1.11  Query:    

Accounting treatment of advance licences for import of duty free raw materials.

1.The querist has stated that as per the usual practice the exports can be made either under duty drawback scheme, or under advance licence scheme:

(a)        Under the duty drawback scheme, either duty drawback can be claimed on the basis of all industry rate of duty drawback fixed, or in case such all industry rate has not been fixed, the exporters file application for fixation of rates and subsequently after getting the rate fixed, they claim duty drawback. The duty receivable in such case, as per the querist, is shown as ‘Duty Drawback Receivables’ and is accounted for on the exports effected during the year.

(b)        The advance licence scheme enables the exporters to import or procure locally the duty free inputs for manufacturing export products. Under this scheme the following two situations may arise:

(i)        The exporter can import/procure duty free inputs first, then manufacture the export product and export the same. In such a case the exporter will always have duty free inputs with him and no amount of duty will be involved on the exports effected.

(ii)        Alternatively, the exporter can first make exports by using their duty paid stock and subsequently procure duty fee inputs and replenish the same with his duty paid stock of domestic uses. In such a case there will always be involvement of duty on the exports already effected.

In the above second alternative, as per the querist, if the exporter, after effecting exports, chooses not to import the duty free inputs, he has the following two options: -

(i)         He can transfer/sell advance licence as it is, to another actual user with a premium which is virtually nothing but duty impact; or

(ii)        He can claim duty drawback by requesting the custom authorities for conversion of his DEEC shipping bills into DBK shipping bills.

2. As per the querist, para 66 of EXIM policy 1992-97, reproduced below, provides that exporters can start making exports immediately after lodging application for advance licence with the Licensing Authority. They are not to wait for issue of advance licence. Thus, in case the exporters make exports before issue of advance licence, such export production will be from the duty paid stock.

“Para 66 – Exports in anticipation of licence – Exports/supplies made from the date of receipt of an application under this scheme by the licensing authority may be accepted towards discharge of export obligation. If the application is approved, the licence shall be issued in accordance with the policy and procedures in force on the date of its issue. The conversion of duty free shipping bills to drawback shipping bill may also be permitted by the Customs Authorities in case the application is rejected or modified by the Licensing Authority.”

Thus, according to the querist, the exporters will always get duty benefit on the materials already exported either by importing duty free inputs or by claiming duty draw back.

3.The above provision of allowing exports before issue of advance licence has been made, as per the querist, keeping in mind the delivery schedule as per export orders. As per the usual practice the overseas buyers ask for supply within 1 to 3 months and do not wait for longer delivery scheme, whereas the issue of licence, procurement of inputs and manufacturing the product to be exported takes at least 6-8 months.

4. The querist has stated that para 71 of Exim Policy 1992-97, reproduced below, provides penalty in case the licence-holder fails to fulfil the export obligation within validity period and hence, it is the usual practice that exporters try to fulfil their export obligation as early as possible even by using their duty paid stock. However, the duty free material which is imported later on can be consumed for own consumption after effecting exports.

“Para 71 – Penalty – If a holder of a duty free licence under the scheme violates any condition of the licence or fails to fulfil the export obligation, he shall be liable to action in accordance with the Foreign Trade (Development and Regulation) Act, 1992, Orders/Rules made under the said Act, Export and Import Policy, Hand Book of Procedures and other laws in force.”

5.The querist has further stated that now the Exim Policy also provides for transferability of advance licences (Refer para 67). According to para 67 of the Exim Policy 1992-97, reproduced below on fulfillment of the export obligation, instead of actual import, the advance licence holder can transfer/sell advance licence to other users.

“Para 67 – Transferability of Advance Licence – A value or quantity based Advance Licence (except Intermediate Advance Licence and a Special Imprest Licence) or the materials imported against them, may be freely transferrable after the export obligation has been fulfilled, export proceeds realised and the bank guarantee/LUT redeemed. This facility shall not be available in cases where the MODVAT/Proforma Credit facility or excise relief under Rule 191 B of the Central Excise Rules has been availed of.”

