FINAL COURSE

GROUP – II

REVISION TEST PAPERS

MAY, 2023

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
New Delhi

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 © The Institute of Chartered Accountants of India

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Edition : March, 2023

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 Contents
Page Nos.

Objective & Approach .................................................................................................... i – vi

Objective of Revision Test Paper ........................................................................................... i

Planning & Preparing for Examination ....................................................................................ii

Subject-wise Guidance – An Overview .................................................................................. iii

Paper-wise RTPs

Paper 5: Strategic Cost Management and Performance Evaluation ........................... 1 – 36

Paper 6: 6A to 6F [ELECTIVE PAPERS] ........................................................................ 37

Paper 7: Direct Tax Laws & International Taxation .................................................. 38 – 66

Paper 8: Indirect Tax Laws ..................................................................................... 67 – 85

Applicability of Standards/Guidance Notes/Legislative Amendments etc. for

May, 2023 Final Examination ..................................................................................... 86 – 99

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 REVISION TEST PAPER, MAY, 2023 – OBJECTIVE & APPROACH
(Students are advised to go through the following paragraphs carefully to derive
maximum benefit out of this RTP)
I. Objective of Revision Test Paper
Revision Test Papers are one among the many educational inputs provided by the Board
of Studies (BOS) to its students. Popularly referred to as RTP by the students, it is one of
the very old publications of the BOS whose significance and relevance from the
examination perspective has stood the test of time.
RTPs provide glimpses of not only the desirable ways in which examination questions are
to be answered but also of the professional quality and standard of the answers expected
of students in the examination. Further, aspirants can assess their level of preparation for
the examination by answering various questions given in the RTP and can also update
themselves with the latest developments in the various subjects relevant from the
examination point of view.
The primary objectives of the RTP are:
• To help students get an insight of their preparedness for the forthcoming examination;
• To provide an opportunity for a student to find all the latest developments relevant for
the forthcoming examination at one place;
• To supplement earlier studies;
• To enhance the confidence level of the students adequately; and
• To leverage the preparation of the students by giving guidance on how to approach
the examinations.
RTPs contain the following:
(i) Planning and preparing for examination
(ii) Subject-wise guidance – An overview
(iii) Updates applicable for a particular exam in the relevant subjects
(iv) Topic-wise questions and detailed answers thereof in respect of each paper
(v) Relevant announcement applicable for the particular examination
Students must bear in mind that the RTP contains a variety of questions based on different
sections of the syllabi and thus a comprehensive study of the entire syllabus is a pre -
requisite before answering the questions of the RTP. In other words, in order to derive
maximum benefit out of the RTPs, it is advised that before proceeding to solve the
questions given in the RTP, students ought to have thoroughly read the Study Materials .
It is important to remember that there can be large number of other complex questions

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 REVISION TEST PAPER ii

which are not covered in the RTP. In fact, questions contained herein are only illustrative
in nature.
The topics on which the questions are set herein have been carefully selected and
meticulous attention has been paid in framing different types of questions. Detailed
answers are provided to enable the students to do a self-assessment and have a focused
approach for effective preparation.
Students are welcome to send their suggestions for fine tuning the RTP to the Director,
Board of Studies, The Institute of Chartered Accountants of India, A -29, Sector-62, Noida
201 309 (Uttar Pradesh). RTP is also available on the Institute’s website www.icai.org
under the BOS knowledge portal in students section for downloading.
II. Planning and preparing for examination
Ideally, when the RTP reaches your hand, you must have finished reading the relevant
Study Materials of all the subjects (along with the Supplementary Study Papers in case of
Final Papers 6C, 7 and 8, Judicial Update in Paper 7 and Amendments and Judicial Update
in Final Paper 6D available at the BoS Knowledge Portal on the Institute’s website at
https://boslive.icai.org/education_content_AmendmentsDevelopments.php?p=Amendmen
ts/Developments&c=final). Make sure that you have read the Study Materials (along with
the Supplementary Study Papers, Judicial Update and Amendments in respective papers)
thoroughly. Get a good grasp of the concepts/ provisions/amendments/cases discussed
therein.
After reading the Study Materials along with Supplementary Study Papers and Judicial
Update thoroughly, then, proceed to solve the questions given in the RTP on your own.
RTP is in an effective tool to revise and refresh the concepts and provisions discussed in
the Study Material. RTPs are provided to you to help you assess your level of preparation.
Hence you must solve the questions given therein on your own and thereafter compare
your answers with the answers given therein.
Examination tips
How well a student fares in the examination depends upon the level and depth of his
preparation. However, there are certain important points which can help a student better
his performance in the examination. These useful tips are given below:
 Reach the examination hall well in time.
 As soon as you get the question paper, read it carefully and thoroughly. You are
given separate 15 minutes for reading the question paper.
 Plan your time so that appropriate time is awarded for each question. Keep sometime
for checking the answers as well.
 First impression is the last impression. The question which you can answer in the
best manner should be attempted first.

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 iii FINAL EXAMINATION: MAY, 2023

 Always attempt to do all questions. Therefore, it is important that you must finish
each question within allocated time.
 Read the question carefully more than once before starting the answer to understand
very clearly as to what is required.
 Answer all parts of a question one after the other; do not answer different parts of the
same question at different places.
 Write in a neat and legible hand-writing.
 Always be concise and write to the point and do not try to fill pages unnecessarily.
 There must be logical expression of the answer.
 In case a question is not clear, you may state your assumptions and then answer the
question.
 Check your answers carefully and underline important points before leaving the
examination hall.

III. Subject-wise Guidance – An Overview

PAPER - 5: Strategic Cost Management and Performance Evaluation

The Revision Test paper on Strategic Cost Management and Performance Evaluation
covers Case Studies/ Questions on the following topics:
S. Topic About the Problem Verbs used Industry
No.
1. Competitive Strategy that should be Advise Airline
Advantage followed to gain superior
performance and
competitive advantage
over competitors.
2. Ethical and About various non- List, Evaluate, Copper rods
Nonfinancial financial and ethical Recommend manufacturer
Considerations consideration in decision
making.
3. Total Quality Analysis of Actual Prepare, Check, Auto components
Management Results vs Planned Analysis
Levels
4. Supply Chain Analysis on the non- Analyze Apparel
Management financial measures of manufacturer
quality.

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 REVISION TEST PAPER iv

5. Value Chain Discussion on three Discuss Toy manufacturer

Analysis primary activities of value
chain through which firm
can minimise cost gap.
6. Theory of To determine the optimum Prepare, Manufacturer of
Constraints production mix; price Calculate, products
customization; most Recommend.
appropriate pricing policy. List, State
7. Ethical and Non- Discussion on non- Discuss Manufacture of
Financial financial considerations. chemical
Considerations intermediaries
8. Direct Product Financial analysis; Analyse, Decorative’ s
Profitability discussion on activity- Discuss Manufacturer
based management;
9. Non- Financial Financial performance Discuss Trader of
Performance vs. Customer satisfaction Household
Measures Products
10. Performance Comment on the Prepare, Charity
Measurement in performance against Comment
Not for Profit objectives.
Sector
11. Balanced Development of Develop Resort
Scorecard Balanced Scorecard
(Short Scenario Based
Question)
12. Competitive Identify the strategy (cost Identify, Justify ---
Advantage leadership vs.
differentiation)
13. Customer Identification of Identify, Weighing
Profitability customer’s profitability Compute machines
Analysis manufacturer
14. Pareto Analysis Construction of Construct, Spectacle
frequency table Identify manufacturer
15. Pricing Decision Application of learning Calculate Electronics
curve
Every effort has been made to include all possible elucidations for a given case/
question aided by outline and well-chosen photographs for quick industry reference.

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 v FINAL EXAMINATION: MAY, 2023

PAPER 7: DIRECT TAX LAWS AND INTERNATIONAL TAXATION

The syllabus of this paper is divided into two parts, namely, Part I: Direct Tax Laws (70
Marks) and Part II: International Taxation (30 Marks).
The provisions of direct tax laws, as amended by the Finance Act, 202 2 and significant
notifications and circulars issued upto 31.10.2022, are relevant for May, 2023 examination.
The relevant assessment year for May, 2023 examination is A.Y.2023-24.
The October, 2021 edition of the Study Material has to be read along with the
Supplementary Study Paper 2022 containing the provisions of direct tax laws, which
have been amended by the Finance Act, 2022 and notifications and circulars issued
between 1.11.2021 and 31.10.2022. The Supplementary Study Paper 2022 is available
at https://resource.cdn.icai.org/72303bos58234.pdf. “Before we begin…” in pages iii and
iv of the Supplementary Study Paper 2022 explain the manner in which amendments
have been presented therein. Students are advised to read these pages before reading
the amended provisions in the Supplementary Study Paper 2022. The Judicial Update
for May 2023 examination available at https://resource.cdn.icai.org/72695bos58611.pdf
is also relevant and important for May, 2023 examination.
Thus, you have to read the October 2021 edition of the Study Material along with the
Supplementary Study Paper 2022 and Judicial Update for May, 2023 examination
thoroughly to attain conceptual clarity and understand the impact of amendments and
interpretation of court rulings. Thereafter, solve the questions given in this RTP
independently and compare the same with the answers given to assess your level of
preparedness for the examination.

PAPER – 8: INDIRECT TAX LAWS

For Paper 8: Indirect Tax Laws, the following are applicable for May 2023 examination:
(i) The provisions of the CGST Act, 2017 and IGST Act, 2017 as amended by the Finance Act,
2022, which have become effective up to 31st October, 2022, including significant notifications
and circulars issued and other legislative amendments made, up to 31st October, 2022.
(ii) The provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975, as amended by the
Finance Act, 2022, including significant notifications and circulars issued and other legislative
amendments made, up to 31st October, 2022.
* The amendments made by the Annual Union Finance Acts in the CGST Act, 2017 and IGST
Act, 2017 are made effective from the date notified subsequently. Thus, only those
amendments made by the relevant Finance Acts which have become effective till 31.10.2022
are applicable for May, 2023 examinations. Accordingly, the amendments made by the
Finance Act, 2022 are applicable for May 2023 examinations.
However, it may be noted that amendment made by the Finance Act, 2021 in section 16 of the
IGST Act, 2017 and amendments made by the Finance (No. 2) Act, 2019 in sections 2(4), 95,

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 REVISION TEST PAPER vi

102, 103, 104, 105 and 106 of the CGST Act, 2017 and the insertion of new sections 101A,
101B & 101C in the CGST Act, 2017, have not become effective till 31.10.2022 and thus, are
not applicable for May 2023 examinations.
Further, a list of topic-wise exclusions from the syllabus has been specified by way of
“Study Guidelines for May 2023 Examination”. The same is given as part of
“Applicability of Standards/Guidance Notes/Legislative Amendments etc. for
May 2023 - Final Examination” appended at the end of this Revision Test Paper.
The subject of Indirect Tax Laws at the Final level is divided into two parts, namely,
Part I: Goods and Services Tax for 75 marks and Part II: Customs & Foreign Trade Policy
(FTP) for 25 marks.
Students may note that October 2021 Edition of the Study Material read alongwith
Supplementary Study Paper 2023 is applicable for Final Paper 8: Indirect Tax Laws. The
Study Material has been divided into four modules for ease of handling by students. The
first three modules are on GST and the fourth module is on Customs and FTP.
The subject matter of Part I: Goods and Services Tax of the Study Material on Indirect Tax
Laws is based on the provisions of the Central Goods and Services Tax Act, 2017 and
Integrated Goods and Services Act, 2017 as amended up to 30.04.2021. The amendments
made by the notifications and circulars issued between 01.05.2021 and 31.10.2022 in GST
laws as well as the amendments made by the Finance Act, 2021 and Finance Act, 2022
which became effective between 01.05.2021 and 31.10.2022, are given in the
Supplementary Study Paper 2023.
The content discussed in Part II: Customs & FTP is based on the customs law as amended
by the Finance Act, 2021 and significant notifications and circulars issued till 30.04.2021.
The amendments made by the Finance Act, 2022 in Customs & FTP as well as significant
notifications/ circulars issued, between 01.05.2021 and 31.10.2022, are given in t he
Supplementary Study Paper 2023.
You have to read the Study Material thoroughly to attain conceptual clarity. Read the case
laws given at the end of each chapter under “Significant Select Cases” in module on
customs laws.
Solve the questions given in this RTP independently and compare the same with the
answers given to assess your level of preparedness for the examination. Detailed answers
have been provided for the descriptive questions given in this RTP to facilitate in depth
understanding and appreciation of the provisions of the indirect tax laws in problem solving.
This will help in enhancing your conceptual clarity and honing your application and
analytical skills so that you are able to approach the examination with confidence and a
positive attitude.

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© The Institute of Chartered Accountants of India
 PAPER – 5: STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION

××× CASE STUDY×××

Competitive Advantage

1. BA is the second largest airline in the Country “D”. Aviation industry in the Country “D” is
growing fast. In 2011, 45 million people travelled to/ from/ or within the Country “D”. By
2020 that doubled to 100 million. This number is expected to treble to 300 million by
2030. Also, by 2025, Country “D” is expected to be the third largest air transport market
in the world, behind the US and China.
Government is trying to meet the significant growth potential of aviation Industry.
However, it will create challenges also for the airline industry and its industry partners.
Government also wants to ensure that broader business and policy environment should
not place hurdles which inhibit growth and reduce the level of benefits that aviation can
deliver to the nation. The industry, its supply chain partners, and the government and
policy makers have a clear mandate to work in collaboration towards the common goal of
ensuring that aviation’s economic and social benefits are fulfilled.
Despite of operating in World’s fastest growing market BA struggles for passengers.
Also, BA is facing following problems:
▪ Aviation Turbine Fuel (ATF) prices constitute about 40% of operational costs in
Country “D” and are taxed higher here than anywhere else in the World. The Central
government charges 14% duty on ATF. While the state government pile on their
own local tax that can go as high as 29%.
▪ The currency depreciation is hitting Airline harder. About 25% to 30% of their costs,
excluding ATF, are dollar denominated, from aircraft lease rents, maintenance costs
to ground handling and parking charges abroad etc.
▪ With the entry of Low Budget Carriers, full-service carrier like BA that have higher
overhead costs have been forced to offer discount to passengers looking for great
bargain.
▪ Continuous improvements in tourism infrastructure, tourism policies, human
resources development, airport infrastructure density are among the areas that
could further enhance Country “D”’s competitiveness. Ease of doing business over
the last five years has risen.

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 2 FINAL EXAMINATION: MAY, 2023

▪ The intense competition among domestic airlines carriers, the need to capture a
slice of the ever-expanding market and passenger price sensitivity makes the
airlines difficult to raise ticket prices.
Together, these factors have now plunged Country “D”’s aviation industry to its most
precarious phase in the last three years or so.
BA is facing huge competition as a “year of sharp U-turns” for “D”’s aviation industry from
record profit in Financial Year 2019-20 to mega losses, resulting in direct need of
recapitalisation. BA has been appealing to the government for a decade for a reduction
in taxes on fuel, but all in vain. ATF is 35-40% more expensive in Country “D” than in the
rest of the world, because of relatively high tax rates.
Required
ADVISE the strategy that BA should follow in order to gain superior performance and
competitive advantage over its competitors.
Ethical and Nonfinancial Considerations
2. Moon Limited is in the business of manufacturing copper rods. The copper rods are sold
to various cable wires manufacturers across the country. The growth in economy,
especially the power sector, has led to a sharp increase in demand of cable wires and
copper rods. The company is considering an opportunity to set up its own copper wire
manufacturing plant and gain a share of cable wire’s market. A detailed study was
carried out to understand the market of cable wires, market growth, competitive
landscape, financial feasibility etc. The Chairman has asked the Director of Finance to
review the financial feasibility study and highlight concerns, if any.
The following paragraphs contain summarised information of financial study carried out:
− The project of setting up a new cable wire manufacturing plant is expected to yield a
Net Present Value of `200 crores considering a project life of 20 years. The initial
cost of setting up the plant is `500 crores which is readily available with the
company. The project would yield an IRR of 17.5% which is higher than the IRR of
other plants under operation.
− The plant would employ about 70% of labour on contractual basis. These labours
would mostly comprise immigrants from neighbouring countries. The feasibility study
has assumed that the immigrants labours would be paid 15% less wage than that
paid to other workers. However, the wage paid to immigrants would still be higher
than the minimum wage requirements. The contribution to retirement funds is also
not considered in the project evaluation. The company feels that immigrant workers
would not stay beyond a period of a year and thus there is no requirement to
contribute to retirement funds.
− The existing plants of the company do not have free space available and hence the
company will need to buy land adjacent to its existing plant. A part of the proposed

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 3

land to be acquired falls under the forest reserve area where no commercial activity
is allowed. The company officials are in liaison with the government officials to get
the land parcel approved. A certain amount of the value of land would be paid to
certain government officials through a consultant. This cost is not a part of the
project evaluation report.
− The new plant would also produce certain chemically harmful waste which would be
disposed off into a nearby river after treatment. The company however does not
have any technology to treat the waste fully. A new treatment plant would cost about
`100 crores.
The finance director has forwarded the entire report to you for comments.
Required
(i) LIST Various non-financial and ethical consideration in decision making.
(ii) EVALUATE the impact of the various issues in the financial study and give your
RECOMMENDATION.

×××QUESTIONS×××

Total Quality Management

3. WEI Ltd has a dedicated set of production facilities for an auto component – coded X
pertaining to the gearbox of its leading car – GX2. With a vendor park set up in the
vicinity of the parent manufacturing plant, the Just – in – Time system ensures that no
stock of materials; work in progress or finished goods are held.
At the beginning of the year 2021, the planned information relating to the production of
component X through the dedicated facilities is as follows:
(i) Each unit of component X has input materials; 5 units of materials A at `20 per unit
and 4 units of materials B at `10 per unit.
(ii) Variable cost per unit of component X (excluding materials) is `25 per unit worked
on.
(iii) Fixed costs of the dedicated facilities for the period: `2,50,000.
(iv) It is anticipated that 7.5% of the units of X worked on in the process will be
defective and will be scrapped.
It is estimated that customers will require replacement (free of charge) of faulty units of
component X at the rate of 1 % of the quantity invoiced to them in fulfillment of orders.
WEI Ltd. is pursuing a TQM philosophy. Consequently all losses will be treated as
abnormal in recognition of a zero-defect policy and will be valued at variable cost of
production.

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 4 FINAL EXAMINATION: MAY, 2023

Actual statistics for each of the years 2021-2023 for component X are shown given
below–
2021 2022 2023
Worked on in the process (units) 6,005 7,500 7,000
Invoiced to customers (units) 5,500 6,500 6,500
Total costs:
Materials A and B (`) 8,40,700 10,50,000 9,80,000
Variable costs of production (`) 1,50,125 1,87,500 1,75,000
(Excluding materials costs)
Fixed costs (`) 2,87,500 2,62,000 2,90,000
No changes have occurred from the planned price levels from materials, variable
overhead or fixed overhead costs.
Actual free replacements of component X to customers were 250 units and 40 units in
years 2022 and 2013 respectively.
WEI Ltd. authorized additional expenditure during the year 2022 and 2023 as follows:
2022: Equipment accuracy checks of ` 10,000 and staff training of ` 5,000.
2023: Equipment accuracy checks of ` 10,000 plus ` 15,000 of inspection costs; also
staff training costs of ` 5,000 plus ` 3,000 on extra planned maintenance of equipment.
Required
(a) CHECK whether in the year 2021 actual results were achieved at the planned level
in respect of (i) quantities and losses and (ii) units cost levels for material and
variable costs.
(b) Use figures arrived (a) in order to CALCULATE the value of the internal and
external failure costs for year 2021.
(c) PREPARE a statement for the years 2022 and 2023 which provide reconciliation
between the number of components invoiced to customers with those worked on in
the production process. The statement should show the change from the planned
quantity of process losses and changes from the planned quantity of replacement of
faulty components in customer hands.
(d) PREPARE a statement for the years 2022 and 2023 which shows actual internal
failure costs, external failure costs, appraisal costs and prevention costs .

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 5

(e) Give an ANALYSIS, which explains the meaning and inter – relationship of figures
given above in table and in the analysis in (a), (b), (c) & (d).
[Note: Ignore fractions in case of units]
Supply Chain Management
4. An apparel manufacturing company has a factory in Ahmedabad, making denim clothing
for customers of all ages. It sells its clothing from its factory outlet store located within the
city. Until 6 months back, the company had a business model wherein the products
manufactured at its factory would be sent to its factory outlet store. Customers would visit
the store and choose apparel suiting their tastes. Production was based on prediction of
customer demand. This “made to stock” model has been placed for many years.
Few months back, the store manager noticed many customers exiting without making any
purchases. Tracking this and after obtaining feedback from customers over sometime, it
was found that many products were unacceptable to the customers’ tastes - either the
shade or design of denim was not what they wanted or that the apparel was not of the
correct fit for them. The management then decided to provide customers a choice of either
choosing from their standard apparel range that has already been made (“made to stock”
model) or to offer them a “made to order” option.
The company now displays its range of denim material at the factory outlet. Customers can
go through the samples and choose the material of their choice. Company certified tailors
would then take measurements based on the customers’ preferences. A detailed order
customized to the customers’ needs would then be drawn up. The factory has set up a
separate tailoring division that would stich the apparel specifically for these “made to order”
sales. For this new machines and production line resources have been put in place.
Customized products are manufactured and be made available to the customer within 3
working days’ time from the date of placing the order. The customer comes to the store
and picks up the apparel ordered. For delays beyond this timeline, the customer gets to
pay 5% less on the order value. This is done to attract and maintain customers, who
would otherwise choose to purchase apparel offered by rival competitors. Therefore,
speed of delivery of the customized product is critical for the company. This is the main
selling point for the company to operate the “made to order” business model.
If further modifications are needed due to errors on part of the company (quality /
finishing issues), the apparel would need to be modified / re-stitched once again. The
company will bear the cost of modification or replacement of garment.
This new “made-to-order” has been in place for the past 6 months. At the stage of project
proposal, the management found it a lucrative option for the company because:
(i) Customers are willing to pay a higher price to have customized clothing as
compared to the standard fitting.
(ii) It would attract more customers to the store

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 6 FINAL EXAMINATION: MAY, 2023

(iii) If the model works well, the dependence on the “made to stock” model can reduce.
Savings in inventory stock, obsolescence and warehousing costs will benefit the
company’s bottom-line.
Customers have been very enthusiastic in availing this customization facility offered by
the company. Sales have increased manifold in the last few months. Therefore, the
management is interested to understand the metrics related to their “made to order”
business mode to assess its success and risks. Some of the non-financial metrics are:
Month
Metric 1 2 3 4 5 6
Orders needing modification on account of errors in 15% 12% 10% 8% 5% 4%
order taking or manufacturing process (% of sales
orders made under "made to order" model)
Orders delivered beyond the 3 working days 5% 4% 3% 6% 7% 5%
timeline (% of sales orders made under "made to
order" model)
Production downtime (hours) 44 88 22 141 132 123
Labor idle time due to unavailability of 25 22 17 13 24 22
material (hours)
Ratio of "made to order" to total sales from the 16% 22% 25% 32% 34% 38%
factory outlet (Ratio of sales value)
Repeat orders by customers availing this facility (% 4% 21% 33% 54% 60% 63%
of customers giving repeat order / total customers
availing "made to order" facility)

Required
ANALYZE the non-financial measures of quality of the division over the six-month period.
Focus on the production performance, delivery cycle performance and customer
satisfaction.
Value Chain Analysis
5. X is a leading toy manufacturing firm. Having commenced its commercial operations in
the year 1990, the firm has a state-of-the-art manufacturing facility in India. It sells toys
through retail outlets and the firm’s website. X has been pioneering the concepts of
quality and safety in toys and has been instrumental in raising the quality standards of
toys in the Indian Market.
X’s mission is to influence parents to spend on toys that enable every child to grow with
quality toys that contributes to his/ her wholesome development.
X procures the materials from a number of different suppliers. All of the purchased
material are dispatched to its warehouse located at its factory and are held there unless
they are moved to production. After production is completed, finished toys are moved to

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 7

X’s retail outlets by its own vehicles. Each week, the vehicles follow the same time
schedule regardless of the weight they are carrying. Finished toys that are sold through
the X’s website are dispatched to its distribution centre.
X has recently got the contract to manufacture a new toy that is ‘Ty-Z’, a mini cartoon
based on a character from a famous international animated film. X has not been given
any target price, hence is free to set the selling price of ‘Ty-Z’, however, must pay a
royalty of 10% of the selling price to the film director. X is also planning to sell ‘Ty-Z’
through its retail outlets.
X has decided to follow a target costing technique for ‘Ty-Z’. Marketing manager has
determined the selling price to be around `1,750 per ‘Ty-Z’. X needs a margin of 26% of
the selling price of ‘Ty-Z’.
For the estimated costs per ‘Ty-Z’ refer Annexure.
Required
DISCUSS three primary activities of value chain through which X can minimise gap if any.
Annexure
Estimated Costs per ‘Ty-Z’
`
Material C 150.50
Material D 122.50
Other Material see note below
Labour (0.4 hours at `1,050 per hour) 420.00
‘Ty-Z’- specific production overhead cost 132.30
‘Ty-Z’- specific selling and distribution cost 166.60
Note- Each ‘Ty-Z’ requires 0.70 kg of ‘other materials’. These ‘other materials’ are
procured from a supplier at a cost of `280 per kg and around 5% of all purchased
materials are found to be downgraded.
Theory of Constraints
6. CIMC produces two types of products CZ and CD at its manufacturing plant. Both the
products are produced using the same materials, machinery, and skilled labour. Machine
hours available for the year is 4,000 hours.
Information relating to products are as follows:
Particulars CZ CD
Selling Price per unit `16,000 `4,000
Material Costs per unit `7,000 `1,200
Machine Hours per unit 1.6 hrs. 0.8 hrs.

