PRIME/ME39/FINAL 1

AATNo. of Pages: 5 Total Marks: 100 No of Questions: 7 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 2

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 3

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/ unit (series 1)

Probability Variable cost/unit (series 2)

Probability Sales volume Units (series 3)

Probability

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 40Variable overhead 6 4 10Direct labour : Department Rate/ Hr. D1 ` 1 28hrs 16hrs 30hrs D2 ` 2 5hrs 6hrs 10hrs D3 ` 1 16hrs 8hrs 30hrsCurrent production p.a. 10,000 5,000 6,000Selling price per unit ` 100 136 180Forecast 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 4

Source Bank

Interest rate (%) for projects Max credit (000s) P Q R S T

Private Bank 20 18 18 17 17 Any amount

` Nationalized Bank 16 16 16 15 16 400 Co-operative Bank 15 15 15 13 14 250 Amount required (000s) 200 150 200 125 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 5

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 pre-separation 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 1

PRIME ACADEMY 39th SESSION MODEL EXAM - FINAL – ADVANCED MANAGEMENT ACCOUNTING

SUGGESTED ANSWERS

1 a) Should ABC Road Carriers acquire and install the new system?

` Additional Costs of the new scheduling & tracking system p.a. 1,25,000 Additional Revenue from Improvement in on-time performance 1,80,000 (`9,000 x 10%/0.5%) Contribution from Additional Annual Revenue (45% x ` 1,80,000)… (A) 81,000 Cost Saving in respect of Cartons [(2,500-1,200) x ` 55]… (B) 71,500 Total Benefits (A+B) 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 Dr 3,20,000 To Accounts Payable 3,20,000 For Material Placed into Production: No Entry For Actual Direct Labour Cost: Combined with Overhead For Actual Overhead Cost : Conversion Cost Control Dr 5,00,000 To Payroll 50,000 To Accounts Payable 4,50,00 For Application of Overheads: No Entry For Completion of Units: Finished Goods Dr 7,90,000 To Raw Material in Process A/c 3,20,000 To Conversion Control Account 4,70,000 For Units Sold: Cost of Goods Sold Dr 7,90,000 To Finished Goods 7,90,000 For Recognition of Variance: Cost of Goods Sold Dr 30,000 To Conversion Control Account 30,000

c)

PRIME/ME39/FINAL 2

W X Y ZSales price 56 67 89 96Less: Material 22 31 38 46Variable overhead 12 15 18 15Contribution 7 1 15 11Factor (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) 8,00,000Less: Cost of purchase (2,000 x 200) 4,00,000Variable Cost (2,000 x 150) 3,00,000 7,00,000 1,00,000Company’s total contribution 1,00,000 (b) When component is purchased from Division A by Division B Division A ` ` `Sales (2,000 x 220) 4,40,000Less: Variable cost (2,000 x 190) 3,80,000 60,000Division B Sales (2,000 x 400) 8,00,000Less: Variable cost Purchase cost from Division A (2,000 x 220) 4,40,000Variable cost in Division B (2,000 x 150) 3,00,000 7,40,000 60,000Company’s total contribution 1,20,000Thus, it will be beneficial for the company as a whole to ask Division B to buy the component from Division A.

(

b

ii) Statement Division AContributDivision BSales (2,0Less: VariCost of puDivision BCompany’The comp30,000 aspurchase

(iii) Statemen Division ADivision BSales (2,0Less : variCost of puDivision BCompany’If the comcalculated (iv) Fixatio(a) Whenvariable c(b) If facilVariable COpportunTransfer P(c) If markvariable c

b)

The objecindicate b

t of total cont

A ion from alte

B 00 x 400) able cost urchase (2,00B (2,000 x 150’s total contr

pany’s contribs compared tthe compone

nt of total con

A B 00 x 400) iable cost urchase (2,00B ’s total contr

mponent is pud under (i) ab

on of transfern there are n

ost i.e. `190 ities of Divisio

Cost nity cost Price ket price getsost of `190 p

ctive is minimby M where M

tribution if Div

ernative use o

0 x 400) 0) ibution butions whento when therent from outs

ntribution wh

0 x 185) 3,73,0

ibution urchased by ove. Hence it

r price no alternativeper componeon A can be p

s reduced to `per componen

mization of tM = infinity. A

vision A could

of facilities

43

n component re is inter deside.

hen compone` `

8,00

70,00000,000 6,70

Division B frot will be bene

e uses of proent will be chaput to alterna

`190 ` 15 `205

`185 and thent should be c

time taken. T dummy colu

d be put to al`

8,0

4,00,0003,00,000 7,0

is purchasedepartmental

ent is availabl` `

Nil

0,000

0,000 1,30,01,30,0

om Division Aeficial to buy t

oduction facarged tive uses :

ere is no altercharged.

