PRIME/43rd /FINAL 1

THE SOCIETY OF AUDITORS AND PRIME ACADEMY

MODEL EXAM – FINAL - SEP 2016

ADVANCED MANAGEMENT ACCOUNTING

No. of Questions: 7 Total Marks: 100

No. of Pages: 7 Time Allowed: 3 hrs

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

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

1(a) ABC Ltd. is engaged in business of manufacturing branded readymade garments. It has a single manufacturing facility at Ludhiana. Raw material is supplied by various suppliers.

Majority of its revenue comes from export to Euro Zone and US. To strengthen its position further in the Global Market, it is planning to enhance quality and provide assurance through long term warranty. For the coming years company has set objective to reduce the quality costs in each of the primary activities in its value chain. State the primary activities as per Porter’s Value Chain Analysis in the value chain of ABC Ltd with brief description.

(b) State the validity of following statements along with the reasons:

(i) Two activities have common predecessor and successor activities. So, they can have common initial and final nodes. (ii) In respect of any activity whether real or dummy, the terminal node should bear a number higher than the initial node number. (iii) For every critical activity in a network, the earliest start and the earliest finish time as well as the latest finish time and the latest start time are the same.

(iv) The optimal duration of a project is the minimum time in which it can be completed. (v) Resource leveling aims at smoothening of the resource usage rate without changing the project duration.

(c) Find the optimal solution for the assignment problem with the following cost matrix:

Area /Salesman W X Y Z

A 12 10 8 9

B 8 9 11 7

C 11 14 12 10

D 9 9 8 9

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(d) In WM Ltd. the ‘OB’ equipment is about to be replaced either by ‘CF’ system or by an ‘OF’ system. Finance costs 12% a year and the other estimated costs are as follows:

CF (Rs.) OF (Rs.)

Initial Cost 28,000 40,000

Annual Operating Costs 24,000 p.a. 18,000 p.a.

Required: If the company expected the new system (either CF or OF) to last at least for 12 years, which system should be chosen?

(4 x 5 = 20 Marks)

2(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 Rs. 123 Direct Material per unit Rs. 36 Direct Labour Cost first batch Rs. 52,500 Other Variable Costs Rs. 24 Specific Fixed Cost Rs. 38,75,000

Required: 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 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 Rs. 1,00,00,000 , assuming that a constant rate of learning applies throughout the products life. (8 Marks)

(b) Universal LTD. is engaged in marketing of wide range of consumer goods. M, N, O and Pare the zonal sales officers for your zones. The company fixes annual sales target for them individually. You are furnished with the following: The standard costs of sales target in respect of M, N, O and P are Rs. 5,00,000, Rs. 3,75,000, Rs. 4,00,000 and Rs. 4,25,000 respectively.

M, N, O and P respectively earned Rs. 29,900, Rs. 23,500, Rs. 24,500 and Rs. 25,800 as commission at 5% on actual sales affected by them during the previous year.

The relevant variances as computed by a qualified accountant are as follows:

Particulars M

N

O

P Sales Price Variance 4,000 (F) 6,000 (A) 5,000 (A) 2,000 (A)

Sales Volume Variance 6,000 (A) 26,000 (F) 15,000 (F) 8,000 (F)

Sales Margin Mix Variance 14,000 (A) 8,000 (F) 17,000 (F) 3,000 (A)

Note: (A) = Adverse variance and (F) = Favorable variance

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Required:

(i) Compute the amount of Sales Target Fixed and the Actual Margin Earned in case of each of the zonal sales officer.

(ii) Evaluate the overall performance of these zonal sales officers taking three relevant base factors and then recommend whose performance is the best. (8 Marks)

3(a) Oxford Medical Care Co. (OMCC) is a pharmaceutical firm, operating its entire business through its four customers Ox1, Ox2, Ox3, and Ox4. Ox1 and Ox2 are small pharmaceutical stores while Ox3 and Ox4 are large discount stores with attached pharmacies. OMCC uses discount pricing strategy and prices its products at variable cost plus 25%.

Item Small Pharmaceuticals

Large Pharmaceuticals Activity Rate

Ox1 Ox2 Ox3 Ox4 Number of Orders 4 9 6 3 `750 Order Size `40,000 `20,000 `4,25,000 `4,00,000 n/a Average Discount 4.50% 9.50% 17.50% 11.50% n/a Regular Deliveries 4 9 6 3 `375 Expedited Deliveries 2 0 2 0 `1,250 General Administration Cost

`20,250 `48,375

Required: Prepare a Customer Profitability Statement that shows the profit from each customer and each customer channel. Recommend some points to improve OMCCs profit. (8 Marks)

(b) Aves Airlines Ltd. operates its services under the brand ‘Yellow Bird’. The ‘Yellow Bird’ route network spans prominent business metropolis as well as key leisure destinations across the Indian subcontinent. ‘Yellow Bird’, a low-fare carrier launched with the objective of commoditizing air travel, offers airline seats at marginal premium to train fares across India. Profits of the ‘Yellow Bird’ have been decreasing for several years. In an effort to improve the company’s performance, consideration is being given to dropping several flights that appear to be unprofitable. Income statement for one such flight from ‘New Delhi’ to ‘Kullu’ (Y-09) is given below (per flight):

Rs. Rs.

Ticket Revenue (175 seats x 80% Occupancy x `7,000 ticket price)

9,80,000

Less: Variable Expenses (`1,400 per person) 1,96,000

Contribution Margin 7,84,000

Less: Flight Expenses:

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Salaries, Flight Crew 2,05,000

Salaries, Flight Assistants 45,500

Baggage Loading and Flight Preparation 72,000

Overnight Costs for Flight Crew and Assistants at destination 18,000

Fuel for Aircraft 2,55,000

Depreciation on Aircraft (Based on obsolescence)

51,000

Liability Insurance 1,53,000

Flight Promotion 35,000

Hanger Parking Fee for Aircraft at destination 15,000 8,49,500

Net Gain / (Loss) (65,500)

The following additional information is available about flight Y-09. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid by the flight. The baggage loading and flight preparation expense is an allocation of ground crew’s salaries and depreciation of ground equipment. One third of the liability insurance is a special charge assessed against flight Y-09 because in the opinion of insurance company, the destination of the flight is in a “high-risk” area. The hanger parking fee is a standard fee charged for aircraft at all airports. If flight Y-09 is dropped, ‘Golden Bird’ Airlines has no authorization at present to replace it with another flight. Required: Prepare an analysis showing what impact dropping flight Y-09 would have on the airline’s profit. ( 8 Marks )

4(a) Electro Life Ltd. is a leading Home Appliances manufacturer. The company uses just-in- time manufacturing process, thereby having no inventory. Manufacturing is done in batch size of 100 units which cannot be altered without significant cost implications. Although the products are manufactured in batches of 100 units, they are sold as single units at the market price. Due to fierce competition in the market, the company is forced to follow market price of each product. The following table provides the financial results of its four unique products:

Alpha Beta Gamma Theta Total

Sales (units) 2,00,000 2,60,000 1,60,000 3,00,000

Revenue(Rs) 26,00,000 45,20,000 42,40,000 32,00,000 145,60,000

Less: MaterialCost Rs.

6,00,000 18,20,000 18,80,000 10,00,000 53,00,000

Less: Labour Cost Rs. 8,00,000 20,80,000 12,80,000 12,00,000 53,60,000

Less: Overheads Rs. 8,00,000 7,80,000 3,20,000 12,00,000 31,00,000

Profit / (Loss) Rs. 4,00,000 (1,60,000) 7,60,000 (2,00,000) 8,00,000

Since, company is concerned about loss in manufacturing and selling of two products so, it has approached you to clear picture on its products and costs. You have conducted a detailed investigation whose findings are below: The overhead absorption rate of Rs. 2 per machine hour has been used to allocate overheads into the above product costs. Further analysis of the overhead cost shows that some of it is

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caused by the number of machine hours used, some is caused by the number of batches produced and some are product specific fixed overheads that would be avoided if the product were discontinued. Other general fixed overhead costs would be avoided only by the closure of the factory. Numeric details are summarized below: Rs. Rs.

Machine Hour related 6,20,000 Batch related 4,60,000

Product specific fixed overhead:

Alpha 10,00,000

Beta 1,00,000

Gamma 2,00,000

Theta 1,00,000 14,00,000

General Fixed Overheads 6,20,000

TOTAL 31,00,000

The other information is as follows:

Alpha Beta Gamma Theta Total

Machine Hours 4,00,000 3,90,000 1,60,000 6,00,000 15,50,000

Labour Hours 1,00,000 2,60,000 1,60,000 1,50,000 6,70,000

You are required to : (i) Prepare a profitability statement that is more useful for decision making than the profit statement prepared by Electro Life Ltd. (ii) Calculate the break even volume in batches and also in approximate units for Product ‘Alpha’. ( 8 Marks )

(b) A firm manufactures two products A and B on which the profits earned per unit are Rs. 10 and Rs.20 respectively. Each product is processed on two machines M1 and M2. Product A requires 4 hours of processing time on M1 and 2 hours on M2. Product B requires 2 hours of processing time on M1 and 4 hours on M2. Machine M1 is available for not more than 60 hours, while machine M2 is available for 48 Hours. Formulate the above data into a linear programming model and find the optimum profit through simplex method.What is your conclusion regarding optimality. ( 8 Marks )

5(a) A small maintenance project consists of jobs in the table below. With each job is listed its normal time and a minimum, or crash time, in days. The cost (in Rs/day) of each job is also given.

Job Normal Time (Days) Crash Time (Days) Crash cost Rs/day

1-2 18 14 40

1-3 23 22 20

2-3 08 05 60

2-4 10 06 40

3-4 03 02 80

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(a) Crash the project duration in steps and arrive at the minimum duration. What will be the critical path and the cost of crashing? (b) If there is an indirect cost of Rs. 70 per day. What will be the optimal project duration and cost of crashing. ( 8 Marks )

(b) A company has two divisions. Eastern Division manufactures a unique timing device. It is never sold outside the company and it cannot be obtained from any other source Western division incorporates this device in a finished product which it sells. One device is used for each unit of product. Most of Eastern Division's costs are fixed upto Rs.600 for any output till 1000 units. There after total costs increase at the rate of Rs.100 for every additional 1000 units made. In the hope of optimising his division's results, Eastern Division's Manager has set a transfer price of 50p per unit. Western Division costs in assembling the timing device in the finished product and selling it are, in addition to the transfer price of the timing device, Rs.1200 for any output to 1000 units and Rs. 200 for every 1000 units thereafter. Western Division finds that it can only increase its sales by spending more on promotion or reducing selling prices. Western Division's sales forecast is

Sales in units 1000 2000 3000 4000 5000 6000

Net sales revenue for thousand units (RS.) 1900 1700 1500 1250 960 770

You are required: (i) To prepare schedule of Western Division's costs (including purchases from Eastern Division), sales revenue and net income at the indicated sales levels. (ii) To state what level of sales maximizes Western Division's net income of the company at that level. (iii) To assume that the company's divisional structure and transfer pricing is abandoned and prepare a further schedule of costs, sales and net income for the company as a whole, at the indicated sales levels. (iv) To state what level of sales maximizes the company's net income and explain why it differs from that calculated under a divisional organization (v) To state what range of transfer price will maximize the company's net income as well as western division’s income. ( 8 Marks)

6(a) The following table shows all the necessary information on the available supply from each warehouse, the requirement of each market and the unit transportation cost in rupees

Warehouses

Markets Supply

I II III IV

A 5 2 4 3 22

B 4 8 1 6 15

4-5 08 06 50

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C 4 6 7 5 8

Requirement 7 12 17 9 45/45

The shipping clerk has worked out the following schedule from experience: 12 units from A to II, 1 unit from A to III, 9 units from A to IV, 15 units from B to III, 7 units from C to I and I unit from C to III. Check if the clerk has made the Optimal Schedule. Find the Optimal Schedule and Minimum Total Shipping Cost. ( 6 Marks )

(b) A Company produces three products, details of costs and sales value per unit is given below: Rs. per unit

Products / Particulars A B C Sales Value 2000 3000 2500 Direct Material 500 1000 800 Direct Wages Rs.100 per hour 500 700 400 Variable Overheads 300 600 700

80% of Direct Material is imported @ Rs.500per kg. Import is restricted to 5000kg. Capacity available for production of A and C is restricted to 6250 and 6000 hours respectively. Fixed Cost is Rs.20 lakhs. You are required to compute the most profitable product mix and profit thereof. Company identifies a source of alternative material as replacement of imported material. Availability of material will not be restricted but carrying cost will be @Rs.2.75 per kg. The Company plans to modify its process to suit the new material and enhance its capacity for all the products by 20% above the present one with an investment of Rs.25 lakhs at an interest cost of 15%. Company expects 30% rise in its profit. Find out the price the company can pay to alternative source. ( 10 Marks ) 7. Answer any four: (a) Write a short note on Predatory Pricing. (b) Distinguish between Activity based costing and Activity based management. (c) State any five qualitative factors relevant for decision making. (d) Distinguish between Traditional and Zero based budgeting. (e) List down the advantages of simulation. (4 X 4 = 16 Marks)

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THE SOCIETY OF AUDITORS AND PRIME ACADEMY

43rd SESSION MODEL EXAM – FINAL – ADVANCED MANAGEMENT ACCOUNTING SUGGESTED ANSWERS

1.

(a) Primary activities are the activities that are directly involved in transforming inputs into outputs and delivery and after-sales support to output. Following are the primary activities in the value chain of ABC Ltd.:- (i) Inbound Logistics: These activities are related to the material handling and warehousing. It

also covers transporting raw material from the supplier to the place of processing inside the factory.

(ii) Operations: These activities are directly responsible for the transformation of raw material into final product for the delivery to the consumers

(iii) Outbound Logistics: These activities are involved in movement of finished goods to the point of sales. Order processing and distribution are major part of these activities.

(iv) Marketing and Sales: These activities are performed for demand creation and customer solicitation. Communication, pricing and channel management are major part of these activities.

(v) Service: These activities are performed after selling the goods to the consumers Installation, repair and parts replacement are some examples of these activities.

(i) Invalid

Reason: As per the rules of network construction, parallel activities between two events, without intervening events, are prohibited. Dummy activities are needed when two or more activities have same initial and terminal events. Dummy activities do not consume time or resources.

(ii) Valid Reason: As per the conventions adopted in drawing networks, the head event or terminal node always has a number higher than that of initial node or tail event.

(iii) Invalid Reason: For every critical activity in a network, the earliest start time and the latest start time is same and also the earliest finish time and the latest finish time is same.

(iv) Invalid Reason: The optimum duration is the time period in which the total cost of the project is minimum.

(v) Valid Reason: Resource leveling is a network technique used for reducing the requirement of a particular resource due to its paucity or insufficiency within a constraint on the project duration. The process of resource leveling utilize the large floats available on non-critical activities of the project and cuts down the demand of the resource.

(b)

Salesman W X Y Z

A 3 1 0 1

B 0 1 4 0

C 0 3 2 0

D 0 0 0 1

Salesman W X Y Z

A 4 2 0 1 B 1 2 4 0 C 1 4 2 0 D 1 1 0 1

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The Optimal Assignment is Salesman Job Cost A Y 8

B Z 7 C W 11 D X 9

Hence, the total minimum cost of the project is ` 35. Note: Alternative Solution to the problem is also possible

Salesman W X Y Z

A 3 1 0 1

B 0 1 4 0

C 0 3 2 0

D 0 0 0 1

Salesman Job Cost A Y 8 B W 8 C Z 10

D X 9

(c) Calculation of Life-cycle Costs

CF OF

(`) (`)

Initial Cost 28,000 40,000

Add: Annual Operating Costs 1,48,656 (`24,000 × 6.194)

1,11,492 (`18,000 × 6.194)

Total Life Cycle Costs 1,76,656 1,51,492

The annuity of 12% finance costs for 12 years is 6.194. Analysis When we compare only the initial cost, we will tend to purchase CF system, for its cheap acquisition cost. But when we compare the total life-cycle costs, the OF system is most preferable, for its lowest total life-cycle costs.

2.

(a) 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 batches

x = Cumulative No. of batches produced

b = Learning Coefficient /Index

y = ` 52,500 × (64) –0.152

= ` 52,500 × 0.5314 = ` 27,898.50

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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

(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

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Log 0.1676 = (log r/ Log 2) X 8 Log 2

log 0.1676 = log r8 0.1676 = r8 r = r = 80% (b) Statement Showing “Sales Target Fixed and Actual Margin”

Particulars Zonal Sales Officers

M (`) N (`) O (`) P (`)

Commissioned Earned 29,900 23,500 24,500 25,800

Actual Sales (Commission Earned/ 5%)

5,98,000 4,70,000 4,90,000 5,16,000

Sales Price Variance 4,000(F) 6,000(A) 5,000(A) 2,000(A)

Sales Volume Variance 6,000(A) 26,000(F) 15,000(F) 8,000(F)

Sales Target (Budgeted Sales) 6,00,000 4,50,000 4,80,000 5,10,000

Standard Cost of Sales Target 5,00,000 3,75,000 4,00,000 4,25,000

Budgeted Margin 1,00,000 75,000 80,000 85,000

Sales Margin Mix Variance 14,000(A) 8,000(F) 17,000(F) 3,000(A)

Sales Price Variance 4,000(F) 6,000(A) 5,000(A) 2,000(A)

Actual Margin 90,000 77,000 92,000 80,000

Note: Since no information has been given about Sales Margin Quantity Variance, therefore for calculating actual margin the same has been assumed to be zero. Statement Showing “Evaluation of the Performance of Zonal Sales Officers”

Particulars Zonal Sales Officers

M N O P

Efficiency towards the Target Sales

(a) Whether target achieved No Yes Yes Yes

(b) Actual Sales to Target Sales Ratio 99.67% 104.44% 102.08% 101.18%

(c) Rank IV I II III

Contribution Approach

(a) Contribution Earned (`) 90,000 77,000 92,000 80,000

(b) Rank II IV I III

Margin Vs Sales Ratio

(a) Budgeted Margin/ Sales Target Ratio

16.67% 16.67% 16.67% 16.67%

(b) Actual Margin Vs Actual Sales Ratio

15.05% 16.38% 18.78% 15.50%

(c) Rank IV II I III

An analysis on performance of four Zonal Sales Officers based on three base factors, the performance of officer O is the best.

