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    Applicability Of Excise Duty On Waste And Scrap

    Introduction:

    Applicability of excise duty on waste and scrap is always been one of the perennial area of litigation under the Central Excise Law. With intent to subject waste and scrap to excise duty, many of the waste and scraps which arises during the process of manufacture of various excisable goods are included in the Central Excise Tariff. The definition of ‘Excisable Goods’ as appearing under Section 2(d) of the Central Excise Act, 1944 is also amended by inserting an explanation with effect from 10.05.2008 which deems that anything that can be capable of being brought to market and sold are deemed to be marketable and thus excisable. On the other hand, there is several waste and scrap which are subjected to nil rate of duty, thereby Department requiring assessee to reverse CENVAT Credit at 6%/7% of their value under Rule 6 of CENVAT Credit Rules, 2004. Let us abreast ourselves the latest legal position of this issue.

    Legislative Background:

    Prior to insertion of explanation to Section 2(d),several courts have interpreted that certain waste and scrap are not excisable goods despite mentioning them in Central Excise Tariff on the reason that they are not marketable as they are not known to commerce as marketable commodity. In the case of UOI vs.Indian Aluminum Co. Ltd, 1995(77)E.L.T268(SC) wherein excisability of aluminum dross and skimmings was examined and the Supreme Court has held as follows;

    “13.……………………………………..Dross and skimmings may contain some small percentage of metal. But dross and skimmings are not metal in the same class as waste or scrap. It may be possible to recover some metal from such dross and skimmings. They can, therefore, be sold. But this does not make them a marketable commodity. As learned Single Judge of the Bombay High Court has pointed out, even rubbish can be sold. Everything, however which is sold is not necessarily a marketable commodity as known to commerce and which, it may be worthwhile to trade in. Learned Single Judge of the Bombay High Court, therefore, rightly came to the conclusion that the proviso to Rule 56A was not applicable as aluminium dross and skimmings are not excisable goods.”

    Explanation inserted in Section 2(d) w.e.f. from 10.05.2008:

    In order to overcome the challenge on marketability of waste and scrap, an explanation was inserted in the definition of ‘excisable goods’ under Section 2(d) of the Central Excise Act, 1944 by Finance Act, 2008 w.e.f 10.05.2008. The same is reproduced as under;

    "excisable goods" means goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt;

    Explanation. - For the purposes of this clause, "goods" includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.

     

    Consequent to the amendment, Pune Commissionerate released Circular No. 904/24/2009-CX dated 28.10.2009 where in it has been stated that bagasse, aluminum/zinc dross and other such products termed as waste, residue or refuse which arise during the course of manufacture and are capable of being sold for consideration would be excisable goods and chargeable to payment of excise duty. Thus by virtue of the above amendment, Revenue sought to levy excise duty on various types of waste and scrap. Let’s see how successful they are!

    Process should amount to manufacture apart from goods being excisable:

    Excise duty is on the event of manufacture. In order to attract excise duty, apart from goods involved are excisable goods by finding place in Central Excise Tariff, they should also be manufactured. ‘Manufacture’ as defined under section 2(f) of the Central Excise Act, 1944 provides that it includes

    1. any process incidental or ancillary to the completion of a manufactured product. or
    2. any process which is specified in relation to any goods in the section or chapter notes of Central Excise or
    3. any process involving labelling, re-labelling, packing or repacking of goods specified in third schedule to Central Excise Act, 1944

    Process covered under point no 2 and 3 are deemed manufacture. Immediately upon the insertion of deeming fiction in the definition of ‘excisable goods’ under Section 2(d) to cover waste and scrap and above mentioned clarificatory circular, the contention came up that are they subject to excise duty even if the process involved in getting such waste and scrap does not amount to manufacture as discussed above.

    In the case of Grasim Industries Ltd vs. UOI, 2011(273)E.L.T.10(SC) wherein the issue whether the metal scrap or waste generated while repairing of worn out machineries or parts of cement manufacturing plant amounts to manufacture for levying excise duty? In this case, Revenue proceeded to levy excise duty on the basis of Note 8(a) to Section XV of the Tariff Act which states – ‘Metal waste and scrap from the manufacture or metal waste and scrap from mechanical working of metal’.

    In this case, the Supreme Court has held that section note has very limited purpose of extending coverage to the particular items to the relevant tariff entry in the schedule for determining the applicable rate of duty and it cannot be readily construed to have any deeming effect in relation to process of manufacture as contemplated by Section 2(f) of the Act, unless expressly mentioned in the said Section Note.

