Archive for July, 2010

MONTE CARLO simulation and its misuse in project finance

Thursday, July 29th, 2010

Thursday, July 29, 2010

Monte Carlo Simulation and its Misuse in Project Finance

This is a guest post by Mr.Sacha Singh. You can read Sacha’s blogs on



Monte Carlo is the capital of the principality of Monaco in south of France. For over a hundred and fifty years it has been a favourite destination of the rich. They flock there to enjoy gaming sessions in one of the oldest functioning casinos of the world. Roulette is a favourite game where large sums of money are made or lost over the turn of a spinning wheel. If the wheel is true and there are n different numbers, each appearing once, on which its needle can stop then the probability of getting any number after a spin is of course 1/n. Any model that attempts to create a life like scenario by generating random numbers is called, after the spinning wheel of the casino, Monte Carlo model.

Here is a simple example (developed for class room introduction). A restaurant has observed that the number of diners on any weekday is given by the following discrete distribution:

Now suppose it sells one dinner for 4 and its variable costs per dinner is 1.5 and there is a disposal cost of 0.2 for each unsold dinner. How many dinners should be prepared?

Monte Carlo way of solving this problem will be to prepare an Excel model in which we cook each possible no of dinners (100,200,400,600) say 10000 times. And generate random numbers to get the no of diners as per the observed distribution each of the 10,000 times and then find out which quantity gives maximum average profit!

The model is fairly simple. It uses Excel function RAND() in B2 to generate a randum number, in cell B3 it uses the random number so generated to get the number of diners based on the distribution schedule (the word Rand in the formula refers to the assigned name of B2 and not to the Excel function and DistSchedule is the assigned name of the range F2:G5.) The profit arrived at in cell B11 is used as an input for the Data Table. (I have used Data Table to generate 1000 trials because it is very easy to get the profit with different numbers of diners by using Data Table.
(The Excel file can be seen here)

It makes one point very clear- a Monte Carlo analysis can be at best as good as the assumptions that go into making it. As can be seen, statistical distributions play a crucial role. If we get the distribution incorrect the simulation will return garbage for sure.

It is quite often heard that one should do a Monte Carlo simulation with project finance models to get a hang of the uncertainty associated with the cash flows of a project. It is not clear how the probability distributions of different inputs for the model can be derived. If we do not have a really good basis for for our assuming a particular distribution, Monte Carlo simulation will be very subjective – depending on the whims (in choosing the distribution) of the analyst.

Penelope Lynch is a project finance expert. Here she says: “I ran an illustrative Monte Carlo analysis with one of my models, using the same set of random data with two slightly different distribution assumptions (the ’shape’ parameter for the commonly used ‘PERT’ distribution). In one case the results indicated that the project would be in default in less than 5% of cases, in the other case, that default would arise in more than 20% of cases. I varied only two inputs, used 10,000 iterations, and the only difference between the two analyses was the value selected for a statistical parameter which I suspect few people really understand, and which is generally just left at the default value when using standard software packages. So for project finance I’d like to raise a big warning flag over the reckless use of Monte Carlo!”

She goes on to say: “Monte Carlo is not simply about generating outcomes for multiple variables, it is about weighting the probabilities of different combinations of variable values, and then using the statstics generated by this process to inform a decision making process.

“Monte Carlo is clearly an excellent and useful statistical tool, provided it is properly understood and used approriately. My concern about it’s use with project finance models is that it is hard to understand exactly what the results mean in relation to the assumptions used. I don’t think it adds transparency, I think it obscures the relationship between assumptions and results, whilst adding a layer of apperantly sophisticated analysis which seduces people into seeing the results as more ‘accurate’ than simple sensitivity analysis.

“For a project finance ‘base case’ anyone making credit or investment decisions should have access to the assumptions used for the base case, should understand them, and should have an idea of the reliability attributable to each assumption. The effects of a defined downside variation in any single assumption, or in any combination of assumptions can then be quantified by running sensitivity cases. Again, the assumptions used can be known and understood and clearly related to specific outcomes, which should facilitate rational decision making.

“Applying Monte Carlo as an alternative to making judjements based on a set of clearly defined base and sensitivty cases undermines this process because, for project finance models, many variables do not have an obvious, established distribution. For example, when running sensitivities for a thermal power plant, what is the probability distribtion for the achieved vs predicted labour costs, chemical costs, plant operating efficiency? On what knowledge, documentation, history can this new set of assumptions be based, and how thoroughly can they be understood? Surely, if the Monte Carlo analysis is going to give results which can be relied upon to assist in decision making, the distribution assumptions are just as important, should be just as well understood and as well justified as any other base case assumption. They should also be subject to sensitivity testing themslves to see how critical they are to the results. Rather than providing transparency, for this specific application (project finance), I would contend that Monte Carlo simply introduces a whole set of poorly understood, poorly justified and generally opaque additional assumptions, produces results which in some cases are essentially arbitrary, but which have a veneer of technical credibility which can lead to them being seen as more informative and reliable than the simple results produced from the relatively well understood and justified basic model assumptions.”

Invitation to write on your CMA India Blog

Wednesday, July 21st, 2010

Your CMA India Portal invites articles/write-ups to be published as Blog post on the portal. Kindly send your article along with your introduction / background/ qualifications. Also mention your website/social site like linkedin etc to the administrators/moderators for getting it published on the CMA India Portal. It is preferable to be registered on the portal although it is not compulsory. Some of the articles already published as Blogs on the portal can be read at

Article need to be:

1. Original

2. References, if any, need to be clearly stated

3. It can cover any topic of professional interest (from accounting, audit, banking, economics, investments, stocks, finance, taxation, law etc.)

