article by ca. sudha g. bhushan

The Management Accountant |May 2012 505

Official Organ of the Institute of Cost Accountants of India established in year 1944 (Foundermember of IFAC, SAFA and CAPA)

Volume 47 No. 5 May 2012

C O N T E N T S

TheManagement Accountant

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Case StudySustainable Growth in Indian Jute Industry—AnExploratory Study by Ashim PaulDiagnosing BSNL As A Business—PerformanceAnalysis of A Fully Owned Government Company—A Case Study of Bharat Sanchar Nigam Ltd.by John Thomas & Ramesh Damarla

Human Resource ManagementOrganization Development : An Orientation toChange Management by Dr. Anand BansalAn empirical study of relationships betweenrelational psychological contract and employees’attitudes towards OCB factors and its application inIndian Industryby Mihir Ajgaonkar, Dr. Utpal Baul & Dr. S. M. Phadke

Project ManagementProject Management Team Handling Challenges toMultinational Corporation by Dr. Javed MasoodBankingSustainable Development : Few Aspects in IndianBanking Sector by Pradipta Gangopadhyay

Financial Reporting‘Crime and Punishment’ : An introspection into twoinfamous financial reporting frauds across the worldby Dr. Arindam Gupta

Economic MattersBlack Money : Methods and Means of Controlling atOrigin by D. Venkata Narayana

Security AnalysisTest of Market Efficiency by Dr. M. Appala Raju

Institute News

Letters to Editor

Book Review

IDEALS THE INSTITUTE STANDS FOR

❏ to develop the Cost and Management Accountancy profession ❏ to develop the body of members and properly

equip them for functions ❏ to ensure sound professional ethics ❏ to keep abreast of new developments.

The contents of this journal are the copyright of The Institute of Cost Accountants of India, whose permission is necessary

for reproduction in whole or in part.

InsideThis Issue

EDITORIAL

PRESIDENT’S COMMUNIQUE

CHAIRPERSON’S COMMUNIQUE

Cover Theme

Arm’s Length Price—CMA is India—a PerspectiveDr. Santonu Moitra

International Transfer Pricing : The Current Land-scape in India by Dr. Sujit Kumar Roy & Pallab Pyne

Thin Capitalisation and Arm‘s Length Pricingby A Sekar & Sudha G Bhushan

Arm’s Length Pricing in Indiaby Dr. Sukamal Datta

Taxation

Tax Titbits—Finance Bill, 2012—What Next?by S. Rajaratnam

Coming Home to Roost : Bilateral InvestmentAgreements : Coping With Treaty Boomerangsby P. Ravindran

Documents for Availing Cenvat Credit—SomeIssues by M. Govindarajan

CostingSalient Features and Observations on CARR(Pharmaceutical Industry), 2011by V. R. Kedia & Dipti Kejriwal

Budget AnalysisIs the Union Budget of India (2012-2013) Realisticand Achievable?by Dr. Dilip Kumar Datta

506 The Management Accountant |May 2012

INSTITUTE UPDATES

MISSION STATEMENT

“The Institute of Cost Accountants of IndiaProfessionals would ethically drive enterprises globallyby creating value to stakeholders in the socio-econo-mic context through competencies drawn from theintegration of strategy, management and accounting.”

VISION STATEMENT

“The Institute of Cost Accountants of India wouldbe the preferred source of resources and professionalsfor the financial leadership of enterprises globally.’’

PRESIDENTM. Gopalakrishnan

email : [email protected] PRESIDENT

Rakesh Singhemail : [email protected]

COUNCIL MEMBERSAmit Anand Apte, A. Om Prakash,

Aruna Vilas Soman, A.S. Durga Prasad,Dr. Sanjiban Bandyopadhyaya, Hari Krishan Goel, Manas Kumar Thakur, P.V.S. Jagan Mohan Rao,Pramodkumar Vithaldasji Bhattad, Sanjay Gupta,

S.R. Bhargave, Suresh Chandra Mohanty,T.C.A. Srinivasa Prasad

GOVERNMENT NOMINEESA. K. Srivastava, Nandna Munshi

Ashish Kumar, G. Sreekumar, K. GovindarajSenior Director (Research)

Chandana [email protected]

Senior Director (Studies)R N Pal

[email protected] (Technical)

J. P. [email protected]

Director (Internal Control & Systems)Arnab Chakraborty

[email protected] Das

Director (Examinations)[email protected]

Director (CAT), (Training & Placement)L. Gurumurthy

[email protected] (Professional Development)

J. K. [email protected]

Director (Continuing Education Programme)D. Chandru

[email protected] (Discipline, Administration, Membership & Legal)

& Joint SecretaryKaushik Banerjee

[email protected] (Finance)

S. R. [email protected]

Director (Administration–Delhi Office & PublicRelations)

S. C. [email protected]

EDITORRajendra Bose

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From the Editor’s DeskFrom the Editor’s Desk

The term ‘arm’s length’ has been defined in the Kohler's Dictionary for theAccountants as something done ‘‘on a commercial basis, dealing with or as thoughdealing with independent, unrelated persons; competitive; straightforward;involving no favouritism or irregularity; as, arm's length purchase’’. It is alsosuggested in the said dictionary that transactions between affiliated companies arenot ordinarily regarded as being at arm's length even though expressed in terms ofmarket values. The point in particular is that, if two or three divisions or units/plants of a company enter into commercial transactions, say, intercompany transferof goods and services, there will be no impact on the profit/loss of the entity evenif one division charges another a price which is more or less than their commercialvalue. So for the entity, it remains a zero sum game. However, if the transaction isbetween two independent parties and the transaction is entered into for a priceless than its commercial value, it impacts the ultimate profit or loss of the entities.It is this relative gain or loss of the business entities which makes arm's lengthpricing a very important aspect of the transfer pricing mechanism. It is very common to find multi-divisional/multi-locational conglomerates which,by their inherent nature, have production and distribution facilities spread acrossdifferent states and even countries with varied tax jurisdictions and implications.Decision to host a particular facility in a particular location or country is influencedby the strategic considerations. However, when the goods and services areexchanged between two or more divisions of the same enterprise, but located indifferent tax jurisdictions, the tax authorities will view the supplier of the goodsand services as seller and the receiver as buyer, even though the transaction isessentially between two divisions or units of the same enterprise. This principle,known as the arm's length principle, is now part of the international consensusand also the cornerstone of the OECD principles of transfer pricing guidelines forthe multinational enterprises around the world. Arm's length pricing would notonly help the revenue authorities to get their reasonable share of tax revenues fromthe activities of the multinational entities in their territories, but would also lead tofair international allocation of income.Although the logic of arm’s length pricing appears to be straightforward, but inreality it requires robust economic analysis and a clear understanding of not onlythe functioning of the market, but also of the subtle factors like the economic diversand the mechanisms in the market. Behind the theory of arm’s length pricing thereis clearly an assumption that there is a free flow of information in the market andthe parties involved—the multinational entities and the revenue authorities of therespective tax jurisdiction—are able to gather it whenever needed. Such anassumption, however, is not only naive, but it faces challenge from the theory ofefficient market hypothesis, which comes in a strong, semi-strong and weak form.Indeed, the world we live in is better explained, not by such phenomena as perfectmarket or perfect information, but by the existence of imperfect market whereinformation asymmetry prevails. Parties involved in such a situation can come upwith differing interpretations for the same event and get muddled up in disputes.International transfer pricing is one such area, which upholds arm's length principle,but ends up in a maze of disputes while practically applying it. Perhaps, this explainswhy India is locked in tax disputes with several multinational entities involvingthousands of crores in tax revenues.Considering the importance of the topic, the timing for deliberations on arm’slength pricing in the pages of the Management Accountant could not be moreperfect! I hope that our eminent contributors to this issue of the magazine willenlighten us on the various aspects of the problem and offer food for thoughts forour readers.

International

transfer

pricing is one

such area,

which

upholds arm's

length

principle, but

ends up in a

maze of

disputes while

practically

applying it.


M. Gopalakrishnan, President

President’s Communique


We can see better with open eyes,we can hear better with open ears andwe can perform better with open minds

—Anonymous

Dear Professional Colleagues,

The value addition provided by a profession supplements and strengthens thestatutory role which it normally plays under the legal framework by thegovernment. As long as this aspect is recognized by the profession, the respectfor it increases. Sometimes we get a rare opportunity to present this aspect to theGovernment during the formulation of the statute, so that the same can beincorporated in an appropriate form in the regulations. Our Institute utilized thisopportunity when the new CARR and CAR notifications incorporated the PartIII - Performance Reporting to the management, as a part of the report to besubmitted by the Cost Auditor. This key aspect was discussed in the recentinterview I gave to the Economic Times, which not only highlighted the valueadded role played by the CMAs but also touched on the most vital aspect of the‘‘need for intelligent decisions based on thorough knowledge of the … internalworking’’. The new notifications have respected the management's role indeveloping internal decision systems based on a robust cost and managementplatform and have mandated the cost auditors to concentrate more on testing theinternal cost reporting systems and introduce best practices that are enshrined inCost Accounting Standards into those systems. This aspect has been recognizedby the Cost Audit and Assurance Standard Board, when it has put ‘‘acquiringknowledge of the business process’’ as the first point in the Exposure Draft onCAAS 320.The Government also looks at ethical, economical, efficient and effective operationsand safeguarding resources against loss, as the building blocks of theimplementation of the various schemes. The CAG’s office has highlighted this asthe key aspect in the policy document defining the role played by them indischarging their constitutional functions. While the role of external financialaccounting professionals, who are engaged in transaction audits for Governmentschemes have been predominant so far, our Institute has been constantlyrepresenting for a role for the last three aspects i.e. efficient and effective operationsand safeguarding resources against loss, which can be done only by CMAs. TheInstitute has also got the go ahead for conducting training programme for theGovt. officials on this aspect. But let us also admit that this requires tremendouseffort in capacity building amongst our practicing professionals, whose numberis growing day by day. The Regional Councils and Chapters have to play a majorrole on this aspect, and I have been also highlighting this aspect during myinteractions with them. The technical guidance on this matter is always availablefrom the Institute and the newly formed CEP-2, will also help in conducting thecapacity building seminars for the practitioners.I am glad to inform you that the Ministry of Corporate Affairs has formed aCommittee to formulate a Policy Document on Corporate Governance under thechairmanship of Shri Adi Godrej, and our Institute has been made a member andI attended the first meeting of the Committee held on 5th April 2012. During themeeting Dr. M. Veerappa Moily, Honourable Union Minister of Corporate Affairs,articulated the Government's view on laying down a policy on CorporateGovernance and the background for the creation of the Committee consisting ofrepresentatives from industry, professional bodies and other stakeholders todiscuss and arrive at a well structured policy on Corporate Governance drawing




from the experiences of the past and the current thinkingon the subject.Members may recall that the Institute has been made amember of the Government Accounting Standards Board,w.e.f. Jan 2012. The first meeting of the Board was heldon 20th April, 2012 at New Delhi. The activities of theDirectorate of Advanced Studies started off in full swingwith the Board of Advanced Studies holding its firstmeeting on 7th April, 2012 followed by the next meetingon 20th April 2011. This has accelerated the starting ofthe Advanced Courses that have been planned by theInstitute. The details have been given elsewhere in thismessage.The Council meeting held on 31stMarch 2012, also tooksome key decisions on holding of conferences. It wasdecided that the various national conferences will be heldin all the four regions so that each region gets anopportunity to hold at least one national event per year.The National Cost Convention, National Practitioner'sConvention, National Student’s Convention and theNational Regional Council and Chapter's Convention willbe held in each of the four regions. It was also decidedthat each Region will hold one Regional Conference peryear in a city as decided by the Regional Council, insteadof multitude of Regional Conferences being held invarious cities in some Regions. The First Foundation Dayof the Institute will be held at New Delhi on 19th May2012, which falls on the day on which the Act was passedby the Parliament.As a strong believer in embracing best practice andinstalling systems in all operations of the Institute, sincereeffort is on to install new system driven operations andhaving standard operating practice in place. Acomprehensive guideline is almost in its final shape.As the Institute's operations are expanding, new recruitsare taking place in various departments. I hope that withthe combinations of the experience of the seniorexecutives and the enthusiasm of the new blood Institutewill thrive further in the right direction.I am also happy to inform you that myself and VicePresident, Shri Rakesh Singh were invited to attend the1st meeting of the reconstituted Quality Review Boardof the Institute, held on 10th April 2012 under theChairmanship of Shri R.S Sharma, Ex-CMD, ONGC. Weassured that the Institute shall provide full support forthe efficient and effective functioning of the Board.Regional Council and Chapter Events

