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Volume - X | November 2018
Baroda Branch of Western India Regional Council ofThe Institute of Chartered Accountants of India
The Institute of Chartered Accountants of India(Setup by an Act of Parliament)
EditorialTeam
Contents
CA. Dhiren Parikh 93762 11099Chairman
CA. Hitesh Agrawal 99980 28737
CA. Krunal Brahmbhatt 78748 11551
CA. Vin d Pahilwani 98980 78176
CA. Pradeep Agrawal 98985 60967
CA. Arpan Dodia 98983 83530
CA. Abhijit J Kotecha 98254 83173
CA. Manoj Sahu 90990 94500
CA. Rikin Patel 88667 09509
Vice-Chairman
Secretary
Treasurer
Ex-officio
IP - Chairman
Committee Member
Committee Member
Committee Member
o
CA. Dhiren Parikh CA. Manoj Sahu
CA. Rahul Parikh CA. Nayan R Kothari
CA. Neena Patel CA. Gunjan Agrawal
CA. Jigita Shah CA. Dhruti Vaidya
CA. Parth Patel CA. Chintan Popat
Forthcoming Events
Direct Tax Updates
Return of Time Expired Drugs orMedicines ... 4
Snap Gallery ... 11
Ind AS 115 - Revenue fromContracts with Customers Part 4
... 2
... 3
... 6
Judicial Decisions on Indirect Taxes ... 10
Pg. No.
ManagingCommittee
Chairman Communication
Respected Professional Colleague,
For we, Chartered Accountants the word responsibility holds great
sense. It is said that the degree of responsibility you take for your life
determines how much change you can create in it. The more you take
responsibility for your past and present, the more you are able to create
future you seek.
Whereas till October ’18 we were more concerned for completion of
Income TaxAudits and now December 18 has become the deadlines for
completion of GSTAudits. So members will be busy in next task of GST
Audits as well as to spare fruitful time with the family for Diwali
festival.
In the month of October, many programme were organised for our
members. The month started with new batch of Certificate Course on
GST. Apart from this, we have organised two days workshop on RERA
as well as two days workshop on Tally. The government has notified a
new return form for Goods and Services Tax (GST) that will have to be
filed for the full year. Therefore, Baroda Branch has organised a full day
seminar on GST to update knowledge of members. Interactive meet
with Dy. Mayor of Vadodara Shri Jivrajbhai Chauhan gave us a chance
to represent contribution of Chartered Accountants and Institute as a
’
whole in partner in nation building.
In the month of November, we have planned to start new ISA
Professional Training batch after Diwali. We have also planned to start
first batch of Educational Course on ICAI Registered Valuers
organisation (RVO). Awareness programme on ICAI Valuation
Standard 2018 is planned which is organised by Valuation Standards
Boards of ICAI. Interested members are requested to register at the
earliest. We have also arranged lecture meeting on Start-up and Role
and Opportunity for CharteredAccountants in Start-up venture.
I request all the members to ensure that the Branch Office has your
updated address and email.I appeal all the members to give their
constructive feedback on all the activities of the Branch, including
Newsletters.
In the month of November we will be busy in celebrating Diwali festival
and to enjoy vacation with family and friends.It’s that time of the year
which every Indian looks forward to ….the month of Festivals!!!!
In this month we all will be celebrating Diwali that is festival of Light,
Joy, Happiness, and family & friends get -together and many more.
Wishing all of you a very Happy Diwali and Prosperous NewYear.
Thanks & Regards,
Yours’in Profession,
Chairman
CA. Dhiren Parikh
e-Newsletter(Circulated by Email)
Baroda Branch of WIRC of ICAI2
Branch Events Lecture Meeting onICAI Valuation Standards 2018
HrsCPE 3
Day & Date : Thursday, 01.11.2018
Time :
Faculty :
Fees :
05:00 pm to 08:00 pm
CA. Pratik Singhi, Mumbai
Rs.150/- including GST
ICAI Bhawan, VadodaraVenue :
Lecture Meeting on Start Up
HrsCPE 2
Day & Date : Saturday, 24.11.2018
Time :
Faculty :
Fees :
03:00 pm to 05:00 pm
Mr. Nikhi Suthar & CA. Devang Sadrani, Vadodara
Rs. 200/- including GST
ICAI Bhawan, VadodaraVenue :
GST Clinic
HrsCPE 2
Day & Date : Tuesday, 27.11.2018
Time :
Faculty :
Fees :
06:00 pm to 08:00 pm
CA.Anirudh Sonpal & CA. Dhruvank Parikh
Rs. 120/- including GST
ICAI Bhawan, VadodaraVenue :
Batch of Educational Course onICAI Registered Valuers Organisation (RVO)
Day & Date : Tentative Strating From - Saturday & Sunday, 17, 18,24 & 25.11.2018 & 01, 02, 15 & 16.12.2018
Fees : Primary membership fee is Rs 5000 plus 18% GST =Rs 5,900/-
The fees for the Educational course is Rs 25000 plus18% GST = Rs 29,500/-
ICAI Bhawan, VadodaraVenue :
ISA PTDay & Date : Tentative Strating From - Saturday & Sunday, 24 &
25.11.2018 & 01, 02, 15, 16, 22, 23, 29 & 30.12.2018
Fees : Registration fee : Rs.20,000/-
ICAI Bhawan, VadodaraVenue :
CA Members Cricket Match
Career Counselling
Day & Date : Sunday, 25.11.2018
VCA Academy, Vasna Bhayli Road, VadodaraVenue :
Date : 01.11.2018
