PRIME/ME38/FINAL 1

MAT 2

No. of Pages: 7 Total Marks:100

No of Questions: 7 Time Allowed : 3 Hours

Question No.1 is compulsory

Answer any 5 from remaining 6 questions

Working notes should form part of answers

1. a) 6000 pen drives of 2 GB to be sold in a perfectly competitive market to earn ` 1,06,000 profit, whereas in a monopoly market only 1200 units are required to be sold to earn the same profit. The fixed costs for the period are ` 74,000. the contribution per unit in the monopoly market is as high as three fourths its variable cost. Determine the targets selling price per unit under each market condition.

b) Following data is available for Tile Ltd. Standard working hours – 8 hours a day of 5 days per

week, Maximum capacity – 50 Employees, Actual working – 40 Employees, Actual hours expected to be worked per 4 week – 6,400 hours Standard hours expected to be earned for four weeks – 8000 hours Actual hours worked in the four week period – 6,000 hours Standard hours earned in the four week period – 7,000 hours.

The related period is of 4 weeks. In this period there was a one special day holiday due to national event. Calculate the following ratios:- i) Efficiency Ratio, ii) Activity Ratio, iii) Calendar Ratio, iv)Standard capacity usage Ratio.

c) A Project Manager has to manage various projects. For each project given below, you are required to advise him whether to use PERT or CPM and briefly state the reason: (i) Project K is yet to begin. The manager has recently successfully handled similar projects. He is

able to break down the project into smaller modules and knows when he may comfortably finish each module.

(ii) Project L has been sanctioned some fixed amount. Though the manager is familiar about what time it will take, he expects pressure towards the end to finish the project slightly earlier, by deploying additional resources of the company.

(iii) Project M is new to the manager. He has never handled such a project. He can break up the project into smaller modules, but even then, he is not sure of their exact times.

(iv) Project N has a limitation on the skilled workforce available. But the manager knows from earlier experience, the slack on each event in the project. He is confident of handling the bottleneck of labour.

(v) Project O is a research project, bound to produce immense benefit to the company in future.

d) A company produces three products A, B and C. The following information is available for a period:

A B C

Contribution* (Rupees per unit) 30 25 15

*(Sales – Direct materials)

PRIME/ME38/FINAL 2

Machine hours required per unit of production:

Hours

Throughout accounting ratio

A B C

Machine 1 10 2 4 133.33%

Machine 2 15 3 6 200%

Machine 3 5 1 2 66.67%

Estimated sales demand for A, B and C are 500 units each and machine capacity is limited to 6,000 hours for each machine. You are required to analyze the above information and apply theory of constraints process to remove the constraints. How many units of each product will be made? [4 x 5=20 Marks]

2. (a) AML Ltd. is engaged in production of three types of ice-cream products: Coco, Strawberry and

Vanilla. The company presently sells 50,000 units of Coco @ 25 per unit, Strawberry 20,000 @ 20 per unit and Vanilla 60,000 units @ 15 per unit. The demand is sensitive to selling price and it has been observed that every reduction of 1 per unit in selling price, increases the demand for each product by 10% to the previous level. The company has the production capacity of 60,500 units of Coco, 24,200 units of Strawberry and 72,600 units of Vanilla. The company marks up 25% on cost of the product. The Company management decides to apply ABC analysis. For this purpose it identifies four activities and the rates as follows:

Customer support and assistance 1.10 p.u. sold. The other relevant information for the products are as follows:

Under the traditional costing system, store support costs are charged @ 30% of prime cost. In ABC these costs are coming under customer support and assistance.

Required: (i) Calculate target cost for each product after a reduction of selling price required to

achieve the sales equal to the production capacity. (ii) Calculate the total cost and unit cost of each product at the maximum level using

traditional costing. (iii) Calculate the total cost and unit cost of each product at the maximum level using activity

based costing. (iv) Compare he cost of each product calculated in (i) and (ii) with (iii) and comment on it.

(10 Marks)

Activity Cost Rate

Ordering ` 800 per purchase order

Delivery ` 700 per delivery

Shelf stocking ` 199 per hour

Coco Strawberry Vanilla

Direct Material p.u. (`) 8 6 5

Direct Labour p.u. (`) 5 4 3

No. of purchase orders 35 30 15

No. of deliveries 112 66 48

Shelf stocking hours 130 150 160

PRIME/ME38/FINAL 3

b) The budgeted and actual cost data of M Ltd. for 6 months from April to September, 2012 are as under:

In the first half of financial year 2012-13, production is budgeted for 30,000 units, material cost per tonne will increase from last year's actual by ` 150, but it is proposed to maintain the consumption efficiency of 2008 as budgeted. Labour efficiency will be lower by 1%and labour rate will be 44 per hour. Variable and fixed overheads will go up by 20% over 2008 actual. Prepare the Production Cost budget for the period April-September, 2012 giving all the workings. (6 Marks)

3 a) ABC LTD are considering to introduce a new Kitchen Gadget KG . The Expenditure so far made by the Research Department to develop the product is ` 4.00 Lakhs the Production department has provided the following information:

(i) Cost of Production per unit:- Material – ` 42.50, Labour – `27.50, Variable Overhead – ` 10.00

(ii) Anticipated additional fixed costs per annum: Rent for additional space ` 24 Lakhs. Other additional Fixed Costs (excluding Depreciation of machine) i.e. Factory, Administrative & Selling)`35 Lakhs A new machine is required to be built for commercial production of the product for which the estimated cost `8.0 Lakhs .After –tax cost of capital is 10% it is expected that the commercial life of the machine will be 10 years and the full cost of the machine will be depreciated on straight line basis which is allowed for taxation also over a period of 10 years. Tax rate is 40 % .Scrap value of the machine at the end of 10th year is`2, 00,000.

(iii) The market research department has estimated demand for product as follows:

Year (1 – 5) Year (1 – 5)

Demand (Units) Probability Demand (Units) Probability

2,00,000 0.10 12,000 0.2

10,00,000 0.65 8,000 0.5

60,000 0.25 2,000 0.3

D.DCF Factors

1- 5 Years (Cumulative) 3.79

6 – 10 Years (Cumulative) 2.355

10th Year 0.386

Compute Minimum Selling Price of the Product KG (8 Marks)

b) An electronics firm which has developed a new type of fire-alarm system has been asked to

quote for a prospective contract. The customer requires separate price quotations for each of the following possible orders:

Particulars Budget ` Actual `

Production units 16,000 14,000

Material cost 25,60,000 41,60,000

(1,600 MT@ `1,600) (at ` 1,650)

Labour cost 16,00,000 15,99,840

(at 40 per hour) (at 44 per hour)

Variable overhead 3,00,000 2,76,000

Fixed overhead 4,60,000 5,80,000

PRIME/ME38/FINAL 4

Order Number of re-alarm systems First 100 Second 60 Third 40 The firm estimates the following cost per unit for the first order: Direct Materials ` 500 Direct Labour: Deptt. A (Highly automatic) 20 hours at ` 10 per hour Deptt. B (Skilled labour) 40 hours at ` 15 per hour Variable overheads absorbed 20% of direct labour Fixed overheads absorbed Deptt. A 8 per hour Deptt. B 5 per hour Determine a price per unit for each of the three orders, assuming the firm uses a mark up of 25% on total costs and allows for an 80% learning curve. Extract from 80% learning curve table: X 1.0 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 Y(%) 100.0 91.7 89.5 87.6 86.1 84.4 83.0 81.5 80.0 X represents the cumulative total volume produced to date expressed as a multiple of the initial order. Y is the learning curve factor, for a given X value, expressed as a percentage of the cost of the initial order. (8 Marks)

4 a) A company using a standard costing system furnishes the following statement showing the details relating to a month.

Budget Actual ` `

Product and sales volume in units 10000 9000 Selling price per unit 60.00 61.50 Costs for the month: Direct materials 2,50,000 2,57,400 Direct wages 2,25,000 2,20,500 Variable overheads 10,000 9,250 Fixed overheads 25,000 23,240 Direct labour hours 50,000 42,000 Per unit data: Direct materials kg/unit 25 26 Direct materials price/ kg 1.00 1.10 Direct labour hours / unit 5 4.5 Direct labour rate / hour 4.50 5.25

You are required to compute all variances and reconcile the budgeted profit with actual profit. (8 Marks)

PRIME/ME38/FINAL 5

b) Optically Ltd. makes two kinds of products, P (lenses) and Q (swimming goggles) in divisions P and Q respectively. P is an input for Q and two units of P are needed to make one unit ofQ.

P Q

`/u of P `/u of Q

Direct Materials 20 25 (excluding

P)

Direct Labour 30 35

Variable Overhead 10 20

External Demand (units) 3,000 3,000

Capacity (units) 7,000 2,500

Selling Price `/u (outside market) 100 410

If Q buys P from outside, it has the following costs:

For order quantity 2,499 or less 90 per unit for the entire quantity ordered.

For order quantity 2,500 – 5,000 80 per unit for the entire quantity ordered. For order quantity more than 5,000 70 per unit for the entire quantity ordered.

You are required to: (i) Evaluate the best strategies for Division P and Q. (ii) Briefly explain the concept of goal congruence. (8 Marks)

5 a) Entertain U Ltd. hires an air-conditioned theatre to stage plays on weekend evenings. One

play is staged pea evening. The following are the seating arrangements: VIP rows-the first 3 rows of 30 seas per row, priced at 320 per seat. Middle level-the next 18 rows of 20 seats per row priced at 250 per sea. Last level -6 rows of 30 seats per room priced at 120 per seat. For each evening a drama troop has to be hired at ` 71,000, rent has to be paid for the theatre at V 14,000 per evening and air conditioning and other state arrangements charges work out to 7,400 per evening. Every time a play is staged, the drama troup's friends and guests occupy the first row of the VIP class, free or charged, by virtue of passes granted to these guest, the troupe ensures that 50% of the remaining seats of the VIP class and 50% of the seats of the other two classes are sold to outsiders in advance and the money is passed on to Entertain U. The troupe also finds for every evening, a sponsor who pouts up his advertisements banner near the stage and pays Entertain U a sum of 9,000 per evening. Entertain U supplies snacks during though interval free of charge to all the guests in the hall, including the VIP free guests. The snacks cost Entertain U `20 per person. Entertain U sells the remaining tickets and observes that for every one seat demanded from the last level, there are 3 seats demanded from the middle level and 1 seat demanded from the VIP level. You may assume that in case any level is filled, the visitor busy the next higher or lower level, subject to availability. (i) You are required to calculate the number of seats that Entertain U has to sell in order to

break-even and give the category wise total seat occupancy at BEP. (ii) Instead of the given pattern of demand, if Entertain U finds that the demand for VIP,

Middle and Last level is in the ratio 2:2:5, how many seats each category will Entertain U have to sell in order to break-even.? (11 Marks)

PRIME/ME38/FINAL 6

b) H. Ltd. manufactures three products. The material cost, selling price and bottleneck resource details per unit are as follows:

Budgeted factory costs for the period are ` 221600. The bottleneck resource time available is 75120 minutes per period. Required:

(i) Company adopted throughput accounting and products are ranked according to 'product return per minute'. Select the highest rank product.

(ii) Calculate throughput accounting ratio and comment on it. (5 Marks)

6 a) The following information relates to labour of x Ltd.

Type of Labour Skilled Semi Skilled Un Skilled Total

No. of workers in standard gang 4 3 2 9

Standard rate per hour (Rs) 6 3 1 –

Number of workers in actual gang

Actual rate per hour (`) 7 2 2 –

In a 40 hours week, the gang produced 270 standard hours. The actual number of semi–skilled workers is two times the actual number of unskilled workers. The rate variance of semi–skilled workers is `160 (F). Find the following:

(i) The number of workers in each category (ii) Total gang variance (iii) Total Sub–efficiency variance (iv) Total labour rate variance (v) Total labour cost variance (7 Marks)

b) A company manufacture two products A and B, involving three departments Machining,

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

Machining Fabrication Assembly Profit (Hours) (Hours) (Hours) ` A 1 5 3 80 B 2 4 1 100 Capacity 720 1800 900 Set up Linear Programming problem to maximize profit. What will be the product Mix at Maximum profit level? (9 Marks)

Particulars

Product X Product Y Product Z

Selling price (`) 66 75 90

Material and other variable cost (`) 24 30 40

Bottleneck resource time (minutes) 15 15 20

PRIME/ME38/FINAL 7

7 a) 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 contract commitments, the refinery must produce at least 500 units of A and at lease 300 units of B for the next month. It has ,1,500 units of crude Q, 1,900 units of crude P and 1,000 of crude R. For each unit of A, refinery receives `60 while for each unit of B, it receives ` 90. Formulate the problem as linear programming model so as to maximize the revenue.

b) Mention the data required to operate the material requirement planning system. c) Distinguish between Committed fixed cost and discretionary fixed cost.

d) Differentiate between value added and non value added activities in the context of ABC costing. Give examples for the same. (4 x 4 = 16 Marks)

PRIME/ME38/FINAL 1

PRIME ACADEMY 38th SESSION MODEL EXAM - FINAL – ADVANCED MANAGEMENT ACCOUNTING

SUGGESTED ANSWERS

1a) b) Maximum Capacity in the budgeted period = 50 employees * 8 hours * 5 days * 4 weeks

= 8,000 hours. Budgeted hours = 40 employees * 8 hours * 5 days * 4 weeks = 6,400 hrs. Actual Hours = 6,000 hours Standard hours for actual output = 7000 hours Budgeted No. of days = 20 days (4 weeks * 5 days) Actual No. of days = 20 – 1 = 19 days. Efficiency Ratio = Standard hours / Actual hours * 100 = ((7000/6000)*100) = 116.67% Activity Ratio = ((7000/6400)*100) = 109.375% Calendar Ratio = ((Available working days / Budgeted working days) * 100) = ((19/20)*100) = 95% Standard Capacity Ratio = (Budgeted hours / Max. possible hours in the budgeted period) * 100 = ((6400/8000)*100) = 80%

c)

(i) K CPM - No uncertainty regarding timing of activities

(ii) L CPM - Known timing; optional crashing required

(iii) M PERT - Unknown activity timing; probabilistic model is necessary

(iv) N CPM - Known activity timing; Limiting availability of skilled labour calls for resource smoothening

(v) O PERT - Research project; uncertainty about of timing of activities.

d)

Throughout Accounting ratio is highest for ‘Machine 2’.