The combinamn is introdu

lternative use` `

30

00,000

00,000 1,001,30

d from outsidtransfer. Hen

e from outsid

000000A, the contribthe compone

ilities of Divi

rnative use of

ations not avuced in the ab

e : `

0,000

0,0000,000e, shows an

nce, it will be

de at Rs. 185

bution is onlyent from outsi

ision A In su

f facilities of

vailable for above matrix.

increase of Re beneficial t

y ` 1,20,000 aide.

uch a case th

Division A. Th

assignment a

Rs. to

as

he

he

re

3 (a)

)

b)

Selling Pri14 15 16 Variable C(`) 2 3 4 Sales Volu(units) 30000 40000 50000

ice Probab

Cost

ume

bility Cumu0.35 0.50 0.15

0.30 0.50 0.20

0.25 0.40 0.35

lative probab001

00

1

001

bility Rando0.35 0.85 1.00

0.300.80 1.00

0.25 0.65 1.00

m Numbers00 - 3435 - 8485 - 99

00 - 2930 - 79

80 - 99

00 - 3435 - 8485 - 99

PRIME/ME39/FINAL 6

SIMULATION USING 3 SERlES OF 10 RANDOM NUMBERS EACH

Run

Random Number series Price `

Random Number series

Variable cost

Random no

Sales unit

Fixed cost Profit `

1 2 3 4 5 6 7 (2-4)×6-71 82 15 27 2 23 30000 150000 2400002 84 15 26 2 57 40000 150000 3700003 28 14 92 4 99 50000 150000 3500004 82 15 63 3 84 40000 150000 3300005 36 15 83 4 51 40000 150000 2900006 92 16 3 2 29 40000 150000 4100007 73 15 10 2 41 40000 150000 3700008 91 16 39 3 11 30000 150000 2400009 63 15 10 2 66 40000 150000 37000010 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 A

10,000 units B

5,000 units C

6,000 units Total Sales (`) (i) 10,00,000 6,80,000 10,80,000 27,60,000Direct material 2,00,000 3,00,000 2,40,000 7,40,000Direct wages : Dept 1 2,80,000 80,000 1,80,000 5,40,0002 1,00,000 60,000 1,20,000 2,80,0003 1,60,000 40,000 1,80,000 3,80,000Variable overhead 60,000 20,000 60,000 1,40,000Marginal cost (ii) 8,00,000 5,00,000 7,80,000 20,80,000Contribution (i) – (ii) 2,00,000 1,80,000 3,00,000 6,80,000Fixed overhead 4,00,000Net profit 2,80,000

b)

Since theorder B, CTotal houA (10,000B (5,000 xC (6,000 xTotal hou ReallocatiProduct B A C #balancinii. StatemUnits Sales Marginal ContributFixed costNet profit

Total amomade balas under:

MargiContrContrRanki

key factor iC and A, as rars available in

0 x 5) x 6) x 10) rs

ion on Hrs. avUnits Hrs.7,000 9,000 1,600

g figure ent of profit a

A 1,601,6

costs 1,2ion 3t t

ount requiredanced by put

inal cost (per ibution (per uibution (per hng

s labour hounked above. n Dept. 2 on t

50,000 30,000 60,000 1,40,000

vailable in De per unit To

6 10

5

as per revised00 ` B 7,0

60,000 9,58,000 7,02,000 2,5

d as loan = `tting 100 aga

unit) unit) hour of Dept

urs, productio

the basis of c

pt. 2 otal hours

42,00090,0008,000#

1,40,000

d programme000 ` C 9,052,000 16,200,000 11,752,000 4,5

`750 (000s). inst the Priva

80 10020 36

2) 4 6III I

on hours sho

urrent produ

e 000 ` Tota20,000 2770,000 1950,000 7

43

The private ate bank. Init

0 130 6 50 6 5

II

ould be appli

ction

al ` 7,32,0009,98,0007,34,0004,00,000334,000

Bank can givtial Basic feas

ed for the p

ve any amounsible solution

products in th

nt. The date is determine

he

is ed

5 a)