Venue : Shreyas High School, Vadodara
WICASA Events
Cricket Tournament
Date : 24.11.2018 & 25.11.2018
Venue : VCAAcademy, Vasna Bhayli Road, Vadodara
Career Counselling
Date : 01.11.2018
Venue : Silver Oak School, Vadodara
GST Certificate Course
Dates : 26.11.2018 to 08.12.2018
Venue : ICAI Bhawan, Vadodara
Football League
Date : 02.12.2018
Venue : BFA, Gotri, Vadodara
Baroda Branch of WIRC of ICAI3
Contributed by :can be reached at [email protected]
CA. Narendra Hindocha
Direct Tax Updates
1. Fees of Portfolio Manager
2. Proceedings on death of assesse
Many people hand over their funds to Portfolio
Managers to make and manage investments in shares
and securities. This is a very common practice but the
tax issues relating thereto are far from clear. One of the
issues is whether income from such portfolio is
assessable as Business income or as Capital gains. The
other issue is relating to deductibility of the charges of
the Portfolio manager when such income is assessed as
Capital Gains. Yesterday I read a decision stating that
such charges are not deductible. Today, I read decision
of Income Tax Appellate Tribunal, Kolkata Bench in
I.T.A No. 856/Kol/2017 in case of Joy Beauty Care (P)
Ltd. -vs- DCIT pronounced on 05.09.2018 holding that
the
Another common issue which calls for clarity relating
to procedural issues is the manner of continuing
proceedings on death of a person. Decision I read in
this connection is that reported at (2018) TaxCorp(LJ)
15638 (HC-MADRAS) in case of Alamelu Veerappan
vs. ITO. While section 159 contemplates continuance
of proceedings in case of legal representative, the
decision observes that there is
or take steps to
cancel the PAN registration. It further observes that:
- A
Portfolio Manager’s fees paid by the assessee is
eligible for deduction while computing Short Term
Capital Gain.
no obligation on the
part of the legal representatives of a deceased assessee
to intimate the death of the assessee
notice issued in the name of a dead person is
unenforceable in law.
- The
The defect is fatal and is not curable u/s
292B.
- Legal representatives are liable u/s 159 only if
proceedings have already been initiated when the
assessee was alive and are continued against the
legal heirs
In case of Sahir Sami Khatib vs. ITO (Bombay High
Court)
In Income Tax Appeal (IT) NO. 722 OF 2015, the
assessee who was the
that he should be
assessed on deemed dividend under section 2(22)e
in the
borrowing company. The Tribunal did not accept this
claim and the High Court held that no substantial
question of law arose. However, it added that the
decision could be
In another case relating to the provision, Income Tax
Appel la te Tribunal Hyderabad in M.A.
N o . 6 8 / H y d / 2 0 1 8 ( A r i s i n g o u t o f I TA
No.240/Hyd/2017) In case of Sri Srikanth MarruVs
Income Tax Officer held that for the purpose of the
section
Some interesting News in Press tempted me to
incorporate the contents within this newsletter.
Newpaper report about the tax matter of the Chinese
fact that the Revenue had no knowledge
about the death of the assessee does not change
the law.
only shareholder that had
shareholding in the lending company as well as in the
borrowing company, claimed
only
to the extent of his proportionate shareholding
different if two or more
shareholders are shareholders of the same lending
company and the same borrowing company.
only the profit accumulated until the
beginning of the year was to be considered.
3. Deemed dividend
4. Newspaper reports
Chinese SuperstarTax matter
Superstar Fan Bingbing caught my eye. It says
That reminded
me of repeated experiences of lawyers representing
our Income-tax Department and the taxmen briefing
them being poorly prepared. I believe increasing
accountability of our taxmen is badly needed.The
other thing I noticed was the report stating that she
would avoid imprisonment if she pays up in time. That
reminded me of our settlement commission. Here also I
believe that a quick respite from huge uncertainty is
badly needed, even if it is case of a taxpayer having
gone astray and even if it is at a cost.
Demands are raised on Uber India Systems Pvt. Ltd for
not deducting tax at source from payments to drivers
who are called partner drivers.
as it made
such payments in pursuance of contracts between such
drivers and Uber NV. The Indian company is providing
marketing and support services to Uber BV. I believe
even non-residents are liable to deduct tax at source and
wonder if Revenue would proceed against Uber BV,
even if Uber India succeeds. If they can do so, I wonder
what benefit Uber as a group would get by taking such a
plea.
Summons are issued to Managerial Personnel ofAvery
India Limited for defaults in TDS issues. What caught
my eye was that the
as per Newspaper
report.
I wish you all a Happy Diwali and a Prosperous New
Year not tangled in litigation.
the
officials who investigated her for tax evasion have
been punished for poor management.
