1.5   Query:           

Valuation of imported goods-in-transit.

1. A public sector company is engaged in the manufacture of machine tools, CNC machines and forgings. The company is importing regularly raw-materials, stores and components required for the production of various products. These goods are kept in customs warehouse (or bonded warehouse) and are cleared (or debonded) as and when required. The value of uncleared bonded consignments as at the end of the financial year was being shown as inventory under a separate head “Material-in-Transit”. The CIF value in respect of such material is included for the purposes of disclosure in the notes to the balance sheet as required by Schedule VI to the Companies Act, 1956. When the goods are de-bonded/cleared and received by the company, these goods are treated as “goods-under inspection” until the same are finally inspected and accepted by the inspection department of the company. After final inspection and acceptance, the value of goods are treated as purchases of materials.

2. As per the accounting policy of the company, the inventories are valued at “cost or market value, whichever is lower”. For the purposes of ascertaining the cost of imported goods-in-transit detailed above the company has been adopting the method of aggregating the following elements of cost:

                        i)            Invoice price

                        ii)            Freight (Sea/Air)

                        iii)            Customs Duty

                        iv)            Customs Warehousing charges

                        v)            Interest on Customs Duty

                        vi)            Insurance

Further, the clearing agent’s charges are also added to the above cost as and when the goods are cleared/de-bonded from the customs warehouse and received by the company.

3. As per the querist, the customs duty is payable at the rates prevailing on the date of clearance/de-bonding only when the goods are cleared/debonded. According to the querist, the company has also to pay customs warehousing charges and interest on customs duty as assessed by the customs authorities as per the customs rules.

4. The querist has also informed that the C&AG audit party contended that interest element on customs duty calculated on provisional basis is to be charged off to the profit and loss accounts of respective years. Accordingly, the company had changed its accounting practice during the financial year 1993-94 and charged off the interest portion on customs duty to the profit and loss account.

5. The querist has further informed that during the review of accounts for the financial year 1993-94, C&AG had raised an objection for the inclusion of customs warehouse charges in the cost of imported goods-in-transit/purchase. Their comments for the financial years 1991-92 and 1993-94 and the company’s replies to the above are reproduced below.

1993-94

Goods under Inspection/In Transit – Rs.380.65 lakhs

According to the querist, the company has taken a stand that all the above elements are directly attributable to the procurement of goods and form part of cost of goods.

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

(a) Whether the present procedure being adopted by the company regarding the inclusion of freight (Sea/Air), insurance, customs duty, interest on customs duty, customs warehousing charges and clearing agent’s charges in the cost of imported goods is in accordance with the standard accounting practices, or  

(b) the stand taken by the C&AG stating that these being period costs the same should be charged off to P& L account.

                                                                          Opinion                                         July 11, 1995

1. The Committee states at the outset that it has addressed itself to the issues raised by the querist in para 6 of the query and not to other aspects stated in the query.

2. The Committee notes paragraphs 6.2, 6.3, 6.4, 16 and 28 of Accounting Standard (AS) 2 on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, which are reproduced below:

                        “6.2    ‘Historical Cost’ represents an appropriate combination of

                                    a)            cost of purchase;

                                    b)            cost of conversion; and

c) other costs incurred in the normal course of business in bringing the inventories upto their present location and condition.

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 drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase.

6.4 ‘Cost of Conversion’ consists of

i) costs which are specifically attributable to units of production, i.e., direct labour, direct expenses and sub-contracted work; and

ii) production overheads, ascertained in accordance with either the direct costing or absorption costing method.

16. Cost other than production overheads are sometimes incurred in bringing inventories to their present location and condition, for example, expenditure incurred in designing products for specific customers. On the other hand, selling and distribution expenses, general administration overhead, research and development costs and interest are usually considered not to relate to putting the inventories in their present location and condition. They are, therefore, excluded from determining the valuation of inventories. 

28. Overheads other than production overheads should be included as part of the inventory cost only to the extent that they clearly relate to putting the inventories in their present location and condition.”

3. The Committee is of the view that freight (Sea/Air), insurance incurred for goods-in-transit and customs duty are expenses which are normally directly attributable to the acquisition of the imported goods from the bonded warehouse. The Committee is, further, of the view that clearing agent’s charges apparently result in changing the location of the imported goods from the bonded warehouse. Therefore, these expenses should not be included in the cost of the inventory of goods lying in the bonded warehouse, but should be included as a cost in respect of inventories under inspection and subsequent stages after the clearing charges are incurred.

4. The Committee is also of the view that it appears from the facts of the query that the interest on customs duty and customs warehousing charges are not directly related in effecting change in either location or condition of the inventory.

5.  Based on the above, the Expert Advisory Committee is of the following opinion on the issues raised by the querist at para 6 of the query:

(a) Only freight (Sea/Air), insurance incurred on goods-in-transit, and customs duty should be included in the valuation of inventories of imported goods lying in the bonded warehouse. Clearing charges should be included in respect of inventories at stages subsequent to clearing from the bonded warehouse. Interest on customs duty and customs warehousing charges should not be included in valuation of inventories and the same should be charged off to Profit & Loss Account.

(b) See (a) above.

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