    The Supreme Court held that the goods must be produced or manufactured in India in order to be subject to excise duty. Simply because a particular item is mentioned in tariff, it cannot automatically become exigible to excise duty. Vide para 8, it was held as under;

    “…………………………….In our opinion, the charging section 3 of the Act comes into play only when the goods are excisable goods under section 2(d) of the Act falling under any of the tariff entry in the schedule to the tariff act and are manufactured in terms of Section 2(f) of the Act. Therefore the conditions contemplated under Section 2(d) and Section 2(f) has to be satisfied conjunctively inorder to entail the imposition of excise duty under Section 3 of the Act……………………”.

     

    Thus even after the insertion of explanation in Section 2(d) for deemed marketability, ‘process amounting to manufacture’ is still an essential condition to be satisfied in order to levy excise duty on waste and scrap. Thus waste and scrap which can fetch some amount if sold though become excisable goods but subject to excise duty only if the process or processes out of which such waste and scrap arise either amounts to manufacture as conventionally understood i.e. distinct article from raw material emerge having distinctive name, character and usage must emerge or the said process amounts to deemed manufacture as defined under Section 2(f)(ii) and (iii) of the Central Excise Act, 1944.

    Many of the wastes and scrap arises in the course of manufacture of excisable goods. They arise inevitably but are not intended to be manufactured or produced by manufacturer. Of course, they may fetch some value but in most cases their value would be minimal compared to the final products manufactured and their removal costs would be higher than their value. The process involved in generation of many of the wastes and scraps may not amount to manufacture as defined under Section 2(f). Examples of such wastes and scraps are as follows;

    Bagasse upon extraction of juice from sugarcane:

    In the process of manufacture of sugar, sugarcane is crushed, its juice is extracted and bagasse emerges as residual waste and scrap of sugarcane. The said bagasse is specified in Central Excise Tariff under tariff item 23032000 and is subjected to Nil rate of duty. The Allahabad High Court in the case of BalrampurChini Mills Ltd vs. UOI, 2014(300)ELT372(All) wherein it was held that bagasse is not a manufactured goods and it is never manufactured, but it only emerges in the process of final product, namely, sugar.

    Sludge arising in the course of manufacture:

    Sludge emerging from effluent treat plant cannot be avoided in manufacture of final products. The same cannot be said to have manufactured as held in the case of CCE vs. Oxygen Equipment and Engg. Co. P. Ltd, 2002(143) E LTA82(SC).

    Aluminum skimmings and dross during manufacture of aluminum sheets:

    In the course of manufacture of aluminum sheets out of aluminum ingots, dross and skimmings arise. These are the impurities/foreign matter formed on molten metal for use in manufacture. The Bombay High Court in the case of Hindalco Industries Limited vs. UOI, 2015(315)ELT10(Bom) wherein it was held vide para 24 –“It may be that dross and skimmings may be capable of fetching some sale price, for that matter any rubbish can be sold. But that is not the criterion. It cannot be said that dross and skimmings are the result of treatment, labour or manipulation whereby the end-product is dross and skimmings. They are merely the scum thrown out in the process of manufacture of aluminum sheets. Therefore, it cannot be said that dross and skimmings are transformation resulting in a new and different article with a distinctive name, character or use or that they ordinarily come to the market to be bought and sold and are known to the market. The article or goods manufactured from the aluminum ingots was not dross and skimmings but the aluminum sheets”. Therefore no duty is leviable on waste and scrap.

    Thus unless the process involving amounts to manufacture or deemed manufacture as the case may be, excisability of waste and scrap do not arise.

     

    Is sale of such waste and scrap requires compliance under Rule 6 of CENVAT Credit Rules, 2004?:

    Many of the waste and scrap specified in the Central Excise Tariff are subjected to Nil rate of duty. Revenue treating these wastes and scraps as exempted goods and on the premise that the input material is used both in manufacturing dutiable final products and exempted waste and scrap, are demanding reversal/payment of excise duty at 6%/7% on sale price of waste and scrap in terms of Rule 6 of the CENVAT Credit Rules, 2004. Further, many assessee prepare to pay excise duty on such waste and scrap though not emerged out of manufacturing process as they are under the impression that non­paymentwould requirethem to undertake complex compliance burden under Rule 6 of the CENVAT Credit Rules, 2004.

    This rule requires maintenance of separate books of accounts for inputs and input services that are used for manufacture of exempted goods and dutiable goods or for provision of exempted services and taxable services. Credit is allowed only on those inputs and input services that are used for manufacture of dutiable goods or for provision of taxable services. Otherwise an amount equal to six percent of the value of exempted goods or exempted services is required to be paid.

