Success-Gurus

FINAL EXAMINATION
(REVISED SYLLABUS - 2008)
GROUP - III
Paper-14 : INDIRECT & DIRECT – TAX MANAGEMENT
PART - A
[ INDIRECT TAX ]
Q1. Discuss the Rules for Classification of Excisable Goods.
Answer 1.
The rules of classification of Excisable Goods are:
General Rules for Interpretation of Schedule to Central Excise Tariff and Customs Tariff are given
in First Schedule to the Tariff. The rules are same for excise and customs. The highlights of rules
are given below.
Rule 1
Classification shall be determined according to the terms of the headings and any
relative section or chapter notes and, provided such headings or Notes do not otherwise require,
according to other provisions of the rules.
First part of rule 2(a)
Any reference to complete goods also includes incomplete or un-finished goods, if such incomplete
or un-finished goods have the essential characteristic of finished goods.
Second part of rule 2(a)
Heading will also include finished goods removed un-assembled or disassembled i.e. in SKD or CKD
packs.
Second part of rule 2(b)
Any reference in heading to material or substance will also include the reference to mixture or
combination of that material or substance with other materials or substance. The classification of
goods consisting of more than one material or substance shall be according to the principles
contained in rule 3.
Rule 3
When by application of sub-rule (b) of rule 2 or for any other reason, goods are, prima facie,
classifiable under two or more headings, classification shall be effected as given in rule 3(a), 3(b)
or 3(c).
Rule 3(a)
The heading which provides most specific description shall be preferred to heading providing a
general description.
140 Revisionary Test Paper (Revised Syllabus-2008)
3(b)
If Mixture and Composite goods consisting of different materials or different components cannot
be classified based on above rule i.e. rule 3(a), it should be classified as if they consisted of the
material or component which gives it their essential character.
3(c)
If two or more headings seem equally possible and the dispute cannot be resolved by any of the
aforesaid rules, if both the headings appear equally specific, the heading which occurs last in
numerical order is to be preferred (i.e. latter the better).
Rule 4
If the classification is not possible by any of the aforesaid rules 1, 2 and 3, then it should be
classified under the heading appropriate to goods to which they are most akin. [This is only a last
resort and a desperate remedy to resolve the classification issue]
Rule 5
Cases for camera, musical instruments, drawing instruments, necklaces etc. specially shaped for
that article, suitable for long term use will be classified along with that article, if such articles are
normally sold along with such cases. Further, packing materials and containers are also to be
classified with the goods except when the packing is for repetitive use (This provision is obviously
made to ensure that the packing and the goods are charged at same rate of duty).
Rule 6
Classification of goods in sub-headings shall be determined in terms of those sub-headings. Only
sub-headings at the same level are comparable.
Q2. State the rules of Valuation of Excisable Goods.
Answer 2.
The important rules of Central Excise Valuation Rules, 2000.
Rule 2(b): “Normal transaction value” means the transaction value at which the greatest aggregate
quantity of goods are sold.
If goods are not sold at the time of removal, then value will be based on the value of such goods
sold by assessee at any other time nearest to the time of removal, subject to reasonable adjustments.
Rule 5: Some times, goods may be sold at place other than the place of removal e.g. in case of
FOR delivery contract. In such cases, actual cost of transportation from place of removal upto
place of delivery of the excisable goods will be allowable as deduction. Cost of transportation can
be either on actual basis or on equalized basis.
Rule 6: If price is not the sole consideration for sale, the ‘Assessable Value’ will be the price
charged by assessee, plus money value of the additional consideration received.The buyer may
supply any of the following directly or indirectly, free or at reduced cost.
(i) Materials, components, parts and similar items
(ii) Tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used
(iii) Material consumed, including packaging materials
(iv) Engineering, development, art work, design work and plans and sketches undertaken
elsewhere than in the factory of production and necessary for the production of the goodsIn
such cases, value of such additional consideration will be added to the price charged by
assessee to arrive at the ‘transaction value’. [explanation 1 to Rule 6].
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Explanation 2 to rule 6
Where an assessee receives any advance payment from the buyer against delivery of any excisable
goods, no notional interest on such advance shall be added to the value unless the Central Excise
Officer has evidence to the effect that the advance received has influenced the fixation of the
price of the goods.
Rule 7
When goods are sold through depot, there is no ‘sale’ at the time of removal from factory. In such
cases, price prevailing at depot (but at the time of removal from factory) shall be the basis of
Assessable Value. The value should be ‘normal transaction value’ of such goods sold from the
depot at the time of removal or at the nearest time of removal from factory.
Rule 8
In case of captive consumption, valuation shall be done on basis of cost of production plus 10%
(Cost of production is required to be calculated as per CAS-4)
Rule 9
If entire production is sold to ‘related person’ other than inter-connected undertakings, the assessable
value will be ‘normal transaction value’ at which the related person sells the goods to unrelated
buyers.
Proviso to rule 9
If assessee sales goods to ‘related person’, but related person uses them in captive consumption
(and not sell them), valuation will be done on basis of cost of production plus 10%, as per rule 8.
Rule 10
If entire production is sold to ‘related person’ who are inter-connected undertakings, the assessable
value will be as follows – (a) If they are ‘related person’ as defined in other clauses or is a holding
or subsidiary company of assessee, ‘normal transaction value’ at which the related person sells
the goods to unrelated buyers (b) In other cases, the value will be as if they are not ‘related
person’.
Rule 10A
In case of job worker manufacturing goods on behalf of Principal Manufacturer, value will be the
value at which the Principal Manufacturer sales goods to unrelated buyer.‘Job worker’ means a
person engaged in manufacture or production of goods on behalf of a principal manufacturer, from
any inputs or capital goods supplied by the said principal manufacturer or by any other person
authorised by him.
Rule 11
Residuary method - If value cannot be determined under any of the foregoing rules, value shall be
determined using reasonable means consistent with the principles and general provisions of section
4 and Valuation Rules.
Q3. (a) Exemption granted to SSI.
(b) Define Captive Consumption
Answer 3.
(a) Exemption to SSI
• SSI are eligible for exemption from duty under Notification No. 8/2003-CE dated 1-3-2003.
The SSI unit need not be registered with any authority.
142 Revisionary Test Paper (Revised Syllabus-2008)
• Broadly, items generally manufactured by SSI (except in tobacco, matches and textile sector)
are eligible for SSI exemption. Some items like pan masala, matches, watches, tobacco
products, Power driven pumps for water not confirming to BIS, products covered under
compounded levy scheme etc. are specifically excluded, even when these can be manufactured
by SSI. Some items like automobiles, primary iron and steel etc. are not eligible for SSI
exemption, but anyway, these are beyond capacity of SSI unit to manufacture.
• Unit whose turnover was less that Rs 4 crores in previous year are entitled to full exemption
upto Rs 150 lakhs in current financial year.
• SSI units manufacturing goods with brand name of others are not eligible for exemption,
unless the goods are manufactured in rural area.
• Turnover of all units belonging to a manufacturer will be clubbed for calculating SSI exemption
limit.
• Clubbing is also possible if two units are sham or bogus or if there is unity of interest and
practically they are one.
While calculating limit of Rs 400/150 lakhs –
• Turnover of Exports, deemed exports, turnover of non-excisable goods, goods manufactured
with other’s brand name and cleared on full payment of duty, job work done under notification
No. 214/86-CE, 83/94-CE and 84/94-CE, processing not amounting to manufacture, strips of
plastics used within factory is to be excluded.
• Value of intermediate products (when final product is exempt under notification other than
SSI exemption notification), branded goods manufactured in rural area and cleared without
payment of duty, export to Nepal and Bhutan and goods cleared on payment of duty is to be
included.
• Value of turnover of goods exempted under notification (other than SSI exemption notification
or job work exemption notification) is to be included for purpose of limit of Rs 400 lakhs, but
excluded for limit of Rs 150 lakhs.
(b) Captive consumption
• Excise duty is payable on goods manufactured and used within the factory.
• The intermediate product manufactured within the factory is exempt from duty, if it is
consumed captively for manufacture of (a) Capital goods as defined in Cenvat Credit Rules
i.e. those which are eligible for Cenvat credit or (b) Used for in or in relation to manufacture
of final products eligible for Cenvat, made from inputs which are eligible for Cenvat. [Notification
No. 67/1995 dated 16-3-1995].
• Duty is payable only if intermediate goods are marketable.
• If duty is payable on intermediate products, valuation will be on basis of cost of production
plus 10%.
• Cost of production should be calculated on basis of CAS-4.
Q4. Discuss the procedures followed in Central Excise.
Answer 4.
Answer: Some procedures are basic, which every assessee is required to follow. Besides, some
procedures are required to be followed as and when required.
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Basic Procedures
(1) Every person who produces or manufactures excisable goods, is required to get registered,
unless exempted. [Rule 9 of Central Excise Rules]. If there is any change in information
supplied in Form A-1, the same should be supplied in Form A-1.
(2) Manufacturer is required to maintain Daily Stock Account (DSA) of goods manufactured,
cleared and in stock. [Rule 10 of Central Excise Rules]
(3) Goods must be cleared under Invoice of assessee, duly authenticated by the owner or his
authorised agent. In case of cigarettes, invoice should be countersigned by Excise officer.
[Rule 11 of Central Excise Rules]
(4) Duty is payable on monthly basis through GAR-7 challan / Cenvat credit by 5th/6th of following
month, except in March. SSI units have to pay duty on monthly basis by 15th/16th of
following month. Assessee paying duty through PLA more than Rs 50 lakhs per annum is
required to make e-payment only [Rule 8].
(5) Monthly return in form ER-1 should be filed by 10th of following month. SSI units have to file
quarterly return in form ER-3. [Rule 12 of Central Excise Rules] - - EOU/STP units to file
monthly return in form ER-2 – see rule 17(3) of CE Rules
(6) Assessees paying duty of Rs one crore or more per annum through PLA are required to
submit Annual Financial Information Statement for each financial year by 30th November of
succeeding year in prescribed form ER-4 [rule 12(2) of Central Excise Rules].
(7) Specified assessees are required to submit Information relating to Principal Inputs every year
before 30th April in form ER-5, to Superintendent of Central Excise. Return for 2004-05 was
required to be submitted by 31-12-2004 [rule 9A(1) to Cenvat Credit rules inserted w.e.f.
25-11-2004]. Any alteration in principal inputs is also required to be submitted to
Superintendent of Central Excise in form ER-5 within 15 days [rule 9A(2) to Cenvat Credit
rules inserted w.e.f. 25-11-2004]. Only assessees manufacturing goods under specified tariff
heading are required to submit the return. The specified tariff headings are – 22, 28 to 30,
32, 34, 38 to 40, 48, 72 to 74, 76, 84, 85, 87, 90 and 94; 54.02, 54.03, 55.01, 55.02,
55.03, 55.04. Even in case of assessees manufacturing those products, only assessees paying
duty of Rs one crore or more through PLA (current account) are required to submit the
return.
(8) Assessee who is required to submit ER-5 is also required to submit monthly return of receipt
and consumption of each of Principal Inputs in form ER-6 to Superintendent of Central Excise
by tenth of following month [rule 9A(3) to Cenvat Credit rules inserted w.e.f. 25-11-2004].
Only those assessees who are required to submit ER-5 return are required to submit ER-6
return.
(9) Every assessee is required to submit a list in duplicate of records maintained in respect of
transactions of receipt, purchase, sales or delivery of goods including inputs and capital
goods, input services and financial records and statements including trial balance [Rule 22(2)].
(10) Inform change in boundary of premises, address, name of authorised person, change in name
of partners, directors or Managing Director in form A-1. [Refer Instructions given below
form A-1]
These are core procedures which each assessee has to follow. There are other procedures which
are not routine.
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Non-core procedures - The non-core procedures are as follows -
(a) Export without payment of duty or under claim of rebate [Rules 18 and 19 of Central Excise
Rules]
(b) Receipt of goods for repairs / reconditioning [Rule 16 of Central Excise Rules]
(c) Receipt of Goods at concessional rate of duty for manufacture of Excisable Goods.
(d) Payment of duty under Compounded Levy Scheme
(e) Provisional Assessment [Rule 7 of Central Excise Rules]
(f) Warehousing of goods.
(g) Appeals and settlement.
Q5. (a) State the requirements for removal of final products.
(b) State the Export Procedures
(c) Procedure to be followed if the goods are brought for repairs.
Answer 5.
(a) Invoice for removal of final products
Rule 11(1) of Central Excise Rules provides that excisable goods can be removed from factory or
warehouse only under an ‘Invoice’ signed by owner or his authorised agent. In case of cigarettes,
invoice shall be counter-signed by Inspector. Invoice should bear serial number and should be in
triplicate.
As per Rule 11(2) of Central Excise Rules, Invoice shall contain –
(a) Registration Number
(b) Address of jurisdictional Central Excise Division.
(c) Name of consignee
(d) Description and classification of goods
(e) Time and date of removal
(f) Mode of transport and vehicle registration number
(g) Rate of duty
(h) Quantity and Value of goods
(i) Duty payable on the goods.
(b) Export Procedures
• Exports are free from taxes and duties.
• Goods can be exported without payment of excise duty under bond under rule 19 or under
claim of rebate of duty under rule 18.
• Excisable Goods should be exported under cover of Invoice and ARE-1 form.
• Merchant exporter has to execute a bond and issue CT-1 so that goods can be cleared
without payment of duty. Manufacturer has to issue Letter of Undertaking.
• Export to Nepal /Bhutan are required to be made on payment of excise duty.
• EOU has to issue CT-3 certificate for obtaining inputs without payment of excise duty.
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(c) Bringing goods for repairs, re-making etc.
• Duty paid goods can be brought in factory for being re-made, refined, reconditioned or for
any other reason under rule 16.
• The goods need not have been manufactured by assessee himself.
• Cenvat credit of duty paid on such goods can be taken, on basis of duty paying documents of
such goods.
• After processing/repairs, if the process amounts to ‘manufacture’, excise duty based on
assessable value is payable.
• If process does not amount to manufacture, an ‘amount’ equal to Cenvat credit availed
should be paid [rule 16(2)].
• If some self manufactured components are used, duty will have to be paid on such components.
• Buyer/recipient of such goods can avail Cenvat credit of such amount/duty.
• If the above procedure cannot be followed, permission of Commissioner is required [rule
16(3)].
Q6. Discuss the duty liability of:
(a) Software and unbranded software
(b) Books on CD
(c) Unbranded software is service
Answer 6.
(a) Software is ‘goods’, but unbranded software is service.
In Tata Consultancy Services v. State of Andhra Pradesh (2005) 1 SCC 308 = 141 Taxman 132
= 271 ITR 401 = AIR 2005 SC 371 = 2004 AIR SCW 6583 = 137 STC 620 = 178 ELT 22 (SC
5 member Constitution bench), it has been held that canned software (i.e. computer software
packages sold off the shelf) like Oracle, Lotus, Master-Key etc. are ‘goods’. The copyright in the
programme may remain with originator of programme, but the moment copies are made and
marketed, they become ‘goods’. It was held that test to determine whether a property is ‘goods’
for purpose of sales tax, is not whether the property is tangible or intangible or incorporal. The
test is whether the concerned item is capable of abstraction, consumption and use, and whether
it can be transmitted, transferred, delivered, stored, possessed etc. Even intellectual property,
once it is put on a media, whether it be in form of books or canvas (in case of painting) or computer
discs or cassettes and marketed would become goods. In all such cases, intellectual property has
been incorporated on a media for purpose of transfer. The buyer is purchasing the intellectual
property and not the media, i.e. the paper or cassette or discs or CD. - - There is no distinction
between ‘branded’ and ‘unbranded’ software. In both cases, the software is capable of being
abstracted, consumed and used. In both the cases, the software can be transmitted, transferred,
delivered, stores, possessed etc. Unbranded software when marketed/sold may be goods. However,
Supreme Court did not express any opinion because in case of unbranded software, other questions
like situs of contract of sale and/or whether the contract is a service contract may arise. Hence,
in case of unbranded software, the issue is not yet fully settled. [SC upheld decision of AP High
Court reported in Tata Consultancy Services v. State of AP (1997) 105 STC 421 (AP HC DB)].
In Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 3 STT 245 = 145
STC 91 = 282 ITR 273 (SC 3 member bench), following extract from decision in case of Tata
Consultancy Services v. State of Andhra Pradesh was quoted with approval and adopted, ‘A
146 Revisionary Test Paper (Revised Syllabus-2008)
‘goods’ may be a tangible property or an intangible one. It would become goods provided it has the
attributes thereof having regard to (a) its utility; (b) capable of being bought and sold and (c)
capable of being transferred, delivered, stored and possessed. If a software, whether customised
or non-customised satisfies these attributes, the same would be goods’.
Earlier also, in Associated Cement Companies Ltd. v. CC 2001(4) SCC 593 = 2001 AIR SCW
559 = 128 ELT 21 = AIR 2001 SC 862 = 124 STC 59 (SC 3 member bench), it was held that
computer software is ‘goods’ even if it is copyrightable as intellectual property.
In State Bank of India v. Municipal Corporation 1997(3) Mh LJ 718 = AIR 1997 Bom 220, it was
held that ‘computer software’ is ‘appliance’ of computer. It was held that it is ‘goods’ and octroi
can be levied on full value and not on only value of empty floppy. [In this case, it was held that
octroi cannot be levied on license fee for duplicating the software for distribution outside the
corporation limits].
Excise duty on software - All software, except canned software i.e. software that can be sold off
the shelf, is ‘exempt’ under notification No. 6/2006-CE dated 1-3-2006.
Para 138 of Finance Minister’s speech dated 28-2-2006 reads as follows, ‘I propose to impose an
8 per cent excise duty on packaged software sold over the counter. Customized software and
software packages downloaded from the internet will be exempt from this levy’.
Meaning of ‘software’ - ‘Information Technology Software’ is defined in Supplementary Note of
chapter 85 of Central Excise Tariff (and also Customs Tariff) as follows - ‘For the purpose of
heading 8523, ‘Information Technology Software’ means any representation of instructions, data,
sound or image, including source code and object code, recorded in a machine readable form, and
capable of being manipulated or providing interactivity to a user, by means of an automatic data
processing machine’.
In CCE v. Pentamedia Graphics (2006) 198 ELT 164 (SC), it was held that ‘motion picture animation
file’ recorded in a machine readable format and capable of being manipulated by automatic data
processing machine is software – referred in Padmini Polymers v. CCE (2007) 215 ELT 392
(CESTAT), where it was held that multimedia application software on CD ROM is exempt. In this
case, Cook Books and games which were interactive were held as ‘software’. Reference was
made to CBE&C circular No. 7/98-Cus dated 10-2-1998 where it was clarified that encyclopedia,
games, books will be ‘software’ if these satisfy the interactivity criterion.
The SC decision was also followed in Gayatri Impex v. CC (2007) 215 ELT 397 (CESTAT) and
Adani Exports v. CCE (2007) 210 ELT 443 (CESTAT). However, from the decision, it is not clear
what was exactly imported.
There is no requirement that to qualify as software, it must work without any operating system
preloaded on computer. Any programme which requires anther programme like operating system
will also be treated as software – Contessa Commercial Co. P Ltd. v. CC (2007) 208 ELT 299
(CESTAT). In this case, the importer had imported educational programmes and games.
(b) Books on CD.
In case of encyclopedia and books, there is hardly any ‘interactivity’, except that search engine
helps in locating particular information. Further, search engine, which can be termed as ‘software’
forms insignificant part of the whole goods. Applying the criteria of ‘essential character’ in case of
mixture of goods, in my view, these cannot be termed as ‘software’. These have to be classified
as books.
Note 2 to chapter 49 reads as follows, ‘For the purpose of Chapter 49, the term ‘printed’ also
means reproduced by means of a duplicating machine, produced under the control of an automatic
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data processing machine, embossed, photographed, photocopies, thermocopied or typewritten.
Hence, it can be argued that a book can be ‘printed’ on CD since it is produced under the control
of an automatic data processing machine.
As per item Sr. No. 26 of Notification No. 6/2006-CE dated 1-3-2006, CD-ROMs containing books
of an educational nature, journal, periodicals (magazines) or newspaper are fully exempt from
excise duty. Thus, a book can be on CD has been recognised in law.
(c) Unbranded software is service
Though Supreme Court has held that tailor made software is also goods, Finance Bill, 2008 has
imposed service tax on tailor made i.e. unbranded software.
“Information technology software” means any representation of instructions, data, sound or image,
including source code and object code, recorded in a machine readable form, and capable of being
manipulated or providing interactivity to a user, by means of a computer or an automatic data
processing machine or any other device or equipment [proposed section 65(53a) of Finance Bill,
2008]
Any service provided or to be provided to any person, by any other person in relation to information
technology software for use in the course, or furtherance, of business or commerce, including,—
(i) development of information technology software, (ii) study, analysis, design and programming
of information technology software, (iii) adaptation, upgradation, enhancement, implementation
and other similar services related to information technology software, (iv) providing advice,
consultancy and assistance on matters related to information technology software, including
conducting feasibility studies on implementation of a system, specifications for a database design,
guidance and assistance during the startup phase of a new system, specifications to secure a
database, advice on proprietary information technology software (v) acquiring the right to use
information technology software for commercial exploitation including right to reproduce, distribute
and sell information technology software and right to use software components for the creation of
and inclusion in other information technology software products (vi) acquiring the right to use
information technology software supplied electronically, is a taxable service [proposed section
65(105)(zzzze) of Finance Bill, 2008].
Q7. State whether the following are “Goods” as per Central Excise Act, 1944.
(a) Plant and machinery assembled at site
(b) Articles marketable before erection
(c) Goods produced in SEZ in India.
(d) Dutiability of Steel and concrete Structures
(e) Structure for pre-fabricated building
(f) Fabrication of steel structure at site
Answer 7.
(a) Plant and machinery assembled at site
Plant and Machinery assembled and erected at site cannot be treated as ‘goods’ for the purpose
of Excise duty, if it is not marketable and movable. [It may be noted that even if goods are held as
‘excisable’, they will be exempt if manufactured within factory of production. See case law under
‘Captive Consumption’ in later chapter].
The word ‘goods’ applies to those which can be brought to market for being bought and sold, and
it is implied that it applies to such goods as are movable. Goods erected and installed in the
148 Revisionary Test Paper (Revised Syllabus-2008)
premises and embedded to earth cease to be goods and cannot be held to be excisable goods. -
Quality Steel Tubes (P.) Ltd. v. CCE 75 ELT 17 (SC) = (1995) 2 SCC 372 = 6 RLT 131 = 1995
AIR SCW 11 - in this case, it was held that tube mill and welding head erected and installed in the
premises and embedded in the earth for manufacture of steel tubes and pipes are not ‘goods’.
[followed in Mittal Works v. CCE (1997) 1 SCC 203 = 1996 (88) ELT 622 (SC) = 106 STC 201
- quoted with approval in Thermax Ltd. v. CCE 1998(99) ELT 481 (SC) - same view in Triveni
Engineering v. CCE AIR 2000 SC 2896 = 2000 AIR SCW 3144 = 40 RLT 1 = 120 ELT 273 (SC)
* CCE v. Damodar Ropeways 2003(151) ELT 3 = 54 RLT 125 (SC 3 member bench).
In Municipal Corporation of Greater Bombay v. Indian Oil Corporation AIR 1991 SC 686 = 1991
Supp (2) SCC 18, it was held that if the chattel is movable to another place in the same position
(condition?), it is movable property. If it has to be dismantled and re-erected at later place, it is
attached to earth and is immovable property.
Assembly at site is not manufacture, if immovable product emerges - In Mittal Engg Works v. CCE
1996 (88) ELT 622 = 17 RLT 612 = 106 STC 201 = (1997) 1 SCC 203, it was held that if an
article has to be assembled, erected and attached to the earth at site and if it is not capable of
being sold as it is, without anything more, it is not ‘goods’. Erection and installation of a plant is not
excisable - followed in CCE v. Hyderabad Race Club 1996 (88) ELT 633 (SC), where it was held
that an article embedded in the earth was not ‘goods’ and hence excise duty is not leviable –
followed in TTG Industries v. CCE 2004 AIR SCW 3329 = 167 ELT 501 (SC) – same view in case
of storage cabinets, kitchen counters etc. erected at site in Craft Interiors P Ltd. v. CCE 2006
(203) ELT 529 (SC) – same view in respect of refrigeration plant, air conditioning plant and
caustic soda plant in CCE v. Virdi Brothers 2007 (207) ELT 321 (SC).
Capital Goods manufactured within factory of production are exempt even if manufactured by
third party - It may be noted that capital goods manufactured within the factory and used within
the factory are exempt from excise duty vide notification No. 67/1995-CE dated 16.3.1995. The
exemption is available even when the capital goods are manufactured in the factory of production
by third party. [see case law under ‘Captive Consumption’].
Assembly is manufacture only if machinery can be removed without dis-assembly - In Triveni
Engineering v. CCE AIR 2000 SC 2896 = 2000 AIR SCW 3144 = 40 RLT 1 = 120 ELT 273
(SC), it was observed, ‘The marketability test requires that the goods as such should be in a
position to be taken to market and sold. If they have to be separated, the test is not satisfied’.
[Thus, if machine has to be dis-assembled for removal, it is not ‘goods’ and duty cannot be levied].
If machine (generating set in this case) is only bolted on a frame and is capable of being shifted
from that place, it is capable of being sold. It is goods and not immovable property – Mallur
Siddeswara Spinning Mills v. CCE 2004 (166) ELT 154 (SC).
Present legal position in respect of machinery erected at site – The latest judgment on the issue is
of Triveni Engineering judgment dated 8-8-2000, which has been practically accepted by Board
vide its circular dated 15-1-2002. Hence, the present legal provision is, as decided in Triveni
Engineering, i.e. ‘The marketability test requires that the goods as such should be in a position to
be taken to market and sold. If they have to be separated, the test is not satisfied’. Thus, if
machinery has to be dismantled before removal, it will not be goods. Following is also clear - (a)
Duty cannot be levied on immovable property (b) If plant is so embedded to earth that it is not
possible to move it without dismantling, no duty can be levied (c) If machinery is superficially
attached to earth for operational efficiency, and can be easily removed without dismantling, duty
is leviable (d) Turnkey projects are not dutiable, but individual component/machinery will be dutiable,
if marketable.
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(b) Article can be ‘goods’ if marketable before erection
An article will be liable to duty if its manufacture is complete before it is fastened to earth.
Similarly, if ‘machinery’ is in marketable condition at the time of removal from factory of
manufacture, duty will be leviable, even if subsequently, it is to be fastened to earth.
(c) Goods produced in SEZ in India is exempted from tax.
(d) Dutiability of Steel and concrete Structures
Following are covered in ‘iron and steel structure’ as defined in tariff heading 7308 – (i) big
structures like bridges, transmission towers, and lattice masts, lock-gates, roofs etc. of iron and
steel (ii) parts of structures e.g. doors, windows and their frames, shutters, balustrades, pillars
and columns etc. of iron and steel (iii) Plates, rods, angles, shapes, sections, tubes and the like
prepared for use in structures of iron and steel.
In Mahindra & Mahindra Ltd. v. CCE 2005 (190) ELT 301 (CESTAT 3 member LB), it has been
held as follows –
(i) Immovable iron and steel structures are not goods.
(ii) Structures and parts mentioned in parenthesis of 7308 like bridges, lock-gates, towers,
trusses, columns frames etc., in their movable state will be subject to excise duty, even if
latter they get permanently fixed in the structures.
(iii) Plates, rods, angles, sections, tubes and the like, prepared for use in the structures will also
be excisable goods subject to duty in their pre-assembled or disassembled state.
Fabrication of steel structurals like columns, crane, grinders, trusses amounts to ‘manufacture’- R
S Avtar Singh v. CCE (2007) 213 ELT 105 (CESTAT).
(e) Structure for pre-fabricated building is dutiable
Steel structure for prefabricated building is dutiable. – Mittal Pipe Mfg. Co. v. CCE 2002(146) ELT
624 (CEGAT).
(f)Fabrication of steel structure at site is exempt
As per Sr. No. 64 of notification No. 3/2005-CE dated 24-2-2005, (earlier it was in tariff entry
7308.50), structures fabricated at site of work for use in construction at site are exempt from
duty. In Delhi Tourism v. CCE 1999(114) ELT 421 (CEGAT), it was held that the term ‘site’ should
be given wider meaning and not narrow meaning. Even if structure is cast at different place and
brought to site of construction, it will be eligible for exemption.
Q8. Comment on the classification of goods on the followings:
(a) Classification of parachute coconut oil
(b) Plastic name plate
(c) Meaning of ‘set of articles’ – distinction between laptop and desktop
(d) Software/records/tapes supplied along with equipment
Answer 8.
(a) Classification of parachute coconut oil
In Amardeo Plastics Industries v. CCE (2007) 210 ELT 360 (CESTAT 2 v. 1 order), on the basis of
chapter notes, it was held that parachute coconut oil is ‘vegetable oil’ under chapter 15 and not
‘preparation for use on the hair’, since the marking on package did not say that it is for ‘such
specialized use’, though advertisements did indicate so.
150 Revisionary Test Paper (Revised Syllabus-2008)
However, in Shalimar Chemical Works v. CST (2008) 12 VST 485 (WBTT), it has been held that
except in a few Southern States, coconut oil is not treated as edible oil for use of daily cooking. In
West Bengal, considering consumption pattern, coconut oil cannot be treated as ‘edible oil’. It has
to be treated as ‘hair oil’.