Machine 2’ is the bottleneck

Contribution per unit of bottleneck machine hour : Total ‘Machine 2’ hours available = 6,000

A ` B ` C `

ii Contribution per unit ( ) 30 25 15

iii ‘Machine 2’ hours 15 3 6

iiii. Contribution per ‘Machine 2’ hours

iiv. (A / B)

2

8.33

2 .5

Particulars Perfect

Competition ` Monopoly `

Units 6,000 1,200

Contribution (1,06,000 + 74,000) 1,80,000 1,80,000

Contribution per unit 30 150

Variable Cost per unit 150 X 4/3 200

Variable Cost per unit 200

Selling Price per unit 230 350

PRIME/ME38/FINAL 2

vv. Ranking 3 1 2

vvi. . Maximum Demand 500 500 500

vvii. Machine 2’ hours required: (B×E) 7,500 1,500 3,000

‘Machine 2’ hours allotted on the basis of ranking 1,500 1,500 3,000

Units 100 500 50

2) (a) (i) Cost of products under target costing:

Demand unit and selling price

Coco Strawberry Vanilla

Selling price Demand Selling price

Demand Selling price

Demand

25 50,000 20 20,000 15 60,000

24 55,000 19 22,000 14 66,000

23 60,500 18 24,200 13 72,600

Target cost of each product after reduction in selling price

Coco Strawberry Vanilla

Selling price after reduction 23.00 18.00 13.00

Profit marks up 25% on cost i.e. 20% on selling price

4.60 3.60 2.60

Target cost of production (Per unit)

(ii) Cost of product under traditional costing

Coco Strawberry Vanilla

Units 60,500 24,200 72,600

Material cost (8, 6, 5 per unit) 8 6 5

Labour cost (5, 4,3 per unit) 5 4 3

Prime cost 13 10 8

Store support cost (30% of prime) 3.90 3 2.40

Cost per unit 16.90 13.00 10.40

(iii) Cost of product under activity based costing

Coco Strawberry Vanilla

Units 60,500 24,200 72,600

Material cost (8,6,5 per unit) 4,84,000 1,45,200 3,63,000

Labour cost (5, 4, 3 per unit) 3,02,500 96,800 2,17,800

Prime cost 7,86,500 2,42,000 5,80,800

Ordering cost @ 800 (35, 30, 15) 28,000 24,000 12,000

Delivery cost @ 700 (112, 66, 48) 78,400 46,200 33,600

Shelf stocking @ 199 (130, 150, 160) 25,870 29,850 31,840

Customer support 1.10` 66,500 26,620 79,860

Total cost 9,85,320 3,68,670 7,38,100

Cost per unit 16.29 15.23 10.17

PRIME/ME38/FINAL 3

(iv) Comparative analysis of cost of production ( )

Coco

Strawberry

Vanilla

(a) As per Target Costing 18.40 14.40 10.40

(b) As per traditional costing 16.90 13.00 10.40

(c) As per Activity Based costing 16.29 15.23 10.17

(a) – (c) 2.11 -0.83 0.23

(b) –(c) 0.61 -2.23 0.23

Note: The cost of product of Strawberry is higher in ABC method in comparison to target costing and traditional methods. It indicated that actual profit under target costing is less than targeted. For remaining two products, ABC is most suitable.

(b) Balanced Score Card is a set of financial and non-financial measure relating to a company's critical success factors. It is approach, which provides information to management to assist in strategic policy formulation and achievement. It emphasizes the need to provide the user with a set of information, which addresses all relevant areas of performance in an objective and unbiased manner. As a management tool it helps companies to assess overall performance, improve operational processes and enable management to develop better plans for improvements. It offers managers a balanced view of their organization upon which they can further add-on.

b) Production cost budget

(for the 6 months ending 30 September)

30,000 units

Cost per unit Total

` `

Material cost 180 54,00,000

Labour cost 115.21 34,56,420 Variable overhead 23.65 7,09,500

Fixed overhead 23.2 6,96,000

342.06 1.02,61,920

Assumption ; Here, difference in actual and standard time is also considered for calculating the lower efficiency i.e.3.74%+1%=4.74%.

Working Notes: I. Material cost Material consumption per unit@ = 1600MT = 0.10MT

16000 Consumption for 30,000 units = 3,000 MT. Cost of 3,000 MT@ ` 1,800 per MT = ` 54,00,000. II. Labour cost can be calculated as follows: Time required for 30,000 units = 75,000 hours Add: *(3.74% + 1%) = 4.74% for lower efficiency = 3,555 hours = 78,555 hours

PRIME/ME38/FINAL 4

*3.74% = Difference in actual and standard hours X 100 Actual hours 1,360 hours = __________ 36,360 hours Labour cost = 78,555 hours x 44 per hour = 34,56,420. III. Variable overhead

Actual rate = 2,76,000 = 19.71 per unit

14000 Add: 20% =3.94 per unit =23.65 per unit Total variable overhead = 30,000 x 23.65 =7,09,500 IV. Fixed overhead Actual = `5,80,000 Add: 20% = `1.16.000 = ` 6.96.000 According to above the production cost budget will be as follows; Production cost budget (for the 6 months ending September)

30,000 units

Cost per unit Total

` `

Material cost 180 54,00,000 Labour cost 111.1 33,33,000 Variable overhead 23.65 7,09,500 Fixed overhead 23.2 6.96.000 337.95 1.01.38.500

Working notes: I. Material cost Material consumption per unit = 1600MT = 0.10MT 16,000 Consumption for 30,000 units = 3,000 MT. Cost of 3,000 MT@` 1,800 per MT = ` 54,00,000. II.Labour Cost: 2011 - Total Budgeted Hour = 16,00,000 = 40,000 hours 40 Labour hour budget for each unit = 40000 = 2.5 16000 Actual time paid = 36,360 hours Less: Standard labour hours for 14,000 units (i.e. 14,000 x 2.5) = 35,000 hours Diff. in actual and standard hours = 1,360 Hours Time required for 30,000 units (30,000 x 2.5) = 75,000 hours

PRIME/ME38/FINAL 5

Add: 1% for lower efficiency =750 hours =75,750 hours Labour cost = 75,750 hours x 44 per hour = 33,33,000 III.Variable overhead Actual =` 276,000 = 19.71 per unit 14,000 units Add: 20 % = 3.94 = 23.65 Total variable overhead = 30,000 x 23.65 = ` 7,09,500 IV.Fixed overhead Actual =` 5,80,000 Add: 20% = ` 1.16.000 = ` 6,96,000

3a) As treatment of R& D cost is not indicated, it is treated as sunk costs. Expected sales volume 1-5 yrs = (200000x0.1) + (10,0000x 0.65)+(60000 x 0.25) = 1,00,000 units 6-10 yrs = (120000x 0.2) + (80000 x0.5)+ (20000 x 0.3) = 70,000 units. Let X = Sales price per unit of product KG

Amount in ` Year Year Year Year 0 1-5 ` 6-10 ` 10 ` i)Outflow –machine cost 8,00000 (Refer to working note 1) ii)Inflow – Sales revenue(A) 1,0000X 7,00,00X Less outflow cost Materials + Labour + Overheads 80,00,000 56,00,000 Fixed overhead 59,00,000 59,00,000 Depreciation of machine 80,000 80,000 Total cost (B) 1,39,80,000 1,15,80,000 Profit before Tax(A-B) 1,00,000X 70,000X- 1,39,80,000 1,15,80,000 Less : Tax @ 40 % 40000X 28000X- 55,92,000 46,32,000 Profit after tax before Depreciation 60,000x- 42,200X- Add depreciation 83,88,000 69,48,000 Salvage/Scrap 80,000 80,000 200000

Net Flows : (c ) -8,00,000 60000X 42,000X 2,00000 83,08,000 68,68,000 DCF Factors (D) 3.79 2.355 0.386 Discounted Cash Inflows ( C ) x ( D) -8,00,000 2,27,400X 98910X 77200 3,14,87,320 16174140

PRIME/ME38/FINAL 6

Net Cash Inflow = 3,26,310X – ` 4,85,38,660 For determining minimum selling price the net cash inflows should be Zero i.e 3,26,310 x = ` 4,85,38,660 (Or) X= ` 148.75 = ` 149 approx.

3 b) i) Price/Unit for first 100 units:

Particulars ` `

Direct materials 500

Direct labour: Deptt. A 20 hrs. @10

200

Deptt. B40 hrs. @ 15 600 800

Variable 0/H 20% of ` 800/- 160

Fixed 0/H Deptt. A 20 hrs. @ 8 160

Deptt. B 40 hrs @ 5 200 360

Total cost 1,820

Profit 455

Selling price per unit 2,275

(ii) Price/Unit for Second Order of 60 Units : Learning will be applicable only in Dept. B Cumulative output becomes 100 units + 60 units = 160 units i.e. 1.6 times for which learning is 86.1% from the table. total hours for 160 units = 160x40x0.861 = 5510.4 units. hours for 60 units = Hrs for 160 units - Hrs for 100 units. = 5510.40 - 4000 hrs = 1510.40 hrs. Hours per unit = 1510.40/60 = 25.17 Calculation of selling price per unit:

Particulars ` `

Direct materials 500

Direct labour: Deptt. A 20 hrs@ 10 200

Deptt.B 25.17 hrs@ 15 377.55 577.55

Variable 0/H 20% of ` 577.55 115.51

Fixed 0/H : Deptt. A 20 hrs@ 8 160

Deptt. B 25.17@ 5 125.85 285.85

Total Cost 1478.91

Profit 369.73

Selling price per unit 1848.64

iii) Price/Unit for Third Order of 40 Units: Cumulative Output becomes 100+60+40 = 200 units i.e. 2 times for which Learning is 80% from the table Total hours for 200 units = 200 x 40 x .80 = 6400 hrs Hours for 40 units = Hrs for 200 units - Hrs for 160 units. = 6400 - 5510.4 = 889.6 hrs. Hours per unit = 889.6/40 = 22.24 hrs

PRIME/ME38/FINAL 7

Calculation of selling price/ unit:

Alternative Solution:

Particulars Amt. in First Second Third Order at 80%

Direct Material 500 500 500

Direct Labour Dept A (20 hours @ ` 10 per hour) 200 200 200

Dept B (40 hours @ ` 15 per hour) 600 516.6 480

Variable overheads (20% of direct labour) 160 143 136

Fixed Overheads Dept A (20 hours @ ` 8 per hour) 160 160 160

Dept B (40 @ ` 5 per hour) 200 172.2 160

Total Cost 1820 1692.12 1636

Profit {25% of Cost) 455 423.03 409

Selling Price per Alarm 2275 2115.15 2045

Note: Learning Curve not applicable for Dept A as it is high automated *Second Order-60 fire-alarms, Cumulative Total = 160 fire-alarms The cumulative total is now 160 Alann, which is denoted by the multiple of 160/100 i.e. 1.6. From the 80% learning curve table the relevant percentage factor is 86.1% of the labour cost. Cumulative order 160 @ ` 2115.15 3,38,424 Previous order 100 @ ` 2275 2,27,500 Increment order 60 1,10,924 Therefore, charge price per Alarm 1848.73 **Third Order-40 Alarm, Cumulative Total = 200 Alarm The cumulative total is now 200 fire alarms, which is denoted by the multiple of 200/100 i.e. 2. From the 80% learning curve table the relevant percentage factor is 80% of the labour cost. Cumulative orders 200 @ ` 2045 409000 Previous order 160 @ ` 2115.15 338424 Incremental order 40 70576 Therefore, charge price per Alarm (`") 1764.40

Particulars `

Direct material 500.00

Direct labour: Deptt. A 20 hrs @ 10

200.00

Deptt. 8 22.24 hrs @ 15 333.6

Variable 0/H 20% of ` 533.60 500. 00

Fixed O/H : Deptt. A 20 hrs @ 8 200.00

Deptt. B 22.24 @ 5 111.2

Total Cost 1411.52

Profit 352.88

Selling Price/Unit 1764.4

PRIME/ME38/FINAL 8

4 a) 1. Computation of material variances:

Standard data for actual output Actual data

Qty kgs S.P per Kg Amount ` Qty Kgs S.P per Kg Amount `

2,25,000 1 2,02,500 2,34,000 1.1 2,20,500

Material cost variance : =(S.C – A.C) = ` 2,25,000 – ` 2,57,400 = ` 32,400 (Adv.) Material price variance: =(S.P – A.P) A.Q = (1–1.10) 2,34,000 = ` 23,400 (Adv.) Material usage variance: =(S.Q – A.Q) S.P = (2,25,000 – 2,34,000) .1 = ` 9,000 (Adv.) 2. Computation of labour variances:

Standard data for actual Profit Actual Output

Std Hour Std rate per hour

Amount Actual hours

Production hours

Idle time

Rate per hour

Amount `

45000 4.5 2,02,500 42,000 40,500 1,500 5.25 2,20,500

Labour cost variance : = (S.C – A.C) = (`2,02,500 – `2, 20,500) = `18,000 (Adv.) Labour rate variance: = (S.R – A.R) A.H = (4.50 – 5.25) 42,000 = `31,500 (Adv.) Labour efficiency variance: = (S.H – Actual production hrs) S.R = (45,000 – 40,500) 4.50 =`20,250 (Fav) Idle time variance = Idle time hours x standard rate per hour = 1,500 hours x `4.50 = ` 6,750(Adv) 3. Computation of Fixed overhead variances: Budgeted / Standard data Actual data Budgeted overheads (`) 25,000 Fixed overheads (`) 23,240 Budgeted output (units) 10,000 Actual output (units) 9,000 Budgeted (hours) 50,000 Actual production (hours) 40,500 Idle hours 1,500 Standard rate per unit `2.5 Standard rate per hour 0.50 Standard time per unit 5 hours Total fixed overhead cost variance: = {Fixed overhead recovered on actual output – Actual fixed overhead incurred} = { 9,000 x ` 2.50 – ` 23,240} = ` 740 (Adv) Expenditure variance:

PRIME/ME38/FINAL 9

= [Budgeted fixed overheads – Actual fixed overheads] = [` 25,000 – ` 23,240) = ` 1,760 (fav.) Volume variance: = [Budgeted volume – Actual volume) Std. rate per unit = (10,000 – 9,000) `2.50 =`2,500 (Adv.) Efficiency variance: = (Standard hours for actual output – Actual production hours) Std rate per hour = (45,000 hours – 40,500 hours) 0.50 = `2,250 (Fav.) Capacity variance: = (Budgeted hours – Actual hours) Std rate per hour = (50,000 hours – 42,000 hours) 0.50 = `4,000 (adv) Idle time variance: = Idle time hours x Std rate per hour = 1,500 hours x 0.50 = `750 (Adv.) 4.Computation of variable overhead variances: Budgeted / Standard data Actual data Budgeted variable overheads for 8100 Units Actual variable OH (`) 9,250 actual production hours Standard hours per unit ` 5 Actual output (units) 9,000

Actual production (hours) 40,500 Standard variable overhead rate per hour (`) 0.20 Standard variable overhead rate per unit `.1 Total variable overhead cost variance: =(Variable overhead recovered on actual output - Actual variable overhead incurred) = (9,000 units x` 1 – ` 9,250) = ` 250 (Adv.) Expenditure variance: = [Budgeted variable overheads – Actual variable overheads] = [` 8,100 – ` 9,250) = ` 1,150 (Adv.) Efficiency variance: = [Standard hours for actual output – Actual hours) Std. rate per unit = (45,000 – 40,500) 0.20 =` 900 (Fav.) 5.Computation of sales variance:

Standard / Budgeted data Actual data

Budgeted qty units S.P per unit Amount `

Actual qty units

S.P per unit

Amount `

10000 60 60,000 9000 61.5 553500

Total sales value variance: = [Budgeted sales value – Actual sales value] = (` 6,00,000 – ` 5,53,500) = ` 46,500 (Adv.) Sales price variance: = [Budgeted selling price – Actual selling price] AQ = (60 - 61.50) 9,000 = ` 13,500 (Fav.) Sales volume variance: = [Budgeted volume – Actual volume] Budgeted S.P per unit = (10,000 – 9,000) 60 = ` 60,000 (Adv.)

PRIME/ME38/FINAL 10

Standard gross margin volume variance: = (Budgeted volume – Actual volume) Std. gross margin per unit = (10,000 – 9,000) (` 60 – ` 51) = ` 9,000 (Adv.)

Reconciliation of budgeted profit with actual profit:

` Budgeted profit 90,000 Sales gross margin volume variance 9,000 (Adv) Standard profit 81,000 Sales price variance 13,500 (Fav) Total 94,500 Cost variances: Direct material 32,400 (Adv.) Direct labour 18,000 (Adv.) Variable overhead 250 (Adv) Fixed overhead 740 (Adv) 51,390 (Adv.) Actual profit 43,110

(c) Optical Ltd manufactures P( lenses) and Q ( swimming goggles ). Division P has option to supply to Division Q or sell to outside market. Division Q has option to buy from Division P or purchase from outside market. However, both divisions have to work within their individual capacity.