    As discussed above bagasse emerges as residual waste and scrap of sugarcane. The said bagasse is specified in Central Excise Tariff under tariff item 23032000 and is subjected to Nil rate of duty. Considering bagasse as exempted good, department demanded duty under Rule 6 of the CENVAT Credit Rules, 2004. In the case of BalarampurChini Mills Ltd vs. UOI, (supra) where in the Allahabad High Court held that for applicability of rule 6, the manufacture of dutiable goods and manufacture of exempted goods are the conditions precedent. Since waste is never manufactured and it only emerges in the process of manufacture of final product and cannot be considered as manufacture of exempted goods, Rule is not applicable to bagasse which is admittedly an inevitable waste emerging from the crushing of sugarcane.

    Even assuming they were exempted goods, still reversal is not required under Rule 6 by applying the position laid out by Supreme Court in the case of UOI vs. Hindustan Zinc Ltd, 2014-TIOL-55-SC-CX. The respondent in this case is engaged in manufacture of non-ferrous metals like zinc out of zinc ore. In the process, sulphuric acid is emerged as by-product which is exempted. Department required the respondent to pay an amount equal to 8% (as in force at relevant point of time) of the sale price of exempted goods (Sulphuric acid)under Rule 57CC of erstwhile Central Excise Rules and Rule 6 of the CENVAT Credit Rules, 2004.

    The Supreme Court observed in para 20 “Sulphuric acid is indeed a byproduct. It is not as though some quantity of zinc ore concentrate has gone into the production of sulphuric acid, applicability of Rule 57 CC can be attracted. The entire quantity of zinc has indeed been used in the production of zinc and no part can be traced in the sulphuric acid. It is for this reason, the respondents maintained the inventory of zinc concentrate for the production of zinc and there was no necessity and indeed it is impossible, to maintain separate records for zinc concentrate used in the production of sulphuric acid. The mischief of recovery of 8% under Rule 57 CC on exempted sulphuric acid is not attracted”.

    Thus even assuming waste and scrap of the nature discussed above are exempted goods, they are just the inevitable by-products which emerge in the course of manufacture of final products and in such circumstances it cannot be assumed that the inputs are used for manufacture of both final products and these wastes and scraps. Accordingly, compliance under Rule 6 of the CENVAT Credit Rules, 2004 is also not warranted.

    Conclusion:

    To sum up, it is important to give an appropriate treatment to the waste and scrap arising in the factory during manufacture. Mere mentioning of waste and scrap in Central Excise Tariff and the fact that it fetches some price if sold in market is not sufficient to attract excise duty. In addition, the process out of which the waste and scrap emerge should also amount to manufacture.Only then excise duty is attracted. As no manufacture is involved, the same cannot be construed as exempted goods for reversal of CENVAT Credit under Rule 6 of CENVAT Credit Rules, 2004.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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    Private Family Trust

    LEGAL CONCEPT OF TRUSTS

    The Indian Trusts Act, 1882 governs the private trusts. This Act doesn’t apply to public trusts and private charitable trusts. The distinction between the private and public trusts is that in private trusts, the beneficiaries are defined and ascertained individuals, but in public trusts, interest may be vested in uncertain and fluctuating body of persons.

    A private trust comes into existence when the owner of a particular property (the settlor), while intending to transfer the property to a chosen individual/individuals (the beneficiaries) doesn’t vest the property with the beneficiaries but with other people (the trustees), who are given the responsibility of making over the benefits of the property to the beneficiaries. For example, a father may be settlor of a trust, make himself and his wife as the trustees and his children as beneficiaries.

    While creation of such trusts, the following points should be taken care:

    • The subject matter of the trust should be certain; the person desired to be benefited must be certain, and the period of trust must be defined directly or indirectly.
    • Though the Indian Trust Act doesn’t forbid the beneficiary of a trust from being appointed as a trustee, but as a general rule, it is advisable to avoid appointing a beneficiary as a trustee as there may arise a conflict between his interest and his duty. It was held by Orissa High Court in M.C.Mohapatravs.M.C.Mohapatra that the same person may be a trustee and a beneficiary.
    • Typically, a trust deed should provide the day on which the corpus be distributed among the Normally, the settlor should mention the last date by which the trust should be wound up and leave it to the discretion of the trustee to distribute a part of, or the entire corpus earlier. Under the law, however, the life of such a trust cannot exceed twenty five years. In other words, a private trust should be wound up by a date not later than twenty five years from the date of the creation of the trust. In most cases, however, the corpus is distributed after the children attains majority.
    • The investments of trust money are governed by section 20 & section 40 of the Indian Trust Act, 1882. These sections give the details of securities in which investments can be made. However, there is a residuary section 20(f), which says that the trustee may invest money in any security expressly authorized by the instrument of trust. The investment clause in the trust deed should be suitably drafted so that full flexibility remains in the hands oftrustees. However, it may be noted that the investment clause is applicable only if the trust has surplus money, which is not immediately For fulfilling the objects of the Trust, the investment can be made in any immovable and moveable property.

