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PRIME/45th ME /FINAL 1

The Society of Auditors and Prime Academy Model Exam – FINAL – Sep 2017

Paper 5 - Advanced Management Accounting No. of Questions: 7 Total Marks: 100 No. of Pages: 6 Time Allowed: 3 hrs

Question No 1 is Compulsory answer any five of the remaining questions Working notes should form part of the respective answers

Wherever necessary candidates can make assumptions and disclose the same by way of a note.

1. (a) A Pharmaceutical Company produces formulations having a shelf life of one year. The Company has an

opening stock of 30,000 boxes on 1st January, 2015 and expected to produce 1, 30,000 boxes as was in the just ended year 2014. Expected sale would be 1, 50, 000 boxes. Costing Department has worked out escalation in cost by 25% on variable cost and 10% on fixed cost. Fixed Cost for the year 2015 is ` 40/unit. New price announced for 2015 is ` 100/ box. Variable cost on opening stock is ̀40/ box. You are required to compute breakeven volume for the year 2015.

(b) An oil refinery can blend three grades of crude oil to produce quality A and quality B petrol. Two possible

blending processes are available. For each production run, the older process uses 5 units of crude Q, 7 units of crude P and 2 units of crude R and produces 9 units of A and 7 units of B. The newer process uses 3 units of crude Q, 9 unit of crude P and 4 units of crude R to produce 5 units of A and 9 units of B. Because of prior commitments the refinery must produce at least 500 units of A and at least 300 units of B for the next month. It has 1500 units of crude Q, 1900 units of crude P and 1000 units of crude R. For each unit of A the refinery receives ` 60 while for each unit of B the refinery receives ` 90. Formulate the problem as Linear Programming model so as to maximize revenue.

(c) Following is the data regarding cost incurred by four salesmen in four regions. Compute the minimum

cost and also the number of possibilities.

Salesman A B C D

R1 4 12 16 8

R2 20 28 32 24

R3 36 44 48 40

R4 52 60 64 56

(d) Explain briefly the major components of a Balanced Scorecard.

2. (a) A company manufactures two products A and B involving 3 departments – Machining, Fabrication and

Assembly. The process time, profit/unit and total capacity of each department is given in the following table:

Product Machining (Hours) Fabrication (Hours) Assembly (Hours) Profit (`)

A 1 5 3 80 B 2 4 1 100 Capacity 720 1800 900

Set up a Linear Programming problem to maximize profit. What will be the product mix at the maximum profit level?

PRIME A

CADEMY


(b) X Ltd manufactures a semi- conductor for which the cost and price structure is given below: Particulars ` /unit Selling Price 500 Direct Material 150

Direct Labour 150 Variable Overhead 50 General Fixed Cost 2,00,000

The product is manufactured by a machine, whose spare part costing ` 2,000 needs replacement after every 100 pieces of output. This is in addition to the above costs. Assume that no defectives are produced and that the spare part is readily available in the market at all times at ` 2,000. (i) What is the BEP for the above data ? (ii) Comment on the BEP, if the fixed cost can be reduced to ` 1,80,000 from the existing level of 2,00,000.

3. (a) Bearing Ltd. makes three products A, B and C in Divisions A, B and C respectively. The following is the

information given: Particulars Nature A B C Direct materials (excluding Material A for Division B & C) ` per unit 4 15 20

Direct labour ` per unit 2 3 4

Variable Overhead ` per unit 1 1 1 Selling Price to outside customers ` per unit 15 40 50 Existing Capacity No. of units 5,000 2,500 2,500

Maximum External Demand No. of units 3,750 5,000 4,000 Additional Fixed Cost that would be incurred to install additional capacity

` 24,000 6,000 18,700

Maximum additional units that can be produced by additional capacity

No. of units 5,000 1,250 2,250

B and C need material A as their input. Material A is available outside at ̀15/unit. Division A supplies the material free from defects. Each unit of B and C requires 1 unit of A as the input material. If B purchases from outside, it has to pay ` 15/unit. If B purchases from A, it has to incur in addition to the transfer price, ` 2 per unit as variable cost to modify it. B has sufficient idle capacity to inspect its inputs without additional costs. If C gets the material from A, it can use it directly, but if it gets material from outside, which is at ` 15, it has to do one of the following: (i) Inspect it at its own shop floor at ` 3/ unit. (OR) (ii) Get the supplier to supply inspected products and pay the supplier `2 / unit as the inspection charges. (OR) (iii) A has enough idle labour, which it can lend to C to inspect at Re. 1/ unit even though C purchases from outside. A has to fix a uniform transfer price for both B and C. The transfer price will not be known to outsiders and is at the discretion of the Divisional Manage ̀What is the best strategy for each division and the company as a whole?

PRIME A

CADEMY


(b) Apex Limited manufactures two products, P and Q, using the same production facility. The following information is available for a production period:

Particulars Product P Product Q Demand (units) 2,20,000 1,75,000

Contribution (` / unit) 10 12 Machine hours per 100 units 15 25

P and Q can be produced only in batches of 100 units, and whatever is produced has to be sold or discarded. Inventory build-up is not possible from one production period to another. The total fixed costs for each level of production and directly attributable to P and Q are given below :

Level of output Total Fixed Costs (`) Product P Product Q

Upto 1,00,000 units 6,00,000 5,50,000

1,00,001 – 2,00,000 units 13,50,000 12,20,000 2,00,001 – 3,00,000 units ( maximum possible level) 18,70,000 15,50,000

75,000 machine hours are available in the production period. Required : (i) Calculate the quantities of P and Q in the best product mix to achieve the maximum profit and compute the maximum profit. (ii) What will be the opportunity cost of meeting P’s demand fully?

4. (a) Consider the following data for the transportation problem:

Factory Destination Supply to be exhausted (x) (y) (z)

A 5 1 7 10 B 6 4 6 80 C 3 2 5 15 Demand 75 20 50

Since there is not enough supply, some of the demands at the three destinations may not be satisfied. For the unsatisfied demands, let the penalty costs be rupees 1,2 and 3 for the destinations (x) (y) and (z) respectively. Find the optimal allocation that minimizes the transportation and penalty costs.

(b) A manufacturing company has furnished the following financial data relating to the actual output of 9,600 units produced in the last quarter:

Particulars ` Sales 4,45,500 Costs:

Direct Materials 59,400 Direct Wages 89,400 Variable Overheads 1,45,500 Fixed Overheads 78,000 3,72,300

Profit 73,200

The standard wage rate is ` 4.50 per hour and the standard variable overhead rate is ` 7.50 per hour. The company uses a JIT system and the budgeted production and sales quantity is 10,000 units. The following are the variances from standard costs recorded during the last quarter:

PRIME A

CADEMY


Particulars ` Direct Materials Price V 600 A Usage V 1,200 A Direct Wages Rate V 1,500 F

Efficiency V 4,500 A Variable Overheads Expense V 6,000 F Efficiency V 7,500 A Fixed Overheads Expense V 3,000 A

Sales Price V 13,500 F You are required to: (i) Prepare the Original budget and the Standard cost sheet per unit of output. (ii) Produce a statement reconciling the budgeted profit with actual profit.

5. (a) A small project is composed of 7 activities whose time estimates are listed in table below. Activities are

identified by their beginning (i) and ending (j) mode numbers.

Activity (i-j) Optimistic Most Likely Pessimistic

1-2 2 2 14

1-3 2 8 14

1-4 4 4 16

2-5 2 2 2

3-5 4 10 28

4-6 4 10 16

5-6 6 12 30

Draw the project network and identify all the paths through it Find the expected duration and variance for each activity. What is the expected project length? Calculate the variance and standard deviation of the project length. What is the probability that the project will be completed at least 8 months earlier than expected time If the project due date is 38 months, what is the probability of not meeting the due date Given:

Z 0.50 0.67 1 1.33 2

Probability 0.3085 0.2514 0.1587 0.0918 0.0228

(b) A car rental agency has collected the following data on the demand for five-seater vehicles over the past

50 days. Daily Demand 4 5 6 7 8

No. of days 4 10 16 14 6 The agency has only 6 cars at present. Use the following 5 random nos. to generate 5 days of demand for the rental agency. Random Nos. : 30, 48, 71, 56, 90 Required: (i) What is the average number of cars rented per day for 5 days? (ii) How many rentals will be lost over the 5 days?

PRIME A

CADEMY


6. (a) A ltd. manufactures two parts “O” and “P” for computer industry.

O: Annual production and sales 100000 units at selling price of `100.05 per unit P: Annual production and sales 50,000 units at selling price of `150 per unit. Direct and indirect costs incurred on these two parts are as follows: Figures in 000’s

Particulars O P Total

Direct Material (Variable) 4,200 3,000 7,200

Labour Cost (Variable) 1,500 1,000 2,500

Direct Manufacturing cost (See note) 700 550 1,250

Indirect costs:

Machine set up cost 462

Testing cost 2,375

Engineering cost 2,250

16,037

Note: Direct manufacturing costs represent the cost of machine capacity dedicated to the production of each product. These costs are fixed and are not expected to vary over the long-run horizon. Additional information is as follows:

Particulars O P

Production Batch size (Units) 1000 500

Set up time per batch (Hrs) 30 36

Testing up time per batch (Hrs) 5 9

Engineering cost incurred on each product (`) 840,000 1,410,000

A foreign competitor has introduced a product very similar to “O”. to maintain the company’s share and profit, A ltd. has to reduce the price to `86.25. the company calls for a meeting and comes up with a proposal to change design of Product “O”. The expected effect of new design is as follows: Direct Material cost is expected to decrease by `5 per unit. Labour cost is expected to decrease by `2 per unit. Machine time is expected to decrease by 15 minutes; previously it took 3 hours to produce 1 unit of “O”. The machine will be dedicated to the production of new design. Set up time will be 28 hours for each set up. Time required for testing each unit will be reduced by 1 hour Engineering cost and batch size will remain unchanged. Required: Company management identifies that cost driver for machine set-up costs is ‘set up hours used in batch setting’ and for testing costs is ‘testing time. Engineering costs are assigned to products by special study. Calculate the full cost per unit of O and P using Activity-Based costing. What is the target cost per unit for O and P using Activity-Based costing? What is the target cost per unit for new design to maintain the same mark-p percentage on full cost per unit as it had earlier? Assume cost per unit of cost drivers for the new design remains unchanged. Will the new design achieve the cost reduction target?

PRIME A

CADEMY


(b) AB Ltd. makes and sells a labor intensive product. Its labour force has a learning rate of 80% applicable only to direct labour and not to variable overhead. The cost per unit of the first product is as follows :

Particulars ` Direct Materials 10,000 Direct Labour (@ ` 4 / hr) 8,000 Variable Overhead 2,000

Total Variable Cost 20,000 AB Ltd. has received an order from P Ltd. for 4 units of the product. Another customer, Q Ltd. is also interested in purchasing 4 units of the product. AB Ltd. has the capacity to fulfill both the orde` Q Ltd. presently purchases this product in the market for ` 17,200 and is willing to pay this price per unit of AB’s product. But for P Ltd. lets AB choose one of the following options : (i) A price of ` 16,500 / unit for the 4 units it proposes to take from AB. (OR) (ii) Supply P Ltd’s idle labour force to AB, for only 4 units of production, with AB having to pay only Re. 1 per labour hour to P Ltd’s worke ̀P Ltd’s workers will be withdrawn after the first 4 units are produced. In this case, AB need not use its labour for producing P Ltd’s requirement. P Ltd. assures AB that its labour force also has a learning rate of 80%. In this option, P Ltd. offers to buy the product from AB at only ̀14,000 per unit. P and Q shall not know of each other’s offer. Required : If both orders came before any work started, what is the best option that AB may choose?

7. Write short notes on any 4 of the following: a. Shadow price b. Concurrent activities c. Kaizen Costing d. Export vs Local Sale Decision e. Negotiated Transfer Price. (4 x 4 = 16 Marks)

PRIME A

CADEMY

PRIME/45th ME/FINAL 1

The Society of Auditors and Prime Academy 45th Session Model Exam - Final - Advanced Management Accounting

Suggested Answers

1. (a) Shelf life is one year hence opening stock of 30,000 boxes is to be sold first. Contribution on these boxes is

30,000 (100 -40) = ` 18,00,000. In the question production of 2014 is same as in 2015. Hence the fixed cost for the year 2014 is ` 52,00,000 (1,30,000 X 40). Therefore fixed cost for the year 2015 is ` 57,20,000 ( 52,00,000 + 10% x 52,00,000). Variable cost for the year 2015 (` 40 + 25% x 40) = ` 50 / unit. Break even volume is the volume to meet the fixed cost i.e. fixed cost equals contribution. Therefore, remaining fixed cost of ` 39,20,000 (57,20,000 – 18,00,000) to be recovered from production during 2015. Production in 2015 to reach BEP = 3920000 / 50 = 78400 units. Therefore BEP for the year 2015 is 1,08,400 boxes (30000 + 78400)

(b) Maximize Z = 60 (9x + 5y) + 90 (7x + 9y) =1170 x + 1110 y Subject to 9x + 5y ≥ 500 commitment for A 7x + 9y ≥ 300 commitment for B 5x + 3y ≤ 1500 availability of Q 7x + 9y ≤ 1900 availability of P 2x + 4y ≤ 1000 availability of R and x ≥ 0, y ≥ 0.

(c)

4 12 16 8

20 28 32 24 36 44 48 40 52 60 64 56

Subtracting minimum element – each row

0 8 12 4 0 8 12 4 0 8 12 4 0 8 12 4

Subtracting minimum element – each column

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

A B C D

R1 R2 R3 R4 R2 R3 R4 R1 R3 R4 R1 R2 R4 R1 R2 R3

R1 R3 R4 R2

Minimum no. of lines to cover all zeros = 4 = order of the matrix. Hence optional assignment is possible. Minimum Cost = 4 + 28 + 48 + 56 = 136 = AR1 + BR2 + CR3 + DR4 Since all are zeros, there are 24 solutions to this assignment problem. Viz. Matrix Above A can be assigned in 4 ways, B in 3 ways for each A’s 4 ways.

(d) An ideal balanced score card combines measures of past performance with measures of the firm’s drivers of future performance. The following perspectives are evaluated:

Perspective Measures Customer Price, Delivery, Quality, Support Internal Efficiency, Sales penetration, New product introduction Innovation and Learning Technology, Cost Leadership

Financial Sales, Cost of Sales, Return on Capital Employed etc.

PRIME A

CADEMY


2. (a) Maximize Z = 80x + 100y subject to x + 2y ≤ 720

5x + 4y ≤ 1800 3x + y ≤ 900

X ≥ 0 ; y ≥ 0 Where x = No of units of A ; y = No. of units of B By the addition of slack variables s1, s2 and s3 the inequalities can be converted into equations. The problems thus become Z = 80x + 100y subject to x + 2y + S1 = 720 5x + 4y + s2 = 1800 3x + y + s3 = 900 and X ≥ 0, y ≥ 0, S1 ≥ 0, S2 ≥ 0, S3 ≥ 0

Table I :

Cj 80 100 0 0 0

Prod. Mix Qty X Y S1 S2 S3 Ratio

0 S1 720 1 2 1 0 0 360 ←

0 S2 1800 5 4 0 1 0 450

0 S3 900 3 1 0 0 1 900

Zj 0 0 0 0 0 0

Cj - Zj 80 100 0 0 0

↑

Table II :

Cj 80 100 0 0 0

Prod. Mix Qty X Y S1 S2 S3 Ratio

100 Y 360 1/2 1 1/2 0 0 720

0 S2 450 3 0 -2 1 0 150 ←

0 S3 540 5/2 0 - 1/2 0 1 216

Zj 3600 50 100 50 0 0

Cj - Zj 30 0 -50 0 0

↑

Table III: Optimal

Cj 80 100 0 0 0

Prod. Mix Qty X Y S1 S2 S3

100 Y 300 0 1 5/6 - 1/6 0

80 X 120 1 0 - 2/3 1/3 0

0 S3 240 0 0 7/6 - 5/6 1

Zj 39600 80 100 30 10 0

Cj - Zj 0 0 -30 -10 0

PRIME A

CADEMY


(b)

(i) For Computing the BEP: Parts cost although a step fixed cost can be consider as variable for the limited purpose of computing the range in which BEP occurs The Variable parts cost per unit is ` 20 (2000/100).

Range in which the BEP occur 200000/(200-20) = 1111.11

Range 1101-1200

General Fixed Cost 2,00,000

Parts cost 24,000 (12 x 2000)

Total Fixed cost 2,24,000

Gross Contribution/unit** 200

BEP 1,120 units

**Gross Contribution per unit = Sales- Direct Material – Direct Labour – Variable Overheads ` 500 – ` 150 – ` 100 – ` 50 = ` 200. (ii) When fixed cost is ` 1, 80,000. Range of BEP will be (1, 80,000/180) = ` 1,000 (901-1000)

Since the BEP of 1,000 falls on the upper most limits in the range 901-1000 there will be one more BEP in the subsequent range in 1,000 – 1,100.

