For Private Circulation Only • February 2012 • Vol 6 Issue 2
AUDITOR
S U B S TA N C E OV E R F O R M
Society of Auditors
Chennai Inside this Issue... •
From the Edit Pad
2
•
Point
3
•
Counter Point
6
•
Allotments of Bank Central Statutory Audit
8
•
Elsewhere
9
•
An SMS from SIRC of ICAI
11
•
The politics behind the Companies Bill
12
•
Recent Judicial Decisions Reported
14
•
Announcements
15
FROM THE EDIT PAD
P.S. Prabhakar
Though some encouraging responses were received on the re-launch of the AUDITOR, actually, we could do with more! That said, it has indeed become a challenge to rise up to expectations of the ever demanding (and how subtly he does it?) President Mr Anand to bring the issue on a monthly basis. Well, as they say in tamil, when you put your head in to the pit of the mortar, can you afford to be afraid of the pestle? On the day we launched the Society's website and the AUDITOR, we had the momentous decision delivered by the 3-member bench of the Hon'ble Supreme Court on the Vodafone case. In this issue, we are carrying a ‘Point-Counter Point’ discussion on the decision from the tax angle by CA. Sriram Seshadri and from the macro economics angle by CA. M R Venkatesh & CA. Manoj Solanki. For a longwhile, I have been intrigued about the Government’s attempts on the new Companies Bill and decided to pry what has been happening. The result of such prying is an article, primarily put together in a single readable form of the various information collated from various sources, with some spice added. In the January issue, we had an article by Mr Raman on the re-naming of the Institute of Cost Accountants of India. Rajan sent me a piece, which just for the hilarious tenor of
AUDITOR
it, I thought I should share with you all. On the not-so-hilarious side, we are bringing the normally unspoken issues in the matter of bank audit allotments to the fore, just for the sake of elucidating to members who may not be familiar as to what are all the things that happen in the Central Statutory Audit scenario of PSU banks. The regular coulmns “Judicial Decisions” and “Elsewhere” do, of course, find their respective places of prominence. At our ICAI, there has been a change of guard, with new President and Vice President taking over office for what we can call the truncated year (being election year). Yes, we are in for some fun time, as ICAI elections are approaching! Sudden bonhomies, affectionate calls from long lost friends, unexpected and surprise visits by the important members of the profession to offices of not-so-important members, very concerned e-mails, invites to parties, well-built apprentices mistaken for CAs, aspirants to the Councils vying with one another to steal stage space in seminars, conferences etc. to put their verbose skills to best possible use etc. will all be the order of the day in the next few months! Let us all bask under such attentive love tortures! (It's all once in three years, after all!).
Editorial Board
A periodical from Society of Auditors Chennai CA P S Prabhakar, Editor Society of Auditors “Platinum Chambers” 33, TNHB Complex, 4, Luz Church Road, Mylapore, Chennai - 600 004. Phone : 044-2498 6979 E-mail : society.auditor@gmail.com editor@societyofauditors.in Website URL: www.societyofauditors.in
2
CA B Ramanakumar CA Mahesh Krishnan CA Subramania Sarma CA P Anand, President, Ex-officio Member CA R Sivakumar, Vice President, Ex-officio Member CA S Ramakrishnan, Vice President, Ex-officio Member CA B K Moorthy, Secretrary, Ex-officio Member
AUDITOR • February 2012
Point Supreme Court “looks at” Vodafone favorably The Supreme Court of India (“SC”) pronounced its decision in the controversial and high stakes tax dispute involving sale of shares of an offshore entity, holding underlying Indian shares / assets, by Hutch to Vodafone. The decision reinforces many of the important international taxation principles, as well as the importance of adherence to the Rule of Law. This alert provides a detailed analysis of this landmark decision, highlighting crucial findings and principles and BMR's advisory on its implications. Background Vodafone International Holdings BV (“Vodafone“) entered into a Share Purchase Agreement (“SPA”) with Hutchison Telecommunications International Limited (“HTIL”), a Cayman Island entity, for purchasing the shareholding of CGP Investment (Holdings) Ltd (“CGP”), a Cayman based subsidiary of HTIL. CGP, directly and indirectly, owned approximately 52 percent of the share capital of Hutchison Essar Limited ('HEL"), an Indian entity. In addition, under separate framework agreements, Vodafone also became entitled to certain call options on shares in HEL held by some other entities having indirect shareholding in HEL. The SPA, with the framework agreements resulted in acquisition by Vodafone of approximately 67 percent effective economic interest in HEL. The Revenue authorities issued a notice to Vodafone, holding it in-default for failure to withhold taxes on gains arising to HTIL on the transfer of shares of CGP. The litigation involved two distinct phases, before the Bombay High Court (“HC”) and the SC, spread over a period of 4 years. The first round of litigation involved the question of law with respect to whether the Revenue authorities had the jurisdiction to tax the offshore transaction. The HC in its earlier ruling had upheld the jurisdiction of the Revenue authorities to tax such a transaction. In the second round of litigation post the determination by the Revenue authorities that Vodafone was liable to withholding tax, the Bombay HC held that the essence of the transaction was a change in the 'controlling interest' of HEL, which constituted a source of income in AUDITOR • February 2012
Sriram Seshadri India. The HC held that the transaction had significant nexus with India. The HC also held that several other rights had been transferred besides the CGP share, which if situated in India could be taxed in India, and the consideration should be allocated over such rights also. Vodafone had appealed to the SC against this decision of the Bombay HC. Ruling of the SC The SC has clarified principles on tax treatment of offshore transfers and has also made some crucial observations, inter-alia, on the need for General Anti Avoidance Rules (“GAAR”), certainty in the tax regime, etc. While concurring with the main order delivered by Chief Justice S H Kapadia (“CJ”) (on behalf of Justice Swantanter Kumar and himself), Justice Radhakrishnan, one of the three judges on the bench, delivered a separate detailed judgment which discusses several aspects of the transaction. The observations made by, and the principles arising from the two judgments, have been elaborated below - firstly the generic tax principles followed by aspects which have specific references to the Vodafone transaction. On Azadi Bachao Andolan and tax avoidance The SC in the case of Azadi Bachao Andolan (“ABA”) had rendered a landmark ruling by holding that a Mauritius company holding a valid Tax Residency Certificate (“TRC”) would be considered to be a resident of Mauritius, and a the beneficial holder of the shares (of an Indian company) and motive with which such companies were set-up were irrelevant. Interpreting the principles enunciated in the much r e f e r r e d c a s e s o f We s t m i n s t e r a n d R a m s a y, pronounced by the English Courts, the SC in the Vodafone case observed that Courts were not compelled to look at a document or transaction in isolation and the legal nature of the transaction should be discerned by looking at the entire transaction as a whole and not by adopting a dissecting approach thereby enunciating use of 'look at' approach. Deriving the principle of fiscal nullity from the English cases, it was held that in a transaction with a series (continued on next page)
3
(continued from previous page)
