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volume 59 no.

5 november 2010 r100

CHARTERED

JOURNAL
volume 59 no. 5 november 2010

THE
ACCOUNTANT
T H E I N S T I T U T E O F C H A RT E R E D A C C O U N TA N T S O F I N D I A
the chartered accountant

Happy
r100

Deepawali
683 Editorial

CSR and Indian Accountancy Profession


Having transcended the national etc. have all been steps in the right corporate governance and practices.
economic frontiers, the India growth direction. The rapid globalisation is conti-
story is now aggressively going The need of the hour is the business nuously expanding the professional
global. The gigantic corporate growth models where making profits and horizons. The flourishing and
has done India good. But there is doing social environmental good go spreading economy, wave of mergers
even better side of this development. hand in hand. This background not and acquisitions, integration of India
In the backdrop of tough competition only offers a plethora of professional with world economy, renewed stress
and ‘Liberalisation – Privatisation - opportunities for the Chartered on transparency and corporate
Globalisation’ (LPG) wave sweeping Accountants but also puts important governance and emergence of
through countries and continents, social responsibility on them. Given knowledge society have thrown
more and more corporations are the set of skills they possess, CAs up myriad of present and future
realising that a growth without a can play a crucial role with respect opportunities for professionals be
social face cannot be sustained for to both statutory and voluntary they in practice or industry. Starting
long. They are increasingly heeding aspects of CSR. They are already with a small strength of just 1,685 as
the concepts like ‘inclusive growth’, proving to be an effective facilitator on 1st April, 1950, more than 1,60,000
‘Responsible Business Enterprise’, and implementer of the modern CAs are today providing pivotal
‘Convergence of accounting approaches like transparency in support, both behind and over the
standards’ and to cap it all — Good corporate financial disclosure, scenes, across different economic
Corporate Governance practices. value addition and tax compliance. and business spheres right up to the
They are successfully intertwining Further, they can help corporations level of CEOs and CFOs. Indeed,
their Corporate Social Responsibility devise such strategies, policies the Indian CA fraternity is already
(CSR) with their business strategies and projects that serve both their making a big difference and it has
to the benefit of all. business as well as social goals. all the potential to make much more
The CSR is no longer a cliché They can ensure that the corporate difference so far as ensuring good
but a popular benevolent thinking in values and social values never come governance is concerned.
action. As such, corporate activities in conflict. The country needs to improve
today extend to almost every sphere When associated with the implementation mechanisms for
of life, from manufacturing to service, Corporate-aided community proj- the efforts to yield results while the
education, hospitality, environment ects, the CAs can ensure that the government expenditure needs to
and even spirituality. projects benefit the intended lot be efficiently directed and utilized.
But much more is still required to and their social objective is not CAs can facilitate the same. They
be done to make a real difference at lost in corporate exercise of profit can put in place the much-needed
the ground level at large, particularly maximisation or building brand fiscal discipline, accountability,
in rural India. There is a need for an equity. CAs have the potential to transparency, fairness of transactions
effective Government-NGO-Corporate be the most effective tool of Good and good governance with regard to
partnership to do away the scepticism Corporate Governance. It is high various Government schemes across
about CSR as just another tool of time that professionals help create the country. With the calls for private
the ultimate business objective of Responsible Business Enterprises. sector and governments to be more
maximising profits. It is time that With more and more companies accountable and transparent getting
Governments encourage corporations embracing entire world as their shriller, today’s accountants’ role
in their civic activities through supportive workplace and market place, is in sharp focus. What is needed
legislations. It is time that there is corporate governance has become is a joint endeavour to fostering
greater corporate accountability, and the key to business success. Today, an environment of “cooperative
convergence of accounting standards accounting is the language of global federalism and collective pursuit of
to ensure transparency, efficacy and business. And compliance with national goals”. Indian economic
user-friendliness of corporate financial accounting standards is the corner tide must lift all boats in its wake.
statements. SEBI has done its bit so stone of corporate governance. And Chartered Accountant can help
far as statutory aspect of Corporate This presents a great challenge and bring about the same.
Governance and CSR is concerned. opportunity for the professionals
Revised Clause 49, Independent who can be of great help in creating Editorial Board
Directors, Whistle Blower Policy, an enabling environment for better ICAI – Partner in Nation Building

THE CHARTERED ACCOUNTANT november 2010 3


Contents 684

EDITORIAL BOARD
volume 59 no. 5 November 2010 r100
EDITOR CA. AMARJIT CHOPRA,

CHARTERED
President set up by an act of parliament

JOURNAL
JOINT EDITOR CA. G. RAMASWAMY,

THE
Vice-President
MEMBERS CA. JAYANT P. GOKHALE
CA. JAYDEEP N. SHAH

ACCOUNTANT
CA. SANJEEV MAHESHWARI
CA. SHIWAJI B. ZAWARE
CA. M. DEVARAJA REDDY
CA. P. RAJENDRA KUMAR
CA. SUMANTRA GUHA
CA. SUBODH AGARWAL
T H E I N S T I T U T E O F C H A RT E R E D A C C O U N TA N T S O F I N D I A
CA. ANUJ GOYAL


CA. PANKAJ TYAGEE
CA. LAXMINIWAS SHARMA EDITORIAL ............................................................................................ 683


CA. SUBHASH C. GOEL
CA. DHARAM V. CHOPRA
FROM THE PRESIDENT .................................................................... 686
CA. VIMAL R. KHANNA PHOTOGRAPHS .................................................................................. 692
legal update
SECRETARY SHRI VIJAY KAPUR
ICAI EDITORIAL TEAM NADEEM AHMED
SUSANTA K. SAHU
CA. NITIN JAIN
 Legal Decisions................................................................................................. 696
Dr. N. K. RANJAN  Circulars/Notifications....................................................................................... 709
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
ICAI Bhawan, Post Box No.7100, Indraprastha Marg,
CAREER WATCH ................................................................................. 714
New Delhi-110002, Tel: +91 (11) 39893989. ACCOUNTANT’S BROWSER .......................................................... 716
NATIONAL UPDATE ............................................................................
E-mail: icaiho@icai.org, Website: www.icai.org
797
SUBSCRIPTION RATES
Inland subscribers : R1,000 per annum INTERNATIONAL UPDATE ............................................................... 799
ECONOMIC UPDATE ..........................................................................
Overseas : $150 per annum
(subscribers by sea mail) 801
For Overseas Members/Subscribers CLASSIFIEDS....................................................................................... 802


•Air Mail Surcharge : R2,100 per annum
•Sea Mail Surcharge : R1,100 per annum CABF DONORS LIST.......................................................................... 803
CA Students : R1,400 for 3.5 years TRACING THE ROOTS........................................................................ 803

Other students & faculties
R400 per annum
: R600 per annum ICAI NEWS
CLASSIFIEDS:  Invitation to Contribute Articles for E-Newsletter ............................................... 804
Minimum R1,000/- for the first 25 words or part thereof and R250/- for five
words or part thereof over and above first twenty five words. Please contact:  Residential Programme for PCC/IPCC/PE-II students/
The Journal Section at ICAI Bhawan, Noida or call at +91(120) 3045921 or newly qualified Chartered Accountants ............................................................ 804
e-mail at eboard@icai.org
DESIGN, ADVERTISEMENT & MARKETING
 For Mandatory Compliance: Indian CA firms having tie-up/affiliation with
SPENTA MULTIMEDIA international entities/network ............................................................................ 805
MUMBAI: Spenta Multimedia, Peninsula Spenta, Mathuradas Mill
Compound, N. M. Joshi Marg, Lower Parel. Mumbai-400013. Tel: +91 (22)  Loan Scheme through Corporation Bank ............................................................ 806
24811022/24811025, Telefax: -91(22) 24811021.
DELHI: No.7, 1st Floor, Nizamuddin (West) Market. New Delhi-110013. Tel:  Special Placement Programme through Video Conferencing Mode
+91 (11) 4669 9999. for Organisations functioning in Gulf Council Countries (GCC)/Middle East,
BENGALURU: Old No. 583, New No. 9, Sri Manjunatha Krupa, 80 Feet Road,
3rd Cross, Opp. Koramangala Police Station, Bengaluru-560095. Tel: +91(80) November - December, 2010............................................................................. 807
4161 8966/77.
KOLKATA: 206-Jodhpur Park, Kolkata - 700068. Tel: +91(33) 2473 5896.  ICAI Seeks Space and Infrastructure to Conduct Campus Interviews .............. 808
Telefax: +91(33) 2413 7973.
CHENNAI: AKS Pooja Complex, 2nd Floor, Old No: 203 New No: 154, R. K.
EVENTS
Mutt Road, Mandevelli (Next to Jagan Mohan Clinic), Chennai-600028.  Training Workshop on Audit Excellence .................................................................... 809
Tel: +91(44) 4218 8984/85.
HYDERABAD: H.No:8-2-684/3/R/1&2, Flat No: 304, Alankrith Apts,  Seminar on Capacity Building Measures &
Gulmohar Avenue, Rd No: 12, Banjara Hills, Hyderabad. Tel.: +91 9676666691
ICAI RESERVES THE RIGHT TO REJECT ADVERTISEMENTS
New Professional Avenues, Hyderabad ........................................................... 810
Printed and published by Vijay Kapur on behalf of The Institute of Chartered  Conference on Capacity Building Measures &
Accountants of India (ICAI)
Editor — CA. Amarjit Chopra New Professional Avenues, Varanasi ............................................................... 810
Published at ICAI Bhawan, P. O. Box No. 7100, Indraprastha Marg, New Delhi
- 110 002 and printed at Spenta Multimedia. Peninsula Spenta, Mathuradas  ICAI Awards - 2010 – Corporate CA Achievers’ Acclaim ................................. 811
Mill Compound. N. M. Joshi Marg, Lower Parel, Mumbai - 400013  One Day Workshop, Surat ................................................................................ 811
The views and opinions expressed or implied in THE CHARTERED
ACCOUNTANT are those of the authors and do not necessarily reflect those  Two Days Workshop on Excellence in Profession, Jabalpur ............................ 812
of ICAI. Unsolicited articles and transparencies are sent in at the owner’s
risk and the publisher accepts no liability for loss or damage. Material in this  Two Days Residential Refresher Course, Bodhgaya ........................................ 812
publication may not be reproduced, whether in part or in whole, without the
 Two Days Workshop on Excellence in Service Tax, Mathura ............................ 813
consent of ICAI.
DISCLAIMER: The ICAI is not in any way responsible for the result of any  National Conference, Ahmedabad .................................................................... 814
action taken on the basis of the advertisement published in the Journal. The
members, however, may bear in mind the provision of the Code of Ethics  Two Days National Conference, Guwahati ........................................................ 814
while responding to the advertisements.
TOTAL CIRCULATION: 2,04,000  All India CA Conference – 2010, Bhubaneswar ................................................ 815
Total No. of Pages: 148 including Covers  ICAI’s Corporate Forum ..................................................................................... 816
Cover image: www.imagesbazaar.com
Inside images and graphics: www.dreamstime.com  International Conference on Accountancy Profession, New Delhi .................... 817

4 THE CHARTERED ACCOUNTANT November 2010


685 Contents

........................ ACCOUNTING
 IFRS – Exceptions
- CA. Aditya Singhal 718
 Accounting for Customer Loyalty Programmes
Under IFRS
banking and finance
- CA. Anjani Kumar Khetan 726
 Fundamental Analysis
- CA. Siddhartha Jain 774

........................ AUDITING
 Private Equity and Valuation
- CA. Nikhil Bagrodia 779
 Concern for “Going Concern”
- CA. Rahul Kumar Bajaj 729
 A New Approach to the Audit of ULBs
in the New Environment of Reforms
- CA. Atanusasan Mukhopadhyay 733

........................ INTERNATIONAL TAXATION TRADE


 Royalty & Fees for Technical Service – Analysis of  Producers and Distributors: Case of Organised

Recent Judgments of Authority of Advance Rulings Retail in India

- Committee of International Taxation of the ICAI 739 - Dr. Vasudha Joshi 786

 Interest, Royalty & Fees for Technical Services  Significance of ‘Zeroing’ in Anti-Dumping Matters

to Non-Residents - Dr. P. Sree Sudha 792

- CA. Anshuman Chaturvedi 748

........................ TAXATION
 Applicability of Concessional Tax Rate to
Non-Residents on Long-Term Capital Gains Arising
from Transfer of Securities
- CA. Shailendra Sharma 753 bOOK REVIEW
 Quick Reference Guide to First Time Adoption
of IFRS: Indian Context 802

........................ CORPORATE GOVERNANCE


 Corporate Governance and Company Attributes:
Case of Selected Private Sector Companies in India
- Dr. Punam Agarwal & Dr. Manoj Sharma 758

GENERAL
........................ CORPORATE AND ALLIED LAWS  ‘Unique Identification Number’ to Pave Way for a
New India
 A to Z of Limited Liability Partnership
- Mushtaque Ali 820
- CA. Rajat Mohan 765

........................ WTO
 New Competition Regime in India and
BACKPAGE
the WTO — Opportunities for Chartered Accountants Cross Word 053
- Dr. S. Chakravarthy 769 Smile Please 825

THE CHARTERED ACCOUNTANT november 2010 5


From the President 686

Dear All,
“India stands at a crucial stage. All
across the globe there is interest in
India as an emerging global power…
We have to be able to compete with
the finest minds in the world. In this,
education occupies a crucial position,”
so said Hon’ble President of India
Smt. Pratibha Devisingh Patil recently.
I am delighted to inform you that we
had the honour to meet this visionary
and inspiring first woman President
of the country at the Rashtrapati
Bhawan recently. During the meeting,
the undersigned, along with Vice
President CA. G Ramaswamy, Council
Member CA. S.B. Zaware and a
member from Pune CA. M.S. Jadhav
updated her about our Institute and our philosophers, or great men can exist, Sharma and ICWAI Central Council
contribution as an important partner if we have intelligent and educated member Shri A. N. Raman. Agenda
in Nation Building. We also requested women in society. of the delegation was to interact
her to be the Chief Guest at the mega It is time to learn a lesson, as it with the government functionaries
high-profile International Conference is never too late to do so: women and accounting professionals in
being organised by us on 4-6 January deserve equal treatment and respect Moscow. The Institute of Professional
2011, details of which have been from our society. Initially, we may have Accountants of Russia (IPAR) showed
published elsewhere in the journal. to start with some adjustment in order keen interest in our activities. On the
Her Excellency Smt. Patil showed keen to accommodate them with equality. initiatives of our Vice-President, the
interest in the activities and role of the Let us take a pledge to respect them IPAR responded positively by coming
Institute in the growth and development in our family, first, as we know: charity forward with a proposal for mutual areas
of national economy in particular begins at home. This will bring a of cooperation regarding implementing
and society in general. We fervently sea change in not just the form and IFRS, auditing and quality control
hope that she will kindly give her composition of our society but also standards, and internal audit standards,
consent to grace our International in the quality of our own existence. etc. We have invited the IPAR President
Conference. To quote our adorable President of Mr. Vyacheslav V. Skobara and Chair
Meanwhile, as readers will recall, we India Hon’ble Pratibha Devisingh Patil: of the IPAR International Affairs Ms.
basked in the glory of Commonwealth “Empowerment of women is parti- Svetlana M. Bychkova to attend our
Games 2010 by winning a record cularly important to me as I believe International Conference to be held
number of medals. We got medals this leads to the empowerment of the in January 2011. The delegation also
in events we were not hopeful at all. nation”. American lawyer and political met Mr. Sergey D. Shabalov, State
We did not mind being at second activist Bella Abzug rightly observed: Secretary, Deputy Finance Minister of
position, but we rejoiced performing Women are changing the stream, Russian Federation.
better than England. Reasons for making it clean and green, and safe
celebrations were many. There is a for all. There is a definitive connection Roundtable Conference on
remarkable trend emerging slowly between women’s rights and Commerce and Accountancy
but distinctly, which is very keen development, and socio-economic Education in India
on engulfing all spheres of human development and peace of a state. We recently organised ICAI’s first ever
existence: our female sportspersons Now let you be updated on some Roundtable Conference on Commerce
have performed unexpectedly better important developments over the last and Accountancy Education System
in many events of the Commonwealth month. in India in New Delhi to exchange
Games. Ironically, Haryana having thoughts on various areas of academic
the lowest sex ratio probably has the MCA Delegation to Moscow and practical interest in the field of
largest share of medals earned by ICAI Vice-President CA. G. Ramaswamy commerce and accountancy education
female sportspersons. We personally with the Director, Board of Studies, Shri in India. It was inaugurated by Shri
have observed that, of late, female Vijay Kapur was in Moscow recently as Jitesh Khosla, Additional Secretary and
students have been performing better part of the MCA delegation led by the Officer on Special Duty, Indian Institute
in CA examinations too. In fact, they MCA Secretary Shri R. Bandyopadhyay. of Corporate Affairs, who was keen on
have been doing better in all other Other members of the Indian delegation us leading in enhancing the financial
fields of education. Anyway heroes, were ICWAI President Shri B. M. literacy and the basic knowledge of

6 THE CHARTERED ACCOUNTANT November 2010


687 From the President

the accountancy amongst the people Unique Identification Authority of India to society in general and our economy
of India. Eight Vice-Chancellors, (UIDAI), the undersigned, on behalf in particular.
namely Prof. Manoj K. Mishra of of the Institute, extended a promise
University of Lucknow, Prof. K. K. of complete support to the ambitious Draft of ASLB on Presentation of
Deka of Dibrugarh University, Prof. A. UID project of our country with all Financial Statements Ready
D. Sawant of University of Rajasthan, possible resources of the Institute. We In the direction of establishing a single
Prof. Binayak Rath of Utkal University, suggested to him that ICAI can play set of high quality financial reporting
Prof. R. Venkata Rao of National Law important role in development and standards for Local Bodies further, the
School, Bangalore, Prof. I. V. Trivedi of implementation of this project, while Committee on Accounting Standards
Mohanlal Sukhadia University, and Prof. actively working with the Government. for Local Bodies (CASLB) has
J. L. Gupta (former Vice-Chancellor) We showed our willingness to offer recently finalised the draft of ASLB on
of Bilaspur University, attended the the manpower of vast base of ICAI ‘Presentation of Financial Statements’
Conference. More than 55 Heads, members located across the country to prescribe the manner in which
Deans of Commerce and Management to be used in the implementation general purpose financial statements
Department, and faculty members of the project, which will result in should be presented. This would
representing various management the issuance of Unique IDs to all help the Local Bodies immensely in
institutions and universities of India citizens of India. We also informed presenting their financial statements
also participated. The undersigned Shri Nilekani that our members in a comparable and consistent
also participated in the Conference with having experience in endeavours manner. Also, drafts of Standards on
Central Council colleagues CA. Vinod such as PAN card, e-governance and ‘Inventories’ and ‘Segment Reporting’
Jain, Chairman, Board of Studies, CA. facilitation centres for sales tax and will soon be finalised.
Jaydeep N. Shah, CA. Bhavna Doshi, excise could be well-suited to be a part
CA. Rajkumar S. Adukia and CA. S. of this project. During the meeting, New Group to Respond
B. Zaware. Presentations were made we also discussed the use of IT system to Parliamentary Standing
by Prof. Ashish Bhattacharyya from in Goods and Service Tax among Committee
IIM, Kolkata, Dr. Avinash Chander, other issues of our mutual interest. A Special Group was constituted for
Technical Director of ICAI and Shri Mr. Nilekani promised to utilise the formulating ICAI’s views/response to
Vijay Kapur, Director, Board of Studies services of Chartered Accountants in the various recommendations made by
of ICAI. the GST project. the Parliamentary Standing Committee
We wish to inform that the discu- on Finance on Companies Bill 2009.
ssions held provided a good platform ICAI Briefs Media on IFRS The Group has met and deliberated
for exchange of views amongst the Convergence on the Report in detail. The views/
leading accounting educators of We would like to remind our members suggestions as formulated are getting
India. Quite rightfully, everybody that we are committed to meet our finalised for sending our response.
requested us to bring out uniform deadline of the convergence of the
reading material on Indian Accounting Indian Accounting Standards with ICAI Probe into Auditing/
Standards converged with IFRS in a the International Financial Reporting Accounting Violations in IPL
simplified and illustrative manner for Standards (IFRSs) effective April, 2011 We are planning to send notices to
university students. They also desired in select entities as per the roadmap six IPL franchisees seeking more
that the Institute could frame model laid down by the Government. Let us information from the companies
course curriculum meant for the Indian also recall that, to spread awareness owning the teams. These franchisees
universities. Representatives of some and popularise the convergence of are – Kings XI Punjab, Delhi Daredevils,
universities even offered us the space our accounting standards with the Rajasthan Royals, Chennai Super
for building up reference libraries and IFRSs, we have launched a nationwide Kings and Deccan Chargers. The
classrooms for imparting education campaign. As part of this very initiative, investigations into alleged violations
through e-learning mode. During we recently organised an interactive of auditing and accounting norms by
the discussions, the participants session with the representatives of the auditors are not yet complete due
also stressed the need to bring Indian media, basically to brief them to the non-availability of the required
transparency and accountability in on the IFRSs-related developments information in these companies. This
examination system. We are very and convergence, and to help investigation is part of a multi-agency
confident that a synergy between them print objective and authentic probe launched by the Government of
the Institute and the universities can information in this regard in the media. India, e.g. I-T Department is probing tax
produce better results. This whole exercise was aimed at evasion, ED money laundering, MCA
encouraging and helping the media sources of funding and shareholders’
ICAI Offers Support to Shri in supporting our efforts to spread patterns, etc. Surprisingly, there is
Nandan Nilekani for UID Project mass awareness about IFRSs and to no published financial information
During the meeting recently held with highlight the comprehensive benefits with Kolkata Knight Riders and Royal
Shri Nandan Nilekani, Chairman of the that convergence is going to provide Challengers.

THE CHARTERED ACCOUNTANT november 2010 7


From the President 688

Project Parivartan obtain a Permanent Account Number Mr. Salman Khurshid was the Chief
Project Parivartan, a journey embarked in India due to which a PAN encrypted Guest while Union Minister of Law and
on to bring about a paradigm shift DSC could not be immediately Justice Mr. M Veerappa Moily was the
in the working of our Institute and available. Hence, a representation Guest of Honour at the well-attended
conceived with an idea of taking posing the difficulty being faced by conference. Other speakers included
the Institute to a qualitatively new Foreign Companies was made by Chief Justice of India Mr. Justice S.H
way of working, aims to create a the Institute to the Central Board of Kapadia, Chairman Competition
single tightly-integrated system for Direct Taxes. In view of the same the Appellate Tribunal Dr. Justice Arijit
catering to the entire community of Central Board of Direct Taxes has Pasayat and Competition Commission
chartered accountants and students, relaxed the requirement of using chairman Mr. Dhanendra Kumar.
irrespective of their geographical encrypted PAN on DSC for non-resident The undersigned also addressed
locations, through the Internet. It also signatories of Foreign Companies. the conference from professional
aims to create a truly next-generation Accordingly, the signatory may register perspective. The global competition
Institute through IT-revolution. The with a non-PAN DSC from CCA, India law scenario vis-à-vis India, and
journey so far in this direction has and use the same jurisdiction while various aspects of newly enforced
been quite successful and the Project uploading the return. This facility is Competition Law were discussed in
is at the execution of next level of IT available only for all foreign Companies the conference.
maturity. The ground covered so far under the jurisdiction of respective
includes the EoI for infrastructure and International Taxation wards or circles Asia-Oceania Standard Setters
software applications, to onboard of Income Tax Department. Group Meeting
our IT partners. We have witnessed We recently attended the second
good traction and interest from major ICAI Wants Power to Act Against annual meeting of the Asia-Oceania
players in the market. The Project Erring Firms Standard Setters Group (AOSSG),
Management Office is working on It is quite affirmative now for the Institute which was formed last year as
closely with all other departments to to be ready for seeking power from the a forum for the countries in the
complete our requirements for the law to take action against erring CA firms. region to exchange their ideas and
tenders that we plan to float towards In this light, as per the Act, the Institute have a joint voice in matters relating
the end of this month. Despite the can take disciplinary action against its to IFRSs. The undersigned, along with
tedious process, we assure everybody members but not against the firms. At Council Member and the Chairman,
that our institute is committed to the same time, it is becoming extremely Accounting Standards Board, CA.
transformation. We will keep you important to curb the wrongful and Manoj Fadnis and the Technical
updated of the progress as we make illegal acts committed by the firms. So, Director, Dr. Avinash Chander, put forth
from time to time. for the first time, the ICAI has decided to India’s approach and perspective on
recommend to the Government of India various issues of mutual interest
CBDT Takes Positive Action that power to act against an erring firms that were discussed and decided at
Following ICAI Representaion be given to the Institute after necessary the meeting in Tokyo. We are happy
As you will be aware, an amendment amendments in the Act. Action to inform you that at the meeting
to Rule 12 of the Income-tax against the firms are proposed to be it was decided to establish a new
Rules, 1962 vide notification no. initiated in rarest of rare circumstances working group for IAS 41, Agriculture,
49 dated 9th July, 2010 made it and in the cases in which there are which will be led by the ICAI. The
mandatory for all Companies continuous and repetitive acts of meeting was attended by 24 accounting
(including foreign companies) filing negligence, jeopardising of public standard setting bodies from countries
ITR-6 to digitally sign the Income-tax interest or proved collusion in and jurisdictions in the Asian-Oceania
return for the AY 2010-11. Thereafter, perpetration of fraud. Generally the region, representatives from the
certain procedural changes were action is contemplated only against International Accounting Standards
effected. The Institute was given to individual members. We definitely Board (IASB) and a Trustee of the
understand that as per the changed need more powers to ensure that IFRS Foundation.
requirements made applicable w.e.f. big corporate scandals do not occur
1.08.2010, where the signatory to the in future. Initiatives for Members
return is not the same as the signatory Unique Code (UCD) for Members
in the immediately preceding year, the International Competition Law in Practice Soon:
system required that the DSC also Conference We are planning to introduce a unique
contains the PAN encryption therein. The Institute played a crucial role code numbers to check the increasing
The said revised procedure was as Knowledge Partner for a high- instances of fraudulent practices
creating practical difficulties profile International Competition Law including forged attestations, as part of
in case of Foreign Companies Conference organised by Competition our ongoing Project Parivartan initiated
whose directors being Law Bar Association in national capital to change our operational processes
non-residents were not required to recently. Corporate Affairs Minister to meet global benchmarks. Modalities

8 THE CHARTERED ACCOUNTANT November 2010


689 From the President

are being worked out. We are being the private sector. The Group shall the workshop included Secretary, MCA
assisted by the software giant Infosys comprise CA. Vinod Jain, Chairman, Shri R. Bandyopadhyay, Shri Jitesh
in this endeavour. Then, we would like Board of Studies (Convenor) and CA. Khosla, Additional Secretary to the
our banks to insist upon this UCD, as Pankaj I. Jain, Chairman, Professional Government of India and Officer on
people file different balance sheets Development Committee. The said Special Duty (OSD), IICA, Ms. Renuka
for different purposes without the Group will submit as early as possible Kumar, Joint Secretary MCA, Shri
knowledge/approval of our members. the aforestated draft paper to the Pawan Kumar, Director (Tax Policy),
Similarly, there are instances when Professional Development Committee Department of Revenue, Ministry of
financial statements filed in the tax and Board of Studies for consideration Finance, Ms. Gargi Ray of Infosys
department are different from the ones and making recommendations to the technologies, Past Presidents of ICAI
sent to banks or registrar of companies. Council. The members of the Council CA. N. P. Sarda and CA. Ved Jain
Since the CA membership numbers may also be requested to give their and Council members CA. Jayant P.
are in public domain, introduction of suggestions/inputs for consideration Gokhale and CA. Bhawana Doshi. The
UCD will certainly help in protection of by the Professional Development undersigned highlighted the various
our members. Committee/Board of Studies. steps taken by the ICAI in the process
of convergence of Indian Accounting
Special Loan Scheme of Tie-Up with United Stock Standards with IFRS including the
Corporation Bank for CAs: Exchange for Currency Derivatives capacity building and other related
We take pleasure to inform our Awareness: initiatives. About 70 CEOs, Directors,
members that the Committee for It is quite satisfying to inform you that CFOs, Auditors, representatives from
Capacity Building of CA Firms and we have operationalised the MoU regulatory bodies, fellow members
Small & Medium Practitioners has signed last year with the United Stock of the ICAI and ICAI’s CA employees
helped the Institute in going into an Exchange (USE) of India Limited, attended the workshop.
MoU with the Corporation Bank for newest stock exchange for currency
providing financial assistance in form derivatives, to impart comprehensive Four-Day Training Workshops on
of liberalised loan scheme called knowledge of financial markets to Audit Excellence:
Corp CA for our members and firms. our members. Following this, the Auditing standards issued by our
Comptroller and Auditor General of USE will sponsor our members Institute are both best practices and
India Shri Vinod Rai, Chairman & by organising seminars, panel- performance benchmarks for our
Managing Director of Corporation discussions, workshops on financial profession, and the quintessential
Bank Shri Ramnath Pradeep and markets and corporate governance. features of our very existence and
Executive Director of Corporation We would provide institutional supremacy in the auditing profession.
Bank Shri Asit Pal were present on the support and facilitate interactions To give an impetus to our awareness
occasion. This scheme will cater to with our members. At least two such creation initiatives, four-day Training
various financial needs of members programmes are proposed to be Workshops on Audit Excellence will
of the CA profession including cost organised with them before the end of be launched soon by the Auditing
of furniture/fixture/office equipments this year. On this occasion, Managing and Assurance Standards Board
contributing in the working capital for Director and CEO of the USE Shri T. S. (AASB) of ICAI for imparting training
building their profession. We sincerely Narayanasami expressed his ‘pleasure on implementation of the Standards
hope that a large number of members to be associated with ICAI’ and desired on Auditing issued under the Clarity
would be benefited by this landmark ‘to build knowledge about financial Project. The details are available
scheme. We must acknowledge the markets especially sophisticated elsewhere in the Journal.
hard work of the Committee Chairman, instruments like currency derivatives
CA. Sanjeev Maheshwari behind this in India.’ We are sure that this would Resources on Auditing Standards:
accomplishment. The details of the be enriching experience for both the A Guide containing practical guidance
scheme have been hosted on our organisations. and ready-to-use templates on
website and also published elsewhere application of auditing standards
in the journal. IICA-ICAI Joint Workshop on IFRS: to audits of small entities will soon
We recently organised a special be published to help with the
New Group to Consider Provisions workshop on ‘IFRS – Issues in Transition’ understanding of auditing standards
for Physically Challenged CAs: jointly with Indian Institute of Corporate and promoting implementation of
We are happy to inform you that Affairs (IICA). The workshop dwelt Standards. As another measure
a Group has been constituted to on managing transition to IFRS that to promote the understanding of
consider and prepare a draft paper poses a great challenge to the makers auditing standards, the AASB is also
on the various concessions that one and users of financial statements and developing a Manual of Presentations
can have for physically challenged to the reporting authorities, i.e., the on Standards on Auditing & Other
Chartered Accountants vis-à-vis the practical implication of IFRS. Prominent Engagement Standards that will act as
openings available in PSUs or in personalities who shared their views in a quick reference for an overview of the

THE CHARTERED ACCOUNTANT november 2010 9


From the President 690

requirements of auditing standards. in communication, leadership and vision to make our examination system
This can be effectively used by the personality in general including hi-tech and futuristic.
audit firms as well in training their audit the technical skills for effective
staff on auditing standards. functioning in profession. The New Members Nominated on 21st
programme will start on December 1, Council of ICAI
Convocation Ceremony in Jaipur: 2010, at the Centre of Excellence of We welcome Dr. T. V. Somanathan, Joint
The convocation programme for the ICAI in Hyderabad. In fact, more than Secretary, Ministry of Corporate Affairs,
newly enrolled Associate Members 50 students have already been enrolled New Delhi, and Ms. Usha Sankar,
of the Institute from Central Region for this programme. In the meantime, Director General (Commercial), Office
(covering the states of Rajasthan and a three-month residential programme of the Comptroller & Auditor General
Madhya Pradesh) was successfully shall commence from December 6, of India, New Delhi, as nominated
held at Jaipur on October 5, 2010. 2010, at National Institute of Financial members on the 21st Council of our
It was a time of celebration and of Management in Faridabad. We Institute for the remaining term of
acknowledgement of our students’ hard sincerely hope to witness a large the Council or till further orders. They
work. The undersigned inaugurated the number of participants and we are sure have replaced Ms. Renuka Kumar and
function and conferred the certificates they will use this opportunity to become Shri K. P. Sasidharan respectively. We
of merit to the deserving and newly- better professionals. Such an active sincerely hope to get their complete
enrolled members in the presence of participation will encourage us further help and support in all endeavours
Past President CA. Sunil Goyal, Central to hold similar and better programmes for progress of our Institute. We
Council colleague CA. Anuj Goyal, for them in future. also place on record the valuable
past Central Council colleague CA. P. contributions made by Ms. Kumar and
P. Pareek and Jaipur Branch Chairman Online Articles Placement Portal: Mr. Sasidharan in the Council.
CA. C. L. Yadav among others. While We are glad to inform that the Board Meanwhile, we have submitted
stressing the need of having effective of Studies has introduced an optional our comments/suggestions on Draft
communication skills, the undersigned Campus Placement Scheme for International Standard ISO 26000
informed the members about the selection of Articled Assistants by CA (Guidance on Social Responsibility)
growing recognition of Indian CAs Firms. The Pilot Campus Placement and on Applicability of Foreign Direct
internationally, and noted with Programme was held at Delhi in August Investments in LLP to the Ministry of
appreciation the rising ratio of female 2010 for the CA firms having their HOs/ Corporate Affairs (MCA).
members. Branch Offices in Delhi/New Delhi and
for eligible students who would like to Happy Deepawali
Certified Filing Centre Registration service their articles in the CA Firms Deepawali, the pious festival of lights,
till November 2010: in Delhi/New Delhi. Considering the is the celebration of the victory of good
We want to inform all members of our good response, positive feedback and over evil. The underlining message
community that the registration process requests received from both CA Firms of this festival is that the evil and
under the Certified Filing Centre (CFC) and Students, it has been decided falsehood may appear to be mightier
scheme is valid till November 30, to start an Online Articles Placement and more resourceful but it is only the
2010. We have received 271 CFC Portal - http://bosapp.icai.org from 5th truth and good that prevails in the end.
applications (88 new application October, 2010 to facilitate placement of Let’s imbibe the spirit of this festival
and 183 applications for renewal of Articles in CA Firms on pan India basis. and take a vow to lead the world from
existing CFCs) from the members till We request both eligible candidates darkness to light, from falsehood to
date. and CA firms to avail of this facility and truth, and from wrong to right. Let us
register themselves online through vow to live each day in the most pious,
Students’ Initiatives the portal. The candidates shortlisted God-conscious way. This Deepawali
Residential Programme on by CA Firms would be informed by let us give thanks for all we hold dear:
Professional Skills & Development: e-mail through the Portal, to appear Our health, our family, our friends and
A six-week residential programme on for interviews/interactions at their to the grace of God which never ends.
Professional Skills and Development respective Offices, at the designated May this Deepawali fill your life with
has been conceived by the Board date and time. prosperity and peace, and love and joy
of Studies for the benefit of our which doesn’t cease. May the festival
students and newly-qualified CPT Online Examination results: of lights be the harbinger of growth of
chartered accountants. All students The results of CPT online examinations our profession.
who have passed PCC/IPCC/PE-II held on 18th and 19th September this
examinations and who are pursuing year were declared recently and we Wish you all a very happy Deepawali.
last year of the article training or those are happy to inform you that the results
who are newly-qualified chartered (28.40 per cent) have been satisfactory. CA. AMARJIT CHOPRA
accountants will be eligible for the What is more satisfying is that our online
programme and, therefore, are examinations are slowly-but-steadily
invited to join it. This will offer a gaining popularity among new-age President, ICAI
unique opportunity to develop skills students and this portends well for our October 25, 2010

10 THE CHARTERED ACCOUNTANT November 2010


Photographs 692

Meeting with President of India


CA. Amarjit Chopra, President, ICAI, CA. G. Ramaswamy, Vice President, ICAI and CA. S. B. Zaware, Central Council Member with CA. M. S. Jadhav met
Her Excellency Smt. Pratibha Devisingh Patil, President of India at Rashtrapati Bhavan, New Delhi. (October 18, 2010)

Rouund Table Conference IFRS Workshop for Media Personnel


CA. Amarjit Chopra, President ICAI addressing the Round Table Conference President, ICAI CA. Amarjit Chopra addresses the media personnel during
on Commerce & Accountancy Education in India: Issues and Challenges the Workshop on Indian Accounting Standards Converged with IFRSs –
held at India Habitat Centre, New Delhi. Other dignitaries on the dais “First time adoption of IFRS – Latest updates.” Central Council Member
are (from left) Shri Vijay Kapur, Director, BOS-ICAI, Shri Jitesh Khosla, CA. Manoj Fadnis can be seen on the dais. (October 22, 2010)
Additional Secretary, Government of India, Shri T. Karthikeyan, Secretary,
ICAI and CA. Vinod Jain, Chairman, BOS-ICAI. (September 26, 2010)

Joint IICA-ICAI Workshop on IFRS ICAI President with Chairman, UIDAI


ICAI President CA. Amarjit Chopra presenting a memento to Shri R. President, ICAI during a meeting with Shri Nandan Nilekani,Chairman,
Bandyopadhyay, Secretary, Ministry of Corporate Affairs in presence of Unique Identification Authority of India (UIDAI). Shri Shaleen Suneja, Sr.
Shri Jitesh Khosla, Additional Secretary, Government of India & OSD, Assistant Secretary, ICAI was also present on the occasion. (October 20,
IICA and Shri T. Karthikeyan, Secretary, ICAI during the Joint IICA-ICAI 2010)
Workshop on IFRS. (September 27, 2010)

12 THE CHARTERED ACCOUNTANT November 2010


Photographs 694

ICAI Vice President with President, IPAR Conference on International Taxation


CA. G. Ramaswamy, Vice President, ICAI greets with Mr. V. V. Skobara, CA. Amarjit Chopra, President, ICAI lighting the lamp at the Two Day
President, Institute of Professional Accountants and Auditors of Russia Conference on International Taxation hosted by NIRC of ICAI at New Delhi
(IPAR) during a visit to Moscow. in presence of CA. Atul Kumar Gupta, Chairman, NIRC, CA. Hans Raj
Chug, Secretary, NIRC with two other dignitaries. (October 22, 2010)

Jaipur Convocation
CA. Amarjit Chopra, President, ICAI in presence of past President CA. CA. Amarjit Chopra, President, ICAI handing over the Certificate of
Sunil Goyal lighting the lamp to inaugurate the Convocation 2010 held Membership to a participant at the Convocation held at Jaipur in presence
at Jaipur. Other dignitaries at the podium include CA. Anuj Goyal, Central of CA. Anuj Goyal, Central Council Member, CA. Khemisha Soni, Chairman,
Council Member, CA. Khemisha Soni, Chairman, CIRC of ICAI and CA. C. CIRC and CA. C. L. Yadav, Chairman, Jaipur Branch. (October 5, 2010)
L. Yadav, Chairman, Jaipur Branch. (October 5, 2010)

ANNOUNCEMENT

Plagiarism: A Matter of Growing Concern


[Our journal, The Chartered Accountant, is a means to enhance It is an intellectual crime.
our members’ knowledge and update them on contemporary
developments in the area of accountancy and other allied Authors who submit plagiarised work for publication will be
professions and topics of professional interest. We cater this strictly proceeded against as per policy and rules of Institute of
service to all our members, e.g. more than 1,60,000 in number. Chartered Accountants of India and the law of the land. We will
Our Journal is read by more than 2 lakh readers across India also represent such cases to authorities of the organisations
and abroad.] where these authors work.

We receive articles from our authors either on their own or in We appeal, therefore, to all our prospective authors not to
response to our invitation when we bring out special issues. In send a plagiarised work to us for publication and not try to take
the recent past, we have come across the practice of plagiarism credit for a work which is not theirs. Any reference of other
in some of the submissions by our authors. Contents of some sources/authors/content should be duly given within quotes
articles have been found to be lifted from resources including with the name of the source in the body of the submitted
books, websites, etc., and presented to us as authors’ original articles’ text itself. By following this practice, we will essentially
work, which is nothing but plagiarism, an infringement of others’ show respect towards the creative community which all of us
intellectual property rights and, therefore, a punishable offence. value immensely.
- Editor

14 THE CHARTERED ACCOUNTANT November 2010


LEGAL UPDATE 696
Legal Decisions

Legal Decisions1
DIRECT TAXES obligation on the balance sheet date is determinable
Income-tax with reasonable certainity. The considerations for
Section 28(i) of the Income-tax Act, 1961 accounting the income are entirely on different footing.
– Business & Professional Income – v) As per AS-11, when the transaction is not settled in the
Chargeable as same accounting period as that in which it occurred,
Where a forward contract is entered into by assessee to the exchange difference arises over more than one
sell foreign currency at an agreed price at a future date accounting period.
falling beyond last date of accounting period, loss if any vi) The forward foreign exchange contracts have all the
would be incurred to assessee on account of evaluation of trappings of stock- in-trade.
contract on last date of accounting period i.e. before date vii) In the ultimate analysis, there was no revenue effect
of maturity of forward contract [Assessment Year 1998-99 and it was only the timing of taxation of loss/profit.
& 1999-2000] Accordingly, it was to be held that where a forward
Dy. CIT v. Bank of Bahrain & Kuwait, August 13, 2010 contract is entered into by the assessee to sell the foreign
[MUM-ITAT (SB)] currency at an agreed price at a future date falling beyond
The assessee is a non-resident company carrying on the last date of accounting period, the loss, if any, would
banking business in India. It entered into forward contracts be incurred to the assessee on account of evaluation of
with its clients to buy or sell foreign exchange at an agreed the contract on the last date of the accounting period, i.e.,
price on a future date. On the date of maturity, the contract before the date of maturity of the forward contract.
was executed which might result in the profits or losses to
the assessee. In some cases, the date of maturity of the Section 28(i) of the Income-tax Act, 1961– Business &
contract falls beyond the end of the accounting period. Professional Income – Chargeable as
In such cases, the assessee evaluated the unmatured If guarantee commission received by bank is refundable
forward contracts on the last day of the accounting period then it cannot be said that absolute right to commission
on the basis of rate of foreign exchange prevailing on that has accrued in favour of bank at time of execution of
date and books the loss or profit, as per rates notified by contract for furnishing guarantee and on the other hand
Foreign Exchange Dealers Association of India (FEDAI). The if guarantee commission is not depended upon period of
revenue’s stand was that, this method of accounting was guarantee and, thus, has accrued in favour of bank on date
not correct because the loss was incurred on the date of of execution of contract for furnishing guarantee then same
maturity of the contract and there could not be any loss prior has to be taxed in year in which guarantee is furnished
to such date. irrespective of period to which guarantee remained alive
The Special Bench of the Tribunal held that forward [Assessment Year 1998-99 & 1999-2000]
foreign exchange contract means an agreement to Dy. CIT v. Bank of Bahrain & Kuwait, August 13, 2010
exchange different currencies at a forward rate. Forward [MUM-ITAT (SB)]
rate is a specified rate for exchange of currency at a The assessee-bank following mercantile system of
specified date. The assessee entered into forward contract accounting, accounted the guarantee commission related
with clients to buy or sell foreign exchange at an agreed to the year only. The Assessing Officer was of the opinion
price at a future date in order to hedge against the possible that the transaction involving bank guarantee was only in the
future financial loss on account of wide fluctuation in the rate year the guarantee was given. The assessee got the right to
of foreign currency. Thus, firstly, forward foreign exchange receive the said commission in the said year. He observed
contract created a continuing binding obligation on the that guarantee commission was not advance commission
date of contract against the assessee to fulfill the same on received and, therefore, there was no question of deferring
the date of maturity and secondly, it was in the nature of the same to future year. He, accordingly, considered the
hedging contract because it was a contract entered into entire income relating to guarantee commission in the year
against possible financial losses. in which the guarantee was given. The basic question to be
The assessee’s appeal was to be allowed for the answered was as to at what stage the assessee acquired
following reasons:- the absolute right to receive the income.
i) A binding obligation accrued against the assessee The Special Bench of the Mumbai Tribunal held
the minute it entered into forward foreign exchange that if the guarantee commission received by bank was
contracts. refundable then it could not be said that absolute right to
ii) A consistent method of accounting followed by the commission had accrued in favour of the assessee at
assessee could not be disregarded only on the ground the time of execution of contract for furnishing guarantee by
that a better method could be adopted. it, but if the guarantee commission was not depended upon
iii) The assessee had consistently followed the same the period of guarantee and, thus, had accrued in favour
method of accounting in regard to recognition of profit of the assessee on the date of execution of contract for
or loss both, in respect of forward foreign exchange furnishing guaratnee then the same had to be taxed in the
contract as per the rate prevailing on March 31. year in which the guarantee was furnished irrespective of
iv) A liability was said to have crystalised when a pending the period to which guarantee remained alive. This was so

1
Readers are invited to send their comments on the selection of cases and their utility at eboard@icai.org. For the convenience of readers full text of
these cases have been hosted on the website of the institute at the link: www.icai.org/post.html?post_id=967&c_id=59
16 THE CHARTERED ACCOUNTANT November 2010
LEGAL UPDATE 698
Legal Decisions

because the guarantee commission cannot be apportioned are the test of initial outlay of the business, the aim and
with reference to the period over which the guarantee object of the expenditure, enduring benefit test and the test
extended. of fixed and circulating capital.
The assessee had acquired a business concern in India
Section 28(i) of the Income-tax Act, 1961– Business & with its outlay and the entire transaction was outlined in the
Professional Income – Chargeable as MOU. The purchase price itself stated that the amount of
Where assessee company was incorporated for purpose Rs.52.5 crore was to be paid as a total purchase price for
of effectuating transactions agreed in MOU with the very the Compressor Division assets and other land and building.
intention and purpose of establishing business in India by The non-compete agreement was made an Appendix
taking over compressor and related operations of another to the agreement and was, thus, part and parcel of the
company in India, and non-compete agreement with main agreement the signing and execution whereof was a
said company was part and parcel of whole transaction, condition precedent for the completion of the transaction.
expenditure incurred by assessee in pursuance of non- The assessee company was incorporated for the
compete agreement would be capital expenditure, purpose of effectuating the transactions agreed in the
deduction of which could not be granted to assessee as MOU. The purpose of the assessee company for which
revenue expenditure [Assessment Year 1998-99] it was incorporated was that “Tecumseh USA” being a
Tecumseh India Private Limited v. Addl. CIT, July 30, leading global compressor manufacturer was interested
2010 [DEL-ITAT(SB)] in purchasing compressor related operations of Whirlpool
The parent company of the assessee company being India for Indian compressor market. Thus, the very intention
leading manufacturer of compressors worldwide, had and purpose was to establish business in India by taking
desired to enter the Indian market for that activity and, for the over the compressor and related operations of Whirlpool
purpose of effectuating such desire that company entered India in India. The non- compete agreement was part and
into an agreement called MOU with the Whirlpool India Ltd. parcel of the whole transaction and cannot be treated to be
and its parent company in which it was clearly stated in a separate transaction.
clause 1.1 that Tecumseh and Whirlpool would enter into If the expenditure is made for the initial outlay or for the
an asset purchase agreement whereby Tecumseh (through expansion of business or a substantial replacement of the
a to be established local Indian entity) shall purchase all equipment, then, it will fall under the capital expenditure. The
compressor, machinery, equipment and tooling located at expenditure in qustion was not incurred while the business
Whirlpool’s Faridabad facility as well as related compressor was carrying on. The non-compete agreement was no
component assets located at Whirlpool’s Ballabhgarh facility executed subsequent to the date of main agreement, but
[including laminations, wire drawings, central tool room, in the main agreement itself the non-compete agreement
overhead protectors and relays] and all such assets were to was appended without which the transaction was not
be fully identified in such asset purchase agreement or other complete as by including the amount paid for non-compete
appropriate local Indian documentation required to detail agreement the purchase price as stated in MOU could be
such sale and purchase. Similarly, in clause 12 and 12.1 arrived at. Apart from this, the incurring of expenditure also
the mention was made regarding non-compete agreement brought an enduring benefit to the assessee.
whereby Whirlpool India and Whirlpool USA (including its In the case of the assessee there were several
wholly owned subsidiaries) agreed not to manufacture competitors and what the assessee had got only the non-
or repair compressors during the term of global sourcing compete agreement from one party, namely, “Whirlpool
agreement with Tecumseh. However, Whirlpool had been India” from which it had purchased the manufacturing
given right to sell refrigerator compressors purchased from related facilities. It was not necessary that the assessee
Tecumseh to service partners subject to provisions of clause should acquire monopoly rights while warding off the
6.1 of the agreement. competition. Warding off competition in business even to a
For entire transaction which included non-compete rival dealer constitutes capital expenditure and to hold them
agreement an aggregate sum of Rs.52.5 crore was agreed capital expenditure it is not necessary that non-compete fee
to be paid as per MOU. As per the MOU parties were to is paid to create monopoly rights.
meet for determining the proper allocation of the purchase The expenditure as claimed by the assessee in pursuance
price for various assets. The allocation of price for various of non-compete agreement were capital expenditure, the
assets included a sum of Rs.2.65 crore being called as deduction of which could not be granted to the assessee as
“non-compete fee”. revenue expenditure.
The Special Bench of the Delhi Tribunal held that, if
the expenditure is made for acquiring or bringing into Section 32 of the Income-tax Act, 1961 - Depreciation
existence an asset or advantage for the enduring benefit of Where in a case the unabsorbed depreciation allowance
the business, then it will be properly attributable to capital arose in assessment years 1997-98 to 1999-2000 which
and, on the other hand, if it is made not for the purpose of could not be adjusted against the income under the
bringing into existence any asset advantage, but for running head `Profits and gains of business or profession’ up to
the business or working it with a view to produce the profit, assessment year 2002-2003, assessee could not claim set
then, it will be in the nature of revenue. off of such unabsorbed depreciation allowance against
The basic test to determine the nature of an expenditure income under any head other than “Profits and gains of

18 THE CHARTERED ACCOUNTANT November 2010


LEGAL UPDATE 700
Legal Decisions

business or profession” in assessment years 2003-04 and in the case when the tax has been deductible as per the
2004-05; assessee could not claim set off of such brought provisions of Chapter-XVII but deducted in the subsequent
forward unabsorbed depreciation allowance against income year or deducted during the last month of previous year but
under head `Income from other sources’ [Assessment Year paid after the due date under Section 139(1) or deducted
2003-04 & 2004-05] during the other month of the previous year except last
Dy. CIT v. Times Guaranty Limited, June 30, 2010 [MUM- month but paid after the end of the said previous year then
ITAT (SB)] the said sum shall not be allowed as deduction in computing
Where in a case the unabsorbed depreciation allowance the income of the previous year but allowed in the previous
arose in the second period i.e. assessment years 1997-98 to year in which the said tax has been paid. If the condition of
1999-2000 which could not be adjusted against the income deduction and payment prescribed under Section Chapter
under the head `Profits and gains of business or profession’ XVII/XVIIB are applicable for disallowance of the deduction
up to assessment year 2002-2003, the assessee could not 40(a)(ia) then the provisions of Section 40(a)(ia) will be
claim set off of such unabsorbed depreciation allowance rendered as meaningless, absurdity and etios. As per the
against income under any head other than “Profits and gains provisions of Section 40(a)(ia) the deduction is disallowed
of business or profession” in the assessment years 2003-04 only in the case when either no tax was deducted or it was
and 2004-05. The assessee could also not seek to claim the not paid after deduction. But when the tax is deducted may
set off of such brought forward unabsorbed depreciation be belatedly and deposited belatedly then deduction is
allowance against income under the head `Income from allowable in the previous year in which it was so deposited.
other sources’. Therefore, if the provisions of Section 194C with respect
Thus, the unabsorbed depreciation relating to to the time of deduction and payments are applied for the
assessment years 1997-1998 to 1999-2000 was carried disallowance under Section 40(a)(ia) then there will be no
forward up to assessment years 2003-04 and 2004-05 purpose or object for providing the certain conditions of
was to be dealt with in accordance with the provisions of actual deduction of tax and payment of tax under Section
Section 32(2) as applicable for assessment years 1997- 40(a)(ia). The provisions of Chapter XVII are relevant only
1998 to 1999-2000 and the same could not be dealt with for ascertaining the deductibility of the tax at source and
in accordance with the said provisions as applicable to not for the actual deduction and payment for attracting the
assessment years 2003-2004 and 2004-2005. provisions of Section 40(a)(ia). Since in the case in hand
when the assessee had deducted the tax in the last month
Section 40 (a) (ia) read with Section 139(1) of the In- of the previous year i.e March 2005 and deposited the same
come-tax Act, 1961 – Expences Disallowed – Interest, before the due date of filing of the retune under Section
Commission or Brokerage, Fees for Professional or 139(1) then it is covered under clause “A” of Section 40(a)
Technical Sevices (ia). Therefore, when the assessee’s case covered under
When assessee had deducted tax in last month of previous the main provisions of existing law then there is no need
year i.e March 2005 and deposited same before due date to go to the issue of prospective or retrospective effect of
of filing of return under Section 139(1), assessee’s claim of the amendment in the provisions by the Finance Act, 2010.
deduction is to be allowed [Assessment Year 2005-06] Accordingly, the claims of the deduction of the assessee are
Bapushaeb Nanasaheb Dhumal v. Asstt. CIT, June 25, to be allowed.
2010 (ITAT-MUM)
As per the clause (ia) of sub-Section (a) of Section 40 Section 115JB, read with Section 47 of Income-tax Act,
when tax is deductible at source on the payment under 1961 – Special Provision for Payment of tax by certain
Chapter –XVII and such tax has not been deducted or after Companies
deduction has not been paid then the said deduction is not Merely because long term capital gain is exempt under
allowable. As per the sub-clause “A” of Clause (ia) if the Section 47(iv) under normal provision of the Act, it is not
tax is deducted during the last month of previous year and correct to say that it is also to be reduced from net profit
paid on or before the due date of filing of return as per the for purpose of computing book profit under Section 115JB
provisions of Section 139(1) then such sum shall be allowed when Explanation to Section 115JB does not provide for
as deduction. In the cases where the tax is deducted during any deduction in terms of Section 47(iv) [Assessment Year
previous year other than the last month of previous year 2004-05]
but is deposited before the last day of previous year then Rain Commodities Limited v. Dy. CIT, July 2, 2010 [HYD-
it will be allowed as deduction. Therefore, the conditions ITAT (SB)]
for allowability of the deduction is prescribed under Whenever the Legislature wanted income exempted
Section 40(a)(ia) itself and provisions of Chapter –XVII and under the normal provisions of the Act to be excluded from
Section 194C under chapter XVIIB at that relevant point of the computation of book profits, they have provided so.
time are relevant only for the purposes of ascertaining the Under explanation (ii) and Explanation (f) to Section 115JB,
deductibility of the tax on the payment. Once, the nature of the income and expenditure to which provisions of Sections
payment is falling under the provisions of Chapter –XVII/VIIB 10, 11 and 12 apply are to be excluded from the computation
then the disallowance under Section 40(a)(ia) shall be as of Book Profits. Similarly, if any deductions permitted
per the condition as provided under this Section itself. The under the normal provisions of the Act are intended to be
proviso to Section 40(a)(ia) makes it further clear that even deducted from the Book profits also the same is specifically