The meeting organized on 11th April 2012, jointly byConfederation of Indian Industry and our Institute, wasa good event showcasing the benefits of institute industrypartnership. Myself and Vice President accompanied by

the Central Council Members CMA. Dr.SanjibanBandyopdhayaya and CMA. Manas Kr. Thakur were ableto have detailed interaction with members and chapterrepresentatives who attended the conference.One of the major initiatives of the Ministry of CorporateAffairs, the Indian Institute of Corporate Affairs, movedinto their state-of-art new premises at Manesar, whichwas inaugurated by the Honourable Prime MinisterDr.Manmohan Singh ji. It was heartening to note thePrime Minister in his speech highlighting the role ofprofessional bodies along with the corporate sector in thegrowth of the Indian economy. I was happy to inaugurate the new extended conferencehall by the Lucknow Chapter on 21st April 2012, alongwith the Vice President. We had very good interactionwith the large number of members present on theoccasion in which the developmental works that cantaken up for the profession were discussed.Student’s mattersStudies

To facilitate the student community, the StudiesDirectorate already started a new logistics systemwhereby, the students on the registration day itself willbe provided with the requisite study material. Althoughthis process has taken off well, I find that many chaptersare still following the old manual system, in spite of thecontinuous communication from the Directorate ofStudies about implementation of the IEPS system forstudent registration. This is putting lot of students intoproblems as some of the chapters are accumulating theapplications and completing the registrations in onego in the last minute. I request the Regional Councilsand Chapters to co-operate with the Directorate ofStudies so that the students at large are benefitted by theinitiative.Examination

The Examination Directorate is busy in making allarrangement for the ensuing June 2012 term ofexamination all over India and overseas centers. Thistime, for further strengthening the process of conduct ofexamination, photo attendance sheet along with photoadmit card will be in place which will streamline theexamination process further.Technical Directorate

I am happy to note that the CASB in its 52nd meetingheld on 16th April has cleared the Guidance Note on CAS-7 on Employee Cost. In addition, the CAASB in its 9thmeeting held on 17th April has cleared the CAAS-320 onPlanning an Audit of Cost Statements and CAAS-340 onAudit Documentation. Both the drafts are likely to bediscussed by the Council in its forthcoming meeting.

510 The Management Accountant |May 2012510 The Management Accountant |May 2012


The Technical Directorate Extension Centres have startedtheir activities in right earnest and the meeting of CFOsfrom various industries was organised on 25th April,2012 at Chennai. Myself, Vice President, Shri. B. R.Prabhakar Chairman, SIRC, Shri J. P. Singh, Director(Technical) and Ms. Chandra. V, Advisor (TDEC-Chennai) used the meet to trigger Special Interest Groupfocusing on sector specific issues, which was welcomedby the CFOs present.Training and Placement DirectoratePlacement

I am also pleased to inform you that the CampusPlacement Programme for December 2011 qualifiedCMAs has been successfully completed in all the fourRegions during the month of April. Corporate like TCS,HCL GENPACT visited our campus for the first time andshowed lot of interest in hiring our CMAs. PSUs like CoalIndia, ONGC and other Corporate like Wipro, SaintGobain, Pidilite, CIPLA, Amtek, Accenture, Mukund,Suzlon and Nestle India visited our campus to find theirfuture managers. Some more Banks/Corporate have alsoexpressed their willingness to recruit our qualified CMAsin the month of May 2012. The credit for making the entireplacement program a success goes to the integratedapproach adopted by Placement Directorate under theguidance of Chairman-Members in Industry Committeeand the Regional Councils and I compliment them fortheir efforts.Training

I have already shared the news of the tie up we havemade with Food Corporation of India for engaging costtrainees. Many more Corporate have expressed theirinterest to absorb our Intermediate qualified students asTrainees. While nearly 500 companies have alreadybeen compiled for Training our students, manyCorporate giants like MMTC, NBCC, NHPC and ChennaiMetro Water have recruited Intermediate qualifiedstudents as Trainees in the recent months. Majority ofthe students undergoing Training are enrolled withPracticing Cost Accountants. With the scope for practiceexpanding, I am sure more and more students wouldenroll with Practicing Members. As the Industry isnowadays concerned about the employability factor ofthe students of this country, I am sure our students trainedby Industry and Practicing Members would have a greatfuture.Professional Development Directorate

As all of you are aware, the Ministry of Corporate AffairsCost Audit Branch vide General Circular No. 15/2011dated 11th April, 2011 changed the procedure forappointment of cost auditors by the companies. The

Central Government has issued revised version of Form23C and Form 23D with effect from 21st April, 2012. Priorto revised version, the companies who would like toappoint same cost auditor for multi products/ units wererequired to file individual Form 23C for each of productsunder cost audit but new version allows filing of singleForm 23C if a company wants to appoint one and thesame cost auditor for the multi products/ units. Suchfiling would facilitate cost accountant appointed as costauditor for all the products of same "company" to becounted as one "Company" for the purpose of limit undersection 224(1B) of the Companies Act, 1956. Similarly,Form 23D relating to information by cost auditor toCentral Government would facilitate the one and samecost auditor to furnish the information of his/herappointment as cost auditor for the multi products/units.The revised version of new Forms 23C and 23D alongwith instructions for filing up these forms are hosted onthe Institute website and MCA21 website.

CEP-I Directorate

I am pleased to inform that well known internationalauthority on Accounting Standards, Dr. T P Ghosh,Professor, IMT Dubai conducted the workshop by theInstitute in order to help the Corporates to update theirknowledge on the Revised Schedule VI to the CompaniesAct 1956. As expected, Dr.Ghosh was able to impart apractical approach to the concept, which has triggeredthe demand for more such workshops in future.

I request the members to go thru the calendar ofManagement Development Programmes for the year2012-13 which has been brought out by the Directorateincorporating the new topics and other contemporarytopics for up-dation of the CMA professionals. The sameis being published in the Journal for the information anduse of our members and others.

CEP-2 Directorate

I am happy that the CEP-2 Directorate is planning to bringsoon the webinars of some of the technical sessions ofthe eminent faculty members for the benefit of ourmembers and students. The Directorate had discussionswith many Government Departments and otherorganizations for organizing exclusive tailor made in-house programmes for them during the year 2012-13.

Membership Directorate

I am glad to inform you that the scheme of BenevolentFund is being redesigned for providing more benefit tothe members of the Fund. For this purpose, the LifeMembership fee for the Benevolent Fund has been raisedto Rs. 2500/- (one-time payment) from the existing fee ofRs. 2000/-. For the purpose of obtaining benefit from

The Management Accountant |May 2012 511The Management Accountant |May 2012 511


the Fund, a member should ensure to pay his up to dateAssociate/Fellow membership fees to the Institute andhis name should continue to exist in the Register ofMembers of the Institute. I request the members to takefull advantage of the membership to the BenevolentFund.Journal Directorate

I am happy to share that ‘The Management Accountant’journal has now come with a new professional ‘avataar’—in full colour, thereby fulfilling the wishes of all ourmembers. This has improved the external look and getup of the journal significantly and is now comparablewith some of the best of the journals in the country. Icomplement the Chairman and the members of theJournal Committee for this. The use of ‘map litho’ paperof the best quality and superior printing has contributedto a great extent in the beautification process. I am alsohappy to know that the efforts to continually enhancethe qualitative aspect of the journal by inviting practicalarticles from corporate managers, industry experts andpracticing members is bearing fruition. As members cansee that the April 2012 journal has 90% of the coveragefrom the practical point of view. I request all subjectmatter experts in various industries to continue tocontribute to the knowledge base of one and all throughthe official organ of the Institute.Advanced Studies DirectorateIn the month of April, the Board of Advanced Studies

met twice in order to finalize and launch two of its initialcourses on :(I) Business Valuation and Corporate Restructuring,

and(II) Treasury and Financial Risk ManagementThe above two courses are expected to be launchedsoon and the details on the courses shall also soon bemade available to interested candidates. It has beendecided that more of such advanced studies courses inthe field of cost and management accountancy andother allied disciplines, that enjoy market demand andscope can be launched for our members in the future. Iam glad that best of the minds from academia andindustry comprising the Advanced Studies Board areputting their efforts and experience in designing thesecourses for the benefit of our members and the profession,on the whole.My best wishes to the members and their families forBudh Purnima and other festivals during the month,

Sincerely yours,

CMA M. GopalakrishnanPresidentThe Institute of Cost Accountants of India1st May 2012


Dear Professional Colleagues,

It gives me immense pleasure to address all of youthrough ‘Management Accountant’ as chairperson ofthe Committee of Banking & Insurance. I further feelprivileged, to also work as Chairperson of theCommittee for Members’ Facilities & Services.

As we all know effective from 1st February, 2012the name of the institute has changed to the Institute ofCost Accountants of India. The Associate and Fellowmembers of the Institute are now entitled to use theacronym ‘ACMA’ and ‘FCMA’ after their names. Withthis, the members have got due recognition and areentrusted with additional responsibility to preserve andenhance their work profile. The Practicing Members ofthe Institute can now enter into a Limited LiabilityPartnership (LLP), in accordance with the LLP Act, 2008.The detailed guidelines in this regard are uploaded onthe Institute's website. I request the professionalcolleagues to visit the Institute’s website regularly,which is constantly updated to serve you better.

The institute has written to the members to updatetheir changed postal addresses, contact numbers andemail addresses, on a regular basis, to enable theInstitute to communicate with them better and faster.I am delighted to inform that in the last six months,we have brought down the response turnaround timeof queries generated by the members to a great extent.We further hope to improvise the assistance in the nearfuture, with the web-based software service, such asonline application for membership, advancement tofellowship, payment of the dues, etc.

I am glad to inform you that in the last one year,we have added almost 550 practicing members, 1700associate members and 320 fellow members and withthe growth of the Institute on various fronts, both interms of academic development and industrial

Aruna Soman

Chairperson,Committee on Banking & InsuranceMembers’ Facilities & ServicesCommittee

interface, these figures would escalate in the days tocome.

The role of the Committee on Banking & Insuranceunder the present scenario is very important and theCommittee has initiated networking activities withBanks and Insurance companies, in order to openbusiness avenues for the Practicing Members andfacilitate employment avenues for the members andstudents completing their final examination.

Representations have been made to Reserve Bankof India, so that our members may partake in providingstrategic guidance to ailing companies and to workhand in hand with Asset Reconstruction Companies,to improve the climate of recovering bank dues.Representation has also been made to provideguidance on Risk Based Internal Audit and ConcurrentAudit of Commercial Banks. This will give ourMembers an opportunity to work with them, in viewof the fact that the banks may implement improvedinternal control framework for IT audit procedure.Representation has also been made to SEBI to includeCost Accountants as investment advisers, inaccordance with its regulation of Investment Advisers.

The Committee is also in the process of dialogue withthe regulators such as SEBI, RBI and IRDA to discernavenues where the professional members can contribute,by offering their valuable services in the Stock marketand Banking and Insurance sector of the country.

