Having understood the Liberalized Remittance Scheme that allows remittance of funds out of India by any person in the earlier Articles, we will focus on understanding the specific provisions relating to Remittance of Assets outside India by Non-Residents. Such transactions are subject to the provisions of Foreign Exchange Management (Remittance of Assets) Regulations 2000. The Notifications related to these are Notification No FEMA 13(R)/2016-RB and FEMA 21(R)/2018-RB.


What is a Remittance of Asset?
It means Remittance outside India:
  • Of funds in a deposit with bank/ firm/ company
  • Provident fund balance or super-annuation benefits
  • Amount of claim or maturity proceeds of insurance policy
  • Sale proceeds of shares, securities, immovable property
  • Sale proceeds of any other asset held in India in accordance with the provisions of the Act or rules/regulations made under the Act
We will understand in detail the remittance as 3 broad categories:

PART I- REMITTANCE OF ASSETS BY NRI/PIO
PART II- REMITTANCE OF ASSETS BY FOREIGN NATIONAL OF NON-INDIAN ORIGIN AND FOREIGN COMPANIES
PART III- MISCELLANEOUS REMITTANCES


PART I- REMITTANCE OF ASSETS BY NRI/PIO

Provisions with respect to NRO Accounts, Immovable Property Sale Proceeds and others:
  • An NRI/PIO may remit an amount up to USD 1 million per financial year out of the balances held in his NRO Account for all bonafide purposes to the satisfaction of the Authorized Dealer, provided all applicable taxes have been paid in India.
  • The Balances in NRO Account may also include sale proceeds of immovable property acquired by the Non-Resident out of his/ her resources in India or sale proceeds of property received by way of inheritance of gift. It is clarified that settlement is also a mode of inheritance from the parent, the only difference being under settlement the property passes to the beneficiary on the death of the owner/parent without any legal procedures/ hassles and helps in avoiding any delay and inconvenience in applying for probate etc.,
  • Repatriation of Sale Proceeds of residential property purchased out of foreign exchange is restricted to not more than two such properties.
  • Authorised Dealers may permit repatriation of amounts representing refund of application/earnest money/purchase consideration made by the house building agencies/sellers on account of non-allotment of flat/plot/cancellation of booking/ deals for purchase of residential or commercial property together with interest (after payment of applicable taxes), provided original payment was made out of NRE/FCNR account of the account holder or remittance outside India through normal banking channels and the authorized dealer is satisfied about the genuineness of the transaction. Such funds may also be credited to the NRE/ FCNR account of the NRIs/PIO if they so desire.
  • Repatriation of sale proceeds of residential accommodation purchased by NRI/PIO out of funds raised by them by way of loans can be can done, to the extent that such loan is repaid by them out of foreign inward remittances received through normal banking channel or by debit to NRE/FCNR account.
  • Remittance of Income like rent, dividend, pension, interest etc. of NRIs/PIO s who do not maintain and NRO Account are freely allowed on the basis of appropriate certification by a Chartered Accountant that the amount is eligible for remittance and applicable taxes have been paid.
  • Remittance of maturity proceeds of FCNR(B) Deposits to the third parties outside India is allowed provided the transaction is specifically authorized by the account holder and the authorized dealer is satisfied about the bona fides of the transaction.
FACILITIES FOR STUDENTS
  • Students who leave India to study abroad are treated as NRIs and will be eligible to receive remittances from India up to USD 1 million from close relatives on self-declaration towards maintenance (including cost of studies)
  • up to USD 1 million out of sale proceeds of assets/ balances in their account maintained with an Authorized Dealer in India.
RESTRICTIONS
  • Remittance in respect of Immovable property sale proceeds is not available to citizen of Pakistan, Bangladesh, Sri Lanka, China, Hong Kong, Macau, Afghanistan, Iran, Nepal and Bhutan.
  • Remittance of Sale Proceeds of other financial assets is not available to citizens of Pakistan, Bangladesh, Nepal and Bhutan.
PART II- REMITTANCE OF ASSETS BY FOREIGN NATIONAL OF NON-INDIAN ORIGIN AND FOREIGN COMPANIES
SCENARIO PROVISIONS
Remittance after Retirement from Employment/ Inherited Assets/ widow of Indian Citizen (** not applicable to citizens of Nepal and Bhutan)

