volume 61 no.

4 october 2012 r100

THE

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

ACCOUNTANT
set up by an act of parliament

Freedom is not worth having if it does not include the freedom to make mistakes The best way to find yourself is to lose yourself in the service of others Live as if you were to die tomorrow. Learn as if you were to live foreverYou must be the change you wish to see in the world An ounce of practice is worth more than tons of preaching.
Father of the Nation Mahatma Gandhi (1889-1948)

JOURNAL

CHARTERED

volume 61 no. 4 october 2012 the chartered accountant r100

 EDITORIAL

543

Corporate Governance and Role of CAs

ffective governance and sustainability are increasingly important considerations for governments, organisations, business leaders, investors, consumers, and many other stakeholders throughout the world. The accountancy profession supports the move to a model of sustainable economies and corporate responsibility, where organisations pursue a more sustainable path and are better governed. The issue of Corporate Governance has attained increased importance in the wake of the global financial crisis and recent corporate scams. Corporate scandals in the 1980s, 1990s, and earlier this decade have focused investors, the public, businesses, auditors, governments and regulators on the need for better corporate governance. There has rightly been a longstanding view that sound corporate governance is beneficial for financial markets. Thus, sound corporate governance can contribute to financial market integrity and economic efficiency. In a nutshell, as substantiated by OECD, corporate governance (CG) is a set of relationships between a companys management, its board, its shareholders, and other stakeholders such as employees and creditors. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring related performance. Good corporate governance should provide proper incentives for the board and management to (avoid conflicts of interest and) pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. Role of CAs ICAI Members in Industry work within organisations in commerce, industry, financial services, education, and the public and not-for-profit sectorsas leaders and strategic partners in building long-term sustainable organisational success. They play a variety of important roles, including as creators, enablers, preservers, and reporters of sustainable value for their organisations. These CAs play critical roles in generating sustainable economic growth and stability worldwide by contributing to strategy support, planning, decision support and control, adding value to organisations and to the information they issue.

Within these roles, professional accountants are increasingly expected to perform as integrators, bringing together environmental, social, and economic performance and various business functions and processes; and as navigators, supporting the needs of governing bodies and management. Their work provides the foundation for credible and reliable financial and nonfinancial information, which is vital to building investor confidence. ICAI strives to promote and contribute to the value of professional accountants in corporates by increasing awareness of the important roles professional accountants play, supporting member bodies in enhancing the competence of their members, and facilitating the communication and sharing of good practices and ideas. The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC) has published Investor Demand for Environmental, Social, and Governance Disclosures: Implications for Professional Accountants in Business. The report considers trends in investor demand for and use of environmental, social, and governance (ESG) information, and recommends how professional accountants can better support their organisations in responding to these demands, and ultimately improve the management and reporting of ESG performance. The report highlights an evolving trend towards greater interest in ESG factors, and integration of these factors and ESG performance information into investment processes and decisions. To alert professional accountants to essential ESG metrics and indicators sought by investors, the report provides a sector-neutral list of core performance indicators most frequently used by investors to evaluate ESG performance, and a review of how investors might consider the financial implications and monetisation of these factors. As professional accountants both support and fill leadership roles in management operations and control, as well as stakeholder communications, they are well placed to apply accounting discipline and rigour to the collection, analysis, and reporting of ESG data, and to support the incorporation of ESG factors into their organisations management processes, systems, and reporting. Their involvement in improving the relevance and quality of their organisations internal and external business reporting will be critical to meet the challenge of increasing the use of ESG information.
-Editorial Board

IcAI- Partner in Nation building

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

544

CONTENTS
CA. JAYDEEP NARENDRA SHAH, President CA. MAHESH P. SARDA SHRI PRITHVI HALDEA SHRI GAUTAM GUHA CA. ANIL S. DANI CA. S. SUNDARARAMAN CA. K. GOPAL CA. R. GIRI CA. DEEPAK RINDANI NADEEM AHMED SUSANTA K. SAHU DR. N. K. RANJAN NIMISHA SINGH

EDITOR MEMBERS

THE

VOICE
543

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

ACCOUNTANT
SET UP BY AN ACT OF PARLIAMENT

SECRETARY ICAI EDITORIAL TEAM

546

Editorial - Corporate Governance and Role of CAs From the President

Freedom is not worth having if it does not include the freedom to make mistakes The best way to nd yourself is to lose yourself in the service of others Live as if you were to die tomorrow. Learn as if you were to live foreverYou must be the change you wish to see in the world An ounce of practice is worth more than tonnes of preaching.
Father of the Nation Mahatma Gandhi (1869-1948)

MEMBERS
552 554 558 596
R100

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ICAI Bhawan, Post Box No.7100, Indraprastha Marg, New Delhi-110002, Tel: +91 (11) 39893989. E-mail: [email protected], Website: www.icai.org SUBSCRIPTION RATES Inland subscribers : Overseas:

R1,000 per annum $150 per annum (subscribers by sea mail)

671 696

Readers Write Photographs Know Your Ethics Opinion - Provision for Warranty under Construction Contract and Corresponding Revenue Recognition Career Watch Classifieds

For Overseas Members/Subscribers Air Mail Surcharge : R2,100 per annum Sea Mail Surcharge : R1,100 per annum CA Students Other students & faculties : R1,400 for 3.5 years R400 per annum : R600 per annum

UPDATES
571 Legal Update - Legal Decisions - Circulars and Notifications National Update International Update Accountants Browser

CLASSIFIEDS: 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: The Journal Section at ICAI Bhawan, A-29, Sector-62, Noida or call at +91(120) 3045955 or e-mail at [email protected] EDITORIAL SUPPORT, DESIGN, ADVERTISEMENT & MARKETING SPENTA MULTIMEDIA Aaron Rodrigues, V. Kalidasan, Nilesh Juvalekar & Anand Dhuri. MUMBAI: Spenta Multimedia, Peninsula Spenta, Mathuradas Mill Compound, N. M. Joshi Marg, Lower Parel. Mumbai-400013. Tel: +91 (22) 24811022/24811025, Telefax: -91(22) 24811021. DELHI: No.7, 1st Floor, Nizamuddin (West) Market. New Delhi-110013. Tel: +91 (11) 4669 9999. BENGALURU: Old No. 583, New No. 9, Sri Manjunatha Krupa, 80 Feet Road, 3rd Cross, Opp. Koramangala Police Station, Bengaluru-560095. Tel: +91(80) 4161 8966/77. KOLKATA: 206-Jodhpur Park, Kolkata - 700068. Tel: +91(33) 2473 5896. Telefax: +91(33) 2413 7973. CHENNAI: 1st Floor,#5 Montieth Road Egmore, Chennai 600 028. Tel: +91-44-4218 8984/85 ICAI RESERVES THE RIGHT TO REJECT ADVERTISEMENTS Printed and published by Vijay Kapur on behalf of The Institute of Chartered Accountants of India (ICAI) Editor CA. Jaydeep Narendra Shah Published at ICAI Bhawan, P. O. Box No. 7100, Indraprastha Marg, New Delhi - 110 002 and printed at Spenta Multimedia. Peninsula Spenta, Mathuradas Mill Compound. N. M. Joshi Marg, Lower Parel, Mumbai - 400013 The views and opinions expressed or implied in THE CHARTERED ACCOUNTANT are those of the authors and do not necessarily reflect those of ICAI. Unsolicited articles and transparencies are sent in at the owners risk and the publisher accepts no liability for loss or damage. Material in this publication may not be reproduced, whether in part or in whole, without the consent of ICAI. DISCLAIMER: The ICAI is not in any way responsible for the result of any 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 while responding to the advertisements. TOTAL CIRCULATION: 2,31,196 Total No. of Pages: 164 including Covers Cover Image: Rashtrapati Bhavan Inside images and Graphics: www.dreamstime.com

673 675 677

ICAI nEWS
672 678 678 680 680 681 682 682 683 683 684 685 685 686 687 687 688 690 691 691 692 693 693 Billing & Accounting Software Increase in Fee for Duplicate Certificate of Membership and Certificate of Practice as an Associate or Fellow www.icai.org.in: An Exclusive Website for CA Firms of ICAI Study Tour to Hong Kong Health Insurance Scheme Inviting Resource Persons for Conducting Investor Awareness Programmes Payroll Software Portfolio Management Software Antivirus Software at discounted price Quick Insight Invitation for Expression of Interest for Authoring Publications relevant to the Members in Practice of ICAI Tax Cloud Software Excise & EXIM Software Job Fair Invitation for empanelment as Resource Persons Certificate Course on Concurrent Audit of Banks Empanelment as a Technical Reviewer with the Quality Review Board Certificate Course on Master in Business Finance Guide to Reporting on Pro Forma Financial Statements Third Phase of E-Learning on Standards on Auditing, launched Certificate Course on Forex and Treasury Management Non-Receipt of The Chartered Accountant Journal New Publications

EVEnTS
697 Forthcoming Events

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

JOURNAL

IN THIS ISSUE...

VOLUME 61 NO. 4 OCTOBER 2012 R100

CHARTERED

VOLUME 61 NO. 4 OCTOBER 2012 THE CHARTERED ACCOUNTANT

 CONTENTS

545

THE

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

ACCOUNTANT
set up by an act of parliament

DID YOU KnOW

560 Mahatmas Tryst with Learning and Accountancy - Contributed by Journal Section & Accountancy Museum of India, ICAI

InDUSTRY SPECIfIC
634 Does the Size of a Company Impact Profitability Transfer Pricing Analysis for IT Sector Chandrima Bhattacharya & S. P. Singh

CORPORATE & AllIED lAWS

641

In COnVERSATIOn
566 568 CAs Critical Stakeholder in Enabling Process of Sustained Growth, Says Governor of Goa Chartered Accountants Can Act as Pillars of Honesty and Integrity, says Goa CM

The Journey of a Bill to Become an Act CA. Raghav Kumar Bajaj

BAnKInG AnD fInAnCE

647 ATM Vulnerabilities, Frauds and Crimes CA. T.S. Subramanian

ACCOUnTInG
600 Triple Bottom Line Accounting Need of the Hour for Sustainability Goal Prof. Manju Punia Chopra

AUDITInG
605 Professional Skepticism: A Snapshot of Provisions in the Standards on Auditing Contributed by Auditing & Assurance Standards Board Secretariat

CORPORATE GOVERnAnCE
652 Should Shareholder Activism in India be a Mere Reality or Absolute Necessity? CA. H. Ghosh

InfORMATIOn TEChnOlOGY
657

TAxATIOn
610 618 621 Service Tax on Director Services to Companies CA. Mohammad Salim Tax Planning under MAT CA. Baljit Singh Reassessment under Income-tax Act, 1961- Some Issues M. Govindarajan

ERP Systems - Overview of their Emergence, Implementation and the Way Forward CA. Pramod Bhave

MAnAGEMEnT
664 Value-Based Management for Valuing Values in Organisations Prof. S. S. Khanka

InTERnATIOnAl TAxATIOn
628 The Wait is finally Over Advance Pricing Agreements Committee on International Taxation of the ICAI

BACKPAGE
700 Cross Word 076 Smile Please

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

JOURNAL

CHARTERED

volume 61 no. 4 october 2012 R100

546

FROM THE PRESIDENT

democratic and pro-development. Therefore, not all of them need be welcomed. Those that divide society and stunt its democratic growth need to be dropped with immediate effect. Lines that divide should never be drawn. We need to erase them if we want to survive with our sense of responsibility intact. We attack our own fellow citizens with a false sense of belongingness, which we have created around us. Bigger townships all over the world being seats of various economic activities have been a centre of employment and other economic support of the people, and, in return, these townships have grown and prospered too because of their inhabitants and their industrious work. Suddenly we, being the earliest settlers, decide that we have to have larger rights over the advantage and start expressing our anguish over others who have migrated in the recent past, resulting in an exodus. Read History and we will all agree that we have all been migrants in some way or the other. Quite purposely and timely, we forget nationalism. What makes us think that we have the right to deny fundamental rights to our fellow countrymen? We need to check our own credentials if we are civilised enough to live in a society. We need to check our moves and movements. Previously, I had expressed that our smaller townships need to develop and the Government needs to invest in them in order to create newer seats of economy. That would decrease such migrations. Forced acts of malicious vandalism against our fellow citizens-in-need would only lead to more of such acts. A time will come when we will find it difficult to decide who is correct, how it will stop, who should stop this and who should have the last say. Many such questions may arise and make these situation complex. It is better to heed to what Mahatma Gandhi had asked many years before: What difference does it make to the dead, the orphans and the homeless, whether the mad destruction is wrought under the name of totalitarianism or the holy name of liberty or democracy? It is time to think. It is time to answer. Let us take time to check our steps. Let us not create bad memories for the young of our times; otherwise, they would never forgive us for not changing our ways in good time. ***** Now, let me give you an update on some of the significant achievements vis--vis profession over the past one month:
w w w. i c a i . o r g

CA. Jaydeep Narendra Shah, President, ICAI

Dear Friends,
I find it quite apt at present to remember the father of our nation Mahatma Gandhi and his never-ending trust in nonviolent method of protest and struggle. Violence begets violence. Those who believe in the spirit of democracy know that violence is never a solution. A problem could never be resolved through an act of violence. Mahatma had said: Victory attained by violence is tantamount to a defeat, for it is temporaryI object to violence because when it appears to do good; the good is only temporary, the evil it does is permanent. Let us accept this. Violence leads to turbulence in democracy. Remember: silence could be quite powerful, at times enough to overpower worst of the chaotic situations. Similarly, nonviolence too has the ability to block this continuum of violence in our society or state. The need is to identify a method. Here, I would love to agree with John Keats, a critically acclaimed poet who celebrated love: I have been astonished that men could die martyrs for religion - I have shuddered at it. I shudder no more - I could be martyred for my religion - Love is my religion - I could die for that. Not all traditions are
6 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 FROM THE PRESIDENT

Council and Regional Councils Elections I am happy to note that taking forward our age-old tradition of autonomy and independence, the process of December 2012 elections for the 23rd Council of the Institute and its 22nd Regional Councils has been initiated. With this, has begun the festival of our professions inherent internal democracy. And with this, has also come the time to yet again demonstrate before the world that Indian chartered accountants symbolise prudence, discipline, integrity, positivism and professional decorum and conduct, besides their other usual traits. Remember, democracy flourishes from lively, healthy and positive debates on the ideas of development, and it endures when people of every background and belief find a way to set aside smaller differences in service of a greater purpose, which, in our case, is our accountancy profession. Though leaders are free to say anything, but when they do it without any fact-checking, democracy fails to think intelligently. While in the fray, we must take a cue from the noted author Jaachynma Agu who rightly says: Dont blow off another's candle for it won't make yours shine brighter. Election Code of Conduct has already come into force, i.e. from September 5, and I am sure all will abide by the same in letter as well as spirit. On the other hand, let me assure you all that, in line with our tradition, I will leave no stone unturned to ensure free and fair elections. I am sure each of our fraternity will support me and the Institute in this endeavour. Details about the elections have been prominently hosted on our website under a separate link. Remember that if we stick to our tradition of self-discipline, positive planks and high ideals and character of our great profession and ensure fair elections, then, irrespective of whoever wins, the ultimate winner will be our glorious profession. It will be a triumph of our accounting fraternity, who first and foremost votes for our internal democracy, independence and ultimate growth and development of our profession. International Initiatives MoU with NZICA, New Zealand: We have recently entered into an MoU with the New Zealand Institute of Chartered Accountants (NZICA), which will be operational soon. Details about this MoU have been hosted on our website. SAFA Board & Other Events in Kathmandu: I along with ICAI past-President CA. Amarjit Chopra and some of my other Central Council colleagues,
w ww.ica i.org

547

attended the 23rd meeting of SAFA Board and various Committee meetings held recently in Kathmandu. The meetings were also attended by the representatives of accountancy bodies from the SAARC countries namely India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives. Coinciding with the meetings, SAFA Seminar on International Taxation & Transfer Pricing was also hosted by the Institute of Chartered Accountants of Nepal, where my Central Council colleague CA. Bhavna Doshi presented a wellappreciated keynote paper on Global Development in International Taxation at the Seminar. She also spoke at length on International Tax Practices Opportunities & Challenges later on the occasion. Edinburgh Group & IFAC Meeting in New York: ICAI past-President CA. G. Ramaswamy recently attended the Edinburgh Group and IFAC Meeting held in New York, where he dwelled upon various issues relating to accountancy profession at large. APEC CEO Summit in Russia: One of my Council colleague represented the ICAI at the APEC CEO Summit 2012 in Russia recently, where the the latest developments in the profession were discussed while focusing on its theme Addressing Challenges, Expanding Possibilities. Extending Help and Training to Bhutan: ICAI pastPresident CA. Amarjit Chopra and one my Council colleagues represented the Institute in Bhutan recently to discuss the areas of co-operation in a lead to signing of an MoU with the Accounting and Auditing Assurance Board (AASB) of Bhutan. Past-President CA. Amarjit Chopra along with other faculty members including Shri Yagnesh Desai also imparted training in IFRS to the Bhutanese nationals as part of a six-day training programme conducted by ICAI at the request of the AASB Bhutan. IFRS Conference 2012 in Dubai: My two Central Council colleagues went to Dubai to attend the IFRS Conference 2012 recently, where the discussions were held on issues relating to first-time adoption of IFRS, extractive industry issues, implementation of IFRSs, and so on. Speakers on the occasion included representatives from the IASB. Study Tour on International Taxation: With a view to acclimatise our members about the best practices in the area of international taxation and to provide them an opportunity to participate and interact
THE CHARTERED ACCOUNTANT oc tobe r 2012 7

548

FROM THE PRESIDENT

carrying on business or providing services and claiming deduction under section 80P of the Incometax Act, 1961, were under the impression that they are not required to get their accounts audited under section 44AB of the Income-tax Act, 1961. Suggestions Submitted to CBEC On Central Excise & Service Tax: To simplify the essential procedures and liberalise CENVAT Credit rules with a view to make them assessee-friendly, we have submitted our suggestions to a Study Group that has been set up by the Government of India to examine the feasibility and develop a draft Common Code for central excise and service tax, keeping however, in view of the challenges in the context of impending GST. A need to bring accountability in tax administration has also been emphasised in our suggestions. On Augmenting Indirect Tax Revenue: We have recently suggested a variety of measures to the CBEC to augment the revenue of indirect taxes, including to introduce excise/service tax audit in line with the income tax audit for traders/ manufacturers/service-providers having a turnover of goods/services of more than three crore rupees. To reduce the litigation time, we have suggested steps including accelerating administrative reforms at lower levels which would also enhance smooth tax-collection, increasing the number of benches of CESTAT, and so on. Initiatives for Profession Guide to Reporting on Pro Forma Financial Statements: I am happy that we have issued Guide to Reporting on Pro Forma Financial Statements (pursuant to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009) to provide guidance to the members regarding reporting on Pro Forma Financial Statements required by the SEBI (ICDR) Regulations, 2009 as amended. The Guide is under print and will soon be available. Launch of 3rd Phase of E-Learning on Standards on Auditing: I am happy that after the successful launch of two phases of E-learning on Standards on Auditing (SAs), we have now launched the Third Phase of E-learning on Standards on Auditing. Till now, 522 and 157 registrations have been made for the first and second phase respectively and out of these registrations, 204 and 59 members have completed the course successfully.

with the experts of The International Tax Academy (ITA) of The International Bureau of Fiscal Documentation (IBFD), Netherlands, we recently conducted a Study Tour on International Taxation to Amsterdam in Netherlands led by my Central Council colleague and International Taxation Committee Chairman CA. Mahesh P. Sarda. IBFD is a unique centre of expertise offering high-quality information and education on international tax and the worlds foremost authority on cross-border taxation. Tax practitioners across the world rely on its highquality and independent research in taxation. ITA, established in 1989, is recognised worldwide as a reputable learning centre in the field of international taxation, which has provided certificate to our members of the course. Initiatives for Govt. Offices/Officials Model Role and Responsibilities of Non- Official Directors of CPSEs: In a major initiative of the ICAI for central public sector enterprises (CPSEs), we have prepared a Draft Model Role And Responsibilities of Non- Official Directors of Central Public Sector Enterprises on the request of Department of Public Enterprises (DPE), Ministry of Heavy Industries and Public Enterprises, Government of India. The report has been handed over to the Secretary DPE Shri O. P. Rawat who appreciated our efforts. As you may be aware, the presence of Non- Official (Independent) Directors on the Board is important for sound Corporate Governance to protect and build stakeholders confidence. As such, defining their role and responsibilities becomes equally significant for transparency and decision-making. It helps to contribute towards smooth functioning of the company and fulfilling of the responsibilities by a Non- Official Director in an effective and efficient manner. The report is based on the Companies Bill provisions and guidelines of the DPE. I am sure that this draft report would prove to be immensely useful for the DPE in particular and nation in general. Representations to CBDT: For better compliance of the statutory obligations, we recently made a representation to CBDT to review and delete both the Annexures I and II to Form No. 3CD as they have outlived their utility. We are hoping that our request will be accepted by the Department. Further, we also submitted a Representation to CBDT to clarify the applicability of provisions of Section 44AB to Cooperative Societies. This is because it was brought to our notice that majority of Co-operative Societies

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 FROM THE PRESIDENT

Finance Professionals Forum Launched: It's my pleasure to inform you that I along with two of my Council colleagues recently launched a Financial Professionals Forum in New Delhi, with an objective to bring together professionals having expertise in various fields of finance and to ensure enrichment of their fundamentals. The forum will facilitate continuous professional development, placements, training and research in the related fields. Capacity Building Measures of Practitioners & CA Firms: In order to strengthen the portfolio of our practitioners, we recently released a brochure on Quick Insight 2012 as part of their capacity-building measures. We have also made available free of cost for two financial years Tax Cloud: Cloud-Based & TDS Return Preparation for CAs, Portfolio Management Software and Excise & EXIM Compliance Software for CA practitioners and firms. Rajasthan Minister Hails Indian Accountancy Profession: I am happy to inform you that Cooperative Minister of Rajasthan Shri Parsadi Lal Meena, who was the Chief Guest at a national seminar organised by our Committee for Cooperatives & NPO Sectors and hosted by the Jaipur Branch of CIRC, spoke very high of our profession and its membership. A Quick Referencer on Cooperatives & NPO Sectors for the benefit of the membership of our Institute was also released on the occasion. Some of my Council colleagues were also present on the occasion among other dignitaries. Amendment in Tamil Nadu VAT Act: An amendment has been carried out recently in Tamil Nadu Value Added Tax Act, 2006 whereby a provision of audit by accountants including chartered accountants has been included in the Act. Workshops on Enabling Service Tax Practice: Taxation of services has witnessed a paradigm shift this year with a comprehensive system of taxation services replacing the erstwhile selective taxation of services. We have organised so far 24 two- and threeday workshops on Enabling Service Tax Practice across the country training about 2,100 members of the profession as part of an initiative to educate them on the basics of service-tax law and to familiarise them with the large-scale amendments made therein. In view of a strong and positive feedback from their participants, we intend to organise more of such workshops in future.

549

WIRC Regional Conference: I am happy to share with you that Member of Parliament (Rajya Sabha) CA. K. Rahman Khan delivered the inaugural address at the recently held 27th Regional Conference of WIRC in Mumbai. I must thank the WIRC for successfully holding the Conference, where the technical sessions were moderated by the likes of great leaders of profession that included ICAI past-Presidents CA. M. M. Chitale and CA. T. N. Manoharan. ICAI past-Presidents CA. N. P. Sarda and CA. Sunil H. Talati, Indian Overseas Bank CMD Shri Narendra, Union Bank of India CMD Shri D. S. Sarkar, and Anil Dhirubhai Ambani Group Group Managing Director CA. Guatam Doshi, among others, also chaired the sessions. They along with the speakers added to the academic and professional flavour of the Conference through their technical expertise. Future Group CEO Shri Kishore Biyani, and Shri Anand Rathi were the keynote speakers on the occasion. I must compliment the office bearers of WIRC and other members from the region for making the Conference a success. CIRC Regional Conference: The CIRC of ICAI recently organised its 33rd Regional Conference in Agra, which was attended by a large number of members. Justice Madan B. Lokur, a Supreme Court judge, was the Chief Guest on the occasion who spoke very high about our profession and potential of our members in economic growth of the country. I and many of my council colleagues besides other dignitaries were also present on the occasion. MBF Convocation: I am happy to inform you that the convocation ceremony of the second batch of Master in Business Finance Certificate course was organised recently where completion certificates and certificates of merit were distributed to the successful participants. I am sure, in the times to come, these finance professionals equipped with in-depth knowledge of accounting, auditing and taxation will become the backbone of entire financial network of the Country. Infrastructure Initiatives Foundation Stone of Pimpri Chinchwad Branch Building Laid: I am happy to inform you that in yet another step as part of our constant efforts to strengthen our infrastructure, I recently laid the foundation stone of the building of Pimpri Chinchwad Branch of WIRC to commence the construction. The Mayor and

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

550

FROM THE PRESIDENT

say within two to three years, are also welcome to join the course. ***** Festivals give us an opportunity to celebrate and provide us an opportunity to rejoice in community. Our elders used to say: joy when shared increases and pain when shared decreases. Joy and pain are actually relative, and absence of either of the two will result in a loss of the other. These require frames of reference to exist. We have already learnt that we cannot celebrate our joy in isolation, and that sharing is quite innate to happiness. Since, our surrounding helps us to rejoice, we will have to become more responsible and start respecting our surrounding. And, if we want to evolve our existence further, we will have to consciously acknowledge the presence of innateness even in the feelings of pain and grief. It is quite selfish that we call on others when we want to celebrate our joy and we willingly present us when it is time to share others joy, but we keep ourselves away when it is time to share their pain and grief. Truth is, we will never experience real happiness if we keep our connection with our surrounding partial. We should not act selfish. We are not responsible if we do so. We cannot act selfish. It is our social responsibility to create a real and complete bond with our society where and on which we and our ventures thrive. Dussehra and Idul Zuha (sometimes also called Eid-ul-Adha or Greater Eid) are approaching. While the former signifies a victory of the good over the evil and recognition of strength and courage to fight for that, the latter accredits endurance and willingness to sacrifice even our most precious possessions for the greater good. May the spirit of our festivals envelop our very soul and provide us strength and courage to do something for the welfare of our society! Best wishes

the Commissioner of Pimpri Chinchwad Municipal Corporation Ms. Mohini Lande and Shri Shrikar Pardeshi and some of my Central Council colleagues were also present on the occasion. I look forward to early completion of the construction for the ultimate benefit of our members and students. Foundation Stone of Rajamahendravaram Branch Laid: I am pleased to inform you that I recently also laid the foundation stone of Rajamahendravaram Branch of SIRC of ICAI. I am sure that this initiative will go a long way in boosting our infrastructure for the ultimate benefit of the members and the profession. A number of similar infrastructural initiatives are also on the cards. Initiatives for Students National Convention for CA Students in Guwahati: I along with a Central Council colleague inaugurated the National Convention of CA Students, hosted for the first time by the Guwahati Branch, where students from all over the country presented papers. A cultural evening Gen-X Blast was also organised on the occasion. Besides other officials of the EIRC and EICASA, EICASA Guwahati Branch Chairman and Guwahati Branch Vice-Chairman were also present on the occasion. National Convention for CA Students in Chennai: Our Board of Studies recently organised a very well attended a national convention of CA Students on the theme Jnana Kaanksha. Speaker of the Tamil Nadu State Legislative Assembly Shri D. Jayakumar was the Chief Guest on the occasion which was graced by eminent personalities of the region besides several of my Council colleagues. Residential Programme on Professional Skills Development: I am pleased to inform that we are organising the 16th and 17th batches of our fourweek Residential Programme on Professional Skills Development in November-December 2012 at our Centre of Excellence in Hyderabad, which will offer a unique opportunity to our students while focusing on their communication skills, leadership skills, and other executive skills for an effective professional delivery. All the students who have passed CA IPCC/ PCC/ PE-II examinations and pursuing last year of the article-training or completed that are invited to join the course. Recently-qualified chartered accountants,

CA. Jaydeep Narendra Shah President, ICAI

New Delhi, September 22, 2012

10

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

552

READERS WRITE
felt good to go through the article. We look forward to more such health oriented and inspiring articles in the journal.
-CA. Mohammad Samiur Rahman

September 2012 Issue was Informative The Editorial of the September 2012 issue of the journal titled Despite Global Pressures, Indian Economy Continues to be Resilient and Confident was very positive and it rightly said that creating negative impression of our economy in unfair to the inherent strength out economy has shown in the past. Of course, there are several gaps that need to be bridged but nevertheless India is in an advantageous position over many nations now because of its large domestic market, its robust investment-to-GDP ration and demographic advantage. I also found very informative the articles titled Revised Schedule VI-A Scientific Approach towards Preparation of Financial Statements, Audit of Smaller Entitities: A Snapshot of Special Considerations in Standards on Auditing, Taxability of Liaison Offices in India, Implementation of Basel III Capital Regulation in India and A Primer on Attribution of Profits to Dependent Agent Permanent Establishment. Keep up the good work.
-CA. S Gulati

Run for Health was Inspiring I am a newly qualified CA. The article titled Run for Health in the September 2012 issue of the journal was really inspiring and interesting. The author, who is into running for years, motivates us to remain fit irrespective of age. It

Service Tax Articles Were Very Useful The articles on service tax amendments in August 2012 issue of the journal were all worth reading and very useful. Before reading these articles, various issues were not clear to me. The articles titled Analysis of Service and Negative list and Reverse charge under service tax (Post Union Budget 2012 scenario) were written by authors with examples. These articles cleared various doubts related to reverse charge and negative list. Apart from that, legal update on service tax and articles titled Exemptions and negative list under new service tax regime and Impact of negative list on credit mechanism are also worth mentioning so far as their knowledge enhancing utility for we Chartered Accountants. I am very much thankful to Editorial Board of the ICAI for focusing on Service Tax amendments in the August 2012 issue of the journal.
-CA. Umesh Chand, Mathura

was good to read the rare facts and valuable information about Indian accountancy profession since its inception. This issue can be preserved for a long time reference. Further, the August, 2012 issue was also worth reading and very informative as it put focus on various latest changes in the Service Tax regime in the country. I thank one and all who contributed towards bringing out these issues of the journal.
-CA. P. V. Vittal, Visakhpatnam

Journal Highlights on e-Mail are Welcome I thank ICAI for having started the practice of sending the journal highlights through e-mailer. I was happy to receive the well presented highlights September 2012 issue of the journal through email. This environment-friendly initiative, if expanded to a larger scale, can go a long way in saving considerable number of trees and quantities of paper. With this, an option may be given to the members to unsubscribe the hard copy of the Journal and take this e-initiative to its logical conclusion.
-CA. Kanak Kaddgam, Bangalore

For Attention of Members

Certificate Course on Concurrent Audit of Banks at Baroda from October 19-21, 26-28, 2012. For registration please contact Baroda Branch Ph: (0265) 2681115/2680593, E-mail [email protected]

The Chartered Accountant July, 2012 issue was really a collectors issue as it carried a series of information and interesting articles from eminent personalities of the profession and other related fields. It

Edi tor
For the Attention of Readers
Readers attention is specifically invited to the fact that the views and opinions expressed or implied in The Chartered Accountant journal are those of the respective authors only, and not of the ICAI. The ICAI bears no responsibility of any sort whatsoever in case of any action taken by any reader based on any article published in the Journal.

Write to Editor

Information is Power and our ever-evolving profession needs more and more of that today than ever before. Do you have any relevant points to make, experiences to share, and views to spread among the CA fraternity? If yes, e-mail us at [email protected]/[email protected] or write to: The Editor, The Journal Section, ICAI, A-29, Sector 62, Noida (UP) - 201309

12

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

554

PHOTOGRAPHS

27th WIRC Regional Conference in Mumbai

ICAI President CA. Jaydeep Narendra Shah presenting a memento to Member of Parliament (Rajya Sabha) CA. K. Rahman Khan during the inauguration of the Conference. (August 31, 2012)

National Conference in Agra

ICAI President CA. Jaydeep Narendra Shah sharing the dais with the Chattisgarh Governor Shri Shekhar Dutt during the Conference. (August 25-26, 2012)

SAFA Events in Kathmandu

ICAI President CA. Jaydeep Narendra Shah and Central Council member CA. Bhavna Doshi along with Nepalese Finance Minister Mr. Barsha Man Pun and ICAN President CA. Madhu Bir Pande at the events. (September 14 -15, 2012)

Public Finance Awareness Programme in Shimla

ICAI past-President CA. Amarjit Chopra addressing the participants at a Public Finance and Government Accounting awareness programme held at Himachal Pradesh Branch of NIRC in Shimla (August 24, 2012)

ICAI Central Council member CA. Mahesh P. Sarda with the participants of Study Tour on Treaty Aspects of international Tax Planning held at International Bureau of Fiscal Documentation in Amsterdam (August 19-24, 2012)

Study Tour to Amsterdam

14

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

556

PHOTOGRAPHS

ICAI President CA. Jaydeep Narendra Shah presents a draft report on Model Roles and Responsibilities of Non-Official Directors on the Board of Central Public Sector Enterprises to the Secretary, Department of Public Enterprises Shri O. P. Rawat in the presence of other officials of the Department. (September 20, 2012)

ICAI Presents Report on Roles & Responsibilities of Non-Official Directors of CPSEs to DPE

Residential Programme in Hyderabad

ICAI President CA. Jaydeep Narendra Shah distributing Participation Certificates to its 14th and 15th batches of the Programme while the ICAI Director Board of Studies Shri Vijay Kapur looks on. (September 10, 2012)

SC Judge Welcomed at CIRC Regional Conference

ICAI President CA. Jaydeep Narendra Shah presenting a bouquet to Supreme Court judge Justice Madan B. Lokur at the 33rd CIRC Regional Conference held in Agra (September 1, 2012)

Convocation of MBF Certificate Course

ICAI President CA. Jaydeep Narendra Shah being presented a bouquet during the convocation of the second batch of Master in Business Finance Certificate Course held in New Delhi (September 1, 2012)

16

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

558

KNOW YOUR ETHICS

Ethical Issues in Question-Answer Form Q. Can a Chartered Accountant in practice also practice as an Advocate? A. Yes, Council direction under Clause (7) of Part I of the First Schedule to the Act prescribes that a Chartered Accountant in practice who is otherwise eligible may practice as an Advocate subject to the permission of the Bar Council but in such cases, he should not use designation 'Chartered Accountant' in respect of the matters involving the practice as an Advocate. In respect of other matters he should use the designation 'Chartered Accountant' but he should not use the designation 'Chartered Accountant' and 'Advocate' simultaneously. Q. Whether a Chartered Accountant in practice can use the designation 'Corporate Lawyer'? A. No, a Chartered Accountant in practice is not permitted to use the designation 'Corporate Lawyer'. Q. Can a Chartered Accountant in practice/ firm give advertisement in press? A. No, however, the members in practice may advertise the services setting out the services provided by him or his firm, and particulars of his firm, through a `Write-Up, subject to such guidelines as may be issued by the Council. Q. Whether a member can appear on television/radio or give lectures at forums? A. Yes, Council direction under Clause (7) of Part I of the First Schedule to the Act prescribes that a member may appear on television/radio or give lectures at forums and may give his name and describe himself as a chartered accountant. Special qualifications or specialised knowledge directly relevant to the subject matter of the programme may also be given. But no reference should be made, in the case of practicing member to the name and address or services of his firm. What he may say or write must not be promotional of him or his firm but must be an objective professional view of the topic under consideration. Q. Whether Companies in which Chartered Accountants have been appointed as directors on their Board can publish
* contributed by the ethical Standards board of the IcAI
18 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

description about the Chartered Accountant's expertise, specialisation and knowledge in any particular field or add appellations or adjectives to their names in the prospectus or public announcements issued by these companies? A. The Council's attention has been drawn to the fact that more and more companies are appointing Chartered Accountants as directors on their Boards. The prospectus or public announcements issued by these companies often publish descriptions about the Chartered Accountants expertise, specialisation and knowledge in any particular field or add appellations or adjectives to their names. Attention of the members in this context is invited to the provisions of Clause (6) and (7) of Part I of the First Schedule to the Act. In order that the inclusion of the name of a member of the Institute in the prospectus or public announcements or other public communications issued by the companies in which the member is a director does not contravene the above noted provisions, it is necessary that the members should take necessary steps to ensure that such prospectus or public announcements or public communications do not advertise his professional attainments and also that such prospectus or public announcements or public communications do not directly or indirectly amount to solicitation of clients for professional work by the member. While it may be difficult to lay down a rigid rule in this respect, the members must use their good judgment, depending upon the facts and circumstances of each case to ensure that the above noted provisions are complied with both in letter and spirit. It is advisable for a member that as soon as he is appointed as a director on the Board of a company, he should specifically invite the attention of the management of the company to the aforesaid provisions and should request that before any such prospectus or public announcements or public communication mentioning the name of the member concerned, is issued, the material pertaining to the member concerned should, as far as practicable be got approved by him.

w w w. i c a i . o r g

560

DID YOU KNOW

Mahatmas Tryst with Learning and Accountancy *

Very few know that our Father of Nation was quite wary of the discipline called accountancy and that he overcame this fear soon after he realised that. He was quite like Albert Einstein who too, despite being a great scientific investigator, felt: The hardest thing in the world to understand is the income tax. Gandhi found the words like debit, credit, P. Note, etc., all Greek. While preparing for his client Dada Abdulla Sheths case, he got troubled as he could not follow even the basic terminologies of accountancy that were the repertoire of the case. He immediately concluded that knowledge of accountancy was essential even for his basic understanding of the case. He decided to learn accountancy from scratch. He purchased a book on accountancy to understand this stream of knowledge. Read on to know more about Mahatma Gandhis tryst with learning and accountancy...

(Image Courtesy: Government of India, Photo Division)

Mahatma Gandhi had quite a measured and careful approach in reflecting on problems, and a remarkable skill for reaching at their root through a sharp analysis of the conditions, which often resulted in learning many things from scratch. It is actually interesting to watch Gandhis journey to the core of a situation and, then, cognition inspired by that situation. We all know how he once had been thrown out of his railway compartment in South Africa in 1893 during his legal first-class travel. That discriminatory treatment forced him to think: Should I fight for my rights or go back to India, or should I go on to Pretoria without minding the insults, and return to India after finishing the case? He carefully analysed this event and concluded that that was superficial-only a symptom of the deep disease

of colour prejudice. Then, he decided to resolve: I should try, if possible, to root out the disease and suffer hardships in the process. Mahatma Gandhi quite instinctively used to reach the core of all his problems. In South Africa, while delivering his first public speech on observing truthfulness in business at a meeting of all Indians in Pretoria, he expressed his respect for truth in business while denying the dominant notion that truth was not possible in business, or rather inconsistent with business. Quite like today, those days too business was considered quite a practical act and truth on the other hand an aspect of religion, as Gandhi has described in his autobiography. Basically, he did not like character-for-convenience condition and quite strongly opposed the-then stand on business

*Contributed by Journal Section & Accountancy Museum of India, ICAI

20 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

562

DID YOU KNOW

South Africa was mainly about accounts. Only one who knew accounts could understand and explain it. The clerk went on talking about this debited and that credited, and I felt more and more confused. I did not know what a P. Note meant. I failed to find the word in the dictionary. I revealed my ignorance to the clerk, and learnt from him that a P. Note meant a promissory note. I purchased a book on book-keeping and studied it. That gave me some confidence. I understood the case. I saw that Abdulla Sheth, who did not know how to keep accounts, had so much practical knowledge that he could quickly solve intricacies of book-keeping. I told him that I was prepared to go to Pretoria.
Gandhis approach to learning resembled Einsteins idea of education: Education is what remains after one has forgotten everything he learned in school. Education for them was not strictly learnt and applied inside classrooms; rather, real learning or education for them has to be vital for our coexistence. Our students could extract potent lessons from his experiences, especially from his approach to apprenticeship in profession.

awakening the merchants to a sense of their duty and their responsibility to be truthful. Mahatma Gandhi, quite ahead of his time, identified the value of social responsibility in growth and stability of businesses and corporations. He, then, went on to advise his audience to forget the distinction of their region and religion and form an association so that they could make better representation to authorities with regard to their hardships in South Africa. During the discussion immediately after his speech, he intelligently sensed that very few Indian businessmen that were present there knew English well. He immediately advised them to learn the language of the land if they wanted a growth in their business. He evidently indicated that a language could be learnt even at an advanced age and cited some examples to support his opinion. He in fact had offered to teach. Learning Accountancy Very few know that Mahatma Gandhi was quite wary of the discipline called accountancy and that he overcame his fear soon after this realisation. He was quite like Albert Einstein who too, despite being a great scientific investigator, feared accountancy: The hardest thing in the world to understand is the income tax. Gandhi found the words like debit, credit, P. Note, etc., all Greek, since neither his school syllabus nor his higher education in England had anything relating to accountancy. While preparing for his client Dada Abdulla Sheths case, he got troubled as he could not follow anything about credit, debit or bookkeeping, which were the repertoire of that case. He immediately concluded that knowledge of accountancy would be essential even for his basic understanding of the case. He decided to learn accountancy from scratch. He purchased a book on accountancy to understand this stream of knowledge: Abdulla Sheth gave me this letter to read, and asked me if I would go to Pretoria. "I can only say after I have understood the case from you," said I. "At present I am at a loss to know what I have to do there." He thereupon asked his clerks to explain the case to me. As I began to study the case, I felt as though I ought to begin from A B C of the subjectA Parsi lawyer was examining a witness and asking him questions regarding credit and debit entries in account books. It was all Greek to me. Book-keeping I had learnt neither at school nor during my stay in England. And the case for which I had come to

He took it upon himself to prove his strength while learning many things from scratch to prepare himself for legal practice: Here I learnt the things that a junior barrister learns in a senior barrister's chamberArising out of business transactions, it was full of intricacies of accounts. Part of the claim was based on promissory notes, and part on the specific performance of promise to deliver promissory notes. The defence was that the promissory notes were fraudulently taken and lacked sufficient consideration...The preparation of the plaintiff"s case for the attorney and the sifting of facts in support of his case had been entrusted to me. It was an education to see how much the attorney accepted, and how much he rejected from my preparation...I saw that this preparation for the case would give me a fair measure of my powers of comprehension and my capacity for marshalling evidenceI took the keenest interest in the case. Indeed I threw myself into it. I read all the papers pertaining

22

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

564

DID YOU KNOW

that he was amongst the most courageous people of his time. Voices when together are heard. Responsibility towards our society needs to be understood. Getting to the root of the problem first is essential in order to resolve that completely. Gandhis approach to learning resembled Einsteins idea of education: Education is what remains after one has forgotten everything he learned in school. Education for them was not strictly learnt and applied inside classrooms; rather, real learning or education for them has to be vital for our coexistence. Our students could extract potent lessons from his experiences, especially from his approach to apprenticeship in profession. Gandhi really worked hard and contributed a lot to his superiors work with his humility intact. He intended to learn from his mentors all the time and rated homework and preparation quite high. He reflected on his legal profession differently considering social responsibility an integral aspect of that. Being socially responsible was no less than being responsible to truth itself for him. Learning to Act Without Fear or Favour For Mahatma Gandhi, practising peace was a learning experience. While practising peace and non-violence, he learnt to act without fear or favour, a conduct which has also been specifically prescribed for followers of accountancy profession by its founding fathers. Peace is not simply the absence of violence. It is not simply an individuals inner peace either. It is more a positive state of fullness of life. Its offshoot on the political side is based on democracy, justice and ecological integrity, aiming towards a just and sustainable world. For Mahatma Gandhi, peace and spirituality were very closely linked. Fearlessness is the first requisite of spirituality. He says: To me God is truth and love; God is ethics and morality; God is fearlessness. The words of wisdom of the Mahatma amply corroborate one of the basic philosophies of accountancy profession, i.e. to conduct oneself without fear or favour. Mahatma Gandhi was indeed a fearless and spiritual. Gandhi teaches us to accept suffering, even to court suffering, if we want personal transformation, political revolution, and a vision of God. Hate the sin and not the sinner is a precept which, though easy enough to understand, is rarely practised, and that is why the poison of hatred spreads in the world. It is easy enough to be friendly to ones friends. But to befriend the one who regards himself as your enemy is the quintessence of true religion.

to the transactions. My client was a man of great ability and reposed absolute confidence in me, and this rendered my work easy. I made a fair study of book-keeping. My capacity for translation was improved by having to translate the correspondence Understanding His Profession Mahatma Gandhi acknowledged Mr. Pincott and Mr. Leonard who taught him: facts are three-fourths of the law and that if we take care of the facts of a case, the law will take care of itself. Gandhi could see facts in an entirely new light following the advices; he deduced: Facts mean truth, and once we adhere to truth, the law comes to our aid naturally. For once, he got disgusted with his profession. He keenly observed: Should a case be allowed to continue to be fought out in court, it might go on indefinitely and to no advantage of either party. He concluded that his duty was to befriend both parties and bring them together and that the true practice of law is to know the better side of human nature and to enter mens hearts, and that true function of a lawyer was to unite parties riven asunder. He admitted: A large part of the twenty years of his practice as a lawyer was occupied in bringing about private compromisesI lost nothing thereby not even money, certainly not my soul. His perception of the legal profession was quite unique, which has the might to guide the followers of this profession even today. Mahatma Gandhi opined: The duty of a lawyer is always to place before the judges, and to help them to arrive at, the truth, never to prove the guilty as innocent. If we want to spiritualise our profession, we will have to apply our professional energies in the larger interests of our nation. As professionals, we are responsible for the dignity of our profession. Therefore, he asked: If you fail in your duty what shall become of the other professions? He is quick to remind: There is a higher court than (all) courts of justice and that is the court of conscience. Learning Mahatmas Way Truly, that was his Mahatma-like dealing with his condition and experiences. He literally taught us some fundamental lessons it is never a better time than present to start, it is never too late to learn a thing, character that religions prescribe to their followers needs to be exercised in all spheres of life; this is what courage is to be what you are all the time. We know

24

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

566

IN-CONVERSATION

CAs Critical Stakeholder in Enabling Process of Sustained Growth, Says Governor of Goa
Governor of Goa, Shri Bharat Vir Wanchoo, addressed the 317th meeting of the ICAI Council, held in Goa from 13th to 15th August 2012. He held the Indian accountancy profession in high esteem and pinned high hopes on Indian CA professionals as trustees of good governance and facilitators of foolproof financial management mechanism and processes. He called Indian CAs critical stakeholders in enabling the process of sustained growth. Following are the excerpts from his speech.
I am aware of the history of your Institute and I am deeply impressed by the achievements made by the Institute during the six decades of its existence. Established in 1949 by an Act of Parliament, with the objective of regulating and streamlining the profession of chartered accountancy, the Institute of Chartered Accountants of India is one such organisation whose contribution in providing valuable inputs to the Government in the process of formulation of its economic plans is very well recognised and appreciated. It is a matter of satisfaction that this Institute has, over the years, maintained excellent standards of professionalism and rendered splendid service to the nation My tribute to all those who have nurtured and developed this prestigious institution to its current stature and level. Friends, chartered accountants are critical stakeholders in the sustainable development of our country. As you are well aware, the role of chartered accountants has gained considerable importance in the present-day transnational and evolving economic and business spheres especially in the banking, finance, capital market and infrastructure sectors. You have come to play the role of trustees of good governance, contributing actively to national development in distinct areas like taxation, company law matters, project financing and several other areas. There is no doubt that chartered accountants with their professional expertise and innovative approach have become active and important partners in our on-going economic growth process. Friends, India has been witnessing a phenomenal expansion in trade, commerce and industry. Our economic reform strategy is gaining new ground. Utmost care needs to be taken to ensure that our corporate and financial institutions do not falter in their functioning. Financial crises and corporate scandals around the world are indeed a matter of deep concern We have to put in place, strong incorruptible and foolproof systems with full accountability and transparency in all our economic and financial propriety, and will have to keep this important aspect in mind while discharging our professional duties and responsibilities. It is heartening to note that the Institute has acquired an enviable reputation as an educational and professional body. I am deeply impressed by the fact that you have on your rolls more than 10 lakh students. I have no doubt that you will do still better and not only maintain the current stature, but in fact improve upon it. The growing importance of trade and industry along with the rapid growth of the capital and money markets, has further increased the role and importance of chartered accountants. To play the pivotal role with full responsibility, the chartered accountants of today require not only intelligence but also unimpeachable integrity and honesty. As you are aware, the prestige of a profession depends on the collective image of its individual members. The credibility of your profession is directly linked to the manner in which you will respond to the needs of the society and remain accountable in terms of service to the nation. I am confident that the Institute of Chartered Accountants of India, which has inherited an impressive record of professional growth and accomplishments, will continue to play a vital role in the smooth and fast growth of our economy.
w w w. i c a i . o r g

26

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

568

IN-CONVERSATION

Chartered Accountants Can Act as Pillars of Honesty and Integrity, says Goa CM
Chief Minister of Goa, Shri Manohar Parrikar addressed the 317th meeting of the ICAI Council held in Goa from 13th to 15th August 2012. In his address, he spoke very high of Indian accountancy profession and exuded confidence that the Indian CA professionals can play a proactive and very effective role in responsible governance of financial management and discipline. The Chief Minister asked for sincere help of Indian CAs in plugging the leakages in the state treasury and thereby help in further development of Goa. He said that CAs can act as pillars of honesty and integrity and the nation can rely on them. Following are the excerpts from his speech.