of pre-ordained steps, those without commercial purpose could be ignored for determining the intended fiscal purpose. During the course of the hearing, the perceived differences in the position of the SC in the case of ABA and McDowell on the issue of tax avoidance was brought forth by the counsels for the Revenue. It would be pertinent to note that in the case of McDowell, the SC had held that all legitimate tax planning was allowable and only colorable devices could not be a part of tax planning. The SC in the case of Vodafone reconciled the two earlier judgments by observing that the majority judgment in the case of McDowell meant that only legitimate tax planning would be within the framework of the law. The view of Justice Chinnappa Reddy (one of the judges on the Bench of the McDowell case) was in concurrence to the majority view, in so far as it states that colorable devices could not come within the ambit of legitimate avoidance of tax liability. Therefore, there was no conflict between McDowell and ABA and the latter did not require any reconsideration. This is a critical finding as the Revenue authorities have previously and consistently stated that the principles of ABA and McDowell decisions are conflicting. On validity of the Tax Residency Certificate (TRC) With respect to the conclusive nature of a TRC, Justice Radhakrishnan observed as under A valid TRC, in the absence of a Limitation Of Benefits (“LOB”) clause was conclusive as regards the residence and beneficial ownership, and Revenue cannot at the time of exit deny treaty benefits to such Mauritius company. The Revenue would however, not be precluded from denying the tax treaty benefits, if it were established that the Mauritius company had no commercial substance and had been interposed solely with a view to avoid tax. Thus, a TRC can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax, such as for round tripping or for other illegal activities. On scope of section 9 of the Income-tax Act, 1961 (“Act”) regarding existence of “look through” provisions and source of income Section 9(1), which deems income to accrue or arise in India whether directly or indirectly, inter-alia, from 4
the transfer of a capital asset situated in India, is a legal fiction which cannot be expanded by giving purposive interpretation, particularly if it transforms the concept of chargeability which is already embedded in that section. The scope of income arising from transfer of capital assets under section 9(1)(i) is dependent on existence of three elements - namely transfer, existence of a capital asset and situation of such asset in India. In the absence of ambiguity in the language, a purposive interpretation of section 9(1)(i) could not be applied to cover indirect transfer of capital assets / property situated in India. The word “indirectly” used in section 9(1)(i) goes with income and not with the transfer of capital asset. Thus, section 9 does not envisage taxation of an “indirect transfer” of a capital asset situated in India, rather covers taxation of “income accruing indirectly” from transfer of such an asset. A specific inclusion of indirect transfer of capital asset in the Direct Taxes Code Bill, 2010 (“DTC”) indicates that the existing provisions of section 9(1)(i) of the Act do not cover such transfers. Source in relation to an income is construed to be where the transaction of sale takes place and not where value of the asset, which is the subject of the transaction, was acquired or derived from. On role of CGP in the transaction Every multi-national company reconfigures itself into a corporate group by dividing itself into a number of subsidiaries which are financially interlinked. Consequently, the parent company suffers a loss whenever the rest of the group experiences a downturn this grouping is based on the principle of internal correlation. Courts have evolved doctrines like piercing the corporate veil, substance over form, etc but genuine tax planning cannot be ruled against by the Court(s). CGP was an investment vehicle and was in existence since 1998. While two routes were available to Hutch ie, to sell the shares of CGP or the Mauritius companies, the sale of shares of CGP was found commercially a more efficient way of ensuring a smooth transition of business on divestment, It cannot, therefore, be said that CGP had no business or commercial purpose. On scope and applicability of sections 195 and 163 The applicability of section 195, which requires 'any (continued on next page)
AUDITOR • February 2012
(continued from previous page)
person' making a payment of a sum chargeable to tax to a non-resident to withhold tax on the same, depends on the “tax presence” of the non-resident payer in India. Tax presence must be construed in the context of the transaction under question. Investment by a group company in an Indian company does not create a tax presence of all companies in of that group in India. In the absence of income chargeable under the Act, section 195 failed to apply in the case of Vodafone. Justice Radhakrishnan further stated that section 195 of the Act would apply only if payments are made from a resident to another non-resident and not between two non residents situated outside India. “Any person” in section 195 of the Act would mean any person who is “resident” in India. In the absence of chargeability to tax, nothing could be recovered from the agent under section 163(1)(c) of the Act. Merely because a person is an agent or is to be treated as an agent, would not lead to an automatic conclusion that he becomes liable to pay taxes on behalf of the non-resident. Since, there was no income chargeable to tax in India arising from the transfer of shares of CGP, Vodafone could not be treated as an agent of Hutch under section 163 of the Act. On need for legislation and certainty: Tax avoidance is a problem faced by almost all countries following civil and common law systems and all share the common broad aim, ie, to combat it. Many countries are taking various legislative measures to increase the scrutiny of transactions conducted by non-resident enterprises. The Vodafone case is an eye-opener of what India lacks in regulatory laws and what measures India has to take to meet the various unprecedented situations, that too without sacrificing national interest. The DTC envisages creation of an economically efficient and effective direct tax system by proposing a GAAR. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. The controversy around the Vodafone tax dispute has held the attention of international investors and the tax community right since its inception. This landmark ruling reinforces many historically AUDITOR • February 2012
established canons of taxation, provides a stamp of approval to international holding company structures and the modern trends of contractual rights built in shareholders' agreements. It also strikes a balance between upholding a genuine business structure and s u b te r f u g e s . Th e r u l i n g s e n d s s i g n a l s to th e Government on aspects such as GAAR, fixes the burden of proof with the Revenue and provides a general guidance on its judicious use. This decision will go a long way in reinforcing the investor confidence and will also usher in a regime of greater certainty for international investors. What next… The Government's response to this decision of the SC will be keenly observed, specifically as this decision arrives less than a couple of months before the release of the Union Budget 2012. The key question is whether the Government would seek to amend the law in the upcoming Finance Bill, 2012 to enact explicit “look through” in the current statute or would these provisions be enacted only in the DTC as originally planned. The SC has categorically held that tax can only be levied on a transaction and not on its “effects”. The proposed GAAR provision is similar to an “Effects Doctrine”, which is an antitrust legislation in the US laws. According to this doctrine, domestic competition laws are applicable to foreign entities but also to entities located outside the state's territory, when their behavior or transactions produce an "effect" within the domestic territory. The "nationality" of entity is irrelevant for the purposes of antitrust enforcement and the effects doctrine covers all entity irrespective of their nationality. In all, this ruling reiterates certain important aspects with respect to tax avoidance principles. It is an important ruling which not only lays down cardinal principles of international taxation, but also deals with equally crucial principles having a bearing on international corporate law. Vodafone has gained as this decision obliviates the tax demand of USD 2.1 billion, causes tax refund (along with 4 per cent interest) of USD 500 million approximately which had been deposited, and removes the risk of tax penalties. The Revenue has only gained from the first round of litigation of its rights to information and documentation. The tax community and investors have gained materially from the articulation of the tax principles, many of which were always enshrined in jurisprudence but needed re-emphasis in light of evolved business structures and practices and an aggressive tax environment. 5
Counter Point
M R Venkatesh and Manoj Solanki*
Vodafone – Not heard the last word yet! The question before the Hon’ble Supreme Court was whether the Indian Revenue Authorities have the jurisdiction to tax the gains that accrued to Hutchison (HTIL) while exiting the Indian telecommunication business through the sale of its Cayman Island company (CGP) and accordingly, whether they can proceed against the Buyer (Vodafone) for failure to withhold tax.
