PRIME/PT39/FINAL 1

PRIME ACADEMY 39th SESSION PROGRESS TEST

ADVANCED MANAGEMENT ACCOUNTING No of pages: 5 Total Marks: 75 Time Allowed: 2 Hrs PART - A

1. Which factor is to be considered when management is faced with the problem as to whether a part should be manufactured or it should be purchased from outside market.

a. Fixed cost of the product b. Total cost of the product c. Surplus capacity in the market d. Sunk cost.

2. The cost unaffected by fluctuations in the level of activity is referred to as

a. Joint cost b. Fixed cost c. Variable cost d. Product cost

3. The northwest corner rule requires that we start allocating units to shipping routes in the:

a. Lower right corner of the table. b. Upper right corner of the table. c. highest costly cell of the table. d. Upper left-hand corner of the table.

4. Cost relating to a time period rather than to the output of products or services.

a. Overhead cost b. Indirect cost c. Sunk cost d. Period cost

5. Cost of a finished product built up from its cost elements.”

a. Prime cost b. Product cost c. Production cost d. Period cost

6. a decision whether to produce one product or another is generally made by comparing

a. Contribution b. Fixed cost c. Selling price d. Total profit

7. Cost that has been irreversibly incurred or committed and cannot therefore be considered

relevant to a decision is a. Period cost b. variable cost c. Sunk cost d. Marginal cost

PRIME/PT39/FINAL 2

8. If overhead absorbed is less than that incurred there is

a. Under absorption b. Over absorption c. No absorption d. None of the above

9. ___________is the change (increase or decrease) in the total cost due to change in the level

of activity, technology or production process or method of production. a. Marginal cost b. Differential cost c. Direct cost d. Indirect cost

10. Sunk cost is irrelevant in decision-making, but irrelevant costs are not sunk costs”.

a. True b. False

11. Which of the following is relevant cost:

a. All fixed costs b. Variable costs which do not vary with the decision c. Book value of the asset d. Incremental costs

12. A company generally buy a component instead of making it under following situations:

a. If it costs less to buy rather than to manufacture it internally; b. If the return on the necessary investment to be made to manufacture is not

attractive enough; c. If the company does not have the requisite skilled manpower to make; d. All of the above

13. The objective of an assignment problem is to assign a number of origins to the equal number

of destinations at a minimum cost or maximum profit. a. True b. False

14. In a transportation problem with total demand of 1200 and total supply of 900, we should

add _____________ off ___________ to convert it to a balanced problem. a. Dummy supply, 300. b. Dummy supply, 2100. c. Dummy demand, 300. d. Dummy demand, 2100. (2 Marks)

15. The actual sale of a company is Rs 1450 and budgeted sale is ` 150. The actual profit is

` 210 and budgeted is ` 90. Compute PV Ratio a. 45% b. 60% c. 55% d. 50% (2 Marks)

PRIME/PT39/FINAL 3

16. Compute fixed cost for the above question

a. ` 360 b. ` 660 c. ` 330 d. ` 300 (2 Marks)

17. A retail company sells computers, each of which is sold for ` 250 and bought from the

manufacturer for ` 100. The retailer’s fixed costs are ` 150,000. Maximum possible sales are ` 3,000. How many computers must be sold to break-even?

a. ` 2,000. b. ` 750. c. ` 1,000. d. ` 3,000. (2 Marks)

18. Using the information in question 16, how much profit or loss would be made if 2,700

computers were sold? a. ` 450,000 profit. b. ` 150,000 loss. c. ` 162,000 profit. d. ` 255,000 profit. (2 Marks)

19. Using the information in question 16, how many computers would have to be sold for the

company two and a profit of ` 180,000? a. ` 2,200. b. ` 1,000. c. ` 720. d. ` 1,200. (2 Marks)

PART - B (50 Marks)

Answer any four from the following

1. Jolly Gourmet Food Products is a new entrant in the market for chocolates. It has introduced a new product—Sweetie. This is a small rectangular chocolate bar. The bars are wrapped in aluminium foil and packed in attractive cartons containing 50 bars. A carton, is therefore, considered the basic sales unit. Although management had made detailed estimates of costs and volumes prior to undertaking this venture, new projections based on actual cost experience are now required. Income Statements for the last two quarters are each thought to be representative of the costs and productive efficiency we can expected in the next few quarter. There were virtually no inventories on hand at the end of each quarter. The income statements reveal the following:–

First Quarter(`) Second Quarter(`) Sales : 50,000 × ` 24 12,00,000 — 70,000 × ` 24 — 16,80,000 Less: Cost of Goods Sold 7,00,000 8,80,000 Gross Margin 5,00,000 8,00,000 Less: Selling and Administration 6,50,000 6,90,000 Net Income / (Loss) before Taxes (1,50,000) 1,10,000 Less: Tax (60,000) 44,000 Net Income / (Loss) (90,000) 66,000

PRIME/PT39/FINAL 4

The firm’s overall marginal and average income tax rate is 40%. This 40% figure has been used to estimate the tax liability arising from the chocolate operations. Required:

a) Management would like to know the breakeven point in terms of quarterly carton sales for the chocolates.

b) Management estimates that there is an investment of ` 30,00,000 in this product line. What quarterly carton sales and total revenue are required in each quarter to earn an after tax return of 20% per annum on investment? (10 Marks)

2. A private firm employs typists on hourly piece rate basis for their daily work. Five typists are

working in that firm and their charges and speeds are different. On the basis of some earlier understanding, only one job is given to one typist and the typist is paid for full hours even when he or she works for a fraction of an hour. Find the least cost allocation for the following details: Typist Rate per hour

(`) No. of pages typed per hour

Job No. of pages

A 5 12 P 199B 6 14 Q 175C 3 8 R 145D 4 10 S 298E 4 11 T 178 (10 Marks)

3. A firm has three shops with a total of 80 televisions. An order is received from the local authority for sets to be delivered to 4 schools. The transport costs from shops are shown below. You are required to make the most economic deliveries. Schools Requirements A B C D

Available

Sets 20 30 15 5

Cost Shop I 40 2 4 1 6 Shop II 20 4 3 3 3 Shop III 20 1 2 5 2

(10 Marks)

4. Recently, Ministry of Health and Family Welfare along with Drug Control Department have come hard on health care centres for charging exorbitant fees from their patients. Human Health Care Ltd. (HHCL), a leading integrated healthcare delivery provider company is feeling pinch of measures taken by authorities and facing margin pressures due to this. HHCL is operating in a competitive environment so; it’s difficult to increase patient numbers also. Management Consultant of the company has come out with some plan for cost control and reduction. HHCL provides treatment under package system where fees is charged irrespective of days a patient stays in the hospital. Consultant has estimated 2.50 patient days per patient. He wants to reduce it to 2 days. By doing this, consultant has targeted the general variable cost of ` 500 per patient day. Annually 15,000 patients visit to the hospital for treatment.