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3 (a) Statement Showing “Customer Profitability Analysis”

Particulars Ox1 Ox2 Channel Total

Ox3 Ox4 Channel Total Small Stores Large Stores

Revenue 1,60,000 1,80,000 3,40,000 25,50,000

12,00,000

37,50,000

Discount 7,200 17,100 24,300 4,46,250 1,38,000 5,84,250

Net Revenue 1,52,800 1,62,900 3,15,700 21,03,750

10,62,000

31,65,750

Variable Costs 1,28,000 1,44,000 2,72,000 20,40,000

9,60,000 30,00,000

Contribution Margin 24,800 18,900 43,700 63,750 1,02,000 1,65,750

Order Processing 3,000 6,750 9,750 4,500 2,250 6,750

Regular Deliveries 1,500 3,375 4,875 2,250 1,125 3,375

Expedited Deliveries 2,500 --- 2,500 2,500 --- 2,500

Customer Profit 17,800 8,775 26,575 54,500 98,625 1,53,125

Channel Cost 20,250 48,375

Channel Profit 6,325 1,04,750

Recommendations Small Pharmaceuticals Even though Ox1 has lower sales volume (11% lesser from Ox2), it is contributing around 67% of small store‟s profit as its order is for larger quantities and discount offered is very less. OMCC is only just at breakeven point with small pharmaceuticals. To improve profit OMCC should: (i) Coordinate with Ox2 to increase order size and try to negotiate a smaller discount. (ii) Try to work with Ox1 to reduce expedite deliveries. Large Pharmaceuticals OMCC makes substantial profit from the large pharmaceuticals. Ox4 alone contributing around 55%

of total customer‟s profit and its order is for larger quantities. Therefore, Ox 4 is most favorable

customer and may be given little extra attention. For Ox3, OMCC may have no options but to treat

it as less profitable customer as Ox3 accounts more than 60% of sales.

(b) Statement Showing Impact on Airline’s Profit if Flight Y-09 is Discontinued ` Contribution Margin lost if the flight is discontinued (7,84,000) Less: Flight Costs which can be avoided if the flight is discontinued: FlightPromotion………………………………………… 35,000 FuelforAircraft………………………………………… 2,55,000 Liability Insurance(1/3x ` 1,53,000)……………………… 51,000 Salaries,FlightAssistants………………………………… 45,500 Overnight Costs for Flight Crew and Assistants…………………… 18,000

4,04,500 (3,79,500)

If Aves Airlines Ltd. goes for discontinuation of flight K-09, its profit will go down by `3,79,500. Following costs are not relevant to the decision: − Salaries, flight crew - Fixed annual salaries which will not change − Baggage loading and flight preparation- This is an allocated cost, which will continue even if the

flight is discontinued. − Depreciation of aircraft -Sunk Cost − Liability insurance (two third) − Hanger parking fee- This cost will be incurred regardless of whether the flight is made.

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4. (a) Statement of Profitability of Electro Life Ltd

Products (Amount in ̀

Alpha Beta Gamma Theta Total

Sales 26,00,000 45,20,000 42,40,000 32,00,000 1,45,60,000

Direct Materials 6,00,000 18,20,000 18,80,000 10,00,000 53,00,000

Direct Wages 8,00,000 20,80,000 12,80,000 12,00,000 53,60,000

Overheads(W.N.2)

Machine Related 1,60,000 1,56,000 64,000 2,40,000 6,20,000

Batch Related 1,00,000 1,30,000 80,000 1,50,000 4,60,000

Contribution 9,40,000 3,34,000 9,36,000 6,10,000 28,20,000

ProductSpecific Fixed Overheads

10,00,000 1,00,000 2,00,000 1,00,000 14,00,000

Gross Profit (60,000) 2,34,000 7,36,000 5,10,000 14,20,000

General Fixed Overheads 6,20,000

Profit 8,00,000

(ii) Break even point Total sale value of product ‘Alpha’ = ` 26,00,000 Total contribution of product ‘Alpha’ = ` 9,40,000 Specific Fixed Overheads (Product ‘Alpha’) = ` 10,00,000 Break-even Sales = Specific Fixed cost x Total sales Value Total contribution =`10,00,000/`9,40,000*` 26,00,000 =`27,65,957.45 Break-even Sales units = `27,65,957.45/`13 = 2,12,766 units However production must be done in batches of 100 units. Therefore, 2128 batches are required for break even .Due to production in batches, 34 units( 2128 batches x 100 units -212766 units) would be produced extra. These 34 units would add extra cost ` 282.20 (34 units x ` 8.3*).Accordingly, break-even units as calculated above will increase by 22 units ( ` 282.2/ `13).

(*) `600000+`800000+`160000+`100000

200000 units

Break-even units of Product “ Alpha” is 2,12,788 units (2,12,766 units + 22 units ) Workings: W.N.-1 Calculation Showing Overhead Rates

Overhead’s Related Factors

Overhead Cost (`) [a]

Total No. of Units of Factors [b]

Overhead Rate (`) [a] / [b]

Machining Hours 6,20,000 15,50,000 hrs 0.40

Batch Production 4,60,000 9,200 batches 50.00

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W.N.-2 Statement Showing - Overhead Costs Related to Product

Particulars Alpha Beta Gamma Theta

Machining hrs ` 1,60,000 ` 1,56,000 ` 64,000 ` 2,40,000

related overheads (4,00,000 hrs × (3,90,000 hrs × (1,60,000 hrs × (6,00,000 hrs ×

`0.40) ` 0.40) ` 0.40) ` 0.40)

Batch related `1,00,000 `1,30,000 `80,000 `1,50,000

overheads (2,000 batches (2,600 batches × (1,600 batches × (3,000 batches × ` 50) ` 50) ` 50) × ` 50)

4(b) The Network for the given problem:

The Various Paths in the network are:

1–2–3–4–5 with project duration = 37 Days

1–2–4–5 with project duration = 36 Days

1–3–4–5 with project duration = 34 Days

The Critical Path is 1–2–3–4–5. The normal length of the project is 37 days. Crashing Step 1:

Crashing Cost = ` 40 × 3 Days

= `120 Now the various paths in the network with revised duration are:

1–2–3–4–5 with project duration = 34 Days

1–2–4–5 with project duration = 33 Days

1–3–4–5 with project duration = 34 Days

Crashing Step 2:

Crash Activity 1–

Crashing Cost = ` (40 + 20) × 1 Day

= ` 60

Now the various paths in the network with revised duration are:

1–2–3–4–5 with project duration = 33 Days 1–2–4–5 with project duration = 32 Days

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1–3–4–5 with project duration = 33 Days

Crashing Step 3:

Crash Common Activity 4–5 by Two Days

Crashing Cost = =

` 50 × 2 Days ` 100

Now the various paths in the network with revised duration are:

1–2–3–4–5 with project duration = 31 Days

1–2–4–5 with project duration = 30 Days 1–3– 4–5 with project duration = 31 Days

Crashing Step 4:

Crash Activity 3–4 by 1 Day

Crashing Cost = ` 80 × 1 Day

= ` 80 Now the various paths in the network with revised duration are:

1–2–3–4–5 with project duration = 30 Days

1–2–4–5 with project duration = 30 Days

1–3–4–5 with project duration = 30 Days

Further crushing is not possible.

Revised Network for the given problem:

Statement Showing “Crashing Cost & Total Cost”

Normal Project Length Days

Job Crashed Crashing Cost Indirect Cost Total Cost

37 – – `2,590 (`70 × 37 Days)

`2,590

36 1–2 ` 40 `2,520 (`70 × 36 Days)

`2,560

35 1–2 `80 (` 40 + `40)

`2,450 (`70 × 35 Days)

`2,530

34 1–2 `120 (` 80 + `40)

`2,380 (`70 × 34 Days)

`2,500

33 1–2,1–3 `180 (`120 + `60)

`2,310 (`70 × 33 Days)

`2,490

32 4–5 `230 (` 180 + ` 50)

`2,240 (`70 × 32 Days)

`2,470

31 4–5 ` 280 (` 230 + ̀ 50)

`2,170 (`70 × 31 Days)

`2,450*

30 3–4 `360 (` 280 + `80)

`2,100 (`70 × 30 Days)

`2,460

Crash Cost at minimum duration of 30 Days is ` 360.

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Since the total cost (crashing cost + indirect cost) starts increasing from 30 days, the Optimum Project Duration is 31 days with the Crashing Cost of ` 280.

5. (a) Max Z = 10A+20B

Sub to 4A + 2B ≤ 60; 2A + 4B ≤ 48; A,B ≥ 0

10 20 s1 s2 Ratio

Profit Product Mix Quantity A B C D

0 s1 60 4 2 1 0 60/2 = 30

0 S2 48 2 4 0 1 48/4 = 12

zj 0 0 0 0 0

Yj-Zj 10 20 0 0

0 S1 36 3 0 1 - 1/2

20 B 12 1/2 1 0 1/4

zj 40 10 20 0 5

Yj-Zj 0 0 0 -5

Optimal Profit is ` 240/- Conclusion - Alternative answer is there since y-z of A= 0. This can be verified by doing one more iteration by bringing in X1 in place of S1.

(b) WESTERN DIVISION INCOME STATEMENT `

Sales Volume 1,000 2,000 3,000 4,000 5,000 6,000

Net Sales Revenue 1,900 3,400 4,500 5,000 4,800 4,620 Cost: Western Div. Costs. 1,200 1,400 1,600 1,800 2,000 2,200 Eastern Div. Transfer cost 500 1,000 1,500 2,000 2,500 3,000 Total Cost 1,700 2,400 3,100 3,800 4,500 5,200

Net Income / (Loss) 200 1,000 1,400 1,200 300 -580

(b)A sales level of 3,000 units per day maximises Western Division's net income at 1,400. At 3,000 units per day, Eastern Division's net income will be :

`000's Transfer revenue from Western (at 50 p per unit) 1,500 Fixed Costs 600 Additional Costs (100 per 1,000) 200 800

Net Income 700

Company net income:

`000's Western Division revenue 4,500 Eastern Division Costs 1600 Western Division costs 800 2400

Net Income 2,100

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(c) COMPANY INCOME STATEMENT sales units per day 1,000 2,000 3,000 4,000 5,000 6,000 Net sales revenue 1,900 3,400 4,500 5,000 4,800 4,620 Costs: Fixed to (1,000 units) 1,800 1,800 1,800 1,800 1,800 1,800 Additional variables (3,00 per 1,000) 300 600 900 1,200 1,500 Total costs 1,800 2,100 2,400 2,700 3,000 3,300

Net Income 100 1,300 2,100 2,300 1,800 1,320 (c) The company's Net income is maximized at a sales level of 4,000 units per day. Under divisional

organization a sales level of 3,000 units maximizes Western Division income because of the fact that sales revenue per unit falls as sales volume increases where as the transfer price per unit remains constant. Consequently, marginal sales revenue for the 1,000 units above 3,000 is `500, which does not cover the transfer cost plus Western Division marginal costs `(500+200). The sales level to maximize company income, however will be the same whatever reporting structure is adopted. Any calculation should ignore intra company profits so that the effect on company income may be assessed clearly. Thus, the marginal revenue of `500 more than covers company's marginal costs `(200+100) for the 1,000 units between 3,000 and 4,000 and it is only when sales exceed 4,000 that company income is reduced.

6 (a) The Initial basic solution worked out by the shipping clerk is as follows- 1 2 4 3

C1 C2 C3 C4

0 R1 5 12

2

1

4 9

3 22

-3 R2 4 8 15

1 6 15

3 R3 7

4 6 1

7 5 8 7 12 17 9 45 Note: The net evaluation of Cell R3C4 has a negative value of 1. Hence the allotment by shipping clerk is not optimal. 2 2 4 3 C1 C2 C3 C4

0 R1 5 12

2 2

4 8

3 22

-3 R2 4 8 15

1 6 15

2 R3 7

4 6

7 1

5 8 7 12 17 9 45 Note: Since all the net evaluation of the cells are positive. Optimal Solution is obtained. The optimal cost is ` 104 ( 12*2 + 2*4 + 8*3 + 15*1 + 7*4 + 1*5)

(b)

Particulars A ` B ` C ` Total `

Sales Price 2,000 3,000 2,500 Imported Material 400 800 640 Domestic Material 100 200 160

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Direct Wages 500 700 400 Variable Overheads 300 600 700 Total Variable Costs 1,300 2,300 1,900 Contribution per unit 700 700 600 Imported Material in kg 0.80 1.60 1.28 Contribution per kg of Imported Material 875.00 437.50 468.75 Ranking based on Cont. per kg of Imported Mat. 1.00 3.00 2.00 Labour Hours Required 5.00 7.00 4.00 Contribution per Labour hour 140.00 100.00 150.00 Ranking based on Contribution per Labour Hour 2.00 3.00 1.00 Units to be prod. on basis of labour hours available 1,250

1,500

Imported Material required/available in kg 1,000 2,080 1,920 Optimum Product Mix 1,250 1,300 1,500 Contribution 875,000 910,000 900,000 Total Contribution

2,685,000

Fixed Cost

2,000,000

Profit

685,000 (b) Profitability to be maintained after process modifications & capacity enhancement

Particulars A ` B ` C ` Total `

Units to be Produced 1,500 1,560 1,800 Sales value 3,000,000 4,680,000 4,500,000 12,180,000

Substitute Material required (kg) 1,200 2,496 2,304 6,000

Total variable cost per unit (excl.Imported Mat) 900 1,500 1,260 Total variable cost (excl. Imported Mat) 1,350,000 2,340,000 2,268,000 5,958,000

Contribution required + Sub Material Cost

6,222,000

Profit required at enhance rate

890,500

Fixed Cost (incl. interest on invt.)

2,375,000

Contribution required

3,265,500

Substitute material cost of 6000 kg

2,956,500

Cost per kg

492.75

Transport Cost

2.75

Price May be offered per kg

490

7) (a) Predatory Pricing occurs when a firm with significant market power sets prices at a sufficiently low

level with the purpose of damaging or forcing a competitor to withdraw from the market. It may involve dumping, i.e. selling a product in a foreign market at below cost, or below the domestic market price (subject to, for example, adjustments for taxation differences, transportation costs, specification differences).

(b) The ABC refers to the technique for determining the cost of activities and the output that those

activities produce. It is the logical distribution of overhead i.e. overhead should be distributed on the consumption of resources consumed by goods and services. The aim of ABC is to generate improved cost data for use in managing a company’s activities. The ABM is much a broader concept. It refers to the management philosophy that focuses on the planning, execution and measurement of activities as the key to competitive advantage.

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(c) Qualitative Factors may include: (i) The liquidity risk; (ii) The state of the economy, and its levels of inflation; (iii) Effect of new technological breakthroughs; (iv) Effect of a decision on employee morale, motivation, leadership and so on; (v) Effect of a decision on long-term future profitability; (vi) Effect of a decision on a company’s public image and the reaction of customers.

(d)

Traditional Budgeting Zero based budgeting

Accounting Oriented Responsibility Accounting Oriented Reference is past budget. Some managers only inflate them.

Fresh approach without any previous reference. Nothing is taken into account without justification

Routine Approach Investigative Approach

(e) Advantages of simulation are enumerated below:

(i) Simulation techniques allow experimentation with a model of the system rather than the actual operating system. Sometimes experimenting with the actual system itself could prove to be too costly and, in many cases too disruptive. For example, if you are comparing two ways of providing food service in a hospital, the confusion that would result from operating two different systems long enough to get valid observations might be too great. Similarly, the operation of a large computer centre under a number of different operating alternatives might be too expensive to be feasible.

(ii) The non-technical manager can comprehend simulation more easily than a complex mathematical model. Simulation does not require simplifications and assumptions to the extent required in analytical solutions. A simulation model is easier to explain to management personnel since it is a description of the behaviour of some system or process.

(iii) Sometimes there is not sufficient time to allow the actual system to operate extensively. For example, if we were studying long-term trends in world population, we simply could not wait the required number of years to see results. Simulation allows the manager to incorporate time into an analysis. In a computer simulation of business operation the manager can compress the result of several years or periods into a few minutes of running time.

(iv) Simulation allows a user to analyze these large complex problems for which analytical results are not available. For example, in an inventory problem if the distribution for demand and lead time for an item follow a standard distribution, such as the poison distribution, then a mathematical or analytical solution can be found. However, when mathematically convenient distributions are not applicable to the problem, an analytical analysis of the problem may be impossible. A simulation model is a useful solution procedure for such problems.

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The Society of Auditors and Prime Academy Model Exam – FINAL - Sep 2016

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

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

1. ABC Private Limited is an Insurance Company. It is evaluating a large scale development and/or acquisition of new application software. It also wants to deploy a GRC framework. In this context, answer the following: a) What are the advantages of a pre-written application software (5 Marks) b) There are many reasons why organisations fail to achieve systems development objectives-

explain the reasons in brief (5 Marks) c) List the key practices to determine the status of IT Governance and what are the benefits of IT

Governance (5 Marks) d) Explain in brief the systems audit and control requirements as per IRDA (5 Marks)

2. a) Information to be useful has to have certain characteristics- Explain (6 Marks) b) Explain the Contents of a Security Policy (6 Marks) c) Explain Advantages and Goals of BCM (4 Marks)

3. a) Explain the 8 phases of BCP Plan formulation and implementation (6 Marks) b) Explain any 6 factors which justify the need for audit of Information Systems (6 Marks) c) Explain the objectives of IT Act, 2000 (4 Marks)

4 a) How are electronic records authenticated using Digital Signatures (6 Marks) b) What are the challenges in the Cloud Computing Architecture (6 Marks) c) Explain Green IT (4 Marks)

5. a) Explain the impact of computerisation on Audit trails and audit evidences (6 Marks) b) Explain the term transaction processing systems and their features (6 Marks) c) List the enablers as per COBIT 5 (4 Marks)

6. a) Explain the terms full back-up, differential back-up and incremental back-up. Analyse the same from the perspective of time, cost and restoration procedures (6 Marks) b) What are the key benefits of ISO 27001? Why would a Company adopt ISO 27001? (6 Marks) c) Explain the contents of a Systems Manual (4 Marks)

7. Write short notes on any four of the following – a. Confidentiality, Integrity and Availability b. Inherent Risk and Control Risk c. Packet Filtering Firewall d. Data Dictionary e. Integrated Test Facility (4 x 4 = 16 Marks)

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THE SOCIETY OF AUDITORS AND PRIME ACADEMY

43rd SESSION MODEL EXAM – FINAL – INFORMATION SYSTEMS CONTROL AND AUDIT SUGGESTED ANSWERS

1. a)

S. No. Points for consideration

Advantage if we buy the software Disadvantage if it is developed in-house

1. Implementation Rapid implementation May take months or years to implement

2. Risk Low risk- product already available- organisation aware of the features it is going to get at what price.

Long development time- leads to uncertainty as regards quality and cost of development.