4. Although there are no limitations on length, it is advisable to keep the article length to not more than 3-4 A4 size pages. Font size 11 Calibri or Arial with a single space construct.

Need more information. Contact CMA Devarajan

Thank you.

 CMA India Portal Team


Sunday, July 11th, 2010


This is  a guest post by Mr.Sacha Singh. Sacha consults on change management, process evaluation and valuation of firms. He enjoys ghazals, thumris and at times bhajans. To read more of Sacha’s blogs visit:


 I am revising my lecture notes on euro as after many years I have been assigned to take International Financial Management. I had last revised it in 2005 when euro was just six years old. It had stabilized and it also had the backing of enormous political commitment of leaders and citizens alike. I expected, as many others did, that euro would sail through any storms that may come its way. I had also, somewhat boldly, shared my view that in coming decades euro would offer stiff competition to dollar as the international reserve currency of choice. I expected that sooner rather than later the primary prices of gold and crude would be available in euro. (Yuan was nowhere on my radar, so much for my perspicacity.)

The Greek crisis has made me more circumspect. To be sure, this was anticipated at the time of monetary union. No, not that Greeks would do what they did but that a monetary union would rob the sovereign member states of the power to conduct their independent monetary policy and in face of an asymmetric shock (i.e. a shock that does not affect all member states or at least not to the same extent) the affected region would not have the policy option of reducing interest to stimulate the economy. Such region, then, would have to be bailed out by other member states collectively. (Greeks created their own shock.)

Consider an example from India. The IT boom bypassed some of the Indian states, e.g. Bihar. The information age created opportunities in Bangalore, Pune, Gurgaon, Noida and other places but not in Patna and Bhagalpur. Since factor movement is free in India you find a large number of Biharis working at Bangalore, Pune … Factor movement is permitted in euro-land but we do not see large numbers of Greeks migrating to Germany in search of work. The barriers are cultural, linguistic and religious rather than statutory.

Greeks were saved with capital from ECB – about one trillion dollars. It is not inconceivable that other PIIGS countries may require similar bailouts in future. The money will have to come from the northern member states – mainly Germany. How long will it take the German tax payers to say no to systemic transfer of their wealth to other countries? Will they vote to move out of the common currency zone; perhaps not alone but with other North European member states?

Albert Edwards, a strategist at Paris-based Société Générale bank, at the height of the crisis said the euro’s collapse was “inevitable.” Meanwhile, the Centre for Economics and Business Research (CEBR) in London predicted that the euro would fall to parity with the dollar in 2011, “assuming the euro exists then.” Many economists feel that the euro may not fail totally, but they do feel that that the euro land may shrink; stronger northern states sticking together - Holland, France, Germany, Belgium, Luxembourg – may be a few more.

Michael Schuman has an interesting take, read here. “The independent nations of Europe have gotten into bed together, with the common market as the blanket and the euro as the wedding ring, and they have to start behaving that way, as members of a union they want to see succeed. But while Europe’s leaders vow they’re committed to each other for richer or poorer, till-death-do-us-part, they seem intent on pushing the region towards the poorer and making that death-induced parting more likely. If the countries of Europe want to live happily ever after, they’ve got to finally put their swingin’ singles days behind them.”

But can they? Can the Italians, Greeks, Spaniards and Portuguese raised under the warm Mediterranean sun adapt to the cold Teutonic discipline ?

Invitation to write on CMA India Blog

Saturday, July 10th, 2010

Your CMA India Portal invites articles/write-ups to be published as Blog post on the portal.

Kindly send your article along with your introduction / background/ qualifications. Also mention your website/social site like linkedin etc to the administrators/moderators for getting it published on the CMA India Portal. It is preferable to be registered on the portal although it is not compulsory. Some of the articles already published as Blogs on the portal can be read at

Article need to be:
1. Original
2. References, if any, need to be clearly stated
3. It can cover any topic of professional interest (from accounting, audit, banking, economics, investments, stocks, finance, taxation, law etc.)
4. Although there are no limitations on length, it is advisable to keep the article length to not more than 3-4 A4 size pages. Font size 11 Calibri or Arial with a single space construct.

Need more information. Contact CMA Devarajan

Thank you,
CMA India Portal Team

ST on TDS?

Thursday, July 8th, 2010

ST on TDS?

This a guest post by Ms.Rebecca Andrews. A talented law student who rakes up pertinent questions / issues on various subjects including taxation (both direct and indirect). One such issue was pertaining to the Service Tax on TDS. She initiated a debate in one of the tax portals and invited professionals to give their thoughts on the subject. Below is the compilation of those thoughts  including her own.





Original Query

 : When payment is made to a foreign service provider, TDS is effected.  Simultaneously, Service Tax is also paid on such gross amounts inclusive of TDS, on reverse charge basis.


Issue : What when the agreement may specify that  foreign Service Provider shall be paid the agreed amount and the tax shall be borne by Indian service receiver.