In this regard, the Committee has already taken theinitiative of reviving the agreement with ISACA, fortraining our members and students, to build capabilityin carrying out Information Systems Audits inFinancial Institutions.

I will fall short in my responsibility if I do notconvey my gratitude to the President of the Instituteand all my colleagues in the Council, for the confidencethey have shown in me, by entrusting me with thistask and for their cooperation and incessant support. Ialso express my deep felt appreciation towards myteam members from the department, for their sustainedassistance and back up.

Aruna SomanChairperson,Committee on Banking & InsuranceMembers’ Facilities & Services Committee1st May 2012

Chairperson’s Communique



COVER THEME

Arm’s Length Price—CMA in India—a Perspective

Santonu Moitra

M.Com., ACMA, CS, MBA, CIA (IIA)Dy. Manager (F & A), ONGC Ltd.

With globalisation of business and withcompanies operating in different geographic and geopolitical areas because of cost,

tax marketing efficiencies the Taxation of thetransaction among these different located companieshas led to the development of Transfer PricingRegulations and determination of Arms Length Prices.Globalisation is one reason for this interest, the rise ofthe multinational corporation is another and with thefact that more than 60% of world trade takes placewithin multinational enterprises, the importance oftransfer pricing becomes clear.

The present framework for Arms Length Prices wastriggered mainly by US regulations in 1990 onintangible tangible and cost sharing. Today’sframework is mainly based on OECD guidelinesissued in 2010. The international standard thatOECD Member countries have agreed should beused for determining transfer prices for tax purposesis set forth in Article 9 of the OECD Model TaxConvention as : where ‘‘conditions are made orimposed between the two enterprises in theircommercial or financial relations which differ fromthose which would be made between independententerprises, then any profits which would, but for thoseconditions, have accrued to one of the enterprises, but,by reason of those conditions, have not so accrued, maybe included in the profits of that enterprise and taxedaccordingly.’’

A company in X country buys gearboxes from itsown subsidiary in country Y (Y only does business withX). The price at which the company in X parent paysits subsidiary—the transfer price—will determine howmuch profit the Y unit reports and how much local taxit pays. If the company in country X pays below normallocal market prices, or lower than the Cost ofproduction of the unit in country Y,the unit in countryY may appear to be in financial difficulty, even thoughthe group as a whole shows a decent profit on the

vehicle sold in country X. The Tax Authority in countryX will not be effected as the additional profit will bereported at their end, and revenue will gain, but incountry Y the Tax Authorities will be losing Taxrevenue and will not have much profit to tax on theirside of the operation or, even, there may be a loss ifthe transfer price is set at lower than cost of production.Further, if there is tax rate differential between X andY then there can be a considerable gain to the companyalso at the cost of Tax revenue.

This example gives the perspective why the transferpricing regulations are necessary to protect therevenue of the countries.

In Indian context the provisions have been enactedwith a view to provide a statutory framework whichcan lead to computation of reasonable, fair andequitable profit and tax in India so that the profitschargeable to tax in India do not get diverted elsewhereby altering the prices charged and paid in intra-group transactions leading to erosion of ourtax revenues—CIRCULAR NO.12 OF 2001, dated23.08.2001of CDBT.

Circular No. 14/2001 dated 27/11/2001 : Theincreasing participation of multinational groups ineconomic activities in the country has given rise to newand complex issues emerging from transactionsentered into between two or more enterprisesbelonging to the same multinational group.

Taxation–examiningWhether TP = ALP


COVER THEME

The profits derived by such enterprises carrying onbusiness in India can be controlled by the multinationalgroup, by manipulating the prices charged and paidin such intragroup transactions, thereby leading toerosion of tax revenues. This gives the rationale forTransfer Pricing Regulations.

Indian transfer pricing regulations are exhaustive inmany respects and are broadly based on the OECDTransfer Pricing Guidelines for Multinational Enterprisesand Tax Administrations (‘OECD Guidelines’).

Legislation introduced effective from April 1, 2001Sec. 92 to 92F of Income Tax Act, Rule 10A to 10E

Income Tax Rules, 1962, Circular No 12, Aug 23 2001,Circular No 14, Dec 24 2001, Administrative guidelinesMay 20 2003.

Provisions applicable only if there is aninternational transaction(s) [Section 92B] ‘between’ twoor more associated enterprises [ Sec. 92A].

As per Sec. 92B ‘international transaction’’ meansa transaction between two or more associatedenterprises, either or both of whom are non-residents,in the nature of purchase, sale or lease of tangible orintangible property, or provision of services, or lendingor borrowing money, or any other transaction havinga bearing on the profits, income, losses or assets of suchenterprises and shall include a mutual agreement orarrangement between two or more associatedenterprises for the allocation or apportionment of, orany contribution to, any cost or expense incurred or tobe incurred in connection with a benefit, service orfacility provided or to be provided to any one or moreof such enterprises.

In the Finance Bill 2012 it is proposed toretrospectively amend the term ‘internationaltransaction’ to specifically include :

● Guarantees● Any debt arising during the course of business

(e.g. credit period on outstanding receivables);● Business reorganisations or restructuring,

irrespective of whether the same has an impacton current year’s profits, income, losses or assets.

Intangible properties including marketing intangibles,human assets, technology related intangibles, etc.

This amendment will take effect retrospectivelyfrom 1 April 2002 and will apply in relation to FY 2001-02 onwards.

Deeming provisions [Section 92B(2)]Transaction between an enterprise and a person

(other than an associated enterprise) shall be deemedto be a transaction between two associated enterprises,if there exists a prior agreement or the terms of such ainternational transaction are in substance determinedbetween one of these entities and the associatedenterprise of the other contracting entity

Overview of Indian Regulatory Process forTransfer Pricing and Arms Length Transaction

Prior approval▲

▲

▲Sec 92CA(1)Refers the case

TRANSFERPRICING

OFFICER (TPO)

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● DETERMINES ARMSLENGTH PRICE

● AS PER SEC 92 C

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Draft Assessment order as per ALPDetermined by TPO

ASSESSEE

For apparentmistakes in DraftAssessment Order

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APPEALNOTICE UNDER SEC 92CA(2)

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▲

REPLY BY ASSESSEE▲

Dispute Resolution Panel CIT(A)

▲▲

ITAT▲▲

COMMISSIONERASSESSING

OFFICER

Transfer Pricing MethodsComparable Uncontrolled Price (CUP)Where the price charged for goods, services or

property transferred in a controlled transaction iscompared to a CUT (comparable uncontrolledtransaction). The CUT acts as the benchmark fordetermining the ALP. It is the most direct way indetermining the Arms Length Price (ALP) The OECDreports prefer this method among all methods if it canbe used and such comparable data is available.Adjustments to CUP is allowable by taxationauthorities which include Credit Terms, volume ofsales, logistics and other transaction costs etc to arriveat the ALP.

The various practical difficulties in applying thismethod are that there could be differences betweencontrolled and uncontrolled transactions in the natureof volume of business, geographic market, timing oftransactions, product life cycle, intangibles brandedvs generic products etc. Also, accurate information likequality of products, various terms of transaction etc.is not available in the public domain.

Internal CUP

External CUP

manufacturer

Related party

Unrelated party

▲

▲

manufacturer Related party

Non-related manufacturer Related party

▲

▲


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VVF Limited vs. DCIT—(ITANo. 673 -MUM - 08) :It was held by the ITAT that the transaction of lendingmoney by the assessee by way of interest-free foreigncurrency loan to its foreign subsidiaries, should becompared with a company lending in foreign currencyto unrelated party. It was observed that the ICICI Bankhad advanced foreign currency loan to the assessee atLIBOR plus 3%. This can be taken as an "internal CUP"as the credit rating of subsidiary merges with the creditrating of the Parent. The comparison of interest shouldnot be benchmarked with the Cash Credit @ 14% givento the Assessee.

Resale Price MethodThe resale price method begins with the price at

which a product that has been purchased from anassociated enterprise is resold to an independententerprise. This price (the resale price) is then reducedby an appropriate gross margin on this price (the‘‘resale price margin’’) representing the amount outof which the reseller would seek to cover its sellingand other operating expenses and, in the light of thefunctions performed (taking into account assets usedand risks assumed), make an appropriate profit. Whatis left after subtracting the gross margin can beregarded, after adjustment for other costs associatedwith the purchase of the product (e.g. customs duties),as an arm's length price for the original transfer ofproperty between the associated enterprises. Thismethod is most useful where it is applied to marketingoperations. An appropriate resale price margin is easyto determine where the reseller does not addsubstantially to the value of the product. In contrast, itmay be more difficult to use the resale price methodto arrive at an arm's length price where, before resale,the goods are further processed or incorporated into amore complicated product so that their identity is lostor transformed (e.g. where components are joinedtogether in finished or semi-finished goods).

Another example where the resale price marginrequires particular care is where the reseller contributessubstantially to the creation or maintenance ofintangible property associated with the product (e.g.trademarks or trade names) which are owned by anassociated enterprise. In such cases, the contributionof the goods originally transferred to the value of thefinal product cannot be easily evaluated.

X is the subsidiary of C, which is a multinationalparent company.

C has two similar models of machinery model A &model B.

Both models are similar in terms of properties,construction, production processes and functions andare comparable

C sells model A to X(a controlled transaction),which, in turn, sells them to independent retailers.Sales-force Training and warranty risk are borne by X

On the other hand, C sells model B to Dindependent company which sells to independentretailers. C trains D’s sales-force and develops trainingmaterial for them free of cost, and bears all the costand bears warranty risk.

Both Xand D is tax resident of the same countryMarkets of models of machinery A & B are sameX purchased 1,000 model A from C @1,000/

machine.X sold the 1,000 model A to a number of

independent retailers @ 1,100/. X spent Rs. 14,000 on developing its own training

material and trained its own sales force on and thewarranty costs are Rs. 30,000.

For calculation of ALP on transaction between Xand C :

X selected the transaction between C and D as acomparable uncontrolled transaction.

The gross profit margin earned by D from the resaleof model B to independent retailers was found to be10%.Sales to third parties of ¥ (1,000 model A@ 1,100) = 1,100,000Purchases from C 1,000 Model A @ 800) = 800,000Gross Profit = 300,000

Functional analysis reflects a number of differences(Training Sales-force and warranty) between thecontrolled and the selected comparable uncontrolledtransactions, which materially affect the gross margin—hence adjustments to the ALP is required.

Arms length Gross Margin on the basis of sales ofModel B machines by C to of D @10% 110000

Add :Adjustments for functional and risk differences :Training costs 14,000Warranty costs 30,000Total adjustments 44,000Adjusted gross profit 154,000Adjusted transfer price of model A from C to X= X net sales of model A – Adjusted gross profit= 1,100,000 – 154,000 = 964,000Adjusted Arms Length transfer price for sales of C

to X = 964,000/ 1,000 = 964 /model ACost Plus MethodCP method begins with the costs incurred by a

supplier of a product or service provided to anassociated enterprise, and a comparable gross mark-


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up is then added to those costs. This comparable grossmark up is determined by :

Internal Comparable TransactionWhere the cost plus mark up of the supplier in the

controlled transaction is determined by the cost plusmark-up realized for these items between one party tothe controlled transaction and an independententerprise in a comparable uncontrolled transaction,or

External Comparable TransactionWhere the cost plus mark up of the supplier in the

controlled transaction is determined by the cost plusmark unrealized between two independent enterprisesnone of which is party to the controlled transaction ina comparable uncontrolled transaction.