3. Quality Vendors dealing in application software- retain specialists who have lot of experience. Hence product quality good.

In-house programmers have to work on a wide range of applications and may not have expertise.

4. Cost Software vendors sell products to various customers and hence cost per customer may be low.

There may be some hidden costs.

b) Note: Students can write any five of the following reasons.

(i) Lack of senior management effort and involvement:

Developers and users watch as to which projects are getting senior manager attention. They would shift focus from projects they feel is not getting the required attention of top management.

Also it is the top management which commits resources to the projects and controls its progress.

(ii) Shifting user needs (called as scope creep- due to lack of software baselining)

User requirements for information systems keep changing. More changes imply more requests for systems development and more development projects.

Also if changes occur during development effort, there would be no baseline and developers find it very difficult to provide for every change request.

Ex: Say a accounts software is in the process of development. A user request comes asking for additional report generation not stated in earlier requirement specification. When this development is being done another user may come with further requests and so on, there is no end to it.

(iii) Development of unstructured or strategic systems

The requirements, specification and objectives of strategic systems are difficult to define and hence it would be difficult to determine if development effort is successful or not.(Ex: Expert Systems)

(iv) New technologies When management tries to leverage new technology to its competitive advantage, it may face

a problem that personnel are not familiar with the technology. Ex: An organisation may want to achieve good results by implementing an ERP package, but may face a problem if users’ do not know how to use the package.

(v) Lack of standard project management and systems development methodologies

Lack of formal project management methodologies makes it difficult to stick to time schedules/budget schedules.

(vi) Over-worked or under-trained development efforts

Systems development team is over-worked due to constant requests

Most of the company’s do not invest in employee training and hence the employees are not up-date on current technologies.

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(vii) Resistance to change

Any development effort is countered by resistance to change. If employees perceive that as a result of business process re-engineering their power position

will be affected or that there may be “down-sizing/retrenchment” they will work against the development effort.

Example: When computers were introduced in banks, in the early stages it faced lot of resistance from employee unions who felt it would adversely affect their job security.

(viii) Lack of user participation

If users are not involved in the development efforts, they may not feel responsible for the success of the projects. Also there may be resistance to change.

Hence user involvement is critical to the success of the project. (ix) Inadequate testing and user training

If new systems are not tested properly, they may not meet the business objectives. Also it may give rise to control risks.

End user training on the new system is critical since any system is only as effective as the user who uses it.

c) i. Key practices to determine the status of IT Governance

Some of the key practices which determine the status or extent of implementation of IT Governance in an enterprise are: i. Who is responsible for directing, controlling and executing decisions ? ii. How are those decisions made ? iii. What is the information required to make those decisions ? iv. What decision making mechanisms are required ? v. How does the management handle exceptions ? vi. Is there a monitoring process for governance results ? Are there process improvements being

undertaken ? ii. Benefits of IT Governance

i. Increased value to business- delivered through IT initiatives ii. Increased user satisfaction amongst users of IT (i.e all departments) iii. IT becomes agile and flexible to support the needs of the business units- alignment of IT with

business. iv. Better utilization of IT Costs and investments v. Improved management of IT and management of IT Related Risks vi. IT driven compliance with corporate policies, applicable legislations and laws vii. Optimal utilization of IT resources viii. Ensures IT related processes are overseen effectively and transparently ix. Confirms compliance with legal and regulatory requirements

d) Insurance Regulatory Development Authority (IRDA) Systems Audit:

a. All insurance companies should have their systems and processes audited atleast once in three years.

b. Internal, concurrent and statutory auditors are not eligible for appointment. c. CA Firm to be appointed should have a minimum of 3-4 years of experience in IT Audits of

Banks or Mutual Funds or Insurance Companies. System Control:

a. There should be electronic transfer of data without manual intervention- all systems should be seamlessly integrated. Audit trails required for every data entry point. Procedure for reviewing and maintaining audit trail to be implemented.

b. Auditor to comment on audit trail maintained.

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c. Auditor to review Front office systems (FOS), Mid Office Systems (MOS) and Back Office Systems (BOS) and confirm that there is audit trails for data entry, authorization, cancellation and modifications.

d. Auditor to check if there exists separate logins for each user and maintains trail for every transaction with respect to login ID, date and time for all transactions.

2. a)

1. Timeliness : Available when required 2. Purpose : Must have a purpose at the time of transmission 3. Mode & format : Mode- visual, verbal or written Format- so designed to

assist decision making (Ex: Classified/ tabulated/ exceptions only)

4. Redundancy : Excess information per unit of data 5. Rate : Number of numeric characters /minute – for humans Number of bits per second – for machines 6. Frequency : Periodicity of information flow 7. Completeness : As complete/comprehensive as possible 8. Reliability : Source from which information originates should be

reliable/ confidence level high 9. Cost benefit analysis : Benefits derived from using the information should justify

cost of procuring the information 10. Validity : Information should be as close to the purpose it purports 11. Quality : Correctness (Ex: Without any personal bias)

b) The broad contents of a security policy are: i. Purpose and Scope ii. Security organisation structure- roles of various personnel/groups iii. Responsibility allocation iv. Asset classification and security classification v. Access control vi. Incident handling vii. Physical and environmental controls viii. Business Continuity Management ix. Systems development and maintenance controls For each of these areas, we would now need to understand the broad contents. i. Purpose and Scope

This part of the security policy details the main objective to be achieved by the policy formulation- viz. achieving confidentiality, integrity and availability of IT resources. The policy is formulated in order to: a. Prevent unauthorised access to IT resources b. Provide access to authorised users with the necessary controls c. Define scope, extent of applicability and period of applicability (called as statement of

applicability or SOA) ii. Security organisation structure

This part defines the security responsibility of various group of people The various individuals/groups and their responsibilities are as follows: (Note: The designations below are examples of how security is organised in say a large Industrial Group with various companies and divisions within it. Individual names and responsibilities may vary from organisation to organisation- this list is only illustrative)

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iii. Responsibility allocation Responsibility for the management of information security policy should be set out. A owner would be appointed for each information asset

Awareness should be created on their responsibilities Any new connection to the network should be authorised A call tree containing list of emergency contact numbers needs to be maintained

Risk assessment should be carried out whenever third party accesses organisation’s systems Third party access to IT infrastructure should be restricted and monitored

iv. Asset classification and data classification Inventory of all IT assets to be maintained

Data classification (ex: Sensitive, classified, public data etc.) should be carried out as per the directions of the data “owner”

Procedures to be followed for data labeling and handling Access to data classified as “Confidential” should be restricted

Data exchange between organisation (ex: with suppliers, customers, government) should be controlled

Secure disposal procedures to be followed for media containing sensitive data v. Access Control

Access controls to protect systems from unauthorised access Access to be granted as per business requirements on a need-to-know, need-to-do basis System Owners to approve accesses to users (as they are also held responsible for the systems

under their control)

Concept of least privilege to be adhered to (i.e provide privilege only to the extent required)

User registration (at the time of new user joining) and de-registration (at the time of user leaving) process to be adhered to

Each user to have unique id.

Unattended PCs and workstations should automatically lock-out. Password policy (length, history, number of failed attempts, validity periods etc) need to be

specified. vi. Incident Handling

List of what constitutes security incident should be defined

Incident reporting format (either online or through paper documents) should be formulated Employees to be made aware of the reporting mechanism

Mechanism to investigate security incidents and initiate corrective action to be taken vii. Physical and Environmental Security

Physical security to be maintained across the organisation and IT infrastructure Access to sensitive areas (like server room) should be restricted to authorised staff only

Confidential data and assets should be under secure lock and key when not in use Separate loading/unloading area (sometimes called as staging area) for equipment to be

identified

Any movement of hardware or software from the premises should be with prior authorisation only

Environmental controls like temperature control, clean power supply, fire detection and suppression systems should be in place

Information processing facility should be strategically located to minimise impact from natural and man-made threats

Sensitive facilities should not be advertised

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viii. Business Continuity Management

A BCP should be maintained, tested and updated periodically. Employee awareness on BCP to be created

A Business Impact Assessment (BIA) should be conducted annually. Hardware vendors must support supply of stand-by equipment in case of a disaster and SLA

with network service provider should address issues of committed up-time, failover network provision, connectivity to DR site etc.

ix. Systems Development and maintenance controls

Any new software development or changes thereto should incorporate security All controls to be identified and agreed prior to development of information systems

c) Goals of BCM i. Proactively improves an enterprise’s resilience against the disruption of its ability to achieve its

key objectives ii. Provides a rehearsed method of restoring an enterprise’s ability to supply its key products and

services at an agreed level within an agreed time after a disruption and iii. Delivers a proven capability to manage a business disruption and protect the enterprise’s

reputation and brand. Advantages of BCM i. Able to proactively assess the threat scenario and potential risks ii. Has planned response to disruptions which can contain the damage and minimize the impact on

the enterprise and iii. Is able to demonstrate a response through a process of regular testing and training.

3. a) Eight Phases of Business Continuity Plan formulation and implementation are:

i. Plan initiation or pre-plan activity ii. Vulnerability/Control Assessment and basic definition of what the Plan should address iii. Business Impact Analysis (BIA) iv. Detailed plan definitions v. Plan development/formulation vi. Test Program for the plan vii. Plan maintenance program viii. Testing and implementation of the plan Each phase in detail is as follows i. Pre-Plan or Plan initiation phase

This phase is a preliminary survey of the organisation’s infrastructure and environment. It helps in plan formulation and refinement and identification of key issues which could have a bearing on the plan. During this phase the organisation should constitute a BCP Committee to supervise and direct the BCP team. The Business Continuity Manager (BCM) works in tandem with the BCP committee for detailed plan formulation. Two other major outcomes of this phase is development of a plan to support recovery programs and awareness/educating those team members who would participate in the BCP program.

ii. Vulnerability/ Control Assessment Controls help mitigate risk and it is preferable that the organisation focus on reducing the probability of disaster occurrence (preventive control) rather than spending resources on minimising impact of an actual disaster (corrective or restorative control) The activities involved in this phase are: a. A control/security review of the complete IT infrastructure – ranging from people to networks

to databases etc. (i.e to find out if controls are in place and working or whether they are ineffective)

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b. Based on review improve or implement emergency plans and disaster prevention measures c. Presenting recommendations and suggestions for improvement to the BCP Committee d. Drawing out a broad scope for the plan e. Analyse, recommend and invest in planning and maintenance software for development and

maintenance of the plan f. Developing a plan framework g. Constitute BCP teams and create awareness

iii. Business Impact Analysis (BIA) Refers to a process of determining the impact of losing the support of any resource-i.e the loss that would be suffered assuming some IT asset (say a server, database etc.) is not available. The business impact analysis assessment study will establish the escalation (increase) of that loss over a period of time –i.e how the loss would increase when the unavailability time increases. Thus the organisation can arrive at “tolerable down-time” or “pain threshold”- the length of time business units can survive without IT resources. Tasks carried out as part of BIA are: a. Identifying organisational risks including single point failure risks and other infrastructure risks b. Identification of key business processes c. Analysing the threats and quantifying the same in relation to key business processes- both in

terms of downtime and financial loss. d. Identifying the dependencies and interdependencies of key business processes- so that their

priority/order of recovery could be understood. e. Ascertaining the tolerable downtime for each business process f. Determining the recovery infrastructure required Data for the purpose of BIA is assimilated through questionnaires, workshops (where business teams meet and discuss), interviews (of key personnel in each department) and review of documents like IT plan, security policy etc. The BIA report is tabled at the BCP Committee for them to make appropriate decisions regarding recovery strategy.

iv. Detailed plan definitions In this phase a set of recovery requirements is developed which forms the basis for strategy selection. These requirements are to support the critical processes as identified in BIA- for each process the hardware, software, network/telecommunication set-up, user/system documentation, personnel, facilities like outsourced support etc. is identified. The recovery strategy would depend on the length of outage/unavailability- classified as short term, intermediate term and long term. The BCP scope, objectives and assumptions are also decided at this stage.

v. Plan development/formulation: In this phase the available alternates are determined and an appropriate (i.e which suits the criticality of a particular process) alternate operating strategy is determined for timely recovery of the critical processes and their dependent activities. The Plan should address both business aspects and technical aspects in recovery. The plan components are defined and documented. In order to make the BCP operational, it may require changes to the user procedures, data processing activities, vendors and suppliers (for supply of key resources/services as part of BCP- ex: standby equipment) and definition of roles and responsibilities of personnel under the BCP. Recovery standards and strategies are determined as part of this phase.

vi. Test Program for the plan: In this phase a comprehensive program/strategy is decided on how the plan should be tested. The goals/objectives of testing are established and alternate testing strategies are determined.

vii. Plan Maintenance Program: Maintenance refers to activities carried out to keep the plan update and current. In this phase, the issue of how to maintain/update the plan is decided. Plan revision may be necessary due to changes in technological infrastructure or business processes. The activities in this phase include: a. Fixing the responsibility and ownership for various BCP components

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b. Identifying key indicators/triggers for maintenance- to ensure that any technical/operational/structural changes are updated to those responsible for keeping the plan up-date/current.

c. Establish the maintenance time-frame and procedures d. Implementing document version control over BCP

viii. Testing and implementation of the plan: Once the plan is devised, tests are conducted to ensure that the plan works and changes if required based on test results are carried out. Objectives of testing the plan include : a. Ensure that the recovery procedures are comprehensive and workable b. To evaluate the extent to which personnel have adopted to the plan- their level of

understanding is evaluated- The degrees of success or failure of the employee training program on BCP is understood.

c. The resources like processes, IT infrastructure, facilities and data are available and operational during the recovery effort.

d. The manual procedures and IT back-ups are current and can be made operational

b) S.No. Factors Meaning 1. Cost of Data Loss Data is a key asset to most businesses today. It helps

organisations adapt and survive in a competitive environment.

2. Incorrect Decision Making For correct decision making process, accurate data is required- which is dependent on a well controlled IT environment.

3. Cost of Computer Abuse Threats due to malware, hackers etc. can cause loss or damage to IT infrastructure

4. Value of IT Assets Most of the IT Assets are expensive investments that a Company makes.

5. High Cost of computer errors System errors- like processing errors- can lead to wide spread impact as they tend to affect a broad range of transactions

6. Need to maintain data privacy Corporates may be handling sensitive personal information- which if misused- may affect the privacy of individuals

7. Need to maintain data integrity

This objective is to ensure that there are no unauthorized modifications to data.

8. System Effectiveness Objective This objective determines if the investments in IT are leading to business objectives being achieved

9. System Efficiency Objective This objective determines if there is optimal use of IT Assets.

c) Objectives of the IT Act, 2000 :

To grant legal recognition for transactions carried out through electronic commerce (where data interchange is through electronic means)

To recognise digital signatures as a method of authentication To facilitate filing of electronic documents with Government departments

To facilitate and give legal sanction to electronic fund transfers (EFTs) between banks/financial institutions

To recognise book keeping in electronic form by the Banks

To amend the Indian Penal Code, the Indian Evidence Act , Bankers’ Book Evidence Act and the RBI Act

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4. a)

Chapter II of the IT Act consisting of S.3, deals with the authentication of electronic records using “Digital Signature” and a new section 3A which deals with authentication of electronic record using “Electronic Signature” Digital Signature Working Logic Suppose “A” wants to send a message digitally signed to “B”, he has to follow the following steps. Events happening at the sender’s place (A’s Place):

Step 1: Run a one way hashing function on the message text to get the message digest. Hashing function refers to a computer program that creates a unique message digest (Let us call it Message Digest 1) for every message. Even if a small change is made to the message, the message digest would be altered- throwing out the modifications made. (At the end of Step 1, “A” has the original message + a message digest) Step 2 : Encrypt the message digest using “A’s” Private Key. (At the end of Step 2, “A” has the original message + encrypted message digest called as digital signature/digitally signed message) Step 3: “A” sends the ORIGINAL MESSAGE + ENCRYPTED MESSAGE DIGEST TO “B” EVENTS HAPPENING AT THE SENDER’S PLACE

SENDER “A”

Run a Hashing Obtain a Message Digest Function (Say Message Digest 1)

Encrypt the message Digest using A’s Private key (Obtain encrypted message Digest called as digital sign.)

Send the clear text message AND Encrypted Message Digest

Events happening at the receiver’s place (B’s Place): “B” receives the ORIGINAL MESSAGE + ENCRYPTED MESSAGE DIGEST sent by “A” Step 1: “B” runs a hashing function on the original message and gets locally a message digest ( Called as Message Digest 2 )

Clear

Message /

Plain Text

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Step 2: “B” decrypts the Encrypted message digest sent by “A” using A’s public key – gets back the Message Digest 1. Step 3:

“B” compares MD 1 with MD 2

If MD1 & MD2 are same If MD1 & MD 2 are different

Evidence that message has not Evidence that message has been been tampered/changed in tampered/changed in transmission transmission

If B is able to decrypt the encrypted message digest using A’s Public key, it implies that the original message has been sent by A, since he alone has access to his private key. Hence the sender is authenticated.

b)

S.No. Challenges Meaning 1. Confidentiality Most of the cloud networks are public network- hence there is

a need to maintain confidentiality. This can be achieved through encryption and physical isolation.

2. Integrity While data is moved on to the cloud, it has to be ensured that there is no unauthorized modification to the said data. This can be achieved by using mechanisms like digital signatures, hashing etc.

3. Availability Ensures data is available through reliable back-ups etc. Cloud services can be hit by disruptions due DoS Attacks, breakdowns, outages etc.

4. Governance The client may not have direct control over the employees or the services. There may be a need to formulate policies and procedures and ensure there is framework for risk management and audits.

5. Trust Trust ensures that the service arrangement have sufficient means to allow visibility into the security and privacy controls and processes employed by the Cloud Service provider.

6. Legal issues and compliance Impact of legal, privacy and data security laws vis-à-vis cloud deployment needs to be studied. One of the problems could be that data could be physically located anywhere on the cloud. The cloud service provider needs to establish a process of internal controls, monitoring of the same and subject their systems to external audits.

7. Privacy It is an issue to be addressed in every stage of cloud architecture design. It should include both legal compliance and trust.

8. Audit Audit is a check on the cloud environment. It is generally secure but such audits are insisted upon by clients and may be time consuming.

9. Data Theft In the cloud data is stored in such a manner that it is accessible from anywhere anytime. This increases the risk. Also many service providers may not have their own equipment- they

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would be hosting on other service provider’s equipments- which may be less secure.

