Expert Advisory Committee

Query No. 16

Subject:

Revenue recognition.1

A. Facts of the Case

1. A wholly owned undertaking of the Central Government, under the administrative control of Ministry of Textiles, is registered under the Companies Act, 1956. The main activity of the company is to procure cotton and supply the same to various textile mills in private sector and public sector.

2. In view of the financial difficulties experienced by various textile mills, the company was required to adopt various marketing strategies to motivate the mills to buy quality cotton from the company at competitive prices. One of the schemes introduced by the company is called ‘Godown Storage Facility Scheme’ (GSF scheme) for sale of fully pressed cotton bales to mills. This scheme is in operation since 1985-86. The benefit of this scheme is availed by a number of mills.

3. The salient features of GSF scheme are as under:

(i) The company enters into a sale contract with the mill and draws up a schedule of delivery, normally not exceeding 90 days from the date of the contract. This is made a part of the sale contract.

(ii) The sale contract is issued generally after deposit of 5% to 10% of the value of cotton contracted by the company. This advance is adjusted against the amount due at the time of last delivery.

(iii) The representatives of the mill inspect and approve the cotton bales purchased by the mill. The weighment of the cotton bales is carried out in the presence of the representatives of the mill and the bales are handed over to the transporter nominated by the mill.

(iv) The cotton bales are despatched to the godown selected by the company near the mill premises for storage under GSF scheme. The transporter is given a copy of the proforma invoice together with delivery order (on which their acknowledgement is obtained), despatch instruction, etc., when transportation and transit insurance charges are paid by the mill.

(v) The company prepares final invoice in the name of the mill when the cotton bales are inspected, weighed and despatched through a transporter nominated by the mill to the godown under GSF scheme. At this stage, sales account is credited and the account of the mill is debited on the basis of the invoice.

(vi) The rate of carrying charges for storing cotton beyond free delivery period is calculated as per the terms of contract till the date of realisation of payment.

(vii) The cotton bales are despatched by the branch/depot of the company as ‘consignor’ in the name of ‘company a/c x.y.z mill’as ‘consignee’.

(viii) Where the company has no arrangement for storage, it may agree to store the cotton bales in the godown belonging to the mill with lock and key under the custody of the company. During the period of storage in the godown of the mill, the property is deemed to be the property of the company and the mill or the creditors of the mill have no lien on the cotton bales stored in the godown. The mill cannot obstruct access and clearance of goods by the company. The querist has stated that although one of the conditions in the scheme states that the property in the goods is deemed to be of the company, this condition refers to the possession of the goods and not the legal title to the goods. As per the querist, this condition has been put in the scheme with a view to avoid any leg al complications at a later stage, if any creditor of the mill wants to attach the property of the mill. In other words, this condition ensures that the company is able to exercise its lien over the goods as ‘unpaid seller’ until the entire price for the goods is paid by the mill.

(ix) The delivery of the cotton bales is made to the mills as and when full payment, including carrying charges and other charges, is made by the mill. In case of payment by cheques, the mill is allowed to take delivery of the goods only on confirmation of realisation of payment in the company’s account. The mill i s allowed to take delivery of the cotton bales in lots of not less than 50 bales each on making payment for the same. The mill is also required to furnish ‘C Form’ in respect of the bales sold to them.

(x) The storage insurance for the cotton bales stored under GSF scheme is paid by the company as the cost of insurance is recovered by way of carrying charges. This condition has been put to ensure that the goods are covered by adequate insurance.

(xi) All expenses upto weighment stage are on the company’s account. Any further expenditure incurred after the weighment stage have to be met by the mill purchasing the cotton bales.

4. The company is treating the sale of the cotton bales stored under GSF scheme as a concluded sale, the moment the goods are delivered to the transporter nominated by the mill and despatched to the godown near the mill premises and the invoice is prepared. According to the view taken by the company, the legal title to the cotton bales is transferred to the mill at that stage. The querist has supported the view by advancing the following arguments:

(i) After the cotton bales are inspected and weighment is done in the presence of the representatives of the mill, the goods are transported through a transporter nominated by the mill. The transportation charges as well as transit insurance charges are paid by the mill.