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 8 FINAL EXAMINATION: MAY, 2023

Maximum Annual Demand 2,000 units 1,600 units

Online Booking (already accepted for) 400 units 1,200 units
Due to poor productivity levels, late order and declining profits over recent years, the
CEO has suggested the introduction of throughput accounting in the company.
The total of all factory costs is `1,42,60,000, excluding material.
Required
(i) Using throughput accounting, PREPARE statement to determine the optimum
production mix and maximum profit for the next year.
(ii) CALCULATE the amount of profit lost due to acceptance of online booking of the
products.
(iii) RECOMMEND the options to be followed in order to avoid any loss of profit.
(iv) LIST various ways through which price customization could be done.
(v) Given that products CZ and CD are respectively in ‘maturity stage’ and ‘introduction
stage’ of their life cycle. STATE the most appropriate pricing policy that could be
followed by the CIMC for CZ and CD as per their life cycle.
Ethical and Non-Financial Considerations
7. WXY Limited specializes in the manufacture of chemical intermediaries in a very
competitive business environment. WXY is a public listed company, with majority of its
shareholders being institutional investors like mutual funds, banks and insurance
companies.
It is located in a water scarce zone in Tamil Nadu. There are restrictions on the tapping
and usage of groundwater under the relevant laws. Penal provisions of the law will apply
in case of violations. The production process requires water and the amount of water that
the company can draw is limited to 19,000 kilo-litres (1 Kilo-litre is 1,000 litres). Purchase
of water is not an option as availability is highly erratic and exorbitant on cost.
The company manufactures two types of chemicals “W” and “Y” and these are sold in
kilograms. The company is in the process of making the business plan for the year 2023.
Based on the actual operating data for 2022 and taking into consideration the inflation
and possible price increases that it can obtain from the market, the following product
costing details have been arrived at:
Product W Y
Capacity Volume kg. (not inter-changeable) 8,25,000 9,30,000
Selling Price per kg. `2,000 `1,000
Variable Cost per kg. `1,500 `650
Water (litre/ kg.) 12.5 10

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 9

Under the relevant income tax laws prevalent, companies with a turnover o f `250 Cr.
(Crores) or less are taxed at a lower rate of 25% as against the normal 30%. The
company intends to keep its sales for 2021 equal to `250 Cr. or slightly lesser to avail
this concessional income tax benefit.
With capacity constraints, the company has calculated that it would be still beneficial for
the company to stick to `250 Cr. as only a marginal increase in turnover is possible over
`250 Cr.; after a higher tax @30%, the PAT would be still lower than the PAT arrived at
after doing just `250 Cr. and availing the lower income tax rate.
CFO asked management consultant to work out the volumes in kg. of products “W” and
“Y” which would give an optimal (maximum) contribution given the constraints on
capacity, water usage and turnover to avail the concessional income tax benefit.
Consultant works out with the following product mix using Linear Programming. She also
proposes another mix which does not meet the constraint on water usage where the
company could end up drawing excess water than permitted by 113 kilo-litres but would
result in an increase of `30 lacs in contribution. She says that it is easily possible to do
this by managing reporting to the water authorities.
Product Optimal Suggested
W (Volume in kg.) 8,00,000 7,85,000
Y (Volume in kg.) 9,00,000 9,30,000
Contribution in `Cr. 71.5 71.8
Constraints
Sales <= 250 Cr. 250 250
Volume of "W" in kg. <= 8,25,000 8,00,000 7,85,000
Volume of "Y" in kg. <= 9,30,000 9,00,000 9,30,000
Water usage (in KL) <= 19,000 19,000 19,113
Required
The CFO is not satisfied with the calculations. He wants you (Sr. Finance Manager) to
come up with a proper DISCUSSION.
Direct Product Profitability (DPP)
8. Quebec Ornamental Company (QOC) has been a name to count on for quality and
service. It has been designing wide range of ornamental products for more than two
decades using the highest-quality standard. Such quality is achieved through years of
experience and the integrity that is maintained by its employees. They are known for
their perfection. WIK approached QOC to make inquiry of two products. The two
products are indoor fountain known as ‘O-1’ and a large gnome known as ‘O-2’ for
garden. Mr. X, the management accountant of QOC, has estimated the variable costs per
unit of ‘O-1’ and ‘O-2’ as being `622.50 and `103.75 respectively. He estimated his
calculations based on the following information:

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 10 FINAL EXAMINATION: MAY, 2023

(1) Products Data

O-1 O-2 Other Products

Production/ Sales (units) 10,000 20,000 80,000
Total Direct Material Costs `22,50,000 `7,50,000 `60,00,000
Total Direct Labour Cost `15,00,000 `5,00,000 `60,00,000
(2) Total variable overheads for QOC are `1,20,00,000 out of which 30% belong to the
procurement, warehousing and use of direct materials. While all other variable
overheads are related to direct labour
(3) QOC presently allocate variable overheads into products units using percentage of
total direct material cost and total direct labour cost.
(4) WIK is willing to purchase ‘O-1’ at `740 per unit and ‘O-2’ at `151 per unit.
(5) QOC will not accept any work yielding an estimated contribution to sales ratio less
than 28%.
The directors of QOC are considering switching to an activity-based costing system and
recently appointed a management consultants firm to undertake an in-depth review of
existing operations. As result of that review, the consultants concluded that estimated
relevant cost drivers for material and labour related overhead costs attributable to ‘O-1’
and ‘O-2’ are as follows:
Other
O-1 O-2
Products
Direct Material Related Overheads:
(The volume of raw materials held to facilitate production of
each product is the cost driver.)
Material Ratio per product unit 5 8 5
Direct Labour related overheads:
(The number of labour operations performed is the cost driver.)
Labour Operations per product unit 7 6 5
Required
(i) Give a financial ANALYSIS of the decision strategy which QOC may implement about
the manufacture of each product using the unit cost information available.
(ii) DISCUSS whether activity-based management should be adopted in companies like
QOC.

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 11

Non-Financial Performance Measures

9. Kristin LLP sells wide range of household products. The firm has recently received few
negative feedbacks about the product and customer services. CEO is not happy with
this. As per the opinion of CEO –
“Nowadays when social media play such an important role in making decisions, its
crucial to keep an eye on the quality of customer service you provide. If you don’t care
about customers’ satisfaction, don’t expect them to care about your services or products.
When customer share their story, they’re not just sharing their problems. They are
actually teaching you how to make your product, service, and business better.”
There has been considerable discussion at the corporate level as to improve ‘Customer
Satisfaction’. Convinced with this logic, firm has invested heavily in customer satisfaction
and adopted the following plan of action–
- providing helpline 24/7 in order to develop personal relationship with customer;
- redesign its online platform in order to make it more customer friendly;
- rewarding loyal customers by giving them experience, they would not forget for life;
and
- ease the return and refund policy, offering no questions- asked guarantee is a smart
move over competitors.
The CEO was initially delighted to see that their efforts pay off in the form of higher
customer satisfaction score index, however he is anxious to see the corresponding
financial results.

Required
Does the seeming lack of improvement in financial performance with customer
satisfaction, Kristen LLP should stop investing a superior customer experience?
DISCUSS.

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Performance Measurement in Not for Profit Sector

10. Olderhelp India is a leading charity working with and for the disadvantaged elderly for
over 5 decades. Olderhelp advocates for their needs for universal pension, quality
healthcare, action against elder abuse and many more. Olderhelp collects donations and
funds and utilises them for the welfare of elders. The governing body of Olderhelp has
setup four performance objectives for the three months to 30 Sep 2022:
- to achieve a level of donation of `30,00,000
- to keep advertisement cost not more than 3% of donation
- to keep welfare cost more than 85% of donation
- to achieve 90% of respite care requested from the community
Actual results were as follows:
July Aug Sep
Donation (`) 7,00,000 13,00,000 11,00,000
Advertisement Costs (`) 17,500 52,000 33,000
Elder’s welfare cost (`) 5,74,000 10,92,000 979,000
Respite care requests (days) 1,120 1,140 1,200
Respite care provided (days) 896 1,003 1,104
The aim is to serve elder needs in a holistic manner, enabling them to live active,
dignified and healthier lives.
Requirement
PREPARE a statement to assist the manager in evaluation performance against
objectives and COMMENT on the performance.
Balanced Scorecard
11. “Hard Rock Coconut” is an exclusive resort located in a famous Island of Pacific Ocean
that vows to isolate its guests from the hustle and bustle of everyday life. Its leading
principle is “all contemporary amenity wrapped in old-world charisma”. Each of the
resort’s 18 villas has a separate theme like Castle, Majestic, Ambassador, Royal
Chateau, Coconut, Lemon, Balinese etc and guests often ask for a specific villa wh en
they make reservations. Villas are Ideal for families or friends travelling toget her and
these villas feature luxurious accommodation spanning two floors. Since it is located
within a 300-acre estate on white sand beach, the resort offers its guests a wide variety
of outdoor activities such as horseback riding, hiking, diving, snorkelling, sailing, golf and
so on. Guests could also while away the day relaxing in the pool and availing themselves
of the resort’s world-famous spa “Hard Coco Spa”. The dining room, which only has three
tables for the public, is acceptable proud of its 4-star rating.

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 13

Required
DEVELOP a Balanced Scorecard for “Hard Rock Coconut”.
Note- It is sufficient to give two measures in each of the four perspectives.
Competitive Advantage
12. The following are the income statements of two firms in the same industry.
Firm WG (`) Firm WD (`)
Revenues 22,00,000 44,00,000
Less: Variable costs 9,90,000 26,40,000
Contribution margin 12,10,000 17,60,000
Less: Fixed costs 7,70,000 13,20,000
Profit before taxes 4,40,000 4,40,000
Required
IDENTIFY the strategy (cost leadership vs. differentiation) followed by two firms. JUSTIFY
your classification.
Customer Profitability Analysis
13. JA Ltd. manufactures weighing machines of standard size and sells its products to two
industrial customers namely MT Ltd. and KG Ltd. and to a dealer MG Bros. having shops
in different cities. The maximum retail price per unit of weighing machine is `11,000 and
per unit average cost of production is `5,500 (40% is general fixed overhead cost).
The Finance Officer has been asked to undertake a customer profitability analysis and
calculate and compare the profit margin per customer (before deducting general fixed
overhead) to know about the real customer profitability.
Following are the additional overhead information:
Delivery Costs `200 per Kilometer
Emergency Delivery Cost (in addition to Delivery Cost) `21,000 per Delivery
Order Processing Cost `6,000 per Order
Specific Discount and Sales Commission As per Negotiation
Product Advertisement Cost Actual Cost
The following data are available for each customer:
Particulars MT Ltd. KG Ltd. MG Bros.
Sales (in units) 2,000 1,000 800
Total Delivery Kilometer Travelled 1,000 800 900

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 14 FINAL EXAMINATION: MAY, 2023

No. of Emergency Delivery 2 1 0

No. of Orders Processed 4 2 8
Specific Discount 25% 20% 15%
(Percentage of Sales Revenue)
Sales Commission 15% 10% 5%
(Percentage of Sales Revenue)
Advertisement Costs (`) 8,75,000 6,15,000 4,30,000
Required
IDENTIFY most profitable customer (basis on calculations).
Pareto Analysis
14. The following information is given about the type of defects during a production period
and the frequencies of their occurrence in a spectacle manufacturing company:
Defect No. of items
End Frame not equidistant from the centre 10
Non-uniform grinding of lenses 60
Power mismatches 20
Scratches on the surface 110
Spots / Stains on lenses 5
Rough edges of lenses 70
Frame colours-shade differences 25
Required
CONSTRUCT a frequency table so that a Pareto Chart can be constructed for the defect
type. IDENTIFY areas on which the company should maintain focus?
Pricing Decision
15. The research and development wing of Electronics Ltd. has developed a new kind of
energy efficient inverter motor with 5-star rating from Bureau of Standards of Energy for
use in industrial generator. The initial trials noted that it would take 10 hours for the first
motor, which is subject to learning curve of 80%. The cost of material per motor would be
`2,500, labour charges `175 per hour and overheads amount to 125% of labour cost.
The first order received is for delivery of eight motors.
Required
CALCULATE price the company should quote to have a profit margin of 20% on sales.

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 15

SUGGESTED ANSWERS/HINTS

1. In consideration to Michael Porter’s theory about creating a superior performance and

competitive advantage, a firm’s overall competitive advantage derives from the difference
between the value it offers to customer and its cost of creating that customer value. In
order to survive and prosper in industry, firm must meet two criteria– they must supply
what customers want to buy and they must survive competition.
To attain superior performance and attain competitive advantage, firm must have
distinctive competencies. Distinctive competencies can take any of the following two
forms:
Relative low-Cost advantage– under which customers gain when a firm’s total costs
undercut those of its average competitor.
An offering or differentiation advantage– If customer perceive a product or service as
superior, they become more willing to pay a premium price relative to the price they will
have to pay for competing offerings.
Low Cost Advantage (Cost Leadership)
BA can enjoy relative cost advantage if its total costs are lower than those of its
competitors. This relative cost advantage enables a business to do one of the following:
– Charge a lower price than its competitors for its services to gain market share and
still maintain current profitability; or
– Match with the price of competing services and increase its profitability.
Cost reductions in BA can be achieved through yield management with variable pricing
depending on capacity utilization with careful monitoring; application of computer and
communication technology in cost effective way i.e. selling seats via the internet rather
than through travel agents; trimming overhead costs by using lower cost out-of-town
airports, no printed tickets, seat allocations, or free meals and drinks; efficient operations
i.e. fast turnaround times for aircraft to improve utilization; and no exceptions policies to
reduce the cost of handling exceptions (e.g. no flexibility for passengers who arrive late).
Cost economies can also be realized from large scale operations. However, it is
important to note that as soon as more firms strive to become the cost leader, rivalry
become so fierce that the consequences for the profitability in the industry are
disastrous.
Differentiation Advantage
It occurs when customers perceive that a business services offering is of higher quality,
involves fewer risks and/or outperform services offered by competitors. In other words,
customers perceive the service offered by a business to be superior. For example ,
differentiation may include a firm’s ability to deliver services, and other factors that

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 16 FINAL EXAMINATION: MAY, 2023

provide unique customer value. BA is a multinational passenger airline. It can adopt a

differentiation approach by offering passengers a higher-quality experience than many of
its rivals. This allows it to charge a premium for its flights compared to many other
airlines.
A differentiation advantage can be achieved by offering enhanced features such as prime
landing slots can be obtained at major airports around the world; using superior and
advance technology; well-maintained, clean, and comfortable aircraft; training in
customer care and the recruitment of high-quality staff; providing complementary
services such as in-flight entertainment, high-quality food, and drink. Customer value can
also be increased by subjective features such as brand image, advertising based on
quality of service provided. However, differentiator cannot ignore its cost position. If
costs are too high the premium price are nullified.
On successfully differentiated its offering, management of BA may exploit the advantage
in one of two ways viz., either increase price until it just offsets the cost of improvement
in customer benefits, thus maintaining current market share; or price below the “full
premium” level to build market share.
Alternatively, BA may focus on geographical region and short point to point flights to
reduce costs. Michael Porter enlightens focus as attaining low cost or product
differentiation for a particular buyer group, segment of product line, or geographic market
rather than for the industry as a whole. The focuser can attain competitive advantage
within a niche, because large firms are either not attracted to niche or have ignored the
potential. The narrow focus in itself though is not adequate for a competitive advantage.
The firms need to optimize the strategy on two variants: cost focus and differentiation
focus. One risk of a ‘focus strategy’ is that broadly targeted competitors devastate the
segment once it becomes economically attractive.
In addition, the currency depreciation is hitting Airlines harder and international
overhead costs have risen, the BA should attempt to increase the number of internal
domestic flights. Moreover, ATF cost can also be lowered by investment in fuel saving
modern Airbuses, however, the reduction in operating costs may outweigh the capital
equipment costs.
To gain competitive advantage BA may also assess Value Shop Model. Value Shop
generates value by organizing resources (e.g. people, knowledge, and skills) and
deploying them to solve specific problems, for example, delivering airline services to the
passengers or delivering a solution to the business problem. Shops are organized
around making executing decisions- identifying and assessing problems or opportunities,
developing alternative solutions or approaches, choosing one, executing it and
evaluating results.
In this way, the above discussed strategies may be more appropriate for helping BA in
achieving superior performance and competitive advantage over its competitors.

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Concept in Practice
Southwest Airlines (SA) targeted on a geographic region and short point-to- point
flights to reduce costs. Even though it offered no-frills service (no-frills or no frills
service is one for which the non-essential features like food, entertainment, printing
of boarding pass etc. have been removed to keep the price low) and was based in
secondary airports, SA improved quality relative to the limited set of competing alter-
natives by offering direct flights rather than connecting flights requiring changing
planes at large hub airports. The SA also offered better on-time performance and
friendly amenities.
2. Issue
Moon Limited manufactures copper rods and is considering commencing a new plant for
manufacturing of cable wire. A financial evaluation has been carried out and the project
appears to be financially viable. The project has a positive NPV of `200 crores and an IRR
of 17.5%. Though the project is financial viable, there are certain concerns relating to the
project.
Non-Financial and Ethical Consideration in Decision Making
Capital Budgeting or Investments decisions are generally made based on the various
financial evaluation like Net Present Value, Internal Rate of Return, Payback Period etc.
The financial considerations in capital budgeting decisions are important because the end
objective of every for-profit business is maximisation of shareholder’s wealth. However, an
important aspect of capital budgeting is that investment decisions cannot be purely based
on financial analysis; there are other soft non-financial aspects of the investment appraisal
that need to be thoroughly looked into. Some of the non-financial considerations that a
company factors for capital budgeting or investment decisions are listed below:
Environmental Factors
Environmental factors like pollution, deforestation, impact on climate and weather,
greenhouse effects etc. must be considered by companies while selecting a project for
implementation. Any project which adversely affects the environment is not taken positively
by common public and environmentalists. A lot of projects have been stalled or delayed
due to the protests by pro-environment groups leading to cost and time overrun. The
government through ministry of environment could impose penalties on projects which are
violating environmental norms or green norms.
Staff Motivation
Staff motivation and satisfaction is another important factor which companies might
consider while choosing projects. If, for example, a company decides to implement
automation in its plants for operations which would result in redundancy in labour, the
overall staff motivation would come down. Staff and workers would resort to strikes and
lockouts to protest against such decisions. The company should adopt a participative
approach while taking such decisions considering the impact it would have on the labours.

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Government Regulations
The companies must comply with relevant government regulations while implementing
projects. Some projects might be profitable and yield excellent returns. However, if the
profits and cashflows are generated by violating government regulations, it could be
harmful in the longer run for the company and its brand. The companies must ensure that
all relevant laws and regulations are complied with.
Availability of Resources
The evaluation of any project must also consider availability of key resources like raw
material, manpower, logistics infrastructure, electricity etc. If there is any constraint on any
of the key resources at a future date, a financially viable and excellent project could well
turn into a failed project. It is thus important that the requirements and availability of key
resources are analysed in advance.
Availability of Project Site
Site selection involves measuring the needs of a new project against the merits of potential
locations. This indicates the practice of new facility location, keeping in mind project
requirements. A wrong or unsuitable project location may mar the very benefits of a
financially lucrative investment proposal.
Corporate Social Responsibility
Corporate social responsibility refers to "the ethical principle that an organisation should be
responsible for how its behaviour might affect society and the environment”. The
companies do not function in silos but are a part of the larger society and environment.
They have a responsibility towards the society and environment to use the various
resources judiciously and ensure a sustainable development. Companies are expected to
uplift the well being of the society at large and to not harm the environment through
operations. The aspects of corporate social responsibility must also be considered while
deciding the project to be implemented.
Ethics
Ethics are a set of guiding moral principles for individuals and corporates. Every company
has a duty of care to various stakeholders (shareholders, employees, suppliers, customers
etc.). A company is expected to act in a fair and transparent manner and be honest in all its
dealings with stakeholders.
Issues in the Financial Study
As discussed earlier, the project is financial viable with a very good NPV and IRR. The
amount required to build the plant is also available with the company. Financially, the
project must be accepted. However, there are certain non-financial issues which must be
addressed before a decision to build the plant is taken.

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Payment to Labour and Ethics

As explained earlier, every company has a duty of care to all its stakeholders and the
stakeholders must be treated fairly. Labours are a key stakeholder for the construction and
running of the plant. The company has chosen to pay 15% lower wage to immigrant
workers and not contribute anything towards their retirement benefits.
The company is paying a higher wage to the labours than required by law and hence there
is nothing illegal in such payments. However, the company must not discriminate between
workers who are doing same nature of work just because the workers are immigrants. The
reputation of the company might be affected because of the lower wages paid to
immigrants. There is a possibility that these labours go on protests and strikes or decide
not to work for the company.
The company has also decided not to contribute to retirement funds for these workers. This
could have a legal implication as well. The financial impact of paying wages at par with
other workers and contributing to the retirement fund for immigrant workers is not known.
However, the company should reconsider this decision and pay all the workers the same
level of wages. The company should also contribute to the retirement fund of employees.
Availability of land and bribery
The existing plant does not have sufficient space to build a new plant and hence the
company is planning to acquire additional land which falls under the forest reserve area
where no commercial activity is allowed. The company is in liaison with government
officials to get the land acquisition approved. The company would also be paying bribes
indirectly to the government officials to get the land allotment approved.
The payment of bribes to government officials, whether directly or indirectly would be
unethical. The company could face litigation for acquiring land by unfair means and in
future, there is a possibility of such allotments being cancelled. The company’s reputation
would also be dented if news of bribery is published by the media. The company also has a
responsibility towards the environment and must contribute towards a sustainable
development. The society at large would not take acquisition of forest land by unfair means
positively. This impact the overall goodwill and brand image of the company.
The company must evaluate if land at other sites can be acquired for construction of the
plant. Such acquisition would be at a higher cost but would be beneficial to the company in
the longer run.
Chemical waste and technology
The proposed plant is likely to emit chemically harmful waste which would pollute the
environment. The technology available with the company can treat such waste partially.
The company has to incur an additional cost of `100 crores to build a new treatment plant.
This means that the NPV of the project would be reduced by `100 crores and IRR would
also be lesser if the new treatment plant is built.