10. Architecture Reliability of the cloud service depends on the architecture design and implementation.

11. Identity Management and Access Control

An organisation’s identification and authentication framework may not extend to cloud’s identity management. Cloud services should be backed by robust identity management solutions- which provides trust and shares digital attributes between cloud provider and the organisation.

12. Incident Response The cloud service provider to have an incident response mechanism in place to share information during and after an incident.

13. Software isolation In a multi-tenant environment, the service provider to isolate software through virtualization and other logical segregation mechanisms.

14. Application Software security Application controls and security issues are still valid in a cloud environment as well- service provider to monitor and maintain the servers.

c) It refers to a study and practice of using computing resources in a more efficient and environmentally

friendly and responsible way. Computing involves use of several natural resources- from raw materials required to manufacture them, to power consumption at data centres to keep them operational to finally disposing of (scrapping of e-waste) the same at the end of their useful life. It refers to environmentally responsible/sustainable use of computers and their resources. A voluntary labelling program termed as Energy Star promoted by Environmental protection agency (EPA) promotes energy efficiency in hardware of all kinds. Steps in Green IT include: i. Power down the CPU and peripherals during periods of prolonged inactivity ii. Working with systems in contiguous / continuous blocks of time- keeping the system power off at

the rest of the time iii. Energy intensive operations like laser printing needs to be powered up only when required iv. Use of energy efficient Liquid Crystal Display Monitors (LCD) instead of Cathode Ray Tube (CRT) v. Enabling power management features like turning off hard disks , CD Drives and displays after

several minutes of inactivity vi. Disposal of e-waste as per regulatory requirements vii. Exploring alternate energy sources for co

5. a)

1. Change in audit trail and audit evidence While in manual environment audit trails were easily visible and traceable, in computerised environment the audit trails are fragmented and difficult to trace. For example a payment voucher manually generated provides sufficient audit trail. If the same payment is made through say electronic clearing system or net banking, audit trails are not very visible and difficult for the auditor to trace. This is called as digital evidence. Issues relating to digital evidence are: a. Data Retention Policy

Depending on the data retention policy of an organisation, past transactions may or may not be readily available for verification on the system. They may have to be retrieved on demand. Also the data stored on the system may require specific software to interpret the data and may not be as easy as auditing from a printed document.

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b. Direct data entry or lack of physical input documents Many transaction processing systems work under the direct entry mode wherein data is input into the system directly without any supporting documents- for example ATM transactions which affects account balances but has no input documents.

c. Lack of visible audit trail or short retention period of audit trails: Some organisations retain audit trails only for a short period of time- thus auditors may have to modify his audit approach suitably to look for compensating controls

d. Reduction in printed outputs As printed outputs are declining, audits may have to be carried out directly on data on the system through a separate access mechanism.

e. Automated or system generated transactions Certain transactions are system generated- for example if safety stock and re-order limits are set in an ERP, on reaching a particular stocking quantity, the ERP system may generate an automated purchase order and even email it to the supplier/vendor. Such transactions have no human intervention for authorisation and hence no judgment thereby increasing the chances of errors.

f. Legal Issues: In contracts and payments which are concluded online, territorial jurisdiction issues arise as regards place of origination, taxation, dispute resolution etc. For example for an online purchase of goods, the buyer may be located in one state, the web site may be located in a server in another state or country, the goods may be shipped from a different location and payment may be credited online with a Bank in another country. In such a transaction, fixing the jurisdiction, for say a dispute, is quite difficult. Similarly admissibility of digital evidence-i.e whether it is good evidence or not- in a court of law is a challenge and is in very nascent stages.

b) Transaction processing systems are the first level of systems which capture the basic data as it originates from various business functions like billing, cash payments etc. The data captured through these systems are processed and forms the base for other systems like MIS, DSS etc. These systems work on the typical processing cycle- i.e input, process, storage and output. Inputs could take the form of invoices, vouchers, bills etc which are help in basic data capture. Processing could take the form of journals and registers- either manual or computer based. Storage is a sort of summary of transactions- in form of ledgers etc. Outputs take the form of trial balances, statements etc. Features of TPS: i. As this pertains to capture of basic data, the volume is quite large- it is an effort to capture every

detail which could have a monetary impact. ii. Automation of operations/life stream systems- billing and other activities constitute the core

functions of day to day operations and TPS aims to automate such functions. iii. Tangible benefits in terms of time saving, reduced number of errors, better quality of data iv. Forms the base for other systems like MIS, DSS etc. Without TPS, data required for managerial

decision making may not be available.

c) Enablers are factors that individually and collectively influence whether Governance and Management of IT would work. Higher level IT related goals define what different enablers should achieve. Seven categories of enablers described in COBIT 5 i. Principles, policies and frameworks are vehicle to translate the desired behavior into practical

guidance for day-to-day management ii. Processes describe an organized set of practices and activities to achieve certain objectives and

produce a set of outputs in support of achieving overall IT-related goals iii. Organisational structures are the key decision making entities in an enterprise iv. Culture, ethics and behavior of individuals and of the enterprise are often underestimated as a

success factor in governance and management activity.

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v. Information is pervasive throughout any organisation and includes all information produced and used by the enterprise. Information is required for keeping the organisation running and well governed, but at operational level, information is very often the key product of the enterprise itself.

vi. Services, infrastructure and applications include the infrastructure, technology and applications that provide the enterprise with information technology processing and service.

vii. People, skill and competencies are linked to people and are required for successful completion of all activities and for making correct decisions and for taking corrective action

6. a)

S. No Type of Back-up Meaning Time/cost Involved

Restoration Process

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

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

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

2. Differential back-up

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

Faster than full back-up and more economical.

Two step process: i. Restore the last full back-

up ii. Restore the appropriate

differential back-up 3. Incremental back-

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

Most economical, saves a lot of time and space

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

b) Key Benefits of ISO 27001 are as follows:

i. It can act as an extension of the current quality system to include security ii. ii. It provides an opportunity to identify and manage risks to key information and system assets iii. Provides confidence and assurance to trading partners and clients- acts as a marketing tool iv. Allows an independent review and assurance of information security practices.

A Company may adopt ISO 27001 for the following reasons: i. It is suitable for protecting critical and sensitive information ii. It provides holistic risk based approach to secure information and compliance iii. Demonstrates credibility, trust , satisfaction and confidence with stake holders, partners, citizens

and customers iv. Demonstrates security status according to internationally accepted criteria v. Creates a market differentiation due to prestige, image and external goodwill vi. A company certified is accepted globally.

c) The deliverable of the Design phase is a document containing description of the activities to be carried out with diagrammatic representations like flowcharts. This document is called as systems manual/job specification manual. Contents of a Systems Manual An overview of the existing system in place Information and process flows of the existing system The outputs and the intended recipients of the existing system

A description of the proposed system Data and process flows of the proposed system Outputs and departments for which they are intended

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Input layout and departments responsible for various inputs Description of the various files to be maintained- temporary files, permanent files etc. and the

contents of each file

A program listing which would constitute the new system Estimates as regards the probable time involved in development (expressed in terms of computer

hours, man days etc.)

Proposed controls and audit trails to be enabled in the new system

7. a. Confidentiality, Integrity and Availability

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

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

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

2. Integrity Data is protected against unauthorised modifications

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

3. Availability Information system are available and usable when required

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

b. Inherent Risk and Control Risk i. Inherent Risk :

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

ii. Control Risk (can be understood as risk of a control failure) : Control risk is a measure of auditor’s assessment of the likelihood that risk would exceed the tolerable level and would not be prevented or detected by client’s internal control system. It is defined as risk that could occur in an audit area and which would be material, individually or in combination with other errors and will not be prevented or detected or corrected in a timely manner by the internal control systems.

c. Packet Filtering Firewall Has a filtering/screening router which has to programmed with the filtering rules. It implies that the router should be told which packet from which source IP address should be allowed to which destination IP address - Based on the rules accepts or denies access They provide low cost, low security access control Disadvantages Designed for free flow of information, rather than to restrict it. No explicit authentication of outside users takes place and does not examine packet contents Vulnerable to IP spoofing attacks where hackers disguise packets as originating from authorised users and gain access to network.

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d. Data Dictionary

It contains data about data (called as “meta data”) Contains descriptive information about data items in the files of the information system. Ex : Date field is a data field. Data dictionary contains information like date field accepts data only in “dd/mm/yyyy” format. It is describing the characteristic of the data field.

Some information contained in the data dictionary

Codes describing data length, data type (numeric, alphabetic etc.) Information about the source document used to create the data item. Names of the computer files storing data items. As new data fields are added to the record structure data dictionary is updated. Example : If roll number field is added to a screen, the data dictionary is updated to state that this field will contain a maximum of 8 characters, the first two places will be alphabets, and the next 6 will be reserved for numbers. Like AB2455. As a data field is deleted corresponding entries are deleted in the data dictionary. If new computer programs are created to access the existing data items in the files data dictionary is updated about the data items these programs access. e. Integrated Test Facility

A small set of fictitious records are placed in master file (representing fictitious divisions, departments ,or supplier/customer)

These dummy entries/records processed along with regular records. They do not affect actual records and employees unaware of the testing taking place.

At the end of processing, the system collects ITF records and the processing results. The auditor compares with expected results to verify if controls working as desired.

Methods of entering test data The transactions to be tested have to be tagged- the application software to be programmed to be recognise such transactions and invoke two updates- one for the live data and another for ITF dummy entries. Also the auditor can choose between tagging live data as ITF data- which is easy to use and test- but may not test all limiting conditions and may interfere with live processing. Alternatively he can enter separate test data for ITF which would be comprehensive and cover all logical paths. However, preparation of test cases for ITF may be time consuming and costly.

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The Society of Auditors and Prime Academy Model Exam – FINAL - Sep 2016

Paper 7 - Direct Tax Laws No. of Questions: 7 Total Marks: 100 No. of Pages: 5 Time Allowed: 3 hrs

Question No 1 is compulsory - Answer any 5 out of the 6 questions

Working notes should form part of the answers 1. a) RSK Limited is engaged in manufacturing pipes and tubes. The profit and loss account of the company for

the year ended 31st March, 2016 shows a net profit of ` 405 lacs. The following information and particulars are furnished to you. You are required to compute total income of the company for Assessment Year 2016 -17 indicating reasons for treatment of each item.

i. A group free air ticket was provided by a supplier for reaching a certain volume of purchase during the financial year 2015-16. The same is en cashed by the company for ` 10 lacs in April 2016.

ii. A regular supplier of raw materials agreed for settlement of 8 lacs instead of ` 10 lacs for poor quality of material supplied during the previous year which was not given effect in the running account of the supplier.

iii. Krishna Bank sanctioned and disbursed a term loan in the financial year 2011-12 for a sum of Rs. 50 lacs. Interest of ` 8 lacs was in arrear. The bank has converted the arrear interest into a new loan repayable in ten equal instalments. During the year, the company has paid two instalments and the amount so paid has been reduced from Funded Interest in the Balance Sheet.

iv. The company remitted ̀5 lacs as interest to a company incorporated in USA on a loan taken two years ago. Tax deducted under section 195 from such interest has been deposited by the company on 15” May, 2016. The said interest was debited to profit and loss account.

v. Liquidated damage of ` 3 lacs received from SK Limited for delay in supply of plant and machinery has been shown under the head other income’ in Profit & Loss Account.

vi. Sandeep, a sales executive stationed at HO at Delhi, was on official tour in Bangalore from 31st May, 2015 to 18 June, 2015 and 28th September, 2015 to 15th October, 2015 for the business development. The company has paid Sandeep’s salary in cash, from its local office at Bangalore for the month of May, 2015 (payable on 1st June) and September 2015 (payable on 1st October), amounting to ` 25,000 and ̀27,000 respectively (net of TDS and other deduction), as Sandeep has no bank account at Bangalore. These were included in the amount of salary” debited to Profit and Loss Account. Profits and Gains of Business or Profession.

vii. The company has taken up initiative to restructure its debt and paid ` 20,000 to a finance company, MIs KKS Ltd., towards pre payment premium. As per the scheme, ` 50,000 loan was waived against its loan and B Limited directly credited it to its reserve account, considering loan waiver amount as capital receipt.

viii. The company has contributed ̀50,000 to an electoral trust and the same stands included under the head General Expenses. (10 Marks)

b) Kapadia Memorial Trust running hospitals is registered under section 12A. Following particulars relevant

for the previous year ended 31’ March, 2016 are furnished to enable you to compute tax liability of the trust. (i) Income from running of hospitals ` 14.25 lacs. (ii) Donation received (including anonymous donation ` 3 lacs) ` 5.75 lacs. (iii) Amount applied for the purposes of hospital ` 13 lacs. (iv) The trust had accumulated ` 15 lacs under section 11(2) in the financial year 2010-11 for a period of five years for extension of one of its hospitals. The trust has spent ` 13.50 lacs for the said purpose till 31st March, 2016. Compute the taxable income of the trust and tax payable by Asha Memorial Trust for the assessment year 2015-16. (10 Marks)

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2. Answer any Four from the following: (a)

(i) Explain in brief about the treatment to be given in the following case under the Income-tax Act, 1961 for the A.Y. 2016-17: Radhe received on 11.9.2015 gifts each of ` 21,000 from his two friends Shiva and Krishna and of ` 51,000 from his sister living in UK. (2 Marks)

(ii) Sumit voluntarily filed a revised return of income within the prescribed time limit after discovering that interest received from bank was not disclosed in the original return. Can he be absolved of penalty under section 271(1)(c)? (2Marks)

(b) (i) Mr. Ravi, an lAS Officer, was posted to USA by the Government of India on 11.07.15 for a period of

three years. He was paid salary of ` 3 lacs for the period 01.04.15 to 10.07.15 and of ` 12 lacs for the period upto 31.03.16. He left India for USA in the night of 10.07.15 and did not come even for a day up till 31.03.16. (2 Marks)

(ii) During the financial year 2015-16, Mr. A received a sum of ` 1,80,000 (` 60,000 p. a.) by way of enhancement for the last three years as the Government department (tenant) enhanced the rate of rent with retrospective effect. Will the sum of ` 1,80,000 be taxable in the assessment year 2016-17? Can it be spread over the last three years? (2 Marks)

(c) (i) Can the brought forward losses and unabsorbed depreciation be set off against the profit

determined under section 44B? (2 Marks) (ii) People Housing Ltd. is engaged in the business of constructing residential and commercial

properties. One of the building properties was included in the closing stock in the Balance Sheet. The said building was let out for a monthly rent as suitable buyers could not be found. All other buildings had been sold by the company. State with reasons whether the income by way of rent from the unsold property is assessable as income from business or income from house property. (2 Marks)

(d) I Limited, an Indian Company supplied billets to its holding company, U. Limited, UK during the previous

year 2015 -1 limited also supplied the same product to another UK based company, V Limited, an unrelated entity. The transactions with U Limited are priced at Euro 500 per MT (FOB), whereas the transactions with V. Limited are priced at Euro 700 per MT (CIF). Insurance and Freight amounts to Euro 200 per MT. Compute the arm’s length price for the transaction with U. Limited. (4 Marks)

(e) Examine critically in the context of provisions contained in Income-tax Act, 1961 as to the correctness of

the action or the treatment to be given the following case: An amount of ` 12,50,000 paid by XYZ Ltd., after approval by the board, to a hospital in UK for the heart surgery of its managing director was charged under medical expenses. The Assessing Officer, while completing the assessment of the company, taxed the amount so paid by the company as a perquisite in the hands of its Managing Director. (4 Marks)

3. a) Examine the taxability or allowability or otherwise in the following cases while computing income under

the head Profits and gains from business or profession” to be declared in the return of income for the financial year ended on 31.3.2016

i. Amount received towards power subsidy with a stipulation that the same is to be adjusted in the electricity bills.

ii. Donations received by a person in the course of carrying on vocation from his followers. iii. Profit derived by an assessee engaged in carrying the business as dealers in shares on exchange of

the shares held as stock in trade of one Company with the shares of other Company. iv. Interest received by a contractor on the amount of compensation awarded by an arbitrator

resolving the dispute relating to the work done.

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v. The amount of margin money forfeited by a bank on the failure of its constituents of not taking the delivery of the shares purchased by such bank on their behalf.

vi. Depreciation on the decoders” given on loan to the cable operators but owned by the assessee who is engaged in the business of distributing satellite channels. (6 x 2 = 12 Marks)

b) A political party, duly registered under section 29A of the Representation of the People Act, 1951,

received rent of ` 1,25,000 per month of one of its building let out to a bank from 01.06.15. (2 Marks)

c) Mr. Divakar avails the benefit of L TC and went by air (economy class) on a holiday in India on 25.01.2016 along with his wife and three children consisting of son aged 4 years and twin daughters of 1 year age. Total cost of tickets reimbursed by his employer was ` 90,000 (i” 60,000 for 2 adults and ̀30,000 for the three children). State with reasons the amount which can be claimed by Mr. Divyam out of the reimbursement as not subject to tax. Will your answer be different where among his three children the twins were of 4 years of age and the age of the son was of 1 year? (2 Marks)

4. Answers any four Examine critically any four out of the following problems Jissues/cases in the context of provisions contained in the Income-tax Act, 1961 relevant for Assessment Year 2016-17. Support the answers with relevant case laws and workings.

a) Mr. Janak is proprietor of Ws. Yash Texnit which is engaged in garment manufacturing business. The entire block of Plant & Machinery chargeable to depreciation @ 15% has 15 different machinery items as at 3 1-03-2015. One of the machinery used for packing had become obsolete and was discarded by Mr. Janak in July’ 13. Assessee filed its return for A. V. 2015-16 claiming total depreciation of ` 40 lacs which includes r 4.00 lacs being the depreciation claimed on the machinery item discarded by Mr. Janak. The A. 0. disallowed the claim of depreciation of `4. 00 lacs during the course of scrutiny assessment. comment on the validity of action taken by A. 0.

b) X. Ltd. issued debentures in the previous year 2015-16, which were to be matured at the end of five years. The debenture holder was given an option of one time up front payment of 60 per debenture on account of interest which was to be immediately paid by the company. As per the option exercised by the debenture holders, company paid interest up front to them in the first year itself and the same was claimed as deduction in the return of the company. But in the accounts, the interest expenditure was shown as deferred expenditure to be written off over a period of five years. During the course of assessment, the Assessing Officer spread the up front interest paid over a period of five year term of debentures and allowed only one fifth of the amount in the previous year 2015-16. Examine the correctness of the action of Assessing Officer.

c) An assessee deducted the tax at the time of making the payment of salaries. However, it delayed depositing the amounts of tax deducted with the revenue. The quantum of tax deducted was deposited with the revenue along with the interest by the assessee on its own before any notice determining the amount or declaring the assessee to be in default was made by the Revenue. The Assessing Officer levied penalty under section 221 of the Income-tax Act, 1961, for failure to pay tax deducted at source within the prescribed time. Is the action of Assessing Officer justified?

d) Ms. Ankisha had filed her return for the relevant assessment year wherein her total income consisted of income from business and profession of ` 3.25 lacs and income from short term capital gain of ` 2 lacs. During the course of scrutiny, the Assessing Officer interpreted the income of ` 2 lacs declared as short term capital gain (STCG) as income from her business having regard to the nature of transactions, The Assessing Officer completed the assessment and levied penalty under section 271(1)(c) on the grounds that Ms. Ankisha had furnished inaccurate particulars of her income. Is the action of Assessing Officer justified in law?

