Tax Management

with reference to :
‘Make Or Buy’
Decisions
‘MAKE OR BUY’ 
DECISIONS
 applies to industries where assembly of products
takes place to make a finished product.
 Like a manufacturing of car, where thousands of
different parts or components are assembled to
make a car.
Factors for ‘Make or Buy’
 Costing
 Utilizationsof Capacity
 Inadequacy Fund
 Latest Technology
 Dependence of supplier
 Labor problem in the factory
Cost involved in making of a Part.
 Fixed  Cost : Purchased of Plant etc.
 Variable Cost : Raw Materials, Labour, Electricity
etc.
Cost involved in buying of a part
from outside agency :
 Buying Cost
 Inventory Cost
Tax Consideration :
 Establishing a new Unit :         If the decision to manufacture a part
or component involves a setting up a separate industrial unit than tax
incentives available u/s 10A, 10B, 32, 80IA and 80IB should be
considered.
 Export :           If ‘Make or Buy’ decision is taken for exporting
goods then tax incentives available u/s 80HHC depends upon
whether goods manufactured by taxpayer himself are exported or
goods manufactured by others are exported by the taxpayers.
 Sale of Plant & Machinery :    If buying is cheaper than
manufacturing and the assessee decides to buy parts or components
for along period of time, he may like to sell the existing plant and
machinery. Tax implication as specified by Sec. 50 has to considered.
Where idle capacity exists in the
existing undertaking
 When no extra fixed cost is required
If MC <= P (Produce)
Otherwise Buy
 When some extra cost is required

If VC + FC <= P (Produce)
Otherwise Buy
Where idle capacity does not exist
 IfVC + FC + OC <= P Make it.
 Otherwise Buy it.
 Example 1
X Ltd. Manufactures electric pumping sets. The company has the
option to either make or buy from the market component Y used in
manufacturing the sets.
Option 1: The component will be manufactured on new machinery
costing Rs. 1 lakh with a life of 10 years. Material required cost Rs
2 per kg and wages Rs 0.30 per hour. The salary of the foreman
employed is Rs 1500 per month and other variable overheads
include Rs 20,000 for manufacturing 25,000 components per year.
Material required is 25000 kgs. And requires 50,000 labour hours.
Option 2: The component is readily available in the market @ Rs
4.30 per piece.
Will it be profitable to make or buy the component?
Sale of Assets for Scientific Research
 Any capital expenditure incurred on purchase of
asset for scientific research is allowed as
deduction in full in the year in which such
expenditure is incurred if the research is related to
the business of the assessee.
Tax treatment on sale of the asset for
scientific research
 To dispose off the asset without using it for any
other business purpose.
 To start using the asset for other business purposes
when the business house stops using it for
scientific research.
CASE 1: To dispose off the asset without
using it for any other business purpose.
 The sale price to the extent it is equal to the
amount of deduction allowed u/s 35 will be treated
as ‘Deemed income’ for the P.Y. in which such
asset is sold.
 Capital Gain/Loss shall be calculated as:

Capital Gain/Loss = Sale proceeds – Cost/Indexed

cost of acquisition
CASE 2: When such asset is used for some
other business purpose also before sale.
 The cost of such asset shall be included in the
relevant block of assets.
 Cost to be included = Cost of acquisition –
Deduction claimed u/s 35
 In case whole cost has been claimed as deduction,
the cost to be included will be NIL.