20 THE CHARTERED ACCOUNTANT November 2010


LEGAL UPDATE 702
Legal Decisions

provided. Deductions under Sections 80HHC, 80HHD, on 31-12-2004, since assessee had already disclosed
80HHE, 80HHF and deduction under Sections 80IA, 80IB all material facts and he had also filed return within time,
were specifically excluded from the computation of Book proceedings initiated by Assessing Officer for second
profits at various times. The long term capital gain is to be time under Section 147 would be barred by limitation.
included in the net profit prepared under the Companies • A perusal of the Explanation 1 to proviso to Section 147
Act and the same is not deductible from the net profit for would show that a mere production of accounts books
the purpose of computing book profit under Section 115JB. and other evidence could have been discovered by
Merely because the long term capital gain is exempt under the Assessing Officer would not amount to disclosure
Section 47(iv) under the normal provision of the Act, it is not within the meaning of the provision. Therefore, the said
correct to say that it is also to be reduced from the net profit Explanation 1 should be considered in the context of
for the purpose of computing book profit under Section the provision, inasmuch as the same is applicable only
115JB when the Explanation to Section 115JB does not for the production of the records and other evidence.
provide for any deduction in terms of Section 47(iv). In other Hence, the same will not be applicable to the case of
words, Section 47(iv) has no application in the computation filing of a return with adequate particulars fully disclosing
of book profit under Section 115JB. Thus from a reading all the materials for the purpose of assessment.
of the Section 115JB as well as the analyses of various
High Court and Supreme Court decisions, the inescapable Section 148 read with Sections 80-IB and 147 of the
conclusion is that the book profits have to be calculated on Income-tax Act, 1961 - Income escaping assessment -
the net profits computed as per Parts II and III of Schedule Issue of notice
VI to the Companies Act, 1956 and as adjusted by the No notice would be issued under Section 148 after
amounts mentioned in the explanation. No further rebates four years from end of assessment year on ground that
or deductions after such adjustments, notwithstanding the assessee-Government contractor was not eligible for
fact whether any income is taxable or no under the normal deduction in view of subsequent amendment in Act and
provisions of the Income tax Act. Computation of income thereby assessee became a deemed failure [Assessment
under the normal provisions and the Book profits are two Years 2003-04 & 2004-05]
parallel computations. While normally followed method of Sadbhav Engineering Ltd. v. Dy. CIT, July 7, 2010
accounting in the books may also be taken for the purpose (GUJ)
of computing income under the income tax Act, the actual The first proviso to Section 147 of the Act, lays down
computation of Book profits will not affect or be governed that where an assessment under sub-Section (3) of
by the computation of income under the normal provisions Section 143 or the said Section has been made for the
of the Income tax Act. In fact only because the Government relevant assessment year, no action shall be taken under
felt that companies availing of various deductions permitted the Section after expiry of four years from the end of the
under the Income tax Act showed a low income for the relevant assessment year, unless any income chargeable
purpose of Income tax but was able to show healthy profits to tax has escaped assessment by reason of the failure on
as per books on the basis of which dividends were distributed the part of the assessee to make a return under Section
and to tax these types of companies that tax on book profits 139 or in response to a notice issued under sub-Section
were introduced. By again importing deductions allowed (1) of Section 142 or Section 148 or to disclose fully and
under the normal provisions of income tax into computation truly all material facts necessary for his assessment. Thus,
of book profits, the very purpose for which these Sections for the purpose of invoking Section 147 after the expiry of
were introduced would be negated. To sum up, it was to be four years from the end of the relevant assessment year, the
held that in the absence of any provision for exclusion of income chargeable to tax should have escaped assessment
capital gains exempted in the computation of book profit by reason of failure on the part of the assessee either (i) to
under the provisions contained in Explanation to Section make a return under Section 139 or in response to a notice
115JB, an assessee is not entitled to the exclusion thereof. issued under sub-Section (1) of Section 142 or Section 148,
or (ii) to disclose fully and truly all material facts necessary
Section 147 of Income-tax Act, 1961 – Income escaping for his assessment.
assessment On a plain reading of the reasons recorded, it was apparent
CIT v. Baer Shoes (India) Pvt. Ltd, August 3, 2010 that the same were totally silent as regards any failure on the
(MAD) part of the petitioner to disclose fully and truly all material facts
[Assessment Year 1999-2000] necessary for its assessment for the relevant assessment
• Merely because a judgment has been rendered, even if years. From the reasons recorded it was apparent that the
by Apex Court, same cannot be a ground for reopening assessments are sought to be reopened on the ground that
assessment under Section 147. as per the explanation given below Section 80-IA(13), which
• Where for assessment year 1999-2000, first has been substituted by the Finance Act No.2 of 2009 with
reassessment was done by Assessing Officer under retrospective effect from 1.4.2000, deduction under Section
Section 147 on 18-3-2003 and, thereafter, notice for 80-IA would not be admissible to an assessee who carries
reopening assessment for second time was issued on business which was in the nature of works contract. That
to assessee on 4-8-2005, while four years period of the petitioner-assessee being a civil contractor working
limitation for invoking power under Section 147 expired for the Government was not eligible for deduction under

22 THE CHARTERED ACCOUNTANT November 2010


LEGAL UPDATE 704
Legal Decisions

Section 80-IA as claimed by the assessee and, hence of the assessee, if any to file e-TDS returns may result in
there was reason to believe that income chargeable to tax independent consequences which are provided in law. That
had escaped assessment for the assessment years under however, cannot justify the rejection of the application made
consideration. The record of the case did not in any manner by the assessee for the determination of withholding of tax
indicate that proceedings under Section 147 were sought to at a lower rate on payments which are to be received by the
be reopened by reason of failure on the part of the petitioner assessee. The delay, if any, in paying tax may result in other
to disclose fully and truly all material facts necessary for its consequences which are provided for by the Act, including
assessment for assessment years under consideration. The penal consequences under Section 271(1). However, that
respondent in its affidavit in reply also had not disputed the cannot justify the rejection of an application under Section
fact that there was no failure on the part of the petitioner 197.
to disclose fully and truly all material facts. Only by way of The Revenue could not take plea that in the event
submission advanced before the Court it was contended that the assessee paid excess tax, it would be entitled to
that in the light of the amendment of Section 80IB, it was a refund of the tax paid together with interest and hence,
deemed that the petitioner had failed to disclose the correct no prejudice would be caused to the assessee. The entire
facts. As to whether or not there is any failure on the part of approach would be specious. The Assessing Officer was
the assessee in disclosing fully and truly all material facts required, in the first instance, to apply his mind to the
necessary for his assessment, is a matter of fact and there fact that the conditions for the grant of a certificate under
can be no deemed failure as is sought to be contended on Section 197 are duly fulfilled. If those conditions are duly
behalf of the Revenue. In the circumstances, in absence of fulfilled, it will be impermissible for the Assessing Officer to
any failure on the part of the assessee to disclose fully and reject the application merely on a whim and on caprice. It
truly all material facts necessary for its assessment for the is impermissible to hold that no prejudice would be caused
assessment years under consideration, the notices under to the assessee since tax would be refunded later together
Section 148 of the Act having been issued after the expiry of a with interest.
period of four years from the end of the relevant assessment
years, the very initiation of proceedings under Section 147 Section 264 of the Income-tax Act, 1961 - Revision – Of
stood vitiated and as such could not be sustained. other orders
Rejection of an application under Section 197 by Assessing
Section 197 of the Income-tax Act, 1961 - Deduction of Officer results in an order as required under Section 264 and,
tax at source - Certificate for deduction at lower rate hence, revisional power which is vested in Commissioner
If conditions for grant of a certificate under Section 197 were under Section 264 would be attracted
duly fulfilled, it would be impermissible for Assessing Officer Larsen & Toubro Ltd. v. Asstt. CIT, April 28, 2010 (BOM)
to reject application for issuing a certificate; it cannot be The Assessing Officer, when he decides an application
contended that no prejudice would be caused to assessee under Section 197(1) must of necessity pass an order
since tax would be refunded later together with interest on the application. Where the application is allowed,
Larsen & Toubro Ltd. v. Asstt. CIT, April 28, 2010 (BOM) that application culminates in the grant of a certificate in
The Assessing Officer dismissed the application for the accordance with the provisions of sub-Section (1) of Section
grant of certificate under Section 197 on the ground that (i) 197. But it would be far fetched to accept the view that the
the calculation mechanism provided under Rule 28AA of the rejection of an application must lie in the absolute discretion
Income-tax Rules, 1962 fails as the financial statements of of the Assessing Officer or that the Assessing Officer is not
the assessee for the three previous years was unavailable; bound to indicate reasons or a basis for the rejection of the
(ii) no e-TDS returns were filed by the assessee. application. The fact that Parliament has empowered the
The Bombay High Court held that: Board to frame Rules under sub-Section 2A, having due
Sub-rule (1) of Rule 28AA would indicate that the regard to the convenience of assessees and the interests of
Assessing Officer, on an application made in Form 13 under the Revenue specifying the cases and circumstances under
Section 197 may issue a certificate in accordance with the which an application can be made and the conditions subject
provisions of sub-Section (1) of Section 197 for deduction to which such a certificate may be granted is sufficient to
of tax at source at the rate or rates calculated in the manner indicate that the exercise of powers by the Assessing Officer
specified thereafter. is intended to be structured in accordance with the provisions
Clause (1) of Rule 28AA provides a mode of computing of Section 197 and the Rules framed by the Board under
the rate at which tax is to be deduced at source. This is sub-Section 2A. The Assessing Officer cannot be heard to
not a condition of eligibility. It cannot be contended that the urge that though an assessee fulfills all the requirements
mechanism that is contemplated under Rule 28AA would which are stipulated in Rule 28AA or, as the case may be,
break down in the case of the assessee on the ground that in Rule 29B, he possesses an unguided discretion to reject
the financial statements of the assessee in the previous the application. Consequently, the Assessing Officer when
three years were not available. In this case, sub-clause (ii) he rejects an application is bound to furnish reasons which
would not apply and the rate would be computed under would demonstrate an application of mind by him to the
sub-clause (i). circumstances which are mandated both by the Statute
The application cannot be rejected on the ground and by the Rules to be taken into consideration. Hence,
that the assessee has not filed e-TDS returns. The failure the rejection of an application under Section 197 does not

24 THE CHARTERED ACCOUNTANT November 2010


705 LEGAL UPDATE
Legal Decisions

result in an order. The expression “order” for the purposes


of Section 264 has a wide connotation. Sub-Section (1) of
Section 264 provides that in the case of any order other
than an order to which Section 263 applies, passed by an
authority subordinate to him, the Commissioner may either
of his own motion or on application by the assessee for
revision, call for the record of any proceeding under the Act
in which any such order has been passed and after making
an enquiry, pass such order thereon not being an order
prejudicial to the assessee as he thinks fit. Parliament has
used the expression “any order”. Hence, any order passed
by an authority subordinate to the Commissioner, other than
an order to which Section 263 applies, is subject to the
revisional jurisdiction under Section 264. A determination on
an application under Section 197 requires an order to be
passed by the Assessing Officer after application of mind
to the circumstances which are germane under Section 197
and the Rules framed under sub-Section 2A. There would be
an order which would be subject to his revisional jurisdiction
under Section 264.

INDIRECT TAXES
Excise
Rule 57Q of the Central Excise Rules,
1944 – Modvat Credit
CCE v. Rajasthan Spinning & Weaving
Mills Ltd, July 9, 2010 (SC)
MODVAT credit is available in respect of steel plates
and M.S. channels used in fabrication of chimney for diesel
generating set, by treating these items as capital goods.

Sales Tax
Sales tax - Contempt of Court
Garware Polyester Ltd. v. State of Maharashtra, July 1,
2010 (BOM)
Where in assessment order, it was recorded that
judgment of High Court in a particular case was not
accepted by Revenue Department and legal proceeding
is initiated against said judgment; but in fact said decision
was not stayed, this amounted to contempt of High Court.

Service Tax
Section 65(105) (zzzze) of the Finance Act, 1994 – Infor-
mation Technology Software Service
Software is goods and whether transaction would amount to
sale or service would depend upon individual transaction;
Parliament has legislative competence to charge tax on
service in respect of software

Infotech Software Dealers Association v. Union of India,


August 24, 2010 (MAD)
Software is goods
A software programme may consist of various
commands which enable the computer to perform a
designated task. The copyright in that programme may
remain with the originator of the programme. The term ‘all
materials, articles and commodities’ includes both tangible
and intangible/incorporeal property which is capable of
abstraction, consumption and use and which can be

THE CHARTERED ACCOUNTANT november 2010 25


LEGAL UPDATE 706
Legal Decisions

transmitted, delivered, stored, possessed etc. A software is To decide the imposition of tax, the nature of transaction
an intellectual property and it is an article of value. Indian is relevant. When a statute, particularly a taxing statute is
law does not recognise or make a distinction between considered with reference to the legislative competency,
tangible property and intangible property. A ‘goods’ may be the nature of transaction and the dominant intention on
a tangible property or an intangible one. It would become such transaction would be relevant. In the event the goods
goods provided it has the attributes thereof having regard to or commodity is sold as such, the transaction would fall
(a) utility (b) capable of being bought and sold (c) capable of under Entry 56 of List II of Schedule VII. However, without
transmitted, transferred, delivered, stored and possessed. If there being a sale of such goods, the right to use the
a software whether customised or non- customised satisfies information or the data stored in a commodity, namely, the
these attributes, the same would be goods. In view of the software is transferred, whether it can be called as a sale of
settled law, it must be held that software is ‘goods’ as the commodity or the goods as such is the question to be
defined in Article 366(12) of the Constitution of India. considered.
Article 366(29A)(d) is a deeming provision as to tax on
Legislative competence of Parliament to levy Sales the right to transfer the use of any goods for any purpose
and Service Tax be considered as a tax on sale or purchase of goods.
The software being an intangible property can be Even before the Amendment came into force, the customs
considered as goods for the purpose of levy of sales tax. Notification No.21 of 2002 dated 1-3-2002 referring the
However, in a transaction whereby the software is delivered goods in Sl.No.157 excluded the standard rate of customs
to the customers, the question is as to whether it would for “Information Technology Software” and the document of
amount to an exclusive sale. There may be cases of title conveying the right to use the “Information Technology
exclusive sale or exclusive service or where the element of Software”. Sl.No.311 of the Notification relates to Compact
sales and service is involved. In cases where an element of Disc Read Only Memory (CD-ROM) prescribing Nil standard
service is alone involved, the Parliament has the legislative rate. Even in the budget speech 2006-07, the Minister for
competency to enact law for levying service tax under Entry Finance has stated that customised software and software
93-C. That Entry 93-C is not notified. Hence, in case if an downloaded from internet will be exempt from levy of 8%
element of service is available, the Parliament has got power excise duty on packaged software sold over the counter. The
to impose service tax under the residual Entry 97 of List I of exemption from excise duty for the packaged software would
VII Schedule. be available only when sales take place. Similarly, the excise
After the Constitution (Forty-Sixth Amendment) Act, 1982 Notification dated 1.3.2006 in Sl.No.27 has exempted tax
introducing clause (29A)(d) to Article 366 of the Constitution, for any customised software (that is to say any customised
tax on the sale or purchase of goods includes “a tax on software developed for specific user or client) other than
the transfer of the right to use any goods for any purpose packaged software or canned software. The explanation
whether or not for a specified period” for cash, deferred provides that a packaged software or canned software
payment or other valuable consideration. The Finance Act, means a software developed to meet the needs of variety of
2008 has brought in some new services under the service users and which is intended for sale and capable of being
tax net. One of them is “Information Technology Software sold off the shelf. Similarly, in the budget speech 2008-09,
Service”. The relevant amendment became effective from the Minister for Finance in paragraph 151, while increasing
16.5.2008. the excise duty from 8% to 12% on packaged software to

26 THE CHARTERED ACCOUNTANT November 2010


707 LEGAL UPDATE
Legal Decisions

bring it on par with the customised software which will attract a service tax of
12%. Only in the above background, the amendment was brought into the
Finance Act, 1994 to include “Information Technology Software” service to
be a taxable service.
To find out as to whether there is an element of sale involved when software
is delivered to its customer, the terms and conditions of End User Licence
Agreement (EULA) are material. Where the dominant intention of the parties
would show that the developer or the creator of software keeps back the
copyright of each software, be it canned, packaged or customised, and what
is transferred to the network subscriber, namely, the dealers, is only the right
to use with copyright protection. By that agreement, even the developer does
not sell the software as such. By that Master End-User License Agreement,
the dealers again enter into an End-User License Agreement for marketing
the software as per the conditions stipulated therein. In common parlance,
end user is a person who uses a product or utilises the service. An end user
of a computer software is one who does not have any significant contact
with the developer/creator/designer of the software. When a transaction
took place between the dealers with its customers, it is not the sale of the
software as such, but only the contents of the data stored in the software.
This would amount to only service. To bring the deemed sale under Article
366(29A)(d) of the Constitution of India, there must be a transfer of right to
use any goods and when the goods as such is not transferred, the question
of deeming sale of goods does not arise and in that sense, the transaction
would be only a service and not a sale.
The Parliament has the legislative competency to bring in enactments to
include certain services provided or to be provided in terms of information
technology software for use in the course or furtherance of business or
commerce to mean a taxable service, in terms of the residuary Entry 97 of List I
of Schedule VII, the challenge to the amended provision cannot be accepted so
long as the residuary power is available. However, the question as to whether
a transaction would amount to sale or service depends upon the individual
transaction and on that ground, the vires of a provision cannot be questioned.
The amended provision cannot be held to be unconstitutional on the ground
that the Parliament lacks the legislative competency and the applicability of
that provision would depend upon the individual transactions which could be
established before the authorities as and when the demand is made.
In view of above findings, the challenge to provision of Section 65(105)
(zzzzl) on the ground that it is contrary to the provisions of Articles 245, 265
and 268A must fail. For the same reasons, the other challenge with regard to
Articles 14 and 19(1)(g) of the Constitution of India are also not proper.
Therefore, it is to be held that the software is goods and whether the
transaction would amount to sale or service would depend upon the individual
transaction and for the reason of that challenge, the amended provision of
Section 65(105)(zzzze) cannot be held to be unconstitutional so long as the
Parliament has the legislative competency to enact law in respect of tax on
service in exercise of powers under Entry 97 of List I of Schedule VII.

OTHER ACTS
Companies Act
Section 630 of the Companies Act, 1956 read with Sec-
tions 34 & 406 of the Indian Penal Code – Penalty for
wrongful withholding of Property
Automobile Products India Ltd. v. Das John Peter & others, July
20, 2010 (SC)
Where caretaker of property of company retired from service and
promised to vacate the servant quarter by a particular date but committed
default of his own promise, there was no other choice or option but to direct
accused persons to vacate the premises and to hand over its peaceful
vacant possession to the company .

THE CHARTERED ACCOUNTANT november 2010 27


LEGAL UPDATE 708
Legal Decisions

SEBI the target company. It is another matter that the common


Regulation 2(e) of the SEBI (Substantial Acquisition of objective or purpose may be in pursuance of an agreement
Shares and Takeover) Regulations, 1997 – Person act- or an understanding, formal or informal; the acquisition of
ing in concert shares etc. may be direct or indirect or the persons acting
Unless it is shown that an agreement has been entered into in concert may cooperate in actual acquisition of shares
for common objective or purpose of substantial acquisition etc. or they may agree to cooperate in such acquisition.
of shares or voting rights or control over company, no person Nonetheless, the element of the shared common objective
can be said to have come in relationship of “persons acting or purpose is the sin qua non for the relationship of “persons
in concert”; deeming provision under sub-regulation (2) acting in concert” to come into being.
would give rise to presumption, only from date two or more The relationship of “persons acting in concert” is not
persons come together in one of specified relationships a fortuitous relationship. It can come into being only by
and not from any earlier date design. Hence, unless it is shown that an agreement
Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati has been entered into for the common objective or
and Others, July 8, 2010 (SC) purpose of substantial acquisition of shares or voting
The concept of “person acting in concert” under rights or control over the company they can not be said
regulation 2(e)(1) is based on a target company on the one to have come in the relationship of “persons acting
side, and on the other side two or more persons coming in concert”.
together with the shared common objective or purpose of
substantial acquisition of shares etc. of the target company. Deeming provision as contained in sub-clause (2) of
Unless there is a target company, substantial acquisition Regulation 2(e)
of whose shares etc. is the common objective or purpose The deeming provision cannot do away either with the
of two or more persons coming together there can be no target company or the common objective or purpose of
“persons acting in concert”. For, dehors the target company substantial acquisition of shares etc. of the target company
the idea of “persons acting in concert” is as irrelevant as a shared by two or more persons because to do so would be
cheat with no one as victim of his deception. Two or more destructive of the very idea of “persons acting in concert” as
persons may join hands together with the shared common defined in sub-clause (1) of regulation 2(e). Sub- regulation
objective or purpose of any kind but so long as the common (2) of regulation 2(e) containing the deeming clause should
object and purpose is not of substantial acquisition of shares be seen as a `stand alone’ provision, independent of sub-
of a target company they would not comprise “persons regulation (1) of regulation 2(e).
acting in concert”. The deeming provision simply says that in case of
The other limb of the concept requires two or more nine specified kinds of relationships, in each category, the
persons joining together with the shared common objective person paired with the other would be deemed to be acting
and purpose of substantial acquisition of shares etc. of a in concert with him/it. What it means is that if one partner in
certain target company. There can be no “persons acting the pair makes or agrees to make substantial acquisition of
in concert” unless there is a shared common objective shares etc. in a company it would be presumed that he/it
or purpose between two or more persons of substantial was acting in pursuance of a common objective or purpose
acquisition of shares etc. of the target company. For, dehors shared with the other partner of the pair. In order to hold
the element of the shared common objective or purpose that a person is acting in concert with the acquirer or with
the idea of “person acting in concert” is as meaningless another person it must be established that the two share
as criminal conspiracy without any agreement to commit a the common intention of acquisition of shares of some
criminal offence. The idea of “persons acting in concert” is target company. The deeming fiction under sub-regulation
not about a fortuitous relationship coming into existence by (2) can only operate prospectively and not retrospectively.
accident or chance. The relationship can come into being That is to say the deeming provision would give rise to the
only by design, by meeting of minds between two or more presumption, only from the date two or more persons come
persons leading to the shared common objective or purpose together in one of the specified relationships and not from
of acquisition of substantial acquisition of shares etc. of any earlier date. n

28 THE CHARTERED ACCOUNTANT November 2010


709 LEGAL UPDATE
Circulars / Notifications

CIRCULARS/NOTIFICATIONS
DIRECT TAXES vehicles, dumpers or tippers, as the case may be, used to
I. Circulars provide the prescribed taxable services would be treated
1. Circular No. 6/2010 dated 20-9-2010 as capital goods.
Section 80P of the Income-tax Act, 1961 Note: Dumpers or tippers used for providing site
- Deduction in respect of income of co- preparation and clearance, excavation, earth moving and
operative societies - Clarification regarding eligibility of demolition services and mining services were included
deduction under Section 80P to Regional Rural Banks in the list of capital goods eligible for CENVAT credit vide
Notification No. 25/2010 CE(NT) dated 22.06.2010.
The Central Board of Direct Taxes has, through, this
circular clarified that Regional Rural Banks are not eligible
for deduction under Section 80P of the Income-tax Act, II.Circular:
1961 from the assessment year 2007-08 onwards. It has 1. Circular No. 935/25/2010-CX dated 21.09.2010
also been clarified that the Circular No. 319 dated 11-1- has been issued so as to streamline the procedures
1982 deeming any Regional Rural Bank to be cooperative relating to processing of departmental litigation before the
society stands withdrawn for application with effect from AY Supreme Court, High Courts and CESTAT. The Board has
2007-08. taken a serious note of the matter that more than 50 per
This is in consequent to the amendment in section cent of the proposals received by it suffer from infirmities
Finance Act, 2006, which laid down specifically that w.e.f. including delays beyond limitation period. It has been
1-4-2007 the provision of Section 80P will not apply to any decided to fasten accountability wherever SLP/Civil Appeal
cooperative bank other than a Primary Agricultural Credit Proposal is received by the Board without observance of
Society or a Primary Cooperative Agricultural and Rural due procedure or with infirmities or later than the prescribed
Development Bank. The same has been clarified by this time frame. The field formations have been directed to
circular. scrupulously follow the instructions contained in this
circular.

II. Notifications
1. Notification No. 77, dated 11.10.2010, S.O. 2519(E) B. CUSTOMS DUTY
Section 80CCF provides a deduction to an assessee, I. Circulars:
being an individual or a Hindu undivided family, of the 1. Circular No. 38/2010-Cus. dated 27.09.2010 has
amount paid as subscription to long-term infrastructure been issued to explain the salient features of the changes
bonds as may, for the purposes of this section, be notified made by the Annual Supplement to the Foreign Trade
by the Central Government subject to a maximum of Policy (FTP), 2009-2014 and the Handbook of Procedures
R20,000. (Vol.I) notified by the DGFT vide Notification No. 1(RE-
2010)/2009-2014 dated 23rd August 2010 and Public Notice
The Central Board of Direct Taxes, has, through this
1(RE-2010)/2009-14 dated 23rd August 2010 respectively.
Notification notified the bonds, subscription to which
The Department of Revenue has since issued Notification
would qualify for deduction under Section 80CCF subject
Nos.88/2010-Cus, 89/2010-Cus and 90/2010-Cus all dated
to certain conditions specified therein. These bonds have
01.09.2010, 91/2010-Cus dated 06.09.2010, 92/2010-Cus
been named as “Long term infrastructure bonds” of India
dated 10.09.2010, 93/2010-Cus dated 14.09.2010 and
Infrastructure Finance Company Limited (IIFCL) and shall
97/2010-Cus dated 21.09.2010 to implement the Policy and
be issued during the financial year 2010-11.
the Handbook.
The complete text of the above notifications/ Circulars
2. Circular No. 39/2010-Cus. dated 15.10.2010 has
can be downloaded from the website of the Income-tax
been issued to modify the procedure provided in Circular
Department, www.incometaxindia.gov.in, and the complete
No.43/2007-Cus dated 05.12.2007 to the extent that the
link may be downloaded from the home page of the Direct
Commissioners of Central Excise or Customs and Central
Taxes Committee of the Institute at http://www.icai.org/post.
Excise, as the case may be, may issue authorisation to Dy./
html?post_id=965&c_id=57.
Asstt. Commissioners of Central Excise posted in Divisions
(Matter on Direct Taxes has been contributed by
under them for the purpose of disbursing drawback to DTA
the Direct Taxes Committee of the ICAI)
units against disclaimers issued by SEZ units/developers.
The cheque book issued by the Pay & Accounts Officer
INDIRECT TAXES of the jurisdictional Central Excise or the Customs and
A. EXCISE DUTY Central Excise Commissionerate, as the case may be,
I Notification: to the Central Excise Division for making refunds may be
1. Notification No. 29/2010-CE (N.T.) used for disbursement of drawback and the accounting
dated 24.09.2010 has amended Rule 2(a) procedure as laid down in the Principal, CCA’s office letter
of the CENVAT Credit Rules, 2004 so as to No. Coord/2(8)/98/434 dated 13.06.2005 may be followed
provide that components, spares and accessories of motor in this regard.

THE CHARTERED ACCOUNTANT november 2010 29


LEGAL UPDATE 710
Circulars / Notifications

C. SERVICE TAX 2006 respectively. In other words, under both the Export and
I. Notifications: Import Rules, the new services will fall under the residual
1. Notification No. 49/2010-ST dated 08.10.2010 has category.
provided an optional mode of payment of service tax to a 2. Circular No. 130/12/2010-ST dated 20.09.2010 :
distributor or selling agent of lotteries by inserting sub-rule The monetary limits for adjudication of penalty by Central
(7C) in rule 6 of the Service Tax Rules, 1994. The distributor Excise Officers have been revised by the Central Board of
or selling agents rendering the taxable service of promotion, Excise and Customs vide Notification No. 48/2010 ST dated
marketing or organising/assisting in organising lottery can 08.09.2010. Under the revised limits, Superintendents have
discharge their service tax liability in the following manner been empowered to adjudicate cases involving service tax
instead of paying service tax @10%: upto R1 lakh in a show cause notice. Similar monetary limits
Where the guaranteed lottery prize R6000/- on every R10 Lakh (or part for the purpose of adjudication under Section 73 have been
payout is > 80% of R10 Lakh) of aggregate face prescribed vide this Circular.
value of lottery tickets printed by the
organising State for a draw. Further, in respect of the above powers of adjudication
Where the guaranteed lottery prize R9000/- on every R10 Lakh (or part conferred on the Superintendents, the following has been
payout is < 80% of R10 Lakh) of aggregate face
value of lottery tickets printed by the clarified vide the circular:
organising State for a draw.
(i) The Superintendents would be competent to decide
cases that involve service tax and/or CENVAT credit
In case of online lottery, the aggregate face value of upto Rone lakh in individual show cause notices.
lottery tickets will be the aggregate value of tickets sold. (ii) They would not be competent to decide cases that
The distributor or selling agent will have to exercise such involve taxability of services, valuation of services,
option within a period of one month of the beginning of eligibility of exemption and cases involving suppression
each financial year. The option once exercised cannot of facts, fraud, collusion, willful mis-statement, etc.
be withdrawn during the remaining part of the financial (iii) They would be competent to decide cases involving
year. wrong availment of CENVAT credit upto a monetary
For the financial year 2010-11, the distributor or selling limit of R1 lakh.
agent will have to exercise such option by 07.11.2010. The The complete text of above notification and circulars are
new service provider can exercise such option within one available at www.cbec.gov.in
month of providing the service. Once exercised, the option (Matter on Indirect Taxes has been contributed by the
cannot be withdrawn during the remaining part of that Indirect Taxes Committee of the ICAI)
financial year.
The expressions “distributor or selling agent”, “draw”, FEMA
“online lottery” and “organising state” will have the same 1. RBI/2010-11/ 199 A.P. (DIR Series)
meaning as is assigned to them under Lottery (Regulation) Circular No. 13 dated September 14,
Rules, 2010. 2010
2. Notification No. 50/2010-ST dated 08.10.2010 has Reporting under Foreign Direct
exempted the persons marketing the lottery tickets, other Investment (FDI) Scheme
than the authorised distributors or selling agents, from Ref: Notification No. FEMA 20/2000-RB dated May 3, 2000,
service tax if the distributor or selling agent avails of optional as amended, A.P. (DIR Series) Circular No. 44 dated May
composition scheme notified vide Notification No. 49/2010 30, 2008
ST dated 08.10.2010 in respect of such lottery during the
In terms of para 9 of Schedule 1 to the Notification, Indian
financial year.
companies are required to report, the details of the amount
However, the exemption will not be available when of consideration received for issue of FDI instruments, viz.
such person markets lottery tickets to the distributors or equity shares, fully and mandatorily convertible preference
selling agents who have not opted for the above-mentioned shares and debentures under the FDI scheme, in the
composition scheme. Advance Reporting Format along with the KYC report on the
Here, “distributor or selling agent” will have the meaning as non-resident investor, to the Regional Office of the Reserve
is assigned to them under Lottery (Regulation) Rules, 2010. Bank in whose jurisdiction the Registered Office of the
company operates, within 30 days of receipt of the amount
II. Circulars: of consideration. Further, the Indian company is required
1. Circular No. 129/11/2010-ST dated 21.09.2010 has to issue the FDI instruments to the non-resident investor
been issued to clarify that new services notified through the within 180 days of the receipt of the inward remittance and
Finance Act, 2010 fall under rule 3(1)(iii) and rule 3(iii) of the report the same in Form FC-GPR, to the Regional Office
Export of Services Rules 2005 and the Taxation of Services concerned of the Reserve Bank, within 30 days from the
(Provided from Outside India and Received in India) Rules, date of issue of shares.

30 THE CHARTERED ACCOUNTANT November 2010


711 LEGAL UPDATE
Circulars / Notifications

As FDI is an important component of the Balance of


Payments (BoP) statistics, which is being compiled and
published on a quarterly basis, any delay in submission
of the FDI data results in under-reporting of FDI in the BoP
statistics. Further, delay in reporting of the FDI transactions
(receipt of advance consideration and issue of FDI
compliant instruments) and issuance of shares/ refund of
advance consideration beyond 180 days of receipt of the
same without the Reserve Bank’s approval are considered
as violations under the provisions of the Foreign Exchange
Management Act, 1999 (FEMA). Therefore, AD Category - I
banks are advised to sensitize and impress upon their clients
the importance of strict adherence to the FDI reporting
requirements including the KYC report. In this regard, AD
Category-I banks may make suitable internal arrangements
to monitor / track the inward remittances reported through
Advance Reporting Format and the subsequent issue
of shares or refund of share application money by the
companies.
The complete text of the above-mentioned circulars and
notifications on FEMA can be downloaded from the link:
http://www.rbi.org.in
(Matter on FEMA has been contributed by
CA. Manoj Shah and CA. Hinesh Doshi)

CORPORATE LAWS
1.Permissible period for remittance of
e-payments into Government account
www.rbi.gov.in
The RBI has issued Circular No. DGBA.
GAD.No.H. 2444 /42.01.011/2010-11 dated
08.10.2010 that recalls a Committee which was constituted
by the Controller General of Accounts, Ministry of Finance,
Government of India, to review the permissible period for
transfer of funds to the Government account in case of
e-payment and other related issues and the Committee
recommended that the remittance norm of T+1 working day
(including put through date) for e-payment as applicable for
private sector banks may also be made applicable for the
public sector banks. Based on the recommendations of the
Committee, it is decided that the remittance period in respect
of all Government transactions made through e-payments
in respect of public sector banks will be T+1 working day
(including put through date) w.e.f. November 1, 2010. One
may refer to the above website for further details.

2. Monthly reporting by Portfolio Managers


www.sebi.gov.in
The SEBI has issued Circular No. IMD/DF/14/2010
dated 08.10.2010 in relation to submission of monthly report
by portfolio managers and advising that the format for the
monthly report on portfolio management activity has been
revised. All portfolio managers are advised to upload the
report in the revised format on SEBI Portal by the 5th of the

THE CHARTERED ACCOUNTANT november 2010 31


LEGAL UPDATE 712
Circulars / Notifications

following month with effect from the report for the month of and undertaking about their structures and also it had
October 2010 onwards. This amendment is made to protect communicated to the FIIs through their custodians that
the interests of investors in securities and to promote the those entities that do not file the requisite information by the
development of and to regulate the securities market. One stipulated date shall not be able to take fresh positions in
may refer to the above website for further details and revised the cash as well as the derivatives market w.e.f. 1st October
format of the report. 2010 and that thereafter the non-compliant entities could
either retain their current positions or sell-off/unwind. SEBI
3. Review of Securities Lending and Borrowing (SLB) has clarified that w.e.f. 1st October 2010 the FIIs and sub-
Framework accounts that have not complied with these requirements of
www.sebi.gov.in providing information on their structures will not be permitted
The SEBI has issued Circular No. CIR/MRD/DP/ 33 /2010 to take fresh positions in cash and derivatives market while
dated 07.10.2010 in relation to SLB and has clarified that they can retain their current positions or sell-off/unwind. One
in relation to dividend, the amount for the same would be may refer to the above website for further details.
worked out and recovered from the borrower on the book
closure / record date and passed on to the lender. One may 6. Prudential norms on investment in zero coupon bonds
refer to the above website for further details. www.rbi.gov.in
The RBI has issued Circular No. DBOD No. BP.BC.
4. Portfolio managers - regulation of fees and charges 44/21.04.141/ 2010-11 dated 29.09.2010 that it has come to
www.sebi.gov.in its notice that banks are investing in long term zero coupon
The SEBI has issued Circular No. IMD/DF/13/2010 bonds (ZCBs) issued by corporates including those issued
dated 05.10.2010 in relation to the above subject whereby by Non-Banking Financial Companies (NBFCs). In the case
SEBI has stated that it has been receiving complaints of ZCBs, the issuers are not required to pay any interest
from clients relating to fees and charges being levied by or installments till the maturity of bonds. As a result, the
portfolio managers and upon scrutiny of the complaints, it credit risk in such investments would go unrecognised
had come to the notice of SEBI that the clauses relating to till the maturity of bonds and this risk could especially be
fees and charges in the portfolio manager-client agreement significant in the case of long term ZCBs. Such issuances
do not always clearly reflect the fees and charges payable and investments if done on a large scale could pose
by the client and the manner of computation of the same. systemic problems. Hence, the RBI has decided that banks
Hence, in order to bring about greater uniformity, clarity should henceforth not invest in ZCBs unless the issuer
and transparency with regard to fees and charges, portfolio builds up sinking fund for all accrued interest and keeps
managers are advised to take the measures in respect of it invested in liquid investments/securities (Government
all client agreements in relation to fees and charges where bonds), and also that banks should put in place
it is clarified that profit / performance shall be computed on conservative limits for their investments in ZCBs. The banks
the basis of high water mark principle over the life of the are advised to take immediate action to adhere to the above
investment, for charging of performance/profit sharing fee. instructions. One may refer to the above website for further
All fees and charges shall be levied on the actual amount details.
of clients’ assets under management. The High Water Mark
shall be applicable for discretionary and non-discretionary 7. Bank loans for financing promoters contribution
services and not for advisory services. In case of interim www.rbi.gov.in
contributions / withdrawals by clients, performance fees The RBI has issued Circular No. D BOD.No.BP.BC.42
may be charged after appropriately adjusting the high water /21.04.141/2010-11 dated 27.09.2010 whereby it has stated
mark on proportionate basis. To ensure transparency and that the current dispensation on ‘bank finance against
adequate disclosure regarding fees and charges, the client shares and debentures’, promoters’ contribution towards
agreement shall contain a separate Annexure which shall list the equity capital of a company should come from their own
all fees and charges payable to the portfolio manager. The resources and banks should not normally grant advances
above Circular also provides an Illustration giving sample to take up shares of other companies (a few exceptions
computation for the fees and charges. One may refer to the were made viz. that of allowing banks to extend financial
above website for further details. assistance to Indian companies for acquisition of equity
in overseas joint ventures/wholly owned subsidiaries or
5. Declarations and undertaking from FIIs (Foreign in other overseas companies, to successful bidders for
Institutional Investors) acquisition of shares of the PSUs under the Government
www.sebi.gov.in of India’s disinvestment programme, etc.).The RBI has now
The SEBI has issued Circular No. IMD/FII/12/2010 advised that this restriction on grant of bank advances for
dated 29.09.2010 reminding that it had earlier mandated financing promoters’ contribution towards equity capital
all registered FIIs to provide the requisite declarations would also extend to bank finance to activities related to

32 THE CHARTERED ACCOUNTANT November 2010


713 LEGAL UPDATE
Circulars / Notifications

such acquisitions like payment of non-compete fee, etc.


It is further advised that these restrictions would also be
applicable to bank finance to such activities by overseas
branches/subsidiaries of Indian banks. One may refer to the
above website for further details.

8. FII investment limits in Government securities and


corporate bonds increased
www.pib.nic.in
The Ministry of Finance has issued PIB Press Release
dated 23.09.2010 increasing the current limit of FII investment
in Government Securities by US $ 5 billion raising the cap
to US $ 10 billion and the incremental limit of US $ 5 billion
be invested in securities with residual maturity of over five
years. The current limit of Fll investment in corporate bonds
has also been increased by US $ 5 billion raising the cap to
US $ 20 billion and the incremental limit of US $ 5 billion be
invested in corporate bonds with residual maturity of over
five years issued by companies in infrastructure sector. The
enhancement of the Fll investment cap is with the objective
to provide avenues for increased Fll investments in debt
securities, help investment in infrastructure sector and the
development of Government securities and corporate bond
markets in the country. The policy has been reviewed in
the context of lndia’s evolving macroeconomic situation,
its increasing attractiveness as an investment destination
and need for additional financial resources for lndia’s
infrastructure sector while balancing its monetary policy.
Currently, Flls can invest up to USD 5 billion and USD 15
billion in Government securities and corporate bonds
respectively. One may refer to the above website for further
details.

9. Clarification on Introduction of Call Auction in pre-


open session
www.sebi.gov.in
The SEBI has issued Circular No. CIR/MRD/DP/32/2010
dated 17.09.2010 regarding introduction of call auction in
pre-open session clarifying (and superceding the previous
circulars/clarifications in this regard) that in case the
equilibrium price is not discovered in the pre-open session,
wherein, there are only market orders, the market orders
shall be matched at previous day’s close price and all
unmatched market orders shall be shifted to the order book
of the normal market at previous day’s close price following
time priority. Previous day’s close price shall be the opening
price. In case the equilibrium price is not discovered in the
pre-open session and there are no market orders to be
matched, all unmatched market orders (at previous day’s
close price) and limit orders shall be shifted to the order
book of the normal market following price time priority. One
may refer to the above website for further details.
(Matter on Corporate Laws has been contributed by
CA. Jayesh Thakur)
n

THE CHARTERED ACCOUNTANT november 2010 33


CAREER WATCH 714

Report on Campus Placement Programme – August-September, 2010*


The Committee for Members in Industry organises Salient features
Campus Placement Programmes for all level of Chartered 1. Candidates have been given two choices to meet the
Accountants at frequent intervals throughout the year. The recruiting organisations. First at smaller cities and
Committee for Members in Industry is committed to provide second (if the candidates has not been selected at
world class placement services to the Members and best smaller cities) at bigger cities.
accounting and finance talents to the industry. 2. The committee organised Orientation Programme for
candidates to sharpen their soft skills and give updates
In its endeavor to provide quality Accounting, Finance, Tax, on the Technical side.
Audit and Management Consultancy personnel to recruiting 3. In this Campus Placement Programme all the candidates
entities, the Committee has successfully organized one more have been permitted to attend the Orientation Programme
round of Campus Placement Programme for newly qualified at any of the centres to avoid the requirement to travel
Chartered Accountants at sixteen centres viz. Ahmedabad, to centres chosen for interviews for attending the
Bangalore, Bhubaneswar, Chennai, Coimbatore, Ernakulam, Orientation Programme.
Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Ludhiana,
Mumbai, Nagpur, New Delhi and Pune in Aug-Sept, 2010. The following table shows the statistical information of
campus interview at a glance:
Brief summary of the placement programme of both the
phases is as follows: A) Phase I
Number of Candidates Registered 3111
Centre Candidates Number of Total No of jobs
Number of Interview Teams 156 Registered Interview Offered
Teams
Number of Organisations 88
Number of Jobs Offered 1398 Ahmedabad 314 6 153

Percentage of jobs offered vis-a-vis registered 44.94% Bhubaneswar 39 7 29


candidates
Coimbatore 30 4 5

Executive Summary Ernakulam 12 1 0


1. Highest salary offered for International posting in
Indore 67 1 8
the Campus Placement Programme is R21 lacs per
annum. Jaipur 346 5 15
2. Highest salary offered ever for Domestic posting in Kanpur 96 2 5
the Campus Placement Programme is R15 lacs per
annum. Ludhiana 68 1 0

3. The minimum salary paid is R3.25 lacs per annum. Nagpur 30 3 10


4. The average salary offered was R6.45 lacs per annum.
Pune 404 5 54
5. Total 1406 candidates have participated in phase I
interviews and 2920 candidates have participated in Total 1406 35 279
phase II interviews after merger of candidates from
A) Phase II
smaller centres. In all 3111 candidates registered
for availing the services of Campus Placement Centre Candidates Number of Total No of jobs
Registered* Interview Offered
Programme. Teams
6. Around 13981 jobs were offered to the candidates who
Bangalore 226 17 109
participated in Campus Placement Programme.
7. In all more than 44 per cent of registered candidates Hyderabad 107 11 53

were offered jobs. Kolkata 313 20 122


8. 1144 candidates accepted the job offers. Chennai 208 21 120
9. 88 entities including the corporate organizations and the
Mumbai 1115 25 441
Chartered Accountancy Firms have participated during
the Campus Placement Programme. New Delhi 951 23 274
10. 156 Interview Panels have participated during this Total 2920 117 1119
Campus Placement Programme. *
The figures also include candidates merged from smaller centre to the bigger centres as per their choice.

*
Comments/suggestions for improvement in placement programme, particularly to improve the penetration are welcome at placements@icai.org
1
This write up reflects the status as on 05/10/2010 11:00 AM. Results are awaited from some of the companies. For further details kindly visit http://www.cmii.icai.org

34 THE CHARTERED ACCOUNTANT November 2010


REFERENCE 716

ACCOUNTANT’S BROWSER
‘PROFESSIONAL NEWS & VIEWS PUBLISHED ELSEWHERE’
Index of some useful articles taken from Periodicals/Newspapers received during September-
October 2010 for the reference of Faculty/Students & Members of the Institute.

1. ACCOUNTING 4. EDUCATION
Accounting for Varieties of Capitalism: The Case Changing Role of Teachers in Strengthening Value-based
Against a Single Set of Global Accounting Standards by Higher Education by Raju Narayana Swamy. University News,
Martin Walker. The British Accounting Review, Vol.42, 2010, September 27 – October 03, 2010, pp. 14-18.
pp. 137-152. Delcon Consortium: A New Addition in the Galaxy of Library
Blue-Ribbon Panel Narrows Field for Private Company e-Consortia in India by Anil Singh & Sanjiv Sain. University
Financial Reporting by Alexandra Defelice. Journal of News, September 20-26, 2010, pp. 21-24.
Accountancy, September 2010, pp. 24-28. Entry of Foreign Universities: How & How Much to Regulate
Financial Regulatory Reform: What You Need to Know by by R. Govinda. University News, September 20-26, 2010, pp.
Matthew G. Lamoreaux. Journal of Accountancy, September 63-64.
2010, pp. 30-33. Foreign Educational Institutions (Regulation of Entry
IFRS 8 – Operating Segments by Nasir Hashmi. & Operations) Bill, 2010: A Limited Enterprise by Kavita
Management Accountant, May-June 2010, pp. 42-44. A. Sharma. University News, September 13-19, 2010,
IFRS 9: Financial Instruments – An Overview by Shantonu pp. 15-20.
Moitra. The Management Accountant, September 2010, pp. Internationalization of Indian Higher Education by Pawan
737-739. Agarwal. University News, September 13--19, 2010, pp. 46-53.
The Influence of the Introduction of Accounting Disclosure On Opening a World Class University by R.P. Singh.
Regulation on Mandatory Disclosure Compliance: Evidence University News, September 13-19, 2010, pp. 65-66.
from Jordan by Mahmoud al- Akra. The British Accounting
Review, Vol.42, 2010, pp. 170-186. 5. INVESTMENT
Allowability of Losses from Forex Derivatives by S.
2. AUDITING Dhananjayan. BCAJ, September 2010, pp. 9-14.
Sustainability Reporting & XBRL – Part 2 by Brad Monterio. Commodity Derivatives Market of India – An Overview
Strategic Finance, September 2010, pp. 56-57 & 61. by Bidisha Sarkar Datta. The Management Accountant,
September 2010, pp. 710-714.
3. ECONOMICS
Accessing Institutional Finance : A Demand Side Story for 6. MANAGEMENT
Rural India. Eco. & Pol. Weekly, September 11, 2010, pp. 56- Corporate Governance & the Current Crisis by Philippe
62. Haspeslagh. Corporate Governance, Vol. 10/4, pp. 375-377.
Corporate Investment: Growth in 2009-10 & Prospects for Follow the Leaders by Robert Angel. CA Magazine, October
2010-11. RBI Bulletin, August 2010, pp. 1579-1590. 2010, pp. 20-27.
Finances of Public Limited Companies: 2008-09. RBI Responding to the Crisis: Redefining Corporate Value
Bulletin, August 2010, pp. 1591-1640. by Bruno Berthon. Corporate Governance, Vol. 10/4,
Financing of SME Firms in India Interview with Ranjana pp. 354-359.
Kumar, Former CWD, Indian Bank: Vigilance Commissioner, Role of Forward Contracts in Corporate Risk Management
Central Vigilance Commission by Ashok Thampy. IIMB by L.N. Koli & Brijesh Rawat. The Management Accountant,
Management Review, Vol.22, 2010, pp. 93-101. September 2010, pp. 707-709.
Income Inequality in India: Pre & Post-Reform Periods by
Sandip Sarkar & Balwant Singh Mehta. Eco. & Pol. Weekly, 7. TAXATION & FINANCE
September 11, 2010, pp. 45-55. The Evolution of the Term “Beneficial Ownership” in
Making the Global Economy More Sustainable by Peter Relation to International Taxation over the Past 45 Years by
Loscher. Corporate Governance, Vol.10/4, 2010, pp. 349-353. Charl du Toit. Bulletin for International Taxation, October 2010,
Productivity & Capital Investments: An Empirical pp. 500-510.
Study of Three Manufacturing Industries in India by Atanu Is Fiscal Justice Progressing? by Frans Vanistendael.
Chaudhuri etc. IIMB Management Review, Vol.22, 2010, pp. Bulletin for International Taxation, October 2010, pp. 526-540.
65-79. The Taxation of Mineral Resources – From the Resource
Values & Virtues in the Era of Globalization. University Super Profits Tax to the Minerals Resource Rent Tax by Michael
News, September 27 – October 03, 2010, pp. 6-11. Butler. Asia-Pacific Tax Bulletin, July-August 2010, pp. 292-295.

Full Texts of the above articles are available with the Central Council Library, ICAI, which can be
referred on all working days. For further inquiries please contact on 011-23370154 or by e-mail at
library@icai.org

36 THE CHARTERED ACCOUNTANT November 2010


ACCOUNTING 718

IFRS – Exceptions

Exposed Draft 1 proposed that a first time adopter should use either all the exemptions or none of them.
However, the IASB reconsidered this approach in the light of comments received and grouped the exceptions
to retrospective applications into two groups. Thus IFRS-1 establishes two categories of exceptions to
the principle that an entity’s opening IFRS statement of financial position shall comply with each IFRS.
First category prohibits retrospective application of some aspects of other IFRSs. Second category grants
exemptions from some requirements of other IFRSs. (Optional exceptional). This article provides an overview
of the exemptions available in the IFRS. Read on to know more.

Exposed Draft 1 proposed that a first b) Second category grants exemp-


time adopter should use either all the tions from some requirements
exemptions or none of them. However, of other IFRSs. (Optional
the IASB reconsidered this approach exceptional)
in the light of comments received and The first group consists of
grouped the exceptions to retrospective mandatory exceptions where full
applications into two groups. Thus retrospective application is prohibited.
IFRS-1 establishes two categories These are in respect of some aspects
of exceptions to the principle that an of de-recognition, hedge accounting,
entity’s opening IFRS statement of estimates, assets classified as held for
financial position shall comply with sale and discontinued operations.
each IFRS: The reason given by the IASB for
CA. Aditya Singhal a) First category prohibits these requirements is that there is
(The author is a member of the Institute. retrospective application of some a danger of abuse if retrospective
He can be reached at eboard@icai.org) aspects of other IFRSs. application would require judgments by

38 THE CHARTERED ACCOUNTANT November 2010


719 ACCOUNTING

managements about past conditions of an estimate made in accordance entity’s first IFRS financial statements,
after the outcome of a particular with previous GAAP at 31 December in which case the references to the
transaction is already known. 20X3. The entity shall not reflect that date of transition to IFRSs are replaced
And the Second group consists new information in its opening IFRS by references to the end of that
of optional exemptions which may be statement of position (unless the comparative period.
selected independently of each other. estimates need adjustment for any B. Derecognition of financial
Entities adopting IFRSs will, therefore, differences in accounting policies or assets and financial liabilities
need to decide in each case the there is objective evidence that the Except as permitted by below
advantages and disadvantages of using estimates were in error). Instead, the paragraph, a first-time adopter shall
these exceptions. When more than one entity shall reflect that new information apply the derecognition requirements
voluntary exemption affects an account in profit or loss (or, if appropriate, other in IAS 39 Financial Instruments:
balance, more than one exemption comprehensive income) for the year Recognition and Measurement
can be applied. The decision to apply ended 31 December 20X4. prospectively for transactions
individual voluntary exemptions is An entity may need to make occurring on or after 1 January 2004.
independent. There is no requirement to estimates in accordance with IFRSs at In other words, if a first-time adopter
use a particular voluntary exemption as the date of transition to IFRSs that were derecognised non-derivative financial
the result of choosing another voluntary not required at that date under previous assets or non-derivative financial
exemption. Further please note that GAAP. To achieve consistency with IAS liabilities in accordance with its previous
IFRS1 clearly states that an entity shall 10, those estimates in accordance GAAP as a result of a transaction that
not apply these exemptions by analogy with IFRSs shall reflect conditions that occurred before 1st January, 2004, it
to other items existed at the date of transition to IFRSs. shall not recognise those assets and
In particular, estimates at the date of liabilities in accordance with IFRSs
Prohibition of Retrospective transition to IFRSs of market prices, (unless they qualify for recognition as a
Application of Some interest rates or foreign exchange rates result of a later transaction or event).
Aspects of Other IFRSs shall reflect market conditions at that Notwithstanding above paragraph,
Under this category, IFRS1 prohibits date. an entity may apply the derecognition
retrospective application of below four Above three paragraphs apply requirements in IAS 39 retrospectively
aspects of other IFRSs relating to: to the opening IFRS statement of from a date of the entity’s choosing,
A. Estimates financial position. They also apply to provided that the information needed
An entity’s estimates in accordance a comparative period presented in an to apply IAS 39 to financial assets and
with IFRSs at the date of transition financial liabilities derecognised as a
A first-time adopter
to IFRSs shall be consistent with result of past transactions was obtained
shall apply the
estimates made for the same date in at the time of initially accounting for
derecognition
accordance with previous GAAP (after those transactions.
requirements in IAS 39 Financial
adjustments to reflect any difference C. Hedge accounting
Instruments: Recognition and
in accounting policies), unless there is As required by IAS 39, at the date of
Measurement prospectively for
objective evidence that those estimates transition to IFRSs, an entity shall:
transactions occurring on or
were in error. a) Measure all derivatives at fair value;
after 1 January 2004. In other
An entity may receive information and
words, if a first-time adopter
after the date of transition to IFRSs b) Eliminate all deferred losses and
derecognised non-derivative
about estimates that it had made gains arising on derivatives that
financial assets or non-
under previous GAAP. In accordance were reported in accordance with
derivative financial liabilities
with above paragraph, an entity shall previous GAAP as if they were
in accordance with its previous
treat the receipt of that information in assets or liabilities.
GAAP as a result of a transaction
the same way as non-adjusting events An entity shall not reflect in its
that occurred before 1 January
after the reporting period in accordance opening IFRS statement of financial
2004, it shall not recognise
with IAS 10 Events after the Reporting position a hedging relationship of a
those assets and liabilities in
Period. For example, assume that an type that does not qualify for hedge
accordance with IFRSs (unless
entity’s date of transition to IFRSs is accounting in accordance with IAS 39 (for
they qualify for recognition as
1 January 20X4 and new information example, many hedging relationships
a result of a later transaction or
on 15 July 20X4 requires the revision where the hedging instrument is a cash
event).