Example (1) : Agreed Renumeration = USD 100

Applicable Tax = 20%

Remitted amount : USD 80

Service Tax Paid on = USD 100


Example (2) : Agreed Renumeration = USD 100

Applicable Tax = 20%

Remitted amount : USD 100

Service Tax Paid on = USD 100

Department’s view = It should be on USD 120


The argument can be taken that amount payable to foreign parties as per the contract entered with the parties have been remitted to them and service tax have been paid on that amount. As per Indian Income Tax Laws service receiver is required to charge income tax on the transactions with the foreign parties. He has duly paid the said amount to the credit of the Central Government. In those cases where liability to pay such tax was on him (service Receiver) he has paid tax to the credit of the Central Government on grossing up basis and no amount have been paid/ credited in this regard to the foreign parties.


As per his understanding of the example-2, it is not consideration for any service but a statutory levy and no service tax is leviable on statutory levy.


Last year, Chennai CESTAT passed the following order. Relevant portion is highlighted.


2009 (16) S.T.R. 729 (Tri. - Chennai)


Ms. Jyoti Balasundaram, Vice-President and Shri P. Karthikeyan,  Member (T)






Stay Order No. 411/2009, dated 18-5-2009 in Application No. ST/S/133/2009 in  Appeal No. ST/219/2009

Stay/Dispensation of pre-deposit - Valuation - Service tax paid on entire technical consultancy payment made to foreign service providers for off-shore services - Demand by grossing up amount by including TDS amount - Prima facie force in appellant’s contention that provision for grossing up of amount under Section 195A of Income Tax Act, 1961 applicable for computing income tax and not Service tax - Demand revenue neutral as services received used in manufacture and Cenvat credit admissible - Strong prima facie case made out - Pre-deposit waived - Section 67 of Finance Act, 1994 - Section 35F of Central Excise Act, 1944 as applicable to Service tax vide Section 83 of Finance Act, 1994. [paras 1, 2, 3]

Pre-deposit waived


Salim and Associates v. Commissioner — 2007 (7) S.T.R. 48 (Tribunal)  — Distinguished [Para 2]

REPRESENTED BY :        Shri K.S. Venkatagiri, Advocate, for the Appellant.

Shri V.V. Hariharan, JCDR, for the Respondent.

[Order per : Jyoti Balasundaram, Vice-President] . - We have heard both sides on the application for waiver of pre-deposit of service tax of  Rs. 1,65,53,563/ - confirmed on the amount paid to foreign service providers for “off-shore services” rendered to the applicants during the period March 2004 to September 2007 by grossing up the amount paid by including TDS amount therein.

2.We find prima facie force in the submission of the applicants that they are liable to pay and have paid service tax with reference to the amount charg  ed and received by the service provider and that the provision for grossing up of the amount under Section 195A of the Income Tax Act is applicable only for the purposes of computing the method of payment of income tax and not for the purpose of computing service tax. Prima facie, the decision of the Tribunal in Salim & Associates v. Commissioner of C. Ex., Calicut, 2007 (7) S.T.R. 48 (Tri.-Bang.) relied on by the Revenue is distinguishable on facts - in that case it was held that tax deducted at source cannot be excluded for the purpose of demand of service tax while in the present case, such is not the case of the applicants who have paid service tax on the entire technical consultancy payment to foreign service providers for ‘off-shore services’ rendered during the period in dispute. We, further, note that in any event the services received by the applicants are used in relation to the manufacture of the excisable goods and the applicants are, therefore, eligible to Cenvat credit and the demand is completely revenue-neutral.

3.In the light of the above discussion, we hold that strong prima facie case for unconditional waiver has been made out on merits and hence allow the prayer of the assessees for waiver of pre-deposit and stay of recovery of the amounts adjudged, pending the appeal.


 Debate on the issue is invited.



I reproduce the valuable feed-back received from the experts in the field. Response to the query by Mr. Datey is also given below.  


The main query has now been defined more sharply by Mr. Gururaj :

There is no specific provision which authorizes addition of TDS amount to value of service;

Under CE law, duty itself is a deductible amount from the gross receipt;

 Even in Service tax, Section 67 permits similar computation as cum-tax-value;

 Taxes must not form part of assessable value.


Mr. Datey, however opines differently that  TDS is what the person needs to pay as tax to the govt. and entitles him to take set-off. Therefore, it is a part of the consideration.


Mr. B.N.Gururaj, Advocate :


The first example almost never happens. No foreign service provider would agree to deduction of Indian tax out of the sums due to him - not in my experience in any case. Therefore, in practice, the Indian service recipient deducts tax at source, but bears the incidence himself. As far as service tax is concerned, the service recipient has to pay service tax on the amount payable as consideration. Tax remitted cannot be construed as income. At least, in Indirect Taxes, which principle has been followed: under CE law, duty itself is a deductible amount, where the price is inclusive of duty. Under service tax also, section 67  itself allows treatment of consideration as cum-tax value.


Where the tax in question which is to be deducted is a direct tax, there is no need to treat it differently under indirect taxes. Taxes must not form part of the assessable value. To this extent, in the stay matter, the Chennai Bench has taken reasonable view.


Besides, the settled principle of law is that charge of tax must be construed strictly. Therefore, by analogy drawn Income Tax law, TDS amount cannot be grossed up on the value of service. There must be specific provision which authorises such addition of TDS amount to value of taxable service.


One may soon expect such an amendment, if the government is in too much hurry to await the enactment of GST.



Mr. Devarajan CMA, Devarajan Swaminathan & Co.: From a transaction perspective, it is clear that the agreement is structured on

a “net of tax” basis.


Taking your example forward, the service tax should be on 125$

Net amount 100 US$

tds@20% works out to 25US$

gross amount 125US$

Service tax on 125US$.