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As discussed earlier, the company must operate in a socially responsible manner and
consider implication of its action on the environment. The pollution caused by plants
affects the surrounding environment and might lead to protests by local residents.
Sometimes such protests are backed by NGOs as well. The commissioning of
environmentally sensitive projects is difficult at times and can cause project delays as
well.
The company should consider acquiring a new chemical waste treatment plant to ensure
that there is no discharge of harmful waste from the company’s plant. Though, there is
an additional cost involved in building a new plant, it is important that the society at large
perceives that the company is operating in a socially responsible manner. The company
operates in a society and is an integral part of it and hence, it has certain responsibilities
towards the society as well.
Conclusion
The ultimate objective of a company is to maximise shareholder’s wealth. The company
must, however, operate in a socially responsible manner in achieving the objective of
wealth maximisation. The company has a duty of care to other stakeholders like
employees, society at large etc. In some cases, there may be conflict between different
stakeholder’s objectives. For instance, a new waste treatment plant would be good for
the environment and society at large but would be adverse for shareholders as an
additional cost of `100 crores would be incurred. The company must definitely consider
non-financial factors along with financial factors while deciding on whether to build a new
plant or not.
3. (a) (i)
units
Components worked on in the process 6,005
Less: Planned defective units (7.5% of 6,005) 450
Less: Replacements to customers (1% of 5,555) 55
Components invoiced to customers 5,500
Therefore actual results agree with planned results.
(ii) Planned component cost = (5 units × `20 for materials A) + (4 units × `10 for
material B) + `25 variable cost = `165
Comparing with the data in the table:
Materials = `840,700/6,005 units = `140
Variable overhead = `150,125/6,005 units = `25
(b) Internal failure costs = `74,250 (450 units × `165)
External failure costs = `9,075 (55 units × `165)

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 21

(c)
2022 (units) 2023 (units)
Components invoiced to customers 6,500 6,500
Planned replacement (1%) 65 65
Unplanned replacement (Total-Planned) 185 –25
(250–65) (40–65)
Components delivered to customers [A] 6,750 6,540
Components worked on in the process [B] 7,500 7,000
Total Process defects [C = B–A] 750 460
Planned process defects (7.5% of worked on In 562 525
the process) [D]
Unplanned defects (balancing figure) [C–D] 188 – 65
(d)
2022 (`) 2023 (`)
Internal failure costs 123,750 75,900
(750 units × ` 165) (460 units × ` 165)
External failure costs 41,250 6,600
{(65+185) units × ` 165} {(65-25) units × ` 165}
Appraisal costs 10, 000 25,000
Prevention costs 5,000 8,000
(e) The following points should be part of Analysis:
1. The information presented in (c) indicates that free replacements to customers
were 185 greater than planned in the year 2022 but 25 less than planned in the
year 2023. In contrast, in process defects were 188 more than planned
(approximately 33%) in the year 2022 and 65 less than plan (approximately 12%)
in the year 2023.
Cost 2021 2022 Change 2023 Change
(`) (`) w.r.t (`) w.r.t
previous previous
period (`) period (`)
Internal Failure 74,250 123,750 49,500 75,900 (-)47,850
Costs
External Failure 9,075 41,250 32,175 6,600 (-)34,650
Costs
Total 83,325 165,000 81,675 82,500 (-)82,500

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 22 FINAL EXAMINATION: MAY, 2023

2. Both Internal failure and External failure costs have increased substantially in
the year 2022 but decreased significantly in the year 2023.
3. The additional failure cost w.r.t the year 2021 was ` 81,675 in the year 2022
and cost savings w.r.t. year 2022 were ` 82,500 in the year 2023.
4. It seems that expenditure on inspection of `15,000 and expenditure on extra
planned maintenance of `3,000 in the year 2023 has yielded major results.
This should be thoroughly analysed and be adopted as a successful tool to
reduce failure cost. Reduced failures will also improve the brand equity and
customer satisfaction of the product.
4. Analysis of the operating data of the “made to order” at the business store revealed the
following:
Production Performance:
(i) Modifications to orders: This company has to bear the cost of modification /
replacement of the garment incurred on account of error in its order taking or
manufacturing process. Therefore, orders needing such modification should be kept
at the minimum. Such instances were higher than 10% in the first three months.
With experience, either in the order taking process or manufacturing process, these
errors have reduced substantially in the later months. The managers of the order
taking and manufacturing departments need to understand and constantly keep
track of these errors in order to keep them at a bare minimum. Management may
want to set a benchmark, financially in terms of the cost of modification and non-
financially in terms of the acceptable threshold for such instances. Monthly tracking
of this metric will help detection of errors earlier.
(ii) Production downtime: Production downtime normally occurs either due to break
down of machinery or plant maintenance. It is unproductive time, reducing the
machine’s capacity. It must be kept minimum. Downtime hours have been steadily
increasing in the past 3 months, the overall monthly average being 91.67 hours. The
production manager has to analyze and take corrective action at the earliest.
Urgency of the issue can be compounded by the fact that sales orders under the
“make to order” model have been increasing steadily over the last few months. In
the latest month, 38% of the overall sales was from this model. Therefore, the
production capacity should be utilized optimally to ensure ability to meet delivery
deadlines.
(iii) Labor Idle time: Labor Idle time due to unavailability of material is another
unproductive waste of resource. The procurement department can address
unavailability of material. On an average 20.5 hours of labor time is idle due to
unavailability of the appropriate material. Appropriate steps with suppliers can lead
to agreements to ensure seamless supply of material when required. This will
enable the company to meet delivery deadlines given to customers.

© The Institute of Chartered Accountants of India

 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 23

Delivery Cycle Performance:

(i) On-time delivery: The orders need to be delivered to the store within 3 working days
of placing order. The customer picks up the order from the store. Speed of delivery
is critical to the company. Any delay beyond this timeline, the customer benefits by
a 5% reduced price on the order as compensation for delay. Prompt delivery is also
the company’s selling point to attract customers, who would otherwise patronize its
rivals. On an average 5% of the orders are not delivered within time. Therefore,
average delivery success rate is only 95%. The management has to take steps that
this is kept to the minimum in order not to stem loss of revenue as also to build
brand loyalty with the customer base.
Customer Satisfaction:
(i) Repeat orders by customers: Prompt, quality delivery of the customized order would
ensure that customers return in future with further orders. Statistics shows that
repeat orders have steadily increased, which is a very positive signal to the
management. Initially, only 4% of the customers under this model placed repeat
orders. This increased substantially. Now almost 63% of the customers who
purchase under this model come back with more orders!
(ii) Sales mix: Popularity among customers for customized services is further validated
by the steady increase in the ratio of such sales to the overall sales of the company
from the factory outlet. Now, this model generates an average of 28% of the total
sales from the outlet, with a likely projection of having a higher share in the overall
sales mix. Therefore, the “make to order” model can be termed a success.
Workings
Metric Month Monthly
1 2 3 4 5 6 Average
Production performance
Orders needing modification on 15% 12% 10% 8% 5% 4% 9%
account of errors in order taking or
manufacturing process (% of sales
orders made under "made to order"
model)
Production downtime (hours) 44 88 22 141 132 123 91.67
Labor idle time due to unavailability of 25 22 17 13 24 22 20.50
material (hours)
Delivery cycle time
Orders delivered beyond the 3 working 5% 4% 3% 6% 7% 5% 5%
days timeline (% of sales orders made
under "made to order" model)

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 24 FINAL EXAMINATION: MAY, 2023

Customer satisfaction
Repeat orders by customers availing 4% 21% 33% 54% 60% 63% 39.17%
this facility (% of customers giving
repeat order / total customers availing
"made to order" facility)
Ratio of "made to order" to total sales 16% 22% 25% 32% 34% 38% 28%
from the factory outlet (Ratio of sales
value)

5. In case of X, there is a cost gap of Rs. 78.22. Where a gap exists between the current
estimated cost levels and the target cost, it is essential that this gap be closed. Cost gap
can be removed by reducing the cost over all the Value Chain through the
development of the spirit co-operation and understanding among all members of
organizations associated with the product from suppliers, producers, customers, agents
and service providers.
In Xs Value Chain, three primary activities are:-
Inbound logistics
These are activities concerned with receiving, storing and distributing the inputs (raw
material) to the production process. The relationship with supplier is a key component in
this process. Currently, X procures materials from multiple suppliers and stores these
materials in its store. Shifting to a just-in-time (JIT) system technique in procurement
of materials could possibly save substantial storage costs provided the JIT supplier must
agree to take the responsibility for the good quality of materials supplied. This will also
become a source of savings because downgraded items will be removed. However, X
might have to pay additional payout to a supplier for JIT purchasing to work.
Outbound logistics
These activities involve collecting, storing and distributing the products to the customers.
At X, scheduled transportation of toys to retail outlets is outbound logistics activity.
Potentially, the scheduled transportation of toys to retail outlets every week is not an
efficient way. Such deliveries do not consider whether toy is required at retail outlets or
not, hence X may possibly deliver toys to retail outlets those do not need toys and suffer
unnecessary transportation costs.
X should plan to implement EDI system that will help it to improve warehousing and
logistics by automatically tracking inbound shipments as well as outbound products.
Adopting EDI, X can not only improve processes but also streamline inventory
management across many channels. However, it will require setup time and a learning
curve to implement the same.

© The Institute of Chartered Accountants of India

 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 25

Marketing and sales

Marketing and sales provide the means by which the customers are made aware of the
product. At X, the sales of toys via its retail outlets and website are marketing and sales
activities.
X is planning to sell ‘Ty-Z’ via retailers. If X sales ‘Ty-Z’ through its website rather than
through retail outlet, significant cost could easily be avoided. Simultaneously, X will be
able to expose itself to attract international customers to buy ‘Ty-Z’ as product is
based on character from a famous international animated film.
Overall, X may create a cost advantage by reconfiguring the Value Chain.
Reconfiguration means structural changes such a new production process, new
distribution channels or a different sales approach as discussed above.
Workings
Statement Showing Computation of Cost GAP
`
Sales Price 1,750.00
Less: Royalty @10% 175.00
Less: Profit @26% 455.00
Target Cost ‘Ty-Z’ 1,120.00
Material C 150.50
Material D 122.50
Labour (0.40 hours at `1,050 per hour) 420.00
Other Material (0.70 kg × `280 per kg) / 0.95 206.32
Production Overheads Cost 132.30
Distribution and Sales Cost 166.60
Estimated Cost ‘Ty-Z’ 1,198.22
Cost Gap 78.22
6. (i) Statement Showing Machine Hours
Product Maximum Machine Total Machine
Demand Hours/ Unit Hours
CZ 2,000 units 1.6 3,200
CD 1,600 units 0.8 1,280
Total machine hours required to meet maximum demand 4,480
Machine hours available 4,000
Shortage of machine hours 480
‘Machine hours’ is the bottleneck activity.

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 26 FINAL EXAMINATION: MAY, 2023

Statement of Ranking
Particulars CZ CD
Selling Price per unit `16,000 `4,000
Less: Material Costs per unit `7,000 `1,200
Throughput per unit `9,000 `2,800
Machine Hour Required per unit 1.6 0.8
Throughput Return per hour `9,000/1.6 `2,800/0.8
= `5,625 = `3,500
Throughput Accounting (TA) Ratio 5,625/3,565 3,500/3,565
(throughput return per hour/ cost per factory hour) =1.58 =0.98
Ranking I II
Cost per factory hour = `1,42,60,000/ 4,000 hrs. = `3,565
Optimum Production Plan
Product No of units Machine Total Machine T/P per Total T/P
hr. per unit hrs. hr. ` `
CZ 400 1.6 640 5,625 36,00,000
(online orders)
CD 1,200 0.8 960 3,500 33,60,000
(online orders)
CZ 2,400/1.6 1.6 2,400 5,625 1,35,00,000
=1,500 (b/f)
Total 2,04,60,000
Less: Total Factory Costs 1,42,60,000
Profit 62,00,000
(ii) Had there been no online booking first product CZ should be produced = 2,000 units
using 3,200 machine hours (2,000 × 1.6). Because of online booking already
accepted for 1,200 units of product CD, unfulfilled demand of product CZ = 2,000 -
1,900 = 100 units.
Machine Hrs. Required for 100 units of CZ (100 × 1.6) 160 hrs.
Throughput Lost for Product CZ (160 hrs. × 5,625) `9,00,000
Throughput Return Earned for Product CD (160 hrs. × 3,500) `5,60,000
Throughput lost `3,40,000

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 27

(iii) Recommendation
Option-1
Throughput accounting ratio is the throughput return earned in an hour divided by
the factory cost (labour and overheads) incurred by the factory in one hour. Factory
cost is generally fixed in nature. A ratio above 1 signifies that the throughput return
is greater than the factory cost and therefore the product is profitable. Product CZ
has a throughput accounting ratio of 1.58 while Product CD has a throughput
accounting ratio of 0.98, this indicates that hourly return from Product can cover the
hourly factory cost, it is profitable. Product CD does not yield enough hourly return
to cover the hourly factory cost, it is not profitable. Therefore, CIMC should consider
ways of improving throughput accounting ratio of Product CD (i.e. above 1.0).
TA ratio could be improved by:
▪ Increasing the selling price of the Product CD but the demand may fall.
▪ Reducing the material cost per unit as well as operating costs. However, there
may be quality issues.
▪ Improving efficiency e.g. increase number of units that are made in each
bottleneck hour.
▪ Raising up bottleneck so that more hours are available of bottleneck resource.
Option-2
CIMC has to prioritize production of Product CZ since it is more profitable than
Product CD. As per the throughput accounting ratio, Product CD does not yield
sufficient return per hour to cover the hourly overhead cost therefore, gets second
priority over Product CZ.
Since machine hours are the bottleneck, if production for entire 4,000 hours is
focused on Product CZ, return yielded would be sufficient to cover the factory
overheads. However, Product CZ has a maximum demand of 2,000 units, that
requires 3,200 machine hours (2,000 units × 1.6 hours per unit of production).
Remaining 800 machine hours can be devoted to Product CD, during which 1,000
units can be produced (800 machine hours / 0.8 hours per unit). Maximum demand
for Product CD is 1,600 units. Therefore, the balance demand of 600 units of
Product CD will remain unsatisfied.
However, to meet unsatisfied demand of Product CD, CIMC may consider the
option of sub-contracting either a part of whole of the production of Product
CD. This way it can meet the entire demand for Product CD for 1,600 units. If it
subcontracts the entire production of Product CD, it can also scale down its in-
house capacity. Sub-contracting decision requires suitable cost benefit analysis.

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 28 FINAL EXAMINATION: MAY, 2023

Moreover, the risk associated with outsourcing like unsatisfactory quality and
service or failure of supplier cannot be ignored.
Overall, to enhance profitability or avoid any type of loss of profit, CIMC may
consider the options recommended above with a long term perspective.
(iv) Pricing of a product is sometimes customized keeping taste, preference, and
perceived value of a customer into consideration. Price customization is done in the
following ways:
▪ Based on product line: When products are customized as per the customer’s
requirements, pricing can be adapted based on the customer’s specifications .
Standard products can have a base price, to which the company can top-up
charges to any additional customization.
▪ Based on customer’s past behavior: Customers with good payment record
have established their credit-worthiness. To sustain business, they may be
extended additional discounts as compared to other customers.
▪ Based on demographics: Different pricing strategies may be adopted based on
age or social status. For example, railway fare discounts for senior citizens or
concessional price tickets for military personnel.
▪ Based on time differential: Different price for different time periods. If a
customer extends a long-term contract, an additional discount may be
extended since business is contracted for a longer period of time. Example,
discounted price for data usage provided by a broadband service provider if
subscription paid for six months or more.
Apart from the above accounting principles, other macro economic and legal factors
should also be given importance while chalking out a pricing strategy.
(v) The life-cycle of a product has 4 stages namely Introductory stage, Growth stage,
Maturity stage and Decline stage.
Product CZ is given to be in the maturity stage. This third stage of product life cycle
is characterized by an established market for the product. After rapid growth in sale
volume in the previous stages, growth of sales for the product will saturate.
Competition would be high due to large number of rivals in the market, this may lead
to decreasing market share. Unit selling price may remain constant since the market
is well established. Occasional offers may be used to tempt customers, otherwise
this stage will mark consolidation of the market.
Product CD is in the introduction stage, the first stage of product life cycle.
Penetration pricing is adopted to charge a low price in the initial stage for
penetrating the market as quickly as possible. For a new product this low price

© The Institute of Chartered Accountants of India

 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 29

strategy will popularize the product. Once the market is established, the price may be
increased. Penetration pricing will be suitable when:
(i) Demand for the product is elastic, more demand when prices are low.
(ii) Large scale production of the product yields economies of scale.
(iii) Threat of competition requires prices to be set low. It serves as an entry barrier to
prospective competitors as well.
However, if Product CD is a highly innovative product, it may adopt Skimming price
policy. The product with unique features will differentiate it from other products
leading to a revolutionary impact on market and customer behavior. Customers may
not mind paying a premium for the unique product offering. Focus may be on
promoting the product to gain market share. Skimming price policy may work when:
(i) There seem to be no competitors providing similar products.
(ii) Demand is inelastic.
Over time, competitors can reverse engineer and offer similar products. Therefore,
the price may be lowered in the long run to retain market share.
7. Primary goal of investor –owned firms is shareholder wealth maximisation, which translates
to stock price maximisation. Management Consultant’s plan is looking good for the WXY as
there is a positive impact on the profitability (`30 lacs) of the company. Also, WXY
operates in a competitive environment so for its survival, it has to work on plans like above.
There is second side of coin that cannot also be ignored i.e. business ethics. It is easily
possible to manage drawing of excess water, but it is not an ethical practice as the
company has responsibilities towards use of natural resources like water and protecting the
environment.
Besides, a whistle-blower complaint to the water authorities can land the company into
trouble in terms of penalties, a financial impact and also such penalties are disallowed for
income tax purposes. It is possible that such a violation may be reported in the media
causing disrepute to the name of the company. It can also make investors in the share
market stay away from the company as it has ethical governance issues. The company will
face challenges in obtaining other government approvals when it will plan expansion as this
violation may have to be reported on the applications seeking approvals.
Overall
May be WXY would able to earn profit due to this plan in short run but it will tarnish the
image of the WXY which would hurt profitability in long run. Therefore, before taking any
decision on this plan, WXY should analyse both qualitative and qualitative factors.

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 30 FINAL EXAMINATION: MAY, 2023

8. (i) Analysis
The product costs per unit along with the respective contribution per unit may be
calculated either by employing an ABC approach or alternatively by using the
existing basis for the allocation of variable overhead cost.
The current scenario of product costing suggests that ‘O-2’ should be produced as
per the request of WIK because the contribution to sales ratio is 31.29%. However,
the current scenario of product costing also suggests that QOC should not
undertake production of ‘O-1’ at a selling price of `740 per unit since the estimated
contribution to sales ratio is 15.88% is lower than the desired contribution to sales
ratio of 28%.
Activity based costing approach ensures greater accuracy by using multiple cost
drivers and determines areas generating the greatest profit or loss. Table [(d)]
shows how much the contribution to sales (%) for each product changes when the
overhead allocation method changes to ABC. As shown in Table, contribution to
sales ratio on ‘O-1’ increased to 31.87% from 15.88% while contribution to sales
ratio on ‘O-2’ reduced from 31.87% to - 29.23%.
Thus, QOC should opt to produce ‘O-1’ for WIK as contribution to sales ratio is
31.87 which is higher than the desired one.
(ii) The term Activity based management (ABM) is used to describe the cost
management application of ABC. The use of ABC as a costing tool to manage costs
at activity level is known as Activity Based Cost Management (ABM). ABM is a
discipline that focuses on the efficient and effective management of activities as the
route to continuously improving the value received by customers and to improve
strategic and operational decisions in an organisation. Kaplan and Cooper divide
ABM into Operational and Strategic.
Operational ABM covers the actions that increase efficiency, lower cost (i.e. reduce
the cost driver rate of activities) and lead to higher revenue through better
resources utilisation- in short, the action required to do things right. In other words,
it is all about ‘doing things right’, using ABC information to improve efficiency. It also
helps in identifying and improving value added activities and removing non-value
added activities as to reduce cost without distorting product value.
Strategic ABM is about ‘doing the right things’. It uses ABC information to determine
which products is to be manufactured and which activities is to be used. QOC can
also use this for customer profitability analysis, identifying that which cu stomers are
the most profitable and focusing on them more.
A risk with ABM is that some activities have an implicit value are not reflected in a
financial value added to any product. For example, a good and pleasant working
environment can attract and retain the best human resources, but might not be
identified as value added activities in operational ABM.

© The Institute of Chartered Accountants of India

 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 31

ABM provides managers an understanding of costs and helps teams to make

certain decisions that benefit the whole organizations and not just their own
activities.
Therefore, some companies like QOC may adopt ABM to improve their operations
and obtain useful activity information.
Workings
(a) Direct Material Cost per unit
O-1 O-2
Total Costs (`) 22,50,000 750,000
Production units 10,000 20,000
Cost per unit (`) 225.00 37.50
(b) Direct Labour Cost per unit
O-1 O-2
Total Costs (`) 15,00,000 5,00,000
Production units 10,000 20,000
Cost per unit (`) 150.00 25.00
(c) Variable Overheads
Material Related
Overhead Cost = 30% × `120,00,000 = `36,00,000
Total Volume Factor
Particulars Units Required per unit Total Volume
O-1 10,000 5 50,000
O-2 20,000 8 1,60,000
Other 80,000 5 4.00,000
Total Volume Factor 6,10,000
Overhead per unit of volume = `36,00,000/ 6,10,000 = `5.90.
Therefore, Overhead Cost per product unit will be as follows:
O-1 5 `5.90 29.50
O-2 8 `5.90 47.20
Labour Related
Overhead Cost = 70% × `120,00,000 = `84,00,000

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 32 FINAL EXAMINATION: MAY, 2023

Total Operations Factor

Particulars Units Required per unit Total Volume
O-1 10,000 7 70,000
O-2 20,000 6 1,20,000
Other 80,000 5 4,00,000
Total Operations Factor 5,90,000
Overhead per operation = `84,00,000/ 5,90,000 = `14.24.
Therefore, Overhead Cost per product unit will be as follows:
O-1 7 `14.24 99.68
O-2 6 `14.24 85.44
(d) Product Information (by unit) is as follows:
O-1 O-2
Particulars Current ABC Current ABC
Scenario Basis Scenario Basis
Selling Price …(A) 740.00 740.00 151.00 151.00
Direct Material Cost 225.00 225.00 37.50 37.50
Direct Labour Cost 150.00 150.00 25.00 25.00
Variable Overhead Cost:
Material Related 90.00 29.50 15.00 47.20
Labour Related 157.50 99.68 26.25 85.44
Total Variable Cost …(B) 622.50 504.18 103.75 195.14
Contribution …(A) - (B) 117.50 235.82 47.25 (44.14)
Contribution to Sales (%) 15.88 31.87 31.29 (29.23)


Total Variable Overheads are 120L. Out of which 30% i.e. 36L relates to material and
70% i.e. 84L relates to Labour. Now allocate variable overheads into product units
using % of total direct material cost and total direct labour cost.
VO Material Related 40% of Material Cost
`{36L/ (22.5L + 7.5L + 60L)}
VO Labour Related 105% of Labour Cost
`{84L/ (15L + 5L + 60L)}
O-1 & O-2

© The Institute of Chartered Accountants of India

 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 33

VO Material Related `90 = 40% of `225;

`15 = 40% of `37.5
VO Labour Related `157.5 = 105% of `150;
`26.25 = 105% of `25

9. In this case we can see that there are two considerable sides of the question one is
customer satisfaction and another one is profitability. By adopting the proposed plans
firm manage to get higher customer satisfaction score card and it is expected that with
high customer satisfaction, the firm’s financial result will improve i.e. increase ROA.
However, increasing the customer satisfaction is costly. Plans which are used to increase
customer satisfaction will increase the cost of the firm. This additional cost will weaken
the firm’s ROA by lowing profit and increasing the asset base. The optimum level of
customer satisfaction is where the incremental benefits are equal to incremental costs of
increasing satisfaction.
While observing the pattern of data, the customer satisfaction has increased from 86
points to 91 points in first three quarters of 2019. At this level, the additional benefits
seem to more significant than the additional cost. However, in subsequent quarters,
additional cost has increased more rapidly than the additional benefits. Therefore, there
is decrease in ROA as we move forward on the index. However, toward the end of 2020,
we see a marginal increase in ROA. This is due to the lead-lag relation between
satisfaction and ROA. Increased satisfaction might take some more time, some more
quarters to result in higher ROA and the relation might not be linear. However, toward the
end of 2020, the customer satisfaction score stabilizes at current levels (93-96 points).
Overall, Kristin should not stop investing in superior customer experience, the lack of
apparent pattern in customer satisfaction and profitability could stem from several causes
as discussed above. Instead, firm should take decision considering current satisfaction
levels, the cost to increased satisfaction, and perception of the increased benefit.
Moreover, the firm should also consider the current sales, otherwise it might lose its
share to competitor if they do nothing!
10. Statement Showing Performance
July Aug Sep
Advertisement cost as a percentage of donation 2.5% 4% 3%
Target percentage of Advertisement cost of donation 3% 3% 3%
Welfare cost as a percentage of donation 82% 84% 89%
Target percentage of welfare cost as a percentage of donation 85% 85% 85%
Respite care provided 80% 87.98% 92%
Target percentage of respite care 90% 90% 90%

