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PRIME/41st ME/FINAL 1

DLAG No. of Pages: 5 Total Marks: 100 No of Questions: 7 Time Allowed: 3 Hrs

Question no.1 is compulsory Answer any five questions from the remaining six questions

Working notes should form part of the answer 1.

a) X Ltd. supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd. facilitates production of any one spare part for a particular period of time. The following are the cost and other information for the production of the two different spare parts A and B: Per unit Part A Part B Alloy usage 1.6 kgs. 1.6 kgs. Machine Time: Machine A 0.6 hrs 0.25 hrs Machine Time: Machine B 0.5 hrs 0.55 hrs Target Price (`) 145 115 Total hours available: Machine A 4,000 hours Machine B 4,500 hours Alloy available is 13,000 kgs. @ ` 12.50 per kg. Variable overheads per machine hours: Machine A : ` 80 Machine B : ` 100 You are required to identify the spare part which will optimize contribution at the offered price. If Y Ltd. reduces target price by 10% and offers ` 60 per hour of unutilized machine hour, what will be the total contribution from the spare part identified above?

b) Rearrange the activities suitably for leveling the audit executives with the help of time scale diagram if

during first 52 days only 8 to 10 audit executives and during remaining days 16 to 22 audit executives can be made available.

c) ABC Ltd. is planning to introduce Kaizen Costing approach in its manufacturing plant. State whether and why the following are VALID OR NOT in respect of Kaizen Costing. (i) VP (Finance) is of the view that company has to make a huge initial investment to bring a large scale

modification in production process. (ii) Head (Personnel) has made a point that introduction of Kaizen Costing does not eliminate the

training requirement of employees. (iii) General Manager (Manufacturing) firmly believes that only shop floor employees and workers’

involvement is prerequisite of Kaizen Costing approach. (iv) Manager (Operations) has concerns about creation of confusion among employees and workers

regarding their roles and degradation in quality of production.

PRIME A

CADEMY


d) Aditya Decors Ltd. (ADL) is a leading manufacturer of luxury sanitary products and has divided its whole business into different product segments. At the Last year the management of ADL has decided to make some changes in its one of product-line ‘AADee’, the improved version was made available for sale from 1st of April 2014. At the end of the financial year 2014-15, the finance and accounts department has extracted some relevant data for the product line ‘AADee’ to analyse the decision taken last year. The data related with AADee for the financial year 2013-14 and 2014-15 are as follows:

2013-14 2014-15

No. of Units Sold 4,00,000 4,30,000

Selling Price per unit `4,175 ` 4,325

Direct Materials Consumed 24,00,000 kg. 25,10,000 kg.

Cost per kg. of Direct Materials `470 `485

Direct Labour Used 32,00,000 h` 34,80,000 h`

Rate per labour hour `30 ` 31

Fixed Costs `1,60,00,000 ` 1,76,00,000

ADL has the capacity to produce 5,00,000 units of AADee a year. Required: (i) ANALYSE the changes in the operating income from financial year 2013-14 to 2014-15 with respect to the following components: (a) Growth, (b) Price- Recovery and (c) Productivity Components (4 x 5 = 20 Marks)

2. a) After observing heavy congestion of customers over a period of time in a petrol station, Mr. X has

decided to set up a petrol pump facility on his own in a nearby site. He has compiled statistics relating to the potential customers arrival pattern and service pattern as given below. He has also decided to evaluate the operations by using the simulation technique.

Arrivals Services

Inter-arrival time (minutes) Probability Inter-arrival time (minutes) Probability

2 4 6 8 10

0.22 0.30 0.24 0.14 0.10

4 6 8 10

0.28 0.40 0.22 0.10

Assume: (i) The clock starts at 8.00 hours (ii) Only one pump is set up (iii) The following 12 Random Numbers are to be used to depict the customer arrival pattern. (iv) 78, 26, 94, 08, 46, 63, 18, 35, 59, 12, 97 and 82. (v) The following 12 Random Numbers are to be used to depict the customer service pattern. (vi) 44, 21, 73, 96, 63, 35, 57, 31, 84, 24, 05 and 37.

Your are required to find out the (i) Probability of the pump being idle and (ii) Average time spent by a customer waiting in queue (8 Marks)

b) DKD Ltd. makes tow products – X and Y, with the following cost patterns.

Product X Product Y

Direct materials 27 24

Direct Labour at ` 5 per hour 20 25

Variable production overheads at ` 6 per hour 3 6

50 55

Production fixed overheads total ` 3,00,000 per month and these are absorbed on the basis of direct labour hours Budgeted direct labour hours are 25,000 per month. However, the company has carried out an analysis of its production support activities and found that its „fixed cost‟ actually vary in accordance with non-volume-related factors

PRIME A

CADEMY


Activity Cost-driver Product X Product Y Total cost Set-ups Production runs 30 20 ` 40,000 Materials handing Production runs 30 20 `1,50,000 Inspection Inspections 880 3,520 `1,10,000 3,00,000 Budget Production is 1,250 units of product X and 4,000 units of product Y. Required: Given that the company wishes to make a profit of 20% on full production costs calculate the prices that should be charged for products X and Y using the following. (i) Full cost pricing (ii) Activity based cost pricing (iii) Offer your comments on the figures arrived at (a) and (b) (8 Marks)

3.

a) An oil Refinery can blend 3 grades of crude oil to produces Quality A & 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 units of Crude P & 4 units of Crude R to produces 5 units of A & 9 units of B. Because of prior contract commitments, the refinery must produce at least 500 units of A and at least 300 units of B for the next month. It has 1,500 units of Crude Q, 1900 units of Crude P and 1,000 units of Crude R. For each unit of A, refinery receives ` 60 while for each unit of B, it receives ` 90. With reference to LPP, How do you formulate? (8 Marks)

b) Division K is a profit centre which produces three products L,M & N. Each Product has an external market.

Products L M N

External Market Price per unit ` 48 ` 46 ` 40

Variable Cost of Production in Division L ` 33 ` 24 ` 28

Labour Hours required per unit in Div L 3 4 2

Product M can be transferred to Division J, but the maximum quantity that might be required for transfer is 300 units of M.

Products L M N

The maximum External Sales are 800 units 500 units 300 units

Instead of receiving transfers of Product M from Division K, Division J could buy similar product in the open market at a slightly cheaper price of Rs45 per unit. What should the transfer price be for each unit for 300 units of Y, if the total labour hours available in Division K are (i) 3800 hours (ii) 5600 hours

(8 Marks) 4.

a) Division Z is a profit center which produces four products A, B, C and D. Each product is sold in the external market also. Data for the period is:

A B C D

Market Price per unit (`) 150 146 140 130

Variable Cost of Production per unit (`) 130 100 90 85

Labour Hours Required per unit 3 4 2 3

Product D can be transferred to Division Y, but the maximum quantity that may be required for transfer is 2,500 units of D. The maximum sales in the external market are: A 2,800 units B 2,500 units C 2,300 units D 1,600 units Division Y can purchase the same product at a price of ` 125 per unit from outside instead of receiving transfer of product D from Division Z. Required to calculate the „Transfer Price‟ for each unit for 2,500 units of D, if the total labour hours available in Division Z are 20,000 hours? (10 Marks)

PRIME A

CADEMY


b) Expert Roadways Services Pvt. Ltd. is planning to run a fleet of 15 buses in Birpur City on a fixed route.

Company has estimated a total of 2,51,85,000 passenger kilometers per annum. It is estimated buses to have 100% load factor. Buses are purchased at a price of ` 44,00,000 per unit whose scrape value at the end of 5 years life is ` 5,50,000. Seating capacity of a bus excluding a Driver’s seat is 42. Each bus can give a mileage of 5 kmpl. Average cost of fuel is ` 66 per liter. Cost of Lubricants & Sundries per 1,000 km would be ` 3,300. Company will pay ` 27,500 per month to Driver and two attendants for each bus. Other annual charges per bus: Insurance ` 55,000, Garage Charges ` 33,000, Repairs & Maintenance ` 55,000. Route Permit Charges upto 20,000 km is ` 5,500 and ` 2,200 for every additional 5,000 km or part thereof. Required: (i) CALCULATE a suggested fare per passenger/km taking into account markup on cost @20% to cover

general overheads and sufficient profit. (ii) The Transport Sector of Birpur is highly regulated. The Government has fixed the fare @ ` 1.35 for

next 2 years COMMENT on the two year’s profitability taking into consideration the inflation rate of 8%.

Note: Route permit charges is not subject to Inflation. (6 Marks)

5. a) AUD International Co. is a multiproduct firm. It is planning to launch a new product „X- 500‟ in coming

months. Production will be in batches of 1,000 units throughout the life of the product. It is also possible to achieve 90% learning rate but the learning would cease after 64th batch. Other relevant data of product „X-500‟ is as follows:

Expected Life 2,56,000 units

Selling Price per unit `123

Direct Material per unit `36

Direct Labour Cost first batch `52,500

Other Variable Costs `24

Specific Fixed Cost `38,75,000

Required: (i) Calculate the „Expected Profit‟ to be earned from the product over its lifetime. Note: The learning

index for a 90% learning curve is -0.152; (64) –0.152 = 0.5314; (63) –0.152 = 0.5327 (ii) It is now thought that a learning effect will continue for all of the 256 batches that will be produced.

Calculate the „Rate of Learning‟ required to achieve a lifetime product profit of ` 1,00,00,000, assuming that a constant rate of learning applies throughout the products life. (8 Marks)

b) Managing Director of Petro-KL Ltd (PTKLL) thinks that Standard Costing has little to offer in the reporting

of material variances due to frequently change in price of materials. PTKLL can utilize one of two equally suitable raw materials and always plan to utilize the raw material which will lead to cheapest total production costs. However PTKLL is frequently trapped by price changes and the material actually used often provides, after the event, to have been more expensive than the alternative which was originally rejected. During last accounting period, to produce a unit of ‘P’ PTKLL could use either 2.50 Kg of ‘PG’ or 2.50 kg of ‘PD’. PTKLL planned to use ‘PG’ as it appeared it would be cheaper of the two and plans were based on a cost of ‘PG’ of ` 1.50 per Kg. Due to market movements the actual prices changed and if PTKLL had purchased efficiently the cost would have been: ‘PG’ ` 2.25 per Kg; ‘PD’ ` 2.00 per Kg Production of ‘P’ was 1,000 units and usage of ‘PG’ amounted to 2,700 Kg at a total cost of ` 6,480/- You are required to analyze the material variance for ‘P’ by: (i) Traditional Variance Analysis; and (ii) An approach which distinguishes between Planning and Operational Variances. (8 Marks)

PRIME A

CADEMY


6. a) Super Products Ltd. manufactures and sells a single product and has estimated a sales revenue of ` 126

lakhs this year based on a 20% profit on selling price. Each unit of the product requires 3 Ibs. of material A and 1.1/2 Ibs. of material B, for manufacture as well as a processing time of 7 hours in the Machine Shop and 2.1/2 hours on the Assembly Section. Overheads are absorbed at a blanket rate of 33.1/3% on Direct Labour. The factory works 5 days of 8 hours a week in a normal 52 weeks a year. On an average statutory holidays, leave and absenteeism and idle time amount to 96 hours, 80 hours and 64 hours respectively, in a year. The other details are as under: Purchase Price Material A ` 6 per lb. Material B ` 4 per lb. Comprehensive Labour Rate Machine Shop ` 4.00 per hour Assembly Section ` 3.20 per hour No. of Employees Machine Shop 600 Assembly Section 180 Finished Goods Material A Material B Opening Stock 20,000 Units 54,000 lbs. 33,000 lbs Closing Stock (Estimated) 25,000 Units 30,000 lbs. 66,000 lbs You are required to calculate: (i) The number of units of the product proposed to be sold. (ii) Purchases to be made of Materials A and B during the year in rupees. (iii) Capacity utilization of Machine Shop and Assembly Section, along with your comments. (8 Marks)

b) A manufacturer of jeans is interested in developing an advertising campaign that will reach four different

age groups. Advertising campaigns can be conducted through TV, Radio and Magazines. The following table gives the estimated cost in rupees per exposure for each age group according to the medium employed. In addition, Maximum exposure levels possible in each of the media, namely TV, Radio and Magazines are 40, 30 and 20 million respectively. Also the minimum desired exposures within each age group, namely 13-18,19-25,26-35,36 & older, are 30, 25,15 and 10 millions. The objective is to minimize the cost of attaining the minimum exposure level in each age group.

Media Age group

13-18 19-25 26-35 36 & above

TV 12 7 10 10

Radio 10 9 12 10

Magazines 14 12 9 12

(i) Formulate the above as a transportation problem, and find the optimal solution. (ii) Solve this problem if the policy is to provide at least 4 million exposures through TV in the 13-18 age

group and at least 8 million exposures through TV in the age group 19-25. (8 Marks)

7. Answer any four out of the following: a) “In many organizations, initiatives to introduce Balanced Scorecard failed because efforts were made to

negotiate targets rather than to build consensus.” Elucidate b) In an assignment problem to assign jobs to men to minimize the time taken, suppose that one man

does not know how to do a particular job, how will you eliminate this allocation from the solution? c) Comment on the use of opportunity cost for the purpose of: (i) decision-making and (ii) cost control d) “Target costing is less useful in situations where the majority of costs are not locked in during the

design phase”-Explain with example. e) X Ltd. wants to enter in the market with a new product ‘Gamma’. You are required to help

management of X Ltd. in deciding pricing strategy if (i) Demand of the ‘Gamma’ is elastic, (ii) Good possibility of substantial savings on large scale production and (iii) There is threat of competition. (4 x 4 = 16 Marks)

PRIME A

CADEMY

PRIME/41st /ME/FINAL 1

PRIME ACADEMY 41st SESSION MODEL EXAM - FINAL – ADVANCED MANAGEMENT ACCOUNTING

SUGGESTED ANSWERS 1.

(a)

Number of Parts to be Manufactured Part A ` Part B `

Machine “A” (4,000 hrs) 6,666 16,000

Machine “B” (4,500 hrs) 9,000 8,181

Alloy Available (13,000 kg.) 8,125 8,125

Maximum Number of Parts to be manufactured 6,666 8,125

Material (`12.5 × 1.6 kg) 20 20

Variable Overhead: Machine “A” 48 20

Variable Overhead: Machine “B” 50 55

Total Variable Cost per unit 118 95

Price Offered 145 115

Contribution per unit 27 20

Total Contribution for units produced (I) 1,79,982 1,62,500

Spare Part A will optimize the contribution.

Part A `

Parts to be manufactured numbers 6,666

Machine A : to be used 4,000

Machine B : to be used 3,333

Underutilized Machine Hours (4,500 hrs – 3,333 hrs) 1,167

Compensation for unutilized machine hours (1,167hrs × `60) …(II) 70,020

Reduction in Price by 10%, Causing fall in Contribution of `14.50 per unit (6,666 units × `14.5) …(III)

96,657

Total Contribution (I + II – III) 1,53,345

(b) Refer Time Scale Diagram-1:

This is a problem of duration constraint of 100 days as also resource constraint (audit executives). We have to re-arrange the activities so that they can be performed with the given resource availabilities in the stipulated time of 100 days. Refer Time Scale Diagram-2: The critical activities 1-2, 2-4, 4-6, 6-7, and 7-8 would be scheduled first. Activity 1-3 is not critical. However scheduling 1-3 even at the scheduled time zero would involve increase of audit executives to 14 on days 21 & 22, which is in excess of availability. We therefore have to resort to do this by doing overtime. Now activities 2-6 can be delayed by 32 days i.e. instead of starting it on 21st day we can delay it to start on 53rd day. Similarly we delay activities 4-5 and 5-7 by twelve days each to start on 59th day and 73rd day. This would ensure that the resources are demanded as per availability and project completion too take place at 100 days.

PRIME A

CADEMY


Diagram 1

Diagram 2

(c) (i) Invalid: Kaizen Costing is the system of cost reduction procedures which involves making small

and continuous improvements to the production processes rather than innovations or large-scale investment.

(ii) Valid: The training of employees is very much a long-term and ongoing process in the Kaizen costing approach. Training enhances the abilities of employees.

(iii) Invalid: Kaizen costing approach involves everyone from top management level to the shop floor employees. Every employee’s active participation is a must requirement.

(iv) Invalid: Though the aim of Kaizen Costing is to reduce the cost but at the same time it also aims to maintain the quality. Kaizen costing also aims to bring the clarity in roles and responsibilities for all employees.

PRIME A

CADEMY


(d) Analysis of Changes in the Operating Income from Financial Year 2013-14 to 2014-15. Growth Component Revenue Effect of Growth Component =( Actual Units of Output Sold in 2014 -15 less Actual Units of Sold in 2013 -14) ×SellingPricein2013 -14 = (4,30,000units−4,00,000units)×` 4,175 = `12,52,50,000 (F)

PRIME A

CADEMY


PRIME A

CADEMY


2.

(a)

Inter-arrival time Service time

Minutes Probability Cumulative prob Range Minutes Probability

Cumulative prob Range

2 0.22 0.22 00-21

4 0.3 0.52 22-51 4 0.28 0.28 00-27

6 0.24 0.76 52-75 6 0.4 0.68 28-67

8 0.14 0.9 76-89 8 0.22 0.9 68-89

10 0.1 1 90-99 10 0.1 1 90-99

Average waiting time spent by the customer = 140/12 = 11.67 mins. Probability if idle time of petrol station = 12/86 = 0.1395 i.e., 14%

Random for inter arrival

Inter time

Entry in queue

Service time

Random for service Service

Service time

Waiting of customer Idle

1 78 8 8.08 8.08 44 6 8.14 - 8

2 26 4 8.12 8.14 21 4 8.18 2 -

3 94 10 8.22 8.22 73 8 8.3 - 4

4 8 2 8.24 8.3 96 10 8.4 6 -

5 46 4 8.28 8.4 63 6 8.46 12 -

6 63 6 8.34 8.46 35 6 8.52 12 -

7 18 2 8.36 8.52 57 6 8.58 16 -

8 35 4 8.4 8.58 31 6 9.04 18 -

9 59 6 8.46 9.04 84 8 9.12 18 -

10 12 2 8.48 9.12 24 4 9.16 24 -

11 97 10 8.58 9.16 5 4 9.2 18

12 82 8 9.06 9.2 37 6 9.26 14

TOTAL 140 12

PRIME A

CADEMY


(b) (i) The full cost and mark-up will be calculated as follows.