The defence taken is
that the Indian company was not responsible for
making such payments( it had made payments as
agent of Uber NV, a Netherland entity)
matter related to 1978 and the
amount involved was Rs.8800/-
UberTDS matter
Prosecution forTDS
Baroda Branch of WIRC of ICAI4
Contributed by :can be reached at [email protected]
CA. Abhay Desai
Return of Time ExpiredDrugs or Medicines
– Critical Analysis ofThe Recent Circular
1. Circular No. 72/46/2018-GST dated 26.10.2018 has
been issued clarifying the procedure in respect of return
of time expired drugs or medicines. Said circular
clarifies that the time expired drugs or medicines can be
returned either by issuance of credit note or by treating
the said goods return as fresh supply and hence on an
invoice. Said circular also clarifies the input tax credit
(“ITC”) implications under both the options. Let us
explore whether the said clarification is in line with the
legal provisions.
2. Referred circular at paragraph 3(A) provides for an
option to treat the return of time expired drugs or
medicines as “fresh supply”. In other words a person
can return the said goods by treating it is as a fresh
supply and thereby issue an invoice for the same as
under:
i. If the registered person returning the goods is under
composition: Such person shall prepare a bill of
supply and pay tax at the rate applicable to a
composition taxpayer. The registered recipient
(wholesaler or manufacturer) shall not be entitled
to ITC in respect of the composition tax paid.
ii. If the registered person returning the goods is not
under composition: Such person shall prepare a tax
invoice and pay the tax on the value of supply
declared on such tax invoice. The recipient shall be
eligible to avail ITC of the tax levied on such
invoice subject to the fulfilment of the conditions
specified in Section 16 of the CGSTAct.
Return of time expired goods to be treated as fresh supply
iii. If an unregistered person is returning the goods:
Such person may return the said goods by issuing
any commercial document without charging any
tax on the same.
3. Said circular also provides that if the returned goods are
destroyed by the recipient, then in accordance with the
provisions of Sec. 17(5)(h) of the CGSTAct, 2017 ITC
on the said goods is required to be reversed. Following
illustration has been provided in the referred circular:
4. Referred circular also provides that such time expired
goods can be returned by issuing a credit note by the
supplier who had originally supplied the goods.
Circular further provides that an adjustment of the tax
shown on such credit note can be claimed only if such
credit note is issued within the time limit specified in
sub-section (2) of section 34 of the CGST Act. If a
credit note is issued beyond the stated time limit, the
supplier issuing the credit note will not be able to claim
adjustment of the tax. Consequently there is no
requirement to declare such credit note on the common
portal by the supplier (i.e. by the person who has issued
the credit note) as tax liability cannot be adjusted in this
case. Hence in such scenario from the circular it
appears that even ITC is not required to be reduced by
the registered recipient, if such recipient has claimed
the ITC. An illustration as under has been provided in
the referred circular:
ITC implications if the returned goods are destroyed
Return of time expired goods by issuing Credit Note
“Illustration: Supposedly, manufacturer has availed
ITC of Rs. 10/- at the time of manufacture of medicines
valued at Rs. 100/-. At the time of return of such
medicine on the account of expiry, the ITC available to
the manufacturer on the basis of fresh invoice issued by
wholesaler is Rs. 15/-. So, when the time expired goods
are destroyed by the manufacturer he would be
required to reverse ITC of Rs. 15/- and not of Rs. 10/-.”
Case
1
2
D a t e o fS u p p l y o fgoods frommanufacturer/wholesaler towholesa le r /retailer
1st July, 2017
1st July, 2017
Date of returno f t i m eexpired goodsfrom retailer /wholesaler towholesaler /manufacturer
20thSeptember,2018
20th October,2018
Date of return of time expired goodsfrom retailer / wholesaler towholesaler / manufacturer
Credit note will be issued by thesupplier (manufacturer/wholesaler)and the same to be uploaded by himon the common portal. Subsequently,tax liability can be adjusted by suchsupplier provided the recipient(wholesaler/retailer) has either notavailed the ITC or if availed hasreversed the ITC.
Credit note will be issued by thesupplier (manufacturer/wholesaler)but there is no requirement to uploadthe same on the common portal.Subsequently tax liability cannot beadjusted by such supplier.
ITC implications if the returned goods are destroyed
Critical analysis
Time limit for issuing the credit notes
5. Circular further provides that if the goods which are
returned on the strength of a credit note (within the time
limits or beyond) are destroyed, then the concerned
supplier is required to reverse the ITC attributable to
the manufacture of such goods, in terms of the
provisions of clause (h) of subsection (5) of section 17
of the CGSTAct.
6. The contents of the circular stated above contains many
gaps when one considers the same in light of the legal
provisions. Let us understand the said gaps:
7. The circular through the illustration states that the time
limit for issuing the credit notes in respect of invoices
issued from July 2017 - March 2018 is the end of the
month of September, 2018. Hence in case-2 above, it
provides that tax in respect of the credit note issued on
20th October, 2018 cannot be adjusted. Sec. 34(2) of
the CGST, 2017 which stipulates such time limit is
Baroda Branch of WIRC of ICAI5
relevant and hence reproduced below:
8. Close perusal of the above provision will entail that the
registered person who issues the credit note shall
declare “the details of such credit note in the return” for
the month during which such credit note has been
issued but not later than September following the end of
the financial year in which such supply was made or the
date of furnishing of the relevant annual return,
whichever is earlier. Hence the cut-off date shall be
determined with reference to the “return for the month
of September” wherein “details of credit note” are
required to be declared or the actual date of filing of the
annual return, whichever is earlier. Hence the crucial
question to answer is that what is the “return” wherein
the “details of such credit note” are to be declared ?
