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CHARTERED
JOURNAL
THE
volume 59 no. 7 january 2011
ACCOUNTANT
T H E I N S T I T U T E O F C H A RT E R E D A C C O U N TA N T S O F I N D I A
the chartered accountant
Happy &
Prosperous
New year
r100
2011
995 Editorial
EDITORIAL BOARD
volume 59 no. 7 january 2011 r100
EDITOR CA. AMARJIT CHOPRA,
CHARTERED
President set up by an act of parliament
JOURNAL
JOINT EDITOR CA. G. RAMASWAMY,
THE
Vice-President
MEMBERS CA. JAYANT P. GOKHALE
CA. JAYDEEP N. SHAH
ACCOUNTANT
CA. SANJEEV MAHESHWARI
CA. SHIWAJI B. ZAWARE
CA. M. DEVARAJA REDDY
CA. P. RAJENDRA KUMAR
CA. SUMANTRA GUHA
CA. SUBODH AGARWAL
T H E I N S T I T U T E O F C H A RT E R E D A C C O U N TA N T S O F I N D I A
CA. ANUJ GOYAL
EDITORIAL .................................................................................................
CA. PANKAJ TYAGEE
CA. LAXMINIWAS SHARMA 995
CA. SUBHASH C. GOEL
CA. DHARAM V. CHOPRA FROM THE PRESIDENT ............................................................................. 998
CA. VIMAL R. KHANNA
SECRETARY
ICAI EDITORIAL TEAM
SHRI VIJAY KAPUR
NADEEM AHMED
READERS WRITE ...................................................................................... 1004
SUSANTA K. SAHU
CA. NITIN JAIN PHOTOGRAPHS ........................................................................................ 1006
Dr. N. K. RANJAN
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA legal update
ICAI Bhawan, Post Box No.7100, Indraprastha Marg,
New Delhi-110002, Tel: +91 (11) 39893989. Legal Decisions.................................................................................................. 1024
E-mail: icaiho@icai.org, Website: www.icai.org
SUBSCRIPTION RATES Circulars/Notifications........................................................................................ 1032
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OPINION .................................................................................................... 1040
EVENTS
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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 Residential Refresher Course on Banking,
of ICAI. Unsolicited articles and transparencies are sent in at the owner’s
risk and the publisher accepts no liability for loss or damage. Material in this
Insurance and Pension at Amritsar ................................................................... 1134
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 Training Workshop on Audit Excellence at Jaipur, Pune, Indore,
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 Hyderabad and Bangalore ........................................................................................ 1135
while responding to the advertisements.
TOTAL CIRCULATION: 2,05,666
National Summit on Networking and Capacity Building
Total No. of Pages: 148 including Covers
Cover image: www.dreamstime.com
Inside images and graphics: www.dreamstime.com of CA Firms at Mumbai ..................................................................................... 1136
........................ SPEECH
ICAI Deserves to be Complemented
- Union Finance Minister, Mr. Pranab Mukherjee 1010
CAs’ Skills and Professional Excellence INTERNATIONAL TAXATION
Remain Undisputed Controlled Foreign Companies
- CBDT Chairman, Mr. S. S. N. Moorthy 1012 - Committee of International Taxation of the ICAI 1085
Where There are Opportunities for Profession, Applicability of Transfer Pricing Provisions
Growth Will Follow to Domestic Related Party Transactions –
- ICAI Past President, CA. V. Rajaraman 1016 Analysis of Recent Ruling of Supreme Court
- CA. Sunny Kishore Bilaney 1089
........................ In Conversation
CORPORATE GOVERNANCE
CAs Have a Critical Role in Ensuring
That Business Growth is Fair
Changing Role of Audit Committees
- UIDAI Chairman, Mr. Nandan Nilekani 1018
and Risk Management
- CA. (Dr.) Nisha Kohli and Shruti Kapoor 1093
........................ ACCOUNTING
Paradigm Shift in Indian Accounting Discipline:
Convergence to IFRS CORPORATE AND ALLIED LAWS
- Prof. Manju Punia Chopra 1046 Compoundability of Offences – Hits and Misses
Human Resource Accounting - Mr. S. M. Jain 1101
- CA. Vikas Jain 1058 The Prospect and Problems of
National Accounting System in Panchayat Raj New Pension Scheme in India
Institutions (PRIs) in West Bengal: - Dr. Aminul Islam 1104
Adoption or Convergence
- CA. (Dr.) Sanjib Kumar Basu 1065
........................ AUDITING
Audit of a Public Sector Undertaking – REPORT
An Overview ICAI Past Presidents Meeting on the
- CA. K. Sekar 1072 Companies Bill, 2009 - A Report 1110
SAFA Regional Standards Setters Conference
in New Delhi - A Report 1114
........................ TAXATION
Refund of CENVAT Credit to Exporter of Goods
- CA. Gautam Joshi 1077
Taxation of Limited Liability Partnership BACKPAGE
- CA. Aadesh Kumar Agrawal 1080 Cross Word 055
Smile Please 1137
by the Institute of Chartered Accountants Meeting with Member Secretary of that these will be brought in the public
of Nepal (ICAN). It was inaugurated by Planning Commission: The undersigned domain at a very early date.
Dr. Ram Baran Yadav, Hon’ble President along with the ICAI Secretary recently Meeting of GASAB at C&AG: The
of Nepal. On the sidelines, we had met Ms. Sudha Pillai, Member undersigned recently attended a
a meeting with the office bearers of Secretary, Planning Commission. We meeting of the Government Accounting
the ICAN, who requested us to start a expressed our willingness to be a part Standards Advisory Board (GASAB)
course on DISA and IFRS in Nepal and of every scheme being introduced by in the office of the Comptroller and
asked us for help on other professional central and/or state governments by Auditor General of India, New Delhi. The
matters. We promised all possible help introduction of scheme of maintenance undersigned suggested that the role of
and support to them. of accounts and internal/statutory audits preparing the Accounting Standards
Interaction with Trade Officials of by chartered accountants across the equivalent to IPSAS may be given to
Various Embassies in India: In order nation. For the purpose, we also offered ICAI and the GASAB might undertake
to develop means to foster bilateral a multipurpose panel which is prepared the responsibility of approving the same.
cooperation and to explore areas by the Institute on an annual basis. The idea was welcomed by the GASAB
whereby ICAI can collaborate with ICAI to Play Crucial Role in Audit of Chairman and endorsed by the RBI
similar placed organisations/institutions Accounts of Political Parties: We wish nominee. In the context of the pending
for positioning brand Indian CA globally, to inform with pride that the Election final decisions, however, it was decided
we recently organised an interaction Commission of India is in process of to include ICAI representation in every
with the trade officials of 15 embassies examining if the Accounting Standards technical group constituted to prepare
in India. Representatives from USA, and Auditing and Assurance Standards the Standards.
Colombia, Mauritius, Iraq, Israel, Italy, adopted by us could be made applicable ICAI submits First Interim Report
Kenya, Malawi, Maldives, Paraguay, to the accounts and audits of political on Direct Taxes Code Bill, 2010: It is
Tunisia, United Arab Emirates, Congo, parties. In this regard, the undersigned satisfying to note that we have recently
Bangladesh and Kyrgyz Republic, attended a meeting convened by the submitted the first interim report on
actively interacted and touched upon Election Commission of India recently the Direct Taxes Code Bill, 2010 to
the areas where the ICAI can help in in New Delhi. It was decided to entrust the Standing Committee on Finance.
promoting the mandate of providing the ICAI with the responsibility of looking Suggestions of various members of
“One Stop” information on the socio- at various formats of accounts of Direct Taxes Committee and sub-groups
economic legal and regulatory political parties and advise in the matter on Direct Taxes Code Bill, 2010 were
environment. accordingly. considered before preparing the the
Development in IFRS Convergence: Final Report on the Bill.
Initiatives with Government As the date of convergence with IFRS ICAI Nomination for Pre-Budget
India Corporate Week, New Delhi: is drawing close, there is considerable Meeting under Ministry of Finance: It
The undersigned along with the Vice- activity on the part of the ICAI at the was a matter of pride for the profession
President CA. G. Ramaswamy, few Ministry of Corporate Affairs to complete that we had received a letter from the
Central Council colleagues and officers the remaining tasks by 2010. In this Ministry of Finance to nominate our
of the Institute attended the inaugural regard, the Council of the ICAI recently representatives to participate in the pre-
function of India Corporate Week approved revised Schedule XIV to the budget meeting to be convened by the
recently, organised by the Ministry Companies Act, 1956 which proposes Department of Revenue with various
of Corporate Affairs. Hon’ble Prime to lay down the indicative lives of various trade and industry associations in New
Minister of India Dr. Manmohan Singh assets for companies which will be Delhi. CA. Sanjay Kumar Agarwal,
was the Chief Guest. The function was required to follow the Indian Accounting member, Direct Taxes Committee was
presided over by Hon’ble Minister for Standards converged with IFRS. The authorised to attend the aforesaid
Corporate Affairs Shri Salman Khurshid. revised Schedule XIV will be considered meeting, who presented our suggestions
As part of this Week, the ICAI along by the National Advisory Committee on Direct Taxes outlining the gist of the
with MCA organised a large number on Accounting Standards at its next recommendations on pre-budget and
of half-day seminars on the same meeting and thereafter will be sent focusing on its core issues.
theme, Sustainable Business, at various to the Ministry of Corporate Affairs Presentation on Pre-Budget
branches across the nation under the for its notification. The Council, at its Memorandum, 2011 in Ministry of
aegis of Corporate Laws & Corporate last meeting, also finalised certain Finance: This is to inform our professional
Governance Committee. clarifications on the Roadmap for colleagues that the Indirect Taxes
Meeting of Central Statutory Auditors Convergence issued earlier by the Committee of the Institute has recently
of Public-Sector Banks: The RBI Ministry of Corporate Affairs. These submitted the Pre-Budget Memorandum,
organised meetings recently of Central clarifications will be sent to the Ministry 2011 containing the suggestions related
statutory auditors of public-sector for issuance. It may also be mentioned to indirect taxes to the Ministry of Finance.
banks on regional basis. The one that nearly all Accounting Standards Subsequently, in response to an invitation
organised in Delhi was addressed by which will come into effect from April 1, by the Ministry to make a presentation
the under-signed. Such a pragmatic 2011, have been finalised by the NACAS outlining the gist of recommendations
step shall definitely lead to better and the Ministry of Corporate Affairs is in Pre-Budget Memorandum, 2011, our
coordination between auditors and also in the process of finalising the same Central Council colleague Indirect Taxes
regulators. for their notification and it is expected Committee Chairperson CA. Bhavna
Doshi along with CA. Smita Mishra, of profession was expressed. The Initiatives in the Institute
Secretary to the Committee, presented issue whether a firm should be made For Corporates:
our suggestions on Indirect Taxes. responsible for a criminal action of one ICAI Awards for Excellence in Financial
Position Paper on Direct Taxes Issue of its partners was also discussed. It Reporting (2009-10): The Shield Panel,
Arising from IFRS Convergence was opined that action against a firm a sub-Committee of the ICAI Research
Ready: It is satisfying to inform that the should be initiated only in the rarest of Committee, recently considered the
draft position paper with regard to Direct rare circumstances, where there was short-listed entries in 10 categories
Taxes issues arising from convergence collusion of all partners or a case of specified for the competition ‘ICAI
of Indian Accounting Standards (ASs) repetitive professional misconduct. The Awards for Excellence in Financial
with International Financial Reporting need for inclusive growth of profession Reporting’ for 2009-10. About 140
Standards (IFRSs) has been prepared was also highlighted. entities participated in the competition
by a sub-group constituted under the CA Independent Directors on Board in these categories based on functional
convenorship of our Central Council of Various Banks Meet: An interactive classification. A meeting of jury for the
colleague and Direct Taxes Committee meeting of chartered accountant Awards was held recently, which was
Chairman CA. Jayant Gokhale, which independent directors on the Board of chaired by Padma Vibhushan Shri
would be submitted to the Ministry of various banks was recently organised Naresh Chandra, who is also the present
Corporate Affairs for consideration and by the ICAI in New Delhi. More than 15 Chairman of the National Securities
action shortly. directors including those from private- Advisory Board. Other members of the
sector banks attended the meeting, jury present in the meeting were CA.
Initiatives for Profession who assured us to extend their support, Piyush Goyal, Member of Parliament
ICAI Past-Presidents Discussed Issues especially, when the matter regarding (Rajya Sabha), CA. V. Balakrishnan,
on Companies Bill, 2009: We wish to appointment of auditors and tax CFO, Infosys Ltd., Dr. A.K. Banerjee,
inform all members of the profession auditors in banks was being raised and former Deputy C&AG, Smt. K. J.
that a meeting of the Past-Presidents of discussed. ICAI Past-President CA. T. S. Udeshi, former Deputy Governor, RBI &
ICAI was convened recently to seek their Vishwanath, Professional Development Chairperson, BCSBI, CA. Pallav Gupta,
guidance on issues arising out of new Committee Chairman and Vice- General Manager (Taxation), ITC Ltd.,
Companies Bill, 2009 and with regard Chairman CA. Pankaj Jain and CA. C. and Shri Prithvi Haldea, Central Council
to the surrogate practices carried out by S. Nanda respectively, and many other Member, ICAI. CA. Ashu Suyash,
some of the firms, its implications and Council colleagues also attended the Managing Director and Country Head-
the measures to be taken to overcome meeting. India Fidelity International, also attended
the same. The meeting threw up most Meeting of CA Firms: We also wish to the meeting through teleconference. The
radical views focusing on the emerging inform our professional colleagues that Shield Panelists made a presentation on
paradigm and the market-driven forces a meeting of select CA firms having top three/four entries selected by them
that confront the profession today. There more than 10 partners was called in each category to the Jury. The Jury
was a consensus that the task of setting recently. The undersigned along with decided the winners after a thorough
of auditing standards should remain ICAI Vice-President CA. G Ramaswamy, deliberation. It may also be informed,
with the Institute, as these auditing interacted with the representatives of that as per the Council’s decision at its
standards concern the profession those firms and discussed the current 261st meeting held in 2006, the names of
at large. NACAAS can at best be an status of profession with regard to winners of ‘ICAI Awards for Excellence
advisory body to review the standards. capacity building of small and medium in Financial Reporting’ are sent to the
If at all the NACAAS comes up, its practitioners and invited suggestions FRRB and the Disciplinary Directorate
chair should lie with the CA profession from them to improve the same. It was of the Institute to ascertain whether any
and there should be a majority of our heartening to observe that members proceeding against any winner of the
nominees in its Council. It was also from 21 firms participated in this meeting competition is pending either before the
desired to highlight the track record of at such a short notice. It was highlighted Board or the Directorate.
the ICAI in standard-setting. The issues that the mergers & acquisitions may be
of rotation of auditors and joint audit encouraged for availing the benefit of For Members:
were supported and accepted. It was synergy of locations and the expertise of Orissa Governor Commends CA
suggested that if the concept of rotation various firms in different fields, rather than Profession: Every year one Council
of auditors can work well in public-sector joining hands merely for empanelment. meeting is organised outside the ICAI
audit, it can work for private-sector as In the context of collaboration, creation headquarters purporting to refresh
well. There was a general consensus of a portal of networking based on the the members. This year, it was held in
that rotation of auditors should be synergy of location and profession was the holy city of Puri. We are happy to
restricted to companies where there suggested. It was also decided to create inform you that the Hon’ble Governor
is substantial public interest, and this a public discussion forum to invite of Orissa Shri Murlidhar C. Bhandare
should not be extended to other entities. members of profession to contribute on addressed the 301st meeting of our
However, rotation within the network capacity building. A multinational firm Council in Puri recently. He commended
was not acceptable to the participants. present in the meeting expressed that our Institute and said ‘that Indian
A need to define management they would promote hand-holding with Chartered Accountants have made in
consultancy services in the perspective SMPs rather than acquiring them. growth of Indian economy in the era
of liberalisaion and globalisation...the the Department having a bearing on International Placement Programme
Institute has performed its role very well.’ the performance of our profession. through Video Conferencing: It is
He afterwards expressed expectations The Conference got an overwhelming gratifying for all of us that the ICAI
of the Government that ‘Government response, as it was attended by organised a special placement
would welcome suggestions from the approximately 4,000 members. programme through video conferencing
Institute on ways and means to introduce Council Decides on EMD/Deposit: mode for the organisations functioning
a greater transparency and accountability The Council at its 301st Meeting in GCC/Middle East countries. Students
in financial accounting and reporting considered the recommendations of selected at the interviews conducted
system at all levels of the Government the Ethical Standards Board on the with Qatar Insurance Co., Doha, were
utilising the services of its members.’ payment of earnest or deposit money by offered a package of R16 lakh per
We are thankful to him for praising our various users of professional services annum.
Institute and profession. We assure or organisations while responding to ICAI Creates Panel of Arbitrators
him we would continue to serve our tenders/enquiries issued from time to through Certificate Course on
society to the best of our capabilities. time. The Council recommended a cost- Arbitration: It is satisfying to note that
The undersigned, along with the ICAI sheet to be maintained by the members the ICAI has been administering the
Vice-President and some of the Council of Institute while responding to tenders, Certificate Course on Arbitration for the
members, also addressed a group of incorporating details of the costs benefit of our members while empathi-
some-400 students who showed great being incurred therein having regard to sing with the role of ADR mechanism.
enthusiasm during the interaction. We number of persons involved, hours to The ICAI Panel of Arbitrators comprising
are also thankful to the EIRC of ICAI and be spent, etc., so that the same may be members who have successfully
its Bhubaneswar and Cuttack Branches called for by the Institute for perusal. The undergone this Certificate Course is
for extending a great hospitability and same may also be subject to the peer maintained by the Institute. We would
making our stay comfortable in Puri. review. like to share here that Hon’ble Rajasthan
We would also like to thank our Central CPE in e-Learning Mode: It is High Court has agreed to appoint
Council colleagues CA. Subodh K. heartening to inform you that the Council arbitrators from our panel. The High
Agrawal, CA. Abhijit Bandyopadhyay at its 301st Meeting has approved CPE Court of Gujarat and the High Court of
and CA. Sumantra Guha for making in e-learning mode. This decision will Chhattisgarh have also expressed their
this grand arrangement. We also paid add yet another important dimension to desire to associate with us in the matter
obeisance to Lord Jagannath and the ICAI’s endeavours to impart quality of promoting the ADR mechanism and
sought His blessings. professional education to its members to hold knowledge-sharing programmes
42nd Regional Conference of SIRC at in the most convenient way. It will for the benefit of their judicial officers,
Kochi: The undersigned along with the facilitate learning for the members just and we are in process of finalising the
ICAI Vice-President CA. G. Ramaswamy at the click of the mouse. We are sure details with them.
and few Council colleagues recently that this decision will go a long way in Certificate Course on Valuation: 800
attended the 42nd Regional Conference helping members in actively pursuing members have been registered for
of SIRC, hosted by its Kochi Branch, our CPE programme very conveniently Certificate Course on Valuation till date.
which was inaugurated by Shri Pranab without undertaking the hardships of Examinations for the ongoing batches
Mukherjee, Hon’ble Finance Minister physical attendance and will prove to in Delhi, Mumbai, Chennai and Kolkata
of India, in the presence of Prof. K. be beneficial for the CA community at were held recently. A fresh batch of
V. Thomas, Hon’ble Union Minister large. the course commenced in Hyderabad
of State for Agriculture, Consumer ICAI Allotted Land: It is a matter of recently. Batches at other places too
Affairs, Food and Public Distribution. happiness for the profession that the would start shortly.
Many distinguished guests including Institute has been allotted a plot of land National Conference of Chartered
Members of Parliament Shri P. C. measuring 2,128.50 square meters in Accountants in Guwahati: The
Chacko and Shri P. Rajeev, MLA and Rohini, i.e. North-West Delhi. We would undersigned also attended, with the
Former Finance Minister of Kerala Shri soon be given possession of the land. ICAI Vice-President CA. G. Ramaswamy
K. M. Mani, Member of Kerala Legislative Also, Kanpur Development Authority and some Central Council colleagues,
Assembly CA. Thomas Chazhikadan, has allotted a land measuring approx. a two-day National Conference
and Secretary to Government of India 2,460 square meters to the ICAI. I of Chartered Accountants hosted
and Vice-Chancellor of NMI University congratulate the Managing Committee recently by our Guwahati Branch. The
Dr. C. V. Ananda Bose, were also Members of the CIRC of the ICAI for their Conference was inaugurated by His
present. It was also attended by senior efforts. Excellency Hon’ble Governor of Bihar
functionaries of various banks including CA Qualification Recognised as Shri Devanand Konwar, who highly
Federal Bank Limited MD & CEO Shri Criterion for PhD: I am happy to inform appreciated our disciplinary mechanism.
Shyam Srinivasan, Indian Overseas Bank that IIM-Shillong would now recognise IIM-Shillong Director Dr. Ashoke K.
CMD Shri M. Narendra, and State Bank CA as a qualification for PhD. Director Dutta and SBI - NE Circle CGM Shri
of India CGM Shri B. S. Bhasin. Central of the Institute, Dr. Ashoke K. Dutta, has R. K. Garg were present as the guests
Board of Direct Taxes Chairman Shri S. expressed his willingness to collaborate of honour. ICAI Past-President CA.
S. N. Moorthy delivered the valedictory with the ICAI on different programmes in Sunil Talati also delivered the keynote
address outlining various initiatives of the areas of common interest. address.
For Students almost 900 students in this small city. of the profession that the MCA has
Live Virtual Classes to Begin: We are Meetings at Saharanpur, Dehradun communicated the nomination of Ms. Ila
happy to inform our students that the and Roorkee: The undersigned also met Singh, Principal Director of Commercial
Live Virtual Classes will be inaugurated our students at Saharanpur, Dehradun Audit & Ex-officio Member, Audit Board-I,
on December 28, 2010, on the occasion and Roorkee. Students everywhere New Delhi (Office of the C&AG), on the
of the International Conference of were present in great numbers showing Disciplinary Committee of our Institute
CA students. It will be a historic step their enthusiastic response and keen constituted under the provisions
in our services towards CA student interest in our Institutional activities. of Section 21B of the Chartered
community, as it will also bring closer The undersigned also responded and Accountants Act, 1949 (namely, under
our students spread across the nation, addressed their queries suitably. the new disciplinary mechanism), in
especially from mofussil towns. The place of Shri Birendra Kumar, until
Board of Studies has organised demo Initiatives of ICAI Committees further orders.
classes at 25 centres in 22 cities in order Four-Day Training Workshops on Audit
to assess the impact of technology and Excellence in Metros: The Auditing and All of us have an inherent ability to
to evaluate the quality of audio-visual by Assurance Standards Board (AASB) transform our words and actions into
the participants attending these classes, has been working towards taking the sheer joy and happiness. Let us recall
prior to the formal inauguration. It is auditing standards to the common here the lines of probably the greatest
proposed to organise classes at all five members. In that league, it has already twentieth century Brazilian poet, Carlos
regions. Classes are likely to formally successfully launched and completed Drummond de Andrade: Our pain
commence in the third week of January Four Day Training Workshops on Audit doesn’t come from the things that we’ve
2011. We must congratulate CA. Vinod Excellence at the four metros, New Delhi, lived, but from the things that were
Jain, Chairman, Board of Studies, and Mumbai, Chennai and Kolkata. While the dreamed up and not acquired…We
his team for making efforts to make this undersigned inaugurated the workshop suffer not because we age, but because
project a reality. in New Delhi, ICAI Vice-President CA. G. the future is being confiscated from us,
Hosting of Suggested Answers: As Ramaswamy and United India Insurance thus preventing a thousand adventures
part of our efforts to enhance the Chairman-cum-MD Shri G. Srinivasan to happen to us, all those with whom we
transparency of our examination system, inaugurated the workshops in Chennai dreamed and we never ever try. He later
it has been decided to host suggested and Mumbai respectively. In view of the on goes on to say in the same verse,
answers to the November 2010 positive response received for these Every day I live, the more I become
examinations well before the declaration Workshops, the Board is now planning convinced that the waste of life are in
of results, i.e. by December 31, 2010. to organise similar workshops in Jaipur, love that we don’t give, the forces that
International Conference of CA Indore, Pune, Hyderabad and Bangalore we don’t use, in the selfish prudence that
Students: We are happy to inform in January 2011. nothing ventures, and that, dodging the
all our students that an International Conference on Management of suffering, we lose also the happiness.
Conference of CA Students will be Fiscal & Natural Wealth in Lucknow: How true these lines are even today!
organised in New Delhi on December The undersigned recently attended Following on the line, we have been
28-29, 2010. About 750 students have the inaugural session of a two-day trying to help our society and our country
already registered showing their active conference on Management of Fiscal appear better by extending all possible
interest in the Conference. & Natural Wealth organised by the help that we can contribute; we have
Modification/Revision of Final Course Committee on Economic, Commercial been endeavoring to help and empower
Study Material Complete: We are Laws & WTO at the Lucknow branch members of our profession who are yet
happy to inform that the entire study of CIRC, which was inaugurated by to take off in their career; we have been
material for the Final course has been Hon’ble Governor of Uttar Pradesh Shri striving to reach distant locations across
revised/modified substantially. We B. L. Joshi. Committee Chairman and the world offering our technical and
hopefully will make this (with practice Vice-Chiarman CA. Rajkumar Adukia infrastructural resources. Fundamentally
manuals) available to our students by and CA. Rajendra Kumar P., Central we have been making honest efforts
January 2011 through the respective Council colleague CA. Manoj Fadnis to create a better world for all to
Branches/Regions. and CIRC Chairperson CA. Kemisha live in.
National Conventions, Regional Soni were also present during the Let us begin the New Year with
and Sub-Regional Conferences of Conference. a promise to help others and with a
Students Organised: We would like to ICAI Submitted Bank Branch Auditors’ belief that only a happy and satisfied
happily inform that the Board of Studies Panel to NABARD: We wish to inform surrounding has the power to make us
has successfully organised National all members of the profession that the happy and satisfied.
Conventions of CA Students in Mumbai, Professional Development Committee
Nagpur and Indore. These conventions has submitted the Bank Branch Auditors’ Best wishes
were well-organised and attended by Panel for the year 2010-11 to the
students in large numbers. In addition, NABARD for appointment of statutory
Sub-Regional/Regional Conferences were auditors of regional rural banks and
also organised at Ernakulam, Jamnagar state/district central cooperative banks.
and Tirupati. The undersigned inaugurated MCA Nominates Ms. Ila Singh on CA. Amarjit Chopra
the Conference at Tirupati and found it ICAI Disciplinary Committee: We President, ICAI
overwhelming to witness participation of would like to apprise all stakeholders December 26, 2010
Editor
Editor
For the Attention of Readers Write to Editor
Readers’ attention is specifically invited to the fact ‘Information is Power’ and our ever-evolving profession
that the views and opinions expressed or implied in needs more and more of that today than ever before.
The Chartered Accountant journal are those of the Do you have any relevant points to make, experiences
respective authors only, and not of the ICAI. The ICAI to share, and views to spread among the CA fraternity?
bears no responsibility of any sort whatsoever in case If yes, e-mail us at eboard@icai.org/nadeem@icai.org
of any action taken by any reader based on any article or write to:
published in the Journal. The Editor, The Journal Section, ICAI, A-29, Sector 62, Noida
(UP) - 201309
Orissa Governor Addresses ICAI Council Interaction with Foreign Trade Officials
Governor of Orissa Shri Murlidhar Chandrakant Bhandare with CA. Amarjit Chopra, President, ICAI with Council Members CA. Vinod Jain,
ICAI President CA. Amarjit Chopra and ICAI Vice President CA. G. CA. Devaraja Reddy M., CA. Charanjot Singh Nanda, and CA. Rajkumar
Ramaswamy at the 301st meeting of the Central Council of the ICAI in Puri. S. Adukia and Trade Officials of various embassies in India during an
(December 20, 2010) interaction at New Delhi. (December 8, 2010)
The 42nd Annual Conference of Southern India Regional Council of the Institute of Chartered Accountants
of India was held at Jawharlal Nehru International Stadium Kaloor Kochi on 27th November, 2010. Various
important topics of professional interest were discussed during this well-attended annual conference of
the SIRC, which came into existence on 1st April 1952. Union Finance Minister Mr. Pranab Mukherjee, CBDT
Chairman Mr. S.S.N. Moorthy, ICAI President CA. Amarjit Chopra and ICAI Vice President CA. G. Ramaswamy
were among the dignitaries who graced the occasion. Following are the excerpts from the address of
Mr. Pranab Mukherjee, given on the occasion.
“I am very happy to be here today at the 42nd Annual Let me complement ICAI for its initiative to work with
Conference of Southern India Regional Council of the financial institutions in streamlining and fine tuning the
Institute of Chartered Accountants of India. I believe this is financial reporting, auditing and accounting architecture
a prestigious annual event which has become well known of India. Such efforts create greater awareness among
for deliberating topical issues of professional importance stakeholders about the challenges and opportunities
to your association. Issues like the International Financial that we have before us and help in identifying issues that
Reporting Standards and the imminent implementation of need to be addressed for accelerating and sustaining the
our tax reforms have a bearing on the future of our reporting development tempo.
and disclosure framework which needs attention of a forum The Government is aware of the fact that India’s
such as this. economic legislation needs to be progressive and be in
If one were to go back a decade, few would have tune with global norms and best practices. Towards this
anticipated the Indian GDP to grow at rates of 8 to 9 per end we have introduced the Direct Taxes Code Bill. The
cent, or our stock market indices- SENSEX and NIFTY- to thrust of the Code is to improve efficiency and equity of our
reach the levels that we see today. The resilience that India tax system by eliminating distortions in the tax structure,
has demonstrated in recent times has been recognised and introducing moderate levels of taxation and expanding the
appreciated across the globe. There has been a significant tax base. The language has been simplified to enable better
increase in the economy’s capacity to absorb shocks without comprehension, remove ambiguity and encourage voluntary
major disruptions. It reflects a maturing of our management compliance. The new Code is designed to provide stability
of economic policy and developments. That this has in the tax regime as it is based on well accepted principles of
happened even as the economy has become far more taxation and best international practices. I am confident that
globally integrated over the years indicates that globalisation together with GST, this will streamline the tax administration
and economic resilience can go hand in hand. of the country by making it efficient and equitable.
We have all contributed to this progress in our We have concluded tax information exchange
respective domains. ICAI deserves to be complemented. agreements with eight countries and jurisdictions including
Bahamas, Bermuda, British Virgin Islands, Isle of Man, “We need to regulate better and
Jersey, Monaco, Cayman Islands and Argentina. Active at the same time ensure that
negotiations are in progress with other jurisdictions. The
regulation does not degenerate
renegotiation of Double Taxation Avoidance Agreement
(DTAA) with treaty partners is being actively pursued and a
into obsessive control. While too tight a
revised DTAA with Switzerland has already been signed. regulation may lead to a lack of development
Indian companies are increasingly accessing the global in financial products, a very lax regulatory
markets to meet their capital needs by listing their securities structure may encourage financial
on the stock exchanges outside India. To be able to misdemeanour.”
communicate and effectively engage with the world we need
The responsibility for corporate governance is
a common language that is understood by every market in
multilayered. Within a company internal audit department is
the world. This was the main objective of converging our
the proverbial foot soldier to detect and prevent fraud on a
national accounting standards with IFRS. India as a member
day to day basis. The Board of Directors have the ultimate
country of G20 is committed to achieving a single set of high
responsibility for in-house oversight. At the external level
quality global accounting standards. The use of globally
there are several components like market regulators, external
acceptable accounting framework helps in promoting
auditors, tax authorities, banks and financial institutions
investors’ confidence and brings more clarity and uniformity
besides investor groups or associations. Providing essential
for users of financial statements.
financial information on a company’s performance to its
The use of standardised accounting practices helps
shareholder and other stakeholders is an integral and
in mitigating the problem of information asymmetry
important part of good corporate governance.
between various stakeholders such as managers, owners
We need to regulate better and at the same time ensure
and creditors. While managers have the incentive to be
that regulation does not degenerate into obsessive control.
more forthcoming on good news about the company’s
While too tight a regulation may lead to a lack of development
performance and prospects, they may want to hold back
in financial products, a very lax regulatory structure may
bad news. The accountants as information intermediaries
encourage financial misdemeanour. Indeed, market
between managers and shareholders need to identify
regulation is no longer viewed as an irrelevant intrusion but
and recognise losses at an early stage, thereby mitigating
is considered necessary to help achieve developmental
asymmetry in information. Accounting standards have to
goals. The recent experience from the global financial crisis
be based on principles, be uniformly applied and assist
has reinforced this belief.
in presenting the true picture of the financial health of the
As India gets more integrated with the global economy,
company, while ensuring accountability in all respects.
we must have stronger disclosure standards in keeping with
This will help in avoiding unknown risks and allow
the international best practices. We must also build stronger
everyone to have a fair assessment of the company. If
supervisory frameworks to provide incentive for more
financial performance is volatile, the function of a sound
responsible corporate conduct. I am sure you are all aware
accounting procedure is to report the volatility. Volatility in
that the Ministry of Corporate Affairs brought out voluntary
the market can be managed by risk management tools.
guidelines for corporate governance in December 2009. I
We should not fiddle with accounting standards to fix such
urge all companies to adopt this guideline in the spirit of self
problems.
regulation.
“Let me complement ICAI for its Recently there have been instances where the auditing
initiative to work with financial community has been found wanting in its professional
propriety while valuing complex financial products. I am
institutions in streamlining and fine
confident that ICAI as a mentor will plug those loopholes. We
tuning the financial reporting, auditing and must promote and encourage ethical use of information by
accounting architecture of India. Such efforts avoiding, controlling and disclosing conflicts wherever they
create greater awareness among stakeholders arise. While doing so we should ensure that the procedures
about the challenges and opportunities that established to control conflicts are not porous. As the
we have before us and help in identifying Government and the market regulators continue to exercise
vigil on the markets, it is up to the other stakeholders to
issues that need to be addressed for
contribute their share in ensuring good governance.
accelerating and sustaining the development Indeed, good governance makes for growth and long term
tempo.” sustainability in business.” n
development of systems, they have contributed to substantial Well, your role of course is quite
cross border transactions which are not reflected in your tricky. You have to balance between
normal accounting procedures. So I have been just thinking
as a role of contributor to nation
– you have to have what I would call, an international tax
language and an international accounting language. I am
building and also your loyalty and your
not speaking about the letters. I am not speaking about responsibility to the clients. And this has to
what you call the words or lexicon. I am speaking about the be very delicately matched and unless that is
system, the interaction. done, I think professional excellence cannot
After all, we are all moving to a situation where be achieved.
transactions should be transparent. Because just a few
minutes ago, I heard you are all contributing to nation two main concepts. On the one hand we have brought in
building. If nation building has to take place, transparency GAAR – The General Anti Avoidance Rule – to safeguard the
is the most essential accounting and reporting basis and I interest of revenue. And on the other hand, the mechanism
think unless we have this international tax language, I mean, of APA – Advanced Pricing Arrangements, and the safe
it is a very regular concept it is for you to develop, where harbour routes so that there is a balance between aggressive
transparency can be supreme and transactions will be tax planning and also tax payer-friendly measures. If this can
available to all the countries for proper taxation and thereby be appreciated by all of you and applied in a very serious
development of the country. manner, the revenue will be substantially high both for the
Well, your role of course is quite tricky. You have to centre and for the State. So this is what we have planned.
balance between as a role of contributor to nation building In fact, while formulating the DTC, we took into account
and also your loyalty and your responsibility to the clients. all the industry concerns all the concerns expressed by the
And this has to be very delicately matched and unless that Chartered Accountants and our professionals and I think we
is done, I think professional excellence cannot be achieved. have done a reasonably good job. Because, the feedback
And I am sure most of you are aware of that. Why I highlight which we get is not that all critical but more of a modificatory
the cross border issue is because, India has come into the nature. So we feel protecting aggressive tax planning has
international transaction status only for the last 10 years. been the problem in international taxation. So we brought in
We started our transfer pricing mechanism only in 2001 and GAAR but it will be tempered in with all rules and regulations
we have traveled a long distance during the interregnum of and also guidelines. So I think there will be nothing to worry
9 years and now we are accepted as one of the countries about the implementation part of GAAR. At the same time,
which apply the Transfer Pricing mechanism in a very for the honest, for the straight forward assessee, we have to
sustainable way all over the world. provide a safe harbour and also some mechanism by which
You know, among the OECD countries, among the UN the prices are determined early. So I think these two provisions
forum and even among the American, UK, US for a, India has in the DTC will be bringing in a revolution in international tax
got a place of importance. Why? Because, our professionals concept and also in international tax assessment.
and our tax administrators have taken care of the provisions You may be wondering why I am speaking only about
of transfer pricing mechanism. But much more things have international taxation? Because our concern now is mostly
to be done. That is why in the new DTC we have brought in with cross border transactions. We had the Vodafone issue,
we had the Microsoft issue, we have the Samsung issue –
But to keep the progress going,
all running to hundreds of crores of revenue. At the same
your role, your contribution will be time, we have to provide a balanced taxation avenue to the
important. Because, in most of the honest tax payer. And once we take care of the small tax
areas, you function, I would like to say ‘watch payer by a moderate rate of tax, I think 90 per cent of the
dog’ and I am sure, especially after the fiasco small tax payers will be taken care of.
of Satyam, we have all woken up to keep the When we had a study, we found the first slab of that
10 per cent or whatever it is, which consists of and takes
status of what you call, watchdog. And unless
care of almost 90 per cent of our tax paying public. And in
we protect the economy, the accounting the DTC, we have put up the provisions in such a way that
standards and reporting, the economy will the salary, the house property and other income they are
not be in good shape. I am sure all of you are very simply tabulated and they need not go into the rules
aware of these facts and you are doing the and schedules. The rules and schedules are meant for the
job very well. corporates and the high network individuals. So I think we
are moving towards an era of simplicity, transparency and What we are aiming at is a very
also tax payer-friendly administration. transparent tax administration
Of course, I do admit we have to go a long way. Our
and we require your contribution
TDS administration is not yet fully complete. Our processing
of return is not yet fully fool proof. But we have made a
and your help in making it more transparent
strong beginning. And I think our AS 26 which takes care and more meaningful. I am sure you can
of your TDS payment has been reasonably successful in a rise to the occasion because, your skills and
very short period of time. So what I mean to say is, between professional excellence remain undisputed.
the profession and the tax administrator there is going to And on our part, we are moving to a regime,
be less of a bridge and more of a sort of convergence. And
where things will be simpler.