PRIME/PT39/FINAL 5

Medical Superintendent has some concerns with that of Consultant’s plan. According to him, reducing the patient stay would be detrimental to the full recovery of patient. They would come again for admission thereby increasing current readmission rate from 3% to 5%; it means readmitting 300 additional patients per year. Company has to spend ` 25,00,000 more to accommodate this increase in readmission. But Consultant has found bless in disguise in this. He said every readmission is treated as new admission so it would result in additional cash flow of ` 4,500 per patient in the form of admission fees. Calculate the impact of Management Consultant’s plan on profit of the company. Also comment on result and other factors that should be kept in mind before taking any decision. (10 Marks) 5. Blue Bird Ltd. produces and sells Bicycles. It also manufactures the chains for its Bicycles. It

expects to produce and sell 24,000 Bicycles during 2014 –15. It is considering an offer from an outside vendor to supply any number of chains at ` 12 per chains. The accountant of Blue Bird Ltd. reports the following costs for producing 24,000 chains:

Particulars Cost per unit (`) Total cost (`) Direct material 5.00 1,20,000 Direct labour 4.00 96,000 Variable manufacturing overhead 2.00 48,000 Inspection, set up etc. 1.00 24,000 Machine rent 1.00 24,000 Allocated fixed overhead 1.25 30,000 14.25 3,42,000

The following additional information is available:

(i) Inspection, set up etc. vary with the number of batches in which the chains are produced. Currently chains are being produced in the batch size of 2,000 units.

(ii) Direct labour cost represents wages to four workers who are exclusively engaged in the manufacturing of chains. These workers are in permanent capacity and cannot be retrenched.

(iii) if Blue Bird Ltd. procures all its chains from outside vendor it will not require the machine which it has hired for manufacturing chains.

Required:

(i) Assume that if Blue Bird Ltd. purchase chains from outside vendor, the facility (including workers) where the chains are currently manufactured will remain idle. Should Blue Bird Ltd. accept the offer from outside vendor at the anticipated production and sale volume of 24,000 units.

(ii) Whether your decision in (i) will change if facilities can be used to upgrade the Bicycle which will result in incremental revenue of ` 22 per Bicycle. The variable cost for upgrading would be ` 18 and tooling cost would be ` 16,000. (10 Marks)

PRIME/ME39/FINAL 1

PRIME ACADEMY 39th SESSION – FINAL - PROGRESS TEST

ADVANCED MANAGEMENT ACCOUNTING SUGGESTED ANSWERS

PART - A 1. C. Surplus capacity in the market 2. B. Fixed cost 3. d. Upper left-hand corner of the table. 4. d. Period cost 5. b. product cost 6. a. contribution 7. c. Sunk cost 8. a. under absorption 9. b. Differential cost 10. a. True 11. d. Incremental cost 12. d. all of the above 13. A. True 14. A. Dummy supply, 300 15. B. 60% 16. B. Rs 660 17. C. 1000 18. D. Rs 255,000 19. A. 2,200

PART – B

1. Estimation of the Fixed and Variable Costs. i. Variable Manufacturing Cost per carton = ChangeinCosts/ChangeinActivity

= (8,80,000-7,00,000)/(70,000 -50,000) =1,80,000/20,000 = `9 per carton

ii. Fixed Manufacturing Costs: Costs of Goods Sold = Fixed Manufacturing Cost + Variable ManufacturingCost ` 7,00,000 = Fixed Manufacturing Cost + (50,000 Cartons × `9) Fixed Manufacturing Cost = ` 7,00,000 – ` 4,50,000 = ` 2,50,000 Variable Selling and Administration Cost per unit:

= (6,90,000- 6,50,000)/(70,000 -50,000) =40,000/20,000 = ` 2 per unit

a) Fixed Selling & Administration Costs: Total Selling & Admn. Costs = Fixed Selling & Admn. Cost + Variable Selling & Admn. Costs ` 6,50,000 = Fixed Selling & Admn. Costs + (50,000 Cartons × ` 2) Fixed Selling & Admn. Cost = ` 6,50,000 – ` 1,00,000 = ` 5,50,000 So the Total Variable Costs per unit are `11 per unit (` 9 + ` 2). Total Fixed Costs are ` 8,00,000 per quarter (` 2,50,000 + ` 5,50,000). Given Sale Price of `24 per carton and Variable Costs of ` 11 per carton, the Contribution per

carton is ` 13 (` 24 – ` 11). Breakeven Point = Fixed cost (per quarter) ÷ Contribution per Carton

PRIME/ME39/FINAL 2

= 8,00,000/13= 61,539 Cartons

b) To earn an After Tax Return of 20% on `30,00,000, the Desired Annual After Tax NetIncome is `6,00,000 (`30,00,000 × 20%). The Quarterly After Tax Net Income will be`1,50,000. Given the Tax Rate of 40%, the Pre-tax Return will be `2,50,000 (`1,50,000× 100/60).

Quarterly Sales (units) = (FixedCost + DesiredReturn)÷Contribution per unit = (8,00,000+2,50,000)/ = 80,769 Cartons

Quarterly Sales Revenue = `19,38,456 (80,769 Cartons × `24)

2. Step 1: Typists P Q R S T A 85 75 65 125 75B 90 78 66 132 78C 75 66 57 114 23D 80 72 60 120 72E 76 64 56 112 68

Step 2: Row operations Typists P Q R S T A 20 10 0 60 10B 24 12 0 66 12C 18 9 0 57 12D 20 12 0 60 12E 20 8 0 56 12

Step 3: Column Operations Typists P Q R S T A 2 2 0 4 0 B 6 4 0 10 2 C 0 1 0 1 2 D 2 4 0 4 2 E 2 0 0 0 2 The minimum number of lines which cover all zero’s is three which is less than the order of the matrix. So subtract 2, the minimum uncovered number from all uncovered elements and add it to the junction value. Typists P Q R S T A 2 2 2 4 0 B 4 2 0 8 0 C 0 1 2 1 2 D 0 2 0 2 0 E 2 0 2 0 2 The minimum number of lines which cover all zero’s is four which is less than the order of the matrix. So subtract 1, the minimum uncovered number from all uncovered elements and add it to the junction value.

PRIME/ME39/FINAL 3

Typists P Q R S T A 2 1 2 3 0 B 4 1 0 7 0 C 0 0 2 0 2 D 0 1 0 1 0 E 3 0 3 0 2 Assignment: Typists P Q R S T A 2 1 2 3 0 B 4 1 0 7 0 C 0 0 2 0 2 D 0 1 0 1 0 E 3 0 3 0 2 Typist Job Cost A T 75 B R 66 C Q 66 D P 80 E S 112 Total 399

3. Tabulation:

Shop School Sets A B C DI 2 4 1 6 40 II 4 3 3 3 20 III 1 2 5 2 20 Requirements 20 30 15 5 70 80 Insertion of dummy column

Vogel’s approximation method

Shop

School

Sets

Difference

A B C D Dummy

I

2 4 1 6

0 40 1 1

II

4 3 3 3

0 20 3 -

Shop School

Sets A B C D Dummy

I 2 4 1 6 0 40 II 4 3 3 3 0 20III 1 2 5 2 0 20 Requirements 20 30 15 5 10 80 80

15 15

15 5

PRIME/ME39/FINAL 4

III 1

2 5 2

0 20 1 1

Requirem ents

20 30 15 5 10 80 80

Difference 1 1 2 1 0

1 1 - 1 0 There are six independent allocations, whereas m+n-1=8. Therefore solution is degenerate. We treat III B as occupied. Let us now introduce for unallocated cell. We assume u1 = 0 and remaining are calculated below.