THE CHARTERED ACCOUNTANT november 2010 39


ACCOUNTING 720

instrument or written option; where the


hedged item is a net position; or where
the hedge covers interest risk in a
held-to-maturity investment). However,
if an entity designated a net position
as a hedged item in accordance with
previous GAAP, it may designate an
individual item within that net position
as a hedged item in accordance with
IFRSs, provided that it does so no later
than the date of transition to IFRSs.
If, before the date of transition to
IFRSs, an entity had designated a Exemptions From Some b) The first-time adopter shall
transaction as a hedge but the hedge Requirements of Other recognise all its assets and
does not meet the conditions for hedge IFRSs liabilities at the date of transition
accounting in IAS 39 the entity shall Under this category, a first time adopter to IFRSs that were acquired or
apply paragraphs 91 and 101 of IAS may elect to use one or more of the assumed in a past business
39 to discontinue hedge accounting. following exemptions: combination, other than:
Transactions entered into before the A. Business Combinations i. Some financial assets and
date of transition to IFRSs shall not be A first-time adopter may elect not financial liabilities derecognised
retrospectively designated as hedges. to apply IFRS 3 (as revised in 2008) in accordance with previous
D. Non-controlling interests retrospectively to past business GAAP (see paragraph B2);
A first-time adopter shall apply the combinations (business combinations and
following requirements of IAS 27 (as that occurred before the date of ii. Assets, including goodwill,
amended in 2008) prospectively from transition to IFRSs). However, if a first- and liabilities that were not
the date of transition to IFRSs: time adopter restates any business recognised in the acquirer’s
a) The requirement in paragraph 28 combination to comply with IFRS 3 (as consolidated statement of
that total comprehensive income revised in 2008), it shall restate all later financial position in accordance
is attributed to the owners of the business combinations and shall also with previous GAAP and also
parent and to the non-controlling apply IAS 27 (as amended in 2008) would not qualify for recognition
interests even if this results in the from that same date. For example, if in accordance with IFRSs in the
non-controlling interests having a a first-time adopter elects to restate a separate statement of financial
deficit balance; business combination that occurred position of the acquiree (see
b) The requirements in paragraphs 30 on 30 June 20X6, it shall restate all (f)–(i) below).
and 31 for accounting for changes business combinations that occurred The first-time adopter shall
in the parent’s ownership interest between 30 June 20X6 and the date recognise any resulting change by
in a subsidiary that do not result in of transition to IFRSs, and it shall also adjusting retained earnings (or, if
a loss of control; and apply IAS 27 (amended 2008) from 30 appropriate, another category of
c) The requirements in paragraphs June 20X6. equity), unless the change results from
34–37 for accounting for a loss of If a first-time adopter does not the recognition of an intangible asset
control over a subsidiary, and the apply IFRS 3 retrospectively to a that was previously subsumed within
related requirements of paragraph past business combination, this has goodwill (see (g)(i) below).
8A of IFRS 5 Non-current Assets the following consequences for that c) The first-time adopter shall exclude
Held for Sale and Discontinued business combination: from its opening IFRS statement
Operations. a) The first-time adopter shall keep of financial position any item
However, if a first-time adopter the same classification (as an recognised in accordance with
elects to apply IFRS 3 (as revised in acquisition by the legal acquirer, previous GAAP that does not
2008) retrospectively to past business a reverse acquisition by the legal qualify for recognition as an asset
combinations, it shall also apply IAS 27 acquiree, or a uniting of interests) or liability under IFRSs. The first-
(as amended in 2008) in accordance as in its previous GAAP financial time adopter shall account for the
with IFRS1. statements. resulting change as follows:

40 THE CHARTERED ACCOUNTANT November 2010


721 ACCOUNTING

i. The first-time adopter may not treat the business combination as the acquiree to do in its IFRS
have classified a past business an acquisition. statement of financial position.
combination as an acquisition d) IFRSs require subsequent Similarly, if the acquirer had not,
and recognised as an measurement of some assets in accordance with its previous
intangible asset an item that and liabilities on a basis that is not GAAP, recognised a contingent
does not qualify for recognition based on original cost, such as fair liability that still exists at the date
as an asset in accordance with value. The first-time adopter shall of transition to IFRSs, the acquirer
IAS 38 Intangible Assets. It measure these assets and liabilities shall recognise that contingent
shall reclassify that item (and, on that basis in its opening IFRS liability at that date unless
if any, the related deferred tax statement of financial position, even IAS 37 Provisions, Contingent
and non-controlling interests) if they were acquired or assumed Liabilities and Contingent Assets
as part of goodwill (unless it in a past business combination. would prohibit its recognition in
deducted goodwill directly It shall recognise any resulting the financial statements of the
from equity in accordance with change in the carrying amount by acquiree. Conversely, if an asset or
previous GAAP, see (g)(i) and adjusting retained earnings (or, if liability was subsumed in goodwill
(i) below). appropriate, another category of in accordance with previous GAAP
ii. The first-time adopter shall equity), rather than goodwill. but would have been recognised
recognise all other resulting e) Immediately after the business separately under IFRS 3, that asset
changes in retained earnings.* combination, the carrying amount or liability remains in goodwill unless
*Such changes include in accordance with previous IFRSs would require its recognition
reclassifications from or to intangible GAAP of assets acquired and in the financial statements of the
assets if goodwill was not recognised in liabilities assumed in that business acquiree.
accordance with previous GAAP as an combination shall be their deemed g) The carrying amount of goodwill
asset. This arises if, in accordance with cost in accordance with IFRSs at in the opening IFRS statement
previous GAAP, the entity (a) deducted that date. If IFRSs require a cost- of financial position shall be its
goodwill directly from equity or (b) did based measurement of those carrying amount in accordance
assets and liabilities at a later date, with previous GAAP at the date
A first-time adopter that deemed cost shall be the of transition to IFRSs, after the
may elect not to basis for cost-based depreciation following two adjustments:
apply IFRS 3 (as or amortisation from the date of the i. If required by (c)(i) above,
revised in 2008) retrospectively business combination. the first-time adopter shall
to past business combinations f) If an asset acquired, or liability increase the carrying amount
(business combinations that assumed, in a past business of goodwill when it reclassifies
occurred before the date of combination was not recognised an item that it recognised as an
transition to IFRSs). However, in accordance with previous GAAP, intangible asset in accordance
if a first-time adopter restates it does not have a deemed cost of with previous GAAP. Similarly,
any business combination to zero in the opening IFRS statement if (f) above requires the first-
comply with IFRS 3 (as revised of financial position. Instead, time adopter to recognise
in 2008), it shall restate all later the acquirer shall recognise and an intangible asset that was
business combinations and shall measure it in its consolidated subsumed in recognised
also apply IAS 27 (as amended in statement of financial position on goodwill in accordance with
2008) from that same date. For the basis that IFRSs would require previous GAAP, the first-time
example, if a first-time adopter in the statement of financial position adopter shall decrease the
elects to restate a business of the acquiree. To illustrate: if the carrying amount of goodwill
combination that occurred on acquirer had not, in accordance accordingly (and, if applicable,
30 June 20X6, it shall restate with its previous GAAP, capitalised adjust deferred tax and non-
all business combinations that finance leases acquired in a past controlling interests).
occurred between 30 June 20X6 business combination, it shall ii. Regardless of whether there
and the date of transition to capitalise those leases in its is any indication that the
IFRSs, and it shall also apply IAS consolidated financial statements, goodwill may be impaired, the
27 (amended 2008) from 30 June as IAS 17 Leases would require first-time adopter shall apply
20X6.

THE CHARTERED ACCOUNTANT november 2010 41


ACCOUNTING 722

IAS 36 in testing the goodwill i) If the first-time adopter recognised transition to IFRSs between:
for impairment at the date goodwill in accordance with i. The parent’s interest in those
of transition to IFRSs and in previous GAAP as a deduction adjusted carrying amounts;
recognising any resulting from equity: and
impairment loss in retained i. It shall not recognise that ii. The cost in the parent’s
earnings (or, if so required by goodwill in its opening IFRS separate financial statements of
IAS 36, in revaluation surplus). statement of financial position. its investment in the subsidiary.
The impairment test shall be Furthermore, it shall not k) The measurement of non-
based on conditions at the reclassify that goodwill to profit controlling interests and deferred
date of transition to IFRSs. or loss if it disposes of the tax follows from the measurement
h) No other adjustments shall be subsidiary or if the investment of other assets and liabilities.
made to the carrying amount of in the subsidiary becomes Therefore, the above adjustments
goodwill at the date of transition impaired. to recognised assets and liabilities
to IFRSs. For example, the first- ii. Adjustments resulting from affect non-controlling interests and
time adopter shall not restate the the subsequent resolution of deferred tax.
carrying amount of goodwill: a contingency affecting the The exemption for past business
i. To exclude in process research purchase consideration shall combinations also applies to past
and development acquired be recognised in retained acquisitions of investments in
in that business combination earnings. associates and of interests in joint
(unless the related intangible j) In accordance with its previous ventures. Furthermore, the date
asset would qualify for GAAP, the first-time adopter may selected for paragraph 1 applies
recognition in accordance not have consolidated a subsidiary equally for all such acquisitions.
with IAS 38 in the statement acquired in a past business B. The Effects of Changes in
of financial position of the combination (for example, Foreign Exchange Rates
acquiree); because the parent did not regard An entity need not apply IAS 21
ii. To adjust previous amortisation it as a subsidiary in accordance The Effects of Changes in Foreign
of goodwill; with previous GAAP or did not Exchange Rates retrospectively to
iii. To reverse adjustments to prepare consolidated financial fair value adjustments and goodwill
goodwill that IFRS 3 would statements). The first-time adopter arising in business combinations that
not permit, but were made shall adjust the carrying amounts occurred before the date of transition
in accordance with previous of the subsidiary’s assets and to IFRSs. If the entity does not apply
GAAP because of adjustments liabilities to the amounts that IFRSs IAS 21 retrospectively to those fair
to assets and liabilities between would require in the subsidiary’s value adjustments and goodwill,
the date of the business statement of financial position. it shall treat them as assets and
combination and the date of The deemed cost of goodwill liabilities of the entity rather than as
transition to IFRSs. equals the difference at the date of assets and liabilities of the acquiree.
Therefore, those goodwill and fair
value adjustments either are already
expressed in the entity’s functional
currency or are non-monetary foreign
currency items, which are reported
using the exchange rate applied in
accordance with previous GAAP.
An entity may apply IAS 21
retrospectively to fair value adjustments
and goodwill arising in either:
a) All business combinations that
occurred before the date of
transition to IFRSs; or
b) All business combinations that the
entity elects to restate to comply

42 THE CHARTERED ACCOUNTANT November 2010


723 ACCOUNTING

with IFRS 3, as permitted by An entity need not elects to use the cost model in IAS
paragraph C(i) above. apply IAS 21 The 40 Investment Property and
C. Share-based payment Effects of Changes b) Intangible assets that meet:
transactions in Foreign Exchange Rates iii. The recognition criteria in
A first-time adopter is encouraged, but retrospectively to fair value IAS 38 (including reliable
not required, to apply IFRS 2 Share- adjustments and goodwill measurement of original cost);
based Payment to equity instruments arising in business combinations and
that were granted on or before 7 that occurred before the date iv. The criteria in IAS 38 for
November 2002. A first-time adopter of transition to IFRSs. If the revaluation (including the
is also encouraged, but not required, entity does not apply IAS 21 existence of an active market).
to apply IFRS 2 to equity instruments retrospectively to those fair An entity shall not use these
that were granted after 7 November value adjustments and goodwill, elections for other assets or for
2002 and vested before the later of (a) it shall treat them as assets and liabilities.
the date of transition to IFRSs and (b) liabilities of the entity rather A first-time adopter may have
1 January 2005. However, if a first-time than as assets and liabilities established a deemed cost in
adopter elects to apply IFRS 2 to such of the acquiree. Therefore, accordance with previous GAAP for
equity instruments, it may do so only those goodwill and fair value some or all of its assets and liabilities
if the entity has disclosed publicly the adjustments either are already by measuring them at their fair value
fair value of those equity instruments, expressed in the entity’s at one particular date because of an
determined at the measurement date, functional currency or are event such as a privatization or initial
as defined in IFRS 2. For all grants of non-monetary foreign currency public offering. It may use such event-
equity instruments to which IFRS 2 has items, which are reported using driven fair value.
not been applied (eg equity instruments the exchange rate applied in F. Leases
granted on or before 7 November accordance with previous A first-time adopter may apply the
2002), a first-time adopter shall GAAP. transitional provisions in IFRIC 4
nevertheless disclose the information Insurance Contracts. IFRS 4 restricts Determining whether an Arrangement
required by paragraphs 44 and 45 of changes in accounting policies for contains a Lease. Therefore, a first-
IFRS 2. If a first-time adopter modifies insurance contracts, including changes time adopter may determine whether
the terms or conditions of a grant of made by a first-time adopter. an arrangement existing at the date of
equity instruments to which IFRS 2 E. Fair value or revaluation as transition to IFRSs contains a lease on
has not been applied, the entity is not deemed cost the basis of facts and circumstances
required to apply paragraphs 26–29 An entity may elect to measure an existing at that date.
of IFRS 2 if the modification occurred item of property, plant and equipment G. Employee benefits
before the date of transition to IFRSs. at the date of transition to IFRSs at its In accordance with IAS 19 Employee
A first-time adopter is encouraged, fair value and use that fair value as its Benefits, an entity may elect to use
but not required, to apply IFRS 2 to deemed cost at that date. a ‘corridor’ approach that leaves
liabilities arising from share-based A first-time adopter may elect to some actuarial gains and losses
payment transactions that were settled use a previous GAAP revaluation of an unrecognised. Retrospective
before the date of transition to IFRSs. A item of property, plant and equipment application of this approach requires
first-time adopter is also encouraged, at, or before, the date of transition to an entity to split the cumulative actuarial
but not required, to apply IFRS 2 to IFRSs as deemed cost at the date of gains and losses from the inception of
liabilities that were settled before 1 the revaluation, if the revaluation was, the plan until the date of transition to
January 2005. For liabilities to which at the date of the revaluation, broadly IFRSs into a recognised portion and an
IFRS 2 is applied, a first-time adopter comparable to: unrecognised portion. However, a first-
is not required to restate comparative a) Fair value; or time adopter may elect to recognise all
information to the extent that the b) Cost or depreciated cost in cumulative actuarial gains and losses
information relates to a period or date accordance with IFRSs, adjusted at the date of transition to IFRSs, even
that is earlier than 7 November 2002. to reflect, for example, changes in if it uses the corridor approach for later
D. Insurance contracts a general or specific price index. actuarial gains and losses. If a first-
A first-time adopter may apply the The elections are also available for: time adopter uses this election, it shall
transitional provisions in IFRS 4 a) Investment property, if an entity apply it to all plans.

THE CHARTERED ACCOUNTANT november 2010 43


ACCOUNTING 724

An entity may disclose the amounts that investment at one of the following a) the carrying amounts that would
required by paragraph 120A(p) of IAS amounts in its separate opening IFRS be included in the parent’s
19 as the amounts are determined for statement of financial position: consolidated financial statements,
each accounting period prospectively a) Cost determined in accordance based on the parent’s date of
from the date of transition to IFRSs. with IAS 27 or transition to IFRSs, if no adjust-
H. Cumulative translation b) Deemed cost. The deemed cost of ments were made for consolidation
differences such an investment shall be its: procedures and for the effects of
IAS 21 requires an entity: i. Fair value (determined in the business combination in which
a) To recognise some translation accordance with IAS 39) at the the parent acquired the subsidiary;
differences in other comprehensive entity’s date or
income and accumulate these in ii. of transition to IFRSs in its b) The carrying amounts required by
a separate component of equity; separate financial statements; the rest of this IFRS, based on the
and or subsidiary’s date of transition to
b) On disposal of a foreign operation, iii. Previous GAAP carrying IFRSs. These carrying amounts
to reclassify the cumulative amount at that date. could differ from those described
translation difference for that A first-time adopter may choose in (a) above:
foreign operation (including, if either (i) or (ii) above to measure its i. When the exemptions in this
applicable, gains and losses on investment in each subsidiary, jointly IFRS result in measurements
related hedges) from equity to controlled entity or associate that it that depend on the date of
profit or loss as part of the gain or elects to measure using a deemed transition to IFRSs.
loss on disposal. cost. ii. When the accounting policies
However, a first-time adopter need J. Assets and liabilities of used in the subsidiary’s
not comply with these requirements subsidiaries, associates and joint financial statements differ
for cumulative translation differences ventures from those in the consolidated
that existed at the date of transition to If a subsidiary becomes a first- financial statements. For
IFRSs. If a first-time adopter uses this time adopter later than its parent, example, the subsidiary may
exemption: the subsidiary shall, in its financial use as its accounting policy the
a) The cumulative translation statements, measure its assets and cost model in IAS 16 Property,
differences for all foreign operations liabilities at either: Plant and Equipment, whereas
are deemed to be zero at the date the group may
A first-time adopter
of transition to IFRSs; and iii. Use the revaluation model.
is encouraged, but
b) The gain or loss on a subsequent A similar election is available to an
not required, to apply
disposal of any foreign operation associate or joint venture that becomes
IFRS 2 Share-based Payment
shall exclude translation differences a first-time adopter later than an entity
to equity instruments that
that arose before the date of that has significant influence or joint
were granted on or before 7
transition to IFRSs and shall include control over it.
November 2002. A first-time
later translation differences. However, if an entity becomes a first-
adopter is also encouraged, but
I. Investments in subsidiaries, time adopter later than its subsidiary
not required, to apply IFRS 2 to
jointly controlled entities and (or associate or joint venture) the
equity instruments that were
associates entity shall, in its consolidated financial
granted after 7 November 2002
When an entity prepares separate statements, measure the assets and
and vested before the later
financial statements, IAS 27 (as liabilities of the subsidiary (or associate
of (a) the date of transition to
amended in 2008) requires it to account or joint venture) at the same carrying
IFRSs and (b) 1 January 2005.
for its investments in subsidiaries, jointly amounts as in the financial statements
However, if a first-time adopter
controlled entities and associates of the subsidiary (or associate or
elects to apply IFRS 2 to such
either: joint venture), after adjusting for
equity instruments, it may do so
a) At cost or consolidation and equity accounting
only if the entity has disclosed
b) In accordance with IAS 39. adjustments and for the effects of the
publicly the fair value of those
If a first-time adopter measures such business combination in which the
equity instruments, determined
an investment at cost in accordance entity acquired the subsidiary. Similarly,
at the measurement date, as
with paragraph 18, it shall measure if a parent becomes a first-time adopter
defined in IFRS 2.

44 THE CHARTERED ACCOUNTANT November 2010


725 ACCOUNTING

for its separate financial statements a) An entity is permitted to make an IAS 32 Financial
earlier or later than for its consolidated available-for-sale designation at Instruments:
financial statements, it shall measure the date of transition to IFRSs. Presentation requires
its assets and liabilities at the same b) An entity is permitted to designate, an entity to split a compound
amounts in both financial statements, at the date of transition to IFRSs, financial instrument at inception
except for consolidation adjustments. any financial asset or financial into separate liability and
K.Compound financial instruments liability as at fair value through equity components. If the
IAS 32 Financial Instruments: profit or loss provided the asset liability component is no longer
Presentation requires an entity to split or liability meets the criteria in outstanding, retrospective
a compound financial instrument at paragraph 9(b)(i), 9(b)(ii) or 11A of application of IAS 32 involves
inception into separate liability and IAS 39 at that date. separating two portions of
equity components. If the liability M. Fair value measurement of equity. The first portion is in
component is no longer outstanding, financial assets or financial retained earnings and represents
retrospective application of IAS 32 liabilities at initial recognition the cumulative interest accreted
involves separating two portions Notwithstanding the requirements of on the liability component.
of equity. The first portion is in paragraphs 7 and 9, an entity may The other portion represents
retained earnings and represents apply the requirements in the last the original equity component.
the cumulative interest accreted on sentence of IAS 39 paragraph AG76 However, in accordance with this
the liability component. The other and in paragraph AG76A, in either of IFRS, a first-time adopter need
portion represents the original equity the following ways: not separate these two portions
component. However, in accordance a) Prospectively to transactions if the liability component is no
with this IFRS, a first-time adopter entered into after 25 October 2002; longer outstanding at the date
need not separate these two portions or of transition to IFRSs.
if the liability component is no longer b) Prospectively to transactions by discounting the liability to that
outstanding at the date of transition to entered into after 1 January 2004. date using its best estimate of the
IFRSs. N. Decommissioning liabilities historical risk-adjusted discount
L. Designation of previously included in the cost of property, rate(s) that would have applied
recognised financial instruments plant and equipment for that liability over the intervening
IAS 39 permits a financial asset to IFRIC 1 Changes in Existing period; and
be designated on initial recognition Decommissioning, Restoration and c) Calculate the accumulated
as available for sale or a financial Similar Liabilities requires specified depreciation on that amount, as at
instrument (provided it meets certain changes in a decommissioning, the date of transition to IFRSs, on
criteria) to be designated as a financial restoration or similar liability to be the basis of the current estimate
asset or financial liability at fair value added to or deducted from the cost of the useful life of the asset, using
through profit or loss. Despite this of the asset to which it relates; the the depreciation policy adopted
requirement exceptions apply in the adjusted depreciable amount of the by the entity in accordance with
following circumstances: asset is then depreciated prospectively IFRSs.
over its remaining useful life. A first- O. Financial assets or intangible
time adopter need not comply with assets accounted for in
these requirements for changes in accordance with IFRIC 12
such liabilities that occurred before the A first-time adopter may apply the
date of transition to IFRSs. If a first-time transitional provisions in IFRIC 12.
adopter uses this exemption, it shall: P. Borrowing costs
a) Measure the liability as at the date A first-time adopter may apply the
of transition to IFRSs in accordance transitional provisions set out in
with IAS 37; paragraphs 27 and 28 of IAS 23, as
b) To the extent that the liability is within revised in 2007. In those paragraphs
the scope of IFRIC 1, estimate the references to the effective date shall
amount that would have been be interpreted as 1 July 2009 or the
included in the cost of the related date of transition to IFRSs, whichever
asset when the liability first arose, is late. n

THE CHARTERED ACCOUNTANT november 2010 45


ACCOUNTING 726

Accounting for Customer Loyalty Programmes Under


IFRS

Customer loyalty programmes have become an integral part of a wide range of businesses and are used
by companies to retain customers and increase sales volumes. These programmes represent a structured
marketing effort intended to reward customers for the past purchases. The article intends to explain what
these programmes are and what led to the development of a specific accounting pronouncement. It further
explains what is covered and what is not under IFRIC-13 and explains the accounting treatment.

What it is? the entity itself or by an external third


Customer loyalty programmes are now party. A typical example in India is a
an integral element of a wide range of departmental store (say, Pantaloon
businesses and are used by companies Retail) that awards reward points to
to retain customers and increase its member-cardholders, which can be
sales volumes. These programmes redeemed by them in future.
represent a structured marketing effort
intended to reward customers for the Accounting Pronouncement
past purchases. Normally members Under IFRS
under the programme are granted In June 2007, the IFRIC issued IFRIC-
‘award credits’ that can be redeemed 13: Customer Loyalty Programmes,
– with or without conditions - to which addresses accounting for the
CA. Anjani Kumar Khetan obtain free or discounted goods and award credits granted by an entity
(The author is a member of the Institute. services. Further, those free goods to their customers. Until that time,
He can be reached at eboard@icai.org) IFRSs did not have any detailed
or services can either be provided by

46 THE CHARTERED ACCOUNTANT November 2010


727 ACCOUNTING

guidance in this area and accordingly In June 2007, the Estimating Fair Value of
corporate practices to account for IFRIC issued IFRIC-13: ‘Award Credits’
such obligations were varying. IFRIC- Customer Loyalty For the purposes of accounting for the
13 is applicable for annual periods Programmes, which addresses ‘award credits’, fair value of the award
beginning on or after 1st July 2008 with accounting for the award credits credits need to be ascertained, since
earlier application permitted. granted by an entity to their IFRIC-13 requires that the award credits
customers. Until that time, should be measured by reference
Scope of IFRIC-13 IFRSs did not have any detailed to their fair value (i.e., the amount for
IFRIC-13 covers all types of customer guidance in this area and which the award credits can be sold
loyalty programmes, in which the award accordingly corporate practices separately).
credits are granted to customers as to account for such obligations However, the fair value estimation
part of the sale transaction (including were varying. IFRIC-13 is is the most challenging issue. The
awards that can be redeemed for applicable for annual periods following factors are generally
goods or services not supplied by the beginning on or after 1st July considered in fair value estimation:
entity). However, if an entity distributes 2008 with earlier application • changes in popularity of the loyalty
‘money-off vouchers’ or, any other permitted. programme over the years
sort of promotion that do not require Put differently, the IFRIC requires • changing redemption pattern
an initial purchase, IFRIC-13 does that the fair value of the consideration (which may be a result of cus-
not apply. Put differently, IFRIC-13 received or receivable in respect of the tomers’ age group / geographical
applies only when the right to obtain initial sale shall be allocated between location / buying pattern)
free or discounted goods or services the (i) award credits and (ii) the other • minimum award credits required
is granted to customers as part of the component of the sale. However, before a customer can redeem
initial sale transaction. In particular, it does not prescribe an allocation them and the ability of the
the IFRIC explains how such entities method for multiple component sales. customers’ to achieve that level
should account for their obligations to Once the allocation is determined, • absence of historical experience
provide for free or discounted goods or the amount applicable to the first because of changing
services (awards) to customers, who component is deferred as a liability until circumstances
redeem their award credits. the entity fulfils its obligation in respect
of the award credits. The balance of the Illustration:
Accounting For Award amount is recognised as revenue at the The following paragraphs illustrate a
Credits Granted Under time of first sale. Here, it is important very simplified accounting for award
Customer Loyalty to reiterate that the IFRIC requires credits given under a customer loyalty
Programme an entity to measure the liability with programme.
According to the consensus in IFRIC- respect to the award credits on the Assume that a departmental
13: basis of fair value of the award credits store gives 10 award points for every
• An entity shall apply paragraph to the customer (and not on the basis purchase worth R500 which can be
13 of IAS-18 and account for of their ‘cost to the entity’). redeemed by the customer for further
award credits as a separately Further, for the purposes of shopping with the store. Unutilised
identifiable component of the sales classifying the accounting treatment points will lapse on the expiry of 2
transaction(s) in which they are under IFRIC-13, the following scenarios years from the date of grant. The fair
granted (the ‘initial sale’); are relevant: value of each point is assumed to be
• The fair value of the consideration Scenario 1: The entity itself supplies R0.50. Assume further that during
received or receivable in respect free goods or services of the accounting year ended 2008, the
of the initial sale shall be allocated the same type departmental store awarded 100 lac
between the award credits and the Scenario 2: The entity itself supplies points to various customers (for a total
other components of the sale; and free goods or services of yearly sale of R5000 lacs), of which 18
• The consideration allocated to the different types lac points remained to be redeemed at
award credits shall be measured Scenario 3: The entity gives differential 2008 year-end. The management of the
by reference to their fair value, (i.e., award credits departmental store expects that only
the amount for which the award Scenario 4: Award credits are 80% of these points will be redeemed
credits could be sold separately). redeemed by third parties in future. During 2009, 10.80 lac award

THE CHARTERED ACCOUNTANT november 2010 47


ACCOUNTING 728

points were redeemed and during the year(s) since only 80 per cent
year 2010 and the management is now of the outstanding award points
of the view that the balance 3.60 lac are expected to be redeemed in
award points will be redeemed in 2010. future?
However, only 180,000 award points Here, the departmental store can
were actually redeemed in 2010 – with apply paragraph 36 of IAS-37 for
the balance 1.80 lacs award points estimating the future obligations at
getting lapsed. the end of 2008. It may be recalled
fair value of ‘80 per cent of 18
Given the above, the award points that Para 36 of IAS-37 stipulates
lacs award points’ expected to be
will be accounted for (during the year that “the amount recognised as
redeemed in future)
2008 to 2010, when any unutilized provision shall be the best estimate
award credits eventually lapse) as of the expenditure required to settle
Year 2009:
follows: the present obligation at the end
(d) During 2009, 10.80 lacs award
of the reporting period”. Further,
points are redeemed. On
Year 2008: IAS-37 allows application of
redemption of these points the
(a) Accounting for 100 lacs points probability factor for measurement
following entry need to be passed:
awarded: of provisions. Accordingly, only 80
Dr. Deferred Revenue 5.40 lacs
Dr. Bank account 5000 lacs per cent of the total liability of R9
Cr. Sales account 5.40 lacs
Cr. Sales account 4950 lacs lacs should be deferred and the
(Being revenue recognized on
Cr. Deferred Revenue 50 lacs balance R1.80 lacs (being R9 lacs
redemption of 10.80 lacs award
(Being sale recognised excluding less R7.20 lacs) will be recognised
credits)
‘fair value of 100 lacs award as revenue at the end of Dec-2008,
With the above entry being
cerdits’) for which the entry is:
passed, there will be a balance
It can be seen from the above that Dr. Deferred Revenue 1.80 lacs
of R1.80 lacs in deferred revenue
R50 lacs (being the fair value of Cr. Sales account 1.80 lacs
(representing fair value of balance
the 100 lacs award points credited (Being writing back of deferred
3.60 lacs award points expected to
during 2008) has been credited revenue based on management
be redeemed in 2010)
to the liability account and the estimate)
balance R4950 lacs has been With the above entry being passed,
Year 2010:
recognised as revenue. there will be a balance of R7.20 lacs
(e) During 2010, 1.80 lacs award points
in deferred revenue (representing
are redeemed. On redemption of
(b) Accounting for 82 lacs points Put differently, the these points the following entry
redeemed: IFRIC requires that need to be passed:
When 82 lac award points are the fair value of Dr. Deferred Revenue 0.90 lacs
redeemed, the liability of R41 lacs the consideration received or Cr. Sales account 0.90 lacs
(equivalent to the fair value of 82 receivable in respect of the (Being revenue recognised on
lacs award points) will be reversed initial sale shall be allocated redemption of 1.80 lacs award
and the corresponding revenue between the (i) award credits credits)
recognised, for which the following and (ii) the other component
entry will be passed: of the sale. However, it does (f) Since the award points are no
Dr. Deferred Revenue 41 lacs not prescribe an allocation longer redeemable after 2010, the
Cr. Sales account 41 lacs method for multiple liability with respect to the balance
(Being revenue recognised on component sales. Once the of 1.80 lacs award points is no
redemption of 82 lacs award allocation is determined, the longer required and need to be
credits) amount applicable to the first written back, for which the following
component is deferred as a entry is passed:
(c) The next question at 2008 year- liability until the entity fulfils Dr. Deferred Revenue 0.90 lacs
end is: how much of the balance its obligation in respect of the Cr. Sales account 0.90 lacs
deferred revenue liability R9 lacs award credits. The balance of the (Being writing back of deferred
(being 50 lacs less 41 lacs) should amount is recognised as revenue revenue for 1.80 lac award points). n
be carried forward to the next at the time of first sale.

48 THE CHARTERED ACCOUNTANT November 2010


729 AUDITING

Concern for “Going Concern”

Going Concern is one of the It’s high time to come terms with The purpose of this article is to
“Going Concern.” Going Concern is discuss the role of the auditor in the
Fundamental Accounting
one of the Fundamental Accounting audit of financial statements as far as
Assumptions as laid down by the
Assumptions as laid down by the the concept of “Going Concern” is
Accounting Standard -1 issued Accounting Standard - 1 issued by concerned. The Institute had issued
by the Institute of Chartered the Institute of Chartered Accountants a Statement on Standard Auditing
Accountants of India (Institute). of India. As per this assumption, the Practices (SAP/AAS-16 / SA 570) on
As per this assumption, the enterprise is normally viewed as a Going Concern with the main objective
going concern, i.e., as continuing in of describing auditor’s responsibilities
enterprise is normally viewed as a
operation for the foreseeable future. in the audit of financial statements
going concern, i.e., as continuing
It is assumed that the enterprise has regarding the appropriateness of the
in operation for the foreseeable neither the intention nor the necessity going concern assumption as a basis
future. The purpose of this article of liquidation or of curtailing materially for the preparation of the financial
is to discuss the role of an auditor the scale of operations. On the basis statements. It is of utmost importance
in the audit of financial statements of this assumption, the assets are not for the auditors to consider the
stated at their realisable value in the appropriateness of the going concern
as far as the concept of “Going
Balance Sheet but on cost or cost less assumption in the audit of the financial
Concern” is concerned.
depreciation. statements.

Meaning of Going Concern Indicators/Signs of “Going


"A principle of Concern” in Danger
accounting practice that It is very important to know as to what
assumes businesses
are the cases or situations wherein
to be going concerns,
unless circumstances the “Going Concern” is at risk. As
indicate otherwise." an auditor, such cases are of vital
Oxford This principle implies
a It is very important to
Dictionary that "assets are shown
at cost, or at cost less know as to what are
depreciation, and not at the cases or situations
their break up values,"
and "liabilities applicable
wherein the “Going Concern”
only on liquidation are is at risk. As an auditor, such
not shown." cases are of vital significance
Activity An entity is considered particularly because the auditors
Based as `going concern' if it is need to express their opinion
CA. Rahul Kumar Bajaj b
Risk able to pay its debts as
on the true and fairness of the
(The author is member of the Institute. He Evaluation and when they fall due.
can be reached at rahul.kumar.bajaj@ Model of financial information on which a
icai.org) Auditing. lot of users are dependent.

THE CHARTERED ACCOUNTANT november 2010 49


AUDITING 730

significance particularly because the the issue of Going Concern, then AAS- as to determine that whether the
auditors need to express their opinion 16 / SA 570, Going Concern, requires assets appearing in the financial
on the true and fairness of the financial him to update his audit procedures statements are free of any charge,
information on which a lot of users are accordingly to collect sufficient if any.
dependent. The report of the auditor appropriate audit evidences to resolve e) Consider the availability of sufficient
helps establish the credibility of the the issue of Going Concern and satisfy funds with the enterprise so as
financial statements. AAS 16/SA 570 himself that the enterprise will continue to discharge its liabilities in the
on Going Concern lays down certain in operation for a foreseeable future. normal course of the business.
indicators where Going Concern is to In such circumstances where Going f) Review the loan agreements and
be questioned: - Concern is questionable, following the conditions attached thereto, if
S. Financial Operating Others any, and consider their suitability
No. with the existing circumstances
1 Negative Net Worth/ Loss of key Non-compliance with as to whether the enterprise is in a
Working capital management without capital or other statutory condition to fulfill those conditions.
replacement requirements
g) Consider the cases and litigations
2 Reliance on short-term Loss of a major market, Pending legal proceedings and discuss them with the
borrowings to finance franchise, license, or against the entity that may, management as well as with
long-term assets or lack principal supplier if successful, result in the experts, if any and take their
of funds to discharge the judgments that could not opinion and status on such cases
Long term Liabilities. be met.
and litigations with regards to the
3 Adverse key financial Labour difficulties or Changes in legislation or
ratios shortages of important government policy claims etc.
supplies h) Discuss heavy provisions
4 Substantial operating Sickness of the entity appearing in the Profit & Loss
losses under any statutory Account of the Entity.
definition
5 Negative cash flows from
operations
6 Arrears of dividends
7 Entering into a scheme of
arrangement with creditors
for reduction of liability
8 Inability to obtain financing
for essential new product
development or other
essential investments
9 Difficulty in complying
with the terms of loan
agreements
Face Off with “Going points, in view of the author, might be
Concern” of significance for an auditor (the list is
AAS-5 / SA 500 (“Audit Evidence”) not intended to be exhaustive): -
requires the auditor to obtain sufficient a) Consider the number of suppliers
appropriate audit evidence through available with the enterprise so as
the performance of compliance and to mitigate the logistical risk.
substantive procedures so as to enable b) Ensure whether the assets
him to draw reasonable conclusions appearing in the Balance Sheet
therefrom on which base his opinion are covered under insurance.
on the financial information which is c) Ensure that there is a sufficient
the objective of his audit (“AAS-2 / SA market in place for the products
200A => Objectives and Scope of an of the enterprise and have
Audit of Financial Statements”). If at any related discussions with the
time during the course of an audit, an management.
auditor finds himself in suspicion on d) Review the existing conditions so

50 THE CHARTERED ACCOUNTANT November 2010


731 AUDITING

Reporting Requirements as doubts that the company will be able “The company is incurring heavy
per AAS 16/SA 570 to continue for a foreseeable future cash losses from the past 5 years which
The Auditor’s report is an essential then he shall include the following has adversely affected the profitability
component of usage for the users of paragraph in his audit report: - of the company. There is no mention of
the financial information, especially “We draw attention to Note___ in these facts in the financial information.
the shareholders in case of listed the financial information. The company In our opinion, subject to the
companies. For instance, if a public is incurring heavy cash losses from omission of the information dealt with in
company reports that its auditors have the past 5 years which has adversely the preceding paragraph, the financial
doubts about its ability to continue as affected the profitability of the company. statements give a true and fair view of
a going concern, investors are likely to These factors along with other factors the financial position of the Company
take that as a sign of increased risk and as laid out in Note___ raise doubt on at March 31, 19X1 and the results of its
would want to take back their funds as the ability of the company to continue operations for the year then ended.”
soon as possible. its operations for a foreseeable future.”
If an auditor, after analysing the However, if the auditor discovers Examples of Reporting by
collected sufficient appropriate audit that there is no adequate disclosure Some Enterprises
evidences, feels that the “Going of the facts mentioned in para 5.2, Following is a compilation of the
Concern” is at risk then he needs to then he needs to qualify his report in examples of some of the reporting in
ensure as to whether there is adequate the following form (considering same cases where the concept of Going
disclosure in the financial statements example): Concern was questionable:
that the enterprise will not be able to S. No. Name of Company Auditor’s Comments
realise its assets and discharge off 1 Alcobex Metals Ltd “The accumulated losses of the company have
its liabilities in the normal course of exceeded the net worth of the company and the
company has been incurring cash losses for the past few
business. An auditor needs to consider years. However, the accounts of the company have been
whether the financial statements prepared on the basis of going concern assumption.”
describe the principal conditions which 2 Alembic Glass Industries “No provision has been made by the company in
Ltd. respect of difference, if any, in the price of gas supplied
raise the doubt about the enterprise’s by ONGC during the period January 30, 1987 to May
ability to continue in the foreseeable 31, 1991 and interest for delayed payment thereon,
the matter being sub-judice.” And, “despite impending
future. If there is proper disclosure liability of ONGC on the company... accounts are
of the above mentioned facts in the continued to be prepared on a going concern basis.”
financial information, then an auditor 3 Fairfield Atlas Ltd ``the appropriateness of the going concern basis
used for the preparation of the accounts in view of
need not qualify his report but mention substantial erosion of net worth of the company arising
such fact in his report by referring the from operating losses.’’ The company, however, justifies
that `no adjustment has been made to write down the
corresponding note in the financial assets to net realisable value’ because `the principal
information. shareholder, Fairfield Manufacturing Company Inc, US,
has informed the company of its intention of providing
For instance, if an auditor concludes financial support to the company to meet its obligations,
that the company is incurring heavy as they fall due.’ Perhaps, the obligations are yet to fall
due.
losses from the past few years and
4 Ispat Profiles India Ltd “The company has further received notice from
If at any time during some of its secured lenders under Securitisation and
Reconstruction of Financial Assets and Enforcement
the course of an of Security Interest Act 2002, which the company has
audit, an auditor challenged.” As a result, The going concern concept will
hold good depending upon the receipt of support from
finds himself in suspicion on the its bankers, financial institutions and promoters, etc,
issue of Going Concern, then note the auditors. Necessary adjustment may have to
be made to the value of assets and liabilities in case the
AAS-16/SA 570 - Going Concern, going concern concept is vitiated.
requires him to update his audit 5 Scindia Steam Navigation “The shipping operations of the company stand
procedures accordingly to collect Company Ltd. suspended. Further, the company has continuously
incurred losses (other than profit on sale of properties)
sufficient appropriate audit during the quarter and thereby the net worth of the
evidences to resolve the issue company has been totally eroded and a substantial loss
is carried forward as at September 30, 2006.” Despite
of Going Concern and satisfy this, the company’s accounts have been prepared on
himself that the enterprise will a going concern basis, `in the absence of adequate
data and information for its compilation on an alternative
continue in operation for a basis’.
foreseeable future. Source: - “Business Line”, Friday, January 5, 2007

THE CHARTERED ACCOUNTANT november 2010 51


AUDITING 732

The Auditor’s report an auditor finds non-compliance with The concept of Going
is an essential the aforesaid law, then AAS 16/SA 570 Concern is of vital
component of usage plays a vital role in how the auditor shall importance for an
for the users of the financial face this situation. auditor if he needs to properly
information, especially the Another might be the case where express his opinion on the true
shareholders in case of listed the enterprise has a pending litigation and fair position of the financial
companies. as at the end of the year which involves position and the operating
a heavy claim and if decided against the results as at the Balance Sheet
Examples of Going Concern enterprise would question the concept Date.
In the case of projects, the Going Going Concern. In such circumstances,
Concern issue arises during the last the auditor needs to have discussions to ensure a proper disclosure in the
year when the project is about to with the management as well as with financial information as well a proper
be completed. Such cases are no the experts, if any (lawyers etc) so as reporting in his Report.
different from others. Here, the assets to get a clear picture of the litigation/
and the liabilities in the last year, when case as at the balance sheet date. If Conclusion
Going Concern is at risk, the assets the auditor feels that the enterprise Going Concern, being a fundamental
and the liabilities are to be stated at is on an adverse side with regards to accounting assumption holds
their realisable values. The facts about such litigation/case, then he needs significant importance for an auditor.
the enterprise’s inability to continue in The financial statements need to
foreseeable future need to properly
If an auditor, after disclose the policies which have been
disclose in the financial statements and
analysing the followed in the preparation of financial
accordingly proper disclosure need to
collected sufficient statements. But with regards to 3
be made in the Auditor’s report.
appropriate audit evidences, fundamental accounting assumptions
There are some cases where the
feels that the “Going Concern” is including “Going Concern”, one need
Going Concern is at risk due to some
at risk then he needs to ensure not disclose their compliance but non-
legislative Provisions. For instance, the
as to whether there is adequate compliance. Eventually, the concept of
Government might come out with a law
disclosure in the financial Going Concern is of vital importance
stating that all the companies with an
statements that the enterprise for an auditor if he needs to properly
annual turnover of R50 crore or more
will not be able to realise its express his opinion on the true and fair
need to provide employment to “x” new
assets and discharge off its position of the financial position and
persons every year else they would be
liabilities in the normal course of the operating results as at the Balance
treated as defunct. Now while auditing,
business. Sheet Date.n

52 THE CHARTERED ACCOUNTANT November 2010


733 AUDITING

A New Approach to the Audit of ULBs


in the New Environment of Reforms

More than five years have elapsed since the publication of the National Municipal Accounts Manual (NMAM).
Implementation of accrual-based double entry accounting in the Urban Local Bodies (ULBs) of many states
of India is in progress on the lines of the NMAM, either on the basis of its guidelines as such, or getting the
same customised in the perspective of the ideals and the objectives of the related states. Though milestones
achieved in this area are far less than the satisfactory level, the need for a National Audit Manual for ULBs is
already felt. Read on to have an overview of the concept.
More than five years have elapsed bodies as the third-tier of government
since the publication of the National becoming gradually more and more
Municipal Accounts Manual (NMAM). engaged in citizen-centric public
Implementation of accrual-based sphere of activities, scope of their
double entry accounting in the Urban audit will ramify and will be particularly
Local Bodies (ULBs) of many states significant in the examination of the
of India is in progress on the lines of propriety of their transactions.
the NMAM, either on the basis of its
guidelines as such, or getting the Basis of Extended Audit
same customised in the perspective Functions
of the ideals and the objectives of With the enactment of the Constitution
the related states. Though milestones (Seventy-fourth Amendment) Act,
achieved in this area are far less than 1992, States were asked to endow the
the satisfactory level, the need for a ULBs with such powers and authority
National Audit Manual for ULBs is as may be necessary to enable them
already felt. This is especially in view of to function as institutions of self-
the status of the ULBs of some states government. Article 243W empowers
which are in quite advanced stage in the Legislature of a State to devolve
following the codified structure and upon the ULBs powers and
Chart of Accounts as per the NMAM, responsibilities subject to specified
and in maintaining day-to-day accounts conditions, with respect to – (i) the
electronically. preparation for plans for economic
Before highlighting the scope of a development and social justice; (ii)
prospective National Audit Manual for the performance of functions and the
ULBs, proper analysis is required on the implementation of schemes as may be
background which inspired the reforms entrusted to them including those in
CA. Atanusasan
activities in the ULBs, ever since the relation to the matters listed in the Twelfth
Mukhopadhyay
(The author is a member of the Institute. local bodies have been recognised as Schedule. In the Twelfth Schedule as
He can be reached at eboard@icai.org) the third tier of government. With local many as 18 broad outlines have been

THE CHARTERED ACCOUNTANT november 2010 53


AUDITING 734

prescribed to suggest the areas of position of Funds of an ULB could not Plan (CDP)/Draft Development Plan
functions of the ULBs. A careful study be known, it was difficult to have an (DDP) for a specified block of years
of the 18-point charter of functions idea about the own corpus of the ULB, with participative citizen interface,
will help one assess the vast and position of Secured and Unsecured and the break up of the CDP/DDP
wide range of activities that may bind Loan could not be determined, status into Annual Development Plan (ADP)
the ULBs obviously to the enormous of Assets/Liabilities was not fully for each year of the related block, the
accountability towards citizens. known, status of on-going works/ process of Budget in the ULBs will be
Auditors share great responsibility liabilities could not be gauged, huge in the threshold of significant changes.
in this connection as the vast areas receivables of the ULBs from tax and ADP is the quantitative and qualitative
of functions of the ULBs will naturally non-tax revenue was not ascertainable, description of plans and programmes
involve huge financial transactions, measuring service costs was almost containing prioritised proposals for
and common citizens’ intent must be impossible, and so on. There was, each year. The same is taken out of
to get assured of the healthy financial therefore, a common cry of demands for the Development Plan for the related
discipline. new initiatives by all the stakeholders. block of years, and is matched with
The 11th Finance Commission The directions of the combined resources/funds available for the
recommended greater control and demands were towards ensuring good related year. Once the ADP is linked
supervision over proper maintenance urban governance, self-reliance and to the Financial Budget, Budget would
of accounts by all ULBs, and their sustenance, combating increasing become much more than a traditional
audit. The commission held that in pressure on infrastructure, improved financial statement in the municipal
regard to utilisation of grants by local capacity building, strengthening parlance. In the changed scenario
bodies, more stringent compliance was institutional arrangement, installing of reforms of the ULBs especially
required, formats for preparation of standard operating procedure, effective through implementation of
Budget and Accounts by ULBs needed citizens relationship management, Development Plan, Budget will be
to be reviewed and suitably prescribed, strengthening decentralised planning oriented towards projection and
formats should be evolved to determine in a participative manner, ensuring achievement of physical target/volume
the cost of important utilities and enhanced service delivery system, and the consequential allocation of
services, and the like. The position of meeting service demands and financial outlay against such physical
accounting was really very alarming expectations of citizens, effective goals both in qualitative and quantitative
in an average ULB, and the general grievance-redressal management, terms. ULBs across the country will be,
impression about the ULBs was very overall improvement of financial within near future, in the vicinity of the
much in the negative, viz., the correct management, et al. This implies that synchronisation of the chain actions of
In the Twelfth the scope of auditors’ examination City/Draft Development Plan – Annual
Schedule as many of the state of affairs of the ULBs will Development Plan – Financial Budget,
as 18 broad outlines have two aspects – first, examination and will thereby come within the terrain
have been prescribed to suggest of transactions having direct bearing of Outcome Budget.
the areas of functions of the on finance and accounts, and second, The conventional revision of
ULBs. A careful study of the 18- the persistent irregularities and weak- financial budget after six months
point charter of functions will nesses in different areas of functions of operation, would in the changed
help one assess the vast and causing avoidable spending and loss circumstances focus one’s attention
wide range of activities that of revenue. Therefore, developing not only on the receipts/incomes
may bind the ULBs obviously national level broad audit guidelines for or payments/expenditure, but the
to the enormous accountability ULBs will call for clear understanding of physical operational targets would
towards citizens. Auditors share all the components involved in each of as well require study/revision both
great responsibility in this the aforesaid activities. from qualitative and quantitative
connection as the vast areas aspects. The mid-term review of the
of functions of the ULBs will Outcome Budget Exercise Development Plan, as will be required
naturally involve huge financial Outcome Budget is another area which to reorient it with real-life situation,
transactions, and common will change the planning process vis- might lead to the re-prioritisation
citizens’ intent must be to get à-vis budgetary control exercise to of project proposals resulting
assured of the healthy financial an enormous extent. Following the appropriate reflection in the ADP for
discipline. implementation of City Development the subsequent years. The ADP thus

54 THE CHARTERED ACCOUNTANT November 2010


735 AUDITING

Audit gains between original estimates, revised will apply. In the present write-up,
tremendous estimates and the actual figures? the major part of the discussion on
importance in the • How minimum is the supplementary examination of opening balance sheet
said area of synchronization of demand? will be skipped. 1
the chain actions of City/Draft • Are the projections unreal and
Development Plan – Annual unachievable? System Study in
Development Plan – Financial • How user-friendly and readable Computerised Environment
Budget. The planning process, the are the budget documents? In relation to the examination of annual
linking of financial outlay to the • Can the Budget be accepted as a accounts vis-à-vis compilation at
planned projects and activities reliable MIS tool? the year end, auditors’ first task is to
to draw up budget estimate, Audit will check the Budget Variance study the system of computerised
mid-term review of development Report (BVR) and examine: environment. The computerised
plan, revised budget, variance • whether the BVR is analysed at environment may mean application of
analysis of financial figures the overall organisation level of the one or more modules in the individual
and physical data – all these ULBs? ULBs on stand-alone basis, or an
will come under the scanner of • whether the BVR is analysed at e-Governance system installed in
auditors. each Budgeting Centre? all the ULBs of a state either through
• whether the BVR is analysed on individual and independent servers or
modified would serve as input to the quarterly basis? through the Central Data Monitoring
Revised Budget Estimate. The process • whether the variance report is Centre (CDMC). Prospective auditors
of budget will, therefore, involve analysed to ascertain Reasons for of the ULBs have to keep in mind that
ascertainment of financial figures with Variance and to regularly take up to follow the codified Chart of Accounts
reference to projects and physical Corrective Measures. as prescribed in the NMAM is almost
operational targets. Any review of the impossible without using software that
financial figures will naturally stem Audit in Financial Sector is capable of exhibiting accounting
from study of the circumstances In the financial sector of the ULBs, results fully or partially under Function,
involving projects and physical reforms for mobilising internal Functionary, Field and Fund codes
operational targets. Budgetary Control and external financial resources, separately.
exercise would, therefore become transparency and disclosures, an Ministry of Urban Development,
more broad-based. Favourable and overall internal control system as GOI has made a compulsive obligation
adverse variance analysis would apply tools for better monitoring get utmost on the ULBs availing themselves
both to financial figures as well as importance in the changed scenario of of the financial assistance under
quantitative and qualitative physical greater expectations of citizens from Jawaharlal Nehru National Urban
targets and outcomes. Audit gains ULBs. The NMAM acts as a precursor to Renewal Mission (JNNURM) to install
tremendous importance in the said these activities since installing accrual- e-Governance system.The Ministry has
area of synchronization of the chain based double entry accounting will already specified the areas of functions
actions of City/Draft Development Plan greatly help in collection and collation to be brought under e-Governance
– Annual Development Plan – Financial of relevant data. For the first-time audit system in “Hand Book on Service
Budget. The planning process, in Finance and Accounts sector in Level Bench Marks for e-Governance
the linking of financial outlay to the the accrual accounting environment, in Municipalities”.2 In Section II of
planned projects and activities to draw auditor will need to cover two aspects the Hand Book (Pages 39 – 147)
up budget estimate, mid-term review – (a) examination of opening balance the following Service Level Bench
of development plan, revised budget, sheet which will be the first step Marks have been indicated under an
variance analysis of financial figures of migration from traditional single integrated e-Governance system:
and physical data – all these will come entry to accrual-based double entry Birth/Death Registration
under the scanner of auditors. accounting, and (b) examination of Calculation and Payment of
Audit will also assess perfection in annual accounts vis-à-vis compilation Property Tax
ULBs’ Budget through queries, e.g., at the year end. From the second Payment and Management of
• How minimum are the variations year onwards, only the second part Utility Bills
1
Interested readers may kindly refer to the present author’s article entitled “Conversion of ULB Accounting System by Proper Mix of Internal Workforce
and External Agency” published in the Chartered Accountant – Volume 56, No. 09, March 2008 where an indicative checklist was presented. The
checklist will inter alia help in covering the major areas for verification of the correctness of the opening balance sheet.
2
Visit website “http://jnnurm.nic.in” to see the above Hand Book.