This is in sync with the provisions of section 195A of the IT Act.

125$ is also the “consideration” for the services rendered, as the TDS amount is

BORNE by the service receiver ON BEHALF of the Service Provider. The primary

liability for payment of tax is with the service provider that is clearly

reflected in section 195A.


This is one more perspective other than the one Datey Saab just mentioned.


Non issuance of TDS Certificate would be non compliance with Section 203, it

does not challenge the theory. (Not the issue here)


If this is not the case, pls do let me know. Will help me interpret legal

provisions better.



Mr. V S Datey : Really TDS is not a ’statutory levy’. This is actually an amount paid on behalf of customer. He can and indeed does take credit of the TDS paid by u. Thus, TDS is not ‘tax’ at all. It is actually amount paid on behalf of customer to govt. hence it is part of consideration to him and service tax should apply.

By  Rebecca :If no TDS certificate is issued to the Service Provider to enable him to take set-off, then can we challenge this theory ? “

Mr.  V S DateyIf he does not issue TDS certificate, it is clear violation of a statutory provision. How u can challange a theory on basis of some clear violation of a statutory provision?

Clarification by Rebecca to Mr. Datey : This simply means that where the tax is deducted from the sum payable to foreign service provider, he is issued a TDS cert. to enable him to take set-of under DTT in his country.  This is a case where  burden of TDS is being borne by him (SP) and not the service receiver.  On the other hand, where the service-receiver has agreed to pay him a net full amount of USD 100, but has to bear the incidence of TDS himself, why would he still issue a TDS certificate to the service provider? (For procedural purposes, in both cases,  deposit compliance is done by Indian service receiver, which is an unrelated issue.) However, it is a secondary query.

Mr. Gaurav Gupta,  ACA, ACS, LL.B. : As per the various judicial rulings, credit for the tax deducted at source (’TDS’) can be claimed even if the TDS certificate has not been issued / received.  However, the deductee is required to prove that TDS has been actually deducted and, deducted under the provisions of the statute.


Please note this is reply to your subsequent query and not to the primary issue. 


Mr. Sitaram Agarwal, B.Com., LL.B., LL.M. (England), FICWA, FCS :

The main concern of the Department is realization of Service Tax on payment made to foreign service provider and accordingly law provides that availer of foreign service is made liable to ensure that service tax on foreign service is deposited in public exchequer, whether service availer deduct at source while making remitting payment to foreign service provider or service availer in India make payment of his own.


In India when Indian transporter does not charge service tax from service availer than service availer is made liable to deposit service tax on service availed and is also entitled to input credit for the amount of service tax deposited. Similarly, liability of service tax on foreign service provider has been shifted on India service availer. Thus charge of service tax on gross amount (service charges + service tax) is not only unauthorized but tantamount to double taxation (tax on tax), again cannon of taxation and totally unjustified, but only harassment of innocent assesses. CBEC should issue circular to clarify the subject matter to field staff as well as public knowledge.


Rebecca first great issue and it requires a lot of reading :

The conclusion that I arrived to is on the basis of rule 7 of the Valuation rules – which are as under

Actual consideration to be the value of taxable service provided from outside India.

7. (1) The value of taxable service received under the provisions of section 66A, shall be such amount as is equal to the actual consideration charged for the services provided or to be provided.

(2) Notwithstanding anything contained in sub-rule (1), the value of taxable services specified in clause (ii) of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, as are partly performed in India, shall be the total consideration paid by the recipient for such services including the value of service partly performed outside India.

Sub clause 1 thereof it uses the word charged and in the second it uses the word paid. Now the significance of both is the issue of interpretation. One may interpret the word “charged” as to be inclusive of TDS being deducted because that is the amt that one debits to the Profit & Loss account. But then does the accounting system decide what ST is to be paid – I think no.

So in my view whatever amt of invoice the foreign party gives is the amt on which one needs to pay tax – so if the contract is cum tax than TDS will be included in the taxable value and if the contract is exclusive of TDS than TDS will not be included. This argument is further strengthened by sub clause 2 which specifically says that the taxable value wud be the amt PAID.

I respectfully disagree with the argument of Mr. Gururaj as it equates TDS with normal taxes – this is not the right argument. TDS is the liability of one towards the government and the deductee gets credit of it subject to the DTA provisions.


Nitesh Jain

Chartered Accountant

Visit us at:  







In CCE v.Louis Berger International Inc.[2009] 18 STT 312 (New Delhi - CESTAT), the assessee received service charges for providing management consultancy services. While paying the above service charges, receipient of said service deducted TDS and paid service tax thereon. Original authority confirmed demand of differential service tax alongwith interest and penalty on said TDS portion of service chargees. On appeal Commissioner (Appeals) held that withheld amount of TDS should be treated as cum-tax amount for the purpose of levy of service tax and accordingly reduced service tax demand and interest thereon.


The tribunal held that since liability to pay income tax arising out of income from services rendered is on assessee, and TDS and amount deducted was payable only on behalf of assessee to the Income Tax Department there was no justification to exclude said amount from gross amount for the purpose of determining service tax and treating amount of withheld TDS as cum-duty tax for the purpose of Service Tax.



kind regards,


CMA. Devarajan Swaminathan

Devarajan Swaminathan & Co.

Cost and Management Accountants



Since the discussions are hotting up, let me add some fuel to fire (before people get tired and stop reading the e-mails on this topic).