Remittance allowed up to USD 1 million per financial year. Conditions:

  1. Sufficient documentary evidence to be submitted to prove that taxes have been paid
  2. If amount is remitted in more than 1 installment, then all such remittances to be made through the same Authorized Dealer.
Remittance of Salary (employee of a Foreign Company sent on deputation to Indian Branch/ office/ subsidiary/ joint venture) Can open/maintain a foreign currency account outside India for receiving the whole of salary payable by the Indian Branch/office/ subsidiary/ joint venture provided all taxes payable in India have been paid.
Remittance of Salary (employee of a Company incorporated in India) Can open, hold and maintain foreign currency account with a bank outside India and remit the whole salary received in India in Indian Rupees to such account provided all applicable taxes in India are paid.
Remittance to Foreign Students after completion of studies

Any amount available in the account of the foreign student after completion of his studies in India can be remitted. Conditions:

  1. Balance funds should represent money remaining out of funds received from abroad through normal banking channels
  2. Rupee proceeds of foreign exchange brought in and exchanged in India with an authorized dealer
  3. Stipend/scholarship received from the Government or any Organization in India.

PRIOR PERMISSION FOR REMITTANCE IN CERTAIN CASES

In the following case, prior permission of Reserve Bank of India has to be obtained for remittances:

  • Remittance exceeding USD 1 million per financial year on account of legacy, bequest or inheritance to a citizen of foreign state, permanently resident outside India and by an NRI/PIO out of balances held in NRO accounts/ sale proceeds of assets/ assets acquired in India out of inheritance or legacy.
  • Remittance to a person resident outside India on the ground that hardship will be caused if such remittance is not made from India.
  • Remittance of winding up proceeds of a branch/office in India of a person resident outside India provided all necessary supporting documentary evidences are submitted along with the application.
  • Remittance of any assets held in India by Companies under liquidation is permissible with prior RBI approval. The power has been delegated to Authorized Dealers who has to ensure compliance is in accordance with order issued by the official liquidator or the liquidator in the case of voluntary winding up and necessary documentary evidences are collected along with the application.
PART III- MISCELLANEOUS REMITTANCES
TAX DEDUCTION AT SOURCE

Reserve Bank of India has clarified that it will not be issuing any instructions under FEEMA clarifying tax issues. The Authorized Dealers are required to comply with tax laws as applicable.


REPATRIATION OF INCOME AND SALE PROCEEDS OF ASSEST HELD ABROAD BY NRIs

Certain clarifications have been given with respect to repatriation of income and sale proceeds of assets held abroad by NRIs who have returned to India for permanent settlement:

  • A person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.
  • This covers the following:
    1. Foreign Currency accounts opened and maintained by such a person when he was resident outside India.
    2. Income earned through employment or business or vocation outside India while such person was resident outside India,
    3. Or from investments made while resident outside India, or from gift or inheritance/ foreign exchange inherited while such a person was resident outside India.
  • A person resident in India may freely utilize all the eligible assets abroad as well as income on such assets or sale proceeds thereof received after return to India, to make any payments or fresh investments abroad without prior approval of RBI. The only condition is the cost of such investments and or any subsequent payments received are met exclusively met out of funds forming part of eligible assets held abroad and transaction is not in contravention of FEMA.