(b) Plastic name plate
Plastic name plate for motor vehicle is to be classified as ‘accessory of motor vehicle’ in chapter
87 and not ‘other articles of plastic’ in chapter 39, since ‘name plate’ is not specified in any
heading in chapter 39 – Pragati Silicons P Ltd. v. CCE (2007) 8 VST 705 = 211 ELT 534 (SC).
(c) Meaning of ‘set of articles’ – distinction between laptop and desktop
‘Set of article’ should consist of more than one item, each complementing the work of another and
retaining their individual identity all the time – CC v. Acer India P Ltd. (2007) 218 ELT 17 (SC). In
this case, it was held that a desktop computer is a combination of CPU with monitor, mouse and
keyboard as a set. A desktop computer does not lose individual identities of CPU, monitor, mouse
and keyboard. Not only they are marketable as separate items but are also used separately. On
the other hand, a laptop (notebook computer) comes in an integrated and inseparable form. It is a
combination of CPU, monitor, mouse and keyboard. A laptop cannot be said to be set of CPU with
monitor mouse and keyboard – confirming Tribunal decision in CC v. Acer India P Ltd. (2007) 208
ELT 132 (CESTAT).
(d) Software/records/tapes supplied along with equipment
Software imports are exempt from customs duty.
Earlier, Customs and Central Excise Tariff had a note No. 6 which stated that software when
presented with the apparatus for which it was intended will be classifiable as software. This note
has been deleted w.e.f. 1-1-2007. Hence, software embedded or pre-loaded in machine is to be
classified along with the machine. This will also be case when software is brought separately, but
as a ‘set’. If tangible software e.g. operating software or application software loaded on disk,
floppy, CD-ROM etc. is imported, it will be classifiable as software under heading 8523 – CC
(Import), Mumbai PN 39/2007 dated 3-12-2007.
In CC v. Hewlett Packard India (Sales) P Ltd. (2007) 215 ELT 484 (SC), it was held that preloaded
software in laptop forms integral part of the laptop. Without operating system like windows,
the laptop cannot work. Hence, the laptop along with software has to be classified as laptop and
values as one unit. Software pre-loaded cannot be classified separately as software (In this case,
the importer wanted to classify hard disk along with software as ‘software’ and refused to give
value of software even when called upon to do so. Hence, the decision has to be seen from
peculiar facts of the case).
Q9. A small scale manufacturer produces a product ‘P’. Some of the production bears his own
brand name, while some production bears brand name of his customer. The customer purchases
the goods from the small scale unit and sales himself by adding 20% margin over his purchase
cost. Clearances of the SSI unit in 2006-07 was Rs. 3,53,00,000. He achieved clearances of
Rs. 445 lakhs in 2007-08 as per following break up. [These clearances are without considering
excise duty and sales tax]
(a) Clearances with his own brand name : Rs. 80 lakhs.
(b) Clearances of product bearing his customer’s brand name : Rs. 365 lakhs.
Group-III : Paper-14 : Indirect & Direct–Tax Management 151
Normal excise duty of his product is 16% plus education cesses as applicable. The SSI unit
intends to avail Cenvat benefit on inputs on goods supplied to the brand name owner but
intends to avail SSI exemption on his own clearances.
(A) Find the total duty paid by the manufacturer in 2007-08, if (a) Inputs are common but SSI
unit is able to maintain separate records of inputs in respect of final products under his
brand name and those with other’s brand name (b) The inputs are common and SSI unit is
not able to maintain separate records on inputs used in final products manufactured under
his brand name and with other’s brand name.
(B) What will be the rate of excise duty payable by him in April 2008 (a) on product bearing
his own brand name and (b) on product bearing his customer’s brand name.
(C) Will there be any difference in duty payable in April 2008 if all his clearances of Rs. 445
lakhs in 2007-08 were of product under his own brand name ?
Answer 8.
(A) SSI unit can avail Cenvat on final products cleared under other’s brand name and avail SSI
exemption in respect of his own production. (a) In the first case, he has to pay duty @ 16% on Rs
365 lakhs, i.e. Rs 58.40 lakhs plus education cess of Rs 1,16,800 plus SAH education cess of Rs
58,400. He cannot avail Cenvat credit in respect of inputs used to manufacture product under his
own brand name. (b) In the second case, since he is unable to maintain separate record of inputs,
he will have to pay 10% ‘amount’ on Rs 80 lakhs as per rule 6(3)(b) of Cenvat Credit Rules. Thus,
he has to pay duty of Rs 58.40 lakhs, plus education cess of Rs 1,16,800 plus SAH education cess
of Rs 58,000, plus an ‘amount’ of Rs 8.00 lakhs. He can avail Cenvat of all the inputs. - - Note that
in respect of goods bearing customer’s brand name, duty is payable on his selling price to the
customer even if customer sells them subsequently at higher price.
The assessee has to carefully do his costing and decide (a) whether to avail Cenvat on all inputs,
pay full duty on all final products and 10% ‘amount’ on final products cleared under his own brand
name or (b) Not avail Cenvat at all and avail exemption from duty on his own production with his
brand name.
(B) The turnover of SSI during 2007-08 was over Rs. 4 crores. However, for purposes of calculating
the upper limit of Rs. 4 crores, clearances with other’s brand name are not to be considered.
Hence, from 1st April 2008, he can clear goods bearing his own brand name upto Rs 150 lakhs
without payment of duty, if he does not avail Cenvat credit on inputs used in such products. If he
is unable to maintain separate records, he will have to pay 10% ‘amount’ on goods manufactured
under his own brand name.
(C) If total turnover of Rs. 4.45 crores in 2007-08 was under his own brand name, the manufacturer
is not eligible for any Small industry concession in April 2006, and he will have to pay duty at
normal rates on his total clearances in April 2008.
Q10. An assessee cleared various manufactured final products during June 2008. The duty payable
for June 2008 on his final products was as follows – Basic – Rs. 2,00,000 Education Cesses
– As applicable. During the month, he received various inputs on which total duty paid by
suppliers of inputs was as follows – Basic duty – Rs. 50,000, Education Cess – Rs. 1,000,
SAH education Cess Rs. 500. Excise duty paid on capital goods received during the month
was as follows – Basic duty – Rs. 12,000. Education Cess - Rs. 240. SAH education cess -
Rs. 120. Service tax paid on input services was as follows – Service Tax – Rs. 10,000.
Education cess – Rs. 200 SAH Education Cess - Rs. 100. How much duty the assessee will
be required to pay by GAR-7 challan for the month of June 2008, if assessee had no
opening balance in his PLA account? What us last date for payment?
152 Revisionary Test Paper (Revised Syllabus-2008)
Answer 10.
Education Cess payable on final products is Rs. 4,000 (2% of Rs. 2,00,000). SAH education cess
payable is Rs. 2,000.
The Cenvat credit available for June 2008 is as follows –
Description Basic duty Service Tax Education Cess SAH Education Cess
Inputs 50,000 1,000 500
Capital Goods
(50% will be eligible
and balance next year) 6,000 120 60
Input Service 10,000 200 100
Total 56,000 10,000 1,320 660
Credit of Rs 66,000 (56,000 + 10,000) can be utilised for basic duty Credit of education cess
and SAH education cess can be utilised only for payment of education cess and SAH education
cess on final product only.
Hence, duty payable through GAR-7 challan for June 2008 is as follows –
Basic Duty Rs Education Cess Rs SAH Education Cess Rs
(A) Duty payable 2,00,000 4,000 2,000
(b) Cenvat Credit 66,000 1,320 660
Net amount payable (A-B) 1,34,000 2,680 1,340
Last date for payment is 5th July, 2008.
Q11. Discuss the process of import of baggage and courier through post.
Answer 11.
Baggage, Courier and import through post
• Baggage includes unaccompanied baggage but does not include motor vehicles [section 2(3)]
• Indians going out can take out any amount of foreign currency as long as it is obtained from
authorised foreign exchange dealer. He can take out and bring in Indian currency only upto
Rs. 1,000.
• Baggage includes all dutiable articles imported by passenger or crew but does not include
motor vehicles, alcoholic drinks (beyond limits) and goods imported through courier.
• Incoming passenger with no dutiable goods can pass through green channel.
• General rate of duty on import of baggage is 36.05% (35% basic customs duty plus 2%
education cess plus 1% SAH education cess). One laptop computer is exempt.
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• Bona fide luggage including used personal effects are exempt from customs duty. In addition
to bona fide luggage and one laptop computer, Indian resident or foreigner residing in India
over 12 years of age is allowed general free allowance (GFA) of Rs 25,000, after stay
abroad for more than three days. GFA is lower when passenger comes from some countries
like Nepal, Bhutan, Myanmar or China.
• Besides GFA, one laptop can be imported free of customs duty.
• GFA cannot be clubbed with other person.
• If a person comes after 6 months of stay, he can bring gold upto 10 Kg on payment of
customs duty @ Rs 250 per 10 gms (plus education cess) and silver upto 100 Kg on payment
of customs duty @ Rs 500 per Kg (plus education cess)
• Commercial samples can be brought in or taken out within prescribed limits.
• Additional concession is available if a person transfers his residence after stay abroad for
two years. He is eligible for concessional rate of 15% duty (plus 2% education cess) of goods
upto Rs 5 lakhs. In case of some goods, duty is Nil. He is also entitled to GFA.
• In case of mini TR (i.e. person returning after 365 days), used personal effects and household
articles upto Rs 75,000 can be brought duty free, in addition to GFA. However, items specified
in Annex I, II and III as specified in Baggage Rules are not allowed duty free.
• Foreign tourists can bring personal effects and travel souvenirs free of duty. Articles upto Rs
8,000 can be brought as gifts duty free.
• If value of foreign currency notes exceeds US $ 5,000 or aggregate value of foreign exchange
(in the form of currency note, bank notes, traveller cheques etc.) exceeds US $ 10,000, the
passenger has to make declaration in Currency Declaration Form (CDF).
• Unaccompanied baggage can be brought. GFA is not allowed on unaccompanied baggage.
Import and export through Courier
Imports and export through couriers are treated as imports or exports as any other mode. It is not
treated as ‘baggage’. There is no restriction on value of goods that can be brought through courier.
The duty payable is normal duty as applicable to all other goods normally imported by ship or air
transport. Duty concessions, if any, are also permissible. Courier Imports and exports (Clearance)
Regulations, 1998 specify the procedures, which are summarised in Chapter 17 of CBE&C’s
Customs Manual, 2001.
Import through post
• Label/declaration on postal article is treated as ‘Entry’. Separate Bill of Entry is not required.
• Postal articles are sent to Foreign parcel Department of Post Office. The list is handed over
to Principal Appraiser of Customs.
• He will inspect mail. Packets suspected of dutiable articles will be opened and examined by
him. He will assess the goods and then seal the parcel.
• Goods will be handed by postmaster to addressee only on receipt of customs duty payable on
the goods.
• Gifts upto Rs 10,000 are free. Post parcel is exempt if customs duty is upto Rs 100.
Q12. (a) Warehousing in Customs
(b) Penalties under Customs Act
(c) Margin of Dumping
(d) Rules for deciding subsidy or dumping margin
154 Revisionary Test Paper (Revised Syllabus-2008)
Answer 12.
(a) Warehousing in customs
• Imported goods can be kept in customs warehouse without payment of customs duty.
• Goods can be kept in warehouse awaiting receipt of import authorisation.
• Goods can be kept in warehouse upto one year, but interest is payable beyond 90 days, @
15%.
• Goods can be manufactured in warehouse and exported without payment of customs duty.
This facility is useful to EOU.
• Warehoused goods cane be (a) Cleared on payment of duty (b) Cleared for export without
payment of duty or (c) transferred to another warehouse without payment of duty.
(b) Penalties under Customs Act
• Smuggling in relation to goods is an act or omission which will make the goods liable to
confiscation.
• Penalty can be imposed for improper imports or improper exports.
• Monetary penalty upto value of goods or Rs 5,000 whichever is higher can be imposed.
• Goods can be confiscated. Permission can be granted for re-export of offending goods..
• In case of goods covered under section 123 of Customs Act, burden of proof that the goods
are not smuggled goods is on the accused.
(c) Margin of Dumping
‘Margin of dumping’ means the difference between normal value and export price (i.e. the price at
which these goods are exported). [section 9A(1)(a)].
‘Normal Value’ means comparable price in ordinary course in trade, for like article, when destined
for consumption in the exporting country or territory. If such price is not available or not comparable
(a) comparable representative price of like article exported from exporting country or territory to
appropriate third country or (b) cost of production plus reasonable profit, can be considered [section
9A(1)(c) of Customs Tariff Act]. The ‘normal value’ is to be determined as per rules.
In Reliance Industries Ltd. v. Designated Authority 2006 (202) ELT 23 (SC), it was held that
‘normal value’ are not exporter specific but exporting country specific. Once dumping of specific
goods from a country is established, dumping duty can be imposed on all exports of those goods
from that country in India, irrespective of the exporter. Rate of duty may vary from exporter to
exporter depending upon the export price.
‘Export Price’ means the price at which goods are exported. If the export price is unreliable due to
association or compensatory arrangement between exporter and importer or a third party, export
price can be constructed (revised) on the basis of price at which the imported articles are first sold
to independent buyer or according to rules made for determining margin of dumping. [section
9A(1)(b)].
Margin of dumping is determined on basis of weighted average of ‘normal value’ and the ‘export
price’ of product under consideration.
(d) Rules for deciding subsidy or dumping margin
Central Government has been empowered to make rules for determining (a) subsidy or bounty in
case of bounty fed goods (b) the normal value and export price to determine margin of dumping in
case of dumping. Accordingly, Customs Tariff (Identification, Assessment and Collection of AntiGroup-
III : Paper-14 : Indirect & Direct–Tax Management 155
dumping duty on Dumped Articles and for determination of Injury) Rules, 1995 [Customs Notification
No. 2/95 (N.T.) dated 1-1-95] provide detailed procedure for determining the injury in case of
dumped articles.
Procedure for fixing anti dumping duty
After the ‘designated authority’ is satisfied about prima facie case, he will give notice to
Governments of exporting countries. Opportunity to inspection of documents and making
representations will be given to interested parties who are likely to be affected. Designated Authority
will first give preliminary finding and then final finding within one year. Provisional duty can be
imposed on basis of preliminary finding which can continue upto 6 months, extendable to 9 months.
Additional duty may be imposed on basis of the final finding.
As per rule 18 of Anti-Dumping Duty Rules, Central Government has to issue a notification fixing
anti-dumping duty within three months from date of notification issued by designated authority.
Q13. (a) An importer imports some goods @ 10,000 US $ on CIF basis. Following dollar rates are
available on the date of presentation of bill of entry : (a) RBI Floor rate : Rs. 43.37 (b)
Inter-bank closing rate : Rs. 43.38 (c) Rate notified by CBE&C under section 14 (3) (a) (i)
of Customs Act : Rs. 43.55 (d) rate at which bank has realised the payment from importer :
Rs. 43.58. Find the assessable value for customs purposes.
(b) A consignment is imported by air. CIF price is 1,000 US Dollars. Freight is 320 US $.
Insurance cost was $ 35. Exchange rate is same as above. Find Value for customs purposes.
(c) FOB Cost of a consignment is 3,000 UK Pounds. Insurance and transport costs are not
available. What is Customs Value? On the date of filing of bill of entry, Reserve Bank of
India reference rate of US $ was 43.37 and inter-bank closing rates were : Rs. 43.38 per
US $ and Rs. 69.38 per UK Pound. Exchange rate announced by Board (CBE&C) by
customs notification was Rs. 69.78 per British Pound. T T buying rate was 69.70 and T
T selling rate was Rs. 69.61 per UK pound.
Answer 13. (a) The relevant exchange rate is Rs. 43.55. Thus, CIF Value of goods is Rs. 4,35,500.
Landing charges [rule 9 (2) of Customs Valuation Rules] @1% of CIF Value are to be added - i.e.
Rs. 4,355. Thus, Customs Value or Assessable Value is Rs. 4,39,855.
(b) FOB Price of consignment is $ 645 (1,000 less 320 less 35). Air freight is to be restricted to
20% of FOB Value for purpose of customs valuation. Hence, freight should be considered as 20%
of 645 i.e. 129 US $ for valuation. Thus, CIF Value for customs purposes is $ 809 (645 + 129 +
35) i.e. Rs. 35,231.95 @ Rs. 43.55 per dollar. Add 1% of CIF i.e. Rs. 352.32 as landing charges.
Thus, Value for Customs purposes will be 35,584.27.
(c) FOB Price is 3,000 UK pounds. Add 20% as freight cost i.e. 600 as actual cost is not available.
Since insurance charges are not known, insurance cost should be taken @ 1.125% of FOB price
i.e. 33.75. Thus, CIF price is 3,633.75 UK pounds. Conversion rate is 69.78. Hence, CIF Value is
Rs. 2,53,563.08 (3,633.75 x 69.78). Landing charges @ 1% of CIF will be Rs. 2,535.63. Thus,
Customs Value is Rs. 2,56,098.71.
Q14. Customs value (Assessable Value) of imported goods is Rs. 2,00,000. Basic Customs duty
payable is 10%. If the goods were produced in India, excise duty payable would have been 16%.
Education cess is as applicable. Special CVD is payable at appropriate rates. Find the Customs
156 Revisionary Test Paper (Revised Syllabus-2008)
duty payable. What are the duty refunds/benefits available if the importer is (a) manufacturer (b)
service provider (c) Trader?
Answer 14.
Duty % Amount
Total Duty
(A) Assessable Value Rs 10,000 200,000.00
(B) Basic Customs Duty 10% 20,000.00
(C) Sub-Total for calculating CVD ‘(A+B)’ 220,000.00
(D) CVD ‘C’ x excise duty rate 16% 35,200.00
(E) Education cess of excise - 2% of ‘D’ 2% 704.00
(F) SAH Education cess of excise - 1% of ‘D’ 1% 352.00
(G) Sub-total for edu cess on customs ‘B+D+E+F’ 56,256.00
(H) Edu Cess of Customs - 2% of ‘G’ 2% 1,125.12
(I) SAH Education Cess of Customs - 1% of ‘G’ 1% 562.56
(J) Sub-total for Spl CVD ‘C+D+E+F+H+I’ 257,943.68
(K) Special CVD u/s 3(5) - 4% of ‘J’ 4% 10,317.75
(L) Total Duty 68,261.43
(M) Total duty rounded to 68,261
Notes : Buyer who is manufacturer, is eligible to avail Cenvat Credit of D, E, F and K above. A
buyer, who is service provider, is eligible to avail Cenvat Credit of D, E and F above. A
trader who sells imported goods in India after charging Vat/sales tax can get refund of
Special CVD of 4% i.e. ‘K’ above.
Q15. Define ‘Related Persons’ as per Customs Valuation Rules,1988.
Answer 15.
For the purpose of these rules, persons shall be deemed to be “related” only if –
(i) they are officers or directors of one another’s businesses;
(ii) they are legally recognised partners in business;
(iii) they are employer and employee;
(iv) any person directly or indirectly owns, controls or holds 5 per cent or more of the outstanding
voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family.
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Q16. When are the custom authorities precluded from enhancing the value on the basis of
contemporaneous import at higher price invoking Rule 4 of the Customs (Determination of
Price of Imported Goods) Rules, 1989 read with section 14 of the Customs Act, 1962.
Answer 16.
If methodology given under Rule 3 is not followed then custom authorities are precluded from
enhancing the value of goods imported on the basis of contemporaneous imports. According to
Rule 3, the value shall be transaction value determined in accordance with Rule 4 and where
conditions of Rule 4 are not satisfied then valuation has to be done in accordance with Rule 5 to 8.
The value can be enhanced on the basis of identical or similar goods imported at or about the same
time as the goods are being valued. If the contemporaneous imports does not satisfy the criteria of
the identical goods or similar goods then custom authorities cannot enhance the value.
Q17. In a particular case of import of goods, the seller in USA and the Indian buyer were found to
be together controlling a third company in India. What are the conditions subject to which
then transaction value of such goods would be accepted for customs purpose?
Answer 17.
(A) Rule 2(2) of Customs Valuation Rules, 1989 specifies the situations in which persons shall be
related. One of the specified situations is that the persons together directly or indirectly
control a third person. It has been further clarified in the explanation to this sub-rule that the
term’ person’ also includes legal persons. In view of the above, the seller and buyer are
deemed to be related in the given case.
(B) Rule 4(3) of Customs Valuation Rules deals with acceptance of transaction value where
buyer and seller are related. Refer Rule 4(3) above.
Q18. Discuss the concept of ‘Price actually paid or payable’ with reference to ‘Transaction Value’
as given in Interpretative notes of Customs Valuation Rules, 1989.
Answer 18.
(a) The price actually paid or payable is the total payment made or to be made by the buyer to or
for the benefit of the seller for the imported goods.
(b) The payment need not necessarily take the form of a transfer of money. Payment may be
made directly or indirectly.
(c) Activities undertaken by the buyer on his own account, other than those for which an
adjustment is provided in Rule 9, are not considered to be an indirect payment to the seller,
even though they might be regarded as of benefit to the seller. The costs of such activities
shall not be added in determining the value of imported goods.
(d) The value of imported goods shall not include the following charges or costs, provided that
they are distinguished from the price actually paid or payable for the imported goods:
• Charges for construction, erection, assembly, maintenance or technical assistance,
undertaken after importation on imported goods such as industrial plant, machinery or
equipment;
• The cost of transport after importation;
• Duties and taxes in India.
158 Revisionary Test Paper (Revised Syllabus-2008)
(e) The price actually paid or payable refers to the price for the imported goods. Thus the flow of
dividends or other payments from the buyer to the seller that do not relate to the imported
goods are not part of the customs value.
Q19. Explain whether the costs and services as given in Rule 9 of the Customs Valuation Rules,
1989 are to be added to the value of the identical goods or similar imported goods under
Rule 5 & 6 respectively.
Answer 19.
(a) Rule 5(1)(c) of the Customs Valuation Rules, 1989 provides that where imported goods are
being valued as per Rule 5, the value of identical goods is adjusted to take into account the
difference attributable to the commercial level or to the quantity or both.
(b) Rule 5{2) provides that where costs and charges referred to in Rule 9 are included in the
value of identical goods, adjustment has to be made for the difference in such costs and
charges between the imported goods and identical goods.
(c) Therefore, if the value of the identical goods does not include certain specific costs and
charges relating to the imported goods, these are to be included as per Rule 9.
Q20. Determine Assessable Value from the following:
Sale quantity Unit Price Number of Sales Total quantity sold at each price
1-10 units 100 10 sales of 5 units 65
5 sales of 3 units
11-25 units 95 5 sales of 11 units 55
Over 25 units 90 1 sale of 30 units 80
1 sale of 50 units
Answer 20.
The greatest number of units sold at a price is 80, therefore, the unit price in the greatest aggregate
quantity is 90.
Q21. XYZ Co., the assessee, has claimed before the Customs Authority that since the exports of
goods in its case attracted no duty, the value, for purposes of the Customs Act, 1963, to be
declared shall be the value of goods, which he expects to receive on sale of goods in the
overseas market.
Briefly discuss giving reasons whether the stand taken by the XYZ Co. is correct.
Answer 21.
The Supreme Court has addressed this issue in M/s Om Prakash Bhatia V. Commissioner of Customs,
Delhi 2004 (155) ELT 423. The Apex Court observed that for finding the value section 14 of the
Customs Act has £o be read with section 2(41) which defines the term Value’. According to it
value means the value as determined in accordance with section 14(1).
According to section 14(1) the value of such goods shall be deemed to be the price at which such
or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation
or exportation, as the case may be, in the course of international trade, where the seller and the
Group-III : Paper-14 : Indirect & Direct–Tax Management 159
buyer have no interest in the business of each other and the price is the sole consideration for the
sale or offer for sale. Therefore, irrespective of the fact whether duty is to be levied or not. the
value has to be determined in accordance with the provisions of section 14 only. Hence, contention
of XYZ Co. is to be rejected.
Q22. DD India Private Limited Imported components and spares of diesel engines such as impellers,
gaskets, elements etc., from 00 Asia Private Limited, Singapore. The Special Valuation
Branch (SVB) Customs House Chennai Initiated Investigation into the question of admissibility
of invoice value for the purpose of valuation of goods Imported and assessment of custom
duty.
The SVB found that DD India was re-selling the imported components at a margin of 65%
(which includes expenses and profits) in the domestic market. The SVB felt that the said
margin should not be more than 45%.
The SVB came to the following conclusions:
1. DD India is related to DD Asia as per rule 2(2) of the Customs Valuation Rules, 1987 as
DD India are the sole distributors in India of DD Asia.
2. The “transaction value” shall be determined as per rule 8 of the Customs Valuation
Rules, 1989. Consequently the invoice value of all imports by DD India was ordered t be
loaded by 20% for the purpose of assessment of the custom duty.
DD India taken over the distribution from M/s Elandtee, who were the erstwhile distributors
In India for DD Asia. During the enquiry proceedings DD India had placed evidence before
the SVB that the margins enjoyed by M/s Elandtee was also 65%. However, this was
ignored by SVB as not relevant.
The SVB also rejected the price list of foreign suppliers produced by DD India without
assigning an reasons. Write a brief note on the two conclusions arrived at by SVB and state,
how as the Excise and Customs consultant of DD India you would assail the same in the
aforesaid facts and circumstances of the case.
Answer 22.
According to explanation to rule 2(2) of the Custom Valuation Rules, 1989, a sole distributor can
be treated as a related person only if he is related in any of the manner specified under rules 2(r)
to rule 2(viii). Therefore, in the given case, on the basis of given facts, DD India cannot be treated
as a related person. First conclusion of SVB is not sustainable.
Second conclusion of SVB is also not sustainable. Assessment of duty has to be based on the price
actually paid or payable and not on any fictitious or notional price. Rule 5 to 8 are adopted only
when transaction value is not available. In Eicher Tractors Ltd. V. CC2000(122) ELT321, 325 the
Supreme Court has held that the reason should fall within the scope of rule 4{2). Before adopting
rule 8 i.e. best judgment, all preceding rules shall be applied and it has to be determined why value
cannot be decided according to any of those rules. The adjudicating authority cannot directly
adopt rule 8 without examining the applicability of preceding rules.
It is to be noted that the facts given do not indicate that SVB has applied any of the preceding
rules. Therefore, adoption of rule 8 is not correct.
Q23. Due to congestion in the ports or non-availability of deep draught all ports are not navigable
unto the jetty. Goods have to be discharges or transshipped at the outer anchorage with the
help of barges. The charges associated with the delivery of cargo at outer anchorage are
160 Revisionary Test Paper (Revised Syllabus-2008)
called ‘barging/lighterage charges’. State giving the reasons whether such charges have to
be included for purpose of determination of assessable value under the Customs Valuation
(Determination of price of imported goods) Rules, 1989.
Answer 23.
AS per MF (DR) Circular No. 29/2005 - Cus dated 13.04.2001, the barging /lighterage charges
borne by the importer in bringing the goods from outer anchorage to the landmass should be
included in the assessable value as ‘extended cost of transportation’ under rule 9{2)(a) of the
Customs Valuation Rules, 1988. The value of goods is deemed to be the price at which such goods
are ordinarily sold or offered for sale for delivery at the time and place of importation in the course
of international trade. The importation gets completed when the goods reach the landmass of the
country and not at the outer anchorage point. Therefore, all the expenses incurred by the importer
in bringing the goods to the landmass of the country will be includible in the assessable value.
Q24. A consignment of 800 metric tones of skimmed milk powder of US origin was imported by
a non-profit making organization for free distribution of milk to the children In a tribal area
under a World Health Programme. This being a special transaction a nominal price of US $
10 per metric ton was charged for the consignment to cover freight and insurance charges.
The customs department found out at or about the importation of this gift consignment
there were the following imports of the skimmed milk powder of US origin :
Sl. No. Quantity imported Unit price in US $ CIF
In metric tonnes
1 20 260
2 100 220
3 500 200
4 900 175
5 400 180
6 780 160
The rate of exchange as on the relevant date was 1 US$ = Rs. 40.
Briefly explain how the assessable value for the purposes of the customs duty will be arrived at in
this case under the Customs Act, 1963 and the Customs Valuation Rules, 1988.
Answer 24.
In the given case only a nominal value of US$ 10 has been charged for covering up the cost of
transportation and insurance of the goods. Not being the actual price of the goods, value cannot
be determined in accordance with Rule 4 and hence, valuation has to be done on the basis of Rule
5 i.e. identical goods.
As per Rule 5, the contemporaneous imports at the same commercial level and in substantially
same quantity will be considered. Therefore, consignments of 20 tonnes and 100 tonnes cannot
be considered while the remaining four consignments can be considered to be of substantially the
same quantity.
According to Rule 5(3) if more than one transaction is found for identical goods then lowest of
them shall be considered for determination of import value of the goods. Therefore, unit price in
the given case will be taken at US $ 160 per metric tonne.
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Particulars Value
1. CIF value of 800 metric tones @ US $ 160 per MT 1,28,000
2. Rate of Exchange 1US $= Rs.40
3. CIF in Indian Rupees=(1) × (2) Rs.51,20,000
4. Add: Landing Charges @ 1% of CIF value (3) Rs.51,200
5. Assessable Value = (3) + (4) Rs.51,71,200
Q25. M/s SAS imported 10000 citizen calculators model No. CT 500 of Chinese origin from
Singapore and declared value to be US$0.90 per piece in the Bill of Entry. The customs
authorities enhanced the value to be US$ 1.80 per piece on the basis of price list of citizen
calculator and contemporaneous imports at the same value. Is the action of Customs justified.