The issue is where the Indian party pays gross amount (as per agreement) to foreign party and pays income tax TDS to indian Govt over and above that (out of its own pocket). Whether in such case, the TDS is includible in value of service (100 + 25 in the original query).


Basically, in most of the cases, the TDS is paid by Indian party at rates prescribed uinder Double Taxation Avoidance Agreement (DTAA). It is now well settled that DTAA has overriding effect over Income Tax Act Provisions.


As I understand, once Indian party pays the tax (TDS), the foreign party gets income tax relief from the income tax payable to them in their country to that extent (I believe that is purpose oI DTAA but I am open to correction on this issue).


If the foreign party does not produce TDS certificate from indian party, the tax relief will not be available to them in their home country.


If so, it is certainly tax paid on behalf of foreign party and is additional consideration to them and should be addible in value of service.


One issue is what is ‘TAX’ in TDS. It is ‘TAX’, but payable by whom? The TAX liability is of the person receiving the income. Return of that income has to be filed by erson receiving that income (and claim deductions, exemptions etc.). It is not TAX payable by person who is deductint the amount


Your comments - views wlecome in this purely academic exercise



V S Datey


Dear friends,

Mr.V.S.Datey has opined that since TDS is a tax paid on behalf of the foreign service provider, it constitutes additional consideration. Hence, it would be includable in the value of taxable services. In a case, where the foreign service provider bears the incidence of tax of India, produces necessary documents in his home country to claim the benefit of DTAA, it is not an additional consideration, but a part of his revenue.  But, where the foreign service provider does not claim the benefit of DTAA (as he does not care to bear the burden of tax, and hence, does not get the certificate from India), can it still be said to be additional consideration. Can this sum be additional consideration in the hands of a person who does not receive it

Secondly, valuation code in service tax does not have the concept of additional consideration. Section 67 of the Finance Act, 1994 adverts to money value of service, or cases where money is not the consideration wholly or partly. It does not refer to ‘additional consideration’. I suspect, the reference to additional consideration is a carryover of Central Excise and Customs Laws!

Therefore, I am of the view that there is no justification for adding TDS sum to taxable value for these two reasons: (1) tax need not form part of taxable value under service tax law, in the absence of specific provision of law, and (2) there is no concept of additional consideration in the valuation code of service tax law.

While parting, I would note that Income Tax is the only greedy law which requires adding back of income tax itself to the taxable income. This obnoxious provision must not enter service tax law.

Yours sincerely,



Prior Period CENVAT credit forgotten?

Wednesday, July 7th, 2010

Prior Period CENVAT credit forgotten?

This a guest post by Ms.Rebecca Andrews. A talented law student who rakes up pertinent questions / issues on various subjects including taxation (both direct and indirect). One such issue was pertaining to the prior period CENVAT credit. She initiated a debate in one of the tax portals and invited professionals to give their thoughts on the subject. Below is the compilation of those thoughts  including her own.

How To Take Delayed CENVAT Credit - If Not Taken Earlier : Is a question often asked. CAs proficient in Income Tax want to know if they did not carry forward CENVAT credit, what should they do now,  or the payment was effected in the next FY, can they still show CENVAT credit in previous year, and so on. 

Solution is simple. Just do it. Now.  What next to do : whether to intimate the department or take permission, or file revised return etc. Why ? Because there is not time-limit prescribed. Sounds strange, but true. Person drafting Rule just wrote “immediately” but did not prescribe any upper time-limit. Held, that immediately word is almost meaningless. In the absence of fixation of any time-limit, assessee can not be stopped from taking credit.

First the Issues :

·         Does “immediately”  mean anytime later;

·         Does payment of tax give an inherent constitutional right to claim CENVAT;

·         If Audit party / deptt. Does not appreciate settled case-laws, should assessee come under pressure to reverse;

·         What will be the impact on P&L statement and What necessary journal entry will be required;

·         What if subsequent  debit entries have been passed, can we credit retrospectively;

·         Would prior period adjustment result in re-statement of accounts ?

There are however other accounting hassles why CAs are reluctant to reopen closed can of worms.  Following is the discussion held last year in July-August 2009. Eminent participants were :

Mr. Ravi Holani

Mr. Sivakumar

Mr. A. Butchaiah

Mr. Deepak Gadgil

Mr. Pradeep Jain

Mr.Parveen Aggarwal

                                                    Case Law :

Cenvat Credit - Delayed availment – held that there is no provision for denying credit because of delay nor there is any time limit for taking credit in the CENVAT Credit Rules and therefore, the stand taken by the Revenue that credit has to be taken within a reasonable period has no basis - even the supplementary instructions issued by the Board also do not prescribe any time limit for the purpose – credit allowed.


 2009 (245) E.L.T. 551 (Tri. - Ahmd.)


Shri B.S.V. Murthy, Member (T)




Final Order Nos. A/88-91/2009-WZB/AHD, dated 1-1-2009 in Appeal Nos. E/1204 and 1240/2008 and Cross Objection No. E/CO/75 and 76/2008

Cenvat/Modvat - Limitation - Delayed availment of credit - No provision in Cenvat Credit Rules, 2004 for denying credit because of delayed availment - No time limit for taking credit in the Rules - Revenue’s stand that credit has to be taken within a reasonable period having no basis - Board’s supplementary instructions also do not prescribe any time limit - No merit in Revenue’s appeal which is rejected - Rule 4(1) ibid. [para 3]

Appeal rejected


J.V. Strips Ltd. v. Commissioner — 2007 (218) E.L.T. 252 (Tribunal) — Referred[ Para 2]

REPRESENTED BY :           Shri D.S. Negi, SDR, for the Appellant.