Companies Act 2013


THE COMPANIES (AMENDMENT) ACT,2019

CA Santhipriya S


On 31st of July, 2019 The Companies Amendment bill, 2019 received presidential assent and The Companies (Amendment) Act, 2019 came into place with 44 sections to amend the various provision of Companies Act 2013. The amendment act has majorly concentrated on strengthening the compliances and penalties for non compliances of various provisions of the Act. In this article, we will cover the significant amendments and implications of the same.


Commencement of Business:
  • Any company which is incorporated after the commencement of this act, cannot commence any business or exercise it’s borrowing powers unless a declaration is filed by the director of the Company within 180 days from the date of incorporation, that subscribers to the memorandum has paid the value of the Shares on the date of such declaration and the company has filed the verification of its registered office with the registrar.
  • Where the company defaults these provisions, it shall be liable to penalty of Rs.50,000 and every officer in charge shall be liable to a penalty of Rs.1000 for each day of default upto Rs.1 Lakh.
  • Further, if the declaration is not filed within 180 days the Registrar has reasonable clause to believe that the company is not carrying on any business and initiate action for the removal of the name of the Company from the Registrar of Companies.
  • This is a new section inserted with an aim to curb shell companies by mandating the filing of receipt of the subscription money and the verification of registered office before commencement of business activity by the Company.
Physical verification by the Registrar

If the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may physically visit the registered office of the company and if any default is found to be made in complying with the requirements of section 12(1) (which requires that every company within 30 days of it’s incorporation and at all times thereafter, have a registered office capable of receiving and acknowledging all communications as may be addressed to it), the registrar may initiate action for the removal of the name of the company from the register of companies.


Registration of Charges
  • Any charges created before the commencement of this Act, will be allowed to be registered, on an application made by the Company to the registrar, within 360 days from the date of such creation of Charge
  • Any charges created on or after the commencement of this Act, have to be registered within a period of 60 days from the date of creation of such charges.
  • Thus, the relaxation provided to the company for registration of charges upto 360 days from the date of Charge creation is restricted to only 60 days.
  • And any person willfully furnishes any false or incorrect information or knowingly suppresses any material information required for registration of charges, the default will be treated as fraud and liable to punishment under section 447 of the Act.
Significant Beneficial Owner
  • Under section 90, clause 4A is inserted as per which, every company shall take necessary steps to identify significant beneficial owner in relation to the company and require him to comply with provisions of section 90.
  • The responsibility to identify the Individual who is a significant beneficial owner and compliance of the provisions by the individual is entrusted upon the company through this amendment.
Corporate Social Responsibility Unspent amount

Any company for which CSR is applicable has to spend 2% of its average net profits of the company during the immediately preceding 3 financial years towards CSR activities. Previously, before the Amendment act, if a company has failed to spend the calculated amount on CSR activity, it has to disclose the reason for not spending the amount in it’s Boards report. This provision is now amended to provide that the any amount unspent pursuant to an ongoing project shall be transferred by the Company within period of 30 days from the end of financial year to a special account to be opened by the company in any scheduled bank to be called the Unspent Corporate Social Responsibility Account and such amount shall be spent by the company towards CSR activities within a period of 3 financial years from the date of such transfer. If such amount is again not spent towards CSR activities within the 3 years timeline given, the company shall transfer the amount to a fund specified in Schedule VII (Prime minister’s national relief fund or any other fund set up by the Central Government for socio economic development and relief and welfare of the Scheduled caste, tribes other backward classes, minorities and women).


Fine replaced with penalty

The amendment act has replaced many penal provisions with an easily quantifiable penalty amount wherein it was earlier left to the adjucating authority to determine and levy the fine for various non compliances of the provisions of the Act.