Product X Product Y

Variable Costs 50.00 55.00

Fixed Production overhead

(`3,00,000/ 25,000 = `12 per direct labour hour) 48.00 60.00

98.00 115.00

Profit mark-up (20%) 19.60 23.00

Selling Price 117.60 138.00

(ii) Using activity based costing, overheads will allocated on the basis of cost drivers

X ` Y ` Total `

Set-ups (30:20) 24,000 16,000 40,000

Materials handling (30:20) 90,000 60,000 1,50,000

Inspections (880:3,520) 22,000 88,000 1,10,000

1,36,000 1,64,000 3,00,000

Budget units 1,250 4,000

Overheads per unit (`) 108.80 41.00

The price is then calculated as before

Product X Product Y

Variable cost 50.00 55.00

Production overheads 108.80 41.00

158.80 96.00

Profit (mark-up) (20%) 31.76 19.20

190.56 115.20

(iii) Comments. The result in (b) are radically different from those in (a). On this basis it appears

that the company has previously been making a huge loss on every unit of Product X sold for `117.60. If the market will not accept a price increase, it may be worth considering ceasing production of product X entirely. It also appears that there is scope for a reduction in the price of product Y, and this would certainly be worthwhile if demand for the product Is elastic.

3. (a)

Crude Oil type Older Process Newer Process Available Crude Oil

Q 5 units 3 units 1,500 units

P 7 units 9 units 1,900 units

R 2 units 4 units 1,000 units

Output obtained per process

A = 9 units, B = 7 units A = 5 units, B = 9 units

Revenue obtained per process

(60 × 9) + (90 × 7) = `1,170 (60 × 5) + (90 × 9) = `1,110

Let X, Y the number of times the refinery decides to use Older process and Newer process respectively. The LPP is: Objective: Maximize Revenue Z = 1,170X + 1,110Y Subject to 5X + 3Y ≤ 1,500 (Crude Old Q available)

PRIME A

CADEMY


7X + 9Y ≤ 1,900 (Crude Old R available) 2X + 4Y 1,000 (Crude Oil P available) 9X + 5Y ≥ 500 (Demand of A) 7X + 9Y ≥ 300 (Demand of B) X, Y ≥ 0 (Non-Negativity Assumption)

(b) Computation of Contribution per labour hour from external Sales

Products L ` M ` N `

External Market Price per unit 48 46 40

Variable Cost of Production in Division L 33 24 28

Contribution 15 22 12

Labour Hours required per unit in Div L 3 4 2

Contribution per Labour hour 5 5.50 6

Ranking III II I

Computation of Transfer Price when the capacity is 3800 hours `

Hours required for N=300*2 = 600 Hours required for M=500*4 =2000

2600 L=800*3 2400

5000 The existing capacity is not sufficient to produce the units to meet the external sales. In order to transfer 300 units of M,1200 hours are required in each division K will give up the production of L to this extent. Variable Cost of M `24 (+) Contribution lost by giving up the production Of L to the extent of 1200 hours =1200*5=6000 Opportunity Cost per unit `20 Required Transfer Price `44 Computation of Transfer Price when the capacity is 5600 hours Variable Cost of M `24 (+) Contribution lost by giving up the production Of L to the extent of 600 hours =600*5=3000 Opportunity Cost per unit `10 Required Transfer Price `34

4.

(a) “Ranking of Products When Availability of Time is the Key Factor”

Products A ` B ` C ` D `

Market Price (`) 150 146 140 130

Less: Variable Cost (`) 130 100 90 85

Contribution per unit (`) 20 46 50 45

Labour Hours per unit 3 hrs 4 hrs 2 hrs 3 hrs

Contribution per Labour Hour 6.66.. 11.50 25.00 15.00

Ranking IV III I II

Maximum Demand (units) 2,800 2,500 2,300 1,600

Total No. of Hours 8,400 10,000 4,600 4,800

Allocation of 20,000 Hours on the Basis of Ranking

600* 10,000 4,600 4,800

(*) Balancing Figure

PRIME A

CADEMY


Note -Time required to meeting the demand of 2,500 units of Product D for Division Y is 7,500 hrs This requirement of time viz. 7,500 hrs for providing 2,500 units of Product D for Division Y can be met by sacrificing 600 hours of Product A (200 units) and 6,900 hours of Product B (1,725 units). Transfer Price = Variable Cost + Opportunity Cost =85 + (6,900 hrs x 11.5 + 600 hrs x 6.66...) / 2,500 units 85 + (79,350 + 4,000) / 2,500units = `85 + `33.34 = `118.34

(b) (i) Statement Suggesting Fare per passenger – km (Each Bus)

Particulars Cost per annum (`) Fixed Expenses: Insurance 55,000.00 Garage Charges 33,000.00 Depreciation 7,70,000.00 Running Expenses: Repair and Maintenance 55,000.00 Cost of Lubricants and Sundries 1,38,517.50 Fuel Cost 5,54,070.00 Salary of Driver and Two Attendants 3,30,000.00 Route Permit Charges 16,500.00 Total Cost per annum 19,52,087.50 Add: Markup @ 20% of Total Cost or 16.67% of Total Revenue 3,90,417.50 Total Revenue 23,42,505.00

Rate per passenger- km equals to `1.395

Workings

Total Passenger Kms = 2,51,85,000 Total Buses = 15 Passenger Kmsper bus = 16,79,000(2,51,85,000 Kms / 15) Total Passenger Capacity per bus = 42 – 2 = 40 Annual Distance Covered by a bus = 41,975 Kms. (16,79,000Kms/40)

(ii) Regulated Fare per passenger km is ` 1.35

Profitability Statement for Each Bus

Particulars Year 1 (`) Year 2 (`)

Fixed Expenses:

Insurance 59,400.00 64,152.00

Garage Charges 35,640.00 38,491.20

Depreciation 7,70,000.00 7,70,000.00

Running Expenses:

Repair and Maintenance 59,400.00 64,152.00

Cost of Lubricants and Sundries 1,49,598.90 1,61,566.81

Fuel Cost 5,98,395.60 6,46,267.25

Salary of Driver and Two Attendants 3,56,400.00 3,84,912.00

Route Permit Charges 16,500.00 16,500.00

Total Cost [A] 20,45,334.50 21,46,041.26

Total Revenue (Regulated) [B] 22,66,650.00 22,66,650.00

PRIME A

CADEMY


Profit [B] – [A] 2,21,315.50 1,20,608.74

Profit to Total Revenue 9.76% 5.32%

The gross margin is showing a downward trend because the cost components have taken into the effect of inflation hence increasing year by year but the total revenue has remained stagnant due to Government regulations which resulted in reduction in gross margin per bus. The company’s gross margin to total revenue ratio has come out to be 9.76% and 5.32% in first and second year respectively but initially the company’s desired gross margin to total revenue ratio is 16.67% to cover general overheads and sufficient profit. Though the amount of general overheads is not given but we can safely assume that they may also subject to inflation i.e. increase year by year then in such case the company needs to maintain or increase its gross margin per bus to maintain its net profit after general overheads which is not possible in regulated environment. The information about regulated fare in the given case is regarding first two years only but if this regulated fare scenario persists for further years then the project may not be viable for the company.

5. (a) (i) Total Direct Labour Cost for first 64 batches based on learning curve of 90% (when the direct

labour cost for the first batch is `52,500) The usual learning curve model is y = axb Where y = Average Direct Labour Cost per batch for x batches a = Direct Labour Cost for first batch x = Cumulative No. of batches produced b = Learning Coefficient /Index y = ` 52,500 × (64) –0.152 = `52,500 × 0.5314 = `27,898.50

Total Direct Labour Cost for first 64 batches = 64 batches × `27,898.50 = `17,85,504

Total Direct Labour Cost for first 63 batches based on learning curve of 90% (when the direct labour cost for the first batch is `52,500) y = `52,500 × (63) –0.152 = `52,500 × 0.5327 = `27,966.75 Total Direct Labour Cost for first 63 batches

= 63 batches × `27,966.75 = `17,61,905 Direct Labour Cost for 64th batch = `17,85,504 - `17,61,905 = `23,599 Total Labour Cost over the Product‟s Life

= `17,85,504 + (192 batches × `23,599) = `63,16,512 Statement Showing “Life Time Expected Profit”

Particulars Amount (`)

Sales (`123 × 2,56,000 units) 3,14,88,000

Less: Direct Material (`36 × 2,56,000 units) 92,16,000

Less: Direct Labour 63,16,512

Less: Other Variable Cost (`24 × 2,56,000 units) 61,44,000

Less: Specific Fixed Cost 38,75,000

Profit 59,36,488

PRIME A

CADEMY


(ii) In order to achieve a Profit of `1,00,00,000 the Total Direct Labour Cost over the Product‟s Lifetime would have to equal `22,53,000. Statement Showing “Life Time Direct Labour Cost”

Particulars Amount (`)

Sales (`123 × 2,56,000 units) 3,14,88,000

Less: Direct Material (`36 × 2,56,000 units) 92,16,000

Less: Other Variable Cost (`24 × 2,56,000 units) 61,44,000

Less: Specific Fixed Cost 38,75,000

Less: Profit 1,00,00,000

Direct Labour 22,53,000

Average Direct Labour Cost per batch for 256 batches is `8,800.78 (`22,53,000 / 256 batches). Total Direct Labour Cost for 256 batches based on learning curve of r% (when the direct labour cost for the first batch is `52,500)

y = `52,500 × (256) b `8,800.78 = `52,500 × (256) b 0.1676 = (256) b log 0.1676 = b × log 28 log 0.1676 = b × 8 log 2 log 0.1676 = (logr/log2) × 8 log 2 log 0.1676 = log r8 0.1676 = r8 r = 8√0.1676 r = 80%

(b) Traditional Variance (Actual Vs Original Budget)

Usage Variance = (Standard Quantity – Actual Quantity) x Standard Price = (2,500 Kg – 2,700 Kg) x `1.50 = ` 300 (A) Price Variance = (Standard Price – Actual Price) x Actual Quantity = (`1.50 – `2.40) x 2,700 Kg = `2,430 (A) Total Variance = `300 (A) + `2,430 (A) = `2,730 (A) Operational Variance (Actual Vs Revised) Usage Variance = (2,500 Kg – 2,700 Kg) x `2.25 = `450 (A) Price Variance = (`2.25 – `2.40) x 2,700 Kg = `405 (A) Total Variance = `450 (A) + `405 (A) = `855 (A) Planning Variance (Revised Vs Original Budget) Controllable Variance = (`2.00 – `2.25) x 2,500 Kg = 625 (A) Uncontrollable Variance = (`1.50 – `2.00) x 2,500 Kg = 1,250 (A) Total Variance = `625 (A) + `1,250 (A) = `1,875 (A) Traditional Variance = Operational Variance + Planning Variance = 855 (A) + 1,875 (A) = 2,730 (A)

6. (a)

(i) STATEMENT OF THE NUMBER OF UNITS OF THE PRODUCT PROPOSED TO BE SOLD

Selling Price per unit `90

Total Sales Revenue `1,26,00,000

Number of Units of the Product (proposed to be sold) 1,40,000 units (`1,26,00,000 / `90)

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Working Notes: Statement of selling price per unit of the product Direct Material: ` A: 3.0 lbs × ` 6 18 B: 1.5 lbs × ` 4 6 Direct Labour: Machine Shop: 7 hrs × ` 4 28 Assembly Section: 2.5 hrs × ` 3.20 8 Overhead 33 ⅓% of Direct Labour [(`28+`8) × 33.33...%] 12 Total Cost per unit 72 Add: Profit 20% of Selling Price (or 25% on Cost) 18 Selling Price per unit 90

(ii) STATEMENT OF MATERIALS A AND B TO BE PURCHASED DURING THE YEAR IN RUPEES

Material Consumption (lbs)

Closing Balance (lbs)

Opening Balance (lbs)

Purchase (lbs.)

Purchase Price (`)

Amount (`)

A 4,35,000 (1,45,000*× 3)

30,000 54,000 4,11,000 6 24,66,000

B 2,17,500 (1,45,000* × 1.5)

66,000 33,000 2,50,500 4 10,02,000

Total 34,68,000 (*) Number of units of finished goods to be manufactured during the year = Sales + Closing Stock – Opening Stock = 1,40,000 + 25,000 – 20,000 = 1,45,000 units (iii) CAPACITY UTILISATION STATEMENT OF MACHINE SHOP AND ASSEMBLY SECTION

Particulars Machine Shop Assembly Section

Hours Available# 11,04,000 (600 person × 1,840 hrs) 3,31,200 (180 persons × 1,840 hrs)

Hours Required 10,15,000(1,45,000 units × 7 hrs) 3,62,500 (1,45,000 units × 2.5 hrs)

Surplus/(Deficit) Hours 89,000 (31,300)

Capacity Utilization 91.94% 109.45%

(#) Hours Available [5 Days × 8 Hrs × 52 Weeks – Idle Time (96 + 80 + 64)] Comments: Above statement shows that there are 89,000 excess hours in the machine shop and also a shortage of 31,300 hours in the assembly section. If the workers are interchangeable, the assembly section should utilise the services of workers which may be moved from the machine shop to meet the production target of 1,45,000 units. If the workers are not interchangeable, the assembly section may either resort to overtime working or increase the strength of workers to achieve the budgeted production.

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(b)

It is apparent from the above table that this transportation problem is an unbalanced one. It is balanced by introducing a dummy age category before applying Vogel’s Approximation Method.

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Alternate solution exists

7. (a) Balanced Scorecard is a set of financial and non-financial measures relating to a company’s critical

success factors It is an approach which provides information to management to assist in strategy implementation. Therefore, the components to be included in the Balanced Scorecard must flow from strategy. The targets should be measurable and must flow from strategy and corporate plan of the company. It is necessary that managers should agree to the components and targets because in absence of a consensus, managers may not commit to the targets established by the top management. Moreover, the functions are interdependent and results in one functional area/ perspective (e.g. innovation and learning) have direct bearing on the results in other functional area / perspective (e.g. customer perspective). Therefore, it is not sufficient that individual managers agree to their targets. Successful implementation requires that the top management builds an overall consensus on the components and targets of the Balanced Scorecard. Negotiation undermines the fundamental principle that the components and targets should flow from strategy. As a result, an approach to establish targets through negotiation defeats the very purpose of Balanced Scorecard.

(b) In an assignment minimization problem, if one task cannot be assigned to one person, introduce a

prohibitively large cost for that allocation, say M, where M has a high the value. Then, while doing the row minimum and column minimum operations, automatically this allocation will get eliminated.

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(c) (i) Decision Making: Opportunity costs apply to the use of scarce resources, where resources are not scarce; there is no sacrifice from the use of these resources. Where a course of action requires the use of scarce resources, it is necessary to incorporate the lost profit which will be foregone from using scarce resources. If resources have no alternative use only the additional cash flow resulting from the course of action should be included in decision making as relevant cost. (ii) Cost Control: The conventional variance analysis will report an adverse usage variance and adverse sales volume variance. However, the failure to achieve the budgeted optimum level of output may be due to inefficient usage of scarce resources.

(d) Target costing is most useful in situations where the majority of product costs are locked in during

the product design phase. This is the case for most manufactured products, but only for few services. In the services area, such as consulting, the bulk of all activities can be reconfigured for cost reduction during the “production” phase, which is when services are being provided directly to the customer. In the services environment the “design team” is still present but is more commonly concerned with streamlining the activities conducted by the employees providing the service, which can continue to be enhanced at any time, not just when the initial services process is being laid out.

For example, Design team can lay out the floor plan of a fast-food restaurant, with the objective of creating an arrangement that allows employees to cover the shortest possible distances while preparing food and serving customers; this is similar to the design of a new product. However, unlike a product design, this layout can be readily altered at any time if the design team can arrive at a better layout, so that the restaurant staff can continue to experience high levels of productivity improvement even after the initial design and layout of the facility. In this situation costs are not locked in during the design phase, so there is less need for target costing.

(e) While preparing to enter the market with a new product, X Ltd. has to adopt a skimming or

penetration pricing strategy. Skimming Pricing: It is a policy of high prices during the early period of a product’s existence. This can be synchronised with high promotional expenditure and in the later years the prices can be gradually reduced. Penetration Pricing: Penetrating pricing, means a pricing suitable for penetrating mass market as quickly as possible through lower price offers The company may not earn profit by resorting to this policy during the initial stage. Later on, the price may be increased as and when the demand picks up. X Ltd. should follow ‘Penetration Pricing’ as - (a) Demand of product ‘Gamma’ can be increase by lowering the price as it has elastic demand. (b) There is also scope of substantial savings on large scale production and increase in demand is sustained by the adoption of low pricing policy. (c) The prices fixed at a low level act as an entry barrier to the prospective competitors

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ILAG No of Pages: 2 Total Marks: 100 No of Questions: 7 Time allowed: 3 Hrs Question No. 1 is compulsory.