Variable Cost for product P in Division P = 60. Variable cost for product Q in Division Q ( excluding 2 Nos P's) = 80. Division P has better market price of its product P than the market price offered to Q division. Thus for maximizing profit of the organization P division should optimize its profit by selling maximum units to outside market. Contribution per unit for sale to outside for division P = 40 Contribution per unit for Div Q as follows : Sale price - Variable cost ( excluding lenses) = 330

Max Contribution per unit ( if procured from P div at its variable cost i.e 60) = 210

Min Contribution per unit ( if procured at 90 per unit from outside) = 150 Contribution per unit at transfer price of 70 i.e minimum market price = 190

Option 1: Division Q buys 5001 units from market @ 70 and meets its capacity. Division P sells 3000 units to outside market @ 100

Sale/ transfer Contribution per unit P Q

Total in (000s)

Div P :Sale of 3000 units to outside market @ 100 40 120 120

Div Q: Sale of 2500 units with P from market @ 70 190 475 475

Less : cost of rejection of one unit of product P -0.07 -0.07

Total 120 474.93 594.93

Option 2: Division P sells 3000 units to outside market, transfer 4000 units to div Q and

PRIME/ME38/FINAL 11

Division Q buys 1000 units from outside market to work within the capacity P Division agrees to a transfer price so that profitability of Q is not affected. To maintain the same profitability of Q, contribution required from 2000 units for Div Q is 400,000 i.e contribution per unit 200 i.e transfer price per unit of P is 65 per unit to make cost of lances 130 Under Option 1, both divisions worked dis-jointly without caring for capacity utilization resulting lower profitability of the organization. Under Option 2, both divisions worked with mutual advantages for optimizing their individual profits and overall profit for the organization has gone up by effective utilization of capacity. Product P from Division P fetches higher price from open market indicating good quality of product. Moreover, supply from P division is well assured in the long run which is the justification of establishment of two parallel divisions. Hence, Option 2 is suggested.

Division functioning as profit centers strive to achieve maximum divisional profits, either by internal transfers or from outside purchase. This may not match with the organization’s objective of maximum overall profits. Divisions may be commercial to advice overall objects objectives, where divisional decisions are in line with the overall best for the company, and this is goal congruence. Divisions at a disadvantage may be given due weight age while appraising their performance. Goal incongruence defeats the purpose of divisional profit centre system.

5a)

` `

Troupe Hire 71,000

Rent 14,000

A/C 7,400

VIP Snacks 600 93,000

Fixed Revenues:

Seats Sold by the troupe 54,000

Sponsor's advertisement 9,000 63,000

Net fixed costs recovered by Entertain U to Break even 30,000

Seats Sold by ttie troupe 54,000

Sponsor's advertisement 9,000

63,000

VIP Med Lost

Total seats available 90 360 180

Less: Free 30

Less: Sold by troupe 30 180 90

Can be sold by Entertain U 30 180 90

Row Price 320 220 120

Variable cost 20 20 20

Contribution per seat 300 200 100

Demand 1 3 1

PRIME/ME38/FINAL 12

= 300*1+200*3+100*1 = 200 1+3+1 Therefore, BEP for Entertain U is 30000/200 = 150 No. of Seats

VIP Rows Middle Level Last Level

BF Seats Total 150 30 90 30

Contribution per unit 300 200 100

Contribution (`) 9000 18000 3000 30,000

Category wise occupancy at BEP: VIP = 30+30+30 = 90, Middle level = 90+180 = 270, Last level = 120 If demand ratio is in the ratio of 2: 2 :5 : Weighted contribution per seats = (2*300+ 2*200+ 5*100)/9 = 180 Seats Ratio 40 40 100 Quantity available 30 180 90 Break Even quantity 30 10 90 10 10 30 60 90 Contribution per unit 300 200 100 No. of seats 30 60 90 Contribution ` 9000 12000 9000 Total ` 30,000

b)

Particulars X Y Z

Selling Price 66 75 90

Variable Cost 24 30 40

Throughput Contribution 42 45 50

Minutes per unit 15 15 20

Contribution per minute 2.8 3 2.5

Ranking II 1 III

Factory Cost per minute( 221600/75120) 2.95 2.95 2.95 TA Ratio = Cont. per min / cost per minute 0.95 1.02 0.85 Ranking based on TA Ratio II I III Comment: Product Y yields more contribution compared to average factory contribution per minute, whereas X and Z yield less.

6 a)

SR SH SRSH SR RSH SRRSH SR AH SRAH AR AH ARAH

Skill 6× 120 720 6× 960 160 6× 12

0 120 7× 120 840

Semi-Skill 3× 90 270 3× 360 120 3× 16

0 480 2× 160 320

Unskilled 1× 60 60 1× 80 80 1× 80 __80 2× 80 160

1050 1400 1280 1320

PRIME/ME38/FINAL 13

Sub-efficiency Variance Gang Variance

Rate Variance

350 (A) 120 (F) 40 (A)

Cost Variance = 270 (A)

Workings Note: Standard hours produced = 270 Standard Mix: 270 ÷ 9 = 30 Actual hrs = 40 × 9 = 360 hrs. Actual hrs in Standard Ratio = 360 4: 3: 2: Skilled Semi-skilled Unskilled 4 3 2

= 49

360 = 3

9

360 = 2

9

360

= 160 = 120 = 80 [(Standard Rate = Actual Rate) Actual hrs.]= Rate Variance Semi-skilled = 160 (3 – 2) Actual hrs = 160 Actual hrs = 160 (for semi-skilled) Actual Semi-skilled = 2 (Unskilled actual) 160 = 2 (Unskilled) Unskilled hrs (actual) = (160÷2) =80 Total Actual = 360

Actual hrs – skilled = 360 – (160 + 80) = 360 – 240 = 120 Actual Hrs. Skilled Semi-skilled Unskilled 120 160 80 40 hr week

40

120= 3

40

160= 4

40

80= 2

No. of Workers (i) Skilled =3, Semi-skilled=4, Unskilled=2 (ii) Gang Variance: = (Actual Hrs in Standard Ratio – Actual Hrs in Actual Ratio) × Standard Rate = 1400 – 1280 = 120 (F) (iii) Sub-efficiency Variance: = Standard Rate (Standard Hrs – Actual Hrs in Standard Ratio) = 1050 – 1400 = 350 (A) (iv) Total Labour Rate Variance: = Actual Hrs (Standard Rate – Actual Rate)

PRIME/ME38/FINAL 14

= 1280 – 1320 = 40 (A) (v) Labour Cost Variance: = (Standard Rate × Standard Hrs – Actual Rate × Actual Hrs.) = 1050 – 1320 = 270 (A) (b) 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 problem 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

80 100 0 0 0

Profit/ Unit

Qty X Y S1 S2 S3

S1 0 720 1 2 1 0 0 720/2=360

S2 0 1800 5 4 0 1 0 1800/4=450

S3 0 900 3 1 0 0 1 900/1=900

Net Evaluation Row

80 100 0 0 0

1800 – 720 ×4/2 = 360 900 - 720×1/2 = 540 5 – I×2 = 3 3 - 1× ½ = 5/2 4 – 2 × 2 =0 I – 2 ×1/2 = 0 0 - I×2 = - 2 0 – I ×1/2 =- 1/2 PAPL/ME27/F 12 I - 0×2 = I 0 – 0 ×1/2 = 0 0 - 0×2 = 0 I- 0×1/2 = I Table 2:

80 100 0 0 0

Profit/ Unit

Qty X Y S1 S2 S3

Y 100 360 ½ 1 ½ 0 0 360/1/2=720

S2 0 360 3 0 -2 1 0 360/3=120

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

Net Evaluation Row

30 0 -50 0 0

360 – 360 × 1/6 = 300 540 – 360 × 5/6 = 240 ½ - 3 ×1/6 = 0 5/2 –3 × 5/6 = 0

PRIME/ME38/FINAL 15

1- 0× 1/6=1 0 – 0 × 5/6 = 0 ½ - -2 × 1/6 = 5/6 -1/2 - -2 ×5/6 = 7/6 0 – 1 ×1/6 = - 1/6 0 – 1 × 5/6 = -5/6 0 – 0 ×1/6 = 0 1-0 × 5/6 = 1 Table 3:

80 100 0 0 0

Profit/ Unit

Qty X Y S1 S2 S3

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

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

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

Net Evaluation Row

0 0 180/6 -60/6

All the values of the net evaluation row of Table 3 are either zero or negative, the optimal program has been obtained. Here X = 120, y = 300 and the maximum profit = 80×120 + 100× 300 = 9600 + 30,000 = `39,600/-

7) (a) Maximize Z = 60 (9x1 + 5x2) + 90 (7x1 + 9x2) = 1170x1 + 1110x2 Subject to 9x1 + 5x2 ≥ 500 commitment for A 7x1 + 9x2 ≥ 300 commitment for B 5x1 + 3x2 ≤ 1500 availability of Q 7x1 + 9x2 ≤ 1900 availability of P 2x1 + 4x2 ≤ 1000 availability of R and x1 ≥ 0, x2 ≥ 0.

b) Data requirements to operate materiai requirement planning system: The master Production scliedule: This scliedule specifies tlie quantity of eacli finislied unit of products to be produced and tlie time at wliich each unit will be required. The Bill of material file:The bill of material file specifies the sub-assemblies, components and materials required for each of the finished goods. The inventory file:This file maintains details of items in hand for each sub-assembly, components and materials required for each of the finished goods. The routing file:This file specifies the sequence of operations required to manufacture sub -assemblies, components and finished goods. The master parts fileiThis file contains information on the production time of sub¬ assemblies; components produced internally and lead times for externally acquired items.

c) Committed Fixed costs 1. These are fixed costs that arise from the possession of- I) Assets, i.e. Plant, Building

and equipment (e.g. Depreciation, rent, taxes, Insurance Premium etc) or. Ii) A basic organization (e.g. Salaries of staff)

2. These costs remain unaffected by nay short- term changes in volume of production.

PRIME/ME38/FINAL 16

3. Any reduction in committed fixed costs under normal activities of the concern would have adverse effects on the concern’s long-term objectives.

4. Such costs cannot be controlled 5. Also Know as “Unavoidable” fixed costs

Discretionary Fixed Costs:

1. These are fixed costs incurred as a result of management’s discretion/decision. 2. It arises from periodic (usually yearly decisions regarding the maximum outlay to be

incurred,(e.g. advertising) 3. These cannot be changes or altered in the short run. 4. Discretionary fixed costs can change from year to year without disturbing the long

term objectives. So, theses are “escapable” costs. 5. These costs can be controlled. 6. Also Known as “Avoidable” fixed costs.

d) A value added activity is an activity that customers perceive as adding usefulness to the product or

service they purchase. In other words, it is an activity that, if eliminated, will reduce the actual utility or usefulness which customers obtain from using the product or service. For example, painting a car in a company manufacturing cars or a computer manufacturing company making computers with preloaded software. A non-value added activity is an activity where there is an opportunity of cost reduction without reducing the product’s service potential to the customer. In other words, it is an activity that, if eliminated, will not reduce the actual or perceived value that customers obtain by using the product or service. For example, storage and moving of raw materials. Value-added activities enhance the value of products and services in the eyes of the organisation’s customers while meeting its own goals. Non-value added activities on the other hand do not contribute to customer-perceived value.

PRIME/ME38/FINAL 1

SAT 2 No of Pages: 2 Total Marks: 100 No of Questions: 7 Time allowed: 3 Hrs Question no.1 is Compulsory Answer any 5 Qns from the rest 1. Do-well co. ltd which is engaged in manufacturing and supply of motor components has decided to

scrap off its legacy system and move into a new ERP environment to facilitate better planning of production and procurement activities, working capital management, effective sales management and automation of administrative activities. It has also as a part of this exercise decided to implement a BCP plan which did not exist till now. To meet this end, the company has appointed you as its ERP migration consultant and seeks your advice.

(a) When the existing information system is to be converted into a new system, what are the activities involved in the conversion process?

(b) What is meant by Business Continuity Planning? Explain the areas covered by Business

Continuity. (c) List at least ten components which the information security policy should cover.

(d) What are the benefits of an ERP system to the company? (4 x 5 = 20 Marks)

2.

a) State any 6 reasons as to why organizations fail to achieve system development objectives? (6 Marks)

b) Write short notes on system development team (6 Marks) c) List out the various fact-finding techniques during the requirement analysis or the system analysis

phase. (4 Marks) 3.

a) List out any ten threats to a computerized environment. (5 Marks) b) Distinguish between emergency plan and back up plan (5 Marks) c) Explain the following terms as provided by the Information Technology Act

a. Public Key b. Originator c. Hacking (3 x 2 = 6 Marks)

4.

a) What is a test strategy? Explain the various types of test plans. (6 Marks) b) Write short notes on static and dynamic testing (4 Marks) c) Broadly specify as to how as an IS Auditor, you would review the computer network of an

organization. (6 Marks) 5.

a) List out any ten threats to a computerized environment. (5 Marks) b) Distinguish between Systematic and unsystematic risk. (5 Marks) c) Explain the following terms as provided by the Information Technology Act

i. Public Key ii. Originator

iii. Hacking (3 x 2 =6 Marks)

PRIME/ME38/FINAL 2

6. a) What is Capability Maturity Model? Explain its 5 stages (6 Marks) b) What are audit trails? How can an audit trail help to achieve security objective? (6 Marks) c) What is the procedure to apply for a license to issue electronic signature

certificates, under Section 22, Information Technology (Amendment) Act, 2008? (4 Marks)

7 a) You are newly appointed as the IS Auditor of ABC Company. List out the various areas you would

want to examine in your new position. (Scope of an IS Audit) (5 Marks) b) What is Business Impact Analysis? Explain briefly the activities performed during this stage.

(2 Marks) c) What is integrated test facility? (4 Marks) d) What is an information system and explain its role in management. (5 Marks)

PRIME/ME38/FINAL 1

PRIME ACADEMY 38th SESSION MODEL EXAM - FINAL - INFORMATION SYSTEM AND CONTROL AUDIT

SUGGESSTED ANSWERS 1.

a) Conversion from existing information system to a new system involves the following activities:

Defining the procedures for correcting and converting the data into the new application, determining ‘what data can be converted through software and what data manually’;

Creation of data back ups

Performing data cleansing before data conversion;

Identifying the methods to assess the accuracy of conversion like record counts and control totals;

Designing exception reports showing the data which could not be converted through software; and

Establishing responsibility for verifying and signing off and accepting overall conversion by the system owner,

Establishing responsibility for verifying and signing off and accepting overall conversion by the system owner.

b) Business Continuity Planning (BCP) is the creation and validation of a practical logistical plan for how an organization will recover and restore partially or completely interrupted critical functions within a predetermined time after a disaster or extended disruption. The logistical plan is called a Business Continuity Plan. Planning is an activity to be performed before the disaster occurs otherwise it would be too late to plan an effective response. The resulting outage from such a disaster can have serious effects on the viability of a firm's operations, profitability, quality of service, and convenience. Business Continuity covers the following areas:

Business resumption planning – resuming critical business operations;

Disaster recovery planning – The technological aspect of BCP, the advance planning and preparation necessary to minimize losses and ensure continuity of critical business functions of the organization in the event of a disaster.

Crisis Management – The overall co-ordination of an organization’s response to a crisis in an effective timely manner, with the goal of avoiding or minimizing damage to the organization’s profitability, reputation or ability to operate.

c) A good security policy should clearly state the following :

Purpose and Scope of the Document and the intended audience,

The Security Infrastructure,

Security policy document maintenance and compliance requirements,

Incident response mechanism and incident reporting,

Security organization Structure,

Inventory and Classification of assets,

Description of technologies and computing structure,

Physical and Environmental Security,

Identity Management and access control,

IT Operations management,

IT Communications,

System Development and Maintenance Controls,

Business Continuity Planning,

Legal Compliances,

PRIME/ME38/FINAL 2

Monitoring and Auditing Requirements, and

Underlying Technical Policy.

d) Benefits to the company arising from ERP implementation:

ERP helps to integrate financial information across companies.

ERP helps to keep track of customer order information.

ERP facilitates speeding up of manufacturing processes. ERP systems come with standard methods for automating some of the steps of a manufacturing process. Standardizing those processes and using a single, integrated computer system can save time, increase productivity and reduce headcount.