THE CHARTERED ACCOUNTANT november 2010 55


AUDITING 736

Grievances Handling codes of (a) Function, (b) Functionary, In regard to recovery of operation
Building Plan Approval (c) Field, and (d) Funds. All accounting and maintenance cost (such as –
e-Procurement and Project/Ward entries should be booked Function- in connection with water supply,
Works wise, Functionary-wise and Field-wise. sanitation, garbage removal, etc.),
Solid Waste Management System For the present, Municipal Fund is the auditor needs to enquire as to whether
Licenses common fund with Major and Minor the attempt to recover cost includes
Accounting System Funds categorised within it. Accounting recovery of capital as well as operation
Personnel Management System should be done strictly in accordance and maintenance cost – whether the
In the circumstances, system study with these codes without which Budget recovery is made through consolidated
comes as the first major obligation of Estimate and Revised Budget Estimate service charge or by the application
auditors of the ULBs, including the would not be generated from the of service-wise separate charges –
study of system integration, system system as prescribed in the NMAM. whether the process of recovery is
security and sustenance of the consistent with the decision of full
system. While conducting usual audit Grants and Other Funds, cost or partial cost recovery – whether
checks in respect of different modules Cost of Utilities and there exists a well defined policy of
of e-Governance system, auditor Services, Optimal Use of pricing, viz., cost-based pricing, or
has to understand the operational Assets target pricing including a rate of return,
flowchart, linear relationship between In course of routine checking of or pricing on a sliding scale based on
all the modules, integration of finance transactions, special emphasis should marginal costing. Auditor may come
and accounts and other modules, – in view of the recommendations of across situations when pricing will be
and accordingly formulate the audit the 11th Finance Commission, be given dependent on competitive environment
programme. While different codes on utilisation of grants and other funds, emerging out of extraneous political
used in different modules have to be determination of cost of important factors. Such situations will call for fair
studied and understood with reference utilities and services and recovery of and professional reporting.
to the subjective application of codes such costs, proper accounting and Audit-checks to test the position
in absence of the standard codes for optimal uses of assets, and the like. of assets management will involve
different modules, in the case of finance In relation to grants, auditor needs to examining whether assets used for
and accounting module the standard check if grants are being utilised for the In course of
codification structure as prescribed in purpose for which they are received – routine checking of
the NMAM will be hopefully followed whether there is any diversion of grant transactions, special
across the country. Audit checks on funds and if so, whether the diversion emphasis should – in view of
day-to-day accounting will first ensure has been properly reflected in accounts the recommendations of the
that the 7-digit Primary Accounting – and whether the utilisation certificates 11th Finance Commission, be
Code has been correctly applied for grants are in agreement with the given on utilisation of grants
with Major head – 3 digits, Minor actual utilisation of funds. In respect and other funds, determination
head – 2 digits, and Detailed head – of loans, the checking should include of cost of important utilities
2 digits (with Secondary Accounting whether secured and unsecured and services and recovery of
code of 3-digits) as prescribed in the loans are taken for valid reasons and such costs, proper accounting
NMAM. Any deviation made from the at minimum cost – whether there was and optimal uses of assets,
prescribed 7-digit Primary Accounting any alternative source of financing and the like. In relation to
Code by the ULBs of any state will – whether principal and interest grants, auditor needs to check
cause difficulties for them in future in amounts of loans are being repaid as if grants are being utilised for
that for any national-level compilation per schedule. Similarly, audit checks the purpose for which they are
of codification-wise results for the in respect of funds received under received – whether there is any
ULBs, such states will face problems Deposit Works should ascertain diversion of grant funds and
of conversion from codes used to whether funds received against if so, whether the diversion
codes prescribed in the NMAM. Apart Deposit Works from Zilla Parishads/ has been properly reflected in
from the 7-digit Primary Accounting MPLAD/MLA fund (BEUP) or from any accounts – and whether the
Code, the other important aspect to other source for specific works, are utilisation certificates for grants
be considered is the booking of all utilized for the purpose for which the are in agreement with the actual
accounting entries under the given same were received. utilisation of funds.

56 THE CHARTERED ACCOUNTANT November 2010


737 AUDITING

Accounting of major auditor’s attention for proper accounting “Capital Expenditure” in the financial
items of assets and thereof. One such special item is Capital statement. Alternatively, Government
liabilities has been Expenditure without right to assets. of India may authorise state
fairly dealt with in the NMAM ULBs often pay hefty sums of money governments to create a detailed head
from which the auditor’s lines to the Electricity Authority for arranging code describing “Capital expenditure
of action can be conceptualized street lighting within their respective without right to assets”, under minor
and drawn. However, certain municipal jurisdiction. Such amounts head code 80 describing “Other Fixed
items not discussed in the are generally paid as cost for light Assets” under major head code 4-10
NMAM, nevertheless quite posts, cables and other accessories, describing “Fixed Assets”. Creation of
significant both in terms of apart from the usual service charges of the said primary accounting code will
value and accounting treatment, the Electricity Authority. The ownership also call for the creation of a detailed
will deserve auditor’s attention to the light posts, cables and the head like “Write-off one-fifth of capital
for proper accounting thereof. related accessories in such cases is expenditure without right to assets”
One such special item is Capital not transferred in favour of the ULBs. with an appropriate detailed head code
Expenditure without right to Similarly, ULBs often pay to Public under minor head code 80 of the major
assets. Health Department or other State head code 2-72. Auditor’s professional
Government/autonomous bodies comments would be important for the
discharging primary functions such substantial amounts as contribution appropriate treatment of these items
as water supply, cleaning operations, to the construction of public utility on the part of Government of India and
sewerage treatment, water treatment infrastructure, maybe, covering more the state governments.
etc. are in optimum use – whether there than one ULB in a cluster, e.g. installing
is any loss of revenue or additional trans-municipal water supply system Audit Approach at Formative
expenditure for the inefficiencies of and laying pipe lines, long roads, etc. Stage
such assets – how best they can be In such cases the constructing agency Besides, auditor should make certain
efficiently run – whether other assets generally operates and maintains the important disclosures in the notes
of the municipalities like parks and same even after the construction is on financial statements, viz., amount
playgrounds, tourist spots, heritage completed and put to use. The subject- of contracts entered into in respect
buildings, etc. are in proper shape to assets are not handed over to any of capital works but no work started,
act as good sources of revenue and ULB. The situations are somewhat claims against ULB awaiting judicial
square up the current loss of revenue similar to the one mentioned in para decision, escalation claims made
or opportunity loss – whether there 10 of the ICAI’s Guidance Note on
are some idle assets such as parking Treatment of Capital expenditure Auditor should make
space, open lands, etc., which are not represented by assets during certain important
suitable for best use and purposes in Construction period, and the Guidance disclosures in the
the interest of citizens, simultaneously Note in this case recommends to notes on financial statements,
making it possible for the civic body disclose the expenditure in the balance viz., amount of contracts entered
to generate some income out of them. sheet under the general heading of into in respect of capital works
A candid professional reporting is “Capital Expenditure” subject to two but no work started, claims
required also in this case. conditions – first, the description of against ULB awaiting judicial
this specific item on the balance sheet decision, escalation claims
Treatment of Items for should be such as to indicate quite made by contractors, any other
Which Specific Prescription clearly that the capital expenditure is claims not acknowledged as
is Not Available not represented by any assets, and the debts, assets remaining with
Accounting of major items of assets second, the capital expenditure should ULB without title deed, assets in
and liabilities has been fairly dealt with be written off over the approximate permissive possession without
in the NMAM from which the auditor’s period of its utility or over a relatively any economic benefit being
lines of action can be conceptualised brief period not exceeding five years, enjoyed, litigated receivables
and drawn. However, certain items not whichever is less. The format of Balance from taxes and other revenues
discussed in the NMAM, nevertheless Sheet prescribed in the NMAM will not collected, guarantee given by
quite significant both in terms of value require addition of a new major head to ULB for elected representatives/
and accounting treatment, will deserve provide scope to accommodate such staff, and the like.

THE CHARTERED ACCOUNTANT november 2010 57


AUDITING 738

by contractors, any other claims The financial Audit or the C&AG in discharge of
not acknowledged as debts, assets statements and their responsibilities would be in
remaining with ULB without title deed, balance sheet of addition to such an audit.
assets in permissive possession the ULBs should be audited • The existing arrangement between
without any economic benefit by an Auditor in the manner the C&AG of India and the State
being enjoyed, litigated receivables prescribed for audit of Governments with regard to
from taxes and other revenues not Government Companies under providing Technical Guidance
collected, guarantee given by ULB for the Companies Act, 1956 with and Supervision (TGS) over
elected representatives/staff, and the the difference that in the case maintenance of accounts and
like. It is noteworthy that this changed of audit of these local bodies, audit of PRIs and ULBs should
environment of newly introduced the C&AG should prescribe be institutionalised by making
accrual accounting, planning guidelines for empanelment of provisions in the State Laws
and development procedure, the Chartered Accountants and governing local bodies.
e-Governance and the overall the selection can be made by • Audit reports on local bodies
professional management for the the State Governments within should be placed before the State
ULBs as conceived, in consonance these guidelines. The audit to be Legislature and these reports
with the overhauling and restructuring done by the Local Fund Audit or should be discussed by a separate
of the total management of the ULBs the C&AG in discharge of their committee of the State Legislature
under the JNNURM, are at present at responsibilities would be in on the same lines as the Public
the budding stage. All these processes addition to such an audit. Accounts Committee (PAC).
will surely pass through various phases Administrative Reforms Commission • Each State may ensure that the local
of trial and error and check-points on Local Bodies. The report states bodies have adequate capacity
to finally reach the optimum levels of that a number of recommendations to match with the standards of
efficiency. Audit is perhaps the most of the Sixth Report of the Second accounting and auditing.
significant check-point which can Administrative Reforms Commission • The system of outcome auditing
direct the derailed lines of action to the titled “Local Governance – An should be gradually introduced.
right track by its objective critique. The Inspiring Journey into the Future” has For this purpose the key indicators
current period of time can be called been accepted by Government of of performance in respect of a
construction period for the ULBs’ India. Among the recommendations government scheme will need
journey towards professionalism. accepted by Government of India, the to be decided and announced in
Hence, at this formative stage, audit’s following may be found relevant and advance.
approach should be more oriented to interesting for chartered accountants: • To complement institutional audit
offering suggestions for improvement • The accounting system for the arrangements, adoption and
of the weak areas of activities so ULBs as provided in the National monitoring of prudent financial
that the competent authorities can Municipal Accounts Manual management practices in the local
comfortably sail through a learning (NMAM) should be adopted by the bodies should be institutionalised
process, and comprehend exactly State Governments. by the State Governments by
what deliverables are expected of • The financial statements and legislating an appropriate law on
them from the citizens. Also, audit can balance sheet of the ULBs should Fiscal Responsibility for Local
really focus on subjects of relevance be audited by an Auditor in the Bodies.
which may not have hitherto given birth manner prescribed for audit of The above report suggests that
to discourses at adequate scale, even Government Companies under Chartered Accountants are most likely
though absolutely desirable. the Companies Act, 1956 with the to be awarded with audit assignments
difference that in the case of audit of ULBs across the country. It is
Chartered Accountants’ of these local bodies, the C&AG therefore imperative that Chartered
Concern should prescribe guidelines for Accountants will take the onus of
In relation to Arrangements in Local empanelment of the Chartered contemplating the pros and cons of
Bodies Audit & Accounts, office Accountants and the selection can ULB audit beforehand. This article
of the C&AG has come out with a be made by the State Governments aims at providing some inputs to the
Report 3 which inter alia includes within these guidelines. The audit designing of the audit programme in
recommendation of the Second to be done by the Local Fund this connection.n

3
Visit website “www.cag.gov.in/html/localbodies.htm”.

58 THE CHARTERED ACCOUNTANT November 2010


739 INTERNATIONAL TAXATION

Royalty & Fees for Technical Service– Analysis of


Recent Judgments of Authority of Advance Rulings

The globalisation of Indian economy and the progressive development that has taken place in recent years
have allured the multi-national corporations to enter into all types of business and trade formats in India
be it as own or engaging through domestic partners and channels. One of the significant matters arising
out of such international trade is the taxability of complex and widely debated issues like Permanent
Establishments, taxation of Royalty and Fees for Technical Services (“FTS”), Dividends, Cross Border Capital
Gains, etc. Whether the country in which the recipient of income is resident has a right to tax the income
generated from an international transaction or the country from which the Source of income is derived has
the right to tax the income. To resolve these issues and to avoid taxation of the same income in more than
two countries, most of the countries enter into bilateral agreements known as Double Taxation Avoidance
Agreements (‘DTAA or tax treaty’), wherein the rights of the country to tax a particular source of income are
clearly determined. This article focuses on recent judicial precedents delivered by Authority of Advance
Rulings (“AARs) in India in respect of taxability of Royalty and FTS to the service/technology provider.

Background China, Ceylon and other countries


Kautilya’s Arthasastra deals with the and levy known as a “Vartanam” was
system of taxation in a real elaborate and collected on all foreign commodities
planned manner. Kautilya described in imported in the country. There was
detail, the trade and commerce carried another levy called “Dvarodaya”
on with foreign countries and the active which was paid by the concerned
(Contributed by the Committee of Interna-
tional Taxation of the ICAI. Comments can interest of Mauryan Empire to promote businessman for the import of foreign
be sent to citax@icai.org) such trade. Goods were imported from goods. With the change in times

THE CHARTERED ACCOUNTANT november 2010 59


INTERNATIONAL TAXATION 740

nomenclature changed and Vartanam Royalty and taxed in the state in which income
or Dvarodya became custom duties FTS arise from arises on gross basis. Most of treaties
or import duties but basic concept of commercialisation provides rate of taxation of 10 per cent
levy of taxes on import of goods and of intellectual property rights. or 20 per cent for such payment.
services continued. Royalty is defined under the Concept of “make available” is
The globalisation of Indian economy Income-tax Act, 1961 to mean of a huge litigation in India and there
and the progressive development that sum payable for the use or right are numerous judicial precedents
has taken place in recent years have to use intellectual property like in this respect. As held consistently
allured the multi-national corporations patent, invention, model, design, by judiciary in India and overseas
to enter into all types of business and secret formula or process or countries as well as by OECD and
trade formats in India be it as own or trade mark or similar property other commentaries technology will be
engaging through domestic partners and any industrial, commercial considered as “made available” when
and channels. One of the significant or scientific equipment. Any the person acquiring the service is
matters arising out of such international payment made in relation enabled to apply the technology on his
trade is the taxability of complex and to imparting information or own without the aid of service provider.
widely debated issues like Permanent any other services rendered Unless the Litmus test of “make
Establishments, taxation of Royalty and in connection with the said available” is not satisfied, the payment
Fees for Technical Services (“FTS”), properties is also termed as cannot be characterised as FTS/
Dividends, Cross Border Capital Gains, Royalty. The definition provided FIS (wherever provided in DTAA) and
etc. Whether the country in which the in the treaty is largely the same, taxability is curtailed. Thus the scope
recipient of income is resident has but is more restrictive. of FTS gets considerably restricted in
a right to tax the income generated Royalty. The definition provided in the case where the treaties contain an FIS
from an international transaction or treaty is largely the same, but is more clause.
the country from which the Source of restrictive.
income is derived has the right to tax The term FTS is defined under the Current Trends
the income. To resolve these issues Act to include any payment made for While the Revenue authorities are
and to avoid taxation of the same rendering technical, consultancy and striving towards bringing maximum
income in more than two countries, managerial services. The definition in possible incomes within the ambit of
most of the countries enter into bilateral the treaty is more or less the same, Royalty or FTS, on the other hand the
agreements known as Double Taxation but most of the treaties do not include assesses are attempting to avoid such
Avoidance Agreements (‘DTAA or managerial services within the ambit classification since income which is not
tax treaty’), wherein the rights of the of FTS. Further, treaties with certain classified as Royalty or FTS is business
country to tax a particular source of countries such as US, UK, Singapore, income and in absence of PE in the
income are clearly determined. Portugal, etc have an additional source state the same is taxable only in
criteria of “make available technical the state where the recipient of income
Meaning of the Terms – knowledge, skill etc” for a payment to is resident. This divergence of interests
‘Royalty and FTS’ qualify as FTS. Some of the treaties is the cause of much litigation.
Royalty and FTS arise from term the FTS as “Fees for Included In order to avoid perpetual litigation
commercialisation of intellectual Services” (“FIS”). Simply put, FTS/ tax payers are increasingly resorting
property rights. Royalty is defined FIS means rendering of technical, to the Authority of Advance Rulings
under the Income-tax Act, 1961 (‘Act’) consultancy and managerial services (‘AAR’). A ruling by the AAR is binding
to mean sum payable for the use or and make available the technical skill, only on the Applicant, in respect of
right to use intellectual property like knowledge, experience, know-how, or the transaction in relation to which the
patent, invention, model, design, secret processes to the recipient. The concept ruling has been sought and on the Tax
formula or process or trade mark or of make available is interpreted and Authority, in respect of the Applicant
similar property and any industrial, explained in detail with examples in and the said transaction, unless, there
commercial or scientific equipment. the ‘Memorandum of Understanding is a change, either in law or in facts,
Any payment made in relation to concerning fees for included services on the basis of which the advance
imparting information or any other in Article 12’ forming a part of India –US ruling was pronounced. However, the
services rendered in connection with DTAA. Generally, as per the provisions advance rulings do have a persuasive
the said properties is also termed as of treaties, Royalty and FTS can be value and the Courts in India and the

60 THE CHARTERED ACCOUNTANT November 2010


741 INTERNATIONAL TAXATION

appellate authorities do recognise the may also provide services like between the foreign architect and
principles and ratio laid down by the identifying cost saving schemes, Indian associate as per the agreement
AAR, while deciding similar cases. assisting in the bidding process, terms. Payments to Indian sub-
In the ensuing article we have selection of contractor etc. depending contractors/associates are usually
discussed some interesting issues upon the terms of contract. Sometimes, made by Indian companies directly.
in light of some recent rulings of AAR the foreign companies work jointly with In such cases, assesses have been
dealing with Royalty or FTS. an Indian sub-contractor/associate arguing that the agreement should
architect. A part of project, like be considered as an integrated one
ISSUE I development of design, drawings and and should be considered as sale of
Payment for architectural services, related dossiers and other consultancy designs and plans and not rendering
designs and drawings – Whether services are rendered by the foreign of any technical services. It was further
Fees For Technical Services or Sale counterpart from overseas and the argued that as the documents/plans
of designs and plans? actual implementation and cons- are sent from overseas countries to
With the modernisation in the truction supervision is the respon- the Indian companies, the sale has
Construction industry arena, Indian sibility of the Indian team. been concluded outside India and in
companies are increasingly hiring The consideration is divided view of absence of PE of the foreign
the foreign companies to harness companies in India, payments made
An agreement in
the benefits of their world class to overseas countries are not taxable
case of architectural
architectural expertise and experience in India.
services has to be
for developing super structures in India AAR has recently examined the
read having regard to the
as well. In such a scenario, typically issue in case of GMP International
scope and objective. A holistic
the work is broadly divided into three GmbH (AAR No 827 of 2009 reported
view needs to be considered
parts though covered in one single at 321 ITR 411)) and HMS Real Estate
in viewing the agreement
agreement: Pvt. Ltd. (A.A.R. No. 832 of 2009)
without being carried away by
Stage I: Development of programme, wherein arguments of the assessees
the apparent tenor of some of
master plan and concept are negated and following principles
the clauses of the agreement. If
designs have been laid down for adjudging the
the essence of any agreement
Stage II: Preparation of design taxability of such transactions.
is to obtain consultancy and
development drawings and • Basic designs services including
technical services, the same
related documents; preparation of master plan, concept
cannot be read otherwise and
Stage III: Implementation of designs design, schematic design, design
the payments made should be
and supervision of actual development and construction
categorised as FTS only and not
construction documents, assistance in bidding
outright sale of designs and
Additionally, the foreign companies and contractors’ selection process
drawings.

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INTERNATIONAL TAXATION 742

Judiciary has
consistently held
that technical skill,
knowledge, etc. can be said to
be made available only when
the recipient of the service is
enabled to apply the technology
or know-how. A related ruling
of the AAR has confirmed the
said principle and clarified that “design and consultancy services” view needs to be considered in viewing
support services, sharing of and not merely sale of designs and the agreement without being carried
information, giving guidelines drawings. Further, in case of HMS away by the apparent tenor of some
/ plans to achieve uniformity, Real Estate, AAR also highlighted of the clauses of the agreement. If the
brand building and cost the inference to the definition of essence of any agreement is to obtain
efficiency do not amounts to FTS in the India- US tax treaty1 consultancy and technical services the
“make available” any technical • AAR has also observed that they same cannot be read otherwise and the
knowledge or experience and would not like to express an payments made should be categorised
hence not subject to tax in opinion on the question whether as FTS only and not outright sale of
India. the consideration attributable to designs and drawings.
and consultancy during the the transfer of designs and plans Additional point
construction phase are all part can be brought within the scope Further, the AAR has held that
of broad nature of architectural of the clause – “payment received concessional rate of 10 per cent
services and the agreement for information concerning in accordance with provisions of
cannot be read in isolation and industrial, commercial or scientific Section115A would be applicable
the components of the contract experience” occurring in the at the time of tax withholding. As per
cannot be placed in water-tight definition of “royalty” vide Article the provisions of Section 115A of the
components. The agreement shall 12.3(a). Act concessional rate is applicable,
be read as a whole and not in • Remittances made to the overseas provided the agreement is approved
parts. architectural firm for the purpose by the Central Government; or where
• The services are in the nature of FTS of payments to consultants in it relates to the matter included in the
as it transfers technical plans and overseas country would not be Industrial Policy. Divergent views are in
designs to the Indian companies. subject to tax in India as the existence on these. However, it appears
AAR further, observed that the services are rendered outside that the AAR has not examined the
architectural services can also be India. (needs to be examined in controversy in detail while deciding the
brought within the fold of the first view of retrospective amendment to issue of applicable rate of tax.
part of clause (b) starting with Section 9)
the expression “make available”. • Payments made towards other ISSUE 2
However, AAR has categorically reimbursable expenses cannot be Payment for Support Services from
observed that it is unnecessary to considered income as chargeable Group Companies – “Make available”
express a final view in the matter. to tax in the hands of architectural or not?
• The approach should be to firm. Today, Multinational Companies
ascertain what is the true scope Conclusion (MNCs) operate across the
and dominant object of the An agreement in case of architectural globe providing same services
contract. The essence of the services has to be read having regard or manufacturing same goods in
transaction in reality is to obtain to the scope and objective. A holistic various parts of the world. Generally,

1
Article 12 (4) of India – US DTAA
“For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any
technical or consultancy services (including through the provision of services of technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in
paragraph 3 is received ; or
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical
plan or technical design.”

62 THE CHARTERED ACCOUNTANT November 2010


743 INTERNATIONAL TAXATION

The dispute arises in case of those matters, guidelines, templates, best


countries which have ‘make available’ practices and strategies that could
clause in the definition of FTS in be adopted in various spheres of
the tax treaty. As discussed above their business. Dissemination of
generally speaking technology would information, furnishing guidelines and
be considered to have been made suggesting plans of action aimed at
available only when the purchaser of uniformity and seamless quality in
the services is enabled to apply the business dealings of participating
technology on his own without the group entities do not per se amount
aid of service provider. The issue is to making available to them technical
whether the support services discussed knowledge and experience possessed
here make available any technical by overseas group companies. AAR
knowledge, skill, know-how etc to the specifically observed that – “Even if we
Indian counterparts so as to constitute proceed on the basis that some of the
FTS/FIS as per the provisions of the tax services have the flavour of imparting
treaty. technical knowledge and experience
MNCs would like to follow similar The above issue has been to the recipient of service, the further
strategies, policies, plans, methods, discussed by AAR in the case of Bharati question is whether such provision of
procedures etc at all the locations. AXA General Insurance Co.Ltd. (AAR services enables the person acquiring
This standardisation results in brand- No 845 of 2009 reported at 2010-TII- the services to apply the technology
building and uniformity on one hand 30-ARA-INTL) contained therein. This test specifically
and reduces the duplication of efforts The said judgment has been laid down in clause (b), in our view, is not
on other. analysed with reference to DTAA satisfied and the legal position clarified
Today the Indian subsidiaries/ between India and Singapore. The by this Authority while interpreting more
associates receive continuous definition of FTS given in the tax treaty or less similar Treaty provisions applies
assistance from parent/group is similar to the India - US tax treaty. with greater force to the present case in
companies such as business support, The AAR has proceeded to analyze the view of the narrow language employed
marketing support, information interpretation of term ‘make available’ as in the India-Singapore Tax Treaty.”
technology support, strategy support, per the meaning given in Memorandum AAR further observed in the case of
policy formation assistance ranging of Understanding (“MOU”) given in the cost allocation in respect of Information
from personnel to managing public India- US DTAA. The same is on the Technology services that – “It will be
relations, communications and risk etc. legal position that merely because too much to say that by providing such
Regarding compensation, the group treaties are with different countries does
Services rendered
companies are compensated on cost not mean different meanings have to
by accreditation
plus mark-up basis or the Indian entity be assigned to same words especially
institution for
is allocated a portion of cost on some when both have been entered into by
granting accreditation
rationale basis depending on the terms the same country on the other side,
certificate cannot be said
of agreement. namely India2.
to have made available any
It is well accepted that these In light of the same AAR has held
technical knowledge, skills etc
services partake the color of technical that some of the services undoubtedly
and hence the same cannot
or at times consultancy services. As per have the flavor of management,
be classified as FTS/FIS. The
the provisions of the Act, any payment consultancy or technical services.
AAR ruling is consistent with
made for technical, managerial or But the more important question to
the judicial trend in respect
consultancy services is considered as be answered is whether the group
of interpretation of “make
FTS and hence is liable to tax. Majority companies make available to the Indian
available”. The AAR has rightly
of the Double Taxation Avoidance counterparts any technical knowledge,
held that organisation are
Agreement that India has entered into experience, skills or know-how by
apprised by the accreditation
with other nations have definition of FTS providing the ‘support services’ or not.
institute for any shortcomings
similar to the one provided in the Act. What all was provided by the overseas
or need of improvement does
Hence, payments to those countries group companies was information
not amounts to technical service
may be liable to tax as FTS. on various business and commercial
within the meaning of FTS.
2
Raymond Limited vs. DCIT [2003] 86 ITD 791

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INTERNATIONAL TAXATION 744

services (assuming they are technical confidence/comfort that goods and Characterisation of
or consultancy services), the applicant services meet established standards. income for supply /
receiving the services is enables to During the process of their assessment use of software is an
apply the technology contained therein accreditation agencies evaluates the issue of debate in India since
i.e. the technology, knowledge, skills, capabilities, competence, potential long. A ruling by the AAR further
etc. possessed by the service provider and infrastructure possessed by reiterates that payments for
or technical plan developed by the such organisations in light of certain computer software should be
service provider. We do not find anything set standards and parameters. determined, having regard to
in the IT support services that answer Subsequently, they apprise the nature and extent of rights
the description of technical services as organisations of its shortcomings granted to the purchaser and
defined in the Treaty.” and deficiencies, if any, or given the provisions of copyright
Conclusion an opportunity to rectify. Once the law would be relevant for this
Judiciary has consistently held that assessment meets their standards purpose. The AAR has also
technical skill, knowledge, etc can be these agencies accredit the referred and relied on the OECD
said to be made available only when organisations. commentary while arriving
the recipient of the service is enabled to The question under consideration at the conclusion and hence
apply the technology or know-how. The is whether the accreditation services confirms the relevance of OECD
above referred ruling has confirmed the provided to the Indian companies are commentary even on the aspect
said principle and clarified that support in the nature of FTS/FIS and subject to on which India has expressed
services, sharing of information, giving tax in India or not. certain reservations.
guidelines/plans to achieve uniformity, The similar issue has been dealt the CABs which are utilized by CAB in
brand building and cost efficiency do with by AAR in Joint Accreditation conducting its business. The nature
not amounts to “make available” any System of Australia and New Zealand of activity undertaken by the applicant
technical knowledge or experience (AAR No 838 of 2009 reported at 2010- clearly rules out any such inference.”
and hence not subject to tax in India. TII-28-ARA-INTL) Conclusion
The AAR has observed that though Services rendered by accreditation
ISSUE 3 Accreditation agency evaluates the institution for granting accreditation
Payment for Accreditation service – capabilities, competence, potential certificate cannot be said to have made
whether FTS or not? and infrastructure possessed by such available any technical knowledge,
The Accreditation agencies organisations they do not transfer of skills etc and hence the same cannot
accredit various organisations which any skills or technical knowledge or be classified as FTS / FIS. Ruling is
provide third party certification experience or process or know-how to consistent with the judicial trend in
and / or inspection services. Such the Indian organisations. The fact that respect of interpretation of “make
accreditations provide users the such organisations are apprised of its available”. The AAR has rightly held
shortcomings and deficiencies, if any, that organisation are apprised by
or given an opportunity to rectify, does the accreditation institute for any
not reasonably lead to the inference shortcomings or need of improvement
of “making available” the skills, does not amounts to technical service
technical knowledge etc., possessed within the meaning of FTS.
by the applicant. The fact that the
organisations are benefited from the ISSUE 4
accreditation has no bearing on the Supply of Software which is neither
issue. AAR categorically observed off the shelf nor customised to
that- “CAB, will of course, be benefited reseller – Whether Royalty?
by the accreditation certificate issued This is the most litigious issue
by the applicant but that fact has hardly as regards sale of software/ right to
any bearing on the point whether use the software is concerned. The
“make available” criterion has been Revenue authorities have always been
satisfied or not. Viewed from any angle, taking a position that payments made
it cannot be said that the applicant is by an Indian assessee in respect of
imparting any knowledge or skills to software would classify as Royalty and

64 THE CHARTERED ACCOUNTANT November 2010


745 INTERNATIONAL TAXATION

assesses have maintained a stand that commercial exploitation of the software.


these payments are not in the nature Therefore, the applicant contended
of Royalty. that the payment was not in the nature
This issue has been dealt with by of Royalty under Article 12 of the Indo-
AAR in M/s. Dassault Systems K.K., Japan treaty. Further, it was contended
(AAR No 821 of 2009 reported at 2010- that the income should be treated as
TIOL-02-ARA-IT ) business income taxable under Article
In the given case, the applicant, 7 of the treaty and in absence of a PE
a Japanese company is selling of the applicant in India; the income
standardised but special purpose cannot be taxed in India. use of copyright have been conferred
software to its Indian reseller for The Revenue authorities contended on him.”
onward sale to the end user in India. that the license fees paid by the end The AAR observed that in the given
The invoices were raised by the user in India is for transfer of copyrights case, the core of the transaction is to
Japanese company on the Indian in computer software and therefore the authorize the end user to have access
reseller. The applicant contended payment should be treated as Royalty and make use of the licensed software
that the transaction with the end user for use of process. Further, the Revenue products over which the Applicant has
is transfer of a copyrighted software authorities also contended that the exclusive copyright, without giving
product and not the copyright in such reseller is a dependant agent of the any scope for the end user or the
software. The copyright continues to applicant in India, since the reseller reseller to deal with them any further.
be vested with the Japanese company. is performing functions on behalf of The AAR categorically held that – “In
Neither the end user nor the reseller the applicant and has the authority to the instant case, the end-user is not
has any rights which would enable conclude contracts in India. given the authority to do any of the acts
The AAR noted that Copyright, contemplated in sub-clauses (i) to (vii)
With the recent which is a species of Intellectual of clause (a) of Section 14, not to speak
development in the Property Rights, belongs to the owner. of the exclusive right to do the said
Income-tax arena i.e. Ownership includes a bundle of rights acts. In fact, the restrictions placed on
introduction of Direct tax Code mentioned in the Indian Copyright Act, the end-user and the VAR which have
(DTC), taxability of Royalty and 1957, directed towards commercial been referred to earlier couples with a
FTS has got a new dimension. exploitation of the copyright. If any of declaration that the intellectual property
DTC has touched two major these rights are parted in favour of rights in the licensed programmes will
components deciding taxability another so that the other person can remains exclusively with the applicant
of payments as Royalty or FTS enjoy that right in the same manner (or its licensors) and the non-exclusive
– rates (i.e. 20 per cent from in which the owner can, it can then and non-transferable character of
10 per cent) and definition, be said that these specific rights, license are all meant to ensure that none
e.g. the definition of Royalty concerning use of copyright, have of the rights vesting in the applicant as
has been enlarged to cover been conferred upon him. The AAR copyright-holder can be claimed or
payment for use/right to use of observed that- “The copyright which is enjoyed by the licensee and that they
transmission by satellite, cable, a species of intellectual property rights will remain intact and are preserved.”
optic fibre or similar technology, belongs to the owner or its assignee It was further observed that –
transfer of all or any rights if any. The ownership thereof carried “Where the purpose of the licence or the
in respect of cinematograph with it a bundle of rights which are by transaction is only to establish access
films & live coverage of events. and large directed towards commercial to the copyrighted product for internal
Similarly, definition of FTS exploitation of this intangible property business purpose, it would not be
would also include payment right. Those rights attached to copyright legally correct to state that the copyright
for development and transfer are enumerated in Section 14 of the itself has been transferred to any extent.
of a design, drawing, plan or Copyright Act, 1957. If any of these It does not make any difference even
software, or any other service rights are parted with in favour of another if the computer programme based on
of a similar nature. These so that the other person can enjoy that to the user is a highly specialized one.
changes in the DTC would have right in the same manner in which the The parting of intellectual property rights
far reaching consequences on owner can, it can then be said that inherent in an attached to the software
the taxability of Royalty those specific rights concerning the product in favour of the lincencee /
and FTS.

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INTERNATIONAL TAXATION 746

customer is what is contemplated by In case of GeoQuest Systems B.V, ISSUE 5


the definition clause in the Act as well the question raised before the AAR Payments made for supply of system
as the Treaty.” The AAR thus held that was whether the income arising to comprising of Hardware + Software
merely authorizing and enabling an the Applicant (Netherlands Company) + Services – Royalty or FTS/FIS?
end user to have the benefit of data or from offshore supply of software would Another interesting situation could
instructions contained therein, without be said to accrue or arise or deemed to be a case where a system is supplied
any further right to deal with them be accrued or arisen in India? under a contract which comprises
independently, does not amount to The AAR categorically observed of hardware, software and involves
transfer of rights in relation to copyright that the crucial clauses in the rendering of services as well. Whether
or conferment of rights to use the Agreement concerning Dassault payment for such a system would be
copyright. Thus it was held that the Systems are substantially similar to considered as Royalty or FTS/FIS?
payment is not royalty either under the the clauses in the Agreement relevant Well, such a question can only be
Act or under the treaty. to the present case. Thus relying answered in the light of the actual facts
The AAR further held that by upon the arguments discussed in the of the case of and substance of the
making use of or having access to the Dassault Systems Ruling, the AAR held contract.
computer programmes or following that the income from offshore supply of Similar issue has been analyzed and
a set of instructions so as to be software cannot be treated as royalty explained by AAR in Airport Authority of
able to effectively use the computer within the meaning of Article 12 of the India, (AAR No 810 of 2009 reported at
programmes would not amount to use India-Netherlands treaty. 36 DTR (AAR) 323
of process. Accordingly, such payments Conclusion In this case, Airport Authority of India
would not fall within the ambit of ‘use of Characterisation of income for supply (‘AAI’) had entered into a contract for
process’ part of the definition of royalty. / use of software is an issue of debate Automation Upgrade for third runway
The AAR observed that- “By making use in India since long. This ruling by the at IGI Airport with a US company. The
of or having access to the computer AAR further reiterates that payments contract involves Raytheon supplying
programs embedded in the software, for computer software should be hardware, software and providing
it cannot be said that the customer is determined, having regard to the services in connection with installation.
using the process that has gone into nature and extent of rights granted to The cost of software is the major
the end product or that he acquired the purchaser and the provisions of component of the contract.
any rights in relation to the process as copyright law would be relevant for this US Company granted the licence
such. Nor can it be said that following purpose. The AAR has also referred on non-transferable, non-exclusive,
the series of instructions so as to able and relied on the OECD commentary royalty-free basis to use the executable
to effectively make use of the programs while arriving at the conclusion and software code and technical
contained in the software amounts to hence confirms the relevance of OECD documentation for use in the automation
the use of process or acquisition of any commentary even on the aspect on system to AAI. It was responsible
rights in relation thereto.” which India has expressed certain for delivering, installing, testing and
reservations. inspecting of the system and providing
Additional Point the necessary information to operate,
In the given fact pattern where: maintain and repair the system. The
• Business of distributor is not software of the automation system
controlled by the principal was the mechanism through which
• Distributor is not negotiating or the information and inputs concerning
concluding the contracts on behalf various technical aspects were
of principal provided to the AAI personnel.
• Order procured by distributor Based on these facts, AAR held
is subject to confirmation by that software provided by US company
principal equipped AAI with the necessary
• Distributor is free to decide its technical skills and operational efficiency
price to run the system. The AAR observed
There is not principal and agent that – “The software of the automation
relationship and the same does not system is the mechanism through
constitute Agency PE. which the informations and inputs

66 THE CHARTERED ACCOUNTANT November 2010


747 INTERNATIONAL TAXATION

concerning various technical aspects software cannot be viewed in isolation.


based on the expertise and experience Software is a part of the package
of Raytheon are made available to the of setting up upgraded automation
AAI personnel which in turn equips system and as stated earlier, it has no
them with the necessary technical skills value unless the supplier shares the
and operational efficiency. By means technical knowledge, information and
of various technical services provided experience with the user and suitably
by Raytheon’s personnel and the equip the personnel of AAI to handle
sharing of their technical knowledge the system by themselves. It needs
and experiences with AAI personnel at training and imparting of valuable
the time of integration with the existing informations and instructions. Viewed in
system and the site acceptance test this background, we are of the view that
and the technical manuals and data the payment made towards software
furnished for putting the system to can be legitimately brought within the
effective use, Raytheon is making fold of Art 12(4) (b) of the Tax Treaty, if
available to AAI its technical knowledge not Art 12(3).”
and skills. In ultimate analysis, the Conclusion
recipient of service is enables to apply The decision of the AAR in Airports
the technology. Viewed from another Authority of India has surprisingly permanent establishment and taxation
angle, the transfer of a technical plan is turned back the wheels of time. It has of Royalty and FTS / FIS. We hope that
also involved in devising and activating surprisingly ignored the jurisprudence the above discussions and analysis
the upgraded automation system. developed over a series of cases throw some light and clarifies certain
Thus, the AAR has given a strange beginning with the decision of the aspects of the most talked about
finding that once the technology has Special Bench of the Delhi Tribunal in issues in International taxation arena -
been embedded in the equipment and the case of Motorola Inc. v. DCIT wherein Royalty and FTS/FIS.
if the purchaser of the equipment is Courts have differentiated a sale of a Moreover, with the recent
enables to use the same it tantamount copyrighted article from a transfer of development in the Income-tax arena i.e.
to making available technical skills, the underlying copyright. Judiciary has introduction of Direct tax Code (‘DTC’),
know-how etc. Further, AAR has consistently held that receipts from an taxability of Royalty and FTS has got a
distinguished ruling of Dassault ordinary sale of software not involving new dimension. DTC has touched two
Systems by stating that the same was a transfer of copyrights would be major components deciding taxability
in respect of standardise software. classified as business profits and not of payments as Royalty or FTS – rates
Interestingly, the AAR has concluded as FTS or Royalty. The AAR has failed (i.e. 20 per cent from 10 per cent) and
that payment made towards supply to appreciate that the standard industry definition, e.g. the definition of Royalty
of software is in the nature of FTS practice of transferring software is by has been enlarged to cover payment
with these findings – “The fact that way of a licence which specifies the for use/right to use of transmission by
the applicant – AAI itself has not terms of usage but does not transfer satellite, cable, optic fibre or similar
been provided with the technology any right in the copyrights that subsist technology, transfer of all or any rights
for developing the software as such in the software. in respect of cinematograph films
does not really make a difference. The and live coverage of events. Similarly,
expression used is: “make available Wrapping Up definition of FTS would also include
technical knowledge, experience or It appears that objective of avoiding payment for development and transfer
skills”. The substance of the transaction, double taxation to a certain extent of a design, drawing, plan or software,
in our view, is rendering of technical is solved but the problem of under or any other service of a similar nature.
and consulting services which make taxation or erosion of tax base still These changes in the DTC would have
available to AAI the technical knowledge, exists and revenue authorities of far reaching consequences on the
experience and skills possessed by different countries are still interpreting taxability of Royalty and FTS. However,
Raytheon in the field and the provision the treating in their own way. Further, only the time would decide whether
of software system is only part of that the development of e-commerce and these changes would reduce the
exercise. The delivery of software free technology transfers raises new existing litigation or add to it. Let’s wait
and the specification of the cost of questions as regards concepts of and watch ourselves! n

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INTERNATIONAL TAXATION 748

Interest, Royalty & Fees for Technical Services


to Non-Residents

The issues of International taxation are becoming more and more important for the day. The proposed Direct
Code Tax (DTC) is also containing changes in the direct tax system to check the tax evasions. The taxation
of Interest, Royalty and Fees for technical services (FTS) depends on the provisions of the Income-tax Act,
1961 and the relevant Double Taxation Avoidance Agreement (DTAA). With the support of Section 90(2), the
assessee has an option to opt for the taxation either under the act or under the DTAA, whichever is more
beneficial to him. [Union of India v/s Azadi Bachao Andalon (2003)(SC)]. Read on to know more.

Introduction Double Taxation Avoidance Agreement


The issues of International taxation are (DTAA). With the support of Section
becoming more and more important 90(2), the assessee has an option to
for the day. The proposed Direct Code opt for the taxation either under the act
Tax (DTC) is also containing changes or under the DTAA, whichever is more
in the direct tax system to check the tax beneficial to him. [Union of India V/s.
evasions. Azadi Bachao Andalon (2003)(SC)]
The taxation of Interest, Royalty Hon’ble High Court of Madras in
CA. Anshuman Chaturvedi and Fees for technical services (FTS) the case of CIT V/s. Copes Vulcan Inc.
(The author is a member of the Institute. depends on the provisions of the (1987) has held that in case FTS does
He can be reached at eboard@icai.org) Income-tax Act, 1961 and the relevant not fall within the ambit of Section 9(1)

68 THE CHARTERED ACCOUNTANT November 2010


749 INTERNATIONAL TAXATION

(vii), recourse cannot be had to the The pertinent questions that arise in Deduction of Tax on Royalty
general provisions of the “business such a factual matrix are whether such and Fees for Technical
connection” under Section 9(1) to tax integrated payments can be subjected Services
the income. to different tax treatment, and whether As regards transfer of payment to
withholding is to be on the net profit a non-resident in consideration of
Presumptive Taxation comprised in gross sums or on the royalty or technical services received,
The Income-tax Act provides that gross sums themselves. Section 195 of the IT Act provides that
a non-resident having sources of In the leading case of Sultan any person responsible for paying to
income situated in India is taxed on Brothers v. CIT, Hon’ble Supreme Court a non-resident any sum chargeable
presumptive basis on most of the has held that the Assessing Officer can under the Act shall at the time of credit
incomes arising in India. The deeming enquire whether the contract could still of such income deduct income-tax
provisions are Section 44D and Section have stood if hypothetically the contract thereon at the rates in force. Income
115A of the Income-tax Act, 1961. were to be split, and the reimbursement by way of royalty or technical services
These provisions read together provide ignored — if it can, then the sums can is chargeable under the IT Act. Thus,
for a special method for computing be subject to different tax treatment, the primary obligation of paying the tax
income by way of royalty or fees for otherwise not. on royalties or technical services is not
technical services in the case of foreign In addition to above there are various on the non-resident himself but on the
companies. The rate of tax is fixed at a judicial pronouncements relating to person who is making such payments
flat 10 per cent of the gross receipts Section 195 the deduction of tax at to him. Failure to comply with this
for royalty or technical services, in sources and on the re-imbursement of provision may result in disallowance of
total disregard of any expenditure expenses. As per the critical analysis the expenditure, interest on the taxes
incurred by the non-resident referred of these cases, if the re-imbursement and penal action.
to in Section 28 to 44C of the Income- amount is very clearly indicated and Clauses (v), (vi) and (vii) of Section
tax Act. Thus, 10 per cent of the gross supported by the invoices, then no tax 9(1) of the IT Act provide that income
receipts to the foreign entity are to be needs to be deducted. However, where shall be deemed to arise in India by
withheld with disregard to the actual the re-imbursement amount is related way of royalties and fees for technical
income accruing to the non-resident. to the fee and the same is mentioned services respectively if the payment
This policy of presumptive taxation in the agreement, then tax needs to be is payable by the Government or a
is grounded on reasons of practical deducted. resident, except in cases where such
convenience like absence of books The Income-tax payment is payable for the purposes
of account, supporting evidences etc. Act provides that a of a business or profession or making
provided they maintain a permanent non-resident having an earning from a source outside India.
establishment in India and comply with sources of income situated in Moreover, payment by a non-resident
the requirements of Section 44A and India is taxed on presumptive is also included in this category if
288 of the IT Act. basis on most of the incomes such payment is for the purposes of
arising in India. The deeming business or profession carried on by
Composite Payments and TDS provisions are Section 44D and such person in India or for the purposes
Very often one comes across Section 115A of the Income-tax of earning any income from any source
agreements in connection with royalties Act, 1961. These provisions read in India. To illustrate, X & Co, an Indian
and fees for technical services wherein together provide for a special resident, enters into a contract with
a resident agrees to pay contractual method for computing income D Inc, a resident of the US, that on
consideration to a non-resident. The by way of royalty or fees for payment of certain sums, D Inc would
consideration consists of two parts, technical services in the case of courier to X & Co certain drawings and
one part is for royalties or technical foreign companies. The rate of diagrams related to construction of iron
services on which the resident is tax is fixed at a flat 10 per cent ore melting plants. Though, in this case
obliged to withhold tax, and the other of the gross receipts for royalty service has not been performed in India,
part is claimed to be non-taxable in the or technical services, in total still withholding tax would become
hands of the non-resident recipient on disregard of any expenditure due. However, if an Indian business
grounds of being mere reimbursement incurred by the non-resident chain were to set up a business in UK,
of expenditure incurred by the non- referred to in Section 28 to 44C and technical services were availed in
resident, hence not liable to taxation. of the Income-tax Act. UK for the purpose of setting up of the

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INTERNATIONAL TAXATION 750

There are two a landmark judgment Ishikawajima- royalty and fees for technical services,
different schools Harima Heavy Industries Ltd. v. DIT had whose source is in India.
of thoughts viz., a given an opposite position from the The government has taken the
school of thought does exist to above, where it was held that a service support of the Source Rule, which is
the effect that the concept of can be taxed in India only when it is recognised in India’s DTAAs and it is
territorial nexus, for the purpose rendered and utilised in India. very much valid. Accordingly, India
of determining the tax liability, To overcome the rule made under may tax any such income or payment
is relevant only for a territorial the Ishikawajima, the Finance Act, which is being paid to a non-resident
tax system in which taxability 2007 was amended by the revenue. by its resident irrespective of the situs
in a tax jurisdiction is confined However such amendment did not of the service. Hence, the situs of the
to the income earned within its changed the position of the law. payer and the situs of the utilisation
borders. Under this system, any Further, the Finance Act 2010 has of services will determine the tax
foreign income that is earned made amendment in the Income Tax jurisdiction.
outside of its borders is not Act by inserting the following clause in In almost all the DTAAs signed by
taxed by the tax jurisdiction, but Section 9: India, the provision relating to taxation
then apart from tax heavens, “It is proposed to provide that of Interest, Royalty and FTS is that these
the only prominent countries the income of non-resident shall be arising in a contracting state and paid
that are considered territorial deemed to accrue or arise in India to a resident of the other contracting
tax systems are France, Belgium, under clause (v) or clause (vi) or clause state may be taxed in that other state.
Hong Kong and the Netherlands, (vii) of sub-Section (1) and shall be However, such amounts may also be
and in those countries also included in the total income of the non- taxed in the contracting state in which
this system comes with certain resident, whether or not- they arise, and according to the law of
anti-abuse riders. In other major (i) The non-resident has a residence that state.
tax systems, the source and or place of business or business Regarding the provision for the
residence rules are concurrently connection in India; or (ii) The non- small services, such providers i.e.
followed resident has rendered services in India. Individuals providing the professional
business, which would be a source of The amendment will take effect, services or independent services shall
income to the Indian business chain retrospectively, from 1st June 1976 and be taxable only in the state unless he
there, such payments would not be will, accordingly, apply in relation to has fixed place of business available
subject to Indian withholding tax. This the assessment year 1977-1978 and to him in the other contracting state
receipt basis of taxation is the object subsequent years. based on the DTAA.
of much criticism and against the spirit The aforementioned amendment In a recent judgement pronounced
of various tax treaties entered into by has made the intention of the by ITAT Mumbai in the case of
India with foreign countries. government very clear to tax all those Ashapura Minichem Limited Vs. ADIT
The Hon’ble Supreme Court in payments in the nature of interest, [2010], where it was held that the FTS

70 THE CHARTERED ACCOUNTANT November 2010


751 INTERNATIONAL TAXATION

paid by an Indian Company to Chinese behind the additional requirement of located outside India was payment for
Company are liable to tax in India even this section is to put a check on the tax use of equipment and hence royalty
if the services are rendered outside evasion and in case of non-resident it [Cargo Community Network Pte Ltd
India. becomes more important because of (289 ITR 355)(AAR)]
There are two different schools of the practical difficulties faced by the Outright sale of engineering
thoughts viz., a school of thought does department for having no jurisdiction calculations, designs and drawings,
exist to the effect that the concept of on the non-residents. etc. by a non-resident entity to a
territorial nexus, for the purpose of Chapter XVIIB deals with the resident entity cannot be regarded as
determining the tax liability, is relevant deduction at source by the payer, royalty [Davy Ashmore India Ltd (190
only for a territorial tax system in which whereas Chapter XVII deals with ITR 626)(Cal. HC)]
taxability in a tax jurisdiction is confined collection and recovery of tax and
to the income earned within its borders. Section 195 falls in Section XVII. On Definition of Interest
Under this system, any foreign income analysis of Section 206AA with Section Both the OECD and UN Model use
that is earned outside of its borders 195, the tax is liable to be deducted at similar words to define the term
is not taxed by the tax jurisdiction, source when the sum is chargeable to interest:
but then apart from tax heavens, the tax under the provisions of IT Act. In Article 11(3) defines the term
only prominent countries that are case, the sum is not taxable, there is “interest” to mean income from debt
considered territorial tax systems are no need to deduct tax at source as well claims of every kind, whether or not
France, Belgium, Hong Kong and the as the Section 206AA will not apply. secured by mortgage and whether
Netherlands, and in those countries In a very recent judgment by or not carrying a right to participate
also this system comes with certain Hon’ble Supreme Court in the case in debtor’s profits, and in particular,
anti-abuse riders. In other major tax of GE India Technology Centre Private income from government securities
systems, the source and residence Ltd. vs. CIT (2010), it has been held and income from bonds or debentures,
rules are concurrently followed. On that ‘the obligation to deduct tax at including premiums and prizes
a conceptual note, source rule of source arises only when there is a sum attaching to such securities, bonds
taxation requires an income sourced chargeable under the act’. Therefore, or debentures. The definition provides
from a tax jurisdiction to be taxed in where the sum paid/payable is not that penalty charges for late payment
this jurisdiction, and residence rule an income in the hands of recipient shall not be regarded as interest for the
of taxation requires income, earned and not chargeable to tax, there is no purpose of this article.
from wherever, to be taxed in the tax need to deduct tax at source and the
jurisdiction in which earner is resident. provisions of Section 206AA would not
Both the OECD and
New Section 206AA :The new be applicable. For instance, where the
UN Model use similar
requirement to furnish the PAN has payment is made for import of certain
words to define
been inserted through the Finance commodity, there is no need to deduct
the term interest. Article 11(3)
No. (2) Act, 2009 vide Section 206AA tax at source.
defines the term “interest”
w.e.f. 1st April 2010 after Section Meaning of the term Royalty & FTS
to mean income from debt
206A of the Income-tax Act, 1961. as per various courts: Fee for use of
claims of every kind, whether
This new section overrides the entire satellite is “royalty” under Act & DTAA
or not secured by mortgage
act and non-furnishing of the PAN [New Skies Satellites vs. ADIT (ITAT
and whether or not carrying a
may lead to a higher tax expenses to Delhi Special Bench)]
right to participate in debtor’s
non-residents. The wordings of this Royalty paid by non-resident
profits, and in particular, income
section are “Notwithstanding anything does not “arise” in India if there is
from government securities
contained in any other provisions of no “economic link” between the PE
and income from bonds or
this Act, any person entitled to receive and the royalty [DDIT vs. SET Satellite
debentures, including premiums
any sum or income or amount, on (Singapore) (ITAT Mumbai)]
and prizes attaching to such
which tax is deductible under Chapter Software embedded on a CD is a
securities, bonds or debentures.
XVIIB …… ....……” “good” and hence, any consideration
The definition provides that
This is the anti-avoidance provision. received for the same would be towards
penalty charges for late
Therefore, this section will override the sale of “good” [Tata Consultancy
payment shall not be regarded
Section 90(2) of the IT Act also; it may Services (271 ITR 401)(SC)]
as interest for the purpose of
override the entire treaty. The intention Payment made for access of a portal
this article.