Answer 25.
The customs authorities have enhanced the value of the goods based on price list of the
contemporaneous imports of identical goods. Now, it is for the importer to prove that the price
declared by him in the Bill of Entry is the genuine price and it is not affected by any other
consideration. The facts of the case are similar to that of SAS Impex V. CC 2002 (144) ELT 215
(T) where the Tribunal held that enhancement of value on the basis of contemporaneous imports
is sustainable in absence of any evidence that the price declared in the Bill of Entry is the genuine
price.
Q26. Gujrat Dry Fruits Limited imported dry fruits and declared the value as under –
Date of imports Quantity Declared value per MT Country of import
November 2008 250 25,000 Egypt
November 2008 150 25,000 Egypt
It was found that imports were also made by some other dealers as indicated below
Date of Imports:
Date of import and importer Quantity (MT) Declared Value Rs. per MT Country of import
September 2008 50 35,000 Dubai
Mumbai
October 2008
Chennai Fruits Ltd 20 40,000 Persia
The Customs Department has sought to assess the imports made by the Gujarat Fruits Ltd. as
contemporaneous imports under section 14 read with Rule 5 of the Customs Valuation Rules,
1989. Briefly examine whether the action proposed by the Department is correct.
Answer 26.
The goods are said to be identical only if the goods to be valued have been produced in the same
country. In the given question, the goods in question have been imported from Egypt while other
importers have imported goods from other countries. Moreover, there is a substantial difference
in the quantity of the goods imported and contemporaneous imports taken by the customs for
162 Revisionary Test Paper (Revised Syllabus-2008)
enhancing the value. In accordance with the provisions of section 14 and the Customs Valuation
Rules. 1989 the action taken by the Department is not correct.
Q27. C & Co. imported second hand machinery and declared the transaction value in the Bill of
Entry filed for the purpose of assessment of import duty. The Assistant Commissioner ignored
the transaction value and based on the chartered engineer’s certificate showing that the
machinery was in working condition and had a residual life of 10 years, he completed the
assessment under Rule 8 of the Customs Valuation (Determination of value of Imported
Goods) Rules, 1989 after allowing maximum depreciation of 70%.
Discuss briefly giving reasons whether the action of the Assistant Commissioner is valid in
law.
Answer 27.
The facts given in the case are similar to the facts in Tolin Rubber Pvt. Ltd. V. COC, Cochin,
[2005] 163 ELT 289 (SC). In this case the Supreme Court stated that the value of the goods has
to be determined as per rule 4(1) of the Customs Valuation Rules, 1989 and only in the circumstances
referred under rule 4(2) the transaction value can be rejected and further determination has to be
made as per rule 8. The assessing authority has not given any reason for rejecting the transaction
value. It was held by the Supreme Court that the price declared by the company in the Bill of Entry
has to be accepted by the Department.
Applying the same ratio in the given situation, it may be concluded that the decision of the Assistant
Commissioner is not valid in law.
Q28. V Steels imported various items for its captive power plant with technical know-how from
N engineering USA. The relevant drawings of the turbine shaft and lay out of the turbine
with other items were also supplied. One of the items which was turbine shaft was in semifinished
condition. Before fitting the turbine shaft had to be further ground and finished as
per the dimensions of the shaft indicated in the lay out drawings. V Steels paid US$ 2001
for the layout drawings and did not pay any custom duty on this amount. The Customs
Department claims that this amount of USS 2001 forms part of the transaction value under
Rule 9(1) of the Custom Valuation Rules, 1989. The counter of V steels to this claim made
by the Department is that the drawings indicating the dimensions of the turbine shaft was
merely a layout drawing of the turbine with other items of the turbine room.
Explain with reference to the provisions of Rule 9 of the Customs Valuation Rules, 1988,
whether the claim made by the Department is tenable.
Answer 28.
In accordance with Rule 9(1)(e) of the Customs Valuation Rules, 1989, in determining the transaction
value, any payment made by the buyer as a condition of sale of goods will be included in the value
of the goods.
In the given case, the turbine shaft was imported in the semi-finished condition and before lilting,
it has to be finished as per the specifications in the drawing. Therefore, drawing becomes essential
for finishing and fitting of the shaft. Therefore, amount of USS 2001 paid towards the drawings,
which is essential for working of the turbine, has to be included in the assessable value.
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Q29. Rule 4 of the Customs Valuation Rules, 1989, states that the transaction value of the good
shall be the price actually paid or payable for the goods when sold for export to India
adjusted in accordance with provisions of Rule 9 with regard to costs and services. What is
the benefit available to the importer with respect to cost of transportation for importation
by air when FOB value is ascertainable.
Answer 29.
The cost of transportation is required to be added with the FOB value for valuation purposes.
Where the import is by air, if the cost of import exceeds 20% of FOB value then for the purpose
of valuation it shall be restricted to 20% of the FOB value.
Q30. M/s H.R.C. imported a consignment of computer software and manual valued at USS 42
lacs and contended that the actual value was only US S 10 lakhs and the balance amount
represented licence fee for using the software at multiple locations and as such custom
duty Is payable only on the actual value of US $ 10 lakhs. Is the contention raised by M/s
HRC correct? Discuss.
Answer 30.
The facts of the case are similar to that of the case of Slate Bank of India v. C.C, Bombay
2000 (115) ELT 597 (SC). The Supreme Court held that the license for country wide use cannot
be considered as the charges for the right to reproduce the imported goods as envisaged in the
interpretative Note to Rule 9(1)(c) of the Valuation Rules. Therefore, total cost incurred in
transaction value on which custom duty has to be paid and total cost for the purpose of assessment
of custom duty would include single site licence fee as well as country wide licence fee.
Since software cannot be used at multiple location unless licence fee is paid for such use, it
becomes a part of the software and therefore contention of M/s HRC is not correct.
Q31. Rl is an indenting agent of an Italian Company. The agreement provides for payment of 20%
commission on the Imported equipments supplied by Rl to users in India. However, in respect
of Rl’s own requirement of equipments supplied by the Italian company no commission was
payable as there was to be no value addition by the indenting agent. The department wants
to enhance the value of import by 20% as according to them the indenting agent is a
‘Related Person’. Examine briefly whether the stand taken by the department is correct
with reference to Section 14 of the Customs Act, 1963 and Rule 9 of the Customs Valuation
Rules, 1989 regarding “cost and services” and Rule 2(2) regarding “Related Persons”.
Answer 31.
Valuation of imported goods has to be done in accordance with the provisions of section 14 of the
Customs Act, 1963 read with the Customs Valuation Rules, 1989 for the purpose of charging
custom duty.
Rule of 9 of the aforesaid Rules provide that the value of the services paid by importer but not
included in the value of goods shall be added. ‘Related person’ has been defined under Rule 2(2).
Rule 4 provides that when sale is to a related person, the transaction value may be accepted if the
relationship has not affected the price in any way.
Going by the definition of Rule 2(2) the indenting agent cannot be treated as a related. As per rule
9 only the cost of services paid by the importer is to be included in the value of goods. In the
instant case the commission of 20% cannot be added. Therefore, contention of the department is
not correct.
164 Revisionary Test Paper (Revised Syllabus-2008)
Q32. Discuss briefly with reference to decided case laws as to how the ‘value’ shall be determined
under section 14 of the Customs Act, 1963 read with the Customs Valuation Rules, 1989
in the following cases —
(i) Goods are offered at specially reduced price to buyer and buyer is asked not to disclose
specially reduced price to any other party In India.
(ii) There has been a price rise between the date of contract and the date of importation.
The contract was over 6 months before the date of shipment.
(iii) The sale involves special discounts limited to exclusive agents.
(iv) The goods are purchased on high seas.
Answer 32.
(i) Where sale is made at a specially reduced price then such price cannot be said to be the
ordinary price. In the case of Padia Sales Corporation V. Collector of Customs [1994] 66
ELT 35 (SC) the Supreme Court has stated that where goods are offered to the buyers at
specially reduced price and the buyer has been asked not to disclose this to any other party,
then the discounted price will not be acceptable.
(ii) The value of imported goods is to be determined at the time of importation thereof. Therefore,
where there has been a price rise between the date of contract and the date of actual
importation then value at the time of actual importation i.e. after price hike, is to be considered
for the purpose of levy of custom duty. Rajkumar Knitting Mills Pvt. Ltd. V. Collector of
Customs [1999] 98 ELT (SC).
(iii) In the case of Eicher Tractors Ltd. V. Commissioner of Customs, Mumbai [2001] 122 ELT
321 (SC), the Supreme Court observed that the price paid by the importer to the vendor in
the ordinary course of commerce shall be taken to be the value of imported goods. Therefore,
where seller and buyer are not related person and sale price is the genuine price, it shall be
accepted for the purpose of custom duty. But according to revised rules, where special
discounts are offered to the exclusive agents such discounted price shall not be accepted as
the assessable value.
(iv) In the case of Godavari Fertilizers V. C.C.Ex [1997] 81 ELT 535(T) the Tribunal observed
that in case of high seas sales the price charged from the assessee will be value of the
imported goods.
Q33. M/s Agrawal Industries imported by Air from USA certain goods on CIF value $ 6,500. Air
freight US$ 1,400 and insurance charges US$ 100 were also paid. Bill of entry was presented
on 28.02.09 but the Entry Inward was granted on 10.3.09. Other relevant information is as
follows :
As on 28.02.09 As on 10.03.08
Rate of exchange
As announced by CBEC US$ 1 Rs. 46.80 Rs. 46.70
As announced by RBI US$ 1 Rs. 46.60 Rs. 46.50
Rates of custom duty
Basic Custom Duty 25% 16%
Additional Custom Duty 20% 16%
The same goods are exempt from Excise duty in India, if manufactured without the aid of power.
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Compute the assessable value and give the rates of basic and additional custom .duty to be
adopted in this case, as also the basis for arriving at the Basic and Additional custom duty (actual
duty calculation need not be given.
Answer 33.
When import is by air, the cost of air freight should not exceed 20% of FOB value, hence the FOB
value is as under —
CIF Value US$ 6,500
Less: Air freight US$ 1,400
Insurance US$ 100
FOB Value of imports US$ 5,000
Add: Air freight 20% of
Assessable value US$1,000
Insurance US$ 100
TOTAL US$ 6,100
CIF Value in Indian Rupees US$ 1 = Rs. 46.80
US$ 6,100 × 46.80 Rs.2,85,480.00
Add : 1% of GIF value towards handling charges Rs. 2.854.80
Assessable Value Rs. 2,88,334.80
Q34. Infotech Limited has imported a machine from Japan at FOB cost of 50,000 Yen (Japanese).
The other expenses incurred are as follows —
(i) Freight from Japan to Indian port 5000 yen.
(ii) Insurance paid to insurer in India Rs. 2500
(iii) Designing charges paid to consultancy firm in Japan 7500 yen
(iv) M/s Infotech spent Rs. 25,000 in India for development work connected with the machine.
(v) Transportation cost from Indian port to factory Rs. 7500.
(vi) Central Government has announced exchange rate of 1 yen = Rs. 0.40 by notification
under section 14(3) of the Customs Act, 1962. The exchange rate prevailing on that day
in the market was 1 yen = Rs. 0.4052.
(vii) M/s Infotech made payment to the bank based on the exchange rate of 1 yen=Rs. 0.4150.
(viii) The commission payable to the agent in India was at 5% of the FOB price in Indian rupees.
The rate of custom duty is 35%. Similar goods are subject to 15% excise duty in India.
Clearly show your working to arrive at the total assessable value in rupees for purposes of
Ivey of custom duty.
166 Revisionary Test Paper (Revised Syllabus-2008)
Answer 34.
Computation of Assessable Value
FOB Value 50,000
Freight 5,000
Designing charges paid in Japan 7,500
Total 62,500 yen
FOB value in Indian rupees = 62,500×0.40 Rs. 25,000
Add:
Insurance Rs. 2,500
Agents Commission @ 5% of 50,000 yen×0.40 Rs. 1,000
Total CIF value Rs. 28,500
Add: 1% of CIF value as handling charges Rs. 285
Assessable value Rs. 28,785
Notes :
• Designing charges paid in India have not been included in assessable value.
• Transportation charges paid in India for transportation from port to factory have not been
included in the assessable value as this is post importation expenditure.
Q35. Discuss briefly with reference to the decided case law whether the landing charges imposed
after the landing of the goods, but prior to their clearance for custom purposes are to be
included for determining the value under section 14 of the Customs Act, 1962 and arriving
on the custom duty payable.
Answer 35.
In Garden Silk Mills Ltd. V. UOI [1999] 113 ELT 358 (SC) the Supreme Court held that in determining
the deemed price in international trade the element of port charges, which are borne by the
importer, have to be added in the assessable value.
As per the Customs Valuation Rules, 1988, handling charges are added in the CIF value @ 1% of
GIF value irrespective of the actual amount of landing charges.
Q36. Discuss the Includibility or otherwise to the assessable value under the Customs Ac 1962 of
the following payments made by the importer to the overseas supplier of second hand plant
in India:
(i) Dismantling charges for removing the second hand plant at the supplier’s place an shipping
to Indian importer.
(ii) Fees for supervision of erection and commissioning of plant in India. For this purpose the
foreign supplier deputed their technician in India.
(iii) Payments for tools, dies and moulds (imported along with plant) for use in connection
with the manufacture of excisable goods on successful commissioning of the plant.
(iv) Lump sum payment and annual royalty for transfer of technical know-how for
manufacturing goods.
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Answer 36.
(i) Dismantling charges - According to Rule 9 of the Custom Valuation Rules, 1989. a payments
actually made or payable by the importer in connection with the import c goods, to the
extent not included in the price of the goods are to be included. In the give case payment of
dismantling charges is certainly incidental and essential for import c machine. Therefore, it
is to be included in the assessable value.
(ii) Fees for supervision of erection and commissioning – The activity of erection an commissioning
is post import activity and thus, any amount of supervision for the same are not includible in
the assessable value. It is also to be noted that such cost is not included in price of the plant
at the time of importation into India, as required under section 14 of the Customs Act,
1963.
(iii) Payments for tools, dies and moulds (imported along with plant) - If the tools, die and moulds
etc imported along with the plant are to be used with the same plant the value thereof is to
be included in the assessable value of the plant otherwise not.
(iv) Lump sum payment and annual royalty for transfer of technical know-how - As per rule 9 of
the Customs Valuation Rules. 1989, the transaction value is inflated by cost c services and
expenses as specified. Under rule 9(1)(c) royalties and licence fee related t the imported
goods that the buyer is required to pay as a condition of sale of goods being valued, is added
to the transaction price. It is to be noted that only such amount c royalties and licence fee
which relate to the imported goods is to be added back. In this case the lump sum payment
and annual royalty are related to the manufacture of good and do not relate to the imported
goods. Hence, this amount is not includible in this assessable value.
Q37. Discuss the Includibility of the following payments made by an importer to the overseas
supplier of an imported machine/equipment, to the assessable value of imported machine:
(a) Process licence fee and technology transfer fee
(b) Dismantling charges for removing the machine before shipment to India at the
foreign supplier’s site
(c) Training charges paid to supplier, for imparting training to Indian company’s
personnel, on how to use the equipment.
Your answer shall be with reference to section 14 of the Customs Act, 1962. You may
draw support from decided cases.
Answer 37.
According to section 14, the value shall be the price at which goods are ordinarily sold in the
course of international trade.
(a) Process licence fee and technology transfer fee - In Collector V. Essar Gujarat Ltd. [1997]
88 ELT 609, the Supreme Court held that process licence fees, cost of technical services
paid are inciudible in the assessable value vide section 14 of the Customs Act, 1963 read
with rule 9 of the Customs Valuation Rules, 1989.
(b) Dismantling charges - According to Rule 9 of the Custom Valuation Rules, 1989, all payments
actually made or payable by the importer in connection with the import of goods, to the
extent not included in the price of the goods are to be included. In the given case payment
of dismantling charges is certainly incidental and essential for import of machine. Therefore,
it is to be included in the assessable value.
168 Revisionary Test Paper (Revised Syllabus-2008)
(c) Training charges - Training charges are not includible in the assessable value because it is a
cost to be incurred after the arrival of goods in India and not at the time of importation.
Collector V. Essar Gujarat Ltd. [1997] 88 ELT 609 (SC)
Q38. Explain briefly, how the following would be treated for purposes of valuation under section
14 of the Customs Act, 1963 and the Customs Valuation Rules, 1989 —
• Dismantling charges paid by the importer of a machine to the foreign supplier for
removal of the machine before shipment at the foreign supplier’s place
• Demurrage charges actually incurred by the importer of goods.
Answer 38.
According to Rule 9 of the Custom Valuation Rules, 1989, all payments actually made or payable
by the importer in connection with the import of goods, to the extent not included in the price of
the goods are to be included. In the given case payment of dismantling charges is certainly incidental
and essential for import of machine. Therefore, it is to be included in the assessable value.
Demurrage charges are the charges which are payable by the importer for failure to remove the
goods from the port within the permitted time limit. Rule 9(4) provides that any cost incurred in
connection with the import but not provided in the rule shall not be included in the assessable
value. Therefore, demurrage charges are not to be included therein. Moreover, according to section
14, the value shall be the price at which goods are ordinarily sold in the course of international
trade. Payment of demurrage is not an ordinary situation. Therefore, it is not inciudible in the
assessable value.
Q39. ABC Ltd. a manufacturer of fertilizers, imported large quantity of rock phosphate and sulphur.
Goods were purchased by ABC Ltd. on high seas and the responsibility of unloading in India
was theirs and they maintained their own wharf at port unloading equipment and staff for
the same. Custom authorities assessed the landing charges at 1.4% on CIF value thereof
(then assessed rate) and the importer had paid the same as demanded. Later on, custom
authorities claimed that the said 1.4% did not include stevedoring charges or unloading
charges and therefore they added them separately calculating them upon the basis of interalia
unloading labour charges, custom staff over time, post-hire charges for dining hall, fuel,
electricity, depreciation, maintenance cost, administrative over-heads and notional interest
on capital.
State what your advise to the company would be, bearing in mind the provisions of the’
Customs Act, 1963 and decided cases.
Answer 39.
The main issue in the question is ‘landing charges’. Custom authorities are within the powers to
charge landing charges at a percentage basis or on actual basis. In the given case though the
entire work of unloading is done by the assessee himself, the department added 1.4% of the CIF
value as landing charges which are paid by the assessee. Later on department has claimed additional
amount. The facts of the case are similar to that of Coromondal Fertilizers Ltd.V. Collector of
Customs in which the Supreme Court observed that:
(a) ‘Landing charges’ means the expenditure incurred by the importer for bringing goods on
board the ship to land. Landing charges, if any, in law, must be assessed on actuals, but as
a matter of practice, particularly to facilitate expeditious clearance, landing charges are
Group-III : Paper-14 : Indirect & Direct–Tax Management 169
issued at a percentage of the value of goods and such assessment is accepted. When so
assessed, landing charges cover the totality of all that an importer spends to bring the
imported goods to land.
(b) Stevedoring charges or unloading charges are not to be added when landing charges are
assessed on percentage basis.
Thus, assessee is not required to pay any additional duty as demanded by the custom authorities.
Q40. M/s XYZ, a 100% Export Oriented Undertaking imported DG sets and furnace oil duty free
for setting up captive power plant for Its power requirements for export production. They
used the power so generated for export production but sold surplus power In domestic tariff
area. Is custom department justified In demanding duty on DG sets and furnace oil as
surplus power has been sold in domestic tariff area.
Answer 40.
No. the department cannot demand duty on DG set and furnace oil because the 100% EOU has
already used power for production of export goods and it is only the surplus that has been sold in
the domestic tariff area. CCE&CV. Hanil Era Textiles Ltd. [2005] 180 ELT A 44 (SC)
Q41. An importer has imported certain goods and while determining the assessable value, landing
charges @ 1% of CIF value were added. The importer has claimed that actual landing
charges are much lower than 1% of the CIF value in his case. You have been asked to
advise whether the importer can file a bill of entry by adding actual landing charges instead
of notional 1% of CIF value or not.
Answer 41.
The importer cannot file Bill of Entry by adding actual landing charges. Rule 3(2)(b) of Customs
Valuation Rules, 1989 has statutorily laid down a fixed 1% charge on free on board value (F.O.B
Value) of the goods plus the cost of transport plus the cost of insurance.
In Wipro Ltd. Vs ACC, it was held that handling charges of 1% of CIF Value, which is
very nominal, are not arbitrary. It has been fixed under the power conferred by the
Parliament on the rule making authority and such an act cannot be considered beyond the
power conferred by Section 14(1) or Section 156 of the Customs Act. 1963.
Accordingly, the importer should have filed Bill of Entry by adding the statutorily fixed 1%
charges in the CIF value regardless of the actual handling charges being much lower in
the present case.
Q42. A consignment of 20 tonnes of chemicals produced by Company A in Berlin, West Germany
is imported by Company B at $ 20 per kg., C.I.F. Mumbai. At about the same time a
consignment of 16 tonnes of same chemical manufactured by same company viz., Company
A in Berlin, is imported by Company C at Mumbai; for their principals at $ 16 per kg., C.I.F.,
Mumbai. What value should be taken for assessment of consignments of both the importers
i.e. Company B and C? Give reaso in support of your determination of value. Quote relevant
sections of Customs Act, 1963.
Answer 42.
The value is determined as per Section 14(1) of the Customs Act.
170 Revisionary Test Paper (Revised Syllabus-2008)
• It is clear from the given problem that the same exporter has supplied the goods, almost
at the same time but quoting two different rates based on the quantity.
• A show cause notice has to be issued to importer for the lower price of goods.
• If the explanation provided by the importer is not satisfactory, then the customs officer
can finalise the assessment on the basis of $20 per kg.
Q43. What would be the value for the purpose of customs, If a consignment imported by air has
a CIF price of US $ 2,500 including freight US $700 and insurance US $ 90? The exchange
rate notified by the Government of India under section 14(3)(a)(i) of the Customs Act, 1963
is Rs. 42.50.
Answer 43.
Computation of Assessable Value
Particulars Amount Amount
(in US $) (in Rs.)
CIF Value $2,500
Less : Freight $700
Less : Insurance Cost $90
FOB Value $1,710
Computation of Assessable Value:
FOB Value as computed above $1,710
Add : Freight (restricted to 20% of FOB Value) $342
Add : Insurance Cost $90
CIF Value $2,142
Exchange rate 1$ = Rs.42.50
Total CIF in Rs. ($2,142 × Rs.42.50) A 91,035
Add : Landing Charges @ 1% of ‘CIF value’ B 910
Assessable Value (A+B) 91,945
Q44. A consignment is imported by air. CIF price is US$ 12,500. Freight is US$ 2,450 and
insurance cost is US$ 300. On the date of presentation of bill of entry, RBI floor rate was
US$ = Rs.42.80 and rate notified by Government of India was Rs.41.75. Find the value of
the consignment for customs purposes.
Group-III : Paper-14 : Indirect & Direct–Tax Management 171
Answer 44.
Computation of Assessable Value
Particulars Amount Amount
(in USD) (in Rs.)
CIF Value $12,500
Less : Freight $2,450
Less : Insurance Cost $300
FOB Value $9,750
Computation of Assessable Value :
FOB Value as computed above $9,750
Add : Freight (restricted to 20% of FOB Value) $1,950
Add : Insurance Cost $300
CIF Value $12,000
Exchange rate 1$ = Rs.41.75
Total CIF in Rs. ($12,000 X Rs.41.75) A 5,01,000
Add : Landing Charges @ 1% of ‘CIF value’ B 5,010
Assessable Value (A+B) 5,06,010
Q45. An importer in India imported raw materials @ US $ 25,000 FOB. The goods were packed
for which US $ 600 were charged extra. The goods were stuffed in Container, the price of
which was US $ 2,000. Insurance charges and ocean freight of US $ 250 and 800 respectively
were paid. A commission of US $ 500 had to be paid to a broker for arranging the deal:
1 US $ = Rs.41.38 ; Customs Duty is 30%; Excise duty on similar goods in India is 14%.
Determine the duty payable.
Answer 45.
Computation of Assessable Value and Customs Duty Payable
Particulars Amount Amount
(in USD) (in Rs.)
FOB Value $25,000
Add: Packing Charges at USA $600
Add: Freight charges (20% of FOB value or
actual whichever is less) $800
Add: Commission to broker who made necessary
arrangement at USA $500
Add: Insurance Charge $250
CIF Value $27,150
Exchange rate $1=Rs.41.38
Total CIF Value in Rs. A 11,23,467
Add: Landing Charges @ 1 % of ‘CIF value’ B 11,235
Assessable Value (A+B) 11,34,702
172 Revisionary Test Paper (Revised Syllabus-2008)
Particulars Amount Amount
(in USD) (in Rs.)
Duty on Assessable Value :
Basic Customs Duty (BCD) @ 30% of AV 3,40,411
(11,34,702 × 30/100)
Countervailing Duty (CVD) @ 14% is payable
on (AV + BCD) [11,34,702 + 3,40,411]
= (14,75,113 × 14/100) 2,06,516
Total (BCD+CVD) 5,46,927
Education Cess @ 2% on (BCD + CVD) 10,939
SHEC@1%on (BCD+CVD) 5,469
Total Duty Payable (BCD + CVD + Education Cess + SHEC) 5,63,335
Notes :
1. Container is durable and returnable, so no Customs Duty is charged on the cost of containers.
2. Any expenses incurred outside India and any expenses committed outside India but paid
in India shall be included to consider or calculate GIF Value, duty.
Q46. A consignment is imported by air.
• CIF price is 2,000 Euro.
• Air freight is 550 Euro.
• Insurance cost is Euro 50.
• Exchange rate announced by CBE&C as per customs notification is 1 Euro = Rs.67.10.
• Basic Customs duty payable is 30%.
• Excise duty on similar goods produced in India is 14%.
Find Value for customs purposes and total customs duty payable.
Answer 46.
Computation of Assessable Value and Customs Duty Payable
Particulars Amount Amount
(in Euro) (in Rs.)
FOB Value (Refer Note 1) 1,400
Add: Freight (Refer Note 2) 240
Add: Insurance 50
CIF Value 1,730
Value as landing charges (1% of GIF Value) 17
Assessable Value 1,747
Exchange Rate 1Euro = Rs.67.10
Assessable Value in Indian currency 1,17,224
Group-III : Paper-14 : Indirect & Direct–Tax Management 173
Duty on above
Basic Customs Duty (BCD) @ 30% of AV 35,167
Countervailing Duty (CVD) @14% is
payable on (AV + BCD) [1,17,224 + 35,167}] 21,335
Total [BCD + CVD] 56,502
Add: Education Cess @ 2% on (BCD+CVD) 1,103
(56,502 × 2/100)
Add: SHEC @ 1% on (BCD + CVD) 565
Total Customs Duty Payable
(BCD + CVD + Education Cess + SHEC) 58,170
Notes :
1. FOB Price of consignment is 1,400 Euro [2,000-550-50].
2. Air freight is to be restricted to 20% of FOB Value for purpose of customs valuation.
Hence, freight will be considered as 20% of 1,400 i.e. 280 Euro for purpose of valuation.
Q47. Determine the total Customs Duty payable from the following data —
• Quantity imported : 100 MTs
• FOB value : Swiss Franc 10000
• AIR Fright: Swiss Franc 2500
• Insurance : Data not available
• Exchange rate : 1 Swiss Franc = Rs.34
• Rate of BCD - 30%
• Rate of CENVAT under First Schedule to CETA : 14%
• Rate of SED under Second Schedule to CETA : 14%
• Rate of AED(GSI) under Additional Duties of Excise (GSI) Act: Rs.10/kg,
• Rate of NCCD 1%.
Answer 47.
Computation of Assessable Value and Customs Duty Payable
Particulars Computation Amount
FOB Value - Swiss Francs 10,000
Freight @ 20% of FOB 10,000×20% = 2,000
Insurance @ 1.125% of FOB 10,000×1.125%= 113
CIF Value 12,113
Add: Landing Charges @ 1% of CIF 12,112×1%= 121
Total Assessable Value in Swiss Francs 12,234
Total Assessable Value (in Rupees) 2,234×34 = 4,15,956
174 Revisionary Test Paper (Revised Syllabus-2008)
Duty on above :
Basic Customs Duty (BCD) @ 30% Rs. 4,15,956×30% = Rs. 1,24,787
NCCD (1% of Assessable Value) Rs. 4, 15,956×1% Rs. 4,160
CVD @ 28% of (AV + BCD + NCCD) Rs. 5,44,885×28% Rs. 1,52,568
AED (GSI) Rs.10 per Kg.
Hence for 100 MT 10,000×10 = Rs. 10,00,000
Education Cess @ 2% on [BCD + NCCD +
CVD + AED (GSI)] = Rs. 12,81,515 ×2% = Rs. 25,630
SHEC@1%on[BCD+NCCD+CVD+AED(GSI)] = Rs. 12,81,515 ×1% = Rs. 12,815
Total Customs Duty Payable
= (BCD +NCCD + CVD + AED +Education
Cess + SHEC) Rs.13,19,960
Notes:
1. Since air freight is more than 20% of FOB, freight is required to be limited to 20% of
FOB i.e. 2,000 SF (Swiss Francs).
2. Since insurance data is not available, insurance cost is to be taken @ 1.125% on FOB,
i.e. 113 SF (Approximately).
3. Basic Excise Duty (Cenvat) is 14% and Special Excise Duty (SED) is 14%. Hence,
CVD, which is equal to excise duty will be 28%.