I am sure this will help in revenue mobilisation. And I am
very happy that your IFRS convergence is a very slow going substantially high as we witness now from 1 lakh crore to
affair. Because, it is for you to consider and perhaps to think 4,30,000 crore.
deeply whether we are equipped enough to implement And look at the indirect taxes. They are also growing at a
the IFRS in all its full measure. My feeling is, we are not. faster pace at 44 per cent which is something phenomenal.
Perhaps, because of international compulsions you So taxes are bound to grow, economy is growing
may have to invoke it in a few cases in a and your role as a watch dog, I repeat
very singular, exemplary fashion. watch dog-because even though
But as far as the Income Tax you may be in the back office
Department is concerned, preparing accounts monitoring
and also the normal the accounting practices, but
asessee is concerned, your role in the corporate
it is my opinion. I governance is very very
don’t know how the important. Of course, the
profession looks Satyam fiasco may be a
upon it, but I think contribution of so many
you are also going factors. We can’t blame
slow. And that is any one single person
required. Because for that fiasco.
we can’t go ahead Now we have
with a revolutionary learnt a lesson as
accounting practice to how to monitor
when all other systems taxation, accounting
are not attuned to that and our practices. And
shift or take off. I think I think we have learnt a
you are conscious of very hard lesson. So it is
that. for you to take it forward, to
So, I don’t want to give keep that ethical governance
a long speech. What we are there in corporates, which
aiming at is a very transparent contributes to resource mobilisation
tax administration and we require your and glory of the profession. So, I wish you
contribution and your help in making it more all well. Once more I congratulate the office bearers
transparent and more meaningful. I am sure you can rise to for this grand function and I am also very happy to be with
the occasion because, your skills and professional excellence you here because I took over as an Income Tax Officer long
remain undisputed. And on our part, we are moving to a ago in the year 1974 in Kerala and three decades, almost
regime, where things will be simpler. Things will be more on 37 years have passed and many of my senior Chartered
the system and things will be more understandable to the Accountants many of them with whom I used to interact they
common man in a very simple language. And I am sure, if are before me here. Some of them have retired into their
this trend goes on, the collection from the revenue will be consultancy rooms. I will also retire of course, shortly. So it
substantial in the next five years to come. Because, nobody is a very momentous occasion. I wish you all well. Wish the
imagined from 2001 to 2010, the growth of taxes would be profession well.” n
All these activities are bound to give immense “Whether one likes it or not,
opportunities for the expected growth in the membership size would matter. Therefore,
for both employment and practice opportunities. The only
professional people must gather
challenge to the profession is—‘Are we prepared for these
great tasks ahead?’
themselves in greater numbers to form
I am very happy that both the Council of the Institute partnership firms. The style of functioning
and the membership at large are aware of this challenge, of the firms must also adapt to the changes
and are preparing themselves both in the knowledge and occurring in the organisational management
technological field. The Institute is suitably amending the like having trust, strict disciple to acting
core syllabus for various examinations of the Institute as
in a professional way as opposed to
well as through continued educational programmes for
existing members. Recently, the Institute has also adopted
unorganised way of working like family way
the IFRS so as to integrate the profession with the standards of conducting business. The aim is pooling
prevailing in most of the other advanced countries. of talents and specialization in particular
It is a welcome sign that growth in the profession, as fields. The partnership should function in an
witnessed, has spread to most cities and towns instead of impersonal way for the collective benefit of
concentrating in the state capitals and big cities only. It is
all the people, be it partners, employees, or,
bound to migrate to taluka headquarters and smaller towns.
This would be the necessity of the day and the only way, clients.”
perhaps, for the profession to grow. This is also a natural way of working like family way of conducting business. The
phenomenon in the sense that where there are opportunities, aim is pooling of talents and specialization in particular
growth would follow. Membership should be prepared for fields. The partnership should function in an impersonal
this change and it may not be a difficult task, since social way for the collective benefit of all the people, be it partners,
amenities are fast reaching the panchayat level and smaller employees, or, clients.
towns. Different sizes of firms can serve different sizes of
Another question that is often asked is as to what business organisations, since business would also be carried
would happen to the practicing small firms and individual on by organisations of different sizes. There will be some co-
practitioners in the face of competition from big-sized firms. relation between the size of a business organisation and that
In my view, this should also not present big hurdle, provided of a practicing firm. Highly specialised individual practitioners
we realize the necessity to reorganise to the changing would also have room in this scenario. The size of the firm
situations. With the growth in the complexities in the would depend on the urge for growth and specialisation, the
economic scenario, there is a necessity for the profession to demand for firm’s services and the satisfaction level of the
change its organisational setup. mind of those involved in the organisation. Whether we wish
Whether one likes it or not, size would matter. Therefore, or not, the size has to grow; but the growth would come only
professional people must gather themselves in greater out of mutual trust and confidence in each other’s sincerity.
numbers to form partnership firms. The style of functioning The ICAI has already had some regulations for some
of the firms must also adapt to the changes occurring in the kind of leveling of the professional practice through
organisational management like having trust, strict disciple minimum fee structure to be changed by different sizes of
to acting in a professional way as opposed to unorganised firms. Networking of smaller firms specialised in different
“It is a welcome sign that growth fields and spread in different locations would also help in
in the profession, as witnessed, has meeting with the challenge of size. But, all these would need
spread to most cities and towns an attitude of ‘give and take’ and, more than everything,
‘trust’ in others.
instead of concentrating in the state capitals
Lastly, a word about the students of the profession:
and big cities only. It is bound to migrate There have been too many changes in the entry-level
to taluka headquarters and smaller towns. criteria. This is perhaps an area where more thought should
This would be the necessity of the day and be bestowed and experiences of other countries be taken
the only way, perhaps, for the profession to into consideration. I have no fixed idea on this, except for the
grow. This is also a natural phenomenon in fact that excellence in theoretical knowledge and the ability
to apply them to practical situations are the foundation stone
the sense that where there are opportunities,
for a competent professional to face the challenge in life.” n
growth would follow.”
‘Padma Bhushan’ CA. Nandan Nilekani, has been conferred with “Businessman of the Year” for Asia, ‘World’s
most respected business leaders’, Joseph Schumpeter Prize and ‘Legend in Leadership Award’. Time
magazine placed him in the Time 100 list of ‘World’s Most Influential People’. Born on 2 nd June, 1955, he is
often addressed as The “Bill Gates of Bangalore”. He is currently the Chairman of the Unique Identification
Authority of India (UIDAI), a position of Cabinet Rank, after a successful career in Infosys. He is also heading
Government of India’s technology committee called as TAGUP. Co-founder India’s National Association of
Software and Service Companies (NASSCOM), he has authored the much talked about book ‘Imagining
India: The Idea of a Renewed Nation’. In a recent interview to ICAI, he shared his vision on a range of issues
including UID project, Indian economy, corporate governance and Chartered Accountancy profession.
Following is the interview.
Q 1. How does it feel moving from the helm of Infosys, one direction. Governments in India have recognised
leading IT giant of the country to become a part the power of IT and communication infrastructure, as
of the leaders of the national government? Does it a tool to address critical developmental challenges,
reconcile with the thought process articulated by and take resources to the poor more effectively. I think
you to put India in the global front? this is a great step, and will be instrumental in India’s
Ans. The Aadhaar initiative will build the foundation to bring growth and its role in the world.
remote services and resource access to a much Q 2. What challenges have you faced or you foresee in
broader swath of India, especially the poor. It would managing the UIDAI? Were there any challenges on
address some of the barriers in access that limit the account of the differences in the management styles
poor from educational and employment opportunities, of the government and corporate world?
constrains access to social security, and that prevents Ans. Of course the government and corporate sector work
them from migrating for better jobs and incomes. A quite differently. But I have been lucky in that I have
chance to lead a project that would help address some a great team within the UIDAI, a dedicated group of
of these challenges is indeed an exciting opportunity bureaucrats and people from outside Government
for me. who are truly committed to the goals of the project.
I think that the Aadhaar initiative, the effort to Q 3. A very large number of Indians have Election
build a broad public information infrastructure in Commission identity cards. They also have ration
India, and the attempts in various states to address cards, BPL card, driving licence and passports.
delivery problems in public programmes, all point in There are PAN cards also. What is unique about
Aadhaar of UIDAI? Don’t you think that more cards As we see more complex, global
will mean more confusion for the public? What are business models among Indian
the costs and benefits of having Aadhaar?
firms, the CA profession will have
Ans. One very clear difference between the identity cards
that exist and Aadhaar is that Aadhaar is a number,
to specialise – in their knowledge base,
not a card. An individual, once they have an Aadhaar geographical expertise, and in how they
number, can prove their identity by providing their assess corporate risk and opportunity. With
number and corresponding demographic or biometric the use of IT tools and ERP gaining ground
information. in business, we will also see technological
This will significantly ease the confusion people
expertise become a priority for chartered
face today with identification. Because multiple
identity documents are now available, different service
accountants.
providers in India often have varying requirements of Ans. While I am not personally ambitious, I am ambitious
how a person must verify their identity, before they about what is possible for India, and all that we can
receive a service. This makes identification procedures potentially achieve during this period of growth. In
repetitive and exhausting for customers, and costly for my book, I had accordingly outlined some of the key
service providers. The use of the Aadhaar number will policy and investment decisions we would need to
offer a clear, uniform standard across applications see broad-based, equitable development. If we make
and service providers, for establishing identity as well the right decisions and investments, I believe India will
as proof of address. see a path to development that is both high-growth
Additionally, since Aadhaar numbers are unique and inclusive. I am doing what I can to help achieve
due to being linked to a person’s unique biometrics, this, through the UIDAI initiative. I also feel one should
one person can only have one number. This will help concentrate on adding value and being relevant at all
resolve the challenges of fraud and duplication we times.
face today in our identification infrastructure. Q 5. In comparison to the world economy which has still
Q 4. You have earned for yourself Padma Bhushan. not come-up from the recessionary phase, Indian
You have also been awarded “Businessman of the economy is on the fast track revival and growth,
Year” for Asia, ‘World’s most respected business what according to you are our strength areas for
leaders’, Joseph Schumpeter Prize and ‘Legend in the resilience of Indian economy? What role does
Leadership Award’. Time magazine placed you in information technology play in it?
the Time 100 list of ‘World’s Most Influential People’. Ans. India has some substantial advantages, which is
You have often been addressed as The “Bill Gates of making its growth fairly resilient in the face of global
Bangalore”. How do you then explain your penchant recessionary forces. It has a substantial demographic
for excellence? Normally when corporate CEOs write dividend, which means that our young, working
books, they tend to write either about their biggest population substantially outnumber the number of
deals or about their perspective on management dependents – young children and the retired elderly
theory or philosophy. You have authored a book – in the population. Our working population is in fact,
about India (Imagining India: The Idea of a Renewed set to be the largest in the world, with over 800 million
Nation), which is totally different from usual book? workers by 2020.
The second advantage India has is its vibrant
One very clear difference between
domestic economy. This makes us less susceptible
the identity cards that exist and to shifts in global trading markets. The size of our
Aadhaar is that Aadhaar is a domestic consumer market is growing rapidly,
number, not a card. An individual, once they thanks to an expanding middle class and changing
have an Aadhaar number, can prove their aspirations, especially among the poor.
identity by providing their number and The third factor in India’s favour is our growing
access, as well as openness to information and
corresponding demographic or biometric
communication technologies. The spread of mobile
information. This will significantly ease phones has put communication devices in the
the confusion people face today with hands of millions of poor residents across India – a
identification. device that can be the gateway to accessing critical
information, services and resources, wherever they of promoters and minority shareholders. Effective
are in the country. I think the use of technology corporate governance is finally, a voluntary act – the
through mobile phones and Internet access will be standards reveal themselves in how people within the
critical in intensifying our other advantages. It will help corporation behave when they believe that they are not
us leverage the strengths of our young workers, equip being watched. Such behaviour must be reinforced
them with the right skills to move out of poverty, and time and again within the company’s culture, and
contribute to India’s growth and productivity. And it reflected from the very top management. Such a
will also enable us to reach both our rural and urban culture is possible across industries and markets only
markets more effectively, and provide consumers with when many more Indian companies set an example in
the services they need. their business processes and practice.
Q 6. The issue of corporate governance is a hotly- Q 7. Through rigorous training and education, the
debated one, particularly after the Satyam episode. chartered accountants today are not merely confined
Having established an impeccable corporate to their core areas of accounting, auditing and
governance record yourself, how do you rate the taxation. Their roles are evolving. What corporate
governance standards in our Indian India expects from them. What in your
industry? How much scope is opinion the challenges a chartered
there for improvements on that accountant is facing in the current
front? business environment?
Ans. I think we have made Ans. As we see more complex,
significant progress in our global business models among
standard of corporate Indian firms, the CA profession
governance in the last will have to specialise – in
two decades, thanks their knowledge base,
to the efforts of SEBI geographical expertise, and
and the Ministry of in how they assess corporate
Corporate Affairs. Many risk and opportunity. With
significant corporate the use of IT tools and ERP
governance reforms, gaining ground in business,
such as transparency in we will also see technological
financial reporting and expertise become a priority for
in director appointments, chartered accountants.
have become mandatory In the coming years, with the
for listed companies, thanks to impending adoption of International
the amendment to Clause 49 of the Financial Reporting Standards (IFRS),
Listing Agreement of Stock Exchanges. The much more will be expected of our accounting and
voluntary guidelines issued by the MCA in 2009 have auditing professionals, in terms of how they perform
also set a high bar in governance for companies. valuations and interpret financial statements, as well
We have also benefited from the standards set by as their independent judgement when it comes to the
Indian firms that increasingly target global markets, and health of the firms.
consequently adopted international best practices. Overall, I believe that chartered accountants
However, while we have increasingly strong standards have a critical role to play in ensuring that business
of governance in place, recent corporate scandals growth is fair, transparent, and beneficial to the larger
have highlighted the challenges we face in enforcing economy. This profession will be pivotal in determining
these standards. There is scope for improvement how corporate governance evolves in India. The
when it comes to compliance with existing governance integrity, objectivity and professional competence of
standards, in ensuring accountability when compliance our chartered accountants will be key to ensuring high
is not fulfilled, and fixing the problems that remain. levels of transparency and adherence to standards
Additionally, it remains entirely possible for among businesses, and in ensuring that the benefits
companies to follow the letter of standards in corporate of growth are distributed to not just employees,
governance but not their spirit when it comes to the shareholders, and the management, but also to the
functioning of independent directors, audits, the role greater community. n
Legal Decisions1
DIRECT TAXES test specifically laid down in clause (b), is not satisfied and
Section 9 read with Section 195 of the the legal position clarified by this Authority while interpreting
Income-tax Act, 1961 - Income - Deemed more or less similar Treaty provisions applies with greater
to accrue or arise in India force to the present case in view of the narrow language
Payments made by Indian Insurance employed in the India-Singapore Tax Treaty,
company to Singapore company for providing access Providing comments and suggestions after reviewing
to applications and to server hardware system hosted in the strategies and plans developed by the applicant,
Singapore and related support under the terms of Service giving suggestions to the applicant to improve the product
Agreement is not in nature of ‘royalty’ within meaning of developed by it so as to bring it in line with the common
term in Explanation 2 to clause (vi) of Section 9(1) practices followed by other AXA entities across the globe,
Bharati Axa General Insurance Co Ltd, In re, August 6, providing HR support assistance, assisting the applicant
2010 (AAR) in choosing cost effective re-insurance partners, reviewing
The applicant insurance company entered into a Service the actuarial methodologies developed by the applicant
Agreement with a Singapore company, AXA ARC for receiving and providing suggestions and inputs to achieve standard
assistance such as business support, marketing information actuarial practices and processing guidelines in connection
technology support services and strategy support etc. The with the settlement of claims, marketing and risk analysis,
applicant states that these services are merely advisory in fall short of the requirements laid down in the definition of
nature and are procured with the intention of carrying on fees for technical services in Tax Treaty between India and
business in line with the best practices followed by other Singapore. It will be too much to say that by providing
AXA group entities globally. The applicant desires to know if such services (assuming they are technical or consultancy
AXA ARC has any liability to pay tax in India in respect of the services), the applicant receiving the services is enabled to
fee received from the applicant. apply the technology contained therein i.e. the technology,
The Authority for Advance Rulings held that the services knowledge, skills, etc. possessed by the service provider or
rendered by AXA ARC may well be brought within the technical plan developed by the service provider. IT support
scope of this definition clause because they answer the services does not fall under the description of technical
description of consultancy services or some of them may be services as defined in the Treaty.
categorised as technical service also. But, in Treaty provision, Coming to the payments made by the applicant to AXA
the qualifying words “make available technical knowledge, ARC for providing access to software applications and to
experience, skills, know-how, which enables the recipients the server hardware system hosted in Singapore for internal
of services to apply the technology contained therein” make purposes and for availing of related support services under
material difference. All the technical or consultancy services the terms of the Service Agreement, cannot be brought
cannot be brought within the scope of this definition unless within the scope of the definition of ‘royalty’ in Article 12.3
they make available technical knowledge, know-how, etc, of the India- Singapore Tax Treaty. There is no transfer of
which in turn facilitates the person acquiring the services any copyright contained in the computer software provided
to apply the technology embedded therein. The transfer of by AXA ARC. Applying the principle laid down in Dassult
technology technical plan or know-how squarely falls within Systems case 322 ITR 125 and the earlier ruling in FactSet
the purview of this definition. But, the question is whether Research Systems Inc. 317 ITR 169, etc., it is to be held that
in the instant case, the ingredients of clause (b) of Article clause (a) of Article 12.3 of Tax Treaty relating to ‘use of’ or
12.4 of the Treaty can be said to have been satisfied. As per ‘right to use’, copyright of literary/scientific work is attracted.
Section 9(1)(vii) the income in the nature of ‘royalty’ or ‘fees The payments made for access to the system hosted in
for technical services (FTS)’ is taxable as deemed income Singapore is for availing of the facility provided by AXA ARC
irrespective of whether the income actually accrues or arise and it cannot be said that the applicant has been conferred
or is received in India. The fee for technical services paid any right of usage of the equipment located abroad, more
by an Indian business entity in connection with the services so when the server is not dedicated to the applicant. Thus,
received by it would constitute deemed income. However, it the fee paid to the AXA ARC by the applicant does not
is well settled that if the provisions of the Tax Treaty are more amount to fee for technical services within the meaning of
beneficial to the assessee, then the provisions of the Act India-Singapore Tax Treaty.
must yield to the Tax Treaty. The assessee can invoke the Therefore, the payments made to AXA ARC does not
more beneficial treaty provisions to avoid taxation in India. amount to ‘fee for technical services’ and ‘royalty’ within
In fact, this principle is specifically recognised in Section the meaning of Article 12 of the India-Singapore Tax Treaty.
90(2). Further, AXA ARC does not have a permanent establishment
The definition of FTS as contained in clause (b) of in India, and therefore, the payments received by it cannot
Article 12.4 is explicitly designed to restrict the scope and be taxed as business profits under the Treaty. The receipts
ambit of the technical and consultancy services. Even if on by AXA ARC from the applicant will not suffer withholding tax
proceeds on the basis that some of the services have the under Section 195 of the Act.
flavour of imparting technical knowledge and experience
to the recipient of service, the further question is whether Section 9 read with Section 115A of the Income-tax Act,
such provision of services enables the person acquiring 1961 - Income - Deemed to accrue or arise in India
the services to apply the technology contained therein. This Where applicant offer accreditation mainly in respect of
1
Readers are invited to send their comments on the selection of cases and their utility at eboard@icai.org.
32 THE CHARTERED ACCOUNTANT january 2011
LEGAL UPDATE 1026
Legal Decisions
Management Systems Certification, Production certificate, of on-site assessment and also in view of the fact that the
Personnel certification, Inspection and Greenhouse Gas applicant does not have a fixed place of business or PE in
validation and verification through Conformity Assessment India and the visits of the applicant’s personnel were of less
Bodies in different countries, income derived does not fall than 90 days in a 12 month period.
within ‘royalty’ clauses of Indo-Australia DTAA
Joint Accreditation System of Australia and New Section 10(23C) read with Sections 2(15), 11 and 263 of
Zealand, In Re, August 6, 2010 (AAR) the Income-tax Act, 1961 - Exemption - Religious Trust
The applicant, Joint Accreditation System of Australia / Institution
and New Zealand is a not for profit, self funding organisation Running of coaching classes and earning income therefrom
accorded the status of an international organisation and and incurring expenditure thereon by ICAI is appropriate
provides accreditation to CABs (Conformity Assessment [Assessment Year 2005-06]
Bodies) in several countries including India. The applicant The Institute of Chartered Accountants of India v. DIT
accredits organisations which provide third party certification (Exemption), October 18, 2010 (ITAT-Delhi)
and/or inspection services. The main function of the applicant The CIT initiated proceedings under Section 263 against
is to accredit, following the successful assessment, those the assessee/Institute of Chartered Accountants of India
bodies considered competent and impartial to provide an (ICAI/Institute) on the ground that it was earning income
effective service in various spheres. The applicant offers and incurring expenditure on coaching classes, whereas
accreditation mainly for programmes of Management the Chartered Accountants Act, 1949 nowhere provides for
Systems Certification, Production certificate – a codemark, such coaching classes. Further running of coaching classes
watermark, Personnel certification, Inspection and is a business and not a charitable activity and for this
Greenhouse Gas validation and verification. In consideration purpose, the assessee ought to have maintained separate
of the accreditation work done by the applicant, it receives books of account. Since the assessee has not maintained
fee from CAB in the form of application fee, programme fee, separate books, the profits and gains of the ICAI could not
certificate fees and fee for conducting surveillance audit, be exempt.
witnessing audit and re-assessment visits. The ITAT Delhi held that various regulations of ICAI provide
The questions are formulated in order to seek advance for coaching etc to the students of chartered accountancy
ruling are whether the consideration received/receivable course. These regulations inter-alia provide that no candidate
by the applicant from CABs can be classified as ‘fees for shall be admitted to the professional examination unless
technical services’ as defined under Section 9(1)(vii) liable he produces a certificate from the head of the coaching
to be taxed in India according to the provisions of Section organisation to the effect that he is registered with coaching
115A(1)(b)(AA) or (BB). organisation and has complied with the requirements of
The Authority for Advance Rulings held that there is no the theoretical education scheme. The candidate is also
transfer of any skills or technical knowledge or experience, required to pay such fees as may be fixed by the council for
or process or know-how to the CABs on account of grant such professional education. Before a student is eligible for
of accreditation to those entities. The skills, expertise or appearing in the examination, he has to produce a certificate
know-how possessed by the applicant for the grant of from the head of the coaching organisation to the effect
accreditation certificate cannot be said to have been made that he has complied with the requirements of postal tuition
available to the CAB who gets the accreditation. What the scheme. An articled clerk who has completed the practical
applicant does is to evaluate and assess the capabilities, training as provided in these regulations, before complying
competence, potential and infrastructure possessed by the for membership of the institute, shall be required to attend a
CAB in the light of certain set standards and parameters. course on general management and communication skills.
The fact that the CAB is apprised of its shortcomings and Similarly, an audit clerk who has completed the practical
deficiencies, if any, and that the CAB is given an opportunity to training is also required to attend the course on general
rectify, if possible, does not reasonably lead to the inference management and communication skill or any other course
of ‘making available’ the skills, technical knowledge etc. as may be specified in the council from time to time. For
possessed by the applicant to the CAB. CAB will, of course, this purpose, the council is to arrange funds for coaching
be benefited by the accreditation certificate issued by the candidates for the examinations at convenient centers in
applicant but that fact has hardly any bearing on the point its region. For this purpose, the Institute is also conducting
whether “make available” criterion has been satisfied or not. classes for chartered accountancy students registered with
Viewed from any angle, it cannot be said that the applicant it. These classes are conducted for which nominal fee is
is imparting any knowledge or skills to the CABs which are charged from the students registered with the Institute.
utilised by the CAB in conducting its business. The nature These classes are provided to the students registered
of activity undertaken by the applicant clearly rules out any with the Institute to train and prepare them for appearing
such inference. in the main examination. Thus, Institute is discharging its
Further, the income derived does not fall within the statutory function as required by the Parliament, which
‘royalty’ clause (which includes ‘fees for technical services’) does not amount to any commercial activity. From the
under Article 12 of the Indo-Australia Double Taxation Treaty. detailed brochure, it may be found that Institute provides a
No permanent establishment can be inferred on account of comprehensive study package including large question bank
occasional visits of the applicant’s personnel for the purpose for which no separate cost is charged from the students.
The Board of Studies also provides a CD for self-assessment and over- invoicing of expenses, Assessing Officer may
and model test papers. Expenditure is being incurred for apply any of generally accepted methods of determination
preparation of the study package, CD etc., salary of the of arm’s length price, including methods provided under
faculty and other professionals, printing and stationery, Transfer Pricing Regulations
research and development etc. The students registered for CIT v. Glaxo Smithkline Asia (P) Ltd, October 26, 2010 (SC)
chartered accountancy are also provided on-line guidance In the case of domestic transactions, the under-invoicing
through Institute’s own website. At a very nominal cost, of sales and over-invoicing of expenses ordinarily will be
these services are provided to the students. The Institute revenue neutral in nature, except in two circumstances
also provides computer training to the students registered having tax arbitrage—
with it, at a very low fee. Thus, major activity of the Institute i. If one of the related Companies is loss making and the
revolves around chartered accountancy education and other is profit making and profit is shifted to the loss
training and as such, the observation of the DIT (Exemption) making concern; and
to the effect that coaching activity is not allowed under the ii. If there are different rates for two related units (on
Act is incorrect and against the facts. However, this is far account of different status, area based incentives,
more important activity of the Institute and the Institute is nature of activity, etc.) and if profit is diverted towards
considered to be one of the best educational institutions the unit on the lower side of tax arbitrage. For example,
of the world providing chartered accountancy education in sale of goods or services from non-SEZ area (taxable
India. division) to SEZ unit (non-taxable unit) at a price below
The Institute as such merely it is receiving coaching fee the market price so that taxable division will have less
from students for imparting education, cannot be said to profit taxable and non-taxable division will have a higher
have been carrying on business and accordingly it is not profit exemption.
required to maintain separate books of accounts as alleged All these complications arise in cases where fair market
by DIT(E). The income of the coaching classes earned by value is required to be assigned to the transactions between
the assessee Institute is within its objects and its Regulations related parties in terms of Section 40A(2). The matter needs
and further these activities are educational activity within to be examined by Central Board of Direct Taxes. Since it is
the definition of Section 2(15), and consequently therefore informed that the matter has been examined by CBDT and
cannot be activity of business for which separate books of it is of the view that amendments would be required to the
accounts are required to be maintained. The order of the provisions of the Act if such Transfer Pricing Regulations are
learned DIT(E) is therefore not sustainable as the income required to be applied to domestic transactions between
of the Institute is exempt not only under Section 10(23C)(iv) related parties under Section 40A(2).
but also under Section 11. The Institute is an educational In order to reduce litigation, certain provisions of the
institute and hence its income will also be exempt under Act, like Section 40A(2) and Section 80IA(10), need to be
Section 11 as education falls within the meaning of charitable amended empowering the Assessing Officer to make
purpose under Section 2(15). adjustments to the income declared by the assessee
having regard to the fair market value of the transactions
Section 40A(2) of the Income-tax Act, 1961 - Expenses between the related parties. The Assessing Officer may
disallowed – Excessive or unreasonable payments thereafter apply any of the generally accepted methods of
In case of domestic transactions under-invoicing of sales determination of arm’s length price, including the methods
provided under Transfer Pricing Regulations. Requirement Shubh Timb Steels Ltd. v. Union of India, November 22,
for maintenance of documents or getting specific transfer 2010 (P&H)
pricing audit done by the taxpayers in respect of domestic Legislative competence
transactions between the related parties. Service tax on service of renting of property is exclusively
Per Court: Normally, the Supreme Court does not make covered by Entry 49 List II. Entry 49 of List II relates to tax on
recommendations or suggestions. However, in order to land and building and not any activity relating thereto. Income
reduce litigation occurring in complicated matters, we are of tax on income from property, wealth tax on capital value of
the view that the question of amendment, as indicated above, assets including land and building and gift tax on gift of land
may require consideration expeditiously by the Ministry of and building have been upheld. It cannot be held that renting
Finance. In the meantime, CBDT may also consider issuing of property did not involve any service as service could only
appropriate instructions in that regard. Accordingly, we be in relation to property and not by renting of property.
direct the Registry to forward copies of this Order both to Renting of property for commercial purposes is certainly a
the Ministry of Finance and CBDT for consideration. service and has value for the service receiver. Moreover, the
aspect of service element in renting transaction is certainly
INDIRECT TAXES an independent aspect covered under Entry 92C read with
Service Tax Entry 97 of List I. In any case, subject matter of impugned
Section 65 (90a) and Section 65 (105) levy being outside the scope of entry 49 of List II, power
(zzzz) of the Finance Act, 1994 – Renting of Union Legislature is undoubted. Question whether levy
of Immovable Property will be harsh being in addition to income tax and property
Levy of service tax on providing of service tax is not a matter for this Court once there is legislative
to any person by any other person by renting of immovable competence for the levy. Even if it is held that transaction of
property for business is not exclusively covered by Entry transfer of right in immovable property did not involve value
49 List II, but it is covered by Entry 92C, read with 97 of addition, the provision cannot be held to be void in absence
List I and, thus, could not be said to be outside purview of encroachment on List II.
of Central legislature; amendment levying service tax on
this service being made retrospectively operative from 1-6- Retrospectivity of levy
2007 is not improper It is well settled that competent legislature can always
clarify or validate a law retrospectively. It cannot be held to time financing by banks and other Financial Institutions
be harsh or arbitrary. Object of validating law is to rectify the (including NBFCs). These are services rendered to
defect in phraseology or lacuna and to effectuate and to their customers which comes within the meaning of the
carry out the object for which earlier law was enacted. expression “taxable services” as defined in Section 65(105)
(zm). The taxable event under the impugned law is the
Section 66 read with Sections 65(12) and 65(105)(zm) rendition of service. The impugned tax is not on material
of the Finance Act, 1994 – Charge of Service Tax or sale. It is on activity/service rendered by the service
Service tax imposed on value of taxable services, insofar as provider to its customer. Equipment Leasing/Hire-Purchase
it relates to financial leasing services including equipment finance are long term financing activities undertaken as
leasing and hire purchase is constitutionally valid and within their business by NBFCs. As far as the taxable value in case
the legislative competence of Parliament by virtue of Article of financial leasing including equipment leasing and hire-
366(29A) of Constitution purchase is concerned, the amount received as principal is
Association of Leasing & Financial Service Companies not the consideration for services rendered. Such amount is
v. Union of India, October 26, 2010 (SC) credited to the capital account of the lessor/hire-purchase
Equipment Leasing and Hire-Purchase Finance are service provider, it is the interest/finance charge which
activities of long term financing and they fall within the ambit is treated as income or revenue and which is credited to
of “banking and other financial services”. A financial lease the revenue account. Such interest or finance charges
is a lease that transfers substantially all risks and rewards together with the lease management fee/processing fee/
incident to ownership, in the said lease, the lessor (NBFC) documentation charges are treated as considerations for the
merely finances the equipment/asset which the lessee is services rendered and accordingly they constitute the value
free to select, order, take delivery and maintain. The lessor of taxable services on which service tax is made payable. In
(NBFC) arranges the funding. It accepts the invoice from fact, the Government has given exemption from payment of
the vendor (supplier) and pays him. The income which the service tax to financial leasing services including equipment
lessor earns is by way of finance/interest charges in addition leasing and hire-purchase on that portion of taxable value
to the management fees or documentation charges, etc. comprising of 90 per cent of the amount representing as
It is this income which constitutes the measure of tax for interest, i.e., the difference between the instalment paid
the purposes of calculating the value of taxable services towards repayment of the lease amount and the principal
under Section 67 of the Finance Act, 1994. Thus, a financial amount in such instalments paid (See Notification No.
lease would come within “financial leasing services” in 4/2006 Service Tax, dated 1-3-2006). In other words, service
terms of Section 65(12)(a)(i). There are different types tax is leviable only on 10 per cent of the interest portion.
of financial leases, namely, a tax based financial lease, a (See also Circular F. No. B.11/1/2001-TRU, dated 9-7-2001
leverage lease and an operating lease. Even in the matter in which it has been clarified that service tax, in the case
of allocation between the principal and finance/interest of financial leasing including equipment leasing and hire-
charges, adjudication under the Act was warranted which purchase, will be leviable only on the lease management
has not been done. One must also bear in mind that Article fees/processing fees/documentation charges recovered at
366(29A) is essentially sales tax specific. It was brought in to the time of entering into the agreement and on the finance/
expand the tax base which stood narrowed down because interest charges recovered in equated monthly instalments
of certain judgments of this Court. That is the reason for and not on the principal amount). Merely because for
bringing in the concept of “deemed sale” under which tax valuation purposes inter alia “finance/interest charges”
could be imposed on mere “delivery” on hire-purchase [See are taken into account and merely because service tax
clause (c)] which expression is also there in the second limb is imposed on financial services with reference to “hiring/
of the said article. interest” charges, the impugned tax does not cease to be
Entry 97 of List I with Article 246(1) confers exclusive service tax and nor does it become tax on hire-purchase/
power first, to make laws in respect of matters specified in leasing transactions under Article 366(29A) read with Entry
Entries 1 to 96 in List I and, secondly, it confers the residuary 54, List II. Thus, while State Legislature is competent to
power of making laws by Entry 97, Article 248 does not impose tax on “sale” by legislation relatable to Entry 54
provide for any express powers of Parliament but only for of List II of Seventh Schedule, tax on the aspect of the
its residuary power. Article 248 adds nothing to the power “services”, vendor not being relatable to any entry in the
conferred by Article 246(1) read with Entry 97, List I. Entry State List, would be within the legislative competence of the
97, List I which confers residuary powers on Parliament Parliament under Article 248 read with Entry 97 of List I of
provides “any other matter not enumerated in List II and Seventh Schedule to the Constitution.
List III including any tax not mentioned in either of those Service tax imposed by Section 66 of the Finance Act,
lists”. The word “other” is important. It means “any subject 1994 (as amended) on the value of taxable services referred
of legislation other than the subject mentioned in Entries to in Section 65(105)(zm) read with Section 65(12) of the
1-96”. said Act, insofar as it relates to financial leasing services
The impugned levy relates to or is with respect to the including equipment leasing and hire-purchase is within the
particular topic of “banking and other financial services” legislative competence of the Parliament under Entry 97,
which includes within it one of the several enumerated List I of the Seventh Schedule to the Constitution. n
services, viz., financial leasing services. These include long
CIRCULARS/NOTIFICATIONS
INDIRECT TAXES DBOD No. BL.BC.55/22.01.001/2005-06 dated January 23,
A. EXCISE 2006, and a soft copy should be e-mailed.
I. Circular
1. Circular No. 937/27/2010-CX dated 2. Processing and Settlement of Export related receipts
26.11.2010: Notification No. 29/2004 CE facilitated by Online Payment Gateways
dated 09.07.2004 as amended by Notification No. 58/2008 RBI/2010-11/281 A.P. (DIR Series) Circular No. 17
– CE dated 07.12.2008 granted full and unconditional November 16, 2010
exemption to certain items of Textile Sector during the period In order to facilitate small value export transactions and
07.12.2008 to 06.07.2009. evade violation of the provisions of the Foreign Exchange
While another Notification No. 59/2008 – CE dated Management Act (FEMA), the above referred circular issues
07.12.2008 prescribed a concessional rate of duty of 4 per a set of guidelines to allow the Authorised Dealer Category-l
cent on these items, with the benefit of Cenvat Credit during (AD Category-l) banks to offer the facility of repatriation
the above said period. of export related remittances by entering into standing
In this regard, Circular No. 937/27/2010 – CX dated arrangements with Online Payment Gateway Service
26.11.2010 has been issued to clarify that in view of the Providers (OPGSPs), subject to the following conditions:
specific bar provided under section 5A (1A) of the Central (i) The AD Category-I banks offering this facility shall carry
Excise Act, the manufacturer can not opt to pay the duty out the due diligence of the OPGSP.
under notification no. 59/2008 – CE dated 07.12.2008 (ii) This facility shall only be available for export of goods
and can not avail the Cenvat Credit of the duty paid on and services of value not exceeding USD 500 (US
inputs. Dollar five hundred).
(iii) AD Category-I banks providing such facilities shall
B. SERVICE TAX open a NOSTRO collection account for receipt of
I. Circular the export related payments facilitated through such
1. Circular No.131/13/2010-ST dated 07.12.2010: arrangements. Where the exporters availing of this
Transmission and distribution of electricity have been facility are required to open notional accounts with the
exempted from service tax vide Notification Nos.11/2010 & OPGSP, it shall be ensured that no funds are allowed
32/2010 dated 27.02.2010 and 22.06.2010 respectively. to be retained in such accounts and all receipts should
Circular No. 131/13/2010 – ST dated 07.12.2010 has be automatically swept and pooled into the NOSTRO
been issued to clarify that supply of electricity meters for collection account opened by the AD Category-I bank.
hire to the consumers is eligible for the above - mentioned (iv) A separate NOSTRO collection account may be
exemptions for the reason of the same being an essential maintained for each OPGSP or the bank should be able
activity having direct and close nexus with transmission and to delineate the transactions in the NOSTRO account of
distribution of electricity. each OPGSP.
The complete text of the above circulars are available at (v) The following debits will only be permitted to the
http://www.cbec.gov.in NOSTRO collection account opened under this
arrangement:
(Matter on Indirect Taxes has been contributed by the
a) Repatriation of funds representing export proceeds
Indirect Taxes Committee of the ICAI)
to India for credit to the exporters’ account;
b) Payment of fee/commission to the OPGSP as per the
FEMA predetermined rates / frequency/ arrangement; and
1. Reporting Mechanism – Data of c) Charge back to the importer where the exporter has
Authorised Dealer Category-I Branches failed in discharging his obligations under the sale
RBI/2010-11/278 A.P. (DIR Series) Circular contract.
No. 16 dated November 16, 2010 (vi) The balances held in the NOSTRO collection account
Ref: A.P. (DIR Series) Circular No. 54 dated shall be repatriated and credited to the respective
May 08, 2007. exporter’s account with a bank in India immediately on
In terms of the extant guidelines, all AD Category - I banks receipt of the confirmation from the importer and, in no
are required to inform any changes in the categorization of case, later than seven days from the date of credit to
their branches dealing in foreign exchange to the Director of the NOSTRO collection account.