HTIL could at its sole discretion terminate the agreement and parties would have no claim against each other; •
‘Company Interests’ are defined to be the aggregate interests in 66.9848% of the issued share capital of the Indian company, HEL;
•
For the purpose of assessing damages suffered by Vodafone for any breach of the SPA, the SPA shall be treated as requiring HTIL to procure the delivery of 66.9848% of the issued share capital of HEL to Vodafone
•
Various Term Sheet and Frame work agreements executed in connection with the transaction which ensured that controlling power over HEL was transferred from Hutchison to Vodafone. CGP held 42% of the share capital of HEL through wholly owned subsidiaries and about 10% of HEL through Minority shareholdings in certain Indian Cos; however, Vodafone acquired the right to appoint 8 directors (ie approx 67%) out of the total 12 directors on the board of HEL b y v i r t u e o f Te r m S h e e t agreement with Essar
It will be interesting to consider the Hon'ble Court's opinion on some of the following key aspects: Nature of the Transaction The Hon’ble Chief Justice of India (‘CJI’) summarised the issue in the Introduction (para 2 of the order) as: “In short, the Revenue seeks to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets.” We b e l i e v e t h a t t h e p r i m a r y argument of the Revenue in this case is that the Sale Purchase Agreement ( S PA ) a n d o t h e r t r a n s a c t i o n documents executed by HTIL and Vodafone, commercially construed, e v i d e n c e s a t r a n s f e r o f H T I L’s property rights in the Indian company (HEL) by their extinguishment and the transfer of the share capital of CGP is only one of the means for facilitating the transaction. This is also evident from para 72 of the order and that in our opinion is the crux of the issue that refuses to die down. The Hon’ble SC has adopted the “Look At” principle and looking at the entire transaction holistically arrived at the conclusion that extinguishment of HTIL’s rights in HEL took place by virtue of transfer of share of CGP share and not by virtue of the various transaction documents. If we take into account the aspects as listed below, do we still arrive at the same conclusion? or the Hon'ble SC ought to have further clarified the application of the “Look At” principle? •
H o w H T I L a n d Vo d a f o n e c o n s t r u e d t h e transaction Offer letter, Disclosures made at the Stock exchanges, etc (as has been analysed in the Bombay HC order);
•
Various clauses of the SPA (as has been analysed in the Bombay HC order)
• 6
Clause 4.3(c): If FIPB approval was not obtained,
•
The entire value that was ascribed to HTIL's stake in CGP was computed only on the basis of the enterprise value of HEL and no value was ascribed to CGP or any of the intermediate companies between CGP and HEL
•
No financial data/corporate data of CGP was maintained by HTIL and the share capital of CGP was only 1 share of US$ 1
•
Call Options for acquiring shares of certain Indian companies which resulted in rights over 15% of the equity shares of HEL were valued at a price similar to the price of the shares of HEL
With due respect, has the Hon’ble SC adequately dealt with the primary argument of the Revenue before dealing with the alternative arguments? Lifting of Corporate Veil In the context of international tax aspects of Holding Structures and lifting of Corporate Veil by courts, the Hon’ble CJI has laid the principle that the subsidiary companies should act on the authority of its own executive directors and they cannot be merely puppets of the holding company (refer paras 67 and 74 of the Order). (continued on next page)
AUDITOR • February 2012
(continued from previous page)
The above principle laid down by the Hon’ble CJI is very important in the context of a Multi-national corporate structure. However, in the instant case, the Hon’ble CJI has not analysed whether CGP or its downstream subsidiaries satisfied the above test and crucially whether the directors of these downstream companies were mere “puppets” of the parent company. Further, the Revenue had, in its order, provided a Chart giving the details of the resolutions passed for accepting the resignations of the Board of Directors of all the intermediary companies. The said chart of the Revenue clearly demonstrates that the directors on the board of all the downstream companies were the same and the resolutions passed were identical in respect of the same agenda by all the companies. This clearly suggests that the board of directors of CGP and the intermediate subsidiary companies in Mauritius have acted merely as puppets of the ultimate Parent company, i.e. HTIL and accordingly, as per the principles cited above by the Hon’ble CJI, the principle of lifting the corporate veil could squarely apply to the facts of the present case.
substance of such investment holding company. Thus, with due respect, is the Hon’ble SC inadvertently legitimizing the use of Tax Havens so far as the investments are ultimately for business operations in India and whether this may encourage any foreign investor to invest in India through a Tax Haven country instead of investing directly in India as he could legitimately save on the capital gain taxability in India at the time of exiting the Indian operations. With due respects to the Supreme Court if structures located at tax havens are not artificial devices, what else is? Controlling Interest not being distinct from Shares The Hon’ble CJI has held that control and management is a facet of the holding of shares and applying the principles governing shares and the rights of the shareholders to the facts of this case held that this case concerns a straightforward share sale (refer page 88 of the order).
Strangely, after laying down the principle, the Court refused to pierce the corporate veil, more so when the CGP structure was shoved into the deal at the proverbial last minute. Why Cayman Islands? The answer to the question is obvious Cayman Islands is a tax haven. And by refusing to pierce the corporate veil of a structure located in the Tax Haven, the moot point to this date is whether inadvertently this order of the Hon’ble Supreme Court has given a leg up for “double non-taxation”.
The general principle that ‘controlling interest which a shareholder acquires is an incident of the holding of shares and has no separate or identifiable existence distinct from the shareholding’ should be applicable in a situation where controlling interest is acquired as an incidence of acquisition of a particular number of shares. However, shouldn’t it be evaluated in further detail if the above general principle will still hold good in a situation where transaction between the parties is explicitly for acquisition of controlling interest in a subsidiary company and the same is given effect to by transferring shares of an overseas parent company (as is the situation in the present case)?
Tests laid down for distinguishing a transaction from Tax Avoidance scheme
It may also be interesting to ponder over the following questions:
The Hon’ble CJI has laid down certain tests in para 73 on page 55 in order to find out whether a given transaction evidences a preordained transaction which is created for tax avoidance purposes or it evidences an investment to participate in India. These tests primarily focus on the duration of the business operations and generation of taxable revenue by the operating entity in India, and applying these tests, the Hon’ble CJI concluded that in the present case, it cannot be said that the structure was created or used as a sham or tax avoidant.
1. In case the Hongkong based company HTIL were ultimately found to be beneficially owned by say Indians - would the SC still hold the same view? If no, how would the Revenue ever find out the real beneficiaries if it were to only apply the “Look At” test and not “Look Through”?