The abovezeroes an

)

A. OH RecTotal OH =Total MacOH Recov B. Cost St

e solution is d so the solu

covery Rate u= `63,000 + `chine Hours =very Rate = To

tatement und

optimal sincetion is not un

under Absorp`20,000 + `15= (720 x 4) + (6otal OH � Tota

der Absorptio

e all elementnique. There a

ption Costing5,000 + `10,0600 x 3) + (48al Machine H

on Costing

ts in NET are are four alter

000 + `2,592 =80 x 2) + (504 ours = `1,10,

non- negativnate solution

= `1,10,592 x 1) = 6,144

,592 / 6,144 =

ve. However ns.

machine hou= `18 per hou

there are fou

rs. ur.

ur

Mac

Oru2

OP42

Machine Operctivities in the

One productiouns, Product 1 runs. Total

One Batch Ordroduct B = 602 batches, To

ration and Me ratio 4:3:2 i

on run = 24 unB = 600 / 24 = 96 runs.

der = 12 units00 / 12 = 50 botal = 192.

Maintenance i.e. `28,000, `nits. So, the n= 25 runs, Pr

s. So, the no.batches, Prod

Cost of `63`21,000 and `no. of producroduct C = 48

. of batches auct C = 480 /

3,000 is appo` 14,000 tion runs are0 / 24 = 20 ru

are - Product / 12 = 40 batc

ortioned to t

- Product A =uns, Product

A = 720 / 12ches, Product

the first thre

= 720 / 24 = 3D = 504 / 24

2 = 60 batche D = 504 / 12

ee

30 =

es, =

6 a

F. Comis comactivit Produhoursaffect

b)

)

Statepre-se

Cost (100: Cost aTotal Sales Profit

To ascertainare further incrementa

Output (T Incremenprocessin

mments: Themparatively aties and resoucts A and B s per unit aret pricing decis

ment showineparation joi

upto the poi60: 80) or (5:

after separaticosts revenue

t/(Loss)

n optimal conprocessed a

l profit or los

Tons)

tal revenueg

re is a wide da superior murces consumhave been o

e higher thansions in case t

ng profit or lnt costs

int of separa:3:4) ion point

ntribution, firafter separats after furthe

e from fu

difference betmethod of tramed, rather thover- costed u that of Prodthe Company

oss of each

tion in the r

rst, the increion point is

er processing:Prod100 (`)

urther

(`

tween the OHacing OH coshan just the munder Absorpducts C and Dy following Co

product usin

Tot

(`) ratio of 96

401,361,46

10

mental profitto be comp

: duct A

25,00

`500 – `250)

H cost as tracests since it r

machine hourption Costing D. Such unreaost Plus Pricin

ng weights as

al ProduA

(`) 6,000 40

0,000 206,000 606,000 500,000 (10,

t or loss fromuted. The st

Product 60 (`)

00

) × (`800

ed by the tworelates the Os taken. system, sinc

alistic cost trang policy.

s the basis of

uct ProduB (`)

0,000 24,0

0,000 12,00,000 36,00,000 48,0

000) 12,0

m each produatement bel

B P8(

6,000

– `700) ×

o systems. ABOH Costs usin

ce the machinacing may als

f apportionin

ct ProductC (`)

000 32,00

000 8,00000 40,00000 48,00000 8,00

uct, if producow shows th

Product C 80 (`)

12

(`600 –`45

BC ng

ne so

ng

t

00

00000000

cts he

,000

50) ×

PRIME/ME39/FINAL 11

100 60 80Less: Incremental cost 20,000 12,000 8,000Incremental profit (loss) 5,000 (6,000) 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 TotalOutput (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-assembly- M 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

units made per availability constraints

Only M is made 40000 units with the availability constraints and 40000 units of P purchased

Production of final Product BS (units)

