Accounting treatment of custom duty and voyage expense on import of dredger

A. Facts of the Case

A public sector company was engaged in the business of providing dredging services to all major and
minor ports, Indian Navy, fishing harbors and other maritime organisatisation. During the year 2000-01,
Company acquired dredger (“Dredger” is a machine which is used to remove sediments from bottom
of lakes, rivers and sea bodies) from Netherland. As per the contractual terms, the property in the dredger
will be transferred to the company after completion of all necessary inspection and successful sea trials
in Netherland.
The dredger is brought into India and Company paid an amount of Rs. 896.81 lakhs towards custom duty
and Rs. 180 lakhs towards voyage expenses. The amount incurred on transportation (i.e., custom duty
and voyage expenses) are charged off to profit & loss as Company is of the contention that the dredger
was ready in all aspects for intended use at the time company took its delivery from Netherland.
However, government auditors suggested them to capitalize Rs. 1,076.81 lakhs (i.e., custom duty
amounting to Rs. 896.81 lakhs and voyage expense of Rs. 180 lakhs).

B. Issue

The Company has sought the opinion of ICAI in respect of the issues arising from the above-mentioned facts:

Whether treatment adopted by the company in respect of valuation of dredger is correct or not.

C. Opinion

On the basis of the above-mentioned facts, the opinion in respect of the issue raised by the
Company:

1. ICAI is of the opinion that, as per AS -10 cost of “Property, plant & equipment” comprise its purchase
   price, including import duties, other non- refundable taxes and any directly attributable cost of
   bringing the asset to its working condition for its intended use. Directly attributable cost consists of:
   i.) Site preparation;
   ii.) Initial delivery and handling cost;
   iii.) Installation cost.
2. The committee highlighted from the above that import duty and initial delivery and handling
   charges should be capitalized as a part of property, plant & equipment.

D. Conclusion

Custom duty and voyage expenses incurred by the company should be capitalized. Hence the Company is not right with the valuation of dredger.
The above opinion was affirmed by the ICAI- Expert Advisory Committee.

Swati Bansal, Audit Associate, SW India