Candidates are required to answer any five questions from the remaining six Questions

1. KBR Technologies Ltd. is in the development of web applications for various domains. For the development purposes, the company is committed to follow the best practices suggested by System Development Life Cycle. A system development methodology is a formalized, standardized, documented set of activities used to manage a system development project. It refers to the framework that is used to structure, plan and control the process of developing an information system. Each of the available methodologies is best suited to specific kinds of projects, based on various technical, organizational, project and team considerations. Read the above carefully and answer the following:

a) Discuss the Feasibility study and its types under SDLC. (5 Marks) b) What can be various fact finding techniques that may be adopted to gather the requirement?

(5 Marks) c) Briefly describe any five weaknesses of Rapid Application Development (RAD) Methodology.

(5 Marks) d) What are the possible advantages under SDLC? (5 Marks)

2.

a) What do you mean by encryption? Differentiate between private key encryption and public key encryption. (6 Marks)

b) In a Computer-held information system, what types of protection an organization can use to prevent leakage or misuse of information? (6 Marks)

c) While auditing a Disaster Recovery Plan (DRP) for information technology assets, what concerns are required to be addressed? Explain. (4 Marks)

3. a) As an IS auditor, what are the output controls required to be reviewed with respect to application

controls? (6 Marks) b) What do you mean by by an Expert system? Briefly explain some of the properties that potential

applications should possess to qualify for an expert system development? (6 Marks) c) What are the repercussions of cyber frauds on an enterprise? (4 Marks)

4. a) Define the agile mode of software development and discuss its strengths? (6 Marks) b) An enterprise XYZ implemented a Business Continuity Plan and decided to get its plan audited.

What factors should be verified while auditing or self-assessment of the enterprise’s Business continuity management program? (6 Marks)

c) Explain two primary methods, which are used for the analysis f the scope of a project in SDLC?

(4 Marks)

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5.

a) you are appointed to audit the information systems of XYZ Limited. As part of preliminary evaluation, list the major aspects which you would study to gain a good understanding of the technology environment and control issues. (6 Marks)

b) Explain the major ways to control remote and distributed data processing in the new web applications. (6 Marks)

c) The manner of selecting the auditors builds confidence among various stakeholders. Describe

SEBI norms for selecting the auditor. (4 Marks)

6.

a) what do you understand by Transactional Processing System? Briefly explain key activities involved in TPS? (6 Marks)

b) Discuss the key management practices for assessing and evaluating the system of internal controls in an enterprise in detail. (6 Marks)

c) Explain internal controls as per Committee of Sponsoring Organizations of the Tread way Commission (COSO) . (4 Marks)

7. write short notes (Any Four)

a) Buy your Own Devices ( BYOD)

b) Operating System Security

c) General Controls d) Principles of COBIT 5

e) Best practices of Green IT (4 x 4 = 16 Marks)

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PRIME ACADEMY 41st SESSION MODEL EXAM - FINAL - INFORMATION SYSTEM AND CONTROL AUDIT

SUGGESSTED ANSWERS 1.

(a) System Development Life Cycle (SDLC) framework provides system designers and developers to follow a sequence of activities. It consists of a set of steps or phases in which each phase of the SDLC uses the results of the previous one. The SDLC s document driven, which means that at crucial stages during the process documentation is produced. A phase of the SDLC is not complete until the appropriate documentation or artefact is produced. These are sometimes referred as deliverables. Key activities, which are performed in the ‘Requirements Analysis Phase’, are given as follows:

To identify and consult the stakeholders to determine their expectations and resolve their conflicts;

To analyse requirements to detect and correct conflicts and determine priorities;

To verify the requirements to be complete, consistent, unambiguous, verifiable, modifiable, testable and traceable;

To gather data or find facts using tools like - interviewing, research/document collection, questionnaires, observation;

To model activities such as developing models to document Data Flow Diagrams, E-R Diagrams; and

To document activities such as interview, questionnaires, reports etc. and development of a system (data) dictionary to document the modelling activities.

(b) Major points that may be considered for establishing better information protection are given as follows: Not all data has the same value: Each data has a different value and accordingly the information may

be handled and protected differently. Organizations must determine the value of the different types of information in their environment before they plan for the appropriate levels of protection.

Know where the critical data resides: Identification of the location where each data is located enables an organization to establish an integrated security solution.

Develop an access control methodology: Information does not have to be removed to cause damage or to have financial impact. Information that is inadvertently damaged, disclosed or copied without the knowledge of the owner may render the data useless. To guard against this, organizations must establish some type of access control methodology.

Protect information stored on media: Employees can cause considerable damage by walking out the door with information on USB Drives or CD-ROMS. In addition, companies should control magnetic media to reduce the loss of software (both application and operating system) and finally, when migrating from one platform to another, the status of all hard drives and the associated data should be controlled.

Review hardcopy output: The hardcopy output of employees’ daily work should also be reviewed. In addition, ‘what measures are used to safeguard all drafts and working papers’ should also be reviewed.

(c) Major weaknesses of agile methodology are given as follows:

In case of some software deliverables, especially the large ones, it is difficult to assess the efforts required at the beginning of the software development life cycle.

There is lack of emphasis on necessary designing and documentation.

Agile increases potential threats to business continuity and knowledge transfer. By nature, Agile projects are extremely light on documentation because the team focuses on verbal communication with the customer rather than on documents or manuals.

Agile requires more re-work. Because of the lack of long-term planning and the lightweight approach to architecture, re-work is often required on agile projects when the various components of the software are combined and forced to interact.

The project can easily get taken off track if the customer representative is not clear about the final outcome that they want.

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Only senior programmers are capable of taking the kind of decisions required during the development process. Hence, it has no place for newly appointed programmers, unless combined with experienced resources.

Agile lacks the attention to outside integration. Because Agile teams often do not invest the time in identifying and designing the integration points with other systems in advance, the need for an integration point can become a last-minute surprise that often requires re-work, additional time, removal from scope, or a poor-quality product.

2. (a) Encryption: Encryption refers to conversion of data into a secret code for storage in databases and

transmission over networks. The sender uses an encryption algorithm to convert the original message called Clear Text into a coded equivalent called Cipher Text. At the receiving end, the cipher text is decoded (decrypted) back into clear text. The encryption algorithm uses a key, which is a binary number that is typically from 56 to 128 bits in length. The more bits in the key, the stronger the encryption method. Two general approaches to encryption are private key and public key encryption.

Private Key Encryption: It uses a single key known to both the sender and the receiver of the message. To encode a message, the sender provides the encryption algorithm with the key, which is used to produce a cipher text message. The message enters into the communication channel and is transmitted to the receiver’s location, where it is stored. The receiver decodes the message with a decryption program that uses the same key employed by the sender. Public Key Encryption: The public key encryption technique uses two different keys: one for messages and the other for decoding them. Each recipient has a private key that is kept secret and a public key that is published. The sender of a message uses the receiver’s public key to encrypt the message. The receiver then uses his/her private key to decrypt the message. Users never need to share their private keys to decrypt messages, thus reducing the likelihood that it may fall into the hands of any unauthorized person.

(b) There are two basic types of information protection that an organization can use to prevent leakage or

misuse of information, which are given as follows: Preventative Information Protection: It is based on use of security controls, which itself is a group of three types of controls such as Physical, Logical, and Administrative.

Physical controls deal with Doors, Locks, Guards, Floppy Disk Access Locks, Cables locking systems to desks/walls, CCTV, Paper Shredders, Fire Suppression Systems,

Logical controls deal with Passwords, File Permissions, Access Control Lists,Account Privileges, Power Protection Systems, and

Administrative controls deal with Security Awareness, User Account Revocation and Policy.

Restorative Information Protection: If an organization cannot recover or recreate critical information systems in an acceptable time period, the organization will suffer and possibly have to go out of business. Hence, the key requirement of any restorative information system protection plan is that the information systems can be recovered. The restorative information protection program must address the following:

Whether the recovery process has been evaluated and tested recently?

The time taken for restoration,

The quantum of productivity loss,

The strict adherence of plan, and

The time needed to input the data changes since the last backup.

(c) While auditing a Disaster Recovery Plan (DRP) for IT assets, the following concerns are required to be addressed:

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Determine if the plan reflects the current IT environment.

Determine if the plan includes prioritization of critical applications and systems.

Determine if the plan includes time requirements for recovery/availability of each critical system, and that they are reasonable.

Does the disaster recovery/ business resumption plan include arrangements for emergency telecommunications?

Is there a plan for alternate means of data transmission if the computer network is interrupted? Has the security of alternate methods been considered?

Determine if a testing schedule exists and is adequate (at least annually). Verify the date of the last test. Determine if weaknesses identified in the last tests were corrected.

Determine if information backup procedures are sufficient to allow for recovery of critical data.

Determine if copies of the plan are safeguarded by off-site storage.

Does the disaster recovery/ business resumption plan include provisions for Personnel? 3.

(a) As an IS Auditor, various Output Controls required to be reviewed with respect to application Controls are as follows:

Storage and logging of sensitive, critical forms: Pre-printed stationery should be stored securely to prevent unauthorized destruction or removal and usage. Only authorized persons should be allowed access to stationery supplies such as security forms, negotiable instruments, etc.

Logging of output program executions: When programs used for output of data are executed, these should be logged and monitored; otherwise confidentiality/integrity of the data may be compromised.

Spooling/queuing: “Spool” is an acronym for “Simultaneous Peripherals Operations Online”. This is a process used to ensure that the user is able to continue working, while the print operation is getting completed.

Controls over printing: Outputs should be made on the correct printer and it should be ensured that unauthorized disclosure of information printed does not take place. Users must be trained to select the correct printer and access restrictions may be placed on the workstations that can be used for printing.

Report distribution and collection controls: Distribution of reports should be made in a secure way to prevent unauthorized disclosure of data. A log should be maintained for reports that were generated and to whom these were distributed. Uncollected reports should be stored securely.

Retention controls: Retention controls consider the duration for which output should be retained before being destroyed. Consideration should be given to the type of medium on which the output is stored. Retention control requires that a date should be determined for each output item produced.

(b) Expert System - An Expert System is highly developed Decision Support System that utilizes knowledge

generally possessed by an expert to share a problem. Expert Systems are software systems that imitate the reasoning processes of human experts and provide decision makers with the type of advice they would normally receive from such expert systems. For instance, an Expert System in the area of investment portfolio management might ask its user a number of specific questions relating to investments for a particular client like – how much can be invested. Does the client have any preferences regarding specific types of securities? And so on.

Some of the properties that potential applications should possess to qualify for Expert System development are given as follows:

Availability – One or more experts are capable of communicating ‘how they go about solving the problems to which the Expert System will be applied.’

Complexity – Solution of the problems for which the Expert Systems will be used is a complex task that requires logical inference processing, which would not be easily handled by conventional information processing.

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Domain – The domain, or subject area, of the problem is relatively small and limited to a relatively well-defined problem area.

Expertise – Solutions to the problem require the efforts of experts. That is, only a few possess the knowledge, techniques, and intuition needed.

Structure – The solution process must be able to cope with ill-structured, uncertain, missing, and conflicting data, and a dynamic problem-solving situation.

(c) The repercussions of cyber frauds on an enterprise can be viewed under the following dimensions:

Financial Loss: Cyber frauds lead to actual cash loss to target company/organization. For example, wrongfully withdrawal of money from bank accounts.

Legal Repercussions: Entities hit by cyber frauds are caught in legal liabilities to their customers. Section 43A of the Information Technology Act, 2000, fixes liability for companies/organizations having secured data of customers. These entities need to ensure that such data is well protected. In case a fraudster breaks into such database, it adds to the liability of entities.

Loss of credibility or Competitive Edge: News that an organizations database has been hit by fraudsters, leads to loss of competitive advantage. This also leads to lose credibility.

Disclosure of Confidential, Sensitive or Embarrassing Information: Cyber- attack may expose critical information in public domain. For example, the instances of individuals leaking information about governments secret programs.

Sabotage: The above situation may lead to misuse of such information by enemy country. 4.

(a) Agile Model: This is an organized set of software development methodologies based on the “iterative” and “incremental” development, where requirements and solutions evolve through collaboration between self-organizing, cross-functional teams. It promotes adaptive planning, evolutionary development and delivery; time boxed iterative approach and encourages rapid and flexible response to change. It is a conceptual framework that promotes foreseen interactions throughout the development life cycle. Some of the strengths of Agile Model identified by the experts and practitioners include the following:

Agile methodology has the concept of an adaptive team, which enables to respond to the changing requirements.

The team does not have to invest time and efforts and finally find that by the time they delivered the product, the requirement of the customer has changed.

Face to face communication and continuous inputs from customer representative leaves a little space for guesswork.

The documentation is crisp and to the point to save time.

The end result is generally the high quality software in least possible time duration and satisfied customer.

(b) An audit or self-assessment of the enterprise’s Business Continuity Management (BCM) program should

verify the following factors:

All key products and services and their supporting critical activities and resources have been identified and included in the enterprise’s BCM strategy;

The enterprise’s BCM policy, strategies, framework and plans accurately reflect its priorities and requirements (the enterprise’s objectives);

The enterprise’ BCM competence and its BCM capability are effective and fit-for-purpose and will permit management, command, control and coordination of an incident;

The enterprise’s BCM solutions are effective, up-to-date and fit-for-purpose, and appropriate to the level of risk faced by the enterprise;

The enterprise’s BCM maintenance and exercising programs have been effectively implemented;

BCM strategies and plans incorporate improvements identified during incidents and exercises and in the maintenance program;

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The enterprise has an ongoing program for BCM training and awareness;

BCM procedures have been effectively communicated to relevant staff, and that those staff understand their roles and responsibilities; and

Change control processes are in place and operate effectively.

(c) Two primary methods which are used for the analysis of the scope of a project in SDLC are given as follows: • Reviewing Internal Documents: The analysts conducting the investigation first try to learn about the

organization involved in, or affected by, the project. For example, to review an inventory system proposal, an analyst may try to know how the inventory department operates and who are the managers and supervisors. Analysts can usually learn these details by examining organization charts and studying written operating procedures.

• Conducting Interviews: Written documents tell the analyst how the systems should operate, but they may not include enough details to allow a decision to be made about the merits of a systems proposal, nor do they present users' views about current operations. To learn these details, analysts use interviews. Interviews allow analysts to know more about the nature of the project request and the reasons for submitting it. Usually, preliminary investigation interviews involve only management and supervisory personnel.

5. (a) As a part of preliminary evaluation, the major aspects which should be studied to gain a good

understanding of the technology environment and related control issues are as follows:

Analysis of business processes and level of automation,

Assessing the extent of dependence of the enterprise on Information Technology to carry on its businesses i.e. Role of IT in the success and survival of business,

Understanding technology architecture which could be quite diverse such as a distributed architecture or a centralized architecture or a hybrid architecture,

Studying network diagrams to understand physical and logical network connectivity,

Understanding extended enterprise architecture wherein the organization systems connect seamlessly with other stakeholders such as vendors (SCM), customers(CRM), employees (ERM) and the government,

Knowledge of various technologies and their advantages and limitations is a critical competence requirement for the auditor. For example, authentication risks relating to e-mail systems,

And finally, studying Information Technology policies, standards, guidelines and procedures.

(b) Major ways that can be used for controlling of the remote and distributed data processing applications are given as follows: • Remote access to computer and data files through the network should be implemented. • A terminal lock can assure physical security to some extent. • Applications that can be remotely accessed via modem and other devices should be controlled

appropriately. • Terminal and computer operations at remote locations should be monitored carefully and frequently

for violations. • In order to prevent the unauthorized users to gain entry into the system, there should be proper

control mechanisms over system documentation and manuals. • Data transmission over remote locations should be controlled. The location, which sends data should

attach needed control information that helps the receiving location to verify the genuineness and integrity.

• When replicated copies of files exist at multiple locations, it must be ensured that all are identical copies contain the same information and checks are also done to ensure that duplicate data does not exist.

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(c) The SEBI norms for Auditor Selection are as follows: • Auditor must have minimum 3 years of experience in IT audit of Securities Industry participants e.g.

stock exchanges, clearing houses, depositories etc. The audit experience should have covered all the major Areas mentioned under SEBI’s Audit Terms of Reference (TOR).

• The Auditor must have experience in/direct access to experienced resources in the areas covered under TOR. It is recommended that resources employed shall have relevant industry recognized certifications e.g. CISA (Certified Information Systems Auditor) from ISACA, CISM (Certified Information Securities Manager) from ISACA, GSNA (GIAC Systems and Network Auditor), CISSP (Certified Information Systems Security Professional) from International Information Systems Security Certification Consortium (ISC)².

• The Auditor should have IT audit/governance frameworks and processes conforming to industry leading practices like Co BIT.

• The Auditor must not have any conflict of interest in conducting fair, objective and independent audit of the Exchange/Depository. He should not have been engaged over the last three years in any consulting engagement with any departments/units of the entity being audited.

• The Auditor may not have any cases pending against its previous auditees, which fall under SEBI’s jurisdiction, which point to its incompetence and/or unsuitability to perform the audit task.

6. (a) Transaction Processing System (TPS): At the lowest level of management, TPS is an information system

that manipulates data from business transactions. Any business activity such as sales, purchase, production, delivery, payments or receipts involves transaction and these transactions are to be organized and manipulated to generate various information products for internal and external use. For example, selling of a product to a customer will give rise to the need of further information like customer billing, inventory status and increase in account receivable balance. TPS will thus record and manipulate transaction data into usable information.

Major activities involved in a TPS are given as follows: • Capturing data and organizing in files or databases; • Processing files/databases using application software; • Generating information in the form of reports; and • Processing queries from various quarters of the organization.

(b) The key management practices for assessing and evaluating the system of internal controls in an

enterprise are given as follows: • Monitor Internal Controls: Continuously monitor, benchmark and improve the IT control environment

and control framework to meet organizational objectives. • Review Business Process Controls Effectiveness: Review the operation of controls, including a review

of monitoring and test evidence to ensure that controls within business processes operate effectively. It also includes activities to maintain evidence of the effective operation of controls through mechanisms such as periodic testing of controls, continuous controls monitoring, independent assessments, command and control centres, and network operations centres. This provides the business with the assurance of control effectiveness to meet requirements related to business, regulatory and social responsibilities.