Q48. ‘A’ imports by air from USA a Gear cutting machine complete with accessories and spares.
Its HS classification is 84.6140 and Value US $ FOB 20,000.
Other relevant date/information:
(1) At the request of importer, US $ 1,000 have been incurred for improving the design,
etc. of machine, but is not reflected in the invoice, but will be paid by the party.
(2) Freight - US $ 6,000.
(3) Goods are insured but premium is not shown/available in invoice.
(4) Commission to be paid to local agent in India Rs.4,500.
(5) Freight and insurance from airport to factory is Rs.4,500.
(6) Exchange rate is US $ 1 = Rs.42.
(7) Duties of Customs: Basic - 30% CVD - 14%.
Compute (i) Assessable value (ii) Customs duty.
Group-III : Paper-14 : Indirect & Direct–Tax Management 175
Answer 48.
Computation of Assessable Value and Customs Duty Payable
Particulars Amount Amount
(in $) (in Rs.)
FOB Value of Machine 20,000
Add: Expenditure for improving design 1,000
Add: Freight limited to 20% of FOB [Rule 9 (2)] 4,000
Insurance @ 1.125% of FOB [Rule 9(2)(c)(iii)] 225
Sub-Total 25,225
Sub-Total In Rs. [@ Rs. 42 per $] 10,59,450
Add: Agents Commission [Rule 9(1)(i)] 4,500
Total CIF Value 10,63,950
Add: Landing charges 1% of CIF 10,640
Assessable Value( A.V ) 10,74,590
Duty on above
Basic Customs Duty (BCD) @ 30% of A.V 3,22,377
Countervailing Duty (CVD) @14% 1,95,575
on (A.V + BCD) [10,74,590+3,22,377)
Education Cess @ 2% on (BCD + CVD) 10,359
[3,22,377+1,95,575]
SHEC @ 1% on (BCD + CVD) 5,180
Total Customs Duty Payable
(BCD + CVD + Education Cess + SHEC) 5,33,491
Q49. Determine the assessable value and customs duty amount from the following data:
1. Name of the raw material: XL-105
2. FOB value: Euro 1 million
3. Ocean freight: Actual data not available
4. Ocean Insurance: Actual data not available
5. Freight from sea port to godown paid in India: Rs.10,000
6. Transit insurance in India: Rs.2,000
7. Selling commission paid to agent in India: 5%
8. Royalty on manufacture and sale of final
product payable to foreign collaborator: 5%
9. Interest payable on raw material imported at
180 days credit (on FOB value): 12% p.a.
10. Dividend paid to the foreign supplier of raw material: Rs.2 per share on 1 million
on their equity participation for the year 08-09 shares of face value Rs.10/- share.
176 Revisionary Test Paper (Revised Syllabus-2008)
• Importer supplied design and drawings worth Euro 10,000 to the foreign raw
material supplier.
• Landing charges as per Customs provisions
• Customs duty rates: BCD - 30%, CVD - 14%
• Exchange rate: 1 Euro = Rs.68.
Answer 49.
Computation of Assessable Value and Customs Duty Payable
Particulars Amount in Euro Amount in Rs.
FOB Value 10,00,000
Add: Freight @ 20% of FOB 2,00,000
Add: Insurance @ 1.125% of FOB 11,250
Total 12,11,250
Add: Designing and drawing charges 10,000
Total CIF Value 12,21,250
CIF Value in Rs.@ Rs.68.00 8,30,45,000
Add: Local Agency Commission @ 5% 41,52,250
Total Value (A) 8,71,97,250
Add: Landing Charges @ 1% of (A) (B) 8,71,972
Assessable Value (A+B) 8,80,69,222
Duty on above
Basic Customs Duty (BCD) @ 30% of AV 2,64,20,767
CVD @ 14% is payable on (AV+BCD) 1,60,28,598
[8,80,69,222+2,64,20,767]
Education Cess @ 2% on (BCD + CVD) 8,48,987
[2,64,20,767 + 1,60,28,598]
SHEC @ 1% on [ 2,64,20,767 + 1,60,28,598] 4,24,494
Total Customs Duty Payable
(BCD + CVD + Education Cess +SHEC) 4,37,22,846
Notes :
1. Since ocean freight is not available, it has to be taken at 20% of FOB.
2. Insurance is taken @ 1.125% of FOB Value.
3. Landing charges will be 1% of GIF Value, as per Customs Valuation Rules.
4. It is assumed that selling commission to selling agent in India is payable on basis of
GIF Value of goods including cost of drawings supplied by buyer.
5. Royalty on manufacture and sale of final products payable to foreign collaborators has
no relation to goods imported. Hence, it is not includible in Assessable Value for
customs.
Group-III : Paper-14 : Indirect & Direct–Tax Management 177
6. Dividend paid to foreign supplier has no relation with supply of raw materials. It is not
includible in Assessable Value.
7. Interest payable for credit is not includible in assessable value for customs purposes,
as it is not part of ‘transaction value”.
8. Freight from seaport to godown and transit insurance in India are post-importation costs
and are not includible.
9. As per rule 9(1)(b)(iv) of Customs Valuation Rules, cost of engineering drawings is
includible only if work was undertaken outside India. Since, payment has been made in
Euro; it is assumed that the design and drawing work was done outside India.
Q50. Discuss the Excisability of the following goods:
(i) Do Cement Concrete Armour Units constitute excisable goods? Board of Trustees v.
Collector of Central Excise 2007 (216) ELT 513 (S.C.)
The assessee, Vishakhapatnam Port Trust, used Cement Concrete Armour Units for
installation of break waters in the outer harbour for keeping the water calm. Concrete
Armour Blocks were essentially in prismoid form, of certain specification and were made
to order. These blocks were harbour or location specific. It was contended by the
Department that the impugned units were excisable goods chargeable to excise duty.
The Supreme Court observed that there was no evidence to show that such blocks could
be used in any other harbour. The Department did not produce any evidence to show that
impugned units were bought and sold in market as a commodity. The Apex Court reiterated
the settled principle that in order to constitute excisable goods, twin tests of process
amounting to manufacture and marketability had to be satisfied.
The Apex Court stated that goods were manufactured with the object of being sold in
market. If the goods were not capable of being sold, then the test of marketability was
not fulfilled. Thus, the Apex Court rejected the claim of the Department.
(ii) Whether process of converting raw asfoetida into compounded asfoetida amounts to
manufacture? CCEx. v. Laljee Godhoo & Co. 2007 (216) ELT 514 (S.C.)
The Supreme Court observed that the impugned process did not result in any chemical
change. The product remained the same at the starting and terminal points of the process.
Thus, the Apex Court upheld the Tribunal’s decision holding that since the essential character
of the impugned goods remained constant, there was no manufacture.
(iii) Can waste material of building construction be taken as non-dutiable, when no credit has
been availed on either inputs or capital goods? Union of India v. Banswara Syntex Ltd.
2008 (221) ELT 360 (Raj.)
The High Court held that MS Scrap arising as waste material of building construction,
wherein credit of duty neither as inputs nor capital goods had been availed would be nondutiable
as it did not arise from manufacturing process.
(iv) Does an article become excisable by mere mention in Excise Tariff? CCEx., Chandigarh Vs
Gurdaspur Distillery 2008 (224) ELT 337 (S.C.)
The assessee was engaged in the manufacture of de-natured Ethyl alcohol. During the
manufacture of de-natured Ethyl alcohol, a residue known as spent wash came into
existence. The same was reacted in a closed type digester and methane gas was being
178 Revisionary Test Paper (Revised Syllabus-2008)
produced. This methane gas was being consumed captively by the assessee as a fuel in
distillery. Revenue appealed that duty should be levied on the methane gas thereby produced.
However, the assessee took the stand that since methane gas was not marketable as
such, it was not dutiable.
Tribunal referred to the case of Bhor Industries Ltd. v. Collector of Central Excise 1989
(40) ELT 280 wherein it was held that marketability is an essential ingredient in order to
attract excise duty and decided the case in favour of the assessee. SC upholding the
Tribunal’s decision held that an article did not become liable to excise duty merely because
of its specification in Schedule to Central Excise Tariff Act, 1985 unless it was salable and
known to market. Since, the Department failed to prove the marketability of the goods in
question, it was held that the methane gas produced by respondent was not marketable
and hence, was not liable to duty.
(v) Is excise duty leviable on intermediate product when finding on marketability is absent?
White Machines v. CCEx., Delhi 2008 (224) ELT 347 (S.C.)
The assessee manufactured C.I. castings which were captively consumed for producing
C.I. Chilled Rolls. These Chilled Rolls were exempted from payment of excise duty. Revenue
alleged that C.I. castings which were intermediary product were marketable. Therefore,
excise duty would be payable on them as the final product was exempt from duty.
Delhi High Court observed that if the intermediary product (C.I. castings) was marketable,
then the excise duty would be payable because the final product i.e. C.I. Chilled Rolls was
exempted from the payment of excise duty. However, the Tribunal failed to record any
finding regarding marketability of the said intermediary product i.e. C.I. castings. Hence,
it was held that in the absence of any findings recorded by the Tribunal regarding the
marketability, duty could not be levied on the goods in question.
(vi) Whether labeling or relabeling without repacking from bulk to retail amounts to “deemed
manufacture”? CCEx., Mumbai v. BOC (I) Ltd. 2008 (226) ELT 323 (S.C.)
The assessee, BOC, procured Helium from other manufacturers, affixed the labels and
sold it under its own brand name. Revenue alleged that activity of affixing labels of their
own name amounted to manufacture as per Note 10 of Chapter 28 of schedule to Central
Excise Tariff.
Note 10 of Chapter 28 of First Schedule to Central Excise Tariff reads as under:
“……..in relation to products of this Chapter, labeling or relabeling of containers and
repacking from bulk packs, or the adoption of any other treatment to render the product
marketable to the consumer, shall amount to manufacture”.
In the case of CCEx., Mumbai v. Johnson & Johnson Ltd 2005 (188) ELT 467 (S.C.), SC
held that mere packing for marketing or mere labeling or relabeling in the absence of any
activity of repacking from bulk packs to retail packs would not render the product marketable
directly to the consumer and not amounted to manufacture. SC observed that the
respondent only labeled or relabeled the product and did not pack or repack from bulk
packs to retail packs in the present case. Therefore, it held that the impugned activity did
not amount to manufacture.
Note - Section 2(f) of Central Excise Act states that “manufacture” includes any process—
(i) incidental or ancillary to the completion of manufactured product or (ii) which is specified
in relation to any goods in the Section or Chapter notes of the Schedule to the Central
Excise Tariff Act, 1985 as amounting to manufacture, or (iii) which, in relation to goods
Group-III : Paper-14 : Indirect & Direct–Tax Management 179
specified in third schedule to the CEA, involves packing or repacking of such goods in a
unit container or labelling or re-labelling of containers or declaration or alteration of retail
sale price or any other treatment to render the product marketable to consumer. Clauses
(ii) and (iii) of section 2 (f) ibid pertain to “deemed manufacture”. Abovementioned case
relates to clause (ii) of the said section.
(vii) Whether swaging process amounts to manufacture in terms of Section 2(f) of the Central
Excise Act, 1944? Prachi Industries vs. CCEx., Chandigarh 2008 (225) ELT 16 (S.C.)
The appellant used to purchase duty paid MS tubes from its manufacturers and cut the
same into requisite length. Thereafter, put it in the swaging machine for undertaking
swaging process whereby dies fitted in the machine imparted “folds” to the flat surface of
the MS tube/pipe. The Department took the plea that swaging process amounted to
manufacture and hence, duty was payable on the goods manufactured by the appellant.
The Apex Court held that process of swaging amounted to manufacture and assessee was
liable to pay duty thereon. As per Section 2 (f), Manufacture includes “any process –
incidental or ancillary to the completion of a manufactured product”. In other words,
incidental process must be an integral part of manufacture resulting into a new finished
product which must be of a different physical shape, size and use. Moreover, the said
process must impart a change of a lasting character to the original product or raw material.
SC observed that swaging was the process which imparted a change of a lasting character
to the plane MS pipe or tube by use of dies which existed in the machine. After the
process of swaging, the identity of the plane MS pipe or the tube underwent a change in
terms of form, shape and use.
SC clarified that MS plane pipe/tube could carry water to the overhead tank whereas the
work piece produced in the present case was useful as a decorative item or as an item
which provided a strong grip in auto-rickshaw. Hence, SC held that swaging amounted to
manufacture and thus, excise duty was payable by the assessee.
(viii) When does the manufacturing activity get completed - either at the time of clearance of
goods from the premises of the job-worker or at the time of their clearance from the
premises of the manufacturer? CCEx., Pondicherry v. Sunco Rubbers Ltd. 2008 (228) ELT
27 (Mad.)
The assessee, a job worker, received raw materials required for the manufacture of strips
tyres from the primary manufacturers (viz. raw material suppliers) for further processing
and after undertaking the processing returned them to the suppliers. Thereafter, the
suppliers carried on the processes of deflashing, testing and inspection on those goods.
The Department opined that since the goods processed at the premises of the job worker
were fully manufactured goods, the job worker should pay excise duty on such goods
before clearing them from its premises.
High Court ruled that having regard to the activities like deflashing, testing, inspection etc.
being undertaken by the primary manufacturers, it was evident that the goods were made
ready for marketing only after the same were subjected to the above mentioned processes
at the hands of the raw material suppliers. Hence, the manufacturing process was complete
only after these processes were carried out at the premises of the suppliers. The job
worker collected only job charges for the various processes undertaken by him on the
goods. Moreover, as per section-2(f)(i), any activity which is incidental or ancillary to the
manufacture of the final product would be considered as a manufacturing activity.
Therefore, the goods cleared from the premises of the job worker, could not be regarded
180 Revisionary Test Paper (Revised Syllabus-2008)
as fully manufactured goods, and as such, the activity undertaken by the assessee could
not be regarded as a manufacturing process, as required under erstwhile rule 57F (2)/57F
(3) of the Central Excise Rules, 1944 (now rule 16A of Central Excise Rules, 2002).
Note – Rule 16A of Central Excise Rules, 2002 relating to removal of goods for job work,
etc. reads as under—
Any inputs received in a factory may be removed as such or after being partially processed
to a job worker for further processing, testing, repair, re-conditioning or any other purpose
subject to the fulfilment of conditions specified in this behalf by the Commissioner of
Central Excise having jurisdiction.
(ix) Can transmission apparatus installed in mobile tower stations be excisable? CCEx., Mumbai-
IV v. Hutchison Max Telecom P. Ltd. 2008 (224) ELT 191 (Bom.)
The respondent was engaged in providing mobile telecommunication services based on
GSM. The question that arose in this case was whether, the transmission apparatus installed
at site room was goods and secondly if even so, whether they were marketable.
Bombay High Court proceeded on the Tribunal’s finding that what had been assembled and
installed was a new commodity having a distinct name from the components from which
it had been assembled. Now, considering the question of marketability of this new
commodity, HC observed that, firstly, whenever the site had to be relocated, all the
equipments like BTS/BSC, microwave equipment, batteries, control panels, air-conditioners,
UPS, tower antennae were required to be dismantled into individual components, then
they were to be moved from the existing site and reassembled at new site. This involved
damages to certain parts like cable trays, etc. which were embedded/fixed to the civil
structure as also the BTS microwave equipment itself. Secondly, all the components of
the new product could not be shifted as an illustration the room housing the equipment
because this act of dismantling from the permanent site would render such goods not
marketable. Thirdly, the goods could not be re-erected as in the previous place as the
requirement of each place was different. In the light of all these facts, the court inferred
that the tests of marketability and mobility were not satisfied.
As per order dated 15-1-2002 by CBEC, New Delhi, if items assembled or erected at site
and attached by foundation to earth cannot be dismantled without substantial damage to
its components and thus cannot be reassembled then the items would not be considered as
movable and will, therefore, not be excisable goods. So, in the present case, the new
product would not be considered as movable, and, hence not excisable. Therefore, it was
held that though a new product came into existence yet, as it was not movable, saleable
and marketable, it would not be subject to excise duty.
(x) Whether parts of compressor cleared as a ‘stand alone item’ should be classified along
with the compressor? CCEx. v. Frick India Ltd. 2007 (216) ELT 497(S.C.)
The assessee manufactured and cleared on payment of duty complete compressors, safety
valves and filters under Heading 84.14, Heading 84.81 and Heading 84.21 respectively of
the Central Excise Tariff. The assessee also supplied bought-out items like V belt, motor,
pulley, belt guard, gauge etc. to their buyers, as a package. The Department contended
that as per Rule 2(a) of the General Interpretative Rules for Classification, safety valves
and filters should be classified along with the compressors as they were essential parts of
the compressors. Consequently, the Department contended that the value of the safety
valves and filters together with the value of bought-out items should be includible in the
assessable value of the compressor.
Group-III : Paper-14 : Indirect & Direct–Tax Management 181
The Supreme Court observed that Rule 2(a) of the General Interpretative Rules for
Classification could not be applied in this case as:
(i) The compressors manufactured by assessee were removed as ‘stand-alone’ item and
not in an unassembled or disassembled condition; and
(ii) Section and Chapter notes in Tariff and the Interpretative Rules did not provide guidelines
for valuation of excisable goods because they decided the classification as valuation is
different from classification.
Thus, the Apex Court upheld the Tribunal’s decision holding that parts/accessories could
not be classified as ‘compressors’ under Heading 84.14.
However, the Apex Court remanded back the matter relating to valuation to the
Commissioner for denovo consideration so as to examine the pricing aspect of entire package
supplied by the assessee to its buyers.
(xi) Where would the processed cashew nuts, peanuts, almonds etc. manufactured by dry
roasting, oil roasting, salting, and seasoning would be classifiable: Chapter 20 or Chapter
8 of the Central Excise Tariff? CCus. & CEx. v. Phil Corporation Ltd. 2008 (223) ELT 9
(SC)
The respondent processed cashew nuts, peanuts, almonds etc. by dry roasting, oil roasting,
salting, seasoning, packed them in different containers and cleared the same under its
brand name. The respondent did not register with the Central Excise Authorities and cleared
these goods without payment of excise duty on the ground that such goods were agricultural
product classifiable under “Chapter 8- Edible Fruit and Nuts; Peel of Citrus Fruit or Melons”
of the Central Excise Tariff and chargeable to nil rate of duty.
However, the Department claimed that such goods were classifiable under “Chapter 20 –
Preparation of Vegetables, Fruit, Nuts or Other Parts of Plants” of the Central Excise
Tariff on the ground that Notes to Chapter 20 of Harmonised System of Nomenclature
(HSN) provide that Chapter 20 includes “almonds, ground nuts, areca (or betel) nuts and
other nuts, dry-roasted, oil roasted or fat-roasted, whether or not containing or coated
with vegetable oil, salt, flavours, spices or other additives”.
The Supreme Court observed that the Central Excise Tariff Act was broadly based on the
system of classification from the international convention called the Brussels’ Convention
on the Harmonised Commodity Description and Coding System (Harmonised System of
Nomenclature) with necessary modification. HSN contained a list of all the possible goods
that were traded (including animals, human hair etc.) and as such the mention of an item
had got nothing to do whether it was manufactured and taxable or not.
The Supreme Court reiterated that the HSN was a safe guide for the purpose of deciding
issues of classification. In the present case, the HSN explanatory Notes to Chapter 20
categorically stated that the products in question were so included in Chapter 20. The
HSN explanatory Notes to Chapter 20 also categorically stated that its products were
excluded from Chapter 8 as they fell in Chapter 20. Thus, the Apex Court held that
processed cashew nuts, peanuts, almonds etc. manufactured by dry roasting, oil roasting,
salting, and seasoning and packed in different containers and cleared under respondent’s
brand name would be classifiable under Chapter 20 of Central Excise tariff and not under
Chapter 8 in view of HSN explanatory notes to Chapter 20.
182 Revisionary Test Paper (Revised Syllabus-2008)
(xii) When should the excisable goods be valued on the basis of retail sale price? Jayanti Food
Processing (P) Ltd. v. CCEx., Rajasthan 2007 (215) ELT 327 (SC)
The Supreme Court elaborated on the scope of maximum retail price (MRP) based valuation
under section 4A of the Central Excise Act, 1944 in this case. The Apex Court observed
that excisable goods are valued on the basis of retail sale price when following conditions
are fulfilled :
(i) where the excisable goods are packaged and
(ii) such packages are required to mention price thereof under Standards of Weights and
Measures Act, 1976 or the Rules made thereunder or under any other law and
(iii) such goods are specified by the Central Government by notification in the Official
Gazette.
The Supreme Court held that nature of sales was not relevant for determining the
application of section 4A. The following issues were discussed by the Supreme Court
in the instant case:
(i) The assessee sold four litre pack of ice-cream to intermediary (hotels) which ultimately
sold the ice-cream in scoops (not the package) to individuals or group of individuals.
The Supreme Court held that the package sold by the assessee could not be termed as
retail package nor the sale thereof be termed as a retail sale and as such there was no
requirement of mentioning the retail sale price on that package. Thus, the Apex Court
held that section 4A of the Central Excise Act, 1944 would not apply to ice-cream
sold by the assessee.
(ii) The assessee sold telephone instruments to Department of Telecommunications, MTNL
and BSNL who in turn provided such instruments to general public on rental basis.
MRP’s were declared on all the instruments in question. The Supreme Court held that
sale of telephone instruments would be covered under retail sale and the package
would be a retail package. The Supreme Court rejected the argument that since the
purchasers were not the ultimate consumers, the sale was not a retail sale. The Court
held that since purchasers used the telephone instruments for supplying to their
customers on rental basis or on some other basis, it could not be said that they were
not ultimate consumers. Thus, the Apex Court held that the assessment should be
done under section 4A of the Central Excise Act, 1944 and not under section 4.
(iii) Refrigerators were sold to bottling companies like Pepsi, Coca Cola etc., packed in a
package declaring MRP on them. However, MRP and contract price were different.
The Supreme Court held that duty should be paid on MRP and not on contract price
and hence assessment should be done under section 4A of the Central Excise Act,
1944 and not under section 4.
(xiii) Whether two parties can be deemed to be ‘related persons’ if the registered offices of
both the parties are located in the same premises? CCEx. v. Damnet Chemicals Pvt. Ltd.
2007 (216) ELT 3 (SC)
The registered offices of the assessee and one of the bulk buyers of the assessee were
located in the same premises. Further, the factory of the assessee was located in the
industrial area owned by the bulk buyer of the assessee, for which the assessee used to
pay a suitable rent. The assessee gave 40% discount to the said bulk buyer. The Department
questioned this discount on the ground that the two parties were related persons.
Group-III : Paper-14 : Indirect & Direct–Tax Management 183
The Supreme Court observed that since there was no evidence of any mutuality of interest
between the two parties, they would not be deemed to be related persons just because
their registered offices were situated in same premises and manufacturing unit of the
assessee was situated in industrial area owned by the buyer. There was no evidence that
the assessee received anything extra from the bulk buyer other than the price charged.
Also, there was no evidence that profit made by the bulk buyer had flown into the assessee
company. Thus, the Apex Court held that there was nothing wrong in giving 40% discount
to the bulk buyer.
(xiv) Whether only the effective rate of taxes i.e., the rate as reduced by the concession provided
by the exemption notification, if any, should be claimed as a deduction under section 4 for
computing the assessable value? Modipon Fibre Company v. CCEx. 2007 (218) ELT 8 (SC)
The assessee manufactured nylon and cleared it from its factory to its various depots in
other States. Turnover tax on such clearances was payable at dual rate of 0.5% for sales
in backward areas and at 2% for normal areas. The concession in rate of turnover tax, in
case of backward areas, was given vide an exemption notification. However, the assessee
claimed deduction under erstwhile section 4 at full rate of 2% in respect of entire clearance
of goods.
The issue under consideration was that whether the deduction of 2% could be claimed in
respect of entire clearance of goods i.e., even in case of clearance in backward areas
where 0.5% turnover tax was paid.
The Supreme Court observed that erstwhile section 4 of the Central Excise Act, 1944
prescribed that only actual value of duty payable i.e., the effective duty of excise payable on
the goods should be considered while computing the assessable value. Such effective duty of
excise should be calculated on the basis of prescribed rate as reduced by the concession
provided by the exemption notification, if any. The Apex Court ruled that such a principle
would also apply in respect of actual value of any other tax including turnover tax.
Note - The principle enunciated in this judgment will hold good in respect of new section 4
also as the new section 4 also prescribes that transaction value is “the price actually paid
or payable for the goods, when sold ……but does not include the amount of duty of excise,
sales tax and other taxes, if any, actually paid or actually payable on such goods.” Thus,
only effective rates of taxes are deductible under the scheme of new section 4 as well.
(xv) Is a refrigerator a pre-packed commodity for the purpose of valuation under section 4A?
Whirlpool of India Ltd. v. Union of India 2007 (218) ELT 167 (SC)
The appellant manufactured refrigerators. A notification issued by the Central Government
under section 4A (1) and (2) covered refrigerator. Therefore, the refrigerator had to be
valued on the basis of retail sale price under section 4A with the prescribed abatement of
40%. However, the appellant contended that refrigerator was not a packaged commodity
and hence should not find place in the notification.
The Supreme Court observed that the refrigerator was a pre-packed commodity. The
Apex Court elaborated that even if the package of refrigerator was required to be opened
for testing, the refrigerator would still continue to be a pre-packed commodity and its sale
would be a retail sale under Standards of Weights and Measures Act, 1976 and Standards
of Weights and Measures (Packaged Commodities)Rules, 1977. The Supreme Court
observed that MRP would have to be printed on package and the plea that MRP would be
different depending on the area of sale would not absolve the manufacturer from displaying
the MRP.
184 Revisionary Test Paper (Revised Syllabus-2008)
The Supreme Court held that the said notification issued under section 4A of the Central
Excise Act, 1944 could not be faulted merely because appellant felt that refrigerator was
not a packaged commodity. The Apex Court made it clear that once the notification issued
under section 4A of the Central Excise Act, 1944 included the refrigerator, the appellant
could not get out of the scope of notification without challenging the notification.
(xvi) Should the free samples be valued as per rule 8 of the Central Excise Valuation
(Determination of Price of Excisable Goods) Rules, 2000 and not as per rule 4 as clarified
vide Circular No. 813/10/2005 CX dated 25.04.2005? Indian Drugs Manufacturer’s Assn.
v. Union of India 2008 (222) ELT 22 (Bom)
The High Court observed that since rule 8 of the Central Excise Valuation (Determination
of Price of Excisable Goods) Rules, 2000 only covers cases where goods are not sold but
are cleared exclusively for use and consumption in the manufacture of other articles, it
would not apply in the instant case as the samples were not cleared for captive consumption
but were identical or similar to goods cleared on sale in wholesale trade. The fact that
physician’s samples might be distributed in a different pack or in a different bottle would
not make them different from goods sold in the open market.
The High Court observed that there was nothing in rule 4 which suggested that it applied
only to goods sold but not delivered at the time and place of removal; rather, rule 4 was a
general rule and words “such goods” therein clearly meant that goods in question must be
similar or identical to and had same quality or character to the goods sold and delivered.
The High Court further explained that by use of words “if necessary” in rule 4 it was made
clear that adjustments should be permitted, wherever necessary.
Thus, the High Court held that physician’s free samples would be valued under section 4(1)
(b) of Central Excise Act, 1944 read with rule 4 of the Central Excise Valuation
(Determination of Price of Excisable Goods) Rules, 2000, i.e., the free samples would be
valued based on the value of such goods sold and delivered at any other time nearest to
the time and place of removal of such samples.
Note - This case establishes that Circular No. 813/10/2005 CX dated 25.04.2005 states
the correct position of law and is in consonance with the Central Excise Act, 1944 and the
rules made thereunder.
(xvii) How will assessable vale of goods sold to related person at or about the same price at
which it is sold to non-related parties be ascertained? CCEx., Chandigarh v. Bharti Telecom
Ltd. 2008 (226) ELT 3 (S.C.)
The assessee, Bharti telecom Ltd. (BTL), sold 75% of its product - electronic push button
telephones - to Department of Telecommunications (DOT) and Mahanagar Telephone Nigam
Limited (MTNL) and remaining 25% in the open market through Siemens Telecom Limited
(STL). STL was a joint venture company of BTL and STL. According to Revenue, BTL and
STL were related persons having mutuality of interest. And BTL sold its product to STL at
a far less price than the price at which STL sold it in the whole sale market. So, the
Revenue’s contention was that assessable value in this case was the price at which STL
sold the product in open market while as per assessee, assessable value was the price at
which BTL sold the product to STL.
The Apex Court observed that BTL sold the goods to STL at or about the same price at
which it sold the goods to DOT and MTNL. Therefore, it held that even if STL was taken to
Group-III : Paper-14 : Indirect & Direct–Tax Management 185
be a related person to BTL (though the Court did not hold so); it had not influenced the
price at which the goods were sold by BTL to STL. Under the circumstances, transaction
value should be taken to be the assessable value.
(xviii) Whether reversal of credit amounts to not taking of credit? CCEx. v. Bombay Dyeing &
Mfg. Co. Ltd. 2007 (215) ELT 3 (SC)
The assessee manufactured gray fabrics from yarn. The gray fabric was exempt from
excise duty under a notification if the following two conditions were satisfied:
(i) the duty on yarn (input) was paid before claiming the exemption and
(ii) CENVAT credit for duty paid on yarn (input) was not taken.