Range 901 – 1,000 1,000 – 1,100 (`) (`) Gross Fixed Cost Parts Cost Total Fixed Cost Gross Contribution BEP

1,80,000 20,000

(10 X 2,000)

2,00,000 200

1,000 Units

1,80,000 22,000

(11 X 2,000)

2,02,000 200

1,010 Units

3. (a) B will not pay A anything more than 13, because at 13, it will incur additional cost of Rs 2/- to modify it, 13 + 2

=15, the outside cost. A B C

Outside Sale Transfer to B & C Divisional Variable cost of Production Transfer from A Modification Total Variable cost of Production Selling Price Contribution

7

7 15

8

7

7 13

6

19 13

2 34 40

6

25 13

38 50 12

PRIME A

CADEMY


Option for C, Purchase all units from A @ 13: Any other option is costlier.

Particulars A ` B ` C `

Maximum external demand 3,750 5,000 4,000

Exiting capacity 5,000 2,500 2,500

Maximum capacity that can be added 5,000 1,250 2,250

Total maximum that can be produced 10,000 3,750 4,750

Additional Fixed cost on expansion 24,000 6,000 18,700

Units that must be sold /transfer to get this amount as

contribution

4000

(24000/6) 1000 (6000/6)

1558.33

(18700/6)

External demand not covered by the existing capacity - 2,500 1500

Decision

Expand make

10,000 units

3,750-outside

3,750-B

2,500-C

Expand make

2,500+1,250 =

3,750units

Do not

expand

make only

2,500 units

Particulars A B ` C ` Outside Sale Transfer to B & C

Units 3,750 3,750 + 2,500 = 6,250 3,750 2,500

Contribution / Unit 8 6 6 12 Contribution 30,000 37,500 22,500 30,000 Total 67,500 22,500 30,000 Additional Fixed Cost 24,000 6,000 -

Net Revenue Addition 43,500 16,500 30,000 Individual Strategy is the Company’s best strategy.

(b) Statement showing “ Contribution / Machine Hour”

P ` Q `

Demand (Batches of 100 units) 2200 (2,20,000 / 100) 1750 (1,75,000 / 100)

Contribution (Rs/ Batch) 1,000 (Rs 10x100 units) 1,200 (Rs 12x100 units)

Machine Hours requires per Batch 15 25

Contribution / Machine Hour 66.68 48

Rank I II

Allocation of Machine Hours on the basis of ranking Produce ‘P’ as much as possible = 2,200 batches Hours required = 33,000 hrs (2,200 batches * 15 Hrs) Balance Hours available = 42,000 hrs (75,000 hrs – 33,000 hrs) Produce ‘Q’ the next best = 1680 Batches (42,500hrs/25hrs) Statement showing the “ Maximum possible contribution”

PRIME A

CADEMY


Products Batches Cont./ Batch Total `

P 2,200 1,000 22,00,000 Q 1,680 1,200 20,16,000 Maximum Possible Contribution 42,16,000

Statement showing “Incremental Fixed Cost”

“P” ̀ “Q” ̀ Up to 1,000 batches 6,00,000 5,50,000

Next 1,000 batches 7,50,000 6,70,000 Next 1,000 batches 5,20,000 3,30,000

For Producing additional batches above 2,000 batches of product ‘P’ Apex limited have to incur additional fixed cost of ` 5,25,000 to earn additional contribution of Rs 200,000 ( 200 batches * Rs 1,000) which is not beneficial. However, hours saved on 200 batches i.e., 3,000 hrs ( 200 matches * 15 hrs) can be utilized for the production of ‘Q’ to the extent of 70 batches (1,750 batches i.e., maximum demand of ‘Q’ – 1,680 batches).The contribution from producing additional 70 batches of product Q will be Rs 84,000 (70 batches * Rs 1,200). Accordingly best product mix will be 2,000 batches of ‘P’ And 1,750 batches of ‘Q’. Statement showing “maximum profits”

Product Batches Cont./Batch Total `

‘P’ 2,000 1,000 20,00,000 ‘Q’ 1,750 1,200 21,00,000

Contribution 41,00,000 Less: Fixed Cost – P 13,50,000 Less: Fixed Cost – Q 12,20,000 Net Profit 15,30,000

Statement showing “Opportunity Cost”

Particulars Total ` Additional fixed cost not covered by producing P in the maximum range(Rs 5,20,000- Rs 2,00,000)

3,20,000

Add: Loss of Contribution (not producing 70 batches of Q) 84,000 Total Opportunity Cost 4,04,000

4. (a) The initial solution is obtained below by Vogel’s Method

Since demand (= 75 + 20 + 50 = 145) is greater than supply (= 10 + 80 + 15 = 105) by 40 units, the given problem is an unbalanced one. We introduce a dummy factory with a supply of 40 units. It is given that for the unsatisfied demands, the penalty cost is rupees 1, 2 and 3 for destinations (1), (2) and (3) respectively. Hence, the transportation problem becomes

Factory Destination Supply to be exhausted

(1) (2) (3)

A 5 1 7 10

B 6 4 6 80 C 3 2 5 15 Dummy 1 2 3 40 Demand 75 20 5 145

PRIME A

CADEMY


Destination

Supply Difference

10 100 4_ _

5 1 7

B 20 10 50 80/70/50/0 2 2 2

6 4 6

C 15 15/0 1 1 1

3 2 5

Dummy 40 40/0 1 1 _

1 2 3

Demand 75/35/20/0 20/10/0 50/0

Difference 2 1 2

2 0 2

3 2 1

The initial solution is given in the table below

Supply

A 10 10

5 1 7

B 20 10 50 80

6 4 6

C 15 15

3 2 5

Dummy 40 40

1 2 3

Demand 75 20 50

We now apply the optimality test to find whether the initial solution found above is optimal or not. The number of allocations is 6 which is equal to the required m + n -1 (=6) allocations. Also these allocations are dependent. Hence both the conditions are satisfied. Let us now introduce ui and vj I – (1,2,3,4) and j = (1,2,3) such that ∆ij = Cij – (ui + vj) for allocated cells. We assume that u2 = 0 and remaining ui ‘s, vi ‘s and ∆ij’s are calculated as below :

(1) (2) (3) Ui 's

A 2 10 4 -3

5 1 7

B 20 10 50

0

6 4 6 C 15 1 2

-3

3 2 5 Dummy 40 3 2

-5

1 2 3 Vj's 6 4 6

PRIME A

CADEMY


Since all ∆ij’s for non-basic cells are positive, therefore, the solution obtained above is an optimal one. The allocation of factories to destinations and their cost is given below :

Factory Destination Units Cost (`) Total Cost (`) A (2) 10 1 ` 10 B (1) 20 6 ` 120 Transportation Cost B (2) 10 4 ` 40

B (3) 50 6 ` 300 C (1) 15 3 ` 45 Dummy (1) 40 1 ` 40 Penalty Cost ` 555

(b) Direct Material

Material Cost Variance = Material Price Variance + Material Usage Variance = 600 (A) + 1200 (A) = 1800 (A) Material Cost Variance = Standard Cost * – Actual Cost (* Std Cost of Std Qty for Actual Output ) 1800 (A) = Standard Cost – ` 59,400 Standard Cost = ` 57,600 Material Price Variance = Standard Cost of Actual Quantity – Actual Cost 600 (A) = Standard Cost of Actual Quantity – ` 59400 Standard Cost of Actual Quantity = 58,800 Standard Cost per unit = (` 57600 / 9,600 units) = ` 6 Direct Labour Labour Cost Variance = Standard Cost – Actual Cost 3000 (A) = Standard Cost – ` 89400 Standard Cost = 86,400 Labour rate variance = Standard cost of actual time – Actual Cost ` 1500 (F) = Standard cost of actual time – 89400 Standard cost of actual time = 90900 (F) Standard Cost per unit = 9 (86400/9600 units) Standard rate per hour = ` 4.50 Std time per unit = 2 hours ( ` 9 / ` 4.5) Variable Overheads Standard Rate per hour = ` 7.5 Standard Rate per unit = ` 7.5 x 2 hours = ` 15 Fixed Overheads Expenditure Variance = Budgeted fixed overhead – Actual Fixed overheads 3000 (A) = Budgeted fixed overhead – ` 78000 Budgeted fixed overhead = ` 75,000 Standard rate per unit = ` 7.5 (75000 / 10000 units) Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed Overheads = ` 7.5 x 9600 units – `75000 = 3000 (A)

PRIME A

CADEMY


Sales Variances (Turnover Based) Price Variance = Actual Sales – Standard Sales 13500 (F) = ` 445500 - Standard Sales Standard Sales = ` 432000 Budgeted price per unit = Std Sales / Actual Quantity = ` 432000 / 9600 units = ` 45 Volume Variance = Standard Sales – Budgeted Sales = ` 432000 – (45 x 10000 units) = 18000 (A) Sales Variances (Margin Based) Sales Margin Price Variance = Sales Price Variance = 13500 (F) ORIGINAL BUDGET AND STANDARD COST SHEET

Particulars (Budgeted Units = 10000 units)

Budget (`) Standard Cost per unit

Sales (A) 450000 45 Direct Materials @ ` 6/ unit 60000 6 Direct Wages @ ` 9/ unit 90000 9 Variable Overhead @ ` 15/unit 150000 15

Fixed Overheads @ ` 7.5/unit 75000 7.5 Total Cost (B) 375000 37.5 Budgeted Profit (A – B) 75000 7.5

Sales Margin Volume Variance = Sales Volume Variance x Budgeted Net Profit Ratio = 18000 (A) x 7.5 / 45 * 100 = 3000 (A) STATEMENT OF RECONCILIATION

Particulars ` Budgeted Profit 75000 Less : Sales Margin Volume Variance 3000 (A) Standard Profit 72000 Add : Sales Price Variance 13500 (F)

Less : Materials Usage Variance 1200 (A) Less : Material Price Variance 600 (A) Less : Labour Efficiency Variance 4500 (A)

Add : Labour Rate Variance 1500 (F) Less : Variable Overhead Efficiency Variance 7500 (A) Add : Variable Overhead Expenditure Variance 6000 (F) Less : Fixed Overhead Volume Variance 3000 (A) Less : Fixed Overhead Expense Variance 3000 (A) Actual Profit 73200

PRIME A

CADEMY


5. (a) Activity (i-j) Optimistic Most Likely Pessimistic Expected Return Variance

(to + 4 tm + tp)/6 Si2 = {(to - tp)/6}2

1-2 2 2 14 4 4

1-3 2 8 14 8 4

1-4 4 4 16 6 4

2-5 2 2 2 2 0

3-5 4 10 28 12 16

4-6 4 10 16 10 4

5-6 6 12 30 14 16

TOTAL 56 48

Critical Path – 1-3-5-6 = 8+12+14 = 34 days

Variance of project length is σ2 = 4+16+16 = 36 . SD of the project = 6 The standard normal deviation is : Z = (Due Date – Expected date of completion) / SD = (26 – 34) / 6 = -1.33 Probability of meeting the due date is 9.18% from the table given in question When the due date is 38 days Z = (38 – 34) / 6 = 4 / 6 = 0.67. Probability meeting the date is 0.2514 or 25.14%. (b)

Daily Demand Days Probability Cum Probability Random No. assigned

4 4 0.08 0.08 00 - 07

5 10 0.2 0.28 08 - 27

6 16 0.32 0.6 28 - 59

7 14 0.28 0.88 60 - 87

8 6 0.12 1 88 - 99

PRIME A

CADEMY


Day

Random

No. Demand

No. of cars on

present

Rent

Lost

1 30 6 6 0

2 48 6 6 0

3 71 7 6 1

4 56 6 6 0

5 90 8 6 2

Total 30 3

Average No. of Cars = 30/5 = 6 No . of car rentals = 3

6. (a) Computation of quantities of cost drivers

Particulars O P Total

a. Quantity 1,00,000 units 50,000 units

b. Batch size 1,000 units 500 units

c. Number of batches (a/b) 100 batches 100 batches

d. Set up time per batch 30 hours 36 hours

e. Total set up time for production (c*d) 3,000 hours 3,600 hours 6,600 hours

f. Testing time per unit 5 hours 9 hours

g. Total testing time for production (a*f) 5,00,000 hours 4,50,000 9,50,000 hours

Computation of ABC recovery rates

Activity Activity cost pool Cost driver Cost driver quantity ABC rate

Machine

set-up ` 4,62,000 Set up hours 6,600 set up hours ` 70 per hour

Testing ` 23,75,000 Testing hours 9,50,000 testing hours ` 2.50 per hour

Computation of cost per unit using ABC system

Particulars O ` P `

Direct costs

Direct materials 42,00,000/1,00,000 = 42.00 30,00,000/50,000 = 60.00

Direct labour 15,00,000/1,00,000 = 15.00 10,00,000/50,000 = 20.00

Direct machining 7,00,00/1,00,000 = 7.00 5,50,000/50,000 = 11.00

Sub-total of direct costs 64 91

Indirect costs

Machine set up (`70*30 hrs)/1,000 units = 2.10 (`70*36hrs)/500 units = 5.04

Testing (`2.5/hr * 5 hrs) = 12.50 (`2.5/hr * 9 hrs) = 22.50

Engineering 8,40,000/1,00,000 = 8.40 14,10,000/50,000 = 28.20

Sub-total of indirect

costs 23 55.74

Total cost 87 146.74

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Mark up (or) profit per unit of P = Selling price - Full cost = `100.05 - `87.00 = `13.05 per unit Percentage of markup to full cost = `13.05 / `87 = 15% on cost

New Selling Price (given) `86.25

Less: Target Profit at 15% on cost 15/115 = 86.25 x 15/115 `11.25

Target cost for new design of P ` 75

Computation of Cost per unit of New Design P

Particulars Details Amount ̀

Direct costs :

Direct Materials 42.00-5.00 37

Direct Labour 15.00-2.00 13

Direct Machine (dedicated machine,

700000/100000 7 hence time saved is not relevant,

as the costs continue to be fixed)

Sub total of direct costs 57

Indirect costs :

Machine costs (`70 x 28 hrs) / 1000 units 1.96

Testing (` 2.5/hr x 4 hrs) 10

Engineering 840000 / 100000 units 8.4

Sub total of indirect costs 20.36

Total estimated costs of new design P 77.36

Target cost is ` 75.00 only. Hence, the new design will not achieve the cost reduction target. Note: It is assumed that output of P will remain at 100000 units, inspite of the reduction in machine time. To maintain 15% profit margin, probable selling price of new design P will be `77.36 + 15% of ̀ 77.36 = `88.96.

(b)

Material Cost p.u = 10,000 Variable Cost = 2,000

Total Variable cost = 12,000 Option 1 : If both the orders came together learning rate of 80% applies and 8 units can be made with an average time of 1,024 hours per unit. Cost to PQ :Variable cost excl. labour = ` 12,000 ; Labour cost 1,024 hrs x 4 `/hr = ` 4096 ` 16,096

Units Avg Hrs per unit

1 2000

2 1600

4 1280

8 1024 PRIME A

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Q P

Selling price p.u ` 17,200 ` 16,500 (Under Option I)

Variable cost p.u ` 16,096 ` 16,096

Contribution p.u ` 1,104 ` 404

No of units 4 4

Contribution (`) 4416 1616 6032

Option II : If P Ltd supplies its labour. 80% of learning curve will apply to 4 units each of AB & P. Hence hrs/ unit = 1280.

Particulars Q P Selling Price ` 17,200 ` 14,000 Variable Cost (excl. labour) ` 12,000 ` 12,000 Labour Cost: 1280 x 4 1280 x 1

` 5,120

-

-

` 1,280

Total Variable Cost ` 17,120 ` 13,280 Contribution ` 80 ` 720 Units 4 4

Contribution (`) 320 2,880 3,200 AB should not take labour from P Ltd. It should choose Option I.

7) a) Increase in value which would be created by having available one additional unit of a limiting resource at its

original cost. This represents the opportunity cost of not having the use of the one extra unit. This information is routinely produced when mathematical programming (especially linear programming) is used to model activity.

b) Activities may not always be discrete i.e. they may be done in part allowing the subsequent activities to commence before the preceding activity is fully completed. Activities of this kind are to be frequently encountered in batch production. If, for example, a batch of 50 spindles is to be processed on two machines obviously it is not necessary to process all the items of the batch on the first machine and then transfer these to the next machine. A few items processed on the first machine may be transferred to the second machine before completion of the entire batch on the first machine. Since this is a matter of great practical importance we shall dwell upon it at a greater length. Such simultaneous or concurrent activities are to be encountered in sewage work e.g., trenching, laying pipe, welding pipe and back filling, all going on simultaneously with suitable lags on construction work.

c) Kaizen Costing is a Japanese Term for a number of cost reduction steps that can be used subsequent to issuing a new product design to the factory floor. Some of the activities in Kaizen Costing Methodology include elimination of waste in the production, assembly and distribution process, as well as the elimination of work steps in any of these areas. Though these points are also covered in the value engineering phase of target costing, the initial value engineering may not uncover all possible cost savings. Thus Kaizen Costing is really designed to repeat many of the value engineering steps for as long as a product is produced, constantly refining the process and thereby stripping out extra costs. The cost reductions resulting from Kaizen Costing are much smaller than those achieved with value engineering but are still worth the effort since competitive pressures are likely to force down the price of product over time, and any possible cost savings allow a company to still attain its targeted profit margins while continuing to reduce cost.