In our humble view, any genuine Foreign Investment into business operations in India will ordinarily satisfy all the above tests even if the same has been routed through an investment holding company in a Tax Haven country (like Cayman Island in the instant case) without demonstrating the commercial AUDITOR • February 2012
2. In case the SC had given a favorable order to the Revenue, how could it have enforced the Order on Vodafone BV, which was a Netherlands based entity? Could Vodafone India in such case be held an Agent of Vodafone BV? For all these and several other reasons, the last word has not been spoken on the Vodafone Judgment. Watch this space! * The authors M R Venkatesh and Manoj Solanki are Chartered Accountants based out of Chennai and Pune respectively.
7
Allotments of Bank Central Statutory Audit List of firms eligible for Central Statutory Audit of banks for the current financial year has been released by RBI and all the vacancies have been filled. Though there was a well reasoned move of allotment of audits for newer firms of Chartered Accountants by alloting a ratio of 60:40, due to some new twists made (God knows on whose behest), the same was not followed. Let me share some of my viewpoints on the issue: 1. Central Statutory Auditors for nationalized banks were appointed by RBI till 2005-06, based on list of eligible audit firms provided by PDC of ICAI. 2. Till that year Central Statutory Audit of banks was done by a select few eligible audit firms. 3. In order to encourage small and medium firms to also qualify for such assignments and to promote capacity building ICAI encouraged merger of small and medium firms so that they become eligible for audit assignments like statutory audit of big PSUs as well as Central Statutory Audit of banks. Because of this, many small and medium firms merged. 4. But owing to seniority consideration of firms which have already been carrying out Central Statutory Audit of banks, many new firms who were otherwise eligible under RBI norms could not actually get such assignments. In order to infuse new firms and encourage them (who are eligible under RBI norms) and to ensure equitable distribution of audit assignments among eligible firms, RBI came out with a formula of 9:1 to make “New Firms” to get such assignments. This was later made to 8:2 and as more number of “New Firms” became eligible, this was made to 6:4. This has been made very clear in the Road Map and guidelines for appointment of Central Statutory Auditors released by RBI and posted on their website. (Please see under “Appointment of Central Statutory Auditors” under “For Bankers” in RBI website) 5. Page No.9 of the Road Map clearly says that the
CA J.V.Ramanujam
formula of 60:40 among the “Experienced and New” will continue from 2005-06 and onwards. (Reference: RBI website-For Bankers-Appointment of Central Statutory Auditors-Road map and Guidelines). 6. Many “New Firms” actually got benefited on account of this bold and encouraging formula of RBI. If one goes through the list of Central Statutory Auditors appointed by RBI during last four to five years, it is really heartening and encouraging to find “New Firms”. 7. Suddenly Government of India, came up with an obnoxious and fatal idea to allow bank managements themselves to choose their Central Statutory Auditors from out of a list of eligible firms released by RBI. This great exercise was termed as Autonomy. However banks were not allowed to fix the fees nor remove any auditor without RBI permission. 8. This sudden move was a blow and almost a death knell for small and medium firms particularly those who had assiduously and painstakingly built up the capacity of the firms to get such assignments with necessary qualifications and through proper channel. 9. And this so-called 'Autonomy' method resulted in almost a scramble and made eligible firms, old and new, to actually go on the solicitation mode. Appointments and Renewals were made arbitrarily with experience (in lobbying) and familiarity (with the Bank top managments) as the only considerations. 10. This year for a vacancy of 40 as many as 325 firms were provided to the banks to choose for appointment but one can see that no “New Firm” has been offered for appointment by any bank. The lesson to be learnt, therefore, is that just because you made yourself qualified to do the job, if you think that job will be given to you, at least in course of time, you deserve a place in fools paradise.
Society of Auditors (Regd.), Chennai 600 004 and Chartered Accountants Study Circle (Regd.), Chennai 600 004 jointly organising a One day Workshop on Practical Aspects of Bank Branch Audit on Saturday, the 17th March 2012 TOPIC Audit of CBS Branches Audit Planning & Documentation L F A R & Other Certificates Panel Discussion
SPEAKER Mr. A. Vijayakumar, A.G.M. Karur Vysya Bank CA. M.N. Venkatesan CA. S. Pattabhiraman Panelists: CA. M. Naganathan, CA. Chinnasamy Ganesan CA. S. Ramesh Delegate Fee : Rs. 1000/Timing: 9.15 a.m. to 5 .00 p.m. Venue: Quality Inn Sabari - Convention Centre, Thirumalai Road, T.Nagar Cheque in favour of “Society of Auditors” Please register on or before 10.03.2012 so as to make proper arrangements. 8
AUDITOR • February 2012
Elsewhere Regulators Debate Solutions to Poor Audit Quality Faced with a disturbing spike in audit failures in the aftermath of the financial crisis, America's top audit regulator, James Doty, has decided to poke a hornet's nest. Doty, Chairman of the Public Company Accounting Oversight Board, is the driver of an initiative to determine whether mandatory rotation of audit firms would adequately shake up the audit profession and improve audit quality. And while his regulatory cohortsat least those on this side of the Atlantic agree with the idea of figuring out what causes audits to go wrong, they may not wish as much to provoke the ire of the industry. So far, Doty's fellow board members have agreed only to float the rotation idea and asked for input on whether it's the right answer. The European Commission, on the other hand, is already a step further down the path, and is currently considering a measure to limit audit engagements to six years and prohibit audit firms from providing any non-audit services to their clients. The Securities and Exchange Commission is urging Doty and the PCAOB to put the brakes on mandatory rotation. Staff members at the SEC have told the PCAOB that it should do more work to figure out why audits fail before considering measures as radical as mandatory rotation. At a year-end national conference of the American Institute of Certified Public Accountants, SEC staffers practically directed the PCAOB to get a better handle on why audits fail and take a look at some rusty auditor performance standards before pulling the rug from under longstanding auditor-client relationships. Basel group allows easing liquidity rules; Breach in crisis Banks will be allowed go below minimum liquidity levels set by global regulators during a financial crisis so that they can avoid cash-flow difficulties. “During a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement,” the Basel Committee on Banking Supervision's governing board said on its website, following a meeting in the Swiss city. The aim of the measure, known as a liquidity coverage ratio, is to ensure that lenders hold enough easy-to-sell assets to survive a 30-day credit squeeze. The requirement, one of several measures from the Basel group designed to prevent a repeat of the 2008 financial crisis, is scheduled to enter into force in 2015. Banks have argued that the rule may curtail loans by forcing them to hoard cash and buy government bonds. Bank supervisors say the standard is needed to prevent a repeat of the collapses of Lehman Brothers Holdings Inc. and Dexia SA, which were blamed in part on the
AUDITOR • February 2012