Non Compliance Earlier Penal provision Amended Penal Provision
Prohibition in Issue of shares at discount The default was punishable with Fine or imprisonment or both. The default is punishable with penalty of an amount equal to the amount raised through issue of shares at discount or Rs.5 lakhs whichever is less and the Company shall also be liable to refund all the monies received with interest @ 12% p.a from the date of issues of shares.
Filing with registrar for alteration of Share capital The Non-compliance was punishable with Fine only. Company and every officer is liable to penalty of Rs.1000 rupees for every day of default or Rs.5 lakhs whichever is less
Filing of Annual Return The Non-compliance was punishable with Fine or imprisonment or both. The Company and Every officer in default shall be liable to penalty of Rs. 50000. In case of continuous default, a further penalty of Rs. 100 for each day, subject to a maximum of Rs. 5 Lakhs.
Statement annexed to Notice for calling general meeting in case of Special Business The non-compliance was liable to fine only. The non-compliance shall now result in Every promoter, director, manager or other key managerial personnel who is default be liable to a penalty of Rs.50000 or five times the benefit accruing whichever is higher.
Declaration to appoint proxy in a notice calling general meeting Every officer in default was liable to fine. Every officer shall be liable to penalty of Rs.5000.
Failure of filing resolutions with registrar Punishable with fine only. Company shall be liable to a penalty of Rs.1 Lakh and in case of continuing failure, with a further penalty of Rs.5000 for each day after the first during which such failure continues, subject to a maximum of Rs.25 Lakhs and every officer shall be liable to a penalty of Rs.50000 and in case of continuing failure, with a further penalty of Rs.500 for each day after the first during which such failure continues, subject to a maximum of Rs.5 lakhs.
Failure of Report on Annual General Meeting by public listed company Punishable with fine only. Company shall be liable to a penalty of Rs. 1 Lakh and in case of continuing failure, with a further penalty of Rs.500 for each day after the first during which such failure continues, subject to a maximum of Rs.5 lakhs and every officer of the company who is in default shall be liable to a penalty which shall not be less than Rs. 25,000 and in case of continuing failure, with a further penalty of Rs.500 for each day after the first during which such failure continues, subject to a maximum of Rs.1 Lakh
Failure and delay in filing of copy of financial statement with registrar. Punishable with Fine or imprisonment or both The Company shall be shall be liable to a penalty of Rs.1 Lakh and in case of continuing failure, with a further penalty of Rs.100 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs.
Failure in filing by auditor after resignation Punishable with fine only. The auditor shall be liable to a penalty of Rs.50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with a further penalty of Rs.500 for each day after the first during which such failure continues, subject to a maximum of Rs.5 Lakhs.
Failure by company to intimate DIN to registrar Punishable with fine only The Company and every officer in default shall be liable to penalty of Rs.25,000 and in case of continuing failure, with a further penalty of Rs.100 for each day after the first during which such failure continues, subject to a maximum of Rs.1 Lakh, and every officer of the company who is in default shall be liable to a penalty of Rs.25,000 and in case of continuing failure, with a further penalty of Rs.100 for each day after the first during which such failure continues, subject to a maximum of Rs.1 Lakh
Punishment for contravention in respect of DIN Punishable with Fine or imprisonment or both Director of the company shall be liable to a penalty which may extend to Rs. 50,000 and where the default is a continuing one, with a further penalty which may extend to Rs.500 for each day after the first during which such default continues.”
Directorships beyond specified number. Punishable with fine only Liable to a penalty of Rs.5000 for each day after the first during which such contravention continues
Payment to Director for Loss of Office, etc., in Connection with Transfer of Undertaking, Property or Shares The default in non-compliance was liable to fine only. The Director of the company shall be liable to a penalty of Rs.1 Lakh.
Non-Compliance in Overall Maximum Managerial Remuneration The default was punishable with fine only. Any person in default shall be liable to penalty of Rs.1 Lakh and where any default is made by the Company, the penalty shall be Rs.5 Lakh
Failure to appoint KMPs in specified class of companies The default was punishable with fine only The company shall be liable to penalty of Rs.5 Lakhs and every officer shall be liable to penalty of Rs.50000 and where such default is continuous one, further penalty of Rs.1000 per day for each day the default continues but not exceeding Rs.5 lakhs.
Failure to register offer of scheme involving transfer of shares The failure was punishable with fine only. The director who fails to register shall be liable to penalty of Rs.1 Lakh.