    CREATION OF PRI VATE TRUSTS

    A registered document is necessary to set up a trust if immovable property is being transferred to it. However, if only moveable property is settled upon the trust, no formal document or agreement in writing is necessary. It is always advisable to prepare a trust deed on a stamp paper, and have it signed by the settlor and the trustees in presence of a witness, to avoid any subsequent disputes.

    TYPES OF PRIVATE TRUSTS

    A trust may either a discretionary or non-discretionary trust. A trust is non-discretionary if the shares of the beneficiaries are________________ clearly defined by the settlor. In other words, although the trustees have the powers to administer and manage the trust, and its finances, they do not have the discretion to decide the proportion in which the income or the corpus is to be distributed among the beneficiaries.

     

    A discretionary trust, on the other hand, only specifies the names of the beneficiaries. The trustees have complete discretion to decide the proportion in which the income or the corpus is to be distributed.

     

    Thus, the trustees may distribute the benefits to just a few beneficiaries (and totally exclude the others) or change the proportion each year or even decide not to distribute the income at all in a given year.

     

    In effect, so long as the benefits are passed on to one or more of the beneficiaries named by the settlor, the trustees have the discretion to decide who among the beneficiaries will benefit from the trust.

    TAXABILITY

    As per Section 2(31) a trust is not a person and hence trust is not an assessee. Trustees and beneficiaries are assessee under the Act. In case of trust the status of trustee is wholly irrelevant. Trust income be taxed in the like manner and same extent of beneficiaries. Under tax law a trustee is taxed as representative assessee.

     

    The taxability of the Trust depends upon the type of the trust. In the case of a non-discretionary trust, all income is taxable in the hands of the beneficiaries. But if the beneficiaries are minors, the income is to be clubbed with that of the parent with the higher income.

    On the other hand, in the case of a discretionary trust, in which the shares of the beneficiaries are unknown and indeterminate, it is taxed in the hands of trust at the maximum marginal rate.

     

    Inheritance by will is different from trust. In case of will there is an inheritance. In case of trust it is a receipt of funds or gift or distribution and there is no inheritance.

     

    Section 56(2)(vii) is applicable to discretionary trust. If the donor and all beneficiaries are relatives section 56 has no application.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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    The Revenue’s Misperception On Cum Tax Benefit

     

     

    The provisions regarding Cum Tax/Cum Duty is available both under Central Excise Act, 1944 and Finance Act (Service Tax Law) under Section 4(1) and Section 67(2) respectively. Accordingly, wherever service tax or excise duty is not separately collected, assessee is entitled to compute their tax liability treating the gross amount collected as inclusive of service tax/excise duty.

    Though this appears to be simple, straightforward benefit to assessees, but it is not so in reality considering the litigation that took place on this benefit. The vehemence contention of the Revenue is that mere non-collection of service tax/excise duty does not entitle the assessee for this benefit; the invoice should indicate that the amount charged is inclusive of service tax/excise duty. The article aims to demystify the ambiguity surrounded this straightforward benefit.

    Is It Possible under Law to Issue an Invoice Inclusive of Taxes?

    As stated above, the main contention of the revenue for declining this benefit is that the invoice issued to Service Provider/Customer should indicate that amount charged is inclusive of service tax/excise duty. In this context, it is relevant to examine whether it is legally possible to issue an invoice inclusive of service tax/excise duty or not.

    Section 12A of Central Excise Act, 1944 provides that every person who is liable to pay duty of excise on any goods shall at the time of clearance of goods, prominently indicate in all goods relating to assessment, sales invoice, and other like documents, the amount of such duty which will form part of the price at which such goods are sold. The said section is also made applicable to Service Tax law vide Section 83 of the Finance Act, 1994.

    This section begins with Non-obstante clause ‘Notwithstanding’ which means that this section has overriding effect even in case of inconsistency with other provisions of the Act. Thus whenever assessee is of the view that excise duty/service tax is applicable or at least doubtful but decides to collect, then he has to prominently indicate the same in the invoice. Thus in case, he issues invoice as inclusive of excise duty/service tax, then the same is in contravention of this section.

    The question of non-collection of excise duty/service tax arises only when the assessee interprets that excise duty/service tax is not applicable on particular goods/services as the case may be. The issue of cum-tax benefit arises in that case only. Section 11D of the Central Excise Act, 1944 assessee should not collect any amount in excess of duty assessed or determined to be payable by representing it towards excise duty. Similarly Finance Act, 1994 contains section 73A.

     

    Thus in a scenario, where assessee is at least doubtful of excise duty/service tax applicability and issues invoices saying price is inclusive of excise duty/service tax and subsequently if he claims that no duty/tax is payable, still he may require to deposit the portion representing excise duty in such inclusive price because this may indirectly tantamount to collection of some portion of price representing excise duty which is not statutorily payable.