Shop School

Sets ui

A B C D Dummy I

2 4 1 6

0 40 0

II

4 3 3 3

0 20 -1

III 1

2

5 2 0 20 -2

Reqt 20 30 15 5 10 80

Vj 3 4 1 4 0

Occupied cells Unoccupied cellsU1+v2 =4 or v2=4 2-(0+3) =-1 U1+v3 = 1 or v3=1 6-(0+4)=2 U1+v5=0 or v5=0 4-(-1+3)=2U2+v2=3 or v4=4 3-(-1+1)=3 U2+v4=3 or v4=4 0-(-1+0)=1 U3+v1=1 or v1=3 5-(-2+1)=6 U3+v2=2 or u3=-2 2-(-2+4)=0 We find that shadow cost (ij) for cell I-A is negative. Therefore the above solution is not optimal. Introduce in the cell I-A with negative shadow cost, an assignment 0.

Shop School

Sets ui

A B C D Dummy I

2 4 1 6

0 40 0

II

4 3 3 3

0 20 0

III 1 2

5 2 0 20 -1

20

15 15

15

20

5 2

-1

3

210

1

6 0 2

1 15

15

5

5 2

15

2

310

0

5 015

PRIME/ME39/FINAL 5

Reqt 20 30 15 5 10 80

Vj 2 3 1 3 0

The above solution is optimum since all opportunity costs in unused cells are positive. Occupied cells Unoccupied cells U1+v1 =2 or v1=2 4-(0+3) =1 U1+v3 = 1 or v3=1 6-(0+3)=3 U1+v5=0 or v5=0 4-(01+2)=2U2+v2=3 or u2=0 3-(01+1)=2 U2+v4=3 or v4=3 0-(0+0)=0 U3+v1=1 or v1=-1 5-(-1+1)=5 U3+v2=2 or v2=-3 2-(-1+3)=0

4. i) Impact of Management Consultant’s Plan on Profit of the Human Health Care Ltd. Statement Showing Cost Benefit Analysis Particulars (`) Cost: Incremental Cost due to Increased Readmission

25,00,000

Benefit: Saving in General Variable Cost due to Reduction in Patient Days [15,000 Patients × (2.5 Days – 2.0 Days) × `500)

37,50,000

Revenue from Increased Readmission (300 Patients × `4,500) 13,50,000 Incremental Benefit 26,00,000

ii) Comment

Primary goal of investor-owned firms is shareholder wealth maximization, whichtranslates to stock price maximization. Management consultant’s plan is lookinggood for the HHCL as there is a positive impact on the profitability of the company (refer Cost Benefit Analysis). Also HHCL operates in a competitive environment so for its survival, it has to workon plans like above.But there is also the second side of a coin that cannot also be ignored i.e. humanityvalues and business ethics. Discharging patients before their full recovery will adddiscomfort and disruption in their lives which cannot be quantified into money. Therecould be other severe consequences as well because of this practice. For gainingextra benefits, HHCL cannot play with the life of patients. It would put a questionmark on the business ethics of the HHCL.May be HHCL would able to earn incremental profit due to this practice in short runbut It will tarnish the image of the HHCL which would hurt profitability in the longrun. So, before taking any decision on this plan, HHCL should analyze both quantitative as well as qualitative factors.

5. i) Deciding whether Blue Bird Ltd. should accept the offer from an outside vendor insteadof manufacturing the chains inside.

(`) Offered Bought Out Price per chain (if Purchased from Outside Vendor) 12 Less: Variable Cost per unit (if Chains were Produced inside) 7 Excess of Bought Out Price per chain over Variable Cost 5 Total Excess Amount if 24,000 Chains were Purchased 1,20,000 Less: Avoidable Costs Inspection Setup etc 24,000 Machine Rent 24,000 Excess of Bought Out Price over Variable and Avoidable Cost 72,000

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Blue Bird Ltd. should not accept the offer of an outside vendor because its acceptance would result in the reduction of profit by ` 72,000.

ii) Deciding whether the use of internal facilities for upgrading the quality of chains the quality of chains would be beneficial in comparison to their purchase from an outside vendor.

(`) Incremental Revenue per Bicycle 22Less: Differential Cost per Bicycle 18Contribution per Bicycle 4Total Contribution (24,000 × `4) 96,000Less: Tooling Cost 16,000Net Contribution 80,000

Blue Bird Ltd. should accept the offer of alternative use of facilities for upgrading the Bicycle as its use, would produce, an incremental net contribution of ` 80,000, which is more than the excess of bought out price over variable and avoidable costs by ` 8,000.

PRIME/PT39/FINAL 1

PRIME ACADEMY 39th SESSION - PROGRESS TEST

INFORMATION SYSTEM CONTROL AND AUDIT No of Pages: 2 Total Marks:75 Time Allowed: 2Hrs

PART - A 1. _______, ____________ & __________ are the three information systems security objectives in

any organization 2. A____ is the essential foundation for an effective and comprehensive information security

program. 3. ________ Means the processing of a transaction, there are split between different people, such

that one person cannot process a transaction right from start to finish. 4. ________Establishes interface between the user of the system and the system itself. The system

must ensure that it has an authentic user. Users allowed using resources in restricted ways. 5. ______ involves the change of data before or after they are entered into the system 6. A ________ is an illicit coding contained in a legitimate program, and causes an illegitimate

action. 7. _________ involves slicing of small amounts of money from a computerized transaction or

account. 8. ________ allow insertion of specific logic, such as program interrupts that permit a review of

data. 9. ___________ involves leaking information out of the computer by means of dumping files to

paper or stealing computer reports and tape. 10. ____________ is the act of following an authorized person through a secured door or

electronically attaching to an authorized telecommunication link that intercepts and alters transmissions.

11. ____________ consists of a pushbutton panel that is mounted near the door outside of a secured area.

12. ___________ refers to the gaining access to confidential information by searching corporate records.

13. _________ is the process of gathering and interpreting facts, diagnosing problems, and using the information to recommend improvements to the system.

14. __________ is the process of planning and structuring a new business system or one to replace or complement an existing system.

15. _________ refers to a type of software development methodology. which uses minimal planning in favour of rapid prototyping.

16. A ________ is a table, which may accompany a flowchart, defining the possible contingencies that may be considered within the program and the appropriate course of action for each contingency.