It would have been my profession (CA Profession) had I agreed to my father, who wanted me to be a chartered accountant first because accountancy runs very deep in my family. He insisted that I become a chartered accountant. I said no, not because I cant do accounts. I had no courage of standing for someone elses sin. You need courage for that because ultimately you have to defend your client. But today, I am almost in the similar business, though it is not my profession. The issue today is about the country. When I see backwards, I see that you have a very important task. I for one have decided during these five years of

my tenure, to use much of the capability developed by the chartered accountants for the benefit of the people. I am saying benefit of the people because many a time, the governments are penny wise and pound foolish. I was discussing whether we can work out arrangement by which the institution issues a directive or an advisory to the government, for the minimum charges for every type of professional services because we are going to take more and more of these. For example, the mining issue. I wanted a committee to work out the framework of the parameters of the work and what exactly is required by the Government, which can comprise of three people from the Government side and three people from chartered accountants side who know how the problem can be resolved or what can be the parameters by which the situation where hundreds of crores of royalty has been manipulated, can be resolved. We have this very funny problem. Every year when we match the production figure and export

28

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

570

IN-CONVERSATION
work, inverse proportion, direct proportion, etc. Once he told students that a tank can store 50 buckets of water. He asked that if a person takes out 10 buckets, fills in 10 buckets per hour, how many hours it will take to fill the tank. The answer was simple. Almost the entire class rose saying five hours. Then, the next question was very funny. He said that if the tank has three holes and three buckets of water leaked every hour, how many hours it will take to fill it. Now, it is a very complex situation now. Every hour, seven buckets go. So, you can calculate it that way. Two or three students could give the correct answer. I was one of them. I solved the problem. I went to IIT. But, once in a while when remembering the childhood memories, this question used to come to me why did the teacher put this particular question to me. Who will pour water in a tank with leaks? No one will do that. If a bucket leaks, you will find some temporary araldite or something, stick it and stop the leakage. No one is going to use a utensil which is leaking. There is no point. In one hour or two hours, it is going to empty out. I never got an answer until I became a chief minister. That night I realised that that empty bucket is Government treasury and many politicians and bureaucrats have drilled holes into it, leaking the Government treasury very heavily. But, I think audit and good accounts can reduce the leakage, can plug most of the holes, if not all. I would, therefore, request ICAI Council: you are the people who should form a team which should work with the Government for some time in this regard. Last issue, which according to me is most important, is that all can work provided integrity is par-excellence. The Council, therefore, will do a great service to this nation, if it starts imbibing value education into the chartered accountants. There are certain institutions which must maintain their credentials and high standards at all costs, like my engineering college, IIT. I would say that this (ICAI) is another institution which should maintain its quality, fight all the way for it. You should ensure that your credentials remain impeccable. If that happens, then I think this country can definitely rely on you as a pillar of honesty and integrity.
w w w. i c a i . o r g

figure, export is always more than the production. I dont understand how. It is because the accounting system is not proper. Ultimately it is smart mind which over-smarts the tax laws. I remember a story of my childhood days. It is a story about two neighbours one worked for customs; the other apparently did not work but was richer than the former who was an honest customs officer. The one who was richer did only one thing. Everyday he travelled to the neighbouring state where taxes were very low and came back in the evening with lots of mud on bicycle. He claimed that he used that mud for some pottery but actually didnt do that. So, this customs officer, when he was posted at the check post, started checking every day the bags of mud he was carrying on his bicycle. He used to empty them, check for any diamond or gold or any smuggling activity but found nothing. This went on for 25 years. At the end of 25 years, finally on the last day when he checked everything and the things were clear, he said, Can I ask you one thing? In 15 minutes, I am retiring. I am not a government servant after 15 minutes. Can we meet at the coffee shop nearby after 15 minutes? So, they met. He said, I cant punish you now as I am no more a government officer. Can you tell me the secret of your money? I am sure you were smuggling something but I could never find what. The fellow said: Since you are not a government servant any more and if you give me your word that you wont divulge my secret, I will tell you my secret. I never smuggled anything through the mud; I smuggled bicycles. So, the people who are smart, however complicated tax laws you make, they are likely to smuggle something out of it. So, the best way to overcome that is to make tax laws so easy that it becomes impossible for them to cheat. As such, I would only request you to work, go through the Governments requirements. Probably, the Council can form a small body which can look into the Governments difficulties. Government is being cheated. I work 16-18 (hours) because I am trying to plug the treasury leakages. I remember a childhood incident of my maths teacher. In 4th standard, he used to teach us the logic of time and
30 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 LEGAL UPDATE

571

Legal Decisions1
LD/61/12 CIT, Bangalore Vs. De Beers India Minerals Pvt. Ltd. March 15, 2012 (KAR) Section 9 of Income-tax Act, 1961, read with Article 12 of DTA between India and Netherlands - Income - Deemed to accrue or arise in India Income received by Dutch company from Indian diamond prospecting company for providing technical services to supply technical data related to geological survey including drawings, plans, maps, etc., to diamond bearing deposits targets but withheld technical knowledge of such data processing would not be fees for technical services within meaning of DTA between India and Netherlands The assessees were engaged in the business of prospecting and mining for diamonds and other minerals. They have been granted licences by different State Governments for mineral reconnaissance activities. For this purpose, to carry out geophysical survey, the assessees entered into an agreement with a Dutch company Fugro which is an expert in performing air borne geophysical services to acquire during data the survey, process data and provide necessary reports. The Karnataka High Court held the followings: Issue of Fees for technical services In terms of agreement/contract between the assessees and Fugro and in view of the facts of the case, it was clear that assesses acknowledge the services of Fugro for conducting survey, taking photographs and providing data information and maps. That was the technical services which the Fugro had rendered to the assessees. The technology adopted by Fugro in rendering those technical services was not made available to the assessees. The survey report was very clear. Unless the technology was also made available, the assessees were unable to undertake the very same survey independently excluding Fugro in future. Therefore, that technical services which was rendered by Fugro was not of enduring in nature. It
1

DIRECT TAXES

Income-tax Act

was a case specific. The assessees can make use of the data supplied by way of technical services and put its experience in identifying the locations where the diamonds are found and carrying on its business. But the technical services which was provided by Fugro would not enable the assessees to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey. In that view of the matter, though Fugro rendered technical services as defined under Section 9(1)(vii) Explanation 2, it did not satisfy the requirement of technical services as contained in DTAA, Therefore, the liability to tax was not attracted. Development and transfer of any technical plan or technical design to the assessee Fugro was engaged in providing services relating to collection and processing of the data. The contract was for providing of services and not for supply of technical design or plan. Fugro compiled the data and processed them for error correction and delivered it to the assessees in a computer readable media. Using this raw Input data provided by Fugro, the assessees would further process same in software technology which were not owned or provided and, thus, by Fugro would generate report to determine probable targets. The reports and maps were are only additional mode of representation of data and it was not a technical plan or design as understood in law. The agreement entered into between the assessees and the Fugro, makes it clear that the information and data to any site on which any work services were performed under the agreement would belong exclusively to the assessees and the Fugro keep such information strictly confidential. Therefore, the technical plan or design always belonged to the ownership of the assessees. It never vested with Fugro. Under the terms of the agreement, the data collected was kept confidential under the supervision of the Government of India. Under the terms of the agreement, the ownership of the data collected or other documents vested with the assessees only and not with Fugro. Therefore, the Fugro was never the owner of the said data and, hence, the question of transfer of such data did not arise. The assessees were given the licence for prospecting under the provisions of Mines & Minerals (Development and Regulation) Act, 1957. By virtue of the aforesaid

Readers are invited to send their comments on the selection of cases and their utility at [email protected].

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

31

574

LEGAL UPDATE
available. Fugro had not devised any technical plan or technical design. Therefore, the question of Fugro transferring any technical plan or technical design did not arise in the facts of these cases. The maps which were delivered were not of kind of any developmental activity. As such, the information which was furnished to the assesses by way of technical services in the digital form was also given in the form of maps. Therefore, the case on hand did not fall in the second part of the aforesaid clause dealing with development and transfer of plans and designs. Therefore, there was no development and transfer of any technical plan or technical design to the assessee. LD/61/13 CIT-10 Vs. Black & Veatch Consulting (P.) Ltd. April 9, 2012 (BOM) [Asssessment Years 2003-04 and 2004-05] Section 10A read with Section 72 and Section 80-A of Income-tax Act, 1961 - Free Trade Zone Brought forward unabsorbed depreciation and losses of a unit, income of which is not eligible for deduction under section 10A cannot be set off against current profit of eligible unit for computing deduction under section 10A Section 10A is a provision which is in the nature of a deduction and not an exemption. The deduction under section 10A has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A gross total income to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof,

licence, the assessees were given the right to undertake reconnaissance, prospecting or mining operations in any area except under and in accordance with the terms and conditions of reconnaissance permit or of a prospecting licence as the case might be of a mining lease granted under the Act and the Rules made thereunder. Reconnaissance permits means permit granted for the purpose of undertaking the reconnaissance operations. Reconnaissance operations means any operations undertaken for preliminary prospecting of a mineral through regional, aerial, geophysical or geophysical survey's and geological mapping on a grid specified from time to time by the Central Government or sub-surface excavation. Prospecting operations means any operations undertaken for the purpose of exploring, locating or proving mineral deposits. It is because of the statutory obligation imposed by the Mineral Concession Rules, 1969 on the licensee in the contract entered into between the assessees and Fugro, it was specifically provided in the agreement that all information and data relating to any site on which any work or services are performed under the agreement would belong exclusively to the assessees and the contractor would keep such Information strictly confidential. All information recorded in digital and analog form and all products derived from information were the property of the assessees. The contractor agreed not to divulge any information to any person or organisation without the written permission of the assessees and only to be divulged to the assessees, personnel who were specified by the assessees as appropriate persons to whom the contractor might provide information. The agreement further provided that the contractor would not grant entry to any data site of aircraft to any person other than those authorised by the assessees and the contractor shall exercise all due care to preserve the integrity of all information. Therefore, the assessees not being possessed with the technical know-how to conduct this prospecting operations end reconnaissance operations, engaged the services of Fugro which was expert in the field. By way of technical services Fugro delivered to the assessees the data and information after such operations. The said data is certainly made use of by the assessees. Not only the said data and information was furnished in the digital form, it was also provided to the assessees in the form of maps and photographs. These maps and photographs which were made available to the assessees could not be construed as Technology made

34

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 LEGAL UPDATE
such an approach cannot be accepted. The deduction under section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. LD/61/14 Mehru Electrical & Engg. (P.) Ltd. Vs. CIT, Alwar April 27, 2012 (RAJ) Section 24 of Income-tax Act, 1961 - Income from house property Deductions from If a case is adjourned by giving a last opportunity to counsel for assessee, same can be adjourned again on the date fixed, if sufficient or reasonable cause exists on that day It was clearly mentioned by the tribunal on the last hearing on 11-1-2010 that both the parties were being given the last opportunity and the case was adjourned for 9-2-2010. Application for adjournment was filed by the assessees counsel on 8-2-2010, which was put up for consideration before the Tribunal on 9-2-2010. From the application, it appeared that Counsel for assessee had to go to out of station due to some urgent work. Application was available on record. No one was present on behalf of assessee. Tribunal, in absence of Counsel for assessee, rejected the adjournment application. The Rajasthan High Court held that ordinarily, it is not incumbent on the part of the Tribunal to adjourn the case again when a last opportunity had already been granted to the Counsel for assessee, however, there may be number of circumstances where adjournment becomes necessary, in the interest of justice. If Counsel for assessee had to go for some urgent work to outstation and an application for adjournment was moved in advance, then in the interest of justice, a short adjournment should have been granted. If number of opportunities had already been afforded to the Counsel for assessee, then adjournment could have been granted, on payment of cost. The Tribunal, in the present case, had not assigned any reason as to whether reason mentioned in the application for adjournment, constituted sufficient cause for adjournment or not? Even if, a last opportunity is granted and case is fixed for hearing and sufficient cause is shown on the date fixed for hearing, then the case can be adjourned and it should be adjourned, in the interest of justice. In these circumstances, it was to be held that the Tribunal committed an illegality in rejecting the
w ww.ica i.org

575

THE CHARTERED ACCOUNTANT oc tobe r 2012

35

576

LEGAL UPDATE
of exchange fluctuation also had the character of a capital receipt. Consequently, the Tribunal on facts held against the Revenue and set aside the order of the Commissioner of Income Tax. The Madras High Court held that evidently the receipt related to the issue of global depository shares by the assessee. The said shares were issued for widening its capital base. The fact remains what was remitted was equivalent to what was received in US dollars. Thus, the receipt on account of exchange fluctuation being related to the money received on capital issue, the receipt was only capital in nature. In the decision reported in EID Parry Limited v. CIT, 174 ITR 11 the Madras High Court pointed out on account of exchange fluctuation, if the assessee receives further money, the same represented capital receipt. Considering the fact that the surplus amount which arose was on account of the exchange fluctuation on the money received on capital account and not on account of any transaction by the assessee, as a trading asset or as part of circulating capital, the surplus amount arising on account of exchange fluctuation has to be treated as capital receipt. In CIT v. Jagatjit Industries Limited, 337 ITR 21, the Delhi High Court held that for the purpose of determination of the character of the receipt, one has to know whether the amount was held by the assessee on capital account or in any other account. Thus, receipt on account of exchange fluctuation on the money held on the allotment of shares has to be held as capital only. The Delhi High Court pointed out that the money was received on allotment of shares by way of GDR and the amount was collected in US Dollars. The gain on account of exchange fluctuation was attributable to the share capital and such gain on capital account. Referring to the fact that 21 per cent of the gain was taken as revenue receipt, since the same was utilised for general corporate uses, the Delhi High Court held that the entire money collected in foreign exchange represented share capital. Thus, the use of this share capital, i.e., how this money is to be utilised, would be of no consequence. It pointed out that even if money is raised by issuance of equity shares domestically, the money thus collected as share capital is to be treated as capital receipt. Merely because part of the share capital is used as a working capital, the character of the receipt would not become a revenue receipt. Thus, once this aspect becomes clear and the entire money raised through issue of equity shares is to be treated as share capital, the gains on account of foreign exchange fluctuations, in the event such share capital collected

application for adjournment and in deciding the appeal, ex-parte, without hearing the learned counsel for assessee. LD/61/15 CIT-III, Chennai Vs. PVP Ventures Limited June 19, 2002 (MAD) [Assessment Year 2001-02] Section 28(i) read with Section 80HHE of the Income-tax Act, 1961 - Business and professional income Chargeable as Where assessee issued global depository shares (GDS) with reference to establishment of offshore software development centre at Chennai and had kept FDs of GDS proceeds abroad, receipt on account of exchange fluctuation when money was brought in India is to be treated as capital receipt The assessee issued global depository shares with reference to establishment of offshore software development centre at Chennai. The assessee kept a part of the money abroad. When the money was brought to India, due to strong dollar position, the assessee gained on the repatriated amount. This was claimed as a capital receipt. Pointing out the printed prospectus to the issue of GDS, the Commissioner viewed that the aggregate net proceeds received were used principally to fund the establishment of offshore software development and the balance was used for working capital and for other general corporate purposes. The Commissioner viewed that the assessee had kept FDs of the GDS proceeds on its own and not because of any compulsion. Consequently, the amount received on account of exchange fluctuation was to be treated as revenue receipt and the Assessing Officer erred in reducing it in the income of the assessee while computing the deduction under Section 80HHE. He opined that in the computation of deduction under Section 80HHE, the Assessing Officer should have restricted it to 90 per cent of the receipt. The Tribunal held that there was nothing on record to show that the retention of GDS proceeds in FDs were later on brought into to India only for a gain. The Tribunal pointed out that the increase in the value was not due to any activity of the assesee but due to the change in the exchange rate of the Indian rupee to the US Dollar. The receipt on the issue of GDS being capital in nature, the amount received on account

36

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 LEGAL UPDATE
in foreign exchange; hence, is only capital receipts and the determination as to whether it is to be treated as capital receipt or revenue receipt cannot depend upon the end use of the share capital. Thus, the conclusion arrived at by the Tribunal that the character of the receipt on account of exchange fluctuation is nothing but capital, was just and proper. Section 37(1) of the Income-tax Act, 1961 Business expenditure Allowable as While allotting the shares to the employees in respect of Employees Staff Option Plan and Employees Staff Purchase Scheme Guidelines, the difference between market prices and price at which option is exercised by employees is to be allowed as expenditure The assessee had debited a sum of R66.82 lakhs under the head of Staff Welfare expenditure. The said sum was incurred by the assessee in respect of Employees Staff Option Plan and Employees Staff Purchase Scheme Guidelines, 1999. While allowing the shares to the employees, the difference in the value was to be allowed as expenditure. The Assessing Officer allowed the Staff Welfare expenditure incurred in terms of accounting policies prescribed in SEBI guidelines. The Commissioner revised this claim accepted by the Assessing Officer and held that the accounting treatment prescribed by SEBI, nowhere suggests that it was revenue expenditure to be debited to the Profit and Loss Account as it was only a notional and contingent expenditure. In the circumstances, the Commissioner held that the shares allotted under Employees Staff Option Plan and Employee Staff Purchase Scheme Guidelines, having not stated anything about the manner of treatment to this expenditure, the difference in the value at which the shares were allotted and the market value of the shares did not warrant any allowance as expenditure. The Commissioner passed an order directing the Assessing Officer to revise the assessment. The Tribunal pointed out that the shares were issued to the employees only for the interest of the business of the assessee to induce employees to work in the best interest of the assessee. The allotment of shares was done by the assessee in strict compliance of SEBI regulations, which mandate that the difference between the market prices and the price at which the option is exercised by the employees is to be debited to the Profit and Loss Account as expenditure. The
w ww.ica i.org
THE CHARTERED ACCOUNTANT oc tobe r 2012

577

37

578

LEGAL UPDATE
loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. Thus, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of Revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, the order of assessment cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is unsustainable in law. There must be definite finding for quashing the assessment that the Officer did not do proper enquiry at the time of assessment and, thus, this warranted exercise of jurisdiction under Section 263. While assuming jurisdiction under Section 263, the Commissioner has to satisfy himself, out of statutory compulsion that as the order passed by the Officer is an erroneous one and prejudicial to the Revenue warranting exercise of power under Section 263. LD/61/16 CIT, Kolkata Vs. SMIFS Securities Ltd. August 22, 2012(SC) [Assessment Year 2003-04] Section 32 of the Income Tax Act, 1961 Depreciation Stock Exchange Membership Cards are assets eligible for depreciation under Section 32. Section 32 of the Income Tax Act, 1961 Depreciation Goodwill' is an asset under Explanation 3(b) to Section 32(1) In accordance with Scheme of Amalgamation of company YSN (Amalgamating Company) with the appellant-assessee company assets and liabilities of YSN were transferred to and vested in the assessee company. In the process goodwill has arisen in the books of the assessee company. It was explained that excess consideration paid by the assessee over the value of net assets acquired of YSN should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. The Assessing Officer held that goodwill is not an asset falling under Explanation 3 to Section 32(1).
w w w. i c a i . o r g

Tribunal pointed out that what had been adopted was not notional or contingent as had been submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability and, thus, the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under section 263. The Madras High Court held the assessee had to follow SEBI direction and by following such direction, the assessee claimed the ascertained amount as liability for deduction. There exists no error to disturb the order of the Tribunal. Section 263 of the Income-tax Act, 1961 Revision Of orders prejudicial to revenue To initiate revision, there must be definite finding for quashing the assessment that the Officer did not do proper enquiry at the time of assessment and, thus, this warranted exercise of jurisdiction under Section 263 Once the Commissioner (Appeals) had based his show cause notice on a particular ground to treat a receipt as having particular character, any subsequent change on receipt of a reply to the show-cause notice strikes at the very base of the grounds for exercising the authority under Section 263. In Malabar Industrial Co. Ltd v. CIT, 243 ITR 83, explaining to the scope of the expression 'prejudicial to Revenue', the Apex Court pointed out that the prerequisite for the exercise of jurisdiction by the Commissioner suo moto under Section 263 is that the order of the Income Tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Apex Court pointed out that the said provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. Every
38 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

580

LEGAL UPDATE
authorities below indicate that the assessee claimed deduction in the course of business under section 36(1) (vii). Therefore, the claim was to be allowed. LD/61/17 Arisudana Spinning Mills Ltd. Vs. CIT, Ludhiana September 5, 2012(SC) [Assessment Year 1998-99] Section 80-IA read with Section 143 of the Income Tax Act, 1961 - Deductions - Profits and gains from industrial undertakings engaged in infrastructure developments, etc. Where assessee had not maintained a separate account for manufacturing as a part of industrial undertaking, Assessing Officer was justified in working out manufacturing account giving a bifurcationfor purpose of section 80-IA The assessee-Company was engaged in the business of manufacturing of yarn. The assessee derived income from what it called `manufacturing activity'. It denied that it had undertaken any trading activity during the year in question. On income of R51,82,666, the assessee claimed deduction at the rate of thirty per cent under Section 80-IA amounting to R15,54,800. On scrutiny the Assessing Officer found that the assessee had not maintained a separate trading and profit and loss account for the goods manufactured while in the assessment year in question, it appeared that the assessee had sold raw wool, wool waste and textile and knitting cloths. When a query was raised, the assessee contended that, for certain business exigencies in the assessment year in question, it had sold the above items. According to the assessee, the sale of raw wool, wool waste, etc., would not disentitle it from claiming the benefit under Section 80-IA. The Department found that the assessee has not maintained the accounts for manufacture of yarn actually produced as a part of industrial undertaking. Consequently, the Assessing Officer worked out, on his own the manufacturing account giving a bifurcation in terms of quantity of raw wool produced. The assessee challenged the preparation of separate trading account by the Assessing Officer in respect of manufacturing activities and trading activities. The Tribunal and the High Court upheld the order of the Assessing Officer. The Supreme Court held that, on facts, the assessee ought to have maintained a separate account in respect
w w w. i c a i . o r g

The Supreme Court held that, from the reading of Explanation 3 to Section 32(1), it is clear that `Goodwill' is an asset under Explanation 3(b) to Section 32(1). The Assessing Officer came to the conclusion that no amount was actually paid on account of goodwill. This was a factual finding. The Commissioner (Appeals) has come to the conclusion that the assets and liabilities of YSN were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-Company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-Company stood increased. This finding has also been upheld by the Tribunal. Therefore, there was no reason to interfere with the factual finding. Section 36(1)(vii) of the Income Tax Act, 1961 Bed Debts Manner in which assessee maintains its accounts is not conclusive for deciding nature of expenditure; where concurrent finding of facts recorded by the authorities below indicate that assessee claimed deduction in course of business under section 36(1)(vii), said claim cannot be denied merely because Tax Audit Report indicated said amount to have been incurred on capital account The question was raised regarding cancellation of disallowance of bad debt. The Revenue contended that, since the Tax Audit Report indicated the amount to have been incurred on capital account, the assessee was not entitled to deduction on account of bad debt. Both the CIT(A) as well as the ITAT concluded that the assessee has satisfied the provisions of Section 36(1)(vii). They have held that bad debt claimed by the assessee was incurred in the normal course of business and, therefore, the assessee was entitled to deduction under Section 36(1)(vii) . The Supreme Court held that, it is well-settled now by a catena of decisions that the manner in which the assessee maintains its accounts is not conclusive for deciding the nature of expenditure. In the present case, the concurrent finding of facts recorded by the

40

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 LEGAL UPDATE
of raw material which it had sold during the assessment year. If the assessee had maintained a separate account, then, in that event, a clear picture would have emerged which would have indicated the income accrued from the manufacturing activity and the income accrued on the sale of raw material. There was no reason why separate accounts were not maintained for the raw material sold and for the income derived from manufacture of yarn. Therefore, these appeals filed by the assessee were to be dismissed. LD/61/18 Asstt. CIT, Mumbai Vs. ICICI Securities Primary Dealership Ltd. August 22, 2012 (SC) Section 147 of the Income Tax Act, 1961 - Income escaping assessment Where in return, asseessee had fully disclosed details of stock and shares, but later on revenue reopened assessment on ground that loss incurred was a speculative loss, same being change of opinion, reopening was not proper The assessee had disclosed full details in the Return of Income in the matter of its dealing in stocks and shares. According to the assessee, the loss incurred was a business loss. Later on, the Assessing Officer reopened the assessment taking the view that the loss incurred was a speculative loss. The Supreme Court held that, the re-opening of the assessment by the Assessing Officer was clearly a change of opinion. The order reopening the assessment was not maintainable.
Note: Judgment & Order of Bombay High Court in ICICI Securities Primary Dealership Ltd. Vs. Asstt. CIT (Writ Petition No. 1999 of 2006 dated 22-08-20056), upheld.

581

LD/61/19 General Motors India Pvt. Ltd. Vs. Dy.CIT August 23, 2012 (GUJ) [Assessment Year 2006-07] Section 147 read with Section 148 of the Income-tax Act, 1961 Income Escaping Assessment After a notice for re-assessment has been issued it is not open to Assessing Officer to decide objection to notice under section 148 by a composite assessment order; Assessing Officer is required to, first decide objection of assessee filed under section 148 and serve a copy of order on assessee and after giving some reasonable time to assessee for challenging his order, it is open to him to pass an assessment order. Where after a notice for re-assessment has been issued, no order has been passed by the Assessing Officer deciding the objection filed by the assessee under Section 148 of the Act and assessment order has been passed or the order deciding an objection under Section 148 of
w ww.ica i.org
THE CHARTERED ACCOUNTANT oc tobe r 2012 41

582

LEGAL UPDATE
the assessment merely because on the same documents considered earlier by him, another inference was possible. The reassessment can only take place if the conditions laid down under Section 147 are fulfilled otherwise under the garb of change of opinion, the Assessing Officer may review his earlier assessment order. The Apex Court in Commissioner of Income Tax vs. Kelvinator of India Limited, (2010) 320 ITR 561 has observed that the concept of change of opinion is an in-built test to check abuse of power by the Assessing Officer. The Assessing Officer has wide power to reopen the assessment proceedings with effect from 1.4.1989 provided there was some tangible material to come to the conclusion that there was escapement of income from assessment and the reasons under Section 147 must have a link with the formation of the belief. The tangible material must have nexus to the escapement of income from being assessed to tax, but without there being any tangible material, it is not open to the Assessing Officer to form a belief that income of the assessee has escaped assessment from tax. The Assessing Officer while forming his opinion and recording reasons under Section 147 of the Act, in the instant case, was aware that at the time of original assessment, the Assessing Officer had considered the material on record and took a conscious decision in scrutiny assessment and allowed the unabsorbed depreciation pertaining to Assessment Year 1997-98 of R43,60,21,158/- to be set off against the income of Assessment Year 2006-07. No tangible material was available with the Assessing Officer while forming opinion under Section 147 of the Act. Reopening of original assessment order on the ground that unabsorbed depreciation was allowed to be set off, wrongly, against the provisions of amended Section 32(2) would amount to reviewing the original assessment order which is not permissible. If on the facts disclosed by the assessee, a wrong legal inference is taken by the Assessing Officer at the time of original assessment then it would not confer any power on him under Section 147 of the Act to commence reassessment proceedings. The Assessing Officer cannot take benefit of his own wrong and reopen the assessment proceedings under Section 147 of the Act. It would be a case of second thought on the same material and the omission to draw the correct legal presumption during the original assessment proceedings did not warrant initiation of proceedings under Section 147 of the Act. Whether the legal

the Act has not been communicated to the assessee and assessment order has been passed or the objection filed under Section 148 has been decided along with the assessment order, order of the Assessing Officer would be bad in law. If the objection under Section 148 has been rejected without there being any tangible material available with the Assessing Officer to form an opinion that there is escapement of income from assessment and in absence of reasons having direct link with the formation of the belief, the writ Court under Article 226 can quash the notice issued under Section 148 of the Act. The writ petition filed by the petitioner is maintainable. The Assessing Officer is mandated to decide the objection to the notice under Section 148 and supply or communicate it to the assessee. The assessee gets an opportunity to challenge the order in a writ petition. Thereafter, the Assessing Officer may pass the reassessment order. It was not open to the Assessing Officer to decide the objection to notice under section 148 by a composite assessment order. The Assessing Officer was required to, first decide the objection of the assessee filed under section 148 and serve a copy of the order on assessee. And after giving some reasonable time to the assessee for challenging his order, it was open to him to pass an assessment order. Where this was not done by the Assessing Officer, the order on the objection to the notice under section 148 and the assessment order passed under the Act deserve to be quashed. Section 147 read with Section 148 and Section 32 of the Income-tax Act, 1961 Income Escaping Assessment An assessment order cannot be reopened on the ground that in original assessment order, Assessing Officer had not correctly applied the provisions of Section 32(2) when assessee had disclosed fully and truly all material facts necessary for his assessment Where there was no omission or failure on the part of the assessee to make a return under Section 139 and the assessee had disclosed fully and truly all material facts necessary for his assessment for the year, nor subsequently, the Assessing Officer had any tangible material on record, on the basis of which he could have formed his opinion or could have reason to believe that income chargeable to tax had escaped assessment, assessment order could not be reopened. The Assessing Officer has the power to reopen the assessment proceedings if some tangible material had come to his knowledge. However, he cannot reopen

42

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 LEGAL UPDATE
inference has been rightly drawn or not is none of the concern of the subsequent Assessing Officer and the assessee cannot be held responsible for the remissness on the part of Assessing Officer in not applying the correct law. The mistake of law claimed to have been committed by the Assessing Officer in allowing unabsorbed depreciation of Assessment Year 199798 to be set off against the income of Assessment Year 2006-07 was not due to assessee's omission or failure to disclose fully and truly all material facts. The mistake, if any, committed by the Assessing Officer at the time of assessment could not furnish a ground to the Assessing Officer to reopen the original assessment order as it would amount to change of opinion. Where the assessee had disclosed fully and truly all material facts necessary for his assessment for the year and in response to the queries of the Assessing Officer, the assessee had placed entire material demanded by the Assessing Officer. And on the material on record, the Assessing Officer applied his mind and allowed unabsorbed depreciation for the year Assessment Year 1997-98 and other assessment years, to be carried forward and set off against the income of Assessment Year 2006-07, then merely because the Assessing Officer did not give reasons for allowing the claim of unabsorbed depreciation in the original assessment order would not make the assessment order illegal. The Assessing Officer, in law, must be deemed to have formed an opinion that the assessees claim deserves to be accepted. Thus, in such a situation, the original assessment order cannot be reopened as it would amount to change of opinion by the Assessing Officer and the reassessment order is liable to be set aside. Section 32 read with Section 147/148 of the Income-tax Act, 1961 - Depreciation Unabsorbed depreciation from Assessment Year 1997-98 upto the Assessment Year 2001-02 got carried forward to assessment year 2002-03 and became part thereof; it came to be governed by provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against profits and gains of subsequent years, without any limit whatsoever The question arose for consideration was whether the unabsorbed depreciation pertaining to Assessment Year 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by Section 32 as amended by Finance Act 2001. The reason given by the Assessing Officer under section 147 is that Section 32(2) of the Act

583

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

43

584

LEGAL UPDATE
the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from Assessment Year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (Assessment Year 2002- 03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in Assessment Year 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence keeping in view the purpose of amendment of section 32(2), a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied. However, Circular No.14 of 2001 had clarified that under Section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under Section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the Assessment Years 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the Assessment Year 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years. Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which it relates. If such depreciation amount is more than the amount of the profits of that business, then such excess comes for absorption from the profits and gains from any other business or business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a

was amended by Finance Act No. 2 of 1996 w.e.f. Assessment Year 1997-98 and the unabsorbed depreciation for the Assessment Year 1997-98 could be carried forward up to the maximum period of 8 years from the year in which it was first computed. According to the Assessing Officer, 8 years expired in the Assessment Year 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of Assessment Year 1997-98 for being carried forward and set off against the income for the Assessment Year 2005-06. But the assessee was not entitled for unabsorbed depreciation for Assessment Year 199798, which was not eligible for being carried forward and set off against the income for the Assessment Year 2006-07. The Gujarat High Court held that prior to the Finance Act No. 2 of 1996 the unabsorbed depreciation for any year was allowed to be carry forward indefinitely and by a deeming fiction became allowance of the immediately succeeding year. The Finance Act No. 2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the Assessment Year 1997-98. Circular No.762 dated 18.2.1998 issued by the Central Board of Direct Taxes (CBDT) in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. So, the unabsorbed depreciation allowance of Assessment Year 1996-97 would be added to the allowance of Assessment Year 1997-98 and the limitation of 8 years for the carry-forward and setoff of such unabsorbed depreciation would start from Assessment Year 1997-98. The CBDT Circular No. 14/2001 clarifies the intent of the amendment of the provision of section 32(2) by the Finance Act, 2001 that it is for enabling

44

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 LEGAL UPDATE
still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year. Where there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. Therefore it is to be held that any unabsorbed depreciation available to an assessee on 1st day of April 2002 (Assessment Year 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from Assessment Year 1997-98 upto the Assessment Year 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section

585

32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. LD/61/20 CIT, Gujarat Vs. Gujarat Flouro Chemicals August 23, 2012 (SC) Section 214 of the Income Tax Act, 1961 Interest - Payable by government Judgment of Supreme Court in Sandvik Asia Limited Vs. Commissioner of Income Tax, [2006] 280 ITR 643/2006 (2) SCC 658 holding that interest is payable by the Revenue to assessee if the aggregate of installments of Advance Tax/TDS paid exceeds assessed tax, requires reconsideration The question which arose as to whether interest is payable by the Revenue to the assessee if the aggre-

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

45

586

LEGAL UPDATE
where statutory orders under section 234 was not delivered to petitioner, complaint was not maintainable A letter dated 24.02.2004 was issued by the ROC to the company to inquire about its affairs. This was duly replied vide letter dated 15.04.2004. The reply was examined and thereafter an order dated 19.04.2004 under section 234(1) was issued to the company which remained unresponded. Thereafter another order dated 16.06.2004 under section 234(3A) was issued by ROC requesting the Company to furnish the desired information, but no response was received. As no response was received qua the aforesaid two orders, a show cause notice dated 26.07.2005 was issued to the company under section 234(4)(a) which also did not evoke any response. Thereafter a report was sent by ROC to the Central Government in terms of section 234(6) seeking advice for prosecution of company under section 234. It was thereafter that the complaint was filed in the Court of ACMM by the ROC against the Company and its functionaries including the petitioners. The ACMM passed the impugned order of summoning of all the accused including the petitioners. The impugned order is assailed the petitioners. The Delhi High Court held that it was submitted that three orders dated 19.04.2004, 16.06.2004 and 26.07.2005 under section 234 (1), 234 (3A) and 234 (4) (a) respectively were issued by the ROC to the petitioner company, but these evoked no response. However, from the perusal of the record, it could be seen that there was no evidence which was brought by the respondent to prima facie prove the service of such orders on the petitioner company. The receipt of such statutory orders was a sine-quanon for alleging non-compliance of the orders of the respondent. Reply to the letter by the petitioner company could not be equated to acknowledgement of a statutory notice as per the requirement of law. In the present case, absence of any documentary proof of service of such orders of ROC on the petitioner company indicates that the prosecution was initiated without giving any opportunity to the petitioner company to advance its reply. The respondent/ complainant had made an averment regarding the issue of statutory orders, however, they were silent as regard to the factum of delivery or mode of proof of delivery of the said statutory orders. Thus, prima facie the statutory orders under section 234 were not delivered to the petitioner and that being so the complaint was not maintainable.
w w w. i c a i . o r g

gate of installments of Advance Tax/TDS paid exceeds the assessed tax? The Supreme Court held that, in the case of Sandvik Asia Limited Vs. Commissioner of Income Tax & Ors., [2006] 280 ITR 643/2006 (2) S.C.C. 658, the Division Bench of the Supreme Court held that, in view of the express provisions, the assessee was entitled to compensation by way of interest for the delay in payment of the amounts lawfully due to the assessee, which were withheld wrongly by the Revenue. However, Section 214 does not provide for payment of compensation by the Revenue to the assessee in whose favour a refund order has been passed. Moreover, in Sandvik Asia (supra), interest was ordered on the basis of equity. It was also ordered to be paid on the basis of Article 265 of the Constitution. There are serious doubts about the correctness of the judgment in Sandvik Asia (supra). The judgement of this Court in the case of Modi Industries Limited Vs. Commissioner of Income Tax, 1995 (6) S.C.C. 396 correctly holds that Advance Tax or TDS loses its identity as soon as it is adjusted against the liability created by the Assessment Order and becomes tax paid pursuant to the Assessment Order. If Advance Tax or TDS loses its identity and becomes tax paid on the passing of the Assessment Order, then, is the assessee not entitled to interest under the relevant provisions of the Act? In this connection, one may refer to the provisions of Sections 195(1), 195A, 214, 219, 237, 243 and 244. The plain reading of the relevant provisions makes it clear that Sandvik Asia (supra) has not been correctly decided. Therefore, this matter is to be placed before the Chief Justice for appropriate orders. Companies Act LD/61/21 Jiyuan Li Vs. Registrar of Companies March 1, 2012 (DEL) Section 234 of the Companies Act, 1956 read with Section 482 of the Criminal Procedure Code Power of Registrar to call for Information or Explanation Receipt of statutory orders is a sine-qua-non for alleging non-compliance of orders of ROC;

OTHER ACTS

46

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 LEGAL UPDATE

587

Circulars/Notifications
(Matter on Direct Taxes has been contributed by the Direct Taxes Committee of the ICAI)

Given below are the important Circulars and Notifications issued by the CBDT, CBEC, MCA, RBI and SEBI during the last month for information and use of members. Readers are requested to use the citation/website or weblink to access the full text of desired circular/notification. You are requested to please submit your feedback and suggestions on the column at eboard@icai. org.