9. Sec. 37(1) of the CGSTAct, 2017 read with Rule 59(2)
of the CGST Rules, 2017 clearly provides that the
details of the credit note are to be declared in the
“details of outward supplies” which are to be furnished
in FORM GSTR-1. Rule 61(2) further provides that
PART A of the “return” in FORM GSTR-3 shall be
electronically generated on the basis of information
furnished through FORM GSTR-1, FORM GSTR-2
“Sec. 34(2) Any registered person who issues a credit
note in relation to a supply of goods or services or both
during which such credit note has
been issued following the
end of the financial year in which such supply was
made,
and the tax liability shall
be adjusted in such manner as may be prescribed:
Provided that no reduction in output tax liability of the
supplier shall be permitted, if the incidence of tax and
interest on such supply has been passed on to any other
person.”
shall declare the details of such credit note in the
return for the month
but not later than September
or the date of furnishing of the relevant annual
return, whichever is earlier,
and based on other liabilities of preceding tax periods.
Hence the “return” referred under Sec. 34(2) is the
return in “FORM GSTR-3” wherein details of the
credit note are required to be furnished. Return
furnished in “FORM GSTR-3B” under Rule 61(5) is
not the return wherein such “details of credit note” are
to be declared. Hence in absence of FORM-3, the due
date for issuance of such credit note shall be the date of
furnishing of the relevant annual return.
10. Above conclusion emerges due to the fact that the law
(which is designed on the GSTR 1, 2 & 3 system) is
made to be applied where such system has been
suspended and has been replaced with GSTR-3B.
Hence unless law is amended to make it in line with the
reality of GSTR-3B, such issues will remain open.
11. The referred circular very conveniently says that in
cases where credit note is issued and returned goods are
destroyed, ITC “attributable to the manufacture of such
goods” needs to be reversed as per provisions of Sec.
17(5)(h) of the CGSTAct, 2017. Circular however does
not address the issue with respect to the determination
of such “attributable” ITC (which will include capital
goods as well as input services), if such reversal is
called for. Let us see the legal provisions. Sec. 17(5)(h)
is reproduced below for ready reference:
12. Close reading of the above provision shall entail that
the ITC shall not be available “in respect of goods”
destroyed. Now, whether the said provision can cover
inputs, input services as well as capital goods which
ITC implications
“Sec. 17(5) Notwithstanding anything contained in
sub-section (1) of section 16 and subsection (1) of
section 18, input tax credit shall not be available in
respect of the following, namely:—
(h) goods lost, stolen, destroyed, written off or disposed
of by way of gift or free samples;”
might have been used in/for the manufacture of goods
which have been destroyed ?
13. The interpretation of the term “in respect of” fell on the
apex court in the case of State of Madras vs M/s.
Swastik Tobacco Factory 1966 AIR 1000 (SC). Hon.
Supreme Court held that the Indian tax laws have used
the expression “in respect of" as synonymous with the
expression “on”. Reference was made toArt. 288 of the
Constitution of India; s. 3 of the Indian Income-taxAct,
1922; ss. 3(2) and 3(5), Second Proviso, of the Madras
General Sales Tax Act, 1939; s. 3(1A) of the Central
Excise and Salt Act, 1944; and ss. 9 of the Kerala Sales
Tax Act. It was also held that even if the word
“attributable” is substituted for the words “in respect
of”, the result will not be different, for the duty paid
shall be attributable to the goods. If it was paid on the
raw material it can be attributable only to the raw
material and not to the finished goods.
14. Reference is also invited to Rule 42 & 43 of the CGST
Rules, 2017 which provides for the determination of
the ITC “attributable” to non-business use or exempted
supplies as per the provisions of Sec. 17(1) & (2) of the
CGSTAct, 2017. Abare reading of said Rules will lead
to an inescapable conclusion that the same applies to
only cases covered u/s 17(1) & 17(2). It does not apply
to cases covered u/s 17(5) including clause (h) referred
above. In absence of any mechanism to determine such
“attributable” ITC, the said reversal is not tenable (see
Commissioner of Income Tax vs. B.C. Srinivasa Setty
((1981) 128 ITR 294 (SC)).
15. It is hence suggested to the Government to kindly
clarify on the gaps identified above. Leaving it for the
Courts will do no good to anyone.
Conclusion
Baroda Branch of WIRC of ICAI6
Continuing with the five-step approach to recognize revenue
under Ind AS - 115; the fourth step and fifth step will be
discussed in this issue. We shall also discuss in detail about
contract costs.
Step-4 Allocating the transaction price to performance
obligations
Ind AS 115 requires an entity to allocate transaction price
when there is single transaction price for contract having
multiple performance obligations. At the time of allocation
of the transaction price, entity should ensure that the amount
allocated to each performance obligation represents the
amount of consideration which an entity expects to be
entitled in exchange of promised goods or services.
Entities should determine the standalone selling price for
each performance obligation and allocate the transaction
price based on each item’s relative value to the total value of
the goods and services in the contract.