lenders running out of short-term funding. Global regulators said last year they would amend the rule to address unintended results. “There will be a concern nevertheless that banks won't want to draw down their liquidity buffers because of how such a move may be received by the markets,” said Patrick Fell, a director at Pricewaterhouse Coopers LLP in London. “A bank that is seen to draw on the buffer could feel itself to be weakened and compromised.” Regulators must still clarify which assets banks should be allowed to count toward liquidity buffers and how much funding lenders should expect to lose in a crisis, the group said. Work on the main elements of the liquidity rule should be completed by the end of 2012, it said. The Basel committee will provide further guidance on when lenders will be allowed to breach the minimum rule, and make sure the standard doesn’t interfere with central-bank policies. “The aim of the liquidity coverage ratio is to ensure that banks, in normal times, have a sound funding structure and hold sufficient liquid assets,” said Mervyn King, the governing board’s chairman. This should mean “central banks are asked to perform only as lenders of last resort and not as lenders of first resort,” said Mr. King, also governor of the Bank of England. The liquidity rules were part of a package of measures adopted by global banking regulators in 2010 to strengthen the resilience of banks. The new rules also included tougher capital requirements that more than tripled the core reserves lenders must hold. Separately, the governing board said the Basel committee will carry out “detailed” peer reviews of whether nations have correctly implemented capital rules for lenders. A Canadian TP news The most recent Canadian transfer pricing trial, in the case of McKesson Canada Corporation vs. The Queen, concluded on February 3, 2012 after four days of argument in the Tax Court of Canada in Toronto. This marked the conclusion of a trial that commenced on October 17, 2011. The issue in this case was ascertaining the arm's length price of the agreed-upon discount rate for factoring accounts receivable. While the agreed-upon discount rate was 2.2%, the Minister of National Revenue held that the arm's length rate was 1.0127%. U.S. cranks up the pressure on banks in Switzerland Until recently, the quiet Swiss town of St. Gallen was best known for the medieval manuscripts housed in its abbey library. But lately the city has had to grapple with a less pious
9
(continued from previous page)
claim to fame: St. Gallen is home to Wegelin, a private bank indicted by U.S. authorities this month for allegedly helping rich Americans evade taxes. Switzerland gained its reputation as a tax haven over the decades thanks to its strict banking secrecy law that was put in place in 1935. While the Swiss argue that banking secrecy protects the client, critics say the banks are taking other countries' money to enrich themselves. A report last year from Boston Consulting Group said Switzerland is the top market for offshore money, holding some $2.1-trillion (U.S.) in assets. It's no secret that banking is a big business here in St. Gallen, as it is throughout Switzerland, accounting for some 6.7 per cent of GDP in 2010. Banks are scattered throughout the pretty streets of the old town, some world giants like Credit Suisse and UBS, and others unknown to the masses. It is here in this unassuming town near the Austrian border that some of the world's wealthiest citizens entrust their fortunes to discrete bankers who guarantee their confidentiality. But that secrecy is increasingly under attack by dogged U.S. investigators. The U.S. Justice Department is investigating 11 Swiss banks or foreign banks' Swiss subsidiaries, including W e g e l i n , C r e d i t S u i s s e , J u l i u s B a e r, B a s l e r Kantonalbank, HSBC, and Zurcher Kantonalbank (ZKB). The Swiss recently sent 20,000 encrypted banking documents to U.S. authorities, saying it could help decode them when a settlement is reached, according to a report from Bloomberg News. The Swiss have been taken by surprise at how quickly and devastatingly the U.S. authorities are chipping away at their prized banking secrecy tradition. In St. Gallen's heart stands a baroque building where Wegelin, Switzerland's oldest private bank, used to do business. But the imminent threat of U.S. charges forced its owners to sell to rival Raiffeisen at the end of January. Wegelin's ensuing indictment on Feb. 2 rattled the Swiss, who believed they were making progress in their negotiations with the Americans over their long-running tax dispute. It's a view that some Swiss don't want to acknowledge. Banking has been good to this small alpine country. Wealth is prominently on display in Zurich, where women bundled in fur coats and private bankers in sleek suits and coats stroll along the streets. The main street, Bahnhofstrasse, is among the world's most exclusive addresses, where the well-heeled go to buy designer clothes and stunning jewellery. But there's a darker side to Swiss banking, the one depicted in countless Hollywood movies where unsavoury people hold a Swiss bank account because of dodgy business dealings. The consequent loss of tax revenue has been a sore point for many governments. But the U.S. really began to crack down on the Swiss in 2008 when allegations emerged that employees at UBS, Switzerland's biggest bank, helped Americans avoid
10
taxes. UBS admitted its guilt the following year, agreeing to pay a $780-million fine and hand over the names of 4,450 U.S. accounts. In return, prosecution was deferred and UBS could continue to operate in the U.S. The tax fight, teamed with volatile global financial markets, and new banking rules, are making life difficult for Swiss banks. Swiss daily Tages-Anzeiger, citing experts, recently reported that the number of bankers in Switzerland could fall to 80,000 in coming years from 108,000 last year. Some Swiss banks are changing the way they operate in the U.S. ZKB, for example, is exiting the business of offering bank accounts to clients who reside in the U.S. When Raiffeisen bought Wegelin, it left behind the U.S. customers. ZKB's CEO Martin Scholl described the U.S. tax dispute as a challenge but insisted the bank is not scared. What the Swiss would like to see is a resolution that lets them hold on to the concept of banking secrecy while still dealing with the tax evasion issue. They also want an agreement that covers all Swiss banks rather than just the ones being investigated. One model is recent tax agreements reached between Switzerland, Britain and Germany, which would see the Swiss impose a withholding tax on assets that would be passed on to those governments without exchanging customer data. The Swiss economy is not just based on banking. The Swiss have created many other world-renowned businesses including drug makers Roche and Novartis and food giant NestlĂŠ. Probably it will strengthen Switzerland at the end of the day because we get away from this myth that private banking is the only reason for its riches! Global accounting reform ups pressure on U.S. to sign up Plans by the accounting body responsible for global standards to make itself more answerable to the public will put pressure on the United States to sign up or risk losing influence. The International Accounting Standards Board (IASB) has drawn up the standards, which are used by listed companies in over 100 countries, including the European Union.So far the United States has delayed its decision to sign up, under pressure from companies and Congress who say they do not want to cede regulatory sovereignty to a London-based body. But a recent publication by the IASB's Trustees and Monitoring Board of plans to make themselves more open and accountable in their second decade may push the United States to think again, given the far-reaching impact that accounting rules have on financial markets and investors. G20 leaders want a single set of global accounting standards to improve transparency for investors and regulators, starting with "convergence" or alignment of IASB and U.S. rules. The IASB's Monitoring Board also said that in future it would only accept members from countries that use IASB rules and set January 2013 as the date for its first eligibility assessment.
AUDITOR • February 2012
(continued from previous page)
Four Americans have seats on the IASB board, with Americans also among the Trustees. The U.S. Securities and Exchange Commission is on the Monitoring Board and signed off on the new blueprint. The SEC also allows foreign companies with a U.S. listing to file under IASB rules. In particular, over 100 companies from Canada are listed in the United States and file
statements there using IASB rules. In a bid to mollify U.S. critics, the blueprints put heavy emphasis on cracking down on "carve outs" whereby countries or regions introduce exemptions from some IASB rules. U.S. policymakers have pointed to carve outs as evidence the IASB rules cannot be truly global as world leaders want.