DIRECT TAXES

A. NOTIFICATIONS 1. Computation of Arms Length Price In exercise of the powers conferred by the second proviso to Section 92C(2) of the Incometax Act, 1961, the Central Government has, through this notification, notified that the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price for Assessment Year 2012-13, where the variation between the arm's length price determined under Section 92C and the price at which the international transaction has actually been undertaken does not exceed 5% of the latter. [Notification No. 31/2012, dated- 17-08-2012] 2. Income-tax (Dispute Resolution Panel) (1st Amendment) Rules, 2012 Section 144C(14) empowers the CBDT to make rules for the efficient functioning of the Dispute Resolution Panel and expeditions disposal of the objections filed by the eligible assessee. In exercise of the powers conferred by Section 144C(14) of the Income-tax Act, 1961, the Central Board of Direct Taxes had notified Income-tax (Dispute Resolution Panel) Rules, 2012 vide Notification No. 84/2009, dated 20-11-2009. Rule 3 of the said Rules deal with constitution of the Panel. Sub-rule (2) of Rule (3) empowers the CBDT to assign by name three Commissioners of Income-tax to each panel as members who, in addition to their regular duties as Commissioners, shall also carry on the functions of the panel. This sub-rule has now been amended to empower the CBDT to make such assignment by designation instead of by name. The existing sub-rule (3) of Rule (3) empowers the CBDT to assign by name another Commissioner
w ww.ica i.org

of Income-tax in the place of the outgoing member to carry out the functions of the panel, in a case where any member of the panel is transferred. Sub-rule (3) has been substituted and now subrules (3) and (3A) have been inserted. New Sub-rule (3) empowers the CBDT to assign one Commissioner of Income-tax as a Reserve Member to each panel, who, in addition to his regular duties as Commissioner, shall also carry on the functions of the panel, in place of any Member, as and when required by the Director General of Income-tax (International Taxation). Further, as per new sub-rule (3A), the Director General of Income-tax (International Taxation) may, after giving the eligible assessee an opportunity of being heard and after recording the reasons, transfer a case from one panel to another panel. [Notification No. 33/2012, dated- 24-08-2012] 3. Substitution of Rule 40BA & Form No. 29C The Finance Act, 2011 had introduced the concept of Alternate Minimum Tax (AMT) in relation to Limited Liability Partnerships (LLPs). The Finance Act, 2012 has extended the levy of AMT to certain persons other than Companies, in order to widen the tax base vis-vis profit-linked deductions. Correspondingly, the title and applicability of Rule 40BA requiring the report of an accountant to be furnished under Section 115JC(3) in Form No. 29C have been amended to make the same applicable for certain persons other than companies. Consequent amendments have been made in Form No. 29C. [Notification No. 34/2012, dated 28-08-2012] 4. DTAA -Agreement for Multilateral Convention on Mutual administrative assistance on tax matters with OECD member countries In exercise of the powers conferred by Section 90 of the Income-tax Act, 1961, the Central Government, has through this notification, notified that all the provisions of the Convention for Mutual
THE CHARTERED ACCOUNTANT oc tobe r 2012 47

588

LEGAL UPDATE
a certificate from an accountant, in such form as may be prescribed, to the effect that such resident has furnished his return of income under Section 139 taking into account such sum for computing income in such return of income and has paid the tax due on the income declared by him in such return of income. Corresponding amendments have also been made by the Finance Act, 2012 in the Section 206C(6A) regarding collection of tax at source. In exercise of the powers conferred by Section 295 of the Income-tax Act, 1961, the Central Board of Direct Taxes, has through this notification, notified Income-tax (11th Amendment) Rules, 2012 to provide for the Form in which the report of the accountant is to be furnished. Accordingly, following rules have been inserted: 1. Rule 31ACB The certificate from an accountant under the first proviso to sub-section (1) of section 201 shall be furnished in Form No. 26A. 2. Rule 37J The certificate from an accountant under first proviso to sub-section (6A) of Section 206C shall be furnished in Form No. 27BA The said Forms have been inserted in Appendix-II of the Income-tax Rules, 1962. [Notification No. 37/2012, dated 12-09-2012] The complete details of the text of the Notifications can be downloaded from the link: http://law.incometaxindia.gov.in/DIT/Notifications. aspx B. PRESS RELEASES 1. Appointment of Dr. Poonam Kishore Saxena as Chairperson of CBDT Dr. Poonam Kishore Saxena has taken over as Chairperson, Central Board of Direct Taxes on 21st August, 2012. [Press release No. 402/92/2006-MC (3 OF 2012), dated 21-08-2012] 2. CBDT explains the Rationale behind APA Scheme As the Finance Act, 2012 had inserted Sections 92CC and 92CD in the Income-tax Act, 1961 introducing the provisions of Advance Pricing Agreement (APA), the CBDT has, through this press release, explained the rationale behind APA scheme which was notified by the Ministry of Finance through Notification No. 36, dated 30-08-2012, and which shall come into effect from the date of its publication in the Official Gazette, i.e. from 30-8-2012. [Press release, dated 31-08-2012]
w w w. i c a i . o r g

Administrative Assistance on Tax Matters with Organisation for Economic Co-operation and development (OECD) member countries, shall be given effect to in the Union of India with effect from the 1st June, 2012, i.e., the date of entry into force of the said Convention. [Notification No. 35/2012, dated- 29-08-2012] 5. Insertion of Rules 10F, 10G, 10H, 10-I, 10-J, 10K, 10L, 10M, 10N, 10-O, 10P, 10Q, 10R, 10S, 10T & 44GA Advance Pricing Agreement Scheme prescribed by CBDT. Section 92CC has been inserted by the Finance Act, 2012 to empower the CBDT to enter into an advance pricing agreement with any person for determining the arms length price or specifying the manner in which arms length price is to be determined, in relation to an international transaction to be entered into by such person. However, the CBDT can do so with the approval of the Central Government. Section 92CC(9) empowers the CBDT to prescribe a scheme, specifying therein a manner, form, procedure and any other matter generally in respect of the advance pricing agreement. Accordingly, in exercise of the powers conferred in Section 92CC(9) read with Section 295 of the Income-tax Act, 1961, the CBDT has inserted Rules 10F to 10T prescribing an Advance Pricing Agreement (APA) Scheme, which shall come into force from the date of its publication in the Official Gazette, i.e., from 30-08-2012. Further, Rule 44GA has also been inserted to provide for the procedure to deal with requests for bilateral or multilateral advance pricing agreements. In addition, Form No. 3CEC, 3CED, 3CEE have been inserted in Appendix-II of the Income-tax Rules, 1962 which provides for the format of application for a prefiling meeting, for an APA, for withdrawal of APA request, respectively. Form No. 3CEF provides the format of Annual Compliance Report on APA. [Notification No. 36/2012, dated 30-08-2012] 6. Form of certificate from an accountant under Section 201(1) and 206C(6A) prescribed The Finance Act, 2012 had inserted proviso to Section 201(1) which provides that any person who fails to deduct the whole or any part of the tax in accordance with the provisions of chapter XVII on the sum paid to a resident or on the sum credited to the account of a resident, shall not be deemed to be assessee in default in respect of such tax if he furnishes

48

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 LEGAL UPDATE
3. Comments from stakeholders and general public invited on Expert Committees report on GAAR and expansion of scope of terms of reference of the Committee The Expert Committee on GAAR, chaired by Dr. Parthasarathi Shome, has submitted its draft report after analysis of the GAAR provisions and noting the concerns expressed by various shareholders. The draft report of the said Committee has been uploaded on the Finance Ministry's website (http://finmin.nic.in) for comments/suggestions from stakeholders and general public. Further, through this press release, the Government has expanded the scope of the Terms of Reference of the aforesaid Committee to include all non-resident tax payers instead of only FIIs. [Press release, dated 01-09-2012] The complete details of the text of the press releases can be downloaded from the link: http://law.incometaxindia.gov.in/DIT/Circulars.aspx C. TAXPAYER FRIENDLY INITIATIVES 1. Attention-Tax payers of Delhi & Mumbai-Demand Management Fortnight-www.incometaxindia.gov.in The Income Tax Department is observing the first fortnight of September, 2012 starting from 03-09-2012 to 14-09-2012 as Demand Management Fortnight. In this regard a single window grievance cell has been set up to receive, acknowledge, and monitor grievance petitions pertaining to demand adjustment by CPC Bangalore for entire CCIT (CCA) Delhi & Mumbai Region. All taxpayers having a grievance pertaining to incorrect arrear demand communicated/ adjusted by CPC, Bangalore are required to contact to the nodal officer only and not their jurisdictional assessing officers. 2. View your arrear demand-www.incometaxindia. gov.in As a Taxpayer friendly initiative, a facility to view details of Arrear Demand of taxpayers as communicated by their Jurisdictional Assessing Officers (A.O.) to the Central Processing Centre (CPC) has now been enabled on the e-filing website, i.e., https://incometaxindiaefiling.gov. in/portal/index.do. Taxpayers can now log in to My Account window and view their Arrear Demand.

589

InDIRECT TAXES

(Matter on Indirect Taxes has been contributed by the Indirect Taxes Committee of the ICAI)

A. SERVICE TAX 1. No service tax on vocational education course if offered by the Central/State Government/Local Authority CBEC has clarified that service tax is not leviable on vocational education/training/skill development courses (VEC) offered by the institution of the Government (Central Government or State Government) or a local authority as in terms of Section 66D (a), only specified services provided by the Government are liable to tax and VEC is excluded from the service tax. However, if the VEC is offered by an institution, as an independent entity in the form of society or any other similar body, service tax treatment would be determined by either sub-clause (ii) or (iii) of clause (l) of Section 66D of the Finance Act, 1994. Sub-clause (ii) refers to qualification recognised by any law and sub-clause (iii) refers to approved VEC. In the context of VEC, qualification implies a Certificate, Diploma, Degree or any other similar Certificate. The words recognised by any law will include such courses as are approved or recognised by any entity established under a central or state law including delegated legislation, for the purpose of granting recognition to any education course including a VEC. [Circular No.164/15/2012 ST dated 28-08-2012] The text of the above notifications/circular is available at www.cbec.gov.in

FEMA

(Matter on FEMA has been contributed by CA. Manoj Shah and CA. Hinesh Doshi)

A. Foreign Direct Investment by citizen/entity incorporated in Pakistan Press Note No.3 (2012 Series) issued by DIPP dated 1st August, 2012 and A.P. (DIR Series) Circular No. 16 dated 22nd August, 2012 In terms of Regulation 5 (1) of the Foreign Exchange Management (Transfer or Issue of Security by

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

49

590

LEGAL UPDATE
C. Overseas Direct Investments (ODI) Rationalisation of Form ODI A.P. (DIR Series) Circular No. 15 dated 21st August, 2012 Regulation 6(2)(iv) of the Notification No. FEMA 120/RB-2004 dated 7th July, 2004 requires the Indian Party to submit the Annual performance Report (APR) in respect of all its overseas investments in the format given in Part III of the Form ODI within 60 days from the date of expiry of the statutory period as specified by the respective laws of the host country for finalisation of the audited accounts of the Joint Venture (JV)/ Wholly Owned Subsidiary (WOS) outside India or such further period as may be allowed by the Reserve Bank. In view of the above, it has now been decided to amend the Part I of Form ODI and add the following items in Section E and Fof Form ODI Part I, to be submitted by every Indian party in terms of the above Regulation, while undertaking ODI transactions. (i) In Section E, after item (c), item (d) wherever applicable, the Annual Performance Report, as required in terms of Regulation 15(iii) of the Notification No. FEMA 120/RB - 2004 dated 7th July, 2004, as amended from time to time, in respect of all the existing JV/WOS of the Indian party has been submitted. (ii) In Section F, after item (v), a clause Further, certified that, wherever applicable, the Annual Performance Report, as required in terms of Regulation 15(iii) of the Notification ibid, in respect of all the existing JV/WOS of the Indian party has been submitted. The revised Section E and F of Form ODI Part I can be referred at: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/ AE1521082012.pdf D. Rationalisation and Liberalisation of External Commercial Borrowings (ECB) - Amendments to the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 [Notification No. FEMA 120/RB-2004 dated 7th July, 2004] Notification No. FEMA 231/2012-RB]/G.S.R.609(E) dated 30th May, 2012 - Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2012 RBI had, vide A.P. (DIR Series) Circular No.27 dated 23rd September, 2011 enhanced the limit of ECB for Eligible borrowers in real sector-industrial sectorinfrastructure sector up to $ 750 million or equivalent per financial year under the automatic route as against
w w w. i c a i . o r g

a Person Resident outside India) Regulations, 2000 (FDI Regulations), a person resident outside India, who is a citizen of Pakistan or an entity incorporated in Pakistan, is not allowed to purchase shares or convertible debentures of an Indian company under Foreign Direct Investment (FDI) Scheme. The Government of India has, on 1st August, 2012 reviewed the policy as contained in paragraph 3.1.1 of Circular 1 of 2012 - Consolidated FDI Policy and decided to permit a citizen of Pakistan or an entity incorporated in Pakistan to make investments in India, under the Government route, in sectors/activities other than defence, space and atomic energy. Consequently, RBI has now decided that notwithstanding anything contained in the aforesaid Regulation, a person who is a citizen of Pakistan or an entity incorporated in Pakistan may, with the prior approval of the Foreign Investment Promotion Board of the Government of India, purchase shares and convertible debentures of an Indian company under FDI Scheme subject to the terms and conditions specified in Schedule 1 of the FDI Regulations, provided further that notwithstanding anything contained in Schedule I of the FDI Regulations the Indian company, receiving such foreign direct investment, is not engaged or shall not engage in sectors/activities pertaining to defence, space and atomic energy and sectors/activities prohibited for foreign investment. B. Risk Management and Inter Bank Dealings A. P. (DIR Series) Circular No. 13 dated 31st July, 2012 and Press Release: 2012-2013/165 dated 31st July, 2012 In order to provide operational flexibility to the exporters in their hedging operations, the RBI has allowed exporters to cancel and rebook forward contracts to the extent of 25% of the contracts booked in a financial year for hedging their contracted export exposures. Further, to provide some flexibility to AD Category-I banks in managing their Net Overnight Open Position Limit (NOOPL), it has been decided to permit them to exclude their Net Options Position and the positions taken by the overseas branches from their NOOPL, for positions involving Rupee as one of the currencies. Accordingly, limits for such positions, within the overall NOOPL, may be separately fixed by the respective banks board and communicated to the RBI for approval.

50

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 LEGAL UPDATE
the previous limit of $ 500 million or equivalent per financial year. Accordingly, Regulation 21 and Schedule I of the original Regulations has now been amended to reflect the changed position. The amended Regulations shall be deemed to have come into force with effect 23rd September, 2011. E. Amendments to the Schedule II to the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 [Notification No. FEMA 25/RB-2000 dated 3rd May, 2000] Notification No. FEMA 226/2012-RB]/G.S.R.608(E) dated 16th March, 2012 - Foreign Exchange Management (Foreign Exchange Derivative Contracts) (Amendment) Regulations, 2012 1. Hedging Initial Public Offers (IPO) flows by Foreign Institutional Investors (FIIs) under the Application Supported by Blocked Amount (ASBA) mechanism RBI had, vide A.P. (DIR Series) Circular No.68 dated 20th May, 2011, permitted the FIIs to enter into foreign currency-rupee swaps for IPO related transient capital flows under the ASBA mechanism subject to terms and conditions specified in the said circular. Accordingly, suitable amendment is made to Schedule II to the original Regulations by way of this notification. The amended Regulations shall be deemed to have come into force with effect from 20th May, 2011. 2. Facilitating Rupee Trade hedging facilities for non-resident entities RBI had, vide A.P. (DIR Series) Circular No.03 dated 21st July, 2011 issued guidelines to allow non-resident importers and exporters to hedge their currency risk in respect of exports from and imports to India, invoiced in Indian Rupees, with Authorised Dealers in India. Accordingly, Schedule II to the original Regulations is amended to give effect to the aforesaid circular of RBI by way of this notification. The amended Regulations shall be deemed to have come into force with effect from 21st July, 2011. F. Indian Depository Receipts (IDRs) - Amendments to the Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000 [Notification No. FEMA 20/ RB-2000 dated 3rd May, 2000] and Foreign Exchange
w ww.ica i.org

591

Management (Transfer or Issue of any Foreign Security) Regulations, 2004 [Notification No. FEMA 120/RB-2004 dated 7th July, 2004] Notification [No. FEMA 225/2012-RB]/G.S.R.607(E) dated 3rd March, 2012 - Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2012 and Notification [No. FEMA 224/2012RB]/G.S.R.608(E) dated 16th March, 2012 - Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) (Second Amendment) Regulations, 2012 RBI had, vide A.P. (DIR Series) Circular No. 05 dated 22nd July, 2009 operationalised the Companies (Issue of Depository Receipts) Rules, 2004 (IDR Rules), notified by the Government of India, as amended from time to time and permitted eligible companies resident outside India to issue IDRs through a Domestic Depository. The permission has been granted subject to compliance with the IDR Rules and subsequent amendments made thereto and the SEBI (DIP) Guidelines, 2000 (then existing), as amended from time to time. Furthermore, Foreign Institutional Investors (FIIs) including SEBI approved sub-accounts of the FIIs registered with SEBI and Non-Resident Indians (NRIs) may also invest, purchase, hold and transfer IDRs of eligible companys resident outside India and issued in the Indian capital market subject to the aforesaid regulations as amended from time to time. Accordingly, Notification no. FEMA 20/RBI-2000 dated 3rd May, 2000 and FEMA 120/RB-2004 dated 7th July, 2004 are amended to give effect to the aforesaid circular of RBI. The amended Regulations shall be deemed to have come into force with effect from 22nd July, 2009. G. Amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 [Notification No. FEMA 3/2000-RB dated 3rd May, 2000] Notification No. FEMA 232/2012-RB]/G.S.R.610(E) dated 30th May, 2012 - the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) (Amendment) Regulations, 2012 1. External Commercial Borrowings (ECB) for Micro Finance Institutions (MFIs) and NonGovernment Organisations (NGOs) - engaged in micro finance activities under Automatic Route RBI had, vide A. P. (DIR Series) Circular No.59 dated 19th December, 2011 permitted MFIs to
THE CHARTERED ACCOUNTANT oc tobe r 2012 51

592

LEGAL UPDATE
eligible foreign companies in Indian markets. This cap would be akin to the caps imposed for FII investment in debt securities and would be monitored by SEBI. The issuance, redemption and fungibility of IDRs would also be subject to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time as well as other relevant guidelines issued in this regard by the Government, the SEBI and the RBI from time to time. I. Non-resident guarantee for non-fund based facilities entered between two resident entities A.P. (DIR Series) Circular No. 20 dated 29th August, 2012 RBI has vide Notification No. FEMA 29/2000RB dated 26th September, 2000 granted general permi-ssion to a person resident in India, being a principal debtor, to make payment to a person resident outside India, who has met the liability under a guarantee. On a review, RBI has decided to extend the facility of non-resident guarantee under the general permission for non-fund based facilities (such as Letters of Credit/guarantees/Letter of Undertaking (LoU)/Letter of Comfort (LoC)) entered into between two persons resident in India. The method of discharge of liability by the non-resident guarantor under the guarantee and the subsequent repayment of the liability by the principal debtor shall continue, as hitherto, as detailed in A.P. (DIR Series) Circular No. 28 dated 30th March, 2001. Further, RBI has also decided to introduce a reporting format to capture such guarantees issued and invoked. Accordingly, Authorised Dealer Category-I banks are required to furnish such details by all its branches, in a consolidated statement, during the quarter, as per the format in Annex to the Chief General Manager, Foreign Exchange Department, ECB Division, Reserve Bank of India, Central Office Building, 11th floor, Fort, Mumbai 400 001 (and in MS-Excel file through email) so as to reach the Department not later than 10th day of the following month. J. Hedging facilities for foreign investment by Qualified Foreign Investors (QFIs) A.P. (DIR Series) Circular No. 21 dated 31st August, 2012 RBI has decided to allow QFIs to hedge their currency risk on account of their permissible investments (in equity and debt instruments), as per the specified guidelines given in the said circular.
w w w. i c a i . o r g

raise ECB upto $ 10 million or equivalent during a financial year for permitted end-uses, under the Automatic Route. Further, NGOs engaged in micro finance activities were allowed to avail of ECB up to $ 10 million or equivalent per financial year under the automatic route as against the present limit of $ 5 million or equivalent per financial year. Accordingly, suitable amendments are made to the Schedule I of the original Regulations. The amended Regulations shall be deemed to have come into force with effect from 19th December, 2011. 2. Enhancement of ECB limit under the automatic route RBI had, vide A.P. (DIR Series) Circular No.27 dated 23rd September, 2011 enhanced the limit of ECB for Eligible borrowers in real sectorindustrial sector-infrastructure sector up to $ 750 million or equivalent per financial year under the automatic route as against the previous limit of $ 500 million or equivalent per financial year. Accordingly, suitable amendments are made to the Schedule II of the original Regulations. The amended Regulations shall be deemed to have come into force with effect 23rd September, 2011.

H. Limited two way fungibilty allowed for IDRs A. P. (DIR Series) Circular No. 19 dated 28th August, 2012 In terms of A.P. (DIR Series) Circular No.5 dated 22nd July, 2009 issued by RBI, automatic fungibility of IDRs is not permitted. RBI has now decided to allow limited two way fungibility for IDRs (similar to the limited two way fungibility facility available for ADRs/GDRs) subject to the following terms and conditions: 1. The conversion of IDRs into underlying equity shares would be governed by the conditions mentioned in paras 6 and 7 of A.P. (DIR Series) Circular No. 5 dated 22nd July, 2009. 2. Fresh IDRs would continue to be issued in terms of the provisions of A.P. (DIR Series) Circular No. 5 dated 22nd July, 2009. 3. The re-issuance of IDRs shall be allowed only to the extent of IDRs that have been redeemed/ converted into underlying shares and sold. 4. There would be an overall cap of $ 5 billion for raising of capital by issuance of IDRs by

52

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 LEGAL UPDATE
Please refer circular for detailed operational guidelines and other terms and conditions as available at: http://rbidocs.rbi.org.in/rdocs/Notification/PDFs/ AP21310812FSl.pdf K. Overseas Investment by Indian Parties in Pakistan A.P. (DIR Series) Circular No. 25 dated 7th September, 2012 Hitherto, in terms of Regulation 6(2) of the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2004 (ODI Regulations), investment by Indian Parties in Pakistan is not permitted. It has now been decided that the overseas direct investment by Indian Parties in Pakistan shall henceforth be considered under the approval route under Regulation 9 of the ODI Regulations.

593

would require prior approval of Central Government under Section 309 and 310 of the Act. The MCA has now clarified that any increase in remuneration of nonwhole time director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government under Sections 309 and 310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit [under Section 309(4)] of the company, as the case may be, in the financial year 2012-13. One may refer to the above citation for further details. 2. Employee of a company holding shares of the company up to 0.5% of paid-up share capital The MCA has issued Notification No. F. No. 14/11/2012-CL-VII dated 16-08-2012 and initially referred to its earlier notification whereby companies were exempted from obtaining the approval of the Central Government for payment of remuneration exceeding the limits imposed by the Companies Act, 1956 in respect of managerial persons not having any interest in the capital of the company and not related to the directors or promoters thereof. The MCA had received a number of representations pointing to the corporate practice of allocating shares by way of qualification shares and/or shares under any scheme for allotment of shares to the employees of the company including under Employees' Stock Option Plan (ESOP). It is now clarified that any employee of a company holding shares of the company up to 0.5% of paid-up share capital under any scheme formulated for allotment of shares to such employees including under Employees' Stock Option Plan or by way of qualification shares are also covered under the category of persons not having any interest in the capital of the company. One may refer to the above citation for further details.

CORPORATE LAWS

(Matter on Corporate Laws has been contributed by CA. Jayesh Thakur)

MCA (www.mca.gov.in) 1. Applicability of service tax on commission payable to non-whole time directors The MCA has issued General Circular No. 24/2012 dated 09-08-2012 in relation to applicability of service tax on commission payable to non-whole time directors of a company under Section 309(4) of the Companies Act, 1956 and approval of Central Government under Sections 309/310 of the Companies Act. In terms of the introduction by the Finance Act 2012 of applicability of service tax to anyone who provides a service not covered under the negative/ exempted list and if the value of annual revenue is more than R10 lakh. The non-whole time directors of a company are presently not covered under the exempted list and as such, the sitting fee/commission payable to them by the company is liable to service tax. If such Service Tax is paid by the company, it will be deemed to be a part of remuneration under section 198 of the Act and would accordingly increase the remuneration amount of such non-whole time directors. This remuneration could then exceed the limit of 1% profit [under Section 309(4)] of the company when the company has a managing/whole time directors/managers, or, 3% of the profit [under Section 309(4)] of the company if the company does not have a Managing/whole time directors/managers. This
w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

53

594

LEGAL UPDATE
The scrutiny of all audit reports filed as per Form B shall be carried out twice a year based on the reports received up to half year ending on June and December of every year and for this purpose, specific timelines are prescribed. One may refer to the above citation for further details. 2. Business responsibility reports The SEBI has issued Circular No. CIR/CFD/ DIL/8/2012 dated 13-08-2012 referring to the MCA guidelines on 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business' which contain comprehensive principles to be adopted by companies as part of their business practices and a structured business responsibility reporting format requiring certain specified disclosures, demonstrating the steps taken by companies to implement the said principles. In line with these guidelines and considering the larger interest of public disclosure regarding steps taken by listed entities from a Environmental, Social and Governance (ESG) perspective, it has been decided to mandate inclusion of Business Responsibility Reports (BR reports) as part of the annual reports for listed entities. Therefore, in line with the objective to enhance the quality of disclosures made by listed entities, certain listing conditions are hereby specified by way of inserting Clause 55 in the equity Listing Agreement as provided in Annexure-1 to the above circular. An Annexure-2 also provides certain key principles to assess the fulfillment of listed entities and a description of the core elements under these principles. The requirement to include BR Reports as part of the annual reports shall be mandatory for top 100 listed entities based on market capitalisation at BSE and NSE as on 31st March, 2012. The BSE and NSE shall independently draw up a list of listed entities to which the circular would be applicable based on the said criteria and disseminate the same on their websites respectively. Other listed entities may voluntarily disclose BR Reports as part of their Annual Reports. One may refer to the above citation for further details. 3. Manner of achieving minimum public shareholding requirements The SEBI has issued Circular No. CIR/CFD/ DIL/11/2012 dated 29-08-2012 pursuant to amendments to Clause 40A of the Listing Agreement. Now, with a view to facilitate listed entities to comply with the minimum public shareholding requirements with-

3. Filing of balance sheet and profit & loss account in non-XBRL format date extended The MCA has issued General Circular No. 28/2012 on 03-09-2012 extending the date of annual filing of forms 23AC and 23ACA in non-XBRL format without any additional fee or penalty. All companies which are required to file non-XBRL e-forms 23-AC and 23-ACA as per revised schedule VI will now be allowed to file their financial statements without any additional fee/penalty up to 15s October 2012 or within 30 days from the date of their AGM, whichever is later. One may recall that earlier on 02-08-2012 the date was extended to 15th September which is now further extended to 15th October, 2012. One may refer to the above citation for further details. SEBI (www.sebi.gov.in) 1. Manner of dealing with audit reports filed by listed companies The SEBI has issued Circular No. CIR/CFD/ DIL/7/2012 dated 13-08-2012 stating that in terms of clause 31(a) of equity listing agreement, listed companies are required to submit six copies of annual reports containing audited annual financial statements to the stock exchanges. While SEBI recognises that in its continuous endeavor to enhance the quality of financial reporting being done by listed companies, it has now decided to put in place a system to monitor the audit qualifications contained in the audit report accompanying the audited annual financial statements submitted by listed companies. One may refer to the exact text of amendments to the equity listing agreement in this regard provided in the Annexure to this circular. Now, listed companies shall be required to submit (as applicable, alongwith copies of annual reports submitted to stock exchanges), a) Form A: unqualified/matter of emphasis report, and, (b) Form B: qualified/subject to/except for audit report. The formats are provided as part of Annexure to this circular. These forms shall be signed by the a) Chief Executive Officer/Managing Director, b) Chief Financial Officer, c) Auditor and d) Chairman of the Audit Committee. The information submitted as per these forms shall also draw attention to relevant notes in the annual financial statements, management's response to qualifications in the directors' report and comments of the Board/Chair of the Audit Committee. A specific procedure is mandated for the stock exchanges to be observed to process the audit reports accompanying the audited annual financial statements submitted by listed companies alongwith Form B.

54

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 LEGAL UPDATE
in the time specified in the Securities Contracts (Regulation) Rules, 1957 ("SCRR, 1957"), the following additional methods shall be available: Rights Issues to public shareholders, with promoters/promoter group shareholders forgoing their rights entitlement. Bonus Issues to public shareholders, with promoters/promoter group shareholders forgoing their bonus entitlement. Listed entities desirous of achieving the minimum public shareholding requirement through other means, or in seeking any relaxation from the available methods, may approach SEBI with appropriate details. Such requests would be considered by SEBI based on merit. SEBI would endeavour to communicate its decision within 30 days from the date of receipt of such requests. One may refer to the above citation for further details. 4. Know your client requirements for foreign investors The SEBI has issued Circular No. CIR/MIRSD/11/2012 dated 05-09-2012 in relation to know your client (KYC) norms for the securities market. Based on representations received regarding operational issues in the implementation of SEBI Circulars on KYC issued earlier in case of foreign investors viz. foreign institutional investors, subaccounts and qualified foreign investors and in consultation with the stock exchanges, depositories and intermediaries, SEBI has now issued certain clarifications which are included in Annexure A to this circular. It is clarified that the intermediaries shall strictly follow the risk based due diligence approach as prescribed by SEBI Master Circular on AML No. CIR/ ISD/AML/3/2010 dated 31st December, 2010 and shall conduct ongoing client due diligence based on the risk profile and financial position of the clients as prescribed in the Circular. The requirements of this circular are applicable for both new and existing clients. One may refer to the above citation for further details and the KYC requirements for the foreign investors. 5. Steps to re-energise Mutual Fund (MF) industry The SEBI has issued Circular No. CIR/IMD/ DF/21/2012 dated 13-09-2012 to re-energise the MF industry. This is done so as to increase penetration of mutual fund products and to energise the distribution network while protecting the interest of investors, and for this purpose SEBI held a series of meetings with various stakeholders in the MF industry. Mutual Fund Advisory Committee (MFAC) also deliberated
w ww.ica i.org

595

and offered its recommendations on issues confronted by the industry. Pursuant to SEBI Boards approval to various recommendations, it has been decided to implement and allow MFs to charge Additional TER (Total Expense Ratio) can be charged up to 30 basis points on daily net assets of the scheme, charge service tax on investment and advisory fees to the scheme, to have a single plan structure for mutual fund schemes, to provide separate option for direct investments, ensure harmonising applicability of NAV across schemes, have monthly portfolio disclosures, disclosure with respect to half yearly financial results, etc. One may refer to the above citation for further details. 6. Application supported by blocked amount (ASBA) facility in public/rights issue The SEBI has issued Circular No. CIR/CFD/ DIL/12/2012 dated 13-09-2012 after noticing that some banks while making applications on own account using ASBA facility are doing so without having clear demarcated funds and that some banks are marking lien against credit limits/ overdraft facility of their account holders for ASBA applications. SEBI has now stated that Self Certified Syndicate Banks (SCSBs) are hereby advised to ensure that for applications made by any investor using ASBA facility, the SCSBs shall block the application amount only against/in a funded deposit account and ensure that clear demarcated funds are available for ASBA applications. SEBI has also advised SCSBs to ensure that for making applications on own account using ASBA facility, they should have a separate account in own name with any of the SEBI registered SCSBs. Such account shall be used solely for the purpose of making application in public issues and clear demarcated funds should be available in such account for ASBA applications. One may refer to the above citation for further details.

THE CHARTERED ACCOUNTANT oc tobe r 2012

55

596

OPINION

Provision for Warranty under Construction Contract and Corresponding Revenue Recognition
The following is the opinion given by the Expert Advisory Committee of the Institute in response to a query sent by a member. This is being published for the information of readers.

A. Facts of the Case 1. A public sector company (hereinafter referred to as the company) is engaged in the field of engineering, manufacture of equipment, erection and commissioning of power projects. In addition, the company is also in the business of transportation, transmission, defence, etc. The normal execution period of a contract ranges between 3 to 5 years. The normal warrantee/ guarantee period of a contract is between 18 to 24 months, which starts from the date of completion of trial operation of the project. The company has 15 manufacturing units, 4 power sector regions, service centers and regional offices besides project sites spread all over India and abroad. The company is listed with NSE and BSE. The turnover of the company was R43,337 crore in the year 2010-11. 2. The querist has stated that revenue recognition in respect of long term construction contracts is done based on percentage of completion method in line with the requirements of Accounting Standard (AS) 7, Construction Contracts, notified under the Companies (Accounting Standards) Rules, 2006 (hereinafter referred to as Rules). The accounting policies in respect of revenue recognition and provision for contractual obligation (warranty/ guarantee) are as under. The warranty obligation is created at 2.5% of the contract value based on past trends. Revenue recognition "Revenue is recognised on percentage completion method based on the percentage of actual cost incurred upto the reporting date to the total estimated cost of the contract." Provision for warranties From 01.04.2010 "The company provides warranty cost at 2.5% of the revenue progressively as and when it
56 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

recognises the revenue and maintain the same throughout the warranty period. Earlier policy (upto 31.03.2010) Provision for contractual obligations is maintained at 2.5% of the contract value on completion of trial operation. 3. The querist has stated that the accounting practice in respect of provision for warranty obligation while working out percentage of completion for revenue recognition is as follows: From 01.04.2010 Provision is created towards warranty obligation at 2.5% of the revenue progressively as and when the revenue is recognised and the same is added to actual cost incurred upto reporting period for working out percentage of completion under AS 7 contracts. 2.5% of the contract value is also added towards warranty obligation to the total estimated cost to complete the work for percentage completion method. Earlier Practice While working out the total cost to complete the contract, contractual obligation at 2.5% of the value of the contract was added, to work out the percentage of completion and to recognise the revenue. On completion of trial operation, 2.5% of contract value is added in the actual cost incurred to bring the cost incurred to 100% and also to recognise 100% revenue. Provision for warranty obligation is also created for the same amount. 4. The querist has further stated the following issues and grounds for change of accounting policy: (i) The recognition of turnover of 2.5% value of each despatch/activity completion was deferred till the completion of trial operation by adding
w w w. i c a i . o r g

 OPINION
2.5% of the contract value to estimated cost to complete but not in actual cost incurred upto the reporting period in ascertaining the percentage completion. (ii) Further, there was a mismatch in recognition of turnover and creation of provision for contractual obligation in the year of completion of trial operation. In case of profitable projects, revenue recognised before the trial operation was lower than 97.5% of the contract revenue and in case of loss making projects, it was more than 97.5%. (iii) There was a deferment of revenue till completion of trial operation and recognising revenue on trial operation without any despatch/activity completion was against the spirit of revenue recognition and AS 7 . This may be construed against the revenue recognition principle as per which, the revenue has to be recognised at 100% of the value of the activities completed or services rendered in line with AS 7. (iv) Paragraph 11 of Accounting Standard (AS) 29, Provisions, Contingent Liabilities and Contingent Assets, notified under the Rules states, An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. Obligations also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. From this, it is very clear that the obligation could be a statutory requirement from a binding contract or normal business practice, custom and desire to maintain good business relations etc. In all the contracts of the company, the contract provides for warranty for periods ranging between 12 months to 24 months which is a binding contract. However, while executing the contract ranging over a period of 3 to 4 years, the company is always bound to rectify, rework, compensate any defects, short supplies, operational problems of the individual equipment already supplied in respect of which turnover has been recognised even before the warranty period. In fact, it can be concluded that the contractual obligation coexists right from the date the first supply is made irrespective of the fact whether the trial operation has been completed or not. The company is always to incur additional expenditure to rectify the problem with equipment supplied, work
w ww.ica i.org

597

performed etc. and in respect of which turnover has been recognised. (v) Further, as per AS 7, the normal principle of revenue recognition is substituted by the percentage of completion method and the revenue itself is progressively recognised on consideration of the substance of the transaction. It is, therefore, appropriate that to the extent the revenue has been recognised, the related warranty cost should also be recognised. Whatever has been recognised as contract revenue under percentage of completion method (PoCM) is subject matter of warranty and to that extent, warranty has become a present obligation even though period of warranty may commence at a later date. (vi) As per revenue recognition principle, 100% revenue needs to be recognised on completion of corresponding supplies/work performed with matching cost. (vii) This issue was also referred for opinion to an accounting expert and to a leading Chartered Accountant firm who is assisting the company in IFRS implementation. The changed policy is in line with the opinion given by them. (viii) Further, the company has also reviewed the practices of similar companies in the industry which are reproduced below: X Ltd. The company provides for anticipated costs for warranties when it recognises revenue on the related products or contracts. Warranty costs include calculated costs arising from imperfections in design, material and workmanship in the companys products. Y Ltd. Product-related expenses and losses from onerous contracts, provisions for estimated costs related to product warranties are recorded in cost of goods sold and services rendered at the time the related sale is recognised. Z Ltd. Production costs include direct costs (such as material, labour and warranty costs) and indirect costs. Warranty costs are estimated on the basis of contractual agreement, available statistical data and weighting of all
THE CHARTERED ACCOUNTANT oc tobe r 2012 57

598

OPINION
possible outcomes against their associated probabilities. Warranty periods may extend upto five years. 7. As regards recognition of provision for warranty costs, the Committee notes paragraphs 11 and 14 of AS 29, notified under the Rules as follows: 11. An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. Obligations also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. 14. A provision should be recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised. From the above, the Committee is of the view that a provision should be recognised when there exists present obligation to act or perform in a certain way and other conditions for its recognition under AS 29 are satisfied. Obligations may arise from a binding contract or statutory requirement and may also arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. The Committee notes from the Facts of the Case that all the contracts of the company provide for warranty for periods ranging between 12 to 24 months and while executing the contract over a period of 3 to 4 years, the company is always bound to rectify, rework and compensate any defects, short supplies, operational problems of the individual equipment already supplied under construction contracts. Thus, there exists a contractual/customary present obligation in respect of warranty service which will require outflow of resources embodying economic benefits to settle the obligation. Further, the Committee notes that, in the extant case, the company can reliably estimate the amount of obligation on the basis of past trend. Accordingly, the Committee is of the view that a provision in respect of warranty service should be recognised in the extant case. 8. As far as timing of recognition of provision is concerned, the Committee notes paragraphs 15, 16 and 21 of AS 7, as reproduced below:

(ix) According to the querist, the change has definitely resulted in better presentation of the financial statements and it is well within the principles of conservatism and prudence. The present change in accounting policy is exactly in line with the revenue recognition requirements of AS 7 and at the same time improves the presentation of financial statements. B. Query 5. Considering the above, the querist has sought the opinion of the Expert Advisory Committee as to whether the present policy and practice of the company on provision for warranties, viz., creation of provision towards warranty obligation progressively during construction period and considering the same as cost incurred to determine the percentage of completion for revenue recognition under AS 7 is in line with the requirements of accounting standards. C. Points considered by the Committee 6. The Committee notes from the Facts of the Case that the basic issue raised in the query relates to recognition of provision for warranty costs under a construction contract and its treatment for determining the percentage of completion for recognition of contract revenue. The Committee has, therefore, considered only this issue and has not examined any other issue that may arise from the Facts of the Case, such as, measurement of amount of provision for warranty obligation, accounting for construction costs and revenue in general, appropriateness of method selected for determination of stage of completion of a contract, accounting for change in accounting policy, etc. The opinion expressed hereinafter only lays down the general principles to be followed in the extant case and has not gone into calculations of contract costs and contract revenue during various accounting periods. Further, the Committee has presumed from the Facts of the Case that the warranty service in the extant case is the normal quality-assurance type warranty, which is neither separately priced nor separately sold as per the business practice in case of construction contracts.

58

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 OPINION

599

during the progress of the contract and as such, the 15. Contract costs should comprise: proportionate warranty cost should be provided for (a) costs that relate directly to the specific during the contract period. The Committee is of the contract; view that such provision for expected warranty costs would also be contract cost incurred and therefore, 16. Costs that relate directly to a specific contract should be considered for determining the stage of include: completion for recognition of revenue as per the principles of AS 7. (g) the estimated costs of rectification and guarantee work, including expected warranty D. Opinion costs; and (Emphasis supplied by the Committee.) 9. On the basis of the above and subject to paragraph 6 above, the Committee is of the opinion that the 21. When the outcome of a construction provision for warranty costs should be recognised contract can be estimated reliably, contract progressively during the construction on performance revenue and contract costs associated of contract activity and in respect of which contract with the construction contract should cost is recognised. Since such provision for be recognised as revenue and expenses expected warranty costs would also be contract cost respectively by reference to the stage of incurred, the proportionate warranty cost should be completion of the contract activity at the considered for determining the stage of completion reporting date. for recognition of revenue as per the principles of AS 7, as discussed in paragraphs 7 and 8 above. From the above, the Committee is of the view that the expected warranty cost is a contract cost which is directly related to a specific contract. 1 The Opinion is only that of the Expert Advisory When the outcome of a construction contract Committee and does not necessarily represent the can be estimated reliably, contract revenue and Opinion of the Council of the Institute. contract costs associated with the construction contract should be recognised as revenue and 2 The Opinion is based on the facts supplied and in the expenses respectively by reference to the stage of specific circumstances of the querist. The Committee completion of the contract activity at the balance finalised the Opinion on 06.02.2012. The Opinion must, sheet date. In the instant case, the company follows therefore, be read in the light of any amendments and/ the percentage of completion method for recognising or other developments subsequent to the issuance of its revenue which indicates that the outcome of Opinion by the Committee. a construction contract can be estimated reliably. Accordingly, following the percentage of completion 3 The Compendium of Opinions containing the method, the contract costs, including provision Opinions of Expert Advisory Committee has for expected warranty costs, should be recognised been published in twenty nine volumes. A CD of by reference to stage of completion of the contract Compendium of Opinions containing twenty nine activity at the reporting date. In this regard, the volumes has also been released by the Committee. Committee also notes from the Facts of the Case that These are available for sale at the Institute's office the querist has stated that even during the execution at New Delhi and its regional council offices at of the projects, the company is bound to rectify, Mumbai, Chennai, Kolkata and Kanpur. rework and compensate any defects, short supplies, operational problems of the individual equipment 4 Recent opinions of the Committee are available on the already supplied and that the contractual obligation website of the Institute under the head Resources. in respect of warranty coexists from the date of first 5 Opinions can be obtained from EAC as per its supply. Thus, the Committee is of the view that in Advisory Service Rules which are available on the the extant case, present obligation in respect of website of the ICAI, under the head Resources. For contractual warranty as per the provisions of AS 29 further information, write to [email protected]. arises from the performance of a contract activity in respect of which contract cost is recognised even n
w ww.ica i.org
THE CHARTERED ACCOUNTANT oc tobe r 2012 59

600

ACCOUNTING

Triple Bottom Line Accounting - Need of the Hour for Sustainability Goal
Being sustainable has been the talk of the business town in the past decade. But the big question still remains- How to measure the degree to which an organisation is being sustainable? John Elkington- the man behind the concept of measuring sustainability strove during mid 1990s to encompass a new framework for measuring performance in Corporate America. This new accounting framework was called Triple Bottom Line accounting (TBL), 3BL, and 3Ps. It went much beyond the traditional boundaries of measuring profit, return on investments, shareholders value, etc. TBL accounting focuses on comprehensive investment results i.e. in line with performance along the interrelated dimensions of profit, planet and people. Hence TBL accounting can act as an important tool to support sustainability goal of the organisations. TBL accounting is gaining interest from for-profit businesses, nonprofit organisations and government sector as well. Many businesses have already shifted to TBL accounting sustainability framework. Similar approach is also shown by non-profit organisations and government sectors at national, state and local level around the globe. This article revisits the TBL accounting sustainability framework concept, tries to explain its utility for organisations, policy makers and economic development practitioners and highlights certain recent examples of putting TBL accounting into practice.

Prof. Manju Punia Chopra

(The author is faculty of MATS Institute of Management and Entrepreneurship, Bangalore. She can be reached at manjuchopra10@gmail. com)

TBL Accounting Defined TBL is also an accounting framework that incorporates three dimensions of performance: Financial, Environmental and Social. The inclusion of environmental and social dimensions along with financial, makes it stand apart from traditional accounting framework. But it is difficult to assign appropriate means of measurement of environmental and social dimensions. The TBL accounting dimensions are commonly known as three Ps: Profit, Planet, and People. These are referred to as 3Ps.

60

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 ACCOUNTING
Before the introduction of sustainability concept as TBL Accounting by Elkington, environmentalists had wrestled with measure of and framework for sustainability. Academic disciplines organised around sustainability have multiplied over last three decades. Andrew Savitz has given the apt definition of TBL accounting, which should be agreed by people inside and outside academia. The TBL accounting captures the essence of sustainability by measuring the impacts of organisations activities on the worldincluding both its profitability and shareholders value and its social, human and environmental capital. THE TRICK IS NOT DEFINING TBL. THE TRICK IS MEASURING IT.

601

TBL Calculation The biggest challenge in TBL accounting is that the three Ps do not have a common measuring unit. Rupees/ any other countrys currency are the unit of measuring profit. What should be social capital measured in? What about the environmental or ecological health? Thus boiling down on common unit of measurement is THE CHALLENGE. Some advocate monetising all the dimensions of the TBL including social welfare or environmental damage, which makes sense. This would have the benefit of having a common unit Rupees. Most object on putting a price tag on heritage sites, endangered species or wetlands on philosophical grounds. The remaining question the valuation technique of finding the right price for damaged heritage sites, endangered sites or lost wetlands. Another decent solution is calculation of TBL with reference to an index. Via this method, the issue of incompatible units gets eliminated and as long as there is universally accepted accounting method, allows for comparison between entities. Example: Comparing performance between companies, cities, developmental projects or for that matter any other unit. However, even in the use of an index, the subjectivity issue remains. Example: 1. How is the index components weighted? 2. Would each P get equal weighting? 3. What about sub-components within each P? 4. Do they each get equal weighting? 5. Is the people category more important than planet? 6. Who decides? Another option would do away with measuring sustainability using dollars or using an index. If the users of the TBL had the stomach for it, each sustainability measure would stand alone. "Acres of wetlands" would be a measure, for example, and progress would be gauged based on wetland creation, destruction or status quo over time. The downside to this approach is the proliferation of metrics that may be pertinent to measuring sustainability. The TBL user may get metric fatigue. Having discussed the difficulties with calculating TBL accounting, let us turn the attention to potential metrics for inclusion in a TBL calculation.

