AAT
No. of Pages: 5
No of Questions: 7
Total Marks: 100
Time Allowed: 3 Hours
Question No.1 is compulsory
Answer any 5 from remaining 6 questions
Working notes should form part of answer
1. a) ABC Road Carriers is a transporting company that transports goods from one place to another. It
measures quality of service in terms of : (i) Time required to transport goods (ii) On–time delivery
(iii) Number of lost or damaged cartons. To improve its business prospects and performance the
company is seriously considering to install a scheduling and tracking system, which involves an annual
outlay of ` 1,25,000. The company furnishes the following information about its present and
anticipated future performance:
Current Expected
On–time delivery
85%
95%
Variable costs per carton lost or damaged
` 55
` 55
Fixed costs per carton lost or damaged
` 45
` 45
Number of cartons lost or damaged
2,500
1,200
The company expects that each half per cent point increase in on–time performance will result in
revenue increase of ` 9,000 per annum. Contribution margin of 45% is required. Should ABC Road
Carriers acquire and install the new system? Also calculate additional amount of revenue required if
benefits from new system is equal to cost & Contribution margin is 47.5%.
(5 marks)
b) Give Back flush Costing Journal Entries in respect of following transactions:
(i) Raw Material were purchased ` 3,20,000 (ii) Material placed into production
(iii) Actual Direct Labour Cost ` 50,000
(iv) Actual Overhead Cost ` 4,50,000
(v) Conversion Cost applied ` 4,70,000
(vi) All Units were completed & Sold
(vii) Variance is Recognized.
(5 marks)
c) HG Ltd manufactures four products. The unit cost, selling price and bottleneck resource details per
unit are as follows:
Product W Product X Product Y Product Z
`
`
`
`
Selling price
56
67
89
96
Materials cost
22
31
38
46
Labour cost
15
20
18
24
Variable overhead
12
15
18
15
Fixed overhead
4
2
8
7
Bottleneck resource time
10min
10min
15min
15min
The company adopted throughput accounting policy. As a cost accountant how would you rank the
products ?
(5 Marks)
d) A machine which originally cost ` 12,000 has an estimated life of 10 years and is depreciated at the
rate of ` 1,200 per year. It has been unused for some time, however, as expected production orders
did not materialize. A special order has now been received which would require the use of the
machine for two months. The current net realizable value of the machine is ` 8,000. If it is used for
the job, its value is expected to fall to ` 7,500. The net book value of the machine is ` 8,400. Routine
maintenance of the machine currently costs ` 40 per month. With use, the cost of maintenance and
repairs would increase to ` 60 per month. What would be the relevant cost of using the machine for
the order so that it can be charged as the minimum price for the order?
(5 Marks)
PRIME/ME39/FINAL
1
2. a) A company is organized into two large Divisions. Division “A‟ produces a component which is used by
Division ‟B‟ in making a final product. The final product is sold for ` 400 each. Division “A‟ has a
capacity to produce 2,000 units and the entire quantity can be purchased by Division B.
Division “A‟ informed that due to installation of new machines, its depreciation cost had gone up and
hence wanted to increase the price of the component to be supplied to Division B to ` 220. Division “B‟
however can buy the component from the outside market at ` 200 each. The variable cost of Division
“B‟ in manufacturing the final product by using the component is ` 150 (excluding the component
cost). Present statement indicating the position of each Division and the company as a whole taking
each of the following situations separately.
(i) If there are no alternative use for the production facilities of A, will the company benefit if Division
B buys from outside suppliers at ` 200 per component?
(ii) If internal facilities of A are not otherwise idle and the alternative use of the facilities will give an
annual cash operating saving of ` 30,000 to Division A, should Division B purchase the component
from outside suppliers?
(iii) If there are no alternative used for the production facilities of Division A and the selling price for
the component in the outside market drops by ` 15, should Division B purchase from outside
suppliers?
(iv) What transfer price would you fix for the component in each of the above circumstances?
(10 Marks)
b) Five Swimmers are eligible to compete in a relay team that should have four swimmers swimming
different styles- backstroke, breaststroke, free style and butterfly. The time taken for the five swimmers
- Anand, Balu, Chandru, Deepak and Eswar – to cover a distance of 100 metres in various swimming
styles are given below in minutes: seconds.
(i) Anand swims backstroke in 1:09, breaststroke in 1:15 and has never competed in free style or
butterfly.
(ii) Balu is a free style specialist averaging 1:01 for 100 metres but can also swim breaststroke in 1:16
and butterfly in 1:20.
(iii) Chandru swims all styles, backstroke 1:10, breaststroke 1:12, free style 1:05 and butterfly 1:20.
(iv) Deepak swims only butterfly at 1:11 while Eswar swims backstroke 1:20, breaststroke 1:16, free
style 1:06 and butterfly 1:10. Which swimmers should be assigned to which swimming style? Who
will not be in the team?
(6 Marks)
3 a) NAVAYOGANA LTD., has adopted a Standard Costing System. The Standard output for a period is 20,000
units. The Standard Cost and Profit per unit is given below :
`
Direct Materials (6 units @ ` 1.50)
9.00
Direct Labour (6 units @ ` 1.00)
6.00
Direct Expenses
1.00
Factory Overheads :
Variable
0.50
Fixed
0.60
Administrative Overheads
0.60
17.70
Profit per unit
2.30
Selling Price (Fixed by Government)
20.00
Actual production and sales for a period was 14,400 units. The following are the variance
worked out at the end of the period :
Favorable
Adverse
(`)
(`)
Direct Materials:
Price Variance
–
8,500
Usage Variance
2,100
–
PRIME/ME39/FINAL
2
Direct labour:
Rate Variance
–
8,000
Efficiency Variance
6,400
–
Factory Overheads:
Variable Expenditure Variance
800
–
Fixed Expenditure Variance
800
–
Fixed Volume Variance
–
3,360
Administrative Overheads:
Expenditure Variance
–
800
Volume Variance
–
3,360
You are required to :
(i) Ascertain the details of cost and prepare the Profit and Loss Account in the statement for
the period, showing actual profit. And
(ii) Reconcile the actual profit with the standard profit.
(10 marks)
b) The top management of ZASLEEN LTD., is considering the problem of marketing a new product. The
fixed cost required in the project is ` 1,50,000. The three factors that are uncertain are Selling Price,
Variable Cost and the annual Sales Volume. The product has a Life of only one year. The management
has collected the following data regarding the possible levels of these three factors:
Selling Price/ Probability Variable cost Probability Sales volume
Probability
unit (series 1)
/unit (series 2)
Units (series 3)
14
0.35
2
0.30
30,000
0.25
15
0.50
3
0.50
40,000
0.40
16
0.15
4
0.50
50,000
0.35
(6 Marks)
4 a) The directors of ABC Ltd. manufactures three products A,B and C, have as ked for advice on the product
mix of the company. The following information is given:
Particulars
A
B
C
Standard cost per unit :
Direct material
20
60
40
Variable overhead
6
4
10
Direct labour :
Department Rate/ Hr.
D1
`1
28hrs 16hrs 30hrs
D2
`2
5hrs 6hrs 10hrs
D3
`1
16hrs 8hrs 30hrs
Current production p.a.
10,000 5,000 6,000
Selling price per unit `
100
136
180
Forecast of sales for next year 12,000 7,000 9,000
Fixed overheads p.a. is `4,00,000. Further, the type of labour required by Dept. 2 is in short supply and
it is not possible to increase the manpower of this department beyond its present level. You are
required to prepare a statement showing the most profitable mix of the products to be made and sold.
The statement which should be presented in two parts should show :
(i) the profit expected on current budgeted production; and
(ii) The profit which could be expected if the most profitable mix was produced.
(8 Marks)
b) Home Build Construction Company is interested in taking loans from banks for its projects – P, Q, R, S,
T. The rates of interest and the lending capacity differ from bank to bank. All these projects are to be
completed. The relevant details are provided below. Assuming the role of a consultant, advice the
Company as to how it should take the loans so that the total interest payable is least. Find out
alternate optimum solutions, if any.
PRIME/ME39/FINAL
3
Source
Bank
Private Bank
Nationalized Bank
Co-operative Bank
Amount
required
(000s)
Interest rate (%) for projects
P
Q
R
S
T
20
16
15
18
16
15
18
16
15
17
15
13
200
150
200
125
Max credit
(000s)
Any amount
17
`
16 400
14 250
75
(8 Marks)
5 a) XYZ Ltd manufactures four products namely A, B, C and D using the same plant and process. The
following information relates to a production period –
Product
A
B
C
D
Output in units
720
600
480
504
Costs per unit:
Materials
`42
`45
`40
`48
Labour
`10
`9
`7
`8
Machine hours per unit 4 hours 3 hours 2 hours 1 hour
The four products are similar and are usually produced in production runs of 24 units and sold in
batches of 12 units. The Company presently uses machine hour rate for absorbing production
overhead. The total overheads incurred by the company for the period is –
a) Machine Operation and Maintenance Cost = `63,000,
b) Set Up Costs
= `20,000,
c) Stores Receiving
= `15,000,
d) Inspection
= `10,000, and
e) Material Handling and Dispatch
= `2,592.
During the period, the following Cost Drivers are to be used for the Overhead
Cost
Setup
Stores Receiving
Inspection
Materials Handling
Cost Driver No. of production runs Requisitions raised No. of production runs Orders executed
It is also determined that • Machine Operation and Maintenance Cost should be apportioned between Set-Up Cost, Stores
Receiving and Inspection Activity in the ratio 4:3:2.
• Number of Requisitions raised on Stores is 50 for each product and the number of orders
executed is 192, each order being for a batch of 12 of a product.
Required:
 Calculate the Total Costs for each product if all Overhead costs are absorbed on a machine hour
basis.
 Calculate the total costs for each product, using Activity-Based Costing system.
 Comment briefly on differences disclosed between OH traced by present system and those
traced by ABC.
(10 Marks)
b) Four Products A, B, C and D have ` 5, ` 7, ` 3 and ` 9 profitability respectively. First type of material
(limited supply of 800 kgs.) is required by A, B, C and D at 4 kgs., 3 kgs., 8 kgs., and 2 kgs.,
respectively per unit. Second type of material has a limited supply of 300 kgs., and is for A, B, c and D
at 1 kgs., 2 kgs., 0 kgs and 1 kg. per unit. Supply of other type of materials consumed is not limited.
Machine hours available are 500 hrs and the requirement are 8, 5, 0, 4 hours for A, B, C and D each
per unit. Labour hours are limited to 900 hours and requirements are 3, 2, 1 and 5 hours for A, B, C
and D respectively. How should the firm approach so as to maximize its profitability? Formulate this
as a linear programming problem. You are not required to solve the LPP.
(6 marks)
PRIME/ME39/FINAL
4
6 a) X Ltd. is in the Food Processing Industry. In one of its processes, three joint products are manufactured.
Traditionally, the company has apportioned costs incurred up to the Joint Products’ pre-separation
point on the basis of weight of outputs of the product. You have been recently appointed Cost
Accountant, and have been investigating process cost and accounting procedure You are required to
prepare statements for management to show:
a. The profit or loss of each product as ascertained using weight basis of apportioning preseparation joint costs.
b. The optimal contribution which could be obtained from the manufacture of these products.
The following process data for December are given. Cost incurred up to separation point are ` 96,000 :
Product A Product B Product C
Cost incurred after separation point (`)
20,000
12,000
8,000
Selling price per Ton of completed product (`)
500
800
600
Estimated, if sold at separation point (`)
250
700
450
Output (Tons)
100
60
80
The cost of any unused capacity after the separation point should be ignored.
(7 Marks)
b) ALEENA LTD., manufactures two sub-assemblies M and P. One unit of each is assembled to produce the
final product BS. The following information is available:
Sub- Assemble M
Sub- Assembly P Final Product - BS
Material Used – Special Steel Plates
20 kg
20 kg
—
Other direct manufacturing cost (`)
500
500
—
Final assembly Cost (`)
—
— 1,000
ALEENA LTD., has procured an order for supply of 40,000 units of the final product BS on an urgent
basis at a price of ` 3,000 per unit. However ALEENA LTD., can arrange for only 800 MT of Special Steel
Plate required for production. On enquiry in the market, a supplier has been located, who has got
ready stock of 40,000 units of Sub-assembly P and is willing to sell the entire quantity to ALEENA LTD.
(5 marks)
c) The Operation costs of a product produced by ZYX Ltd. are ` 53. Presently, the company produces only
600 units p.a. to sell at ` 55 per unit due to hard competition in the market. But with existing facilities,
production can be increased to 1000 units if additional production can be sold in the market. The
Company accordingly introduced Target Costing on Market Research, New Design for the product and
changes in the process so that costs are brought down substantially and market share can be increased.
The estimates for the next year are:
Required:
(a) Calculate the target costs per unit and target costs for the expected volume, and
(b) Compare the existing profit with target profit.
(4 Marks)
7. Answer any four from the following:
a) What is life cycle costing? Explain the stages in product life-cycle?
b) State the areas in which the application of learning curve theory can help a manufacturing
organization?
c) Advise whether to continue or shut down?
Fixed expenses at 50% activity `15,000
Fixed expenses when the factory is shut down `10,000
Additional expenses in closing down `1,000
Production at 50% activity = 5,000 units
Contribution per unit ` 1
d) Discuss the application of learning curve.
e) What are the general types of errors in logical sequencing while drawing a network diagram?
(4 x 4=16 Marks)
PRIME/ME39/FINAL
5
PRIME ACADEMY
39th SESSION MODEL EXAM - FINAL – ADVANCED MANAGEMENT ACCOUNTING
SUGGESTED ANSWERS
1 a)
Should ABC Road Carriers acquire and install the new system?
`
1,25,000
1,80,000
Additional Costs of the new scheduling & tracking system p.a.
Additional Revenue from Improvement in on-time performance
(`9,000 x 10%/0.5%)
Contribution from Additional Annual Revenue
(45% x ` 1,80,000)… (A)
Cost Saving in respect of Cartons [(2,500-1,200) x ` 55]… (B)
Total Benefits (A+B)
81,000
71,500
1,52,500
As Expected Benefits are more than the cost. Accordingly company should install the new system.
Calculation of additional amount of revenue required if benefits from new system is equal to cost &
Contribution margin is 47.5%:
`
Costs of the new scheduling & tracking system (A)
1,25,000
Cost Saving in respect of Cartons (B)
71,500
Contribution Margin (A – B)
53,500
Contribution Margin %
47.5
Corresponding Additional Revenue
1,12,632
b)
For Raw Material Purchased:
Raw Material in Process A/c
To Accounts Payable
For Material Placed into Production:
No Entry
For Actual Direct Labour Cost:
Combined with Overhead
For Actual Overhead Cost :
Conversion Cost Control
To Payroll
To Accounts Payable
For Application of Overheads:
No Entry
For Completion of Units:
Finished Goods
To Raw Material in Process A/c
To Conversion Control Account
For Units Sold:
Cost of Goods Sold
To Finished Goods
For Recognition of Variance:
Cost of Goods Sold
To Conversion Control Account
`
3,20,000
Dr
3,20,000
Dr
5,00,000
50,000
4,50,00
Dr
7,90,000
3,20,000
4,70,000
Dr
7,90,000
7,90,000
Dr
30,000
30,000
c)
PRIME/ME39/FINAL
`
1
W X
Y
Z
Sales price
56 67 89 96
Less: Material
22 31 38 46
Variable overhead 12 15 18 15
Contribution
7
1 15 11
Factor (a/b) Rank III IV I
II
Thus, if the products are ranked according to their contribution, the most profitable product is Y.
d)
Relevant costs of using the machine for the order
(`)
(i) Loss in the net realizable value of machine by using it on the order
(`8,000 – ` 7,500)
500
(ii) Additional maintenance and repair for two months, i.e.,
(` 60 – `40) × 2
40
Minimum price
540
Note:
(i) Books value of `8,400 is irrelevant for decision.
(ii) Net realizable value of the machine fall from ` 8,000 to ` 7,500. This loss of ` 500 is relevant for
decision, because it is influenced exclusively by the decision.
(iii) ` 7,500 will be realized after months at least. Therefore, time value of ` 7,500 for two months at
least. Therefore, present value of future realizable value of ` 7,500 should be found out and this
present value should be deducted from ` 8,000. This will be the correct relevant cost in place of
` 500 shown above in the absence of discounting factor.
2 a)
(i) Statement of contribution
(a) When component is purchased by Division B from outside
(`)
Division A
Nil
Division B sales (2,000 x 400)
8,00,000
Less: Cost of purchase (2,000 x 200) 4,00,000
Variable Cost (2,000 x 150)
3,00,000 7,00,000 1,00,000
Company’s total contribution
1,00,000
(b) When component is purchased from Division A by Division B
`
`
`
Division A
Sales (2,000 x 220)
4,40,000
Less: Variable cost (2,000 x 190)
3,80,000
60,000
Division B
Sales (2,000 x 400)
8,00,000
Less: Variable cost
Purchase cost from Division A (2,000 x 220) 4,40,000
Variable cost in Division B (2,000 x 150)
3,00,000 7,40,000
60,000
Company’s total contribution
1,20,000
Thus, it will be beneficial for the company as a whole to ask Division B to buy the component from
Division A.
PRIME/ME39/FINAL
2
(ii) Statementt of total conttribution if Divvision A could
d be put to allternative usee :
`
`
`
Division A
Contribution from alte
ernative use of
o facilities
300,000
Division B
Sales (2,000 x 400)
8,0
00,000
Less: Variable cost
Cost of pu
urchase (2,000 x 400)
4
4,00,000
Division B (2,000 x 150
0)
3
3,00,000
7,0
00,000 1,000,000
Company’’s total contribution
1,300,000
The comp
pany’s contrib
butions when
n component is purchased
d from outside, shows an increase of R
Rs.
30,000 ass compared to
t when therre is inter deepartmental transfer. Hen
nce, it will bee beneficial tto
purchase the componeent from outsside.
nt of total con
ntribution wh
hen componeent is available from outsid
de at Rs. 185
(iii) Statemen
`
`
`
Division A
Nil
Division B
Sales (2,000 x 400)
8,00
0,000
Less : variiable cost
Cost of pu
urchase (2,000 x 185) 3,7
70,000
Division B
3,0
00,000 6,70
0,000 1,30,0
000
Company’’s total contribution
1,30,0
000
If the com
mponent is pu
urchased by Division B fro
om Division A,
A the contrib
bution is onlyy ` 1,20,000 aas
calculated
d under (i) above. Hence itt will be beneeficial to buy the
t componeent from outsiide.
on of transferr price
(iv) Fixatio
(a) When
n there are no
n alternativee uses of pro
oduction facilities of Diviision A In su
uch a case th
he
variable cost i.e. `190 per componeent will be chaarged
on A can be put
p to alternative uses :
(b) If facilities of Divisio
Cost
`190
Variable C
Opportun
nity cost
` 15
`205
Transfer P
Price
(c) If markket price getss reduced to `185
`
and theere is no alterrnative use off facilities of Division A. Th
he
variable cost of `190 per
p componen
nt should be charged.
c
b
b)
mization of time
t
taken. The
T combinaations not avvailable for assignment
a
are
The objecctive is minim
indicate b
by M where M = infinity. A dummy column is introdu
uced in the ab
bove matrix.