The duty on yarn was supposed to be paid at the spindle stage. However, owing to practical
difficulties the assessee deferred the payment of duty from spindle stage to the stage of
clearance of gray fabric. At this stage the duty was paid along with the appropriate interest.
The assessee took the credit for duty paid on yarn but reversed the same before its
utilization.
The Apex Court observed that both the conditions of the notification were fulfilled as duty
on yarn, though paid on deferred basis, was paid before the clearance of gray fabric on
which exemption was claimed. Hence, payment was made before stage of exemption.
Further, the assessee did not utilize the credit, which it got on payment of duty on input
(yarn). The Supreme Court held that since the entry for credit was reversed before utilizing
the same, it would amount to not taking of credit. Thus, gray fabrics were subject to nil
rate of duty.
(xix) Whether provisions of erstwhile rule 57CC of the Central Excise Rules, 1944 [now rule
6(3) (b) of the CENVAT Credit Rules, 2004] would apply when there is no sale but just
stock transfer? CCEx. v. Ballarpur Industries Ltd. 2007 (215) ELT 489 (SC)
As per erstwhile rule 57CC of the Central Excise Rules, 1944, where common inputs, on
which credit is taken, are used to manufacture dutiable and exempted final products and
separate accounts are not maintained, the manufacturer has to pay an amount equal to
8% (now 10%) of the price (excluding sales tax and other taxes, if any, payable on such
goods) of the price of the exempted final goods charged for sale of such goods at the time
of clearance of such goods from the factory.
The Tribunal, when the issue was brought before it, opined that rule 57CC would not apply
in case of stock transfer as it applies only in case of sale. However, the Supreme Court
rejected the Tribunal’s view. The Apex court observed that erstwhile rule 57CC was a
provision which sought to recover presumptive amount @ 8% of the price of exempted
final goods at the time of removal for sale. Thus, rate of 8% was the measure to calculate
the presumptive sum. The Court opined that since the entire rule was based on “deemed
price” and “recovery of presumptive amount” hence, the words “price charged at the time
of sale” must be read as “eight percent of the value of exempted goods”. Thus, the Supreme
Court held that rule 57CC applied in cases of stock transfers also.
Note - Rule 6(3) (b) of the CENVAT Credit Rules, 2004 corresponds with the erstwhile rule
57CC of the Central Excise Rules, 1944. Thus, the principle enunciated in this case law
will hold good for present rule 6(3) (b) of the CENVAT Credit Rules, 2004 as well.
186 Revisionary Test Paper (Revised Syllabus-2008)
(xx) Does cement used in constructing foundation for machinery qualify as an eligible input for
the purpose of availing CENVAT? Union of India v. Hindustan Zinc Ltd. 2007 (218) ELT
503 (Raj.)
The assessee availed credit of duty paid on cement which was used in the construction of
foundation for machineries and as a building material. The Revenue claimed that cement
was not an eligible input in terms of explanation II to rule 2(g) of the erstwhile CENVAT
Credit rules, 2002 (now explanation II to rule 2(k) of the CENVAT Credit Rules, 2004).
The High Court observed that cement used as building material for laying foundation could
not be directly or indirectly said to be an integral part in connection with the manufacture
of final product. Further, the High Court opined that foundation made of cement would not
fall under the category of capital goods as defined under rule 2(b) of the erstwhile CENVAT
Credit Rules, 2002 (now rule 2(a) of CENVAT Credit Rules, 2004). Thus, cement would
not qualify to be an input in terms of explanation II of rule 2(g) of erstwhile CENVAT Credit
rules, 2002 (now explanation II of rule 2(k) of CENVAT Credit Rules, 2004).
Q51. Whether hospitality services rendered at executive lounge at the airport come within the
purview of airport services?
Answer 51.
In the case of Oberoi Flight Services v. CST 2007 (7) STR 516 (Tri. – Del.)
The appellant maintained an “Executive Lounge and Snack Bar” at transit area in the airport. The
facilities provided at the lounge were that of newspaper, magazines, tea, coffee, snacks, cable
TV, liquor, cigarette, computer with internet, STD/ISD etc. The Department contended that these
services were airport services.
The Tribunal held that these services are not airport services as they have nothing to do with
arrival or departure of aircraft which is the substance of airport service. Further, some of the
services provided at the lounge like cable TV, STD/ISD are separately liable to service tax under
their respective headings. The Tribunal explained that a service would not be treated as airport
service just because it is rendered in airport. The Tribunal held that the appellant was in hospitality
business and the running of the executive lounge to provide facilities to passengers would form
part of hospitality service and not airport service.
Q52. Does port service cover repair of vessels in dry docks?
Answer 52.
In the case of Homa Engineering Works v. CCEx., Mumbai 2007 (7) STR 546 (Tri.- Mum)
The appellant was engaged in repairing, chipping, cleaning and painting of vessels. The appellant
had taken registration under maintenance or repair services. However, the Department relied on
section 42 of the Major Port Trusts Act, 1963, which provides the scope of services to be provided
by the Board or other person, and claimed that such service was port service. Clause (e) of section
42(1) provides that the Board shall inter alia have power to undertake piloting, hauling, mooring,
remooring, hooking, or measuring of vessels or any other service in respect of vessels.
The Tribunal held that the expression ‘any other services in respect of vessels’ in the statutory
definition could be extended only to the services which were connected with the movement of
vessels. The Tribunal held that repairing of vessel in dry docks was not connected with the movement
of vessel in any manner and thus such service would not be classified under port service.
Group-III : Paper-14 : Indirect & Direct–Tax Management 187
The Tribunal further held that C.B.E & C Circular dated 10-11-2003 clarifying ship repair at dry
docks taxable under port services was not in accordance with the law. The Tribunal stated that
the impugned clarification was bin.
Q53. Is the activity of collecting human blood samples and separating serum from it covered
within the ambit of business auxiliary service?
Answer 53.
In the case of CCEx. v. Dr. Lal Path. Lab (P) Ltd. 2007 (8) STR 337 (P&H)
The assessee owned a collection centre at Ludhiana, which was engaged in the drawing of human
blood, urine and stool samples on behalf of the Principal Lab at Delhi for conducting biological
tests. The assessee sent the samples so collected to the principal company at New Delhi through
a courier. The assessee received 25% commission for such service. The Department demanded
service tax on such commission on the ground that the activity carried out by the assessee amounted
to promotion or marketing of service provided by its Principal Lab at New Delhi and thus would be
covered under business or auxiliary service.
The High Court held that merely because the assessee renders any incidental service like putting
across or dropping of the name of the principal company, it would not become part of the definition
of ‘business auxiliary service’. The High Court observed that the activity undertaken by the assessee
was covered by the exception postulated by sub-section (106) of section 65, which excluded any
testing or analysis service provided in relation to human beings or animals from the scope of
taxable ‘technical testing and analysis’ service.
The High Court reaffirmed the Tribunal’s opinion that the drawing of test samples form part of
testing and analysis service and it was not a separate service covered under business auxiliary
service. Moreover, even if the drawing of samples and testing and analysis were seen as entirely
separate and different services, drawing of sample and initial processing of the same were clearly
connected or incidental to testing and analysis.
Q54. Whether ‘retainer fee’ is liable to service tax?
Answer 54.
In the case of S. Maruthappan v. CCEx. 2007 (8) STR 228 (Tri-Chennai)
The appellant was engaged in the capacity of a consulting engineer by M/s Nagammal Mills Ltd.
for supervising electrical works for a certain period. The remuneration paid to him by the company
was accounted as ‘retainer allowance’ in the accounts of the company for the material period.
The Department demanded service tax on such retainer allowance received by the appellant from
the company.
The Tribunal opined that the transaction between a ‘service provider’ and a ‘service recipient’
must be on principal-to-principal basis. The Tribunal held that since this basic requirement was not
satisfied in this case the demand of service tax was liable to be vacated.
Q55. Whether supplying of computers and other hardware items on hire and generation of MIS
reports would come under the ambit of ‘business auxiliary service’?
Answer 55.
In the case of Bellary Computers v. CCEx. (Appeals) 2007 (8) STR 470 (Tri.-Bang.)
188 Revisionary Test Paper (Revised Syllabus-2008)
The appellant entered into an agreement with an electricity concern for providing software and
hardware for implementation of the computerized billing revenue management system. A large
number of computers were supplied to the electricity concern by the appellants and for the supply
of these computers, printers and other hardware items, the appellants received hire charges.
They were also required to generate MIS reports and did a lot of data processing and generated
reports. The Department contended that the services provided by the appellant were business
auxiliary services and were thus liable to service tax.
The Tribunal observed that the appellants were not actually promoting the business of the electricity
concern. The Tribunal held that except billing all other services rendered by the appellant were
related to information technology service and hence were excluded from the scope of the ‘business
auxiliary service’. Thus, the Tribunal remanded the case to the original authority for recomputation
of service tax liability by excluding the amount charged for hiring hardware and information
technology services.
Note - Section 65(19) of the Finance Act, 1994 inter alia lays down that business auxiliary service
does not include information technology.
Q56. Whether sale of ready built flats is taxable under ‘construction of complex service’?
Answer 56.
In the case of Greenview Land & Buildcon limited v. CCEx., Chandigarh 2008 (11) STR 113 (Tri –
Del.)
The assessee was engaged in construction of complex without engaging any contractor or service
provider in relation to it. The entire work was carried out by appellant as developer and builder and
ready built flats were sold.
Tribunal observed that as per CBEC Circular No. 96/7/2007-S.T. dated 23-8-2007, if no other
person is engaged in construction work and the builder/promoter/developer/any such person
undertakes construction work on his own without engaging the services of any other person, then
in such cases, (i) service provider and service recipient relationship does not exist, (ii) services
provided are in the nature of self-supply of services. Therefore, Tribunal held that sale of ready
built flats in the instant case was not taxable under ‘construction of complex service’.
Group-III : Paper-14 : Indirect & Direct–Tax Management 189
PART - B
[ DIRECT TAX ]
Q1. R submits the following information regarding his salary income for the year 2006-07: Basic
salary Rs.15,000p.m.; D.A(forming part of salary) 40% of basic salary;City Compensatory
Allowance Rs.300p.m.; Children Education Allowance Rs.400 pm per child for 3 children;
Transport Allowance Rs.1,000 p.m. He is provided with a rent free unfurnished accommodation
which is owned by the employer. The fair rental value of the house is Rs.24,000 p.a. Compute
the gross salary assuming accommodation is provided in a city where population is (a)
exceeding 25 lakhs (b) exceeding 10 lakhs but not exceeding 25 lakhs (c) less than 10 lakhs
Answer 1.
Computation of Income from Salary
Particulars Amount Amount
Basic salary 15,000 x 12 1,80,000
D.A. (40% of 1,80,000) 72,000
City Compensatory Allowance (fully taxable) (300 x 12) 3,600
Children Education Allowance
Actual amount received (400 x 12 x 3) 14,400
Less: Exemption u/s 10(14)
@ Rs.100 per month per child subject to a maximum of 2 children 2,400 12,000
(100 x 12 x 2)
Transport Allowance 12,000
Actual amount received ( 1,000 x 12) 9,600 2,400
Less: Exemption u/s 10(14) @ Rs.800 p.m. (800 x 12)
Gross Income from Salary u/s 17(1) 2,70,000
Add: Value of Unfurnished accommodation u/s 17(2) rule
3(1) explanation 1
Case (a) Population exceeding 25 lakhs
15% of salary
Salary = Basic pay+DA( forming part of retirement benefits)+all other taxable allowances
= 1,80,000+72,000+3,600+12,000+2,400
= 2,70,000 40,500
Total Income from Salary 3,10,500
Note: Case (b): where population is exceeding 10 lakhs but not exceeding 25 lakhs
10% of Salary shall be considered as the value of taxable perquisite
= 10% of Rs.2,70,000 = Rs.27,000
Case (c) : where population is less than 10 lakhs
7.5 % of salary shall be considered as the value of taxable perquisite
= 7.5% of Rs.2,70,000 = Rs.20,250
190 Revisionary Test Paper (Revised Syllabus-2008)
Q2. Mr.Sambhu was provided an accommodation in a hotel by his employer for 22 days before
providing him a rent free accommodation which is owned by the employer. The hotel charges
paid Rs.6,000. Salary for the purpose of accommodation for the period of 22 days is Rs.11,000.
Compute the value of accommodation.
Answer 2.
Computation:
In case of accommodation provided to the assessee on account of transfer, which is exceeding 15
days cumulatively, such shall be taxable as a perquisite. The company recovered Rs.1,000 from
the employee. Compute taxability.
Lower of the following:
(i) 24% of salary paid/payable= 24% of 11,000 = 2,640
(ii) Actual charges paid/payable = 6,000 2,640
Less Amount paid or payable by the employee 1,000
Taxable value of perquisite 1,640
Q3. Mr.Ritesh is provided with an accommodation in Kolkata since April 2008. Salary Rs.40,000
p.m. Cost of furniture provided Rs.80,000. On 1st September, 2008, following a promotion
with a increase in Salary by Rs.15,000, he was transferred to Jharkhand (population less
than 25 lakhs but more than 10 lakhs),and was also provided an accommodation there.
Mr.Ritesh was allowed to retain the Kolkata accommodation till March, 2009. Compute
taxability.
Answer 3.
Computation:
Phase 1: Value of Furnished Accommodation (Kolkata) (April to September 2008)
Particulars Rs.
Value of unfurnished accommodation (15% of 40,000 × 6 months) 36,000
Add: Value of Furniture provided:
• 10%p.a. of original cost of such furniture
(10% of 80,000 x 6 months) 8.000
Value of Furnished Accommodation 44,000
Phase 2: Valuation of accommodation (October 2008 to December 2008)
(a) For the first 90 days of transfer: Where accommodation is provided both at existing place
of work and in new place, the accommodation, which has lower value, shall be taxable.
(b) After 90 days: Both accommodations shall be taxable.
Computation for the first 90 days of transfer: (October 2008 to December 2008)
Lower of:
(i) Value of accommodation at existing place of work
(ii) Value of accommodation at new place
Group-III : Paper-14 : Indirect & Direct–Tax Management 191
Value of accommodation at existing place of work (Kolkata)
15% of salary for 3 months (i.e. 90 days) = 15% of 55,000 x 3 months=24,750
Add: Cost of furniture provided: 10% of 80,000 x 3 months =24,000
Total Value of Perquisite 48,750
Value of accommodation at new work place(Jharkhand)
10% of salary for 3 months (i.e. 90 days) = 10% of 55,000 x 3 months = 16,500
Therefore, the assessee shall be assessed to tax on Rs.16,500 (being the lower)
Phase 3: Valuation of accommodation (after 90 days) (January 2009 to March 2009)
For Kolkata accommodation: 15% of 55,000 x 3 months = Rs.24,750
Add: Cost of furniture provided: 10% x 80,000 x 3 months = Rs.24,000
Total value of perquisite Rs.48,750
For Jharkhand accommodation: 10% of 55,000 x 3 months = Rs.16,500
Total value of perquisite:
Particulars Taxable value of
perquisite
Phase 1: Accomodation in Kolkata 44,000
Phase 2: Accomodation in Jharkhand (being the lower during 90 days) 16,500
Phase 3: Accomodation in Kolkata 48,750
16,500
Total Value of Taxable Perquisite 1,25,750
OTHER FACILITIES AND PERQUISITES TO EMPLOYEE AND HIS HOUSEHOLD
Q4. Determine the value of education facility in the following cases:
(1) Three children of G, an employee of S Ltd., are studying in a school, run by S Ltd. School
fees is Rs.2,500 pm and hostel fees is Rs.2,000 pm. But the employer recovers only
Rs.600 pm and Rs.500 pm respectively. However, a similar school or a hostel around the
locality charges Rs.1,800 pm and Rs.1,200 pm respectively.
2) The employer has also reimbursed the school fees of Rs.1,200 pm of his nephew, fully
dependent on him after the death of his brother.
Answer 4.
Computation of taxable value of education facility [As per Rule 3(5)]
Particulars Taxable value of
perquisite
(1)(a) School fees of his children, studying in a school run by employer:
(Rs.1,800 × 3 × 12) – (1,000 × 3 x 12) – (600 × 3 × 12) 7,200
(b) Hostel fees: (2,000 × 3 × 12) – (500 x 3 × 12) 54,000
2) School fee of nephew (1,200 × 12) 14,400
Total value of taxable perquisite 75,600
192 Revisionary Test Paper (Revised Syllabus-2008)
Q5. Mr. Z is the manager of F Ltd. his son is a student of Amity International School. School fees
of Rs.4,000 pm and hostel fees of Rs.3,000 pm., are directly paid by Z Ltd. to the school but
it recovers from Z only 30%. F also joins an advanced course of Marketing Management for
4 months at IIM, Ahmedabad, fees of the course, Rs.2,50,000 is paid by F Ltd. Determine
the perquisite value of the education facility.
Answer 5.
Computation:
Computation of taxable value of education facility [As per Rule 3(5)]
Particulars Taxable value of
perquisite (Rs.)
(1) (a) School fees of his children, studying in a school run by employer:
(Rs.4,000×12) – (1,200×12) 33,600
(b) Hostel fees: (3,000×12) – (900×12) 25,200
(2) Fees paid for Marketing Management course for Mr. Z (it is a fully
exempted perquisite) Nil
Total value of taxable perquisite 58,800
Q6. The Profit and Loss Account of RAI & Co. for the previous year 2008-2009 is given as
follows:
Particulars Rs. Particulars Rs.
Purchases of goods 10,00,000 Sale of goods 26,00,000
Salaries, bonus and commission 8,00,000 Closing stock 50,000
Rent, rates and taxes 60,000 Interest on drawings 7,000
Depreciation @ 16% on WDV 20,000 Interest on securities 20,000
Travelling expenses 1,50,000
Interest on capital 25,000
Advertisement 1,20,000
Entertainment expenses 60,000
Expenditure on neon-sign board 50,000
New telephone deposit under OYT 5,000
scheme
Compensation for cancelling 10,000
purchase order of an outdated
machine
Expenses for promoting family 20,000
planning among employees
Net profit 3,57,000
26,77,000 26,77,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 193
Additional Information :
(i) Salaries, bonus and commission include: Rs
(a) Salary to the proprietor 1,50,000
(b) Bonus paid to employees on 31-10-2009 75,000
(c) Salary of Rs 1,20,000 was paid in India to B, a non-resident employee but neither any tax
was deducted at source nor paid thereon. However, B is a PAN holder and has cleared his
tax liability.
(d) Advertisement includes:
(i) a hoarding bill paid in cash, Rs.20,050
(ii) advertisement published in souvenir, published by a political party Rs.10,000
(e) Depreciation has been charged on plants and machinery and furniture and fittings in proportion
of 3:2.
Depreciation @ 15% on plant and @10% on furniture.
(f) Purchases include goods of Rs.1,00,000, imported without a licence and confiscated by the
customs authorities.
(g) Travelling expenses include a sum of Rs.1,00,000 on foreign travel to purchase a machine.
Negotiations have not been finalized.
(h) Annual stock taking revealed a theft of goods, costing Rs.30,000.
(i) This year stock valuation was deviated from the market price to cost price which is 20%
less than its market price.
Compute taxable business profits for the Assessment year 2009-10.
Answer 6.
Computation of Taxable Business Profits for the Assessment Year 2009-2010
Particulars Rs Rs
Income from Business
Net profit as per profit and loss account 3,57,000
Add : Inadmissible Expenses
(a) Salary paid to Proprietor 1,50,000
(b) Bonus paid to employees: Deduction will be allowed in Previous 75,000
Year 2009-10 (Sec.43B, being disallowance of unpaid liability)
(c) Salary paid to non-resident employee, without deducting or 1,20,000
paying TDS[Sec.40(a)(iii)]
(d) Advertisement bills paid in cash [Sec. 37(1) r.w. Sec. 40A(3)] 20,050
(e) Advertisement in sourvenir published by political party [Sec.37(2B)] 10,000
(f) Depreciation to be treated separately
194 Revisionary Test Paper (Revised Syllabus-2008)
(g) Expenses on family planning: allowable only to a company 20,000
assessee [Sec.36(1)(ix)]
(h) Foreign travel to acquire a new machine, ( being capital in nature, 20,000
deal not yet finalized. It may be added to the cost of the asset
when such asset is actually procured)
(i) Interest on capital [Sec. 36(1)(iii)] [There is no borrowings] 1,00,000
(j) Expenditure on neon sign board, being a capital expenditure 25,000
on advertisement, hence disallowed.
(k) Compensation paid to cancel a capital liability, capital in 50,000
nature, hence disallowed u/s 37(1)
(l) Under valuation of closing stock:[50,000/80% - 50,000]10,000
Less: Expenses allowed:
Interest on Drawings 12,500 6,12,550
Depreciation u/s 32: 9,69,550
(a) Plant and machinery:
WDV on 01.04.4007 : 20,000 x 4/5 x 100/16 1,00,000 7,000
Add: Cost of neon-sign board 50,000
1,50,000
Less: Depreciation @15% 22,500
WDV as on 31.3.08 1,27,500
(b) Furniture and Fittings: 22,500
WDV on 01/04/07: 20,000 × 1/5×100/16 25,000
Less: Depreciation @10% 2,500
WDV on 31.3.2008 22,500 2,500
Less: Incomes credited to Profit and Loss A/c to be treated under
separate Head of Income
Interest on Government Securities 20,000 52,000
Taxable Business Profits 9,17,550
Note :
(1) Loss due to theft of stock-in-trade is allowable in computing business profits u/s 29. Such
loss is incidental to business operation. Since purchase of goods have already been debited
to profit and loss account, no separate adjustment is required.
(2) Loss in illegal business may be allowed u/s 29. Explanation to Sec.37(1) does not apply to
Sec.29.
(3) Deposit for new telephone connection is allowable u/s 37(1). Hence, no adjustment is required.
Group-III : Paper-14 : Indirect & Direct–Tax Management 195
Q7. The Profit & Loss Account of Mr.Dipak Sinha for the previous year 2008-2009 is given
below:
Particulars Rs Particulars Rs.
Cost of goods sold 16,00,000 Sales 34,70,000
Salaries wages 9,00,000 Rent of staff quarters 3,00,000
Rent of business premises, owned 2,50,000 Sale price of machinery 5,00,000
by the assessee block on 31-03-2009
Repairs and renewals 1,40,000
Income tax paid 60,000
Excise duty paid 1,00,000
Sales tax payable 2,00,000
Legal expenses 3,00,000
Municipal taxes payable for staff 10,000
quarters
Provision for bad debts 60,000
Contingency reserve 1,00,000
Employees contribution to 50,000
recognised fund
Net profit 5,00,000
42,70,000 42,70,000
Additional Information:
(i) Salaries include:
(a) Rs 1,20,000 was paid outside India to an employee, “resident” in India but neither tax
was deducted nor tax has been paid thereon,
(b) Rs 90,000 was paid in India to an employee “resident” in India but neither tax deducted
therefrom nor paid thereon.
(ii) Excise duty of Rs 50,000 for the assessment year 2008-2009 was paid on 1 January 2009
but it was not included in the profit and loss a/c.
(iii) Sales tax amounting Rs 1,30,000 was paid on 31 July 2009 and the balance was paid on
1 August 2009, the due date of furnishing return of income is 31 July 2009.
(iv) Repairs/renewals include remodelling and renovation costing Rs.80,000.
(v) Legal expenses include:
(a) Lawyer fee of Rs 50,000 paid by bearer cheque to K, nephew of the proprietor. The
Assessing Officer disallowed a sum of Rs.10,000, being found in excess of the desired
qualifications;
(b) Gift of Rs 1,20,000, made to wife, a tax-advisor, but disallowed by the A.O.
(vi) Employees contribution include:
(a) Rs 30,000 credited to their account on due date under Provident Fund rules,
(b) Rs 20,000 credited to their account in November 2009.
(vii) Commission receipts of Rs 2,00,000 have not been credited to the profit and loss account
as their recovery seems to be doubtful.
196 Revisionary Test Paper (Revised Syllabus-2008)
(viii) WDV of machinery on 01-04-2008 was Rs 6,50,000.
(ix) WDV of business premises and staff quarters as on 01-04-2007: Rs 10,00,000 and Rs
30,00,000, respectively. Depreciation @10% on Business Premises and @ 5% on staff
quarters.
Compute taxable profits for the previous year 2008-2009.
Answer7.
Computation of Business Profits for the Assessment Year 2009-10
Particulars Rs Rs
Net profit as per profits and loss a/c 5,00,000
Add: Inadmissible Expenses:
(i) Rent of business premises owned by the assessee (Sec. 30) 2,50,000
(ii) Remodelling and renovation, being repairs of capital nature 60,000
(iii) Income tax paid [Sec. 40(a)(ii)l 60,000
(iv) Sales tax remaining unpaid up to due date of furnishing 70,000
return of income
(v) Legal expense includes:
(a) Gift made to wife, Sec. 37(1) 1,00,000
(b) Fees paid to lawyer (being a relative) Sec. 40A(2) 10,000
(vi) Salaries paid outside India to a “resident” employee TDS 1,20,000
[Sec. 40(a)(iii)]
(vii) Salaries paid in India to a resident employer without TDS —
(viii) Municipal tax payable for staff quarters [Sec. 43B] 10,000
(ix) Provision for bad debts [Sec. 36] 60,000
(x) Contingency reserve [Sec. 37(1)] 1,00,000
(xi) Employees’ contribution credited to their account after due date 20,000
(xii) Commission receipts which have accrued during the year 1,00,000
but recovery seems doubtful seems doubtful
(xiii) Employees’ contribution not credited to—profit and loss a/c 50,000 10,30,000
15,30,000
Less: Inadmissible receipts/ admissible claims:
(i) Excise duty (Sec. 43B) 50,000
(iii) Sale price of machine, being capital receipts 5,00,000
(iv) Depreciation: (a) Staff quarters: 5% of 30,00,000 1,50,000
(b) Business Premises: 10% of 10,00,000 1,00,000 8,00,000
Taxable business profits 7,30,000
Note:
Sale of machinery block : Sale of machinery block results into short-term capital loss of Rs 1,50,000
(Rs 6,50,000 – Rs 1,00,000) under Sec. 50.
No capital loss, whether short-term or long term, can be set- off against any income. It is to be
carried forward for next 8 assessment years.
Group-III : Paper-14 : Indirect & Direct–Tax Management 197
Q8. The firm of M/s Amal & Associates is engaged in the business of growing and manufacturing
tea. The Profit & Loss Account for the year, 2008-2009 is given as follows:
Particulars Rs Particulars Rs
Cost of growing and manufacturing tea 40,00,000 Sales 95,00,000
Salaries and wages 15,00,000 Stock 13,50,000
Advertising 5,00,000
Entertainment expenses 1,00,000
Travelling expenses 3,00,000
Fine and penalties 50,000
Cost of patent rights 6,00,000
Expenses on scientific research 6,00,000
General and sundry expenses 2,00,000
Net profit 30,00,000
1,08,50,000 1,08,50,000
You are further informed :
(i) Advertising includes payment of Rs 2,00,000 made to a political party for insertion of
advertisement in party’s journal. The payment has been made by bearer cheque,
(ii) Travelling expenses include a visit of the director to UK for 10 days (including 2 days for
travelling). Five days were utilized for business purpose. Permission for foreign exchange
was granted for Rs 50,000. Total expenditure on the visit is Rs 1,00,000 (including air fare
of Rs 40,000).
(iii) Expenses on scientific research include:
(a) Purchase of land Rs.1,50,000
(b) Contribution to Agricultural Research Institute, New Delhi which is a National Laboratory
Rs.20,000.
(c) Contribution to Bhaba Atomic Research Centre (an approved research association)for
statistical research, which is not related to business Rs.30,000.
(iv) Refund of custom duty, deducted in the previous year, 2006-2007, amounting to Rs 50,000,
has not been credited to the profit and loss account.
(v) Sundry expenses include a contribution of Rs 60,000 to Kolkata Municipal Corporation for
undertaking a Drinking Water Project for slum-dwellers. The Project has been approved by
National Committee but KMC has not issued any certificate indicating the progress of the
project.
(vi) A deposit of Rs 12,00,000 was made in instalments with National Bank for Agriculture and
Rural Development (a) Rs 4,00,000 in September 2008, (b) Rs 6,00,000 in July 2009 and
(c) Rs 2,00,000 in December 2009. It has not been included in the profit and loss account.
Date of submitting return of income 30/09/2009.
(vii) (a) W.D.V. of machinery on 01-04-2008 (Rate of depreciation 15%) Rs.15,00,000
(b) Machinery purchased in December 2008 for scientific research Rs.5,00,000
(c) Purchase of five small drier machine, each costing Rs.10,000
(d) Sale price of an old machinery (Rate of depreciation 15%) Rs.6,00,000
198 Revisionary Test Paper (Revised Syllabus-2008)
(viii) Lump sum payment of Rs 5,00,000 was made to acquire a licence regarding technical
information to improve tea-flavour. It has not been charged to P/L a/c.
Compute the taxable business profits for the assessment year 2009-2010.
Answer 8.
Computation of Business Profits for the Assessment Year 2009-2010
Particulars Rs Rs
Net profit 30,00,000
Add: Inadmissible Expenses:
1. Advertisement payment to a political party [Sec. 37(2B)] 20,00,000
2. Travelling outside India [Sec. 37(1)]. Proportionate expenses 22,500
of foreign travel, (excluding air fare) not relating to
business:60,000 ×3/8
3. Fine and penalties 50,000
4. Cost of patent rights 6,00,000
5. Expenditure on scientific research (Sec. 35): Purchase of land 1,50,000
6. Contribution to Bombay Municipal Committee (Sec. 35 AC): 60,000 10,82,500
Since the Certificate indicating progress in the prescribed
form has not been issued, no deduction is allowed.
