Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.3       Query

 

Treatment of Advance Licences received for import of duty-free raw materials

against export commitments but not realised in the books of account

 

1. A manufacturing company engaged in export business of dyes and dyes intermediates has applied for Advance Licences for import of duty-free raw materials against export commitments given to the Government of India.

 

2. The company has exported a large quantity of its products and fulfilled the export commitments for the Advance Licences. The exports are made of the products manufactured from locally purchased raw materials which cost more than double the cost of imported duty-free raw materials.

 

3. The transactions of purchase of raw materials from local market and their conversion and export at competitive prices have yielded huge losses for the company although the company will benefit in the long run, when on securing Advance Licence for imports, future purchase prices or raw materials will be very low as compared to their prevailing prices in the local market.

 

4. The company is at present in a situation where it has incurred huge losses on exports of products manufactured from raw materials purchased at very high local prices. The company has acquired most of the Advance Licences by the end of the year but benefit of the licences will not materialise unless and until the import of duty free materials is made and the products manufactured from them are sold out. The querist has submitted that in such a situation the company’s accounts for the current year will indicate a huge loss unless the benefits available out of Advance Licences are accounted for.

 

5. The querist has supplied the following additional information:

 

        (i)Advance Licence is a licence for duty free import of raw materials, issued to an exporter by the Government of India on the basis of application received from the exporter in prescribed forms, indicating the particulars of goods to be exported and the quantities and values of imported raw materials, required for manufacture of such goods.

 

        (ii)Under the Advance Licence Scheme, the exporter, who is holding the Advance Licence in his name, receives duty exemption for import of raw materials required for the committed subsequent export of the finished goods. However, the exporter is permitted to commence the export of the goods manufactured from “imported duty paid”/ “locally purchased” raw materials even before obtaining the Advance Licence, in which case the exporter should mention the  “File Number” of his Advance Licence application on all the export documents. The exporter is then entitled to obtain “Credit” in the ‘Export’ side of the Advance Licence Pass Book, called the  “D.E.E.C. Book”, producing the documents of the goods exported. In cases where the export is made, but due to some reasons the applicant fails to obtain the Advance Licence, the benefit of the duty exemption will not arise and the question of entitlement to “Credit” in DEEC Book also does not arise.

 

       (iii)In the present case the exporter has received the “File Numbers” of the applications and has exported goods quoting the File Numbers on the documents and at the end of the same year the exporter has received most of the Advance Licences, while for some others, the licences are issued in the subsequent year.

 

       (iv)The benefit of the export under the Advance Licence Scheme can be quantified in terms of the estimated value of saving in import duty in importing the raw materials.

 

       (v)The condition required to be fulfilled before obtaining the benefit under the Advance Licence is that, at the time of duty-free import of the materials, the importer has to furnish a bond worth the value of duty involved in favour of the Government of India. This bond is cleared on obtaining “Credit” in the DEEC Book. In case there is already “Credit” available in the DEEC Book, no condition is required to be fulfilled for utilising the benefit under the Advance Licence.

 

6. In the above context, the querist has sought the advice of the Expert Advisory Committee on the proper method of accounting to be followed, particularly with regard to the following issues: -

 

       (i)Is it possible to value these Advance Licences as inventories in respect of which the export obligation has been fulfilled and, if yes, can it be said that the duty benefit available in future on the licences be its value?

 

       (ii)Is it possible to consider the “estimated future duty benefit” as an incentive and treat it in the accounts as “Other Income” just as cash incentives and duty drawback and also can the amount appear as “Amount recoverable in cash or in kind or for value to be received” under the head Current Assets and be written-off on actual utilisation (in such a case under which head to charge the amount written-off in profit and loss statement in subsequent years?). In which year the benefit should be accounted for if the export is made in the current year but the Advance Licence is actually received in the subsequent year?

 

       (iii)Is it possible to defer a portion of the cost of locally purchased raw materials by accounting the difference between consumption of raw materials at the local price and the international duty-free price thereby yielding “Adverse Price Variance” in raw materials to be carried forward in the balance sheet as “Amount recoverable in cash or in kind or for value to be received” and set-off against the “Favourable Price Variances” in future years?

   

                                                             Opinion                                                January 12, 1987

 

1.The Committee notes that para 6.1 of Accounting Standard 2 of the Institute of Chartered Accountants of India on ‘Valuation of Inventories’, states:

 

          ‘Inventories’ means tangible property held

 

               (i)for sale in the ordinary course of business, or

 

               (ii)in the process of production for such sale, or

 

    (iii)for consumption in the production of goods or service for sale, including maintenance supplies and consumables other than machinery spares.”

           

2. As per the above definition of inventories, the Committee is of the opinion that the Advance Licences received for import of duty-free raw materials do not qualify for inclusion as inventories.

 

3. With regard to considering the “estimated future duty benefit” as an income for the period in which the Advance Licences are received or the goods are exported against File Numbers, the Committee notes that one of the major considerations governing the selection and application of accounting policies is ‘prudence’, according to which profits are not anticipated but recognised only when realised in view of the uncertainty attached to future events. *On the basis of the facts of the query, the Committee, is of the opinion that in view of uncertainty attached to future events related to the earning of the duty benefit no revenue should be recognised in respect of the Advance Licences received in the current period on the goods exported in that period as also in respect of the goods exported in the current period against File Numbers, the Advance Licences being received in a subsequent period. The Committee is further of the opinion that on the same considerations, it is not proper to defer a portion of the cost of locally purchased raw materials by accounting the difference between consumption of raw materials at the local price and the international duty-free price.

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* Accounting Standard 1 (AS-1), ‘Disclosure of Accounting Policies, issued by the Institute of Chartered Accountants of India.