ERP helps the manufacturing process flow more smoothly, and it improves visibility of the order fulfillment process inside the company. That can lead to reduced inventories of the materials.

ERP helps in standardizing HR information, especially with companies having multiple business units.

ERP provides increased control over invoicing and payment processing which increases the productivity of the personnel in the accounts department.

ERP reduces paper documents by providing on-line formats for quickly entering and retrieving information.

ERP provides more accurate and real time information to fulfill the needs of the management and the auditors.

ERP improves supply-demand linkage with remote locations and branches in different countries.

ERP provides a unified customer database usable by all applications and facilitates effective customer follow – up.

ERP improves International operations by supporting a variety of tax structures, invoicing schemes, multiple currencies, multiple period accounting and languages.

2 A) Some reasons are

Lack of senior management support for and involvement in information systems development.

Shifting user needs: Constant changes results in more requests for systems development & new project which serves as a challenge to the development team

Difficulty in defining the requirements, specifications, and objectives for development of strategic systems where the decision making is unstructured

Personnel are not as familiar with the new technology

Lack of standard project management and systems development methodologies

Overworked or under-trained development staff.

Resistance to change: People have a natural tendency to resist change, when they perceive that the project will result in personnel cutbacks such as downsizing

Lack of user participation in the development efforts to define their requirements

Inadequate testing and user training.

B) System Development team Several people in the organisation are responsible for systems development. Their roles are as follows:

The top management level steering committee consists of a group of key IS services users that acts as a review body for IS plans and applications development. The steering committee ensures that ongoing systems development activities are consistently aimed at satisfying the information requirements of managers and users within the organisation.

PRIME/ME38/FINAL 3

If the project appears worthwhile to the steering committee, it becomes the responsibility of the IS department to develop it successfully.

A project management team generally consisting of both computer professionals and key users is appointed to coordinate development activities of the system.

Systems analysts are assigned to determine user requirements, design the system and assist in development and implementation activities.

Systems designers take a lead role during the design, development and implementation stages.

In end-user developed systems, the end-user seeks guidance from information centre personnel while developing the system. Some organisations require the information centre to certify the final system as a quality assurance measure.

C) Various fact-finding techniques, which are used by the system analyst for determining these needs/ requirements, are briefly discussed below:

Document

Document means manuals, input forms, output forms, diagrams of how the current system works, organisation charts, job descriptions, program codes for the applications associated with the current system, etc. Documents are a very good source of information about user needs and the current system. They are easy to collect, convey a lot of information and provide relatively objective data. The analyst should ensure that the documents which he is collecting are current, accurate and contain up-to-date information.

Questionnaires

Users and managers are asked to complete questionnaire about the information system when the traditional system development approach is chosen. The main strength of questionnaires is that a large amount of data can be collected through a variety of users quickly. Also, if the questionnaire is skill fully drafted, responses can be analysed rapidly with the help of a computer.

Interviews

The data gathered through interviews often provide systems developer with a complete picture of the problems and opportunities. Interviews also give analyst the opportunity to note user reaction first-hand and to probe for further information.

Observation

In prototyping approaches, observation plays a central role in requirement analysis. Only by observing how users react to prototypes of a new system, the system can be successfully developed. In the traditional approach, observation is not always mandatory. But it is desirable in most instances. The analyst should visit the user site to watch how the work was taking place. Such a surprise visit often helps the analyst in getting a clear picture of the user’s environment and to determine why a request for a new system was submitted.

PRIME/ME38/FINAL 4

3) A) Threats to a computerized environment

Power Loss

Communication failure

Disgruntled Employees

Errors

Malicious Code

Abuse of access privileges by employees

Natural disasters

Social engineering

Theft or destruction of computing resources

Downtime due to technology failure

Fire, etc B)

Systematic risk Unsystematic risk

Unavoidable, would remain no matter what technology is used

Avoidable, peculiar to a technology or application and can be mitigated

Can be reduced by designing management control process. Mitigation through investment in technology is not possible.

The management should consider whether the additional payment to mitigate the risk is justifiable considering the possibility of loss that may or may not occur. The answer lies in identification of whether the overall risk exposure of the organisation is coming down because of the additional investment.

For example the probability of power outage is not dependant on the industry but is dependant on external factors.

For example one can use a computer system with automatic mirroring to reduce the exposure to loss rising out of data loss in the event of failure of host computer.

C)

Public key the key of a key pair used to verify a digital signature and listed in the Digital Signature Certificate

Originator a person who sends, generates, stores or transmits any electronic message or causes any electronic message to be sent, generated, stored or transmitted to any other person but does not include an intermediary

Hacking the act of destroying or deleting or altering any information residing in a computer resource or diminishing its value or utility, or affecting it injuriously in spite of knowing that such action is likely to cause wrongful loss or damage the public or that person.

4.

a) Test Strategy: A test strategy is the plan to cover the product in such a way so as to develop an adequate assessment of quality. The purpose of a test strategy is to clarify the major tasks and challenges of the test project. The test strategy identifies multiple test levels, which are going to be performed for the project. Activities to be performed at each level should be well planned in advance and documented.

Unit test plan - It is a software verification and validation method in which a programmer tests if individual units of source code are fit for use. The unit test plan is the overall plan to carry out the unit test activities.

PRIME/ME38/FINAL 5

Integration test plan - Integration testing is the phase in software testing in which individual software modules are combined and tested as a group. Integration testing takes as its input modules that have been unit tested, groups them in larger aggregates, applies tests defined in an integration test to those aggregates, and delivers as its output the integrated system ready for system testing.

System test plan - System testing of software or hardware is testing conducted on a complete, integrated system to evaluate the system's compliance with its specified requirements. System testing falls within the scope of black box testing, and as such, should require no knowledge of the inner design of the code or logic. The system test plan is the overall plan carrying out the system test level activities. In the system test, apart from testing the functional aspects of the system, there are some special testing activities carried out, such as stress testing etc.

Acceptance test plan –verifies that the final deliverable meets the customer's requirements. This is used to validate that the software meets the agreed requirements. The client at their place performs the acceptance testing and uses the results to determine whether to accept the delivery of the software. The methods and the format of testing are as decided by the client.

b)

Static Testing Dynamic Testing

Verification performed without executing the system's code. This type of testing is checklist based to ensure that the work is getting executed as per the organization’s standards. These standards can be for Coding, Integrating and Deployment. Typically static testing consists of reviews, walkthroughs and inspections.

Dynamic Testing involves working with the software, giving input values and checking if the output is as expected. These are the Validation activities. Unit Tests, Integration Tests, System Tests and Acceptance Tests are few of the Dynamic Testing methodologies.

c) Review of Network

Review the network architecture selection parameters to ensure that the cost of the chosen architecture is not greater than its benefit.

Review the network topology and the technology used for data transmission to ensure that security concerns have been addressed;

Review if significant traffic types and applications used over the network are duly monitored,

Ensure that roles and duties of the network administrator and other users of the LAN are properly documented and periodically reviewed.

Ensure that physical controls protect LAN hardware and access points to the LAN by limiting access to those individuals authorised by management.

Ensure that LAN hardware devices, particularly the file server and documentation, are located in a secure facility and restricted to the LAN administrator. The wiring closet and cabling should be secure. Keys to the LAN file server facility should be controlled to prevent or minimize the risk of unauthorized access.

PRIME/ME38/FINAL 6

5. a)

Threats to a computerized environment

Power Loss

Communication failure

Disgruntled Employees

Errors

Malicious Code

Abuse of access privileges by employees

Natural disasters

Social engineering

Theft or destruction of computing resources

Downtime due to technology failure

Fire, etc b)

Systematic risk Unsystematic risk

Unavoidable, would remain no matter what technology is used

Avoidable, peculiar to a technology or application and can be mitigated

Can be reduced by designing management control process. Mitigation through investment in technology is not possible.

The management should consider whether the additional payment to mitigate the risk is justifiable considering the possibility of loss that may or may not occur. The answer lies in identification of whether the overall risk exposure of the organisation is coming down because of the additional investment.

For example the probability of power outage is not dependant on the industry but is dependant on external factors.

For example one can use a computer system with automatic mirroring to reduce the exposure to loss rising out of data loss in the event of failure of host computer.

c)

Public key the key of a key pair used to verify a digital signature and listed in the Digital Signature Certificate

Originator a person who sends, generates, stores or transmits any electronic message or causes any electronic message to be sent, generated, stored or transmitted to any other person but does not include an intermediary

Hacking the act of destroying or deleting or altering any information residing in a computer resource or diminishing its value or utility, or affecting it injuriously in spite of knowing that such action is likely to cause wrongful loss or damage the public or that person.

PRIME/ME38/FINAL 7

6.a) CMM is a process improvement approach which provides organizations with effective elements for effective process improvement. It guides software organizations process improvement approach which provides organizations with effective elements for effective process improvement. The 5 stages are:

i) Level 1: Initial Level - organizations do not have a stable environment for developing and maintaining software. In the event of a crisis, projects move away from planned procedures, resulting in difficulties in making commitments.

ii) Level 2: The Repeatable Level - Process capability is enhanced by establishing basic process management discipline on a project by project basis. The software managers track project costs, schedules and functionality. Realistic project commitments are based on the results observed on previous projects and on the requirements of the current project.

iii) Level 3: The Defined Level - The standard process for developing and maintaining software across the organization is documented, including both software engineering and management processes, and these processes are integrated into a coherent whole.

iv) Level 4: The Managed Level – The organization sets quantitative quality goals for both software products and processes. An organization-wide software process database is used to collect and analyze the data available from the projects' defined software processes. The software process capability is both quantifiable and predictable as the software process operates within measurable limits.

v) Level 5: The Optimizing Level - The organization can identify its weaknesses and strengthen the processes by identifying new technologies and innovations. The software process capability of is characterized as continuously improving.

b) Audit trail are logs that can be designed to record activity at the system, application, and user

level. It provides an important detective control to help and accomplish security objectives. Audit trails can be used to support security objectives in three ways:

Detecting unauthorized access: This can happen in real time or after the fact. Real time detection is used to protect the systems from malicious users and report on changes in system performance that may indicate infestation by a virus or worm. After-the-fact detection logs can be stored electronically and reviewed periodically or as needed.

Reconstruct events: Audit trails can also be used to reconstruct events that result in system failures, security violations by individuals, or application processing errors.

Personal Accountability: Audit trails can be used to monitor user activity at the lowest level of detail. Individual are less likely to violate an organization's security policy if they know that their actions are recorded in an audit log.

c) Every application for issue of a license shall be accompanied by

(i) a certification practice statement; (ii) a statement including the procedure with respect to identification of the applicant; (iii) payment of such fees, not exceeding twenty-five thousand rupees as may be prescribed

by the Central Government; and (iv) such other documents, as may be prescribed by the Central Government.

PRIME/ME38/FINAL 8

7. a) The scope of the audit covers examination and evaluation of adequacy and effectiveness of

internal controls over data, application systems, technology, facilities and people. The auditor examines the following:

Mission statement and goals & objectives for information systems security and activities.

Risk assessment and managing risks associated with information systems.

IS strategies, implementation plans, mechanism to monitor progress

IS budgets and variance analysis

Compliance with IS policies, guidelines, procedures

Major contracts, approval mechanism, monitoring compliance to contract

Performance measurement against SLAs (Service Level Agreement)

Internal audit reports, previous audit reports, vulnerability assessment and penetration testing report and compliance report.

BCP and DRP plan, test results of these plans.

Compliance with legal and statutory requirements.

Personnel management – appointment, promotions, background screening, access rights, termination, training etc.

b) Business Impact analysis: Business Impact Analysis (BIA) is essentially a means of systematically assessing the potential impacts resulting from various events or incidents. It enables the business continuity team to identify critical systems, processes and functions, assess the economic impact of incidents and disasters that result in a denial of access to the system, services and facilities, and assess the length of time business units can survive without access to the system, services and facilities. Activities performed during this stage are:

Identify organizational risks - This includes single point of failure and infrastructure risks. The objective is to identify risks and opportunities and to minimize potential threats that may lead to a disaster.

Identify critical business processes.

Identify and quantify threats/ risks to critical business processes both in terms of outage and financial impact.

Identify dependencies and interdependencies of critical business processes and the order in which they must be restored.

Determine the maximum allowable downtime for each business process.

Identify the type and the quantity of resources required for recovery e.g. tables chairs, faxes, photocopies, safes, desktops, printers, etc.

Determine the impact to the organization in the event of a disaster, e.g. financial reputation, etc. The required information gathered through questionnaires, workshops, interviews and examination of documents is presented as a report to the steering committee. This report is used as a basis for identifying systems and resources required to support the critical services provided by information processing and other services and facilities.

PRIME/ME38/FINAL 9

c) integrated Test Facility - The ITF technique involves the creation of a dummy entity in the application system files and the processing of audit test data against the entity as a means of verifying processing authenticity, accuracy, and completeness. This test data would be included with the normal production data used as input to the application system. Test transactions are tagged and updated to both system master file and ITF dummy entity. Specially prepared test data can be used to provide extensive coverage of execution paths in the application system to be tested. The application system may be programmed to recognize ITF transactions and to ignore them in terms of any processing that might affect users.

d) An information system can be considered as an arrangement of a number of elements that

provides effective information for decision-making and / or control of some functionalities of an organization. Enterprises use information system to reduce costs, control wastes or generate revenue. Some of important implications of information system in business are as follows:

Information system will help managers in effective decision-making to achieve the organizational goal.

Based on well-designed information system, an organization will gain edge in the competitive environment.

Innovative ideas for solving critical problems may come out from good information system.

If information system is viewed as a process it can be integrated to formulate a strategy of action or operation.

PRIME/ME38/FINAL 1

DAS2 No. of Pages: 6 Total Marks: 100 No of Questions: 7 Time Allowed: 3 Hrs

Question No.1 is Compulsory. Attempt any five questions from the remaining six questions.

Working notes should form part of the answers

1 a) TIF is a public limited company, registered as category I merchant banker with SEBI, and engaged in the business of stock broking, investment and trading in shares and securities. The Assessee had taken a loan from Investment Trust of India. During the previous year, the assessee had transferred shares of a company held by it to the Investment Trust of India. Therefore, in the current year, the assessee was liable to pay the loan amount to the Investment Trust of India and had the right to receive the sale price of the shares transferred to Investment Trust of India, In order to avoid the unnecessary circular transfer of shares, both the parties agreed to set off the amount payable and receivable by way of passing journal entries and the balance loan amount was paid by the assessee by way of an account payee cheque. Can repayment of loan by passing mere adjusting book entries by the assessee be taken to be in contravention of the provisions of section269T to attract penalty under section 271E? (5 Marks)

b)While computing the net wealth of Mr.Ram, an Indian Resident, for the assessment year 2014-2015, the following facts were noted.

(i) Since his marriage in 1977, he had made gifts of jewellery and ornaments to his wife from time to time the value whereof at the material time aggregated to `40, 000 but now the valuation date stands at `2, 00,000.Mrs.Ram has pledged the ornaments and jewellery to take loans for her personal use out of which loans of `60, 000 were outstanding on the valuation date.

(ii) Mr.Ram became a member of a co-operative housing society which under a house building scheme of the society allotted to him a flat in 1975for a sum of `8, 50,000.The flat has throughout been used by him for his own residence. Its value as on March 31st, 2014was ``13, 00,000.The consideration was payable in installments and on the valuation date a sum of `25, 000 was still outstanding.

(iii) Mr. Ram became a member of a similar co-operative society in 1983and made a similar deposit of `2, 00,000 with it for allotment to him of a flat (which is not allotted so far) under its housing building scheme in a multi-storied building. The deposit has been under the said scheme.

(iv) Mr.Ram took out a policy on his own life for a sum of `1,00,000 in the year 1991, the maturity being in2021or on earlier death. If he survives till 2013eight annual premiums are payable.