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e) Bhola & Co., a firm, failed to pay the advance tax as required by the provisions of Income-tax Act, 1961. The assessment was done under section 143(3) and the assessment order issued by the Assessing Officer stated that interest is payable under section 234B of the Income-tax Act, 1961. The order did not contain any direction for the payment of interest, it merely stated that interest is payable. The assessee’s contention is that since the direction for payment of interest is absent in the assessment order, it could not be fastened with liability to interest under section 234B. Examine the validity of assessee’s contention. (4 x 4 = 16 Marks)

5. (i) XYZ Bank Inc, a US banking company, has a branch in India, XYZ Bank Ltd. During the P.Y.2015-16,

the Indian branch paid 70 crore towards interest to its head office, XYZ Bank Inc. What are the tax consequences of such interest payment by the Indian branch to the head office? Is the Indian branch required to deduct tax at source on such payment?

(ii) An institution having “advancement of any other object of general public utility” as its main object is registered under section 12AA. Its total receipts for the P.Y.2015- 16 is ` 50 Iakhs, out of which receipts from trading activity is ` 15 Iakhs. Would the institution continue to retain its “charitable status” and be eligible for exemption under section 11 for A.Y.2016-17, if it applies its receipts from trading activity towards its main object? Discuss. What would be your answer if the main object of the above institution is Yoga”? Profits and gains of business or profession

(iii) Upsilon Ltd. has received a notice under section 148 for the A.Y.2013-14 on 22-09-2016. It also anticipates similar notices for the Assessment Years 2011-12 and 2012-13, in respect of which it has already filed its return of income. While examining the books of account and other documents of the company, a large amount of concealed income has been noticed. Advise Upsilon Ltd. the proper course of action.

(iv) Discuss the following issues in the context of the provisions of the Income-tax Act, 1961, with specific reference to clarification given by the Central Board of Direct Taxes along with the relevant legal decision followed – i. Does the period of limitation for imposition of penalty under sections 271 D and 271 E commence when assessment order is passed by the Assessing Officer or when notice is issued by the Joint Commissioner? ii. What is the period of limitation for imposition of penalty under sections 271D and 271E? Is it dependent on the pendency of appeal against the assessment or other order referred to in

section 275(1 )(a)? (4 x 4 = 16 Marks)

6. (a) Discuss whether transfer pricing provisions under the Income-tax Act, 1961 are attracted in respect of

the following cases i. XV Ltd., an Indian company, has two units, X & Y. Unit X, which commenced business two years

back, is engaged in the development of a highway project, for which purpose an agreement has been entered into with the Central Government. Unit Y is carrying on the business of trading in steel. Unit Y transfers steel of the value of 80 lakhs to Unit X for 68 lakhs.

ii. Transfer of industrial design by X Ltd., an Indian company, to Y Inc., a US company, which guarantees 20% of the borrowings of X Ltd.

iii. Marketing management services provided by LMN Inc., a French company to MNO Ltd., an Indian company. LMN Inc. is a specified foreign company as defined in section 11 5BBD, in relation to MNO Ltd.

iv. Ms. Poorna, a resident Indian, is a director of ABC Ltd, an Indian company. ABC Ltd. pays salary of ` 22 Iakhs per annum to Manasi, who is Ms. Pooma’s daughter.

v. Purchase of equipment by A Ltd., an Indian company, from B Inc., a Japanese company. A Ltd. is the subsidiary of B Inc. (4 Marks)

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(b) Fly High Ltd. has paid a sum of 20 lakhs during the year ended 31-3-2016 to Airports Authority of India towards landing and parking charges. The company has deducted tax at source@2% under section 194C on the said payment and remitted the tax deducted within the prescribed time. The Assessing Officer contended that landing and parking charges were levied for use of the land of the airport and hence, the payment was in the nature of rent attracting TDS@10% under section 194-I. Discuss the correctness or otherwise of the contention of the Assessing Officer. (4 Marks)

(c) Discuss the following issues in the context of the provisions of the Income-tax Act, 1961, with specific reference to clarification given by the Central Board of Direct Taxes (i) Moon TV, a television channel, made payment of ` 50 lakhs to a production house for production of programme for telecasting as per the specifications given by the channel. The copyright of the programme is also transferred to Moon TV. Would such payment be liable for tax deduction at source under section 194C? Discuss. Also, examine whether the provisions of tax deduction at source under section 1 94C would be attracted if the payment was made by Moon TV for acquisition of telecasting rights of the content already produced by the production house. (ii) Mudra Adco Ltd., an advertising company, has retained a sum of ` 15 lakhs, towards charges for procuring and canvassing advertisements, from payment of 1 crore due to Cloud TV, a television channel, and remitted the balance amount of 85 lakhs to the television channel. Would the provisions of tax deduction at source under section 194H be attracted on the sum of ` 15 lakhs retained by the advertising company? (8 Marks)

7. a) Mr. Kadam is entitled to a salary of ` 25,000 per month. He is given an option by his employer either to

take house rent allowance or a rent free accommodation which is owned by the company. The HRA amount payable was ̀5,000 per month. The rent for the hired accommodation was `6,000 per month at New Delhi. Advice Mr. Kadam whether it would be beneficial for him to avail HRA or Rent Free Accommodation. Give your advice on the basis of Net Take Home Cash benefits (3 Marks)

b) During the financial year 2015-16, Mr. A received a sum of ` 1,80,000 (` 60,000 p. a.) by way of enhancement for the last three years as the Government department (tenant) enhanced the rate of rent with retrospective effect. Will the sum of ` 1,80,000 be taxable in the assessment year 2016-17? Can it be spread over the last three years? (3 Marks)

c) Who can be treated as an agent of a non-resident foreign collaborator for the purpose of proceedings and/or any other matters under the Income-tax Act, 1961? (6 Marks)

d) What are the “Specified Domestic Transactions” subject to Transfer Pricing provisions? (4 Marks)

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THE SOCIETY OF AUDITORS AND PRIME ACADEMY 43rd SESSION MODEL EXAM – FINAL – DIRECT TAX LAWS

SUGGESTED ANSWERS 1. (a) Computation of total income of RSK Ltd. for the A.Y.2016 -17

Particulars Amount (Rs.in lacs)

Amount (Rs.in lacs)

Profits and gains from business or profession Net profit as per profit and loss account Add : Items debited to profit and loss account, but to be disallowed and items not considered in accounts but to be taxed [See Note I below]

405

Value of group free air ticket provided by a supplier is taxable as business income under section 28(iv), as the value of any benefit, whether convertible into money or not, arising from business is taxable as business income.

10

Amount waived by the supplier of raw materials is a deemed income under section 41(1), as the expenditure was allowed as deduction in the last year and there is a benefit by way of remission or cessation of a trading liability. The fact that effect was not given in the running account of supplier is not relevant.

2

Interest payable outside India to a foreign company is not allowable since tax deducted by the assessee is not deposited during the previous year or in the subsequent year within the time prescribed under section 200(1) [Section 40(a)(i)]. In this case, the tax deducted was deposited after the prescribed date after the end of the previous year and therefore, the assessee can claim deduction only in the F.Y - 2016-2017.

5

Contribution to electoral trust is not an allowable expenditure while computing business income. Hence, the same has to be added back, since it is included in general expenses.

0.50 17.5

Adjusted Profits (i) 422.5

Less: Amount of deduction allowable or amount credited to profit and loss account but not taxable [See Note I belowj Under section 43B, interest on loan due to any scheduled bank, etc. is allowed as deduction, if such interest is actually paid irrespective of the method of accounting followed by the assessee. Conversion of arrear interest into a fresh loan by a bank cannot be considered as actual payment of interest. However, the amount of funded interest (i.e. converted loan) actually paid is allowable as deduction. Hence, 1,60,000, being two installments of 80,000 each, actually paid is deductible.

1.60

Liquidated damages have been received due to delay in supply of plant and machinery by the supplier. As the liquidated damages relates to delayed supply of a capital asset, it is in the nature of capital receipt and not revenue receipt. As the amount has been 3 00 wrongly credited to the profit and loss account, the same should be deducted.

3.00

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In the case of CIT v. Gujarat Guardian Ltd. (2009) 177 Taxman 434 (Del.), it was held that pre-payment premium represents interest as per section 2(28A). Section 2(28A) defines interest to include any other charge in respect of money borrowed or debt incurred. Section 36(1)(iii) provides for deduction of interest paid in respect of capital borrowed for the purposes of business or profession. Under section 43B, such interest is allowable as deduction on actual payment. From a combined reading of section 2(28A), 36(1)(iii) and 43B it can be inferred that pre-payment premium is deductible as business expenditure in one lump-sum on actual payment.

0.20

4.80

Business Income 417.70 Gross Total Income: 417.70 Less: Deduction under Chapter Vl-A Deduction under section 8OGGB in respect of contribution by the assessee company to an electoral trust.

0.50

Total Income

417.20

Notes 1. Since the question is silent as to whether the net profit of 405 lacs is after taking into account the adjustments in (I) to (viii), the problem has been worked out on the assumption that except for items (iv), (v) (vi) and (viii) in respect of which there is a specific mention about inclusion, all other adjustments i.e. (i), (ii), (iii) and (vii) have not been given effect to in the profit and loss account. 2. In respect of payment of salary to sales executive in cash, no disallowance under section 40A(3) is to be made as such payment falls within the scope of Rule 6DD(1). Salary paid to him in cash is allowable as the executive was temporarily posted for a continuous period of more than 15 days in Bangalore, not being the place of his normal duty, tax was deducted from such salary under section 192 and he does not maintain any bank account in Bangalore. Therefore, no disallowance under section 40A(3) is attracted in respect of such salary. 3. Remission of principal amount of loan does not amount to income under section 41(1) or under section 28(iv), where there is a waiver of loan taken from a bank or financial institution, unless the loan is taken for a trading activity. It is assumed that such loan is not taken for a trading activity and therefore, waiver of loan cannot be treated as income.

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(b) Computation of taxable income of Kapadia Memorial Trust for AY. 2016 – 17

Particulars Amount in Rs.

Income from running of hospitals 14,25,000

Donation other than anonymous donation 2,75,000 17,00,000

Less: 15% of income of 17 lacs accumulated or set apart

under section 11(1)(a) 255,000

Amount applied for the purposes of hospital 13,00,000 15,55,000

1,45,000

Add: Amount accumulated for extension of a hospital but not

spent deemed to be income under section 11(3) ( 15 1.50.000 150000

lacs — 13.50 lacs) (See Note I below) 2,95,000

Incomes which do not form part of Total Income 7

Add: Anonymous donation taxable @30% under section 3,00,000

115BBC (See Note 2 below)

Total Income 5,95,000

Tax on above:

Tax on anonymous donation of 2 lacs at 30% 60,000

(See Note 2 below)

Tax on other income of at normal rates 2,95,000

Upto 250000 Nil

Over 250000 up to 2,95,000 @ 10% 45000 4500

64500

Education cess @2% 1290

Secondary and higher education cess@1% 645

Tax payable 66435

2. (a)

(i) Section 56(2)(vii) provides that where any sum of money is received without consideration by an individual or a Hindu undivided family from any person or persons and the aggregate value of all such sums received during the previous year exceeds Rs.50,000, the whole of the aggregate value of such sum shall be included in the total income of such individual or Hindu undivided family under the head lncome from other sources”. However, any sum received from a relative would be exempted from the taxability provisions under section 56(2)(vii). Sister of an individual is a relative for the purpose of section 56(2)(vii). Therefore, the gift received by Radhe from sister living in UK would be exempted from the applicability of section 56(1)(vii). Further, gifts received by Radhe on 11.9.2015 from his two friends of Rs 21,000 each shall not be included in the total income of Radhe since, the aggregate value of all such sums received during the previous year does not exceed Rs.50,000.

(ii) On this issue, the Gujarat High Court, in CIT v. Manibhai & Brothers (2007) 294 ITR 501 (Guj.), observed that

for imposition of penalty under section 271(l)(c), there should be a deliberate concealment of particulars or furnishing of inaccurate particulars by the assessee. For this purpose, the conduct of the assessee from the beginning till the end of the assessment proceedings in totality should be considered. If a revised return of income is filed by the assessee after the omission or wrong statement in the original return is

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discovered by the Assessing Officer in the course of assessment proceedings, then the Assessing Officer can impose penalty under section 271(1)(c). However, if the assessee voluntarily files a revised return of income, suo moto, before the assessment order is passed, after he himself discovers an omission or wrong statement in the original return, then, penalty cannot be levied under section 271(1)(c). In view of above legal position, Sumit can be absolved of penalty under section 271(1)(c), since he has filed the revised return under section 139(5), suo moto, within the prescribed time limit.

(b) (i) The salary drawn by an lAS Officer by virtue of his posting in USA, despite the fact that he was a non-

resident in the previous year, shall be subject to tax in India as per section 9(1)(iii) which states that income chargeable under the head “Salaries” payable by the Government to a citizen of India for his services outside India shall be deemed to accrue or arise in India. Therefore, the total amount of salary of 15 lakh received by the lAS Officer in and outside India shall be subject to tax in India in the A.Y 2016-17.

(ii) As per section 25B, the arrears of rent shall be taxable in the previous year in which such arrears are received. The assessee shall be allowed deduction @ 30% of such amount received. Further, it is not necessary that the assessee should be owner of such house property in the previous year in which such arrears are received. As the arrear rent of 1,80,000 is received in the previous year 2015-16, the same is taxable in the A.Y.2016-17. Thus, the net sum of 1,26,000 (i.e. 1,80,000 — 54,000) shall be chargeable to tax under the head “Income from house property”. There is no provision in the Income-tax Act, 1961, enabling the assessee to spread over the arrears of rent over the last three years.

(c) (i) The provisions of section 44B, introduced w.e.f. 1.4.1976, requiring computation of income of a non-

resident from shipping business on a presumptive basis are mandatory and not optional. Therefore, there is no possibility of having a business loss where income is computed on presumptive basis under section 44B. In case the brought forward losses mentioned in the question are taken to be business losses, there is an inbuilt presumption that such losses and depreciation relate to another business of the non-resident and not the shipping business. In such a case, both business loss and unabsorbed depreciation of another business can be set-off against the profits determined under section 44B in respect of shipping business. Even though the provisions of section 44B are applicable notwithstanding anything to the contrary contained in sections 28 to 43K, it is possible to take a view since the non obstante clause is relevant only for computation of income from shipping business under section 44B, it does not bar set-off of unabsorbed depreciation relating to some other business.

(ii) Under section 22, the charging section for income from house property”, the only exception provided is the income derived from property used/occupied by the assessee for his own business. Therefore, income derived from letting out of house property will always be taxable under the head “Income from house property”. Even if the business of the assessee is to own and give houses on rent or to trade in houses, the annual value of the houses owned by him during the previous year would be taxable as “Income from house property”. It will be so taxable even if property is held by the assessee as stock-in-trade of his business. Note — The Gujarat High Court has, however, expressed an alternate view in CIT v. Neha Builders P. Ltd. (2008) 296 ITR 661, where it was held that in the case of an assessee engaged in construction and sale of buildings, the same would constitute stock-in-trade of the assessee and any income derived from stock would be assessable as business income.

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(d) In this case, I Limited, the Indian company, supplied billets to its foreign holding company, U Limited Since the foreign company, U Limited, holds more than 26% shares in I Limited, I Limited and U Limited shall be deemed to be associated enterprises within the meaning of section 92A. As I Limited supplies similar product to an unrelated entity, V Limited, UK, the transactions between I Limited and V. Limited can be considered as comparable uncontrolled transactions for the purpose of determining the arm’s length price of the transactions between I. Limited and U Limited Comparable Uncontrolled Price (CUP) method of determination of arm’s length price (ALP) wou ld be applicable in this case. Transactions with U Limited are on FOB basis, whereas transactions with V Limited are on CIF basis. This difference has to be adjusted before comparing the prices. Since the adjusted price for V. Limited, UK and the price fixed for U Limited are the same, the arm’s length price is Euro 500 per MT. Since the sale price to related party (i.e., U Limited) and unrelated party (i.e., V Limited) is the same, the transaction with related party U Limited has also been carried out at arm’s length price.

(e) A Managing Director generally occupies the dual capacity of being a director as well as an employee of the company. In this case, assuming that the Managing Director is also an employee of XYZ Ltd., clause (vi) of the proviso to section 17(2) would get attracted. Clause (vi) of the proviso to section 17(2) provides that any expenditure incurred by the employer on medical treatment of the employee outside India shall be excluded from perquisite only to the extent permitted by RBI, Therefore, the expenditure on medical treatment of the Managing Director outside India shall be excluded from perquisite to the extent permitted by RBI as per clause (vi) of the proviso to section 17(2). If it is assumed that the entire amount is permitted by RBI, there would be no perquisite chargeable in the hands of the Managing Director. Therefore, in such a case, the action of the Assessing Officer in taxing the entire amount paid by the company as a perquisite in the hands of the Managing Director is incorrect. This question can also be answered by applying the ratio of the Allahabad High Court ruling in CIT v. D.P. Kanodia (2008) 296 ITR 0616. In that case, the High Court observed that the reimbursement by the company of medical expenditure incurred outside India by the director cannot be considered as an amenity or benefit provided by the company to its director, and therefore the provisions of section 17(2)(iii)(a) would not be attracted. Therefore, such reimbursement was not a perquisite within the meaning of section 17(2)(iii)(a). Hence, applying the ratio of the above case to the facts of this case, the action of the Assessing Officer in taxing the amount paid by the company as a perquisite in the hands of the Managing Director is incorrect.

3. (a)

(i) Power subsidy received by the assessee is revenue in nature as it goes towards reduction of the electricity bills. Therefore, the subsidy is taxable as business income. It was so held by the Supreme Court in CIT vs. Rajaram Maize Products (2001) 251 ITR 427.