• Perform Control Self-assessments: Encourage management and process owners to take positive ownership of control improvement through a continuing program of self- assessment to evaluate the completeness and effectiveness of management’s control over processes, policies and contracts.

• Identify and Report Control Deficiencies: Identify control deficiencies and analyze and identify their underlying root causes. Escalate control deficiencies and report to stakeholders.

• Ensure that assurance providers are independent and qualified: Ensure that the entities performing assurance are independent from the function, groups or organizations in scope. The entities performing assurance should demonstrate an appropriate attitude and appearance, competence in

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the skills and knowledge necessary to perform assurance, and adherence to codes of ethics and professional standards.

• Plan Assurance Initiatives: Plan assurance initiatives based on enterprise objectives and conformance objectives, assurance objectives and strategic priorities, inherent risk resource constraints, and sufficient knowledge of the enterprise.

• Scope assurance initiatives: Define and agree with management on the scope of the assurance initiative, based on the assurance objectives.

• Execute assurance initiatives: Execute the planned assurance initiative. Report on identified findings. Provide positive assurance opinions, where appropriate, and recommendations for improvement relating to identified operational performance, external compliance and internal control system residual risks.

(c) As per Committee of Sponsoring Organizations of the Tread way Commission (COSO),Internal Control is

comprised of five interrelated components:

Control Environment: For each business process, an organization needs to develop and maintain a control environment including categorizing the criticality and materiality of each business process, plus the owners of the business process.

Risk Assessment: Each business process comes with various risks. A control environment must include an assessment of the risks associated with each business process.

Control Activities: Control activities must be developed to manage, mitigate, and reduce the risks associated with each business process. It is unrealistic to expect to eliminate risks completely.

Information and Communication: Associated with control activities are information and communication systems. These enable an organization to capture and exchange the information needed to conduct, manage, and control its business processes.

Monitoring: The internal control process must be continuously monitored with modifications made as warranted by changing conditions.

7. (a) Mobile Computing and Buy Your Own Devices (BYOD): Mobile computing, including BYOD is the single

most radical shift in business since the PC revolution of the 1980s. Over the next decade, it will have a huge impact on how people work and live, how companies operate, and on the IT infrastructure. These services will focus on the issues and opportunities surrounding the new way to communicate and consume computing services. Mobile computing is not just P Cs on the move. Mobile devices such as smart phones, tablets, and the iPod Touch, the last PDA standing are a radically different kind of device s, designed from the ground up as end points of data networks both internal corporate networks and the Internet rather than primarily as stand-alone devices. They are optimized for mobility, which means that they have to be light, easy to handle, and maximize battery life. Where laptops has a three hour battery life, the tablet and Smartphone regularly run 12 hours or more between charging and serve as windows into the Cloud.

(b) Operating System Security: Operating System Security involves policy, procedure and controls that determine, ‘who can access the operating system’, ‘which resources they can access’, and ‘what action they can take’. The following security components are found in secure operating system: • Log-in Procedure: A log-in procedure is the first line of defence against unauthorized access. When

the user initiates the log-on process by entering user-id and password, the system compares the ID

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and password to a database of valid users. If the system finds a match, then log-on attempt is authorized.

• Access Token: If the log on attempt is successful, the Operating System creates an access token that contains key information about the user including user-id, password, user group and privileges granted to the user. The information in the access token is used to approve all actions attempted by the user during the session.

• Access Control List: This list contains information that defines the access privileges for all valid users of the resource. When a user attempts to access a resource, the system compasses his or her user-id and privileges contained in the access token with those contained in the access control list. If there is a match, the user is granted access.

• Discretionary Access Control: The system administrator usually determines; who is granted access to specific resources and maintains the access control list.

However, resource owners in distributed systems may be granted discretionary access control which allows them to grant access privileges to other users.

(c) General Controls: General Controls are those that control the design, security, and use of computer

programs and the security of data files in general throughout an organization. On the whole, General Controls apply to all computerized applications and consist of a combination of system software and manual procedures that create an overall control environment.

(d) Five Principles of COBIT 5: COBIT 5 simplifies governance challenges with just five principles (shown in

Fig.). The five key principles for governance and management of enterprise IT in COBIT 5 taken together enable the enterprise to build an effective governance and management framework that optimizes information and technology investment and use for the benefit of stakeholders. 1. Meeting Stakeholders Needs. 2. Covering the enterprise end to end. 3. Applying a single integrated framework. 4. Enabling a holistic approach 5. Separating Governess from management.

(e) Best practices of Green IT are as follows:

Involving stakeholders on campus yields policies and green IT initiatives more likely to be embraced by the campus community.

Partnering takes advantage of existing efforts and ensures wider reach and more effective use of limited resources.

Guidelines for using the best practices simplify adaption of green IT by campus users and encourage them to consider green computing practices the norm.

On-going communication about and campus commitment to green IT best practices to produce notable results.

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XLAG

No of Pages: 4 Total Marks: 100 No of Questions: 7 Time allowed: 3 Hrs

Question No.1 is compulsory. Answer any 5 from remaining 6 questions

Wherever appropriate suitable assumption(s) should be made and indicated in the answer by the candidate

Working notes should form part of the answer 1.

a) Delta Ltd. credited the following amounts to the account of resident payees in the month of March, 2015 without deduction of tax at source. What would be the consequence of non-deduction of tax at source by Delta Ltd. on these amounts during the financial year 2014-15, assuming that the resident payees in all the cases mentioned below, have not paid the tax, if any, which was required to be deducted by Delta Ltd.?

Particulars Amount in INR

1 2 3

Salary to its employees (credited and paid in March, 2015) Non-compete fees to Mr. Rajesh (credited and paid in March, 2015) Directors’ remuneration (credited in March, 2015 and paid in April, 2015)

12,00,000 110,000

28,000

Would your answer change if Delta Ltd. has deducted tax on directors’ remuneration in April, 2015 at the time of payment and remitted the same in July, 2015? (5 Marks)

b) A non-resident Indian has the following sources of income in India. You are required to compute his total income and determine his tax liability applying the provisions of Chapter XII-A. Details of your workings, with reasons, should form part of your answer:


1 2

Dividend from Indian company Interest on debentures of an Indian company invested out of remittances in convertible foreign exchange Less: Interest paid on money borrowed in India for investment in the debentures

50,000 75,000

25,000

Net 50,000

3 Long-term capital gains on sale of shares subscribed in convertible foreign exchange: Cost in 2008-09 INR. 2,00,000 Sale in 2014-15 INR. 3,00,000 -------------------- INR. 1,00,000 Less: Brokerage INR. 10,000 Cost Inflation index 2008-09 : 582 2014-15 : 1024

90,000

4 Property income in India (Net) TDS

300,000 30,000

The property was acquired partly out of a loan from HDFC. The repayment of loan made during the year amounted to INR 20,000. The assessee also claims deduction of INR 10,000 by way of donation to the Prime Minister’s National Relief Fund and of INR 20,000 towards interest on loan taken for higher education in India in 2008 before his migration. (10 Marks)

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c) Mr. Thakur transferred 2,000 debentures of INR 100 each of Wild Tiger Ltd. to his wife Mrs. Sushma Thakur on 3.10.2012 without consideration. The company paid interest of INR 30,000 in September, 2014 which was deposited by Mrs. Thakur with Sridhar Finance Co. in October, 2014. Sridhar Finance Co. paid interest of INR 3,000 upto March, 2015. How would both the interest income be charged to tax in A.Y. 2015-16? (5 Marks)

2. Gopi Tea Limited is engaged in growing and manufacturing tea in Assam and West Bengal. The company's profit and loss account for the year ended 31st March, 2015 shows a net profit of INR 550 lacs after debiting or crediting the following amounts: a) Depreciation INR 40 lacs. b) Interest amounting to INR 2 lacs on term loan from a bank for purchase of machinery for one of its tea

factories. c) Repairs to factory building amounting to INR 15 lacs for which a sum of INR 10 lacs was withdrawn

from Tea Deposit account maintained with National Bank for Agricultural and Rural Development (NABARD) as per section 33AB of the Income- tax Act, 1961.

d) Profit from sale of green tea leaves plucked in own gardens INR 20 lacs. e) INR 5 lacs on account of stamp duty and registration fees for the issue of bonus shares. f) INR 10 lacs, being sales tax dues of earlier years determined during the year on disposal of appeals by

the appellate authority, for which the company has furnished a bank guarantee to the Commercial Tax Authority.

g) INR 5 lacs written off as bad in respect of a trade debt transferred from Saraswati Tea Limited in previous year 2012-13 pursuant to a scheme of amalgamation approved by the jurisdictional High Court.

h) INR 2 lacs contributed to Employees' Welfare Trust. (i) Interest on inter-corporate deposit INR 1 lac and INR 1.50 lacs for February, 2015 and March,

2015, respectively, for which tax deducted at source was paid to the Central Government in June, 2015. Following additional information are furnished by the management:

(ii) Depreciation as per Tax Audit Report under section 44AB INR 55 lacs. (iii) One financial institution converted arrear interest of INR 10 lacs into a new loan in financial year

2010-11, which is repayable in five annual installments. The company has paid INR 2 lacs towards the installment due for the financial year 2014-15 in February, 2015.

(iv) A sum of INR 250 lacs deposited in NABARD on 15th June, 2015 as per the provision of Section 33AB.

Compute total income of the company for the Assessment Year 2015-16 stating the reasons for each item. Ignore provision relating to Minimum Alternate Tax. (16 Marks)

3. a) The assessment of Mr. Hari for A.Y.2007-08 was made on 28.3.2009 making an addition of INR

3,25,000 in respect of certain income received during the P.Y.2006-07. The assessee contested the addition before Commissioner (Appeals) but lost the case. The Appellate Tribunal passed an order on 26.2.2014 holding that the said income was not taxable in the P.Y.2006-07 but the same was taxable in the year of accrual, being P.Y.2001-02 relevant to A.Y.2002-03. The Assessing Officer issued notice under section 148 for A.Y.2002-03 in March 2014 bringing to tax the sum of INR 3,25,000. Is the notice for reassessment valid? Would your answer change if, in the said case, the assessment order for A.Y.2007-08 was made on 4.4.2009 instead of 28.3.2009? (8 Marks)

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b) S Limited was amalgamated with A Limited on 01.04.2014. All the conditions of section 2(1B) were satisfied.

S Limited has the following carried forward losses as assessed till the Assessment Year 2014-15:


1 2 3 4

Speculative Loss Unabsorbed Depreciation Unabsorbed expenditure of capital nature on scientific research Business Loss

4 18

2 120

A Limited has computed a profit of INR 140 lacs for the financial year 2014-15 before setting off the eligible losses of S Limited but after providing depreciation at 15% per annum on INR 150 lacs, being the consideration at which plant and machinery were transferred to A Limited. The written down value as per income-tax record of S Limited as on 31st March, 2014 was INR 100 lacs. The above profit of A Limited includes speculative profit of INR 10 lacs. Compute the total income of A Limited for Assessment Year 2015-16 and indicate the losses/other allowances to be carried forward by it.

(8 Marks) 4.

a) Ms. Smita purchased a land at a cost of INR 15 lakhs in the financial year 1990-91 and held the same as her capital asset till 31st March, 2012. She started her real estate business on 1st April, 2012 and converted the said land into stock-in-trade of her business on the said date, when the fair market value of the land was INR 180 lakhs. She constructed 10 flats of equal size, quality and dimension. Cost of construction of each flat is INR 10 lakhs. Construction was completed in January, 2015. She sold 8 flats at INR 30 lakhs per flat in February and March, 2015. The remaining 2 flats were held in stock as on 31st March, 2015. She invested INR 30 lakhs in bonds issued by Rural Electrification Corporation Ltd. in March, 2015 and INR 40 lakhs in bonds issued by National Highways Authority of India in April, 2015. Compute the amount of chargeable capital gain and business income in the hands of Ms. Smita arising from the above transactions for Assessment Year 2015-16 indicating clearly the reasons for treatment for each item. Cost Inflation Index: F.Y. 1990-91: 182; F.Y. 2012-13: 852; F.Y. 2014-15: 1024 (8 Marks)

b) Discuss the correctness or otherwise of the following propositions in the context of the Income-tax Act,

1961: (i) The powers of the Commissioner of Income-tax (Appeals) to enhance the assessment are plenary

and quite wide. (ii) The High Court cannot interfere with the factual finding recorded by the lower authorities and the

Tribunal, without any valid reasons. (8 Marks)

5. Answer any four out of five. a) Mr. Manas, a non-resident individual, is due to receive interest of INR 6,25,000 in March 2015 from a

notified infrastructure debt fund eligible for exemption under section 10(47). He incurred expenditure amounting to INR 32,000 for earning such income. Assuming that Mr. Manas is a resident of a Notified Jurisdictional Area (NJA), discuss the tax implications in his hands and the applicability of provisions relating to deduction of tax at source from such interest.

b) Shivji charitable trust purchased a building for INR 25 lakh in March, 2014 for the purposes of the trust and claimed the same as application of income in the P.Y.2013-14. It also claims depreciation@10% on buildings for P.Y.2014-15, while computing income for the purpose of application. Discuss the correctness of the depreciation claim made by Shivji charitable trust.

c) R. Ltd. was engaged in the business of manufacturing and trading activities. The company was declared a sick industrial company and as a part of a restructuring programme, a part of the term loan for purchase of machinery and cash credit and interest was waived. The Assessing Officer was of the view that the waiver of loans and interest amounted to remission or cessation of liability and was taxable under section 41(1) of the Income-tax Act, 1961. Give your views on the correctness of the action of the Assessing Officer.

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d) Mr. Devraj, after putting 25 years of service, opted for voluntary retirement and under approved

scheme received an amount of INR 20 lacs as VRS compensation on 01.01.2015. He was advised by his tax consultant to claim exemption to the extent as specified in section 10(10C) and also the relief under section 89. He, in order to have an expert opinion, consults you and asks whether such a treatment of VRS compensation is permissible under the Act.

e) Discuss the taxability of the following receipts in the hands of Mr. H under the Income-tax Act, 1961 - (i) Gets INR 1,75,000 in cash as a marriage gift from his grandfather on 13.02.2015. (ii) Received 100 shares of B Ltd., the fair market value of which was INR 1,00,000 on his birthday,

21.04.2014 from his friend Mr. J. (4 x 4 = 16 Marks) 6.

a) A business trust, registered under SEBI (Real Estate Investment Trusts) Regulations, 2014, gives particulars of its income for the P.Y.2014-15: 1. Interest income from A Ltd. – INR 4 crore; 2. Dividend income from A Ltd. – INR 2 crore; 3. Short-term capital gains on sale of listed shares of A Ltd. – INR 3 crore; 4. Short-term capital gains on sale of developmental properties – INR 2 crore 5. Interest received from investments in unlisted debentures of real estate companies – INR 10 lakh;

A Ltd. is an Indian company in which the business trust holds controlling interest. The business trust holds 62% of the shareholding of A Ltd. Discuss the tax consequences of the above income earned by the business trust in the hands of the business trust and the unit holders, assuming that the business trust has distributed INR 10 crore to the unit holders in the P.Y.2014-15. (8 Marks)

b) Discuss whether transfer pricing provisions under the Income-tax Act, 1961 are attracted in respect of the following cases - (i) Transfer of technical knowhow by Alpha Ltd., an Indian company, to Beta Inc., a French company,

which guarantees 15% of the borrowings of Alpha Ltd. (ii) Purchase of plant and machinery by Phi Ltd., an Indian company, from Rho Inc., a Swedish

company. Phi Ltd. is the subsidiary of Rho Inc. (iii) Ms. Nidhi, a resident Indian, is a director of Delta Ltd, an Indian company. Delta Ltd. pays salary of

INR 45 lakhs per annum to Yashasvi, who is Ms. Nidhi’s daughter. (iv) Alpha Ltd., an Indian company, has two units Sun & Moon. Sun, 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. Moon is carrying on the business of trading in cement. Moon transfers cement of the value of INR 65 lakhs to Sun for INR 45 lakhs.

(v) Scientific research services provided by Sigma Inc., a German company to Theta Ltd., an Indian company. Sigma Inc. is a ―specified foreign company‖ as defined in section 115BBD, in relation to Theta Ltd. (8 Marks)

7. a) What is the meaning of “successor in business” for the purpose of section 41(1) of the Income-tax Act,

1961? b) What are the "specified domestic transactions" which are subject to transfer pricing provisions? c) What is the quantum of penalty that could be levied in each of the following cases -

(i) Failure to get books of accounts audited as required under section 44AB within the time prescribed under the Act.

(ii) Failure to furnish report from an accountant as required under section 92E. d) The following issues arise in connection with the deduction of tax at source under Chapter XVII-B.