(ii) The cotton bales are kept in the godown near the mill premises under lock and key of the company as the mill has not made full payment for the cotton bales and the company, being the unpaid seller, is holding possession of the cotton bales as it has a lien on the cotton bales under the Sale of Goods Act, 1930.

(iii) The storage insurance for the cotton bales stored in the godown under GSF scheme is taken in the name of the company a/c. x.y.z mill. Whenever, there is any damage due to fire or otherwise, the insurance claim is made with the insurance company by the company. Any shortfall in the insurance claim as compared with the price of the cotton bales damaged or lost in fire is reimbursed by the mill to the company. In case the company is able to receive more than the value of the cotton, the difference is paid to the mill.

(iv) If the mill does not take delivery of the cotton bales from the godown under GSF scheme within the stipulated time or the extended time, the company has a right to sell the cotton bales to any other party on behalf of the mill. If the company is not able to realise the contracted price, the financial loss on account of resale of the cotton bales to a third party is recovered from the mill. The querist has separately informed that the company had realised amount in excess of value of bales on some occasions in past due to upward market fluctuations at the time of resale of bales or insurance claims for bales despatched under the GSF scheme and damaged in transit. In all such cases, such excess realisations have been paid to the buyer mills, notwithstanding the provisions in the sale contract.

5. The querist has stated that the company is treating the above transaction as sale of cotton bales to the mill. In the earlier years, the auditors of the company had accepted this position, but in the accounting year 1996-97, while one of the statutory auditors accepted the position with regard to accounting of such sales under GSF scheme, the other statutory auditor qualified his report by stating that the effective control of the cotton bales was not transferred to the buyers under GSF scheme and to this extent paragraph 11(i) of Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, was not satisfied. However, in the comments of the Comptroller & Auditor General of India u/s 619(4) of the Companies Act, 1956, on the accounts of the company for the year 1996-97, the procedure followed by the company for accounting for sales under GSF scheme has been accepted. In the subsequent years, i.e., 1997-98 to 1999-2000, both the statutory auditors accepted the practice followed by the company in recording sales under GSF scheme.

6. The querist has stated that the statutory auditors appointed for auditing the accounts of the company for the year ending 31.03.2001 have raised some doubts about the above procedure of booking sales under GSF scheme. They have qualified their report by stating that the company is not justified in accounting for sales under GSF scheme as sales. Paragraphs 2(d) and 2(f)(i) of the audit report are reproduced as under:

“(d) In our opinion, the profit and loss account and balance sheet comply with the mandatory accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956, except in case of sales against Godown Storage Facility (GSF) referred to in significant accounting policy 5(a) which is not in accordance with Accounting Standard 9 issued by the Institute of Chartered Accountants of India (ICAI).”

“(f)(i) Sales includes Rs. 5650.94 lakh being sales against Godown Storage Facility which is not in accordance with Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the ICAI, consequently sales are overstated by Rs. 5650.94 lakh, sundry debtors, net of advances (secured) are overstated by Rs. 5315.61 lakh. The consequential effect of understatement of stocks and understatement of losses is indeterminate due to non-quantification of transit insurance, spot expenses and sales tax booked on such sales.”

The querist has further mentioned that one of the statutory auditors who has subscribed to the above audit qualification on accounts for the year 2000-

2001 was the statutory auditor in the year 1999-2000 when he had accepted the view of the company in respect of accounting for sales under GSF scheme and there was no audit qualification on this issue in that year.

7. As per the querist, the Comptroller & Auditor General of India in his comments u/s 619(4) of the Companies Act, 1956, has not made any adverse comments on the accounts for the year 2000-2001.

8. The querist has stated that in the addendum to Directors’ Report for the year 2000-2001, the reply of the directors on the above qualification of the statutory auditors is as under:

“2.3 In paragraph 5(a) of the significant accounting policies, thecompany has stated as under:-

“5(a) Sales of lint, full pressed bales and cotton seeds as reduced by brokerage paid/payable to buyers’ agent, are recognised at the time of issuance of delivery orders by the company provided weighment has taken place on or before the close of the accounting year. Sales under godown storage facility are booked though the physical delivery of sales has not been completed.Sundry debtors are shown as secured to the extent of bales sold but lying unlifted under godown storage facility as at close of accounting year.”

