BCAJ | Bombay Chartered Accountant Journal

REPRESENTATION

Bombay Chartered Accountants’ Society

7, Jolly Bhavan No. 2,

New Marine Lines, Mumbai-400020.

Tel. : 61377600 to 05 / Fax : 61377666
E-mail : bca@bcasonline.org;

Website : www.bcasonline.org

WebTV : www.bcasonline.tv

September 27, 2011

Shri Shobhit Jain

OSD (TRU)

Central Board of Excise and Customs (CBEC)

Government of India, North Block,

Parliamentary Street, New Delhi-110001.

Respected Sir,

Subject: Representation of our Views on the Concept Paper for
Public Debate Taxation of Services based on a Negative List of Services

We have seen with interest the Concept Paper for Public Debate and on behalf of the Bombay Chartered Accountants’ Society, and would like to humbly submit our representation on various aspects.

We hope that our representation will receive due consideration. We would be most willing to put forward our views in person should this be required. Thanking you,

We remain,

Yours truly,
For Bombay Chartered Accountants’ Society

Pradip K. Thanawala

President

Govind G. Goyal

Chairman,

Indirect Taxes & Allied Laws Committee

Representation of our Views on the Concept Paper for Public Debate Taxation of Services based on a Negative List of Services

1.0 Background Pursuant to the announcement made by the Honourable Finance Minister while presenting the Union Budget 2011, a concept paper on taxation of services based on negative list of services has been issued for public debate and views are solicited from all stakeholders before 30-9-2011. Accordingly, we present our views on the said concept paper.

2.0 Recommendations in brief The concept paper introduces the justification for the negative list on the grounds of administrative challenge, stability and comprehensiveness and proceeds to place certain questions for public debate and feedback. The questions placed and our summarised feedback on those questions is tabulated below:

3.0 The country should not adopt a negative list

The concept paper in paras 2, 3 and 4 highlights in detail the issues surrounding the positive and negative lists. While it does accept that the currently existing positive list has certain advantages in terms of definitiveness, it seeks to justify the introduction of the negative list by citing certain limitations of the current mechanism of positive list. We are of the view that most of the said limitations can be either removed even in positive list approach or are so inherent that they would exist even in the negative list approach. The following table explains the same :

On a perusal of the above table, it is evident that the reasons cited in favour of the transition appear to be more a mirage. The same issues can be addressed in the positive list or would likely to be continued in the negative list as well.

It may be noted that though the consolidated Excise Act was enacted in 1944, the residuary entry under Excise Law (converting the law from the negative list to positive list) was introduced only in 1975 i.e., more than 30 years after the introduction of the law. As compared to that time frame, the service tax law is merely 17 years old. Further, it is much easier to provide a comprehensive definition of ‘goods’ as compared to ‘services’. Therefore, the challenges of introducing a negative list in services can be compounded.

4.0 Even if it is felt that we need to adopt the negative list, the same should be adopted only at the time of GST and not earlier than that

The nation is on the verge of introducing a major indirect tax reform by introduction of comprehensive Goods and Service Tax (GST). The introduction of GST will obviate the need to classify transactions between goods and services to a great extent. Further, the Constitutional Amendments required for introducing GST will obviate many of the challenges faced currently in defining the scope of services. Therefore, it is felt that even if we need to adopt the negative list, the same should be adopted only at the time of GST and not earlier than that.

5.0 If the negative list is introduced prior to the introduction of the GST, the definition as recommended below should be adopted Service means any obligation undertaken by the assessee for a monetary consideration pursuant to a contract or agreement, whether written or not, (other than a contract or agreement for supply of goods, money or immoveable property) between two or more consenting parties and includes:

A. right to use an immovable property;

B. construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority;

C. temporary transfer or permitting the use or enjoyment of any intellectual property right;

D. obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

E. service in relation to lease or hire of goods; and

F. right to enter any premises

But excludes a supply —

A. by an employee to an employer in the course of or in relation to the employment of the person;

B. by a constitutional authority under the Indian Constitution or a member of an Indian Legislature or a local self-government in that capacity;

C. that amounts to manufacture of excisable goods or is chargeable as part of the value of goods to a duty in terms of the provisions of Central Excise Act, 1944;

The above amended definition is preferable since the proposed definition states that service means ‘anything’. The word ‘anything’ does not convey any meaning. No statute defines the charging provision to be ‘anything’. There needs to be a certainty to what is proposed to be taxed. Anything conveys vagueness rather than certainty or definitiveness. Further, generally the term ‘thing’ is used for tangible products like book, CD, etc. However, a lecture delivered by a professor or song performed by a singer (some examples of services) cannot be said to be ‘things’ in general parlance. Therefore, in trying to define service as ‘anything’, the soul of service is missed out.

6.0 In addition to the negative list of services, another list of services eligible for zero rating should also be introduced
The concept paper includes a negative list of services. However, it does not include services which should be zero- rated. It is therefore important that another list consisting of zero-rated services (i.e. services which are not liable for tax on the output but at the same time eligible for input credit) should be included. The said list should include exports and supplies to SEZ units and developers.

BCAJ Admin

Lecture Meetings

Subject : Taxation of Real Estate — Some Important Aspects including PCM, Development & Redevelopment, S. 50C and S. 80IB(10)

Speaker : Pradip Kapasi, Chartered Accountant

Date : 20-10-2010

After a brief introduction of the topic for the evening, the learned speaker took up the Completed Contract Method (CCM) as the first issue to be discussed. The Supreme Court in the case of Bilahari Investment (299 ITR 1) held that the CCM which was acceptable in accountancy was also acceptable in the case of income tax. The propositions laid down by the Supreme Court in this decision were that the CCM was an accepted method of accounting, it was an objective method and it was a revenue-neutral method. Based on the observations of the Supreme Court, the speaker opined that the CCM would be acceptable provided that there was no accounting standard in force prohibiting use of the CCM.

The speaker then proceeded to discuss certain recent developments in accountancy which have a bearing on the topic. It was noted that AS-7 was revised to provide that the revenue for all contracts entered into on or after 1-4-2003 would have to be recognised for on a Percentage Completion Method (PCM) only?: the option to use CCM has been withdrawn. Further, the revised AS-7 is not applicable to builders and developers but only to contractors. The speaker referred to the opinion of the Expert Advisory Committee of ICAI which has opined that the revenue recognition of builders and developers would be in accordance with AS-9 read with AS-2. Reference was made to the Exposure Draft of ASI which had clarified that the revenue was required to be recognised in cases of builders and developers only at the time of parting with the possession of the premises and not at the time of mere execution of the agreement for sale. However, the Draft was not finalised and instead, the Guidance Note 23 was issued, which states that it would be reasonable to assume that the property in goods passes on the execution of agreement and therefore, revenue recognition should occur at that stage provided work had commenced. Attention was drawn to the GN which provided that in cases where substantial work is yet to be performed at the time of execution of the agreement, one would have to recognise the revenue in stages by reverting to AS-7 for following the PCM. Thereafter, the speaker discussed some important aspects of relevant IFRS on this topic, viz., IAS 11, IAS 18, IAS 40 and IFRIC 15.

Thereafter, the learned speaker addressed the issue of how the taxation of real estate industry would be affected by the various accounting changes that have or will take place. The speaker opined that given all the accounting changes, in view of S. 145 and S. 145A and the tribunal decisions in the case of Greater Ashoka LDC. (P) Ltd. (89 TTJ 281) and Growth Techno Projects Ltd. (29 SOT 59), following the CCM would not be difficult.

The speaker then highlighted that the cost of acquisition of land is to be ignored in considering the value of the work completed and also in determining the stage of completion of work. He explained that the base unit for computing the work completion can be w.r.t. — area, cost, time or sales value. He expressed that the time of passing the effective control and management by the builder-developer was crucial in deciding the time for recognition of revenue. The speaker opined that the revenue may be recognised once the stage of completion of work reached 25% of the total work to be done. He also referred to some pertinent issues arising in valuation of stock/land/WIP.

The next point of discussion was whether the borrowing cost incurred (being in the nature of period cost) was allowable as deduction in computing the income for tax purposes?? It was explained that the Bombay High Court in the case of Lokhandwala Constructions (260 ITR 579) held that the interest should be allowed as a deduction as it was in the nature of business expense u/s. 36(1)(iii). On the topic of ‘Borrowing Cost’, the speaker also discussed the cases of Wallstreet Constructions [101 ITD 156 (Mum.) (SB)], K. Raheja [102 ITD 414 (Mum.)], Thakkar Developers [115 TTJ 841 (Pune)].

The next question was whether sharing of land or real estate of any kind, in any manner, would by default lead to formation of a joint venture?? If yes, another question would be whether this JV would then be an AOP and taxable as a separate entity?? He highlighted the acute controversy prevailing on account of the conflicting decisions of the AAR in the cases of Van Ord 248 ITR 399, and Geo Consult GmbH (304 ITR 283). In the opinion of the speaker, the arrangement of land sharing without sharing the profit does not amount to joint venture.

In the area of indirect taxation and allied laws, the speaker discussed the developments in the following areas?:

Service tax on sale of flats — Harekrishna Developers AIT, 2008 128 (AAR), Magus Constructions P. Ltd., 2008 TIOL 321 (Gau.).

Consumer Protection Act — Fakirchand Gulati v. Uppal, (SC), ITAT Online.

VAT on sale of flats — Review of K. Raheja’s decision by larger Bench of SC in L&T’s case, Amendment of 2006 w.e.f. 20-6-2006, Trade Cir-cular dated 7-2-2007 and Amendment of 2010.

Stamp Duty — Development agreements and tenancy transfers.

Thereafter, the speaker discussed whether a development agreement results into a transfer in the hands of the landlord and if yes, at what point of time does the liability to pay tax arise?? The decision of Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (260 ITR 491) was discussed and debated and the serious consequences following this decision were highlighted.

Next, in the cases redevelopment of tenanted properties, the speaker said that in case the land-lord himself develops the property, there would be no transfer in his hands. However, in case the landlord does not develop the property himself, in such cases, the above decision of the Bombay High Court would be applicable.

Other situations and alternatives arising from the decision of Chaturbhuj Dwarkadas Kapadia such as development pending the approval, willingness to perform, deferred possessions, piecemeal transfers, partial retention, need for written agreement, etc. were discussed.

Next point was redevelopment. In case of redevelopment of tenanted property, there could be three situations in respect of the tenant on redevelopment?:

The tenant of old property becomes tenant of new property after the redevelopment — Would this result in capital gains in the hands of the tenant?? There is a transfer, however, capital gains would arise only if there is a full value of consideration.

Tenant remains a tenant immediately after the redevelopment, but after a while, he becomes the owner — There are two views on transfer when tenancy is converted to ownership. One view, to which the speaker subscribed, is that there is a new right in place of the old right and thus, there is transfer. The other view is that tenancy provides an occupancy right and upon conversion to ownership, there is a merger of an inferior interest to superior interest but no transfer.

Tenancy is converted to ownership immediately on redevelopment — Whether when such ownership property is transferred shortly after conversion to ownership, would it be long-term or short-term?? Courts have held that this is short-term capital asset as what was transferred was the ownership right which was acquired only in the short term.

In case of redevelopment of society property, issue is whether there is any liability to tax when the society and owners transfer the development rights to developers. If yes, the issue would be that since the transferable development rights (TDR) have no cost of acquisition, there would be no capital gains tax. In this regard, the decision in the case of Shakti Insulated Wires Ltd. (87 ITD 56), should be noted which stated that the cost of acquisition was to be determined by pro-rating the cost of acquisition of the land. However, later there were decisions in the cases of Jethalal D. Mehta (2 SOT 422) and Om Shanti CHS Ltd. (41-B BCAJ 265) which held that since TDR and additional FSI have no cost of acquisition, there was no capital gains tax. However, in case of transfer of unutilised FSI, there would be capital gains tax.

Another issue in this case would be whether taxability would be in the hands of the society or members. In case of Auroville CHS Ltd., the Mumbai Tribunal has taken a view that the taxability should be in the hands of the members. However, at present, this issue has not been examined in detail by any court of law.

The meeting ended with the vote of thanks.

Subject : Important Practical and Legal Issues arising out of first and second appeal and relevant amendments related to appeals in DTC

Speaker : Dr. K. Shivram, Advocate

Date : 24-11-2010

Dr. K. Shivram, Advocate, addressed the members on the subject of “Important Practical and Legal Issues arising out of first and second appeal and relevant amendments related to appeals in DTC” on November 24, 2010 at IMC. The speaker in his exhaustive style covered various issues with regard to procedures and legal concepts in relation to appeals. He discussed not only the main legal and procedural issues in relation to appeals, but also the practical issues in representation and documentation which can cause damage unless not observed diligently.

The speaker started with appeals at the first appellate stage. He covered in detail the fundamental procedural requirements of grounds of appeal and the statement of facts required for every appeal. He stressed on the importance of each document and the ramifications if irregularities crop up in the same. He also dealt with reassessment proceedings and instances where an assessee can ask for squashing of the proceedings.

The speaker ably covered significant issues including that of making a claim in the course of assessment proceedings, inclusion of additional grounds for the first time before the appellate authority, raising of the jurisdictional issue at a later point of time, production of additional evidence, etc.

In the same vein, he brought out the finer points in germane topics like who can file or sign an appeal by alerting the participants to the risk of an assessment by consent, the consultant’s limited role, etc. He briefly covered the powers of the CIT(Appeals) as also the rights available with the appellant including those with respect to stay of recovery proceedings.

For the benefit of participants, he listed out various instances in which defects in an appeal can be cured under the maxim of judicial propriety. He also gave a list of judicial precedents to support each instance.

In the later part of his speech, Dr. K. Shivram elaborated on the various issues regarding appeals to the Income-tax Appellate Tribunal.

He highlighted specific points in relation to filing of appeal, service of order, etc. He detailed various rules in relation to rights of respondent, rectification of mistake, presentation of paper book, filing fees, etc.

For each major issue, he provided anecdotes from his vast personal experience to drive home the point. Further, his speech was bolstered by a gamut of legal precedents which found immense favour with all participants. He also gave an insight on important aspects of the Direct Tax Code wherever relvant.

At the end, he provided a detailed referencer on various guidelines and regulations. It is said that for every legal argument, the presentation of the argument is as important as the content. To that end, Dr. K. Shivram capped his exhaustive presentation by providing resources for the participants on the art of representation.

The participants also got a chance to get their queries answered from the learned speaker. His enthusiasm coupled with his deep knowledge of the subject was well appreciated by all the participants.

Subject : Recent Developments in IFRS – Globally and in India

Speaker : Mr. N. P. Sarda, Chartered Accountant

Date : 08-12-2010

Mr. N.P. Sarda, started his lecture by briefing about the journey of the formation of Accounting Standards. In 1977, India had to decide whether to adopt the International Accounting Standards in totality or to formulate its own Accounting Standards. The Accounting Standards Committee decided to formulate its own standards; accordingly Indian Accounting Standards came into existence. The Indian Accounting Standards are being followed since last three decades.

In 2007, again a debate arose whether to follow the International Financial Reporting Standards (IFRS) and adopt the same in totality or to bridge the gap between Indian Accounting Standards and IFRS by converging the standards. The decision was taken to adopt the convergence process.

The journey of IFRS was explained. Initially, there were 41 International Accounting Standards (IAS) as they were termed prior to being termed as IFRS. Out of these 41 IAS, 12 standards were withdrawn or superseded by new standards, leaving 29 IAS. Presently, there are nine IFRS and 16 interpretations on IFRS known as IFRICs. Finally there are 11 interpretations on IAS also. To sum up, at present IFRS has total of 65 documents to be referred.

To be at the level where all the accounting standards are accepted by the world at large, a country has to pass through three stages, namely:

Harmonisation;

Convergence; and

Adoption

India, has successfully harmonised its Accounting Standards to suit the local needs of stakeholders. It has decided not to directly adopt the IFRS, but will be passing through the second stage of convergence of Indian Accounting Standards with the IFRS. In convergence, there is right to ‘carve out’ i.e. right to differ from IFRS.

Section 211 of the Companies Act, 1956 will have to deal with two categories of Financial Statements.

Financial Statements prepared as per IFRS Converged Accounting Standards for the entities where the adoption of IFRS Converged Accounting Standards is mandatory; and

Financial Statements prepared by other entities, where they will continue to prepare them as per the Indian Accounting Standards.

The two main challenges for convergence are:

Fair Value; and

Tax Implications.

The above two challenges are of a very great concern and they are considered to be major barriers to the smooth implementation of IFRS.

The ideal decision is to have the applicability of IFRS only for the Consolidated Financial Statements (CFS) and allowing individual subsidiaries and also holding company to continue to follow Indian Accounting Standards. This will mitigate the issues relating to tax, Schedule VI, Schedule XIV and other corporate compliances. In fact, listed companies of 27 countries of Europe have only CFS prepared as per IFRS.

There will have to be legislative changes to the provisions of Sections 78, 100, 205, etc, taking into consideration the treatment given under IFRS. For example:

Redeemable Preference Capital which is part of Equity as per Indian AS, will have to be treated as debt as per IFRS;

Fully Convertible Debentures, which till the time of conversion is treated as debt, will have to be segregated and the element of Equity will have to be shown under Equity.

There will have to be a separate Schedule VI for Financial Statements under IFRS. Even Schedule XIV will also have to be amended for IFRS compliant Financial Statements, in view of the fact that as per IFRS, depreciation on assets has to be pro-vided as per the actual useful life of the asset. The existing Schedule XIV prescribes standard rates of depreciation for various categories of fixed assets, irrespective of its useful life.

There have to be rules of the game for convergence, which are covered in IFRS 1 – First Time Adoption of IFRS.

There are five items where the effect of the changes due to adoption of IFRS is to be ignored for the past years and the effect has to be considered from the year of adoption only. It means there will not be retrospective changes required to be made to the Financial Statements in such cases.

There are 17 items, wherein an option is given to the entity to apply treatment prescribed under IFRS with effect from a particular date in past on adoption of IFRS.

Regarding the change in Accounting Policy, as per the Indian AS, the difference due to the change is taken to the current year’s profit and loss account and the impact on the profit/loss of the current year due to such change is quantified.

As per the IFRS, instead of working on the current year for the impact, the change has to be carried out in the previous year figures, which are part of the comparative figures with the current year.

Further, there is an additional statement in IFRS known as Other Comprehensive Income (OCI) Statement, which deals with the unrealised gains/ losses on fair valuing the assets and liabilities. As IFRS follows a Balance Sheet approach to the Financial Statements, it requires that all the assets and liabilities are reflected at their fair values. In view of the same, wherever there are adjustments to the assets and liabilities, which are only on account of fair valuing the same, such adjustments are taken to OCI.

A conceptual difference between IFRS and Indian GAAPs is that the IFRS follows Fair Value Accounting which is relevant in today’s context, whereas Indian GAAPs follows Historical Cost concept which is a reliable concept but may not be relevant in today’s context.

Another Conceptual difference between IFRS and Indian GAAPs is that of Substance over Form.

Indian GAAP gives more importance to the legal aspect of the transaction than the beneficial aspect;

IFRS believes in beneficial aspect than the legal aspect and hence judgment plays a vital role in the preparation of accounts under IFRS.

Mr. Sarda concluded by stating that the User should know from the Financial Statements what the Pre-parer of Financial Statements knows.

The learned speaker thereafter replied questions raised by audience.

The meeting terminated with a vote of thanks to the speaker.

BCAJ Admin

Society News

Seminar on Direct Tax Code

The Taxation Committee of BCAS had conducted a Seminar on Direct Tax Code on 26th & 27th November, 2010 at Y. B. Chavan Pratishthan, Nariman Point. The seminar received very good response. The total enrolment was more than 450 participants which included members from the industry and from different parts of the country. The Seminar was addressed by prominent speakers namely; Mr. Pinakin Desai, Mr. Kishor Karia, Mr. Gautam Doshi, Mr. Rajan Vora, Mr. Gautam Nayak, Mr. Hitesh Gajaria. The speakers highlighted important aspects of the Direct Tax Code and gave suggestions for making proper representations to the Government on certain contentious and far reaching consequences that the DTC may have.

Accounting and Auditing Committee Careers in Internal Audit – An Exploratory Programme

The regulatory framework on one hand and the accelerated pace of the economy on the other hand has made it imperative for progressive enterprises to set up effective Internal Audit systems to aid the management and to enable the enterprise to achieve its objectives. Chartered accountants now have the opportunity to either become a part of the in-house Internal Audit team of large companies, banks, financial institutions, etc. or to join the Internal Audit practice of a professional firm.

To create awareness about the potential careers that await chartered accountants in the area of internal audit, the Accounting and Auditing Committee held a half day exploratory programme entitled “Careers in Internal Audit” on December 11, 2010 at BCAS premises.

Mr. Pradip Thanawala, Vice president, welcomed the participants and shared his thoughts on the changing role of internal audit in present times.

The panel of speakers comprised of – Ms. Neesha Samant, Mr. Nischal Shah and Mr. Shailin Desai, Chartered Accountants. Mr. Nischal Shah was part of the Corporate Internal Audit team of a large IT company prior to pursuing his MBA and thereafter joined a well-known credit rating agency. He elaborated on the advantages of starting one’s professional career with a stint in Internal Audit. Through sharing of his personal experiences, he explained that internal audit provides exposure to the key functional areas of the entity audited and thereby creates ample opportunities of cross-functional interactions.

Ms. Neesha Samant shared her experience as a senior member of the Internal Audit Department of a large group of entities engaged in Banking and Financial Services sector. She drew comparisons between working in industry as in house internal auditor vis-à-vis working in CA firm as an outsourced internal auditor. She convinced the participants that switching between CA firm and the industry is not at all difficult for those pursuing career in internal audit. She also briefed participants on the skill sets and competencies needed to pursue a career in Internal Audit and provided the list of Professional Certification courses that may be taken up by candidates interested in pursuing a career in Internal Audit.

Mr. Shailin Desai, who specialises in Internal Audit and Risk Advisory Services for the Telecom Industry, in a large accounting/consulting firm, gave altogether new insights for pursuing a career in Business & Risk Advisory services with large accounting/consulting firms. Through lucid example of a large corporate house where the Internal Audit Head was asked to take over as the acting-CEO during the absence of the latter, he drove home the organisation-wide role of the Internal Auditor. He also shared his experience of developing industry specialisation within internal audit and the edge that such specialisation creates in present times. His passionate rendering of “the Art of Internal Audit” stirred a lot of interest amongst the young participants.

The programme concluded with a question/answer session that gave the participants a chance to clarify their doubts and address their concerns. The panel of speakers was joined by Ms. Nandita Parekh & Mr. Atul Shah, Course Coordinators in the concluding session. The participants were encouraged to attend the six day Foundation Course on Internal Audit that is scheduled to be conducted by BCAS in the month of February, 2010 as well as to take up membership of BCAS Students’ Forum & Internal Audit Study Circle for ongoing learning in the area of Internal Audit.

The program received an overwhelming response with an enrolment of 78 participants – and for many young participants, it was their first introduction to the BCAS.

BCAJ Admin

Society News

Dt.23/12/2010 2nd Residential Study Course on IFRS

Accounting & Auditing Committee
The second Residential Study Course on IFRS 2010 was jointly organised by BCAS with IMC. It was held at Hotel Gateway Nashik on Thursday 23rd, Friday 24th, & Saturday 25th December. The winter cold and Christmas mood set the perfect tone for the study course.

There were 82 participants (including 21 from industry) for the RSC and were divided into 3 groups.

Day 1: At the commencement of programme, the President extended welcome to the participants, Paper writers, Group Leaders and members of accounting and auditing committee. He shared the vision statement and exhorted that BCAS shall harness talent and disseminate knowledge to members, build skills and network amongst them. He also expressed that sharpening the knowledge on IFRS is the need of the hour. He complimented the accounting and auditing committee for organising this event.

Chairman Himanshu Kishnadwala, briefly gave information about IFRS and explained the course, and the structure of the current programme.

1st Technical Session:
In the first session the Paper Writer Mr. Ramesh Lakshman made an initial presentation on the topic ‘Introduction and concept of Fair Value methodologies and Applicability’.

In his presentation covering the subject Mr. Ramesh touched upon, various important concepts.

He explained that there are different approaches of determining fair value viz.

a. Market approach, Income approach, and Cost Valuation approach. He suggested to refer to Level 1,2 & 3 of US GAAP.

b. He explained different applicable inputs to be referred to
At Level 1 The quoted prices in active markets, At Level 2 quoted prices of similar assets (in-terest rate, yield curve prepayment Etc.) At Level 3 Inobservable inputs should be referred to e. g. He suggested to follow guidelines covered in Para AG 69 to 82 of IAS 39.

Post Lunch Group Leaders Ashutosh Pednekar, Anagha Thatte and Jayesh Gandhi discussed actual case studies on Forex and commodity derivatives.

Mr. Simarjeet from Reuters who was accompanying the paper writer in his presentation showed live data of cross currency and curves through internet connections and explained how these data can be useful for Level 2 and Level 3 assumptions. In his concluding presentation, the Paper writer Ramesh Lakshman dealt with the uncertainties and peculiaritiesattached with Fair Valuation.

On Day 2: Group Leader Paresh Clerk, Bharat Jain and Anand Paurana led the discussion paper by Sudhir Soni on IFRS 1 “First time adoption of IFRS”. The Group Leaders with their own power point presentations explained the actual accounting enteries and also covered reference para of IFRS, IFRIC and IAS.

The Group Leaders also covered the case studies on consolidation IAS 27. They explained each case studies and made an interactive presentation and shared reference points from IAS 27.

The total discussion time allotted for the above was 4 hours.

In the Post Lunch Session, the Paper writer Sudhir Soni explained the concepts and responded to the queries and posers raised by each groups.

In the evening CA Vaibhav Manek made an interesting presentation on “Leadership in Professional Service” presentation covering people, process, knowledge base, competence mapping, unique identity of professional practice firms etc. He emphasised need of networking, capacity building, amongst professional firms and grooming and mentoring Leadership.

After the presentation participants had sumptuous dinner at Pool side enjoying cold weather and music.

On Day 3: The group leaders Manish Sampat and Vijay Mehta, Gautam Shah and Hasmukh Dedia, Murtuza Vajihi and Nitesh Dedia respectively led the discussion on paper on Revenue recognition. (with focus on Infrastructure and real estate sector) written by Khozema Anajwalla and Atul Deshmukh.

Both paper writers and six group leaders emphasised that to understand standards, first the same have to be read, facts studied and then applied.

In the concluding session participants expressed their satisfaction. The Chairman complimented the convenors and the BCAS staff led by the GM for the excellent co-ordination and arrangements for the RSC.

Dt. 4/01/2011 Book Release (Service Tax)
The revised and updated edition of Service Tax Books were released on 4th January 2011 at the hands of CA. Mayur Nayak, President, CA. Pradip Thanawala, Vice President, CA. Govind Goyal, Chairman – Indirect Taxes and Allied Laws Committee and CA. Suhas Paranjpe, Convenor – Indirect Taxes and Allied Laws Committee. Four books namely, Service Tax – Basic Concepts and Procedures, Service Tax Goods Transport Agency Services, Service Tax – Business Auxiliary Services and Business Support Services and Service Tax – Construction Related Services.

BCAS Foundation Jointly with PCGT, IMC, PCaW
A talk on Whistleblowing was organised by Public Concern for Governance Trust, AntiCorruption Cell of the Indian Merchants’ Chamber (IMC) and BCAS Foundation(Bombay Chartered Accountants’ Society) at the Babubhai Chinai Committee Room,IMC on January 7, 2011.

BCAS Foundation Jointly with PCGT, IMC, PCaW : Gathering listening to the talk

Mr. Julio F. Ribeiro, Chairman, Anti Corruption Cell, welcomed the participants. He spoke about the importance of Whistleblowing. He added that the name ‘Public Concern for Governance Trust’ was taken from ‘Public Concern at Work’ (PCaW) UK.Dr. Dhananjay Samant, Chief Economist, represented IMC and was seated on the dais Mr. Narayan Varma, Trustee, PCGT, explained the concept of Whistleblowing to the participants. He also discussed the recent attacks on RTI activists in Mumbai.Ms. Sukaina Esmail, Program Director, PCGT, introduced Ms. Shonali Routray, Client Services Manager, PCaW. Ms Routray introduced the topic of Whistleblowing in the new cyber age with the Wikileaks story. She spoke about the scope and process of Whistleblower protection in the UK. She discussed the mechanism and scope of Public Interest Disclosure Act,UK and presented statistics on the cases received and the judgments made. Ms Routray discussed Indian law with respect to Whistleblowing and highlighted some of its mechanisms and the protections it offers. Mr. Yeshwant Gawand narrated his own experiences as a whistleblower. He spoke about how he was beaten up for taking on a Shiv Sena corporator over alleged encroachments and undeclared assets. Mr. Ribeiro assured him of support from PCGT. Mr. Nitin Shinghala, Joint Secretary, Bombay Chartered Accountants’ Society thanked Ms. Shonali Routray, the IMC and all the participants for attending the meeting.

Dt. 7/01/2011 Study Tour to Bangalore

Seminar Committee:
Seminar Committee of BCAS organised a Study Tour to Bangalore and Mysore from 7th January, 2011 to 9th January, 2011. 67 participants (including 16 participants from Bangalore) participated. On 7th January, participants visited General Assembly Plant of Toyota Kirloskar Motor Company and then visited campuses of Wipro and Infosys at Bangalore. The company officials at the 3 locations also made detailed presentations. Next day, the participants visited Infosys Technology’s Training Centre and Leadership Facility at Mysore, spread over 344 acres. Participants were amazed to see World Class facilities to train 10,000 trainees at a time at one location with facilities for lodging and boarding. The campus was impeccably maintained. One felt proud as an Indian that an Indian Company could create such a World Class facilities which other leading companies in the world would aspire to have. One was left wondering about the systems and processes at work behind such a large and beautiful facility working with such a clock – work like precision. This is a result of one man’s vision and dedication.

VISIBLE BENEFITS TO THE PARTICIPANTS OF VISITING GROUP OUT OF OBSERVATIONS & PRESENTATIONS AT WIPRO & INFOSYS:

Driven by values and highest adherence to those values, is the ultimate mantra.

Clarity of vision, goals and mission is paramount.

Skills of implementing the large projects are essentials.

Leaders can be groomed and trained.

Excellent infrastructure and energetic working environment are essentials.

Human capital is the most valuable asset class.

World class and excellent training facilities are must for sustainable and impressive growth.

There is no substitute for honesty, integrity, hard work and conducive environment.

Quality….Quality….Quality in every area and everywhere.

Excellent township to house employees is indispensable.

Grit, focused approach and passionate working make the work enjoyable, as well as successful.

The Study Tour held ended with half – day conference jointly with Karnataka State Chartered Accountants’ Association. The following presentations were made:

1. IFRS-Traditional Issues & Implementation Challenges by CA. Vinayak Pai, Bangalore. The session was chaired by CA Krishna Swamy.

2. International Taxation – Recent Developments by Ms. Bijal Ajinkya, Advocate, Mumbai. The session was chaired by CA Padamchand Khincha.

The study tour was organised in cooperation with the Karnataka State Chartered Accountants’ Association. BCAS appreciates efforts of CA H. Padamchand Khincha, CA Prabhu Allama, CA Ganapath Raj, Mr. Laxman and other Office Bearers of KSCAA, who played an active role in the success of the tour.

15th January 2011 Half-Day Workshop on MVAT Audit and Levy of VAT on Builders & Developers

Indirect Taxes and Allied Laws Committee:
BCAS had organised a Half-Day Workshop on MVAT Audit and Levy of VAT on Builders & Developers on 15th January 2011. The faculty for the first session on levy of VAT on Builders and Developers was CA. Rajat Talati. After touching upon the history of levy of VAT on Builders and Developers, the speaker outlined the whole scheme and the different Schemes for taxation under the MVAT Act and the issues and controversies under each scheme. The speaker indicated in a detailed manner how different dates were critical to determine the scope, extent and manner of coverage. The speaker also touched upon Practical Issues relating to the same and explained how in practical scenario even minute details can change the manner of levy.

In the concluding part, the speaker touched upon VAT implications relating to Redevelopment of societies and also guided the participants on their queries. The meeting ended with a vote of thanks to the Speaker.

The faculty for the second session on Revised Form 704 relating to VAT audit, Mr. Kiran Garkar started with a brief outline of Form 704. He then took up Annexure-wise detailed coverage of the revisions made in Form 704 beginning with Annexure J and moving on from Annexure G to I. Lastly, he touched upon the Annexure F pertaining to ratios and explained how the ratios, were in effect partly verifying the same details in different way. He also explained how the ratios had newly added the details pertaining to opening and closing inventory. There were a lot of questions relating to how the data should be input including purchases where set-off was not availed. The speaker clarified on each of them and explained how one would need to use their judgment and at the same time, clearly disclose the manner of arriving at reported figures. The meeting ended with a vote of thanks to the Speaker.

10th January 2011 Lecture Meeting by Sis. Shivani (Brahmakumari) on Unlocking the Treasures of Life

Lecture Meeting (Under the Auspices of Amita Memorial Trust, jointly with Bombay Chartered Accountants’ Society and Chamber of Tax Consultants)

Subject : Unlocking the Treasures of Life
Speaker : Brahma Kumari Shivani
Date : January 10, 2011

Amita Memorial Trust has been created in the memory of Amita Momaya, a young Chartered Accountant and a core group member of BCAS, who passed away on January 31, 1987 at the age of 26 years. Under the auspices of Amita Memorial Trust, Bombay Chartered Accountants’ Society jointly with the Chamber of Tax Consultants, organised a spiritual talk by Brahma Kumari Shivani, on Januray 10, 2011. Shivaniji held the audience spellbound, as she explained that the ability to control one’s mind is the secret of happiness. Through a series of day-to-day incidents, she impressed upon the audience that happiness resides within all of us, and yet we try to find it outside. She compared happiness to a filled glass that we all already possess – and rather than protecting the contents of this glass, many of our reactions result in leakages and spillages from this full glass.

Brahma Kumari Shivani, eloquent speaker of the popular talk show “Awakening with Brahmakumaris” has inspired millions across the globe through her profound insights on spirituality. At this spiritual talk she once again touched many-a-souls and created a unique spiritual experience for the listeners. Her ability to combine practical situations with simple insights makes the audience convinced that spirituality and true happiness is within their reach. Her talk not only enlightened, but also empowered the audience on their inward journey.

BCAJ Admin

Part B : Some Recent Judgments

I. Supreme Court:

1. Classification:

Marine Logistic Services to Offshore Support Vessels from 1-6-2007 to 15-5-2008 whether could be held as services in relation to mining ?

Union of India v. Indian National Shipowners Association, 2011 (21) STR 3 (SC)

The short question involved in the case relates to the classification i.e., whether the services provided by members of the Association could be covered as services in relation to mining of mineral, oil or gas as provided in section 65(105)(zzzy) of the Finance Act, 1994 (the Act) introduced with effect from 1-6-2007. The Association contended that they were appropriately covered by the provisions of section 65(105)(zzzz) of the Act dealing with supply of tangible goods for hire. This service was introduced from 16-5-2008. The members of the Association provided vessels to ONGC on time-charter basis for the period in question viz. 1-6-2007 to 15-5-2008. The scope of the work in addition also included services such as carrying men and material between base and offshore installation, carrying out routine surveillance in offshore, carrying out rescue operations if and when required and carrying out any other field work which would be within the capability of the chartered vessels. Earlier the High Court held that the nature of work carried out by the members of the respondent could not be said to be the work in relation to mining activity. The Supreme Court also found that none of the activities mentioned in the agreement with ONGC by one of the members could be said to be a service rendered in relation to mining of mineral, oil or gas. Therefore, it affirmed the order of the High Court looking into facts in issues only and left the question of law decided by the High Court, open to be considered at length in appropriate case.

2. Commercial training or coaching services:

Whether computer training institutes were exempt between 10-9-2004 and 15-6-2005?

Commissioner of C.Ex. v. Sunwin Technosolution P. Ltd., 2011 (21) STR 97 (SC)

The Department challenged the judgment of the Jharkhand High Court holding that service tax was not payable by the computer training institutes for the impugned period.

Initially a Notification dated 20th June, 2003 was issued providing exemption to vocational training institutes including computer training institutes. However, the said Notification was effective till 30th June, 2004. Later a new Notification dated 10th September, 2004 was issued, which exempted vocational training institute and recreational training institute from the levy of service tax but did not specifically cover computer training institutes. This Notification, however, was amended by Notification dated 7th June, 2005 (effective from 16th June, 2005), which specifically excluded computer training institutes from the scope of the exemption. Therefore, according to the respondent since the amendment in Notification dated 10th September, 2004 was made effective from June 16, 2005, it implied that computer training institutes stood exempted for the impugned period of 2004-2005 and the liability would arise only from 16th June, 2005.

The Department contended that the Government was fully conscious of the fact that computer training institutes were not to get exemption and the same was clear because these were excluded from the Notification dated 10th September, 2004 and Notification dated 7th June, 2005 was more or less in the nature of clarification. The Apex Court confirmed that since computer training institutes were was out of the scope of exemption from 10-9-2004, the liability existed for the impugned period.

II. High Court:

3. CENVAT credit:

Does Cenvat credit of service tax on input services need to be reversed when inputs are removed?

Commissioner of C.Ex., Chandigarh v. Punjab Steels, 2011 (21) STR 5 (P & H)

The respondent, a manufacturer removed certain inputs from the factory without being used. The respondent did not reverse the CENVAT credit of service tax paid on input service (i.e., Goods Transport Service) so received in relation to purchase of inputs, as no provisions exist in the Rules in this regard. The Tribunal passed an order favouring the respondent. The Revenue filed an appeal raising a question of law whether CENVAT credit availed on input service at the time of receipt of inputs is required to be reversed at the time of clearance of inputs. The Revenue referred to Rule 3(5) of the CENVAT Credit Rules, 2004 (CCR) which specifies that Cenvat credit taken on inputs or capital goods needs to be reversed when the inputs are removed as such from the factory and contended that the respondent was required to reverse the CENVAT credit even of service tax on input services. Further, the Revenue also relied on Rule 5 of CCR which provides that CENVAT credit on inputs or input services is required to be reversed when the assessee is entitled to refund of tax paid on inputs or input services.

The respondent contended that there exists a material difference in language used in Rule 3 and Rule 5 of CCR. Rule 3 provides for reversal of credit on inputs or capital goods and Rule 5 refers to reversal of credit on inputs or input services. Further, inputs and input service are separately defined under CCR. The Revenue cannot direct respondents to reverse the credit on input service merely on analogy. The Court held that Rule 5 on which reliance was placed by the Revenue, stood on different footing. There being no specific provision for reversal of CENVAT credit on service tax paid on input service, such a proposal was not in accordance with the law. Hence, the appeal by the Department was dismissed holding that there did not exist substantial question of law and tax could not be levied merely by inference.

4. Penalty:

Can penalty u/s.76 of the Finance Act, 1994 be reduced below the minimum prescribed limit?

Commissioner of C.Ex. and Customs v. S. J. Mehta & Co., 2011 (21) STR (Guj.)

The respondents paid service tax along with interest after the due date of payment. They also filed a belated service tax return. Due to the lapses, penalty of Rs.88,800 u/s.76 of the Act was imposed. The respondents in the appeal got the penalty amount reduced to Rs.25,000 on invocation of section 80 of the Act. The Revenue’s appeal was rejected by the Tribunal.

Reliance was placed on a similar case reported at 2010 (19) STR 641 (Guj.) where the High Court quashed the order of the Tribunal. Apart from this, on a conjoint reading of section 76 and section 80 of the Act, the High Court had taken the view that there exists no discretion to the authority for levying a penalty below the minimum prescribed limit. Following this decision, the order of the Tribunal was set aside and the issue was divided to be looked at afresh by the Tribunal.

III. Tribunal :

5. Business Auxiliary Service:

Whether promotion of logo or branding service could be held as ‘Business Auxiliary Service’?

Jetlite (India) Ltd. v. Commr. of C.Ex., New Delhi 2011 (21) STR 119 (Tri.-Delhi)

In the year 2003 to 2007 (hereinafter called as the ‘relevant period’) Sahara Airlines used the logo and advertisement of its group company Sahara India Commercial Corporation Ltd. on its stationary and tickets. The Tax Department claimed that display of information of construction projects of Sahara India Commercial Corporation on boarding passes and baggage tags amounted to advertising and consequently a business auxiliary service and thus demanded a huge sum as liability to tax form Jetlite which had taken over Sahara Airlines.

The contentions of the appellant were as under:

The appellant merely displayed logo of the group companies and were a part of the said group and were not rendering any service to Sahara Corporation. No other activity was carried out by them.

The activities did not relate to any service as such rendered by Sahara Corporation to its customers and hence the appellant could not have been charged of having rendered service in the nature of business auxiliary services.

Services of ‘brand promotion’ and ‘sale of space’ have been introduced in the said Act subsequent to the relevant period and hence the appellants could not be held to have rendered such service.

Activity of the construction and sale of immovable property does not amount to service and promotion of immovable property is not covered within the definition of ‘business auxiliary service’.

Not a single document on record suggested that the appellants had promoted or marketed any service of Sahara Corporation, i.e., the appellants did not carry out advertising activity for the projects of Sahara Corporation.

The sale of immovable property by Sahara Corporation could not be deemed to be service for the relevant period as Sahara Corporation constructed building for themselves and not for others. Further, letter dated 10-9-2004 of the Ministry of Finance, clarified that the builder constructing for himself did not render any service as such.

The submissions of the Department were as under:

Resolution by Sahara Corporation revealed that they had decided to use the services of the appellants for promoting their business and in consideration of which, the appellants were to receive certain amount per passenger.

Merely because end product is transferred by way of sale, that will not wipe out the effect of services rendered by Sahara Corporation.

Subject-matter of sale being that property constructed comprised various services to make the premises ready for sale.

If the interpretation of the appellants was to be accepted, it would defeat the very provision of law.

Rejecting the demand of the Department, the Tribunal held as under:

Mere printing of logo or the promotion of a brand without reference to any particular service provided by the client was not covered under BAS (Business Auxiliary Service).

The service of brand promotion is brought in as a separate taxable service by the Finance Act, 2010 with effect from 1-7-2010 and before this date, brand promotion activity was not taxable under BAS.

Construction of immovable property on its own behalf and its sale does not constitute a service and therefore, even if such activities were promoted, it did not amount to ‘promotion or marketing of service provided by the client’. Furthermore, Memorandum or Articles of Association is not sufficient to establish that there was service for promotion or marketing provided. Similarly, relying on registration certificate, one cannot conclude about the liability to service tax. The Department has to place on record factual matrix which would disclose basic information, which would enlighten as to the activity of the firm.

The adjudication order went beyond the show-cause notice in confirming the demand by referring to various activities that Sahara Group carried on that were not alleged in the show-cause notice.

The onus to establish classification and taxability was on the department was not discharged by the Department.

Hence, the appeal was allowed holding that the appellant’s service could not be taxed as Business Auxiliary Service.

6. CENVAT credit:

a) Whether input service used for outward transportation is eligible for benefit as CENVAT credit?

Somaiya Organo Chemicals v. Commr. of C.Ex. & Cus., Aurangabad 2011 (21) STR 114 (Tri.-Mumbai)

The appellant paid service tax on the insurance policy in respect of goods transported from the factory to the port of export.

In case of export of goods, it has been held that input service includes services rendered for outward transportation upto place of removal of goods and service tax paid to facilitate goods to reach the place of removal has to be eligible for benefit of CENVAT credit. Insurance service was taken by the appellant for transportation of goods from the factory to the port of export. Thus, input service was used for the business activity undertaken up to the place of removal of goods. The Tribunal held that the appellant was entitled to take input service credit.

b) Is Cenvat credit available on air-ticket booking service for paying excise duty on manufacture of final products ?

Somaiya Organo Chemicals v. Commr. of C.Ex. & Cus., Aurangabad 2011 (21) STR 114 (Tri.-Mumbai)

The respondent was engaged in the activity of manufacture. Various air journeys were undertaken by employees for business purpose.

Revenue in appeal claimed that air-ticket booking service was not an input service as there was no nexus between air-ticket booking service and manufacturing activity. The respondent con-tended that ‘the object of CENVAT scheme is to allow credit on inputs used in or in relation to manufacture of final product and to allow credit on input services used in or in relation to manufacture of final product as well as in relation to business of manufacture’. Business activity cannot be restricted to mere manufacturing activity and it covers all activities that are related to business. The term ‘in relation to business’ cannot be given a restricted meaning and expenses incurred as a result of commercial expediency are covered by the said term. The appeal was allowed.

7. Commercial or Industrial Construction service:

Whether laying of pipeline covered as ‘Commercial or Industrial Construction service ?

Dinesh Chandra Agarwal Infracon P. Ltd. v. Commissioner of Central Excise, Ahmedabad 2011 (21) STR 41 (Tri.-Ahmd.)

The appellant provided service of laying of long-distance pipelines for the transfer of water in the State of Gujarat under a contract with the Gujarat State’s Sewerage Board, an independent body constituted under an Act of the State Government.

The Tribunal observed that service tax would be payable under the service head, ‘Commercial or Industrial Construction Service’ only if the service was provided to any person by a commercial concern and in relation to commercial or industrial construction service.

The appellant did satisfy the first condition mentioned above; however the second condition was not very certain. ‘Commercial or Industrial Construction Service’ was chargeable to service tax if it was used for the furtherance of business or commerce. As the canal built by the Government was not falling under commercial activity, service tax was held to be not chargeable.

Water purchased by the Board was distributed to rural and urban areas for the purpose of irrigation and drinking at subsidised rates and the operating cost was also not recovered by them. To set up an establishment for water supply was a part of the duties and functions of the State to provide its citizens with a better living. Accordingly, the services provided were held to be not covered as commercial or industrial construction service and therefore the appeal was allowed.

8. Penalty:

Should penalty be leviable in case service tax is paid along with interest after issuance of show-cause notice?

Rockwool Insulation v. CCE, Rajkot 2011 (21) STR 62 (Tri.-Ahmd.)

The appellant engaged in providing construction services paid service tax after the due date along with interest. However, part payment of service tax was made by the appellant after the issuance of show-cause notice (SCN). Penalty was levied on the appellant for non-payment of service tax along with interest.

Further, the appellant also collected service tax from their customers and admitted that the service tax was not paid because of financial difficulty. Thus, having regard to collection of service tax and non -payment, penalty was considered warranted and the case was remanded for re-determination of penalty imposable.

9. Principles of natural justice:

Show-cause notice issued by the revisionary authority violating the principles of natural justice.

Klockner Desma Machinery Pvt Ltd v. CST, Ahmedabad 2011 (21) STR 37 (Tri.-Ahmd.)

In the present case the demand of service tax raised against the appellant was initially dropped by the Assistant Commissioner and then taken for review by the Commissioner. Show-cause notice was issued by the Commissioner on 13-1-2010 requiring the appellant to file reply within seven days of receipt of notice and appear for personal hearing on 20th, 21st or 22nd January. The appellant applied for an extension of time to reply on 18-1-2010. There was no reference in the impugned order to said reply of the assessee. It was held that a period of seven days granted to the assessee to file a reply and personal hearing on three consecutive days in accordance with the principles of natural justice. The matter was remanded to the Adjudicating Authority for fresh decision observing principles of natural justice.

10. Rebate : Export of services:

Whether non-filing of prior declaration leads to rejection of rebate claim?

Manubhai & Co. v. CST, Ahmedabad 2011 (21) STR 65 (Tri.-Ahmd.)

The appellant claimed refund under Notification No. 12/2005-ST being service tax paid on input services used in services exported by them. The said Notification provides for filing of declaration describing the quantity, value, rate of duty, amount of tax payable on inputs, value and amount of service tax and cess payable on input services prior to the date of export. The Authority was of the opinion that the assessee could not claim refund on the ground that the appellant had not filed of non-filing declaration before export. It was further held that the notification is divided into two parts. The first part gives conditions to be fulfilled for granting of refund and the second part gives the procedures to be followed and that the requirement of a declaration in the Notification cannot be treated as a mere procedural requirement.

The appellant argued that substantive benefit can-not be denied on the ground of procedural lapses. The Tribunal held that failure to file declaration is not sufficient to hold that the assessee did not pay service tax on input services. Non-observance of a procedural condition was of a technical nature and cannot be used to deny the substantive concession.

11. Refund:

Whether refund is allowable when service tax is paid in case when the assessee fails to take benefit of small scale exemption?

Cancio E.P. Mascarenhas v. CCEx., Goa 2011 (21) STR 17 (Tri.-Mumbai)

Notification 6/2005 provided for threshold exemption of service tax on taxable services of the value not exceeding Rs.8 lakh to a service provider in the relevant year. The appellant did not know about this benefit and paid service tax on commission received from his client. On becoming aware, the appellant filed a refund claim of service tax paid by them. However, it was rejected on the ground that the appellant had not exercised the option for claiming the benefit of threshold exemption Notification. Departmental authorities submitted that the appellant paid tax by fulfilling the condition 2(1) of the said Notification which says that a service provider can opt to pay service tax and not avail the benefit of exemption, but the option once exercised shall not be withdrawn during the remaining part of the year. In this regard the assessee contended that the benefit of exemption Notification was available in any financial year subject to fulfilment of conditions specified in the Notification. The assessee could not take the decision in advance as he got registered in November 2007 and could not opt for exemption during the financial year. Hence, condition of 2(1) of the said Notification was not applicable to the appellant. Apart from this, the appellant also did not recover service tax from clients and paid service tax as an honest taxpayer. The appeal was allowed and the refund was allowed.

BCAJ Admin

Society News

Report on the Europe Tour of BCAS

A delegation of 21 persons comprising of members of BCAS and their families went on an educational tour to Europe from 30th May to 12th June 2011. The delegation visited six countries, namely, Switzerland, Austria, Germany, Belgium, Netherlands, and France.

The members started off from Switzerland where they visited Zurich University at which the campus of the veterinary medical college was simply awesome. It had big parks and a lake inside, with a modern library and congenial atmosphere for learning. Our delegates interacted with some students including an Indian and learnt that the Zurich University is spread over a huge area and that the campus we visited is just a small part thereof.

Thereafter, the delegation embarked on an orientation tour of Zurich which is a well planned and clean city, with large buildings of UBS, Credit Suisse and other monuments. Being a sunny day, most Europeans were found riding bicycles and/or taking sun bath by the side of a river. Post Zurich, the members travelled to Luzern and stayed at Swiss Chalet –Schloss Hotel.

On 3rd June 2011 the members visited the University at Munich, Germany, where they were warmly received by Prof. Denial and Prof. Bahwa, juniors of Prof. Dr. Moris Lehner. Members were taken for an orientation tour of the Munich University covering Convocation Hall, Class Rooms and were briefed about the historic association therewith. The University comprising different departments is spread over many buildings. One of the buildings, houses two Auditoriums – one very old and the other recent one. Members visited the class room where Late Prof. Dr. Klaus Vogel used to take lectures.Prof. Dr. Lehner exchanged pleasantries with the delegation. He has succeeded Prof. Dr. Klaus Vogel. He and his team is presently busy working on the 6th edition of the most celebrated title “Klaus Vogel on Double Taxation Conventions”. This book will be published in German Language, whereas Prof. Dr. Ekkehart Reimer (once his junior) from Heidelberg University is working on the English edition of the book. Members were touched by the hospitality extended by Dr. Lehner and his team. It was a very rewarding experience to have visited Munich University.

On Saturday 4th June 2011, the delegates visited Heidelberg University where they were warmly received by Prof. Dr. Ekkehart Reimer and his team. The University was established in 1385 and has 625 years of glorious history. The late Prof. Dr. Klaus occupied his chair at this University from 1966 to 1977 and then moved on to Munich. Prof. Reimer had organised a conference to discuss German Tax System and some of the recent rulings in the light of German Tax Treaties. He made an excellent presentation where members participated enthusiastically. The delegates were shown the “Students’ Jail” where punishment was meted out to errant students in good old days, which has now become a place for sightseeing. Members appreciated efforts and pains taken by Prof. Reimer and his team.

On Tuesday 7th June 2011, in the first half, members visited the University of Leiden which is the first University in the Netherlands, founded on 8th February 1575. The motto of the University is “Praesidium Libertatis”, Bastion of Liberty. The delegation visited the International Tax Centre situated on the banks of a canal. Leiden is beautiful city with, neat and clean streets and picturesque buildings on both sides of the canal. Mr. Michail Tegos (Mike), Program Coordinator for Adv. LLM International Tax Law extended a warm reception to the delegation. Delegation visited International Tax Centre (ITC) with class rooms, studio apartment for faculties, students’ reading room, researchers’ reading cubicles and the convocation hall. Normally, a batch comprises 40 students, mostly Europeans, and sometimes Asians including Indians. We found one student from India and one NRI student from Singapore pursuing their Masters at Leiden. The group was fortunate to meet the Director of ITC and an erudite personality, Prof. Dr. Kees Van Raad. He spent some time with the delegates and explained various courses conducted by the ITC at Leiden. He exhorted members to take advantage of these courses. Later, members visited the Law Department building beautiful library and a lecture hall. Members expressed their gratification over the visit and thanked Mike for all his efforts in making the visit memorable.From Leiden, the delegates drove to Amsterdam and visited International Bureau of Fiscal Documentation (IBFD) where the Director, Belema Obuoforibo, of the Knowledge Centre and various other officials extended a warm welcome to the delegates. Seven different presentations were made on various activities of IBFD. The entire programme was meticulously planned. First, Ms. Belema, introduced the working of the Knowledge Centre. Thereafter, Ms. Jolien Terpstra informed about the Library and Documentation Centre. Ms. Myra Flaminiano briefed about the activities of the Government Consultancy Department, whereas Mr. Ban Van Breevoort, Publisher introduced the Online Research Platform. Mr. Shee Boon Law and Ms. Leandra Juilen, both from the International Tax Academy, enlightened the delegates about the Academy’s activities and expressed a desire to organise joint programmes with BCAS. Mr. Frans Vanistendael, the Academic Chairman, talked about the various academic initiatives undertaken. The delegates then visited state of the art library on International Tax Literature. It was a proud moment to see one of the publications of the BCAS in the IBFD library.

On Thursday 9th June, 2011 at 9.30 am, the delegation of Organisation for Economic Co-operation and Development (OECD) at Paris, France. Mr. Stefaan. DEBAETS, Advisor – Transfer Pricing, had oragnised a conference on Transfer Pricing for the benefit of the delegates. Ms. Linda Aidan from the OECD Public Affairs Division. warmly received delegates. Mr. Jean de la Rochebrochard briefed members about OECD and its activities. Ms. Mayra Lucas made a presentation on the OECD Transfer Pricing Guidelines, 2010 which was very informative and instructive. She also briefed about the future work contemplated by OECD. After the presentation, the delegates visited some of the facilities at OECD. The infrastructure at OECD is amazing. As high ranking officials/ representatives visit the institution throughout the year, the security is very stringent. Meeting and Assembly halls of different capacities are in place to take care of meetings of various working groups of members countries/observers on a variety of issues from environment to governance and taxation.In conclusion, the tour was very successful, as members had an opportunity to visit some of the reputed educational institutions the world over, which has not only widened their academic horizon but would also help them in their professional pursuit. Young members were fascinated by the courses offered by various institutions and got a valuable input for their career planning. Seniors had an occasion to interact with faculty to understand the subjects from different perspectives. The kind of respect and reception our members received from each of these seats of learning was simply unparalleled. Delegates realised that the BCAS is known and respected overseas everywhere.

A set of reading material received from various Institutions/Universities is available in the BCAS library for the benefit of its membership.

BCAS acknowledges with thanks the efforts put in by S/s Roy Rohatgi, T.P. Ostwal and Dhaval Sanghavi in facilitating above visits.

BCAJ Admin

Society News

Recent Important Judgements in Service Tax

Mr. V Sridharan, Advocate, and Founder Partner of Lakhsmikumaran and Sridharan addressed the members on the subject of ‘Recent Important Judgements in Service Tax’ on 19th January 2011 at the IMC. The speaker in his interactive style covered various issues with regard to the constitutionality of various provisions enacted under the service tax law. The highlight of the lecture was the support the speaker drew from various precedents under Indian and foreign cases to explain the fundamentals regarding the constitutionality of levy of service tax.

At the outset, the speaker dissected in detail the provisions relating to levy of service tax on under construction flats and analysed the niceties of the decision of the Punjab & Haryana High Court upholding the constitutional validity of the same. Thereafter, he analysed the provisions regarding the retrospective validation of the amendment regarding the renting of commercial properties. He also dealt with the complex issue of overlapping jurisdictions of taxation in case of financial leases.

Before the end of the seminar, participants also got a chance to get their queries answered from the learned speaker. His enthusiasm coupled with his deep knowledge of the subject was well appreciated by the participants.

Government’s Initiatives on Electronic Credit for Income-tax Payments

Meeting was addressed by two senior executives from NSDL, along with Ms. Delnaz Mistry, Manager NSDL on Government’s Initiatives on Electronic Credit for Income Tax payments on 31st January 2011. They touched upon subjects of TDS, Quarterly statements, issues relating to mis-mactch, and allotments of Permanent Account Number. They also dealt with procedure for obtaining PAN by non residents.

The Power Point presentation covered various practical issues dealing with TIN, E-payments, Challan Status Enquiry, key points for preparation and submission of E-TDS statements, Quarterly Statement Status, Refund Status, Registration for viewing of Form 26AS and benefits of Form 26 AS.

Speaker brought out the common errors/ inconsistencies and gave practical suggestions to overcome the same. She also informed of new initiatives planned that are likely to be introduced in near future. The participants raised their queries and pointed out difficulties faced by them was and shared their experience. The meeting was highly interactive. NSDL officials promised all the help to members to sort out their difficulties.

Nani Palkhiwala Memorial Lecture

The Eighth Nani A. Palkhivala Memorial Lecture was held on 7th February 2011 at the Tata Theatre, NCPA, Nariman Point, Mumbai 400 021 on ‘The Emerging Scenario in Education’ and was delivered by Mr. Kapil Sibal, Minister for Human Resource Development, Science & Technology & Earth Sciences, Communications & Information Technology, Govt. of India.

In the beginning the Sixth Nani A Palkhivala Civil Liberties Award was presented to Chaman Lal for the protection and preservation of civil liberties. The Award was presented by Mrs. Justice Sujata Manohar (Retd.).

Mr. Kapil Sibal presented the Vision 2020 of the Government of India in the field of education. He informed that the Government was committed to improve the education scenario in India. Enactment of the Right to Education Act was the first step in that direction. He emphasised the need for improving the ratio of school and college going children. By the end of the next decade India would need about 40,000 more colleges and about 1000 new universities. He also informed about the plan to connect colleges and universities through optical fiber which would enable students to learn online from any place and from any College/University.

He reiterated his Government commitment to reduce stress and tension associated with the present education system and assured steps to introduce comprehensive and continuous evaluation system.

He expressed hope and trust in Indian youth and promised them better tomorrow.

Standard Chartered Mumbai Marathon, 2011

Standard Chartered Mumbai Marathon, 2011, was held on 16th January, 2011. Bombay Chartered Accountants’ Society supported the cause of education by registering as an NGO for the Marathon. Over 50 members participated from the Society and ran for the cause. The enthusiasm of the members was visible as they all supported the cause in good number irrespective of their age. Members not only supported for the DREAM RUN which was for 6 Km but also the HALF MARATHON of 21 Km & FULL MARATHON of 42Km.