Reserve Bank of India. (vii) AD Category-I banks shall satisfy themselves as to
The above information should be prepared in the bonafides of the transactions and ensure that the
Proforma I or II, as specified in RBI circulars DBOD No. purpose codes reported to the Reserve Bank in the
BL.BC.92/22.06.001/2004-05 dated May 20, 2005 and online payment gateways are appropriate.
RBI/2010-11/288 A.P. (DIR Series) Circular No.19 A.P. Maintenance of Records of the Identity of the Clients
(FL Series) Circular No. 02 November 25, 2010 of the Banking Companies, Financial Institutions and
The RBI has issued clarifications / instructions with Intermediaries) Second Amendment Rules, 2010-
regard to the captioned subject and has further modified Obligation of Authorised Persons
the instructions contained in A.P. (DIR Series) Circular No. RBI/2010-11/ 311 A.P. (DIR Series) Circular No. 24 A.P.
18 [A.P. (FL/ RL Series) Circular No. 05] dated November (FL/RL Series) Circular No. 05 December 13, 2010
27, 2009. Ref.: DPSS.CO.AD.No.552/02.27.004/2010-2011 dated
The above circular is available on RBI website at - September 15, 2010
http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id= The Government of India vide its Notification No.
6114&Mode=0 10/2010- E.S./ F.No.6/8/2009-E.S. dated June 16, 2010, has
amended the Prevention of Money-laundering (Maintenance
5. Know Your Customer (KYC) norms/ Anti-Money of Records of the Nature and Value of Transactions,
Laundering (AML) standards/ Combating the Financing the Procedure and Manner of Maintaining and Time for
of Terrorism (CFT)/ Obligation of Authorised Persons Furnishing Information and Verification and Maintenance
under Prevention of Money Laundering Act, (PMLA), of Records of the Identity of the Clients of the Banking
2002, as amended by Prevention of Money Laundering Companies, Financial Institutions and Intermediaries) Rules,
(Amendment) Act, 2009- Money changing activities 2005. RBI has issued circular in this regard vide DPSS.
RBI/2010-11/292 A.P. (DIR Series) Circular No.20 A.P. CO.AD.No.552/02.27.004/2010-2011 dated September 15,
(FL/RL Series) Circular No.03 November 30, 2010 2010.
Further to A.P. (DIR Series) Circular No.18 dated Any failure to comply with the requirements of the
November 25, 2010 issued by RBI, the RBI has issued more aforesaid Rules as amended, to the extent they are
clarifications / instructions with regard to the captioned applicable to foreign exchange transactions, shall also be
subject and has further modified the instructions contained treated as failure to comply with the directions issued by the
in A.P. (DIR Series) Circular No. 17 [A.P. (FL/ RL Series) Reserve Bank of India under sections 10(4) and 11(1) of the
Circular No. 04] dated November 27, 2009. Foreign Exchange Management Act, 1999.
The above circular is available on RBI website at - The above circular is available on RBI website at –
http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id= http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=
6122&Mode=0 6144&Mode=0
(Matter on FEMA has been contributed by CA. Manoj Shah
and CA. Hinesh Doshi)
6. Know Your Customer (KYC) norms/ Anti-Money
Laundering (AML) standards/ Combating the Financing
of Terrorism (CFT)/ Obligation of Authorised Persons CORPORATE LAWS
under Prevention of Money Laundering Act, (PMLA), 1. Submission of Balance Sheet and
2002, as amended by Prevention of Money Laundering Profit & Loss Account by NBFCs
(Amendment) Act, 2009 - Cross Border Inward www.rbi.gov.in
Remittance under Money Transfer Service Scheme The RBI has issued Notification No.
RBI/2010-11/293 A.P. (DIR Series) Circular No.21 A.P. DNBS. 217/CGM(US)-2010 dated 01.12.2010
(FL Series) Circular No.04 November 30, 2010 amending the Non-Banking Financial (Deposit Accepting)
Further to A.P. (DIR Series) Circular No.19 dated Companies Prudential Norms Directions, 2007 and Non-
November 25, 2010 issued by RBI, the RBI has issued Banking Financial (Non-Deposit Accepting) Companies
clarifications / instructions with regard to the captioned Prudential Norms Directions, 2007 and providing that every
subject and has further modified the instructions contained NBFC shall finalise its balance sheet and profit and loss
in A.P. (DIR Series) Circular No. 18 [A.P. (FL/ RL Series) account as on March 31 every year within a period of three
Circular No. 05] dated November 27, 2009. months from the date to which it pertains. For example,
The above circular is available on RBI website at - balance sheet as on March 31st of a year shall be finalised
by June 30th of the year. One may refer to the above website
http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=
for further details.
6123&Mode=0
Information Services Private Limited to commence the criminals who gain illegal access to deposit accounts by
business of credit information. One may refer to the above recruiting third parties to act as “money mules” and in
website for further details. some cases these third parties may be innocent while in
others they may be having complicity with the criminals. In a
3. Prudential Guidelines - Investment in Venture Capital money mule transaction, an individual with a bank account
Funds (VCFs) is recruited to receive cheque deposits or wire transfers
www.sebi.gov.in and then transfer these funds to accounts held on behalf
The RBI has issued Circular No. DBOD.FID.FIC.No of another person or to other individuals, minus a certain
9/01.02.00/2010-11 dated 01.12.2010 observing that commission payment. Money mules may be recruited by a
exposure of banks to Venture Capital Funds (VCFs) had variety of methods, including spam e-mails, advertisements
been steadily increasing in pre-2006 periods and while on genuine recruitment web sites, social networking sites,
noting at that time the significance of venture capital instant messaging and advertisements in newspapers.
activities and need for banks’ involvement in financing When caught, these money mules often have their bank
of venture capital funds was well recognised, it was also accounts suspended, causing inconvenience and potential
considered important to address the relatively higher risks financial loss, apart from facing likely legal action for being
inherent in such exposures. In view of this, the RBI had part of a fraud. Many a times the address and contact
earlier in 2006 reviewed the entire issue of financing of VCFs details of such mules are found to be fake or not up to
and revised the prudential framework governing banks’ date, making it difficult for enforcement agencies to locate
exposure to VCFs whereby banks were advised to comply the account holder. The operations of such mule accounts
with the prudential requirements relating to financing of can be minimised if banks follow the guidelines contained
VCFs set out in the 2006 Circular No. DBOD. No. BP.BC. in the Master Circular on Know Your Customer (KYC) norms/
27/21.01.002/2006-2007 dated 23.08.2006. It has now been Anti-Money Laundering (AML) standards/Combating of
advised that the above referred guidelines as applicable to Financing of Terrorism (CFT)/Obligation of banks under
banks and issued to banks shall mutatis mutandis apply to PMLA, 2002. Banks are, therefore, advised to strictly adhere
the select All-India Financial Institutions. One may refer to to the guidelines on KYC/AML/CFT issued from time to time
the above website for further details. and to those relating to periodical updation of customer
identification data after the account is opened and also to
monitoring of transactions in order to protect themselves
4. Operation of Bank Accounts and Money Mules
and their customers from misuse by such fraudsters. One
www.rbi.gov.in
may refer to the above website for further details.
The RBI has issued Circular No. DBOD.AML.BC.
No.65/14 .01.001/2010-11 dated 07.12.2010 noting that
earlier several circulars had talked about the regulator’s 5. Issuance of Non-Convertible Debentures (NCDs)
intent of preventing banks from being used, intentionally or www.rbi.gov.in
unintentionally, by criminal elements for money laundering The RBI has issued Circular No. IDMD.PCD.No.
or terrorist financing activities Reserve Bank of India 24/14.03.03/2010-11 dated 06.12.2010 referring its earlier
has issued guidelines on Know Your Customer (KYC) directions named Issuance of Non-Convertible Debentures
norms/Anti-Money Laundering (AML) standards/ Combating (Reserve Bank) Directions, 2010 dated June 23, 2010
of Financing of Terrorism (CFT). The RBI has noticed that issued vide circular IDMD.DOD.10/11.01.01(A)/2009-
“Money mules” can be used to launder the proceeds 10 covering the regulation of NCDs of maturity up to one
of fraud schemes (e.g., phishing and identity theft) by year. Taking into account the feedback received from the
market participants, the Reserve Bank of India has issued on huge demand from corporate sector, the Ministry has
an amendment Direction, i.e., Issuance of Non-Convertible decided to re-launch the Scheme as, “Easy Exit Scheme,
Debentures (Reserve Bank) (Amendment) Directions, 2010, 2011” under Section 560 of the Companies Act, 1956.
inter alia, permitting Financial Institutions (FIs) to invest in The Scheme shall come into force on the 1st January,
NCDs of maturity up to one year, Non-Banking Financial 2011 and shall remain in force up to 31st January, 2011. The
Companies including Primary Dealers that do not maintain scheme is applicable to any “defunct company” which has
a working capital limit to issue NCDs of maturity up to one active status on Ministry of Corporate Affairs portal may
year and FIIs to invest in NCDs of maturity up to one year apply under EES, 2011 in accordance with the provisions of
subject to extant provisions of FEMA and SEBI guidelines this Scheme for getting its name strike off from the Register
issued in this regard. One may refer to the above website of Companies. The scheme is not applicable to certain
for further details. companies like listed companies, companies that have been
de-listed, section 25 companies, vanishing companies,
6. Easy Exit Scheme, 2011 (“EES, 2011”) companies facing inspection or investigation, companies
www.mca.gov.in accepted public deposits which are either outstanding or the
The Ministry of Corporate Affairs (“MCA”) has issued company is in default in repayment of the same, company
the EES, 2011 on 03.12.2010 since it was observed by the having secured loan, company having management
MCA that certain companies were registered under the dispute, company in respect of which filing of documents
Companies Act, 1956, but due to various reasons some of have been stayed by court or Company Law Board (CLB) or
them are inoperative since incorporation or commenced Central Government or any other competent authority and
business but became inoperative later on and are not company having dues towards income tax or sales tax or
filing their due documents timely with the Registrar of central excise or banks and financial institutions or any other
Companies. These companies may be defunct and may Central Government or State Government Departments or
be desirous of getting their names strike off from the authorities or any local authorities. The scheme provides
Register of Companies. In order to give an opportunity to a simple procedure for making an application. One may
the defunct companies for getting their names strike off note that the MCA may initiate action against defaulting
from the Register of Companies, the Ministry had launched companies once the scheme period is over. One may refer
a Scheme namely, “Easy Exit Scheme, 2010” under Section to the above website for further details.
560 of the Companies Act, 1956 during May-August, 2010. (Matter on Corporate Laws has been contributed by CA.
A large number of companies availed this scheme. However, Jayesh Thakur)
n
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A. Facts of the Case (b) Regarding fixed assets created on land not
1. A public sector undertaking registered under the belonging to the company, which are also not owned
Companies Act, 1956, is engaged in refining and by the company, the expenditure incurred on the
marketing of petroleum products. construction of such assets should be classified as
2. The querist has stated that sometimes when a new ‘Capital Expenditure’ in the balance sheet indicating
project, for example, setting up of a new refinery is appropriately, the nature of the expenditure
undertaken by the company, it has to incur expenditure including the fact that the assets are not owned
on the construction/development of certain assets, by the company. Also, after the commencement of
like electricity transmission lines, railway siding, roads, commercial operations, the same should be written
culverts, bridges, etc., in order to facilitate construction off to the profit and loss account.
of project and subsequently to facilitate its operations. Both the above opinions, in the view of the querist,
The ownership of such assets (hereinafter referred to as clearly state that till the commencement of commercial
‘enabling assets’) as well as the land on which these operations, such expenses should be classified as
assets are situated does not vest with the company. The capital expenditure and after the commencement of
existing accounting policy of the company with respect commercial operations, the same should be written off
to such ‘enabling assets’ is as under: to the profit and loss account. Accordingly, as per the
“Capital expenditure on items like electricity querist, the company is uniformly following the above
transmission lines, railway siding, roads, culverts, * etc. accounting policy since 1999-2000.
the ownership of which is not with the company are 4. According to the querist, the statutory auditors of the
charged off to revenue. Such expenditure incurred company hold the opinion that the existing accounting
during construction period of projects is accounted treatment of such enabling assets followed by the
as unallocated capital expenditure and is charged company does not appear to be correct. The views of
to revenue in the year of capitalisation of such the statutory auditors regarding treatment of expenditure
projects.” of such nature are stated by the querist as under:
(* “Oil Jetty” may be added in the year 2009-10.) S. No. Nature of expenditure Accounting treatment
According to the querist, the ‘unallocated capital 1. Fixed assets created on land Capital expenditure shall form
not belonging to the company part of the fixed assets belonging
expenditure’ is presented in the balance sheet as capital but the fixed assets are owned to the company and treated
by the company. accordingly.
work-in-progress (CWIP).
2. (a) Fixed assets created (a) Expenditure to be debited to
3. The querist has further stated that the existing accounting on land where neither CWIP till the enabling asset
the assets, nor the land, is ready for use.
policy is being followed based on the opinion of the belongs to the company, (b) On completion of the
Expert Advisory Committee (EAC) of the Institute of or enabling asset, the same to
(b) The expenditure be capitalised.
Chartered Accountants of India (ICAI), expressed on the is incurred by way (c) Such capital expenditure
of payment to the to be reflected as “Capital
treatment of such expenditure as contained in Volume government / private expenditure on assets not
IX, Query No.1.32 and Volume XII, Query No.1.3 of the agencies for construction owned by the company”.
of bridge, roads, etc. (d) Such capital expenditure
Compendium of Opinions. In both the opinions, EAC and the company uses to be amortised over the
such enabling assets period of its utility but not
has referred to paragraph 10 of the Guidance Note on etc. for the purpose of exceeding 5 years.
completing its own project (e) Amount amortised to be
Treatment of Expenditure during Construction Period1. and subsequently for treated as expenditure
The conclusion of the said opinions, as per the querist, operational purposes. during construction
Such enabling assets are period till the completion
is as under: available for general public of the project for which
use also. the enabling asset was
(a) Fixed assets which, though having been built on land originally created. After the
not belonging to the company, but are owned by the completion of the project,
the amortised amount is to
company, should form part of the relevant head of be charged to the profit and
loss account every year for
fixed assets belonging to the company and treated the balance period of its
utility.
accordingly.
1
The Guidance Note on Treatment of Expenditure during Construction Period has since been withdrawn by the Council of the Institute of Chartered
Accountants of India vide its decision taken at its 280th meeting held on August 7-9, 2008.
3. (a) Upgrading, widening of To be accounted for as incidental and property, are associated with legal rights,
certain portions / stretches expenditure during construction
of the road, culverts etc. period. including the right of ownership. In determining
on land not owned by the existence of an asset, the right of ownership
the company to enable
the movement of heavy is not essential; thus, for example, an item held
construction equipment
during the course of under a hire purchase is an asset of the hire
putting up of project.
purchaser since the hire purchaser controls the
(b) Upgrading, widening, To be charged to profit and loss
renovating, repairing, account in the year of incurrence. benefits which are expected to flow from the item.
re-laying of certain portion
/ stretches of the road, Although the capacity of an enterprise to control
culverts etc. after the benefits is usually the result of legal rights, an item
completion of the project
to enable the movement may nonetheless satisfy the definition of an asset
of vehicles / employees /
general public. even when there is no legal control. For example,
5. The querist has stated that after the withdrawal of the know-how obtained from a development activity
Guidance Note on Treatment of Expenditure during may meet the definition of an asset when, by
Construction Period, no direct reference to expenses keeping that know-how secret, an enterprise
of such nature is found either in Accounting Standard controls the benefits that are expected to flow
(AS) 10, ‘Accounting for Fixed Assets’, or in Accounting from it.” (Emphasis supplied by the querist.)
Standard (AS) 26, ‘Intangible Assets’. However, to • Paragraph 14 of AS 26 states as under:
understand the accounting treatment of enabling “14. An enterprise controls an asset if the
assets, the querist has drawn attention to the following enterprise has the power to obtain the future
definitions: economic benefits flowing from the underlying
Definition of Asset: resource and also can restrict the access of others
Paragraph 49(a) of the Framework for the to those benefits. The capacity of an enterprise
Prepara-tion and Presentation of Financial to control the future economic benefits from an
Statements, issued by ICAI, defines an asset as intangible asset would normally stem from legal
under: rights that are enforceable in a court of law. In
“An asset is a resource controlled by the the absence of legal rights, it is more difficult to
enterprise as a result of past events from demonstrate control. However, legal enforceability
which future economic benefits are expected of a right is not a necessary condition for control
to flow to the enterprise (emphasis supplied since an enterprise may be able to control the
by the querist).” future economic benefits in some other way.”
Paragraph 6 of AS 26 defines, inter alia, an asset (Emphasis supplied by the querist.)
as under: The querist has stated that since in most of the cases
“An asset is a resource: of enabling assets, the company cannot restrict the
(a) controlled by an enterprise as a result access of others to the benefits arising from them, it can
of past events; and be concluded that the company does not have control
(b) from which future economic benefits over the assets (emphasis supplied by the querist).
are expected to flow to the enterprise.” 8. With respect to ‘future economic benefits’, the querist has
6. According to the querist, as is clear from the above stated that future economic benefits are ensured from
definitions, in order to recognise the expenditure as an the enabling assets since they would facilitate operations
asset, the following two conditions must be satisfied: of the company. Hence, as per the querist, even though
(i) The company must have control over the asset, the expenditure has been incurred for obtaining future
and economic benefits, the criteria for recognition as an
(ii) Future economic benefits must flow to the asset are not met because the company cannot restrict
company from these assets. (Emphasis supplied the access of others to enabling assets.
by the querist.) 9. The querist has also stated that paragraph 56 of AS 26
7. With respect to ‘control over the asset’, the querist has which deals with such expenses states, inter alia, as
stated that ‘control’ has been defined/referred as under: under:
• Paragraph 56 of the Framework for the Preparation “In some cases, expenditure is incurred to provide
and Presentation of Financial Statements issued by future economic benefits to an enterprise, but
the ICAI, states as under: no intangible asset or other asset is acquired or
“56. Many assets, for example, receivables created that can be recognised. In these cases, the
expenditure is recognised as an expense when it is its operations and the ownership of which does not vest
incurred.” (Emphasis supplied by the querist.) with the company, collectively referred to by the querist
Therefore, the querist has stated that, in the view of as ‘enabling assets’. The Committee has, therefore,
the company, the accounting treatment followed by considered only this issue and has not touched upon
the company of treating such expenditure incurred any other issue that may arise from the Facts of the
during construction of projects as unallocated capital Case, such as, fixed assets owned by the company but
expenditure and charging off the same to revenue in the created on land not belonging to the company, etc. The
year of capitalisation of such projects is in order. Committee further notes from the Facts of the Case that
the expenditure on ‘enabling assets’ includes payment
B. Query to the government / private agencies for construction of
10. Due to divergence of opinion between the company and the ‘enabling assets’ which will be available for general
the statutory auditors and keeping in view the querist’s public use also. In the absence of any information to the
view that subsequent to the withdrawal of the ‘Guidance contrary, the Committee presumes that the expenditure
Note on Treatment of Expenditure during Construction on ‘enabling assets’ is not adjustable against any
Period’, these issues have neither been covered in any payment to be made by the company towards future
of the Accounting Standards, nor the issue has been use of such assets.
a subject matter of any query to the Expert Advisory 12. The Committee notes that paragraphs 49 and 88 of
Committee, the querist has sought the opinion of the the ‘Framework for the Preparation and Presentation of
Committee on the following issues: Financial Statements’, issued by the Institute of Chartered
(i) Whether the current accounting treatment of Accountants of India, give respectively, the following
considering the expenditure incurred on ‘enabling definition of and recognition criteria for, an asset:
assets’ as CWIP during construction period of the “An asset is a resource controlled by the enterprise
project and charging off the same to revenue in the as a result of past events from which future economic
year of completion of the project is correct. benefits are expected to flow to the enterprise.”
(ii) Whether the accounting treatment suggested by the “88. An asset is recognised in the balance sheet
auditors in paragraph 4 above is correct. when it is probable that the future economic benefits
(iii) Whether such expenditure can be charged off to associated with it will flow to the enterprise and the
revenue; asset has a cost or value that can be measured
(a) If yes, the accounting period in which such reliably.”
expenditure should be charged off to revenue, From the above, the Committee notes that an expenditure
i.e., whether incurred by an enterprise can be recognised as an asset only
– in the accounting period of incurrence of such if it is a ‘resource controlled by the enterprise’. Therefore, the
expenditure; or issue raised by the querist requires examination from the
– in the accounting period in which the enabling point of view of the type of the resource that the company
asset is complete and ready for use; or controls, if any, as a result of expenditure on ‘enabling
– in the accounting period of completion of the assets’. For this purpose, the Committee has examined
main project for which such expenditure was whether the expenditure results into recognition of a tangible
incurred. asset or an intangible asset.
(b) If yes, what should be the treatment for such 13. The Committee is of the view that the above-mentioned
expenditure which is still lying as CWIP as on expenditure can be considered to result into a tangible
date. asset, only when, the company is able to control such
(iv) If the answer to all or any of the above queries at asset(s). The Committee is of the view that an entity
(i) to (iii) is in the negative, what is the suggested that controls an asset can generally deal with that asset
accounting treatment for such expenditure. as it pleases. For example, the entity having control of
an asset can exchange it for other assets, employ it to
C. Points considered by the Committee produce goods or services, charge a price for others
11. The Committee notes from the Facts of the Case that to use it, use it to settle liabilities, hold it, or distribute
the basic issue raised in the query relates to accounting it to owners. Further, the Committee is of the view that
for construction/development of electricity transmission an indicator of control of an item of fixed asset would
lines, railway sidings, roads, etc. in order to facilitate be that the entity can restrict the access of others to
construction of the project and subsequently to facilitate the benefits derived from that asset. This view is also
supported by the principles enunciated in paragraph 14 and rebates are deducted in arriving at the purchase
of AS 26, as reproduced in paragraph 15 below. price. …”
14. The Committee notes from the Facts of the Case that “10.1 In arriving at the gross book value of self-
the ownership of the ‘enabling assets’ does not vest constructed fixed assets, the same principles apply
with the company. The assets are available for general as those described in paragraphs 9.1 to 9.5. Included
public use. Although the company is entitled to use in the gross book value are costs of construction that
these assets for the purpose of completing its own relate directly to the specific asset and costs that are
projects and subsequently for operational purposes, attributable to the construction activity in general and
it has no say on the use of such assets by others. can be allocated to the specific asset. Any internal
Thus, none of the factors mentioned in paragraph 13 profits are eliminated in arriving at such costs.”
above indicating control of the company is evident. From the above, the Committee is of the view that
Thus, ‘enabling assets’ are not resources controlled by the basic principle to be applied while capitalising an
the company and, therefore, the expenditure incurred item of cost to the cost of a fixed asset/project under
by the company on such ‘enabling assets’ cannot be construction is that it should be directly attributable to
capitalised as a separate tangible asset. the construction of the project/fixed asset for bringing
15. The Committee now examines whether the above- it to its working condition for its intended use. The
said expenditure results into an intangible asset for costs that are directly attributable to the construction/
the company. In this context, the Committee notes the acquisition of a fixed asset/project for bringing it to
following paragraphs from AS 26: its working condition are those costs that would have
“An intangible asset is an identifiable non-monetary been avoided if the construction/acquisition had not
asset, without physical substance, held for use in been made. These are the expenditures without the
the production or supply of goods or services, for incurrence of which, the construction of project/asset
rental to others, or for administrative purposes. could not have taken place and the project/asset
An asset is a resource: could not be brought to its working condition, such
(a) controlled by an enterprise as a result of past as, site preparation costs, installation costs, salaries of
events; and engineers engaged in construction activities, etc. The
(b) from which future economic benefits are avoidance of costs as the basis of identifying directly
expected to flow to the enterprise.” attributable cost for the purpose of capitalisation is also
“14. An enterprise controls an asset if the enterprise supported by Accounting Standard (AS) 16, ‘Borrowing
has the power to obtain the future economic benefits Costs’. From the above, the Committee is of the view that
flowing from the underlying resource and also can the expenditure incurred on ‘enabling assets’ cannot be
restrict the access of others to those benefits. …” considered as directly attributable cost and accordingly,
From the above, the Committee is of the view that the the same cannot also be capitalised as a component of
expenditure incurred by the company on ‘enabling fixed asset.
assets’ not owned by the company does not meet the 17. The Committee further notes that paragraph 56 of AS 26
definitions of the terms ‘asset’ and ‘intangible asset’ as, provides as below:
even though the economic benefits are expected to flow “56. In some cases, expenditure is incurred to
to the enterprise from such facilities, the company does provide future economic benefits to an enterprise,
not have control over such facilities. Accordingly, such but no intangible asset or other asset is acquired or
expenditure cannot also be capitalised as a separate created that can be recognised. In these cases, the
intangible asset. expenditure is recognised as an expense when it is
16. Now, the question arises as to whether the expenditure incurred. …”
incurred on ‘enabling assets’ could be considered as a From the above, the Committee is of the view that the
component of the cost of a fixed asset/project. In this expenditure incurred on ‘enabling assets’ should be
context, the Committee further notes paragraphs 9.1 expensed and charged to the profit and loss account of
and 10.1 of AS 10, which are reproduced below: the period in which these are incurred.
“9.1 The cost of an item of fixed asset comprises 18. As far as accounting treatment given by the company in
its purchase price, including import duties and other respect of such ‘enabling assets’ which are still lying as
non-refundable taxes or levies and any directly capital work-in-progress as on the date is concerned,
attributable cost of bringing the asset to its working the Committee notes that as per the Announcement
condition for its intended use; any trade discounts on Clarification on Status of Accounting Standards and
D. Opinion
19. On the basis of the above, the Committee is of the
following opinion on the issues raised in paragraph 10
above:
(i) No, the existing accounting treatment followed by the
company of considering the expenditure incurred on
‘enabling assets’ as capital work-in-progress during
construction period of the project and charging off
the same to revenue in the year of completion of the
project is not correct.
(ii) No, the accounting treatment suggested by the
auditors with regard to the ‘enabling assets’ is also
not correct.
(iii) (a) Yes, the expenditure incurred on enabling assets
not owned by the company should be charged off
to revenue in the accounting period of incurrence of
such expenditure.
(b) Expenditure on such assets not owned by the
company appearing as CWIP, being an error should
be rectified and disclosed as a ‘prior period item’
as per the requirements of AS 5 in the financial
statements of the period in which such rectification
is carried out as discussed in paragraph 18 above.
Guidance Notes, issued by the Institute of Chartered (iv) The expenditure on ‘enabling assets’ should be
Accountants of India, “In a situation where certain expensed by way of charge to the profit and loss
matters are covered both by an Accounting Standard account of the period in which the same is incurred.
and a Guidance Note, issued by the Institute of Chartered 1 The Opinion is only that of the Expert Advisory Committee
Accountants of India, the Guidance Note or the relevant and does not necessarily represent the Opinion of the
portion thereof will be considered as superseded from Council of the Institute.
the date of the relevant Accounting Standard coming
2 The Opinion is based on the facts supplied and in the
into effect, unless otherwise specified in the Accounting
specific circumstances of the querist.
Standard. …” Accordingly, the Committee is of the view
that the recommendations of a Guidance Note would be 3 The Compendium of Opinions containing the Opinions
applicable only to the extent these are not contrary to an of Expert Advisory Committee has been published in
Accounting Standard. Hence, the recommendations of twenty eight volumes. A CD of Compendium of Opinions
the ‘Guidance Note on Treatment of Expenditure during containing twenty eight volumes has also been released
Construction Period’, after AS 26 becoming applicable by the Committee. These are available for sale at the
to the company (even before the withdrawal of the said Institute’s office at New Delhi and its regional council
Guidance Note) were applicable only to the extent these offices at Mumbai, Chennai, Kolkata and Kanpur.
were not contrary to the provisions of AS 26. Therefore, 4 Recent opinions of the Committee are available on the
since, after AS 26 became applicable to the company,
website of the Institute under the head ‘Resources’.
the expenditure incurred on ‘enabling assets’ was not
expensed by the company as per the requirements
5 Opinions can be obtained from EAC as per its Advisory
of AS 26, as discussed above, the same is an error
Service Rules which are available on the website of the
committed in the prior years which should be rectified in
ICAI, under the head ‘Resources’. For further information,
the financial statements and disclosed as a ‘prior period
write to eac@icai.org .
item’ of the period in which such rectification is carried
out in accordance with the requirements of Accounting n
is a proposal being considered for IFRS eliminates As Indian businesses become more
US domestic companies to transition barriers to cross global in terms of their operations and
to IFRS between 2014 and 2016 in a border listings, investor base, IFRS would enable a
phased manner. More countries have by ensuring that financial comparison of Indian companies with
plans to adopt IFRS as their national statements are more global peers.
accounting standards in the future. By transparent. Even in cases where • IFRS gives better access
2011, the number of countries requiring listing an overseas exchanges to global capital markets and
or permitting IFRS is expected to is permitted using local (Indian) reduces the cost of capital:
reach 150. The focus of IFRS GAAP, international investors IFRS are accepted as a financial
implementation in most developed generally ascribe an additional reporting framework for companies
countries has been on listed risk premium if the underlying seeking admission to almost all of the
companies. The IASB co-operates financial information is not in world’s bourses. Currently, several
with national accounting standards to prepared in accordance with the companies that seek to raise capital
achieve convergence in accounting international standards. Thus and list securities in the US capital
standards around the world. the adoption of global standards market or other exchanges such as
such as IFRS may reduce the risk the London Stock Exchange may
India’s Roadmap to premium and consequently the be required to convert their financial
Convergence cost of capital. statements to IFRS to meet the
In line with the global trend, the (SEBI), the ICAI needs to work closely regulatory requirements or to meet the
Institute of Chartered Accountants of with these regulators on the roadmap to expectations of the investment bankers
India (ICAI) has plans for convergence convergence. Adoption of IFRS in India and investors. In such cases unless
with IFRS for certain defined entities would accordingly require changes to the company has previously adopted
(listed entities, banks and insurance the regulatory environment and the IFRS, it would be required to convert
entities and certain large sized entities) ability of the ICAI to move towards its historical financial statements to
with effect from accounting period its planned full convergence by 2011 IFRS for the purpose of listing, which
commencing on or after 1st April, which would be directly dependent may result in delays and additional
2011. Large size entities are defined on the pace of the required regulatory costs relating to dual set of financial
as entities with turnover in excess of change. statements.
R1 billion or borrowings in excess IFRS eliminates barriers to cross
of R250 million. For other small and Benefits of Convergence border listings, by ensuring that
medium sized entities (SME), the Convergence with the IFRS is expected financial statements are more
ICAI has proposed the application of to result in several benefits to Indian transparent. Even in cases where
the proposed International Financial entities, few are as follows: listing an overseas exchanges is
Reporting Standard for SME’s (with or • IFRS significantly improves the permitted using local (Indian) GAAP,
without modifications). The proposed comparability of entities: international investors generally
standard represents a simplified set IFRS provides more comparability ascribe an additional risk premium if
of standards for SME’s with disclosure among sectors, countries and the underlying financial information
requirements reduced, methods companies. Due to its universal is not in prepared in accordance with
for recognition and measurement approach, it can both improve and the international standards. Thus, the
simplified and topics not relevant initiate new relationships with investors, adoption of global standards such as
to SME’s eliminated. Given that the customers and suppliers across the IFRS may reduce the risk premium and
accounting standard setting in India is globe, since financial statements in consequently the cost of capital.
subject to direct or indirect oversight accordance with IFRS cut across Similarly, companies raising
by several regulators such as National borders. IFRS will facilitate inc- capital and listed only on the local
Advisory Committee on Accounting reased comparability of performance exchanges in India would be able to
Standards (NASCAS) established and compatibility among financial better attract international investors
by the Ministry of Corporate Affairs, statements of countries, sectors, and and reduce risk premium, by providing
Government of India, Reserve Bank of companies. It may also result in greater financial information that is more
India (RBI), Insurance Regulatory and transparency about a company’s transparent and understandable for
Development Authority (IRDA) and the activities to outsiders such as investors, the international investor community.
Securities Exchange Board of India customers and other business partners. IFRS financial information can also
result in more accurate risk evaluations Group wise adoption of IFRS will globally accepted standard will result
by the international lenders and low eliminate the need for such multiple in growth in international business,
risk premium for international debt reporting, if IFRS is accepted or higher cross border capital flows
offerings. Improved communication required in all countries of operation. and transactions and will provide
and interaction with investors and Internal management reporting an impetus for economic growth.
analysts may provide companies with a under IFRS will also improve the Additionally, convergence with IFRS
competitive advantage and also wider quality and consistency of information would also benefit the large pool of
access to capital at lower costs. Indian that management needs in order to Indian accounting professionals who
companies may be able to initiate new make effective and timely decisions for can develop IFRS skills and provide
relationships with investors, customers the business. IFRS reporting actively these skills to the global marketplace.
and suppliers internationally since IFRS contributes to effective management
provides a globally accepted platform. of business. When applied throughout Challenges to Conversion
• IFRS provides impetus to cross- a group’s accounting processes, The ICAI issued “Concept Paper” in
border acquisitions: IFRS harmonises internal and late 2007 on “Convergence with IFRS
By providing transparent and external reporting by creating a single in India” which proposed a plan for
comparable financial information, accounting language across the certain defined entities, mutual funds
IFRS reporting provides an impetus business. and other large sized entities (based
to cross-border acquisitions, enables • An IFRS balance sheet will be on threshold criteria of turnover or
partnerships and alliances with closer to economic value: borrowings) with effect from accounting
foreign entities, and lowers the cost of Historical cost will be substituted by fair periods commencing on or after 1st
integration in post acquisition periods. values for several balance sheet items, April, 2011.
Currently, if an Indian company which will enable a corporate to know its However, it is possible that
acquires a foreign entity, the financial true worth. Example: intangible assets convergence may eventually occur in
position on the date of the acquisition acquired in business combinations will a phased manner based on approach
and post acquisition results of the be recorded separately at fair value, adopted in other countries, where
foreign entity have to be converted from and all financial instruments and all the focus is initially only on listed
its local GAAP (which maybe IFRS) to investment properties will be reflected entities. Similarly it is possible that
Indian GAAP. Similarly, if an overseas at fair values, thereby reflecting a better the current thresholds of turnover
entity that follows IFRS acquires an measure of the current value of the net or borrowings used for defining
Indian company, the post acquisition assets of the entity. large-sized entities may be revised
financial information would need to be • Economic growth and upwards. These measures would be
converted from GAAP to IFRS, thereby opportunities for accounting intended to narrow down the number
increasing post-acquisition financial professionals: of affected companies and to ensure
integration efforts and costs. Convergence with IFRS and to a that the experience gained during the
• Improvement in quality and convergence by such companies can
Under IFRS,
consistency of information, avoid be leveraged by other relatively small
convertible debt is
multiple reporting and reduce cost companies.
split into a liability
of the finance function: ICAI has decided to follow a
and equity portion whereby the
Currently, different entities within convergence approach to IFRS
proceeds from the issuance of
a group, that reside in different implementation rather than adoption
the debt are allocated to the
jurisdictions may be required to of IFRS as issued by the IASB. It
two components. The liability
prepare a dual set of financial state- considers that the adoption of
component is recognised at fair
ments for external financial reporting; IFRS (without any modifications) as
value by discounting at a market
one for the local statutory financial impractical in the Indian context due to
rate for non-convertible debt,
reporting in the home country and various reasons as follows:
while the balance proceeds
second for the reporting to the parent • The legal and the regulatory
are allocated to the equity
company (assuming that the parent environment prevailing in the
component and recorded
company follows IFRS). The increase country have to be considered
directly in equity. This results in
in efforts of finance function introduces for implementing IFRS. There are
recognising effective interest
complexity in financial reporting and instances where the legal and
expense using rates applicable
increase costs of finance function. the regulatory requirements are
to non-convertible debt.
at variance with the requirements financial statements shall be prepared Unlike Indian
under IFRS. Hence relevant laws in conformity with such a law. One of standards, where prior
including the Companies Act, the most important works is for the period items that
SEBI, IRDA, RBI regulations, tax government to frame and revises laws represent correction of errors; and
laws, etc. will need to be suitably in consultation with ICAI and NASCAS cumulative impact of change in
amended before IFRS can be to facilitate convergence with IFRS. accounting policies, are recorded
implemented. Revisions would be required in as an adjustment in the current
• Alternative accounting choices the Companies Act which currently period, IFRS generally require
that are permitted in IFRS may prescribes the format for presentation accounting policy changes and
be incompatible with the local of financial statements, the minimum correction of prior period errors
requirements and considerations rates of depreciation and classification to be made by adjusting opening
within specific sectors or of redeemable preference shares as retained earnings and restating
industries. Hence, ICAI as part equity. Many of these prescriptions comparatives. This is a relatively
of the convergence process may directly conflict with accounting and new concept for preparers,
restrict the available accounting presentation mandated by the IFRS auditors, users, regulators,
alternatives. and accordingly need to be amended investors and analysts in India
• The current level of preparedness to enable convergence and smooth (although such restatements
within the country for impleme- adoption of the new accounting are required in certain limited
nting IFRS is low and ICAI framework. situations that involve initial
recognises the urgent and SEBI has also prescribed guide- public offerings) and would
the pressing need to create a lines for listed companies with respect require companies to clearly
resource pool of professionals to presentation formats for quarterly communicate with and educate
to manage the conversion and and annual results and accounting for investors and other users to
implementation process. certain transactions, some of which highlight the impact of this
are not in accordance with the IFRS, change.
Regulatory Roadblocks example: Clause 41 of the Listing accounting standards currently in force
In order to reach convergence with Agreement permits companies to in India.
IFRS there is an urgent need for publish and report only standalone The RBI and IRDA regulate the
change in several laws and regulations quarterly financial results. IFRS financial reporting for banks, financial
governing financial accounting and considers only consolidated financial institutions and insurance companies,
reporting and taxation in India. statements as the primary financial respectively, including the presentation
In addition to accounting stan- statements of the entity. format and accounting treatment for
dards, there are legal and regulatory Courts in India commonly approve certain types of transactions. The
requirements that determine the accounting under amalgamation/ RBI provides detailed guidance on
manner in which financial information restructuring schemes which may not provision relating to non-performing
is reported or presented in financial be in accordance with the account- advances, classification and consistent
statements. The Companies Act, ing principles/standards. Under the with the requirements of IFRS.