TBL is also an accounting framework that incorporates three dimensions of performance: Financial, Environmental and Social. The inclusion of environmental and social dimensions along with financial, makes it stand apart from traditional accounting framework. But it is difficult to assign appropriate means of measurement of environmental and social dimensions.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

61

602

ACCOUNTING

Index- How to Design It No universal standard method is available for calculating TBL. There is no universally accepted accounting standard for measuring each of the three TBL accounting categories as well. This can be taken as strength of TBL since it allows the users to customise the TBL accounting framework to the needs of various entities. All the entities (businesses, non-profits and governments) may gauge environmental sustainability in the same terms, say reducing the amount of solid waste generated. But a local mass transit might measure success in terms of passenger miles travelled, while a for-profit bus company would measure its success in terms of earnings per share. The TBL accounting has appetite for accommodating such differences. Also TBL can be project, entity or strategic business unit (SBU) specific. The level of the entity, type of project and the geographic scope will drive many of the decisions about what measures to include. That said, the set of measures will ultimately be determined by stakeholders and subject matter experts and the ability to collect the necessary data. While there is significant literature on the appropriate measures to use for sustainability at the state or national levels, in the end, data availability will drive the TBL calculations. Many of the traditional sustainability measures, measures vetted through academic discourse, are presented below. Financial/Economic/Profit Measures Financial variables are those variables that deal with the bottom line and flow of money. It should look at flow of funds in the form of income/expenditure, taxes, business climate factors, employment and business diversity factors. To be specific, they can be: Personal income Cost of underemployment Establishment churn Establishment sizes Job growth Employment distribution by sector Percentage of firms in each sector Revenue by sector contributing to gross state product Environmental/Ecological/Planet Measures Environmental variables are those variables that represent measures of natural resources and also reflect

The biggest challenge in TBL accounting is that the three Ps do not have a common measuring unit. Rupees/any other countrys currency are the unit of measuring profit. What should be social capital measured in? What about the environmental or ecological health? Thus boiling down on common unit of measurement is THE CHALLENGE.

potential influences to its feasibility. It may include air and water quality, energy consumption, natural resources, solid and toxic waste, land use as well as cover. Ideally the impacts of a project or policy on a certain area could be identified/measured if long range trends are available for each of the environmental variables. To be specific, they can be: Sulphur dioxide concentration Concentration of nitrogen oxides Selected priority pollutants Excessive nutrients Electricity consumption Fossil fuel consumption Solid waste management Hazardous waste management Change in land use/land cover Social, People Measures Social variables are those variables that define social dimensions of a community/ region and could include measurement such as education, equity of gender, equal employment opportunity (EEOs), excess to social resources, health and well-being, standard of living and social capital. The examples listed below are small snippets of specific potential variable: Unemployment Rate Female Labour Force Participation Rate Median House-hold Income Literacy Rate Poverty Rate Average Commuting Time Crime Rate Life Expectancy Rate Data for most of the measures may be collected at the national and the state level and may also be available at local level.

62

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 ACCOUNTING
There are many approaches to seek participation of the stake holders in designing the TBL accounting framework like: Developing a decision matrix for incorporating public preferences, having a Narrative Format in place for solicitation of share holders participation and in-depth and holistic project evaluation and forming a stake holders rank and weigh component of the

603

sustainability framework according to community priorities. Example: a community may consider an important measure of success for an entrepreneurial development program to be the number of self-help group owned companies formed over a certain time period. Hence, it will be the organisations responsibility to produce the final set of measures applicable to the project at hand.

Innovation Capital Efficiency Risk Management Margin Improvement Growth Enhancement Total Shareholder Return

Job Creation Skills Enhancement Local Economic Impacts Special Investments Business Ethics Security

Economic Growth
Resource Efficiency Product Stewardship Life-Cycle Management Products to Services

SocioEconomic

EcoEfficiency

Sustainability

Diversity Human Rights Community Outreach Indigenous Communities Labor Relations

Social Progress

SocioEnvironmental

Environmental Stewardship
Clean Air, Water & Land Emissions Reductions Zero Waste, Releases & Spills Biodiversity

Safety & Health Environmental Regulations Global Climate Change Access to Potable Water Crisis Management Environmental Justice

TBL Users TBL can be used by each and every entity, small or big. These entities can be for-profit businesses, nonprofit organisations and government at national, state and local levels. For-Profit Businesses: Businesses have well digested the fact that the core

value of sustainability will ultimately lead to greater long-term profitability. For example reduction of packaging waste ultimately leads to cost reduction and hence profitability enhancement. Businesses using a TBL accounting framework in India and across the globe: Tata group of companies, Indian Tobacco Company

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

63

604

ACCOUNTING
Policy-makers at government level can use the sustainability to decide which actions they should or should not take to make the society more sustainable. They may find the cause and effect relationship between actions taken. The European Union uses integrated assessment to identify the likely positive and negative impacts of proposed policy actions, enabling informed political judgement to be made about the proposal and identify trade-offs in achieving competing objectives. Summary John Elkingtons TBL accounting framework has changed the way accounting is done around the globe by for-profit, non-profit and governments. The concept of sustainability measurement has changed the performance matrix of the businesses. Beyond the foundation of measuring sustainability on three fronts profit, planet and people, the TBL accounting allows organisations to customise the concept in a manner suitable to their specific requirements. It is accepted that TBL accounting framework has challenges for putting it into a practice. The biggest challenge is measurement of each category, digging applicable data and finally calculation of the organisation contribution to sustainability. But setting aside the challenges, the TBL accounting framework allows organisations to truly evaluate the ramifications of their decision from a long run sustainability perspective.

(ITC), General Electric (GE), Unilever, Procter and Gamble (P&G), Johnsons and Johnsons, IKEA, Cadburys, Ernst and Young (E & Y), Vodafone, Sierra Nevada Energy Watch Non-Profit Organisations: Though TBL accounting has not been in the vogue in non-profit organisations in India but in many developed nations, the concept is well accepted by the same. In those countries, non-profit organisations have partnered with private firms to address the sustainability issue that affect mutual stakeholders. For-profit businesses have identified the fact that aligning with non-profit organisations that have goals of economic prosperity, social well-being and environmental protection makes good business sense. Non-profit Organisations using TBL Accounting Framework: Conserve India, RSF social finance a non profit organisation that uniquely focuses on how their investments improve all three categories of the TBL. While RSF takes an original approach to the TBL concept, one can see how the TBL can be tailored to nearly any organisation. Governments: In India the governments at most of the levels have not tested the TBL accounting concept. But governments of many of developed countries have adopted the concept at national, state and local levels. Governments Using TBL Accounting Framework: North America, United kingdom, Australia, European Union, Maryland, Minnesota, Vermont, Utah, SanFrancisco Bay Area, North-east Ohio.

John Elkingtons TBL accounting framework has changed the way accounting is done around the globe by for-profit, non-profit and governments. The concept of sustainability measurement has changed the performance matrix of the businesses. Beyond the foundation of measuring sustainability on three fronts profit, planet and people, the TBL accounting allows organisations to customise the concept in a manner suitable to their specific requirements.

64

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 AUDITING

605

Professional Skepticism: A Snapshot of Provisions in the Standards on Auditing

(Contributed by Auditing & Assurance Standards Board Secretariat.)1

The Standards on Auditing (SAs) contain objectives, requirements and application, and other explanatory material that are designed to support the auditor in obtaining reasonable assurance. The SAs require the auditor to exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit. The Standards also require the auditors to, among other things: Identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entitys internal control. Obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks. Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained. The Standard on Auditing (SA) 200, Overall Objectives Of The Independent Auditor And The Conduct Of An Audit In Accordance With Standards On Auditing, defines the term Professional Skepticism as An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. The auditor, therefore, needs to plan and perform an audit with professional skepticism, recognising that circumstances may exist that cause the financial statements to be materially misstated. Professional skepticism includes being alert to, for example: Audit evidence that contradicts other audit evidence obtained. Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. Conditions that may indicate possible fraud.
1

Circumstances that suggest the need for audit procedures in addition to those required by the SAs. Thus, among other things, exercising professional skepticism helps the auditor to reduce the risks of matters critical to an effective audit, such as: Overlooking unusual circumstances. Over generalising when drawing conclusions from audit observations. Using inappropriate assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the results thereof. Exercise of professional skepticism is also necessary in the critical assessment of audit evidence and includes questioning contradictory audit evidence and the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light of the circumstances, for example, in the case where fraud risk factors exist and a single document, of a nature that is susceptible to fraud, is the sole supporting evidence for a material financial statement amount. The application of professional skepticism enhances the effectiveness of an audit procedure and of its application and reduces the possibility that the auditor might select an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results. The concept of professional skepticism is also closely integrated with exercise of professional judgement by the auditor. Professional judgment refers to application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Exercise of both professional skepticism and professional judgment are indispensible elements of ensuring audit quality.

The views presented herein do not necessarily represent the views of the Auditing & Assurance Standards Board. For feedback, please email: aasb@ icai.org

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

65

606

AUDITING
an extract from the various such SAs which contain specific requirement for application of professional skepticism by the auditor. The extract is for the ready reference of the readers and is not meant to be a substitute for the authoritative text of the SAs issued by ICAI.

Standards on Auditing (SAs) The Standards on Auditing issued by the Institute of Chartered Accountants of India are principle based rather than rule based. Thus, these Standards, at many places envisage exercise of professional skepticism and professional judgment in application of the principles/ requirements enunciated therein. The following is

Context Requirement Application SA 220: Quality Control For An Audit Of Financial Statements A13. Direction of the engagement team 15. The engagement partner shall take Direction, involves informing the members of responsibility for: Supervision and the engagement team of matters such (a) The direction, supervision and performance Performance as: of the audit engagement in compliance with Their responsibilities, including the professional standards and regulatory and legal need to comply with relevant ethical requirements; and (Ref: Para. A13-A15, A20) requirements, and to plan and perform ... an audit with professional skepticism as required by SA 200. Responsibilities of respective partners where more than one partner is involved in the conduct of an audit engagement. The objectives of the work to be performed. The nature of the entitys business. Risk-related issues. Problems that may arise. The detailed approach to the performance of the engagement. Discussion among members of the engagement team allows less experienced team members to raise questions with more experienced team members, so that appropriate communication can occur within the engagement team. SA 230: Audit Documentation Form, Content and 8. The auditor shall prepare audit documentation that is sufficient to enable an experienced Extent of Audit auditor, having no previous connection with Documentation the audit, to understand: (a) The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements; ..

A7. Audit documentation provides evidence that the audit complies with SAs. However, it is neither necessary nor practicable for the auditor to document every matter considered, or professional judgment made, in an audit. Further, it is unnecessary for the auditor to document separately (as in a checklist, for example) compliance with matters for which compliance is demonstrated by documents included within the audit file. For example: ..
w w w. i c a i . o r g

66

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 AUDITING
Context Requirement

607

Application In relation to requirements that apply generally throughout the audit, there may be a number of ways in which compliance with them may be demonstrated within the audit file: For example, there may be no single way in which the auditors professional skepticism is documented. But the audit documentation may nevertheless provide evidence of the auditors exercise of professional skepticism in accordance with SAs. Such evidence may include specific procedures performed to corroborate managements responses to the auditors inquiries.

SA 240: The Auditors Responsibilities Relating To Fraud Responsibilities of 8. When obtaining reasonable assurance, the auditor is responsible for maintaining an the Auditor attitude of professional skepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud. The requirements in this SA are designed to assist the auditor in identifying and assessing the risks of material misstatement due to fraud and in designing procedures to detect such misstatement. Professional Skepticism 12. In accordance with SA 200 (Revised) , the auditor shall maintain an attitude of professional skepticism throughout the audit, recognising the possibility that a material misstatement due to fraud could exist, notwithstanding the auditors past experience of the honesty and integrity of the entitys management and those charged with governance. (Ref: Para. A7- A8) A7. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. Maintaining an attitude of professional skepticism requires an ongoing questioning of whether the information and audit evidence obtained suggests that a material misstatement due to fraud may exist. It includes considering the reliability of the information to be used as audit evidence and the controls over its preparation and maintenance where relevant. Due to the characteristics of fraud, the auditors attitude of professional skepticism is particularly important when considering the risks of material misstatement due to fraud.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

67

608

AUDITING
Requirement

Application A8. Although the auditor cannot be expected to disregard past experience of the honesty and integrity of the entitys management and those charged with governance, the auditors attitude of professional skepticism is particularly important in considering the risks of material misstatement due to fraud because there may have been changes in circumstances. A17. Management is often in the best 18. The auditor shall make inquiries of Risk Assessment position to perpetrate fraud. management, and others within the entity as Procedures and Accordingly, when evaluating appropriate, to determine whether they have Related Activities managements responses to inquiries knowledge of any actual, suspected or alleged - Management and with an attitude of professional fraud affecting the entity. Others within the skepticism, the auditor may judge it Entity necessary to corroborate responses to inquiries with other information. A33. Determining overall responses to 28. In accordance with SA 330, the auditor shall Responses to address the assessed risks of material determine overall responses, to address the the Assessed misstatement due to fraud, generally assessed risks of material misstatement due to Risks of Material includes the consideration of how fraud at the financial statement level. Misstatement Due the overall conduct of the audit to Fraud - Overall can reflect increased professional Responses skepticism, for example, through: Increased sensitivity in the selection of the nature and extent of documentation to be examined in support of material transactions. Increased recognition of the need to corroborate management explanations or representations concerning material matters. SA 250: Consideration Of Laws And Regulations In An Audit Of Financial Statements 8. The auditor is required by this SA to remain alert Responsibility of to the possibility that other audit procedures the Auditor applied for the purpose of forming an opinion on financial statements, may bring instances of identified or suspected non-compliance to the auditors attention. Maintaining an attitude of professional skepticism throughout the audit, as required by SA 200 (Revised), is important in this context, given the extent of laws and regulations that affect the entity. SA 330: The Auditors Responses To Assessed Risks Overall Responses 5. The auditor shall design and implement overall A1. Overall responses to address the assessed risks of material responses to address the assessed risks of misstatement at the financial material misstatement at the financial statement statement level may include: level.

Context

68

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 AUDITING
Context Requirement

609

Application Emphasising to the audit team the need to maintain professional skepticism. . SA 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates, And Related Disclosures A40. The review of prior period accounting 9. The auditor shall review the outcome of Risk Assessment estimates may also assist the auditor, accounting estimates included in the prior Procedures and in the current period, in identifying period financial statements, or, where Related Activities circumstances or conditions that applicable, their subsequent re-estimation increase the susceptibility of for the purpose of the current period. The accounting estimates to, or indicate nature and extent of the auditors review the presence of, possible management takes account of the nature of the accounting bias. The auditors professional estimates, and whether the information skepticism assists in identifying such obtained from the review would be relevant circumstances or conditions and in to identifying and assessing risks of material determining the nature, timing and misstatement of accounting estimates made extent of further audit procedures. in the current period financial statements. However, the review is not intended to call into question the judgments made in the prior periods that were based on information available at that time. SA 550: Related Parties Responsibilities of 7. Planning and performing the audit with professional skepticism as required by SA the Auditor 200 is therefore particularly important in this context, given the potential for undisclosed related party relationships and transactions. The requirements in this SA are designed to assist the auditor in identifying and assessing the risks of material misstatement associated with related party relationships and transactions, and in designing audit procedures to respond to the assessed risks. 12. The engagement team discussion that SA 315 A9. Matters that may be addressed in the Understanding and SA 240 require2, shall include specific the Entitys discussion among the engagement Related Party team include: consideration of the susceptibility of the Relationships and The nature and extent of the entitys financial statements to material misstatement Transactions relationships and transactions with due to fraud or error that could result from related parties (using, for example, the entitys related party relationships and the auditors record of identified transactions. related parties updated after each audit). An emphasis on the importance of maintaining an attitude of professional skepticism throughout the audit, regarding the potential for material misstatement associated with related party relationships and transactions.

n
2

SA 315, paragraph 10; and SA 240 (Revised), paragraph 15.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

69

610

TAXATION

Service Tax on Director Services to Companies

The new changes ushered by Finance Act, 2012 are a paradigm shift from the existing system where only services of specified descriptions were subjected to tax. In the new system, effective from 1st July, 2012, all services, except those specified in the negative list, will be subject to taxation. In addition to this, certain services have also been exempted through Mega Exemption Notification No. 25/2012-ST dated 20-06-2012. Due to the transition from positive list to negative list based taxation, many services which were hitherto outside the tax net, have now become taxable. One such service, which was out of tax net earlier but has become taxable now, is services provided by a director of a company to the said company. Read on to know more
1. Introduction The Finance Act, 2012 has ushered in a new system of taxation of services; based on Negative list with effect from 1st July, 2012. A negative list of services implies two things: firstly, a list of services which will not be subject to service tax; secondly, all other services other than mentioned in the negative list, which fall within the definition of the services will become taxable. This can be contrasted from the method of taxation that was applicable till 30th June, 2012 based on a positive list, wherein a detailed description for each taxable service was provided and all other unspecified services were not exigible to tax. Accordingly, with effect from 1st July, 2012, all services rendered in taxable territory except those specified in the negative list, will be subject to taxation in terms of newly inserted charging Section 66B of Chapter V of Finance Act, 1994. As per the Section 66D of said Chapter, seventeen services have been

CA. Mohammad Salim

(The author is a member of the Institute. He can be reached at [email protected])

70

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 TAXATION
included in negative list and thus exempt from service tax. In addition to this, certain services have always been exempted through Mega Exemption Notification No. 25/2012-ST dated 20-06-2012. Due to the transition from positive list to negative list based taxation, many services which were hitherto outside the tax net, have now become taxable. One such service, which was out of tax net earlier but has become taxable now, is services provided by a director of a company to the said company. As we know, Directors are appointed by the shareholders for managing the day-to-day activities of the company, as it can function only through some human agency and it is impracticable for all the shareholders of a company, especially in case of a big public company to manage its affairs. The Directors are collectively known as the Board of Directors and they provide key services to the company in the course of its management. 2. Position of Taxability of Director Services up to 30th June, 2012 During this period, the taxation was based on a positive list, wherein detailed description for each taxable service was provided and all other unspecified services were not chargeable to tax. Director Services were not specifically covered/ included in any of the definition of the taxable service as defined in erstwhile Section 65(105) of the Finance Act, 1994. Central Board of Excise and Customs also vide Circular No. 115/09/2009 ST dated 31st July, 2009 had examined the applicability of service tax:i) Under Business Auxiliary service on payments to Managing Director/Directors (whole time, or Independent) by the company, and ii) On Independent Directors who are part of the Board of Directors under Management Consultant service.

611

And it was clarified that remunerations paid to Managing Director/Directors of companies whether whole-time or independent when being compensated for their performance as Managing Director/Directors would not be liable to service tax. However, in case such directors provide any advice or consultancy to the company, for which they are being compensated separately, such service would become chargeable to service tax. Accordingly, in view of the above circular, the services provided by the Managing Director/Directors in the capacity of Director were not eligible to service tax, up to 30th June, 2012. 3. Position of Taxability of Director Services from 1st July, 2012 Onwards As stated earlier, with the advent of negative list regime from 1st July, 2012, the director services have become taxable. But, here it is important to understand the following issues:a) Whether all director services are taxable. If not, then, which director services are taxable. b) Which payments or consideration to directors are taxable. c) Which person is liable to pay tax - Implications on Directors/Companies. Now let us discuss each of above issues in detail: 3 a) Which Director Services are Taxable: As per Section 66B of the Act, there shall be tax levied on the value of service other than those specified in the negative list provided or agreed to be provided in a taxable territory by one person to another. Earlier, there was no definition of service. Now, service has been defined in Section 65 B(44) of the Act, which is being inter alia reproduced as under:"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include (a) .. (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) .. As the services of director is an activity carried out by one person (director) for another (company) generally for consideration (remuneration) and as no exclusions regarding services of directors exist in the negative list mandated in Section 66D, and as well as in the mega exemption notification no 25/2012-ST

As the services of director is an activity carried out by one person (director) for another (company) generally for consideration (remuneration) and as no exclusions regarding services of directors exist in the negative list mandated in Section 66D, and as well as in the mega exemption notification no 25/2012-ST dated 20-06-2012, the director services to companies are now taxable, except in some cases.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

71

612

TAXATION

dated 20-06-2012, the director services to companies are now taxable, except in the following cases: a) Services provided by a Director who is an employee to the company (employer) in the course of or in relation to his employment. b) Director Services provided in a non taxable territory. c) Director Services provided without consideration. Now let us discuss each of the above exceptions: Exception 1:- Services provided by a Director as an employee in the course of or in relation to his employment: For understanding whether directors can be considered as employees of the company, let us briefly discuss the definitions/types of Directors as per Companies Act and SEBI regulations. Section 2(13) of the Companies Act, 1956 defines a Director as including any person occupying the position of a Director, by whatever name called. The Companies Act refers to the following two specific categories of Directors: Managing Directors; and Whole-time Directors. Further, the Securities Contracts (Regulation Act, 1956, read with the rules and regulations made thereunder, requires every company desirous of listing its shares on a recognised Indian stock exchange, to execute a listing agreement with such Indian stock exchange. The Listing Agreement as prescribed by SEBI, provides for the following categories of Directors: 1. Executive Director; 2. Non-executive Director; and 3. Independent Director. An Executive Director can be either a Whole-time Director of the company or a Managing Director. In contrast, a non-executive Director is a Director who is neither a Whole-time Director nor a Managing Director. Independent Director is also a non executive director, but certain conditions are required to be met e.g. he should not hold more than 2% of the block of voting shares. Nominee directors appointed by institution that he has invested in, or lent money to the company, are also treated as Independent Directors. As per Section 2 (26), a managing director, means a director who is entrusted with substantial powers of management which would not otherwise be exercisable by him. The powers so conferred are alterable by the company. He is also removable the same way as he was appointed irrespective of the fact that his appointment has been approved by the Central Government. But if

The payment of salary, allowances, PF contribution, perquisites, etc. to Managing Director and WholeTime Directors being employees of the company in the course of or in relation to his employment; would not constitute a taxable service. However, any services provided outside the ambit of employment like advice or consultancy to the company outside the scope of employment for consideration would constitute a service, which was taxable prior to 1st July, 2012 also.

he is prematurely removed from office, he is entitled to compensation. It has been held in case of News Papers Proprietary Syndicate Ltd,Re, [1990]2Ch349 that a managing director is an employee of the company, but not to the extent so as to be entitled to preferential payments. The Supreme Court observed that a Managing Director can be regarded as a principal employer for the purposes of the ESI Act, 1948. Employees State Insurance Corpn. Vs. Appex Engineering P. Ltd., (1998) 1 Comp LJ 10: [19981 1 LLJ 274 (SC). As per explanation given in Section 269 of the Companies Act, Whole Time Director includes a director in the whole time employment of the company. Further, a managing director or whole time director cannot resign merely by giving a notice, as formal acceptance of the same is essential to make it complete and effective. This is because, they occupy two positions or possess two capacities, viz (i) one, that of director, and (ii) the other, that of a manager or officer of the company in the sense of wholetime employee. The notice or letter of resignation is therefore required to be approved or accepted by the company and the officer concerned has to be relieved of his duties and responsibilities attached to the office which he has resigned from (Achutha Pal Vs. Registrar of Companies (1956) 36 Comp. Cas 598). However, in case of ordinary director, formal acceptance of resignation is not needed. (Abdul Hug Vs. Katpadi Industries Ltd. A.I.R 1960 mad. 483). Accordingly, in view of the above discussion, the managing director and whole time directors would normally be employees of the company. This view is also corroborated from the fact that the remuneration paid to whole time directors and Managing Director are regarded as income from salary and is subjected to TDS under Section 192 of the Income-tax Act, 1961 as amended.

72

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 TAXATION
Accordingly, the payment of salary, allowances, PF contribution, perquisites, etc to Managing Director and Whole Time Directors being employees of the company in the course of or in relation to his employment; would not constitute a taxable service. However, any services provided outside the ambit of employment like advice or consultancy to the company outside the scope of employment for consideration would constitute a service, which was taxable prior to 1st July, 2012 also. Exception 2- Director Services provided in a nontaxable territory: As per Section 66B of the Act, there shall be tax levied on the value of service if provided or agreed to be provided in a taxable territory. The word taxable territory has been defined in Section 65B(52) as territory to which the provisions of Chapter V of Finance Act, 1994 as amended apply, i.e. Service Tax. As per Section 64, this chapter applies to all over India except State of Jammu and Kashmir. The word India has been defined in Section 65B(27) in a very vide manner. It not only includes territorial waters, continental shelf in India, exclusive economic zone, but also includes sea bed underlying the territorial waters and airspace above territorial waters. Taxability arises when the provision of service is made in a taxable territory. Section 66C empowers the Central Government to make rules for determination of place of provision of service. The Place for Provision of Service Rules, 2012 has been notified vide Notification No. 28/2012-ST, dated 20-6-2012. As per Rule 3 of said Rules (general rule) which is applicable for director services, the place of provision of service shall be the location of the recipient of service i.e. the company. Accordingly, if the company is located in non taxable territory like Jammu and Kashmir, then service tax would not be leviable on the services provided by a director which may or may not be from a taxable territory. Exception 3- Director Services provided without consideration: As per Section 65 B(44) of the Act, "Service" means any activity carried out by a person for another for consideration. As per Explanation (a) to Section 67 of the Act, consideration includes any amount that is payable for the taxable services provided or to be provided. Accordingly, if any director is providing services without any consideration, then such service won't

613

constitute a taxable service. This normally occurs in case of nominee directors, where generally the sitting fees is not paid. As discussed above, the director services to companies are taxable except in above three situations. Accordingly, the director services provided by non executive directors/Independent Directors for a consideration to a company located in a taxable territory would normally be eligible to service tax. 3 b) Which payments to directors are taxable? After discussing which director services constitute service, it is important to discuss about the amounts/ consideration on which service tax is to be levied. In this regard, the presentation namely Budget 2012: Changes in Service Tax dated 13-07-2012 of Ministry of Finance inter alia, states that tax is applicable on any monetary or non-monetary considerations like Directors fee, Commission/bonus, Company car/ travel reimbursements etc. Now let us discuss each of the above items, in the light of our earlier discussions:i) Director Fees/Sitting Fees:Section 309(2) of the Companies Act, 1956 contemplates payment to a Director of remuneration by way of a fee for attending meetings of the Board or Committees constituted by the Board. In case of managing director and whole time director, the payment of sitting fee forms part of managerial remuneration and if amounts are payable in accordance to Schedule XIII, no such sitting fee is payable to them. Further Department Letter No. 3/1/90 CL-V, dated 18-07-1990 makes it very clear that sitting fee may be paid only to a director who is not a whole time director or a managing director. i.e. sitting fees may be paid to a nonexecutive director or Independent Director only. As director fee/sitting fees is generally paid to non executive director, independent director who are not an employee of the company, such fee shall be taxable and such fee shall be liable to service tax. ii) Commission/bonus Any Commission/bonus accrued by company to the director shall be subjected to tax. However, it is important here to note that any commission/Bonus which has accrued to the managing director or whole time director as a result of services provided in the course of employment would not be subjected to service tax.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

73

614

TAXATION

As regards where non-executive directors are concerned, some companies pay them the commission up to a limit as % of net profits subject to compliance with the provisions of the Companies Act, 1956. In the light of earlier discussions, the same would also be subject to service tax. However, as payment of bonus is regulated by Payment of Bonus Act, 1965 which mandates for payment of Bonus only to employees and as nonexecutive directors are not employees, they are not generally paid bonus. However if paid, same shall be taxable. iii) Company car/travel reimbursements, etc. The relevant Rule here is Rule 5(1) of the Service Tax (Determination of value) Rules, 2006 which states that where any expenditure or costs are incurred by the service provider in the course of providing the taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. As service tax is applicable on reimbursements of expenses incurred for rendering a taxable service, accordingly the reimbursements, if any, would also be taxable. However, any reimbursement relating to rendering of service as employee by managing director/whole time director would be exempt. Accordingly, if any reimbursements of expenses have been made towards travel expenses, taxi charges, boarding, lodging in relation to attending of the board/audit committee meeting to the nonexecutive directors/independent directors, the same would be included as consideration for payment of service tax. However, it is important to note here that in the event the expenditure/costs are incurred by such director as pure agent i.e all conditions given in Rule 5(2) of Service Tax (Determination of value) Rules, 2006 have been fulfilled, then such expenditures would be excluded from the value of taxable service. Further, if the travel, boarding, lodging arrangements for directors are made directly by company and payment is also directly made by company to the Hotel, travel agency etc, then service tax may not be taxable as expenditure or costs are not incurred by the service provider in such case and no reimbursements are involved.

From 7th August, 2012 as the taxable director services have been covered under reverse charge, the Directors would not be liable for claim/deposit of service tax and other requirements of the service tax law even when a director receives payment in his personal capacity. Even the entities receiving fee in respect of directors nominated by them are not required to pay service tax on the same.

Apart from the above items which are stated in the presentation of the Ministry of Finance, service tax can be levied on the following items also:iv) Services provided by executive director beyond employment: If any services are provided by managing director or whole time director which are outside the ambit of employment like advice or consultancy to the company for consideration, the same would constitute a service. Such services would be taxable in case of non executive directors as well. v) Non monetary considerations: The term consideration includes not only the monetary considerations (i.e. received in money) but also to non monetary considerations as well. Accordingly, if the non- executive directors are compensated by any non-monetary consideration like supply of goods or services in return of provision of service etc , the value of the same needs to be determined as per Section 67 of the Act and Service Tax (Determination of Value) Rules, 2006 and tax on the same is to be levied. 3 c) Which person is liable to pay tax Implications on Directors/Companies: Recently, two notifications have been issued on 7th August, 2012 which have brought the taxable director services under reverse charge mechanism i.e. the service recipient (company) has been made as the person liable to pay service tax to the Government. Reverse charge is encapsulated under Rule 2(1) (d) of the Service Tax Rules, 1994 read with Section 68(2) of the Finance Act, 1994. The summary of both the notifications is given below:Notification No. 45/2012 - Service Tax dated 7th August, 2012 Vide this notification, an amendment has been made

74

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 TAXATION
in the notification No.30/2012-Service Tax, dated the 20th June, 2012 by including the services provided or agreed to be provided by a director of a company to the said company, as a service taxable under reverse charge mechanism. Further, the extent of service tax payable on the same by the service provider and the service recipient has also been stipulated as under:S. Description of service % of % of No service tax service tax payable payable by by person the person providing receiving service the service 5A in respect of services Nil 100% provided or agreed to be provided by a director of a company to the said company Notification No. 46/2012 - Service Tax dated 7th August, 2012 Vide this notification, the Rule 2(1) (d) of the Service Tax Rules, 1994, which defines person liable for paying service tax has been amended by inserting a new item (EE) after item E as under:(EE) in relation to service provided or agreed to be provided by a director of a company to the said company, the recipient of such service; As a consequence of the above notifications, the burden of the payment of taxes in case of director services has been shifted from the service provider (Director) to the service recipient (Company). Further, the entire service tax is payable by such company. Although no mention of date of applicability is there in the Notification No. 45/2012 Service Tax, but as per Notification No. 46/2012- Service Tax, it has been mentioned that the amendment shall come into force on the date of publication in the official gazette i.e. 7th August, 2012. Accordingly, though the director services have been brought into service tax net from the date of applicability of negative list regime i.e. 1st July, 2012, but the same has been included under reverse charge from 7th August, 2012. Accordingly, in respect of director services provided from 1st July to 6th August, 2012 the service provider i.e. Director would be liable to pay tax. However from 7th August, 2012 onwards the service recipient i.e. the company will be liable to pay tax. While bifurcating the service in said periods the Point of Taxation Rules, 2011 need to be considered for determining the point at which the taxable service

615

shall be deemed to be provided under Rule 6(1) of the Service Tax Rules. The Point of Taxation Rules, 2011 state that the point of taxation shall be earlier of the following:a) The time when the invoice for the service provided or agreed to be provided is issued (Provided that where the invoice is not issued within time period specified in Rule 4A of Service Tax Rules, 1994 i.e. 30 days from date of completion of such taxable service, the point of taxation shall be the date of completion of provision of the service.) or: b) the time when the payment/advance by whatever name called is received to extent of such payment. In respect of director services, normally the date of audit committee meeting or Board meeting would be the date of completion of taxable service. Accordingly, if invoice is issued by Director for consideration of director services within 30 days of date of said meeting the invoice date or the date of payment whichever is earlier would be the point of taxation. However, if the invoice is not raised within the said period, then the date of meeting or the date of payment of consideration whichever is earlier, would be regarded as point when the service would be deemed to be provided. The position regarding liability of payment of service tax on Directors and Companies has been discussed in detail below. i) Taxability of director services deemed to be provided during the period 1st July to 6th August, 2012. a) Liability of Directors During this period, as the taxable director services were not covered under reverse charge, accordingly, the Directors would be liable to claim the amount of service tax from the company apart from fee etc and deposit the same by due dates and also comply with all the other requirements of the service tax law. The above position has been corroborated by draft circular F.No. 354/127/2012-TRU dated 27th July 2012, which states that when a director receives payment in his personal capacity, the same is liable to be taxed in the hands of the Director. It is important to note here that the service tax would be exigible only if the gross taxable service income of the Directors during the financial year exceeds R10 lakh. Accordingly, if the said income of the Directors does not exceed this limit, which would normally be the case, then no service tax would be applicable.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

75

616

TAXATION
receiving the director services is located in nontaxable territory like State of Jammu & Kashmir, then no payment of service tax is to be made by such company. Company liable to pay tax is required to comply with all the necessary compliances, such as obtaining service tax registration, payment of service tax, filing of tax return as applicable under the service tax law. The service tax amount so incurred by companies under reverse charge would be extra cost of the companies. However, non-trading companies can take cenvat credit on the same as per cenvat Credit Rules, if it qualifies as eligible input service. Further, vide General Circular no. 24/2012, dated 9-8-2012 of Ministry of Corporate Affairs, Government of India, it has now been stated that any increase in remuneration of Non-Whole Time Director(s) of a company solely on account of payment of service tax on commission payable to them by the company, shall not require approval of Central Government under Sections 309 and 310 of the Companies Act even if it exceeds the limit of 1% or 3% of the profit [under Sections 309(4)] of the company, as the case may be, in the financial year 2012-13. ii) Taxability of director services deemed to be provided from 7th August, 2012 onwards. a) Implication on Directors From 7th August, 2012 as the taxable director services have been covered under reverse charge, the Directors would not be liable for claim/deposit of service tax and other requirements of the service tax law, even when a director receives payment in his personal capacity. Even the entities receiving fee in respect of directors nominated by them are not required to pay service tax on the same. b) Implication on Company The company other than those located in a nontaxable territory, would be required to pay service tax under reverse charge basis in respect of taxable services obtained from the directors for a consideration, irrespective of fact whether they are located within or outside the taxable territory or are nominee directors of Government/other entities. Further as discussed earlier, the threshold limit of R10 lakh is not applicable in reverse charge mechanism. In other words, even if the payment is R1, company is required to pay service tax on the same.

However in the following cases, service tax would not be paid by Directors:As per draft circular draft circular dated 27th July, 2012, A director may also be appointed to represent an entity (including government) who has either invested in the company or is otherwise authorised to nominate a director. Where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be supplied by such an entity and not by the individual director. Accordingly, in such cases, the service tax would be paid not by director but by such entity, which had appointed the Director. However, in the case of Government nominee directors where fee is charged by the Government appointing the director and is paid to Government, the services shall be deemed to be provided by the Government and liable to be taxed under the exclusion sub- (iv) of clause (a) of Section 66D of the Finance Act, 1994 i.e. support services by Government to business. Such services are liable to be taxed on reverse charge basis from 1st July, 2012 and therefore, tax is to paid by the service recipient i.e. Company. Further, if the directors are located in a non-taxable territory i.e. State of Jammu & Kashmir or outside India, then service tax is not payable by such director. However, if in this case the company is located in a taxable territory, the transaction would be covered under reverse charge from 1st July, 2012 and tax would be paid by the company. Also, in cases where the company receiving the director services is located in non taxable territory, then such service wont constitute taxable service and thus the tax is neither payable by director nor the company. b) Implication on Company receiving the service: No service tax to be paid in respect of consideration to Directors located in taxable territory. However, in case of any payment towards taxable service to a Director, located outside India or in State of Jammu and Kashmir or in case of payment to Government against consideration of Government nominee director, the company is required to pay the full amount of service tax under reverse charge basis as per Section 2(1)(d) of the Service tax Rules, 1994 read with notification No 30/2012- Service Tax Dated 20th June, 2012. Further in this case, the threshold limit of R10 lakhs will not be applicable. However if in the above cases, the company

76

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 TAXATION
As discussed earlier, the Company is required to comply with all the necessary compliances, such as obtaining service tax registration, payment of service tax, filing of tax return as applicable under the service tax law. The service tax amount so incurred by companies under reverse charge would be extra cost of the companies, however, non-trading companies can take Cenvat credit on the same as per Cenvat Credit Rules, if it qualifies as eligible input service. Further, as stated earlier vide General Circular no. 24/2012, dated 9-8-2012, it has now been stated that any increase in remuneration of Non-Whole Time Director(s) of a company solely on account of payment of service tax on commission, shall not require approval of Central Government under Sections 309 and 310 of the Companies Act, even if it exceeds the prescribed limits, in the financial year 2012-13. For ready reference, the persons liable to pay tax on the director services in various situations, is summarised in the table given below: TAX TO BE PAID BY Particulars Services Services provided provided during 1st July from 7th th to 6 August, August, 2012. 2012 onwards. Director located Director Company in a taxable (under territory receives reverse consideration for charge) taxable service in his personal capacity from a Co. located in a taxable territory. Entity (other than Such Entity Company Govt.) receives the (under consideration of fee reverse against nominee charge) director from a company located in a taxable territory. Govt. receives the Company Company consideration of (under reverse (under fee against Govt. charge) reverse nominee director charge) from a company located in a taxable territory. Directors located in a non taxable territory providing taxable service to a Co. located in a taxable territory for consideration. Company receiving the service for consideration located in non taxable territory. Company (under reverse charge)

617

Company (under reverse charge)

No tax

No tax

Conclusion The scope of service tax under the new regime of negative list has been enlarged with effect from 1st July, 2012, as many services which were hitherto outside the tax net, like services provided by a director of a company to the said company, have become taxable. However, the positive take away here is that the director remuneration to executive directors i.e. managing director, whole time directors (being employees) which is the major component of consideration for director services, is still not eligible to service tax as provision of service by an employee to an employer in the course of or in relation to his employment has specifically been excluded from the definition of service under Section 65B (44). Accordingly, service tax would generally be applicable only in respect of payments to non-executive directors like Director/sitting fees, commission, certain reimbursements etc. and that too, if such services are provided to a company located in a taxable territory. Further, the director services have specifically been covered under reverse charge mechanism from 7th August, 2012. Accordingly, the payment of service tax in case of taxable director services deemed to be provided on or after 7th August, 2012 is to be made by the company receiving such services. However, the service tax in respect of director services deemed to be provided from 1st July to 6th August, 2012 is normally required to be made by the director concerned, except in certain cases where the same would be paid by the company under reverse charge or the entity appointing nominee director and receiving some fee towards director services. While determining the point of time when the relevant service period is deemed to be provided, the principles enunciated under the Point of Taxation Rules, 2011 need to be applied.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

77

618

TAXATION

Tax Planning under MAT

MAT (minimum alternate tax) was introduced to ensure that companies that did not contribute to the Government by way of corporate tax by taking advantage of various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of their book profits as MAT. Provisions of the MAT were introduced for such companies, popularly known as ZeroTax Companies, since they did not pay any tax because income computed as per provisions of the Act was either insignificant, nil or negative, despite showing book profits and declaring substantial dividends to their shareholders. Author presents some suggestions on how to manage taxation under MAT provisions. Read on

CA. Baljit Singh

(The author is a member of the Institute. He may be contacted at baljit.singh.ca.cs@gmail. com.)

MAT Provisions were introduced to reduce the differences between the income tax computed on the basis of the IT provisions and the projected tax on profits declared by the companies. In many cases, depreciation rate difference is the main reason of the attraction of MAT. Depreciation rates as per income tax act are more than the depreciation rates in the Companies Act. There are some tax-planning tips under MAT:

78

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 TAXATION
01. Depreciation Policy The Companies Act provides two alternatives of depreciation, i.e. SLM (straight line method) and WDV (written down value); while opting for the method of depreciation, project the depreciation of the next 10 years also under both the methods, and choose the best beneficial method. Best methodology: WDV method will reduce the tax computed under MAT in case of new projects, as the WDV rates are higher than the SLM rates. Illustration 1 Particulars Depreciation Policy Profit before Depreciation Cost of Machinery (new) Depreciation rate Depreciation Book Profit MAT @ 19.055% Depreciation as per Income tax act Additional Depreciation Profit as per income tax provisons Tax under normal provision Tax payable

619

Precautions: a. Consider the labour laws also before taking any decision. Best methodology: Do file the returns well before the payment of the bonus so that the excessive tax is adjusted against the MAT. Illustration 2 Particulars Case-1 Case-2 Difference MAT Credit 94,000 94,000 available (last year) Profit as per 15,00,000 15,00,000 income tax act Add back 50,000 50,000 payments under 43B made /not made Profit taxable 14,50,000 15,00,000 (50,000) under income tax 20,00,000 20,00,000 Book Profit under MAT Tax payable 4,48,050 4,63,500 (15,450) under normal provisions MAT Tax 3,81,100 3,81,100 @19.055% Tax payable 4,48,050 4,63,500 (15,450) under normal provisions Adjustment of 66,950 82,400 (15,450) MAT MAT credit lost 27,050 11,600 Case-1 : payment made under 43B made before filing of return Case-2 : payment made after filing of return. 03. Policy Taken for Defined Benefit Plan If we underpay any MAT that is not recoverable in the coming years, we can avoid taking the contribution plans of the gratuity, leave with wages. Payments made under the contribution plans are deductible under the normal provisions of the Act, but the MAT will remain the same. Difference of the same will be forfeited after 10 years. However, the payment of the gratuity made after the 10 years will also be eligible for deduction under normal provision of the Act.

Case-1 WDV

Case-2 Difference SLM 0

15,00,000 15,00,000 25,00,000 25,00,000 13.91% 4.75%

3,47,750 1,18,750 2,29,000 11,52,250 13,81,250 (2,29,000) 2,19,561 2,63,197 (43,636) 6,25,000 5,00,000 3,75,000 1,15,875 2,19,561 6,25,000 5,00,000 3,75,000 1,15,875 2,63,197 (43,636)

02. Payments Made under Section 43B If the MAT is going to expire and if we delay the payment under Section 43B that are required to be made for deduction before filing a return, the income tax payable under normal provision will be increased; but the same will be adjusted with MAT which is actually going to expire. The payment made after filing of the return will be deducted in the next assessment year also. However, the MAT provision if applicable in the next will have additional 10 years to set off.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

79

620

TAXATION

Precautions: a. Consider the other benefits and labour laws also into consideration. 04. MAT Consideration in Buy Vs. Lease Decision If we take any buy Vs. lease decision, it is advisable not to consider the full depreciation available for the income tax purposes provided the MAT is not recoverable in the future period, as most of the depreciation provided in the Act will be substituted by the MAT by invoking the provision of the MAT. 05. Partnership Firms as Subsidiary If a company is running multiple plants and each plant has distinct assets, we can compute the plantwise normal income tax and MAT. We can identify the plant having the high difference of MAT over normal income tax which is ultimately increasing the MAT of the entire company. It is advisable to convert/ transfer the plant into subsidiary as a partnership firm, as a partnership firm does not attract the provisions of MAT. Ultimately, total taxes payable will decrease. Precautions: a. Consider the provisions of the Section 14A of the Act. b. While analysing, do consider and estimate the future periods. It may be possible that a plant that pays a high MAT also recovers the high amount of MAT after few years. c. Also consider the future expansion into consideration.

If we underpay any MAT that is not recoverable in the coming years, we can avoid taking the contribution plans of the gratuity, leave with wages. Payments made under the contribution plans are deductible under the normal provisions of the Act, but the MAT will remain the same. Difference of the same will be forfeited after 10 years.

companies. If two companies have different scenarios under MAT, i.e. one company has projected the excess of MAT over normal income tax and another has projected the normal income tax over MAT, recompute the income tax after the projected merger of the two companies. If total tax computed is reduced, it is advisable to do the merger to reduce the MAT for the coming years. Precaution: a. Consider the other benefit, income tax and other commercial benefits, which may be lost due to merger. b. Also consider the cost of merger. c. Predict the future expansion and profits.