(v) Mr.Ram had two cars for his personal use each being of value of `95, 000. (vi) By profession Mr.Ram is an architect and the value of the tools and instruments required by

him for his professional use is `70, 000. Discuss how the items are to be treated for the purposes of wealth tax assessment.

(5 Marks)

c) M/s. Jeeva Limited engaged in the business of Wind Energy Generation and supply, seeks your advice on the following matters pertaining to Income Tax issues for the FY 2013-14:

(i) The Company wants to procure 20 new wind mills for the FY 2013-14. The Finance Manager

of the company suggested that the company can take advantage of higher depreciation at 80% and reduce considerable tax. Advice.

PRIME/ME38/FINAL 2

(ii) The Company wants to issue convertible debentures during the year. It seeks your advice to know whether the expenditure incurred on such issue can be claimed as revenue expenditure under the provisions of Income Tax Act.

(iii) During the year the Company incurred expenses on Feasibility study for technological advancement in the area of Wind Energy. The company wants to know if the expenses can be capitalized as R&D COST.

(iv) In order to safeguard the work on erection of windmills, the Company paid certain sum of money to local goods and policemen. Advice if this can be claimed as revenue expenditure.

(v) The Company incurred expenditure on cleaning up of surrounding areas including breaking obstructions for smooth running for windmill. Whether these expenses are allowable as revenue expenditure. (10 Marks)

2. On April 1, 2013, ABC Ltd.commenced the operation of a warehousing facility in Andhra Pradesh for

storage of agricultural produce. The following information is available from the records of the company-

Expenses incurred prior to April 1,2013 `

Purchase of land for warehouse 50,00,000

Construction cost of warehouse 8,00,000

Purchase of know –how for warehouse 10,00,000

Salary to staff 78,000

These expenses capitalised on March 31st,2014

Expenses incurred during 2013-14

Construction cost of warehouse 60,00,000

Purchase of old plant and machinery(from domestic market) 2,00,000

Purchase of old plant and machinery(from Germany) 4,00,000

Purchase of new plant and machinery 9,00,000

Purchase of goodwill 3,50,000

Profit and loss account for the year 2013-2014 ` `

Depreciation of building at 5% 3,40,000 Amount collected from persons using warehouse

78,00,000

Depreciation of machinery at 23.33%

3,50,000

Cost of know how (amount written off)

10,00,000

Other operating expenses 7,51,000

Donation to political party 10,000

Net profit 53,49,000

78,00,000 78,00,000

Out of the cost of operating expenses, a payment of `40, 000 is made in cash. Other operating expenses are deductible under section 37.Find out the taxable income of ABC Ltd.for the assessment year 2014-2015on the assumption that ABC ltd has the following income from other sources –income of operating commission agency:`20,15,000(computed under the provisions of the Income Tax Act) and dividend from a foreign company `50,000. (16 Marks)

3

a) PQR LLP has a profit of `5 core after charging interest on capital for P amounting to `10 lakhs calculated at 15% perannum as per the agreement ,but before considering remuneration to partners.What is maximum amount of remuneration to partners assuming all the partners are working partners and remuneration is authorized by the LLP instrument?

PRIME/ME38/FINAL 3

b) Smt. Rajammal had three house properties in Chennai valued at ` 2 Crores. She had bought a

plot of land at the outskirts of Chennai on 1.7.2012for ` 50 Lacs and the construction of building commenced in Nov’2012. The construction was completed in April 2013. She filed the return of wealth declaring the three houses worth 2 Crores and paid Wealth Tax. The assessing officer contended that the house under construction should also be declared in the return and tax to be paid thereon. Smt. Rajammal challenged the demand from Assessing officer, with a view that house property was Incomplete on the relevant valuation date and hence no tax is payable. Do you agree with the assessee’s claim?

c) Explain the guidelines issued by CBDT for obtaining prior permission under section 281 to transfer or create charge on the assets of the business.

d) From the following dated furnished by Mr.Soumitra, determine the value of house property built

on leasehold land as at the valuation date 31.3.2014:

(4 x 4 =16 Marks)

4 Answer the following with the aid of case laws. a) The assessee is a co-operative society and is engaged in marketing of fertilizers and purchase

and processing of seeds. The assessee had claimed deduction under section 80P(2)(d) on dividend income received from NAFED and co-operative bank and also on interest on deposits made with co-operative banks. The Assessing Officer, relying upon section 14A, contended that the aforesaid incomes were not included in the total income of the assessee and therefore, expenditure with respect to such income should be disallowed. Whether the contention of AO is correct?

b) Would the doctrine of merger apply for calculating the period of limitation under section 154(7)? c) M/s. Pawan Energy Limited, was engaged in the business of Wind Energy and Windmill supply.

The company procured all the parts of the windmill separately from various suppliers and assembled the same to erect windmills. Being eligible as an Industrial Undertaking, the company claimed the benefit of deduction u/s 80 IB. However the Assessing officer disallowed the claim, contending that there was no manufacturing process carried out by the assessee. His contention was that the “procurement of parts and assembly into single unit” is not included in the definition of Manufacture and that each part is equivalent to windmill. Explain whether the view of Assessing officer is correct?

d) With reference to the appeal case of M/s Raja Exports Ltd, the Appellate Tribunal had issued the Order and confirmed its judgment. Subsequently the same order was recalled by the Appellate Tribunal under powers of Sec.254 (2) and reconsidered the entire matter under the appeal. A fresh order was issued by substituting a view taken in the first instance. The Assessee, Raja Exports challenged the action of appellate tribunal in High Court. Do you agree with the view of assessee? Will the challenge be upheld by the Court? (4 x 4 = 16 Marks)

Particulars `

Annual Value as per Municipal valuation 1,40,000

Rent received from tenant (Property vacant for 3 months during the year) 1,08,000

Municipal tax paid by tenant 10,000

Repairs on property borne by tenant 8,000

Refundable deposit collected from tenant as security deposit which does not carry any interest

50,000

The difference between un built area and specified area over aggregate area is 10.5%.

PRIME/ME38/FINAL 4

5 a) The Central government acquires a house property owned by Mr.Ganesh on Oct 17th ,1996.The property was purchased on April 10,1977.for `76,000.The Cost of improvement during 1987-88is `40,000 and fair market value of the property on April 1,1981 is `1.42,000..The Government awards `5,77,000 as compensation which is received partly `77,000 on May 13,2013and partly `5,00,000 on April 1,2014.Being aggrieved against the order ,Mr.Ganesh files an appeal. The Court as per the order dated August 12,2015, enhanced the compensation from `5,77,000 to `9,50,000.Legal expenses incurred by Mr.Ganesh was `20,000.Mr.Ganesh receives the additional compensation of `3,73,000 on April 15,2016.Compute the income of Mr.Ganesh under the head capital gains. (CII-1996-97is 305) (3 Marks)

b)

(a)The published accounts of X Ltd, a public Limited company, for the year ending March 31, 2013 contain the following notes:

(i) The debit for sales tax payment of `8 lakhs relates to a demand issued by the sales tax department in respect of which a stay has been obtained from the High court on a petition under article 226 of the constitution disputing the liability.

(ii) An Amount of $12,000 due to the company on account of the agency commission from a foreign company has not been taken into account as income for the year ending March 31 st, 2014as the payment of the amount has been withheld by the foreign company on the ground that X Ltd is liable for damages for breach of certain conditions in relation to the terms of agency agreement.

(iii) The provision for bonus payable to workers includes additional bonus of `10 lakhs calculated on a claim of increased wages which is the subject matter of dispute with the Industrial Tribunal has not yet been received.

(iv) The company had acquired a building in a rural area near its factory for the purpose of promoting rural development and the building has not yet been used for any rural development or has the company been using it for business. For preparing its return of income for the assessment year 2014-2015, the company desires to know from you how the items mentioned above are to be treated so as to get the maximum advantage in regard to its tax liability. (4 Marks)

c) M/s ABN AMRO Bank was incorporated in Netherlands and was having its principle branch office in India and in the course of its banking activities; the said branch in India remitted substantial funds to its head office as payment of interest. The assessee claimed that for the purpose of computation of expenditure, branch and head office were to be taken as separate entities but for the purpose of payment of tax to be deducted at source on interest payment, it was to be taken as one bank and no deduction of tax was to be made. Do you agree with the view of the assessee? Explain with reference to the provisions of DTAA between India and Netherlands. (6 Marks)

d) Chris Gayle, a Cricketer and a non-Indian citizen participated in India in a Cricket Tournament and won the prize money of `30 lacs. He contributed articles on the tournament in a local newspaper for which he was paid `2 Lac. He was also paid `10,00,000 by a company for appearance in a T.V. advertisement. He had to incur `6,00,000 towards his travel costs to India which was not reimbursed by the sponsors. He was a non-resident for tax purposes in India. Chris Gayle seeks your advice regarding his tax liability in India for assessment year 2013-14. Is he required to file his return of income under section 139(1)? (3 Marks)

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6 a) Compute the business income as well as the total income of X ltd for the assessment year 2014- 2015.,on the basis of the following particulars:

(i) The Company is a closely held public limited company incorporated in India in a notified backward area to carry on the business of manufacture and sale of machines. The company commenced commercial production on October 1,1987.

(ii) The company exported goods worth `10 lakhs to Malaysia during the previous year 2013-2014(the entire turnover is received in convertible foreign exchange) and incurred expenses as under: -Cost of expenditure outside India ,`2 lakhs in respect of goods exported but payment was made to an advertising agency in India.

- cost of free samples incurred in India ,`50,000 and incurred outside India,`40,000. -Expenditure on branch office outside India `1.5 lakhs. -Cost of tenders incurred outside India `10,000.

(iii) The company contributed a sum of `50,000 to Rural Development Fund, notified by Central government (amount debited to P&L account)

(iv) The company incurred brokerage and legal charges debited to P&L account as under: -`50,000 on machinery purchased and installed before Oct 1,2013on instalment payment system -`5,000 on money borrowed for making investment in Government Bonds as security for Electricity deposit.

(v) Capital expenditure was incurred during the year on plant and machinery of the value of `5 lakhs in the research and development newly setup.

(vi) Salary to managing director was paid at `16,000 per month plus perquisites valued at `1,200 per month.

(vii) ̀ 2,00,000 was incurred on advertisement and publicity excluding advertisement referred to in item (ii).(This sum of `2,00,000 includes `58,000 on guest house expenditure and `10,000 on advertisement in souvenir published by a political party ).The turnover of the company is `1,60 lakhs. (i) Donation to an institution recognised under section 80G of the Income Tax Act was

`75,000 (debited to P&L account). (ii) The net profit of the company as per P&L account is `25 lakhs. (iii) Gross dividend of `25,000 was received from a foreign company on April 10,2013and

credited to profit and loss account .Amount of dividend distributed by the assessee company to its shareholders for 2013-2014is `10,000.(date of distribution is April 1,2014).

(iv) Depreciation is to be charged at 10% on buildings (WDV :`40,00,000) and at 15% on plant and machinery (WDV:`40,50,000,exclusive brokerage /legal charges).Depreciation debited in the accounts is `6,00,000. (10 Marks)

b) Are “transfer pricing” provisions under the Income-tax Act, 1961 attracted in respect of the following cases? Explain.

(i) Ms. Poorna, a resident Indian, is a director of Sigma Ltd, an Indian company. Sigma Ltd. pays salary of ` 60 lakh per annum to Mr. Pranav, who is Ms. Poorna’s son.

(ii) Omicron Ltd., an Indian company, has two units Phi & Rho. Phi, which commenced business three years back, is engaged in the development of a highway project, for which purpose an agreement has been entered into with the Central Government. Rho is carrying on the business of trading in steel. Rho transfers steel to the value of ` 70 lakh to Phi for ` 40 lakh.

(iii) Transfer of process patents by Omega Ltd. to Theta Inc., an Australian company, which guarantees 20% of the borrowings of Omega Ltd.

(iv) Legal services provided by Alpha Inc., USA to Beta Ltd., an Indian company. Alpha Inc. is a “specified foreign company” as defined in section 115BBD, in relation to Beta Ltd.(6 Marks)

PRIME/ME38/FINAL 6

7 a) Ascertain from the following particulars the minimum amount of advance tax payable by way of

different installments to ensure that interest liability under section 234C is not attracted by RS Ltd. `

Business Income 2,00,000

Long –term capital gain on October 10,2013. 20,000

Winnings from lottery on December 31,2013(out of which tax deducted at source is `30,000)

1,00,000

(7 Marks) b) Mr Ravi (61 years) is a musician deriving income from concerts performed outside India of

`7,50,000.Tax of `1,50,and 000 was deducted at source in the country where the concerts were given and remaining`6,00,000 is remitted to India. India does not have any agreement with that country for avoidance of double taxation .Assuming his Indian Income is `4,00,000,what is the relief due to him under section 91 for the assessment year 2013-2014,assuming he has deposited `22,000 in the public provident fund account during the previous year. (6 Marks)

c) Explain how the accounting principle is applied on dissolution of firm for tax purposes. (3 Marks)

PRIME/ME38/FINAL 1

PRIME ACADEMY 38th SESSION MODEL EXAM - FINAL – DIRECT TAX LAWS

SUGGESTED ANSWERS 1.(a)

In CIT vs. Triumph International Finance (I ) ltd., In effect, the assessee has violated the provisions of section 269F by repaying the loan amount by way of passing book entries and therefore penalty under section 271E is applicable. However, since the transaction in bonafide in nature being a normal business transaction and has not been made with a view to avoid tax, it was held that the assessee has shown reasonable cause for failure under section 269T and therefore ,as per the provisions of section 273B,no penalty under section 271E could be imposed on the assessee for contravening the provisions of section 269T.In order to mitigate the hardship caused by certain penalty provisions in case of genuine business transactions ,section 273B provides that no penalty under interalia , section 271E shall be imposed on a person for any failure referred to in the said section,if such person proves that there was reasonable cause for such failure.

1(b) The value of gift ` 2, 00,000 on valuation date is includible in the wealth of Mr.Ram; however `60,000 is not deductible.

(i) Mr.Ram is the deemed owner of the house property. As the house is self occupied for residential purpose, its valuation would be the market value on March 31,1975 or on March 31,2013.The amount includible in the net wealth would be `8,25,000 (`8,50,000-25,000).However one house is exempt from tax.

(ii) Amount of deposit ` 2, 00,000 is not chargeable to wealth tax. (iii) Valuation of the policy on the valuation date is not taxable. (iv) ` 1, 90,000 is chargeable to wealth tax. (v) Tools and instruments are not taxable.

c) Response to M/s. Jeeva Limited on matters pertaining to Income Tax issues for the FY 2012-13:

(i) As per the Notification 15/2012 dated 30-03-2012, the Depreciation on windmill installed after 31-03-2012 is restricted to 15%. As per the existing provisions, the plant and machinery in the nature of renewable energy devices being: (a) Wind mills and any specially designed devices which run on wind mills (b) Any special devices including electric generators and pumps running on wind

energy are entitled to depreciation@80% under section 32. Accordingly The CBDT has, vide this notification, restricted the eligibility of claiming depreciation@80% to such wind mills and special devices installed on or before 31.03.2012. Accordingly, such plant and machinery installed on or after 1st April, 2012 shall be entitled to depreciation at the general rate applicable to plant &machinery i.e., 15%.Hence the advice of the Finance Manager is incorrect and the Company is advised to consider the amendment before taking the decision on bulk procurement.

(ii) Yes. It is possible to claim the expenses on issue of convertible debenture as revenue expenditure. This has been substantiated in the case of CIT vs ITC Hotels Ltd (2011) 334 ITR 109. On this issue, the Karnataka High Court held that the expenditure incurred on the issue and collection of debentures shall be treated as revenue expenditure even in case of convertible debentures, i.e. the debentures which had to be converted into shares at a later date.