Discuss the liability for tax deduction in these cases: (i) An employee of the Central Government receives arrears of salary for the earlier 3 years. He

enquires whether he is liable for deduction of tax on the entire amount during the current year. (ii) State Bank of India pays INR 50,000 per month as rent to the Central Government for a building in

which one of its branches is situated. (4 x 4 = 16 Marks)

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PRIME ACADEMY 41st SESSION MODEL EXAM - FINAL – DIRECT TAX LAWS


a) With effect from A.Y.2015-16, non-deduction of tax at source on any sum payable to a resident on which tax is deductible at source as per the provisions of Chapter XVII-B would attract disallowance under section 40(a)(ia). Therefore, non-deduction of tax at source on any sum paid by way of salary on which tax is deductible under section 192 or any sum credited or paid by way of non-compete fees and directors’ remuneration on which tax is deductible under section 194J, would attract disallowance@30% under section 40(a)(ia). Whereas in case of salary, tax has to be deducted under section 192 at the time of payment, in case of non-compete fees and directors’ remuneration, tax has to be deducted at the time of credit of such sum to the account of the payee or at the time of payment, whichever is earlier. Therefore, in all the three cases i.e., salary, non- compete fees and directors’ remuneration, tax is deductible in the P.Y.2014-15, since salary was paid in that year and non-compete fees and directors’ remuneration was credited in that year. Therefore, the amount to be disallowed under section 40(a)(ia) while computing business income for A.Y.2015-16 is as follows –

Particulars Amount paid in INR `

Disallowance u/s 40(a)(ia) @ 30% `

Salary [tax is deductible under section 192] Non-compete fees to Mr. Rajesh [tax is deductible under section 194J] Directors’ remuneration [tax is deductible under section 194J without any threshold limit]

12,00,000

1,10,000

28,000

360,000

33,000

8,400

Disallowance under section 40(a)(ia) 4,01,400

If the tax is deducted on directors’ remuneration in the next year i.e., P.Y.2015-16 at the time of payment and remitted to the Government, the amount of INR 8,400 would be allowed as deduction while computing the business income of A.Y.2016-17.

b) Chapter XII–A, comprising of sections 115C to 115I, contains special provisions which provide concessional tax treatment in relation to certain incomes of non-residents (i.e. investment income and long term capital gains). Therefore, in this case, the income of the non-resident has to be computed applying the provisions of Chapter XII-A. According to section 115C –

(a)The income derived by a non-resident Indian from any foreign exchange asset other than dividend referred to in section 115-O is called as “Investment income”. (b)Foreign exchange asset includes debentures issued by an Indian public company acquired or purchased with or subscribed to in, convertible foreign exchange. Section 115D provides that in computing such “Investment income” or “Long-term capital gains” of a non-resident Indian – No deduction in respect of any expenditure or allowance under any provision of the Income-tax Act, 1961 is allowable in computing such investment income; No deduction under Chapter VI-A shall be allowed in respect of both investment income and long term capital gains; and No indexation will be applicable in respect of long term capital gains.

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Section 115E provides that the investment income and/or long-term capital gains in respect of foreign exchange asset will constitute a separate block of income and investment income will be charged to income-tax at a flat rate of 20% and long term capital gains at a flat rate of 10%. If the non-resident Indian has any other income in India, such other income will constitute altogether a separate block of income and will be charged to tax as if such other income is the total income. The aggregate of the income-tax so calculated in respect of the said two blocks of income will be the total tax payable. Computation of total income for A.Y. 2015-16

Particulars Amount `

1.Dividend income –Exempt under section 10(34) 2.Debenture Interest [interest on loans borrowed for investment not allowable as deduction as per section 115D(1)] 3.Long-term capital gains -Assuming it was subjected To Securities Transaction Tax, the entire long term capital gain from sale of shares is exempt under section 10(38) 4.Property Income (Net) [ assuming net of all deductions] Gross Total Income Less: Deduction under section 80C in respect of housing loan repaid 20,000 Deduction under section 80E allowable in respect of interest paid on loan taken for higher education 20,000 Deduction under section 80G in respect of donation to Prime Minister’s National Relief Fund (100%) 10,000 Total income

Nil

75,0000

Nil 3,00,000 3,75,000

50,000 3,25,000

Computation of tax payable

Particulars ` `

Tax at 20% on debenture interest of `75,000 Total Income (as reduced by investment income) i.e. `3,25,000 minus `75,000 Tax thereon Add: Education cess @ 2% & secondary and higher education cess @ 1% Less: Tax deducted at source Balance tax refundable

2,50,000

15,000

Nil 15,000

450 15,450 30,000 14,550

c) As per section 64(1)(iv), income arising from assets transferred without adequate consideration by an

individual to his spouse is liable to be clubbed in the hands of the individual. It may be noted that income on the asset transferred has to be clubbed but if there is accretion to the asset, any further income derived on such accretion should not be clubbed. Therefore, applying the provisions of section 64(1)(iv), `30,000, being the interest on debentures received by M` Sushma Thakur in September, 2014 will be clubbed with the income of Mr. Thakur, since he had transferred the debentures of the company without consideration to her in October, 2012. However, the interest of `3,000 upto March 2015 earned by M` Sushma Thakur on the interest on the debentures deposited by her with Sridhar Finance Company shall be taxable in her individual capacity and will not be clubbed with the income of Mr. Thakur.

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2. Computation of total income of Gopi Tea Ltd. for the A.Y.2015-16

Particulars Amount Amount

Profit and Gain from Business and Profession Net profit as per Profit & Loss Account Add: Items debited but to be considered separately or to be disallowed Depreciation as per accounts Repairs to factory building to the extent of amount spent by withdrawal from Tea Deposit Account (Note 2) Sales tax not paid (Note 4) Contribution to Employees’ Welfare Trust disallowed under section 40A(9) (Note 6) Interest on inter-corporate deposit for February, 2015 and March 2015 for which tax deducted at source was deducted and deposited in June 2015 allowed under section 40(a)(ia) (Note 7) Less: Amount credited to profit & loss account but not chargeable to tax. Profit on sale of green tea leaves plucked in own gardens is agricultural income and the same is exempt under section 10(1) Less: Deductions allowable while computing business income Depreciation as per Income-tax Rules Payment of new loan converted from arrear interest(Note 8) Deduction under section 33AB for making deposit in an account with NABARD as per scheme approved by the Tea Board, being lower of the following two amounts: Amount deposited 40% of the profit from business of growing and manufacturing tea computed under the head “profits and gains from business and profession” before making this deduction (`5,35,00,000 x 40%) Less: 60% of above, being agricultural income as per Rule 8 Business income Gross Total Income Less :Deduction under Chapter VIA Total Income

40,00,000 10,00,000

10,00,000

2,00,000

Nil

55,00,000 2,00,000

2,50,00,000

2,14,00,000

5,50,00,000

62,00,000 6,12,00,0000

20,00,000 5,92,00,000

57,00,000 5,35,00,000

2,14,00,000 3,21,00,000 1,92,60,000 1,28,40,000 1,28,40,000

Nil 1,28,40,000

Notes: (i) As per section 36(1)(iii), interest paid in respect of capital borrowed for the purpose of business or

profession is allowed as deduction. The term loan was taken for purchasing machinery for use in a tea factory. Thus, the term loan was used for the purpose of business. Hence, interest on term loan is allowable as deduction. As interest has already been debited to the profit and loss account, no adjustment is required. It is assumed that–

The new machinery was not acquired for extension of the business of the company; and

The interest has been actually paid. (ii) As per section 33AB(6), where any amount standing to the credit of the assessee in the account

maintained with NABARD is utilized by the assessee for the purpose of any expenditure in connection with such business in accordance with the scheme approved by the Tea Board, such expenditure shall

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not be allowed as deduction. Therefore, the amount of `10 lacs withdrawn and utilized for incurring expenditure on repair to factory building is to be disallowed.

(iii) The Supreme Court, in the case of CIT vs. General Insurance Corporation (2006) 286 ITR 232, observed that there is no inflow of fresh funds or increase in capital employed on account of issue of bonus shares. There is only reallocation of company's fund on account of issue of bonus shares by capitalization of reserves. The company has not acquired any benefit of enduring nature. There is no increase in capital base of the company. Therefore, stamp duty and registration fee in Connection with issue of bonus shares is allowable as revenue expenditure under section 37(1).

(iv) According to section 43B, any tax, duty, cess or fee (by whatever name called) is allowed as deduction if they are actually paid on or before the due date of filing return of income under section 139(1) irrespective of the method of accounting followed by the assessee. In the case of CIT vs. Udaipur Distillery Company Limited (2004) 268 ITR 305 (Raj),it was held that actual payment requires that amount must flow from the assessee to the public exchequer as specified in section 43B. Mere furnishing of bank guarantee by the assessee towards sales tax dues does not mean actual payment of sales tax dues. Therefore, sales tax liability determined on appeal shall be disallowed under section 43B for non-payment. This decision was affirmed by the Apex Court in CIT v. Mc Dowell and Co. Ltd. (2009) 314 ITR 167.

(v) Under section 36(1)(vii) read with section 36(2), an assessee can claim deduction in respect of bad debt, provided the amount of such debt has been taken into account in computing total income of the assessee and it is written off in the books of account of the assessee. In the case of CIT vs. T.VeerabhadraRao, K.KoteswaraRao& Co. (1985) 155 ITR 152 (SC),the Apex Court held that the successor of a business is entitled to write off the predecessor’s debt as a bad debt and claim deduction if the other conditions are fulfilled. This is so because the benefit of deduction in respect of bad debt is not accrued to the assessee by way of personal relief but relates to the business. Therefore, the assessee company is entitled todeduction under section 36(1)(vii) read with section 36(2) in respect of debt transferred from theamalgamating company, Saraswati Tea Limited

(vi) As per section 40A(9), any contribution made by the assessee as an employer to any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act or other institution for any purpose shall be disallowed, except where such contribution is paid to a recognised provident fund or approved superannuation fund or approved gratuity fund. Therefore, contribution to the Employees' Welfare Trust is to be disallowed.

(vii) Section 40(a)(ia) seeks to disallow 30% of any sum paid to any resident, if tax is not deducted at source or, after deduction, tax is not deposited to the Central Government on or before the due date prescribed under section 139(1) of the Act. In this case, tax has been deducted on interest and paid before the due date prescribed under section 139(1). Hence, the expenditure shall be allowed.

(viii) As per Explanation 3C below section 43B, a deduction of any sum, being interest payable on any loan or borrowing from a public financial institution shall be allowed, if such interest has been actually paid and such interest which has been converted into a loan or borrowing shall not be deemed to have been actually paid.

The manner in which the converted interest will be allowed as deduction has been clarified vide Circular No.7/2006 dated 17.7.2006.The unpaid interest, whenever actually paid to the financial institution, will be in the nature of revenue expenditure deserving deduction in the computation of income. Therefore, irrespective of the nomenclature, the deduction will be allowed in the previous year in which the converted interest is actually paid. Accordingly, the sum of `2 lacs, being installment paid in February, 2015 shall be allowed as deduction while computing business income of P.Y.2014-15

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3. a) Section 149(1) provides the time limit for issue of notice under section 148 for assessment, reassessment

or recomputation where income has escaped assessment. The time limit prescribed under section 149(1) in a case where incomeescaping assessment exceeds INR.1lakh is 6 years from the end of the relevant assessment year. In this case, the relevant assessment year is A.Y.2002-03, being the year in respect of which the income exceeding INR.1lakh has escaped assessment. The six year time limit under section 149(1) for issuing notice under section 148 relating to A.Y.2002-03 expires on 31.3.2009. In this case, the notice under section 148 is issued in March, 2014, which is outside the six year time limit prescribed under section 149(1). The restriction of time limit under section 149(1) is, however, not applicable where notice under section 148 is issued for making an assessment, reassessment or recomputation to give effect to any finding or direction contained in an order passed by any authority in any proceeding by way of appeal, reference or revision or by a Court in any proceeding under any other law. This relaxation is contained in section 150(1). However, such relaxation will not apply where any such assessment or reassessment relates to an assessment year in respect of which an assessment or reassessment could not have been made at the time the order which was the subject matter of appeal, reference or revision, as the case may be, was made on account of such assessment or reassessment having become time-barred at that point of time itself. This restriction is contained in section 150(2). The relaxation contained in section 150(1) is, therefore, subject to the restriction contained in section 150(2). In this case, since the notice under section 148 was issued for the purpose of making reassessment to give effect to an appellate order, the restriction contained in section 149(1) does not apply. The relaxation under section 150(1) will apply in this case, since the order which was the subject matter of appeal was passed on 28.3.2009, which is within the six year time limit from the end of the relevant assessment year, i.e., A.Y.2002-03. Therefore, since the original order which was the subject matter of appeal was passed on 28.3.2009, the relaxation contained in section 150(1) will apply. Consequently, the notice issued under section 148 by the Assessing Officer in March 2014, in this case, would be valid. However, if the original order was passed on 4.4.2009, it falls outside the six year time limit in relation to A.Y.2002-03, which expires on 31.3.2009. The operation of section 150(1) would then be subject to the restriction contained in section 150(2). According to section 150(2), if on the date of passing of the order which was the subject matter of appeal (i.e., on 4.4.2009), the reassessment could not have been made on account of the same having become time-barred, then, notice for reassessment cannot be issued now by availing the relaxation given in section 150(1). Therefore, if the original order was passed on 4.4.2009, the notice issued under section 148 by the Assessing Officer in March 2014 would not be valid.

b) Computation of total income of A Limited for the A.Y. 2015-16

Particulars ` (in Lakhs)

Business income Business income before setting-off brought forward losses of S Ltd Add: Excess depreciation claimed in the scheme of amalgamation of S Limited with A Limited Value at which assets are transferred by S Ltd WDV in the books of S Ltd Excess accounted Excess depreciation claimed in computing taxable income of A Ltd. [`50 lacs × 15 %] [Explanation 2 to section 43(6)] Set-off of brought forward business loss of S Ltd. (See Notes 2 & 4) Set-off of unabsorbed depreciation under section 32(2) read with section 72A (See Notes 2 & 4) Set-off of unabsorbed capital expenditure under section 35(1)(iv) read with section

150 100

50

140

7.50 147.50

(120.00)

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35(4) (See Note 5)

(18.00) (2.00)

7.50

Notes: (i) It is presumed that the amalgamation is within the meaning of section 72Aof the Income-tax Act,

1961. (ii) In the case of amalgamation of companies, the unabsorbed losses and unabsorbed depreciation of

the amalgamating company shall be deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected and such business loss and unabsorbed depreciation shall be carried forward and set-off by the amalgamated company for a period of 8 years and indefinitely, respectively.

(iii) As per section 72A(7), the accumulated loss to be carried forward specifically excludes loss sustained in a speculative business. Therefore, speculative loss of `4 lacs of S Ltd. cannot be carried forward by A Ltd.

(iv) Section 72(2) provides that where any allowance or part thereof unabsorbed under section 32(2) (i.e., unabsorbed depreciation) or section 35(4) (i.e., unabsorbed scientific research capital expenditure) is to be carried forward, effect has to be first given to brought forward business losses under section 72.

(v) Section 35(4) provides that the provisions of section 32(2) relating to unabsorbed depreciation shall apply in relation to deduction allowable under section 35(1)(iv) in respect of capital expenditure on scientific research related to the business carried on by the assessee. Therefore, unabsorbed capital expenditure on scientific research can be set-off and carried forward in the same manner as unabsorbed depreciation.

(vi) The restriction contained in section 73 is only regarding set-off of loss computed in respect of speculative business. Such a loss can be set-off only against profits of another speculation business and not non-speculation business. However, there is no restriction under the Income-tax Act, 1961 regarding set-off of normal business losses against speculative income. Therefore, normal business losses can be set-Off against profits of a speculative business.

Consequently, there is no loss or allowance to be carried forward by A Ltd. to the F.Y. 2014-15.

4. a) Computation of capital gains and business income of Ms. Smita for A.Y.2015-16

` Capital Gains Fair market value of land on the date of conversion deemed as the full value of consideration for the purposes of section 45(2) Less: Indexed cost of acquisition [INR 15,00,000 × 852/182]

1,80,00,000

70,21,978

1,09,78,022

Proportionate capital gains arising during A.Y.2015-16 [INR 1,09,78,022 × 8/10] Less: Exemption under section 54EC Capital gains chargeable to tax for A.Y.2015-16 Business Income Sale price of flats [8 × INR 30 lakhs] Less: Cost of flats Fair market value of land on the date of conversion [INR 180 lakhs × 8/10] Cost of construction of flats [8 × INR 10 lakhs] Business income chargeable to tax for A.Y.2015-16

87,82,418

50,00,000 37,82,418

2,40,00,000 1,44,00,000

80,00,000

16,00,000

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Notes: (i) The conversion of a capital asset into stock-in-trade is treated as a transfer under section 2(47). It

would be treated as a transfer in the year in which the capital asset is converted into stock-in-trade. (ii) However, as per section 45(2), the capital gains arising from the transfer by way of conversion of

capital assets into stock-in-trade will be chargeable to tax only in the year in which the stock-in-trade is sold.

(iii) The indexation benefit for computing indexed cost of acquisition would, however, be available only up to the year of conversion of capital asset to stock-in-trade and not up to the year of sale of stock-in-trade.

(iv) For the purpose of computing capital gains in such cases, the fair market value of the capital asset on the date on which it was converted into stock-in-trade shall be deemed to be the full value of consideration received or accruing as a result of the transfer of the capital asset. In this case, since only 80% of the stock-in-trade (8 flats out of 10 flats) is sold in the P.Y.2014-15, only proportionate capital gains (i.e., 80%) would be chargeable in the A.Y.2015-16.

(v) On sale of such stock-in-trade, business income would arise. The business income chargeable to tax would be the difference between the price at which the stock-in- trade is sold and the fair market value on the date of conversion of the capital asset into stock-in-trade.