Previously, when these non compliances were punishable with fine, the authority to charge and to decide the quantum of such fine lied with special courts. If a company makes a non compliance, the ROC shall file a case with the special court, the courts will determine the quantum of fine based on the implications and effect of the non compliance by the company and then will charge the fine. In cases of penalty, the ROC after ascertaining the non compliance of the provisions of the act, he shall determine the penalty amount based on these amended provisions of this Act and impose the same for the non compliances.


Disqualification of Director

Section 164 is amended to include new clause wherein it is provided that any Director who holds directorship more than the limit specified in Section 165 will be disqualified and will not be eligible for being appointed as director of any company. As per Section 165, a person cannot hold office as director in more than 20 companies at the same time and in case of public companies, he cannot hold office in more than 10 companies.


Penalty for repeated default

A new section 454A has been inserted to provide that where a company or an officer of a company or any other person having already been subjected to penalty for default under any provisions of this Act, again commits such default within a period of 3 years from the date of order imposing such penalty, for the second or the subsequent defaults, the Company or any officer or any other person shall be liable to twice the amount of the penalty imposable under the provisions of the act.

It is clear from the above that the Companies Amendment Act, 2019 was brought into place to curb the shell companies and to ensure the high compliance of the act by bringing clarity and mandatory clauses to certain provisions and increasing penalty for non compliances.


TAXATION

Recent Advance rulings on GST

CA Srinidhi S


The year 2018 was the year of advance rulings on the GST. There are various conflicting decisions taken by two or more State AAARs on the same issue. At present, there is no provision of Centralized Appellate Authority for Advance Ruling (AAAR). The GST Council in its 31st meeting has recommended the creation of Centralized AAAR to deal with such rulings. Let’s have a look at some of the Advance Rulings.



GST would be applicable on cheque bouncing charges: AAR
[Maharashtra v. Bajaj Finance Limited]
  • The applicant, a NBFC is engaged in providing various types of loans to the customers, such as auto-loans, loans against the property, personal loans, consumer durable goods loans, etc. It has entered into agreements with borrowers/customers for providing loans to them. The loan agreements provide for repayment of the outstanding dues/EMI through cheque/ECS/NACH or any other electronic or clearing mandate. In case of dishonouring of payment instrument or instruction, the applicant collects the penal or bouncing charges. The applicant filed an application for Advance Ruling whether the bouncing charges should be treated as supply? It contended that bouncing charges collected from the customers are in the nature of penalty or liquidated damages. Therefore, same are not considerations for supply of services and, hence, not subject to GST levy.
  • The Authority for Advance Ruling held that the receipt of cheque bouncing charges on dishonouring of cheques would be receipt of amounts for tolerating the act of their customers in dishonouring of cheque. Therefore, it would be treated as supply under GST as per S. No. 5(e) of Schedule II of the CGST Act, 2017 and, hence, taxable under the GST Act.
GST paid under wrong head by mistake can be adjusted under another head: HC
[Saji S. v. Commission, State GST Department Tax Tower, Thiruvananthapuram]
  • The assessee, a registered dealer, purchased goods from consignor in Chennai. While those goods were in transit, goods were detained and consignor paid the tax and penalty and it remitted the amount under the head 'SGST' instead of 'IGST'. The authorities refused to release the goods on the ground that the remittance had to be paid under the head 'IGST'. The assessee filed writ petition.
  • The assessee submitted that if the remittance was treated as a mistake on the consignor's part, the statute had empowered the authorities to transfer the deposit from one head to another, i.e., from SGST to IGST. However, the authorities submitted that the petitioner had to pay the amount under 'IGST' and then claim a refund from the head 'SGST'.
  • The High Court observed that the GST Act provides for the refund of the tax paid mistakenly under one head instead of another head. But Rule 4 of the GST Refund Rules speaks of adjustment. It was further observed that if the amount of refund would be completely adjusted against any outstanding demand under the Act, an order giving details of the adjustment to be made in Part A of Form GST RFD-07. Thus, in the case of assessee, GST paid under wrong head by mistake could be adjusted under another head. Therefore, High Court directed that the concerned officials must allow the adjustment and get amount transferred from the head 'SGST' to 'IGST'.
Sale of religious books or DVDs in Satsang would attract GST: AAR
[Shrimad Rajchandra Adhyatmik Satsang Sadhana Kendra]
  • The assessee filed an application for Advance Ruling on whether the sale of spiritual products such as books, DVDs, etc., could be treated as supply as per GST Act? It contended that the money earned from such goods was used for main object only, i.e., for charitable and religious purposes. Therefore, such an activity could not be treated as an activity of carrying out business.
  • The Authority for Advance Ruling held that there was no specific exemption to registered charitable trusts for supply of such goods under GST. The sale of spiritual products which was incidental or ancillary to main charitable object of assessee could be said to be business. Therefore, the sale of spiritual products could be treated as supply under the GST Act and GST would be applicable on it.
Transfer of business as 'Going Concern' is exempt from GST: Karnataka AAR
[Rajashri Foods (P.) Ltd.,]