An SMS from SIRC of ICAI Couple of days ago, I received a text message, which invited me to attend a program on CARR & CAR and the venue for the meeting was mentioned as SIRC of ICAI, Egmore. Rubbing my eyes, I read it again and it was certainly Egmore. Flummoxed as I was, my mind was getting deluged by a few questions: Why suddenly the office of the SIRC was shifted from Nungambakkam? What was the need? Whether the new premises will have adequate parking? Why Egmore which is far off from the present premises? The netizen in me made to check with the websites of SIRC of ICAI and ICAI at New Delhi and I found no announcement of the change of address. Though I normally delete the received text messages immediately, I did not treat this message with such disdain as it had intrigued me a lot. Well, I again checked whether there was any error in my reading of the SMS. No, it clearly conveyed it was at SIRC of ICAI, Egmore. I called up the SIRC of ICAI at Nungambakkam to enquire about the sudden unannounced change. The friend who attended the call it said that it was a prank (with a tone of irritation of a government servant who talks to an honest citizen) and there is no plan to shift, that too to Egmore. I thought I would put my DISA qualification (at least and at last!) to (any) use and decided to do my bit of investigation into this whole murky (?) affair. The luck of a skilled investigator also smiled at me that the puzzle got solved by itself. After a few minutes a cost accountant friend of mine called and he told me that recently the Central Government in one of its active initiatives of a great national importance announced the change in the name of the Institute of Cost and Works Accountants of India (ICWAI). It seems that the erstwhile ICWAI requested the government that its name be changed to Institute of Cost and Management Accountants of India. In a rare display of alacrity, the Institute of Chartered Accountants of India (ICAI) in its wisest wisdom opposed the name change (on the ground why should management accounting be monopolised by them) and ultimately the Central Government took the easy option of changing the name of the ICWAI as Institute of Cost Accountants of India, thereby creating one more ICAI. For the purpose of differentiation, let me name the rechristened ICWAI as ICAI (II). The story was narrated as that of a soap opera with all the thrills of a victor or for that matter as that of the David against the Goliath. He further narrated that it was the turn of the hunter becoming
AUDITOR • February 2012
R.G. Rajan, FCA hunted and said now ICAI (II) demands the name Chartered should be removed from the original ICAI at its represents a terminology of the colonial regime. I thought this was pure patriotism, at its best. My mind wandered during the course of the conversation to the immediate problem of identification and I started wondering if the members of the costing institute also use the designation ACA or FCA how it will be distinguished from the members of original ICAI. How will a person print his business card if he is a member of both the institutes? All these looked the immediate concerns of a poor chartered accountant who is already petrified at the thoughts of IFRS, DTC, GST, Company Law, Revised Schedule VI etc., The following flowing thoughts came to my mind instantly about different possibilities. Will it be like this? Mr X, ACA, ACA OR Mr X, ACA, ACA (ICAI (II) Or if you are mathematically inclined 2
Mr X ACA
So engrossed in the thought I involuntarily asked my friend about the impending confusions. He said that the confusions will not arise because members of ICAI (II) are permitted to use the designation ACMA or FCMA. He clarified CAR means Cost Audit Rules and CARR means Cost Accounting Record Rules and happily hung up. For a moment I felt like a child, which lost its parents in a crowded place or more simply put, felt like our prime minister Dr Manmohan Singh. Being an ardent Chartered Accountant, my mind wondered on the possible actions our ICAI can do to protect its identity. Reading a lot of tamil weeklies gave me instant solutions. I thought ICAI being the first one can claim agmark copy right over its use of ICAI and they can advertise “We are the Original ICAI! Beware of Copy CAts”. Thinking any more on this was making life complex and I decided not to let this complexity make me lose the few precious hair on my head. Hence, I started to get busy with my routine work at office (facebook posting and chatting!)…..
11
The politics behind the Companies Bill Like the proverbial tiger which keeps threatening of its visit but never showing up its face, the possibility of an all-new Company Law keeps rearing its head on and off. Government after Government, Lok Sabha after Lok Sabha, Minister after Minister will keep attempting new Companies Bill, each version of which will generate enough and more excitement among the Chartered Accountants / Company Secretaries fraternities, be the subject matter of many articles in professional and business publications, seminars and conferences, animated discussions on the desirability or otherwise of a provision here or a subsection there and after some time will go the way in which Shakespeare named one of his celebrated Comedies: “Much Ado about Nothing�. P.Chidambaram began this unsuccessful (so far) crusade in 1997. Subsequent attempts were made by Arun Jaitley in 2003, Prem Chand Gupta in 2008, and Salman Khurshid in 2009. Murali Deora brought this up in 2011 and the present incumbent Veerappa Moily is supposed to be pursuing it. While the Bills put forward by Chidambaram and Gupta lapsed with the various editions of Lok Sabha, Jaitley's was withdrawn by the NDA government for re-haul and Khurshid's was referred to the Standing Committee on Finance, which came down heavily on the Bill. So the final result: The country is still waiting for a new Act to replace the obsolete piece. And unfortunately, it will be quite presumptuous to assume Anna Hazare will undertake another fast for the sake of modifying, of all things in this world, the Companies' Act. The Companies Act, which was first formulated in 1913 and then in 1956, has been left kind of untouched, allowing companies to make full use of all the loopholes explored in a time span of over half a century. Be it the Harshad Mehta scam in 1992, Global Trust Bank in 2003 or Satyam in 2009, frauds and irregularities have become the order of the day because the business community now knows where all they can get away with their frauds using a dead Act. Ever since the country opened its economy, the corporate world has grown in leaps and bounds calling for changes in the age-old norms to ensure a fraud-free environment. It has become all the more important for the kind of investors' money that is at stake now (considering daily turnovers of Rs.32.93 billion at BSE and Rs.116.23 billion at NSE in March, 2011 and investment of Rs.500 billion - total of trade at FIMMDA, NSE and BSE in March 2011 in the corporate bond market). However, Companies Act, 1956 in its present form is failing to serve the purpose and needs to be revamped to fulfill a few critical requirements such as strengthening corporate governence, higher compliance standards, ensuring transparency, convergence with gloabal accounting standards, removing impractical bottlenecks etc. Corporate Governence: Weak corporate governance is a serious concern for India. Even the adoption of Clause 49 in January 2006, formulated for improvement of corporate governance in all listed companies (including key stipulations like 50% the board must comprise of independent directors), could not serve much for the purpose. In fact, as a KPMG survey report on Corporate Governance pointed out that 90% of corporate India thinks that Clause 49 itself needs a change (44% believe that it needs to be revamped significantly) to
12