The Cost of Production is the starting point for thismethod. Comparability of COP is necessary forcomparison. Traditional Financial Accounting Systemsdo not capture such cost, neither provides guidelinesfor arriving at such cost leading to different bases beingadopted by companies. For this Cost AccountingStandard (CAS) is the only imperative which gives afirm data base for such analysis .ICAI has issued suchstandard and CMAs are best equipped to formulateand certify such benchmarking which arise under theCP method as a result of accounting practicesinconsistency—where the supplier in the controlledtransaction treats a particular cost item as an indirectcost (i.e. this cost item is accounted for as part of thecost of sales), while the supplier in the selectedcomparable uncontrolled transaction treats the samecost item as an operating expense (i.e. this cost item isnot subtracted at the gross profit level). In such a case,and assuming that the aforementioned accountingpractice difference is the only difference between thetwo transactions, the gross profit in the comparableuncontrolled transaction tends to be higher than thegross profit in the controlled transaction.

Transaction Net Margin Method (TNMM)This method was recommended by OECD in

response to US Comparable Profits method (CPM).Comparing the net profit margin relative to anappropriate base such as costs, sales or assets realizedby the taxpayer in a controlled transaction with thenet profit margin realized by the same taxpayer, or byan independent enterprise in a comparableuncontrolled transaction, NP margin with AssociateEnterprise established based on cost incurred saleseffected, assets employed, etc.

NP margin in uncontrolled transaction iscalculated based on the same criteria.

NP margin in uncontrolled transaction situationsis adjusted to factor open market issues.

NP margin of AE transaction established/compared with uncontrolled Transaction NP.

While CP and RP methods compare gross profitmargins, TNMM compares net profit margins TNMMon a transactional basis and not on a companywidebasis.

Profit Split MethodThe Profit Split Method seeks to eliminate the

effect on profits of special conditions made or imposedin a controlled transaction by determining thedivision of profits that independent enterprises wouldhave expected had it undertaken the transaction.

Steps for the application of the profit split method:The first step is to determine the total profit earned

by the firm from a controlled transaction, not the totalprofits of the group as a whole.

This is generally the operating profit, before thededuction of interest and taxes.

The second step is to split the profit between theparties based on the relative value of theircontributions to the controlled transactions,considering the functions performed, the assets used,and the risks (FAR) by each party in the controlledtransaction, in relation to what independentparties would have received, ie benchmark withindependent transactions and allocate profit on thatbasis.

The total profit could be allocated using one of thefollowing approaches:

1. Contribution Analysis Approach : where thetotal operating profit from a controlled transaction isdivided between the associated enterprises basedupon the relative value of the functions performedby each of the associated enterprises participatingin the controlled transaction, supplemented asmuch as possible by external market data that indicatehow independent enterprises would have dividedprofits in similar circumstances.

2. Residual Profit Split approach : where theoperating profit of the controlled transactions isdivided between the associated enterprises.

This process is carried out in two stages:(a) Each of the parties to the controlled transaction

is assigned a return to the basic functions that itperforms (e.g. manufacturing or distribution).Ordinarily, this basic return is to be determined bybenchmarking to market returns achieved for similartypes of transactions by independent enterprises.

(b) The residual profit remaining after the first stagedivision would be allocated among the parties basedon an analysis as to how this residual would have been


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divided between independent enterprises. Indicatorsof the parties' contributions of intangible propertycould be particularly useful in this context.

X and Y are two associated enterprises in twodifferent tax jurisdictions. Both manufacture the sameproduct. Both these companies make expenditure forthe creation of an intangible asset which both thecompanies use to promote the product. X and Yexclusively sell products to third parties. (it is alsoassumed that intangible cost is for the first year andthese is no prior expenditure on this intangible). It ispresumed that Profit Split is the best applicablemethod. On market analysis of uncontrolledtransactions, it is seen that such transactions earn areturn of 10% of the Cost and that the residual profitshould be split in proportion to X and Y intangible assetexpenditure.

Global Formulary Apportionment Method (GFA)This method is not accepted by OECD countries as

well as Indian Taxation regulations as a valid methodof arriving at ALP.

A global formulary apportionment methodallocates the global profits on a consolidated basisamong the associated enterprises in different countrieson the basis of a predetermined formula.

There are three essential steps to apply a globalformulary apportionment method :

1. Determining the unit to be taxed in including AE2. Determining the global profits3. Establishing the formula to be used to allocate

the global profits of the unit. This formula is to be basedon combination of costs, assets, payroll, and sales.

The GFA allocates the total profits of the groupbetween parties on the basis of an arbitrarypredetermined formula, based on weighing of relativelabor costs, relative capital employed, and/or otherrelative factors. By contrast, the profit split method

seeks to allocate the integrated profits of a transactionon the basis of the actual relative contributions of theparties to the profit in light of what comparableindependent enterprises would have sought to achievein comparable circumstances. Thus it seeks to establisha more objective measure of each of the parties’ profit.

CAS6 also lists out the same methods for TangibleTransactions and the appropriate methods forIntangibles. CAS 6 indicates that, for intangibles, CUPor Resale Price method would be appropriate. Wheretransfer of highly valuable intangible is involved profitbased method (Profit split method or Transactional NetMargin method) is more appropriate.

Sec. 92C of the Income Tax Act stipulatesComputation of Arm's Length Price by applying the‘most appropriate’ method out of

1. Comparable Uncontrolled Price (CUP)2. Resale Price Method (RPM)3. Cost Plus Method (CPM)4. Transaction Net Margin Method (TNMM)5. Profit Split Method (PSM)CAS 6 issued by ICAI provides guidelines on the

above.As per Income Tax Act, most appropriate method

referred above shall be applied, for determination ofarm’s length price

Options under proviso to Section 92 C (2)Where more than one price is determined by the

most appropriate method the ALP shall be taken to bethe arithmetical mean of such prices.

ORIf the variation between the ALP so determined and

price at which the international transaction has actuallybeen undertaken does not exceed five per cent of thelatter, the price at which the international transactionhas actually been undertaken shall be deemed to bethe arm’s length price.

(Amended by the Finance (No. 2) Act, 2009)[Section 92C].The Finance Bill 2011 had proposed that instead of

a variation of 5 percent, the allowable variation wouldbe such percentage as may be notified by CentralGovernment in this behalf. The Finance Bill 2012 hasprovided an upper ceiling of 3 percent as the tolerancerange for determination of the ALP.

The same shall be effective from 1 April 2013, andshall apply in relation to FY 2012-13 onwards.

Comparability and Benchmarking key to Transferprice

The principle of comparability is fundamental inthe determination of arm’s length transfer prices. This

X Y X+YSales 100 300 400Cost as per CAS14 60 95 155Gross Profit 40 205 245Intangible asset exp 10 40 50Operating profit 30 165 195Return on similar transaction 12 19 31with uncontrolled entitiesResidual Profit to be split 18 146 164Intangible expenditure basis of 32.8 131.2 164Residual Profit SplitProfit for ALP 44.80 150.20 195.00Additional revenue as per ALP 14.80


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is due to the fact that the price or profit of anuncontrolled transaction is used as a benchmarkagainst which the price or profit of a controlledtransaction is to be evaluated. The comparisonconducted between controlled and uncontrolledtransactions on the degree of similarity particularly inregard to the characteristics of the property or servicestransferred, and the functions performed in each ofthe transactions taking account of the assets used andrisks assumed, is very critical in arriving at the ArmsLength Price, and adjustments, if any, have to becarried out for comparability in arriving at ALP.

In a recent case relating to Sapient CorporationPvt Ltd the Delhi Bench of ITAT ruled that if lossmaking comparables are excluded from comparison,comparables with superprofits will also have to beexcluded from comparison. The decision reterioratesthe importance of proper FAR analysis for the purposeof ensuring that functional comparability is theprimary basis of selection of comparable companies.

The OECD Transfer Pricing Guidelines describethe following as the major factors determiningcomparability :

1. Characteristics of Property or ServicesAccording to the OECD Transfer Pricing

Guidelines, the most important characteristics to beexamined in analyzing this factor include, but are notlimited to, the following :

(a) In the case of transfers of tangible property:● Physical features of the property● Property quality and reliability, and● Property availability and volume of supply.

(b) In the case of provision of services:● The nature and extent of the services.

(c) In the case of intangible property:● Form of transaction (e.g. licensing or sale)● Type of intangible (patent, trademark, or

knowhow)— Duration and degree of protection, and— Anticipated benefits from the use of theproperty.

2. Functional AnalysisFunctional analysis is an analysis of the functions

performed (taking into account assets used and risksassumed) by associated enterprises in controlledtransactions and by independent enterprises incomparable uncontrolled transactions.

Three main aspects in any transaction is analysed infunctional analysis :

➢ Functions undertaken by each party to atransaction and the economic significance ofsuch functions

➢ Assets (both tangible and intangible) employedby each party to that transaction

➢ Risks borne by each party to that transaction.3. Contractual TermsContractual terms play in defining, explicitly or

implicitly, how the responsibilities, risks, and benefitsare to be divided between the parties in a particulartransaction.

Contractual terms include :➢ Sales or purchase volume➢ Working Capital➢ Financing—direct/indirect➢ Collaterals for transactions➢ Contract duration➢ Delivery terms➢ Credit and payment terms➢ Terms governing the provision of warranties➢ Terms governing the right to updates, or

modifications➢ Terms allocating the different risks, such as the

exchange rate risk, inventory risk, etc.4. Economic CircumstancesEconomic factors are recommended by the OECD

Transfer Pricing Guidelines to be considered inmeasuring

➢ market comparability➢ Geographic location➢ Size of the markets➢ Extent of competition in the markets and the

relative competitive positions of the buyers andsellers

➢ Credit Terms➢ Availability of substitute goods and services➢ Levels of supply and demand in the market as

a whole and in particular regions➢ government regulation of the market➢ Costs of production, including the costs of land,

labor, and capital➢ Transport costs➢ Level of the market (e.g. retail or wholesale)➢ Date and time of transactions➢ Business, economic and product cycles; etc.5. Business StrategiesBusiness strategies must be examined in determining

comparability for transfer pricing purposes.Business strategies would take into account many

aspects of an enterprise, such as innovation and newproduct development, degree of diversification, riskaversion, assessment of political changes, input ofexisting and planned labour laws, duration ofarrangements, and other factors bearing upon the dailyconduct of business. Such business strategies may need


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to be taken into account when determining thecomparability of controlled and uncontrolledtransactions and enterprises.

Documentation requirement to be fulfilled bythe company as per Sec. 92D of Income Tax Act andRule 10D of Income Tax Rules

Documentation requirement to be fulfilled by thecompany as per Sec. 92D of Income Tax Act and Rule10D of Income Tax Rules :

(a) a description of the ownership structure of theassessee enterprise with details of shares or otherownership interest held therein by other enterprises.

(b) a profile of the multinational group of which theassessee enterprise is a part along with the name, address,legal status and country of tax residence of each of theenterprises comprised in the group with whominternational transactions have been entered into by theassessee, and ownership linkages among them.

(c) a broad description of the business of theassessee and the industry in which the assesseeoperates, and of the business of the associatedenterprises with whom the assessee has transacted.

(d) the nature and terms (including prices) ofinternational transactions entered into with eachassociated enterprise, details of property transferredor services provided and the quantum and the valueof each such transaction or class of such transaction.

(e) a description of the functions performed, risksassumed and assets employed or to be employed bythe assessee and by the associated enterprises involvedin the international transaction.

(f) a record of the economic and market analyses,forecasts, budgets or any other financial estimatesprepared by the assessee for the business as a wholeand for each division or product separately, which mayhave a bearing on the international transactionsentered into by the assessee.

(g) a record of uncontrolled transactions taken intoaccount for analysing their comparability with theinternational transactions entered into, including arecord of the nature, terms and conditions relating toany uncontrolled transaction with third parties whichmay be of relevance to the pricing of the internationaltransactions.

(h) a record of the analysis performed to evaluatecomparability of uncontrolled transactions with therelevant international transaction.