Shri M.J. Mehta, Consultant, for the Respondent.

[Order]. - These appeals have been filed against the order of the Commissioner (Appeals) wherein he allowed the delayed availment of Cenvat credit of duty on various services received by them in connection with manufacturing activities.

2. Ld. DR submits that the appellants should have taken the credit within a reasonable time whereas they have taken credit after more than one year. He submits that as per Cenvat credit Rules 4(1), Cenvat Credit has to be taken immediately on receipt of inputs. He cites the decision of the Tribunal in the case of M/s. J.V. Strips Ltd. [2007 (218) E.L.T. 252 (Tri. Del. )]. On the other hand ld. Consultant submits that the said rule is not applicable to the input services. In any case he also submits that the rule provides that credit may be taken immediately. But it does not really disallow credit to be taken subsequently. He also submits that in the CBEC’s Excise Manual of supplementary instructions in para 3.5 of Chapter 5, it has been clarified that “Cenvat credit may be taken immediately on receipt of inputs in the factory. This, however, does not mean, nor it is even envisaged that if the manufacturer does not take credit as soon as the inputs are received in the factory, he would be denied the benefit thereof.”

3. I have considered the rival submissions. I find that there is no provision for denying credit because of delay nor there is any time limit for taking credit in the Cenvat credit Rules and therefore, the stand taken by the Revenue that credit has to be taken within a reasonable period has no basis. As rightly pointed out by ld. Consultant, even the supplementary instructions issued by the Board also do not prescribe any time limit for the purpose. In view of the above, appeals filed by the Commissioner have no merit and accordingly are rejected. Cross-objections are also disposed of.

(Pronounced in court)

 By CA Deepak Gadgil  : Yes Dear Rebecca

If u read scheme of CCR 2004 - it’s sort of constitutional right given to you to avail cenvat Credit.

CA Deepak Gadgil,

By CA. Pradeep Jain :

Dear Professional friend,

Earlier in erstwhile Modvat Rules, there was time limit of six months on which credit can be taken. But there is no time limit prescribed in the new Rules. It is written that it should be taken immediately. But it does not mean it should be taken immediately on receipt of material. Even the CBEC manual of supplementary instructions has provided for the same. But taking after a reasonable time may call for inquiry from the department about the genuine transaction. But as per decisions they can not disallow the same.

But departmental audit is still not agreeing on the same and raising paras for the same. If the amount is small, they compel the assessee to reverse the same. To avoid litigation, they are doing so in most of the cases. We normally guide the assessee in this regard.

There should be system that the departmental officer should not raise paras on the issues which is settled by the tribunal or Court. We have always pleaded through various associations that there should be accountability of officers on issue of show cause notices. If it is decided in favour of assessee then person raising  audit para or issuing show casue notice should bear the cost of litigation or deprived of the promotions. This can end the unnecessary litigaion.

CA. Pradeep Jain

By Mr. Parveen Aggarwal : Dear Friends 

If the assessee has not claim the CENVAT in the past previous years, then he must had claimed the entire amount ( The expense on which he has paid the service tax + the service tax on that expense) as an expense in the profit and loss accout.

Now what will be the impact on the profit and loss account of the current year? 

What necessary journal entry will be required in that case?          Thanks

Parveen Aggarwal<>

CA Ravi Holani

By Mr. A. Butchaiah :

I agree with the view. However, let us go a step further.

Suppose credit is not taken earlier which was due on a particular date (transaction date). Subsequent debit entries have been passed. Then you found the missing credit. Can we take the credit retrospectively? If yes, can we re-enter the subsequent entries and avoid further deposits? Further, if it happens in subsequent year (immediately after year end) how

do we disclose in the accounts?

These aspects, may lead to practical difficulties. I will be happy to know the views.

A. Butchaiah

Butchaiah & Associates

By Ravi Holani :

 Accounting treatment is a separate issue, it could not control any legal provision. in 1992, there was a reference before the Tribunal about any time limit to take the credit which was decided against the revenue, subsequently, for few years, the time limit for input credit had been fixed upto 6 months from the date of receipt of the input which was again deleted under CENVAT CREDIT RULES, so if any judgment is against the assessee, prior to take any decision, period and the concerned provisions must be considered accordingly.
CA Ravi Holani

By S Sivakumar : As you have rightly stated, there are no issues in terms of availment of Cenvat credit at a later date, in respect of inputs / input services received earlier. The only issue is that, in respect of corporates, the requisite accounting entries would need to be passed.

In terms of the accrual basis of accounting which is mandatorily to be followed by corporates, any availment of credit in respect of a transaction in a subsequent year would need to be shown as a prior period item and this practice is prescribed by the accounting standards. 

Most corporates follow this practice and there can be no issues. 

In any case, Cenvat credit cannot be denied due to the passing or non-passing of accounting entries. 

S Sivakumar

By Rebecca : Dear Mr. Sivakumar & Mr. A. Butchaiah :

Reference thread below where Mr. Butchaiah had observed :

“Suppose credit is not taken earlier which was due on a particular date (transaction date). Subsequent debit entries have been passed. Then you found the missing credit. Can we take the credit retrospectively? If yes, can we re-enter the subsequent entries and avoid further deposits? Further, if it happens in subsequent year (immediately after year end) how do we disclose in the accounts? These aspects, may lead to practical difficulties.”