20000 40000 20000

Revenue @ ` 3000 per unit

` 600 Lakhs ` 1200 Lakhs ` 600 Lakhs

Less: Direct Material Cost (Other than Spl. St. plates)

For M @ ` 500/unit ` (100) Lakhs ` (200) Lakhs –For P @ ` 500/unit ` (100) Lakhs – Less : Handling Cost @ ` 100 per unit

– ` (40) Lakhs ` (40) Lakhs

Less: Final Assembling cost @ ` 1000/unit

` (200) Lakhs ` (400) Lakhs ` (200) Lakhs

Margin ` 200 Lakhs ` 560 Lakhs ` 360 Lakhs

c)

7 a)

Decision: Buying Prcompany company indirectlygood cust

Statemen

)

Life cycle making a caring fodevelopmoperatingphysical aStages in Introdu

put onsales rlaunchmarket

Growtbecauslower tconsumsupporproducsurpris

Maturideclinihave treplaceThis is periodmeans

rice for Sub-a(Aleena Ltd.

. Therefore, tomer relatio

t of target co

costing is a tproduct, du

r and disposment, productg costs generassets. Product Life Cuction stage – the market arevenue low

hing the prodt acceptance.h Stage – In tse of the cumthan in the emer acceptanrt. But to suct is successfse. ity Stage – Tng percentagtried the proement rate o

usually the over which

s of market se

ssembly – P .,) will not m

any price benship with th

osts

technique whring its econsing of phystion, maintenrated by the

Cycle : There – Research anand its aware and profitsuct will rank . Sales of newthe growth smulative effearlier stage, t

nce in the lauustain growthul, growth us

This stage bege growth raoduct and saof satisfied bu

longest stagesales are ma

egmentation a

could br ` 90make any fina

low ` 900 foe company.

hich takes accnomic life. It sical assets, nance, replace acquisition,

are five distinnd engineerin

eness and accs probably n

high in this pw products usstage productects of introdthe product wunch stage ith, consumer sually acceler

egins after sate the markeales settle auyers. In addie in the cycleaintained depand finding n

00 ( ` 360 Laancial gain a

or P will add

count of the includes the including thement and duse, mainte

nct stages in tng skill leads ceptance are egative. Thephase as critisually rise slowt penetrationductory promwill start to mt now becom

satisfaction rates at some

ales cease toet saturation t a rate govition there we, and most pends upon tew uses for it

kh ÷ 40000) at this price,

to the profit

total cost of costs associ

e feasibility isposal, as w

enance and r

the life cycle to product dminimal. Pro

e skill that isical factor in wly at first.

n into the mamotion, distrimake a profit mes vital or s

must be ene point, often

o rise expone– eventually

verned by pwere no new d

existing prodthe firms abit.

as maximumthough it m

t and help in

owning a phated with acstudies, res

well as supporreplacement

of a product evelopment.

omotional coss exhibited isecuring succ

rket and salebution. Sincecontributionecure wholesured at this

n catching th

entially. The y most potenopulation grdistribution cducts are in tility to stretc

. But, then thay benefit th

maintaining

ysical asset, ocquiring, usinearch, desig

rt, training anof permanen

as follows: The product

sts will be higin testing ancess and initi

es will increase costs will b. Following thsaler / retailes stage. If the innovator b

causes of thntial customeowth and th

channels to fithis stage. Thh the cycle b

he he

a

or g, n,

nd nt

is h,

nd ial

se be he er he by

he ers he ill. he by

PRIME/ME39/FINAL 13

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.

e)) Generallyparticular

(i)

(ii)

(iii)

y three types rly when it is a

Looping: Nis to be stras Cycling

Dangling: Ais called dfault, sinceresult.

