Factoring in prices

SME CHATROOM/ Duties depend on whether capital goods imports impact prices

At the time of exports, the value of invoice in Indian rupees as per the exchange rate (approved by Customs) applicable on the day the "let export" order given by customs is credited in the books of accounts. The rupee equivalent of the proceeds at the time of actual realisation of such exports usually works out to more than what has been booked in the accounts at the time of exports due to exchange rate fluctuations. Moreover, such exports may take place in one year and export realisation may take place in another year

The income tax authorities are not allowing such exchange difference profit pertaining the earlier year's transactions received in current year u/s 10A of Income Tax Act, 1961. Whether the SEZ exporting units has any option to deal with this situation?

In short, whether income derived out of exchange fluctuation at the time of actual realisation of export proceeds in the current year in respect of exports effected in the earlier years can qualify for exemption u/s 10A of Income Tax Act, 1961?

The deduction allowed under Section 10A has to be calculated on the basis of 'profits of business', 'export turnover' and 'total turnover'.

'Profits of business' refer to profits computed in accordance with Sec.28 to 44 D of the Income Tax Act, 1961. Loss or gain due to exchange rate fluctuation impacts 'profits of business'

'Export turnover' refers to the FOB value of export proceeds brought into India by the assessee in convertible foreign exchange within the period allowed by the RBI.

'Total turnover' includes domestic as well as export sales made by the assessee during the year.

So, you cannot claim any export sales as 'export turnover' for the purposes of Section 10A unless you have realised the export proceeds; in which case, you would know the exact amount you have received. For the purposes of claiming deduction u/s 10A, while filing the returns (irrespective of what you have reckoned in your account books), you may reckon 'export turnover' as what you have actually received

We are covered under one of the seven categories, who, as recipient of service, are liable to pay service tax in respect of transport of goods by road. We pay service tax on 25% of the freight, as per notification No.32 / 2004 - ST dated. 03.12.2004. Is it in order?

The Director General of Service Tax had issued Circular no F. No. V/DGST/43-GTO/02/2005/19879, dated 30-3-2005 that the benefit of Notification No. 32/2004, dated 3-12-2004 granting an abatement of 75% from the gross amount charged by goods transport agency (GTA) for providing the said taxable service, is available only in cases where Goods Transport Agency is liable to pay service tax and that this benefit is not available in cases where the provisions of Notification No. 35/2004, dated 3-12-2004 are applicable. (i.e. where the consignee or consignor are from one of the seven categories mentioned therein). This circular has been a source of some confusion. It has, apparently, been withdrawn. Please see 2005 (183) ELT A4.

However, it may be noted that notification No. 32/2004 - ST dated 3.12.2004 exempts 'such taxable service as provided by a goods transport agency to a customer, in relation to transport of goods by road in a goods carriage, from so much of the service tax leviable thereon under section 66 of the said Act, as is in excess of the service tax calculated on a value which is equivalent to 25 per cent. of the gross amount charged from the customer by such goods transport agency for providing the said taxable service'.

In my opinion, the language used in the notification no. 32/2004-ST dated 3.12.2004 clearly exempts the service as a whole regardless of who discharges the service tax liability.

Secondly, as you are covered under one of the seven categories mentioned in the notification no. 35/2004 dated 3.12.2004, you are required to get yourself registered as a GTA. So, you are deemed to be a provider of GTA service.

Please note that the notification 32/2004-ST stipulates certain conditions that can be complied only by the GTA. One condition is that the GTA has not taken Cenvat credit of excise duty in respect of capital goods or inputs used for providing the service. The second condition is that the GTA has not availed the benefit of notification no. 12/2003-ST dated 20.06.2003.

You may obtain a declaration from the GTA regarding compliance with the conditions before availing the 75% abatement on freight for the purpose of service tax payment.

This declaration may be even obtained on the goods consignment note itself or separately. You may ask the GTA to indemnify you against any payment/liability/loss of credit/damage caused to company in case of default to comply with the said declaration.

We are setting up a chemical manufacturing project as an SSI unit. The main capital equipment would require import from our US collaborator. The whole production of unit will be sold in domestic market.

Please guide us on the duties (Customs & VAT) applicable for importing such capital equipment and duty waiver available, if any, to SSI units for importing such capital equipment.

Since you are an SSI, I gather that the value of imported machinery will be less than Rs 1 crore. Secondly, since the entire production will be sold in the domestic market, you will not be able to take up any export obligation.

Thirdly, since the item to be imported relates to equipment/machinery for chemical machinery, you may not get any exemptions based on end use. Without specific descriptions of machinery/equipment to be imported and its classification, it is difficult to be precise about the importability and applicable duties.

In general, capital goods are freely allowed for import i.e. without a licence and the aggregate import duties will work out to 34.44% (basic duty 15%; additional duty i.e. CVD 16.32% and education cess 2%. The basic duty will be levied on CIF value plus 1%; additional duty on CIF value plus 1% plus basic duty; the education cess CIF value plus 1% basic duty plus CVD)

In case you import from a financial collaborator, you will have to examine whether the import will be from a related party as defined in Rule 2 (2) of Customs Valuation Rules, 1988. If so, the customs will require you to establish in terms of Rule 4 (3) of Customs Valuation Rules, 1988 that the relationship has not influenced the price.

In case the collaboration is technical, the customs will examine whether the royalty or technical collaboration fee or licensee fee paid to the supplier relates to the imported goods in question and if so, load the value (i.e. price paid or payable) in accordance with Rule 9 (1) © of the Customs Valuation Rules, 1988.

Even if the said fees do not relate to the imported goods in question, the customs will examine whether any consideration in respect of imported goods is being passed on through the said fees with a view to under invoice the imported goods.

Since the imports of goods in your case do not relate to sales within India, there is no implication of sales tax or VAT.

This is the seventh column on SME-related queries. TNC Rajagopalan will answer questions from readers on SME-related issues pertaining on taxes, exim policies or registrations/reservations, etc. This will be a fortnightly column to be run every alternate Wednesday on the Accent page. Due to a technical glitch, the ID smequeries@business-standard.com was not receiving mails. The error has been rectified and readers can now send mails.