© The Institute of Chartered Accountants of India

 34 FINAL EXAMINATION: MAY, 2023

Comment
Total donation received `31,00,000 (=`7,00,000+`13,00,000+`11,00,000) have
exceeded the target `30,00,000. Though there is no fix trend of receiving fund while it is
noticeable that there were special fundraising activities in Aug which generated highest
receipt.
Advertisement costs have been within the target of 3% in July and Sep but exceeded the
target in Aug, more information is needed to establish why this occurred.
For the month of July and Aug the welfare cost are less than the target, while for the
month of September Olderhelp have exceeded the target of expenditure of cost.
The improvement in the respite care provided by Olderhelp has been steady and for the
month of september the target has exceeded.
11. The following is a possible Balanced Scorecard for “Hard Rock Coconut”
Financial Perspective Economic Value Added
Revenue per villa
Customer Perspective % Repeat customers
Number of customer complaints
Internal Business Service rating of spa
Staff hours per guest
% Cost spent for maintenance
Travel guide rank for restaurant
Innovation and Learning Employee retention
Number of new services offered
12. Higher contribution margin ratio exhibited by firm WG indicates that firm WG is following
a differentiation strategy while firm WD appears to be more focused on cost leadership.
This is also substantiated by higher fixed costs i.e. R&D, innovation etc. for each sale
` in firm WG.
Innovation allows a firm to command premium prices and earn more contribution per
sales `. However, innovation is expensive.
Firm WG Firm WD
Contribution margin/ Sales 0.55 0.40
Fixed costs/ Sales 0.35 0.30
Profit margin/ Sales 0.20 0.10

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 PAPER – 5 : STRATEGIC COST MANAGEMENT AND PERFORMANCE EVALUATION 35

13. Customer Profitability Statement

Particulars MT Ltd. KG Ltd. MG Bros.
Sales (units) 2,000 1,000 800
(`) (`) (`)
Sales Revenue ...(A) 2,20,00,000 1,10,00,000 88,00,000
Less: Average Variable Cost ...(B) 66,00,000 33,00,000 26,40,000
(`5,500 × 60% = 3,300 p.u.)
Contribution [70% of Sales] ...(A) - (B) 1,54,00,000 77,00,000 61,60,000
Less: Additional Overheads
Delivery Cost 2,00,000 1,60,000 1,80,000
(No. of K.M. × `200)
Emergency Delivery Cost 42,000 21,000 ----
(No. of Emergency Delivery × `21,000)
Order Processing Cost 24,000 12,000 48,000
(No. of Orders × `6,000)
Specific Discount 55,00,000 22,00,000 13,20,000
Sales Commission 33,00,000 11,00,000 4,40,000
Advertisement Cost 8,75,000 6,15,000 4,30,000
Profit per customer* 54,59,000 35,92,000 37,42,000
Profit Margin per customer* (%) 24.81% 32.65% 42.52%
Rank III II I
* Before Deducting General Fixed Overhead Cost
The Contribution Margin is 70% for each Customer but when the other Overheads Costs
per customer is included in the above Profitability Statement the Profitability of the three
Customers become different. MG Bros. is the most Profitable Customer.
14. Statement Showing “Pareto Analysis of Defects”
Defect Type No. of % of Total Cumulative Total
Items Items
Scratches on the surface 110 36.67% 36.67%
Rough edges of lenses 70 23.33% 60.00%
Non-uniform grinding of lenses 60 20.00% 80.00%

© The Institute of Chartered Accountants of India

 36 FINAL EXAMINATION: MAY, 2023

Frame colours-shade differences 25 8.33% 88.33%

Power mismatches 20 6.67% 95.00%
End frame not equidistant from the 10 3.33% 98.33%
centre
Spots/ Strain on lenses 5 1.67% 100.00%
300 100.00%
The company should focus on eliminating scratches on the surface, rough edges of
lenses and grinding of lenses related defects which constitute 80% portion, according to
Pareto Theory.
15. Calculation of labour hours required
No. of units Cumulative Average Time per unit (hrs.) Total Hours
1 10 10
2 8 16
4 6.4 25.6
8 5.12 40.96
Calculation of price to be quoted for 8 motors
`
Material Cost (8 × `2,500) 20,000
Labour Cost (40.96 × `175) 7,168
Overheads (7168 × 125%) 8,960
Total Cost 36,128
Add: Profit 20% on sales i.e., 25% on cost 9,032
Price to be quoted 45,160

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 PAPER – 6A to 6F [ELECTIVE PAPERS]

PAPER – 6 A : RISK MANAGEMENT

PAPER – 6 B : FINANCIAL SERVICES AND CAPITAL MARKET

PAPER – 6 C : INTERNATIONAL TAXATION

PAPER – 6 D : ECONOMIC LAWS

PAPER – 6 E : GLOBAL FINANCIAL REPORTING STANDARDS

PAPER – 6 F : MULTIDISCIPLINARY CASE STUDY

These papers are open book and case study based. Case Studies on all the above elective

subjects have been webhosted at the BoS Knowledge Portal.

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 PAPER 7: DIRECT TAX LAWS & INTERNATIONAL TAXATION

The provisions of direct tax laws, as amended by the Finance Act, 2022 and the significant notifications
and circulars issued upto 31.10.2022, are relevant for May, 2023 examination. The relevant assessment
year is A.Y.2023-24. The October, 2021 edition of the Study Material has to be read along with the
Supplementary Study Paper 2022 available at https://resource.cdn.icai.org/72303bos58234.pdf,
containing the provisions of direct tax laws which have been amended by the Finance Act, 2022 and
notifications and circulars issued upto 31.10.2022. The webhosted Judicial Update available at
https://resource.cdn.icai.org/72695bos58611.pdf is also relevant for May, 2023 Examination.

QUESTIONS AND ANSWERS

Case Scenario 1
Mr. Hari (aged 42 years) is a resident Indian who is a salaried employee. His salary income
(computed) for the P.Y.2022-23 is ` 17,50,000. His brother Mr. Rajesh (aged 45 years) is a
resident Indian carrying on retail trade business in which he incurred a loss of ` 5,25,000
(computed) for the P.Y.2022-23. He also trades in Virtual Digital Assets. The details of assets
transferred by Mr. Hari and Mr. Rajesh during the P.Y.2022-23 are given hereunder:
Particulars Mr. Hari Mr. Rajesh
Land and building ` `
Date of acquisition 1.4.2021
Cost of acquisition 20,00,000
Date of transfer 28.2.2023
Expenses on transfer 1,00,000
Sale consideration 30,00,000
Virtual Digital Asset
Number of units 40 50
Date of acquisition 1.4.2020 31.5.2020
Cost of acquisition (of 40 5,20,000 2,50,000
units/50 units, respectively)
Date of transfer 1.9.2022 1.3.2023
Expenses on transfer 2,000 1,000
Sale consideration (of 40 4,90,000 3,50,000
units/50 units, respectively)

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FMV on the date of transfer 5,10,000 4,10,000

(of 40 units/50 units,
respectively)
Person to whom Mr. Ganesh (who is Mr. Vallish (who is
transferred engaged in the engaged in the
business of trading in business of trading
foodgrains) in furniture)
Turnover of the transferee ` 90 lakh ` 15 lakh
(Mr. Ganesh and Mr.
Vallish) in the F.Y.2021-22
Turnover of the transferee ` 110 lakh ` 22 lakh
(Mr. Ganesh and Mr.
Vallish) in the F.Y.2022-23
During the P.Y.2022-23, Mr. Hari has dividend income of ` 10 lakh from shares of Indian
companies. He has paid interest of ` 4 lakh on loan borrowed for investment in shares. Both
Mr. Hari and Mr. Rajesh have deposited ` 1,50,000 in PPF. Mr. Hari has interest on savings
account of ` 22,000 while Mr. Rajesh has income from fixed deposits of ` 50,000.
CII for F.Y.2020-21 – 301; F.Y. 2021-22 – 317 and F.Y.2022-23 – 331.
On the basis of the facts given above, choose the most appropriate answer to Q.1 to Q.6
below, based on the provisions of the Income-tax Act, 1961 -
1. What is the tax treatment of loss from transfer of virtual digital asset by Mr. Hari?
(a) It is a long-term capital loss which cannot be set-off against capital gains on transfer
of land and building; it has to be carried forward for set-off against long-term capital
gains of the subsequent year.
(b) It is a short-term capital loss which can be set-off against capital gains on transfer
of land and building.
(c) Such loss cannot be set-off against any other source of income in the P.Y.2022-23
but can be carried forward for set-off against income from transfer of virtual digital
asset in the subsequent year
(d) Such loss can neither be set-off against any other source of income in the P.Y. 2022-
23 nor can it be carried forward to the subsequent year for set-off against income
from same source.
2. What is the income includible in the total income of Mr. Rajesh on account of transfer of
virtual digital asset?
(a) ` 99,000

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 40 FINAL EXAMINATION: MAY, 2023

(b) ` 1,00,000
(c) ` 1,59,000
(d) ` 1,60,000
3. What is the amount of tax deductible by Mr. Ganesh and Mr. Vallish under section 194S
from consideration paid to Mr. Hari and Mr. Rajesh for transfer of virtual digital asset?
(a) Nil, in both cases, since their turnover of P.Y.2021-22 does not exceed ` 100 lakhs
(b) ` 4,900 and Nil, respectively. Tax is deductible by Ganesh since his turnover for
P.Y.2022-23 exceeds ` 100 lakhs. No tax is deductible by Mr. Vallish since his
turnover does not exceed ` 100 lakhs.
(c) ` 5,100 and ` 4,100, respectively. Tax is deductible@1% of higher of actual
consideration and fair market value of virtual digital assets.
(d) ` 4,900 and ` 3,500, respectively. Tax is deductible@1% of sale consideration,
since the same is in excess of the prescribed threshold limits.
4. What is the income includible in the total income of Mr. Ganesh and Mr. Vallish on receipt
of virtual digital asset for inadequate consideration?
(a) ` 20,000 and Nil, respectively
(b) Nil, in both cases.
(c) ` 20,000 and ` 60,000, respectively.
(d) Nil and ` 60,000, respectively.
5. What is the total income (rounded off) of Mr. Hari for A.Y.2023-24? Assume that he has
not opted for section 115BAC.
(a) ` 32,23,670
(b) ` 32,82,000
(c) ` 33,02,000
(d) ` 33,12,000
6. What would be the tax payable (rounded off) by Mr. Rajesh for A.Y.2023-24? What is the
amount of business loss, if any, to be carried forward to A.Y.2024 -25? Assume that he
has not opted for section 115BAC.
(a) Tax payable Nil; business loss to be carried forward ` 3,75,000

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(b) Tax payable ` 30,890; business loss to be carried forward ` 4,75,000

(c) Tax payable ` 27,700; business loss to be carried forward ` 4,75,000
(d) Tax payable ` 45,820; business loss to be carried forward ` 4,75,000

Case Scenario 2
Helpage is a charitable trust registered under section 12AB, with its main object falling under
the residuary clause “any other object of general public utility”. During the P.Y.2022-23, it
received ` 80 lakh as voluntary contributions. The trust also borrowed ` 40 lakh on 1.7.2022
from Indian bank to purchase land for construction of an office building from where it can carry
out its functions. The trust repaid principal of ` 10 lakh to Indian bank on 31.3.2023. The trust
incurred revenue expenditure of ` 17 lakh and capital expenditure of ` 60 lakh towards purchase
of land for construction of office building during the P.Y.2022-23. Out of the revenue
expenditure of ` 17 lakh, ` 15 lakh was paid during the P.Y.2022-23 itself. Out of the remaining
` 2 lakh, ` 1 lakh was paid in April, 2023 and ` 1 lakh was paid in January, 2024. During the
P.Y.2022-23, the trust also paid ` 3 lakh towards revenue expenditure incurred during the
P.Y.2021-22 and ` 1 lakh towards revenue expenditure incurred during the P.Y.2020-21.
The trust also received ` 30 lakhs by way of corpus donations during the P.Y.2022-23, out of
which it deposited ` 25 lakhs in post office savings bank account (the balance in post office
savings bank account after such deposit is ` 32 lakhs). The trust also withdrew ` 5 lakhs from
post office savings bank account and applied towards purchase of land for construction of office
building.
The trust has donated to Eduaid, another trust registered under section 12AB with main object
of providing education to poor, ` 12 lakhs out of its current year income. The trust has applied
` 2 lakh out of its current year income for medical treatment of brother of the trustee, who met
with an accident while working in his factory.
On the basis of the facts given above, choose the most appropriate answer to Q.7 to Q.11
below, based on the provisions of the Income-tax Act, 1961 -
7. What would be the application of the trust for the P.Y.2022-23 (excluding unconditional
accumulation of 15%), assuming that it has fulfilled the relevant conditions stipulated
under section 12A?
(a) ` 43 lakhs
(b) ` 55 lakhs
(c) ` 56 lakhs

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 42 FINAL EXAMINATION: MAY, 2023

(d) ` 60 lakhs
8. If the trust does not get its accounts audited before the specified date referred to in
section 44AB, what would be the consequence?
(a) No deduction would be allowed if the trust fails get its accounts audited before the
specified date referred to in section 44AB.
(b) Capital expenditure incurred on account of purchase of land for construction of
office building would not be allowed.
(c) Amount donated to Eduaid would not be allowed.
(d) Both capital expenditure incurred on account of purchase of land and the amount
donated to Eduaid would not be allowed.
9. What is the amount of income which would be chargeable to tax under section 115BBI
for A.Y.2023-24?
(a) ` 2,00,000
(b) ` 5,00,000
(c) ` 7,00,000
(d) ` 12,00,000
10. What is the quantum of penalty which can be levied under section 271AAE? Assume that
the specified violation has occurred only once during the P.Y.2022-23.
(a) ` 2,00,000
(b) ` 4,00,000
(c) ` 5,00,000
(d) ` 7,00,000
11. Assuming for the purpose of this MCQ, that the trust has receipts of ` 22 lakh from trade,
commerce and business in P.Y.2022-23 while advancing the object of general public
utility, what is the tax consequence?
(a) The registration of the trust would be cancelled since it has violated the stipulated
condition for grant of exemption.
(b) The registration of the trust would not be cancelled though the trust would be
denied exemption for violating the stipulated condition.
(c) The trust would be denied exemption and the entire income of the trust would be

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chargeable to tax at the maximum marginal rate.

(d) Neither the registration of the trust would be cancelled nor would it be denied
exemption as it has not violated the stipulated condition.
12. Mr. Aadesh, a resident Indian, purchased an apartment in Ashiana Gardens, a gated
housing complex, from M/s. Ashiana Constructions Ltd., an Indian company, for ` 48
lakhs. In addition, he paid ` 1 lakh for club membership fees and ` 1 lakh for car parking
fee. The stamp duty value of the apartment on the date of transfer was ` 49.80 lakhs. Is
Mr. Aadesh liable to deduct tax at source in respect of this transaction? If so, how much?
(a) No, Aadesh is not liable to deduct tax at source, as both the consideration and the
stamp duty value do not exceed ` 50 lakh.
(b) No, Aadesh is not liable to deduct tax at source, as the lower of stamp duty value
and the consideration, is less than ` 50 lakh.
(c) Yes, Aadesh is liable to deduct tax of ` 49,800
(d) Yes, Aadesh is liable to deduct tax of ` 50,000
13. A Ltd. is a pharmaceutical company in which public are substantially interested. It issued
bonus shares to all its shareholders. The company gives free samples of medicines to
medical practitioners. B Ltd., trading in electronic goods, offers sales discount to its
customers from the listed retail price. B Ltd. also provides free air tickets to Bangkok to
its dealers on achieving sales targets. Are A Ltd. and B Ltd. required to deduct tax at
source under section 194R? If so, in respect of which transactions? Assume that all
transactions took place on or after 1.7.2022 and the value of such transaction(s) with each
resident exceeds the prescribed threshold limit under section 194R.
(a) A Ltd. is required to deduct tax at source on issue of bonus shares and distribution
of free samples of medicine. B Ltd. is required to deduct tax at source on sales
discount to customers and provision of free air tickets to dealers.
(b) A Ltd. is required to deduct tax on distribution of free samples of medicine but not
on issue of bonus shares. B Ltd. is required to deduct tax at source on sales
discount to customers and provision of free air tickets to dealers.
(c) A Ltd. is required to deduct tax on distribution of free samples of medicine but not
on issue of bonus shares. B Ltd. is required to deduct tax at source on provision of
free air tickets to dealers but not on sales discount to customers.
(d) A Ltd. is required to deduct tax on distribution of free samples of medicine but not
on issue of bonus shares. B Ltd. is not required to deduct tax at source on sales
discount to customers and provision of free air tickets to dealers.

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 44 FINAL EXAMINATION: MAY, 2023

14. Mr. Aakash filed his original return of income under section 139(1) for A.Y.2022 -23 and
A.Y.2023-24 on 31.7.2022 and 31.7.2023, respectively. He however filed an updated
return of income under section 139(8A) for A.Y.2022-23 on 31.10.2023. What is the time
limit for completion of assessment under section 143(3) in respect of A.Y.2022-23 and
A.Y.2023-24?
(a) 31.12.2023 and 31.12.2024, respectively

(b) 31.12.2024, in both cases

(c) 31.12.2025 and 31.12.2024, respectively
(d) 31.12.2024 and 31.12.2025, respectively.

15. Mr. Ram, a resident individual aged 40 years, has total income of ` 4,15,00,000 for
A.Y.2023-24 which comprises of salary (computed) of ` 1,80,00,000, long-term capital
gains of ` 60,00,000 u/s 112, long-term capital gains of ` 45,00,000 u/s 112A, short-term
capital gains of ` 1,00,00,000 u/s 111A, dividend of ` 10,00,000 and interest income of
` 20,00,000. What would be his tax liability for A.Y.2023-24, assuming that he does not
opt for section 115BAC?
(a) ` 1,17,01,690
(b) ` 1,17,13,650
(c) ` 1,10,65,990
(d) ` 1,10,77,950

16. M/s. Alpha & Co. is a partnership firm with five partners sharing profits and losses equally.
Its return for the A.Y.2023-24 was selected for scrutiny u/s 143(3). The controversy was in
relation to the loan of ` 50 lakhs from one partner, Mr. Raghav, credited in the books of
the firm. The firm’s explanation that Mr. Raghav has given a loan for ` 50 lakhs carrying
interest@12%, as approved by the partnership deed, was not accepted since Mr. Raghav’s
explanation for the source of income in his hands was not found satisfactory by the
Assessing Officer. Accordingly, the Assessing Officer treated the said amount as cash
credits in the hands of the firm, M/s. Alpha & Co., and subjected the same to tax@78%.
Discuss the correctness of the action of the Assessing Officer.
17. On 31.3.2023, A Ltd. has an outstanding interest liability of ` 3.50 crores towards loan
payable to IFCI Ltd., a public financial institution. On the same date, it issued debentures
to IFCI Ltd. in lieu of the outstanding interest and deducted the said interest while
computing profits and gains of business of A.Y.2023-24. The Assessing Officer, however,
rejected the deduction of interest on loan claimed by A Ltd. Discuss the validity of the
action of the Assessing Officer.

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18. Examine whether the following persons are required to file return of income for A.Y.2023 -
24, giving brief reasons for your answer –
(i) Mr. Albert, aged 31 years, whose turnover from business is ` 70 lakhs for the
P.Y.2022-23 and whose total income computed as per books of account is ` 2
lakhs. This is the first year of his business. He has no other income. He is not
claiming any deduction under Chapter VI-A or section 10AA.
(ii) Mr. Ashish, aged 42 years, has gross receipts of ` 5 lakhs from profession and
profits and gains of ` 2.50 lakhs (computed) from profession for the P.Y.
2022-23. In addition, he has interest of ` 4 lakhs on fixed deposits and ` 50,000
from savings bank account.
(iii) M/s. ABC & Co., a law firm, whose gross receipts from profession for the
P.Y.2022-23 is ` 9 lakhs.
(iv) XYZ (P) Ltd. which has incurred expenditure of an amount of ` 95,000 towards
consumption of electricity in the F.Y.2022-23.
(v) Mr. Vallish, aged 58 years, who has deposited ` 50 lakhs in his savings bank
account with SBI on 28th March, 2023. The said sum was received as a gift from
his son, Mr. Rishi, aged 30 years, who is employed in a company. Mr. Vallish
used the said sum to purchase a flat for ` 30 lakhs on 25 th April, 2023 for self-
residence. The balance money was transferred to a 1-year fixed deposit on 28 th
April, 2023. Mr. Vallish does not maintain any other bank account. He is not in
receipt of any other source of income other than interest on this fixed deposit.

19. The business premises of Mr. Arjun was searched on 17.4.2022 under section 132,
consequent to which the Assessing Officer has in his possession documents revealing
information pertaining to shares purchased in the P.Y.2016-17 for ` 23 lakhs and in the
P.Y.2017-18 for ` 25 lakhs.
(i) Can the Assessing Officer issue notice under section 148 for bringing to tax income
escaping assessment?
(ii) Would your answer change if the shares purchased in the P.Y.2016-17 were for ` 30
lakhs instead of ` 23 lakhs?
(iii) What would be your answer if, consequent to the search, the Assessing Officer has
in his possession, documents revealing information pertaining to expenditure of ` 52
lakhs incurred for the marriage of his daughter in the P.Y.2016-17 instead of the
information pertaining to shares? Examine.
20. ABC Co-operative society is engaged in marketing of agricultural produce grown by its
members. The profits and gains attributable to such business for A.Y.2023-24 is ` 60
lakhs (computed). It has employed ten new employees with salary of ` 20,000 p.m. on
1.5.2022. Salary is paid by account payee cheque. It gets its books of accounts audited
under section 44AB. It also earns interest of ` 32 lakhs on fixed deposits with banks.

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 46 FINAL EXAMINATION: MAY, 2023

Compute its total income and tax liability for A.Y.2023-24 and advise whether it should opt
for the special provisions under section 115BAD.
What would be your answer if ABC Co-operative society is a Co-operative bank engaged
in the business of banking, all other facts remaining the same? Assume that it is not a
primary agricultural credit society or a primary co-operative agricultural and rural
development bank.
21. Beta LLP, a limited liability partnership in India is engaged in export of computers through
two units, namely, Unit I and Unit II. Unit I is setup in Special Economic Zone (SEZ) and
Unit II is set up in a Domestic Tariff Area (DTA). The LLP furnishes the following information
relating to its 4th year of operation ended on 31-3-2023:
Items (Amount in `llakhs)
Unit I Unit II
Export Turnover 1800 1150
Domestic Turnover 300 650
Duty Draw Back 52 48
Profit on sale of Import Entitlement 33 Nil
Salaries paid 700 388
Other expenses 775 620
Net Profit of the year 710 840
Additional Information:
(i) Unit I:
- Expenses of ` 41 lakhs are disallowable under section 43B and export sales
proceeds received in India amounted to ` 1600 lakhs.
- Export sales of ` 1800 lakhs include freight and insurance of ` 300 lakhs
attributable to delivery outside India; and realization of ` 1600 lakhs includes
amount of insurance and freight charges of ` 180 lakhs attributable to delivery
outside India.
(ii) Unit II:
- Export sales received in India was ` 970 lakhs.
- Expenses charged which are to be disallowed as per section 40A(3) are of ` 55
lakhs.
Determine the total income and tax liability of Beta LLP for the A.Y.2023-24.