When dumerror is cal

of errors in a complicated

Normally in a rictly adherederror

Activity whichangling active the activity

mmy activitielled error of r

logical sequed one. These network, the

d, as this wou

h is not conneity. The situa

y represented

es are inserteredundancy.

encing may aare known as

e arrow pointuld avoid illog

ected to any ation represend by the dang

ed in a netw

arise while drs looping, dants are from le

gical looping.

of the intermnted by the fgling arrow 9

ork diagram

rawing a netngling and redeft to right. TLooping erro

mediate eventfollowing diag

9-11 is undert

unnecessaril

work diagramdundancy. his conventior is also know

ts or end evengram is also taken with n

y, this type o

m,

on wn

nt at

no

of

PRIME/ME39/FINAL 1

ICTNo of Page: 1 Total Marks: 100 No of Questions: 7 Time allowed: 3 Hrs Question no.1 is Compulsory Answer any 5 Qns from the rest

1. a) What is a business contingency? What do you understand by a BCP Process? b) Explain in detail about the need and the contents of a BCP manual c) Explain the term Business Impact Analysis (BIA) d) Explain the objectives of undertaking a BCP maintenance task (4x5=20 Marks)

2.

a) What is Governance of Enterprise IT (GEIT)? List the benefits of GEIT. (6 Marks) b) What is an IT steering committee? List out the key functions of the steering committee.

(6 Marks) c) Explain the following terms in the context of risk management

i. Exposure: ii. Countermeasure: (2 x2 = 4 Marks)

3.

a. What do you understand by a Transaction Processing System? (4 Marks) b. What are the pre-requisites of an effective MIS? (6 Marks) c. Write short notes

i. Voice mail ii. Expert System (2 x 3 = 6 Marks)

4.

a. Write short note on Information Security Policy (6 Marks) b. Distinguish between physical and logical access controls. (6 Marks) c. Explain the impact of Cyber Frauds on Enterprises (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 (6 Marks) b. Explain the following terms

i. Certification Practice Statement ii. Electronic Form

iii. Key pair (3 x 2 = 6 Marks) c. Explain the term “Cloud Computing” (4 Marks)

PRIME/ME39/FINAL 1

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 2

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 3

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 on-line 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-to-date 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 4

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 5

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 6

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 7

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 8

c) i) 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.

ii) 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.

iii) Fieldwork: Gathering evidence by interviewing staff and managers, reviewing documents, and observing processes etc.

iv) 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.

v) Reporting: Reporting to the management is done after analysis of evidence gathered and analyzed

vi) 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 1

DASNo. of Pages: 6 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. 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) 1202 New air conditioners purchase and installed in company’s guest house on

18 Sept 2013 8

3 Purchase of second hand machinery (15% block) on 1 August 2013 for business purpose (the machinery was put to use immediately)

25

4 Purchase used computers (60%) block on 8 January 2014 185 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 637 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 lakhs

Particulars ` in lakhs

Partners’ Capital : Alpha 300 Beta 400 Gamma 200 900

Urban Land 300

Cash credit from bank(Secured by hypothecation of stock and debtors

200 Urban land (construction not allowed) 700

Term loan taken from bank (Secured by charge on gold and silver)

1200 Factory land 200

Creditors 1000 Residential house 300Other 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 300Total 3900 Total 3900

PRIME/ME39/FINAL 2

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 3

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 4

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 of transactions entered into in the PY 2013-14

Declared operating margin

Operating expenses

1 A Limited., an Indian company

Provision of system support services to X Inc. which is a specified foreign company in relation to A limited

INR 600 crores INR 90 crores

INR 450 crores

2 B Limited an Indian company

Provisions of data processing services with the use of information technology to Y Inc., its foreign subsidiary

INR 400 crores INR 62 crores

INR 300 crores

3 C & Co., a partnership firm

Provision of contract R&D Services relation to development of internet technology to XYZ & Co., a foreign firm which holds 12% interest in C& Co,

INR 100 crores INR 20 crores

INR 70 crores

4 D Limited an Indian Company

Provision of contract R&D Services relating to generic pharmaceutical drug to ABC Inc., a foreign company which guarantees 15% of the total borrowing of D limited

INR 50 crores INR 9 crores

INR 30 crores

5 Sole proprietary concern of Mr. E solely engaged in the manufacture and export of automobile transmission and steering parts

100% export of automobile transmission and steering parts to LMN LLP, a foreign LLP controlled by Mr. E jointly with his relatives

INR 12 crores INR 1 crores

INR 10 crores

6 F Limited an Indian company solely engaged in the original manufacture and export of non-core auto components

100% export of non-core auto components to GKG Inc. a foreign company. F limited appoints two thirds of the board of directors of GKG Ind.