The stand-alone selling price is the price at which an entity
would sell a promised good or service separately to a
customer and is best evidenced when the entity sells that
good or service separately in similar circumstances and to
similar customers. In many situations, stand-alone selling
prices will not be readily available with entity. In those cases,
the entity must estimate the stand-alone selling price by
considering all information reasonably available, such as
market conditions, entity-specific factors, information about
customers, etc.
Suitable methods for estimating the stand-alone selling price
of a good or service include, but are not limited to:
Contributed by : CA. Dipti Kodwani & CA. Ravisha Kariyacan be reached at [email protected] & [email protected]
Ind AS 115 - Revenuefrom Contracts with
Customers Part 4
Method
Adjusted marketassessmentapproach
Expected costplus a marginapproach
Residual approach
Description
This approach considers the market in whichgoods or services is sold and estimates theprice that a customer in that market would bewilling to pay. For example, an entity may takeinto consideration prices of entity’scompetitors for similar goods or services andadjusting those prices as necessary to reflectthe entity’s costs and margins.
Applying this approach can be difficult whenentity is selling relatively new goods orservices because estimating market demandmay be difficult in those cases.
This approach considers entity’s expected costof goods or services and adding appropriatemargins for that good or service.
This approach involves deducting from thetotal transaction price the sum of the estimatedstandalone selling prices of other goods andservices in the contract to estimate astandalone selling price for the remaininggoods or services. This method is permittedonly if the entity either:
a. sells the same good or service to differentcustomers (at or near the same time) fordifferent prices; or
b. has not previously sold good or service ona standalone basis and has not yetestablished a price for that good orservice.
A combination of methods may need to be used to estimate
the stand-alone selling prices of the goods or services
promised in the contract if two or more of those goods or
services have highly variable or uncertain stand-alone selling
prices.
Customers often receive a discount for purchasing
multiple goods and/or services as a bundle for single
transaction price. Discounts are allocated to all the
Exceptions to general allocation principles
1) Allocation of a discount
performance obligations in an arrangement based on
their relative standalone selling prices, so that the
discount is allocated proportionately to all performance
obligations.
However, an entity shall allocate a discount entirely to
one or more, but not all, performance obligations in the
contract if all the following criteria are met:
(a) the entity has standalone selling price of each good
or service in the contract;
(b) the entity also regularly sells on a stand-alone
basis a bundle of those distinct goods or services at
a discount; and
(c) the discount attributable to each bundle of goods
or services is substantially the same as the discount
in the contract.
Contracts may contain an element of consideration that
is variable or contingent upon certain thresholds or
events being met or achieved. For example, an entity
could have the right to additional consideration upon
early delivery of a product in an arrangement that
includes multiple products.
Var iable cons idera t ion wi l l be a l loca ted
proportionately to all the separate performance
obligations under the relative stand-alone selling price
allocation method. However, an entity shall allocate a
variable amount and subsequent changes to that
amount– entirely to a performance obligation, only if
both of the following criteria are met:
a. The variable payment relates specifically to the
entity’s efforts towards, satisfying that particular
performance obligation.
b. The result of the allocation is consistent with the
amount of consideration to which the entity
expects to be entitled in exchange for the promised
goods or services.
2) Allocation of variable consideration
Baroda Branch of WIRC of ICAI7
Above discussion can be summarized as:
A Company provides IT system establishment and support
service to its client. It enters into contract with its customer
for one-time establishment of Local Area Network,
development of Server and support services aggregating to
Rs. 100,000. As per terms of contract, Company is eligible
for Rs.10,000 as an incentive (in addition to above fees), if
issues raised are solved within time specified by the client.
a) How will the transaction price of Rs.100,000 be
allocated to performance obligations?
b) What will be the accounting treatment for the incentive
amount assuming that Company is able to solve issues
raised by the client in 100% of the cases within time
specified by the client?
The Company determines that each of the promised goods or
services represents a separate performance obligation
because it frequently establishes local area network on a
stand-alone basis, the stand-alone selling price of the same is
Rs.25,000. The Company develops the Server and estimates
the stand -alone selling price of Rs. 45,000 based on the
underlying cost and the amount of margin the company
believes the market will bear ((i.e., the expected cost plus a
margin approach).
(a) Company needs to allocate the Transaction price of
Let us understand the same with an example
Example 1:
Solution:
Rs.100,000 to each performance obligation based on
stand-alone selling price as under:
* Stand-alone selling price of support service:
Total Transaction Price- Stand-alone Selling Price of
other obligations
Rs.1,00,000- (Rs. 25,000+ Rs. 45,000) = Rs. 30,000
(b) The eligible incentive represents variable
consideration and is solely associated with provision of
support services within stipulated time and hence the
entire incentive of Rs.10,000 shall be allocated to
support services.
A Company sells a photocopier machine for Rs. 100,000
with a contractual understanding that it will also do
maintenance for five years. In certain other transactions
where the Company has sold photocopier machines without
maintenance, the value is Rs. 80,000. If the maintenance
contract is taken separately for 5 years, its value is Rs.
30,000. How should the Company allocate transaction price
of Rs. 100,000?
The Company should allocate the transaction price of Rs.
100,000 to the Photocopier Machine and maintenance
service based on standalone selling price:
Photocopier Machine: Rs. 72,727 (Rs.100,000 x Rs.