17. _________ is prepared by the organisation and given to vendors, asking the vendors to prepare a bid and submit it to the organization

18. CASE stands for ____________ 19. __________ should be placed under the raised floor, near drain holes and unattended

equipment storage facilities 20. _________ is an act of penetrating computer systems to gain knowledge about the system and

how it works 21. __________refers to a process of evaluating alternative systems through cost/benefit analysis so

that the most feasible and desirable system can be selected for development. 22. Loss of customer sales and goodwill due to errors made at the time of installation of a new

system is an example of ________ costs. 23. A ________of all developed systems must be performed to assess the effectiveness and

efficiency of the new system and of the development process. (25 Marks)

PRIME/PT39/FINAL 2

PART - B (50 Marks) Answer any 5 Qns.

1.

a) List out the components of a good security policy (6 Marks) b) Based on the objectives, controls are classified as preventive, detective, corrective and compensatory. Explain each of these controls in brief (4 Marks)

2. a) Write short notes

i) Cryptography (2 Marks) ii) Processing controls (2 Marks)

b) Explain in brief the major data integrity policies (6 Marks)

3. a) What do you understand by "cryptosystem"? Also explain the two basic techniques for encrypting Information

(6 Marks) b) Write short notes (2 Marks each)

i) Manual Logging: ii) Denial of Service (DoS) Attack:

4. a) Some organizations fail to achieve the system development objectives. Explain the possible reasons for the same. (6 Marks) b) What do you understand by “prototyping approach” to system development? (4 Marks)

5. a) SDLC consists of a series of activities. Explain each stage in brief (6 Marks) b) Explain the factors that would be considered while reviewing the operational feasibility of a new system development project. (4 Marks)

6. a) Explain the various fact finding techniques used by analysts for determining user needs (4 Marks) b) Write short notes

i) Stress Tests: ii) Black Box Testing: iii) Objectives of Post implementation review (2 Marks each)

PRIME/PT39/FINAL 1

PRIME ACADEMY 39th SESSION – FINAL - PROGRESS TEST

INFORMATION SYSTEM CONTROL AND AUDIT SUGGESTED ANSWERS

PART - A

1. Confidentiality, integrity & availability 2. Information security policy 3. Segregation of duties 4. Boundary controls 5. Data diddling 6. Trojan horse 7. Salami Techniques 8. Trap doors 9. Data leakage 10. Piggybacking 11. cipher lock 12. Scavenging or Dumpster Diving 13. System Analysis 14. System Design 15. Rapid Application Development (RAD) 16. Decision Table 17. RFP (request for proposal) 18. Computer Aided System Engineering tool 19. Water Detectors 20. Hacking 21. Feasibility study 22. Intangible Costs 23. post-implementation review

PART - B

1 a) A good security policy should clearly state the following: Purpose and Scope of the Document and the intended audience; The Security Infrastructure; Security policy document maintenance and compliance requirements; Incident response mechanism and incident reporting; Security organization Structure; Inventory and Classification of assets; Description of technologies and computing structure; Physical and Environmental Security; Identity Management and access control; IT Operations management; IT Communications; System Development and Maintenance Controls; Business Continuity Planning; Legal Compliances; and Monitoring and Auditing Requirements.

PRIME/PT39/FINAL 2

b)

i) Preventive Controls: Preventive controls are those inputs, which are designed to prevent an error, omission or malicious act occurring. The broad characteristics of preventive controls are: A clear-cut understanding about the vulnerabilities of the asset Understanding probable threats Provision of necessary controls for probable threats from materializing

Some examples of preventive control are Employ qualified personnel, Segregation of duties, Access control, Documentation, Training and retraining of staff, Firewalls etc.

ii) Detective Control: These controls are designed to detect errors, omissions or malicious acts that occur and report the occurrence. The main characteristics of such controls are as follows: Clear understanding of lawful activities so that anything which deviates from these is

reported as unlawful, malicious, etc. An established mechanism to refer the reported unlawful activities to the appropriate

person or group Interaction with the preventive control to prevent such acts from occurring Surprise checks by supervisor

Some examples include hash totals; duplicate checking of calculations, internal audit functions, Intrusion detection system, cash counts and bank reconciliation, monitoring expenditures against budgeted amount etc.

iii) Corrective Controls: Corrective controls are designed to reduce the impact or correct an error once it has been detected. Corrective controls may include the use of default dates on invoices where an operator has tried to enter the incorrect date. A business continuity plan is considered to be a significant corrective control. The main characteristics of the corrective controls are: Minimize the impact of the threat Identify the cause of the problem Remedy problems discovered by detective controls Get feedback from preventive and detective controls Correct error arising from a problem Modify the processing systems to minimize future occurrences of the problem

Examples of Corrective Controls include Contingency planning, backup procedure, investigate budget variance and report violations

iv) Compensatory Controls: While designing controls it is necessary to remember that the cost of the lock should not be more than the cost of the assets it protects. If the organization is not able to implement appropriate control due to financial, administrative or operational reasons, there should be adequate compensatory measures which may although not be as efficient as the appropriate control, can indubitably reduce the probability of threats to the assets. Such measures are called compensatory controls. Compensatory controls include audit trails, user controls and error correction

2 a)

i) Cryptography: It deals with programs for transforming data into cipher text that are meaningless to anyone, who does not possess the authentication to access the respective system resource or file. A cryptographic technique encrypts data (clear text) into cryptograms (cipher text) and its strength depends on the time and cost to decipher the cipher text by a cryptanalyst. Three techniques of cryptography are transposition (permute the order of characters within a set of data), substitution (replace text with a key-text) and product cipher (combination of transposition and substitution).

ii) Processing Controls: Data processing controls perform validation checks to identify errors during

processing of data. They are required to ensure both the completeness and the accuracy of data

PRIME/PT39/FINAL 3

being processed. Normally, the processing controls are enforced through database management system that stores the data. However, adequate controls should be enforced through the front end application system also to have consistency in the control process.

b)

Major data integrity policies are given as under: Virus-Signature Updating: Virus signatures must be updated automatically when they are made

available from the vendor through enabling of automatic updates. Software Testing: All software must be tested in a suitable test environment before installation

on production systems. Division of Environments: The division of environments into Development, Test, and

Production is required for critical systems. Offsite Backup Storage: Backups older than one month must be sent offsite for permanent

storage. Quarter-End and Year-End Backups: Quarter-end and year-end backups must be done

separately from the normal schedule, for accounting purposes Disaster Recovery: A comprehensive disaster-recovery plan must be used to ensure continuity

of the corporate business in the event of an outage.