    Thus it may be practically impossible for an assessee to issue an invoice inclusive excise duty/service tax without contravening the law. Even if he does so and subsequently claims that no excise duty/service tax is payable, he may be required to pay to Government the portion representing excise duty/service tax from such inclusive price in terms of Section 11D/Section 73A as the case may be.

    Presumption of Passing the Incidence of Excise duty/Service Tax:

    The Cum-Tax provisions of Central Excise & Service Tax law are reproduced as follows;

    Central Excise

    Service Tax

    Expln to Section 4(1):

    For the removal of doubts, it is hereby declared

    that the price-cum-duty of the excisable goods

    sold by the assessee shall be the price actually

    paid to him for the goods sold and the money

    value of the additional consideration, if any,

    flowing directly or indirectly from the buyer to

    the assessee in connection with the sale of such

    goods, and such price-cum-d uty, excluding sales

    tax and other taxes, if any, actually paid, shall

    be deemed to include the duty payable on such

    goods

    Section 67(2):

    Where the gross amount charged by a service

    provider, for the service   provided or to be

    provided is inclusive of service tax payable, the

    value of such taxable service shall    be such

    amount as, with the addition of tax payable, is

    equal to the gross amount charged.

    In terms of the above sections, whenever, excise duty/service tax is not separately collected by the assessee as the case may be, then the price of the goods or the gross amount charged for services shall be deemed to include excise duty/service tax as the case may be.

    In terms of Section 12B of the Central Excise Act, 1944, there is an irrefutable presumption that every person who is paying excise duty on goods shall be deemed to have passed on the full incidence of such duty to the buyer of such goods. This section is made applicable to service tax also vide Section 83 of the Finance Act, 1994. It is because of this presumption, Revenue proceed to recover tax dues from assessees irrespective of the fact whether excise duty/service tax is collected by them separately from customer or not.

     

    The Supreme Court in the case of Hindustan Sugar Mills vs. State of Rajasthan & Otrs, 1978(4)SCC271 has held that it is only as part of consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability, statutory or otherwise, under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill.

    Thus statutorily the only manner in which taxes or duties are payable by the purchaser of goods or receiver of services is as a part of consideration towards goods/services. So the price realized would be regarded as inclusive of duty/taxes because by necessary implication the manufacturer or service provider has taken on the liability to pay all taxes on such transaction. The other party is relieved from all liabilities with respect to procurement of such goods and services.

    This presumption holds good unless and until the revenue proves otherwise or there is express contractual obligation between the parties for reimbursement of taxes required to be payable if any in future on this transaction.

    Thus upon harmonious interpretation of the provisions of both Sections 12A, 12B, along with Explanation to Section 4(1) of Central Excise Act, 1944 and Section 67(2) of the Finance Act, 1994 it is very clear law that does not permit collection of excise duty/service tax by issuing invoice as taxes inclusive in price of goods or gross amount charged for services as the case may be. Whenever excise duty/service tax is not charged separately, the invoice amount shall be treated as inclusive of excise duty or service tax and accordingly the benefit of cum-tax is required to be extended to assessee.

    Ambiguity created by decisions of Supreme Court:

    Let us have a look at various decisions of the Supreme Court on this issue. Latest one on this issue is the case of Amrit Agro Industries Ltd vs. CCE, 2007-TIOL-244-SC-CX. In this case, the Appellant has classified the roasted peanuts under Chapter 21.01 and claimed exemption. Revenue contended that the same is classifiable under Chapter and excise duty is payable. As roasted peanuts are cleared by claiming exemption, the Appellant has not collected excise duty separately from the customer. In this context, the issue of whether cum-tax benefit is available to Appellant was considered by SC.

    Supreme Court by placing reliance in the Judgment of ACCE vs. Bata India Ltd, 1996 (84) ELT 164(SC) affirmed the view that unless it is shown by the manufacturer, that the price of goods includes an amount of excise duty payable to him, there is no question of exclusion of duty element from the price for determination of value.

    It is a well settled legal position that facts of a decision relied upon have to be shown to fit the factual situation of a given case. Without such discussion reliance could not be placed on a decision. With due respect to the views of Supreme Court in Amrit Agro Industries Ltd case (supra), the paper writer is of the view that reliance was placed in the proposition of Bata India Ltd case(supra) without appreciating the factual context in true perspective.

     

    Coming to Bata India Ltd case (Supra), the issue that came up for consideration before the Supreme Court is regarding eligibility to a conditional exemption with reference to value of excisable goods. An exemption notification was inforce which provided exemption from excise duty when the value of the footwear does not exceed Rs. 60 per pair. The assesse claimed that the benefit of this exemption is also applicable even when the price of the goods is above Rs.60 to Rs. 66 on the argument that if excise duty element is taken away from price, then the value of the goods would be within the limit of Rs. 60.