generate better result. Lack of a strong oversight and monitoring system, which the Act has failed so far to provide, is certainly the main reason behind the country's failure to provide better corporate governance. Add to it the very fact that while developed countries are managing the show with stringent penal and criminal consequences for poor corporate governance, as 71% of the respondents in the KPMG survey believe, penalty levels in India are quite inadequate to even create some amount of threat on part the wrongdoers. Perhaps that's why even a year after Clause 49 was put into force, a group of professors from Wharton had found out that as high as 60% of India Inc. was still to adhere to the terms, and after 5 years, SEBI still has as many as 1,297 pending cases of grievances r e l a t e d t o C o r p o r a t e G o v e r n a n c e , Re s t r u c t u r i n g , Substantial Acquisition and Takeovers, Buyback Delisting, Compliance with Listing Conditions et al (that is after the market regulator's tremendous efforts to reduce the number from 2,828 in 2009). Changing dynamics of corporate ownership in India too is a big reason for the Act to ensure higher governance. More so, for the fact that while foreign ownership in most industries was limited to 40% in pre-1990s, the scenario is changing quickly as the government has already allowed 51% ownership in most industries, while as high as 74% to 100% in select cases. Under such a scenario, ensuring better governance is very critical to save the interest of the minority shareholders, at least for the fact that 63% of corporate India believes that concerns of minority shareholder groups are not adequately addressed by boards requiring significant efforts on part of the law itself. Higher Compliances and need for transparency: While the number of companies in India is increasing at a whopping rate of 241 new companies per day (considering that 64,990 companies limited by shares were registered under the Companies Act, 1956 between April 1, 2010 and December 31, 2010), what is absolutely unbelievable is that only 53.8% of the 8,47,165 companies listed with the Registrar of Companies (RoC) as on March 31, 2010 have filed their annual return last year, which means the activities of the remaining 48.2% of the companies are just unknown. Worse, this is for the only time in the past 5 years that more than 50% of all companies have filed their annual return with RoC. Such non-filing or late filing of statutory papers allows both scope and time to companies to commit fraud (mostly related to financial documents). The only way to bring this mess to order is by creating a strong and well coordinated regulatory environment with ample legal support. This means while the Companies Act needs to prescribe punitive actions against those who do not file or delay in filing their annual statements; it also needs to empower RoC to take those actions prescribed without any hassle. Removing bottlenecks: Companies Act, 1956 carries many such critical terms, which are used very effectively by the companies to mislead investors because the rules prescribed around those terms are just vague and incomplete. One does not even look much deep to find out such terms. The very base of all share transactions, face value of the share itself is one such term. What is very unbelievable is the
AUDITOR • February 2012
(continued from previous page)
fact that Companies Act, 1956 has no provision to provide a basis to fix the face value of a share allowing companies to decide it on their own. Thus, the companies keep it as low as Re.1 to Rs.10 so that they can lure investors later by announcing bumper dividends to the tune of 100% to 1000%, which in reality amount to only Rs.10 to Rs.100 a share for one with a face value of Rs.10. Moreover, there is no upper limit on the premium that a company can charge from investors at the time of issue. As a result, companies end up charging as exorbitant amounts (VA Tech Wabag Ltd. issued shares of Rs.5 each at a premium of Rs.1,305 per share). Such premium on shares invariably breaks all possible links that could have been established between the face value and market value of share. Thus, there exists a huge difference between the market value of a share and the true equity base of a company. Considering this example from a different direction, had there been a cap on premium charged (say 100% for example), the face value of shares would have witnessed a more justifiable value to fetch the company the same amount of capital. If that was not enough, consider this. There is no restriction in the Act on splitting of a share, which means a company can break or split its share to as many numbers as it wants. Also, it can consolidate as many shares into a single share. This not only dilutes minority share holders stake in a company against their will, but also makes it difficult for a common investor to understand whether a share having market price of Rs.50 is costlier or cheaper as compared to one with a market price of Rs.100. The story is more or less the same with bonus issues. Though on the face of it the term should indicate a constant super performance of the company, it is not the case in real life. Owing to lack of adequate provisions, while companies use bonus issues to avoid dividend distribution tax, shareholders bear the liability in terms of capital gain tax when they decide to sell off those bonus shares (only short term, of course). How well the companies are using it can be well understood from the very fact that a total of 105 companies issued bonus shares during 2008 and 2009 when the whole world was under financial crisis. The figure remained at 99 last year alone. While there are a plethora of other terms and inadequate provisions in the Companies Act 1956, the Act also suffers from serious bottlenecks in terms of delegating enough power to the regulators. As compared to Securities and Exchange Commission in the US, regulators in India be it RoC, SEBI or any other regulator which has a role in administering operation of companies in India are just toothless. They almost have no power to move ahead on their own and punish the offender in a manner (like arresting promoters, seizing assets or banning the company altogether) that can set an example for others. What's happening? th
Though, on 15 December 2011 The Ministry of Corporate Affairs introduced the Companies Bill 2011 in the Lok Sabha, the Government is going mysteriously slow on pressing for the passage of the Companies Bill, 2011. By end December, business and political observers began to get flummoxed over what transpired in the past few weeks that has led to the stalling of what looked like a done deal just a couple of weeks ago.
AUDITOR • February 2012
One, largely unsubstantiated, reason being bandied around is that the immediate passage of the Bill seems to have fallen victim to shadowy corporate lobbying on behalf of companies that have much to lose if it is passed in the current form. The sudden turn of events has mystified even members of Parliament's standing committee on finance, which deliberated on the Bill. A member commented that they had made 172 recommendations, of which 165 have been accepted by the government but still have no idea why there is a delay except perhaps that some corporate houses want the bill delayed. However, inview of the sensitivity around the issue, no one is willing to come on the record. Ostensibly, the clause to make private placement norms for unlisted firms more stringent is proving to be the thorn in the flesh for certain companies whose plans to raise big money through this route would have come unstuck if the Bill was passed in the last Parliament session, which of course saw tumultuous yet practically useless dramatics on Lokpal bill. Having introduced the Bill in Parliament in December, the Government cannot pull it out unless it gets leave of the House to withdraw it. The Bill has neither been withdrawn nor pressed for passage. While addressing the Indian Paint Industry Conference in Mumbai on 15 January, 2005, Vinod Dhall, Member, Competition Commission of India had said, “When Enron, Worldcom, Anderson and some other companies collapsed amidst high corporate drama in the second half of 2001, one of the first authorities in the world to sit up and take note was the Department of Company Affairs. But unlike America that brought out the Sarbanes-Oxley Act within two months, we did not want to do a knee-jerk reaction, but rather make a measured and mature response properly balancing the interests of promoters, shareholders, independent directors and others.” What he said in the context of the Indian Companies Act 1956 did a great PR job for the Government of India; first by indicating the Government's concern for the rising issues in the corporate world and second by promising that the Government would soon deliver something that is better than Serbanes-Oxley. Well, cut to the realities, the incidents cited above took place in 2001, Dhall delivered that speech in 2005 and now it is 2012; forget about something better than SOX, the Government is yet to come up with anything whatsoever in the name of a refurbished Companies' Act - though in the meantime, since the time Mr.Dhall delivered his inspiring words, the number of companies governed under the present Act has increased by a mind-boggling 22.5% from 712,435 companies limited by shares as on November 30, 2005 to 8,72,740 as on December 31, 2010. Corporate affairs minister Veerappa Moily is optimistic about introducing the Bill in the budget session, which according to Mukherjee will start in March. “They (standing committee members) have told me that they will send it back in a month's time and allow me to present it in Parliament in the budget session,” Moily said a few weeks back on the sidelines of a conference on corporate social responsibility. However, there are whispers in the corridors of MCA that every time the Companies Bill draft comes up for serious consideration, the Minister loses his job! Whether Moily can break the jinx or not remains to be seen.