3 a) A cryptosystem refers to a suite of algorithms needed for data transformations viz. encryption and decryption. Encrypting data converts it to an unintelligible form called cipher. Decrypting cipher converts the data back to its original form called plaintext. A key is a piece of information which controls the cryptography algorithm. A cryptosystem consists of three algorithms: one for key generation, one for encryption, and one for decryption. The term cipher is often used to refer to a pair of algorithms, one for encryption and one for decryption. Therefore, the term "cryptosystem" is most often used when the key generation algorithm is important. For this reason, the term "cryptosystem" is commonly used to refer to public key techniques. There are two basic techniques for encrypting information: symmetric encryption (also called secret key encryption) and asymmetric encryption (also called public key encryption.) Symmetric encryption is the oldest and best-known technique where a secret key is applied to the text of a message to change the content in a particular way. As long as both sender and recipient know the secret key, they can encrypt and decrypt all messages that use this key. Where the question of sharing the secret keys over a public network such as internet becomes a problem, asymmetric encryption can be used where there is a key pair – a public key (which is published) and a private key (which is kept secret to avoid compromise or disclosure.). The private key is used to create an electronic identifier called a digital signature that uniquely identifies the holder of the private key and can only be authenticated with the corresponding public key. Any message that is encrypted by using the public key can only be decrypted by applying by using the matching private key. Any message that is encrypted by using the private key can only be decrypted by using the matching public key.

b)

i) Manual Logging: All visitors should be prompted to sign a visitor’s log indicating their name, company represented, their purpose of visit, and person to see. Logging may happen at both fronts, reception and entrance to the computer room. A valid and acceptable identification such as a driver’s license, business card or vendor identification tag may also be asked for before allowing entry inside the company.

PRIME/PT39/FINAL 4

ii) Denial of Service (DoS) Attack:

It refers to an action or series of actions that prevents access to a software system by its intended/authorized users; causes the delay of its time-critical operations; or prevents any part of the system from functioning.

4 a) Lack of senior management support for and involvement in information systems development. Shifting user needs: Constant changes results in more requests for systems development & new

project which serves as a challenge to the development team Difficulty in defining the requirements, specifications, and objectives for development of

strategic systems where the decision making is unstructured Personnel are not as familiar with the new technology Lack of standard project management and systems development methodologies Overworked or under-trained development staff. Resistance to change: People have a natural tendency to resist change, when they perceive that

the project will result in personnel cutbacks such as downsizing Lack of user participation in the development efforts to define their requirements Inadequate testing and user training.

b) What do you understand by “prototyping approach” to system development? (4 marks) Prototyping approach involves developing a small or pilot version called a prototype which is a part of a system. A prototype is a usable system or system component that is built quickly and at a lesser cost, and with the intention of modifying/replicating/expanding or even replacing it by a full-scale and fully operational system. As users work with the prototype, they learn about the system criticalities and make suggestions about the ways to manage it. These suggestions are then incorporated to improve the prototype, which is also used and evaluated Finally, when a prototype is developed that satisfies all user requirements, either it is refined and turned into the final system or it is scrapped. If it is scrapped, the knowledge gained from building the prototype is used to develop the real system.

5 a) i) Preliminary investigation

A preliminary investigation is undertaken when users come across a problem or opportunity and submit a formal request for a new system to the MIS department. This activity consists of three parts: Request clarification: Precisely determining what the originator wants Feasibility study: Technical, economic and operational feasibility by the analyst Request approval: Based on the observations of the analyst, the management decides which

System should be taken up for development.

ii) Requirements analysis or systems analysis Here, analysts work closely with employees and managers of the organisation for determining information requirements of the users. Several fact-finding techniques and tools such as questionnaires, interviews, observing decision-maker behaviour and their office environment etc. are used for understanding the requirements. As details are gathered, the analysts study the present system to identify its problems and shortcomings and identify the features, which the new system should include to satisfy the new or changed user application environment. This step is also referred to as “systems analysis”.

PRIME/PT39/FINAL 5

iii) Design of the system

During system design, the user requirements are incorporated into a new systems design. The design of an information system produces the details that state how a system will meet the requirements identified above. The analyst designs various reports/outputs, data entry procedures, inputs, files and database. He also selects file structures and data storage devices. These detailed design specifications are then passed on to the programming staff so that software development can begin.

iv) Acquisition and development of software Resources required in the form of hardware, software & services are determined. Choices are made regarding which products to buy or lease from which vendors. Software may be developed in-house or purchased off the shelf or purchased and customized to suit the requirements. The analyst plays a critical role in this stage.

v) Systems testing

A system testing is done experimentally to ensure that the software does not fail i.e. it runs according to its specifications and in the way users expect. Special test data are input for processing, and results examined. If it is found satisfactory, it is eventually tested with actual data from the current system.

vi) Implementation and maintenance

After the system is found to be fit, it is implemented with the actual data. Hardware is installed and users are then trained on the new system and eventually work on it is carried out independently. The results of the development efforts are reviewed to ensure that the new system satisfies user requirements. After implementation, the system is maintained; it is modified to adapt to changing users and business needs. Even when a system is fully specified, designed, purchased and running, it is continually being enhanced or maintained. Thus system development life cycle should be viewed as a continuous iterative process.

b)

Operational Feasibility: It is concerned with ascertaining the views of workers, employees, customers and suppliers about the use of computer facility. A system can be highly feasible in all respects except the operational and fails miserably because of human problems. Some of the questions, which help in testing the operational feasibility of a project, may include the following:

• Is there sufficient support for the system from management and from users? • Are current business methods acceptable to users? • Have the users been involved in planning and development of the project? • Will the proposed system cause harm? Will it produce poorer results in any respect or area? Will loss of control result in any areas? Will accessibility of information be lost? • Will individual performance be poorer after implementation than before?

This analysis may involve a subjective assessment of the political and managerial environment in which the system is to be implemented. In general, the greater the requirements for change in the user environment in which the system will be installed, greater is the risk of implementation failure.

PRIME/PT39/FINAL 6

6 a)

Various fact-finding techniques, which are used by the system analyst for determining these needs/ requirements, are briefly discussed below: Documents: Document means manuals, input forms, output forms, diagrams of how the current

system works, organisation charts, job descriptions, program codes for the applications associated with the current system, etc. Documents are a very good source of information about user needs and the current system. They are easy to collect, convey a lot of information and provide relatively objective data. The analyst should ensure that the documents which he is collecting are current, accurate and contain up-to-date information.

Questionnaires: Users and managers are asked to complete questionnaire about the information system when the traditional system development approach is chosen. The main strength of questionnaires is that a large amount of data can be collected through a variety of users quickly. Also, if the questionnaire is skill fully drafted, responses can be analysed rapidly with the help of a computer.

Interviews: The data gathered through interviews often provide systems developer with a complete picture of the problems and opportunities. Interviews also give analyst the opportunity to note user reaction first-hand and to probe for further information.

Observation: In prototyping approaches, observation plays a central role in requirement analysis. Only by observing how users react to prototypes of a new system, the system can be successfully developed. In the traditional approach, observation is not always mandatory. But it is desirable in most instances. The analyst should visit the user site to watch how the work was taking place. Such a surprise visit often helps the analyst in getting a clear picture of the user’s environment and to determine why a request for a new system was submitted.

b)

i) Stress Tests: Stress testing is a form of testing that is used to determine the stability of a given system or entity. It involves testing beyond normal operational capacity, often to a breaking point, in order to observe the results. These tests are designed to overload a program in various ways. The purpose of a stress test is to determine the limitations of the program. For example, during a sort operation, the available memory can be reduced to find out whether the program is able to handle the situation

ii) Black Box Testing: Black Box Testing takes an external perspective of the test object, to derive test cases. These tests can be functional or non-functional, though usually functional. The test designer selects typical inputs including simple, extreme, valid and invalid input-cases and executes to uncover errors. There is no knowledge of the test object's internal structure.

iii) Objectives of Post implementation review The specific aims of a Post Implementation Review are to: Evaluate the project team’s achievements against the original objectives set out in the Business Case; Measure and compare actual system performance against that specified; Compare actual incurred project costs against the original estimated costs, and make revised cost projections; Learn for the future in order to avoid repeating mistakes.