THE CHARTERED ACCOUNTANT november 2010 71


INTERNATIONAL TAXATION 752

Definition of Royalty literary, artistic or scientific work Definition of Technical


Generally, royalty is the sum payable including films or video tapes for Services Technical
for the right to use someone else’s use in connection with television service has been
property for the purpose of gain. or tapes for use in connection defined as any consideration
Royalty is a sum which is taxable under with radio broadcasting, but not (including any lump sum
section 9 of the IT Act, which section including consideration for the consideration) for the rendering
further provides that consideration sale, distribution or exhibition of of any managerial, technical or
flowing in from the following items shall cinematographic films; or consultancy services (including
be deemed to be royalty: The terms “secret” appearing in the the provision of services of
i. the transfer of all or any rights phrase “secret formula or process” in technical or other personnel)
(including the granting of a licence) Explanation 2 to Section 9(1)(vi) and but not including consideration
in respect of a patent, invention, in the relevant Article of DTAA will not for any construction, assembly,
model, design, secret formula or qualify the word “process.” Therefore, and mining or like project. Thus,
process or trade mark or similar to fall within the meaning of royalty as under the head technical service,
property; envisaged in these provisions, it is not managerial and consultancy
ii. the imparting of any information necessary that the services rendered services too have been
concerning the working of, or the must be through “secret process” only. included.
use of, a patent, invention, model, Even services rendered through simple royalties. Also, the capital gains earned
design, secret formula or process process will also be covered within the from the sale of transfer of IPR are not
or trade mark or similar property; meaning of royalty. deemed to be royalties.
iii. the use of any patent, invention, The payments received by
model, design, secret formula or assessee from their customers is on Fees for Technical Services
process or trade mark or similar account of use on account of use of Definition of Technical Services
property; their satellites for telecommunication Technical service has been defined
iv. the imparting of any information and broadcasting, amounts to royalty as any consideration (including any
concerning technical, industrial, within the meaning of Section 9(1) lump sum consideration) for the
commercial or scientific knowledge, (vi) of IT Act, 1961. It also amounts to rendering of any managerial, technical
experience or skill; royalty within the meaning of respective or consultancy services (including
v. the use or right to use any industrial, Articles of DTAA the provision of services of technical
commercial or scientific equipment What is not Royalty?: Clause (v) to or other personnel) but not including
but not including the amounts Explanation 2 of Section 9(1)(vi) of consideration for any construction,
referred to in Section 44BB; the IT Act makes an exception for assembly, and mining or like project.
vi. the transfer of all or any rights consideration for the sale, distribution Thus, under the head technical service,
(including the granting of a licence) or exhibition or cinematographic film, managerial and consultancy services
in respect of any copyright, which all shall not be deemed as too have been included. n

72 THE CHARTERED ACCOUNTANT November 2010


753 TAXATION

Applicability of Concessional Tax Rate to Non-


Residents on Long-Term Capital Gains Arising from
Transfer of Securities
At this stage of globalization when
prominent offshore companies
have queued for investment in
India, the mode of investment in
our companies is channelized
either through private investment
in form of FDI or investment
in capital markets. Acquisition
of shares by non-residents in
Indian company is permitted
subject to foreign exchange
regulations. Conversely, exit of
such investment from securities
of Indian companies besides
compliance of foreign exchange
regulations would result in
tax implications on gains or
losses arising from sale of such
securities. From the viewpoint of Introduction non-residents, foreign entities are
taxability for nonresidents, foreign India has reached the forefront of undertaking enormous investments in
globalisation which is evidenced securities of Indian entities to promote
entities are undertaking enormous
through prominent offshore companies their business activities in India.
investments in securities of Indian lined up for investment opportunities. Such Indian firms attracting foreign
entities to promote their business The mode of investment in Indian investment may or may not be listed on
in India. This article discusses companies is channelised either Indian stock exchanges. Many of such
applicability of concessional rate through private investment in the form of corporations are subsidiaries of other
of tax on gains arising from sale Foreign Direct Investment or investment foreign companies.
in capital markets. Acquisition of shares Of late, non-residents have been
of securities by non-residents in
by non-residents in Indian company is facing litigation towards tax treatment
India. permitted subject to foreign exchange of gains arising on sale of listed or non-
regulations. Conversely, exit of such listed securities of Indian companies.
investment from securities of Indian The debate is primarily on account of
companies besides compliance of tax rate applicable and implication of
foreign exchange regulations would income tax on non-residents on capital
result in tax implications on gains gains arising from sale of securities. In
or losses arising from sale of such many cases, the transaction is between
securities. two or more non-residents situated
This article discusses the outside India. In such a case also,
applicability of concessional rate of tax question arises whether capital gain,
CA. Shailendra Sharma
on gains arising from sale of securities if any, will be liable to tax in India at
(The Author is a member of the Institute.
He can be contacted at eboard by non-residents in India. Viewed special long term rate of 20 per cent or
@icai.org.) from the standpoint of taxability for at a concessional rate of 10 per cent.

THE CHARTERED ACCOUNTANT november 2010 73


TAXATION 754

A diagrammatic representation of the transaction along with the tax implication The debate is
on capital gains arising on sales of securities is given below: primarily on account
of tax rate applicable
and implication of income tax on
non-residents on capital gains
arising from sale of securities.
In many cases, the transaction
is between two or more non-
residents situated outside India.
In such a case also, question
arises whether capital gain, if
any, will be liable to tax in India
at special long-term rate of 20
per cent or at a concessional
rate of 10 per cent.

Capital Gains Tax Regime in • The transfer should be for a


India consideration;
Under the Indian tax laws, Section 45 • The transfer must have been
to 55A of the Income-tax Act, 1961 effected in the previous year; and
(‘the Act’) deals with treatment of • Gain/losses arising on such
capital gains/losses arising on transfer transfer of a capital asset should
of capital asset. Section 45 of the Act, be computable.
provides that any profits or gains arising Under the Indian tax laws, gains
from transfer of capital asset effected arising on transfer of capital assets held
in the previous year (commencing from for more than 36 months (12 months for
April 1 up to March 31) shall, subject securities listed on a recognized stock
to available exemptions pursuant to exchange or mutual fund units) are
Sections 54, 54B, 54D, 54EA, 54EB, treated as long-term capital gains and
54F, 54G and 54H [with effect from 1-4- are taxed at special rates as compared
1991] shall be chargeable to income to short-term capital gains. While
tax under the head ‘Capital Gains’. computing long-term capital gains, the
The basic question arises as cost of acquisition and improvement is
to whether ‘Capital Gains’ being considered at a prescribed cost inflation
capital receipt can be brought to index for the year. As a result, the step-
tax as income. It is pertinent to note up cost as indexed cost of acquisition
that ordinary accounting principles will be reduced from sale consideration
distinction between capital receipt and received, to arrive at the capital gain.
revenue receipt are not always followed Presently, long-term capital gains
under the Act. Section 2(24) of the are taxed at the rate of 20 per cent for
Act explicitly provides that ‘’income’’ individuals and foreign companies, and
includes any capital gains chargeable 30 per cent in case of short-term capital
under Section 45 of the Act. gains. However, long-term capital gains
The requisites of charging capital on the transfer of shares/bonds issued
gains to income tax, under Section 45 in foreign currency under a scheme
are: notified by the Indian Government are
• There must be a capital asset; taxed at 10 per cent. A synopsis of tax
• The capital asset must have been payable on gains arising from sale of
transferred; securities has been tabulated:

74 THE CHARTERED ACCOUNTANT November 2010


755 TAXATION

Period of holding Characterisation Tax rate (inclusive of surcharge and education cess)
Domestic Company Foreign Company Individuals
12 months or less Short term 33.99* percent, in case 42.23 percent, in case 30.90 percent, in case
of shares not listed on of shares not listed on of shares not listed on
any recognised stock any recognised stock any recognised stock
exchange exchange exchange
16.99* percent, in 15.84 percent, in case 15.45 percent, in case
case of shares listed of shares listed on of shares listed on
on a recognised stock a recognised stock a recognised stock
exchange and the sale exchange and the sale / exchange and the sale /
/ transfer is subject to transfer is subject to STT transfer is subject to STT
Securities Transaction
Tax (‘STT’)
More than 12 Long term 22.66* percent, in case 21.12* percent, in case 20.60* percent, in case
months of shares not listed on of shares not listed on of shares not listed on
any recognised stock any recognised stock any recognised stock
exchange exchange exchange
Nil, in case of shares Nil, in case of shares Nil, in case of shares
listed on a recognised listed on a recognised listed on a recognised
stock exchange and the stock exchange and the stock exchange and the
sale / transfer is subject sale / transfer is subject sale / transfer is subject
to STT to STT to STT

* assuming taxable income exceeds R10 million

Capital Gains Tax the assessment year 1992-93. specified under Sections 115AB and
Implication for Non- Subsequently, effective from 115AD with an effective rate of tax on
Residents assessment year 1993-94, Section long-term capital gains accruing to
Section 112 of the Act provides for 115AD provides for 10 per cent rate such non-residents at 20 per cent.
tax on long-term capital gains at the of tax on long-term capital gains in Interestingly, proviso to Section
rate of 20 per cent in case of various respect of securities other than units 112(1) was inserted by the Finance Act,
categories of assessees including (as referred in 115AB) purchased by 1999, effective from assessment year
non-residents. Clause (c) of Section foreign institutional investors. Other 2000-01. As a result from assessment
112, applies to all non-residents non-residents were taxable at a higher years 1995-96 to 1999-2000, rate of tax
including foreign company. Section rate vis-à-vis long-term capital gains. on long-term capital gains accruing to
112 as originally enacted, effective Effective from the assessment year non-residents (except non-residents
from the assessment year 1993-94, did 1995-96, Clause (c) was inserted under falling under Sections 115AB and
not apply to non-residents. However, Section 112(1) by the Finance Act, 1994 115AD) is 20 per cent, irrespective of
Section 115AB, provides for a rate of in order to provide a uniform rate of tax whether the case of the assessee falls
tax at 10 per cent on long-term capital on long-term capital gains accruing within the scope of the first or second
gains in respect of units purchased to other non-residents. Accordingly, proviso to Section 48 of the Act. On
in foreign currency by an overseas Section 112(1)(c) will apply to non- perusing the provisos to Section 48 of the
financial organisation, effective from residents other than the non-residents Act, it is amply clear that computation of

THE CHARTERED ACCOUNTANT november 2010 75


TAXATION 756

Section 45 of the while computing long-term capital gain. and debentures, would be available to
Act, provides that Application of this method is restricted non-residents, irrespective of whether
any profits or gains to cases falling within the scope of the these assets had been purchased in
arising from transfer of capital second proviso to Section 48. foreign exchange or not.
asset effected in the previous The legislature has used the word Conversely, Section 115AB
year (commencing from April 1 ‘shall’ in the first and second provisos provides tax rate of 10 per cent on long-
up to March 31) shall, subject to to Section 48 vis-à-vis computation of term capital gain arising or accruing to
available exemptions pursuant capital gains. Both the provisos are overseas financial organizations vis-a-
to Sections 54, 54B, 54D, 54EA, mutually exclusive and no option lies vis units purchased in foreign currency.
54EB, 54F, 54G and 54H [with either with the assessee or with the However, Section 115AB(2) specifically
effect from 1-4-1991] shall be assessing officer in this regard. The provides that second proviso to Section
chargeable to income tax under expression in proviso to Section 112(1) 48 would not apply for computing such
the head ‘Capital Gains’. ‘before giving effect to the provisions capital gain. The first proviso to Section
capital gain is bifurcated into two parts. of the second proviso to Section 48’ 48 is not applicable to units purchased
The first proviso covers those cases presupposes existence of a case where in foreign currency and, therefore,
where capital assets being shares or computation of long-term capital gain the legislature has not mentioned the
debentures of an Indian company are is to be made in accordance with the first proviso to Section 48 in Section
acquired by a non-resident in foreign formula contained in respect of second 115AB(2).
currency. proviso to Section 48. This means that Hence, the legislature has provided
In such a scenario, cost of the legislature never intended to give marginal relief under Section 112(1)
acquisition and expenditure incurred benefit of the proviso to Section 112(1) proviso in those cases where rate of 20
wholly and exclusively in connection to those cases where long-term capital per cent on net long-term capital gains
with transfer of such shares as well as gain is required to be computed under is more than 10 per cent rate of tax on
the sale consideration is required to be the first proviso to Section 48. The gross amount of capital gains. There is
converted in the same foreign currency, language of the proviso is very clear. a deliberate attempt by the legislature
which were utilised for acquiring such In other words, Section 112(1) of to restrict the benefit of Section 112(1)
shares/debentures so as to compute the Act provides for 20 per cent tax proviso to those cases where the long-
the capital gains in foreign currency. rate applicable on long-term capital term capital gains are to be computed
The capital gains so computed are gains to residents and non-residents under the second proviso to Section
then reconverted into Indian currency depending on the nature of securities, 48 of the Act.
for the purpose of computing tax provided such securities are held Accordingly, the legislature has
thereon. This method is applicable to for a period exceeding 12 months provided concessional rate of tax at 10
short-term as well as long-term capital (as determined under the Securities per cent on the gross amount of long-
assets, being shares or debentures of Contract (Regulations) Act). However, term capital gains, i.e. computation
an Indian company. Any other assets a 10 per cent concessionary tax rate is without claiming any deduction or
are not covered under this proviso. available for gains arising on the sale of benefit under the first and second
The second proviso to Section 48 listed shares so long as the assessee provisos to Section 48 of the Act. It is in
provides method of computing long- has not computed gains using cost this context the legislature believes that
term capital gains in respect of any indexation facility under the second Presently, long-term
long-term capital assets acquired by proviso to Section 48 of the Act. capital gains are
an assessee irrespective of the status Wherever second proviso to Section taxed at the rate
except long-term capital gains arising 48 is applicable, it only means that of 20 per cent for individuals
to a non-resident from transfer of long- calculation under the second proviso and foreign companies, and
term capital assets specified in the first shall not enter into the computation 30 per cent in case of short-
proviso to Section 48. According to this of capital gain, the same cannot be term capital gains. However,
method ‘cost of acquisition’ and ‘cost construed as a condition precedent for long-term capital gains on the
of improvement’ referred in Section invoking the proviso to Section 112(1). transfer of shares/bonds issued
48(ii) should be substituted by ‘indexed Consequently, the benefit of indexation in foreign currency under a
cost of acquisition’ and ‘indexed cost on the cost of acquisition under second scheme notified by the Indian
of improvement’ which would be proviso to Section 48 of the Act for long- Government are taxed at 10 per
deducted from the sale consideration term capital assets, other than shares cent.

76 THE CHARTERED ACCOUNTANT November 2010


757 TAXATION

the tax payers falling under the second The tax treaties invariably contain prescribed in Section 112(1). Reference
proviso to Section 48 should not be put provisions of non-discrimination against in this connection may be made to a
to a disadvantage as compared to tax foreign enterprises which in effect recent case of Fujitsu Services Limited
payers falling under Sections 115AB provide that a foreign enterprise in India [2009] 182 Taxmann 263 (AAR).
and 115AD. will not be subjected to any taxation The AAR followed the case of Timken
which is more burdensome than the France SAS [2007] 294 ITR 513 (AAR),
Resolving the Dispute – taxation to which Indian enterprises are where the Tribunal held that in respect
Issues and Precedence subjected to under similar conditions. of the long term capital gains arising
Recently, there have been a difference If foreign enterprises are discriminated from the sale of shares, Timken France
of opinion between the Income-tax by imposing higher rate of tax without SAS (a non-resident) was entitled to the
Appellate Tribunal and Authority for providing similar benefits as that to benefits of the first proviso to Section
Advance Rulings (AAR) on the issue the Indian enterprise, it is certainly a 112 (1) based on the discussions
whether the concessional rate of tax at concern on India’s commitment to above and therefore the quantum of tax
10 per cent is available to a non-resident honour tax treaties entered with other payable shall not exceed 10 per cent of
company or not. In fact, the rate of 10 sovereign States. the amount of capital gain.
per cent as contained in proviso to Alternatively, the AAR has ruled Similarly, following the analogy
Section 112(1) applies on the amount contrarian opinion’ s according the laid down in the above AAR rulings it
of capital gain calculated before giving benefit of lower rate of tax conferred appears that, the benefit of indexed
effect to the provisions of the second by the proviso to Section 112(1) which cost of acquisition of long-term capital
proviso to Section 48, i.e. indexation can be invoked by non- residents. The assets should be available to non-
of cost of acquisition. According to the language used in proviso to Section residents irrespective of whether
Tribunal, the concessional rate provided 112(1) does not deny the concessional these assets had been purchased
in the proviso to Section 112(1) will be rate of tax to any category of assesses in foreign exchange. Also, the mere
available only in those cases where who are not eligible to claim the fact that protection from exchange
the benefit of indexation is applicable. benefit of indexed cost of acquisition rate fluctuation is available to non-
Where the provisions of indexation as as provided in Section 48. In other residents, does not conclude that the
contained in second proviso to Section words, the eligibility to avail benefit of non-residents should not be entitled
48 are not applicable, the concessional indexed cost is not a sine qua none for for the benefit of reduced rate of tax
rate of 10 per cent will not be available. applying the reduced rate of 10 per cent which the residents are eligible as
Reference in this connection is made reiterated in the case of Mcleod Russel
As a result from
to BASF Aktieneresellschaft vs. DCIT India Limited [2008] 299 ITR 79 (AAR),
assessment years
[2007] 293 ITR 1 (Bombay). Burmah Castrol Plc [2008] 307 ITR 324
1995-96 to 1999-
If view of the Tribunal is to be (AAR), Alcan Inc. vs. DDIT [2007] 112
2000, rate of tax on long-term
accepted, long-term capital gain is TTJ 328 (Mumbai) and followed by
capital gains accruing to non-
taxable at 20 per cent - both for Indian Compagnie Financiere Hamon, [2009]
residents (except non-residents
and foreign companies. However, the 310 ITR 001 (AAR).
falling under Sections 115AB
tax rate of 20 per cent will be reduced
and 115AD) is 20 per cent,
to 10 per cent in case of Indian
irrespective of whether the Key Takeaways
companies, where the indexation The issue for the time being has been
case of the assessee falls within
benefit is not availed. Since, indexation settled by AAR and other judicial
the scope of the first or second
provisions are not applicable to foreign authorities by following the accepted
proviso to Section 48 of the
companies such companies will be principle of lower rate of permissible
Act. On perusing the provisos to
liable to pay tax at 20 per cent. In the to non-residents until the same is not
Section 48 of the Act, it is amply
event, if the above interpretation is been over-ruled or challenged before
clear that computation of capital
accepted, foreign companies stand the higher judicial authorities. The
gain is bifurcated into two
at a disadvantageous position as issue remains to face the litmus test
parts. The first proviso covers
compared to Indian companies. This before the lower tax authorities who
those cases where capital assets
will create discrimination against would challenge during assessment
being shares or debentures of
foreign companies and also against the proceedings going forward and its
an Indian company are acquired
principles envisaged in the tax treaties acceptability before enforced as law or
by a non-resident in foreign
India has signed with other countries. clarification from the regulators. n
currency.

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CORPORATE GOVERNANCE 758

Corporate Governance and Company Attributes:


Case of Selected Private Sector Companies in India

Adam Smith introduced the importance of governance when he talked about the responsibility of the
directors of a company and compared them with partners in a private coparcenary, who frequently keep
an eye over their own. He, however, did not use the phrase Corporate Governance. The word governance
was used for the first time by Geoffrey Chaucer (also known as father of English literature). Concern for
governance grew tremendously during 1980’s as a result of a number of international business frauds and
failures. New rules and regulations governing the conduct of Board were written with the objective to achieve
a balance between the essential powers of board and their proper accountability. This article describes the
case of selected Indian private sector companies in that context.
The seeds of corporate governance a need to achieve a balance between
were sowed long back when Adam the essential powers of board and their
Smith recognized the importance of proper accountability.
governance and said: The directors of Oxford Dictionary defines corporate
the company being managers of other governance as a ‘system by which
people’s money than their own, it cannot business corporations are directed and
well be expected that they should watch controlled. The governance structure
over it with the same anxious vigilance specifies the distribution of rights
with which the partners in a private and responsibilities among different
coparcenary frequently watch over their participants in the corporation, such
own. Adam Smith, however, did not use as, the Board of Directors, manager,
the phrase ‘Corporate Governance’. shareholders and other stakeholders,
The word governance occurred for and spell out the rules and procedures
the first time in the writings of Geoffrey for making decisions on corporate
Chaucer. The concern for governance affairs. By doing this, it provides the
started gaining grounds during 1980’s structure through which the company
Dr. Punam Agarwal as an aftermath of series of frauds and objectives are set along with the means
Dr. Manoj Sharma business failures in the US and the of attaining these objectives as well as
(The authors are Associate Professors in UK. As a result, a plethora of rules and for monitoring performance’.
the Govt. PG College for Girls and in the
Panjab University, Chandigarh respective- regulations governing the conduct of Thus, corporate governance is
ly. They can be contacted at punamag- Board were formed. The main objective not just corporate management,
garwal@yahoo.com.) in all these codes of best practices was but is referred to as the inbuilt and

78 THE CHARTERED ACCOUNTANT November 2010


759 CORPORATE GOVERNANCE

dynamic mechanism adopted by The governance subsidiary company information)


the corporate bodies in its widest structure specifies 4. Disclosure with respect to: Basics
connotations to include a fair, efficient the distribution of related party transactions;
and transparent administration to meet of rights and responsibilities Disclosure of Accounting
certain well defined objectives and among different participants treatment; Board disclosures –
also for meeting the unmet in terms in the corporation, such as, the risk management; Disclosure of
of achieving corporate excellence. It board of directors, manager, use of funds from public issues,
is a system of structuring, operating shareholders and other rights issues preferential issues,
and controlling a business with a view stakeholders, and spell out etc.; Remuneration of Directors;
to achieve long term strategic goals the rules and procedures for Management Discussions
to satisfy shareholders, creditors, making decisions on corporate and Analysis; Disclosure to
employees, customers and suppliers affairs. shareholders.
and complying with the legal and item of corporate governance 5. CEO/CFO certification
regulatory framework, apart from guidelines. The non-compliance of any 6. Report on corporate governance
meeting environmental and local mandatory requirement with reasons 7. Compliance Certificate
community needs. When it is practiced thereof must be stated in the Annual
under a well laid out system, it leads to Report. Similarly, the extent to which Non-Mandatory
the building of a legal, commercial and the non-mandatory requirements 1. Chairman of the Board
institutional framework and demarcates have been adopted should also be 2. Remunerations Committee.
the boundaries within which these specifically highlighted. The revised 3. Shareholders Rights
functions are performed. Clause-49 shall be implemented as: 4. Audit Qualifications
J. Wolfensohn, the president of i) By all companies seeking listing for 5. Training of Board members
World Bank, defines the purpose of the first time at the time of listing 6. Mechanism for evaluating non-
corporate governance as to promote ii) By all companies having a paid up executive Board Members.
corporate fairness, transparency capital of Rs. 3 crore and above or 7. Whistle Blower Policy.
and accountability. A wide range net worth of Rs. 25 crore or more at The scope of corporate governance
of activities like transparency in any time in the history of the entity, is broad with a wide spectrum of
management, optimum and judicious the revised clause will have to be interrelated and interconnected
utilisation of scarce resources of applied by December 31, 2005. activities in a harmonized and
the society, tax compliance, better In this regard, the stock exchanges transparent way towards the effective
employee management, protection of shall set up monitoring cell to monitor achievement of organizational goals
investors’ interest, better disclosure compliance with the revised clause and in a profound manner by laying
for the stakeholders, protection submitted a consolidated compliance greater emphasis to the corporate and
from environmental pollution and report to SEBI within 60 days from the social accountability of the business
degradation and the like fall within the end of each quarter. enterprises to the stakeholders in
ambit of corporate governance. The broad outline of mandatory particular and society as a whole.
The regulatory framework of and non-mandatory requirements is:
corporate governance in India consists Research Methodology
of the companies legislation; SEBI Act Mandatory The private-sector companies,
1992; the Securities Contract Act, 1956, 1. Board of Directors (includes as ranked on average market
the Listing Agreement, etc. Clause-49 Composition of the Board; Non- capitalization in a business magazine
incorporating the recommendations executive Director Compensation (2005-06) constituted the subject of
of Kumar Mangalam Birla Committee and disclosures; Provisions as to the study. Banking and insurance
ordains the listed companies to comply Board and its committees; and companies were excluded from the
with various corporate governance Code of conduct for the Board and sample because of their different
norms. For the purpose of compliance, Management. disclosure requirements. First 100
every listed company must include a 2. Qualified and independent companies, out of 500 listed in the
separate section captioned as “Report Audit Committee (Committee’s magazine, constituted the sample and
on Corporate Governance” in its annual Meetings, Powers, Role and the time period covered was 2005-06
Report. The report shall provide details Mandatory Review of information) and 2006-07.
of compliance with every mandatory 3. Subsidiary companies (unlisted The data was collected from the

THE CHARTERED ACCOUNTANT november 2010 79


CORPORATE GOVERNANCE 760

annual reports of the companies, their using turnover or sales (Rs. in crore) statements and projected operating
websites, prowess database of CMIE, and total assets (Rs. in crore). The and financial performance of the
stock exchange directories, etc., to profitability was measured using net company.
measure the extent and quality of profit to sales ratio and net profit to The contemporary information
corporate governance, an unweighted total assets ratio. related to general company infor-
corporate governance index was For type of audit firms, seven large mation, products and markets, plants
developed. This corporate governance and reputed audit firms were put in one and warehouses, directors, manager
index included both mandatory and group and the rest in the second group. auditors, shares related information,
non-mandatory disclosures as given out Then, companies were divided into two employee related information
in the Clause 49 of Listing Agreement. groups depending upon whether they accounting issues, etc. The historical
The mandatory disclosures included got their accounts audited from any information consisted of quantitative
information on composition of board, of the specified audit firms or by an details like ratios, EPS, DPS, expansions
their remuneration, audit committee, audit firm belonging to second group. and improvement efforts assets and
disclosures on various issues, T-tests, then, were applied to see if liabilities details, stock market data,
CEO/CFO certification, corporate there existed significant difference segment reporting, corporate social
governance report and compliance between the mean corporate disclosure responsibility reporting, value-added
report. The non-mandatory disclosures or governance score of the two groups. statement, corporate governance
included a policy on code of conduct Similarly, for the character of the reports, etc.
for the directors and management, companies, the selected companies Following points summarise the
declaration of half-yearly performance, were divided into two groups, i.e. MNC conclusion of the study:
remuneration committee, training of and domestic, and, then, T-tests were 1. 100 per cent of the companies
the director’s evaluation system for applied. under study prepared a report
non-executive directors and whistle For the calculation of corporate on corporate governance to be
blower policy. disclosure score, an index similar to included in the annual reports of
After developing the indexes, Corporate Disclosure Index was used. the respective companies.
annual reports were thoroughly The index used in this study consists 2. All companies showed an
analyzed to see the disclosure extent. of an extensive list 147 information improvement in their corporate
A score of 1 was assigned on inclusion items – both mandatory and voluntary governance score in the year
in the annual report and 0 for non- items. The items so included in the 2006-07 as compared to 2005-
inclusion. Then, total score obtained index are applicable to a wide range of 06. However, the increase was not
by a company was calculated. These users and are not directed to a specific significant at 95 per cent level of
scores were converted into 100 using user group. The items included were confidence.
the following formula: divided into three broad groups, viz. 3. The maximum score of 72 was
Governance Index in % = futuristic, contemporary and historical attained by Gillette India followed

[Scores obtained by the company


]
Maximum score of the relavant index
X 100.
information. The futuristic information
included general business outlook.
by Asian Paints, ICI India, Matrix
Labs, Tata Motors (71 in their case)
The score obtained by the Future plans, projected cash-flow in the year 2005-06.
companies for governance (see For the purpose of 4. In the year 2006-07, the maximum
Appendix 1) were then subjected to compliance, every score of 76 that was attained by
various statistical analysis tools, i.e. listed company must Seas Goa followed by Gillette India
correlation analysis, simple regression include a separate section (75), M & M & Reliance Capital
analysis and T-test (independent and captioned as “Report on (73), ICI India, Matrix Labs and
paired samples). The study goes Corporate Governance” in its Tata Motors (72).
further to analyse the influence of annual Report. The report shall 5. The mean value of corporate
certain corporate attributes like size, provide details of compliance governance score increased from
profitability, type of the audit firm, with every mandatory item 62.436 to 65.464 in a period of one
character of the company and extent of corporate governance year, i.e. from 2005-06 to 2006-07.
of disclosure, on the corporate gover- guidelines. The non-compliance 6. The number of companies in each
nance score of the selected companies of any mandatory requirement quartile virtually remained same in
using above stated statistical tools. The with reasons thereof must be both the years.
size of the company was measured stated in the Annual Report. With regard to detailed governance

80 THE CHARTERED ACCOUNTANT November 2010


761 CORPORATE GOVERNANCE

report under each head and sub-head, companies are not taking any 5. Regarding communication of
following conclusions were made: expert opinion form outside and half yearly results to shareholder
1. 100 per cent of the companies hence no permission is required household, it was found that 28
gave a statement of company’s and thus no disclosure. out of 71 companies (29 per cent)
philosophy on code of corporate 7. Only 19 per cent of the companies actually sent the information. One
governance. disclosed information about its company disclosed that it sends
2. 100 per cent companies disclosed unlisted subsidiary companies information on shareholders
the composition of its BOD’s remaining 81 per cent simply request. 42 companies did not
segregating in each case between remained silent on the issue disclose the information.
independent, executive and non- probably because they do not have 6. 47 out of 71 companies had
executive directors. any unlisted subsidiary company. maintained a separation between
3. 4 per cent of the companies did 8. Shareholdings of non-executive the roles played by CEO and
not disclose whether its chairman directors were disclosed only in chairman of the company.
executive or non-executive 37 per cent of the companies 7. Only 1 out of 71 companies, i.e.
director. while remaining 63 per cent kept Infosys, disclosed that annual
4. 100 per cent companies disclosed silence. This information is vital in meetings for non-executive or
information with regard to non- assessing the independence of independent directors were
executive director’s compensation, non-executive directors. regularly held in the company.
their attendance, number of board 9. Good Internal control system paves 8. As many as 24 companies had
meetings held in a year. way for efficient governance. Still a system of evaluating board
5. Information about companies only 40 per cent of the companies members performance. While 47
where board members hold disclosed the working of internal companies did not have such a
positions was not disclosed at all. control system prevailing in their system.
6. 100 per cent of the companies organization while the rest 60 per 9. 33.8 per cent of the companies
disclosed information about audit cent did not disclose. had a system for the training of
committee-- its composition, In the non-mandatory information the board members while 47.2 per
meetings, participation of head category, following is the summary of cent did not have such a system.
of finance in audit committee conclusions: 10. 11 out of 71 companies disclosed
meetings. However, information 1. 63 out of 71(89 per cent) companies the tenure of directors while a
regarding seeking permission to disclosed that they have a policy majority did not do so. Only one
take outsiders expert advice was on code of conduct applicable to company disclosed the age limit
disclosed only by 11 per cent its management. While remaining 8 of the directors while remaining 70
company. This may be because (11.2 per cent) companies did not kept silent.
The mandatory have a policy on code of conduct The most interesting aspect of
disclosures included applicable to management. the study was that not even a single
information on 2. 34 per cent of the companies (24 company out of the 71 revealed the
composition of board, their out of 71) had a policy prohibiting succession plan of the director of the
remuneration, audit committee, insider trading while 47 companies board which otherwise is desirable
disclosures on various issues, did not frame such a policy. under the annals of the corporate
CEO/CFO certification, corporate 3. 41 out of 71 (58 per cent) governance. The study goes further
governance report and companies disclosed information to analyze the correlation between
compliance report. The non- about their whistle blower policy corporate governance and other
mandatory disclosures included to provide safeguards against the company attributes like disclosure,
a policy on code of conduct for intimidation of employees who size, profitability, type of audit firm and
the directors and management, avail of the mechanism. the character of the company
declaration of half-yearly 4. 17 out of 71 companies did A) The correlation coefficient
performance, remuneration not formulate the remuneration between corporation disclosure
committee, training of the committee. The remaining and corporate governance score
director’s evaluation system 54 companies disclosed the for the year 2005-06 was 0.385,
for non-executive directors and composition of the remuneration which was found to be significant
whistle blower policy. committee also. at 0.01 levels. The R-value for the

THE CHARTERED ACCOUNTANT november 2010 81


CORPORATE GOVERNANCE 762

year 2006-07 was 0.250 which was Transparency in corporate account of corporate disclosure score.
significant at 0.05 levels. Better disclosures has become the important The results obtained above were found
disclosure score is indicative of phenomenon of good corporate to be consistent with the results of the
better governance, hence the governance to disseminate in a study by Kant (2004).
positive correlation. The F-values prudent and crystal-clear manner all B) The size of a company as
under regression analysis too the necessary information to the users measured by sales and total assets
were significant at 0.01 levels for of financial statements to help them was not found to be influencing the
both the years. Thus, corporate take rational decision making in order corporate governance score for both
disclosure enhances governance. to protect their diversified interests. the years.
Good governance facilitates A transparent disclosure approach C) Extent of corporate governance
better corporate disclosure and vice indicates a company’s commitment and profitability of a company too were
– versa is also true. As companies are to good corporate governance and found to be independent variables
becoming more aware and convinced helps to build trust with stakeholders. as the R values were found to be
about better governance, more and The study further analyses causative insignificant at 0.05 levels.
more stakeholders’ related information relation between the two using simple D) Market capitalizations,
is being made public by them. Since regression analysis. The results were EPS and DPS do not influence the
the board works for the best interest of as follows:- corporate governance score of a
all stakeholders, they are not hesitant Table 1.3
to disclose. This statement was Year Dependent Regression Coefficient R2 R-2 F - Value
adequately supported by the values Variable Constant Independent
Variable
of Pearson correlation coefficient R in
2005-06 Corporate 43.556 0.171 0.148 0.136 0.001*
both the periods under study. Governance
Tables 1.1 and 1.2 reveal the 2006-07 Corporate 52.031 0.117 0.063 0.049 0.035*
correlation coefficient between Governance
corporate disclosure score and company as reflected by the results of
Simple Regression Results:
corporate governance score for the the correlation analysis.
Corporate Disclosure
year 2005-06 and 2006-07. The value E) The study shows that actual
The Table 1.3 shows the predictive
of R for 2005-06 was 0.385 while the governance score was not significantly
power of corporate disclosure score to
same in the year 2006-07 was 0.250. associated with nature of the audit firm
assess the corresponding corporate
These values were found to be positive and character of the company either.
governance score. F-value of 0.001 in
and highly significant at 99 per cent
the year 2005-2006 and F-value of 0.035
and 95 per cent level of confidence Recommendations:
in the year 2006-2007 were found to be
respectively. As companies are Dr. Madam Bhasin, from Sung
highly significant at 0.01 level. 14.8 per
becoming more aware and convinced Kyun Kwan University, South Korea,
cent and 6.3 per cent variability in the
about better governance, more and advocates the following for improving
corporate governance score for the
more stakeholders’ related information corporate governance:
year 2005-2006 and 2006-2007 was on
is being made public by them.
Table 1.1
Correlations between Corporate Disclosure and Corporate Governance 2005-06
The index used in
Corporate Corporate
Disclosure Governance this study consists
2005-2006 2005-2006 of an extensive list
Corporate Disclosure 2005-2006 Pearson Correlation 1 .385** 147 information items – both
Corporate Governance 2005-2006 Pearson Correlation .385** 1 mandatory and voluntary
** Correlation is significant at the 0.01 level (2-tailed). items. The items so included
Table 1.2 in the index are applicable to
Correlations between Corporate Disclosure and Corporate Governance 2006-07 a wide range of users and are
Corporate Corporate not directed to a specific user
Governance Disclosure
2006-2007 2006-2007 group. The items included were
Corporate Governance 2006-2007 Pearson Correlation 1 .250* divided into three broad groups,
Corporate Disclosure 2006-2007 Pearson Correlation .250* 1 viz. futuristic, contemporary and
* Correlation is significant at the 0.05 level (2-tailed). historical information.

82 THE CHARTERED ACCOUNTANT November 2010


763 CORPORATE GOVERNANCE

The items so included • The training of the directors


in the index are should be made mandatory to
applicable to a ensure that directors remain
wide range of users and are knowledgeable of current
not directed to a specific user trends.
group. The items included were • The liability of the directors
divided into three broad groups, should be increased to better governance practices:
viz. futuristic, contemporary protect Investors and make • Liberalizing India’s capital
and historical information. The them more responsible in their markets to protect the interest
futuristic information included actions. of minority shareholders.
general business outlook. 2. Enforcement Issues: The • Implementing more robust
Future plans, projected cash- law enforcement should be bankruptcy laws
flow statements and projected transparent, swift and uniform • Expanding the legal rights of
operating and financial to ensure credibility and utility of whistle blowers.
performance of the company. a framework. In India, there are • Increasing shareholders
three regulatory bodies namely activism would help to
1. Reforms of the Boards of Directors DCA, SEBI and Stock exchanges prevent abuses by majority
that include: which possess the power to shareholders that are a
• The requirement of independent prescribe and enforce the rules. cause for concern in Indian
directors in the board should This dispersion of power weakens businesses. Shareholders
further be enhanced to the the enforcement. So, clear-cut activism will fill the void in
level of the NYSE and NASDAQ mandate for each regulatory body managerial monitoring.
system listing rules requiring should be established. 4. Embracing corporate governance
majority of the board of 3. Redefining India’s corporate Laws- has a philosophy – it requires
directors to be independent. While India’s corporate laws are evolution of a culture of social
• The number of directorship sophisticated; they are inadequate conscience. The board of directors
an individual may hold should on a number of counts. Corporate must play a very crucial part in
be ‘restricted’ so that their laws in India need modification in cultivating a positive corporate
performance is not hampered. order to facilitate sound corporate culture.n

Appendix I
CORPORATE GOVERNANCE SCORES OF THE INDIAN COMPANIES
Sl. no. Name of the company Corporate Governance (CG) CG in % Increase or % Change in CG
decrease in CG
2005-06 2006-07 2005-06 2006-07
1 ABB 61.00 62.00 74.39 75.61 1.00 1.64
2 Amtek autos 63.00 69.00 76.83 84.15 6.00 9.52
3 Ashok leyland 67.00 68.00 81.71 82.93 1.00 1.49
4 Asian paint 71.00 73.00 86.59 89.02 2.00 2.82
5 Aventis pharma 53.00 56.00 64.63 68.29 3.00 5.66
6 Bharat forge 64.00 66.00 78.05 80.49 2.00 3.13
7 Bharati Tele Tech 51.00 53.00 62.20 64.63 2.00 3.92
8 Biocon 61.00 63.00 74.39 76.83 2.00 3.28
9 Britannia 67.00 68.00 81.71 82.93 1.00 1.49
10 Ballarpur Industries 63.00 65.00 76.83 79.27 2.00 3.17
11 Cipla 60.00 61.00 73.17 74.39 1.00 1.67
12 Crompton Greaves 51.00 70.00 62.20 85.37 19.00 37.25
13 Cummins India 59.00 67.00 71.95 81.71 8.00 13.56
14 Castrol India 67.00 69.00 81.71 84.15 2.00 2.99
15 Dabur India 69.00 70.00 84.15 85.37 1.00 1.45
16 Essar oil 61.00 65.00 74.39 79.27 4.00 6.56
17 EIH 57.00 60.00 69.51 73.17 3.00 5.26
18 Financial technologies 63.00 65.00 76.83 79.27 2.00 3.17

THE CHARTERED ACCOUNTANT november 2010 83


CORPORATE GOVERNANCE 764

19 Gammon India 58.00 62.00 70.73 75.61 4.00 6.90


20 Gillette India 72.00 75.00 87.80 91.46 3.00 4.17
21 Glaxosmithkline 63.00 70.00 76.83 85.37 7.00 11.11
22 Godrej consumer product 69.00 71.00 84.15 86.59 2.00 2.90
23 Grasim Industries 64.00 65.00 78.05 79.27 1.00 1.56
24 Gujrat Ambuja 56.00 57.00 68.29 69.51 1.00 1.79
25 HCL Infosystem 59.00 61.00 71.95 74.39 2.00 3.39
26 Hero Honda 66.00 69.00 80.49 84.15 3.00 4.55
27 HDFC 59.00 61.00 71.95 74.39 2.00 3.39
28 Hindalco Industries 69.00 70.00 84.15 85.37 1.00 1.45
29 Hindustan lever ltd. 63.00 65.00 76.83 79.27 2.00 3.17
30 Hindustan zinc ltd 48.00 55.00 58.54 67.07 7.00 14.58
31 HT media 60.00 61.00 73.17 74.39 1.00 1.67
32 ICI India 71.00 72.00 86.59 87.80 1.00 1.41
33 Infosys Technologies 69.00 70.00 84.15 85.37 1.00 1.45
34 I- Flex solutions 49.00 51.00 59.76 62.20 2.00 4.08
35 Indian hotels - Taj 67.00 68.00 81.71 82.93 1.00 1.49
36 Indian Petrochemical corp. 63.00 65.00 76.83 79.27 2.00 3.17
37 ITC ltd. 70.00 72.00 85.37 87.80 2.00 2.86
38 Jet airways 66.00 67.00 80.49 81.71 1.00 1.52
39 Jindal steel & power 63.00 68.00 76.83 82.93 5.00 7.94
40 JSW steel 67.00 71.00 81.71 86.59 4.00 5.97
41 L&T 60.00 61.00 73.17 74.39 1.00 1.67
42 Lupins limited 56.00 57.00 68.29 69.51 1.00 1.79
43 Maruti Udyog 60.00 64.00 73.17 78.05 4.00 6.67
44 Matrix labs 71.00 72.00 86.59 87.80 1.00 1.41
45 Mcleod Russell 60.00 63.00 73.17 76.83 3.00 5.00
46 M&M 67.00 73.00 81.71 89.02 6.00 8.96
47 Nicholas primal India 64.00 66.00 78.05 80.49 2.00 3.13
48 Nirma 52.00 55.00 63.41 67.07 3.00 5.77
49 Nestle india 59.00 60.00 71.95 73.17 1.00 1.69
50 Pidilite Industries 64.00 70.00 78.05 85.37 6.00 9.38
51 Pantaloon retail [India] 59.00 60.00 71.95 73.17 1.00 1.69
52 Patni computer system 57.00 59.00 69.51 71.95 2.00 3.51
53 Pfizer 58.00 63.00 70.73 76.83 5.00 8.62
54 P & G Hygiene & Health Care 55.00 61.00 67.07 74.39 6.00 10.91
55 Ranbaxy 63.00 65.00 76.83 79.27 2.00 3.17
56 Raymond 68.00 69.00 82.93 84.15 1.00 1.47
57 Reliance Capital 61.00 73.00 74.39 89.02 12.00 19.67
58 Reliance Industries 67.00 71.00 81.71 86.59 4.00 5.97
59 Satyam Computer services 61.00 63.00 74.39 76.83 2.00 3.28
60 Sesa Goa 70.00 76.00 85.37 92.68 6.00 8.57
61 Siemens 67.00 69.00 81.71 84.15 2.00 2.99
62 Sun pharmaceutical 59.00 61.00 71.95 74.39 2.00 3.39
63 Tata Motors 71.00 72.00 86.59 87.80 1.00 1.41
64 Tata Power 64.00 66.00 78.05 80.49 2.00 3.13
65 Tata Steel 58.00 61.00 70.73 74.39 3.00 5.17
66 Tata Tea 68.00 71.00 82.93 86.59 3.00 4.41
67 TCS 61.00 62.00 74.39 75.61 1.00 1.64
68 Ultratech cement 65.00 68.00 79.27 82.93 3.00 4.62
69 UP Hotels ltd. 63.00 65.00 76.83 79.27 2.00 3.17
70 WIPRO 68.00 71.00 82.93 86.59 3.00 4.41
71 Wockhardt 58.00 65.00 70.73 79.27 7.00 12.07

84 THE CHARTERED ACCOUNTANT November 2010


765 CORPORATE AND ALLIED LAWS

A to Z of Limited Liability Partnership

Limited Liability Partnership (LLP) is a body corporate formed and incorporated under the LLP Act, which
is a distinct legal entity separate from that of its partners. Introducing LLPs as a new business structure
would fill the gap between business firms such as sole proprietorship and partnership, which are generally
unregulated and Limited Liability Companies, which are governed by the Companies Act, 1956. It will also
help in the growth of services sector in India. This article provides an overview of the procedural aspects of
LLP right from the incorporation to winding up.

Introduction as sole proprietorship and partnership,


The concept of Limited Liability which are generally unregulated and
Partnership (LLP) in India is viewed Limited Liability Companies, which
as an alternative corporate business are governed by the Companies Act,
vehicle that provides the benefits 1956. It will also help in the growth of
of limited liability and also allows its services sector in India. Further, the
members the flexibility of organising provisions of the Indian Partnership
their internal structure as a partnership Act, 1932 shall not apply to a limited
based on a mutually arrived agreement. liability partnership.
The revised Bill received the assent of
the President of India on January 7, Salient Features
2009. The salient features of the act are as
LLP is a body corporate formed and follows:
incorporated under the LLP Act, which 1. LLP can be formed by any two
is a distinct legal entity separate from or more person, associated for
CA. Rajat Mohan that of its partners. Introducing LLPs carrying on a lawful business,
(The author is a member of the Institute.
He can be reached at rajat.mohan@icai. as a new business structure would fill by subscribing their names to
org) the gap between business firms such incorporation document.

THE CHARTERED ACCOUNTANT november 2010 85


CORPORATE AND ALLIED LAWS 766

2. The rights and duties of LLP and Incorporation of LLP reserved by any Partner/Designated
its partners shall be governed by The procedure for incorporation of LLP Partner by filing Form 1.
an agreement between partners or is same as that of Incorporation of a • Individual Designated Partner of
between LLP and the partners. Company, which is given below: Partner shall log into their account
3. The LLP will be a separate legal by entering user name and
entity, liable of its assets, with (i). Registration of User password. After this, open Form 1
liability of the partners being limited In order to access the relevant official from E-forms and fill in the details.
to their agreed contribution in the website (www.11p.gov.in) every user Details of minimum two designated
LLP. needs to be registered with the site by partners of the proposed LLP, one
4. Every LLP shall have at least two filling an online form of them must be a resident of
partners and shall also have at 1. Register yourself on the website of India, is required to be filled in the
least two individuals as Designated LLP, i.e. www.11p.gov.in by clicking application for reservation of name.
Partners, of whom at least one shall on “Register” tab on top right hand Only individuals or nominees on
be resident in India. corner of the page. behalf of the bodies corporate as
5. The LLP shall be under an 2. Also upload your digital signature partners can act as designated
obligation to maintain annual certificate. partners.
accounts reflecting true and fair • Select name of the proposed LLP
view of its state of affairs. (ii). Obtaining Designated Partner (max. 6 choices can be indicated).
6. A firm, private company or an Identification Number • Attach Digital signatures, pay the
unlisted company is allowed to Every Designated partner of the necessary fee online and submit
convert itself into LLP. proposed LLP shall obtain “Designated the e-form on LLP Portal.
7. The act provides for the winding Partner Identification Number (DPIN),
up of LLP which may be either by filing Form 7 online. (iv). Incorporation of LLP
voluntary or by the tribunal. 1. Individual Designated Partner shall This is the last step of incorporating
8. The provisions of the Indian Log into their account by entering a LLP, where Form-2 is required to be
Partnership Act, 1932 are not user name and password. After filed with registrar along with necessary
applicable to LLP. this, open Form 7 Form E-forms documents.
and fill the required information. 1. After the name is reserved by
A partner is
2. Submit the application form online the Registrar, log on to the portal
not personally
after Paying filing fee of R100 and fill up Form 2 “Incorporation
liable; directly or
online. Note the provisional DPIN Document and Statement”.
indirectly for an obligation,
generated by the system. 2. Pay the prescribed fee for
solely by reason of being a
3. Take the print-out of the application registration as specified under
partner of the limited liability
form, affix a latest passport size ‘Annexure A’ of the LLP Rules,
partnership. However,
photograph and get it attested/ 2009.
the personal liability of a
certified for submission physically, 3. Statement in the e-form is to be
partner shall not be affected
along with documentary evidences digitally signed by a person named
for his own wrongful act or
(proof of identify and proof of in the incorporation document
omission, but a partner shall
residence). as a designated partner having
not be personally liable for
4. Deliver the printed and signed permanent DPIN and also to be
the wrongful act or omission
application form, along with the digitally signed by an advocate/
of any other partner of
prescribed documents by hand/ company secretary/chartered
the LLP. If in case any act
courier/registered post to the Office accountant/cost accountant in
being carried out be LLP or
of Registrar, Ministry of Corporate practice and engaged in the
any partner with intention
Affairs, 3rd Floor, “Paryavaran formation of LLP.
to defraud creditors or
Bhawan”, CGO Complex, Lodhi 4. Following documents are required
any other person or for
Road, New Delhi – 110003. to be filed along with Form 2:
any fraudulent purpose,
• Copy of authorisation where
the liability in such cases
(iii). Reserve name of proposed the partner is a limited liability
shall be unlimited for all or
LLP partnership, or company, or
any other debts or other
Name of Proposed LLP may be a limited liability partnership
liabilities of the LLP.

86 THE CHARTERED ACCOUNTANT November 2010


767 CORPORATE AND ALLIED LAWS

incorporated outside India or a in such cases shall be unlimited for all a Designated Partner Identification
company incorporated outside or any other debts or other liabilities of Number (DPIN).
India. the LLP. In case any such act is carried A designated partner shall be liable
• Proof of address of registered out by a partner, then his liability shall to all penalties imposed on the limited
office of limited liability be unlimited and also liability of LLP liability partnership for any contravention
partnership. be unlimited unless it is established of the provisions of the act.
• Details in respect of names of by the limited liability partnership that
partners/witnesses and their such act was without the knowledge Books of Accounts
signatures. or the authority of the limited liability Every limited liability partnership shall
• Any other document as partnership. However, a partner shall keep books of accounts which shall
specified in the form. not be personally liable for the wrongful contain:
5. Registrar will register the LLP, within act or omission of any other partner of 1. particulars of all sums of money
14 days of filing of Form 2 and a the LLP. received and expended by the
certificate of incorporation will be Every person who is knowingly limited liability partnership and
issued to LLP in Form 16. a party to any such act shall be the matters in respect of which
punishable with an imprisonment for the receipt and expenditure takes
(v). Filing of other information a term which may extend to two years place;
Following documents are required to and with fine which shall not be less 2. a record of the assets and liabilities
be filed within 30 Days of incorporation than fifty thousand rupees but which of the limited liability partnership;
of LLP or these may also be filed may extend to R5 lakh. 3. statements of cost of goods
simultaneously at the time of filing purchased, inventories, work-in-
Form 2. Designated Partners progress, finished goods and cost
• Form 3 – Details of LLP Every limited liability partnership shall of goods sold; and
agreement have at least two designated partners Such books of accounts shall be
• Form 4 – Notice of Appointment of who are individuals and at least one of preserved for eight years.
Partner/Designate Partner. them shall be a resident in India. In case Every LLP shall file the Statement
all the partners are bodies corporate of Accounts and Solvency in Form-8
Eligibility to be a Partner or in which one or more partners are with the Registrar, within a period of
Any person may become a partner individuals and bodies corporate, at thirty days from the end of six months
by and in accordance with the limited least two individuals who are partners of the financial year.
liability partnership agreement and of such limited liability partnership or
he may also cease to be a partner nominees of such bodies corporate Audit
in accordance with limited liability shall act as designated partners. Every limited liability partnership
partnership agreement. Every designated partner of a shall be required to get its accounts
limited liability partnership shall obtain audited. However a limited liability
Extent and Limitation of Every limited partnership whose turnover does not
Liability of Partners liability partnership exceed, in any financial year, forty lakh
A partner is not personally liable; directly shall be required rupees, or whose contribution does not
or indirectly for an obligation, solely to get its accounts audited. exceed R25 lakh shall not be required
by reason of being a partner of the However a limited liability to get its accounts audited. Audit
limited liability partnership. However, partnership whose turnover can be assigned only to a Chartered
the personal liability of a partner shall does not exceed, in Accountant in practice.
not be affected for his own wrongful any financial year, forty
act or omission, but a partner shall not lakh rupees, or whose Annual Return
be personally liable for the wrongful act contribution does not Every limited liability partnership shall
or omission of any other partner of the exceed twenty-five lakh file and annual return with the Registrar
LLP. rupees shall not be required in Form 11 within 60 days of closure of
If in case any act being carried out to get its accounts audited. its financial year. The annual return of
be LLP or any partner with intention to Audit can be assigned only an LLP having turnover upto R5 crore
defraud creditors or any other person or to a Chartered Accountant during the corresponding financial
for any fraudulent purpose, the liability in practice. year or contribution upto R50 lakh

THE CHARTERED ACCOUNTANT november 2010 87


CORPORATE AND ALLIED LAWS 768

shall be accompanied with a certificate A Private online duly signed by proposed


from a designated partner (other than Company/ Designated Partner. This
the signatory to the annual return), to Unlisted Public application should also be
the effect the annual return contains Company (“Co.”) can be verified by a Practicing Company
true and correct information. In all converted into LLP. Upon Secretary.
other cases, the annual return shall such conversion the Following documents shall be
be accompanied with a certificate company shall be deemed attached with this Form:
from a Company Secretary in practice to be dissolved and all a) Consent of each shareholder
to the effect that he has verified the the assets and liabilities of the Co.
particulars from the books and records of the company shall be b) Duly filled in Form 2, 3 and 4.
of the limited liability partnership and transferred to, and vest with c) No. Objection Certificate from
found them to be true and correct. LLP. Conversion can be Tax authorities.
carried out in three steps: d) In case of Professional Firms,
Conversion From Firm into (a) Obtain DPIN (b) Reserve approval from governing
LLP name of proposed LLP, and Council of relevant body.
A firm can be converted into LLP. Upon (c) Apply to Registrar in e) Consent of Creditors.
such conversion, the partnership firm Form 18 online duly signed The ROC may register the company
shall be deemed to dissolved and all by proposed Designated as an LLP and issue Certificate of
the assets and liabilities of the firm shall Partner. This application registration in Form 19, provided all
be transferred to, and vest with LLP. should also be verified the members of the company become
Conversion can be carried out by by a Practicing Company partners of LLP. The new LLP so
the following procedure: Secretary. formed is required to inform within 15
1. Obtain DPIN days of the date of registration, to the
2. Reserve name of proposed LLP limited liability partnership shall also be concerned Registrar of Companies
3. Apply to Registrar in Form 17 required to be submitted in Form-14. with which it was registered under the
online duly signed by proposed The LLP shall ensure that within a provisions of the Companies Act, 1956
Designated Partner. This application period of twelve months commencing about the conversion and particulars
should also be verified by a not later than 14 days after the of the limited liability partnership shall
Practicing Company Secretary. date of registration, every official also be required to be submitted in
Following documents shall be correspondence of the LLP bears Form 14.
attached with this Form: a statement that it has, as from the The LLP shall ensure that within a
a. Consent of each of the partner date of registration, been converted period of twelve months commencing
of the firm. from a firm into a LLP and the name not later than 14 days after the
b. Duly filled in Form 2, 3 and 4. of registration number, of the firm from date of registration, every official
c. No Objection Certificate from which it was converted. correspondence of the LLP bears a
Tax authorities. statement that it, as from the date of
d. In case of Professional Firms, Conversion from Private registration, has been converted from a
approval from governing Company/Unlisted Public company into a LLP and the name and
Council of relevant body. Company into LLP registration number, of the company
e. Consent of Creditors. A Private Company/Unlisted Public from which it was converted.
The ROC may register the firm Company (“Co.”) can be converted
as an LLP and issue Certification of into LLP. Upon such conversion the Winding up and Dissolution
registration in Form 19, provided all the company shall be deemed to be of LLP
partners of the firm become partners dissolved and all the assets and The Act provides for voluntary winding
of LLP. The new LLP so formed is liabilities of the company shall be up of LLP or circumstances under
required to inform within 15 days of the transferred to, and vest with LLP. which the winding up proceedings can
date of registration, to the concerned Conversion can be carried out by the be initiated by the tribunal. The Central
Registrar of Firms with which it was following procedure: Government is also empowered under
registered under the provisions of the 1. Obtain DPIN the act to make rules for the provisions
Indian Partnership Act, 1932 about 2. Reserve name of proposed LLP in relation to winding up and dissolution
the conversion and particulars of the 3. Apply to Registrar in Form 18 of LLP. n

88 THE CHARTERED ACCOUNTANT November 2010


769 WTO

New Competition Regime in India and the WTO—


Opportunities for Chartered Accountants

The importance of professional services in a globally competitive milieu and the impact of competition
regime on professional services cannot be over emphasised. During the interaction between the High Level
Committee on Competition Policy and Law1 and the Professional Institutes, Chambers of Commerce and the
Bar Associations, the need for an appropriate strategy for enhancing the competitiveness of the professional
services in the global context was stressed almost unanimously. The sole attributable factor for this stress
is the coming into being of the World Trade Organisation (WTO) Agreement known as General Agreement
on Trade in Services (GATS). This article addresses the opportunities for Chartered Accountants in the New
Competition Regime in India and in the context of India having become a Member of the WTO.