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d) Under this method each decentralized unit is considered as an independent unit and such units decide the transfer price by negotiations or bargaining. Divisional managers have full freedom to purchase their requirement from outside if the prices quoted by their sister unit are lower. A system of negotiated prices develops business like attitude amongst divisions of the company. In order to avoid any reduction in overall profits of the company, the top management may impose restriction on the external purchase/sale of goods. In order to have an effective system of intra-company transfer pricing; the following points should be kept in view: Prices of all transfers in and out of a profit centre should be determined by negotiation between the buyer and the seller (i.e. transferee and transferor) Negotiations should have access to full data on alternative sources and markets and to public and private information about market prices. Buyers and sellers should be completely free to deal outside the company.

e) When the firm is catering to the needs of the local market and surplus capacity is still available, it may think of utilizing the same to meet export orders at a price lower than that prevailing in the local market. This decision is made only when the local sale is earning a profit i.e., where its fixed expenses have already been recovered by the local sales. In such cases, if the export price is more than the marginal cost, it is preferable to enter the export market. Any reduction in the price prevailing in the local market to fulfill surplus capacity may have adverse effect on the normal local sales. Dumping in the export market at a lower price will not, however, have any such adverse effect on local sales.

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Paper 6 - Information Systems Control and Audit No. of Questions: 7 Total Marks: 100 No. of Page: 1 Time Allowed: 3 hrs

Question Number 1 is compulsory. Answer any 5 questions from the remaining 6 questions

1. XYZ Private Limited is an Mutual Fund. It is evaluating a large scale development and/or acquisition of new

application software. It also wants to deploy a good Information Security Policy. In this context, answer the following: (a) Why do businesses require a new application software (b) List and explain the 6 stages of SDLC in brief (c) List key contents of Information Security Policy (d) Explain in brief the Annual Systems Audit requirement mandated by SEBI for market intermediaries

(4 x 5 = 20 Marks) 2.

(a) What are the components of Computer based information systems (6 Marks) (b) What are audit trails ? Explain the objective of audit trails ? (6 Marks) (c) List the factors to be considered in an agreement with a service provider for alternate processing site

(4 Marks) 3.

(a) Explain full back-up, incremental back-up and differential back-up (6 Marks) (b) Explain impact of computerisation on Internal Controls (6 Marks) (c) Explain the scope of IT Act, 2000 (4 Marks)

4. (a) How the term Corporate Governance and Business Governance (6 Marks) (b) Explain the risks associated with BYOD (6 Marks) (c) Explain Terms Public Cloud and Private Cloud (4 Marks)

5. (a) Explain the term confidentiality, integrity and availability (6 Marks) (b) Explain the characteristics and benefits of an Expert System (6 Marks) (c) List the risk mitigation strategies (4 Marks)

6. (a) Explain the terms hot site, warm site and cold site (6 Marks) (b) Explain the term inherent risk, control risk and detection risk (6 Marks) (c) Explain in brief prototyping approach to SDLC (4 Marks)

7. Write short notes on any four of the following – 4 x 4 = 16 Marks

(a) Public Key Cryptography (b) SCARF (c) Social Engineering (d) Data Mining (e) BIA (4 x 4 = 16 Marks)

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The Society of Auditors and Prime Academy 45th Session Model Exam - Final - Information Systems Control and Audit

Suggested Answers

1. (a)

1. Solve a business problem Example: Reduce excess data entry errors by eliminating the manual entry of sales details.

2. To make use of a business opportunity Example 1: A bank may have introduced a new product – say foreign currency deposit/draft facility – which may require a new software or modification to existing software. Example 2: A bank might have introduced ATM facility for its customers. Hence to link ATM to account balance, it may require new software.

3. Problem with current technology Example: The software that the organization is currently using may have some serious bugs/errors or the vendor does not support the software – hence need to go in for new software.

4. Respond to external factors / legal requirements Example 1: The RBI has asked all the banks to introduce RTGS scheme. The Banks may require new software /modification to existing software Example 2: The central government introduces value added tax (VAT). Hence organisations may need to modify their billing software to incorporate vat.

(b) The Six stages in brief

Stage 1: Preliminary investigation:

When undertaken: Preliminary investigation is undertaken when users come across a problem or an opportunity and submit a formal request for a new system to the MIS/IT department.

Steps involved : Preliminary investigation consists of three broad steps 1. Request clarification: Requests submitted by the users may require some clarification before system investigation can commence. This is to determine as to what the user actually wants. 2. Feasibility study: The system analyst carries out technical, financial, operational, schedule and legal feasibility study to determine whether the proposed system is feasible or not. 3. Approval of the request: Some requests may get eliminated at the feasibility study stage. Based on the analyst’s observations, the management decides which system should be taken up for development. Approval is critical as management commits resources (capital, manpower) at this stage.

Stage 2: Requirement Analysis or Systems Analysis:

Once the management decides to go ahead with the development, the user needs should be studied in detail.

The systems analyst uses various tools like interviews, questionnaires, environment analysis to understand the requirements.

He identifies the problems and short comings of the existing system which should be addressed in the new system

Stage 3: Design of the system (Blue Print): The user requirements as identified are incorporated in the design of the new system. In this stage various reports, outputs, inputs, files are designed to show how user requirements will be

met.

The detailed design is then given to the programmers so that they can start the development (i.e. coding/programming).

(Similar to how the architect’s plans are given to the construction contractor to start construction activity)

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Stage 4: Development and Acquisition of software:

After resolving the design details, resources needed like hardware, software are determined. The organisation may decide buy or lease or to develop the software in-house If the software is to be developed in-house, the analyst works closely with the programmers and also

works on the documentation of the software and the procedure manuals. Stage 5: Systems Testing:

Before information system can be introduced in live/production environment, it needs to be tested to ensure that software does not fail and that it runs according to specifications given by the users.

Set of test data (called as test cases) are fed into the new system and the results examined with the expected results. Afterwards the new system may be fed with sample live data and results examined.

Ex: To test a tax-module we would key in the details and obtain the final tax payable. This would be checked with the calculations done manually to ensure that the system works correctly.

(Note: There are various approaches to testing like systems testing, unit testing, interface testing and stress testing)

Stage 6: Implementation and Maintenance:

After a system passes through the testing process, it is implemented in live area.

New hardware if required is installed and users are trained to work on the new system. After the system has stabilised in live area, it is monitored to ensure that it satisfies user requirements. It may also undergo some maintenance efforts to adapt to changing user and business needs.

(c)

The broad contents of a security policy are: i. Purpose and Scope ii. Security organisation structure- roles of various personnel/groups iii. Responsibility allocation iv. Asset classification and security classification v. Access control vi. Incident handling vii. Physical and environmental controls viii. Business Continuity Management ix. Systems development and maintenance controls

(d) Annual Systems Audit requirement as mandated by SEBI for market intermediaries providing depository

services is as follows: i. The audit should be conducted in accordance with norms, terms of reference and guidelines issued

by SEBI ii. Board of the Depository may appoint the Auditor- he can perform audits for maximum of 3

consecutive years. iii. Audit schedule to be submitted to SEBI atleast 2 months in advance along with scope of current audit

and previous audit. iv. Scope of audit may be extended by SEBI keeping in mind the changes since the last audit. v. Audit report to be submitted to the auditee – should have specific observations on compliance/non-

compliance issues, observations and minor deviations as well as qualitative comments on scope for improvement. It should also address open issues from previous audit reports.

vi. Auditee management to comment on Non-conformities and observations- with specific time-table for initiating corrective action (within 3 months) and reported to SEBI. Auditor to state if follow-up audit required to review status of NCs. The report to be submitted to SEBI within 1 month of completion of audit.

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2. (a) A computer based information system is a combination of people, IT and business processes that

generates information for managerial decision making. A computer based information system is constituted by

S.No. Component Meaning 1. People They are the IT professionals and users of IT. 2. Hardware They are the tangible/physical components – like Servers, Desktops etc. 3. Software These are set of instructions/programs – can be grouped into :

System software- used to manage and run the computers- like Operating Systems Application Software: those used in business process- like payroll etc. Utilities- which are tools which automate routine functions- like calculator

4. Network These are the telecommunication media- made of the network cables/media and network devices. They facilitate data sharing, resource sharing etc.

5. Data This refers to the information generally stored within a database or a file system.

(b) Meaning

It refers to recording or logging of activities at the operating system, network, application software, user and database levels. For example application logs contain details of who initiated a transaction, who authorised it, date and time etc. Objective The objective of audit trail control are three fold:

S. No. Objective Example a. Help detect unauthorised

access or attempted access to the system

An unauthorised user trying a user-id password wrong three times would be logged by the system

b. Facilitate reconstruction of events in case of system failure

Database logs contain before image and after image of data values which help reconstruct the database tables in case of a failure.

c. Fixing of accountability Transactions can be traced to individual users based on the user-id details appearing in the logs. The person carrying out the transaction cannot later deny it since his user-id is captured in the log.

(c) The agreement with third party service provider should address the following:

a. How soon the site would be available in case of a disaster (i.e how quickly can the organisation move to the alternate processing site)

b. Number of concurrent users to the site (more concurrent users, lesser would be the time available or space available)

c. Order of priority in case of concurrent users wanting to use the alternate processing site d. Period and terms and conditions for usage of site e. Facilities and services that the service provider agrees to provide (like power, network connection,

cabling etc.) f. Controls to be present and if warranted, audit of the same at the alternate processing facility

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3. (a)

S.No. Type of Back-up

Meaning Time/cost Involved

Restoration Process

1. Full Back-up Simplest form of back-up- with a full back-up, every back-up contains all files.

Time consuming process and may not be suitable with large volumes of data

Simple to restore- single restore session is sufficient for restoring all backed-up files

2. Differential back-up

Back-up of all files which have changed since the last full back-up

Faster than full back-up and more economical.

Two step process: i. Restore the last full back-up ii. Restore the appropriate differential back-up

3. Incremental back-up

Only files which have changed since the last full back-up/differential back-up or incremental back-up are saved.

Most economical, saves a lot of time and space

Difficult to restore- start with last full back and then recover from every incremental back-up taken since.

(b)

S.No. Item of impact Explanation 1. Concentration of

programs and data More often than not, computerization would lead to concentration of software and data in a few machines - hence increasing risk. Controls to protect these systems need to be in place to avoid downtime.

2. Physical Access vs. Logical access control

In manual environment, the thrust was on physical access methods like door locks, filing cabinets etc. In computerized environment while physical access controls would still be required, the thrust would be more on logical access controls like passwords, encryption etc.

3. Paper based authorisation vs. Online authorisation

Transaction authorisation in manual environment took the form of an individual preparing the voucher/document and another authorizing the same by affixing his signature/seal. In a computerized environment, the authorisation would take the form of one user initiating the transaction online using his login ID and another user authorizing the same using his login ID.

4. Skill set of personnel Skilled/trained employees are considered a form of preventive control. The skill set requirement for employees in computerized environment differs from skill set requirements in a manual environment.

5. Segregation of duties Segregation of duties is required to ensure that a single employee or group cannot put through a complete transaction all by themselves. In computerized environment this is achieved by enabling role based access/restricting access privileges. Apart from segregation at the transaction level, it is imperative to have the same even at the job definition level for IT Staff- i.e programmer cannot be an end-user and vice versa.

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6 Adequate Documents and Records

In manual transactions there are visible audit trails for transaction initiation and authorisation. In computerised environment there are no or very little documents evidencing transactions- may have to rely on system based evidence.

7. Management Supervision In manual environment, supervision of personnel is relatively easier as the managers and their subordinates are generally present in the same physical location. With use of data communication mechanisms to reach customers, employee supervision may also have to be done remotely.

8. Independent check on performance

In manual environment, staff as subject to independent checks-as they may commit inadvertent errors or fail to follow laid down procedures. In automated environment, software once tested and deployed are generally stable- unless there is a software or hardware failure.

9. Delegation of authority and responsibility

Clearly defined authority and responsibility is a primary control in both manual and computer based systems. It is challenging to achieve this in a computerised environment, as resources may be shared amongst users.

(c) Scope of the Act (Chapter 1) It shall extend to the whole of India and, save as otherwise provided in this Act, it applies also to any

offence or contravention there under committed outside India by any person.

It has been made effective from 17.10.2000. (Amendment Act is effective 23.12.2008-Assent of the President on 05.02.2009- Notified on 27.10.2009 )

This Act shall not apply to: (As per First Schedule) (AM) a. a negotiable instrument (other than a cheque) as defined in section 13 of the Negotiable Instruments

Act, 1881 (26 of 1881); b. a power-of-attorney as defined in S. 1A of the Powers-of-Attorney Act, 1882; c. a trust as defined in section 3 of the Indian Trusts Act, 1882; d. a will as defined in clause (h) of section 2 of the Indian Succession Act, 1925 including any other

testamentary disposition by whatever name called; e. any contract for the sale or conveyance of immovable property or any interest in such property; f. any such class of documents or transactions as may be notified by the Central Government in the

Official Gazette.

4 (a) The concept of good governance by itself would not make the organisation successful- it needs to be

integrated with need for the enterprise to create wealth to stakeholders. Hence there is a need to balance the two aspects- conformance and performance. i. Conformance or Corporate Governance Dimension: This focusses on regulatory requirements. It covers aspects like role of Chairman, CEO, Composition and function of the BoD, Committees of the Board- ex: Audit Committee, Control Assurance and Risk Management etc. This aspect is generally driven by regulatory requirements and may be subject to assurance or audit process. There are established oversight mechanisms for the BoD- like committees mainly of non-executive directors- like audit committee which ensure corporate governance processes are effective.

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ii. Performance or Business Governance: This dimension focusses on strategy and value creation with the objective of helping the Board take strategic decisions, understanding the risk appetite and its key performance drivers. It is pro-active, business oriented and takes a futuristic/forward looking view. Unless corporate governance, performance governance is not amenable to an oversight mechanism or to any standards – varies from company to company. Overall strategy is the responsibility of the Board. It may help to create a committee like a strategy committee to fill the oversight gap.

(b) BYOD comes with its share of risk- allowing access to corporate network, emails, client data on the same device . i. Network Risk:

When corporate devices/company provided devices are used the IT Dept. has complete visibility into the devices connected to the network- helping them analyse and monitor the devices. When employees are allowed to connect their own devices, the IT Dept. may not be aware of the total number of devices connected – in case of security concern like virus outbreak, they may not be sure if all devices have been scanned.

ii. Device Risk: A loss or theft of a personal device can result in enormous financial and reputation risk as the device may contain sensitive corporate data. Company trade secrets may be retrieved by perpetrators from stolen devices.

iii. Application Risk: Most of the user devices may not have update security softwares- like patch update, anti-virus/malware updates etc. Thus mobile vulnerabilities have increased- it is not clear as to whether the organisation or the employee is responsible for securing the devices.

iv. Implementation risk: A BYOD Program to address issues both technical in nature and also implementation issues. As corporate data is at stake a strong implementation policy will communicate to the users the expectations – in the absence of which chances of misuse increase. A weak policy would result in making the devices vulnerable to threats.

(c)

i. Public Clouds: This environment can be used by general public-can be utilized by various individuals, organisations etc. These are administered by third party vendors over the internet and charged by pay-per-use basis.

Advantage of such cloud type is : a. It offers facility to develop, deploy and manage enterprise applications at affordable costs. b. It allows organisations to deliver highly scalable and reliable applications rapidly and at more

affordable costs. c. Security is a concern. ii. Private Clouds: Such clouds reside within the boundaries of an organisation and is used exclusively for

the organisation’s benefit. Also known as internal clouds they are deployed by the IT Dept. for optimizing resource utilization.

Advantage of such cloud type is : a. They improve average server utilization – high efficiency levels from low cost servers and hardware. b. High level of automation reduces operating costs and admin overheads.

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5. (a)

S.No. Control Obj. Meaning Example 1. Confidentiality Data and information are

disclosed/made-available only to those who have a right to know it (i.e. unauthorised persons should not have access to data)

Payroll data should be known only to the payroll department. Manager in purchase department need not know the payroll details of all employees in the organisation

2. Integrity Data is protected against unauthorised modifications

Sales price master data in the look-up list should not be modifiable by all sales employees or billing clerks.

3. Availability Information system are available and usable when required

System should have minimum down time. In case of hardware/software problem (Ex: disk crash) availability is affected.

(b) Characteristics of an Expert System

To qualify as an expert system, the following are some of the desired characteristics i. Availability of subject matter experts to communicate and build the KB of the expert system ii. Tasks handled should be complex enough that it cannot be handled by a normal processing system iii. Focus should be on a single domain- i.e if it is for oil drilling- it would address that area only and not

weather forecasting or vice-versa 3. Benefits of an Expert System i. Reduces the risks associated with knowledge loss due to an experts death, resignation, job shift etc-

especially in industries where expertise is scarce- like nuclear science, oil drilling etc. ii. Ready access to data on a real-time basis iii. Not susceptible to limitations like human beings- no fatigue, probabilistic behaviour etc. iv. Helpful in situations where strategic decisions are to be taken- for example pricing of an insurance

product etc.