1956 directly provides guidance on current accounting/legal framework, In cases where a material error
accounting and financial reporting such legally approved deviations from is discovered in previous reported
matters. Courts in India also have the accounting standards/principles financial statements IFRS requires that
the powers to endorse accounting are accepted. Under IFRS, however, the previously reported financial statements
for certain transactions even if the accounting treatment in any proposal/ be ‘restated’. This process involves
proposed accounting treatment is scheme submitted to any court for issuing new financial statements
not consistent with the Generally approval would have to in accordance marked as ‘Restated’ with detailed
Accepted Accounting Principles with the IFRS. The need to amend disclosures on the reasons and items
(GAAP) in India. procedures/laws to facilitate this is contributing to the restatement. Where
As per the preface to the Indian significant as the recent past there required, the external auditor of the
Accounting standards, if a particular have been number of Mergers and entity would then issue an audit opinion
accounting standard is not found to be Acquisitions (M&A) and restructuring on such ‘restated’ financial statements.
in conformity with a law, the provisions transactions that have court sanction, Currently, there are few or no general
of the said law will prevail and the but are not in conformity even with the provisions in India that would permit
the revision of such previously reported plan in matter related to income taxes sheet, which serves as a starting point
financial statements. and indirect taxes. Tax authorities for future accounting under IFRS.
Keeping in mind the above need to ensure clarity in tax treatment The key principle of IFRS 1 is full
regulatory roadblocks, one of the main of items arising from convergence to retrospective application of all IFRS
risks identified with IFRS convergence IFRS. Example: unrealised losses and in force at the closing balance sheet
is that without adequate regulatory gains on derivatives that are required for the first IFRS financial statements.
changes the financial statements to be marked to market under IFRS. However, there are 10 areas of
prepared using converged Indian Different taxation framework is possible optional exemptions introduced by the
standards may still not fully comply for tax treatments of such unrealised IFRS 1 that aim to reduce the burden
with the IFRS issued by the IASB. losses and gains. Under one approach, of retrospective application. Entities
In such a case, even if all the Indian taxable income would include such are required to make judgments
Accounting Standards are converged unrealised gains/losses included in and decisions about which option to
with IFRS prior to 1st April, 2011, the the profit and loss account. While apply in their first set of IFRS financial
financial statements prepared by an alternative approach for taxable statements. The exemptions provide
Indian companies for the year ending income would exclude such ‘unrealised limited relief for the first time adopters
31st March, 2012, may not be compliant fair value related’ adjustments. Every mainly in areas where the information
with IFRS. Thus, Indian companies that country that transits to IFRS standards needed to apply IFRS retrospectively
seek to prepare fully complaint IFRS from a financial reporting perspective might not be available.
financial statements (either because would need to separately evaluate There are no exemptions from the
of overseas listings; or for meeting the alignment of tax regulations. It is, demanding disclosure requirements
expectations of international investors/ therefore, important that the Indian tax of IFRS and many companies will
partners; or for any other reasons) authorities are engaged sufficiently need to collect and publish additional
would still need to make adjustments in advance to decide on such critical information. Though IFRS 1 goes some
to these financial statements to aspects of taxation. way to reduce the practical difficulties
achieve compliance with IFRS. This The IASB in order to assist first time associated with retrospective appl-
would largely negate several expected adopters to overcome difficulties in ication, retrospective application
benefits of convergence. applying IFRS has provided guidance would still be required in many
One of the other related challenges in IFRS 1 “First time Adoption of areas.
identified is the need to fully consider International Financial Reporting Further, there is a lack of clarity on
and clarify the proposed convergence Standards”. Most of the Indian entities the status of other authoritative and
will be adopting IFRS for the first time. non authoritative accounting guidance
1st April, 2011,
However, regulators in India have (for example guidance notes issued by
still seems some
reiterated that Indian Accounting the ICAI, opinions of the expert advisory
way off, but as
Standards will be modified on an committee of the ICAI) subsequent to
previously discussed, one of the
individual basis to converge with the stated ‘convergence’. In several
fundamental principles of IFRS
equivalent international standards. instances while the Indian Accounting
is the need to adopt many of its
As a result there is a lack of clarity on Standard are in full conformity with the
requirements retrospectively
whether full convergence and equivalent IFRS, interpretive guidance
at first time application i.e.,
compliance with IFRS would require provided in India may be inconsistent
as though the company had
companies to transit to IFRS using with interpretive guidance and
always reported under IFRS.
principles established in IFRS 1 or if practice in other countries that are fully
Meeting this requirement calls
there would be any other alternative compliant with IFRS.
for accounting adjustments that
model that is proposed to be used in Indian standard setters and
often relate to events which
India. regulators need to consider the above
took place several years ago,
IFRS 1 provides the basis on which issues very carefully to ensure that the
and it can be very difficult to
entities should convert their financial convergence with IFRS achieves the
generate all the necessary data
statements to IFRS. It lays down expected benefits for Indian companies.
from such a distant standpoint.
the transition approach that is to be Similarly, Indian companies need to
Complete IFRS statements have
followed in an entity’s first set of consider these issues while presenting
to include comparative figures
IFRS financial statements, and in the their perspective to the standard setters
for the period before the one
preparation of its opening IFRS balance and regulators.
actually being reported.
Goodwill acquired standards. Thus, depending on the For most companies, application
may be allocated form of the arrangement and other of the purchase accounting principles
at segment level or factors, goodwill may be computed discussed above would result in an
profit center level to distribute based on the book value of the assets adjustment to the value of the assets
the impairment loss. Goodwill of the acquired company or the fair and liabilities recorded recognition
will be accounted only on value of the assets of the acquired of previously unrecorded intangible
acquisition for the surplus of company. Similarly, depending on the assets and consequent adjustments
purchase consideration over the form of the arrangement, the resultant to goodwill balances. These
carrying amount of the assets goodwill may either be amortised over adjustments would subsequently affect
and liabilities. If the acquisition a period or not amortised, but tested the post-acquisition consolidated
is providing a value addition for impairment. In certain cases, the results, generally through increased
as a brand, the goodwill will court-approved scheme may provide amortisation and depreciation.
be allocated to the level below that the goodwill is adjusted against Additionally, the ability of companies to
segments so that, if required for the reserves of the acquirer. Finally, include, in the consolidated financial
test of impairment the amount Indian GAAP still permits the use of the statements, the revenues and profits
charged off will be lesser. pooling-of-interest method whereby of the acquired companies, prior to
the entire transaction is accounted the date of the investment or prior to
Impact of key differences based on carrying values and no the date that control is obtained, would
• Acquisitions and consolidated goodwill arises. also be restricted.
financial statements Under IFRS, all acquisitions • Intangible assets acquired
Currently, only listed Indian companies are generally accounted for using Under Indian GAAP intangible assets
and banks are required to prepare the purchase method whereby the are generally recognised only if they
consolidated financial statements. All purchase price is compared to the are acquired separately. All intangible
other entities issue only standalone fair value of all identifiable tangible assets are amortised over their useful
financial statements. Adoption of IFRS assets, liabilities, contingent liabilities lives (and tested for impairment) and
would require all defined entities (which and intangible assets of the acquired there is a rebuttable presumption
include large-sized entities that are not company, with the excess being that the useful life cannot exceed
listed on stock exchanges) to prepare recognised as goodwill. This goodwill 10 years. Under IFRS, intangible
and present consolidated financial is not amortised, but is assessed assets are recorded either while
statements. for impairment annually. The limited accounting for acquisitions using the
Under Indian GAAP, there is exception to this principle relates to purchase method, or when intangible
no comprehensive standard that acquisitions between entities under assets are acquired separately. IFRS
addresses accounting for acquisitions common control, whereby an entity acknowledges that certain intangible
where one entity obtains control of can adopt an accounting policy choice assets may have indefinite useful
another entity. The accounting for of recognising the acquisition either by lives (for example, brands that
such transactions is largely dependent the purchase method discussed earlier, demonstrate certain characteristics) and
on the form of the acquisition. For or by the pooling-of-interest method. accordingly, such intangible assets are
example, the accounting treatment Another key area of difference not amortised, but tested for impair-
may differ dependent on whether relates to the date of acquisition from ment annually. Additionally, consistent
the acquired company is retained as which the results of the acquired with the treatment of all other
a separate legal entity, whether it is company are included in the depreciable assets, intangible assets
legally merged with the acquirer or consolidated financial statements. are amortised over their estimated
whether a group of assets constituting While conceptually, both Indian GAAP useful lives and there is no presumption
a business is acquired. To add to and IFRS prescribe consolidation from that restricts the useful life.
the complexity and confusion, if the the date when control is obtained or On adoption of IFRS, Indian
acquired company is merged with the the investment is acquired, in certain companies that may acquire certain
acquirer through a court-approved specific situations (for example, court- long-lived brands and similar intangible
scheme, the scheme itself may approved schemes), the scheme may assets, may reach a conclusion that
prescribe an accounting treatment provide for an acquisition date that these intangible assets, which are
that is required to be followed, which precedes the date of investment or the amortised under Indian GAAP, are no
may be in variation with the accounting date that control is actually obtained. longer required to be amortised or that
these assets can be amortised over are carried at fair value. For investments recognised based on the stated rate
longer periods of time that represent categorised as trading, all unrealised of interest. Thus, if the stated rate of
their economic useful lives. gains and losses are recorded in the interest is lower than the market rate
• Share-based payments to income statement. For investments on non-convertible debt (due to the
employees classified as available-for-sale, presence of the conversion feature),
Indian GAAP on share-based payment the unrealised gains and losses are adoption of IFRS will result in additional
to employees (for example, employee generally recorded directly as an interest expense based on this split
stock options) provides entities with adjustment to shareholders funds. allocation approach.
a choice to either adopt the intrinsic Held-to-maturity investments are Under IFRS, an entity must
value method or the fair value method. carried at amortised cost. It is likely that recognise all derivative instruments
Substantially all Indian companies on adoption of IFRS, most investment at fair value on the balance sheet.
have currently opted to adopt the securities held by Indian companies Unless certain specific rules for hedge
intrinsic value method. Under this would be categorised as available- accounting are met, all changes in
method, since most employee stock for-sale and accordingly would be fair value are recorded through the
options are granted with an exercise carried at fair value. This would affect income statement. Indian GAAP
price equal to the market price on the the reported value of the investment currently provides limited guidance
grant date, no compensation cost is portfolio and net worth. on accounting for derivatives. Thus,
recognised. IFRS mandates the use IFRS require that a financial except for certain specific forward
of the fair value method, whereby the instrument should be classified in exchange contracts, most derivative
fair value of the options is determined accordance with the substance of the instruments are currently not recorded
using an option pricing model such as contractual agreement rather than its on the balance sheet and do not affect
the Black-Scholes model or the Lattice legal form (substance over form). Thus, the financial statements until realised/
model. This would usually result in redeemable preference share would settled. The ICAI has already issued
recognition of compensation cost even be a financial liability and dividends standards on presentation, recognition,
if the options are in-the-money on the on redeemable preference shares measurement of financial instruments
grant date. are recognised as interest expense exactly on the basis of IFRS. However,
On adoption, most Indian under IFRS and impact the profits these will be mandatory only from
companies that have issued share and loss for the year. This is different 1st April, 2011. Adopting these
based payments may need to record from the Indian GAAP classification standards in relation to derivative
previously unrecognised compen- of redeemable preference shares as instruments and hedge accounting will
sation cost relating to these award, equity and the related presentation of be a monumental shift in accounting
based on the fair value approach. dividends on such preference shares for a large number of items on the
• Financial instruments as appropriation of profits. This would balance sheet which will lead to
Financial instruments where Indian impact financial structures and debt- recognition of many financial instru-
GAAP differs significantly from IFRS equity ratios. ments which are currently kept off-
include financial assets such as Similarly, under IFRS, convertible The principle based
investments, financial liabilities such debt is split into a liability and equity accounting in IFRS
as convertible debt and preference portion whereby the proceeds from puts much more
shares and derivative instruments. the issuance of the debt are allocated value to work of the consultant
Under Indian GAAP, long-term to the two components. The liability who can make this conversion
investments are generally carried at component is recognised at fair value and also on the management
cost, less impairment; and current by discounting at a market rate for non- to make a proper gap analysis
investments are carried at lower of convertible debt, while the balance and estimate of the cut over
cost or market value. IFRS requires proceeds are allocated to the equity challenges which will unfold
that investments be categorised into component and recorded directly on conversion. It may not be
three categories: trading or investment in equity. This results in recognising possible to understand the
carried at fair value, held-to-maturity and effective interest expense using rates ramifications and disclosure
available-for-sale. Except for held-to- applicable to non-convertible debt. requirements at an early stage,
maturity investments (where the entity Under Indian GAAP, there is no specific so the plans and efforts for
has the intent and ability to hold the accounting guidance for convertible conversion should begin now to
investment till maturity), all investments debt and interest expense is generally avoid last minute problems.
balance sheet. Additionally, unless Expenses (SORIE) with supplementary choice about adopting IFRS, they can
specific hedge accounting require- notes is required. A SORIE is a subset approach conversion in one of two
ments are met, these standards will of SOCIE. An entity includes in SORIE ways:
result in significant income statement revaluation reserve, unrealised gains or • The conversion to IFRS of financial
volatility impacted by changes in fair losses on valuation of available-for-sale statements prepared under local
value of the derivative instruments. investments, which are not reported accounting standards by various
through the income statement, but are entities within the group, as part of
Restatement of Comparative directly adjusted to equity. When an the group consolidation process;
Financial Statements for entity elects to present a SORIE, the or
Changes in Accounting additional information regarding capital • Implementing IFRS in the
Policies and Correction of transactions with owners (issuance accounting process across
Errors of equity, distribution of dividends), the entire organisation, across
Unlike Indian standards, where prior movements in accumulated profit and geographies.
period items that represent correction loss and a reconciliation of all other The second of these two options
of errors; and cumulative impact components of equity is presented in involves using IFRS as the trigger for
of change in accounting policies, the notes to the financial statements. harmonisation of internal and external
are recorded as an adjustment in No such statements are required reporting. Companies might also
the current period, IFRS generally under Indian GAAP. However, the need to revisit the basis for calculating
require accounting policy changes movement in capital and reserves and management incentive payments
and correction of prior period errors appropriation of profit and loss account given the likely impact of IFRS on
to be made by adjusting opening is presented in the income statement financial performance measures. The
retained earnings and restating and the balance sheet. decision about which option to choose
comparatives. This is a relatively new Under IFRS, expenses can be revolves around a company’s intended
concept for preparers, auditors, users, classified by nature (salary, rent, use of IFRS and more importantly on
regulators, investors and analysts in power and fuel) or by function (cost of whether IFRS is permitted or required
India (although such restatements are revenues, selling expenses, general and in all geographies where the company
required in certain limited situations administrative). Schedule VI requires operates. The broader its proposed
that involve initial public offerings) classification by nature. Companies application, the more sense it makes
and would require companies to would need to carefully evaluate the to implement IFRS throughout the
clearly communicate with and educate presentation requirements of IFRS to accounting process. Our experience
investors and other users to highlight identify incremental disclosures and indicates that this course of action is
the impact of this change. changes to presentation requirements. more efficient and effective, since it
provides companies with an internal
Presentation of Financial Critical Success Factors for reporting language, which is fully
Statements IFRS Convergence Projects consistent with their external reporting
Financial statements presentation for- On the basis of the study conducted framework.
mats under Indian GAAP are primarily on IFRS, following common critical
driven by regulatory requirements success factors are identified for Leadership
specified in the Indian Companies Indian companies for successful IFRS Conversion to IFRS is nothing less
Act and other regulation for specific conversion projects: than a major change programme.
industries (for example, banking and • Strategy It requires senior management to
insurance). Under IFRS, IAS 1 sets out • Leadership take responsibility for the project
detailed requirements for presentation • Communication and to demonstrate clear leadership
of financial statements, including their • Resources and sponsorship throughout its
structure and minimum requirements • Knowledge implementation.
for content. • Project management This is the only way to gain the
Under IFRS, in addition to the • Time widespread acceptance of change,
balance sheet, income statement and which is required by conversion.
cash flow statement, either a Statement Strategy Furthermore, the complexity of the
of Changes in Equity (SOCIE) or a Although with effect from 1st April process demands a high degree
Statement of Recognised Income and 2011, Indian companies may have no of priority from those assigned
Knowledge
The qualification for membership of the
project team is knowledge. This is not
just knowledge of the technical aspects
of IFRS, equally important is:
• A good overview of the company’s
business issues, together with
the events and transactions
that typically characterised the
company’s activity;
• Familiarity with the reporting
processes currently in place and
the technology that supports
Diagram 1: Phases of Project Management
Time
1st April, 2011, still seems some way off,
but as previously discussed, one of the
fundamental principles of IFRS is the
need to adopt many of its requirements
retrospectively at first time application
i.e., as though the company had
always reported under IFRS. Meeting
this requirement calls for accounting
adjustments that often relate to events
business and its key activities including for the harmonisation of local GAAPs which took place several years ago,
acquisitions, alliances or joint ventures. followed in different geographies. and it can be very difficult to generate
The objective is to enable management Under IFRS, a plan for enhancing all the necessary data from such a
to make informed decisions about the or speeding up the consolidation distant standpoint. Complete IFRS
impact of IFRS and to determine a process, planning and implementing statements have to include comparative
path forward which is cost effective the necessary system changes, figures for the period before the one
and minimises disruption to the as well as developing a detailed actually being reported. This means
business. training programme for financial and that for a company with a 31st March
In order to arrive at these decisions, operational staff needs to be mapped year end, in order to comply with IFRS
the gaps need to be identified between out. This phase also involves for accounting period commencing
old policies and procedures and the developing a detailed timeline for on or after 1st April, 2011, an IFRS
new ones required in following IFRS a dry-run, data collection, testing balance sheet as at 1st April, 2010 at
such as accounting and disclosure and analysis. A rigorous project the latest, will be required.
issues and the impact on statutory management plan is also essential. The earlier companies start the
reporting. This also applies to gaps in conversion process, the more time
systems and processes and training Implement they will have to find and solve any
needs. This is where the plans are finally put teething problems.
Having made an assessment into action and the businesses start
of where the organisation is now, to make IFRS part of their day to-day Managing the IFRS
and the position it needs to get to, a operations. Changeover
master conversion plan and budget The training programme needs Indian enterprises that will convert
can be developed for the conversion to be rolled out so that everyone to IFRS have the opportunity to learn
process. This includes formulating understands the new accounting from the experiences of those who
additional objectives and benefits, regime, how to use the reporting have already adopted IFRS worldwide
such as streamlining financial reporting packages and how to account for as well as in India. By examining the
processes or improving timeliness, events and transactions under IFRS. approaches used in successful IFRS
which the organisation wants to derive The data-gathering process also needs implementation projects across the
from the conversion. to start at this point, including at least, world, Indian companies can smoot-
A multi-disciplinary team needs to a one-year parallel run to produce hen their IFRS transition projects.
be assigned to the IFRS conversion internal IFRS numbers for comparative Below are a few of the key steps and
project to help make sure that purposes. questions that need to be addressed
the Assess phase is successfully Finally, all the information gathered by an entity as it approaches IFRS
completed. has to be consolidated to produce convergence.
IFRS financial statements. Since it Each enterprise usually begins
Design is unlikely that this process will work its IFRS project with a high level
The second phase is about mobilising perfectly the first time, dry-runs of the assessment:
the organisation for closing the procedures should be carried out. • What areas of IFRS are likely to
gaps identified in the Assess phase. This will enable weaknesses to be have the biggest impact on its
These might include, for example, identified, which can be eliminated financial reporting?
a redevelopment of the reporting before the organisation goes live with • How complex is the transition
package, a transition programme IFRS. likely to be?
• What challenges it might enco- Accounting and reporting: likely affect systems, processes and
unter during the implementation? Focus on such actions such as: controls. Assess their impact by:
• Who needs to be involved in the • Mapping each line of financial • Addressing the level of flexibility
project? statements, notes to the appli- for changes in the current systems
After completing this initial cable IFRS standard. ledger structure, chart of accounts,
scoping and mobilising the necessary • Conducting a systematic gap mapping, functionality and suitably.
resources, the project team moves to analysis of the differences bet- • Understanding the current IT
a more detailed level. Team members ween IFRS and current accounting project priorities and determining
should undertake systematic and policies and detailed practices whether any planned projects
detailed gap analysis to establish the relating to balance sheet items, should be deferred or revised.
potential impact of conversion. These income statement items, general • Assessing the impact on current
detailed gap assessments require or special topics and disclosure data gathering processes in
significantly more time and effort issues. which additional information is
by the conversion team. Doing the • Weighing the pros and cons of the required or will change under IFRS.
work well the first time is essential as many IFRS 1 elective exemptions, • Determining the effect on your
it creates a blue print for the design to help reduce the burden internal control processes. Which
and implementation phases of the of applying IFRS standards key controls could change with
project and sets the foundation and retroactively to past transactions. the implementation of IFRS?
addressing the project’s impact across • Assessing the impact of various • Determining the need for multiple
the organisation. accounting policy choices GAAP reporting due to tax or other
available under IFRS (such as regulatory considerations.
Need for a Structured revaluation or amortisation cost
Approach methods of measuring property, Business and people
This methodology focuses on the plant and equipment). Address the impact of IFRS on people
impact transition in four clusters: throughout the business by:
systems and processes; business- Systems and processes • Providing training for staff at all
related issues; the people function and Decisions in all other work streams will levels to the extent required.
accounting and reporting. Since IFRS will be India’s new
accounting language many
people who provide support or
use financial information may
need to understand the new
accounting technical standards
that will affect the organisation
and any new processes that will
need to be implemented.
• Investigating impacts on
normal business and financial
contracts (example debt
covenants) budgeting proce-
sses, performance management
metrics, incentive compensation
plans and other operations.
• Analysing the likely effect on tax
calculations and reporting.
• Evaluating the implications for
regulatory submissions for example
banking and insurance companies.
• Formulating and implementing
communications plans for an
enterprise’s many stakeholders
Diagram 2: Structural Approach to IFRS
Diagnostic requirements.
Detailed gap analysis between current • Preparation of financial state-
accounting practices and disclosures ments for interim and annual
under Indian GAAP and IFRS comparative periods as per the
requirements. final transitional requirements.
• Identify accounting policy choices
and options under IFRS. Cut- over during these phases are likely to be
• Evaluate identified gaps to • Reporting for the first reporting beneficial for companies irrespective
determine: period as per the final transitional of the ultimate manner of transition
• Impact on IT systems requirements. adopted in India.
• Impact on processes • Post- implementation review.
• Impact on internal financial • Multi- GAAP reporting for tax and Conclusion
reporting controls regulatory purposes, as required. The transition from GAAP to IFRS
• Impact on business practices and is not only inevitable, but a positive
contracts Ongoing communication and development that would help make
• Develop a convergence path and project management capital markets more competitive.
plan along with related manpower/ • Managing expectations of Transitioning to IFRS would allow
cost budgets internal and external stakeholders companies to compete for capital
through timely and regular in other countries, while reducing
Design and planning communications. cost and complexity for companies
• Training strategy and • Overall project management to operating internationally; we also
implementation of training plan. track progress against defined think that embracing a single set of
• Designing templates to capture milestones. global accounting standards would
historical information Given the current regulatory contribute to a higher degree of investor
• Designing templates of pro- uncertainty on the manner of transition, understanding and confidence. And
forma financial statements and companies may find it useful to finally India should follow the league by
disclosures implement the Diagnostic phase and joining hands with the major countries
• Evaluating systems and process certain elements of the Design and following IFRS which is expected to be
changes as required Planning phase. Efforts expended 150 by year 2011. n
Over the past few decades, world economies have undergone a fundamental transformation from an
Industrial Economy (manufacturing based) to the knowledge and information based Service Economy
(Contribution in GDP 53.7 per cent) for survival and profit. Success of any service industry totally relies
upon the quality of human resources it possesses. The increasing awareness and recognition of human
and intellectual capital as a core economic resources of the current era, have forced the firms to shift
their focus from investment only in traditional physical assets (such as inventories, plant and equipment)
towards the investment and development in human capital. Human capital and intellectual property are
seen as determinants of economic success at both the macroeconomic and the firm level. This has made
the investment in training and development programmes very critical and there is a need to develop new
methods, tools and concepts for monitoring and evaluation of management development programmes
in terms of their impact, results and value or return on investment. Unfortunately, no specific Accounting
Standard has been developed by any regulatory authority for valuing human resources of any organisation.
The article focuses on concepts of “Human Resource Accounting” and various techniques to determine the
value of human resources.
of the value of the employee to the human organisation. The methods to an individual’s value as
organisation. for calculating the economic value an organisational resource.
2. Opportunity Cost Approach – of individuals may be classified into Specifically, we can conceptualise
This approach focuses on the Monetary and Non-Monetary Methods. a person’s value to an organisation
calculation of what would have Monetary measures for assessing under two different conditions:
been the returns if the money Individual Value 1. Remaining as an economic
spent on HR was spent on some 1. Flamholtz’s model of determinants resource for the full period of
other alternatives. of Individual Value to Formal economic benefit or service life
Limitation Organisations 2. Remaining as an economic
This method does not fulfill 2. The Lev & Schwartz Model resource for less than the full
the objective and not a perfect 3. Morse Net Benefit Model: period of economic benefit or
method to value HR. So, it is 4. Hekimian and Jones Competitive service life.
limited to internal reporting and Bidding Model
assessment only. Economic Conditional Value (ECV)
3. Replacement Cost Approach: 1. Flamholtz’s Stochastic It is the amount that an organisation
This approach focuses on the Model could potentially realise from the
cost associated to replace the • According to Flamholtz, the value employee’s services during the period
present employees the costs can of an individual is the present of his or her productive service life in
be classified as worth of the services that he is the organisation. It is composed of
• Costs of Recruitment likely to render to the organisation following factors:
• Selection in future till his/her balance service 1. Productivity or performance –
• Hiring life. As an individual moves from These are the set of services that
• Placement one position to another, at the an individual is expected to provide
• Orientation same level or at different levels, in his/her present position.
• Job Training the profile of the services provided 2. Transferability - These are the set
• Loss in revenue due to by him is likely to change. The of services that he/she is expected
unavailability of a particular present cumulative value of all to provide if and when he/she is
employee. the possible services that may be in different positions at the same
That will occur in order to replace rendered by him during his/her level, if he is transferred.
them. association with the organisation 3. Promotability - These are the
Limitation is the value of the individual to the set of services that are expected
Substitution of replacement cost organisation. when the individual is promoted to
method for historical cost method • The possibility that people can a higher level positions within an
does little more than update leave organisations does not organisation.
the valuation, at the expense of eliminate them as capital, it 4. Exit – Leaving the firm, either
importing considerably more merely creates a dual aspect voluntarily or by request.
subjectivity into the measure. These factors depend, to a great
The economic value
This method may also lead to extent, on individual determinants
approach of human
an upwardly biased estimate like activation level of the individual
capital valuation
because an inefficient firm may (his motivation and energy level)
is based on the expected
incur greater cost to replace an and organisational determinants like
present value of the services
employee. opportunity to use these skills or roles
(in economic terms) that is
and the reward system.
expected to be generated by
The Economic Value Approach:
the human resources of any
The economic value approach of Economic Realisable Value (ERV)
organisation. This may be the
human capital valuation is based on the The amount actually expected to
value of individuals, groups or
expected present value of the services be derived, taking into account the
the total human organisation.
(in economic terms) that is expected to person’s likelihood remaining in the
The methods for calculating the
be generated by the human resources organisation. The ultimate measure
economic value of individuals
of any organisation. This may be the of a person’s value is to be expected
may be classified into Monetary
value of individuals, groups or the total realisable value because this concept
and Non-Monetary Methods.
is a function of the expected conditional to a firm depends upon the value realisable future value to deter-
value, and the probability that the of the service states the person mine their present realisable
individual will remain in the organisation will occupy in an organisational value.
for the duration of his/her productive hierarchy (present position, next
service life. Since individuals are not higher position, exit and so on) as Formula Used for Valuation:
owned by the organisation and are free well as the probabilities that the Tt ∑ Si * P(Si)
to leave, ascertaining the probability of person will occupy each possible ECV =∑ [ ]
their turnover becomes important. The service state. i=1 (1+Rd )t
interaction between the individual and • State Transition: Where;
organisational determinants mention- In time, people move in the ECV = Expected Conditional Value
ed above, leads to job satisfaction. The organisational hierarchy from one Tt = Total remaining service life
higher is the level of job satisfaction; service (or role) to another. These Si = value generated in a particular
the lower is the probability of employee movements from state to state state
turnover. Therefore, higher is the are termed as state transition and P(Si) = probability of a person to
expected realisable value. these transitions are probabilistic occupy a particular state
in nature. Rd = Rate of Discount
• Service State: After calculating the ECV, we calculate
These are the different roles that Steps in implementing Flamholtz ERV by using the conditional
an individual may occupy in a firm, Model: probability of an employee to retain
thus performing different levels of • Step -1: Define the mutually in an organisation using the following
service. The value of an individual exclusive set of the various formula:
possible roles that an employee Tr ∑ Si * P(Si)
In the absence of can take in his service life in the ERV =∑ [ ]
Human Resource organisation. i=1 (1+Rd )t
Accounting, the • Step -2: Determine the value of
management may not realise each state [(S1 ,S2 , S3…… Sn)] to Where;
the negative effects of certain the organisation , or the services ERV = Expected Realisable Value
programmes aimed at improving state values. TR = total realisable service life = Tt
profits in the short-run. Such • Step -3: Estimate a person’s *P(r)
programmes may result in expected tenure, or service life, in P (R) = probability of remaining in the
decreased value of human assets the organisation organisation = P(R) = 1- P (T)
due to fall in the productivity • Step -4: Find the probability that a P (T) = probability of turnover
levels, high labour turnover, person will occupy each possible
low morale, etc. HRA in any state at specified future time Methods for valuation of expense
organisation should be designed (P(Si)). centre groups
to serve mainly two functions. • Step -5: Calculate the expected FlamHoltz proposes three methods for
First it should focus more on conditional future value by valuation of Human Resources:
recognition of human resource aggregating all employees value • Capitalisation of Compensation
as a critical success factor for at different states and multiplying • Replacement Cost Valuation
any organisation, as it is the men it with the remaining service life of • Original Cost Valuation
behind the organisation who an employee.
drive it towards success. The • Step -6: Discount the expected Capitalisation
emphasis on the human capital conditional future value to deter- The capitalisation method is based on
should be increased to remain mine their present value. capitalising a person’s salary and using
in the competition in today’s • Step -7: Calculate the expected it as a measure of human value. The
economic era. The second aim of realisable future value by agg- value may be ascertained for groups
HRA is to provide an alternative regating all employees value at as well as individuals. The value of
accounting system designed to different states and multiplying it the group is essentially the aggregate
measure the cost and value of with the realisable service life of value of the individuals compromising
human assets to an an employee. the group. Capitalisation of compen-
organisation. • Step -8: Discount the expected sation method is not considered an
• P.E. = the individual’s present bargaining capacity, skill, other for human resources already
annual earnings experience, etc. which may cause available within the organisation. The
• CAGR = annual growth rate of differential salary structure are highest bidder ‘wins’ the resource.
earnings also ignored. There is no criteria on which the bids
• t = remaining service life and are based. Rather, the managers rely
rd = a discount rate specific 3. Morse Net Benefit Model only on their judgment.
to the cost of capital to the Morse suggested that the value of
company human resources is equivalent to the Conclusion
difference between present value In the absence of Human Resource
Taking an example for Lev and of the services to be rendered by Accounting, the management may
Schwartz model: employees and the value of direct not realise the negative effects
Assumptions : and indirect future payments to the of certain programmes aimed at
i. Rate of discount = 8 % employees. improving profits in the short-run. Such
ii. Annual growth rate of earnings Steps of valuation: programmes may result in decreased
(CAGR) = 10 % 1. The gross value of the services value of human assets due to fall in
Employee Band Age Service remaining CTC Future Value PV the productivity levels, high labour
A1 1 25 35 10000 $ 3,372,292.42 $ 228,083.46 turnover, low morale, etc. HRA in any
A2 2 35 25 15000 $ 1,950,247.07 $ 284,770.99 organisation should be designed to
A3 3 45 15 20000 $ 1,002,539.56 $ 316,042.28
serve mainly two functions. First it
A4 4 30 30 25000 $ 5,234,820.68 $ 520,222.52
should focus more on recognition of
A5 5 21 39 30000 $ 14,812,120.00 $ 736,360.96
A6 6 34 26 35000 $ 5,005,634.15 $ 676,770.57 human resource as a critical success
A7 7 55 5 40000 $ 773,044.80 $ 526,121.30 factor for any organisation, as it is the
A8 8 54 6 45000 $ 956,642.94 $ 602,847.32 men behind the organisation who drive
Total NPV $ 3,891,219.40 it towards success. The emphasis on
Total employees 1000 to be rendered in future by the the human capital should be increased
Skilled 500 employees in their individual and to remain in the competition in today’s
Semi skilled 300 collective capacity. economic era. The second aim of HRA
Technical 50 2. The value of direct and indirect is to provide an alternative accounting
Managerial 150 future payments to the employees system designed to measure the
Total income 11001111 is determined. cost and value of human assets to an
Total employee cost 1100111 3. The excess of the value of future organisation.
Value added 2323232 human resources derived over In this sense HRA represents
Nopat 1111111 the value of future payments is both dimensions, a way to view
Total value of human $ 3,891,219.40 calculated. This represents the net human resources as critical part of the
resources benefit to the enterprise because company and a set of measures to
Skilled $ 3,112,975.52 of human resources. quantify the effects of human resource
Semi skilled $ 389,121.94 management strategies upon the cost
4. By applying a predetermined
Technical $ 194,560.97
discount rate (usually the cost and value of people as organisational
Managerial $ 194,560.97
of capital) to the net benefit, the resources. The methods discussed
Limitations of the Lev & Schwartz present value is determined. above are in their infant stages and
model: – This amount represents the there is an urgent need to develop a new
• It is essentially an input measure .It value of human resources to the accounting standard for valuing human
ignores the output i.e. productivity enterprises. resources of the organisations. The
of employees. application and usefulness of Human
• Service state of each individual 4. Hekimian and Jones Resource Measurement depends on
employee is not considered. Competitive Bidding Model the future efforts and experiments to
• The attrition rate in organisation is This method is based upon the be made by practicing managers,
also ignored. judgment of the managers under whom accountants and academicians. The
• Factors responsible for higher an employee works and the value of application of HRA also needs support
earning potentiality of each the employees is determined by the from the professional bodies and
individual employee like seniority, managers. Managers bid against each Government. n
Following the recommendation of the Government Accounting Standard Advisory Board (GASAB) on
Accounting Reforms for Government Accounting, and Government of India’s major push in this direction,
West Bengal government has decided to introduce accrual based double entry system in all the rural local
bodies, i.e., all the three tiers of Panchayats in the State. The double entry accrual basis of accounting system
will gradually replace the existing system of double entry cash basis of accounting system in all the three
tiers of Panchayats, viz. Zilla Parishads, Panchayat Samitis and Gram Panchayats. The Central Government,
Ministry of Panchayati Raj and Comptroller and Auditor General of India have also proposed that every State
Governments have to follow ‘National Accounting System’ for the maintenance of accounts of the rural local
bodies. So far as the accounts of the rural local bodies are concerned, West Bengal Government is cautious
in introducing all the features of this sophisticated accounting system. Read on to know more.
The accounting Panchayat and Rural Development to be maintained at all for proper
system in Panchayats Department has rightly approached maintenance of accounting info-
of West Bengal, like to adopt the following changes in rmation, are either withdrawn or
accounting system of rural the principles and techniques of the modified to make the accounting
local bodies of other states in accounting system for the Gram system more specific and
this country, is suffering from Panchayat along with the introduction purposeful.
a number of limitations. One of the new Accounts Rules in the year 6. A separate chapter has been in-
such limitation is that the lack 2008 with special features: cluded in the new Accounts Rules
of definite accounts heads and 1. For the first time, it is proposed in covering the accounting system
ancient audit rules hampers the new Accounts Rules that the of the Gram Unnayan Samiti.
financial control on modern books of accounts of the Gram However, the Gram Unnayan
lines. Without the help of trained Panchayats will be maintained by Samiti will maintain its books of
employees, sophisticated accoun- following double entry system of accounts and other records only
ting practices cannot be adopted. accounting. on single entry system, not on
In Panchayats, there is shortage 2. The cashbook will be maintained double entry system. Also, the
of trained employees. under double column basis, i.e., cashbook of the Gram Unnayan
budgetary control over governmental separate column will be kept for Samiti will be maintained under
revenues and expenditures. Govern- recording transactions through single column basis, i.e., without
ment Accounting is heavily tilted in bank accounts in addition to making any distinction between
favour of legal compliance. Where there cash column. As a result, the cash transactions and transac-
is any conflict between accounting transactions between cash and tions through bank, all the
logic and legal compliance, the latter bank, i.e., either cash deposited transactions will be recorded in
must get the priority. into bank or cash withdrawn one column of the cashbook.
It is true that Government Account- from bank for meeting different
ing uses many of the tools and expenses will be possible to be Limitations of the Existing
techniques of business accounting. recorded in the cash book through Accounting System:
But there still exists a great deal of contra entry. The accounting system in Panchayats
difference between the two. In busi- 3. The recording of accounting of West Bengal, like accounting
ness accounting, the main focus is information along with other system of rural local bodies of other
on the determination of periodic profit management and administration states in this country is suffering from
through the matching of revenues related information are also a number of limitations. Following are
and expenses. A large body of possible to be performed with the some of the important limitations of
principles and rules has developed help of computerised accounting the existing Panchayat Accounting
in business accounting, which system to be installed at each System in West Bengal:
aims at providing guidelines as to Gram Panchayat. The installation a. Lack of definite accounts heads
how the matching process is to be of computerised accounting and ancient audit rules hampers
performed under different conditions. system in West Bengal PRI Bodies financial control on modern lines.
Since the profit motive is absent in has almost been completed. b. Without the help of trained
governmental entities, the matching 4. To ensure better flow of fund and employees, sophisticated acc-
oriented principles and rules have effective financial management, ounting practices cannot be
practically no relevance in the context certain provisions are included in adopted. In Panchayats, there is
of governmental accounting. the new Accounts Rules for the shortage of trained employees.
preparation of statements show- c. Details about different program-
Accounting System in West ing the periodical fund position mes are not available from the
Bengal PRIs to help the decision-makers in books of accounts, because
Present Scenario: taking fund related decisions accounting break up of
In the context of the limitations of the quickly and effectively. programmes are not prepared.