80,000/ Rs. 110,000)
Maintenance Service: Rs. 27,273 (Rs. 100,000 x Rs.
30,000/Rs. 110,000)
Performance Obligation Method Used Allocation ofTransactionprice (Rs.)
Establishment of Local Observable Price 25,000Area Network
Development of Server Expected Cost 45,000plus a margin
Support service Residual 30,000*approach
Total Transaction Price 1,00,000
Example 2:
Solution:
The allocation results in discount of Rs. 10,000 being
allocated proportionately to the two performance
obligations.
Transaction price can change as a result of contract
modification. An entity should allocate to the performance
obligation any subsequent changes in transaction price on the
same basis as was allocated at contract inception. An entity
should not reallocate the transaction price to reflect changes
in stand-alone selling prices after contract inception.
Amounts allocated to a satisfied performance obligation are
recognised either as revenue or as a reduction in revenue in
the period the change occurs.
Under Ind AS 115, an entity recognizes revenue when the
entity satisfies a performance obligation by transferring a
promised good or service to a customer. Transfer takes place
when the customer obtains control of the good or services.
‘Transfer of control’ is different from ‘Transfer of significant
risks and rewards’as given in IndAS 18 Revenue.
Transfer of control is said to take place when customer can
direct the use of that asset and obtains substantially all the
remaining benefits from the asset. It includes the ability to
prevent others from using and obtaining the benefits from an
asset. Benefits from an asset basically refers to cash inflows
that can be obtained directly or indirectly from an asset, say
for example by:
(a) using that asset to produce goods or provide services;
(b) using that asset to increase the value of other assets;
(c) using that asset to settle liabilities;
(d) selling or exchanging that asset;
(e) pledging the asset to secure a loan; and
(f) holding the asset.
Hence, practically an entity should assess transfer of control
for recognising revenue from perspective of customer.
Changes in estimated transaction price
Step 5: Recognize Revenue
When Transfer of Control take place?
Point in time vs. Over time
Allocating Transaction PricePerformanceOblilgation 1
PerformanceOblilgation 2
PerformanceOblilgation 3
Determine stand-alone selling prices - is the price directly observable?
Yes No
Use observableprices
Estimate the price
Adjusted marketassessmentapproach
Expected costplus approach
Residual approach
Exceptions to theallocation requirement:• Discount
Variable consideration•
Baroda Branch of WIRC of ICAI8
For each performance obligation identified, an entity shall
determine at contract inception whether it satisfies the
performance obligation over time or satisfies the
performance obligation at point in time. If an entity does not
satisfy a performance obligation over time, the performance
obligation is satisfied at a point in time.
Recognition of revenue at ‘point in time’ indicates
recognising revenue either on completion of contract or
when condition for revenue recognition is met and
recognition of revenue at ‘point over time’ indicates
recognising revenue based on work completion i.e
percentage of completion method basis.
An entity recognises revenue over time, if any one of
following criteria is met:
• The customer can control the asset as it is created or
enhanced.
E.g. Contract to build customised plant on the
customer’s land based on specification provided by the
customer and work done till date remains with
customer.
• The entity transfers benefit of the services to the
customer as it performs. Normally performance
obligation is satisfied over time if another entity will
not be required to rework on the portion of work which
is already done by an entity if that other entity is
required to complete the remaining performance
obligation.
E.g. Software service company engaged in
development of customised software and providing
support services recognises revenue from software
support services at point over time since it is provided
by the company and used by the client simultaneously.
• The entity’s performance creates or enhances an asset
that has no alternative use to the entity and is specific to
customer’s requirement, and the entity has the right to
receive payment for work performed to date.
Performance obligations satisfied over time
E.g. Construction of specific machinery on instruction
of customer, which cannot be used by any other
customer and company has right to receive payment for
work completed till date.
If none of the above criteria is met, then performance
obligation is satisfied at point in time when there is transfer of
control. For this, an entity shall consider indicators of the
transfer of control by analysing whether:
• The entity has present right to payment for the asset
• Legal title is passed to the customer
• There is transfer of physical possession of asset to
customer
• Significant risks and rewards of ownership of the asset
transferred to customer
• The Customer has accepted the asset
Ind AS 115 discusses two methods that are appropriate for
measuring an entity’s progress toward completion of a
performance obligation. An entity shall apply single method
for each performance obligation satisfied over time
Methods for measuring progress to recognise revenue
over time
Method
OutputMethod
Based onmeasurementof resultsthat areachieved andvalue that istransferredto thecustomer
Examples
• Surveys ofperformancecompleted to date,
• Appraisals ofresults achieved,
• Milestonesreached,
• Time elapsed andunits produced, or
• Units delivered
Description
• If an entity has a rightto receiveconsideration from acustomer based onwork completed todate, then the entitymay recognize revenueequivalent to anamount to which theentity has a right toinvoice.
• Since this methodmeasures directly theperformance, it isconsidered asappropriate depictionof entity’sperformance.