(vi) In case of conversion of capital asset into stock-in-trade and subsequent sale of stock- in-trade, the period of 6 months is to be reckoned from the date of sale of stock-in-trade for the purpose of exemption under section 54EC [CBDT Circular No.791 dated 2.6.2000]. In this case, since the investment in bonds of RECL and NHAI has been made within 6 months of sale of flats, the same qualifies for exemption under section54EC. However, the maximum exemption under section 54EC would be restricted to INR 50 lakhs, even though the total investment in bonds of RECL and NHAI within the six month period is INR 70 lakhs.

b) (i) The proposition is correct in law. The Supreme Court has, in CIT vs. McMilan& Co. (1958) 33 ITR 182

and CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225, held that in disposing of an appeal before him, the appellate authority can travel over a whole range of the assessment order. The scope of his powers is co-terminus with that of the Assessing Officer. He can do what the Assessing Officer can do and can also direct him to do, what he has failed to do. He can assess income from sources which have been considered by the Assessing Officer but not brought to tax. He can consider every aspect of the assessment order and give appropriate reliefs. The Allahabad High Court has, in CIT v. KashiNathChandiwala (2006) 280 ITR 318, held that the appellate authority is empowered to consider and decide any matter arising out of the proceedings in which the order appealed against was passed notwithstanding the fact that such matter was not raised before him by the assessee. The Commissioner (Appeals) is entitled to direct additions in respect of items of income not considered by the Assessing Officer. Further, the Apex Court has, in the case of Jute Corporation of India Ltd. vs. CIT (1991) 187 ITR 688, held that the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. Thus, the powers of the Commissioner of Income-tax (Appeals) in enhancing the assessment are very wide and plenary.

(ii) The proposition is correct in law. A finding of fact cannot be disturbed by the High Court in exercise of its powers under section 260A. The Income-tax Appellate Tribunal is the final fact finding authority and the findings Of fact recorded by the Tribunal can be interfered with by the High Court under section 260A only on the ground that the same were without evidence or material, or if the finding is contrary to the evidence, or is perverse or there is no direct nexus between conclusion of fact and the primary fact upon which that conclusion is based. In CIT vs. P. Mohanakala (2007) 291 ITR 278 and M. JanardhanaRao v. Joint CIT (2005) 273 ITR 50, the Apex Court observed that the High Court had set aside the factual findings of the lower

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authorities and the Tribunal without any valid reason. The Apex Court held that the findings of fact could not be interfered with by the High Court without carefully considering the facts on record, the surrounding circumstances and the material evidence. There is no scope for interference with the factual findings, unless the findings are per se without reason or basis, perverse and/or contrary to the material on record. Hence, only if the issue gives rise to a substantial question of law, an appeal shall lie before the High Court.

5. a) The interest income received by Mr. Manas, a non-resident, from a notified infrastructure debt fund

would be subject to a concessional tax rate of 5% under section 115A on the gross amount of such interest income. Therefore, the tax liability of Mr. Manas in respect of such income would be INR 32,188 (being 5% of INR 6,25,000 plus education cess@2% and secondary and higher education cess@1%). Under section 194LB, tax is deductible @5% on interest paid by such fund to a non- resident. However, since Mr. Manas is a resident of a Notified Jurisdictional Area (NJA), tax would be deductible@30% as per section 94A, and not@ 5% specified under section 194LB. This is on account of the provisions of section 94A(5), which provides that―Notwithstanding anything contained in any other provision of this Act, where a person located in a NJA is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII-B, the tax shall be deducted at the highest of the following rates, namely –

(a) at the rate or rates in force; (b) at the rate specified in the relevant provision of the Act; (c) at the rate of thirty per cent.‖

b) Section 11(6) provides that income for the purposes of application shall be determined without allowing

any deduction for depreciation or otherwise in respect of any asset, the cost of acquisition of which has been claimed as an application of income under section 11 in the same or any other previous year. Accordingly, in this case, since the cost of building (i.e., INR.25 lakh) has been claimed and allowed as application of income under section 11 while computing the income of the trust for the P.Y.2013-14, depreciation on building will not be allowed for the purpose of determining income for the purposes of application in the P.Y.2014-15.

c) The term loan for purchase of machinery is not a trading liability. Therefore, on writing off of the loans, no benefit or perquisite arose to R Ltd. in the revenue field. Therefore, the provisions of section 41(1) are not attracted in this case since the waiver is in respect of a term loan taken for a capital asset and hence, cannot be treated as remission or cessation of a trading liability. Thus, the waiver of such term loans cannot be treated as income of R Ltd. However, where the loan is written off in the cash credit account, the benefit is in the revenue field as the money had been borrowed for day-to-day affairs and not for the purchase of capital asset. Therefore, the writing off of these loans on the cash credit account which was received for carrying out the day-to-day operations of the assessee amounted to remission of a trading liability and hence, has to be treated as income in the hands of R Ltd. by virtue of section 41(1). This is the crux of the Delhi High Court decision in Rollatainers Ltd. v. CIT (2011) 339 ITR 54. In effect, the provisions of section 41(1) are attracted in respect of waiver of the working capital loan utilized for day-to-day business operations, since it amounted to remission of a trading liability.However, in the case of waiver of term loan for purchasing capital assets, the provisions of section 41(1) are not attracted since it cannot be treated as remission or cessation of a trading liability. Waiver of interest on term loan is not taxable under section 41(1), since interest due but not paid would not have been allowed as deduction in the earlier years or current year, on account of the provisions of section 43B.Therefore, the question of taxability of interest waived does not arise. Therefore, the action of the Assessing Officer in invoking the provisions of section 41(1) in respect of waiver of cash credit is correct. However, as regards invoking the provisions of section 41(1) in respect of waiver of term loan and interest, the action of the Assessing Officer is not correct.

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d) Where any relief was allowed under section 89 for any assessmentyear in respect of any amount received or receivable on voluntary retirement, no exemption under section 10(10C) shall be allowed in respect of the said sum in that assessment year or any other assessment year. Similarly, relief under section 89 cannot be claimed if benefit of exemption has been claimed under section 10(10C). Mr. Devraj can, therefore, opt to claim exemption of `5 lacs under section 10(10C) or relief under section 89(1) in respect of compensation received on voluntary retirement, but not both. Accordingly, the advice given by his tax consultant is not correct.

e) Where any sum of money is received without consideration by an individual or HUF and the aggregate value of all such sums received during the previous year exceeds INR.50,000, the whole of the aggregate value would be included in the total income of the individual under section 56(2)(vii). (i) Cash of INR.1,75,000 received from grandfather as marriage gift: Any sum received from a relative is

exempt from the applicability of section 56(2)(vii). Relative includes ascendant or descendant of the individual. Since grandfather is a lineal ascendant, the amount of INR.1,75,000 received from him is not chargeable to tax. In any case, any sum of money received on the occasion of marriage of the individual is exempt, whether or not received from a relative. So, the amount of INR.1,75,000 received from his grandfather is not chargeable to tax.

(ii) Shares received from a friend on 21.04.2014: As per Explanation to section 56(2)(vii), property includes shares and securities. Value of shares of B Ltd. gifted by his friend Mr. J on 21.04.2014 is taxable since receipt of property without consideration is chargeable to tax under section 56(2)(vii) if its aggregate fair market value exceeds INR.50,000. Since shares are included in the definition of “property” under section 56(2)(vii) and the aggregate fair market value, in this case, exceeds INR.50,000, it is taxable under section 56(2)(vii).

(iii) Sum of INR.51,000 received from sister: Any sum received from a relative is exempt from the applicability of section 56(2)(vii). Since, sister is a “relative” for the purpose of this clause, the amount of INR.51,000 received from her would be exempt.

(iv) Wrist Watch valued at INR.60,000 received from a friend on 1.12.2014: Receipt of property without consideration would attract the provisions of section 56(2)(vii). However, the provisions of section 56(2)(vii) are attracted only in respect of “property” as defined in that section. Since wrist watch is not included in the said definition of “property”, the receipt of the same without consideration would not attract the provisions of section 56(2)(vii) and the same shall not be taxable in the hands of Mr. H.

6.

a) Tax consequences in the hands of the business trust and its investors (i) Interest income of INR.4 crore from A Ltd.: There would be no tax liability in the hands of business

trust due to pass-through status enjoyed by it under section 10(23FC) in respect of interest income from A Ltd., being the special purpose vehicle [See Notes 2 & 3 below]. Therefore, A Ltd. is not required to deduct tax at source on interest payment to the business trust. However, the business trust has to deduct tax at source under section 194LBA –

-@10%, on interest component of income distributed to resident unit holders; and -@5%, on interest component of income distributed to non-corporate non-resident unit holders and

foreign companies. Interest component of income distributed to unit holders is taxable in the hands of the unit holders – @5%, in case of unit holders, being non-corporate non-residents or foreign companies; and at normal rates oftax, in case of resident unit holde` The interest component of income received from the business trust in the hands of each unit-holder would be determined in the proportion of 4/11.1, by virtue of section 115UA(1) [See Notes 1 & 4 below].

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(ii) Dividend income of INR.2 crore from A Ltd.: There would be no tax liability in the hands of the business trust since dividend is subject to dividend distribution tax under section 115-O in the hands of A Ltd; Hence, the dividend income is exempt under section 10(34) in the hands of the business trust. Any distributed income referred to in section 115UA, to the extent it does not comprise of interest referred to in section 10(23FC) received by unit holders, is exempt in their hands under section 10(23FD). Therefore, by virtue of section 10(23FD), there would be no tax liability on the dividend component of income distributed to unit holders in their hands.

(iii) Short-term capital gains of INR.3 crore on sale of listed shares of A Ltd.: As per section 115UA(2), the business trust is liable to pay tax@15% under section 111A in respect of short-term capital gains on sale of listed shares of special purpose vehicle [See Note 6]. There would, however, be no tax liability on the capital gain component of income distributed to unit holders, by virtue of the exemption contained in section 10(23FD) [See Note 5].

(iv) Short-term capital gains of INR.2 crore on sale of developmental properties: It is taxable at maximum marginal rate of 33.99% in the hands of the business trust as per section 115UA(2) [See Note 6]. There would be no tax liability in the hands of the unit holders on the capital gain component of income distributed to them, by virtue of the exemption contained in section 10(23FD) [See Note 5].

(v) Interest of INR.10 lakh received in respect of investment in unlisted debentures of real estate companies: Such interest is [email protected]%, being the maximum marginal rate, in the hands of the business trust, as per section 115UA(2) [See Note 6].However, there would be no tax liability in the hands of the unit holders on the interest component of income distributed to them, by virtue of section 10(23FD) [See Note 5].

Notes: (1) New Chapter XII-FA, containing the special provisions relating to business trusts, has been inserted

w.e.f. A.Y.2015-16. Section 115UA(1) provides that any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder, as it had been received by, or accrued to the business trust.

(2) Section 10(23FC) exempts any income of a business trust by way of interest received or receivable from a Special Purpose Vehicle (SPV). Thus, the business trust enjoys a pass-through status in respect of interest received or receivable from a SPV.

(3) SPV means any company or LLP in which the business trust holds controlling interest and any specified percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration [not less than 50% as per the current SEBI (Real Estate Investment Trusts) Regulations, 2014]. Since A Ltd.is an Indian company in which the business trust holds controlling interest and 62% of shareholding, it is a special purpose vehicle. It is presumed that A Ltd. fulfills the other conditions specified in the regulations to qualify as an SPV.

(4) The distributed income of the business trust, to the extent it comprises of interest referred to in section 10(23FC), is deemed to be the income of the unit holder in the previous year of distribution and subject to tax in the hands of the unit holder in that year. Accordingly, the business trust is required to deduct tax at source on interest component of income distributed to its unit holde`

(5) Any distributed income referred to in section 115UA, to the extent it does not comprise of interest referred to in section 10(23FC), received by unit holders is exempt in their hands under section 10(23FD).

(6) Section 115UA(2) provides that subject tothe provisions of sections 111A and 112, the total income of a business trust shall be chargeable to tax at the maximum marginal rate.

b)

(i) The scope of the term ―intangible property‖ has been amplified to include, inter alia, technical knowhow, which is a technology related intangible asset. Transfer of intangible property falls within the scope of the term ―international transaction‖. Since Beta Inc. guarantees not less than 10% of the borrowings of Alpha Ltd., Beta Inc. and Alpha Ltd. are associated enterprises. Therefore, since

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transfer of technical knowhow by Alpha Ltd., an Indian company, to Beta Inc., a French company, is an international transaction between associated enterprises, the provisions of transfer pricing are attracted in this case.

(ii) Purchase of tangible property falls within the scope of ―international transaction‖. Tangible property

includes plant and machinery. Rho Inc. and Phi Ltd. are associated enterprises, since Rho Inc., being a holding company of Phi Ltd., fulfills the condition of holding shares carrying not less than 26% of the voting power in Phi Ltd. Therefore, purchase of plant and machinery by Phi Ltd., an Indian company, from Rho Inc., a Swedish company, is an international transaction between associated enterprises, and consequently, the provisions of transfer pricing are attracted in this case.

(iii) This transaction falls within the meaning of ―specified domestic transaction‖ under 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., daughter) of Ms. Nidhi, who is a director of Delta 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 Delta Ltd. exceeds a sum of INR 5 crore.

(iv) Unit Sun is eligible for deduction@100% of the profits derived from its eligible business (i.e., the business of developing an infrastructure facility, namely, a highway project in this case) under section 80-IA. However, Unit Moon is not engaged in any ―eligible business‖. Since Unit Moon has transferred cement to Unit Sun 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 exceeds a sum of INR 5 crore.

(v) The Explanation to section 92B amplifies the scope of the term ―international transaction‖. According to the said Explanation, international transaction includes, inter alia, provision of scientific research services. Sigma Inc. is a specified foreign company in relation to Theta Ltd. Therefore, the condition of Theta Ltd. holding shares carrying not less than 26% of the voting power in Sigma Inc is satisfied. Hence, Sigma Inc. and Theta Ltd. are associated enterprises. Since the provision of scientific research services by Sigma Inc. to Theta Ltd. is an ―international transaction‖ between associated enterprises, transfer pricing provisions are attracted in this case.

7. (a) For purposes of section 41(1) of the Income-tax Act, 1961, “successor in business” means –

(i) In the case of amalgamation of companies, the amalgamated company. (ii) In the case a person is succeeded by another person in that business or profession of the first

mentioned person, the other person. (iii) Where a firm carrying on a business is succeeded by another firm, the other firm. (iv) Where there has been a demerger, the resulting co

(b) As per section 92BA, the specified domestic transactions, which are subject to transfer pricing provisions, means any of the following transactions, not being an international transaction, namely- (i) Any expenditure in respect of which payment has been made or is to be made to a related person

referred to in section 40A(2)(b); (ii) Any transaction referred to in section 80A i.e., inter-unit transfer of goods and services by an

undertaking or unit or enterprise or eligible business to other business carried on by the assessee or vice versa, for consideration not corresponding to the market value on the date of transfer;

(iii) Any transfer of goods or services referred to in section 80-IA(8) i.e., inter-unit transfer of goods or services between eligible business and other business, where the consideration for transfer does not correspond with the market value of goods and services;

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(iv) Any business transacted between the assessee carrying on eligible business and other person as referred to section 80-IA(10);

(v) Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of section 80-IA(8) or section 80-IA(10) are applicable; or

(vi) Any other transaction as may be prescribed. However, the above mentioned transactions shall not be treated as specified domestic transaction in case the aggregate of such transactions entered into by the assessee in the previous year does not exceed a sum of inr.5 crore.

(c) The penalty that could be levied in each case is:-

(i) Failure to get books of accounts audited as required under section 44AB of the Income-tax Act, 1961 - a sum equal to ½% of the total sales, turnover or gross receipts, as the case may be, in business, or of the gross receipts in profession, in such previous year or years, or a sum of INR.1,50,000, Whichever is less [Section 271B].

(ii) Failure to furnish report from an accountant as required by section 92E - a sum of INR.1,00,000 [Section 271BA].

(d) (i) As per section 192, tax is deductible at source by any person who is responsible for paying any

income chargeable under the head salaries. However, under sub section (2A) of that section, the employee will be entitled to relief under section 89(1) and consequently he will be required to furnish to the person responsible for making the payment, such particulars in the prescribed form. The person responsible for making the payment shall compute the relief and take into account the same while making deduction of tax at source from salary.

(ii) Section 194-I, which governs the deductions of tax at source on payment of rent, exceeding INR.1,80,000 per annum is applicable to all taxable entities excepting individuals and HUFs, who were not subject to tax audit under section 44AB in the immediately preceding financial year. However, under section 196, exemption is provided in respect of payments made to Government from application of provisions of tax deduction at source. Therefore, no tax is required to be deducted at source by State Bank of India from rental payment to the Government.

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ROSE No. of Pages: 4 Total Marks: 100 No of Questions: 7 Time Allowed: 3 Hrs

Question No.1 is compulsory Answer any 5 questions from remaining 6 questions

1. a) Compute the duty payable under the Customs Act, 1962 for an imported machinery based on the

following information: (i) Assessable value of the imported equipment US $ 12,000. (ii) Date of Bill of Entry 25.03.2015 basic customs duty on this date @ 20% and exchange rate notified

by the Central Board of Excise and Customs US $ 1 = ` 65. (iii) Date of Entry inwards 21.03.2015 Basic customs duty on this date @ 16% and exchange rate

notified by the Central Board of Excise and Customs US $ 1 = ` 57. (iv) Additional duty payable under Section 3(1) and (2) of the Customs Tariff Act, 1975: 15%. (v) Additional duty under Section 3(5) of the Customs Tariff Act, 1975: 4%. (vi) Education Cess @ 2% and secondary and higher education cess @ 1%. Make suitable assumptions where required and show the relevant workings and round off your answer to the nearest Rupee.

b) ABC Ltd., purchased a machine at a cum-duty price of ` 17,97,760. The excise duty rate charged on the said machine was 12% plus education cess 2% plus secondary and higher education cess 1%. The machine was purchased on 1-7-2013 and was disposed of on 30-9-2015 for a price of ` 10,00,000 in working condition as second hand machine.