06. Foreign Branches If a company has a foreign branch having separate Best methodology: It is beneficial to the undertaking operations which are in profit and if MAT is applicable covered under tax holiday plans. to that, the company can convert that foreign branch into the company in that country as subsidiary. The Illustration 3 foreign subsidiary does not attract Particulars Plant 1 Plant 2 TOTAL Merged Difference the provisions of MAT. Book Profit 10,00,000 15,00,000 25,00,000 25,00,000 Precaution: Profit as per 5,00,000 20,00,000 25,00,000 25,00,000 a. Also consider the provision of income tax tax laws and corporate laws of Act foreign country. MAT 1,90,550 2,85,825 4,76,375 4,76,375 b. Also consider the regulation of @19.055% RBI. Tax as per 1,54,500 6,18,000 7,72,500 7,72,500 Income tax 07. Merger of Companies Act Synergy benefit can also be gained Tax 1,90,550 6,18,000 8,08,550 7,72,500 36,050 by adjusting the MAT of the two Payable
80 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

628

INTERNATIONAL TAXATION

The Wait is finally Over Advance Pricing Agreements

The widely anticipated and eagerly awaited rules for the implementation of the Advance Pricing Agreements (APAs) were notified by the Indian Revenue Authorities on 31st August, 2012. introduction of provisions relating to APAs with effect from 1st July, 2012 in the Incometax Act, 1961 (Act) vide the Finance Act 2012 would be like a beacon of hope to many Multinational Corporations as well as Indian taxpayers having intra-group transactions and facing transfer pricing litigations. The prospect of having a certainty with regard to their transfer prices and reduction of future litigation, no doubt would have been a reassuring thought to many finance officers of the companies entangled in transfer pricing litigation. However, the Finance Act 2012 only provided the genesis for APAs into the Indian tax laws without actually providing the rules for its implementation. This article takes you through the provisions and rules for the implementation of APAs.
The wait is finally over No, we are not referring to the latest IPhone 5 launched by Apple. Yes, lifting the curtains on the IPhone 5 this September certainly would have adduced this reaction from the millions of IPhone users and technocrats across the globe. But a similar reaction would not be out of place for the widely anticipated and eagerly awaited rules for the implementation of the Advance Pricing Agreements (APAs) which were notified by the Indian Revenue Authorities on 31st August 2012. The increased focus and the aggressive posturing of the Revenue authorities on the transfer pricing of international transactions between associated enterprises have resulted in transfer pricing adjustments in case of multitude of taxpayers. This has resulted in rounds of litigations at various levels and an uncertainty for the taxpayers with regard to the transfer price for their intra-group transactions.
w w w. i c a i . o r g

(Contributed by the Committee on International Taxation of the ICAI. Comments can be sent to citax@ icai.org)

88

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 INTERNATIONAL TAXATION
Given the same, introduction of provisions relating to APAs with effect from 1st July 2012 in the Incometax Act, 1961 (Act) vide the Finance Act 2012 would be like a beacon of hope to many Multinational Corporations as well as Indian taxpayers having intra-group transactions and facing transfer pricing litigations. The prospect of having a certainty with regard to their transfer prices and reduction of future litigation, no doubt would have been a reassuring thought to many finance officers of the companies entangled in transfer pricing litigation. However, the Finance Act 2012 only provided the genesis for APAs into the Indian tax laws without actually providing the rules for its implementation. The APA rules were finally notified by the Indian Revenue Authorities on 31st August 2012. 1. What is an APA? An APA is an arrangement between the taxpayer and the Revenue Authorities in relation to future intragroup transactions with a view to agree upfront on the transfer pricing approach. An APA generally covers an appropriate set of criteria relating to the method, comparables and appropriate adjustments thereto, critical assumptions as to future events etc. to arrive at a transfer price or a pricing methodology for intragroup transactions which would be acceptable for both the taxpayer and the Revenue Authorities. APAs are generally of two types: 1. Unilateral APA It is an agreement between the taxpayer and the Revenue Authorities of the country where such taxpayer is assessed to tax 2. Bilateral/Multilateral APA It is an agreement between the taxpayer and the Revenue Authorities

629

of the country where such taxpayer is assessed to tax and Revenue Authorities of one or more foreign countries where the taxpayer may be having intragroup transactions 2. APA in Indian Scenario Section 92CC and 92CD of the Act contains the provisions relating to APAs. As per the same, any person who has undertaken an international transaction or is contemplating to undertake an international transaction is eligible to enter into an APA. The salient features of the Indian APA provisions are as under: 1. The arms length transfer price (ALP) under the APA would be determined using any of the already prescribed method or any other method, with necessary adjustments or variations. Thus, the provisions retain flexibility to determine the ALP using a method which may recognise the commercially rational of the transaction 2. The ALP determined as per the APA mechanism will be considered to be the transfer price of the international transaction subject of such APA 3. The APA is binding both on the taxpayer and Revenue authorities for the international transaction for which the same is entered into as long as there are no changes in the law or facts which formed the basis for the APA 4. The APA would be valid for a period specified in the APA subject to a maximum period of 5 years 5. The APA can be entered into only for future or proposed international transaction or in case of continuing transaction for the previous years occurring after the application is filed and not for the transactions already completed i.e. the APA mechanism do not contain provisions for roll back The provisions relating to giving effect of the APA in the tax return and completing the assessment are contained under Section 92CD of the Act. The same are summarised below: a) Taxpayers entering into an APA are mandatorily required to furnish a modified return for the years to which the APA applies within three months from the end of the month in which the APA comes into effect. b) Modified return to reflect only the modifications relevant to the issues arising under the APA. c) In case of any pending assessment/reassessment proceedings at the time of filing the modified return, the same are to be finalised based on the Modified return and the normal period of limitation for
THE CHARTERED ACCOUNTANT oc tobe r 2012 89

The provisions relating to giving effect of the APA in the tax return and completing the assessment are contained under Section 92CD of the Act, which include that taxpayers entering into an APA are mandatorily required to furnish a modified return for the years to which the APA applies within three months from the end of the month in which the APA comes into effect. Modified return will reflect only the modifications relevant to the issues arising under the APA. The Government has now notified the rules, Rule 10F to 10T and Rule 44GA under the Income-tax Rules, 1962 (Rules) for implementation of these provisions.

w ww.ica i.org

630

INTERNATIONAL TAXATION
desires so, may file the pre-filing consultation on an anonymous basis. Form 3CEC specified for filing a pre-filing consultation is quite a comprehensive form requiring the applicant taxpayer to furnish such details as details of the taxpayers business and its business model, group structure, list of associated enterprises with which the transaction is proposed to be entered, functional and risk profile of the taxpayer and its associated enterprise, details of proposed transaction etc. Based on the details filed, the pre-filing consultation shall broadly cover the following: (a) Determine the scope of the agreement; (b) Identify the transfer pricing issues; (c) Determine the suitability of international transaction for APA; (d) Discuss the broad terms of the APA. The pre-finding consultation does not bind the taxpayer neither the Revenue authority to enter into an APA nor means that the taxpayer has applied for entering into an APA. Thus, based on the prefiling consultation if taxpayer believes that the said international transaction is not fit for an APA, the taxpayer may not file an APA application and pursue the matter further. 3.2. Filing the APA application Any person who has completed the pre-filing consultation may then file for an APA in the Form 3CED along with payment of the requisite fees. The filing fees have been linked to the quantum of transaction involved. The schedule of fees specified is specified in the following table: Amount of international transaction Fees (R) subject to APA 10 lakh Amount not exceeding R100 crore Amount exceeding R100 crore but not 15 lakh exceeding R200 crore 20 lakh Amount exceeding R200 crore The application for APA is to be filed with the DGIT (International Taxation) in case of a unilateral APA and to the competent authority of India in case of a bilateral or a multilateral agreement. The application is required to be filed 1) before undertaking the transaction, or 2) in case of transactions of continuing nature which are already in place, before the first day of the financial year for which the application is to be made. For e.g. If an APA is sought

A taxpayer which has filed an application for APA is entitled to withdraw the application at any time prior to the finalisation of the APA by filing an application in Form 3CEE. However, in case of a withdrawal of application suo moto by the taxpayer applicant, the fees paid would not be refunded. An application for APA filed by the taxpayer may also be rejected by the APA authority if any defect is noticed in the application Form 3CED or if the application is not in accordance with the understanding reached in prefiling consultation.

completion of the proceedings would be extended by one year. d) In case the assessment/reassessment proceedings have been completed at the time of filing the modified return, total income would need to be assessed/reassessed based on the modified tax return within one year from the end of the financial year in which the modified return is filed e) Any taxpayer aggrieved by the order of the assessment order passed in consonance of the modified return, can file an appeal with the Commissioner of Income-tax (Appeals). The Government has now notified the rules, Rule 10F to 10T and Rule 44GA under the Income-tax Rules, 1962 (Rules) for implementation of these provisions. Rule 10F to 10T specify the procedures for filing APA applications, forms in which the application needs to filed, information and data to be submitted along with the application, circumstances under which an application may be rejected/withdrawn or discontinued and the compliance procedures post the conclusion of the APA. Rule 44GA specifies the procedure to be followed in case of a bilateral or multilateral APA. 3. Implementation of APA 3.1. Pre-filing consultation As per the APA rules, every person who wishes to obtain an APA is required to mandatorily undertake a pre-filing consultation before filing a formal application for an APA. An application for pre-filing consultation is required to be made in the specified form (Form 3CEC) to the Director General of Income-tax (International Taxation). The rules provide that the Applicant, if he

90

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INTERNATIONAL TAXATION
for a proposed transaction, then the application can be filed anytime before entering into the said transaction. Alternatively, if an APA is to be filed for an already ongoing transaction, then an application for assessment year relevant to FY 2013-14 is required to be filed on or before 31st March 2013. Form 3CED too, like the Form 3CEC for pre-filing consultation, requires various details which can be broadly categorised as under: a) Details of international transactions proposed to be covered under the APA b) Functional analysis of the applicant taxpayer and the relevant entities with regard to the international transaction covering a description of the business strategies (both current and future) relating to R&D, production and marketing, budget statements, projections and business plans for future period covered by the APA, general business and industrial trends c) Choice of transfer pricing method d) Proposed terms and conditions and critical assumptions for the APA As can be seen, the details called for in the APA application form are quite comprehensive. 3.3. Withdrawal/rejection of the application A taxpayer which has filed an application for APA is entitled to withdraw the application at any time prior to the finalisation of the APA by filing an application in Form 3CEE. However, in case of a withdrawal of application sou moto by the taxpayer applicant, the fees paid would not be refunded. An application for APA filed by the taxpayer may also be rejected by the APA authority if any defect is noticed in the application Form 3CED or if the application is not in accordance with the understanding reached in pre-filing consultation. In case any deficiency is noticed by the APA authority DGIT (International taxation) in case of unilateral APA or the Competent Authority in case of Bilateral or Multilateral APA, the APA authority shall first serve a deficiency letter on the applicant within one month from the date of receipt of the application. The applicant shall remove the deficiency or modify the application within 15 days of receipt of the deficiency letter or within a maximum extended period of another 15 days. In case the defect is still not rectified, the application may be rejected after giving an opportunity of being heard to the applicant. In case the application

631

is rejected, the fees paid by the applicant would be refunded. 3.4. Processing of application If the application filed by the Applicant is found to be complete in all aspects, the APA authority may allow the application to be taken up for processing in consultation and discussion with the applicant in accordance with the provisions of Rule 10L. Broadly the APA application will be processed as under: a) Hold meetings with the applicant; b) Call for additional document or information or material from the applicant; c) Visit the business premises of the applicant; or d) Make such inquiries as it deems fit in the circumstances of the case. On completion of the above process, the APA authority i.e. the DGIT (International Taxation) or the Competent Authority along with the applicant shall prepare a proposed mutually agreed draft APA containing the results of the process carried out for determining the arms length price under the APA. The APA shall be entered into by the APA authority only after seeking the approval from the Central Government. An application for APA may be amended by the applicant any time before the finalisation of the terms by the APA authority. Such an amendment may only be permitted if the amendment does not have effect of altering the nature of the original application. Further, such amendment would only be allowed if it is accompanied by an additional fee, if any. 3.5. Procedure for dealing with Bilateral or Multilateral APA applications Rule 44GA of the Rules deal with the provisions relating to an application filed for bilateral or a multilateral APA. A bilateral or a multilateral APA application, like the unilateral application, too has to be filed in the normal Form 3CED. A bilateral or a multilateral APA application shall not be processed unless the associated enterprise situated outside India has initiated the process of APA with the Competent Authority in the corresponding country. The Competent Authority in India shall enter into a negotiation with the Competent Authority of the corresponding country and try to reach a set of terms which are acceptable to both the parties. In case the

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

91

632

INTERNATIONAL TAXATION
covered under the APA. For the purpose of carryingout the compliance audit, the TPO may require the taxpayer to a) Substantiate compliance with the terms of the APA, including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method; b) Submit any information, or document to establish that the terms of the APA have been complied with. The TPO is required to complete the compliance audit and furnish the report to the APA authorities within six months from the end of the month in which the annual compliance report is received by the TPO. 3.9. Revision of APA An APA can be revised or cancelled under any of the following circumstances: a) There is a change in the critical assumptions or there is a breach of the conditions subject to which the APA has finalised; b) There is a change in the law that modifies any matter covered by the agreement but it is not of a nature which renders the APA non-binding; or c) There is a request from the Competent Authority of the corresponding country for revision of the APA in case of a bilateral or a multilateral agreement An APA may be revised by the APA authority either suo moto or on a request by the taxpayer. However, where the APA is sought to be revised by the APA authority suo moto, no revision shall be made unless an opportunity of being heard is given to the applicant. In case the applicant is not agreeable to the revision, the APA may be cancelled. In case the APA authority is not agreeable to the revision proposed by the applicant, the authority shall reject such proposed revision by passing a speaking order. 3.10. Cancellation of APA An APA may be cancelled by the Revenue Authorities in the following situations: a) Compliance audit report contains finding of a breach of the terms of the APA by the taxpayer; b) The taxpayer has failed to file the annual compliance report within time; c) The annual compliance report furnished by the taxpayer contains material errors;

Competent Authorities agree to a set of terms for the APA, the Competent Authority in India shall formalise a mutual agreement procedure arrangement with the corresponding Competent Authority and intimate the same to the applicant. In case there is a failure to reach an agreement, the applicant would be notified likewise. It needs to be noted that the Applicant would not be entitled to be the part of the discussion between the Competent Authorities. On being intimated about the APA agreed by the Competent Authorities, the applicant is required to communicate its acceptance or otherwise of the same within 30 days. In case the APA is not acceptable to the applicant, the applicant may choose to enter into a Unilateral APA or withdraw the application. 3.6. A typical APA terms covered An APA may among other things include a) The international transactions covered by the agreement b) The agreed transfer pricing methodology, if any c) Determination of the arms length price, if any d) Definition of any relevant terms to be used in items b and c above e) Critical assumptions f) The conditions, if any, other than provided in the Act or these rules An APA shall not be binding on the Revenue Authorities or the taxpayer if there is a change in any of critical assumptions or breach of any conditions of the APA. An APA may be revised or cancelled, if there is a change in any of the critical assumptions or a breach of the conditions. 3.7. Compliances post APA Annual Compliance report After obtaining an APA, the taxpayer applicant is required to furnish an annual compliance report in the prescribed Form 3CEF with the APA authority for each year covered in the APA. The annual compliance report is required to be filed in quadruplicate within 30 days of the due date of filing of the income-tax return for that year or within 90 days of entering into the APA, whichever is later. 3.8. APA compliance audit The Transfer Pricing Officer (TPO) holding jurisdiction over the taxpayer would carry out a compliance audit of the APA for each of the year

92

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INTERNATIONAL TAXATION
d) Where the revision proposed to the APA by the Revenue Authorities are not agreeable to the taxpayer and hence, the APA is cancelled; or e) Where the APA has been obtained on account of a fraud or misrepresentation of facts. No order for cancellation of the APA shall be passed without giving an opportunity of being heard to the taxpayer. Further, the order for cancellation of APA shall be a speaking order and should contain reasons for non-acceptance of the taxpayers submission. The order for cancellation of the APA is also required to specify the effective date for cancellation of the APA. 3.11. Renewal of APA For renewing the APA, the same procedure as specified for a new APA application needs to be followed except the pre-filing consultation procedure. 4. Benefits & Risks Associated with APA Following are likely to be the benefits of APA a) Likely to provide a certainty of the transfer prices of international transaction. b) Would help in avoiding transfer pricing litigation in respect of the transactions covered by the APA. A Bilateral or a Multilateral APA may be even more effective in mitigating transfer pricing litigation as it binds authorities of both the countries. c) The APA would be agreed by senior Revenue Authorities like the DGIT (International Taxation) or the Competent Authorities of the countries and approved by the Central Government.

633

d) APAs likely to provide solutions to complex and difficult or unique transactions. e) As the authorities have agreed on the transfer price upfront, the risk of double taxation is eliminated or mitigated. However, it necessarily does not mean it is likely to a smooth sailing. Following could be the risks or the pitfalls of an APA: a) The APA is likely to be a time-consuming exercise, especially in the case of a Bilateral or a Multilateral APA as the Competent Authorities of the corresponding countries are also involved. b) An APA may not provide certainty in case of a Unilateral APA or if the APA involves unreliable prediction on market conditions without adequate critical assumptions. c) Taxpayers may be required to divulge more information in an APA application than is normally required for a transfer pricing assessment. d) Considering the nature of the information divulged as well as the fact that the information collected would be shared with the respective transfer pricing authority holding jurisdiction over the taxpayer, the said details could be used against the taxpayer in course of the transfer pricing proceedings. e) The fairly lengthy procedure for obtaining the APA may create a strain on the resources of both, the taxpayer as well as the tax authorities in terms of time and costs. 5. Way forward Across the world, APA regulations have been successfully implemented and have helped to reduce the transfer pricing litigation to a great extent and have provided the taxpayers a certainty with regard to their transfer pricing methodology. Given the said experience, introduction of APA regulations in India augurs well for the taxpayers facing transfer pricing adjustments and provide them with an alternate dispute resolution panel, albeit one which helps in avoiding the dispute. However, the fairly high application fees (up to R20 lakh in some cases) and the past experience of taxpayers with the Dispute Resolution Panel may act as a deterrent for the taxpayers. Given the same, one needs to wait and watch whether the APA achieves its objective. Initial reports suggest that IPhone 5 has certainly lived up to the hype and expectations of the IPhone lovers. It needs to be seen whether the Indian APA regulations was worth the wait.

Rule 44GA of the Rules deal with the provisions relating to an application filed for bilateral or a multilateral APA. A bilateral or a multilateral APA application, like the unilateral application, too has to be filed in the normal Form 3CED. A bilateral or a multilateral APA application shall not be processed unless the associated enterprise situated outside India has initiated the process of APA with the Competent Authority in the corresponding country.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

93

634

INDUSTRY-SPECIFIC

Does the Size of a Company Impact Profitability Transfer Pricing Analysis for IT Sector

The heart of transfer pricing analysis lies in the comparability study undertaken by a taxpayer to establish the arms length nature of the cross border transactions entered into by it with its group companies. Generally, the methodology adopted in the study comprises the use of both quantitative and qualitative criteria that may embed a certain degree of subjectivity, which is often challenged by Revenue Authorities. Since it is not feasible to qualitatively analyse every company for selection of the comparable companies, one has to compulsively apply quantitative filters. One of such filters is the turnover filter, which is the subject matter of this article. A question that arises is whether turnover filter is an appropriate filter for identifying comparable companies under transfer pricing regulations of India. There are conflicting decisions by tax tribunals. The same appears more to be based on common sense and emotions rather than on economic analysis. This article seeks to analyse this issue from legal as well as economic basis in the case of Information Technology sector. The economic analysis shows that size does matter during comparability study. Read on to know more
The underlying logic of the turnover filter is the concept of economies of scale. In simple language, it means that efficiency of production increases as the number of goods produced increases. A company that achieves economies of scale, lowers its average cost per unit through increased production, since its fixed costs are shared over an increased number of goods. Alternatively, this means that as a company grows and its production volume increases, the company will have a better chance to decrease its production costs. Adam Smith identified the division of labor and specialisation as the two key means to achieve a larger return on production. Through these two factors, employees would not only be able to concentrate on
w w w. i c a i . o r g

Chandrima Bhattacharya* & S P Singh**

(*The author is an economist. **The author is Ex-Indian Revenue Service Officer. They can be reached at [email protected])

94

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 INDUSTRY-SPECIFIC
a specific task, but also, with time, improve the skills necessary to perform their jobs. The tasks could then be performed better and faster. There may be other reasons for achieving economies of scale as well. However, this increase has limitations. After a limit due to various factors like increase in costs, the trend changes, whereby a plateau is reached and there may be decrease in profitability. A question that arises is whether turnover filter is an appropriate filter for identifying comparable companies under transfer pricing regulations of India. There are conflicting decisions by tax tribunals. The same appear more to be based on common sense and emotions rather than on economic analysis. This article seeks to analyse this issue from legal as well as economic basis in the case of the Information Technology sector. The economic analysis shows that size does matter during a comparability study. Comparability Criteria under Indian TP Regulations Rule 10B (3) identifies the conditions under which uncontrolled transactions shall be comparable to the international transaction under question. 1This provides that, if there are differences between two enterprises which can have material effect on the price or cost in relation to the transaction under examination then those two enterprises cannot be said to be good comparables. There is no guidance issued in respect of treatment of differences on account of size of the enterprises, hence one has to look at the international experience, decisions in India by various appellate authorities and the empirical evidences. OECD and the Turnover Filter There is no gainsaying that comparability is one of the most important factors in a transfer pricing study. The OECD defines comparability analysis as (A) comparison of a controlled and an uncontrolled transaction or transactions. Controlled and uncontrolled transactions are comparable if none of the differences between the transactions could materially affect the factor being examined in the methodology (e.g. price or margin), or if reasonably accurate adjustments can
1

635

be made to eliminate the material effects of any such differences2. Thus, in the analysis, once uncontrolled transaction (s) is identified one needs to identify differences between the controlled and uncontrolled transaction (s). The uncontrolled transaction(s) can be considered as comparable if reasonably accurate adjustments can be made to eliminate the material effects of the differences. This is the underlying concept in identifying filters for rejecting companies, while selecting comparable companies under the deductive approach.3 The OECD in para 1.36 highlights the importance of attributes while deciding comparables. It says that (I) In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arms length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arms length transactions. Among the attributes, apart from functions, assets and risks, economic circumstances of the parties and the business strategies pursued by the parties are important. The OECD identifies some of the most commonly observed quantitative criteria. These include4 size criteria of Sales, Assets or Number of Employees. It observes that the size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. In view of the above, it can be inferred that the OECD is of the view that if companies have similar functions, assets and risk profile then the turnover would have an impact on profit margin. Consequently, companies having very different turnover should not be selected as comparables. Recent Decisions on the Turnover Filter: Discussed hereunder are some of the decisions by the Income Tax Appellate Tribunal (the Tax Tribunal or Tribunal). In most of the cases, the Tribunal has upheld application of turnover as a filter for identifying comparable companies.

3 4

Rule 10B (3):an uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market, or (ii) reasonably accurate adjustments can be made to eliminate the material effect of such differences. Glossary, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010 (hereinafter referred to as OECD or OECD Transfer Pricing guidelines) Para 3.41, Page 119, OECD Para 3.43 Page 120, OECD

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

95

636

INDUSTRY-SPECIFIC
transactions, the taxpayer had adopted two comparable companies having average arithmetic mean of 3.91% against the taxpayers margin of 7.70%. During the transfer pricing assessment proceedings, the taxpayer updated the comparable search and submitted a list of six comparable companies. Of these 6 companies, the tax officer rejected four companies on various grounds inter alia by adoption of a turnover filter. The Tribunal ruled that the comparable companies with turnover less than 20% of the taxpayers turnover cannot be accepted, since the economies of scale are not available to small businesses operating in the same industry. The Tribunal observed: It is a universal fact that there are lot of differences between the large businesses and small businesses operating in the same field. In the case of small business economies of scale are not available and, therefore, generally less profitable. However, the generic decision of the Tribunal to disregard the companies with low turnover vis--vis the taxpayer continues to be subjective, as the Tribunal did not comment on the appropriate threshold. Symantec Software Solutions Private Limited7 In this case, the taxpayer challenged the huge adjustment on account of transfer pricing. Among various grounds taken before the tax tribunal, the taxpayer agitated against the rejection of application of turnover filter for identifying comparable companies. The taxpayers view was that the Transfer Pricing Officer (TPO) erred by accepting comparable companies of all sizes irrespective of their scale of operations. The Taxpayer objected that the tax officer did not make any adjustments on account of differences in functional and risk profile of the comparables, with reference to the use of turnover filter to exclude companies. The Tribunal ruled in favor of the department stating that the taxpayer has not brought on record as to how such differences have influenced the result of comparability with empirical data, to the satisfaction of tax authorities. While discussing the issue of turnover filter, the Tribunal highlighted the contention of the taxpayer that the comparables having more than R500 million and less than R50 million of turnovers should be excluded

ST Microelectronics Private Limited5 During the assessment years [AY] 2003-04, 2004-05 and 2006-07, the taxpayer rendered the aid software development services, along with provision of certain marketing support services, to its associated enterprises (AEs). For the purpose of benchmarking, the taxpayer aggregated these two types of services since the latter formed a very insignificant part of the entire revenue. Further, TNMM was selected as the most appropriate method with OP/OC as the profit level indicator. The tax officer rejected the transfer pricing analysis of the taxpayer and identified a new set of comparable companies using various filters inter alia rejecting companies with total sales below R10 crore and above R1,000 crore and employee cost/total cost below 10%. Since the current-year data of these comparable companies exceeded taxpayers PLI by more than 5%, therefore the tax officer made an upward adjustment to the total income of the taxpayer. The tribunal approved of the search methodology adopted by the tax officer and remarked that the taxpayer had failed to consider two key drivers of IT industry, viz. highly-skilled manpower and turnover in its search process. Thus, the tribunal did not consider size of a company to be a significant factor in determining comparables. M/s DHL Express (India) Private Limited6 Taxpayer, a wholly owned subsidiary of DHL World Wide B.V. Netherlands (Associated Enterprise or AE), is engaged in the business of courier services. During the year, the taxpayer had certain international transactions with its AE with respect to payment of network fees, reimbursement of expenses etc. For determination of arms length price of the above

In view of the above, it can be inferred that the OECD is of the view that if companies have similar functions, assets and risk profile then the turnover would have an impact on profit margin. Consequently, companies having very different turnover should not be selected as comparables.

ST Microelectronics Private Limited [2011-TII-63-ITAT-DEL-TP] DHL Express (India) (P Ltd. Vs. Assistant Commissioner of Income-tax, 10(1), Mumbai .) [2011] 46 SOT 379 (MUM.)/[2011] 11 taxmann.com 40 (MUM.) [27-04-2011] 7 Symantec Software Solutions (P Ltd. Vs. Assistant Commissioner of Income Tax-10(1) .) [2011] 46 SOT 48 (MUM.)/[2011] 11 taxmann.com 264 (MUM.) [31-05-2011]
5 6

96

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INDUSTRY-SPECIFIC
for determining the ALP, because the taxpayers revenue from marketing support services was about R200 million. One of the arguments before the Tribunal was that as per Rule 10B (3), if there are material differences between the transaction being compared, then, reasonably accurate adjustments should be made to eliminate the material difference. The taxpayer thereafter argued that since the TPO has not made any such adjustment; therefore, the comparables, which are having more than R500 million and less than R50 million of turnovers should be discarded. The observations by the Tribunal are very interesting and important. They observed as follows: There is no quarrel on the point that if the comparables proposed to be taken into consideration by the TPO are having an abnormal differences of turnover in comparison to the turnover of the assessee, and if it is apparent due to such abnormal difference in the turnover, the operating profits of the comparables got distorted then in such a case, those comparables should be excluded from the list of the ALP. In the case in hand, the assessee raised these objections only because some of the comparables are having high profit and also high difference in turnover and not because of the high or low turnover has influenced the operating margin of the comparables. All the objections and contentions raised by the assessee in respect of this issue are general in nature and no specific fact has been brought on record to show that due to the difference in turnover the comparables become noncomparables. The assessee has not demonstrated as to how the difference in turnover has influenced the result of the comparables. It is accepted economic principles and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive. Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margin, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself. Thus, in this case the Tribunal rejected the argument of the taxpayer to apply turnover filter on two counts first, the taxpayer itself selected the comparables which it sought to eliminate by applying the turnover
8

637

The comparability analysis is the crux of the transfer pricing study conducted by any taxpayer. There is no mandate in the Indian Income-Tax Act or Rules that stipulates the exact way of conduction of this study. Naturally, the process applied by a taxpayer may vary from case to case. The subjectivity involved in the exercise has sparked umpteen numbers of debates on the issue of comparability and the application of quantitative filters to arrive at the closest set of comparable companies.

filter. Second, the taxpayer failed to show that turnover has undue influence on profits. Frost & Sullivan (I)(P) Ltd.8 In this case, the Tribunal observes that the AO has considered companies with huge turnover as comparables. In fact, as mentioned by tribunal against the turnover of R10.82 crore of the company, the AO selected comparables which had turnover as high as R5,869 crore. The Tribunal finally held as follows: We, therefore, find merit in the submission of the Ld. Counsel for the assessee that there is no basis for only excluding loss making companies and not excluding the high profit making companies or companies which are not at all comparable considering their size, volume of turnover and other factors. In our opinion, the whole exercise of selecting comparables by the TPO is not proper and is in a haphazard manner. (Emphasis added) The above references aptly highlight the relevance and importance of the turnover filter in the comparability analysis. Presently, the turnover filter has been conveniently adopted and shunned by the Revenue Authorities and taxpayers alike. Therefore, it becomes imperative for the taxpayer or the Revenue Authorities to substantiate the application of this filter in terms of a background analysis, rather than mechanically using it as an elimination tool. Issues in the Use of the Turnover Filter The debate that centers on the use of the turnover filter is twofold. First, whether the use of this filter is justified (in reference to the service sector), by which one needs to analyse whether classifying companies of same scale of operations is at all required. This would

[2012] 19 Taxmann.com 189 (Mumbai Trib.); Order is dated 24 February 2012

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

97

638

INDUSTRY-SPECIFIC
Asset could be selected as a measure of scale of a company. It can be treated as an independent variable; it is not directly linked to the dependent variable, namely, operating profit. However, since the industries analysed are in the service segment, assets may not reliably reflect the scale of operation of a company. The primary value driver in the service sector is the human resource; hence, head count can serve as a better indicator of the size of a company in the IT sector. On the other hand, asset could be a good measure of the scale of operation for the companies in the manufacturing sector. Having said that human resource is the primary value driver in service companies, number of employees is a good indicator of the scale or size of a company. However, the databases9 available to us do not have adequate information on the number of employees. Hence this variable could not be used. For the purpose of this analysis, market capitalisation of a company has been used as the independent variable or the measure of scale of operation of a company. Market capitalisation is defined as the market value of the business of a company. It is often used as an indicator of the scale of operation of a company. It is calculated by multiplying a company's shares outstanding by the current market price of one share. Statistical Analysis The regression analysis will test a relationship between profitability and market capitalisation. The relation is hypothesised to be a simple non-linear form as under: {Profit=m (MC) + n (MC) 2+C}10 (1) MC=Market Capitalisation m= determines the impact on profitability for a change in the market capitalisation n=determines the shape of the curve, a positive term indicates that as market capitalisation increases, the profitability keeps on increasing; and a negative term indicates that as market capitalisation increases, the profitability increases initially, then the increase slows down beyond a level. C= intercept term For the regression analysis, a sample of data has been collected from PROWESS database for the two industries: BPO/ITeS Software development

compel one to examine the relationship between performances of the company, measured in terms of profitability and its size, measured in terms of turnover or sales. Alternatively, this means whether there is an impact of economies of scale on profitability. Second, since it would not be feasible to find companies that have exactly the same scale of operations, what should be the range of companies that could be taken as comparable? Choice of Independent Variable This article attempts to address the first issue, namely, finding the relationship between profitability of a company and its scale of operations. The second issue of the range of selection of comparable companies still remains subjective. This paper attempts to conduct a statistical analysis (in the service sector) to establish whether there is an impact of scale on the profitability of a company in the IT service industry. The industries covered in the analysis are in the following service sectors: BPO/ITeS Software Development services A regression analysis is conducted with operating profit as the dependent variable and size or scale of operation of the company as the independent variable. The issue lies in finding a suitable financial parameter that can be adopted as a measure of scale of a company. The suitable options explored for selection of the independent variable are as under: Sales Employee cost Assets Number of employees Market capitalisation Sales or employee cost seems to be the most appropriate measure of scale of operation of the company. However, for the purpose of the regression analysis, it is imperative that the dependent variable (here, operating profit) should not be related to the independent variable (say sales or employee cost, that being the most significant component of total cost for a service industry). As profit is calculated as Sales-Cost, neither of these variables could serve as the independent variable for the measure of scale.
9 10

Refer Prowess database of CMIE for the purpose of this analysis to collect data For the theoretical basis of the use of this non-linear form of regression model refer: William H. Greene: Econometric Analysis, Fifth Edition

98

T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INDUSTRY-SPECIFIC
Data has been collected based on certain financial criteria for the industries mentioned above. The companies selected qualified in the following financial criteria: Financial data on operating profit and market capitalisation exist for latest year Net sales greater than R1 crore Service income/Net sales greater than 25% Net worth positive The detailed procedure of selection of the data is documented in Annexure 1. For selected sample of companies, data has been gathered for operating profit11 and market capitalisation (annual market capitalisation). A sample of 97 companies was generated for the purpose of the analysis. The regression is run, to give the ordinary least square estimates of the coefficient and the intercept terms. The output results for IT industries are as under: IT Sector:
SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total 2 94 96 Coefficients Intercept X Variable 1 X Variable 2 -5.436406832 0.209130494 -1.51505E-05 SS 5318176.723 15198968.28 20517145.01 Standard Error 65.78935532 0.058244353 7.17454E-06 t Stat -0.08263 3.590571 -2.1117 P-value 0.934319 0.000527 0.037365 Lower 95% -136.062714 0.093484966 -2.93957E-05 MS 2659088 161691.2 F 16.44548 Significance F 7.51221E-07 0.509123236 0.25920647 0.243444905 402.1083833 97

639

Upper 95% 125.1899004 0.324776022 -9.05249E-07

Interpretation of Results From the above, it can be seen that there is an impact of market capitalisation on profitability. The co-efficient term is positive and significant. This in laymans language means that as the size or scale of operation (measured in terms of its market capitalisation) rises, the profitability of the company
11

also increases. Specifically, a one rupee increase in market capitalisation is associated with a twenty paise increase in profitability. The economic justification of the result emanates from the basis of the existence of scale economies. For example, as the size of a company increases, there is separate division that specialises in any particular work, depending on the skill of the labor

Operating profit has been defined as Operating Income-Operating expenses

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012

99

640

INDUSTRY-SPECIFIC
account of economies of scale. Hence the application of turnover filter to screen companies comparable to, say, ST Microelectronics is not an arbitrary process. This filter would automatically make an adjustment for the differences in profitability on account of scale effect from the universal set of companies to give the ones that would be better comparable to ST Microelectronics in terms of profitability. The very purpose of the transfer pricing analysis is to find companies that are the closest to that of the taxpayer in terms of functionality and hence reflected in its profitability. However, it may be noted that the cases discussed are all in the IT service segment and hence, the importance of the application of the turnover filter in that industry. Conclusion The comparability analysis is the crux of the transfer pricing study conducted by any taxpayer. There is no mandate in the Indian Income-Tax Act or Rules that stipulates the exact way of conduction of this study. Naturally, the process applied by a taxpayer may vary from case to case. The subjectivity involved in the exercise has sparked umpteen numbers of debates on the issue of comparability and the application of quantitative filters to arrive at the closest set of comparable companies. It is understandable, that it is not feasible for the taxpayer to manually review the functional profile of all the thousands of companies available in the databases. Hence, it has to resort to some mechanism to screen the potential comparable companies before going for a closer qualitative analysis of them manually. The method adopted in all the cases of such comparable analysis is to apply financial screens, to arrive at a set more comparable to the taxpayer. The revenue authorities understand the importance of this step in the entire process and themselves applied such screens in search strategy. The essence of the debate has now moved to the use of some quantitative research for justifying the application of these financial screens. The case of the turnover filter and the possible justification of its use have been discussed above. The conclusion that may be drawn from this limited exercise and the selected sample of data, tends to indicate the existence of a relation between size and profitability, hence the justification of the use of a turnover filter as a financial screen, when a large sample size is available.
w w w. i c a i . o r g

available. With the increase in specialisation, there in increase in operational efficiencies that are achieved, this could be a possible reason for the increase in profitability of the company with increase in size. The data has also been plotted in the graph below, the dots showing the actual data points of the sample. The trend line fitted further clarifies our analysis done above. As the market capitalisation increases the profitability increases, further the shape of the curve is one with a negative co-efficient term for the second order variable.

Thus, the above graph more clearly explains our analysis and the relation between market capitalisation and profitability. This relation can be logically explained as well, in the fact that due to increase in efficiency with the increase in size of a company the profitability rises. However, beyond a level of increase, it may not be as efficient to reap the benefits of economies of scale; this is due to the additional costs incurred on account of monitoring costs, etc. Application to the Recent Cases Now, the conclusion of the statistical analysis is applied to the recent cases mentioned above. Broadly, it can be said, the characteristics of the IT service companies would be driven by similar economic logic as is dictated by the norms of the industry in which it functions. It can be concluded from the analysis conducted in this article that there is an impact of scale in the IT industry. Hence, it can be safely concluded that in the case of all companies belonging to the same/similar industry there be scale effects in their profitability. When the search is conducted for comparable companies in the same industry their profitability would also contain the scale effect. This would mean, as the turnover increases for any firm belonging to this industry, their profitability would increase due to the benefits the firm can reap on
1 0 0 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 CORPORATE AND ALLIED LAWS

641

The Journey of a Bill to Become an Act

The Legislature in India has enacted more than thousand statutes and the number is still increasing. As Chartered Accountants, we are expected and required to have detailed knowledge of some of the laws which directly affect our working. Apart from these, we are also needed to have at least some basic knowledge of various other laws which indirectly have an effect on our vocation. Hence, it becomes extremely important for us to be well-versed with the procedure of law making in India. Through this article, the author has made an attempt to describe the journey through which a Bill transforms into an Act.
Introduction The Republic of India, in its more than 60 year long history, has enacted more than thousand Central Acts for the territory of India i.e. more than 1050 Central Acts plus a large number of State Acts and still these are going on. All these statutes, some even overlapping one another, deal with varied types of subjects and establish a framework within which a particular types of transactions, events and activities are governed. For example, the Income-tax Act, 1961 contains, inter alia, the detailed provisions relating to the chargeability, computation, assessment, collection & recovery, penalties & prosecutions in relation to taxes on income in India. A Chartered Accountant has to be well-versed with a variety of laws which might have a bearing on his profession; hence, it is extremely essential for

CA. Raghav Kumar Bajaj

(The author is a member of the Institute. He can be reached at raghav@ chiramritlaw.com)

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 101

642

CORPORATE AND ALLIED LAWS

S.No. Particulars Purpose

India has more than 1050 Central Acts plus a large number of State Acts and still these are going on.

a Chartered Accountant to have an understanding of the law making procedure in India. Each such Act, before becoming an Act is termed as a Bill and such Bill has to go through a specified Parliamentary procedure before it becomes an Act. Let us now try to understand in brief, the process by which a Bill becomes an Act. Constitutional Hierarchy The Constitution of India, the supreme law in India, was enacted by the Constituent Assembly on 26th November, 1949; but came into effect on 26th January, 1950. It was for this reason that 26th January, 1950 is celebrated as the Republic Day of India, because it is from this date that the Constitution of India established India as a Republic. Also, India had its first President Dr. Rajendra Prasad who held office as the President of India with effect from 26th January, 1950. The President of India is the head of state and first citizen of India. The President is also the Commander-in-Chief of the armed forces of India. The Republic of India mainly comprises of the following three branches viz. The Legislature, The Executive and The Judiciary. All these three arms have their own independent objectives and purpose as follows: S.No. Particulars Purpose 1 The India, being a federal Legislature structure, has got (or the governments operating at Parliament) the Centre level and the State level The Parliament is the supreme legislative body in India. At the Centre level, the Legislature comprises of the Upper House (the Rajya Sabha) and the Lower House (the Lok Sabha)

The Executive

At the State level, the state Legislature comprises of the Upper House (the Vidhan Parishad) and the Lower House (the Vidhan Sabha). As of 2011, 6 (out of 28) states have an Upper House: Andhra Pradesh, Bihar, Jammu and Kashmir, Karnataka, Maharashtra, and Uttar Pradesh. The executive branch is the part of government that has sole authority and responsibility for the daily administration of the state. The executive power is vested on mainly the President of India by Article 53(1) of the Constitution of India. The President has to act in accordance with aid and advise tendered by the head of the government (Prime Minister of India) and his/her Council of Ministers (the cabinet) as described in Article 74 (Constitution of India). The Indian judiciary is independent of the executive and legislative branches of the government according to the Constitution. It consists of the Supreme Court of India at the top, followed by High Courts (21 in number) of respective states with district judges sitting in District Courts and Magistrates of Second Class and Civil Judge (Junior Division) at the bottom.

The Judiciary

1 0 2 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 CORPORATE AND ALLIED LAWS

The following chart will better present the above mentioned hierarchy in India:

643

Bill Vs. Act 1.1. The basic difference between a Bill and an Act is that a Bill is a statute in the draft form and cannot become a law unless it has received the approval of both the Houses of the Parliament and the assent of the President of India. 1.2. As soon as the bill has been framed, it has to be published in the newspapers and suggestions are invited from the general people, and after going through the suggestions of the people the bill is amended and then Bill may be introduced in the Parliament by: 1.2.1. Ministers (such bills are known as Government bills) or 1.2.2. Private members (such bills are known as Private Members bills) 1.3. Let us now discuss in detail the Legislative process i.e. the procedure which leads to the formation of an Act from a Bill. Legislative process [Parliamentary Procedure Abstract Series No. 36] 1.1. The comprehensive legislative process, which begins with the introduction of the bill in the Parliament, discussions on the provisions of the bill and then ending with the assent of the President of India. These are provided in the Parliamentary Procedure Abstract Series No. 36.

The following graphic presentation will better explain the summary of the said Legislative Process:

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 103

644

CORPORATE AND ALLIED LAWS

1.2. As mentioned above, the basic function of the Parliament is to make laws, amend them or to repeal them. India being a federal country, laws can be made separately at different levels by the Union Government (Federal Government) for the entire country and by the State Governments for their respective states. The process of law making begins with the introduction of a Bill in either House of Parliament. However, Money Bills and Bills which, inter alia, contain provisions for any of the matters attracting sub-clauses (a) to (f) of clause (1) of Article 110 of the Constitution of India cannot be introduced in the Rajya Sabha. They can be introduced only in Lok Sabha on the recommendation of the President. A seven days notice in writing is required to be given by the Member of Parliament of his intention to move for leave to introduce the Bill. The Speaker may, however, allow the motion to be moved at a shorter notice. 1.3. After the introduction of the Bill, the next stage is the Circulation of the Bill. It is required that at least two days before the day on which the Bill is proposed to be introduced; copies thereof must be made available for use. This requirement of prior circulation, however, does not apply to Appropriation Bills and Finance Bills (off course to maintain the secrecy of such bills). The Speaker may, however, permit the introduction of a Bill without prior circulation or after circulation for a period shorter than two days, if adequate reasons are given in a Memorandum for consideration of the Speaker as to why the Bill is proposed to be introduced earlier than two days after circulation of copies or without prior circulation. 1.4. Subsequent to the introduction and circulation of the Bill comes the part where the discussions in respect of the various provisions of the Bill take place. It is termed as the Passage of the Bill (since in this part, the Bill passes through both the Houses of the Parliament with detailed discussions being held on the various provisions of the Bill). During the passage of a bill, it undergoes three readings in each House, i.e., the Lok Sabha and the Rajya Sabha, before it is
The basic function of the Parliament is to make laws, amend them or to repeal them.