(c) List the risk mitigation strategies (4 Marks) Depending upon the type of risk and its significance to business, management may choose to: a. Avoid Risk: eliminate risk by eliminating the cause. For example if a particular software is known to

contain Trojans, management may choose not to install it all and thus avoid risk b. Mitigate Risk: lessening the probability or impact of risk by defining, implementing and monitoring

controls. For example to reduce the risk associated with viruses, the management may choose to implement anti-virus software as an control measure

c. Transfer Risk: Through methodologies like insurance etc. d. Accept Risk: Acknowledge that a level of risk will exist and monitor it e. Ignore Risk: Which is dangerous

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6. (a)

S.No. Type of Site Meaning When to use? Cost 1. Hot Site It is a fully configured

site with all hardware and software- in some cases may contain data also.

If fast recovery is critical.

Expensive to maintain

2. Warm Site Partially configured- may contain hardware that are difficult to obtain- a few selected peripherals and power supply

If intermediate level of back-up is sufficient

Less expensive than a hot site but more expensive than a cold site

3. Cold Site Only physical location and power supply provided- no hardware is available.

If the tolerable downtime is large

Least expensive but difficult to configure in case of a disaster

(b)

i. Inherent Risk : Refers to susceptibility of information resources to loss, damage or destruction assuming there are no related internal controls. If auditor concludes that there is high likelihood of risk exposure ignoring internal controls, he would conclude that inherent risk is high. Example: Internet banking/mobile banking would have higher inherent risk compared to branch banking.

ii. Control Risk (can be understood as risk of a control failure) : Control risk is a measure of auditor’s assessment of the likelihood that risk would exceed the tolerable level and would not be prevented or detected by client’s internal control system.

It is defined as risk that could occur in an audit area and which would be material, individually or in combination with other errors and will not be prevented or detected or corrected in a timely manner by the internal control systems.

iii. Detection Risk (Can be understood as failure to detect a control weakness) : It is a risk that an IS Auditors compliance or substantive procedures would not detect an error which could be material individually or in combination with other errors. Detection risk is generally attributable to lack of proper audit planning or choice of inappropriate audit procedures.

(c)

Meaning of prototype: It is a usable system or a system component that is built quickly at a lesser cost and with the intention of being modified or replaced with a full scale or fully operational system.

Using traditional approach may take years to complete. Hence for smaller systems the organisations build prototype/pilot versions.

The users are allowed to work with the prototype, their suggestions are incorporated into the prototype and a revised prototype is developed. This process goes on till a prototype is reached which incorporates all user requirements.

The final prototype can either be : 1. Refined/turned into the real system

or 2. Scrapped and the knowledge used to build the real system.

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7. (a) Public Key Cryptography

According to S.2 (f) of the Information Technology Act, 2000, "asymmetric crypto system" means a system of a secure key pair consisting of a private key for creating a digital signature and a public key to verify the digital signature.

(b) SCARF

It involves embedding audit modules to continuously monitor transaction activities which the auditor feels is material / significant.

The data deemed important by auditor (say payments above 20000 in cash)are recorded in a SCARF file or audit log

The auditor takes print outs of the SCARF file to examine whether any transactions require follow-up

(c) Social Engineering Social engineering, in the context of information security, refers to psychological manipulation of people into performing actions or divulging confidential information. A type of confidence trick for the purpose of information gathering, fraud, or system access.

(d) Data Mining The analysis step of the "Knowledge Discovery and Data Mining" process, or KDD, an interdisciplinary subfield of computer science, is the computational process of discovering patterns in large data sets involving methods at the intersection of artificial intelligence, machine learning, statistics, and database systems. The overall goal of the data mining process is to extract information from a data set and transform it into an understandable structure for further use. This can be used in various business applications like market analysis and management by finding patterns that are helpful in target marketing, customer relation management, market based analysis, cross selling, market segmentation, risk analysis, customer retention, improved underwriting, quality control, fraud analysis etc.

(e) BIA Refers to a process of determining the impact of losing the support of any resource-i.e the loss that would be suffered assuming some IT asset (say a server, database etc.) is not available. The business impact analysis assessment study will establish the escalation (increase) of that loss over a period of time – i.e how the loss would increase when the unavailability time increases. Thus the organisation can arrive at “tolerable down-time” or “pain threshold”- the length of time business units can survive without IT resources.

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http://en.wikipedia.org/wiki/Psychological_manipulation

http://en.wikipedia.org/wiki/Confidence_trick

http://en.wikipedia.org/wiki/Computer_science

http://en.wikipedia.org/wiki/Data_set

http://en.wikipedia.org/wiki/Data_set

http://en.wikipedia.org/wiki/Artificial_intelligence

http://en.wikipedia.org/wiki/Machine_learning

http://en.wikipedia.org/wiki/Statistics

http://en.wikipedia.org/wiki/Database_system



Paper 7 - Direct Tax Laws No. of Questions: 7 Total Marks: 100 No. of Pages: 4 Time Allowed: 3 hrs

Working notes should form part of the respective answers. Question No.1 is Compulsory.

Answer any five questions from the remaining six questions. All questions relate to the assesment year 2017-18, unless otherwise stated in the question.

1. a) Mr.Vasan, aged 62 years, furnishes the following particulars for the year ending 31.03.2017.

(i) Life Insurance Premium paid - ̀ 30,000, actual capital sum of the policy assured for ` 1,20,000. The insurance policy was taken on 1.4.2011.

(ii) Contribution to Public Provident Fund - ` 40,000 in the name of father. (iii) Tuition fee payment - ` 8,000 each for 2 sons pursing full time graduation course in Calcutta;

Tuition fee for daughter pursuing PHD in Kellogg University, USA - ` 2.20 lakhs. (iv) Housing loan principal repayment - ` 32,000 to Axis Bank.This property is under construction in

Calcutta as on 31.03.2017; (v) Principal repayment of housing loan taken from a relative - ` 70,000. The property is self-

occupied at Pune. (vi) Deposit under Senior Citizen Savings Scheme - ` 15,000 (vii) Five-year deposits in an account under Post Office Time Deposit Scheme - ` 50,000. (viii) Investment in National Savings Certificate - ` 70,000. Compute the deduction eligible under appropriate provisions of section 80C for AY 2017-18. (10 Marks)

b) Mr. Suresh, an individual resident in India aged 38 years, furnishes you the following particulars of income earned in India, Foreign Countries "X" and "Y" for the previous year 2016-17. Compute the total income and tax payable by Mr. Mahesh in India for AY 17-18 assuming that India has not entered into double taxation avoidance agreement with countries A&B.

Particulars ` Indian Income Income from business carried on in Chennai 9,60,000

Interest on savings bank with Karur Vysya Bank 35,000 Income earned in Foreign Country "A" [Rate of Tax -12%] Agricultural income in Country "A" 72,000 Royalty income from a book on art from Country "A" (Gross) 8,00,000 Expenses incurred for earning royalty 70,000 Income earned in Foreign Country "B" [Rate of Tax -21%] Dividend received from a country incorporated in Country "B" 2,25,000 Rent from a house situated in Country "B" (Gross) 3,30,000

Municipal tax paid in respect of the above house (not allowed as deduction in Country "B"

10,000

Compute total income of the instution and tax payable by it for the AY 2017-18. (10 Marks)

2. Park Hospitality Limited is engaged in the business of running hotels of 3-star category. The Company's Statement of Profit and Loss for the previous year ended 31st March 17 shows a net profit of ` 152 lakhs after debiting or crediting the following items:

(i) Payment of ` 0.25 lakh and ` 0.30 lakh in cash on 3rd December, 2016 and 10th December, 2016 respectively for purchase of crab, lobster and squid to Mr. Suresh, a fisherman, and Mr.Malik, a middleman for these products

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(ii) Contribution towards employees' pension scheme notified by the Central Government under 80CCD for a sum of ` 3 lakhs calculated at 12% of basic salary and dearness allowance payable to the employees.

(iii) Payment of ` 6.50 lakhs towards transportation of various materials procured by one of its hotel to M/s Raj Transport, a partnership firm, without deduction of tax at source. The firm has furnished its permanent account no. in the tender document.

(iv) Profit of ` 12 lakhs on sale of plot of land to Arun Limited, a domestic company, the entire shares of which are held by the assessee company. The plot was acquired by Park hospitality limited on 1st June, 2015.

(v) Contribution of ` 2.50 lakhs to Indian Institute of Technology with a specific direction for use of the amount for scientific research programme approved by the prescribed authority.

(vi) Expense of ` 10 lakhs on foreign travel of two directors for a collaberation agreement with a foreign company for a brewery project to be set up. The negotiation did not succeed and the project was abandoned.

(vii) Fees of ` 1 lakh paid to independent directors for attending Board meeting without deduction of tax at source under section 194J.

(viii) Depreciation charged ` 10 lakhs. (ix) ` 10 lakhs, being the additional compensation received from the State Government pursuant

to an interim order of Court in respect of land aquired by the State Government in the previous year 2015-16.

(x) Dividend received from a foreign company ` 5 lakhs. Additional Information:

(a) As a corporate debt restructuring, the bank has converted unpaid interest of ` 10 lakhs up to 31st March, 2016 in to a new loan account repayable in five equal annual installments. The first installment of ` 2 lakhs was paid in March, 2017 by debiting new loan account.

(b) Depreciation as per Income-tax Act, 1961 - ̀ 5 lakhs. (c) The company received a bill for ` 2 lakhs on 31st March, 2017 from the supplier of vegetables

for supply made in March, 2017. The bill was ommitted to be recorded in the books in March, 2017. The bill was paid in April, 2017 and the necessary entry was made in the books then.

Compute the total income of Park Hospitality Limited for the assessment year 2017-18. indicating the reason for treatment of each item. Ignore MAT provisions. (16 Marks)

3. (a) Explain the circumstances under which the Assessing Officer can resort to provisional attachment of

the property of the assessee. Also state the period of time for which such attachment can take place. When can the Assessing Officer revoke provisional assessment of property? Discuss. (8 Marks)

(b) (i) Mataji charitable trust purchased a building for ` 25 lakh in March, 2016 for the purposes of the

trust and claimed the same as application of income in the P.Y 15-16. It also claims depreciation@10% on buildings for P.Y 16-17, while computing income for the purpose of application. Discuss the correctness of the depreciation claimed by Mataji charitable trust.

(ii) Deviji Charitable trust, whose main object is relief of the poor, filed an application for registration on 1st April, 2016 and was registered under section 12AA on 1st September, 2016. The trust is in existence since May, 2014. The trust claimed the benefits of section 11 and 12 in respect of the income from property held under trust for AY 15-16 to AY 17-18. Discuss the correctness of the claim of the trust, if assesment proceedings for AY 15-16 and AY 16-17 are pending before the Assessing Officer on 1st September, 2016. (2 x 4 = 8 Marks)

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4. Answer any four out of the following five cases. (a) How do you deal with the following issue under the respective provisions of the Income-tax Act,

1961? The assessee, who was deriving income from "house property", realised a sum of `78,000 on account of display of advertisement hoardings of various concerns on the roof of the building. He claims that this amount should be considered under the head "House Property" and not under "other sources" (4 Marks)

(b) Mr.A had placed a deposit of `10 lakhs in a bank on which he received interest of `80,000. He had also borrowed `5 lakhs from the same bank on the security of deposit and was liable to pay ` 50,000 by way of interest to the bank. He therefore, offered the difference between two amounts of ` 30,000 as income from other sources. Is this correct?. (4 Marks)

(c) Mr.Sunil sold a plot during the financial year 2016-17 and invested the sale proceeds in purchase of a new house in the name of his wife by the end of the financial year i.e., by 31st March, 2017. He claimed deduction under section 54F in respect of the new house purchased by him in the name of his wife. The Assessing Officer, while making the assessment for the Assessment Year 2017-18, denied such deduction on the ground that in order to avail benefit under section 54F, it is necessary to invest the proceeds in the name of the assessee. Comment on the validity of action taken by the Assessing Officer. (4 Marks)

(d) During the financial year 2016-17, Mr.X received a sum of ` 1,50,000 (` 50,000 p.a) by way of arrears for the last three years as the Government department (tenant) enhanced the rate of rent with retrospective effect. Will the sum of ` 1,50,000 be taxable in the assessment year 2017-18? Can it be spread over the last three years?. (4 Marks)

(e) Preman & Associates had made payment in excess of the limits prescribed to the contractors for carrying out labour job at various sites, but had not deducted tax at source as per section 194C. State the penalty applicable as per the provisions of the Income-tax Act, 1961. (4 Marks)

5.

(a) Examine the treatment of Government Grants as per the provisions of the Income – tax Act,1961 read with ICDS VII. (i) Subsidy for the corpus of a trust established by the Central Government. (ii) Government grants received in June 2016 as compensation for losses incurred during the P.Y

2015-16 by a unit set up in a backward area in the state of Bihar in that year. (6 Marks) (b) Examine the taxability or allowability or otherwise in the following cases while computing income

under the head " Profits and gains from business or profession" to be declared in the return of income for the assesment year 2017-18. (i) Amount received towards power subsidy with a stipulation that the same is to be adjusted in

the electricity bills. (ii) The amount of margin money forfeited by a bank on the failure of its constituents of not

taking the delivery of the shares purchased by such bankon their behalf. (iii) Depreciation on the "decoders" given on loan to the cable operators but owned by the

assessee who is engaged in the business of distributing satellite channels. (6 Marks)

(c) XYZ Ltd, an indian company, was registered on 1.4.2014. It is solely engaged in the manufacture of textiles. Its turnover for the AY 2014-15, AY 2015-16 and AY 2016-17 are ` 3 crore, ` 5 crore and ̀ 6 crore, respectively.What would be the total tax payable by XYZ Ltd for AY 17-18, if its total income for the PY 2016-17 is ` 1.20 crore?. (4 Marks)

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6. (a) "Proceedings cannot be intiated under the Act, unless a proper notice to this effect has been

served upon". In this context answer: (i) What are the prescribed modes of service of such notice? (ii) On whom should the notice be addressed and served upon in the cases where the assessee is

a dissolved firm, a deceased person and a partitioned HUF. (2 x 3 = 6 Marks) (b) Beta Ltd, a domestic company, declared a dividend of ` 95 lakh for the year FY 2015-16 and

distributed the same on 26.10.2016. Mr. Ram, holding 20% shares in Beta ltd., receives dividend of `19 lakh in December, 2016. Mr. Shyam, holding 10% shares in Beta Ltd., receives dividend of `9.5 lakh. Discuss the tax implications in the hands of Beta Ltd., Mr. Ram and Mr. Shyam, assuming that Mr.Ram and Mr.Shyam have not received dividend from any other domestic company during the year. (6 Marks)

(c) Mr. Ram, a residential individual of the age of 47 years, has not furnished his return of income for the AY 2016-17. However, the total income assessed in respect of such year under section 143(3) is `25 lakh. Is penalty under section 270A attracted in this case, and if so, what is the quantum of penalty leviable . (4 Marks)

7. (a) Explain the context of provisions contained in Chapter XVII of the Act and also work out the

amount of tax to be deducted by the payer of income in the following cases: (i) Payment of `5 lacs made by X Ltd to Y Events Co.Ltd for organizing a debate competition of

the subject " Preservation of Rural Heritage of Tamil Nadu". (ii) "Profit Commission" of `1 lac paid by a re-insurance company to the insurer company after

the expiry of the term of insurance where there was no claim during the treaty. (iii) Vimal, a part time director of PSR Pvt. Ltd. was paid an amount of `2,35,000 as fees which

was actually in the nature of commission on sales for the period 1.4.2016 to 30.6.2016. (3 x 2 = 6 Marks)

(b) White Lime Co of US entered in to contracts with three Indian companies namely White Ltd, Red Ltd and Blue Ltd. for supplying know –how. White Lime Co. made an application to Authority for Advance Rulings (AAR) on the rate of withholding tax on receipts applicable to it. Red Ltd. also made an application to the Assessing Officer for determination of the rate at which tax is deductible on the payment made to non-resident company i.e White Lime Co. The Authority for Advance Rulings (AAR) rejected the application of White Lime Co. on the ground that the question raised in the application is already pending before an Income-tax authority.

(6 Marks) (c) Which class or classes of buyers are not required to collect tax at source under section 206C (1D)

[Notification No.75/2016, dated 19.08.2016] ?. (4 Marks) PRIME A

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The Society of Auditors and Prime Academy45th Session Model Exam – Final – Direct Tax Laws

Suggested Answers

1.(a) Computation of eligible deduction under section 80C for A.Y. 2017-18.

