Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 30

Subject:   

Valuation of inventory of raw-materials when set-off of excise duty

paid is available on finished goods under CENVAT Scheme.1

A.  Facts of the Case

 

1.  A company is engaged in the manufacture of drugs and pharmaceuticals.  It purchases raw materials from domestic market as well as the international market.  The materials purchased from the domestic market attract excise duty which is available for set-off against the excise duty payable on the finished products under the Central Value Added Tax (CENVAT) Scheme.

 

2.   The CENVAT (credit of duty paid on raw materials) is available only as a set-off against the excise duty payable on the finished goods at the time of clearance of finished/final products.  The duty so paid on the raw materials is not recoverable in cash or otherwise from the central excise authorities.

 

B. Query

 

3. The querist has sought the opinion of the Expert Advisory Committee on the issue as to whether the excise duty paid falls in the category of duties and taxes “other than subsequently recoverable by the enterprise from the taxing authorities” (paragraph 7 of Accounting Standard (AS) 2, ‘Valuation of Inventories’) and therefore, whether the cost of inventories of raw materials should be net of excise duty paid on raw materials.

 

C. Points Considered by the Committee

 

4. The Committee notes paragraphs 6 and 7 of the revised Accounting Standard (AS) 2, ‘Valuation of Inventories’, which state as below:

 

“6.  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.” “7.  The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition.  Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase.”

 

5. The Committee notes that the revised ‘Guidance Note on Accounting Treatment for MODVAT/CENVAT’, after reproducing the above paragraphs of AS 2, concludes in paragraph 17 that only those duties have to be included as costs of purchase of inventories which are not subsequently recoverable by the enterprise from the taxing authorities.  Since the excise duty on raw materials under consideration is available for set-off against the excise duty on final product, it is of the nature of duty recoverable from taxing authorities.  The Guidance Note also recognises that “the inventory of inputs should be valued at net of input duty.  In other words, the specified duty paid on input will not form part of the cost of inventories” (paragraph 34).

 

D. Opinion

 

6. On the basis of the above, the Committee is of the opinion that the excise duty paid on raw materials covered by the CENVAT Scheme is in the nature of duty subsequently recoverable from the taxing authorities.  Therefore, the cost of purchase of raw materials should not include the excise duty paid.  In other words, the cost of inventories of the raw materials should be net of excise duty paid on the same

 

1Opinio finalised by the Committee on 25.9.2000.