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A. Facts of the Case
1. A State Government enterprise (hereafter referred to as the ‘company’) is engaged in mining and marketing of four major minerals, namely, Rock Phosphate, Gypsum, Lignite and Limestone. It is also in the business of generating and selling of wind energy. The querist has stated that the Government of Rajasthan vide its Notification no. F 12(15) FD/Tax/2008-09 dated 25.2.2008 has imposed Environment and Health Cess on mineral rights (hereinafter referred to as ‘M.R. Cess’) on the despatch of certain minerals from the mines at the rates prescribed and mentioned in the Notification.
2. As per the querist, since the cess is in the nature of indirect tax and the point of levy is the despatch of minerals from mine, the liability of the company to pay the cess arises as soon as the mineral is despatched from mines. Thus, the amount of cess paid/payable on the minerals despatched from the mines is treated as an expenditure of the company and is, therefore, debited to the profit and loss account under the head ‘M.R. Cess on Minerals’. (At the same time, the value of cess on material remaining unsold at the railway sidings is included in the cost of closing stock.)
3. The querist has stated that being an indirect tax, the same is collected through customers at the time of sale at the rate specified by the State Government as under:
(i) Rock Phosphate @ Rs. 35 per MT
(ii) Gypsum @ Rs. 5 per MT
(iii) Cement Grade Limestone @ Rs. 5 per MT
The cess is shown separately in the invoices. In addition to this, the sales tax is also charged thereon and the same is paid to the sales tax department.
4. At the time of preparation of the financial statements for the financial year 2007-08, the company has shown the amount of cess collected as its operational revenue and included in sales. The querist has stated that the accounting treatment given by the company has also been confirmed by the Accountant General (‘AG’) auditors while conducting their audit under section 619(4) of the Companies Act, 1956.
5. The statutory auditors, during the course of conducting their audit under section 224 of the Companies Act, 1956, held a different opinion on the accounting treatment given by the company, and issued their report with the following qualification:
“The M.R. Cess has been imposed by the Government of Rajasthan w.e.f. 25.2.08 on despatches of certain minerals and has been credited Rs. 35,24,452/- in the sales of the company and the amount of Rs. 58,08,272/- against the M.R. Cess due for payment to the Government of Rajasthan has been shown in Mining Expenditure whereas the M.R. Cess is neither a part of the sales nor the amount due to the Government of Rajasthan is an expenditure of the company. Thus the sales of Rs. 35,24,452/- has been overstated and expenditure of M.R. Cess has been overstated to the extent of Rs. 58,08,272/- in the profit and loss account.”
6. The querist has also provided the AG Auditors’ observations on the report of the statutory auditors which states as below:
“A reference is invited to qualification no: F(xii) wherein it was stated that cess on mineral rights (M.R. cess) imposed by the Government of Rajasthan on despatch of Rock Phosphate, Gypsum and cement grade limestone was neither a part of the sales nor the expenditure of the company and hence there was overstatement of expenditure by Rs.58.08 lakh and sales by Rs.35.24 lakh as the company accounted for both expenditure and sales in the profit and loss account.
The clarification of the statutory auditors was not in order as the company, in pursuance of the notification (February, 2008), was liable to pay the environment and health cess on the mineral rights (M.R. cess) at the prescribed rates on the despatch of Rock Phosphate, Gypsum and Limestone (cement grade) on the material despatched from mines as was done in respect of payment of royalty and is recovering the same from the customers by including in the sales invoice on the quantity sold. Thus, the company was liable for payment of M.R. cess on the quantity despatched from mines whether they were sold or not and at the same time it was realising the amount from the customers by including in the sales invoice only on the quantity sold. Hence, the payment is expenditure and the amount included in the sales invoices is an income to the company. Thus, the accounting treatment given by the company in its books of account was in order.”
B. Query
7. Since the view of statutory auditors contradicted the accounting treatment given by the company, the querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether the accounting treatment given by the company for cess collected and payable is correct or not. If not, what alternative treatment is possible.
(ii) Whether charging of sales tax on the cess is in accordance with the provisions of Rajasthan VAT Act and CST Act.
C. Points considered by the Committee
8. The Committee notes that the first issue raised by the querist in paragraph 7 above, relates to the accounting treatment of Environment and Health Cess on mineral rights collected and payable. As regards the second issue on charging of sales tax on the cess in accordance with the provisions of Rajasthan VAT Act and CST Act, the Committee refrains from examining the issue and expressing any opinion thereon since it involves interpretation of an enactment and as per Rule 2 of the Advisory Service Rules of the Committee, it does not answer queries which involve pure interpretation of legal enactments. Therefore, the Committee has examined only the first issue and has not examined any other issue that may be contained in the Facts of the Case. Further, the Committee has not examined the point of time of levy of cess in view of the said Rule 2 of the Advisory Service Rules and presumes that M.R. Cess is levied at the time of despatch of minerals as stated by the querist in the Facts of the Case.
9. The Committee is of the view that since the M.R. Cess is to be paid by the company on despatch of minerals irrespective of the purpose for despatch, i.e., whether the minerals despatched are sold or not, whether the minerals are despatched for captive use, etc., the cess is an operational expenditure which should be charged to the profit and loss account.
10. In the context of inclusion of cess in the cost of inventory, the Committee examines the applicability of Accounting Standard (AS) 2, ‘Valuation of Inventories’, to the company. The Committee notes that paragraph 1(d) of AS 2 excludes from its scope the following:
“(d) producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well established practices in those industries.”
From the copy of the Annual Report for the year 2007-08 furnished separately by the querist, the Committee notes that the company follows the following accounting policy in respect of valuation of inventories:
“The valuation of inventories is carried out on the principle of net realisable value or cost of production whichever is less except Stock of Green Marble which is valued at a token value of Re. 1/- per MT.”
From the above, it appears that the company does not value the inventories of minerals at its net realisable value, rather values the same on the principle of cost or net realisable value, whichever is lower. Thus, the inventories of minerals in the case of the company do not fall within paragraph 1(d) of AS 2 reproduced above, and therefore, do not get excluded from the scope of AS 2. Accordingly, provisions of AS 2 will apply to the company.
11. The Committee further notes the following paragraph of 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.”
In accordance with the provisions of AS 2 as quoted above, the cost of inventories of minerals should be inclusive of the cess thereon.
12. With respect to the inclusion of the amount of cess collected as part of operational revenue, the Committee is of the view that since cess is a part of the operational cost, inclusion of the same in the operational revenue is in order.
D. Opinion
13. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 7 above:
(i) Subject to the considerations stated in paragraph 8 above, the accounting treatment given by the company for cess collected and payable is correct. If the amount of cess is material having regard to the facts and circumstances, both cess expenditure and cess amount included in sales, should be disclosed. The question of alternative treatment does not arise.
(ii) As stated in paragraph 8 above, in view of Rule 2 of the Advisory Service Rules, the Committee refrains from expressing any opinion on this issue.
1Opinion finalised by the Committee on 8.5.2009
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