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PRIME/PT39/FINAL 1

PPPRIME ACADEMY 39TH SESSION PROGRESS TEST

INDIRECT TAX LAWS No. of Pages: 4 Total Marks: 75

Time Allowed: 2Hrs PART A Working notes should form part of answer

1. Choose the best answer from the given options in respect of the following: a) ‘Taxable Event’ is that event which on its occurrence _______________.

i. Attracts levy of penalty ii. Creates or attracts the liability to tax

iii. Tantamount to manufacture of excisable goods iv. Would not create any tax liability

b) According to Rule 2(a) of Central Excise Tariff Act, 1985 if any particular heading refers to a Finished or complete articled, the incomplete or unfinished form of that article shall also be Classified under the same heading if it

i. Has the same brand name ii. Have the essential characteristics of the finished goods

iii. Has a popular meaning or meaning attached to it by those dealing with it iv. All the above.

c) As per rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, the value of the excisable goods used for captive consumption is ________ of the Cost of production of such goods.

i. 110% ii. 160%

iii. 112.36% iv. 150%

d) Section 9 of the Central Excise Act, 1944 enumerates that an offence relating to any excisable Goods on which the duty liveable exceeds __________ shall be punishable with a term of Imprisonment extending to 7 years and with fine.

i. ` 30 Lakhs ii. ` 60 Lakhs

iii. ` 50 Lakhs iv. ` 100 Lakhs

e) E-payment of excise duty is mandatory for all assessee who have paid excise duty of INR ____________ in previous year

i. ` 50 Lakhs or more ii. ` 10 Lakhs or more

iii. ` 1 Lakhs or more iv. ` 5 Lakhs or more

(5x1=5 Marks)

2. Examine whether central excise duty is liveable in the following situations:- (a) Mohan Builders have constructed an office building for M/s XYZ & Co. (b) ABC Maintenance Services Ltd. provided maintenance services for refrigerators and air- Conditioners (2x2 ½ = 5 Marks)

PRIME/PT39/FINAL 2

3. An assesses sold certain goods to PQR Ltd. for INR 20,000 (excluding excise duty and other taxes) on 09.09.2013. The buyer, PQR Ltd., is a related person as defined under section 4(3)(b) of the Central Excise Act, 1944. It did not sell the goods, but used it as intermediary product. The cost of production of the said goods determined as per CAS-4 was INR 16,000. Determine the assessable value in the given case. What will be the assessable value, if in the aforesaid case, PQR Ltd. is not related to the assessee?

(5 Marks) 4. With reference to the provision of Finance Act, 1994, examine whether service tax is liveable in the

Following situations: i) A Chartered Accountant rendering services in Jammu and Kashmir. ii) An interior decorator based in J&K provides professional services at New Delhi. iii) Services provided in a vessel stationed at a distance of 10 nautical miles from the Indian land

mass. iv) Postal services provided by Department of Posts to various State Governments are liable to

service tax. v) Services provided in a vessel stationed at a distance of 54 nautical miles from Indian land

mass in Exclusive Economic Zone (EEZ) of India for extraction of mineral oil. (5 x 2=10 Marks)

PART - B (50 Marks)

1. a) Naman Ltd. is registered under the Central Excise Act, 1944. It has paid the following amounts

under the Central Excise Act, 1944: Central excise duty INR 16,00,000 Amount of interest INR 1,00,000 In addition, it is liable under the following statues for the amounts indicated against them: The company has a property with a realizable value of INR 20 lakh. What legal remedy, under section 11E of the Central Excise Act, 1944, is available to Central Excise Department for recovery of the aforementioned dues of INR 17 lakh?

b) An SSI manufacturer may like to pay full duty even when he is eligible for SSI exemption.

(i) Can he do so? (ii) Why he would like to pay full duty? (iii) What is the duty payable?

(2 x 5=10 Marks) 2.

a) Bata Footwear is a leading manufacturer of shoes. Legal Metrology Act, 2009 requires declaration of retail sale price on the package of shoes and shoes are also notified under section 4A of Central Excise Act, 1944 (RSP/MRP based valuation provisions). Following information has been furnished by Bata Footwear:

Abatement available on shoes 40% of retail sale price MRP marked on the package INR 2,000 per pair of shoes

The Recovery of Debts Due to Banks and Financial Institutions Act,1993

` 3,00,000

The Securitization and Reconstruction of FinancialAssets and theEnforcement of Security Interest Act, 2002

2,00,000

The Factories Act, 1948 3,00,000 The Customs Act, 1962 6,00,000

PRIME/PT39/FINAL 3

Price at which Bata Footwear sells the shoes to their Wholesalers –INR 1300 per pair Price at which wholesalers sell the shoes to retail shop INR 1500 per pair Price at which shoes are sold by retailers to final consumers INR 1,900 (` 100 offered as discount on printed retail sale price)

Excise duty - 12%, Education cess - 2%, Secondary and Higher Education Cess - 1% Calculate excise duty payable on a pair of shoes.

b) A manufacturer of machinery sold a special machine. Following details are provided in relation to Amount charged:

Other information furnished is – Cash discount @ 2% on price of machinery was allowed as the customer paid the bill amount

before dispatch. State VAT rate – 5% Central excise duty rate 12% and education cesses as applicable

Calculate excise duty payable on the special machine. (2 x 5=10 Marks) 3.

a) State whether following activities undertaken by M & M Manufacturers of Chandigarh would be Liable to service tax during August, 2014:

i. Manufacture of herbal cosmetics liable to excise duty under the Central Excise Act, 1944. ii. Manufacture of alcoholic drinks liable to excise duty under the Punjab Excise Act, 1914.

iii. Processing of raw materials to make them fit for further production. The process is notliable to any excise duty.

iv. Manufacture of medicines liable to excise duty under the Medicinal and ToiletPreparations (Excise Duties) Act, 1955.

b) Big Agro Handlers’ furnishes the following details with respect to the activities undertaken by them

in the month of June 2014:

Particulars `

Price of machinery excluding taxes and dutiesInstallation charges [Machinery is fixed to earth in customer’s premisesPacking charges Extra charges for designing the machine Outward freight beyond place of removal

6,00,000 21,000

9,000 20,000 12,000

S. No. Particulars `

(i) (ii) (iii) (iv) (v) (vi) (vii)

Supply of farm labour Warehousing of biscuits Sale of rice on commission basis Training of farmers on use of new pesticides and fertilizers developed through scientific research Renting of vacant land to a stud farm Testing undertaken for soil of a farm land Leasing of vacant land to a poultry farm

