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A. Facts of the Case
1. A wholly owned Government of India enterprise (hereinafter referred to as the ‘company’) is engaged in manufacturing of automotive tyres. The company is under reference to the Board for Industrial and Financial Reconstruction (BIFR) since the year 1992. Due to non-availability of working capital, the company had to discontinue the production of its own-brand products. At present, the company is doing 100% jobbing work for other major manufacturing companies (hereinafter referred to as the ‘other manufacturing companies’) of similar product, i.e., tyres. The ‘other manufacturing companies’ are providing 100% major raw materials and chemicals for manufacturing of tyres in their brand name. The cost of other indirect materials, labour, power and fuel, etc., are borne by the company. The company is charging conversion charges at fixed rate per tyre produced, as is mutually agreed.
2. The querist has stated that the ‘other manufacturing companies’ are submitting their price list as per the Central Excise Rules and the company delivers the finished goods to these companies from the plant by issuing invoice under Rule 11 of the Central Excise Rules (permission has been accorded for separate invoice for separate ‘other manufacturing companies’) to remove the goods to their nearest godown by paying appropriate excise duty as adjusted by utilisation of CENVAT credited to their respective accounts (since raw materials are supplied by the ‘other manufacturing companies’).
3. Thus, the querist has stated, for all practical purposes, as per the Excise Rules, the company is the manufacturer and all liabilities on account of excise duty are to be shouldered by it as all manufacturing activities are done under the company’s code number allotted by the Excise Authorities, although, as per the Memorandum of Understanding (MOU) entered into with each of the ‘other manufacturing companies’, liabilities on account of excise duty, present or future, for tyres manufactured at the company’s plant are to be borne/reimbursed by them.
Accounting treatment
4. The querist has stated that before the introduction of e-payment of excise duty, the company was accounting for only the conversion charges receivable from the ‘other manufacturing companies’ by credit to its profit and loss account. The ‘other manufacturing companies’ used to pay excise duty directly to the designated bank through demand drafts under the company’s code number. Since no money was received/paid by the company on account of excise duty for tyres manufactured on behalf of ‘other manufacturing companies’ at the company’s factory, no accounting was done/reflected in the financial books/profit and loss account of the company.
5. The querist has further stated that with the introduction of e-payment, the methodology has been changed and presently, the excise duty payable (net of CENVAT credit as availed on their inputs) by the ‘other manufacturing companies’ is remitted to the company’s bank account and the company is making the net payment of excise duty to the authorities. The amount so received from the ‘other manufacturing companies’ for payment of excise duty is being treated as “Collection (received from the ‘other manufacturing companies’ on account of excise) to be paid out”.
B. Query
6. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether the accounting done by the company for conversion charges as mentioned above is sufficient for such jobbing work.
(ii) Whether the amount remitted by the ‘other manufacturing companies’ on account of excise duty on tyres manufactured by the company on their behalf and payment of the same to the Excise Authorities are also required to be accounted for by the company under appropriate account heads and reflected in the profit and loss account, instead of under the account head ‘Collection to be paid out’, considering that the payment of excise duty is routed through the bank account of the company (for e-payment) and the tyres are manufactured in the company’s factory. If so, how it is to be accounted for/reflected in the accounts?
C. Points considered by the Committee
7. The Committee, while answering the query, has examined only the issues raised in paragraph 6 above and has not touched upon any other issue that may arise from the Facts of the Case, such as, the accounting treatment followed by the company earlier, i.e., before the introduction of e-payment of excise duty, etc. Further, the Committee has considered the issue only from an accounting point of view and has not examined any other issue that may involve interpretation of legal enactments, such as, the Central Excise Rules or, Cenvat Credit Rules, as Rule 2 of the Advisory Service Rules in accordance with which the Committee answers the queries, prohibits it from answering queries involving interpretation of legal enactments.
8. The Committee notes that Accounting Standard (AS) 9, ‘Revenue Recognition’, defines the term ‘revenue’ as follows:
“Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.”
9. The Committee notes from the Facts of the Case that the company is doing 100% jobbing work for other major manufacturing companies by charging only conversion charges at fixed rate per tyre produced and delivers the finished goods to these companies. From this, it appears to the Committee that the significant risks and rewards of ownership of goods are not transferred from ‘other manufacturing companies’ to the company and that the company in the instant case is manufacturing the goods only on behalf of other manufacturing companies. If that be the case, in the view of the Committee, the revenue of the company would be limited to the conversion charges receivable as per the terms of the contract.
10. As regards the accounting for excise duty, the Committee notes that the primary liability of paying the excise duty to the authorities is that of the company in question. Accordingly, the excise duty expense should be reflected in the financial statements of the company. For the purpose of reflecting the excise duty expense, the Committee is of the view that the expense is of two types, viz., (i) excise duty on the goods manufactured by the company, which has been paid during the accounting period and (ii) the excise duty in respect of the goods which have been manufactured but still not removed from the factory premises of the company or from the bonded warehouse, if any and, therefore, excise duty has not been paid on the same. With regard to the latter, the Committee notes the following requirements of the Guidance Note on Accounting Treatment for Excise Duty, issued by the Institute of Chartered Accountants of India:
“18. Since the liability for excise duty arises when the manufacture of the goods is completed, it is necessary to create a provision for liability of unpaid excise duty on stocks lying in the factory or bonded warehouse. …”
Accordingly, with respect to (ii) above, the company should make a provision for the excise duty payable.
11. Regarding the reimbursement receivable towards excise duty payable in respect of which a provision is made as per paragraph 10 above, the Committee is of the view that the accounting treatment should be in accordance with the following paragraphs of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’:
“46. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation. The reimbursement should be treated as a separate asset. The amount recognised for the reimbursement should not exceed the amount of the provision.
47. In the statement of profit and loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.”
“67. An enterprise should disclose the following for each class of provision:
…
(c) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.”
12. With regard to the excise duty paid by the company during the year on the goods manufactured and transferred to the other manufacturing companies, the Committee is of the view that since the company is doing the jobbing work for other manufacturing companies, the requirements of the following Explanation to paragraph 10 of AS 9 notified by the Central Government under the Companies (Accounting Standards) Rules, 2006, does not apply since the company is not selling the goods.
“Explanation:
The amount of revenue from sales transactions (turnover) should be disclosed in the following manner on the face of the statement of profit and loss:
Turnover (Gross) XX
Less: Excise Duty XX
Turnover (Net) XX
The amount of excise duty to be deducted from the turnover should be the total excise duty for the year except the excise duty related to the difference between the closing stock and opening stock. The excise duty related to the difference between the closing stock and opening stock should be recognised separately in the statement of profit and loss, with an explanatory note in the notes to accounts to explain the nature of the two amounts of excise duty.”
Since the requirements of the above Explanation do not apply to the company, the excise duty paid may be presented net of the amount of reimbursement in the statement of profit and loss. The amount of the excise duty paid and the reimbursements thereagainst during the period should be disclosed in the notes to the accounts.
D. Opinion
13. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 6 above:
(i) In the facts and circumstances of the case, recognition of the conversion charges as revenue appears to be correct. Please refer paragraph 9 above.
(ii) The accounting for excise duty and reimbursement of the same by the ‘other manufacturing companies’ should be done as discussed in paragraphs 10, 11 and 12 above.
1Opinion finalised by the Committee on 24.08.2009
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