Tool Amortisation & Excise Demand

This query is : Resolved

CA Ysil Karunai (Querist)
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10 March 2010 XYZ Pvt. Ltd. is a manufacturer of car metal components. The parts of the car metal components are manufactured through using of a special type of “Dye”. During the year 2007-08, invoice raised against the customer for one component in the following prescribed format.

Material 50000.00
Labour charges 45000.00
Power and fuel 15000.00
Tool (Dye) depreciation 5000.00
Over hands 5000.00
Total costs 120000.00
Add: excise duty @8% 9600.00
129600.00
Add: VAT @4% 5184.00
Invoice value 134784.00

During the year 2008-09, there was a mutual agreement between the one of the customer and XYZ Ltd. was, the “Dye” being supplied by the customer to XYZ ltd, and it request not to charge depreciation. Accordingly, the XYZ Ltd. revise the invoice in the following format for a customer from 1\4\2008-31\3\09

Material cost 50000.00
Labour charges 45000.00
Power & fuel 15000.00
Over heads 5000.00
Total costs 115000.00
Add: excise duty @8% 9200.00
124200.00
Add: VAT @4% 4968.00
Invoice value 129168.00

Since there was a lower collection of excise duty during the year 2008-09, the excise officer came to know the agreement between the customer and XYZ Ltd about supply of “Dye” and consequent cost reduction (& excise duty collection).
On1/4/2009 the Central Excise Officer issued a ‘Show Cause’ Notice and stating that since the “Dye” was supplied by customer, add a Tool Amortisation cost on a reasonable estimated basis and arrive a assessable value for excise duty purpose and pay excise duty on that.

For example:

Material 50000.00
Labour 45000.00
Power & fuel 15000.00
Over heads 5000.00
115000.00
(+)Tool amortisation cost 5000.00
Assessable value 120000.00
(+) Excise duty @ 8% 9600.00
129600.00
(-)Amort. cost 5000
124600.00
(+) VAT @ 4% 4984.00
Invoice value 129584.00

Based on the above Notice, there was a huge demand from Excise Department to pay Excise duty for the year 2008-09.

As an Indirect consultant Advice on the above issue.

Maninder Jain

Maninder Jain (Expert)
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11 March 2010 Dear Sir,

I am also involved in an automobile company. I opined that your Assessing officer is right. You cannot remove Tool amortisation cost unless the tool cost has been depreciated fully.

Or the other thing you could do is reduce the tool amortisation cost if you can show to your assessing officer that sales projection for the tool is increased.

Let say Tool cost 100000
Previous sale projection 20

Tool amortisation cost 100000/20= 5000

If the new projection is 100

then new tool amortisation rate is
100000/100= 1000