PRIME/ME38/FINAL 2

(iii) With respect to the claim for feasibility study costs, the decision in the case of CIT vs Priya Village Road shows (2011) 332 ITR 594 is relevant. On this issue, the High Court observed that, in such cases, whether or not a new business/asset comes into existence would become a relevant factor. If there is no creation of a new asset, then the expenditure incurred would be of revenue nature. In this case, since the feasibility studies were conducted by the Company for the existing business of Wind Energy with a common administration and common fund, the expenses were of revenue nature. Hence it is advised that the expenditure cannot be capitalized.

(iv) In the case of CIT vs Neelavathi & Others (2010) (Karn) it was held that any payment made to the police illegally amounts to bribe and such illegal ratification cannot be considered as an allowable deduction. Similarly, any payment to a gunda as a precautionary measure so that he shall not cause any disturbance in the erection area of the Company is an illegal payment for which no deduction is allowable under the Act. Accordingly the Company is advised not to claim such expenditure.

(v) Applying the ratio of the decision in case of CIT vs Hindustan Zinc Ltd, it is clear that the operation expenses incurred by the assessee solely intended for furtherance of the enterprise can by no means be treated as Capital Expenditure. The object and effect of the expenditure incurred by the assessee is to facilitate its trade operation and enable smooth conduct. Accordingly the expenses are allowed to be claimed as revenue expenditure.

2.

Amount deductible under section 35D `

Expenditure incurred prior to the commencement of operation(to the extent these are capitalised)

Purchase of land(not qualified for deduction) Nil

Construction cost of warehouse 8,00,000

Purchase of know-how 10,00,000

Salary to staff 78,000

Expenses incurred during the previous year

Construction cost of warehouse 60,00,000

Purchase of machinery(2,00,000+4,00,000+9,00,000) 15,00,000

Total 93, 78,000

Computation of income from warehouse

Net profit as per profit and loss account 53,49,000

Add: depreciation of building(not deductible as cost of the building is eligible for deduction under section35AD)

3,40,000

Add: depreciation of machinery (not deductible as cost of the machinery is eligible for deduction under section35AD)

3,50,000

Add: Cost of know-how(as deduction is available under section 35 AD) 10,00,000

Add: amount paid in cash (operating expenses) 40,000

Add: Donation to political party 10,000

Less: Deduction under section 35AD 93,78,000

Loss from warehouse 22,89,000.

Computation of income

Commission agency business ` 20,15,000

Warehouse (` 22,89,000)

Business Income (loss from operating specified business under section 35 AD cannot be set off against any other business).

20,15,000

PRIME/ME38/FINAL 3

Income from other sources(dividend from foreign company) 50,000

Gross Total Income 20,65,000

Less: Deduction under section 80GGb(donation to political party) 10,000

Net income 20,55,000

3(a) `

Net profit 5,00,00,000

Add: interest in excess of 12% perannum (10,00,000*3/15) 2,00,000

Book profit 5,02,00,000

Maximum remuneration to working partners(90% of `3,00,000 + 60% of `4,99,00,000) 3,02,10,000

b)

(i) Yes. Assessee’s claim is correct. Incomplete building of the assessee neither fell within the definition of a building as defined u/s2(ea) of the Act nor withing the definition of a “urban land” . Therefore, value of house under construction and invenstment on construction is not liable to wealth-tax. CIT vs. Smt. Neena Jain 2011 330 ITR 157.

(ii) If the institution receives only `23 lakhs in aggregate from an activity in the nature of trade during the P.Y.2011-12, then it will not lose its “charitable” status since receipt of up to `25 lakhs in a year from such activity is permissible as per the amendment by the Finance Act, 2011. The institution can claim exemption subject to fulfillment of other conditions under sections 11 to 13.

(iii) The restriction regarding carrying on of a trading activity for a cess, fee or other consideration will not apply if the main object of the institution is “relief of the poor”. Therefore, receipt of `30 lakhs from a trading activity by such an institution will not affect its “charitable” status. The institution can claim exemption subject to fulfillment of other conditions under sections 11 to 13.

c) The guidelines prescribed a form to be completed by the tax payer if the tax payer desires to

transfer an asset. This form is required to be filed 30 days in prior to the date of proposed transition.

In addition the guidelines also prescribe the following circumstances and time frames for grant of prior permission by the AO pursuant to an application being filed by the tax payer.

Where no demand is o/s and there exist no likelihood of any demand arising in the next 6 months, the AO is required to grant permission within 10 working days from the date of receipt of application.

Where an undisputed demand is o/s and there exist no likelihood of any demand arising in the next 6 months, then the tax payer is required to pay the outstanding demand with interest . AO is required to grant permission within 10 working days from the date of payment of demand and interest thereon

.Where a disputed demand is o/s the tax payer is required to obtain stay for the demand and indemnify the outstanding demand by way of bank guarantee or sufficient assets or by the department retaining the first charge on the assets proposed to be transferred or on which such charge is created, to the extent of such demand.AO is required to grant permission within 10 working days of the indemnification of demand

If the demand is likely to arise in the next 6 months and the AO explores option under section 281B of the Act for the assets excluding the assets under consideration the AO is required to grant within 15 days from the date of receipt of application.

PRIME/ME38/FINAL 4

Where the AO issue permission it would be valid for

180 days from the date of issue of the approval

Service of order of attachment whichever is earlier

d) Assessee: Mr. Soumitra Valuation Date: 31.3.2014, Assessment Year: 2014-15 Computation of Value of House Property Step I: Computation of Gross Maintainable Rent(GMR)

Particulars ` `

Actual Annual Rent- ` 1,08,000 x 12 Months/9 Months Add: Municipal tax paid by the Tenant l/9th of Actual Rent Receivable as repair expenses are borne by the tenant - ` 1,44,000/9 Interest on Refundable Security Deposit- ` 50,000 x 15% x 9/12

10,000 16,000

5,625

1,44,000

31,625

GROSS MAINTANABLE RENT (GMR) 17,05,625

Step II: Computation of Net Maintainable Rent (NMR)

Particulars ` `

Gross Maintainable Rent (GMR) Less: Municipal Taxes levied by the local authority 15% of Gross Maintainable Rent - ` 1,75,625 x 15%

10,000 26,399

1,76,000

(36,399)

NET MAINTANABLE RENT (NMR) 1,39,281

Step III: Capitalization of the Net Maintainable Rent (CNMR) (Assumed that unexpired lease period is more than 50 Years) NMR × Multiple Factor for an Unexpired Lease Period - ` 1,39,281 × 10 = ` 13,92,810 Step IV: Addition of Premium to SNMR in case of excess inbuilt area:

Particulars `

Add: Capitalization of the Net Maintainable Asset Premium for excess of 10.5% un built area over specified area-30% of CNMR

13,92,810 4,17,843

Value of House Property as per Wealth Tax Act 18,10,653

4

(a) The contention of AO is incorrect. In the case of CIT vs. Kribhco (2012) 209 Taxman 252 (Delhi), the High Court observed that section 14A is not applicable for deductions, which are permissible and allowed under Chapter VIA. Section 14A is applicable only if an income is not included in the total income as per the provisions of Chapter III of the Income-tax Act, 1961. Deductions under Chapter VIA are different from the exclusions/ exemptions provided under Chapter III. The words “do not form part of the total income under this Act” used in section 14A are significant and important. Income which qualifies for deductions under section 80C to 80U has to be first included in the total income of the assessee and then allowed as a deduction. However, income referred to in Chapter III do not form part of the total income and therefore, as per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income.

PRIME/ME38/FINAL 5

Therefore, the Delhi High Court held that no disallowance can be made under section 14A in respect of income included in total income in respect of which deduction is allowable under section 80C to 80U.

(b) Relevant Case Law : CIT v. Tony Electronics Limited (2010) 320 ITR 378 (Del.)

Relevant section: 154(7) The issue under consideration is whether the time limit of 4 years as per section 154(7) would apply from the date of original assessment order or the order of the Appellate Authority. The High Court held that once an appeal against the order passed by an authority is preferred and is decided by the appellate authority, the order of the Assessing Officer merges with the order of the appellate authority. After merger, the order of the original authority ceases to exist and the order of the appellate authority prevails. Thus, the period of limitation of 4 years for the purpose of section 154(7) has to be counted from the date of the order of the Appellate Authority. Note - In this case, the Delhi High Court has followed the decision of the Supreme Court in case of Hind Wire Industries v. CIT (1995) 212 ITR 639.

(c) The view of the Assessing officer is incorrect in view of the decision in the case of CIT vs Chiranjjeevi Wind Energy Ltd. (2011) 333 ITR 192. In the said case, Madras High Court applied the ratio of Supreme Court judgment in various cases and held that different parts procured by the assessee could not be treated as windmill individually. Those different parts had distinctive names and only when assembled together, they got transformed into an ultimate product which was commercially known as a “windmill”. Thus such an activity would amount to Manufacture as well as production of a thing to qualify for deduction u/s 80 IB. Note: The definition of manufacture has been incorporated in section 2(29BA) by the Finance (No. 2) Act, 2009 w.e.f. from 01.04.2009, and it means, inter alia, a change in a non-living physical object or article or thing resulting in transformation of the object or article or thing in to a new and distinct object or article or thing having a different name, character and use. Assembling of windmill at factory and putting them at site of customer apparently satisfies this definition of manufacture also.

(d) Yes the view of the Assessee is correct applying the decisions of Bombay High Court in the

case of CIT vs Earnest Exports Ltd (2010). In this case, the High Court observed that the power under section 254(2) is limited to rectification of a mistake apparent on record and therefore, the Tribunal must restrict itself within those parameters. Section 254(2) is not a carte blanche for the Tribunal to change its own view by substituting a view which it believes should have been taken in the first instance. Section 254(2) is not a mandate to unsettle decisions taken after due reflection. In this case, the Tribunal, while dealing with the application under section 245(2), virtually reconsidered the entire matter and came to a different conclusion. This amounted to a re-appreciation of the correctness of the earlier decision on merits, which is beyond the scope of the power conferred under section 254(2).

PRIME/ME38/FINAL 6

5(a) Assessment year2014-2015 `

Initial compensation 5,77,000

Less: Cost of Acquisition 4,33,100

Indexed Cost of Improvement 1,22,100

Long-term capital gains 28,000

Notes: 1. Indexed cost of acquisition is computed as follows 1, 42,000*305/100=` 4,33,100. 2. Indexed cost of improvement 40,000*305/100=` 1,22,100. Assessment year 2017-18. `

Additional compensation 3,73,000

Less: cost of improvement Nil

Cost of improvement Nil

Expenses of transfer 20,000

Long-term capital gains 3,53,000

b)

(i) Any sum payable by way of tax is deductible only in the year in which tax is actually paid. (ii) The income of $12,000 has accrued during the previous year 2013-2014.It is therefore chargeable to tax for the assessment year 2014-2015.The liability for payment is a contingent liability till it is ascertained. (iii) Bonus is deductible only on payment basis. (iv) Deduction can be claimed under section 35CCA.

c) Not only the ratio decidendi, but also obiter dicta of the Supreme Court are binding on all the

Courts. High Courts: 1. A Division Bench of a High Court is generally bound by its earlier decision, but it may

refuse to follow the same if the earlier judgment is per incuriam. 2. If the Division Bench of a High Court does not agree with its earlier judgment it will have

to either follow the same or refer the issue to a Full Bench.

d) Under section 115BBA, all the three items of receipts by Chris Gayle in India are chargeable to tax. No expenditure is allowable against such receipts. The rate of tax chargeable is 20 per cent, plus education cess @2% and secondary and higher education cess @1%. The total tax liability works out to `8,65,200 being 20.6% of ` 42 Lacs.

Thus, Chris Gayle will be liable to tax on the income earned in India. He is not required to file his return of income if -

i. his total income during the previous year consists only of income arising under section 115BBA and

ii. the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

PRIME/ME38/FINAL 7

6(a) `

Net profit as per P&L A/c - 25,00,000

Add:Depreciation charged – 6,00,000

Add: Expenditure on branch office 1,50,000

Add: Brokerage and legal charges for machinery – 50,000

Add: brokerage for investment in government bonds 5,000

Add: expenditure on political pary – 10,000

Add: Donation – 75,000

Net addditions – 33,90,000

Less: deprecation building 10% - 4,00,000

P&M – 15% 5,40,000

Less: scientific expenditure – 5,00,000

Less: Foreign company dividend – 25,000

Total business income – 19,25,000

Add: Income from other sources – 25,000

Gross total income – 19,50,000

Less: 80G(50%) – 37500

Less: political party – 10,000

Net taxable income- 19,02,500

b)

(i) This transaction falls within the meaning of “specified domestic transaction” under new section 92BA, since the salary payment has been made to a related person referred to in section 40A(2)(b) i.e., relative (i.e. son) of Ms. Poorna, who is a director of Sigma Ltd. However, such a transaction would be treated as a “specified domestic transaction” to attract transfer pricing provisions only if the aggregate of such transactions as specified in section 92BA during the year by Sigma Ltd. exceeds a sum of ` 5 crore.

(ii) Unit Phi is eligible for deduction@100% of the profits derived from its eligible business (i.e., the business of developing a highway project) under section 80-IA. However, Unit Rho is not engaged in any “eligible business”. Since Unit Rho has transferred steel to Unit Phi at a price lower than the fair market value, it is an inter- Unit transfer of goods between eligible business and other business, where the consideration for transfer does not correspond with the market value of goods. Therefore, this transaction would fall within the meaning of “specified domestic transaction” to attract transfer pricing provisions, if the aggregate value of transactions specified in section 92BA during the year exceed ` 5 crore. business three years back, is engaged in the development of a highway project, for which purpose an agreement has been entered into with the Central Government. Rho is carrying on the business of trading in steel. Rho transfers steel to the value of ` 70 lakh to Phi for ` 40 lakh.

(iii) The scope of the term “intangible property” has been amplified to include, inter alia, process patents, which is a technology intangible. Transfer of intangible property falls within the scope of the term “international transaction”. Since Theta Inc. guarantees more than 10% of the borrowings of Omega Ltd., Theta Inc. and Omega Ltd. are associated enterprises. Therefore, since transfer of process patents by Omega Ltd. to Theta Inc. is an international transaction between associated enterprises, the provisions of transfer pricing are attracted in this case.

PRIME/ME38/FINAL 8

(iv) The scope of the term “international transaction” has been amplified by the Finance Act, 2012 by insertion of Explanation to section 92B. According to the said Explanation, international transaction includes, inter alia, provision of legal services. Alpha Inc. is a specified foreign company in relation to Beta Ltd. Therefore, the condition of Beta Ltd. holding shares carrying not less than 26% of the voting power in Alpha Inc is satisfied. Hence, Alpha Inc. and Beta Ltd. are associated enterprises. Since the provision of legal services by Alpha Inc. to Beta Ltd. is an “international transaction” between associated enterprises, transfer pricing provisions are attracted in this case.