2.4 Accordingly, the company is treating bales sold under the GSF scheme as sale, the moment the goods are delivered at spot to the transporter of the mills and despatched to the godown near the mill premises and the invoice is prepared. The company is advised that the legal title to the cotton bales is transferred to the mill, the moment the goods are delivered to the transporter and despatched to the godown. The company is also advised that significant risks and rewards of the ownership are transferred to the mill as the mill has agreed to bear the loss, if there is any damage to the goods after its despatch from spot by fire or otherwise. The company has retained the possession of the cotton bales only in its capacity as ‘unpaid seller’ as it has a lien on the cotton bales under the Sale of Goods Act, 1930.

2.5 The company has obtained a fresh opinion on the legal and accounting matters of sales under GSF scheme from an eminent chartered accountant who has confirmed that the system of booking sales under GSF scheme being followed by the company for several years in the past is in accordance with the requirements of Accounting Standard (AS) 9. It is significant to note that this method of accounting is being followed since 1985-86 and the same has been accepted by all the previous statutory auditors except one of the joint auditors who had given an adverse report on the accounts for the year 1996-97. It may also be noted that even one of the joint auditors who was auditor in the accounting year 1999-2000, has also accepted the above accounting policy followed by the company as he has not made any adverse remarks on this aspect in auditors’ report on the accounts for the year 1999-2000. It may also be stated that the Comptroller and Auditor General of India has also accepted this method of accounting for all the years as no adverse comment has been made in their report u/s 619(4) of the Companies Act, 1956, in any of the years. The accounting policy is also endorsed by the Income-tax authorities and Sales-tax authorities in all the states. The board of directors is, therefore, of the view that the method of accounting being followed by the company for recognising sales under GSF scheme for last several years and widely accepted by concerned authorities is in accordance with the requirements of Accounting Standard (AS) 9 on ‘Revenue Recognition’ and no change is required therein.”

9. The querist has stated that the Institute of Chartered Accountants of India has issued Accounting Standard (AS) 9, ‘Revenue Recognition’. This Standard deals with recognition of revenue in the statement of profit and loss of the enterprise arising in the course of the ordinary activities of the enterprise from the sale of goods, rendering of services and the use by others of the resources of the enterprise. The querist has reproduced paragraph 6.1 of AS 9 which states as below:

“6.1 A key criterion for determining when to recognise revenue from a transaction involving the sale of goods is that the seller has transferred the property in the goods to the buyer for a consideration. The transfer of property in goods, in most cases, results in or coincides with the transfer of significant risks and rewards of ownership to the buyer. However, there may be situations where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership. Revenue in such situations is recognised at the time of transfer of significant risks and rewards of ownership to the buyer. Such cases may arise where delivery has been delayed through the fault of either the buyer or the seller and the goods are at the risk of the party at fault as regards any loss which might not have occurred but for such fault. Further, sometimes the parties may agree that the risk will pass at a time different from the time when ownership passes.”

Based on the above, the querist has expressed his view that it is evident that even if the property in goods has not passed to the buyer but if significant risks and rewards of ownership are transferred to the buyer, revenue from sale of goods can be recognised by the enterprise.

10. The querist has also reproduced paragraphs 10 and 11 of AS 9 as below:

“ 10 . Revenue from sales or service transactions should b e recognised when the requirements as to performance set out in paragraphs 11 and 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.

11. In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled:

(i) the seller of goods has transferred to the buyer th e property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and

(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.”

11. The querist has stated that the Appendix to AS 9 gives certain illustrations on application of the Standard. Paragraph A-1 of this Appendix

is reproduced below:

“1. Delivery is delayed at buyer’s request and buyer takes title and accepts billing Revenue should be recognised notwithstanding that physical delivery has not been completed so long as there is every expectation that delivery will be made. However, the item must be on hand, identified and ready for delivery to the buyer at the time the sale is recognised rather than there being simply an intention to acquire or manufacture the goods in time for delivery.”