(ii) Donations received by a person from his followers in the course of carrying on vocation for the furtherance of the objects of his vocation were receipts arising from the carrying on of his vocation and not casual or non-recurring receipts. The Supreme Court, in Dr. K. George Thomas vs. CIT (1985) 156 ITR 412, held that such donations are taxable as a business income as there is a direct nexus between the vocation carried on by the assessee and the receipt of such donation.

(iii) The difference between the cost/book value of shares of the first company and the market value of shares of the new company on the date of such exchange has to be treated as profit derived by the dealer in shares (on exchange of shares held as stock-in-trade of first company with the shares of the new company) in the normal course of his business, and hence such profit is taxable as business income. It was so held by the Supreme Court in Orient Trading Co. Ltd. vs. CIT (1997) 224 ITR 371.

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(iv) Interest received by a contractor on the amount of compensation awarded by an arbitrator resolving the dispute relating to the work done is in the nature of receipt relating to the business of the contractor and shall be, thus, assessable as business income. This view was upheld by the Supreme Court, in CIT vs. B. N. Agaiwala and Co. (2003) 259 ITR 754.

(v) Since the bank is purchasing shares on behalf of the constituents, the forfeiture of margin money by the bank from the constituents for not paying the balance amount of purchase price and not taking delivery of shares purchased by the bank on their behalf is in the normal course of its banking business and hence, the forfeited amount is assessable as business income of the bank. The forfeited amount being revenue in nature cannot be adjusted against the purchase price of the shares. The Supreme Court, in the case of CIT vs. Lakshmi Vilas Bank Ltd. (1996) 220 ITR 305, has confirmed this view.

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

(b) Rent received by the political party from the bank is an income chargeable under the head lncome from

house property. However, according to the provisions of section 13A, income from, inter alia, house property shall not be included in total income of a political party registered under section 29A of the Representation of the People Act, 1951, provided the political party fulfills the conditions as specified therein. Therefore, rent of 1,25,000 received by the registered political party from letting out of its building to a bank would not be included in its total income.

(c) Mr. Divakar can avail exemption as per section 10(5) on the entire amount of 90,000 reimbursed by the

employer for the LTC as the same was availed for himself, his wife and the three children in India and the journey was also undertaken by economy class airfare. The restriction imposed for two children is not applicable to the multiple births which take place after the first child. However, if the age of the twin daughters is more than the age of the son, the restriction imposed for two children under the section would be applicable and therefore, Mr. Divyam cannot avail exemption in this case for all the three children. The exemption of LTC can be availed in respect of only two children. Therefore, the fare of 10000 (i.e., 30,000 x 1/3) reimbursed for one child will form part of taxable salary and balance amount of LTC of 80000 (90,000 - 10,000) will be exempt under section 10(5).

4. (a) The issue under consideration is whether disallowance of depreciation made by the Assessing Officer with

regard to the discarded asset, in arriving at the written down value of the block of assets, is justified. One of the conditions for claim of depreciation under section 32 is that the eligible asset must have been put to use for the purpose of business or profession. The other aspect to considered is whether merely discarding an obsolete machinery, which is physically available, will attract the expression “moneys payable” appearing in section 43(6), so as to deduct its value from the written down value of the block.The facts in the present case are similar to facts in the case of CIT v. Yamaha Motor India Pvt. Ltd. (2010) 328 ITR 297, wherein the Delhi High Court observed that the expression “used for the purposes of the business” in section 32 when used with respect to discarded machinery would mean the use in the business, not only in the relevant financial year/previous year, but also in the earlier financial years.The discarded machinery may not be actually used in the relevant previous year but depreciation can be claimed as long as it was used for the purposes of business in the earlier years provided the block continues to exist in the relevant previous year. Therefore, the condition for claiming

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depreciation in respect of the discarded machine would be satisfied if it was used in the earlier previous years for the business. For the purpose of section 43(6), “moneys payable” means the sale price, in case of sale, or the insurance, salvage or compensation moneys payable in respect of the asset. In this case, the machinery has not been sold as machinery or scrap or disposed off, and it continues to exist. Hence, there is no “moneys payable” in this case, which alone is deductible while computing the WDV of the block to which it belongs. Applying the rationale of the above case, the action of the Assessing Officer in disallowing 4 lakhs, being the depreciation claim attributable to discarded machinery, on the ground that the same was not put to use in the relevant previous year, is invalid, since the said machinery was put to use in the earlier previous years.

(b) The issue under consideration is whether, in a case where debentures are issued with maturity at the end of five years, and the debenture holders are given an option of upfront payment of interest in the first year itself, can the entire upfront interest paid be claimed as deduction by the company in the first year or should the same be deferred over a period of five years; and would the treatment of such interest as deferred revenue expenditure in the books of account have any impact on the tax treatment. The facts of the case are similar to the facts in Taparia Tools Ltd. v. JCIT (2015) 372 ITR 605, wherein the above issue came up before the Supreme Court. In that case, it was observed that under section 36(1)(iii), the amount of interest paid in respect of capital borrowed for the purposes of business or profession, is allowable as deduction. The moment the open for upfront payment was exercised by the subscriber, the liability of X Ltd. to make the payment in that year had arisen. Not only had the liability arisen in the previous year in question, it was even quantified and discharged as well in that very year. As per the rationale of the Supreme Court ruling in Taparia Tools Ltd. ‘s case, when the deduction of entire upfront payment of interest is allowable as per the Income-tax Act, 1961, the fact that a different treatment was given in the books of account could not be a factor which would bar the company from claiming the entire expenditure as a deduction. Accordingly, the acon of the Assessing Officer in spreading the upfront interest paid over the five year term of debentures and restricting the deduction in the P.Y.2015-16 to one- fifth of the upfront interest paid is not correct. The company is eligible to claim the enbre amount of interest paid upfront as deduction under section 36(1)(iii) in the P.Y.2015-16.

(c) Penalty under section 221 is attracted when an assessee is in default or is deemed to be in default in making payment of tax.The issue under consideration in this case is whether the Assessing Officer was justified in levying penalty under section 221 when the assessee had voluntarily remitted the tax deducted at source, though belatedly. This issue came up before the Bombay High Court in the case of Reliance Industries Ltd. v. CIT (2015) 377 ITR 74. The High Court observed that as per section 201, a person is deemed to be an assessee-in-default for failure to deduct tax or after deduction, pay the tax to the credit of the Government within the prescribed time. In the case on hand, the assessee has deducted the tax but failed to pay the tax so deducted to the credit of the Government within the prescribed time. Hence, it would be deemed to be an assessee-in-default for failure to pay the tax after deduction. Consequently, penalty under section 221 would be attracted. Further, the assessee would riot cease to be liable to penalty under section 221 merely by reason of the fact that before the levy of penalty, he has paid the tax [Explanation to section 221(1)1. The action of the Assessing Officer in this case is, therefore, justified.

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(d) Under section 271(1)(c), penalty of 100% to 300% of the amount of tax sought to be evaded is leviable for concealment of income or furnishing inaccurate particulars of income. In the case on hand, the amount in question, namely 2 Iakhs declared as short-term capital gains, was honestly reported by Ms. Ankisha in her return of income. The Assessing Officer assessed the income as business income. Reporting of income under a different head formed the basis of levy of penalty. The issue under consideration is whether reporting of income under a different head of income can tantamount to furnishing of inaccurate particulars of income to attract penalty under section 271(1)(c). The facts of the case are similar to the facts in CIT v. Amit Jam (2013) 351 ITR 74, in which the Delhi High Court relied upon Supreme Court ruling in CIT v. Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158 wherein it was held that merely because the Assessing Officer was of the opinion that the income falls under some other head cannot be reason enough to treat the particulars reported in the return as ‘inaccurate particulars”. Where there is no finding that any details supplied by the assessee in its return were incorrect or erroneous or false, there is no question of imposing penalty under section 271(1)(c). Mere reporting of income under a different head would not characterize the particulars reported as inaccurate” to attract levy of penalty under section 271(1)(c). Therefore, in this case, action of the Assessing Officer in levying penalty under section 271(1)(c) on the ground that Ms. Ankisha had furnished inaccurate particulars of her income on account of mere reporting of income under a different head is, therefore, not justified in law.

(e) Interest under section 234B is attracted for non-payment of advance tax or shortfall payment of advance tax. As per the provisions of section 234B, the moment an assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by the assessee is less than 90% of the assessed tax, the assessee becomes liable to pay simple interest @1% per month or part of the month. Levy of interest under section 234B is automatic when the conditions of section 234B are met and the income-tax computation sheet form part of the assessment order. It was so held by the Gauhati High Court in the case of CIT v. Assam Mineral Development Corporation Ltd. (2010) 320 ITR 149. The contention of the firm, Bhola & Co., that it could not be fastened with the liability to interest under section 234B in the absence of the direction for payment of such interest in the assessment order is, therefore, not valid, assuming that interest under section 234B has been computed for determining the tax liability as per the income-tax computation sheet annexed to the assessment order. Interest liability under section 234B would arise, even in the absence of specific direction for payment of interest in the assessment order. Note — Answers to all sub-parts of question 4 are based on interpretation of case laws. The answers given above are based on particular legal decisions wherein the facts of the case and issue under consideration are similar to the facts given and issue(s) raised in the questions. However, it may also be possible to answer some of these questions on the basis of other case laws wherein the facts and issue(s) are similar.

5. (i)

1. As per section 5(2), the total income of a non-resident would include all income received or deemed to be received in India in the relevant previous year and all income which accrues or arises or is deemed to accrue or arise to him in India in that year. Section 9(1 )(v) lays down the circumstances under which the interest income is deemed to accrue or arise in India. Under section 9(1 )(v), income by way of interest is deemed to accrue or arise in India, if it is payable by— (a) the Government ; or (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside

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India or for the purposes of making or earning any income from any source outside India or (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India. In order to provide clarity and certainty, on the issue of taxability of interest payable by the permanent establishment (PE) of a non-resident engaged in banking business to the head office, an Explanation has been inserted in section 9(1)(v). Accordingly, in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the PE in India of such non-resident to the head office shall be deemed to accrue or arise in India. Such interest shall be chargeable to tax in addition to any income attributable to the PE in India. Further, the PE in India shall be deemed to be a person separate and independent of the non-resident person of which it is a PE and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery would apply accordingly. Also, the PE in India has to deduct tax at source on any interest payable to either the head office outside India. Non-deduction would result in disallowance of interest claimed as expenditure by the PE and may also attract levy of interest and penalty in accordance with relevant provisions of the Act. In this case, XYZ Bank Inc. is a non-resident engaged in banking business having a PE (i.e., a branch, XYZ Bank Ltd.) in India. Accordingly, any interest payable by the branch in India to the head office, XYZ Bank Inc. located outside India, shall be deemed to accrue or arise in India, in the hands of XYZ Bank Inc. Such interest shall be chargeable to tax in India in the hands of XYZ Bank Inc. in addition to any income attributable to the branch in India. Further, the Indian branch, XYZ Bank Ltd., shall be deemed to be a person separate and independent of XYZ Bank Inc. of which it is a branch and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery would apply accordingly. Also, the Indian branch, XYZ Bank Ltd., has to deduct tax at source on any interest payable to its head office, XYZ Bank Inc. Non-deduction would result in disallowance of interest claimed as expenditure by XYZ Bank Ltd. and also attract levy of interest and penalty. (ii) An institution having “advancement of any other object of general public utility” as its main object is registered under section 12AA. Its total receipts for the P.Y.2015- 16 is 50 Iakhs, out of which receipts from trading activity is 15 Iakhs. Would the institution continue to retain its “charitable status” and be eligible for exemption under section 11 for A.Y.2016-17, if it applies its receipts from trading activity towards its main object? Discuss. What would be your answer if the main object of the above institution is ‘Yoga”? Profits and gains of business or profession 2. (a) Section 2(15) defines charitable purpose & to include relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility. However, the advancement of any other object of general public utility shall not be a charitable purpose, if the institution is carrying on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income derived from such activity, unless — (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year. In this case, the main object of the institution is advancement of any other object of general public Utility”. Since it derives income from an activity in the nature of trade during a financial year, it would lose its

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“charitable status for that year, even if it applies such income for its main objects, unless - (I) receipts from such activity does not exceed 20% of the total receipts in that year; and (ii) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility. In this case, the receipts from such activity are 30% of total receipts. Hence, the institution will lose its charitable status and will not get the benefit of tax exemption under section 11 or 12 in the P.Y.2015-16, even if it applies such receipts for its main object and irrespective of whether the registration issued is cancelled or not. (b) Yoga has been specifically included in the definition of “charitable purpose” by the Finance Act, 2015 with effect from A.Y.2016-17. Hence, it would no longer fall under the residual clause “advancement of any other object of general public utility”. Therefore, an institution having yoga as its main object would not be subject to the restrictions which are applicable to the residuary object “advancement of any other object of general public utility”. Such institution would continue to retain its ‘charitable” status, even if it derives income from an activity in the nature of trade. (iii) Upsilon Ltd. has received a notice under section 148 for the A.Y.2013-14 on 22-09-2016. It also anticipates similar notices for the Assessment Years 2011-12 and 2012-13, in respect of which it has already filed its return of income. While examining the books of account and other documents of the company, a large amount of concealed income has been noticed. Advise Upsilon Ltd. the proper course of action. An assessee may, at any stage of a case relating to him, make an application in the prescribed form and manner to the Settlement Commission under section 245C. “Case” means any proceeding for assessment which may be pending before an Assessing Officer on the date on which such application is made. A proceeding for assessment or reassessment or recomputation under section 147 is deemed to have commenced from the date of issue of notice under section 148. Where a notice under section 148 is issued for any assessment year, a proceeding under section 147 shall be deemed to have commenced on the date of issue of such notice and the assessee can approach the Settlement Commission for other assessment years as well, even if notice under section 148 for such other assessment years have not been issued but could have been issued on that date. However, a return of income for such other assessment years should have been furnished under section 139 or in response to notice under section 142. In the case on hand, Upsilon Ltd. has received a notice under section 148 for the A.Y. 2013-14 and also anticipates similar notices for the assessment years 2011-12 and 201 2-13 for which return of income has been furnished. Moreover, since after examination of the books of account, a large amount of concealed income is also noticed, it is presumed that the second condition that the additional amount of income-tax payable on the income disclosed in the application should exceed 10 lakhs would also be satisfied. Based on these facts, assuming that the necessary conditions are fulfilled, Upsilon Ltd. may approach the Settlement Commission to have his case settled and apply for grant of immunity from penalty and prosecution.

(iv) (a) The Kerala High Court, in Grihalakshmi Vision v. Addi. CIT (2015) 379 ITR 1GYJ, observed that the question to be considered is whether proceedings for levy of penalty are initiated with the passing of the order of assessment by the Assessing Officer or whether such proceedings commence with the issuance of the notice by the Joint Commissioner. From the statutory provisions, it is clear that the competent authority to levy penalty is the Joint Commissioner. Therefore, only the Joint Commissioner can initiate proceedings for levy of penalty. Such initiation of proceedings could not have been done by the Assessing Officer. The statement in the assessment order that the proceedings under Section 271D and 271E are initiated is inconsequential. On the other hand, if the assessment order is taken as the initiation of penalty proceedings, such initiation would be by an authority who is not competent to do so and the proceedings thereafter would be

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proceedings without jurisdiction. Thus, the initiation of the penalty proceedings is only with the issuance of the notice by the Joint Commissioner to the assessee to which he has filed his reply. The CBDT Circular No.9/2016 dated 26.4 .2016 clarifies that the above judgement reflects the Departmental View. Accordingly, the Assessing Officers (below the rank of Joint Commissioner of income-tax) have to make a reference to the Range Head, regarding any violation of the provisions of section 269SS and section 269T, as the case may be, in the course of the assessment proceedings (or any other proceedings under the Act). The Assessing Officer (below the rank of Joint Commissioner of Income-tax) shall not issue the notice in this regard. The Range Head will issue the penalty notice and shall dispose/complete the proceedings within the limitation prescribed under section 275(1) (c)Note - The Circular further clarifies that where any High Court decides this issue contrary to the “Departmental View”, the “Departmental View” thereon shall not be operative in the area falling in the jurisdiction of the relevant High Court. (b) Is it dependent on the pendency of appeal against the assessment or other order referred to in section 275 (1 )(a) The Delhi High Court, in CIT v. Worldwide Township Projects Ltd. (2014) 367 ITR 433. observed that is well settled that penalty under section 271D or section 271E is independent of the assessment. The action inviting imposition of penalty is granting of loans above the prescribed limit otherwise than through banking channels and as such infringement of section 269SS is not related to the income that may be assessed or finally adjudicated. In this view, section 275(1)(a) would not be applicable and the provisions of section 275(1 ) (c) would be attracted. The CBDT, in its Circular No.10/2016 dated 26.4.2016, clarified that it is a settled position that the period of limitation of penalty proceedings under section 271D and section 271E is governed by the provisions of section 275(1)(c). Therefore, the limitation period for the imposition of penalty under these provisions would be the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later. The limitation period is not dependent on the pendency of appeal against the assessment or other order referred to in section 275(1)(a).

6. (a) (i) XV Ltd., an Indian company, has two units, X & Y. Unit X, which commenced business two years back, is

engaged in the development of a highway project, for which purpose an agreement has been entered into with the Central Government. Unit Y is carrying on the business of trading in steel. Unit Y transfers steel of the value of 80 lakhs to Unit X for 68 lakhs.

(ii) Transfer of industrial design by X Ltd., an Indian company, to Y Inc., a US company, which guarantees 20% of the borrowings of X Ltd.

(iii) Marketing management services provided by LMN Inc., a French company to MNO Ltd., an Indian company. LMN Inc. is a specified foreign company as defined in section 11 5BBD, in relation to MNO Ltd.

(iv) Ms. Poorna, a resident Indian, is a director of ABC Ltd, an Indian company. ABC Ltd. pays salary of 22 Iakhs per annum to Manasi, who is Ms. Pooma’s daughter.

(v) Purchase of equipment by A Ltd., an Indian company, from B Inc., a Japanese company. A Ltd. is the subsidiary of B Inc.Unit X 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-lA. However, Unit Y is not engaged in any “eligible business’. Since Unit Y has transferred steel to Unit X 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.