(i) a description of the methods considered fordetermining the arm's length price in relation to eachinternational transaction or class of transaction, themethod selected as the most appropriate method alongwith explanations as to why such method was soselected, and how such method was applied in eachcase.

(j) a record of the actual working carried out fordetermining the arm’s length price, including detailsof the comparable data and financial information usedin applying the most appropriate method, andadjustments, if any, which were made to account fordifferences between the international transaction andthe comparable uncontrolled transactions, or betweenthe enterprises entering into such transactions.

(k) the assumptions, policies and price negotiations,if any, which have critically affected the determinationof the arm’s length price.

(l) details of the adjustments, if any, made totransfer prices to align them with arm's length pricesdetermined under these rules and consequentadjustment made to the total income for tax purposes.

(m) any other information, data or document,including information or data relating to the associatedenterprise, which may be relevant for determinationof the arm’s length price.

The above documentation requirements is notmandatory where the aggregate value, as recorded inthe books of account, of international transactionsentered into by the assessee does not exceed one crorerupees.

Advance Pricing Agreement (APA) underTransfer Pricing Regulations in the Union Budgetof year 2012-13

An APA is an agreement between a taxpayer andat least one tax administration on an appropriatetransfer pricing methodology for a related partytransaction. This agreement applies over a fixed periodof time. Unilateral APA is an agreement between ataxpayer and the tax administration of the countrywhere it is subject to taxation. A bilateral or multilateralAPA is between the taxpayer, the tax administrationof the country where it is subject to taxation and oneor more foreign tax administrations.

The introduction of Advance Pricing Agreement(APA) under Transfer Pricing Regulations in the unionbudget of year 2012-13 is a positive step to reduce thelitigation as it will be based on bilateral understandingbetween two countries wherein it has been proposedto be valid for a maximum of consecutive 5 years unlessthere is a change in provisions of the Code having abearing on the international transaction.

It is pertinent to note that unilateral APAs are notrecognised by a foreign tax authority and, thereby, therisk of double taxation would still exist, if the foreigntax authority does not agree with the method ofcomputing the arm’s-length price (ALP).

However, in case of bilateral/multilateral APAs,all the tax authorities involved in the covered


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transactions including the Indian and foreign taxauthorities agree to the ALP of the covered transactionand, thereby, the MNCs avoid the burden of doubletaxation.

Introduction of the APA legislation would bringabout certainty, clarity of opinion, and other benefitsto corporate India. The APAs offer better assuranceon transfer pricing methods and are conducive inproviding certainty and unanimity of approach.

Strategic Implications of setting of Proper ArmsLength Price

For any decision of investment the Tax liability ofthe principal outside India and the tax liability of thecompany in India needs to factor in the Transfer Pricingregulation in force to avoid future legal tussles andalso to protect the profitability envisaged in theviability of the proposals. These needs to be examinedin details during assessment of the viability of theproject itself along with cost management tools to finetune the tax strategy with the costing of the productand transfers.

Bombay High Court, in case of SET Satellite(Singapore) Pte Ltd (218 CTR 452), in line withthe Supreme Court decision in Supreme Courtjudgement in case of DIT (Intl Taxation) vs. MorganStanley and Co Inc (292 ITR 416) has held that if thecorrect arm’s length price is applied and paid, thennothing further would be left to be taxed in the handsof the foreign enterprise. The Bombay High Court hasrestored the CIT(A) order in the taxpayer’s case andheld that in case the agent is remunerated atarm’s length by the foreign principal, the tax liabilityof the foreign principal (which would arise in case itis regarded to have a PE in India) would standextinguished.

Where the transactions are held to be at arm'slength, nothing further can be attributed to the PE,provided that the transfer price takes into account allthe risktaking functions of the foreign enterprise. Thus,assessment of PE gets extinguished only if thefollowing two conditions are cumulatively met :

The associate enterprise has been remunerated onarm’s length basis, and By FAR (Functions performed,Assets utilised and Risks assumed) analysis of Indianand foreign enterprise.

Nothing more can be attributed to PE liability offoreign company in India and may not be extinguishedunless the transfer pricing takes into account the FARanalysis of Indian company as well as foreigncompany.

This needs to be kept in perspective while arrivingat Arms Length Price of Permanent Establishments inIndia, otherwise the Revenue Department may could

attempt to attribute profits to a PE transfer pricingdocumen-tation should be maintained andbenchmarking should be done in a manner wherebythe Functions performed, Assets utilised and Riskassumed (FAR) of both the foreign entity and Indianentity are taken into account.

Tax rate differential exists between countries andcompanies take that into account during their astutetax planning process. Improper Tax planning vis-a-vistax liability on transfer pricing can lead to marginsgoing hayware as companies in these days of intensecompetition operate in wafer-thin margins only.

Role of CMA and ICAI in Transfer PricingICAI has issued Transfer Pricing Guidelines in

2002. The Cost Accounting Standards 1-4 issued byICAI has great relevance is arriving at ALP in TransferPrice :

All the Five methods mandated by Income Tax Act,India, requires as an input detailed cost accountingdata/information, especially in respect of adjustmentsto be incorporated with respect of controlled anduncontrolled transactions to make them comparableto arrive at the ALP. Financial Accounting system doesnot capture the data or give the information Product-wise, Cost poolwise,Cost driverwise, Cost centerwiseneither the financial audit checks the veracity of thesame, it concentrates on proper booking of expenditureand proper representation in Final Accounts focusedon investors.

However, the regulatory requirements, speciallywith regards to Transfer Pricing, cannot be met byFinancial Accountants. This requires proper costaccounting system and the information generatedneeds validation by conducting Cost Audit by CMAs.The Revenue administration as well as the companieswill find such information handy in dealing withTransfer Pricing decisions.

Presently this data is not readily available—

CAS No.

CAS1

CAS2

CAS3

CAS3

(Revised 2011)

CAS4

Title

Classification of Cost

Capacity Determination

Overheads

Overheads

Cost of Production forCaptive Consumption

Details

For preparation of Cost Statements

For determination of capacity

For Collection, Allocation,Apportionment and Absorptionof overheads

To bring uniformity and consis-tency in the principles andmethods of determining theOverheads with reasonableaccuracy

To determine the assessable valueof excisable goods used forcaptive consumption

(contd. to page 527)


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Introduction

Multinational corporations (MNCs) are notnew phenomenon, but since the World WarII (1939-1945), their spectacular rise has

considerably reshaped both the global economy andthe world politics (the political roles played by someAmerican MNCs in the 1970s may be recalled). Withthe intensifying force of globalization, the influence ofthe MNCs in the world economy has further deepenedso much that 80% of the world’s industrial productionis said to be generated by 1,000 largest MNCs and asmuch as one third of the total US international trade isconducted by and within US owned MNCS by meansof intercompany transactions (Truitt, 2006 : p.161). Bysome recent estimates, MNCs’ production worldwidegenerated value-added of approximately $16 trillionin 2010, about a quarter of global GDP, while theforeign affiliates of MNCs accounted for more than 10per cent of global GDP and one-third of world exports(UNCTAD, 2011). If we add to this figure the tradethat takes place between MNCs and other unaffiliatedfirms (which are, more often than not, non-equitymodes of international production by the MNCs),which accounted for $2 trillion in international salesin 2010, then MNCs are involved in about two-thirdsof world trade (UNCTAD, 2011; Wittendorff, 2010 ).No doubt that these MNCs are the keystone of theglobal economic edifice and they will surely maintainthat position in the global village that the world is now.Because of their unique position and core competenciesthese MNCs are able to coordinate their activitieswithin a global value chain either through their directsupervision and control—leading to cross border FDI—or through non-equity mode of production in acontractual arrangement but nonetheless exercisingrelative bargaining power over those host-countryfirms.

While the ultimate ownership and controlconfiguration of a global value chain is the outcome ofa set of strategic choices by the MNC—the relative costs

International Transfer Pricing : The Current

Landscape in India

Dr. Sujit Kumar RoyAssociate Professor & Head of theDepartment of AccountancyGoenka College of Commerce andBusiness Administration, Kolkata

Pallab PyneGuest Faculty

Goenka College of Commerce andBusiness Administration, Kolkata

and benefits, the associated risks, the feasibility ofavailable options and legal barriers in the host country,for example—it oversees a sequence of activities fromprocurement of inputs, through manufacturingoperations to distribution, sales and after-sales services.In addition, firms undertake activities—such as ITfunctions or R&D—which support all parts of the valuechain (UNCTAD 2011).

Pricing ConundrumOne of the most difficult, and controversial as well,

areas in the relationship between the MNCs and theiroverseas subsidiaries has been the pricing issue of thegoods, services and technologies used in theproduction and distribution of cross-border transactionof goods and services.

Indeed, the plethora of literature on the subject hasidentified intercompany pricing of goods and servicesas one of the most significant and perplexing issuesfaced by the MNCs (Weekly 1992; O’ Connor, 1997).Such intercompany pricing is also used as a vehicle toachieve several other objectives such as:

● Moving funds internationally● Minimizing tariffs● Avoiding exchange control quotas● Minimizing exchange risks● Increasing share of profits from joint ventures● Optimizing managerial incentives and

performance evaluation; and● Minimizing taxes.The bare-bones of the aforesaid objectives

influencing MNC pricing policy, more specificallyreferred to as 'transfer pricing issues’, are well-discussed in O'Connor (1997). For example, O’ Connorexplains that, if a MNC wants to move fund out of acountry, it can charge higher price to its foreignaffiliate, or can do the opposite when the objective isto supply fund to the affiliate. Similarly, affiliateswishing to pay lower import duty may follow lowmark-up policy. If the MNC under-prices the shipment


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of goods to the foreign affiliate, it can effectively offsetthe volume effects of exchange quotas. Exchange ratefluctuation is a zero-sum game in the sense that loss ofone party results in gain to the other party by equalmeasure; but depending on the accounting treatmentsand tax laws of the respective party it can havedifferent effect on different party. The profits from ajoint venture similarly can be made to vary dependingon the transfer price charged to the affiliates. Whenfirms are organised as decentralized profit centres,transfer pricing between centres can be a majordeterminant of corporate performance.

Since MNCs and their affiliates are located indifferent tax jurisdictions having different tax rates,transfer pricing is also influenced by tax considerations(Feinschreiber and Kent, 2003). Income tax paymentsare significant costs for most MNCs and transactionsbetween affiliated entities are an important part ofthese income tax exposures (ibid).

In a typical situation, where tax rates are same intwo countries, no special advantage accrues to theMNCs from tax minimization perspective from onemark up policy than the other. But when the tax ratesare different, the MNCs are likely to pursue a highmark up policy in order to shift profits from a higherto a lower tax jurisdiction. Quite logically, in anincreasingly globalized economy, the decisions ofgovernments regarding corporate taxation affect thedecisions of multinational firms regarding where tolocate economic activity and where to book profits(Clausing, 2009). This, in turn, affects the governments,leaving a wide chasm in terms of revenue they get andwhat they would have got in a tax-neutral situation.

The problem of lost revenues from taxation isfurther aggravated by the incidences of ‘‘Tax Havens’’,which, in combination with low rates of taxes(sometimes no tax at all) help the unscrupulousenterprises to avoid taxes by means of varioussubterfuges. These tax havens have in the recent pastrisen to the fore of the fiscal policy debate and havebeen identified as one of the root causes of many ofthe shortfalls plaguing the governments of the world.These tax havens had become the major plank ofPresident Clinton’s 1992 presidential campaign as hewanted to ensure that foreign investors pay their fairshare of US taxes (Kaufman, 1998). A recent study(Clausing, 2009), which sought to show theimplications of tax avoidance on the US economy,revealed that between 1982 and 2004, income shiftingincentives in the tax havens cost the U.S. governmentapproximately 35 percent of corporate income taxrevenues, involving an amount in excess of $ 60 billionin 2004. According to another source, the 50 largestcompanies in the FTSE 100 were depriving the UK

Treasury of approximately £11.8 billion and global taxrevenue lost to tax havens exceeded US$255 billion peryear (see Wikipedia article on Tax Haven).