ParticularsLife Insurance Premium (See Note 1) 24,000Contribution to Public Provident Fund (See Note 2) NilTuition fee of 2 sons for graduation course (See Note 3) 16,000Housing loan principal repayment (See Notes 4 & 5) NilSenior Citizen Savings Scheme Deposit (See Note 6) 15,000Post Office Time Deposit Scheme 50,000Investment in National Savings Certificate 70,000Total Investment 1,75,000

Notes:1. Any amount of life insurance premium paid in excess of the specified percentage of

actual capital sum assured shall be ignored for the purpose of deduction under section 80C. In the given case, since the insurance policy has been issued before 1.04.2012, therefore 20% of actual capital sum assured i.e., 24,000 shall be allowed as deduction, whereas, the premium paid during the year is 30,000. Therefore, the excess premium of 6,000 does not qualify for deduction.

2. In the case of an individual, contribution to PPF can be made in his name or in the name of his spouse or children to qualify for deduction under section 80C. As the contribution was made in the name of his father, deduction is not allowable.

3. Tuition fee paid is eligible for deduction under section 80C for a maximum of two children. Therefore, 16,000 shall be allowed as deduction. Tuition fee paid to an educational institution situated outside India is not eligible for deduction.

4. In order to claim the principal repayment on loan borrowed for house property as deduction, the construction of such property should have been completed and should be chargeable to tax under the head "Income from house property". In the given case, since the property is under construction, principal repayment does not qualify for deduction.

5. Repayment of principal on housing loan is not allowed as deduction in case the loan is borrowed from friends, relatives etc. In order to qualify for deduction, the loan should have been obtained from Central Government / State Government / bank / specified employer / institution.

6. The following investments are also eligible for deduction under section 80C:- five year time deposit in an account under Post Office Time Deposit Rules, 1981; and deposit in an account under the Senior Citizens Savings Scheme Rules, 2004.

(b) Computation of total income of Mr. Suresh for A.Y.2017-18Particulars ₹ ₹Income from House Property [House situated in Country B]

Gross Annual Value 1 3,30,000Less: Municipal taxes paid in Country B 10,000Net Annual Value 3,20,000Less: Deduction under section 24 – 30% of NAV 96,000 2,24,000

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Profits and Gains of Business or ProfessionIncome from business carried on in India 9,20,000

Income from Other SourcesInterest on Savings bank with Karur Vysya 35,000Agricultural Income from Country A 72,000 Dividend received from Company incorporated in Country B 2,25,000Royalty income from a book on art from Country A (after

Deducting expense of 70,000) 7,30,000 10,62,000Gross Total Income 22,06,000Less: Deduction under Chapter VIAUnder section 80QQB – Royalty income of a resident from a work of art2

3,00,000

Under section 80TTA – Interest on savings bank account, subject to a maximum of 10,000

10,000

Total Income 18,96,000

Computation of tax liability of Mr. Suresh for A.Y.2017-18ParticularsTax on total income [30% of 8,96,000+ 1,25,000] 3,93,800Add: Education cess@3% 11,814

4,05,614Less: Rebate under section 91 (see Working Note below) 1,54,530Tax Payable 2,51,084Tax Payable (Rounded off) 2,51,080

1. Rental income has been taken as GAV in the absence of other information relating to fair rent, municipal value etc.

2. It is assumed that the royalty earned outside India has been brought into India in convertible foreign exchange within a period of six months from the end of the previous year.

Calculation of Rebate under section 91:Average rate of tax in India [i.e., 4,05,614/ 18,96,000 21.39%x 100]Average rate of tax in country A 12%Doubly taxed income pertaining to country A3Agricultural Income 72,000Royalty Income [ 8,00,000 – 70,000 (Expenses) – 4,30,000

3,00,000 (deduction under section 80QQB)] 5,02,000

Rebate under section 91 on . 5,02,000 @12% being the lower of average Indian tax rate (21.39%) and foreign tax rate (12%)

60,240

Average rate of tax in country B 21%Doubly taxed income pertaining to country BIncome from house property 2,24,000Dividend 2,25,000

4,49,000

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Rebate under section 91 on 4,49,000 @21% (being 94,290the lower of average Indian tax rate (21.34%) and foreign tax rate (21%)

Total rebate under section 91 (Country A + Country B) 1,54,530

3. Doubly taxed income includes only that part of income which is included in the assessees total income. The amount deducted under Chapter VIA is not doubly taxed and hence, no relief is allowable in respect of such amount – CIT v. Dr. R.N. Jhanji (1990) 185 ITR 586 (Raj.).

2. Computation of Total Income of Park Hospitality Ltd. for the A.Y.2017-18

Profits and Gains from Business and Profession ₹ ₹

Net profit as per profit and loss account 1,52,00,000Add: Items debited but to be considered separately orto be disallowed(a) Payment to middleman for purchase of crab etc. in anamount exceeding 20,000 30,000[Under section 40A(3), disallowance is attracted in respect of expenditure for which cash payment exceeding 20,000is made on a day to a person. Payment of 25,000 tofishermen for purchase of crab etc. is covered by exceptionunder Rule 6DD. However, payment of 30,000 tomiddlemen for purchase of crab etc. is not covered underthe exception - CBDT Circular 10/2008 dated 5/12/2008].(b) Contribution towards employees’ pension scheme in 50,000excess of 10% of salary disallowed under section 40A(9)[Contribution to the extent of 10% of salary (basic salary +dearness allowance, if it forms part of pay for retirementbenefits) is allowable as deduction under section 36(1)(iva).In this case, it is presumed that dearness allowance formspart of pay for retirement benefits](c) Payment to transport contractor without deduction of -tax at sourceNo tax is required to be deducted at source under section 194C in respect of payment to transport contractor, if the contractor furnishes his PAN. In this case, since the contractor has furnished his PAN, no tax is required to be deducted in respect of payment of 6.50 lakhs made for transport of materials. Hence, no disallowance under section 40(a)(ia) would be attracted in this case for non-deduction of tax at source].(d) Expenses on foreign travel of two directors for a collaboration agreement which failed to materialize

10,00,000

[Where such expenditure is incurred for a project not related the existing business and the project was abandoned without creating a new asset, the expenses are capital in nature. Brewery project is not related to the existing business of running three star hotels](e) Fees paid to directors without deducting tax at source [30% of 1 lakh]

30,000

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[Disallowance@30% would be attracted under section 40(a)(ia) for non-deduction of tax at source from director’s remuneration on which tax is deductible under section 194J]

11,10,000

1,63,10,000Less: Items credited but to be considered separately / Expenditure to be allowed(f) Profit on sale of plot of land to 100% subsidiary[Short-term capital gains arises on sale of plot of land held for less than 36 months. However, in this case, since the transfer is to a 100% subsidiary company and the subsidiary company is an Indian company, the same would not constitute a transfer for levy of capital gains tax as per section 47(iv). Since this amount has been credited to the statement of profit and loss, the same has to be deducted for computing business income].

12,00,000

(g) Contribution to IIT for scientific research[Contribution to IIT for scientific research programme approved by the prescribed authority qualifies for weighted deduction@200% under section 35(2AA). Since 100% of contribution has already been debited to the statement of profit and loss, the balance 100% has to be deducted while computing business income

2,50,000

(h) DepreciationDepreciation allowable under the Income-tax Act, 1961 is 15 lakhs whereas the depreciation as per books of account debited to the statement of profit and loss is 10 lakhs. Hence, the additional amount of 5 lakhs has to be deducted while computing business income]

5,00,000

(i) Additional compensation received from State Government[Since the additional compensation has been received pursuant to an interim order of the Court, the same would be deemed as income chargeable to tax under the head “Capital Gains” in the year of final order as per section 45(5). Since the compensation has been credited to the statement of profit and loss, the same has to be deducted while computing business income]

10,00,000

(j) Dividend received from foreign companyDividend received from foreign company is taxable under the head “Income from other sources”. Since the said dividend has been credited to the statement of profit and loss, the same has to be deducted while computing business income]

5,00,000

(k) Interest paid during the yearConversion of unpaid interest into loan shall not be construed as payment of interest for the purpose section 43B. The amount of unpaid interest converted into a new loan will be allowable as deduction only in the year in which such converted loan is actually paid. Since 2 lakhs has been paid in the P.Y.2014-15, the same is allowable as deduction]

2,00,000

(l) Purchases omitted to be recorded in the books[Since the purchase is made in March, 2015 (i.e., P.Y.2014- 15), in respect of which bill of 2 lakhs received on 31.3.2015 has been

2,00,000

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omitted to be recorded in the books in that year, it has to be deducted to compute the business income.3 It is logical to assume that the company is following mercantile system of accounting.]

38,50,000Income under the head " Profit and Gains of Business or Profession" 1,24,60,000Income from Other SourcesDividend received from foreign company[Dividend received from a foreign company is chargeable to tax under the head “Income from other sources”.1]

5,00,000

Gross Total Income 1,29,60,000Less: Deduction under Chapter VI-A NilTotal Income 1,29,60,000Only dividend received from domestic companies would be exempt under section 10(34), since dividend distribution tax is paid by the companies on such dividend.

3. a) As per the provisions of section 281B, there can be provisional attachment to protect the

interest of Revenue in certain cases i.e.-(i) The proceeding for the assessment of any income or for the assessment or reassessment

of any income which has escaped assessment should be pending.(ii) Such attachment should be necessary for the purpose of protecting the interest of Revenue

in the opinion of the Assessing Officer.(iii) The previous approval of the Principal Chief Commissioner or Chief Commissioner, Principal

Commissioner or Commissioner, Principal Director General or Director General or Principal Director or Director has been obtained by the Assessing Officer.

(iv) The Assessing Officer, may, by an order in writing attach provisionally any property belonging to the assessee in the manner provided in the Second Schedule.

(v) Such provisional attachment shall cease to have effect after the expiry of a period of six months from the date of order made under section 281B(1). However, the period can be

(vi) extended by the Principal Chief Commissioner or Chief Commissioner, PrincipalCommissioner or Commissioner, Principal Director General or Director General or Principal Director or Director, as the case may be, for the reasons to be recorded in writing for a further period or periods as he thinks fit. The total period of extension in any case cannot exceed 2 years or 60 days after the date of order of assessment or reassessment, whichever is later.

(vii) The Assessing Officer shall, by order in writing, revoke provisional attachment of a property made under section 281B(1) in a case where the assesse furnishes a guarantee from a scheduled bank, for an amount not less than the fair market value of such provisionally attached property or for an amount which is sufficient to protect the interests of the revenue.

b)i.

Section 11(6) provides that income for the purposes of application shall be determined without allowing any deduction for depreciation or otherwise in respect of any asset, the cost of acquisition of which has been claimed as an application of income under section 11 in the same or any other previous year.Accordingly, in this case, since the cost of building (i.e., 25 lakh) has been claimed and allowed as application of income under section 11 while computing the income of the trust for the P.Y.2015-16, depreciation on building will not be allowed for the purpose of determining income for the purposes of application in the P.Y.2016-17.

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Therefore, the depreciation claim made by Mataji charitable trust is not correct.

ii. Section 12A(2) provides that the provisions of section 11 and 12 shall apply in relation to the income of a trust from the assessment year immediately following the financial year in which the application for registration is made. Accordingly, by virtue of this provisions the exemption provision would apply from AY 2017-18 since the charitable trust made an application for registration in Apr 2016.However the first proviso to section 12A(2) provides that in case where a trust or institution has been granted registration under 12AA, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the AO as on the date of such registration provided the object and activities of the trust remain same for such preceding yearIn this case since the assessment proceedings for AY 15-16 and 16-17 are pending before the AO on the date of registration of trust, the claim of the charitable trust is correct and the benefit of exemptions under sections 11 and 12 would be available in respect of those years , provided the objects and activities of the trust are same during those years.

4. a. This question came up for consideration before calcutta high court in Mukherjee estate p ltd Vs CIT

(2000) . It was decided that the assessee let out the roof for advertisement for hoardings and that the income cannot be considered as income from house property as hoardings do not form part of building . Such income is chargeable under income under other sources

b. The interest income from deposit in the bank is assessable under the head income from other sources. The deduction admissible against this income is any expenditure (not being the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. However the interest paid on the borrowing of 5 lakhs does not fall under this category. This has been held by SC in CIT Vs V.Gopinathan (2001). In that case SC observed that the interest received by the assessee from the bank on a fixed deposit is income in his hands, and there could be no deduction there from unless there is a law permitting such deduction. The interest on loan taken by the assessee on the security of the fixed deposit would not go to reduce the income by way of interest on the fixed deposits as there is no provision of deduction of such interest on the loan.Therefore in this case, the full sum of 80,000 will be liable to tax under income from other sources.In case the assessee had deposited business funds and availed loan against such deposit for business use of such loan, the interest on loan against deposit is eligible for deduction.

c. The issue under consideration in this case is whether exemption under section 54F can be denied to Mr. Suni l , if sale proceeds of a long term capital asset10 are invested in a new residential house within the stipulated time limit but the said house is purchased in the name of his wife and not in his name.This issue came up before the Delhi High Court in CIT v. Kamal Wahal (2013) 351 ITR 4, wherein it was observed that section 54F requires purchase or construction of a residential property within the specified period. It does not require purchase of new residential house property in the name of the assessee himself.The Delhi High Court decided that having regard to the rule of purposive construction and the object of enactment of section 54F, the assessee is entitled to claim exemption under section 54F in respect of utilization of sale proceeds of plot of land for investment in residential house property in the name of his wifeIn this case, Mr. Sunil had not purchased the new house in the name of a stranger or

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somebody who is unconnected with him, but had purchased it in the name of his wife. The entire investment for purchase of new residential house had come out of the sale proceeds of the plot belonging to Mr. Sunil and there was no contribution from his wife. Therefore, applying the rationale of the above Delhi High Court ruling in this case, the action of the Assessing Officer in denying the claim for deduction under section 54F in the hands of Sunil due to the reason that he had invested the sale proceeds in purchasing a new residential house in the name of his wife rather than in his name, is not valid. It is assumed that the plot is a long-term capital asset

d. As per Section 25A the arrears of rent shall be taxable in the previous year in which such arrears are received. The assessee shall be allowed deduction of 30% of such amount received . Further it is not necessary that the assessee should be the owner of the such house property in the previous year in which such arrears are received. As arrears of rent of .1,80,000 is received in the PY 16-17, the same is taxable in the AY 17-18. Thus the net sum of .1,26,000 is.(1,80,000-54,000) shall be chargeable ot tax under house property income. There is no provision in the Income-tax Act, enabling the assessee to spread over the arrears of rent over the last three years.

e.(i) Penalty under section 271C is attracted for failure to deduct tax at source. The penalty would be a sum equal to the amount of tax which such person has failed to deduct. Such penalty can be imposed only by the Joint Commissioner. Therefore, Preman & Associates shall be liable for penalty under section 271C equal to the amount of tax which they have failed to deduct under section 194C from the payments made to the contractors. The penalty would be in addition to the disallowance of 30% of expenditure/payment under section 40(a)(ia).

(ii) Section 133(6) empowers the Income-tax authority to require any person to furnish information in relation to such points or matters which will be useful for or relevant to any enquiry or proceeding under the Act. Failure on the part of an assessee to furnish the information in relation to such points or matters as required makes him liable for penalty under section 272A(2) of 100 for every day during which the failure continues.In a case where no proceeding is pending, the Income-tax authority can exercise this power only after obtaining the approval of the Principal Director/Director or Principal Commissioner/Commissioner as the case may be. In this case, it is presumed that the s Income-tax authority has obtained the approval of the Principal Director/Director or Principal Commissioner/ Commissioner before exercising this power.

5.a. Section 2(24) defining income, includes within its fold, assistance in the form of a subsidy or

grant or cash incentive or duty drawback or waiver or concession or reimbursement, by whatever name called, by the Central Government or State Government or any authority or body or agency in cash or kind to the assessee, other than –(i) the subsidy or grant or reimbursement which is taken into account for determination of actual cost of the asset in accordance with Explanation 10 to section 43(1); or(ii) the subsidy or grant by the Central Government for the purpose of corpus of a trust or institution established by the Central Government or a State Government, as the case may be.

(a) ICDS VII deals with the treatment of government grants. It requires Government grants relatable to depreciable fixed assets to be reduced from actual cost/Written Down Value. Accordingly, considering the exclusion from the definition of income under section 2(24) and the above provision contained in ICDS VII, subsidy for purchase of plant and machinery for the purpose of business should be reduced from actual cost/written down value.

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In order to avoid genuine hardship in cases where subsidy provided by the Central Government for budgetary support of a trust would become taxable by virtue of inclusion of subsidy in the definition of income under section 2(24), it has now been specifically provided that such subsidy or grant by the Central Government for the purpose of corpus of a trust or institution established by, inter alia, the Central Government shall not be included in the definition of income under section 2(24). Therefore, subsidy for the purpose of the corpus of a trust established by the Central Government is not includible in the definition of income for levy of income- tax.

