1.19     Query 

Whether ‘spare parts for resale’ should be included in ‘raw

materials consumed’ for the purpose of Schedule VI

1 A public sector company is engaged in the manufacture and sale of heavy earthmoving equipment, railcoaches, heavy duty trailers, aircraft towing tractors etc. The company also renders after-sales service both during and outside the warranty period. The company supplies spare parts to the customers both from bought-out stores and internal fabrications.

2.The company, by way of separate schedule ‘consumption of materials’, discloses the opening stocks, purchases and closing stocks in respect of ‘raw materials and components’ and ‘spare parts for resale’; the resultant figure so arrived is shown as ‘raw materials consumed, in the profit and loss account.

3.The company has now been advised that the aforesaid manner of disclosure of ‘raw materials consumed’ is not appropriate since, as the very description indicates, the spares are bought for resale and not for consumption. The company is however of the view that no change in the manner of disclosure is required as the company is engaged in manufacturing, trading and servicing activity and that there is sufficient compliance of the provisions of the Companies Act as provided in Part II of Schedule VI, clause 3 (ii) (a)-2(d). The company further argues that all the spares meant for resale are not bought out items and a fair share includes items manufactured and/or assembled/manufactured in the works of the company and the stock also includes items of both shop manufactured and bought-out origin.

4.The querist has sought the opinion of the Expert Advisory Committee on whether the manner of disclosure adopted by the company with regard to ‘spare parts for resale’-both internally manufactured and bought-out -as a part of ‘raw materials consumed’ is appropriate for the purpose of requirements of Schedule VI to the Companies Act, 1956.

                                                            Opinion                                                            May 21, 1986

1. From the facts of the query, the Committee notes that the spare parts for resale are consumed internally for the manufacture of other product(s) as well as sold directly as a trading activity. In this regard, the Committee also notes that clause 3 (2) (d) of Schedule VI to the Companies Act, 1956, requires as below:

“In case of a company which falls under more than one of the categories mentioned in (a), (b) & (c) above, it shall be sufficient compliance with the requirement herein if the total amounts are shown in respect of the opening and closing stocks, purchases, sales and consumption of raw materials with value and quantitative break-up and the gross income from service rendered is shown.”

2. On the basis of above, the Committee is of the opinion that the requirements of Schedule VI to the Companies Act would be fulfilled if the company discloses the opening and closing stocks of the spare parts and raw materials, purchases of raw materials and spare parts and the consumption of raw materials. The Committee however notes that there can be a practical difficulty in segregating the spare parts purchased and internally manufactured and used for the purpose of resale and internal consumption. The Committee is therefore of the opinion that the present form of disclosure adopted by the company is appropriate for the purpose of requirements of Schedule VI to the Companies Act provided it is shown under the head “Cost of Materials/spares consumed/sold.”

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