3 (a))
b)
Probab
bility Cumulative probab
bility Random Numbers
Selling Priice
14
0.35
0
0.35
00 - 34
15
0.50
0
0.85
35 - 84
16
0.15
1
1.00
85 - 99
Variable C
Cost
(`)
2
0.30
0
0.30
00 - 29
3
0.50
0
0.80
30 - 79
4
0.20
1
1.00
80 - 99
Sales Volu
ume
(units)
30000
0.25
0
0.25
00 - 34
40000
0.40
0
0.65
35 - 84
50000
0.35
1
1.00
85 - 99
SIMULATION USING 3 SERlES OF 10 RANDOM NUMBERS EACH
Random
Random
Number
Number Variable Random Sales
Fixed
Run
series
Price `
series
cost
no
unit
cost
Profit `
1
2
3
4
5
6
7 (2-4)×6-7
1
82
15
27
2
23
30000 150000
240000
2
84
15
26
2
57
40000 150000
370000
3
28
14
92
4
99
50000 150000
350000
4
82
15
63
3
84
40000 150000
330000
5
36
15
83
4
51
40000 150000
290000
6
92
16
3
2
29
40000 150000
410000
7
73
15
10
2
41
40000 150000
370000
8
91
16
39
3
11
30000 150000
240000
9
63
15
10
2
66
40000 150000
370000
10
29
14
10
2
30
40000 150000
330000
Total
3300000
Therefore, the expected Profit (Average): 3300000/10 = ` 3,30,000.
Working Notes:
Profit = (Selling Price-Variable Cost) × Sales Volume - Fixed Cost.
`
Trial- 1 = (15-2) x 30000 - 150000 = 240000
2 = (15-2) × 40000 - 150000 = 370000
3 = ( 14-4) × 50000 - 150000 = 350000
4 = (15-3) × 40000 - 150000 = 330000
5 = (15-4) × 40000 - 150000 = 290000
6 = (16-2) × 40000 - 150000 = 410000
7 = (15-2) × 40000 - 150000 = 370000
8 = (16-3) × 30000 - 150000 = 240000
9 = (15 -2) × 40000 - 150000 = 370000
10 = (14 -2) × 40000 - 150000 = 330000
4 a)
Products
Sales (`) (i)
Direct material
Direct wages :
Dept 1
2
3
Variable
overhead
Marginal cost (ii)
Contribution (i) –
(ii)
Fixed overhead
Net profit
PRIME/ME39/FINAL
A
10,000 units
10,00,000
2,00,000
B
5,000 units
6,80,000
3,00,000
2,80,000
1,00,000
1,60,000
80,000
60,000
40,000
60,000
8,00,000
20,000
5,00,000
60,000 1,40,000
7,80,000 20,80,000
2,00,000
1,80,000
3,00,000
6
C
6,000 units
Total
10,80,000 27,60,000
2,40,000 7,40,000
1,80,000
1,20,000
1,80,000
5,40,000
2,80,000
3,80,000
6,80,000
4,00,000
2,80,000
Margiinal cost (per unit)
80 100
0 130
Contribution (per unit)
u
20 36
6 50
Contribution (per hour
h
of Dept 2)
4
6
5
Ranking
III I
II
Since the key factor is labour hou
urs, productio
on hours sho
ould be applied for the products
p
in th
he
order B, C and A, as ranked above.
Total hours available in
n Dept. 2 on the
t basis of current production
A (10,000
0 x 5)
50,000
B (5,000 x 6)
30,000
C (6,000 x 10)
60,000
Total hours
1,40,000
Reallocatiion on Hrs. avvailable in Dept. 2
Product Units Hrs. per unit To
otal hours
B
7,000
6
42,000
A
9,000
10
90,000
C
1,600
5
8,000#
1,40,000
#balancing figure
a per revised
d programmee
ii. Statement of profit as
A 1,60
00 ` B 7,0
000 `
C 9,0
000 ` Totaal `
Units
Sales
1,6
60,000
9,5
52,000 16,2
20,000
27
7,32,000
Marginal costs
1,28,000
7,0
00,000 11,7
70,000
19
9,98,000
Contribution
32,000
2,5
52,000
4,5
50,000
7
7,34,000
Fixed costt
4
4,00,000
Net profitt
3
334,000
b)
Total amo
ount required
d as loan = `750
`
(000s). The private Bank can givve any amoun
nt. The date is
made balanced by puttting 100 against the Privaate bank. Inittial Basic feassible solution is determineed
as under:
ur
The abovee solution is optimal sincee all elementts in NET are non- negativve. However there are fou
zeroes and so the solution is not un
nique. There are
a four alternate solution
ns.
5 a))
u
Absorp
ption Costing
A. OH Reccovery Rate under
Total OH = `63,000 + `20,000
`
+ `15
5,000 + `10,0
000 + `2,592 = `1,10,592
Total Macchine Hours = (720 x 4) + (6
600 x 3) + (48
80 x 2) + (504 x 1) = 6,144 machine hours.
OH Recovvery Rate = To
otal OH Totaal Machine Hours = `1,10,,592 / 6,144 = `18 per hou
ur.
der Absorptio
on Costing
B. Cost Sttatement und



Machine Operration and Maintenance
M
M
Cost of `63
3,000 is appo
ortioned to the
t first threee
acctivities in thee ratio 4:3:2 i.e.
i `28,000, ``21,000 and ` 14,000
O productio
One
on run = 24 un
nits. So, the no.
n of production runs are - Product A = 720 / 24 = 30
3
ru
uns, Product B = 600 / 24 = 25 runs, Prroduct C = 480 / 24 = 20 ru
uns, Product D = 504 / 24 =
21 runs. Total = 96 runs.
O Batch Ord
One
der = 12 unitss. So, the no.. of batches are
a - Product A = 720 / 12
2 = 60 batchees,
Product B = 60
00 / 12 = 50 batches,
b
Product C = 480 / 12 = 40 batcches, Product D = 504 / 12 =
otal = 192.
422 batches, To
mments: There is a wide difference
d
bettween the OH
H cost as traceed by the two
o systems. AB
BC
F. Com
is com
mparatively a superior m
method of traacing OH cossts since it rrelates the OH
O Costs usin
ng
activitties and resources consum
med, rather th
han just the m
machine hours taken.
Produ
o
costed under
u
Absorp
ption Costing system, sincce the machin
ne
ucts A and B have been overhourss per unit aree higher than that of Prod
ducts C and D.
D Such unreaalistic cost traacing may alsso
affectt pricing decissions in case the
t Companyy following Co
ost Plus Pricin
ng policy.
b)
6 a)
ng profit or loss of each product usin
ng weights ass the
Statement showin
eparation joint costs
pre-se
Total
Produ
uct
A
(`)
(`)
Cost upto the poiint of separation in the ratio
r
of
96
6,000
40
0,000
(100: 60: 80) or (5::3:4)
Cost aafter separatiion point
40
0,000
20
0,000
Total costs
1,36
6,000
60
0,000
Sales revenue
1,46
6,000
50
0,000
Profitt/(Loss)
10
0,000 (10,000)
basis off apportionin
ng
Product Productt
B
C
(`)
(`)
24,0
000
32,00
00
12,0
000
36,0
000
48,0
000
12,0
000
8,00
00
40,00
00
48,00
00
8,00
00
To ascertain
n optimal con
ntribution, firrst, the incremental profitt or loss from
m each produ
uct, if produccts
are further processed after
a
separation point is to be computed. The statement below shows th
he
incremental profit or loss after furtheer processing::
Prod
duct A
P
Product
C
Product B
Output (TTons)
100
60
8
80
(`)
(`)
(
(`)
Incremental revenuee from fu
urther
25,00
00
6,000
12,000
processing
(``500 – `250)) ×
(`800 – `700) ×
(`600 –`45
50) ×
100
20,000
5,000
Less: Incremental cost
Incremental profit (loss)
60
12,000
(6,000)
80
8,000
4,000
It can be seen from the above statement that there will be a loss of `6,000 if further processing of
product B is done after the separation point. It is, therefore, recommended that Product B should be
sold at separation point. The optimal contribution based on this recommendation will be as follows:
Statement showing optimal contribution
Product A
Product B
Product C
Total
Output (Tons)
100
60
80
(`)
(`)
(`)
(`)
Sales revenue
50,000
42,000
48,000 1,40,000
(100× ` 500) (60× ` 700) (80× ` 600)
Less: Post separation cost
20,000
—
8,000
28,000
Contribution
30,000
42,000
40,000 1,12,000
b)
The limiting factor is the availability of Special Steel. Only 800 MT of Special Steel is available.
To produce 40000 units, the requirement of Special Steel will be:
Sub-assembly M: 20kg x 40000 units = 800 MT
P: 20 kg x 40000 units = 800 MT
Therefore the available alternatives are:
(i) To restrict production of BS to 20000 units, fully utilizing the available 800 MT of Special Steel
Plates.
(ii) To produce 40000 units of BS using 800 MT of Special Steel Plates for the required sub-assemblyM and procuring 40000 units of Sub-assembly P from the outside supplier.
Comparative Economies Statement of the Two Alternatives
Alternative- I
Alternative- II
Incremental
M and P (each 20000 Only M is made 40000 units with
units
made
per the availability constraints and
availability constraints
40000 units of P purchased
final
20000
40000
Production of
Product BS (units)
Revenue @ ` 3000
per unit
Less: Direct Material
Cost (Other than Spl.
St. plates)
For M @ ` 500/unit
For P @ ` 500/unit
Less : Handling Cost @
` 100 per unit
Less: Final Assembling
cost @ ` 1000/unit
Margin
PRIME/ME39/FINAL
20000
` 600 Lakhs
` 1200 Lakhs
` 600 Lakhs
` (100) Lakhs
` (100) Lakhs
–
` (200) Lakhs
–
` (40) Lakhs
–
` (200) Lakhs
` (400) Lakhs
` 200 Lakhs
` 560 Lakhs
11
` (40)
Lakhs
` (200)
Lakhs
` 360 Lakhs
Decision:
Buying Prrice for Sub-assembly – P could br ` 90
00 ( ` 360 Lakh ÷ 40000) as
a maximum. But, then th
he
company (Aleena Ltd..,) will not m
make any finaancial gain at this price, though it may benefit th
he
company
or P will add to the profitt and help in maintaining a
indirectly. Therefore, any price below ` 900 fo
good custtomer relationship with the company.
c)
Statement of target co
osts
7 a))
Life cycle costing is a technique
t
wh
hich takes acccount of the total cost of owning a physical asset, o
or
making a product, during its econ
nomic life. It includes the costs associated with accquiring, using,
caring for and dispossing of physsical assets, including the feasibility studies, research, design,
ment, producttion, mainten
nance, replaceement and disposal, as w
well as supporrt, training an
nd
developm
operatingg costs generrated by the acquisition, use, mainteenance and rreplacement of permanen
nt
physical aassets.
Stages in Product Life Cycle
C
: There are five distin
nct stages in the
t life cycle of a product as follows:
 Introdu
uction stage – Research an
nd engineerin
ng skill leads to product development. The product is
put on the market and
a its awareeness and accceptance are minimal. Pro
omotional cossts will be high,
r
low and profitss probably negative. Thee skill that iss exhibited in
i testing an
nd
sales revenue
launch
hing the product will rank high in this phase
p
as critiical factor in securing succcess and initiial
markett acceptance.. Sales of new
w products ussually rise slow
wly at first.
 Growth Stage – In the
t growth sstage productt penetration
n into the market and salees will increasse
becausse of the cum
mulative effeects of introd
ductory prom
motion, distribution. Since
e costs will be
b
lower than
t
in the earlier stage, the
t product will
w start to make
m
a profit contribution. Following th
he
consum
mer acceptan
nce in the lau
unch stage itt now becom
mes vital or secure wholesaler / retaileer
supporrt. But to su
ustain growth
h, consumer satisfaction must be ensured at thiss stage. If th
he
producct is successful, growth ussually accelerrates at somee point, often
n catching the innovator b
by
surprisse.
 Maturiity Stage – This
T
stage beegins after saales cease to
o rise exponeentially. The causes of th
he
declining percentagge growth rate the markeet saturation – eventuallyy most poten
ntial customeers
have ttried the pro
oduct and saales settle at a rate govverned by population growth and th
he
replaceement rate of
o satisfied bu
uyers. In addiition there w
were no new distribution
d
channels
c
to fiill.
This is usually the longest stagee in the cyclee, and most existing prod
ducts are in this
t
stage. Th
he
pends upon the
t firms abiility to stretch the cycle b
by
period over which sales are maaintained dep
egmentation and
a finding new uses for itt.
meanss of market se
 Saturation stage – As the market becomes saturated, pressure is exerted for a new product and
sales along with profit begin to fall. Intensified marketing effort may prolong the period of
maturity, but only by increasing costs disproportionately.
 Declining Stage – Eventually most products and brands enter a period of declining sales. This may
be caused by the following factors: Technical advances leading to product substitution Fashion
and changing tastes Exogenous cost factors will reduce profitability until it reaches zero at which
point the products life is commercially complete.
b)
The following are the areas where the effects of learning curve would be useful to decision making in
a manufacturing organization:
(i) Pricing decision – Since learning curve permit better cost prediction, it seems that they should
be employed in pricing decision.
(ii) Work scheduling – Learning curve increases a firms ability to predict their required labour input
and make it possible to forecast labour needs.
(iii) Capital budgeting – One of the most important aspects in capital budgeting problems is the
amount of cash flows. The learning curve suggests that unit costs are likely to begin high and
reducing afterwards.
(iv) Overtime decisions – Hiring more workers is not likely to be an easily reversible decision.
Hence, if an organization is near the beginning its learning curve, it prefers to work overtime
rather than hire additional workers who will not be needed later.
(v) Fixation of pay scales – In fixing pay scales and production bonus, the time needed to learn
production process should be allowed for in calculating the wages and bonus for a period. The
wage incentive schemes must recognize the learning curve i.e., the employees will need to be
compensated during the early stages of learning for the lower than normal level of
performance.
(vi) Cash budgets – Since learning effect reduces unit variable costs as more units are produced, it
should be allowed for in cash flow projections.
(vii) Direct costs – The learning curve applies to an industry where there is a high labour turnover or
when products and process are subject to frequent changes. As the labour hours or cost is
reduced for repeat orders, a knowledge of learning curve helps in direct labour budget.
(viii) Setting of standard costs – If the learning phase is not recognized an incorrect standard may be
established. When cumulative output is low the standard cost is high, resulting in favorable
variances. The converse of this applies when cumulative output is high.
c)
A. If the plant is shut down the sunk costs or fixed expenses
11,000
B. If it is working at 50% activity the fixed expenses
15,000
C. Additional fixed expenses: [(B-A)]
4,000
D. Contribution (5,000 units ` 1 p.u.)
5,000
By working at 50% activity the firm is able to recover the additional fixed expenses of ` 4,000 and
earn an extra contribution of `1,000 towards shut down expenses. Hence it is advisable to continue
production in the factory instead of closing it down.
d)
Kaizen costing is a modification of standard costing which is essential to realize the planned cost
reductions in continuous time. Kaizen costing is a Japanese contribution to cost accounting. Kaizen
costing is continuous improvement applied to cost reduction in the manufacturing stage of a
product’s life. Like that of standard costing programme, the aim of Kaizen costing is to remove
inefficiencies from production processes. Kaizen costing tracks the cost reduction plans on a monthly
basis. The Kaizen costing targets are expressed in the physical resources terms. If the head of a
group fails to achieve the Kaizen costing target by 1 percent, review by senior will start. Resource
consumption is so tightly controlled in many Japanese firms. Thus the planned cost reductions are
planned and monitored through Kaizen cost targets in terms of physical resources.
PRIME/ME39/FINAL
13
e))
Generallyy three types of errors in logical sequeencing may arise
a
while drrawing a network diagram
m,
particularrly when it is a complicated
d one. These are known ass looping, dan
ngling and red
dundancy.
(i)
Looping: Normally
N
in a network, thee arrow pointts are from leeft to right. This conventio
on
is to be strrictly adhered
d, as this wou
uld avoid illoggical looping. Looping error is also know
wn
as Cycling error
(ii)
Dangling: Activity
nt
A
which
h is not conneected to any of the interm
mediate eventts or end even
is called dangling activity. The situaation represen
nted by the following
f
diaggram is also at
fault, since
e the activityy represented
d by the danggling arrow 9-11
9
is underttaken with n
no
result.
(iii)
mmy activitiees are inserteed in a network diagram unnecessarily, this type of
o
When dum
error is callled error of rredundancy.
ICT
No of Page: 1
No of Questions: 7
Total Marks: 100
Time allowed: 3 Hrs
Question no.1 is Compulsory
Answer any 5 Qns from the rest
1.
a)
b)
c)
d)
What is a business contingency? What do you understand by a BCP Process?
Explain in detail about the need and the contents of a BCP manual
Explain the term Business Impact Analysis (BIA)
Explain the objectives of undertaking a BCP maintenance task
a)
b)
What is Governance of Enterprise IT (GEIT)? List the benefits of GEIT.
(6 Marks)
What is an IT steering committee? List out the key functions of the steering committee.
(6 Marks)
Explain the following terms in the context of risk management
i. Exposure:
ii. Countermeasure:
(2 x2 = 4 Marks)
(4x5=20 Marks)
2.
c)
3.
a. What do you understand by a Transaction Processing System?
b. What are the pre-requisites of an effective MIS?
c. Write short notes
i. Voice mail
ii. Expert System
(4 Marks)
(6 Marks)
(2 x 3 = 6 Marks)
4.
a. Write short note on Information Security Policy
b. Distinguish between physical and logical access controls.
c. Explain the impact of Cyber Frauds on Enterprises
(6 Marks)
(6 Marks)
(4 marks)
5.
a. What do you understand by the term System Development? Explain in brief its two major
components
(4 Marks)
b. Explain the “Prototyping model” along with its stages
(6 Marks)
c. Write short notes
i. Decision Tree:
ii. System Components Matrix:
(2 x 3 = 6 Marks)
6.
a. List out the factors influencing audit of computers and the impact of IS audit functions in an
Organization
(6 Marks)
b. Explain the 5 categories of systems audit
(5 Marks)
c. Explain the steps involved in an IS audit
(5 Marks)
7.
a. List out the objectives of the Information Technology Act
b. Explain the following terms
i. Certification Practice Statement
ii. Electronic Form
iii. Key pair
c. Explain the term “Cloud Computing”
PRIME/ME39/FINAL
1
(6 Marks)
(3 x 2 = 6 Marks)
(4 Marks)
PRIME ACADEMY
39th SESSION MODEL EXAM - FINAL - INFORMATION SYSTEM AND CONTROL AUDIT
SUGGESSTED ANSWERS
1. a) A business contingency is an event with the potential to disrupt computer operations, thereby
disrupting critical mission and business functions. Such an event could be a power outage, hardware
failure, fire, or storm. If the event is very destructive, it is often called a disaster.
BCP is a process designed to reduce the risk to an enterprise from an unexpected disruption of its
critical functions, both manual and automated ones, and assure continuity of minimum level of
services necessary for critical operations. The purpose of BCP is to ensure that vital business functions
(critical business operations) are recovered and operationalized within an acceptable timeframe. The
purpose is to ensure continuity of business and not necessarily the continuity of all systems,
computers or networks. The BCP identifies the critical functions of the enterprise and the resources
required to support them. The Plan provides guidelines for ensuring that needed personnel and
resources are available for both disaster preparation and incident response so as to ensure that the
proper procedures will be carried out to ensure the timely restoration of services.
b) An incident or disaster affecting critical business operations can strike at anytime. Successful
organizations have a comprehensive BCP Manual, which ensures process readiness, data and system
availability to ensure business continuity. A BCP manual is a documented description of actions to be
taken, resources to be used and procedures to be followed before, during and after an event that
severely disrupts all or part of the business operations. The BCP is expected to provide:

Reasonable assurance to senior management of enterprise about the capability of the enterprise
to recover from any unexpected incident or disaster affecting business operations and continue
to provide services with minimal impact.

Anticipate various types of incident or disaster scenarios and outline the action plan for
recovering from the incident or disaster with minimum impact and ensuring ‘Continuous
availability of all key services to clients’.
The BCP Manual is expected to specify the responsibilities of the BCM team, whose mission is to
establish appropriate BCP procedures to ensure the continuity of enterprise's critical business
functions. In the event of an incident or disaster affecting any of the functional areas, the BCM Team
serves as liasioning teams between the functional area(s) affected and other departments providing
support services.