13
Recent Judicial Decisions Reported
P.M. Veeramani, FCA
Statute: Income Tax Act 1961 – Sec.2 (15) – Indulging in trade, commerce, business Title : ICAI vs DIT (Exemptions) Decision in favour of : Assessee Citation: 64 DTR 226 Bench: Delhi HC DIT was not justified in refusing exemption under 10(23C)(iv) to ICAI by a cryptic order on the ground that by imparting education for fee, it was engaged in business, without considering whether it was engaged in trade, commerce or business within the meaning of first proviso to section 2(15) and further without considering the plea that it had not violated section 11(5) or third proviso to 10(23C)(iv). Statute: Income Tax Act 1961 – Sec.2 (22)(e) – deemed dividend Decision in favour of : Assessee Title : DCIT vs Madhusudan Investment & Trading Co Pvt Ltd Bench: ITAT Kolkatta Citation: 48 SOT 360 Deemed dividend can be assessed only in hands of a person who is a share holder of lender company and not in hands of a person other than a share holder. Expression ‘share holder being a person who is the beneficial owner of shares’ referred to in first limb of section refers to both a registered share holder and beneficial share holder. Therefore, if a person is a registered share holder but not beneficial then provision will not apply. Similarly, if a person is a beneficial share holder but not a registered share holder then also provision will not apply. Statute: Income Tax Act 1961 – Sec 5 – No accrual if condition not satisfied Title : ITO vs Finian Estates Developers Private Ltd Decision in favour of : Assessee Citation: 63 DTR Trib 314 Bench: ITAT Delhi Assessee having entered into agreement with the stipulation that rights as per the said agreement would come into existence only when a license is granted by Government Authority, no income accrued during the year since no approval was granted by the Government during the year. Statute: Income Tax Act 1961 – Sec 9 (1)(vi) - purchase of software is royalty Title : CIT vs Samsung Electronics Co Ltd Decision in favour of : Revenue Citation: 64 DTR 178 Bench: Karnataka HC Assessee having imported shrink wrapped software / off the shelf software from non-resident companies under software license agreement whereby license is granted to assessee for taking copy of the software, store the same in the hard disk , to take back up copy while the ownership of the copyright continues to vest in the supplier, there is only transfer of right to use copy of software and therefore, payment made to suppliers constitute royalty within meaning of section 9(1)(vi) and consequently assessee was under obligation to deduct TDS under section 195 of the Act. Statute: Income Tax Act 1961 – Sec.10 (23C), 12 A – Educational Institution Title : Pine Grove Educational Trust vs ITO Decision in favour of : Assessee Citation: 48 SOT 486 Bench: ITAT Chandigarh Educational institution whose aggregate annual receipt did not exceed Rs.one crore is not statutorily required to obtain registration under section 12A to enable it for exemption under section 10(23C). AO could not deny exemption when there was no material or evidence or record to establish that trust was run contrary to its objects. Statute: Income Tax Act 1961 – Section 14 A – Borrowal in subsequent year Title : G.D.Metsteel Private Ltd vs ACIT Decision in favour of : Assessee Citation: 64 DTR Trib 161 Bench: ITAT Mumbai When investments are made from own funds, merely because the assessee had to subsequently borrow the funds for business use, it cannot be said that the borrowed funds have been used for the purpose of investments and section 14A cannot be invoked. Statute: Income Tax Act 1961 – Section 37 – Customisation of software Title : CIT vs Vioth Paper Fabrics India Ltd Decision in favour of : Assessee Citation: 64 DTR 58 Bench: Punjab and Haryana HC Amount paid for customizing the software according to new requirement whereby only a modification of the existing software was brought about and not spent for acquisition of new software is allowable as revenue expenditure. 14
AUDITOR • February 2012
I N V I T A T I O N
PUBLIC MEETING ON UNION BUDGET 2012 Jointly organized by The Society of Auditors, Chennai The Chartered Accountants Study Circle (Regd.), Chennai The Association of Chartered Accountants, Chennai International Fiscal Association, India Branch, Southern Region Chapter, Chennai Chamber of Indirect Tax Professionals, Chennai S V Research Foundation, Chennai D Rangaswamy Academy for Fiscal Research
‘THE UNION BUDGET 2012’ TOPIC
SPEAKERS
Day : Monday
Date
Direct Tax Proposals
Shri T Banusekar, FCA
Tea : 5.15 PM
Meeting : 5.45 PM
Indirect Tax Proposals Shri K Vaitheeswaran Economic Analysis
Shri S Gurumurthy, FCA
th
: 19 March 2012
Venue : Sivakami Pethachi Auditorium Luz Church Road Mylapore, Chennai 600 004.
The Program will be moderated by Shri G V Raman, FCA All Are Welcome. Your ‘dates’ with the Society 9th March, 2012: Programme on FDI and recent developments on Sec 80G Speaker : CA Kandaswamy; Time : 6 p.m. Venue : Society of Auditors premises, Luz, Mylapore, Chennai 17th March, 2012: One day Workshop on Bank Branch Audit (jointly with CASC) Announcement elsewhere in the issue. 19th March 2012: Budget meeting Details as above. 22nd March 2012: A Student / Staff training programme on the practical aspects of Accounting, Income Tax, VAT/CSt, Service TAx, Auditing, documentation process, Tally accounting and querying is being commenced. This will be for 10 weeks, three days in a week in the evenings. For details to get in touch with CA P. Anand 9381067673. 24th March 2012: A one day seminar on Bank Audit for articled trainees / audit staff. Details later. AUDITOR • February 2012
15
FOR CHOICEST LAW BOOKS PLACE YOUR ORDERS WITH
C. Sitaraman & Co.
LAW BOOK SELLERS, PUBLISHERS & DISTRIBUTORS
Authorised Agents for: Govt. of India & Tamil Nadu Govt Publications
Email : csandco@md3.vsnl.net.in Website: www.sitaraman.com
Head Office : No. 73/37, Royapettah High Road Royapettah, Chennai - 600 014. Fax : 044-28113947 % : 28111516 / 28117069 / 28112990
Branch Sales Showroom : No. 156, Ground Floor, Andhra Insurance Building Thambu Chetty Street, Chennai - 600 001. % : 25342503 / 25340328