• Calculate the amount of CENVAT credit allowable for the financial years 2013-14 and 2014-15 and • Also specify the amount payable towards CENVAT credit already taken at the time of disposal of the machinery in the year 2015-16.

c) M/s. Patel Ltd., sold machinery to Mr. Nilesh at a price of ` 10 lakhs on 15th June, 2014 and the same was removed from the factory at Kolkata. The rate of excise duty applicable is 12.36% on the date of removal. Mr. Nilesh refused to take delivery of the machine when it reached his destination. In the meantime, M/s. Patel Ltd. increased the prices of the similar type of machinery to ` 15 lakhs with effect from 16th June, 2014. The machinery as refused by Mr. Nilesh has been sold on 20th June 2014 to Mr. Sen at the revised price of ` 15 lakhs. The excise duty including Education Cess is 12.36% applicable with effect from 10th June, 2014. Explain the following with reasons: (i) What is the value to be taken as assessable value? (ii) What is the rate of excise duty applicable and duty payable on above transaction? (iii) The Central Excise Officer is demanding duty on the price of ` 15 lakhs at the time of sale to Mr.

Sen. Is he right in his approach? (iv) Does cost of production have any bearing on the assessable value?

d) ABC Ltd. has a manufacturing unit situated in Luck now. In the financial year 2014-15, the total value of

clearances from the unit was ` 600 lakhs. The breakup of clearances is as under : (i) Clearances worth ` 70 lakhs of certain non-excisable goods manufactured by it. (ii) Clearances worth ` 55 lakhs exempted under specified job work notification. (iii) Exports worth ` 125 lakhs (` 100 lakhs to USA and ` 25 lakhs to Nepal). (iv) Clearances worth ` 50 lakhs which were used captively to manufacture finished products that are

exempt under notifications other than Notification No. 8/2003-CE., dated 01-03-2003 as amended.

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(v) Clearances worth `300 lakhs of excisable goods in the normal course. Explain briefly, the treatment for various items and state, whether the unit will be eligible for the benefits of exemption under Notification No. 8/2003-CE dated 1-3-2003 as amended for the year 2015-16.

(4 x 5 = 20 Marks) 2.

a) Determine the Point of Taxation in each of following independent cases in accordance with point of Taxation Rules, 2011.

S. No. Date of actual provision

of service

Time [date] of Invoice, Bill or

Challan as the case may be

Date on which payment

received

1 10.06.2014 30.06.2014 06.06.2014 (part) and

16.06.2014 (remaining)

2. 10.06.2014 12.07.2014 30.06.2014

3. 10.06.2014 12.07.2014 05.06.2014 (part) and

25.06.2014 (remaining)

4. 10.06.2014 22.07.2014 12.08.2014

(4 Marks) b)

(i) After visiting Canada, Mrs. & Mr. A brought to India a laptop computer valued at `85,000, personal effects valued at `90,000 and a personal computer for `78,000. What is the customs duty payable? (2 Marks)

(ii) Specify the relevant dates for warehouse goods in the following cases:

Rate of exchange, when goods are removed for home consumption;

Rate of duty, when goods are removed for home consumption;

Goods deemed to be improperly removed u/s 72 of the Customs Act, or, Rate of duty if the goods are not removed from warehouse within the permissible period. (2 Marks)

c) Compute the customs duty payable from the following data:

Machinery imported from USA by air US $ 16,000

Accessories compulsorily supplied with machine US $ 4,000

Air freight US $ 6,000

Insurance US $ 200

Local agent‘s commission ` 9,000

Exchange rate 1 US $ = ` 60

Customs duty on machine 10% ad valorem

Customs duty on accessory 20% ad valorem

Additional duty of customs 12%, but effective rate by exemption notification

8%

Additional duty of customs under section 3(5) of Customs Tariff Act, 1975

4%

Education Cess + Secondary and Higher Education Cess -2% + 1 %

(4 Marks)

d) BLL Ltd. of Mumbai (having diversified business) has provided the following services, whose values are listed below. Compute its service tax liability : (i) Services provided to a company located in Colombo in relation to organization of a sport event in

Colombo : ` 22 lakhs (ii) Services provided to a company located in Srinagar in relation to festival celebration on Srinagar :

` 6 lakhs

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(iii) Services provided to a company located in Jaipur in relation to fashion show in Dubai : ` 24 lakhs (iv) Services of online database access and retrieval services provided from its website : ` 25 lakhs

(out of this, ` 18 lakhs was provided to recipients located outside India) (4 Marks) 3.

a) An importer, having received 100 casks of whisky from Scotland by a vessel, warehouses them in a bonded place. Each cask is reported to contain 1000 litres. At the time of removal of goods, it is found that 50 cases contained only 980 litres each. The importer claims that there has been a loss in storage and hence no duty can be levied on the shortage. Explain the relevant provisions of the Customs Act, 1962 regarding shortage of volatile goods and state, with reasons, how would you decide the case.

(4 Marks) b) M/s. ZBL Ltd. received the following sums (exclusive of taxes). Compute its service tax liability (Ignore

small service provider's exemption)- (1) Commission from selling of various goods belonging to other parties : ` 15 lakh ; (2) Commission from acting as Clearing and Forwarding Agent: ` 8 lakh ; (3) Commission from acting as clearing agent: ` 6 lakh ; (4) Commission from acting as forwarding agent: ` 9 lakh ; (5) Margin earned from trading in shares : ` 5 lakh ; (6) Margin from trading in futures : ` 8 lakh ;

(4 Marks) c) M/s. Khan Ltd. is a small scale unit manufacturing plastic name plates for motor vehicles as per

specifications provided to them by their customers, who are vehicle manufacture` For purposes of classification under the first schedule to the Central Excise Tariff Act, 1985 the assessee has claimed that the plastic name plates are “parts and accessories of motor vehicles”. The Central Excise Department has proposed classification as “other plastic products” in respect of these plastic name plates. The department’s view is that the motor vehicle is complete without the affixation of name plates and cannot be treated as a part of the motor vehicle. Write a brief note on whether the stand taken by the department is correct in law. (8 Marks)

4. a) A society, running renowned schools, allows other schools to use a specific name, its logo and motto

and receives a non-refundable amount and annual fee as a consideration. Whether this amounts to a taxable service? Explain with reference to a case law. (8 Marks)

b) Can CENVAT credit be availed on machineries purchased for being used in setting up a sugar plant in foreign country when (i) the same are not used in the factory premises and (ii) no duty is paid on final product viz., the sugar plant? (8 Marks)

5. a) Determine the place of provision of services as well as their taxability in each of the following cases:

(i) Mr. A, the owner of an immovable property located in New Delhi gives the said property to Mr. B of London on rent, for commercial purposes. Mr. B pays the rent in UK pounds.

(ii) Mr. Rahul, a Delhi based interior decorator, provides his professional services in respect of an immovable property which is located in San Diego, U.S.A.

(iii) A U.S.A. based company possessing specialization in mineral exploration has been awarded a contract for mineral exploration in respect of specific sites in Canada by Mumbai based Mr. Ram Kapoor.

(iv) ABC Ltd. agrees to provide services connected with oil exploration [by virtue of single agreement for consolidated consideration] to XYZ Ltd. in respect of specific sites located in Assam, Gujarat and Maharashtra. The proportion of services provided by ABC Ltd. in above States worked out to be 25%, 60% and 15%. ABC Ltd. does not have a centralized registration. (8 Marks)

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b) Mr. X is a dealer of smuggled goods. However, he himself does not import the goods. Duty has been demanded from Mr. X under sections 28 and 125(2) of the Customs Act, 1962 although no smuggled goods have been seized from him. Discuss, with the help of a decided case law, if any whether such demand of duty is valid in law. (4 Marks)

c) An order has been issued to M/s. Shankar & Sons in which the Joint Commissioner of Central Excise has

confirmed a duty demand of ` 12,50,000 and imposed a penalty of equal amount under section 11AC of the Central Excise Act, 1944 plus a penalty of ` 1,50,000 under rule 26 of Central Excise Rules, 2002. M/s Shankar & Sons intends to file an appeal with the Commissioner (Appeals) against the said adjudication order. Compute the quantum of pre-deposit required to be made by M/s. Shankar & Sons for filing the appeal with the Commissioner (Appeals). In the above case, what would be the quantum of pre-deposit, if the adjudication order imposed only the penalties under section 11AC of the Central Excise Act, 1944 and rule 26 of Central Excise Rules, 2002 (no duty is demanded)? Answer with reference to the position of law as amended by Finance (No. 2) Act, 2014. (4 Marks)

6. a) Harbhajan Travels Pvt. Ltd., located in Gujarat, is engaged in providing services of renting of motorcab

and discharges its service tax liability by availing abatement granted under Notification No. 26/2012 ST dated 20.06.2012. Amount charged for the services rendered by the company during the month of October, 2014 is ` 6,00,000. The invoices for such services have been issued by Harbhajan Travels Pvt. Ltd. in the month of October, 2014. The company has sub-contracted a part of its services to Ramchandra Cabs Pvt. Ltd., which is also engaged in providing services of renting of motorcab. Ramchandra Cabs Pvt. Ltd. has raised an invoice for ` 1,12,360 dated 25.10.2014 (value of services is ` 1,00,000 and service tax payable thereon is ` 12,360) on Harbhajan Travels Pvt. Ltd. for the services sub-contracted to it during the month of October, 2014. Harbhajan Travels Pvt. Ltd. has received the invoice raised by Ramchandra Cabs Pvt. Ltd. on 25.10.2014. Determine the net service tax liability of Harbhajan Travels Pvt. Ltd. (to be paid in cash) for the month of October, 2014. (8 Marks)

b) Examine the validity of the following statements with reference to the provisions of Central Excise Rules, 2002:-

(i) A manufacturer cannot authenticate the invoices issued by it by means of a digital signature. (ii) An importer who issues Covetable invoices is liable to penalty under rule 25 of Central Excise

Rules, 2002 for non-accountal of excisable goods stored in the warehouse. (4 Marks) (iii) Only public sector companies, resident public limited companies and resident private limited

companies are notified under section 28E(c)(iii) of the Customs Act, 1962 as the class or category of resident persons who can apply for advance ruling in case of specified matters relating to customs duty. Examine the validity of the statement with reference to customs laws. (4 Marks)

7. a) What is the significance of consideration in the context of service tax? Whether a security deposit that

is returnable on completion of provision of service is a consideration for service or not? b) When one can pay duty under protest in Excise? c) Assessable value of certain goods imported from UK is ` 35,00,000. The packet contains 35,000 pieces

with maximum retail price ` 150 each. The goods are assessable under section 4A of the Central Excise Act, 1944, after allowing an abatement of 40%. The excise duty rate is 8% ad valorem. Calculate the amount of additional duty of customs u/s 3(1) of the Customs Tariff Act, 1975 assuming basic customs duty @10% ad valorem.

d) A manufacturer of wooden furniture sold the furniture without painting in it. After the furniture is sold, colour painting is done at the instance of buyers wherever necessary as per their specification either by the painters suggested by the manufacturer or other painters directly engaged by the buyers. Whether such painting would amount to manufacture? (4 x 4 = 16 Marks)

PRIME A

CADEMY


PRIME ACADEMY 41st SESSION MODEL EXAM - FINAL – INDIRECT TAXES LAWS


(a)

Duty ` Total `

Assessable Value (US$ 12,200 x Rate of exchange in force on date of presentation of bill of entry i.e., `65)

--- -- 787800

Add: BCD [As per section 15(1)(a), rate of duty prevalent on date of presentation of bill of entry or date of entry inwards, whichever is later, shall be applicable. Therefore, rate prevalent on 25-03-2014 viz. 20% shall be taken.]

20.00% 157560 157560

Add: Additional duty i.e., CVD u/s 3(1) (excise duty excluding EC and SHEC due to exemption)

15.00%

157560 141804

945360 141804

Add: Education Cess @ 3% on DUTY sub-total upto last stage 3.00% 8981 8981

Add: Special CVD u/s 3(5) @ 4% of total value (including duty) 4.00% 43846 43846

Total 352191 1139991

(b) Part I – CENVAT Credit allowable [Rule 4(2)(a) and 4(2)(b)]:

[Total Duty paid = ` 17,97,760 x 12.36% ÷ 112.36% = ` 1,97,760 F.Y. 2013-14 F.Y. 2014-15

50% credit in year of receipt and balance in subsequent year ` 98,880 ` 98,880

Date of taking credit 01-07-2013 01-04-2014

Part II – Computation of amount payable under Rule 3(5A)

Date of taking credit is 1-7-2013 only

Date of taking credit is 1-7-2013 for 50% and 1-4-2014 for bal. 50%

For first 50% For balance

Credit taken = 50% of ` 1,97,760 1,97,760 98,880 98,880

Date of taking credit 1/7/2013 1/7/2013 1/4/2014

Date of removal 30-09-2015 30-09-2015 30-09-2015

No. of quarters of part thereof 9 9 6

Percentage eligible @ 2.5% for every quarter 22.50% 22.50% 15.00%

Credit reversible [100% - Percentage eligible] 77.50% 77.50% 85.00%

Amount to be paid=Credit Taken x % Reversible 1,53,264 76,632 84,048

Limit I = Total amount payable as about 1,53,264 1,60,680

Limit II = Value ` 10 lakh x Duty i.e., 12.36% 1,23,600 1,23,600

Amount payable under Rule 3(5A) = Higher of Limit I or Limit II 1,53,264 1,60,680

(c)

(i) The price prevailing at the time of removal from factory (i.e. ` 10 lacs on 15th June 2014 is the assessable value.

(ii) The applicable rate of duty is @12.36% and duty amount is ` 1,23,600 (i.e. ` 10 lacs x 12.36/100).

(iii) The Central Excise Officer is not right in his approach.

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(iv) Cost of production has no bearing with assessable value in present case. Central Excise valuation can be below manufacturing cost. If price is the sole consideration and dealing between seller and buyer are arm‘s length, assessable value will be decided on the basis of selling price, even if it is below manufacturing cost. So cost of manufacturing will not change the assessable value.

(d) In order to claim the benefit of SSI exemption in a financial year, the total turnover of a unit should not exceed ` 400 lakh in the preceding year. For this purpose, the total value of clearances shall be calculated as follows –

(` lakhs)

Total value of clearances 600

Less:

Clearances of certain non-excisable goods manufactured by it 70

Clearances exempted under specified job-work notification 55

Exports clearances to USA 100

Clearances of goods used captively to manufacture finished products, which are exempt under Notification other than SSI-exemption notification

Nil

Value of clearances 375

Unit eligible for exemption: Since the aggregate value of clearances during the preceding financial year doesn't exceed `400 lakhs, therefore, the unit is eligible for SSI-exemption in the financial year 2015-16.

2. (a)

S .No

Date of completion of service

Time [date] of Invoice, Bill or Challan as the case may be

Date on which payment received Point of Taxation Remarks

1 10.06.2014 30.06.2014

06.06.2014 (part) and 16.06.2014 (remaining)

06.06.2014 and 16.06.2014 for the respective amounts

Invoice issued within 30 days. Part payment (in the form of advance received before issue of invoice and remaining payment received after completion of service).

2 10.06.2014 12.07.2014 30.06.2014 10.06.2014

Invoice not issued within 30 days and payment received after completion of service.

3 10.06.2014 12.07.2014

05.06.2014 (part) and 25.06.2014 (remaining)

05.06.2014 and 10.06.2014 for the respective amounts

Invoice not issued within 30 days. Part payment received as advance before completion of service and remaining payment received subsequently.

4 10.06.2014 22.07.2014 12.08.2014 10.06.2014

Invoice not issued within 30 days and entire payment received after completion of service.

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(b) (i) 1. Exemption: Personal Effects and One Laptop are exempt from duty. 2. General Free Allowance: The General Free Allowance for the Passenger's of Age ≥ 10 years, and

returning after stay abroad of > 3 days is ` 45,000. [Rule 3 of Baggage Rules, 1998] 3. Rate: Rate of Duty applicable for Baggage = 35% + EC @ 2% + SHEC @ 1% =36.05% 4. Duty: Duty payable on Baggage = ` (78,000 - 45,000) x 36.05% = ` 11,897. (ii) The relevant dates for warehoused goods in the following cases will be:

Warehoused goods (Case) Relevant date

1. Rate of exchange, when goods are removed for home consumption

Date of presentation of bill of entry for warehousing : As per section 14 of the Customs Act, rate of exchange shall be rate in force on the date on which bill of entry for warehousing is presented u/s 46 of the Customs Act, shall be applicable.

2. Rate of duty, when goods are removed for home consumption

Date of presentation of bill of entry for home consumption: As per section 15(1)(b) of the Customs Act, the rate of duty in force on the date on which ex-bond bill of entry for home consumption (removal of goods from warehouse for home consumption) is filed under section 68, shall be applicable.

3. Goods deemed to be improperly removed u/s 72, or, Rate of duty if the goods are not removed from warehouse within the permissible period

Date on which goods are deemed to be improperly removed, or, date of expiry of warehousing period: In case of goods deemed to be improperly removed u/s 72 of the Customs Act, the relevant date for determination of rate duty shall be the date of such deemed removal i.e., the date on which any of the events listed in section 72 occurs For example, in case goods continue to remain in warehouse after expiry of period u/s 61, then, rate of duty in force on date of expiry of such period shall be applied. Section 15(l)(b) cannot apply, as it applies only when goods are removed u/s 68 properly.

(c) Computation of Customs duty payable

Cost of machinery inclusive of accessory (FOB) (See Note) US$ 20,000

Add : Cost of insurance US$ 200

Add: Air freight (restricted to 20% of FOB) US$ 4,000

Total US$ 24,200

Total (In Indian `) US$ 24,200 x ` 60 (being the exchange rate) ` 14,52,000

Add : Agency commission ` 9,000

CIF Value ` 14,61,000

Add : Landing charges (@ 1% of CIF value) ` 14,610

Assessable value ` 14,75,610

Add : Basic Customs Duty (10% of assessable value) [A] ` 1,47,561

Total for Additional duty of Customs leviable under section 3(1) Customs Tariff Act ` 16,23,171

Add : Additional duty of Customs u/s 3(1) Customs Tariff Act equal to excise duty @ 8% [B]

` 1,29,854

Add : Education cess and SHEC @ 3% of [A] + [B] [C] ` 8,322

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Total for Additional duty of Customs u/s 3(5) Customs Tariff Act ` 17,61,347

Add : Additional duty of Customs u/s 3(5) Customs Tariff Act @ 4% [D] ` 70,454

Total imported cost (rounded off) ` 18,31,801

Total customs duty payable = [A] + [B] + [C] + [D] (rounded off) ` 3,56,191

Working notes: (i) As per Accessories (Conditions) Rules, 1963, accessories and spare parts compulsory supplied

with main implements are chargeable at the same rate as applicable to main machine. Therefore, such accessories shall also be chargeable with duty at the applicable to the machinery i.e. @ 10% ad valorem.

