Adjust Rs 111 Cr From MRPL Book Value, Says E&Y

Mumbai, July 29: | Updated: Jul 30 2002, 05:30am hrs
Consultancy major Ernst & Young (E&Y), in its report on Mangalore Refineries and Petrochemicals (MRPL), has come up with a slew of findings, including a recommendation that the export incentives of Rs 111 crore should be adjusted from the book value at March 31, 2002. The book value as per the unaudited financial statements stood at Rs 535 crore.

E&Y was commissioned by the Birlas along with financial institutions (FIs) and a prospective buyer. However, when contacted, company officials said they would not comment on the report as they had not seen it.

Meanwhile, the Oil and Natural Gas Corporation (ONGC) board will meet shortly to approve buying out the AV Birla stake of 37 per cent in MRPL. Hindustan Petroleum Corporation (HPCL) is the co-promoter holding a 37 per cent stake in the refining company.

E&Y added in its report that the company is in the process of assigning the sales tax deferment amount of Rs 252 crore collected till March 31, to a finance company at its net present value (NPV) of Rs 87 crore. The NPV has been calculated using a discount rate of 10 per cent, the E&Y report states. The difference between the amount collected and the NPV of Rs 166 crore has been credited to the profit and loss account.

According to the report, the management has indicated that the deferment amount will be assigned before the finalisation of the audited financial statements for 2001-02 and the assignment agreement will be with retrospective effect from March 31.

E&Y stated in the report: “We are concerned that if the amount is not assigned before the finalisation of the audited financial statement for 2001-02, the income of Rs 166 crore be adjusted from the book value at March 31.”

The report added that the company has changed the accounting policy for accounting for export incentive. It said the MRPL management has indicated that 2001-02 was the first year of availment of export incentives under the advance license scheme. The management indicated that the accounting treatment for export incentives and consequent treatment in the books of accounts has been done in the same manner as the accounting is generally done in the case of Export Promotion Capital Goods (EPCG) scheme.

“On the basis of the matching accounting principle, we recommend the duty benefit should be accounted for in the year of export and Rs 111.34 crore adjusted from the book value at March 31, 2002,” the report states.

An amount of Rs 8 crore relating to various liabilities of capital nature not payable has been written back to income for 2001-02. These were capitalised in earlier years. The MRPL management has indicated that the same have not been reduced from the fixed asset since the amount written back is not significant in relation to the gross block of asset. “In our view, the amount capitalised could be decapitalised and the adverse impact of the decapitalisation on the book value at March 21, is Rs 8 crore,” the report states.

During 2001-02, MRPL has earned a profit of Rs 166 crore on assignment of deferred sales tax liability to a third party. In the provisional computation of income, this is not included in taxable income. Hence, the declared loss is overstated, according to the E&Y report. Even on inclusion of the same in the taxable income, the net result for the year would be taxable loss for the year. Therefore, for the year, there would be no tax liability but this amount would reduce the declared provisional loss, the report noted.

Accordingly, the deferred tax asset also needs to be reduced by the tax impact of this profit. The company has been advised by CC Chokshi & Co. Chartered Accountants. “In our view, the taxability of the amount credited in the profit and loss account on assignment of sales liability is debatable and may be challenged by the tax authorities,” the E&Y report states.

As per the unaudited financial statement for March 31, 2002, the net deferment tax asset amounts to Rs 414 crore and the company has considered that the tax saving in the subsequent years would be 35 per cent of the tax cover available. E&Y added that the amount would translate into a real asset if the amount is absorbed by taxable income for future years under normal provisions of the Act and the tax liability under normal provisions (after absorbing brought forward business losses/ depreciation as discussed above) exceeds 7.5 per cent of the book profits of the years, in which set-off is available. Otherwise the company would be required to pay MAT and to the extent of liability under MAT, the advantage of the brought forward tax cover would get reduced, which will also reduce the deferred tax asset.