Accounting & Auditing Committee

February 2011 was celebrated as the Internal Audit Month at BCAS. The month started with the launch of the seventh six days Internal Audit Studies Foundation Course at Hotel Parle International from 7th February 7, 2011 to 12th February, 2011.

The course received an overwhelming response with a full house with more than 50 participants from various locations including Delhi, Chennai, Pune, Nasik, Ahmedabad, Vadodara and Rajkot.

The course commenced with the Chairman Mr Himanshu Kishnadwala, and Mr Mayur Nayak giving their opening remarks. The course was inaugurated by Smita Gune, a pioneer in the field of Internal Audit, with over 23 years of experience behind her. She spoke about the various opportunities and challenges that face the Internal Audit Profession and also shared with the participants various ways in which such challenges could be addressed. She also lucidly shared vignettes from her exciting journey.

Over the six days, participants were treated to a well-designed course which included:

Internal Audit Overview.

Positioning of Internal Audit in the Corporate framework.

Evolution of Internal Audit, with specific reference to the Indian environment, regulatory framework facilitating Internal Audit.

Preface to Standards on Internal Audit and relevant SIAs.

Internal Audit Objective – Internal Controls,

Compliances, Resource optimisation, Ethics and Governance.

Internal Audit Process – planning (audit charter, audit plan, scope determination, scope review), resource mobilisation & pre-preparation.

Internal Controls – the heart of Internal Audit, with Case studies.

Basics of Risk Management and Risk Assessment.

Situation analysis – Probing skills.

Internal Audit – How to make an impact.

Internal Audit Process – execution: field work and working papers.

Report Writing.

Internal Audit – Case Studies.

Internal Audit in IT environment – orientation (i.e., specific focus on the need to understand, appreciate and utilise the IT environment of the auditee for effective Internal Audit), practical examples in Tally, ERP, web-based system.

Internal Audit – Bag it, Sell it, Present it.

Use of CAATS (for Internal Audit evidence collection).

Building an Internal Audit Team.

Presentation skills and

Data Mining & Analytics for Internal Audit.

The faculty, drawn from both the industry and profession, included Ms. Nandita Parekh, Mr. Bhargav Vatsaraj, Mr. Himanshu Vasa, Mr. Deepjee Singhal, Mr. Jairam Rajshekhar, Mr. Nikunj Shah, Mr. Shailin Desai, Mr. Ravindra Rao, Mr. Kunal Pande, Mr. Atul Shah and Ms. Preeti Cherian.

As part of the concluding session, the participants expressed their deep sense of gratitude to the Society for having conducted such a course which will enable them to provide quality service to their clients. The course concluded with remarks by Past President Mrs Narayan Varma who also distributed certificates to all the participants.

Human Resources Committee:

The Human Resources Committee of BCAS under the auspices of Amita Memorial Trust organised a workshop for its members and students on ‘Effective Communication and Public Speaking’. This workshop was held over three days in February 2011 at the Society’s premises.

Veteran HR trainers Mr. Murli Mehta & Mr. Vivek Patki were the faculty and the workshop had 32 participants. Initially, the basic process and the fundamentals of effective communication were dealt with. Participants were educated about important tools and practical tips on how to succeed in public speaking were imparted. The workshop was specifically designed for members and students keeping in mind some of the most difficult communication issues students and members face while interacting with other people. The motivators also conducted useful exercises on confidence building when speaking in public, ability to overcome anxiety and nervousness when preparing for public and techniques to enhance personal public speaking styles were explained.

The workshop provided personal attention to each participant with constructive and effective feedback along with performance appraisal. This was an excellent opportunity to practice and assess the strengths and ability to use and control ones voice more effectively. The participants were made aware of use of non-verbal signals and physical appearance while speaking.

All the participants were happy with the workshop and the feedback received from them was very encouraging.

After two days of practice the participants were given assignment to prepare and make a five minutes speech on the concluding day. The topics were contemporary and marks were allotted for all the important aspects like opening of a speech, body language, eye contact, gestures, content, overall impact, timing and conclusion. Three judges were called to judge and give their feedback. Six useful management books were distributed to the first three winners and three consolation winners. President Mayur Nayak, Vice President Pradip Thanawala, Past Presidents Pradeep Shah and Rajesh Muni and Managing Committee member Manish Sampat were present at the inauguration and concluding of this workshop. The judges who graced the occasion were Mr. Nitin Shingala, Mr. Mukesh Trivedi & Mr. Kinjal Shah.

BCAJ Admin

Miscellaneous

From Published Accounts

5 Audit Report in case of a
company where in earlier years, manipulations admitted by the erstwhile
management and previous years’ audit reports withdrawn by earlier auditors

Satyam Computer Services
Ltd. — (31-3-2009)

Appointment :

1. We have been appointed as
statutory auditors of SATYAM COMPUTER SERVICES LIMITED (‘the Company’) for the
year ended March 31, 2009 by the Board of Directors of the Company (hereinafter
referred to as the ‘Board’) subject to the ratification by the shareholders of
the Company, pursuant to the order of the Honourable Company Law Board (CLB),
dated October 15, 2009. This report is addressed to the members of the Company,
subject to the ratification of our appointment.

Report on the Financial
Statements :

2. We have audited the
attached Balance Sheet of the Company as at March 31, 2009, the Profit and Loss
Account and the Cash Flow Statement of the Company for the year ended on that
date, both annexed thereto.

Management’s responsibility for
the Financial Statements :

3. These financial
statements are the responsibility of the Company’s Management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

Auditors’ responsibility :

4. Subject to the matters
discussed in this report, we conducted our audit in accordance with the auditing
standards generally accepted in India. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and the disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by the Management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

Companies (Auditor’s Report)
Order, 2003 (CARO) :

5. As required by the
Companies (Auditor’s Report) Order, 2003 (CARO) issued by the Central Government
in terms of S. 227(4A) of the Companies Act, 1956 (‘the Act’) we give in the
Annexure a statement on the matters specified in paragraphs 4 and 5 of the said
Order, which is subject to the matters discussed in this report.

Basis for opinion :

6. As stated in Note 3 of
Schedule 18 :

(a) On January 7, 2009, in a communication (‘the letter’) addressed to the then-existing Board of Directors of the Company and copied to the Stock Exchanges and Chairman of Securities and Exchange Board of India (‘SEBI’), the then Chairman of the Company, Mr. B. Ramalinga Raju (‘the erstwhile Chairman’) admitted that the Company’s Balance Sheet as at September 30, 2008 carried inflated cash and bank balances, non-existent accrued interest, understated liability and overstated debtors position. As per the letter, the gap in the Company’s Balance Sheet had arisen purely on account of inflated profits over a period of last several years. Consequently, various regulators have initiated their investigations and legal proceedings, which are ongoing and are more fully described in the said Note.

(b) The Government-nominated Board of Directors appointed an independent counsel (‘Counsel’) to conduct an investigation of the financial irregularities that would enable preparation of the financial statements of the Company. The Counsel appointed forensic accountants to assist in the investigation (referred to as ‘forensic investigation’) and preparation of the financial statements. The forensic accountants have expressed certain reservations and limitations in their investigation process, which are more fully described in the said Note.

(c) Pursuant to the investigations conducted by the Central Bureau of Investigation (‘the CBI’)/other regulatory authorities, most of the relevant documents in the possession of the Company were seized by the CBI/other authorities and partial access was granted to the Company including for taking photo-copies of the relevant documents as may be required in the presence of the CBI officials.

(d) The former statutory auditors of the Company vide their letter dated January 13, 2009 to the Board of Directors have indicated that their reports and opinions in relation to the financial statements of the Company from the quarter ended June 30, 2000 until the quarter ended September 30, 2008 should no longer be relied upon.

(e) As confirmed by the order of the CLB, and in accordance with Accounting Standard 5 — ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, adjustments resulting from financial irregularities and errors relating to periods prior to April 1, 2008, to the extent identified, have been accounted for as ‘Prior Period Adjustments’ in these financial statements.

(f) As per the assessment of the Management, based on the forensic investigation carried out through an independent counsel/forensic accountants, and the information available at this stage, all identified/required adjustments/disclosures arising from the financial irregularities, have been made in these financial statements.

The Management is of the view that since matters relating to several of the financial irregularities are sub judice and various investigations are ongoing, any further adjustments/disclosures to the financial statements, if required, would be made in the financial statements of the Company as and when the outcome of the above uncertainties is known and the consequential adjustments/disclosures are identified.

In view of the above, we are unable to comment on the adjustments/disclosures which may become necessary as a result of further findings of the ongoing investigations and the consequential impact, if any, on these financial statements.

7. As stated in Note 3.3(ii) of Schedule 18, the Company has, based on the forensic investigation, accounted for the opening balance differences (net debit) of Rs.11,221 million as at April 1, 2002, other differences (net debit) of Rs.166 million during the period from April 1, 2002 to March 31, 2008 and Rs.7 million relating to the period from April 1 to December 31, 2008 aggregating Rs.11,394 million under ‘Unexplained Differences Suspense Account (Net)’ under Schedule 12 due to non-availability of complete information. These net debit amounts aggregating Rs.11,394 million have been fully provided for on grounds of prudence.

In the absence of complete/required information, we are unable to comment on the accounting treatment/ disclosure for the aforesaid unexplained amounts accounted under ‘Unexplained Differences Suspense Account (Net)’ in these financial statements.

8. As stated in Note 6.1 of Schedule 18, the alleged advances amounting to Rs.12,304 mil-lion (net) have been presented separately under ‘Amounts Pending Investigation Suspense Account (Net)’ in the Balance Sheet. In this regard, there are certain claims by thirty-seven companies seek-ing repayment of the amounts allegedly paid by them to the Company as temporary advances which were earlier not recorded in the books of ac-count of the Company. These companies have also claimed damages/compensation/interest on these amounts. Further, these companies have also filed recovery suits/petitions against the Company. The details of these claims are more fully described in the said Note. The Company has not acknowledged any liability to any of the thirty-seven companies and has replied to the legal notices stating that the claims are legally untenable.

The Directorate of Enforcement (‘ED’), Govern-ment of India, is conducting an investigation under the Prevention of Money Laundering Act, 2002 on the amounts allegedly advanced by the aforesaid parties and has directed the Company not to return the amounts until further instructions from the ED.

The Management has represented that since the matter is sub judice and the investigations by various Government agencies are in progress, the Management, at this point of time is not in a position to predict the ultimate outcome of the legal proceedings initiated by these thirty-seven companies.

In view of the above, we are unable to determine whether any adjustments/disclosures will be required in respect of the aforesaid alleged advances amounting to Rs.12,304 million (net) and in respect of the non-accounting of any damages/compensation/interest in these financial statements.

9. As stated in Note 6.3 of Schedule 18, sub-sequent to the letter by the erstwhile Chairman of the Company relating to various financial irregularities in the Company’s financial statements, a number of persons claiming to have purchased the Company’s securities have filed class action lawsuits in various courts in the United States of America. These class action suits are more fully described in the said Note. Based on the legal advice obtained by the Company, the Company is contesting the above lawsuits.

Since the matter is sub judice, the outcome of which is uncertain at this stage, we are unable to comment on the consequential impact, if any, on these financial statements.

10. As stated in Note 8.1(vi) of Schedule 18, an amount of Rs.674 million has been paid as interim dividend for the year 2008-09. Since there are no profits for the purpose of declaring dividend, there is a non-compliance of S. 205 of the Act. Further, as stated in Note 8.1(vii) of Schedule 18, the consequen-tial transfer of the stipulated minimum amounts of profits to General Reserves in accordance with the Companies (Transfer of Profits to Reserves Rules), 1975, has also not been effected due to inadequate balance in the Profit and Loss Account. The Management is proposing to make an application to the appropriate authority for condoning these non-compliances. Refer to paragraph 17 below also.

The possible impact of these non-compliances in the event the Company’s condonation requests are not granted has not been determined or recognised in these financial statements.

11. Attention is invited to the following matters:

(a) As stated in Note 9.2 of Schedule 18, in the absence of certain documents/information, adjustments required in respect of the opening balances as at April 1, 2008 (including the adjustments consequent to the assessment of consistent application of accounting policies) have been carried out to the extent feasible by the Management, based on available alternate evidences/information.

In the absence of the aforesaid documents/ information for the periods prior to April 1, 2008, we could not perform some of the required auditing procedures on the opening balances to the extent deemed necessary by us. Furthermore, due to inadequate records, we are unable to fully assess whether the Company’s accounting policies have been applied on a basis consistent with that of the preceding period.

(b) As stated in Note 9.3 of Schedule 18, certain reconciliations between the sub-systems/sub-ledgers and the general ledger could not be performed completely due to non-availability of all the required information. The Company has identified certain amounts aggregating Rs.27 million (net debit), comprising of Rs.494 million (gross debits) and Rs.467 million (gross credits) appearing in the general ledger, for which complete details are not available and, hence, these amounts have been accounted under ‘Unexplained Differences Suspense Account (Net)’ under Schedule 12 and the Management has made provision for the net unexplained debit amounts aggregating Rs.27 million as at March 31, 2009 on grounds of prudence. Further, there are certain differences in data between inter-connected sub-systems, ultimately interfaced to the general ledger, for which complete details are not available.

In the absence of the required information, we are unable to determine the additional impact, if any, of such unexplained amounts/ differences on these financial statements.
(c) Responses were not received in 3,047 number of cases out of our total sample of 3,746 number of requests sent out for confirmations of balances/other details in respect of parties reflected under Sundry Debtors, Loans and Advances, Current Liabilities, etc. Further, confirmations could not be sent in 47 number of cases due to the non-availability of complete records/ addresses relating to these parties. Refer Note 9.4 of Schedule 18.

Had all the confirmations been received and reconciled, there may have been additional adjustments required to these financial statements which are not determinable, at this stage.

12. Attention is invited to the following matters:

(a) Further to our comments in paragraph 8 above, the amounts received during the year and shown under ‘Amounts Pending Investigation Suspense Account (Net)’ has been presented in the cash flow statement separately since the Management could not identify the nature of the same and, hence, could not categorise the same as operating, investing or financing cash flows.

This is not in accordance with Accounting Standard (AS) 3 — Cash Flow Statements.
(b) Identification of companies/firms/other parties covered in the Register maintained u/s. 301 of the Act, companies under the same management within the meaning of S. 370(1B) of the Act, firms/ private limited companies in which a director is a member or a partner, the non-scheduled banks where a director of the Company is interested and the related parties as required under AS-18 — Related Party Disclosures as stated in Notes 19(iv) and 30 of Schedule 18 has been done by the Management based on available information. For the reasons stated in the said Notes, there may be additional related parties whose relationship would not have been disclosed to the Company, and, hence, not known to the Management.

We are unable to comment on the completeness/correctness of the above-referred details in the absence of all the required information.

(c) As stated in Note 12.4 of Schedule 18, the Company has given as finance lease, vehicles to the employees under the Associates Car Purchase Scheme, the gross original cost of which aggregates Rs.654 million (net book value Rs.382 million as at March 31, 2009), which have not been accounted for as finance leases in accordance with AS-19 — Leases in the absence of complete/adequate information.

In the absence of complete/adequate information, we are unable to determine the extent to which fixed assets and depreciation have been overstated and the impact of the non-compliance with AS-19 — Leases on these financial statements.
(d) As stated in Notes 14.5 and 37 of Schedule 18, the Company has not maintained proper records of its inventories during the year though the required adjustments to account for the inventory in the books of account were made based on the available information with the Management as at the year end. Further, the Company has not disclosed the quantitative details of purchase and sale of hardware equipment and other items as required under Schedule VI of the Act in the absence of complete information.

13. The Management has evaluated and accounted for certain transactions/made the relevant disclosures based on and to the extent of the information available with the Company in respect of the following Notes of Schedule 18:

(a)   Adjustment of unapplied receipts against Sundry Debtors, classification of Sundry Debtors and provisioning for doubtful debts as stated in Note 14.1.
(b)   Accounting for contracts under percentage of completion method and unbilled revenue as stated in Notes 14.2 and 14.3.
(c)   Accounting for multiple deliverable elements, hardware equipments and other items, etc., as stated in Notes 14.4 and 14.5.

(d) Accounting for unearned revenue as stated in Note 14.7.
(e) Accounting for reimbursements/recoveries from customers as stated in Note 14.9.

In the absence of the required information, we are unable to determine the additional impact, if any, of the above matters on these financial statements.

14. As stated in Note 6.6(vi) of Schedule 18, the Company is carrying a total amount of Rs.4,371 million (net of payments) as at March 31, 2009 towards provision for taxation which was made primarily on the basis of the past financial statements. Considering the effects of financial irregularities, status of disputed tax demands, appeals/claims pending before the various authorities, the consequent uncertainties regarding the outcome of these matters and the significant uncertainties in determining the tax liability, the Company has been professionally advised that it is not appropriate to make adjustments to the outstanding balance of tax provision as at March 31, 2009.

In view of the above, we are unable to comment on the adequacy or otherwise of the provision for taxation carried in these financial statements.

15. In view of the matters described in paragraph 6 above and as stated in Note 39 of Schedule 18, information relating to the previous year has been provided only for the purpose of statutory requirements and the same cannot be used for any comparison purposes or otherwise.

16. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to various claims and contingencies:

(a) Note 6.2 regarding the settlement amount of Rs.3,274 million (equivalent to USD 70 million) deposited into the escrow account payable to Upaid Systems Limited.
(b) Note 6.4 regarding the Division of Enforcement of the United States Securities and Exchange Commission conducting a formal investigation into misstatements in the financial statements of the Company for the prior years pursuant to the letter of the erstwhile Chairman and recommending enforcement action against the Company.

(c) Notes 6.6 to 6.8 regarding the various demands/disputes raised by the direct and indirect tax authorities both in India as well as overseas jurisdictions.

As stated in Note 6.13 of Schedule 18, the Company has made appropriate provision for contingencies as at March 31, 2009 which, in the opinion of the Management, is adequate to cover any probable losses in respect of the above litigations and claims.

17. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to certain regulatory non-compliances/breaches:

(a)   Note 8.1 regarding various non-compliances with the provisions of the Act.
(b)   Note 8.2 regarding certain non-compliances of the guidelines issued by the SEBI with respect to allotment of stock options to the employees.
(c)   Note 8.3 regarding certain non-compliances of the provisions of the Foreign Exchange Management Act, 1999.
(d)   Note 8.5 regarding certain non-compliances of the provisions of the Income-tax Act, 1961.

(e) Note 8.6 regarding delay in filing of tax returns in overseas jurisdictions.

The Management has represented that:

(i) the various non-compliances and breaches by the Company of the statutory requirements which have been noticed/observed, duly considering the findings of the forensic investigation/other ongoing regulatory investigations have been summarised in the aforesaid Notes.

(ii) the Company is proposing to make an application to the appropriate authorities, where applicable, for condoning these non-compliances and breaches relatable to the Company.

(iii) the possible impact of these non-compliances and breaches in the event the Company’s condonation requests, where applicable, are not granted has not been determined or recognised in these financial statements.

18. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to certain accounting and other matters:

(a) Note 9.1 regarding the Management’s identification of several deficiencies in the Company’s internal control over financial reporting as at March 31, 2009 along with certain remediation action taken subsequently.

(b) Note 9.5 regarding various risks and uncertainties relevant to the Company’s financial condition as identified by the Management.

(c) Note 12.8 regarding adjustments that may be required on account of the physical verification of fixed assets conducted subsequent to the year end.

(d) Note 13.9 regarding the provisions made for the diminution in the value of investments and Note 19(iii) regarding the provision made for the dues from the subsidiaries.

19. Without qualifying our opinion, we invite attention to Note 22 of Schedule 18 regarding provision for statutory audit fees of Rs.57 million (including for the audit of prior period items) debited to the profit and loss account which is subject to the approval of the shareholders.

Opinion:

20.   Further to our comments in the Annexure referred to in paragraph 5 above and paragraphs 16 to 19 above and subject to our comments in paragraphs 6 to 15 above, we report that:
(a)   we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;
(b)   in our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books;
(c)   the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in agreement with the books of account;
(d)   in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in compliance with the Accounting Standards referred to in S. 211(3C) of the Act;
(e)   in our opinion and to the best of our information and according to the explanations given to us, the said Accounts, read together with the notes thereon, give the information required by the Act in the manner so required and, subject to the consequential effects of our comments in paragraphs 6 to 15 above which are not quantifiable, give a true and fair view in conformity with the accounting principles generally accepted in India:

(i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2009;

(ii) in the case of the Profit and Loss Account, of the loss of the Company for the year ended on that date; and

(iii) in the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date.

Reporting requirements relating to S. 274(1)(g):

21. Since all the Directors as on March 31, 2009 were Government nominees, the reporting requirement relating to S. 274(1)(g) of the Act does not arise.

Compiler’s Note:

The other disclosures in the Notes to Accounts referred to in the audit report are voluminous and hence not reproduced here. The same can be made available by the compiler on request.

BCAJ Admin

From The President

Dear Valued Readers,

“Civil Disobedience” – do these words ring bell? Yes, it was
an integral part of India’s freedom struggle. A totally non-violent way of
protesting against British Rule in India!

Something similar happened in Egypt last month. People in
thousands protested nonviolently against thirty years of autocratic rule of
President Hosni Mubarak at Cairo’s Tahrir Square and other centres for weeks and
in less than one month, Mubarak stepped down yielding to the pressure of the
people for democracy. Indeed, the media played its role very successfully in a
short span of time. Youngsters, with the help of social networking media, like
Facebook, Twitter, YouTube etc., managed to spread the message like wild fire.
They were able to take the army on their side and that was a significant
achievement. The winds of freedom then spread across various other Arab
countries in the Middle East encompassing Bahrain, Tunisia, Libya, Yemen, etc.
All these countries are still being ruled by dictators/kings for decades.
Evidently, the underlying spirit in these uprisings is desire for
freedom/democracy. It is said that man is born free. Freedom is the latent
desire of every human being and is recognised as a fundamental right under the
Indian Constitution, amongst numerous others in the world.

One of champions of human freedom in modern times in India
was the legal luminary late Mr. Nani A. Palkhivala who successfully fought the
case of Kesavananda Bharti vs. State of Kerala before the Supreme Court and made
history. One of the Judges commented: “Never in the history of the Court has
there been a performance like that. With his passionate plea for human freedom
and irrefutable logic, he convinced the Court that the earlier Kesavananda
Bharti case judgment should not be reversed.” Rajaji described him as, “God’s
gift to India”. In his fond memory, the Nani A. Palkhivala Memorial Trust, gives
a “Civil Liberties Award” every year. The award was presented this year to
Padmashri Chaman Lal – a brilliant, honest and upright former IPS officer for
protection and preservation of civil liberties in various capacities. He was
instrumental in combating terrorism in the Punjab and ensuring free and fair
elections post operation Blue Star, worked with a difference as the Director
General of Police in Nagaland for which he was given the “Friend of North East”
Award by the Prime Minister, Dr. Manmohan Singh, in 2004. The moot point here is
that
we still have people in India who can and are upholding the values of freedom
and civil liberties of high order.

One of the surest ways to make humans “free” is by imparting
value based education. “Education is the key to unlock the golden door of
freedom” said George Washington Carver. Indeed, education opens up one’s mind as
one is able to read, contemplate and assimilate frozen thoughts and wisdom from
tomes. Our great leaders of freedom struggle are standing monumental examples.
In his annual address to the US Congress at Capitol Hill, President Obama noted
that India would emerge as a Super power in the decades to come, as it believes
in investing vast resources in its educational endeavour, as knowledge is power.
In order to empower the destitute and poor children of our society and bring
about a difference in their lives, the BCAS Foundation in association with
Public Concern for Governing Trust (PCGT) and the Dharma Bharathi Mission, has
decided to launch a novel project called “Teach English”. Under this mission
children from select Municipal and other schools would be taught conversational
English for three months, with one class every week for a duration of three
hours. Volunteers would be trained to teach English. The project has received
overwhelming response from members and their friends and/or families. If you
would like to contribute your services to this noble cause and to redeem your
debt to the society, you are indeed welcome to join the project. Please write to
the undersigned for any information thereon,
at president@bcasonline.org.

UNION BUDGET – 2011-12

It is heartening to note that in the Union Budget 2011-12,
the Government have laid emphasis on the need for universal access to secondary
education as well as increasing the percentage of students acquiring higher
education and skilled training. The allocation for this purpose is Rs. 52,057
crores, which is 24% higher than the current year – a great welcome move indeed.
The implementation of the “Sarva Shiksha Abhiyan”, the Centrally Sponsored
Scheme “Vocationalisation of Secondary Education” to improve the employability
of our youth and pre-matric scholarship scheme for Scheduled Castes and
Scheduled Tribes, are some of the other highly commendable initiatives taken in
the field of education. But what is going to change the scenario is the linking
of 1500 Institutes of Higher Learning and Research in the Country through an
optical fibre backbone to be in place by 31st March 2012 under the National
Knowledge Network (NKN). This would facilitate geographical spread of education
and knowledge seamlessly. It would create the National Knowledge Sharing
Platform and if implemented rightly, may well become a powerful knowledge bank
of unusual dimensions.

Whereas food inflation at 20% and fiscal deficit at 5.1% of
GDP are matters of grave concern, the Economic Survey unveils some reassuring
statistics. The growth of Indian economy at 8.6 % proves that Indian Economy is
on the growth track. The Union Budget 2011-12, envisages several legislations
and numerous reforms are expected in the Financial Sector. The scope of Service
Tax and Excise has been widened. The growing awareness about the environment and
the launch of a ten-year “Green India Mission” is a welcome move. As expected,
not many changes are made in the area of Direct Taxes, in view of the Direct
Taxes Code on the anvil. Concrete measures have been proposed in the Finance
Bill to unearth black money of Indians abroad through introduction of provisions
compelling assesses to provide details of transactions with persons located in
any country or jurisdiction which does not effectively exchange information with
India.

Cricket fever is on along with examination fever. I can
imagine how difficult it is for students to balance between the two. I wonder
how Government could allow playing cricket during examination season, since
cricket has now become more of an entertainment than a sport, which it ought
tobe!

All the same, I wish all students best of luck in their
endeavour.

Regards,

Mayur Nayak

levitra

BCAJ Admin

From The President

From the President

Dear Esteemed Readers,

Every year, 3rd December is celebrated as International Day
of Persons with Disabilities, as resolved by the UN General Assembly in 1982.
The objective is to create awareness about various disabilities, the basic
rights of people with disabilities, and the need for rehabilitation of such
individuals so that they remain an integral and contributive part of the
society. In today’s world, disabled persons are either ignored, mocked at, or
sympathized with but are rarely treated normally. Disability is a curse and more
so, if that person happens to be in India, as we do not have necessary
facilities and infrastructure for movement of the physically and mentally
challenged; e.g. we do have seats reserved for the physically handicapped in
buses or trains but getting in and out of these modes of transportation is
difficult. In fact, reaching their access points is a nightmare for those with a
limp or for a person on crutches.

We, as an enlightened and resourceful class in the society,
must shoulder responsibility for the well being and welfare of the disabled.
Given an opportunity, the disabled stand out in many respects. There are many
who have overcome their disabilities with sheer determination, perseverance and
hard work and have become role models for many others. Chirag Chauhan, a young
boy who got paralyzed from the waist below in a gruesome local train blast in
Mumbai on 11th July 2006 completed his studies and has become a successful
Chartered Accountant. A friend of mine, Ameet Thakkar, who is a spastic from
birth with more than 50 % disability, is a successful LIC agent with the
distinction of being a club member.

A blind couple, namely, Muktaben and Pankajbhai Dagli from
Pragna Chakshu, Surendranagar, Gujarat, are taking care of almost 200 blind
women and children. Gopi, an eight year old girl, deaf, dumb and blind like
Helen Keller, is being raised by Muktaben. In the worst earthquake to hit
Gujarat in 2001, BCAS and CTC helped them in small measure to rebuild demolished
houses. Our recent visit revealed that in a ten-year span, they have completed
three buildings with a capacity for 300 inmates, a primary and a secondary
school for the blind and also centres for imparting training in computers, music
and beauty care. Indeed, they have become a source of inspiration for many of
us. If they can do so much with a vital faculty missing, think of all that we
can achieve, having all our faculties intact! My plea is that let us recognize
our Individual Social Responsibility (ISR) and give more than what we take. I am
aware that many of our members are doing good social work. My salutation to
them—one and all. We, at BCAS, are compiling a database of all such
contributors. Please do send in your details in the prescribed format, which can
be downloaded from our website
www.bcasonline.org.

In order to provoke thinking amongst members on some of the
burning issues concerning climate, profession, health, family, nation and the
world at large, a one-pager thought-mailer would be released (only by e-mail) on
the first of every calendar month. The first such thought-mailer for December
2010,authored by Mr. Nawshir Mirza on “What Should a Chartered Accountant do
About Climate Change?” elicited good response. We plan to put across this mailer
on our website with a discussion/bulletin board facility or on Facebook where
members can communicate/share their thoughts and/or observations.

The first-ever joint conference by the BCAS with the
Chartered Accountants’ Association (CAA), Ahmedabad, on 18th and 19th December,
2010, held at Ahmedabad on the Direct Taxes Code elicited an overwhelming
response.

Lately, India has been in the limelight not only for its
booming economy but also for its huge market. Indeed, it is the second largest
and fastest growing economy after China. The size of the Indian economy is about
$ 1.3 trillion and is poised to grow at around 9 per cent annually. India has
thus emerged stronger post the global financial crisis, economic meltdown and
the resources crunch. No wonder, India is emerging as a hot destination for all
UN Security Council Permanent Members looking out for large economic deals.
British Prime Minister David Cameron, US President Barack Obama, French
President Nicolas Sarkozy, Chinese Premier Wen Jiabao and the Russian President
Dmitry Medevedev were amongst those world leaders who visited India in the past
six months. They all put together, secured over $80 billion in deals ranging
from defence, nuclear energy to telecoms and the like.

I am of the view that now is the time for India to play its
cards right so as to emerge as one of the economic leaders of the world. India
must therefore negotiate with the nations of the world from its inherent and
potential strengths to achieve its goals.

Curbing inflation and keeping up the momentum of economic
growth is a tall order for any government. Even with a reputed economist at the
helm, as our Prime Minister, India today is witnessing one of the worst ever
inflations especially in food items. Increase in the prices of petrol and diesel
have a cascading effect on such price rise. Well, measures are under way to
contain the unbridled price rise which is not healthy for proper economic
growth.

We are on the threshold of the new decade 2011-2020. In the
first decade (2001-2010), we were witness to a lot of changes occurring in India
and the world. It is high time for us to take stock of the present situation,
consolidate the same and march ahead with renewed zeal and zest to forge ahead.
It is all right if we cannot place an Indian on the MOON, but it is imperative
to reach every poor Indian and provide him with the basic necessities of life.
It is tragic that day after day, our farmers are committing suicide. Let us
resolve to provide opportunities to the downtrodden, not by reservation, but by
education; not by giving fish to eat but teaching them fishing such that they
can lead a life of dignity. Equality deserves to be achieved not by converting
“haves” into “have nots” but by raising the bar of the “have nots” to “haves”.

To this end, let us frame our new year’s resolution in order
to contribute our might, for the betterment of the poorer sections of our
society. Service to humanity is service to God, is it not!

I wish you all a happy and a prosperous New Year!

Mayur Nayak

levitra

BCAJ Admin

From The President

From the President

One of the seven social sins
as enunciated by Mahatma Gandhi was “Politics without Principles”. In good old
days, our political leaders led a principle centered or value based life. There
was a time when Union Minister Lal Bahadur Shashtri resigned from the cabinet
owning moral responsibility after a railway accident. Jai Prakash Narayan,
co-founder of Praja Socialist Party, quit the party in 1957 when he found that
tickets were distributed on the caste basis and forging ahead to pursue
Sarvodaya (good of all) and Lokniti (Polity of the people) as opposed to Rajniti
(Polity of the State).

Today, food inflation is
skyrocketing and our Agriculture Minister remains unperturbed. Farmers are
committing suicide and Ministers are busy in Rajniti. The head of the Vigilance
Commission (CVC) is under a cloud. Government is unable to declare names of the
holders of secret bank accounts overseas. Accountability is nowhere to be seen.
Punishment to culprits is illusory. Judiciary is our only ray of hope and the
Supreme Court’s pointed questions over 2G scam, secret bank accounts overseas,
CVC etc. have put the Government on the defensive. Despite the spate of scams
and corruption charges hurled about, none of the Ministers resigned voluntarily.

The law and order situation
has gone haywire. There is no safety for whistle blowers. RTI activists are
being killed without compunction. On 25th January 2011, Yashwant Sonawane,
Additional Collector Manmad region (Maharashtra) was burnt alive by the oil
mafia. If this be the fate of a Collector, what about the amm aadmi and what can
he expect at all?

An open letter written by 14
eminent citizens of India on 17th January 2011 aptly describes the present day
scenario. They have amongst other things, expressed grave concern over the
widespread “governance deficit” in every sphere of national activity, namely,
government, business and other institutions. They have alleged that misuse of
discretionary (decision making) power is widespread under extraneous influences.
They have demanded urgent steps to arrest the “malaise of corruption, which is
corroding the moral fabric of the nation”.

In Sanskrit there is a
saying that “Yatha Raja, Tatha Praja” (meaning as is the Ruler so is the Ruled).
Therefore, it is imperative that good governance should start from the top.
People in democratic set up today think it is the opposite – as are the people
so are its representatives e.g. the president/prime minister etc. forgetting
that the primary quality of a leader is his being a role model. The entire
Ramayana is written on this theme, and Rama consistently guarded his character
lest it be anything less than perfection (Maryada Purushottam) – a role model.
The Chief Minister of Bihar, Nitishkumar has set an illustration by first
declaring his assets and then demanding others, his ministers and bureaucrats to
follow suit.

We have a unique example of
Mr. Narayanamurthy, a great visionary, who created an empire which has not
touched him as the lotus remaining untouched by mud. His simplicity and
governance are worth emulating. On 7th and 8th January 2011, members of BCAS and
Karnataka State Chartered Accountants’ Association (KSCAA) visited the Campuses
of Wipro, Bangalore and Infosys, Bangalore and Mysore as part of a study tour.
The vastness of Mysore campus of Infosys and the world class training and other
facilities provided therein widened the horizons of participants. It was amazing
to see how one visionary with his enabling team could achieve in a single
lifetime and that, too, without any strings attached. No wonder, companies like
Infosys and Wipro have brought laurels to home. The participants of the study
tour also visited the manufacturing facilities of Toyota at Bangalore. Thanks to
CA. Padamchand Khincha who arranged these memorable events.

The results of CA Final are
out and as usual, there is more remorse than elation notwithstanding the fact
that the result percentage is now better than last time. The lack of formal
coaching may well be the reason for the poor performance. The ICAI’s initiative
to commence Live Virtual Classes at 25 centres in 22 cities across our country
is indeed laudable.

I think we need to reexamine
our present evaluation system which is more of a memory test. It does not matter
how much a student works hard for the entire year; what really matters is that
which he is able to reproduce at the examination hall. May be, the examinations
prepare us to keep our cool/equilibrium during the critical moments of our life.
What worries one is that a student scores 50 marks in a particular subject in
one attempt but gets five marks in the same subject in the subsequent attempt
–one is up against such an inexplicable result, naturally. Maybe, we need live
with the present system until we find a more balanced and rational way of
evaluation wherein performance of a student is reckoned over a period of time
and not just in three hours. This is true not only of CA examinations but also
of other examinations. As far as the CA curriculum is concerned, we all need to
conjoin our minds and help ICAI in evolving a better system of evaluation. The
problem has been identified and its solution cannot be late in arriving. I
appeal to readers to send their suggestions in this regard to president@bcasonline.org.

The much awaited Residential
Refresher Course (RRC) organised by BCAS was completed successfully at Matheran.
More than 200 members participated. The concept of two parallel sessions, one on
Service tax and the other on International tax elicited good participatory
response. RRC Nostalgia – an audio, visual and live programme, on one of the
evenings, kindled memories of the past RRCs. BCAS TV has been launched whereby
members from far off places would be able to benefit from recorded videos, for a
nominal subscription.

A number of activities have
been planned in the next two months. BCAS has designated February 2011 as an
“Internal Audit Month” wherein many programmes in the field of Internal Audit
are scheduled. The idea is to equip our members in this important and emerging
area of practice.

February is the month for
presentation of the Union Budget in Parliament. The winter session was a wash
out, with opposition demanding Joint Parliamentary Committee (JPC) to
investigate the 2G spectrum scam. Let us hope that Parliament would function
meaningfully during the Budget session and transact various important businesses
listed on its agenda, God willing.

Every year the fifth day (Panchami) of the Indian month Magh (this year it is on 8th February), being the first day of spring is celebrated as Saraswati Pooja day. Hindus on this occasion worship Saraswati – the goddess of knowledge, music and art. I pray that Maa Saraswati gives wisdom to all of us to work for the progress and betterment of our nation and humanity at large.

My greetings to you all on the onset of spring (Vasant Paanchami)!

BCAJ Admin

ICAI And Its Members

ICAI and its Members

1. Accounting treatment of advance to subsidiary pending
finalisation of modalities of issue of the shares :

A public limited company (P.C. Ltd.) which is a wholly-owned
subsidiary of a listed government company, is in the business of exploration and
production of oil and gas and other hydrocarbon-related activities outside
India. P.C. Ltd. has acquired 100% share capital of a Cyprus-based company
(ABC). During the same year, ABC acquired the entire issued share capital of a
UK-based company (XYZ). The funds for the acquisition of XYZ amounting to USD
1,922 million were provided by P.C. Ltd. to ABC with the intention to treat it
as share application money without entering into any formal agreement at the
time of remittances. Further, P.C. Ltd. has advanced USD 53 million to ABC for
XYZ’s business requirements.

Subsequently, P.C. Ltd. entered into a ‘Shareholders’
Investment Agreement’ with ABC. As per the terms of shareholders’ Investment
Agreement, ABC will issue preference/equity shares at a mutuality agreed premium
rate. The agreement makes clear the intention to convert the advance of USD
1,922 million given for acquisition of XYZ into preference/equity shares.
However, no concrete modalities regarding vital issues of the shares like,
nature of shares (i.e., equity/preference shares), number of shares, face
value and premium, etc., are firmed up till the balance-sheet date. No written
agreement is in place regarding the settlement of advance of USD 53 million
given for meeting XYZ’s business requirements. However, P.C. Ltd. intends to
convert this advance also into equity/preference shares and the advance is not
likely to be refunded in near future. As the shares are yet to be issued, the
amount of USD 1,975 paid by P.C. Ltd. to ABC has been shown as ‘Advance to ABC’
in Schedule, ‘Loans and Advances’ in the stand-alone financial statements.

As P.C. Ltd. intends to convert the advance of USD 1,975
(1,922 + 53) into equity/preference shares, the advance given to ABC, has been
considered as an extension to the net investment of P.C. Ltd. in ABC, which is a
non-integral foreign operation. Therefore, the net investment in ABC has been
revalued and accounted for in accordance with the requirements of Paragraph 15
and 16 of Accounting Standard (AS) 11. P.C. Ltd. has revalued the advance of USD
1,975 million at the foreign exchange rate at the year-end rate. The credit for
the same amount has been given to ‘Foreign Exchange Translation Reserve’.

However, the C&AG while carrying out their review
u/s.619(3)(b) objected to the above accounting treatment of showing the amount
of USD 1,922 million paid to ABC towards financing acquisition cost of XYZ as
‘Advance’, as in their view, the amount should be shown as ‘Investment (Share
Application Money pending allotment)’ and, therefore should not be revalued in
accordance with Accounting Standard (AS) 13. Further, the C&AG questioned the
credit of the amount arising on revaluation of USD 53 million to ‘Foreign
Exchange Translation Reserve’ instead of taking it to the profit and loss
account, as in their view, the foreign exchange revaluation gain is of revenue
nature.

Query :

In view of the above stated facts, P.C. Ltd. sought the
opinion of the Expert Advisory Committee (EAC) on the appropriate accounting
treatment of advances so paid and treatment of foreign exchange gain/loss
arising on revaluation thereof.

EAC opinion :

EAC has taken the view that accounting treatment in the case
of P.C. Ltd. would depend upon whether the funds advanced to ABC for acquisition
of shares in XYZ and for meeting XYZ’s business requirements can be regarded as
a monetary item or as a non-monetary item. The Committee noted the Accounting
Standard (AS) 11 and came to the conclusion that shareholder’s investment
agreement with ABC only contains the intention to convert the said advance into
preference/equity shares, and no concrete modalities regarding nature of shares
(i.e., equity/preference shares), number of shares, face value, premium,
etc., have been decided till the balance-sheet date. The EAC noted that in
respect of an advance of USD 53 million P.C. Ltd. intends to convert this
advance also into equity/preference shares. However, no agreement in respect
thereof has been entered into or any modality for such conversion has been
decided till the balance-sheet date. Accordingly, the EAC is of the view that
both the advances are of the nature of monetary items. Further, the EAC is also
of the view that accounting treatment followed by the company for the treatment
of the advance of USD 1,975, revaluation of advances and credit of foreign
exchange revaluation gain to Foreign Exchange Translation Reserve is
appropriate.

(Refer pages 1248 to 1252 of C.A. Journal of February, 2011)

2. Our new President and Vice-President :

Shri G. Ramaswamy from Coimbatore has been elected as
President of ICAI on 12th February. Shri Jaydeep Shah from Nagpur has been
elected as Vice-President of ICAI on 12th February. Our greetings and best
wishes to both of them. We wish them a successful term of office in 2011-12.

3. New Chairman of NACAS :

Shri M. M. Chitale, Mumbai, former President of ICAI, has
been appointed as Chairman of National Advisory Committee on Accounting
Standards in place of Shri Y. H. Malegam w.e.f. 31-1-2011 for one year. This
committee is also reconstituted. We wish to convey our greetings and best wishes
to Shri Chitale and wish him and his colleagues a successful term of office in
2011-12.

4. New Minister for Corporate Affairs :

Shri Murli Deora from Mumbai has taken charge as the new
Minister of Corporate Affairs on 20-1-2011. He is known to be a seasonal
industrialist, a proactive social worker and a soft but determined leader. His
Ministry oversees the affairs of ICAI. Our greetings and best wishes to Shri
Deora. We wish him a successful term of office. (Page 1181)

5. MoU with Canada C.A. Institute :

ICAI has signed a MoU with Canadian Institute of Chartered
Accountants for reciprocal membership arrangements. This MoU will facilitate
mobility of members across the borders and further strengthen the ties between
India and Canada. The MoU will establish closer working linkages as well as
provide recognition for members of the two institutes in the respective
countries. (Press Note of ICAI dated 7-2-2011)

6. ICAI News :

(Note : Page Nos. given below are from C.A. Journal of
February, 2011)

(i) Recognition for PhD Courses for CAs :

Institute of Management, Kozhikode (Kerala) and National Law
School of India, Bangalore, have extended a facility to our members to pursue
Fellow Programme i.e., PhD programme. (Page 1149)

(ii) Arrangement with Microsoft :

Special pricing (at very low rates) has been worked out with Microsoft for ICAI members and students. This is a part of the Academic Licensing for providing the latest edition of MS Windows and MS Office. (Page 1149)

iii) Significant achievements and major decisions by Council of ICAI in 2010:
b) Details of some significant achievements by ICAI since February, 2010, are given on pages 1152 to 1168.

a) Details of major Council decisions since February, 2010, are given on pages 1170 to 1180.

iv) ICAI International Conference

International Conference on Role of Accountancy Profession in Sustained Economic Growth was organised by ICAI from 4th to 6th January, 2011, New Delhi. Highlights of the conference proceedings are given on pages 1186 to 1196.

v) Tax issues from conveyance of IFRS with accounting standards:

ICAI has drafted 35 accounting standards after the convergence of IFRS and sent it to the Government for Notification under the Companies Act. (Refer Page 1152). A study group comprising some Council Members and representatives of CBDT was constituted for study of tax issues arising out of convergence of existing accounting standards with IFRC. This Group has prepared a position paper identifying these tax issues and making certain suggestions for amendments in the Income-tax Act and the Companies Act. This position paper is published on pages 1254 to 1263.

(vi) New books released by ICAI:
(a) Technical Guide on Audit of NBFCs.
(b) Practical Approach to General Insurance Management.
(c) Social Audit of Public Money.
(d) Excellence in Financial Reporting Illustrative Guide to Presentation and Disclosures.
(e) Drafting, Conveyancing, Registration and Stamping of Commercial and other Documents.
(f) Changing Times in Government Accounting — A Status Report.
(g) Study on Co-ordination of Internal Auditor with Functional Heads.

(vii) New branches and buildings of ICAI:
The following new branches and buildings at branches have been opened by ICAI:
(a) Latur branch of WIRC.
(b) Ganganagar branch of CIRC.
(c) New building at Bhilai branch of CIRC.
(d) New building at Sangrur branch of NIRC.
(Refer Page 1149)

BCAJ Admin

ICAI And Its Members

ICAI and its Members

1.
Companies Bill, 2009 — New avenues for
Chartered Accountants :

As reported in the last
issue, the above Bill is pending before the Parliament. The Standing Committee
for Finance has submitted its report on 9-9-2009. Several suggestions have been
made by this Committee and the Bill is likely to be modified on this basis and
discussed in the Parliament during the months of February to May, 2011. Some
important changes relating to accounts and audit were discussed in the last
issue of BCA Journal. Some of the other amendments affecting Chartered
Accountants suggested in the Bill are as under.

(i) Clause 422(1) of the
Bill provides that no association or partnership consisting of more than such
number, not exceeding 100, as may be prescribed by Rules, shall be formed for
the purpose of carrying on any business unless it is registered as a company. It
may be noted that under clause 422(2)(b) it is provided that the above
restriction shall not apply to a partnership formed by professionals. Therefore,
Chartered Accountants and other professionals will be able to form a partnership
firm with unlimited number of partners.

(ii) Clauses 368 to 395 of
the Bill provide for the constitution of ‘National Company Law Tribunal’ and
‘National Company Law Appellate Tribunal’ and the functions and procedure to be
followed by these two bodies. Under the scheme of the Bill, existing powers of
the High Courts under the Companies Act will now vest in the Tribunal. Each
Bench of the Tribunal or Appellate Tribunal will consist of two categories of
members. One will be a judicial member and the other a technical member.
President of the Tribunal shall be a sitting or retired Judge of a High Court.
The chairperson of the Appellate Tribunal shall be a sitting or retired Judge of
the Supreme Court or Chief Justice of a High Court. In the list of persons who
can be a technical members of the Tribunal or the Appellate Tribunal it is
provided that a Chartered Accountant in practice for 15 years or more can be
appointed as a technical member of the Tribunal or the Appellate Tribunal.

(iii) Clause 393 of the Bill
also provides that a Chartered Accountant in practice can appear before the
Tribunal or the Appellate Tribunal and argue the case of his client.

(iv) Clause 250 of the Bill
provides that the Central Government shall maintain a panel consisting of names
of Chartered Accountants, Advocates, Company Secretaries, etc. for appointment
as Company Liquidators or Provisional Liquidators. For the purpose of winding up
of a company by the Tribunal, a Company Liquidator who is on the above panel
will have to be appointed. This provision will enable Chartered Accountants in
practice to work as Company Liquidators.

From the above provisions it
will be noted that if the Companies Bill, 2009 is enacted with the above
clauses, our members will be able to render their professional services in the
above new fields.

2.
Accounting treatment of overlift/underlift
quantity of crude oil :

Facts :

A public limited company
(Company) which is a wholly-owned subsidiary of a listed government company, is
in the business of exploration and production of oil and gas and other
hydrocarbon-related activities outside India. Usually, the legal regimes
applicable in most of the counties provide that the ownership of mineral
resources (hydrocarbons) is with respective governments. Accordingly, the host
governments grant the rights to explore, develop and produce hydrocarbons in
certain specified geographical areas within their territories (Rights) to the
companies on some equitable consideration under various regimes. The activities
of the Company, thus, include securing such Rights and then to explore, develop
and produce hydrocarbons. Such Rights are secured either on a 100% basis,
wherein the Company or its affiliates themselves take the entire risks and
rewards of such Rights or in consortium with other participants where the joint
venture participants share the risks and rewards in certain agreed proportions.

The Company is a participant
in a production sharing agreement along with other companies (Consortium) and
the government of a foreign country (State) in respect of certain geographical
area.

The Company is accounting
for the overlift/underlift quantity of its basic entitlement as per its declared
accounting policy. Following the accounting policy, the Company reduced the
sales arrived at by multiplying overlift quantity by the sale price of crude oil
realised by the Company for its last sold cargo during March 2009 and created
liability for the same. In case of underlift as on the balance sheet date, the
Company would have treated the underlift quantity as inventory of the Company
and would have valued it in accordance with the requirements of Accounting
Standard (AS) 2, ‘Valuation of Inventories’ at cost or net realisable value,
whichever is lower.

However, C&AG auditors while
carrying out their review for the financial year 2008-09 objected to the
accounting for overlift quantity as liability and contended that the Company
should treat overlift quantity as its own share of production and should have
booked sales for the overlift quantity simultaneously recognising expenditure on
the basis of its recent cost figures.

Query :

Hence, the Company sought
the opinion of the Expert Advisor Committee of ICAI on the appropriate
accounting treatment of overlift/underlift quantity of crude oil by the Company,
i.e., whether the accounting policy of the Company in recognising
overlift quantity as liability and underlift quantity as inventory is
appropriate and whether the accounting treatment carried out by the Company in
respect of overlift quantity of crude oil by recognising the same as liability
at recent sales price of the crude oil realised by the Company is appropriate ?

Opinion :

After considering the term ‘revenue’ as provided by Accounting Standard (AS) 9, ‘Revenue Recogni-tion’, the Committee expressed the view that the total amount of consideration arising from the sale of crude oil should be recognised as revenue.

Further, after considering paragraph 10 of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, the Committee has taken the view that the overlift of crude oil gives rise to an obligation on the Company to transfer future economic benefits. Accordingly, a liability should be provided for by the Company by way of charge to the profit and loss account for overlift quantity.

Furthermore, the amount of provision for the liability in respect of overlift quantity should be determined on the basis of the best estimate of the expenditure required to settle the present obligation at the balance sheet date as per the requirements of paragraph 35 of AS-29.

As regards underlift situation, the Committee has taken the view that to the extent it is the settlement of an overlift situation of the earlier periods, it should be recognised by debiting the liability provided for under the overlift situation and crediting/reducing the Company’s proportion-ate share in the production cost. In respect of other underlift situations, the Committee has noted that the Framework for the Preparation and Pre-sentation of Financial Statements, issued by ICAI provides that “an asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to an enterprise”. Accordingly, the Committee expressed the view that an underlift represents a right to future economic benefit through entitlement to receive equivalent production in the future and is therefore, an asset.

Since in the present case, the Company is charged for the proportionate share of production cost as per its basic entitlement, but the quantity of crude oil lifted is less than its basis entitlement, the amount paid in excess is ‘prepaid expense’. The Committee has taken the view that under the underlift situation, the Company should recognise a pre-paid expense by crediting its proportionate share of production cost as per the joint operating agreement/production sharing agreement.

On the basis of the above, the Committee expressed the opinion that the accounting policy of the Company in recognising overlift quantity as liability is appropriate, however, recognition of liability by reversing the sales/revenue of the Company at the recent sales price of the crude oil is not appropriate. The accounting policy of recognising the underlift quantity as inventory is
also not appropriate.

3. 300th Meeting of Council of ICAI held on 24-11-2010:

Some of the important decisions taken by the Council at the above meeting are as under:
(i) Formulation of guidelines for revival of derecognised Study Circles: A Study Circle which was earlier derecognised by the Council can be revived by the Continuing Professional Education Committee, subject to the compliance with certain norms to be specified in this regard.

(ii) Recognition of fair value changes in investment property: The ASB has decided that instead of recognising the changes in fair value in investment property in profit or loss, where an entity adopts the option of measuring investment property at fair value as per the draft AS-37 dealing with ‘Investment Property’, the same should be recognised in other comprehensive income.

(iii) To ensure professional competence of our members: The Council decided that where there has been a gap of 5 or more years between the removal of name and application of restoration of the name, if the member applies for Certificate of Practice, he should undergo a specified refresher course of a duration of 30 hours in the modules to be developed by Board of Studies, either in physical form during weekends or in the online format. Alternatively, such members could attend CPE programmes and earn 30 CPE hours before the Certificate of Practice is restored/granted.

(iv) Persons who have not enrolled as members: For the persons who have passed the final examination and become eligible for enrolment as a member, but have not applied for membership within 5 years from the date of their becoming eligible, should undergo the aforesaid refresher course for getting enrolled as a member.

(v) Modalities to be recommended for holding the office of Office Bearers: For the year 2011-12 and 2012-13 for those branches where the majority of members of Managing Committee have held that office of Chairman in earlier years, the Council observed that holding of post of Chairman of a branch again is not acceptable either from good governance point of view or from ethical point of view. Therefore, the Council has decided that the Chairman of a branch after demitting office should not seek re-election for or hold the post of the Chairman of the said branch in the year 2010-11 and 2012-13.

(vi) Common Proficiency Test: It is decided that candidate shall have to obtain at one sitting, a minimum of 30% marks (out of maximum marks specified by the Council for each Section) and a minimum of 50% marks in the aggregate of all the Sections, subject to the principle of negative marking, in a manner as may be specified by the Council from time to time.

(vii) Revised Final Study Material available by January 2011: The Board of Studies had released the revised final study material which has been updated and modified. Entire study material along with Practice Manuals would be available at all branches of ICAI by January 2011.
(Refer pages 836-837 of CA Journal for December, 2010)

(viii) In case of reconstitution of a firm, wherever Form 18 duly signed by the remaining partners and the resignation letter of outgoing partner(s) is received, the office will take such reconstitution on record as per the current practice.

(ix) Wherever the firm is ‘at will’ as per the deed of partnership and the retirement of a partner(s) is informed and Form 18, accompanied by a certified copy of partnership deed, can be submitted duly signed by the remaining/surviving partners of the firm. In such a case, the fact of such retirement will be informed to the outgoing partner(s) concerned giving a notice by recorded delivery mode of 14 days to inform the factual position. In case no response is received, the reconstitution of the firm will be taken on record. If an objection is received, the reconstitution of the firm will not be taken on record and the firm as well as the outgoing partner(s) will be informed about the option of availing the forum of Dispute Resolution Mechanism of the Institute.

(x) Wherever the firm is ‘at will’ as per the deed of partnership and the partnership deed has vested in the Managing Partner of the firm to perform certain specified acts which includes reconstitution of firm on his own he can, in pursuance of such authority, inform the Institute and submit Form 18 accompanied by a certified copy of partnership deed, duly signed by the re-maining/surviving partners of the firm. The fact of such Form 18 specifying the act will be informed to the outgoing partner(s) concerned giving a notice by recorded delivery mode of 14 days to inform the factual position. In case no response or confirmation is received, the reconstitution of the firm will be taken on record. If objection is received, the reconstitution of the firm will still be taken on record and the aggrieved members can move the Dispute Resolution Mechanism.

(Refer page 842 of CA Journal for December, 2010)

4. Dispute Resolution Mechanism:
The Council of ICAI has announced the development of Alternate Dispute Resolution Mechanism (Arbitrator) for dealing with disputes of (i) Member v. Member and (ii) Member v. Student.

5. ICAI News:

(Note?: Page Nos. given below are from the CA Journal for December, 2010)

(i) Discrepancies noticed by Peer Reviewers during Review Process:
Peer Review is directed towards maintenance and enhancement of quality attestation services and to provide guidance to improve their performance and adhere to various statutory and the other regulatory requirements. Some of the discrepancies noticed during the course of Peer Review of records of some of the members have been reported on page 968.

(ii) New Publication of ICAI:
(a) Background Material for Audit Training Work-shops and Seminars (A manual of Presentations on Standards on Auditing and other Engagement Standards) has been published by the Institute.
(page 972)

(b) Revised Guidelines and FAQs for Training of Articled Assistants outside India. (page 973)

(iii) Empanelment with C & AG:
Applications for empanelment with C & AG by firms of Chartered Accountants for 2011-12 can be made after 1-1-2011. Details published on page 972.

(iv) Multipurpose Empanelment Forms:
Details about Multipurpose Empanelment Forms (Including Bank Branch Auditor’s Empanelment) have been published on pages 975-977.

BCAJ Admin

ICAI And Its Members

1. Companies Bill, 2009 — Appointment and qualifications of directors:

As reported in the earlier issues, the above Bill is pending before the Parliament. The Standing Committee on Finance has submitted its report to the Parliament on 31-10-2010. Several suggestions have been made by this Committee and the Bill is likely to be modified and discussed in the Parliament during the coming few months. Some important changes relating to appointment and qualifications of directors are suggested in the Bill. These are contained in clauses 132-153 of the Bill. The changes suggested are as under:

(i) Clause 132 of the Bill provides that the minimum number of directors shall be three in the case of a public company and two in the case of a private company. As regards one-person company, the minimum number shall be one. It is, further, provided that the maximum number of directors in any company cannot exceed 15, excluding directors nominated by the lending institutions. Further, at least one director should be a resident in India. The company will be entitled to increase the number of directors beyond 15 after passing a special resolution of the shareholders at the general meeting.

(ii) In the case of a listed company, having such amount of paid-up share capital as may be prescribed, the requirement will be that it shall have atleast 1/3rd of the total number of directors as independent directors. The Central Government may prescribe the number of independent directors in case of other public companies and subsidiaries of any public company.

(iii) The term ‘Independent Director’ has been defined in clause 132(5). According to this definition, a nominee director is not to be treated as an independent director. The other conditions for an independent director are as under:

(a) The director should be a person of integrity and should possess relevant expertise and experience; or

(b) The director or his/her relatives —

should not have pecuniary relationship or transaction with the company, its holding, subsidiary or associate company or promotors amounting to 2% or more of its gross turnover or total income during the two immediately preceeding financial years or during the current financial year.

should not hold or should not have held any senior management position or as key managerial personnel or as employee of the company in any three immediately preceeding relevant financial years.

is or has been employee or a partner, in any of the three immediately preceeding financial years, of a firm of auditors, company secretaries or cost auditors of the company or its associates.

is or has been employee or a partner of a legal or consultancy firm which had in any of the three immediately preceeding financial years transaction with the company or its associates amounting to 10% or more of the gross turnover of the firm.

holds, in aggregate, 2% or more of the total voting power of the company.

he is a chief executive or director of any non-profit organisation that receives 25% or more of its income from the company or its associate or holds 2% of more of the total voting power of the company, or

(iv) The role, duties and functions of an independent director will be prescribed by the Central Government by way of rules.

(v) The independent directors shall not be entitled to any remuneration other than sitting fees, reimbursement of expenses, for participation of board and other meetings and profit-related commission, stock option as may be approved by the shareholders.

(vi) An independent director shall not have a tenure exceeding, in the aggregate, a period of six consecutive years on the board of a company. However, after the lapse of three years, he can be appointed as an independent director for up to six years provided that no such director can have or shall have more than two tenures as independent director in any company.