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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 20 crore. (ii) The scope of the term “intangible property’ has been amplified to include, inter alia, industrial design, which is a engineering related intangible asset. Transfer of intangible property falls within the scope of the term “international transaction’. Since Y Inc., a US company, guarantees not less than 10% of the borrowings of X Ltd., an Indian company, Y Inc. and X Ltd. are deemed to be associated enterprises under section 92A(2). Therefore, since transfer of industrial design by X Ltd., an Indian company, to Y Inc., a US company, is an international transaction between associated enterprises, the provisions of transfer pricing are attracted in this case. (iii) Clause (i) of Explanation to section 92B amplifies the scope of the term intemational transaction. According to the said Explanation, international transaction includes, inter alia, provision of marketing management services. LMN Inc. is a specified foreign company in relation to MNO Ltd. Therefore, the condition of MNO Ltd. holding shares carrying not less than 26% of the voting power in LMN Inc is satisfied. Hence, LMN Inc. and MNO Ltd. are deemed to be associated enterprises under section 92A(2). Since the provision of marketing management services by LMN Inc. to MNO Ltd. is an “international transaction” between associated enterprises, transfer pricing provisions are attracted in this case. (iv) 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. Pooma. who is a director of ABC 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 ABC Ltd. exceeds a sum of 20 crore. (v) Purchase of tangible property falls within the scope of “international transaction. Tangible property includes equipment. B Inc. and A Ltd. are deemed to be associated enterprises under section 92A(2), since B Inc., being a holding company of A Ltd., fulfils the condition of holding shares carrying not less than 26% of the voting power in A Ltd. Therefore, purchase of equipment by A Ltd., an Indian company, from B Inc., a Japanese company, is an international transaction between associated enterprises, and consequently, the provisions of transfer pricing are attracted in this case.

(b) The issue as to whether the charges fixed by the Airport Authority of India (AAI) for landing and parking facility for the aircraft are for the use of the land” by the airline company came up before the Supreme Court in Japan Airlines Co. Ltd. v. CIT / CIT v. Singapore Airlines Ltd. (2015) 377 ITR 372. The Supreme Court observed that the charges which are fixed by the MI for landing and take-off services as well as for parking of aircrafts are not for the “use of the land”. These charges are for services and facilities offered in connection with the aircraft operation at the airport which include providing of air traffic services, ground safety services, aeronautical communication facilities, installation and maintenance of navigational aids and meteorological services at the airport. There are various international protocols which mandate all authorities manning and managing these airports to construct the airport of desired standards which are stipulated in the protocols. The services which are required to be provided by these authorities, like Ml, are aimed at passengers’ safety as well as for safe landing and parking of the aircrafts. Therefore, the services are not restricted to merely permitting use of the land of airport. On the contrary, it encompasses all the facilities that are to be compulsorily offered by the Ml in tune with the requirements of the protocol. The Supreme Court observed that the charges levied on air-traffic includes landing charges, lighting charges, approach and aerodrome control charges, aircraft parking charges, aerobridge charges, hangar charges, passenger service charges, cargo charges, etc. Thus, when the airlines pay for these charges, treating such charges as charges for use of the land would tantamount to adopting a totally simplistic approach which is far away from the reality.

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The Supreme Court opined that the substance behind such charges has to be considered and when the issue is viewed from this angle. keeping the larger picture in mind, it becomes very clear that the charges are not for use of the land per se and, therefore, it cannot be treated as rent within the meaning of section 194-I. The Supreme Court, thus, concurred with the view taken by the Madras High Court in Singapore Airlines case and overruled the view taken by the Delhi High Court in United Airlines/Japan Airlines case. Applying the rationale of the Supreme Court ruling to the facts of this case, the contention of the Assessing Officer that landing and parking charges are levied for use of the land of airport and hence, the charges are in the nature of rent to attract the provisions of tax deduction at source under section 1 94-I is !22 correct Note — In view of the above Supreme Court ruling, students may ignore the answer to Q.9 in pages 28.6 and 28.7 in the printed copy of the December, 2015 edition of the Practice Manual, based on the Delhi High Court ruling in Japan Airlines Co. Ltd.’s case and Madras High Court ruling in Singapore Airlines Ltd.

(c) The CBDT has, vide Circular No. 4/2016 dated 29.2.2016, clarified that while applying the relevant provisions of TDS on a contract for content production, a distinction is required to be made between: (i) a payment for production of content/programme as per the specifications of the broadcaster/telecaster; and (ii) a payment for acquisition of broadcastingltelecastirig rights of the content already produced by the production house. In the first situation where the content is produced as per the specifications provided by the broadcaster/telecaster and the copyright of the content/programme also gets transferred to the telecaster/broadcaster, such contract is covered by the definition of the term ‘work’ in section 194C and, therefore, subject to TDS under that section.1 However, in a case where the telecaster/broadcaster acquires only the telecastirigl broadcasting rights of the content already produced by the production house, there is no contract for “carrying out any work”, as required in section 194C(1). Therefore, such payments are not liable for TDS under section 194C. However, payments of this nature may be liable for TDS under other sections of Chapter XVII-B of the Act. In this case, since the programme is produced by the production house as per the specifications given by Moon TV, a television channel, and the copyright is also transferred to the television channel, the same falls within the scope of definition of the term ‘work’ under section 194C. Therefore, the payment of Rs.50 lakhs made by Moon TV to the production house would be subject to tax deduction at source under section 194C. If, however, the payment was made by Moon TV for acquisition of telecasting rights of the content already produced by the production house, there is no contract for “carrying out any work”, as required in section 194C(1). Therefore, such payment would not be liable for tax deduction at source under section 194C. (ii) The issue of whether fees/charges taken or retained by advertising companies from media companies for canvasing/booking advertisements (typically 15% of the billing) is ‘commission’ or ‘discount’ to attract the provisions of tax deduction at source has been darified by the CBDT vide its Circular No.5/20 16 dated 29.2.20 16. The Circular draws reference to the Allahabad High Court ruling in the case of Jagran Prakashan Ltd. and the Delhi High Court ruling in the matter of Living Media Limited. In both the cases, the Courts have held that the relationship between the media company and the advertising agency is that of a ‘principal-to-

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principal’ and, therefore, not liable for TDS under section 194H

7. (i) Option I: Rent Free Accomodation Option II: House Rent Allowance(HRA)

Particulars Option I Amount (Rs.)

Option II Amount (Rs.)

Basic Salary 300000 300000

HRA 60000 Value of Perqs (15% of 300000)

45000 -

HRA Least of 50% of Basic Salary HRA received

150000 60000

- (60000)

Actual Rent paid 72000 Taxable Income 345000 360000 Tax on above 9500 11000 Rebate U/s 87A (2000) (2000)

Tax Payable 7500 9000

Education cess 150 180 Secondary education cess 75 90 Total tax liability 7725 9270

Cash Inflow Gross Salary – Tax

337275 350730

Less: Rental outflow

- 72000

Net Cash inflow 337275 278730

Since the Net cash inflow in Option 1 is higher, Rent Free Accomodation is the better option. (ii) As per section 25B, the arrears of rent shall be taxable in the previous year in which such arrears are received. The assessee shall be allowed deduction @ 30% of such amount received. Further, it is not necessary that the assessee should be owner of such house property in the previous year in which such arrears are received. As the arrear rent of 1,80,000 is received in the previous year 2015-16, the same is taxable in the A.Y.2016-17. Thus, the net sum of 1,26,000 (i.e. 1,80,000 — 54,000) shall be chargeable to tax under the head “Income from house property”. There is no provision in the Income-tax Act, 1961, enabling the assessee to spread over the arrears of rent over the last three years. (iii) Section 2(7) defining the term ‘assessee’, includes within its scope, a representative assessee as well. The Assessing Officer is statutorily empowered to issue notice under section 163 to any person to deem him as the agent of the non-resident foreign collaborator.

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The term agent’ in relation to a non-resident includes: i) any person in India who is employed by or on behalf of the non-resident; or (ii) any person in India who has any business connection with the non-resident; or (iii) any person in India from or though whom the non-resident is in receipt of any income, whether directly or indirectly; or (iv) any person in India who is the trustee of the non-resident; or (v) any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India. However, a broker in India who in respect of any transaction does not deal directly with or on behalf of a non-resident principal but deals with or through a non-resident broker will not be deemed to be an agent under section 163 in respect of such transactions, provided both the following conditions are fulfilled: (a) the transactions must be earned on in the ordinary course of business through the first mentioned broker; and (b) the non-resident broker must be one who carries on such transactions in the ordinary course of his business and not as a principal. (iv) Specified Domestic Transaction under the transfer Pricing regulation means a transaction which is not an International Transaction, and the quantum of the transactions in the previous year exceeds Rs.20 crore. The transactions are those covered under Section 92BA. 92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee 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 person referred to in clause (b) of sub-section (2) of section 40A;

(ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) any business transacted between the assessee and other person as referred to in sub-section (10)

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

provisions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or (vi) any other transaction as may be prescribed.

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The Society of Auditors and Prime Academy Model Exam – FINAL - Sep 2016

Paper 8 - Indirect Tax Laws No. of Questions: 7 Total Marks: 100 No. of Pages: 3 Time Allowed: 3 hrs

Question No. 1 is compulsory. Candidates are required to answer any FIVE questions from the remaining six 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) State briefly with reasons whether the credit under the CENVAT Credit Riles would be available in the

flowing cases: i) Inputs are pilfered from the store room ii) Durable and Returnable packing material used for clearance of Final Product iii) An input becomes a waste and sold as scrap: and iv) Inputs used in trail runs. (4 x 2 = 6 Marks)

(b) Write a short note on SSI Exemptions related to Jewellery Manufacturers. (2 Marks) (c) GST Ltd has awarded a contract for ` 140 lakh to Strong Construction Ltd. in respect of alterations to

one of its buildings which were abandoned by GST Ltd five years ago. The purpose is to make the said building workable. The materials required for carrying out the alterations is provided by Strong Construction Ltd. Are the services of Strong Construction Ltd. subject to service tax and if so, determine the amount of service tax payable? (5 Marks)

(d) Explain Briefly the significance of “TRADE PARLANCE TEST” with respect to classification of excisable goods under the Central Excise Act, 1944 (3 Marks)

(e) Compute export duty from the following data: i) FOB price of goods: US $ 5,00,000. ii) Shipping bill presented electronically on 26-05-2016. iii) Proper officer passed order permitting clearance and loading of goods for export (Let Export

Order) on 04-06-2016. iv) Rate of exchange and rate of export duty are as under:

Date Rate of Exchange Rate of Export Duty

May 26, 2016 1 US $ = Rs 55 10%

June 4, 2016 1 US $ = Rs 56 8%

v) Rate of exchange is notified for export by Central Board of Excise and Customs. Make suitable

assumptions wherever required and show the workings. (4 Marks)

2. (a) A land owner enters into an agreement with a builder, whereby, he gives land to the builder to

construct a residential complex and sell flats/houses of such complex to buyers. The builder, in turn, agrees to assign a portion of the constructed area, in the form of flats in favour of the land owner. The remaining flats are sold by the builder to various buyers.With reference to a recent circular issued by CBEC, discuss how will the value of construction service provided by the builder to the land owner be determined? (4 Marks)

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(b) Compute taxable value and service tax from following sums received by Get Well Soon Medical Centre (exclusive of service tax) (Ignore small service providers exemption) for year ending 31-3-2016 (1)Testing (with transmission of medical samples between laboratories) –` 10 lakhs (2) Medical consumed as a part of health care service – ` 5 lakhs (3) Preventive health care services : ` 4lakhs (4) Treatment along with facilities provided such as TV, AC, room rent, medal to patients ( as a part of package): ` 33 Lakh (5) Genetic affinity examination for determining biological father: ` 4 lakh (6) Hair transplant services due to injury in a fire accident: ` 7 lakh (7) Cosmetic surgery of a film star. ` 16 lakh (8) Conduction of medical examination of individual: ` 1 lakh (8 Marks)

(c) State any five circumstances under which export goods are liable to confiscation under section 113 of Customs Act, 1962. (4 Marks)

3. (a) Raman Ltd. is engaged in providing the taxable services and has been filing its service tax returns

regularly. However, its jurisdictional Commissioner of Central Excise has the reasons to believe that Raman Ltd. has not correctly computed the value of its taxable services for the previous year. Can the jurisdictional Commissioner direct such person to get its accounts audited by a Chartered Accountant totheextent and forthe period as may be specified by him? Discuss briefly. Will your answer be different if Raman Ltd. contends that its accounts for the previous year have been audited under the Income-tax Act, 1961? (4 Marks)

(b) Examine briefly whether issuing a SIM card is “Service or “Goods” with related legal provisions on telecom related services and also quote suitable case laws. (4 Marks)

(c) With reference to Place of Provision of Service (PoPS) Rules, answer the following question i) A movie-on-demand is provided as on-board entertainment during the Bangalore-Delhi leg of a

Singapore-Bangalore-Delhi flight against a charge of Rs. 500 per passenger in addition to the fare of Rs. 25,000 per passenger. What will be the place of provision of service in this case? Will your answer change, if the above service is provided on a Delhi-Bangalore-Singapore- Malaysia flight during the Singapore-Malaysia leg?

ii) Mr. Siddharth has a permanent residence at Ahmedabad. He has a savings bank account with Ahmedabad Branch of Safe and Sound Bank. On April 1, 2013, Mr. Siddharth opened a safe deposit locker with the Ahmedabad Branch of Safe and Sound Bank. Mr. Siddharth went to USA for official work in December, 2013 and has been residing there since then. Mr. Siddharth contends that since he is a non-resident during the year 2014-15 in terms of the Income-tax Act, service tax cannot be levied on the locker fee charged by Safe and Sound Bank for the year 2014-15. Examine the correctness of the contention of Mr. Siddharth. (8 Marks)

4. (a) Describe the power of a Central Excise Officer to summon persons under the Central Excise Act.

(4 Marks) (b)

i) Discuss with brie reason whether the following are taxable services as per the provisions of the Finance Act 1994 - (1) Services rendered by a service provider from India for use in Singapore (2) Services rendered by a service provider having his registered office in Kashmir, in the State of Tamil Nadu (3) Services rendered by a betting house in Kerala (4) Services rendered to an EOU (5) Services rendered outside India, received and used in India by an individual otherwise than for personal use. (4 Marks)

ii) Discuss the BOT Projects under Works Contract Service. (4 Marks) (c) Mr. GST and Mrs.GST, Indian residents, after visiting London for seven days, returned to India on 5-2-

2015. They brought following goods – (a) personal effects like cloths, etc. ` 1,39,000 (b) Two laptop computers valued at ` 89,000 and ` 84,000 (c) One personal computer – ` 36,000 (d) two litres of liquor – ̀ 3,200 (e) one specialized new camera with invoice in name of Mrs. GST for ` 97,400. Compute the customs duty payable. (4 Marks)

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5. (a) Compute the assessable value of the imported goods under the Customs Act, 1962 from the

following information:

US$

Cost of the machine at the factory of the exporter 10,000

Transport charges from the factory of exporter to the port for shipment

500

Handling charges paid for loading the machine in the ship 50

Buying commission paid by the importer 50

Freight charges from exporting country to India 1,000

Exchange rate to be considered: 1$ = `60

Actual insurance charges paid are not ascertainable

(5 Marks) (b) The CESTAT passed an order in case of Mr. Honest Man holding that the activity carried out by Mr.

Honest Man is liable to service tax. Aggrieved by the said order, Mr. Honest Man wishes to file an appeal against the said order. You are required to advise him as to whether he can file an appeal to High Court, in the given case, on the question of levy of service tax on a particular activity and also refer the relevant case laws if any. (7 Marks)

(c) Elaborate the EPCG Authorization Scheme as per FTP 2015 – 20 (4 Marks) 6. (a) Mention the powers of Settlement Commission to grant immunity from prosecution and penalty

under section 32K of the Central Excise Act, 1944. (4 Marks) (b) Determine the applicability of service tax in each of the following independent cases:

i) Construction, erection, commissioning or installation of original workspertaining to an airport. ii) Service of Mutual Fund Agent and Distributor iii) Services provided by way of admission to a national park iv) The ambulance services provided by an entity which is not a clinicalestablishment or an

authorised medical practitioner or paramedics. (8 Marks) (c) Briefly explain the provisions relating to creation of first charge on the property of the assessee, as

provided under section 142A of the Customs Act, 1962. (4 Marks)

7. (a) Mr. Ramanan manufactures electronic items for selling them within India as well as exports to

Germany. He has stored his goods in the warehouse for the purpose of export. However, on account of certain unforeseen circumstances, goods cannot be exported to Germany. Now, he wishes to divert said goods kept in the warehouse for home consumption. Can he do so? If yes, briefly explain the procedure to be adopted by Mr. Ramanan for diverting the goods kept in the warehouse for being exported to Germany, for home consumption. (4 Marks)

(b) (i) Jailog wants to import by air a laptop from USA. Such laptop has been used by Bhupati - the seller for

few months there. Jailog contends that he can freely import such laptop without any restriction/ authorization. Examine the correctness of Jailog’s claim in the light of the provisions of FTP 2015-2020 (4 Marks)

(ii) Discuss the power to search premises under section 82 of the Finance Act, 1994. (4 Marks) (c) What are the salient features of Duty Free Import Authorization Scheme (DFIA)? Which duties are

exempted under this scheme? (4 Marks)

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THE SOCIETY OF AUDITORS AND PRIME ACADEMY 43rd SESSION MODEL EXAM – FINAL – INDIRECT TAX LAWS

SUGGESTED ANSWERS 1. (a)

i) NO. Goods must be used within factory of production and must have some relation with manufacture so as to qualify as ‘input’ under rule 2(k). Since input “pilfered” (theft) are never “used”, hence, they are not input and credit is not admissible.

ii) YES. Goods must be used within factory of production and must have some relation with manufacture so as to qualify as ‘input’ under Rule 2(k). Cost of durable and returnable packing a part of

iii) YES. Goods must be used within factory of production and must have some relation with manufacture so as to qualify as ‘input’ under Rule 2(k) . Since it was impossible to use total quantity of chlorine gas and some quantity left out was unavoidable, hence, quantity left out was “used” within factory. Hence, credit was admissible on left out portion also – CCEx v. Andhra Paper Mill Ltd. 2011 269 ELT 79 (AP).

iv) YES. As inputs used in trial runs are necessary for manufacture, hence, they are eligible as ‘input’.

(b) SSI exemption In case of Jewellery manufacturers:- With effect from 01.03.2016, excise duty of 1% (without CENVAT credit) or 12.5% (with CENVAT credit) has been levied on articles of Jewellery [excluding silver Jewellery, other than studded with diamonds/other precious stones]. The SSI exemption for such Jewellery manufacturers would be upto Rs. 6 crore in a year with an eligibility limit of Rs. 12 crore in the preceding year. Thus, a Jewellery manufacturer will be eligible for exemption from excise duty on first clearances upto Rs. 6 crore during a financial year, if his aggregate domestic clearances during preceding financial year did not exceed Rs. 12 crore.