(ii) Though actual air freight is US $ 6,000, it is limited to 20% of FOB value of goods as per Rule 10(2) of Customs Valuation Rules.

(iii) Agency Commission, which is incurred in India, is not regarded as buying Commission and therefore will be added to determine the CIF value.

(d) The taxable value and service tax is computed below (amount in `)

(i) Services provided to a company located in Colombo in relation to organization of a sport event in Colombo: As per Rule 6 of the Place of Provisions Rules, 2012, in case of services provided in relation to organization of events, the services shall be taxable at the place of location of event. Since event is held in non-taxable territory, it is not liable to service tax

nil

(ii) Services provided to a company located in Srinagar in relation to organization of a sport event in Srinagar: As per Rule 6 of the Place of Provisions Rules, 2012, in case of services provided in relation to organization of events, the services shall be taxable at the place of location of event. Since event is held in non-taxable territory, it is not liable to service tax

Nil

(iii) Services provided to a company located in Jaipur in relation to fashion show in Dubai: Since services are in relation to event held in Dubai, hence, as per Rule 6, they are not taxable. But, since the services are provided to a recipient located in taxable territory (Jaipur) and both service provider and recipient are located in taxable territory, hence, as per Rule 8, these services are liable to service tax.

24,00,000

(iv) Services of online database access and retrieval services provided from its website: As per Rule 9, the place of provision is the place of location of service provider. Since, service provider ZBL Ltd. is located in Mumbai (taxable territory), hence, these services will be taxable in full irrespective of location of the service recipient.

25,00,000

Total Taxable Value 49,00,000

Service tax @ 12.36% 6,05,640

3.

(a) The duty payable on 15 litres per case found deficient will be remitted u/s 70, as whisky (wine/beer) is notified goods u/s 70, the loss is found at the time of delivery from warehouse and loss of mere 1.5% per cask appears to be a natural loss.

(b) Computation of service tax liability: (i) Commission from selling of various goods belonging to other parties : `15 lakh - Taxable; (ii) Commission from acting as Clearing and Forwarding Agent: ` 8 lakh - Taxable; (iii) Commission from acting as clearing agent: ` 6 lakh - Taxable; (iv) Commission from acting as forwarding agent: ` 9 lakh - Taxable; (v) Margin earned from trading in shares : ` 5 lakh - Shares are securities and "goods" and trading

in goods is a service covered within negative list u/s 66D(e) - Not taxable; (vi) Margin from trading in futures: ` 8 lakh - Futures are securities and "goods" and trading in

goods is a service covered within negative list u/s 66D(e) - Not taxable; Taxable Value = 15+8+6 + 9 = ` 38 lakh; and service tax thereon @ 12.36% = ` 4,69,680.

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CADEMY


(c) No, the stand taken by the Department is not valid in law. The plastic name plates should be classified as parts and accessories of motor vehicles on following grounds:

(i) name plates are solely and exclusively used for motor vehicles. (ii) classification as parts and accessories of motor vehicles is more specific while the classification as other plastic products is residuary and more general in nature. The Department has examined only whether the name plates can be considered ‘parts’. Of motor vehicles, it has not at all considered whether these name plates can be considered ‘accessories’ of motor vehicle – An ‘accessory’ by its very definition is something supplementary or subordinate in nature and need not be essential for the actual functioning of the product. In a similar case of Pragati Silicons Pvt. Ltd. v. CCEx. Delhi (2007) 211 ELT 534 (SC), the Apex Court applying the test laid down in the case of Mehra Bros. v. Joint Commercial Officer (1991) 51 ELT 173 (SC) has held that name plates add to convenient use of motor vehicle and give an identity to it. They add effectiveness and value to vehicle and are at very least accessories of vehicles. Thus, even if there was any difficulty in the inclusion of the name plates as ‘parts’ of the motor vehicles, they would most certainly have been covered by the broader term ‘accessory’ as car seat covers and upholstery etc.

4. (a) Relevant Judicial Case: Mayo College General Council v. CCEx. (Appeals) 2012 (28) STR 225 (Raj)

Facts of the case: The petitioner, Mayo College, was a society running internationally renowned schools. It allowed other schools to use the name 'Mayoor School', its logo and motto, and as a consideration thereof received collaboration fees from such schools which comprised of a nonrefundable amount and annual fee. The schools were required to observe certain obligations/terms and unimpeachable confidentiality. Points of dispute: The department contended that the petitioner was engaged in providing franchise service to schools that were running their institutes using its school name "Mayoor School". Therefore, a show cause notice proposing recovery of service tax along with interest and penalty was issued against them. The petitioners submitted that they did not provide any franchise services to the said schools, rather they provided their expertise for the establishment and development of these schools. The agreement entered into between the petitioners and the said schools also did not reveal that any franchise service was provided by the petitioner to these schools. It was contended by the petitioners that they were a non-profit society carrying on non-commercial activities and that their main obligation was to maintain the high standard of the education in the said schools. Further, they did not collect any 'franchise fees' from the said schools and therefore, were not liable to pay service tax. Decision of the case: The High Court held that when the petitioner permitted other schools to use their name, logo as also motto, it clearly tan amounted to providing 'franchise service' to the said schools and if the petitioner realized the 'franchise' or 'collaboration fees' from the franchise schools, the petitioner was duty bound to pay service tax to the department.

(b) KCP Ltd. v. CCEx. 2013 (295) ELT 353 (SC) Facts of the case: The assessee was a manufacturer of machinery for sugar and cement plants and parts thereof falling under Chapter 84 of the Central Excise Act, 1944. It entered into a contract for setting up a sugar manufacturing plant in Vietnam. For this purpose, the assessee manufactured certain machines in its own factory and also purchased certain other machinery from other dealers/manufacture` Both the machineries (manufactured and bought-out) were then put in a container and transported to Vietnam for setting up the sugar plant. Point of dispute: The assessee availed CENVAT credit on bought-out machinery describing them as eligible capital goods. The Department, however, contended that the bought-out machinery was not eligible capital goods as the same had not been used by the assessee in its factory premises.

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Observations of the Court: The Supreme Court observed that the objective of the scheme of CENVAT credit is to remove cascading effect of duty imposed on the final product. There are two basic conditions for availing CENVAT credit: (i) Duty must have been paid on inputs and such inputs must be used in manufacture of final product in the factory of the manufacturer, (ii) Excise duty must have been levied on final product. The Supreme Court explained that if duty is not levied on the final product, question of grant of any relief would not arise as in that case there would not be any cascading effect on the duty imposed on inputs. The Supreme Court pointed out that since the sugar plant was set up in Vietnam, it could not be said that the plant was manufactured in the factory of the assessee. Thus, no duty was paid by the assessee on the final product i.e., on sugar plant which had been set up in Vietnam. Therefore, there would not be any question of availing credit of the duty paid on the inputs. The Supreme Court further observed that the bought-out machinery was not used by the assessee in the manufacture of the machinery (which had been transported along with bought-out machinery to Vietnam for setting up the sugar plant) as the same was not even unpacked or tested, and transported in exact condition along with machinery manufactured by the assessee. The assessee, therefore, merely acted as a trader or as an exporter in relation to the machinery purchased by it, which had been exported and used for setting up a sugar plant in a foreign country. Decision: The Supreme Court held that CENVAT credit could not be allowed to the assessee as no duty was paid on sugar plant set up in a foreign country. Further, since the bought-out machinery was not used in the assessee’s factory premises, the necessary condition for availing CENVAT credit on capital goods could not be fulfilled.

5. (a)

(i) As per rule 5 of the PoPS Rules, in case of a service that is ‘directly in relation to immovable property’, the place of provision is where the immovable property is located, irrespective of where the provider or receiver is located. Since in the given case, the immovable property in question is located in New Delhi, the place of provision of service is New Delhi and resultantly, the service would be taxable in India. The fact that payment is made in foreign currency does not have any bearing on deciding the taxability of a service.

(ii) Since in the given case, the immovable property in question is located in San Diego, the place of provision of service is San Diego, U.S.A. and resultantly, the service would not be taxable in India [Rule 5 of the PoPS Rules].

(iii) In this case, since specific sites in respect of which mineral exploration is to be carried out are located in Canada, the place of provision of services as per rule 5 of the PoPS Rules will be Canada which does not fall within the ambit of ‘taxable territory’ and resultantly, these services will not be taxable in India. The fact that service providing company is located in USA and service recipient is located in Mumbai (India) is not significant.

(iv) Although all the locations given in this case fall within the taxable territory, PoPS Rules are still applicable as these rules are also useful for those service providers who operate from multiple locations within India without having centralised registration for the purpose of determining the precise taxable jurisdiction applicable to their operations. Where any immovable property related service referred to in rule 5 is provided at more than one location, including a location in the taxable territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is provided [Rule 7 of the PoPS Rules]. Therefore, in the present case, ABC Ltd. is liable to pay service tax and the place of provision of services would be Gujarat because greatest proportion of taxable service [i.e. 60%] is provided there.

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CADEMY


(b) The issue involved in the given case is whether customs duty can be demanded under section 28 and/or section 125(2) of the Customs Act, 1962 from a person dealing in smuggled goods when no such goods are seized from him. Recently, the Karnataka High Court addressed this issue in the case of CCus. v. Dinesh Chhajer 2014 (300) ELT 498 (Kar.). In the instant case, the High Court made the following significant observations:- (i) Section 28 applies to a case where the goods are imported by an importer and the duty is not

paid in accordance with law, for which a notice of demand is issued on the person. In case of notice demanding duty under section 125(2), firstly the goods should have been confiscated and the duty demandable is in addition to the fine payable under section 125(1) in respect of confiscated goods. Thus, notices issued under sections 28 and 125(2) are not identical and fall into completely different areas.

(ii) The material on record disclosed that the assessee did not import the goods but was only a dealer of the smuggled goods. Therefore, there was no obligation cast on him under the Act to pay duty. Thus, the notice issued under section 28 of the Act to the assessee is unsustainable as he is not the person who is chargeable to duty under the Act.

(iii) Since no goods were seized, there could not be any confiscation and in the absence of a confiscation, question of payment of duty by the person who is the owner of the goods or from whose possession the goods are seized, does not arise. Based on the above observations, the High Court held that no duty is leviable against the assessee as he is neither the importer of the goods nor was in possession of any goods.

In the given case, Mr. X is only a dealer of smuggled goods; he is not the importer of these goods and also no such goods have been seized from him. Therefore, applying the ratio of the above mentioned decision to the given situation, it can be concluded that customs duty under section 28 and/or section 125(2) of the Customs Act, 1962 cannot be demanded from Mr. X.

(c) With effect from 06.08.2014, section 35F of Central Excise Act, 1944 has been substituted with a new section to provide, inter alia, that an appeal cannot be filed with the Commissioner (Appeals) unless the appellant has deposited 7.5% of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise. The amount of such pre-deposit, however, will not exceed ` 10 crores. Therefore, in the given case, though both duty and penalty are in dispute, quantum of pre-deposit will be 7.5% of only the disputed duty amount i.e., 7.5% of ` 12,50,000 which is ` 93,750. If the adjudication order imposed only the penalties under section 11AC of the Central Excise Act, 1944 and rule 26 of Central Excise Rules, 2002 (no duty is demanded), then as per section 35F of Central Excise Act, 1944, 7.5% of the penalty has to be paid as pre-deposit where such penalty only is in dispute for filing an appeal with the Commissioner (Appeals). Further, Circular No. 984/08/2014 CX dated 16.09.2014 issued by CBEC has clarified that where penalty alone is in dispute and penalties have been imposed under different provisions of the Act, pre-deposit would be calculated based on the aggregate of all penalties imposed in the order sought to be appealed against. Thus, in the given case, quantum of pre-deposit will be 7.5% of ` 14,00,000 [` 12,50,000 under section 11AC plus ` 1,50,000 under rule 26] which is ` 1,05,000.

6. (a) Computation of net service tax liability (to be paid in cash) of Harbhajan Travels Pvt. Ltd. for October,

2014

Particulars (`)

Amount charged for the services 6,00,000

Value of taxable service @ 40% of the amount charged for the service [Note 1] 2,40,000

Service tax @ 12.36% 29,664

Less: CENVAT credit [Note 2] 4,944

Net service tax liability to be paid in cash 24,720

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CADEMY


Notes: (i) Notification No. 26/2012 ST provides that value of taxable services in respect of services of

renting of motor cabs is 40% of the amount charged by the service provider. In other words, an abatement of 60% of the amount charged is available in respect of services of renting of motorcab.

(ii) With effect from 01.10.2014, Notification No. 26/2012 ST has been amended to provide that up to 40% CENVAT credit of input service of renting of a motorcab provided by a sub-contractor to the main contractor (providing service of renting of motorcab) could be availed by the main contractor if the sub-contractor is paying service tax on full value i.e., no abatement is being availed by sub-contractor. This credit will be available even if the main contractor pays the service tax on abated value. Since Ramchandra Cabs Pvt. Ltd. has paid service tax on full value (` 1,00,000 x 12.36% = ` 12,360), Harbhajan Travels Pvt. Ltd. can avail credit upto ` 4,944 (40% of ` 12,360).

(iii) Since Harbhajan Travels Pvt. Ltd. is a company, reverse charge provisions will not apply in its case. Further, provisions of partial reverse charge will not apply in case of Ramchandra Cabs Pvt. Ltd. also, as in its case services are provided in similar line of business.

(b) (i) The said statement is not correct. With effect from 01.03.2015, a new sub-rule (8) has been

inserted in rule 11 of Central Excise Rules, 2002 vide Notification No.8/2015 CE (NT) dated 01.03.2015 to provide for authentication of invoices by digital signatures. It has been provided that an invoice issued under this rule by a manufacturer may be authenticated by means of a digital signature.

(ii) The said statement is correct. Prior to 01.03.2015, the provisions of rule 25 of Central Excise Rules, 2002 relating to confiscation and penalty for specified contraventions were applicable to a producer, manufacturer, registered person of a warehouse and a registered dealer. However, with effect from 01.03.2015, the scope of applicability of rule 25 has been extended vide Notification No. 8/2015 CE (NT) dated 01.03.2015 to an importer who issues an invoice on which CENVAT credit can be taken. Further, it may be noted that non-accountal of excisable goods stored in the warehouse is a specified contravention under rule 25 of Central Excise Rules, 2002.

(c) The said statement is not valid. Prior to 01.03.2015, public sector companies, resident public limited companies and resident private limited companies were notified under section 28E(c)(iii) of Customs Act, 1962 as the class or category of resident persons who can apply for advance ruling in case of specified matters relating to customs duty. However, with effect from 01.03.2015, Notification No. 27/2015 Cus (NT) dated 01.03.2015 has expanded the scope of advance ruling by additionally notifying resident firm as class or category of residents who can apply for advance ruling in case of specified matters relating to customs duty. Thus, now a resident firm will also be eligible to make an application for advance ruling in customs duty.

7. (a) As per section 67 of the Finance Act, 1994, ‗consideration‘ includes any amount that is payable for

the taxable service provided or to be provided. As per section 2(d) of the Indian Contract Act, 1872, consideration is defined as ―when at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing, or promises to do or abstain from doing, something such act or abstinence or promise is called a consideration for the promise.‖Activity carried out without any consideration are outside the ambit of service, such as donations, gifts, free charities etc. However an act by a charitable institution for consideration would be a service and taxable unless otherwise exempted. But following are some examples of non-monetary consideration: (i) Supply of goods and services in return for provision of service. (ii) Refraining or forbearing to do an act in return for provision of service. (iii) Tolerating an act or a situation in return for provision of a service. (iv) Doing or agreeing to do an act in return for provision of service.

PRIME A

CADEMY


Grants given for a research where the researcher is under no obligation to carry out a particular research would not be a consideration for such research. Donations to a charitable organisation are not consideration unless charity is obligated to provide something in return. Security deposit which is in the nature of security and hence do not represent consideration for service. However if the deposit is in the nature of a colorable substance wherein the interest on the deposit substitutes for the consideration for service provided or the interest earned has a perceptible impact on the consideration charged for service then such interest would form part of gross amount received for the service. Also security deposit should not be in lieu of advance payment for the service.

(b) Sometimes it happens that the classification of goods done by excise authorities, assessable value determined by the excise authorities in adjudication proceedings, etc. are not agreeable or acceptable to the assessee. In such cases, the assessee can file an appeal and in the meanwhile he can pay duty under protest

(c) The goods are assessable under section 4A of the Central Excise Act, 1944 and hence: As per section 3 of Customs Tariff Act, 1975, value for the purpose of levy of additional duty of customs u/s 3(1) = Retail Sale Price – permissible abatement = [35,000 × (` 150 – 40% of ` 150)] = `31,50,000. Additional duty of customs = 8% of ` 31,50,000 = ` 2,52,000.

(d) In this case, although colour painting of wooden furniture is incidental or ancillary to manufacture of furniture, the furniture is sold as a finished product without painting and the painting is done after the furniture is sold. Hence it would not amount to manufacture as no new commercial product having different name, use or character comes into existence.

PRIME A

CADEMY