(vii) In clause 146, it is provided that no person shall hold office as director, including any alternate directorship, in more than 10 public limited companies at the same time. Further, it is also provided that, out of the above, maximum number of listed companies in which such a person can be appointed as a director shall not exceed 5.

(viii) Clauses 132-153 contain other provisions relating to mandatory requirement of obtaining DIN, appointment of additional directors, disqualification of directors, duties of directors, their resignation, removal, etc. These provisions are more or less the same as in the existing Companies Act.

2. Treatment of capital expenditure on assets not owned by the company:

A Public sector undertaking registered under the Companies Act, 1956, is engaged in refining and marketing of petroleum products. When a new project by setting up of new refinery is undertaken by the company, it has to incur expenditure on the construction/development of certain assets, like electricity transmission lines, railway sliding, roads, culverts, bridges, oil jetty, etc., in order to facilitate construction of project and subsequently to facilitate its operations. The ownership of such assets (enabling assets) as well as the land on which these assets are situated does not vest with the company.

The existing accounting policy of the company in respect to such ‘enabling assets’ is as under:

(a) Fixed assets which are owned by the company, but built on land not belonging to the company, are treated as fixed assets belonging to the company.

(b) As regards fixed assets constructed, which are not owned by the company, on land not belonging to the company, the expenditure incurred on the constructions of such assets has been classified as ‘Capital Expenditure’ in the balance sheet indicating appropriately, the nature of the expenditure including the fact that the assets are not owned by the company, and after commencement of commercial operations, the same is written off to the profit and loss account.

However, the statutory auditors of the company are of the opinion that existing accounting treatment of such ‘enabling assets’ followed by the company does not appear to be correct. According to them, (a) expenditure should be debited to Capital Work In Progress (CWIP) till the enabling asset is ready for use. (b) On completion of the enabling asset, the same should be capitalised. (c) Such capital expenditure should be reflected as ‘Capital Expenditure on Assets not owned by the Company’. (d) Such capital expenditure should be amortised over the period of its utility, but not exceeding 5 years and (e) Amount amortised should be treated as expenditure during the construction period till the completion of the project, for which the enabling asset was originally created. After the completion of the project, the amortised amount is to be charged to the profit and loss account every year for the balance period of its utility.

Query:

On these facts, the company has sought the opinion of the EAC whether the accounting treatment followed by the company in respect of expenditure incurred on ‘enabling assets’ as CWIP during construction period of the project and charging off the same to the revenue in the year of completion of the project is correct?

EAC opinion:

After considering paragraphs 49 & 88 of the ‘Framework for the Preparation and Presentation of Financial Statements’ the Committee has taken the view that expenditure incurred by an enterprise cannot be recognised as an asset as resource is not controlled by the enterprise. An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Further, the Committee has taken the view that an indicator of control of an item of fixed asset would be that the entity can restrict the access of others to the benefit derived from the asset. From the facts of the case it is evident that the ownership of the ‘enabling assets’ does not vest with the company. The assets are available for general public use. Although the company is entitled to use these assets for the purpose of completing its own projects and subsequently for operational purposes, it has no say on the use of such assets by others. Thus, ‘enabling assets’ are not resources controlled by the company and, therefore, the expenditure incurred by the company on such ‘enabling assets’ can not be capitalised as assets either tangible or intangible considering AS-10 and AS-26. Further, the expenditure incurred on ‘enabling assets’ cannot be considered as directly attributable to such assets and therefore the same can not be capitalised.

In view of this, the Committee has taken the view that expenditure incurred on ‘enabling assets’ should be expensed and charged to profit and loss account of the period in which these are incurred.

As far as accounting treatment given by the company in respect of such ‘enabling assets’ which are still lying as CWIP, the Committee has taken the view that the same is an error committed in the prior years by the company, which should be rectified in the financial statements and disclosed as a ‘prior period items’ of the period in which such rectification is carried out in accordance with the requirements of Accounting Standard (AS) 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.(Pages 1040 to 1045 of C.A. Journal of January, 2011)

3. ICAI News:

(note : Page nos. given below are from January, 2011 C.a. Journal)

(i) CPE in e-Learning mode:
The Council of ICAI has approved CPE in e-Learning Mode. This decision will facilitate learning for the members just at the click of the mouse. In other words, this will help members to persue CPE Programme conveniently without undertaking the hardship of physical attendance and will prove to be beneficial for each member. (Page 1001)

(ii) Certificate course on valuation:
It is reported that 800 members of our Institute have been registered for certificate course on ‘Valuation’. Examinations are being held in batches at various places all over India. (Page 1001)

(iii) Suggested answers for examination members:
ICAI has hosted suggested answers for the examinations held in November, 2010 on its website. It is reported that the entire study material for the final course has been revised/modified substantially. This will be available to the students in the month of January through their respective branches/regions. (Page 1002)

(iv) Bank branch auditors’ panel for NABARD:
Bank Branch Auditors’ Panel by the Professional Development Committee of ICAI has prepared a Bank Branch Auditors’ Panel for the year 2010-11 and submitted the same to NABARD for appointment of statutory auditors for regional rural bank and state/district central co-operative banks. (Page 1002)

(v) Empanelment of CA firms with C & AG for 2011-12:
C & AG has invited online applications from firms of CAs who wish to empanel for the year 2011-12 for appointment as auditors of Government companies/corporations. Format of the application is available on the website : www.cag.gov.in CA firms can apply or update the data showing status of the firms as on 1-1-2011. This application can be submitted by 31-3-2011. Any changes in the constitution of the firm occuring from 1-1-2011 onwards should continue to be updated by the CA firm in the website which will be available through out the year. (Page 1132)

(vi) New publications of ICAI:

(a) ICAI has published Compendium of Standards on Internal Audit. (As on 1-10-2010)

(b) ICAI has also published Compendium of Opin-ions given by the Expert Advisory Committee (Vol. XXVIII). (Page 1132)

(vii) Grievance cell at WIRC:

A grievance cell has been formed to address issues of members and students related to administrative matters. Members can send the issues by e-mail to grievance@wirc-icai.org or in writing to WIRC. The members of the Grievance Cell are Chairman, Secretary, Shruti Shah, Neel Majithia, (RCMs) and Students Counsellor.

(viii) Extension of CPE Block:

Members may note that ICAI has decided to extend the CPE Block periof of 3 years ending on 31st December, 2010, by three months, i.e., to 31st March, 2011.

(ix) Recognition for Doctoral programme:

IIM Kozhikode & IIM Shillong has recognised Chartered Accountancy qualification as an eligibility to pursue their Doctoral programme i.e., Fellow Programme in Management.

(x) Placement programme:

ICAI has recently organised a special placement programme through video conferencing mode for the organisations functioning in GCC/Middle East countries.

(xi) Arbitration course:

ICAI has created a panel of Arbitrators through the certificate course on Arbitration.

BCAJ Admin

Miscellaneous

CARO Audit Report in case of a company where in earlier years, manipulations admitted by the erstwhile management and previous years audit reports withdrawn by earlier auditors

Satyam Computer Services Ltd. — (31-3-2009)

Compiler’s Note:

The main Audit Report of the Company was published in February 2011 (pages 87-92) issue of BCAJ. Given hereunder are relevant extracts from the CARO report. Since disclosures in the Notes to Accounts referred to in the audit report are voluminous, the same are not reproduced here. The same can be made available by BCAS on request.

Annexure to the Auditors’ Report:

(Referred to in paragraph 5 of our report of even date)

(i) Having regard to the nature of the Company’s business/activities/result/transactions, etc., clauses (viii), (xii), (xiii), (xiv), (xix) and (xx) of CARO are not applicable.

(ii) In respect of its fixed assets:

(a) The Company has maintained records of fixed assets showing particulars, including quantitative details and situation of the fixed assets situated within India except that quantitative details, asset description, etc., in respect of some of the fixed assets, need to be updated in the Fixed Assets Register. According to the information and explanations given to us, in respect of the fixed assets situated at the overseas branches of the Company, the Company has not maintained complete records showing the quantitative details and situation of fixed assets.

(b) The fixed assets were not physically verified during the year by the Management. Refer to paragraph 18(c) of the Auditors’ Report also.

(c) The fixed assets disposed of during the year, in our opinion, do not constitute a substantial part of the fixed assets of the Company and such disposal has, in our opinion, not affected the going concern status of the Company.

(iii) In respect of its inventory:

(a) As explained to us, the inventories were not physically verified during the year by the Management.

(b) Since no physical verification was conducted, reporting on the procedures followed by the Management does not arise.

(c) In our opinion and according to the information and explanations given to us, the Company has not maintained proper records of its inventories during the year, though the required adjustments to account for the inventory in the books of account were made based on the information available with the Management as at the year end. Refer to Paragraph 12(d) of the Auditors’ Report also.

(iv) Subject to the comments in paragraphs 8 and 12(b) of the Auditors’ Report, in respect of loans, secured or unsecured, granted by the Company to companies, firms or other parties covered in the Register u/s.301 of the Act :

(a) With respect to the transactions recorded for the period from 1st April to 31st December, 2008, as the Register maintained by the Company (updated as at that date) has been seized by the Income Tax Department, only photocopies were made available for our verification. Subject to our reliance on such photocopies, the Company has not granted or taken any loans, secured or unsecured, to/from companies, firms or other parties covered in the Register maintained in pursuance of section 301 of the Act, during the period from 1st April to 31st December, 2008.

(b) According to the information and explanations given to us, the Company has not granted or taken any loans, secured or unsecured, to/from companies, firms or other parties covered in the Register maintained in pursuance of section 301 of the Act for the period from 1st January to 31st March, 2009.

(v) In our opinion and according to the information and explanations given to us, there was no adequate internal control system commensurate with the size of the Company and the nature of its business with regard to purchases of inventory and fixed assets and the sale of goods and services. During the course of our audit, we have observed several major weaknesses in such internal control system. Refer to paragraph 18(a) of the Auditors’ Report also.

(vi) Subject to the comments in paragraphs 8 and 12(b) of the Auditors’ Report, in respect of contracts or arrangements entered in the Register maintained in pursuance of section 301 of the Act, to the best of our knowledge and belief and according to the information and explanations given to us and subject to our reliance on the photocopies of the Register for the period from 1st April to 31st December, 2008 [Refer Item (iv)(a) above]:

(a) The particulars of contracts or arrangements referred to in section 301 of the Act that needed to be entered in the Register maintained under the said section have been so entered.

(b) There were no transactions in excess of Rs.5 lakhs in respect of any party.

(vii) Subject to our comments in paragraph 8 of the Auditors’ Report, according to the information and explanations given to us, the Company has not accepted any deposit from the public during the year.

(viii) In our opinion, read with our comments in paragraph 18(a) of the Auditors’ Report, the Company did not have an internal audit system commensurate with its size and nature of its business.

(ix) According to the information and explanations given to us in respect of statutory dues:

(a) Whilst the Company has been generally regular in depositing undisputed dues relating to Investor Education and Protection Fund, Wealth Tax and other material statutory dues applicable to it with the appropriate authorities, there were significant delays in depositing undisputed dues in respect of Provident Fund, Employees’ State Insurance, Tax Deducted at Source, Sales Tax/VAT, Works Contract Tax and Service Tax.

(b) There were no undisputed amounts payable in respect of Provident Fund, Investor Education and Protection Fund, Employees’ State Insurance, Wealth Tax, Sales Tax/VAT, Service Tax, Cess and other material statutory dues in arrears as at 31st March, 2009 for a period of more than six months from the date they became payable except in respect of Tax Deducted at Source amounting to Rs.171,945 and certain overseas taxes amounting to Rs.866,456. As regards to income tax, we are unable to comment on the dues in arrears as on 31st March, 2009 for a period of more than six months from the date they became payable in view of the matters described under paragraph 14 of the Auditors’ Report.

c) Details of dues of Income Tax, Sales Tax, Service Tax and Cess which have not been deposited as on 31st March, 2009 on account of disputes are given below:
(not reproduced here)

x) The accumulated losses of the Company at the end of the financial year have exceeded the net worth of the Company. Further, the Company has incurred cash losses in the financial year ended 31st March, 2009. For the reasons stated in paragraph 15 of the Auditors’ Report, we are unable to comment on the cash losses for the immediately preceding financial year.

xi) In our opinion and according to the explanations given to us, the Company has not defaulted in the repayment of dues to banks. The Company does not have any dues to financial institutions and has not issued any debentures.

xii) In our opinion and according to the information and explanations given to us, the terms and conditions of the guarantees given by the Company for loans taken by some of its sub-sidiaries from banks and financial institutions, as made available to us for our verification, are not prima facie prejudicial to the interests of the Company considering the nature of the guarantees, purposes and needs.

xiii) In our opinion and according to the information and explanations given to us, term loans have been applied for the purposes for which they were obtained, other than temporary deployment pending application.

xiv) In view of our comments in paragraph 8 of the Auditors’ Report, we are unable to comment whether the funds raised on short-term basis have been used during the year for long-term investment.

xv) The Company has not made any preferential allotment of shares to parties and companies covered in the Register maintained u/s.301 of the Companies Act, 1956 during the year.

xvi)To the best of our knowledge and according to the information and explanations given to us, the details of fraud on or by the Company noticed or reported during the year are given below:

a) As stated in paragraph 6 of the Auditors’ Report, there were various financial irregularities which are more fully described in Note 3 of Schedule 18.

b) Various other instances of fraud noticed by the Management involving the employees of the Company/vendors of the Company, the amounts whereof were not material and the same have been suitably dealt with in the financial statements of the Company.

BCAJ Admin

ORDERS OF CIC

Right to Information

Section 2(f) of the RTI ACT: INFORMATION Section 2(f) which defines the word
‘information’ provides as follows.

In this Act, unless the context otherwise requires.

(f) ‘Information’ means any material in any form,
including records, documents, memos, e-mails, opinions, advices, press
releases, circulars, orders, logbooks, contracts, reports, papers, samples,
models, data material held in any electronic form and information relating
to any private body which can be accessed by a public authority under any
other law for the time being in force;

“According to the Commission, ‘information’ which is
requested u/s.6(1) of the RTI Act refers to only that information which is
available on record. Such information cannot be created. The terms ‘opinions’
and ‘advices’ which are brought within the purview of ‘information’ u/s.2(f) of
the RTI Act are opinions or advices that are already present on record. It does
not mean that if the opinion or advice of the public authority is sought
u/s.6(1) of the RTI Act, the said opinion or advice shall have to be created. It
must be an opinion or advice which is already on record. The creation of
information by the public authority every time such information is sought
u/s.6(1) of the RTI Act shall render governance impossible. However, the
Commission has observed that there are certain practices within a department
that are peculiar to that department. Such practices or understanding within the
department may not be present in a recorded form. Where information sought
u/s.6(1) of the RTI Act pertains to such general practices or understanding,
then the same must be provided to the applicant, even if such practices or
understanding are not specifically on record.”

The Appellant in the case before the Commission had cited one
order of the Supreme Court of India in the matter of Khanapuram Gandaiah v
Administration Officer & Ors. 2010(1) ID 287 (SC). The Supreme Court of India,
while dismissing the petition, interpreted section 2(f) of the RTI Act and
observed that an applicant u/s.6 of the RTI Act can get any information which is
already in existence and accessible to the public authority under law. The
applicant is entitled to get a copy of the opinions, advices, circulars, orders,
etc but he cannot ask for any information as to why such opinions, advices,
circulars, orders, etc have been passed, especially in matters pertaining to
judicial decisions.

Note: I have not covered in this reporting, the facts of the
case as same are not required to bring out the analysis and interpretation
made of the provisions of Section 2(f).

[Dr. Jitendra Nath Gupta vs. PIO & SDM (Civil Lines):
Decision No. CIC/SG/A/ 2010 / 00 2398/ 9878 of 22.10.2010] [2010(2) ID 593 (CIC,
DELHI)]

? Mr. Virajoo Kumar had asked Telecom Regulatory Authority of
India (TRAI) to provide him certain information in respect of Mobile no.
09304549785..

PIO of TRAI replied to inform the applicant that no such
information was being maintained by TRAI.

During the hearing before the Commission, the representative
of TRAI submitted that TRAI can call for such information from the service
provider as it needs for its own purposes by passing an order in writing but the
information requested for by appellant is not wanted by TRAI and therefore, it
is not bound to call for this information from the service provider.

As per the clause 2(f), information also includes
‘information relating to any private body which can be accessed by a public
authority under any other law for the time being in force.’ In other words, if
TRAI has authority under any law to access information from Reliance Company, it
can access that information for onward transmission to the information seeker.
According to Shri. Abraham, u/s.12of the TRAI Act,1997, TRAI has the authority
to call for information from the service provider by passing an order in writing
but this information should be such as is needed by TRAI for its own purpose. In
other words, according to him, TRAI cannot seek information from a private
entity for servicing the RTI Act.

Hereunder I reproduce paras 6 to 9 of the
decision –

6. Clause (a) of section 12(1) is reproduced
below –

‘(a) call upon any service provider at any time to furnish in
writing such information or explanation relating to its affairs as the Authority
may require’

Shri Abraham lays emphasis on the last 05 words of the above
clause viz. ‘as the Authority may require.’ It is his interpretation that this
expression means that TRAI can call for information only when it needs it for
its own purposes and not for the purposes of supplying it to the information
seeker under the provisions of the RTI Act.

7. We are afraid, the construction put on clause (a) by Shri
Abraham is not correct. According to us, the true meaning of the expression ‘as
the Authority may require’ is ‘as the Authority may direct’. In other words,
TRAI can call for such information from a private entity as it needs for its own
purposes as also for the purpose of servicing the RTI Act.

8. The above interpretation also finds support in the
Judgement dated 25.9.2009 of the Delhi High Court in WP (civil) No 765 of 2007 (Poorna
Prajna Public School Vs CIC) wherein High Court favoured wider interpretation of
the word ‘information’. The relevant part of para 16 of the judgement is
extracted below: –

“Further, information which a public authority can access
under any other law from private body is also ‘information’ u/s.2(f). The public
authority should be entitled to ask for the said information under law from the
private body. Details available with a public authority about a private body are
‘information’ and details which can be accessed by the public authority from
private body are also ‘information’ but the law should permit and entitle the
public authority to ask for the said details from a private body”.

DECISION

9. In view of the above, we are of the opinion that the
appellant is legally entitled to seek the information from TRAI u/s 2(f) of the
RTI Act and TRAI is mandated to call for such information from the service
provider (Reliance Company in this case) as mentioned hereinabove and furnish
the same to the appellant. We respectfully disagree with the view taken by other
Single Benches of the Commission.

[Virajoo Kumar vs. TRAI: Decision No. CIC/DS/ C/
2010/00 332 decided on 25.10.2010] [2010(2) ID 661(CIC DELHI)]

PART B: The RTI Act, 2005

In the last issue (Feb 2011) I had reported on the directions issued by the Central Information Commission (CIC) on 09.12.2010 to all the Central Government’s Public Authorities through the Min-istries & Departments of Government of India. It appears that landmark initiative taken by the CIC is not bearing good fruit.

Of the 1,600 public authorities (government departments, apex bodies, autonomous organisations and ministries) listed by the Commission, only 125 have obeyed its direc-tive and appointed transparency officers. The macro picture at the central level is no better with only 34 of 70 odd ministries and apex bodies appointing transparency officers. The ministries of finance, home and culture and the Prime Minister’s Office have done nothing except expressing their intention to appoint a transparency officer.

The Department of Personnel and Training (DoPT), the parent department of the Commission, has taken exception to the directions and said that by giving such directions to departments, CIC has overstepped its brief. In its letter to the authority, DoPT has said that by appointing transparency officers CIC was trying to ‘create another bureaucracy’.

CIC, however, feels that it is only trying to assign another responsibility to the same set of bureaucrats present in the government departments. Speaking to ET, Chief Central Information Commissioner Satyanand Mishra said, ‘We are examining the matter. The Com-mission does not have the powers to withdraw any of its orders. At the same time we don’t need to justify our orders. If any department has an objection it can only take legal recourse. Over the past few years in our deliberations as Information Commissioners, we had found that had the Ministries voluntarily disclosed information many applications would not have been filed. This is why the directive was given.’

Information on & Arround

Gandhigiri for getting information:

Four members of Deshbhakti Andolan distributed roses to employees at the Charity Commissioner’s office in Worli one day in early February.
Deshbhakti Andolan resorted to Gandhigiri after the Charity Commissioner’s Office, in response to a query filed under the Right to Information Act by one of the andolan members, said it had lost pertinent files and papers.
Charity Commissioner on complaint made has assured that the file would be traced and information shall be provided.

Working at the Commissions:

The Public Cause Research Foundation has analysed 79,813 decisions passed by the CICs and SICs across the country. The researchers found that in 59,631 cases, the information was delayed, but only 1,896 officials were punished. The report said had these penalties been imposed, the exchequer would have got nearly Rs. 86 crore during 2009-10. ‘Twenty-six Commissioners across the country did not impose a single penalty in the whole year’

Working at crematoria in Mumbai:

Activist Anil Galgali, who sought information under the Right to Information Act, said those who register the number of deaths in the crematoria were over-worked.
There is a paucity of staff at the crematoria run by the municipal administration. With 36 posts lying vacant in the 46 crematoria run by the BMC, the delay in getting the last rites done has been inconveniencing citizens as well as the staffers.
The civic administration runs 46 crematoria, 7 cemeteries for Christians and 10 for Muslims. Apart from these, there are 125 privately-run ones and 11 powered by electricity.
Galgali said that after the RTI application was filed; the civic body issued a circular directing the authorities to fill the vacant posts.

PART D: RTI & SUCCESS STORIES

Normally, my article contains 3 parts as would be observed above. Since long, I have been wanting to add PART D: containing success stories of RTI. BCAS Foundation & Public Concern for Governance Trust (PCGT) (where at I am a trustee) run 4 RTI Clinics and on an average 50 individuals visit these clinics in a month and are provided RTI guidance and they submit RTI applications and appeals etc. We now intend to arrange feedback on their applications etc. As such very few come back to report the success they get or solutions that they achieve though many have satisfactory results.

Similarly, I believe many CAs make RTI applications etc and have success stories.

It is with the above belief that I intend to add PART D as above to my article. I request all read-ers to send their RTI success stories in brief. We would like to report them here. Please join in this crusade.

Hereunder one success story:

Extracts from Akila Maheshwari’s email of 23 Feb 2011:

Dear Narayan Varmaji:

First of all let me profusely thank you and other members of PCGT and BCAS for guiding my hus-band Dr. Shiban Charagi to fight his case through RTI. He was not only successful to get justice for himself but for others too, when a large Goverment Organisation like B.A.R.C. (Bhabha Atomic Research Centre) under Department of Atomic Energy had to strictly adhere to Supreme Court Judgements of 12th May 2008 by Justice Markandeye Katju.

BARC has started informing officers at all levels about their CR Grading by their Superiors. Also an officer can challenge his CR grading by refusing to put his signature on the intimation of the CR Grading.

My husband (who has the rare privilege of being listed in MARQUIS who is who in the world) was denied PRIS (Performance related incentives scheme) on the basis of poor assessment by his immediate supervisor. My husband has been a UNESCO Scholar. He was a one of the few employees (out of 15300) denied PRIS on poor CR grading. His CR was assessed in a hurry by a biased supervisor. He was also denied facilities for research work and manpower assigned to him removed and he was thereby harrased and humiliated.

My husband filed a letter of grievances to the PMO. This was forwarded to the Secretary DAE. Other reminders followed. But no action took place at ground level.

Later my husband took guidance from BCAS and was successful in getting a sum of over a lakh rupees (pre tax deduction). He was informed of his previous grade in CR. Later his grading was revised. After re-assessment PRIS sanctioned. This is the first such case in the history of the Department of Atomic Energy.

A battle that would have cost lakhs of rupees if taken up legally with CAT etc and would have been time consuming also and few years delay ended within two to three months of filing the RTI petition.

Hail RTI! Hail BCAS & PCGT and all the activists who made RTI a reality! RTI is a new pillar of Indian democracy.

BCAJ Admin

Right To Information

Right to Information

Privacy &/v. Disclosure

One American writer has said:

“One man’s freedom of information is another man’s invasion
of privacy.”

The personal information of an individual need not be made
public in every case, as he has a right to be left alone, which now has been
recognised as a fundamental right the world over.

Article 21 of the Constitution of India:

21. Protection of life and personal liberty:

No person shall be deprived of his life or personal
liberty except according to procedure established by law.

The Supreme Court has ruled, modelled on the decisions of the
US Supreme Court, with regard to privacy. The Court observed in R. Rajagopal
alias R. R. Gopal v. State of Tamil Nadu (1994) 6 SCC 632:

The right to privacy is implicit in the right of life and
liberty guaranteed to the citizens of this country by Article 21. It is a
‘right to be left alone’. A citizen has a right to safeguard the privacy of
his own, his family, marriage, procreation, motherhood and education among
other matters. None can publish anything concerning the above matters without
his consent. If he does so, he would be violating the right to privacy of the
person concerned and would be liable in action for damages.

Article 19 of the Constitution of India reads:

“All citizens shall have the right to freedom of speech and
expression.”

That right, as per the Supreme Court of India, includes the
right to information. S. 8(1)(j) of the RTI Act:

8(1) Notwithstanding anything contained in this Act,
there shall be no obligation to give any citizen

(j) information which relates to:

§ personal information

§ the disclosure of which has no relationship to any public activity or
interest, or

§ which would cause unwarranted invasion of the privacy of the individual

§ unless the Central Public Information Officer or the State Public
Information Officer or the Appellate Authority, as the case may be, is
satisfied that the larger public interest justifies the disclosure of such
information:

Provided that the information which cannot be denied to the
Parliament or a State Legislature shall not be denied to any person.

Landmark judgment of Delhi High Court (F.B.) pronounced on
12-1-2010:

In Secretary General, Supreme Court of India v. Subhash
Chandra Agarwal: The Full Bench of the Delhi High Court concurred with the
view of the learned single Judge that the contents of asset declarations,
pursuant to the 1997 Resolution, are entitled to be treated as personal
information, and may be accessed in accordance with the procedure prescribed
u/s.8(1)(j); and that they are not otherwise subject to disclosure. Therefore,
as regards the contents of the declarations, whenever applicants approach the
authorities under the Act, they would have to satisfy themselves u/s.8(1)(j)
that such disclosure is warranted in ‘larger public interest’.

Privacy issues & RTI:

S. 8(1)(j) talks of personal information:

Dictionary defines:

§
‘person’ as human being, an individual

§
‘personal’ as relating to or affecting an individual

Hence, S. 8(1)(j) only covers natural persons, i.e.,
individuals, it covers privacy of the individuals only.

Hence, other entities like companies, HUF, trusts, etc. are
not covered under this clause and any information on them cannot be affected by
the exemption u/s.8(1)(j).

Similarly, no such entities can take protection under the
Right of Privacy, a fundamental right guaranteed under the Article 21 of the
Constitution.

Re. Individual’s personal information gets exemption under
this clause on the following three criteria:

1. ‘It must be
personal information’:

Personal information here has reference to the third party’s
information and not one’s own.

Extract from a Full Bench decision (five members of the
Central Information Commission) dated 23-4-2007, explaining the scope and ambit
of this clause: (Para 32)

In this case there were six applicants/complainants and 5
public authorities. Out of 5 Information Commissioners, three are presently in
chair, two have retired.

This Section has to be read as a whole. If that were done, it would be apparent that personal information does not mean information relating to the information seeker, but about third party. That is why, in the Section, it is stated “unwarranted invasion of the privacy of the individual”. If one were to seek information about oneself or one’s own case, the question of invasion of privacy of one’s own self does not arise. If one were to ask information about a third party and if it were to invade the privacy of the individual, the information seeker can be denied the information on the ground that disclosure would invade the privacy of a third party. Therefore, when a citizen seeks information about his own case and as long as the information sought is not exempt in terms of other provisions of S. 8 of RTI Act, this clause cannot be applied to deny the information. Thus, denial for inspection/verification of his own answer sheets by a citizen applying the provisions of S. 8(1)(j) is not sustainable.

2. It must not have been disclosed to the public authority as a part of public activity:

When a citizen provides information in discharge of a statutory obligation, it is a disclosure as a part of public activity. The same cannot be exempted under this clause. For example:

Income-tax return — Not exempt.

The Assessment Order — Exempt.

Names of persons who applied for arms licenses — Not exempt.

See:

Mr. Jagvesh Kumar Sharma, New Delhi v. PIO, Govt. of NCT of Delhi Decision No. CIC/WB/A/2008/00993 dated 16-3-2009

One para thereof:

Various public authorities in performing their functions routinely ask for ‘personal’ information from citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a public authority as an employee, or asks for permission, licence or authorisation, all these are public activities. Applying for an arms licence certainly falls in this category. As a matter of fact S. 4(1)(b)(xii) requires a suo moto publishing of ‘particulars of recipients of concessions, permits or authorisations granted by it’.

3. The disclosure of the information would cause unwarranted invasion of the privacy of the individual
What is unwarranted invasion of privacy of a person cannot be enlisted exhaustively. However cases have arisen before numerous adjudicative bodies on the issue of invasion of privacy arising out of the requests to furnish information under the RTI Act. To cite an example is the case before the Central Information Commission in Mr. Harish Lamba v. Indian Council of Medical Research, CIC/AD/A/20009/0010371 dated 2nd September, 2009. The Commission denied to provide information about expenses on educa-tion of the children of members of the Committee u/s.8(1)(j) as it was held to be personal information disclosure of which will cause unwarranted invasion of privacy of individuals constituting the Project Review Committee.

The right of privacy is an evolving right and the extent of its strength and reach is different in different countries.

Privacy is the ability of an individual or group to seclude themselves or information about themselves and thereby reveal themselves selectively. The boundaries and content of what is considered private differ among cultures and individuals, but share basic common themes. Privacy is sometimes related to anonymity, the wish to remain unnoticed or unidentified in the public realm. When something is private to a person , it usually means there is something within them that is considered inherently special or personally sensitive. The degree to which private information is exposed therefore depends on how the public will receive this information, which differs between places and over time.

Assuming that this clause is applicable after undergoing above three criteria, still it is overridden if larger public interest justifies the disclosure of such information.

Such matters could be of many types — e.g.,:

criminal activity of any individual

tax evasion matter

medical related information on the Prime Minister and the President of India.

Para from the decision in
Mr. Mahesh Kumar Sharma
v. PIO, Govt. of NCT of Delhi
Decision No. CIC/AT/A/2008/01262/SG/2109 dated 27-2-2009

The test of public interest is to be applied to give information only if any of the exemptions of S. 8 apply. Even if the exemptions apply, the Act enjoins that if there is a larger public interest, the information would still have to be given. There is no requirement in the Act of establishing any pub-lic interest for information to be obtained by the sovereign citizen; nor is there any requirement to establish larger public interest, unless an exemption is held to be valid.

Para from the Decision No. CIC/OK/A/2008/00860/ SG/0809, dated 31-12-2008.

The concept of public interest cannot be invoked for denial of information. The Section empowers the Public Information Officer to provide the exempted information if it is in the larger public interest; meaning thereby that access to the exempted information can be allowed if public interest is served in providing the information.

The term ‘privacy’ means things in different contexts. Different people, cultures, and nations have a wide variety of expectations about how much privacy a person is entitled to or what constitutes an invasion of privacy.

Almost all countries have laws which in some way limit privacy; an example of this would be law concerning taxation, which normally require the sharing of information about personal income or earnings.

Similarly, if one is in job with the Government or is politician contesting for seat in Parliament, etc. he is obliged to disclose certain information publicly. Transparency is inseparable from good governance and privacy has then to be sacrificed for such occupation/situation and disclosure of many personal information has to be accepted as essential for democracy to be meaningful.

There are many types of privacy e.g.,

Physical: In the USA, the right of the people to be secured in their houses, against unreasonable security and seizures is guaranteed. In India, our Income-tax Act provides for power to search and survey and over-rides privacy right, but reasonable restrictions also are built into the provisions like S. 133A(2) which provide that an income-tax authority may enter any place of business or profession referred to in Ss.(1) only during the hours at which such place is open for the conduct of business or profession and, in the case of any other place, only after sunrise and before sunset.

Informational: Various types of personal information come in public domain, specially financial e.g., many transactions reported through Annual Information Returns (AIR) being furnished by many bodies like MFs, property registration authorities (see ITR-2, instruction 9) are to be disclosed. However, one is allowed to keep :in privacy outlets of one’s wealth/income other than required to be disclosed under AIR.

Medical privacy allows a person to keep their medical records from being revealed to others. This may be because people have concern that it might affect their employment. Or it may be because they would not wish others to know about medical or psychological conditions or treatment which would be embarrassing. Revealing medical data could also reveal other details about one’s personal life (such as about one’s sexual activity for example).

The secret ballot is the simplest and most widespread measure to ensure that political views are not known to any one other than the original voter. It is nearly universal in modern democracy, and considered a basic right of citizenship. In fact even where other rights of privacy do not exist, this type of privacy very often does.

There is also concept of privacy in relation to spiritual and intellectual attributes of an individual, also many other types of privacy concepts prevail.

The concept of privacy is most often associated with western culture. Universal Declaration of Human Rights, Article 12 states:
No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.

In India, this right is not very deep. It would de-pend on each case to determine whether privacy is invaded in an unwarranted manner or not.

In fact, as regards the UID project, privacy right is extensively invaded and many civil society individuals are disturbed about it. Various representations have been made to the Authority through civil society meetings and discussions. In response, the Government has set up a group of officers under the Secretary, DOPT to develop frameworks for data protection, security and privacy.

It is difficult to balance between privacy and disclosure. An individual would say that he has the ‘right to be let alone’ yet he wants to live in the society and not alone, he wants to be part of the society. He has then to be open for disclosure. Hence, there is a right to privacy and the need for disclosure.

Dr. Alan Westin (He is a professor of Public Law & Government Emeritus, Columbia University, Department of Political Science and has conducted 30 privacy surveys and created privacy indexes) once wrote:

Each individual is continually engaged in a personal adjustment process in which he balances the de-sire for privacy with the desire for disclosure and communication of himself to others, in light of the environmental conditions and social norms set by the society in which he lives.

In India the subject of ‘privacy’ has hardly been in public debates. However as noted above, the UID project has opened up this subject, more now with ‘2G Scam tapes’. The Income-tax authorities have tapped the phones of Niira Radia, a powerful lobbyist. The same have been leaked and partly now are in public domain. Issue is raised by Mr. Ratan Tata whether his right to privacy is violated. Let me quote some opinions on the same?: one pro-disclosure, one against and the third balanced.

Advocate Prashant Bhushan:

I think it (tapes made public) is absolutely in public interest. The Income-tax Department taped all these conversations legally. If whoever leaked it did it in public interest, it could be argued that he or she is a whistle-blower. But there is no precise definition of public interest. If somebody asked for the tapes through the Right To Information Act, they could be denied only on the premise that it would compromise the investigation, or that it contains personal information that has no relevance to public interest at all. Whatever has come out in public domain is not personal information. It’s all purely official communication, which is of interest to the public. Tata was talking to Radia, only because she happened to be employed by the Tata group as its lobbyist.

Mr. Deepak Parekh on NDTV’S ‘Walk the talk program’ said: “the tapes and the leaked conversations were an invasion of privacy.”

Mr. Arun Jaitley writes on this issue of privacy related to these tapes:
“The intercepted materials are ordinarily not likely to be secrets of the State. Their disclosures are neither prohibited, nor can at present be penalised. It is expected that the same would be available with the relevant departments of the Government and a legitimate disclosure of the same could be made either through the RTI Act or through an investigative process if the same are utilised for that purpose. If the material intercepted deals with matters concerning the affairs of the State, unauthorised intervention in the functioning of a government or commission of an offence, it could be handed over to the competent authority dealing with the matter. However, if the conversations so taped are private in nature and have no bearing whatsoever on the functioning of the State, it would ordinarily be expected from the competent authority to direct that such conversations or intercepts be maintained in absolute secrecy and its disclosure and use is prohibited.

However, those who seek to interfere in the matters of the State and influence decisions concerning the State of play in the political arena are hardly expected to contend that a cloak of secrecy be maintained around their roles. They may have a right to privacy in relation to their private lives, but not in relation to activities which are wholly political or related to the public affairs of the State.”

On macro level on this issue of privacy &/v. information, let me quote Barack Obama:
Open government is, within limits, an ideal that we all share. US president Barack Obama endorsed it when he took office in January 2009. ‘Starting today,’ he told his cabinet secretaries and staff “every agency and department should know that this administration stands on the side not of those who seek to withhold information, but those who seek to make it known.” He then noted that there would have to be exceptions to this policy to protect privacy and national security.

An iconic industrialist, Mr. Ratan Tata feels violated, is outraged over the public disclosure of his private conversation with lobbyist, Niira Radia. Mr. Tata has filed a petition in the Supreme Court invoking Article 21 of the Constitution, arguing that what has happened is an invasion of his privacy.

I have always wondered whether the right of privacy is opposite to the right to information or these two fundamental rights make balance for human dignity and human values. I believe that there cannot be any general conclusion as to which right universally overrides the other; each case has to be decided on the issue involved.

Let us hope that the Supreme Court decision enlightens the citizens on this vital issue of human rights and restrictions therein. It shall be a land-mark decision. Citizens await the same, hopefully in February 2011.

(I was invited by the Institute of Secretarial Training and Management, Department of Personnel & Training, Ministry of Personnel, Public Governances & Pensions, GOI to make a presentation on the subject ‘Privacy Issues & RTI.’ This article is based on the said presentation and further developed by other information available on this subject on Wikipedia and other websites and the recent news items related to tapes of telephone conversion between Niira Radia and others in newspapers and magazines).

BCAJ Admin

Right To Information

Right to Information

S. 8(1)(h) :

S. 8(1)(h) reads as under :

8(1) Notwithstanding anything contained in this Act,
there shall be no obligation to give any citizen,

(h) information which would impede the process of
investigation or apprehension or prosecution of offenders;

The petitioner, Bhagat Singh in the writ proceedings
approached High Court of Delhi seeking partial quashing of the Order of CIC and
also petition to direct PIO to supply the information sought by him immediately.

The facts of the case are as follows :

The petitioner was married in 2000 to Smt. Saroj Nirmal. In
November 2000 she filed a criminal complaint alleging that she had spent/paid as
dowry an amount of Rs.10 lakh. Alleging that these claims were false, the
petitioner, with a view to defend the criminal prosecution launched against him,
approached the Income-tax Department with a tax evasion petition (TEP) dated
24-9-2003. Thereafter, in 2004 the Income-tax Department summoned the
petitioner’s wife to present her case before them. Meanwhile, the petitioner
made repeated request to the Director of Income-tax (investigation) to know the
status of the hearing and TEP proceeding. On failing to get a response he moved
an application under the Act in November, 2005. He requested for the following
information :

“(i) Fate of petitioner’s complaint (tax evasion
petition) dated 24-9-2003.

(ii) What is the source of income of petitioner’s wife
Smt. Saroj Nirmal other than from teaching as a primary teacher in a private
school ?

(iii) What action the Department had taken against Smt.
Saroj Nirmal after issuing a notice u/s.131 of the Income-tax Act,
1961/pursuant to the said Tax Evasion petition.”

The application was rejected by PIO u/s.8(1)(j). The first AA
also rejected it not only u/s.8(1)(j) but also u/s.8(1)(h).

In the second appeal before CIC, it rejected the contention,
of PIO & AA that clause (j) applies. As to clause (h), it ruled :

“as the investigation on TEP has been conducted by DIT
(Inv), the relevant report is the outcome of public action which needs to be
disclosed. This, therefore, cannot be exempted u/s.8(1)(j) as interpreted by
the Appellate Authority. Accordingly, DIT (Inv) is directed to disclose the
report as per the provision u/s.10(1) & (2), after the entire process of
investigation and tax recovery, if any, is complete in every respect’’

Before the Court, petitioner submitted that disclosure of the
information sought could not in any way impede the investigation process nor CIC
has given any reason as to how such disclosure would hamper investigation.

The Court in para 12 analysed the Right provided under the
RTI Act, 2005 and in paras 13 & 14 analysed the right of information vs. denial
thereof :

12. The Act is an effectuation of the right to freedom of
speech and expression. In an increasingly knowledge-based society,
information, and access to information holds the key to resources, benefits
and distribution of power. Information, more than any other element, is of
critical importance in a participatory democracy. By one fell stroke, under
the Act, the maze of procedures and officials barriers that had previously
impeded information, has been swept aside. The citizen and information seekers
have, subject to a few exceptions, an overriding right to be given information
on matters in the possession of the state and public agencies that are covered
by the Act. As is reflected in its preamble paragraphs, the enactment seeks to
promote transparency, arrest corruption and to hold the Government and its
instrumentalities accountable to the governed. This spirit of the Act must be
borne in mind while constructing the provisions contained therein.

13. Access to information, u/s.3 of the Act, is the rule
and exemption u/s.8, the exceptions. S. 8 being a restriction on this
fundamental right, must therefore be strictly construed. It should not be
interpreted in manner as to shadow the very right itself. U/s.8, exemption
from releasing information is granted if it would impede the process of
investigation or the prosecution of the offenders. It is apparent that the
mere existence of an investigation process cannot be a ground for refusal of
the offenders; the authority withholding information must show satisfactory
reasons as to why the release of such information would hamper the
investigation process. Such reasons should be germane, and the opinion of the
process being hampered should be reasonable and based on some material. Sans
this consideration, S. 8(1)(h) and other such provisions would become the
heaven for dodging demands for information.

14. A right based enactment is akin to a welfare measure
and like the Act, should receive a liberal interpretation. The contextual
background and history of the Act is such that the exemptions outlined in S.
8, relieving the authorities from the obligation to provide information,
constitute restrictions on the exercise of the rights provided by it.
Therefore such exemption provisions have to be constructed in their terms;
there is some authority supporting this view [see Nathan Devi v. Radha Devi
Gupta, 2005 I AD (SC) 357; VII (2004) SLT 615; 2005 (2) SCC 201; B. R.
Kapoor v. State of Tamil Nadu, VI (2001) SLT 659; 2001 (7) SCC 231 and
V. Tulasamma v. Sesha Reddy, 1977 (3) SCC 99]. Adopting a different
approach would result in narrowing the rights and approving a judicially
mandated class of restriction on the rights under the Act, which is
unwarranted.

The Court then held as under:

“As to the issue of whether the investigation has been complete or not, I think that the authorities have not applied their mind about the nature of information sought. As is submit-ted by the Petitioner, he merely seeks access to the preliminary reports investigation pursuant to which notices u/s.131, u/s.143(2), u/s.148 of the Income -tax Act have been issued and not as to the outcome of the investigation and reassessment carried on by the Assessing Officer. As held in the preceding part of the judgment, without a disclosure as to how the investigation process would be hampered by sharing the materials collected till the notices were issued to the assessee, the respondents could not have rejected the request for granting information. The CIC, even after overruling the objection, should not have imposed the condition that information could be disclosed only after recovery was made.”

The Court then set aside the order of CIC in so for as it withholds information until tax recovery orders are made. It also directed PIO and AA to release the information sought on the basis of the materials available and collected by them within two weeks.

[Bhagat Singh v. CIC and others, WP(C) No. 3114 of 2007 dated 3-12-2007] [RTI R IV (2010) 223 (Delhi)]

PART B?: The RTI Act, 2005

S. 19(8)(a) and implementation of S. 4 of the RTI Act:

S. 19 deals with “Appeal. Ss.(8) grants certain powers to the Information Commission (both central

& state). Ss.(8) reads as under:

(8) In its decision, the Central Information Com-mission or State Information Commission, as the case may be, has the power to:

(a)   require the public authority to take any such steps as may be necessary to secure compliance with the provisions of this Act, including:
(i)   by providing access to information, if so requested, in a particular form;
(ii)   by appointing a Central Public Information Officer or State Public Information Officer, as the case may be;
(iii)   by publishing certain information or categories of information;
(iv)   by making necessary changes to its practices in relation to the maintenance, management and destruction of records;
(v)   by enhancing the provision of training on the right to information for its officials;
(vi)   by providing it with an annual report in compliance with clause (b) of Ss.(i) of S. 4;
(b)   require the public authority to compensate the complainant for any loss or other detriment suffered;
(c)   impose any of the penalties provided under this Act;
(d)   reject the application.

It appears for the first time Commission has is-sued directions to Public Authorities u/s.19(8)(a) of the RTI Act as above jointly signed by 7 Central Information Commissioners. Document is dated 15-11-2010. Brief contents of the said directions are as under:

Commission has been nothing in its decisions that although the RTI Act has now been in place for five years, a key element of the law- voluntary disclosure by public authorities, enshrined in S. 4 of the Act has not been fully implemented in letter and spirit. There are, no-doubt departments and public authorities, which are more transparent and open than the others, but most do not conform to the matrix of disclosure set out in S. 4.

Secrecy in the functioning of the public authority should be the exception and not the norm, since as stated in the preamble to the RTI Act, transparency of information is vital to a functioning democracy.

The first step towards promotion of transparency in the functioning of the public authority should be an improvement in the record-management practices. S. 4 lists out the ingredients of record management in some detail.

The time has now come when the public authorities must start a sustained drive to inform their governance practices with transparency and to take the series of small steps required to put in place a system which promotes it. S. 4 provides only a window to possible actions and much more will need to be done in order to achieve the type of goals which are envisaged.

Based on above introductory write up, the Commission by powers invested

U/s.19(8)(a) of the RTI Act has directed that obligations set out in S. 4 of the RTI Act be discharged by the public authorities as per the time limits set out by it. Its directions pertain to two items:
(1) Record Management Obligation and (2) Personnel related details and functions of public authorities.

S. 4 requires public authority to publish certain information covering above two subjects. Commission notes that action in this regards has been tardy and that it is time that these requirements of S. 4 be fully implemented in a systematic manner and directs

That these actions as ordained above shall be completed by all public authorities within a period of 120 days from the date of this order.

Commission further directed that,

(i) The information in compliance with S. 4 obligation by Public authorities shall be uploaded on a portal to be set up exclusively for this purpose by the CIC.

(ii) Within 30 days of this order, each public authority shall designate one of their senior officers as ‘Transparency Officer’ (with all necessary supporting personnel), whose task it will be
(a) to oversee the implementation of the S. 4 obligation by public authorities, and to apprise the top management of its progress.

(b) to be the interface for the CIC regarding the progress of (a).
(c) help promote congenial condition for positive and timely response to RTI-requests by CPIOS, deemed-CPIOs.

(d) to be a contact point for the public in all RTI-related matters.
(iii) Names of the transparency officers shall be communicated to throw Commission by public authorities.

Each ministry or department of the Government has been directed to forward these directions to public authorities u/s.25(2) of the RTI Act, 2005.

The Commission has written to all secretaries in each ministry or department of the Government of India and has requested them to forward the directions to Public Authority under their jurisdiction exercisable u/s.25(2) of the RTI Act.

In such communication, the Commission writes;

(a) The ultimate aim of the RTI Act is that public should have access to most information held by public authorities without the use of the RTI laws. S. 4 of the RTI Act is an initial, but necessary, prelude to achievement of that objective. Hence the importance of this Section.

The Commission is to set up portal for uploading all S. 4 compliance-related information. The idea is that an average citizen should be able to see for himself as to how public authorities have progressed in complying with the transparency obligations cast on them by S. 4 of the RTI Act.

It is now learnt as reported in media that DiPT has challenged the demand made by the Commission for Pro-active disclosure and appointment of transparency officers by public authorities. DoPT itself has refused to follow CIC’s directions as noted above CIC has now sought legal advice on the objections raised by DoPT.

Citizens and RTI Activists are perplexed at this attitude of DoPT. Now, Chief Information Commissioner, Satyananda Mishra has reacted & stated; “I do feel that the ministry should rise above the technicality and look at the objectives of the CIC order which was to ensure that Government implement the provisions of the Act”.

Let us hope that other ministries. Departments do not flout these directions so boldly and proactively demanded by the Central Information Commission.

INFORMATION ON & AROUND

RTO’s (Regional Transport Office) working in Mumbai:

If you have to wait for days to get a new license or renew an existing one, do not get surprised. Frustrated by delays in issuing licences/duplicate permits and also in the ‘annual passing (clearance)’ of autos/taxis, an auto union led by Thampy Kurlan recently sought data under RTI, which showed a sharp contrast between vehicular population and the RTO staff strength in Mumbai.

In March 1999, the total number of registered vehicles in all three Mumbai RTOs was 9.10 lakh. This rose to 16.74 lakh by March 2009. Similarly, the number of driving licences issued till March 1999 was 33.5 lakh, which increased to 56.77 lakh in March 2009. In comparisons, the staff strength (of RTO) declined from 913 officers and men (in 1999) to just 738 employees in 2009.

Working in MANTRALAYA, Mumbai:

IT pays to be a government servant?! For, where else would you not be sackled if you did not report to duty for even one day in almost two years?

That, unfortunately, is the state of affairs in Mantralaya where action is still pending against such employees, as was revealed in the Law and Judiciary department’s reply to an RTI by MID Day. However, despite filing the RTI application on absenteeism in Mantralaya almost a month back, the 34 other departments have not replied to it at all.

The RTI was sent to the Public Information Officer, General Administration Department (GAD), on November 25, 2010, it sought information on Mantralaya staffers who remained away from duty and the action that was taken against them by the government. On December 6, S. B Dalvi, information officer from the Law and Judiciary department, replied to the RTI and stated that 5 out of the 300-plus employees in the department have been irregular at work and have not been reporting for more than 18 months.

SEBI challenges CIC’s order in Court:

SEBI has moved Bombay High Court against an order of the Central Information Commission (CIC) to make public action by it on a complaint against RIL in 2000 on the sale of 12 crore shares for the benefit of its promoters. The CIC, on an RTI application by Arun Agrawal, had directed SEBI to provide details of action taken on the complaint of S. Gurumurthy of Swadeshi Jagran Manch

Right of service after RTI:

Times of India under ‘YOUR RIGHT TO KNOW’ writes: Without the right to service, the RTI will be rendered meaningless as mere knowledge of what the babu has noted in the files is not enough. It must be supplemented by giving people the right to demand service from civil servants. This alone can make files get dusted out and translate decisions to actual work on the ground.

Youngest Indian to file an RTI query:

At CNN/IBN Citizen Journalist awards ceremony this month an award is given to Aishwarya Sharma, from Lucknow, young girl of 9 years who filed a Right to Information (RTI) query for removal of a garbage disposal site in front of her School.

Her initiative was a success and a Public Library has now been constructed in that place.

BCAJ Admin

Business Etiquette

In the previous articles, we discussed etiquette norms for email phones and business meetings. It might be a good idea now to touch upon how personal grooming, attire and dining etiquette can make a great contribution in your overall success rating. In this concluding series of article on Business Etiquette, we shall discuss those norms in addition to discussing etiquette requirements for conducting a teleconference.

Etiquette for teleconferencing
An important consideration one has to keep in mind while engaging in teleconferencing, (especially with overseas client) is that you are not visible to him. The way you speak and conduct yourself on the phone is the sole criteria of his judgment. While most are familiar with general norms for conducting one on one teleconference, the challenge of engaging on multi-level team teleconference is entirely different. Some of the essential points are given below:

Set up an agenda and duration of call in advance.
Choose an anchor who will conduct the teleconference and introduce his team members.
Start with greeting and small talk not more than a minute.
If situation demands long articulation from one side, then keep asking for confirmation from the other side every few minutes. These could be ‘Do you agree?, Is it ok?, Am I coming out clear?, any queries?’ etc.
If no answer is forthcoming, then ask the anchor on the other side whether you can continue.
Do not interrupt the other side when they are talking. If you must, then interrupt with apology and explain the reason. If the interrupter is person other than the anchor, then he must announce his name and designation. This will remove confusion in the mind of person on the other side as to who has interrupted, why and at what designation level to appropriately respond to the interrupter.
If you find difficulty in understanding the accent, request the other side to repeat the sentence and to speak slowly.
If the other side has not understood you correctly then use sentences like ‘I think I need to explain more clearly’ or ‘I am afraid I have not been able to communicate it properly’. Never say ‘You are not understanding’ or ‘Your understanding is wrong’.
In case of a disagreement on a point, do not stretch it. Say ‘This may need further discussions, let’s park it’ and move on to the next point.
Wind up with summary and action plan on both sides.

Personal grooming and attire:
Famous American thinker Emerson once said ‘People begin to evaluate us before any words are ever spoken, who you are speaks so loudly —- I do not hear what you say’. Thus the way you dress and observe personal hygiene will have an impact on your chance to succeed. Some important etiquette tips are given below:

Always dress appropriate to occasion. Do not overdress or wear casuals for business meeting. If not sure about the dress code, it is better to stick to semiformal.
Ensure that your hair is properly combed and nails are clean and manicured. Shoes should be well polished.
The tie should not stretch below the belt. It is a general norm to wear the belt of the same colour as that of the shoes. Socks should be matching the colour of trousers.
Do not carry loose sheaf of papers. Carry a folder or a briefcase.
Do not make multiple fold of paper and stuff them in the pocket. Pockets should not be bulgy with papers and/or coins.
The pen should always be kept in the breast pocket of coat and not in the front pocket of a shirt.

Dining etiquette:
Business lunch and dinner have become indispensable part of modern business. Hospitality is not just a formality but a vehicle to conclude many important business negotiations. Though dining protocols are a subject by themselves and can warrant a separate article, it is essential to know a few basic etiquette norms. They are given below:

Always find out the preference of the guest if you are the host.
Reach a few minutes early than the given time if you are the host.
Please wait to be seated in a fine dining restaurant or a coffee shop of hotel.
Belongings should not be kept on the table but on the floor on the right hand.
Do not pick up napkin/spoon if it falls down. Politely ask a serving waiter for a new one.
Do not blow on hot food to cool it.
In the overseas restaurant ask for ‘No Meat’ dishes if you are a vegetarian. In some countries fish food is considered vegetarian.
Do not unfold napkin with jerk. When not finished with your meal, please ensure to leave the napkin on the seat if you need to leave your seat for any reason. If you have finished your meal, then please put the napkin on the table. These are silent signals to the waiter.
Swab the napkin on your face — Do not wipe with it.
Serving is always done from left to right and clearing from right to left. When you find multiple cutlery by your side for different courses, please use the same from the extreme left to right for each course. In such restaurants, water glass for you is on your right side.
Please do not use toothpick without covering your mouth with hands.
Start discussing business only after ordering is finished. However, you must be aware about protocols of certain countries like Japan where no business discussion is expected to be conducted over meal.
Please be discreet about settling the bill. Do not disclose the amount. Be quick to ask the bill as a signal to the serving staff as to who is the host.
Always thank the guest for his having graced the invitation and ask him whether he enjoyed the meal.

All the etiquette norms that we have discussed in the series of articles are only indicative. One must remember that the best etiquette is caring for comfort of others around you in a genuine way.

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BCAJ Admin

ICAI and its members

1. Code of ethics

The Ethical Standards Board of ICAI has considered some ethical issues which have been published in C.A. Journal for September, 2011, at page 380. Some of these issues are as under:

(i) Issue: If a member has passed any additional course of the ICAI, is he permitted to print such qualification on visiting cards, letter heads and other stationery?

Under Clause (7) of Part I of the First Schedule to the C.A. Act, a member is permitted to print such qualification on the visiting cards, letter heads and other stationery like a degree of a University established by law in India or recognised by the Central Government or a title indicating membership of the ICAI or of any other Institution that has been recognised by the Central Government or may be recognised by the Council.

(ii) Issue: Whether a member in practice can use the designation (District Governor) in his rotary visiting card along with the term ‘Chartered Accountant’?

The member who is in practice cannot use the designation of ‘District Governor’ in his rotary visiting card along with the term ‘Chartered Accountant’.

(iii) Issue: Whether public notice published in the newspaper by a Chartered Accountant individually or jointly with an Advocate in respect of acquirement of land by their client is permitted?

In terms of the Guidelines under Clause (7) of Part I of the First Schedule to the C.A. Act, as appearing in the Code of Ethics, the public notice published in the newspaper in respect of acquirement of land by their client is permissible.

(iv) Issue: Whether it is obligatory for the auditor appointed to conduct a special audit u/s.233A of the Companies Act to communicate with the previous auditor who has conducted the regular audit for the period covered by the special audit?

Council direction under Clause (8) of Part I of the First Schedule to the C.A. Act prescribes that it is not obligatory for the auditor appointed to conduct a special audit u/s.233A of the Companies Act to communicate with the previous auditor who has conducted the regular audit for the period covered by the special audit.

(v) Issue: Whether a Chartered Accountant in practice can accept audit in case the audit fee of the previous auditor remains unpaid?

In case the undisputed audit fees for carrying out the statutory audit under the Companies Act, or various other statues have not been paid, the incoming auditor should not accept the appointment unless such fees are paid. In respect of other dues, the incoming auditor should in appropriate circumstances use his influence in favour of his predecessor to have the dispute as regards the fees settled.

(vi) Issue: Whether a Chartered Accountant firm can accept branch audit of a bank when a partner has taken loan from any other branch of the same bank?

Independence of Auditors can neither be diluted nor any scope be left for dilution in the eye of stakeholders. The term ‘indebtness’ must continue to be in relation to an entity and not in relation to a branch. Thus if a partner has taken loan from any branch of a bank, the firm is not allowed to do the audit of other branch of that bank.

2. Opinion on financial statements when there is substantial interest

The Council has revised the existing guidelines on the above subject w.e.f. 28-6-2011 as under.

“A member of the Institute shall not express his opinion on financial statements of any business or enterprise in which one or more persons who are his ‘Relatives’ within the meaning of Accounting Standard (AS-18) has/have, either by themselves or in conjunction with such member, a substantial interest in the said business or enterprise.

Explanation — For this purpose and for the purpose of compliance of clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949, the expression ‘Substantial Interest’ shall have the same meaning as is assigned thereto under Appendix (9) of the Chartered Accountants Regulations 1988.”

It may be noted that para 10.9 of AS-18 defines ‘Relative’ to mean ‘in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence or be influenced by that Individual in his/her dealing with the reporting enterprise.’ (Refer pages 488-489 of C.A. Journal for September, 2011).

3. Answer Books of ICAI Examination
In a recent decision of the Supreme Court of India, in a dispute under the Right to Information Act, it is held that ICAI must disclose, if requested by a candidate in its examination, the standard criteria relating to moderation employed by it for the purpose of making revision. The submission of ICAI that it had copy right over question papers and, therefore, this cannot be disclosed even after the tests was rejected by the Court. Further, the submission to the effect that if this criteria is disclosed, the workload on the Institute will increase and it will be difficult to handle this workload in view of the large number of candidates who may demand this information, the Supreme Court has said that “Additional workload is not a defence. If there are practical insurmountable difficulties, it is open to the examining bodies to bring them to the notice of the Government for consideration, so that any changes to the Act can be deliberated upon. Examining bodies like ICAI should change their old mindsets and tune them to the new regime of the disclosure of maximum information. Public authorities should realise that in an era of transparency, previous practices of unwarranted secrecy have no longer a place”.

4. K.Y.C. Norms
The Council has formulated the following Know Your Client Norms (KYC norms) which shall be recommendatory in nature, and apply only in case of attest function by members in practice w.e.f. 13-7-2011.

K.Y.C. Norms

The financial services industry globally is required to obtain information of their clients and comply Know Your Client Norms (KYC norms).

