1.8       Query

Meaning of the expression “Face value of the capital investment”

for the purpose of a notification issued under Rule 8 of theCentral Excise Rules, 1944

1.A company manufacturing paper started commercial production during 1979. According to the querist, the company capitalised the following items of expenditure in connection with its plant and machinery as per the standard accounting principles:

            (i)            Invoice value of the machinery (including duties and taxes).

(ii)            Transport changes to the site.

(iii)            Foundation and erection expenditure.

(iv)            Consultants’ charges and expenditure.

(v)        Proportionate pre-operative expenditure incurred during the construction stage of the project distributed over various fixed assets as per standard principles.

(vi)            Other expenditure directly connected.

 2.The Government of India, to encourage establishment of new paper mills in the country, issued a notification no. 108/81-CE, dated 24.4.81, offering incentive by way of 50 per cent reduction in the levy of excise duty, subject to a maximum of 30 per cent of the “sum-total of the capital investment made on the plant and machinery” for the manufacture of specified types of paper. In this connection the said Explanation II of the said notification states as below:

Explanation II—For the purposes of computing the “sum total of the value of the capital investment made on the plant and machinery for the manufacture of the said goods”, the face value of the capital investment at the time when such investment was made only shall be taken into account, but the value of the investment made on plant and machinery which have been removed permanently from the said factory or rendered unfit for use prior to the date of the first clearance of the said goods, shall be excluded.

3.The Central Excise Department does not agree that the items of expenditure listed in para 1 above should be included for the purpose of the above notification.

4.The querist has sought the opinion of the Expert Advisory Committee as to whether the items of expenditure, mentioned in para 1 above, should be included in the “sum-total of the capital investment made on the plant and machinery”.

                                                          Opinion                                                               1^st April, 1985

1.The Committee notes that from accounting point of view ‘capital investment in plant and machinery’ “comprises its purchase price, including import duties and non-refundable purchase taxes, and any directly attributable costs of bringing the asset to 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:

(a)            site preparation;

(b)            initial delivery and handling costs;

(c)            installation cost, such as special foundations for plant;

(d)            professional fees (architects, engineers etc.)

……………………pre-production costs would not form part of the cost of property, plant and equipment unless they are necessary to bring the asset to its working condition.”*

2. The Committee however notes that Explanation II to the said notification issued by the Government, uses the expression “Face value of the capital investment.” The Committee is therefore of the view that its meaning has also to be considered in the light of the term ‘face value’.

3.The Committee notes that according to ‘A Dictionary for Accountants’ (5^th Edition) by Eric L. Kohler,  ‘Face value’ means “The nominal amount of a bond, not, mortgage, or other security as stated in the instrument itself, exclusive of interest or dividend accumulations. This may or may not coincide with the price at which the instrument was first sold, its present market value, or its redemption price.” Similarly, in Stroud’s Judicial Dictionary (3^rd edition) it is stated that the “nominal share capital of a company is the face value of its shares……..” The Committee is of the view that the term ‘face value’ can safely be interpreted as the value of an asset shown on the face of the document of its accession, which may or may not be the same as the costs directly incurred in bringing the asset to its working condition for its intended use.

4. The Committee is therefore of the opinion that on the basis of the above, an interpretation of the term the ‘Face value of capital investment in plant and machinery’ can be the amount shown on the document(s) of accession. e.g., invoice of such plant and machinery. On the other hand, for accounting purposes the value of plant and machinery may be different. The Committee however is conscious that since the said expression i.e. “face value” has been used as a special term in the notification of the Government, its final interpretation can only be may by the courts.

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