Query No. 6
Subject: Whether excise duty liability forms part of valuation of inventories of finished products.1 A. Facts of the
Case
1. A public
sector company under the administrative control of Ministry 2. The company’s
commercial terms for
supply of equipments
and spares being generally
on ex-works basis,
the excise duty
is collected over and above
ex-works rates from the customers and remitted to excise authorities. The
company has been consistently following the net method 3. During the
audit of accounts for the fianancial year 1999-2000, the statutory auditors
qualified their report as below: “....with regard to non-inclusion of excise duty on finished
stock on hand which is contrary to the provisions of AS 2 (revised) read with
the Guidance Note issued by the Institute of Chartered Accountants of India
which has the
impact of understatement of
the finished goods by Rs. 1736.35
lakh with the corresponding understatement of
liability by the
like amount. However,
there is no
impact on profit.” 4. The company
has given the following arguments to the auditors for exclusion of excise duty
on finished stock:
5. According to the querist, the following case laws substantiate the company’s views:
According to the method advocated by the Revenue department, the entire Modvat credit on the goods purchased should be credited to the profit and loss account and the Modvat credit attributable to the closing stock should also be added to the value of closing stock.
The court concluded that this results in double taxation as crediting Modvat credit on the closing stock not consumed and including the same again while valuing closing stock would mean taxing the same Modvat credit twice. In the said judgement reference has been drawn to the Supreme Court judgement in the case of CIT vs. British Paints India Ltd. (188 ITR 44) wherein it was held that whatever component forms part of purchase should also form part of the closing stock and if duty paid is excluded from purchases, it cannot be included in the closing stock. It was urged that under the Modvat scheme, the assessee was entitled to claim set-off in respect of the excise duty paid on inputs which would effectively reduce the amount payable by way of excise duty on finished products well in advance and, therefore, such excise duty paid on inputs cannot form part of the cost of inputs.
Yet another case that has been cited is the judgement of the Supreme Court in the case of Collector of Central Excise vs. Dai Ichi Karkaria Ltd., AIR 1999 SC 3234, in which, inter- alia, it has been laid down that excise duty paid on raw material, if Modvated, shall not be included in the cost of production of the excisable product. In other words, if the assessee pays purchase price of Rs. 100 for the input and gets back Rs. 10 by way of Modvat credit the input cost would be Rs. 90 which would be the cost of raw material. The Supreme Court has accepted the Guidance Note on the subject issued by the Institute of Chartered Accountants of India in the said judgement. Under the circumstances, the assessee was entitled to follow either of the two methods.
Reference has also been drawn to the case of Chainrup Sampatram vs. CIT (24 ITR 481), in which the Supreme Court has laid down that profits do not arise out of valuation of closing stock. That valuation of closing stock is a necessary part of the process of determining the trading results and it cannot be regarded as a source of such profits. If the inventory is valued at gross value then the purchases shall also have to be recorded at gross value. Only then, the balancing of the entries could effectively take place.
B. Query
6. The querist has sought the opinion of the Expert Advisory Committee on the issue as to whether the present practice of the company to exclude unpaid excise duty from the cost of finished goods at the year-end is correct or not in the light of the Mumbai High Court’s judgement referred to above which, according to the querist, is in line with the commercial practice. C. Points considered by the Committee
7. The opinion of the Committee given hereafter is from the accounting point of view and not from the taxation point of view. The Committee restricts itself to the particular issue raised in the query, i.e., accounting treatment of excise duty in the valuation of finished stock and has not touched upon any other issue contained in the facts of the case.
8. The Committee notes that the cases quoted by the querist, including the case of M/s. Indo Nippon Chemical vs. CIT, refer to the exclusion of the excise duty paid to the supplier on purchase of raw materials against which MODVAT credit is available and, therefore, are relevant for the purpose of valuation of inventories of raw materials. The Guidance Note issued by the Institute of Chartered Accountants of India, viz., the ‘Guidance Note on Accounting Treatment for MODVAT Credit’ referred to by the courts, is also in relation to the excise duty paid to the supplier on raw materials. The Committee, therefore, notes that the ‘exclusive method’ is relevant only in relation to the valuation of inventories of raw materials insofar as it relates to the excise duty paid to supplier against which MODVAT credit is available and not for the purpose of excise duty liability on finished goods. The Committee further notes that the statutory auditors of the company have also qualified their report with regard to excise duty liability on finished goods.
9. The Committee notes that for accounting for excise duty on finished products, Accounting Standard (AS) 2 (revised), ‘Valuation of Inventories’ and ‘Guidance Note on Accounting Treatment for Excise Duty’ (revised), issued by the Institute of Chartered Accountants of India, are relevant. The Committee notes that paragraph 6 of AS 2 (revised) provides the following:
“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.”
10. The Committee also notes that paragraph 21 of the ‘Guidance Note on Accounting Treatment for Excise Duty’ recommends the following accounting treatment of excise duty:
“21. As explained in this Guidance Note, the liability for excise duty arises at the point of time at which the manufacture is completed. The excise duty paid or provided on finished goods should, therefore, be included in inventory valuation. Similarly, excise duty paid on purchases (other than those subsequently recoverable by the enterprise from the taxing authorities) as well as intermediary products used for manufacture should also be included in the valuation of work-in-progress or finished goods.”
11. The Committee further notes that the liability for the payment of excise duty to the authorities is that of the manufacturer and can not be passed on to the customers. It is only the burden of the liability that can be passed on to the customers by way of an increase in the selling price, just like any other element of cost of manufacture, e.g., increase in freight cost on purchase of raw materials, can be passed on to the customers.
D. Opinion
12. On the basis of the above, the Committee is of the opinion that unpaid excise duty should be considered as an element of cost for valuation of inventories of finished goods. The Mumbai High Court judgement in the case of M/s. Indo-Nippon Chemical vs. CIT referred to in paragraph 5 above is not relevant in the present case.
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