INR 12 crores INR 1 crores

INR 10 Crores

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 5

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 6

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 Income-tax 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/39TH ME/FINAL 1

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 - Second hand machinery - New plant and machinery - Air conditioner installed in company’s guest house Computers acquired during the year Less: Asset sold during the year Written down value before charging depreciation Less: Depreciation for the P.Y.2013-14 (See Note 1 below) WDV as on 1.4.2014

25.00

108.00 8.00

(7.00)

254.00 43.95

210.05

18.00 ---

18.00 5.40

12.60 Note 1 : Computation of depreciation for the P.Y.2013-14 Normal depreciation [Under section 32(1)(ii)] Depreciation@30% on computers put to use for less than 180 days (50% of 60% × INR 18crores) Depreciation on plant and machinery (15% block) (INR 63crores × 7.5%) + [(INR 254crores–INR 63crores) × 15%]Additional depreciation [Under section 32(1)(iia)] - New plant and machinery installed on 5 July .2013 (INR45crores × 20%) - on 4.Feb.2014 (INR63crores × 10%) Total depreciation

28.65

9.00

6.30 43.95

5.40

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 acquired and installed during the P.Y.2013-14

16.20

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.2013-14 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 air-conditioners 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 2

Plant, factory shed, Lorry, Inventory & Sundry Debtors E NIL Gold and silver F 1100 Cash at bank G NIL 1950 Less: Term loan towards urban land H 233 Net wealth of the firm 1717

Apportionment of net wealth to partners INR in lakhs

Particulars Alpha Beta Gamma Total Capital 300 400 200 900Other than capital (apportioned as per Profit sharing ratio)

326.80 326.80 163.40 817

Total 626.80 626.80 363.40 1717Share 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 Non-

resident Resident

Share in companies Not an asset N.A N.ACash in hand Nil Not taxable NilFixed Deposit Not an asset Not an

asset Not an asset

Share in the net wealth of the firm 626.80 626.80 363.40Residential house in Nairobi NIL Non-

taxable NIL

Total 626.80 726.80 363.80Less: Debts incurred – loan taken for investment in the firm

30 Nil NIL

Total 596.80 726.80 363.80Exemption u/s5(vi) – Share of residential house of firm

120 120 60

Taxable net wealth of partners 476.80 606.80 303.40Notes:

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 3

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.

i) 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.

j) 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 AY 2014-15

Particulars WN Ref INR Income from Business 1 24,98,300Income from other sources

- Interest on income tax refund 4,570

Gross Total Income 25,02,870Less: Deduction u/s 80GGB Contribution to electoral trust

5 1,02,500

Total Income 24,00,370

Working Note 1: Income from business: Particulars Notes INR INR Net profit as per P&L Account 33,90,000Add: Inadmissible and items considered separately 1. Difference in stock 1 300,000 2. Unaccounted sales 75,000 3. Bonus relating to previous year 3 47,500 4. Repairs to premised included in rent 4 Nil 5. Advertisement in the souvenir issued by a political

party 5 2,500

6. Penalty paid for non-fulfillment of delivery condition of contract of sale

6 Nil

7. Amount spent on a notified scheme meant for uplift of residence of Mid Himalayan Region

7 Nil

8. Amount paid to lawyer being wife od director 8 75,000 9. Contribution to electoral trust 5 100,000 10. Sales tax penalty 9 5,300 11. Interest for delayed deposit of sales tax 9 Nil 12. Deprecation 75,500 13. Interest on loans 10 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 3 7,500

2. Depreciation as per Income tax Act 11 65,000 3. Warehousing charges 12 15,00,000 4. Income tax refund 20,000 15,92,500

Income from Business 24,98,300

PRIME/39TH ME/FINAL 4

Working Notes: 1. Difference in stock valuation:

Particulars INR INR Closing stock as at 31 March 2014 as agreed with Income tax department

12,50,000

Less: Stock as per P&L Account 4,50,000 8,00,000Less: Opening stock as at 1 April 2013 8,75,000 Stock as per P&L Account (3,75,000) 5,00,000Difference 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 5

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 non-resident 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 6

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 re-appreciation 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 7

(ii) information technology enabled services; or (iii) knowledge process outsourcing services; or (iv) contract R & D services wholly or partly relating to software development; or (v) contract R & D services wholly or partly relating to generic pharmaceutical drugs. (vi) 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 8

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 9

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 10

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 non-resident 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) Business income (before deduction under section 10AA) (INR70 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%

90

40 50 15

PRIME/39TH ME/FINAL 11

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) Total income as per the normal provisions Add: Deduction under section 10AA Adjusted total income Tax@18.5% of Adjusted total income Add: Education cess @2% & SHEC @1% Alternate Minimum Tax as per section 115JC

50.0040.0090.0016.65

0.5017.15

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 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” 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. 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).