InputMethod
Uses costsincurredrelative tototalestimatedcosts todeterminethe extent ofprogresstowardscompletion
• Resourcesconsumed,
• Labour hoursspent,
• Costs incurred,
• Machine hoursused, or
• Time lapsed
• Revenue can berecognised on astraight-line basis ifefforts are consumedevenly over theperformance period
• Only those costs whichrelate to the transfer ofcontrol of goods orservices to thecustomer must beincluded
Ability to reasonably measure progress
Example:
Solution
An entity shall recognise revenue for a performance
obligation satisfied over time only if the entity is able to
measure progress towards satisfaction of the performance
obligation reasonably.
In those circumstances, where an entity is not able to
reasonably measure the outcome of a performance obligation
but expects to recover the costs that is incurred in satisfying
the performance obligation, the entity shall recognise
revenue only to the extent of the costs incurred till the time
the outcome of the performance obligation can be measured
reliably.
The company entered into an agreement with customer for
supply of specified number of books till 31st March 2018.
The contract terms stipulated that the Company must
complete the contract before 31st March 2018, and in the
event of failure, only 75% of the cost incurred will be
reimbursed. Company could complete only 85% of the
assignment till 31st March, 2018. Till that date the company
has incurred cost of Rs.4,00,000 and has sought an extension
of time but it is not sure whether the extension will be granted
or not. How revenue will be recognised in given situation for
the year ended 31st March 2018?
In the present case, the outcome of the contract cannot be
measured reliably, but it is certain that the company can
Baroda Branch of WIRC of ICAI9
recover the 75% of the cost incurred as per terms of the
agreement.Accordingly, the Company can recognise 75% of
the cost incurred as revenue, i.e., Rs.3,00,000.
Ind AS 115 specifies the accounting treatment for the cost
that are relatable to contracts that an entity incurs to obtain
and fulfil contract to provide promised goods and services to
customers.
Incremental cost of obtaining contract with customer
(i.e cost incurred solely to obtain contracts and would
not have been incurred if contract is not obtained)
should be recognised as an asset if entity expects to
recover those costs and shall be amortised over the
period of the contract. All other cost incurred should be
recognise as an expense unless those costs are
specifically chargeable to customer as per terms of
contract irrespective of whether contract is obtained or
not. Further an entity may recognise contract cost as an
expense immediately when it is incurred when the asset
resulting from capitalization of such cost is amortised
within one year or less.
Example- Sales commission paid to sales manager on
obtaining contract is incremental cost of obtaining
contract. However fixed salaries of employees or
advertisement and marketing expenses are not
incremental cost of obtaining contract since this cost an
entity would incur irrespective contract is obtained or
not.
Contract Costs
1) Costs to obtain a contract
Ind AS 115 explicitly states that if contract costs are incurred
in fulfilling a contract that are not within the scope of another
standard, an entity shall recognise those cost as an asset if
those cost meet all the following criteria:
a) Cost relates directly to contract or to specific
anticipated contract. This may include any of the
following:
• Direct labour (e.g. salaries and wages of employees
specifically engaged to provide goods or services
directly to the customer)
• Direct Materials (e.g. material purchased for
providing the promised goods or services to the
customer)
• Allocation of costs that relate directly to the contract
(e.g. depreciation on assets used in fulfilling the
contract)
• Cost that are explicitly chargeable to the customer
under terms of contract (i.e. Training to technical
personnel on new technology for fulfilling contract
and chargeable to customer as per terms of contract)
• Other costs that are incurred only because an entity
has entered into the contract
b) Incurrence of cost either generates or enhances
resource of the entity that will be used in satisfying
performance obligations in the future. Significant
judgement may be required to determine the same.
c) Such cost incurred are expected to be recovered from
customer.
If any of the above criteria are not met, cost incurred should
be expensed as incurred. This may include:
a) General and administrative costs
b) Cost of wasted materials, labour or other resources
which were not included in contract price.
c) Cost that relates to performance obligation which is
already satisfied or contract which is partially satisfied
but cost relating to unsatisfied portion cannot be
identified separately.
The Company is engaged into manufacturing of engineering
goods and it enters into contract with new customer for
which following cost are incurred:
1. Rent paid for premises
2. Salary to sales person (Fixed)
3. Commission to sales person (Variable)
4. Advertisement Cost
5. Material Purchased & labour services availed for
delivering promised goods or services
How such cost will be dealt with?
Rent paid Expense
Salary to sales person (Fixed) Expense
Commission to sales person (Variable) Capitalize
Advertisement cost Expense
Material Purchased & labour services Capitalizeavailed for delivering promisedgoods or services
Capitalized contract costs are amortized with expense
recognised on systematic basis to reflect entity’s transfer of
the related goods or services.
An entity shall carry out impairment analysis and recognise
an impairment loss in profit or loss if the carrying amount of
an asset recognised exceeds remaining amount of
consideration the entity expects to receive in exchange for
providing the goods and services less the remaining costs
that relate directly to providing those goods and services and
not recognised as expenses.
Example
Solution
Cost Treatment
Amortization and impairment
Costs to obtain a contractDo the costs incurred to obtain a contract represent consideration
paid/payable to the customer?
Apply Ind AS 115guidance (reduction
from revenue)
Yes
Yes
YesNo No
No
No
Yes
Capitalise the costs
Are the costs incrementalexpected to be recovered?
Expense as incurred
Do they meet the capitalisationcriteria as fulfilment costs?
Would the costs be incurred regardless ofwhether the contract is obtained?