Keeping in mind the highest standards of Chartered Accountancy profession in India, the Council of ICAI thought it necessary to recommend such norms to be observed by the members of the profession who are in practice.

In light of this background, the Council of ICAI approved the following KYC Norms. However, these norms are recommendatory in nature and every Chartered Accountant carrying out attest function is encouraged to follow them.

1. Entity Information
(i) General Information — (a) Name of the Entity, (b) Type of Entity and (c) Business Description

(ii) Corporate Structure — (a) Name of ultimate parent company, (b) Name of parent company and (c) Name of Affiliates

(iii) Regulatory Information — (a) Company PAN No., (b) Company Identification No., (c) Directors’ Identification No., (d) Directors’ Name & Addresses and (e) Name(s) and Addresses of Companies, in which above person is director

2. Other information
a) Entities financial information, (b) Name of the ultimate parent Auditor and (c) Any known violation of any Law/Regulations

5. EAC Opinion

ESOP Accounting on Account of Revision of the Exercise Price

Facts:
A listed manufacturing company had granted stock options to its employees (‘ESOP’) in August, 2007. Total number of options granted originally was 10,000 to be vested over a period of 4 years i.e., 25% each year. Market price of shares of the company on the date of ESOP grant was Rs.2,800 per share and exercise price was Rs.2,000 per share.view of AS-16.

On account of attritions/non-fulfilment of eligibility conditions, the number of options has been reduced to 9,000 in the year 2009. The company has followed intrinsic value method for ESOP accounting as provided by the ‘Guidance Note on Accounting for Employee Share-based Payments’ issued by ICAI.

The company decides to revise the exercise price as Rs.1,800 per share in 2009 on account of reduction in market price of company’s share which was Rs.2,000 per share in that year.

The company has raised the following questions.

(i) Whether any additional charge is to be taken to the profit and loss account under employee cost on revision of exercise price in 2009. If yes, what will be the amount to be charged as employee cost on revision of the exercise price from 2009 onwards?

(ii) Whether the extra charge in 2008 will be adjustable in subsequent charge to the profit and loss account in the remaining vesting period, consequent upon reduction in the number of ESOPs eligible for exercise in 2009.

(iii) What will be the treatment of the amount credited to the ESOP Outstanding Account against original grant, i.e., Rs.800 per share (Rs.2,800 less Rs.2,000) at the time of exercise of options?

Opinion

The Committee has noted that ICAI has issued a ‘Guidance Note on Accounting for Employee Share – based Payments’. It is also noted that SEBI has also issued the “Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme). The Committee has noted that while accounting for modification of terms of stock option is not addressed in SEBI Guidelines, the same is addressed in ICAI Guidance Note.

After detailed consideration of the above guidance notes, the committee has given the following opinion.

(i) Incremental cost on account of revision of exercise price is required to be accounted for in respect of outstanding options on the basis of difference between the exercise price measured immediately before and after the revision. As regards the amount to be charged from 2009 onwards as employee cost on account of revision of the exercise price, it should be the sum of the amount chargeable as per original plan plus the relevant portion of the incremental cost to be expensed. The basis of amortisation of the incremental cost should be same as adopted for amortisation of the original cost as per SEBI Guidelines.

(ii) Extra charge in 2009 will be the net result of accounting for lapses and accounting for incremental cost expensed as explained in paragraph 15 of the opinion.

(iii) At the time of exercise of the option, amount in ESOP Outstanding Account, to the extent that it is related to the options exercised, should be debited along with the consideration received against them (viz. cash/bank account), while Share Capital and Share Premium account should be credited as explained in para 16 of the opinion.

(Refer pages 416 to 419 of C.A. Journal for September, 2011)

6. Unique Document Identification (UDIN)
Time and again, various authorities across the country have reposed their faith in chartered accountants as professionals realising the work of their attributes like integrity, excellence and independence. Based on the same, they are relying on various certifications being issued by chartered accountants in practice in the normal course of business. They look upto chartered accountants as reliable source of authentic information and to ensure compliance with various rules, regulations, procedures stipulated under different statues.

However, many instances have been brought to the attention of ICAI wherein financial statements and certificates issued by non -members or members not holding Certificate of Practice have been relied upon by authorities as true statements and certificates. It needs no reiteration that a certificate issued by a practising chartered accountant binds him to its accuracy and subject him to disciplinary proceedings of the Institute, in case a complain in that regard is filed with the Institute by the concerned authorities or any affected party.

To ensure the authenticity of various statements and documents being certified/attested by Chartered Accountants, ICAI has introduced the new concept of Unique Document Identification Number. The said scheme is available at the link http:/www.icai.org/uid

Clarifications on various issues relating to UDIN are given on pages 504 and 505 of C.A. Journal for September, 2011.

7. CA Profession and Women Empowerment
In the CA students Journal for September, 2011, a write-up on this topic states that CA is one profession which, of late, is witnessing a significant spurt in the number of girls enroling and qualifying in C.A. examination and also figuring prominently in the top 50 Merit List. Some noteworthy information in the write-up is as under.

(i) Ms. Shirin K. Engineer became the first woman CA 1933. She was followed by Ms. R. Shivabhogam in 1947 and Ms. Nilima Chatterjee in 1954.

(ii) In November, 1983, Ms. Nandita P. (Shah) Parekh got the honour of becoming the first lady candidate to secure the first rank in C.A. Final Examination. She was followed by Ms. C. V. Sakunthala who secured first rank in May, 1984, Final Examination. Both these girls were awarded special prizes by our Prime Minister late Mrs. Indira Gandhi at a special function organised by the Institute. During the years 1989 to 2011, 14 girl candidates have secured the first rank in Final Examination. In May, 2011 Final Examination all the first three ranks have been secured by girls viz. Ms. Maitreyee Rajaput (Pune), Arti Jain (Bikaner) and Charmy Sheth (Mumbai).

(iii) The membership of women in C.A. profession in the span of 16 years from 1995 to 2010 has increased from 5.21% in 1995 to 18% in 2010. The women membership increased from 3697 in 1995 to 29491 in 2011. The increase of women in part-time practice was from 541 to 1387, (b) full-time practice 1569 to 9139 and (c) not in practice 1587 to 18965.

BCAJ Admin

ICAI and its members

1. Code of ethics:

The Ethical Standards Board of ICAI has considered some ethical issues which are published in C.A. Journal of May, 2011, at page 1653. Some of these issues are as under:

(i) Issue: Can a Chartered Accountant in practice agree to select and recruit personnel, conduct training programmes and work studies for and on behalf of a client?

Response: The ‘Management Consultancy and other Services’ as specified by the Council includes both, personnel recruitment and conduct of training programmes and work studies. As such, the same are permitted for a Chartered Accountant in practice.

(ii) Issue: Can a Chartered Accountant in practice secure any professional business through the services of a person who is not his employee or partner?

Response: The CA Act, 1949 does not permit a practising Chartered Accountant to secure, either through the services of a person who is not an employee of such Chartered Accountant or who is not his partner, any professional business.

(iii) Issue: Can a Chartered Accountant in practice seek professional work from his professional colleagues?

Response: As per CA Act, 1949 a member is permitted to apply or request for, or to invite, or to secure professional work from another Chartered Accountant in practice.

(iv) Issue: Can a Chartered Accountant in practice accept original professional work emanating from a client introduced to him by another member?

Response: A Chartered Accountant in practice should not accept the original professional work emanating from a client introduced to him by another member. If any professional work of such client comes to him directly, it should be his duty to ask the client that he should come through the other member dealing generally with his original work.

(v) Issue: Can a Chartered Accountant accept the appointment as Superior Authority by Certifying Authority for processing Digital Signature?

Response: A Chartered Accountant may accept the appointment as Superior Authority by Certifying Authority for processing Digital Signature.

(vi) Issue: Whether the Code of Ethics will be applicable outside India?

Response: The Code of Ethics of the Institute is applicable to all its members even outside India.

2. Annual Accounts of ICAI for the year ending 31-3-2010:

3. Revenue Recognition of sales in foreign currency hedged by a forward contract:

A listed manufacturing company has domestic sales as well as export sales and the company has the following forex hedging strategy for currency risk:

(a) The hedged exposures/forecasted cash flows are highly probable because these are always based on signed contracts, sales orders and purchase orders.

(b) The hedge documentation (such as forex policy/procedure, the documentation of each individual hedge, selection of hedge instruments, etc.) is in place.

(c) There is always one-to-one relation between the hedged exposure and hedge instrument (no netting, no clubbing together of hedged items).

(d) The relation of hedged item versus hedge instrument is 100% effective and can be measured accordingly.

After entering into an export order the company takes forward cover for the full amount of the sales invoice which is receivable in US Dollars normally after sixty days. The forward cover is also taken for sixty days.

Query:
In the light of the above, the company has sought the opinion of the EAC regarding revenue recognition on the following issues:

(i) The rate at which the sale should be accounted, (a) whether at the rate on the date of bill of lading, on which date the property in goods has passed on to the customer as per the contract, or (b) at the forward contract rate i.e., the rate at which the company will be realising the sale proceeds from the customer on due date.

(ii) It is assumed that the customer will not fail on the due date for the purpose of the above. If customer fails to pay on the due date what will be the opinion of the Committee.

(iii) Will the company be complying with (a) Accounting Standard (AS) 9, ‘Revenue Recognition’; (b) Accounting Standard (AS) 11, ‘Effects of Changes in Foreign Exchange Rates’, (c) Accounting Standard (AS) 30, ‘Financial Instruments: Recognition and Measurement’, (d) AS 31, ‘Financial Instruments: Presentation’ and (e) AS 32 ‘Financial Instruments: Disclosure’, dealing with hedge accounting?

Opinion of EAC:

After considering paragraph 9 of Accounting Standard (AS) 11, the Committee is of the view that the sales in the instant case should be recorded by applying the exchange rate at the date of the transaction. The transaction date for the purpose of recognition of revenue would be the date on which the significant risk and rewards of the ownership of goods are transferred to the buyers.

Further, considering the Accounting Standard (AS) 9, the Committee is of the view that the revenue should not be recognised unless it is reasonably certain that the ultimate collection of the revenue will be made. However, if the uncertainty relating to collectability arises subsequent to the recognition of revenue, a separate provision for the uncertainty should be recognised.

Furthermore, the Committee clarified that for the accounting purposes, the issue of recognition of revenue is independent of the accounting for foreign exchange transactions, including hedging. Accounting for sale. i.e., recognition of revenue in the present case would be governed by the provisions of AS-9. Accounting for foreign exchange transactions, including hedging, is governed by AS-11 and/or AS-30 depending upon the nature of the transaction. In the instant case, since the transactions undertaken by the company have been stated by the company to be highly probable forecast transactions, forward exchange contracts in respect of these transactions can be accounted for as a cash flow hedge considering the provisions of AS-30. So, if the company accounts for revenue (sales) at forward contract rate it will not be complying with the requirements of AS-9, AS-11, AS-30 and AS-32. AS-31 is not relevant in the present case.

(Refer pages 1650 to 1652 of C.A. Journal of May, 2011)

4. Amendments in Service tax relating to Chartered Accountants:

(i) Point of Taxation Rules, 2011, have come into force from 1-4-2011. Under these Rules, Service tax will be payable on the date of invoice or payment, whichever is earlier. If the invoice is not issued within 14 days of rendering the services, the tax is payable from the date of rendering such service. Option is given to assessees to postpone the effective date to 1-7-2011 under certain circumstances.

(ii) However, due to efforts of ICAI and other professional bodies, in the cases of Chartered Accountants, cost accountants, company secretaries, architects or interior decorators, persons rendering legal, scientific or technical consultancy service, a concession is given to these professionals to pay Service tax on receipt of fees, as at present.

(iii) By a Notification No. 25/2006, dated 13-7-2006 exemption was given to practicing Chartered Accountants, cost accountants and company secretaries in respect of professional fees received by them from clients for representation before tax or other statutory authority. This exemption is now withdrawn w.e.f. 1-5-2011 by a Notification No. 32/2011, dated 25-4-2011. Therefore, these professionals will have to charge Service tax on fees to be charged to clients for representation before tax and other statutory authorities.

5. ICAI News:

(Note: Page Nos. given below are from C.A. Journal of May, 2011)

(i) Filing financial statements in XBRL mode:
The MCA has issued General Circular No. 9/2011, dated 31-3-2011 and has stated that it has decided to mandate certain class of companies to file balance sheets and profit and loss account for the year 2010-11 onwards by using eXtensible Business Reporting Language (XBRL) taxonomy. The financial statements required to be filed in XBRL format would be based upon the taxonomy on XBRL developed for the existing Schedule VI, as per the existing (non-converged) Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006.

All companies that are part of coverage in Phase-I would be the following class of companies which will be required to file the financial statements in XBRL form only from the year 2010-11:

All companies listed in India and their subsidiaries, including overseas subsidiaries;

All other companies having paid up capital of Rs.5 crore and above or a turnover of Rs.100 crore or above.

All companies covered by Phase-I would be permitted to file the above financial statements up to 30-9-2011 without any additional filing fee. (Page 1649)

(ii) DISA holder to conduct system audit:

The RBI vide its recent Circular relating to submission of system audit reports has allowed a holder of a Diploma in Information System Audit (DISA) of the ICAI to conduct audit of Authorised Payment System Operators and Entities, apart from a Certified Information Systems Auditor (CISA) and registered with Information Systems Audit and Control Association. (Page 1610)

(iii) Appellate Authority under C.A. Act:

The Appellate Authority u/s. 22A(1) of the Chartered Accountants Act, 1949 was constituted by the Central Government in March, 2009, but the same was not functional, as the Chairperson of the

Authority had not taken charge. Recently, Justice Shri S. N. Dhingra (Retd.) has been appointed by the Government as the Chairperson. Shri Dhingra along with the representatives of all the three institutes would meet the MCA Secretary where it would be, inter alia, proposed to request for an office space for the Appellate Authority that is currently housed in the ICAI headquarters in New Delhi. (Page 1611)

(iv) Recommended fee structure on professional assignment:

The Council of ICAI has recommended the minimum scale of fees for professional assignments undertaken by our members. Separate fees are recommended for members practising in metros and non-metros. Details are available on the website of ICAI. Broadly stated, these fees are as under:

Note: Separate minimum fees are recommended for work relating to (a) VAT/Profession Tax, (b) Audit and other assignments, (c) Management services, (d) Investigation, (e) Certification, (f) Consultation, (g) Arbitration, (h) NBFC, RBI matters, (i) FEMA matters, (j) Service tax, and (k) Project Financing. (Page 1610)

BCAJ Admin

FROM THE PRESIDENT

Dear readers, Just before we celebrated the festival of lights, we lost two iconic personalities, both of international stature, albeit in different fields. The first was the demise of Steve Jobs a name one identified with Apple, and the second was the death of our own Jagjit Singh. Both made a difference to our lives one by making the world more accessible and the other by soothing our frayed nerves and lifting our spirit by his melodious music.

The exit of Steve Jobs will be remembered by all of us for a long time to come. He was always full of new ideas and was a great thinker. He said “Innovation distinguishes between a leader and a follower”. It is this lack of innovation and leadership which is at the root of many of our current problems. People heading organisations, States and the country need to act differently. Whenever we face a problem we all tend to look at history for solutions. Despite all the talk of new thought our leaders take decisions based on precedent. It is here that we need a change and a break from the past.

Let me illustrate this. To meet the challenge of inflation the Reserve Bank of India, has at regular intervals increased the interest rates. Despite four or five increases in the past few months inflation is not showing any signs of being tamed. This is not to say that I have any other solution to offer. However I believe that it is necessary for the regulator to look at other options, deregulation being one of them. To that extent freeing of the savings rate is a step in the right direction. But this step by the Reserve Bank of India may not be sufficient. What we also need is for the government to step on the accelerator as far as the reform process is concerned. It is true that every decision of the government will be under intense public scrutiny but that does not mean, that to avoid public gaze one stops taking decisions altogether. The government must quickly come out from its stupor.

At the level of organisations including our very own we need to think differently. For over six decades the Society has played a pivotal role in updating its members about professional development, increasing their knowledge base and sharpening their skills to ensure that they render service of the highest quality. All the programmes of the society, its seminars, workshops, lecture meetings, publications as well as its flagship the Journal have maintained high standards of quality. However I must be candid and admit that the response is not the same as it was a decade ago. I think there is nothing wrong with our content we only need to rethink the manner and form in which we deliver it.

What I am trying to drive that is that if one is to change for the better it is necessary to look at what the future holds and innovate rather than look at history. Undoubtedly one learns lessons from history but even that is written with reference to the context which was in the mind of the author. To quote Winston Churchill “History will be kind to me for I shall write it”. Therefore while our glorious past must make us proud let us think and act differently for a bright future.

It is nearly 4 months since the time that I took over as the President of the society, and I thought that the middle of the year is the right time to share my thoughts with you in regard to what I mentioned in the foregoing paragraphs. What we miss at the society is a feedback from members. I would urge all of you to write to me about what we should do to ensure that the society continues to serve you to your satisfaction.

With warm regards,

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BCAJ Admin

Lecture Meetings

Subject : Recent Amendments in Schedule VI of the Companies Act, 1956

Speaker : P. R. Ramesh, Chartered Accountant

Date : 4-5-2011

P. R. Ramesh, Chartered Accountant addressed the members of the Society and public at large on the subject of ‘Recent Amendments in Schedule VI of the Companies Act, 1956’ on 4th May, 2011 at IMC. The learned speaker made a threadbare and systematic analysis of the recent amendments in Schedule VI of the Companies Act with and reference to context and by highlighting important issues. The speaker commenced his presentation with the history and applicability of Schedule VI. He explained in depth how Schedule VI came into the Companies Act, formulation of NACS (National Advisory Committee on Accounting Standard), etc. He also gave information about the procedure followed for bringing about these amendments.

The speaker then resolved the issue regarding the date from which the amendments in Schedule VI would apply. He explained that the applicability date would be 1st April, 2011 and not 1st April, 2010. The confusion was created because the Ministry’s website initially showed the applicability date as 1st April, 2010, which was later changed to 1st April, 2011.

The speaker then gave an overview of the revised format of Schedule VI before discussing each specific amendment. He explained to the audience the advantages and problems associated with each and every amendment like removal of ‘Appropriations’ part from the Profit & Loss account, etc.

For the benefit of participants, he individually listed out major highlights from the amendments. He elaborated on the various issues that may crop up like keeping a track of the debtors from the date they become due and not from the date of sale; classification of current and non-current items, absence of the head ‘Net working capital’ in the balance sheet, etc. He also gave an insight on important aspects of IFRS wherever relevant.

Mr. Ramesh encapsulated his analysis by presenting a tabular comparison between the old Schedule VI and revised Schedule VI for clear understanding of the changes. It provided exhaustive information on degree of changes made as compared to the old Schedule.

At the end, he presented important issues to ponder, which arose out of these amendments. Some of these issues were regarding the reclassification of the previous year’s figures into the revised format, whether proposed dividend is to be provided for or not, etc. He also touched upon the implementation issues of Schedule VI, voluminous disclosure requirements; lack of clarity vis-à-vis long-term borrowings, etc.

He concluded by convincing the participants that a change in mindset will be required by everyone dealing with the new Schedule VI.

After his presentation the learned speaker answered all queries raised by members in the audience. His enthusiasm coupled with his deep knowledge of the subject was well appreciated by all the gathering.

The speaker’s presentation is available on the BCAS website. Further, his speech is also available on BCAS Web TV.

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BCAJ Admin

Company Law

Updates of Company Law from 15th April 2011 to 20th May 2011

The Ministry of Corporate Affairs as a part of the green initiative in Corporate Governance allowed paperless compliances by the companies. It has dispensed with physical sending of the Annual Report comprising of Balance Sheet, Profit and Loss Account, Director’s Report, Auditor’s Report to its members as required u/s.219 of the Act vide its General Circular No. 17/2011, dated 21- 4-2011. In lieu thereof it has clarified vide General Circular No. 18/2011, dated 29th April 2011, that the same are permitted to be sent by E-mail but subject to fulfilment of certain conditions.

Details available on:

http://www.mca.gov.in/Ministry/pdf/Circular_17- 2011_21apr2011.pdf and

http://www.mca.gov.in/Ministry/pdf/Circular_18- 2011_29apr2011.pdf

The Ministry of Corporate Affairs has vide General Circular No. 19/2011, dated 2-5-2011, informed that the portal has a facility that allows the Registrar of Companies to mark a company as ‘marked as having management dispute based on the complaints received by them. This creates an alert and documents filed on the portal are not approved and remain in the registry as work in progress till it is demarked by the Registrar. The matters in which the Registrar of Companies shall use this facility is available on:

http://www.mca.gov.in/Ministry/pdf/Circular_19- 2011_02may2011.pdf

The Ministry of Corporate Affairs has vide General Circular No. 20/2011, dated 2-5-2011 has intimated regarding the E-form 32 pertaining to the particulars of appointment of directors, etc., and changes therein pursuant to section 303(2) of the Companies Act — filing of conflicting return by contesting parties.

Details about this Circular are available on

http://www.mca.gov.in/Ministry/pdf/Circular_20-2011 _02may2011.pdf

The Ministry of Corporate Affairs has vide Circular No. 21/2011, dated 2nd May 2011 given approval to the National Securities Depository Limited (NSDL) and Central Depository Services (India) Ltd. (CDSL), subject to the condition that they obtain a certificate from Standardisation Testing and Quality Certification (STQC) Directorate, New Delhi for providing electronic platform for electronic voting under the Companies Act, 1956. For details refer:

http://www.mca.gov.in/Ministry/pdf/Circular_21-2011 _02may2011.pdf

The Ministry of Corporate Affairs vide Circular No. 2/11, dated 8-2-2011, had granted a general exemption u/s. 212(8) to companies for attaching the balance sheets of subsidiaries to their annual reports, provided conditions specified therein were satisfied. The Ministry has clarified the same will apply to unlisted companies also in order to ensure transparency in those cases where balance sheets are not attached. For details refer:

http://www.mca.gov.in/Ministry/pdf/Circular_22-2011 _02may2011.pdf

The Ministry of Corporate Affairs has issued a corrigendum to Circular No. 9/2011, dated 31-3-2011 pertaining to Filing of Balance Sheet and Profit and Loss Account in eXtensible Business Reporting Language (XBRL) The following shall be substituted and read as under:

“(i) all Companies listed in India and their subsidiaries, having paid up capital of Rs.5 crores and above or a turnover of Rs.100 crores or above, excluding Banking Companies, Insurance Companies, Power Companies, NBFC’s and overseas subsidiaries of these Companies.”

For details refer:

http://www.mca.gov.in/Ministry/pdf/Circular_25- 2011_12may2011.pdf

The Ministry of Corporate Affairs vide General Circular No. 24/2011, dated 11-5- 2011 has clarified that when the beneficiary of the loan/guarantee/security is a Public Limited Company, approval of the Central Government needs to be sought only if provisions of sub-sections (d) and (e) of section 295 are attracted. For details refer:

http://www.mca.gov.in/Ministry/pdf/Circular_24- 2011_12may2011.pdf

The Ministry of Corporate Affairs has vide Circular No. 23/2011, dated 3rd May 2011 clarified that the effective date of the Companies (Particulars of Employees) Amendment Rules, 2011, as all Directors Reports u/s. 217 approved by the Board on or after 1-4-2011 irrespective of the accounting year, to which they relate. The MCA vide GSR 289(E) dated 31-3-2011 had raised the limit of employee’s salary to be disclosed in the Directors’ Report u/s. 217 to Rs.60 lac for the year or at Rs.5.00 lac per month in case of part of the year. For details refer:

http://www.mca.gov.in/Ministry/pdf/Circular_25- 2011_12may2011.pdf

The Central Government vide Notification GSR (E), dated 11-5-2011 made the following amendment in the Companies (Accounting Standards) Rules, 2006 called the Companies (Accounting Standards) Amendment Rules 201. In the said rules, in the Annexure under the heading ‘B. ACCOUNTING STANDARDS’, in the sub-heading ‘Accounting Standards (AS) 11 relating to ‘the Effects of Changes in Foreign Exchange Rates’, in Paragraph 46, for the words and figures “46. In respect of accounting periods commencing on or after 7th December 2006 and ending on or before 31st March 2011,” the following shall be substituted namely:

“46. In respect of accounting periods commencing on or after 7th December 2006 and ending on or before 31st March 2012.”

For details refer:

http://www.mca.gov.in/Ministry/notification/pdf/ Notification_G.S.R._11may2011.pdf

Business rules and taxonomy for XBRL reporting — Ministry of Corporate Affairs has informed that it is in process of finalising business rules and taxonomy for XBRL reporting. Final taxonomy and business rules would be circulated by 20th May, 2011. Stakeholders and companies have been requested not to buy accounting software before final business rules so as to avoid any inconvenience.

The Ministry of Corporate Affairs has been informed that Form 61 for normalising a company should not be filed by a dormant company which is desirous of getting struck off under the Easy Exit Scheme (EES), 2011. Such company should file Form EES, 2011 only. In case any charges are pending, such company is also allowed to file Form 17 for satisfaction of the same. Form 61 for normalising a company should be filed by only those dormant companies which are desirous of getting back to active status by filing the due annual returns and balance sheets.

CORRIGENDUM [F.No. 5/7/2011-CL V], dated 1-5-2011 — In exercise of the powers conferred by sub-section (1) of section 637 of the Companies Act, 1956, regarding the Delegation by Central Government of its powers and functions u/s. 25 of the Companies Act, 1956, namely, pertaining to the power to grant approval to dispense with ‘Limited’ in name of charitable or other company, to the Registrar of Companies, the Central Government has notified that it shall come into force w.e.f. 1st May, 2011.

Provided further that the applications received by the Regional Directors u/s. 25 of the Companies Act, 1956 during the period 17th March, 2011 till 30th April, 2011 will be dealt by the concerned Regional Directors.

The Central Government vide Order dated F. No. 52/26/CAB-2010, dated 2nd May 2011 has directed all companies to which the following Cost Accounting Records Rules apply and those which have an aggregate value of networth exceeding Rs.5 crore or aggregate value of turnover from sale or supply of all products or activities exceeding Rs.20 crore or those companies having listed securities whether in India or outside India to have their cost accounting records for each financial year commencing on or after 1st April 2011, audited by a Cost Auditor:

1.   Cost Accounting Records (Bulk Drugs) Rules, 1974
2.   Cost Accounting Records (Formulations) Rules, 1988
3.   Cost Accounting Records (Fertilisers) Rules, 1993
4.   Cost Accounting Records (Sugar) Rules, 1997
5.   Cost Accounting Records (Industrial Alcohol) Rules, 1997
6.   Cost Accounting Records (Electrical Industry) Rules, 2001
7.   Cost Accounting Records (Petroleum Industry) Rules, 2002
8.   Cost Accounting Records (Telecommunications) Rules, 2002.

Further the companies need to follow the revised procedure for appointment of Cost Auditor as given in the General Circular No. 15/2011 [52/2/CAB -2011], dated 11th April 2011.

The Central Government vide Order dated F. No. 52/26/CAB-2010, dated 3rd May 2011 for has directed all companies to which any of the following Cost Accounting Records Rules apply and those which have an aggregate value of turnover from sale or supply of all products or activities exceeding Rs.100 crore or those companies having listed securities whether in India or outside India to have their cost accounting records for each financial year commencing on or after 1st April 2011, audited by a Cost Auditor for:

(a)   Cost Accounting Records (Cement) Rules, 1997
(b)   Cost Accounting Records (Tyres and Tubes) Rules, 1967
(c)   Cost Accounting Records (Steel Plant) Rules, 1990
(d)   Cost Accounting Records (Steel Tubes and Pipes) Rules, 1984
(e)   Cost Accounting Records (Paper) Rules, 1975
(f)   Cost Accounting Records (Insecticides) Rules, 1993.

Further the companies need to follow the revised procedure for appointment of Cost Auditor as given in the General Circular No. 15/2011 [52/2/CAB -2011], dated 11th April 2011.

Appointment of Cost Auditor — The Cost Audit Branch under the Ministry of Corporate Affairs has revised the procedure to be followed by companies to appoint Cost Auditors u/s. 233B of the Companies Act, 1956. As per the revised procedure, the audit committee will be the first point of reference for appointment of the Cost Auditors. The Company will electronically file an application in E-form 23C within 90 days of the Commencement of the finan-cial year with the Central Government for approval and the same will deemed to be approved, unless the contrary is heard within 30 days.

For details refer:

http://www.mca.gov.in/Ministry/mcaoffices/CAB_ Circular_15-2011_11Apr2011.pdf

Participation by shareholders in the Gen-eral Meetings through electronic mode: The Ministry of Corporate Affairs has vide General Circular No. 27/2011, dated 20th May 2011 has clarified that shareholders of a company may participate in a gen-eral meeting through electronic mode i.e., video conference facility so long as other terms and conditions mentioned in the Circular are fulfilled.

For details refer:

http://www.mca.gov.in/Ministry/pdf/Circular_27-2011 _20may2011.pdf

Participation by Directors in meetings of Board/ Committee of Directors through electronic mode: The Ministry of Corporate Affairs has vide General Circular No. 28/2011, dated 20th May 2011 has clarified that directors of a
company may participate in a meeting/committee of directors through electronic mode i.e., video conference facility so long as other terms and conditions mentioned in the Circular are fulfilled.

For details refer:

http://www.mca.gov.in/Ministry/pdf/Circular_28-2011 _20may2011.pdf

Issue of Certificate by Digital Signature: The Ministry of Corporate Affairs has vide General Circular No. 29/2011, dated 20th May 2011 has decided that all certificates and standard let-ters issued by the Registrar of Companies will be issued electronically under the electronic signature of the Registrar. For details refer:

http://www.mca.gov.in/Ministry/pdf/Circular_29-2011 _20may2011.pdf

BCAJ Admin

Business Etiquette

In the previous article on the subject of business etiquette, we discussed e-mail etiquette norms. In the current article we will discuss norms for mobile phone etiquette and business meetings.

Mobile phone etiquette

It was not a long time ago that there were training sessions on how to speak on the landline telephone. While technology is making landline telephones obsolete with introduction of mobile phones, fundamentals have not changed on how to communicate effectively on the phone. In fact, the need to know basic etiquette norms for handling conversations on the mobile phones has increased because of breach of privacy it can create. Hence, while some basic etiquette, such as speaking softly, introducing yourself if you are the caller and always asking for the person by his name followed by a designation when dialling a board-line in large organisations is taken for granted, some of the points that one must bear in mind about mobile etiquette are discussed below.

Always ask whether the receiver is comfortable taking the call at that time. If not, find out what time would suit him.
Please be careful in selection of the ring tone of the mobile. A wild ring tone will be very embarrassing in the business circle and will not be appreciated, as it could label you as frivolous. Imagine the negative impact a ring tone of a crying baby can create when you are in public place with business associates. As a professional, your ring tone as well as caller tune should be as sober as possible since it reflects who you are and your work culture.
Always keep your mobile on silent or vibration mode during business meetings or while in club, auditorium, hospital or dispensary. Sometimes mobile phone usage is prohibited at certain public places, especially overseas; hence it is better to check the signs before using the mobile. For instance, there are some compartments in long-distance trains abroad where mobile phones are not allowed to be used.
Do not ever listen to music on mobile phone at a public place without using headphones.
If your phone is not responded, follow up by a text message with a request to call up when free. If your call is diverted to a voice mail, then leave a brief message as to why you called up and end with a date and time. If there is urgency, then state that on the voice mail. For instance, you may say that you called up to inform that you have not received the missing information which is required for submission of appeal and you should be contacted urgently to discuss the same.
Do not take a call when you are in an important business meeting or consultation. It is extremely insulting and irritating to other members. If still unavoidable, then excuse yourself, walk away a short distance and quickly finish the call. Do not let it happen too frequently.
While sending text messages, be brief and discreet. Never send any message of a sensitive nature. It is better to convey such message during one-on-one conversation. The reason is that you do not have control over the confidentiality on the recipient’s mobile.
If you have put the call on a speaker phone, then inform the other side. Unaware, he could blurt out something that might not be appropriate for others to hear.

Etiquette for business meeting

It is important to set the agenda for the business meeting and set the time duration in advance. This is expected to be generally done by the initiator in consultation with the person with whom meeting is requested. It is always preferable to clarify whether any special hardware/software or Internet will be required during the meeting, so that arrangements could be made in advance. Having a back-up arrangement, should something fail, always saves embarrassment.

Be punctual. In case of an unavoidable delay, call up, apologise and request for revised time. If meeting for the first time, remember a few protocols. The host should introduce himself first with the guest and then his colleagues. The guest should then introduce his colleagues to the host and allow his members to self introduce to the members from the host side. Exchange of visiting cards should be done with the right hand or both hands with a slight bow. Do not put the visiting card in the wallet if you are a male. It literally means that you are sitting on someone in your pocket. As far as possible, let the visiting card remain in front of you on the table during the meeting, so that you are constantly reminded of the name and designation of the other person. It is advisable to distribute your card only to the main member and not to all the participants in the meeting unless asked specifically by someone.

In formal meetings, wait for the Chairman to take the seat and sit where directed. Never jump to business talk without a few positive and polite statements of gratitude and appreciation. There are a few ice-breakers or a small talk on subjects of common interest like weather, current events, etc. which always helps set the ball in motion. Keeping time limit in mind give lead to get on with business. The lead could be something like . . . I will not take much of the precious time of the participants who have kindly consented to be present and with their permission whether it will be alright to move on to the first point of agenda.

After understanding the hierarchy, while presenting your point of view, always keep your eyes focussed on the anchor person. However, keep others also engaged with occasional eye-contact and enrolment by taking a small pause and asking if you are understood well enough. Keep your voice and body language soft and steady. Always voice your disagreement positively. For instance, you could say that you respect their viewpoint but you have certain practical considerations to be having a different viewpoint. Never show your impulse however unreasonable the contention from other side may be. Leave an escape vent to say that you are sure if that argument has come from person as distinguished as him then there must be some substance behind it and you will require some time to mull over it.

Start winding up before 5 minutes of the allotted time by summarising and end the meeting with thank you and wish to meeting again.

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BCAJ Admin

ICAI News

(i) New publications of ICAI (a) Indian Accounting Standards (Ind AS) Vol. I and II

(b) Technical Guide on Audit in Automobile Industry (Page 340)

(d) A Study on, Drafting, Conveyancing, etc. of Commercial and other Documents

(ii) CA firms and SMP (a) ICAI has arranged a MCA 21 Compliance Software viz. ‘ICAI-ROC’ for members in practice and CA Firms (Page 341)

(b) ICAI has launched its exclusive website www.icai.org.in for members in practice and CA Firms (Page 341)

(iii) ICAI — Tax Suite ICAI has arranged a Tax Compliance Software viz. ICAI-Tax Suite for members in practice and CA Firms (Page 342)

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BCAJ Admin

Code of ethics

The Ethical Standards Board of ICAI has considered some ethical issues which are published in CA Journal for August, 2011, at page 214. Some of these issues are as under:

(i) Issue: Whether Companies in which Chartered Accountants have been appointed as Directors on their Board can publish their attainments:

In some cases, description about the Chartered Accountant’s expertise, specialisation and knowledge in any particular field as well as appellations or adjectives to their names are published in the prospectus or public announcements issued by the Company. The Council of ICAI has clarified that the inclusion of the name of the member of ICAI in such prospectus, public announcements or other public communication does not contravene Clauses (6) and (7) of Part I of the First Schedule of C.A. Act. However, the member should ensure that in such publications the Company does not advertise the professional attainments of the member. It is also necessary to ensure that by such publications member should not directly or indirectly solicit for professional work.

It is advisable for the member that as soon as he is appointed as a Director, he should specifically inform the Company about the above restrictions. He should request the Company that before any such communication is issued, the Company it should get the contents of the communication about the member approved by him.

(ii) Issue: Whether a Chartered Accountant/Firm is permitted to use logo on letter heads, stationery, etc.

The use of logo/monogram of any kind/form/style/ design/colour, etc. on any stationery, documents, visiting cards, magnetic devices, internet, letter heads, sign board, etc. is prohibited. Use/printing of member/QR:firm name in any other manner tantamounting to logo/monogram is also prohibited. However, a common CA logo has been allowed to the members, provided it is used in the correct manner within the terms of Council Guidelines.

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BCAJ Admin

From the President

Dear readers,

The year 2011 draws to a close. As I write this communication there is a mention in the media of the third anniversary of the dastardly attack by terrorists in Mumbai popularly known as 26 /11. Have things changed. For those who lost their near and dear ones on that day life would never be the same again. However for others that day has merely remained a memory. For some time individuals, organisations kept up the pressure on the government to take serious look at security concerns. Gradually the public went back to its daily struggle for existence and 26/11 was forgotten. Like many other events we now remember the event on anniversary days. There will be a number of reasons for this but the fact leaves one sad. Most of the much-publicised security measures have remained only on paper. As long as this attitude continues we will always be soft targets waiting for another attack to occur.

While the attack in Mumbai is now history, the attack on an eminent leader of Mr. Sharad Pawar brought to light many facets of those whom we term as leaders in public life. While the attack needed to be denounced in the strongest terms and it was, the events thereafter were avoidable. The comment on the attack by a person who is today considered an icon of the movement against corruption brought forth his serious limitations. I believe that the comment was an off-the-cuff remark and a clear mistake. After all every leader is human and is prone to make errors. The best thing to do was to accept the mistake unreservedly. This does not appear to have been done with ego probably being the obstacle. Many may perceive this to be a very harsh assessment but for me the comment is the culmination of the instrangient attitude of the person and those who surround him. It is absolutely essential that the persons leading this movement against corruption do a serious introspection for if they fail to frame a proper strategy, the energy that the movement has been able to galvanise will be frittered away. I hope those in charge of the movement make the necessary changes so that it does not lose focus.

It is now clear that the Direct tax code and GST will not meet their appointed dates. Though there could be substantial debate about the necessity of the Direct tax code itself the delay in implementing it as well as much other legislation is puts a question mark on the sincerity of the government. Innumerable man-hours of bureaucrats, professionals and others have been spent in drafting discussing and suggesting amendments to these proposed legislations. If they do not become law all this effort will go down the drain.

For the past year or so the government seems to be in a deep slumber. None of the decisions regarding policy initiatives which were a part of the UPA manifesto have been taken. One reason for this lack of decision making is said to be the fear of bureaucrats who are afraid of their decision being subject to public scrutiny and malafide intent being attributed to them. To an extent this is on account of the media glare on any event. Anything that goes wrong is attributed to an erroneous decision and an investigation is promptly ordered. We must also accept that it is only those who act will make mistakes. It is often easy to find fault with decisions in hindsight. As long as an action is taken bona fide and with due care the person must not be held responsible if the decision turns out be erroneous. People must understand the distinction between error and fraud.

One way of avoiding this inaction on account of fear is to make the decision making process as transparent as possible. If the rationale behind decisions is made known to the public much before the consequences of the decision occur this may help all concerned. One of our past Presidents always says that change is the only constant thing in life. For nearly two decades Mr.Ratan Tata has been the leader of one of the largest industrial house is in our country. His actions have taken the Tata Empire to new heights. One was therefore curious to know as who would take his place. What one liked most about that change in the leadership of this group was the manner in which it will take place. Mr. Ratan Tata had announced his date of retirement well in advance and his successor has been named a year before Mr. Tata calls it a day. This is the manner in which the baton should be passed. Our political class and others need to take a leaf out of Mr. Tata’s book. If there is an age of retirement for industrialists there ought to be one for those who run this country. We hope that Mr Cyrus Mistry who will now head the group will maintain the standards of ethics, integrity and excellence which his predecessor has set.

The year 2011 has seen turmoil and turbulence in public life. However without churning there is no Amrut. Though there are dark clouds on the economic horizon I am sure that they will pass. I am an optimist. The nation was disappointed when the little master was unable to complete his century of centuries on his home ground. However while achieving that milestone on his own turf would have gladdened hearts, to achieve it overseas and against a challenging side will give him greater satisfaction. Let us wish him all success and hope that his achievement will enable us to begin 2012 on a high note. I take this opportunity to wish all readers a very happy and prosperous 2012!

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BCAJ Admin

ICAI and its Members

1. Code of ethics

The Ethical Standards Board of ICAI has considered some ethical issues which have been published in C.A. Journal for October, 2011, at pages 528-530. Some of these issues are as under:

(i) Issue : Whether a statutory auditor can be appointed in the adjourned meeting in place of existing statutory auditor where no special notice for removal or replacement of the retiring auditor is received at the time of the original meeting ?

If any annual general meeting is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the company, since in terms of section 190(1) of the Companies Act. Special notice should be given to the Company at least fourteen clear days before the meeting in which the subject-matter of the notice is to be considered. The meeting contemplated in section 190(1), undoubtedly, is the original meeting.

(ii) Issue : Whether a Chartered Accountant or a firm of Chartered Accountants can charge or offer to charge professional fees based on a percentage of turnover ?

In terms of Clause (10) of Part I of First Schedule to the CA Act, a Chartered Accountant or a firm of Chartered Accountants is not permitted to charge fees on a percentage of turnover, except in the circumstances provided under Regulation 192 of CA Regulations. This Regulation permits fees to be charged based on a percentage of profits or based upon the findings, or results of such work in the following cases :

(a) In the case of a receiver or a liquidator, the fees may be based on a percentage of the realisation or disbursement of the assets;

(b) In the case of an auditor of a co-operative society, the fees may be based on a percentage of the paid-up capital or the working capital or the gross or net income or profits; and

(c) In the case of a valuer for the purposes of direct taxes and duties, the fees may be based on a percentage of the value of the property valued.

(iii) Issue : Can a practising Chartered Accountant accept a position as auditor previously held by some other Chartered Accountant in such conditions as to constitute undercutting ?

Prior to the amendment in the CA Act in 2006, undercutting was not permitted under Clause (12) of Part-I of the First Schedule to the CA Act. After the 2006 amendment, this provision has been repealed, and hence, it is not violative for a practising Chartered Accountant to accept a position as auditor at a fee below the fee earlier charged by the previous auditor.

(iv) Issue : Whether a member of the Institute shall be deemed to be guilty of professional misconduct if he does not supply the information called for, or does not comply with the requirements asked for, by the Institute ?

A member of the Institute shall be deemed to be guilty of professional misconduct if he does not supply the information called for, or does not comply with the requirements asked for, by the Institute [As per Clause (2) of Part III of the First Schedule to the CA Act].

2. Disciplinary case

In the case of CA P. Ramkrishna, ICAI decided to remove the name of the member for a period of 5 years for professional misconduct in the matter of audit of Global Trust Bank Ltd. This disciplinary case was started by ICAI on the basis of information received by it prior to amendment of the C.A. Act in 2006. When the matter was referred to the Delhi High Court for confirmation of the penalty, the member argued that ICAI had no jurisdiction to decide an information case started before amendment of the C.A. Act after the amendment made in that Act. The Single Judge of the High Court decided the matter in favour of the member on this technical ground. On appeal by ICAI before the Division Bench of the High Court, the appeal was decided in favour of ICAI. The High Court held that the changes in the procedure for conducting disciplinary cases by amendment of C.A. in 2006, were only meant to fine-tune certain technical issues and this amendment did not take away the jurisdiction of ICAI to award punishment in a case where disciplinary proceedings were started before the amendment in an Information case. Thus, the recommendation of ICAI to remove the name of the member for a period of 5 years was approved by the High Court.

3. EAC opinion

Segment reporting

Facts
A public limited company is engaged in the business of manufacturing products on contract basis. The company manufactures engineering products, castings, etc. as per the design, engineering standards and specifications prescribed by the customers. The company manufactures industrial valves under brand name of its customer in the USA. The company also manufactures castings, both machined and unmachined, and supplies the same to tractor and auto sector.

The geographical distribution of the sales of the company is restricted to one country/region. For example, more than 95% of valves are supplied to the USA. Castings are sold in India with a small portion of export.

The financial statements presented and reviewed by the Board is for the company as a whole without any segmentation. Bank facilities are also arranged based on the financials of the company as a single-segment organisation. Banks have accepted this position.

Query
On the facts and circumstances stated above, the company has sought the opinion of the Expert Advisory Committee as to whether it is in order to continue the present practice of treating the business as a single segment, i.e., contract manufacturing.

Opinion

After considering the provisions of Accounting Standard (AS)17, ‘Segment Reporting’, the committee is of the view that to identify business and geographical segments, the enterprise needs to evaluate whether the risks and returns of the different components are different as per the factors stated in the definitions of the terms ‘business segment’ and ‘geographical segment’. The organisational structure of an enterprise and its internal reporting system are normally the basis for identifying the segments.

From the facts of the case, the committee is of the view that the information about whether the risks and returns associated with the various products in which the company deals in, are different, is not clear.

In the company’s case, some of the products manufactured by the company, for example, in the case of valves, sales are restricted to a single customer and accordingly, the risks and returns in such cases where the company is relying on a single customer may be different from the risks and returns of a product where the company is not relying on a single customer. Similarly, risks and returns in case of products manufactured by machines may be different from the products which are hand-made. Therefore, considering the nature of the products produced, production processes involved in manufacturing and type or class of customers, the company should evaluate whether there can be different business segments in the present case.

Further, the Committee is also of the view that there may be different pricing strategies, credit risks and exchange control regulations involved for domestic and international sales. In such a case, the risks and returns in different geographical regions may be different and accordingly, the different geographical regions may be considered as different geographical segments. Thus, geographical segments may also be identified by segregating its total turnover into domestic sales and international sales, irrespective of the nature or kind of the products being sold.

In view of the above, if it is concluded that there is neither more than one business segment, nor more than one geographical segment, segment information is not required to be disclosed. The fact that there is only one ‘business segment’ and ‘geographical segment’ should be disclosed by way of a note as per the requirements of Explanation to paragraph 38 of AS-17.

[Please see pages 561 to 564 of C.A. Journal, October 2011].

4. Result of campus placements of members
Campus placement programme for new members was organised in major cities in August-September, 2011. Brief summary of the placement programme is given below:

(i)

No. of candidates registered

—

10317

(ii)

No. of interview
teams

—

177

(iiii)

No. of participating
organisations

—

(iv)

No. of jobs offered
(12.23%)

—

1262

(v)

Highest salary
offered fordomestic

posting (Rs. lakh
p.a.)

—

13.93

(vi)

Minimum salary
offered

—

3.75

(Rs. lakh p.a.)

(vii)

Average salary (Rs.
lakh p.a.)

—

6.25

Out of 1262 jobs offered, 1098 candidates have accepted the job offers.

(For details please refer pages 623-624 of C.A. Journal for October, 2011)

5. ICAI News

(Note : Page Nos. given below are from C.A. Journal for October, 2011)

(i) Peer Review Board
The Peer Review Board has issued a Notification in August, 2011, stating that the cost of the peer review for stages I, II and III, including honorarium and TA/DA for reviewer and his qualified assistant, shall be as under:

Total revenue from attestation service

Cost

clients of practice unit (Per Annum)

(Rs.)

Less
than Rs.10 lakh p.a.

15,000

From
Rs.10 lakh to 50 lakh p.a.

25,000

From
Rs.50 lakh to 1 crore p.a.

40,000

From
Rs.1 crore to 3 crore p.a.

60,000

From
Rs.3 crore to 5 crore p.a.

75,000

Above Rs.5 crore p.a.

1,00,000

(Refer page 632)

(ii) Statutory audit of banks
At present, an audit firm can take up statutory central audit of one PSB, four private sector banks and four foreign banks simultaneously each year. ICAI has reviewed these guidelines and it has been decided that an audit firm which takes up statutory central bank audit assignment in private and foreign banks will not qualify to take up statutory audit in public sector banks during that particular year. The revised guidelines will come into effect from 2012-13. (page 632)

(iii) ICAI-ROC
ICAI has arranged a MCA-21 compliance software viz. ICAI-ROC for members in practice and CA firms. ICAI-ROC software was launched on 1-7-2011. Salient features of this software are given in page 633.

(iv) ICAI — Tax Suite
A Tax compliance software for members in practice and CA firms has been developed by ICAI in the name of Tax Suite. Members in practice and CA firms can make use of this software which was launched on 1-7-2011. Salient features of this software are at page 634.

(v) Group term insurance for members
ICAI has tied-up with LIC for special scheme for insuring life of its members and their spouses. This scheme is open for all the members of the Institute. The details about the premium and other conditions are at page 635.

(vi) Developing website for CA firms
ICAI had launched an exclusive website www.icai.org.in to enable the members in practice and CA firms to create their own websites and upload details of their firms in order to get network and get better visibility. So far, 1699 firms have created their websites. (page 519)

(vii) List of members
List of members as on 1-4-2011 has been prepared and hosted on the website of the Institute. The members can review the list on the website. CDs of the members’ list will also be released by ICAI. (page 519)

(viii) Number of Tax Audit Assignments
ICAI has clarified that Audit conducted u/s.44AD, 44AE and 44AF of the Income-tax Act will not be included in the specified number of Tax Audit Assignments conducted by the members of the Institute. (page 519)

BCAJ Admin

MINUTES OF THE MEETING OF REPRESENTATIVES OF ASSOCIATIONS OF TAX CONSULTANTS WITH CHIEF COMMISSIONERS OF INCOME TAX

Bombay Chartered Accountants’ Society
7, Jolly Bhavan No. 2, New Marine Lines, Mumbai-400020.
Tel. : 61377600 to 05 / Fax : 61377666
E-mail : bca@bcasonline.org;
Website : www.bcasonline.org WebTV : www.bcasonline.tv
11th November, 2011

To,
Central Board of Direct Taxes,
New Delhi.
Dear Sir,

Re : Representation on Tax Accounting Standards

With reference to the discussion paper on Tax Accounting Standards and the draft Tax Accounting Standards circulated along with the discussion paper, we enclose herewith our representation in respect thereof.

We trust you will take our suggestions into account.

Thanking you,
Yours faithfully,
For Bombay Chartered Accountants’ Society,

(Pradip K. Thanawala)               (Gautam Nayak)
President                                     Chairman
                                                   Taxation Committee

Representation on Tax Accounting Standards
Bombay Chartered Accountants’ Society

The Central Board of Direct Taxes (‘CBDT’) has released a ‘Discussion Paper on Tax Accounting Standards’. Drafts of Tax Accounting Standards (‘TAS’) on Construction Contracts and Government Grants are annexed to the Discussion Paper (‘DP’). The CBDT has invited comments/suggestions on the DP and the drafts of the TAS.

In respect thereof, we give hereinbelow our comments/suggestions on the above DP and TAS.

1. At the outset, it is submitted that there is absolutely no need for notifying a different set of Accounting Standards (TAS) for the purpose of computing income under the provisions of the Income-tax Act. Though phased introduction of Ind-AS would mean that some taxpayers would be following Ind-AS while others would be following AS notified under the Company Rules, even today the position is that corporates are following Accounting Standards notified under the Company Rules, while non-corporates are following Accounting Standards issued by ICAI. Each set of taxpayers may be permitted to compute their taxable income as per the relevant accounting standards applicable to each of them.

2. If an accounting standard is not to be followed for the purposes of maintenance of accounts but only for computation of taxable income, then it is not an accounting standard, and it is an enactment of computation provisions. It can be compared to section 145A which requires an adjustment to the reported profits based on the specific statutory provision.

3. The standards notified under section 145 are required to be followed while maintaining books of account and it is not open to prescribe standards u/s.145 which are not to be followed while maintaining books of account. This amounts to incorporating computational provisions in the garb of accounting standards.

4. Amendments cannot be made in the computation provisions in the guise of introducing an accounting standard without making a specific provision in the statute in that behalf and without requiring the said accounting standard to be followed while maintaining the books of account.

5. By notifying TAS, there is an attempt to nullify the effect of well-settled legal positions that have stood the ground since more than half a century, namely, the pre-eminence of the commercial accounting standards, which yield only to statutory provisions, e.g., distinction between capital and revenue, etc. The effect of the decisions of the Supreme Court would be nullified by a notification of TAS, which ignores the commercial accounting principles and sets its own subjective standards of accounting.

6. The tax accounting standards are now meant to be the basis of computation of taxable income by a mere notification. This will open the door to amendments in the law without requiring amendments in the Act, and thereby the executive will be encroaching on the powers of the Legislature. This is not permissible.

7. The basic premise on which the new TAS are proposed, as laid down in para 3.2 of the DP, does not hold water. The accounting standards are for correctly arriving at commercial profits and cannot be in harmony with the provisions of the Act, since otherwise there can be no scope for provisions such as section 43B, which drastically alter the commercial profits in order to arrive at the taxable income. Again, the question of accounting standards providing for specific rules to enable computation of income with certainty and clarity does not arise since the purpose of accounting standards, even those to be notified u/s.145(2), is not that. The alternatives remaining in the accounting standards, which have drastically reduced, have been retained after much deliberation, and a lot of thought process has gone into it keeping in mind its need in the Indian scenario.

8. In order to even make the reconciliation statement, in some cases, elaborate workings will be required to be prepared, kept and maintained to the satisfaction of the Assessing Officer which would amount to re-writing accounting entries passed in the books of account and may be equivalent to maintaining separate books of account. This itself would cast a substantial burden on taxpayers.

9. The corresponding effects in some cases not having been made in the books of account may lead to disastrous consequences. For instance, an assessee who has written off the amount due in respect of a construction contract, would not have written off the retention amount, since he has not accounted for the same as his income. In the reconciliation statement, he would be required to add the retention amount as his income, but will he be allowed deduction for bad debts in respect thereof if he is unable to recover it, without having written it off in the books of account?

In view of the above, the justification to prescribe new TAS in the DP itself does not stand and there is absolutely no need to prescribe new TAS.

Further as regards the draft TAS, we give our comments as follows:

Common

Both the TAS contain elaborate requirements as to ‘disclosure’. Since the said Standards are not to be followed while maintaining books of account, nor in the preparation of financial statements, it is not all clear as to where the disclosure is required to be made.

Tax accounting for construction contracts

1. The TAS states that contract revenue shall include retentions; in other words, retentions would become part of the income, even though conditions specified in the contract have not been satisfied. This is clearly against the principle of accrual, where there has to be reasonable certainty of receipt for an income to have accrued.

2. The TAS does away completely with the provision for recognising expected loss and omits the following words which are present in AS-7 “An expected loss on the construction contract should be recognised as an expense immediately”. This is contrary to the principle of ‘prudence’, which has also been recognised as such in the Accounting Standard I relating to disclosure of accounting policies which has been notified u/s.145(2) at para 4(i) which reads as under:
“Prudence — Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.”

3. The TAS seeks to place an artificial limit of 25% completion beyond which contract cost and revenue should be recognised, even if the outcome of the contract cannot be estimated reliably. It is submitted that costs and revenue should be recognised on 25% completion, only if the outcome of the contract can be estimated reliably.

Tax accounting for government grants
1. The TAS does not provide for the capital approach method for grants. This seeks to do away with the well-established distinction between capital receipt and revenue receipt and is wholly unwarranted. The well-established concept of capital grant, which is not in the nature of income, cannot be nullified by mere notification of a Tax Accounting Standard, without a specific amendment to the definition of income in section 2(24).

2. AS-12 provides that mere receipt of grant is not necessarily conclusive evidence that conditions attached to the grants have been or will be fulfilled. The TAS specifically provides that recognition of a government grant shall not be postponed beyond the date of actual receipt. This is also against the basic principle of accounting that income should not be fully recognised if certain obligations are yet to be performed.

BCAJ Admin

FROM THE PRESIDENT

Dear readers, This is my first communication to you after having assumed office as the President of the Society. I am conscious that this is an honour and a great responsibility. I am sure that with your good wishes, the support of my predecessors, my team of office bearers and the BCAS staff, I will be able to measure up to the confidence you have reposed in me.

In my address as the incoming President, I had stated that if the Society’s programmes are to be carried out with the same zest and zeal, younger entrants to the profession must join the Society. As I pen this communication, the CA final results have just been declared. My congratulations to all those who have been declared successful. Three young girls have bagged the first three positions in the merit list. At a time when the media is filled with gender bias even among educated sections of the public, this is heartening news. Like in many other fields women are poised to make a mark in our profession. As per the statistics of the Institute of Chartered Accountants of India (ICAI):

? For 50 years since Independence, 8% of CAs were women

? The number of women CAs will increase to 30% in the next decade from the current 16%

? In the decade 2000-2010, 16% of the 1,70,000 CAs in India were women.

It is my earnest desire that these young talented chartered accountants should join the Society. This will make the programmes of the Society even more vibrant.

Mergers and acquisitions among professional firms is the order of the day. In that light the announcement of ICAI to recognise limited liability partnerships (LLP’s) is significant. Notifications in that regard will follow. I believe this is a great opportunity for many medium-sized firms to network, collaborate and eventually merge. The Society is alive to these developments, and a power summit was held a couple of months ago to facilitate interaction between professionals who wish to take steps in this direction. If the number of large firms undergoes an increase, the quality of service will be enhanced.

The progress as regards new tax legislation seems to have slowed down considerably. The report of the Select Committee of the Parliament on the Direct Tax Code bill (DTC) is yet to reach the Parliament. It is unlikely that DTC will be passed before the end of this year. If that happens the DTC may have to be postponed by at least a year. Even on the GST front the efforts to build a consensus do not seem to have made much headway. One only hopes that all political parties give the necessary priority, as the absence of this legislation is increasing both, tax cost and compliance cost.

While new tax legislations are making slow progress, the accounting standards are also causing some concern. We already have IFRS, and Ind AS. On the auditing front internal audit standards have also been prescribed. We have just been informed that CARO 2011 will replace the existing CARO 2003.

While we are on accounting and auditing standards, I believe that our profession needs to seriously introspect on the multiplicity of these standards and their relevance to the users of financial statements. We are rendering a service and the authentication function that we perform should have utility for the users of the financial statements. Undoubtedly the users of our services have different needs and it is virtually impossible to have tailor-made legislation or regulation to meet individual requirements. However while framing accounting standards this aspect of the matter must be considered. The financial statements that we authenticate must be comprehensible to the readers of those financial statements. In this connection, CARO 2011, which will probably prescribe different reporting requirements for different categories of companies, is most welcome. This may be a step in the right direction and different users will get the type of assurance they require and the type of information they desire.

When this issue reaches you, our country will be on the threshold of celebrating its 64th Independence Day. Despite the large number of problems that our country faces, one is absolutely certain that we have come a long way since 1947. There can be a debate on whether we will become an economic superpower or not, but it is certain that India has become relevant to all the nations of the world. For the last two decades, barring a couple of years we have witnessed sustained economic growth. I hope that we will be able to control the inflationary trends, particularly food inflation. As in every developing country, we face problems of disparity in distribution of wealth. The distribution of the fruits of economic growth is unequal.

It is this economic disparity that extremist elements exploit. The continuous terrorist attacks on our country in general and our city in particular are a cause for grave concern. As the commercial capital, the city of Mumbai will always be a target for those who want to create disharmony among us and disrupt our lives. The recent serial bomb blasts on 13th July 2011 are a sad reminder of this fact. We need to force our government to take all the necessary steps to prevent any such recurrence. As individuals we should remain vigilant.

Before I sign off, I appeal to all readers to give their feedback, on all the activities of the Society including this Journal. At the Society we strive for excellence. If we are informed of the areas of improvement it will help us. Remember, this is your Society and by informing us and making suggestions you will be helping yourself and your colleagues.