Mr. Sivakumar has given a well-considered and erudite response on the issue (please see below). I too have discussed the matter with a couple of CAs. There appears to be reluctance, infact extreme hesitation, on their part to avail such credit, if not taken in the previous accounting year. Plea is that such CENVAT credit has been booked as an expenses. If it is taken no, it will tantamount to restating the figures.

What are these misgivings, how far are these valid, whether there is an inherent constraint in such acounting treatment which creates a contradiction of sorts in Direct Taxes Vs. Indirect Taxes, is an issue, that I feel requires a great deal of discussion. 

May I request the prominent members to please take a lead and at least highlight why they feel let the sleeping dogs lie. Meaning thereby that if a decision was taken earlier and entries made, trying to revisit or reconsider these issues are fraught with more headache than benefit. 

With my knowledge of Income Tax being next to Zero, I am hardly in a position to contribute meaningfully, except to state my confusion of this concept.

Rebecca Andrews

By Mr. Sivakumar : If, in respect of a transaction which has already been booked as expenses in an earlier year, Cenvat credit is taken in a subsequent year, there are absolutely no problems. In the year in which the credit is taken, this item will get shown as a prior period income.  We have handled cases, wherein Cenvat credit running tens of crores have been taken in the subsequent years and these have been approved by Big 4 auditors.

Since this treatment is based on the mandatory accounting standard, the income arising out of the write back of Cenvat credit will get taxed under the Income tax Act. There is absolutely no question of any re-statement or re-drawing of the accounts of the earlier years.

The concept related to the prior period adjustments is a fundamental concept, which any CA student would be aware of. This not only applies for Cenvat credit issues, but to any expenditure or income, which has been left out in a particular year but is recognized in a subsequent year. 

S Sivakumar

By Mr.   : I thought the matter was simple than complex as it appears from exchange of mails. If this was missed out in an earlier year, due to an omission or error, that will go as a prior period adjustment in the current year  in the accounting records and for tax purposes, you could go and revise that particular year.

By Chenrat : I am just guessing but perhaps they are afraid of opening up a can of worms: such as mismatch of inputs to outputs ? Please excuse if I have misunderstood the issue.

While the law is that, cenvat credit can be taken at any time, please bear in mind that credit can be taken only on the basis of valid invoices from service providers, who should have raised invoices within 14 days of the rendering of the service or the receipt of the advance amount. It is here that a lot of issues crop up. If service tax has not been charged earlier and if the service provider issues invoices now, for services rendered earlier, it would be difficult to take the credit, as the 14 day rule is violated.

If invoices with service tax amounts have been received in time for the previous financial years and the services receiver has not take credit, there is no harm in taking credit now.



Invitation to write on CMA India Blog

Monday, July 5th, 2010

Your CMA India Portal invites articles/write-ups to be published as Blog post on the portal.

Kindly send your article along with your introduction / background/ qualifications. Also mention your website/social site like linkedin etc to the administrators/moderators for getting it published on the CMA India Portal. It is preferable to be registered on the portal although it is not compulsory. Some of the articles already published as Blogs on the portal can be read at

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CMA India Portal Team

Finance e-Bulletin - June 2010

Friday, July 2nd, 2010

Finance e-Bulletin - June 2010

This is a guest post by CMA.R.Satyanarayana. CMA.Satyanarayana is a Practicing Cost and Management Accountant. He retired GM(F&A) from Lubrizol India Pvt Ltd Mumbai and is a fellow member of ICWAI(membership No.6518). He was visiting faculty for more than 15 years for MBA(Finance) students in reputed management colleges in Navi Mumbai.  He regularly contributes articles to journals. He is presently a faculty attached to Hyderabad chapter of ICWAI.

You can reach him at

Quotes for the month: 1. It is unwise to be too sure of one’s own wisdom.  It is healthy to be It reminded that the strongest might weaken and the wisest might err.  - Mahatma Gandhi

2. Focusing your life solely on making a buck shows a certain poverty of ambition.  It asks too little of yourself.  Because it’s only when you hitch your wagon to something larger than yourself that you realize your true potential. - Barack Obama   


“Push and Pull” in ABC

Friday, July 2nd, 2010

“Push and Pull” in ABC

This is a guest post by CMA. Rajendra Patil Pune. He is a specialist in Activity Based Management and Corporate Performance Management consulting, implementation and training  You can read his blogs at


Those who are familiar with the manufacturing system must have heard or used this “Push and Pull’ technique. In this technique the downstream manufacturing process does not produce the part unless it is required by the upstream process. This is true for the final product also. It has got another name also “Top down and bottom up” approach. This is very popular with the planning and budgeting process. In the Top down approach the budget amount from the parent is distributed among the children with some logic. In Bottom up approach the budget amounts from various children departments are accumulated for the parent one.

In costing also people used to take every dollar from the accounting system and passed it to the final products. The accounting principles also required it to be done in that way. Later on people started using the capacity of the manufacturing equipments in the calculation of product costs. Though the machines were available for all 24 hours, their capacity was considered upon how long they are generally used, and called as ‘Normal Capacity’. The unused capacity is called ‘idle capacity’ and corresponding costs as ‘idle costs’.

Activity Based Costing (ABC) also started with the loading 100% of the costs from the resources to the cost objects through the activities. When the use of ABC was started for the services industries like banking, insurance, telecom etc. it must have started looking absurd to take all the costs of a branch of a bank to the services that it provides and then decide its profitability. This must led to the different way of putting the ABC model. I think that is when people thought of the ABC model which calculates the costs of the services based upon the volume of transactions.