1990 Accounts Rules as well as the 5. All the irrelevant books and d. Valuation of assets is consi-
problems faced in the accounting registers, which are not usually dered in accounts without any
practices followed at the Gram maintained by the Gram application of either appreciation
Panchayat Level in West Bengal, the Panchayats and also not required or depreciation of assets, which
fails to show the correct present The road map for the conversion Most of the
value of the assets. process of the existing accounting limitations of the PRI
e. All properties belonging to the system into double entry based accounting system
Panchayat bodies are not valued. accrual accounting system includes in West Bengal can be removed
f. No income and expenditure certain steps and proposals to make by adopting accrual basis of
account is prepared in the the conversion process ‘easy to adopt’ accounting. The present system
accounts; only receipts and for the employees of the PRI Bodies of double entry cash basis of
payments account is prepared. in West Bengal. These steps and accounting will be replaced by
Hence, real operating perform- proposals include: double entry accrual system of
ance and the results thereof are accounting. The road map for
not revealed. Steps for conversion into accrual conversion into double entry
g. Nothing like the balance sheet system: accrual basis of accounting from
is prepared. As a result, the In the year 2008, the Government of the existing system has been
financial state of affairs cannot be India has given a target to the state developed keeping in view the
obtained. governments for switching over to typical nature of operations of
h. The present internal audit accrual basis of accounting by the rural local bodies.
system is too old, ineffective and rural local bodies within a period of 12 assets registers. However, there is lack
inadequate. years. Throughout this time span, the of clarity in the recognition of assets in
i. There is neither any accountability State Government will have to take the the books of accounts, which should be
nor any motivation for maximising initiative step by step to convert their developed by the competent authority.
collection of own source of cash basis of accounting system into Step 3: After completion of the
revenue. accrual basis of accounting on the above two steps, the next step is to
j. There is no concrete guideline for following lines: recognise the liability in their totality. A
the utilisation of fund collected Step 1: Accounting of expenses part of the liability would be recognised
through own source of revenue under accrual basis in the initial step. in step one along with the recognition
in case of Zilla Parishads and The Gram Panchayat Accounts Rules of the outstanding expenses and
Panchayat Samitis. have already included certain reporting committed liabilities. The liabilities
k. The present statutory audit formats which will incorporate which are not directly related with the
practices are not very useful in the outstanding expenses and committed incurrence of expenses are mainly
sense that such audit usually gets liabilities for expenses. In addition recognised in this step. At this stage,
converted into cash transaction to this initiative, certain accounting the rural local bodies of the State of
audit only. Besides, serious entries are recommended for adoption West Bengal will be able to prepare
attention to the lapses pointed out in the maintenance of PRI accounts, their balance sheets.
by the auditors is not given by the which will ensure the recognition and Step 4: When the PRI Bodies will
authorities as a whole. measurement of expenses accrued be able to prepare their statement of
but not yet paid. The initiative for the financial position, i.e. balance sheet,
Roadmap of West Bengal PRIs inclusion of the same type of reporting the next and final requirement is then
Accounting System: formats and accounting treatments in to prepare the statement of financial
Most of the above mentioned limit- the Zilla Parishad and the Panchayat performance, i.e. the income and
ations of the PRI accounting system Samiti Accounts and Finance Rules expenditure account. For this purpose,
in West Bengal can be removed by have also been taken. the final step is the accounting for
adopting accrual basis of accounting. Step 2: Recognition of Assets accrued incomes and recognition of
The present system of double entry owned and under the disposal of the expected revenues by the PRI Bodies
cash basis of accounting will be PRI Bodies will be the next step. The PRI in the State.
replaced by double entry accrual Bodies has already started recognition After completing the above steps,
system of accounting. The road map of assets created under different govt. the accounts of the PRI Bodies will
for conversion into double entry accrual sponsored programmes and in the be converted into accrual based
basis of accounting from the existing Acts and Rules relating to Accounting accounting system. For this purpose,
system has been developed keeping and Financial Management in force the State Government will have to take
in view the typical nature of operations in West Bengal PRI Bodies, there are proper initiatives on timely basis and if
of rural local bodies. provisions for the maintenance of necessary, the regulatory framework
governing the maintenance of the double entry system of accounting Ministry of Panchayati Raj and
accounts of PRI Bodies will be on and from the financial year Comptroller and Auditor General of
amended to suit the requirement of 2008-09. It may be noted in this context India have also proposed that every
conversion. that the rural local bodies in West state governments have to follow
Bengal have not yet adopted accrual ‘National Accounting System’ for the
Proposals for conversion into basis of accounting. As a result, the maintenance of accounts of the rural
accrual system: cash basis of accounting records local bodies. Through the adoption
1. The PRI accounting system in West transactions only on receipts and of National Accounting System’, the
Bengal will be fully computerised payments of cash (for incomes and Central Government is trying to ensure
with the help of the two internally expenses items) and not when such uniformity of the accounting practices
developed accounting software- incomes or expenses accrue to rural by all the rural local bodies in the
IFMAS SARAL for the Zilla local bodies. As a result, an analysis of states.
Parishad and the Panchayat the true and fair view of the activities of
Samitis and GPMS for the Gram the rural local bodies is not possible as Concept and Objectives of
Panchayats. income accrued but not received and National Accounting System
2. All the employees involved in the expenses incurred but not yet paid are National Accounting System is a
maintenance of accounts in all the not reflected in the financial statements system depicting simplified procedure
three tiers of Panchayat System of the rural local bodies. under cash basis of accounting and
will be given support through As per the recommendation meant for all the levels of government
proper training on both acc- of the Government Accounting accounting- Central Government, State
rual system of accounting and Standard Advisory Board (GASAB) on Government as well as urban and rural
accounting software having acc- Accounting Reforms for Government local government.
rual basis of accounting features. Accounting, Government of India has Objectives of the National
3. The new accrual basis of shown its interest and Government of Accounting System in the context of
accounting system should comply West Bengal has decided to introduce rural local government are:
with the following requirements of accrual based double entry system a. To prescribe the Accounting
the regulatory framework under in all the rural local bodies, i.e., all Principles, this will be followed by
which it has to operate: the three tiers of Panchayats in the all the three tiers of Panchayats
• Generally Accepted Acc- State. The double entry accrual basis under the new double entry cash
ounting Principles, i.e., of accounting system will gradually basis of accounting.
Accounting Standards issued replace the existing system of double b. To prescribe a uniform Chart of
by the Competent Authority entry cash basis of accounting system Accounts, that will facilitate com-
from time to time. in all the three tiers of Panchayats, parison between different rural
• The West Bengal Panchayat viz. Zilla Parishads, Panchayat Samitis local bodies and facilitate double
Act, 1978. and Gram Panchayats. entry system of accounting.
• The West Bengal Zilla Parishads The Central Government, c. To prescribe new formats that will
and Panchayat Samitis have to be followed by the rural
The Central
Accounts Rules, 2003. local bodies.
Government, Ministry
• The Gram Panchayat Accounts, d. To prescribe Guidelines for
of Panchayati Raj and
Audit and Budget Rules, 2007. recording transactions in the
Comptroller and Auditor General
books of accounts of the rural
of India have also proposed that
Introduction to National every state governments have local bodies.
Accounting System to follow ‘National Accounting
Background Features of National Accounting
System’ for the maintenance of
The rural local bodies in West Bengal System
accounts of the rural local bodies.
were following single entry cash basis In National Accounting System,
Through the adoption of National
of accounting. However, from the year accounting transactions are required to
Accounting System’, the Central
2003-2004, the Zilla Parishads and be recorded in the books of accounts
Government is trying to ensure
the Panchayat Samitis have adopted of the rural local bodies by following
uniformity of the accounting
double entry system of accounting and certain codes of accounts. The chart
practices by all the rural local
the Gram Panchayats have adopted of accounts prepared for this purpose
bodies in the states.
by the authority bearing different under the correct head uniformly. locally and update the data
codes for accounting heads are the • The State would stand to benefit periodically on the online site.
basis of recording transactions in the from being able to track the
books of accounts. The main features flow and usage of funds and Defects identified in National
of national accounting system are as accordingly decide on the Accounting System
under: subsequent releases. Following are the defects identified
1. The chart of accounts includes • The Panchayats would gain while going through the proposals for
accounting codification covering in terms of better financial National Accounting System received
four important aspects of the items management and enhanced from the Central Government in the
of transactions to be recorded- credibility. initial stage of discussion in the year
major head, minor head, sub • The list of codes for functions, 2008. It may happen that the National
head and objective head. programmes and activities of Accounting System has got revised
2. The receipts side may not have PRIs is based on a three-tier from time to time to eliminate the defects
any object head as because it classification system. In addition within it. However, the observations
may not be possible to identify the to that a sub-head has been regarding the defects identified are on
purpose for which the amount is incorporated. the basis of the initial discussion paper
received at the time of receiving • The nomenclature of the major issued by the Central Government in
the money. heads has been devised in the year 2008.
3. The payment side should have equivalence with the 29 subjects • Most of the formats developed are
all the four components of heads listed in the Eleventh Schedule to on the basis of the old Local Self
and unlike the receipts head, the the Constitution. Government Act.
payment head is based on the • Within this three-tier classification, • Accounts are maintained under
function or purpose of the fund there is a flexibility to open subject Single Entry Accounting System.
received. The receipts side is heads under a particular minor No double entry accounting being
basically recorded on the basis of head based on future devolution adopted.
the source of the fund received. to PRIs or other contingencies. • Adjustment entries, viz. ledger
• Although initially, the accounts to ledger adjustment entry is not
General Observations on National are to be prepared on cash basis, possible.
Accounting System requisite features have been • Only Reports and Returns are
• The model formats are simple, built into the simplified system to possible to be produced. Cash
comprehensive and robust and enable subsequent transition to Receipts and Cash Payment
will aid in capturing expenditure the accrual system. Vouchers are not produced.
• No Accounts Ledgers are
In national accounting
Pre-condition for the adoption of maintained.
system, accounting
National Accounting System • Register of Receipts and Register
transactions are
• It is intended to switchover to the of Payments are backdated
required to be recorded in
revised formats of the National concepts.
the books of accounts of the
Accounting System for PRIs with • Refund of revenue/ reimbursement
rural local bodies by following
effect from 1-4-2011. Accordingly, of expenditure treatment are
certain codes of accounts. The
opening balances as on 1-4-2011 defective.
chart of accounts prepared for
will be required. Where amounts • There is no provision for
this purpose by the authority
are in arrears and the required rectification entry.
bearing different codes for
balances are not available, • Codification of different accounts
accounting heads are the basis
Panchayats would need to prepare heads are not well drafted.
of recording transactions in the
a ‘Statement of Affairs’ based on
books of accounts. The chart of
which, opening balances can be Convergence of West
accounts includes accounting
worked out. Bengal PRIs Accounting
codification covering four
• Though the software will be web- System with National
important aspects of the items
based, an offline version of the Accounting System
of transactions to be recorded-
same will be available so that The new Accounts Rules for the
major head, minor head, sub
users can enter account details Zilla Parishads and the Panchayat
head and objective head.
The Audit of a Public Sector Undertaking (PSU) has certain unique procedures/steps as compared to a
normal audit of a company. This article tries to give a step by step analysis of the various events in a PSU
Audit and actions required to be taken by a Statutory Auditor of a PSU. The article also highlights the recent
changes made in the reporting format by CAG which is applicable from 2010-11.
also the name and qualifications the list of nodal officers for of Deputy Director wherein
of personnel deployed for audit each Region/Division should the Auditors would explain the
of each unit. be obtained. allocation of work among them
b. The Directions issued d. The Draft Accounting Policy and the time frame for completion
under Section 619(3) of the for the year would be dis- of the audit work. After this the
Companies Act should be cussed and any corrections/ Deputy Director would explain the
followed. amendments which are Additional Sub-Directions for the
c. Before commencing the audit, brought in during the year said year under Section 619(3) of
it should be verified that the would be analysed and a final the Companies Act. A copy of the
undertaking has complied draft would be made ready. Additional Sub Directions would
with or taken action on the e. The time frame for comm- be handed over to the auditors.
assurances as well as the encement and completion of • Each Statutory Auditor would draw
comments issued by the CAG the Audit would be discussed up an Audit Programme for the
and Statutory Auditors of and fixed. Time frame would department he has been allotted
previous year’s accounts. have to be fixed for the in accordance with the auditing
d. The implications of various Branches, Operating offices, standards including fixing the
notes on accounts may Department of Head office and extent of verification, Materiality
invariably be qualified and Final Consolidation. level to be adopted etc. While
suitably quantified in your f. In case of Joint Audits, the work framing the audit programme it
report. allocation among the auditors is advisable to consult with the
e. The last three years qualifica- would be discussed and a joint auditors who would have
tions and notes to accounts decision would be arrived at. conducted the audit of that
may be compared to ascertain g. The Work Allocation Statement department in the previous year
whether the Management has would be drawn and would be which would give a fair idea on the
taken rectificatory action. signed by all Joint auditors as a areas to be focused upon.
f. In case of computerised token of their acceptance. • The Statutory auditor would call
accounts, the auditor should • It is advisable to have a Meeting for the internal audit reports/CAG
assess and report the areas at the various regions (before the transaction audit reports and other
of computerisation and how it year end) where the Heads of the audit reports for the financial year.
impacts the work of auditing Operating offices and the Branch • The adequacy of the internal
the accounts. auditors are present. The statutory control systems should be
• A Meeting of the Auditors would auditor would address the meeting evaluated and accordingly the
take place along with the Top with special emphasis on the audit programme can be altered.
Management of the company unique points which would have • The Guidelines issued by the
wherein in the following would be to be carefully looked into by the concerned Board of the PSU
broadly discussed:- Branch auditors. Any clarifications/ delegating various financial powers
a. The Closing Guidelines for queries of Branch auditors would to be obtained.
the relevant year would be be addressed at the meeting. • The Production flowchart, note
discussed and the auditors • There would be a Meeting at the on inventory management and
are required to suggest various CAG’s office in the presence system, Costing Systems used,
changes/amendments. The auditor on receipt Compliance report on the various
b. The Guidelines given to the of the audit reports statutes to be obtained before
branch auditors would also be from the branches starting the audit.
discussed and auditors should should carefully scrutinise the • In computerised environments the
ensure that it broadly covers same and ensure that the entries auditor is required to verify whether
all the areas. In case there are which are required to be passed the software used has been tested/
any special points which the at Head Office are duly passed, validated, Systems Audit has been
statutory auditor would like to and the issues which the branch conducted and in case of change
emphasise, the same would be auditors have not been able to in software whether Migration Audit
included in the Guidelines. take a decision are noted down has been conducted.
c. The list of branch auditors and and corrective action taken at • The auditor should verify and
the head office level.
ascertain whether there are any Simultaneously during (v) Financial Statements including
new statutory or regulatory the course of Audit, cash flow statement
changes which would have mate- the Statutory auditors (vi) Various certificates/disclosures
rial impact on the financial stability have to prepare the Report under required under the statute.
or profitability of the entity. An section 619(3) of the Companies • Once the financials are finalised
Impact analysis should be done Act. The report is broadly the date of meeting of Audit
on any material change in the categorised in to XVI different Committee and Board would be
regulatory requirement. heads. The format as prescribed finalised.
• The auditor should verify the by CAG is in a questionnaire • The auditors would be present at
minutes of the Board Meeting, format and encompasses all the Audit Committee meeting and
Audit Committee Meetings, the possible areas of the PSU they would have to present their
Investment Committee and any including internal control, frauds, views/observations in addition to
other Committee set up by the business risks, control over clarifications required by the ACB
Board and make note of the assets, investment functions, members.
decisions arrived at in the Board. costing systems, environmental • The accounts would be adopted in
• The auditor should also verify management, corporate social the Board meeting. If required the
the Budgets which are given to responsibility, systems security, auditors would also be requested
the Ministries concerned on a fixed assets, etc. to participate during the approval
periodical basis. in order that the issues are being of accounts.
• The auditor should get a copy of the sorted out then and there and • Simultaneously during the course
new guidelines/instructions issued the management is also being of Audit, the Statutory auditors
by the regulatory authorities during made aware of the issues. Here have to prepare the Report under
the year in respect of accounts again the meeting discussion and Section 619(3) of the Companies
including reconciliation. the decisions arrived at should Act. The report is broadly
• During the course of audit, the be minuted and signed by both categorised in to XVI different
auditor can also inspect any of the auditors and the management. heads. The format as prescribed
operating offices independently to • Wherever the Management relies by CAG is in a questionnaire
get first hand information about the on expert’s opinion (like Actuary format and encompasses all the
process and have discussion with report), the same should be made possible areas of the PSU including
the branch auditor concerned. available to the auditors and the internal control, frauds, business
• The auditor on receipt of the audit auditors can also discuss the issue risks, control over assets, invest-
reports from the branches should with the expert, if any clarifications ment functions, costing systems,
carefully scrutinise the same and are required on the assumptions environmental management, corpo-
ensure that: made by the expert. rate social responsibility, systems
(i) The entries which are required • A Management Representation security, fixed assets, etc.
to be passed at Head office are Letter would be given by the • The replies to the questions are
duly passed. management to the auditors to be framed in consultation with
(ii) The issues which the branch which would cover all the areas of all the Joint auditors and the
auditors have not been able to accounting/internal control. management. Wherever the reply
take a decision are noted down • On finalisation of the accounts, is based on the information of
and corrective action taken at a final meeting would take place management the same should
the head office level. with the management wherein the be disclosed and a certificate
• In case of Joint audits, Periodical following would be placed and should be obtained from the
meetings should be conducted discussed:- Management.
during the course of audit, and (i) Accounting Policy for the year • The replies to the questions should
ensure that each meeting is (ii) Notes forming part of the be to the point and should not be
properly minuted and signed by all accounts vague.
auditors. (iii) Final observations/issues of • Proper back-up papers should
• Similarly there must frequent the auditors be available for the report under
interaction between the top (iv) Reply by the management to Section 619(3) of the Companies
management and the auditors the issues raised Act.
The Format of auditors are required to furnish the the Principal Director, commercial
the Report under details of man-power deployed for audit and ex-officio member, Audit
Section 619(3) of the the work including the man days Board of the respective region
Companies Act as prescribed of partners. The broad parameters mentioning that nothing significant
by CAG has undergone drastic on which the assessment is made has come to their knowledge
changes. This new format is are: which would give rise to any
applicable for the accounting (i) Coverage of Audit comment upon or supplement to
period starting with 2010-11 (ii) Compliance to various Statutory Auditors Report under
(Revision made vide CAG office requirements of Companies Section 619(4) of the Companies
Circular No.134-CA-IV/42-2001(III) Act, other statutes Act, 1956. These final comments
dated 15.04.2010) (iii) Compliance with established should be prominently disclosed
• The CAG has powers to call for Accounting Standards in the Annual Report of the PSU.
the working papers and other • CAG conducts their audit/review • In the event that replies are not
information collected during the after the approval of accounts in convincing/acceptable in the view
course of audit. the Board meeting. Audit Paras are of CAG, then the accounts are
• The most important point to be raised during their course of audit required to be restated or in the
ensured is that the Report to CAG and finally preliminary comments discretion of the management
has to be prepared simultaneously are given to the Management and where they have strong grounds
with the audit of accounts as the to the auditors. against the comments they would
report would have to be normally • The auditors are required to list out the same in the Annual
submitted within a few days after give their reply to the preliminary report along with the reply.
signing the financials. If any comments along with the
negative reporting is made then it management. Changes in the Format for
must be ensured that the same has • Normally there would be a meeting Reporting Under Section
been considered in the financial between the Audit officers of CAG, 619(3) of the Companies
statements. Hence if there are management and the statutory Act, 1956
negative comments in the report auditors to discuss the replies • The Format of the Report under
it must be those for which the given to the preliminary comments. Section 619(3) of the Companies
impact is already considered in the The auditors are required to give Act as prescribed by CAG has
financial statements or the negative their views on the issues raised undergone drastic changes. This
comments are on a subject which and also explanation as to why the new format is applicable for the
has no financial impact. same was not considered in their accounting period starting with
• CAG, on completion of the report. 2010-11 (Revision made vide CAG
statutory audit, would adjudge the • If the replies are acceptable to the office Circular No.134-CA-IV/42-
performance of the auditors. The CAG, a final Comment is issued by 2001(III) dated 15-04-2010)
The changes have been made into the transactions in detail. As the on certain sensitive issues which
in all the major areas and emphasis audits of PSUs are expected to be would definitely put pressure on the
has been made to a greater extent completed before 30th of April auditors.
on Proprietary Audit. For certain in most of the cases, it is highly The additional data, which is now
questions it involves more of probing impractical to require comments called for, is given below:-
Head Additional Questions
Corporate Whether the Audit Committee has reviewed and discussed with the management and the internal and external auditors, the
Governance and adequacy and effectiveness of the accounting and financial controls, including the company’s financial and risk management
Audit Committee policies.
Business Risk (i) The process used for identification of business risks and steps taken to mitigate it by the management.
(ii) The capital expenditure/capital invested not put to use.
(iii) The cost benefits analysis of major capital expenditure/expansion including IRR and pay back period.
(iii) The existence of Macro, Sector and Operation Threats that could drive fundamental changes in business model.
System of Accounts (i) Please report which of the accounting policies adopted by the company are not in conformity with the accounting policies
& Financial Control applicable to the industry/companies in the same sector, particularly the government companies. What is the impact of such
polices on the accounts?
(ii) Indicate separately the amount of balances remained unconfirmed from government departments/PSUs and private parties
and their percentage to total amount under each head.
(iii) Whether any incidence involving improper use or wastage of funds was noticed.
(iv) Whether work flow and document flow is in place to ensure proper controls and systems commensurate with the delegation of
work?
Fraud/Risk (i) Whether the company has formulated code of conduct for senior management.
(ii) How the company has dealt with reported frauds and what are the remedial measures taken for preventing recurrence?
(iii) Whether the Company has “whistle blowing” policy.
(iv) Whether the fraud policy has been periodically reviewed and evaluated to determine whether it was designed and
implemented to achieve optimal effectiveness.
Assets (i) Whether the company has conducted physical verification of Fixed Assets during the year and a format report is being
prepared for the same?
(ii) Whether there is a policy to review and implement impairment of assets.
Investment (i) Whether any surplus funds are invested? Is there any effect on availability of funds for working capital because of investments
leading to borrowings at higher rates?
(ii) How often market value is reviewed and whether profits are made on sale of investments.
Liabilities and Loans Whether any study was conducted to avail any other instruments or derivatives instead of high cost loans?
Award & Execution (i) Whether there are any disputes/claims unsettled for a long time.
of Contracts (ii) What is the procedure followed by the company for purchasing proprietary items? What is the procedure for ascertaining the
authenticity of the propriety items certificate given by an official based on which tendering is not resorted to and goods are
purchased from a particular supplier?
Costing Systems (i) Whether there is any system to evaluate the abnormal losses and taking remedial measures to control such losses?
(ii) What is the method being followed by the company to charge overheads? How is the overhead rate being arrived at? In case
of cost plus contracts, are the overheads being recovered completely or not?
Internal audit System (i) Whether internal audit is independent and reports directly to the Chairman/Head of the Company
(ii) If internal audit is outsourced then whether the selection process is fair and transparent.
(iii) Whether entities which are not under the jurisdiction of the professional institute are being given the work of Internal Audit.
(iv) Does the Internal Audit report contain any serious irregularity which needs immediate attention of Management/Government.
(v) What is the total impact of all shortcomings/deficiencies pointed out in the latest Internal Audit Report and pending for
compliance as on date?
(vi) Whether mistakes/shortcomings pointed out in the latest report is of the same kind/type as pointed out in earlier reports.
Legal/Arbitration Is there any system to ensure proper documentation (like minutes if the meetings, foreseeing contingencies, foreign exchange
Cases fluctuation etc.) before agreement with foreign parties as well as Indian parties?
EDP Audit (i) Whether the company has detailed/comprehensive list of all reports/statements which can be generated by the system in use?
(ii) Whether there is an effective IT Steering Committee.
(iii) Whether there exists effective disaster recovery plan for EDP department which is periodically reviewed and evaluated.
(iv) Whether any of the findings and recommendations noted in the EDP Audit Report was considered significant and whether the
issues were satisfactorily resolved.
Corporate Social (i) How is the company discharging its Corporate Social Responsibility?
Responsibility (ii) Whether any Board approved policy is in place and is being properly followed.
(iii) Whether there is a system of fixation of targets for CSR activities.
(iv) Whether adequate monitoring mechanism exists for implementation of CSR activities.
General (i) Whether contribution of employer and employee to Provident Fund is kept separately out of business and proper safeguard of
the same is taken care of.
(ii) Where land acquisition is involved in setting up new projects an enquiry as to whether settlement of dues and rehabilitation of
those affected are being done expeditiously and in a transparent manner to ensure that the benefits go to the really affected
people and is not diverted to agents and intermediaries including political parties.
(iii) Whether the Company has done any mergers and acquisitions during the year? Whether a thorough need analysis was done
before merger or acquisition? Whether shareholders acceptance was taken before decision on merger/acquisition was arrived
at? What was the impact thereof on the profitability of the company?
(iv) If test checking was applied by statutory auditors, the manner in which areas of checking have been identified may be specified.
Extent of sample selected and methodology of sampling adopted may also be specified.
n
Original Notification No. 41/2007 dated 06-10-2007 and further precedents were being introduced to grant
exemption to exporters of goods from service tax on taxable services received and used by them while
exporting the goods. To overcome the deficiencies and grant the refund to exporter of goods as early as
possible, the government has revised Notification No. 41/2007 in 2009-10 with a new Notification 17/2009
dated 07-07-2009. This article compares the earlier and new notification of refund and compiles the problems
faced by exporters followed by departmental clarifications on the same.
is not required to file A-2 and can 3. Only 17 specified services are This shows that this was being
directly apply for a refund. allowed as refund listed below – covered in new Notification to
3. The refund claim shall be filed Sr. Classification List of Services encourage the schemes of Ministry
No. in Section Commerce or Ministry of Textiles.
within one year from the date of
65(105)
export of the said goods and date 5. If the refund claim is greater than
1 (d) General Insurance
of export is the date of export order services of goods 0.25 per cent of total FOB value
as passed by custom officer under exported of exports then a certification from
section 51 of Customs Act, 1962. 2 (zn) Port services of goods the Company auditor or tax auditor
exported
Earlier, under Notification No. 3 (zzh) Technical Testing & (Chartered Accountant only)
41/2007 dated 06-10-2007 refund Analysis Service should be provided along with the
shall be filed on a quarterly basis, 4 (zzi) Technical Inspection & claim of refund stating the fact that
Certification Service
within sixty days from the end of the 5 (zzl) Other Port and any
the refund is higher than 0.25 per
relevant quarter during which the Authorised Person cent of total FOB value of exports.
Services No such certification requirement
said goods have been exported.
6* (zzp) Transport of Goods by
Further, the word “sixty days” has Road only up to Port was prescribed in the original
been substituted with the words 7 (zzzd) Cleaning Services of Notification 41/2007.
“six months” by Notification No. Exported goods 6. Sale proceeds of exported goods
8 (zzzp) Transport of Goods by
32/2008 dated 18-11-2008. Rail only up to Port should have been received by
4. Refund shall be filled to the 9 (zzzzj) Supply of Tangible Goods exporter within the time limit
Assistant or Deputy Commissioner Service prescribed under FEMA, 1999 and
10# (zzzzl) Service provided for
of Central Excise, as the case may transport of export goods
if not then refund will be considered
be, having jurisdiction over the through national water as erroneous.
factory of manufacture, registered way, inland water, and
coastal shipping.
office or the head office, as the 11 (f) Courier Services Problems Faced by
case may be, of such exporter in 12 (h) Customs House Agent Exporters and Board
Form A-1. Service Clarifications
13 (j) C & F Agent Service
However, in cases of merchant 1. Whether refund is admissible
14 (zm) Banking & other Financial
exporters, central excise officers Service retrospective?
have denied accepting the claim 15 (zza) Storage and Warehouse As clarified in Circular No.
Service
of refund and forwarded the files 112/06/2009-ST dated 12-03-2009,
16 (zzk) Money Exchange Service
to Service Tax Commissioners for 17 ANY Terminal Handling As clarified in Circular
verification and further processing Charges
* Refund of this service will be No. 112/06/2009-ST
just because they are allotted
available if exemption under dated 12-03-2009,
Service Tax Numbers. In fact,
Notification No. 18/2009 is not being prospective in nature,
as per Notification, only Central
availed. However, it is always refund could only be sanctioned
Excise Commissioners are
feasible to go for exemption to on taxable services provided
required to process the claims
save the cash flows today in on or after the date they are
and non-acceptance of the claim
terms of exemption instead of notified in the said notification,
by them results into unnecessary
relying on the future cash flows i.e., 06-10-2007. Refund is
delay, paper work and expensive
i.e. refund. prospective, even if the goods, in
procedure on the part of assessee.
# The said service was being later relation to which these services
5. No refund allowed below R500.
on added by Notification No. are used, are exported after
the date when such services
Conditions to be Satisfied to 40/2009 dated 13-09-2009.
are notified under notification
Claim the Refund 4. Exporter should have been
registered with any Export No. 41/2007-ST. However, no
1. No CENVAT Credit shall be taken
Promotion Councils sponsored by such circular is being issued
on the amount claimed as refund.
the Ministry of Commerce or the in relation to Notification No.
2. Service Tax should have been
Ministry of Textiles. 17/2009 because period prior to
disbursed first to Central Govern-
No such registration was required this notification i.e. before 07-
ment i.e. first pay and then get it
in the original Notification 41/2007. 07-2009 refund is eligible under
refunded.
Notification 41/2007.
Refund is always a
distant reality. Though
period of granting
refund was not mentioned in
original notification, Circular No.
120/01/2010-ST dated 19-01-2010
requires authorities to disburse
the refund claims within 30 days
of receipt of the claim.
The same circular also mentions
that any lapse in this regard
will be viewed seriously and
exporters are facilitated a
special officer.
required under the law to be kept
in the Head Office for audit. The
same can be avoided by either
certifying by the management
or by the chartered accountant
after duly verified the same by
him. Only in case of in-depth
enquiry original documents can be
verified. (Circular No. 112/06/2009-
ST dated 12-03-2009).
5. Drafting Errors in forms
being prospective in nature, Granting refund to exporters, on In Form A-1 Table No. 1 entry
refund could only be sanctioned taxable services that he receives number 4 word “Let order” is
on taxable services provided on and uses for export do not require wrongly written as “Late order”.
or after the date they are notified verification of registration certificate “Let order” means order passed
in the said notification, i.e., of service provider. Therefore, under Section 51 of Customs
06-10-2007. Refund is prospective, refund should be granted in Act, 1962 by custom officer after
even if the goods, in relation to such cases, if otherwise in order. custom physical verification.
which these services are used, (Circular No. 112/06/2009-ST However, no such clarification has
are exported after the date when dated 12-03-2009) been received till date.
such services are notified under 3. Incomplete Invoices Circular No.
notification No. 41/2007-ST. 120/01/2010-ST dated 19-01-2010 Conclusion
However, no such circular is being has clarified that if invoices and Refund is always a distant reality.
issued in relation to Notification other documents submitted by Though period of granting refund was
No. 17/2009 because period exporter of goods are incomplete not mentioned in original notification,
prior to this notification i.e. before to prove the nexus of the use Circular No. 120/01/2010-ST dated
07-07-2009 refund is eligible under of taxable services in export of 19-01-2010 requires authorities to
Notification 41/2007. goods then the exporter should disburse the refund claims within 30
2. The service provider providing provide a certificate by a chartered days of receipt of the claim. The same
services to the exporter provides accountant stating the nexus of the circular also mentions that any lapse
various services but having taxable services used in exporting in this regard will be viewed seriously
registration of only one service. goods. and exporters are facilitated a special
Can refund be denied on the 4. Submission of Original Invoices officer.
grounds that the taxable services It is always hardship for the With the introduction of revised
that are not covered under the exporter to provide original notification and circular at the beginning
registration of service provider are documents with the claim of of year 2010, refund procedures are
not eligible for such refunds? refund. Such documents are expected to be expedited. n
Limited Liability Partnership (LLP) and general partnership is being treated as equivalent (except for recovery
purposes) in the Income-tax Act, 1961. As opposed to a corporate entity, distribution made by an LLP to its
partners is tax exempt i.e. there is no dividend distribution tax on distribution to partners and further, an LLP
is not subject to Minimum Alternate Tax. The Finance Bill, 2010 has proposed the much awaited provisions
with respect to tax treatment on conversion of existing private companies and unlisted public companies into
LLPs. Introduction of a tax regime will provide a road of certainty in relation to the tax cost associated with
carrying the business via the LLP mode. However, further clarifications and suitable amendments to the Act
are desired to remove the cloud of uncertainty in relation to certain issues. Read on to know more.
Limited Liability Partnership (LLP) is the date of publication in the official
a buzz word today in India. However, it gazette itself and rest of the rules were
is not a new concept but an international made effective from 31-5-2009.
wine in an Indian bottle. LLP Law is Limited Liability Partnership Rules,
prevalent in many countries like UK, 2010 were published in the official
Japan, Canada, USA, Germany, etc. gazette on 11-1-2010 and were made
effective from 15-1-2010.
Limited Liability Partnership
Act Taxation of LLP
Limited Liability Partnership Act, 2008 LLP is a hybrid form of business having
was published in the official gazette the colours of both, General Partnership
on 9th January, 2009, but it was made and Company. It provides the benefits
effective in parts. Initially some of the of limited liability but allows its members
provisions were made effective on 31st the flexibility of organising their internal
March, 2009. Afterwards most of the structure as partnership based on a
provisions which were left were made mutually arrived agreement. As soon
effective from 31st May, 2009. However, as the Limited Liability Partnership Act
there are still some provisions left got the legal consent, the need for a
which are to be notified so as to make clear cut tax regime in respect of the
them effective. income of the LLP was essential to give
certainty in all respects of conducting
Limited Liability Partnership business via this mode of business.
Rules Finance Act, 2009 substituted
Limited Liability Partnership Rules, the definition of firm, partner and
CA. Aadesh Kumar Agrawal
(The author is a member of the Institute. 2009 were published in the official partnership given under Section 2(23)
He can be reached at eboard@icai.org) gazette on 1-4-2009. Rules 1 to 31, of the Income Tax Act as under:-
34 to 37 and 41 came into force from ‘(i) “firm” shall have the meaning
assigned to it in the Indian payment. Maximum rate of interest be converted into LLP following the
Partnership Act, 1932 (9 of 1932), allowable is 12 per cent per annum. provisions given under Section 58
and shall include a limited liability Section 40(b) was amended by the and Fourth Schedule to the Act.
partnership as defined in the Finance Act, 2009 so as to provide However, there are no provisions
Limited Liability Partnership Act, uniform limit of remuneration for both available in Limited Liability Partnership
2008 (6 of 2009); professional and non professional firms Act to reconvert back into a partnership
(ii) “partner” shall have the meaning for simplicity and administrative ease. or a company from LLP. In such a case,
assigned to it in the Indian The revised limits of remuneration are the decision has to be well evaluated
Partnership Act, 1932 (9 of 1932), as under: realising that there is no “u turn”
and shall include,— On the first R3 lakh of R1,50,000 or 90 per available down the road.
(a) any person who, being a book profit or in case cent of Book Profit
of a loss whichever is more
minor, has been admitted to the On the balance of Book 60 per cent
Conversion of Partnership
benefits of partnership; and Profit into LLP: Tax Implications
(b) a partner of a limited liability As per definition given under Income-
partnership as defined in the Taxation of Partners tax Act, 1961 Firm includes LLP.
