Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 32

Subject:

Recognition of Duty Credit Entitlement Certificates issued

under the ‘Served from India Scheme’. 1

A. Facts of the Case

1. An enterprise was formed by merger of two enterprises on 1st April, 1995 by an Act of Parliament. The enterprise is not incorporated under the Companies Act. It is governed by the Airports Authority of India (AAI) Act, 1994. Its mission is to progress through excellence and customer satisfaction with world-class airport and air traffic services fostering economic development. Its main functions are to build, operate and maintain airports and airstrips; and provide air-traffic services to airlines.

2. The enterprise maintains 127 airports throughout India, viz., 15 international airports, 86 domestic airports and 26 civil enclaves. It earns foreign exchange by providing air-traffic services and other airport services to foreign airlines in India. It also provides enroute air traffic services to foreign airlines passing through/over India.

3. The querist has stated that the accounts of the enterprise are drawn up in the format approved by the Government under section 41 of the AAI Act, 1994 and the AAI (Annual Report and Annual Statement of Accounts) Rules, 2003. The enterprise is broadly following Accounting Standards prescribed by the Institute of Chartered Accountants of India. The Comptroller and Auditor General of India (C&AG) is the sole auditor of the enterprise.

4. The querist has further stated that the Government of India has introduced many schemes for promotion of exports, like export incentives under Duty Entitlement Pass Book (DEPB) scheme, EPCG scheme, etc. The enterprise is entitled to import goods specified in list 20 appended to Notification No. 21 / 2002-Customs dated 01.03.2002, required for development of airports at concessional customs duty of 10%.

5. According to the querist, the Director General of Foreign Trade (DGFT), Government of India, has announced a ‘Served from India Scheme’. Under the Scheme, all service providers (other than hotels and restaurants) shall be entitled to duty credit equivalent to 10% of the foreign exchange earned by them in the preceding financial year. During March 2005, the enterprise obtained duty credit certificates (duty credit entitlement) from the DGFT under the ‘Served from India Scheme’ amounting to Rs.70.84 crore. The certificates were issued on 30th March, 2005.

6. The salient features of the duty credit certificates as per the querist are as under:


(a) These certificates are valid for 2 years from the date of issue.


(b) Duty credit entitlement may be used for import of any capital goods including spares, office equipment and professional equipment, office furniture and consumables, provided it is part of the main line of business.


(c) The entitlement and the goods imported shall be non- transferable (emphasis supplied by the querist.)

7. The querist has stated that during the year 2005-06, the enterprise utilised duty credit certificates amounting to Rs.11.25 crore for use in the import of capital goods and Rs.7.21 crore for import of spares, totalling Rs.18.46 crore. As the enterprise had not paid any customs duty for capital items imported during the year 2005-06 for its operation, only the cost paid by the enterprise (i.e., without customs duty) was capitalised in the books of account. Similarly, as no customs duty was paid for import of spares, the cost actually paid by the enterprise was charged to the profit and loss account without customs duty.

8. The querist has further informed that the enterprise has appointed a consultant for liaisoning with the customs department, who is paid service charges based on duty credit certificates utilised on import of any consignment for its operations.

9. The querist has also stated that before getting duty credit certificates, the enterprise used to get concessional duty benefits on certain items and used to account for such items on cost basis and customs duty (concessional) actually paid.

10. In the view of the querist, as the enterprise has not paid any customs duty for capital items imported during 2005-06 for its operation, only the cost paid by the enterprise (without customs duty) should be taken as the cost for capitalisation of assets in its books of account on the basis of requirement 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; any trade discounts and rebates are deducted in arriving at the purchase price. Similarly, no customs duty was paid for import of spares, accordingly, the cost paid by the enterprise was charged to the profit and loss account without customs duty.

B. Query

11. During audit of annual accounts of the enterprise for the financial year 2005-06, the following issues came up for decision, on which the querist has sought the opinion of the Expert Advisory Committee:

 

(i) Whether the amount of Rs. 70.84 crore being the value of duty credit entitlement certificates obtained from DGFT under the ‘Served from India Scheme’ is required to be considered as income of the enterprise and booked as income in the books of account.


(ii) Whether the duty credit entitlement certificates utilised for payment of customs duty in respect of capital items procured should be added to the cost of such items.


(iii) Whether the value of duty credit entitlement certificates utilised for purchase of stores and spares should be included in the cost of such spares.


(iv) Whether the commission/service charges payable to consultant for utilising the duty credit entitlement certificates is to be added to the cost of the items imported by the enterprise for its use or to be charged off.


(v) Whether the balance value of duty credit certificates (Rs. 70.84 crore minus Rs. 18.46 crore = Rs. 52.38 crore) lying unutilised at the end of the year, i.e., 31st March, 2006, is to be treated as a current asset and accounted for as such.


C. Points considered by the Committee

12. The Committee notes that the basic issue raised in the query relates to the recognition of duty credit entitlement certificates issued under the ‘Served from India Scheme’, i.e., how this benefit should be recognised in the books of account, and whether the balance of duty credit entitlement certificates lying unutilised at the end of the year should be recognised as ‘current assets’, i.e., the timing of recognition of the duty credit entitlement and presentation thereof. In this regard, the Committee notes that even though the entitlement received under the Scheme does not strictly fall within the definition of the term ‘revenue’, as defined under Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, such duty credit entitlement is of the nature of revenue and accordingly, it should be recognised as ‘other income’ in the books of account of the enterprise provided the conditions for recognition of revenue as discussed in paragraph 14 below are satisfied.