(b) As per ICDS VII, Government grants receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial support to the person with no further related costs have to be recognized as income of the period in which it is receivable. Therefore, in this case, Government grants received in June 2016 as compensation for losses incurred during the P.Y.2015-16 have to be recognized as income of the P.Y.2016-17 (A.Y.2017-18)

b.(i) As per section 2(24)(xviii) assistance in the form of subsidy or grant or cash incentive by the Central Government or a State Government or any authority or body or agency in cash or kind is chargeable to tax as income. Also, ICDS VII seeks admission of such grant as income. Government grants should not be recognized until there is reasonable assurance that (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received. However, recognition of such grant shall not be postponed beyond the date of actual receipt. Since power subsidy has been received by the assessee, it is revenue in nature and chargeable to tax in A.Y. 2017-18.(ii) Since the bank is purchasing shares on behalf of the constituents, the forfeiture of margin money by the bank from the constituents for not paying the balance amount of purchase price and not taking delivery of shares purchased by the bank on their behalf is in the normal course of its banking business and hence, the forfeited amount is assessable as business income of the bank. The forfeited amount being revenue in nature cannot be adjusted against the purchase price of the shares. The Supreme Court has, in the case of CIT vs. Lakshmi Vilas Bank Ltd. (1996) 220 ITR 305, confirmed this view.

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(iii) Loan of “decoders” to cable operators is in the normal course of the assessee’s business of distribution of satellite channels, and hence the same can be treated as use of asset for business purposes. Since the assessee is the owner of decoders used for business purposes, he is entitled to depreciation under section 32. The Delhi High Court, in CIT vs. Turner International India (P) Ltd. (2008) 297 ITR 373, has confirmed this view.

c. Since the total turnover of XYZ Ltd. in the P.Y.2014 -15 does not exceed 5 crore, the applicable rate of tax for A.Y.2017-18 is 29% of total income of 1.20 crores. Further, since the total income exceeds 1 crore but does not exceed 10 crore, the applicable rate of surcharge would be 7% of tax on total income. This would be further increased by education cess@2% and secondary and higher education cess@1% of tax and surcharge.Accordingly, tax payable by XYZ Ltd. for A.Y.2017-18 would be calculated as follows:

ParticularsTax@29% on total income of 1,20,00,000 for the P.Y.2016-17Add: Surcharge@7% (since total income exceeds 1 crore but does not exceed 10 crore) on tax on total income

Add: Education cess@2% and SHEC@1% on tax plus surcharge

34,80,000

2,43,600

37,23,6001,11,708

Total tax payable 38,35,308

6.a.

(i) As per section 282(1), the service of notice or summon or requisition or order or any other communication under this Act may be made by delivering or transmitting a copy thereof to the person named therein -(1) By post or such courier services as approved by the CBDT; or(2) In such manner as provided in the Code of Civil Procedure, 1908 for the purposes of service

of summons; or(3) In the form of any electronic record as provided in Chapter IV of the Information

Technology Act, 2000; or(4) By any other means of transmission of documents as may be provided by rules made by

the CBDT in this behalf.The CBDT is empowered to make rules providing for the addresses (including the address for electronic mail or electronic mail message) to which such communication may be delivered or transmitted to the person named therein.

(ii) The service of notice in the given cases should be on the persons mentioned hereunder:-

Person Notice to be addressed and served onA dissolved firm

A deceased person A partitioned HUF

Any person who was a partner (not being a minor) immediately before dissolution.The legal heirs of the deceased.Last Manager of the HUF, or, if he is dead, then, all adult members of the erstwhile HUF.

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b.(i) The dividend of 95 lakh declared and distributed in the P.Y.2016-17 is subject to dividend

distribution tax under section 115-O in the hands of Beta Ltd. First of all, the dividend paid has to be grossed up by applying the rate of 15%. The gross dividend is 111.76 lakhs [ 95 lakh × 100/85]. Dividend distribution tax @17.304% is 19.3398 lakh.

(ii) In the hands of Mr.Ram, dividend received upto 10 lakh would be exempt under section 10(34). 9 lakh, being dividend received in excess of 10 lakh, would be taxable@10% as per section 115BBDA. Such dividend would not be exempt under section 10(34). Therefore, tax payable by Mr. Ganesh on dividend of 9 lakh under section 115BBDA would be 92,700 [i.e., 10% of 9 lakh + cess@3%].

(iii) In the hands of Mr. S h y a m , the entire dividend of 9.50 lakh received would be exempt under section 10(34), since only dividend received in excess of 10 lakh would be taxable under section 115BBDA.

c. Mr. Ram is deemed to have under-reported his income since he has not filed his return of income and his assessed income exceeds the basic exemption limit of 2,50,000. Hence, penalty under section 270A is leviable in his case.Computation of penalty leviable under section 270A

Particulars . .Assessment under section 143(3)

25,00,000

2,57,500

Under-reported income:Total income assessed under section 143(3)(-) Basic exemption limit 2,50,000

22,50,000Tax payable on under-reported income as increased by the

5,00,000basic exemption limit [30% of 12.5 lakhs + 1,25,000]Add: EC & SHEC@3% __15,000

5,15,000Penalty leviable@50% of tax payable

Note – It is assumed that the under-reported income is not on account of misreporting.

7.a.

i. The services of event managers in relation to sports activities alone have been notified by CBDT as professional services for the purpose of section 194J. in this case payment of Rs.5 lacs was made to an event management company for organising of a debate competition. Hence the provisions of 194J are not attracted. However TDS provisions under Section 194C relating to contract payment woube be attracted and consequently tax has to be deducted @ 2% under section 194C. The tax deductible under 194 C would be Rs.10,000/- being 2% of 5 lacs.

ii. Section 194D requires deduction of TDS @ 10% from insurance commission. Reinsurance is different from insurance since there is no direct contractual relationship between the person insured and the re-insurer. In order to attract Section 194D, the commission or other payment covered under section should be a remuneration or reward for soliciting or procuring the insurance business. The insurance companies do not procure business for the reinsurance company nor does the reinsurer pay commission or other payment for soliciting business from the insurance companies.

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Therefore section 194D has no application. Hence when profit commission is paid by a reinsurance company to an insurance company, after the expiry of the term of insurance, in respect of cases where there is no claim during the operation of the reinsurance treaty, tax deduction under section 194D is not attracted.

iii. Section 194J provides for TDS @10% on any remuneration or fees or commission, by whatever name called paid to a director which is not in the nature of salary in respect of which tax is deductible at source under section 192. Hence tax is to be deducted at source under section 194J @ 10% by PQR Pvt Ltd on the commssion of Rs.2,35,000/- paid to Mr.Vimal, a part time director. The tax deductible under 194J would be Rs.23,500/-, being 10% of Rs.2,35,000/-.

b. The matter relates to the admission or rejection of the application filed before the Authority for Advance Rulings on the ground specified in clause (i) of the first proviso to Section 245R(2). The said clause 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 this case, no application had been filed or contention urged by the applicant foreign company, namely White lime Co before any income tax authority/ Appellate Tribunal / court, raising the question raised in the application filed with AAR. However, one of the Indian companies namely Red Ltd, had raised the question before the AO, not 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 the foreign company. 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 applicants case. Therefore as held in Ericsson Telephone corporation India AB Vs CIT(1997) the application filed by the Indian Company, Red Ltd before the AO cannot be treated to have been filed by the foreign company. White Lime Co. Hence the rejection of the application of White Lime Co by the AAR on the ground that the question raised in the application is already pending before an income tax authority is not justified.

c. Upto 31.05.2016, Section 206C(1D) required collection of tax at source @ 1% by a seller in respect of cash consideration exceeding .5 Lakh on sale of jewellery or exceeding .2 lakh on sale of bullion. W.e.f.01.06.2016, the scope of section 206C(1D) has been expanded. It now requires collection of tax at sources @ 1% by a seller in respect of cash consideration received on sale of goods (other than bullion or jewellery ) or rendering services if such consideration exceeds .2 lakhs. However as per section 206C(1E), the requirement of TCS under section 206(1D) in case of receipt of cash consideration on sale of goods (other than bullion or jewellery ) or providing services would not apply to such class of buyers who fulfill the prescribed conditions. Accordingly, vide this notification the CBDT inserted a new rule 37CB to provide that the provision of section 206C(1D) in relation to sale of any goods (other than bullion or jewellery) or providing of services shall not apply to the following class or classes of buyers-(i) Governement embassies, Consulates, High commissions, Legation or Commission and trade

representation of a foreign state(ii) institutions notified under United Nations (privilleges and Immunities) Act 1947

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Paper 8 - Indirect Tax Law No. of Questions: 7 Total Marks: 100 No. of Pages: 6 Time Allowed: 3 hrs Question No. 1 is compulsory Answer any 5 out of remaining 6 questions Wherever necessary, suitable assumption may be made and disclosed by way of note Working note should form part of the respective answer.

1. a) M/s. Shakespeare Ltd. is engaged in the manufacture and sale of Perfumes, notified under Section 4A of

the Central Excise Act, 1944. The notified rate of abatement for the perfumes is 25%. Determine the central excise duty payable by M/s Shakespeare Ltd. from the following details:- (i) 300 bottles having retail sale price (RSP) of Rs. 5,500 per bottle are sold in retail packages to a

wholesale dealer at Rs. 4,500 per bottle. (ii) 200 bottles having two RSPs of Rs. 4,700 and Rs. 5,500 are sold in retail packages to ultimate

consumers. (iii) 1,000 bottles having RSP of Rs. 5,500 per bottle are sold in retail packages, but buyer is charged for

900 bottles only at Rs. 5,000 per bottle (100 bottles have been given free as quantity discount). (iv) 50 bottles were given away as free samples, without any RSP on the pack. (v) 300 multi-packs were cleared at 5,500 per pack, each containing one perfume bottle and one free

shampoo (without any RSP on it). Each perfume had RSP of Rs. 5,500, which was scored out and each multi-pack had RSP of Rs. 6,000.

The rate of excise duty is 12.5%. Make suitable assumptions wherever required and show the calculations with appropriate notes. (5 Marks)

b) 15000 Carpets were imported for charitable distribution in India by “Good Deeds Charitable trust. The trust did not pay either for the cost of goods or for the design and development charges, which was borne by the supplier. Custom officer computed FOB value at USD 20,000 (including design and development charges), which was accepted by the trust. Other details obtained were as follows: (i) Freight paid (air)(in USD) – 4,500 (ii) Design & development charges paid in USA (in USD) – 2500 (iii) Commission payable to an agent in India (Rs.) – 12500 (iv) Exchange rate and rate of basic duty notified by CBEC is as follows:

Date of bill of entry – 8-09-2017 BCD – 20% Exchange rate in Rs. – 60 Date of entry inward – 30-09-2017

BCD – 30% Exchange rate in Rs. 62

(v) Additional duty payable u/s 3(1) of the Custom Tariff Act, 1975 – 12% (vi) Additional duty payable u/s 3(5) of the Customs tariff act, 1975 – 4% (vii) Cess is applicable Compute the assessable value and amount of total customs duty payable under the Customs Act, 1962. Make suitable assumption where required. Working notes should form the part of the answer. (5 Marks)

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c) (i) Mamtha (based in Amritsar) provides consultancy services to Anirudh (based in Chennai) and charges

Rs.30,000 for the same. Mamtha is not registered under GST but Sahil is registered. Would the provision of Reverse Charge apply in this case?

(ii) Komal gets her website redesigned from Mr.Jiggi based in Kerala (an unregistered person under GST) on 15th August for Rs.4800. He also hires Raveena, a digital marketer based in TamilNadu (unregistered person under GST) for promotion of his website on 15th July for Rs.3700. (5 Marks)

d) Write about supply without consideration with examples? (5 Marks)

2. a) Determine the amount of CENVAT Credit available to Priyank Manufacturing Ltd. in respect of the

following items procured by them in the month of November,2017:

S.No Item Excise Duty paid (including EC and SHEC) Rs.

(i) Raw materials 83,000

(ii) Capital goods used for generation of electricity for captive use within the factory

2,50,000

(iii) Goods used in the guest house primarily for personal use. 50,000

(iv) Inputs used for making structures for support of capital goods 1,00,000

(v) Parts and components for use in the manufacture of final product 50,000

(vi Goods for providing free warranty 20,000

(vii) Special purpose motor vehicle (falling under tariff heading 8705) for use in the factory of manufacturer

5,00,000

Note: The aggregate value of clearances of Priyank Manufacturing Ltd. for the financial year 2016-17 is 480 Lakh (4 Marks)

b) Mr. Armaan, an importer has imported some garments from London on 08.04.2017. He is unable to make self-assessment under section 17(1) of Customs Act and hence has made a request in writing to the proper officer for Provisional assessment. Can he apply for Provisional assessment? (4 Marks)

c) Veronica Ltd is engaged in providing taxable services. It received following amounts in the April. Compute the value of taxable service and service tax payable by it . (i) Advance received from clients for which no services has been rendered so far – Rs. 17,00,000 (ii) Demurrage charges recovered from provision of service beyond agreed period – Rs. 1,75,000 (iii) Security deposit forfeited for damages done by service receiver owing to his negligence in the course

of receiving a service (No due to unforeseen actions) – Rs. 1,35,000 (iv) Payment received from a client (including Rs. 50,000 paid extra by mistake). However, Veronica Ltd.

Refused to return the excess amount received – Rs. 5,00,000 Veronica Ltd is not eligible for small service provider exemption under Notification No. 33/2012 – ST, and service tax has not been charged separately. Rate of service tax is 15% (4 Marks)

d) M.K.G. College General Council, a society, running internationally renowned schools, allowed other schools to use the name-‘ABC school’, its logo and motto, and as a consideration thereof received ‘collaboration fees’ from such schools which comprised of a non-refundable amount and annual fee. Examine, with the help of a decided case law, whether service tax is leviable in the present case.

(4 Marks)

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3. a) M/s Chetna goods services, a good transport agency furnishes the following information. Determine value

of services and tax thereon i. Service provided to Neha co Ltd. Where person liable to pay freight is XYZ Ltd -40 lakh ii. Freight for transport of food grains and pulses -2.5 lakh iii. Service to an unregistered firm -8 lakh iv. Service provided as a ‘clearing and forwarding agent’ -2 lakh v. Composite service provided which include packing/unpacking, loading, unloading of ‘used household

goods’ in the course of transportation by road -2 lakh vi. Tax paid on input services used in providing GTA services -90,000

(4 Marks) b) Yash Ltd is manufacturer of excisable goods. From following information made available regarding central

excise duty paid on procurement of inputs etc., during January 2017, determine amount of CENVAT Credit available to this company giving explanations for the treatment of given items:

S.no Particulars ED (Rs.) 1. Inputs used in factory of manufacture 1,50,000 2. Goods for use in generation of electricity for self consumption 75,000

3. Cement for construction of a godown in the factory 20,000 4. Goods for laying of foundation for support of capital goods 30,000 5. Goods primarily for personal use of employees in staff colony 25,000 6. Consumable stores for use in manufacture of goods 20,000

c) After visiting UK for 10 days, Mrs. & Mr. Rathod brought to India

1. a Laptop computer valued at Rs.40,000, 2. Personal effects valued at Rs. 56,000 and 3. A personal computer for Rs. 85,000. What is the customs Duty payable? (4 Marks)

d) Mention the place of provision of services in respect of the following services under the Place of Provision of Services Rules, 2012: (a) Services relating to immovable property. (b) Services provided at more than one location. (c) Services in respect of passenger transportation. (4 Marks)

4. a)

i. Ray Ltd. Is located in India and holding 51% of the shares of White Ltd, a USA based Company. White Ltd. provides Business Auxiliary services to Rex Ltd. From the following details, determine POT of Rex Ltd: M 13

Agreed Consideration US $ 1,00,000

Date on which Services are provided by White Ltd. 16.09.2016 Date on which Invoice is sent by White Ltd. 19.09.2016

Date of Debit in the books of account of Ray Ltd. 30.09.2016 Date on which payment is made by Rex Ltd. 23.12.2016

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ii. Mega star hotel Pvt ltd provided following services a. Hotel has 45 rooms in all, out of which 30 rooms were deluxe with a declared tariff of 1,200 per day. The

other 15 room were semi deluxe with a declared tariff of 800 per day. The hotel offers 25% discount on deluxe room. The occupancy ratio of the rooms on average was 80%

b. Receipts for serving food from air- conditioned restaurant 6lakh. This amount include 2lakh for goods sold on MRP basis across the counter as part of bill

c. Gross receipts for serving food from non air- conditioned restaurant clearly demarcated and separately named 4lakh.

Compute the value of taxable service. Mega star is not eligible for SSP exemption (8 Marks)

b) Sumo ltd. is a small scale industrial unit which is producing ‘Keplin’, a tonic for growing children. Under Annual Report for year 2016-17, the SSI unit shows a gross sales turnover of Rs. 230 lakhs. The product ‘keplin’ attracts excise duty at 12.5% and sales tax at 10%. Calculate the duty liability under Notification No. 8/2003. What will be your answer if gross sales turnover is Rs.290 lakhs. (4 Marks)

c) Mention the reward scheme provided under FTP which aims to compensate infrastructural inefficiencies and associated costs involved in the export of products produced in India. Discuss the basis of computation of reward under said scheme. How can the duty scripts issued under the Scheme be utilized? (4 Marks)

5. a) Mahima Ltd having SEZ unit/s as well as DTA( Domestic Tariff Area) unit/s, furnishes the following data for

relevant quarter. It has opted for refund route under Not. No. 12/2013 – ST. determine the amount of refund.

