Query No. 14

Subject:          

  Provision for customs duty.¹

A. Facts of the Case

1. A  company,  under  the  Ministry  of  Defence,  is  involved  in  the following activities:

(a) Construction of naval ships for Indian Navy;

 

(b) Repairing of ships and other ocean going vessels;

 

(c) Construction of offshore platforms and other structures.

2. For  the  purpose  of  above  activities,  the  company  categorises  its imports into three major groups:

(a) Imports  made for  the purpose  of construction  of naval  ships for Indian Navy;

 

(b) Imports for repairs and construction of ocean going vessels;

 

(c) Construction of offshore platforms and structures.

 3. According  to  the  querist,  the  imports  made  for  naval  ships  are specifically exempted from payment of customs duty as per the provisions of notification no.20/2000 dated 01-03-2000. Accordingly, the goods are cleared without payment of customs duty and thus are not covered under bond. Exemption from payment of customs duty is available for imports for repairs and construction of ocean going vessels as well as construction of offshore platforms and structures, and are currently covered under the provisions of Customs Exemption Notification no.16/2000 and 31/2000 dated  01-03-2000  and  24-03-2000  respectively.  These  exemptions  are available  on  fulfilling  of  certain  conditions.  The  conditions  inter  alia envisage the usage of materials in final products, which is required to be manufactured in bond  under provisions of the Customs  Act, 1962. For this  purpose,  the  company  has  got  in-bond  manufacturing  licence  and also has in-bond warehousing licence granted by customs authorities.

4. On  the  basis  of  the  above,  the  company  has  been  following  the practice of accounting for customs duty and related charges in the books as  and  when  paid.  The  customs  duty  and  the  related  charges  are  not provided  in  the  books  and  are  also  not  considered  for  valuation  of inventories. The practice followed by the company is disclosed by way of a note in the annual accounts. The statutory auditors have commented that  the  customs  duty  and  related  expenses  are  accounted  for  on  cash basis which is in contravention of the provisions of the Companies Act,1956.

5. According to the querist, the issue of requirement of a provision for customs duty liability on the goods lying in customs bonded warehouse has  been  earlier  examined  by  the  Expert  Advisory  Committee  in  the years 1976, 1990 and 1995. All the three opinions by and large opined that  the customs  duty amount  should be  provided  for  in respect  of  the material lying in bond. However, these opinions were based on the facts put up for the opinion. After going through the facts, the company’s view is  that  in  these  cases  the  liability  of  customs  duty  was  more  or  less ascertained. However, the quantum of liability and the time of crystalising the same was at variance. Therefore, the Expert Advisory Committee had rightly opined that the duty becomes chargeable at the time of import of goods itself and the liability is only discharged at a subsequent date.

6. According to the querist, the facts and circumstances of the company under consideration are different in following respects:

(i) The materials are imported for specific projects and are used in in-bond manufacturing. On completion of the manufacturing activity, the goods are exempted from customs duty on fulfilling the conditions laid down in exemption notification.

 

(ii) Under the  company’s business  activities, it  is envisaged  that no customs duty would be required to be paid on the material imported. Whenever the company considers that it will not be in a position to avail exemptions laid down in the notifications, the customs duty on the imports is paid ab initio and material is generally not kept in bond. In such events, the duty paid on the material is accounted for at the time of payment irrespective of usage of the material.

 

(iii) The material imported by the company and kept in the bonded warehouse is issued for in-bond manufacturing without payment of  duty  and  thus  the  company  is  in  a  position  to  utilise  the material  without  payment  of  duty  till  the  final  product  for which it is imported, is ready and the ‘nil’ duty is decided on the  basis  of  exemptions  applicable/available  for  the  final product on debonding/despatch of final product. Thus, the basic objective of the company in maintaining the bonded warehouse is to fulfil the condition of exemption notification. Accordingly, no  provision  of  customs  duty  is  required  to  be  made  in  the accounts for the imported raw materials and parts, which are kept in the bonded warehouses and are specifically meant for utilisation in in-bond manufacture of the products which are exempted from payment of customs duty.

B. Query

7. The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting practice followed by the company in respect of imported in-bond goods/items which are exempted from payment of customs duty is in accordance with the statutory requirements of section 209 of the Companies Act, 1956.

C. Points considered by the Committee

8. The Committee restricts itself to the specific question raised by the querist and has not gone into the question as to the time when the customs duty becomes payable.

9. The  Committee  notes  that  section  209(3)  of  the  Companies  Act,1956, requires as below:

“For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein, –

(a)   ....

 

(b)  if such books are not kept on accrual basis and according to the double entry system of accounting.”

 10.   The Committee also notes that paragraph 8.1 of the ‘Guidance Note on  Accrual  Basis  of  Accounting’,  issued  by  the  Institute  of  Chartered Accountants of India (ICAI), states as below:

“The Council of  the ICAI and its various  committees have issued various Guidance Notes, Statements and Accounting Standards. The accounting  treatments  contained  in  these  documents  are  primarily based on accrual accounting. Thus, adoption of accounting treatments recommended in these documents would ensure that a company has followed accrual basis of accounting....”

11. The Committee notes that the Institute of Chartered Accountants of India has issued a ‘Guidance Note on Accounting Treatment for Excise Duty’ which deals, inter alia, with the question of provision for excise duty liability in respect of goods lying in bonded warehouse. Paragraph 19 of the aforesaid Guidance Note states as below:

“19. The estimate of such liability can be made at the rates in force on the balance sheet date. For this purpose, other factors affecting liability should be considered e.g., exemptions being availed by the enterprise, pattern of sales – export, domestic, etc. Thus, if a small scale undertaking is availing the benefit of exemption allowed in a particular  financial  year  and  declares  that  it  wishes  to  avail  such exemption during next financial year also, excise duty liability should be  calculated  after  taking  into  consideration  the  availability  of exemption under the relevant notification. Similarly, if an enterprise is captively consuming all its production of a specific product and has been availing of exemption from payment of duty on that product, no provision for excise duty may be required in respect of non-duty paid stock of that product lying in factory or bonded warehouse….”

12. The  Committee  is  of  the  view  that  though  the  above  paragraph relates  to  provision  for  excise  duty,  the  underlying  principles  are  also relevant for provision for customs duty. Accordingly, the Committee is of the  view  that  if  any  undertaking  is  availing  the  benefit  of  exemption under  any  notification,  the  customs  duty  liability  should  be  calculated after  taking  into  consideration  the  availability  of  exemption  under  the relevant notification.

D. Opinion

13. On the basis of the above, the Committee is of the opinion that the practice of the company to account for customs duty and related charges on cash basis is not appropriate per se. The customs duty liability should be  provided  for  after  taking  into  consideration  the  availability  of exemption.  However,  in  case  no  liability  on  account  of  customs  duty arises due to the available exemptions, no provision would be required to be made for the customs duty liability.

¹Opinion finalised by the Committee on 14.4.2001.