There are number of tax havens around the world,but the Cayman Islands—a tiny British dependencyof some 54,000 population in the Caribbean Sea—hascome to the fore in connection with a tax disputebetween the Government of India and VodafoneInternational Holdings B.V. The tax dispute, whichinvolved intricate chain-holdings of severalinternational and Indian companies, boils down to theright of the Indian Government to tax an overseastransaction between three foreign entities, namely theVodafone International holdings (resident for taxpurposes in the Netherlands), CGP Investments(Holdings) Ltd., (a company resident for tax purposesin the Cayman Islands) and The Hutchison Group(Hong Kong-based). In a merger/acquisition type ofdeal between Vodafone and Hutchison group in theCayman Island-based CGP Investments, theunderlying assets of one Indian company also gottransferred to Vodafone International. The Govern-ment of India slapped a Rs. 12,000 crores tax notice onVodafone, but in a wending course of protracted legalbattle the Indian Apex Court gave verdict in favourVodafone, reversing the earlier judgment of theBombay High Court favouring the Indian Government.No doubt the judgment of the Supreme Court is inconsonance with the strict interpretation of thelanguage used in the Income-tax Act, 1961, but to getat the nub of things (which could not have been doneunder the existing provisions due to the unforeseenlimitations of legal wordings) the Government hasmade amendments to the Act retrospectively from1962, inviting scathing attack from the media as wellas from the Industry. While the Vodafone issue couldbe a topic of healthy academic debate, in the contextof tax haven, the identity and the ‘‘reputation’’ of theCayman Islands needs some elaboration.

In the recent past this tax haven was the subject ofan investigation by the United States GovernmentAccountability Office (GAO, 2008) entailing theenforcement challenge for the US tax authorities. Thereport of the GAO, among several other things,provides some interesting facts about one UglandHouse—a tiny building owned by Maples and Calder,a law firm and company-services provider that servesas registered office for the 18,857 entities it created asof March 2008 on behalf of a largely internationalclientele. The Report also mentioned that 96 percentof those entities were exempt companies, exemptlimited partnerships, and exempt trusts. They wereprohibited from trading in the Cayman Islands withany persons, firm, or other corporation except infurtherance of their business that is carried on outsidethe Cayman Islands. Needless to mention that Cayman


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Islands and its ilk are the causes of headaches for thegovernments throughout the world, inviting stricterenforcement mechanism in the form of transfer priceregulations and General Anti Avoidance Rule (GAAR).

Arm’s length principle for Transfer PricingAs globalization continues to make inroad into the

global economy, the fiscal authorities all over the worldare getting increasingly concerned to get theirlegitimate share of tax revenue from MNC activitiesin their territories. The OECD Guidelines forMultinational Enterprises (OECD, 2008), therefore,required the MNCs to provide the relevant authoritiesthe information necessary for the correct determinationof taxes to be assessed in connection with theiroperations and conforming transfer pricing practicesto the arm’s length principle.

Arm’s length pricing (ALP), which is now aninternational consensus, is a method of stripping thepossible camouflage embedded in the transfer pricing.It is set forth in Article 9 of the OECD Model TaxConvention as :

Where ‘‘conditions are made or imposed betweenthe two enterprises in their commercial or financialrelations which differ from those which would be madebetween independent enterprises, then any profitswhich would, but for those conditions, have accruedto one of the enterprises, but, by reason of thoseconditions, have not so accrued, may be included inthe profits of that enterprise and taxed accordingly’’(OECD, 2010).

Simply stated, ALP is the price for the hypotheticaltransaction, which the associated enterprises wouldhave agreed if they would have made comparabletransactions on the open market rather than thecontrolled transaction that was in fact made. The arm'slength principle involves a valuation of controlledtransactions where the yardstick is the markettransaction. Transfer pricing, therefore, demands acritical economic analysis to show how transfer pricehas been determined and to substantiate that itcomplies with the arm's length principle. It is, in fact,an exercise in comparability which is at the heart oftransfer pricing. The question usually revolves aroundthe factors that determine the tested transaction andhow these can be compared with the independent butequivalent situations observed between arm's-lengthparties (Zetter et al, 2009).

From the point of view of taxation policy the choiceof arm's length principle is justified by the fact that itcontributes tax equality and neutrality between theassociated enterprises and an independent enterprise.The principles of equality and neutrality are the corevalues of the tax law and constitute the basis for tax

treatment of corporate group formations (Wittendorff,2010). Because the arm’s length principle putsassociated and independent enterprises on a moreequal footing for tax purposes, it should promote thegrowth of international trade and investment and thuslead to fair international income allocation.

Transfer Pricing TechniquesAlthough the law relating to transfer pricing is

different in different countries, they have large degreeof similarity with the OECD guidelines, andirrespective of the minor differences, they all aim atachieving a comparability test for the transactionsbetween the MNCs and the associated enterprises.Indeed, the OECD has reiterated its principles thatwhen transfer pricing does not reflect market forcesand the arm’s length principle, the tax liabilities of theassociated enterprises and the tax revenues of the hostcountries could be distorted. Therefore, OECD membercountries have agreed that for tax purposes the profitsof associated enterprises may be adjusted to correctany such distortions and thereby ensure that the arm'slength principle is satisfied (OECD, 2010: p. 32).Accordingly, the OECD has devised a number ofmethods for transfer pricing with a view to achievingarm's length price. However, it is important to bear inmind that the need for the aforesaid adjustments toapproximate arm’s length transactions arisesirrespective of any contractual obligation undertakenby the parties to pay a particular price or of anyintention of the parties to minimize tax. Thus, a taxadjustment under the arm's length principle would notaffect the underlying contractual obligations fornon-tax purposes between the associated enterprises(ibid : p.31).

The ‘‘standard’’ transfer pricing methods includethe following :

● Comparable Uncontrolled Price (CUP) Method :The OECD (2010) has defined this method as that‘‘compares the price for property or servicestransferred in a controlled transaction to the pricecharged for property or services transferred in acomparable uncontrolled transaction in comparablecircumstances’’. CUP, by its very definition,contemplates an observable market price for theproperty and services in question. Therefore, as longas this condition is fulfilled, this is the most direct andreliable way to apply the arm's length principle. Themethod is commonly used to calculate arm's lengthinterest rates on intercompany loans.

● Cost-plus Method : This method involvesselection of comparable business and calculation of anappropriate profit as a mark-up on the cost inputs ofthe representative firm. According to the OECD, thismethod is likely to be most useful where semi-finished


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goods are sold between associated parties, whereassociated parties have concluded joint facilityagreements or long-term buy-and-supply arrange-ments, or where the controlled transaction is theprovision of services.

● Resale Price Method : The OECD has defined itas a transfer pricing method based on the price at whicha product that has been purchased from an associatedenterprise is resold to an independent enterprise. Theresale price is reduced by the resale price margin. Whatis left after subtracting the resale price margin can beregarded, after adjustment for other costs associatedwith the purchase of the product (e.g. custom duties),as an arm’s length price of the original transfer ofproperty between the associated enterprises.

● Profit Split Method : This method is mainlyapplicable in international transactions involvingtransfer of unique intangibles or in multipleinternational transactions which are so interrelated thatthey cannot be evaluated separately for the purposeof determining the arm's length price of any onetransaction. Under such circumstances the profits splitmethod identifies the combined profit to be split forthe associated enterprises from a controlled transactionand then splits those profits between the associatedenterprises based upon an economically valid basisthat approximates the division of profits that wouldhave been anticipated and reflected in an agreementmade at arm’s length.

● Transactional Net Margin Method : As a variantof the profit split method, this method examines thenet profit relative to an appropriate base (e.g. costs,sales, assets) that a taxpayer realizes from a controlledtransaction. The net profit margin realized by theenterprise or by an unrelated enterprise from acomparable uncontrolled transaction or a number ofsuch transactions is also computed and this is takeninto account to arrive at an arm's length price in relationto the international transaction with the associatedenterprise.

● Unspecified Methods : Apart from the ‘‘standardmethods’’ described above, the literature oninternational transfer pricing has identified amultiplicity of other methods to arrive at arm’s lengthprice. Such methods attempt to provide informationon the prices or profits that the controlled entities couldhave realized by choosing a realistic alternative to thecontrolled transaction.

Advance Pricing Agreements and Safe HarboursWhile the concept of arm’s length pricing is well-

accepted both by the multinational taxpayers and thetaxing authorities around the world, the fact remainsthat it is fraught with several practical obstacles. The

rules relating to the ALP are not only different indifferent countries, but also the methodologies behindthe ALP are not straightforward and, therefore, notamenable to unique interpretations by the tax payerand the tax collectors. In theory, ALP intends to lookto the identical transaction under the samecircumstances between uncontrolled entities. But inreality such identicalness rarely exists. As a practicalmatter, therefore, the determination of ALP, more oftenthan not, is based on ‘‘comparable transactions’’ under‘‘comparable conditions’’, making it more of a fact-intensive process and judgmental in nature. In theprocess, the difference in perceptions and economicassumptions lead to disputes and harsh transferpricing audits from the aggressive Revenues which arevying with each other to aggrandize its fair share of‘‘legitimate tax’’. Countries which are noted for suchaggressive transfer pricing policies include, in orderof rank, Japan, India, China, Canada and the US(KPMG, 2011). For instance, at the end of the sixthcycle of transfer price audit in India, the Income-taxDepartment has made transfer price adjustments tothe extent of INR 20,000 crores. If all the six transferprice audits conducted since its inception in 2003 aretaken into consideration, the cumulative value of theadjustments would be well above INR 50,000 crores(PWC, 2011). The worst part of the story is that morethan 99 per cent of these cases—that also involvedisputes relating to royalty payments to principals—are under litigation. These include some of the topglobal companies such as Microsoft, Hindalco, Maruti,GE Capital and Oracle.

The hazardous procedure of ALP also carries withit huge penalties for non-compliance—rangingbetween 40-50 percent of the tax due in the case ofUnited States; and at least 2 percent of the internationaltransactions in the case of India. Due to such inherentrisk of ALP, in 1991 Apple Computer became the firstcompany which entered into an advance pricingagreements with two tax authorities, the United Statesand Australia, to determine how its related partytransactions should be valued for tax purposes(O'Connor, 2011). In the same year, the United Satesadopted formal advance pricing procedures ontransfer pricing, which was soon emulated by Japan,the UK, Canada, Mexico, Australia, Germany, andsome Scandinavian countries. Since then both thenumber of countries and the number of companiesentering into APA agreements have been risingsteadily. As of now, more than 900 companies haveentered into advance pricing agreements in the UnitedStates. The corresponding number of advance pricingagreements in Japan is about 600, 350 in Australia, 250in China and 150 in Canada (KPMG, 2011). With the


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rising number of transfer pricing disputes and theescalating tax war among the nations, advance pricingagreements are fast becoming the new order of theinternational transfer pricing regime.

An APA is basically a contractual arrangement withthe tax administration of one or more countries toresolve potential tax disputes in an amicable andcooperative manner. The OECD (2010) has defined theterm as ‘‘An arrangement that determines, in advanceof controlled transactions, an appropriate set ofcriteria (e.g. method, comparables and appropriateadjustments thereto, critical assumptions as to futureevents) for the determination of the transfer pricingfor those transactions over a fixed period of time’’.According to the Internal Revenue Service (USA),APAs are designed to resolve actual or potentialtransfer pricing disputes in a principled, cooperativemanner, as an alternative to adversarial process. It is abinding contract between the taxpayer and the taxadministration of one or more countries (unilateralAPA and multilateral APA) by which the latter agreesnot to seek transfer pricing adjustments for a coveredtransaction, provided that the taxpayer follows theagreed transfer pricing method.