54,000

80,000

60,000

150,000

Income from other sources 3,44,000 Computation of “Capital Gains” of Ms. Remya for the A.Y.2014-15

Particulars INR Sale Consideration (23.03.2014) Less: Cost of acquisition [deemed to be the fair market valuecharged to tax under section 56(2)(vii)] Short-term capital gains

120,000

80,000

40,000

PRIME/39TH ME/FINAL 12

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 INRIndian Income Foreign Income Gross Total Income Deduction under section 80C PPF Contribution Approved LIC pension fund (Deduction u/s80C restricted to INR100,000) Eligible amount 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) Eligible amount Less: Deduction under Chapter VI-A Total Income Tax on total income @10% on INR2,82,000 (INR4,82,000- 2,00,000) 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%

70,000 32,000

102,000

100,000

18,000 21,000 39,000

38,000

510,000110,000620,000

(138,000)

4,82,00028,200

(2,000)26,200

524262

26,9865.60%

10.00%

6,160

PRIME/39TH ME/FINAL 13

(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/ME39/FINAL 1

ITSNo. 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

fertilizers developed through scientific research 10,000

(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 backward area

1,00,000

(iii) Interest received from client who has not made timely payment of service

2,00,000

(iv) For free services rendered to customers, amount reimbursed by the manufacturer of such product

50,000

(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 Amount ` (i) Total value of clearances of goods with own brand name: 50,00,000 (ii) Total value of clearance of goods with brand name of other

parties: 1,00,00,000

(iii) Clearances of goods which are totally exempt under another notification (other than an exemption based on quantity or

45,00,000

PRIME/ME39/FINAL 2

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 04-03-

2013. (iv) Rate of exchange and rate of export duty are as under:

Rate of Exchange

Rate of Export Duty

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 3

(ii) Manufacture of alcoholic drinks liable to excise duty under the Punjab Excise Act, 1914 (iii) 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) e) 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)

3) a) Clarification on implementation of decision of Supreme Court in case of goods sold at a price below the cost. (5 Marks)

b) 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)

c) 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)

4) 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 4

Erection of fire proofing system in airport 70 Repair and maintenance of building 25 Installation of mechanized food grain handling system 7 Construction of offices for Sales tax department 35 Construction of road on sub-contract basis L & T(main contractor) who is engaged in construction of road for use by general public

15

Construction of commercial building(FMV of goods supplied by recipient of ` 5 lakhs and no amount was charged for it)

30

Repair and maintenance of Airport 20 Other information

i) Excise duty paid on capital goods used for providing all these services

2

ii) Excise duty paid on inputs used for providing these services 11 iii) Received architect services in relation to construction of offices for

sales tax department 2

iv) Received services of subcontractor for construction of offices for sales tax department

10

v) Received services of subcontractor for construction of commercial building

3

6) 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 1

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 Amount in ` Free service provided to friend of director (W.N. 1) NIL Subsidy received from government for making investment in backward area

(W.N.2) NIL

Interest received from client who has not made timely payment of service

(W.N.3) NIL

For services rendered to customers, amount (W.N.4) 50,000

PRIME/ME39/FINAL 2

reimbursed by the manufacturer of such productOther 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. 33/2012-ST, dated 20-06-2012

10,00,000

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. Particulars Amount (`)(i) Clearances of goods with own brand name 50,00,000 (ii) Clearances of goods with brand name of other parties [Note 1] 1,00,00,000 (iii) 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 under Notification No. 8/2003 CE dated 01.03.2003

1,50,00,000

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 Amount (US $) FOB price of goods [Note 1] 1,00,000 Amount (`) Value in Indian currency (US $ 1,00,000 x ` 55) [Note 2] 55,00,000 Export duty @ 8% [Note 3] 4,40,000