12. As per the querist, the statutory auditors appear to have relied on paragraphs 2(e) and 3 of the Appendix to AS 9. The querist has stated that paragraph 2(e) refers to sales made against cash on delivery. He has stated that in the case of such a sale, revenue should not be recognised until cash is received by the seller. The querist has argued that a sale under GSF scheme is not a sale against cash on delivery. Paragraph 3 of the Appendix refers to sales where the purchases are made on instalment payments to the seller and the seller delivers the goods only when the final payment is received. The querist has stated that sale under GSF scheme is not a sale when the buyer has to make the payment before concluding the sale. This is a sale which is first concluded by entering into a sale contract and where the payment is deferred at the request of the buyer. Goods are stored in the godown at the request of the buyer and the payment is made as and when delivery is taken. The time for taking the delivery is stipulated and it is also clarified that any loss or damage to the goods during the period when goods are stored in the godown, will be on the buyer’s account. As per the querist, paragraph 3 of the Appendix will not apply to the GSF scheme.

13.The querist has stated that in the case of the company, the example given in paragraph A-1 will apply because delivery is delayed at the request of the buyer and in the meantime the buyer has accepted the title and also accepted the invoice raised by the company. The goods have been identified and are ready for delivery and there is no uncertainty about the recovery of the sale price.

14. In the opinion of the querist, the statutory auditors have relied on the conditions in the contract that during the period for such storage of the cotton bales in the godown under GSF scheme, the property will be deemed to be the property of the company. The querist has stated that though legal title has already passed to the mill, this condition has been put only to protect the interest of the company so that the creditors of the mill do not bring any attachment. The querist has argued that even if it is assumed that the property in the goods remains with the company, as explained in paragraph 6.1 of AS 9, once significant risks and rewards of ownership are transferred to the buyer, the revenue can be recognised. One has to consider the commercial nature and substance of the transaction when the question of accounting is being considered. In the case of the company, the significant risks and rewards of ownership are transferred to the mill inasmuch as the mill has agreed to bear the loss if there is damage to the goods by fire or otherwise or if the company suffers loss when it is required to sell the goods to the third party, when there is a default by the mill in taking delivery of cotton bales. Again, if the company is able to realise excess price on resale of the cotton bales when the mill does not take delivery, the excess over the contracted price is passed on to the mill. The querist has stated that taking into consideration all the terms and conditions under GSF scheme and the substance of the transaction, it is evident that the company is justified in treating the transaction as sale and in recognising revenue on such sale in its books of account.

15. The querist has supported the above view by the commentary on ‘Accounting Standard on Revenue Recognition’ by Dr. Kamal Gupta, Former Technical Director, the Institute of Chartered Accountants of India, in his book ‘Contemporary Auditing’ (5th Edition). On pages 273 and 274, he observes as under:

“Accounting Standard on Revenue Recognition

AS-9, Revenue Recognition, deals with the issues involved in recognition of revenue arising in the course of ordinary activities of an enterprise from sale of goods, rendering of services, and use by others of resources of the enterprise yielding interest, royalties and dividends.

Sale of Goods: The Standard states that revenue from sale of goods should be recognised when all the following conditions have been fulfilled.

(a) The seller of the goods has transferred to the buyer the property in the goods for a price, or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods to a degree usually associated with ownership.

(b) No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.

(c ) It is not unreasonable to expect ultimate collection of the consideration.

It may be noted that the criteria laid down in the Standard for recognition of revenue from sales transactions are primarily based on the definition of the term ‘sale’ as given in the Sale of Goods Act. However, t he Standard also treats certain other transactions as ‘sales’ even though no sale has taken place in the legal sense of the term, i.e., before the property in the goods is transferred from the seller to the buyer under the provisions of the law governing such transactions. Such a treatment is based on the consideration of substance over form, i.e., if in substance, a sale has taken place, it should be recognised in the accounts, irrespective of whether or not a sale has taken place in the legal sense.”

16. The querist has referred to the following opinions of the Expert Advisory Committee of the Institute of Chartered Accountants of India, on similar cases:

(i) In the Compendium of Opinions, Volume I, pages 154-157, the Expert Advisory Committee has given opinion in the case of a pharmaceutical company which had appointed carting agents and goods were handed over to them for onward despatch to parties at different destinations through transport firms. The question for consideration was whether goods held by carting agents as on the balance sheet date, can be considered as sales for accounting purposes. The relevant portion of the opinion is as under:

“On general considerations, a transaction may be recognised in accounts as sale when –

(a) No significant uncertainties exist regarding:

(i)         the consideration that will be derived from the sale of the goods;

(ii)        at the time of sale there is a reasonable expectation of ultimate collection; and

(iii)   the extent to which goods may be returned; and

(b) the seller of the goods has transferred to the buyer the significant risks and rewards of ownership.