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22. SF Ltd. is engaged in manufacturing and sale of pharmaceutical products. The net profit
of the company as per statement of profit and loss for the year ended 31 st March, 2023 is
` 930 lakhs, after debiting or crediting the following items:
(i) The opening and closing stock for the year were ` 66 lakhs and ` 63 lakhs
respectively. Opening stock was overvalued by 10% and Closing stock was
undervalued by 10%.
(ii) Payment of ` 65 lakhs on 15 th October 2022 to a foreign company for obtaining know
how for a product launched in the month of November 2022.
(iii) Profit on sale of 2200 shares of M/s. MS Ltd., a listed company ` 2,97,000. These
shares were sold on 27.11.2022 for ` 220 per share. The highest price of MS Ltd.
quoted on the stock exchange as on 31.01.2018 was ` 195 per share. The said
shares were acquired for ` 85 per share on 12.08.2016. STT was paid both at the
time of purchase and sale of shares.
(iv) Electricity charges of ` 8 lakhs for the month of February 2023 and March 2023 was
unpaid up to the due date of filing of return.
(v) Loss of ` 2.2 lakhs due to hedging contract against future price fluctuations in respect
of import of raw material, used in the course of manufacturing.
(vi) Depreciation charged to the Statement of Profit and Loss was ` 48 lakhs.
(vii) Credits to statement of Profit and Loss include dividend of ` 5,20,000 received on
September 9, 2022 from a foreign company, in which it holds 30% voting rights.
(viii) ` 32 lakhs received from Zen Ltd. under an agreement in the form of non -compete
fees for not carrying out any business in a particular product.
(ix) Advance received amounting to ` 22 lakhs on proposed sale of land, forfeited due to
non-receipt of balance amount of ` 70 lakhs on time, as per terms of agreement. The
land was purchased during FY 2018-19.
(x) Excess on sale of unlisted shares - ` 18 lakhs (Sold on 18 th January 2023).
(xi) Loss of ` 2 lakh from hedging contracts entered into for mitigating the loss arising
due to fluctuation in foreign currency payment towards an imported machinery
purchased from Japan for ` 70 lakhs, which was installed and put to use in the month
of November 2022.
Additional Information:
(1) Normal depreciation allowable as per the Income-tax Act, 1961 ` 35 lakhs.

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(2) Depreciation on plant and machinery imported and installed during November 2022
and on technical know-how has not been considered while calculating normal
depreciation as per Income-tax Act, 1961 given in (1) above.
(3) During the year F.Y. 2022-23, the company has employed 59 additional employees.
All these employees contribute to a recognized provident fund. 36 out of 59
employees joined on 1-6-2022 on a salary of ` 15,000 per month, 18 joined on 1-7-
2022 on a salary of ` 35,200 per month, and 5 joined on 1-11-2022 on a salary of
` 22,000 per month. The salaries of 10 employees who joined on 1-6-2022 are being
settled by bearer cheques every month. Audit under section 44AB has been done
before the due date.
(4) The unlisted shares were acquired on 18.2.2018 for ` 80 lakhs.
(5) Cost Inflation Index F.Y. 2016-17 - 264, F.Y. 2017-18 - 272, F.Y. 2022-23- 331.
You are required to compute the total income and tax liability of the company for the
A.Y.2023-24 clearly stating the reasons for treatment of each of the items given above.
The return of income of the company is to be filed applying the provisions of section
115BAA.
23. (i) Gamma Inc., a US company, received income by way of fees for technical services
of ` 3 crore from Delta Ltd., an Indian company, in pursuance of an agreement
between Delta Ltd. and Gamma Inc. entered into in the year 2012, which is approved
by the Central Government. Expenses incurred for earning such income is ` 22 lakhs.
Examine the taxability of the above sum in the hands of Gamma Inc as per the
provisions of the Income-tax Act, 1961 and the requirement, if any, to file return of
income, assuming that Gamma Inc does not have a permanent establishment in India.
(ii) If Gamma Inc. has a permanent establishment in India and the contract/agreement
with Delta Ltd. and other Indian companies for rendering technical services is
effectively connected with such PE in India, examine the taxability based on the
following details provided –
Particulars Amount (`)
(1) Fees for technical services received from Delta Ltd. 3 crore
(2) Expenses incurred for earning such income referred to in 22 lakhs
(1) above
(3) Fees for technical services received from other Indian 5 crore
companies in pursuance of approved agreement entered
into between the years 2010 to 2015
(4) Expenses incurred for earning such income referred to in 35 lakhs
(3) above

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(5) Expenditure not wholly and exclusively incurred for the 12 lakhs
business of such PE [not included in (2) & (4) above]
(6) Amounts paid by the PE to HO (not being in the nature of 15 lakhs
reimbursement of actual expenses)
What are the other requirements, if any, under the Income-tax Act, 1961 in this case?
24. (i) Phi & Co. is engaged in providing scientific research services to several non-resident
clients. Such services are also provided to Zeta Inc., which guarantees 12% of the
total loans of Phi & Co. Examine whether transfer pricing provisions are attracted in
respect of this transaction.
(ii) Without prejudice to the answer to (i) above, assuming that transfer pricing provisions
are attracted in this case and that the Assessing Officer had made a primary
adjustment of ` 310 lakhs to transfer price in the P.Y.2020-21 vide order dated
1.4.2022 and the same was accepted by Phi & Co., what are the consequent
requirements as per the Income-tax Act, 1961 and the implications of non-compliance
with the said requirements? Assume that the transaction is denominated in Indian
Rupees and no amount has been repatriated upto 31.3.2023. The one year marginal
cost of fund lending rate of State Bank of India as on 1.4.2022 is 9%.
25. Mr. Hari, aged 32 years, is a resident individual having income from the following sources:
(i) Income from a sole-proprietary business in Pune = ` 40 lakhs.
(ii) Share of profit from a partnership firm in Mumbai = ` 25 lakhs.
(iii) Agricultural Income (gross) from coffee estates in Country X, a foreign country with
which India has no DTAA, CXD 36000. Tax deducted on the above income CXD 9,000
(iv) Brought forward business loss of F.Y.2021-22 in Country X was CXD 5,000 which is
not permitted to be set off against other income as per the laws of that country.
(v) Mr. Hari has deposited ` 1,50,000 in public provident fund and paid medical insurance
premium of ` 28,000 by account payee cheque to insure his health. He has also paid
` 52,000 as insurance premium to insure the health of his mother and father, who are
resident Indians aged 65 years and 68 years, respectively. He also incurred ` 20,000
on the medical treatment of his dependent sister, who is a person with disability. His
sister does not claim deduction under section 80U.
Compute total income and net tax liability of Mr. Hari for the A.Y. 2023-24, after providing
for deduction under section 91, assuming that 1 CXD = ` 50 and that he does not opt for
section 115BAC.

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SUGGESTED ANSWERS

MCQ No. Most Appropriate Answer MCQ No. Most Appropriate Answer
1. (d) 9. (c)
2. (b) 10. (a)
3. (d) 11. (d)
4. (d) 12. (d)
5. (d) 13. (c)
6. (c) 14. (b)
7. (b) 15. (c)
8. (d)

16. As per section 68, where any sum is found credited in the books of an assessee maintained
for any previous year and the assessee offers no explanation about the nature and source
or the explanation offered is not satisfactory in the opinion of the Assessing Officer, the
sum so credited may be charged as income of the assessee of that previous year.
The first proviso to section 68 provides that where the sum so credited consists of loan or
borrowing or any such amount, by whatever name called, any explanation offered by the
assessee in whose books such sum is credited would not be deemed to be satisfa ctory,
unless -
- the person in whose name such credit is recorded in the books of such assessee also
offers an explanation about the nature and source of such sum so credited and
- in the opinion of the Assessing Officer, such explanation has been found t o be
satisfactory.
Such cash credits would be taxable@78% [tax@60% under section 115BBE plus
surcharge@25% plus cess@4%].
Since Mr. Raghav was unable to explain the source of the sum of ` 50 lakhs in his hands
to the satisfaction of the Assessing Officer, such sum credited in the books of Alpha & Co.
as loan from Mr. Raghav would be treated as cash credit in the hands of the firm and
subject to tax@78%. Accordingly, the action of the Assessing Officer, in this case, is
correct.
17. As per section 43B, interest payable by the assessee on interest on loan from a public
financial institution is allowable as deduction only in the year in which such interest is
actually paid by the assessee. The proviso to section 43B permits deduction if such sum

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 PAPER – 7: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 51

is paid on or before the due date of filing of return under section 139(1) in respect of the
previous year in which the liability to pay such sum was incurred.
Explanation 3C to section 43B clarifies that if any sum payable by the assessee as interest
on any such loan is converted into a loan or borrowing or advance or debenture on any
other instrument by which the liability to pay is deferred to a future date, the interest
so converted and not “actually paid” shall not be deemed as actual payment, and hence,
would not be allowed as deduction.
In this case, since A Ltd. has converted the interest of ` 3.50 crores payable to IFCI Ltd.
on loan borrowed from it, the interest so converted into debentures and not actually paid
shall not be deemed as actual payment, and hence, would not be allowed as deduction
while computing its profits and gains of business for A.Y.2023-24. Accordingly, the action
of the Assessing Officer in rejecting the deduction of interest on loan claimed by A Ltd.
while computing its profits and gains of business for A.Y.2023-24, is correct.
18. Requirement of filing return of income
(i) Yes, Mr. Albert is required to file his return of income for A.Y.2023-24.
As per section 139(1)(b), an individual is required to file his return if his total
income, without giving effect to deductions under, inter alia, Chapter VI-A and
section 10AA, exceeds the basic exemption limit. In this case, Mr. Albert’s total
income of ` 2,00,000 is lower than the basic exemption limit of ` 2,50,000.
However, such person referred to in section 139(1)(b) who is not required to file
his return on account of his total income being lower than the basic exemption
limit would be required to file return of income if, inter alia, his turnover in business
exceeds ` 60 lakhs. In this case, since Mr. Albert’s turnover from business for the
P.Y.2022-23 is ` 70 lakhs, he has to file return of his income for A.Y.2023-24.
(ii) Yes, Mr. Ashish is required to file his return of income for A.Y.2023-24.
Mr. Ashish’s total income for A.Y.2023-24 without giving effect to Chapter VI-A
deductions is ` 7 lakhs [` 2.50 lakhs from profession + ` 4 lakhs interest on fixed
deposits + ` 0.50 lakhs interest on savings bank account], which exceeds the
basic exemption limit of ` 2,50,000. Hence, he is required to file his return of
income for A.Y.2023-24 as per section 139(1)(b).
Note - The threshold limit of ` 10 lakhs for gross receipts in profession has to be
looked into only in a case where an individual referred to in section 139(1)(b) is
not required to file his return of income thereunder i.e., only if Ashish’s total
income without giving effect to Chapter VI-A deductions is lower than the basic
exemption limit.

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 52 FINAL EXAMINATION: MAY, 2023

(iii) Yes, M/s. ABC & Co. is required to file its return of income for A.Y.2023-24.
As per section 139(1)(a), a firm is compulsorily required to file its return of income.
The threshold limit of ` 10 lakhs for gross receipts in profession is relevant only
for a person other than a company or a firm.
(iv) Yes, XYZ (P) Ltd. is required to file its return of income for A.Y.2023-24.
As per section 139(1)(a), a company has to mandatorily file its return of income.
The condition of filing of return of income where expenditure towards consumption
of electricity exceeds ` 1 lakh applies to a person other than a company or a firm.
(v) Yes, Mr. Vallish is required to file his return of income for A.Y.2023-24.
Gift of ` 50 lakhs received from son is not taxable under section 56(2)(x) in the
hands of Mr. Vallish, since his son is his relative, and gifts from a relative are
excluded from the applicability of section 56(2)(x). The only income of Mr. Vallish
for the P.Y.2022-23 would be interest on savings account for a period of 4 days
from 28 th March, 2023 to 31st March, 2023 on ` 50 lakhs, which would be lower
than the basic exemption limit. As per section 139(1)(b), an individual is required
to file his return if his total income exceeds the basic exemption limit. In this case,
Mr. Vallish’s total income is lower than the basic exemption limit of ` 2,50,000.
However, such person referred to in section 139(1)(b) who is not required to file
his return on account of his total income being lower than the basic exemption
limit would be required to file return of income if, inter alia, the deposit in his
savings account is ` 50 lakhs or more during the previous year.
Since a deposit of ` 50 lakhs has been made in the savings account of Mr. Vallish
in the P.Y.2022-23, he is required to file his return of income for A.Y.2023-24.

19. Where search is initiated under section 132, the Assessing Officer shall be deemed to have
information suggesting that income has escaped assessment. In such a case, where
search was initiated on or after 1.4.2021, the relevant assessment year can be any
assessment year which is not time-barred under section 149. As per section 149(1)(a), the
time limit for issue of notice under section 148 for the relevant assessment year is upto 3
years from the end of the relevant assessment year. However, if the Assessing Officer
has in his possession, books of account which reveal that income chargeable to tax,
represented in the form of an asset or expenditure in respect of a transaction or in relation
to an event or occasion or an entry or entries in the books of account, which has escaped
assessment amounts to or is likely to amount to ` 50 lakh or more, notice can be issued
beyond 3 years but not more than 10 years from the end of the relevant assessment year.
For this purpose, “asset” includes immovable property, being land or building or both,
shares and securities, loans and advances, deposits in bank account.

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 PAPER – 7: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 53

(i) In this case, since search was conducted under section 132 on 17.4.2022, the
Assessing Officer is deemed to have information suggesting that income chargeable
to tax has escaped assessment in the case of Mr. Arjun. In this case, the Assessing
Officer has in his possession, books of account which reveal that incom e chargeable
to tax, represented in the form of an asset, has escaped assessment. Shares are
included in the definition of “asset”. However, the income chargeable to tax,
represented in the form of shares, which has escaped assessment amounts to ` 48
lakhs (i.e., ` 23 lakhs + ` 25 lakhs). Since the amount is lower than ` 50 lakhs,
notice cannot be issued beyond 3 years from the end of the relevant assessment
year. In this case, the relevant assessment years are A.Y.2017-18 (relevant to
P.Y.2016-17) and A.Y.2018-19 (relevant to P.Y.2017-18). The three-year period for
A.Y.2017-18 and A.Y.2018-19 expired on 31.3.2021 and 31.3.2022, respectively.
Accordingly, notice cannot be issued under section 148 in April, 2022 due to expiry
of the three-year time limit under section 149(1)(a).
(ii) In this case, the income chargeable to tax, represented in the form of shares, which
has escaped assessment amounts to ` 55 lakhs (i.e., ` 30 lakhs + ` 25 lakhs). Since
the amount is more than ` 50 lakhs, an extended period of 10 years from the end of
the relevant assessment year (i.e., from the end of 31.3.2018 and 31.3.2019) would
be available under section 149(1)(b) for issue of notice, which has not expired in April,
2022. Therefore, Assessing Officer can issue notice under section 148 for A.Y.2017 -
18 and A.Y.2018-19 with the prior approval of specified authority.
(iii) If the Assessing Officer has in his possession documents revealing information
pertaining to expenditure of ` 52 lakhs incurred for the marriage of his daughter in
the P.Y.2016-17, then, the income escaping assessment, represented in the form of
expenditure in relation to an event or occasion would be ` 52 lakhs. Therefore, he
can issue notice under section 148 in April, 2022 (with the prior approval of specified
authority), since an extended period of 10 years from the end of the relevant
assessment year (i.e., end of 31.3.2018) would be available under section 149(1)(b),
which has not expired as on that date.
Note – Notice cannot be issued under section 148 in respect of the relevant assessment
year beginning on or before 1.4.2021, if on the date of issue of such notice, the time limit
prescribed for issue of notice under erstwhile section 153A has expired. In cases (ii) and
(iii) above, the time limit for issue of notice under erstwhile section 153A in case of relevant
assessment year beginning on or before 1.4.2021, has also not expired in April, 2022.
Since search had taken place in the P.Y.2022-23 relevant to A.Y.2023-24, the Assessing
Officer could have issued notice for six assessment years immediately preceding
A.Y.2023-24 (i.e., from A.Y.2017-18 to A.Y.2022-23) under the erstwhile section 153A.

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 54 FINAL EXAMINATION: MAY, 2023

20. Computation of total income & tax liability of ABC Co-operative Society for A.Y.2023-
24 (under the regular provisions of the Act)
Particulars ` `
Profits and gains of business or profession 60,00,000
Income from other sources – Interest on bank fixed 32,00,000
deposits
Gross Total Income 92,00,000
Less: Deductions under Chapter VI-A
Deduction u/s 80JJAA [30% of ` 20,000 x 10 6,60,000
employees x 11 months]
Deduction u/s 80P 60,00,000
[ABC Co-operative society is entitled for deduction
under section 80P.on the whole of the amount of
profits and gains of business attributable to the
activity of marketing of agricultural produce grown by
its members]
66,60,000
Total Income 25,40,000
Tax liability:
Upto ` 10,000 – 10% 1,000
` 10,000 – ` 20,000 – 20% 2,000
` 20,000 – ` 25,40,000 – 30% 7,56,000
7,59,000
Add: Health and education cess@4% 30,360
Tax liability 7,89,360
Alternate Minimum Tax
Total Income 25,40,000
Add: Deduction under section 80JJAA 6,60,000
Adjusted Total Income 32,00,000
Alternate Minimum Tax@15% of ` 32,00,000 4,80,000
Add: Health and education cess@4% 19,200
Alternate Minimum Tax 4,99,200
Since AMT is lower than the tax payable under the regular provisions of the Act,
the tax liability of the co-operative society would be ` 7,89,360.

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 PAPER – 7: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 55

Computation of total income & tax liability of ABC Co-operative Society under
section 115BAD for A.Y.2023-24

Particulars ` `
Profits and gains of business or profession 60,00,000
Income from other sources – Interest on bank fixed deposits 32,00,000
Gross Total Income 92,00,000
Less: Deductions under Chapter VI-A
Deduction u/s 80JJAA [30% of ` 20,000 x 10 6,60,000
employees x 11 months]
Deduction u/s 80P [Not allowable where the co-
operative society opts for section 115BAD] -
6,60,000
Total Income 85,40,000
Tax liability
22% of ` 85,40,000 18,78,800
Add: Surcharge@10% 1,87,880
20,66,680
Add: Health and education cess@4% 82,667
Tax liability 21,49,347
Tax liability (rounded off) 21,49,350
Since the tax liability under section 115BAD is higher than the tax liability under the
regular provisions of the Act, ABC Co-operative Society should not opt for section
115BAD.
If ABC Co-operative Society is engaged in the business of banking
Computation of total income & tax liability of ABC Co-operative Bank for
A.Y.2023-24 (under the regular provisions of the Act)
Particulars ` `
Profits and gains of business or profession 60,00,000
Income from other sources – Interest on bank fixed
deposits 32,00,000
Gross Total Income 92,00,000
Less: Deductions under Chapter VI-A
Deduction u/s 80JJAA [30% of ` 20,000 x 10 6,60,000
employees x 11 months]

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 56 FINAL EXAMINATION: MAY, 2023

Deduction u/s 80P [Not allowable in case of co- Nil

operative banks]
6,60,000
Total Income 85,40,000
Tax liability:
Upto ` 10,000 – 10% 1,000
` 10,000 – ` 20,000 – 20% 2,000
` 20,000 – ` 85,40,000 – 30% 25,56,000 _______
25,59,000
Add: Health and education cess@4% 1,02,360
Tax liability 26,61,360
Alternate Minimum Tax
Total Income 85,40,000
Add: Deduction under section 80JJAA 6,60,000
Adjusted Total Income 92,00,000
Alternate Minimum Tax@15% of ` 92,00,000 13,80,000
Add: Health and education cess@4% 55,200
Alternate Minimum Tax 14,35,200
Since AMT is lower than the tax payable under the regular provisions of the Act,
the tax liability of the co-operative bank would be ` 26,61,360.

Computation of total income & tax liability of ABC Co-operative Bank under section
115BAD for A.Y.2023-24
Particulars ` `
Profits and gains of business or profession 60,00,000
Income from other sources – Interest on bank fixed deposits 32,00,000
Gross Total Income 92,00,000
Less: Deductions under Chapter VI-A
Deduction u/s 80JJAA [30% of ` 20,000 x 10 6,60,000
employees x 11 months]
Deduction u/s 80P [Not allowable] _
6,60,000
Total Income 85,40,000

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 PAPER – 7: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 57

Tax liability
22% of ` 85,40,000 18,78,800
Add: Surcharge@10% 1,87,880
20,66,680
Add: Health and education cess@4% 82,667
Tax liability 21,49,347
Tax liability (rounded off) 21,49,350

Since the tax liability under section 115BAD is lower than the tax liability under the regular
provisions of the Act, ABC Co-operative Bank should opt for section 115BAD. However,
once it has exercised this option for P.Y.2022-23 relevant to A.Y.2023-24, it would apply
for subsequent assessment years as well and cannot be withdrawn for the same or any
other previous year.
21. Computation of total income and tax liability of Beta LLP for A.Y.2023-24
Particulars ` (in lakh)
Profit from Unit I [` 710 lakhs + ` 41 lakhs, being disallowance u/s 43B] 751.00
Profit from Unit II [` 840 lakhs + ` 55 lakhs, being disallowance u/s 895.00
40A(3)]
1646.00
Less: Deduction under section 10AA [See Working Note below] 525.40
Total Income 1120.60
Particulars ` (in lakh)
Tax on total income@30% 336.18
Add: Surcharge@12%, since total income > `1 crore 40.34
376.52
Add: Health and Education cess@4% 15.06
Tax liability (as per normal provisions) 391.58
Computation of Adjusted total income and Alternate Minimum tax of Beta LLP
as per the provisions of section 115JC for A.Y. 2023-24
Particulars ` (in lakh)
Total income as per the normal provisions 1120.60
Add: Deduction under section 10AA 525.40
Adjusted Total Income 1646.00
Tax@18.5% of Adjusted Total Income 304.51

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 58 FINAL EXAMINATION: MAY, 2023

Add: Surcharge @12% as the adjusted total income is > ` 1 crore 36.54
341.05
Add: Health and Education cess@4% 13.64
Alternate Minimum Tax as per section 115JC 354.69
Since the tax liability as per the normal provisions of the Act is more than the alternate
minimum tax payable, the total income as per normal provisions shall be liable to tax
and the tax liability for A.Y. 2023-24 shall be ` 391.58 lakhs.
Working Note:
Computation of deduction under section 10AA in respect of Unit I located in a SEZ
Particulars ` (in lakh)
Total turnover of Unit I 1800.00
(` 1800 lakhs + ` 300 lakhs) – ` 300 lakhs, being freight and insurance
attributable to delivery outside India included therein. Since such freight
and insurance has been excluded from export turnover, the same has
to be excluded from total turnover also 1
Export Turnover of Unit I
Export sale proceeds received in India 1600.00
Less: Insurance and freight attributable to delivery outside India not
includible in export turnover 180.00
1420.00
Profit “derived from” Unit I
Net profit for the year 710.00
Add: Disallowance under section 43B 41.00
751.00
Less: Items of business income which are in the nature of ancillary
profits and hence, do not constitute profit ‘derived from’ business
for the purpose of deduction under section 10AA
Duty drawback 52
Profit on sale of import entitlement 33
85.00
666.00

1
CIT v. Dell International Services India P. Ltd. (2012) 206 Taxman 107 (Karnataka)

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 PAPER – 7: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 59

Deduction under section 10AA

Export turnover of Unit I
Profit derived from Unit I  x 100%
Total turnover of Unit I 525.40
= 100% of 666 х 1420/1800 =

22. Computation of total Income and tax liability of SF Ltd. for the A.Y. 2023-24 under
section 115BAA
Particulars Amount (in `)
I Profits and gains of business and profession
Net profit as per Statement of profit and loss 9,30,00,000
Add: (i) Stock valuation adjustments
Overvaluation of opening stock [` 66,00,000 x 10/110] 6,00,000
Undervaluation of closing stock [` 63,00,000 x 10/90] 7,00,000
Add: Items debited but to be considered
separately or to be disallowed
(ii) Payment towards know-how for a product 65,00,000
[Payment towards obtaining know-how is
capital expenditure i.e., an intangible asset
and eligible for depreciation. Since the same is
debited in statement of profit and loss, it has to
be added back]
(iv) Electricity charges unpaid upto the due of -
filing return of income
[Electricity charges are not included within the
scope of section 43B2, therefore no
disallowance would be attracted. Since the
same is already debited in statement of profit
and loss, no further adjustment is required]
(v) Loss due to hedging contract in respect of -
raw material
[Loss due to hedging contract against future
price fluctuations in respect of import of raw
material for manufacturing is not deemed to be
speculative transaction. Hence, the same is