Service tax on services exclusively used for authorised operations in SEZ Rs.7,70,000+ SBC Rs.27,500+KKC Rs.27,500

Service tax on services exclusively used for operations in DTA Rs.3,85,000+SBC Rs.13,750+KKC Rs.13,750. Service tax paid on services commonly used for SEZ and DTA units Rs.14,00,000+SBC Rs.50,000+KKC

Rs.50,000

The turnover of SEZ units is Rs. 400lacs and for DTA units Rs.1200 lacs. (4 Marks)

b) Sejal Ltd is engaged in providing taxable services. It received following amounts in the month of September. Compute the value of taxable services and the service tax payable by it :

S.no Particulars Rs. 1. Advances received from Clients for which no service has been rendered so far 10,00,000 2. Demurrage Charges recovered from the provision of services beyond the

agreed period 25,000

3. Security Deposits forfeited for damages done by Service Receiver owing to his negligence in the course of receiving a service (not due to unforeseen actions)

35,000

4. Payment received from a client (including Rs.25,000 paid extra by mistake). However, Sejal Ltd refused to return the excess payment received.

2,00,000

NOTE: Sejal Ltd is not eligible for small service provider’s exemption under Notification No. 33/2012- ST, dated 20.06.2012 and Service Tax has not been charged separately. Rate of service tax & cess is 15% (4 Marks)

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c) SJP Ltd. removed goods from their factory at Chennai on 23-02-2015 for sale from depot at Calicut. On that date, the normal transaction value of goods at Chennai factory was Rs. 35,000 and the rate of duty was 8% ad-valorem. The said goods were sold from Calicut depot on 15-3-2015. On that date the normal transaction value at Calicut depot was Rs. 37,000 and rate of duty w a s 10%. The normal transaction value at Calicut depot on 23-02-2015 was Rs. 30,000 and the rate of duty was 8%. SJP Ltd. paid the duty on Rs. 35,000 at the rate of 8%. The Central Excise Department claimed central excise duty @ 10% on the value of Rs. 37,000. Examine whether Department is correct. (4 Marks)

d) i. Which class of importers is required to pay customs duty electronically? What is the full name of dedicated payment gateway set up by the Board (CBEC) to use e-payment facility easily by an importer? (2 Marks) ii. Can the time-limit prescribed under section 48 of the Custom Act, 1962 for clearance of the goods within 30 days be read as time-limit for filing of bill of entry under section 46 of the Customs Act, 1962? You may take the help of case law, if any, for your decision. (2 Marks)

6. a) Compute the Assessee Value under the central excise act, 1944 in the following case

Production: 4,000 units on 1st Jan Quantity sold: 1000 units @ Rs.300 per unit, 900 units @ Rs. 250 per unit

Samples clearances: 600 units Balance in stock: 1500 units (at the end of factory day for 1st Jan) Assume that the rate per unit is exclusive of central excise duty. (4 Marks)

b) Explain briefly the offences which are cognizable and bailable under section 104 of the Custom Act, 1962 (4 Marks)

c) Jio Ltd. commenced its business on 21st June, 2016 in Mumbai. It has provided/availed following services

upto 31st March, 2017. Determine its service tax liability for the Financial Year 2016-17. (i) Taxable services provided under its own brand name: Rs. 8,50,000 (ii) Declared services (Sum charged Rs. 7 lakh, but value determined as per valuation rules is 60% i.e.,

Rs. 4,80,000) (iii) Services wholly exempt under Notification No. 25/2012 dated 25-06-2016: Rs.8,00,000 (iv) Services provided under brand name of other person: Rs.5,50,000 (fully taxable) (v) Availed services of goods transport agency and paid freight of Rs. 3,00,000 The assessee is ready to opt for any exemption available to it under service tax law. (Make suitable assumptions wherever required and show workings.) (5 Marks)

d) Based on the Place of Provision of Service Rules, 2012, determine the place of provision of service and their taxability in each of the following independent cases: a. A Mumbai based builder provides construction services to Maharastra based company in respect of

construction of its new building in Afghanistan. b. A USA based company has been awarded mineral exploration contract in respect of specific sites in

ZIMBABWE by a Mumbai based corporation. (3 Marks)

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7. a) Mary’s Housekeeping Ltd. was liable to make e-payment of service tax of Rs. 700,000 for the month of

June, 2015. However, it deposited the tax on 06.12.2015. Compute the amount of interest payable by Mary’s Housekeeping Ltd. under section 75 of the Finance Act, 1994. The value of taxable services provided by Kishore Housekeeping Ltd. during the financial year 2014-15 was Rs. 55 lakh. What would be the amount of interest payable by Mary’s Housekeeping Ltd. if the value of services provided by it during the financial year 2014-15 was Rs. 90 lakh? Note: Mary’s Housekeeping Ltd. had collected service tax of Rs. 7, 00,000 (mentioned above) from its customers during the month of June, 2015. (4 Marks)

b) Two exporters namely, Dreams Pvt. Ltd. and Passion Pvt. Ltd. have achieved the status of Status Holders (One Star Export House) in the financial year 2016-17. Both the exporters have been regularly exporting goods every year. What would have been the minimum export performance of the two exporters to achieve such status? Both the exporters want to establish export warehouses in accordance with the applicable guidelines. What should be their minimum export turnover to enable them to establish export warehouses? (4 Marks)

c) (i) Excisable goods cleared from factory after payment of duty , but destroyed by fire in transit.

(ii) Goods manufactured in factory and claimed by manufacturer as unit for consumption for marketing (2 + 2 = 4 Marks)

d) Ms Vani, a performing artist, provides following services (i) Performing classical dance 1,00,000 (ii) Performing in T.V serial 3,80,000 (iii) Service as brand ambassador 11,00,000 (iv) Coaching in recreational activities relating to art 2,10,000 (v) Activities in sculpture making 4,10,000 (vi) Performing western dance 1,00,000 Determine service tax payable. Ms. Vani paid service tax of 6lakh during the preceding FY

(4 Marks)

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The Society of Auditors and Prime Academy 45th Session Model Exam - Final - Indirect Tax Law

Suggested Answers

1. a) Computation of central excise duty payable by M/s. Shakespeare Ltd.

Particulars Amount (`)

Amount (`)

Retail sale price of 300 bottles (300 x ` 5,500) 16,50,000

Less: Abatement @ 25% 4,12,500

Assessable value (A) [Note 1] 12,37,500

Retail sale price of 200 bottles (200 x `5,500) [Note 2] 11,00,000


Assessable value (B) 8,25,000

Retail sale price of 1000 bottles (1,000 x `5,500) 55,00,000


Assessable value (C) [Note 3] 41,25,000

Retail sale price of 50 bottles (50 x ` 5,500) 2,75,000

Less: Abatement @ 25% 68,750

Assessable value (D) [Note 4] 2,06,250

Retail sale price of 300 bottles (300 x ` 6000) [Note 5] 18,00,000


Assessable value (E) 13,50,000

Total assessable value (A) + (B) + (C) + (D) + (E) 77,43,750

Total excise duty payable @ 12.5% 9,67,968

Notes:

1. The assessable value of products notified under section 4A of the Central Excise Act, 1944 is the retail sale price declared on the package less abatement, if any.

2. Where on the package of any excisable goods more than one retail sale price is declared, the maximum of such retail sale prices is deemed to be the retail sale price [Explanation 2(a) to section 4A of the Central Excise Act, 1944].

3. Provisions of Section 4A override the provisions of Section 4. Therefore, assessable value will be retail sale price declared on the package less abatement irrespective of the quantity discounts offered to the buyer [Indica Laboratories v. CCE (2007) 213 ELT 20 (CESTAT 3 Member Bench].

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4. Free samples of the products covered under MRP based assessment are valued under Rule 4 of the Central Excise (Determination of Price of Excisable Goods) Rules, 2000 by taking into consideration the deemed value under section 4A [Circular No. 915/05/2010-CX dated 19.02.2010].

5. Retail sale price (RSP) of the multi-pack is considered (` 5,500) and product supplied free (rice) in a multi-pack is not assessed separately. Further, since scored out RSP cannot be considered as RSP either by seller or by buyer, the same is not taken as the RSP for the purpose of valuation of excisable goods.

b)

Particulars Amount ̀

FOB value computed by Customs Officer (including design and development charges) 20,000 US $

Exchange Rate [Note 1] ` 60 per $

`

FOB value computed by Customs Officer (in rupees) 12,00,000

Add: Commission payable to agent in India 12,500

FOB value as per customs 12,12,500

Add: Air freight (`12,12,500 × 20%) [Note 2] 2,42,500

Add: Insurance (1.125% of `12,12,500) [Note 3] 13,640

CIF value for customs purposes 14,68,640

Add: Landing charges @ 1% of CIF value [Note 4] 14,686

Assessable value 14 83,327

Add: Basic custom duty @ 30% (`14, 83,327 × 30%) – rounded off [Note 5] 4,44,998

Total 19,28,325

Additional duty leviable under section 3(1) of Customs Tariff Act, 1975 (CTA) @ 12%

(` 19,28,325 × 12%) [Rounded off]

[Education cess (EC) and Secondary and higher education cess (SHEC) on CVD are

exempt]

2,31,399

EC and SHEC = 3% of `6,76,397 (` 4,44,998 + ` 2,31,399)

[rounded off]

20,292

Value for special CVD [` 14,83,327.04 + ` 4,44,998 + ` 2,31,399

+ ` 20,292]

21,80,016

Additional duty leviable under section 3(5) of CTA (`21,80,016 × 4%) [Rounded off]

[EC and SHEC are not payable on special CVD]

87,201

Total customs duty payable

(` 4,44,998 + ` 2,31,399 + ` 20,292 + ` 87,201)

7,83,890

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Note: 1. Rate of exchange notified by CBEC on the date of filing of bill of entry has to be considered [Third

proviso to section 14 of the Customs Act, 1962]. 2. In case of goods imported by air, freight cannot exceed 20% of FOB value [Second proviso to rule

10(2) of the Customs (Determination of Value of Imported Goods) Rules, 2007]. 3. Insurance charges, when not ascertainable, have to be included @ 1.125% of FOB value of goods

[Clause (iii) of first proviso to rule 10(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007].

4. Landing charges have to be included @ 1% of CIF value of goods [Clause (ii) of first proviso to rule 10(2) of the Customs (Determination of Value of Imported Goods) Rules, 2007].

5. Rate of duty will be the rate in force on the date of presentation of bill of entry or on the date of arrival of the aircraft, whichever is later [Proviso to section 15 of the Customs Act, 1962].

Note: The term “Date of Entry Inward” given in the question be read as “date of arrival of aircraft”. c)

(i)

As Ms. Mamtha is providing an inter – state service, she would be required to mandatorily get registered under GST. Without getting registered - she cannot provide inter – state service. Only registered person can provide inter –state service.

To provide inter – state service, Ms. Mamtha would be required to get registered. And once, she gets registered, this would be a transaction between Mamtha and Anirudh both of whom are registered under GST and therefore the provision of section 9(4) won’t apply for the levy of GST. Note: According to Sec 9(4), if the total supply of goods or services from unregistered persons does not exceed ̀ 5000 in a day, then the provisions of reverse charge would not be applicable.

(ii) In such a case, the provision of Reverse Change would be applicable as the aggregate value of such

supplies is ` 8,500 which is more than `5,000 in a day.

d) Supply without consideration: “Supply without Consideration” under Schedule 1 are reproduced as follows:

Permanent transfer/Disposal of business assets : This clause has wide enough to cover transfer of business assets from holding to subsidiary company for nil consideration. However, it is important to note that this provision would apply if input tax credit is availed on such asset. Example: A cloth retailer gives clothes from his business stock to his friend for `free’ of cost. In this case, transfer of business stock would amount to supply if he had claimed input tax credit on his purchase of business asset.

Supply between related person or distinct person: Related person : Person who are associated in the business of one and another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

Example: (a) Officers or directors of one another’s business. (b) Employer and employee (c) Legally recognized partners

Distinct person specified under sec. 25: A person who has obtained / is required to obtain more than one registration, whether in one or more state / union territory shall in respect of each such registration is treated as distinct person.

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Example: Madhav a CA , has registered head office in Mumbai. He has also obtained registration in the state of

Kerala in respect of his branch office. Madhav shall be treated as distinct person in respect of registration in Kerala and Mumbai.

Principal & Agent: Supply of goods from Principal to his Agent, without consideration, where the agent undertakes to supply such goods on behalf of the principal is considered as supply and vice versa Example: Vroom Motors engages Motors ltd. as an agent to sell bikes on its behalf. For this purpose, Vroom motors has supplied 30 bikes to the showroom of Motors ltd. located in Bhopal. Supply of bikes by Vroom motors to Motors ltd. is treated as supply.

Importation of service: Import of service from by a taxable person from a related person or from his establishment located outside India, in the course or furtherance of business shall be treated as supply. Example: XYZ Ltd. received a legal consultancy services from its head office located in Thailand. The head office has rendered such services free of cost to its branch office. Since XYZ Ltd. and the branch office is related persons, services rendered by XYZ Ltd will be qualify has supply even though the head office has not charged anything.

2. a) Computation of CENVAT credit available to Priyank Manufacturing Ltd.

Particulars `

Raw materials 83,000 Capital goods used for generation of electricity for captive use within the factory (` 2,50,000×50%) [as per Definition of capital goods under rule 2(a) of the CENVAT Credit Rules, 2004]

1,25,000

Goods used in the guest house primarily for personal use [as per definition of inputs under rule 2(k) of the CENVAT Credit Rules, 2004]

Nil

Inputs used for making structures for support of capital goods [as per definition of inputs under rule 2(k) of the CENVAT Credit Rules, 2004]

Nil

Parts and components for use in the manufacture of final product [as per definition of inputs under rule 2(k) of the CENVAT Credit Rules, 2004]

50,000

Goods for providing free warranty [as per definition of inputs under rule 2(k) of the CENVAT Credit Rules, 2004] (It has been assumed that the value of free warranty is included in the price of the final product and is not charged separately from the customer)

20,000

Special purpose motor vehicle (falling under tariff heading 8705) for use in the factory of manufacturer (5,00,000×50%) [as per Definition of capital goods under rule 2(a) of the CENVAT Credit Rules, 2004]

2,50,000 Total CENVAT credit available 5,28,000

Note: Since its value of clearances in the financial year 2016-17 is ` 480 Lakhs, Priyank Manufacturing Ltd. is not eligible for SSI exemption in FY 2017 - 18. Hence, as per Third proviso to rule 4(2) (a) of the CENVAT Credit Rules, 2004, CENVAT credit on capital goods will be restricted to 50% in the first year.

b) Section 18(1) of Customs Act provides that the importer may make a request for assessment of goods by

the officer when he is not in a position to self-assess. Section 18(1) provides as follows:- Notwithstanding anything contained in this Act but without prejudice to the provisions of section 46, —

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(a) where the importer or exporter is unable to make self-assessment under sub- section (1) of section 17 and makes a request in writing to the proper officer for assessment; or

(b) where the proper officer deems it necessary to subject any imported goods or export goods to any chemical or other test; or

(c) where the importer or exporter has produced all the necessary documents and furnished full information but the proper officer deems it necessary to make further enquiry; or

(d) where necessary documents have not been produced or information has not been furnished and the proper officer deems it necessary to make further enquiry, the proper officer may direct that the duty leviable on such goods be assessed provisionally if the importer or the exporter, as the case may be, furnishes such security as the proper officer deems fit for the payment of the deficiency, if any, between the duty as may be finally assessed or re-assessed as the case may be, and the duty provisionally assessed.

Hence, Mr. Armann can apply for Provisional assessment for the garments imported on 08.04.2017

c) Computation of Service Tax Payable:

S.No Particulars ` 1. Advance received from clients for which no service has been rendered

so far 17,00,000

2. Demurrage charges recovered from the provision of service beyond the agreed period

1,75,000

3. Security deposits forfeited for damages done by service receiver owing to his negligence in the course of receiving a service (Not due to unforeseen actions)

1,35,000

4. Payment received from a client (including ` 50,000 paid extra by mistake). However, Veronica Ltd. Refused to return the excess amount received

5,00,000

Total amount including Service tax (as tax has not been charged separately, as give in question, amount is inclusive of tax)

25,10,000

Service tax = `25,10,000 x 15 / 115 3,27,391 Notes:

Service agreed to be provided are also liable to service tax, hence advances received are taxable. Demurrage charges are includible in value under Rule 6(1)(x) of Service Tax (Determination of Value)

Rules,2006. It is a service u/s 66E(e)

Forfeiture of security deposits for accidental damages arising due to unforeseen action are not includible in value under Rule 6(2)(vi). However in this case neither there is unforeseen action nor damages are characterized as accidental and cannot be excluded from value. Therefore, damages are in nature of extra consideration and are liable to service tax.