On the facts stated by the querists, it would appear that:

(1) the carting agents and the transporters, both act as the agents of the querists, and not of the purchasers of the goods in question, whereas the collecting banks act in turn as agents for both the parties to the sale;

(2) risk does not pass on to the buyer, under the terms of the contract up to the point of time at which the goods with the carting agents are delivered to the transporter.

Accordingly, in the opinion of the Committee, goods held by carting agents, for which invoices are already raised and accounted for as sales, should not be recognised as sales at the year end, i.e., 31st March.

As regards goods despatched prior to 31st March in respect of which the documents made “to self” and endorsed in favour of the collecting banker which were not retired by the consignees on 31st March, the Committee’s opinion is as under:

(1) In drawing up the accounts of undertakings trading on terms whereby goods are supplied subject to reservation of title, it is necessary to decide at what stage they should be treated as sold by the supplier. In reaching this decision, it is considered that the commercial substance of the transaction of this nature has to be decided from considerations of all the surrounding circumstances.

(2) The circumstances surrounding the transaction may indicate that reservation of title is regarded by the parties as having no practical relevance except in the event of insolvency of the customer. The accounts of the seller would be distorted by the omission of such goods from sales and debtors, only on the ground that the legal title to the goods was acquired by the purchaser a short time after the “cut-off point for consideration”, namely the balance sheet date . A c c o r d i n g l y, in such circumstances, the goods may be treated as sales in the accounts of the seller.

(3) Precedents for the accounting treatment of goods supplied as sales by reference to the substance rather than for the strict legal form of the transactions already exist in, for example, hire purchase sales and in certain export sales which are often included in sales on despatch from the seller’s factory, even though legal title may not have passed.

(4) Where the accounts are materially affected by the accounting treatment adopted in relation to sales subject to reservation of title, the treatment should be disclosed in the balance sheet.

(5) Further, in accounting, a key criterion for determining when to recognise revenue from a transaction involving the sale of goods is that the seller has transferred to the buyer significant risks and rewards of ownership of the asset sold. If the seller retains significant risks of ownership, it is normally inappropriate to recognise the transaction as sale.

(6) Where only a non-significant risk of ownership is retained by the seller, this will not normally preclude the recognition of revenue, for example, when title is retained by the seller solely to protect the collectability of the amount due.

(7) This also supports the view of the Committee that goods sent under documents made to self and endorsed in favour of the collecting bank can be treated as sales, as the risk involved is insignificant.

(8) However, if at the time of the annual closing, it is known to the querists that the purchaser has refused payment or failed to take delivery of the goods against payment within the time provided for under the contract, or in the absence of a specific time, for longer than the customary period of time for this to be done, the transaction should not continue to be treated as a sale in the accounts of the relevant year.”

(ii) In the Compendium of Opinions, Volume XVII, at pages 35- 42, the Expert Advisory Committee has considered the case of a Government of India undertaking which used to record sales of certain goods which were unconditionally appropriated to the sale contract irrespective of delivery and location. Whenever, the customer’s prior inspection at the works was stipulated, sale was accounted for only after acceptance by the customer. The company was following this method on consistent basis. The statutory auditor had taken the view that the method of recognising sales as adopted by the company was not in conformity with AS 9. The Expert Advisory Committee, while giving the opinion on this issue, has first reproduced paragraphs 10 and 11 of AS 9 and, thereafter, observed in paragraphs 2 to 4 of the opinion as under:

“2. The Committee notes that section 23(1) of the Sale of Goods Act, 1930, lays down as below:

“Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation is made.”

Thus, if it is legally sustainable that property in the goods has been transferred as per the aforesaid provisions of law, performance should be regarded as having been achieved for the purpose of compliance with AS 9.

3. The question whether all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership, is a question of the fact. For this purpose, factors such as who will bear the loss in case the goods are destroyed while they are in the custody of the seller, the risk of loss in transit, the rights of the unpaid seller, etc., will have to be considered in each case of sale.