6. As per the querist, transfer of advance licences as stated above, is always at a premium which is virtually nothing but a duty difference, because the transferee can import/procure duty free materials mentioned in the advance lincence. The querist is of the view that like REP licences which were being accounted for in the books of account at a tentative rate of premium prevailing at that time, the unutilised portion of advance licences can be accounted for at a tentative rate of premium which may be calculated on the basis of difference in amount of duty.

7. The querist has stated that from Income-tax point of view, in case the exporters are not allowed to account for duty involvement on the material already exported from duty paid stock during the year, the profit and loss account will not reflect correct position because the export is effected and accounted for in the current year, whereas the incentive (duty involvement) is accounted for in subsequent year. The accounts will not be true and fair where the exporter adopts accrual system of accounting, if he does not account for all the benefit of the sale/exports already effected in the year itself, as per the querist.

8. The querist has also stated that there is usual practice in EEC countries to impose anti-dumping duty on the goods exported from India in case the balance sheet and the profit and loss account of the exporter shows loss. In such cases, the European authorities assume that the said exporter has exported the goods at the cheapest lower price (that is, at a loss) and hence, they impose antidumping duty. As per the querist, their representatives come to India and verify the accounts of each and every major exporter and where the accounts/balance sheet of an exporter show loss, they impose anti-dumping duty, resulting into the goods becoming costly and it becomes difficult to export the goods.

9. In view of the above facts, the querist is of the view that the Committee may review its earlier opinion on the subject, published in Compendium of Opinions, Volume VII, page 4, and consider whether exporters should now be allowed to account for materials consumed for exports already effected on duty free input values, or to account for premium on unutilised portion of advance licences. As per the querist, as the duty rate is always available under customs/excise tariff, there is no problem in accounting for such duty amount, or premium on unutilised licences. Moreover, as per the querist, the accounting of duty impact for the exports already effected will show true and fair position and is very much on the lines of accrual accounting system and such provision will not be in contravention to any Income-tax Act provision.

                                                                               Opinion                                     May 17, 1994

1. The opinion of the Expert Advisory Committee expressed herein is restricted to the accounting treatment of advance licences received on export of goods manufactured out of the duty paid inputs. In view of Rule 2 of the Advisory Service Rules, the Committee has not considered the taxation aspect of the query.

2.The Committee also notes para 13.16 of the ‘Guidance Note on Terms Used in Financial Statements’, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India, which defines, 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 also notes paragraph 6.3 of AS 2 on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, which states, inter alia:

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

4. The Committee notes paras 67 and 71 of the Exim Policy 1992-97, as reproduced at paras 5 and 4 of the query, respectively.

5. The Committee 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. The benefit arising out of import of raw materials free of customs duty or sale of an advance licence can be realised, in view of the Committee, only when the goods manufactured from these materials are sold, or as the case may be, the licence is sold in the market.

6.The Committee also notes that although the ‘specific user’ condition has been omitted for issue of advance licences, there are other conditions to be satisfied. Moreover, the cost of such advance licences is not reliably ascertianable, and their net realisable values may fluctuate considerably since they would also depend on many uncertain factors such as demand for imported goods, change in prices of domestic goods, rate of custom duty prevailing at the relevant point of time etc. The querist himself has indicated in para 6 of the query that the premium is ‘tentative’.

7.On the basis of the above, the Committee reiterates its earlier opinion, as mentioned in para 9 of the query, that in view of uncertainty attached to future events related to the earning of benefits from use or sale of the advance licences received by the company, no revenue should be recognised until the same is actually realised. Also, in the opinion of the Committee, the material used for manufacture of goods exported should be accounted for at its actual cost of purchase as per para 3 above. No adjustment for value of advance licences should be made in cost of such raw material.

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