13. As far as the question regarding whether the duty credit entitlement certificates, i.e., duty credit entitlement utilised for payment of customs duty in respect of capital items and stores and spares should be added/included in the cost of such items is concerned, the Committee notes from paragraph 7 above that at the time of purchase of these items, the enterprise is recording the capital items, and stores and spares at the cost incurred net of duty. In this regard, the Committee notes paragraph 9.1 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, and paragraphs 6 and 7 of Accounting Standard (AS) 2, ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, which state as follows:

 

AS 10

 

“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.”

       AS 2



“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.”

 From the above, the Committee is of the view that the cost of purchase of fixed assets, consumables, spares, etc. should be recorded at their full value inclusive of the customs duties payable thereon whether by way of payment in cash or whether by way of utilisation of duty credit entitlement, with a view to provide the fairest possible approximation to the costs incurred in bringing these items to their present location and working condition. For the errors in the preparation of financial statements of prior periods, necessary adjustments should be made. Any income or expense arising as a consequence of making such adjustments should be disclosed as ‘prior period item’ in the determination of net profit or loss for the current period as per the provisions of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India.

14. With regard to the issue raised by the querist in paragraph 11(v) above, relating to accounting treatment of the balance value of duty credit entitlement certificates lying unutilised at the end of the year, the Committee notes that it depends on when the revenue in respect of the duty credit entitlement certificates is recognised. As far as the timing of recognition of the revenue in respect thereof is concerned, the Committee is of the view that since there are certain uncertainties involved with respect to the utilisation of duty credit as these certificates are non-transferable and are valid only for 2 years from the date of issue, as stated by the querist in paragraph 6 above; and since this benefit is of the nature of revenue, as discussed in paragraph 12 above, the principles enunciated under paragraph 9.1 of AS 9 regarding timing of recognition would be applicable, which states as follows:

 


“9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.”



Keeping in view the above-mentioned revenue recognition principle of AS 9, the Committee is of the view that the credit under the Scheme should be recognised only at the time when and to the extent there is no significant uncertainty as to its measurability and ultimate realisation, i.e., utilisation of the credit under the Scheme. The assessment of the level of uncertainty is a matter of judgement based on the facts and circumstances of each case on considering factors, such as, utilisation of duty credit within the specified period as evidenced by the existence of a binding contract for purchase of allowable specified goods against which the duty credit can be utilised; the expected cost of purchase of the imported allowable specified goods vis-à -vis the cost thereof in the domestic market; etc. Events occurring between the balance sheet date and the date on which the financial statements are approved by the governing authority may also remove the uncertainty about the utilisation of the duty credit, e.g., imports are made after the balance sheet date but before the approval of the financial statements by the governing authority, against which the duty credit has been utilised. Thus, in the view of the Committee, the enterprise should recognise the duty credit entitlement in the profit and loss account as its ‘other income’ on the above basis, by debiting the ‘duty credit entitlement account’ and crediting the profit and loss account. At the time of purchase of fixed asset or spares, etc., such credit entitlement should be adjusted against the duty payable on the import of these items. The balance of duty credit entitlement standing in the books of account, remaining unutilised, if any, at the end of the year should be disclosed under the head ‘Loans and Advances’, on the ‘Assets’ side of the balance sheet since, it is of the nature of pre-paid expenses which would be adjusted against the customs duty expenses in future period.

15. As regards the commission/service charges payable to consultant for utilising the duty credit entitlement certificates, the Committee is of the view that these charges do not add any value to the items so imported and are not directly attributable expenses, i.e., the costs without the incurrence of which the transaction would not have taken place. Accordingly, these should not be added to the cost of the items; instead, these should be charged to the profit and loss account when incurred.

D. Opinion

16. The Committee is of the following opinion on the issues raised in paragraph 11 above:


(i) The revenue in respect of the duty credit entitlement certificates should be recognised as income in the books of account when and to the extent there is no significant uncertainty as to their ultimate realisation, i.e., utilisation of the credit under the Scheme as discussed in paragraph 14 above.


(ii) The capital items procured should be recorded at the value inclusive of the customs duty payable thereon whether by way of cash or by way of adjustment of the duty credit entitlement. Please refer to paragraph 13 above.


(iii) The stores and spares should be recorded at the value inclusive of the customs duty payable thereon whether by way of cash or by way of adjustment of the duty credit entitlement. Please refer to paragraph 13 above.


(iv) The commission/service charges payable to consultant for utilising the duty credit entitlement certificates should not be added to the cost of the items imported by the enterprise. These expenses should be charged to the profit and loss account as discussed in paragraph 15 above.


(v) The balance value of duty credit entitlement certificates lying unutilised at the year-end should be disclosed under the head ‘Loans and Advances’ on the ‘Assets’ side of the balance sheet provided they have been recognised as revenue on the basis of considerations discussed in paragraph 14 above.

1Opinion finalised by the Committee on 17.1.2007