The assessee has manufacturing units. It intends to sell one unit along with all its assets and liabilities for a lump sum consideration. It filed an application for Advance Ruling on the following two issues.


1 Whether such transaction would be deemed as supply of goods or supply of services or both?
2 Whether such transaction would be exempt under S. No. 2 of the Notification No.12/2017-Central Tax (Rate), dated June 28, 2017?

The Authority for Advance Ruling held that the business will continue in new hands. Hence, such transaction would be in the nature of a going concern. When the business is transferred as a going concern, then it does not amount to supply of goods as per part 4(c) of the Schedule II of the Central GST Act. Further, the column no. 3 of the Table in the Notification No. 12/2017-Central Tax (Rate) gives the description of the services. Therefore, such transaction would be treated as 'Supply of service' and, hence, would be exempt from GST as per S. No. 2 of the Notification No.12/2017-Central Tax (Rate), dated June 28, 2017.

Sr. No. Chapter Description of Services Rate Condition
1 Chapter 99 Services by way of transfer of a going concern, as a whole or an independent part thereof. Nil Nil

GST to be levied on activities done by employees of corporate office for its units located in other states
[Columbia Asia Hospitals (P.) Ltd.,]

Trending Topics

REVENUE FROM CONTRACTS WITH CUSTOMERS

CA Rohit Ravi


BACKGROUND

Ind AS 115, Revenue from Contracts with Customers (which is based on IFRS 15, Revenue from Contracts with Customers) was originally notified vide G.S.R. 111(E) dated 16th February 2015. However, subsequent to the decision of International Accounting Standards Board (IASB) to defer the implementation of IFRS 15, the MCA vide Companies (Indian Accounting Standards) (Amendment) Rules, 2016 dated 30th March 2016 omitted Ind AS 115 and inserted Ind AS 11, Construction Contracts and Ind AS 18, Revenue.


To align with the revised effective date 01st January 2018, of IFRS 15, the MCA, on 28th March 2018, re-notified Ind AS 115, Revenue from Contracts with Customers as part of the Companies (Indian Accounting Standards) Amendment Rules, 2018. With the Ind AS 115 being effective for accounting periods beginning on or after 01st April 2018, existing revenue recognition standards Ind AS 11 and Ind AS 18 shall stand omitted and the Guidance Note on Accounting for Real Estate Transactions (for entities to whom Ind AS is applicable) issued by ICAI in May 2016 stands withdrawn.

OBJECTIVE

The primary objective of IND AS 115 is to establish the principles of recognising revenue which the entity expects to be entitled for exchange of goods or services or both. Further, IND AS 115 necessitates reporting requirements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.