Baroda Branch of WIRC of ICAI10
Contributed by :can be reached at [email protected]
CA. Anirudh Sonpal
Judicial Decisions onIndirect Taxes
I. LEVY& SUPPLY
1.1 The Honourable High Court, while disposing the
petition filed on levy of Service Tax/GST on fees for
license for sale of liquor, observed that in view of the
decision of the GST Council in its 26th meeting on 10-
3-2018 that no service tax/GST on such fee, the WP
seeking quashing of notice issued to petitioner seeking
information, becomes infructuous.
[Divya Singla vs UoI – P&H HC]
1.2 The activities performed by the employees at the
corporate office in the course of or in relation to
employment such as accounting, other administrative
and IT system maintenance for the units located in the
other states as well i.e. distinct persons as per Section
25(4) of the Central Goods and Services Tax Act, 2017
(CGST Act) shall be treated as supply as per Entry 2 of
Schedule I of the CGSTAct.
[ColumbiaAsia Hospitals Pvt Ltd –AAR Karnataka]
1.3 TheApplicant is engaged in manufacture and supply of
beer under various brand names. The Applicant, apart
from manufacturing beer on its own, also has
manufacturing arrangement with contract brewing /
bottling units (CBU) who manufacture brands of beer
belonging to the applicant and supply such beer to
market. CBUs manufacture beer bearing brands owned
by the applicant by procuring raw materials, packaging
mater ials , incurr ing overheads and other
manufacturing costs etc. on its own and sell the beer
directly to Government corporations / wholesale
depending on the state market. The CBUs, upon the
sale of the goods, pay the statutory levies and taxes. The
CBUs further account for the manufacturing cost and
distribution overheads in their books of account as they
had procured all the resources for the manufacture of
the beer. Further they retain a certain amount of profit.
After accounting all these revenues, the CBUs transfer
the balance amount to the applicant.
TheAAR ruled that:
(i) The CBUs are not engaged in supply of service to
the applicant and therefore there does not arise any
liability to pay GST on the amount retained by the
CBUs as their profit.
(ii) GST is payable by the Brand owner (UBL) on
Surplus Profit transferred by the CBU to brand
owner out of the manufacturing activity and the
supply of service to the CBUs is classified under
Service Code (Tariff) 999799 and liable to pay
GST at 18% (CGST-9%, SGST-9%) on the
amount received from the CBUs.
[United Breweries Ltd –AAR Karnataka]
2.1 First stage dealers are eligible to avail benefit of cenvat
credit in relation to goods which were purchased prior
to one year from date when GST came into effect. The
benefit of credit of eligible duties on the purchases
made by the first stage dealer as per the then existing
Cenvat Credit rules was a vested right. By virtue of
clause (iv) of sub-section (3) of section 140 of CGST
Act such right has been taken away with retrospective
effect in relation to goods which were purchased prior
to one year from the appointed day. This retrospectivity
given to the provision has no rational or reasonable
basis for imposition of the condition. The reasons cited
in limiting the exercise of rights have no co-relation
with the advent of GST regime; same factors,
parameters and considerations of "in order to co-relate
II. INPUTTAX CREDIT
the goods or administrative convenience" prevailed
even under the Central Excise Act and the Cenvat
Credit Rules when no such restriction was imposed on
enjoyment of Cenvat Credit in relation to goods
purchased prior to one year. The Honourable High
Court thus observed that clause (iv) of sub-section(3) of
section 140 is unconstitutional and therefore, the same
is struck down.
[Filco Trade Centre Pvt Ltd vs UoI – Gujarat HC]
2.2 'Telecommunication tower' does not come within
purview of goods in as much as same being an
immovable property and Input Tax Credit on
'telecommunication tower' is not admissible as per
explanation to section 17(6) of CGST/SGSTAct, 2017.
However, infrastructure provided by the applicant,
which though fixed to the earth, can be moved and
shifted without damaging the structure, in not an
immovable property akin to Telecommunication
Tower; hence ITC would be available on such
telecommunication infrastructure, which is movable
property and can be classified as ‘goods’.
[Vindhya Telelinks Ltd –AAR Uttarakhand]
With reference to levy of GST on restaurant services,
theAAR observed that right to avail ITC is not absolute
and is subject to the attached terms and conditions.
Notification 46/2017 – Central Tax (Rate) has provided
the GST rate of 5% with no ITC on input goods and
services; since the notification has used the word
‘shall’, the option to charge and pay GST @ 18% and
claim ITC is not available.
[Coffee Day Global Ltd –AAR Karnataka]
III. RATE
Baroda Branch of WIRC of ICAI11
Snap Gallery
Workshop on RERA on 16 & 17.10.2018 Workshop on TALLY on 19 & 20.10.2018
CA. Harsh Patel CA. Tejas Purohit Mr. Harsh Patel
Full Day Seminar on GST on 27.10.2018
CA. Deepak Bholusaria CA. Nagesh Bajaj CA. Dhruvank Parikh
Stu
dy
Cir
cle
Strategic Analysis of Operating Income on 23.10.2018
CA. Siddharth Jadeja
Wish joys and happinesson this New Year
bloom in your lifeas flowers in a garden
Baroda Branch of WIRC of ICAI
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Meeting with Collector of Vadodara Ms. Shalini Agarwal on 30.10.2018