PRIME/ME39/FINAL 3

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 and higher education cess

16.48%

Excise duty paid on equipment = ` 15,14,240 × 16.48 \ 116.48

2,14,240

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 2,14,240Less: (i) First 50% credit = [` 1,07,120 × 2.5%] × 10 quarters (credit availed on 01.09.2010) (ii) Next 50% credit = [`1,07,120 × 2.5%] × 7 quarters (credit availed on 01.04.2011)

26,780

18,746 45,526Amount payable on disposal of machinery 1,68,714Duty leviable on transaction value (`12,00,000 x 12.36%) 1,48,320Amount 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 4

2) a) S. No. Institute/Centre Taxability 1. ‘Udaan’ – ITIs affiliated to NCVT are covered under the definition of

approved VEC. Thus, the same are included in the negative list. Non-taxable

2. ‘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.

Taxable

3. ‘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.

Non-taxable

4. ‘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.

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. Activity June, 2013 (i) 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.

Non-taxable

(ii) 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.

Non-taxable

(iii) 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.

Taxable

(iv) 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.

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 5

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 6

(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;

(600*` 30)(i.e. ` 20000*.12% subject to minimum of ` 30

18,000

500 transactions of conversion of Dollar into INR ` 1 lakhs (per transaction)

(1lac* 0.12%)*500 60,000

200 transactions of conversion of INRin {120+(4lacs*0.06%)}*200 72,000

PRIME/ME39/FINAL 7

Dollar of ` 5 lakhs per transaction 100 transactions of conversion of euro into Indian Rupee of ` 500 lakhs per transaction;

{100*[(660+490lacs*0.012%}subject to maximum of ` 6,000/-

6,00,000

300 transactions of conversion of dollar into Euro of ` 100 lakh per transaction.

[660+{90lacs*0.012%}]*300 5,22,000

SERVICE TAX 12,72,000 Add: EC & SHEC 38,160TOTAL TAX 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 8

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 9

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 Offence Amount involved Term of imprisonment

Offence type

A

First time offence

(i) upto ` 50 lakh Upto 1 year Non cognizable and bailable offence

Above ` 50 Lakhs Min 6 months - 3 years

Non cognizable and bailable offence

Second time & subsequent offence

The term of imprisionment may extend to 3 years

Non cognizable and bailable offence

B

First time offence

(i) upto ` 50 lakh Upto 1 year Non cognizable and bailable offence

Above ` 50 Lakhs Min 6 months - 7 years

Congizable and non bailable offence

Second time & subsequent offence

(i) upto ` 50 lakh Upto 3 year Non cognizable and bailable 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 10

Notes i) 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. ii) 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.

iii) 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.

iv) 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%) 12,00,000Annual maintenance contract of cars (taxable value of service – 10 Lakhs* 70%) 7,00,000Installation of AC, lifts and escalators(taxable value of service – 40 Lakhs * 40%) 16,00,000Erection of fire proofing system in airport – Exempt under notification 25/2012-st ExemptRepair and maintenance of building (taxable value – 25*60%) 15,00,000Installation of mechanized food grain handling system ExemptConstruction of offices for Sales tax department ExemptConstruction of road on sub-contract basis L & T(main contractor) who is engaged in construction of road for use by general public

Exempt

Construction of commercial building (Taxable value - (30 + 5)*40% ) 14,00,000Repair and maintenance of Airport (Taxable value of service – 20 * 60%) 12,00,000Value of taxable service 76,00,000Service tax @12.36%

9,39,360Less: Cenvat Credit

i) Duty paid on capital goods (50% of duty is allowed in year of acquisition and balance in subsequent years)

1,00,000

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%) 37,080NET 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 11

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 schedule to the central excise tariff act, 1985,

Omitted from notification w.e.f. 01.04.2013

b.Relief material meant for victims of natural or man-made disasters, calamities, accidents or mishaps; Exempt under notification

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 12

(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

charged – Exempt Conditions

In respect of transport of passengers by air, with or without accompanied belongings(Entry 5)

60% CENVAT credit of duty paid on inputs and capital goods, used for providing the taxable service has not 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 passengers, with or without accompanied belongings in rail (Entry 3)

70% -

(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].