Limited Liability Partnership Act, Profit of LLP credited to the accounts Therefore, conversion of Firm into
2008 (6 of 2009); of the partners shall be exempt to tax LLP will be conversion to itself i.e. no
(iii) “partnership” shall have the under Section 10(2A) in the hands change (nothing happened) in the eyes
meaning assigned to it in the of partners to avoid double taxation. of Income Tax Law, subject to right and
Indian Partnership Act, 1932 (9 of However, remuneration and interest obligations of the partners remain the
1932), and shall include a limited paid by the LLP to its partners shall be same after conversion and if there is
liability partnership as defined in taxable in the hands of partners up to no transfer of any asset or liability after
the Limited Liability Partnership Act, which deduction has been claimed by conversion. Explanatory Memorandum
2008 (6 of 2009); the LLP under Section 40(b) under the of the Union Budget 2009-10 clarifies
By the above amendments it head “Profits and gains of business as follows:-
was clarified that LLP shall be taxed or profession”. However, any amount “As an LLP and a general partnership
at par with general partnership i.e. exceeding the limit specified under is being treated as equivalent (except
taxation in the hands of the entity and Section 40(b) paid by LLP to its partner for recovery purposes) in the Act, the
exemption from tax in the hands of its shall be taxable in the hands of LLP conversion from a general partnership
partners. Accordingly, all the provisions and therefore, not chargeable to tax in firm to an LLP will have no tax
of the Income-tax Act, 1961 which the hands of partners. implications if the rights and obligations
are applicable on firm, partner and of the partners remain the same after
partnership shall also be applicable on Forms of Business By certain
LLP, partner of LLP and Limited Liability Convertible into LLP amendments it
Partnership unless otherwise provided Following forms of business can be was clarified that
in the Act. Therefore, LLP shall pay converted into LLP: LLP shall be taxed at par with
tax @ 30.09 per cent (30% + 3% • Partnership firm, in pursuant to general partnership i.e. taxation
education cess) on its profit earned Section 55 of Limited Liability in the hands of the entity and
during any previous year. Since the LLPs Partnership Act, 2008, can be exemption from tax in the hands
have been treated at par with the general converted into LLP following the of its partners. Accordingly, all
partnership, the provisions of Minimum provisions given under Section 58 the provisions of the Income
Alternate Tax and Dividend Distribution and Second Schedule to the Act. Tax Act which are applicable on
Tax will not be applicable for LLP. • Private company, in pursuant to firm, partner and partnership
Section 56 of Limited Liability shall also be applicable on LLP,
Remuneration and Interest Partnership Act, 2008, can be partner of LLP and Limited
to Partners converted into LLP following the Liability Partnership unless
LLP shall be eligible to claim provisions given under Section 58 otherwise provided in the Act.
remuneration and interest paid to its and Third Schedule to the Act. Therefore, LLP shall pay tax
partners up to the permissible limit • Unlisted public company, in @ 30.09 percent (30% + 3%
given under section 40(b) subject to pursuant to Section 57 of Limited education cess) on its profit ear-
LLP Agreement authorises such Liability Partnership Act, 2008, can ned during any previous year.
conversion and if there is no transfer of in the same proportion as their companies to be converted into LLP.
any asset or liability after conversion. If shareholding in the company on Since there is a liability to pay dividend
there is a violation of these conditions, the date of conversion; distribution tax @ 16.995 per cent for
the provisions of Section 45 shall 3. The shareholders of the company the company on declaration/payment/
apply.” do not receive any consideration distribution of dividend out of its
Therefore, there will be no capital or benefit, directly or indirectly, in current or accumulated profit, therefore,
gain on conversion of firm into LLP any form or manner, other than by sixth condition restricts the partners
either in the hands of firm or in the way of share in profit and capital of LLP to distribute its accumulated
hands of partners. All the provisions of contribution in the LLP; profit standing on the date of conversion
the Income-tax Act, 1961 shall continue 4. The aggregate of the profit sharing in the accounts of the company to
to apply on LLP as they would have ratio of the shareholders of the avoid the conversion only for saving
applied on firm as if no conversion had company in the LLP shall not be dividend distribution tax.
taken place. less than 50 per cent, at any time However, issuing bonus shares to
during the period of five years from equity shareholders is not dividend as
Conversion of Private or the date of conversion; per definition given under Section 2(22)
Unlisted Public Company 5. The total sales, turnover or gross and thus out of the ambit of dividend
into LLP: Tax Implications receipts in business of the company distribution tax. Therefore, if before
Income Tax Law was silent about the in any of the three previous years conversion, company issues bonus
tax implications, on conversion of preceding the previous year in shares to its equity shareholders out of
Private Company or Unlisted Public which the conversion takes place its accumulated profit by capitalising
Company (hereinafter referred to as does not exceed R60 lakh; and its whole profit and on the next
company) into LLP. The Finance Bill, 6. No amount is paid, either directly day it converts itself into LLP, then,
2010 has proposed to make provisions or indirectly, to any partner out of shareholders (prospective partners)
for the same. Proposed provisions are balance of accumulated profit shall get their part of accumulated
as under:- standing in the accounts of the profit to the credit of their capital
A. Transfer of Asset shall not be company on the date of conversion account as contribution in LLP without
regarded as transfer for a period of three years from the any tax implication which is not the
Section 47 of the Income-tax Act date of conversion. intention of Law. Hence sixth condition
has been proposed to be amended Above mentioned six conditions introduced by Finance Bill, 2010 needs
so as to include new clause (xiiib). are cumulative and each one of them reconsideration.
As per proposed Section 47 (xiiib), has to be satisfied to claim exemption. B. Withdrawal of Exemption
any transfer of a capital asset or The first four conditions are on the New sub section 4 to Section 47A
intangible asset by a company to a same line as provided for conversion has been proposed to be inserted by
LLP as a result of conversion of the of firm/AOP/BOI into company in the Finance Bill, 2010 so as to provide
company into LLP in accordance Section 47(xiii). Fifth condition seems that:
with the provisions of Section to be added to discourage the big • Capital gain not previously charged
56 or Section 57 of the Limited If before conversion, under Section 45 due to fulfillment
Liability Partnership Act shall not company issues of six conditions laid down in the
be regarded as transfer if and bonus shares to proviso to Section 47(xiiib) shall be
only if following six conditions are its equity shareholders out deemed to be the profits and gains
satisfied [given in the proviso to of its accumulated profit by of the successor LLP if any of the
proposed Section 47(xiiib)]:- capitalising its whole profit and conditions laid down in the proviso
1. All the assets and liabilities of the on the next day it converts itself to Section 47(xiiib) are violated.
company immediately before the into LLP, then, shareholders • Such income shall be chargeable
conversion become the assets (prospective partners) shall get to tax in the previous year in which
and liabilities of the LLP; their part of accumulated profit the requirements of the said
2. All the shareholders of the company to the credit of their capital proviso are violated.
immediately before the conversion account as contribution in LLP • It is not clear from the language of
become the partners of the LLP without any tax implication proposed Section 47A(4) as to the
and their capital contribution and which is not the intention of head under which such income
profit sharing ratio in the LLP are Law. would be taxed. However, having
regard to the placement of Section E. Cost of Block transferred on A new sub section
47A(4) in the provisions relating to conversion (4A) to Section 35DDA
taxation of capital gains, it appears New Explanation 2C to Section has been proposed to
that it would be treated as capital 43(6) has been proposed to be be inserted by Finance Bill, 2010
gains. inserted by the Finance Bill, 2010 so as providing that, if a company is
C. Amortisation of expenditure to provide that, where in any previous converted into LLP satisfying the
incurred under Voluntary Retirement year, any block of assets has been six conditions laid down in the
Scheme (VRS) transferred by a company to LLP on its proviso to Section 47(xiiib), then,
Section 35DDA(1) provides conversion, satisfying the six conditions provisions of Section 35DDA
deduction of the total amount, laid down in the proviso to Section shall apply to the successor LLP
paid by an assessee under VRS to 47(xiiib), then, the actual cost of the as they would have applied
an employee, in five equal annual block of assets in the case of LLP shall to the said company as if
installments commencing from the be the written down value of the block reorganisation of business had
previous year in which such amount is of assets on the date of conversion in not taken place.
paid by the assessee. the case of the said company. to set off and carry forward of loss
A new sub section (4A) to Section F. Cost of Acquisition and allowance for depreciation shall
35DDA has been proposed to be Section 49(1)(iii)(e) has been apply accordingly. Meaning thereby
inserted by the Finance Bill, 2010 proposed to be amended by the LLP can carry forward such business
providing that, if a company is con- Finance Bill, 2010 so as to provide that, loss for the fresh period of eight years
verted into LLP satisfying the six where a LLP acquires capital asset under Section 72 of the Income-tax Act
conditions laid down in the proviso satisfying the six conditions laid down and unabsorbed depreciation can be
to Section 47(xiiib), then, provisions in the proviso to Section 47(xiiib), then, carried forward for the indefinite period
of Section 35DDA shall apply to the the cost of acquisition of such asset for under Section 32(2) by the successor
successor LLP as they would have LLP shall be deemed to be the cost for LLP.
applied to the said company as if which the previous owner (company) of However, if any of the six conditions
reorganisation of business had not the property acquired it, as increased laid down in the proviso to section
taken place. Thus the deduction shall by the cost of any improvement of 47(xiiib) is violated subsequently,
be available for the remaining period to the assets incurred or borne by the the set off of loss or allowance of
the LLP. previous owner or the successor LLP, depreciation made in any previous
Sub section (5) to Section 35DDA as the case may be. year in the hands of the successor LLP,
has also been proposed to be shall be deemed to be the income of
amended by Finance Bill, 2010 so as G. Carry Forward of Business Loss the LLP chargeable to tax in the year in
to provide that, no deduction under and Unabsorbed Depreciation which such violation has taken place.
Section 35DDA shall be allowed to the A new sub section 6A to Section H. MAT Credit shall Lapse
said company for the previous year 72A has been proposed to be inserted, A new sub section 7 to Section
in which such conversion has taken in consequent to which clause (a) and 115JAA has been proposed to be
place. (b) of Section 72A(7) has also been inserted by the Finance Bill, 2010 so as
D. Actual cost of any capital asset of proposed to be amended by the to provide that, if there is a conversion
specified business referred under Finance Bill, 2010 so as to provide that, of a company into LLP irrespective of
Section 35AD if there is a conversion of company into the fact it satisfies the six conditions
Explanation 13 to Section 43(1) LLP satisfying the six conditions laid laid down in the proviso to Section
has been proposed to be amended down in the proviso to Section 47(xiiib), 47(xiiib), MAT credit available to the
by Finance Bill, 2010 so as to provide then, accumulated business loss (not predecessor company shall lapse and
that, the actual cost of any capital asset being a loss sustained in a speculation the LLP cannot enjoy the benefit of the
on which deduction has been allowed business) and unabsorbed depreciation same.
or is allowable to the assessee under of the predecessor company, shall be I. Taxation of Shareholders
Section 35AD, shall be treated as NIL, if deemed to be the loss or allowance On conversion of company into LLP
the capital asset is acquired or received of depreciation of the successor LLP the shares held by the shareholders
on conversion of company into LLP for the purpose of the previous year of the company will get extinguished
satisfying the six conditions laid down in which such conversion has taken and will be substituted by balance
in the proviso to Section 47(xiiib). place and other provisions relating in their respective capital accounts.
As per definition given under Section was a LLP. under Income-tax Act, 1961 are only
2(47) of Income Tax Act, transfer in In such case, every person who with respect to companies. There are
relation to a capital asset, includes, was a partner of the LLP at any time detailed provisions under Income-tax
the extinguishment of any rights during the relevant previous year, Act, 1961 about the tax implications,
thereon and thus chargeable to tax shall be jointly and severally liable for if amalgamation or demerger of
under Section 45. But unlike cases the payment of such tax unless he companies takes place. Transfer of
of amalgamation and demerger, the proves that the non-recovery cannot capital asset by the amalgamating
proposed amendments do not clarify be attributed to any gross neglect, company or demerged company
the position of tax neutrality in the misfeasance or breach of duty on his to the amalgamated company or
hands of the shareholders and still is part in relation to the affairs of the LLP. resulting company as the case may
an open question. Section 167C supersedes the be, is not considered as transfer hence
Limited Liability Partnership Act, 2008. does not attract capital gain subject to
Who to Sign the Return Although this Section appears to be in fulfillment of certain conditions given
Section 140 has been amended by the conflict with the scheme of the Limited under Section 47. On the other hand,
Finance Act, 2009 so as to provide that, Liability Partnership Act, 2008, which transfer of shares in the amalgamating
in the case of a LLP, return of income can does not make the partners personally company or demerged company as
be signed by the designated partner liable for the liabilities of the LLP, it seems the case may be, by the shareholders,
thereof, or where for any unavoidable to be in line with existing provisions of does not tantamount to transfer subject
reason such designated partner is not Section 179 of the Income-tax Act, which to fulfillment of certain conditions given
able to sign and verify the return, or cast a similar liability on the Directors of under Section 47.
where there is no designated partner a private company in liquidation. However, there are no such
as such, by any partner thereof. provisions for LLPs. It is recommended
Liability of Partners in Presumptive Taxation to amend the definitions of amalga-
Liquidation Scheme under Section 44AD mation and demerger given under
A new Section 167C has been The existing provisions of the Income Tax Act so as to cover the
inserted by the Finance Act, 2009 so Income-tax Act, 1961 provide an option amalgamation and demerger of LLP
as to provide the provisions regarding to the assessee for taxation of income too or to provide separate provisions
liability of partners to pay tax in the on presumptive basis in the case of for the same.
case of liquidation of LLP. It provides construction business, income from
that where any tax due and cannot be goods carriages and business of retail Conclusion
recovered from- trade under Section 44AD, 44AE and Taxation scheme for LLP has been
1. LLP in respect of any income of 44AF respectively. However, a LLP can prescribed on the same lines as
any previous year, or enjoy presumptive taxation scheme currently applicable for Partnership
2. Any other person in respect of only up to assessment year 2011- Firms (except for recovery purposes),
any income of any previous year 12, except that provided in Section and all the provisions of the Income-
during which such other person 44AE. As Section 44AD has been tax Act applicable to Firm apply to LLP
The existing made inapplicable on LLP and Section also unless otherwise provided in the
provisions of the 44AF has been made inoperative Act. There are specific provisions in
Income-tax Act, 1961 from assessment year 2011-12 by the Income Tax Act for the tax implications
provide an option to the Finance Act, 2009. on conversion of private company
assessee for taxation of income or unlisted public company into LLP.
on presumptive basis in the Amalgamation of LLP Despite some clarity being provided by
case of construction business, There are certain provisions under the Income-tax Act, 1961 and Finance
income from goods carriages and Limited Liability Partnership Act, 2008 Bill, 2010 there are still certain issues
business of retail trade under in pursuant to which LLP can opt for like tax implications on amalgamation
Section 44AD, 44AE and 44AF amalgamation or demerger, etc. The or demerger of LLP, taxation of
respectively. However, a LLP words amalgamation and demerger shareholders upon acquiring an
can enjoy presumptive taxation have been defined in Income-tax Act, interest in the LLP as a result of
scheme only up to assessment 1961 itself under Clause (1B) and (19AA) conversion of company into LLP, etc.
year 2011-12, except that to Section 2 respectively. Definitions of which require clarifications to remove
provided in Section 44AE. amalgamation and demerger given the uncertainties. n
The Direct Tax Code (DTC) 2010 has proposed a host of new and revised provisions concerning cross-border
taxation of income. One of the major provisions proposed by DTC 2010 relates to introduction of Controlled
Foreign Company (CFC) regulations. CFC regulations are a broad set of regulations which are primarily
aimed to prevent avoidance/deferral of tax by resident taxpayers by establishing intermediate foreign
subsidiaries in low tax jurisdictions and parking income in those entities. This article attempts to decode the
CFC regulations. With the opening of world-trade, their overseas operations by setting up
more and more companies have tried an intermediary holding company in a
to spread their operations in a number tax-favourable jurisdiction. The profits
of countries by either establishing earned by the subsidiaries would
a formal/informal place of business be distributed to such intermediary
in other countries or by setting up holding companies as dividend and
of local subsidiaries to manage the would be parked there.
business in those country/surrounding While this would certainly help
regions. The income earned by in reducing the overall tax cost (or at
subsidiaries suffers from dual taxation least deferment of tax till the income is
on distribution of the same as dividend distributed by such foreign company),
by such subsidiaries (first in the hands non-repatriation of funds to the
of the subsidiaries in the respective parent company jurisdiction results
source country and second in the in a loss of revenue for the country
(Contributed by the Committee of Interna- hands of the holding company on where the parent is located. With a
tional Taxation of the ICAI. Comments can receipt of dividend). To avoid this dual view to prevent such accumulation
be sent to citax@icai.org) taxation, companies started structuring and non-distribution of income by
intermediate holding company, many by the shareholders or deemed to be set-up by resident companies in
countries started introducing the CFC distributed to them by way of dividend. low-tax jurisdictions are targeted.
regulations in their tax laws. The main Often only part of the controlled Accordingly, where a resident company
aim of CFC regulations is to prevent company’s income is dealt with in this sets up a subsidiary mainly to act as
the accumulation of income/funds in way, typically passive income such an intermediate holding company or
tax-favourable jurisdiction by including as dividends, interest and royalties non-operating holding company in
the undistributed income of such (“tainted income”). Many, but not all a low-tax jurisdiction, such foreign
foreign companies in the total income controlled foreign company regimes company is deemed to be a controlled
of parent company. apply only to corporate shareholders.” foreign company for the purpose of
CFC regulations were initially Operation of a typical CFC CFC regulations. In such a scenario,
introduced in the United States of regulation is explained by the following CFC regulations are deemed to be
America as early as 1962. With the illustration: applicable on such foreign companies
passing of time, CFC regulations grew XYZ Limited - Parent company in low-tax jurisdiction and all the
in prominence with a number of coun- India income earned by such foreign
tries incorporating similar provisions in Mauritius 100%
companies is taxed in the hands of the
their tax laws. Currently, many develo- XYZ Co. - Intermediate Holding company resident company.
ped countries like Canada, Germany,
USA 100%
2) Transactional approach
Japan, France, UK, New Zealand, Under the transactional approach,
Australia and emerging economies XYZ Inc - Operating company
the focus is generally restricted to the
like Mexico, Argentina, Indonesia and The above is a typical illustration passive income earned by foreign
China have CFC regulations in their tax of an organisation structure wherein subsidiaries of resident companies.
laws. the CFC regulations may become Passive income would tend to include
Incorporation of CFC regulations applicable. In the above case, incomes like royalty, interest, rent,
in the tax laws to counter use of tax- XYZ Co. is an intermediate holding capital gains, etc.
friendly jurisdictions for avoidance/ company established in favourable 3) Entity-level approach
deferment of tax is encouraged even tax jurisdiction as a holding company This is a hybrid approach combining
by the Organisation for Economic Co- for various operating companies in the principles of jurisdictional app-
operation and Development (OECD) in other jurisdictions. The profits earned roach and transactional approach.
its report on Harmful Tax Competition. by XYZ Inc would be distributed as Under this approach, CFC regulations
dividend to XYZ Co and parked there are triggered both when the foreign
CFC Regulations – Concept to escape higher tax rate in the parent The Indian tax
As explained earlier, CFC regulations company XYZ Limited’s country, India. authorities have
are a broad set of regulations designed Under the CFC regulations, XYZ Co. woken up to the
to prevent the deferral and avoidance would be deemed to be a controlled needs of having CFC regulations
of tax by residents, (including foreign company/corporation and as an effective anti-avoidance
domestic companies) by establishing the undistributed income of the same regulation. DTC 2010 proposes
foreign entities/subsidiaries, in low would be taxed in the hands of XYZ to introduce the CFC regulations
tax jurisdictions and parking income Limited, even though actual dividend to prevent avoidance/ deferral
in those countries. The International is not declared by XYZ Co., Mauritius. of tax by parking income in
Bureau of Fiscal Documentation tax friendly jurisdictions. The
(IBFD) has explained CFC legislations CFC Regulations – CFC regulations under DTC
as under: Approaches 2010 propagate an ‘entity-
“The term is generally used in the CFC regulations typically have the level approach’. Under this
context of tax avoidance rules designed following approaches approach, the focus is on the
to combat the diversion by resident 1) Jurisdictional approach CFC as an entity rather than on
taxpayers of income to companies 2) Transactional approach its income, although the nature
they control and which are typically 3) Entity-level approach of its income (whether active or
resident in countries imposing low-or- passive income) is an important
no taxation. Under these rules income 1) Jurisdictional approach factor in the determination of
of the controlled company is typically Under the jurisdictional approach of whether or not the CFC rules
either deemed to be realised directly CFC regulations, foreign companies apply.
subsidiary is set up in a low-tax provisions of DTC 2010 if it were a The proposed CFC
jurisdiction and when the foreign domestic company. Accordingly, regulations, when
subsidiary has passive income if a controlled foreign company made effective could
stream. is paying tax at an effective rate have a significant impact on
The CFC regulations proposed which is more than 50 per cent of the many corporate houses of
under DTC 2010 follow the entity level the tax rate applicable under the India having global presence
approach. DTC 2010, then the income of such with likelihood that the profits
company would be exempted from of their foreign subsidiaries
CFC Regulations – Indian the CFC regulations; be taxable in India. Given the
Perspective c) Shares of such foreign company same, it would be advisable
The Indian tax authorities have are not listed on any stock for such companies to review
woken up to the needs of having exchange in the foreign country of their current business structure
CFC regulations as an effective anti- which it is a resident; and if required, restructure the
avoidance regulation. DTC 2010 d) The specified income of such same to adequately address
proposes to introduce the CFC foreign company does not exceed the challenges which would be
regulations to prevent avoidance/ R25 lakh or equivalent of such posed by the CFC regulations.
deferral of tax by parking income in tax income; and
friendly jurisdictions. e) It is not engaged in active trade or company derives a majority
The CFC regulations under DTC business (meaning it only earns of income from onward
2010 propagate an ‘entity-level passive income). selling of goods/services
approach’. Under this approach, A company would be deemed to to its group concerns only,
the focus is on the CFC as an entity carry on active trade or business if then in spite of being
rather than on its income, although the it fulfills the following conditions: involved in active trade
nature of its income (whether active or i) It actively participates in or business, such foreign
passive income) is an important factor industrial, commercial or company may still be
in the determination of whether or not financial undertakings through considered as a CFC for
the CFC rules apply. Once a foreign employees or other personal the purpose of applicability
company qualifies as a CFC (and none in the country of residence of of these regulations. To
of the exemptions apply), all of the such foreign country; and illustrate, in the earlier figure
income of the CFC is taxed in the hands ii) The following income of CFC, if XYZ Co. (Mauritius)
of the resident-controlling shareholder constitutes less than 50 per purchases its goods for
on a proportionate basis. The future cent of the total income of such XYZ Limited and more than
dividend distribution of the attributed foreign company: 50 per cent of its income is
income by the CFC is deductible. a) Dividend; derived from sales made
CFC regulations under the DTC b) Interest; to XYZ Inc and/or other
2010 are applicable on all Controlled c) Income from house associated enterprises,
Foreign Companies. Controlled property; then the XYZ Co. would be
Foreign companies have been defined d) Capital gains; deemed to be a controlled
to include all the foreign companies e) Annuity payment; foreign company and its
which fulfill the following conditions: f) Royalty; income would be liable to
a) A minimum of 50 per cent control g) Sale or licensing of intan- tax in India.
either by way of equity or voting gible rights on industrial, i) Income from management,
power is exercised by a resident literary or artistic property; holding or investment in
taxpayer or a significant influence h) Income from sale of goods securities, shareholdings,
over the foreign company is or supply of services receivables or other finan-
exercised by such resident including financial services cial assets;
taxpayer; to persons controlled by j) Income falling under the
b) Is a resident in tax jurisdiction such foreign company or head residuary sources.
having an effective rate of tax less an associated enterprise of If the above conditions are fulfilled
than 50 per cent of the rate of such foreign company. by a foreign company controlled by a
tax it would have paid under the Accordingly, if the foreign resident person, then CFC regulations
would be applicable to such a foreign Where E is the number of days Under the
company. The above can be explained during which the foreign company jurisdictional
by way of the illustration: remained a CFC; and approach of CFC
Particulars Conditions fulfilled
regulations, foreign companies
Minimum 50 per cent of equity/ voting power in foreign set-up by resident companies
company is held by resident taxpayer or significant influence in low-tax jurisdictions are
is exercised by such resident taxpayer
targeted. Accordingly, where
Effective tax rate of foreign company is less than the 50 per
cent of tax rate under DTC 2010
a resident company sets up a
Shares of foreign company is not listed on stock exchange in subsidiary mainly to act as an
foreign company’s country
intermediate holding company or
Specified income of foreign company does not exceed
equivalent of R25 lakh
non-operating holding company
It is not engaged in active trade or business
in a low-tax jurisdiction, such
Foreign company is CFC for the purpose of CFC regulations
foreign company is deemed to be
a controlled foreign company for
In such case, the income of the Where F is the total number of days the purpose of CFC regulations. In
foreign company, which would form part in the accounting period of the foreign such a scenario, CFC regulations
of the resident taxpayer controlling the company. are deemed to be applicable
foreign company, would be computed The above formulae can be on such foreign companies in
as per the below formula: explained with the help of the following low-tax jurisdiction and all the
Income attributed to B C illustrations: income earned by such foreign
= A X X companies is taxed in the hands
resident taxpayer 100 D
Where A is the specified income of Illustration 1: of the resident company.
foreign company to be determined as XYZ Co is a foreign company. During Illustration 2:
the formula provided; the FY 2009-10, its net profit was If in illustration 1 above, XYZ Limited
Where B is the percentage of equivalent of R2 crore. It had made a had acquired its stake only on
capital/ voting share or interest held in provision for unascertained liabilities 1st January 2010, then the income
the foreign company; to the tune of R5 lakh. It paid an would be worked out as under:
Where C is the number of days out interim dividend of R20 lakh during Specified Income = (2,00,00,000 +
of D, voting shares/ interest held by FY 2009-10. During the whole of 5,00,000 – 20,00,000) X (90 / 365)
resident taxpayer in foreign company; FY 2009-10, XYZ Limited held = (1,85,00,000) X
and 60 per cent of the total paid up capital 0.2466
Where D is the number of days, of XYZ Co. In such a case, the income = 45,62,100
the foreign company remained as to be attributed to XYZ Limited for
controlled foreign company. FY 2009-10 would be determined as Income to be attributed to XYZ Limited
The formula to compute the value under: = (45,62,100) x (60/100) x (90/90)
of A is provided as under: Specified Income = (2,00,00,000 + = 45,62,100 X 0.6
E 5,00,000 – 20,00,000) X (365 / 365) = 27,37,260
Specified Income = (A + B - C - D) X
F = (1,85,00,000) X 1
Where A is the net profit of the = 1,85,00,000 Way forward
foreign company as per its profit and The proposed CFC regulations, when
loss account; Income to be attributed to XYZ Limited made effective could have a significant
Where B is provisions made for = (1,85,00,000) x (60/100) x (365/365) impact on the many corporate houses
liabilities (other than ascertained = 1,85,00,000 X 0.6 of India having global presence with
liabilities); = 1,11,00,000 likelihood that the profits of their foreign
Where C is amount of interim In the above case, if the income subsidiaries be taxable in India. Given
dividend paid, if such dividend was not earned by the foreign company, the same, it would be advisable for
already debited to the profit and loss XYZ Co is accumulated by it and such companies to review their current
account; remains undistributed, then as per the business structure and if required,
Where D is the loss which was provisions of DTC 2010, R1,11,00,000 restructure the same to adequately
not earlier deducted while computing would be added to the total income of address the challenges which would
income of such foreign company; XYZ Limited. be posed by the CFC regulations. n
Transfer pricing has become most important international tax issue for multinational enterprises operating in
India. The recent ruling of Supreme Court in the case of CIT v. GlaxoSmithKline Asia Private Limited (2010-
TII-02-SC-LB-TP) has cleared the controversy surrounding an important issue of applicability of transfer
pricing provisions to domestic related party transactions. The ruling of Supreme Court has provided relief to
the taxpayers, as Supreme Court held that transfer-pricing provisions in its current form are not applicable
to domestic related party transaction. However, Supreme Court made certain suggestions to Ministry of
Finance for amending the Income-tax Act, 1961 and thereby increasing the scope of TP provisions even
to domestic related transactions under certain circumstances. If the suggestions of Supreme Court are
implemented it can cause significant increase in compliance requirement of taxpayers.
a) There should be two or more applicability of TP provisions, where to the fair market value of the
associated enterprise (as defined both the parties to the transactions are goods, services or facilities for
under Section 92A of the Act); and subject to tax in India. The High Court which the payment is made or the
b) These associated enterprises enter held that the only condition precedent legitimate needs of the business or
into international transaction (as for invoking Transfer Pricing provisions profession of the assessee or the
defined under Section 92B of the is that there should be income arising benefit derived by or accruing to
Act) from international transaction; and him therefrom.
If the above conditions are satisfied such income has to be computed Then so much of the expenditure
then TP provisions are applicable and having regard to arm’s length price. as is so considered by him to be
such transactions should be at arm’s The High Court was thus of the view excessive or unreasonable shall not be
length price. Thus in this connection it that there was no ambiguity or absurd allowed as a deduction.
is pertinent to understand the definition consequence of application of Transfer
of international transactions as given Pricing in a scenario where both the Ruling of Supreme Court
under Section 92B of the Act. parties to the transaction are subject to • Facts of Case
jurisdiction of taxing authorities in India. M/s GlaxoSmithKline Asia Private
Definition of International Further, in India the definition of Limited (GSK Asia) is a company
Transaction international transaction has been engaged in the business of
Section 92B (1) of the Act defines kept very wide and there is concept manufacture and sale of fast-
“international transaction” as of deemed international transaction moving consumer products. GSK
“a transaction between two or more which is given under Section 92B (2) Asia did not have any employee
associated enterprises, either or both of of the Act. As per Section 92B (2) of other than a Company Secretary.
whom are non-residents, in the nature the Act: The administrative services relating
of purchase, sale or lease of tangible “A transaction entered into by an to marketing, finance, human
or intangible property, or provision enterprise with a person other than resource, secretarial services etc
of services, or lending or borrowing an associated enterprise shall, for were provided by Glaxo Smith
money, or any other transaction having the purposes of sub-section (1), be Kline Consumer Healthcare
a bearing on the profits, income, deemed to be a transaction entered into Limited (‘GSKCH’), a widely held
losses or assets of such enterprises, between two associated enterprises, public limited Indian company. The
and shall include a mutual agreement if there exists a prior agreement in agreement between the GSKCH
or arrangement between two or more relation to the relevant transaction and the GSK Asia was that the GSK
associated enterprises for the allocation between such other person and the Asia would reimburse the costs
or apportionment of, or any contribution associated enterprise, or the terms of
Normally SC
to, any cost or expense incurred or the relevant transaction are determined
does not make
to be incurred in connection with a in substance between such other
recommendations
benefit, service or facility provided or to person and the associated enterprise.”
or suggestions. However, SC
be provided to any one or more of such Thus, even a transaction with an
in order to reduce litigation
enterprises” enterprise, which is not an associated
suggested that certain
Thus, what is essential is that enterprise are intended to be covered
provisions of the Act, like
international transaction should be within scope of TP provisions.
Section 40A (2) and Section
between associated enterprises 80IA (10), need to be amended
and either or both such associated Section 40A (2) of the Act empowering the AO to make
enterprises must be a non-resident. Section 40A (2) of the Act states that: adjustments to the income
Hence, the Act intends to bring all • Where the assessee incurs any declared by the assessee having
cross-border inter-company transac- expenditure in respect of which regard to the fair market value
tion within the scope of TP provisions. payment has been or is to be made of the transactions between the
In this connection, it is pertinent to a related person as defined in related parties using any of the
to highlight the ruling of Punjab and clause (b) of this sub-section (2) of generally accepted methods of
Haryana High Court in case of Coca Section 40A of the Act, and determination of arm’s length
Cola India Inc v. ACIT. In this judgment • the Assessing Officer is of opinion price, including the methods
one of the question raised by Coca Cola that such expenditure is excessive provided under Transfer Pricing
India Inc before the High Court was on or unreasonable having regard Regulation.
incurred by GSKCH for providing or unreasonable unless the case the Revenue to refund the amount
the various services plus 5 per falls within the scope of Section and also held that the GSK Asia is
cent mark-up (referred to as ‘’cross 40A(2) of the Act. Since there were entitled to interest on such amount
charges’’). no material on record to show that of refund as well as interest on
Assessing Officer (“AO”) held that such provisions could be attracted delayed refund as per the provi-
the payment of cross charge to ITAT provided relief to GSK Asia sions of the Act. Against the said
GSKCH was not fully and exclu- and deleted the disallowance order of the High Court, Revenue
sively for the purpose of business made by AO. Against the ITAT filed Special Leave Petition (SLP)
of the GSK Asia and, therefore, Revenue filed appeal to High Court before the Supreme Court.
could not be justified in terms of its which was also dismissed. • Ruling of SC
legitimate business requirements. For subsequent years, however, Based on the perusal of materials
The AO held that the payment of the AO continued to disallow the SC held that GSK Asia and GSKCH
cross charges to the extent of 7 per claim and recovered the demand are not related parties in terms
cent of net sales alone was justified through attachment. GSK Asia got of Section 40A (2) of the Act and
and balance was disallowed. The relief from the ITAT and Revenues’ that the entire exercise is revenue
disallowance was confirmed by appeal are pending with the High neutral. Hence, the SLP filed by the
the Commissioner of Income-tax Court. However, for the delay on Revenue was dismissed.
(Appeal). However, the Income Tax the part of the Revenue to give However, SC then raised a question
Appellate Tribunal (“ITAT”) held that effect to the ITAT’s order, GSK Asia whether TP provisions should be
there is no provision to disallow filed a writ petition with the High limited to only to cross border
any expenditure on the ground Court. The High Court issued a transactions or whether TP provi-
that such expenditure is excessive direction by way of a mandamus to sions should be extended to
Audit Committee (AC), as an element of corporate governance, is responsible for improving director’s
understanding and awareness of accounting related issues and other important matters concerning
the behaviour of the organisation and the integrity of any financial information that is reported to the
stakeholders. Accounting scandals and the growing concern about the quality of financial statements have
led to the broadening of the scope of the Audit Committee to encompass risk management as one of its
fiduciary duties. The manner in which the directors discharge their duties is increasing under scrutiny. As
per the provisions of all codes of good practice in corporate governance and stock exchange listing criteria,
listed companies are required to have Audit Committee to discuss and review the firm’s risk assessment
strategies. This article highlights how the remit of audit committees has expanded to include oversight of risk
management and control systems to create an environment for adherence to the practices of good corporate
governance.
meet at least three times a year to these statements are the indicators of the increasing role and importance of
discuss details of audit-related matters, the financial health of a company. The the audit committee.13 They not only
note recommendations from the audi- AC approves the accounting practices ensure good corporate governance
tor and consider any contentions that adapted by the company and monitor through internal monitoring but also a
had arisen during the audit process.8 their reliability and compliance with the mechanism to ensure that an oppor-
Recent claims made in various required regulations, thus preventing tune relationship exists between the
professional and governmental reports any accounting frauds.10 They are auditors and the company manage-
about AC’s benefits on a number of expected to ascertain whether the ment who are under the scanner for all
aspects of corporate governance annual accounts of the company pre- the financial reports being audited.14
have lead to the acceptance of the sent a ‘true and fair’ picture.11 The
AC as a relevant governance structure management of a company has an Assessing Risks and
resulting in many improved legislations incentive in presenting a rosy picture of Control Environment
regarding the same. Corporate gover- the annual reports to attract investors. AC has a role to play in the Internal
nance involves decision making, Thus it is important for the AC to be Audit function and on the internal
accountability and monitoring. Cor- prudent while assessing the accounts controls and in risk management.
respondingly, responsibilities of AC of the company. It has to ensure that the policies
can be broadly classified into three implemented by the management are
categories – 9 Evaluating the Audit effective in identifying company’s risks
Process and that the controls are adequate.15
Overseeing Financial A company’s audit process is executed As a part of its responsibility towards
Reporting by the internal audit department risk management they are expected to
One of the obligations of public responsible for monitoring the perform- oversee management’s identification
companies towards the shareholders is ance of the company’s internal controls and assessment of business risk
the disclosure of complete and accurate and the independent audit firm res- i.e. both internal and external risk.
financial information. This is important ponsible for auditing and attesting to According to Article 1 paragraph 24 of
from the investor’s perspective as the company’s financial statements. It the 2006 Directive on Statutory Audits,
The Smith Report was provides a channel a communication audit committees and an effective
prepared as guidance between the external and internal internal control system not only help
to UK’s Combined auditors and the board helping to to minimise financial, operational and
Code, which further formed ensure that the board is fully aware compliance risks, but also “enhance
the basis for a number of the of all the relevant issues related to the the quality of financial reporting.”16
Corporate Governance codes audit and that any difference in opinion Since audit committee acts as
issued in Asia. The Combined between the auditors and the board a representative of shareholders
Code basically laid down the is addressed. The Audit Committee is interests, it is not only responsible
various best practices picked now required to be directly responsible for monitoring the financial reporting
from the various committees for the appointment, compensation process, but also the effectiveness of
and guidance report, such as i.e. audit fees and the fee paid for non the company’s internal controls, the
the Cadbury Report, Greenbury audit work and review of the work of internal audit and risk management
Report, Hampel Committee etc. the external auditors.12 systems.
eventually hand picking those Management becomes more In simple terms risk may be defined
regulations that systematically accountable in the act of being as a threat that an organisation’s
streamlined corporate custodians of the shareholders ability to achieve its objectives may be
governance structures. interest in the company because of adversely affected by action or event.