    Supreme Court held that the intention behind the notification was to give relief to the consumers who could not afford to pay high price foot wear. If the argument of assesse is accepted, the consumer will end up in paying higher amount (more than 60) bearing excise duty component as contemplated, but the manufacturer need not remit to Central Government, the excess amount though collected representing as excise duty.

    It was in this context, Supreme Court held that when manufacturer has included in the wholesale price any amount by way of tax, even when no such tax is payable, he is increasing the profit element which cannot be excluded as representing the element of excise duty.

    In this factual context, it was held that unless it is shown by the manufacturer, that the price of goods includes an amount of excise duty payable to him, there is no question of exclusion of duty element from the price for determination of value.

    In another case, CCE vs. MarutiUdyog Ltd, 2002(141)ELT3(SC) wherein the assesse has removed waste and scrap arose during manufacture without paying any excise duty. Revenue demanded excise duty on sale of such waste and scrap. In this context, the Supreme Court has referred to the judgment of Bata Ltd case(supra) and held that when cum-duty price is charged, then in arriving at the excisable value of goods, the element of duty which is payable has to be excluded.

    Thus Supreme Court itself, in this case, has drawn the correct proposition with regard to Cum Tax benefit. In many cases, Revenue is denying cum-tax benefit by placing reliance in subsequent favorable judgment of Amrit Agro Industries Ltd case. To add to the misery of assessees, various tribunals have also denied cum-tax benefits in several cases by upholding such reliance without appreciating the correct legal position with reference to other Supreme Court Judgments on this issue.

    Conclusion:

    In view of the above discussion, it is very clear that Revenue Contention that Cum-Tax benefit is available only when invoice issued expressly states that price/gross amount charged is inclusive of excise duty/service tax as the case may be is clearly based on wrong footing of one Supreme Court decision. On the other hand, such compliance is impracticable without contravening the law. Thus Cum-Tax benefit is a straightforward one available to assessees in all cases where excise duty/service tax is not collected separately. However until the matter is settled, assesse is required to face the misery of revenue biased adjudication.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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    The Art Of Delegation Is Fundamental To Growth

    Delegation is vital for effective leadership. Effective distribution of activities can make better use of restricted time and generate opportunity for development.

    Delegation is the assignment of responsibility to another individual for the purpose of carrying out specific activities. Improved time management, increased teamwork and sense of achievements are the key benefits of delegation.

    Auditor need to find ways to maximize the available time. Mixture of reduced workforces, greater stakeholder expectations, the productivity and concentration challenges associated with multitasking leave many auditors wishing there are more hours a day. One approach is to delegate activities. Delegation of activities is important for the auditors who are at Supervisory role.

    Auditors at time are hesitant to delegate work for reason like “it take less time if I do it myself”, such excuses keep auditors from benefiting from one of the best time-management tools. Involving others can help develop their skills and abilities, so next time a similar requirement arises, tasks can be delegated with confidence. Effective time-management requires a lot of candid effort on the part of the delegator. When delegation is approached correctly it allows for the growth of everyone involved in the process.

    Delegating can be helpful in the following situations

    • When the task offers valuable training to an employee
    • When an employee has more knowledge related to the task than delegator
    • When the task is recurring and all employees should be prepared or trained
    • When the task is of less priority and high priority tasks requires your immediate attention

    Describe the Task

    It is important to clearly articulate the task to be performed with time lines for completing the activity, clarification for the situation that requires additional effort. Any specific formatting, style or such other criteria to be followed should be recognized at this stage, for this a high –level picture of what “complete” Job shall look like shall be established. Very often auditors go into delegation without giving clear thought to the full scope of the activity and steps to be performed, decreasing the probability that the delegation will be successful.

    Skill Identification and select the individual or team

    It is important for the delegator to comprehend the necessary skills required to accomplish the task and identify who within the team exhibits those attributes. Adopt an appropriate strategy to delegate the right task to the right people at the right time and in the right way if a task is delegated to a person without adequate skills, it is unlikely the task will be performed adequately and within the expected time frame. Hence the possibility of delegating the similar activities in the future will be reduced. With that in mind, auditors should consider who may be best positioned to complete the activity within the established time frame.

     

    Support and Communicate Expectations

    Use a systematic step-by-step approach to brief people on what you want to delegate to them. Clear expectations are not always established and shared with the delegate about the specific tasks to be performed. Communicating the expectations in a clear and precise manner prevents errors caused by miscommunication. Common failures in communicating expectations include:

    • Lack of adequate information regarding the task must be performed
    • Unclear direction about the way to carry out the task
    • Not sharing with the intended audience about purpose of the activity
    • Not providing relevant background information
    • Not discussing in advance specific formatting, style or other such criteria

    Understanding the Task

    It is important to ensure that the delegator and the delegate have a mutual understanding of the task. The person who will be performing the task should be encouraged to ask any clarifying questions necessary to better understand the activity, timelines and any other requirements. For clarity the delegator should consider having the delegate repeat back a summary of the activity to provide visibility into any areas in which the expectations may be unclear. Face to face meetings are better suited than email to ensure there is a common understanding; such meeting allows the delegator to read the body language of the delegate to help identify any areas that may be unclear.