APAs have several advantages over the traditionaltransfer pricing system. From the taxpayers’ point ofview, it eliminates the uncertainty, provided the criticalconditions are met. In the uncertain world of transferpricing, it provides certainty to help the tax payer witha definite tax outcome and liability. As against thepredatory transfer pricing ambience, it promotes a non-adversarial spirit and environment between thetaxpayers and the tax administration, leading to freeflow of information for mutual benefits. Costly andtime-consuming examinations and litigation of majortransfer pricing issues for taxpayers and taxadministrations may also be avoided.

Bilateral and multilateral APAs substantiallyreduce or eliminate the possibility of juridical oreconomic double or non taxation since all the relevantcountries participate in the process.

But APA is not without its pitfalls. It is a time-consuming process and can take significant amountof time and resources as compared to a tax audit. Aunilateral APA may sometimes take 12 to 18 months,while a bilateral APA may involve more than 24months. Obviously, such an arrangement may not besuitable for small organizations and non-repetitivenature of transactions. In contrast to APA, which is ataxpayer-specific arrangement, safe harbour is generalin nature. Designed as a comfort mechanism, safeharbours provide for circumstances in which a certaincategory of taxpayers can follow a simple set of rulesunder which transfer prices are automatically accepted

by the revenue authorities. According to the OECD(2010: Para 4.94), ‘‘a safe harbour is a statutoryprovision that applies to a given category of taxpayersand that relieves eligible taxpayers from certainobligations otherwise imposed by the tax code bysubstituting exceptional, usually simpler obligations’’.The positive aspects of safe harbour include certaintywith respect to tax obligations and administrativesimplicity. But the most important aspect of safeharbour is of course compliance relief for a designatedclass of taxpayers who may be subjected to, instead ofa specific transfer pricing method, a sort ofpresumptive tax.

Like APAs, safe harbours are also not without itsflipside; it is arbitrary and it sacrifices accuracy inreporting arm's length price, but this demerit is offsetagainst the simplicity and compliance relief that thetaxpayer is accorded. It also insulates the taxpayeragainst the hazards of arduous transfer price audits.

Evolving Landscape of Transfer Pricing in IndiaAt a time when India is being considered a

centripetal force of globalization and MNCs aremaking beeline to enter the vast Indian market,especially in the lucrative sectors like multi-brandretailing, the country seems to be caught between thedevil and the deep blue seas over its transfer pricingpolicies. The Vodafone case is not just an isolated issue,but the general uncertainty over international taxmatters is manifest in the fact that at least INR 30,000crores of tax revenues involving some 1,200 companiesare locked in transfer pricing litigations pending beforecourts, income-tax tribunals and tax appealcommissioners. India now has the dubious distinctionof having the most international transfer price disputes.However, the recent developments in transfer pricingmatters are seen as a bellwether of change of India'sramshackle transfer pricing policy.

Although India’s foray into a systematicinternational transfer pricing policy is traced to theFinance Bill, 2001, its attempt towards tackling thetransfer pricing problems can be traced far back intothe Income-tax provisions contained in the Act of 1922.Section 42(2) of the said Act, which corresponded toSection 92 of the Income-tax Act of 1961, dealt withthe provisions relating to computation of income fromtransaction with non-residents. In Mazagoan Dock Ltdv. CIT [34 IT 3368], in which two non-resident shippingcompanies entered into an agreement with a residentcompany for providing repair services to the parentbodies free of cost, was held by the Supreme Court tobe the income of the resident company (See Palkhivalaand Palkhivala, 1990 : pp. 1004-05). Section 92 of theIncome-tax Act, 1961 (the old section before it wasreplaced by the new Section 92 w.e.f. the assessmentyear 2002-03), which was a transmutation of section


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42(2) of the old Act, brought about similar charges tothe resident assessee and required the AssessingOfficer to ‘‘determine the amount of profits which mayreasonably be deemed to have been derived therefrom’’. The transfer pricing provisions (if it can be atall called by that name at this juncture) under the oldprovision of the Act was no better than the guessti-mates of the Income-tax department. However, in linewith the global trend, India made a new beginning withits transfer pricing policy when it was carved out ofthe OECD guidelines and codified as law by theFinance Act, 2001 (effective from the assessment year2002-03). The said Finance Act replaced the old Section92 and in its place inserted a new Chapter X, containingeight sections, into the Income-tax Act 1961(viz.Sections 92, 92A, 92B, 92C, 92CA, 92D, 92E and 92F).Subsequent developments include some major changesmade in the Income-tax Act in 2009 and in 2012. Withthese developments, India now has more or lesscomparable transfer pricing mechanism.

An overview of the Indian transfer pricingmechanism is presented :

● Arm’s length pricing : Effective from theassessment year 2002-03, the sections mentioned in theparenthesis above have been added to the Income-taxAct to delineate the arm's length pricing system forinternational transactions. Section 92 requires everyassessee to compute income arising from internationaltransactions with associated parties on the basis ofarm's length price. Section 92A defines exhaustivelythe meaning of associated parties, while the meaningof international transactions is defined in Section 92B,which covers five types of transactions: loans oradvances; performance of personal services; use oftangible property; transfer of/use of intangibleproperty; and sale/purchase/lease of tangibleproperty. The methods of computation of arm's lengthprice contained in Section 92C are in conformity withthe ‘‘standard methods’’ mentioned earlier. TheCentral Board of Direct Taxes (CBDT) has frameddetailed Rules (Rule 10A, 10B and 10C) to define anddetermine arm’s length price under Section 92C.

Transfer pricing in India requires an elaboratesystem of information and record keeping. Therequirements of Section 93D, read with Rule 10D, arestringent enough. Also, an accountant’s reportdetailing the international transactions entered into bythe assessee is to be furnished in accordance with therequirements of Section 932E, Rule 10E and Form No.3CEB.

Important changes made in 2009International transfer pricing in India is in an

evolutionary stage. Finance Act, 2009, has made thefollowing additions to the existing transfer pricingregulations “

● Safe Harbour Rules : with retrospective effectfrom the assessment year 2009-10, Finance (No.2) Acthas inserted Section 92CB to provide for safe harbourrules for computing arm's length price. The CBDT hasbeen empowered to make rules, which are likely toroll out anytime soon.

● Dispute Resolution Panel (DRP) : Transferpricing mechanisms, being subjective in nature, areinherently prone to disputation and prolongedlitigations. To instil confidence in the foreign investorsin India, Finance (No. 2) Act has inserted Section 144Cto provide for alternate dispute resolution panel. As aresult, unlike in the past, when the order passed bythe Transfer Pricing Officer under Section 92CA wasbinding, Section 144C has removed the straightjacketby providing for the DRP.

As collegiums of three Commissioners of income-tax, the DRP would hear the dispute within a periodof nine months. No tax demands will be raised on thetaxpayer until the final order is passed by the DRP.DRP decisions are final and binding on the revenueauthorities. However, if aggrieved, the taxpayer isentitled to appeal before a higher appellate authority.

Important changes made in 2012Finance Bill 2012, which is awaiting passage, has

added further momentum to the transfer pricingmechanism in India. The changes made by the FinanceBill are reflective of the resolve of the government,which is besotted with the problems of black moneyand tax avoidance. Important changes made hereinclude Advance Pricing Agreements (APA) under thenewly inserted Sections 92CC and 92CD; and GeneralAnti-avoidance Rule (GAAR) under Section 95. Thesetwo issues were within the scheme of things in theproposed Direct Taxes Code (DTC), but the teethingproblems with the DTC still remaining unresolved,they have been included in the current Finance Bill topre-pone implementations of these matters. Theprovisions of APA are more or less in conformity withthose discussed above; GAAR intends to put a brakeon aggressive tax planning by the foreign players aswell as the domestic assessees. Under the provisionsof GAAR, the tax administrations in India areaccoutered with wide discretionary powers.

ConclusionFinance Bill 2012 has made a few more amendments

which have far-reaching consequences for the MNCsand transfer pricing in India. First, Sections 9 and 195have been amended to clarify that business located inIndia but owned by the foreign enterprises shall bedeemed to be situated in India and accordingly, sale ofassets of such enterprises shall fall within the ambit ofthe Indian tax. As a result of retrospective amendments


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of these sections from 1.4.1962, Vodafone’s purchase ofHutchison’s stake in Vodafone India and Birla'sacquisition of AT&T's stake in Idea, which were nottaxable previously, would be taxable in India. Second,the clarification added to Section 9(1) (i) make paymentfor software acquired from abroad as a royalty. Theimplication of this amendment is that foreign companiessupplying that software now will come within thepurview of transfer pricing. Third, the amendment toSection 40A now empowers the Assessing Officers todecide on taxability of expenditure incurred in theprocess of transactions with the group companies. Thiswill not only lead to higher taxes for the MNCs, but thewide discretionary powers enjoyed by the AssessingOfficers will make it a potential weapon against theMNCs. But India is not alone in fleecing the MNCs.China has recently hardened its transfer pricingregulations, resulting in an explosion of transfer pricingcontroversies. The Canadian tax administration hasasked Merck, a leader in the healthcare industry, to payadditional $660 million in taxes due to transfer priceadjustments, while the company has disputed a furtherclaim for $550 million. Hasbro, a toymaker, has faceda demand from the Mexican authorities for an extra$98 million due to transfer price adjustments. InGermany, there is a spate of transfer price audits withadverse consequences for the MNCs. The question inparticular is whether transfer pricing is the low hangingfruit or not that the revenue-starved governmentswould bend the branch at their sweet will to grab it.This seems to be the conundrum of internationaltaxation begging the answer from the experts. ❐

References■ Clausing, Kimberly A. (2009): ‘‘Multinational Firm Tax

Avoidance and Tax Policy’’, National Tax Journal , Vol.LXIl, No. 4 (December) : 703-25.

■ GAO (2008) : Cayman Islands: Business and TaxAdvantages Attract U.S. Persons and EnforcementChallenges Exist, U.S. Government AccountabilityOffice, Washington, DC.

■ Kaufman, Nancy H. (1998): ‘Fairness and the Taxationof International Income’, Law and Policy in InternationalBusiness, (winter), 145-203.

■ KPMG (2011): Global Transfer Pricing Review,www.kpmg.com.

■ OECD (2008): OECD Guidelines for MultinationalEnterprises, OECD Publishing, Paris.

■ OECD (2010) : OECD Transfer Pricing Guidelines forMultinational Enterprises and Tax Administrations,OECD Publishing, Paris.

■ Palkhivala, N.A and Palkhivala, B.A. (1990): The Lawand Practice of Income Tax, N.M. Tripathi (P) Ltd.,Bombay, (Eighth Edition, Vol. I).

■ PWC (2011): Certainty in the Uncertain World of TransferPricing: White Paper on TPA in India, www.pwc.com/india.

■ Truitt, Wesley B. (2006): The Corporation, GreenwoodPresses : Westport.

■ UNCTAD (2011): World Investment Report 2011, UnitedNations, New York/Geneva.

■ Weekly, James K. (1992): ‘‘Pricing in Foreign Markets:Pitfalls and Opportunities’’, Industrial MarketingManagement, 21 (2) : 173-79.

■ Wittendorff, Jens (2010) Transfer Pricing and the Arm’sLength Principle in International Tax Law, Kluwer LawInternational, Netherlands.

■ Zetter, Martin et al (2009) : ‘‘Transfer Pricing and theNew Economics’’, International Tax Review, (Nov), 20(9).[Gale Document Number: GALE|A213239923].

the record requirements of the Income Tax Act leavesit to the companies to decide the principle on whichit is dealt with, i.e., guidelines, basis of overheadallocation, treatment of abnormal costs, treatment ofcapacity utilization in overheads etc leading to non-comparability of information available.