BCM is business-owned, business-driven process that establishes a fit-for-purpose strategic and
operational framework that:
 Proactively improves an enterprise’s resilience against the disruption of its ability to achieve its
key objectives;
 Provides a rehearsed method of restoring an enterprise’s ability to supply its key products and
services to an agreed level within an agreed time after a disruption; and
 Delivers a proven capability to manage a business disruption and protect the enterprise’s
reputation and brand.
c) Business Impact Analysis (BIA) is essentially a means of systematically assessing the potential
impacts resulting from various events or incidents. The process of BIA determines and documents
the impact of a disruption of the activities that support its key products and services. It enables the
business continuity teamto identify critical systems, processes and functions, assess the economic
impact of incidents and disasters that result in a denial of access to the system, services and facilities,
and assess the "pain threshold, "that is, the length of time business units can survive without access
to the system, services and facilities.
For each activity supporting the delivery of key products and services within the scope of its
BCM program, the enterprise should:
 assess the impacts that would occur if the activity was disrupted over a period of time;
PRIME/ME39/FINAL
1

identify the maximum time period after the start of a disruption within which the activity needs
to be resumed;
 Identify critical business processes;
 assess the minimum level at which the activity needs to be performed on its resumption;
 identify the length of time within which normal levels of operation need to be resumed; and
 Identify any inter-dependent activities, assets, supporting infrastructure or resources that have
also to be maintained continuously or recovered over time.
The enterprise should have a documented approach to conduct BIA. The enterprise should
document its approach to assessing the impact of disruption and its findings and conclusions. The
BIA Report should be presented to the Top Management .This report identifies critical service
functions and the time frame in which they must be recovered after interruption. The BIA Report
should then be used as a basis for identifying systems and resources required to support the critical
services provided by information processing and other services and facilities. Developing the BCP
also takes into account the BIA process.
d)
The maintenance tasks undertaken in Development of BCP are to:
 Determine the ownership and responsibility for maintaining the various BCP strategies within
the enterprise;
 Identify the BCP maintenance triggers to ensure that any organisational, operational, and
structural changes are communicated to the personnel who are accountable for ensuring that
the plan remains up-to-date;
 Determine the maintenance regime to ensure the plan remains up-to-date;
 Determine the maintenance processes to update the plan; and
 Implement version control procedures to ensure that the plan is maintained up-to-date.
2.
a) Governance of Enterprise IT is a sub-set of corporate governance and facilitates implementation of a
framework of IS controls within an enterprise as relevant and encompassing all key areas. The
primary objectives of GEIT are to analyze and articulate the requirements for the governance of
enterprise IT, and to put in place and maintain effective enabling structures, principles, processes and
practices, with clarity of responsibilities and authority to achieve the enterprise's mission, goals and
objectives.
Benefits of GEIT
These are given as follows:
 It provides a consistent approach integrated and aligned with the enterprise governance
approach.
 It ensures that IT-related decisions are made in line with the enterprise's strategies and
objectives.
 It ensures that IT-related processes are overseen effectively and transparently.
 It confirms compliance with legal and regulatory requirements.
 It ensures that the governance requirements for board members are met.
b) The IT steering committee is a committee appointed by the senior management to provide
appropriate direction to IT deployment and information systems and to ensure that the information
technology deployment is in tune with the enterprise business goals and objectives. This committee
called as the IT Steering Committee is ideally led by a member of the Board of Directors and
comprises of functional heads from all key departments of the enterprise including the audit and IT
department. The role and responsibility of the IT Steering Committee and its members must be
documented and approved by senior management. As the members comprise of function heads of
departments, they would be responsible for taking decisions relating to their departments as
required. The IT Steering Committee provides overall direction to deployment of IT and information
systems in the enterprises. The key functions of the committee would include of the following:
PRIME/ME39/FINAL
2
 To ensure that long and short-range plans of the IT department are in tune with enterprise goals
and objectives;
 To establish size and scope of IT function and sets priorities within the scope;
 To review and approve major IT deployment projects in all their stages;
 To approve and monitor key projects by measuring result of IT projects in terms of return on
investment, etc.;
 To review the status of IS plans and budgets and overall IT performance;
 To review and approve standards, policies and procedures;
 To make decisions on all key aspects of IT deployment and implementation;
 To facilitate implementation of IT security within enterprise;
 To facilitate and resolve conflicts in deployment of IT and ensure availability of a viable
communication system exists between IT and its users; and
 To report to the Board of Directors onIT activities ona regular basis
c)
i) An exposure is the extent of loss the enterprise has to face when a risk materializes. It is not just the
immediate impact, but the real harm that occurs in the long run. For example; loss of business,
failure to perform the system’s mission, loss of reputation, violation of privacy and loss of resources
etc.
ii) An action, device, procedure, technique or other measure that reduces the vulnerability of a
component or system is referred as countermeasure. For example, well known threat ‘spoofing the
user identity’, has two countermeasures:
• Strong authentication protocols to validate users; and
• Passwords should not be stored in configuration files instead some secure mechanism should be
used.
3. a)
At the lowest level of management, TPS is an information system that manipulates data from
business transactions. Any business activity such as sales, purchase, production, delivery, payments
or receipts involves transaction and these transactions are to be organized and manipulated to
generate various information products for external use. For example, selling of a product to a
customer will give rise to the need of further information like customer billing, inventory status and
increase in account receivable balance. TPS will thus record and manipulate transaction data into
usable information. Typically, a TPS involves the following activities:
• Capturing data to organize in files or databases;
• Processing of files/databases using application software;
• Generating information in the form of reports; and
• Processing of queries from various quarters of the organization.
A TPS may follow the periodic data preparation and batch processing (as in payroll application) or online processing (as in inventory control application). However, in industries and business houses,
now-a-days on-line approach is preferred in many applications as it provides information with up-todate status. However, the people involved in TPS usually are not in a position to take any
management decision.
b) The pre-requisites of an effective MIS are given as follows:
 Database - It is collection of files, which is collection of records and records are nothing but
collection of data. The data in database is organized in such a way that accessing to the data is
improved and redundancy is reduced. The main characteristics of database are given as follows:
 It is user–oriented.
 It is capable of being used as a common data source to various users, helps in avoiding
duplication of efforts in storage and retrieval of data and information.
 It is available to authorized persons only.
 It is controlled by a separate authority established for the purpose, known as Database
Management System (DBMS).
PRIME/ME39/FINAL
3









Qualified System and Management Staff –The second pre-requisite of effective MIS is that it
should be manned by qualified officers. These officers, who are experts in the field, should
understand clearly the views of their fellow officers. For this, the organizational management
base should comprise of two categories of officers; Systems and Computer experts and
Management
experts.
Systems and Computer experts in addition to their expertise in their subject area/s should also be
capable of understanding management concepts to facilitate the understanding of problems
faced by the concern. They should also be clear about the process of decision making and
information requirements for planning and control functions.
Management experts should also understand quite clearly the concepts and operations of a
computer. This basic knowledge of computers will be useful to place them in a comfortable
position, while working with systems technicians in designing or otherwise of the information
system.
Support of Top Management –The support from top management is required for the
effectiveness of MIS in an organization. The reasons for the same are as follows:
Any implementation, which does not receive the support of top management will not be
effectively controlled and tends to be get lesser priority and may be delayed or abandoned.
The resources involved in computer-based information systems are large and are growing larger
in view of importance gained by management information system.
To gain the support of top management, the officers should place before top management all
the supporting facts and state clearly the benefits, which will accrue from it to the concern. This
step will certainly enlighten management, and will change their attitude towards MIS. Their
wholehearted support and cooperation will help in making MIS an effective one.
Control and maintenance of MIS-Control of the MIS means the operation of the system as it was
designed to operate. Some time, users develop their own procedures or short cut methods to use
the system, which reduce its effectiveness. To check such habits of users, the management at
each level in the organization should devise checks for the information system control.
Maintenance is closely related to control. Formal methods for changing and documenting
changes must be provided.
c) i) Voice Mail –Voice mail is a variation of the email in which messages are transmitted as digitized voice.
The recipient of the voice mail has to dial a voice mail service or access the e-mailbox using the
specified equipment and he can hear the spoken message in the voice of the sender. The secured
type of voice mail service may require the recipient to enter identification code before the access is
granted to the stored information.
ii) An Expert System is highly developed DSS that utilizes knowledge generally possessed by an expert to
share a problem. Expert Systems are software systems that imitate the reasoning processes of
human experts and provide decision makers with the type of advice they would normally receive
from such expert systems.
For instance, an expert system in the area of investment portfolio management might ask its user a
number of specific questions relating to investments for a particular client like – how much can be
invested. A characteristic of expert systems is the ability to declare or explain the reasoning process
that was used to make decisions.
4. a) An information security policy is the statement of intent by the management about how to protect a
company’s information assets. It is a formal statement of the rules, which give access to people to an
organization's technology and information assets, and which they must abide. In its basic form, a
information security policy is a document that describes an organization’s information security
controls and activities. The policy does not specify technologies or specific solutions; it defines a
specific set of intentions and conditions that help protect a company’s information assets and its
PRIME/ME39/FINAL
4
ability to conduct business. An information security policy is the essential foundation for an effective
and comprehensive information security program. It is the primary way in which management’s
information security concerns are translated into specific measurable and testable goals and
objectives. It provides guidance to the people, who build, install, and maintain information systems.
Information
Security policy invariably includes rules intended to:
• Preserve and protect information from any unauthorized modification, access or disclosure;
• Limit or eliminate potential legal liability from employees or third parties; and
• Prevent waste or inappropriate use of the resources of an organization.
An information security policy should be in written form. It provides instructions to employees about
‘what kinds of behaviour or resource usage are required and acceptable’, and about ‘what is
unacceptable’. An information security policy also provides direction to all employees about how to
protect organization’s information assets, and instructions regarding acceptable (and unacceptable)
practices and behavior.
b) Physical Access Controls
These controls are personnel; hardware and software related and include procedures exercised on
access to IT resources by employees/outsiders. The controls relate to establishing appropriate
physical security and access control measures for IT facilities, including off-site use of information
devices in conformance with the general security policy. These Physical security and access controls
should address supporting services (such as electric power), backup media and any other elements
required for the system’s operation. Access should be restricted to authorized individuals Where IT
resources are located in public areas, they should be appropriately protected to prevent or deter loss
or damage from theft or vandalism. Further, IT management should ensure zero visibility.
Logical Access Controls
Logical access controls are implemented to ensure that access to systems, data and programs
is restricted to authorized users so as to safeguard information against unauthorized use, disclosure
or modification, damage or loss. The key factors considered in designing logical access controls
include confidentiality and privacy requirements, authorization, authentication and incident handling,
reporting and follow-up, virus prevention and detection, firewalls, centralized security administration,
user training and tools for monitoring compliance, intrusion testing and reporting.
c) The impact of cyber frauds on enterprises can be viewed under the following dimensions:
o Financial Loss: Cyber frauds lead to actual cash loss to target company/organization.
For example, wrongfully withdrawal of money from bank accounts.
o Legal Repercussions: Entities hit by cyber frauds are caught in legal liabilities to their customers.
Section 43A of the Information Technology Act, 2000, fixes liability for companies/organizations
having secured data of customers. These entities need to ensure that such data is well
protected. In case a fraudster breaks into such database, it adds to the liability of entities.
o Loss of credibility or Competitive Edge: News that an organizations database has been hit by
fraudsters, leads to loss of competitive advantage. This also leads to lose credibility. There have
been instances where share prices of such companies went down, as the news of such attach
percolated to the market.
o Disclosure of Confidential, Sensitive or Embarrassing Information: Cyber-attack may expose
critical information in public domain. For example, the instances of individuals leaking
information about governments secret programs.
o Sabotage: The above situation may lead to misuse of such information by enemy country.
5.
a) In business, systems development refers to the process of examining a business situation with the
intent of improving it through better procedures and methods. System development can generally be
thought of as having two major components described briefly as follows:
 System Analysis is the process of gathering and interpreting facts, diagnosing problems, and using
the information to recommend improvements to the system.
PRIME/ME39/FINAL
5
 System Design is the process of planning and structuring a new business system or one to replace
or complement an existing system.
b) A prototype is a usable system or system component that is built quickly and at a lesser cost, and with
the intention of modifying/replicating/expanding or even replacing it by a full-scale and fully
operational system. The goal of prototyping approach is to develop a small or pilot version called a
prototype of part or all of a system. . As users work with the prototype, they learn about the system
criticalities and make suggestions about the ways to manage it. These suggestions are then
incorporated to improve the prototype, which is also used and evaluated Finally, when a prototype is
developed that satisfies all user requirements, either it is refined and turned into the final system or
it is scrapped. If it is scrapped, the knowledge gained from building the prototype is used to develop
the real system.
Steps involved:
 Identify Information System Requirements: In traditional approach, the system requirements are
to be identified before the development process starts. However, under prototype approach, the
design team needs only fundamental system requirements to build the initial prototype, the
process of determining them can be less formal and time-consuming than when performing
traditional systems analysis.
 Develop the Initial Prototype: The designers create an initial base model and give little or no
consideration to internal controls, but instead emphasize system characteristics such as simplicity,
flexibility, and ease of use. These characteristics enable users to interact with tentative versions
of data entry display screens, menus, input prompts, and source documents. The users also need
to be able to respond to system prompts, make inquiries of the information system, judge
response times of the system, and issue commands
 Test and Revise: After finishing the initial prototype, the designers first demonstrate the model to
users and then give it to them to experiment and ask users to record their likes and dislikes about
the system and recommend changes. Using this feedback, the design team modifies the
prototype as necessary and then resubmits the revised model to system users for reevaluation.
Thus iterative process of modification and reevaluation continues until the users are satisfied.
 Obtain User Signoff of the Approved Prototype: Users formally approve the final version of the
prototype, which commits them to the current design and establishes a contractual obligation
about what the system will, and will not, do or provide. Prototyping is not commonly used for
developing traditional applications such as accounts receivable, accounts payable, payroll, or
inventory management, where the inputs, processing, and outputs are well known and clearly
defined.
c) i) A Decision Tree or tree diagram is a support tool that uses a tree-like graph or model of decisions and
their possible consequences, including chance event outcomes, resource costs, and utility. Decision
tree is commonly used in operations research, specifically in decision analysis, to help identify a
strategy most likely to reach a goal and to calculate conditional probabilities.
ii) A System Component Matrix provides a matrix framework to document the resources used, the
activities performed and the information produced by an information system. It can be used as an
information system framework for both systems analysis and system design and views the
information system as a matrix of components that highlights how the basic activities of input,
processing, output, storage and controls are accomplished in an information system, and how the
use of hardware, software and people resources can convert data resources into information
products.
PRIME/ME39/FINAL
6
6. a)












Organizational Costs of Data Loss: Data is a critical resource of an organization for its present
and future process and its ability to adapt and survive in a changing environment.
Incorrect Decision Making: Management and operational controls taken by managers involve
detection, investigations and correction of the processes. These high level decisions require
accurate data to make quality decision rules.
Costs of Computer Abuse: Unauthorized access to computer systems, malwares, unauthorized
physical access to computer facilities and unauthorized copies of sensitive data can lead to
destruction of assets (hardware, software, data, information etc.)
Value of Computer Hardware, Software and Personnel: These are critical resources of an
organization, which has a credible impact on its infrastructure and business competitiveness.
High Costs of Computer Error: In a computerized enterprise environment where many critical
business processes are performed, a data error during entry or process would cause great
damage.
Maintenance of Privacy: Today, data collected in a business process contains private information
about an individual too. These data were also collected before computers but now, there is a fear
that privacy has eroded beyond acceptable levels.
Controlled evolution of computer Use: Use of Technology and reliability of complex computer
systems cannot be guaranteed and the consequences of using unreliable systems can be
destructive.
Information Systems Auditing: It is the process of attesting objectives (those of the external
auditor) that focus on asset safeguarding and data integrity, and management objectives (those
of the internal auditor) that include effectiveness and efficiency both.
Asset Safeguarding Objectives: The information system assets (hardware, software, data
information etc.) must be protected by a system of internal controls from unauthorized access.
Data Integrity Objectives: It is a fundamental attribute of IS Auditing. The importance to
maintain integrity of data of an organization requires all the time. It is also important from the
business perspective of the decision maker, competition and the market environment.
System Effectiveness Objectives: Effectiveness of a system is evaluated by auditing the
characteristics and objective of the system to meet business and user requirements.
System Efficiency Objectives: To optimize the use of various information system resources
(machine time, peripherals, system software and labour) along with the impact on its computing
environment.
b) IS Audits has been categorized into five types:
i) Systems and Application: An audit to verify that systems and applications are appropriate, are
efficient, and are adequately controlled to ensure valid, reliable, timely, and secure input,
processing, and output at all levels of a system's activity.
ii) Information Processing Facilities: An audit to verify that the processing facility is controlled to
ensure timely, accurate, and efficient processing of applications under normal and potentially
disruptive conditions.
iii) Systems Development: An audit to verify that the systems under development meet the
objectives of the organization and to ensure that the systems are developed in accordance with
generally accepted standards for systems development.
iv) Management of IT and Enterprise Architecture: An audit to verify that IT management has
developed an organizational structure and procedures to ensure a controlled and efficient
environment for information processing.
v) Telecommunications, Intranets, and Extranets: An audit to verify that controls are in place on the
client (end point device), server, and on the network connecting the clients and servers.
PRIME/ME39/FINAL
7
c)
i)
ii)
iii)
iv)
v)
vi)
Scoping and pre-audit survey: Auditors determine the main area/s of focus and any areas that are
explicitly out-of-scope, based on the scope-definitions agreed with management. Information
sources at this stage include background reading and web browsing, previous audit reports, pre
audit interview, observations and, sometimes, subjective impressions that simply deserve further
investigation.
Planning and preparation: During which the scope is broken down into greater levels of detail,
usually involving the generation of an audit work plan or risk-control-matrix.
Fieldwork: Gathering evidence by interviewing staff and managers, reviewing documents, and
observing processes etc.
Analysis: This step involves desperately sorting out, reviewing and trying to make sense of all that
evidence gathered earlier. SWOT (Strengths, Weaknesses, Opportunities, Threats) or PEST
(Political, Economic, Social, Technological) techniques can be used for analysis.
Reporting: Reporting to the management is done after analysis of evidence gathered and
analyzed
Closure: Closure involves preparing notes for future audits and follow up with management to
complete the actions they promised after previous audits.
7. a)
The Objectives of the Act are given as follows:
 To grant legal recognition for transactions carried out by means of electronic data interchange
and other means of electronic communication commonly referred to as “electronic commerce”
in place of paper based methods of communication;
 To give legal recognition to Digital signatures for authentication of any information or matter,
which requires authentication under any law;
 To facilitate electronic filing of documents with Government departments;
 To facilitate electronic storage of data;
 To facilitate and give legal sanction to electronic fund transfers between banks and financial
institutions;
 To give legal recognition for keeping of books of accounts by banker’s in electronic form; and
 To amend the Indian Penal Code, the Indian Evidence Act, 1872, the Banker’s Book Evidence Act,
1891, and the Reserve Bank of India Act, 1934.
b)
i) It means a statement issued by a Certifying Authority to specify the practices that the Certifying
Authority employs in issuing Electronic Signature Certificates;
ii) Electronic form with reference to information means any information generated, sent, received or
stored in media, magnetic, optical, computer memory, micro film, computer generated micro fiche or
similar device
iii) "Key Pair", in an asymmetric crypto system, means a private key and its mathematically related public
key, which are so related that the public key can verify a digital signature created by the private key
c)
Cloud computing simply means the use of computing resources as a service through networks,
typically the Internet. With Cloud Computing, users can access database resources via the Internet
from anywhere, for as long as they need, without worrying about any maintenance or management
of actual resources. Cloud computing is both, a combination of software and hardware based
computing resources delivered as a networked service. This model of IT enabled services enables
anytime access to a shared pool of applications and resources. These applications and resources can
be accessed using a simple front-end interface such as a Web browser, and as a result enabling users
to access the resources from any client device including notebooks, desktops and mobile devices
Cloud computing provides the facility to access shared resources and common infrastructure offering
services on demand over the network to perform operations that meet changing business need The
location of physical resources and devices being accessed are typically not known to the end user. It
also provides facilities for users to develop, deploy and manage their applications ‘on the cloud’,
which entails virtualization of resources that maintains and manages itself.