4. The Committee is, accordingly, of the view that in case of short production cycle items whether the transfer of property has actually taken place or significant risks and rewards of ownership in the goods have been transferred to the buyer are to be determined keeping in view the legal provisions and the actual facts and circumstances of the case; respectively, as discussed heretobefore.”

17. The querist has stated that from the above, it is evident that one has to look for the substance of the transaction while accounting for sales. Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, sets out certain considerations in the matter of selection of accounting policies. Paragraph 17 of this Standard states that the major considerations governing the selection and application of accounting policies are (a) prudence, (b) substance over form and (c) materiality. As regards substance over form, the Standard states that the accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. The querist has stated that Dr. Kamal Gupta has observed in his book referred to in paragraph 15 above that the criteria laid down in AS 9 for recognition of revenue from sales transactions are primarily based on the definition of the term ‘sale’ as given in the Sale of Goods Act. He has further observed that the Standard also treats certain other transactions as sales even though no sale has taken place in the legal sense, i.e., before the property in the goods is transferred from the seller to the buyer under the provisions of the law governing such transactions. Such a treatment is based on consideration of substance over form, i.e., if in substance, a sale has taken place, it should be recognised in the accounts irrespective of whether or not a sale has taken place in the legal sense. The querist has stated that as mentioned in paragraph 16 above, the Expert Advisory Committee has also taken a similar view in the various opinions given by it.

B. Query

18. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether the accounting policy of the company to recognise sales under GSF scheme when the goods are delivered to the transporter for despatch to the customer’s godown and issue of relevant sale invoice is proper and in accordance with AS 9.

(b) Whether the clause regarding deemed possession of stocks in the contract for sale adversely affects the compliance of parameters prescribed under AS 9.

C. Points considered by the Committee

19. The Committee notes from paragraphs 10 and 11 of AS 9, reproduced in paragraph 10 above, that revenue from sales transactions should be recognised when all the following conditions have been fulfilled:

(i) the seller of the goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred and the seller retains no effective control of the goods transferred to a degree usually associated with ownership;

(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods; and

(iii) it is not unreasonab le to expect ultimate collection of the consideration.

20. The Committee is of the view that the question as to whether all significant risks and rewards of ownership have been transferred is determined on the basis of the facts and circumstances of each case. In the context of this query, the Committee notes the following from the facts of the case:

(i) The company does not have the right to resell the goods unless the buyer has defaulted in taking the delivery of the goods on payment as per the terms of contract. Even in the case of resale made in the event of default, any profit arising therefrom or any loss incurred on resale is paid to/recovered from the buyer. Similarly, if the goods are damaged due to fire or otherwise while stored in the godown under GSF scheme, any shortfall in the insurance claim is recovered from the buyer and any excess amount recovered is paid to the buyer.

(ii) The buyer of the goods can take delivery of the goods sold under the GSF scheme at any time by making payment for the goods. Thus, it is the buyer who has to decide when to obtain possession of the goods by making payment and the seller is under a n obligation to release possession of goods.

21. The Committee also notes that in the present case, the company has not given physical possession of the goods sold under the GSF scheme until the payment is made only to secure the collectability of the payment due. Keeping in view this aspect and the facts stated in the above paragraph, the Committee is of the view that the company has retained only an insignificant risk of ownership by withholding the delivery of the goods till the payment is made. Accordingly, in the facts and circumstances of the case, the Committee is of the view that all significant risks and rewards of ownership have been transferred and the seller retains no effective control of the goods transferred to a degree usually associated with ownership. The Committee is further of the view that the accounting policy to recognise the revenue at the time the final invoice is made in the name of the buyer and goods are despatched to the godown under the GSF scheme is in accordance with AS 9 subject to fulfilment of conditions specified in paragraph 19(ii) and (iii).

D. Opinion

22. On the basis of the above, the Committee is of the following opinion on issues raised in paragraph 18:

(a) In the facts and circumstances of the case, the accounting policy of the company to recognise sales under the GSF scheme when the goods are delivered to the transporter for despatch to the customer’s godown and issue of relevant sale invoice appears to be proper and in accordance with AS 9, subject to the conditions specified in paragraph 19(ii) and (iii).

(b) No, in the present case the clause regarding deemed possession of stocks in the contract for sale does not adversely affect the compliance of parameters prescribed under AS 9.

1Opinion finalised by the Committee on 20.1.2003.