2 CIT vs Andhra Ferro Alloys (P.) Ltd. (2012) 349 ITR 255 (AP)

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 60 FINAL EXAMINATION: MAY, 2023

allowable as deduction while computing

income from manufacturing. Since the same is
already debited in statement of profit and loss,
no further adjustment is required]
(vi) Depreciation as per books of account 48,00,000
(xi) Loss from hedging contract in respect of 2,00,000
imported machinery from Japan
[Loss from hedging contracts entered for
mitigating loss arising due to fluctuation in
foreign currency payment towards import of
machinery has to be added to the actual cost
of the machinery as per section 43A. Since the
same is wrongly debited to statement of profit
and loss, same has to be added back].
AI(3) Salary paid to employees through bearer 15,00,000
cheques
[Salary paid through bearer cheques (10
employees x ` 15,000 x 10 months) will attract
disallowance u/s 40A(3) and hence, the same
has to be added back] _ ___ 1,43,00,000
10,73,00,000
Less: Items credited but chargeable to tax under
other head/ expenses allowed but not debited
(iii) Profit on sale of shares of M/s MS Ltd. 2,97,000
[Capital Gain arising on sale of shares of MS Ltd.
is taxable under the head “Capital Gains”. Since
the profit on sale of shares has been credited to
the statement of profit and loss, the same has to
be deducted while computing business income]
(vii) Dividend received from foreign company 5,20,000
[Dividend income from foreign company is
taxable under the head “Income from other
sources”. Since the said dividend has been
credited to the statement of profit and loss, the
same has to be deducted while computing
business income]
(viii) Non-compete fees for not carrying out any -
business in a particular product
[Non-compete fees for not carrying out any
business in a particular product would be

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 PAPER – 7: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 61

chargeable to tax as business income under

section 28(va). Since the same is already
credited in statement of profit and loss, no
further adjustment is required]
(ix) Advance forfeited in respect of sale of land 22,00,000
[With effect from A.Y.2015-16, advance
forfeited in respect of sale of land due to non-
receipt of balance amount of consideration
would be taxable under the head “Income from
other sources”. Since the same has been
credited to the statement of profit and loss, the
same has to be deducted while computing
business income]
(x) Profit on sale of unlisted shares 18,00,000
[Profit on sale of unlisted shares is taxable
under the head “Capital Gains”. Since profits
have been credited to the statement of profit
and loss, the same has to be deducted while
computing business income] ________ 48,17,000
10,24,83,000
Less: Depreciation as per Income-tax Act, 1961 35,00,000
[other than imported plant & machinery and
know-how]
Deprecation on: `
Plant & Machinery imported 70,00,000
Add: Loss on hedging contract 2,00,000
72,00,000
- Normal depreciation @7.5% of 5,40,000
` 72,00,000 [only 50% of the 15%
allowable since machinery is put to use for
less than 180 days]
- Additional depreciation not allowable, -
since company is opting for section
115BAA
Know-how @ 12.5% of ` 65,00,000 [50% of
25% since know how was obtained on 15 th
October 2022, which is used for less than 180
days] 8,12,500 48,52,500
9,76,30,500

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 62 FINAL EXAMINATION: MAY, 2023

II Capital Gains
Long term capital gain on sale of unlisted shares
[Since shares were held for more than 24 months]
Full value of consideration 98,00,000
[` 18,00,000 + ` 80,00,000]
Less: Indexed cost of acquisition
[80,00,000 x 331/272] 97,35,294
64,706
Long term capital gain on sale of listed shares of
M/s. MS Ltd. [Since shares were held for more than
12 months] `
Full value of consideration 4,84,000
(2,200 x ` 220)
Less: Cost of acquisition 4,29,000 55,000
[Higher of (i) and (ii) below]
(i) Actual cost of acquisition ` 1,87,000(2,200 x
` 85)
(ii) ` 4,29,000, being lower of fair market value as
on 31.1.2018 (i.e., ` 4,29,000, being 2,200 x
195) and sale consideration (i.e., ` 4,84,000)
1,19,706
III Income from Other Sources
Advance forfeited on sale of land 22,00,000
Dividend from foreign company 5,20,000
27,20,000
Gross Total Income 10,04,70,206
Less: Deduction under section 80JJAA 11,70,000
[Deduction under section 80JJAA is allowable
though company is opting for concessional tax rate
under section 115BAA. For computation of amount,
see working note below]
Total income 9,93,00,206
Total income (rounded off) 9,93,00,210

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Computation of tax liability of SF Ltd. for the A.Y. 2023-24 u/s 115BAA
Particulars `
Tax on long-term capital gains u/s 112A would be nil, since such gain Nil
does not exceed ` 1 lakh
Tax on long term capital gain @20% under section 112 on unlisted 12,941
shares [` 64,706 x 20%]
Tax on remaining income including dividend received from foreign
company @22% remaining income is ` 9,91,80,504 [` 9,93,00,210 –
` 55,000 – ` 64,706] 2,18,19,711
2,18,32,652
Add: Surcharge@10% 21,83,265
2,40,15,917
Add: Health and education cess@4% 9,60,637
Tax liability 2,49,76,554
Tax liability (rounded Off) 2,49,76,550
Working Note - Computation of deduction u/s 80JJAA
No of eligible additional employees [59 (-) 18 (-) 5 = 36] 36
[18 employees who joined on 1.7.2022 do not qualify as “additional
employees” since their monthly emoluments exceed ` 25,000 and 5
employees who joined on 1.11.2022 also do not qualify as additional
employees, since they have not employed for more than 240 days
during the P.Y.2022-23]. In respect of these 5 employees deduction in
respect of their additional employee cost would eligible for deduction
in subsequent previous year.
Additional employee cost means the total emoluments paid or payable
to additional employees employed during the P.Y.2022-23. However,
the additional employee cost in respect of 10 employees who joined
on 1.6.2022, whose salary is paid by bearer cheque would be Nil.
Additional employee cost
[` 15,000 x 26 employees (36 - 10) x 10 months] = ` 39,00,000 ` 39,00,000
Eligible deduction = 30% of ` 39,00,000 ` 11,70,000
23. (i) Where Gamma Inc., a US company, does not have a PE in India
In this case, Gamma Inc. would be eligible for a concessional rate of tax@10% (plus
surcharge@2% and HEC@4%) of ` 3 crore under section 115A on the fees for
technical services received from Delta Ltd., an Indian company, since the same is in
pursuance of an agreement entered into after 31.3.1976, which has been approved

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 64 FINAL EXAMINATION: MAY, 2023

by the Central Government. No deduction, however, would be allowed in respect of

expenditure of ` 22 lakhs incurred to earn such income. Also, Gamma Inc. would be
exempted from filing its return of income in India under section 139 if tax deductible
at source@10% under section 115A (plus surcharge@2% and HEC@4%) has been
fully deducted from such income. If, however, tax has not been deducted or has been
deducted at a lower rate, if any, specified in the DTAA with US, then, benefit of
exemption from filing of return of income would not be available.
(ii) Where Gamma Inc., a US company, has a PE in India and rendering technical
services is effectively connected with the PE in India.
Since Gamma Inc. carries on business through a PE in India, in pursuance of an
agreement with Delta Ltd. or other Indian companies entered into after 31.3.2003,
and the income by way of fees for technical services is effectively connected with the
PE in India as per section 44DA, such income shall be computed under the head
“Profits and gains of business or profession” in accordance with the provisions of the
Income-tax Act, 1961 and subject to tax@40% plus surcharge@2% and HEC@4%.
Accordingly, expenses of ` 57 lakhs (` 22 lakhs + ` 35 lakhs) incurred for earning
fees for technical services of ` 8 crore (` 3 crore + ` 5 crore) is allowable as deduction
therefrom. However, expenditure of ` 12 lakhs which is not incurred wholly and
exclusively for the business of the PE and the amount of ` 15 lakhs paid by the PE
to the HO is not allowable as deduction.
Gamma Inc. is required to maintain books of account u/s 44AA and get the same
audited under section 44AB and furnish report on or before the specified date i.e.,
date one month prior to the due date for furnishing the return of income u/s 139(1).
24. (i) Provision of scientific research services falls within the scope of international
transaction under section 92B. Phi & Co. and Zeta Inc. are deemed to be associated
enterprises as per section 92A(2)(d), since Zeta Inc. guarantees not less than 10%
of the total borrowings of Phi & Co. Since there is an international transaction
between associated enterprises, transfer pricing provisions are attracted in this case.
(ii) Where the Assessing Officer has made a primary adjustment of ` 310 lakhs to the
transfer price and the same has been accepted by Phi & Co., secondary adjustment
has to be made in the books of account as per section 92CE, since the primary
adjustment made by the Assessing Officer and accepted by Phi & Co exceeds ` 100
lakhs and the primary adjustment is in relation to P.Y.2020-21. The excess money
determined based on the primary adjustment has to be repatriated to India within 90
days from the date of order, failing which the same would be deemed as an advance
and interest would be attracted at the one-year marginal cost of fund lending rate of
State Bank of India as on 1.4.2022 + 3.25%, since the international transaction has
been denominated in Indian Rupees. In this case, since the excess money has not
been repatriated within 90 days, the same would be deemed to be an advance made

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 PAPER – 7: DIRECT TAX LAWS AND INTERNATIONAL TAXATION 65

by Phi & Co. to Zeta Inc. and interest would be attracted@12.25% (9% + 3.25%) from
1.4.2022, being the date of the order of the Assessing Officer. The interest would
amount to ` 37.975 lakhs (i.e., 12.25% of ` 310 lakhs) for the P.Y.2022-23.
Alternatively, Phi & Co. can opt to pay additional income-tax@20.9664% (tax@18%
plus surcharge@12% plus cess@4%) on ` 310 lakhs, which would amount to ` 65
lakhs. In such a case, secondary adjustment is not required to be made.
25. Computation of total income and net tax liability of Mr. Hari for A.Y. 2023-24
Particulars ` `
Profits and gains from business and profession
Income from sole proprietary concern in India 40,00,000
Share of profit from a partnership firm in India of ` 25
lakhs, is exempt Nil
Business profit 40,00,000
Less: Business Loss3 in Country X (CXD 5000 x 2,50,000
` 50/CXD) 37,50,000
Income from Other Sources
Agricultural income from coffee estates in Country X, is
taxable in India (CXD 36000 x ` 50/CXD) 18,00,000
Gross Total Income 55,50,000
Less: Deductions under Chapter VI-A
Under section 80C [deposit in PPF] 1,50,000
Under section 80D 75,000
[Medical insurance premium paid ` 28,000 for self,
restricted to ` 25,000; ` 52,000 for senior citizen parents,
restricted to ` 50,000]
Under section 80DD
[Flat deduction of ` 75,000 irrespective of the
expenditure incurred on dependent sister, being a person
with disability] 75,000
3,00,000
Total Income 52,50,000

3Since the eight year has not expired from the assessment year in which such business loss was incurred,
such business loss can be set-off against current year business income.

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 66 FINAL EXAMINATION: MAY, 2023

Tax on ` 52,50,000 [(30% x ` 42,50,000) plus 13,87,500

` 1,12,500]
Add: Surcharge@10%, since total income exceeds ` 50 1,38,750
lakh but does not exceed ` 1 crore.
15,26,250
Add: HEC@4% 61,050
15,87,300
Average rate of tax in India 30.23%
[i.e., ` 15,87,300/` 52,50,000 x 100]
Average rate of tax in Country X 25%
[i.e., CXD 9000/CXD 36000]
Doubly taxed income [` 18,00,000 – ` 2,50,000] 15,50,000
Rebate under section 91 on ` 15,50,000@25%
(lower of average Indian tax rate and rate of tax in
Country X) 3,87,500
Net tax liability [` 15,87,300 – ` 3,87,500] 11,99,800
Note: Since Mr. Hari is resident in India for the P.Y.2022-23, his global income would be
subject to tax in India. He is eligible for deduction under section 91 since the following
conditions are fulfilled:-
(a) He is a resident in India during the relevant previous year.
(b) Agricultural income accrues or arises to him outside India in Country X during that
previous year.
(c) Such agricultural income is not deemed to accrue or arise in India during the
previous year.
(d) The income in question i.e., agricultural income, has been subjected to income -tax
in Country X in his hands and he has paid tax on such income in Country X.
(e) There is no agreement under section 90 for the relief or avoidance of double taxation
between India and Country X, where the income has accrued or arisen.

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 PAPER-8: INDIRECT TAX LAWS

QUESTIONS

(1) All questions should be answered on the basis of position of (i) GST law as
amended by the Finance Act, 2022 including significant notifications and circulars
and other legislative amendments made, up to 31 st October, 2022 and (ii) customs
law as amended by the Finance Act, 2022 including significant notifications and
circulars and other legislative amendments made, up to 31 st October, 2022.
(2) Unless otherwise specified, the section numbers and rules referred herein pertain
to the Central Goods and Services Tax Act, 2017 and the Central Goods and
Services Tax Rules, 2017 respectively.
(3) The GST rates for goods and services mentioned in various questions are
hypothetical and may not necessarily be the actual rates leviable on those goods
and services. The rates of customs duty are also hypothetical and may not
necessarily be the actual rates. Further, GST compensation cess should be
ignored in all the questions, wherever applicable.
Mr. X is engaged in the business of supplying FMCG (Fast-moving consumer goods) to the
customers on retail as well as wholesale basis. X has its head office located in Delhi and
branches in Rajasthan and Madhya Pradesh. It is registered under GST in all the three
States.
During the month of January, following transactions were undertaken:
(i) X supplied goods to its agent A from its factory located in Rajasthan. A sold them to the
unrelated wholesalers in the State of Rajasthan by issuing an invoice in his own name.
The goods of like kind and quality were sold by A to an unrelated customer for
` 1,00,000. A also purchased goods of like kind and quality from another independent
supplier for ` 80,000 on the same day.
(ii) X appointed a consultancy firm – Rudra Consultancy registered in Rajasthan- to
incorporate a new company and to undertake all the legal formalities for incorporation of
said company, for an agreed consideration of ` 35,000. Rudra Consultancy paid the
legal fee of ` 15,000 to the relevant Government Department during the process of
incorporation of the company. The GST invoice was issued by Rudra Consultancy on X’s
branch in Rajasthan for an amount of ` 35,000 without any breakup of its own service
charges and other legal expenses or fees.
(iii) X imported certain digital data warehousing services from Mazon Inc. located in USA.
The amount charged by Mazon Inc. was ` 5,00,000. The services were for personal
consumption of X and were not used in course or furtherance of business of X. The
transaction was billed to X on the GST registration number of Rajasthan.

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 68 FINAL EXAMINATION: MAY, 2023

(iv) X imported certain online gaming services from Balibaba Inc. located in China. The
services were provided to X on free of cost basis. The open market value of such
services was ` 1,00,000. These services were also for personal consumption of X and
were received on a device whose internet protocol address was registered in India. The
transaction was billed to X on the GST registration number of Rajasthan.
(v) Madhya Pradesh branch of X purchased goods worth ` 15,00,000 (liable to GST @ 5%)
from a Madhya Pradesh dealer and procured certain input services worth ` 5,00,000
(liable to GST @ 28%) in Madhya Pradesh. In the later part of the month, X sold these
goods for ` 18,00,000 (liable to GST @ 5%).
(vi) Rajasthan branch paid the sponsorship fee of ` 5,00,000 to Ganga Solutions, registered
in Rajasthan, for an entertainment event organised by Ganga Solutions in Haryana.
The opening balance of input tax credit of X in the States of Delhi, Rajasthan and Madhya
Pradesh is nil. Further, there is no other inward or outward supply transaction for X in the
months of January apart from the aforementioned transactions. Subject to the information
given above, assume that all the other conditions necessary for availing ITC have been
fulfilled.
All the above transactions are exclusive of GST, wherever applicable. GST is applicable in
the aforesaid case scenario at the following rates unless otherwise specified:
I. Intra-State supply – 9% CGST and 9% SGST
II. Inter-State supply – 18% IGST
Based on the facts of the case scenario given above, choose the most appropriate answer to
Q. Nos. 1 to 5 below:
1. In respect of the goods supplied by X to its agent A in Rajasthan, the value of supply
shall be __________.
(a) ` 1,10,000
(b) ` 72,000
(c) Nil, since the supply between agent and principal without consideration is not a supply.
(d) ` 80,000 or at the option of X - ` 90,000
2. GST payable on the services of incorporation of the company provided by Rudra
Consultancy to X is _____________.
(a) ` 6,300 and full input tax credit of the same is available to X
(b) ` 3,600 and full input tax credit of the same is available to X
(c) ` 6,300 and input tax credit of ` 3,600 is available to X
(d) ` 6,300 and no input tax credit is available to X

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3. Which of the following statements is true in respect of import of digital data warehousing
services and online gaming services?
(a) IGST of ` 1,08,000 is payable by X under reverse charge mechanism and full input tax
credit of the same is available to X.
(b) Service providers i.e. Mazon Inc. and Balibaba Inc. need to obtain registration as
OIDAR (Online Information Database Access and Retrieval) service providers and pay
IGST of ` 1,08,000 and no input tax credit is available to X.
(c) IGST of ` 90,000 is payable by X under reverse charge mechanism and no input tax
credit of the same is available to X.
(d) No GST is payable since import of services by individuals for personal use is specifically
exempt under GST.
4. Which of the following statements is true in respect of the sponsorship fee paid by
Rajasthan branch of X to Ganga Solutions?
(a) X is liable to pay IGST of ` 90,000.
(b) Ganga Solutions is liable to pay IGST of ` 90,000.
(c) X is liable to pay CGST and SGST of ` 45,000 each.
(d) Ganga Solutions is liable to pay CGST and SGST of ` 45,000 each.
5. Compute the net GST liability of X in Madhya Pradesh and amount of input tax credit
refund, if any, available to X.
(a) Net GST liability is ` 15,000 and eligible refund amount under inverted duty
structure is ` 1,40,000.
(b) Net GST payable is nil and eligible refund amount under inverted duty structure is
` 1,25,000.
(c) Net GST payable is nil and no refund is available.
(d) Net GST payable is nil and eligible refund amount under inverted duty structure is
` 75,000.
6. Dhoomketu, registered under GST in Virar, Maharashtra, is appointed as a del-credre
agent by Bigbang Ltd. He sells shoes to his customers locally within the same State.
Bigbang Ltd. is also registered under GST in Maharashtra.
During the current financial year, Bigbang Ltd. supplied taxable goods worth ` 9.50 crore
whose open market value is ` 9.82 crore, from its Navi Mumbai unit to Dhoomketu.
Dhoomketu has further sold these goods for ` 10.10 crore by raising invoices using his
own GSTIN.
Dhoomketu has received a commission of ` 65 lakh from Bigbang Ltd. during the year
and has guaranteed the payment of the value of such goods from the customers to

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 70 FINAL EXAMINATION: MAY, 2023

Bigbang Ltd. Dhoomketu has also provided financial assistance in the form of larger
credit period to his customers, on which he has also earned interest of ` 25 lakh.
Compute the value of supply of Bigbang Ltd. and Dhoomketu for the current financial
year assuming that both of them wish to adopt minimum value of supply to the extent
possible.
(a) Bigbang Ltd.: ` 9.09 crore and Dhoomketu: ` 11.00 crore
(b) Bigbang Ltd.: ` 10.05 crore and Dhoomketu: ` 10.85 crore
(c) Bigbang Ltd.: ` 10.15 crore and Dhoomketu: ` 10.85 crore
(d) Bigbang Ltd.: ` 10.15 crore and Dhoomketu:` 75.00 lakh
7. Which of the following activity is liable to GST?
(i) Supply of food by a hospital to patients (not admitted) or their attendants or visitors
(ii) Transportation of passengers by non-air-conditioned railways
(iii) Services by a brand ambassador by way of folk-dance performance where
consideration charged is ` 1,40,000
(iv) Transportation of agriculture produce by air from one place to another place in India
(v) Services by way of loading, unloading, packing, storage or warehousing of rice
Choose the most appropriate option.
(a) (i), (v)
(b) (iii), (iv), (v)
(c) (i), (iii), (iv)
(d) (iv), (v)
8. Which of the following statements is correct in relation to value of imported goods
determined under rule 4 of the Customs Valuation (Determination of Value of Imported
Goods) Rules, 2007, i.e. transaction value of identical goods?
(a) The transaction value of identical goods in a sale at any commercial level and in
substantially the same quantity as the goods being valued shall be used to
determine the value of imported goods.
(b) The transaction value of identical goods in a sale at same commercial level and in
any quantity as the goods being valued shall be used to determine the value of
imported goods.
(c) The transaction value of identical goods in a sale at same commercial level and in
substantially the same quantity as the goods being valued shall be used to
determine the value of imported goods.

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 PAPER – 8: INDIRECT TAX LAWS 71

(d) The transaction value of identical goods in a sale at any commercial level and in
any quantity as the goods being valued shall be used to determine the value of
imported goods.
9. Safeguard duty cannot be imposed if:
(a) the article on which it is proposed to be imposed originates from a developed
country provided its share of imports is not more than 3% of total imports of that
article in India.
(b) the article on which it is proposed to be imposed originates from a developing
country provided its share of imports is not more than 5% of total imports of that
article in India.
(c) the article on which it is proposed to be imposed originates from more than one
developing country and its aggregate share of imports from developing countries
each with less than 3% share taken together does not exceed 9% of total imports of
that article into India.
(d) the article is imported by a person in special category State.
10. Jankinandan Associates, a proprietorship firm in Lucknow registered under GST,
manufactures three taxable products ‘Zeta’, ‘Sigma’ and ‘Omega’. The following
information has been provided by Jankinandan Associates for a particular tax period.
(i) ‘Omega’ and ‘Zeta’ are sold in the domestic market as well as exported outside
India. The domestic turnover (excluding export sales) of ‘Zeta’ and ‘Omega’ are
` 21 lakh and ` 15 lakh respectively. Export turnover of ‘Zeta’ with payment of IGST
(not eligible to avail benefit of merchant exports under Notification No. 41/2017) is
` 3.75 lakh. ‘Omega’ worth ` 15 lakh is exported.
(ii) Tax on ‘Sigma’ is payable under reverse charge. ‘Sigma’ is being sold only
domestically and the domestic turnover of ‘Sigma’ is ` 9 lakh.
(iii) The firm is also engaged in providing taxable consultancy services. Consultancy
services of ` 30 lakh have been provided to unrelated clients located in foreign
countries. In all cases, consideration has been received in convertible foreign
exchange.
(iv) The firm sold the shares held by it for ` 375 lakh which were earlier purchased at a
price of ` 360 lakh.
(v) Due to shortage of funds, it sold one of its factory buildings for ` 180 lakh
(excluding stamp duty of ` 3.50 lakh, being 2% of value). The entire consideration
is received post issuance of completion certificate; building was occupied thereafter .
(vi) The firm earned an interest of ` 6 lakh on the money invested in fixed deposits with
Gaba Bank.

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 72 FINAL EXAMINATION: MAY, 2023

The details of the inputs/input services availed by the firm during the said tax period are
as under:
(i) The firm received legal services from an advocate in relation to product ‘Zeta’ for a
consideration of ` 5.25 lakh.
(ii) Remaining inputs and input services availed during the tax period worth ` 52.50
lakh and ` 22.50 lakh respectively have been commonly used for supply of goods
and services mentioned above.
You are required to compute the net GST liability of Jankinandan Associates, payable
from Electronic Credit Ledger and/or Electronic Cash Ledger, as the case may be, for the
given tax period using the above-mentioned information.
Note: All the above transactions are exclusive of GST, wherever applicable. Assume that
rates of GST on inward and outward supply of goods and services are 12% and 18%
respectively (Ignore bifurcation of CGST, SGST or IGST for the sake of simplicity).
Subject to the information given above, assume that all the other conditions necessary
for availing ITC have been fulfilled.
Turnover of Jankinandan Associates was ` 72 lakh in the preceding financial year.
Unless otherwise mentioned, exports are made under letter of undertaking.
11. Jigyasa Ltd. has multiple wholesale outlets of toys in Mumbai, Maharashtra. It receives
an order for toys worth ` 1,20,000 (inclusive of GST leviable @ 18%) from Upasana,
owner of a retail toy store in Delhi. While checking the stock, it is found that order worth
` 55,000 can be fulfilled from the company’s Bandra (Mumbai) store and remaining
goods worth ` 65,000 can be sent from its Goregaon (Mumbai) store.
Both the stores are instructed to issue separate invoices for the goods sent to Upasana.
The goods are transported to Upasana in Delhi, in a single conveyance owned by Jaidev
Transporters.
You are required to advise Jigyasa Ltd. with regard to issuance of e-way bill(s).
12. Vividh Pvt. Ltd. is engaged in supplying various services in Bangalore. It is registered in
the State of Karnataka. It has furnished the following information for the month of June:
S.No. Particulars Amount (`)
(i) Services provided by way of fumigation in a warehouse of 13,00,000
agricultural produce.
(ii) Service of transportation of passengers by metered cabs 5,40,000
provided through Webcastle Ltd., an electronic commerce
operator (ECO)
(iii) 4 buses each with a seating capacity of 72 passengers given 6,00,000
on hire to State Transport Undertaking (STU). Such buses
run on a route and timing as decided by STU.

