Query No. 49

Subject:           Accounting treatment of import duty and voyage expenses on import of dredger.1

A. Facts of the Case

1. A  public  sector  undertaking  under  the  Ministry  of  Transport, incorporated under the Companies Act, 1956, has the main objective of providing integrated dredging services to all major and minor ports, Indian Navy, fishing harbors and other maritime organisations.

2. During  the  year  2000-01,  the  company  acquired  one  ocean  going self-propelled Trailer Suction Hopper Dredger (hereinafter referred to as ‘the  dredger’)  from  Holland. As  per  the  contractual  terms,  the  dredger was delivered at builder’s yard at The Netherlands after completion of necessary  inspection  formalities  and  successful  sea  trials.  As  per  the terms of the contract with the builder, the price of the dredger is ex-yard, the builder, and legally and contractually, the property in the dredger was passed  on  to  the  company  on  taking  delivery  at  The  Netherlands.  The company’s personnel manned the dredger on its maiden voyage to India. When the dredger was delivered at the builder’s yard, it was complete in all respects and ready for its intended use, i.e., dredging.

3. After completion of the maiden voyage, the dredger reached Chennai port  in  March  2001.  The  company paid  an  amount  of  Rs.  896.81  lakh towards customs duty at Chennai port. During the maiden voyage from The  Netherlands  to  India,  the  company  also  incurred  voyage  expenses amounting to Rs. 180 lakh.

4. The cost of the dredger was capitalised in the books of the company in the financial year 2000-01. While capitalising the same, the company has not included the voyage expenses as well as the customs duty paid in the  cost  of  the  asset  and  charged  off  the  same  to  the  profit  and  loss account. Similarly, the voyage expenditure on a dredger acquired during the  previous  year  from  the  same  builder  at  The  Netherlands  was  also charged off to the profit and loss account during the current year.

5. The  C&AG  objected  to  this  treatment  stating  that  the  voyage expenses and the customs duty should be included in the capital cost of the  dredger.  The  comments  issued  by  the  C&AG  in  this  respect  are reproduced below:

“Balance Sheet

Application of Funds

Fixed Assets (Gross Block)(Schedule-IV)

Dredgers – Rs. 56,576.26 lakh

The above is understated by Rs. 1205.47 lakh due to charging off of customs duty (Rs. 896.81 lakh) and transportation charges (Rs. 179.47 lakh) in respect of the dredger XVI and withdrawal of transportation charges of Rs. 129.19 lakh in respect of dredger XV capitalised in the previous year. This has resulted in understatement of depreciation by Rs. 17.80 lakh and profit for the year by Rs. 1187.67 lakh.”

6. The querist has drawn the attention of the Committee to paragraph 9.1  of  Accounting  Standard  (AS)  10,  ‘Accounting  for  Fixed  Assets’, issued by the  Institute of Chartered Accountants of  India, which states that  the  “cost  of  an  item  of  fixed  asset  comprises  its  purchase  price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use”. In the case of the company, the dredger was ready in all respects  and  ready  for  its  intended  use  at  the  time  the  company  took delivery  of  the  dredger  ex-builder’s  yard  at  The  Netherlands  after successful  completion  of  all  tests  and  trials  stipulated  in  the  relevant agreement  with  the  builder.  As  per  the  querist,  the  cut  off  point  for capitalisation  of  the  cost  of  dredger  is  that  point  of  time  and  voyage expenses and payment of customs duty arose subsequently. According to the  querist,  AS  10  clearly  specifies  capitalisation  of  the  expenditure incurred upto the point when the asset is ready to be put to its intended use. The company had earlier negotiated with a German customer for a dredging contract employing this dredger at Germany.

7. The querist has further argued that as per paragraph 9.4 of AS 10, the expenditure incurred on start-up and commissioning of the project, including  the  expenditure  incurred  on  test  runs  and  experimental production, is usually capitalised as an indirect element of the construction cost. Further, as per paragraph 9.5 of AS 10, if the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred  during  this  period  are  charged  to  the  statement  of  profit  and loss. As per the querist, it is clear from the above that the intention of the Standard  is  that  the  expenditure  incurred  upto  the  period  the  asset  is ready to be put to its intended use only, shall be treated as part of capital cost. According to the querist, in the case of the company, the dredger was  ready  to  be  put  to  its  intended  use  when  the  dredger  was  taken delivery  ex-builder’s  yard  at  The  Netherlands,  and  therefore,  any expenditure incurred thereafter shall not form part of the capital cost.

B. Query

8. The querist has sought the opinion of the Expert Advisory Committee as to whether the company should capitalise the import duty and voyage expenses as a part of the cost of the dredger.

C. Points considered by the Committee

9. The Committee notes paragraph 9.1 of AS 10, the relevant portion of which is reproduced below:

“9.1  The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any  directly  attributable  cost  of  bringing  the  asset  to  its  working condition for its intended use; any trade discounts and rebates are deducted  in  arriving  at  the  purchase  price.  Examples  of  directly attributable costs are:

         (i)         site preparation;

         (ii)         initial delivery and handling costs;

         (iii)         installation cost, such as special foundations for plant and

         (iv)         professional  fees,  for  example  fees  of  architects  and engineers.

The  cost  of  a  fixed  asset  may  undergo  changes  subsequent  to  its acquisition  or  construction  on  account  of  exchange  fluctuations, price adjustments, changes in duties or similar factors.”

10. The Committee notes from the above that import duties and initial delivery and handling costs should be capitalised as a part of the cost of an  item  of  a  fixed  asset.  The  Committee  also  notes  that  despite  the company’s negotiations with a German customer for employing the dredger at  Germany,  the  dredger  was  actually  brought  and  put  to  use  in  India. Accordingly,  the  Committee  is  of  the  view  that  the  import  duties  and voyage  expenses  incurred  to  bring  the  dredger  to  India  from  The Netherlands should be capitalised as a part of the cost of the dredger.

D. Opinion

11. On the basis of the above, the Committee is of the opinion that the customs duty paid and voyage expenses incurred in respect of the maiden voyage of the dredger from The Netherlands to India should be included in the cost of the dredger.

1Opinion finalised by the Committee on 30.1.2002.

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