India being a federal country, laws can be made separately at different levels by the Union Government for the entire country and by the State Governments for their respective states.

submitted to the President for assent. Each such reading can further be sub-divided into different stages wherein different tasks are undertaken. Let us now analyse each such reading which takes place in the Parliament. 1.4.1. First Reading The First Reading refers to the motion for leave to introduce a Bill in the House on the adoption of which the Bill is introduced. The First Reading comprises of the following three stages: Stage I: Procedure regarding opposing the Introduction of Bill This is the stage wherein the introduction of the Bill is opposed. The introduction of the Bill can be opposed either on the grounds of ultra vires competence or other general grounds. In the former case, the Speaker of the House may permit a full discussion thereon; while in the latter, the Speaker may allow brief statements from the member who opposes the motion and the Minister who moved the motion and thereafter, put the motion to the vote of the House. Stage II: Publication of Bills in the Gazette Once the introduction of the Bill is not opposed in the House, the Bill is published in the Gazette of India (such publication can take place only after the Bill has been introduced). However, for publishing the Bill even before its introduction, the Ministerin-charge of the Bill has to obtain the permission of the Speaker. If changes are made in the Bill after it has been published in the Gazette, it becomes a new Bill and the motion for leave to introduce the Bill has to be moved again as in the case of any other Bill.

1 0 4 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 CORPORATE AND ALLIED LAWS

Stage III: Reference of Bills to Departmentally Related Standing Committees (DRSC) This is the stage where a Bill can be referred by the Chairman of the Rajya Sabha or the Speaker of the Lok Sabha to examine such Bills (since the particular Department can better analyse the provisions of a Bill) introduced in either House and make report thereon in the given time (normal time allowed is three months). 1.4.2. Second Reading In this phase, various detailed discussions are held on the different provisions contained in the Bill; and the Bill is considered clause-by-clause by the Parliament to make any suitable amendments in the draft statute. This

645

Money Bills and Bills which, inter alia, contain provisions for any of the matters attracting subclauses (a) to (f) of Article 110(1) of the Constitution cannot be introduced in the Rajya Sabha.

phase comprises of the following two stages: Stage I: Discussions on the principles of the Bill This is the stage where preliminary discussions are held on the chief principles of the Bill. Broadly speaking, at this stage, the points which are considered include as to whether the Bill is to be taken into consideration or not. If the bill is thought fit to be considered, then

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tob e r 2012 105

646

CORPORATE AND ALLIED LAWS

it is circulated for the purpose of eliciting opinion thereon by referring it to a Select Committee of the House or a Joint Committee of both the Houses. If the bill is referred to a Select Committee or a Joint Committee, then the Committee considers the bill in detail and invites memoranda from public at large as well as from specialised interest groups to place materials and points of view before the Committee. Stage II: Clause-by-clause consideration of the Bill The stage II of the Second Reading in the passage of the Bill where detailed discussions take place on each clause of the bill. Amendments can be moved at this stage also. The protocol adopted in this stage is that each amendment and each clause is put to the vote of the House. Such amendments become part of the bill if they are accepted by a majority of the members present and voting. When all the discussions are concluded and the various amendments, clauses have been put to the vote of the House, the Stage II of the Second Reading is deemed to be over when the voting is completed. 1.4.3. Third Reading The Third Reading in the passage of the Bill is the final segment in the passage of the Bill wherein the limited discussions are held that the Bill, as amended, be passed or not. At this point of time, the debate is confined to arguments either in support or rejection of the Bill without referring to the details involved. Though no detailed dialogue is held at this point, but still; at this stage also, amendments can be allowed in the bill only if they are merely formal, verbal or consequential. 1.5. Withdrawal of bills Any bill introduced in the Parliament can be withdrawn at any stage of its discussion by the minister in charge of the bill who introduced it in the Parliament. However, the withdrawal is permitted only on the following grounds: 1.5.1. The legislative proposal for which the bill was introduced in the Parliament is to be dropped. 1.5.2. The bill is to be replaced subsequently by a new bill which substantially alters its provisions. 1.5.3. The bill is to be replaced subsequently by another bill which includes all its provisions. 1.6. Joint sitting A Joint sitting of the both the houses of the Parliament can take place in respect of all bills, except a money bill and a Constitutional amendment bill. A joint sitting takes place in the following cases: 1.6.1. The bill passed by one House is rejected by the other House, or 1.6.2. The Houses have disagreed to the amendments to be made in the Bill, or 1.6.3. More than six months have elapsed from the date of receipt of the Bill by the other House without the Bill being passed In all/any such circumstances, the President of India may call a joint sitting of the two houses of the Parliament to resolve the deadlock. 1.7. Assent of the President 1.7.1. After the Bill is passed by both the Houses of the Parliament, it is sent to the President of India for its assent, who is empowered to give its assent or withhold its assent or to return the Bill (if it is not a Money bill), with its recommendations to the Houses for reconsideration. In such cases, if the Houses pass the Bill again with or without amendments, the President cannot withhold its assent to such a Bill. 1.7.2. In case of a Constitutional Amendment Bill (CAB), the President is bound to give its assent to a CAB presented to it for its assent. 1.7.3. Once the assent of the President is given to a Bill, the Bill becomes an Act. This is the journey of a Bill before it becomes an Act.

The process of law making begins with the introduction of a Bill in either House of Parliament.

1 0 6 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 BANKING AND FINANCE

647

ATM Vulnerabilities, Frauds and Crimes

Identifying vulnerabilities in the ATM system is an indispensable skill for the auditors of today. The sheer number of the ATM crimes and their wide variety make it very difficult for any person to grasp the essence of the subject. The author, after analysing thirteen hundred cases, has classified the vulnerabilities into four groups viz., Customer and the Bank being cheated, Machine failure, Security failure and Accidents. This article illustratively covers the point of 'the Customers and the Bank being cheated'. Further, this article is an attempt to equip the auditors that would help them in detecting the loopholes that lay hidden in the ATM system. The ATM system has totally revolutionalised the
banking services by reducing the hassles a customer had to endure in transacting with the banks. But the occurrence of an unprecedented number of ATM crimes has given it quite an amount of notoriety. It has placed a huge burden on the banks in the shape of extra security management. It has also cast on the auditor the additional responsibility of identifying and reporting on inadequate security in the ATM systems. It will be difficult for an auditor to understand the vulnerabilities of the ATM system without obtaining a good insight into the weaknesses of the ATM system and the wide variety of vulnerabilities arising there from. Once understood, it will give him an ability to identify risks and strengthen his audit procedures. The present article is an attempt to equip the auditor with precisely this type of information that would help him in detecting the loopholes that lie hidden deep in the ATM system. The analysis given below is based on the results of a detailed study of about thirteen hundred cases reported in news papers and articles from all over the world and in the internet. Most of the aspects of ATM frauds have been included, even though some of them may not be directly relevant from an audit point of view. Some of the cases might look imagined or exaggerated
THE CHARTERED ACCOUNTANT oc tobe r 2012 107

CA. T.S. Subramanian

(The author is a Member of the Institute. He can be reached at [email protected])

w ww.ica i.org

648

BANKING AND FINANCE

on the magnetic stripe on the card and transmits them to a device in a parked car. Some skimmers are affixed with tapes just below the card slot. In another model, the body of the skimmer appears just like the original card insertion unit and thrust into the card slot. Imagine, skimmers have also been found inside the ATMs! Retailers of small sized ATMs turn into crooks and they fix skimmers inside a few ATMs and place them in Malls and Plazas. They are genuine ATMs but they record and store card details and PIN. These are recovered later and used to withdraw funds. In a very recent case police arrested Pascari of Limerick city in Ireland who crafted his own custom-made skimmer equipped ATM machines by ordering the spare parts directly from ATM companies. An electronically sensitive, thin, plastic sheet pasted within the card slot can also obtain the card details and transmit them. A notice "Due to recent fraud attempts at this ATM machine, we require you to swipe your card in the card reader below before inserting your card. We apologise for the inconvenience can be found pasted on the ATM. This card reader is a skimmer fixed by the criminal. The entrance door of an ATM enclosure has a card swipe device for unlocking the door. Crooks replace it with similar looking device with skimmers and collect the card details. In places where several ATMs are set up in a row, the suspect places Do Not Use. Out of Order boards before all the ATMs (except the one with the skimmer). The customers are automatically forced to use the ATM with the skimmer. Miniature pinhole cameras can videograph the finger movements on the keypad and transmit them wirelessly. These are of the size of rupee coin and blend with the colour of the ATM. They are fixed just above the keypad. Sometimes, they are painted to appear like a logo and fixed on the broad frame of the ATM screen itself. Slightly bigger cameras that focus on the keypad are hidden in document folders where a sticker hides the camera from view. For the customer, the keypad looks normal. But it has been overlaid with a mould in the shape of the original key pad, made out of thick pliable plastic material of the same colour and containing some special electronic circuits. When a person presses a key in the mould, the ATM key also gets pressed. The mould records
w w w. i c a i . o r g

versions, but each method described here is based on actual facts. The vulnerabilities in the ATM System If a person attempts to study the vulnerabilities of the ATM, he would find himself drowned in cases of frauds so large in number and so wide in spectrum that he would not make any head or tail out of it. In order to obtain a proper grasp on the subject, classification under the following groups will help, viz., the risk of losses arising on account of:A. The bank or the customer being cheated B. The faults in the machines, software and procedures C. Inadequacy or failure of security arrangements D. Unforeseen circumstances and accidents In this article the author has discussed the point number A i.e. the bank or the customer being cheated. A. The Bank or the Customer Being Cheated This heading falls into further five categories, viz., losses or damages caused by, 1. Outsiders (strangers), 2. Insiders (employees), 3. Technicians (engineers, service providers) and, 4. Bank customers. 1. Outsiders (Strangers) The card and the PIN are essential for breaking into an account. It is surprising how human ingenuity has been used to find diverse methods for achieving this end. a) Shoulder surfing Shoulder Surfing is the oldest method of collecting the PIN. The crook stands behind the customer, looks over his shoulder, watches his key strokes, and memorises the PIN. b) Skimming When a person collects the PIN as well as the card details without the knowledge of the customer it is known as Skimming. The customer notices nothing abnormal in the ATM, but, as his card goes through the card slot the crook receives the details of his card. This is achieved by pushing a Skimmer (an electronic device in the shape of oblong black disk which is held in place by spring levers) into the ATM slot. The card has to pass through the skimmers slot before reaching the ATM card reader. The skimmer reads the data
1 0 8 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 BANKING AND FINANCE

the position and transmits the key stroke details to another device. It is called Duplicate PIN Pad Overlay. The customer thinks it is a protective plastic covering. But it is a thin transparent, touch sensitive, plastic sheet stuck above the PIN pad. It detects every keystroke and transmits them electronically to another device. This is an advanced version of the PIN Pad Overlay. c) False ATM fronts Gangs involved in large scale ATM fraud operations prepare duplicate front panels of the ATM and get them fixed over the card insertion and print out units thus covering them up. No one can make out that it is not a part of ATM. The ATM works normally. But the customers card has to pass through this panel and the skimmer installed within the front panel transmits the card details to a receiver. d) Fake ATMs It is a common practice the world over to allow private non banking parties to install ATMs in Malls and Plazas. They can be misused to collect card details and the PIN. Parties install ATMs in such public places with bank stickers, hotline numbers etc., pasted all over but without any real connection to any network. Initially cash is disbursed to one and all. Later on, it starts displaying a note of technical error or No funds. After a few days, they remove the machine, recover the details of cards and PINs and also more than what they had given from the installed skimmer! e) Stealing the card Snatching from the hand or the bag containing the ATM card and breaking open letter boxes and stealing banks letters carrying the card or PIN, are the common methods used. A decent looking gentleman helps an elderly person or an uneducated lady by withdrawing the cash from ATM and gives back the card. But he gives back a fake card. According to a recent report in Odisha, the arrested Balaram Sahoo amassed R 1 crore in two years with this method. Workers intercept the mails of their employers and steal the cards. Jail Wardens, hospital employees, helpers in old age homes steal ATM cards of their wards.
w ww.ica i.org

649

If a person, in a hurry, forgets to remove the card, the workers around notice it and make use of the active account for withdrawing cash. Some even change the PIN. f) Social Engineering When a person poses as very responsible and makes another person believe that he could be trusted, it is a case of Social Engineering. He convinces the card owner that he is safe enough to be trusted with his ATM card and PIN code. He might impersonate as a bank officer, bank employee or a member of the police. Here are some examples to illustrate. Posing as a Bank Officer a. He telephones the customer and says that the bank has cancelled his defective card because of security reasons. He asks for the card but at the same time volunteers to get it collected. He says the old invalid PIN has also to be cancelled before issuing a new one and obtains the PIN. An accomplice collects the card. b. He represents himself as an employee of the bank, canvassing for a contest for ATM card holders with huge sums as prize money. He gives them the form, which looks genuine. One of the conditions is that no box should be left empty, and it contains a box for the PIN. He then wants to verify the ATM card is genuine. He swipes them in his portable skimmer. c. Posing as a bank security officer, he rings up a client and asks for his cooperation in nabbing a dishonest employee who is trying to steal funds from his account. To execute the trap he asks him to leave his card secretly under the door of the bank after closure of the bank. Next day, he informs him that the employee has been caught red handed and thanks him and tells him that his card is required as evidence and a fresh card would be issued to him. He then collects the PIN by saying that it is needed for cancellation of the old card. d. A ladys card gets stuck in an ATM by some installed device. She rings up the emergency phone number given in a
THE CHARTERED ACCOUNTANT oc tobe r 2012 109

650

BANKING AND FINANCE

bogus sticker pasted on the ATM. The man on the other side who is an accomplice, identifies himself as the bank employee and offers to issue a new one in its place. For that he needs her PIN and the lady gives it. The card is retrieved later by the crooks. Posing as Police Officer a) First he steals wallets by breaking into lockers in Social Clubs, Sports Club etc. He then rings up the card holder, identifies himself as a police officer, informs him that his card and the wallet had been found with an arrested culprit. He says it will not be returned to him, but to the bank. He says that a small formality needs to be complied with, viz., the PIN has to be recorded in the files. He gives the phone number of the Police Station (his friends) where he should lodge his PIN. b) Dressed as a senior police officer in uniform, with badges, gun etc, driving a big car with flash lights on, accosts elderly persons driving their car and, with his intimidating language checks their belongings, confiscates the ATM card and also obtains the PIN. Miscellaneous The criminal, impersonating a senior officer of the super market, phones up a sales girl in the market and informs her that he wants to give her a huge cash incentive for her good work, but confidentially. He wants her ATM card and PIN so that it could be deposited into her account without the knowledge of other employees. The girl gives them. A notice, "If for any reason your card is retained please enter your PIN number three times and then press cancel button." is pasted on the ATM. The customer inserts the card and it is stuck. He enters the PIN three times but nothing happens. He leaves. The crook standing behind memorises the PIN and retrieves the card. The secret is the opaque sheet of plastic placed inside to prevent the card reader unit reading the magnetic stripe. h) Post & Courier In Chennai, a customer received an SMS alert of ATM withdrawals, even before he received the card! On investigation, it was found that four persons belonging to a courier company used to hand over the mails to a gang of criminals for a day, who fished out the card details and PIN and returned the mail intact. In US, a Californian postal carrier and a South Brunswick letter carrier were arrested on charges of theft of ATM cards. The interception of the bank letters by the employees in Post Offices and Couriers is a cause for serious concern. i) Hacking the ATM In certain banks, dedicated lines are used to connect the ATMs to the host computer along with a separate dial-up line to the host for the use of maintenance engineers. Stealing the confidential number for the dial up line the hacker intrudes into the ATM circuit and converts his friends card into a Security Card which enables him to do any fraud. According to the book ATM Exposed published by Sailclose Publications 2003, a computer programmer in Taiwan stole 4 million dollars by making more than 7,000 cards by intercepting the communication line to the ATMs. j) Jackpotting At the Black Hat Security Conference 2010 in Las Vegas, researcher Barnaby Jack demonstrated, on the stage, high-tech hacks against two genuine ATMs. In one, Jack reprogrammed the ATM remotely over a network; in another attack, he opened ATMs front panel and plugged in a USB stick loaded with his own software. The large audience was shocked to see dozens of crisp bills flow out from both the ATMs.
w w w. i c a i . o r g

g) Lebonese loops This was the first method used when the practice of ATM card capturing started. The culprit positions a thin rigid plastic strip having long wires in the sides (Lebonese Loop), deep inside the ATM slot. When a card is inserted, the Loop prevents its movement and the machine stops. The culprit standing behind him asks him to try entering the PIN twice or thrice, but nothing happens. He memorises the PIN. After the card holder leaves, the culprit pulls out the strip with the help of the wires and the card comes out.
1 1 0 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 BANKING AND FINANCE

2. Insiders (Bank Employees) ATM cash containers are protected by a set of confidential combinations. Only the few trusted members of the staff of the bank or the service providers know them. When the ATM cash disappears mysteriously without any trace, it is rational to conclude that the combinations had been used with or without the connivance of the employees. It might have been leaked out on account of negligence or coercion. It is also possible that they were stolen. It is a cause for concern that, for the employees in the section dealing with ATM cards and PINs, opportunities exist for collecting PINs and card details. In many fraud cases, the bank employees were found to be the collaborators. Model Anupama Verma of Mumbai never uses her ATM card and had not even opened the PIN letter. Yet R17.36 lakh was withdrawn from her account by using the ATM card 170 times. Two employees of her bank were the culprits. Ralph Elmer of Battle Creek, Michigan never even knew that an ATM card was issued on his account but withdrawals of over $ 40,000 had been made over several years. There is a loophole in the despatch section of the bank which sends the card and the PIN to customers. The employees were found to have changed the addresses on the envelope and diverted them to the address of a criminal. The deposit envelopes in the ATM deposit box were found to have been tampered with and cash removed by collectors. They were also responsible for stealing the amounts swallowed by ATM on account of non withdrawal. In a bank in Bahrain, an employee who handled the entire ATM operations single handed, swindled money and tried to cover up the fraud by juggling with the daily cash top-ups for the machine. 3. Technicians (Engineers, Service providers) ATM technicians and service providers like cash fillers etc., are given separate passwords for conducting the ATM operations. These passwords are supposed to be activated only for the brief period of operation. There are instances where, due to negligence, the passwords were not deactivated, and it resulted in the disappearence of cash from ATM. In one case, an ATM repairman in New York who knew the keystrokes to change the denomination of the issue trays changed $20 tray into a $ 5 tray and made the bank issue $20 instead of $5.
w ww.ica i.org

651

4. Bank Customers It is difficult to believe that customers are also indulging in fraudulent activities when they notice any weakness in the system. During the 9/11 disaster when the banks, for humane reasons, decided to open ATMs without their normal controls, the customers stole $ 15 million within a few days! In the Transaction Reversal method, the customer removes some notes in the middle of the stack when the machine delivers a stack of notes, and waits. The machine swallows the rest of the notes as unclaimed, but there would be no record of the shortage anywhere. In a recent R1 crore fraud involving Federal Bank and other banks this method was used. The gang members used to demand a withdrawal of R10,000 from ATM of Federal Bank. But they used to take only R 9,900 and leave the last R100 note inside the ATM. The ATM machine would retrieve the note, and would flash a message of failed transaction in the software system of the private bank whose ATM card was used for withdrawal. Their accounts never got debited. In ATMs where cheques are accepted as deposits, a huge number of frauds have been executed by depositing cheques on accounts without balance and withdrawing cash against them. Modifying the ATM Chinese criminals used an unusual method. They cut the cash conveyor belt inside the ATM so that the undelivered cash falls within the machine. After the departure of the client, they removed the cash. Miscellaneous In certain ATMs, the customer has to swipe the card and then remove it. At the end, he has to hit a key to exit. If the key is not pressed, the machine waits for 60 seconds before closing. The Daily Telegraph Kolkata reported that one Alok knew this secret and used to transact as soon as the customer left. Though he failed on most occasions, but few times he succeeded to fetch a whopping sum of about R4 lakh. Phishing Phishing technique is mostly used by hackers to obtain confidential details of bank password via email. But sometimes they collect ATM PINs too. The customer believes in a bogus email looking exactly like his bankers asking for personal details, password PIN etc., He blindly complies with the request.
THE CHARTERED ACCOUNTANT oc tobe r 2012 111

652

CORPORATE GOVERNANCE

Should Shareholder Activism in India Be A Mere Reality or Absolute Necessity?

What shareholder activism really means is, a revolutionary action for exercising their democratic right to effect social, environmental and corporate change and to build better, more sustainable business which in turn help the corporations become better governed business overall. There are numerous weapons in the activist armoury that empower the stakeholders to involve themselves in setting the situation right, whenever they are of the view that the company in which their financial and physical capital are invested is being managed in an unethical/inefficient/ irresponsible manner and that may endanger safety of their investment and risk their personal reputation and respect. Unlike in the western world, where there is strong shareholder activism, the concept that was enjoying its infancy for several decades, seems to be growing from baby steps to youthful strides in India. This article discusses different aspects of shareholder activism in India. Read on to know more

The world is a dangerous place, not because of those who do evil, but because of those who look on and do nothing- Albert Einstein How Did the Concept Evolve? With the growth of Indian economy at a decent pace, the issues relating to corporate governance and accountability are becoming increasingly important. Gone are the days when shareholders (minority in particular) were mostly content with receiving regular

CA. H. Ghosh
(The author is a member of the ICAI, working as Joint Director in the Institute. He can be reached as ghosh@ icai.org)

1 1 2 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 CORPORATE GOVERNANCE

653

In India, there are primarily four avenues which ensure that debt holders and equity holders can exercise exit or voice opinions to make company management accountable. These include the Companies Act 1956; the SEBI Act 1992, and various regulations prescribed by the SEBI; a market for corporate control and active participation by financial institutions and institutional investors.

value, yet the empirical evidence suggests that effects of such activism are mixed. How Far the Concept of Shareholder Activism is Organised in India? Unlike in the western world, where there is strong shareholder activism, the concept that was enjoying its infancy for several decades, seems to be growing from baby steps to youthful strides in India. The proxy advisors, in those countries, offer proxy advisory and solicitation services that may enhance effectiveness of activist coalitions campaign. Active investors are clearly influenced by the recommendations issued by such advisors to vote for or against a proposal. In particular, their recommendations encourage passive shareholders to vote in favour of proposals put forward by an activist coalition. In that line, the (two) proxy advisory firms like In-Govern and Institutional Investors Advisory Services (IIAS) are aiding the development of the (shareholder activism) idea for improvement in corporate governance practices in India. There are several instances of shareholder activism in India. In the wake of consistent strike at its Manesar Plant, the worried investors of Maruti Suzuki dared to take the step of talking directly to the representatives of workers unions while its stock price slipped to 52 week low. At the behest of the minority shareholders, the Crompton Greaves had to give a commitment towards selling a R270 crore jet that it bought during the period of disappointing profit to an unlisted group company. While the state owned institutional investor, LIC, increased its investment up to R3,500 crore in various tobacco companies, an NGO, working for cancer patients, raised its voice and questioned over the ethics and irony of such acts and the investor was at the receiving end. What is Share (Stake) holder Activism All About? Shareholder activism (in fact, shareholder engagement), in short, refers to exerting articulated pressure by exercising democratic power provided to the shareholders as owner/monitors of the company to influence its behaviour. The active participation of shareholders in their companys operations can ensure better management, less frauds, superior performance and improved corporate governance. By virtue of corporate democratic rights provided to them, the shareholders can raise concerns over economic, environmental even social issues in the annual or other general meetings. Shareholder activists generally include public institutional funds, unions, religious

return (interim/final dividend) on their investment and having convenient exit option of realising their capital along with comparable appreciation. Simply, with provision of those two facilities cum flexibilities, they seldom bothered about the FAT (Fairness, Accountability and Transparency) factors of corporate governance and were hardly interested to know how their company was functioning or controlled by whom and what pragmatic measures need to be adopted to safeguard their investment at least to ensure its consistent return and to protect the company from probable failures due to bad management. Now, they are more concerned about investment security and corporate sustainability with special emphasis on certain fundamentals such as, safety and reliability of products that their company produces, profit (not how much but how such) maximisation and market capitalisation, social and environmental care, faster and better movement of their company to achieve global recognition, strategic management to reduce risk, broadening of brand value and image building, improving corporate culture and employee loyalty with respect to human rights and importantly enhancing effectiveness of enterprise governance. In fact, with the aid of regulatory power provided by laws of the land, the shareholders, be it singly or collectively, can now assert their democratic right by challenging the board decision, demanding poll on a resolution or calling extraordinary general meetings to resolve issues whenever they come across irregularity or inconsistency in the functioning pattern of the company or the management falls short of their expectation. Exercise of such articulated action open to the shareholders, in short, refers to shareholder activism. Ideally such right should be exercised responsibly, putting aside their ego and bearing in mind the best interest of the shareholders, stakeholders, employees, environment and the community at large. At the heart of shareholder activism is the quest for

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 113

654

CORPORATE GOVERNANCE
discretionary behaviour of management. In India, there are primarily four avenues which ensure that debt holders and equity holders can exercise exit or voice opinions to make company management accountable. These are the Companies Act 1956; the SEBI Act 1992, and various regulations prescribed by the SEBI; a market for corporate control (in the post economic reform scenario, regulation for substantial acquisition of shares ensures transparency in operations, equity and disclosure of material information to parties concerned) and active participation by financial institutions and institutional investors. There are rules that allow minority shareholders to take certain remedial action if they believe that they are being oppressed by the majority shareholders, and the company is indulging in management of resources in a way that causes prejudice to the interest of the company and the public. Is shareholder activism controversial? Those who favour the concept argue that companies with active and engaged shareholders are more likely to be successful in the long term; yet many reformers who are uncomfortable with this decentralised, market driven change, argue that pluralistic change is divisive and disruptive to corporations, boards, and even investors. They propose instead a peaceful solution that imposes a rigid process, vests power in a few arbitrary hands, and shuts down the opportunity for debate, contention and argument. Though, no change at all is better than the wrong kind of change, we need to promote this decentralised, market driven approach and fight those who would replace democracy with bureaucracy. How does Shareholder Activism work in France? In general, Shareholder Activism in France is a multistage process, which only in certain circumstances is escalated to the most hostile stage. The stages are illustrated below. Target Selection: The first stage involves target selection from a portfolio of firms. The choice of a target could be driven by a number of considerations relating to underperformance, governance, social or environmental issues. Private Engagement: The second stage, known as behind the scenes or Private engagement activism consists of collaborative informal communication activities (e.g., Private meeting with CEO and the Chairman or meeting with board members.) Public Engagement: In contrast, the third stage becomes confrontational as a result of the refusal

institutions, universities, foundations, environmental activists and human right groups. Shareholder activism can be exercised through proxy battles, publicity campaigns, shareholder resolutions, litigation and negotiations with management. What are the Possible Ways to Make It Work Effectively? With the support of legal and institutional framework, the enlightened shareholders have pursued a much expanded and increasingly sophisticated series of tactics in their effort to monitor the corporations, in which they have invested, including everything from public lobbying to quiet, rigorous, behind the scene negotiations. In fact, the traditional board centric model of corporate governance now seems insufficient and tends to gravitate toward a paradigm that includes an increased role for shareholders. Shareholders now have greater access to proxy voting process. They can nominate dissident board candidates along with the selected management nominees. Active investors may seek or avail services of proxy advisory professionals and can vote for or against a proposal. And they can communicate among themselves. In short, shareholders now have a greatly enhanced opportunity to involve themselves in company operations. Regulatory Options for Stakeholders to Make Management Accountable? The main objective of the Companies Act is to ensure that the interests of the creditors and shareholders are adequately protected and that the shareholders are adequately represented in the management of a company. Since the day to day business of a company is controlled by the board of directors, it is, therefore, important that corporate boards can influence how well a company is run and functions. Enlightened shareholders, supported by a legal or institutional framework, can provide the necessary bulwark against

The market for shareholder activism in India is at a nascent stage. There are no large shareholders associations that can monitor and exercise control over corporations. The central problem in Indian corporate governance is not a conflict between management and owners as in the US and the UK, but a conflict between the dominant shareholders and the minority shareholders.

1 1 4 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 CORPORATE GOVERNANCE
by the target management to accommodate the changes sought by the activists. This stage refers to proxy voting process to support a shareholder proposal or to contest a management proposal at the shareholder meeting. It may also be characterised by activities such as media coverage, lobbying initiatives, and a proxy battle. Hostility: Finally, the fourth stage is characterised by the most hostile degree of activism and can take the form of a publicised exit by a dissatisfied shareholder, a takeover attempt, and/or a lawsuit. There are documented positive correlations between legal actions and calls for Extraordinary General Meetings (EGMs) of shareholders. In particular, when executive remuneration is the issue, shareholder activism appears to be most expressed through AGMs, through the courts or by filing a complaint with the authority appropriate. A recent (TCI) case on shareholder activism related to CIL dispute may attract wider corporate governance issues and if not resolved deftly, may call for involvement of the UN Trade Commission One of the partners at The Childrens Investment Fund Management, TCI, remarked- We have a strong record of activism in many countries and just because no one has done this in India before doesnt mean its not going to work. Importantly, TCI that holds nearly two percent of the Coal India Ltd. (CIL) share, largest holding after the Government of India, has commenced legal action after its repeated attempts to engage with CIL and the Government had failed. Certain concerns such as, Government involvement in the pricing of coal (CIL sells much of its coal under fuel supply agreements at up to 70% discount to market rates), contravention of two international agreements for the promotion and protection of investment, failure on the part of CIL Board to stand up for the interests of the

655

With a view to strengthening control mechanism, improving the governance standard and protecting the interest of investors and minority shareholders, in particular, the Companies bill prescribed a lot of new provisions. These include introduction of the concept of corporate social responsibility; proposal of provisions in respect of vigil mechanism (whistle blowing); introduction of the concept of independent directors, etc.

company and protecting the interest of the minority shareholders leading to breach of fiduciary duties, lack of leadership at CIL since IPO are the few to mention that TCI has alleged. That partner even went on saying- The implications are huge and potentially very detrimental to India if they dont follow through in a sensible fashion. If they choose to list a company they have to treat minority shareholders with respect. The instant impact of those allegations is that the independent directors of CIL opposed Fuel Supply Agreements (FSAs) with nearly 50 power units and perhaps the Coal Ministry of the Government has no better option than to suspend signing any such FSAs in March 2012. Why Shareholder Activism in India is Not Gaining Popularity? The market for shareholder activism in India is at a nascent stage. There are no large shareholders associations that can monitor and exercise control over corporations. The central problem in Indian corporate governance is not a conflict between management and owners as in the US and the UK, but a conflict between the dominant shareholders and the minority shareholders. The board cannot even in theory resolve this conflict. But, how can one, even in theory, envisage a board that can discipline the dominant shareholders from whom the board derives all its powers? In reality, the problem of dominant shareholders arises in three large categories of Indian companies. First, are the Public Sector Undertakings (PSUs) where the Government is the dominant (in fact, majority) shareholders and the general public holds a minority stake (often as little as 20%). Second, are the Multi National Companies (MNCs) where the foreign parent is dominant (in most cases majority) shareholders. Third, are the Indian business group where the

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 115

656

CORPORATE GOVERNANCE

promoters (together with their friends and relatives) are the dominant shareholders with large minority stakes, Government owned financial institutions hold a comparable stake and the balance is held by the general public. That apart, there is a lack of active long term investors such as pension and hedge fund institutions; in comparison as in India, investors usually set sight on short term gains. The Indian market holds the history of limited institutional ownership with promoters including Government holding majority stakes followed by retail investors and institutions. Moreover, India suffers from a problem of too many regulations. Investors have little faith in the system as high litigation cost is involved; manipulative ways are adopted by the promoters sometimes, which makes it tough for activist shareholders to survive. What are the Ways Forward? With a view to strengthening control mechanism, improving the governance standard and protecting the interest of investors and minority shareholders, in particular, the Companies bill prescribed a lot of new provisions and a few are cited below. Concept of corporate social responsibility is being introduced Provisions in respect of vigil mechanism (whistle blowing) proposed Concept of independent directors introduced In addition to Audit Committee, various committees like Nomination and Remuneration Committee and CSR Committee have been prescribed Exit option to shareholders in case of dissent to change in object for which public issue was made Specific disclosure regarding effect of merger on creditors, key managerial personnel, promoters and non-promoter shareholders is provided The Tribunal is being empowered to provide for exit offer to dissenting shareholders in case of compromise or arrangement Valuation by registered valuers mandatory for certain actions like issue of shares to persons other than existing shareholders, acquisition/ selling of assets on non-cash considerations to Directors/persons related to Directors, valuation at the time of merger/amalgamation, purchase of shares held by minority shareholders by majority shareholders

Acceptance of deposits from public subject to a more stringent regime Central Government to have power to prescribe class or classes of companies which shall not be permitted to allow use of proxies Provisions that a person shall have proxies for such number of members/ such number of shares as may be prescribed Provision for class action suits to provide minimum number of persons who may apply for such suits and safeguards against misuse of these provisions Right of an investor to claim to continue even after transfer of the amount to Investor Education and Protection Fund (IEPF) Statutory status to Serious fraud Investigation Office proposed

Conclusion The shareholder activism, in its softest form, should be of prescribing suggestions on strategic issues wherever really needed to ensure sustainable success of a publicly traded company. Since shareholder activism is a situation specific action, there cannot be one size fits all formula. In fact, there are numerous weapons in the activist armoury with diverse powers; its application therefore, should be invoked wisely to bring about the social and cultural change peacefully, leading to satisfaction of all stakeholders. Finally, let the share (stake) holders use that democratic power in right spirit for better governance of corporations. Let us conclude by remembering the words of wisdom of the Comptroller and Auditor General of India, Mr Vinod Rai, No business can be sustainable unless based on probity and integrity. do not succumb to the temptation of short term gainsnothing wrong will go unnoticed for long.

1 1 6 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INFORMATION TECHNOLOGY

657

ERP Systems - Overview of their Emergence, Implementation and the Way Forward

ERP systems have emerged as the changing face of industry in the last 12 years or so. Business managers, both functional and technical, working in trade and industry for long, have witnessed the importance these systems have gained over a period of time, as a driver to optimise resource utilisation and profitability. This article attempts to summarise comparative strengths of ERP systems, considerations relevant to their implementation and in the future where are these systems headed. Readers will appreciate that it is only a synopsis of the whole new world that ERP systems have given rise to in trade and industry. It is intended to give a flavour of what to expect from ERP systems, the precautions to be taken during their implementations and their relevance in the long run from the perspective of advanced web enabled applications.
Computerisation in Pre-Globalisation Era Traditionally, Electronic Data Processing (EDP) was considered a backdoor function in the industry. Programmers, System Analysts and Executive Managers in EDP took up system development work based on requirements submitted by individual departments. Functional departments prepared documents in desired templates and submitted those to EDP, where Data Entry Operators punched the data into the system. Until ERP dawned on the horizons of business, Pay Roll, Inventories, Accounts Receivable and Payable, Fixed Assets, etc. were the favourite applications close to the heart of a finance manager; Bill of Materials, Route Cards, Production Orders were the usual applications for operations managers. Sales management used to

CA. Pramod Bhave

(The author is a member of the institute. He can be reached at eboard@ icai.org)

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 117

658

INFORMATION TECHNOLOGY
Most of these ERP systems also provide for automation in operations by scheduling background jobs to execute various business processes and sub processes in a desirable sequence without manual intervention. Their comparative strengths are discussed hereunder 1. On Line (Real Time) Data Processing In ERP systems, the data is processed on real time basis and reflected in reports online. For example, posting of a goods receipt updates Purchase Order against which goods were ordered; it updates inventory record of relevant Item codes in 'inventory module'; it generates posting in financial accounts; and it also updates inventory and clearing account balances in Balance Sheet. Any business transaction, financial or quantitative, processed in ERP system environment will update records in all relevant functional areas. Thus, when customer order is received, for example, ERP system will provide for creation of sales order with reference to it, create delivery order, post goods issues against sales order impacting inventories and generating accounting entry against it, generate sales invoice and post financial transaction for sales. System will also concurrently update reports in MIS. Data once entered is cross referenced subsequently in all relevant documents and records avoiding duplication of data entry to a great extent. As against this, scope of standalone applications used to be very limited. Most of these applications used to be home grown, catering to the specific needs of departments concerned. So, continuing with same example one could envisage independent systems in Sales and Distribution management to book customer purchase orders, to create delivery orders, to print sales invoices, to post financial entries for sales, to update report on Day's Sales Outstanding and to update Credit History for individual customers. 2. Built-in System Intelligence and Granularity in Reporting Stand alone applications had inherent limitations and were only used to process voluminous data; to perform arithmetic; to ensure accuracy and speedy retrieval of the data and to print ledgers and documents. These applications lacked built-in system intelligence to check the data entered and validate its legitimacy. Advanced ERP systems like SAP R/3 have strong system intelligence capabilities. For example, budget or stock availability checks instituted in ERP

be concerned with printing of sales invoices based on input feeds by data entry operators. Most of these used to be standalone applications, meaning that these records or the sets of data would not have any interface with other functions, so to say. Customer accounts were not being updated when sales invoices were raised on customers and system did not generate accounting entry to provide for liability or credit to cash or bank when goods receipt was posted. Data for given applications used to be punched at a time and their printed output sent to the departmental managers. Wrong or incorrect input, either at its origination or during data entry was not very uncommon and one could very often hear murmuring of both functional and EDP managers Garbage in, Garbage out...(!) Data Entry Operators used Hash Totals to check and verify accuracy of data, leaving ample scope for compensating errors inside huge blocks of printed paper. Expecting reports from EDP in a desired format with desired information captured in reports was at times considered next to impossible. During late eighties and onwards, however, progressive organisations started taking an initiative towards integration of some of these applications. Integrated applications like Material Requirement Planning (MRP) or integrated financial accounting involving General Ledger (GL), Accounts Receivable (AR) and Accounts Payable (AP) started becoming common. However, coverage of those systems from integration perspective was not very comprehensive. Emergence of ERP Systems and their Comparative Strengths The modern day Enterprise Resource Planning (ERP) systems encompass all activities and functions carried out in a business organisation. These systems process data in an integrated manner based on established relationships amongst those activities and functions.

1 1 8 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INFORMATION TECHNOLOGY
systems can prevent purchase order being raised if budget is exceeded or sales order being raised if stock is not likely to be available by scheduled delivery date. Stand alone applications did not provide for any granularity in reporting. ERP systems offer capabilities to develop reports with required granularity to provide kaleidoscopic view of operations and profitability. For example, a report on sales, COGS and net margins (PBIT) for different combinations of characteristics like customer, product, sales region, sales district and sales offices is possible to be developed in ERP systems. 3. Strong Document Numbering Controls and Audit Trails In ERP systems, one finds that the document numbering controls are robust and that every transaction, financial or quantitative, is always documented and identified with reference to a document number. So, establishing audit trail for any end to end process is always easier in these systems. ERP systems have given rise to the concept of end to end processes like Order to Cash (OTC) or Procure to Pay (PTP) or Record to Report (RTR). The built-in audit trails make it easier to track document references, in any end to end process like OTC, for example. It is easier to track, for example, document references for quotations, customer Purchase Order, Sales Order, customer advance, Delivery Document, Sales Invoice, and subsequent settlement of customer receivable for every billing transaction processed in system. SAP R/3 provides for such audit trails in respect of most business processes. Standalone applications which ran primarily based on data feeds in batches did not provide for such robust audit trails as those applications lacked interface with other related applications. For example, application to process goods receipts did not have interface with General Ledger to generate accounting entries for
In ERP systems, the data is processed on real time basis and reflected in reports online. For example, posting of a goods receipt updates Purchase Order against which goods were ordered; it updates inventory record of relevant Item codes in 'inventory module'; it generates posting in financial accounts; and it also updates inventory and clearing account balances in Balance Sheet.

659

goods receipts nor did it update purchase orders against which goods were received. 4. Eco-friendly Nature The III Tier System Architecture used in ERP systems enable individual users view transactions and reports being updated on real time basis. Carrying loads of print outs of various ledgers is no longer considered necessary. In a way, these ERP systems are very environment friendly as well. This was not the case with conventional stand alone systems wherein data punched in the system used to be processed in batches and made available to users usually in printed form. 5. Best Business Practices Of late, most business organisations have implemented ERP systems offered by credible multinational or domestic companies. The decision to do so instead of depending upon in-house capabilities stems from the perspective of ensuring assured systems support over long term and availing the benefit of best business practices configured in those systems. ERP systems coordinate resources, information and activities needed to complete business processes in all functional areas like Materials, Production, Sales, Finance, HR, etc. System updates relevant records in an integrated manner whenever any business process or sub process is executed in the system. 6. Improved Return on Investment Given the nature of these systems it is rather easy to imagine their vast potential in bringing operational efficiencies in their wake. These systems can reinforce strong managerial controls, focus attention on areas where improvement is necessary, and enable organisations to operate on principles of lean management. Market competition in todays world has no boundaries. Globalisation of business the world over necessitates that every business organisation must utilise its fullest potential to reduce costs and improve its market share and profitability to stay afloat. Realising this, most business organisations, small and large alike, have implemented ERP systems or they are in process of their implementation or on the look out for ERP system that is optimum to their needs from cost benefit perspective. Mergers and acquisitions are quite obvious in today's business world. The bigger fish would always want smaller ones to adopt and roll out the same system it has implemented. World is not

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 119

660

INFORMATION TECHNOLOGY

static even when it comes to the newer versions of these systems and their Integration strengths. So, the process of implementing system version upgrades, roll-outs and enhancements will continue unabated. Ongoing system implementation projects and their support round the clock, are matters of routine in most parts of the world. 7. Team Work and Improved Employee Morale To implement the ERP systems i.e. either to replace manual or stand alone legacy systems or implement version upgrade or system enhancements in any organisation, you need a team comprising Domain Consultants, Application Developers, System Administrators, Project Managers and least to mention, enthusiastic Business Process Champions from business and you also need a strong support from top management. You need domain consultants who will understand business; interact ably with users in different functional areas; put across their view point and share best business practices implemented elsewhere in past. Given the nature of integrated systems environment, it follows that a consultant or key user in any given domain, may it be finance or production or sales, cannot work in isolation. He or she would have to move in tandem with consultants in other areas. Standalone applications viewed functional departments more as water tight compartments. Departmental interests deserved more attention over organisational effectiveness of operations leading to inter departmental or inter personal feuds in many instances. System Implementation Costs ERP system implementation projects involve considerable cost outlay. This is regarded purely as an investment and the initiative for the same is usually taken at the highest level of management hierarchy. Many factors will impact the cost needed for such projects, volume and complexity of operations and geographical diversity of business being the most important considerations from overall implementation cost perspective. ERP implementation involves costs to purchase user licenses, fees that the implementation partners charge, cost of hardware like servers and desktops, cost of training from ERP system vendors, cost of logistics for consulting team, cost of work sub-contracted, etc. Considering the amount of expenditure involved, the time it takes to implement the system and the

ERP system implementation is usually a long drawn process in large organisations. Depending upon complexity of operations and number of plant or office locations, the initial implementation could take anything between six months to couple of years. Multinational organisations carry out these implementations in phases over different geographies.

shortcomings that the system may suffer from flaws in its implementation, management of the business keenly observes project progress on regular basis. Implementation Period ERP system implementation is usually a long drawn process in large organisations. Depending upon complexity of operations and number of plant or office locations, the initial implementation could take anything between six months to couple of years. Multinational organisations carry out these implementations in phases over different geographies like Americas, Europe, APAC (Asia Pacific Region) or AMEA (Africa and Middle East Asia). Some organisations adopt a different approach. They start with usually financial accounting alone, and then integrate Materials and Sales functions and once these basic modules stabilise, they implement Production Planning, Controlling and HR. Regardless of the time it takes, ERP implementation is regarded as a project concurrent to the main business and regardless of the fact that the project is undertaken concurrently it is accorded prime importance, given far reaching implications any good or bad system has on the business. Stakeholders There are many stakeholders in this project, right from top management to a process owner responsible to handle day to day activities. There is a steering committee comprising representative from top management, usually CEO or CFO/COO and one from implementation partner with matching capabilities. Then there are project managers, functional heads, business process champions, key users and employees at large. Larger the business, larger will be the scope of the project for initial implementation and larger will be the overall project team. Resources from business are drawn either as Full Time i.e. working exclusively on system implementation or on Need Based basis.

1 2 0 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INFORMATION TECHNOLOGY
All of these role players will have some stake in successful implementationprocess owners need simplified processes; business process champions look forward to promotions...; middle level managers want to ensure that they continue to have a say in business and their importance is retained...; top management wants a system just not to replace legacy systems but the system that will improve operational efficiency. Dynamics of System Implementation Any ERP system implementation would usually involve four phases mentioned below. The time estimates for their completion depend mainly upon scope of the given project. 1. Requirement Gathering and Business Blue Print Documentation 2. Business Process Re-engineering and System Realisation 3. Go Live Preparation and 4. Go Live and Post Go Live system support First two phases are particularly important from the perspective of building a robust system that fulfills user expectations. It is during requirement gathering and system realisation phases that the utmost care needs to be exercised to ensure that there are no communication gaps and user expectations are met. The first phase, Requirement Gathering and Business Blue Print Documentation involves activities like i. Conducting user workshops and interviews to understand current business processes, master and transaction data processed in legacy systems and reports produced by those systems. ii. Performing so called Gap Analysis to bring out gaps in current practices and future expectations. iii. Documenting current practices as well as proposed requirements in what is known as As Is Status and Proposed to Be documents. iv. Determining if the requirements could be met by standard system configuration i.e. through Reengineered Business Processes as recommended in ERP systems or if the requirements would need custom development. v. Conducting play back sessions before select audience to reconfirm if requirements were correctly understood. vi. Carrying out system configuration and executing transactions with sample data to offer Proof of Concept (PoC) for specific solutions sought by the business.

