) Materials imported for use in the manufacture of vehicles for exports are not loaded with customs duty paid on such materials.
(ii) Customs duty paid on such materials is booked under the head ‘Deposit with Customs’.
(iii) Amount received as drawback is adjusted against amount lying under ‘Deposit with Customs’.
(c) If the transaction to in (a) above cannot be considered as a continuing transaction, whether the following accounting treatment would be correct:
(i) Since duty drawback and CCS would not have been accounted for at the year-end on vehicles and components in stock, whether the company would be correct in valuing such inventories at a value which includes import duty and does not exclude CCS. Also, materials imported for use in the manufacture of vehicles for exports will be loaded with customs duty and amounts available as drawback will be routed through profit and loss account.
(ii) Since export selling prices would be less than the cost of manufacture (without excluding duty drawback and CCS), whether the company would be correct in valuing them at export prices agreed upon in foreign currency and converted at year-end rates.
(iii) ‘Guidance Note on Treatment of Excise Duty’, issued by the Research Committee of the Institute of Chartered Accountants of India, recommends making provision for excise duty on goods lying in bonded warehouse at the year-end. In such a case, whether the company would be correct in excluding the excise duty for the purpose of inventory valuation in case it is known that the vehicles lying in stock are meant for export only and in which case ultimately no excise duty would be payable.
Opinion March 29, 1990
1.The Committee is of the view that since vehicles manufactured from imported components can only be exported and not sold in the domestic market, i.e., imports made bear an export obligation, the entire operation of import of components, manufacture of vehicles therefrom and export of vehicles will constitute one single continuing transaction. In such a case, the Committee is of the view that what is paid as customs duty is in effect a deposit in the nature of security, i.e., when vehicles manufactured from these components are exported, the customs duty would be refunded in the form of duty drawback.
2. The Committee is, therefore, of the following opinion in respect of the issues raised in paragraph 5 of the query:
(a) Since it is obligatory for the company to export the vehicles manufactured from imported components, the activity of import of components, manufacture of vehicles therefrom and export of vehicles will be construed as one single continuing transaction.
(b) The accounting treatment suggested by the querist in paragraph 5(b) of the query is correct in case of the transaction mentioned in (a) above.
(c) Since the answer to query raised in para 5 (a) of the query is in the affirmative, the issues raised in paras 5(c)(i) and (ii) of the query need not be answered. The Committee is of the view that issue raised in paragraph 5(c) (iii) of the query would also be relevant to query raised in para 5 (a) and (b) of the query and is of the opinion that the company should make provision for excise duty on goods lying in the bonded warehouse at the year-end. In case provision for excise duty is not made in respect of the goods which have not been cleared from the factory premises or which are lying in bond, it is necessary to quantify the amount of the liability and make adequate disclosure of the fact in the accounts. [Para 33 of ‘Guidance Note on Accounting Treatment for Excise Duty’, issued by the Research Committee of the Institute of Chartered Accountants of India].
______________________
|