(c) Since the contract entered into by STRONG Construction Ltd. requires the provision of both services and material, it is ‘works contract’ [Section 65B (54) of the Finance Act, 1994]. Thus, services of STRONG Construction Ltd. will be subject to service tax as declared service under section 66E (h) of Finance Act, 1994. Further, since the contract is for carrying out alterations in respect an abandoned building with a view to make it workable, it falls within the purview of term “original works” [Clause (a) of explanation 1 to rule 2A of the Service Tax (Determination of Value) Rules, 2006]. In the given case, the value of the service portion in the execution of the works contract will be determined as per rule 2A(ii)(A) of the Service Tax (Determination of Value) Rules, 2006. It provides that service tax shall be payable on 40% of the total amount charged for the works contract. The computation of service tax payable is exhibited below: 40% of the total amount charged Rs. 56 lakh [Rs. 140 lakh × 40%] Rate of service tax 12.36% Service tax payable Rs. 6,92,160/-[4.944% of the total amount charged of Rs. 140 lakh]

(d) According to trade parlance test, if a product is not defined in the schedules and section notes

and chapter notes of the tariff, then, it should be classified according to its popular meaning or meaning attached to it by those dealing with it i.e. in its commercial sense. However, if the tariff headings itself uses highly scientific or technical terms then goods should be classified in scientific or technical sense.

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However, Trade parlance theory should not be applied, when i) The legislature has adopted a technical term. In this case technical term should be under

stood in the technical sense and not on the basis of market parlance. (Akbar Badruddin Jiwani – 1990 – SC)

ii) The goods are clearly defined in the statue or Central Excise Tariff Act, 1985 (e) Computation of Export Duty

Particulars Amount (US $)

FOB price of goods [Note 1] 1,00,000

Amount (Rs)

Value in Indian currency (US $ 1,00,000 x Rs. 55) [Note 2] 55,00,000

Export duty @ 8% [Note 3] 4,40,000

Notes: 1) As per section 14(1) of the Customs Act, 1962, assessable value of the export goods is the

transaction value of such goods which is the price actually paid or payable for the goods when sold for export from India for delivery at the time and place of exportation.

2) As per third proviso to section 14(1) of the Customs Act, 1962, assessable value has to be calculated with reference to the rate of exchange notified by the CBEC on the date of presentation of shipping bill of export.

3) As per section 16(1)(a) of the Customs Act, 1962, in case of goods entered for export, the rate of duty prevalent on the date on which the proper officer makes an order permitting clearance and loading of the goods for exportation, is considered

2. (a) According to the CBEC Education Guide on Taxation of Services, 2012, value of construction

service provided to such land owner will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly. However, Circular No. 151/2/2012 ST dated 10.02.2012 states that value of land may not be ascertainable ordinarily and therefore, value, in the case of flats given to first category of service receiver, that is, the land owner, is determinable in terms of section 67(1)(iii) read with rule 3(a) of Service Tax (Determination of Value) Rules, 2006. Accordingly, the value of these flats would be equal to the value of similar flats charged by the builder/developer from the second category of service receivers i.e. the buyers. In case the prices of flats/houses undergo a change over the period of sale (from the first sale of flat/house in the residential complex to the last sale of the flat/house), the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid by the builder/developer on the 'construction service' involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g. allotment letter). The Circular dated 10.2.2012 is in accordance with the provisions relating to valuation as laid down in the Finance Act, 1994 and the Service Tax (Determination of Value) Rules, 2006. In view of the above, it is directed that in valuing the service of construction provided by a builder/developer to a land owner, who transfers his land to builder, for getting, in return, constructed flats/dwellings from builder/developer, the valuation will be in accordance with the Board Circular dated 10.2.2012 and not the Education Guide.

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(b) 1. Testing (with transmission of medical samples between laboratories) – Exempt 2. Medical consumed as a part of health care service – such medical are never sold – dominant

nature is health care service, which is exempt – fully exempt 3. Preventive health care services - Exempt (‘care’ is also exempt) 4. Treatment along with facilities provided such as TV, AC, room rent, medical to patients ( as a

part of package) : natural bundling in ordinary course of business – essential character is ‘health care services’, which is exempt – fully exempt

5. Genetic affinity examination for determining biological father: Rs 4 lakh – not related to ‘diagnosis or treatment or care for illness, injury, deformity or pregnancy’ – not exempt – Taxable

6. Hair transplant services due to injury in a fire accident – Exempt, as it has been done to restore damage due to fire accident

7. Cosmetic surgery of a film star: Rs 16 lakh – not exempt – taxable 8. Conduction medical examination of individuals : Exempt Hence, taxable = 4 + 16 = 20 lakh. Service tax @ 14% = Rs. 2, 80,000 Plus SBC 0.5% = Rs. 10,000.

(c) As per section 113 of Customs Act, following export goods are liable to confiscation. These are

‘goods attempted to be improperly exported’: 1) Goods attempted to be exported by sea or air from place other than customs port or

customs airport [section 113(a)]. 2) Goods attempted to be exported by land or inland water through unspecified route [section

113(b)]. 3) Goods brought near land frontier or coast of India or near any bay, gulf, creek or tidal river

for exporting from place other than customs port or customs station [section 113(c)]. 4) Goods attempted to be exported contrary to prohibition under Customs Act or any other law

[like FEMA etc.] [section 113(d)]. 5) Goods concealed in any conveyance brought within limits of customs area for exportation

[section 113(e)].

3. (a) Section 72A(1) of Finance Act, 1994, inter alia, provides that if the Principal Commissioner of

Central Excise/ Commissioner of Central Excise has reasons to believe that any person liable to pay service tax has failed to declare or determine the value of a taxable service correctly, he may direct such person to get his accounts audited by a Chartered Accountant or a Cost Accountant nominated by him, to the extent and for the period as may be specified by him. Therefore, in the present case, jurisdictional Commissioner of Central Excise can direct Raman Ltd. to get its accounts audited by a Chartered Accountant nominated by him, to the extent and for the period as may be specified by him. Further, section 72A(3) provides that the Commissioner of Central Excise is empowered to direct a special audit even if the accounts of such person have been audited under any other law for the time being in force. Therefore, the contention of Raman Ltd. that its accounts for the previous year have been audited under the Income-tax Act, 1961 cannot be accepted and it will have to comply with the order, if any, of the jurisdictional Commissioner to get its accounts audited.

(b) A SIM Card or Subscriber Identity Module is a portable memory chip used in cellular telephones.

It is a tiny encoded circuit board which is fitted into cell phones at the time of signing on as a subscriber. The SIM Card holds the details of the subscriber, security data and memory to store personal numbers and it stores information which helps the network service provider to recognize the caller.

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It was held that, Escotel Mobile Communications Ltd. vs. Union of India. Transaction of selling of SIM Card to the subscriber is also a part of the "service" rendered by the service provider to the subscriber. The same view also confirmed in Idea Mobile Communications Ltd Vs, CCE. It has been held that SIM Card does not have any intrinsic value. The value of SIM cards forms part of the activation charges as no activation is possible without a valid functioning of SIM card and the value of the taxable service is calculated on the gross total amount received by the operator from the subscribers. Thus, Service tax is payable and not VAT.

(c)

i) As per rule 12 of PoPS Rules, the place of provision of services provided on board a conveyance during the course of a passenger transport operation, including services intended to be wholly or substantially consumed while on board, shall be the first scheduled point of departure of that conveyance for the journey. Hence, in this case the place of provision of this service will be Singapore, which is outside the taxable territory. However, if the above service is provided on a Delhi-Bangalore-Singapore- Malaysia flight during the Singapore-Malaysia leg, then the place of provision of this service will be Delhi, which is in the taxable territory.

ii) Leviability of service tax is determined in terms of the provisions of Finance Act, 1994 and not in terms of Income-tax Act, 1961. The fact that Mr. Siddharth is a non-resident is irrelevant for determining the taxability of services received by him. As per section 66B of Finance Act, 1994, service tax is levied on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another. As per rule 9 of PoPS Rules, the place of provision of services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders is the location of the service provider. Account has been defined under rule 2(b) of PoPS Rules to mean an account bearing interest to the depositor, and includes a non-resident external account and a non-resident ordinary account. Services linked to or requiring opening and operation of bank accounts such as lending, deposits, safe deposit locker etc. are few examples of services that are provided by a banking company or financial institution to an “account holder” in the ordinary course of business. Since, in the present case, services (safe deposit locker) are provided by Ahmedabad Branch of Safe and Sound Bank to an account holder (Mr. Siddharth), rule 9 of PoPS Rules will apply. Thus, the place of provision of service would be Ahmedabad and since Ahmedabad falls in taxable territory, locker fee would be liable to service tax.

4. (a) Section 14 of the Central Excise Act, 1944 contains the provisions relating to power of a Central

Excise Officer to summon persons. As per this section, any Central Excise Officer empowered by the Central Government in this behalf, shall have power to summon any person whose attendance he considers necessary for: (i) giving evidence, or (ii) producing a document or (iii) any other thing in any enquiry which he is making for any of the purposes of this Act.

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All persons so summoned shall be bound to attend, either in person or by an authorized agent, as such officer may direct. Further, these persons shall be bound to state the truth upon any subject in respect of which they are examined and produce documents and other things as may be required. Every inquiry under this section shall be deemed to be a “judicial proceeding” within the meaning of section 193 and section 228 of the Indian Penal Code.

(b) (i) (1) Depends on nature of service as place of provision of service depends on nature of service

(2) taxable but service tax and Swach Bharat Cess (SBC) payable by service receiver (3) Not taxable as in negative list (4) service tax and SBC payable (5) taxable and service tax payable by individual in India under reverse charge, if place of provision of service is India ass per Place of Provision of Service Rules.

(ii) Projects awarded by National Highways Authority of India (NHAI) on BOT – Build Operate & Transfer basis, the agreement are termed as ‘concession agreement’ and the contractee is termed as ‘concessionaire’ and not ‘contractor’. In this case, the private party makes its own investment in the project and then gets exclusive rights to collect toll or other amounts or prescribed period (in many cases, 20/30 years). After the prescribed period, the ownership is transferred to Government. Thus, it is a grant of right to enjoy fruits of the immovable property or specified period. IT is ‘profit a prendre’ i.e. grant of benefit arising out land. IT is not ‘works contract’. This is not construction contract given by Government. The ‘concessionaire’ (by whatever name called) is construction the roads etc. for himself and not or Government.

(c) Personal effects and two laptops are exempt. General Free Allowance (GFA) is Rs 45,000 per

passenger. However, GFA cannot be pooled. Thus, Mr. GST can import one personal computer (Rs 36,000) and two litres of liquor (Rs 3,200) without payment of customs duty under his GFA. The excess General Free Allowance cannot be pooled with Mrs. GST. Mrs. GST can avail GFA of Rs 45,000 for import of camera. Since value of camera is Rs 97, 400, she will be liable to pay customs duty on balance Rs 52,400. Customs duty @ 36.05 %( including education cess and SAH cess) will be Rs 18,890.20

5. (a)

Computation of assessable value of the imported goods

US $

(i) Cost of the machine at the factory 10,000.00

(ii) Transport charges up to port 500.00

(iii) Handling charges at the port 50.00

FOB 10,550.00

(iv) Freight charges up to India 1,000.00

(v) Insurance charges @ 1.125% of FOB [Note 1] 118.69

CIF 11,668.69

CIF in Indian rupees @ Rs. 60/ per $ Rs. 7,00,121.40

(vi) Add: Landing charges @ 1% of CIF [Note 1] Rs.

7,001.21

Assessable Value Rs. 7,07,122.61

Assessable Value (rounded off) Rs. 7,07,123

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Notes: (1) Insurance charges and landing charges have been included @ 1.125% of FOB value of

goods and 1% of CIF value of goods respectively [First proviso to rule 10(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007].

(2) Buying commission is not included in the assessable value [Rule 10(1)(a)(i) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007].

(b) No, Mr. Honest Man cannot file an appeal to High Court, in the given case, on the question of

levy of service tax on a particular activity. Section 83 of the Finance Act, 1994 makes the provisions of section 35G and section 35L of the Central Excise Act, 1944 applicable to the service tax.

Section 35G (1) of the Central Excise Act, 1944 provides that an appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal (not being an order relating, among other things, to the determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment), if the High Court is satisfied that the case involves a substantial question of law. Section 35L (1) of the Act, inter alia, provides that an appeal shall lie to the Supreme Court from any order passed by the Appellate Tribunal relating, among other things, to the determination of any question having a relation to the rate of duty of excise or to the value of goods for purposes of assessment. Thus, on combined reading of section 35G (1) and section 35L (1), it can be inferred that an appeal against “an order of Tribunal relating to the determination of any question having a relation to the rate of duty of excise/service tax or to the value of goods/service tax for purposes of assessment” shall not lie to High Court. Appeal against such an order can be filed to Supreme Court.

Further, section 35L (2) provides that the ‘determination of any question having a relation to the rate of service tax’ shall include the determination of taxability for the purpose of assessment. Thus, in the given case, the appeal lies to the Apex Court under section 35L of the Central Excise Act, 1944, which alone has exclusive jurisdiction to decide the said question.

Note: Delhi High Court, in case of Commissioner of Service Tax v. Ernst & Young Pvt. Ltd. 2014 (34) S.T.R. 3 (Del.), had also taken the aforesaid view.

(c) Export Promotion Capital Goods (EPCG) scheme enables an Indian manufacturer or service

provider to obtain capital goods at nil rate of customs duty against commitment of export obligation. The objective is to facilitate import of capital goods or producing quality goods and services to enhance India’s export competitiveness – para 5 of FTP 2015 – 20 EPCG scheme allows import of capital goods (including CKD/SKD thereof as well as computer software systems) for pre-production, production and post-production at zero Customs duty, subject to an export obligation equivalent to 6 times of duty saved on capital goods imported under EPCG scheme. Importer will be issued ‘EPCG Authorization’ for this purpose. Import of capital goods shall be subject to Actual User condition till export obligation is completed.

6. (a) The Settlement Commission can grant immunity under section 32K of Central Excise Act, 1944

from prosecution for any offence under the Act and either wholly or in part from the imposition of penalty if it is satisfied that the applicant has made full and true disclosure and co-operated with the Commission.

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If the payment is not made as per the settlement order or any particulars are concealed or any false evidence is given, the immunity can be withdrawn. If prosecution has already been launched before submission of application for settlement, the immunity against such prosecution cannot be granted.

(b)

i. Taxable With effect from 1.04.2015, service tax will be payable on construction, erection, commissioning or installation of original works pertaining to an airport [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

ii. Taxable With effect from 1.04.2015, services provided by Mutual Fund agents and Distributors to Mutual Fund or Asset Management Companies.

iii. Exempt With effect from 1.04.2015, services provided by way of admission to a national park has been exempted from service tax. A new entry has been inserted in the notification to give effect to this exemption. [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

iv. Exempt With effect from 1.04.2015, ambulance services provided by all service providers (whether or not by clinical establishment or an authorised medical practitioner or paramedics) has been exempted from service tax [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

(c) Section 142A of the Customs Act, 1962 provides that any amount of duty, penalty, interest or

any other sum payable under the Customs Act has a first charge on the property of the assessee or the person in default, save as otherwise provided in the following:-

i) Any sum payable under section 529A of the Companies Act, 1956. ii) Any sum payable under Recovery of Debts Due to Banks and the Financial

Institutions Act, 1993 iii) Any sum payable under the Securitization and Reconstruction of Financial

Assets and the Enforcement of Security Interest Act, 2002

7. (a) Yes, Mr. Ramanan can divert the goods kept in the warehouse for being exported, for home

consumption. The following procedure as specified in Chapter 10, para 6 of CBEC’s Excise Manual of Supplementary Instructions, 2005 is to be followed in this regard:- i) With the permission of the Deputy or Assistant Commissioner of Central Excise, the goods

can be cleared for home consumption on invoice after payment of duty, interest and any other charges. Necessary entries are to be made in the export warehouse register maintained by the exporter in the warehouse.

ii) Credit will be permitted in the Running Bond Account equivalent to the duty involved in the goods so diverted. If entire quantity is not diverted, calculation shall be done on pro-rata basis.

iii) Goods can be diverted for home-consumption even after the clearance from the warehouse on ARE.1. For cancellation of documents, provisions of Notification No. 46/2001-CE (NT) dated 26.6.2001 shall be followed. The intimation shall be given to Deputy/Assistant Commissioner having jurisdiction over the warehouse. Credit in Running Bond Account will be permitted in the same manner as mentioned above.

iv) The exporter has to pay interest @ 24% p.a. on the amount of duty payable on such goods from the day of clearance from the factory of production or any other premises approved till the date of payment of duty and clearance.

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(b) (i) Import of second hand capital goods including their re-furnished/re-conditioned spares is

allowed freely. However, import of second hand PC, laptop, air conditioner, DG set and photocopier will require authorization. In view of above, Jailog’s claim is not correct as second hand laptops can be imported only against an authorization.

(ii) Section 82 of the Finance Act, 1994 provides that where the Joint Commissioner / Additional Commissioner of Central Excise/such other Central Excise officer as may be notified by the Board has reasons to believe that any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Chapter, are secreted in any place, he may authorise in writing any Central Excise officer to search for and seize or may himself search and seize such documents or books or things. The search shall be subject to the Code of Criminal Procedure, 1973.

(c) DFIA is issued to allow duty free import of inputs, fuel, oil, energy sources, catalyst which are

required for production of export product. The goods imported are exempt ONLY from basic customs duty. Additional customs duty/excise duty, being not exempt, shall be adjusted as CENVAT credit as per DoR rules. DFIA shall be issued on post export basis for products for which Standard Input Output Norms (SION) have been notified. Separate DFIA shall be issued for each SION and each port. No DFIA shall be issued for an export product where SION prescribes ‘Actual User’ condition for any input. Holder of DFIA has an option to procure the materials/ inputs from indigenous manufacturer/STE in lieu of direct import against Advance Release Order (ARO)/ Invalidation letter/ Back to Back Inland Letter of Credit. However, DFIA holder may obtain supplies from EOU/EHTP/BTP/STP/SEZ units, without obtaining ARO or Invalidation letter. Drawback as per rate determined and fixed by Central Excise authority shall be available for duty paid inputs, whether imported or indigenous, used in the export product. DFIA or the inputs imported against it can be transferred after the fulfillment of the export obligation. A minimum 20% value addition is required for issuance of DFIA except for items in gems and jewellery sector.

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