58,000 1,65,000

68,000 10,000

1,31,500 1,21,500

83,500

PRIME/PT39/FINAL 4

Compute the service tax liability of ‘Big Agro Handlers’ for the month of June, 2014. Assume that the point of taxation in respect of all the activities mentioned above falls in the month of June, 2014 itself. ‘Big Agro Handlers’ has paid service tax of ` 6,18,000 during the Financial Year 2013-14. (2 x 5=10 Marks)

4. a) ABC Co. is buying oil in drums of 200 litters. They pack this oil in small tins of one litre each, put their

label giving details of contents, volume and MRP. Advise whether ABC Co. are liable to pay excise duty on small tins sold by them. (2 Marks)

b) Hero Honda Motors Ltd. purchases raw material and supplies it to ABC Engineering Company. ABC Engineering Company manufactures automobile components as per the design supplied by Hero Honda Motors. Such components bear brand name of Hero Honda Motors Ltd. namely, ‘Hero Honda’. ABC Engineering Company supplies these components to Hero Honda Motors Ltd., who in turn sells them in market as spare parts of automobiles. Who is liable to pay central excise duty on such components? (2 Marks)

c) XYZ Co. is a manufacturer. It intends to pay ad valorem excise duty on the basis of assessable value computed under section 4 of the Central Excise Act, 1944. However, Excise Department insists that XYZ Co. should pay duty under Compounded Levy Scheme as the product manufactured by it is covered under the said scheme. You are required to examine the situation in the light of the relevant statutory provisions. Will your answer be different if the product manufactured by XYZ Co. is notified under production capacity based duty scheme? (6 Marks)

5. a) Answer the following with reference to the applicability of service tax as per the amended provisions

of service tax: (i) Transport facility provided by a School to its students through a fleet of buses and cabs owned

by the School. (ii) Transportation of petroleum and petroleum products and household effects by railways. (iii) Service provided in relation to repair or maintenance of aircraft owned by a State

Government. (iv) Exhibiting movies on television channels.

(v) Transportation of postal mails or mail bags by vessel. (5 Marks )

b) Can service tax be levied on the services rendered in connection with a chit fund business? (5 Marks)

PRIME/PT39/FINAL 1

PRIME ACADEMY 39TH SESSION - FINAL - PROGRESS TEST - INDIRECT TAXES SUGGESTED ANSWERS PART-A

1. a) ii) creates attracts the liability to tax b) ii) have the essential characteristics of the finished goods c) i) 110% d) iii) 50 Lakhs e) ii) 10 Lakhs

2. a) No. Excise duty is livable only when manufacture results in goods that are excisable. For being

called goods, items ought to be movable and marketable. Since office buildings marketable but not movable, it is not ‘goods’ but an immovable property. Hence, excise duty is not livable on construction of office building.

b) No. Excise duty is livable on manufacture of excisable goods. However, activity of maintenance of

refrigerators and air conditioners is not ‘manufacture’ as it does not result into emergence of a new article having different name, character or use. Thus, since the activity is not ‘manufacture’, excise duty is not livable on the same.

3. The proviso to rule 9 of the Central Excise Valuation (Determination of Excisable Goods)Rules, 2000

lays down that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value thereof shall be determined in the manner specified in rule 8 of the Valuation Rules which provides that the value will be 110% of the cost of production or manufacture of such goods. Therefore, when the goods are sold to PQR Ltd., the assessable value shall be 110% of INR 16,000 (INR 16,000 × 110%) i.e., INR 17,600. However, in the instant case, if PQR Ltd. is an unrelated buyer, the assessable value will be the transaction value of the goods i.e. INR 20,000.

4. i) No. By virtue of section 64(1) of Finance Act, 1994, service tax law extends to whole of India except the State of Jammu and Kashmir. Thus, rendering of services by a Chartered Accountant in the State of Jammu and Kashmir is not taxable.

ii) Yes. As per charging section 66B of Finance Act, 1994, services provided in the taxable territory are liable to service tax. Since, taxable territory does not include Jammu & Kashmir, service tax is not payable if services are provided in Jammu & Kashmir. However, if a person from Jammu & Kashmir provides the service outside Jammu & Kashmir in any other part of India, the service is liable to service tax, as the location where service is consumed is relevant. Thus, professional services provided at New Delhi (taxable territory) by an interior decorator based in located in Jammu & Kashmir, i.e. non-taxable territory will be liable to service tax.

iii) Yes. Levy of service tax extends to whole of India except Jammu and Kashmir and India means, inter alia, its territorial waters which extend upto 12 nautical miles from Indian land mass. Therefore, services provided in the vessel stationed at a distance of 10 nautical miles from the Indian land mass i.e., in Indian territorial waters will be liable to service tax.

PRIME/PT39/FINAL 2

iv) No. Invalid. Services provided by Government and local authorities are covered in negative list of services with a few exceptions. Services by Department of Posts provided to a person other than Government is one of such exceptions. Thus, Postal services provided to various State Governments will be covered in negative list of services and hence, would not be liable to service tax.

(v) Yes. In this case, since the vessel is used for one of the designated purposes i.e., for extraction of mineral oil, services provided thereat will be liable to service tax.

PART - B

1. a) Section 11E of Central Excise Act, 1944 creates a first charge on the property of a defaulter for recovery of the Central Excise dues subject to the provisions of the Companies Act,Recovery of Debt

due to Bank and Financial Institution Act and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. This implies that after the dues, if any, owing under the provisions of these Acts, dues under the Central Excise Act shall have a first charge.

In the light of the aforesaid provisions, in the given case, the Department can create first charge on the property of the assessee in default - Naman Ltd. subject to amounts payable under the following acts: Thus, the Department will be able to create first charge of INR 15 lakh (INR 20 lakh -INR 5 lakh) for the recovery of excise dues.

b) (i) Yes, the concerned manufacturer can do so. In such a situation he can avail CENVATcredit on

inputs. (ii) He would like to pay full duty if his customer wants to avail CENVAT credit and if duty paid on

his inputs is quite substantial. As a result, the effective cost of the buyer will be reduced. (iii) Duty payable will be normal duty less concession, if any available under any other exemption

notification.

2. a) Since Legal Metrology Act, 2009 requires declaration of retail sale price on the package of shoes and

shoes are also notified under section 4A of Central Excise Act, 1944.Excise duty shall be payable on the basis of RSP less abatement:

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993

3,00,000

The Securitization and Reconstruction of Financial AssetsandtheEnforcement of Security Interest Act, 2002

2,00,000

Particulars `

MRP marked on the package of a pair of shoes Less: Abatement @ 40% of RSP [40% of ` 2,000] Value for purpose of excise duty Excise duty @ 12% [12% of ` 1,200] Education cess @ 2% [2% of ` 144] Secondary and Higher Education Cess @ 1% [1% of ` 144] Total excise duty payable (rounded off)

2,000 8,00

1,200 144

2.88 1.44 148

PRIME/PT39/FINAL 3

b) Computation of Excise Duty Note 1. While computing assessable value:-

(i) packing charges and extra designing charges have been included as such payments are ‘in connection with sale’.