7 (a) Computation of minimum advance tax payable:

On June 15,2012 `

Business Income 2,00,000

Tax payable @30.9% 61,800

Minimum advance tax payable on June 15,2012(12% of 61,800) 7,416

On September 15 ,2012

Minimum advance tax payable on September 15,2012 is (36% of `61,800-7416) 14,832

On December 15,2012

Business income 2,00,000

Long –term capital gain 20,000

Taxable income 2,20,000

Tax payable(30.9% of `2,00,000)+ (20.6% of `20,000) 65,920

Minimum advance tax payable on december15,2012(75% of 65,920)-7416-14,832 27,192

On March 15,2013

Business income 2,00,000

Long-term capital gains 20,000

Winnings from lottery 1,00,000

Taxable income 3,20,000

Tax payable (30.9% of 3,00,000) + (20.6% of 20,000) 96,820

Minimum advance tax payable on March 15,2013 (100% of 96,820)-7,416-14,832-27,192-30,000

17,380

b)

` Indian Income 4,00,000

Foreign income 7,50,000

Gross Total Income 11,50,000

Less: Deduction under section 80C 22,000

Taxable income 11,28,000

Tax on income 1,68,400

Add: surcharge Nil

Tax 1,68,400

Add: Education cess (2% of tax) 3,368

Secondary and higher secondary cess (1% of Tax) 1,684

Tax 173,452

Rate of Tax in India (`1,88,902/`11,28,000)*100 15.37%

Rate of Tax in foreign country (1,50,000/7,50,000)*100 20%

Doubly taxed income 7,50,000

PRIME/ME38/FINAL 9

Rebate under section 91 on `7,50,000 @15.37% 1,15,275

Tax payable in India (rounded off) 68,177

c) The going concern concept of accounting provides for valuation of inventory at cost or market price, whichever is less. However, on dissolution of firm, there is settlement of account inter se amongst the partners. The accounting practice prescribes valuation of inventory on market value basis. The provisions of tax law do not provide for such market price valuation though section 45(4) prescribes for adopting market value in respect of capital assets. The Apex Court in ALA Firm v. CIT (1991) 189 ITR 285 (SC) has held that when the firm is dissolved and business is discontinued, the closing stock is to be valued at market price and not at cost and the surplus, if any, shall be taxed as business income. It is possible to argue that the tax law also provides for such valuation by means of section 45(4) by interpreting that on dissolution and discontinuance of business, the stock in trade loses the exception prescribed in section 2(14) and becomes a capital asset, thus falling within the domain of section 45(4). It may be of interest to note that when there is dissolution of firm by operation of law but there is no discontinuance of business, the stock valuation will not be at market price as held in Sakthi Trading Co. v. CIT 250 ITR 871 (SC). Even dissolution of firm due to demise of one partner and continuation of business by the other partner as proprietor was held as not within the ambit of section 45(4) as held in CIT v. Moped & Machines (2006) 281 ITR 52 (MP) on the reasoning that there was no transfer as contemplated under section 2(47).

PRIME/ME38/FINAL 1

CAS 2 No. of Pages: 4 Total Marks: 100 No of Questions: 7 Times Allowed: 3 Hrs

Question No. 1 is compulsory Answer any Five from the remaining

Working notes should form part of the answer 1.

(i) M/s Handel Ltd. supplies raw material to a job worker Pihu Ltd. After completing the job work, the finished product of 4,000 packets is returned to Handel Ltd. putting the retail sale price as | ` 25 on each packet. The product in the packet is covered under MRP provisions and 40% abatement is available on it. Determine the assessable value under Central Excise law from the following details:

Particulars `

Cost of raw material supplied 45,000

J ob Worker’s charges including profit 9,500

Transportation charges for sending the raw material to the job worker 2,000

Transportation charges for returning the finished packets to Handel Ltd. 2,000

(5 Marks) (ii) Calculate the VAT liability for the period March 1, 2012 to March. 31, 2012 from the following

particulars: Inputs worth ` 1,00,000 were purchased within the State. ` 2,00,000 worth of finished goods were sold within the State and ` 1,00,000 worth of goods were sold in the course of inter-State trade. VAT paid on procurement of capital goods worth ` 1,00,000 during the month was at 12.5%. If the input and output tax rate in the State are 12.5% and 4% respectively and the central sales tax rate is 2%, show the total tax liability under the State VAT law and under the Central Sales Tax Act. (5 Marks)

(iii) M/s. GWS Industries Ltd was the manufacturer of the white cement. He repaired his worn out machineries/parts of the cement manufacturing plant at its workshop such as damaged roller, shafts and coupling with the help of welding electrodes, mild steel, cutting tools, M.S. Angles, M.S. Channels, M.S. Beams, etc. In this process of repair, M.S. scrap and Iron scrap were generated. The assessee cleared this metal scrap and waste without paying any excise duty. The Department issued a show cause notice demanding duty on the said waste contending that the process of generation of scrap and waste amounted to the manufacture in terms of section 2(f) of the Central Excise Act. Whether the contention of the department is correct? Decide with the help of case law. (5 Marks)

iv) An importer imported Description of goods: Mulberry Raw Silk (not thrown) (HS Code 5002 00) from People’s Republic of China. CIF value was US $ 20,000 and quantity 1,000 Kgs. Exchange rate was 1 US $ = ` 44 on date of presentation of Bill of Entry. Customs Duty rates are –

(i) Basic Customs Duty 10% (ii) Education Cess 2% (iii) SAH Education cess - 1%. There is no excise duty payable on these goods if manufactured

in India. As per Notification No. 106/2003-Cus dated 10-7-2003, anti-dumping duty has been imposed on these goods imported from China, manufactured by any producer in People’s Republic of China. The anti-dumping duty will be equal to difference between amount calculated @ US $ 31.69 per Kg and ‘landed value’ of goods. Compute Customs Duty liability & anti-dumping liability. (5 Marks)

v) Sun Industries Ltd. sent certain goods by a ship from Kolkata to Colombo in Sri Lanka under claim

for drawback on the said goods u/s 75 of the Customs Act, against shipping bill. The ship had passed beyond the territorial waters of India and the engine developed trouble while the ship was in the high seas falling within the ambit of expression ‘taking out to a place outside India’.

PRIME/ME38/FINAL 2

The ship returned back and ran aground in Indian territorial waters at the port of Paradeep. The fittings, stores and cargo were salvaged. Discuss the admissibility of claim for drawback by the company. (5 Marks)

2. (a) Examine the validity of the following statements with reference to Cenvat Credit Rules, 2004 as

amended: (i) All motor vehicles are eligible as capital goods used in the factory of the manufacturer of the

final products for availing Cenvat Credit. (ii) Cenvat credit on inputs cannot be taken without bringing them into the premises of output

service provider. (6 Marks)

(b) Trostry India Pvt. Ltd. had imported second-hand machinery along with spare parts from its sister concern located at New York. There was indication in the invoice that the machinery was certified by the load port Chartered Engineer. However, the certificate issued by the load port Chartered Engineer was not enclosed along with the Bill of Entry and only the invoice was submitted. Since the appellant didn’t submit the valuation report, the Custom authorities referred the matter for valuation to local valuer. During the process of valuation, the local valuer found that the value of the machinery was under estimated. On being issued a show cause notice for mis declaration of the value of imported goods, Trostry India Pvt. Ltd. paid duty on the value indicated as per the original report of load port Chartered Engineer, which was higher than the value declared by it. Explain, with the help of a decided case law, whether Trostry India Pvt. Ltd. had mis declared the value of the imported goods leading to confiscation of the same and imposition of penalty. (6 Marks)

(c) Interest on Delayed payment of Duty as per the Customs Act, 1962. (3 Marks)

3. (a) Next Gen Life Sciences Ltd. was the manufacturer of Povidone Iodine Cleansing Solution USP and

Wokadine Surgical Scrub. The only difference between these two products was that Wokadine was a branded product whereas Povidone Iodine Cleansing Solution was a generic name. The Revenue contended that the said products were not medicament in terms of Chapter Note 2(i) of Chapter 30 of the Tariff Act* as it neither had “Prophylactic” nor “Therapeutic” usage. The Revenue said that in order to qualify as a medicament, the goods must be capable of curing or preventing some disease or aliment. Therefore, the said products cannot be classified under Chapter Heading 3003 of Tariff Act. They submitted that the product in dispute, namely Povidone Iodine Solution or its patent and proprietary equivalent Wokadine surgical scrub, was essentially used as a medicated detergent. The assessee stated that the Revenue, in their show cause notices, had admitted that the products in issue were antiseptic and used by surgeons for cleaning or de-germing their hands and scrubbing surface of skin of patient before operation. They further submitted that the products were medicament in which some carriers were added and therefore, it would fall under chapter sub-heading 3003 and not under chapter 34. The assessee’s claim before the authorities and also before the Tribunal was that the aforesaid products were medicaments and, therefore, required to be classified under Chapter sub-heading 3003 of the Tariff, whereas the Revenue’s stand was that the products in question are detergents and, therefore, to be classified under chapter sub-heading 3402.90. You are required to explain with the relevant Case law whether “In case of a specific entry viz-a-viz a residuary entry, which one should be preferred for classification purpose? (6 Marks)

PRIME/ME38/FINAL 3

b) The assessee, an organization promoted by several financial institutions, received grants-in-aid from the Central and State Governments for implementation of welfare schemes for various sections of society, such as minorities, poor villagers etc. These schemes were wide-ranging. The assessee did not pay service tax on these amounts received from Governments, while they paid service tax on the consideration received from non-government agencies for advice, consulting or technical assistance rendered to them under the head ―consulting engineer‘s service. Department sought to levy service tax on the grants-in-aid received by assessee from the government for implementation of the Government welfare schemes under ―scientific or technical consultancy‖. Decide with the help of case laws if any? (6 Marks)

c) M/s Accent IT Co. imported laptops with Hard Disc Drives (HDD) preloaded with operating

software like Windows XP, XP home etc. The department has claimed that the said laptop along with the operating software was classifiable and assessable as a single unit. It is the claim of the assessee that the software loaded HDD should be classified and assessed separately as an exemption is available as per notification issued under section 25(1) of the Customs Act, 1962. Decide with a brief note whether the action proposed by the department is correct in law. (3 Marks)

4. a) (i) Differentiate between "non-excisable goods" and "non-dutiable goods". (ii) Briefly explain the expression “Place of removal” under the Central Excise Act, 1944.

(2x 3 = 6 Marks) b) Can service tax be levied on the services rendered in connection with a chit fund business?

(6 Marks) c) A bill of entry was presented on 4th August, 2011. The vessel carrying goods arrived on 11th

August, 2011. Entry inwards was granted on 13th August, 2011, and the bill of entry was assessed on that date and was also returned to the importer for payment of duty on that date. The duty amounting to ` 5,00,000 was paid by the importer on 22nd August, 2011. Calculate the amount of interest payable under section 47(2) of the Customs Act, 1962, given that there were four holidays during the period from 14th August to 22nd August, 2011. (3 Marks)

5 a)

(i) List down any three services exempted under the Negative List Approach vide Section 66D as introduced in Finance Act 2012.

(ii) What are the circumstances under which VAT registration could be cancelled? Write a brief note. (2 x 3=6 Marks)

b) Whether expenditure like travel, hotel stay, transportation and the like incurred by service

provider in course of providing taxable service should be treated as consideration for taxable service and included in value for charging service tax? Explain based on the relevant judgments. (6 Marks)

c) Mr. Sunny Bhansali, an importer has imported some garments from Germany on 02.04.2012. 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? (3 Marks)

PRIME/ME38/FINAL 4

6 (a)

(i) “The Commissioner of Central Excise may order Special audit under service tax on random basis.” Discuss briefly.

(ii) Explain briefly the mandatory provisions under VAT with respect to the records to be maintained by the assessee. (2 x 3 = 6 Marks)

b) Explain briefly with reference to Rule 21 of the Central Excise Rules, 2002 with relation to

Remission of Duty (6 Marks) c)

(i) Compute the invoice value and VAT payable by Mr. Mayank who purchases goods within the state for ` 4,50,000 (including VAT) and earns 20% profit on sale price. VAT rate on purchases and sales is 12.5%.

(ii) “Under VAT, barring the items covered by the negative list and subject to retention rules, the dealers are entitled to set off on capital goods like any other purchases.”Examine the validity of the statement and discuss the procedural requirements for claim of set off of capital goods. (2 x 3 = 6 Marks)

7

a) Can a document which is relevant for a proceeding under the Central Excise Act, 1944 be searched by a Central Excise Officer? Explain the relevant provisions. (6 Marks)

b) M/s White Limited was engaged in the manufacture of tooth paste. It was sold as a combo pack of

tooth paste and a bought out tooth brush. The assessee availed CENVAT credit of central excise duty paid on the tooth brush. Revenue contended that the tooth brush was not an input for the manufacture of the tooth paste and the cost of tooth brush was not added in the M.R.P. of the combo pack and hence, the assessee had availed CENVAT credit of duty paid on tooth brush in contravention of the provisions of the CENVAT Credit Rules, 2004. Comment with the help of decided Case law. (6 Marks)

c) Briefly state the concept of Export of Taxable Services under rule 3 of the Export of Service Rules,

2005 (3 Marks)

PRIME/ME38/FINAL 1

PRIME ACADEMY 38th SESSION MODEL EXAM - FINAL – INDIRECT TAX LAWS

SUGGESTED ANSWERS 1.

(a) As the product is under MRP scheme, the duty shall be payable only as per the provisions of section 4A of the Central Excise Act i.e. on the basis of MRP less abatement and not on the basis of material cost plus job charges etc. Section 4A overrides section 4 of the Central Excise Act.: Hence, assessable value in this case shall be determined as under:-

Particulars `

Retail sale price of 4000 packets = 4000 x 25 1,00,000

Less: Abatement @ 40% 40,000

Assessable Value 60,000

b) VAT liability for the period March 1, 2012 to March. 31, 2012

Particulars

`

Inputs purchased in the month [12.5% VAT] 1,00,000

Output sold in the month (within the State) 2,00,000

Inter-State sales 1,00,000

Input credit (including capital goods) (`12,500 + ` 12,500) 25,000

Output tax 8,000

CST for Inter-State sale @ 2% 2,000

State VAT liability (` 8,000 – ` 25,000) Nil

Excess credit carried forward to subsequent month 17,000

Central sales tax to be paid (` 2,000 –` 17,000) Nil

Excess credit carried forward to subsequent period 15,000

c) The given facts are similar to the case of “Grasim Industries Limited v. UOI 2011 (273) E.L.T. 10 (S.C)”. The Apex Court observed that manufacture in terms of section 2(f) includes any process incidental or ancillary to the completion of the manufactured product. This ‘any process’ can be a process in manufacture or process in relation to manufacture of the end product, which involves bringing some kind of change to the raw material at various stages by different operations. The process in relation to manufacture means a process which is so integrally connected to the manufacturing of the end product without which, the manufacture of the end product would be impossible or commercially inexpedient. However, in the present case, it is clear that the process of repair and maintenance of the machinery of the cement manufacturing plant, in which M.S. scrap and Iron scrap arise, has no contribution or effect on the process of manufacturing of the cement, (the end product). The repairing activity in any possible manner cannot be called as a part of manufacturing activity in relation to production of end product. Therefore, the M.S. scrap and Iron scrap cannot be said to be a by-product of the final product. At the best, it is the by-product of the repairing process. Hence, it held that the generation of metal scrap or waste during the repair of the worn out machineries/parts of cement manufacturing plant does not amount to manufacture.

PRIME/ME38/FINAL 2

d) (a) Computation of Customs duty : ` Total CIF Price US $ 20,000 CIF @ ` 44 per 1 US $ 8,80,000.00 Add – Landing charges @ 1% 8,800.00 Assessable Value 8,88,800.00 Basic duty @ 10% 88,880.00 Education Cess @ 2% on 88,880.00 1,777.60 SAH education Cess 1% 888.80 Total Customs Duty payable (Basic + Education Cess) 91,546.40 Rounded off 91,546.40

(b) Computation of landed value `

Assessable Value Under Customs Act 8,88,800.00 Add: All Duties of Customs 91,546.40 Landed Value as per Anti-Dumping Notification 9,80,346.00

(c) Computation of anti-dumping duty `

Rate of Silk Yarn as per Anti-Dumping Notification (US $ 31.69 per kg) × 1000 kgs = US $ 31,690 Value @ ` 44 per US $ = 13,94,360 Less : Landed value as per Anti-Dumping = 9,80,346 Anti-Dumping Duty Payable 4,14,014

e) Since goods had crossed territorial waters of India; it could be said that the “export” was complete

in as much as the goods had reached a place outside India. Merely because the ship returned back and ran aground in the territorial waters doesn’t affect the fact of “export”, which was complete – Sun Industries v CC 1988 (35) ELT 241 (SC).

2.