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 PAPER – 8: INDIRECT TAX LAWS 73

(iv) Goods transport services received from GTA for transporting 1,80,000
the goods to be used in respect of the buses given on hire to
STU. Tax on such services is payable @ 12%.
Compute net GST payable in cash by Vividh Pvt. Ltd. for the month of June assuming
that the above amounts are exclusive of GST and rate of GST, wherever applicable, is
18% unless otherwise mentioned.
13. Swasthya Nursing Home, a clinical establishment, offers the following services:
(i) Rooms provided to the in-patients where the room charges per day are ` 6,500.
(ii) Plastic surgery conducted to repair cleft lip of a new born baby.
(iii) Air ambulance services to transport critically ill patients from distant locations to
Swasthya Nursing Home.
(iv) Supply of food to the in-patients as per the advice of the doctor/nutritionist from its
restaurant – Annapurna Bhawan - located in the basement of Swasthya Nursing
Home. The food is prepared by its employees and nothing is outsourced to a ny
third-party vendors.
(v) Homeopathic medical treatment.
Swasthya Nursing Home also operates a cord blood bank which provides services in
relation to preservation of stem cells.
Determine whether GST is payable in respect of each of the above services provided by
Swasthya Nursing Home.
14. Alpha is a manufacturer and supplier of a machine in India. Gamma of USA helps Alpha
in selling the machine by identifying client in USA, viz., Beta who wants to purchase this
machine and helps in finalizing the contract of supply of machine by Alpha to Beta.
Gamma charges Alpha for his services of locating Beta and helping in finalizing the sale
of machine between Alpha and Beta, for which Gamma invoices Alpha and is paid by
Alpha for the same. Determine the place of supply of the services provided by Gamma to
Alpha.
15. Answer the following questions elaborating the relevant provisions of section 44:
(a) Who is required to furnish the annual return and what is the due date for furnishing
the same?
(b) What is the prescribed form for furnishing annual return/statement?
(c) Who is required to furnish a self-certified reconciliation statement?
16. Nitya Associates is engaged in supplying taxable services in Kerela. The Assistant
Commissioner of Central Tax passed an adjudication order under section 73 which was
received by Nitya Associates on 18th October. In the said order, GST liability of
` 6,00,000 (CGST + SGST) was decided alongwith interest payable @ 18% p.a. for

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 74 FINAL EXAMINATION: MAY, 2023

number of delayed days and a penalty of ` 60,000. Nitya Associates was in complete
disagreement with said order. So, it filed an appeal before the Appellate Authority on
31st October.
Determine the amount of pre-deposit to be made by Nitya Associates for filing the
appeal.
Whether your answer would be different if Nitya Associates appeals only against part of
the demanded amount, say ` 4,00,000 and admits the balance liability of tax amounting
to ` 2,00,000 and proportionate penalty arising from the said order?
17. Robert & Sons is engaged in the supply of taxable goods. It enters into a contract to
supply a consignment of said goods. However, since it is unable to determine the value
of the goods to be supplied by it, it applies for payment of tax on such goods on a
provisional basis along with the required documents in support of its request. On 7th
January, an order allowing payment of tax on provisional basis was passed by the proper
officer indicating the value on the basis of which the assessment is allowed on
provisional basis and the amount for which the bond is to be executed and security is to
be furnished.
Robert & Sons complies with the same and supplies the goods on 29th January thereafter
paying the tax on provisional basis in respect of said consignment on 19th February.
Consequent to the final assessment order passed by the proper officer on 18th March, a
tax of ` 1,80,000 becomes due on the consignment. Robert & Sons pays the tax due on
9thApril.
Determine the interest payable, if any, by Robert & Sons in the above case.
18. Jumbo Steels imported heavy machine from USA. The cost of the machine at the factory
of the exporter was US $ 10,000. The transport charges of US $ 500 were incurred from
the factory of exporter to the port for shipment. At the load port, handling charges of
US $ 50 were paid for loading the machine in the ship. Freight charges from exporting
country to India were US $ 1,000. Jumbo Steels paid a buying commission of US $ 50.
From the information given above, you are required to compute the assessable value of
the imported goods under the Customs Act, 1962 assuming that actual insurance
charges paid are not ascertainable and exchange rate is 1$ = ` 70.
19. Balu Ltd. imported Super Kerosene Oil (SKO) and stored it in a warehouse. An ex -bond
bill of entry for home consumption was filed and duty was paid as per the rate prevalent
on the date of presentation of such bill of entry; and the order for clearance for ho me
consumption was passed.
On account of highly combustible nature of SKO, the importer made an application to
permit the storage of such kerosene oil in the same warehouse until actual clearance for
sale/use. The application was allowed. However, the rate of duty increased when the
goods were actually removed from the warehouse.

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The Department demanded the differential duty. Balu Ltd. challenged the demand. Will
it succeed? Discuss briefly taking support of decided case law, if any.
20. ABC Ltd. imported an offset printing machine from Germany for ` 5 crores and the bill of
entry for home consumption was cleared in April on payment of duty. However, due to
certain technical glitches the said machine could not start functioning and the said
machine was sent-back to the supplier for repairs in May.
The manufacturer of machinery in Germany had made necessary repairs and had sent
back the machine again to ABC Ltd. Accordingly, ABC Ltd. re-imported the machine
without any re-manufacturing or reprocessing in September.
Since the machine was having manufacturing defect, the repairs were carried out by the
machine manufacturer without charging any amount for the repairs. However, the fair
cost of repairs carried out (including cost of material consumed during repairs of ` 70
lakh), would have been ` 90 lakh. Actual insurance and freight charges incurred were
` 7.5 lakh each side from India to Germany and from Germany to India.
Assume that the rate of basic customs duty is 10%, social welfare surcharge is 10% and
integrated tax is 18%.
You are required to compute the amount of customs duty payable (if any) on
re-importation of the machine.

SUGGESTED ANSWERS

1. (d)
2. (a)
3. (c)
4. (d)
5. (c)
6. (a)
7. (c)
8. (c)
9. (c)
10. (i) Computation of GST payable on outward supply
Particulars Value (`) GST (`)
Turnover of ‘Zeta’ [liable to GST @ 12%] 21,00,000 2,52,000
Turnover of ‘Sigma’ [Tax on ‘Sigma’ is payable under 9,00,000 Nil

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 76 FINAL EXAMINATION: MAY, 2023

reverse charge by the recipient of such goods]

Turnover of ‘Omega’ [liable to GST @ 12%] 15,00,000 1,80,000
Export of ‘Zeta’ with payment of IGST @ 12% 3,75,000 45,000
Export of ‘Omega’ 15,00,000 Nil
[Export of goods is a zero rated supply in terms of
section 16(1)(a) of the IGST Act, 2017. A zero rated
supply can be supplied without payment of tax under
a LUT in terms of section 16(3)(a) of that Act.]
Consultancy services provided to independent 30,00,000 Nil
clients located in foreign countries.
[The activity is an export of service in terms of
section 2(6) of the IGST Act, 2017 as the supplier of
service is located in India; the recipient of service is
located outside India; place of supply of service is
outside India (in terms of section 13(2) of the IGST
Act, 2017); payment for the service has been
received in convertible foreign exchange or in Indian
rupees wherever permitted by the Reserve Bank of
India; and supplier of service and recipient of service
are not merely establishments of distinct person.
[Export of services is a zero rated supply in terms of
section 16(1)(a) of the IGST Act, 2017. A zero rated
supply can be supplied without payment of tax under
a LUT in terms of section 16(3)(a) of that Act.]
Sale of shares 3,75,00,000 Nil
[Shares are neither goods nor services in terms of
section 2(52) and 2(102). Hence, sale of shares is
neither a supply of goods nor a supply of services
and hence, is not liable to any tax.]
Sale of building 1,80,00,000 Nil
[Sale of building is neither a supply of goods nor a
supply of services in terms of para 5 of Schedule III
to the CGST Act, provided the entire consideration
has been received after issue of completion
certificate by the competent authority or after its
occupation, whichever is earlier. Hence, the same is
not liable to GST]

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 PAPER – 8: INDIRECT TAX LAWS 77

Interest received on investment in fixed deposits with 6,00,000 Nil

a bank
[Exempt vide Notification No. 12/2017 CT (R) dated
28.06.2017]
Total GST payable on outward supply 4,77,000

(ii) Computation of common credit attributable to exempt supplies during the tax
period
Particulars (`)
Common credit on inputs and input services [Tax on inputs - 10,35,000
` 6,30,000 (` 52,50,000 x 12%) + Tax on input services –
` 4,05,000 (` 22,50,000 x 18%)]
Common credit attributable to exempt supplies (rounded off) 6,97,742
= Common credit on inputs and input services x (Exempt turnover
during the period / Total turnover during the period)
= ` 10,35,000 x ` 1,87,75,000/ ` 2,78,50,000
Exempt turnover = ` 1,87,75,000 and total turnover = ` 2,78,50,000
[Refer note below]

Note:
As per section 17(3), value of exempt supply includes supplies on which the recipient is
liable to pay tax on reverse charge basis, transactions in securities, sale of land and,
subject to clause (b) of paragraph 5 of Schedule II, sale of building. As per explanation
to Chapter V of the CGST Rules, the value of exempt supply in respect of land and
building is the value adopted for paying stamp duty and for security is 1% of the sale
value of such security.
Further, as per explanation to rule 42, the aggregate value of exempt supplies inter alia
excludes the value of services by way of accepting deposits, extending loans or
advances in so far as the consideration is represented by way of interest or discount,
except in case of a banking company or a financial institution including a non-banking
financial company, engaged in supplying services by way of accepting deposits,
extending loans or advances.
Therefore, value of exempt supply in the given case will be the sum of value of output
supply on which tax is payable under reverse charge (` 9,00,000), value of sale of
building (` 3,50,000 / 2 x 100 = ` 1,75,00,000) and value of sale of shares (1% of
` 3,75,00,000 = ` 3,75,000), which comes out to be ` 1,87,75,000.
Total turnover = ` 1,94,00,000 (` 21,00,000 + ` 9,00,000 + ` 15,00,000 + ` 3,75,000 +
` 15,00,000 + ` 30,00,000 + ` 1,75,00,000 + ` 6,00,000 + ` 3,75,000)

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 78 FINAL EXAMINATION: MAY, 2023

(iii) Computation of ITC available in the Electronic Credit Ledger of the

Jankinandan Associates for the tax period
Particulars (`)
Common credit on inputs and input services 10,35,000
Add: Legal services used in the manufacture of taxable product 94,500
‘Zeta’
ITC available in the Electronic Credit Ledger 11,29,500
Less: Common credit attributable to exempt supplies during the tax 6,97,742
period
[As calculated in above table]
Net ITC available 4,31,758

(iv) Computation of net GST liability of Jankinandan Associates for the tax period
Particulars (`)
GST payable on outward supply [As computed earlier] 4,77,000
Less: Input tax credit (ITC) [As computed earlier] 4,31,758
GST payable from Electronic Cash Ledger [A] 45,242
Add: GST payable on legal services under reverse charge 94,500
[` 5,25,000 X 18%] [B]
[Tax on legal services provided by an advocate to a business
entity, is payable under reverse charge by the business entity in
terms of Notification No. 13/2017 CT (R) dated 28.06.2017.
Further, such services are not eligible for exemption provided
under Notification No. 12/2017 CT (R) dated 28.06.2017 as the
turnover of the business entity (Jankinandan Associates) in the
preceding financial year exceeds ` 20 lakh.]
Total GST paid from Electronic Cash Ledger [A] + [B] 1,39,742
[As per section 49(4) amount available in the electronic credit
ledger may be used for making payment towards output tax.
However, tax payable under reverse charge is not an output tax in
terms of section 2(82). Therefore, input tax credit cannot be used
to pay tax payable under reverse charge and thus, tax payable
under reverse charge will have to be paid in cash.]

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 PAPER – 8: INDIRECT TAX LAWS 79

11. Jigyasa Ltd. would be required to prepare two separate e-way bills since each invoice
value exceeds ` 50,000 and each invoice is considered as one consignment for the
purpose of generating e-way bills.
The FAQs on E-way Bill issued by CBIC clarify that if multiple invoices are issued by the
supplier to one recipient, that is, for movement of goods of more than one invoice of
same consignor and consignee, multiple e-way bills have to be generated. In other
words, for each invoice, one e-way bill has to be generated, irrespective of the fact
whether same or different consignors or consignees are involved.
Multiple invoices cannot be clubbed to generate one e-way bill. However, after
generating all these e-way bills, one consolidated e-way bill can be prepared for
transportation purpose, if goods are going in one vehicle.
12. Computation of gross GST liability of Vividh Pvt. Ltd.
Particulars GST (`)
Services by way of fumigation in a warehouse of agricultural produce. 2,34,000
[Taxable since the exemption earlier available with respect to the [13,00,000
services provided by way of fumigation in a warehouse of agricultural ×18%]
produce has been withdrawn.]
Service of transportation of passengers by metered cabs through Nil
Webcastle Ltd., an ECO
[Taxable since services of transport of passengers by metered cabs
supplied through ECO are not exempt from GST. However, tax on such
services shall be paid by ECO. Therefore, Vividh Pvt. Ltd. is not liable to
pay GST on the same.]
Buses with seating capacity of 72 passengers each given on hire to State Nil
Transport Undertaking
[Services by way of giving on hire to a state transport undertaking (STU),
a motor vehicle meant to carry more than 12 passengers, are exempt
from GST irrespective of whether such vehicles are run on routes and
timings as decided by the State Transport Undertakings.]
Total GST payable 2,34,000
Less: Goods transport services availed Nil
[Since GST is payable @ 12% on goods transport services, GST is
payable by the GTA1 under forward charge mechanism and not by Vividh
Pvt. Ltd.

1 It has been most logically assumed that since the applicable rate of GST is 12%, GTA must have exercised
the option to itself pay GST on the services supplied by it.

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 80 FINAL EXAMINATION: MAY, 2023

Further, ITC of the same is not available as such services are exclusively
used for supplying the exempt services of giving on hire the buses to
STU.]
Net GST payable in cash 2,34,000

13. Health care services provided by a clinical establishment, an authorised medical

practitioner or para-medics are exempt from GST vide Notification No. 12/2017 CT (R)
dated 28.06.2017. In light of the same, the eligibility to exemption in respect of each
service offered by Swasthya Nursing Home is examined below:
(i) Not Exempt. Exemption available to health care services provided by a clinical
establishment shall not apply to the services provided by a clinical establishment by
way of providing room [other than Intensive Care Unit (ICU)/Critical Care Unit
(CCU)/Intensive Cardiac Care Unit (ICCU)/Neo natal Intensive Care Unit (NICU)]
having room charges exceeding ` 5000 per day to a person receiving health care
services.
(ii) Exempt. Health care service does not include, inter alia, cosmetic or plastic
surgery, except when undertaken to restore or to reconstruct anatomy or functions
of body affected due to congenital defects, developmental abnormalities, injury or
trauma.
Therefore, plastic surgeries will not be entitled to the said exemption, but the plastic
surgery conducted to repair a cleft lip will be eligible for exemption as it reconstructs
anatomy or functions of body affected due to congenital defects (cleft lip).
(iii) Exempt. Health care service includes services by way of transportation of the
patient to and from a clinical establishment. Thus, air ambulance service to
transport critically ill patients to Swasthya Nursing Home would be eligible for
exemption under the said notification.
(iv) Exempt. Circular No. 32/06/2018 GST dated 12.02.2018 has clarified that food
supplied by the hospital canteen to the in-patients as advised by the
doctor/nutritionists is a part of composite supply of health care services and is not
separately taxable. Thus, it is exempt from GST.
(v) Exempt. Since Homeopathy is a recognized system of medicine in terms of section
2(h) of Clinical Establishments Act, 2010, the same would be eligible for exemption
under the said notification.
Further, exemption available to services provided by cord blood banks by way of
preservation of stem cells or any other service in relation to such preservation has been
withdrawn and thus, said services are no longer exempt from GST. Therefore, services
provided in relation to preservation of stem cells by the cord blood bank operated by
Swasthya Nursing Home will be liable to GST.

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 PAPER – 8: INDIRECT TAX LAWS 81

14. As per section 13(8)(b) of the IGST Act, 2017, the place of supply of the intermediary
services shall be the location of the supplier of services. ‘Intermediary’ has been defined
in of section 2(13) of the IGST Act, as a broker, an agent or any other person, by
whatever name called, who arranges or facilitates the supply of goods or services or
both, or securities, between two or more persons, but does not include a person who
supplies such goods or services or both or securities on his own account.
Further, the concept of intermediary services has been clarified vide Circular No.
159/15/2021 GST dated 21.09.2021 as follows:
(i) Minimum of three parties and two distinct supplies: There must be minimum of
three parties, two principals transacting in the supply of goods or services or
securities (the main supply) and one intermediary arranging or facilitating (the
ancillary supply) the said main supply.
(ii) Intermediary service provider to have the character of an agent, broker or any
other similar person: Intermediary only arranges or facilitates the main supply and
does not himself provide the main supply. Thus, the role of intermediary is only
supportive.
(iii) Does not include a person who supplies such goods or services or both or
securities on his own account: It implies that in cases wherein the person
supplies the main supply, either fully or partly, on principal-to-principal basis, the
said supply cannot be covered under the scope of “intermediary”.
(iv) Sub-contracting for a service is not an intermediary service: Sub-contractor
provides the main supply, either fully or a part thereof, and does not merely arrange
or facilitate the main supply between the principal supplier and his customers, and
therefore, clearly is not an intermediary.
In the backdrop of the above discussion, while Alpha and Beta are the two principals
involved in the main supply of the machinery, Gamma, is facilitating the supply of
machine between Alpha and Beta. In this arrangement, Gamma is providing the ancillary
supply of arranging or facilitating the ‘main supply’ of machine between Alpha and Beta
and therefore, Gamma is an intermediary and is providing intermediary service to Alpha.
Resultantly, in terms of section 13(8)(b) of the IGST Act, 2017, the place of supply of the
intermediary services provided by Gamma shall be the location of the supplier of
services, viz. outside India (USA).
15. (a) All registered persons are required to file an annual return. However, following
persons are not required to file annual return:
(i) Casual taxable persons
(ii) Non-resident taxable person
(iii) Input service distributors

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 82 FINAL EXAMINATION: MAY, 2023

(iv) Persons authorized to deduct/collect tax at source under section 51/52.

The Commissioner may, on the recommendations of the Council, by notification,
exempt any class of registered persons from filing annual return under this section.
The department of the Central/State Government or a local authority, whose books
of account are subject to audit by the Comptroller and Auditor-General of India or an
auditor appointed for auditing the accounts of local authorities under any law for the
time being in force, are exempt from the requirement of furnishing an annual return
including self-certified reconciliation statement.
The annual return for a financial year needs to be filed by 31 st December of the next
financial year.
(b) The annual return is to be filed electronically in Form GSTR-9 through the common
portal.
However, a person paying tax under the composition scheme is required to file the
annual return in Form GSTR-9A.
Further, an ECO required to collect tax at source is required to file an annual
statement referred to in section 52(5) in Form GSTR-9B (yet to be notified). The
statement for a financial year needs to be filed by 31st December of the next
financial year.
(c) All registered persons are required to file furnish a self-certified reconciliation
statement alongwith annual return if their aggregate turnover during a financial year
exceeds ` 5 crores. Such registered persons should furnish, electronically, the
annual return along with a copy of self-certified reconciliation statement, duly
certified, in Form GSTR-9C. A Self-certified reconciliation statement will reconcile
the value of supplies declared in the return furnished for the financial year with the
audited annual financial statement.
However, following persons are not required to file self-certified reconciliation
statement:
(a) Casual taxable persons
(b) Non-resident taxable person
(c) Input service distributors
(d) Persons authorized to deduct/collect tax at source under section 51/52, and
16. Section 107(6) provides that no appeal shall be filed before Appellate Authority (AA),
unless the appellant pays*:-
(a) in full, tax, interest, fine, fee and penalty arising from impugned order, as is
admitted by him; and
(b) 10% of remaining tax in dispute arising from the impugned order subject to a
maximum of ` 25 crore, in relation to which the appeal has been filed.

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 PAPER – 8: INDIRECT TAX LAWS 83

However, no appeal shall be filed to AA against an order under section 129(3) [order for
payment of penalty for release of detained/seized goods/conveyances], unless a sum
equal to 25% of the penalty has been paid by the appellant.
*Equivalent amount is required to be deposited with respect to SGST liability.
Thus, in the given case, Nitya Associates has to make a pre-deposit of 10% of
` 6,00,000, which is ` 60,000 (i.e. CGST ` 30,000 and SGST ` 30,000).
However, when Nitya Associates admits the liability of ` 2,00,000 (CGST + SGST) and
disputes only the balance tax demanded of ` 4,00,000, it has to make a pre-deposit of:
(i) ` 2,00,000 + ` 20,000 [proportionate penalty on tax admitted] + interest @ 18% p.a.
payable on the tax admitted for the period of delay, and
(ii) 10% of ` 4,00,000 which is ` 40,000.
17. Section 60(4) stipulates that where the tax liability as per the final assessment is higher
than under provisional assessment i.e. tax becomes due consequent to order of final
assessment, the registered person shall be liable to pay interest on tax payable on
supply of goods but not paid on the due date, at the rate specified under section 50(1)
[18% p.a.], from the first day after the due date of payment of tax in respect of the goods
supplied under provisional assessment till the date of actual payment, whether such
amount is paid before or after the issuance of order for final assessment.
In the given case, due date for payment of tax on goods cleared on 29th January under
provisional assessment is 20th February.
In view of the provisions of section 60(4), in the given case, Robert & Sons is liable to
pay following interest in respect of the consignment of goods supplied:
= ` 1,80,000 × 18% × 48/365
= ` 4,261 (rounded off)
18. Computation of assessable value of the imported machine
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

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 84 FINAL EXAMINATION: MAY, 2023

`
CIF in Indian rupees @ ` 70/ per $ ` 8,16,808.30
Assessable Value ` 8,16,808.30
Assessable Value (rounded off) 8,16,808

Notes:

(1) Insurance charges have been included @ 1.125% of FOB value of goods [Third
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].
19. Yes, Balu Ltd. will succeed. The facts of the given situation are similar to the case of
CCus vs. Biecco Lawrie Ltd. 2008 (223) ELT 3 (SC) wherein the Supreme Court has held
that where duty on the warehoused goods is paid and out of charge order for home
consumption is made by the proper officer in compliance of the provisions of section 68
of the Customs Act, 1962, the goods allowed to be retained for storage in the warehouse
as permitted under section 49 of the Customs Act are not treated as warehoused goods
and importer would not be required to pay anything more.
Section 49 of the Customs Act inter alia provides that imported goods entered for home
consumption if stored in a public warehouse, or in a private warehouse on the application
of the importer and if the same cannot be cleared within a reasonable time, shall not be
deemed to be warehoused goods for the purposes of this Act, and accordingly the
provisions of Chapter IX shall not apply to such goods.
20. Duty payable on re-importation of goods which had been exported for repairs abroad is
the duty of customs which would be leviable if the value of re-imported goods after
repairs were made up of the fair cost of repairs carried out including cost of materials
used in repairs (whether such costs are actually incurred or not), insurance and freight
charges, both ways. However, following conditions need to be satisfied for availing this
concession:
(a) goods must be re-imported within 3 years, extendable by further 2 years, after their
exportation;
(b) exported goods and the re-imported goods must be the same;
(c) Ownership of the goods should not change.