General Agreement on Trade in comprehensive definition of trade in


Services (GATS) is the first ever set of services. The four modes are:
multilateral, legally-enforceable rules Mode 1: Cross-border supply of
covering International Trade in Services. services - under this mode, the service
It was negotiated in the Uruguay Round crosses the sovereign national barriers
discussions, when the WTO came into much like the international trade in
being. The Agreement incorporates the goods (eg. international telephone
principles of “Most Favoured Nation” calls)
status and “National Treatment” and Mode 2: Consumption abroad - this
deals with market reforms, with a view involves the supply of a service in the
to removing all barriers to trade in territory of one member country to the
services. It further deals with specific service consumer of another member
subjects like Financial Services, country (eg. tourism or a student joining
Dr. S. Chakravarthy Transport, Telecommunications and an educational institute abroad)
(The author is IAS (rtd) and a former
member of Monopolies and Restrictive Natural Persons. Mode 3: Commercial presence -
Trade Practices Commission. He can be In terms of GATS, four different under this mode, the supply of a service
reached at chakravarthy38@gmail.com) modes of supply govern a is rendered through the commercial

High Level Committee (2000): Report of ‘The High Level Committee on Competition Policy and Law’ – Dept. of Company Affairs, Govt. of India, New
1

Delhi, 2000.
THE CHARTERED ACCOUNTANT november 2010 89
WTO 770

The demand for them does not mean any reflection advantage in terms of the second
professional on their importance for the country or largest English speaking skilled
services is a global competition). (technically) population after the US.
derived demand. India has a large reservoir of technically
Accounting services and India’s Competitiveness skilled population for all levels and
in particular, Chartered The demand for professional services sectors. Needless to add, that this
Accountancy services, is a derived demand. Accounting advantage needs to be and is sought
for instance, originate services and in particular, Chartered to be exploited via GATS negotiations
in the requirement of Accountancy services, for instance, on professional services in present
a client to meet either originate in the requirement of a client and in future. India’s competition policy
statutory requirements or to meet either statutory requirements and competition law need to be in the
Management needs. The or Management needs. The current perspective that sub-serves the above
current trend shows that the trend shows that dominant mode of mentioned advantage the country is
dominant mode of supply supply for such services is through enjoying, in terms of its professionals
for such services is through commercial presence (mode 3). and and skilled persons.
commercial presence engagement through international
(mode 3). networks. LPG and Professions
The next and most important With Liberalisation, Privatisation and
presence of a foreign supplier in the mode is movement of natural persons Globalisation (LPG) emerging gradually
territory of a Member country (eg. (mode 4). Inconclusive negotiations in in all economic activities, the professions
establishing branch offices to deliver the Uruguay Round in 1994 primarily have become more than ever before,
services such as banking, legal advice focused on securing commitments important, if not critical for their
or communications) to allow a larger movement of survival and growth. Financial lending
Mode 4: Movement of natural individual qualified professionals. decisions, mergers and acquisitions,
persons - temporary movement This category is regarded by many privatisation of state-owned enterprises,
of natural persons falls under this countries, particularly, the developing valuation of public assets, stock market
mode. In this category, the provider countries to include many categories developments, issues relating to
of the service crosses the border (eg. of professionally qualified persons and Foreign Direct Investment and the like
consultants) of skilled persons like construction require professionals in the areas of
Eleven basic service sectors plus workers, etc. Accountancy, Law, and Finance. Those
a twelfth category for miscellaneous India’s competitiveness lies operating in multi-national environment
services constitute the classification more in services rather than in the desire integrated solutions to support
of services in GATS. This is based manufacturing sector. It has a distinct decision-making. Electronic commerce
on the United Nations Central
Product Classification system. One
of the twelve services recognised
is designated as business services
which include professional and
computer services. India has great
interest in professional and computer
services, as it has a large reservoir
of highly skilled and experienced
professionals like Lawyers, Chartered
Accountants, Cost Accountants,
Company Secretaries and Computer
and Electronics based Scientists/
Technicians, Information Technology/
Communications Scientists/Techni-
cians, Engineers, Doctors, etc,
(there are other categories of
professionals and non-mention of

90 THE CHARTERED ACCOUNTANT November 2010


771 WTO

is opening up entirely new areas, which Accountancy is a profession, which Partnership Act) this reciprocity factor
requires a high degree of interaction has a direct bearing and interaction for is grounded on National honour,
between Accountants and software most economic activities. With the WTO professional self-respect and the desire
professionals. regime in place, there is an imperative of the Institute to use it as a bargaining
need for an appropriate strategy for chip.
Barriers to Movement of enhancing the competitiveness of The regulations under the
Persons under Mode 4 the Indian professional Accountancy Chartered Accountants Act, 1949
Developing countries and in particular, services in the global context. While allow an accountant to advertise in a
India, are generally interested in mode a need for such a strategy cannot be manner as per (ICAI guidelines); there
4 supply under GATS. Mode 4 is of over- emphasised, the presence and are restrictions on soliciting custom,
particular interest to India, which has implications of GATS impel a sense of paying commission, brokerage or
impelled its negotiators at the WTO urgency for the strategy. share of profits to anybody other than
discussions to make a demand of The Accountancy sector is regulated another accountant actively engaged
the developed countries for higher in India through a combination of both in bilateral and multilateral dialogue
commitments of movement of natural law and professional self-regulation. for recognition of its qualifications and
persons, particularly professionals. The Chartered Accountants Act, 1949 currently has bilateral arrangement
Developing countries have been governs the profession of Chartered with leading accounting bodies i.e. UK,
experiencing barriers to the movement Accountancy in the country. Likewise, Australia, Ireland and it is gathered that
of natural persons, created by the Cost and Works Accountants Act, active engagement with many others
developed countries through one or 1959 governs the profession of Cost is on.
more of the following: Accountancy. The Advocates Act, 1961 The legislative restrictions
• Additional tariff/tax on the nationals governs the profession of lawyers. abroad have the combined effect of
of foreign countries that do not The Chartered Accountants Act, denying opportunities and growth to
apply to one’s own nationals. 1949 and the regulations thereunder professional firms, restricting their
• Other regulatory restrictions on the impose certain restrictions in forming desire and ability to compete globally,
nationals of foreign countries. partnership firms. There are restrictions preventing the country from obtaining
• Quantitative limits of temporary on the trade name having a nexus the advantage of India’s considerable
movement of natural persons (eg. with individual or group of individuals human expertise and precluding
H 1B visas). (abstract names are not allowed), on consumers from the opportunity of
• Fees/charges applicable for the number of partners (restricted to free and informed choice. Multilaterally
providing social security net to twenty) and on the number of statutory there should be move to ease out
temporary movement of natural audits of companies (not more than a local regulatory architecture.
persons. twenty per partner). (As per the extant Domestically, many structural changes
• Non-tariff barriers on the movement Accountancy is are in the offing like LLP, which once
of natural persons. a profession, fully operational would pave way for a
The competition policy and/or which has a direct broader role by the accounting firms.
competition law should be appropriately bearing and interaction for It is in this context, when existing
formulated/drafted to deal with such most economic activities. barriers based on citizenship or
anti-competitive practices constituted With the WTO regime in nationality are increasingly becoming
by the aforesaid barriers to movement place, there is an imperative irrelevant, that it is necessary to promote
of natural persons. need for an appropriate competitive quality in Accountancy
strategy for enhancing services and full accountability therefore
Professions in India the competitiveness of on the part of the Accountants. It is
This article applies to all professions. the Indian professional desirable to promote large partnerships
Nonetheless, in order to provide an Accountancy services in the of Accountants to enable them to be
analysis of the impact of competition on global context. While a need globally competitive in efficiency and
professional services, the professions for such a strategy cannot quality of services rendered. Very few
of Accountancy and Law have been be over- emphasised, the firms in India provide what is called the
chosen. Mutatis mutandis, the analysis presence and implications “single window services” which means
and suggestions can apply to almost of GATS impel a sense of providing not only Accountancy but
every other profession. urgency for the strategy. also legal, financial and other advice to

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WTO 772

their clients. Rules as in Limited Liability In the new secretaries or cost accountants or
Partnership should provide for multi- competition legal practitioners or any of his or its
disciplinary partnerships (Lawyers, regime, officers to present his or its case before
Accountants and other professionals), consequent on the the Commission.
which would permit delivery of enactment and enforcement Explanation.—For the purposes of this
composite services, as desired by the of the Competition Act, section,—
clients. 2002, the Chartered (a) “chartered accountant” means
If the Accountancy profession Accountants have a great a chartered accountant as
desires to grow and serve in foreign opportunity before the defined in clause (b) of sub-
soil, freedom of movement must Competition Commission section (1) of section 2 of the
be built into the competition policy. of India to represent the Chartered Accountants Act,
Unnecessary barriers will have to be parties to the cases coming 1949 (38 of 1949) and who
removed to facilitate professional up before it. In other words, has obtained a certificate of
development and improvement in the Chartered Accountants practice under sub-section (1)
quality of services besides building can appear before the of section 6 of that Act;
an environment for easy movement Competition Commission (b) “company secretary” means a
of accountant professionals outside of India on behalf of company secretary as defined
the country. It also remains a fact complainants, defendants or in clause (c) of sub-section (1)
that Preamble to GATS recognizes the Director General. of section 2 of the Company
the right of members to regulate, Secretaries Act, 1980 (56 of
and to introduce new regulations, to professional qualifications on the 1980) and who has obtained
on the supply of services within their basis of which such services can be a certificate of practice under
territories in order to meet national rendered. The professional bodies need sub-section (1) of section 6 of
policy objectives. to regulate the qualifications and need to that Act;
The profession of lawyers is discipline the conduct of the members (c) “cost accountant” means a
governed by the Advocates Act, 1961. who are rendering professional cost accountant as defined in
Like the Accountancy profession, the services. Equally legitimate is the clause (b) of sub-section (1) of
Lawyer profession is governed by regulation, which precludes attempts section 2 of the Cost and Works
the said statute and self-regulation at blatant advertising. Likewise, Accountants Act, 1959 (23 of
stipulations. If the Indian legal system setting accounting standards and 1959) and who has obtained
has to integrate internationally, an performance practices is a legitimate a certificate of practice under
appropriate regulatory system must be regulation. But those regulations which sub-section (1) of section 6 of
in place, which ensures that, disallow normal promotional activity, that Act;
a) there is a general reciprocity of which deny the consumers the benefit (d) “legal practitioner” means an
rights and non-discrimination, of full unrestricted and informed profile advocate, vakil or an attorney
b) foreign lawyers/firms are about professional firms and deny of any High Court, and includes
subject to the same disciplinary the consumers of the choice of firms a pleader in practice”.
jurisdiction as Indian lawyers, should have no place. In the new competition regime,
c) there are greater opportunities consequent on the enactment and
for the future development of Competition Law and enforcement of the Competition Act,
the legal profession in India, Chartered Accountants 2002, the Chartered Accountants
and The new Indian Competition Law, have a great opportunity before the
d) Indian law professionals can namely, Competition Act, 2002 Competition Commission of India to
move abroad for rendering (amended in 2007) has rightly provided represent the parties to the cases
legal services. an excellent window for the profession coming up before it. In other words,
Having listed the restrictions on of Chartered Accountants. It declares Chartered Accountants can appear
professionals, which limit competition in Section 35 thereof that, before the Competition Commission
and their growth, it has to be mentioned “A complainant or defendant or the of India on behalf of complainants,
that this should not be construed Director General may either appear defendants or the Director General. In
that all regulations must be removed. in person or authorise one or more order to so represent, the Chartered
Regulations are necessary with regard chartered accountants or company Accountants need to brace themselves

92 THE CHARTERED ACCOUNTANT November 2010


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on the features and provisions of facility of Indian Accountants and


Competition Act, 2002 with particular Indian Accountant firms entering the
reference to anti-competitive practices, global field without hindrance. A Paper
abuse of dominance, mergers, published in 2003 calls for a strategy
amalgamation, acquisitions and for the Indian Chartered Accountants
acquisitions of control. To put it in community. The roadmap for the
another way, Chartered Accountants strategy as suggested in the White
will have to practice ‘out of the box’ Paper includes:
of Chartered Accountants and equip • Organising and sensitising
themselves with knowledge and info- themselves that their collective
rmation about the competition law, its interest has been impaired with
rules and regulations. This implies that the entry and occupation of the
Chartered Accountants anchoring their Indian consultancy market by the
profession in Chartered Accountancy Multinational Accounting Firms
will have to go for a reinforcing anchor in (MAFs) and their infiltration into the
competition law. This is likely to propel audit and attestation segment in the of Indian Chartered Accountants in the
Chartered Accountant professionals to Indian accounting sector because global context which would imply the
diversification and greater heights. of the policies followed hitherto and imperative need for a level playing field
also because of GATS, for the Indian professionals vis-a-vis
Desirability or Otherwise • Articulating boldly that market the foreign professionals abroad.
of Allowing Foreign reforms framed by the interest
Accountants groups in the West should not be Conclusion
A question that troubles the policy implemented as such, unless a 1. The statutes governing professions
makers and thinkers in the Government level playing field is created for need to be amended to be GATS
and also the Institute of Charted developing countries vis-a-vis the compatible.
Accountants of India (ICAI) is whether developed countries, 2. A positive approach is necessary
Foreign Accountants and Foreign • Reorienting the thinking that the on the part of the Government
Accountant firms should be allowed Indian Chartered Accountants are and the professional institutes/
free play in our country in terms of not merely employees & SMPs but bodies to ensure that the Indian
GATS and the competent reciprocal entrepreneurs and employers as professionals and firms grow to
quality of professional work has no become globally competitive.
A question that
relation to size of firm 3. Professions enjoy certain
troubles the
• Enlisting the support of different monopoly rights of practice in their
policy makers and
stake holders in the Indian economy designated fields and the bodies
thinkers in the Government
to expose the practice of funding administering the professions enjoy
and also the Institute of
agencies and institutions like the considerable autonomy in their
Charted Accountants of
World Bank and IMF of imposing administration. These monopoly
India (ICAI) is whether
auditing firms nominated by them rights and autonomy should be
Foreign Accountants and
on Indian corporates, and channelised for regulating quality
Foreign Accountant firms
• Networking with other professional of the professions, the standards
should be allowed free play
firms like lawyers, consultancy of entry and discipline and
in our country in terms of
firms, etc., to offer one stop service accepted norms of performance.
GATS and the competent
which aspect the LLP provisions They should not be used to limit
reciprocal facility of Indian
are perceptibly going to address. competition.
Accountants and Indian
The Paper has commended a 4. Professional bodies should
Accountant firms entering
goal called “India First”. This mantra channelise their rights of autonomy
the global field without
should not be construed to mean to counter the normal challenges
hindrance. A Paper
Indian Chartered Accountants to the of global integration. It is illogical to
published in 2003 calls for
exclusion of the Foreign Accountants. have a totally protected profession
a strategy for the Indian
On the other hand, the mantra should in an environment of global
Chartered Accountants
be so construed to mean the interest industrial integration. n
community.

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779 BANKING AND FINANCE

Private Equity and Valuation

Private equity is a distinctive 1. What is Private Equity? ranging from those in the less mature
investment strategy with a buy- Private equity is playing a great role venture capital firms to those in the
to-sell orientation. Private equity in today’s global economy. In the last more mature buyout transactions.
decade, it has grown from a small, One distinctive characteristic of
fund investors typically expect
niche activity to a critical component of private equity investment is a buy-to-
their money returned, with a sell orientation. Private equity fund
the financial system. Along with a huge
handsome profit, within 10 years amount of equity investment, private investors typically expect their money
of committing their funds. Private equity deals and employs significant returned with a handsome profit within
equity investments in the portfolio amount of debt and, so, the value 10 years of committing their funds.
companies need more careful of the transactions involving private The economic incentives of the funds
equity funds is often two to three times are aligned with this goal. Most of
analysis because, in most private
the actual equity raised. Until recently, the money for the private equity fund
equity transactions (involving high comes from institutional investors such
few people even knew the names
level of risk), there is no direct of main private equity players. But, as insurance companies, pension
market evidence on the valuation now organizations like Blackstone, funds and endowments, although
of the company being acquired. Kohlberg Kravis Roberts, and Texas many HNIs also invest directly or
The article throws light on various Pacific Group are recognized as major through fund-of-fund intermediaries
players in global financial system. who provide their investors with a more
private equity structures and
Private equity firms make investments diversified portfolio of investments.
valuation issues of portfolio
companies from the perspective Structure of a Typical Private Equity Investment Transaction
of private equity fund. Partnership Equity
Interest Position
Private Equity Private Equity Portfolio
Investor Firm Fund Company
Investment Investment
Private equity investor is an outside investor who makes an investment offered by a
private equity firm. Private equity firm is an intermediary in the illustrated transaction.
Portfolio Company denotes the company that private equity firms invest in. Portfolio
companies are sometimes referred to as investee companies.

The private equity class stretches the way to the large buyouts (leveraged
from venture capital (VC) – working in buyouts or LBO) in which the private
CA. Nikhil Bagrodia early stage companies that in many equity firm buys the entire company.
(The author is a member of the Institute. cases have no revenues but have In some cases, these companies
He can be contacted at eboard@icai.in.) potentially good ideas or technology – all might themselves be quoted on the

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stock market, and a private equity fund involve privately owned companies, back the expansion of existing
performs public-to-private transaction and very often, a particular division businesses, but, for this reading, we
thereby removing the entire company of an existing company. There are would refer simply to venture capital
from the stock market. But in majority many other forms of later-stage and buyouts as the major forms of
of cases, buyout transactions will financing, e.g. providing capital to private equity:

Broad Category Subcategory Brief Description


Venture Capital Seed stage Financing provided to research business ideas, develop prototype products or
conduct market research.
Start-up stage Financing to recently created companies with well articulated business and
market plans.
Expansion stage Financing to companies that have started their selling effort and may be
already breaking even. Financing may serve to expand production capacity,
product development, or provide working capital.
Replacement Financing provided to purchase shares from existing venture capital investors
capital or to reduce financial leverage.

Buyout Acquisition capital Financing in the form of debt, equity or quasi-equity provided to a company to
acquire another company.
Leverage buyout Financing provided by an LBO firm to acquire a company.
Management Financing provided to the management to acquire a company, specific
buyout product-line or division (carve-out)

Special situations Mezzanine finance Financing generally provided in the form of subordinated debt and equity
kicker (warrants, equity, etc)
Distressed Financing of companies in need of restructuring or facing financial distress.
securities
One-time Financing in relation to changing industry trends and new government
opportunities regulations.
Others Other forms of private equity financing are also possible.

1.1 Classifications of Private model depends on some economic have a superior ability to reengineer
Equity in terms of Stage and advantages it may have over the public companies would mean that public
Type of Financial of Portfolio equity governance model. These companies have inherently less
Companies potential advantages can be broadly ability to conduct reengineering or
Private equity funds may also be classi- classified as: organizational changes relative to
fied depending upon their geographical corporations held by private equity.
locations, e.g. regional, national or 1.2.1 Ability to reengineer the However, many public companies
global, and/or sector focuses, e.g. private firm to generate superior have established long track record of
diversified industrial, telecommunication, returns creating value. Thus, only a part of value
healthcare, infrastructure, etc. In order to reengineer their portfolio additions created by private equity
companies, many private equity firms houses may be explained by superior
1.2 Value Creation in Private have developed in-house high-end reorganization and reengineering
Equity consulting capabilities supported capabilities.
The question of how private equity frequently by seasoned industry
funds actually create value has been veterans, e.g. CEOs, CFOs and senior 1.2.2 Ability to access credit
much debated inside and outside the advisors, and have a proven ability markets on more advantageous
private equity industry. The survival to execute deals on a global basis. terms
of the private equity governance Assuming private equity houses Ample availability of credit at

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favourable terms, e.g. low credit e.g. collateralized loan obligations company. Such clauses ensure
spreads and few covenants, led in (CLOs) which consist of a portfolio management’s loyalty to their firm.
2006 and the early half of 2007 to of leveraged loans. In some cases, • Board representation: Corporate
a significant increase in leverage the private equity fund issues high- board seats ensure private
available to buyout transactions. In a yield bonds as a way of financing the equity control in case of major
private equity firm, debt is more heavily portfolio company, and these often are corporate events, e.g. company
utilised and is quoted as a multiple sold to funds that create collateralized sale, takeover, restructuring, IPO,
of EBITDA (earnings before interest, debt obligations (CDOs). These bankruptcy or liquidation.
taxes, depreciation and amortization) transactions have resulted in a large • Non-compete clause: Company
as opposed to multiple of equity, as for transfer of risk to the credit markets. founders must sign such clauses
public firms. However, the markets have recently that prevent them from competing
When considering the impact of slowed, creating less availability of against the firm within a prescribed
leverage on value, we would normally financing of large buyouts. period of time.
turn to one of the foundations of • Preferred dividends and
modern finance: the Modigliani-Miller 1.2.3 Superior alignment of liquidation preference: Private
theorem which states that, in absence interest between managers of the equity firms generally receive their
of taxes, asymmetric information, firm they control and private equity distribution before other owners
bankruptcy costs and assuming firm owners. often in the form of preferred
efficient markets, value of the firm is not Another important factor that dividends and sometimes may be
affected by how the firm is financed, significantly explains the returns earned guaranteed a minimum multiple
whether by equity or debt. However, by private equity funds is the alignment of their original investment. They
relaxing the assumption of ‘no taxes’ of economic interest between private also have priority in the firm’s
from their model, interest tax shield on equity owners and the managers of assets, if the portfolio company is
the acquisition of debt would create a the company they control, which can liquidated.
firm value. One would also expect that crystallize management efforts to • Reserved matters: Domains of
the financial leverage of a firm would achieve ambitious milestones set by strategic importance, e.g. changes
be set at a level where the bankruptcy private equity owners. Result-driven in business plans, acquisition or
costs do not outweigh these tax management pay packages along with divestiture, are subject to approval
benefits. Unlike public companies, various contractual clauses ensure that or veto by the private equity firm.
private equity firms may have a better managers receive proper incentives to • Earn outs (mostly in venture
ability to raise higher levels of debt not reach their targets and that they will not capital): These are mechanisms
only as a result of a better control over be left behind after the private equity linking the acquisition price paid by
management, but also as a result of house exits their investment. The the private equity firm to the portfolio
their reputation for having raised and following are some of the examples of company’s future performance
repaid, such high levels of debts in the contract terms contained in the term over a predetermined time horizon,
previous transactions. sheet that specifies the terms of the generally not exceeding 2 to 3
Such debt financing is raised initially private equity firm’s investment: years.
from the syndicated loan market, but, • Compensation: Compensations By specifying the appropriate
then, is frequently repackaged via contract for the managers of the control mechanism, venture capitals
sophisticated structured products, portfolio companies contains The private equity
clauses that are closely linked class stretches from
to long-term goals and firm’s venture capital
performance. (VC) – working in early stage
• Tag along, drag along clauses: companies that in many cases
These are contractual provisions have no revenues but have
in the share purchase agreements potentially good ideas or
that ensure any potential future technology – all the way to
acquirer of the company may not the large buyouts (leveraged
acquire control without extending an buyouts or LBO) in which the
acquisition offer to all shareholders, private equity firm buys the
including the management of the entire company.

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When considering the firm that is evaluating potential current market value of the target.
impact of leverage investments. Evaluation of However, it is important to make
on value, we would potential acquisition by a private sure that the comparisons are
normally turn to one of the equity firm is particularly complex, appropriate and this is not always
foundations of modern finance: because, in most cases except possible especially in businesses that
the Modigliani-Miller theorem for public-to-private transactions, operate in niche sectors or that are
which states that, in absence of there will be no market prices to pioneering in terms of their products or
taxes, asymmetric information, refer to. Private equity firms can services.
bankruptcy costs and assuming face considerable challenges in The use of market data is also
efficient markets, value of the valuing these companies and this important in the DCF approaches,
firm is not affected by how the reading discusses main ways in particularly in estimating an appropriate
firm is financed, whether by which valuation is approached. discount rate. Cost of capital of private
equity or debt. 2. Perspective of the outside investor companies is estimated generally
who is looking at the costs and risks using the same weighted average cost
of investing in a fund sponsored by of capital (WACC) formula used for
the private equity firm. private companies. A serious challenge,
however, in a private equity setting is the
3. Perspective of a Private lack of public historical data on share
Equity Firm – using market prices and returns. Therefore, the beta
data in valuation that represents relative exposure of the
In most private equity transactions company share to the market must be
with the exception of public-to-private, estimated by means of a proxy. This is
there is no direct market evidence on performed typically by estimating beta
the valuation of the company being for comparable companies and, then,
acquired. But, virtually all valuation by adjusting for financial and operating
make investments in companies techniques employ evidence from leverage.
of considerable risk. In particular, it the market at differing stages in the
may allow the private equity firms to calculation rather than relying entirely 3.1 Valuation Issues in Buyout
significantly increase their control over on accounting data and management Transactions
time and even seize control in case the forecasts. The two most important ways A buyout is a form of private equity
company fails to achieve the agreed in which market data are used to infer transaction in which the buyer acquires
goals. the value of the entity being acquired from the seller a controlling stake in the
are by analyzing the comparable equity capital of the target company. It
2. General Valuation Issues companies that are quoted on public comprises a wide range of techniques
for Private Equity market and valuations implied by recent including but not limited to management
Public firms are bought and sold on transactions involving similar entities. buyouts (MBOs), leveraged buyouts
regulated exchanges daily. Private Typically, these techniques focus on (LBOs), or, takeovers. Our focus
firms, however, are bought by buyers trading or acquisition multiples that in this reading would be LBOs
with specific interests at specific points exist on public markets or in recent that consists of acquisition of a
in time with each potential buyer transactions. For instance, valuation company using borrowed money to
possibly having a different valuation for is sought in food sector for a retail finance a significant portion of the
the firm. Furthermore, valuing a private chain, which is currently a privately acquisition.
firm is more difficult than valuing a owned company; the comparison
public firm, because private equity company approach would look at 3.1.1 LBO Model
firms often transform and re engineer trading multiples, e.g. enterprise value The LBO model is not a separate
the portfolio company such that the to EBITDA, of comparable public valuation technique but rather a way of
future cash flow estimates are difficult companies and use this multiple to determining the impact of the capital
to obtain. value the target. Similarly, if there are structure, purchase price and various
There can be two perspectives of recent M&A transactions in the food other parameters on the returns
valuing private equity investments: retail sector, the transactions multiple expected by the private equity fund from
1. Perspective of a private equity paid could be used to inform the the deal. The objective is not to value the

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firm but to determine the maximum price 3.2 Valuation Issues in Venture
in negotiation that the private equity firm Capital Investments – The
should pay for its stake. Venture Capital Method
The LBO model has three main In venture capital, pre-money valuation
inputs: target firm’s forecasted cash and post-money valuation are the two
flows, expected return from the fundamental concepts. Pre-money
providers of financing, e.g. equity, valuation (PRE), refer to the agreed
senior debts, high-yield bonds, etc., value of a company prior to a round
and the amount of financing available of financing or investment. Post-
for the transaction. The free cash money valuation (POST) is the value
flow forecasts are provided by the of the company after the financing or
management of the target company investing round. Therefore, the post-
and are subject to an extensive money valuation of the firm will be:
due diligence process (strategic, PRE + Investment = POST
commercial, legal and environmental) The proportionate ownership of
to determine the reliability of such the venture capital investment is
forecasts. The exit date, i.e. when determined by: Investment
the target firm is sold, is evaluated POST
at different dates to determine its Typically, both pre-money valuation
influence on the projected returns. The and the level of venture capital
value of the firm at that time is forecast investment are subject to intense
using a relative value of market negotiations between the founders
approach. and venture capital firm, bearing in
mind the fundamental issue of dilution
3.1.2 Value Creation Chart in a of ownership. Dilution of ownership
Leverage Buyout (LBOs) is the reduction in the proportional
ownership of a shareholder in the
capital of a company resulting from the
issuance of additional shares and/or
of securities convertible into shares in
some stage in the future.
In venture capital transactions,
there is significant uncertainty
surrounding the projected future cash
Cost Earnings Multiple Reduction in Exit
growth expansion debt flows. Consequently, discounted cash
flow methodology is rarely used as
On the basis of the input parameters, the first method to determine value.
LBO model provides the maximum Similarly, there are challenges in
price that can be paid to the sellers applying comparable companies In most private
while satisfying the target returns approach, as start-ups generally have equity transactions
for the providers of financing. Value unique features and it may be extremely with the exception
creation comes from a combination difficult to find comparable quoted of public-to-private, there is
of factors: earning growth arising companies operating in the same field. no direct market evidence on
from operational improvements and Alternative valuation methodologies the valuation of the company
enhanced corporate governance; like the venture capital method or the being acquired. But, virtually all
multiple expansions depending real option methodology are used to valuation techniques employ
upon pre-identified potential exits determine value. evidence from the market
and optimal financial leverage In buyouts, given the significant at differing stages in the
and repayment of part of the debt predictability of cash flows, the income calculation rather than relying
with operational cash flows before based approach (discounted cash entirely on accounting data and
the exit. flows, adjusted present value, LBO management forecasts.

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model, target IRR) is frequently used to obtain the post-money (POST) The steps in venture capital method
as a primary method to determine valuation: using the IRR are:
the value of equity, considering the POST = Future Value (FV) Step 1: Using the IRR, compound the
expected change in leverage until the (1 + r)N investment out to exit to obtain the
time of exit of the investment. The initial where, r is the discount rate used by investor’s expected future wealth (W):
high and declining financial leverage is private equity W = Investment (1 + r)N
the main technical issue that needs to N is the number of years until exit Step 2: Determine the required
be adequately factored into the income Step 2: Determine the pre-money (PRE) fractional ownership (f) for the private
approach when applied to a buyout valuation by netting the Investment from equity firm which is the investor’s
valuation. the post-money (POST) valuation: wealth divided by the terminal, future
Venture capital method is a simple PRE = POST – Investment value (FV) of the firm:
approach to valuation that is sometimes Step 3: Determine the required f = W/FV
expressed in the terms of Net Present fractional ownership (f) for the private Step 3: Determine the number of shares
Value (NPV) and sometimes in the equity firm: the private equity firm (Spe) needs to
language of Internal Rate of Return f = Investment obtain their fractional ownership, where
(IRR). POST Se is the entrepreneur’s share:
Step 4: Determine the number of shares Spe = Se[f/(1-f)]
3.2.1 Venture Capital Method using the private equity firm (Spe) needs to Step 4: Determine the stock price per
the Net Present Value (NPV) obtain its fractional ownership where share (P):
Previously, we used the pre-money Se is the entrepreneur’s share. We start P = Investment
(PRE) valuation as the starting point and with the formula for private equity firm’s Spe
using the venture capital investment in fractional ownership: Step 5: Divide the investment by the
the portfolio firm by the private equity f= Spe fractional ownership to obtain the post-
firm, the post-money (POST) valuation Spe + Se money (POST) valuation:
was determined. Post-money valuation And, then solve for Spe; POST= Investment
could also be determined using the Spe = Se[f/(1-f)] f
present value-future vale formulae, Step 5: Determine the stock price per or, perhaps more intuitively, we can
and from that we determine the share (P): use
PRE value. Essentially, the PRE P = Investment POST = P (Spe + Se)
value is the net present value (NPV), Spe Step 6: Determine the pre-money (PRE)
accordingly this approach is referred valuation by netting the investment from
to as venture capital method using the 3.2.2 Venture Capital Method the post-money (POST) valuation:
NPV. using the Internal Rate of Return PRE = POST – Investment
The steps in venture capital method (IRR) Or, use:
using the NPV are: Venture capital method can also be PRE = P x Se
Step 1: Discount the future value of the presented in the language of IRRs.
company at exit back to the present While the IRR is often a problematic 4. Exit Routes: Returning
method in finance, our venture Cash to Investors
The free cash
capital method is sufficiently simple The exit route is among the most
flow forecasts are
that the IRR and the NPV methods critical mechanisms to unlock value
provided by the
give exactly the same result. For in private equity. Most private equity
management of the target
the NPV calculation, we started firms consider their exit options prior to
company and are subject to an
with a given future value and investing and factor their assessment
extensive due diligence process
discounted back to get the post-money of exit outcome into their analysis of
(strategic, commercial, legal and
(POST) valuation. Here, we begin by target and expected internal rate of
environmental) to determine
going in the other direction, i.e. working return. Generally, there are four exit
the reliability of such forecasts.
forward in time. We start by compounding routes for private equity investments:
The exit date, i.e. when the
the investment out to the exit to
target firm is sold, is evaluated
get the investor’s expected future 4.1 Initial Public Offering
at different dates to determine
wealth. In this method, the investor’s (IPOs)
its influence on the projected
discount rate will be used asthe IRR. An IPO usually results in the highest
returns.

104 THE CHARTERED ACCOUNTANT November 2010


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The so-called venture prospects and having a sufficient size. to another private equity firm.
capital method can Timing of an IPO is also an important
also be presented in consideration. 4.3 Management Buyout
the language of IRRs. While the (MBO)
IRR is often a problematic method 4.2 Secondary market sale Management buyout is a takeover
in finance, our venture capital In a secondary sale market, stake held by the management group using
method is sufficiently simple that by a financial investor is sold to another a significant amount of leverage to
the IRR and the NPV methods give investor or to strategic investors finance the acquisition of the company.
(companies operating or willing to Alignment of interest is optimal under
exactly the same result. For the
establish in same sector or market of this exit scenario but may come at the
NPV calculation, we started with a
the portfolio company). Secondary expense of excessive leverage that
given future value and discounted
market sale is more frequent in the may significantly reduce company’s
back to get the post-money
case of buyouts. The following are the flexibility.
(POST) valuation.
two main advantages of secondary
exit value as a result of an enhanced market sale: 4.4 Liquidation
liquidity access to large amounts of The possibility to achieve Controlling stakeholders have the
capital and the possibility to attract the highest valuation multiple in power to liquidate the company, if the
higher caliber managers. But an absence of an IPO; and with the company is no longer viable. This exit
IPO comes at the expense of a segmentation of private equity firms, route generally results in a floor value
cumbersome process, less flexibility specialised firms have the skill to bring for the portfolio company but may
and significant costs. Therefore, an their portfolio companies to the next come at the cost of negative publicity
IPO is an appropriate exit route for level (restructuring, merger, new for the private equity firm, if the portfolio
private companies with an established market) and sell either to a strategic company is large and employee count
operating history, excellent growth investor seeking to exploit synergies or is significant. n

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Producers and Distributors:


Case of Organised Retail in India

Organised retail currently accounting for barely 4 per cent of retail sector in the country is evolving rapidly.
Its share is increasing continuously and this segment is highly visible. Foreign retailers are eager to enter
the country and are busy finding out Indian business partners, but many Indian businesses are taking rapid
strides even without their support. Relation between producers and organised retailers can be full of tension.
Large manufacturers in FMCG sector, who have not been much bothered about distribution so far, are in
for a rude shock given by the economic strength of new retailers. While a close relationship between the
two will result into more efficient distribution, quicker feedback from consumers and concentrated demand
for the producers whereas pressure on price, delayed payments and competition of private labels will
create difficulties. Farmers stand to benefit from the development of new and more compact supply chains
connecting them with organised retail through collectors and distribution centres. Read on to know more.

Introduction but a small cog in the vast machinery


In the Western world, mass distribution of distribution; nonetheless, its last-
followed mass production and together mile operation is very important in
they brought about an unprecedented marketing.
improvement in consumers’ standard Organised retail currently
of living by providing them an ever- accounting for barely 4 per cent of
increasing variety of cheap goods. retail sector in the country is evolving
India too, is currently witnessing a rapidly. Its share is increasing
phase of mass distribution in the form continuously and this segment is
of large, organised supermarkets, highly visible. Foreign retailers are
hypermarkets, shops and malls. eager to enter the country and are
To be sure, improvements in mass busy finding out Indian busi-ness
distribution comprise better practices partners, but many Indian businesses
Vasudha Joshi in marketing, transport and storage. are taking rapid strides even without
(The author is Asst. Professor and Head Telecommunication technology, supply their support. Future, Aditya Birla, Tata,
of Department of Business Administration Reliance groups and Raheja are some
chain networks and logistics are
at Ness Wadia College of Commerce,
making the real difference in distribution prominent names among them. Rapid
Pune. She can be contacted at vasudha.
joshi23@gmail.com) today. In comparison to them, retail is urbanisation, a growing middle class,

106 THE CHARTERED ACCOUNTANT November 2010


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Modern retail is now take a more nuanced view and Survival of traditional retail:
influencing consumers concede that it provides important Traditional retail is being forced to
to loosen their purse benefits to the economy. They are: upgrade and enhance the services
strings. Retail therapy has 1. Greater job creation it offers to retain its customers. It is
become a favourite option to 2. Efficient supply chain being forced to become more efficient.
many. When consumers spend 3. Forcing traditional retail to change, However, it shows no signs of being
more, the whole economy is and wiped out. So it can be said that both
activated. Traditional retailers 4. Benefits for consumers new and old retail will exist and their
have been forced by the new Greater job creation: Employment competitive relationship with perhaps
competition to offer more in traditional retail is essentially family- mutual dependence, will enhance the
services to customers and to based. New retail is like an organised contribution of this sector as a whole.
gain focus in their dealings. industry and it offers a large number of Benefits for consumers: Greater
Earlier, it was thought that new jobs, particularly front-end jobs to those choice, lower price, better quality,
retail would be beneficial to who do not have high educational better shopping experience and
consumers, but inimical to old qualifications. Working conditions enhanced service are all real benefits
retailers, particularly the kirana in organised retail are good, career to consumers because of which they
shops. We can now take a more prospects exist, training is imparted, keep going to new retail shops and
nuanced view and concede that jobs have some element of glamour enjoy themselves.
it provides important benefits (fashionable uniforms, conversation in
to the economy: (a) Greater job English with customers) and salaries How do Producers Look at
creation, (b) Efficient supply are good. A non-graduate who can New Retail?
chain, (c) Forcing traditional speak in English can get R8000 p.m. Apart from consumers and traditional
retail to change, and (d) Benefits as starting salary in these shops. retailers, another group has very
for consumers. Efficient supply chain: Organised important links with retail. The group
exposure to modern lifestyles through retail is strong in sourcing from a wide consists of manufacturers including
TV programmes and to a smaller variety of suppliers and it develops a agriculturists. Its relationship with
extent, foreign visits are creating a good distribution network. A number organised retailer is however, complex.
huge demand for modern shopping of benefits such as reduced lead time, We are yet to reach a stage where
experience. Malls with their posh fewer stock outs, reduced wastage mass production is counter-balanced
locations and interiors, escalators and and fewer inventories follow from them. by mass distribution. So tension
shopping trolleys, attractive displays to Already, it is being seen that supply exists between these two parts.
feast the eye, freedom to touch and feel chains in sectors such as shampoo Their interaction is marked by both
the merchandise, fast moving stocks and detergents, readymade clothes, positive and negative aspects. It is
and attractive promotional offers have supply chains are becoming more very interesting to understand this
secured an important place in the compact resulting into greater margin relationship between producers and
psyche of householders, women and with retailers. The following diagram new retailers.
teenagers. shows the difference in prevalent and A recent study has explored
new supply chains in apparel sector. this relationship while carrying out
Overall benefits Current Supply Chain for Apparels
Modern retail is influencing consumers Manufacturers distributors
to loosen their purse strings. Retail Buying agent
therapy has become a favourite option Manufacturers’ own outlets/
to many. When consumers spend
more, the whole economy is activated. Organised retail shops franchisees multi-brand outlets
Traditional retailers have been forced
by the new competition to offer more
services to customers and to gain focus Consumers
in their dealings. Earlier, it was thought
that new retail would be beneficial to Emerging supply chain for apparels
consumers but inimical to old retailers, Manufacturer
particularly the kirana shops. We can Retailer
Consumers

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TRADE 788

an in-depth study of new retail. (1) It commission, credits, packaging nised retail attracts customers in
distinguishes among three different will be required and transport large numbers. So growth pros-
types of producers viz. large producers, costs will also be reduced. There pects for producers, particularly
small producers and farmers. The will also be greater transparency in FMCG and apparel sectors, will
study is based on interviews carried in the flow of operations. Supply improve. Modern retail places large
out with CEOs/Business Heads/Heads chains will become more efficient orders because of its large shelf
of Retail in 12 large manufacturing firms and they will carry large volume of space. These mean concentrated
in FMCG and apparel sectors. These goods. Traditional supply chains demand that producers will be
interviews were based on a semi- will remain and in addition, new happy to cater to. Organised retail
structured, open-ended questionnaire chains between producers and means large buyers who insist on
that was first circulated among these large, modern retail stores will be low prices and more services. Their
companies. Most of these firms are worked out. pressure will force manufacturers
well-known and they include HUL, ITC 2. New product categories: New to become more efficient by
Foods, Cargill Foods, Glaxo Smith Kline, product categories in FMCG investing in people, processes and
Raymond, Madura Garments, United sector will develop. These will be technology.
Colors of Benetton, FabIndia, etc. The expensive product categories However, these benefits are counter
same study interviewed 20 small and which have greater customer balanced by following points.
medium producers of packaged food, involvement and in personal care
cosmetics, toiletries and apparel from products and eatables, they will Negative aspects:
Delhi. The annual turnover of these benefit from personal handling by 1. Pressure on price: Lower prices
units varied from Rs.10 lakh to Rs. 10 consumers which is facilitated by that organised retail insists on for
crore. Three of the respondents had an modern retail shops. These shops its bulk orders are mostly much
all-India presence while the rest were also facilitate faster customer beyond normal, reasonable limits.
regional players. The number of their feedback and once it is made Wal-Mart, the biggest retail firm
employees varied between 10 and 50. available to producers, quicker in the world, has got a slogan:
The study also contacted farmers who improvements in products and ‘Everyday, lower prices’. In fact,
were growing cauliflowers in Hoskote brands can be effected. Thus a its search for lower prices is
near Bangalore in Karnataka. larger range of opportunities will never ending and so it subjects
be available to producers. its suppliers to immense pressure
Large Producers and New 3. Concentrated demand: Orga- for cost cutting. It has long-term
Retail Organised retail’s sourcing relations with companies
Large businesses in the study were sourcing and such as Proctor and Gamble and
unanimous that emergence of distribution network these relations are buttressed by
organised retail was inevitable in the will help producers. At present, transparency and wide-ranging
economy. Benefits of organised retail organised retail is using sharing of information about
indicated by them were threefold: traditional supply chains which consumer off-take and stocks.
Benefits: have very many middlemen. In Ordinary manufacturers are not
1. New supply chains: Organised due course of time however, used to such a relationship.
retail’s sourcing and distribution it will set up its distribution Organised retail can also delay
network will help producers. At centres and create IT-enabled payment of bills which creates
present, organised retail is using networks of the involved cash flow and working capital
traditional supply chains which parties. Then manufacturers will management problems for
have very many middlemen. In due be able to bypass middlemen producers. Organised retail incurs
course of time however, it will set up and supply directly to new high costs in two areas currently
its distribution centres and create retail shops. This will lead to in India viz. real estate prices
IT-enabled networks of the involved reduced transaction costs as less and manpower costs. To offset
parties. Then manufacturers will commission, credits, packaging their effect, it has to squeeze its
be able to bypass middlemen will be required and transport suppliers and this results in the
and supply directly to new costs will also be reduced. There above-mentioned price-payment
retail shops. This will lead to will also be greater transparency pressure on producers.
reduced transaction costs as less in the flow of operations. 2. Threat of private labels: These

108 THE CHARTERED ACCOUNTANT November 2010


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Finally manufacturers are trying to ‘adopt’ small retailers about local markets and customers.
feel that in future, and to help them to upgrade their
scales will not be operations. They are encouraging Small Producers and New
loaded entirely in favour of them to come together and resort to Retail
modern retail as they are at combined buying of products from The above is the perspective of large
present. High real estate prices manufacturers. Manufacturers are producers. How do small producers
and competition will become also advising small shops that only look at organised retail?
major threats to them in future. by coming together and resorting to Most of the small producers in
(Already, many shops are common action, they will be able to this survey have plans to increase
finding it difficult to generate face the onslaught of organised retail. their scale of operation in the next five
adequate sales on weekdays and Manufacturers have also made years. So they are planning to hire
arrangements are being made to teams headed by accounts and more employees and machinery. At the
bail out Vishal Mega Mart. The category managers to deal with same time, they foresee product market
near stampede on the opening modern retailers. The exclusive job of competition becoming more intense for
of one of its outlets in Pune these teams is to manage relationships them in future. On the one hand, large
just a few years ago had to be with modern retail. Manufacturers are producers and private labels of big
seen to be believed. Subhiksha devoting special efforts to strengthen retailers will take away their business,
has faced similar problems.) their brands. A report indicated that but there exists an opportunity for them
Convenience of consumers and major FMCG companies had formed an to cooperate with retail shops to help
local conditions ultimately informal group to deal with the problem establish private labels and get stable
matter in retail business and of repeated delays and defaults on business on the other. On the whole,
so modern retail will have to credit payments by organised retail. they consider the emergence of new
carry out extensive research to The group was thinking of referring retail as a positive development and
know about local markets and the issue to Confederation of Indian they are willing to work with them. They
customers. Industries and even of boycotting new did not report any change in payment
retail altogether. Organised retail had terms and credit periods while dealing
are retailers’ own brands: not cited credit crunch in the market as with new retailers.
producers’ but store brands. the cause of its delayed payments, but
Modern retail shops allot greater FMCG companies doubted it. They Farmers and New Retail
shelf space to own private labels thought that retailers faced a shortage Agricultural marketing is of immense
and by making them more visible, of cash because of their very ambitious importance, but generally, in our
build them up systematically. In growth plans. The situation has eased country, supply chains of farm produce
the days to come, consumers will somewhat now. are long and middlemen take a large
become used to self-service in Finally, manufacturers feel that in cut in the spread between market price
new retail stores and their buying future, scales will not be loaded entirely and farmers’ cost.
decision will be made in stores in favour of modern retail as they are A recent study of marketing links
rather than at home. Then private at present. High real estate prices of vegetable growers in Uttarakhand
labels will steal a march over and competition will become major found that the average farmer spent
manufacturers’ brands. threats to them in future. (Already, 7.5 hours (2 to travel to the market, 2
Large manufacturers are getting many shops are finding it difficult to to come back home and 3.5 hours at
ready to counter these threats in generate adequate sales on weekdays the wholesale market) to complete a
different ways. They include: and arrangements are being made to transaction which was valued at R3000.
1. Increasing own retail presence bail out Vishal Mega Mart. The near It also found that regulated market rules
2. Helping traditional, small retailers stampede on the opening of one of were observed more in their breach
3. Forming dedicated teams to deal its outlets in Pune just a few years and that brokers charged commission
with organised retail ago had to be seen to be believed. from retailers as well as farmers and
4. Building brand strength Subhiksha has faced similar problems.) their rates exceeded mandated rates.
5. Forming common front Convenience of consumers and local Under these conditions, transaction
Apparel producers are thus conditions ultimately matter in retail costs to farmers amounted to 25 to 38
opening exclusive showrooms to gain business and so modern retail will have per cent of the price paid by the retailer
greater presence in the market. They to carry out extensive research to know in the wholesale market. Thus, existing

THE CHARTERED ACCOUNTANT november 2010 109


TRADE 790

markets are biased in favour of large to poor and better-off farmers, no agents who visit farms at harvest
margins to traders and low prices to cheating with weights and regular times and offer better prices and spot
farmers. payments. payment. They feel that whenever
3. Farmers also stand to gain technical this opportunity arises, farmers forget
Benefits to Farmers know-how and knowledge of about their contractual obligations to
1. The biggest benefit of organised international benchmarks of supermarkets.
retail to farmers lies probably in the sorting, grading and packaging. Taking the case of cauliflower
availability of an additional supply 4. Once a stable relationship is growers in Hoskote, Karnataka, the
chain connecting them to retailers. established between farmers and supply chains were as shown below:
Farmers can now supply fresh food supermarkets, the cropping pattern 1. Farmer — transporters — com-
items directly to supermarkets, is also likely to change. Organised mission agent — wholesaler —
food grains to processors and food retailing with the help of a retailer
thence to supermarkets. By local NGO in Rawain valley to the 2. Farmer — wholesaler — retailer
bypassing middlemen, transaction north of Dehra Dun has brought 3. Farmer — wholesaler — comm-
cost is lowered. This ought to about a change in cropping ission agent — wholesaler —
reduce consumer prices and pattern. The retail shop started a retailer
simultaneously leave greater collection centre for farm produce 4. Farmer — shandi (regulated
income in the hands of farmers. and it was instrumental in making market, called ‘mandi’ in northern
It will eventually mean greater farmers reap some of the benefits states) — consumer
investment in agriculture. mentioned above. The result is that 5. Farmer — Safal Market (set up
2. Other benefits to farmers include instead of the former 5 per cent of by National Dairy Development
better purchase conditions, cultivable area now 50 per cent is Board) — wholesaler — retailer
transparent dealings, same prices devoted to cultivating off-seasonal 6. Farmer — group leader/
The relationship vegetables. Previously hardly 5 consolidator — collection centre
between farmers and per cent of the farmers in this area — supermarket
organised retail has turned to these vegetables. Now 7. Farmer — collection centre —
its downside. Farmers complain almost all of them do. supermarket.
that supermarkets pay after Chain no. 6 and 7 are used only
a time lag while wholesalers Benefit to Retailers by organised retailers while, in all
pay on the spot. Supermarkets To organised retailers, it offers the other chains, the retailer may be an
also impose additional fees on benefit of procuring high quality, fresh organised or traditional retailer. Most
farmers in the form of slotting products. farmers use a mix of these chains.
allowances, promotion fees, The study found that profitability is
discounts for special events, Downside the lowest for the farmer selling to the
etc. Their quality and safety The relationship between farmers and commission agent and the highest for
requirements are stringent and organised retail has its downside. the farmer selling to organised retailer
apt to be changed quickly. About Farmers complain that supermarkets through the consolidator despite his
contractual relations, both the pay after a time lag while wholesalers cost of production being the highest.
parties harbour doubts. Farmers pay on the spot. Supermarkets also Farmers who supply to organised retail
feel that relationship with impose additional fees on farmers through the consolidator invest a lot
organised retail is implicit, not in the form of slotting allowances, of money in crop care. Their product
formally inked into a contract promotion fees, discounts for special quality is far better than that of other
and supermarkets charge that events, etc. Their quality and safety farmers supplying to other channels.
farmers are wont to sell to requirements are stringent and apt to Transaction cost is the lowest for
commission agents who visit be changed quickly. farmers associated with organised retail
farms at harvest times and offer About contractual relations, both and highest for those selling to mandi.
better prices and spot payment. the parties harbour doubts. Farmers The percentage of farmers reporting
They feel that whenever this feel that relationship with organised rejection was lower for the mandi
opportunity arises, farmers retail is implicit, not formally inked into a in comparison with the wholesaler
forget about their contractual contract and supermarkets charge that or the consolidator supplying to the
obligations to supermarkets. farmers are wont to sell to commission organised retailer.

110 THE CHARTERED ACCOUNTANT November 2010


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If they supply to organised retail, they who have not been much bothered
will have to incur high production cost, about distribution so far, are in for a
but their transaction cost for distribution rude swhock given by the economic
will be lower. Should they choose to strength of new retailers. While a
opt for traditional supply chains, their close relationship between the two will
lower cost of production will be offset result into more efficient distribution,
by higher transaction cost. The study quicker feedback from consumers
of cauliflower growers in Hoskote and concentrated demand for the
shows that the first is a more profitable producers whereas pressure on price,
choice. delayed payments and competition
Along with organised retail, of private labels will create difficulties.
corporate processors such as Nestle Farmers stand to benefit from the
and ITC are also dealing with farmers development of new and more compact
directly and are developing what is supply chains connecting them with
Organised retail is particular about known as contract farming. It also organised retail through collectors and
what it buys. In case of cauliflower, it results in new, dedicated supply distribution centres. However, they will
buys only large heads and not the chains which improve the machinery of have to cater to the requirement of
small and medium ones. So, farmers agricultural marketing. high quality and top-end grading and
are usually able to supply only about packaging techniques. With greater
half of their produce to organised retail. Conclusion dissemination of information regarding
They sell the rest to wholesalers, local Relation between producers and what sells in the market, cropping
mandi or villagers. organised retailers can be full of tension. pattern in agriculture may also change
In short, farmers now have a choice. Large manufacturers in FMCG sector, in future. n

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Significance of ‘Zeroing’ in Anti-Dumping Matters

Article VI of GATT 1994 that condemns the dumping per se is based


on the assumption that artificial sales at lower prices may damage a
domestic industry and distorts the dynamics of fair competition and
international free trade, this provision allows WTO members to impose
certain measures in order to offset and/or prevent dumping practices
causing or threatening material injury to a domestic industry. The
WTO’s Dispute Settlement Understanding (DSU) has settled number
of international trade disputes related to anti-dumping especially
on ‘zeroing’. Zeroing is a calculative methodology adopted by anti-
dumping authorities in the course of obtaining final dumping margins,
which excludes any negative margins occurring when export prices
exceed the price in the home market. The WTO’s Appellate Body (AB)
has consistently struck down the zeroing practice as an asymmetrical
calculative methodology. This article primarily deals with dumping,
zeroing practice, the AB’s jurisprudence on zeroing, legal position on
zeroing and issues relating to zeroing.