661

At times, this phase of requirement gathering is regarded as a project by itself and is appropriately named such as Feasibility Study or Discovery Phase. It is independently paid for provided all of its clauses are complied with. In such a scenario, it is considered as a precursor to proposed system implementation. The implementation partner is proposed to come up with detailed effort estimate and implementation price based on the inputs and insight gathered during this phase. However, practices do differ. Many a time, based on proposals submitted and presentations made by implementation partners invited to participate in bidding, an implementation partner or their consortium is awarded a contract for entire system implementation including the time for requirement gathering. The second phase of Business Process Re Engineering and System Realisation starts, once business approves the Business Blue Print document where in 'As Is Status' and 'Proposed to be' is captured. Robust ERP systems like SAP R/3 recommend clients to adopt the best business practices that they offer. But, it is for the client to oblige and re-engineer certain processes as recommended by ERP vendors. There is always scope to customise system as per business requirement. However, the choice to do so should be exercised with great care keeping in mind cost benefit analysis of it and long term sustainability. Functional consultants configure the system based on the BPML (Business Process Master List) prepared during BBP phase. It is extremely important for Business Process Champions and key users from business to get involved proactively during this phase. They have to provide sample master data to be maintained in different functional modules on realistic basis keeping in mind the current as well as proposed requirements, understand 'in built' system intelligence and cross functional integration aspects. They have to understand the way data gets processed in system and they have to also get a good feel of hands-on experience. Usually, implementation partners provide high level and more detailed training to core users. But, it is for core users to utilise the opportunity and understand system intricacies. It is also during this phase that the consultants and developers carry out system developments. Usually, implementation partners prescribe a detailed process, generally referred to as 'Change Requests Control', to follow to accomplish any small or big development. It is for the PMO (Project Management Office) and QA

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 121

662

INFORMATION TECHNOLOGY
During Go Live Preparation phase, PMO ensures such things as i. Users are equipped with system User Ids, passwords and system authorisations. ii. The system logon pad is installed on desktops and laptops. iii. The users are trained adequately in processing transactions under their control. iv. Different plant and office locations are well connected. v. The process for data migration is adhered to by all concerned. vi. The support matrix is published and understood by all concerned for post go live system support. vii. Key users and business process champions have no vacation plans soon after system goes live (!) viii. Critical data like financial and material balances is validated by key users. Usually, PMO will have a check list to ensure that all precautions have been taken and necessary preparations are in place. PMO will monitor the progress and start taking stock of their compliance few days before system is scheduled to go live. In any business, there is no such functional area that is very important or less important from overall effectiveness of business operations. How effectively system will seamlessly integrate operations from the stage of planning and procurement of material inputs to manufacturing and selling finished products is something that prominently occupies top managements attention. After all, any management would invest in implementing ERP system with a view to earn some return, tangible and intangible, on its investment. The tangible returns could be in the form of improved inventory turnover, reduced bad debts, optimised manufacturing operations and improved profitability through focused sales efforts aided by marginal and net contribution analysis. ERP systems have enabled organisations to perform on principles of lean management bringing in efficiency in operations and improving their Return on Investment. Intangible returns could be in the form of enhanced image of the organisation in public eye. In early days of ERP system implementations, the investor community viewed companies undertaking ERP implementations very favourably. Intangible returns could also be in the form of preparedness of business to reap the benefits of technological advancements in the areas relevant to ERP systems and their web applications. Unless

(Quality Assurance) teams to ensure that the process laid down is complied. QA prescribes various forms of testing during this phase. Stand alone processes (not involving any cross modular integration) like maintenance of masters (Customers, Vendors, Materials, Bills of Materials etc.) in respective modules are prescribed for Unit Testing by key users. Core users then participate in Integration Testing of end to end processes involving cross modular integration. Domain consultants provide active help to core users during integration testing. However, another form of integration testing known as User Acceptance Testing is usually expected to be performed by core users independently. It is based on this testing that core users have to provide sign off in token of their acceptance of system configuration and developments, if any. If business has multiple entities in same systems environment where projects for system enhancements are of ongoing nature, then QA also prescribes schedule for Regression Testing which is intended to ensure that the system set up is independent for different entities according to their business requirements. System administration cell will usually conduct System Performance Testing with full data upload and multiple system logons to ensure that system responses are not slowed down. In bigger implementations involving substantial migration of data from legacy systems and number of interfaces with external systems, usually a Pilot Run for a brief period is recommended. Pilot run helps in judging how effectively interfaces will run and if the 'black out' period envisaged will suffice to migrate data during system change over from legacy to ERP. Based on the results of pilot run, project team gets additional opportunity to fine-tune the system and schedule for data migration, wherever necessary. A blackout period is the period during which both legacy and ERP systems are not available to users to enter data or process any transactions. Usually it is recommended during data migration. This consideration is particularly relevant in retail industries where volume of transactions processed every day is enormous. Around the time these forms of testing and the pilot run are due for closure, a steering committee generally deliberates on whether the time is ripe to go live or not. Various considerations play a role in this decision making, the important ones being preparedness of the organisation to go live and comprehensiveness of the system to meet desired objectives.

1 2 2 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INFORMATION TECHNOLOGY
ERP system has been implemented, business will not be able to implement advanced web applications like APO, SRM, CRM, etc. and further optimise operations and profitability. ERP Systems Change the Way of Life in Business Organisations Operations are no longer viewed as watertight compartments once ERP system is implemented. Employees are encouraged to take broader view of operations and end to end processes like, Procure to Pay encompassing transaction processing right from creating purchase requisition to the ultimate invoice verification and vendor payment. Those activities performed earlier by employees in different departments like Material Planning, Purchase, Stores, Production, Sales and Finance are realigned in a way that optimises operations. With roles and authorisations coming in vogue for individuals with system user IDs and passwords, operations become more transparent. Subject to authorisations, concerned employees and their supervisors can view the status of activities under their control in real time. Clarity over steps to be performed in given processes and operations dispenses need for too many middle level managers and it directly promotes flatter organisational structure. So to say, there is little room for supervisory roles in ERP systems environment. Offices wear modern look with computers, printers on office desks and central air conditioning. Online transaction processing reveals inter-dependence and helps to reduce chaos resulting from inaction of laggards. Management tends to view operations from end to end process perspective and it dilutes traditional thinking of departments looking after individual functions like Purchase, Sales, Credit, etc. Change Management Discussion over the dynamics of system implementation cannot be concluded without mentioning the process of 'Change Management' that the organisations have to deploy during the period of system implementation. Providing employees with project progress update at regular intervals through individual emails; putting up banners or posters in shop floor and offices; arranging short quizzes on ERP system and rewarding employees with higher scores; celebrating milestone completions, etc. will go a long way in ensuring that

663

the change in system environment is very well absorbed by all employees. The tools, techniques or the perceptions about change management may differ from place to place. But, given the organisational and cultural changes that these systems bring in, it is always necessary to ensure that the proposed changes in system environment are understood well by all employees and their mindset gets tuned for the change. Many large organisations consider Change Management as an activity concurrent to the main ERP implementation project so as to ensure hassle free post go live operations. Way Forward Most organisations have endured in last 12 years or so the turbulence caused by system changeover and the resultant cultural changes. ERP systems have now come to occupy indispensable role in day-to-day functioning. However, most of these organisations are still coping up with the prolific capabilities that these systems offer. Advanced solutions in SAP R/3, most preferred ERP globally, like 'Sales and Operations Planning', 'New GL', Warehouse Management', 'Material Ledger' and 'Profitability Analysis' have not been utilised to their fullest potential. There is still scope for organisations to improvise on basic ERP systems implemented. Before I conclude, let me briefly sum up the way forward in terms of systems integration with external customers and vendors. Computerisation in business has not stopped with implementation of ERP systems. Now the future trend would be to i. Integrate your business with the business of your suppliers and your customers; ii. Seamlessly integrate your demand for the inputs you require to manufacture your products and seamlessly integrate your supply of products with the demand for your products by your customers; and iii. Balance your capacity to manufacture and plans or schedules to procure and deliver in line with plans of your vendors and customers. All of these applications will be web enabled. They will have integration with ERP systems implemented in the back end. The interplay of all of these applications and systems will result into more efficient utilisation of resources at a macro level.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 123

664

ManageMent

Value-Based Management for Valuing Values in Organisations

India has been known world over as the abode of rich values, spirituality and bliss. Its essence lies in the realization of we, i.e. entire humanity is considered a family. Happiness rests inside us if we have positive feelings for others, which results into external peace and harmony. Advent of materialism has polluted the fabric of the value system in all walks of our life. Business history, for example, is replete with evidences of deterioration in forms of increasing fraud, scandal, misappropriation, bribery and so on. We are one of the most corrupt countries in the world, which is a testimony of the erosion of our values. Such a situation urgently calls for some value-based management system which this article makes a case for. This article explains its various aspects including its benefits, limitations, uses and so on. Read on
Introduction That the Indian subcontinent from time immemorial has been the abode of values and spiritual bliss is confirmed by a variety of evidences. Indian value system or spirituality has shown the beacon light of wisdom and harmonious peaceful coexistence to the rest of the world. But with the advent of materialism, our value-system has changed. Business is part and parcel of a society, and, therefore, that makes no exception to the system of change. Business management has been an evolving concept changing its perspective and meaning over the period. While Mary Parker Follot defined management as the art of getting things done through people (Follett 1941), modern thinkers consider that as a science of getting things done along with others. Henry Ford says: Bringing people together is beginning, keeping people together is progress and working with people is success. How to manage an organisation to serve the desired

Prof. S. S. Khanka
(The author is a faculty of Human Resource Management in the National Institute of Financial Management, Faridabad. He may be contacted at sskahnka05@rediffmail. com.)

1 2 4 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 ManageMent
purpose(s) has been a subject of much discussion and concern among organisational thinkers and practitioners. Depending on the changing perspective of business management, value-based management (VBM) has been a management approach discussed much in the recent past and has been receiving attention and action increasingly in both principle and practice. Supporters of this approach appreciate it as one of the most effective approaches in creating and maximising values for the shareholders of an organisation. It helps combine everyones self-interest around the companys bottom line and corporate value (Nabina Saha, 2009). Being a relatively recent approach, not much is known about the authenticity of this approach. Whatever knowledge is so far available in this subject is highly scattered and as such our understanding about the approach is inadequate and far from satisfactory. What is VBM? Before we try to define VBM, let us first understand what value is. Value is general belief tinged with moral flavour containing an individuals judgmental ideas about what is good, right or desirable. Milton Rokeach (1973), a pioneer in studying and classifying human values as terminal values and instrumental values, defined value as a specific mode of conduct or endstate of existence is personally or socially preferable to an opposite or converse mode of conduct or end-state of existence. Value also means, thus, what is worth and meaningful in totality. Values serve as a foundation for ethical conduct of business corporations. There is an ongoing polemic regarding the metrics that should be used in VBM. As such, VBM has been defined differently by different thinkers. Nonetheless, it is found that most definitions of VBM are, by and large, a sign of the same way of thinking. According to J. Simms (2001), value-based Management is essentially a management approach whereby companies driving

665

philosophy is to maximise shareholder value by producing returns in excess of the cost of capital. Another leading consultancy defines VBM as a management approach which puts shareholder value creation at the centre of the company philosophy. The maximisation of shareholder value directs company strategy, structure and processes, it governs executive remuneration and dictates what measures are used to monitor performance. According to T. Leahy (2000), value-based Management says, in a nutshell, the key to increased shareholder value lies in the integration of strategic planning, performance measurement and compensation. Definitions of VBM can be broadly classified into two dimensions: single, i. e. shareholder dimensions and multiple, i.e. stakeholder dimension. In the former, VBM is considered as a management approach that ensures maximum value for shareholders. Under this dimension, VBM includes: 1. Creating Value: Ways to actually increase or generate maximum future value 2. Managing for Value: Governance, change management, organisational culture, communication, leadership 3. Measuring Value: Valuation Under multiple dimensions, VBM is considered as a comprehensive approach to managing the activities of an organisation, to ensure that stakeholder return is maximised in terms of profits, return on investment, loyal customers, and satisfied employees or, in the case of government departments, satisfied tax payers and service users. Accordingly, VBM aims to provide consistency of various dimensions but not limited to: corporate mission (business philosophy) corporate strategy (courses of action to achieve corporate mission and purpose), corporate governance (who determines the corporate mission and regulates the activities of the corporation), corporate culture, corporate communication, performance management processes and systems, and reward processes and systems. Now, we can profitably define VBM as management system in which entire organisation is focused, measured, compensated for creating value for all stakeholders such as shareholders, customers, employees, vendors, government and society. Thus,

In ever changing and competitive business environment, managers are confronted with increasing and varied kinds of challenges to perform their agent role to ensure optimum use of scare resources, on the one hand, and generate maximum return on investment for owners, on the other

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 125

666

ManageMent

VBM is a holistic approach of creating, managing, and giving values to all stakeholders of an organisation as mentioned in Table 1: Table 1: VBM and Values for Stakeholders Stakeholders Values Organisation Encouraging an innovative organisational climate with free and frank exchange of ideas. Demonstrating high level of personal integrity and modesty. Shareholders Protecting and safeguarding their investment. Ensuring them a fairly high rate of return Employees Understanding and acceptance the needs as well as rights. Providing adequate wages, good working condition, job security, and collective effective machinery for speedy redressal of employee grievances. Scope for suitable opportunities for promotion and selfdevelopment. Inculcating, creating and developing a sense of belongingness to organisation and team spirit among coworkers and camaraderies. Customers Providing quality products and services at fair prices. Fulfilling its commitments impartially and courteously with sound business principles. Government Confirm and contribute to the national interest as mentioned in government policy. Society Ensure the effective use of natural resources. Assist in community affairs. Render needed assistance during natural hazards. Why VBM? In ever-changing and competitive business environment, managers are confronted with increasing and varied kinds of challenges to perform their agent role to ensure optimum use of scare resources, on the

Economic value-added approach was proposed and pioneered by Stern Stewart & Company. EVA is profit after cost of capital and is also known as super profit. A positive EVA indicates that a business is not only earning, it is earning enough to satisfy the providers of fund.

one hand, and generate maximum return on investment for owners, on the other (D. S. Young & S. F. Byrne, 2001). While those challenges reveal inefficiencies in the existing management approaches, those also underline the need for an integrated management tool to face the challenges called VBM. The major drivers resulting interest in VBM include but not limited to the following only: 1. Research findings reveal that explicit focus to shareholder value which was, however, less explicit till 1990s, enable organisations to perform better and other stakeholders also do not suffer at the hands of shareholders (Copeland et al, 2000). 2. Just as traditional method of performance evaluation based on past financial performance has undergone change to an integrated evaluation method dubbed as Balanced Scorecard (R. S. Kaplan & D. P. Norton, 1996), the changed objective of management from managing for earning to managing for creating value has necessitated the evolution of an integrated approach of management dubbed as VBM (Stern Stewart, 1999). 3. Modern organisations are looking for an approach that serves as many purposes as possible. The VBM approach is argued to subsume or render unnecessary most, if not all, other types of performance measures at the corporate and strategic business unit levels. They, therefore, contest the principle of different accounting for different purposes (M. Bromwich, 1998). 4. It is mainly the institutional investors, who traditionally were passive investors, have begun exerting influence on corporate management to create maximum value for shareholders. 5. Of late, increasing attention has been paid to linking executive compensation to shareholder returns, i. e. values. An attempt has been made in the following Table 2 to justify the need for value based management in the present scenario hovering in Indian organisations.

1 2 6 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 ManageMent
Table 2: Business Scenario: Past vis--vis Present The Backdrop The Past The Present Degradation in moral India the abode of values continuously spiritual bliss since toward downturn. time immemorial. People suffering Society from hunger, health, characterised by dishonesty, mistrust, etc. happiness, health, Feeling of I and Me. and honesty, also Few Haves, many called Ram Rajya. Feeling of WE and Haven'ts. OUR Increasing corruption, Realisation of One frauds, and scandals, cheating, distrust, etc. for All and A//for One Ram Rajya replaced by SarvaJan Hitay, A. Raja type Rajya Sarva Jan Sukhay Business is not exception Vasudheva to such radical change. Kutambakam World Business almost paragon as one family. of coiruption, frauds, scandals, and cheating. That necessity is the mother of invention to replace the present greed-based management by value-based management can be well justified by the following black humour in that gag about operation theatre (Moid Siddiqui, 2005): The operation was successful but the patient died. Why was the operation successful? Because it met the defined criteria. Why did the patient die? Because the defined criteria was wrong for the particular operation or patient. Benefits of VBM VBM benefits the stakeholders of an organisation in various ways as mentioned below: 1. Management: VBM enables management to move from the autocratic approach to participative one mainly based on value for all stakeholders of organisation. In a sense, management moves with a balanced approach valuing the values for all. 2. Employees: An organisation that operates following the cardinal principles of VBM empowers its employees as workers as well as owners. VBM creates an organisational culture where employees find their work more satisfying and economically rewarding. 3. Labor Unions: VBM changes the labour unions approach from an utter hostile to seer helping one in deciding and solving organisational matters

667

involves in more interest of the parties involved. Labour unions can also contribute to deliver a higher level of economic justice and far greater rights for their members than the "crumbs" now bargained for within the framework of traditional labor-management bargaining system. 4. Organisation: Organisational evidences are available to confirm that more the management approach is value-driven and value-based, more the stakeholdersinterest are unified and multiplied. This happens because VBM improves both employee and customer satisfaction which ultimately result in increased sale, increased revenue, and increased profit. Profit serves as oxygen for the survival and growth of an organisation. In nutshell, valuing or caring for the values of all stakeholders, in turn benefits business. How? Consider a Chinese proverb here: A little bit of fragrance clings to the hand that gives you roses. In other words, do good to others and we will have good for ourself too i.e. what goes around comes around. Limitations of VBM However, there are some limitations too: VBM being a holistic management system requires cultural change in the organisation and changing culture is a large-scale initiative. Implementation of VBM involves considerable time and other resources which are always not feasible for all organisations. Implementation of VBM in letter and spirit requires top management support which is, however, not always there. Use of VBM also necessitates comprehensive training and consultancy which are quite costly to bear by most of the organisations. VBM helps companies in achieving higher level efficiency but does not encourage collaborative relationships among various units of organisation. It is due to the above reasons that no perfect VBM model could be invented so far. Methods in VBM Though several methods have been used in VBM, following are the four principal ones: 1. Marakon Approach: This approach was proposed by Marakon Associates, an inter-national management consultancy firm in 1978. This approach is based on market-to-book ratio. Here,

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 127

668

ManageMent
Peter Drucker (1995) referred to EVA as a measure of total factor productivity, Robert Boldt, an investment officer at CalPERS, a leading pension fund believes that only EVA gives a real picture of value creation (Prasanna Chandra, 2001). VBM in Practice in India Now, it also seems in logical sequence to investigate into the practice of VBM in the Indian corporations. Gita Piramal selected the top legendary business houses in India on the basis of following seven VBM criteria: 1. Not rags to riches, not because of their personal triumphs but for the The impact of organisational work and effort on thousands of ordinary lives. 2. Producing globally qualitative products and services. 3. Modern mind, i. e., traders think of today's profit, an industrialist looks at tomorrow's balance sheet but a legend thinks of the next generation. 4. Go beyond the boundary to encourage others to become entrepreneurs and start their own businesses. 5. Do not trudge on easy and smooth road to prosperity but hack roads through jungles, build factories in villages, transform barren tracts of land into profitable assets, change mind-sets, and pioneer industry or services. 6. Exhibit strong commitment to the spread of education. 7. Practice patriotic entrepreneurship to make their felt around the world. The VBM practices of some of the prominent Indian organisations are shown in the following Table 3: Table 3: Values Practiced in the Indian Organisations Name Founder Parameters TATA J. R. D. Tata ethos-ideals and Group Tata traditions Sound and straightforward business principles. Commitment towards the interests of the shareholders. Health and welfare of the employees. Generous towards people.
w w w. i c a i . o r g

the market value refers to the long-term equilibrium market value. 2. Alcar Approach: LEK/Alcar Consulting Firm proposed this approach of VBM. According to this approach, a business strategy evaluation involves the following steps: Step 1: Forecasting the operating cash flow stream for the strategic business unit (SBU) during the planning period. Step 2: Discounting the operating cash flow with weighted average cost of capital. Step 3: Finding the present residual value of SBU at the end of the planning period. Step 4: Determining the total shareholder value. Step 5: Calculating the pre-SBU value. Step 6: Finally, determining the ultimate value credited by the strategy. 3. McKinsey Approach: This approach proposed by McKinsey & Company involves the following key steps in VBM: 1. Ensuring the supremacy of the proposition of value maximisation. 2. Finding the actual key drivers of the organisation. 3. Selecting and establishing the most appropriate management process. 4. Implementing the system of VBM in letter and spirit to fulfill its purpose. 4. Economic Value Added (EVA) Approach: This approach was proposed and pioneered by Stern Stewart & Company. EVA is profit after cost of capital and is also known as super profit. A positive EVA indicates that a business is not only earning, it is earning enough to satisfy the providers of fund. Thus, EVA as a performance measure is better than accounting profit. However, one of the objections raised against EVA is that it is entirely based on current income and does not measure the present value of earnings. While different methods of the VBM have their own fan clubs, each camp argues that its measures are the best duly supported by evidence. Nonetheless, EVA method seems to have received more attention and gained more popularity in the corporate world. This was, in fact, triggered by a feature article in Fortune published in 1993 that called the EVA todays hottest financial idea (Shawn Tully, 1993). Since then, increasing references to EVA have appeared in Fortune, Wall Street Journal, The London Times, and a number of special-interest magazines. While

1 2 8 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 ManageMent
Name Parameters Founder Dhirubhai Huge production and Ambani best quality of output with cheapest price. Think big, think fast, think ahead. Introduced the equity cult to thousands of ordinary Indians. Name

669

Founder

Parameters Open discussions Asks everyone to tell top management what problems are and what should be the solutions. Then instills discipline that what has been decided must be done perfectly. Ethical business practices and transparency. Access to telephone lines for ordinary people.

Reliance Group

AMUL

Verghese Kurien

Professionalisation of farming followed with innovative process. Use of qualitative equipment. Constructive social change in rural areas. Empowering the rural masses. Information and infrastructure. Commitment to untested values. Humanity and tolerance for the weaknesses of others. Taking risks. Fully committed to current concepts such as shareholder value, and value-based management (including out-sourcing, employee stock options etc.). Quality products at competitive prices. Challenged government vision of what people want from electronic entertainment.

Infosys

N. R. Narayana Murthy

World Tel

Satyen (Sam) Gangaram Pitroda

Source: Gita Piramal: The Millennium Special:The Past the Present & the Future

Birla Group

G. D. Birla

ZEE TV

Subhash Chandra

Bombay Cawasji Factory system with Spinning Nanabhoy factory labor. Mill Davar Led the way for other entrepreneurs to enter industry.
Mittal Steel

L. N. Mittal

Unique mix of cultures in the management team: takes best from each country.

To sum up, VBM practices relate to the organisational aspects such as ethics and transparency, innovativeness, financial performance, quality of product and services, global competitiveness and people practices, and talent management. It has a mission to achieve the objectives in an environment of fairness, honesty and courtesy towards clients, employees, vendors and society at large. Business history is replete with evidences that business that runs with values survive and thrive, and those that run with self-interest only ultimately fizzle out and flounder in due course of time. Businesses relentless pursuit for profit, call it greed, is very beautifully demonstrated by the following little story as narrated by Moid Siddiqui: A young innocent girl would stand at the graveyard waiting for a dead body to come so that her father, who was a grave digger, would earn enough money to pay for the days meals. If no dead body came to the graveyard, the family would go hungry that day. So, each time the girl looked through the window and saw a dead body coming into the graveyard, she would experience immense pleasure. A strange smile would hover on her face. One day when her own father died, people saw the same strange smile on her face. Lessons from VBM Experiences Many companies in India have joined the VBM bandwagon and the key lessons we have learnt

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 129

670

ManageMent
adapt the methods to fit their own situation. In fact, in most cases, firms develop their systems in-house rather than hiring a consulting firm. Potentials for VBM in India There is an immense potential for VBM in Indian companies, as most of the Indian companies have substantial but underutilised physical assets as reflected in their low productivity of capital. Liberalisation, privatisation and globalisation have heightened the competition since 1991 onwards forcing the companies to review and restructure their portfolios for creating and achieving greater value. Especially, ordinary shareholders earning low level of returns in recent years have been poking corporate management to increase the value of their investment. Concluding Remarks VBM as a new performance device has been gaining increasing use and popularity world wide including India. In the new era of survival of the fittest in totality, valuing values of company as well as of various parties called stakeholders are treated as an asset. Companies, whether private or public, profitmaking or non-profit-making, banking or trading, have to frame ethical and honest values satisfying the needs of their vendors including employees, customers and other stakeholders. Increasing number of companies have been realising the relevance of practicing value-based management for better performance. Infosys founder N. R. Narayana Murthy, an advocate of value management, says: I'm a capitalist in mind, a socialist at heart. Murthy recalls: There was one situation in Karnataka where an officer wanted us (i.e. Infosys Technologies Limited) to bribe him. He told us to pay R4 lakh to him and save R36 lakh or pay R40 lakh to the Government. We paid R40 lakh to the Government. He goes on: Ones clearest conscience is the softest pillow to have a sound sleep. To conclude, winners stand firm on values but compromise on petty things while losers stand firm on petty things but compromise on values. In todays highly competitive business environment, there is a greater need, incentive and compulsion for Indian companies to focus more on value creation. Considering the relevance of VBM in real-value creation, VBM will emerge a more dominant business theme in Indian business organisations in the years to come. Sooner it happens, better will it be for the Indian organisations.
w w w. i c a i . o r g

so far from the experiences of VBM adopters can be: Top management support and involvement is essential. Experiences are available to mention that in order to make the implementation of VBM successful, the needed and timely support from the top management like CEO and CFO is a must condition. Without their active and enthusiastic support and involvement, the philosophy and implementation of VBM is doomed to fail. A good incentive plan is necessary. A good incentive plan in terms of its link between performance and compensation has been a key and critical element in any VBM programme to become it successful. A good incentive plan is characterised by the features like objectivity, simplicity, variability and definitiveness, i. e. no discrimination. Employees should be properly educated and trained. One can not think of success of VBM programme without its understanding by employees. Therefore, employees must be imparted proper training that justifies the need for improving productivity of capital, explains the basics of VBM programme, exemplify how VBM system can contribute to value creation for shareholders. Choice of metric per se is not critical. The metric chosen and circumstances of the company should duly match. Myers (1997) has beautifully exemplified this: Much as hitting a good golf shot depends more on how you strike the ball than on what brand of club you use, achieving success through the use of any performance metric will depend more on how well you apply it than on which one you use. VBM works well in areas conducive for it. It does not benefit all firms equally but ones which stand conducive for it. A firms conduciveness that depends on factors such as the availability of substantial assets so far not productively employed, has diversified into too many areas beyond core competencies and companies that depend more on physical capital than intellectual capital. There is a need for customised VBM system. This simply means that one size does not fit all. VBM adopters review the VBM tools of different adopters and customise their own application. Based on their survey of VBM practices across companies, Martin and Petty reported: Finally, we found that many managers do not accept what the vendors say at face value. They learn from the consultants but then
1 3 0 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

 CAREER WATCH

671

Report on Campus Placement Programme August to September, 2012

The Committee for Members in Industry organises Campus Placement Programmes for all levels of Chartered Accountants at frequent intervals throughout the year. The Committee for Members in Industry is committed to provide world class placement services to the Members and best accounting and finance talents to the industry. In its endeavor to provide quality Accounting, Finance, Tax, Audit and Management Consultancy personnel to recruiting entities, the Committee has successfully organised one more round of Campus Placement Programme for newly qualified Chartered Accountants at 18 centres viz. Ahmedabad, Bangalore, Baroda, Bhubaneswar, Chennai, Coimbatore, Ernakulam, Hyderabad, Indore, Jaipur, Indore Kanpur, Kolkata, Mumbai, Nagpur, New Delhi, Pune and Vapi in August to September, 2012. Brief summary with comparison statement of past placement programme is as follows: August to September, 2012 Number of Candidates Registered 9382 Number of Interview Teams Number of Organisations Number of Jobs Offered Number of Jobs Accepted 86 53 518 497 R9,00,000 and above R7,50,000 to R8,99,000 R5,00,000 to R7,49,000 R3,50,000 to R4,99,000 R2,50,000 to R3,49,000 Total 171 64 618 70 10 933 6. In all 5.52 % of registered candidates were offered jobs. 7. 53 entities including the corporate organisations and the Chartered Accountancy Firms have participated during the Campus Placement Programme. 8. 86 Interview Panels have participated during this Campus Placement Programme.
Salient Features

1. Candidates have been given two choices to meet the recruiting organisations. First at bigger cities and second (if the candidates has not been selected at bigger cities) at smaller cities. 2. The committee organised Orientation Programme for candidates to sharpen their soft skills and give updates on the technical side. 3. In this Campus Placement Programme all the candidates have been permitted to attend the Orientation Programme at any of the centres to avoid the requirement to travel to centres chosen for interviews for attending the Orientation Programme.
Salary Range

Salary Range (per annum)

Number of Candidates February to March, 2012

Percentage of jobs offered vis-a- 5.52% vis registered candidates

Executive Summary

Number of Candidates August to September, 2012 102 57 320 18 NIL 497

1. Highest salary offered for Domestic posting in the Campus Placement Programme is R13.77 lakh per annum. 2. Highest salary offered for International posting in the Campus Placement Programme is R16.70 lakh per annum. 3. The minimum salary paid is R4 lakh per annum. 4. Average CTC offered was R7.1 lakh per annum. 5. Around 518 jobs were offered to the candidates who participated in Campus Placement Programme.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 131

672

CAREER WATCH
Campus interview Centre Chennai Kolkata Hyderabad Pune Jaipur New Delhi Mumbai Ahmedabad Bangalore Baroda Ernakulam Indore Nagpur Chandigarh Bhubaneswar Coimbatore Kanpur Vapi Rank Holder List Total Total Number of registered Interview Jobs Recruited by Candidates for Interview Teams Offered Companies 488 10 63 63 605 6 16 16 305 5 17 17 597 1 NA NA 601 2 24 23 3190 16 163 160 1604 12 100 100 768 2 8 8 1049 13 57 55 826 (10 + 816* ) 2 11 5 105 (11 + 94* ) 1 3 Awaited 1549 (15 + 1534*) 3 17 13 1549 (16 + 1533*) 2 4 4 2101 (59 + 2042*) 1 5 5 1436 (9 + 1427*) 5 18 16 500 (9 + 491*) 3 12 12 505 (18 + 487*) 0 0 0 353 (4 + 349*) 0 0 0 2 9382 86 518 497

The following table shows the statistical information of campus interview at a glance*:

S No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

* Indicates the total figure of the candidates after merger from the bigger centres Information is updated as on 17-09-2012

1 3 2 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 NATIONAL UPDATE
Finance Minister P. Chidambaram has said that the Direct Taxes Code (DTC), initiated by him during his earlier tenure, needed a fresh look. After a meeting with top officials of Central Board of Excise and Customs (CBEC), he also said the tax department has to be firm with tax evaders for whom non-compliance is a business. "DTC has gone through various versions...I need time to look at DTC... It requires a fresh look", Chidambaram said in reply to a question at a press conference. Chidambaram said the department would have to be firm with the small number of non-compliant businesses. "Most people would like to be compliant with tax laws. It is only a very small number that wishes to be non-compliant. I have told the department that we have to be firm with the small number of those non-compliant people," he said. Chidambaram said he has asked CBEC officers to focus more on top 100 tax payers to achieve the indirect tax collection target of R5.05 lakh crore in the current fiscal. Referring to Service Tax, Chidambaram said that although 16 lakh people are registered for paying Service Tax, 10 lakh of them do not pay the levy. Chidambaram said that officials should not harass honest tax payers and make it taxpayer friendly.
Direct Taxes Code Needs Fresh Look, I-T Department to Be Tough on Tax Evaders: FM
(Source: http://www.economictimes.com)

673

response, the Attorney General said it is certainly open to Parliament to approve any recommendations but it does not mean the Councils recommendations will have no value. The Council will make recommendations, but the ultimate prerogative lies with Parliament and Legislative Assemblies. The setting up of the Council does not adversely affect the root of the legislative powers over finance, which are sacrosanct, he added.
(Source: http://www.business-standard.com/india/)

The Goods and Service Tax (GST) Bill is nearing final approval after the Attorney General of India, Goolam E Vahanvati, answered the constitutional queries raised by former finance minister Yashwant Sinha in his capacity as the Chairman of the Parliamentary Standing Committee on Finance. The value-added tax, expected to be implemented by 2013 once the Committee has handed over its report, will replace all indirect taxes levied on goods and services, and is expected to integrate state economies and boost growth. While examining the bill, which is also a Constitutional Amendment Bill, Mr Sinha asked whether or not Parliament and State Legislative Assemblies have the option to not approve the proposal mooted by the Finance Minister of India who presides over the GST Council, which arrived at certain conclusions and tabled its proposals in Parliament. And if Parliament has the option to not approve, then the entire Council unravels. Mr Sinha also asked for clarifications on the role of State Legislative Assemblies in this case. In his
Goods and Service Tax One Step Closer to Final Approval

The Shome Committee Report seeks to address a number of concerns on general anti-avoidance rules (GAAR) and, thereby, mitigate the negative publicity India had received on this count. GAAR, initially sought to be introduced vide the Direct Taxes Code, was introduced a year early - as a possible response to some of the observations of the Supreme Court in the Vodafone case - the implementation was then deferred by a year as a result of all the negative publicity it got. Then, the Shome Committee was set up to hear the stakeholders and the committee has now recommended pushing implementation back by three years. GAAR was introduced alongside the retrospective amendment of S9 seeking to tax overseas transfer of assets with underlying value in India. Together, they raised the fear that India has an aggressive tax administration that results in a proliferation of litigation; litigation is time-consuming; and, at the end of it if one succeeds, the law could be amended retrospectively. The Shome Committee Report should be viewed as a first, but very important, step in the bridging of the trust deficit. The report, prepared after an extensive round of consultations, addresses several key issues: It recognises the need for a consultative process and a buy-in of the key stakeholders, something that was absent when the provisions were introduced. Similar provisions introduced elsewhere in the world were after extensive deliberations. It addresses a key issue of a need for transition. The report recommends grandfathering of the income arising from investments made prior to the GAAR regime as being covered by the earlier regime. The three-year deferment should be viewed in this light. It provides a window of opportunity to taxpayers to prepare and brace themselves for the new regime and to the tax regime to get trained to implement it. It recognises the need to respect tax treaties; we have a right to review and renegotiate tax treaties but bypassing them through domestic
Shome Committee's Recommendations, A Welcome Shift on GAAR

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 133

674

NATIONAL UPDATE
Central Board of Excise & Customs (CBEC) has advised Chief Commissioners of Customs to provide all assistance to enable importers, trade and industry to adopt the new procedure. In order to further reduce transaction cost of the importers and as a trade facilitation measure, it has been decided to make e-payment mandatory for importers registered under Accredited Clients Programme and importers paying the duty of R1 lakh or more per Bill of Entry with effect from 17th September, 2012. Central Board of Excise & Customs (CBEC) has advised Chief Commissioners of Customs to provide all assistance to enable importers, trade and industry to adopt the new procedure. E-payment facility at Customs locations was introduced in 2007 and is available through more than one authorised bank at all major Customs locations having ICES facility.
Central Board of Excise & Customs Makes e-Payment Mandatory for Importers
(Source: http://www.thehindubusinessline.com/)

legislation is not an appropriate way forward. It brings out the important distinction between tax planning arising through legitimate choices available under the provisions of law and tax avoidance by resorting to circuitous transactions that have no commercial value and are only tax-driven.
(Source: http://www.thehindubusinessline.com/)

Companies availing tax exemptions are being scanned by the income tax department. The Central Board of Direct Taxes has started a closer scrutiny of companies paying less corporate tax due to various exemptions. The finance ministry says it has found some of these companies are evading taxes by shifting profits of a non-eligible unit to one in the exempted category. Ministry officials said the tax department would identify the companies which have claimed exemptions when they were not eligible to do so and examine their books. Some companies misuse exemptions and take undue benefits. The tax officer may look into details such as cost of raw material for a unit, power consumption and operational efficiency. The costs incurred by a unit in the exempted area should be compared with the one in a non-exempted area, said one official, who did not wish to be identified. Earlier this month, Finance Minister P Chidambaram had asked the department to go after low tax-paying sectors to add an additional R30,000 crore to revenue. Although the applicable tax rate for corporations is 30%, he said some companies were paying even lower than the average of 24%, due to various tax exemptions and deductions.
CBDT Scrutinising Firms Enjoying Tax Exemptions
(Source: http://www.profit.ndtv.com)

The Central Board of Direct Taxes (CBDT) has decided to set up a committee comprising senior officials of the Finance Ministry and the Income-Tax Department to look into the legal intricacies involved in some of the contentious and controversial cases of the likes of the Vodafone dispute that the taxmen are confronted with. The objective of setting up a Central Technical Committee (CTC), according to an official note, is to usher in clarity on contentious legal issues and, thereby, reduce litigation through adoption of a consistent approach on similar matters of taxation.
CBDT Sets Up Technical Panel to Firm Up Legal Views on Major Cases
(Source: www.timesofindia.com)

After introducing roundthe-clock customs clearance mechanism at major airports and seaports, the government is now working on a single window clearance scheme for reducing the time and cost involved in export and import of goods. As the country braces up for enhanced international trade, the customs department has started developing a single window that will integrate other agencies like drug controller or foods inspectors, thereby facilitating all transit related regulatory requirements. We are developing a system wherein there will be only a single common data form for traders to file, keeping in mind the requirements of all other agencies involved. This way, the trader will not have to obtain a no-objection certificate (NoC) from all the agencies involved but from only one nodal agency, a government source said.
Government Working on Single Window Customs Clearance
(Source: http://www.financialexpress.com/news)

The government has informed Parliament that R86,000 crore in indirect taxes is locked up in litigation. "An amount of R86,000 crore indirect tax revenue of Central Board of Excise and Customs has been locked up in litigation," Minister of State for Finance S. S. Palanimanickam said in a written reply in the Lok Sabha. He said the board continuously monitors recovery of tax arrears.
R86k Crore Indirect Tax Revenue Locked Up in Litigation: Government
(Source: http://www.profit.ndtv.com)

1 3 4 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 INTERNATIONAL UPDATE
FASB is crafting a new expected credit loss impairment model in hopes of moving forward again in the joint accounting for financial instruments project the board is pursuing with the International Accounting Standards Board (IASB). In July, IASB Chairman reacted with consternation when informed that FASB intended to take a step back from the three-bucket impairment model in the project and address stakeholder concerns. FASB Chairman vowed to move quickly to prevent the project from stalling. FASB made key decisions on an alternative impairment model, in its meeting in held in August end, according to a summary of FASB decisions posted to the boards website. FASB has invited the IASB to monitor the deliberations on the alternative model and plans to share its progress with the IASB early in the fall. Although FASB had tentatively agreed to the three-bucket model with the IASB, stakeholder concerns about the understandability, operability, and auditability of that model, as well as whether it would measure risk appropriately, caused FASB to seek a different model. The alternative approach is called the Current Expected Credit Loss (CECL) model. It retains several key concepts that have been jointly agreed upon with the IASB. But there are differences, too, between the models. The FASB summary says, unlike the three-bucket model, the CECL model uses a single-measurement objectivecurrent estimate of expected credit lossesrather than the three-bucket models dual-measurement approach. Under the CECL model, an entity at each reporting date would reflect a credit impairment allowance for its current estimate of the expected credit losses on financial assets held. The estimate of expected credit losses is neither a worst case nor a best case scenario, but it reflects managements estimate of the contractual cash flows that the entity does not expect to collect, according to FASBs summary. Because the basic estimation objective is consistent from period to period, there is no need in the CECL model to describe a transfer notion that determines the measurement objective in each period as the three-bucket model does, according to FASBs summary.
(Source: http://www.journalofaccountancy.com/News/20126359. htm )

675

FASB Takes New Path in Contentious Financial Instruments Project

draft, which is being made available for information purposes to enable constituents to familiarise themselves with the document. The draft will remain on the website until early December 2012 after which time the Board intends to proceed to finalise the draft document.
(Source: http://www.ifrs.org/)

The International Ethics Standards Board for Accountants (IESBA) recently released new requirements that address a professional accountants responsibilities regarding the disclosure of suspected illegal acts committed by a client or employer for public exposure. The proposals describe the circumstances in which a professional accountant is required or expected to breach confidentiality, one of the five fundamental principles in the Code of Ethics for Professional Accountants (the Code), and disclose the act to an appropriate authority. The Exposure Draft (ED), Responding to a Suspected Illegal Act, proposes adding two new sections addressing illegal acts to the Codeone each for professional accountants in public practice and professional accountants in businessand several revisions to other related sections. The new sections clearly delineate the expected course of action for a professional accountant to take if those charged with governance do not respond to the issue appropriately.
IESBA Proposes Changes to Code of Ethics to Address Illegal Acts
(Source: http://www.ifac.org/news)

Last month, the IASB posted to its website a draft of the forthcoming general hedge accounting requirements that will be added to IFRS 9 Financial Instruments. The IASB is not seeking comments on the
Draft of Forthcoming IFRS on General Hedge Accounting
w ww.ica i.org

The International Accounting Standards Board (IASB) and the IFRS Foundation had issued Invitation to Comment (ITC): IASB and IFRS Interpretations Committee Due Process Handbook in May 2012. In its response, the International Federation of Accountants has said that as an organisation that supports four independent, international standard-setting boards, IFAC recognises the public interest imperative of having in place robust and transparent due process arrangements for standard setting. IFAC strongly supports the notion of shared private sector/public sector standard-setting arrangements in the public interest. However, it notes that there is no one way in which such arrangements should be defined and should operate. Therefore, IFAC recognises that the arrangements in place for the IFRS Foundation and International Accounting Standards Board (IASB) differ from the arrangements for the four independent, international standard-setting boards supported by IFAC. Both are robust systems that are developed and implemented to protect the public
IFAC Response to IASB Due Process Consultation
THE CHARTERED ACCOUNTANT oc tobe r 2012 135

676

INTERNATIONAL UPDATE
Rosenberg Associates annual MAP survey. When the impact of mergers is removed, the growth rate was only 2.7%. Revenues were up for firms in all size ranges, though firms with annual fees in excess of $20 million experienced a higher growth rate of 6.5% than smaller firms. Profits, as measured by income per partner, averaged $366,000 compared to $360,000 in 2010. Firms continued to hold expenses tight last year. Coupled with the improved growth rate, equity partner income improved. These tactics enabled firms to enjoy a modest improvement in profits despite the continuance of the recession. Projections for 2012 indicate an improvement over 2011. Overall, firms are projecting a 4% growth rate. The Rosenberg MAP survey, now in its 14th year, reports on the results of 396 firms, most of which range from $220 million in annual fees. Nearly 100 CPA firm metrics are measured. We are passionate about our commitment to making our survey the most accurate and authoritative national survey of CPA firm statistics in the profession, said a top management consultant in a statement. Every year, 30 to 40% of the data we receive contains gross errors. Our survey team of three CPAs reviews the data and gets revisions where necessary. We simply will not include data in our survey that doesnt look right.
(Source: www.accountancyage.com)

interest. At 70 pages the proposed revised handbook provides considerable detail about the process undertaken by the IASB and IFRS Interpretations Committee (the Interpretations Committee), and is considerably longer than the principles-based approach currently in use. It is not clear that there are additional benefits to be derived from having such a long document, which is arguably less accessible and understandable for the general public.
(Source: www.ifac.org)

A recent report from Intuit states, small businesses with fewer than 20 employees created 30,000 new jobs in August, but overall saw revenue declines. The data is based on approximately 83,500 small businesses customers of Intuit Online Payroll and anonymised aggregated data from QuickBooks Online. Small business revenues are gradually recovering from recessionary depths, but are just now reaching levels seen before the recession began in 2007, according to the Intuit Small Business Revenue Index. Small business revenue fell from what it was in the previous month. The retail industry, along with the accommodation and food services sector, saw the biggest declines followed by real estate services. Average monthly compensation grew and average monthly hours worked decreased. Small businesses overall experienced declines in revenue in July. The health care and social assistance sector continued to see the smallest decline of all the industries. Among the industry sectors tracked by Intuit, the hardest hit recently has been small business retail. The sector with the smallest decline is health care. Based on Augusts numbers and revised national employment data from the Bureau of Labor Statistics, Intuit revised upward the previously reported July growth rate which equates to 45,000 jobs added in July, up from a previously reported 35,000 jobs, though these numbers are expected to change once the index is recalibrated. The Employment Index indicated growth in overall employment in August for all regions except for the West North Central and the Middle Atlantic divisions. A state-by-state breakdown showed the largest employment increases in Washington and Michigan, while Missouri saw the largest decrease and North Carolina remained flat.
Intuit Finds Small Businesses Added 30,000 Jobs in August
(Source: http://www.accountingtoday.com/news)

Revenue at accounting firms increased 3.8% in 2011, a significant improvement from the 1.7% increase in 2010, according to
CPA Firms See Revenues Increase
1 3 6 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

More than 100,000 UK businesses could save millions in annual accountancy and administration costs under reduced auditing and reporting requirements announced by the Business Secretary, Vince Cable recently. The Governments response to the consultation on Audit Exemptions and Change of Accounting Framework confirms plans to allow more companies to make a commercial decision about whether or not to have a statutory audit. Vince Cable said: Reporting requirements have become increasingly demanding and costly over the years. We listened to business, who made a strong case for reform, and I am delighted that we are now taking this opportunity to make audit more flexible and targeted. Tackling these problems will help save UK companies millions every year and free them up to expand and grow their business, which ultimately benefits the entire British economy." Currently, to be eligible for an audit exemption in the UK, small companies must be less than a certain size in terms of balance sheet and turnover.
New Rules to Save Businesses millions In Reporting & Accountancy Fees
(Source: http://www.freshbusinessthinking.com)
w w w. i c a i . o r g

 REFERENCE

677

ACCOUNTANTS BROWSER PROFESSIONAL NEWS & VIEWS PUBLISHED ELSEWHERE

Index of some useful articles taken from Periodicals/Newspapers received during August-September, 2012 for the reference of Faculty/ Students & Members of the Institute.