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 PAPER – 8: INDIRECT TAX LAWS 85

Since all the conditions specified above are fulfilled in the given case, the customs duty
payable on re-imported goods will be computed as under:
Particulars ` in lakh
Value of goods re-imported after exports [` 90 lakh (including cost of 105.000
materials) + (insurance and freight charges, both ways ` 7.5 × 2) lakh]
Add: Basic customs duty @ 10% (A) 10.500
Add: Social Welfare Surcharge @ 10% on `10.5 (B) 1.050
Value for computing integrated tax 116.550
Integrated tax @ 18% (` 117 lakh × 18%) - (C) 20.979
Customs duty and integrated tax payable [(A) +(B)+ (C)] 32.529

© The Institute of Chartered Accountants of India

 Applicability of Standards/Guidance Notes/Legislative Amendments etc. for
May, 2023 Examination
Final Course Examination – Group II

ELECTIVE PAPERS
Paper 6A: Risk Management
"The pattern of examination for this paper is open-book and case study based. The entire
content included in the August 2019 edition of the Study Material (including additional topics
mentioned in the syllabus) shall be relevant for the May 2023 examination."
Paper 6B: Financial Services and Capital Markets
The pattern of examination for this paper is open-book and case study based. Part A of the
Study Material of Financial Services and Capital Markets (November 2020 Edition) shall be
relevant for the May 2023 examination. Furthermore, as contained in Part B of the Study
Material of Financial Services and Capital Markets (July 2022 Edition), following SEBI
Regulations (excluding Schedules) revised upto 30th June 2022 are also relevant:
a. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
b. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
c. SEBI (Prohibition of Insider Trading) Regulations, 2015
d. SEBI (Buy Back of Securities) Regulations, 2018
e. SEBI (Mutual Funds) Regulations, 1996
Paper – 6C: International Taxation
1. Applicability of amendments made by Finance Act
As far as the applicability of Finance Act is concerned, the amendments made by the
Finance Act of a particular year would be applicable for May and November examinations
of the next year. Accordingly, the direct tax laws, as amended by the Finance Act, 2022,
would be applicable for May, 2023 examinations. The relevant assessment year for
May, 2023 examinations is A.Y.2023-24. This would be relevant as far as the topics on
International Taxation pertain to the Income-tax Act, 1961, equalization levy and the Black
Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
However, if the case study based question requires computation/determination relating to
any earlier assessment year also, then, the relevant provisions pertaining to that year
would be given in the question itself. In the alternative, the question may mention that the
relevant provisions in the earlier year were the same as they are for A.Y.2023 -24.

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 REVISION TEST PAPER 87

2. Applicability of amendments made by circulars, notifications, press releases/press

notes and other legislations
Students are expected to be updated with the notifications, circulars, press releases/press
notes issued and other legislative amendments made in direct tax laws upto 6 months prior
to the examination. For instance, for May, 2023 examination, significant notifications,
circulars, press releases/press notes issued by the CBDT/Central Government and
legislative amendments made upto 31st October, 2022 would be relevant.
3. Applicability of provisions of direct tax laws dealt with in Final (New) Paper 7 while
addressing issues and making computation in case study based questions in Final
(New) Paper 6C
The questions based on case study in the Elective Paper 6C: International Taxation may
involve application of other provisions of direct tax laws dealt with in detail in Paper 7:
Direct Tax Laws and International Taxation, which the students are expected to be aware
of. Students may note that they are expected to integrate and apply the provisions of direct
tax laws (dealt with in Final Paper 7: Direct Tax Laws and International Taxation and in the
Elective Paper 6C: International Taxation) in making computations and addressing relevant
issues in questions raised in the Elective Paper 6C on International Taxation.
Therefore, the October, 2021 edition of the Study Material for Final Paper 6C: International
Taxation available at https://www.icai.org/post.html?post_id=17802 and Final Paper 7: Direct
Tax Laws and International Taxation available at https://www.icai.org/post.html?post_id=17843
read with the Supplementary Study Paper – 2022, containing the amendments made by
the Finance Act, 2022 and notifications and circulars issued between 1.11.2021 to
31.10.2022,and the Judicial Update relevant for May, 2023 examination, are relevant and
important for answering case-study based questions in Paper 6C. These publications have to
be read along with the relevant bare Acts and Rules to address issues and make computations
in case study based questions. The initial pages of the Study Material of Paper 6C available at
https://resource.cdn.icai.org/66899bos53930ip.pdf contains the link to the important webpages
of the income-tax department and the relevant bare Acts and Rules.
4. Scope of coverage of certain topics
As regards certain topics on International Taxation, namely, Tax Treaties: Overview,
Features, Application & Interpretation and Anti-Avoidance Measures, only the content as
covered in the October, 2021 edition of the Study Material and Supplementary Study
Paper – 2022 is relevant. US Model Convention is excluded from the scope of the topic
“Overview of Model Tax Conventions” by way of Study Guidelines.
It may be noted that if a case study based question involves application of a double taxation
avoidance agreement (DTAA), the extract of the relevant article(s) of the DTAA would be
given in the question paper. Alternatively, the question may mention that the DTAA is in
line with the OECD/UN Model Tax Convention, in which case, the students have to refer

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 88 FINAL EXAMINATION: MAY, 2023

to the relevant article(s) of the Model Tax Convention. Students are expected to have the
ability to interpret the article(s) of the DTAA in answering case study based questions.
Paper 6D: Economic Laws
All the significant Rules/ Notifications/ Circulars/ Clarification/ Orders issued in the specified
Acts covered under the Economic Laws, up to 31 st October, 2022, are applicable for May 2023
examination.
(1) (2) (3)
Inclusions Exclusions
Chapters/ Topics of (Provisions which are (Provisions which are
the syllabus included from the excluded from the
corresponding chapter of corresponding chapter of the
the syllabus) syllabus)
Chapter 1 - The The entire content included in Following Sections of the
Competition Act, 2002 the October 2021 edition of Competition Act, 2002 are
and Rules/ Regulations the Study Material read with excluded for the examination:
the significant relevant 34, 37, 38, 40 are excluded.
amendments (if any) hosted
on the website, shall only be
relevant.
Significant Rules/Regulations
related to the Competition Act
to the extent covered in the
study material, are only
relevant for said examination.
Chapter 2 - Real Estate The entire content included in Regulations pertaining to RERA
(Regulation and the October 2021 edition of are excluded.
Development) Act, 2016 the Study Material read with
and Rules/ Regulations the significant relevant
amendments, if any, hosted
on the website, shall only be
relevant.
Chapter 3 - The The entire content included in Following sections are excluded
Insolvency and the October 2021 edition of of the Notified chapters of the
Bankruptcy Code, 2016 the Study Material read with Code:
and Rules/Regulations the significant relevant 3(2), 3(3), 3(5), 3(14), 3(22),
amendments hosted on the 3(24), 3(25), 3(26), 3(28), 3(29),
website(if any), shall only be 3(32), 3(36), 3(37), 5(2) to 5(4),
relevant for the said 5(16), 5(19).
examinations.

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 REVISION TEST PAPER 89

In specific, Regulations/
Rules related to Insolvency
and Bankruptcy, are covered
in a limited manner and not in
entirety.
These shall only be applicable
to the extent covered in the
study material.
Chapter 4 - The The entire content included in -
Prevention of Money the October 2021 edition of
Laundering Act, 2002 the Study Material read with
and Rules/Regulations the significant relevant
amendments (if any) hosted
on the website, shall only be
relevant.
Rules to the extent covered in
the study material are
relevant.
Chapter 5 - The Foreign The entire content included in Following FEM(Regulations)/
Exchange Management the October 2021 edition of Rules are entirely excluded:
Act, 1999 and Rules the Study Material read with • Foreign Exchange
/Regulations the significant relevant (Authentication of
amendments (if any), hosted Documents) Rules, 2000
on the website, shall only be • Foreign Exchange
relevant.
(Compounding
In specific following FEM Proceedings) Rules, 2000
(Regulations)/ Rules read
• Foreign Exchange
with the Act, shall only be
Management (Adjudication
applicable to the extent
Proceedings and Appeal)
covered in the study material-
Rules, 2000
• Foreign Exchange
• Foreign Exchange
Management (Current
Management (Encashment
Account Transactions)
of Draft, Cheque, Instrument
Rules, 2000
and Payment of Interest)
• Foreign Exchange Rules, 2000
Management (Permissible
• Foreign Exchange
Capital Account
Management (Borrowing
Transactions)
and lending in Rupees)
Regulations, 2000
Regulations, 2000
• Foreign Exchange
Management (Acquisition

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 90 FINAL EXAMINATION: MAY, 2023

and Transfer of • Foreign Exchange

Immovable Property in Management (Deposit)
India) Regulations, 2018 Regulations, 2016
• Foreign Exchange • Foreign Exchange
Management (Acquisition Management
and Transfer of (Establishment in India of a
Immovable Property Branch Office or a Liaison
outside India) Office or a Project Office or
Regulations, 2015 any other place of business)
• Foreign Exchange Regulations, 2016
Management (Export of • Foreign Exchange
Goods and Services) Management (Export and
Regulations, 2015 Import of Currency)
• Foreign Exchange Regulations, 2015
Management (Realisation, • Foreign Exchange
repatriation and surrender Management (Foreign
of foreign exchange) Currency Accounts by a
Regulations, 2015 person resident in India)
• Foreign Exchange Regulations, 2015
Management (Possession • Foreign Exchange
and retention of foreign Management (Foreign
currency) Regulations, Exchange Derivative
2015 Contracts) Regulations,
• Liberalized Remittance 2000
Scheme. • Foreign Exchange
• Import of Goods and Management (Guarantees)
Services Regulations, 2000
• External Commercial • Foreign Exchange
Borrowings Management (Insurance)
• Overseas Direct Regulations, 2015
Investments • Foreign Exchange
Management (Investment in
firm or proprietary Concern
in India) Regulations, 2000
• Foreign Exchange
Management (Issue of
security in India by a Branch
Office or Agency of a person
Resident in outside India)
Regulations, 2000

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 REVISION TEST PAPER 91

• Foreign Exchange
Management (Manner of
Receipt and Payment)
Regulations, 2016
• Foreign Exchange
Management (Remittance of
Assets) Regulations, 2016
• Foreign Exchange
Management (Transfer or
issue of any Foreign
security) Regulations, 2004
• Foreign Exchange
Management (Transfer or
issue of security by a person
resident outside India)
Regulations, 2000
• Foreign Exchange
Management (Withdrawal of
General permission to
Overseas Corporate Bodies)
Regulations, 2003
• Foreign Exchange
Management (Removal of
Difficulties) Order, 2000
• Foreign Exchange
Management
(Crystallization of
Inoperative Foreign
Currency Deposits)
Regulations, 2014
• Foreign Exchange
Management (Offshore
Banking Unit) Regulations,
2002
• Foreign Exchange
Management (International
financial Services Centre)
Regulations, 2015
• Foreign Exchange
Management
(Regularization of assets

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 92 FINAL EXAMINATION: MAY, 2023

held abroad by a person

Resident in India)
Regulations, 2015
Chapter 6 - Prohibition The entire content included in -
of Benami Property the October 2021 edition of
Transactions Act,1988 the Study Material read with
and Rules/ Regulations the significant relevant
amendments (if any) hosted
on the website, shall only be
relevant.
Chapter 7- SARFAESI, The entire content included in -
2002 the October 2021 edition of
the Study Material read with
the significant relevant
amendments (if any) hosted
on the website, shall only be
relevant.
Notes:
(1) In the above table of Inclusion/Exclusion, in respect of the Chapters of the syllabus
specified in column (1) the related exclusion is given in column (3). Where an exclusion
has been so specified in any topic of the syllabus, the provisions corresponding to such
exclusions, covered in other topic(s) forming part of the syllabus, shall also be excluded.
(2) October 2021 edition of the Study Material and Booklet on Significant Case Laws of
January 2022 edition are relevant for May 2023 examinations.
(3) Except the exclusions mentioned in the column (3) of the table, the entire content of the
syllabus included in the October 2021 edition of the Study Material, shall be relevant for
the said examinations.
Paper 6E: Global Financial Reporting Standards
1. Relevant Study Material and Scope of Coverage of the content
October, 2021 edition of the Study Material is relevant for May, 2023 examination.
The study material contains the amendments in IFRS equivalent to the corresponding
amendments taken place in Ind AS till 31st October, 2021. In case any amendment had
taken place in IFRS but the same is yet to be notified in Ind AS, then it would not be
applicable for this paper for May, 2023 examination. Similarly, any amendment which has
been notified by the MCA before 31 st October, 2022 in Ind AS will be applicable for
equivalent IFRS as well. Accordingly, amendments in Ind AS was made by the MCA in
March, 2022. The amendments in IFRS equivalent to corresponding amendments in

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Ind AS (made in March, 2022) will be applicable for May, 2023 GFRS examination. Refer
Annexure to this Study Guidelines.
As regards to the topic on ‘Significant differences between IFRS and US GAAPs’, the
content as covered in the chapter given in the study material would be relevant for
May, 2023 examination. The same file has also been uploaded on the website at the link
https://resource.cdn.icai.org/48696bos32691a.PDF.
2. Non-applicability of certain International Financial Reporting Standards (IFRS) and
IFRS Interpretations (IFRICs)
Since the Core paper on Financial Reporting does not cover Ind AS equivalent to IAS 26,
IAS 29 (including IFRIC 7), IFRS 4, IFRS 6, IFRS 14 and IFRS 17, the same IFRS do not
form part of GFRS Paper. Similarly, in applicable Ind AS there are no corresponding
Appendix on IFRIC 2 and SIC 7, hence these IFRICs also do not form part of the GFRS
Paper.
Annexure
IFRS Amendments applicable for May, 2023 examination
Following amendments are applicable for GFRS paper:
 Amendment to IAS 16 ‘Property, Plant and Equipment’ on accounting of proceeds from
sale of items produced during testing
 Amendment to IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ on
determination of cost of fulfilling a contract for measurement of provision for an onerous
contract.
 Amendments to IFRS 3 ‘Business Combinations’ with reference to Conceptual Framework
for Financial Reporting and insertion of certain paragraphs under exceptions to recognition
principle on liabilities, contingent liabilities and contingent assets
 Annual improvements to IFRS in IFRS 1 ‘First Time Adoption of International Financial
Reporting Standards’, IFRS 9 ‘Financial Instruments’ and IAS 41 ‘Agriculture’.
The key amendments applicable for May, 2023 examination are:
IFRS Significant amendments applicable for May, 2023
examination
IAS 16, ‘Property, Plant and Para 17(e) of IAS 16 has been amended by adding a
Equipment’ clarification that the excess of net proceeds from sale of
items produced during testing will be credited to Profit or
loss.

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 94 FINAL EXAMINATION: MAY, 2023

IAS 37 ‘Provisions, Paragraph 68A has been inserted which clarifies which
Contingent Liabilities and cost needs to be considered in the costs to fulfil a contract
Contingent Assets’ while determining whether the contract is onerous.
As per the amendment, both the incremental costs to fulfil
a contract and allocation of directly attributable costs will
form part of the cost used for determination of onerous
contract.
Para 69 has been amended by replacing ‘assets
dedicated to the contract’ to ‘assets used in fulfilling
the contract’. This amendment requires to take into
consideration the impairment loss on all the assets whose
cost will be considered in assessing the contract is
onerous.
IFRS 3 ‘Business In March, 2018, IASB revised Conceptual Framework for
Combinations’ Financial Reporting.
The amendments made in IFRS 3 is due to change in
reference to Conceptual Framework without change in the
accounting requirements for business combinations.
Due to revision in the Conceptual Framework, there were
certain accounting implications to contingent liabilities and
levies within the scope of IAS 37 and IFRIC 21 ‘Levies’.
As per it, the assets and liabilities in a business
combination are recognised if they meet the definition of
an asset or liability as per the Conceptual Framework.
The timing of recognition of a levy may sometimes be
different due to specific guidance given in IFRIC 21.
Therefore, while recognizing levies at the acquisition date,
an acquirer might recognise at the acquisition date a
liability to pay a levy that it would not recognise
subsequently when applying Appendix C ‘Levies’. This
difference would arise because an entity might recognise
a liability earlier by applying the Conceptual Framework.
This liability would be derecognized immediately
afterwards when principles of IFRIC 21 are applied.
Therefore, to resolve this implication, IFRS 3 has been
amended with regards to recognition exception for
contingent liabilities and levies by inserting para 21A to
21C. An exception has been added to the requirements
of para 11 of IFRS 3 for liabilities and contingent liabilities
that would be within the scope of IAS 37 or IFRIC 21 if
incurred separately, rather than assumed in a business
combination.

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Further, IFRS 3 prohibited the recognition of contingent

assets even prior to the amendments. However,
prohibition was not stated explicitly in IFRS 3 itself.
Therefore, para 23A has been inserted in IFRS 3 to
explicitly prohibit recognition of contingent asset.
IFRS 1 ‘First Time Adoption of Para D13 of IFRS 1 provides an exemption to a first-time
International Financial adopter of IFRS with regard to cumulative translation
Reporting Standards’ differences on the date of transition to IFRS. According
to it, first time adopter of IFRS are permitted to deem all
cumulative translation differences for all foreign
operations to be zero on the date of transition to IFRS.
Para D13A has been inserted in IFRS 1 which removes
the conflict between the requirements of paragraph
D16(a) of IFRS 1 which provides exemption where a
subsidiary adopts IFRS later than its parents and the
exemptions on cumulative translation differences at the
carrying amount included in the parent’s consolidated
financial statements. Similar exemption is available to
joint venture and an associate that uses the exemption in
para D16(a) of IFRS 1. Para D16(a) of IFRS 1 provides
that a subsidiary can measure its assets and liabilities at
the carrying amounts in parent’s consolidated financial
statements.
IFRS 9 ‘Financial As per IFRS 9, a financial liability is derecognised when it
Instruments’ is extinguished, which includes exchange between an
existing borrower and lender due to different or substantial
modification in terms of the contract.
Further, IFRS 9 clarified that terms are considered to have
been substantially modified when the net present value of
the cash flows under the new terms (including any fees
paid net of any fees received) and discounted using the
original EIR differs by atleast 10% from the present value
of the remaining cash flows under the original terms.
Earlier what is to be included in the fees paid and fees
received was not mentioned in the standard.
Now the amendment has been made by substituting para
B3.3.6 and inserting para B3.3.6A in IFRS 9 which clarify
that the fees paid (for the above purpose) includes
amount paid by the borrower to or on behalf of the lender
and fees received includes fees amounts paid by the
lender to or on behalf of the borrower.

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 96 FINAL EXAMINATION: MAY, 2023

IAS 41 ‘Agriculture’ Earlier para 22 of IAS 41 prescribed certain cash flows

that would not be considered for the purpose of assessing
the fair values.
Out of those cash flows, the amendment deleted the cash
flows for taxation from the exclusion list for measurement
of fair value.
This implies that tax cash flows must be included in the
fair value measurement of biological assets as per IAS 41.
Paper 6F: Multidisciplinary Case Study
The Multi-disciplinary case study would involve application of two or more of the seven core
subjects at the Final level. List of seven core subjects at final level is given as under:
Final Paper
Paper 1: Financial Reporting
Paper 2: Strategic Financial Management
Paper 3: Advanced Auditing and Professional Ethics
Paper 4: Corporate and Economic Laws
Paper 5: Strategic Cost Management and Performance Evaluation
Paper 7: Direct Tax Laws & International Taxation
Paper 8: Indirect Tax Laws
Note: The applicability/ non-applicability of Standards/ Guidance Notes/ Legislative
Amendments etc. for Paper 6F: Multidisciplinary Case Study for May, 2023 Examination would
be same as applicable for each of the above individual papers.

Paper 7 : Direct Tax Laws and International Taxation

Applicability of Finance Act, Assessment Year etc. for May, 2023 Examination
The provisions of direct tax laws, as amended by the Finance Act, 2022 including significant
notifications, circulars and press releases issued up to 31st October, 2022, are applicable for
May, 2023 examination. The relevant assessment year is A.Y.2023-24.
The October, 2021 edition of the Study Material contains the provisions of direct tax laws
[Modules 1, 2 and 3] and international taxation [Module 4]. The same has to be read along with
the Supplementary Study Paper -2022 containing the amendments made by the Finance
Act, 2022 and notifications and circulars issued between 1.11.2021 and 31.10.2022 and
the Judicial update for May, 2023 examination.

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Scope of coverage of certain topics in Part II: International Taxation

As regards certain topics on International Taxation, namely, Overview of Model Tax
Conventions, Application & Interpretation of Tax Treaties and Fundamentals of Base Erosion
and Profit Shifting, the specific content as covered in the October, 2021 edition of the Study
Material and Supplementary Study Paper - 2022 would be relevant for May, 2023 Examination.

Paper 8 : Indirect Tax Laws

The following are applicable for May 2023 examination:
(i) The provisions of the CGST Act, 2017 and IGST Act, 2017 as amen ded by the Finance
Act, 2022 including significant notifications and circulars issued and other legislative
amendments made, up to 31 st October, 2022.
(ii) The provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975, as amended
by the Finance Act, 2022, including significant notifications and circulars issued and other
legislative amendments made, up to 31 st October, 2022.
The Study Guidelines given below specify the exclusions from the syllabus for May 2023
examination.
List of topic-wise exclusions from the syllabus

(1) (2) (3)

S. No. in the Topics of the syllabus Exclusions
syllabus (Provisions which are
excluded from the
corresponding topic of the
syllabus)
Part-I: Goods and Services Tax
1(ii) Levy and collection of CGST and IGST – (i) Rate of tax prescribed for
Application of CGST/IGST law; Concept supply of goods*
of supply including composite and mixed (ii) Rate of tax prescribed for
supplies, inter-State supply, intra-State supply of services*
supply, supplies in territorial waters; (iii) Exemptions for supply of
Charge of tax including reverse charge; goods
Exemption from tax; Composition levy
(iv) Categories of supply of
goods, tax on which is
payable on reverse charge
basis

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1(iv) Time and Value of supply Value of supply in cases where

Kerala Flood Cess is applicable.
1(v) Input tax credit (i) Manner of determination of
input tax credit in respect of
inputs, input services and
capital goods and reversal
thereof in respect of real
estate projects
(ii) Manner of reversal of credit
of additional duty of
customs in respect of Gold
dore bar
1(xv) Other provisions Transitional Provisions
Part-II: Customs & FTP
1.(v) Officers of Customs; Appointment of Completely excluded
customs ports, airports etc.
1.(vii) Provisions relating to coastal goods and
vessels carrying coastal goods
1.(x) Demand and Recovery
1.(xi) Provisions relating to prohibited goods,
notified goods, specified goods, illegal
importation/exportation of goods
1.(xii) Searches, seizure and arrest; Offences;
Penalties; Confiscation and Prosecution
1.(xiii) Appeals and Revision; Advance Rulings;
Settlement Commission
1.(xiv) Other provisions
*Rates specified for computing the tax payable under composition levy are included in
the syllabus.
Notes:
(1) The amendments made by the Annual Union Finance Acts in the CGST Act, 2017 and
IGST Act, 2017 are made effective from the date notified subsequently. Thus, only those
amendments made by the relevant Finance Acts which have become effective till
31.10.2022 are applicable for May, 2023 examinations. Accordingly, the amendments
made by the Finance Act, 2022 are applicable for May 2023 examinations.

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However, it may be noted that amendment made by the Finance Act, 2021 in section 16 of
the IGST Act, 2017 and amendments made by the Finance (No. 2) Act, 2019 in sections
2(4), 95, 102, 103, 104, 105 and 106 of the CGST Act, 2017 and the insertion of new
sections 101A, 101B & 101C in the CGST Act, 2017, have not become effective till
31.10.2022 and thus, are not applicable for May 2023 examinations.
(2) In the above table, in respect of the topics of the syllabus specified in column (2) the related
exclusion is given in column (3). Where an exclusion has been so specified in any topic
of the syllabus, the provisions corresponding to such exclusions, covered in other topic(s)
forming part of the syllabus, shall also be excluded.
(3) October 2021 edition of the Study Material read with Supplementary Study Paper for May
2023 examination are relevant for said examination. The amendments in the GST law and
in the customs law and FTP - made after the issuance of the Study Material - to the extent
covered in the Supplementary Study Paper for May 2023 examination alone shall be
relevant for the said examination.
(4) The entire content included in the October 2021 edition of the Study Material (except the
exclusions mentioned herein) and the Supplementary Study Paper for May 2023
examination shall be relevant for the said examination.

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