Add: Deemed profit: Refund of Customs Duty, deducted in earlier 50,000
years, not credited in the profit and loss A/c [Sec.41(1)]
Less: Admissible expenses:
Capital expenditure on scientific research [Sec.35(1)(iv)(2)] 4,00,000
Depreciation on Patent rights @ 25% of Rs.6,00,000 1,50,000
Depreciation on know-how: @ 25% of Rs.5,00,000 1,25,000
Depreciation on Machinery:
WDV as on 01/04/2008: 15,00,000
Add: Purchase of driers 50,000
15,50,000
Less: Sale of Old Machinery 5,00,000
WDV as on 31/3/2009 10,50,000
Depreciation @ 15% on Rs.10,50,000
Weighted Deduction for scientific research: 1,57,500
(i) National Laboratory: @ 125% of Rs.20,000= Rs.25,000 –
Rs.20,000 = Rs.5,000
(ii) Bhaba Atomic Research Laboratory: @ 125% of Rs.30,000=
Rs.37,500 – Rs.30,000 = Rs.7,500
Therefore, total deduction Rs.(5,000 + 7,500) 12,500 8,45,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 199
Composite Profits before making deduction u/s 33AB 32,87,500
Less: Deposit with NABARD (Sec.33AB)
Least of the followings:
(i) Deposit of Rs.10,00,000 (within the due date of
submission of return)
(ii) 40% of Business Profits: 40% of Rs.32,87,500= 10,00,000
Rs.13.15,000
Composite Profits after deduction u/s 33AB 22,87,500
Apportionment of profits into agricultural income and business
income (As per Rule 8)[since the assessee is engaged in the
business of growing and manufacturing tea: 9,15,000
40% of Rs.22,87,500
Q9. What would be your advice regarding admissibility of the following items of expenditure in
computing the business income:
(a) A donation of Rs 1 lakh made to a University for starting a laboratory for scientific
research (i) relating to the assessee’s business, (ii) not relating to the assessee’s business.
(b) Travelling expenses include a sum of Rs 15,000 incurred by a director in travelling abroad
for negotiating purchase of plant and purchase of plant and machinery.
(c) Amount payable as damages to Government on account of shortfall in export target.
(d) Overdraft from bank for payment of income tax: interest charged by the bank is Rs
20,000.
(e) Payment of interest of Rs 40,000 on monies borrowed from bank for payment of dividends
to shareholders.
(f) Rs 12,000 paid for shifting of business from the original site to the present place which is
more advantageously located.
(g) Retrenchment compensation of Rs 4 lakh paid to the workmen on the closure of one of
the units.
(h) Fees paid to the Registrar of Companies for bringing about a change in the Memorandum
and Articles of Association in regard to issue of Equity.
Answer 9.
(a) The donation has been made to University to be used for scientific research for starting a
laboratory. If the University is approved for the purpose of Sec. 35(l)(ii), then irrespective of
the consideration whether the scientific research is related to assessee’s business or not,
deduction could beclaimed@125%ofamountpaid.Ifitisnot approved, donation could not be
claimed as a deduction underSec.35inthecomputationofbusinessincome. However, the
assessee could claim deduction from Gross Total Income under Sec. 80G, if the same is
eligible.
(b) Travelling expenses incurred by the director for negotiating the purchase of plant and
machinery is a capital expenditure and hence to be disallowed.
(c) The payment is not for any infraction of law but for failure to reach a target undertaken by
the company being payment made wholly in the course of business, it is deductible.
200 Revisionary Test Paper (Revised Syllabus-2008)
(d) Interest on overdraft taken to pay income tax is not allowable under Sec. 36(1)(iii). Interest
on borrowings
(e) utilised for payment of dividend is allowable under Sec. 36(1)(iii).
(f) Shifting expenses of business premises resulting in an expenditure of enduring benefit is a
capital expenditure and is not allowable.
(g) Retrenchment compensation payable to workmen on the total closure of a business cannot
be allowed as deduction as the expenses are not incurred for the purpose of carrying on of
its business. When, however, the tax-payer closes one of its units and continues to carry on
the same business as before, the compensation will be admissible under Sec. 37(1).
(h) Fee paid to Registrar of Companies for bringing about change in memorandum and articles
of association is a capital expenditure, where it relates to issue of equity shares. Where
alterations are warranted by the changes made in the Companies Act, the expenses are
allowable.
Q10. Mr J K gets the following gifts during the previous year 2008-2009.
Date of gift Name of the donor Amount of
gift (Rs)
1. 01.07.2007 Gift from R, a friend, by cheque 50,000
2. 01.09.2007 Cash gift from N, nephew 1,00,000
3. 01.12.2007 Gift of diamond ring on his birthday, by a friend, C 75,000
4. 15.12.2007 Cash gifts of Rs. 31,000 each made by four friends 1,24,000
on the occasion of his marriage
5. 01.12.2008 Cash gift made by wife’s sister on house opening ceremony 51,000
6. 15.01.2008 Cash gift from a close friend of father-in-law. 1,51,000
7. 31.01.2008 Cash gift made by great-grandfather 1,51,000
8. 01.02.2008 Cash gift received under the Will of a friend, who is seriously ill. 51,000
9. 15.02.2008 Cash gift made by a business friend on his birthday 75,000
10. 31.03.2008 Cash gifts made by three friends of Rs. 25,000 each
Besides this, JK is engaged in the business of sale and purchase of retail goods.
He maintains no account books. Gross turnover from retail trading is Rs 35,00,000.
Compute his total income for the assessment year 2009-2010.
Group-III : Paper-14 : Indirect & Direct–Tax Management 201
Answer 10.
Solution: Computation of taxable income for the AY 2009-2010
Particulars Amount (Rs)
1. Income from retail trading business [Sec. 44 AF] 5% Rs 35,00,000 1,75,000
2. Income form other sources (money gifts):
(i) Cash gift from a friend, by cheque 50,000
(ii) Cash gift from nephew, not covered by the definition of relative 1,00,000
(iii) Gift of diamond ring—non-monetary gift not taxable —
(iv) Cash gifts on the occasion of marriage are not chargeable even —
if such gifts are made by unrelated persons
(v) Cash gift made by wife’s sister, a relative, not taxable —
(vi) Cash gift by a friend of father-in-law, unrelated person 1,51,000
(vii) Cash gift made by great-grand father, a relative —
(viii) Cash gift received under Will in contemplation of death of a friend —
(ix) Cash gift made by a business friend on his birthday 51,000
(x) Cash gifts, made by three friends, of Rs 25,000 each 75,000
Total income 6,02,000
Q11. Mr Ayan Goel receives the following gifts of of money:
S. No. Date of gift Donor Form of gift Amount Remarks
of gifts
1. 31.3.2008 Friend Cheque 25,000 Cheque is encashed
on 03.04.2008
2. 01.05.2008 Brother Bank draft 50,000
3. 30.07.2008 Non-resident friend Cheque 30,000
4. 01.10.2008 Brother-in-law Cash 10,000
5. 15.11.2008 Great-grandfather-in-law Cash 40,000
6. 05.12.2008 Cousin brother Cash 21,000 On the occasion of
the marriage
7. 01.01.2009 Neighbour NSC-VIII 10,000 Maturity date
Issue 31.03.2009
8. 31.03.2009 Friend Cash 10,000
Determine the chargeability of the aforesaid gifts. Would it make any difference if the amount of
gift made on 31.03.2009 is Rs 10,001.
202 Revisionary Test Paper (Revised Syllabus-2008)
Answer 11.
Solution: Computation of taxable gifts for the AY 2009-2010
Particulars Case – I Case – II
Rs Rs
1. Gift of cheque dated 31.03.2008 from a friend but — —
encashed on 03.04.2007 is not taxable since it does
not exceed Rs 25,000. Chargeability is governed by
the date of receipt and not by date of encashment.
2. Gift from brother is exempt — —
3. Gift from friend 30,000 30,000
4. Gift from brother-in-law—Exempt — —
5. Gift from great grandfather-in-law: Exempt — —
6. Gift on the occasion of the marriage — —
7. Gift from neighbour 10,000 10,000
8. Gift from friend 10,000 10,000
50,000 50,000
Taxable gift Exempt 50,001
Q12. A company is engaged in the development and sale of computer software applications. It
has started a new undertaking for which approval as a 100% export-oriented undertaking
has been obtained from the CBDT. It furnishes the following data and requests you to
compute the deduction allowable to it under Sec. 10B is respect of assessment year 2009-
2010.
Particulars Rs (in lakh)
Total profit of the company for the previous year 50
Total turnover, i.e. Export sales and Domestic sales for the previous year 500
Consideration received in respect of export of software received in convertible 250
foreign exchange within 6 months of the end of the previous year
Sale proceeds credited to a separate account in a bank outside India with the 50
approval of RBI
Telecom and insurance charges attributable to export of software 10
Staff costs and travel expenses incurred in foreign exchange to provide technical 40
assistance outside India to a client
Group-III : Paper-14 : Indirect & Direct–Tax Management 203
Answer 12.
Solution: Computation of income of a 100% export-oriented undertaking: AY 2009-2010
Particulars Rs (in lakh)
Total profit 50
Less: Deduction under Sec. 10B: = × =
×
500
250
50
Total turnover
Export turnover Totalprofits
25
Taxable profits 25
Note:
Export turnover (Rs in lakh)
(i) Sale proceeds of software received in convertible foreign exchange within 250
the prescribed perio
(ii) Sale proceed in convertible foreign exchange kept outside India with the 50
approval of RBI 300
Less : (i) Telecom and insurance attributable to export turnover (-) 10
(ii) Expenses incurred in foreign exchange outside India to provide (-) 40
technical assistance to a client there
Export turnover 250
Q13. XY & Co., a partnership concern had established an undertaking for manufacturing computer
software in Free Trade Zone. It furnishes the following particulars of its second year
operations, ending on 31-03-2009:
Particulars Rs (in lakh)
Total sales of business 100.00
Export sales 80.00
Profit of the business 10.00
Out of the total sales, realisation of sale of Rs 5 lakh is difficult because of the
deficiency of the buyer. Realisation of rest of the sales is received in time.
The plant and machinery used in the business had been depreciated @ 15%
on SLM basis of depreciation and depreciation of Rs 3 lakh was charged to
the Profit and Loss Account.
Compute the taxable income of XY & Co; for the assessment year 2009-2010.
204 Revisionary Test Paper (Revised Syllabus-2008)
Answer 13.
Solution:
Particulars Rs (in lakh)
Profit of business 10,00,000
Add : Depreciation charged on SLM basis 30,000
1,30,000
Less : Depreciation on WDV basis @ 15% of 17,00,000 – [Sec Note below] 2,55,000
10,45,000
Less : Deduction under Sec. 10A : 10,45,000 × 75 ÷ 100 7,83,750
Taxable income 2,61,250
Note:
Rs
1. Computation of Depreciation :
Total purchase price of machine : 3,00,000 15 × 100 20,00,000
Less : Depreciation in the first year @ 15% 3,00,000
WDV at the end of first year 17,00,000
Less: Depreciation for second year @ 15% 2,55,000
WDV at the end of second year 14,45,000
2. Export Turnover:
Export Sales 80,00,000
Less: Remittance not received due to insolvency of buyer 5,00,000
75,00,000
Q14. Mr B holds 5% shares in A Ltd., where his brother and nephew hold 11% and 6% shares,
respectively. Mrs B gets commission of Rs 1,00,000 from A Ltd. for canvassing orders. She
holds no technical/professional qualification. Mr B earns income of Rs 5,00,000 from sugar
business.
Compute their taxable income for the assessment year 2009-10
Answer 14.
Computation of Taxable Income for the AY 2009-10
Particulars of income Mr.B Mrs.B
Rs Rs
Income from sugar business Commission for canvassing orders 2,00,000 90,000
from Z Ltd.: Income from other sources
2,00,000 90,000
Note: In the instant case, Mr B holds 7% and his brother holds only 12% shares in A Ltd. The total
of their shareholding is less than 20%. They have no substantial interest.
Therefore, commission income is assessable as income of Mrs B.
Group-III : Paper-14 : Indirect & Direct–Tax Management 205
Q15. The shareholding of Mr K and Mrs K in S Ltd, is given as follows:
(i) Shareholding of K 7%
(ii) Shareholding of Mrs K 9%
(iii) Shareholding of M, brother of K 8%
(iv) Shareholding of F, father of Mrs K 5%
Mr K and Mrs K are employed with S Ltd. None of them hold technical
qualification. Mr K gets salary @ Rs 10,000 p.m and Mrs K gets
@ Rs 12,000 p.m.
Income from other sources: Rs
Mr K 80,000
Mrs K 1,00,000
Compute taxable income for the assessment year 2009-2010
Answer 15.
Computation of taxable income for the AY 2009-2010
Particulars Mr.K Mrs.K
1. Gross Salary 1,20,000 1,44,000
Salary income of Mr.K to be included in the total income of Mrs.K 1,20,000
as her income from other sources is greater and both of them
have substantial interest alongwith their relative in s Ltd.
2. Income from other sources 80,000 1,00,000
80,000 3,64,000
Q16. Karan held 12% shares in a private limited company. He gifted all the shares to his wife
Neha on 1 October 2008. On 1 November 2007, Neha obtained loan of Rs 5,00,000 from
the company, when the company’s accumulated profit was Rs 1,20,000.
What are the income tax implications of the above transactions?
Answer 16.
Where a closely held company, other than a money-lending company, grants any loan or advance
to a shareholder, holding 10% or more equity shares, such loan or advance to the extent of
accumulated profits (excluding capitalised profits) up to the date of distribution, is deemed to be
dividend [Sec. 2(22)(e)]. Thus, the loan of Rs 5,00,000, taken by wife, is deemed to be dividend.
As the shares were transferred by husband to wife otherwise than for adequate consideration or
in an agreement to live apart, dividend income from such shares will be included in the total
income of her husband [Sec. 64(1)(iv)].
206 Revisionary Test Paper (Revised Syllabus-2008)
Q17. Mr. Dey furnishes the following particulars of his income for the previous year 2008-2009:
Particulars Rs
A: Business loss (-) 4,00,000
Unabsorbed depreciation (-) 2,00,000
B: Business profit 10,00,000
Income from house property 2,00,000
Carried forward losses and allowance;
C business was discontinued on 31-12-2003
Apart from the abovementioned, the following unabsorbed:
1. Business loss (-) 3,00,000
2. Depreciation (-) 2,00,000
D business was discontinued on 1-3-2006 leaving the following unabsorbed:
1. Business loss (-) 3,00,000
2. Depreciation (-) 1,00,000
Compute his total income for the assessment year 2009-10.
Answer 17.
Solution : Computation of total income for the AY 2009-2010:
Particulars Rs Rs
Income from house property 2,00,000
Business - profession
Prof it of B-business (+) 10,00,000
Less: Business loss of A - business (-) 4,00,000
Depreciation of A-business (-) 2,00,000
(+) 4,00,000 4,00,000
Aggregated income 6,00,000
Less: Carried forward business loss:
(i) Loss of C Business to be set-off against business profits (-) 3,00,000
(ii) Loss of D business (-) 3,00,000
6,00,000 (-) 6,00,000
Total income Nil
Note: Where business loss and depreciation both are being carried forward, business loss has got
priority, over depreciation. Unabsorbed depreciation is carried forward without time-limit.
Q18. XYZ & Co., a partnership firm, submits the following particulars of its income and carry
forward losses for the previous year 2008-2009:
Group-III : Paper-14 : Indirect & Direct–Tax Management 207
Particulars Betting on race horses made Betting on race horses made
lawfully(Rs) illegally(Rs)
1. Gross prize on race horses 15,00,000 5,00,000
2. Expenses incurred:
(i) Horses purchased during 6,00,000 75,000
the year
(ii) Medical expenses 1,00,000 20,000
(iii) Animal trainer fees 50,000 15,000
(iv) Fodder expenses 2,60,000 50,000
(v) Stable-rent/insurance 1,20,000 36,000
(vi) Depreciation in the 4,60,000 1,50,000
value of horses
(vii) Staff salaries 1,00,000 40,000
3. Loses brought forward from 6,00,000 2,00,000
the assessment year
2008-2009
Solution:
Computation of total income for the Assessment Year 2009-10
Particulars Betting on race Betting on race
horses made horses made
lawfully illegally
(Rs) (Rs)
Gross prize
Less: Expenses incurred: 15,00,000 15,00,000
(i) Horses purchased—not allowed — —
(ii) Medical expenses (-) 1,00,000 (-) 20,000
(iii) Animal trainer fees (-) 50,000 (-) 15,000
(iv) Fodder expense (-) 2,60,000 (-) 50,000
(v) Stable rent/insurance (-) 1,20,000 (-) 36,000
(vi) Staff salaries (-) 1,00,000 (-) 40,000
(vii) Depreciation in the value of horses—not allowed — —
8,70,000 3,39,000
Less: Brought forward loss 6,00,000 Nil
2,70,000 3,39,000
Total income of the firm = Rs 6,09,000
Note:
“Horse race” means a horse race upon which wagering or betting may be lawfully made [Explanation
(b) to Sec. 74A]. Thus, where wagering or betting is not lawfully made on race horses, any loss
incurred on such betting can neither be set-off nor carried forward. Hence, the carried forward
loss of Rs 2,00,000 cannot be set-off.
208 Revisionary Test Paper (Revised Syllabus-2008)
Q19. Mr N discloses the following incomes for the PY 2008-2009
House property Business or profession Capital gains Income from other sources
Speculation Non-specu- STCG LTCG
Rs Rs lation Rs Rs Rs Rs
A P X C F Family pension
50,000 3,00,000 5,00,000 6,00,000 7,00,000 95,000
B S Y D E Loss from
(-) 40,000 (-)2,00,000 (-) 3,00,000 (-) 3,00,000 (-)5,00,000 (-) 50,000 letting out from
machinery/plant
Determine income under head of income for the AY 2009-2010:
Solution : Aggregation of income under each head of income: AY 2009-2010.
House property Business or profession Capital gains Income from other sources
Speculation Non-specu- STCG LTCG
Rs Rs lation Rs Rs Rs Rs
A P X C F Family pension
50,000 3,00,000 5,00,000 6,00,000 7,00,000 95,000
B S Y D E Loss from
(-)40,000 (-)2,00,000 (-)3,00,000 (-)3,00,000 (-)5,00,000 (-)50,000 letting out
machinery/ plant
Total 10,000 1,00,000 2,00,000 3,00,000 2,00,000 45,000
Q20. A discloses the following incomes from business or profession for the previous year 2009-
2010:
Rs
(i) Profit from X business 6,00,000
(ii) Loss from Y business (-) 2,00,000
(iii) Loss from profession Z (-) 2,50,000
(iv) Profit from speculation business – M 2,00,000
(v) Loss from speculation business – N (-) 3,00,000
Determine the income from business or profession for the
assessment year 2009-2010
Solution: Income from business-profession for the AY 2009-2010
Particulars Rs
(i) X 6,00,000
(ii) Y (-) 2,00,00
(iii) Z (-) 2,50,000
Total business profits 1,50,000
Income from speculation-profession
(i) M 2,00,000
(ii) N (-)3 ,00,000
Loss from speculation business (-) 1,00,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 209
Speculation loss cannot be set-off against the income from business profit, though both of them
fall under the same head of income.
Thus, taxable business profits for the assessment year 2009-2010 is Rs. 1,50,000. The speculation
loss will be carried forward for future set-off for 4 assessment years, immediately succeeding the
assessment year for which it was first computed [Sec. 73(4)].
The time-limit of 4 years is applicable from the assessment year 2008-2009 and subsequent year.
Prior to this, the time-limit was 8 assessment years, immediately following the assessment year in
which the loss was first computed.
Q21. Karan discloses the following particulars of his income for the previous year 2008-2009:
Rs
(i) Business A (+) 4,50,000
(ii) Business B (-) 6,00,000
Instead of full set-off of Rs (-) 6,00,000, Karan wants to claim a partial set-off of B-business loss
of Rs (–) 50,000 against the profits of business-A. Comment.
Solution: Tax implication Karan’s Option :
Rs.
Profit from A business 4,50,000
Less : Business – Loss from B business 3,50,000
Total income 1,00,000
There will be no tax liability of Karan for the assessment year 2008-2009 as his income does not
exceed the exemption Jimit of Rs 1,00,000. Besides, Karan will be entitled to carry forward the
business loss of Rs 2,50,000 for future set-off. The law does not allow him to claim partial set-off.
He has to claim the full set-off:
Rs.
Profit from A business 4,50,000
Loss from B business (-) 6,00,000
Business loss to be carried forward (-) 1,50,000
Q22. Classic Exporters Ltd, runs a new industrial undertaking set up in 2002-2003 which satisfies
the conditions of Sec. 80-IB. Given below is the profit and loss account for the previous
year 2008-2009.
210 Revisionary Test Paper (Revised Syllabus-2008)
Particulars Rs Particulars Rs
Stock 4,00,000 Domestic sales 24,00,000
Purchases 23,00,000 Export sales 43,00,000
Salaries and wages 9,70,000 Export incentives Sec. 28(iiia)/(iiic) 50,000
Entertainment expenses 1,30,000 Profit of foreign branch 2,50,000
Freights and insurance attributable 3,00,000 Brokerage/commission/interest/ 50,000
to exports rent, etc
Travelling expenses 2,20,000 Transfer from contingency reserve 10,00,000
Depreciation 1,50,000 Stock 3,50,000
Selling expenses 1,20,000
Income tax paid 90,000
Income-tax penalty 20,000
Wealth tax paid 10,000
Custom duty payable against 30,000
demand notice
Provision for unascertained liabilities 20,000
Provision for ascertained liabilities 50,000
Proposed dividend 3,00,000
Loss of subsidiary company 50,000
Net profit 32,40,000
84,00,000 84,00,000
You are further informed:
(i) Excise duty for 2007-2008, amounting Rs 1,20,000 was paid on 15 December 2008
(ii) Depreciation under Sec. 32 is Rs 2,20,000
(iii) During the year 2005-2006, contingency reserve, amounting Rs 10,00,000, debited to
profit and loss a/c, was added back to the extent of Rs 4,00,000 in the computation of
book-profits. The company has transferred the said reserve to the profit and loss a/c during
the year.
(iv) Brought forward business loss/depreciation:
PY Accounting purposes Tax purposes
Loss Depreciation Loss Depreciation
2005-2006 (-) 10,00,000 (-) 1,00,000 (-) 5,00,000 (-) 2,50,000
2006-2007 (-) 2,00,000 (-) 3,00,000 (-) 1,00,000 (-) 2,00,000
Compute the following: (a) Total income, (b) Book-profits and (c) Tax liability.
Group-III : Paper-14 : Indirect & Direct–Tax Management 211
Answer 22.
Computation of total income for the AY 2009-2010
Particulars Rs Rs
Net profit as per Profit & Loss A/c 32,40,000
Add:
1. Income tax 90,000
2. Wealth tax 10,000
3. Custom duty payable 30,000
4. Provision for unascertained liability 20,000
5. Proposed dividend 3,00,000
6. Loss of subsidiary company 50,000
7. Income-tax penalty 20,000 5,20,000
37,60,000
Less:
(i) Withdrawals from contingency reserve 10,00,000
(ii) Excise duty 1,20,000
(iii) Depreciation 70,000
(iv) Brokerage, commission, interest and rent, etc. 50,000 12,40,000
Business profits 25,20,000
Add: Income from other sources: Brokerage/ commission, etc. 50,000
Aggregated income 25,70,000
Less:
(i) Brought forward losses (Sec. 72) 6,00,000
(ii) Brought forward depreciation [Sec. 32(2)] 4,50,000 10,50,000
Gross Total Income 15,20,000
Less: Profit from industrial undertaking Sec. 80IB: 30% of
Rs 15,20,000 as included in GTI 4,56,000
Total income 10,64,000
(b) Computation of Book Profits for the AY 2009-2010
Particulars Rs Rs
Net profits as per Profit & Loss A/c 32,40,000
Add:
(i) Income tax 90,000
(ii) Provision for unascertained liability 20,000
(iii) Proposed dividend 3,00,000
(iv) Loss of subsidiary 50,000 4,60,000
37,00,000
Less:
(i) Withdrawals from contingency reserve
(ii) Brought forward business loss or depreciation whichever is less 4,00,000
2004-2005 Depreciation 1,00,000
2005-2006 Loss 2,00,000 7,00,000
Book-profits 30,00,000
212 Revisionary Test Paper (Revised Syllabus-2008)
(c) Computation of tax liability for the AY 2009-2010
Particulars Rs
(a) 30% x 10,64,000 = 3,19,200
(b) 10% x 30,00,000 = 3,00,000
Since the amount of income tax on total income is more than the amount
of tax on book-profits, Accordingly, tax liability is computed as under:
(i) Income tax 3,19,200
(ii) Add: Surcharge on income tax @ 10% 31,920
3,51,120
(iii) Add: Education cess @ 2% 7,022
(iii) Add: SHEC @ 1% 3,511
Tax payable 3,61,653
Note: No adjustment is required for depreciation debited to profit and loss a/c because it is not
on account of revaluation of any asset.
Q23. Z Ltd is a qualifying shipping company which has got two qualifying ships during the previous
year 2008-2009 :
Ship Tonnage weight No. of operational days
Ship A 37,949 tonnes and 990 kg 300 days
Ship B 25,550 tonnes and 275 kg 365 days
Compute its tonnage income under Tonnage Tax Scheme for the assessment year 2009-2010.
Solution:
Ship A Ship B
(i) Tonnage consisting of kilograms is ignored. (i) Tonnage consisting of kilograms is ignored.
(ii) If such tonnage is not a multiple of 100 (ii) If such tonnage is not a multiple of 100, and
tonnes and the last two digits are less than last two degits are 50 or more, the tonnage
50, the tonnage is reduced the tonnage is increased to next higher tonnage which
is reduced to the previous lower tonnage is a multiple of 100
which is a multiple of 100.
(iii) Tonnage rounded off = 37,900 tonnes (iii) Tonnage rounded off - 25,600 tonnes
Group-III : Paper-14 : Indirect & Direct–Tax Management 213
Income— computation under TTS Income— computation under TTS
Daily TI: Rs Daily TI: Rs
First 1,000 tonnes = Rs 46x10 = 460 First 1,000 tonnes = Rs 46x10 = 460
Next 9,000 tonnes = Rs 35x90 = 3150 Next 9,000 tonnes = Rs 35x90 = 3150
Next 15,000 tonnes = Rs 28x150 = 4200 Next 15,000 tonnes = Rs 28x150= 4200
Balance 12,900 tonnes = Rs 19x129 = 2451 Balance 600 tonnes = Rs 19x6 = 114
Daily TI: 10,261 Daily TI: 7,924
Total TI for the previous year 30,78,300 Total TI for the previous year 28,92,260
Rs 10, 261x300 = Rs 7,924x365
Q24. Whether the following expenses, incurred during the year 2008-2009, are liable to FBT? If
so, determine the amount at which FBT would be charged.
(1) A five-star hotel in Bangalore, run by C Ltd., a foreign company, incurred the following
expenses on the New Year Celebrations:
Rs
(i) Purchased musical instruments 3,00,000
(ii) TV sets/coffee machines/fridges to entertain guests 3,00,000
(iii) Food, beverages and drinks 3,00,000
(iv) Cost of lighting/decoration 1,00,000
(v) Honorarium paid to cine stars/TV stars/singers to entertain customers/guests 8,00,000
(vi) Gifts/prizes to best dancing couples to attract more and more participation 1,00,000
(vii) Ad-firms 1,00,000
(2) A firm of Chartered Accountants deputed its senior-most partner to attend a conference,
held at Ontario, on Transfer Pricing & Accounting Standards and incurred the following
expenditure:
Rs
(i) Participation fees 2,00,000
(ii) Foreign travel 4,00,000
(iii) Boarding and loading in a hotel 1,00,000
(3) An association of persons, a construction enterprise, having total receipts of Rs 40,00,000
during the year, deputed its Engineer to supervise construction project of its client at Sydney
for two weeks and incurred the following expenses:
(i) Air travel Rs.2,60,000
(ii) Boarding and lodging in hotel Rs.2,00,000
(iii) Participation fees in a seminar on latest construction techniques Rs.1,00,000
(4) Education scholarship given by a charitable trust, registered under Sec. 12AA of the Incometax
Act Rs.5,00,000.
214 Revisionary Test Paper (Revised Syllabus-2008)
1. Hotel run by
Z Ltd., a foreign
company
(A) Entertainment [Sec. 115WB(2)(A) r.w. Sec,
115WC(1)(c)] (i) Musical instrument, T.V.,
Coffee machines and fridges to entertain
guests: Capital assets in respect of which
depreciation is available under Sec. 32,
only depreciation is liable to FBT. However,
depreciation is liable for FBT only in respect
of motor cars and aircrafts.
— —
(ii) Honorarium to cine stars/TV star singers to
entertain customers/ guests
(B) Hospitality [Sec. 115WB(2)(B) r.w. Sec.
115WC (1)(c)]: Food, beverages and drinks.
(D) Sale promotion (including publicity) {Sec.
115WB(2)(D) r.w. Sec. 115WC(2)(c)]: Adfilms]
(L) Festival celeberations [Sec. 115WB(2)(L) r.w.