    Monitor Regular Progress

    It is important to set regular checkpoints for all delegated activitieswith the person who will be responsible for completing the task especially those that may span several weeks or months. These checkpoints allow the opportunity for the delegate to ask any clarifying questions that may arise during the course of performing the activity. They also enable the delegator to confirm the task is being performed as intended and it is always better to identify early in the process.

    Scope for Improvement

    Delegation sometime may be a skirmish and may push delegator and delegate out of their comfort zones, it can give a fresh set of eyes to an activity that has traditionally been performed by one person. This not only maximizes audits limited time, but new insights can create opportunity for improvement all around. Good delegation saves time, develops employees, grooms a successor and motivates.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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    What is Changing From Current Indian GAAP

    The Famous Five

    The volume and breadth of differences between Indian GAAP and Ind AS is enormous. Further, its impact will vary by industry and for each company. Ind AS will cover every area comprising reported revenues, expenses, assets, liabilities and equity. Before we get into the details of the specific differences, we think companies should be familiar with the Famous Five. In our view, companies will have to devote substantial amount of their time especially in these areas while preparing for Ind AS adoption.

    We have focused on the Famous Five concepts below.

    Revenue Recognition – AS 115

    Consolidation – AS 110

    Business Acquisition – AS 103

    Financials Instruments – AS 109

    Taxes – AS 12

    Let us Focus on AS 115, Revenue from contracts with Customers: Let us try to understand:

    What has changed Revenue recognition? Is it for good or bad?

    How does it affect my financials and its outlook?

    Revenue recognition

    Revenue is one of the most important financial statement measures for both preparers and users of the financial statements. It is therefore an accounting topic heavily scrutinized by investors and regulators. Today, Accounting Standard (AS) 9 on Revenue Recognition does not provide comprehensive guidance for certain aspects resulting in diversity in practices under Indian GAAP. Adoption of Ind AS 115, Revenue from Contract with Customers, provides comprehensive principles for recognising revenue, which will affect mostly all entities that apply Ind AS. Companies will be required to closely analyse their business practices within the revenue cycle to identify and evaluate potential GAAP differences.

     

    Transfer of control

    Under Ind AS 115, revenue is recognised when a customer obtains control of a good or service, while under Indian GAAP, revenue is recognised when there is a transfer of risk and rewards. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is neither same as transfer of risks and rewards nor similar to the culmination of an earnings process as understood today. Entities will be required to apply the new guidance to determine whether revenue should be recognised ‘over time’ or ‘at a point in time’. So as the first step, a company will have to first determine whether control is transferred over time. If the answer to this question is negative, only then revenue will be recognised at a point in time, or else it will be recognised over time.

    The difference between transfer of control vis-a-vis transfer of risk and reward can sometimes be subtle and at other times be stark requiring a detailed understanding of the accounting standard and customer contractual arrangements.

    The five-step control model

    The core principle of Ind AS 115 is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This core principle is described in a five-step model framework:

    Step 1: Identify the contract(s) with the customer

    Step 2: Identify the separate performance obligations in the contract Step 3: Determine the transaction price

    Step 4: Allocate the transaction price to separate performance obligations

    Step 5: Recognise revenue when (or as) each performance obligation is satisfied.

    Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment.

    Performance obligation

    Understanding what a customer expects to receive as a final product is necessary to assess whether goods or services should be combined and accounted as a single performance obligation or separate elements. Some contracts contain a promise to deliver multiple goods or services, but the customer is not purchasing the individual items. Rather, the customer is purchasing the final good or service, which is the aggregate of those individual items. The judgment, based on proper application of the principles envisaged in Ind AS 115, will determine whether a contract involves a single or multiple performance obligations.

    Until now there has been limited guidance in this area of multiple elements or performance obligations under Indian GAAP. Under Ind AS, companies will have to necessarily determine whether there are multiple promises in a contract and whether those promises are distinct. The consideration will then be

     

    allocated to multiple components and revenue recognised when those distinct goods or services are delivered, i.e. when control is transferred.

    It is also to be noted that separate performance obligations may be identified based on promises in a contract which may be explicit or implicit including based on past customary business practices. Also, upon transition to Ind AS, certain previously identified multiple elements may no longer be considered as separate promises under the new standard. In our experience, this area can be quite complex. Companies should carefully understand the impact of this, as potentially upon transition some revenue may never be reported and some could be reported twice.