SCOPE OF IND AS 115

An entity shall apply this Standard to all contracts with customers, except the following:

  • Lease contracts within the scope of Ind AS 17, Leases;
  • Insurance contracts within the scope of Ind AS 104, Insurance Contracts;
  • Financial instruments and other contractual rights or obligations within the scope of Ind AS 109, Financial Instruments, Ind AS 110, Consolidated Financial Statements, Ind AS 111, Joint Arrangements, Ind AS 27, Separate Financial Statements and Ind AS 28, Investments in Associates and Joint Ventures;
  • Non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.
I - IDENTIFYING THE CONTRACT WITH CUSTOMER
What are the criteria for recognising a Contract with Customer?
  • The parties to the contract have approved the contract and are committed to perform their respective obligations.
  • The entity can identify each party’s rights.
  • The entity can identify the payment terms for the goods or services.
  • The contract has commercial substance.
  • It is possible the entity will collect substantially all of the consideration.
Illustration

ABC Limited decides to enter a new market that is currently experiencing economic difficulty and expects that in future economy will improve. ABC Limited enters into an arrangement with a customer in the new region for networking products for promised consideration of Rs 12,50,000. At contract inception, ABC Limited expects that it may not be able to collect the full amount from the customer. Thereby, considering other criteria to be met, ABC Limited needs to assesses whether collectability is probable.

When does a Contract cease to exist?

A contract does not exist if each party to the contract has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party (or parties). A contract is wholly unperformed if both of the following criteria are met

  • The entity has not yet transferred any promised goods or services to the customer;
  • The entity has not yet received, and is not yet entitled to receive, any consideration in exchange for promised goods or services.
What happens when customer fails to meet Contract Recognition Criteria?

If a contract with a customer does not meet the Contract Recognition Criteria, an entity shall continue to assess the contract to determine whether the criteria are subsequently met.

Can Revenue be recognized without meeting Contract Recognition Criteria?

When a contract with a customer does not meet the Contract Recognition Criteria and an entity receives consideration from the customer, the entity shall recognise the consideration received as revenue only when either of the following events has occurred

  • The entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable;
  • The contract has been terminated and the consideration received from the customer is non-refundable.
What is Contract Modification?

A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract. A contract modification could be approved in writing, by oral agreement or implied by customary business practices.


Illustration

An entity promises to sell 120 products to a customer for Rs 120,000 (Rs 1,000 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer at a price of Rs 950 per product which is the standalone selling price for such additional products at the time of placing this additional order. The additional 30 products were not included in the initial contract. It is assumed that additional products are contracted for a price that reflects the stand-alone selling price. Thereby, the contract modification for the additional 30 products is a new and separate contract for future products that does not affect the accounting for the existing contract and Rs 950 per product for the 30 products in the new contract.


II - IDENTIFYING THE PERFORMANCE OBLIGATIONS
How to identify Performance Obligations?

At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer, the goods or services or both, to the customer.


How to satisfy Performance Obligations?

An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.


What does “Control of Asset” mean?

Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows.


A promise to deliver good or provide a service in a contract with a customer constitutes a performance obligation if the promised good or service is distinct. A promised good or service is distinct if they meet the following two criteria:


Criterion 1: Capable of being distinct

Customer can benefit from the good or service on its own or together with other readily available resources.


Criterion 2: Distinct within context of the contract
  • Promise to transfer good or service is separately identifiable from other promises in the contract.
  • If both 1 and 2 are satisfied, then it’s considered to be a Distinct Performance Obligation, else it’s a Non-Distinct Performance Obligation.
  • Eg: When an Entity ABC provides a customer with a Machinery and a separately identifiable installation service, it’s a Distinct Multiple Performance Obligation.
  • If a promised good or service under the contract does not qualify to be a separate performance obligation, the entity would need to combine it with other goods or services until the bundled arrangement qualifies to be a distinct performance obligation
III – DETERMINING THE TRANSACTION PRICE
What are the criteria for measurement?