Sec. 115WC (2}(d)] Cost of lighting and
decoration
(O) Gifts and prizes to best dancing couples
FBT: 31.6725% of 275,000 and rounded off
[Sec. 288B]
20% of 8,00,000 1,60,000
5% of 3,00,000 15,000
— —
5% of 1,00,000 50,000
5% of 1,00,000 50,000
27,000
87,099
2. Partnership
firm of
Chartered
Accountants
(C) Conference [Sec. 115WB(2)(C) r.w. Sec.
115WC(1)(c)] (i) Participation fee—exclusion does
not apply to partner as he is.not an employee
(ii) Foreign travel
(iii) Boarding/ lodging in hotel
FBT: 33.99% of 1,40,000 and rounded off (Sec.
288B)
20% of 2,00,000 40,000
20% of 4,00,000 80,000
20% of 1,00,000 20,000
1,40,000
47,856
3. Association
of persons,
engaged in
construction
activity
(C) Conference [Sec. 115WB(2)(C) r.w. Sec.
115WC(1)(c)]: Participation fee in seminar not liable
to FBT as the participent is an employee
(F) Tour and travel including foreign travel [Sec.
115WB(2)(F)]
(G) Use of hotel, boarding and lodging facility
[Sec. 115WB(2)(G) r.w. Sec. 115WC(1)(c)]
FBT: 30.9% of Rs 53,000 and rounded off (Sec.
288B)
Total income under Sec.44AD is 8% of Rs
40,00,000, i.e. Rs 3,20,000. As it does not exceed
Rs 10,00,000, no surcharge is payable by the AOP.
5% of 1,60,000 13,000
20% of 3,00,000 40,000
53,000
16,377
4. Charitable
trust
(P) Scholarship [Sec. 115WB(2)(P) r.w. Sec.
115WC(1)(d)]
FBT: As the charitable trust is registered under Sec.
12AA, it is not liable to FBT (Proviso to Sec.
115W]. Hence, tax liability is nil.
50% of 5,00,000 2,50,000
— —
Solution : Computation of the liability of FBT for the AY 2009 –2010
Category of Particulars of Expenditure Valuation Taxable
Employer Rule Value
Group-III : Paper-14 : Indirect & Direct–Tax Management 215
Q25. ABC Ltd., an Indian company, operating airline, has incurred the following expenditure for
its employees in the course of its business during the PY 2008-2009:
Sr. No. Particulars of expenditure Amount
(Rs in crore)
1. Free/concessional tickets provided to employees (including employees 20
of its subsidiary airlines) and their family members for private
journeys—Value of concessions, net of recoveries
2. Entertainment 10
3. Hospitality 100
4. Employees welfare 20
5. Use of hotel for boarding and lodging 10
6. Repairs, running, maintenance and depreciation of coaches used to 50
take passengers to and from the airport
7. Repairs, running, maintenance and depreciation of aircrafts 500
8. Telephone expenses—for office use only 2
9. Interest on loan taken for purchasing aircrafts 10
10. Use of club facilities 30
Additional information:
1. Entertainment expenses include ‘entertainment allowances’ to employees: Rs 2 crore.
2. Hospitality includes an expenditure of Rs 10 crore on food, beverages provided to employees
in office and expenditure on non-transferable lunch vouchers usable only on eating joints.
3. Employees welfare expenses include employer’s contribution to recognised fund, Rs 4 crore
and scholarship Rs 1 crore.
4. Club facilities include the cost of club building purchased for Rs 10 crore. Depreciation under
Income-tax Rules amount to Rs 1 crore but depreciation for accounting purposes is Rs 1.5
crore.
5. Free/concessional ticket provided to the employees of subsidiary airline amount to Rs 4 crore.
Determine the liability of FBT for the assessment year 2009-2010.
Solution:
Computation of the liability of FBT for the A.Y. 2009-2010
Sr. Expenditure on Fringe Benefits (Rs in crore) Valuation
No. amount of
Fringe Benefits
(Rs. in crore)
Free and concessional tickets provided to employees 20.00
[Sec. 115WB(1)(b)]:
1. Less: Tickets provided to the employees of subsidiary 4.00
16.00
Valuation at 100% of the cost to the employer 16.00
[Sec. 115WC(1)(a)]
Entertainment [Sec. 115WB(2)(A)] 10.00
216 Revisionary Test Paper (Revised Syllabus-2008)
2. Less: Entertainment allowance paid to employees is 2.00
taxable as salary under Sec. 17(1) in their hands. Hence,
it is excluded 8.00
20% of 8 crore [Sec. 115WC(1)(c)] 1.60
Hospitality [Sec. 115WB(2)(B): 100
3. Less: Payment for food or beverages provided by 10
employer to his employees in office on non-transferable
lunch vouchers to employees, usable on eating joints
20% of Rs. 90 crore [Sec. 115WC(1)(c)] 90 18.00
4. Employee welfare [Sec. 115WB(2)(E): 20
Less: (i) Contribution recognized fund, not liable to FBT (–) 4
(ii) Scholarship, not covered under this clause (–) 1
20% of Rs. 15 crore [Sec. 115WC(1)(c)] 15 3.00
5. Use of hotel, boarding and lodging [Sec. 115WB(2)(G)] 2.00
20% of 10 crore [Sec. 115WC(1)(c)]
6. Repairs, running, maintenance and depreciation of 500
coaches to take passengers to and from airport
[Sec. 115WB (2)(H)]. Coaches are not motor cars.
Therefore, no FBT can be charged.
7. Repairs, running, maintenance and depreciation of 10
aircraft [Sec. 115WB(2)(1)]
Add: Interest on loan taken to purchase aircraft: CBDT
has clarified that interest on loan taken to purchase
motorcars is liable to FBT. Comments, applicable to motor
car, would equally apply to aircraft. Accordingly, interest
on loan, taken to purchase aircraft, would also be liable
to FBT.
The valuation of this facility is taken at nil 510 Nil
[Sec. 115WC(2)(f)].
8. Telephone facility [Sec. 115WB(2)(J)] 20% of 2 crore 0.40
[Sec. 115WC(1)(c)]
9. Scholarship [Sec. 115WB(2)(P)]: 50% of 1 crore 0.50
[Sec. 115WC(1)(d)] Use of
Group-III : Paper-14 : Indirect & Direct–Tax Management 217
10. Club facility [Sec. 115WB(2)(N)]: 30
Less: Cost of building 10
20
Add: Depreciation on club building under Income-tax
Rule: Where the legislature has intended to subject
the amount of depreciation on any capital asset to FBT,
it has specifically provided for it as in clause (H) and (1)
of Sec. 115WB(2). In absence of any legislative intent to
subject the amount of depreciation in respect of club
building to FBT, such depreciation amount is not liable to
FBT. Income-tax Rule Nil
50% of 20 crore [Sec. 115WC(1)(d)] 20 10.00
Total value of Fringe Benefits 51.50
FBT © 33.99% of 51.50 crore 17.5049
Q26. Anand and Aniket are equal members in AA & Associates. The profit and loss account of
the AOP for the year ended 31 March 2009 is as follows:
Particulars Rs Particulars Rs
Selling and administrative Gross Profit 20,00,000
Expenses 8,00,000 Income from house property 3,60,000
Interest to Anand @ 15% 60,000
Remuneration:
Anand 1,50,000
Aniket 1,50,000
Net profit:
Anand 6,00,000
Aniket 6,00,000
23,60,000 23,60,000
Other information:
1. Selling and administrative expenses include Rs 60,000 paid to a consultant in cash.
2. The other income/investment details of the members are given as below:
Members Income Source of income Investments
Anand 90,000 Interest on fixed deposit from bank Purchase of NSC VIII Rs 30,000
Aniket 1,00,000 Interest on govt. securities Contribution to PPF Rs 50,000
Compute the tax liability of the AOP and it members.
218 Revisionary Test Paper (Revised Syllabus-2008)
Solution :
Computation of total income of AOP: AY 2009-2010
Particulars Rs
Net profit 12,00,000
Add: Inadmissible payments.
1. Fees paid to consultants in cash Sec. 40A (3) 60,000
2. Interest paid to members [Sec. 40(ba)]: 60,000
3. Remuneration paid to members Sec. 40(ba) 3,00,000
16,20,000
3,60,000
Less: Income from house property 12,60,000
Business profits
Add: Income from house property 3,60,000
Total income 16,20,000
Tax liability of AOP on total income
Tax on slabs rates 4,35,000
Add: Surcharge on income tax @ 10% 43,500
4,78,500
Education cess 2% 9,570
SHEC @ 1% 4,785
Tax payable 4,92,855
Tax payable rounded off to the nearest multiple of Rs 10 (Sec. 288B) 4,92,860
Allocation of income amongst the members:
Particulars Anand Aniket Total
Rs Rs Rs
Interest 60,000 60,000
Remuneration 1,50,000 1,50,000 3,00,000
Share of divisible profit (12,60,000-60,000-30,00,000) 4,50,000 4,50,000 9,00,000
Share of profit 6,60,000 6,00,000 12,60,000
Share of income from house property 1,80,000 1,80,000 3,60,000
8,40,000 7,80,000 16,20,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 219
Computation of total income of members:
Particulars Anand Aniket
Rs Rs
Share income from AOP 8,40,000 7,80,000
Income from other sources:
Interest on bank deposits 90,000 —
Interest on government securities — 1,00,000
Gross total income 9,30,000 8,80,000
Less: Deduction under Sec. 80C 30,000 50,000
Total income 9,00,000 8,30,000
Tax liability of members:
Tax on slab rates 2,19,000 1,98,000
Add: Surcharge on income tax Nil Nil
Add: Education cess @ 2% on income tax + surcharge on income tax 4,380 3,960
Add : SHEC @ 1% 2,190 1,980
Less: Rebate on share of profit at the average: (See Note below) 2,25,770 2,03,940
Tax payable 2,10,719 1,91,654
Tax payable rounded off to the nearest multiple of Rs 10 (See. 288B) 15,051 12,286
Note: Anand 8,40,000 2,10,719
9,00,000
2,25,770
× = 15,050 12,290
Aniket : 8,30,000 78,00,000 1,91,654
2,03,940 × = 2,10,719 1,91,654
Q27. A, B and C Ltd. are three members of an AOP, sharing profit and losses in the ratio 2:2:1.
The AOP discloses its income for the AY 2009-2010 as below:
Particulars Rs
(i) Long-term capital gains 4,00,000
(ii) Business profits 6,00,000
Determine tax liability of AOP in the following cases:
(i) C Ltd. is an Indian company
(ii) C Ltd. is a foreign company
Solution:
Allocation of income of AOP among partners
Particulars of income A B C Ltd
Rs Rs Rs
Long-term capital gains 1,60,000 1,60,000 80,000
Business profits 2,40,000 2,40,000 1,20,000
Share income of the members 4,00,000 4,00,000 2,00,000
220 Revisionary Test Paper (Revised Syllabus-2008)
Tax liability of AOP
Particulars Case – I Case – II
C Ltd. an Indian company C. Ltd. as foreign company
Rs Rs
Tax on the share of C Ltd.
Case I : 1,20,000 x 33.99% 40,788 —
Case II: 1,20,000 x 42.23% — 50,676
Tax on balance income at AOP:
(i) Long-term capital gain 90,640 90,640
4,00,000 x 22.66%
(ii) Business profits
6,00,000 x 33.99% 2,03,940 2,03,940
Total tax payable 3,35,368 3,45,256
Total Tax (Rounded off a/c 288B) 3,35,370 3,45,260
Q28. Dinesh Pally Cooperative Society Ltd. furnishes the following particulars of its income for
the previous year ending on 31 March 2009:
(i) Interest on government securities 40,000
(ii) Profits from banking business 3,50,000
(iii) Income from purchase and sale of agricultural implement and seeds 2,50,000
to its members
(iv) Income from marketing of agricultural produce of its members 4,00,000
(v) Profits and gains of business 2,20,000
(vi) Income from cottage industry 3,50,000
(vii) Interest and dividends (gross) from other cooperative societies 30,000
Compute total income of the society and calculate the tax payable by it for the assessment year
2009-2010.
Group-III : Paper-14 : Indirect & Direct–Tax Management 221
Solution:
Dinesh Pally Cooperative Society Ltd.
Computation of income of the for the previous year 2008-2009 relatinG to the Assessment Year
ending 2009-2010 :
Particulars Rs Rs
1. Profits and gains of business or profession:
a) Banking business 3,50,000
b) Income from purchase and sale of agricultural implements 2,50,000
and seeds to its members
c) Income from marketing of agricultural produce of its members 4,00,000
d) Profits and gains of business 2,20,000
e) Income from cottage industry 3,50,000 15,70,000
2. Income from other sources:
a) Interest on government securities 40,000
b) Interest and dividends from other cooperatives 30,000 70,000
Gross Total Income 16,40,000
Less: Deduction allowable from gross total income under Sec. 8OP
1. Banking business 3,50,000
2. Income from purchase and sale of agricultural implement and 2,50,000
seeds to its members
3. Income from marketing of agricultural produce of its members 4,00,000
4. Income from cottage industry 3,50,000
5. Interest on government securities(not eligible for deduction) Nil
6. Interest and dividends from other cooperative societies 30,000 13,80,000
Total Income 2,60,000
Computation of Tax Liability:
Particulars Rate Rs
On first Rs 10,000 10% 1,000
On next Rs 10,000 20% 2,000
On balance Rs 2,40,000 30% 72,000
Income tax payable 75,000
Add: Education cess @ 2% 1,5000
Add: SHEC @ 1% 750
Tax payable 77,250
222 Revisionary Test Paper (Revised Syllabus-2008)
Q29. The following details have been supplied by the Karta of an HUF. You are required to compute
its total income and tax liability for the assessment year 2009-2010.
Particulars Rs
(i) Profits from business (after charging Rs 1,00,000 salary to Karta for 15,00,000
managing the business).
(ii) Salary received by the member of a family. 60,000
(iii) Director’s fee received by Karta from B Ltd where HUF holds 40,000
20% shares but he became director because of his qualifications,
(iv) Rental income from house property (after deduction of municipal taxes Rs 2,000). 78,000
(v) Dividends (gross) from Indian companies 15,000
(vi) Long-term capital gain 80,000
(vii) Short-term capital gain 30,000
(viii) Donation to a school, which is an approved institution, 1,00.000
(ix) Deposits in Public Provident Fund 20,000
(x) NSC-VIII issues purchased on 15.3.2009. 40,000
Solution :
Computation of Total Income
Particulars Rs Rs
(i) Income from house property:
Gross annual value (Rs 78,000 + Rs 12,000) 90,000
Less: Municipal taxes paid 12,000
Annual value 78,000
Less: Statutory deduction: 30% ×78,000 23,400 54,600
(ii) Profits and gains from business 15,00,000
(iii) Capital gains (a) long-term + (b) short-term 1,10,000
(iv) Income from other sources—gross dividends from Indian Nil
companies: Exempt [Sec. 10(34)]
Gross total income
Less:
1. Contribution to approved savings (Sec. 80C)
(i) Deposits in Public Provident Fund 20,000
(ii) NSC-VIII Issue 40,000
60,000
2. Donation to recognised school:
(a) Actual donation: Rs 1,00,000 or
(b) 10% of modified total income of
Rs 15,24,600 (16,64,600 - 80,000 - 60000)
whichever is less, is qualifying amount.
Amount of deduction: : 50% of Rs. 1,00,000 50,000 1,10,000
Total income 15,54,600
Group-III : Paper-14 : Indirect & Direct–Tax Management 223
Computation of tax liability:
Particulars of total income Rate of income tax Rs
Rs Rs
(a) Long-term capital gain 1,10,000 20% 22,000
(b) Balance of total income: Rs 14,44,600
(i) First 1,10,000 Nil —
(ii) Next 40,000 10% 4,000
(iii) Next 1,00,000 20% 20,000
(iv) Balance 11,94,600 30% 358,380
Gross income tax 3,80,380
Add: 1. Surcharge on income tax @ 10% 38,038
surcharge 4,18,418
2. Education cess @ 2% on the aggregate of 8,368
income tax and
3. SHEC @ 1% 4,184
Tax payable 4,30,970
Q30. RP Bros., an HUF, furnishes the following particulars of its income and outgoing for the
previous year 2008-2009. Receipts
Receipts: 4,00,000
(i) Short-term capital gain 1,00,000
(ii) Gross winning from lottery 12,00,000
(iii) Sale consideration of 3/4th of agriculture produce, derived from land 50,000
located in India, the balance produce has been kept for family use.
(iv) Net sale proceeds of wild grass and fruits from trees of spontaneous
growth
Payments:
(i) Repair of tube-well 60,000
WDV of tuble-well on 1-4-2007 10,00,000
(ii) Wages paid to agriculture labour 6,00,000
(iii) Manuring and spraying charges 50,000
(iv) Rent of the building, used for storing agriculture produce on site 50,000
(v) Petrol, repair, salary of driver and insurance of motor car. 1,50,000
WDV of motor car on 1-4-2007 2,00,000
50% use of the motor car is for personal purpose of the family
(vi) LIP paid to insure members of the family 20,000
(vii) School fees paid for 3 children of the family @ Rs 15,000 per child 45,000
(viii) Purchase of infrastructure bonds, covered under Sec. 80C(2)(xix) 90,000
(ix) Deposit with LIC for maintenance of a dependant member with disability:
Unabsorbed losses brought forward:
AY: 1998-1999 40,000
AY: 1999-2000 5,00,000
AY: 2003-2004 1,00,000
Determine the total income of the HUF and its tax liability for the assessment year 2009-2010.
224 Revisionary Test Paper (Revised Syllabus-2008)
Computation of Total Income: AY 2008-2009
Particulars Rs Rs
Computation of net agriculture income for the purpose of
aggregation to determine the rate of tax applicable to nonagriculture
income of the HUF. Such computation is done under
the head business profession:
Sale proceeds of agriculture produce 12,00,000
Add: Market value of produce kept for family use: 4,00,000
12,00,000 x (4/3)x (1/4) 16,00,000
Less: Permissible deductions:
(i) Repair of tube-well 60,000
(ii) Wages 6,00,000
(iii) Rent 50,000
(iv) Petrol, repair, salary of driver— 50% 75,000
(v) Manuring and spraying 50,000
(vi) Depreciation on tube-well @ 10% on WDV 1,00,000 9,50,000
(vii) 50% depreciation on motor car: (15% of 2,00,000) x 50% 15,000
Less: Carried forward: Losses:
(i) Loss 1999-2000-not allowed
(ii) Loss from AY 2000-2001 1,00,000
(iii) Loss from AY 2004-2005 45,000 1,45,000
Net Agriculture Income 5,05,000
(b) Computation of Total Income
(i) Short-term capital gain 4,00,000
(ii) Income from other sources:
(a) Winnings from lottery 1,00,000
(b) Net sale proceeds of non-agriculture produce 50,000 1,50,000
Gross Total Income 5,50,000
Less: 1. Contributions paid for approved savings [Sec. 80C(2)]:
(i) LIP on the life of members 20,000
(ii) School fees for 3 children of the HUF [Sec. 80(4)(c)] Nil
(iv) Purchase of infrastructure bonds 90,000
1,10,000
But deduction restricted upto a maximum of Rs.1,00,000 1,00,000
2. Deposit for maintenance (including medical treatment) of a 50,000
dependant with disability (Sec. 80DD)
Total income 4,00,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 225
Computation of Tax Liability
(i) Income tax on winnings 30% 30,000
(ii) Income tax on non-agriculture + agriculture income:
3,00,000 + 5,05,000 at slab rates
(Non-agricultural income=3,00,000 = 5,50,000 – 1,00,000
– 1,00,000 – 50,000)
(a) Income tax on 8,05,000 as if it is the total income 1,90,500
(b) Income tax on agriculture income + exemption limit as if
it is the total income: 5,05,000 + 1,10,000 = 1,31,500
Income tax on non-agriculture income: a - b 60,000 60,000
Tax on total income 90,000
Add: (i) Surcharge on income tax Nil
(ii) Education cess @ 2% 1,800
(iii) SHEC @ 1% 900
Tax payable 92,700
Q31. B Ltd. grows sugarcane to manufacture sugar. The data for the financial year 2007-08 is as
follows:
Cost of cultivation of sugarcane Rs. 6,00,000
Market value of sugarcane when transferred to factory Rs. 10,00,000
Other manufacturing cost Rs. 6,00,000
Sales of sugar Rs. 25,00,000
Salary of Managing Director who looks after all operations of the Company Rs. 3,00,000
Solution:
(1) Business Income:
Sales of Sugar Rs.25,00,000
Less: Market value of sugarcane when transferred to factory Rs.10,00,000
Other manufacturing cost Rs. 6,00,000
Salary of Managing Director Rs. 3,00,000
Rs. 6,00,000
(2) Agricultural Income:
Market value of sugarcane when transferred to factory Rs.10,00,000
Less: Cost of cultivation Rs. 6,00,000
Rs. 4,00,000
226 Revisionary Test Paper (Revised Syllabus-2008)
Q32. Mr. P has estates in Rubber, Tea and Coffee. He has also a nursery wherein he grows
plants and sells. For the previous year ending 31.3.2009, he furnishes the following particulars
of his sources of income from estates and sale of Plants. You are requested to compute the
taxable income for the Assessment year 2009-2010 :
Manufacture of Rubber Rs. 5,00,000
Manufacture of Coffee grown and cured Rs. 3,50,000
Manufacture of Tea Rs. 7,00,000
Sale of Plants from Nursery Rs. 1,00,000
Solution :
Computation of Taxable Income
Rule Nature of Business Agl Inc. Non-Agl. Inc.
7A Sale of centrifuged latex or cenex manufactured 3,25,000 1,75,000
from rubber
7B Sale of grown and cured coffee by seller in India 2,62,500 87,500
8 Growing and Manufacturing Tea 4,20,000 2,80,000
Sale of plants from nursery 1,00,000 —
Total 11,07,500 5,42,500
Computation of Tax Liability:
Rs.
(a) Total Income (Agricultural Income + Non-agricultural Income) 16,50,000
(b) Tax on (a) above 4,44,000
(c) Total of (Agricultural Income + Basic Exemption Limit) 13,17,500
(d) Tax on (c ) above 3,44,250
(e) Tax Payable (b) – (d) 99,750
Add: Surcharge @ 10% (since aggregate income > Rs.10 lakhs) 9,975
Total of Tax (e) + Surcharge 1,09,725
Add: Education Cess @ 2% 2,195
Add: SHEC @ 1% 1,097
Total Tax Liability 1,13,017
Tax payable rounded off u/s 288B 1,13,020
Group-III : Paper-14 : Indirect & Direct–Tax Management 227
Q33. Mr. Prasad, ordinarily resident in India, furnished the following particulars of his income/
savings during the previous year 2008-2009.
Rs
(i) Income from foreign business (Including Rs 2,00,000 from business 12,00,000
connection in India) accruing outside India
(ii) Loss from Indian business (–) 2,00,000
(iii) Income from house property 4,00,000
(iv) Dividends gross from Indian companies 60,000
(v) Deposit in Public Provident Fund 70,000
(vi) Tax paid in foreign country 2,50,000
There is no double taxation avoidance treaty.
Compute the tax liability
Solution :
(a) Computation of total income
Particulars Rs Rs
1. Income from house property 4,00,000
2. Income from business :
(a) Income from Indian business (-) 2,00,000
(b) (I) Income from foreign business accruing or arising (+) 10,00,000
outside India
(ii) Income from foreign business deemed to accrue or arise in India (+) 2,00,000 10,00,000
arise in India
3. Income from other sources
Dividends from Indian companies exempt [Sec. 10(34)] Nil
Gross total income 14,00,000
Less : Deduction for approved savings (Sec. 80C): PPF Deposits 70,000
Total income 13,30,000
Tax liability on total income :
Income-tax on slab rates 3,48,000
Add: Surcharge on income tax @ 10% 34,800
3,82,800
Add : Education cess : 2% on the aggregate of income 7,656.
tax and surcharge
Add : SHEC @ 1% 3,828
Tax liability 3,94,284
Less : Double taxation relief on foreign business profits, 2,08,330
not deemed to accrue or arise in India (Sec. 91)
10,00,000×20.833%
Tax payable 1,85,954
Tax payable to be rounded off to the
nearest multiple of Rs 10 (Sec.,288B) 1,85,950
228 Revisionary Test Paper (Revised Syllabus-2008)
Note: 1. Relief is allowed on the doubly taxed income either at average rate of Indian tax or
average rate of foreign income tax, whichever is lower;
(a) Average rate of Indian income tax : 3,94,284 / 13,30,000 x 100 = 29.65%
(b) Average rate of foreign income tax: (2,50,000/12,00,000) x 100 = 20.833%
2. The amount of doubly taxed income has been worked out as under: Rs
Income from foreign business, accruing outside India 12,00,000
Less: (i) Income from business connection deemed to accrue or
arise in India which is not entitled to double taxation relief. 2,00,000
Doubly taxed income 10,00,000
3. Loss from Indian business has been set-off against profits from foreign business which is
deemed to accrue or arise in India.
The mode of set-off increases the amount of double taxation relief.
Q34. Sania, a resident Indian, furnishes the details for the assessment year 2009-2010.
Rs
(1) Income from profession 1,04,000
(2) Share income from a partnership in country X 40,000
(Tax paid in country X for this income in equivalent Indian rupees Rs 8,000)
(3) Commission income from concern in country Y 30,000
(Tax paid in country Y at 20%) converted in Indian rupee)
(4) Interest from scheduled banks 20,000
Sania wishes to know whether he is eligible to any double taxation relief, if so, its quantum. India
does not have any Double Taxation Avoidance Agreement with countries X and Y.
Solution :
(a) Computation of total income
Particulars Rs Rs
(a) Income from business:
(i) Income from profession 1,04,000
(ii) Share income in partnership firm in country X 40,000 1,44,000
(b) Income from other sources:
(i) Interest from schedule bank 20,000
(ii) Commission earned in country Y, assumed from other sources 30,000 50,000
Total income 1,94,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 229
(b) Computation of tax liability
Particulars Rs
Tax on total income of Rs 1,94,000 9.300
Add: Surcharge on income tax Nil
Education cess @ 2% 9,300
SHEC @ 1% 186
93
9,579
Less: Dobule taxation relief : 70,000 × 4.94 3,458
Tax payable 6,121
Rounded off u/s 288B 6,120
Note: (i) Average rate of tax in the foreign country : 20%
(ii) Average rate of tax in India : 1,94,000 100 4.94%
9,579 × =
Q35. A is a musician deriving income from foreign concerts performed outside India, Rs 50,000.
Tax of Rs 10,000 was deducted at source in the country where the concerts were given.
India does not have any agreement with that country for avoidance of double taxation.
Assuming that Indian income of A is Rs.2,00,000, what is the relief due to him under Sec.
91 for the assessment year 2009-2010.
Solution :
(a) Computation of total income: Rs
(i) Indian income 2,00,000
(ii) Foreign income 50,000
Gross total income or total income 2,50,000
(b) Computation of tax liability:
Income tax on total income at slab rates:
Add: (i) Surcharge on income tax 24,000
(ii) Education cess @ 2% 480
(iii) SHEC @ 1% 240
24,720
Less : Double taxation relief under Sec. 91: Rs 50,000 x 9.9% 4,950
Tax payable 19,770
Note: 1. Average rate of Indian income tax: 100 9.9%
2,50,000
24,720
= × =
2. Average rate of foreign income tax:
Relief is allowed either at the average rate of Indian income tax or te average rate of
foreign income tax, 100 20%
50,000
10,000
× =
whichever is lower. Accordingly, the relief has been allowed at the average rate of
Indian income tax.
230 Revisionary Test Paper (Revised Syllabus-2008)
Q36. ALtd is engaged in the construction of residential flats. For the valuation date 31.3.2009, it
furnishes the following data and requests you to compute the taxable wealth -
(a) Land in urban area (Construction is not permitted as per Municipal Laws in force)
Rs.55,00,000
(b) Motor-cars (used on hire by the company) Rs.10,00,000
(c) Jewellery (Investment) Rs. 25,00,000. Loan taken for purchasing the same Rs. 20,00,000
(d) Cash Balance (as per books) Rs.2,75,000
(e) Bank Balances Rs.5,50,000
(f) Guest House (situated in a place which is 30 Kms away from the local limits of the municipality)
Rs.10,00,000
(g) Residential flats occupied by the Managing Director Rs.15,00,000. The Managing Director
is on whole time appointment and is drawing remuneration of Rs.2,00,000 per month.
(h) Residential house were let out on hire for 200 days Rs.10,00,000
The computation should be supported with proper reasoning for inclusion or exclusion.
Solution :
Valuation Date: 31.03.2009 Computation of Taxable Wealth
Nature of asset Rs. Reason
Land in Urban Area NIL Land in which construction is not permitted
as per municipal law is not an asset u/s 2(ea)
Motor Cars NIL Motor cars used in business of hire is not an
asset u/s 2(ea)
Jewellery 25,00,000 Not held as stock in trade
Cash Balance NIL Cash as per books - Not an asset U/s 2(ea)
Bank Balance NIL Not an asset u/s 2(ea)
Guest House 10,00,000 Asset u/s 2(ea)
Residential Flat occupied by MD 15,00,000 Asset u/s 2(ea) since Annual Gross Salary is
greater than Rs.5,00,000.
Residential House Let-out 10,00,000 Asset U/s 2(ea) as it is not let-out for a period
>300 days.