8 Wallace, P. and Zinkin J.(2005), Mastering Business in Asia: Corporate Governance, Wiley-India
9 Daly, K.(2006),Refocusing the Audit Committee’s Agenda, Directorship, pg.35.
10 Turley, S. and Zaman, M.(2004), The Corporate Governance Effects of Audit Committees; Journal of Management and Governance, 8: 305–332,
Kluwer Academic Publishers
11 As mandated by Companies Act, 1956, 227(2).
12 Mallin, C. A. (2004), Corporate governance, Indian Edition, pg. 128, Oxford Press
13 Beattie, V. and Fearnley, S., Auditor Independence and Non audit services, pg. 1, see www.icaew.co.uk/publicass.
14 Beattie, V., Fearnley, S. and Brandt. R,(2001), Behind Closed Doors: What the Company Audit is Really About Institute of Chartered Accountants in
England and Wales, pg. 29; Also see Cadbury Report 1992
15 Supra note 13, pg. 131
16 The Role of External Auditors in Corporate Governance: Agency Problems and the Management of Risk, Electronic copy available at: http://ssrn.com/
Running a business involves risk and it The board’s insight understanding of the environment the
is well known that the greater the risk, in firm’s future firm exists in and the organisational
the greater the potential return to the and a robust risk pressures that the management
enterprise. The challenge for the board management is required by faces. 19
is to maintain a balance between risk the firms as a remedy to the The risk faced by firms varies
and reward. Corporate Governance continuing effects of the fallout. largely to the environment they exist
involves creating business value whilst It still remains an aspect of in, factors like the control environment,
managing risk.17 Investors focus on corporate governance that management’s capabilities and
the nature and the extent of risk in is often neglected due to understanding of industry market
the companies and the industries potential weakness of the conditions and expectations, the
they want to invest in. Companies boards and their competencies. operational and financial stability of its
having professional enterprise risk In many OCED countries the related functions and the nature of their
management and transparent risk remuneration of the members assets. All these factors integrate within
reporting are considered superior of the board and the senior an organisation creating a unique risk
globally by investors. Thus, directors management remains a highly profile for the firm. The nature of the risk
need to understand and identify controversial issue. profile dictates the audit committee’s
the points at which the company is management or a product recall. core responsibilities of accessing the
critically exposed to risk and develop In modern corporations, audit com- firm’s procedures relating to its risk and
relevant risk strategies and policies. mittees may traditionally be lapsed in control environment and overseeing
This requires a formal authority, like the their efforts towards financial report-ing the financial reporting and constantly
audit committee to ensure that the risk and its accompanying compliance risk evaluating and updating internal and
is properly assessed and managed but there are still daunting challenges independent audit processes.20
throughout the company. Since risk awaiting them if the lapse of non- Over time the context in which audit
assessment needs a proactive, forward traditional risk: cultural, operational, committees operate reflect the cultural
looking orientation, it has been included regulatory and others transform into and structural differences, which
in the mandate of the Audit Committee. financial reporting risks. Inadequate eventually influences their operations,
Thus, the role of audit committee informational dissemination on risk yet there has been a constant
relating to risk management in an can hamper efforts to overcome the codification and harmonisation of best
organisation is to provide risk oversight lapse. Also at times in organisations practices.
i.e. first and foremost to understanding there is no clear distinction over the
the risks that a company may be responsibility for overseeing the risk. Legal and Governance
exposed to, processes and policies The lack of congruence between the Regulations Affecting the
used by management for identifying, internal and external audit committees Role of Audit Committee
assessing and mitigating those risks over key focus areas of risk further fuels Various committees have been formed
and identifying who’s responsible for the lapse making things more difficult globally to improve the effectiveness
the management and oversight of as there is no clear distinction on the of Audit committees. From Cadbury
risks. elements of risk. The company control Report in 1992 to the Turnbull Report in
The existent study on audit environment is directly and indirectly 1999 in UK to Blue Ribbon Committee
committee’s outlook identifies risk in influenced by these issues, hence on Improving the Effectiveness of
two broad spectrums: the financial these issues cannot be sidelined.18 Corporate Audit Committees in 1999
reporting risks which could be The audit committee must look into to Sarbanes-Oxley Act 2002 in US,
accounting judgments and estimates the future prospects of the firm and issues of corporate governance and
and the non-financial reporting risks not just the current scenario to access risk management have become major
with their reporting implications such as situations adeptly. The audit committee concerns for corporations all over the
marketing practices without affecting can only identify perceptive risks and world. Ensuring that the potential threats
revenue recognition, supply chain mitigate them if they have a clear to an organisation have been identified
abstract=1427899
17 Tricker, B. (2009), Corporate Governance: Principles, Policies and Practices, pg. 328 – 330, Oxford University Press
18 Dionne, G. and Triki, T.(2005),Risk Management and Corporate Governance: The Importance of Independence and Financial Knowledge for the
Board and the Audit Committee,
19 Effective Enterprise Risk Oversight: The role of Board of Directors; Committee of sponsoring organizations of the Treadway Commission (2009)
20 Oversight of Risk Management: Considering the Audit Committee’s Role and Responsibilities Audit Committee Roundtable Highlights, Spring (2006),
Audit Committee Institute, KPMG International
The increased important assurance that the board’s accountability towards statements of
responsibilities on the duties relating to audit are carefully general intent and direction, a move
audit committee have discharged.21 away from tangible codes to more
placed an added emphasis on nebulous principles23.
not only the financial reporting Hampel Report
process, but also throughout The recommendations of Hampel’s Turnbull Report
the company’s operations. Committee on Corporate Governance The Institute of Chartered Accountants
To provide an effective (1998) resulted in both a step forward in England and Wales (ICAEW, 1999)
risk oversight a four–part and a step back from the earlier Cad- set up a working party chaired by Nigel
framework can be adapted by bury report. Hampel widened the Turnbull which published its final report
the Audit committees, to better concept of internal control to address titled, Internal Control: Guidance for
visualise the key aspects, which ‘business risk assessment and Directors on the Combined Code to
addresses: 1) organisation and response, financial management, provide guidelines for the directors.
operation; 2) financial reporting compliance with laws and regulations The committee focused on managing
and risk assessment; 3) internal and the safeguarding of assets, including the risks that an organisation maybe
control; and 4) oversight the minimising of fraud’22. Moreover, in exposed to. Turnbull’s guidance
authority. the Report’s authors explicitly stated document filled many of the gaps left
that ‘we are not concerned only with by Cadbury and Hampel. The drafting
carefully assessed and evaluated and the financial aspects of governance’. of Turnbull’s report was driven by the
effectively controlled has become Hampel took a wide view of internal recommendations of the Combined
some of the major responsibilities of control, arguing that directors should Code and the underlying Hampel
the BOD and the Audit Committee. have responsibility for all aspects of recommendations that directors review
The concept of corporate control and a duty to establish a robust all controls. As agreed by the ICAEW
governance saw a revolution in UK system of risk management, designed and the London Stock Exchange,
after a series of governance failures like to identify and evaluate potential the report’s primary purpose was to
the Maxwell case of misuse of pension risks in every aspect of the business provide listed companies with guid-
funds or the share price manipulation operation. This reflected the growing ance to implement the requirements
by Guinness’ directors. recognition that breakdowns in non- in the Code relating to internal control.
financial areas could have significant While the intention of the report was
Cadbury Report financial repercussions for companies. to leave companies a free hand to
Cadbury’s report on the Financial Criticism of Hampel Report: In explain their governance policies, the
Aspects of Corporate Governance the view of many risk professionals, guidance obliged the board to report
(1992) specifically identified the however, not all was well with the on the effectiveness of the company’s
looseness of accounting standards, new recommendations. When it system of internal control.
the absence of a clear framework came to identifying what represented Underlying Turnbull’s emphasis
for ensuring that directors kept such effective control, for instance, on risk control is the idea that risk
under review the controls in their the Report fell desperately short of management and control should be
business, and competitive pressures giving clear guidance. Thus, at one embedded in the business processes.
on companies and auditors, as the stage, the Report states that ‘the word The Turnbull approach, accordingly,
cause of governance breakdowns. “effectiveness” has proved difficult has been interpreted as involving three
The committee advocated that boards both for directors and auditors’ and steps. Firstly, the board or relevant
should appoint Audit Committees should therefore be dropped. The board committee members have
as this would enable the board problem with this view is that if it is to identify the key risks and assess
to delegate to a sub-committee a impossible to require that internal how they have been evaluated and
thorough review of the matters of audit. control be effective, the very meaning managed.
Also, the non-executive directors can of the concept of self-regulation as a Turnbull’s integrated approach
give an independent opinion. Thus, guiding principle is undermined. In this requires application of external
appointment of AC doesn’t diminish the regard, Hampel may have encouraged standards to the matters of financial
responsibility of the Board; it gives an a move away from measurement and reporting and internal controls by
21 Cadury, Sir Adrian (1992), Report of the committee on : The financial aspects of Corporate Governance, GEE and Co. Ltd.
22 Hampel, S. R. (1998), The Committee on Corporate Governance: Final report, Gee Publishing Ltd.
23 Charkham, J. (1998); Corporate Governance: Overcoded? Has Hampel meant Progress? European Business Journal, Vol. 10, No. 4, pp. 179-183.
the external auditors. The ‘Big Five’ Blue Ribbon Committee apparent that the representatives of
accountancy firms are currently offering Further, to protect the interests of shareholder in the firm, the board need
a business risk assessment-based investors in a more efficient manner to be thoroughly involved with the
approach to external audits. However, and strengthen the audit committee audit committee to ensure seamless
external auditor’s expertise is doubted in the United States of America, the functioning, it is also expected that
in the case of non-financial issues. Securities and Exchange Commission this would ensure the board authority
These concerns are coupled (SEC) adopted many new regulations over the management, ensuring that
with more traditional reservations based on the recommendations of the they cannot use flexible accounting
about auditor independence and Blue Ribbon Committee in December practices for their benefit. This leads to
objectivity.24 1999.26 The new regulations required accounting frauds and loss of value on
the audit committee to discuss and the part of shareholders. It is essential
Smith Guidance review the audited financial statements that the auditor is independent on
The Smith Review of audit committees, with the board of directors, to settle the firm as this would reduce the
a group appointed by the FRC, important differences over accounting risk of being biased or influenced by
reported in January 2003. The review practices and significant accounting management. The financial accounting
made it clear the important role of the policies the audit committee needs and reporting situations necessitate a
audit committee ‘while all directors to confer with independent auditors need for independence of the auditor to
have a duty to act in the interests of who also required to provide remove ambiguity, such as one faced
the company, the AC has a particular written disclosures to support their when the client is experiencing financial
role, acting independently from the independence and finally submit a distress and there is a temptation to
executive, to ensure that the interests audit committee report mentioning how see things the way he does.
of the shareholders are properly pro- it had carried out all the regulations The financial crisis in U.S. and
tected in relation to financial reporting within the organisational framework.27 UK were due to the over exposure
and internal control. (Paragraph 1.5) of firms to risk. The crash of the sub-
the review defined the role of AC in Changing Role of Audit prime mortgage market initiated the
terms of oversight, assessment and Committee financial crisis, during the financial
review. There were various issues that were boom, the subprime mortgages and
The Smith Report was prepared brought to light with the fallout of Enron other banking products were easily
as guidance to UK’s Combined especially relating to auditors and available and with the hope to receive
Code, which further formed the the audit committee independence. higher returns the lenders lent credit
basis for a number of the Corporate The Sarbanes-Oxley Act, 2002 was Role of audit
Governance codes issued in Asia. introduced in the U.S. as a result of committee is not just
The Combined Code basically laid the following public outcry from the limited to overseeing
down the various best practices Enron case and it aimed at providing the financial reports, but also
picked from the various committees a definitive structure to the governance has to identify and assess the
and guidance report, such as the of corporation to safeguard the risk that an organisation is
Cadbury Report, Greenbury Report, shareholders.28 exposed to. It is now seen as
Hampel Committee, etc. eventually The regulations set out by the an instrument of corporate
hand picking those regulations that Sarbanes-Oxley Act included functions governance best able to prevent
systematically streamlined corporate recommended for the audit committee fraudulent financial reporting
governance structures. The combined for its appointment and overseeing the and as the best possible way
code was initially framed in 2002 work of the firm’s accounting practices to ensure more effective
and has been constantly updated to to prepare the audit report. However, monitoring of the financial
match the turbulent environment that the Sarbanes-Oxley Act is applicable reporting process, thus making
organisation exists in, the last update only to U.S. listed companies on their risk management as one of its
being in 2008.25 stock exchange.29 Thus, it becomes fiduciary duties.
24 Turnbull, N. (1999) Corporate Guidance for Internal Control, London: Gee & Co. Ltd
25 Guidance on Audit Committees (THE SMITH GUIDANCE), (Oct 2005); Financial Reporting Council.
26 Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, (1999), New York Stock
Exchange and the National Association of Securities Dealers.
27 Smith, M. L. (2006), Audit committee effectiveness: did the blue ribbon committee recommendations make a difference? International Journal of
Accounting, Auditing and Performance Evaluation, Vol. 3, No. 2.
28 Lindberg D.L (2004) Corporate Governance – The Role of the Audit Committee;
29 Romano R., the Sarbanes-Oxley Act and the Making of Quack Corporate Governance; European Corporate Governance Institute Finance Working
Paper No. 52/2004, Yale Law School.
to borrowers who did not completely management was activity based rather needs to improve their effectiveness in
qualify as per the basic criteria. It is a than enterprise based, which were addressing risks that may be driven by
risky investment to give loans to less board responsibilities. Other cases the company’s incentive compensation
creditworthy borrowers who may not showed that the implementation was structure.”
have the potential to repay the loans; an issue even when suitable metrics The recent scandals in the
this fact was neglected by the bank for were put into place to manage risk. global markets and the exposure of
the want of greater gains by sidelining There are a lot of reforms desired companies to newer regulations to
the risks.30 Using credit derivatives and in the company disclosures about improve the governance structures and
collateralised debt obligations (CDOs) foreseeable risk factors with system enhance shareholder involvement and
the subprime market mortgages in place for monitoring and managing benefit have made the audit committee
were repackaged into securities, it risk. A review was on way in most incorporate risk management as one
was a reckless investment. Absence firms by relevant standard setters for of its integral functions. The FSA is
of a proper regulatory mechanism accounting standards and regulatory awaiting the Walker Review to further
and inappropriate use of financial requirements. Lastly, remuneration enhance the audit committee’s
innovations triggered the growth of the systems have not been closely regulations to streamline the system
housing bubble eventually leading it to integrated with strategy and the risk and commit to risk management more
a point where it crashed and placed appetite of the firm looking for its long efficiently. The review is considering the
the financial system of the economy term future. The financial crisis showed independence of the risk management
under great strain. The aftermath of that a difficult task of managing the function as the fiduciary duties of the
the situation was the collapse of banks complex and interconnected risks audit committee are rather broad and
one after another while going bankrupt related to business lies ahead for the the need for a specific department to
(Bear Stearns, AIG, Lehman Brothers) board, thus increasing the focus on understand risk factors and mitigating
or being bought over by their rivals or the effectiveness of the board’s risk their consequences are imminent. This
other firms (Fannie Mae, Freddy Mac, oversight policies. has increased the responsibilities of
Merrill Lynch, Royal Bank of Scotland, The board’s insight in firm’s future the Audit Committee. The members
Dexia)31 and a robust risk management is of the audit committee are burdened
The sub prime markets had be- required by the firms as a remedy to with the new regulations and the
come a heavily invested area to earn the continuing effects of the fallout. It provisions given by the new laws and
high and quick profits. The elements still remains an aspect of corporate Acts implemented to improve the
like securitisation, interest-rate swaps governance that is often neglected due effectiveness of Audit Committees from
and credit default swaps made the to potential weakness of the boards the perspective of managing risk. In
efforts of bankers to make quick money and their competencies. In many short they want a clear understanding
an easier task. OCED countries the remuneration of of the reporting. Thus, the members of
The financial crisis showed the the members of the board and the the audit committee are expected to be
global economy the fallacy of the exist- senior management remains a highly proficient with the complex compliance
ent system of corporate governance. It controversial issue.32 provisions. Further, risk management
put to test the corporate governance As Tim Copnell, Head of KPMG’s requires professional knowledge for
routines which failed to safeguard Audit Committee Institute in the UK identification and assessment of risks
the excessive risk being taken by the said: which the directors may lack. Hence,
various financial companies. It laid “Recession related risks as well they may not be able to accurately
bare the weaknesses of the system, as the quality of the company’s risk assess risk.
even the risk management systems intelligence are two of the major The audit committee has also
in many firms failed due to weak oversight concerns for audit committee been entrusted with the job of
corporate governance structures rather members. But there is also concern addressing the risk management at
than inefficient computer systems and about the culture, tone and incentives the level of executive compensation
models, the information about the underlying the company’s risk and tying it to the risk function to make
crash did not filter to the senior manage- environment, with many saying that the compensation more performance
ment at the early levels even when risk the board and/or audit committee oriented and shareholder friendly.
30 Park, Y.( 2009), The role of financial innovations in the current global financial crisis, Seoul Journal of Economics
31 Soros, G.(2008), The housing bubble and the financial crisis, real-world economics review, issue no. 48, http://www.paecon.net/PAEReview/issue48/
Soros48.pdf
32 Krintpak, G.(2009), The, Corporate Governance Lessons from the financial crisis, Financial Market Trends, OECD 2009, Vol. 2009/1
This has also led to an improved the key aspects, which addresses: be given to the audit committee.
level of commitment by the Non 1) organisation and operation; 2) finan- Various committees formed advocates
Executive Independent Directors cial reporting and risk assessment; that the audit committee should have at
(INEDs) as there have understood 3) internal control; and 4) oversight least three non executive independent
the importance of having an in-depth authority. This framework can help directors. The Turnbull report in 1999
understanding of the organisation and committee members visualise better and the recommendations of the
its functions to analyse the dimensions the key considerations that lie before Blue Ribbon Committee defined the
of risk being undertaken. Also, greater them. Such a risk based framework importance of risk identification and
involvement of institutional investors can help audit committee understand assessment by the audit committee.
in the recent times have ensure that and monitor the processes and can act The need for better governance
the audit committee is more efficiently as an important element in protecting and risk management arises out of
considering shareholders view and its company and itself from undue risk the scandals and fallouts. Enterprises
concerns in firm decisions. This has exposure. Although it is yet to be seen of all types are looking at improved
removed the age old problem of if the current measures are effective in risk oversight processes in the light
individual shareholders not having a nature, arming the audit committee to of the aftermath of the sub-prime
voice in the firm’s decisions. more effectively manage and mitigate meltdown. Expectations for greater
Since risk management has be- risk or just more regulations to further board involvement in risk oversight
come a concern for all the corporations, camouflage the structural fallacies. are creating more demands on senior
Enterprise Risk Management has Even as we hear that signs of executives to strengthen their risk
been embraced by the boards economic recovery may be emerging it management practices and their
and management teams to better is increasingly evident that the current monitoring of the enterprise’s top
connect their risk oversight with the economic crisis is fundamentally risk exposures. Evidently, financial
creation and protection of shareholder different from past recessions and crisis resulted in an increased focus
value. ERM provides a vigorous and that the board and audit committee on the efficiency of the risk oversight
holistic top-down view of key risks oversight is changing, perhaps practices adopted by the board. The
that an organisation is exposed to. permanently as a result. corporate governance rules laid down
COSO issued its Enterprise Risk by New York Stock Exchange requires
Management – Integrated Framework Conclusion risk assessment and risk management
in 2004 to develop an understanding Initially in the paper the role of audit policies to be on the agenda for
in the management of the elements committee as an element of corporate discussion by audit committees of
of an enterprise-wide approach to risk governance was discussed. It was listed companies. Also, assessment
management. That framework defines seen that the role of audit committee of enterprise risk management
ERM as follows: is not just limited to overseeing the procedures has become a part of the
“Enterprise risk management is a financial reports but also has to identify credit rating analysis of credit rating
process, affected by the entity’s board and assess the risk that an organisa- agencies like Standard and Poor’s.
of directors, management, and other tion is exposed to. It is now seen as an Regulatory bodies have suggested
personnel, applied in strategy setting instrument of corporate governance that there may be some new regulatory
and across the enterprise, designed to best able to prevent fraudulent finan- requirements and some changes may
identify potential events that may affect cial reporting and as the best possible be made to the existing ones relating
the entity, and manage risk to be within way to ensure more effective monitoring to the risk oversight responsibilities.
the risk appetite, to provide reasonable of the financial reporting process, thus The business leaders are well aware
assurance regarding the achievement making risk management as one of its of the fact that risks have to be taken
of objectives.” fiduciary duties. regularly to increase the shareholders
The increased responsibilities The importance of audit committee value therefore effective organisations
on the audit committee have placed assuming the duties of the risk understand the strategic advantages
an added emphasis on not only the management can be understood from in managing risks.
financial reporting process, but also the fact that it reduces the influence Thus, it can be said that through
throughout the company’s operations. of board on the auditing process thus Audit Committees organisations are
To provide an effective risk oversight a protecting the shareholders interest. trying to effectively integrate Enterprise
four–part framework can be adapted by However, the question that arises here Risk Management with Corporate
the Audit committees, to better visualise is that of the independence that should Governance.n
Our Supreme Court enjoys the reputation of giving verdicts which display a rare practical pragmatism. This
is what it has done very recently on 3-5-2010 in a pioneering verdict in the case of Damodar S. Prabhu V/s.
Sayed Babalal H. 2010 (2) RLW 1599 by taking radical steps aiming at curbing the tendency among bouncers
to sit over the amount through a cheque. In this judgement authored by Chief Justice K.G. Balakrishnan, it is
laid down that defaulters opting for early settlement before the trial court would have to pay just the principal
amount with applicable interest. However, in the event of their approaching the District Court for settlement
after being convicted by the trial court, the penalty would rise to 10 per cent in District Court and 15 per cent
in High Court to a whopping 20 per cent in Supreme Court. The court therefore laid down such guidelines
which were not available in the provisions of Negotiable Instruments Act even after insertion of Section 147
by amendment. Here the court, short of being a legislator, showed an aggressive instance in interpreting the
law. This was probably felt as essential for the judiciary to be sufficiently relevant and responsive. It is more
or less a judicial-law-making so that bouncers are put on their alert. It is in tune with the spirit of time. The
author in this article has dealt with this aspect of prescribing guidelines for compounding the offences under
the Act as has been propounded and endorsed by the apex court.
this Section. Obviously the offences Sections 143 to 147 into the Act. Naturally this stringent and strong
not referred to in sub Section (1) and These amendments dealt with aspects criminal remedy encouraged the
(2) of Section 320 and not included such as the power of the court to try institution of a large number of cases
in the Table are not compoundable. cases summarily, mode of service of that are relatable to the offence
Similarly, offences punishable under summons, evidence on affidavit, bank contemplated by Section 138 of
laws other than the Indian Penal Code slips to be considered as prima-facie the Act. The disproportionately
could not be compounded. evidence of certain facts and lastly large number of cases involving the
Naturally, a question arose whether the offences under the Act could be dishonour of cheques ran into several
an offence punishable under Section compoundable of which aspect we are lakhs and this state of affairs practically
138 of the Negotiable Instruments concerned in this article. choked our criminal justice system. It
Act which is a special law could The Negotiable Instruments Act has, therefore, been thought that there
be compounded. On this, some 1881 was first amended in the year should be some stiff measures besides
High Courts ruled that if the matter 1988 by Banking Public Financial those provided in the Act which could
was settled between the parties the (Amendment) Act 1988 (Act 66 of bring down the number of cases
offence could be compounded, but 1988) to regulate financial promises in this regard and in this sequence
other High Court took a contrary in growing business, trade, commerce the accused should be made to
view. This position persisted in spite and industrial activities of the country bear the brunt of the litigation. Our
of the insertion of Section 147 of the and the strict liability to promote better Supreme Court, which has reputation
Negotiable Instruments (Amendment vigilance in financial matters. Then of giving verdicts which display a rare
& Misc. provisions) Act 2002 (Act 55 again it was amended in the year 2002 jurisprudential vision so it succinctly
of 2002). According to this, offence and Sections from 143 to 147 were captured this point of Negotiable
punishable under the Act become inserted. The second amendment was Instruments Act in the case of Damodar
compoundable. resorted-to, to plug the loop holes that S. Prabhu V/s. Sayed Babalal 2010
The Supreme Court in the case were perceived even after the insertions (2) RLW 1599. In this case the court
of O.P. Dholkia V/s. State of Haryana of Sections i.e. 138 to 142. The object preferred practical pragmatism to legal
(2000) 1 SCC 672; Shiv Shankaran was obvious that Legislature wanted formalism. Obviously when a statute
V/s. State of Kerala & another (2002) to give it all possible teeth so that a is enacted, it must be remembered
8 SCC 164; Kishore Kumar V/s. J.K. bouncer of cheque does not escape that it is not within human powers to
Corporation Ltd. (2004) 12 SCC 494 the rope. This all was necessitated foresee the manifold set of facts which
and Shailesh Shyam Parsekar V/s. because of an open market economy may arise, and, even if it were, it is not
Baban (2005) 4 SCC 162 besides where we have compulsions of possible to provide for them in terms
other cases, endorsed the view that the primordial need to maintain of free from all ambiguity. This position
compounding of the offence could be transparency and harmony in business surfaced in the administration of this
permitted. Ultimately for addressing transactions and with a view to arrest the law.
the deficiencies perceived in the reasonable prognostication of possible Section 147 of the Act has made
working of this enactment, Section future manifestation arising out of the the offences compoundable, but it
10 of the 2002 Amendment inserted bouncing of cheques, the provisions has not provided any guidance on
Section 147 of have been made all the more stringent. how to proceed with the compounding
the Act has made Then our Apex Court by its judicial of offences under the Act and as has
the offences dissection cut down the dead woods been observed in Section 320 of the
compoundable but it has that crept in the administration of this Cr.P.C. cannot be followed in the strict
not provided any guidance law by trimming of the side branches sense. So it is felt that there is some
on how to proceed with the of the provisions so that the holder of a legislative vacuum which should
compounding of offences cheque is not lost in such thickets and be filled up by judicial-law-making.
under the Act and as has been branches. Law bristles with uncertainties and
observed in Section 320 of the This may kindly be noted that obscurities which can only be removed
Cr.P.C. cannot be followed in when the offence was inserted in the by judicial law making in accordance
the strict sense. So it is felt that statute in 1988, it carried the provision with the principle that in the event of
there is some legislative vacuum for imprisonment upto one year which conflict between the dictates of law and
which should be filled up by was revised to two years following demands of justice, the conflict should
judicial-law-making. the amendment to the Act in 2002. be resolved in favour of justice.
This write up is a critical review of New Pension Scheme (NPS) in India. It outlines the comparative analysis
of different investment schemes. It intends to give an individual a choice of savings and investment products
with different asset allocations, professional fund management, centralised administration and an option to
transfer pension rights from one job/location or form one fund manager to another at low cost. The NPS is
the most important pension reform in the world today. It targets a pension coverage gap that is larger than
the populations of most countries. It seeks to enable today’s young to achieve a dignified retirement through
thrift and self-help. It gives individuals a portable account, nationwide access, simple choices, high real
returns and important rights. And it will not cause a fiscal blow-up deep in to the future which our children
will be taxed for. This write up also explains the advantages and disadvantages of this new scheme.
the scheme every year. The offer offers no guaranteed assurance on be useful for contributors in charting
document lacks information and clarity, security of capital fund and interest out their retirement plan. You must be
which has meant financial planners income. In the first tier scheme, also aware of the fact that premature
are a little hesitant to recommend this premature withdrawal is not permitted. withdrawals are allowed only up to
product to the masses. To help you Withdrawal attracts tax implications 20 per cent of the pension wealth in
decode the mysteries of the NPS, here under the Exempt-Exempt-Taxable the NPS (under type I accounts) and
a ready reckoner on what it is all about (EET) model. The Pension Regulator, therefore, the amount saved should be
and how it pits against other retirement however, is lobbying hard with the calculated after accounting for short-
products. government for parity in treatment item requirements. Tax experts say one
Important out lines of New Pension Scheme like in the case of other government must be careful to commit substantial
(NPS)
retirement schemes. However, since amount in the scheme, as there is no
• NPS will not attract • Under the auto
any Security option, portfolio the exact tax benefits and treatment assurance as to the principal.
Transaction Tax of investors gets at the time of withdrawal are not yet Retirement is a major milestone in
(STT) and Dividend automatically
Distribution Tax rebalanced clear, it may not be a right time to draw one’s journey through life, so make
(DDT) depending upon any inference on the NPS. From a tax sure that you don’t simply retire from
• Currently only age.
tier-1 of the NPS • Major drawback is perspective, PPF right now appears to something, but have something to
is available, where that NPS is taxable be far more superior or even a bank retire to.
there is lock in on withdrawal.
period • NPS not at with recurring deposit is a better option
• Investors can other instruments compared to this scheme. Allocation of NPS Fund
invest at least R 500 such as PPF, were
per month the gains in maturity NPS is more or less like other pension
• Age ranges from 18 is tax free. Dos and Don’ts plans where you invest throughout
years to 55 years to • The ideal pension
buy NPS fund would be a To begin with, tax experts say you your working career and reap the
• Funds collected combination of PPF must take time to work out your cash benefit when you retire by withdrawing
by NPS will be and index fund.
invested equity, flows, including future requirements the amount. Currently, only tier-I of
government carefully before you decide to invest the NPS is available, where there is a
securities and
credit risk bearing in the scheme. Since the scheme lock-in period. Investors can invest a
fixed income offers low liquidity and it comes with minimum R 500 per month (i.e. 6,000
instruments.
• There will not be no guarantee as to the security of your a year). The age ranges from 18 to 55
more than 50 per funds, it is advisable to meticulously years to buy NPS and one cannot exit
cent exposure to
equity market read the fine print relating to the fund before the age of 60 years. Also, while
type you opt for. A section of tax exiting one has to buy an annuity.
Measure Up experts, in fact, believe one must only Funds collected by NPS would be
For the not so adventurous investors, opt for the scheme when a little more invested in three-asset classes - equity,
the scheme comes close a clarity is available in respect of details. government securities and credit risk
personalised investment opportunity, in Further clarity is required on the tax bearing fixed income instruments.
which you make choices relating to the implications, as also the issue of how Also, within the equity class, a fund
fund manager and the risk profile. Yet and when the Pension Fund Regulatory manager will only invest in the index
in terms of flexibility to invest in equity, and Development Authority (PFRDA) funds and not more than 50 per cent of
the scheme has its limitations, as there will, as per the stated investment anyone’s portfolio will be allocated to
is cap of 50 per cent on money you can strategy, evaluate market mechanism equity. Investors also have the choice
allocate in equity. If you compare the for investor protection guarantees to choose the auto choice option.
scheme with other retirement schemes which can be offered for the various Under the auto option, if the age of
such as Public Provident Fund (PPF) schemes. investor is up to 35 years, 50 per cent
and Employees Provident Fund (EPF), In the current scheme, there is
it is non-tax friendly. However, the an auto choice option, which is in the The New Pension
management charge of the NPS is low nature of a lifecycle fund. But one Scheme is set
in comparison to the funds and thus, should look at a retirement plan where to replace the
the effective and efficient Management the amount required for sustaining the philosophy of pension assets
of the NPS fund needs to be seen in current cost of living is ascertained. in India from a defined benefit
the times to come. In this case, they feel Retirement mode to a superior defined
These things apart, the scheme Advisory Consultants (RACs) would contribution mode.
In the scheme, there schemes such as the public provident Fund. An early clarification on the tax
is an auto choice fund? On the other hand, those having benefits would determine the scheme’s
option, which is in the provident fund accounts could top up popularity.
nature of a lifecycle fund. But their contributions instead of putting
one should look at a retirement in the NPS. To be fair, as contributions Comparative Analysis
plan where the amount required build up, total charges would fall as among different Schemes
for sustaining the current cost of a percentage of assets because the NPS has not come at par with other
living is ascertained. fund management fee for NPS is very instruments in the same category such
of his wealth will be invested in equity. low. But the idea is to encourage small as PPF, where the gains on maturity are
Rest of the amount will be allocated savers and they will be put off by the tax free. Also, the other disadvantage
to government securities and credit big initial levy. is lack of a distribution channel.
risk bearing fixed income instruments There are other two instruments-
in the ratio of 20:30. However, once Role of Government mutual funds and the Unit-Linked
the investor’s age crosses 35 years, Regarding NPS Insurance Plans (ULIPs), which
participation towards equity and credit The government could consider compete with NPS. A part of the money
risk bearing fixed income instruments being a co-contributor to the scheme invested in ULIPs gets reinvested in
will start coming down annually. Finally, for the unorganised sector. Under equity and fixed income securities,
at the age of 55 year, the ratio of equity, the Employees Provident Fund while rest is used to provide insurance
government securities and credit risk Organisation’s (EPFO) pension to the investor. Here investors can
bearing fixed income instruments will scheme, the government contributes choose the contribution that they want
be 10:80:10. 1.16 per cent of employees’ salary to to make towards equity and fixed
the pension fund. If the government income securities. The major advantage
Cost of NPS makes a similar contribution into the of ULIP is that on maturity the entire
As the contours of the NPS unfold, it is NPS savings of the poor, it would ease amount is tax – free and the down side
becoming clear that it is an expensive, the costs burden for them. is that it has high commission structure
even unattractive, mass-market In view of the PFRDA in the long and in fact, the cost is the highest in
retirement scheme. The fixed charges run, the record-keeping charges would the first couple of years. This expense
of the NPS are very steep, which loads become a very small fraction of total makes a significant dent in the post
the scheme in favour of wealthier savings. Besides, these charges will maturity amount.
investor. The pension regulator enable customers to get access to Mutual funds, on the other
should have negotiated harder. Each a professional service from NSDL, hand, have much lower expense in
subscriber is required to pay an annual which has invested heavily in a new comparison to the ULIPs. After the
record keeping charge of R350. In system to maintain records of millions changes in ULIP norms by the insu-
addition, any subsequent transaction of subscribers and needs to recoup its rance regulator in June 2010, charges
would invite R30 as levy and R10 by the investment. An estimated eight crore were reduced. According to the new
CRA (Central Record keeping Agency) people are eligible to join the NPS, provisions, for the first five years, the
and R20 from the intermediaries, point which has very low fund management difference between the returns earned
of presence (PoPs). Since there will fees. on investments and the net returns
have to be at least four transactions The PFRDA is also suggesting given could not be more than 4 per
every year, the minimum annual cost that the government should provide cent, taking both commissions and
comes to R470. The base charges similar tax breaks to NPS as available charges into account. By the tenth
would drop to about R350 a year once to other retirement schemes, such as year this figure narrows down to 3 per
the subscriber numbers increase, but the PPF and the General Provident cent and in the 15th year with 2.25 per
even that would be steep for the lowest
bracket saver who puts in the minimum
four contributions of R500 each. For
every R2,000 he contributes to the
scheme, such a saver is paying nearly
R350 in fixed costs every year. Why
should such a small saver not put the
entire R2,350 in a fixed deposit or other
cent. In comparison, mutual funds Benefits & Problems any gain that you make while exiting will
may charge only 2.25 per cent for their The major advantage of NPS is that it is attract tax. The NPS is a great product
equity products. Mutual funds also much cheaper than a mutual fund or a but since it is taxable on maturity, it
enjoy tax benefits akin to the ULIPs if ULIP. The total cost is merely 0.0009 per loses the charm.
one chooses an equity-based scheme. cent for NPS. Also, it is easy to invest NPS has not come at par with
Also, in equity mutual funds the maturity in and operate. In case you choose other instruments in the same category
amount of tax-free if the investment is the auto option, your portfolio gets such as PPF, where the gains on
made for more than one year. However, automatically rebalanced depending maturity are tax-free. Also, the other
generally in the debt mutual funds one upon your age. disadvantage is lack of a distribution
has to pay capital gain tax. But the major drawback is that NPS channel. Another disadvantage is that
(Please see the Table below) is taxable on withdrawal, which means under the proposed cost structure,
savers will need to shell out R470 in
PARTICULARS NEW PENSION EPF PPF INSURANCE
SCHEME LINKED costs each year with R350 going to
PENSION PLAN the National Securities Depository Ltd
Taxability
(NSDL) for account maintenance and
Contribution Exempt up to max Employees Exempt up to Exempt up
Ceiling of 1000,000 contribution exempt max ceiling of to maximum at least another R120 in the form of
under Section up to max R1000, R1000, 000 ceiling of levies on contributions. These charges,
80CCD r.w.s, 80CCE 000 under Section under Section 1000,000 under
80C r.w.s 80CCE; 80C r.w.s. Section 80CCC which could drop in the years ahead as
Employee’s 80CCE r.w.s. 80CCE rising numbers of subscribers bring in
contribution up to
12 per cent of basic economies of scale in administration
salary exempt costs, are seen as high, especially
Accumulation Exempt Exempt Exempt Exempt for poor subscribers, and could
Withdrawal Taxable Exempt Exempt Commuted
pension exempt discourage small savers from the
(up to 1/3 of scheme.
total) Annual
pension-taxable
Flexibility Recommendations
Minimum 6,000 p.a. Min. contribution 500 p.a. Depending 1. The present tax treatment of NPS
contribution (in R) of 12 per cent - upon terms
Compulsory for of scheme
(EET) puts subscribers at a clear
establishment with (generally disadvantage vis-a-vis insurance
over 20 employees higher)
(those earning up to
and non-government PFs will
R10, 000 covered) further depress customer interest.
Maximum No ceiling Up to 27 per cent 70,000 No ceiling Since these are fairly obvious
contribution (in R) of basic salary,
considered together concerns, should PFRDA have
with superannuation rolled out the NPS on 1st May 2003?
Withdrawal Below 60 years Only after retirement Only after No surrender The right answer, of course, is yes.
20 per cent can or termination of 7th year. Can value before
be withdrawn and employment withdraw expiry of 3 years The NPS target a heterogeneous
80 per cent to be 50 per cent mass of 284 million individuals of
used for buying life of amount
insurance annuity. accumulated 3 whom barely 5 per cent are actively
Above 60 years ratio years before. saving for old age. It’s unlikely that
is 40:60 Loan after 3
years
Risk Retirement is a major
Risk involved Depends upon the Nil Nil Depends upon
selection of scheme the type of
milestone in one’s
instruments journey through life,
Security of capital No assurance by the Assured principal Assured No assurance so make sure that you don’t
fund and interest government and interest principal and by the
income interest government simply retire from something
Cost involved but have something to retire
Fund management 0.0009 per cent Nil (to employee) Nil Variable to. From a tax perspective,
charge
PPF is right now appears far
Annual charges Approx. 400 Nil (to employee) Nil Variable
(in R) (assuring 1 more superior or even a bank
transaction) recurring deposit is a better
Fixed cost (account 50 (for opening an Nil (to employee) Nil Variable
opening) account)
option compared to the NPS.
A meeting of all the Past Presidents of the Institute was 9. CA. N. P. Sarda, Past President
called on 29th November, 2010 at New Delhi to obtain their 10. CA. B. P. Rao, Past President
views. The meeting was attended by the following persons: 11. CA. T. S. Vishwanath, Past President
1. CA. Amarjit Chopra, President, ICAI 12. CA. Ashok Chandak, Past President
2. CA. V. B. Haribhakti, Past President 13. CA. R Bupathy, Past President
3. CA. V. Rajaraman, Past President 14. CA. Kamlesh Shivji Vikamsey, Past President
4. CA. R. Balakrishnan, Past President 15. CA. Sunil H. Talati, Past President
5. CA. S. K. Dasgupta, Past President 16. CA. Uttam Prakash Agarwal, Past President
6. CA. K. G. Somani, Past President 17. CA. S. Santhanakrishnan, Central Council Member
7. CA. A. H. Dalal, Past President 18. CA. Vinod Jain, Central Council Member
8. CA. N. C. Sundararajan, Past President 19. CA. Nilesh Vikamsey, Central Council Member
On NACAAS (National
Advisory Committee on
At the outset the President, • ICAI to formulate a strategy for Accounting and auditing
ICAI welcomed the illustrious past giving more suggestions to the Standards)
presidents for their yeomen contribution Government for fine-tuning of the • The process of setting the Auditing
to the Institute and the profession and law. standards is independent of the
having spared their valuable time for • To take into account the perspec- council of ICAI. Auditing standards
attending the meeting. He briefed the tive of the nation as well as the are different form Accounting
members the background on which CA profession while drafting the Standards and Auditing Standards
the Companies Bill 2009 emerged law is one area where the Institute
from surrounding circumstances like • Question emerged whether the has already followed International
Satyam episode, Joint Parliamentary new law is in the right direction. fraternity. In the case of the
Committee Report on stock scam, Dr • Members suggested that the Accounting Standard, the status
JJ Irani Committee Report, Concept Corporate Governance should be quo may be maintained.
paper on Company Law, Companies criteria. • No need of Panel of audit firms.