Payment received from client is liable to service tax. The excess payment received as a result of mistake of client becomes consideration for service as per CBEC Guidance.

d) The said question was examined by the High Court in the case of Mayo College General Council v. CCEx.

(Appeals) 2012 (28) STR 225 (Raj). It was held that when the petitioner permitted other schools to use their name, logo as also motto, it resulted in provision of ‘franchise service’ to the other schools. The petitioner also received consideration for the provision of such ‘franchise service’ whether or not named as ‘franchise fees’ from the franchise schools. Thus service tax is leviable on the transaction and the petitioner was duty bound to pay service tax to the Department.

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3. a)

As XYZ Ltd is liable to pay freight, hence XYZ Ltd is liable to pay service tax (ST) GTA not liable

to pay ST

Exempt under entry 21 of sec 66D(p) Exempt

Assuming firm is partnership firm and is also liable to pay freight and ST. It is not

taxable in hands of GTA

GTA not liable

to pay ST

Naturally bundled service of business is governed by essential character i.e, GTA

service covered under this head- taxable

2,00,000

Taxable sum falling under GTA service 2,00,000

Taxable value @ 40% of 2,00,000(since it relates to ‘used household goods; 60%

abatement allowed assuming no credit is claimed)

40,000

Add: service as ‘clearing & Forwarding agent’ 3,00,000

Total value of service 7,40,000

Service Tax@ 15% (no credit allowed on input services as abatement claimed) 1,11,000

b) Computation of CENVAT Credit available with Yash Ltd

S.No. Reasons ` 1. Goods used in manufacture are ‘input’ 1,50,000

2. Eligible for credit as used for generation of captively used electricity – Full credit is allowed, assuming goods as ‘inputs’ (if capital goods, 50% credit is allowed in 1st year)

75,000

3. Goods used for construction of a building or a civil structure or part thereof are ineligible for credit under rule 2(k) of CENVAT Credit Rules, 2004

-

4. Specifically excluded from scope of input under rule 2(k) of CENVAT Credit Rules, 2004

-

5. Specifically excluded from scope of input under rule 2(k) of CENVAT Credit Rules,2004

-

6. Goods used in manufacture are ‘input’ under rule 2(k) of CCR and eligible for credit 20,000 Total CENVAT Credit available 2,45,000

c) Computation of customs duty payable.

S.No Amount (`) 1. Laptop Exempt

2. Used personal effects Exempt 3. Personal Computer 85,000 Total 85,000 Less: GFA [Rule 3] 50,000

Dutiable Value 35,000 Duty @ 36.05% 12,617.50

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Note: General Free Allowance under Rule 3 Ms the passengers are returning from UK, hence, Rule 3 applies and since passengers appear to be Indian resident, hence, GFA =`50,000 [GFA under this rule shall not be allowed to be pooled with the free allowance of any other passenger. Hence, Mr. X and Mrs. Rathod cannot claim GFA for `50000 each i.e. ` 1,00,000 in total.]

d) Place of Provision of Service.

S.No Services Place of Provision

(a) Services relating to immovable

property

Place where the immovable property is located or intended to

be located [Rule 5 of the Place of Provision of Service Rules,

2012 (POPS Rules)] (b) Services provided at more

than one location

The location in the taxable territory where greatest proportion

of service is provided [Rule 7 of POPS Rules].

(c) Services in respect of

passenger transportation

Place where passenger embarks on the conveyance for a

continuous journey [Rule 11 of POPS Rules]

4. a)

i. (i) A. In the given case, Ray Ltd. Holds 51% of shares in White Ltd, and hence they fall under the

definition of “Associated Enterprises”. (ii) In case of Import of Services by Associated Enterprises and Service Provider is located outside India,

POT shall be earlier of – Date of Debit in the Books of Service Receiver (or) Date of Payment

(iii) Hence, the Point of Taxation in this case shall be the Date of Payment (23.12.2016) or the Date of Debit in the Books of Accounts of Rex Ltd. (30.09.2016), whichever is earlier. Conclusion:

The Point of Taxation for the above service is 30.09.2016 ii.

(i) Room days = 720 room days(30*30*80%) Rent charged = 900per room day (deduct 25% from tariff) Since declared tariff is not below 1000 per room day, it is not exempt. However it is eligible for 40% abatement. Taxable value per room day = 540 per room day (after abatement). Taxable amount = 3,88,800 (720*540) Semi deluxe room- since declared tariff is below 1000 per room day it is exempt.

(ii) Sale of food on MRP across counter Balance receipts are valued under rule 2c @ 40% of 4lakh (6-2lakh) Taxable value = 1,60,000

(iii) Non ac restaurant Exempt u/s 66E(i)

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b) The relevant computation are as follows:

Price incl. of duty & tax

Sales tax

Price cum duty (before availing SSI exemption)

SSI exemption (D)

Price cum duty (after availing SSI exemption)(E)

Duty (F)=(E)*12.5%/112.5%

Value(G)=(C)-(F)

(B)=(A)*10%/110%

(C)=(A)-(B)

230 20.91 209.09 150 59.09 6.56 202.53

290 26.36 263.64 150 113.64 12.63 251

c) Objective of MEIS scheme is to offset infrastructural inefficiencies and associated costs involved in export

of goods/products, which are produced/manufactured in India, especially those having high export intensity, employment potential and thereby enhancing India’s export competitiveness. Under MEIS, exports of notified goods/products to notified markets shall be eligible for reward at the specified rate(s). Unless otherwise specified, the basis of calculation of reward would be:

On realised FOB value of exports in free foreign exchange, (or) On FOB value of exports as given in the Shipping Bills in free foreign exchange, whichever is less.

These scrips can be used for payment of customs duties on import of inputs/goods including notified capital goods, payment of excise duties on domestic procurement of inputs/goods including capital goods, payment of service tax on procurement of services and payment of customs duty and fees

5. a)

Tax SBC KKC Total Service tax on service exclusively used for authorized operations in SEZ

7,70,000 27,500 27,500 8,25,000

Tax, SBC, KKC paid on common service shared in SEZ and DTA in turnover ratio, i.e. ST on common service (15 lakhs) X Turnover of SEZ (400 lakhs)/Total turnover (400+1200 lakhs = 1600 lakhs)

3,50,000 12,500 12,500 3,75,000

Total amount refundable 10,20,000 40,000 40,000 12,000,00 Balance ST is eligible for credit to DTA Used exclusively in DTA 3,85,000 13,750 13,750 4,12,500

On common services (15,0000 – 3,75,000)

10,50,000 37,500 37,500 11,25,000

Total eligible for credit to DTA unit (I + II) 14,35,000 Not allowed

51,25,000 14,86,250

b) S.no Remarks ` 1. Service Tax applicable on receipt of advance 10,00,000 2. Value of service specified includes Demurrage Charges 25,000

3. Liable for service tax as it is not due to unforeseen circumstances 35,000

4. Liable to service tax, since the entire amount is considered as Gross Amount Charged

2,00,000

Taxable Value of Services (including ST ) 12,60,000 Service Tax and Cess thereon (`12,60,000 x 15/115) 1,64,367

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c) Value of excisable goods As per Rule 7 of the Central Excise (Determination of Price of Excisable Goods) Rules, 2000, where excisable goods are not sold at the factory gate or at the warehouse but are transferred to depots or consignment agents or any other place for sale, the assessable value for the goods cleared from factory/warehouse is the normal transaction value of such goods at the depot, etc. at or about the same time at which the goods as being valued are removed from the factory or warehouse. In the given case, ` 35,000 represents value on 23.02.2017 (time of removal) but it is not the value prevalent at the depot. Similarly, ` 37,000 represents depot price, but then it is not the price prevalent on 23.02.2017 (time of removal). The correct value to be adopted in this case is the depot price of such goods (normal transaction value) on 23.02.2017 i.e.,` 30,000. Rate of excise duty The applicable rate of duty shall be the rate in force on the date when such goods are removed from the factory/warehouse. Hence, the correct rate of duty will be 8%.

d) i) Notification No. 83/2012 Cus. (NT) dated 17.09.2012 has made e-payment of customs duty mandatory

for-

Importers paying customs duty of ` 1,00,000 or more per bill of entry Importers registered under Accredited Client Programme

The dedicated payment gateway set up by the Board is called ‘ICEGATE'. The full name of the ICEGATE is Indian Customs Electronic Commerce/Electronic Data interchange (EC/EDI) Gateway.

ii) The said issue came up for consideration before the High Court in case of CCus v. Shreeji Overseas (India) Pvt. Ltd. 2013 (289) E.L.T. 401 (Guj.). The High Court noted that though section 46 of the Customs Act, 1962 does not provide any time-limit for filing a bill of entry by an importer upon arrival of goods, section 48 of the Act permits the authorities to sell the goods after following the specified procedure if the same are not cleared for home consumption/ warehoused/ transshipped within 30 days of being unloaded at the customs station. The High Court, however, held that the time-limit prescribed under section 48 for clearance of the goods within 30 days cannot be read into section 46 and it cannot be inferred that section 46 prescribes any time-limit for filing of bill of entry.

6. a) Assessable Value should be determined for each and every clearance, separately.

Item Computation Assessable Value (`) Removal of 1000 units 1000 x `300 300000 Removal of 900 units 900 x `250 225000

Removal of samples 600 x `250 (Note) 150000 Total Assessable Value 675000

Note: If price is not known, then as per Rule 4 of the central excise duty rules, 2000, value shall be based on value of such goods sold for delivery at any other nearest time. In the above case, `250 is considered since maximum quantity sold at the value.

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b) As per section 104(4) of the Customs Act, 1962, following offences are cognizable offences:

Offences relating to prohibited goods; or Offences relating to evasion or attempted evasion of duty exceeding ` 50 lakh. As per section 104(6) of the Customs Act, 1962, all offences under the Customs Act, 1962 are bailable

offences

c) Computation of service tax liability of Jio Ltd. for the F.Y. 2016-17 Particulars Amount (`)

Service tax payable on taxable services provided:

Taxable services provided under its own brand name (Note 1) 8,50,000

Declared services [Note 2] 4,20,000

Services wholly exempt under Notification No. 25/2012 dated

20.06.2012

- Value of taxable services 12,70,000

Less: Exemption for small service providers [Note 3] 10,00,000

Taxable services liable to service tax 2,70,000

Add: Services provided under brand name of other person [Note 2] 5,50,000

Total taxable services 8,20,000

Service tax payable @ 15% (inclusive of 1% SBC & KKC) [8,20,000 × 15%] (A)

1,23,000 Service tax payable on taxable services received under reverse charge: Freight paid to the goods transport agency 3,00,000

Less: Abatement @ 70% [3,00,000 × 70%] 2,10,000

Taxable services of goods transport agency [Note 4] 90,000

Service tax payable @ 15% (inclusive of 1% SBC & KKC) [75,000 × 15%] (B)

13,500 Total service tax liability (A) + (B) 1,36,500

Notes: 1. Exemption for small service providers is not available in respect of taxable services provided under a

brand name of another person. However, services provided under own brand name are eligible for such exemption [Notification No. 33/2012 ST dated 20.06.2012].

2. Service includes declared services [Section 65B(44) of the Finance Act, 1994]. Service tax is charged on

the value of services determined as per section 67 of the Finance Act, 1994 read with Service Tax (Determination of Value) Rules, 2006. Therefore, value of declared services determined as per Valuation Rules will only be charged to service tax.

3. Taxable services of aggregate value not exceeding ` 10 lakh in any financial year are exempted from service tax if the aggregate value of taxable services rendered does not exceed ` 10 lakh in the preceding financial year. Since Jio Ltd has started rendering services in the financial year 2016-17, it will be eligible for the exemption for small service providers as the aggregate value of taxable services rendered in the preceding financial year 2015-16 is ‘Nil’ (less than ` 10 lakh) [Notification No. 33/2012 ST dated 20.06.2012].

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4. Abatement of 70% of the amount charged by the goods transport agency is given on the presumption that CENVAT credit on inputs, capital goods and input services has not been taken [Notification No. 26/2012 S.T dated 20.06.2012]. Further, entire service tax is payable by service receiver since the person liable to pay freight is a company (Jio Ltd.) and small service providers’ exemption is not available in respect of such services [Notification No. 30/2012 ST dated 20.06.2012 and Notification No. 33/2012 ST dated 20.06.2012].

d) a. In this situation, if rule 5 of the Place of Provision of Service Rules, 2012 [PoPS Rules] is applied, then place of provision of service would be location of property which is Afghanistan. Since Afghanistan falls within non-taxable territory, the foregoing construction services will not be taxable. However, if rule 8 of the PoPS Rules is applied, the place of provision of service will be the location of the service receiver i.e., Maharastra [which falls within the taxable territory] and resultantly, construction services will be taxable. As per rule 14 of the PoPS Rules, if the place of provision of service is determinable in terms of more than one rule, the same is determined as per the rule that occurs later. Therefore, the place of provision in this case will be Maharastra and the service will be taxable (as per rule 8). In this case, since specific sites in respect of which mineral exploration is to be carried out are located in Zimbabwe, the place of provision of service as per Rule 5 of the PoPS Rules will be Zimbabwe which does not fall within the ambit of ‘taxable territory’ and resultantly these services will not be taxable. The fact that service providing company is located in USA and service recipient is located in Mumbai (India) is not significant.

7. a)

Due date for payment of service tax for the month of June, 2016 06.07.2015

Date when service tax was actually paid 06.12.2015 Section 75 of Finance Act, 1994 read with Notification No. 13/2016 ST dated 01.03.2016 provides for charging simple interest where any amount has been collected as service tax but not paid to the credit of the Central Government on or before the date on which such payment becomes due. The interest is payable @ 24% p.a. for the period by which such crediting of tax or any part thereof is delayed. However, in all other cases, 15% simple interest p.a. is payable. Further, such rate of interest shall be reduced by 3% per annum in case of a service provider whose turnover does not exceed ` 60 lakh during any of the financial years covered by the notice or during the last preceding financial year. Since in the given case, Mary’s Housekeeping Services Ltd. has collected service tax but failed to deposit the same on/before the due date with Central Government and its turnover was ̀55 lakh in the preceding financial year, interest under Section 75 will be payable @ 21% as follows:

Period Delay Interest (`)

07.07.2015 to 06.12.2015

5 months ` 7,00,000 × 21% × 5/12 = 61,250

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However, if the value of taxable services provided by Mary’s Housekeeping Services Ltd. in the preceding financial year is ` 90 lakh (i.e. more than ` 60 lakh), interest payable will be computed as follows:

Period Rate of interest Delay Interest (`)

07.07.2015 to 06.12.2015

24% 5 months 7,00,000 × 24% × 5/12 = 70,000

b) Both the exporters want to establish export warehouses in accordance with the applicable guidelines.

What should be their minimum export turnover to enable them to establish export warehouses? Status Holders are business leaders who have excelled in international trade and have successfully contributed to country’s foreign trade. All exporters of goods, services and technology having an import-export code (IEC) number shall be eligible for recognition as a status holder. Status recognition depends upon export performance. In order to be categorized as One Star Export House, an exporter needs to achieve the export performance of 3 million US $ million [FOB/FOR (as converted)] during current and previous three financial years Thus, export performance of Skyfly Pvt. Ltd. and Landup Pvt. Ltd. would have been at least 3 million US $ million [FOB/FOR (as converted)] during current and previous three financial years Further, Two Star Export Houses and above are permitted to establish export warehouses. Therefore, Skyfly Pvt. Ltd. and Landup Pvt. Ltd. can establish export warehouses in India only if they achieve the status of Two Star Export House and above. In order to achieve said status, export performance of the exporters during current and previous three financial years should be as indicated below:

Status Category Export Performance [FOB/FOR (as converted) value in US $ million]

Two Star Export House 25

Three Star Export House 100

Four Star Export House 500

Five Star Export House 2,000-

c)

Case Remission Reason Excisable goods cleared from factory after payment of duty , but destroyed by fire in transit.

No Remission can be granted if goods are destroyed at any time before removal. Goods removed on payment of duty and destroyed in transit after such removal are not eligible.

Goods manufactured in factory and claimed by manufacturer as unit for consumption for marketing.

Yes Rule 21 of CER , 2002 specifically covers this case. Hence, it is eligible for remission subject to other conditions being satisfied including the condition as to destruction of goods.

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d)

Performing classical dance Exempt – if amount charged per performance is up to 1.5lakh vide entry 16

Exempt

Performing in T.V serial Taxable, as not covered in exemption notification 3,80,000 Service as brand ambassador

Taxable , as not covered under entry 16 11,00,000

Coaching in recreational activities relating to art

Exempt , covered under entry 8 Exempt

Activities in sculpture making

Taxable, as not covered in exemption notification 4,10,000

Performing western dance Taxable, no exemption 1,00,000 Taxable value 19,90,000 Less: SSP exemption [not available as Ms. Vani had paid

service tax during preceding F.Y, which shows that taxable turnover of preceding year, had exceeded limit of 10lakh]

Not available

Service Tax @15% 2,98,500

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