I take this opportunity to wish all readers a very happy and peaceful Independence Day. Jai Hind !

With warm regards,

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BCAJ Admin

ICAI News

(i) Empanelment to carry out circulation Audits of Publications

Audit Bureau of circulations which certifies figures of Member Publications desires to empanel firms of Chartered Accountants in the States of
(a) Assam & North Eastern States,
(b) Bihar,
(c) Chhatisgarh,
(d) Goa,
(e) Haryana,
(f) Himachal Pradesh,
(g) Madhya Pradesh,
(h) Punjab,
(i) Orissa,
(j) Uttaranchal and
(k) UP.

The criteria for empanelment and other details are given on page 691.

(ii) Tax Audit Reports

It is reported that according to the CBDT, in respect of financial year 2010-11, total number of Tax Audit Returns filed is about 16 lac. These tax audits were conducted by about 59000 audit firms. The data is further being processed with regard to fake membership numbers, members who have exceeded specified number (ceiling) of tax audit assignments, etc. In order to prevent misuse of membership numbers of tax auditors, it is proposed that, from next year, the uploading of tax audit reports along with digital signatures of auditors may be made mandatory. If members have any suggestions in this regard, the same may be forwarded to ICAI.

(iii) ICAI publications

(a) Compendium of Auditing Standards and Auditing Guidance Notes Vol. 1 and 2. (As on 1-10-2011)

(b) Guide to Audit of Complex Financial Instruments.

(d) Study on Manner of IFRS Implementation in EU and General Status of IFRS Implementation in Selected Countries. (Refer pages 787-788)

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BCAJ Admin

EAC Opinion

Accounting for leave salary laibility

Facts

(i) In the case of a public sector company the rules relating to the leave by employees are as under:

(a) The entitlement of Earned Leave (EL) is related to the number of years of service put in by the employee. The earned leave has two components viz. Encashable Leave (EEL) and Non-Encashable Leave (NEL).

(b) The company gives advance credit of leave in terms of EEL and NEL on the standard dates i.e., 25th June and 25th December.

(d) EL can be encashed at any time during the period of 300 days. NEL can be encashed at the time of retirement.

(e) There are similar Rules for Half-Pay Leave (HPL).

(ii) The accounting practice followed by the company in respect of Leave Liability is as under: Liability for encashable earned leave (EEL), nonencashable earned leave (NEL) and half-pay leave (HPL) is provided for in the books on accrual basis for the value of leave outstanding at the end of the year. According to the company, provision for half-pay leave is made for the total leave balance at the year end without restricting it to 480 half days (240 full days) per employee in line with the requirements of AS-15.

(iii) The Auditors were of the view that this was a long-term liability for the reasons that the past pattern indicates that the employees are unlikely to avail/encash the entire carried forward leave during the next twelve months and hence, the benefit would not be short-term. Accordingly, keeping in view of behavioural pattern of the employees, the leave benefit should be considered as long-term benefit and the provision should be made based on actuarial valuation.

Query

Based on the above, the company had sought the opinion of the Expert Advisory Committee of ICAI (EAC)

(a) whether the company’s view that ‘Leave Liability’ is a short-term liability is correct and

(b) if not, how the change in accounting treatment should be accounted in the books.

Opinion

After considering the various provisions of AS-15, the EAC has expressed the following opinion:

a) Short-term employee benefits are those benefits which fall due wholly within 12 months after the end of the period in which the employees render the related service. Therefore, the treatment of ‘Leave Liability’ as ‘short-term employee benefit’ as interpreted by the company is not correct.

(b) The change in the accounting treatment of Leave Liability from ‘short-term employee benefits’ to ‘other long-term employee benefits’ should be treated as ‘prior period item’. Accordingly, the nature and amount thereof should be included and disclosed in the profit and loss account for the period in which the error is revealed as provided in AS-5. (Refer pages 710-714 of C.A. Journal for November, 2011)

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BCAJ Admin

Code of ethics

The Ethical Standards Board of ICAI has considered some of the ethical issues which have been published in C.A. Journal of November, 2011, at pages 771-772. Some of these issues are as under:

(i) Issue: Whether an auditor is required to provide the client or other auditor of the same enterprise access to his audit working papers ? Working papers are the property of an auditor. An auditor is not required to provide the client access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors, except in case it is required by the regulatory norms.

(ii) Issue: Whether a joint auditor will be responsible for the work done by other joint auditor? Council direction under Clause (2) of Part I of the Second Schedule to the C.A. Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. However, on the other hand, all the joint auditors are jointly and severally responsible for the work which is not inter se divided among the auditors, and also for compliance of requirements of relevant statues.

(iii) Issue: Can a member in practice express his opinion on financial statements of any business or enterprises in which he, his firm or a partner in his firm has a substantial interest? As per Clause (4) of Part I of the Second Schedule to the C.A. Act, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a partner in his firm has substantial interest. The word ‘substantial interest’ is defined in the Resolution passed by the Council in pursuance to Regulation 190A of the CA Regulations (Please refer Appendix F to Code of Ethics — P. 345).

(iv) Issue: Whether a statutory auditor can accept the system audit of the same entity? The statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

(v) Issue: Can a Chartered Accountant receive his professional fees in advance party or in full? There is no bar in the C.A. Act or in the CA Regulations as well as the Code of Ethics in taking the fees in advance.

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BCAJ Admin

FROM THE PRESIDENT

Dear Valued Reader,

The new financial year began with a bang for India, as the Indian Cricket team romped home with the coveted World Cup in One Day International on 2nd April, 2011 at Wankhede Stadium, Mumbai. The entire nation plunged into frenzied celebrations, and why not, after all, history was repeated after 28 years. Several lessons can be learnt by all of us, especially CA students, by observing the way India won the game in the final match:

(i) The game is entirely a mind game. If you can control your nerves during crucial moments, you are sure to win. So dear students, keep your cool on the eve of and during the examinations;

(ii) Some ‘overs’ are bound to go maiden or low-scoring; Keep your spirit high, even when you feel low while studying at times and writing your examinations;

(iii) It is always better to score high in the first few ‘overs’ and keep the scoreboard ticking to keep the tension away, lest the asking rate goes up; similarly, keep a good pace of study from the beginning and while writing answers, maintain an equally good pace from the beginning;

(iv) Do not panic even when there are googlies and/or some early blows (as it happened when both Sehwag and Sachin got out on low scores); it happens even while writing exams, one or two initial papers or answers may misfire, but you should not lose your nerve on that account. Be like a river which always flows in one direction and never in the reverse.

(v) Do not give up until the last ball is bowled. Many exciting matches, including the first World Cup T20 by India, were won on the last ball. It may happen that your last answer and/or paper may get you through the exams, provided you stay on the field.

Eradication of Corruption:

The corrupt politicians looked askance when Anna Hazare began his fast unto the death from 5th April 2011 in support of the Jan Lokpal Bill which is to be enacted to strengthen the fight against corruption. As his fast progressed, support to Hazare from all sections of civil society, particularly the youth, kept on increasing. As the fight against corruption was turning into a nationwide uprising, Government acquiesced. A Committee comprising Members of Parliament and from civil society has been formed to draft a Bill, for passing a law against corrupt people in power which has eluded us for the past 42 years. Not all politicians are interested in enacting a law which could incriminate the political class as such.

The significant aspect of this agitation is participation by young Indians, the aam aadmi, who are simply fed up with corruption in their daily lives.

Protest marches and support emerging from every nook and corner of the country to Hazare resembled like the movement against corruption started by Loknayak Jai Prakash Narayan in the 70’s which provoked Mrs. Indira Gandhi to declare a national emergency. The government this time was wiser and swift to act before the situation got out of control. As always, there are diametrically opposite views in respect of this awesome uprising. The fact however remains that people of India are tired of rampant corruption and the plethora of scams reported in the press, day in and day out. People watched, helplessly and hopelessly, the spectacle of their being looted by powerful politicians and their cronies and they found an outlet in this agitation to voice their frustration. Evidently, they found the idea of punishing politicians exciting enough to come out in the open against the cancer of corruption in public life.

Chartered Accountants, both as taxpayers and tax practitioners are worst hit by the menace of corruption. We, therefore, took the lead to support Anna Hazare. An appeal was made to members to support the cause. I sincerely thank all those who rallied in response there to.

Corporate Membership:
BCAS made history on 13th April 2011 when its General Body at the Extraordinary General Meeting passed a resolution providing for Corporate Membership. Any Company or Limited Liability Partnership (except CA firms in LLP form) can nominate two or more CAs, being its directors/employees as Associate Members of BCAS. A formal launch of Corporate Membership is on the anvil.

History at Midnight:
Similarly, the Government of Maharashtra created history at midnight on Wednesday 20th April 2011 by unanimously passing a bill providing fifty percent reservation for women in the Panchayats and Zilla Parishads.

India of course is full of paradoxes. On the one hand, women are worshipped as Goddesses; on the other, they are harassed and tortured to death by in-laws. Domestic violence perhaps would rank the highest amongst all kinds of human rights violations in this great, ancient country. In stark contrast, passing of women’s reservation bill assumes significance. It is a general perception that women have better understanding of social issues than men and therefore fifty per cent reservation will give them an opportunity to deal with these issues in an effective manner. Let us hope and pray that with the presence of women at the grassroot level, our politicians also would learn some decency in that they would measure their language and behave as becoming persons with a head on their shoulders.

Invitation to young members to take active part in BCAS activities:
Time mellows and imparts maturity. Naturally, persons with seniority and/or grey heads occupy seats of power to guide institutions. Time is never stagnant. And so, the old order need to yield place to the new crop of would be saviors/grey heads and thus the cycle goes on without let up.

I make this pointed reference here for the reason that young professionals are future leaders and they must come forward purposefully to shoulder the responsibilities of BCAS. New ideas from the young and maturity on the part of their seniors would blend well to carry forward the institution in furtherance of the laudable objectives for which the BCAS was founded.

Come one, come all. This is a clarion call to all those who can contribute their mite to make BCAS stronger, healthier and make it as a tool or vehicle to promote the common good of the profession and the citizens.

Very soon the Society will undertake the activity of formation of the Core group for 2011-12 and therefore, I invite both young and senior members to come forward and volunteer for participating in multifarious activities of the Society.

I wish you all a happy vacation with your loved ones.

With warm regards,
Mayur B. Nayak

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BCAJ Admin

Lecture Meetings

Taxation of Shares & Securities — Current Developments

A lecture meeting on the subject of ‘Taxation of Shares & Securities — Current Developments’ was addressed by Pradip Kapasi, Chartered Accountant and Past President of the Society on 3rd August 2011 at the Walchand Hirachand Hall, IMC.

Other programmes

Visit to Dharampur — Kaprada — Bilpudi — Vansada for Tree Plantation and Development Activities

Human Resources Committee of the Society organised a visit to Dharampur — Kaprada — Bilpudi — Vansada in Dist. Valsad and Dist. Navasari, Gujarat for tree plantation and development activities on 19th and 20th June 2011.

The tree plantation was carried out in memory of late Hiten C. Shah, a very active member of the Society, at village Matuniya. This village had been adopted by late Hiten C. Shah and the group pledged to continue the good work done by him. Chartered Accountant; and Introduction to International Taxation by Mayur Nayak, Chartered Accountant.

Students’ Annual Day Celebrations

The Students’ Annual Day now renamed as “The Jal E. Dastur Students’ Annual Day” in loving memory of Jal E. Dastur was celebrated on 6th August 2011 at Direct I-Plex, Andheri. Over 150 students enthusiastically participated in the programme. The students were addressed by Padmashri T. N. Manoharan on the topic ‘Design to Win’. This was followed by hotly contested elocution and quiz competitions.

The winners at the competitions were:

Elocution competition
1. Rutu Shah
2. Ashish Arvind Shukla

Quiz competition

1. Ajay Joshi and Janam Oza
2. Hrushabh Pai and Sagar Kothari Sohrab E. Dastur, Senior Advocate was present throughout the programme and blessed the students.

International Tax & Finance Conference 2011

The 15th International Tax & Finance Conference 2011 was organised by the International Taxation Committee of the Society from 12th August 2011 to 15th August 2011 at the very vast and scenic campus of the Infosys Leadership Institute at Mysore. The papers for group discussions were: ‘Qualification and Characterisation Issues’ by P. V. Srinivasan, Chartered Accountant; ‘General Anti-avoidance Rules’ by T. P. Ostwal, Chartered Accountant; and ‘Case Studies on International Taxation’ by Pranav Sayta, Chartered Accountant. The following technical papers were also presented : ‘Inbound Investment — Private Equity Fund, VCF, FII — Structuring, Regulatory and Tax Aspects’ by Shefali Goradia, Chartered Accountant; and ‘Cross-border Service-tax Issues’ by K. S. Ravishankar, Advocate.

A panel discussion on ‘Case Studies on International Taxation’ was presented by H. Padamchand Khincha, Chartered Accountant and Chythanya K. K., Advocate.

At the Certificate Distribution Programme jointly organised by BCAS and H.R. College of Commerce & Economics, Dr. (Mrs.) Indu Sahani, Principal was felicitated on her appointment as a ‘Member of University Grant Commission’, New Delhi.

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BCAJ Admin

FROM THE PRESIDENT

Dear Valued Reader,

“If you want to make God laugh, tell him about your future plans” – Anonymus.

Indeed, man proposes, God disposes.

The way tsunami struck Japan on 11th March, 2011, and the consequent devastation in a very short span of time has proved the supremacy of nature over mankind. Thousands of people died and properties worth billions of dollars destroyed. What followed turned out to be one of the worst catastrophes in human history, perhaps next only to the manmade nuclear holocaust in the last century. But kudos to their spirit and resilience, the Japanese are facing this tragedy simply bravely – a lesson to be learnt by India and the whole world.

A tsunami like provision in the Finance Bill 2011 – 12 relates to “Point of Service Tax Rules” providing payment of service tax on accrual basis, rather than the existing system of cash basis (i.e. Payment of service tax on receipt basis), has been deferred for the time being. BCAS, in coordination with various other similar organisations, lodged a strong protest against the proposed changes, which coupled with provisions of prosecution on failure to raise invoices within 14 days of rendering services, would have created chaos amongst the professional fraternity. We appealed to the Finance Minister as well as the Prime Minister to have a relook. And we also had an opportunity to meet personally the Chairman CBEC to explain our concern in this regard.

The proposed Rules, for the time being, have been deferred till 30th June 2011 and would be introduced with effect from 1st July 2011 after certain modifications. BCAS, as also other professional bodies (including Lawyers, Architects, Tax Practitioners etc.), have requested that professionals be allowed to continue with the cash system for discharging service tax liability as hitherto. And the professionals may be allowed to rise “Tax Invoice” at the time of receipt of payments, as in vogue in UK and other western countries. I heartily thank all those who extended whole-hearted support to BCAS in this behalf and appeal to them to continue with our joint efforts until fair and rational provisions are put in place.

It is rather unfortunate that, as in the past several years, the Union Budget 2011-12 was passed by the Lok Sabha without any discussion. The opposition walked out of the House capitalising on “cash-for-vote” revelation, by the Wiki leaks. When I read through the memorandum in the Finance Bill explaining the amendments (especially those with retrospective effect), which states that the “amendment is sought to carry out the intention of the Parliament, I wondered as to whose intention it is really! For, when Finance Bills are passed by the Parliament, without any debate or even going through the rationale of a provision, how can one establish Parliament’s intention? Theoretically, it may be that the Parliament wanted a particular change made; but in effect, bureaucrats run the country, as most members of the Parliament have neither the time nor the inclination nor are they equipped to understand the legislative process and the concomitant implications. It is a sorry state of affairs, in that heavier responsibility is cast on professionals, trade and commerce to remain vigilant so as to protect the interests of the people and tax paying public. Indeed, vigilance is the price of liberty. I am reminded of the BCAS logo which says:”na bhayam chAsthi jAgrathaha”, meaning one is vigil need have no fear.

The biggest roadblock to India’s development is the “Reservation Policy”, based on caste, creed and religion. It divides the populace and makes for communal disharmony. Today, we find reservations in almost every walk of life, be it education, employment, politics and so on. Reservations, if any, should be based on economic criteria only, regardless of caste, creed and religion. Reservation in education has led to brain drain for decades. Recently Jats are demanding caste-based reservation, taking the Government to ransom. The Gurjars of Rajasthan secured reservation resorting to violent protests and disrupting normal life. It is high time that the Indian Constitution is amended to bury the cancerous “Reservation Policy” once and for all. Verily, the road to hell is paved with good intentions!

I congratulate CA G. Ramaswamy and CA Jaydeep Shah for taking over the reins of the ICAI as the President and the Vice-president respectively for the year 2011-12. I compliment CA Srinivas Joshi and CA Bhailal Patel for taking over as the Chairman and Vice-Chairman of WIRC of ICAI respectively. The ICAI President, CA G. Ramaswamy, has unveiled his detailed and ambitious plan of action encompassing diverse areas of the profession such as branding of the profession, Members in practice, industry, students, international initiatives etc. We extend our whole hearted cooperation in his endeavour not only in enhancing the image of the profession but also serving CAs across the globe.

A lecture meeting on “currency wars” addressed by CA Rashmin Sanghvi in February 2011 elicited very good response from members, in addition to generating a lot of interest in the arena of international economics and politics. Most recent wars were fought for different reasons though labelled “Justice and Peace”. Control of “oil” was one of the prime reasons for these wars. The recent attack on Libya by NATO is also viewed as such. The bigger crisis looming large in the horizon is scarcity of water. Indeed, “Water Crisis” could hit planet earth much sooner than the apprehended “oil crisis”. There is a dearth of potable water in the Middle East. Verily, water has assumed gigantic dimension. No wonder then that the World celebrated International Water Day on 22nd March 2011. The water crisis would be severer in overpopulated countries like India and I shudder to think about it, in the light of our gross neglect to tackle the emerging crisis. Well, sooner we realise, the better for all of us.

In my message for the month of February 2011, I referred to difficulties experienced by CA students in their exams and results. In order to help them prepare properly for their exams, CA. T. N. Manoharan, addressed them live through a webcast on 14th March 2011 on “How to prepare and write for CA Examinations”. The said video is now available for watch freely on the bcasonline.tv. This has already been watched by more than 3000 students/members. Along with this, we have put up the video of Anupam Kher’s motivational talk on “Power Within” delivered on 16th August 2010.

We are embarking on a new Financial Year. The past Financial Year will be remembered as the year of inflation, games and scams.

Let us pray that may the new Financial Year usher in peace and prosperity for one and all.

Regards,
Mayur Nayak

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BCAJ Admin

Laws and Business

Fraudulent Transfers

Introduction

When a person has a debt and is not paying, then the creditor can approach the Court for an attachment of debtor’s property. If the debtor were to transfer his property with an intent to defraud the creditor, then the creditor would be left without any source to recover his debts. This act of transferring the property on the part of the debtor is known as ‘fraudulent transfer’. Various laws have dealt with this subject of fraudulent transfer by giving it different terminologies, such as voluntary transfer, private alienation, etc. Let us look at some of the important laws dealing with the subject of fraudulent transfer. In this age where several agencies, such as the Enforcement Directorate, are contemplating attaching properties of businessmen/companies the subject of fraudulent transfers assumes importance.

Meaning of fraud
Since we are examining the concept of a fraudulent transfer, let us first understand the meaning of the term fraud. U/s.25 of the Indian Penal Code, 1860, a person is said to do a thing fraudulently if he does so with an intent to defraud and not otherwise. Hence, to prove a charge of fraud, mens rea or a culpable state of mind is a must. The term defraud has not been defined in the Code. However, its general meaning presupposes two elements, deceit or intention to deceive and an injury to someone. The Supreme Court in the case of Dr. Vimla v. Delhi Administration, 1963 SCR Supl. (2) 585, has held as follows:

“. . . . . . the two adverbs, ‘dishonestly’ and ‘fraudulently’ are used alternatively, indicating thereby that one excludes the other. That means they are not tautological and must be given different meanings . . . . . . . . The word ‘defraud’ includes an element of deceit. Deceit is not an ingredient of the definition of the word ‘dishonestly’, while it is an important ingredient of the definition of the word ‘fraudulently’. The former involves a pecuniary or economic gain or loss, while the latter by construction excludes that element. Further the juxtaposition of the two expressions ‘dishonestly’ and ‘fraudulently’ used in the various sections of the Code indicates their close affinity and therefore the definition of one may give colour to the other. To illustrate, in the definition of ‘dishonestly’, wrongful gain or wrongful loss is necessary enough. So too, if the expression ‘fraudulently’ were to be held to involve the element of injury to the person or persons deceived, it would be reasonable to assume that the injury should be something other than pecuniary or economic loss. Though almost always an advantage to one causes loss to another and vice versa, it need not necessarily be so. Should we hold that the concept of ‘fraud’ would include not only deceit but also some injury to the person deceived, it would be appropriate to hold by analogy drawn from the definition of ‘dishonestly’ that to satisfy the definition of ‘fraudulently’ it would be enough if there was a non-economic advantage to the deceiver or a non-economic loss to the deceived. Both need not co-exist. . . . . . ”

In S. P. Changalvaraya Naidu v. Jagannath, 1994 (1) SCC 1, it was held that a fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss. It is a cheating intended to get an advantage. Fraud as is well known vitiates every solemn act. Fraud and justice never dwell together. Fraud is a conduct either by letter or words, which includes the other person or authority to take a definite determinative stand as a response to the conduct of the former either by word or letter. It is also well settled that misrepresentation itself amounts to fraud. Indeed, innocent misrepresentation may also give reason to claim relief against fraud. A fraudulent misrepresentation is called deceit and consists in leading a man into damage by willfully or recklessly causing him to believe and act on falsehood. It is a fraud in law if a party makes representations, which he knows to be false, and injury inures therefrom, although the motive from which the representations proceeded may not have been bad. An act of fraud on court is always viewed seriously. A collusion or conspiracy with a view to deprive the rights of the others in relation to a property would render the transaction void ab initio. Fraud and deception are synonymous.

Fraud is a conduct either by letter or word, which induces the other person or authority to take a definite determinative stand as a response to the conduct of the former either by word or letter — State of Andhra Pradesh v. T. Suryachandra Rao, Appeal (Civil) 4461 of 2005 (SC).

The Supreme Court in Ram Chandra Singh v. Savitri Devi, 2003 (8) SCC 319, held that it is well settled that misrepresentation itself amounts to fraud. Indeed, innocent misrepresentation may also give reason to claim relief against fraud. A fraudulent misrepresentation is called deceit and consists in leading a man into damage by willfully or recklessly causing him to believe and act on falsehood. It is a fraud in law if a party makes representations which he knows to be false, and injury ensues from the same, although the motive from which the representations proceeded may not have been bad. In an ‘action of deceit’ the plaintiff must prove actual fraud. Fraud is proved when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, without caring whether it be true or false.

In Ram Preeti Yadav v. U.P. Board of High School, JT 2003 (Supp. 1) SC 25 it was held that fraud is a conduct either by letter or word, which induces the other person, or authority to take a definite determinative stand as a response to the conduct of former either by word or letter. Although negligence is not fraud, but it can be evidence on fraud.

Civil Procedure Code The Civil Procedure Code, 1908 (‘the Code’) deals with the provisions relating to a Court decree and its execution. In case of a decree from a Court, the Court may require any person to pay any sum to the decree holder (or the plaintiff). In case the defendant fails to do so, the Court can, in execution of its decree, attach the movable and immovable properties of the defendant and recover the amount due by disposal of these assets. According to the CPC, an attachment prevents a private-transfer and no person can benefit from a subsequent transfer of the attached property.

Section 64 of the Code provides for such private alienation. Once a property has been attached, any private alienation of such property by private transfer or delivery and any payment to the judgment debtor of any debt, dividend, etc., contrary to such attachment shall be void as against all claims enforceable under the attachment. Section 64 applies whether the property stands in the name of the judgment debtor or any other person who is a name lender, i.e., benami property — Pradyut Shah, AIR 1979 Bom. 166. However, if the transfer is by an operation of law or pursuant to a Court order, then section 64 does not apply. For instance, a sale consequent to a later attachment would prevail even if there was an earlier attachment on the sale date — Rukmani v. Ram AIR, 1942 Nag. 36. It only covers private transfers, such as, voluntary sales, gifts, mortgages. It may be noted that the private transfers are not void ab initio, but only void as against all claims enforceable under the attachment. There is a difference of opinion amongst various Courts as to whether or not any private transfer after attachment but in pursuance of a contract of sale executed prior to attachment is covered by section 64. Various decisions have held that in order that an attachment renders a subsequent alienation as void u/s.64, the attachment must follow the due process laid down under the Code, e.g., Rules 41 to 57 of Order 21.

Indian Penal Code, 1860

Under the Indian Penal Code (IPC) if the following four conditions are satisfied:

(a) the accused removes, conceals, delivers the property or transfers it or causes to transfer it to someone;

(b) the above is done without adequate consideration;

(c) the intention of the accused was to prevent the distribution of that property among his creditors or some other person’s creditors; and

(d) he must act in a dishonest or fraudulent manner then the accused shall be punished with imprisonment of a term up to 2 years and/or fine.

Similarly, if a person fraudulently or dishonestly prevents any debt which is due to him from being made available to him for the payment of his debts, then the person shall be punished with imprisonment of a term up to 2 years and/ or fine. Thus, this provision seeks to prevent debtors from dodging their dues by preventing receipts from accruing to themselves.

A dishonest or fraudulent execution of an instrument which purports to transfer/charge any property and which contains any false statement with respect to the consideration for such transfer/ charge or to the beneficiaries of such transfer/charge is punishable with imprisonment of a term up to 2 years and/or fine. Benami conveyances would be covered within the scope of this provision.

A person who dishonestly or fraudulently conceals or removes property belonging to himself/ some other person or dishonestly releases any demand or claim to which he is entitled shall be punished with imprisonment of a term up to 2 years and/or fine.

We have already examined the meaning of the term fraud. Let us now see the meaning of the term ‘dishonestly’. Section 24 of the IPC defines ‘dishonesty’ as doing anything with the intention of causing wrongful gain to one person or wrongful loss to another person. Wrongful gain is defined as the gain by unlawful means of property to which the person gaining is not legally entitled. Conversely, wrongful loss means the loss by unlawful means of property to which the person losing it is legally entitled. A person wrongfully gains when he retains/acquires wrongfully. A person loses wrongfully when he is wrongfully kept out or deprived of property. Thus, in order to attract a charge of dishonesty, wrongful gain or loss is a must.

Presidency-Towns Insolvency Act

The Presidency-Towns Insolvency Act, 1909 deals with the law relating to insolvency as applicable in the cities of Mumbai, Chennai and Kolkata. Section 56 of this Act enunciates the doctrine of Fraudulent Preference. Every transfer by a debtor of his property, every payment made, every obligation incurred and every judicial proceeding taken or suffered by him is fraudulent and void against the Official Assignee, if all the following conditions are satisfied:

(i) at the time of the transaction, the debtor was unable to pay his debts

(ii) the transfer must be in favour of a creditor

(iii) the transfer must be with a view to give a preference to that creditor over other creditors

(iv) the creditor has in fact been preferred over other creditors

(v) the debtor must have entered into the transaction without any compulsion

(vi) the debtor must be adjudged insolvent on a petition presented within 3 months after the date of the transaction.

However, the rights of a bona fide person acquiring a title in good faith and for valuable consideration are not affected by the above doctrine.

Section 57 of the Act provides for the protection of bona fide transactions. Subject to the provisions relating to fraudulent preferences, in case of an insolvency, the following would not be affected:

(i) any payment by the insolvent to any of his creditors

(ii) any payment or delivery to the insolvent

(iii) any transfer for valuable consideration; or

(iv) any contract or dealing by or with the insolvent for valuable consideration.

However, the transaction should take place before the date of the order of adjudication and that person with whom such transaction takes place does not have notice of any insolvency petition.

Transfer of Property Act

The Transfer of Property Act, 1882 also deals with the concept of a fraudulent transfer. According to section 53, every transfer of immovable property made with the intent of defeating or defrauding the creditors of the transferor shall be voidable at the option of any creditor who is defeated or delayed. Thus, the following important conditions must be satisfied:

(i) The transfer must be of an immovable property. Unlike the previous two Acts, this section only applies to immovable property. What is an immovable property would be a matter of fact and unless it is a clear-cut case of classic land and building, it would have to be ascertained on a case-by-case basis.

(ii) Section 5 of this Act defines a transfer of property to mean any act by which a living person conveys present or future property to one or more other living persons. The expression living person has been defined to include a company, AOP and BOI.

(iii) The transfer must be made with an intention to delay or defraud one’s creditors. Hence, mens rea or a culpable state of mind on the part of the transferor must be demonstrated. Unless the same is proved, section 53 would not apply. Further, if the intention is to give preference to one creditor over another, then this section would not apply — Sharp v. Jackson, (1899) AC 19. The transfer must be to delay the creditors.

(iv) The transfer is not void ab initio. It only becomes voidable at the creditor’s option. If the creditor sues to avoid the transfer, then he must do so on behalf of all the creditors. The onus of proving that the transfer was made with an intent to delay or defeat creditors lies on the creditors — Daulat Ram v. Ghulam Fatima, (1926) 89 IC 953. However, once the fraud is established, then the onus of proving good faith shifts to the debtor — Amarchand v. Gokul, (1903) 5 Bom LR 142.

However, section 53 does not impair the rights of a buyer in good faith and for consideration. Hence, if a buyer has purchased immovable property without notice of the intention on the part of the debtor to delay his creditors and he has paid good consideration for the same, then his title is not impacted by section 53. This section is subject to the law of insolvency.

Companies Act

U/s.531 of the Companies Act, 1956, any transfer of property, whether movable or immovable, delivery of goods, payment, execution, etc., taken or done by or against a company within 6 months before the commencement of winding-up of a company, is invalid and is treated as a fraudulent preference of the creditors if the same would, in the case of an individual’s insolvency petition, be deemed to be a fraudulent preference. The preference is fraudulent when the substantial and dominant motive was to prefer one creditor or particular creditors — Mohandas v. Tikamdas, (1917) 37 IC 250. It is important to prove that both the transferor and transferee had a common intent to defraud creditors and if the transaction was made in good faith for valuable consideration then the same is not void — Official Liquidator v. MD, AP State Financial Corp., 115 Comp. Cases 284 (AP).

Similarly u/s.531A, such transfer made by a company is void against the liquidator if it is made within one year before the presentation of a winding- up petition. This however, excludes a transfer in its ordinary course of business or in favour of a purchaser in good faith and for valuable consideration. The person who has been fraudulently preferred would be subject to the same rights and liabilities as if he had personally agreed to become a surety for the company’s debt. The extent of his liability is equal to lesser of the mortgage or charge on the property or the value of his interest. The value of his interest is to be determined as on the date of the transaction which constitutes the fraudulent preference as if the interest was free of all encumbrances other than those to which the mortgage or charge for the company’s debt was then subject. This section even applies to transfers made by book entries — Jayanti Bai v. Popular Bank Ltd., 36 Comp. Cases (Ker.).

Income-tax Act

Section 281 of the Act provides that where during the pendency of any tax proceedings or after the completion of the same but before the service of a tax recovery notice, any assessee creates a charge or transfers any of his assets in favour of any other person, then such a charge/transfer would be void as against any tax claim. However, this section does not apply where the transfer is made for adequate consideration and without notice of any previous proceedings/tax demand or with the prior approval of the Assessing Officer. This section applies to any asset being land, building, machinery, plant, securities, bank deposits, provided the same are not stock-in-trade of the assessee. The Bombay High Court has, in the case of Twinstar Holdings Ltd. 260 ITR 6 (Bom.) held that where shares held as investment were converted into stock-in-trade and the only purpose of such conversion was to avoid attachment of the shares by the Department to recover tax, the transfer was void.

Conclusion

Although the legal position appears quiet straight-forward on this issue, its practical implementation is a different ballgame altogether. Whether or not a particular transfer is a fraudulent transfer is a matter of fact, circumstances and evidence. One would have to make a deep study of the evidence before arriving at any conclusion. For instance, whether a settlement by a person on a trust amounts to a fraudulent transfer or is an act of valid asset protection, needs to be carefully scrutinised.

BCAJ Admin

ICAI and its members

1. Code of ethics:

The Ethical Standards Board of ICAI has considered some ethical issues which are published in the C.A. Journal of April, 2011, at page 1472. Some of these issues are as under:

(i) Issue: Whether a member in practice is permitted to undertake the management of NRI funds?

Response: A member in practice is not permitted to undertake such services, as it is not covered under ‘Management Consultancy and other Services’ specified by the Council.

(ii) Issue: Can a chartered accountant in practice provide ‘Portfolio Management Services’?

Response: As the ‘Management Consultancy and other Services’ expressly bars the activities of broking, underwriting and portfolio management, this is not permitted.

(iii) Issue: Can a chartered accountant in practice work as a ‘collection agent’?

Response: A chartered accountant in practice cannot work as a ‘collection agent’, as the ‘Management Consultancy and other Services’ specified by the Council, do not permit such engagement.

(iv) Issue: Whether the auditor of a Subsidiary Company can be a Director of its Holding Company?

Response: The auditor of a Subsidiary Company cannot be a Director of its Holding Company, as it will affect the independence of the auditor.

(v) Issue: Whether a member can take up AMFI (Association of Mutual Funds in India) Course and become a Member of the Association?

Response: Members from industry as well as from practice can pursue the AMFI Course. However, as to the question whether a member can be registered with it so as to take the role of Financial Intermediary, it has been decided that members in Industry, not in practice, can obtain the membership by registering them with a mutual fund/ Association, whereas members in practice (whether holding full-time COP or part-time COP) cannot do so.

(vi) Issue: Whether the permission of Council is necessary for a chartered accountant in practice to engage in share trading?

Response: Engagement by a member, in practice, in the business of buying and selling shares amounts to be ‘any business’ within the meaning of Clause (11) of Part-I of the First Schedule to the CA Act and hence prior permission of the Council is required.

(vii) Issue: Whether concurrent auditor of a bank can also undertake quarterly review of the same bank?

Response: Concurrent audit and the assignment of quarterly review of the same entity cannot be taken simultaneously, as the concurrent audit being a internal audit and the quarterly review being a kind of statutory audit undertaken simultaneously are prohibited under the provisions of ‘Guidance Note on Independence of Auditors’.

(viii) Issue: Whether a firm of Chartered Accountants can print special words ‘celebrating 75 years in the profession’ on the letterheads and envelopes?

Response: Publishing a book by a firm containing its history for the purpose of distributing to clients, associates, friends and well-wishers and printing of the words ‘Celebrating 75 years in the profession’ on special letterheads and envelopes will lead to solicitation of professional work, hence not permissible as per the provisions of Clauses (6) and (7) of Part of the First Schedule to the Chartered Accountants Act, 1949.

2. Revised Schedule VI of the Companies Act, 1956:

The Ministry of Corporate Affairs has notified a Revised Schedule VI of the Companies Act, 1956. This Revised Schedule VI is applicable for the Balance Sheet and Profit & Loss Statement to be prepared for the financial year commencing on or after 1-4- 2011. The horizontal form of old Schedule VI is now withdrawn. Now, all companies will have to prepare the Balance Sheet and Profit & Loss Statement in the vertical form. Some of the general instructions are as under.

(i) The disclosure requirements specified in Part I and Part II of this Schedule are in addition to and not in substitution of the disclosure requirements specified in the accounting standards prescribed under the Companies Act, 1956. Additional disclosures specified in the accounting standards shall be made in the notes to accounts or by way of additional statement, unless required to be disclosed on the face of the financial statements. Similarly, all other disclosures as required by the Companies Act shall be made in the notes to accounts in addition to the requirements set out in this Schedule.

(ii) Notes to accounts shall contain information in addition to that presented in the financial statements and shall provide where required (a) narrative descriptions or disaggregations of items recognised in those statements and (b) Information about items that do not qualify for recognition in those statements.

(iii) For the purpose of this Schedule, the terms used herein shall be as per the applicable accounting standards.

The above instructions will show the importance of accounting standards in the preparation and presentation of financial statements after the new Schedule VI comes into operation.

3. Opinion of EAC

Disclosures in segment report under consolidated financial statements:

Facts:
A company is engaged, through its subsidiaries, joint ventures and associates, in generation of power, development of expressways, airport infrastructure facilities in special economic zones, etc. It is a public company and is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

The company has about 100 subsidiaries/associates/ JVs. It prepares its stand-alone financial statements and also consolidated financial statements. The consolidated financial statements (CFS) include the accounts of the company (stand-alone) and its subsidiaries, associates and joint ventures. According to the company, the CFS are prepared in accordance with historical cost convention and comply in all material respects with the applicable accounting principles in India, the notified accounting standards and other relevant provisions of the Companies Act.

The company believes that under CFS, segment report of the company and its subsidiaries, associates and joint ventures is prepared considering business segment as the primary segment and geographic segment as the secondary segment. The company has identified the business segments as power, roads, airport, engineering, procurement & construction (EPC) and others. Others include the operations like real estate development, investment company which do not qualify for separate disclosure as segments as per the threshold limit prescribed under Accounting Standard (AS) 17, ‘Segment Reporting’.

According to the company, each of the SPVs prepares its stand-alone annual accounts and has specifically identifiable timing differences for the computation of deferred taxes and specific allowances and disallowances for the computation of current tax. Also, each of the SPVs is individually discharging its tax liability and the books of account of each of these entities also carries the tax assets/provisions (net) distinctly. Hence, for the preparation of consolidated financial statements, the company is of the view that the tax assets/ expenses are part of the respective segments only, as the same are distinctly identifiable and directly attributable to those respective sectors/ segments. The company has prepared the consolidated segment report accordingly by classifying the tax assets/expenses under each of the respective segments. However, the same is not acceptable to the auditors who are of the view that the same should be disclosed as an unallocated items in segment report included in consolidated accounts. The auditors are also of the opinion that interest expenses relating to loans borrowed by the SPVs for their projects, overdrafts and other operating liabilities including loans identi

BCAJ Admin

Direct Taxes

DTAA between India and Singapore amended — Notification No. 47/2011, dated 1-9-2011.

DTAA between India and Taipei notified — Notification No. 48/2011, dated 2-9-2011.

Procedure for regulating refund of excess amount of TDS deducted and/or paid — Circular No. 6/2011, dated 24-8-2011.

The CBDT vide Circular No. 2/2011, dated 27-4-2011 had notified the procedure to claim excess amount of TDS deducted/paid from the Assessing Officer (TDS) wherein a time limit of two years from the end of the financial year in which such tax was deducted was laid down. This condition is relaxed for the refund claims pertaining to the period up to 31-3-2009 which may now be submitted to the Assessing Officer (TDS) up to 31-12-2012.

Long-Term Infrastructure Bonds notified — Notification No. 50/2011, dated 9-9-2011.

For the purpose of section 80CCF, CBDT has notified conditions to qualify as Long-Term Infrastructure Bonds, namely:

They shall be issued by IFCI, LIC, IDFC, IIFC and NBFC as classified by RBI as Infrastructure Finance Company during financial year 2011- 2012.
The volume of issuance would be limited to 25% of the additional infrastructure investment (as specified) made by the issuer company during financial year 2011-2012.
Tenure of the Bonds would be ten years with a lock-in period of 5 years. Post that the investor would have the option to sell in the secondary market or opt for buyback scheme as mentioned in the offer document at the time of issue by the issuer. Loan, lien, etc. available post lock-in period.

PAN submission during investment is mandatory.

The yields and the end use of the proceeds have been specified.

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BCAJ Admin

ICAI and its members

1. Code of ethics:

Ethical Standards Board of ICAI has considered some ethical issues which are published in the C.A. Journal of March, 2011 at P. 1344. Some of the these issues are as under.

(i) Issue: Can a Chartered Accountant in practice share his fees with the Government in respect of Government Audit?

Response: In respect of the Government Audit, the Institute has come across certain Circulars/Orders issued by the Registrar of various State Co-operative Societies wherein it has been mentioned that certain amount of audit fee is payable to the concerned State Government and the auditor has to deposit a percentage of his audit fee in the State Treasury by a prescribed challan within a prescribed time of the receipt of the audit fee. In view of the above, the Council considered the issue and while noting that the Government is asking auditors to deposit such percentage of their audit fee for recovering the administrative and other expenses incurred in the process, the Council decided that as such there is no bar in the Code of Ethics to accept such a assignment wherein a percentage of professional fees is deducted by the Government to meet the administrative and other expenditure.

(ii) Issue: Can a Chartered Accountant in practice use/fix a monogram of the Institute on any column/wall located inside the office or on professional documents ?

Response : In view of the directions under Clause (7) of Part I or the First Schedule to the CA Act, a Chartered Accountant in practice is not permitted to use/fix a monogram of the Institute on any column/wall located inside the office or on any professional document.

(iii) Issue: Whether a member in practice is allowed to become a whole-time director of a company?

Response: A member in practice may become a Managing Director or a whole-time Director of a body corporate within the meaning of the Companies Act, 1956, subject to guidelines of corporate practice. However, w.e.f. 1-4-2005, he is not entitled to do attest functions.

(iv) Issue: Can a Chartered Accountant working in a CA firm hold CoP?

Response: A Chartered Accountant working in a C.A. firm can hold CoP. He is not entitled to do any attest function.

2. Accounting for rescheduling of lease rentals:

Facts:
A non-listed company (Company) is a subsidiary of a listed public company. It is an NBFC registered with the RBI. The company has a network of branches over a large part of India to carry on its business. Hence, it takes on lease various properties for its branches. The company is not in the business of leasing and renting.

The company has entered into a lease agreement which has the following main features:

(i) The lease agreement is for a period of nine years.

(ii) The rent for the first three years is at market rate on the date of lease agreement and has an escalation clause applicable after every three years.

(iii) The lessee has the option to exit from the agreement by giving three months’ notice.

The company has stated that in current scenario, the real estate rates in India as well as abroad have undergone various changes due to global financial meltdown and the fall in the equity markets. The property rates have gone down substantially in the range of 30% to 40% and are expected to go down further. Consequently, the rent agreed initially has turned to be substantially high with respect to the current circumstances. The company has been successful in renegotiating the lease rentals of its premises downwards. The company has accounted for lease rentals since the inception of the lease on straightline basis with respect of original lease terms. The company has also stated that in its case, the lease term would be the entire nine-year period as the entity has already decided the same at inception.

Further, the company has also stated that in current scenario, since it has been able to successfully renegotiate the rent, it can be reasonably assumed that the rent actually paid by it reflects the benefit that accrues to the entity and accordingly, the rents actually paid should be debited as expense to the profit and loss account. Further, the company feels that the current scenario is such that the terms in the lease deed have a very high probability of being renegotiated in future. Thus, in view of the company the aforesaid agreed rentals in the agreement are likely to be renegotiated as a further fall is expected.

Query: On these facts, the company has sought the opinion of the Expert Advisory Committee (EAC), whether the principle of recognising lease rentals over the lease term on straight-line method is correct ? and whether the monthly rental should be accounted for at the value of actual lease rent paid in such a case.

EAC opinion: The basic issue raised in the query relates to accounting for lease rentals in the case of operating lease. After considering paragraph 23 of AS-19 the EAC is of the view that as per the principles of AS-19 any departure from the straight-line basis of recognisation of lease expenses under an operating lease must reflect the time pattern of the user’s benefit and therefore it should be considered from any angle of use of the leased asset in physical terms, rather than the benefit derived from the angle of market rate of lease property. Since the leased property in the instant case would be used by the lessee throughout the lease term on a consistent basis, even though the lease rentals have been reduced due to economic slow-down, the Committee is of the view that the lease rent should be recognised on a straight-line basis.

Hence, the revised lease rentals should be taken into account for determining the charge to the profit and loss account over the lease period of nine years. Accordingly, the lease rentals paid under the original lease deed and revised lease rentals payable over the remaining period of the lease as per the supplementary lease deed, should be considered for determining the amount of annual charge on account of lease rentals on straight-line basis. Any resultant adjustments on account of lease rent already recognised in past should be recognised in the current year’s profit and loss account. (Page Nos. 1364 of C.A. Journal of March, 2011)

3. New Accounting Standards: The Govt. has notified new Accounting Standards after convergence with IFRS on 25-2-2011. There are 35 Standards which are called ‘IndAS’. These will be implemented in a phased manner over the next 3 or 4 years. The date for implementation of the Phase No. 1 is not yet notified.

4. New Committees of the Council: The Council of the ICAI has formed seven standing committees and thirty-three non-standing committees on 12th February, 2011 for one year. It may be noted that these include five new committees viz. Public Interest Advisory, Members in Entrepreneurship and Public Services, IFRS Implementation, Co-operatives and NGOS and Disciplinary — Satyam Bench. Names of the Chairman and the Vice-Chairman of these committees are as under :

(i) Standing & Other Committees: Chairman and Vice-Chairman of the Executive, Examination, Finance and Disciplinary Committee (U/s.21D), are Shri G. Ramaswamy (President) and Shri Jaydeep N. Shah (Vice-President), respectively, and Chairman of Board of Discipline (u/s.21A), Disciplinary Committee (u/s.21B), and Disciplinary Committee — Satyam Bench (u/s.21B) is Shri G. Ramaswamy (President).

(ii) Non-standing Committees — Chairman

Sr. No.

Name of the Committee

Chairman

(a)

Accounting Standard Board

Manoj Fardnis

(b)

Auditing & Assurance

Abhijit

Standard Board

Bandyopadhyay

(c)

Board of Studies

V. Murali

(d)

Continuing Professional

Sumantra Guha

Education

Sr. No.

Name of the Committee

Chairman

(e)

Corporate Laws and

S. Santhanakrishan

Corporate Governance

(f)

Direct Taxes

Sanjay K. Agarwal

(g)

Editorial Board

G. Ramaswamy

(h)

Ethical Standards Board

Subodh K. Agrawal

(i)

Expert Advisory

Jayant P. Gokhale

(j)

IFRS Implementation

Amarjit Chopra

(k)

Indirect Taxes

Bhavna G. Doshi

(l)

Internal Audit

Rajkumar S. Adukia

Standards Board

(m)

International Taxation

Mahesh P. Sarda

(n)

Members in Industries

K. Raghu

(o)

Peer Review Board

Pankaj I. Jain

(p)

Professional Development

Amarjit Chopra

(q)

Research

Nilesh S. Vikamsey

Non-standing Committees — Chairman

(Refer Page Nos. 1428 to 1433 of C.A. Journal of March, 2011)

5. ICAI News:

(Note : Page Nos. given below are from C.A. Journal for March, 2011)

i) Amendment of Schedule VI to Companies Act:

The Government has modified the existing Schedule VI giving Form of Balance Sheet and Profit and Loss A/c. by a notification. The new format applies to all audited financial statements for the year 2010-11 and onwards. Therefore, the financial statements for 2010-11 and onwards will have to be prepared and published in the new form of Schedule VI.

ii) New buildings of ICAI:

Foundation stones for new ICAI Bhavans at Ahmedabad, Patna and Saharanpur Branches have been laid by our President. (Page 1316)

iii) Action Plan for 2011:

Our new President has announced his Action Plan during the term of his office in 2011-12. This includes actions to be taken about new initiatives for Branding ICAI, Members in Practice and Industry, Students and International Relations. (Pages 1320-1322)

iv) 61st Annual Function of ICAI:

61st Annual Function of ICAI was held at New Delhi on 11-2-2011. Details of the Function are at Pages 1334-1343.

v) Insurance against Professional Indemnity:

ICAI has arranged insurance protection for our members in practice and for C.A. Firms providing Professional Indemnity. ICAI has signed MOU with New India Assurance Co. Ltd. under which the insurance company will provide insurance scheme to our members at a heavily discounted premium. Under this scheme the insurance company will provide professional indemnity to our members and their firms. (Pages 1316 and 1436)

vi) Guidance Note on Audit of Property, Plant and Equipment:

The above guidance note has been issued by the Auditing and Assurance Standards Board of ICAI. This guidance note should be read with the ‘Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services’ issued by ICAI. Full text of the Guidance Note is published on Pages 1442-1448.

vii) Scholarship for C.A. Students:

Board of Studies of ICAI is granting monthly scholarship to deserving students on following basis.

Sr.

Scholarship name

No. of

Amount

Eligibility criteria

No.

scholarships

(p.m.) (Rs.)

Merit

1250

Granted to students whose names appear at
Sl. No. 1-10

of Merit lists of CPT/IPCC/PCC of Nov./Dec.
2010 Exam

Merit-cum-need

1250

Available to rank-holders of CPT/IPCC
Nov./Dec. 2010

Exam, provided their parent/guardians total
annual in

come does not exceed Rs.1,50,0000

Need Based and

1000

Available to students of PCC/IPCC/Final,
provided their

parent/Weaker Sections guardians’ total
annual income

does not exceed Rs.1,00,000

Campus Placement for Articled Assistants:
Board of Studies of ICAI has introduced campus placement scheme for selection of Articled Assistants by C.A. Firms. This is in addition to the Online Placement Service already available at http://bosapp. icai.org The campus placement will be held between 15th and 30th April, 2011 in cities viz. Ahmedabad, Mumbai, Nagpur, Pune, Bangalore, Chennai, Ernakulam, Hyderabad, Kolkata, Indore, Jaipur, Kanpur, Ghaziabad, Chandigarh and New Delhi.

(Refer C.A. Students Journal for March, 2011, Page 33)

BCAJ Admin

FROM THE PRESIDENT

Dear Valued Reader,

The vacation is in full swing. It is time to relax and rejuvenate. Time to spend quality time with family.

Survival of the fittest is the order, especially in today’s materialistic world where we can lose track of the essence of life. The ultimate goal of life is happiness. We think that if we are successful, we would be happy, but for achieving success the price that we pay is ‘happiness’. Again in the process of gaining material possessions, we lose spiritual wealth. We earn name, fame and wealth at the cost of folks who matter the most in our life. As someone has beautifully put, “It’s good to have money and all the things that money can buy, but it is also good to make sure that you have not lost the things money cannot buy.” The point I am driving at, is that we should strike a balance between work and life.

The results of the recent assembly polls have proved people are fed up with corruption and bad governance. Communism has lost its relevance even in the country of its origin, and is naturally on the decline in India. The model has failed in India as West Bengal, which was ruled by the Communist Party for over three decades, has remained one of the most backward Indian states.

According to Karl Marx, “Communism is the riddle of history solved, and it knows itself to be this solution”. Communist thought stems from the belief that the division of human populace into ‘executive class’ versus ‘working class’ has given rise to ‘haves’ and ‘have-nots’; wherein the former always exploits the latter. Therefore, the ideology propounds a classless and stateless society, where decisions on what to produce and what policies to pursue are made in the best interests of the whole of society — therefore ‘rule of, by, and for the working class’, rather than the elitist class controlling wealth and everyone else working under them for wages. Communism aims at providing resources to each person according to his needs, and not necessarily according to merits. Seniority is preferred over merit.

Capitalism, on the other hand, is the other extreme, wherein survival of the fittest is the lone criteria. ‘Merit’ is supposed to rule over other criteria in every sphere of life, but we all suffer from human weaknesses such as nepotism, partiality, jealousy, etc. The solution, perhaps, lies between these two extremes. And therefore, India adopted the socialistic pattern of society and ‘mixed economy’, where existence of public and private sector side by side was recognised. It was expected that the Government would collect revenue from the rich through progressive taxation and redistribute the wealth to the poor and needy, through welfare measures. The aim was to have the best of both worlds. However, we ended up with the worst of both. Many public sector undertakings had remained inefficient, and private sectors were complacent till 1990, when India perforce had to opt for liberalising the economy — a move towards capitalism.

In the recent state assembly polls, Mamta Benerjee in West Bengal and J. Jayalalitha in Tamil Nadu notched incredible landslide victories. Leadership is not a status but an awesome responsibility, especially when people vote you to power with a thumping majority. Let us hope both these ladies live up to the expectations of their respective electorates by delivering good governance, as ‘good governance is good politics’ has been amply illustrated in the past by various Chief Ministers.

In order to inculcate leadership qualities in students, BCAS, under the auspices of Amita Memorial Leadership Development Fund, organised a full-day course on Leadership on 21st May 2011. Imparting of training by practical examples, role-modelling on communications, etc. was received very well by the students.

The recent unpalatable comments by the Central Minister, Jairam Ramesh, about the quality of faculty at IIT/IIM not being world -class have sparked an avoidable controversy. As per media reports, Mr Ramesh had said, “There is hardly any worthwhile research from our IITs. The faculty in the IITs is not world class. It is the students in IITs and IIMs who are world-class.” Indeed there is a dearth of research scholars and there is need for reforms in our educational systems and more so, in state-run institutions. However, IIT still remains an attractive career option for students. The overall passing percentage has remained below 3%, as in the past.

What is heartening to know is that the mathematical wizard Prof. Anand Kumar and his team from Bihar, are coaching IIT aspirants from the weaker sections of society, totally free of cost. They started this educational initiative in 2002, known as ‘Super 30’ under which 30 meritorious students from the economically backward class are being provided free food, lodging and are coached for a year to take IIT-JEE, which is considered to be one of the toughest written examinations in India. Till date, 236 students have cleared IIT-JEE as a part of this initiative. This year, 24 out of the ‘Super 30’ students have cleared their examinations. The successful candidates include sons of truck drivers, milk vendors, marginal farmers, grade IV railmen, chaatwallahs and so on. Salutations to Prof. Anand Kumar and his team, who are putting leadership into action and making positive contributions to society. I am sure these 236 students in turn, would make the needed difference to others, for this cycle to go on and on. There is an old proverb, “If you want to feed a man for a day, give him a fish, but if you want to feed him for life, teach him to fish.” Indeed, education is a means to free people from their poverty, financial as well as mental.

Increase in petrol prices is heating up the economy and any increase in oil prices would have a snowballing effect. The irony is that neither the Central nor the State Governments are willing to let go of their share of income, which together accounts for nearly 43% of oil prices (Source: The Economic Times, dated 18th May, 2011). Diesel, which has been subsidised for socio-political reasons, continues to bleed oil corporations. Even though some economists favour strengthening of the Indian Rupee, which can somewhat ease pressure on import price of oil, it is not resorted to for the reason that exports could become non-competitive. The RBI indeed is walking on a tight rope. The immediate solution obviously lies in the reduction of duties on oil, and revenue generation through fiscal reforms in other spheres.

The new Managing Committee at BCAS has been elected. I congratulate CA. Pradeep Thanawala who has been elected as President, and CA. Deepak R. Shah, Vice-President of the Society. I compliment other office bearers and members of the Managing Committee.

I wish you all a happy summer, followed by rains, and until we meet next . . . .

Regards,
Mayur Nayak

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BCAJ Admin

FROM THE PRESIDENT

Dear Valued Reader,

It is invariably difficult to pen the first and the last messages. In the first message, one is a bit nervous as how to start, where to start from etc. whereas in the last message one is baffled as where to end, since one has a lot to share with. The year passed by in a jiffy. And today, I communicate with you for the last time as a President of this august body. One learned judge said: “Language is at best an imperfect instrument for human expressions and feelings”. I, too, find “language” grossly inadequate to express my feelings at this moment, yet let me venture out to convey some of my thoughts for whatever they are worth.

It is said, “This life is a gift of God to us and how we live is a return gift from us to God”. Likewise, the BCAS Presidentship was a boon to me and I hope, I have been able to make some difference, which may be regarded as a return gift from me to the membership. All good things come to an end, and for me, the BCAS Presidentship has come to an end. “One year” may be a small period in the life span of an organisation; but it would certainly leave some lasting imprints in my life. I enjoyed every moment of my tenure. Blessings from elders/seniors, good wishes from peers and colleagues, unstinted support from the Core Group members and the BCAS staff have filled my life with positive emotions of love and gratitude. Encouraging feedback from members about various events, President’s messages and new initiatives; memories of working as a team with core group members; togetherness and brotherhood amongst office-bearers are permanent treasures which I shall cherish throughout my life. I thank one and all for contributing so much to enrich my life.

The month of June 2011 was an eventful month for the Society in many respects. An Education Tour to Europe, from 30th May to 12th June 2011, received an overwhelming response from overseas Universities and Educational Institutions. In all 21 delegates participated. Personally, I learnt many lessons from this tour. Punctuality, importance of time, cleanliness and commitment, are some of the qualities that I learnt from the Europeans, whereas team spirit, adjustments, crisis management and brotherhood etc. are some of the other qualities I learnt from my fellow delegates. Humility and warm reception from great personages such as Prof. Dr. Lehner of Munich University, Prof. Dr. Reimer of Heidelberg University and Prof. Dr. Kees Van Raad of Leiden University touched the cockles of my heart. I learnt an important lesson which is, one should be like a Mango tree which bends as it bears more and more fruits or like a Banyan tree which allows many more trees to grow within and around its periphery in such a manner that no one can identify the originating roots.

Back home, the Government bounced upon Baba Ramdev and his disciples who were on fast to pressurise the Government for effective steps to curb rampant corruption, with the result that, the agitation had to be withdrawn.

It is indeed unfortunate that there are no visual proofs of concrete steps from the Government to eradicate deep rooted corruption. The law and order situation is worsening day by day and attacks on whistle blowers and/or activists of “Right to Information”, who try to unearth scams or corrupt practices are on the rise. It is learnt that all important files pertaining to the scam tainted “Adarash Co-operative Housing Society” have gone missing. Day light murder of journalist, Mr. Dey, on the streets of Mumbai, reveals the precarious law and order situation in the financial capital of India. The less said, the better it is for the State of Uttar Pradesh, where violence against women is a daily feature. Some drastic steps are called for, to restore the waning confidence of masses in the political system or law and order machinery.

A group of about ten members from BCAS visited the tribal areas of Dharampur, Kaparada and Vansda in south Gujarat on 19th and 20th June 2011 for tree plantation and “lokarpan” of the Faco Machine at the Sant Ranchoddasji Bapu Eye Hospital at Vansda where at least 50 patients are operated for cataract every Sunday. Even after 63 years of independence, most of the tribals live in abject poverty. They are still deprived of basic necessities of life, such as food, shelter and clothes. Many of them live in sub-human conditions.

India is a land of contrasts. On the one hand, we find modern cities, with latest malls and fashion shops, five star hotels and lavish apartments, whilst on the other; we find abject poverty and slums. The recent hike in the diesel, LPG and kerosene prices can only worsen the economic conditions of the poor.

The latest available report (2010) on the India’s high net worth individuals reveal that it had only about 1,27,000 people comprising 0.01% of the population whose combined net worth was close to one-third of India’s Gross National Income. The gap between “haves” and “haves not” is widening by the day which may lead to civil unrest and increase in crime unless the Government puts in place an effective policy for inclusive growth. That is why Gandhiji coined the word “Antyodaya” i.e. upliftment of the poorest of the poor. Our aim should be the betterment of those who are at the bottom of the pyramid. The BCAS is involved in some projects for the wellbeing of destitute/nomadic/tribal people who are at the lowest stratum of society. Those of you interested may write to the Society at bca@bcasonline.org.