PRIME/ME39/FINAL
8
DAS
No. of Pages: 6
No of Questions: 7
Total Marks: 100
Times Allowed: 3 Hrs
Wherever appropriate suitable assumption (s) should be made and indicated in the answer by the
candidate
Working notes should form part of the answer
Question 1 is compulsory.
Answer any five questions from the remaining six questions.
1. a) Vikas Limited, a company engaged in the manufacturing of industrial machines, furnishes the following
particulars pertaining to PY. 2013-14. computes the deduction available under section 32 and 32AC for AY.
2014-15. also, computes the written down value of as on 1 April 2014.
S. No. Particulars
INR in
crores
1
WDV of plant & machinery as on 1 April 2013 (15% block)
120
2
New air conditioners purchase and installed in company’s guest house on
8
18 Sept 2013
3
Purchase of second hand machinery (15% block) on 1 August 2013 for
25
business purpose (the machinery was put to use immediately)
4
Purchase used computers (60%) block on 8 January 2014
18
5
Acquired and installed new plant and machinery (15% block) on 5 July 2013
45
6
Acquired and installed new plant and machinery (15% block) on 4Feb 2014
63
7
Sold plant machinery on 11 November 2013
7
(10 Marks)
b) Alpha, Beta and Gamma. are partners in a firm a engaged in the business of running a manufacturing unit
in the municipal town of Trichy having a population of more than 10,000 located in the State of Tamil
Nadu. Given below is the balance sheet of the firm as on 31 March 2014.
Particulars
` in Particulars
` in
lakhs
lakhs
Partners’ Capital :
Urban Land
300
Alpha
300
Beta
400
Gamma 200
900
Cash credit from bank(Secured by
200 Urban land (construction not allowed)
700
hypothecation of stock and debtors
Term loan taken from bank (Secured
1200 Factory land
200
by charge on gold and silver)
Creditors
1000 Residential house
300
Other liabilities
600 Plant (WDV)
120
Factory Shed
400
Lorry (WDV)
100
Stocks
300
Gold and Silver
800
Sundry Debtors
180
Advance tax
200
Cash at banks
300
Total
3900 Total
3900
PRIME/ME39/FINAL
1
Two urban lands are valued by independent valuer at ` 500 lakhs and ` 50 lakhs respectively. The market
value of gold and silver on the balance sheet ` 1100 lakhs. The value of residential house is occupied by
partner Alpha, who looks after the production activity of the firm. Partner Beta is a non-resident for
income tax purposes.The partners share the profits in the ratio of 2:2:1.
Details of personal assets of the partners as on 31st March 2014 are as follows.
Particulars
Alpha `
Beta ` Gamma `
Share of Companies
40,000
Nil
Nil
Cash in Hand (in India)
Nil
750
Nil
Fixed Deposit and other deposits with banks
35,000
32,000
40,000
Loan taken for making investment in the firm
30,000
Nil
Nil
Residential House in Nairobi, Kenya
Nil 4,00,000
Nil
You are required to determine the assessable wealth of each partner as at 31st March 2013 stating clearly
the reason for inclusion or exclusion of each item.
(10 Marks)
2. The trading, profit and loss account of Sangu Trading Private Limited having business of agricultural produce,
consumer items and other products for the year ended 31 March 2014.
(All amounts in `)
Trading Account
Opening Stock
375,000 Sales
15,550,000
Purchases
12,575,000 Closing Stock
450,000
Freight & cartage
126,000
Gross Profit
2,924,000
Total
16,000,000 Total
16,000,000
P&L Account
Bonus to Staff
47,500 Gross profit
2,924,000
Rent of premises
53,500 Income tax refund
20,000
Advertisement
5,000 Warehousing Charges
15,00,000
Bad debts
75,000
Interest on loans
163,500
Depreciation
75,500
Sales-tax demand paid
108,350
Miscellaneous expenses
525,650
Net profit of the year
3,390,000
Total
44,44,000 Total
44,44,000
On Scrutiny of records, the following inform and details were extracted:
1. There was a survey u/s 133A on the business premises on 31 March 2014 in which it was revealed
that the value of closing stock of 31 March 2014 was ` 875,000 and a sale of ` 75,000 made on 13
March 2014 was not recorded in the books. The value of closing stocks after considering these facts
and on the basis of inventory prepared by the department as on 31 March 2014 worked out at `
12,50,000 which was accepted to be correct and not disputed.
2. Income tax refund includes amount of ` 4,570 of interest allowed thereon.
3. Bonus to staff includes an amount of ` 7,500 paid in the month of December 2013, which was
provided in the books on 31 March 2013.
4. Rent of premises includes an amount of ` 5,500 incurred on repairs The assessee was under no
obligation to incur such expenses as per rent agreement.
5. Advertisement expenses include an amount of ` 2,500 paid for advertisement published in the
souvenir issued by a political party.
6. Miscellaneous expenses included:
PRIME/ME39/FINAL
2

An amount of ` 15,000 paid towards penalty for non-fulfillment of delivery conditions of
contract of sale for the reasons beyond control.

Amount of Rs, 100,000 spent on a notified scheme meant for the uplift of the residents of Mid
Himalayan Region.

Amount of ` 100,000 paid to the wife of a director who is working as junior lawyer for taking an
opinion on a disputed matter. The senior advocate of Supreme Court had charged only
` 25,000 for the same opinion.

Amount of ` 100,000 paid to an Electoral Trust.
7. Sales tax demand includes an amount of ` 5,300 charged as penalty for delayed filing of returns
and ` 12,750 towards interest for delays in deposit of tax.
8. The Company had made an investment of ` 25 lakhs on the construction of a warehouse in rural
area for the purpose of storage of agricultural produce. This was made available for use from 15
September 2013 and the income from this activity is credited in the P&L account under the head
warehousing charges.
9. Depreciation under the Income tax Act works out at ` 65,000
10. Interest on loans include an amount of ` 20,000 on which tax at source was not deducted.
Compute the income chargeable to tax for AY 2014-15 of Sangu Trading Private limited.
(16 Marks)
3. Attempt any four out of the following questions
(a) The assessment of Babylon Private Limited for the AY 2012 – 13 was completed under section
143(3). On 25 March 2014, the assessing officer reopened the assessment on the ground that
certain expenditure which ought to be disallowed under section 40(a) was not done and hence,
there has been escapement of income. During the course of hearing, he wants to take up some
other matter also, which is not covered by the reason recorded. The Company objects to the same
contending that the same is not permissible as per the provisions of the Income tax Act, 1961.
Examine the correctness of contention of Babylon Private Limited.
(b) BSI Limited filed its return of income for the assessment year 2012-13 on 30 March 2014. The whole
tax payable was already deducted at source. The assessing officer levied a penalty of ` 5000 under
section 271F. the assessee makes a submission to the CIT (Appeals) that he has furnished the return
of income within the due date specified in section 139(4) and hence no penalty should be levied
under 271F. Discuss the correctness or otherwise of the stand taken by the assessee.
(c) A foreign company entered into contracts with several Indian companies for
installation of mobile telephone system and made an application to the Authority for Advance
Rulings for advance ruling on the rate of withholding tax on receipts from Indian companies. One of
the Indian companies had also made an application to the Assessing Officer for determination of the
rate at which tax is deductible on payment to the said foreign company. The Authority for Advance
Rulings rejected the application of the foreign company on the ground that the question raised in
the application is already pending before an income tax authority. Is the rejection of the application
of the foreign company justified in law?
(d) Sky Heights a partnership firm engaged in real estate business, sold a land for ` 70 lakhs on 7 August
2013, in the course of its business. The buyer was a stranger to the assessee firm. The valuation
adopted by the stamp valuation authority was ` 1 crore. The assessing officer wants to adopt the
value of ` 1crore for computing the profit arising from the sale of land, by invoking the provisions of
section 50C. Is the same justified?
(e) Discuss, with the aid of recent case laws, whether the appellate tribunal has under section 254(2)
the power to review or re-appreciate the correctness of its earlier decision. Also, discuss whether
the tribunal has the power to recall an order in entirety to rectify a mistake apparent from record.
(4 X 4 Marks = 16 Marks)
PRIME/ME39/FINAL
3
4 a) Examine the following transactions and discuss whether the transfer price declared by the following
assessee, who has exercised a valid option for application of safe harbor rules can be accepted by the
Income tax authorities:
S.No. Assessee
International transaction
Aggregate value Declared
Operating
of
transactions operating
expenses
entered into in margin
the PY 2013-14
INR
90 INR 450
1
A Limited., an Provision
of
system INR 600 crores
crores
crores
Indian company
support services to X Inc.
which is a specified foreign
company in relation to A
limited
INR
62 INR 300
2
B
Limited
an Provisions
of
data INR 400 crores
crores
crores
Indian company
processing services with
the use of information
technology to Y Inc., its
foreign subsidiary
INR
20 INR
70
3
C
&
Co.,
a Provision of contract R&D INR 100 crores
crores
crores
partnership firm
Services
relation
to
development of internet
technology to XYZ & Co., a
foreign firm which holds
12% interest in C& Co,
INR
9 INR
30
4
D
Limited
an Provision of contract R&D INR 50 crores
crores
crores
Indian Company
Services relating to generic
pharmaceutical drug to
ABC
Inc.,
a
foreign
company which guarantees
15% of the total borrowing
of D limited
INR
1 INR
10
5
Sole proprietary 100% export of automobile INR 12 crores
crores
crores
concern of Mr. E transmission and steering
solely engaged in parts to LMN LLP, a foreign
the manufacture LLP controlled by Mr. E
and export of jointly with his relatives
automobile
transmission and
steering parts
INR
1 INR
10
6
F Limited an Indian 100% export of non-core INR 12 crores
crores
Crores
company
solely auto components to GKG
engaged in the Inc. a foreign company. F
limited appoints two thirds
original
manufacture and of the board of directors of
export of non-core GKG Ind.
auto components
In all the above cases, it may be assumed that the Indian entity which provides the services insignificant
risk. It may also be assumed that the foreign entities referred to above are non-resident in India.
Would you answer change, if any of the cases mentioned above the foreign entity is located in a notified
jurisdictional area?
(6 X 2 Marks = 12 Marks)
PRIME/ME39/FINAL
4
b) Discuss the applicability of provisions for deduction of tax at source under section 194H in the following
cases:
 Discount given to stamp vendors on purchase of stamp paper
 Discount given on supply to SIM cards and recharge coupons by a telecom company to its
distributors under a prepaid scheme.
(4 Marks)
5 a) Mahesh, a Non-resident Indian returned to India on 12th June, 2013 for permanently residing in India after
a stay of about 20 years in UK provides the sources of his various incomes and seeks your opinion to know
about his liability to income tax thereon in India in assessment 2014-15:
 Income of rent of the flat in London which was deposited in a bank there. The flat was given on rent
by him after his return to India Since July 2013.
 Dividends on the shares of 3 German Companies which are being collected in a bank account in
London. He proposes to keep the dividend on shares in London with the permission of the RBI.
 He has got 2 sons, one of whom is of 12 years Both his sons are staying in London and not returning to
India with him. Each of his sons is having income of INR 75,000 in UK (non received in India) and of INR
20,000 in India.
 During the preceding accounting year when he was a non-resident, he had sold 1000 shares which
were acquired by him in British Pound Sterling and the sale proceeds were repatriated. The profit in
terms of British Pound Sterling on sale of these 1000 shares was 175% of the cost at 37,500 while in
terms of Indian rupee it was 50,000.
(8 Marks)
b) Cadtech LLP, a limited liability partnership in India, is engaged in development of software and providing IT
enabled services through two units, one of which is located in a notified Special Economic Zone (SEZ) in
Noida. The particulars relating to previous year 2013-14 furnished by the assessee are as follows:
Total Turnover: SEZ unit ` 140 lakhs and the other unit ` 80 lakhs
Export Turnover: SEZ unit ` 80 lakhs and the other unit ` 40 lakhs
Profit: SEZ unit ` 70 lakhs and the other unit ` 20 lakhs.
The assessee has no other income during the year.
(i) Compute tax payable by Cadtech LLP for the Assessment Year 2014-15.
(ii) Will the amount of tax payable change, if Cadtech LLP is an overseas entity?
(8 Marks)
6 a) Ms. Remya received the following gifts during the P.Y.2013-14 from her friend Mr.Vijay,
1) Cash gift of ` 54,000 on her birthday, 1st August, 2013.
2) 80 shares of BSC Ltd., the fair market value of which was ` 80,000, on herbirthday, 1st August,
2013.On 10th August 2013, 120 shares of DSC Ltd., was purchased by her from Mr.Vijay for
` 20,000 the fair market value of which was ` 80,000 on the date oftransfer. Mr. Vijay had
originally purchased the shares on 12.10.2012 at a cost of ` 12,000.
Further, on 12th October, 2013, Ms. Remya purchased land from her sister’s motherin-law for
`3,50,000. The stamp value of land was ` 5,00,000.On 23rd March, 2014, she sold the 120 shares of
DSC Ltd. For `1,20,000.
Compute the income of Ms. Remya chargeable under the head “Income from other sources” and
“Capital Gains” for A.Y.2014-15.
(8 Marks)
b) Mrs Z, an individual resident retired employee of the Prasar Bharati aged 60 years, is a well known
dramatist deriving income of ` 110,000 from theatrical works played abroad. Tax of ` 11,000 deduced in
the country, where the play was performed. India does not have any Double Tax avoidance agreement
under section 90 of the Income tax act with that country. Her income in India amounted to ` 510,000. In
view of tax planning she has deposited ` 70,000 in public provident fund and paid contribution to
approved pension fund of LIC ` 32,000. She also contributed `18,000 to central Government health
scheme during the previous year and gave payment of medical insurance premium of ` 21,000 to insure
PRIME/ME39/FINAL
5
the health of his father, a non –resident aged 76 years, who is not dependent on her. Compute the tax
liability of Mrs. Z for assessment year 2014-15
(8 Marks)
7 a) Explain in brief, the treatment as to their taxability and/or allow ability, under the provisions of the Incometax Act, 1961, for the assessment year 2013-14, in the following cases:
i. P Ltd. decided to effect buy-back of share capital by purchase of shares in open market. During the year
ended 31.03.2013, P Ltd. purchased its own 10,000shares.
ii. Sharp Ltd. receives a sum of `10 lakhs from Kant Ltd. on 3rd January, 2013 for agreeing not to carry on
any business relating to computer software in India for the next three year
iii. A company had an inventory of closing stock on 31.03.2013, the cost of manufacturing of which was `
50 lakhs and the Excise duty payable was ` 6 lakhs. Since the Excise duty was eligible for deduction only
on actual payment, the company valued the closing stock at ` 50 lakhs only. The company paid duty
amounting to ` 4 lakhs on such stock on clearances up to the date of filing the return.
iv. Prem Ltd. paid ` 50 lakhs as sales commission for the year ended 31.03.2013, without deducting tax at
source, to Mr. Rodriguez (non-resident) who acted as his agent for booking orders, from various
customers who are outside India.
(4 X 3 Marks = 12 Marks)
b) Box Limited did not make a claim of ` 20 lakhs in the return of income filed for A.Y.2014-15 which was
disallowed in the previous assessment year under section 43B.However, the said claim was also not
considered by the Assessing Officer duringassessment proceedings on the ground that no revised return
was filed. Can theassessee now make such claim before the appellate authority?
(4 Marks)
PRIME/ME39/FINAL
6
PRIME ACADEMY
39th SESSION MODEL EXAM - FINAL – DIRECT TAX LAWS
SUGGESTED ANSWERS
1. a) Computation of depreciation allowance under section 32 for the A.Y. 2014-15
Particulars
Plant & Machinery
15%
60%
INR in crores
WDV as on 01.April 2013
120.00
---Add: Plant and Machinery acquired during the year
25.00
- Second hand machinery
108.00
- New plant and machinery
8.00
- Air conditioner installed in company’s guest house
Computers acquired during the year
18.00
Less: Asset sold during the year
(7.00)
--Written down value before charging depreciation
254.00
18.00
Less: Depreciation for the P.Y.2013-14 (See Note 1 below)
43.95
5.40
WDV as on 1.4.2014
210.05
12.60
Note 1 : Computation of depreciation for the P.Y.2013-14
Normal depreciation [Under section 32(1)(ii)]
5.40
Depreciation@30% on computers put to use for less than
180 days (50% of 60% × INR 18crores)
28.65
Depreciation on plant and machinery (15% block)
(INR 63crores × 7.5%) + [(INR 254crores–INR 63crores) × 15%]
Additional depreciation [Under section 32(1)(iia)]
9.00
- New plant and machinery installed on 5 July .2013
(INR45crores × 20%)
- on 4.Feb.2014 (INR63crores × 10%)
6.30
Total depreciation
43.95
5.40
Computation of deduction under section 32AC for the A.Y.2014-15
Particulars
(INR
in
crores)
15% of INR108crores, being aggregate investment in new plant and machinery 16.20
acquired and installed during the P.Y.2013-14
Note – For the A.Y.2014-15, the company would be entitled for investment allowance under section
32AC since the investment in new plant and machinery acquired and installed during the P.Y.201314 is INR108 crores (i.e., more than INR 100 crores). The deduction for investment allowance under
section 32AC would be in addition to the depreciation allowable under section 32 for that year.
However, the investment allowance would not be reduced to arrive at the written down value of
plant and machinery. It may be noted that investment in second hand plant and machinery and airconditioners and computers installed in office would neither be eligible for investment allowance
under section 32AC nor additional depreciation under section 32(1)(iia).
b)
Computation of net wealth in the hands of the firm as on 31.03 2014.
Particulars
Notes INR In lakhs
Urban land
A
550
Urban land on which construction is not permitted
B
NIL
Factory land
C
NIL
Residential house
D
300
PRIME/39TH ME/FINAL
1
Plant, factory shed, Lorry, Inventory & Sundry Debtors
Gold and silver
Cash at bank
E
F
G
Less: Term loan towards urban land
Net wealth of the firm
H
NIL
1100
NIL
1950
233
1717
Apportionment of net wealth to partners
INR in lakhs
Particulars
Alpha
Beta
Gamma Total
Capital
300
400
200
900
Other than capital (apportioned as per Profit
326.80
326.80
163.40
817
sharing ratio)
Total
626.80
626.80
363.40
1717
Share of residential house included above
120
120
60
300
Computation of net wealth in the hands of Partners as on 31 March 2014INR in lakhs
Particulars
Alpha
Beta
Gamma
Residential status
Resident
NonResident
resident
Share in companies
Not an asset
N.A
N.A
Cash in hand
Nil Not taxable
Nil
Fixed Deposit
Not an asset
Not an Not an asset
asset
Share in the net wealth of the firm
626.80
626.80
363.40
Residential house in Nairobi
NIL
NonNIL
taxable
Total
626.80
726.80
363.80
Less: Debts incurred – loan taken for
30
Nil
NIL
investment in the firm
Total
596.80
726.80
363.80
Exemption u/s5(vi) – Share of residential
120
120
60
house of firm
Taxable net wealth of partners
476.80
606.80
303.40
Notes:
a) It is assumed that the assessee held the Urban land for industrial purposes for a period
beyond from the date of acquisition. Accordingly, not subject to exceptions provided u/s
2(ea).
b) Urban land on which construction of a building is not permissible under any law for the time
being in force is not an asset chargeable to Wealth tax.
c) Factory Land is not subject to wealth tax as the land is occupied by the factory building. It is
assumed that the construction has been made with the approval of the appropriate
authority.
d) Residential house is a taxable asset and the value. The value to be adopted is as per schedule
III of the wealth tax act. Since, the value as per Schedule III does not exceed WDV as per
balance sheet by more than 20%, balance sheet value has been adopted.
e) Plant, Factory shed, lorry, inventory & sundry debtors are not subject to wealth tax as they
not covered u/s 2(ea).
f) Gold and silver are taxable assets.
g) Cash at bank is not taxable.
h) A sum of INR 700 lakhs was borrowed towards term loan for purchase of plots with equal
size. In the given case 3 lands are appearing the asset side of the Balance sheet of the firm,
PRIME/39TH ME/FINAL
2
i)
j)
of which 2 lands are not taxable under the Wealth tax act. Therefore, 1/3rd of the amount of
term loan alone shall be considered as debts incurred.