Introduction recommendations that need to be


One of the most significant outcomes adopted by the Dispute Settlement
of the GATT Uruguay Round negotia- Body or DSB, which comprises of the
tions resulting in the establishment of entire membership of WTO. A Panel
the World Trade Organization (WTO) report, if it is not appealed against,
in 1995 was the creation of Dispute or an AB report resulting from an
Settlement Understanding (DSU) appeal, are adopted by the DSB
whose primary objective is to settle and unconditionally accepted by the
trade disputes between members parties to the dispute, unless they
by means of bilateral consultations are rejected by consensus within the
and mediation in the first instance. DSB.
In the event of no resolution in a Since a unanimous rejection of a
dispute, resort can be had to a dispute ruling of the Panel or the AB is a remote
settlement panel comprising of three possibility, this acts as an inherent
members. Questions of law and legal check on the enforcement of the Panel
interpretation arising from rulings of or the AB recommendations. Panel
a WTO Panel can be appealed to the is bound by the rule of stare decisis,
WTO Appellate Body (AB) that has the i.e. the WTO Panels bound by rulings
power to modify or reverse the findings on law and legal interpretation made
and recommendations of a Panel by the AB, which has consistently
report following procedural rules that struck down the zeroing practice. The
have been amended periodically since AB’s anti-zeroing jurisprudence has
Dr. P. Sree Sudha 1996. Technically speaking, the Panel caused further controversies, e.g.
(The author is a Faculty in the Department some members including the US have
of Law, Dr. B. R. Ambedkar University,
and the AB rulings on the consistency
Srikakulam, Andhra Pradesh. She can be or otherwise of a WTO member’s expressed their strong opposition to
contacted at srisudha.k@rediffmail.com.) measure at issue, are referred to as this case law and sought to change

112 THE CHARTERED ACCOUNTANT November 2010


793 TRADE

it through negotiation. Moreover, in a Zeroing is a AB rejected this position and ruled


surprising move, a recent WTO panel calculative that the dumping margin should be
report (US - Stainless Steel) explicitly methodology, established “for the product...and
defied the AB’s jurisprudence and ruled adopted by anti-dumping not for the various types or models
in favor of certain types of zeroing. In authorities in the course of that product.” Because zeroing
this context, the article aims to discuss of obtaining final dumping picks and chooses positive results of
the AB’s jurisprudence on zeroing from margins, which excludes any these intermediate calculations in the
Bed Linen Case to US Steel Case with negative margin occurring when situation of multiple comparisons and
a conclusion. export prices exceed the price disregards (zeroes) negative ones,
in the home market and, thus, it does “not take into account the
Zeroing Means only include positive margins entirety of the prices of some export
Zeroing is a calculative methodology, occurring when home prices transactions” and, thus, “inflates the
adopted by anti-dumping authorities in exceed export prices. margin of dumping for the product
the course of obtaining final dumping have to pay an anti-dumping duty of as a whole.” The AB viewed that this
margins, which excludes any negative $20. failure violated the “fair comparison”
margin occurring when export prices Prior to the conclusion of the obligation under Article 2 of the ADA.
exceed the price in the home market, Uruguay Round, it was the standard
and, thus, only include positive margins practice of some active users of EC - Bed Linen Case
occurring when home prices exceed anti-dumping to apply this practice In this case, the AB ruled that the
export prices. What eventually therefore of zeroing. It is because of the practice of zeroing is not consistent with
happens is systemic overestimation pressure exerted by other countries the objectives and rules of the ADA.
of dumping margins. The AB has during negotiations, Article 2.4.2 of Following the EC Bed Linen cases, a
consistently struck down the zeroing the Agreement on Anti-Dumping series of actions were undertaken at the
practice as an asymmetrical calculative (ADA) was adopted. WTO members EC level to implement the findings of
methodology, adopted by antidumping generally used the weighted average the Panel and AB reports. A regulation
authorities in the course of obtaining method. However, within the weighted was promulgated to empower the EC
final dumping margins.3 The normal average method, some WTO members Council to “(a) repeal or amend the
practice should be to add positive and applied a new type of zeroing, i.e. inter- disputed measure; (b) adopt any other
negative dumping amounts separately model zeroing. If, for example, model special measures which are deemed to
in different transactions, and to reduce A was dumped while model B was not be appropriate in the circumstances”.
the negative amounts from the total of dumped, members would not allow the This regulation did not explicitly
positive dumping amounts, to arrive negative dumping of model B to offset concern the EC-Bed Linen report since
at a dumping margin on the basis of the positive dumping in the calculation it aimed, according to its preambles 4
which anti-dumping duties could be of dumping margin. and 5, at establishing a procedure:
levied. “(4) With a view to permitting the
Following example throws a light AB’s Jurisprudence on Community, where it considers this
on the zeroing method: Zeroing appropriate, to bring a measure taken
In one transaction, the normal value There has been an incremental under regulation11into conformity
is $100 and export price is $80. The expansion in the AB’s anti-zeroing with the recommendations and
dumping margin of $20 is positive. In jurisprudence that resulted from rulings contained in a report
another transaction, the normal value complainants’ strategic use of “as adopted by the DSB, specific
is $120 and export price is $100. The such” complaints. In an early stage, provisions must be introduced.” (5)
margin of $20 in this case is negative. complaining parties challenged “The Community institutions may
If negative and positive margins were specific applications of the zeroing consider it appropriate to repeal,
to be offset in calculating the average methodology (“as applied”) by amend or adopt any other special
on the basis of these two transactions, defending parties. For those who measures with respect to measures
the products would not have been advocate zeroing, a “dumping margin” taken under Regulation12 including
treated as being dumped. If, however, under the ADA could be established measures which have not been
the negative margin is disregarded or “for each product type or for each the subject of dispute settlement
treated as zero, the dumping margin individual transaction” as well as for under the DSU, in order to take
would be positive and the importer may the product as a whole. However, the account of the legal interpretations

THE CHARTERED ACCOUNTANT november 2010 113


TRADE 794

made in a report adopted by the carried out, e.g. on the issue of injury, this perspective, the reassessment of
DSB. In addition, the Community one may argue that the reassessment the injury findings carried out by the
institutions should be able, where falls short of establishing a level playing Commission may not appear immune
appropriate, to suspend or review field for complainants and defendants. to criticism.
such measures.” This imbalance stems from the Under WTO jurisprudence, the
A second regulation revised the fact that, while filing the complaints, rulings made by the Panels or the AB
findings of the investigation taking domestic industries are apparently are binding only on the parties to the
into account the recommendations not obliged to list all the 15 factors dispute. The ruling is that the practice
set out in the EC-Bed Linen report. that must be considered among other of zeroing is inconsistent with the rules
In particular and according to the relevant factors in examining the of the WTO Agreement and should
Regulation, the reassessment of impact of imports on the domestic not be applied and is, therefore, only
the dumping margin was carried industry. In other words, examination binding on the EC. The EC has already
out on the recommendations of the and information on all the 15 factors taken steps to change its rules to
reports concerning “(a) determination is not a prerequisite condition for comply with the decision.
of sales, general and administrative initiating an anti-dumping procedure. As discussed in the case of EC,
expenses and profit when applying Thus, if the investigating authorities, the ADA required that the dumping
article 2(c)(1) of the basic regulations like the Commission in the original calculations be based on comparison
for the purpose of constructed normal investigation did not collect information of ‘weighted-average normal value’
value and (b) the practice of ‘zeroing’ on all 15 factors, it may be difficult to to ‘weighted-average export price’.
when establishing the weighted objectively carry out a reassessment of Accordingly, US law provides for
average margin of dumping”. On injury factors retroactively. Therefore, comparison of weighted-average home
this basis, the EC authorities carried the exporters have to rely on the market prices to weighted average US
out a reassessment of the findings goodwill of the investigating authorities prices in the original investigations.
of the original investigation and new if the data were not collected at the The DOC (Department of Commerce)
calculations were made taking into time of the original investigation. The calculates weighted-average prices by
account the finding of the AB report. EC-Bed Linen Panel held: model, i.e. by control numbers, and by
Overall, it has to be noted that “It appears from this listing [the level of trade (to the extent that there are
the reassessment of the findings listing of the factors enumerated in different levels of trades), and for the
was carried out on the basis of the the provisional regulation] that data entire investigation period. However,
information collected at the time of was not even collected for all the the benefit of average-to average
the original investigation. As the EC factors listed in Article 3.4, let alone brought by the Agreement is offset by
authorities openly admitted in the evaluated by the EC investigation the DOC’s practice of ‘zeroing’. The
regulation concerning the methods authorities. Surely a factor cannot DOC follows the same practice as
of calculating sales, general and be evaluated without the collection discussed in the case of EC, to change
administrative expenses and profit, of relevant data.” the negative dumping margins at
the fact that some information was An objective examination would ‘model’ levels to ‘zero’ for the purpose
not collected at the time of the original have required at the beginning that of calculating the overall dumping
investigation may have implications the complaints by domestic producers margin for the company. This practice,
when a reassessment of findings is should have included data on all 15 like in the case of the EC, enhances
Because zeroing factors for an objective determination the dumping margin significantly.
picks and chooses to be carried out. This burden of proof The practice of ‘zeroing’ has been
positive results of on the part of the complainants and the condemned in the WTO Appellate
these intermediate calculations investigating authorities would strike a ruling in the case of EC practices and
in the situation of multiple balance between this obligation and now it is contingent upon the US to
comparisons and disregards the one of the exporters to respond on change its rules accordingly. However,
(zeroes) negative ones, it does time and with accurate information to the AB ruling in this respect pertains
“not take into account the the questionnaire of the investigating to original investigations only. The US
entirety of the prices of some authorities. Eventually, this may be an anti-dumping regulation has a distinct
export transactions” and thus issue to be raised, as it is an imbalance system of annual administrative review,
“inflates the margin of dumping of rights and obligations between which determines the actual amount of
for the product as a whole.” complainants and defendants. From duty chargeable on the subject goods.

114 THE CHARTERED ACCOUNTANT November 2010


795 TRADE

Under WTO Soft Wood Lumber Products in terms of the “product as a whole”
jurisprudence, the from Canada Case under investigation. Therefore, all
rulings made by the On April 18, 2006, the WTO AB delivered intermediate, individual calculations
Panels or the AB are binding only its decision on the “zeroing” anti- (normal value minus export price) as to
on the parties to the dispute. dumping case which the EC brought various sub-product categories must
The ruling is that the practice against the U.S. In the decision, the be “aggregated” to obtain the final
of zeroing is inconsistent with AB upheld the panel’s finding that the dumping margin. In stark contrast,
the rules of the WTO Agreement US’ zeroing methodology employed in the panel viewed that dumping and
and should not be applied and initial anti-dumping investigations was dumping margin could be defined in
is, therefore, only binding on inconsistent with the fair comparison terms of “a particular export sale” and
the EC. The EC has already taken requirement under the Article 2.4.2 of that antidumping authorities need “not
steps to change its rules to ADA. In addition, the AB, reversing the necessarily require an examination of
comply with the decision. panel’s original finding, held that certain different export sales at an aggregate
Unlike in a new investigation, in an applications of the same methodology level.” The panel viewed that the AB’s
administrative review the DOC does in the administrative review process interpretation was not based on a
not compare the average export price were inconsistent with the Article 9.3 “solid textual basis” and that it should
to the average normal value for the of ADA. This uncompromising ruling adopt a “permissible interpretation”
whole investigation period. leaves the DOC nearly no option but which accommodates a certain type of
Instead, the DOC compares to repeal the ‘zeroing’ methodology on zeroing (simple zeroing) in this case.
the export price for each the whole in the administrative review The panel’s unusual behavior
individual transaction to the most as well, even though the EC’s claim raises many interesting legal
contemporaneous monthly average here was “as applied” to the facts of questions. As it admitted itself,
normal value. The total value of the the particular case. the AB expects panels to follow its
dumping margin is then calculated A recent NAFTA Chapter 19 panel jurisprudence, even in the absence of
by aggregating only transaction- (NAFTA Soft Lumber) condemned formal binding force. More importantly,
specific positive dumping margins this practice invoking the celebrated such jurisprudence creates “legitimate
and then multiplying the quantity sold Charming Betsy doctrine (a US Supreme expectations” among WTO members.
in the US market for each model by Court decision holding that US statutes It seems controversial whether a panel
the unit dumped value to arrive at the should be interpreted, if possible, in could reject the AB’s established
total dollar dumped. Comparison of such a way as to avoid placing the case law on the same issues in the
individual export prices to weighted- US in violation of international law) presence of Article 3.2 of the DSU
average monthly normal prices that expressing the view that the US should which underscores the “stability and
yields negative margins are ignored follow the AB decision against it in predictability” of the multilateral trading
or assigned a ‘zero’ value. However, WTO Soft wood Lumber V. It may be system.
the AB decision on ‘zeroing’ does no coincidence that the EC challenged On the issue of “simple zeroing” by
not appear to cover this practice in the US zeroing methodology after the the US in periodic reviews (where the
the administrative review process. In EC’s own applications of the same panel, disregarding past the AB rulings,
a recent communication to the DSB methodology were invalidated by the found in favour of the US), the AB
requesting for consultation, the EC has WTO. said that in applying “simple zeroing”
brought out at least 22 cases where the in periodic reviews, the USDOC (US
DOC has used the method of ‘zeroing’ US - Zeroing (EC) and US – Department of Commerce) compares
in its dumping margin calculations. Zeroing (Japan) Case prices of individual export transactions
It also shows the effect of ‘zeroing’ However, as the AB’s anti-zeroing rulings against monthly weighted average
leading to higher margin determination gathered momentum, complainants normal values, and disregards the
by the DOC, even where the dumping began to challenge the zeroing policy amounts by which the export prices
margin in a normal situation (without itself (“as such”). The AB accepted exceed the monthly weighted average
zeroing) would have been negative. above two complaints and ruled in normal values, when aggregating the
The DOC’s methodology of calculating favour of complainants (EC and Japan). results of the comparisons to calculate
dumping margin to impose actual The AB’s jurisprudence in the going-forward cash deposit rate for
anti-dumping duty is described in the these two cases is: Dumping and the exporter and the duty assessment
following case: dumping margins must be defined rate for the importer concerned.

THE CHARTERED ACCOUNTANT november 2010 115


TRADE 796

On April 18, 2006, the judicial economy with regard to an additional finding that the Panel
WTO AB delivered Mexico’s claims under: (a) the Article failed to discharge its duties under the
its decision on the VI:1 and VI:2 of GATT 1994, the Article 11 of DSU by making findings
“zeroing” anti-dumping case Articles 2.1, 2.4 and 18.4 of ADA, that contradict those in previous
which the EC brought against and the Article XVI:4 of WTO Appellate Body reports adopted by
the U.S. In the decision, the AB Agreement regarding model zeroing in the DSB. The AB recommended that
upheld the panel’s finding that investigations; and (b) the Article XVI:4 the DSB request the US to bring its
the US’ zeroing methodology of WTO Agreement and the Article measures found in the AB report and
employed in initial anti-dumping 18.4 of ADA regarding simple zeroing in the Panel report as modified by the
investigations was inconsistent in periodic reviews. The AB reversed AB report, to be inconsistent with the
with the fair comparison the Panel’s finding that simple zeroing GATT 1994 and with the ADA, into
requirement under the Article in periodic review is not, as such, conformity with its obligations under
2.4.2 of ADA. inconsistent with the Articles VI:1 and those Agreements.
Simple zeroing thus results in the levy VI:2 of GATT 1994, and Articles 2.1, 2.4
of an amount of anti-dumping duty and 9.3 of ADA; the AB found, instead, Conclusion
that exceeds an exporter’s margin that simple zeroing in periodic reviews Since the old GATT era, zeroing has been
of dumping, which operates as the is, as such, inconsistent with the controversial because it tends to inflate
ceiling for the amount of anti-dumping Article VI:2 of GATT 1994 and the final dumping margins by preventing
duty that can be levied in respect of the Article 9.3 of ADA. It also reversed the those negative margins from offsetting
sales made by an exporter. Therefore, Panel’s finding that the US did not act positive margins. The AB’s rulings are
simple zeroing is, as such, inconsistent inconsistently with the Articles VI:1 and essential part (acquis) of WTO legal
with the Article VI: 2 of GATT 1994 and VI:2 of GATT 1994, and the Articles 2.1, system. As an appellate tribunal which
the Article 9.3 of ADA. 2.4 and 9.3 of ADA; and it found, instead, solely addresses issues of “law,” the
For these reasons, the AB reversed that the US acted inconsistently with AB’s decisions should be respected
the Panel’s finding that simple zeroing Article VI:2 of GATT 1994 and Article by a lower tribunal (panel), especially
in periodic reviews is not, as such, 9.3 of ADA by applying simple zeroing when a panel adjudicates on the same
inconsistent with the Article VI: 2 of in the five periodic reviews at issue in issues. It is especially so considering
GATT 1994 and the Article 9.3 of ADA, this dispute, and found it unnecessary that the AB has rendered the same
Instead, the AB found that simple for purposes of resolving this dispute opinions continuously and consistently.
zeroing in periodic reviews is, as such, to make an additional finding on Otherwise, the fundamental value of
inconsistent with the US obligations Mexico’s claim that simple zeroing in the dispute settlement system, and the
under those provisions. Also, the AB periodic reviews is, as such, and as WTO system in general, i.e., stability
said, “simple zeroing” in periodic applied in the five periodic reviews and predictability, would be seriously
reviews is inconsistent with the Article at issue in this dispute, inconsistent undermined. Considering diametrically
VI: 1 of GATT 1994 and the Article 2.1 with the Article 2.4 of ADA, and on opposite views on ‘zeroing’ among
of ADA. As a result, the US is now Mexico’s related claim under the major WTO members as well as the
obligated to repeal its zeroing policy Article 11 of DSU; and did not make inchoate stage of WTO negotiations
in its entirety nearly on all fronts, both Simple zeroing thus on rules, any legislative breakthrough
in the original investigations and in the results in the levy of on ‘zeroing’, such as an amendment
administrative (periodic) reviews. an amount of anti- of relevant provisions (Articles 2 and
dumping duty that exceeds an 9) of the ADA, is highly unlikely in the
US Stainless Steel Case exporter’s margin of dumping, near future. In the meantime, WTO
In this case, AB’s rulings is rejected by which operates as the ceiling members opposing ‘zeroing’ are liable
Panel further it also explicitly rejected for the amount of anti-dumping to continue to challenge this practice
the AB’s established anti-zeroing duty that can be levied in before the WTO dispute settlement
position, in particular that expressed in respect of the sales made by system. If we look at the saga of
US – Zeroing (EC) and US – Zeroing an exporter. Therefore, simple ‘zeroing’ from Bed Linen Case to recent
(Japan), both of which addressed the zeroing is, as such, inconsistent US Steel case, the WTO AB acted in a
same issue as the panel faced, i.e., a with the Article VI: 2 of GATT positive direction and it was successful
“simple zeroing” in the administrative 1994 and the Article 9.3 of in putting an end to this controversial
(periodic) review. The Panel applied ADA. practice of ‘zeroing’. n

116 THE CHARTERED ACCOUNTANT November 2010


797 NATIONAL UPDATE

Government Starts Audit of Economic Data which passed an order in the case of Krung Thai Bank, said
In a first-of-its-kind exercise, the National Statistical that MAT provisions come into play only when the accounts
Commission (NSC) has ordered an audit of the process are prepared under the Companies Act under the Income-
used in the construction of economic data, starting with Tax Act. A chartered accountant, who appeared for the
the Index of Industrial Production (IIP). The move comes foreign bank told ET, Going by this order, MAT will not be
amid criticism of the quality of data dished out by various applicable to insurance, banking and electrical companies.
government agencies, including the Central Statistical According to the ITAT order on September 30, the provisions
Organisation. Just last month, the Reserve Bank of India of MAT are applicable only when profit and loss accounts are
(RBI) had termed the industrial growth figures highly volatile prepared under the provisions of the Companies Act, under
and expressed doubts about how effectively the index schedule VI. However, the Schedule VI of Companies Act is
reflected the underlying momentum in the industrial sector. not applicable to banks as they are exempt under proviso to
A few days before that, CSO had issued a corrigendum on Section 211 (2) of the Companies Act. The final accounts of
the national accounts data. Even earlier, RBI had questioned banks are to be prepared under the provisions of Banking
the inflation data released by the government. We are just Regulations Act. Therefore Section 115J B of Income-
beginning this exercise and the first audit has been ordered Tax Act governing provisions of MAT is not applicable to
for IIP. With this, we hope to learn both about how we will do banks. In this case the bank was a foreign entity operating
statistical audits in future and then develop mechanisms to through a branch in India. It had shown a profit of over `78
strengthen the system, Chief Statistician T C A Anant said lakh but after adjustments the bank has shown a profit
in an interview. The audit will be undertaken by the Ministry of over `94 lakh. After setting off carry forward loses, the
of Statistics and Programme Implementation (Mospi), bank returned nil income. It is the declaration of nil profit
under the direction of the five-member NSC, headed by R that compelled the I-T department to apply the provisions
Radhakrishna. The idea of a statistical audit was not new. of MAT. The department had argued before ITAT that there
One of the mandates of the NSC had been to conduct is no specific exclusion for banking companies from the
statistical audit for every important macroeconomic data requirement to prepare profit and loss accounts as under
series. In a decentralised statistical system, an audit went Chapter VI of the Companies Act. ITAT however, held that
a long way in identifying and improving statistical gaps that the departments stand is against the intent of the legislature.
resulted from difference in administrative processes and ITAT also cited an earlier judgement on similar grounds
functions of various agencies involved in data collection, given out by a co-ordinate bench in the case of Maharashtra
officials in the statistics ministry said. The results of the State Electricity Board. ITAT held that the provisions of MAT
audit will be put in the public domain. This is expected to do not apply in this case and the assessing officer made
generate transparency and instill confidence in the way an error in concluding that income had escaped the
these numbers are generated, Anant added. The IIP data tax net.
is compiled by Mospi after receiving data from different (Source: http://economictimes.indiatimes.com/)
ministries and state agencies. Mospi is not directly involved
with the primary data collection, though it is responsible for Tax Compliance Will Be Ensured by Direct
maintaining the quality of the data. For that purpose, Mospi, Tax: Revenue Secretary
along with various state agencies, conducts periodic sample The Direct Tax Code (DTC) may result in R55,000 crore
surveys used to maintain the quality of the data received on revenue loss in the first year of implementation, but tax
a monthly basis. Such a sample, in the case of the IIP, is the collection will increase in the subsequent years because
Annual Survey of Industries (ASI). The latest IIP numbers, of greater compliance, Revenue Secretary Sunil Mitra has
which estimated the growth at 13.8 per cent, led by a 63 said. During the first year, revenue will certainly be low. But
per cent growth in capital goods, was criticised for being we hope the better compliance will boost tax collection in
exaggerated. An exercise conducted by Business Standard the subsequent years, Mitra said at an event organised
showed the growth should be around 22 per cent. by Confederation of Indian Industry (CII). He said total
(Source: http://www.business-standard.com) revenue loss in the first year of implementation is estimated
to remain at around R55,000 crore. The major loss is likely
Tax Tribunal: Banks are Not Liable to Pay to happen in corporate income tax collection, estimated at
Minimum Alternate Tax around R39,000 crore. The new norm, which proposes to
A leading tax tribunal has said that banks are not liable to raise the exemption limit on individual income tax from the
pay minimum alternate tax (MAT) since they are governed current R1.6 lakh to R2 lakh will be effective from April 1,
by the Banking Regulation Act and prepare their accounts 2012. Corporate income tax will be reduced to 30 per cent
differently. The Income Tax Appellate Tribunal (ITAT),Mumbai, from the current 33 per cent. The revenue secretary said the

THE CHARTERED ACCOUNTANT november 2010 117


NATIONAL UPDATE 798

key objective of the DTC was not to reduce tax rates, but 86 in first half of 2009 to 141 during April-September 2010.
to bring greater transparency, continuity, consistency and Of the 141 M&A, 68 were domestic deals and 14 inbound.
predictability in the tax system. In value terms, the overall M&A deals rose 345.16 per cent
(Source: http://www.financialexpress.com/) to USD 52.6 billion during April-September 2010 from USD
11.8 billion in the year-ago period. The major mergers and
New Tax Code May Adversely Impact NRIs acquisitions occurred in telecom, metal and mining and
India’s New Direct Tax Code (DTC), described as energy sector, the chamber said.
generous to residents, unfortunately seeks to extract a (Source: http://economictimes.indiatimes.com/)
mouthful from millions of non-resident Indians (NRIs). It
is good news that the government is all set to replace the India Signs Pact with Bermuda on Exchange
age-old Income Tax Act of 1961 and bring far reaching of Tax Information
changes in the tax structure with an aim to tax those citizens India has signed a pact with Caribbean tax haven
in lower income bracket as little as possible, bring the Bermuda, which will facilitate exchange of information
growing number of rich people in the tax net and prevent between the two countries regarding tax evasion. The
tax evasion. With the possibility of archaic rules getting Tax Information Exchange Agreement (TIEA), as it is
replaced with new ones from financial year 2011-2012, called, conforms to the guidelines issued by OECD
the emerging India seems to have welcomed the path- for countries and destinations considered tax havens
breaking initiative taken by the central government. However, to share information. The concept of TIEA was
scores of NRIs are disappointed and are sure to seek developed by OECD for promoting cooperation
changes in the proposed laws that affect them negatively. in tax matters via exchange of information.
For example, under the DTC, NRIs staying in India for more As per agreement, signed by the Premier of Bermuda
than 59 days in a year and 365 days or more over a period of Ewart Brown and Minister of State for Finance S S
four years prior to the financial year will be considered Palanimanickam, both countries can share details on
residents and are, therefore, liable to be taxed on their banking, ownership and past information on tax matters.
global income. Currently they can stay in India up to 181 days (Source: http://www.financialexpress.com/)
in a year and still have no tax liability on the income earned
outside India. Such NRIs typically do not have citizenship RBI to Look Into Functioning of MFIs
of any other country and this is particularly true with The Reserve Bank of India has announced constitution
those living in the Gulf countries where citizenship is of a sub-committee to look into the functioning of micro
extremely difficult to get. Most of the companies or employers finance institutions (MFIs), as they have drawn flak for using
send their employees on two to three month vacation strong-arm tactics to recover loans. The MFI tactics have
period albeit once in two or three years. Some NRIs even prompted the Andhra Pradesh Cabinet to approve
prolong their stay because of medical, social or business an ordinance to rein them in. We have constituted a sub-
reasons. Whatever the reasons, what the DTC implies committee to look into the functioning of the MFIs sector
is henceforth NRIs must count their days whenever they and what bearing they have on RBI policy to take further
visit India. The proposed 59-day stay restriction to save action, RBI Governor D. Subbarao has told media. However,
their hard earned money from being taxed has put them he did not commit to come out with any regulations to deal
in fix. with the MFIs. Stating that the RBI regulates non-banking
(Source: http://beta.profit.ndtv.com/news) finance company, he, however, said there were a vast
number of companies under the MFI sector falling out of
M&A Deals Tally Rose to USD 20.76 Billion the purview of the apex bank. A bill to regulate MFIs is
in the First Half being prepared to be tabled in Parliament. Commenting
Led by Bharti Airtel, India Inc’s outbound mergers and on the performance of banks’ penetration in hinterlands,
acquisitions deals tally rose to USD 20.76 billion in the Dr. Subbarao said, There is a view that MFIs charge high
first six months of the current fiscal from a meagre USD rate of interest...but if the banks cover the last mile, many
527.8 million in the previous year, a study said. “The rise of the MFIs can get institutional credit at cheaper rate.
in outbound deals provides clear evidence that the Indian He added: “We are marshalling all the arguments and
industry is consolidating, and at the same time aggressively I am not suggesting we will initiate legal actions but we
working on global expansion,” the study by Assocham will consult with the government. Capping of interest
said. Total 59 outbound M&A took place during April- rates by MFIs has evoked a sharp division among
September 2010-11 against 27 in the same period of the stakeholders. A Bill on MFIs, however, is not likely to cap
last financial year. The study said the total number of M&A interest rates.
deals (outbound, inbound and domestic) increased from (Source: http://www.thehindubusinessline.com/)

118 THE CHARTERED ACCOUNTANT November 2010


799 INTERNATIONAL UPDATE

IASB Proposes Severe Hyperinflation Amendment to replace the existing derecognition model in IAS
to IFRS 1 39 Financial Instruments: Recognition and Measurement
The International Accounting Standards Board (IASB) and the associated disclosure requirements in IFRS
recently published for public comment, an exposure draft 7. However, in response to the feedback received, the
Severe Hyperinflation, a proposed amendment to IFRS 1 First- IASB decided to retain existing derecognition requirements
time Adoption of International Financial Reporting Standards. (to be incorporated into IFRS 9 Financial Instruments)
The amendment proposes guidance on how an entity should and to finalise improved disclosure requirements. The
resume presenting financial statements in accordance with new requirements are contained in Disclosures—Transfers
International Financial Reporting Standards (IFRSs) after a of Financial Assets (Amendments to IFRS 7). The IASB
period when the entity was unable to comply with IFRSs because and the US Financial Accounting Standards Board
its functional currency was subject to severe hyperinflation. The (FASB) will conduct additional research and analysis, including
exposure draft, Severe Hyperinflation, is open for comment until a post-implementation review of the FASB’s recently amended
30th November 2010 and can be accessed via the ‘Comment on requirements, before determining any further work to be
a Proposal’ section of www.ifrs.org. undertaken. A Feedback Statement, outlining how the IASB
(Source: www.ifrs.org/News/) responded to feedback received through the consultation
process,is available at the website. A podcast introduction to
IAASB Proposes New Guidance on Auditing Com- the new disclosure requirements is also available.
plex Financial Instruments (Source: www.ifrs.org/News/)
The International Auditing and Assurance Standards Board
(IAASB) recently released for public exposure a new proposed IFAC SMP Committee Releases Updated ISA Guide
pronouncement—International Auditing Practice Statement The Small and Medium Practices (SMP) Committee
(IAPS) 1000, Special Considerations in Auditing Complex of the International Federation of Accountants (IFAC)
Financial Instruments—that highlights practical considerations recently issued the second edition of its Guide to Using
for auditors when dealing with complex financial instruments. International Standards on Auditing in the Audits of Small-
The pronouncement gives particular emphasis to auditing and Medium-Sized Entities (ISA Guide). The implementation
considerations relating to valuation and disclosure issues for guide is intended to help practitioners understand and
financial statement items measured at fair value. Through the efficiently apply the Clarified International Standards on
proposed IAPS 1000, the IAASB seeks to raise awareness of Auditing (ISAs), which are effective for audits of financial
issues being encountered in practice, in particular for fair value statements for periods beginning on or after December
estimates and the valuation of assets in illiquid markets. Along 15, 2009. The updated ISA Guide provides IFAC member
with the proposed IAPS 1000, the IAASB is also exposing for bodies—and ultimately the SMPs they represent—with a
comment proposed changes to the current Preface to the unique resource to help them implement the new requirements
International Standards on Quality Control, Auditing, Review, efficiently and deliver high-quality service. The second edition
Other Assurance and Related Services (the proposed amended includes various impro-vements based on feedback from users
Preface), which explains the authority of this and future IAPSs. The of the first edition which was issued in December 2007 and
IAASB plans to finalize proposed IAPS 1000 and the statement was IFAC’s second most popular publication during
of authority in 2011. Auditors, however, may wish to consider the 2008. In addition, it features two integrated case studies,
material in the proposed IAPS 1000 as they plan and perform one of which focuses on an audit of a micro-entity, increased
their upcoming audit engagements. All stakeholders are invited focus on SME audits, and a new colorful design. The ISA
to comment on its proposals. To access the exposure draft or Guide also now comes in two stand-alone volumes:
submit a comment, visit the IAASB’s website at www.iaasb.org/ Volume 1 describes the basic concepts of a risk-based audit
ExposureDrafts.php. Comments on the exposure draft can be in conformance with the Clarified ISAs. Volume 2
given by February 11, 2011. provides practical guidance for the audit of SMEs. The PDF
(Source: http://press.ifac.org/news) version of the ISA Guide can be downloaded free of charge
for personal use from the Publications & Resources section of
IASB Finalises Enhanced Derecognition Disclosure the IFAC website. For information on reproducing or translating
Requirements for Transfer Transactions of Financial As- publications issued by IFAC, contact permissions@ifac.org.
sets (Source: http://press.ifac.org/news )
The International Accounting Standards Board (IASB), the
independent standard-setting body of the IFRS Foundation, Staff Draft of a Forthcoming IFRS on Consolidation
recently issued amendments to IFRS 7 Financial Instruments: IASB recently posted to its website a staff draft of a forthcoming
Disclosures as part of its comprehensive review of off balance IFRS on consolidation that reflects the tentative decisions made
sheet activities. The amendments will allow users of financial to date by it. The draft IFRS has been prepared by the staff of
statements to improve their understanding of transfer transactions the IASB for the board’s project to replace IAS 27 Consolidated
of financial assets (for example, securitisations), including and Separate Financial Statements and SIC-12 Consolidation—
understanding the possible effects of any risks that may remain Special Purpose Entities with a single standard on consolidation.
with the entity that transferred the assets. The amendments The staff draft reflects the cumulative tentative decisions made
also require additional disclosures if a disproportionate by the board, concluding with the meeting in May 2010. The
amount of transfer transactions are undertaken around board’s deliberations are complete, apart from considering the
the end of a reporting period. The amendments broadly effective date of the forthcoming IFRS. However the tentative
align the relevant disclosure requirements of International decisions reached may be subject to change before the board
Financial Reporting Standards (IFRSs) and US Generally issues the final consolidation standard. For more information
Accepted Accounting Principles (GAAP). The IASB had and to read the staff draft the website may be referred.
previously published for public comment proposals (Source: http://www.ifrs.org/News/)

THE CHARTERED ACCOUNTANT november 2010 119


INTERNATIONAL UPDATE 800

IASB and US FASB Complete First Stage of Concep- they collectively supported the significance the accountancy
tual Framework profession has to play in strengthening corporate governance
The International Accounting Standards Board (IASB) and and facilitating the integration of governance and sustainability
the US Financial Accounting Standards Board (FASB) recently into the strategy, operations, and reporting of an organization,
announced the completion of the first phase of their joint project boards should be focused on the long-term sustainability of
to develop an improved conceptual framework for International their businesses. Governance to ensure that the right behaviors
Financial Reporting Standards (IFRSs) and US generally and processes are in place. Governance mechanisms need to
accepted accounting practices (GAAP). The objective of the be strengthened at banks and other companies to ensure better
conceptual framework project is to create a sound foundation for oversight of risk management and executive compensation.
future accounting standards that are principles-based, internally More dialogue is needed between policy makers, the accounting
consistent and internationally converged. The new framework profession, and other financial industries. The conference was
builds on existing IASB and FASB frameworks. The IASB has hosted by the International Federation of Accountants (IFAC)
revised portions of its framework; while the FASB has issued and the United Nations Conference on Trade and Development
‘Concepts Statement 8’ to replace ‘Concepts Statements 1 and (UNCTAD). Participants from more than 50 countries were on
2’. This first phase of the conceptual framework deals with the hand to address key questions including: What lessons has
objective and qualitative characteristics of financial reporting. the financial crisis revealed about corporate governance?
A feedback statement on comments received through the What corporate governance reforms should be developed on a
consultation process is available. An IASB podcast summary global basis? And what role should the accountancy profession
of the project is available for download. Also a podcast posted play? The IFAC/UNCTAD conference was designed to allow
by the FASB on www.fasb.org could be found explaining the professional accountants, corporate governance experts, and
purpose of a concepts statement. other participants to challenge current practices, exchange
(Source: http://www.ifrs.org/News/) views on essential elements of corporate governance, and
discuss best practices that will improve the current and future
Forum of Firms Focuses on Practical Application of business and economic climate.
Group Audit Standard (Source: http://press.ifac.org/news/)
Over 40 senior audit professionals from 20 international
networks of accounting firms in a recent meet shared their Duck-Koo Chung to Serve as Trustee of the IFRS
experiences and industry perspectives in applying International Foundation
Standard on Auditing 600, Special Considerations—Audits of The IFRS Foundation, the oversight body of the International
Group Financial Statements (Including the Work of Component Accounting Standards Board (IASB), recently confirmed the
Auditors) (ISA 600). The symposium, organized by the Forum of appointment of Duck-Koo Chung to serve as a Trustee of the
Firms, assembled a group of experts to discuss several aspects IFRS Foundation for an initial three-year term, with effect from
of auditing a group, including those business activities and 1 January 2011. Mr Chung is a former Minister of Commerce,
entities (components) that are included in the group’s financial Industry and Energy for the Republic of Korea. He is a visiting
statements. “This symposium was designed to encourage professor of international finance at Korea University and
participants to exchange views on challenges unique to auditing Renmin University in Beijing, and a founding member of the
in a group environment, such as cross- border confidentiality North East Asian Research (NEAR) Foundation, a research
considerations and differing ethics requirements,” said chair, group finance experts. The appointment of Mr Chung, as well
Transnational Auditors Committee. “More importantly, with an as the reappointment of Jeffrey Lucy (Australia) and Pedro
aim of seeking ways to more fully obtain the intended benefits of Malan (Brazil) to serve as Trustees for a second three-year
ISA 600, the participants also contributed practical solutions for term, has been approved by the Monitoring Board of the IFRS
further consideration.” Commencing with an overview of the key Foundation. Chung, the first Trustee from Korea to join the IFRS
requirements of ISA 600, the symposium participants discussed Foundation.
a range of application issues, such as the engagement of and (Source: www.ifrs.org/News/)
reporting by component auditors, communication with both
management and component auditors about the group audit Linda de Beer Appointed Chairman of IAASB Con-
process, and determining materiality in a group environment. sultative Advisory Group
Led by speakers from across the spectrum of the Forum’s Prof. Linda de Beer has been appointed chairman of the
membership, including France, Germany, the United Kingdom, Consultative Advisory Group (CAG) to the International Auditing
and the United States, the symposium concluded with a and Assurance Standards Board (IAASB). As a representative
discussion on the importance of firm processes and controls of the Johannesburg Stock Exchange (JSE), Prof. de Beer
that support group audit engagements. This event is the currently represents the World Federation of Exchanges on the
fourth symposium held by the Forum of Firms, and has been a CAG. She was elected by the CAG membership to succeed the
unique way to bring its members together to share and openly current CAG chairman, David Damant, who since June 2004
exchange views on present-day issues. has served as the first independent IAASB CAG chairman. Prof.
(Source: http://press.ifac.org/news ) de Beer’s appointment—a three-year term effective October 1,
2010—has been approved by the International Public Interest
Accountancy Summit on Corporate Governance Re- Oversight Board (PIOB). Prof. de Beer is an independent
form Looks Beyond Global Financial Crisis financial reporting and corporate governance advisor, and
Accountancy leaders from around the world in a meet in visiting professor at the University of the Witwatersrand in
Geneva discussed next steps for global corporate governance Johannesburg.
reforms. With an eye to helping prevent future financial crises, (Source: http://press.ifac.org/news/)

120 THE CHARTERED ACCOUNTANT November 2010


801 ECONOMIC UPDATE

THE CHARTERED ACCOUNTANT november 2010 121


BOOK REVIEW 802

Quick Reference Guide to First


Time Adoption of IFRS: Indian Context*

‘A book based on exposure drafts of Accounting Standards’ – surely


a courageous effort. These exposure drafts are subject to change
and shelf life of this book will be very short. Kudos to the authors for bringing
out such a book so quickly. Both the authors are faculty members of ICAI
certification course on IFRS and Dr Sanjeev is also member of Accounting
Standard Board. Obviously the experience and authority on subject gets
reflected in their writings. They have tried to address the basic but important
issues in this book. The effort is commendable in today’s time when books on
IFRS are being written left right and centre, and most of them are using a trick
called ‘control c’ and ‘control v’, since lot of material is available on the net free
of cost. Moreover both the authors are full time working in industry. No wonder
a statement in preface is coming straight from their heart “We also admire the
Title : patience of our family members...and kids...who were deprived of their share
Quick Reference Guide to
First Time Adoption of IFRS: of attention in our already hectic schedules...”
Indian Context Coming to the contents of book, speed of bringing book in such short time
(With FREE CD
containing IFRS- might have surely thrown up challenges. A lot is expected when a book is from
based annual reports of
Indian/Global companies) such experts. When I was asked to review the book – two questions came to my
Author : mind. Who is the target audience and what is objective of the book.
Dr. Sanjeev Singhal and The book will be helpful for you if you have some basic questions in mind and
CA. Krishan Kant Tulshan
want to refer something in simple manner – a QUICK capsule of latest information
Pages :
484 on IFRS adoption in India. First chapter will be of interest and that itself will be worth
Price : the money which you might have spent to buy this book, which is of course priced
INR525 reasonable. Second chapter is general in nature – talking about challenges in easy
Publisher : language and coming directly out of personal experiences of the authors. n
Bharat Law House Pvt. Ltd.
*Reviewed by CA. Parveen Kumar based in New Delhi

Classifieds

4822 CA Firm requires 3 CA’s and CA Inter having sector, audit of Consolidated accounts and IFRS
experience of 3 years for tax and audit work. conversion and indirect tax aspects of works
Nagesh Behl & Co. 24/9 Moti Nagar, New Delhi contract. Contact: 9426024975, Statutory@
-15. Contact: 9810611888. smaca.in

4823 Baroda based practising CA having own office 4825 We are a 30 years old firm with 5 partners
with 25 years industrial experience seeks at Mumbai. CA firms in Orissa, Chattisgarh,
assignment on partenership/contractual basis. Madhya Pradesh, and Rajasthan with over
Contact: 09376222666 or 0265-2324920. 3 years experience, interested in networking
as per norms of ICAI, on mutually acceptable
4824 Ahmedabad based CA Firm seeks professional tie terms, may please send their profile to Rajnikant
up with CA firms for Internal audit of construction Sahu, rajanikant@dgaca.net, Mob: 9869270425

122 THE CHARTERED ACCOUNTANT November 2010


803 CABF DONORS

The Institute of Chartered Accountants of India duly


acknowledges the following members for making generous
contributions to the Chartered Accountants Benevolent
Fund (CABF):
S.No. M.No. NAME OF FIRMS/MEMBERS AMOUNT 15 017768 CA. Harish Kumar 5100.00
(R) 16 090142 CA. Pawan Singhal 5100.00
1 020848 CA.Sadashiv Vaze 30001.00 17 504363 CA. Raman Kumar 5100.00
2 007963 CA. Vasudeo B Prabhu 25000.00 18 085683 CA. Ashok Gupta 5100.00
Verlekar 19 091101 CA. Shyam Jindal 5100.00
3 051136 CA. Prasun Kumar Mukherjee 25000.00 20 050071 CA. Shyam Sunder Kella 5000.00
4 074529 CA. Jinendra Kumar Jain 11001.00 21 008318 CA. Anant Vasudev Kamat 5000.00
5 071213 CA. P. P. Pareek 11000.00 22 026511 CA. P. Ramachandra Hedge 5000.00
6 087702 CA. Shankar Lal 11000.00 23 034843 CA. Rajendra Laxmikant 5000.00
7 087562 CA. Satish Chander 11000.00 Bhobe
8 089657 CA. Arun Kumar Gupta 11000.00 24 035175 CA. Sarpalle Venkata Raman 5000.00
9 501034 CA. Swadesh Gupta 11000.00 25 104344 CA. Kulkarni Parimal Govind 5000.00
10 042761 CA. Charuhas Dwarkanath 11000.00 26 011017 CA. S. S. Dalvi 5000.00
Upsani 27 099504 CA. Anoop Gupta 5000.00
11 045870 CA. Abhay Prabhakar 11000.00 28 082381 CA. Suresh Kumar Garg 5000.00
Kshirsagar 29 087781 CA. Ajesh Kumar Aggarwal 5000.00
12 081010 CA. Anil Kumar Garg 5151.00 30 088169 CA. Vijay Kumar Gupta 5000.00
13 511710 CA. Anurag Sikka 5100.00 31 097286 CA. Vipin Kumar Gupta 5000.00
14 072877 CA. Sushil Jindal 5100.00 32 North Ex. CA Study Circle 21751.00

Tracing the Roots

Origin of Double Entry Book Keeping in India


time immemorial and accountancy as
an occupation existed in our country
even prior to the days of the Babylonian
Empire. However, accounting with its
present day refinements, no doubt,
is of comparatively very recent origin.
The profession of accountancy in the
form familiar to us today is essentially
a product of 19th century where the
development of commerce, trade
and industry engendered the need for
competent persons with knowledge and
“…In conclusion, a reference needs to This observation has been quoted ability to practice accountancy and the
be made to a pertinent observation made in the “Introduction of Studies in the development of the corporate structure
by Alexander Hamilton F.R.S., the noted History of Accounting” by B.S. Yamey, of business organization in the country
orientalist. In the Book Review in “Monthly Sweet & Maxwell Ltd-.1956, at page 1. resulting in a division between ownership
Review” 26(1798) page 129, he stated as An observation has been appended to of funds and their management has
under: the effect that “Unfortunately, Hamilton undoubtedly been one of the strongest
‘We would remark that the Banias of did not indicate the basis for his influences on the evolution of both
India have been from time immemorial, in remarks”. Needless to say, the analysis accounting and auditing as well as the
possession of the method of book-keeping attempted in the earlier paragraphs profession of the accountancy as we
by double entry, and what Venice was the should more than provide that basis know them now.”
emporium of Indian commerce at the time and establish beyond the shadow of
at which Friar Lucas’s (Pacioli’s) treatise any doubt that accounting and record (Source: History of Accountancy
appeared.” keeping had taken roots in India from Profession- Volume I by GP Kapadia)

THE CHARTERED ACCOUNTANT november 2010 123


ICAI NEWS 804

Committee on Public Finance and Government Accounting –


Invitation to Contribute Articles for E-Newsletter

The Committee on Public Finance & Government the consent of Editorial Board of Committee. Authors
Accounting of The Institute of Chartered Accountants may only submit original work that has not been
of India is regularly coming up with its E-Newsletter appeared elsewhere in any publication.
-‘Prudence’ featuring various articles on economic
issues and measures on bi-monthly basis. The The articles may be sent to us in the form of soft
October-November 2010 issue of the E-Newsletter is copy through mail/CD or in printed format through
available at the URL http://220.227.161.86/20669new post giving details of the subject matter.
sletter_cpfga_oct2010.pdf.
Those desirous may please contact at the following
The Committee invites experts, researchers and address:
writers to contribute articles in different areas of Public
Finance and Government Accounting for publication The Secretary
in the December 2010 issue of its E-newsletter. If the Committee on Public Finance and Government
article is published, a token honorarium of R2000/- Accounting
per article shall be paid. Discretion of the Committee The Institute of Chartered Accountants of India
regarding publication /non-publication of the article ‘ICAI Bhawan’, Indraprastha Marg
shall be final and abiding therewith under copyright of New Delhi-110002
the Committee. Material in this E-Newsletter may not Phone: 011-30110554(O)
be reproduced, whether in part or in whole, without Email: cpf_ga@icai.org

Residential Programme for PCC/IPCC/PE-II students/newly qualified


Chartered Accountants
October 22, 2010
Residential Programme on Professional Skills and salient features are:
Development has been initiated by Board of Studies,
ICAI for the benefit of Chartered Accountancy • An unique blend of Communication and Technical
Students and newly qualified Chartered Accountants. Skills;
All the students who have passed PCC/IPCC/PE- • An integral part of Articleship Training;
II examination and pursuing last year of article
• Exemption from 15 days GMCS course;
training or newly qualified Chartered Accountants
• Subsidised Fee Structure.
are invited to join the course. This programme
offers an unique opportunity and would focus on
development of communication skills, leadership In view of the fact that there are limited seats, the
skills, personal traits as well as technical skills for registration will be done on First -come-First-serve
effective functioning in business organization and basis.
profession.
Students interested to pursue this programme
Six weeks Residential Programme shall may visit website of the Institute (www.icai.org) for
commence from December 1, 2010 at Centre Announcement, details of programme and registration
of Excellence, ICAI, Hyderabad, and Three form.
months Residential Programme shall commence
from December 6, 2010 at National Institute of
Financial Management, Faridabad. Some of the Director, Board of Studies

124 THE CHARTERED ACCOUNTANT November 2010


805 ICAI NEWS

ANNOUNCEMENT (For Mandatory compliance in terms of Clause (2) Part III


of The First Schedule to the Chartered Accountants Act, 1949)
Indian CA firms having tie-up/affiliation with responded by sending the documents however, there
international entities/network could still be some CA firms which might be having
tie-up/affiliation with international entities/network, but
The Council of the Institute had recently considered have not disclosed the same to the Institute and thus
the draft Report on Operation of Multinational Network have not submitted the required documents/details.
Accounting Firms in India, which inter alia, was based
on examination of documents/details provided by The Council, therefore, decided that suitable
many CA firms registered with ICAI and having tie- announcement be hosted in the website of the
up/affiliation with international entities/network and Institute once again, besides publishing the same
the relevant provisions of the Chartered Accountants in `The Chartered Accountant’ and the newsletters
Regulations, 1988. While considering the aforesaid of the Regional Councils, so that the firms which
draft report, the Council noted that announcements have till now not responded is given a last and final
had been in the past hosted by the Institute in its opportunity. The Council also decided that in case on
website in June, 2009 and again in April, 2010, a later date, the Institute comes to know of any firms
besides publishing the same in the July, 2009 issue which have international tie-up/affiliation, but yet had
of the journal, `The Chartered Accountant’ requiring not come forward to disclose the same and submit the
all the Indian CA firms having tie-up/affiliation with documents/details called for, then necessary action
international entities/network to furnish the following under the provisions of the Chartered Accountants
documents/details to the Institute: Act, 1949 be taken against them.

(1) Agreement/contract with the multinational entity Accordingly, this announcement is published
(2) Terms and conditions for usage of name of with a request that the CA firms which have till now
multinational entity not responded to the earlier announcements on
(3) Arrangement for sharing of fees/profit with other the subject, now submit the documents/details to
Indian CA firms with similar/identical name and the below-mentioned officer of the Institute at the
with the multinational entity following address at the earliest, and thus comply
(4) Arrangement for sharing of human resources with the requirements asked for by the Institute:
and infrastructure with other Indian CA firms with
similar/identical name and with the multinational G. Ranganathan
entity Deputy Secretary
(5) Details of remittances made to and received from The Institute of Chartered Accountants of India
the multinational entity ICAI Bhawan
(6) Partnership deed (as on vogue in the last 5 years)
C-1, Sector 1,
(7) Income-tax assessment orders for the last 3 years.
Noida – 201 301.
If assessment orders have not been received,
then they may submit computation of income and Tel.: 0120-3054 823
copies of returns, and Mobile.:09350799933,
(8) Copies of letterheads and visiting cards generally Email: ranga@icai.org
used.

The Council further noted that pursuant to the above (T. KARTHIKEYAN)
announcement, while many CA firms concerned had Secretary, ICAI, New Delhi

THE CHARTERED ACCOUNTANT november 2010 125


ICAI NEWS 806

An Initiative of the Committee for Capacity Building of


CA Firms and Small & Medium Practitioners, ICAI…….
The Committee for Capacity Building of CA Firms and Small & Medium
Practitioners, ICAI has taken a major initiative to arrange financial assistance
to all members in practice/firms in the form of specially designed loan
scheme through Corporation Bank. Through the scheme, eligible Chartered
Accountants can avail finance for setting up offices including cost of furniture/
fixture/office equipments-computers and other accessories. The scheme would
also enable the Chartered Accountants to finance a part of the working capital
for building their profession and will also take care of the needs of fresher (CAs
with experience below three years)
* Members & firms are requested to avail the benefits of this loan scheme. For further details, please
contact nearest branch of Corporation Bank.
Highlights of the loan scheme are given below:
Eligibility: Purpose:
# Chartered Accountants, individually/jointly or # For construction of office premises # For
Proprietorship Concern or a Partnership Firm/ acquisition of ready built new office premises, partly
Partnership with Limited Liability # Age of the individual/ or fully constructed # To finance cost of land and
proprietor shall not exceed 65 years. # The applicants/ construction thereon # To finance cost of furniture
Firms are registered and also holding valid certificate/ & fixture, fittings of office equipments /computers/
license for carrying out the practice. # The applicant’s/ other accessories, etc. # To finance working capital
firm’s name shall not appear in the RBI defaulters list/ and/or financing receivable
CIBIL report. # In case of Firms, all partners shall
join as co applicants. # The applicants/firms should
not have been subjected to disciplinary action by the
Institute.
Nature of facility: Margin:
# Demand Loan/Term Loan for acquisition of fixed # For Term Loan/Demand Loan: Uniform margin of
assets and/or Cash Credit/Overdraft for working 20% # For Working Capital: 25% for Book Debts/
capital Receivables for cash credit or clean overdraft # Value
of land shall not exceed 50% of project cost in case
of purchase of site and construction of premises

Quantum of loan:
Applicable For Existing Firms (Having Practice for 3 Years &
Applicable For Freshers: ( Experience below 3 years) Above)
A] WHERE LATEST GROSS ANNUAL INCOME IS UPTO R5
Metro Urban Other Centres LAKH (income includes professional fees/consultancy fees
etc..)
I. Maximum R20 lakh R15 lakh R10 lakh Metro Urban Other Centres
eligibility:
TL/DL * Out I. Maximum R30 lakh R20 lakh R15 lakh
of which: eligibility :
TL/DL * Out
a. For office R15 lakh R12 lakh R8 lakh of which:
premises a. for office R20 lakh R15 lakh R12 lakh
b. For R5 lakh R3 lakh R2 lakh premises
furnishing & b. For R10 lakh R5 lakh R3 lakh
Other assets Furnishing &
II. For Working R2 lakh R1 lakh R1 lakh Other assets
capital II. For Working R2 lakh R1 lakh R1 lakh
requirement capital

126 THE CHARTERED ACCOUNTANT November 2010


807 ICAI NEWS

B] WHERE LATEST GROSS ANNUAL INCOME IS ABOVE C ] WHERE LATEST GROSS ANNUAL INCOME IS ABOVE
R5 LAKH & UPTO R10 LAKH AS PER LATEST IT RETURN R10 LAKH, AS PER LATEST IT RETURN (WITH
(with experience of 3 years and above) EXPERIENCE OF 3 YEARS AND ABOVE)
Metro Urban Other Metro Urban Other
Centres Centres
I. Maximum R50 lakh R25 lakh R20 lakh I. Maximum R125 lakh R65 lakh R30 lakhs
eligibility: TL/ eligibility :
DL * Out of TL/DL * Out
which: of which:
a. For office R40 lakh R20 lakh R15 lakh a. For office R100 lakh R50 lakh R25 lakh
premises premises
b. For R10 lakh R5 lakh R5 lakh b. For R25 lakh R15 lakh R5 lakh
Furnishing & Furnishing &
Other assets Other assets
II. For Working R5 lakh R2 lakh R2 lakh II. For Working Need based
capital capital

Security: Repayment:
# Term Loan /Demand Loan: Assets acquired out of # Term Loan – Repayable in maximum period of 10
the loan. # For Working Capital Loan: Assignment of years by EMI/PMI, initial moratorium of upto 18 to 24
Book Debts/Receivable. #Collateral security: Suitable months. # Demand Loan – Repayable in maximum
third party guarantee or Tangible securities. 3 years by EMI/PMI, including initial moratorium of 6
months. # Repayment to commence from date of
commercial operations or after completion of initial
repayment holiday or as per the terms of sanction. #
Interest shall be serviced as and when debited.
Rate of interest: Note: Concession of 0.50% extended, if additional
Upto R10 lakh – Min. 10% (Base Rate + 2.25%) collateral security viz., property, LIC policies,
Above R10 lakh – Min. 10.75% (Base Rate + 3%) Deposit, etc., to the extent of 25% of loan amount
(Investment in fixed assets less than R100 lakh) is provided.
Above R10 lakh – Min. 11.75% (Base Rate + 4%) Processing Charges:
(Investment in fixed assets above R100 lakh) 0.25% of loan amount subject to a minimum of
* Subject to gradation of the borrower R5000/-
# Rate of interest at floating rate linked to Base Rate Prepayment charges:
# Rate of interest is subject to review -Nil-

Special Placement Programme through Video Conferencing Mode for


Organisations functioning in Gulf Council Countries (GCC)/Middle East,
November - December, 2010
The Committee for Members in Industry of the providing their services to the organisations in
Institute of Chartered Accountants of India provides GCC/ Middle East. To facilitate employment of
opportunity to the employers to interact with newly chartered accountant in the GCC/Middle East, CMII
qualified Chartered Accountants providing a cost of ICAI is organising Special Placement Programme.
effective mode of recruiting newly qualified Chartered This programme would enable the corporates
Accountants. working in Gulf Council Countries (GCC)/Middle
Special Placement Programme is a step ahead East to recruit Chartered Accountants through video
as an extension to the same programme but with a conferencing mode from Chennai, Kolkata, Mumbai
different objective. For the first time CMII has taken and New Delhi centres from India.
an initiative to organise a separate Special Placement
Programme through video conferencing mode Invitation to Chartered Accountants
for Chartered Accountants. Chartered Accountants It has been decided to organise Special Placement
are getting placed not only within the country but Programme at 4 centres, viz., Chennai, Kolkata,
are also taking up jobs abroad. Many CAs are Mumbai and New Delhi centres through video
THE CHARTERED ACCOUNTANT november 2010 127
ICAI NEWS 808

conferencing mode. A large number of leading organisations are expected to participate.