(a) (i) The said statement is not valid. As per Rule 2(a) of the CENVAT Credit Rules, 2004, although

motor vehicles used in the factory of the manufacturer of the final products are now eligible as capital goods, but following motor vehicles are still not eligible:-

(1) Motor vehicles for the transport of 10 or more persons, including the driver (2) Motor cars and other motor vehicles principally designed for the transport of

persons (other than those covered in (i) above), including station wagons and racing cars

(3) Motor vehicles for transport of goods (4) Motorcycles (including mopeds) and cycles fitted with an auxiliary motor, with

or without side cars. (ii) The said statement is not valid. Rule 4 of the CENVAT Credit Rules, 2004 has been amended vide

Notification No. 18/2012-CE (NT) dated 17.03.2012 to provide that CENVAT credit on inputs can be taken without bringing them into the premises of the output service provider. Credit can be taken when the inputs are delivered to the service provider subject to the maintenance of documentary evidence of delivery and location of the inputs.

(b) Yes, Trostry India Pvt. Ltd. had mis declared the value of the imported goods leading to

confiscation of the same and imposition of penalty. The facts of the given case are similar to the case of Wringley India Pvt.Ltd. v. Commr.of Cus.(Imports), Chennai 2011 (274) E.L.T. 172 (Mad.).

PRIME/ME38/FINAL 3

c) In the instant case, the High Court held that the appellant had made deliberate mis declaration of the value of the imported goods and misguided the Customs Department as even after getting direction to get valuation from local chartered engineer, it was not disclosed that valuation had already been done at load port. Further, it was also not the importer’s case that they did not have in their possession that certificate of load port chartered engineer. Even after obtaining the valuation certificate from the local valuer, the appellant had no grievance. In fact the valuation so done by the local Chartered Engineer was readily accepted by the appellant as evident from the letter issued by them to the Customs Department and the subsequent payment made by them. Hence, the Revenue contended that the appellant had mis-declared the value of the imported goods leading to confiscation of the same and imposition of penalty.

3. (a) The Facts of the Case relate to the Supreme Court Decision in Case of CCE vs. Wockhardt Life

Sciences Ltd. 2012 (277) E.L.T. 299 (SC). The Supreme Court observed that it is the specific case of the assessee that the products in question are primarily used for external treatment of the human-beings for the purpose of the prevention of the disease. This is not disputed by the Revenue. Revenue’s stand is that since the products in question are primarily used as detergents/cleansing preparation, they cannot be brought under the definition of medicaments. Medicaments are products which can be used either for therapeutic or prophylactic usage. The Court said that since the product in question is basically and primarily used for the prophylactic uses; the Tribunal was justified in coming to a conclusion that the product was a medicament. The miniscule quantity of the prophylactic ingredient is not a relevant factor. The Court said that the combined factor that requires to be taken note of for the purpose of the classification of the goods are the composition, the product literature, the label, the character of the product and the use to which the product is put. In the instant case, it is not is dispute that this is used by the surgeons for the purpose of cleaning or degerming their hands and scrubbing the surface of the skin of the patient that portion is operated upon. The purpose is to prevent the infection or disease. Therefore, the product in question can be safely classified as a “medicament” which would fall under chapter sub-heading 3003 which is a specific entry and not under chapter sub-heading 3402.90 which is a residuary entry. Thus, on the basis of the above observation by the Court the Revenue’s appeal was rejected. * Note : “Medicament” means goods (other than foods or beverages such as dietetic, diabetic or fortified foods, tonic beverages) not falling within heading 30.02 or 30.04 which are either :

(a) products comprising two or more constituents which have been mixed or compounded together for therapeutic or prophylactic uses; or

(b) unmixed products suitable for such uses put up in measured doses or in packing’s for retail sale or for use in hospitals.

b) The assessee-company had implemented welfare scheme for the Central and State

governments for the benefit of the poor or otherwise vulnerable/weaker section for the society and collected grant-in-aid from the governments concerned.

The grants-in-aid had totally utilized for implementing the welfare schemes. Nothing over and above these grants-in-aid was received by the assessee from any of the governments. In other words, the assessee did not receive any consideration for ―any service‖ to the governments. Therefore, in the implementation of the Governmental schemes, the assessee as implementing agency did not render any taxable ―service‖ to the government. HENCE Grants-in-aid for implementation of Government scheme fully utilized for the purposes of such scheme Not a consideration for any service accordingly no question of imposition of service tax.

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[APITCO Ltd. [2011] (SC)]

c) The action proposed by the Department is correct in law. The facts of the case are similar to CCus. v. Hewlett Packard India Sales (P) Ltd. (2007) 215 ELT 484 (SC). In this case, the Supreme Court observed that the pre-loaded operating system recorded in HDD in the laptop (item of import) forms an integral part of the laptop as the laptop cannot work without the operating system. A laptop without an operating system is like an empty building. Hence, laptop should be treated as one single unit and assessed accordingly.

4. (a)

(i) Section 2(d) of the Central Excise Act, 1944 defines “excisable goods” as goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt. An explanation to Section 2(d) of the Central Excise Act, 1944 states that the expression “goods”, for purpose of the said clause, includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable. Goods which are not listed in Tariff or goods which are mentioned in Tariff, but the column of rate of duty is blank are non-excisable goods, e.g. water (there is no entry in Tariff). Excise law is not applicable on non excisable goods. “Non-dutiable goods” are excisable goods listed in Excise Tariff. Excise law is applicable to them, but they are not liable to excise duty. Non dutiable goods may be of two types- (a) Nil duty goods-Tariff rate for such goods is nil, and (b) Exempted goods-100% exemption is available under section 5A. for such goods.

(ii) As per section 4(3)(c) of the Central Excise Act,1944, “place of removal” means –

i. a factory or any other place or premises where excisable goods are being produced or manufactured

ii. a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty

iii. a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory

b) The High Court in the case of Delhi Chit Fund Association v. UOI 2013 (30) S.T.R. 347 (Del.) inferred that since in a chit fund business, the subscription is tendered in any one forms of money as defined under section 65B(33), it would be a transaction in money and would fall in the exclusionary part of the definition. Otherwise also, in view of Explanation 2 read along with the exclusionary part, the services rendered by the foreman of the chit business for which a separate consideration is charged would be out of the clutches of the definition. Thus, either way, the services of a foreman of a chit business do not constitute a taxable service. The High Court observed that as per the opening words of the definition of ‘service’, an activity cannot be charged with service tax unless following four aspects or characteristics are present:-

(i) the person who provides the service, (ii) the person who receives the service, (iii) the actual rendering of the service and (iv) the consideration for the service.

A ‘mere transaction in money’ cannot be considered as ‘service’ as it lacks the above four constituent elements. The High Court elucidated that even though ‘mere transaction in money’ is not service in the first place, the intention of the legislature in excluding it from the definition might be that the legislature deemed it fit, ex abundanticautela, to exclude it.

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A clue to proper interpretation of the exclusionary part of the definition is embedded in Explanation 2 which provides that except an activity for which a separate consideration is charged and which relates to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination, all other cases of transaction in money shall stand excluded from the charge of service tax, including the consideration charged for the services of foreman in a chit business. Consequently, the High Court quashed Notification No. 26/2012-S.T. dated 20.06.2012 to the extent of the entry in serial No. 8 thereof.

c) As per section 47(2), importer is liable to pay interest @ 15% p.a. if he fails to make payment within 5 days (excluding holidays) from the date of return of assessed bill of entry to him. The assessed bill of entry was returned to him, on 13th August and the duty was paid on 22nd August 2011. After excluding holidays, the number of days from 14th August to 22nd August 2011 is 5 days (9days - 4 holidays). Since duty has been paid within time period of 5 days, no interest is payable U/S 47(2).

5. (a)

(i) Section 66B is the new charging section inserted by the Finance Act, 2012. Earlier Section 66 was the charging section which will cease to apply now. Section 66B provides that there shall be levied a service tax at the rate of twelve per cent on the value of all services, except the services specified in the negative list, provided or agreed to be provided in the taxable territory by a person to another and collected in the prescribed manner. Section 66B: New charging section Section 66C: Determination of place of provision of service Section 66D: Negative list of services Section 66D has been newly inserted which specify the list of services as the negative list:

ii. service by way of access to a road or a bridge on payment of toll charges. iii. betting, gambling or lottery. iv. admission to entertainment events or access to amusement facilities.

(ii) Circumstances under which VAT registration could be cancelled:

(a) discontinuance of business; or (b) disposal of business; or (c) transfer of business to a new location; or (d) annual turnover of a manufacturer or a trader dealing in designated goods falls

below the specified amount.

(b) Intercontinental Consultants & Technocrats Pvt. Ltd. v. Union of India 2013 (29) S.T.R. 9 (Del.) Observations of the Court: The above question came up for consideration before the Delhi High Court. The High Court noted that as per Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as Rules), expenditure/costs, such as travel, hotel stay, transportation, etc. incurred by service provider in course of providing taxable service has to be treated as consideration for taxable service and included in value for charging service tax. The High Court observed that since section 67(1) of Finance Act, 1994 is subject to provisions of Chapter V - which includes section 66 (now section 66B) – the value of taxable services has to be in consonance with section 66 which levies tax only on taxable service. Thus, there is an inbuilt mechanism to ensure that only taxable service are evaluated under section 67 which provides that value of taxable service is the gross amount charged by service provider ‘for such service. The High Court, therefore, opined that it is only the

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consideration for the taxable service which is chargeable to tax under the relevant Sections. However, rule 5(1) goes far beyond the charging provisions as it includes the expenditure and costs - which are incurred by the service provider “in the course of providing taxable service” - in the value of the taxable service. The High Court elaborated that power to make rules could not exceed or go beyond the section which provides for charge or collection of service tax. The High Court clarified that even though section 94 prescribes to lay every rule framed by Central Government before each House of Parliament, which have power to modify them; the same cannot add any greater force to the Rules than what they ordinarily have as species of subordinate legislation. The High Court further observed that rule 5(1) may also result in double taxation, if expenses like air travel tickets, had already been subjected to service tax. The High Court was of the view that double taxation can be imposed only when it is clearly provided for and intended. It can never be enforced by implication.

c) 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, —

a. where the importer or exporter is unable to make self-assessment under subsection (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. Sunny can apply for Provisional assessment for the garments imported on 02.04.2012.

6. (a)

(i) With effect from 28.05.2012, section 72A has been inserted in the Finance Act, 1994 to provide for the special audit by the practicing Chartered Accountant/Cost Accountant. However, the Commissioner of Central Excise cannot order Special audit under service tax on random basis. The Circumstances under which Commissioner may order Special audit are as follows:- If the Commissioner of Central Excise, has reasons to believe that any person liable to pay service tax—

i. has failed to declare or determine the value of a taxable service correctly; or ii. has availed and utilised credit of duty or tax paid— (a) which is not within the normal limits having regard to the nature of taxable service

provided, the extent of capital goods used or the type of inputs or input services used, or any other relevant factors as he may deem appropriate; or

(b) by means of fraud, collusion, or any willful misstatement or suppression of facts; or

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iii. has operations spread out in multiple locations and it is not possible or practicable to obtain a true and complete picture of his accounts from the registered premises failing under the jurisdiction of the said Commissioner,

He may direct such person to get his accounts audited by a Chartered Accountant or Cost Accountant nominated by him, to the extent and for the period as may be specified by the Commissioner.

(ii) The following records should be maintained under VAT system: i. Purchase records

ii. Sales records iii. VAT account containing the details of output tax and input tax together iv. with credit and debit notes issued during the period v. Separate record for exempt sale

The following records should also be kept and produced to an officer:- Copies of invoices, debit and credit notes issued, all purchase invoices, details of tax charged

on purchases and sales, total output tax, input tax and net tax for each period, details of goods manufactured and delivered from the factory, details of each supply of goods from the business premises. Failure to keep these records may attract penal provisions under the State VAT law.

b) Remission of Duty is granted when the goods are lost or destroyed by natural causes or by unavoidable Accident or are claimed by the manufacturer as unfit for consumption, at any time before removal. If the goods have been cleared after payment of duty , remission of duty cannot be Granted under Rule 21 of the Central Excise Rules,2002. As per Sub Rule 5C of Rule 3 of CENVAT Credit Rules, 2004 inserted Vide notification No 33/2007 CE(NT) dated 07.09.2007 , where on any goods

manufactured or produced by an Assessee , the payment of duty is ordered to be remitted under Rule 21 of the Central Excise Rules,2202 the CENVAT credit taken on the inputs used in the manufacture. Or production such goods shall we reversed.

(c) The Central Government has power to levy anti-dumping duty on dumped articles in accordance with the provisions of section 9A of the Customs Tariff Act, 1975 and the rules framed there under.

i. In a case where no provisional duty is imposed, the date of commencement of anti-dumping duty will be the date of publication of notification, imposing anti-dumping duty under section 9A(1), in the Official Gazette.

ii. In a case where provisional duty is imposed under section 9A(2), the date of commencement of anti-dumping duty will be the date of publication of notification, imposing provisional duty under section 9A(2), in the Official Gazette.

iii. In a case where anti-dumping duty is imposed retrospectively under section 9A(3) from a date prior to the date of imposition of provisional duty, the date of commencement of anti-dumping duty will be such prior date as may be notified in the notification imposing anti-dumping duty retrospectively, but not beyond 90 days from the date of such notification of provisional duty.

7.

(a) No, the Department’s plea is not justified in law. The facts of the given case are similar to the case of CCE v. Tarpaulin International 2010 (256) E.L.T. 481 (S.C.). The Apex Court opined that stitching of tarpaulin sheets and making eyelets did not change basic characteristic of the raw material and end product. The process did not bring into existence a new and distinct product with total transformation in the original commodity. The original material used i.e., the tarpaulin, was still called tarpaulin made-ups even after undergoing the said process. Hence, it could not be said that the process was a manufacturing process.

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Therefore, there could be no levy of Central excise duty on the tarpaulin made-ups. Hence, the Supreme Court, upholding the decision of the Tribunal, held that conversion of tarpaulin into tarpaulin made-ups would not amount to manufacture.

(b) Relevant case law: CCus. v. Prime Health Care Products 2011 (272) E.L.T. 54 (Guj.)

Decision of the case: The High Court noted that the process of packing and re-packing the input, that was, toothbrush and tooth paste in a unit container would fall within the ambit of “manufacture” *as per section 2(f)(iii) of the Central Excise Act, 1944+. Further, the word “input” was defined in rule 2(k) of the CENVAT Credit Rules, 2004 which also included accessories of the final products cleared along with final product. There was no dispute about the fact that on toothbrush, excise duty had been paid. The toothbrush was put in the packet along with the tooth paste and no extra amount was recovered from the consumer on the toothbrush*. Considering the definition given in the rules of “input” and the provisions contained in rule 3, the High Court upheld the Tribunal’s decision that the credit was admissible in the case of the assesses. *Note: The definition of inputs under rule 2(k) has been substituted vide Notification No. 3/2011-C.E. (N.T.) dated 1-3-2011.

(c) The Export of Services, Rules, 2005 specifies 3 categories of cross border transaction of services

and conditions that will be construed as export of services in cases of: i. Specified services which are provided in relation to immovable properties situated outside India – [See list of services in Appendix-4] (Refer Rule 3(1) (i) of Export of Service Rules,2005). ii. Specified services which are partly performed outside India – [See list of services in Appendix – 4] (Ref. Rule 3(1 )(ii) of Export of Service Rules,2005). iii. the remaining taxable services, barring a few exceptions, when provided in relation to business or commerce, to a recipient located outside India, and when such services are provided not in relation to business or commerce, it should be provided to a recipient located outside India at the time of provision of such service. However, where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located outside India. (Ref. Rule 3(I)(iii) of Export of Service Rules,2005). Further condition to be met for treating the provision of any taxable service as export of service - payment For such service is received by the service provider in convertible foreign exchange. [Ref. Rule 3(2) of the Export Of Service Rules, 2005]. Thus, each transaction has to be seen individually to ascertain if it constitutes export of services, fulfilling the requisite parameters.