In the case of non-residents held outside India are not chargeable to Wealth tax.
Accordingly, residential house in Nairobi owned by Partner Beta is not taxable.
There is no mention about the agreed dissolution ratio in the question. therefore the
exemption u/s5(vi) should be apportioned in profit sharing ration. (2:2:1).
k)
2. Computation of total income of M/s Sangu Trading Private Limited
Particulars
Income from Business
Income from other sources
- Interest on income tax refund
Gross Total Income
Less: Deduction u/s 80GGB
Contribution to electoral trust
Total Income
AY 2014-15
WN Ref INR
1
24,98,300
4,570
5
25,02,870
1,02,500
24,00,370
Working Note 1: Income from business:
Particulars
Notes
Net profit as per P&L Account
Add: Inadmissible and items considered separately
1.
Difference in stock
1
2.
Unaccounted sales
3.
Bonus relating to previous year
3
4.
Repairs to premised included in rent
4
5.
Advertisement in the souvenir issued by a political
5
party
6.
Penalty paid for non-fulfillment of delivery
6
condition of contract of sale
7.
Amount spent on a notified scheme meant for
7
uplift of residence of Mid Himalayan Region
8.
Amount paid to lawyer being wife od director
8
9.
Contribution to electoral trust
5
10.
Sales tax penalty
9
11.
Interest for delayed deposit of sales tax
9
12.
Deprecation
13.
Interest on loans
10
INR
INR
33,90,000
300,000
75,000
47,500
Nil
2,500
Nil
Nil
75,000
100,000
5,300
Nil
75,500
20,000
700,000
4,090,000
Less: Admissible and items considered separately
1. U/s 43B – bonus disallowed in earlier year paid in
the financial year
2. Depreciation as per Income tax Act
3. Warehousing charges
4. Income tax refund
Income from Business
PRIME/39TH ME/FINAL
3
3
7,500
11
65,000
12 15,00,000
20,000 15,92,500
24,98,300
Working Notes:
1. Difference in stock valuation:
Particulars
INR
INR
Closing stock as at 31 March 2014 as agreed with Income tax 12,50,000
department
Less: Stock as per P&L Account
4,50,000 8,00,000
Less: Opening stock as at 1 April 2013
8,75,000
Stock as per P&L Account
(3,75,000) 5,00,000
Difference to be considered as income
3,00,000
2. The Assessee carries on the business of agriculture produce, hence his income does not fall
under Agriculture income u/s 2(1A).
3. Bonus of INR 7,500 relating to earlier year wrongly debited to current year profit and loss
account and hence disallowed. However, since the bonus was not allowed in the earlier year
on account of non-payment within the due date of the relevant previous year, the same is
allowed on payment basis on the current year u/s 43B.
4. Repairs to premises is not allowable since it is not on the basis of contractual obligation.
Though, it may not be allowable u/s 30, the same may be claimed u/s 37(1) in view of nexus
with the business.
5. Advertisement expenses INR 2500 for advertisement published in a souvenir issued by a
political party is not allowed as deduction u/s 37(2B). However such advertisement expenses
which are a political contribution u/s 293A of Companies act contribution to electoral trust is
also eligible for deduction u/s 80GGB. Contribution to electoral trust INR 100,000 is eligible for
deduction u.s80GGB. IT is assumed that payment is made otherwise than by way of cash.
6. Any penalty paid for non-fulfillment of contractual obligation of the parties would not be
disallowed. The disallowance is applicable only where the penalty is for infraction of law –
Explanation to 37(1).
7. Amount spent on a notified scheme meant for the uplift of residence of Mod Himalayan
Region is allowable as deduction u.s35AC and hence no disallowance called for.
8. Any payment made to person specified u/s 40A(2)(b) to the extent it is excessive or
unreasonable shall not be allowed. Amount paid to lawyer being wife of director (INR 100,000)
in excess of the amount payable to the senior lawyer (INR. 25,000) is therefore disallowed.
9. As per Explanation to 37(1), penalty for infraction of law is not permissible deduction.
Therefore, the penalty for delayed filing of returns is not allowable. However, any interest paid
for delayed deposit of tax is compensatory in nature and therefore allowable as deduction. –
Lachmandas Mathurdas vs CIT (2002) 254 ITR 799 SC. Accordingly, INR. 12,750 shall not be
disallowed.
10. Interest on loans on which tax not deducted would not be allowed as deduction in view of
Section 40(a)(ia)
11. In the case of certain specified business as referred u/s 35AD, any capital expenditure incurred
shall be allowed as deduction while computing income from business. In a case where there is
a loss from such specified business the loss shall not be entitled to set off against any source or
under any other head as provided u/s 73A. in the given case, income from specified business
being warehousing activity is INR. 15 lakhs, Whereas the capital expenditure incurred is INR.
25 lakhs and a deduction of INR 37.50 lakhs, being 150% of capital expenditure, which can be
claimed as deduction u.s 35AD. The net result is a loss of INR 22.50 lakhs which shall be carried
forward for set off to the subsequent year in accordance with Section 73A.
12. The income tax refund is not taxable. Interest on refund is taxable under the head income
from other sources.
PRIME/39TH ME/FINAL
4
3. (a) The Assessing Officer may, in course of proceeding under section 147, assess or reassess any other
income which has escaped assessment and which comes to his notice subsequently in the course of such
proceeding. Explanation 3 to section 147 clarifies that the Assessing Officer may assess or reassess the
income in respect of any issue (which has escaped assessment), and such issue comes to his notice
subsequently in the course of proceedings under section 147, even though the reason for such issue
does not form part of the reasons recorded under section 148(2). Therefore, the contention of Babylon
Pvt. Ltd. is not correct.
(b) Penalty of INR 5,000 under section 271F is imposable on a person who is required to furnish return
of income under section 139(1) for failure to furnish such return before the end of the relevant
assessment year, i.e. A.Y. 2012-13 in this case. It is true that the assessee can file a belated return
under section 139(4) within one year from the end of the relevant assessment year or before
completion of assessment, whichever is earlier. However, right to file a belated return after the
end of the assessment year does not mean that the liability to pay penalty ceases. The Supreme
Court's decision in Pradip Lamps Works vs. CIT (2001) 249 ITR 797 supports this view. Hence, the
assessee is liable for penalty under section 271F for fails to furnish the return before the end of
relevant assessment year.
(c) Clause (i) of the first proviso of section 245R(2) provides that the Authority shall not allow the
application where the question raised in the application is already pending before any income-tax
authority or Appellate Tribunal or any court. In the above case, no application had been filed or
contention urged by the applicant (foreign company) before any income-tax authority/Appellate
Tribunal/court, raising the question raised in the application filed with AAR. One of the Indian
companies, however, had raised the question before the Assessing Officer, not on the applicant’s
behalf or with a view to benefit the applicant, but only to safeguard its own interest, as it had a
statutory duty to deduct the proper amount of tax from payments made to a non-resident.
Although the question raised pertains to one of the payments made or to be made to the nonresident applicant, it was not one pending determination before any income-tax authority in the
applicant’s case.
Therefore, as held by the AAR in Ericsson Telephone Corporation India AB v. CIT (1997) 224 ITR
203, the application filed by the Indian company before the Assessing Officer cannot be treated to
have been filed by the non-resident. Hence, it would not be proper to reject the application of the
foreign company relying on clause (i) of the proviso to sub-section (2) of section 245R of the
Income-tax Act, 1961. The application is, therefore, maintainable.
(d) Section 50C(1) enjoins that where the consideration received or accruing as a result of the transfer
by an assessee of a capital asset, being land or building or both, is less than the value adopted or
assessed or assessable by the “stamp valuation authority” for the purpose of payment of stamp
duty in respect of such transfer, the value so adopted or assessed or assessable shall for the
purposes of section 48, be deemed to be the full value of the consideration received or accruing as
a result of such transfer. In CIT v. Thiruvengadam Investments Private Limited (2010) 320 ITR 345
(Mad.), the issue under consideration was whether the provisions of section 50C are applicable
where the property is held as a stock-in-trade. The High Court pointed out that it was not in
dispute that the assessee was engaged in real estate business. As the property in the hands of the
assessee was treated as a stock-in-trade and not as a capital asset, there is no question of invoking
the provisions of section 50C. Section 50C pertains to determining the full value of consideration
of a capital asset. However, the Assessing Officer can invoke the provisions of new section 43CA,
which provides that where the consideration for transfer of an asset (other than capital asset),
being land or building or both, is less than the stamp duty value, the value so adopted or assessed
or assessable (i.e., the stamp duty value) shall be deemed to be the full value of the consideration
for the purposes of computing income under the head ‘Profits and gains of business or profession.
PRIME/39TH ME/FINAL
5
Therefore, the Assessing Officer can invoke the provisions of new section 43CA to adopt the value
of INR 1 crore for computing the profit arising on sale of land.
(e) Section 254(2) specifically empowers the Appellate Tribunal to amend any order passed by it,
either suo motu or on an application made by the assessee or Assessing Officer, with a view to
rectifying any mistake apparent from record, at any time within 4 years from the date of passing
the order sought to be amended.
The powers of the Tribunal under section 254(2) relating to rectification of its order are very
limited. Such powers are confined to rectifying any mistake apparent from the record. The mistake
has to be such that for which no elaborate reasons or inquiry is necessary. Accordingly, the reappreciation of evidence placed before the Tribunal during the course of the appeal hearing is not
permitted. It cannot re-adjudicate the issue afresh under the garb of rectification. This issue came
up for consideration before the Punjab & Haryana High Court in the case of CIT vs. Vardhman
Spinning (1997) 226 ITR 296, wherein it was observed that the jurisdiction to review or modify
orders passed by the authorities under the Act cannot be inferred on the basis of a supposed
inherent right.
The Delhi High Court, in Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011) 330 ITR 243
(Delhi)(FB), observed that the justification of an order passed by the Tribunal recalling its own
order is required to be tested on the basis of the law laid down by the Apex Court in Honda Siel
Power Products Ltd. v. CIT (2007) 295 ITR 466, dealing with the Tribunal’s power under section
254(2) to recall its order where prejudice has resulted to a party due to an apparent omission,
mistake or error committed by the Tribunal while passing the order. Such recalling of order for
correcting an apparent mistake committed by the Tribunal has nothing to do with the doctrine or
concept of inherent power of review. It is a well settled provision of law that the Tribunal has no
inherent power to review its own judgment or order on merits or re appreciate the correctness of
its earlier decision on merits. However, the power to recall has to be distinguished from the power
to review. While the Tribunal does not have the inherent power to review its order on merits, it
can recall its order for the purpose of correcting a mistake apparent from the record.
When prejudice results from an order attributable to the Tribunal’s mistake, error or omission,
then it is the duty of the Tribunal to set it right. The Delhi High Court observed that the Tribunal,
while exercising the power of rectification under section 254(2), can recall its order in entirety if it
is satisfied that prejudice has resulted to the party which is attributable to the Tribunal’s mistake,
error or omission and the error committed is apparent.
Thus, while the Tribunal does not have the power to review or re appreciate the correctness of its
earlier decision on merits under section 254(2), it, however, has the power to recall an order in
entirety to rectify a mistake apparent from record.
4 a).
Section 92CB(1) provides that the determination of arm’s length price under section 92C or section
92CA shall be subject to safe harbor rules. Safe harbor means circumstances in which the income
tax authorities shall accept the transfer price declared by the assessee. Section 92CB(2) empowers
the CBDT to prescribe such safe harbor rules or circumstances under which the transfer price
declared by the assessee shall be accepted by the Income-tax Authorities.
Accordingly, in exercise of the powers conferred by section 92CB read with section 295 of the
Income-tax Act, 1961, the CBDT has, vide Notification No.73/2013 dated 18.9.2013, prescribed safe
harbor rules. Rule 10TD provides that where an eligible assessee has entered into an eligible
international transaction and the option exercised by the said assessee is not held to be invalid
under Rule 10TE, the transfer price declared by the assessee in respect of such transaction shall be
accepted by the income tax authorities, if it is in accordance with the circumstances set out there
under. An eligible assessee is a person who has exercised a valid option for application of safe
harbor rules and is engaged in, inter alia, providing the following services, with insignificant risk, to
a non-resident associated enterprise –
(i) software development services; or
PRIME/39TH ME/FINAL
6
(ii)
(iii)
(iv)
(v)
(vi)
information technology enabled services; or
knowledge process outsourcing services; or
contract R & D services wholly or partly relating to software development; or
contract R & D services wholly or partly relating to generic pharmaceutical drugs.
A person who is engaged in the manufacture and export of core or non-core auto
components and where 90% or more of total turnover during the relevant previous year is in
the nature of original equipment manufacturer sales also falls within the definition of
eligible assessee if he has exercised a valid option for application of safe harbor rules.
1. X Inc. is a specified foreign company in relation to A Ltd. Therefore, the condition of A Ltd.
holding shares carrying not less than 26% of the voting power in X Inc is satisfied. Hence, X Inc.
and A Ltd. are deemed to be associated enterprises. Therefore, provision of systems support
services by A Ltd., an Indian company, to XInc., a foreign company, is an international
transaction between associated enterprises, and consequently, the provisions of transfer
pricing are attracted in this case.
Systems support services falls within the definition of “software development services”, and
hence, is an eligible international transaction. Since A Ltd. is providing software development
services to a non-resident associated enterprise and has exercised a valid option for safe harbor
rules, it is an eligible assessee. Since the aggregate value of transactions entered into in the
P.Y.2013-14 exceed INR500 crore, A Ltd. should have declared an operating profit margin of not
less than22% in relation to operating expense, to be covered within the safe harbor rules.
However, since A Ltd. has declared an operating profit margin of only 20% (i.e.,90/100*450) the
same is not in accordance with the circumstance mentioned in Rule10TD. Hence, it is not
binding on the income-tax authorities to accept the transfer price declared by A Ltd.
2. Y Inc., a foreign company, is a subsidiary of B Ltd., an Indian company. Hence, YInc. and B Ltd.
are associated enterprises. Therefore, provision of data processing services by B Ltd., an Indian
company, to Y Inc., a foreign company, is an international transaction between associated
enterprises, and consequently, the provisions of transfer pricing are attracted in this case. Data
processing services with the use of information technology falls within the definition of
“information technology enabled services”, and is hence, an eligible international transaction.
Since B Ltd. is providing data processing services to anon-resident associated enterprise and has
exercised a valid option for safe harbor rules, it is an eligible assessee. Since the aggregate value
of transactions entered into in the P.Y.2013-14 does not exceed INR 500 crore, B Ltd. should
have declared an operating profit margin of not less than 20% in relation to operating expense,
to be covered within the scope of safe harbor rules. In this case, since B Ltd. has declared an
operating profit margin of 20.67% (i.e., 62300*100), the same is in accordance with the
circumstance mentioned in Rule 10TD. Hence, the income-tax authorities shall accept the
transfer price declared by B Ltd in respect of such international transaction.
3. XYZ & Co., a foreign firm holds 12% interest in C & Co., an Indian firm. Therefore, the condition
of one enterprise, being a foreign firm, holding not less than 10% interest in another enterprise,
being an Indian firm, is satisfied. Hence, XYZ & Co. and C & Co. are deemed to be associated
enterprises. Therefore, provision of contract R & D services relating to software development
by C & Co., an Indian firm, to XYZ & Co., a foreign firm, is an international transaction between
associated enterprises, and consequently, the provisions of transfer pricing are attracted in this
case. Development of internet technology falls within the meaning of “contract R&D services
wholly or partly relating to software development”, and hence, is an eligible international
transaction. Since C & Co., an Indian firm, is providing contract R & D services to a non-resident
associated enterprise and has exercised a valid option for safe harbour rules, it is an eligible
assessee. Irrespective of the aggregate value of transactions entered into in the P.Y.2013-14, C
& Co. should have declared an operating profit margin of not less than 30% in relation to
operating expense, to be covered within the safe harbor rules. However, since C & Co. has
PRIME/39TH ME/FINAL
7
declared an operating profit margin of only 28.57% (i.e., 20/70*100), the same is not in
accordance with the circumstance mentioned in Rule 10TD. Hence, it is not binding on the
income-tax authorities to accept the transfer price declared by C & Co.
4. ABC Inc., a foreign company, guarantees 15% of the total borrowings of D Ltd., an Indian
company. Since ABC Inc. guarantees not less than 10% of the total borrowings of D Ltd., ABC
Inc. and D Ltd. are deemed to be associated enterprises. Therefore, provision of contract R & D
services relating to generic pharmaceutical drug by D Ltd., an Indian company, to ABC Inc., a
foreign company, is an international transaction between associated enterprises, and
consequently, the provisions of transfer pricing are attracted in this case. Provision of contract
R& D services in relation to generic pharmaceutical drug is an eligible international transaction.
Since D Ltd. is providing such services to a nonresident associated enterprise and has exercised
a valid option for safe harbor rules, it is an eligible assessee. Irrespective of the aggregate value
of transactions entered into in the P.Y.2013-14,D Ltd. should have declared an operating profit
margin of not less than 29% in relation to operating expense, to be covered within the scope of
safe harbour rules. In this case, since D Ltd. has declared an operating profit margin of 30%
(i.e.,9/30*100), the same is in accordance with the circumstance mentioned in Rule10TD.
Hence, the income-tax authorities shall accept the transfer price declared byD Ltd in respect of
such international transaction.
5. LMN LLP, a foreign LLP, is controlled by Mr.E jointly with his relatives. Mr. E alohas control over
his own sole proprietorship concern. Therefore, the sole proprietorship concern of Mr.E in India
and LMN LLP are deemed to be associated enterprises. Automobile transmission and steering
parts fall within the meaning of “core auto components”, and hence, 100% export of all such
parts originally manufactured by the sole proprietorship concern of Mr.E is an eligible
international transaction. Since the sole proprietorship concern of Mr.E is solely engaged in the
original manufacture and 100% export of such parts and has exercised a valid option for safe
harbor rules, it is an eligible assessee. Irrespective of the aggregate value of transactions
entered into in the P.Y.2013-14,the sole-proprietorship concern of Mr.E should have declared
an operating profit margin of not less than 12% in relation to operating expense, to be covered
within the safe harbor rules. However, since A Ltd. has declared an operating profit margin of
only 10% (i.e., 1/10*100), the same is not in accordance with the circumstance mentioned in
Rule 10TD. Hence, it is not binding on the income-tax authorities to accept the transfer price
declared by Mr.E.