The rest of the month was eventful with lecture meetings on XBRL and filing of income tax returns. A full day seminar on 18th June 2011 on “Laws Impacting Financial Services” elicited good response from the industry and the practicing members alike. On the same day, in the evening a much awaited “BCAS Referencer 2011-12” was released at the hands of the Vice Chancellor of the University of Mumbai Dr. Rajan Welukar. The theme of this year’s reference is “Gandhi Governance” and to suit the occasion a musical concert titled “Jago Hindustani”, comprising patriotic songs was organised which was very well received. Gandhiji’s teachings are perhaps more relevant in this century than the earlier one. Dr. Raghunath Mashelkar, in his celebrated book entitled “Timeless Inspirator-Reliving Gandhi”, has captured kaleidoscope of experiences of 45 distinguished personalities from different walks of life, (such as scientist, industrialist, sports person, social worker, bureaucrat etc.) about Gandhiji’s philosophy and relevance in their lives. According to Dr. Mashelkar what is relevant today is Gandhian Engineering (More from, Less for More) anchored on the two important tenets – affordability and sustainability. When governance as such in public offices is at its low, Gandhian Governance holds the key for betterment and hope. In this context the theme selected by the Membership and Public Relation Committee deserves handsome compliments.

CA. Mohandas Pai speaking on the occasion of the Dilip Dalal Oration Lecture at the Patkar Hall on 29th June 2011 on the subject of “India @ 2030” echoed the necessity of inclusive growth, need for change in the paradigm to accept change and use of technology for growth and development of India. He said that India is poised for the most challenging and exciting times ahead with opportunities galore for youngsters.

Well, friends its time for me to bid adieu. I have experienced tremendous growth, writing to you month after month. I am extremely thankful to you for your encouraging feedback and I shall be missing my monthly communion with you all. Well, I must say that I have had a very satisfying year with support from learned readers.

May God guide you all!

So be it!

Regards,
Mayur Nayak

BCAJ Admin

Direct Taxes

The Finance Bill 2011, received the Presidential Assent on 8-4-2011.

The Finance Bill 2011, received the Presidential Assent on 8th April, 2011.

Circular No. 1/2011 F. NO. 142/1/2011-SO(TPL), dated 6-4-2011 regarding Explanatory notes to the provisions of the Finance Act, 2010.

New tax return forms notified — Notification No. S.O. 693(E), dated 5-4-2011.

For the A.Y. 2011-12, the CBDT has notified new Income Tax Return Forms Sahaj for individual tax returns and Sugam for taxpayers falling under the presumptive taxation scheme as prescribed.

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BCAJ Admin

Business etiquette

Introduction Globalisation of economy has brought new opportunities to extend the boundaries of business beyond India. While these opportunities can be very exciting and enriching, they also present the challenges of successfully assimilating with different cultures and navigating business to the desired goal.

These challenges can sometimes become a major roadblock to achieving success when one unconsciously ignores established business etiquette practices.

Etiquette has to do with respect and civility in everyday life. It is about having well-mannered conversations, making others feel welcome and respected, and getting one’s view point accepted without belittling the other’s viewpoint and coming across in a way that makes a great impression.

In a series of articles in the coming months, we shall cover some of the aspects of our daily chores of business, where how we do it can make a BIG difference in our life and business. Some of the areas we would touch upon are enumerated below :

(i) Email etiquette
(ii) Mobile phone etiquette
(iii) Conducting meetings and teleconferences
(iv) Dining etiquette, attire and personal grooming.

Email In spite of its critical importance, email is sometimes treated in such a casual manner that small lapses can become a major hindrance in achieving a desired goal.

Given below are some of the points that may help to make the email communication more effective.

Selection of id Email id for business should be as simple as possible and preferably with name and surname. Selection of id with wild names can backfire. Thus krish. shah@xyz.com will be a far better choice than fantastickrish@xyz.com

Subject line Every email sent must have a subject line. It should not be too general such as ‘Hi’ ‘Bill’, ‘Payment’, ‘Meeting’, etc. as they do not serve any purpose and can be wrongly misinterpreted as spam. Correct way of putting a subject line is to briefly indicate the purpose of the email. Thus, if it is a reminder about payment, then it is better to write the subject line as ‘Payment for bill no.’ Never send email without a subject line as it will pose a great challenge to the recipient to locate your mail later to act on its content and will become an irritant.

First mail If the email is sent for the first time, then it is better to inform the recipient telephonically about the mail. This is because many times people have set a policy on their email server that they should receive mails in their ‘Inbox’ only from the addresses allowed by them.

Salutation It is preferable to write just the name as salutation unless you know the recipient close enough.

Content
Email should be brief and concise, but not in the SMS language. Any understanding or minutes should be enumerated pointwise giving numbers or bullets. One should never write the mail in ‘Capital’ letters as it is interpreted as if one is shouting. If the situation demands sending long text or working calculations, then it is desirable to send the same by way of an attachment.

Spam
Sometimes the recipient or his organisation’s e-mail policy may not appreciate/permit it since it can put undue pressure on his or organisation’s resources. Hence, it is always a good etiquette to take the general consent of the person in advance if you intend to put him on your mail list for circulation.

Reply
It is always desirable to reply the email of importance within maximum 48 hours. In case the email requires deliberation and/or consultations with others, then it is better to send an interim reply acknowledging the mail and informing the sender how long it will take to give a specific reply. As a sender, if one’s mail has not been replied to, then it will be advisable to write a reminder once on a forward of the previous mail. If even that is not replied to, then it should be ‘cooled off’ until there is a response from the intended recipient. Use discretion while clicking ‘Reply All’ as it has a viral effect increasing stress amongst colleagues.

Forward
One must be very careful while forwarding the email to delete the trail not intended for view by the recipient.

In the next article, we will cover mobile phone etiquette and expected norms for conducting teleconferences and meetings.

It has been my long-standing conviction that India is like a donkey carrying a sack of gold – the donkey does not know what it is carrying but is content to go along with the load on its back. The load of gold is the fantastic treasure – in arts, literature, culture, and some sciences like Ayurvedic medicine – which we have inherited from the days of the splendor that was India.

— Nani Ardeshir Palkhiwala

The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.

— Bill Gates

Look well to this day. Yesterday is but a dream and tomorrow is only a vision. But today well lived makes every yesterday a dream of happiness and every tomorrow a vision of hope. Look well therefore to this day

— Francis Gray

I like thinking big. If you’re going to be thinking anything, you might as well think big

— Donald Trump

”India is an institutionalised democracy of long standing. Democratic changes in govern-ment should be seen as a sign of strength. We expect the reform process to continue although the emphasis may change.”

— Sanjeev Sanyal

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BCAJ Admin

ICAI and its members

Code of ethics

The Ethical Standards Board of ICAI has considered some ethical issues which are published in C.A. Journal for July, 2011, at pages 129-130. Some of these issues are as under:

(i) Issue: Can a Chartered Accountant advertise his professional attainments or services?

After amendment of the C.A. Act in 2006, it is not possible to issue any advertisement soliciting clients under para (6) of the Part I of Schedule I. However, other advertisements about professional attainments or services under para (7) of Part I of Schedule I are permitted. This is subject to the guidelines issued by the Council of ICAI. Detailed guidelines issued by ICAI are given on pages 129-130.

(ii) Issue: Whether a member can arrange business for Insurance companies?

In May, 2011 (page 1653) of C.A. Journal it was stated that this is not possible. It is now clarified that “A member is permitted to render Insurance Financial Advisory Services.” (page 130)

LLP of our members can be statutory Auditors

In the message from our President at P. 9 of C.A. Journal for July, 2011, it is stated that practising Chartered Accountants can now form Limited Liability Partnership (LLP). The Ministry of Corporate Affairs (MCA) has clarified in its Circular No. 30/2011, dated 26-5-2011 that an LLP of Chartered Accountants will not be treated as a Body Corporate u/s.2(7)(c) of the Companies Act. Therefore, such LLP of our practising members can now be appointed as statutory Auditors of a Limited company.

However, there is no clarification on the following issues:

(i) Whether such LLP of our members can be appointed as tax auditors under the Income- tax Act, State VAT Act, Public Trust Act or other similar legislation.

(ii) Whether such LLP can undertake tax representation work, management consultancy work or any other professional work which a Chartered Accountant is permitted under the C.A. Act.

(iii) Whether the name of such LLP as approved by the Registrar of Companies for registration of LLP will be accepted by ICAI and there will be no requirement for obtaining permission for name of C.A. firm under the C.A. Act and regulations.

(iv) Whether ICAI will give a separate Registration No. to such LLP and what will be the procedure for removal of the existing name of C.A. firm from the Register of Firms maintained by ICAI.

(v) Whether changes in constitution of such LLP which are required to be notified to ROC will also be required to be notified to ICAI.

(vi) If an existing C.A. firm is converted into LLP, there will be tax implications since the provisions similar to section 47(xiii) or section 47(xiii b) of the Income-tax Act have not been made when the I.T. Act was amended in 2010.

There will be some other procedural formalities to be followed by our members once this new concept of recognising LLP of our members for C.A. practice is introduced. Let us hope that ICAI will issue guidelines on these issues as early as possible.

Differences between IFRSs and IND AS

ICAI has issued a Note on pages 117 to 126 of C.A. Journal for July, 2011, explaining the changes made by the Ministry of Corporate Affairs (MCA) in Indian Accounting Standards (IND AS) on the recommendations by the National Advisory Committee on Accounting Standards (NACAS) and ICAI. The details of these changes are available on MCA website. It is clarified that IND AS will come into force when the MCA notifies them u/s.211(3)(c) of the Companies Act.

Certificate Courses offered by ICAI

Details about the following certificate courses offered by ICAI are given on pages 127 and 128 of C.A. Journal for July, 2011: Certificate courses on (i) Arbitration, (ii) Derivatives, (iii) Enterprise Risk Management, (iv) Forensic Accounting and Fraud Detection using IT and CAATs, (v) Forex and Treasury Management, (vi) Indirect Taxes, (vii) Internal Audit, (viii) International Taxation, (ix) Master in Business Finance and (x) Valuation.

EAC Opinion

Treatment of loss arising on sale of underperforming assets and associated liabilities to a group company of the supplier of the assets

Facts
A listed company had purchased 20 windmills. These windmills were installed at the site of the company. The supplier was paid in full at Rs.128 lakh per machine amounting to Rs.2560 lakh at debt: equity ratio of 75:25. The debts were funded by two nationalised banks. The machines installed were under operations and maintenance (O & M) for two years free of charge. The supplier had also executed a bond of performance guarantee of power generation of 5 lakh units per machine annually and individually with effect from the date of commissioning, and to compensate the shortfalls in the power generation at the prevailing State Electricity Board’s rate.

The company has stated that right from the inception, there were several problems in the power generation, land title, encroachment thereof and services. The company intimated the supplier regarding poor revenue generation and performance in respect of the 20 windmills. As per the company the supplier admitted and affirmed about the non-performance and low performance of the machines.

After prolong negotiation the company and supplier entered into a Memorandum of Understanding (MOU) dated 10th July, 2008. Now, one of the group companies of the supplier, after getting the sanction of the term loan for takeover of the assets and liabilities, will take over the assets and liabilities of the company in respect of the aforesaid machineries. On the transfer of assets by the company there will be no cash flows, but the accounts, viz. Windmill Generation Receivable Account, Supplier Account, Term Loan Account and Windmill Assets Account (WDV) will be squared off. This process of squaring off will result in the net loss of Rs.444 lakh (excess debit balance) to the company.

Query

On these facts the company had sought the opinion of the EAC as to whether the said loss of Rs.444 lakh arising out of the aforesaid windmill transaction can be amortised over a period of time or whether the said loss should be fully charged off in the year in which windmills are sold by the company.

Opinion

After considering paragraphs 78 and 96 of the Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India, the Committee has taken the view that an expenditure can be recognised as an asset only if it results into a resource controlled by the entity and some future economic benefits are expected to flow to the enterprise as a result of such expenditure. Since neither of the conditions is met in the case of the loss under consideration, it cannot be recognised as an asset and, therefore there is no question of amortisation thereof. Accordingly, such loss should be fully charged off to the profit and loss account when incurred.
(Refer pages 147 to 149 of C.A. Journal — July, 2011)

Achievements of some of the members of the accounting profession are listed on pages 167 of July, 2011 issue of C.A. Journal

(i) Shri K. S. Aiyar — considered as father of Indian Accountancy and the pioneer of commerce education in India. System of three years Articleship for students of our profession introduced by him.

(ii) Shri Sorab E. Engineer — He was the first Articled student of Shri K. S. Aiyar. Later on Shri Engineer was proclaimed as the Guru of our First President Shri G. P. Kapadia.

(iii) Indian Accountancy Board — constituted in 1932 and was the regulator for ‘Registered Accountants’ (RA) till the C.A. Institute was formed on 1-7-1949. Shri G. P. Kapadia was the first member of C.A. Institute with his membership number as ‘one’.

(iv) Institute Logo — suggested by the great nationalist philosopher Shri Arbindo Ghosh.

(v) Shri A. E. Cama — First Indian to become member of C.A. Institute of England and Wales in 1908.

(vi) Journal of C.A. Institute — Journal started with eight-page Bulletin in January, 1950.

(vii) First C. A. Conference — Called by Chartered Accountants from Mumbai in September, 1951, under the presidentship of Shri G. P. Kapadia.

ICAI News
(Note: Page Nos. given below are from C.A. Journal of July, 2011)

(i) Member-in-charge of office of C.A. Firm — It is clarified that only a partner or a C.A. full-time paid assistant can be appointed as a member-in-charge of office of C.A./C.A. Firm.
(page 9)

(ii) Educational Loan Scheme — ICAI has requested banks to give easy loans to C.A. students for joining C.A. course. Bank of Maharashtra, Oriental Bank of Commerce and IDBI Bank have introduced education loans under priority sector lending scheme. Other banks may give such loans to C.A. students. (page 11)

(iii) Entry Requirement for C.A. course — The Council of ICAI has decided to revise entry requirements to C.A. course. According to this decision, in the following cases exemption from CPT examination will be given and student will be allowed to join C.A. Articleship. (a) Commerce graduate with minimum of 55% and non-commerce graduate with minimum of 60% marks, (b) students who have passed Intermediate examination of ICAI/ICSI will be exempted from CPE examination and join Articleship on passing Gr. 1 of IPCC examination, (c) students who wish to join Accounting Technician Course will be exempted from CPT examination. These provisions will be implemented after approval by the Government. (page 10-11)

(iv) Announcements relating to Articled Assistants/Students

(a) Details about working hours of Articled Assistants are published on pages 176-177.

(b) Fees for obtaining duplicate statements of mark sheets for C.A. exams are increased from Rs.10 to Rs.100 per duplicate statement. (page 177)

(v) Campus Placement Programme

ICAI has organised campus placement for qualified members of the Institute at various places as under (page 177):

(a) Banglore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi on 16th to 20th August, 2011.

(b) Bhubaneshwar, Coimbatore and Ernakulam on 1st and 2nd September, 2011.

(d) Ahmedabad and Jaipur on 5th to 7th September, 2011.

(e) Pune 9th, 10th and 12th September, 2011.

(vi) C.A. Final Examination Results
C.A. Final Results for May, 2011 examination have been announced on 19- 7-2011. It is reported that out of 10816 girls 2368 (21.9%) and out of 21603 boys 4277 (19.8%) have qualified as Chartered Accountants. In this examination Ms. Maitrayee Rajput, Arti Jain and Charmy Sheth have secured the first three top positions. This can be considered as a great achievement for the girl students of our Institute.

BCAJ Admin

LECTURE METING

Subject : India@2030
Speaker : Mohandas Pai, CA, former Whole-time Director, Infosys Ltd.
Date : 29th June 2011

Mohandas Pai, a fellow member of the ICAI and ex-Member of the Board of Directors at Infosys, delivered the annual Dilip Dalal Oration Lecture on 29th June 2011. The subject was ‘India @ 2030’. The experienced speaker covered a snapshot of the Indian economy before going into the details of the mega trends which are changing the world and the specific challenges which are faced by India.

Shri Pai commenced his speech with an analysis of the positive factors of the Indian economy with the support of global and domestic statistics. He pointed out how the world is changing with countries like India and China expected to contribute more to the world economy than US, Europe and Japan by 2020 in terms of GDP.

He then elaborated on the three major reasons which are changing the world. According to him, globalisation, though an age-old concept, is accelerating due to factors like reduction in time for travel, communication efficiency, social networking tools, etc. Easy capital flows and reduced trade barriers were the main driving forces behind globalisation. The main impact would be the increase in competition for highly skilled and educated people and resultant brain drain. New regulatory systems would be required to be in place to avoid unfair competition and dumping of goods. However, there was no doubt that globalisation has led to improved living conditions of people. Skilled people of India and China have taken benefit of this globalisation leading to rise of these countries in the world economy. Globalisation is an unstoppable force and should be embraced.

The next big trend which is changing the world according to him is technology. His moot point was that innovation cycles are becoming much shorter. For example, the PC replaced the typewriter and soon the smartphone may well replace the PC! Technology has also led to a much democratised society. Telecommunication and the worldwide web have resulted in breaking barriers. Access to knowledge has empowered the general public. Similarly, ideas can come from any part of the world and can be implemented anywhere. There is free flow of capital, ideas and implementation.

The third mega trend according to Shri Pai is the demographic transition and the aging of population in developed countries. He gave several examples of countries where either the population has declined or there is a rise in number of aged people. In contrast, Asian, African and Islamic countries are witnessing a population growth; and immigrant population in western countries is also rising. By 2030 India will have the youngest population in the world! This represents a tremendous opportunity for India.

All these factors are leading to India’s growth. Shri Pai enumerated several estimates pointing towards a significant growth in the next 20 years. However, there are quite a few issues that India needs to resolve for it to achieve this level of growth. The primary challenges are: Poverty alleviation, healthcare for all, investment in education, and generation of employment opportunities.

For tackling poverty, Shri Pai suggested a major revamping of the subsidy regime. It has not provided the impact it should have, as proved over the last 60 years. The NREGA scheme, while giving more purchasing power to the landless and marginalised, has not given the returns in line with the investments made. Shri Pai has therefore advocated replacement of the current subsidy system by a cash transfer system which would alleviate the present problems.

Healthcare or the lack of it is the second major challenge India faces. Shri Pai suggested a national health insurance scheme for the BPL sector. This would empower the people to choose the best service provider.

While talking about Education, Shri Pai pointed out that the present system cannot decide between quantity and quality. He gave the example of IITs and IIMs where more money is spent in clearing the entrance exams than the fees for the course. He mentioned that large-scale expansion of the education sector is required to give everyone an equal chance for education. While quality in education is essential, it should not become a block. He called for liberalisation with privatisation in the education sector. Mr. Pai felt that there was no harm in having a for-profit sector in education, if access to education was available to all youngsters.

The participants also got a chance to get their queries answered from the learned speaker. The queries covered varied subjects from education problems to corruption. The participants were witness to passionate and well-considered replies from Mr. Pai to their questions.

Subject : Taxation of Cross-Border Transactions — Recent Trend in India
Speaker : Pinakin Desai, CA, Past President, BCAS
Date : 13th July 2011

The meeting began with a warm welcome from the President who introduced the speaker, Pinakin Desai and the topic for the day. The learned speaker covered the various aspects of cross- border transactions in the international tax scenario. Some of the major issues discussed by him are as follows:

Permanent Establishment (PE)

Provisions for creating the following types of PEs were explained:

Service PE: After explaining the requirement for creating a Service PE in India, the following issue related to Service PE was discussed:

ABC Canada provides support services to XYZ India and outsources part of the service function to PQR India, an independent service provider. Contract between ABC Canada and XYZ India and between ABC Canada and PQR India are independent and at a fair price.

Issue involved: Whether period of service rendered by PQR India on behalf of ABC Canada to XYZ India would need to be taken into account for determining threshold of service PE?

Decision of the Delhi ITAT in the case of Lucent Technologies International Inc v. DCIT, (2009 TIOL 161 ITAT-Del.) was referred to and the speaker opined that to aggregate the time spent by personnel of PQR India with the time spent by the personnel of ABC Canada, the personnel of PQR should be under the command and control of ABC Canada, i.e., only the time spent by dependent non-employees of a company can be considered for computing the threshold for constituting Service PE.

Construction PE: The same issue as for Service PE would also arise for a Construction PE.

ICO-1 enters into a contract with FCO for installation of equipment, work being of long duration. FCO sub-contracts part of physical execution to an independent Indian sub-contractor ICO-2. ICO-2 is remunerated by FCO on a fair basis. FCO remains contractually liable to ICO-1, but also has a back to back indemnity from ICO-2.

Issue involved: Whether time spent by ICO-2 needs to be aggregated for determining emergence of Construction PE for FCO?

The speaker opined that same view as Service PE cannot be held in this case as the language in Construction PE article is different from the Service PE article. For a Construction PE, different views are possible, depending on the facts of the case. While there is an AAR Ruling in the case of Pintsch Bamag (318 ITR 190) favouring the view that aggregation is not required when part of the work is outsourced; the commentaries for Skaar, OECD and US appear to suggest that the time of sub-contractor needs to be aggregated.

Agency PE: An Agency PE may get ignited when services are provided by a dependent agent to its principal. An agent is a dependent agent when he has authority and/or habitually exercises authority to conclude contracts on behalf of his principal. A person may be regarded as a dependent agent even if he does not have such authority, but has authority to secure contracts and works almost exclusively for one principal/group.

Issue involved: What kind of work carried on by a person will be said to satisfy ‘securing orders’ criteria and thereby giving rise to a dependent agent?

Reference was made to the US treaty which offered a strict meaning to the term ‘securing an order’ and to Switzerland treaty which gave a very general meaning to the term. The speaker opined that if the matter arose in the case of a neutral treaty which follows neither US nor Swiss Protocol, the courts are more likely to uphold the interpretation of the Swiss Protocol.

The speaker opined an Agency PE from the services of a dependent agent could be avoided if the agent is remunerated at an arm’s-length price.

Section 9(1)(vii) of Income-tax Act, 1961 (Act)

The above section defines the term ‘technical services’. Explanation 2 to the section carves out certain exclusions to what would constitute fees for technical services (FTS). Accordingly, FTS would not include, inter alia, consideration for any construction, assembly, mining or like project undertaken by the recipient. The following observations were made by the speaker:

(a) Pure services/identifiable independent services are not covered by exception of section 9(1)(vii).

(b) When an independent service provider is providing services which require him to engage man, material and equipments within India, he could be said to be carrying on a business in India and hence, would not be covered by section 9(1)(vii).

Source Rule Exception
India-Finland DTAA: Would remote technical services provided by a Finland company to an Indian company be liable to tax in India merely because the fees are payable by an Indian resident on account of the conditions laid down in section 9(1)(vii)?

Article 12(5) of India-Finland DTAA provides that FTS shall be deemed to arise in India, when the payer is a resident of India. Where, however, FTS relate to services performed, within a Contracting State (Finland), then such FTS shall be deemed to arise in the State (Finland) in which the services are performed.

In the present case, FTS arise in Finland as services are performed in Finland and hence, not taxable in India.

India-China DTAA: Would services performed by a Chinese company in China but used for a business in India be taxable in India? Would the same analogy as for the Finland company apply?

Article 12(4) provides that FTS means any payment for provision of services of managerial, technical or consultancy nature by a resident of a Contracting State (China) in the other Contracting State (India).

Article 12(6) provides that FTS shall be deemed to arise in India when the payer is a resident of India.

Mumbai ITAT in the case of Ashapura Minichem has held that in view of the deeming fiction of article 12(6) of the India-China DTAA, it was not necessary to consider the merits of the argument on the scope of Article 12(4).

Technology-driven services
Can the payment made by an Indian telecom company to a foreign telecom company for roaming services be characterised as rent? The decision of the Mumbai ITAT in the case of Vodafone Essar has looked on cellular mobile telephone as service and not rent.

Would the payment made by the Indian service provider to an overseas service provider for roaming/ interconnect services provided to customers require withholding tax? The Delhi HC in the case of Bharti Cellular Ltd. (319 ITR 139) has held that ‘technical service’ would have reference to only technical services rendered by a human. Interconnect services were regarded by the HC as not requiring human intervention and hence, were not technical services and hence, there would be no withholding tax liability.

The SC observations in the case of Bharati Cellular (330 ITR 239) were also discussed. The CBDT Instruction No. 5/2011 issued as a consequence of the above decision was also analysed. The open issues of consideration from this were identified as:

Fate of technology-driven services

Extent and depth of human intervention

HC understanding: reference only to technical service rendered by a human

Likely attitude of tax department in pending telecom cases

Likely attitude of tax department in complex telecom cases

Extension of the attitude in other proceedings

Litigation involving cross examination of experts.

Secondment
If an employee is seconded by a foreign company to an Indian company such that the Indian company is the economic employer while the foreign company is the legal employer, then it was an accepted conclusion that it would not amount to rendering any service by the foreign company other than seconding the employee to the Indian company.

AAR Ruling in the case of Verizon Data Services India Limited (AAR No. 865 of 2010) was discussed in this context. The AAR held contrary view as in that case the foreign company reserved rights over the termination and hiring of seconded employees. The speaker emphasised the need to exercise caution in drafting the secondment agreements to avoid such views.

The observations of the AAR in treating the secondment transaction as Fees for Technical Services were discussed and the speaker opined that the judgment may have curious ramifications if upheld ultimately.

Place of Effective Management (POEM)

The concept of POEM has been introduced by the Direct Tax Code (DTC). After explaining in brief the meaning, application and importance of POEM, the learned speaker shared with the audience his view on the judgment of the Supreme Court in the case of Subbayya Chettaiar v. CIT, (19 ITR 168) which dealt with the concepts of control and management.

Vodafone and related controversy

The facts, issues and the judgment in the case of Vodafone where it was held that when there is transfer of shares of a foreign company by a foreign company to a foreign company, it would still be taxable in India, if the ultimate underlying assets which were being controlled by those shares were located in India. The speaker opined that the facts of the Vodafone case are peculiar in nature and would not necessarily apply to all similar transactions.

Supreme Court axe on black money

The Hassan Ali case relating to black money and the future outlook of India to black money were briefly discussed by the speaker.

The meeting concluded with a hearty vote of thanks and a loud round of applause to the speaker.

BCAJ Admin

From the President

Dear readers,

The events of the past few days makes one feel that India is passing through turbulent times. We are witnessing a strong movement led by Shri Anna Hazare against corruption, with the passing of the Jan Lokpal bill as its immediate aim. We have seen a whitewash of the Indian cricket team in the recently concluded Test series in England. Our country has also felt the tremors of downgrading of the US economy by Standard and Poor the renowned rating agency.

However, I believe that there is one common thread running through these three different events occurring in different countries. That common factor is the weightage that society is giving to the quantum of money one earns and spends, irrespective of the manner that it is earned and the way that it is spent. We have seen a gradual downfall in the value system with a corresponding rise in the importance of wealth. There are many other reasons for corruption but the social recognition that wealth has is a very significant factor. It is on account of the desire to earn the maximum money in the shortest possible time that people adopt undesirable means and our cricketers are no exception. In the US there is uncontrolled spending and consumption, without paying heed to earning abilities. This results in borrowing beyond one’s ability to repay and its consequences have already been experienced by the world.

However, even if one is worried at the turn of events there is still hope. From 13th of August the BCAS had arranged its International Tax and Finance Conference at the Infosys training centre in Mysore. The experience of those four days is something that all participants will cherish for a long time to come. The foresight with which this institution has been built makes one’s heart swell with pride. We were fortunate to experience the world class facilities of the centre as well as the high ethical standards of its creators. It is institutions like these that will ensure that India’s march towards becoming a global power continues unhindered.

Coming back what one witnessed on the streets of Mumbai, scenes which were also replicated all over the country is evidence of the fact that the youth of this country want a change and they are willing to participate in an agitation for that purpose. It is this enthusiasm that needs to be harnessed so that many other illnesses that face this country can also be addressed. I would suggest that those in charge of the agitation at Delhi pay heed to this aspect and use their resources to give direction to this large pool of youth energy.

In the wake of Shi Hazare’s agitation many other aspects have taken a back seat. Important bills and initiatives like the Direct Tax Code, GST and the Companies Bill are hardly being discussed. I am, however, sure that eventually these will have to receive attention. Society has made various representations in this regard and one hopes that the government will consider the views of the society before these bills become final acts.

At the micro level, the Society has been live to the problems that members face while complying with the requirement to file returns electronically. A large number of returns were filed electronically last year and the number has more than doubled this year. Unfortunately, the processing of these returns has created a number of problems. To address these, the Society had organised a visit to the Central Processing Centre, Bangalore and had interacted with the officials there. I am happy to note that the response was very positive and some issues have already been sorted out and others will also be addressed through further interaction in the near future.

Apart from the requirement to file returns electronically, the Ministry of Corporate Affairs has also made furnishing of accounts mandatory for a certain class of companies in the new business reporting language XBRL. The Society has already organised a couple of programmes to increase member awareness and will continue doing so in the days to come. This requirement which is applicable to a limited number of companies in this year will be extended in the coming years to other companies. The new schedule VI has already been notified and the Society has also held a lecture meeting to discuss various issues emanating from the same.

When this communication reaches you, many will be engrossed in carrying out tax audits so that they can meet the 30th September deadline. We will be celebrating the festival of Ganapati in the coming week. Lord Ganesh is the God of wisdom and learning. I pray that the elephant God will give all members the encouragement to continue their learning and give wisdom to those in power to enact laws that are fair!

With warm regards,

Pradip K. Thanawala, CA

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BCAJ Admin

FROM THE PRESIDENT

Dear readers,

Glass half empty or half full?

If one were to believe all the reports coming in over the last one month it would be easy to conclude that India was in the midst of a national crisis. Everything that could go wrong was going wrong. Over the last year or so scams were breaking out with a regularity that would put a railway timetable to shame. A nation that was celebrating a World Cup victory in its ‘national’ pastime, cricket had failed to win a single match against England on a miserable tour. The economy which had recovered from the 2008 crisis seemed to be floundering. Inflation was worsening and there seems to be no respite on the horizon.

A discussion in a group of friends set me thinking. Just six months ago I had persuaded the only son of a friend of mine to return to India after having completed his education explaining to him that this was the country of his dreams and not the west. In a recent conversation the young lad asked me whether I still believed what I had told him six months ago.

I think it is really a question of perception as to whether the glass is half empty or half full. The media seems to report only those stories which garner the highest TRP ratings. Corruption has been the buzz word for the last few months. It is undoubtedly true that it is a malaise that has been eating into our national fabric for over six decades and has now reached alarming proportions. However, that does not mean that there are no honest citizens left. Every day one hears stories of individuals who have shown exemplary honesty and courage. These events do not even get a mention, let alone be reported in the media. Every time there is ‘breaking news’ on television it is of an accident, a scam, a robbery or a murder. Has everything good stopped happening in this country? I think the media needs to show far more restraint and balance than it has been showing at present. There are many positive things happening, they need to be not only reported, they need to be highlighted.

While corruption needs to be exposed we also need to tell the world that we have a judicial system where even the high and mighty land up in jail. The system undoubtedly has substantial lacuna, and is painfully slow, but in retrospect it may still be a better system than the instant justice that is being handed out in other parts of the world. Ours is a judicial system where the accused has the fullest opportunity to present his case and not a system where the administrators decide as to who the criminal is and dispense justice.

Undoubtedly the economic growth has slowed down substantially and is a cause for concern, but it is heartening to note that we have an RBI Governor who while listening to what the Government says does not bow to its demands. One may disagree with the actions of the regulator, but the fact that he is independent is indeed satisfying. We may have fallen from grace in our national pastime, that is cricket, but we are possibly on our way to regaining our strength in hockey.

I think in these hard times there needs to be a change in attitude. Society must bring all problems to the fore and focus on solving them, but as it tackles the ills it must also focus on the positive things that happen. I am in entire agreement with what the spokesman of a prominent national party said in a panel discussion on television. When asked as to why representatives insist on disrupting the Parliament rather than focussing on the problems and debating them, he candidly admitted that people who rush into the well of the Lok Sabha get far more publicity than those who make well-researched speeches. If the media is going to reward and report triviality, then that is what we are going to get.

What is true of the attitude of society is equally true of laws and regulations. The law must undoubtedly punish the wrongdoer, mete out severe punishment if the offence so warrants, but must also have provisions to reward compliance. We see newspapers filled with the advertisements of the Income-tax Department calling upon citizens to do their duty and pay tax. While all law-abiding citizens would undoubtedly comply with the law, such compliance must be commended not by way of a ‘sanman’ letter but by way of some action which actually shows that the State cares. While a person is penalised for deducting tax late or not depositing it within time, there is no credit of tax in the deductor’s own case for having deducted tax properly and in time. Collection of revenue is the duty of the State. When it transfers this obligation to its citizen, I believe it is in the fitness of things that if the citizen does a good job he deserves a reward. I am conscious that many of my professional colleagues and even seniors may not agree with this concept, but I believe that this is something that is worth trying.

I am an eternal optimist and I am of the view that we are on the threshold of change. While we must recognise the evils that face us and do our best to eradicate them, it is essential that we encourage those who have achieved something of note. We need to believe that the glass is half full and will get filled up soon, rather than say that it is half empty and it will get drained in future.

I deliberately gave vent to my feeling in my communication for this month, because I felt that in the month of October most of you would have more time on your hands to ponder over what I had said. All of you have been through the grind for the last entire month trying to fulfil your duty towards your clients, the lawmakers and the regulators. It is time to take a break and unwind a little. There can be no better way to unwind than a dance in the approaching Navaratri festival, meeting friends and relatives and enjoying the festival of lights.

I take this opportunity to wish all readers a joyful Navaratri, a happy Dassera, Diwali and a prosperous New Year!

With warm regards,

Pradip K. Thanawala
C A

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BCAJ Admin

ICAI and its members

1. Attendance by Directors at Board Meetings through video conference:

By a General Circular No. 28/2011, dated 20-5-2011, the Ministry of Corporate Affairs has now permitted directors of companies to attend meetings of the Board of Directors or Committee thereof through electronic mode. Some of the procedural requirements are as under:

(i) Electronic mode means video conference facility i.e., audio-visual electronic communication facility employed which enables all persons participating in that meeting to communicate concurrently with each other without an intermediary, and to participate effectively in the meeting.

(ii) Every director of the company must attend the meeting of Board/Committee of directors personally at least one meeting in a financial year of the company.

(iii) The chairman of the meeting and secretary have to ensure to (a) safeguard the integrity of the meeting via video conferencing, (b) ensure proper video conference equipment/facilities, (c) prepare the minutes of the meeting, and (d) ensure that no one other than concerned director or other authorised participants are attending the meeting through electronic mode.

(iv) The notice of the meeting must inform directors regarding availability of participation through video conference, and provide necessary information to enable directors to access the available facility of video conferencing.

(v) The notice of the meeting shall also seek confirmation from the director as to whether he will attend the meeting physically or through electronic mode and shall also contain the contact number(s)/e-mail addresses of the secretary/designated officer to whom the director shall confirm in this regard.

(vi) In the absence of any confirmation from the director, it will be presumed that he will physically attend the Board meeting.

(vii) There are some other procedural requirements which are of a routine nature.

2. Appointment of Cost Auditors by companies:

By a General Circular No. 15/2011, dated 11-4-2011 the Ministry of Corporate Affairs has changed the procedure for appointment of Cost Auditors u/s. 233B of the Companies Act. At present, such appointment requires prior approval of the Central Government. Now the revised procedure, briefly stated, is as under:

(i) The Audit Committee will have recommend to the Board the name of the Cost Auditors for such appointment and for their remuneration.

(ii) The Company has to file its application in Form 23C for such appointment with Board resolution proposing such appointment and other prescribed annexures within 90 days of commencement of the financial year.

(iii) If the Government does not object within 30 days of filing Form 23C, the company can issue formal letter of appointment to the Cost Auditors. In other words, specific order of the Central Government is not required for appointment of Cost Auditors.

3. Scope of Cost Audit enlarged:

By a Notification dated 3-6-2011, the Ministry of Corporate Affairs has enlarged the requirement for maintenance of Cost Records and Cost Audit to all large companies. The earlier Cost Accounting Rules have been now superseded by this Notification. Briefly stated the Notification provides as under:

(i) The new (Cost Accounting Records) Rules, 2011, shall come into force on the date of its publication in the Official Gazette.

(ii) These Rules apply to every company (including a foreign company) engaged in production, processing, manufacturing or mining activities if the net worth of the company as on the last day of the immediately preceding financial year exceed Rs.5 crore or if the total turnover of the company in the immediately preceeding financial year exceed Rs.20 crore. Further, if the company is a listed company or is in the process of listing, either in India or outside India, these Rules will apply irrespective of its net worth or turnover limits, if it is engaged in the manufacturing, production, processing or mining activities.

(iii) These Rules will not apply to a company engaged in manufacturing, production, etc. of (a) bulk drugs, (b) formulations, (c) fertilisers, (d) sugar, (e) industrial alcohol, (f) electricity industry, (g) petroleum industry and (h) telecommunications. The existing Rules for each of these industries will continue to apply to them.

(iv) The companies to which these Rules apply will have to maintain cost records as stated in this new Rule.

(v) These companies will have to appoint Cost Auditors and file Cost Audit Report with the Government for each year commencing on or after 1-4-2011 in the prescribed form within 180 days of the close of the financial year.

From the above it will be noticed that statutory Auditors of all such companies will have to ensure that these requirements of maintenance of Cost Accounting Records and Cost Audit are complied with in all such companies.

4. EAC Opinion

Revenue recognition in high-sea sale contracts:

Facts:
A public sector undertaking in the field of telecommunications is engaged in manufacturing and supply of various telecom products, providing network solution, manufacturing of mobile infrastructure equipment, etc. The company is having manufacturing facilities at various locations. The supplies and services of the company are mainly to customers such as public sector telecommunication enterprises, defence, railways, etc. All the supplies and services to them are executed through purchase orders, which are generally based on tenders. Most of the tenders call for quotes which are all inclusive (inclusive of freight, insurance, etc.)

The company has stated that it received a Purchase Order (P.O.) from a public sector telecommunication enterprise for supply and installation, testing and commissioning of cellular mobile phone network. Customer P.O. price is inclusive of all levies and taxes, packing, forwarding, freight and insurance, etc. The scope of P.O. includes supply of equipment (which shall be imported and supplied on high-sea sales basis), installation and commissioning of the equipment, maintenance during warranty period and Annual Maintenance Contracts (AMC) after warranty period. Customer’s P.O. contains itemised rates for supply, testing, installation, etc.

The company has further stated that before the materials reached Indian territory, high-sea sales agreement was entered into with the customer and the sale is effected in favour of the customer’s designated sites. Based on the high-sea sales agreement, the documents during the course of transit are endorsed in favour of the customer.

According to the company, as soon as the highsea sales agreement is entered into, the company recognises revenue for the sale value of the equipment (as per separate value given in the customer’s P.O.) During the financial year 2008- 09, the company made supplies and revenue was recognised in the accounts to that extent. However, this accounting treatment was not acceptable to the Government Auditors on account of the following:

(i) Materials which were supplied on high-sea sales basis on March 30, 2009 were received by customer after the accounting year 2008- 09.

(ii) As per P.O., delivery to the ultimate site in satisfactory condition will remain supplier’s responsibility.

(iii) Delivery of materials and services, its instal- lation and commissioning shall be made by the supplier in accordance with the terms and conditions specified in schedule of requirements and special conditions of the contract and the goods shall remain at the risk of the supplier until delivery of the network as a turnkey job has been completed even if there is a transfer of title of the goods earlier on account of high-sea sales.

Query:

In view of the above, the company has sought the opinion of the Expert Advisory Committee (EAC) as to whether accounting for the sale value of equipment immediately on entering into high-sea sales agreement and endorsement of the documents of title without linking to the date of receipt of equipment by customer and also before completion of activity of installation and commissioning of the equipment is in order and in accordance with Accounting Standard (AS) 9, ‘Revenue Recognition’.

Opinion:
The Committee is of the view, after considering the Accounting Standard (AS) 9, ‘Revenue Recognition’, that the company recognises revenue for the sale value of the equipment immediately on entering into the high-sea sales agreement and endorsement of the documents of title. It is also noted that as per clause 16.2 of the customer’s P.O. “Delivery of the goods and services, its installation and commissioning shall be made by the supplier in accordance with the terms and conditions specified in the schedule of requirements and special conditions of the contract and the goods shall remain at the risk of the supplier until delivery of the network as a turn-key job has been completed even if there is a transfer of title of the goods/materials earlier on account of high-sea sales”. Thus, the Committee is of the view that risks and rewards of ownership of the goods under high-sea sales are not transferred at the time of entering into such an agreement or endorsement of the documents of title. Accordingly, the accounting policy followed by the company in this respect is not appropriate.

5. Transfer/Termination of articleship:
Articled assistants are allowed to seek transfer/ termination of articleship only on permissible grounds and the articled assistants are advised to get the consent of the Institute before getting Form 109 signed by the principal in their own interest. ICAI has noticed that some articled assistants are submitting Form 109 signed by the principal along with the application for transfer/ termination of articleship. It is now decided that issuance of Form 109 prior to formal approval of the Institute for transfer will not be taken on record. Therefore, the principal and articled assistant should now forward Form 109 duly signed by both only after obtaining prior permission of the Institute for such Transfer/Termination. (CA Journal for June 2011 P. 1889)

6. ICAI News:

(Note: Page Nos. given below are from C.A. Journal for June, 2011)

(i) Recommended fees structure for C.A. Professionals:

In the last issue of BCA Journal for May, 2011 (Page 360) reference was made to the fees structure recommended by ICAI. Some figures were given in that issue. Now C.A. Journal for June, 2011, contains complete details about the fees structure on pages 1894 to 1898.

(ii) Amendment to Accounting Standard (AS-11):

The Ministry of Corporate Affairs (MCA) has issued a Notification on 11-5-2011. By this Notification the MCA has extended option for the enterprises to capitalise the exchange differences arising on reporting of long-term foreign currency monetary items till 31-3-2012 instead of 31-3-2011. (CA Student’s Journal, June 2011, P. 26)

(iii) NBFC cannot join partnership firms as a partner:

RBI has issued a Circular on 31-3-2011 clarifying that no NBFC can join any partnership firm as a partner. This restriction will apply if any NBFC wants to join any LLP as a partner. (Page 1788)

BCAJ Admin

Part A : ORDERS OF the COURTS

? Section 2(h): Public Authority Thirteen educational institutions had filed writ petitions in the Uttarakhand High Court. A common question of law was involved in all these petitions. All the petitioners before the Court were societies or schools run by societies. Each claimed that the school was entirely privately funded and since they are not ‘public authority’ as defined u/s.2(h) of the Right to Information Act, 2005 (the Act), cognizance cannot be taken against them by the State Information Commission, under the Act.

Their contention before the High Court was that they are neither covered under items (a) to (d) u/s.2(h), nor under the ‘include’ part of that clause (h) as they are not owned, controlled or substantially financed directly or indirectly by funds provided by the appropriate government. Hence they are not ‘public authority’!

It was their contention that in order to get covered under that ‘includes’ part of the clause (h) the society has to be one which is owned or controlled by the government and in any case that ‘control’ exercised by the government should be ‘deep and pervasive’ control inasmuch as the management committee of the school should be controlled by and large by government nominees or by government authorities.

The Court held that these institutions are not ‘public authorities’ as they are not owned or controlled or financed by the government. None of these petitioners owes its existence to a notification or order of the Government, therefore, so far as this part, as to whether the petitioners are ‘public authorities’ is concerned, the same stands settled and it is held that institutions, such as the petitioners are not ‘public authorities’ under the Right to Information Act.

The Court considered another aspect of these writ petitions, that is though the petitioners may not be a ‘public authority’ as defined u/s.2(h) of the Act, whether the education department of the government or any other government department, being a public authority, through its Information Officer or the Appellate Authority under the Act can compel the petitioners to furnish information, which is being sought from these public authorities. For example in case the Public Information Officer in the Department of Secondary Education of Government of Uttarakhand is requested for information which pertains to any of the petitioner schools, the question would be, whether the Public Information Officer of such a public authority can compel the petitioner to furnish this information to that public authority. The answer to this is also to be found in the Act itself. The petitioners here would fall under the category of the ‘third party.’

Section 11 of the Act deals with the subject of ‘Third party information’. The Court took the view that section 11 would apply where petitioners have already given certain information to a public authority, let us say the Department of Education or any other State department. In case the petitioners attach any confidentiality to such information, they must inform the public authority of their intentions. The public authority thereafter, whenever it wants to disclose such an information to any citizen, it must give a prior notice u/s.11(1) of the Act to the ‘third party’, which is the petitioners in the present case and u/s.11(1) of the Act, when this notice has been given, the petitioners shall have an opportunity to represent before the public authority. In case, the public authority still decides to go ahead and furnish such information u/s.11(3) of the Act, this decision must be communicated to the third party who then has a right to file an appeal against this decision u/s.19 of the Act read with section 11(4) and then a right to file a second appeal. Apart from this, the ‘third party’ also has a remedy to directly approach the State Information Commission u/s.18(1)(f) of the Act.

The Court also considered one more aspect, i.e., section 8(1)(j) which relates to personal information. The Court considered 2 situations: One when the information is already held by the public authority such as department of education. In such a case the Court held that provisions of section 11 must be complied with before the information held is provided to the citizen-applicant. Two, the information is not held by the public authority, e.g., department of education. In such case the Court asked: Can the Public Information Officer compel the petitioners to furnish certain information from the records of the petitioners’ office even though such information has not been furnished under any provisions of law by the petitioners before this public authority?

The answer to it, the Court stated would be in negative as it would be an invasion on the privacy of these institutes not being a public authority. Moreover, in case such ‘information’ is not already there with such public authority, it cannot be information ‘which is held’ by the public authority and therefore, it would not be covered under the definition of ‘right to information’ given u/s.2(j) of the Act.

Note: In the last part of this decision it is held that the information which is not on the records of the public authority is not ‘held’ and is hence not covered u/s.2(j) defining ‘right to information’. This part is in contrast to the decision of CIC reported in March 2011, BCAJ. I note that under the definition of ‘right to information’ u/s.2(j) what is covered is not only ‘held’ by but also ‘under the control of’ any public authority. I would imagine that Department of Secondary Education, Government of Uttarakhand has ‘a control’ over all the schools to get whatever information it needs. On that assumption, one needs to consider whether this part of the decision is correct or not.

[Asian Education Charitable Society & Ors. v. State of Uttarakhand & Ors., decided on 9-2-2010 {2010 (2) ID 552}]

Section 8(1)(g): Section 8(1)(g) reads as under: Section 8(1), Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen:

(g) Information, the disclosure of which would endanger the life or physical safety of any person or identify the source of information or assistance given in confidence for law enforcement or security purposes;

The Jharkhand Public Service Commission, Ranchi (JPSC) filed a writ petition in the High Court of Jharkhand challenging the orders passed by the State Information Commission whereby it gave direction to JPSC to furnish the various information sought by the applicant.

The applicant had sought information regarding the names of the members of the interview board who selected candidates for the post of lecturers, etc.

The Commission directed JPSC to furnish the various information i.e., the names of the members of interview board, etc. to the applicant.

High Court of Jharkhand ruled as under:

“As regards the information regarding the names and identities of the members of the Interview Board, the same cannot possibly be furnished in view of the fact that confidentiality regarding the names and identities of the members of the Interview Board needs to be preserved.

Considering the facts and circumstances of the case and also in the light of the discussions made above, claim of the petitioner that the information sought for in respect of the names of the members of the Interview Board cannot be furnished since it would violate confidentiality, appears to be a reasonable objection.

[Jharkhand Public Service Commission v. State of Jharkhand and Others, decided on 19-5-2010. {RTI R1 (2011) 227}]

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BCAJ Admin

Part A : ORDERS OF the COURTS

Section 20(1) of the RTI Act: Penalties
Section 20(1) provides for penalty on Public Information Officer (PIO). Sub- section (1) provides six types by default –

PIO
— refuses to receive an application for information,
— does not furnish information within the time provided under the Act,
— malafidely denies the request for information,
— knowingly gives incorrect, incomplete or misleading information,
— destroys information which is the subject of the request,
— obstructs in any manner in furnishing the information.

If any of the above is committed without any reasonable cause it is provided that the Commission shall impose a penalty on PIO at Rs.250 per day but not exceeding Rs.25,000 .

Issue that has been raised from time to time is whether word ‘shall’ makes impositionof penalty mandatory or ‘shall’ here means ‘may’ and it is optional for CIC to levy or not to levy the penalty.

On 11th April, 2011, CIC Shailesh Gandhi has ruled as under in the case of complainant Mr. Attar Singh v. PIO, Vivekananda College:

The RTI application was furnished on 04-02-2010. The information was provided on 08-04-2011 after the decision of CIC.

After the hearing in the matter of penalty, CIC writes:

If without reasonable cause, information is not furnished within the time specified under sub-section (1) of section 7, the Commission is duty- bound to levy a penalty at the rate of Rs. 250 each day till the information is furnished. Once the Commission decides that there was no reasonable cause for delay, it has to impose the penalty at the rate specified in section 20(1) of the RTI Act and the law gives no discretion in the matter. The burden of proving that denial of information by the PIO was justified and reasonable is clearly on the PIO as per section 19(5) of the RTI Act.

Decision:
As per the provisions of section 20(1) of the RTI Act 2005, the Commission finds this a fit case for levying penalty on Mr. Rajender Kumar Wadhwa, PIO & Administrative Officer. Since the delay in providing the information has been over 100 days, the Commission is passing an order penalising Mr. Rajender Kumar Wadhwa Rs.25000 which is the maximum penalty under the Act.

The Chairman, Vivekananda College is directed to recover the amount of Rs.25000 from the salary of Mr. Rajender Kumar Wadhwa and remit the same by a demand draft or a Banker’s Cheque in the name of the Pay & Accounts Officer, CAT, payable at New Delhi and send the same to Shri Pankaj K. P. Shreyaskar, Joint Registrar and Deputy Secretary of the Central Information Commission, 2nd Floor, August Kranti Bhawan, New Delhi-110066. The amount may be deducted at the rate of Rs.5000 per month every month from the salary of Mr. Rajender Kumar Wadhwa and remitted by the tenth of every month starting from May 2011. The total amount of Rs.25000 will be remitted by 10th September, 2011.

[Mr. Attar Singh v. PIO, Vivekanand College, University of Delhi. Decision No. CIC/SG/C/2010/000502/11484- Penalty]

Section 2(h): Public Authority
Madras High Court (Madurai bench) in a judgment delivered on 06-07-2010 has extensively discussed the words ‘includes’ and ‘substantially financed’ as they appear in section 2(h) which defines ‘Public Authority’.

R. Sivaprakasam sought xerox of the day book pertaining to a receipt of Rs.3, 00,000 received by Karanthai Tamil Sangam (Sangam). Same was denied to him. Subsequently, in response to RTI application made District Registrar, Thanjavur directed Sangam to furnish xerox of the day book as above. This direction is put to challenge in the writ petition.

Sangam submitted that information sought is not ‘information’ as defined u/s2(f), Sangam is not a public authority as defined u/s2(h) and in any case information sought is exempt u/s 8.

Hereunder, I am confining only to the part of the judgment deciding on applicability of section 2(h).

In one earlier judgment the Madras High Court had held as under:

The word ‘substantial’ is not defined in the Act. For the word ‘substantial’ it is not possible to lay down any clear and specific definition. It must be a relative one, however, ‘substantial’ means real or actual as opposed to trivial. ‘Substantial’ also means practicable as far as possible, hence the word ‘substantial’ not to be construed as higher percentage of the estimated amount or otherwise.

The Court then reproduced certain paras (NOs.15 to18, 21&23) from the said judgment as under:

“15. If we look at the definition of section 2(h), it is clear that the appellant-company does not come under the provisions of section 2h(a), (b), (c) or (d), but thereafter section 2(h)(d) of the definition clause uses the word ‘includes’. It is well known that when the word ‘includes’ is used in an interpretation clause, it is used to enlarge the meaning of the words and phrases occurring in the body of the statute. Reference in this connection can be made to G. P. Singh’s ‘Principles of Statutory Interpretation’ in the 10th edition of the said treatise, the learned author formulated that when the word defined is declared to ‘include; such and such, ‘the definition is prima facie extensive’ (page 175 of the book). In support of the aforesaid formulation, the learned authority has referred to a number of decisions. The latest decision referred to in support of the aforesaid proposition was rendered in the case of Associated Indem Mechanical P. Ltd. v. W. B. Small Industries Development Corporation ltd., AIR 2007 SC 788 of the report, the learned judges held as follows:

“10. The definition of premises in section 2(c) uses the word ‘includes’ at two places.It is well settled that the word ‘include’ is generally used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute; and when it is so used those words of phrases must be construed as Comprehending, not only such things, as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include [see Dadaji al ias Dina v. Sukhadeobabu AIR 1980 1 SCR 1135, Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. AIR (1987) 2 SCR 1 and Mahalakshmi Oil Mills v. State of A.P. AIR 1989 SC 335: (1989) SCC 164.”]

16. Therefore, obviously the definition of bodies referred to in Section 2(h)(d)(i) of the RTI Act would receive a liberal interpretation, and here the words which fall for interpretation are the words ‘controlled or substantially financed directly or indirectly by funds provided by the appropriate Government.’

17. We are here concerned with the interpretation of the definition clause in the RTI Act. The Act has been enacted ‘in order to promote transparency and accountability in the working of every public authority’. In the Preamble to the Act, it is made clear that ‘democracy requires an informed citizenry and transparency of information which are vital to its functioning and also to contain corruption and to hold Governments and their instrumentalities accountable to the governed’. From the Preamble to the Act it is clear that revelation of information may cause conflict with the other public interest including efficient operations of the Governments, but the Act has been enacted to harmonise these conflicting interests while preserving the paramountcy of the democratic ideal.

18. The RTI Act thus attempts to inculcate openness in our democratic republic. It has to be accepted that one of the salience of openness in democracy is an access to information about the functioning of the public authorities.

21. The RTI Act is virtually enacted to give effect to citizen’s right to know. Citizen’s right to know has been construed by the Hon’ble Supreme Court a

BCAJ Admin

Direct Taxes

The CBDT has prescribed a new procedure for the above as under:

For deductions made during the current financial year viz. 2011-12, by companies including banking companies, banks, financial institutions including co-operative societies engaged in banking business, the deductors shall issue TDS certificates generated from the central system of the TIN website which can be downloaded and authenticated using either the digital signature or manual one. For other deductors for the current fiscal this facility is optional viz. they can issue a manual TDS certificate else follow the above procedure.

For deductions made in last year viz. 2010-11, all the deductors have the option of either downloading the Form 16A from the website or issuing a manual one.

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BCAJ Admin

Risk-taking businesses shun governments paralysed by extreme risk aversion

After the Tatas, Mahindras and TVS, it is the turn of Reliance Industries (RIL), India’s largest listed company, to start thinking of diversifying overseas. Part of the reason, understandably, is to spread the risk of operating in any one place across several countries. Many companies around the world take this route after reaching a certain scale. Aditya Vikram Birla and Lakshmi Mittal were early adopters of this ‘go-forth’ philosophy, driven in part by the oppressive economic climate of India in the 1970s and 1980s. The 1990s and 2000s saw dramatic growth at home and almost all companies profited handsomely from that. But over the last year or so, the policy climate has changed dramatically for the worse. It’s not that bad things are being written into policy; policy-making is frozen stiff and nobody wants to implement existing stuff. The main reason behind this policy paralysis is the paranoia that’s gripped mantris and babus ever since the Commonwealth and Adarsh scams blew up last year. The 2G probe, arrests and continued detention of ex-ministers, politicians, bureaucrats and company executives have fuelled this fear and Anna Hazare’s anti-graft movement has only exacerbated it. Why sign off on any file, however incongruous, when there’s the slightest chance that one might be held to task for it sometime in future? At the level of an individual, an aversion to risk can be an excellent survival strategy, prodding people towards prudent decision-making. But when an entire system is afflicted with extreme risk aversion, the outcome is the sort of debilitating paralysis that we see today. Governments gripped by this sort of affliction can stumble along for a while, but businesses need to invest and take risks if they are to grow. Unless the administration gets back to work smartly, capital will start looking outside India.

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Practical insights into accounting for certain revenue arrangements

The revenue recognition principles as discussed under Ind AS provide elaborate guidance on various types of arrangements that may be applicable to select class of companies or to most companies in general. In this article, we focus on the guidance provided under appendix B (Customer Loyalty Programmes) and C (Transfer of Assets from Customers) to Ind AS 18 on Revenue, sharing our perspectives on the accounting for the said arrangements.

Customer loyalty programmes
Customer loyalty programmes, comprising loyalty points or ‘award credits’, are offered by a diverse range of businesses, such as supermarkets, retailers, airlines, telecommunication operators, credit card providers and hotels. Award credits may be linked to individual purchases or groups of purchases, or to continued custom over a specified period. The customer can redeem the award credits for free or discounted goods or services.

The structure of loyalty programmes offered by sellers varies, but in general they can be classified into one of the following schemes:

Award credits earned can be redeemed only for goods and services provided by the issuing entity.
Award credits earned can be redeemed for goods and services provided either by the issuing entity or by other entities that participate in the loyalty programme.

For a programme to be accounted as a customer loyalty programme, it needs to contain two essential features:

the entity (seller) grants award credits to a customer as part of a sales transaction; and
subject to meeting any other conditions, the customer can redeem the award credits for free or discounted goods or services in the future.

For instance, a customer receives a complimentary product with every fifth product bought from the entity (seller). As the customer purchases each of the first five products, they are earning the right to receive a free good in the future, i.e., each sales transaction earns the customer credits that go towards free goods in the future.

However, it may be noted that not all types of programmes that provide free or discounted goods are accounted as customer loyalty programmes. For instance, say a purchase of membership of a club entitles a member to purchase certain goods or services at a discounted price. In such case, the substance of such membership needs to be evaluated closely. It may seem that the purchase of membership may not be a separate transaction and the amount received by the club may be against purchase of those discounts themselves.

Accounting for customer loyalty programmes
Deferral of revenue
Under Ind AS, the award credits (i.e., air miles, credit card points, etc.) under customer loyalty programmes are not recognised as sales promotion or any other expense. Instead, they are recognised as a separate component within a multiple element revenue arrangement. As such, the revenue under the sales arrangement is allocated to one or more elements, including the award credit. At the inception of the arrangement, the revenue attributable to the award credit is deferred and is recognised as and when the award credits are redeemed by the customer. The revenue attributed to the award credits takes into account the expected levels of redemption.

Allocation of revenue to award credits
Ind AS requires that the consideration received or receivable from the customer is allocated between the current sales transaction and the award credits by reference to fair values. The Ind ASs do not prescribe a particular allocation method. However, the following two methods provided under IFRS may also be applied under Ind ASs:

relative fair values; or
fair value of the award credits (residual or fair value method).

Using relative fair values, the total consideration is allocated to the different components based on the ratio of the fair values of the components relative to each other. For instance, assume a transaction comprises two components, X and Y. If the fair value of component X is 100 and of component Y is 50, then two-thirds of the total consideration would be allocated to component X. If the total consideration is 120, then revenue of 80 would be allocated to component X and 40 to Y.

Using the residual method, the undelivered components are measured at fair value, and the remainder of the consideration is allocated to the delivered component. For example, assume a transaction consists of two components, X and Y; at the reporting date only component X has been delivered. If the fair value of component Y is 50 and the total consideration is 120, then revenue of 70 would be allocated to component X and 50 to Y.