(ii) installation and erection expenses have not been included as they result in immovable property which is not goods.

(iii) outward freight has not been included as it is incurred for transporting the goods beyond the place of removal.

(iv) cash discount has been allowed as deduction as it has been passed on to the buyer. Note 2. State VAT does not affect excise duty payable.

3. a)

Particulars List price of machinery Add: Packing charges [Note 1(i)]

Extra design charges [Note 1(i)] Total Less : 2% cash discount on price of machinery [` 6,00,000 x 2%] [Note 1(iv)]) Assessable value Excise duty @ 12.36% [inclusive of 3% education cesses] Excise duty payable [rounded off]

6,00,000 9,000

20,000 6,29,000

12,000 6,17,000

76,261.20 76,261

Sl. No. Activity Taxability

(i) Manufacture of herbal cosmetics liable to excise duty under the Central Excise Act, 1944 – covered in the definition of process amounting to manufacture. Thus, included in the negative list [Clause (f) of section 66D].

Non-taxable

(ii) Manufacture of alcoholic drinks liable to excise duty under the Punjab Excise Act, 1914 – covered in the definition of process amounting to manufacture. Thus, included in the negative list.

Non-taxable

(iii) Processing of raw materials to make them fit for further production. The process is not liable to any excise duty. This will be a service liable to service tax.

Taxable

(iv) Manufacture of medicines liable to excise duty under Medicinal and Toilet Preparations (Excise Duties) Act, 1955 is covered in the definition of process amounting to manufacture. Thus, such a manufacture is included in the negative list.

Non-taxable

PRIME/PT39/FINAL 4

b)

1) Clause (d) of negative list of services [section 66D] covers ‘services relating to agriculture or

agricultural produce by way of inter alia – i. supply of farm labour

ii. services provided by a commission agent for sale or purchase of agricultural produce iii. Agricultural extension services. Agriculture extension means application of scientific

research and knowledge to agricultural practices through farmer education or training. iv. Agricultural operations directly related to production of any agricultural produce including

testing.

2) Services relating to agriculture or agricultural produce by way of renting or leasing of vacant land are covered under clause (d) of section 66D. Agriculture means the cultivation of plants and rearing of all life-forms of animals, except the rearing of horses, for food, fiber, fuel, raw material or other similar products. Thus, leasing of vacant land

4. a) Mere repacking from large container to small pack is not ‘manufacture’ of oil as oil continues to be oil

– no new product comes into existence having a distinct name, character or use. Hence, the activity is not ‘manufacture’ and excise duty is not payable. However, if such oil is covered under section 4A of Central Excise Act, 1944 (RSP based valuation provisions), the activity of labelling will be ‘deemed manufacture’ and ABC Co. will be liable to pay excise duty on such containers of one litre each.

b) Liability to pay central excise duty falls on actual manufacturer of goods. Therefore, in this case, ABC

Engineering Company, being actual manufacturer, will be liable to pay excise duty. This would be so even if raw material does not belong to them and goods manufactured by them bear the brand name of Hero Honda Motors Ltd. as in case of central excise, ownership of goods is not the relevant criterion to determine duty liability.

c) Under Compounded Levy Scheme, assessee has an option to pay excise duty on the basis of specified

factors relevant to production of goods covered under the scheme (size of equipment employed, number and types of machines used for manufacture etc.) at specified rates. The prescribed duty has to be paid by the assessee for a specified period.

Sl. No.

Particulars Amount `

(i) (ii) (iii) (iv) (v) (vi) (vii)

Supply of farm labour [Note 1] Warehousing of biscuits [Note 3] Sale of rice on commission basis [Note 1] Training of farmers on use of new pesticides and fertilizers developed through scientific research [Note 1] Renting of vacant land to a stud farm [Note 2] Testing undertaken for soil of a farm land [Note 1] Leasing of vacant land to a poultry farm [Note 2]

Total Service tax @ 12.36% (rounded off)

- 1,65,000

- -

1,31,500

- -

2,96,500

36,647

PRIME/PT39/FINAL 5

Therefore, since Compounded Levy Scheme is an optional scheme, XYZ CO. can pay ad valorem duty under section 4 even if goods manufactured by it are covered under Compounded Levy Scheme. However, duty based on production capacity is mandatory i.e, duty cannot be paid in any other manner in respect of the goods notified under this scheme. Therefore, if goods manufactured by XYZ CO. get notified under production capacity based duty scheme, it will not be able to pay duty under section 4 and will have to compulsorily pay duty based on its production capacity.

5 a) (i) Taxable. Transport facility provided by a School to its students is an auxiliary educational service.

With effect from 01.04.2013, the exemption provided to the auxiliary educational services provided by an educational institution has been withdrawn [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

(ii) Taxable. With effect from 01.04.2013, exemption granted to transportation of petroleum and petroleum products and household effects by railways has been withdrawn [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

(iii) Taxable. With effect from 01.04.2013, the exemption provided in relation to repair or maintenance of aircraft owned by Government (Government includes State Government) has been withdrawn [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

(iv) Taxable. With effect from 01.04.2013, the benefit of exemption in relation to copyrights for cinematograph films has been restricted only to films exhibited in a cinema hall or theatre. Therefore, exhibition of cinematograph films in a place other than cinema hall or theatre, will be taxable [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

(v) Taxable. With effect from 01.04.2013, exemption granted to transportation of postal mails or mail bags by a vessel has been withdrawn [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

b) The High Court in the case of Delhi Chit Fund Association v. UOI 2013 (30) S.T.R. 347 (Del.) inferred

that since in a chit fund business, the subscription is tendered in any one forms of money as defined under section 65B(33), it would be a transaction in money and would fall in the exclusionary part of the definition. Otherwise also, in view of Explanation 2 read along with the exclusionary part, the services rendered by the foreman of the chit business for which a separate consideration is charged would be out of the clutches of the definition. Thus, either way, the services of a foreman of a chit business do not constitute a taxable service. The High Court observed that as per the opening words of the definition of ‘service’, an activity cannot be charged with service tax unless following four aspects or characteristics are present:- (i) the person who provides the service, (ii) the person who receives the service, (iii) the actual rendering of the service and (iv) the consideration for the service. A ‘mere transaction in money’ cannot be considered as ‘service’ as it lacks the above four constituent elements. The High Court elucidated that even though ‘mere transaction in money’ is not service in the first place, the intention of the legislature in excluding it from the definition might be that the legislature deemed it fit, ex abundanticautela, to exclude it. A clue to proper interpretation of the exclusionary part of the definition is embedded in Explanation 2 which provides that except an activity for which a separate consideration is charged and which relates to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination, all other cases of transaction in money shall stand excluded from the charge of service tax, including the consideration charged for the services of foreman in a chit business. Consequently, the High Court quashed Notification No. 26/2012-S.T. dated 20.06.2012 to the extent of the entry in serial No. 8 thereof.