6. F Ltd. and GKG Inc. are deemed to be associated enterprises since F Ltd. appoints more than
half of the Board of Directors of GKG Inc. Manufacture and export of non-core auto
components is an eligible international transaction. Since F Ltd. is engaged in original
manufacture of non-core auto components and 100% export of the same, it is an eligible
assessee. Irrespective of the aggregate value of transactions entered into in the P.Y.2013-14,F
Ltd. should have declared an operating profit margin of not less than 8.5% in relation to
operating expense, to be covered within the scope of safe harbour rules. In this case, since F
Ltd. has declared an operating profit margin of 10% (i.e.,1/10*100), the same is in accordance
with the circumstance mentioned in Rule10TD. Hence, the income-tax authorities shall accept
the transfer price declared byF Ltd in respect of such international transaction.
The safe harbor rules shall not apply in respect of eligible international transactions entered
into with an associated enterprise located in a notified jurisdictional area.
Therefore, if in any of the cases mentioned above, the foreign entity is located in a NJA, the
safe harbor rules shall not be applicable, irrespective of the operating profit margin declared by
the assessee
PRIME/39TH ME/FINAL
8
b)
i.
The issue as to whether discount given to stamp vendors on purchase of stamp papers can be
treated as “commission or brokerage” to attract the provisions for tax deduction at source came
up before the Supreme Court in CIT v. Ahmedabad Stamp Vendors Association (2012) 348 ITR
378. The principal issue in that case was whether stamp vendors were agents of the State
Government who were being paid commission or brokerage or whether the sale of stamp
papers by the Government to the licensed vendors was on “principal to- principal” basis
involving a “contract of sale”. On this issue, the Gujarat High Court had observed that the crucial
question is whether the ownership in the stamp papers passes to the stamp vendor when the
treasury officer delivers stamp papers on payment of price less discount. The Gujarat Stamp
Supply and Sales Rules contemplate that the licensed vendor, while taking delivery of the stamp
papers from the Government offices, is purchasing the stamp papers. The Rules also indicate
that the discount which the licensed vendor has obtained from the Government is on purchase
of the stamp papers. If the licensed stamp vendors were mere agents of the State Government,
no sales tax would have been leviable when the stamp vendors sell the stamp papers to the
customers, because it would have been sale by the Government “through” stamp vendors.
However, entry 84 in Schedule I to the Gujarat Sales Tax Act, 1969 specifically exempts sale of
stamp papers by the licensed vendors from sales-tax. The very basis of the State Legislature
enacting such exemption provision in respect of sale of stamp papers by the licensed vendors
makes it clear that the sale of stamp papers by the licensed vendors to the customers would
have, but for such exemption, been subject to sales tax levy. The question of levy of sales tax
arises only because the licensed vendors themselves sell the stamp papers on their own and not
as agents of the State Government. Had they been treated as agents of the State Government,
there would be no question of levy of sales tax on sale of stamp papers by them, and
consequently, there would have been no necessity for any exemption provision in this regard.
Therefore, although the Government has imposed a number of restrictions on the licensed
stamp vendors regarding the manner of carrying on the business, the stamp vendors are
required to purchase the stamp papers on payment of price less discount on “principal to
principal” basis and there is no “contract of agency” at any point of time. The definition of
“commission or brokerage” under clause (i) of the Explanation to section 194H indicates that the
payment should be received, directly or indirectly, by a person acting on behalf of another
person, inter alia, for services in the course of buying or selling goods. Therefore, the element of
agency is required in case of all services and transactions contemplated by the definition of
“commission or brokerage” under Explanation (i) to section 194H. When the licensed stamp
vendors take delivery of stamp papers on payment of full price less discount and they sell such
stamp papers to the retail customers, neither of the two activities (namely, buying from the
Government and selling to the customers) can be termed as service in the course of buying and
selling of goods. The High Court, therefore, held that discount on purchase of stamp papers does
not fall within the expression “commission or brokerage” to attract the provisions of tax
deduction at source under section 194H.
The Supreme Court affirmed the above decision of the High Court holding that the said
transaction is a sale and the discount given to stamp vendors for purchasing stamps in bulk
quantity is in the nature of cash discount and consequently, section 194H has no application in
this case.
ii.
The issue as to whether discount given on supply of SIM cards and recharge coupons by a
telecom company to its distributors under a prepaid scheme would be treated as commission to
attract the provisions of section 194H came up before the Kerala High Court in Vodafone Essar
Cellular Ltd. v. ACIT (TDS) (2011) 332 ITR 255. On this issue, the Kerala High Court observed that
it was the SIM card which linked the mobile subscriber to the assessee INRs network. Therefore,
PRIME/39TH ME/FINAL
9
supply of SIM card by the assessee-telecom company was only for the purpose of rendering
continued services to the subscriber of the mobile phone.
The position was the same so far as recharge coupons were concerned, which were only air time
charges collected from the subscribers in advance under a prepaid scheme. There was no sale of
any goods involved as claimed by the assessee and the entire charges collected by the assessee
from the distributors at the time of delivery of SIM cards or recharge coupons were only for
rendering services to ultimate subscribers. The assessee was accountable to the subscribers for
failure to render prompt services pursuant to connections given by the distributor. Therefore,
the distributor only acted as a middleman on behalf of the assessee for procuring and retaining
customers and therefore, the discount given to him was within the meaning of commission
under section 194H on which tax was deductible.
5 a) Mahesh returned to India on 12th June 2013 for permanently residing in India after staying in UK for
20 years. During the P.Y.2013-14, he stays in India for 293 days. Since he has stayed in India for a
period of 182 days or more during the previous year 2013-14, he would be a resident in India for the
A.Y.2014-15. However, he would be a resident but not ordinarily resident, assuming that he was a nonresident in nine out of ten previous years preceding P.Y.2013-14/ his stay in India during the seven
previous years is less than 730 days. The residential status of Mahesh for A.Y.2014-15 is, therefore,
Resident but Not Ordinarily Resident. As per section 5(1), only income which is received/deemed to be
received/accrued or arisen/deemed to accrue or arise in India is taxable in case of a Resident but not
Ordinarily Resident. Income which accrues or arises outside India shall not be included in his total
income, unless it is derived from a business controlled in, or a profession set up in, India.
(i) Rental income from a flat in London which was deposited in a bank there shall not be taxable in the
case of a resident but not ordinarily resident, since both the accrual and receipt of income are
outside India.
(ii) Dividends from shares of three German Companies, collected in a bank accoun t in London, would
also not be taxable in the case of a resident but not ordinarily resident since both the accrual and
receipt of income are outside India.
(iii) As per section 64(1A), all income accruing or arising to a minor child is includible in the hands of
the parent, after providing for deduction of INR 1,500 per child under section 10(32).Accordingly,
income of INR 20,000 accruing to his minor son, aged 12 years, in India is includible in the income of
Mahesh, after providing deduction of INR 1,500.
Therefore, INR 18,500 is includible in the income of Mahesh. Income accruing to the minor child
outside India (which is also received outside India) is not includible in the income of Mahesh. It is
assumed that his other son is a major son and hence, his income is not includible in the income of
Mahesh.
5 b)
Computation of total income and tax liability of Cadtech LLP as per the normal provisions of the
Act for A.Y. 2014-15
Particulars
INR (in lakhs)
90
Business income (before deduction under section 10AA) (INR
70 lacs + INR 20 lacs)
Less: Deduction under section 10AA
Profit of unit in SEZ × Export turnover of unit in SEZ
------------------------------------------Total turnover of unit in SEZ
= INR 70 lacs × INR 80 lacs / INR 140 lacs
Total Income
Tax on total income@30%
PRIME/39TH ME/FINAL
40
50
15
10
Add: Education cess @2% & SHEC @1%
Tax liability (as per normal provisions)
0.45
15.45
Computation of Adjusted total income and Alternate Minimum tax of Cadtech LLP as per the
provisions of section 115JC for A.Y. 2014-15
Particulars
INR (in lakhs)
50.00
Total income as per the normal provisions
Add: Deduction under section 10AA
40.00
Adjusted total income
90.00
Tax@18.5% of Adjusted total income
16.65
Add: Education cess @2% & SHEC @1%
0.50
Alternate Minimum Tax as per section 115JC
17.15
Since the tax payable as per the normal provisions of the Act is less than the alternate
minimum tax payable, the adjusted total income shall be deemed to be the total income of
Cadtech LLP and the tax payable for A.Y. 2014-15 shall be INR 17.15 lakh
6
a) Computation of “Income from other sources” of Ms. Remya for the A.Y.2014-15
Particulars
INR
54,000
Cash gift received on 01 August.2013 is taxable under section
56(2)(vii)
Value of shares of BSC Ltd. gifted by Mr. Vijay on 1st
August, 2013 is taxable, as “shares” are included within the
definition of “property”
80,000
Purchase of 120 shares from Mr. Vijay on 10th August 2013
for inadequate consideration would attract the provisions of
56(2)(vii), if the difference between aggregate fair market value
of shares and actual consideration exceeds INR 50,000. Since,
the difference between Fair Market value and consideration is
INR 60,000 (i.e. INR 80,000 – INR 20,000) i.e. it exceeds INR 50,000,
the difference is chargeable to tax in her hands.
60,000
Purchase of land for inadequate consideration on 12.10.2013
would attract the provisions of section 56(2)(vii), if the
difference between stamp duty value and actual consideration
exceeds INR 50,000. Since the difference between Stamp Duty
Value and Consideration is INR 1,50,000 (i.e.,INR 5,00,000 - INR
3,50,000 ), it is chargeable to tax. Sister’s Mother-in-law is
not a relative within the meaning of section 56(2)(vii).
Income from other sources
150,000
3,44,000
Computation of “Capital Gains” of Ms. Remya for the A.Y.2014-15
Particulars
INR
120,000
Sale Consideration (23.03.2014)
Less: Cost of acquisition [deemed to be the fair market value
80,000
charged to tax under section 56(2)(vii)]
Short-term capital gains
PRIME/39TH ME/FINAL
40,000
11
b) An assessee shall be allowed deduction under section 91 provided all the following conditions are
fulfilled:(i) The assessee is a resident in India during the relevant previous year.
(ii) The income accrues or arises to him outside India during that previous year.
(iii) Such income is not deemed to accrue or arise in India during the previous year.
(iv) The income in question has been subjected to income-tax in the foreign country in the
hands of the assessee and the assessee has paid tax on such income in the foreign
country.
(v) There is no agreement under section 90 for the relief or avoidance of double taxation
between India and the other country where the income has accrued or arisen.
In view of the aforesaid provisions, deduction under section 91 will be calculated as follows:
Particulars
INR
INR
510,000
Indian Income
Foreign Income
110,000
Gross Total Income
620,000
Deduction under section 80C
PPF Contribution
Approved LIC pension fund
70,000
32,000
(Deduction u/s80C restricted to INR100,000)
Eligible amount
100,000
Deduction under section 80D
Contribution to central government health scheme for self
Medical insurance premium of father being a senior
Citizen
(Deduction u/s80D restricted to INR20,000 for senior citizen who
are 60 years or more)
18,000
21,000
39,000
38,000
Eligible amount
Less: Deduction under Chapter VI-A
(138,000)
Total Income
Tax on total income @10% on INR2,82,000 (INR4,82,0002,00,000)
Less: Rebate under section 87A
Tax payable
Add: Education cess @ 2%
Secondary and higher education cess @ 1%
Average rate of tax in India [i.e. INR26,986/INR4,82,000 x
100]
Average rate of tax in foreign country
[i.e. INR11,000/ INR110,000 x 100]
Doubly taxed income Rebate under section 91 on INR110,000
@5.60%
PRIME/39TH ME/FINAL
102,000
12
4,82,000
28,200
(2,000)
26,200
524
262
26,986
5.60%
10.00%
6,160
(lower of average Indian tax rate and foreign tax rate]
Tax payable in India [INR26,986 – INR6,160]
20,826
7 a)
(i)
There is no tax liability in the hands of PLtd. as the payment is on capital account. Also, any
payment made by a company on purchase of its own shares in accordance with section 77A of
the Companies Act, 1956 will not constitute dividend under section 2(22). Hence, there is no
liability on the part of P Ltd. to pay dividend distribution tax, assuming that the purchase of
shares is in accordance with section 77A of the Companies Act, 1956. However, capital gains tax
liability would be attracted in the hands of the shareholders under section 46A and the
difference between the value of consideration received by the shareholders and the cost of
acquisition shall be deemed to be the capital gains arising to the shareholders in the year of
purchase of shares by the company.
(ii) As per section 28, any sum received under an agreement for not carrying out any activity in
relation to any business (i.e., non-compete fee) is chargeable to income-tax under the head
“Profits and gains of business or profession”. Accordingly, INR10 lakhs received by Sharp Ltd.
from Kant Ltd. for agreeing not to carry on any business relating to computer software in India
for the next three years is chargeable to income-tax under the head “Profits and gains of
business or profession”.
(iii) Excise duty liability arises at the time of manufacture of goods and therefore, the same has to
be included in the value of closing stock as per section 145A. Therefore, the closing stock has to
be valued at INR 56 lakhs (i.e., including excise duty payable of INR 6 lakhs). As per section 43B,
deduction can be claimed for INR 4 lakhs, being excise duty paid on or before the due date of
filing the return.
(iv) A foreign agent of an Indian exporter operates in his own country and no part of his income
accrues or arises in India. His commission is usually remitted directly to him and is, therefore,
not received by him or on his behalf in India. The commission paid to the non-resident agent for
services rendered outside India is, thus, not chargeable to tax in India. Since commission
income for booking orders by non-resident who remains outside India is not subject to tax in
India, consequently, disallowance under section 40(a)(i) is not attracted in respect of payment
of commission to such non-resident outside India even though tax has not been deducted at
source. If the amount of INR 50 lakhs was remitted to Mr. Rodrigues outside India in foreign
currency, then disallowance under section 40(a)(i) would not be attracted for non-deduction of
tax at source. However, since the question states that Prem Ltd. paid INR 50 lakhs as sales
commission, it is possible to infer that the payment is made in India (as it is made in Indian
currency), in which case, the income would be taxable in the hands of the nonresident.
Consequently, disallowance under section 40(a)(i) for non-deduction of tax at source would be
attracted.
b)
Yes, the assessee is entitled to raise additional claims before the appellate authorities.The
restriction that an additional claim has to be made by filing a revised return applies only in
respect of a claims made before the Assessing Officer. An assessee cannot make a claim
before the Assessing Officer otherwise than by filing a revised return. It was so held by the
Supreme Court in Goetze (India) Ltd v. CIT (2006) 157 Taxman 1. However, this restriction
does not apply to an additional claim made before an appellate authority. The appellate
authorities have jurisdiction to permit additional claims before them, though, the exercise of
such jurisdiction is entirely the authorities’ discretion. It was so held by the Bombay High
Court in CIT v. Pruthvi Brokers & Shareholders (2012) 208 Taxman 498. Thus, an additional
claim can be raised before the Appellate Authority even if no revised return is filed.
PRIME/39TH ME/FINAL
13
ITS
No. of Pages: 4
Total Marks: 100
No of Questions: 7
Times Allowed: 3 Hrs
Wherever appropriate suitable assumption (s) should be made and indicated in the answer by the
Candidate
Working notes should form part of the answer
Question 1 is compulsory.
Answer any five questions from the remaining six questions.
1) Comment all the following Questions
a) Big Agro Handlers’ furnishes the following details with respect to the activities undertaken by them
in the month of June, 2013:
Sl. No.
Particulars
Amount (`)
(i)
Supply of farm labour
58,000
(ii)
Warehousing of biscuits
1,65,000
(iii)
Sale of rice on commission basis
68,000
(iv)
Training of farmers on use of new pesticides and
10,000
fertilizers developed through scientific research
(v)
Renting of vacant land to a stud farm
1,31,500
(vi)
Testing undertaken for soil of a farm land
1,21,500
(vii)
Leasing of vacant land to a poultry farm
83,500
Compute the service tax liability of ‘Big Agro Handlers’ for the month of June, 2013. Assume that
the point of taxation in respect of all the activities mentioned above falls in the month of June,
2013 itself.
‘Big Agro Handlers’ has paid service tax of ` 6,18,000 during the Financial Year 2012-13.
b) Pappu private limited is engaged in providing the taxable services. Compute the value of taxable
service and the service tax payable by it in the month of march 2014, from the following
information.
`
Particulars
(i)
Free services provided to friend of director(similar services _
are rendered for consideration of ` 1,00,000)
(ii)
Subsidy received from government for making investment in 1,00,000
backward area
(iii)
Interest received from client who has not made timely 2,00,000
payment of service
(iv)
For free services rendered to customers, amount 50,000
reimbursed by the manufacturer of such product
(v)
Other taxable service provided during the month
15,00,000
Note: Pappu private limited is eligible for notification No. 33/2012-ST, Dated 20/06/2012.
c) MNO & Co. is the small scale unit located in a rural area and is availing the benefit of small scale
exemption under Notification No.8/2003-CE during the year 2011-12. You are required to
determine the value of the first clearance of the unit and duty liability on the basis of particulars
given below:
Particulars
(i) Total value of clearances of goods with own brand name:
(ii) Total value of clearance of goods with brand name of other
parties:
(iii) Clearances of goods which are totally exempt under another
notification (other than an exemption based on quantity or
PRIME/ME39/FINAL
1
Amount `
50,00,000
1,00,00,000
45,00,000
value of clearances)
Rate of excise duty – 12% plus education cess as applicable.
Assume that the unit is eligible for exemption under Notification No. 8/2003.
(Make suitable assumptions where required and show the calculations with appropriate notes)
d) Compute export duty from the following data:
(i)
FOB price of goods: US $ 1,00,000.
(ii) Shipping bill presented electronically on 26-02-2013.
(iii) Proper officer passed order permitting clearance and loading of goods for export on 04-032013.
(iv) Rate of exchange and rate of export duty are as under:
Rate
of
Rate of Export
Exchan
Duty
ge
On 26-02-2013
1 US $ = `55
10%
On 04-03-2013
1 US $ = `56
8%
(v) Rate of exchange is notified for export by Central Board of Excise and Customs.
(Make suitable assumptions wherever required and show the workings.)
e) KSP Ltd purchased a Pollution Control Equipment for `15,14,240 which is inclusive excise duty at
16% plus education cess 2% plus secondary and higher education cess 1%. The equipment was
purchased on 1-9-2010 and was disposed of as second hand equipment on 10-10-2012 for a price
of `12,00,000. The excise duty rate on the date of disposal was 12% plus education cess @ 2% plus
secondary and higher education cess 1%.
i. You are required to calculate the amount of CENVAT credit allowable for the financial year
2010-11 and 2011-12.
ii. What is the amount payable towards CENVAT credit already availed at the time of disposal
of the equipment in the F.Y. 2012-13? (Make suitable assumptions where required and
show the working and explanation wherever required)
(5 x 5 = 25 Marks)
2)
a) Comment on the applicability of service tax in case of vocational educational courses (VEC) run by
the following institutes during the month of February, 2013 and June, 2013:
i.
‘Udaan’ an industrial training institute (ITI) affiliated to the National Council for Vocational
Training (NCVT)
ii.
‘A-Star’ a vocational education provider affiliated to Sector Skill Council formed under
National Skill Development Corporation (NSDC)
iii.
‘Best Skill Centre’ an industrial training centre (ITC) affiliated to the State Council for
Vocational Training, Delhi
iv.
‘Horizon’, an institute, registered with Directorate General of Employment and Training
(DGET), Union Ministry of Labour and Employment, running a Modular Employable Skill
Course (MESC) approved by the National Council of Vocational Training.
The courses offered in point (a), (b) and (c) are in designated trades notified under the
Apprentices Act, 1961.
(3 Marks)
b) What are the powers of the Tribunal (CESTAT) to grant extension of stay u/s 35C (2A) of the Central
Excise Act, 1944?
(3 Marks)
c) How can a decision, order, summon or notice be served to the intended person u/s 37C(1)(a) of the
Central Excise Act, 1944?.
