The Hindu Business Line : Cost accountant and the art of motorcycle valuation

Here's another: "Wind is in my hair, putt goes my motorcycle, o'er the hill I go." Well, if the bike went ultimately to the apex court, the case we're talking about should be Commissioner of Central Excise, New Delhi vs Hero Honda Motors Ltd, that was decided on April 13.

The company had collected advance from its customers, and earned interest from such funds. The taxman was not complaining about the bikes, but said that the interest should be included in the assessable value. To this, however, Hero Honda didn't agree.

At the tribunal, the decision went in favour of the company, leaving the Department aggrieved. The case thus went to the apex court.

"The question which arises for determination is whether receipt of advance and the income accruing thereon has gone towards depreciation of the sale price," said the court and heard both the sides.

The Excise department said that the main object behind receiving advance from the customers was not security but collection of capital. With the help of financial accounts, MIS reports, pricing and costing, the department contended that income by way of interest, dividends and so on earned from advance "constituted additional flowback (consideration) from the customer to the assessee".

A study of accounts

It may interest accountants that the adjudicating authority had considered the different heads of account.

Thus, interest at 9 per cent paid by Hero Honda to the customers was found to be cost of production; it was incurred "under the head `sales' which implicated `sales income' with `other income'."

The authority had examined the balance sheet, profit and loss account and costing data to find that but for `other income', Hero Honda "was required to increase the prices to recover the cost of manufacture."

He also found that this `other income' accrued to the company in the course of sale; and that the said `other income' formed part of the prices. His conclusion, therefore, was that the difference in the interest paid to the customers and the interest earned on the advances received from the customers constituted `additional consideration' that flowed back from the customer to the company.

The judgment of the Supreme Court cites the company's annual reports showing the opening and closing balance of the funds received under the head `Customers' Advances' and also deployment of the funds so received, and the Report of the Directors that stated that the profits of the company were based on implication of Sales with Other Incomes.

There's more. The adjudicating authority had found difference between the current assets and current liabilities in the final statements indicating utilisation of advances to meet the working capital requirement.

He also stated that the total income (Sales & Other Income) contributed to the profits, with "a direct impact on pricing", especially due to `Other Income'. But for the said `Other Income', it would not have been possible for the company to sell the motorcycles at a price lower than the unit cost of production, he had said.

Enter, the cost accountant

"For the above reasons, we hold that the tribunal has disposed of the appeal before it in a most perfunctory manner without going into any figures at all but by merely on the statement made by counsel and on the basis of material which appears to have been produced first time before the tribunal," observed the apex court judges Justices S.N. Variava, A. R. Lakshmanan and S. H. Kapadia.

"We, therefore, set aside the order of the tribunal and remand the matter back to the tribunal."

Then comes a sentence that should call for celebration on 12 Sudder Street, Kolkata, where the headquarters of the Institute of Cost and Works Accountants of India is situated.

"The tribunal will consider in detail, if necessary, by taking the help of a Cost Accountant and after looking into the accounts of the respondent whether or not the advances or any part thereof have been used in the working capital and whether or not the advances received by the respondent and/or the interest earned thereon have been used in the working capital and/or whether it has the effect of reducing the price of the motorcycle."

And again: "We may clarify that in the event of tribunal coming to the conclusion that additional consideration flowed back from the consumer to the assessee then the value of the benefit shall be ascertained by the tribunal with the assistance of a Cost Accountant."

Norman Ralph Augustine said, "The last 10 per cent of performance generates one-third of the cost and two-thirds of the problems."

One may say that of tax planning too. For, in ingenious methods of financial strategy that save but one-third of outgoing, one may have to factor in the cost of litigation running to more than two-thirds when plans end up in problems.

Even as cost accountants rejoice at the recognition given by the highest court, I'm afraid that the CAs who prepared Hero Honda's accountants may be ruing if a different presentation of numbers would not have given the advance game away.

Lakh bytes about a liquor case

MORE than 20,000 words, or 1,15,000 bytes, and running to about 60 pages is the decision of the apex court in State of Kerala vs Maharashtra Distilleries Ltd, delivered on May 6.

The question was: Whether the incidence of excise duty, having regard to the provision of the Kerala Abkari Act and the relevant Rules, falls upon the manufacturer/distiller and, therefore, includable in their turnover for the purpose of levy of turnover tax, or whether the duty burden falls on the Kerala State Beverages (Manufacturing and Marketing) Corporation Ltd, a Government company which alone is liable to pay the excise duty on Indian Made Foreign Liquor, and consequently the said component is not includable in the turnover of the respondents distillers?

The case was argued by T. L. V. Iyer and F. S. Nariman before Justices N. Santosh Hegde, S. N. Variava, B. P. Singh, H. K. Sema and S. B. Sinha.

Pay particular attention to paragraph 87 of the judgment, which runs to about 700 words and goes into detailed interpretation. An ideal case that professional institutes such as the ICAI may use for analysis in their continuing education programmes to comprehend judicial reasoning.

Tailpiece

Overheard at the operation theatre.

Nurse: "Doctor, did I tell you that the patient is your tax auditor?"

Doctor: "Oh, a big scalpel please!"

Detaxification@TheHindu.co.in

D. Murali

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