The schedule of the Special Placement Programme is as below:


Centre Registration of the Registration of Short-listing by Consent sending by Interviews
Companies the Candidates Companies
Chennai, Upto 22nd November, 23rd November to 1st December, 2010 2nd-3rd December, 7th–8th
Kolkata, 2010 26th November, 2010 December,
Mumbai and 2010 2010
New Delhi

Eligibility of candidates for Special Placement Programme


Chartered Accountants fulfilling the following conditions are eligible to take part in Special Placements.
1. Having the membership number of Institute as on 20th November, 2010. The membership number should
be available with you and would be required for registration.
2. Passed C.A. final examination on or before May, 2010.
The members who have got placements through the placement programme organized by the Institute
between 01.10.2009 to 1.11.2010 are not eligible to apply.

Invitation to Employers
Corporates working in Gulf Council Countries (GCC)/Middle East can now end their search by participating
in Special Placement Programme wherein they would have access to a vast database of members of The
Institute of Chartered Accountants of India.
The event would provide an opportunity to companies to select Chartered Accountants as per their
requirement criterion.
Organisations intending to recruit Chartered Accountants through the above scheme of Special Placement
Programme are requested to get in touch with Committee for Members in Industry, Indraprastha Marg, New
Delhi - 110002, Tel. No. (0091) (11) 30110450/491 E-mail: placements@icai.org, mii@icai.in .
An organisation can participate in one or more centres, as per its requirements. Firms of Chartered
Accountants are also welcome to join. For further details please logon to www.cmii.icai.org .

Chairman
Committee for Members in Industry

ICAI Seek Space and Infrastructure to Conduct Campus Interviews


The Institute invites “Expression of Interest” from reputed Delhi 6 700-800
Institutes (Colleges/ Schools)/ Chartered Accountants
and others to provide furnished AC Rooms and other Jaipur 5 300-400
infrastructure for conducting placement activities like Kanpur 4 50-100
campus interviews, orientation programmes, etc on pan
India basis for 2 to 6 days on periodic basis. The space Kolkata 6 250-350
in the room should be sufficient enough for conducting Ludhiana 4 50-100
Group discussion of around 15-20 people simultaneously.
Larger capacity Halls like theatres and auditoriums are also Mumbai 6 800-1000
required to accommodate the candidates and to be used Pune 5 300-400
as announcement cum waiting area. There should also be
a separate dining area. Those interested may send the details of facilities
CITY MINIMUM CAPACITY / APPROX. available, within 15 days, to the undersigned at “The Institute
NUMBER NUMBER OF of Chartered Accountants of India, ‘ICAI Bhawan’, Post Box
OF CANDIDATES Number 7100, Indraprastha Marg, NEW DELHI - 110 002.”
ROOMS Emails can be sent to cmii@icai.org.
Bangalore 6 200-300 Secretary, CMII of ICAI
Bhubaneswar 4 50

128 THE CHARTERED ACCOUNTANT November 2010


809 EVENTS

24 CPE
HOURS
Organised by the Auditing and Assurance Standards Board
The Auditing and Assurance Standards Board of the Institute is organising Training Workshops on Audit
Excellence to impart in depth knowledge on implementing the new/ revised Standards on Auditing issued by
the ICAI under the Convergence and Clarity Project in the recent past.
9 Practical case study-based approach
9 Interactive classes
Workshop
9 Professionally developed reading material
highlights
Will also include industry specific Standards on Audit implementation issues eg
Bank audit, Audit of PSE’s etc.
Senior and experienced members from the profession as well as faculty from
Trainers
reputed academic Institutions
Duration Four days with six hours of technical sessions in each day
Participants Maximum fifty per workshop
Fees R5000/- per participant (includes cost of reading material and lunch, Tea etc.)
The workshops will commence from the third week of November 2010. To start
Workshop with, Training Workshops would be launched at New Delhi on 3rd December, at
schedules Chennai on 4th December, at Mumbai on 10th December, at Kolkata on 11th
December, 2010.
Registration will be strictly on first come first served basis.

Topics Covered: Topics Covered: Topics Covered: Topics Covered:


x Understanding the x Materiality in Audit x Risk responses (SA 330) x Audit reporting (SA
Clarity project & Planning & Performance x Initial Engagement 700, SA 705, SA 706,
Convergence process (SA (SA 320) Considerations (SA 510) SA 710 & SA 720)
200) x Evaluation of Misstatements x Management x Quality Control of
x Basic concepts of (SA 450) Representations and Audit (SQC 1)
Assurance Engagements x Evidence Gathering-I Communications with x Additional Reporting
(Framework for o Audit Evidence (SA 500 Management (SA 580, SA Requirements (CARO,
Assurance Engagements) & SA 501) 260 & SA 265) 2003)
x Terms of Audit x External Confirmation (SA x Using Work of Others (SA x Industry Specific
Engagement (SA 210) 505) 600, SA 610 & SA 620) Audit Issues:
x Engagement Planning x Analytical Procedures (SA x Documentation (SA 230) o Bank Audits
(SA 300) 520) o Audit in Public
x Risk Assessment x Audit Sampling (SA 530) Sector Enterprises
Procedures (SA 315) x Accounting Estimates (SA x Specific Audit Issues
x Risk Assessment 540) o Implementing
o Fraud auditing
x Related Parties (SA 550)
Considerations (SA standards in
x Subsequent Events (SA 560)
240) smaller audit
x Going Concern (SA 570) clients
o Laws and
Regulations (SA 250)
For further details please contact:
Secretary, Auditing and Assurance Standards Board at 93507 99938
Email: auditworkshop@icai.org, Cc: aasb@icai.org

THE CHARTERED ACCOUNTANT november 2010 129


EVENTS 810

CPE
Seminar on Capacity Building Measures & New Professional Avenues
6
Hours
Organised by: Committee for Capacity Building of CA Firms and Small & Medium Practitioners
Hosted by: Hyderabad Branch of SIRC of ICAI

Date & Time Venue


13th November, 2010 Centre of Excellence, ICAI, Plot no. 10 & 11, Nanakramguda, Hyderabad
8:30 a.m. to 5:30 p.m.
Theme
With advent of globalization and challenges posed by the liberalization process taking place worldwide, a need is felt for strengthening
competencies of CA firms and small practitioners. ICAI’s initiative is to enlarge visibility of CA profession and to rejuvenate practice portfolio
of Small and Medium Practitioners. ICAI has formed CCBCAF&SMP Committee for popularizing effective union of CA firms by facilitating
consolidation through Networking, Mergers and setting up Management Consultancy Services etc. Committee’s focus is on enriching SMPs
through Capacity Building measures for bringing up world class competency and brand image. This seminar will concentrate on issues &
impediments related to capacity building as well as highlight emergent issues of profession.
8:30 am to 9:30 am Registration of Participants
9:30 a.m. to 9:45 a.m. Inaugural Session
First Session Capacity Building Measures-Networking, Merger and Corporate Form of Practice
10:00 a.m. to 11:3 0 a.m.
Second Session Limited Liability Partnership-Benefits to the Profession
11:30 a.m. to 12:30 p.m.
Third Session Stretegies for Wealth Creation, Wealth Maximzation and Wealth Management
12:30 p.m. to 1:30 p.m.
Fourth Session Practice Management, Partnership Deed and LLP Agreement
2:30 p.m. to 3:30 p.m..
Fifth Session Service Tax & Roadmap to GST
3:30p.m. to 4:30p.m.
4:30 pm tp 5:30 pm Open House & Valedictory Session
Registration Fees: R600/-
For registration and further details, please contact
Hyderabad Branch of SIRC of the Institute of Chartered Accountants of India,ICAI BHAWAN,11-5-398/C, Red Hills, HYDERABAD – 500 004
 : hyderabad@icai.org , : (040) 23317026, 23393182
CPE
Conference on Capacity Building Measures & New Professional Avenues
6
Hours
Organised by: Committee for Capacity Building of CA Firms and Small & Medium Practitioners
Hosted by: Varanasi Branch of CIRC of ICAI

Date & Time Venue


4th December, 2010 Hotel Ideal Tower, The Mall Cantt. Varanasi
8:30 a.m. to 6:00 p.m.
Theme
With advent of globalization and challenges posed by the liberalization process taking place worldwide, a need is felt for strengthening compe-
tencies of CA firms and small practitioners. ICAI’s initiative is to enlarge visibility of CA profession and to rejuvenate practice portfolio of Small
and Medium Practitioners. ICAI has formed CCBCAF&SMP Committee for popularizing effective union of CA firms by facilitating consolidation
through Networking, Mergers and setting up Management Consultancy Services etc. Committee’s focus is on enriching SMPs through Capac-
ity Building measures for bringing up world class competency and brand image. This confeence will concentrate on issues & impediments
related to capacity building as well as highlight emergent issues of profession.
8:30 am to 9:30 am Registration of Participants
9:30 a.m. to 9:45 a.m. Inaugural Session
First Session Capacity Building Measures-Networking, CA. Sanjeev Maheshwari
10:00 a.m. to 12:00a.m. Merger and Corporate Form of Practice. Chairman-Committee for Capacity
Building of CA Firms and Small &
Medium Practitioners
Second Session Tenders in Audit & ethical standards CA Sumantra Guha
12:00 p.m. to 1:15 p.m. Central Council Member, ICAI
Third Session Taxation on Charitable & Religious Trust CA M. Devaraja Reddy
2:00 p.m. to 3:30 p.m. Central Council Member, ICAI
Fourth Session Scope of practice in Commercial Economic CA Amresh Vashisht, Member, CCBCAF
3:30 p.m. to 4:30 p.m. & Labour Laws &SMP, ICAI
Fifth Session Service Tax: Key issues CA. Sukant Ray
4:30 p.m. to 5:30 p.m.
5:30 pm to 6:00 pm Open House & Valedictory Session
Registration Fees: R600/-
For registration and further details, please contact
Varanasi Branch of CIRC of ICAI , Plot No. 152, Shree Hari Apartment, Jawahar Nagar Ext. Colony, Near Chetmani Chauraha, Bhelupur (Dur-
gakund), Varanasi,U.P.-221 005 ,  : varanasi@icai.org , : (0542)2390106

130 THE CHARTERED ACCOUNTANT November 2010


811 EVENTS

ICAI AWARDS - 2010 – CORPORATE CA ACHIEVERS’ ACCLAIM


The Committee for Members in Industry of the ICAI annually conducts a mega event Corporate Forum. In the forum contributions made
by the chartered accountants who are working in corporate are recognized by way of awards in different categories. CEO’s, Directors;
CFO’s and other managers who have achieved professionally are considered for different awards. It is a great opportunity for the
members of the Institute to get their contributions recognized by their alma mater. The awards seek to:
• Acknowledge Chartered Accountants in industry who have demonstrated excellence in the way in which they conduct their
profession.
• Acknowledge Chartered Accountants who are exemplary role models in the industry.
• Acknowledge Chartered Accountants who have created value to their company's stakeholders on a sustainable basis.
Award Categories
CA Business Achiever CFO CA Professional Achiever
(CEO/Directors/Equivalent Posi- (Managers in the early or middle part of their
tions) careers)
Financial Services Manufacturing sector Manufacturing sector
Corporate Financial Sector Financial Sector
SME Service Sector Service Sector
CA Global Achiever Information Technology Information Technology
Woman Media and Entertainment Sector Media and Entertainment Sector
Others Telecom Sector Telecom Sector
FMCG Sector FMCG Sector
Infrastructure & Construction Infrastructure & Construction
Healthcare Sector Healthcare Sector
Engineering & Capital Goods Engineering & Capital Goods sector
sector Public Sector
Public Sector Woman
Woman Others
Others
The process of selection shall include inviting nominations, shortlisting and final selection. An eminent jury being chaired by Shri Adi
Godrej, Chairman, Godrej Group, will finalise the recipients of awards. Chartered Accountants who would be interested to participate
for the awards may fill in the nomination form available at www.icai.org or www.cmii.icai.org. You may also send a mail to cmii@
icai.org for a copy of the nomination form. The last date of receipt of nominations by the Committee for Members in Industry is 15th
December 2010 to: The Secretary, Committee for Members in Industry, The Institute of Chartered Accountants of India, ICAI Bhawan,
Post Bag 7100, Indraprashtha Marg, New Delhi - 110 002. You may contact us at cmii@icai.org or call at 011-30110491.

CPE
ONE DAY WORKSHOP
6
Hours
Organised by: COMMITTEE FOR MEMBERS IN INDUSTRY OF ICAI
Hosted by: SURAT BRANCH OF WIRC OF ICAI

Date & Time 27th November 2010


Timing of Sessions Details
9.00 AM Registration and Inaugural Session
TOPICS: 1. IFRS
2. XBRL
Participation Fees R700/-

Cheque (local)/draft in favour of “Surat branch of WIRC of ICAI” payable at Surat and sent it to the ad-
dress given below.

Limited Seats, Registration on First Come First Serve Basis.


Contact Details
For Registration & further Surat Branch of WIRC of ICAI
details, please contact 3- A, Jaldarshan Apartment, Opp.Multistoried Bldgs., Nanpura, SURAT – 395 001
 :surat@icai.org
: 0261-2472932,2464413,3207911

Chairman, CMII

THE CHARTERED ACCOUNTANT november 2010 131


EVENTS 812

CPE TWO DAYS WORKSHOP ON


12 Hours
Excellence in Profession
Organised by: COMMITTEE FOR MEMBERS IN INDUSTRY OF ICAI
Hosted by: JABALPUR BRANCH OF CIRC OF ICAI
Date & Time Venue
24th & 25th November 2010 At Hotel Gulzar Palace, Jabalpur
Day 1: 24th November, 2010
Timing of Sessions Details
9.00 AM - 11.00 AM Registration and Inaugural Session
Inaugural Address by CA. Amarjit Chopra, President, ICAI
Technical Session I Professional opportunities for chartered accountants in industry and in practice.
11:00 AM – 12:45 PM
Technical Session II 12:45 Certification World—Key Issues.
PM – 13:45 PM
Technical Session III Service Tax- How to identify scope of levy & classification.
14:30 PM – 16:30 PM
Technical Session IV Construction of Business Correspondence—Deeds & Documents.
16:30 PM – 18:00 PM
Day 2: 25th November, 2010
Timing of Sessions Details
Technical Session V Income Tax- How to handle search & seizure proceedings.
10:00 PM – 12:00 PM
Technical Session VI Tenders in Auditing- Ethical Issues.
12:00 PM – 13:30 PM
Technical Session VII Scope for members in Commercial, Labour & Economic Laws
14:15 PM – 16:00 PM
Technical Session VIII CENVAT Credit for Service Tax
16:00 PM – 17:15 PM
17:15 PM – 18:15 PM Open House and Valedictory Session
Participation Fees R1250/- For ACA
R1500/- For FCA

Cheque (local)/draft in favour of “Jabalpur Branch of CIRC of ICAI” payable at Jabalpur and sent it to the
address given below.

Limited Seats, Registration on First Come First Serve Basis.


Contact Details
For Registration & further 2095, Tayab Ali Chowk, Napier Town, Jabalpur - 482 002 (M.P.)
details, please contact  :jabalpur@icai.org : [+91] (761) 4063 656, 2627 236

Chairman, CMII

CPE
Two Days Residential Refresher Course at Bodhgaya
12 Hours
Organised by: Committee on Economic, Commercial Laws & WTO
and Committee on Professional Education
Hosted by: Patna Branch of CIRC

Date & Time Venue


November 27 & 28, 2010 [Saturday & Sunday] Sambodhi Resort, Bodhgaya
The Programme will commence at 11.30 AM on November 27, and conclude at 2.15 PM on
November 28, 2010.
Theme
In the era of globalization and increasing competition across the world over, at every stage the need arises to adopt different strategies to
combat the emerging competitive issues tactfully. The objective of this two Days Residential Refresher Course is to provide a forum to discuss
the emerging issues and Impacts related to the dynamics of the various sectors.
Topics to be Discussed Speakers
Professional Opportunity in Economic, Commercial & Allied laws and WTO Moderator: CA. S. P. Sinha
Resource: CA.Rajkumar S. Adukia
Internal Audit especially valuation rules of Central Excise, Service Tax and VAT Laws, Moderator: CA. Rakesh Sangreria
Resource: CA. P. Rajendra Kumar

132 THE CHARTERED ACCOUNTANT November 2010


813 EVENTS

Audit documentation including peer review, quality review and review by financial report Moderator: CA. Saba Mahmood
review board (with special reference to tax audit documentation)
Social Audit CA. Vijay Garg
Overview of IFRS CA. Shiwaji Zaware
Government Accounting with Special Reference to Accounting of the Local Urban Bodies Eminent faculty(ies)
& Panchayati Raj
Fees
• Residential (including accommodation, breakfast, lunch, dinner and course material):
R4000/- For Member on twin Sharing basis R3000/- For Spouse, other family member/ guest each, R1000/- For Children each (Age 5 to
below 10 years)
• Non Residential (without accommodation & Transportation): R2500/- For members and R2,300/- For Spouse, other family member/ guest
each, R1000/- For Children each (Age 5 to below 10 years)

Children up to 05 years Complimentary.


For registration and further details, please contact
: 0612-2238750, 3200796  patna@icai.org; icai_patna@yahoo.co.in Ph: 011 – 30110499, : ctlwto@icai.org; cecl@icai.in.
The detailed announcement will be hosted on the website www.icai.org shortly.

CPE
TWO DAYS WORKSHOP ON
12
Hours
Excellence in Service Tax
Organised by: COMMITTEE FOR MEMBERS IN INDUSTRY OF ICAI
Hosted by: MATHURA BRANCH OF CIRC OF ICAI

Date & Time Venue


17th & 18th December 2010 At Hotel Brijwasi Royal, Mathura

Day 1: 17th December, 2010

Timing of Sessions Details


9.00 AM - 10.00 AM Registration and Inaugural Session

Technical Session I Service Tax: How to decide taxability & classifications.


10:00 AM – 12:00 PM
Technical Session II 12:00 Service Tax: Key Issues on Real Estate Transaction..
PM – 13:30 PM
Technical Session III Other key services.
14:30 PM – 16:00 PM
Technical Session IV Exemption Notification—How to decide the scope.
16:00 PM – 18:00 PM
Day 2: 18th December, 2010

Timing of Sessions Details


Technical Session V How to handle departmental proceedings—Search, Seizure, assessments, ad-judication & appeals proceed-
10:00 AM – 12:00 PM ings.
Technical Session VI Valuation of taxable services.
12:00 PM – 13:30 PM
Technical Session VII CENVAT Credit
14:15 PM – 16:45 PM
16:45 PM – 17:45 PM Open House and Valedictory Session
Participation Fees R1500/-

Cheque (local)/draft in favour of “Mathura branch of CIRC of ICAI” payable at Mathura and sent it to the ad-
dress given below.

Limited Seats, Registration on First Come First Serve Basis.

Contact Details
For Registration & further Bohre Ji Ka Bada, Near K. R. Degree College, Bhens Bahora,
details, please contact MATHURA - 281 001 (U. P.)
 :mathura@icai.org
: [+91] (565) 2501 122

Chairman, CMII

THE CHARTERED ACCOUNTANT november 2010 133


EVENTS 814

CPE
NATIONAL CONFERENCE
12
Hours
Organised by: Direct Taxes Committee of ICAI and Committee for Members in Industry of ICAI
Hosted by: The Ahmedabad branch of WIRC of ICAI

Date Venue
4th December, 2010 and 5th December, 2010 Sindhu Bhavan, Off. S.G.Road, Ahmedabad.
Programme structure
Date Timing TOPICS Faculty
04/12/2010 10.00 AM to 11.00 AM Inauguration

Chief Guests:
Shri S. S. N. Moorthy, Chairman CBDT
Shri Amarjeet Chopra, President of ICAI
11.00 AM to 12.15 PM CFC/GAAR/Place of effective management under DTC Pranav Sayta
12.15 PM to 1.30 PM Provision of Section 56(2) Rajesh Kadakia
2.30 PM to 3.15 PM Opportunities & Challenges for the profession Y. M. Kale*
3.15 PM to 4.30 PM Business Valuation (Including under FEMA) Sujal Shah
4.30 PM to 5.45 PM Penalties – Recent Trend Saurabh Soparkar
05/12/2010 9.30 AM to 10.30 AM Future of the Profession G. Ramaswami, Vice
President of ICAI
10.30 AM to 12.15 PM IFRS Convergence in India - Challenges N. P. Sarda*
12.15 PM to 1.30 PM Business Deductions including impact of Section 14A Padamchand Khincha
2.30 PM to 3.00 PM Speech by Industrialist Eminent Industrialist
3.00 PM to 4.15 PM Import & Export of Service Tax A. R. Krishnan
4.15 PM to 5.30 PM Transfer Pricing – Practical Perspective Vijay Iyer
For registration and further details, please contact
Ahmedabad Branch of Western India Regional Council, The Institute of Chartered Accountants of India
'ICAI BHAWAN', 123, Sardar Patel Colony,
Near Usmanpura Underbridge, Naranpura, Ahmedabad - 380 014
: +91(79) 39893989 / 27680537 / 27680946/ 39821002
*Subject to confirmation

CPE
TWO DAYS NATIONAL CONFERENCE
12
Hours
Organised by: COMMITTEE FOR MEMBERS IN INDUSTRY OF ICAI
Hosted by: GUWAHATI BRANCH OF EIRC OF ICAI

Date & Time Venue


17th & 18th December 2010 At Pragjyoti ITA Centre for performing Arts, Machkhowa, Guwahati
Day 1: 17th December, 2010
Timing of Sessions Details
9.30 AM - 10.30 AM Registration and Inaugural Session
Inaugural Address by CA. Amarjit Chopra, President, ICAI and CA. G. Ramaswamy, Vice-President, ICAI
Technical Session I IFRS and AS and AAS.
10:45 AM – 13:45 PM
Technical Session II Corporate Laws
14:45 PM – 17:45 PM
Day 2: 18th December, 2010
Timing of Sessions Details
Technical Session III Direct Taxation.
10:00 AM – 13:00 PM
Technical Session IV Session on India Economy.
14:00 PM – 17:00 PM
Participation Fees CAs – R2000/- CA Students – R700/- Others – R2000/-
Cheque (local)/draft in favour of “Guwahati Branch of EIRC of ICAI” payable at Guwahati and sent it to the address given
below.
Limited Seats, Registration on First Come First Serve Basis.
Contact Details
For Registration & Please send your registration to Guwahati Branch of EIRC of ICAI
further details, please ICAI Bhawan, 2nd Bye Lane, Manik Nagar,R G Baruah Road,Guwahati – 781005
contact  :icai.guwahati@gmail.com, guwahati@icai.org : 0361-2207660
Chairman, CMII

134 THE CHARTERED ACCOUNTANT November 2010


815 EVENTS

CPE ALL INDIA CA CONFERENCE – 2010

12
“New Paradigms of Competitiveness – Positioning
CAs for Tomorrow’s Challenges"
Jointly Organised by the CPE Committee & Auditing and Assurance Standards Board
Hours of the ICAI

Date Venue
13th & 14th November, 2010 Bhubaneswar
DAY ONE - 13th November, 2010 [Saturday]
Inaugural Session –
10.00 a.m. to 10.30 a.m.
Chief Guest : His Excellency Sri Murlidhar Chandrakant Bhandare
Honourable Governor, Orissa
Guest of Honour : Sri Prafulla Chandra Ghadai, Hon’ble Minister Finance, Orissa
: CA. Amarjit Chopra. President, ICAI
: CA. G. Ramaswami, Vice-President, ICAI

Technical Sessions Speakers


1st Technical Session Contemporary issues in Auditing – Special Chairman: CA. Abhijit Bandyopadhyay, Council
10.45 am to 12.15 pm emphasis on reporting compliance in the Member, ICAI
changed environment Speaker: CA. Amarjit Chopra, President, ICAI
2nd Technical Session Indian Capital Market – The Road Ahead & Chairman: CA. Subodh Kumar Agarwal, Council
12.15 pm to 1.45 pm Challenges Member, ICAI
Speaker: Shri M. S. Sahoo, ED, SEBI*
Shri Vivek Pattanayak (Retd IAS),BSE
3rd Technical Session Development of “XBRL” taxonomy Chairman: CA. S. Santhanakrishnan, Council
2.00 pm to 4.30 pm Member, ICAI
Speaker: CA. T. V. Mohandas Pai, Director, Infosys

4th Technical Session Corporate Law & Reporting Chairman: CA. V. Rajaraman, Past President, ICAI
4.15 pm to 5.45 pm Speaker: CA. Chetan Dalal
DAY TWO - 14th November, 2010 [Sunday]
5 Technical Session
th
IFRS for SMEs – a Possible way forward for Chairman: CA. Krishanu Bhattacharyya, Chairman,
9.30 am to 11.00 am converging with IFRS in Emerging Economy EIRC of ICAI
Speaker: CA. Nilesh Vikamsey, Council Member,
ICAI
6th Technical Session Corporate Governance & Corporate Social CA. M.M. Chitale,
11.00 am to 1.00 pm Responsibility Past President, ICAI

7th Technical Session Direct Tax Code Bill 2010 – Changes in Chairman: CA. Sumantra Guha, Council Member ,
2.00 pm to 3.30 pm conceptual approach ICAI
Speaker: CA. R. Bupathy, Past President, ICAI
CA. Arun Kumar Sabat
8th Technical Session Networking Merger & Demerger and Chairman: CA. N. D. Gupta, Past President, ICAI
3.30 pm to 5.00 pm Coprporate form of Practice- LLP- benefit to Speaker: CA. Sanjeev Maheswari*
profession
VALEDICTORY SESSION 05.00 PM TO 06.00 PM
CA. Abhijit Bandyopadhyay, Council Member, ICAI
CA. Subodh Kumar Agarwal, Council Member, ICAI
CA. Sumantra Guha, Council Member, ICAI
CA. Krishanu Bhattacharyya, Chairman, EIRC of ICAI
For Registration and Further Details
Bhubaneswar Branch (EIRC), The Institute of Chartered Accountants of India, ICAI Bhawan,
A-122/1 Nayapalli, Bhubaneswar - 751 012, Orissa. bhubaneswar@icai.org 0674-2392391
*confirmation awaited

THE CHARTERED ACCOUNTANT november 2010 135


EVENTS 816

ICAI’s Corporate Forum

Committee for Members in Industry (CMII) of ICAI is pleased to announce the conduct of the comprehensive three days
Corporate Forum event in January 2011. Creation of Employment Opportunities, Enhancing Knowledge and Skill Sets
and Recognition of the exemplary work of members in Industry are the primary goals of the CMII. Keeping this in mind,
the CMII will organise this unique Annual Corporate Forum tentatively from 28th January to 30th January, 2011. The ICAI
forum comprises of high-profile concurrent events, i.e.
• Career Ascent – Mid Career Campus
• Special Campus Placement Programme
• Corporate Conclave – In Pursuit of Excellence
• Capital Advantage – Invest & Buy Mart
• ICAI Awards 2010 – Corporate CA Achiever’s Acclaim

Brief details of the programmes are as under:

1) CAREER ASCENT – Mid Career To provide Chartered Accountants who have one year or more of
Campus (28th, 29th, 30th January 2011): industry experience with growth and career prospects, enabling them
to realize their full potential and aspirations and widen their horizon. It
will also enable employers seeking experienced CAs to identify and
recruit talent best suited to their (organisations’) requirements.

2) SPECIAL CAMPUS PLACEMENT For Chartered Accountants who had undergone three months
PROGRAMME (28th, 29th, 30th January Residential Programme of ICAI on Professional Skills Development
2011): wherein prospective employers and candidates interact and explore the
possibility of taking up employment careers in various organisations.

3) CORPORATE CONCLAVE – In pursuit Three one day National Conclaves on contemporary topics to enrich
of Excellence (28th, 29th, 30th January the knowledge and to enhance the skill sets of members.
2011):

4) CAPITAL ADVANTAGE – Invest & Buy Capital Advantage exhibition is a platform where Chartered Accountants
Mart (28th, 29th, 30th January 2011): and Corporates from all over India would mark their presence. This
would enable various organisations involved in Banking, Insurance,
Mutual Funds, Capital Markets, Real Estate, Information Technology
products and services and other technological products to interact with
Chartered Accountants, Investors, Finance Fraternity, and Corporate
Decision Makers.

5) ICAI AWARDS 2010 – Corporate CA Would honour the exemplary work of Chartered Accountants in
Achievers' Acclaim (30th January 2011): Industry by recognising those who have demonstrated excellence in
the professional life, personal life and are the role models for others in
industry. These Corporate CA Achievers Acclaim Awards of ICAI also
seek to acknowledge Chartered Accountants who have created value
to their company's stakeholders on a sustainable basis.

For registration and further details, please contact

ICAI Corporate Forum will be a unique opportunity for the members of ICAI to participate in an event which will provide
them knowledge, Career Opportunities and the chance to be recognised amongst the best in the profession.
For details, please visit, www.cmii.icai.org, www.icai.org. If you need any assistance/details regarding any of the events
in the Corporate Forum 2011, feel free to get in touch with us at service_mii@icai.org or 011-30110549.

136 THE CHARTERED ACCOUNTANT November 2010


817 EVENTS

CPE

12
International Conference on Accountancy Profession:
Catalyst to Sustained Economic Growth’ on 4 – 6 January, 2011 at
Vigyan Bhawan, New Delhi
Hours

As the world becomes ‘The Global Village’, the


accounting profession as an integral instrumentality
in the process of transition has witnessed a
paradigm change in its contributory role in every
sphere of the transformation. The shift in the
business philosophies further emphasises on a
broadened role for the accountancy professionals
as strategy formulators and facilitators. While
moving to such role of a value creator, the Institute
of Chartered Accountants of India (ICAI) has
endeavoured to imbibe the best practices model
by analysing the best approach as available
amongst varied corporates in different parts of the
world and has been playing the role of an enabler
by getting the relevant stakeholders exposed to
such best practices.
The ICAI, recognizing its role and responsibilities
to the stakeholder community at large is organising
an International Conference on the theme
‘Accountancy Profession: Catalyst to Sustained
Economic Growth’ on 4th – 6th January, 2011
at Vigyan Bhawan, New Delhi to dwell deeper

THE CHARTERED ACCOUNTANT november 2010 137


EVENTS 818

in to emerging paradigm of Accountancy Profession and bring the Indian and


global perspective together on the following broad issues that are of contemporary
relevance:

• Economic Resilience through Good Governance


• Harmonisation of Global Standards on Accounting: Sharing Lessons Learnt so
far
• Perspective for Emerging Context
• Landscaping Brand Indian Chartered Accountant Globally
• Journey from Financial Reporting to Business Reporting
• Bridging Expectation Gap: Addressing Public Perspective Post Satyam Fiasco
• Global Paradigm of Auditing Standards
• Meeting Governance Mandate through Entrepreneurial Vision
• Panel Discussion on Country Perspective on Governance & Ethics
• Professional Panorama

Delegate Fees Members R2500


Accompanying Spouse R2500
Non Members R4000
Foreign Delegates US$ 150
On the spot Registration Members R3500
How to make payment Pay online at www.icai.org or Demand Draft in favour of
Secretary, ICAI, International Conference 2011 A/c , Payable at
New Delhi
Organisers Conference Chairman Conference Co-Chairman
CA. Amarjit Chopra CA. G. Ramaswamy
President, ICAI Vice-President, ICAI
For registration and other Shri V. Sagar, Joint Secretary (: 011-30210601)/Shri Kunal
details please contact Sharma EO (: 011-30110542)/Shri Nitin Grover EO
(: 011-30110443)
The Institute of Chartered Accountants of India
ICAI Bhawan, Indraprastha Marg,
New Delhi – 110 002.
Fax: 011-3011 0591
 : ic@icai.in;
Website: http://www.icai.org
Attractions Cultural Extravaganza
5th January, 2011
For more details, please visit http://www.icai.org

138 THE CHARTERED ACCOUNTANT November 2010


GENERAL 820

‘Unique
Identification
Number’
to Pave Way for
a New India
India’s ambitious Unique ID
project, dubbed ‘Aadhar’, which
aims to provide every Indian
citizen (1.2 billion approx.) a
unique 12-digit number mapped
to biometrics, was recently
One of the key challenges faced and Indonesia. The number will be
launched in Nadurbar district of by people in India is difficulty in stored in a centralized database and
Maharashtra. The programme establishing identity. People have linked to the basic demographics and
to provide UID is an opportunity multiple identity documents, each biometric information photograph, ten
for India to design a 21st century serving a different purpose. The most fingerprints and iris of each individual.
important characteristic of ‘Aadhaar’ is The number will be unique and would
system of identification that could
its universality and it is assumed that be available for online and offline
be a significant improvement over
the biometric card with the number verification and, hence, will rule out
the 19th and 20th century systems will be gradually accepted across the the possibility of duplicate and fake
in use in developed countries like country as the identification number by identities from government as well as
United States of America and Italy. all service providers and government various private databases.
The unique identification numbers agencies. It is assumed by the Unique
will take into account the database
Identification Authority of India (UIDAI) Concept: Name and Logo
that the card will increase the trust Brand Name: The brand name of the
of the poor and the marginalized
between private and public agencies Unique Identification number (UID)
people, mostly living in the rural and reduce the denial of services to has been decided to be ‘Aadhaar’.
areas. The numbers will, for the people who have no identification. The ’Aadhaar’ translates into ‘foundation’,
first time, provide an identity to number will also hopefully reduce the or ‘support’ and is present across
those who need it the most. The hassle of repeatedly proving identity by most Indian languages. As Mr. Nandan
various documents to avail services like Nilekani, Chairman of the UIDAI notes,
project has great potential as it
opening a bank account and obtaining “The name Aadhaar communicates the
sets out to take within its purview
passport or driving licence and so on. fundamental role of the number issued
the not-so-privileged residents of For the people living below the poverty by the UIDAI the number as a universal
India. Read on to know more. line and the ones who are entitled identity infrastructure, a foundation
to various government-run welfare over which public and private agencies
programmes, the number and the can build services and applications
biometric data will help in identifying that benefit residents across India.”
the beneficiaries. Aadhaar’s guarantee of uniqueness and
India’s ambitious Unique ID project centralised, online identity verification
is a step towards putting India in the would be the basis for building these
club of more than 50 countries around multiple services and applications,
the world that have some form of and facilitating greater connectivity to
Mushtaque Ali national identity cards. These include markets. Aadhaar would also give any
(The author is a banking professional. He
most of continental Europe (not the resident the ability to access these
can be reached at mushtaql112@gmail.
com) UK), China, Brazil, Japan, Iran, Israel services and resources, anytime,

140 THE CHARTERED ACCOUNTANT November 2010


821 GENERAL

India’s ambitious What is Aadhaar? infrastructure over which Registrars


Unique ID project is a Aadhaar is a 12-digit unique number and Agencies across the country can
step towards putting which the Unique Identification build their identity-based applications.
India in the club of more than Authority of India (UIDAI) will issue UIDAI will build partnerships with
50 countries around the world for all residents. The number will be various Registrars across the country
that have some form of national stored in a centralised database and to enrol residents for the number.
identity cards. These include linked to the basic demographics and Such Registrars may include state
most of continental Europe (not biometric information – photograph, ten governments, state Public Sector Units
the UK), China, Brazil, Japan, Iran, fingerprints and iris – of each individual. (PSUs), banks, telecom companies,
Israel and Indonesia. The number Aadhaar will be easily verifiable in an etc. These Registrars may in turn
will be stored in a centralized online, cost-effective way. It will be partner with enrolling agencies to enrol
database and linked to the basic unique and robust enough to eliminate residents into Aadhaar.
demographics and biometric the large number of duplicate and fake Aadhaar will ensure increased trust
information photograph, identities in government and private between public and private agencies
ten fingerprints and iris of databases. It will be a random number and residents. Once residents enrol
each individual. The number generated, devoid of any classification for Aadhaar, service providers will no
will be unique and would be based on caste, creed, religion and longer face the problem of performing
available for online and offline geography. repeated Know Your Customer (KYC)
verification and, hence, will rule checks before providing services. They
out the possibility of duplicate Why Aadhaar? would no longer have to deny services
and fake identities from Aadhaar-based identification will have to residents without identification
government as well as various two unique features: documents. Residents would also
private databases. (a) Universality, which is ensured be spared the trouble of repeatedly
anywhere in the country. Aadhaar because Aadhaar will over time be proving identity through documents
can for example, provide the identity recognised and accepted across each time they wish to access services
infrastructure for ensuring financial the country and across all service such as obtaining a bank account,
inclusion across the country – banks providers. passport, or driving license, etc.
can link the unique number to a bank (b) Every resident’s entitlement to the By providing a clear proof of
account for every resident, and use the number. identity, Aadhaar will empower poor
online identity authentication to allow The number will consequently and underprivileged residents in
residents to access the account from form the basic, universal identity accessing services such as the formal
anywhere in the country. Aadhaar would WHAT AADHAAR IS WHAT AADHAAR ISN’T
also be a foundation for the effective • A number(12 Digits) • Another Card
enforcement of individual rights. A • For every individual, including infants • One per family
clear registration and recognition of • Enables identification, and is for every • Establishes citizenship and is only for
the individual’s identity with the state is resident Indians
necessary to implement their rights –to • Will collect demographic and biometric • Will collect profiling information such
employment, education, food, etc. The information to establish uniqueness of as caste, religion, language
number, by ensuring such registration individual
and recognition of individuals, would • Voluntary • Mandatory
help the state deliver these rights. • For every resident, irrespective of • Only for individuals who possess
The Logo: The design, which has existing documentation identification documents
been selected as the logo for Aadhaar, • Each individual will be given a single • Individual can obtain multiple
is a sun in red and yellow, with a unique ID number AADHAARs
fingerprint traced across its centre. • UIDAI will enable a universal identity • AADHAARs will replace all other IDs
The logo effectively communicates the infrastructure that any ID based
vision for Aadhaar. It represents a new application like ration card, passport
dawn of equal opportunity for each ,etc. can use
individual, a dawn which emerges • UIDAI will give a "Yes" or "No" response • UIDAI information will be accessible to
from the unique identity the number for any identification authentication public and private agencies
guarantees for each individual. queries

THE CHARTERED ACCOUNTANT november 2010 141


GENERAL 822

Banks in India and Aadhaar may be the first form of events—illness, loss of employment,
are required to identification they will have access droughts, and crop failures. However,
follow customer to. The UIDAI has said that it will due to the lack of access to financial
identification procedures ensure that its Know Your Resident services, many of the Indian poor face
while opening new accounts, (KYR) standards do not become a difficulties in accumulating savings.
to reduce the risk of fraud and barrier for enrolling the poor and has To mitigate the lack of financial
money laundering. The strong accordingly developed an Introducer access in India, the regulator has
authentication that the UIDAI system for residents who lack focused on improving the reach of
will offer, combined with its KYR documentation. Through this system, financial services in new and innovative
standards, can remove the need authorised individuals (‘Introducers’) ways — through no-frills accounts,
for such individual KYC by banks who already have an Aadhaar, can the liberalisation of banking and ATM
for basic, no-frills accounts. introduce residents who don’t have policies, and branchless banking with
It will thus vastly reduce the any identification documents, enabling business correspondents (BC’s),
documentation the poor are them to receive their Aadhaar. which enables local intermediaries
required to produce for a bank such as self-help groups and kirana
account, and significantly bring UID and Financial Inclusion stores to provide banking services.
down KYC costs for banks. In the last 20 years, India has undergone Related efforts have also included the
banking system and give them the a transformation of its economic and promotion of core-banking solutions
opportunity to easily avail various other regulatory structures. Policy reforms in in Regional Rural Banks; and the
services provided by the Government this period have led to the increasing incorporation of the National Payment
and the private sector. The centralised maturity of our markets, as well as Corporation of India (NPCI) to provide
technology infrastructure of the UIDAI healthy regulation. The emphasis on a national infrastructure for payments
will enable ‘anytime, anywhere, anyhow’ de-licensing, entrepreneurship, the use and settlements in the country.
authentication. Aadhaar will thus give of technology and decentralisation of Advancements in technology
migrants mobility of identity. Aadhaar governance to the state and local level such as core banking, ATMs, and
authentication can be done both have in particular, shifted India from mobile connectivity have also had
offline and online, online authentication a restrictive, limited access society enormous impact on banking. Mobile
through a cell phone or land line to a more empowered, open access phones in particular present an
connection will allow residents to verify economy, where people are able to enormous opportunity in spreading
their identity remotely. Remotely, online access resources and services more financial services across India. These
Aadhaar-linked identity verification will easily and effectively. technologies have reduced the need
give poor and rural residents the same But despite these efforts, access for banks to be physically close to
flexibility that urban non-poor residents to finance has remained scarce in rural their customers, and banks have been
presently have in verifying their identity India, and for the poorest residents consequently able to experiment with
and accessing services such as in the country. Today, the proportion providing services through Internet as
banking and retail. Aadhaar will also of rural residents who lack access to well as mobile banking. These options,
demand proper verification prior to bank accounts remains at 40 per cent, in addition to ATMs, have made
enrolment, while ensuring inclusion. and this rises to over three-fifths of banking accessible and affordable for
Existing identity databases in India the population in the east and north- many urban non-poor residents across
are fraught with problems of fraud east parts of India. This exclusion is the country.
and duplicate or ghost beneficiaries. debilitating. Economic opportunity Besides challenges of access
To prevent these problems from is after all, intertwined with financial and identity, a third limitation has
seeping into the Aadhaar database, access. Such financial access is been the cost of providing banking
the UIDAI plans to enrol residents into especially valuable for the poor—it services to the poor who transact in
its database with proper verification offers a cushion to a group whose smaller amounts, commonly referred
of their demographic and biometric incomes are often volatile and small. to as micropayments. Banks consider
information. This will ensure that It gives them opportunities to build such payments unattractive since
the data collected is clean from the savings, insure themselves against transaction costs may be too high
beginning of the programme. However, income shocks and make investments. to bear. The Unique Identification
much of the poor and under-privileged Such savings and insurance protect number (Aadhaar), which identifies
population lack identity documents the poor against potentially ruinous individuals uniquely on the basis

142 THE CHARTERED ACCOUNTANT November 2010


823 GENERAL

of their demographic information deposits at the local BC. Multiple be implemented on top of this
and biometrics will give individuals BC’s at the local level will also give payments system.
the means to clearly establish their customers a choice of BC’s. This The Aadhaar-enabled micropay-
identity to public and private agencies will make customers, particularly ments solution is just one of the many
across the country. It will also create in villages, less vulnerable to local developmental applications of the
an opportunity to address the existing power structures, and lower the Aadhaar.
limitations in financial inclusion. The risk of being exploited by BCs. Financial lnstitutions as Registrars:
Aadhaar can help poor residents easily (c) A high-volume, low-cost revenue The UIDAI has appointed various
establish their identity to banks. As a approach: The UIDAI will mitigate registrars and partners for its
result, banks will be able to scale up the high customer acquisition ambitious UID project. These are
their branch-less banking deployments costs, high transaction costs and the following:
and reach out to a wider population at fixed IT costs that we now face • Bank of India
lower cost. in bringing bank accounts to the • Bank of Baroda
An efficient, cost effective payment poor. • Central Bank
solution is a dire necessity for promoting (d) Electronic transactions: The • United Bank of India
financial inclusion. The Aadhaar and UIDAI’s authentication processes • Corporation Bank
the accompanying authentication will allow banks to verify poor • Indian Bank
mechanism coupled with rudimentary residents both in person and • Punjab and Sind Bank
technology application can provide the remotely. Rural residents will be able • Punjab National Bank
desired micropayment solution. This to transact electronically with each • State Bank of India
can bring low-cost access to financial other as well as with individuals and • Union Bank
services to everyone, a short distance firms outside the village. This will • Canara Bank
from their homes. reduce their dependence on cash, Partners:
The key features of Aadhaar- and lower costs for transactions. • Department of Posts
enabled micropayments outlined are Once a general purpose Aadhaar- • Life Insurance Corporation of
as follows: enabled micropayments system is India (LIC)
(a) UIDAI Know Your Resident in place, a variety of other financial • Ministry of Petroleum and
(KYR) sufficient for Know Your instruments such as micro-credit, Natural Gas
Customer (KYC): Banks in India micro-insurance, micro-pensions, • MNREGA
are required to follow customer and micro-mutual funds can • National Coalition of
identification procedures while Organisations for Security of
The UIDAI's
opening new accounts, to Migrant Workers
authentication
reduce the risk of fraud and • Oriental Bank of Commerce
processes will allow
money laundering. The strong
banks to verify poor residents
authentication that the UIDAI Who Can Get an Aadhaar?
both in person and remotely.
will offer, combined with its KYR An individual who is a resident in India
Rural residents will be able to
standards, can remove the need for and satisfies the verification process laid
transact electronically with
such individual KYC by banks for down by the UIDAI can get an Aadhaar.
each other as well as with
basic, no-frills accounts. It will thus
individuals and firms outside
vastly reduce the documentation How to Get an Aadhaar?
the village. This will reduce their
the poor are required to produce for The process to get an Aadhaar will be
dependence on cash, and lower
a bank account, and significantly circulated by the local media across
costs for transactions. Once
bring down KYC costs for banks. the country upon which residents need
a general purpose Aadhaar-
(b) Ubiquitous BC network and to go to the nearest Enrolment Camp to
enabled micropayments
BC choice: The UIDAI’s clear register for an Aadhaar. A technoholik.
system is in place, a variety
authentication and verification com team recently got a sneak peek
of other financial instruments
processes will allow banks to at the UIDAI tech centre in Bangalore
such as micro-credit, micro-
network with village-based BC’s to find out what a common man need
insurance, micro-pensions, and
such as self-help groups and to know about the enrolment process.
micro-mutual funds can be
kirana stores. Customers will be Following is process as found by
implemented on top of this
able to withdraw money and make technoholik.com.
payments system.

THE CHARTERED ACCOUNTANT november 2010 143


GENERAL 824

The Setup: The enrolment office the enrolment receipt, so that illiterate The compulsory
(EO) sits at right angles to the candidate residents have some way of knowing information for
and enters data into a laptop. The that the receipt indeed belongs to enrolment for UID
insight of the Aadhaar team here is that them. Beyond that, the photograph includes- Name (first and last
the person getting enrolled must see serves no biometric or authentication name compulsory, but middle
what is being entered. Thus, there’s a purpose. name optional), Gender (Male/
monitor in front of you, which mirrors the Biometrics: First there’s an iris Female/Transgender) and Date
enrolment officer’s screen so that you scan where you look into a binocular- of Birth are the compulsory
can point out spelling mistakes or other like device held up to your eyes by the fields. Whereas postal address
errors. If the person getting enrolled EO. After that it’s the four fingers of is also required, it’s more for
is illiterate, he or she can nominate each hand, followed by both thumbs the sake of mailing you UID
someone to accompany and verify. (a process similar to those entering the number than strictly being a
There’s a small laser printer behind the US) for your fingerprints. proof of residence. The EO asks
EO’s laptop and a webcam, fingerprint The wait: The EO makes you review you for a PIN code and city/
reader and iris scanner account for the the data entered one final time before district fields are automatically
remainder of the hardware setup. giving you a laser-printed receipt. One populated. The UID team
Compulsory Information: Name has to walk away with their receipts acknowledges the fact that a
(first and last name compulsory, but and have to wait for the actual number large number of people may not
middle name optional), Gender (Male/ to be delivered by India Post within 20 have any supporting documents
Female/Transgender) and Date of Birth to 30 days. to prove their identity. In this
are the compulsory fields. Whereas Contact Centre Details: The case, one is allowed to bring
postal address is also required, it’s UIDAI will set up a Contact Centre to another resident who is already
more for the sake of mailing you UID manage all queries and grievances in possession of an Aadhaar
number than strictly being a proof and serve as a single point of contact number to be an ‘introducer’ by
of residence. The EO asks you for a for the organisation. The details of the vouching for the person seeking
PIN code and city/district fields are Contact Centre will be published on to enroll.
automatically populated. the website as and when enrolment
Supporting Documents: The UID begins. The users of this system are party by corrupt officials. Apart from
team acknowledges the fact that a large expected to be residents, registrars this, they argue, it’s an individual’s
number of people may not have any and enrolment agencies. Any resident right to protect his or her privacy from
supporting documents to prove their seeking enrolment is given a printed any unlawful interference, even by the
identity. In this case, one is allowed to acknowledgement form with an state. Article 21 of the Constitution, the
bring another resident who is already Enrolment Number, that enables the Hindu Marriage Act, the Copyright Act,
in possession of an Aadhaar number resident to make queries about her/ Juvenile Justice (Care and Protection
to be an ‘introducer’ by vouching for his enrolment status through any of Children) Act, 2000 and the Code
the person seeking to enrol. Of course, communication channel of the contact of Criminal Procedure all place some
there is scope of fraud either with a centre. Each enrolment agency will form of restrictions on the release of
colluding introducer or by just using be given a unique code that will also personal information.
fake supporting documents. However, enable faster and pointed access to
the whole point of Aadhaar is that one the Contact Centre that includes a Is it mandatory or voluntary?
can only fake one’s identity once and technical helpdesk. Considering privacy concerns,
this prevents large-scale ‘ghost identity’ UIDAI has kept provision of voluntary
creation, which is the bane of most Why is the UID Criticized by registration at enrolment camps to
Indian government schemes. The great Some people? obtain the number. Critics, however,
PAN (Permanent Account Number with The main criticism of the UID is based argue that once the programme gets
Income Tax department) card scam on privacy concerns. The project is linked to welfare programmes, the
after all involved a single person creating criticized because, unlike Western PDS system and availing of various
thousands of different PAN numbers. countries, India is not known for services, it will lose its true voluntary
Photograph: A photograph is taken stringent data protection laws and the nature. Hence, it’s also important to
of the person getting enrolled, purely opposing group fears data theft and have stringent laws to prevent denial of
for the purpose of printing it out on selling of the vital information to a third service in such situations. n

144 THE CHARTERED ACCOUNTANT November 2010


825 Backpage

053
ACROSS
1. SEBI has recently permitted the NSE and USE to start trading
in currency _________. (7)
6. Total number of digits in the Unique Identification Number
proposed to be given to all Indian citizens. (6)
7. All IFRS-converged Accounting Standards have been cleared
by the Council of the ICAI except that on __________
contracts. (9)
10. 22nd Chapter of the ICAI. (3,2,7)
11. Balkans and Middle East Countries Auditing and Accounting
History Conference was held at ________. (8)
12. Brand name of Unique ID project of Government of India.
(6)
13. Levy named ‘Vartanam’ or ‘Dwarodaya’ mentioned in
Kautilya’s Arthashastra, which were collected on all foreign
commodities imported in India, is today known as _____
_____. (6,4)

DOWN
2. SEBI has mandated that no stock broker or depository
participant shall deny services to the client if the client refuses
to execute a ______ in their favour.
3. ICAI has decided to hold the international conference of CA
Students at ____ ______ in December 2010. (3,5)
4. The ICAI has entered into an MoU with the _____ bank to
arrange financial assistance to all members in practice / firms in
the form of specially designed loan scheme. (11)
5. SAFA meeting was recently held at ________. (10)
8. A sum payable for the use or right to use intellectual property
like patent, invention, model, design, secret formula or process
or trade mark. (7)
9. Name of the company which recently floated biggest public
offering in the history of Indian Capital Markets. (4,5)
14. Abbreviation of ICAI’s proposed unique code numbers for its
members in practice.

Note:
Members can claim one hour – CPE Credit – Unstructured
Learning for attempting this crossword by filling the details in
the self-declaration form to be submitted to your regional office
annually to avail CPE hours credit for Unstructured learning
activities under the activity 'Providing solutions to
questionnaires/puzzles available on Web/Professional
Journals'. There is no need to individually send this crossword in
hard copy or email.

SOLUTION Crossword 052

1 An auditor is checking the books of an airline. He is puzzled by the excess


use of fuel on a Mumbai to Delhi flight. He rings up the pilot and asks for
an explanation. “It was late at night says the pilot, Delhi was covered in
fog and I lost my bearings.” “I m sorry,” says the auditor, “but you'll have
to bear the cost yourself.” “The cost of what?” asks the pilot. “Of the
bearings you lost.”

THE CHARTERED ACCOUNTANT november 2010 145