(3 Marks)
d) State whether following activities undertaken by M & M Manufacturers of Chandigarh would be
liable to service tax during April, 2013 and June, 2013:
(i)
Manufacture of herbal cosmetics liable to excise duty under the Central Excise Act, 1944
PRIME/ME39/FINAL
2
(ii)
(iii)
e)
3)
a)
b)
c)
4)
Manufacture of alcoholic drinks liable to excise duty under the Punjab Excise Act, 1914
Processing of raw materials to make them fit for further production. The process is not
liable to any excise duty
(iv) Manufacture of medicines liable to excise duty under the Medicinal and Toilet
Preparations (Excise Duties) Act, 1955
(3 Marks)
With reference to section 61 of the Customs Act, 1962, comment on the validity of the following
Statement:
i. Goods, other than capital goods, intended for use in any hundred per cent export oriented
undertaking, can be warehoused till the expiry of five years
(3 Marks)
Clarification on implementation of decision of Supreme Court in case of goods sold at a price below
the cost.
(5 Marks)
Can customs duty be demanded under section 28 and/or section 125(2) of the Customs Act, 1962
from a person dealing in smuggled goods when no such goods are seized from him?
(5 Marks)
How will a cream which is available across the counters as also on prescription of dermatologists for
treating dry skin conditions be classified if it has subsidiary pharmaceutical contents - as medicament
or as cosmetics?
(5 Marks)
a) M/s. MS Ltd., Chennai is an authorized money changer registered under FEMA, 1999. It has
entered the following transaction of money changing during the financial year:
a. 600 transaction of conversion of dollar into Indian rupees of ` 20,000/- per transaction;
b. 500 transactions of conversion of Dollar into INR ` 1 lakhs (per transaction)
c. 200 transactions of conversion of INR in Dollar of ` 5 lakhs per transaction
d. 100 transactions of conversion of euro into Indian Rupee of ` 500 lakhs per transaction;
e. 300 transactions of conversion of dollar into Euro of ` 100 lakh per transaction.
Compute the service tax payable thereon as per rule 6(7B) of Service tax rule, 1994.
b) Whether interest is liable to be paid on delayed refund of special CVD arising in pursuance of the
exemption granted vide Notification No. 102/2007 Cus dated 14.09.2007?
(5 Marks)
c) Can CENVAT credit be availed on machineries purchased for being used in setting up a sugar plant in
foreign country when (i) the same are not used in the factory premises and (ii) no duty is paid on
final product viz., the sugar plant?
(5 Marks)
5) a) Comment on the following:i. CBEC has been empowered to permit landing of vessels and aircrafts at any place other than
customs port or customs airport.
ii. Electronic filing of import/export manifest has been made mandatory except in cases allowed by
Commissioner of Customs.
iii. Period of storage without warehousing is restricted to 30 days. Commissioner may extend it
further by 30 days.
(3 Marks)
b) Explain briefly whether “assembly” would tantamount to ‘manufacture’ under the Central Excise Act,
1944.
(3 Marks)
c) Offence punishable U/s.89 categories those offence whether cognizable / Non-cognizable? (3 Marks)
d) Mohan Ltd provides works contract service. It opted for Rule 2A(ii) of service tax (determination of
value) Rules, 2006.
(i) Compute the value of taxable service
(4 Marks)
(ii) Compute the amount of service tax payable after adjustment of cenvat credit. (2 Marks)
Following are the information provided:
(` in Lakhs)
Particulars
Glaxing, plastering the floor and wall tiling
20
Annual maintenance contract of cars
10
Installation of AC, lifts and escalators
40
PRIME/ME39/FINAL
3
Erection of fire proofing system in airport
Repair and maintenance of building
Installation of mechanized food grain handling system
Construction of offices for Sales tax department
Construction of road on sub-contract basis L & T(main contractor) who is
engaged in construction of road for use by general public
Construction of commercial building(FMV of goods supplied by recipient of ` 5
lakhs and no amount was charged for it)
Repair and maintenance of Airport
Other information
i)
Excise duty paid on capital goods used for providing all these
services
ii)
Excise duty paid on inputs used for providing these services
iii)
Received architect services in relation to construction of offices for
sales tax department
iv)
Received services of subcontractor for construction of offices for
sales tax department
v)
Received services of subcontractor for construction of commercial
building
6)
70
25
7
35
15
30
20
2
11
2
10
3
a) Service tax leviable on the activity by way of erection of pandal or shamiana
(6 Marks)
b) Briefly explain the situations where transaction value u/s.4 of the Central Excise Act, 1944 does not
apply.
(3 Marks)
c) Write short notes on Service tax Voluntary compliance Encouragement scheme.
(3 Marks)
d) Mention whether the following services by way of transportation by rail or a vessel from one place
in
India to another are chargeable o service tax with respect to entry 20 of notification No. 25/2012
i. Petroleum and petroleum products falling under chapter heading 2710 and 2711 of the first
schedule to the central excise tariff act, 1985,
ii. Relief material meant for victims of natural or man-made disasters, calamities, accidents or
mishaps;
iii. Defence or military equipments;
iv. Postal mail or mail bags AND
v. House hold effects.
(3 Marks)
7)
a) Which are the different types of bonds in vogue and executed for various purposes under Central
Excise Act, 1944?
(6 Marks)
b) (i) On the basis of following information, determine the 'Point of Taxation' as per Rule 3of Point of
Taxation Rules, 2011:(1) Commencement of providing of service on
05-06-2013
(2) Completion of service on
10-10-2013
(3) Invoice issued on
20-10-2013
(4) Payment received by cheque and entered in the books on 15-10-2013
(5) Amount credited in bank A/c on
25-10-2013
(6) Service became taxable for the first time on
01-07-2013
(3 Marks)
ii) Write short notes on abatement have been provided in respect of transportation of passengers
(entry 5/3 of Notification No. 26/2012-ST dated 20-06-2012
(3 Marks)
c) Explain briefly the meaning of entry inward and entry outward in the customs law.
(3 Marks)
PRIME/ME39/FINAL
4
PRIME ACADEMY
38th SESSION MODEL EXAM - FINAL – INDIRECT TAXES
SUGGESTED ANSWERS
1)
a)
Computation of service tax payable by Big Agro Handlers for June, 2013
Sl. No. Particulars
Amount (`)
(i)
Supply of farm labour [Note 1]
(ii)
Warehousing of biscuits [Note 3]
1,65,000
(iii)
Sale of rice on commission basis [Note 1]
(iv)
Training of farmers on use of new pesticides and fertilizers
developed through scientific research [Note 1]
(v)
Renting of vacant land to a stud farm [Note 2]
1,31,500
(vi)
Testing undertaken for soil of a farm land [Note 1]
(vii)
Leasing of vacant land to a poultry farm [Note 2]
Total
2,96,500
Service tax @ 12.36% (rounded off)
36,586
Notes:
1) Clause (d) of negative list of services [section 66D] covers ‘services relating to agriculture or
agricultural produce by way of inter alia –
a) supply of farm labour
b) services provided by a commission agent for sale or purchase of agricultural produce
c) agricultural extension services. Agriculture extension means application of scientific
research and knowledge to agricultural practices through farmer education or training.
d) agricultural operations directly related to production of any agricultural produce
including testing.
2) Services relating to agriculture or agricultural produce by way of renting or leasing of vacant
land are covered under clause (d) of section 66D. Agriculture means the cultivation of plants
and rearing of all life-forms of animals, except the rearing of horses, for food, fibre, fuel, raw
material or other similar products. Thus, leasing of vacant land to a poultry farm will be
included in the negative list but renting of vacant land to a stud farm will be outside the
purview of negative list.
3) Loading, unloading, packing, storage or warehousing of agricultural produce is covered
under clause (d) of Section 66D. However, agricultural produce means any produce of
agriculture on which either no further processing is done or such processing is done as is
usually done by a cultivator or producer which does not alter its essential characteristics but
makes it marketable for primary market. Thus, warehousing of biscuit will be taxable as
biscuit is not an agricultural produce.
4) As Big Agro Handler has paid service tax of `6,18,000 during the FY 2012-13, it is not eligible
to small service providers exemption provided under Notification No. 33/2012 ST dated
20.06.2012 in the FY 2013-14.
b) Computation of the value of taxable service and the service tax payable:
Particulars
Ref
Free service provided to friend of director
(W.N. 1)
Subsidy received from government for making (W.N.2)
investment in backward area
Interest received from client who has not made timely (W.N.3)
payment of service
For services rendered to customers, amount (W.N.4)
PRIME/ME39/FINAL
1
Amount in `
NIL
NIL
NIL
50,000
reimbursed by the manufacturer of such product
Other taxable services provided during the month
15,00,000
Total value of services
15,50,000
Less: Small service provider’s Exemption under notification No.
10,00,000
33/2012-ST, dated 20-06-2012
Total value of taxable services
5,50,000
Service tax @ 12.36%
67,980
Working Notes:
1) Section 67(1)(iii) of the Finance Act, 1994 ensures payment of service tax based on
valuation even when consideration is not ascertainable. However, these provisions apply
only when there is consideration. If there is no consideration i.e., in case of free service,
section 67 cannot apply.
2) As per rule 6 of the service tax (determination of value) rules 2006, any subsidy or grant
disbursed by the government cannot form part of the value of taxable service unless such
subsidy or grant directly influences the value of such service.
3) As per rule 6 of the service tax (determination of value) rules 2006, interest on delayed
payment of any consideration for the provision of services shall not form part of value of
taxable services.
4) Amount received from manufacturer for free services rendered to customers is liable for
service tax. The consideration towards the services may be received from any person, not
necessarily the service receiver.
c)
Sl. No.
(i)
(ii)
(iii)
Particulars
Amount (`)
Clearances of goods with own brand name
50,00,000
Clearances of goods with brand name of other parties [Note 1]
1,00,00,000
Clearances of goods which are exempt under a notification other
_
than exemption based on quantity or value of clearances [Note 2]
Total value of clearances eligible for SSI exemption available
1,50,00,000
under Notification No. 8/2003 CE dated 01.03.2003
Less: SSI exemption [Note 3]
1,50,00,000
Dutiable clearances
Nil
Excise duty payable
Nil
Notes:
As per Notification No. 8/2003 CE dated 01.03.2003 1. Since, MNO & Co. is situated in rural area, clearances of goods with brand name of other parties
would also be eligible for SSI exemption.
2. Clearances of goods which are exempt (other than an exemption based on quantity or value of
clearances) under a notification are not included in the first clearances of `150 lakh.
3. First clearances of `150 lakh are exempt from payment of excise duty under SSI exemption.
d)
Particulars
FOB price of goods [Note 1]
Value in Indian currency (US $ 1,00,000 x ` 55) [Note 2]
Export duty @ 8% [Note 3]
PRIME/ME39/FINAL
2
Amount (US $)
1,00,000
Amount (`)
55,00,000
4,40,000
Notes:
1. As per section 14(1) of the Customs Act, 1962, assessable value of the export goods is the
transaction value of such goods which is the price actually paid or payable for the goods
when sold for export from India for delivery at the time and place of exportation.
2. As per third proviso to section 14(1) of the Customs Act, 1962, assessable value has to be
calculated with reference to the rate of exchange notified by the CBEC on the date of
presentation of shipping bill of export.
3. As per section 16(1)(a) of the Customs Act, 1962, in case of goods entered for export, the
rate of duty prevalent on the date on which the proper officer makes an order permitting
clearance and loading of the goods for exportation, is considered.
e) Computation of amount of CENVAT credit allowable for financial years 2010-11 and 2011-12
Amount (`)
Cum duty price of Pollution Control Equipment
`15,14,240
Rate of excise duty including education cess and secondary
16.48%
and higher education cess
Excise duty paid on equipment =
2,14,240
` 15,14,240 × 16.48 \ 116.48
CENVAT credit allowable on pollution control equipment for
the
Financial Year 2010-11 @ 50% [Note-1]
1,07,120
Financial Year 2011-12 @ 50% [Note 1]
1,07,120
Computation of amount payable towards CENVAT credit on disposal of equipment in the financial
year 2012-13
Amount (`)
Total CENVAT credit availed on the equipment
2,14,240
Less:
(i) First 50% credit = [` 1,07,120 × 2.5%] × 10 quarters (credit
26,780
availed on 01.09.2010)
(ii) Next 50% credit = [`1,07,120 × 2.5%] × 7 quarters (credit
18,746
45,526
availed on 01.04.2011)
Amount payable on disposal of machinery
1,68,714
Duty leviable on transaction value (`12,00,000 x 12.36%)
1,48,320
Amount payable towards CENVAT credit on disposal of
equipment [Note 2]
1,68,714
Notes:
1. Pollution control equipment falls under eligible capital goods and credit upto 50% can only be
taken in the financial year in which the capital goods is received. Balance credit can be taken in
any subsequent financial year. [Clause (a) and (b) of rule 4(2) of the CENVAT Credit Rules, 2004].
2. As per rule 3(5A) of the CENVAT Credit Rules, 2004, if the capital goods, on which CENVAT credit
has been taken, are removed after being used, higher of the following two amounts has to be
paid
(i) an amount equal to the CENVAT credit taken on the said capital goods reduced by 2.5%
calculated by straight line method for each quarter of a year or part thereof from the date
of taking the CENVAT credit OR
(ii) Duty leviable on transaction value.
3. It has been assumed that KSP Ltd. is a manufacturer not eligible for SSI exemption and that the
pollution control equipment has been received in the factory on 1.9.2010.
4. Disposal price of the equipment is assumed to be the transaction value (exclusive of excise duty).
PRIME/ME39/FINAL
3
2) a)
S. No.
1.
2.
3.
4.
Institute/Centre
‘Udaan’ – ITIs affiliated to NCVT are covered under the definition of
approved VEC. Thus, the same are included in the negative list.
‘A-Star’ – With effect from 10.05.2013, institutes affiliated to NSDC
have been removed from the definition of approved VEC vide the
Finance Act, 2013. Thus, the same are outside the purview of
negative list.
‘Best Skill Centre’ – With effect from 10.05.2013, ITCs affiliated to
SCVTs have been included in the definition of approved VEC vide the
Finance Act, 2013. Thus, the same are included in the negative list.
‘Horizon’ – Institutes registered with DGET running MESC approved
by NCVT are covered under the definition of approved VEC. Thus, the
same are included in the negative list.
Taxability
Non-taxable
Taxable
Non-taxable
Non-taxable
b) Finance Act, 2013 has amended third proviso to section 35C(2A) of the Central Excise Act, 1944 to
provide that CESTAT may extend the period of stay, by not more than 185 days:i. on an application made in this behalf by a party and
ii. on being satisfied that the delay in disposing of the appeal is not attributable to such party.
However, if the appeal is not disposed of within the total period of 365 days (180 days plus extended
period of 185 days) from the date of the stay order, the stay order would, on the expiry of 365 days,
stand vacated.
c) As per section 37C(1)(a) of the Central Excise Act, 1944, a decision, order, summon or notice can be
served to the intended person: by tendering or sending by registered post with acknowledgment due or
 by tendering or sending by registered post with acknowledgment due or
 by courier approved by the Central Board of Excise and Customs.
d)
S. No.
(i)
(ii)
(iii)
(iv)
Activity
Manufacture of herbal cosmetics liable to excise duty under the
Central Excise Act, 1944 – covered in the definition of process
amounting to manufacture. Thus, included in the negative list.
Manufacture of alcoholic drinks liable to excise duty under the
Punjab Excise Act, 1914 – covered in the definition of process
amounting to manufacture. Thus, included in the negative list.
Processing of raw materials to make them fit for further
production. The process is not liable to any excise duty.
This will be a service liable to service tax.
Manufacture of medicines liable to excise duty under Medicinal
and Toilet Preparations (Excise Duties) Act, 1955 – The Finance
Act, 2013 has included such manufacture in the definition of
process amounting to manufacture. Thus, with effect from
10.05.2013, such a manufacture is included in the negative list.
June, 2013
Non-taxable
Non-taxable
Taxable
Non-taxable
e) Invalid. As per section 61 of the Customs Act, 1962, warehousing period for goods other than capital
goods intended to be used in 100% EOU is three (3) years and not five (5) years
Circular No. 39/2013 Cus dated 01.10.2013 has clarified that a harmonious reading of section 61 and
section 2(44) of the Customs Act, 1962 indicates that when the goods deposited in a warehouse
remain warehoused beyond a period of 90 days, then the interest starts accruing. In other words,
PRIME/ME39/FINAL
4
the relevant date when the period of 90 days would commence would be the date of depositing the
goods in the warehouse and not the date on which into-bond bill of entry in respect of such goods is
presented.
3) a) In case of M/s Fiat India Ltd. 2012 (283) E.L.T 161 (S.C.) [reported in Select Cases in Direct and
Indirect Tax Laws-An essential reading for Final Course (Relevant for May, 2014 and November, 2014
examination)], SC had held that in case the goods were sold at a price substantially lower than the
cost of the manufacture to achieve market penetration, the transaction value declared under section
4 may be rejected.
CBEC, vide Circular No. 979/03/20014-CX dated 15.01.2014, has clarified that the transaction value
cannot be rejected in every case where the declared value is lower than the manufacturing cost
and profit. Due care will be taken at the level of the Commissioner to see whether the case at
hand is similar to the facts and circumstances of the FIAT case.
Further, extended period of limitation shall apply only if there is a sale in the circumstances
similar to the case of M/s Fiat and yet transaction value of goods is declared as the correct
transaction value after the date of the judgment, ie. 29.08.2012.
b) CCus. v Dinesh Chhajer 2014 (300) E.L.T. 498 (Kar.)
Facts of the case: Department’s investigation revealed that the assessee was dealing in smuggled
goods though no smuggled goods were seized from the assessee. Duty was demanded from the
assessee under section 28 and 125(2) of the Customs Act, 1962.
The Tribunal, when the matter was brought before it, held that duty can be demanded under section
28 only from the person chargeable with duty, who is the importer as defined under section 2(26) of
the Act. Further, it held that if the smuggled goods are seized, confiscated and then an option to pay
fine is given to the person from whose possession the goods were seized or to the owner of the
goods, duty could be demanded from such person under section 125(2) of the Act, apart from fine
and penalty. However, since in the instant case, the assessee was not the importer and goods were
also not confiscated, the demand of duty on the assessee was unsustainable in law. The matter was
then taken before the High Court.
Observations of the Court: The High Court observed as under:
i. Section 28 applies to a case where the goods are imported by an importer and the duty is not
paid in accordance with law, for which a notice of demand is issued on the person. In case of
notice demanding duty under section 125(2), firstly the goods should have been confiscated
and the duty demandable is in addition to the fine payable under section 125(1) in respect of
confiscated goods. Thus, notices issued under sections 28 and 125(2) are not identical and fall
into completely different areas.
ii. The material on record disclosed that the assessee did not import the goods. He was not the
owner of the goods but only a dealer of the smuggled goods and therefore, there was no
obligation cast on him under the Act to pay duty. Thus, the notice issued under section 28 of
the Act to the assessee is unsustainable as he is not the person who is chargeable to duty
under the Act.
iii. Since no goods were seized, there could not be any confiscation and in the absence of a
confiscation, question of payment of duty by the person who is the owner of the goods or
from whose possession the goods are seized, does not arise.
Decision: The High Court held that Tribunal was justified in holding that no duty is leviable
against the assessee as he is neither the importer nor the owner of the goods or was in
possession of any goods.
PRIME/ME39/FINAL
5
(c) CCEx. v. Ciens Laboratories 2013 (295) ELT 3 (SC)
Facts of the case: The assessee manufactured a cream called as ‘Moisturex’ which was
prescribed by dermatologists for treating dry skin conditions. However, the same was also
available in chemist or pharmaceutical shops without prescription of a medical practitioner.
The pharmaceutical content of the cream included urea (10%), lactic acid (10%) and
propylene glycol (10%). The assessee classified the cream as medicament under Heading
30.03 of the Central Excise Tariff.