In estimating fair value, the entity (seller) takes into account:

the amount of the discounts or incentives that would otherwise be offered to customers who have not earned award credits from an initial sale; and
the proportion of award credits expected not to be redeemed, i.e., expected forfeitures.

Other estimation techniques may be available. For example, if an entity (seller) pays a third party to supply the awards, then the fair value of the award credit could be estimated by reference to the amount that the entity pays plus a reasonable profit margin. However, judgment is required to select and apply the estimation technique that is most appropriate in the circumstances.

Accounting for revenue related to award credit The revenue attributable to the award credit (that was deferred at inception) shall be recognised as such in the income statement as and when the awards are redeemed.

Any subsequent change in the estimates of awards expected to be redeemed are trued up for differences between the number of awards expected to be redeemed and the actual number of awards redeemed; the amount of revenue deferred at the time of the original sale is not recalculated.

Steps involved in accounting for customer loyalty programmes
Having discussed the principles of revenue recognition relating to the customer loyalty programmes, the following are the broad steps involved in accounting for the same:
1. Understand the various customer loyalty programmes in effect.

2. Identify the deliverables in the different programmes. Along with the principal goods, the deliverables could be supply of own goods free of cost or at a discounted price in future, supply of promotional gifts based on the level of purchases made by the customer, gift coupons which can be redeemed as a discount on future purchases, award credits, etc.

3. Identify the fair value of the goods sold and the award credit. The fair value of the award credit to be determined based on expected level of redemption, after considering the market price of the award and the amount of the discounts or incentives that would otherwise be offered to customers who have not earned award credits from an initial sale.

4. The appropriate method of allocation of consideration to award credit needs to be chosen. There are mainly two methods to allocate values to the components of a multiple deliverable arrangement: — Relative fair value method — Fair value of the undelivered component.

5. Once the value of the deliverables has been assigned as above, the management then needs to recognise revenue for the delivered goods at its fair value allocated as above and defer revenue equivalent to the allocated fair value of the award credit.

6. Once the fair value allocation is determined as above, the consideration allocated to sale of goods is not subsequently re-assessed based on change in estimates of forfeiture rate. The change in estimates of forfeiture rate only affects the pattern of recognition of revenue relating to the award credits.

7. For the undelivered item (i.e., the award credit) the revenue would have to be deferred till the date of actual redemption. On redemption, the revenue attributable to the award credits is recognised.

Let us understand the above principles with the help of an example:

Company X runs a loyalty scheme rewarding a customer’s spend at its stores. Under this scheme, customers are granted 10 loyalty points (or award credits) for every 100 spent in X’s store. Customers can redeem their points for a discount in the price of a new product in X’s stores. The loyalty points are valid for five years and 50 points entitle a customer to a discount of 50 on the retail price of the product in X’s store.

During 2011, X has sales of 500,000 and grants 50,000 loyalty points to its customers. Based on the expectation that only 40,000 loyalty points will be redeemed, management estimates the fair value of each loyalty point granted to be 0.80. During 2011, 15,000 points were redeemed in exchange for new products, and at the end of the reporting period management still expected a total of 40,000 points to be redeemed, i.e., a further 25,000 points will be redeemed.

X records the following entries in 2011 in relation to the loyalty points granted in 2011:

Particulars

Debit

Credit

Bank

Dr.

500,000

To Revenue

460,000

To Deferred Revenue

40,000

(50,000*0.8)

(Being revenue recognised in relation to sale of goods and deferred
revenue for loyalty points)

At the end of the reporting period, the balance of the deferred revenue is 25,000 [(25,000/40,000) x 40,000]. Therefore, the difference in the deferred revenue balance is recognised as revenue for the year.

Particulars

Debit

Credit

Deferred revenue

Dr.

15,000

To Revenue

15,000

(Being revenue recognised in relation to 15,000 loyalty points
redeemed in 2011)

During 2012, 17,500 points are redeemed, and at the end of the year management expects a total of 42,500 points to be redeemed, i.e., an increase of 2,500 over the original estimate. The fair value of each award credit does not change, but the redemption rate is revised based on the new total expected redemptions. At the end of the year, the balance of deferred revenue for 10,000 loyalty points (i.e., 42,500 — 15,000 — 17,500) is 9,412 [(10,000/42,500) x 40,000]. X records the following entry in 2012 in relation to the loyalty points granted in 2011:

Particulars

Debit

Credit

Deferred revenue

Dr.

15,588

(25,000 – 9,412)

To Revenue

15,588

(Being revenue
recognised in relation to loyalty points redeemed in 2012)

Alternatively, on a cumulative basis 30,588 has been released, which can be calculated as (32,500/ 42,500) x 40,000.

Transfer of assets from customers
Ind AS 18 provides guidance on transfers of property, plant and equipment (or cash to acquire it) for entities that receive such assets from their customers in return for a network connection and/or an ongoing supply of goods or services. As such, the principles contained hereunder do not apply to gratuitous transfers of assets i.e., transfer of assets without consideration. Further, the guidance also cannot be applied to transfers that are in the nature of government grants or those covered under the service concession arrangements.

Concept of control
When the Company receives an item of property, plant and equipment from the customer, it will have to assess if the transferred item meets the definition of the asset from the Company’s perspective. An asset is defined as “an asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”.

It is important to note that in determining whether an asset exists, the right of ownership is not essential. Therefore, if the customer continues to control the transferred item, the asset definition would not be met despite a transfer of ownership. Hence, the Company must analyse if it has obtained the control of the transferred asset to recognise the same in its books.

Control would imply right to utilise the transferred asset the way Company deems fit. For example, the Company can exchange that asset for other assets, employ it to produce goods or services, charge a price for others to use it, use it to settle liabilities, hold it, or distribute it to owners.

As part of the arrangement for transfer of asset from the customer, the arrangement may require that the Company must use the transferred item of property, plant and equipment to provide one or more service to the customer. However, if the Company has the ability to decide how the transferred item of property, plant and equipment is operated and maintained and when it is replaced, it can be concluded that the Company controls the transferred item of property, plant and equipment.

If based on the above principles, it is concluded that the company has obtained control over the asset transferred by the customer, the company shall recognise (debit) the transferred asset as its own asset (though it may not have the ownership). The corresponding impact of the transfer shall be recognised as either revenue or deferred revenue, depending upon the obligations assumed by the company in lieu of the transferred asset.

Timing of revenue recognition
In determining the timing of revenue recognition, the entity (recipient) considers:

what performance obligations it has as a result of receiving the customer contribution;

whether these performance obligations should be separated for revenue recognition purposes; and

when revenue related to each separately identifiable performance obligation should be recognised.

Comprehensive guidance on how to determine the entity’s performance obligations is not provided under the appendix C. In practice it may be difficult to determine whether the entity only has to connect the customer to a network, or it has to provide ongoing access to a supply of goods and services, or both.

All relevant facts and circumstances should be evaluated when determining whether additional performance obligations arise from the transfer including:

whether or not the customer providing the contribution is charged the same fee for the supply of goods or services as is charged to other customers that are not required to make such customer contributions;

whether customers have the ability to change the supplier of goods or services at their discretion; and

whether a successor customer needs to pay a connection fee when the customer that made the customer contribution discontinues the service, and if so, the amount of such connection fee relative to the fair value of the asset contributed.

In our view, in determining whether a rate charged to a customer includes a discount, the entity should compare rates for ongoing services charged to customers that make a contribution with the rates charged to customers that do not.

If it is determined that some or all of the revenue arising from the customer contribution relates to the ongoing supply of goods or services, then the revenue is recognised as those services are delivered. Typically, such revenue is recognised over the term specified in the agreement with the customer. If, however, no such term is specified, then the period of revenue recognition is limited to the useful life of the transferred asset.

Instead of property, plant and equipment, an entity may receive cash that must be used to construct or acquire an item of property, plant and equipment in order to connect the customer to a network and/or provide the customer with ongoing access to a supply of goods or services. The accounting for such cash contributions depends on whether the item of property, plant and equipment to be acquired or constructed is recognised as an asset of the entity on acquisition/completion.

If the asset is not recognised by the entity, then the cash contribution is accounted for as proceeds for providing the asset to the customer under Ind AS 11 or Ind AS 18, as applicable.

If the asset is recognised by the entity, then the asset is recognised and measured as it is constructed or acquired in accordance with Ind AS 16; the cash contribution is recognised as revenue following the guidance as stated above.

Steps involved in accounting for transfer of assets from customers
Having discussed the principles of revenue recognition relating to the transfer of assets from customers, the following are the broad steps involved in accounting for the same:
(1) Analyse all the relevant agreements to identify arrangements covered within this guidance.

(2) Assess whether the control over the transferred asset is obtain by the company. If the control is transferred to the company, the asset will be recognised in the Company’s balance sheet.

(3) Determine the obligations assumed by Company in lieu of the transfer of control over the transferred asset.

(4) If the above-mentioned obligations are in the nature of ongoing services, then revenue attributable to those obligations is deferred and recognised as the underlying services are rendered and obligations fulfilled.

(5) To the extent the above-mentioned obligations are fulfilled at the inception of the contract, recognise appropriate revenue upfront.

(6) Depreciate the acquired asset over its useful life.

Let us understand the above principles with the help of an example:

Company X has entered into an agreement with Company Y to outsource some of its manufacturing process. As part of the arrangement, Company X will transfer the ownership of its machinery to Company Y.

Based on a report submitted by independent valuer, the fair value of assets transferred is Rs. 90,000. Initially, Company Y must use the equipment to provide the service required by the outsourcing agreement. Company Y is responsible for maintaining the equipment and replacing it when it decides to do so. The useful life of the equipment is 3 years. The outsourcing agreement requires service to be provided for 3 years for a fixed price of Rs.10,000 per year which is lower than the price that Company Y would have charged if the equipment had not been transferred. In such case the fixed price would have been Rs.40,000 per annum.

Pursuant to a detailed analysis, Company Y determines that the control over the equipment is transferred in its favour. Hence, Company Y would have to initially recognise the asset at its fair value in accordance with Ind AS 16. Further, Company Y would also have to recognise the revenue over the period of the services performed i.e., over 3 years.

Company Y shall recognise the following journal entries to recognise the transactions under the arrangement:

Particulars

Yr
1

Yr
2

Yr
3

Asset

Dr.

90,000

15,000

To Deferred

90,000

15,000

Revenue (Being transfer of

assets from customer)

Bank

Dr.

10,000

Deferred Revenue

Dr.

30,000

To Revenue

40,000

(Being revenue recognised

under the arrangement)

Depreciation

Dr.

30,000

To acc. depreciation

30,000

(Being assets transferred

from customer depreciated

over its useful life)

Summary
Overall, the implementation of the above guidance on customer loyalty programmes and transfer of assets from customers will require significant judgment in several respects while preparing the entity’s financial statements.

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CBDT’s business intelligence data warehousing to boost tax mop-up

To enhance revenue realisation and catch tax evaders quickly, the Central Board of Direct Taxes is working on a comprehensive data warehousing system, which will transform the functioning of the Income-tax Department.

The external data base would complement the internal database of the Department which includes information on permanent account number (PAN), e-filing data, tax deducted at source, share transaction tax payments, annual information returns on high-value transactions and specific information gathered by the Central Information Branch.

According to an internal estimate of the Department, the size to be handled by the I-T warehouse could be around four billion data pieces. The Integrated Taxpayer Database Management System alone has over 600 million pieces of information, mobile numbers would throw up around 1.2 billion data pieces and PAN database had 120 million entries. Besides, there would be local data and also information gathered from different sources.

A senior Income-tax Department official told Business Standard the idea behind RFBIDW was to shift attention from individual assessee to groups such as families, business groups, trades, dealers in particular items and intermediaries for curbing tax evasion.

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Deduction u/s.80IB of Income-tax Act, 1961: A.Y. 1999-00: Condition of employing ten or more workers: ‘Worker’ means person employed by assessee directly or by or through any agency including a contractor.

[CIT v. M/s. Jyoti Plastic Works Pvt. Ltd. (Bom.), ITA No. 5045 of 2010, dated 15-11-2011]

The assessee was engaged in the manufacture of goods by using job workers. Its total number of permanent employees was less than ten. If the job workers are taken into account, the number was more than ten. The assessee’s claim for deduction u/s.80IB was rejected on the ground that the total number of workers (permanent) was less than ten and the condition in section 80IB(2)(iv) was not satisfied. The Tribunal allowed the assessee’s claim. The following question was raised in the appeal filed by the Revenue:

“Whether the Tribunal was justified in holding that the workers supplied by the contractor are also to be treated as workers employed by the assessee for the purposes of section 80IB(2)(iv) of the Income-tax Act, 1961?”

The Bombay High Court upheld the decision of the Tribunal and held as under:

“(i) Section 80IB(2)(iv)(iii) provides that an industrial undertaking must ‘employ’ ten or more workers in a manufacturing process carried on with the aid of power. The expression ‘worker’ which is not defined in the Act means any person employed by the assessee directly or by or through any agency (including a contractor).

(ii) What is relevant is the employment of ten or more workers and not the mode and the manner of employment. The fact that the employer-employee relationship between the workers employed by the assessee differs cannot be a ground to deny deduction u/s.80IB.”

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Deduction u/s.80HHE in case of MAT assessment is to be worked out on the basis of adjusted book profit u/s.115JA and not on the basis of profit computed under regular provisions of the law applicable to the computation of profits and gains of business or profession.

[CIT, Chennai v. Bhari Incomation Tech. Sys P. Ltd., {SLP (Civil) No.33750/2009 dated 20-10-2011}]

The assessee filed its return of income for A.Y. 2000- 01. The assessee claimed deduction u/s.80HHE to the extent of Rs.1,56,33,719 against net profit as per profit and loss account amounting to Rs.3,07,84,105 to arrive at the book profit of Rs.1,51,50,386 u/s.115JA of the Income-tax Act, 1961. This claim for deduction made by the assessee was rejected by the AO.

According to the AO, since in the present case in normal computation no net profit was left after brought-forward losses of the earlier years got adjusted against the current year’s profit, the assessee was not entitled to deduction u/s.80HHE to the extent of Rs.1,56,33,719 for computing book profit u/s.115JA. In Appeal, the CIT(A) upheld the order of the AO. The assessee went in appeal, against the order of the CIT(A), before the Tribunal which, following the judgment of the Special Bench of the Tribunal in the case of Deputy Commissioner of Income-tax, Range 8(3) v. Syncome Formulations (1) Limited, [(2007) 106 ITD 193], took the view that the MAT scheme which includes section 115JA did not take away the benefits given u/s.80HHE. The said judgment of the Special Bench was with regard to computation of deduction u/s.80HHC which, like section 80HHE, fell under Chapter VI-A of the Income Tax Act, 1961.

The High Court upheld the judgment of the Tribunal. On further appeal, the Supreme Court observed that in the said judgment of Special Bench, which Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings squarely applied to the facts of the present case, the Tribunal had held that the deduction u/s.80HHC (section 80HHE also fell in Chapter VI-A) had to be worked out not on the basis of regular income tax profits, but it had to be worked out on the basis of the adjusted book profits in a case where section 115JA was applicable. In the said judgment the dichotomy between the regular income tax profits and adjusted book profits u/s.115JA was clearly brought out. The Tribunal in the said judgment had rightly held that in section 115JA relief had to be computed u/s.80HHC(3)/3(A).

According to the Tribunal, once law itself declared that the adjusted book profit was amendable for further deductions on specified grounds, in a case where section 80HHC (80HHE in the present case) was operational, it became clear that computation for the deduction under those sections needed to be worked out on the basis of the adjusted book profit. The Supreme Court noted that in the present case it was concerned with section 80HHE which was referred to in the Explanation to section 115JA, Clause (ix).

According to the Supreme Court, the judgment of the Special Bench of the Tribunal in Syncome Formulations (supra) squarely applied to the present case. Following the view taken by the Special Bench in Syncome Formulations (supra), the Tribunal in the present case had come to the conclusion that deduction claimed by the assessee u/s.80 HHE had to be worked out on the basis of adjusted book profit u/s.115JA and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business. According to the Supreme Court there was no reason to interfere with the impugned judgment. The Supreme Court agreed with the view taken by the Special Bench of the Tribunal in the case of Syncome Formulations (supra). The Supreme Court dismissed the special leave filed by the Department. Note: In the above context, reference may also be made to the judgment of the Apex Court in the case of Ajanta Pharma Ltd., which has been analysed by us in the column ‘Closements’ in November, 2010 issue of the Journal.

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After education, a health surcharge ?

You may soon have to pay more tax since the government is considering a proposal to levy a surcharge to fund its ambitious plan of providing free healthcare to every citizen in the country.

The Planning Commission’s expert panel that has recommended a levy on universal health coverage has turned down the proposal for a securities transaction tax, and has instead voted for a health surcharge on taxable income to fund the scheme.

The move, it said, would complement the government’s budgetary allocation and also ‘obviate the need for user charges on the rich’.

Cess Pool
(1) Govt. collects Rs.27,500 cr via education cess.
(2) Another Rs.17,700 cr collected by cess goes for construction and maintenance of high ways.
(3) Over Rs.15,000 cr collected as surcharge on corporation, income tax.
(4) Other cesses and surcharges levied by the Centre include those on tobacco, pan masala, salt, among others.
(5) All cesses and surcharges add up to Rs.79,000 cr or 8.5% of total revenues.
(6) They are used for various purposes — from funding calamity relief and contingencies to clean energy.
(7) Govt. had levied cess to fund Kargil war, meet spending needs post Gujarat quake. Both cesses have lapsed. (Source : The Times of India, dated 16-8-2011)

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Non-advocates can appear in consumer cases

The Supreme Court has ruled that non-lawyers can represent, appear and argue cases filed under the Consumer Protection Act before consumer district forums and commissions.

The Supreme Court passed the directive while dismissing an eight year-old appeal filed by the Bar Council of India against a 2002 Bombay High Court judgment that permitted agents to represent consumers. The Supreme Court Bench of Justice Dalveer Bhandari, Justice R. Mukundakam Sharma and Justice Anil Dave on Monday, however, said special guidelines were needed and accordingly, it directed the National Consumer Commission to ‘frame rules within three months’ to regulate the eligibility, ethics and conduct of non-legal representatives. Agents can be friends or relatives but they cannot accept any remuneration and must display competence.

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UK inks deal to tax cash stashed in secret Swiss bank accounts

The Swiss government has agreed to tax black money held by UK citizens in Swiss bank accounts, for the first time, while still hiding their identity.

The deal could seen between £ 3 billion and £ 6 billion a year being handed to HMRC (Her Majesty’s Revenue and Customs) by Swiss authorities.

The agreement is a part of the HMRC’s latest efforts to track down and tax money hidden in offshore accounts. It follows a similar deal agreed earlier this month between Germany and the Swiss authorities.

The UK citizens’ accounts in Swiss banks will be taxed at between 19% and 34% on the principal sum hidden, depending on how long the account has been running.

The Swiss agreed to make an initial down payment of 500 million Swiss francs (£ 387m) toward the tax liabilities of UK citizens with Swiss accounts.

From 2013, the account holders will also face an annual levy of between 27% and 48% on the income from their accounts, based on whether it has arisen as capital gains, dividends or interest. The UK authorities will also have the right to request the banking details of 500 UK individuals a year for further investigation.

UK citizens will only be able to avoid the new tax measures in Switzerland if they come forward and make a full disclosure of their finances there to HMRC.

(Source: The Times of India, dated 26-8-2011)

(Comment: Will India be able to prevail upon Switzerland to sign a similar deal ? Do we have the necessary political will?)

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25 companies in United States paid more to chief executives than taxman

At least 25 top United States companies paid more to their chief executives in 2010 than they did to the federal government in taxes, according to a study released.

The companies which include household names like eBay, Boeing, General Electric and Verizon —averaged $ 1.9 billion each in profits, according to the study by the Institute for Policy Studies.

But a variety of shelters, loopholes and tax reduction strategies allowed the companies to average more than $ 400 million each in tax benefits —which can be taken as a refund or used as write-off against earnings in future years.

The authors of the study, which examined the regulatory filings of the 100 companies with the best-paid chief executives, said that their findings suggested that current United States policy was rewarding tax avoidance rather than innovation.

“We have no evidence that CEO’s are fashioning, with their executive leadership, more effective and efficient enterprises,” the study concluded. “On the other hand, ample evidence suggests that CEO’s and their corporations are expending considerably more energy on avoiding taxes than perhaps ever before at a time when the federal government desperately needs more revenue to maintain basic services for the American people.”

The study comes at a time when business leaders have been lobbying for a cut in corporate taxes and Congress and the Obama administration are considering an overhaul of the tax code to reduce the federal budget deficit.

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Foreign banks complain of ‘Imperialist’ US Tax Rule

A U.S. law meant to snuff out billions of dollars in offshore tax evasion has drawn the criticism of the world’s banks and business people, who dismiss it as imperialist and “the neutron bomb of the global financial system”.

The unusually broad regulation, known as FATCA, or the Foreign Account Tax Compliance Act, makes the world’s financial institutions something of an extension of the tax-collecting Internal Revenue Service — something no other country does for its tax regime.

Conceived as a way to enlist the world in a crackdown on wealthy Americans evading tax, it gives global financial institutions and investment entities a choice: either collect and turn over data on U.S. clients with accounts of at least $ 50,000, or withhold 30% of the interest, dividend and investment payments due those clients and send the money to the IRS.

Foreign institutions and entities that refuse, or fail, to do so face bills for the taxes due, a draconian penalty of 40% of the amount in question and heightened scrutiny by the IRS.

The legislation that created FATCA was introduced in 2009 by four congressmen during a crackdown on: UBS, the Swiss bank giant that sold tax evasion services. Signed into law by U.S. President Barack Obama in March 2010, FATCA goes into effect on January 1, 2014, for most types of transactions and a year later for other payments.

(Source: www.cnbc.com 19-8-2011)

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Cry for Justices

Attend to the shortage of judges at all levels on a war-footing.

The impending shortage of judges in the Supreme Court might grab headlines. But it is only the most visible aspect of a problem that ails our entire judicial system, right from the lowest to the highest level: the acute shortage of judges. So, come October, when seven of the judges of the Apex Court are due to retire, the Supreme Court will find itself functioning with less than 75% of its sanctioned strength. The position in High Courts all over the country is no better. According to news reports, with the exception of Himachal Pradesh, there is not a single High Court in the country that is functioning at full strength.

(Source: The Economic Times, dated 7-9-2011)

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Indian varsities missing in top 200 global list

The world’s second-fastest growing economy does not have an educational institute in the top 200 global list this year. The Indian Institute of Technology (IIT), Bombay — the only Indian varsity that found itself in the Top 200 Quacquarelli Symonds (QS) World University Rankings in 2010 at the number 187 spot — dropped 38 places to 225. Similarly, IIT Delhi fell to number 218 from 202 in 2010 and IIT Madras dropped to 281 from last year’s 262.

The remaining Indian universities featuring in the rankings, including IIT Kanpur, IIT Kharagpur, IIT Roorkee, IIT Guwahati, University of Delhi, University of Calcutta, University of Pune and University of Mumbai, did not find a place in the Top 300 World University Rankings.

Globally, while Massachusetts Institute of Technology (MIT) and University of Oxford bettered their last year’s rankings from five and six to three and five, respectively, Yale University dropped one place from third to fourth rank.

In the Asia list, Japan was the best-represented nation, with five of the top 10 and 57 of the top 200 universities, ahead of China (40) and South Korea (35), Taiwan (16), India (11), Thailand (9), Indonesia (8), Malaysia (7) and Hong Kong (7). Despite its troubled economy, Japan’s universities continued to perform better, with Tokyo and Kyoto each moving up one place to fourth and seventh, respectively. In Singapore, National University of Singapore retained its place in the top three.

(Source: Business Standard, dated 7-9-2011)

(Comment: This is an eloquent testimony of falling standards of higher education in India and therefore the quality of output too. Mumbai University does not find any place at all !)

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Taxability of Income from ‘sale of computer software’ as ‘royalty’

Issue for consideration

Section 4 and section 5 r.w.s. 9(1)(vi) of the Act provide for taxability of income from royalty in India. Section 9(1)(vi) of the Act by a deeming fiction provides for the taxation of income from royalty in India. Explanation 2 to section 9(1)(vi) of the Act defines the word ‘royalty’, which is wide enough to cover both industrial royalties as well as copyright royalties, both being forms of intellectual property. Computer software is regarded as an ‘industrial royalty’ and/or a ‘copyright royalty’. Industrial properties include patents, inventions, process, trademarks, industrial designs, geographic indicators of source, etc. and are generally granted for an article or for the process of making such article. Whereas on the other hand, copyright property include literary and artistic works, plays, films, musical works, knowledge, experience, skill, etc. and are generally granted for ideas, principles, skills, etc.

Just as tangible goods are sold, leased or rented in order to earn monetary gain, on similar lines, the Intellectual Property laws enable authors of the intellectual properties to exploit their work for monetary gain. The modes of exploitation of intellectual property for monetary gains are different for each type of Intellectual Property, which has been covered in various sub-clauses of the definition of ‘royalty’ under Explanation 2 to section 9(1)(vi) and subjected to tax as per the scheme of the Act.

On similar lines, monetary gains arising from exploitation of computer program, an intellectual property, which subsists in computer software is sought to be taxed as royalty under the Act. Explanation 3 to section 9(1)(vi) defines computer software as computer program recorded on any disc, tape, perforated media or other information storage device and includes any such program or any customised electronic data. The Supreme Court in the case of Tata Consultancy Services v. State of AP, 271 ITR 401 held that shelf software were ‘goods’ for the purpose of Sales tax and that there was no distinction between the branded and unbranded software. Without prejudice to the applicability of the aforesaid conclusions as drawn by the Apex Court in context of indirect tax laws, to the provisions of the Act, at least one may refer to the aforesaid decision for a proper understanding as to what software is and what is the nature and character of software, which is also advised by the Apex Court in the decision. The controversy, sought to be discussed here, revolves around the issue whether the income from a sale of the computer software is a ‘royalty’, or is a ‘sale’.

The Revenue holds such sales to be royalty on the ground that during the course of sale of computer software, computer program embedded in it is also licensed and/ or parted with the enduser of the software, and as against the claim of the taxpayers who treat the transaction as one of sale of computer software and not of the computer program embedded in it. The Authority for Advance Rulings (‘AAR’) recently in its ruling in the case of Millennium IT Software Ltd., in re, 62 DTR 1 had an occasion to deal with the aforesaid issue under consideration, wherein the AAR while deciding against the taxpayer’s contention, held that the income from the transaction be regarded as a royalty, liable to tax in India. In deciding the issue in this case the AAR gave findings that were contrary to its own findings on the subject given in the earlier decisions in the cases of Dassault Systems K. K., in re, 322 ITR 125 and FactSet Research Systems Inc, in re, 317 ITR 169.

Millennium IT Software’s case

Millennium IT Software Ltd. (‘Millennium’), a Sri Lankan company, had entered into a software licence and maintenance agreement (‘SLMA’) with Indian Commodity and Exchange Ltd. (‘ICEL’), an Indian company, on 27 March 2009. Under the agreement, Millennium had allowed ICEL to use the software product ‘licensed program’, owned by it. As per the SLMA, an ‘implementation fee’ of Rs.4 crores was agreed to be paid by ICEL to Millennium for licence to use the ‘licensed program’ for 4 years and its installation, with a clause to extend the licence period at the discretion of ICEL. The other relevant terms of SLMA are provided as under:

— Millennium had granted ICEL a ‘right to use’ the licensed program for its business operation;

— Rights granted under the SLMA were nonexclusive, non-transferable, non-assignable, indivisible;

— Millennium had granted rights to make copies of the licensed program to be installed on equipments only at designated sites of ICEL and each copy of licensed program was to carry copyright, trademark and other notice relating to proprietary rights of Millennium;

— ICEL had no right to sell, distribute or disclose the licensed program or associated documents to any third party;

— No intellectual property right or licence was granted to ICEL.

Use of source code and reverse engineering of the licensed program was strictly prohibited; Based on the aforesaid clauses in SLMA, Millennium submitted before the AAR that the implementation fee was not chargeable to tax under the provisions of the Act or under the DTAA with Sri Lanka relying on some of the earlier favourable legal decisions on the subject. The Income-tax Department objected to the said contention of Millennium and submitted before the AAR, that consideration towards implementation fee should be termed as industrial intellectual property that was covered under the vires of the definition of ‘royalty’ under Explanation 2 to section 9(1)(vi).

The AAR however, to begin with, chose to classify computer software as a copyright intellectual royalty as against the Revenue’s contention that it was an industrial intellectual property. The AAR observed that ICEL under SLMA was granted a ‘licence to use’ the computer program which was owned and developed by Millennium and that the consideration paid as ‘implementation fee’ was to enable ICEL to have a ‘right to use’ the licensed program. Further, the AAR held that as per SLMA, Millennium had not only conveyed the ‘right to use’ the software to ICEL but along with the said right had also enabled ICEL to ‘use’ copyright embedded in the program though limited in nature. The AAR in addition to above, held that the second proviso to section 9(1)(vi) of the Act was substantive in nature and if the conditions of second proviso to section 9(1)(vi) were not satisfied, then the intention of the Legislature was to tax even the income from sale of a computer software as a royalty under the Act.

Distinguishing its earlier decision on the facts in the case of Dassault Systems K. K. (supra), the AAR concluded that the consideration received for ‘right to use’ the software is embedded with right or interest in computer program and therefore, would be termed as royalty under the provisions of the Act as well as Article 12.3 of the DTAA with Sri Lanka and made the following observations as regard to DTAA with Sri Lanka:

“The DTAA involved herein is the one between India and Sri Lanka. The definition of royalty contained in this treaty in Article 12.3 shows that it is a payment of any kind received as consideration for the ‘use of or the right to any copyright’. This is seen to differ from some of the later treaties like the one with USA wherein royalty is payment of any kind received as consideration for the ‘use of, or the right to use, any copyright’. The definition in the India-Sri Lanka DTAA is wider than the one found in the IT Act. For, it takes in even the consideration received for permitting another to use a copyright. Even a right to use need not be conferred.

…. It is not necessary even to grant the right to use the copyright if one were to look at it literally, though the grant of a right to use could be said to be included in the grant of a right in the copyright.”

The AAR concluded that the consideration received by Millennium from ICEL be termed as a royalty under the DTAA and u/s.9(1)(vi) of the Income-tax Act.

Dassault Systems’ case

Dassault Systems K. K., (‘Dassault’), a Japanese Company, is engaged in the business of providing ‘Product Lifecycle Management’ software solutions, applications and services. Dassault marketed the aforesaid licensed products mostly through a distribution channel comprising of Value Added Resellers (‘VAR’). VARs are independent third-party resellers who are in the business of selling software products to end-users. As per the business model, Dassault entered into General Value Added Resellers Agreement (‘GVA’) with VARs and sold the software product to VARs for a consideration based on the standard list less discount. The VARs in turn sold the products to end-users at a price independently determined by VARs. The end-users then entered into End User Licence Agreement (‘EULA’) with Dassault and VARs for the product supplied.

Based on the abovementioned facts, Dassault had sought for a ruling from the AAR as to whether the consideration received by Dassault from VARs, from sale of software products would be termed as a business income or a royalty under the Act and/or DTAA between India and Japan. Further, the AAR was explained the modus operandi of the transactions undertaken between Dassault, VARs and the end-users. Dassault submitted before AAR that the end-users including VARs in the sale of software products were only transferred copyrighted software containing computer program but not the copyright therein. It was further contended that consideration was paid for ‘use of copyrighted product and not for use of copyright in computer program’. The end-users/VARs did not avail any of the rights referred to in section 14 of the Copyright Act, 1957 (‘the 1957 Act’). The Income-tax Department objected to the contention of Dassault and submitted that consideration received by Dassault from VARs was on account of rights conferred u/s.14(b) of the 1957 Act and therefore, would be termed as a royalty under the Act.

The AAR to begin with, considered the ordinary meaning of ‘copyright’, reference was made to various definition provisions, modes of transfer of copy-right under the 1957 Act and to the earlier decision of the AAR in the case of FactSet Research Systems Inc., 317 ITR 169. It referred to various clauses of GVA and EULA agreements and the provision of section 14 of the 1957 Act and observed that passing of a ‘right to use’ and facilitating the use of a product for which the owner had a copyright was not the same thing as transferring or assigning rights in relation to the copyright. Further, it observed that “use of a copyrighted product does not entail enjoyment of rights referred in section 14 of the 1957 Act” for computer program and therefore no copyright was transferred and/or parted in the course of said transaction. Merely authorising or enabling a customer to have the benefit of data or instructions therein without any further right to deal with them independently did not entail transfer of rights in relation to copyright or conferment of the right of using the copyright. After negating the objections of the Revenue and in light of the aforesaid observations and references to some of earlier favourable legal decisions on the subject, the AAR held that considering the facts of the case no rights in relation to copyright had been transferred, nor any right of using the copyright as such had been conferred on VARs/end-users in the course of transactions.

In deciding the application, the AAR referred to the provisions of Article 12.3 of the DTAA with Japan which read as under:

“The term ‘royalties’ as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience.”

On due consideration of the said Article 12 of the DTAA and the provisions of section 9(1)(vi) of the Act, the AAR concluded that the income from the transaction under consideration was not a royalty.

Observations

The Income-tax Act, 1961 defines royalty in relation to computer program under Explanation 2(v) to section 9(1)(vi) as ‘transfer of all or any rights (including granting of license) in respect of any copyright ………..A question which requires consideration is therefore, whether the expression ‘transfer of all or any rights’ under the said Explanation can be read to implicitly cover ‘use’ or ‘right to use’.

Observations here are restricted to the provisions of the Act and no references are sought to the text of respective DTAAs, for following reasons:

The definition of royalty and the text of the provisions on royalty under the respective DTAAs are different;

Once the nature of income being discussed here fails to be termed as a ‘royalty’ under the provisions of the Act, then one may not be required even to refer to the provisions of the respective DTAAs, considering the fact that recourse to DTAA is envisaged only for any reliefs and benefits, not conferred by the Act.

The issue under consideration is otherwise a multi- faceted issue and has several dimensions which are sought to be addressed through a few questions and answers thereon.

Does the expression ‘transfer of all or any rights’ under Explanation 2(v) to section 9(1)(vi) include ‘use or right to use’?

A construction of definition of royalty under the Act explains that different actions qua the type of intellectual properties are covered and subjected to tax according to the scheme of the Act, which is tabulated below:

The Legislature in its wisdom has distinguished between the royalty for industry intellectual properties and copyright intellectual properties. It appears that the distinction is in sync with the available means through which each type of intellectual property is exploited for earning a monetary gain. To take an illustration, a technical design which belongs to industrial intellectual property type can be exploited for earning monetary gain in any of the ways as mentioned in Explanation 2(i), (ii) and (iii) of section 9(1)(vi) of the Act, but the same test may fail for films, artistic work, etc., a part of copyright intellectual property type, and vice versa.

When different provisions are made depending upon the type of intellectual property, then the part relevant thereto only should be applied while determining whether or not that part shall fall under the definition of royalty. Such a construction is in accordance with the Latin legal maxim ‘Expresso unius est exclusive alterius’. The general meaning of the maxim is that the express mention of one thing implies the exclusion of another. As a fallout of the said construction, it is possible to hold that rights as prescribed in Explanation 2(i) to (iva) of section 9(1)(vi), as in the nature of right to share information and the use or right to use thereof cannot be covered by the expression ‘transfer of all or any right (including granting of licence)’ under Explanation 2(v) of the Act. In other words, the Legislature did not seek to consider ‘use or right to use’ of computer program embedded in computer software as royalty under the Act.

What is meant by the expression ‘transfer of all or any rights (including granting of licence’ and which rights are sought to be covered?

Though the Act defines the word ‘royalty’, but the expressions viz., ‘all or any’, ‘or’ are uncertain as regard to their scope. Similarly, the terms patents, copyrights, process, invention, skill, etc., remain undefined. In such circumstances, one is required to scrutinise the legislative history to ascertain the principal intention of the Legislature. The above-referred terms are defined in their respective governing special Acts on the subject viz., Copyrights Act, 1957 (‘the 1957 Act’); Patents Act, 1970; Trade Marks Act, 1999, etc.

Section 14 of the 1957 Act defines a copyright in the computer program as a list of rights granted to the author of computer program. The Act also provides for the modes for transfer of the said list of rights in computer program viz. assignment and licence of rights. References to other types of intellectual properties provide for similar provisions under the respective Acts. The intention of the Legislature can therefore be considered as referring to the rights as listed in section 14 of the 1957 Act. The aforesaid construction is also supported by the decision of the Special Bench of the Delhi Tribunal in the case of Motorola Inc v. DCIT, 95 ITD 269.

Whether the rights referred in section 14 of the Copyrights Act, 1957 are transferred in sale of computer software to end-users?

To answer this pertinent question, one requires to appreciate the nature of the transaction which generally takes place in a sale of computer software to end-users. A sale of computer software to end-users either takes place directly from the author of the computer program to end-users or through the channel of distributors. In either case, the computer program embedded in the computer software may or may not be parted and/or licensed with the computer software. Generally, in such sale transactions, what is sought to be parted with the end-users is the copy of copyrighted program embedded in the computer software and not the copyrighted computer program.

Therefore, it requires to be seen whether in a standard End-user License Agreement (‘EULA’) of computer software between the author and end-users, any of the rights mentioned in section 14 r.w.s. 52 of the 1957 Act are made available to the end-users. A table summarising the rights u/s.14 for computer program, as available to each party, generally, to exercise after the transaction of sale of computer software is reproduced below:

Whereas the author of the computer program, as observed in the Table, has all the rights, the end-user does not have any rights under Section 14. Further, the distributors have rights to sell or give on commercial rental a copy of computer program or give limited right to reproduce and store the said computer programs. In other words, the end-users cannot exercise any rights in respect of copyrights in computer program and therefore, any consider-ation paid to the authors/ distributors by the end-user towards sale of computer software may not qualify for being termed as a ‘royalty’ under the Act. In contrast, under the agreement between the author and distributor, since the right to sell or give on commercial rental is conferred on the distributors, any consideration received by the author from a distributor in such a scenario may qualify to be termed as a ‘royalty’ under the Act.

Whether ‘computer program’ is copyright and/or industrial intellectual property?

Though it may sound ironical, but all the contrary judgments on the subject confirm to the proposition that ‘computer program’ is a literary work and qualifies to be termed as a copyright intellectual property. However, the difference of opinion stems in considering the computer program as industrial intellectual property, not being limited to patents but also as process, invention and secret formula. Since, ‘invention’, and ‘patents’ are not defined under the Act it shall be necessary to rely on the respective special Acts governing the law on the subject. Section 3(k) of the Patents Act, 1970 (‘the 1970 Act’) which defines ‘invention’ specifically excludes computer program from being regarded as invention. Section 2(m) of the 1970 Act defines ‘patent’ as an invention, thereby indirectly excluding computer program from its purview. Further, since the end-users do not have any access to the computer program embedded in computer software, they cannot be said to have rights in relation to a process. Lastly, to classify computer program as a secret formula shall be too far-fetched, considering the fact that a secret formula is placed as genus of ‘technical know-how’ under the provisions of the Act.

As a result, computer program embedded in computer software may only be termed as a copyright intellectual property under Explanation 2(v) to section 9(1)(vi).

Without prejudice to aforesaid discussions, recently the Delhi High Court in a judgement delivered in the case of CIT v. Dynamic Vertical Software India (P) Ltd., 332 ITR 222, has based on the facts and circumstances of the case where the assessee, a dealer of Microsoft, had been purchasing the on the subject software from Microsoft and selling it further in Indian market held that the payment made by the assessee to Microsoft could not be termed as a ‘royalty’. Therefore, it can be said that computer software is not a copyright intellectual property.

Lastly, if the rights to use intellectual property are capable of and are allowed to be transferred in sale of computer software to end-users, then every second person would have been capable of developing softwares like Microsoft, Oracle, etc. The general understanding of the word ‘royalty’ in the context of copyright refer to a consideration received by the author from the publisher, who published his work and not as a consideration received by the publisher from the end-user on sale of copy of work.

Based on the aforesaid discussions and observations made in the decision in the case of Dassault Systems (supra), it appears that the ratio of the recent decision of the AAR in the case of Millennium IT Systems (supra) may require reconsideration.

Adding to the bandwagon of major judgments, the AAR has recently in the case of Upaid Systems Limited, In re, 885 of 2010, dated 12th October 2011, based on the facts and circumstances of the case, held that the consideration paid by Satyam to Upaid for perpetual licence of right to use computer software shall be taxable as ‘royalty’ under section 9(1)(vi) of the Act.

1    Facts in the case of Dassault Systems K. K. (supra) were different then generally prevailing in the industry or found in the case of Gracemac Corporation v. ADIT, (supra)
2    For limited purpose as provided in section 52 of the Copyright Act, 1957
3    Facts in the case of Dassault Systems K. K. (supra) were different then generally prevailing in the industry or found in the case of Gracemac Corporation v. ADIT, (supra)
4    Motorola Inc v. DCIT, (95 ITD 269) (Del.) (SB)
5    Gracemac Corporation vs ADIT (47 DTR 65) (Del)
6    Sonata Information Technology Ltd vs ACIT (103 ITD 324) (Bang.)
7    Frontline Soft Ltd vs DCIT (12 DTR 131) (Hyd)

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Amnesty to tax evaders worries Transparency International

Amnesty to tax evaders worries Transparency International with the government considering a plan to offer an amnesty scheme for voluntary disclosure of undisclosed bank accounts and assets held abroad, corruption watchdog Transparency International (TI) has expressed concerns about the amnesty to tax evaders. “Implicit in the proposal is acceptance that business corporate houses and individual businessmen have maintained secret bank accounts in foreign countries both by evading taxes and concealing the source of money, which could involve criminal and terrorist activities,” said P. S. Bawa, chair of Transparency International India. The watchdog said the earlier amnesty schemes were premised on the ground that business houses and individuals would learn a lesson, declare income, and pay taxes in future. But, it added, that this has apparently not happened and the hopes of the government have been belied. TI also believed that the present move confirmed the inappropriateness of such schemes that pardoned not only illegal activities and concealment of sources of income, but also evasion of taxes, all of which are punishable under the common and taxation laws. The body said the scheme encouraged tax evaders to continue such practice in the future. “Condoning such opaque activities that are against all norms of transparency, projects the image of the India as a reluctant, soft, and pliable State,” said the press release. TI reiterated that this would be a violation of the basic tenets of the Constitution that provides for rule of law and not executive orders that appear to be arbitrary and in violation of the fundamental right of equality before law.

(Source : www.business-standard.com)

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IS IT FAIR FOR THE BUREAUCRATS TO INDULGE IN WASTEFUL FORMALITIES?

Introduction
All of us understand the importance of rules and procedures. However, unfortunately the bureaucrats fail to appreciate the very purpose of such rules and procedures. This is not to say that the rules may be bypassed or not complied with. Here is an instance as to how the approach of a government’s office defeats the very purpose of a prescribed formality.

The unfair instance
Recently an application was made to the Director, Software Technology Park of India (STPI), Navi Mumbai under the Right to Information Act, 2005 for obtaining certain information about their status under the Industrial (Development & Regulation) Act, 1951. A similar kind of confirmation was already given by STPI in three other cases. The present application was made since it was insisted upon by the tax authorities. This in itself is another problem.

Court fee stamps worth Rs.10 were affixed to the application
After about 15 days, a letter was received from STPI, New Delhi that the payment of fees by way of court fee stamp was not acceptable. They insisted on payment by cash/DD/postal order.

It was then verified from their website that the fee could be paid only by DD or by postal order. There is no mention of cash. The following questions immediately arise:

(a) they could have easily pointed out such deficiency (if at all it is so) at the time of accepting the application itself.

(b) There is no consistency between what is written in the letter and what appears on the website — in respect of cash payment.

(d) The amusing thing is that the bank charges for the DD of Rs.10 were Rs.30. Further, even the STPI authorities sent the same from New Delhi by speed-post, which was again a waste of money.

Incidental
On the same subject, in the context of section of 10B of the Income-tax Act, 1961, there is an Instruction no. 2/2009 of CBDT, dated March 09, 2009 that an approval granted by Director of Industries (STPI) if ratified by the Board of Approval (BOA) is valid. While clarifying this point, STPI office confirmed that the approval granted by them need not be ratified by BOA.

However, in the letter from STPI there was a typographical error. Instead of the word ‘ratified’ it was typed as ‘rectified’. The concerned CIT (Appeals) insisted on a separate confirmation from STPI regarding this obvious typographical error.

The wasteful aspect of this exercise is selfevident.

Conclusion
(1) The authorities should be made aware of the purpose and spirit of the rules.
(2) They should be trained to do a cost benefit of analysis.
(3) They should be made aware that their adamant attitude in waste of national resources.
(4) There should be clarity and consistency at all levels.

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A.P. (DIR Series) Circular No. 12, dated 15- 9-2011 —Savings Bank account maintained by residents in India — Joint holder — Liberalisation.

This Circular permits resident in India to include their non-resident close relative(s) (relatives as defined in section 6 of the Companies Act, 1956) as joint holder(s) in their resident bank accounts on ‘former or survivor’ basis. However, such nonresident Indian close relatives are not permitted to operate the said bank accounts during the life-time of the resident account holder.

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A.P. (DIR Series) Circular No. 11, dated 7-9- 2011 — External Commercial Borrowings — Simplification of Procedure.

Presently, RBI approval is required for change of lender for existing External Commercial Borrowings (ECB).

This Circular has delegated the powers for approving change of lender for existing ECB to AD Category-I banks in cases where the original lender is an international bank or a multilateral financial institution (such as IFC, ADB, CDC, etc.) or a regional financial institution or a Governmentowned development financial institution or an export credit agency or supplier of equipment and the new lender also belongs to any one of the above mentioned categories, subject to the following:

(i) The new lender is a recognised lender as per the extant ECB norms;

(ii) There is no change in the other terms and conditions of the ECB; and

(iii) The ECB is in compliance with the extant guidelines.

However, RBI approval will have to be obtained, as at present, where change in the recognised lender is due to change of foreign equity holder and foreign collaborator.

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DIARY OF A NOVICE

Monday — Afternoon

I have a meeting in the company of my employer over lunch with executives of a multinational company. The company is a client of my employer. We are discussing issues relating to certain approvals that we need to obtain from some government departments for the client. My employer informs the executives that we need to take some extraconstitutional measures to speed up the process of approvals. The executives tell my employer that since their company is multinational, they are bound by the code of ethics which their principal has mandated to be observed in India. The code prohibits them from taking any extra-constitutional measures. I suggest to my employer that we could ourselves take the extra-constitutional measures and get reimbursed for the cost by way of higher fees that the multinational company may pay. My suggestion is not only accepted by all, but also appreciated. I rise in esteem in the eyes of everybody.

At night I wonder how come I could think of a suggestion I should have never been able to think of, given my nature. I am glad that I helped the executives observe their code. I learnt the lesson that it is possible to maintain moral standards through immoral means.

Tuesday — Morning

I am accompanying a senior tax counsel in the Income-tax Appellate Tribunal. My employer has asked me to accompany the counsel, which was a reward for my brilliant suggestion that I made yesterday. Our client has engaged the counsel to argue a matter before the ITAT. Besides being a reward, my visit to the ITAT was necessary since I had worked as a lower-level income-tax authority. I am more aware of the facts than the counsel. That is the reason my employer has asked me to accompany the counsel, so that I can give my inputs on the facts, if required.

I am sitting just behind the Departmental Representative (DR). I start discussing the case with our counsel. The counsel snubs me for revealing the line of arguments that we are going to take, lest the DR should overhear and frame his strategy accordingly. I become silent. The members arrive in the Court Room. When our case is called out, the counsel stands up and makes an impressive presentation. I know he maintains silence about certain crucial facts. Then the DR makes his submissions. The members find themselves in an utterly confused state as regards the facts and decide to restore the matter back to the AO. Our counsel marches out of the Court room in a victorious manner.

At night
All along I had read and was taught that counsels are officers of the Court and counsels from both sides to a litigation are supposed to assist judges deliver justice. I always thought that everybody’s including the litigants’ interest was best served when justice was done. I always thought there was no winning or losing in a Court; it was all about securing justice. It is always justice that should emerge victorious in any Court, or so I thought. I thought justice could be secured by being transparent. Then, why did the counsels frame strategies and keep them from the other side? A case which would have been brought to a closure was restored back only because the counsels from both the sides did not assist the judges properly. I also suspect my counsel wanted the case go back to the officer for reasons best known to him. If that was so, he has succeeded in his attempt.

I now know it is all about winning and losing in courts. It is a battle in Court without conventional weapons. It is less about justice and more about winning. I learnt that there is no absolute justice.

I take a mild tranquilizer and go to sleep.

Wednesday — Morning

I am asked by my employer to appear before a government official. I go to his office. There are others waiting to meet the same officer. I overhear them talking that the officer is very upright. My heart gladdens to hear that. Perhaps it is my skepticism. I always take the stories of upright officer incredulously.

The usher asks me to go in. I find the officer upright. He tells me that I could not expect certain reliefs we had sought. I am also convinced that the law on this issue was against us. I give up and prepare to stand up. He then requests me to find out if my client could arrange for his son a distributorship of some products that my client manufactures. I nod in affirmation. He then suggests a way out for the relief that I had sought. I could modify our application for relief in a particular manner so that it would fall in a certain category, so as to enable him to grant relief we wanted. I agree to do so and leave.

At night I am glad to discover today that methods of grafts come in a variety of ways. I get a better sleep than I have had the two previous nights.

Thursday — Noon

I am at a seminar where my employer is the guest speaker. He has just finished his presentation. He is hugely applauded and I am proud to have an enlightened employer, though my heart tells me that he has created more issues in his presentation than he has answered.

We break for lunch. There is a murmur among the participants. Most of them find themselves more confused than they were in the morning. I see my employer with a dish in his hands, surrounded by such ignoramuses. They are trying to extract answers to some of the issues my employer has thrown in the presentation. My employer seems to be asking those people to come to his chamber.

At night I wonder whether my employer really possessed answers to those issues. I thought it was wise to believe in his prowess rather than be counted among ignoramuses. I also learnt that professionalism is not being true to one’s self; it is being true to others’ selves. Give answers what others want; not what you believe to be true.

I have a really sound sleep.

Friday — about 1.00 p.m.

There is an agitation organised by a professional body of which my employer and I are members. The agitation is against corruption. The agitation is planned for an hour post lunch. We all colleagues and my employer reach the venue of the agitation. I find in the melee those executives of the multinational company I had met on Monday, and the honest government officer. We all march with caps on our head and placards in our hands with anti-graft slogans from Gateway of India to the Taj Hotel. Our march ends there. I notice that those executives have vanished into the Taj Hotel. I do not know why. I had seen pangs of hunger on their face when they were walking in the march.

At night

I learnt today that everybody has the right to protest against corruption no matter who he is. I am happy I am growing wiser and wiser day by day. People around me also tell me that I show a good amount of maturity in my approach. They tell me that I am practical.

My days of slumber are over. I have deep sleep more so thinking that the next day is a Saturday.

Saturday — Day

I have nothing to write today. Office is closed. I will miss the opportunity of getting still wiser. I am surprised at my appetite for learning things every day.

I now bask in the glory of the knowledge of being a man who is wise, matured, and of all the things, ‘practical’. At night Only sound sleep.

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A.P. (DIR Series) Circular No. 10, dated 7-9-2011 — Deferred Payment Protocols, dated April 30, 1981 and December 23, 1985 between Government of India and erstwhile USSR.

The Rupee value of the special currency basket, with effect from August 23, 2011 is Rs.66.9682 as against the earlier value of Rs.64.7004.

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A.P. (DIR Series) Circular No. 9, dated 29-8-2011 — Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident Exchange Houses.

Presently, under the Rupee Drawing Arrangements (RDA), inward remittances for permissible purposes are received in India through Exchange Houses situated in Gulf countries, Hong Kong and Singapore, with prior approval of RBI.

This Circular has extended this facility of RDA under the Speed Remittance procedures to Exchange Houses situated in Malaysia.

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Domain Names

A domain name, to put it simply, is a host-name that identifies Internet Protocol (IP) resources such as a website.1 For example www.kodak.com is the domain name of the website belonging to the Kodak Corporation. If one were to type the above domain name into the browser of their computer they would be directed to the relevant web page belonging to the Kodak Corporation. The Internet, as is well known, is a global network of networks whereby several computers are interconnected to each other. A domain name, thus, enables one computer to reach a particular web page/website and access the desired content.

In the context of the development of e-commerce, the importance of a domain name and its protection to a modern-day businessman is immense. A domain name consists of a top-level domain name and a second-level domain name. The top-level domain name in the above example would be ‘.com’ whilst the second-level domain name would be ‘kodak’. A common practice these days is to have a second-level domain name which consists of the trade mark and/ or trade name of the business as is evident from the said example. Hence, the wrongful use by a third person of a domain name could be extremely harmful to the goodwill, reputation and business of the owner of the domain name. Thus, the primary question which arises is whether a domain name which may consist of a trade mark or trade name can be protected as a form of intellectual property.

However, before dealing with the law on the aspect of protecting domain names, it would be important to have a basic understanding from the technical standpoint as to how the Internet functions and what is the role of a domain name, etc. in order to effectively understand the role of a domain name in practice.

Working of the Internet
As is well known, the Internet is a network of networks. Hence, a fundamental requirement would be that there must exist a system of locating one another as in locating different computers.

The system as it currently exists is that at one end is the user accessing the Internet from, usually, a computer. At the other end is a server, on which is stored in electronic form, the website which the user wishes to access. The user gains access to the Internet at a gateway, either via an internet service provider (ISP) or via a smaller, usually internal, network called an Intranet. In the middle is a highly sophisticated network comprising router and other computers linked together. Each computer connected to the Internet has a unique numerical address known as the Internet Protocol address (for example, 1.256.123.123) so that electronic information is delivered to the right place. To make these identification numbers more user-friendly, they can be associated with identifiers consisting of alphanumeric characters. These identifiers are Internet domain names. Because they are made up from alphanumeric characters, it is possible for the sequence of characters to spell out words and hence trade marks or other signs used by businesses2.

When the Internet was in its infancy, the system of registering domain names was done through a department of the Government of United States of America. However in the 1990s the United States Government put together an interagency working group to formulate a policy on privatising the domain name system. The idea of a new private non-profit corporation to administer the domain name system evolved into the setting up of the ICANN (Internet Corporation for Assigned Names and Numbers). ICANN was formed in 1998 and is a corporation with participants from all over the world dedicated to keeping the Internet secure, stable and interoperable. The ICANN allows different registrars to register domain names for use on the internet. ICANN, however does not control the content on the domain.

Law in India
Now let us examine the legal position in India on the protection of a domain name as a form of intellectual property. The issue is no longer res integra and has been answered categorically by the Supreme Court in the case of Satyam Infoway Limited v. Sifynet Solutions Private Limited3. The respondent in the said appeal had raised the defence that a domain name is merely an address on the Internet. The registration of a domain name with ICANN could not confer any intellectual property right, since the same was a contract with a registration authority allowing communication to reach the owner’s computer via Internet links channelled through the registration authority’s server which was in a way akin to registration of a company name which is a unique identifier of a company but by itself confers no intellectual property rights. The Apex Court, however, negatived the said contention and held, inter alia, as under;

“The original role of a domain name was no doubt to provide an address for computers on the Internet. But the Internet has developed from a mere means of communication to a mode of carrying on commercial activity. With the increase of commercial activity on the Internet, a domain name is also used as a business identifier. Therefore, the domain name not only serves as an address for internet communication, but also identifies the specific Internet site. In the commercial field, each domain name owner provides information/services which are associated with such domain name. Thus a domain name may pertain to provision of services within the meaning of section 2(z). A domain name is easy to remember and use, and is chosen as an instrument of commercial enterprise not only because it facilitates the ability of consumers to navigate the Internet to find websites they are looking for, but also at the same time, serves to identify and distinguish the business itself, or its goods or services, and to specify its corresponding online Internet location. Consequently a domain name as an address must, of necessity, be peculiar and unique and where a domain name is used in connection with a business, the value of maintaining an exclusive identity becomes critical. “As more and more commercial enterprises trade or advertise their presence on the web, domain names have become more and more valuable and the potential for dispute is high. Whereas a large number of trademarks containing the same name can comfortably co-exist because they are associated with different products, belong to business in different jurisdictions, etc., the distinctive nature of the domain name providing global exclusivity is much sought after. The fact that many consumers searching for a particular site are likely, in the first place, to try and guess its domain name has further enhanced this value”. The answer to the question posed in the preceding paragraph is therefore an affirmative.”

The Apex Court, further held that the use of the same or similar domain name may lead to a diversion of users. Diversion of users means that a person may be directed to another website instead of the website he desires to access. To illustrate consider a case where a user is searching for www.kodak. com, but inadvertently types www.kodake.com into the Internet browser or a search engine and is then directed to the webpage of some third party, this would mean that he has been diverted away from the webpage he sought access to. This would be a form of passing of wherein the user of the mark ‘kodake’ is using the goodwill of the mark ‘kodak’ to divert customers to his website. This could impact e-commerce and its features of instant accessibility to users and potential customers and particularly so in areas of overlap between the two domains. Ordinary consumers/ users seeking to locate the functions available under one domain name may be confused if they accidentally arrived at a different but similar website which offers no such services. Such users could well conclude that the first domain name owner had mis-represented its goods or services through its promotional activities and the first domain owner would thereby lose their custom. It is apparent therefore that a domain name may have all the characteristics of a trade mark and could be protected as such.

Thus, the Apex Court squarely holds that a domain name can be protected as a trade mark. Hence, the proprietor of a trade mark may prevent a wrongful use of a domain name which is identical with and/or deceptively similar to its trade mark by filing proceedings for infringement and/ or passing off.

One factor which must be noted though is that whilst a trade mark is territorial, inasmuch as it would normally be registered within each country separately and protected by the laws of that country, a domain name is registered and used in cyberworld bereft of national boundaries. Thus protection under the national legal system of a country may not always suffice.

To illustrate if Kodak Corporation filed a suit in India against an infringer for injunctive orders against the use of the domain name ‘kodak. com’, the order of the Indian Courts would only be effective within the territory of India and not beyond, even though the infringing website can be accessed from anywhere in the world. Hence, in order to provide a solution to overcome this hurdle, the ICANN adopted the Uniform Dispute Resolution Policy (UDRP).

Uniform Dispute Resolution Policy

The UDRP is a dispute resolution mechanism set up by the ICANN based on the report of the World Intellectual Property Organisation (WIPO). India is one of the 171 countries of the world, who are members of WIPO. WIPO was established as a vehicle for promoting the protection, dissemination and use of intellectual property throughout the world.

The UDRP is incorporated by reference into every agreement for registration of a domain name. The UDRP states that if a third party complainant asserts to the relevant Registrar of domain name that the impugned domain name is identical or confusingly similar to the complainant’s trade mark or that the alleged registrant of the domain name has no rights or legitimate interests in respect of the domain name or that the domain name is being used in bad faith, then the dispute will be submitted to a mandatory administrative proceeding.

