1.2       Query

Treatment of spares of certain instruments supplied to the customers

alongwith the instruments sold to them

1. A company is engaged in the manufacture of process control instruments like valves, level-gauges etc. Its substantial sales are to major fertilizer/power projects. Purchase orders received from such projects normally stipulate that spares required for one year’s functioning of the instruments should be supplied together with the orders. The quantity of spares required is also stipulated in the order.

2.A view has been expressed, according to which such despatches should be treated as sale of raw material requiring separate quantification. The querists however contend that such sales are to be regarded as normal sales of the company and not as sales of raw materials, because

(a) sales of such parts are part of sales in execution of the order regarded as essential spares to ensure continuous operation of the instruments;

(b) the quantity is stipulated by the customers based on expected requirements to avoid delay in replacement and consequent loss due to suspension of operations; and

(c) it is a normal feature with equipment manufacturers to supply such set of spares alongwith the equipments.

3.The querists have sought the opinion of the Expert Advisory Committee on the following issues arising from the above:

(a) whether the supply of spares alongwith the sales orders of the nature described in the query should be shown as a part of sales (turnover) and consequently the quantitative details thereof to be given, if material. If the equipments are quantified, is it necessary to separately indicate quantity and spares accompanying them; or

(b) whether it tantamounts to sale of raw materials requiring computation of profit on sale of raw materials and whether it is to be disclosed as such.

                                         Opinion                                                                        December 31, 1985

From the facts of the query, the Committee notes that apparently the spares supplied together with the instruments are in accordance with one composite sales contract in the ordinary course of business and the prices of such spares are not separately indicated in the order. The  opinion of the Committee is that in such cases (a) such supplies should be treated as a part of “turnover” of the Company, and (b) in respect of quantitative details, only number of equipments sold need be quantified and it is not necessary to separately indicate quantity of spares accompanying such equipments.

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