Point of dispute: The Department contended that the product ‘Moisturex’ is mainly used for
care of the skin and thus, the same ought to be classified as cosmetic or toilet preparations
under Heading 33.04. It was further contended that even if such cosmetic products
contained certain subsidiary pharmaceutical contents or even if they had certain subsidiary
curative or prophylactic value, still, they would be treated as cosmetics only. It was also
contended that since the product can be purchased without prescription of a medical
practitioner, it could not be a medicament.
The assessee on the other hand contended that the very presence of pharmaceutical
substances changes the identity of the product since such constituents are not used for care
of the skin, but for cure of certain diseases relating to skin.
Observations of the Court: The Apex Court observed that the cream was not primarily intended
to protect the skin but was meant for treating or curing dry skin conditions of the human skin.
The Apex Court stated that presence of pharmaceutical ingredients in the cream show that it is
used for prophylactic and therapeutic purposes.
The Supreme Court made the following further significant observations:
i. When a product contains pharmaceutical ingredients that have therapeutic or
prophylactic or curative properties, the proportion of such ingredients is not invariably the
decisive factor in classification. The relevant factor is the curative attributes of such
ingredients that render the product a medicament and not a cosmetic.
ii. Though a product is sold without a prescription of a medical practitioner, it does not lead
to the immediate conclusion that all products that are sold over / across the counter are
cosmetics. There are several products that are sold over-the-counter and are yet,
medicaments.
iii. Prior to adjudicating upon whether a product is a medicament or not, it ought to be seen
as to how do the people who actually use the product, understand it to be. If a product's
primary function is "care” and not "cure”, it is not a medicament. Medicinal products are
used to treat or cure some medical condition whereas cosmetic products are used in
enhancing or improving a person's appearance or beauty.
iv. A product that is used mainly in curing or treating ailments or diseases and contains
curative ingredients, even in small quantities, is to be treated as a medicament.
Decision: The Supreme Court held that owing to the pharmaceutical constituents present
in the cream ‘Moisturex’ and its use for the cure of certain skin diseases, the same would
be classifiable as a medicament under Heading 30.03.
Note: The classification discussed in the above-mentioned case relates to the old Central
Excise Tariff. However, the ratio of the judgment will hold good under the current Central
Excise Tariff as well.
4) (a) Computation of Service tax payable.
600 transaction of conversion of dollar
into Indian rupees of ` 20,000/- per
transaction;
500 transactions of conversion of Dollar
into INR ` 1 lakhs (per transaction)
200 transactions of conversion of INRin
PRIME/ME39/FINAL
(600*` 30)(i.e. ` 20000*.12% subject to
minimum of ` 30
18,000
(1lac* 0.12%)*500
60,000
{120+(4lacs*0.06%)}*200
72,000
6
Dollar of ` 5 lakhs per transaction
100 transactions of conversion of euro {100*[(660+490lacs*0.012%}subject to
into Indian Rupee of ` 500 lakhs per maximum of ` 6,000/transaction;
300 transactions of conversion of dollar [660+{90lacs*0.012%}]*300
into Euro of ` 100 lakh per transaction.
SERVICE TAX
Add:
EC & SHEC
TOTAL TAX
6,00,000
5,22,000
12,72,000
38,160
13,10,160
(b) KSJ Metal Impex (P) Ltd. v. Under Secretary (Cus.) M.F. (D.R.) 2013 (294) ELT 211 (Mad.)
Facts of the case: Section 3(5) of the Customs Tariff Act, 1975 (CETA) provides for levy of special
additional duty (special CVD) in addition to duty leviable under section 3(1) of the CETA to
counterbalance sales tax, value added tax, local tax or any other charges. Notification No.
102/2007 Cus dated 14.09.2007, issued under section 25(1) of the Customs Act, 1962, grants
exemption in respect of such special CVD subject to certain conditions. The exemption under the
said notification is being granted by way of refund of the special CVD. In other words, exemption is
not given ab initio but duty has to be paid first and thereafter, refund for the same needs to be
claimed.
The assessee paid the special CVD and applied for the refund of the same under section 27 of the
Customs Act, 1962 along with interest in pursuance of the above-mentioned notification. The
Department, however, rejected the assessee’s claim for the interest in view of paragraph 4.3 of
CBEC Circular No. 6/2008 Cus. dated 28.04.2008 which stipulated that interest could not be
granted as Notification No. 102/2007-Cus. did not have any specific provision for payment of the
same on refund of duty. The Department was of the view that since such refund of special CVD
was an automatic refund by virtue of Notification No. 102/2007 Cus, it could not be considered as
a refund under section 27 of the Customs Act, 1962 so as to claim interest under section 27A of
the Customs Act, 1962.
Observations of the Court: The High Court was of the view that paragraph 4.3 of Circular No.
6/2008 Cus was totally inconsistent with the provisions of the Customs Act, 1962 and the CETA.
The High Court observed that grant of exemption under section 25(1) of the Customs Act, 1962 is
an independent exercise of power by the Central Government. Notification No. 102/2007 Cus.,
issued in exercise of such powers, provides exemption by way of refund of special CVD and
imposes certain conditions for seeking refund. However, the procedure for such refund will be
governed in terms of section 3(8) of the CETA. Therefore, provisions of section 27 of the Customs
Act, 1962 in relation to refund of duty [made applicable to refund of special CVD vide section 3(8)
of CETA] would be applicable to such refund of special CVD also.
The High Court further stated that a conjoint reading of section 25(1) and section 27 of the
Customs Act makes it clear that the refund application of special CVD should only be filed in
accordance with the procedure specified under section 27 of the Customs Act, 1962 and that there
is no method prescribed under section 25 of the Customs Act, 1962 to file an application for
refund of duty or interest.
Decision: The High Court, therefore, held that :
(i) It would be a misconception of the provisions of the Customs Act, 1962 to state that notification
issued under section 25 of the Customs Act, 1962 does not have any specific provision for interest
on delayed payment of refund.
(ii) When section 27 of the Customs Act, 1962 provides for refund of duty and section 27A of the
Customs Act, 1962 provides for interest on delayed refunds, the Department cannot override the
PRIME/ME39/FINAL
7
said provisions by a Circular and deny the right which is granted by the provisions of the Customs
Act, 1962 and CETA.
(iii) Paragraph 4.3 of the Circular No. 6/2008 Cus. dated 28.04.2008 being contrary to the statute
has to be struck down as bad.
Note: This case clarifies that refund of special CVD arising as a result of exemption granted by way
of exemption notification is governed under section 27 of the Customs Act, 1962 and thus, the
provisions relating to payment of interest on delayed refund of duty as contained in section 27A of
the Customs Act also become applicable in respect of delayed refunds of special CVD which is
granted to give effect to the exemption contained in an exemption notification. Thus, it appears
that the provisions applicable to normal refunds of duty/tax may apply to refunds of duty/tax
arising as a result of exemption granted by way of exemption notifications as well.
c) KCP Ltd. v. CCEx. 2013 (295) ELT 353 (SC)
Facts of the case: The assessee was a manufacturer of machinery for sugar and cement plants and
parts thereof falling under Chapter 84 of the Central Excise Act, 1944. It entered into a contract for
setting up a sugar manufacturing plant in Vietnam. For this purpose, the assessee manufactured
certain machines in its own factory and also purchased certain other machinery from other
dealers/manufacture` Both the machineries (manufactured and bought-out) were then put in a
container and transported to Vietnam for setting up the sugar plant.
Point of dispute: The assessee availed CENVAT credit on bought-out machinery describing them as
eligible capital goods. The Department, however, contended that the bought-out machinery was
not eligible capital goods as the same had not been used by the assessee in its factory premises.
Observations of the Court: The Supreme Court observed that the objective of the scheme of
CENVAT credit is to remove cascading effect of duty imposed on the final product. There are two
basic conditions for availing CENVAT credit:
(i) Duty must have been paid on inputs and such inputs must be used in manufacture of final
product in the factory of the manufacturer,
(ii) Excise duty must have been levied on final product.
The Supreme Court explained that if duty is not levied on the final product, question of grant of
any relief would not arise as in that case there would not be any cascading effect on the duty
imposed on inputs.
The Supreme Court pointed out that since the sugar plant was set up in Vietnam, it could not be
said that the plant was manufactured in the factory of the assessee. Thus, no duty was paid by the
assessee on the final product i.e., on sugar plant which had been set up in Vietnam. Therefore,
there would not be any question of availing credit of the duty paid on the inputs.
The Supreme Court further observed that the bought-out machinery was not used by the assessee
in the manufacture of the machinery (which had been transported along with bought-out
machinery to Vietnam for setting up the sugar plant) as the same was not even unpacked or
tested, and transported in exact condition along with machinery manufactured by the assessee.
The assessee, therefore, merely acted as a trader or as an exporter in relation to the machinery
purchased by it, which had been exported and used for setting up a sugar plant in a foreign
country.
Decision: The Supreme Court held that CENVAT credit could not be allowed to the assessee as no
duty was paid on sugar plant set up in a foreign country. Further, since the bought-out machinery
was not used in the assessee’s factory premises, the necessary condition for availing CENVAT
credit on capital goods could not be fulfilled.
Note: Although the above-mentioned case is based on old MODVAT provisions, the principle
enunciated therein will hold good in context of CENVAT Credit Rules, 2004 also. For the sake of
simplicity and better understanding, the term MODVAT has been referred to as CENVAT wherever
applicable.
PRIME/ME39/FINAL
8
5) a)
i. True : According to Section 29(1) of the Customs Act, CBEC has been empowered to permit
landing of vessels and aircrafts at any place other than customs port or customs airport
ii. True: According to Section 30(1) and 40(1) of the customs act, Electronic filing of
import/export manifest has been made mandatory except in cases allowed by
Commissioner of Customs
iii. True: According to section 49 of the customs act, period of shortage without warehousing is
restricted to 30 days. Commissioner may extend it further by 30 days.
b) Assembly is a process of putting together a number of items or their parts to make a product. All
cases of assembly may not amount to manufacture as an already manufactured item may also be
assembled to put it in a readily usable form.
However, assembly of various parts and components may tantamount to manufacture if a new
product which is movable and marketable emerges out of such assembly. Therefore, if an
“immovable property” emerges after such assembly, it will not be considered as manufacture.
The Apex Court in the case of Narne Tulaman Manufacturers Pvt. Ltd. V CCE 1988 (38) E.L.T. 566
(S.C) held that if the assembly results in new commercial commodity with a distinct name,
character and use, then it would amount to manufacture.
c)
Category
A
B
Offence
Amount involved
Term
of Offence type
imprisonment
(i) upto ` 50 lakh
Upto 1 year
Non cognizable and
bailable offence
First time offence
Above ` 50 Lakhs
Min 6 months - 3 Non cognizable and
years
bailable offence
Second time & The term of imprisionment may extend Non cognizable and
subsequent
to 3 years
bailable offence
offence
(i) upto ` 50 lakh
Upto 1 year
Non cognizable and
bailable offence
First time offence
Above ` 50 Lakhs
Min 6 months - 7 Congizable and non
years
bailable offence
Second time & (i) upto ` 50 lakh
Upto 3 year
Non cognizable and
subsequent
bailable offence
offence
Above ` 50 Lakhs
Upto 7 years
Congizable and non
bailable offence
Category – A Offence:
1. Evasion of payment of service Tax
2. Availment and utilization of CENVAT credit without actual receipt of taxable service
/ excisable goods
3. Maintenance of false books accounts / failure to supply any information / supplying
false information.
Category – B Offence:
1. Non-payment of amount collected as service tax for a period of more than six
months from the due date of payment
PRIME/ME39/FINAL
9
Notes
i)
ii)
iii)
iv)
A cognizable offence is a criminal offence in which the police is empowered to register
an FIR, investigate, and arrest an accused without a court issued warrant.
A bailable offence is a criminal offence in which the accused shall be offered to be
released on suitable bail upon his arrest by the police or the court informing about his
right to be so released.
A non-cognizable offence is an offence in which police can neither register an FIR,
investigate, nor effect arrest without the express permission or directions from the
court.
A non-bailable offence is an offence in which the accused person shall not be
automatically entitled to be released on bail. However, it does not mean that the court
may not order him to be released on a suitable bail - with or without any conditions.
(d) Computation of value of taxable service and service tax thereon- under Rule 2A(ii) of service tax
(Determination of value) Rules, 2006.
`
Particulars
Glaxing, plastering the floor and wall tiling (taxable value of service – 20 Lakhs* 60%)
12,00,000
Annual maintenance contract of cars (taxable value of service – 10 Lakhs* 70%)
7,00,000
Installation of AC, lifts and escalators(taxable value of service – 40 Lakhs * 40%)
16,00,000
Erection of fire proofing system in airport – Exempt under notification 25/2012-st
Exempt
Repair and maintenance of building (taxable value – 25*60%)
15,00,000
Installation of mechanized food grain handling system
Exempt
Construction of offices for Sales tax department
Exempt
Construction of road on sub-contract basis L & T(main contractor) who is engaged in
Exempt
construction of road for use by general public
Construction of commercial building (Taxable value - (30 + 5)*40% )
14,00,000
Repair and maintenance of Airport (Taxable value of service – 20 * 60%)
12,00,000
Value of taxable service
76,00,000
Service tax @12.36%
9,39,360
Less: Cenvat Credit
i)
Duty paid on capital goods (50% of duty is allowed in year of acquisition and
1,00,000
balance in subsequent years)
ii)
Duty paid on inputs – Not allowed
iii)
Service tax paid on architect service – Cenvat credit is not allowed (since
input service is used for providing exempted service)
iv)
Input service of subcontractor – Cenvat credit is not allowed(service tax has
not been paid on this input services as the same is exempt under mega
exemption notification - 25/2012 – ST)
v)
Service tax paid on services of subcontractor (3lakhs * 12.36%)
37,080
NET SERVICE TAX PAYABLE
8,02,280
6) a) Issue: Whether service tax is leviable on the activity of preparation of place for organizing event or
function by way of erection/laying of pandal and shamiana or is it a transaction involving “transfer of
right to use goods” and hence deemed sale?
Clarification: The activity of providing pandal and shamiana along with erection thereof is
generally coupled with other incidental activities like supply of crockery, furniture, sound system,
lighting arrangements, etc. It is a reasonably specialized job and is carried out by the supplier with
the help of his own labour.
For a transaction to be regarded as “transfer of right to use goods”, the transfer has to be
coupled with effective control and possession [Rashtriya Ispat Nigam Ltd.]. Moreover, if pandal
PRIME/ME39/FINAL
10
is given to the customers for use only after having been erected, then it is not transfer of right to
use goods [Harbans Lal vs. State of Haryana].
Applying the ratio of these judgments and the test formulated by SC in case of BSNL v. UOI 2006
(2) S.T.R. 161 (S.C.)[discussed below], CBEC clarified that pandal/shamiana erection activities do
not amount to transfer of right to use goods because effective possession and control over the
pandal or shamiana remains with the service provider, even after the erection is complete and
the specially made–up space for temporary use handed over to the custo`mer. Hence, the
activity by way of erection of pandal or shamiana is a declared service, under section 66E(f).
[Circular No. 168/3/2013-ST dated 15.04.2013]
In order to constitute the transaction for the transfer of the right to use the goods, the
transaction must have the following attributes:a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c. The transferee should have a legal right to use the goods and, consequently, all legal
consequences of such use including any permissions or licenses required therefore
should be available to the transferee;
d. For the period during which the transferee has such legal right, it has to be the
exclusion of the transferor: this is the necessary concomitant or the plain language of
the statute, viz., a “transfer of the right to use” and not merely a license to use the
goods:
Having transferred the right to use the goods during the period for which it is to be transferred,
the owner cannot again transfer the same right to others [BSNL v. UOI 2006 (2) S.T.R. 161 (S.C.)]
b) As per section 4 of the Central Excise Act, 1944, following four conditions are to be fulfilled
individually and cumulatively for valuing excisable goods on the basis of transaction value:
(1) There should be sale of goods.
(2) The goods sold should be for delivery at the time and place of removal.
(3) The assessee and the buyer of the goods should not be related persons.
(4) The price should be sole consideration for the sale.
The transaction value will not apply if any of the above requirements is not fulfilled.
c) An amnesty scheme for service tax assessees known as ‘Service Tax Voluntary Compliance
Encouragement Scheme’ is introduced to encourage the stop filers, non-filers or non-registrants or
who have not disclosed their true liability in the returns filed by them to pay their tax dues without
payment of interest and penalty.
d)
a. Petroleum and petroleum products falling under
chapter heading 2710 and 2711 of the first Omitted from notification w.e.f. 01.04.2013
schedule to the central excise tariff act, 1985,
b.Relief material meant for victims of natural or manExempt under notification
made disasters, calamities, accidents or mishaps;
c. Defence or military equipments;
Exempt under notification
d. Postal mail or mail bags;
Omitted from notification w.e.f. 01.04.2013
e. House hold effects.
Omitted from notification w.e.f. 01.04.2013
7) a) The following types of bonds are presently in vogue:
(i) B-1 Surety/ Security (General Bond) - for export of excisable goods without payment of duty
under rule 19 of Central Excise Rules, 2002.
(ii) B-2 Bond Surety/ Security (General Bond) - for provisional assessment.
PRIME/ME39/FINAL
11
(iii) B-3 Bond (General Bond) - for due dispatch of excisable goods removed for rewarehousing and
export therefrom without payment of duty.
(iv) B-11 Bond - for provisional release of seized goods.
(v) (v) B-17 Bond (General) Surety / Security - composite bond of EPZ/ 100% EOUs for assessment,
export, accounting and disposal of excisable goods obtained free of duty.
(vi) (vi) General Bond with Surety / Security - A manufacturer, who intends to receive goods at
concessional rate of duty under Central Excise (Removal of Goods at Concessional Rate of Duty
for Manufacture of Excisable Goods) Rules, 2001 has to execute a general bond with surety or
security with jurisdictional Assistant Commissioner/Deputy Commissioner.
b) (i) In the given case, since the invoice is issued within the prescribed period of 30 days from the date
of completion of provision of service, the point of taxation, as per rule 3 of the Point of Taxation
Rules, 2011, shall be:
(a)
Date of invoice (i.e. 20.10.2013) (or)
(b)
Date of receipt of payment (i.e. 15.10.2013) [Refer note below] whichever is earlier,
i.e. 15.10.2013
Note: As per rule 2A of the Point of Taxation Rules, 2011, date of payment is:(a)
dates on which the payment is entered in the books of account (i.e 15.10.2013) (or)
(b)
dates on which the payment is credited to the bank account of the person liable to
pay tax (i.e. 25.10.2013)
whichever is earlier, i.e. 15.10.2013.
ii)
Description of taxable service %
of
amount Conditions
charged – Exempt
In respect of transport of 60%
CENVAT credit of duty paid
passengers by air, with or
on inputs and capital goods,
without
accompanied
used for providing the
taxable service has not
belongings(Entry 5)
been taken under the
provisions of the CENVAT
credit rules, 2004. Hence,
Cenvat credit of tax paid on
input services used for
providing
the
taxable
service can be taken.
In respect of transport of 70%
passengers, with or without
accompanied belongings in
rail (Entry 3)
(c)
Entry inwards is a permission granted by the proper officer to a vessel after which the master of the
vessel permits unloading of the imported goods. Such entry inwards is granted only after master of
the vessel delivers import general manifest to the proper officer or the proper officer is satisfied that
there was sufficient cause for not delivering it. Entry inwards, however, is not required for unloading
of baggage accompanying a passenger or a member of the crew, mail bags, animals, perishable
goods and hazardous goods [Section 31 of the Customs Act, 1962].
Entry outwards is a permission granted by the proper officer to a vessel to go on a foreign voyage to
the port of consignment. The master of the vessel permits loading of export goods only after the
proper officer grants entry outwards to the vessel. However, entry outwards is not required for
loading of baggage and mail bags [Section 39 of the Customs Act, 1962].
PRIME/ME39/FINAL
12