Bill 2008 (which lapsed) and finally • Members suggested that a re-look
the Companies Bill, 2009 which should be done on such of those Rotation of Auditors
was introduced and referred to the provisions which has tremendous • Though there was a broad
Parliamentary Standing Committee on impact on the auditors. consensus on the need for rotation
Finance on which Report was laid in • Members also pointed that the new of auditors, still the process by
August, 2010. law is towards harsher treatment which it should be carried out was
He stated that the said Report for non-compliance of the law discussed.
need to be introspected and reviewed and the Companies Bill 2009 has
thoroughly in view of certain provisions provided for fines, etc at 26 places Prohibition on auditors
having a major impact on the CA and out which 4 relate to the rendering certain services
profession and, therefore, the Institute profession. • There is a need for defining
has convened this meeting. He further • Certain provisions relating to the ‘management services’ which is
stated that though the Institute had CA profession have far reaching stated under clause 127(h)
earlier submitted its suggestions on complications.
the Bill as well as on the Report of the • One should look as to what the Punishment for
Parliamentary Standing Committee on new law tries to achieve and how contravention of certain
Finance, a need was felt that provisions can it be achieved. provisions by the auditor
relating to the accountancy profession • Members suggested for zero- • Criminal liability should not be
requires discussion at the larger forum. based analysis of the entire new imposed upon the auditing firm
He requested the members to give company law.
their views/comments. • Members suggested that there Surrogate practices by
After the opening remarks by the should be clear demarcation some of the firms
President, the following were the quick between substantive and • The meeting discussed the
reactions from the members on the procedural law and this would measures for stopping surrogate
subject-matter: be a significant exercise if done practices by the auditing firms. n
Inaugural Session
CA. Amarjit Chopra, President ICAI in
his welcome address highlighted the
importance of organising the instant
Conference at this point of time when all
the SAFA countries are in the process
of either adopting or converging
with IFRS. He added that the instant
Conference would provide a platform
to the standard-setters of SAFA Region
to discuss and resolve various region
specific hindrances with IASB, that
they are facing while converging or
adopting with IFRS. He stated that
ICAI has decided to Convergence with
IFRS as they felt that Convergence is
better than Adoption as it still provides
the opportunity to take care of country
specific issues.
During the Inaugural address
Chief Guest Hon. Shri K. Rahman
Khan, Deputy Chairman, Rajya Sabha
emphasised on the need for the IASB to
recognise civil society as an important
part of the constituency and that the
accounting profession should play the
role of a Trustee for civil society. He
pointed out the need for vigilance by
the accounting profession.
In the key note address, Sir David
Tweedie, Chairman, International
Accounting Standards Board (IASB)
pointed out benefits of IFRS adoption to
economies. He specifically mentioned
Deputy Chairman Rajya Sabha CA. Rahman Khan inaugurates the conference as ICAI President CA.
Amarjit Chopra, ICAI Vice President CA. G. Ramaswamy, Central Council Member CA. Rajkumar Adukia that Convergence is not the same as
and Chairman SAFA Committee on Accounting Auditing Standards Mr. Reyaz Mihular look on. Adoption and that Convergence will
IFRS. During the presentation, he against Convergence. According to stated that 15 Nepal Accounting
highlighted the key areas of impact Md. Humayun Kabir, Bangladesh Standards (NAS) are in compliance with
requiring auditor’s involvement for suffers from lack of technical IFRS while 11 standrads have some
successful implementation of IFRS resources and their local laws and changes to accommodate compliance
converged standards. He stated that regulations which contradict with IFRS with local laws and regulations. Mr P.
the implications of application of fair is a problem. K. Shrestha stated that they will revise
valuation approach would be far more Sharing convergence experience all NAS to make them fully compliant
complex and challenging as compared with IFRS in India, Mr Manoj Fadnis, with IFRS by 1-7-2011 and will issue
to the existing Indian accounting Chairman, Accounting Standards guidance as required. Nepal is in
standards. He informed that IFRS Board of ICAI, specified that India the process of implementing revised
converged standards need to be will adopt a convergence approach. standards for listed companies by
translated to Hindi before notifying There may be a carve out in respect 1-7-2012, other public limited
undre the Companies Act in India. of revenue recognition for real estate companies by 1-7-2013 and rest by
In addition he discussed more on tax development - departure from IFRIC 1-7-2014.
view of unrealised gains and problem 15 and opt for use of percentage Mr. Rashid Rahman Mir, Chairman,
in determination of discounting rates completion method for Real Estate Accounting Standards Committee,
from the market. He emphasised on companies in India. Further there Pakistan shared the convergence
the need of harmonisation of tax laws is another carve out is in respect of experience with IFRS in Pakistan.
along with the IFRS. Further he pointed bargain purchases (take the credit to According to Mr. Rashid Rahman, all
out that costs to SMPs of adopting IFRS Capital Reserve and not to the profit IFRS have been adopted except for
will increase while fees are decreasing and loss account). India has taken the IFRS 9 and IFRS 1. IFRS 9 is under
and the challenge of keeping upto date decision not to adopt the Agriculture consideration for adoption. Further
is also increasing. standard (IAS 41). According to Mr IFRIC 4 and 12 application has been
Manoj Fadnis, consolidation is not deferred by SEC of Pakistan (SECP)
Technical Session 2 - mandatory under Indian Corporate and applicability of IAS 40, 39 and IFRS
Convergence Experience of law and only listed companies are 7 deferred by State Bank of Pakistan
SAFA Countries required to consolidate. IFRS will apply (SBP) for Banks and DFI’s. At the same
Md. Humayun Kabir, Past to consolidated as well as separate time, application of IAS 39 for Insurance
President, ICA Bangladesh shared financial statements. In India, IFRS companies has been deferred by SECP.
the convergence experience with 9 will not be required for companies In Pakistan, the issue of consolidation
IFRS in Bangldesh. He mentioned converging on 1-4-2011. of mutual funds is under consideration
that Bangladesh has taken adoption Mr. P. K. Shrestha, Chairman, and Pakistan is in the process of
approach to transitioning to IFRS as Accounting Standards Board, Nepal adopting IFRS for SME’s.
Sharing convergence experience
with IFRS in Sri Lanka, Mr. Nishan
Fernando, Chairman, Accounting
Standards Committee Sri Lanka,
specified that the Institute of Chartered
Accountants of Sri Lanka took a
bold decision to adopt all IFRS by
1st January 2012 and early adoption
is encouraged. Mr Nishan explained
about the limitations of resources in
applying Accounting Standards in the
Sri Lankan context. He mentioned that
the Accounting Standards Committee
has decided to reallocate its resources
to providing application guidance
and providing comments on the IASB
CA. Manoj Fadnis sharing the Indian experience of convergence with IFRS. Others seen on the dais are
Mr. P.K. Shrestha, Chairman ASB of Nepal, Mr. Rashid Rahman Mir, Chairman, Accounting Standards documents at their Exposure Draft
Committee of ICA Pakistan, Md. Humayun Kabir, Past President, ICA Bangladesh and Mr. Nishan stage.
Fernando, Chairman Accounting Standards Committee of ICA Sri Lanka
Technical Session 3 - SAFA IFRS Cell with 20-30 qualified Mr. Sanath Fernando, Member,
Implementing IAS 32/39 in a people. IFRS Implementation Group for SMEs
Bank Mr. Udhay Phadke, President, presented a paper on the topic ‘IFRS
Mr. V. Venkataramanan discussed Finance, legal and Financial Services for SMEs -A possible way forward for
about the practical problems of Sector and converging with IFRS in emerging/
Implementing Member of the developing economies’. Mr Fernando
IAS 32 & 39 in Group Executive explained the
a bank and Board, Mahindra & need to make
specified that Mahindra Limited, a choice about
fair value is not discussed about using full IFRS or
a major issue implementing IFRS IFRS for SME’s
for banks. Mr V. in a Non-Financial and since a
Ve n k a t a r a m a n Mr. Uday Phadke Diversified Institu- larger proportion
Mr. V. Venkataramanan pointed out that tion and possible workarounds in of companies
Indian banks have weathered the crisis overcoming the challenges. He Mr Sanath Fernando in our region
better than most countries. But this is due pointed out the importance of project are of the SME category, we can
to certain unconventional steps taken management skills and a comprehen- adopt IFRS for SME’s and be IFRS
by RBI, i.e. loosening of provisioning sive implementation plan in the compliant.
requirements during the credit conversion process. Further The Conference concluded on
crisis. importance in training and knowledge the second day with an interactive
Technical Session 4
Mr. Prabhakar Kalavacherla, IASB
Board Member made a presentation
on IASB’s response to helping
overcoming challenges faced by
emerging/developing economies in
implementing IFRS. He specified that
the cost of capital
has come down
by 48 basis points
for those countries
which have
adopted IFRS
(Federal Reserve
study states that Mr. Nadeem Yusuf Adil presenting a paper on ‘Issues in First time adoption of IFRS’. Others seen on the
to reduce 38 bp dais are Mr. Sanath Fernando and Mr. Reyaz Mihular.
IASB Board Member Mr.
Prabhakar Kalavacherla on a 10 year bond, management was highlighted in his panel discussion chaired by Sir
the government has to flood the market presentation. He also dealt with David Tweedie, with CA. Amarjit
with $ 1000 bn). He mentioned that problems around assessment of Chopra and Prabakar Kalavacherla,
the purpose of regulation is to protect de-facto control. Mr. C. Ramakrishnan, CFO TATA
capital markets and thereby financial Motors and Mr. P.S. Bannerjee,
stability and on the other hand the Technical Session 5 Executive VP (Corporate Accounts)
purpose of financial statements is to Mr. Nadeem Yusuf Adil presented and CRO, Larsen & Toubro, joining the
provide information to the users of FS Issues in first time application of panel.
on the future cash flows. He highlighted IFRS in Pakistan. He highlighted the As noted above the presentations
problems with local endorsement. i.e. importance of working with regulators and deliberations at the Conference
urge to tinker, time delay, politicisation, to ensure that there is proper were of very high quality and the
and what the audit report will refer to application of IFRS and that they are in participants expressed complete
and related cost issues. Mr. Prabhakar the process of sorting out issues satisfaction on the subject content of
Kalavacherla proposed to start a to facilitate adopt-ion of IFRS 9. the conference. n
ACCOUNTANT’S BROWSER
‘PROFESSIONAL NEWS & VIEWS PUBLISHED ELSEWHERE’
Index of some useful articles taken from Periodicals/Newspapers received during November-
December 2010 for the reference of Faculty/Students & Members of the Institute.
1. Accounting
Framework for Financial Reporting Standards: Issues & A Department of Statistics & Information Management. RBI Bulletin, Oct.
Suggested Model by AAA FASC. Accounting Horizons, Vol. 24/3, 2010, 2010, pp.1779-1799.
pp.471-485. Preparing Indian Banks for Global Competitiveness: Strategic
Global Accounting Convergence & the Potential Adoption of IFRS & Policy Perspectives by Subir Gokarn. RBI Bulletin, Oct. 2010,
by the U.S. (part I): Conceptual Underpinnings & Economic Analysis by pp.1961-1965.
Luzi Hail etc. Accounting Horizons, Vol. 24/3, 2010, pp. 355-394. Time for Global Capital Account Regulations by Jose Antonio
How do Firms React to the Prohibition of Long-Lived Asset Ocampo. Eco. & Pol. Weekly. November.13, 2010, pp.32-45.
Impairment Reversals ? Evidence from China by Ran Zhang etc. Journal
Account Public Policy, Vol. 29, 2010, pp.424-438. 4. EDUCATION
Is Negative Goodwill Valued by Investors ? by Eugene E. Comiskey Accountability & Transparency in University Governance by A.
etc. Accounting Horizons, Vol. 24/3, 2010, pp. 333-353. Anandakrishnan by M. Anandakrishnan. University News, November
Measuring the Convergence of National Accounting Standards with 8-14, 2010, pp. 18-23.
International Financial Reporting Standards: The Application of Fuzzy Governance in Higher Education Institutions in India: Some Aspects
Clustering Analysis by Xiaohui Qu & Guohua Zhang. The International by S.K. Khanna. University News, November 8-14, 2010, pp.10-13.
Journal of Accounting, Vol.45, 2010, pp.334-355. Governance in Higher Education: International Scenario by R.C.
Report of Standing Committee on Finance (2009-10) on The Sobti. University News, November 8-14, 2010, pp. 31-45.
Chartered Accountants (Amendment) Bill, 2010. Company Law Journal, Right to Education Act, 2009: Salient Features & Major Problems
Vol.4, 2010, pp.90-94. of Implementation by J.S. Jakhar. University News, November 22-28,
Report of Standing Committee on Finance (2009-10) on Cost & 2010, pp.6- 12+18.
Works Accountants (Amendment) Bill, 2010. Company Law Journal,
Vol.4, 2010, pp.95-103. 5. INVESTMENT
Section 404 Compliance & Financial Reporting Quality by Albert L. Competitive Analysis of Vusiness Valuation Services by Michael A.
Nagy. Accounting Horizons, Vol. 24/3, 2010, pp.441-454. Crain. Journal of Accountancy, November 2010, pp.36-40.
Frequency of Corporate Announcements via Stock Exchange
2. AUDITING Websites & Market Efficiency by Asheq Rahman & Roger Debreceny.
Audit Committee Characteristics & Investment in Internal Auditing Journal of Accounting, Auditing & Finance, Summer 2010, pp. 457-490.
by Abhijit Barua etc. Journal Account Public Policy, Vol. 29, 2010, Use of Independent Fairness Opinions & the Performance of
pp. 503- 513. Acquiring Firms by Lucy Huajing Chen. Journal of Accounting, Auditing
Balancing the Costs & Benefits of Auditing & Financial Reporting & Finance, Summer 2010, pp. 323-350.
Regulation Post-SOX, Part II : Perspectives From the Nexus at the
SEX by Zoe-Vonna Palmrose. Accounting Horizons, Vol. 24/3, 2010, 6. MANAGEMENT
pp. 487-507. Corporate Governance & Business Ethics: Challenges for
Effect of Magnitude of Audit Difference & Prior Client Concessions Corporate Sectors by Arindam Ghosh. Chartered Secretary, December
on Negotiations of Proposed Adjustment by Richard C. Hatfield. The 2010, pp.1782-1787.
Accounting Review, Vol.85/5, 2010, pp.1647-1668. Designing & Implementing a Performance Measurement System
Effect of Social Confrontation on Individuals’ Intentions to by Maurice Gosselin. CMA Management, 15th November 2010,
Internally Report Fraud by Steven E. Kaplan etc. Behavioral Research pp.14-18.
in Accounting, Vol.22/2, 2010, pp.51-67. Guiding Values for Corporate Governance: A Consciousness
Effects of Trust & Management Incentives on Audit Committee Perspective by Om Prakash Dani. Chartered Secretary, December
Judgments by Anna M. Rose etc. Behavioral research in Accounting, 2010, pp.1713-1715.
Vol.22/2, 2010, pp. 87-103. How to be a Better Mentor by Erik Thompson. Journal of
Exploring Sarbanes-Oxley’s Effect on Attitudes, Perceptions Accountancy, November 2010, pp.42-46.
of Norms, & Intentions to Commit Financial Statement Fraud from a Management Accounting in Pharmaceutical Sector – A Vital
General Deterrence Perspective by Joseph C. Ugrin & Marcus D. Role in the Decision-Making Process by L.N. Koli. The Management
Odom. Journal Account Public Policy, Vol. 29, 2010, pp. 439-485. Accountant, November 2010, pp.876-879.
Internal Control Reporting Differences Among Public & Stress-Test Your Strategy: The 7 Questions to Ask by Robert
Governmental Auditors: The Case of City & County Circular A-133 Simons. Harvard Business Review, November 2010, pp.93-100.
Audits by Dennis M. Lopez & Gary F. Peters. Journal Account Public
Policy, Vol. 29, 2010, pp.481-502. 7. TAXATION & FINANCE
Prior Audits & Taxpayer Compliance: Experimental Evidence on the Deductibility of ‘Set-On’ Amount Under Payment of Bonus Act by
Effect of Earned Versus Endowed Income by Scott J. Boylan. JATA, Pradip Kapasi & Gautam Nayak. BCAJ, November 2010, pp.45-49.
Vol.32/2, Fall 2010, pp. 73-88. International Taxation: Recent Global Developments in International
Review 2010: Audit, Financial Reporting Consultations by Aidan Taxation by Mayur B. Nayak etc BCAJ, November 2010, pp.59-76.
Lambe & Mark Kenny. Accountancy Ireland, December. 2010, pp.42/6, IRS Amends Plan for Uncertain Tax Positions by Alistair M. Nevius.
pp.7-9. Journal of Accountancy, November 2010, pp.26-29.
Role of Transfer-Pricing Schemes in Coordinated Supply Chains by
3. ECONOMICS Kashi R. Balachandran etc. Journal of Accounting, Auditing & Finance,
Comparatives Study of Special Economic Zones & Land Acquisition: Summer 2010, pp.375-404.
Magical Similarity or Mere Eyewash? by Avani Bansal. Company Law Tax Classification of Foreign Entities in China: The Current State
Journal, Vol.4, 2010, pp.49-52. of Play by Wei Cui. Bulletin for International Taxation, November 2010,
Corporate Disclosure Practices: A Comparative Study Between pp.559-563.
India & America by Deepesh Tiwari. Pranjana, Jan.-June 2010, Vision 2010: It Was Almost Good News. In 2009, The Average
pp.72-87. Canadian by Robert Colapinto. CA Magazine, December 2010,
Performance of Private Corporate Business Sector: 2009-10 by pp.20-27.
Full Texts of the above articles are available with the Central Council Library, ICAI, which can be referred on all
working days. For further inquiries please contact on 011-23370154 or by e-mail at library@icai.org
IASB Proposes Improvements to Hedge amendments set out in Deferred Tax: Recovery of Underlying
Accounting Assets, result from proposals published for public comment in
The International Accounting Standards Board (IASB) an exposure draft in September. IAS 12 requires an entity to
recently published for public comment, an exposure draft measure the deferred tax relating to an asset depending on
on the accounting for hedging activities. The exposure draft whether the entity expects to recover the carrying amount of
proposes requirements that will enable companies to reflect the asset through use or sale. It can be difficult and subjective
their risk management activities better in their financial to assess whether recovery will be through use or through
statements, and, in turn, help investors to understand the effect sale when the asset is measured using the fair value model
of those activities on future cash flows. The proposed model is in IAS 40 Investment Property. The amendment provides a
principle-based, and will more closely align hedge accounting practical solution to the problem by introducing a presumption
with risk management activities undertaken by companies that recovery of the carrying amount will, normally be , be
when hedging their financial and non-financial risk exposures. through sale. As a result of the amendments, SIC-21 Income
The proposals also include enhanced presentation and new Taxes—Recovery of Revalued Non-Depreciable Assets would
disclosure requirements. These proposals sweep away the no longer apply to investment properties carried at fair value.
existing rule-based, complex and inflexible hedge accounting The amendments also incorporate into IAS 12 the remaining
requirements and replace them with a simple, principle-based guidance previously contained in SIC-21, which is accordingly
approach. The result, if adopted, will be a much simpler model withdrawn.
that better reflects risk management practices whilst providing (Source: http://www.ifrs.org/News)
more useful information to investors. The exposure draft
builds on proposals contained in the IASB’s discussion paper Companies Will Get to Use Real Value for Tax Pur-
Reducing Complexity when Reporting Financial Instruments pose in IFRS too
published in March 2008. The exposure draft forms part of Indian corporates sweating over the new International
the IASB’s project to replace IAS 39 Financial Instruments: Accounting Standards increasing their tax liability can relax
Recognition and Measurement, and when its proposals are because the government is likely to allow them to estimate their
confirmed they will be incorporated into IFRS 9 Financial taxes using the current accounting standards. The fair value
Instruments. The exposure draft Hedge Accounting is open accounting of assets and liabilities under IFRS, will give rise
for comment until 9th March 2011 and can be accessed via to notional profits and losses because of market fluctuations
the ‘Comment on a proposal’ section of the IASB website. in prices. Such book valuation gains or losses would have
During the consultation period, the IASB will undertake further distorted the profit and loss accounts of the nearly 300 big
outreach to seek views on the proposals. The IASB will re companies that will start preparing their financial statements
deliberate the proposals with a view to completing the new based on IFRS from the next fiscal and in a situation of rising
hedge accounting requirements in the first half of 2011. In asset prices find their tax liability go up. All notional gains arising
addition to the general hedge accounting proposals in the out of the convergence process will be disclosed separately
exposure draft, the IASB is continuing to discuss portfolio without them directly impacting a company’s taxable net
macro hedge accounting. profits as stated by an official of ministry of corporate affairs.
(Source: http://www.ifrs.org/News) Under the current accounting standard assets and liabilities
are stated at their historical cost. The relaxation follows after
IASB Issues Narrow Amendments to IFRS 1 the finance ministry raised concern that sentiment-driven
The International Accounting Standards Board (IASB) volatility in fair valuing assets and liabilities could impact
issued recently two narrow amendments to IFRS 1 First-time taxation. Following the convergence, profit and loss accounts
Adoption of International Financial Reporting Standards (IFRSs). of companies will have to include unrealised gains and losses
The amendments confirm proposals that were published as on many item such as property values, and on instruments like
separate exposure drafts for public comment in August and derivatives and risk hedges. As per the road map laid down by
September. The first amendment replaces references to a the ministry of corporate affairs, companies listed on domestic
fixed date of ‘1 January 2004’ with ‘the date of transition to stock exchanges, abroad and all companies with a net worth
IFRSs’, thus eliminating the need for companies adopting of over R1,000 crore will have to converge their financial
IFRSs for the first time to restate derecognition transactions statements with IFRS on 1st April, 2011. In effect, the relaxation
that occurred before the date of transition to IFRSs. The will mean that IFRS converged financial statements, which are
second amendment provides guidance on how an entity more realistic in terms of assessing the worth of a firm, will not
should resume presenting financial statements in accordance be used by the taxmen. They will compute the tax liability of
with IFRSs after a period when the entity was unable to comply a firm based on the current Indian accounting norms, which
with IFRSs because its functional currency was subject to is largely based on the historical cost of an asset or liability.
severe hyperinflation. The amendments to IFRS 1 are set As is in Germany, a framework fully consistent with IFRS for
out in Severe Hyperinflation and Removal of Fixed Dates for statutory accounts, and which have separate adjusted records
First-time Adopters and are effective from 1st July 2011. Earlier for tax purposes is desired. The proposal will, however, add to
application is permitted. Further details are available from the companies’ burden as they will have to prepare two sets of
IASB website at www.ifrs.org. accounts. In the long run, experts argue, there has to be a
(Source: http://www.ifrs.org/News) broad reconciliation between IFRS and Indian GAAP profits.
Without a detailed study and a comprehensive approach, any
IASB Issues Amendments to IAS 12 Income short cut methods in the long run can make the income tax
Taxes environment for corporates very chaotic, confusing, litigative
The International Accounting Standards Board (IASB) and challenging. The income-tax (IT) authorities must review
recently issued amendments to IAS 12 Income Taxes. The the converged accounting standards and come up with a
comprehensive way of treating unrealised gains and losses IPSASB Publishes 2010 Annual Improvements
for the purposes of taxation. Standard
(Source: http://bx.businessweek.com/international-accounting). The International Public Sector Accounting Standards
Board (IPSASB) recently published Improvements to
IASB Publishes IFRS Practice Statement on IPSASs—2010. The publication completes the IPSASB’s
Management Commentary improvements project for 2010. The IPSASB’s improvements
The International Accounting Standards Board (IASB) project is modeled on the IASB’s annual update program.
recently published an IFRS Practice Statement Management Improvements are made to existing IPSASs to maintain
Commentary, a broad, non-binding framework for the alignment with International Financial Reporting Standards
presentation of narrative reporting to accompany financial (IFRSs), as well as other general improvements. The
statements prepared in accordance with IFRSs. Management 2010 amendments relate primarily to requirements for
commentary fulfils an important role by providing users of financial recognition, measurement, and disclosure. They do not
statements with a historical and prospective commentary on represent substantive revisions to the content of existing
the entity’s financial position, financial performance and cash standards.International Public Sector Accounting Standards
flows. It serves as a basis for understanding the management’s (IPSASs) is continually reassessed by the IPSASB to ensure
objectives and strategies for achieving those objectives. The that they remain relevant to users of public sector financial
Practice Statement permits entities to adapt the information statements. Improvements to IPSASs—2010 is available to
provided to particular circumstances of their business, download free of charge from the IPSASB section of IFAC’s
including the legal and economic circumstances of individual Publications and Resources site (web.ifac.org/publications).
jurisdictions. This flexible approach will generate more The IPSASB encourages IFAC members, associates,
meaningful disclosure about the most important resources, regional accountancy bodies, and firms to use these
risks and relationships that can affect an entity’s value, and materials and to promote their availability to members and
how they are managed. The Practice Statement is not an IFRS. employees.
Consequently, an entity need not comply with the Practice (Source: http://press.ifac.org/news)
Statement to comply with IFRSs.
(Source: http://www.ifrs.org/News) IAESB Proposes Clarified Standard on Continuing
Professional Development
IPSASB Publishes International Public Sector Con- The International Accounting Education Standards Board
ceptual Framework Documents for Comment (IAESB) recently released for public exposure a proposed
The International Public Sector Accounting Standards revision of International Education Standard (IES) 7, Continuing
Board (IPSASB) recently released, for comment, an exposure Professional Development: A Program of Lifelong Learning
draft (ED) and two Consultation Papers related to its project and Continuing Development of Professional Competence.
to develop a Conceptual Framework for the general purpose IES 7, drafted in 2004, introduces the concepts of continuing
financial reporting of public sector entities. The Conceptual professional development (CPD)—learning that develops
Framework is the IPSASB’s key strategic objective for and maintains competence to enable professional
2010–2012 and is of fundamental importance to the future accountants to perform their roles effectively—as relevant,
of global public sector standard setting for at least the next verifiable, and measurable learning activities and outcomes.
10–15 years. Conceptual Framework Exposure Draft 1 (CF- The proposed redrafting aims to assist the ongoing
ED1), Conceptual Framework for General Purpose Financial worldwide development of CPD systems and compliance
Reporting by Public Sector Entities: Role, Authority, and mechanisms. IAESB expects to increase the opportunity
Scope; Objectives and Users; Qualitative Characteristics; for mobility of labor, and in so doing to contribute to
and Reporting Entity, refines the issues highlighted in a the global economy through these revision efforts. This
Consultation Paper published in 2008 and reflects the exposure draft is the first in a series of planned revisions
IPSASB’s consideration of the responses to that over the coming year. The IAESB plans to clarify the
Consultation Paper. CF-ED1 proposes that the objectives obligations of CPD through the revision of IES 7, and to
of financial reporting should be to provide information for draw international attention to prequalification education
accountability and decision-making purposes. It also proposes for accounting professionals and the competencies of an
that the scope of financial reporting should extend beyond the auditor through revisions of additional standards.
traditional financial statements to include more comprehensive (Source: http://press.ifac.org/news)
financial and non-financial information. The Consultation Paper,
Elements and Recognition in Financial Statements, identifies IASB and FASB Progress Report on Converging
alternative asset and liability-led and revenue and expense- IFRSs and US GAAP
led approaches to financial statements and considers the key The IASB and the FASB published recently, a progress
characteristics of assets, liabilities, revenue and expenses. It report on their work to improve IFRSs and US GAAP and
also discusses whether further elements should be defined to bring about their convergence. Since the last progress
and examines approaches to the recognition of elements. The report was published June 2010 the boards have jointly
Consultation Paper, Measurement of Assets and Liabilities in issued major exposure drafts on Leases and Revenue
Financial Statements, considers the measurement bases that Recognition, completed the first phase of the Conceptual
may be appropriate for the elements that are recognised in Framework project and begun discussions to seek to align
financial statements. It discusses historical cost, market value, their respective Financial Instruments accounting proposals.
and replacement cost and then examines deprival value as an The boards have also further prioritised board time available
approach to select the most relevant measurement basis. . to discuss convergence projects.
(Source: http://press.ifac.org/news) (Source: http://www.ifrs.org/News)
Goods and Services Tax Would be Implemented order, NV Vasudevan, judicial member and Pramod Kumar,
From April 1, 2012 member of ITAT held that scheduling performances of such
Finance Minister Pranab Mukherjee has that Goods and reputed artistes in India is not easy. The ITAT further held that
Services Tax (GST) would be implemented from April 1, these artistes are known for their unpredictable behaviour.
2012. “We wanted to introduce it earlier, but due to some Here comes the role of agent who has the acumen and skills
problems in implementation of the new indirect tax system, to negotiate with such artistes, the order said. It added that
constitutional amendments are needed to levy it in states,” for rendering such services, depending upon the nature of
he said. The finance minister said the Centre would take the deals and time and effort involved, such agents claim
into account the concerns of the states and work towards commission from organisers. There is no material on record
forging a common ground for implementation of the major to substantiate the conclusion of the assessing officer that
tax reform. The GST aims to dismantle the complexities and the entire consideration including fees paid to Davie is in fact
non-transparency in tax regime for goods and services. It fees payable to the artistes to perform in India, the order said
encourages a consumer-friendly product pricing that should adding that this conclusion of the assessing officer is purely
benefit the common man, he said. While VAT brought a on surmises. On reimbursements, the tribunal observed, the
steady increase in the revenues of the states, were now law is well settled that any payment towards reimbursement
moving towards an economy-wide generalised system of of expenses is not chargeable to tax.
GST, which is likely to improve tax collections and boost (Source: http://www.hindustantimes.com)
India’s economic development by integrating the Indian
market through a uniform tax rate, he said. Comptroller and Auditor General Moots Lower
(Source: http://www.business-standard.com) Corporate Tax
The Comptroller and Auditor General (CAG), has mooted
Commission to Agents of Foreign Artistes Non- lower corporate taxes to stop many non-resident firms
Taxable: ITAT from misusing the Double Taxation Avoidance Agreements
The commission paid to foreign agents of international (DTAAs) on account of higher levies in India. In a latest
artistes performing in India is not taxable, ruled the Income review report on direct taxes submitted to Parliament, CAG
Tax Appellate Tribunal (ITAT). The tribunal also ruled observed that in several countries with which India has a
that reimbursement of expenses to international artistes DTAA, tax rates range between 20 per cent to 30 per cent
performing here is also not taxable. This recent ruling by an of net business income of companies while in India, the tax
ITAT bench has provided relief to many event management deduction at source ranges between 10 per cent to 20 per
companies who hire foreign agents to procure international cent on gross receipts which would be much higher than
entertainers to perform in India. The order was passed on the tax rates in other countries. “We feel that a lower flat rate
November 19, in an appeal filed by the Income Tax (I-T) of tax applicable across streams of incomes irrespective of
department against Wizcraft International Entertainment destinations would be a workable alternative,” the report
Private Limited. The department filed an appeal after the said. The Income Tax Act and DTAA together provide for
commissioner of income tax (Appeals) ruled in favour of a multitude of exemptions to the incomes arising to Non-
the company (Wizcraft) saying that payment to an agent Resident Indians which are currently unquantified in terms of
and reimbursement of expenses to the performing artistes revenue foregone, the report said while suggesting the need
are not taxable. As per the case, Wizcraft entered into an to phase out these exemptions. The CAG study pointed
agreement with UK-based Colin Davie who provides artiste out that by lowering levy, it would facilitate greater taxpayer
management services around the world. The company hired compliance, reducing cost of doing business in India and
Davie to get singers Diana King and Shaggy, both from the also cutting down on instances of disputes.
United States of America for various performances in India (Source: http://economictimes.indiatimes.com/)
in 1999 and 2000. While Wizcraft deducted the tax at source
(TDS) while paying the artistes, and deposited the same HC: Govt Can Levy Service Tax Rent on Immov-
with the I-T department, the company did not deduct tax able Property
while reimbursing their travel and other expenses and while The Punjab and Haryana High Court has upheld the
paying commission to Davie. The assessing officer of the I-T Constitutional validity and retrospective levy of service tax
department was of the view that the payment to Davie was on renting of immovable property. The ruling, in favour of
part of the payment to the entertainers. The officer also held the government, will protect over R1,000 crore of revenue
that the nature of services agreed to be rendered by Davie the tax department was expecting from the service. In the
was such that he had to be present in India to perform them. Finance Bill 2010, amendments were made in the definition
Wizcraft said the commission paid to Davie is not taxable in of renting of immovable property to provide explicitly that
India because he had rendered services outside the country the activity of renting itself is a taxable service. The change
only to coordinate the engagements of the international was made with retrospective effect from June 1, 2007. This
artistes. For reimbursement of expenses to artistes, the was likely to get the government another R1,000 crore, apart
company said there is no element of income and therefore from R200 crore in the current financial year.
there is no obligation to deduct TDS from the payment. In the
Note: Readers attention is invited to the fact that CA. PP Pareek has generously contributed a total of R1,09,000 so far and not 66,000
as wrongly mentioned in December 2010 issue of the journal. The inadvertent error is deeply regretted.
We receive articles from our authors either on We appeal, therefore, to all our prospective
their own or in response to our invitation when authors not to send a plagiarised work to us for
we bring out special issues. In the recent past, publication and not try to take credit for a work
we have come across the practice of plagiarism in which is not theirs. Any reference of other sources/
some of the submissions by our authors. Contents authors/content should be duly given within
of some articles have been found to be lifted from quotes with the name of the source in the body of
resources including books, websites, etc., and the submitted articles’ text itself. By following this
presented to us as authors’ original work, which practice, we will essentially show respect towards
is nothing but plagiarism, an infringement of the creative community which all of us value
others’ intellectual property rights and, therefore, a immensely.
punishable offence. It is an intellectual crime. - Editor
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LACS & UPTO RS.10 LACS AS PER LATEST IT RETURN (with LACS, AS PER LATEST IT RETURN (WITH EXPERIENCE OF 3
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* Subject to gradation of the borrower
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in today’s environment
as internal audit This Compendium of Standards on Internal Audit
functions will be more comes with a CD of the entire material to ensure ease
intensively scrutinised by of reference and reusability.
stakeholders. The best
2010
the best practices and processes in carrying out of the Institute. Copies can also be obtained by
internal audit engagements. Standards on Internal post. To order by post, send a demand draft for the
Audit issued by the Internal Audit Standards Board amount of price of the publication (add the charges
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considerations for the internal auditor in planning, Chartered Accountants of India, New Delhi”,
conducting, documenting and reporting on internal payable at New Delhi, to the Postal Sales Department,
audit. The Standards represent the basic principles the Institute of Chartered Accountants of India, A-29,
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This updated edition of Compendium contains text of Postal Charges:
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CPE
Residential Refresher Course on Banking,
12
Hours
Insurance and Pension at Amritsar
Organised by: Committee on Banking, Insurance and Pension
Hosted by: Amritsar Branch of NIRC of ICAI
Theme
The Programme is aimed to equip members of the Institute to play a proactive role in banking, insurance and pension
sectors and to expand professional opportunities therein.
Topics to be Discussed
Classifieds
4829 Delhi based Chartered Accountant firm looking for 4830 CA Firm with offices at Chennai and Madurai, one
practicing Chartered Accountant having 2-3 years partner of 40 years experience and one partner
experience to merge with the firm for mutual benefits. of 10 years experience with DISA /CISA/ DRM
Firm willing to open branch in Bangalore. Freshly qualifications, looking for merger with firms
qualified chartered accountants holding COP may also based at Mumbai/Delhi. Contact subbu@sify.com
apply. Please contract: vkverma@vkvermaco.com /9442258724
24 CPE
HOURS
Organised by the Auditing and Assurance Standards Board
The Auditing and Assurance Standards Board of the Institute is organising Training Workshops on Audit
Excellence to impart in depth knowledge on implementing the new/revised Standards on Auditing issued by
the ICAI under the Convergence and Clarity Project in the recent past.
After successful completion of the Training Workshops at New Delhi, Chennai, Mumbai and Kolkata in
December, 2010, the Board is now organising these Workshops in the following cities in January, 2011:
x Jaipur: January 12, 13, 15 & 16, 2011
x Pune: January 27 to 30, 2011
x Indore: January 22 to 25, 2011
x Hyderabad: (dates to be announced soon)
x Bangalore: (dates to be announced soon)
9 Practical case study-based approach
9 Interactive classes
Workshop 9 Professionally developed reading material
highlights
Will also include industry specific Standards on Audit implementation issues e.g.
Bank audit, Audit of PSE’s etc.
Senior and experienced members from the profession as well as faculty from
Trainers
reputed academic Institutions
Duration Four days with six hours of technical sessions in each day
Participants Maximum fifty per workshop
Fees R5000/- per participant (includes cost of reading material and lunch, Tea etc.)
Registration will be strictly on first come first served basis.
NATIONAL SUMMIT
ON
NETWORKING & CAPACITY BUILDING OF
CA FIRMS
Organised by :
Hosted by:
Committee for Capacity Building of
Western India Regional Council of ICAI
CA Firms & Small and Medium Practitioners, ICAI
Do you desire to expand the size of your practice…….. ?
Are you planning to strengthen the capacity of your Firm……..? TOPICS OF THE SUMMIT
Are you looking at expanding your reach to business clients u Need for Capacity Building
across the Country….? • Scope, Objective, Deliverables,
If yes, then Networking could be the solution. The expectations of Advantages, Disadvantages,
today’s users are that of – ‘Expertise, Experience & Opportunities.
Efficiency’. Networking enables professionals to provide Multi- u Practical aspects of Networking
location services through a ‘Single Window’, which is the need of
the hour. Networking can expand your business opportunities • Scope, Objective, Experience,
exponentially and take you to the next orbit of professional Success Stories, Do’s & Don’ts,
practice. Advantages, Disadvantages.
In order to facilitate members to meet, interact & identify partners u Practical aspects of Merger &
for forming Networks, the Committee for Capacity Building of CA Corporate Form of Practice
Firms and Small & Medium Practitioners (CCBCAF&SMP) has • Scope, Objective, Experience,
organized this unique Networking Summit where like-minded Success Stories, Do’s & Don’ts,
peers may initiate collaborative approach to expand their Advantages, Disadvantages.
professional opportunities. It will provide visionary keynote
sessions on the practical aspects of capacity building measures u Open Networking Session
and foster a productive networking environment for interested • Face to Face interaction
members. Do not miss this opportunity to network, establish amongst Members/Firms for
connections, exchange ideas and gain knowledge. Networking & Merger
6 CPE
Time : 9:30A.M. to 5:30P.M.
Hours
Venue : Hotel Kohinoor Continental, Andheri Kurla Road,
Andheri (E), Mumbai
Registration Amount : Rs. 1000/- per participant.
(Remit cheque in favour of WIRC of ICAI)
Program Director : Chairman, CCBCAF & SMP, ICAI
Mobile No.-09821119043
Program Coordinator : Secretary-CCBCAF&SMP, ICAI, New Delhi
Mobile No.-09350799922
Tel: 0120-3986945-952, E-mail: ccbcaf@icai.org
For Registration and : Deputy Secretary, WIRC of ICAI, Mumbai
further details, please contact Mobile: 09321239892, Tel: 022-39802952
*Participants may visit www.caconnect.co.in to identify firms & members for Networking.
Tablespace will be provided in the Summit for one to one meetings among the members.