A. Facts of the Case

1. A public limited company is engaged in the manufacture and sale of consumer and industrial products.  In respect of the exports made by it, the company is entitled to get benefit under the Duty Entitlement Pass Book (DEPB) Scheme of the central government as laid down by the EXIM Policy 1997-2002.  The salient features of the DEPB scheme are as below:

(a) The objective of the DEPB scheme is to neutralise the incidence of customs duty on import content of an export product.  This neutralisation is to be provided by way of a grant of duty credit against the export of a product.  Under the scheme, an exporter is eligible to claim duty credit as a specific percentage of the FOB value of the export made in freely convertible currency.  Any item shall then be allowed to be imported without payment of customs duty against the credit under DEPB.  The DEPB shall be valid for a period of 12 months from the date of its issuance.

(b) DEPB may be issued on ‘post-export’ basis (i.e. on exports already made) or ‘pre-export’ basis (i.e., to provide the facility for importing inputs which are required for production).  The DEPB on a post-export basis is freely transferable.  The transfer shall however be for imports at the port specified in the DEPB which shall be the port from where the exports have been made.  The DEPB shall initially be issued with non- transferable endorsement, in cases where the realisation of export proceeds has not taken place, to enable the exporter to effect imports for his own use.  However, on receipt of realisation, the DEPB shall be endorsed as transferable.  In cases where the applicant applies for DEPB after realisation, the DEPB shall be issued with transferable endorsement.  No exports shall be allowed under DEPB scheme unless the DEPB rate of export product is notified.

2. The company applies for DEPB credit on a post-export basis on realisation of export proceeds.  The DEPB credit is subsequently utilised towards payment of customs duty on imports and the company does not transfer/endorse the DEPB credit to a third party.  The export is made by one division of the company but the utilisation of the DEPB credit for import is made by another division.

3. On making an application for DEPB credit, the export division of the company records the claim as a receivable and recognises it as an income in the profit and loss account.  Subsequently, on import which takes place at a later date, the import division utilises the claim receivable (backed by a DEPB certificate) to pay the customs duty.  The transactions in respect of export (on which DEPB credit is claimed) and the import (on which DEPB credit is utilised) may take place in different accounting periods.

B. Queries

4. The opinion of the Expert Advisory Committee has been sought on the following issues:

(a)  Whether revenue should be recognised in respect of the DEPB claim on application or receipt of the DEPB credit or whether it should be deferred and matched to the utilisation of the DEPB credit.

(b)  Whether the recognition of DEPB credit as income in one accounting year and the utilisation thereof in a subsequent accounting year amount to non-compliance of the principle of matching costs and revenues.

(c)  If the revenue is recognised at the time of entitlement of DEPB credit, whether it is appropriate to recognise a notional duty for imports when the DEPB credit is utilised.

(d)  What should be the accounting treatment for duty free imports with reference to the DEPB credit?  What methodology should be adopted for valuation of closing stock of materials imported under the DEPB scheme?

(e)  Whether the treatment would be different in case the DEPB credit is held for transfer/endorsement to a third party (i.e., held for sale).

C.  Points Considered by the Committee

5.  The Committee notes that the objective of the DEPB scheme as laid down in the EXIM Policy 1997-2002, is “to neutralise the incidence of customs duty on import content of an export product”.  Under the scheme, this neutralisation is provided by way of a grant of duty credit against the export of a product, which can be realised by way of reduced or nil customs duty on imports.  Thus, the Committee is of the view that for deciding when the credit under the DEPB scheme should be recognised as income would broadly be based on the principles similar to the recognition of revenue.  The Committee is further of the view that the performance related to DEPB credit should be considered to be complete when the relevant exports have been made against which the credit has been granted, provided the other criteria for recognition of revenue are fulfilled, viz., those laid down in Accounting Standard (AS) 9, ‘Revenue Recognition’, which, inter alia provides that revenue should be recognised when there is no significant uncertainty regarding the amount of the consideration that will be derived and when there is no uncertainty as to its ultimate collection.  Where such uncertainties exist, the recognition of revenue should be postponed.

6.  The Committee also notes from the facts of the case that the rate of eligible duty credit is specified as a percentage of the FOB value of the export made and is freely transferable upon fulfilment of certain conditions, such as, realisation of export proceeds, imports to be made at the same port from where exports had been made, etc.  The Committee notes that under the circumstances of the company explained above where the company applies for DEPB credit on post-export basis on realisation of export proceeds and the credit is utilised towards payment of customs duty on imports, there seems to be a reasonable certainty of ultimate collection.  Also, as per the DEPB scheme, there seems to be no uncertainty as to the amount of duty entitlement.  Thus, the Committee is of the view that the DEPB credit should be recognised in the statement of profit and loss of the year in which the export was made on the basis of evidence available with the company as to the reasonable certainty.  The company would also take into consideration ‘events occurring after the balance sheet date’ in terms of Accounting Standard (AS) 4, ‘Contingencies and Events Occurring After the Balance Sheet Date’.

7.  The Committee notes that Accounting Standard (AS) 2, ‘Valuation of Inventories’ provides that “the cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition” (paragraph 6).  AS 2 also provides that “trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase” (paragraph 7).

8.  From the above, the Committee is of the view that the cost of inventories constituting of the materials imported by utilisation of DEPB credit should be the actual cost incurred to make the purchase whether by way of cash or by way of adjustment against the DEPB credit.

9.  In case the DEPB credit is held for sale, the Committee is of the view that the treatment of DEPB credit would be similar to the treatment when it is intended to be utilised for imports.  However, significant uncertainty regarding the amount of consideration realisable and uncertainty regarding its ultimate collection would be taken into account.

10. The activity of export results into entitlement of DEPB credit and accordingly, this credit can not be related to duty payable at the time of subsequent imports.  At the time of subsequent imports the full duty payable on such imports would form part of cost of purchases which is paid partly or fully by way of adjustment of DEPB credit.

D.  Opinion

11. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 4:

(a)  Under the facts and circumstances of the query, the DEPB credit should be recognised in the books of account when no significant uncertainties as to the amount of consideration that would be derived and as to its ultimate collection exist.  In the case of DEPB credit on post-export basis when the company applies for the credit on realisation of export proceeds and the credit is to be utilised for imports by the company, there seems to be no such significant uncertainty and, therefore, the DEPB credit should be recognised in the year in which the export was made in accordance with paragraph 6 above.

(b) The recognition of DEPB credit as income in one accounting year and the utilisation thereof in a subsequent accounting year does not amount to non-compliance of the principle of matching costs and revenues.

(c)  Notional duty for imports when DEPB credit is utilised can not be recognised. The activity of export results into entitlement of DEPB credit and this credit can not be related to duty payable at the time of subsequent imports.  At the time of subsequent imports the full duty payable on such imports would form part of cost of purchases which is paid partly or fully by way of adjustment of DEPB credit.

(d)   The duty-free imports consequent to utilisation of DEPB credit should be recorded in the books of account at the actual cost incurred for them as referred to in paragraph 8 above.  The closing stock constituting of such imported materials should also be valued at the actual cost of purchase in terms of the provisions of AS 2.

(e)  In case the DEPB credit is held for sale, the treatment of DEPB credit would be similar to the treatment when it is intended to be utilised for imports.  However, significant uncertainties regarding the amount of consideration realisable or uncertainty regarding its ultimate collection would be taken into account.  The company would also take into consideration ‘events occurring after the balance sheet date’ in terms of AS 4.