The first way modeling where the 100% of costs are ‘pushed’ to the cost objects through the activities is called the ‘Push model ‘or the ‘top-down approach’ model of ABC. The other way of ABC modeling where the costs are pulled by the cost objects based upon their volume from the resources through the activities is called the ‘Pull model’ or the ‘bottom-up approach’ model. The major difference in these two models is in the push type 100% of the cost flows to the cost object. In pull model cost flown may be less or more than the cost entered in the resource module. This depends on the capacity utilization. In case of the machine we generally used the remaining capacity as ‘idle capacity’, but the in case human resources people do not like them to be called as idle. This sometimes gives a feeling that they have work but are not doing it. So we defined a term as ‘capacity available to use’. For example a branch has a ‘teller’. She will perform the cash deposit or withdrawal activities. If she does not have the sufficient number of transactions because of the footfall in the branch, then we say the rest of time she is available for other activities of the branch. She is not said to be ‘idle’.

This type of modeling has helped in calculation of product and customer profitability in the services industries very well. It has also helped in taking the costs of the internal services departments like HR, IT etc. It has been used by various consultants for a long time now and the current wave named as ‘time driven activity based costing (TDABC)’ is actually a more sophisticated version of the bottom-up or pull type of ABC modeling. This is a modeling technique and most of the commercial software solutions are capable of building such type of models. Now we will take some example and try to understand the difference.

I have learnt this concept from Greg Nolan of GJ&Nolan Co. and I will try to explain this in a similar way. Let’s take a bank is using a push approach to calculate the product profitability.

Push ABC example

The figures in the first column are from the financial accounts. The total revenue, total expenses are available and from that we can calculate the overall profitability of the bank. The revenue can be reasonably taken to the products, but the expenses are not easy to take to the products. We assume that the expenses here are taken on the basis of the # of accounts for various products. !00% of the expenses are taken to all the three products. So if you add the expenses of all the three products it matches with the total expense. With this calculation it shows that product 1 and product 2 are not doing good and product 3 is making profit.

If you ask any business manager if there anything wrong in this, invariably the answer would be ‘NO’. In absence of any cost information this would be accepted and used. The issue starts when you start getting information on a regular basis and start comparing with the earlier period(s). The changes in the figure then may not match with the changes on the business that are happening. To understand this clearly we will add a new product to this scenario and see the calculation.

With the addition of the product 4, brings its own revenue as well as expenses. Because of this the total revenue and the expenses are changed. The new amount of expenses is distributed based on the number of accounts various products. And now, the profitability of the products changes. The product 2, which was unprofitable till last period looks profitable now.

This is when the business managers start disbelieving the numbers. Quite reasonable too. Because there was no business change that happened in that period and still the product started looking profitable. The question comes, what is the correct information? The current information that the product is profitable or the earlier information that the product was unprofitable. Nobody can give the correct answer with this data.

Pull ABC Example

We will take the similar example of the products and try to understand the Pull ABC model.

What is the difference here? The expenses are not distributed based on the # of accounts, but the unit costs are calculated for each product and it is multiplied by the # of accounts. In this case the total expenses do not match with the sum of expenses of the products. This is because the balance is the capacity available for expansion.

Now we add a product here also and see the calculation.

When you add the product and the income and expenses of the same the profitability of the products 1,2 and 3 is unchanged. And which should be, isn’t it? The expenses are taken from the capacity available and the available capacity is reduced.

For the services industries most of the operating expenses are incurred in putting up the resources to service the customers and process the transaction they perform. The profit in that case is the difference between the amount paid by the customer and the amount of resource they consume, as well as the amount of resources positioned but not consumed.

We will take another example of a withdrawal from an ATM. There is an ATM in remote corner of the city, which is hardly used by any customer, but put up by the bank. One fine day a customer goes to that ATM and withdraws some money. In case of the Push model, the whole of the quarter’s expenses for the ATM would be charged to customer and the poor customer would not be shown profitable for the entire life with the bank.

In case of Pull model, the cost of one transaction would be calculated based on the capacity of the ATM to handle and time taken by the transaction. Based on this calculation the customer would be charged to the customer.

The Pull modeling technique can also be used for resource planning. Based on the volume of the different products to be sold in future, we can calculate the requirement of various resources like machines, skill set etc. by adding budgeted expenses to this model we can calculate the planned profitability of the organization. Using this planning model we can compare the actual expenses, profitability, utilization etc. and understand the reasons for the variance.

IOUSA - Lessons for India and Indians?

Thursday, July 1st, 2010

IOUSA is a documentary on the burgeoning deficit of the US economy. The huge deficit staring at the US is an indicator of the worse to come not only to US economy but also to the world economoy. Decoupling theory works? Lets hope so. Lessons for India and Indians to save, manage deficit, live within means and be low on debt.

The 2007 World Trade Imbalances shows China  having the largest trade surplus in the world. Last in ranking no 224 is the US, at 220 it is India.

I first saw this video on Bill.M.Wright’s Blog, Windows to Wall Street
Bill is the founder of Windows to Wall Street and the Wright Solution. Bill holds a BBA in Accounting and Finance and MBA in Management and Investments. Bill has 25 years of experience in the Financial Services Industry and 5 years in the Manufacturing Industry.

Watch this 30 minute video on youtube. This is the link. Do let me know what you make of it.