    Variable consideration

    Entities may agree to provide goods or services for consideration that varies upon certain future events, which may or may not occur. Examples include volume and cash discounts, refund rights, rebates, performance bonuses/incentives, penalties, sales returns, etc. Sometimes this is also driven by past practice of an entity or a particular industry for example a history of giving discounts or concessions after the goods/services are sold. Variable consideration is a wide term and includes all types of positive and negative adjustments to the revenue.

    Under the current accounting practice, it is not uncommon to defer the revenue until the contingency is resolved. However under Ind AS, if the consideration is variable, then a company will need to estimate this variability at the inception of the contract subject to certain constraints,that is there should not be a significant revenue reversal in the future, which will be reassessed at each reporting period. Some of these concepts are new for us, as entities will have to estimate not only downward but also upward adjustments to revenue, something we are not used to. Also, this could result in earlier recognition of revenue as compared to current practice. This could affect entities in industries where variable consideration is presently not recorded until all contingencies are resolved. There is a narrow exception for intellectual property (IP) licenses where the variable consideration is a sales-or usage-based royalty, which will continue to be recognised based on sales or usage.

    Another significant area of difference from the current practice will be presentation of revenue.

    Upon adoption of Ind AS 115, generally all positive and negative adjustments to variable consideration discussed above will be presented as an adjustment to revenue as opposed to costs presently done for certain areas.

    Allocation of transaction price based on relative Standalone selling price

    Entities that sell multiple goods or services in a single arrangement (for example, sale of equipment with two year maintenance services contract) may be following different accounting practices under the current Indian GAAP. Under Ind AS 115, these entities must first evaluate whether the sale of equipment and services are two separate performance obligations, and if yes, then allocate the consideration to each of the distinct goods or services based on their relative standalone selling price. This allocation is

     

    based on the price an entity will charge a customer on a standalone basis for each good or service sold separately. In this regard, management will follow a hierarchy to estimate the selling price. Entities will first consider observable data to determine the standalone-selling price. An entity will need to estimate the standalone selling price if such data does not exist (cost plus profit margin is an acceptable approach). Some entities may also need to determine the standalone selling price of goods or services that previously did not required this assessment.

    Allocation of the transaction price to multiple performance obligations can be a matter involving significant estimate and judgment. Accordingly, a careful analysis of this aspect is required as a part of the transition to Ind AS.

    Licenses

    Entities that license their IP to customers will need to determine whether the license transfers to the customer ‘over time’ or ‘at a point in time’. A license that is transferred over time allows a customer access to the entity’s IP as it exists throughout the license period–such revenue is recognised over time. License provides right to access IP if all of the following criteria are met:

    • The licensor performs activities that significantly affect the I P.
    • The rights expose the customer to the effects of these activities.
    • The activities are not a separate good or service.

    Licenses transferred at a point in time allow the customer the right to use the entity’s IP as it exists when the license is granted. The customer must be able to direct the use and obtain substantially all of the remaining benefits from the licensed IP to recognise revenue when the license is granted. The standard includes several examples to assist entities making this assessment. In certain circumstances, this could result in change from current practice.

    Time value of money

    Some contracts provide the customer or the entity with a significant financing benefit (explicitly or implicitly). This is because performance by an entity and payment by its customer might occur at significantly different times. In such situations, under Ind AS, the entity will have to adjust the transaction price for the time value of money if the contract includes a significant financing component. The standard provides certain exceptions to applying this guidance and a practical expedient which allows entities to ignore time value of money if the time between transfer of goods or services and payment is less than one year.

    Presently, under Indian GAAP, such financing benefit is not identified and separated. This aspect will impact entities which have significant advance or deferred payment arrangements.

    Contract costs

    Entities sometimes incur costs (such as sales commissions or mobilisation activities) to obtain or fulfill a customer contract. Contract costs that meet certain criteria will be capitalised as anasset and get amortised as revenue is recognised upon adoption of Ind AS. Such capitalised costs will require a periodic review for recoverability and impairment, if applicable. If the contract period is a year or less, then as a practical expedient, such capitalisation may not be required.

     Presently, under Indian GAAP, such costs are generally expensed as incurred. This will result in more cost deferral for long-term type of arrangements.

    Presentation

    Ind AS includes more guidance on gross versus net presentation(including items such as excise duty, other charges, etc). Some of this could change the presentation of revenue upon adoption of Ind AS.

    Disclosures

    Extensive disclosures are required to provide greater insight into both, revenue that has been recognised and revenue that is expected to be recognised in the future from existing customer contracts. Quantitative and qualitative information will have to be provided about the significant judgments and changes in those judgments made while recording revenue.

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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