Expert Advisory Committee

1.33 Query:

Provision for customs duty liability in respect of imported

goods lying in a bonded warehouse.

1. A Government of India company established under the Companies Act, is engaged in the business of import and export of various commodities. In terms of the Customs Act, 1962, the importer of goods has to make a bill of entry either for home consumption or warehousing. The company imports non-ferrous metals, steel and industrial raw materials etc. and many a times the goods are kept in a bonded warehouse through bill of entry for warehousing. In the case of goods kept in a bonded warehouse, customs duty is payable at the time of de-bonding the goods and the rate at which duty is payable is the rate prevailing at the time of de-bonding the goods. The bonded warehouses are under the control of customs authorities. If the goods are re-exported directly from the bonded warehouse, the import duty is not payable. Similarly, if the goods are sold on high seas basis, the customs duty is payable directly by the high sea buyer. The high sea sale is permitted by transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.

2.The querist has informed that the company normally treats the import duty on cash basis and no provision is made in the accounts for the goods lying in bonded warehouse or awaiting clearance for which Bill of Entry has not been filed. The latter are treated closing stock (Goods-in-transit) and valued at cost incurred upto that stage. According to the querist, the provision is not made on account of the following reasons: -

(a) As a going concern, liabilities need not be created until such time they are crystallised;

(b) If the goods are re-exported from the bonded warehouse, customs duty is not payable;

(d) The company has option to relinquish the title to the goods u/s 23(2) of the Custom Act, 1962.

3.The auditors of the company have expressed their opinion that liability has to be provided for the goods lying in the boded warehouse or awaiting clearance at the port at the end of the year as the liability has accrued. The querist is of the view that though this does not affect the profit and loss account, the amounts of liabilities, cost of sales and the closing stock value will be different. In the auditor’s view, this has become necessary in the wake of section 209 of the Companies Act requiring companies to maintain their books of account on accrual basis.

4. The querist has pointed out that the Expert Advisory Committee of the Institute has earlier given opinions on similar issues reported at Page No.64-65, Volume – I (3^rd edition, query no.1.35) and Page 36-37 of Volume X (query no. 1.11). However, according to the querist, both the practices are prevalent, i.e., some companies are making provisions on accrual basis and some other companies are giving treatment on cash basis. In the latter case, suitable disclosure is made in the Statement of Accounting Policies and/or notes to the accounts. In case the provision for customs duty is made and the goods are later re-exported or sold on high seas basis, adjustments will have to be made in the accounts in the following year(s). Similarly, on actual payment of duty, which will depend upon the rates in force at the time of debonding, adjustments will have to be made again for the differential amount of duty than that provided at the time for closing of the preceding year(s).

5. The querist has informed that the company prepares trading account and profit and loss account. The opening stock, purchases and customs duties paid/payable etc., are exhibited on the debit side and sales and closing stock on the credit side. The querist is of the view that in case liability is provided for customs duty payable, the same would be reflected both on debit side under customs duty and credit side in stock value. In case, in the next or subsequent year(s), customs duty is not payable, the same will have to be adjusted through the liability and also the value of stock should be adjusted suitably to reflect its realistic value. In this situation, the sale value/re-exported value will be excluding the amount of customs duty and in case the value of stock is not adjusted, the trading account will not reflect true picture. Therefore, according to the querist, under the matching concept, adjustment of customs duty may be through trading account.

6. The querist has sought the opinion of the Expert Advisory Committee on the following issues: -

(i) Whether the company should provide for customs duty liability for goods lying in the bonded warehouses at the end of the year;

(ii) Whether the company should provide for customs duty liability for the goods awaiting clearance at the port at which bill of entry has not been filed at the end of the year;

(iii) in case provision is made, if the customs duty is not payable for the aforesaid reasons, whether the value of opening stock can be adjusted with the amount of customs duty not payable, in the following year.

Opinion February 8, 1995

1. The Committee notes that in the light of the following judgments, it is apparently well established that the goods in question become imported goods as soon as they enter the territorial waters of India and it is at that particular time when the taxable event takes place:

(i) M.S. Shawney v. M/s Sylvania and Laxman Limited 77 Bom LR 380.

(ii) Apar Private Limited and Others v. Union of India and Others [1985] 6 ECC 241 (FB) (Bom).

(iii) Dinesh Kumar Neotia v. The Collector of Customs and others [1988] 18ECC 422 (Cal).

(iv) Jain Shudh Vanaspati Limited v. S.R. Patankar, Asst. Collector of Customs, Bombay, and Others [1988] 15 ECC 180: 1988 (33) ELT 77.

2. The Committee also notes that the Full Bench of Bombay High Court in the case of Apar Private Limited and others v. Union of India and others, while upholding that chargeability under section 12 of the Customs Act arises as soon as the goods enter the territorial waters of India, held that:

- section 12 determines the chargeability;

- section 14 determines the valuation on imported goods; and

- section 15 determines the quantum of duty payable.

3. The Committee is of the view that the chargeability, which is determined by section 12 of the Customs Act, is not deferred to a date when the duty is quantified. Only the quantification and collection of customs duty is postponed and not the chargeability. The Committee is, therefore, of the view that the imported goods are chargeable to customs duty as soon as they enter the territorial waters of India.

4. The Committee is also of the view that exemption of payment of customs duty in specific exceptional circumstances can not be taken as an all pervasive argument for non-provision of the duty in respect of all goods lying in bonded warehouse. Thus, the mere fact that the assessee has an option to relinquish the title, which does not happen ordinarily, cannot be considered as an argument for non-provision of customs duty in general. In the view of the Committee, non-provision of customs duty only on goods meant for re-export and lying in bonded warehouse would appear to be justified provided no customs duty is payable in respect thereof because of the re-export from the bonded warehouse.

5. The Committee is, therefore, of the following opinion, in respect of the issues raised by the querist in para 6 of the query:

(i) The company should ordinarily provide for the customs duty liability for goods lying in the bonded warehouse.

(ii) The company should provide for customs duty liability for goods awaiting clearance at the port not withstanding the fact whether the bills of entry have been filed or not.

(iii) The value of opening stock should not be adjusted with the amount of customs duty not payable. If the company has made provision for the customs duty payable as suggested in (i) & (ii) above, and the same becomes non-payable in the following year, the amount of the said provision should be adjusted through the provision for customs duty account.

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