When a performance obligation is satisfied, an entity shall recognise as revenue the amount of the transaction price that is allocated to that performance obligation.


What is Transaction Price?

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, GST). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.


What is Variable Consideration?

If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. The promised consideration can also vary if an entity’s entitlement to the consideration is contingent on the occurrence or non-occurrence of a future event. Variable consideration may be fixed in amount, but the entity’s right to receive that consideration is contingent on a future outcome.

How shall warrenties be accounted?
Warranties
Customer has option to purchase separately. Customer has no option to purchase separately.
Distinct service, as the entity promises to provide service in addition to the product’s described functionality. Warranty provides an assurance that the product complies with agreed-upon specifications.
Account for the promised warranty as a performance obligation and allocate a portion of the transaction price to that performance obligation, i.e. Revenue shall be recognised on pro-rata/reasonable basis. Account for the warranty in accordance with Ind AS 37 – Provisions, Contingent Liabilities and Contingent Assets.

IV – ALLOCATING THE TRANSACTION PRICE TO PERFORMANCE OBLIGATIONS
What is the objective of allocation?

The objective of the entity should be to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.


How to determine Stand-alone selling price?

The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer. A contractually stated price or a list price for a good or service may be (but shall not be presumed to be) the stand-alone selling price of that good or service.


Difference between Transaction Price and Stand-alone Selling Price

Transaction Price is a broader term as against the Stand-alone Selling Price. Stand-alone Selling Price is similar to MRP whereas the Transaction Price refers to Net Selling Price inclusive of MRP, Discounts, Rebates, Non-Cash Consideration etc.


How to determine stand-alone selling price?

Stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers.


What are the methods to estimate stand-alone selling price?
  • Adjusted Market Assessment Approach – adopting a Comparable Competitor’s Price
  • Expected Cost plus a Margin
  • Residual Approach – Transaction Price less Identified stand-alone prices
How to account for change in transaction price?

After contract inception, the transaction price can change for various reasons, including the resolution of uncertain events or other changes in circumstances that change the amount of consideration to which an entity expects to be entitled in exchange for the promised goods or services.


The following principles should be noted
  • An entity shall allocate to the performance obligations in the contract to any subsequent changes in the transaction price on the same basis as at contract inception. Consequently, an entity shall not reallocate the transaction price to reflect changes in stand-alone selling prices after contract inception.
  • Amounts allocated to a satisfied performance obligation shall be recognised as revenue, or as a reduction of revenue, in the period in which the transaction price changes.
V – SATISFYING PERFORMANCE OBLIGATIONS
Does the customer acquire control over a period of time or at a point in time?

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if any of the following criteria is met

  • The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs;
  • The entity's performance creates or enhances an asset (Ex. – ERP/Software Development) that the customer controls as the asset is created or enhanced;
  • The entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. (Ex. – Manufacturing Machinery based on Specifications of Customer)
What are the methods of measuring progress of Performance Obligation satisfied over time?

Output Methods Input Methods
Recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation.

CARVE OUT IN IND AS 115 FROM IFRS 15
As per IFRS

IFRS 15 provides that all types of penalties which may be levied in the performance of a contract should be considered in the nature of variable consideration for recognising revenue.


Carve-out

Ind AS 115 has been amended to provide that penalties shall be accounted for as per the substance of the contract. Where the penalty is inherent in determination of transaction price, it shall form part of variable consideration, otherwise the same should not be considered for determining the consideration and the transaction price shall be considered as fixed.


DISCLOSURE REQUIREMENTS

The objective of disclosure requirements is to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

An entity should disclose the following:

  • Disaggregation of Income
  • Contract Balances
  • Performance Obligations
  • Significant Judgements
  • Costs to obtain or fulfil a contract