1 ACCOUNTING
Avoiding Common Errors in XBRL Financial Statements by Vinod Kashyap. BCAJ, August 2012, pp.27-28+41. Do Fnancial Statement Users Judge Relevance Based on Properties of Reliability by Kathryn Kadous, etc. The Accounting Review, Vol.87/4, 2012, pp. 1335-56. GAPS in GAAP Accounting for Government Grant by Dolphy DSouza. BCAJ, August 2012, pp.89-90. The Impact of a Heterogeneous Accrual Generating Process on Empirical Accrual Models by Nicholas Dopuch etc. Journal of Accounting, Auditing & Finance, Vol. 27/3, 2012, pp.386-411. Rules-based Accounting Standards & Litigation by Dain C. Donelson etc. The Accounting Review, Vol. 87/4, 2012, pp.1247-1279.

Small is Still Beautiful & Competitive Reflections on the Growth of Micro, Small & Medium Enterprises (MSMEs) in India by Anand Sinha. RBI Bulletin, August 2012, pp.1437-1445.

IT Governance Integration by James Reinhard. Internal Auditor, August 2012, pp.51-60. Managing Cybersecurity Risks by Jeff Drew. Journal of Accountancy, August 2012, pp.44-48.

4 INFORMATION TECHNOLOGY

5 LAW
Company Directors Personal Liability for Tortuous Acts of Company by K. R. Chandratre. Company Law Journal, Vol.3, 2012, pp.38-48. Protecting your Innovations under Patent Laws by Vivek Agarwal. Chartered Secretary, August 2012, pp.993-997. Report for Standing Committee on Finance ( 20112012) on the Companies Bill, 2011. Company Law Journal, Vol.3, 2012, pp.49-57. Trade Marks & Company Secretary in Practice by N. Sridaran. Chartered Secretary, August 2012, pp.988-992.

2 AUDITING
Cost Audit in Pharmaceutical Industry Check List by V. R. Kedia & Dipti Kejriwal. The Management Accountant, August 2012, pp.928-932. Price of Audit by David Hay. Journal, August 2012, pp.80-81. Small Businesses, Big risk: Fraud Controls Lacking at Organisations with Fewer than 100 employees by Ken Tysiac. Journal of Accountancy, August 2012, pp.38-43. The Social Media Scene: Internal Auditors Can Play a Significant Role in Identifying & Mitigating their organisations Social Networking Risks by Allison Cain. Internal Auditor, August 2012, pp.45-49. Whats your Fraud IQ by Andi Mc Neal. Journal of Accountancy, August 2012, pp.32-37.

6 MANAGEMENT
Global Competitiveness of Indian Infrastructure by C. Shankaranarayanan & V. Padmanabhan. Facts for You, August 2012, pp.26-30. The Global Financial Crisis & Corporate Travel by Jann Dyer. Journal, August 2012, pp.46-47. Good Governance: Assurance Managing IT by Paul Brousseau & Philippe Ricart. CA Magazine, September 2012, pp.49-50. Governance & Compliance through Effective Employee Communication by Joffy George. Chartered Secretary, August 2012, pp.972-976. The Need for Disaster Management by K. Revathi. Facts for You, August 2012, pp.41-42.

3 ECONOMICS
Basel III framework: A Road to Resilient Banking System by Mandeep Kaur & Samriti Kapoor. The Management Accountant, August 2012, pp. 938- 943 and 966. Corporate boards in India: Blocked by caste? by D. Ajit etc. Eco. & Pol. Weekly, 11th August, 2012. Pp.39-43. Economic Liberalisation & Indian Public Sector enterprises by Gagan Singh. The Management Accountant, August 2012, pp.967-973.

7 TAXATION & FINANCE

Effective Rate of Corporation Tax on Companies in India by T. N. Pandey. Company Law Journal, Vol.3, 2012, pp.183-190.

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 [email protected]

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 137

678

ICAI NEWS

Increase in Fee for Duplicate Certificate of Membership and Certificate of Practice as an Associate or Fellow
Increase in fee for Duplicate Certificate of Membership and Certificate of Practice as an Associate or Fellow Amendment to the Regulation 184 of the Chartered Accountants Regulations, 1988 This is to inform all concerned that with the issuance of the Notification No.1-CA (7)/145/2012 on August 1, 2012, the fee for Duplicate Certificate of Membership as an Associate or Fellow as well as Certificate of Practice as an Associate or Fellow respectively has been increased to Five Hundred rupees and fee for any other duplicate certificate issued under these regulations has also been increased to Two Hundred Rupees with effect from August 1, 2012. The said notification is available on the Institutes website www.icai.org at the link http://220.227.161. 86/27508notification17036.pdf for information of all concerned. In case of loss/damage of original script certificate of membership or certificate of practice as an associate or fellow, members may file an affidavit to the concerned Regional office of ICAI in the prescribed format available on the Institutes website www.icai.org at the link http://220.227.161.86/8604onfo_faidsc.doc along with application for issuance of duplicate certificate and amount of aforesaid fees which is payable by cheque (in the case of local members) and by demand draft, in favour of The Secretary, The Institute of Chartered Accountants of India, New Delhi or the Decentralised office to which the members belongs. It is clarified that an affidavit is not required to be executed if the original mutilated, torn or damaged certificate is returned to ICAI. Secretary August 21, 2012

www.icai.org.in: An Exclusive Website for CA Firms of ICAI

An Initiative of the Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF&SMP), ICAI
Creating Firms Website: In the website www.icai. org.in, the Firms may create their websites as per the norms laid down by the Council of the Institute of Chartered Accountants of India. The website provides a platform for the CA Firms to upload their firms details and gives them an opportunity to reach out to the members and CA firms practicing worldwide. Knowledge Resources: The website has various downloadable software useful for office management and efficient documentation for the members and firms. Minimum Recommended Scale of Fees: The website also contains Minimum Recommended Scale of Fees for the Professional Assignments done by the Chartered Accountants, Forum for Consolidation: The website also acts as a forum for consolidation of the members and CA Firms by providing for consolidation measures like Networking, Merger and Corporate Form of Practice. Quick Insight-2012: CA Profession CCBCAF & SMP has already released the publication on Quick Insight 2012 during the Chartered Accountants Day Celebrations on 1st July, 2012 for the Members of ICAI which is available in the aforesaid website. Brings Business and CA Firms together Online Directory of CA Firms Websites Manage your site yourself using CMS tools Customise the site yourself No hassles of Registering Domains, Web space etc. For any information on the Website, please contact Dr. Sambit Kumar Mishra, Secretary, CCBCAF & SMP, ICAI on e-mail: [email protected], Phone No. 011-30110497

1 3 8 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

680

ICAI NEWS

Study Tour to Hong Kong (13th to 19th January, 2013)

Study Tour to Hong Kong: An Initiative of Committee for Capacity Building of CA Firms and Small and Medium Practitioners (CCBCAF&SMP), ICAI
With a view to acclimatise the members of the Institute about the best practices in the area of Practitioners and to provide opportunity to participate and interact with the renowned experts of Asian Financial Forum, Hong Kong, the Committee For Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF & SMP) of Institute of Chartered Accountants of India (ICAI) is now pleased to announce an International Study Tour to Hong Kong for the members on self financing basis. Asian Financial Forum is an event that brings together some of the most influential members of the global financial and business community to discuss developments and trends in the dynamic markets of Asia. Asian Financial Forum is organised by HKTDC. A statutory body established in 1966, the Hong Kong Trade Development Council (HKTDC) is the international marketing arm for Hong Kong-based traders, manufacturers and service providers. After the completion of the learning course sessions in Hong Kong, the arrangements have been made to visit the financial institutions in Hong Kong. Sightseeing tour has been arranged in Macau & Lantau etc. Since, the delegation size would be restricted to 30 members; registration for the study tour would be done on first-cum-first-serve basis. For registration, the interested members may kindly contact: Dr. Sambit Kumar Mishra Secretary Committee for Capacity Building of CA Firms and Small & Medium Practitioners(CCBCAF& SMP) The Institute of Chartered Accountants of India, ICAI Bhawan, Indraprastha Marg, New Delhi-110002 Email: [email protected], [email protected] Telephone No: 011- 30110460

1 4 0 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

682

ICAI NEWS

1 4 2 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 ICAI NEWS

683

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 143

684

ICAI NEWS

Invitation for Expression of Interest for Authoring Publications relevant to the Members in Practice of ICAI
The Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF&SMP) is meant to encourage and enhance close links between the Institute and the Chartered Accountants in Practice, so as to provide for them, a base of reference in terms of knowledge, expertise, skills and assistance in their professional growth, simultaneously pursuing the goal of providing newer opportunities to the practitioners & Firms. One of the major responsibilities of CCBCAF & SMP is to bring out publications on various topics relevant for the Members in Practice of the Institute of Chartered Accountants of India (ICAI). The CCBCAF & SMP invites Expression of Interest from members of the Institute and other experts who are interested in developing / preparing basic drafts of the publications on topics relevant to the Members in Practice of ICAI. The intending authors of the CCBCAF & SMP publications are expected to have appropriate level practical experience in the relevant area along with the knowledge of various aspects of profession. The CCBCAF & SMP publication has to be prepared as self-learning booklets in the form of handbooks with proper mix of theory and practical case studies. Apart from getting recognition, among their professional brethren, for their contribution in preparing the background materials, the authors of the accepted publication materials will get: 1. Their names printed in the Publications 2. Honorarium and reimbursement of incidental expenses as per the prevailing policy of the Institute. (Will depend upon the size, time and efforts to be required to prepare such publication materials). The intending authors are required to send a formal request letter with the following details, to Dr. Sambit Kumar Mishra, Secretary, Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF&SMP), The Institute of Chartered Accountants of India, Post Box No.7100, Indraprastha Marg, New Delhi - 110 002. Sending proposals by email at [email protected] with a copy to [email protected] is preferred:

the background materials which will enable the CCBCAF&SMP secretariat for allotting the preparation of material for them 3. Proposed coverage of the Publication 4. Sources of primary and secondary data based on which the Publication material will be written 5. Time frame within which they can submit the publication material.
It may be noted that mere submission of the Expression of Interest may not lead to the allotment of the particular publication materials to a particular applicant. The Institute reserves the right to request any other expert (though they might not have offered their expression of interest in this regard) to prepare publication materials. No communications will be entertained in this regard. Only selected authors will be individually communicated. Indicative topics on which CCBCAF & SMP would like to bring out publications are given below:

1. Mentoring Guidelines for Small & Medium Practitioners 2. Evaluating and Improving Performance : A Guide for Small & Medium Practitioners 3. Handbook for the Practice Management 4. E-Business and the Small & Medium Practitioners 5. Handbook for Information Security Governance : Practitioner/ CA Firms perspectives 6. Issues & Perspectives of Financial Reporting by Small & Medium Practitioners 7. LLP: Practitioner/CA Firms perspective 8. MDP : Practitioner/CA Firms perspective 9. A Roadmap to Direct Tax Code: Practitioner/CA Firms perspective 10. Export Documentation : A Guideline for Small & Medium Practitioners 11. Professional Opportunities: A Snapshot for Small & Medium Practitioners 12. Other topics relevant to Practitioners/ CA Firms
Secretary Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF & SMP), ICAI

1. Brief profile of the author 2. Specific experience and expertise in the relevant topic for which they offer themselves to write
1 4 4 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 ICAI NEWS

685

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 145

 ICAI NEWS
Invitation for empanelment as Resource Persons for the programmes to be organised by CCBCAF&SMP
The Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF&SMP) of the Institute of Chartered Accountants of India proposes to organise the following programmes during the year 2012-2013 which are broadly relevant to the Members of ICAI in Practice. Indicative topics for Committees programmes i. IFRS ii. Taxation iii. Investment Strategy iv. Auditing v. Accounting Standards vi. Revised Schedule VI vii. Valuations viii. Capital Market ix. Portfolio Management x. Networking/Merger/Corporate form of Practice xi. Limited Liability Partnership xii. Service Tax xiii. Income Tax xiv. Issues on Direct Taxes xv. Issues on Indirect Taxes xvi. Professional opportunities/avenues xvii. Other topics relevant for the Practitioners Experts who have more than three years of

687

experience in the relevant area and who have delivered lectures at various forums of Chartered Accountants are eligible for the enlistment in the Panel of Experts. Experts who are interested to be associated with The Institute of Chartered Accountants of India as Resource Persons are requested to send/e-mail their resume to the following address: Dr. Sambit Kumar Mishra Secretary Committee for Capacity Building of CA Firms and Small & Medium Practitioners The Institute of Chartered Accountants of India ICAI Bhawan I.P. Marg, New Delhi 110 002 E-Mail: [email protected] Tel No. 011-30110497 It would be appreciated if the resume including all details regarding qualification, Membership no. of ICAI (if any), Experience, areas of specialisation, contact address, etc. is sent at the earliest, preferably within 15 days. Secretary, Committee for Capacity Building of CA Firms and Small & Medium Practitioners(CCBCAF&SMP), ICAI

Certificate Course on Concurrent Audit of Banks

The concurrent audit system of banks has become very crucial and important for banks. The main objective of the system is to ensure compliance with the audit systems in banks as per the guidelines of the Reserve Bank of India and importantly, to ensure timely detection of lapses/ irregularities. In view of the core competence of the chartered accountants in the area of finance and accounting, risk management, understanding of the internal functioning and controls of banks, etc., the banking sector has been relying extensively on them to comply with these requirements of the regulator. The purpose of the Certificate Course on Concurrent Audit of Banks is to provide an opportunity to the members to understand the intricacies of concurrent audit of banks thereby improving the effectiveness of concurrent audit system in banks, and also the quality and coverage of concurrent audit reports. The Board has successfully completed the four batches of the Course held at Noida, Mumbai, Hyderabad and Nagpur. The course is open for the members of the Institute of Chartered Accountants of India as well as the students who have cleared CA final examinations. The total duration of the course is 6 days.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 147

688

ICAI NEWS
Topics Stock and Debtors Audit, DP Audit Effective Concurrent Audit Reporting Course Fees: R12,500/- per participant (Cheque may be drawn in favor of Baroda Branch of WIRC of ICAI) Date: October 19-21, 26-28, 2012 Venue: Hotel Surya Palace, Sayajigunj, Baroda For Registrations and further details, please contact: Chairman, Baroda Branch of WIRC of ICAI Secretary, Baroda Branch of WIRC of ICAI

Broad Course Content: Topics Banking in India and Concurrent Audit in Banks Legal and Regulatory Framework Organisational Structure of Banks in India Concurrent Audit Universe and Precommencement Planning Procedures Concurrent Audit Procedures : Advances Concurrent Audit Procedures : Treasury and Investment Function Concurrent Audit Procedures : Deposits, Forex and Other Items Basel II & III Paradigm Shift Diligence Report for Banks Use of Technology in Concurrent Audit Software Usage in Banks CBS Demonstration Audit in CBS Environment : Checks & Strategy Bankers Panel Discussion ( GMs of Banks to address) Revenue Audit and Credit Audit, IS & Migration Audits

Empanelment as a Technical Reviewer with the Quality Review Board

Government of India has, in exercise of the powers conferred by Section 28A of the Chartered Accountants Act, 1949, constituted a Quality Review Board to perform the following functions:(a) to make recommendations to the Council with regard to the quality of services provided by the members of Institute; (b) to review the quality of services provided by the members of the Institute including audit services; and (c) to guide the members of the Institute to improve the quality of services and adherence to the various statutory and other regulatory requirements. 2. In exercise of the powers conferred by clauses (f) and (g) of Sub-section (2) of Section 29A read with Section 28C of the Chartered Accountants Act, 1949, Government of India has also issued Chartered Accountants Procedures of Meetings of Quality Review Board, and Terms and Conditions of Service and Allowances of the Chairperson and Members of the Board Rules, 2006. In terms of its Rule 6, in the discharge of its functions, the Board may evaluate and review the quality of work and services provided by the members of the Institute in such manner as it may decide and also lay down the procedure of evaluation criteria to evaluate various services being provided by the members of the Institute and to select, in such manner and form as it may decide, the individuals and firms rendering such services for review. 3. In terms of the aforesaid Rule 6, the Quality Review Board had issued the Procedure for Quality Review of Audit Services of Audit Firms available at its website http://www.qrbca.in . Quality Review under the Chartered Accountants Act, 1949 shall be directed towards inspection/evaluation of audit quality and adherence to various statutory and other regulatory requirements. It would involve inspection and assessment of the work of auditors while carrying out their audit function so that the Board is able to assess (a) the quality of audit and reporting by the auditors; and (b) the quality

1 4 8 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 ICAI NEWS
control framework adopted by the auditors/ audit firms in conducting audit. 4. Now, with a view to carrying out the work of review of quality of audit services of auditors/ audit firms in India, the Quality Review Board has decided to seek the services of members of the Institute to function as Technical Reviewers for the Board in terms of the aforesaid Procedure for Quality Review of Audit Services of Audit Firms issued by it. A suitable amount ranging upto rupees one lac, as may be fixed by the Quality Review Board depending upon the volume of work involved, may also be paid as honorarium. Those interested may kindly apply in the Application Form for Empanelment as a

689

Technical Reviewer as available at the websites of the ICAI (www.icai.org) and QRB (www.qrbca. in). Those who have already applied for in the past and where there is no material change in particulars, need not apply again. 5. The Quality Review Board views that this exercise would go a long way in promoting confidence of investors and other stakeholders in corporate reporting and governance which, in turn, would help in retaining and further enhancing the credibility of the profession in the society. Sd/Secretary, Quality Review Board

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 149

 ICAI NEWS
Guide to Reporting on Pro Forma Financial Statements
As you may be aware, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 after amendment in the year 2010 require disclosure of the Pro Forma Financial Statements in the offer document in certain cases by the issuer and certification of such Pro Forma Financial Statements by the statutory auditor of the issuer. To provide guidance to the members regarding reporting on Pro Forma Financial Statements, the Auditing and Assurance Standards Board of the ICAI has issued the Guide to Reporting on Pro Forma Financial Statements (Pursuant to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009). The Guide covers aspects such as background

691

of Pro Forma Financial Statements, Applicability of the SEBI Regulations in relation to Pro Forma Financial Statements, Managements Responsibilities for Preparation of Pro Forma Financial Statements, Principles of Preparation of Pro Forma Financial Statements, Auditors Responsibilities and Reporting, etc. The Appendices to the Guide provide the relevant text of SEBI Regulations and also provide the Illustrative Pro Forma Financial Statements and Illustrative Auditors Report. The Guide is under print and will soon be available. It will also soon be available for download from ICAI website.

Third Phase of E-Learning on Standards on Auditing, launched

After the successful launch of its first phase and second phase of E-learning on Standards on Auditing (SAs), the Auditing and Assurance Standards Board has now launched the Third Phase of E-learning on these Standards on Auditing. Significant features of E-learning: Step by step coverage on all important aspects of a Standard. Colourful and interactive lessons. Learning at your speed and convenience. Quiz at the end of each module to test understanding. The Third Phase of E-learning covers the following standards: SA 220, Quality Control for an Audit of Financial Statements. SA 260, Communication with Those Charged with Governance. SA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management. SA 299, Responsibility of Joint Auditors. SA 510, Initial Audit EngagementsOpening Balances. SA 520, Analytical Procedures. SA 530, Audit Sampling. SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. SA 580, Written Representations. SA 600, Using the Work of Another Auditor.

Other Details: Duration of Course: 7 hours (Maximum time limit- 90 days) Credit of CPE Hours: 6 Hours Course Fees: R500/Log on to http://elearn.icai.org for registration and other details. Those members who are interested in registering for the first phase or second phase of e-learning can also log on to http://elearn.icai.org for details of Standards covered, registration, etc.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 151

Commencement of Certificate Course on Forex and Treasury Management

[at Delhi, Mumbai, Chennai and kolkata]
About the Course Eligibility
Members of the Institute of Chartered Accountants of India (ICAI) and the Students of the Institute who have passed the CA Final Examination are eligible to pursue this Course.

CPE 48 hrs

The Committee on Financial Markets and Investors Protection (CFM&IP) is one of the Non-Standing Committees of the ICAI which conducts Certificate Course on Forex and Treasury Management (FxTM) for professional development of members in this field. The aim of this Course is to provide a platform to the members to interact with the experts and to understand the recent developments in the field of Forex and Treasury. Moreover the course was designed to enable candidates to understand and conquer the complexities of Forex and Treasury management and to develop skill sets required for making sound financial decisions and the task of managing exposure to Foreign Exchange Movements. The Course also gives an overview of the issues associated with understanding and managing foreign exchange risk and impact of movements in foreign exchange rates on the business of Corporate. The course gives an overview of measuring and managing foreign exchange risks. It is important to know the intricacies of Forex risk management especially during these times when Indian rupee fluctuations causing a lot of financing strain on the importers of products and services and for organisations having foreign currency loans.

Faculty
The Faculty members for the course are from IIMs, Premier Universities, Public & Private Sector Banks/ Financial Institutions, Authors, Senior Chartered Accountants from Industry Profession and reputed academicians.

Fee
Rs. 25,000 (Rs. Twenty Five thousand only). The fee can be paid by Online/ Demand Draft/Pay Order/ Multicity Cheque drawn in the favour of "The Secretary, The Institute of Chartered Accountants of India" payable at New Delhi.

Details and Tentative dates for Fresh Batches

The Committee will be starting new batches of Certificate Course on Forex and Treasury Management at Delhi, Mumbai, Chennai and Kolkata. The tentative dates are as follows: Sl.No 1. 2. 3. 4. Place Delhi Mumbai Chennai Kolkata Tentative date 27th October, 2012 03rd November, 2012 04th November, 2012 17th November, 2012

Course Duration
This is approximately 4 months course. There will be eight classes which will be held on weekends i.e. Saturday and Sunday from 10 a.m. to 5 p.m.

Registration Form Submission

Important Links
Course Contents: http://220.227.161.86/13463course_curriculum_forex.pdf Registration Form: http://220.227.161.86/18248rform_cftm.pdf Online Payment: http://www.icai.org/ccm.html?progid=9 Registrations for the Course have commenced and registrations will be on first come first served basis in view of limited seats. For any query or further details, please contact at the mentioned numbers or by email.

Secretary, CFMIP The Institute of Chartered Accountants of India ICAI Bhawan, Administrative Block, Third Floor A-29 Sector 62, Noida - 201309 Contact No. (0120) 3045945/9650075010/9310542607 E-Mail: [email protected]

 ICAI NEWS

693

Non-Receipt of The Chartered Accountant Journal This is for the information of Members/subscribers who fail to receive The Chartered Accountant journal despatched to them either due to unintimated change of address or postal problems. The membership/subscriber numbers of the members/ subscribers whose journals have been returned undelivered are regularly hosted on the website of the Institute (www.icai.org) under Announcement section for the information of members/subscribers. Please inform the respective regions immediately after you change the address to ensure regular and timely delivery of journals to you. Members can also update their address online in the Members section placed on the top bar of ICAI website. The required link in the Members section is titled Members: Update Your Residential and Professional Addresses (http://www.icai.org/addupdate/). After updating the address online, the member is also required to download the update form and submit the same at their respective regional headline with their signature. Please note that once updated in the respective regional head offices records, the new address gets automatically updated in the centralised data base of the Institute, from where the journal mailing list is prepared. Any queries or complaints in this regard can also be sent by email at [email protected] and [email protected] (for members), and [email protected] and [email protected] (for students) or contact at 0120-3045921 or 0120-3045955.

New Publications
2012 Edition of the Handbook of Auditing Pronouncements The Auditing and Assurance Standards Board has recently brought out the 2012 edition of the Handbook of Auditing Pronouncements. The significant features of the Handbook are as follows: Contains text of the Engagement and Quality Control Standards, Statements and Guidance Notes on auditing, issued by the ICAI as on August 1, 2012. Divided in three volumes: Volume I.A: Compendium of Standards (Contains text of the Preface, Glossary of Terms, Framework for Assurance Engagements, Standards on Quality Control, Standards on Auditing, Standards on Review Engagements, Standards on Assurance Engagements and Standards on Related Services) Volume I.B: Compendium of Statements on Auditing (Contains text of the Statements on Auditing) Volume II: Compendium of Guidance Notes (Contains text of the Guidance Notes on Auditing)

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 153

694

ICAI NEWS
Ordering Information The publication can be purchased directly from the Sales Counters at the ICAIs Regional Offices or at the Head Office. To order by post, requisition may be sent to the Postal Sales Department of the ICAI at [email protected] or [email protected]

Price All the three a single box text of the Box pack of

volumes of the Handbook come in pack alongwith a CD containing entire Handbook. The complete the Handbook is priced at R900/-.

Compendium of Implementation Guides to Engagement and Quality Control Standards The Auditing and Assurance Standards Board has recently brought out the publication, Compendium of Implementation Guides to Engagement and Quality Control Standards which contains the text of all the Implementation Guides issued by the Board as on September 1, 2012. The Compendium contains the following Implementation Guides: Implementation Guide to SQC 1. Implementation Guide to Risk-based Audit of Financial Statements. Implementation Guide to Materiality in Planning and Performing an Audit. Implementation Guide to Standard on Auditing (SA) 530, Audit Sampling. Implementation Guide on Reporting Standards (SA 700, SA 705 & SA 706). The Compendium comes with a CD of the entire Compendium to provide ease of reference. Price: R500/- (including CD) Ordering Information The publication can be purchased directly from the Sales Counters at the ICAIs Regional Offices or at the Head Office. To order by post, requisition may be sent to the Postal Sales Department of the ICAI at [email protected] or [email protected]

Data Analytics and Continuous Controls Monitoring (Including Practical Case Studies) (Price: R200/including CD) Data analysis can help the auditors meet their auditing objectives and would thereby help to comply with auditing standards, support enterprise risk management system, uncover fraud and money laundering, recover costs, improve compliance with regulations and would also provide better insight into business operations and performance. Considering this, the Internal Audit Standards Board has issued this publication Data Analytics and Continuous Controls Monitoring (including Practical Case Studies). Significant Features of the Guide are: Divided into various chapters covering data analytics for business decision making, computeraided audit tools, academic and regulatory drivers to the use of CAATs, stages in use of general audit software. Deals with common general audit software applications across business functions and industries, benefits derived by using general audit software, documentation of process of use of general audit software, etc. Provides guidance on challenges while implementing data analytics, application of CAATs to bank audits, continuing auditing with IDEA, etc.

1 5 4 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 ICAI NEWS
Describes continuous auditing with IDEA and continuous monitoring with big data using Caseware Monitor. Contains case studies on fraud detection using general audit softwares, application of CAATs to Bank Audits, etc. Includes practical case studies for using MS

695

excel for CAATs, Data Analysis and MIS reporting. The Guide comes with two CDs, One containing IDEA V 8.5 Demo with Standard Tutorial Files and User Guide along with Case Studies and Other, having the entire Guide to ensure ease of reference and reusability.

Technical Guide on Internal Audit of Tendering Process (Price: R150/including CD) A proper tendering process is one of the building blocks of a sound governance system. Procedure for acceptance of tenders and awarding contracts, in government and private organisations, must be transparent, fair and open. Internal auditors who understand the basic structure and processes of tendering are able to tailor their internal audit work to implement controls and handle new layers of complexity in tender process. Considering this, the Internal Audit Standards Board of the ICAI is issuing this publication Technical Guide on Internal Audit of Tendering Process to provide extensive knowledge to the members on the laid down practices and procedures followed by the large departments, agencies and other organisations in tendering process. Significant Features of the Guide are: Explains types of tender, purpose of tender, party to float tender, legal principles governing tender audit, pre-requisites of tendering. Describes stages of tendering process. Deals with E-tendering and also contains CVC guidelines regarding e-tendering. Deals with the overall approach of internal audit with reference to Standards on Internal Audit, and the procedures to be undertaken by the internal auditor with regard to peculiar aspects related to it. Provides an insight into major areas of internal audit significance: o Documentation o Inviting tenders o Receiving tenders o Evaluating tenders o Review Committee o Accepting successful tenders and finalising contract and unsuccessful tenders Contains CVC Guidelines regarding Adoption of Integrity Pact (IP) and Guidelines for selection and employment of consultant as Appendices. The Guide comes with CD containing the entire Guide to ensure ease of reference and reusability.

Guide on Corporate Social Responsibility (CSR) Audit (Price: R200/- including CD) Corporate Social Responsibility (CSR) Audit is a key element on building the quality and credibility of CSR reporting, despite variations in approaches adopted and different forms of assurance. With a view to providing appropriate guidance to the members of the Institute on CSR Audit, the Internal Audit Standards Board has issued this Guide on Corporate Social Responsibility (CSR) Audit. Significant Features of the Guide are: Explains corporate social responsibility and its dimensions, approaches, history and evolution, benefits of corporate social responsibility.

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 155

696

ICAI NEWS
of the Institute at New Delhi, Chennai, Mumbai, Kolkata and Kanpur. To order by post, please send a demand draft in favour of Secretary, The Institute of Chartered Accountants of India, payable at New Delhi to: Postal Sales Department A-29, Sector-62 Noida-201309 Phone: (0120) 3045943 E-mail: postalsales@ icai.org

Brief overview of the International initiatives regarding CSR. Discusses major legislations governing CSR. Deals with International CSR Standards, such as, ISO 26000, GRI Guidelines, ISEA Standards, Triple Bottom Line Reporting, Millennium Development Goals Detailed guidance on CSR reporting requirements. Describes role of professional accountants in internal audit of CSR. Contains illustrative CSR Checklist, ISAE 3000 and AA 1000 as Appendices to the Guide. The Guide comes with CD containing the entire Guide to ensure ease of reference and reusability.

Ordering Information The publications can be purchased online. Please refer link: http://www.icai.org/publications.html. The publications are also available at the sales counters

Classifieds
4949 Kochi based CA firm seeks assignment of audit, direct tax, service tax and accounting work on sharing/sub-contracting basis. Contact [email protected]/ 919497325485. 4950 Ahmedabad based CA firm invites proposal for networking, merger and partnership. Retired/ lady member can apply. Please contact: [email protected] 4951 Lucknow based 25 years CA firm invites proposals for Partnership from members holding full/part time COP. Interested candidates may please contact CA. S. N. Gupta at 09415101759, [email protected] 4952 KS Aiyar & Co, wishes to recruit the following CAs for the Chennai Office:-PartnersAudit and Tax, ManagerAudit. Practicing professionals wishing to merge their practice are also welcome to write. Kindly send your profile in strict confidence addressed to the Senior Partner & CEO by email to [email protected]. Kindly confirm receipt by us. More about us is available at www.ksaiyar.com. Candidates/firms must be able to demonstrate the highest standards of quality and ethics and have an entrepreneurial outlook. 4953 Chartered Accountant and Cost Accountant with more than 28 years of Post Qualifications experience of service at senior positions seeks to make further career with reputed Financial Consultants/CA Firms/Industry on full time or part time basis. E-mail: rpmundra@ hotmail.com. Mobile: 9810052576. 4954 Lucknow based partnership firm is looking for partners for opening new branch offices in UP and Uttarakhand. Interested person may please contact: [email protected] 4955 Chennai based Chartered Accountant seeks professional work on assignment and sub contract basis. Contact: 9865691436, Email: [email protected] 4956 Chennai based CA Firm existing since 1970 invites CAs for Employment/Partnership and Proprietorship/Partnership Firms for Mergers. Contact Email: [email protected] 4957 SNR & Company, a CA firm having offices in major metro cities invites applications/ EOI from CAs with 5-7 years of experience in independent handling of Audit and Enterprise Risk advisory assignments. The incumbent would be responsible for the Audit division of the firm at New Delhi. Invitation is for employment/merger in case of CAs in practice of profession. Interested CAs may contact Mr. Manoj Sharma at # 9873485885 (M)/ [email protected]

1 5 6 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 EVENTS

697

Forthcoming Events1
Sl. No. 1. Title of the Seminar/ Conference Date Place Workshop on 13th Information October, Technology - Emerging 2012 Opportunities Guwahati CPE Topics (in brief without details Contact Person Hours of technical sessions, timings and speakers) 6 Regulatory compliance and IS E-mail: [email protected] Audit Mob: 9707078491 Auditing ERP/CBS Safeguards in use of client DSC, Data security, encryption IT governance risk and compliance 20 Forensic Accounting & Fraud E-mail: [email protected] Detection Phone:01203045963 4. Workshop on Capacity 6th October, ICAI Bhawan, 3 2012 Ernakulam Building Measures through IT Tools Standards on Internal Audit - For registration, please contact: Codifying Best Practices Mr. Sanjay Gondavlekar Use of Techniques and Phone: 022-25382453/ 54/56 Technology in Internal Audit E-mail: [email protected] Audit Committee Reporting and Dealing Fraud Prevention & Detection - Role of Internal Auditor Payroll Software ICAI Tax Suite Software ICAI XBRL Software Ernakulam Branch of SIRC of ICAI E-mail: [email protected] Phone: 0484-2369387 Dr. Sambit Kumar Mishra Secretary, Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI Email: [email protected] Phone: 011-30110497 5. Workshop on Capacity 6th October, ICAI Bhawan, 6 2012 Vadodara Building Measures through IT Tools International Avenues including Opportunities for Indian CAs under MRAs Specialisation/Super Specialisations in CA profession Challenges in sustaining Growth of a Firm Challenges for Capacity Building of SMPs through Networking, Merger, Demerger, LLP & Corporate Form of Practice. Payroll Software ICAI Tax Suite Software ICAI XBRL Software Baroda Branch of WIRC of ICAI E-mail: [email protected] Phone: 0265-2680593, 2681115 Bhavnagar Branch of WIRC of ICAI E-mail: [email protected] Phone: 0278-2520211 Dr. Sambit Kumar Mishra Secretary, Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI E-mail: [email protected] Phone: 011-30110497 Vishakapatnam Branch of SIRC of ICAI E-mail:[email protected] Phone: 0891-2755019 Dr. Sambit Kumar Mishra Secretary, Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI E-mail: [email protected] Phone: 011-30110497
1

2.

Certificate Course on Forensic Accounting and Fraud Detection Seminar on Internal Audit and Risk Management

25th October 2012

Mumbai

3.

6th October, Hotel Tip Top 6 2012 Plaza, LBS Road, Thane (W)

6.

Workshop on Capacity 13th October, Building Measures 2012 through IT Tools

ICAI Bhawan, 3 Vishakapatnam

For more details about the forthcoming events please refer the detailed announcements hosted on the ICAI website www.icai.org

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 157

698

EVENTS
Date Place CPE Topics (in brief without details Contact Person Hours of technical sessions, timings and speakers) Payroll Software ICAI Tax Suite Software ICAI XBRL Software Rajkot Branch of WIRC of ICAI Email: [email protected] Phone: 0281-2490908 Dr. Sambit Kumar Mishra Secretary, Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI E-mail: [email protected] Phone: 011-30110497

Sl. No. 7.

Title of the Seminar/ Conference

Workshop on Capacity 13th Building Measures October, through IT Tools 2012

ICAI Bhawan, 3 Rajkot

8.

Workshop on Capacity 20th October, Building Measures 2012 through IT Tools

ICAI Bhawan, 3 Sivakasi

Payroll Software ICAI Tax Suite Software ICAI XBRL Software

Sivakasi Branch of SIRC of ICAI E-mail: [email protected] Dr. Sambit Kumar Mishra Secretary, Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI E-mail: [email protected] Phone: 011-30110497 Erode Branch of SIRC of ICAI Email: [email protected] Phone: 0424-2430776 Dr. Sambit Kumar Mishra Secretary, Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI E-mail: [email protected] Phone: 011-30110497

Workshop on Capacity 20th October, Building Measures 2012 through IT Tools

ICAI Bhawan, 3 Erode

ICAI Tax Suite Software ICAI XBRL Software

10

National Residential Refresher Course

3rd and 5th Salasar Balaji November, 2012

15

Recent Issues in Income Tax Issues on Capital Gain Stress & Life Management for the CA Professionals Recent Issues in Service Tax Professional opportunities in Indirect Taxes Taxation & Legal Issues in Charitable Institutions New Professional Opportunities in Co-operative & NPO Sector Issues on Revised Schedule VI Capacity Building Through IT Tools

Jaipur Branch of CIRC of ICAI E-mail:[email protected],jaipur@ icai.in Mob: 09414041875 CA. Sanjay Kumar Goyal Assistant Secretary, Jaipur Branch of CIRC of ICAI Phone: 0141-3044203 E-mail:[email protected],Jaipur@ icai.in Dr. Sambit Kumar Mishra Secretary, CCBCAF&SMP, ICAI E-mail: [email protected] Phone: 011-30110497 Dr. Amit Agarwal Secretary, CCONPO, ICAI E-mail: [email protected] Phone: 011-30110452

11

Workshop on Recent Emerging Areas

12th October, 2012

Hotel Tip Top 6 Plaza, LBS Road, Thane (W)

Valuation - Knowing what your Dr. Surinder Pal, business is worth Secretary, Committee for International Financial Members in Industry, ICAI Reporting Standards Phone No-011-30110430 -Conceptual Framework E-mail: [email protected] Skills Required to be an Effective Leader Mr. Sanjay Gondavlekar Indian Mergers and Phone: 022-25382453/54/56 Acquisitions: The changing face of Indian Business Ms. Ruchi Gupta Phone: 011-30110549

1 5 8 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g

 EVENTS
Sl. No. 12 Title of the Seminar/ Conference Workshop On Agriculture Sector Date 13th October, 2012 Place

699

CPE Topics (in brief without details Contact Person Hours of technical sessions, timings and speakers) Premises of 6 Overview of Agriculture Sector Dr. Surinder Pal, ICAI, Mumbai Current and Future Scenario Secretary, Committee for Accounting for Agriculture Members in Industry, ICAI Sector Phone: 011-30110430 E-mail: [email protected] Finance for Agriculture Sector IFRS/Ind AS for Agriculture Ms. Srabani Kapoor, Sector Phone: 022-22154935 Mob: 0931239894, Growth Strategy for E-mail: [email protected] Agriculture Sector Ms. Ruchi Gupta, Phone: 011-30110549, Mob: 9312089136 E-mail: [email protected] Hotel Surya Palace, Sayajigunj, Baroda 6 Future Prospective: Strategic Challenges for 2012 and Beyond Dr. Surinder Pal, Secretary, Committee for Members in Industry, ICAI Phone: 011-30110430 Evolving Role of CFO: Newer E-mail: [email protected] Dimensions Newer Challenges Mr. Ketan Kharva, Regulatory Aspects: Phone: 0265-2681115/2680593, Governance & Ethics: E-mail: [email protected] Managing risk Ms. Priyanka Sharma, Introspection: How CFOs can Phone: 011-30110548 do value addition and balance E-mail: [email protected] client expectations Dr. Surinder Pal, Secretary, Committee for Members in Industry, ICAI Phone: 011-30110430 E-mail: [email protected]

13

All Gujarat CFO Workshop

19th October, 2012

Maharashtra CFO Workshop Hotel Orchid, 6 Mumbai

14

20th October, 2012

Expanding Role of CFOs as the ultimate leaders of the organisation CFO as Risk Manager; Resilience and Sustainability

Ms. Uma Raman Latest Laws and Regulations: Phone: 022-22154935Governance & Ethics E-mail: [email protected] Way forward: Looking ahead Mr. Ajeet Nath Tiwari, to 2015 and beyond transition Phone: 011-30110450 from CFO to CEO and E-mail: [email protected] challenges to tackle, skills to acquire and imbibe Dr. Surinder Pal, Secretary, Committee for Members in Industry, ICAI Phone: 011-30110430 E-mail: [email protected] Mr. Ajeet Nath Tiwari, Phone: 011-30110450 E-mail: [email protected]

15

Webinar on 5th October, 4 :00 PM to 6 :00 PM Amalgamation, Merger 2012 and Structuring for Business Growth

Amalgamation, Merger and Structuring for Business Growth

16

Webinar on role of 19th Chartered Accountants October, in Industry in Climate 2012 Change Mitigation

4 :00 PM to 6 :00 PM

Role of Chartered Accountants in Industry in Climate Change Mitigation

Dr. Surinder Pal, Secretary, Committee for Members in Industry, ICAI Phone: 011-30110430 E-mail: [email protected] Mr. Ajeet Nath Tiwari, Phone: 011-30110450 E-mail: [email protected]

w ww.ica i.org

THE CHARTERED ACCOUNTANT oc tobe r 2012 159

700

BACKPAGE

076
1 2 3 4 6 5

DOWN
2

10 11 12

___________analysis is used in establishing trend relation between sales and working capital. 3 ___________maximisation objective considers risk and time value of money. 4 A company cannot appoint a sole selling agent of any area for a term exceeding ________ years at a time. 8 The amount in unpaid dividend accounts of companies shall be transferred to the ____________education and Protection fund. 9 ________interest rate is the rate of interest an investor expects to receive after allowing for inflation. 10 ____________Chart is a chart of financial ratios, which analyses the net profit margin in terms of asset turnover. 13 Additional Customs Duty is commonly known as_________.
NOTe: Members can claim one hour CPe Credit Unstructured Learning for attempting this crossword by filling the details in the selfdeclaration 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.

13 14

SOLUTION CROSSWORD 0 7 5
ACROSS
1 5 6 7 11 12 13 14 The remuneration of the auditor of a Government company, appointed by the C & AG, is fixed by the_______________. The Parliament Logjam (as on 03-09-2012) is on account of CAG Report on_______________ In IFRS 9 financial assets are measured at ____________ value. Possibility of the debt going bad is termed as ____________. The __________rate has to be set higher for riskier projects. From FY12-13 the threshold limit for tax audit under Section 44AB is R_________crore. The defensive interest ratio is a measure of _________term liquidity. Any _________ company intending to open Liasion Office in India is required to obtain prior approval from the RBI.

1 2

Customer: Ive been trying 0800 2100 for two days and cant get through to enquiries, can you help?.. Operator: Where did you get that number from, sir? Customer: It was on the door to the Travel Centre. Operator: Sir, they are our opening hours. A man and his wife entered a dentists office. The wife said, I want a tooth pulled. I dont want gas or Novocain because Im in a terrible hurry. Just pull the tooth as quickly as possible. Youre a brave woman, said the dentist. Now, show me which tooth it is. The wife turns to her husband and says: Open your mouth and show the dentist which tooth it is, dear.

1 6 0 T H E C H A RT E R E D AC C O U N TA N T oct ober 2 0 1 2

w w w. i c a i . o r g