Thus, under the UDRP a complaint may be filed by any party based on the criterion required by the policy for either cancellation or transfer of the domain name. The proceedings are heard and decided by the members of the administrative panel. It may be relevant to note that the said mandatory administrative proceeding does not bar recourse to Courts and that the policy provides that either the complainant or the registrant may approach a Court of competent jurisdiction for independent resolution of the disputes before the administrative proceedings are commenced or after they are concluded. In fact, even an order of the administrative panel is not to be executed for a period of 10 days after it is passed to enable the registrant to approach a Court of competent jurisdiction. In such a case, the panel’s decision would normally stand stayed till the outcome in the lawsuit4.

Thus, any person aggrieved by the wrongful use of a domain name has in principle two routes available to him. The person aggrieved may initiate an action for infringement and passing off under the trade mark law in a Court of competent jurisdiction, if the other requirements are met and may also file a complaint under the UDRP for cancellation and/or transfer of the impugned domain name.

Cybersquatting

At this juncture, before concluding, I would like to draw attention to one of the most common problems faced with respect to wrongful use of domain names i.e., cybersquatting. Cybersquatting (also known as domain squatting), according to the United States federal law ‘Anticybersquatting Consumer Protection Act’, is registering, trafficking in, or using a domain name with bad faith intent to profit from the goodwill of a trade mark belonging to someone else. The cybersquatter then offers to sell the domain to the person or company who owns a trade mark contained within the name at an inflated price5.

This is a very nefarious and prevalent practice. Cybersquatters register several trade-marks as domain names and then hoard them, so that the true owner cannot register a domain name in consonance with its trade mark. At this stage the cybersquatter would then offer to sell the domain name to the true owner of the trade mark thereby making a wrongful profit. A recent illustration of this in the Indian context would be the case of Mr. Arun Jaitley. Mr. Jaitley wanted to register a domain name with his name, but was informed that the domain name www. arunjaitley.com was already registered. The Delhi High Court after considering the several facts involved in that matter was pleased to direct transfer of the domain name and grant punitive damages6.

Another form of cybersquatting would be where the top-level domain name is changed to make several different domain names, such as www.arunjaitley.in or www.arunjaitley.org. In such cases also protection may be sought as in the earlier case.

The problem of cybersquatting is rampant and very serious, hence in addition to the protection already available under the law relating to trade marks and under the UDRP, it may be important to draft a specific legislation to meet with and provide an efficacious remedy against such cyber-squatters. The primary need for such a legislation is obvious inasmuch as the prevalent laws do not deal with such situations, but Courts have by broadly interpreting the prevalent statutes carved out remedies.

Considering the importance and prevalence of the Internet in our lives today, it stands to reason that a domain name is a very valuable property. Second-level domain names which normally tend to consist of the trade mark of a business are the key identifiers to enable a consumer to reach the address/ webpage he wishes to access. There may be cases where a consumer reaches a website only to find that the webpage does not belong to the host he is looking for however, the damage of diversion is already done. Hence, it is imperative that all trade mark owners even if they do not maintain a presence in cyberspace ensure that no wrongful use and/ or deceptive use of their trade mark is being used. Such vigilance is necessary to ensure protection of the trade mark and the goodwill and reputation therein as also to prevent unwary consumers from being deceived.

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VIOLATION OF CODE OF CONDUCT FOR INSIDER TRADING — whether punishable by SEBI?

Can a Director be punished for violating the Company’s Code of Conduct on insider trading? What is the implication if the law only requires that the Company frame a Code, but does not make violations of the Code punishable? The answer to this question is not just critical for all listed companies that have framed fairly stringent Code of Conduct for insider trading, but is also relevant as a fundamental question of law. It should make companies also pause before drafting any Code of Conduct — whether for insider trading or otherwise. This question arises for consideration on account of a recent decision of the Securities Appellate Tribunal (‘SAT’) which has held that violation of the Code of Conduct is punishable with penalty. And, if extended to its logical end, this conclusion would imply that other penal consequences could also follow.

It is worth discussing the background and general context of this issue first. Generally, SEBI provides detailed Regulations for orderly development of capital markets, etc. It regulates and punishes evils such as price manipulation, fraudulent market practices, insider trading, etc. and also provides for other regulations for investor protection, etc. SEBI did attempt to delegate some self-regulatory powers to bodies such as intermediaries, associations and even the companies themselves. The objective seemed to ensure self-discipline so that the burden on SEBI is reduced and SEBI comes into the picture for serious violations or where the self-regulating body itself is negligent. To that effect, the idea was also to circulate model Codes of Conduct which the self-regulating body could follow. Such model also helps in creating a sense of voluntary self-discipline.

However, SEBI often does lay down such Code of Conduct as part of Regulations to be followed without option and in other cases, it requires that the Company frame a Code and gives a model draft. Thus, for example, in cases of stock-brokers, the Code of Conduct laid down for them is prescribed as part of the Regulations which they have to follow and in case of violations, penal consequences follow.

In the SEBI (Prohibition of Insider Trading) Regulations, 1992 (‘the Regulations’), companies and other entities were required to draft a Code of Conduct (for which a model was given) and then they were left to enforce it in the manner they deemed fit. It is important to note that the basic act of insider trading was defined in great detail in the Regulations itself. Insider trading was made punishable with penalty, apart from other penal consequences. However, to ensure that even companies take preventive steps to ensure that insider trading does not actually happen, a ‘model code of conduct’ was provided and the Regulations stated that the companies “shall frame a code of internal procedures and conduct as near thereto the Model Code . . . . . without diluting it in any manner and ensure compliance of the same”. Further, the companies were also required to “adopt appropriate mechanisms and procedures to enforce the Code”. It was also clarified that “action taken by the (company) for violation of the code . . . . . . shall not preclude (SEBI) from initiating proceedings for violation of these Regulations”. The Code consists of procedures like ensuring control over sensitive information, procedures for purchase/sale of shares by the employees, etc., prohibition on sale/purchase in short gaps, etc.

The Code itself provides that for violation of the provisions of the Code, the person concerned “may be penalised and appropriate action may be taken by the company” and “shall also be subject to disciplinary action by the company” of various types which may include wage freeze, etc.

Clearly, if the Company does not frame such a Code of Conduct, it would have violated the Regulations which would result in appropriate penal and other action. However, the question then is if an employee or director violates the Code, and it is not a case of insider trading under the Regulations, can SEBI take action against such employee/director? That was the issue raised in the present case.

The facts of this case can be summarised as follows. The listed company had proposed to carry out certain restructuring transactions which were price-sensitive. The Board of the Company met and passed resolution for such transactions. The Company duly disseminated to the stock exchanges the fact that such decisions were taken. The Managing Director of the Company (‘the MD’), however, sold shares of the Company.

Insider trading is essentially an act where an insider deals in securities of a Company on the basis of unpublished price-sensitive information. Now it is important to note that in the present case, there was no allegation that the MD engaged in insider trading. However, he sold the shares before expiry of 24 hours of the outcome of such Board Meeting being made public. Thus, he was alleged to have violated the Code of Conduct of the Company.

The MD resigned as a Managing Director of the Company and thereafter the Company did not take any action against him apparently satisfied with his voluntary act of resigning as the Managing Director.

However, SEBI initiated action against the MD alleging that he had violated the Code of Conduct. The MD’s contention that violation of the Code was not violation of the Regulations was not accepted and a penalty of Rs.1 crore was levied on him. The MD appealed to SAT which upheld the order of the Adjudicating Officer, but reduced the penalty to Rs.25 lakhs.

Some important extracts from the SAT order are given in the following paragraphs (emphasis provided).

“It needs to be noted that the charge against the appellant in the show-cause notice is of violating Regulation 12(1) read with clause 3.2-3 and 3.2-5 of the code of conduct specified under Part A of Schedule I of the Regulations. In the impugned order, the appellant has been held to be guilty of violating the provisions of the code of conduct only. There is no allegation of insider trading against the appellant. It is not in dispute that the appellant had sold shares within the period when trading window was closed and thus violated the code of conduct prescribed by the company in terms of the obligations imposed upon it under the Regulations. The case of the appellant is that such violation of the code of conduct does not amount to violation of the provisions of the Act or the Regulations framed thereunder and hence not punishable by the Board. It is for the company alone to take action against the appellant. The question that needs to be answered, therefore, is whether violation of the code of conduct formulated by the company in compliance with the requirements of Regulations amounts to violation of Regulations

. . . . . Paragraph 5 of the code of conduct provides for reporting requirements for transactions in securities by all directors/officers/ designated employees and the compliance officer of the company is required to maintain records of all such declarations in the appropriate form.

(The Code) also provides that any sale/purchase or acquisition of shares and securities by all directors/ officers/designated employees shall not be allowed during a period of one exclusive day and conclude one exclusive day after the specified corporate action including declaration of financial results and declaration of dividends.

9. Having considered the submissions made by learned counsel for the parties and after going through the records and the provisions of the regulations referred to above, we are of the considered view that the only possible conclusion that can be arrived at is that the code of conduct prescribed by the company for prevention of insider trading as mandated by the Regulations for all practical purposes is to be treated as a part of the Regulations and any violation of the code of conduct can be dealt with by the Board as violation of the Regulations framed by it. It needs to be appreciated that each company may like to add certain activities regulation of which may be necessary for preservation of price-sensitive information. The Board, cannot foresee all such contingencies and, therefore, it has laid down model code of conduct prescribing bare minimum conduct expected from the directors/ designated employees of the companies. The framing of code of conduct as near to the model code of conduct specified in the Schedule to the Regulations is mandatory for each company. The use of the word ‘shall’ makes it abundantly clear that this is a bare minimum conduct expected from the employees of the company. Paragraph 6 of the model code of conduct also makes it clear that the action by the company shall not preclude the Board from taking any action in case of violation of the Regulations.

…..the different nomenclature given to the code of conduct as a model code of conduct is to provide sufficient leverage to the company to make additions to the bare minimum code as prescribed in the Schedule to the Regulations.

11. The provisions of the Regulations have to be interpreted keeping in view the aims and objectives of the Act. The main object of the Act is to protect the interest of investors in securities and to promote the development of and to regulate the securities market. In case the interpretation given by learned senior counsel for the appellant is accepted, it may lead to a situation where a person is not punished by the company for violating the code of conduct based on the model code of conduct prescribed in the Regulations and the Board finds itself unable to take action because the code of conduct is framed by the company. In fact this is what has precisely happened in this case. The company vide its letter dated February 11, 2008 has informed the Board that the appellant resigned from the office of the Managing Director and it was not possible to persue any action against him and the company decided to close the matter…. The purpose of the insider trading regulations is to prohibit trading by which an insider gains advantages by virtue of his access to price-sensitive information. The evil of insider trading is well recognised. A construction should be adopted that advance rather than suppress this object. To adopt the construction as suggested by the learned senior counsel for the appellant would result in allowing insider trading within a period set by the Board or by the company during which no trading is permissible.

12. We are, therefore, of the considered view that violation of the code of conduct, as framed by the company in accordance with the mandates prescribed in the Regulations, is nothing but part of the Regulations and any violation thereof is punishable by the Board also as violation of the Regulations in addition to such action that may be taken by the company. Any other view taken in the facts and circumstances of the case will defeat the very purpose of the Regulations in question.”

It is submitted with respect that the decision of SAT is erroneous in law. It goes against the wording of the law as well as the nature of the Code of Conduct prescribed in the insider trading Regulations. The only requirement under the Regulations is that the Company should frame the Code of Conduct. If the Company does not frame the Code of Conduct, there is a violation by the Company. If the Company frames the Code of Conduct and if an employee violates it and the Company does not take action, then too the Company may be held liable. However, there is no requirement in the Regulations that employees should follow the Code and if they do not, there would be punishment. Neither is there such a requirement nor is any penal consequences provided. It is not clear how an act can be punished when there is no requirement in law to follow it and also no requirement in law providing for punishment.

If SEBI is deemed to have the power to punish violations of the Code of Conduct, then the provision that the Company ‘may’ take action for violation of the Code of Conduct and this not preclude power of SEBI to punish for violations of the Regulations may be redundant.

The concern of SAT that persons may get away with insider trading if such an interpretation is taken is totally misplaced. The Regulations clearly cover cases of insider trading. In this case, no allegation at all was made of an act of insider trading. The violation was of a procedure to prevent insider trading. If there was no insider trading at all, then there is no question of any punishment. A preventive provision is to ensure that insider trading does not take place. If a person does not follow the preventive step, then the Company may punish such person. If the person does not follow the preventive step and also commits insider trading, then the Company and SEBI both may punish such person. But merely for not carrying out the preventive step which is regulated by the Company and when there is no insider trading at all, SEBI has no role to play.

Insider trading is certainly a bane in the capital markets and needs sternest of action. However, it is submitted that this decision needs reconsideration. It creates a wrong precedent and uncertainty as to the manner in which laws would be framed and enforced.

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Online Incorporation of Companies in 24 Hours.

The Ministry of Corporate Affairs has vide its General Circular No. 49/2011, dated 23rd July 2011 modified the procedure for incorporation of companies. It is now possible to incorporate a company within 24 hours, provided the Form 1, 18 and 32 have been certified by the practising professional with regard to the correctness of the information and declarations given by the subscribers. This facility is optional and forms can also be processed by the Registrar of Companies where no such certification is done by a practising professional.

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DAUGHTER’S RIGHT IN COPARCENARY

Editor’s Note
Two articles by the learned author on the same subject were published in the Journal, (BCAJ — January 2009 and BCAJ — May 2010). This article explains the subject further.

Hindu Law is quite complex and it has become more complex in spite of (or possibly as a result of) its codification. As has been seen in case of other laws enacted by the Parliament, imprecise language has often resulted in spate of litigation for the exact interpretation of the law.

However, one cannot blame only the Legislature. One additional reason for the problem is that while some part of Hindu Law has been codified (e.g., succession, adoption, marriage), the rest of customary Hindu Law still remains uncodified. Subjects like joint family, coparcenary, etc. have not yet been codified. Moreover, rules under the old Hindu Law differ in respect of different schools of Hindu Law like Mitakshara, Dayabhaga, etc.

In my two articles on ‘Daughter’s Right in Coparcenary’ (BCAJ — January 2009 Page 509 and BCAJ — May, 2010 Page 15) I attempted to answer some of the questions affecting a daughter’s right in coparcenary and attempted to analyse some decided case law on the subject.

The Hindu Succession Act, 1956 (‘the Act’) was amended by the Hindu Succession (Amendment) Act, 2005 (‘the Amendment Act’) with effect from 9th September, 2005. Section 6 of the Act, which was substituted by the Amendment Act to the extent it is relevant to this Article reads as under:

“6. Devolution of interest in coparcenary property. — (1) On and from the commencement of the Hindu Succession (Amendment) Act, 2005, in a joint Hindu family governed by the Mitakshara law, the daughter of a coparcener shall, —

(a) by birth become a coparcener in her own right in the same manner as the son;

(b) have the same rights in the coparcenary property as she would have had if she had been a son;

and any reference to a Hindu Mitakshara coparcener shall be deemed to include a reference to a daughter of a coparcener:

Provided x x x

(2) to (5) x x x

Section 6 of the Act (as amended by the Amendment Act) inter alia provides that on and from the commencement of the Amendment Act, in a joint Hindu family governed by Mitakshara law, the daughter of a coparcener by birth becomes a coparcener in her own right in the same manner as the son. The section further provides that any property to which a female Hindu becomes entitled by virtue of the provision shall be held by her with the incidents of coparcenary ownership and shall be regarded as property capable of being disposed of by her by testamentary disposition.

In customary Hindu Law, according to Mitakshara School, the female heirs were not members of the coparcenary. With a view to remove gender discrimination in our laws and to give equal status to a female, various States in the country made State amendments in the Act conferring right on a daughter in the coparcenary property. However, such amendments were not done uniformly by all the States resulting in different provisions applicable in different States. Moreover, while certain rights were conferred on unmarried daughters, there were restrictions as to the rights of a married daughter. Therefore, the Amendment Act was supposed to bring about the uniformity in the country so as to give benefit to a daughter, irrespective of her being married or otherwise.

It is unfortunate that the amendments brought about by the Amendment Act have resulted in a large number of court cases spread over the country.

In my last article I have dealt with a question whether a daughter would get benefit of the Amendment Act if her father was not alive at the time of coming into force of the Amendment Act. In the present article I propose to deal with another controversy on interpretation of the amended section.

Section 6(1) of the Act starts with words ‘on and from’ and goes on to deal with ‘on and from’ the commencement of . . . . . . the daughter of a coparcener shall by birth become a coparcener’. The questions which have arisen before courts in this behalf are (i) what do the words ‘on and from’ signify and (ii) whether the words ‘by birth become a coparcener’ make the Amendment Act retrospective.

In the case of Sugalabai v. Gundappa & Ors., ILR 2007 Kar. 4790 [also 2008(2) Kar LJ 406], the Karnataka High Court had occasion to consider the effect of the words ‘on and from’. It has observed that the words ‘on and from’ mean ‘immediately and after’ the commencement of the Act. It is observed that in other words as soon as the Amendment Act came into force, the daughter of a coparcener becomes by birth a coparcener in her own right in the same manner as the son. The Court also observed that there was nothing in the Act which showed that only those born on and after the commencement of the Act would become coparceners and it was held that even a daughter who was born prior to the Amendment Act became a coparcener immediately on and after the Amendment Act.

It has been held in the case of Pravat Chandra Pattnaik & Ors. v. Sarat Chandra Pattnaik & Anr., AIR 2008 Orissa 133 that the aforesaid amendment was enacted for removing the gender discrimination that prevailed leading to oppression and negation of the fundamental right of equality to women and to render social justice by giving them equal status in society. The Act came into force from 9th September 2005 and the statutory provisions u/s.6 of the Hindu Succession Act, 1956 thereof created a new right. The provisions are not expressly made retrospective by the Legislature. The Act is clear and there is no ambiguity. Therefore, words cannot be interpolated. They do not bear more than one meaning. The Act is therefore, prospective. It creates a substantive right in favour of the daughter. The daughter gets a right of a coparcener from the date when the Amended Act came into force. Consequently, the contention that only the daughters who were born after 2005 would be treated as coparceners was not accepted. It specifically clarifies that the daughter gets a right as a coparcener from the year 2005, whenever she may have been born.

In a very recent unreported judgment, the Bombay High Court has referred to the above cases with approval and taken similar view (see Sadashiv Sakharam Patil v. Chandrakant Gopal Desale — Appeal from Order No. 265 of 2011 etc. decided on 6th September, 2011). Accordingly, these decisions close (at least for the time being) that for the purpose of getting benefit of the amended provision it is not necessary that the birth of the daughter should also be after commencement of the Amendment Act.

Therefore, as per the Law laid down by Courts in above cases, on coming into force of the Amendment Act i.e., 9th September, 2005, the daughter of a coparcener becomes by birth a coparcener in her own right in the same manner as the son even if she was born before the Amendment Act coming into force.

The Karnataka High Court had an occasion to consider one new angle on the same subject. The question which arose before the Court was that while the daughter gets a right to be a coparcener from birth when can the right be said to start. In the case of Pushpalatha N. V. v. Padma V. reported in AIR 2010 Karnataka 124, the Court has inter alia held as follows:

“The Act when it was enacted, the Legislature had no intention of conferring rights which are conferred for the first time on a female relative of a coparcener including a daughter prior to the commencement of the Act. Therefore, while enacting this substituted provision of section 6 also it cannot be made retrospective in the sense applicable to the daughters born before the Act came into force. In the Act before amendment the daughter of a coparcener was not conferred the status of a coparcener. Such a status is conferred only by the Amendment Act in 2005. After conferring such status, right to coparcenary property is given from the date of her birth. Therefore, it should necessarily follow such a date of birth should be after the act came into force, i.e., 17th June, 1956. There was no intention either under the unamended Act or the Act after amendment to confer any such right on a daughter of a coparcener, who was born prior to 17th June, 1956. Therefore, in this context also the opening words of the amending section assume importance. The status of a coparcener is conferred on a daughter of a coparcener on and from the commencement of the Amendment Act, 2005. The right to property is conferred from the date of birth. But, both these rights are conferred under the Act and, therefore, it necessarily follows the daughter of a coparcener who is born after the Act came into force alone will be entitled to a right in the coparcenary property and not a daughter who was born prior to 17th June, 1956.”

Therefore, sum total of the principles laid down by the case law discussed above, is that while on coming into force of the Amendment Act dated 9th September, 2005, the daughter of a coparcener becomes by birth a coparcener in her own right in the same manner as the son even if she was born before the Amendment Act, such a right is subject to the condition that she is born after 17th June, 1956 i.e., coming into force of the Act. The daughter born before the Act came into force does not get any such right.

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Simplification of procedure for delay in filing forms for charges and for shifting of registered office from one state to another.

The Ministry of Corporate Affairs vide General Circular No. 51/2011, dated 25th July 2011, shifted the work relating to the rectification of charges and condonation of delay in filing the requisite forms for charges u/s. 141 of the Companies Act, 1956, from the Company Law Board to the Central Government. The simplified process is expected to be implemented on 24th September 2011. Similarly the jurisdiction for the approval of shifting the registered office from one state to another and consequent alteration of the Memorandum of Association of the company u/s. 17 of the Act has been shifted from Company Law Board to the Central Government and the simplified process is expected to be implemented on 24th September 2011.

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Guidelines for Scheme of Amalgamation/Arrangement.

The Ministry of Corporate Affairs has issued the Guidelines for Regional Directors/Registrar of Companies in the matter of scheme of arrangement/amalgamation u/s. 391-394 pertaining to compromises or arrangement with members or creditors, vide its General Circular No. 53/2011, dated 26th July 2011.

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(2011) 23 STR 265 (Tri.-Chennai) — Commissioner of Central Excise, Coimbatore v. Lakshmi Technology & Engineering Indus Ltd.

Cenvat credit — Renting of immovable property services provided by manufacturer of excisable goods — Manufacturer used credit from a common pool of excise, customs and service tax —Rule permit taking of such credit under a common pool and permit use of such credit for different purposes and thus the utilisation held valid.

Facts:
The assessee, a manufacturer of satellite components and aircraft components, also provided service of renting of immovable property. They used the credit in Cenvat account for paying excise duty on the goods cleared by them and also for paying service tax on service rendered under the category of Renting of Immovable Property. SCN was issued alleging that capital goods, inputs and input services on which credit was taken had no nexus with the renting of property service and thus Cenvat credit could not be utilised by them and demanded service tax accordingly along with interest and penalty.

Held:
It was held that a manufacturer of excisable goods is entitled to use the credit from a common pool to which different categories of specified excise duties, customs duty and service tax are allowed to be taken of.

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(2011) 23 STR 263 (Tri.-Del.) — Commissioner of Central Excise, Allahabad v. Azzam Rubber Products Ltd.

Refund — Double payment of service tax by recipient of GTA services — Tax incidence paid by present respondent — Disclaimer certificate produced from transporters — U/s.11B of Central Excise Act, 1944 not necessary that person paying tax has to claim refund — Revenue’s appeal rejected.

Facts:
The assessee, a manufacturer of footwear, availed the services of goods transports agency i.e., for transportation of inputs and final products. The respondents while depositing service tax mentioned the name of the transporter inadvertently on the challan instead of their own name. On realising their mistake, remitted the tax again vide TR6 challan. The respondents filed an application for refund of tax paid by them earlier and submitted a disclaimer certificate from the transporter stating they have no objection in the said amount being refunded to the respondent. The Department contended that the refund could be granted only to the transporter who made the actual payment as per TR-6 challan and not to the respondent.

Held:
The Tribunal observed that any person was authorised to claim the refund if the applicant is able to furnish documents to establish that duty of incidence has not been passed on. It was held that in the present case, the duty of incidence was paid by the respondents and hence the Revenue‘s appeal was rejected.

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(2011) 23 STR 254 (Tri.-Del.) — Desert Inn Limited v. Commissioner of Central Excise, Jaipur.

Madap-keeper service — Valuation — Parking charges collected from clients includible — Section 65(105)(m) of the Finance Act, 1994 — Suppression of facts — Extended period of limitation can be invoked — Penalty — Option of 25% of penalty within 30 days to be provided.

Facts:
The appellants were providing services of mandapkeeper and paid service tax for the said activity. They also had parking space for which they charged separately from by their clients who enjoyed the services of mandap. A service tax was demanded on the charges for the said parking charges along with interest and penalties.

The appellants contended that they issued separate invoices for the charges and the same was reflected in their balance sheet separately. Also, the major portion of the demand was time-barred. Relying on the judgment in the case of Merwara Estates v. CCE, Jaipur 2009 (16) STR 268 (Tri.-Delhi), the appellants submitted that the penalties are not to be imposed in cases involving interpretation. Further, extended period of limitation was not invocable as suppression could not be alleged on the basis of balance sheet. The appellants relied on the judgment in the case of Martin & Harris Laboratories Ltd. v. CCE, Gurgaon 2005 (185) ELT 421 (Tri.-Delhi). The respondents submitted that without the parking space the mandap could not have been enjoyed by the clients and the car parking charges were not being collected from the persons parking their cars.

Held:
Taking into consideration the definition of ‘Mandapkeeper services’ u/s.65(105)(m) of the Act and the nature of services provided by the appellants, it was held that the services of car parking was in relation to use of the mandap as the car parking was a necessary facility for the use of mandap. The fact of separate collection of car parking charges was not coming clearly in the balance sheet. Extended period of limitation was held invokable as the appellants suppressed the facts from the Department. As regards penalty, it was observed that the appellants were not granted the option of paying 25% of the penalty within 30 days of the order of adjudication as held in the case of K. P. Pouches (P) Ltd. v. UOI, 2008 (228) ELT 331. Also, penalty once imposed u/s.78, penalty u/s.76 is not maintainable. Accordingly, demand of service tax was confirmed along with interest. As regards penalty, an option to pay 25% of the penalty within 30 days of the communication of this order was granted to the appellants.

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Consolidated Financial Statements presented in accordance with International Financial Reporting Standards (IFRS) (as permitted by SEBI)

Glenmark Pharmaceuticals Ltd. (31-3-2011)

Notes to Consolidated Financial Statements

As permitted by Securities Exchange Board of India (‘SEBI’) Circular CIR/CFD/DIL/1/2010, dated 5th April, 2010 (hereinafter referred to as ‘SEBI Circular’), the Group has voluntarily chosen to present its consolidated financial statements in accordance with International Financial Reporting Standards after taking benefit of the additional exemptions provided vide the SEBI Circular (hereinafter referred to as ‘IFRS’). Accordingly, the Group has :

prepared and presented the financial statements for the year ended 31st March, 2011 in accordance with IFRS instead of the accounting standards specified in section 211(3C) of the Companies Act, 1956 (‘Indian GAAP’);

elected to provide the figures for the comparative period as per Indian GAAP as permitted by the SEBI Circular and not as per IFRS as required by International Financial Reporting Standard 1, ‘First-time adoption of International Financial Reporting Standards’ and International Accounting Standard 1, ‘Presentation of Financial Statements’. However, as the classification of the individual line items is not consistent and comparable between the two periods, the figures for the comparative period are not presented alongside that of the current year. Accordingly, these consolidated financial statements should be read along with the consolidated financial statements for the year ended 31st March 2010 presented in the Annual Report for the year ended 31st March 2010;

not presented reconciliations between the equity and comprehensive income as per IFRS and Indian GAAP for the comparative period, as the Group has not prepared financial information in accordance with IFRS for the comparative period as indicated above; and

not presented a reconciliation of significant differences between the figures as disclosed as per IFRS for the year ended 31st March 2011 and the figures as they would have been if Indian GAAP was adopted for the year ended 31st March 2011 as required by the SEBI Circular as the Group has not prepared consolidated financial statements in accordance with Indian GAAP for this period.

These are the Group’s first financial statements prepared in accordance with IFRS (see Note EE for explanation of the transition to IFRS).

Note EE — Transition to International Financial Reporting Standards

The transition from Indian GAAP to IFRS has been made in accordance with the principles laid down in IFRS 1, First-time Adoption of International Financial Reporting Standards. As elaborated in Note A-2.2, the Group has voluntarily elected to use IFRS as permitted by the SEBI Circular along with the additional exemptions provided therein. Accordingly, the Group has transitioned to IFRS with 1st April 2010 being the date of transition.

1. First-time adoption exemptions applied

Upon transition, IFRS 1 permits certain exemptions from full retrospective application. The Group has applied the mandatory exceptions and certain optional exemptions, as set out below.

Mandatory exceptions adopted by the Group

(i) Financial assets and liabilities that had been de-recognised before 1st April 2010 under Indian GAAP have not been recognised under IFRS.

(ii) The Group has used estimates under IFRS that are consistent with those applied under Indian GAAP (with adjustment for accounting policy differences), unless there is objective evidence those estimates were in error.

Optional exemptions applied by the Group

(i) The Group has elected not to apply IFRS 3R Business Combinations retrospectively to business combinations that occurred before the date of transition 1st April 2010.

(ii) The Group has elected to use fair value as deemed cost at the date of transition for some items of property, plant and equipment (see Note H).

(iii) The Group has elected to use facts and circumstances existing at the date of transition to determine whether an arrangement contain a lease. No such assessment was done under Indian GAAP.

(iv) The Group has elected to designate some financial assets as available for sale at the date of transition. The Group has not taken the exemption to designate some financial instruments at fair value through profit or loss.

(v) The Group has elected to recognise all cumulative actuarial gains and losses for its defined benefit plans at the date of transition. Further, the Group has elected to use the exemption not to disclose defined benefit plan surplus/deficit and experience adjustment before the date of transition.

The following reconciliation and explanatory notes thereto describe the effect of the transition on the IFRS opening statement of financial position as at 1st April 2010. All explanations should be read in conjunction with the IFRS accounting policies of Glenmark Group as disclosed in Note A-3.

The reconciliation of the Group’s equity reported under Indian GAAP to its equity under IFRS as at 1st April 2010 may be summarised as follows:

Notes to the reconciliation

2. Foreign currency convertible bonds (FCCBs)

The Company had outstanding ‘zero coupon’ FCCBs as on 1st April 2010. Under Indian GAAP, the Company had chosen to adjust these premium payable on redemption to the additional paid-in capital. As per IAS 32, FCCBs issued by the Company are treated as a liability with an embedded derivative for the call option for conversion to equity shares. Finance costs for the period and the related liability has been computed using the effective interest rate method. The liability is re-measured at amortised cost at each reporting period. Further, the embedded derivative is fair value at the date of transition. Accordingly, the adjustments have been made to retained earnings.

3. Share-based compensation

According to IFRS 2 — Share-based Payments, the Group has recognised share-based payments on fair value and has made an adjustment in the opening statement of financial position by charging such cost to retained earnings.

Under Indian GAAP the Group had an option to account for these options at intrinsic value and therefore no such cost was required to be recognised in the Income statement.

4. Fixed Assets (Including Intangible assets)

(a) Intangible assets

Derecognition of intangible assets

On transition to IFRS, the Group undertook a detailed evaluation of its portfolio of product development assets and intangibles under development, which were previously classifieds intangibles and capital work-in-progress under Indian GAAP. Based on such evaluation, the Group determined that certain products/projects had been de- prioritised and that no future economic benefits were expected to flow to the Group from these products or products being developed under such projects. Accordingly such products/projects did not qualify to be carried forward as intangible assets and accordingly have been derecognised. The Group also determined that the de-prioritisation and the conditions considered for this evaluation excited prior to the date of opening statement of financial position and accordingly, theses intangible assets have been derecognised in the preparation of the opening statement of financial position with a corresponding adjustment to retained earnings as this adjustment relates to earlier periods. (Also refer note 1 on Intangible Assets.)

Reclassification of intangible assets
On transition to IFRS, the Group has reclassified certain assets into intangible assets. These assets were previously classified as fixed tangible assets and their classification has been rectified on preparation of the opening statement of financial position. (Also refer Note H on ‘Property, Plan and Equipment’.)

(b) Property, plant and equipment

Election to use of fair value as deemed cost

At the date of transition, the Group elected to measure some items of assets within property, plant and equipment at fair value as deemed cost. The items of assets fair valued include freehold land, factory and other buildings, plant and machinery and equipments. Depreciation under IFRS is based on this deemed cost. (Also refer Note H on ‘Property, Plant and Equipment’.)

Depreciation

Further, depreciation under Indian GAAP was computed by assigning a life to each item of property, plant and equipment. However, under IFRS, the Group has identified the cost/deemed cost of each significant part item of property, plant and equipment and assigned an estimate of useful life to each such significant part. Accordingly, the depreciation has been recomputed.

5. Non-controlling interest

Under Indian GAAP, financial statements are prepared as per the requirements of Schedule VI of The Companies Act, 1956. Under Schedule VI, non-controlling interest is not included in the total stockholders’ equity and is disclosed separately on the face of the statement of financial position.

On transition to IFRS, the Group has included the non-controlling interest in the statement of equity under the total stockholders’ equity. Further, the non-controlling interest under IFRS has been calculated using the minority’s share of the net assets of the subsidiary.

6. Proposed dividend

In preparation of the financial statements in accordance with Indian GAAP, the Company provided for proposed dividend and tax thereon to comply with the Schedule VI requirements of the Companies Act, 1956. On transition to IFRS, proposed dividend is recognised based on the recognition principles of IAS 37 — ‘Provisions, Contingent Liabilities and Contingent Assets. Considering that the dividend has been proposed after the date of statement of financial position and becomes payable only after approval by the shareholders, there is no present obligation to pay this dividend as at the date of statement of financial position. Accordingly, the liability for proposed dividend and tax thereon has been reversed.

7. Deferred tax

Deferred tax assets and liabilities under Indian GAAP were recorded only on timing differences. However, on transition to IFRS, deferred tax assets and liabilities are recorded on temporary differences. Further, on transition to IFRS, the carrying values of assets and liabilities have undergone a change as a result of the adjustments indicated above, and accordingly, the deferred tax position has been recomputed after considering the new carrying amounts.

8. Presentation differences

In the preparation of these IFRS financial statements, the Group has made several presentation differences between Indian GAAP and IFRS. These differences have no impact on reported profit or total equity. Accordingly, some assets and liabilities have been re-classified into another line item under IFRS at the date of transition. Further, in these financial statements, some line items are described differently (renamed) under IFRS compares to Indian GAAP, although the assets and liabilities included in these line items are unaffected.

From Auditors’ Report on International Financial Reporting Standards

3. We report that the consolidated financial statements have been prepared by Glenmark Group’s management in accordance with the requirements of International Accounting Standard 27, ‘Consolidated and Separate Financial Statements’ forming part of International Financial Reporting Standards (‘IFRS’) as permitted by SEBI Circular CIR/ CFD/DIL/1/2010, dated 5th April 2010 (‘SEBI Circular’).

4. As described in Note A-2.2 to the consolidated financial statements, in the preparation of its first financial statements in accordance with International Financial Reporting Standards, Glenmark Group has not presented any financial information for the comparative period as required by SEBI Circular.

5. As described in Note A-2.2 to the consolidated financial statements, Glenmark Group has not presented a reconciliation of significant differences between the figures as disclosed as per IFRS and the figures as they would have been if the notified Indian Accounting Standards were adopted, as required by SEBI Circular.

6. Based on our audit and consideration of report of other auditors on financial statements and on the other financial information of the components, and to the best of our information and according to the explanations given to us, we are of the opinion that, subject to the omission of the disclosures described in paragraphs 4 and 5 above, subject to the omission of the disclosers described in para 4 and 5 above, the attached consolidated financial statements give a true and fair view in conformity with International Financial Reporting Standards as permitted vide SEBI circular:

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(2011) 23 STR 221 (Tri.-Delhi) — Instrumentation Ltd. v. Commissioner of Central Excise, Jaipur-I.

Work contracts — Liability before 1-6-2007 —
Even in indivisible contract — Lump sum turn key (LSTK) work contracts
or EPC projects — Services provided as part of such contracts liable to
service tax — No mention that service tax is leviable in respect of only
stand-alone activity u/s.65(105) or 66 of the Finance Act, 1994 (the
Act) — Service tax attracted if service is taxable — Consulting
Engineering Service — Engineering drawings separately charged in
contract — Activity covered under Consulting Engineer services — Failure
to obtain registration — Returns not filed — Non-payment of service tax
since 1997 — Assessee guilty of suppression — Extended period of
limitation invokable and liable to penalty.

Facts:
The
appellants engaged in the manufacture of telecommunication equipment,
UPS Systems, and primary and secondary instruments, etc., chargeable to
Central Excise duty. In addition, the appellants also designed,
installed and commissioned the electronic control systems, provided
operational training to the customer’s employees and also undertook
repair and maintenance of these equipments as per the contract with
their customers. Pursuant to the introduction of ‘Consulting Engineers’,
‘Installation & Commissioning’ and ‘Repairs and maintenance’ as
taxable services under section 65 of the Act), the appellants took
service tax registration for ‘Repair & Maintenance’ on 1-8-2003 and
for ‘Installation & commissioning’ and ‘Repairs & Maintenance’
on 20-1-2004. A show-cause notice was issued against the appellants in
respect of the ‘Consulting Engineer’ services provided prior to 1-8-2003
for service tax amounting to Rs.40,71,946 along with interest and
penalty.

Key contention of the appellants:
The
appellants did not provide any Consulting Engineer’s services but
executed lump sum turnkey contracts for design, engineering,
manufacture, supply, erection, testing and commissioning of control
systems. The lower Appellate Authority overlooked the law laid by the
Tribunal in the case of Daelim Industrial Co. Ltd. v. CCE, Vadodra 2003
(155) ELT 457 and a plethora of other cases holding that “lump sum
turn-key contracts for design, engineering, manufacture, supply,
erection, testing and commissioning cannot be vivisected to levy service
tax on the service components”. The view taken by the Tribunal in the
case of CCE, Raipur v. BSBK Pvt. Ltd., 2010 (253) ELT 522 (Tribunal-LB)
that after 46th Constitution amendment, the service part of a turnkey
contract can be separated from the goods part for levy of service tax
did not apply in the present case as the legal fiction under Article
366(29A) cannot be applied to the laws other than sales tax. The
appellants relied on a plethora of cases such as BSNL v. Union of India,
2006 (3) SCC 1, Southern Petrochemical Industries Co. Ltd. v.
Electricity Inspector, (2007) 5 SCC 447, Geo Miller & Co. (P) Ltd.
v. State of M.P., 2004 (5) SCC 209, etc. Relying on the decision in the
case of Patnaik & Co. v. State of Orissa, AIR 1965 SC 1655, it was
submitted that drawing and designs prepared were to be treated as
service provided by the appellant to themselves and not a consulting
engineer’s service provided to clients. Separate amount indicated in the
contract for ‘drawing/designing or engineering’ was only for a
milestone payment to be released on preparation and approval of drawings
and could be treated as value attributable to the drawings and
designing. The contracts in the case were indivisible turn-key contracts
with single-point responsibility which could be treated as severable
contracts. Such contracts became taxable as ‘Work contract services’
w.e.f. 1-6-2007 under 65(105)(zzza) of the Act and any activity under
work contract was not taxable prior to that date. The longer period of
limitation for demand of allegedly non-paid service tax was not
available to the Department as they were aware of the activities of the
appellants since 1991.

Key contention of the respondent:
The
services rendered as ‘consulting engineer’ were clearly distinguishable
as the clauses of the contract showed the intention to provide the
services and to charge separately for the same. The Tribunal in the case
of Transformers & Electricals Kerala Ltd. v. CCE, 2006 (1) STR 233
(CESTAT-DB) held that the engineering consultancy component of EPC
contracts was taxable. Further, the terms of the contract clearly
indicated that service tax was rightly demanded on the charges for
drawing, designs and other technical assistance. There was no provision
in the Act that taxable service mentioned in section 65(105) will not be
taxable if provided under a lump sum turn-key contract (LSTK) or as a
work contract. There was no documentary evidence produced to show that
charges for drawing, designs, engineering assistance, etc. in the
contracts and invoices were not the actual charges for these contracts. A
work contract is a service contract and if that service was taxable
w.e.f. 1-6-2007, the same would attract service tax prior to 1-6-2007,
even if it is provided as a lump sum work contract. In addition it was
contended that the decision of Daelim (supra) did not lay down any law
as SLP was summarily dismissed by the Supreme Court. The Karnataka High
Court decision of Turbotech Precision Engineering Pvt. Ltd. was not a
binding precedent as no reasons were provided in the said judgment for
holding works contract as not liable for service tax.

Held:
The
Tribunal held that the preparation of basic and detailed engineering
drawings, on the basis of which erection and installation work was done
and training of clients was technical assistance provided to the clients
and it had to be held as consulting engineer’s services. As regards the
issue of subjecting lump sum turn-key work contracts to service tax
payment and the levying of the same prior to 1-6-2007, the Tribunal
observed that a contract will attract service tax if the service is
taxable u/s.65(105) of the Act and the legal fiction of Article 366(29A)
was of no relevance in this case. Service tax shall be chargeable in
case of a work contract for a particular service which is taxable
u/s.65(105) of the Act, regardless of it being divisible or indivisible.
The meaning of work contract being a contract for work and labour i.e.,
a service contract prior to 1-6-2007 and hence service tax would be
levied on the same prior to 1-6-2007. The contract and the invoices
indicated that the clients were charged for drawings/designs,
engineering and technical training and hence the contracts contained
component of activity covered by ‘Consulting Engineer service’. Hence,
service tax was chargeable. The longer period of limitation of five
years for unpaid service tax was rightly invoked in the light of the
appel-lant’s failure to furnish any explanation for non-payment of
service tax and for not obtaining registration. Penalty imposed u/s.76,
77 and 78 were also rightly imposed as the facts were suppressed.

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GAPS IN GAP — Acounting for eviction costs by lesors

Issue What is the accounting treatment, from a lessor’s perspective, for costs incurred by the lessor to evict tenants? Are these costs capitalised or expensed as incurred?

Scenario 1
A lessor makes compensation payments to evict the tenants in an investment property with the intention to refurbish/renovate the property.

Scenario 2
A lessor makes a compensation payment to evict a tenant in a multi-tenanted investment property with the intention to re-let the vacated space to a new tenant. The lessor has signed an agreement with the new tenant to occupy the space that the existing tenant is occupying. Under the agreement, the new tenant will pay a significantly higher rent than the existing tenant.

Scenario 3
The same fact pattern as Scenario 2, except that the lessor has not yet found a new tenant when it evicts the existing tenant.

Relevant literature
Under Indian GAAP the following accounting literature is relevant for concluding on this fact pattern.

Paragraph 20 & 21 of AS-10 Accounting for Fixed Assets

Paragraph 20 : The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.

Paragraph 21 : The cost of a self-constructed fixed asset should comprise those costs that relate directly to the specific asset and those that are attributable to the construction activity in general and can be allocated to the specific asset.

Paragraph 31 & 42 of AS-19 Leases Paragraph 31 : Initial direct costs, such as commissions and legal fees, are often incurred by lessors in negotiating and arranging a lease. For finance leases, these initial direct costs are incurred to produce finance income and are either recognised immediately in the statement of profit and loss or allocated against the finance income over the lease term.

Paragraph 42 : Initial direct costs incurred specifically to earn revenues from an operating lease are either deferred and allocated to income over the lease term in proportion to the recognition of rent income, or are recognised as an expense in the statement of profit and loss in the period in which they are incurred.

Author’s view Scenario 1 View A — Expense the eviction costs as incurred

The eviction costs are costs of terminating the existing lease. Therefore, they should be expensed as incurred.

View B — Capitalise the eviction costs It is necessary for the lessor to make eviction payments to the existing tenants in order to refurbish the property. The eviction costs are directly attributable to the property and meet the definition of construction costs of the property and are costs required to bring the asset to “the condition necessary for it to be capable of operating in the manner intended by management”. Therefore, the costs should be capitalised.

Considering paragraph 20 & 21 of AS-10, the author believes that View B is more appropriate.

Scenario 2
View A — Expense the eviction cost as incurred

The eviction cost is a cost of terminating the existing lease, and does not represent a cost of the underlying investment property. Therefore, it should be expensed as incurred.

View B — Eviction costs are initial direct costs and hence can be either capitalised or expensed

Since the lessor has signed an agreement with a new tenant, it must evict the existing tenant in order to allow the new tenant to move into the property. The eviction cost is an initial direct cost incurred by the lessor to arrange the new lease.

For a lessor, paragraph 31 in the case of a finance lease and paragraph 42 in the case of an operating lease, allows either expensing or amortisation of the eviction cost. For finance leases, these eviction costs are incurred to produce finance income and are either recognised immediately in the statement of profit and loss or allocated against the finance income over the lease term. In case of operating lease, eviction costs are either deferred and allocated to income over the lease term in proportion to the recognition of rent income or expensed as incurred.

Hence, for scenario 2, the author believes that the eviction costs are initial direct costs and could be either expensed or capitalised (View B). Nonetheless, some may argue that initial direct costs include expenses such as legal fees and commission (as per paragraph 31) and not eviction costs. Hence they may favour View A, which requires compulsorily expensing as those costs are incurred.

Scenario 3
In the absence of a secured new lease contract the eviction of existing tenants and the costs incurred thereon would not constitute initial direct costs of entering into a new lease arrangement. Consequently, the author believes that such costs should not be capitalised. Nonetheless, some may still argue that under the Framework for the Preparation and Presentation of Financial Statements “An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.” Therefore, based on the asset definition in the framework, some may argue, it is possible to capitalise and amortise such eviction costs.

Considering that these issues are highly debatable the ICAI may consider providing guidance.

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Simplification of procedure for winding-up petitions.

The Ministry of Corporate Affairs has vide General Circular No. 55/2011, dated 26th July 2011, prescribed the procedure to be followed by the Registrar of Companies and Regional Directors for winding up petitions filed by management after committing violations under the Companies Act 1956 or misappropriation of funds of the Company and for petitions filed by creditors. The ROC will prepare a preliminary report based on the last five years data within a week of filing of the petition and the MCA will take a final view within 15 days of such preliminary report and any investigation, etc. will be completed by the ROC and report forwarded to Official Liquidator within 30 days.

The Official Liquidator will place the report before the High Court for appropriate action. To speed-up the winding-up petitions, the Ministry has listed the information to be provided by the Official Liquidator in the General Circular No. 54/2011, dated 26th July 2011. Further the official liquidator also needs to file an application praying to the Court to direct the management of the company to submit information duly verified by a chartered accountant.

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(2011) 22 STR 591 (Tri.-Ahmd.) Flex Art Foil Pvt. Ltd. v. Commissioner of Central Excise, Daman.

Transfer of CENVAT credit on conversion of partnership firm to Pvt. Ltd. — Credit reversed on audit objection but re-credit taken — Whether permission is required to be taken under Rule 10 of the CENVAT Credit Rules, 2004.

Facts:
The partnership firm under the name and style as M/s. Sushmit Packaging was converted into a private limited company under the name of M/s. Flex Art Folio Pvt. Ltd. (the appellants in the case). The appellants took the credit in terms of the provision 10 of the CENVAT Credit Rules, 2004 and informed the Revenue. On an audit objection that credit could not be availed suo motu, the appellants reversed the credit taken. However, it was again taken on realising that no permission was required under the said rule. According to the appellant, it was not the case of suo motu refund in accordance with the Rule 10 of the said rules and relied on the decision in the case of Hewlett Packard (India) Sales Pvt. Ltd. v. Commissioner, 2007 (6) STR 155 (Tribunal). The Revenue contended that even if no permission was required under the said rules, admissibility of the credit on merit was not adjudged by the lower authorities.

Held:
It was held that the denial of credit on the ground that formal permission from the Central Excise Officers was not taken was not justified. However, the matter was remanded to the proper Central Excise Officer since the availability or otherwise of the credit on merits was not adjudged by the lower authorities.

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Certification of e-forms under the Companies Act, 1956 by the practising professionals.

The Ministry of Corporate Affairs has entrusted practising professionals, viz., members of the ICAI, ICSI and ICWAI, with the responsibility of ensuring integrity of documents filed by them in electronic mode. These professionals will now be responsible for submitting/certifying documents (to be signed digitally by them) and system will accept most of these documents online without approval by the Registrar of Companies or other officers of the Ministry of Corporate Affairs. To ensure the data integrity, there will be checking of such submissions. In case of any fraudulent filing, action can be taken against the company, their officers in default and professionals involved in filing. For complete text of the Circular No. 14/2011 dated 8th April 2011 visit:

http://www.mca.gov.in/Ministry/pdf/Circular_14-2011 _12apr2011.pdf

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Provisions regarding Stamp Duty.

The Ministry of Corporate Affairs has informed that with effect from 1st May 2011, the provisions regarding stamp duty payment on Form No. 1, Memorandum of Association, Articles of Association, Form No. 5 and Form No. 44 electronically, at the time of their e-filing through MCA portal in addition to the already existing list of States and Union Territories published on the MCA portal, will also be mandatory for the State of Jammu and Kashmir, with effect from 1st May, 2011. Please refer Notifications Number GSR 642(E) and SO 2276(E), dated 7-9-2009 and SO 3314(E), dated 1-5-2010 issued by the Ministry for further details.

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(2011) 22 STR 583 (Tri.-Bang.) — Durferrit Asea Pvt. Ltd. v. Commissioner of Central Excise, Guntur.

Refund of unutilised CENVAT credit — Whether the appellant is eligible for the refund of claim of the CENVAT credit accumulated despite the nonregistration of appellant’s head office as a service tax distributor and non-distribution of service tax credit as per the laid down procedures — Rule 5 and Rule 7 of the CENVAT Credit Rules, 2004.

Facts:
The appellants claimed refund of unutilised credit of Rs.77,150 for the invoices in the name of the head office which was not registered as service tax distributor. The Adjudicating Authority vide order-in-original rejected the refund claim on the ground that in the absence of registration, head office could not distribute the CENVAT credit to the appellant which was an EOU. The appellants contended that the non-observance of procedure of distribution of credit will not come in the way of the refund of the amount of the credit.

Held:
The Tribunal observed that the appellants had no other units in the relevant division. There was no requirement to follow Rule 7 (Registration as ISD), wherein the appellants had only one manufacturing unit. The eligibility of the appellants as regards availment of the CENVAT credit on the service tax paid on the input services was not questioned by the Commissioner (Appeals). Further, the provisions of Rule 7 of the CENVAT Credit Rules, 2004 come into play only if the appellants wished to get themselves registered as the input service credit distributor, which was not the situation in the instant case. Therefore, the appellants’ claim was allowed by the Tribunal.

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Director’s Relatives (Office or Place of Profit) Amendment Rules, 2011.

The Companies Act, 1956 requires a company to obtain the Central Government’s approval for appointing a director’s relative to an office or place of profit, if the monthly remuneration for such office or place of profit exceeds the prescribed limit. This limit has now been raised from Rs.50,000 per month to Rs.2,50,000 per month.

The notification has also amended Rule 7 of Director’s Relative (Office or Place of Profit) Rules, 2011 and redefined the constitution of Selection Committee for the purpose of appointment of a director to the office or place of profit. Under the amended Rule the Selection Committee shall comprise of:

(1) For listed public companies — independent directors shall constitute the majority and committee ought to have an expert in the respective field from outside the company.

(2) For unlisted public companies — independent directors are not necessary but an expert from outside the company should be part of the committee.

(3) For private limited companies — independent directors and outside experts are not required to be part of the committee.

Thus, even a private company is required to constitute a Selection Committee for appointment of director to an office or place of profit.

For complete text of the Notification visit:

http://www.mca.gov.in/Ministry/notification/pdf/ Notification2_31mar2011.pdf

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(2011) 22 STR 581 (Tri.-Del.) K. S. Transformers (P) Ltd. v. Commissioner of Central Excise, Jaipur-I.

Refund — Unjust enrichment — Section 11B of the Central Excise Act — Service tax on job work found not leviable during specific period. Service tax was however charged by the job worker — Manufacturer did not claim CENVAT credit but issued debit note after a gap of time — Refund claim denied as assessee did not claim immediately — No investigation done to prove debit note wrong — No tax liability without letters of law — Assessee’s appeal allowed.

Facts:
The principal manufacturer issued debit note to the appellant who was a job worker on finding that the service tax on the job work was not leviable during the material period. The appellant was denied refund on the ground that the debit note was issued by the manufacturer after a long time. According to the appellant, they should not suffer by not getting back the money wrongly paid to the Revenue and if the assessee could show that the burden was not passed on or it was reversed, the claim of refund could not be denied. The decisions in the case of Commissioner of Service Tax, Bangalore v. Shiva Ciba Analyticals (I) Ltd., 2009 and Union of India v. A. K. Spintex Ltd., 2009 (234) E.L.T. 41 (Raj.) were relied upon. According to the Revenue, the appellant was disentitled to the refund as they did not immediately claim the refund and relied on the judgment of the Commissioner of Central Excise, Jaipur-II v. Adarsh Gaur Gum Udyog, 2000 (120) E.L.T. 138 (Trib.).

Held:
It was held that the Revenue’s plea does not sustain in light of the failure on part of the Revenue to prove that the debit note was wrong. Further, it was held that when there is no liability to pay tax, the appellant should not suffer and that no taxes can be realised without the letters of law. Accordingly, the appeal was allowed.

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Amendment to Companies (Particulars of Employees) Rules, 1975 — Increase in the limits.

Section 217 of the Companies Act, 1956 requires certain particulars of employees to be disclosed in the Board’s report, who draw remuneration in excess of the prescribed limits. Vide this amendment; these limits are increased from Rs.24 lakh per annum and Rs.2 lakh per month to Rs.60 lakh per annum and Rs.5 lakh per month, respectively.

For complete text of the Notification visit

http://www.mca.gov.in/Ministry/notification/pdf/ Notification_31mar2011.pdf

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(2011) 22 STR 578 (Tri.-Ahmd.) — Ultratech Cement Ltd. v. Commissioner of Central Excise, Bhavnagar.

CENVAT credit of service tax — Whether vehicles used in residential colony of assessee and insurance on residential buildings includible within the scope of ‘input services’.

Facts:
The appellant was denied the credit of service tax paid on the vehicles used in the residential colony of the appellant as also the credit of service tax paid on the insurance of the residential building on the ground that the same could not be considered to be ‘input service’. It was contended that the issue involved in the present case was related to the credit of service tax paid on the services used in activities related to business which covered all activities related to functioning of a business.

Held:
Referring to a number of case laws and relying on the decisions in the case of Manikgarh Cement v. CCE & Cus., Nagpur 2008 (9) STR 554 (Tri.- Mumbai) and Millipore India Ltd. v. CCE., Bangalore 2009 (13) STR 616 (Tri.-Bang.), respectively, it was held that the definition of input service being quite wide, an activity used for business purposes was held as ‘input service’ and the assessee was entitled to the credit of service tax paid on vehicles used in the residential colony of assessee and insurance on residential buildings.

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Exposure Draft on XBRL taxonomy for Commercial and Industrial (C&I) entities.

Ministry of Corporate Affairs has released Exposure Draft of XBRL taxonomy for Commercial and Industrial (C&I) entities for filing their balance sheet and profit and loss account. The draft taxonomy can be downloaded from the following link:

h t t p : / / w w w . m c a . g o v . i n / M i n i s t r y / p d f / MCA_C&I_15apr2011.zip

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(2011) 22 STR 558 (Tri.-Ahmd.) Commissioner of Central Excise, Bhavnagar v. Gujarat Travels.

Tour operator service — Vehicle not registered as a tourist vehicle but registered with the Regional Transport Authority under the PCOP (Contract Carriage Permit) — Whether liable to pay service tax — Appellate Authority holding that assessee not covered prior to 10-9-2004 when ambit expanded to cover any mode of transport — No reason to interfere in order.

Facts:
The respondents operating the tours in an omni-bus registered with the Regional Transport Authority covered under PCOP (Contract Carriage Permit) were not paying service tax on the ground that the tour was not being conducted in a tourist vehicle as defined in the Motor Vehicle Act. The respondents cited the case of Secretary, Federation of Bus Operators Association of Tamil Nadu, Chennai v. UOI and Ors., 2006 (2) STR 411 (Mad.), wherein it was held that the tour conducted by a contract carriage (and not by a tourist vehicle) do not fall within the definition of Tour Operator.

Held:
It was held that there was no reason to interfere in the order of the Commissioner (Appeals) holding that the respondents were not required to pay service tax. The Revenue’s appeal was rejected.

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XBRL filing of balance sheet and profit and loss account

The Ministry of Corporate Affairs by Circular No. 9/2011 dated 31st March 2011has mandated certain companies to file their balance sheets and profit and loss account for the year 2010-11 and onwards using XBRL taxonomy. In the phase I following companies are covered:

(i) All companies listed in India and their subsidiaries, including overseas subsidiaries.

(ii) All companies having a paid-up capital of Rs. 5 crore and above or a turnover of Rs.100 crore and above.

The financial statements required to be filed in XBRL format will be based on the taxonomy on XBRL developed for the existing Schedule VI and non-converged accounting standards notified under The Companies (Accounting Standards) Rules, 2006. For complete text of the circular visit:

http://www.mca.gov.in/Ministry/pdf/xbrl_31mar2011. pdf

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Applicability date of Revised Schedule VI.

The revised Schedule is available on the Ministry of Corporate Affair’s website. The Ministry of Corporate Affairs has also placed on its website a new notification to be published in the official gazette. This Notification amends the first Notification and clarifies that the revised Schedule VI will come into force for the balance sheet and profit and loss account to be prepared for the financial year commencing on or after 1st April 2011. For complete text of the Notification visit

http://www.mca.gov.in/Ministry/notification/pdf/ Notification_28mar2011.pdf

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(2011) 22 STR 553 (Tri.-Bang.) Commissioner of Central Excise, Hyderabad v. Vijay Leasing Company.

Activity of mineral extraction, classification issue — Whether mining service or site formation and clearance service — Activity of site formation, etc. incidental to contract of mining undertaken — Activity not taxable under site formation and clearance service during relevant period i.e., prior to introduction of mining service w.e.f. 1-6-2007.

Refund — Whether tax paid on self-assessment is refundable — Self-assessment cannot be considered as assessment made by officer u/s. 73 of the Finance Act — Assessee justified in filing refund claim.

Facts:
The respondents being engaged in providing services of mining to their clients/principals got themselves registered under the category of ‘site formation and clearance, excavation and earthmoving and demolition’ service and accordingly paid service tax under the said category for the period 16-6-2005 and 30-9-2006. Pursuant to the introduction of separate service under the category of mining service w.e.f. 1-6-2007, they filed a refund claim for an amount of Rs.1,58,11,007 on the ground that their service would fall under the new category. The Revenue contended that the contract entered by the respondents with the principals indicated that the services were of excavation, drilling and demolition services. Moreover, the respondents having discharged the service tax liability on self-assessment could not file a refund claim. The respondents contended that the removal of overburdens and excavation of ore undertaken as per the contract would clearly fall under the category of mining services and was liable to be taxed accordingly. Further that the self-assessment would not amount to assessment done by an officer and hence there was no restriction for claiming the refund.

Held:
Relying on the High Court judgment in the case of Central Office Mewar Palaces Org. v. UOI, [2008 (12) STR 545 (Raj.)], the respondents were held to be entitled to the refund claim. Appeal of the Revenue was rejected.

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Companies (Central Government’s) General Rules and Forms (Amendment) Rules, 2011 — Amendment in Form 61.

The Central Government has vide Notification no. GSR 259(E) [F. No. 1/15/2008-C.L.-V], dated 26-3-2011 amended Form 61 used for filing an application with the Registrar of Companies.

For the complete text of the Circular visit:

http://www.mca.gov.in/Ministry/notification/pdf/ Notification_26mar2011.pdf

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