Total Assets
Less: Debt incurred in relation to 60,00,000
an asset: Loan for Jewellery (20,00,000)
Taxable Net Wealth 40,00,000
Q37. Compute the net wealth of Nivedita, a resident individual as on 31.3.2009 from the following
particulars furnished —
(a) She has a house property at Delhi, valued at Rs. 20,00,000 which is occupied by a firm in
which she is a partner for its business purposes. Another house at Mumbai, valued at
Rs.8,00,000 is being used for his own business.
(b) Vehicles for personal use - (i) Motor Car Rs.10,00,000 (ii) Motor Van — Rs.3,00,000
(iii) Jeep — Rs.5,00,000.
Group-III : Paper-14 : Indirect & Direct–Tax Management 231
(c) Cash on hand - Rs.3,10,000
(d) Jewellery - Rs.10,00,000
(e) Nivedita has gifted to a Trust a residential property situated at Kolkata purchased 5 years
back for Rs.20,00,000 for the benefit of the smaller HUF consisting of herself and her
spouse and let-out for 8 months. Schedule-Ill, Rule 3 value as on 31.3.2009 is Rs. 14 Lakhs.
(f) She had transferred an urban house plot in February 1998 in favour of her niece which was
not revocable during her life time. This niece died on 14.3.2008. Nivedita could get the title
to the plot retransferred to her name only on 15.4.2008 despite sincere and honest efforts.
The market value of the house as on 31.3.2009 is Rs. 10,00,000.
(g) Nivedita is the holder of an impartible estate in which urban agricultural lands of the value
of Rs. 4,30,000 as on 31.3.2009 are comprised.
Solution :
Assessee: Ms. Nivedita Valuation Date: 31.3.2009 Assessment Year: 2009-10
Computation of Net Wealth
Nature of Asset Amount Reasons
Taxable
House Property at Delhi used NIL Property used for business purpose is not an asset
for business by a firm in which u/s 2(ea) (Refer Note)
he is a partner
House Property at Mumbai NIL Property used for business purpose is not an asset
used for his own business u/s 2(ea)
Vehicles for Personal Use
1. Motor-car 10,00,000 Vehicles used for personal purposes are asset
u/s
2. Motor-van 3,00,000 2(ea)
3. Jeep 5,00,000
Cash on Hand 2,60,000 For an Individual, cash in excess of Rs. 50,000
shall be chargeable to Wealth Tax u/s 2(ea)
(Rs.3,10,000 -Rs.50,000)
Jewellery 10,00,000 Jewellery other than those held as stock-in-trade
are asset u/s 2(ea)
Property at Kolkata transferred NIL Taxable u/s 4(1A). Value = Higher of Value as on
to a Trust 20,00,000 Valuation Date Rs.14 Lakhs or Cost of Acquisition
Less: Exemption u/s 5(vi) Rs. 20 Lakhs
20,00,000
Urban House Plot transferred 10,00,000 Taxable u/s 4(5) as the title to the property stands
to Niece vested in Nivedita’s hands immediately on niece’s
demise
Urban Agricultural Land 4,30,000 Holder of an impartible estate is deemed to be the
owner of all properties comprised therein u/s 4(6)
NET WEALTH 44,90,000
232 Revisionary Test Paper (Revised Syllabus-2008)
Q38. Hassan, a person of Indian origin was working in Australia since 1985. He returned to India
for permanent settlement in June 2003 when he remitted the moneys into India. He furnished
the following particulars of his wealth as on 31.3.2009. You are required to arrive at his
wealth in respect of Assessment Year 2009-10.
(a) Market Value of Residential house in Jharkhand (let-out for residence) Rs.10,00,000 with
Net Maintainable Rent p.a. of Rs.1,20,000.
(b) Share in building owned by a firm in which Hassan is a Partner - used for business Rs.5,00,000
(c) Motor-car purchased in April 2008, out of moneys remitted to India from Australia
Rs.4,00,000
(d) Value of interest in Firm excluding item (b) above Rs.5,00,000
(e) Shares in companies (quoted) Rs.2,00,000
(f) Assets purchased out of amount remitted from Australia:
• Jewellery purchased in March 2001 Rs.5,50,000
• Vacant land purchased in October 2000 Rs.10,00,000
(g) Amount standing to the credit of NRE Account Rs.15,00,000
(h) Cash on hand (out of sale proceeds of agricultural income) Rs.65,000
Assessee: Hassan Valuation Date: 31.3.2009 Computation of Net WeaIth
Nature of Asset Amount Reasons
Taxable
Residential House in Jharkhand NIL Not an Asset u/s 2(ea) - Let-out for whole year -
Hence, not taxable
Share in the building owned by NIL Not an asset u/s 2(ea), used for its own business -
the firm not chargeable to tax
Motor-car 4,00,000
Less: Exempt u/s 5(v)-acquired NIL Asset u/s 2(ea). But, exemption available u/s 5(v),
out of money brouqht into India since acquisition out of money brought into India.
(4,00,000)
Value of Interest in a Firm 5,00,000 Assumed as deemed asset u/s 4(1)(b)
Shares in Companies NIL Not an asset u/s 2(ea)
Value of Jewellery 5,50,000 Asset u/s 2(ea) - Not entitled for exemption
Vacant Land 10,00,000 Asset u/s 2(ea) - Purchased in October 1999
Money in NRE A/c NIL Not an asset u/s 2(ea)
Cash in Hand in excess of 15,000 Asset u/s 2(ea), being an Individual
Rs. 50,000
NET WEALTH 20,65,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 233
Q39. Mr. Kushal Sengupta owns a house at Jharkhand, which is let-out at Rs.1,35,000 per annum.
The annual value of the property as per municipal records also is Rs.1,00,000. Municipal
taxes are partly borne by the owner (Rs.5,000) and partly by the tenant (Rs.6,000). Repair
expenses are borne by tenant (Rs10,000) the difference between the un-built area and
specified area does not exceed 5%. The property was acquired on 10.5.1998 for Rs.
15,00,000.
Determine for purposes of Wealth Tax Act, the value of the property as on 31.3.2009 on
the following situations —
(a) The house is built on a freehold land.
(b) It is built on a leasehold land, the unexpired period of lease of the land is more than 50 years.
(c) If the area of the plot on which the house is built is 800 sq. meters. FSI, permissible is 1.4
and FSI utilised is 1088 Sq. metres. (136 Sq. metres x 8 Storeys)
(d) The tenant had made interest free deposit of Rs. 1,00,000 with the landlord.
Assessee: Mr. Kushal Sengupta Valuation Date: 31.3.2009 Assessment Year: 2009-10
Computation of Value of House Property
For Situations (a) & (b):
Computation of Gross Maintainable Rent (Amount in Rs.)
Particulars No Rental Rental Deposit
Deposit excess of 3 Mths
Actual Annual Rent 1,35,000 1,35,000
Add: Municipal Taxes borne by the tenant 6,000 6,000
l/9th of Actual Rent Receivable since repair expenses are 15,000 15,000
borne by the tenant (Rs.1,35,000/ 9)
Rental Deposits - 15% Interest on Rs. 1,00,000 Nil 15,000
GROSS MAINTAINABLE RENT 1,56,000 1,71,000
Less: Municipal Taxes Paid 11,000 11,000
Less: 15% of Gross Maintainable Rent 23,400 25,650
Net Maintainable Rent 1,90,400 2,07,650
Case (a) Capitalization of Net Maintainable Rent
-Freehold Land NMR x 12.5 23,80,000 25,56,625
Case (b) Capitalization of Net Maintainable Rent
-Leasehold Land - Unexpired Lease 50 Years = NMR×10 19,04,000 20,07,650
Property Acquired after 31.3.1974 i.e. 10.5.1997 15,00,000 15,00,000
Therefore, Value of the Property (whether on Lease-hold 15,00,000 15,00,000
Land or on Freehold Land)
For Situation (c ): In case of excess unbuilt area:
Unbuilt Area = (Actual Area of the Land less Built up Area)=(800 sq. mt less 136 sq. mt). = 664 sq. mt.
234 Revisionary Test Paper (Revised Syllabus-2008)
Excess Unbuilt Area = (Unbuilt Area less Specified Area) = 664 sq. mt. less 70% of 800 sq. mt.
= 664 Less 560 = 104 sq. mt
% of Excess Unbuilt Area = Excess Unbuilt Area × 100/Aggregate Area = 104 × 100/800 = 13%
Therefore, Value of the Property = Substituted Net Maintainable Rent i.e. Rs.15,00,000 + 30%
of SNMR = Rs. 19,50,000
Q40. From the following dated furnished by Mr.Soumitra, determine the value of house property
built on leasehold land as at the valuation date 31.3.2009:
Particulars Rs.
Annual Value as per Municipal valuation 1,40,000
Rent received from tenant (Property vacant for 3 months during the year) 1,08,000
Municipal tax paid by tenant 10,000
Repairs on property borne by tenant 8,000
Refundable deposit collected from tenant as security deposit which does not 50,000
carry any interest
The difference between unbuilt area and specified area over aggregate area
is 10.5%.
Assessee: Mr. Soumitra Valuation Date: 31.3.2009 Assessment Year: 2009-10
Computation of Value of House Property
Step I: Computation of Gross Maintainable Rent(GMR)
Particulars Rs. Rs.
Actual Annual Rent- Rs. 1,08,000 x 12 Months/9 Months 1,44,000
Add: Municipal tax paid by the Tenant 10,000
l/9th of Actual Rent Receivable as repair expenses are borne by 16,000
the tenant - Rs. 1,44,000/9
Interest on Refundable Security Deposit- Rs. 50,000 x 15% x 9/12 6,000 32,000
GROSS MAINTAINABLE RENT (GMR) 1,76,000
Step II: Computation of Net Maintainable Rent (NMR)
Particulars Rs. Rs.
Gross Maintainable Rent (GMR) 1,76,000
Less: Municipal Taxes levied by the local authority 10,000
15% of Gross Maintainable Rent - Rs.1,76,000 x 15% 26,400 (36,400)
NET MAINTAINABLE RENT (NMR) 1,39,600
Step III: Capitalisation of the Net Maintainable Rent (CNMR) (Assumed that unexpired lease period
is more than 50 Years)
NMR x Multiple Factor for an Unexpired Lease Period - Rs. 1,39,600×10 =Rs. 13,96,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 235
Step IV: Addition of Premium to SNMR in case of excess inbuilt area:
Particulars Rs.
Add: Capitalisation of the Net Maintainable Asset 13,96,000
Premium for excess of 10.5% unbuilt area over specified area-30% of CNMR 4,18,800
Value of House Property as per Wealth Tax Act 18,14,800
Q41. Property Company Ltd. has let-out a premise with effect from 1.10.2007 on monthly rent
of Rs.1.5 lakh. The lease is valid for 10 years and the tenant has made a deposit equivalent
to 3 months rent. The tenant has undertaken to pay the municipal taxes of the premises
amounting to Rs. 2 lakh. What will be the value of the property under Schedule III of the
Wealth Tax Act for assessment to wealth tax?
Assessee: Property Company Ltd. Valuation Date: 31.3.2009 Assessment Year: 2009-10
Computation of Value of Let-out Property
Actual Annual Rent Receivable - Rs. 1,50,000×12 Months 18,00,000
Add: Municipal Taxes borne by the Tenant 2,00,000
20,00,000
GROSS MAINTAINABLE RENT
Less: Municipal Taxes levied by the Municipal Authority 2,00,000
Less: 15% of Gross Maintainable Rent (Rs. 20,00,000 x 15%) 3,00,000
NET MAINTAINABLE RENT 15,00,000
Value of the Property = Capitalized Value of NMR
NMR×8 (unexpired period of lease is less than 50 years)=Rs. 15,00,000×8=Rs.1,20,00,000
Valuation of Partner’s Interest in Firm
Q42. Net wealth of firm consisting of three partners Bidyut, Kingshuk and Deepak in 2:2:1 and a
capital contribution of Rs.17 Lakhs, Rs.13 Lakhs, and Rs.12 Lakhs respectively is as under-
(a) Value of assets located outside India Rs.30,00,000
(b) Value of assets located in India Rs.80,00,000
(c) Debts incurred in relation to assets in India Rs. 40,00,000
Determine the value of interest of the partners in the firm under the Wealth Tax Act, 1958.
Solution :
Assesses: Bidyut, Kingshuk & Deepak Valuation Date: 31.3.2009
Assessment Year: 2009-10
Computation of net wealth of the Firm
Particulars Rs. Rs.
Value of Assets located in India 80,00,000
Less: Liability in relation to assets in India 40,00,000 40,00,000
Value of Assets located outside India 30,00,000
Net Wealth of the Firm 70,00,000
236 Revisionary Test Paper (Revised Syllabus-2008)
Computation of Interest of the Partner in the net wealth of the Firm (Amount in Rs.)
Particulars Bidyut Kingshuk Deepak
To the extent of Capital Contribution 17,00,000 13,00,000 12,00,000
Balance (Net Wealth-Capital Contribution) in Profit 11,20,000 11,20,000 5,60,000
sharing ratio since dissolution ratio is not given
Interest of the Partner in the Net Wealth of the Firm 28,20,000 24,20,000 17,60,000
Computation of the Interest of the Partner in the net wealth of the Firm on the basis of location of
assets: (Interest of the Partner in the Firm apportioned in the ratio of 4:3)
Particulars Balu Kausik Deepu
Assets Located Inside India 16,11,429 13,82,857 10,05,714
Assets Located Outside India 12,08,571 10,37,143 7,54,286
Interest of the Partner in the Net Wealth of the Firm 28,20,000 24,20,000 17,60,000
Valuation of Life Interest
Q43. Satender is aged 35 years. His father settled a property in trust giving whole life interest
therein to Satender. The income from the property for the years 2005-06 to 2008-09 was
Rs.70,000, Rs.84,000, Rs.90,000, Rs.108,000, respectively. The expenses incurred each
year were Rs.2,000, Rs.4,000, Rs.5,000 and Rs.6,000 respectively. Calculate the value of
life interest of Mr. Jogi in the property so settled on the valuation date 31.3.2009, with the
help of the factor of 9.267.
Step Procedure
1 Average Income for last three years = (Rs.84,000 + Rs.90,000 + Rs.1,08,000) / 3 =
Rs.94,000.
2 Average Expenses for the last three years = (Rs.4,000 + Rs.5,000 + Rs.6,000) / 3 =
Rs.5,000.
3 Maximum Permissible Expenses = Average Expenses or 5% of Average Income, whichever
is less = 5%of Rs.70,000 = Rs.3,500
4 Average Annual Income = Rs.94,000 Less Rs.3,500 = Rs.90,500.
5 Life Interest = Average Annual Income × Life Interest Factor = Rs.90,500 × 9.267=
Rs.8,38,664.
PROBLEMS ON TRANSFER PRICING DETERMINATION OF ARM’S LENGTH PRICE
(1) Computation of ALP using Comparable Uncontrolled Price method
Step I: Identify the price charged/ paid for property transferred or services provided in a comparable
uncontrolled transaction(s).
Step II: Adjust the price derived in Step I above for differences, if any, which could materially
affect the price in the open market.
(a) between the international transaction and the comparable uncontrolled transactions, or
(b) between the enterprises entering into such transactions.
Group-III : Paper-14 : Indirect & Direct–Tax Management 237
Step III: Arm’s Length Price = Step I Add/Less: Step II
Illustration 1.
J Inc. of Korea and CD Ltd, an Indian Company are associated enterprises. CD Ltd manufactures
Cell Phones and sells them to J.K. & F Inc., a Company based at Nepal. During the year CD Ltd.
supplied 2,50,000 Cellular Phones to J Inc. Korea at a price of Rs.3,000 per unit and 35,000 units
to JK & F Inc. at a price of Rs.5,800 per unit. The transactions of CD Ltd with JK & F Inc. are
comparable subject to the following considerations -
I. Sales to J Inc. are on FOB basis, sales to JK &F Inc. are CIF basis. The freight and insurance
paid by J Inc. for each unit @ Rs.700
II. Sales to JK &F Inc. are under a free warranty for Two Years whereas sales to J Inc. are
without any such warranty. The estimated cost of executing such warranty is Rs.500.
III. Since J Inc.’s order was huge in volume, quantity discount of Rs.200 per unit was offered to
it.
Compute the Arm’s Length Price and the amount of increase in the Total Income of CD Ltd, if any,
due to such Arm’s Length Price.
(a) Computation of Arm’s Length Price of Products sold to J Inc. Korea by CD Ltd
Particulars Rs. Rs.
Price per Unit in a Comparable Uncontrolled Transaction 5,800
Less: Adjustment for Differences -
(a) Freight and Insurance Charges 700
(b) Estimated Warranty Costs 500
(c) Discount for Voluminous Purchase 200 (1,400)
Arms’s Length Price for Cellular Phone sold to J Inc. Korea 4,400
(b) Computation of Increase in Total Income of CD Ltd
Particulars Rs.
Arm’s Length Price per Unit Less: 4,400
Price at which actually sold to J Inc. Korea (3,000)
Increase in Price per Unit 1,400
No. of Units sold to J Inc. Korea 2,50,000
Increase in Total Income of CD Ltd (2,50,000 × Rs.1,400) Rs. 35 Crores.
(2) Resale Price Method
Step I: Identify the price at which property purchased or services obtained by the enterprise from
an associated enterprise are resold or are provided to an unrelated enterprise.
Step II: Reduce the normal GP margin accruing to the enterprise or to an unrelated enterprise
from the purchase and resale of the same or similar property or from II) obtaining and providing
the same or similar services, in a comparable uncontrolled transaction/(s).
238 Revisionary Test Paper (Revised Syllabus-2008)
Step III: Reduce expenses incurred by the enterprise in connection with the purchase of property
or obtaining of services.
Step IV: Adjust for functional and other differences, including differences in accounting practices,
if any, between the international transaction and the comparable uncontrolled transactions, or
between the enterprises entering into such transactions, which could materially affect the amount
of gross profit margin in the open market.
Step V: Arm’s Length Price = Step I
Less: Step II & III
Add / Less: Step IV.
Illustration 2.
Megabyte Inc. of France and R Ltd. of India are associated enterprises. R Ltd. imports 3,000
compressors for Air Conditioners from Megabyte Inc. at Rs.7,500 per unit and these are sold to
Pleasure Cooling Solutions Ltd at a price of Rs.11,000 per unit. R Ltd. had also imported similar
products from Cold Inc. Poland and sold outside at a Gross Profit of 20% on Sales.
Megabyte Inc. offered a quantity discount of Rs.1,500 per unit. Cold Inc. could offer only Rs.500
per unit as Quantity Discount. The freight and customs duty paid for imports from Cold Inc. Poland
had cost R Ltd. Rs. 1,200 per piece. In respect of purchase from Cold Inc., R Ltd. had to pay
Rs.200 only as freight charges.
Determine the Arm’s Length Price and the amount of increase in Total Income of R Ltd.
(a) Computation of Arm’s Length Price of Products bought from Megabyte Inc., France by R Ltd,
India
Particulars Amount (Rs.)
Resale Price of Goods Purchased from Megabyte Inc. 11,000
Less: Adjustment for Differences –
a) Normal Gross Profit Margin at 20% of Sale Price
[20% x Rs.11,000] 2,200
b) Incremental Quantity Discount by Megabyte Inc.
[Rs.1,500 -Rs.500] 1,000
c) Difference in Purchase related Expenses 1,000
[Rs. 1,200 -Rs.200]
Arms Length Price 6,800
(b)Computation of Increase in Total Income of R Ltd
Particulars Amount (Rs.)
Price at which actually bought from Megabyte Inc. of France 7,500
Less: Arms Length Price per unit under Resale Price Method (6,800)
Decrease in Purchase Price per unit 700
No. of units purchased from Megabyte Inc. 3,000 units
Increase in Total Income (3,000 units × Rs.700) Rs.21,00,000
Group-III : Paper-14 : Indirect & Direct–Tax Management 239
(3) Cost plus Method in determining ALP
Step I: Determine the direct and indirect costs of production incurred by the enterprise in respect
of property transferred or services provided to an associated enterprise.
Step II: Determine the normal GP mark-up to such costs (computed under same accounting norms)
arising from the transfer or provision of the same or similar property or services by the enterprise,
or by an unrelated enterprise, in a comparable uncontrolled transaction(s).
Step III: Adjust the normal gross profit mark-up referred to in Step II to take into account the
functional and other differences, if any, between the international transaction and the comparable
uncontrolled transactions, or between the enterprises entering into such transactions, which could
materially affect such profit mark-up in the open market.
Step IV: Arm’s Length Price = Step I Add Step III
Illustration 3.
Branco Inc., French Company, holds 45% of Equity in the Indian Company Chirag Technologies
Ltd (CTL). CTL is engaged in development of software and maintenance of the same for customers
across the globe. Its clientele includes Branco Inc.
During the year, CTL had spent 2,400 Man Hours for developing and maintaining software for
Branco Inc, with each hour being billed at Rs.1,300. Costs incurred by CTL for executing work for
Branco Inc. amount to Rs. 20,00,000.
CTL had also undertaken developing software for Harsha Industries Ltd for which CTL had billed
at Rs.2,700 per Man Hour. The persons working for Harsha Industries Ltd. and Branco Inc. were
part of the same team and were of matching credentials and caliber. CTL had made a Gross Profit
of 60% on the Harsha Industries work.
CTL’s transactions with Branco Inc. are comparable to the transactions with Harsha Industries,
subject to the following differences:
I. Branco Inc. gives technical know-how support to CTL which can be valued at 8% of the
normal gross profit. Harsha Industries does not provide any such support.
II. Since the work for Branco involved huge number of man hours, a quantity discount of 14%
of Normal Gross Profits was given.
III. CTL had offered 90 Days credit to Branco the cost of which is measured at 2% of the
Normal Billing Rate, No such discount was offered to Harsha Industries Ltd.
Compute ALP and the amount of increase in Total Income of Chirag Technologies Ltd.
(a) Computation of Arms Length Gross Profit Mark Up
Particulars % %
Normal Gross Profit Mark Up 60.00
Less: Adjustment for differences:
(i) echnical support from Branco Inc. (8% of Normal Gross Profit 60%)
(ii) Quantity Discount @ 14% of Normal Gross Profit (14% of 60%) 4.80
8.40 13.20
46.80
Add: Cost of Credit to Branco Inc. @2% of Normal Gross Profit
(2% of Gross Profit 60%) 1.20
Arms Length Gross Profit Mark-up 48.00
240 Revisionary Test Paper (Revised Syllabus-2008)
(b) Computation of Increase in Total Income of Branco Inc.
Particulars Amount (Rs.)
Cost of Services provided to CTL 20,00,000
Billed Value at Arm’s Length [ Cost / (100 – Arm’s Length Mark) = 38,46,154
[Rs.20,00,000/ (100% -48%]
Less: Actual Billing to Branch Inc. 31,20,000
Increase in Total Income of Branco Inc. 7,26,154
(4) Profit Split Method
This method is mainly applicable in international transactions involving transfer of unique intangibles
or in multiple international transactions which are so inter-related that they cannot be evaluated
separately for the purpose of determining the Arm’s Length Price of any one transaction.
Step I: Determine the combined net profit of the associated enterprises arising from the international
transaction in which they are engaged.
Step II: Determine the relative contribution made by each of the associated enterprises to the
earning of such combined net profit. This is determined on the basis of the FAR Analysis:
(a) Functions performed;
(b) Assets employed;
(c) Risks assumed by each enterprise;
(d) on the basis of reliable external market data which indicates how such contribution would
be determined by unrelated enterprises performing comparable functions in similar
circumstances.
Step III: Split the combined net profit amongst the enterprises on the basis of reasonable returns
and in proportion to their relative contributions, as determined in Step II. (See note below)
Step IV: Arm’s Length Price - Profit apportioned to the assessee under Step III.
NOTE: Combined Net Profit shall be split as under:
III. A. First Split = Reasonable Return:
Allocate an amount to each enterprise so as to provide it with a basic return appropriate for the
type of international transaction with reference to market returns achieved in similar types of
transactions by independent enterprises.
III. B. Second Split = Contribution Ratio:
Allocate the residual net profit amongst the enterprises in proportion to their relative contribution.
III. C. Total Profit:
Share of profit of each enterprise = Step III.A + III.B
Illustration 4.
NBR Medical Equipments Inc. (NBR) of Canada has received an order from a leading UK based
Hospital for development of a hi-tech medical equipment which will integrate the best of software
and latest medical examination tool to meet varied requirements. The order was for 3,00,000
Euros. To execute the order, NBR joined hands with its subsidiary Precision Components Inc. (PCI)
Group-III : Paper-14 : Indirect & Direct–Tax Management 241
of USA and Bioinformatics India Ltd (BIL), an Indian Company. PCI holds 30% of BIL. NBR paid to
PCI and BIL Euro 90,000 and Euro 1,00,000 respectively and kept the balance for itself. In the
entire transaction, a profit of Euro 1,00,000 is earned. Bioinformatics India Ltd incurred a Total
Cost of Euro 80,000 in execution of its work in the above contract. The relative contribution of
NBR, PCI and BIL may be taken at 30%, 30% and 40% respectively. Compute the Arm’s Length
Price and the incremental Total Income of Bioinformatics India Ltd, if any due to adopting Arms
Length Price determined here under.
Particulars Euro
A. Share of each of the Associates in the Value of the Order 3,00,000
Share of BIL [Given] 1,00,000
Share of PCI [Given]
Share of NBR [Amount Retained = 3,00,000 – 1,00,000 - 90,000] 90,000
1,10,000
B. Share of each of the Associates in the Profit of the Order 1,00,000
Combined Total Profits
Share of BIL [Contribution of 40% × Total Profit € 1,00,000] 40,000
Share of PCI [Contribution of 30% × Total Profit € 1,00,000] 30,000
Share of NBR [Contribution of 30% × Total Profit € 1,00,000] 30,000
C. Computation of Incremental Total Income of BIL
Total Cost to BIL Ltd 80,000
Add: Share in the Profit to BIL (from B above) 40,000
Revenue of BIL on the basis of Arm’s Length Price 1,20,000
Less: Revenue Actually received by BIL (1,00,000)
Increase in Total Income of BIL 20,000
(5) Transaction Net Margin Method
Step I: Compute the net profit margin realised by the enterprise from an international transaction
entered into with an associated enterprise, in relation to costs incurred or sales effected or assets
employed by enterprise or having regard to any other relevant base.
Step II: Compute the net profit margin realised by the enterprise or by an unrelated enterprise
from a comparable uncontrolled transaction (s), having regard to the same base as in Step I.
Step III: Adjust the net profit margin as per Step II for differences, if any, which could materially
affect amount of net profit margin in the open market:
(a) between the international transaction and the comparable uncontrolled transactions, or
(b) between the enterprises entering into such transactions.
Step IV: Net Profit Margin for uncontrolled transactions = Step II Add/Less Step III.
Step V: Arm’s Length Price = Transaction Value x Net Profit Margin as per Step IV above.
Meaning of certain terms: For the computation of Arm’s Length Price -
1. “Transaction” includes a number of closely linked transactions.
2. “Uncontrolled Transaction” means a transaction between unrelated enterprises, whether
resident or non-resident.
242 Revisionary Test Paper (Revised Syllabus-2008)
3. “Unrelated Enterprises”: Enterprises are said to be unrelated, if they are not associated or
deemed to be associated u/s 92A.
4. “Uncontrolled conditions”: Conditions which are not controlled or suppressed or
moulded for achievement of pre-determined results are said to be uncontrolled conditions.
5. “Property” includes goods, articles or things, and intangible property.
6. “Services” include financial services.
Illustration 5.
Fox Solutions Inc. a US Company, sells Laser Printer Cartridge Drums to its Indian Subsidiary
Quality Printing Ltd at S 20 per drum. Doc Solutions Inc. has other takers in India for its Cartridge
Drums, for whom the price is $ 30 per drum. During the year, Fox Solutions had supplied 12,000
Cartridge Drums to Quality Printing Ltd.
Determine the Arm’s Length Price and taxable income of Quality Printing Ltd if its income after
considering the above is Rs.45,00,000. Compliance with TDS provisions may be assumed and
Rate per USD is Rs.45. Also determine income of Doc Solutions Inc.
(A) Computation of Total Income of Quality Printing Ltd
Particulars Amount (Rs.) Amount (Rs.)
Total Income before adjusting for differences due to Arm’s 45,00,000
Length Price
Add: Difference on Account of adopting Arm’s Length 1,08,00,000
Price [12,000 × $20 × Rs.45]
Less: Amount under Arm’s Length Price 1,62,00,000
[12,000 × $ 30 × Rs.45]
Incremental Cost on adopting ALP u/s 92(3), Taxable (54,00,000)
Income cannot be reduced on applying ALP. Therefore,
difference on account of ALP is ignored.
Total Income of Quality Printing Ltd. 45,00,000
(B) Computation of Total Income of Fox Solutions Inc.
The provisions relating to taxing income of Fox Solutions Inc., on applying Arm’s Length Price for
transactions entered into by a Foreign Company is given in Circular 23 dated 23.7.1969, which is
as follows:
(I) Transactions Not Taxable in India: Transactions will not be subject tax in India if transactions
are on principal-to-principal basis and are entered into at ALP, and the subsidiary also carries
on business on its own.
(II) Transactions Taxable in India if the Indian Subsidiary does not carry on any business on its
own. The following are the other considerations in this regard -
a) Adopting ALP does not affect the computation of taxable income of Fox Solutions Inc. if
tax has been deducted at source or if tax is deductible.
b) Where ALP is adopted for taxing income of the Parent Company, income of the recipient
Company (i.e. Quality Printing Ltd) will not be recomputed.