Standardisation of Principles as started byICAI by issue of CAS needs to adopted by regulatorsto have a standardised database for TransferPricing. In spite of all the justifications which comenaturally to CMA’s with respect to transfer pricingthe Accountant Report to be filed in Form 3CEBcannot be done by CMA’s. This needs to be taken upby revenue authorities bringing out the benefitspresenting real life case studies. The revenue willbe having Cost Audit, Cost Accounting records andfiling return in Form 3 CEB. For Benchmarkingof similar transaction which it greatly requiredfor Transfer Pricing regulations ICAI needs to take upsuch exercise with Income Tax (TPO) and industry,

along with input from Cost Audit Report bringingout quarterly or half yearly benchmarking reportscustomised for Transfer Pricing itself, making it arepository of information and will be on help to allfuture TP transactions. Specialised courses and trainingprogrammes need to be organised to equip CMAs withan objective of developing and updating the transferpricing developments globally.

Conclusion

Transfer Pricing is a globally evolving area and withpractice and further experience it will further be fine-tuned. Transfer pricing is not an exact science. It is amatter of judgment and finding an answer. Thejudgement element is bound to keep uncertainty andfurther scope for improved analysis. CMA’s have aimportant role to play to make this more refined,accurate and comparable analysis and the future inthis area belongs to the CMAs. ❐

(contd. from page 520)


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Capital Structuring

The most important decision for financialplanners in a company is with respect to theformulation of an ideal capital structure. The

capital structure of any company consists of a mix ofdebt and equity. How much of the funds should bethrough equity and how much should be debt is atypical structuring decision.

Capital structure has to be determined not only atthe time a company is promoted, but also later on as itrequires funds from time to time.

The initial capital structure should be designed verycarefully. The future structure will emerge out of theinitial structure. The company will require funds tofinance its activities continuously. Everytime the fundshave to be procured, the pros and cons of varioussources of finance have to be weighed and the mostadvantageous source of financing has to be selectedeach time. Thus the capital structure decision is acontinuous ongoing decision and has to be takenwhenever a company needs additional finance.

Generally, the factors to be considered whenever acapital structure decision is taken are :

(i) Leverage or Trading on equity(ii) Cost of Funds(iii) Cash flow(iv) Control(v) Flexibility(vi) Size of the company(vii) Sector to which the company belongs(viii) Marketability including efficiency of financial

markets(ix) Tax considerations.Capital structure is the composition of various

sources of long-term finance in the total capitalisationof the company. These various sources of long termfinance can be classified under two broad heads :

(a) Own Funds(b) Borrowed Bunds.

Thin Capitalisation and Arm’s Length Pricing

A Sekar

B.Com., FCMA, ACS, LLB GenPractising Company Secretary, Mumbai

Sudha G BhushanB.Com., Hons, FCA, ACS

Practising Chartered Accountant,Mumbai

Both own funds and borrowed funds includinglong-term loans from financial institutions are used bymost of the large industrial companies. Capitalstructure planning—initially and on continuing basis—is of great importance to any company, as it has aconsiderable bearing on its profitability. A wronginitial decision in this respect may prove quite costlyfor the company. While deciding about capitalstructure, due attention should be paid to objectiveslike profitability, solvency and flexibility. The choiceof the amount of debt and other fixed return securitieson the one hand and variable income securities, namelyequity shares on the other, is made after a comparisonof the characteristics of each kind of securities andafter careful consideration of internal and externalfactors related to the company's operations. In reallife situations, compromises have to be madesomewhere on the line between the expectations ofcompanies seeking funds and the expectations of thosethat supply them. These compromises do not changethe basic distinctions between debt and equity.Generally, the decision about financing is not ofchoosing between equity and debt but is of selectingthe ideal combination of the two. The decision on debt-equity mix is affected by considerations of suitability,risk, income, control and timing. The extent ofweightage that would be given to these factors willvary from company to company depending on thecharacteristics of the industry and the particularsituation of the company. There cannot perhaps be anexact mathematical solution to the decision on capitalstructuring. Human judgement plays an important rolein analysing the various aspects, before a decision onappropriate capital structure is reached.

High Gearing and Low GearingThe term ‘‘capital gearing’’ or ‘‘leverage’’ normally

refers to the proportion of relationship between equityshare capital including reserves and surpluses topreference share capital and other fixed interestbearing funds or loans. In other words, it is theproportion between the fixed interest or dividend


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bearing funds and non fixed interest or dividendbearing funds. Equity share capital includes equityshare capital and all reserves and surpluses items thatbelong to shareholders. Fixed interest bearing fundsincludes debentures, preference share capital and otherlong-term loans.

Capital Gearing can be defined as : ‘‘The mixtureof debt and equity in a firm's capital structure, whichinfluences variations in shareholders profits inresponse to sales and EBIT variations.’’

Formula of capital gearing ratio :[Capital Gearing Ratio = Equity Share Capital/

Fixed Interest Bearing Funds]Capital gearing ratio is important to the company

and the prospective investors. It must be carefullyplanned as it affects the company’s capacity tomaintain a uniform dividend policy during difficulttrading periods. It reveals the suitability of a company’scapitalization. But what it is suitable gearingin a particular case depends upon the facts andcircumstances.

Apart from the financial and ‘‘commercial’’considerations, the decision of capitalization is alsogreatly influenced by tax considerations. There maybe situations when a company may not have access todebt based on its financial strength, but because of taxconsiderations may like to show and treat the financereceived from its associated enterprises or relatedparties as its own debt to claim tax deductions. Thetax authorities globally, however, have been quick topounce upon such tax planning exercises. Differentcountries have made different rules to deal with suchhigh gearing ratio. Over a period of time, the taxmenhave been using the term ‘‘Thin Capitalisation’’ to referto what finance professionals refer to as ‘‘High CapitalGearing.’’

While in strictly arms length transactions withinstitutional or commercial lenders, no problems areexpected. What becomes relevant for financial plannersand taxmen is the financing by promoters and theirassociated enterprises. The problem of capitalizationhowever becomes relevant to the taxmen whensecurities are issued in the nature of debt, (which arein fact ‘‘quasi equity’’) and finance raised from‘‘promoters’’ or ‘‘associated enterprises’’ for claiminginterest deductions as tax benefits with the object ofreducing the taxable income.

Thin CapitalizationWe are discussing the concept of Thin

Capitalisation in the background of financing by wayof ‘‘quasi equity’’ by promoters or associatedenterprises and the taxmen's response to this practice.

A company is said to be thinly capitalized when its

capital is made up of a much greater proportion ofdebt than equity, ie. its gearing or leverage, is too high.This is perceived to create problems for two classes ofpeople :

● consumers and creditors bear the solvency riskof the company, which has to repay the bulk ofits capital with interest; and

● revenue authorities, who are concerned aboutabuse by excessive interest deductions.

An entity (which may be part of a group) may besaid to be thinly capitalized when it has excessive debtin relation to its arm's length borrowing capacity,leading to the possibility of excessive interestdeductions. An important parallel consideration iswhether the rate of interest is one which would havebeen obtained at arm's length rate while comparingfrom independent lender as a stand-alone entity.

In international transactions, the typical method oftax avoidance employed is the use of a thinlycapitalized subsidiary that borrows from the parentor an off-shore vehicle, with the lender being in a lowtax jurisdiction.

The main purpose of such an exercise is to shiftprofits from the country where profits are made to atax haven. Many countries have introducedwithholding taxes on interest payments made by thethinly capitalized company to counter this shifting ofprofits. Thin capitalization rules usually go beyond justthe levels of debt and equity.

Thin Capitalization rules can apply in situationswhere :

● A security is issued, which would not have beenissued without a special relationship between theparties ( tax deductions for interest on loans from groupentities are stopped where the borrower would nothave been able to sustain the debit on its own).

● A loan is made because of a guarantee given tothe lender by a party related to the borrower.

The expression ‘thin capitalisation’ is commonlyused to describe a situation where the proportion ofdebt to equity exceeds certain limits. Thin capitalisation

XYZ B.V

Low tax Jurisdiction Lending of Moneyfrom XYZ to ABC

▲ ▲

▲

Interest payment fromABC to XYZ ▲

ABC Private Limited


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legislation is a tool used by tax authorities to preventthe apparent leakage of tax revenues as a consequenceof the way in which a company is financed. Financinga resident company with debt is considerably moretax efficient than financing with equity. The differencein tax treatment is an incentive to provide capital tothe company in the form of debt instead of equity. Ifthere are no thin capitalisation rules, it is relatively easyfor a non-resident to advance funds to a residentcompany in a way that is christened as debt, so thatthe ‘‘interest payments’’ are straightaway taxdeductible. If controlling shareholders in particular areindifferent to the form in which their investment isstructured are more likely to be guided by taxconsiderations when structuring the legal form of theirinvestment.

The object of Thin Capitalisation Regulations is toprevent the use of excessive ‘captive’ or ‘in-house’ or‘friendly’ loans which would be detrimental to therevenue of home country (where the borrower isresident), as the profits to this extent would effectivelybe shifted to the foreign lender, as the interest paymentswould be tax deductible in the home country.

Therefore many countries—through ThinCapitalisation Regulations—ensure that the deductionsfor interest on debt owed to connected parties, isallowable in the home country as a deduction in thehands of the borrower, only if within the permissiblelimits. While financial leverage has, on its own standing,its own value, this is definitely impaired when interestis not deductible either wholly or partially through theseThin Capitalisation Regulations.

Brief Comparative analysis of Thin CapitalisationRules by different jurisdictions

A wide variety of methods are used to deal withthin capitalisation in various countries. Theseapproaches range from complex legislation to nospecific thin capitalisation legislation at all.

Within this range four general approaches may bedistinguished :

(1) the fixed ratio approach(2) the subjective approach(3) application of rules concerning hidden profit

distributions; and(4) the ‘no rules’ approach.The emphasis on the above factors or combinations of

factors often varies from country to country. Measurestaken by countries to limit excessive debt financing byshareholders are either based on specific legislation oradministrative rules or based on evolving practice.

Under the ‘fixed ratio’ approach, if the debtorcompany’s total debt exceeds a certain proportion ofits equity capital, the interest on the loan or the interest (contd.)

on the excess of the loan over the approved proportionis automatically disallowed and/or treated as adividend. The ratio may be used as a safe-haven rule.It can be seen that these countries which use the fixedratio approach usually have specific thin capitalisationlegislation.

The basis of the ‘subjective’ approach is to look atthe terms and nature of the contribution and thecircumstances in which the financing has been madeand to decide, in the light of all facts and circumstances,whether the real nature of the contribution is debt orequity. Some countries using the subjective approachhave specific legislation. Other countries use moregeneral rules if these are available, such as general anti-avoidance legislation, provisions on ‘abuse of law’,provisions on substance over form.

There are also countries that apply ‘hidden profitdistribution’ rules to reclassify interest as dividends.In some of these countries the hidden profitdistribution rules are applied along with specific ruleswhich limit the deduction of interest on loans fromshareholders. The general principles of transfer pricingrules may also play a role in this respect.Theunderlying idea is that if the loan exceeds what wouldhave been lent in an arm’s-length situation, the lendermust be considered to have an interest in theprofitability of the enterprise and the loan, or anyamount in excess of the arm’s-length amount, must beseen as being designed to procure share in the profits.

While some countries, like France, have detailedregulations, others, like the UK, do not specify a debtto equity ratio, but merely give the right to the InlandRevenue to challenge the interest deductions keepingin view the arm’s-length principle.

In the following paragraph, a brief overview ofthe approach to Thin Capitailsation Rules incountries which provide for safe harbor provisions aregiven :Country Limitation Comments

Australia Debt : Equity 3 : 1 In 2002, Australia’s thin capitalisationregime changed substantially, bringingin lengthy and complex legislation.A ‘safe harbour’ debt amount has beenintroduced, with an alternative ‘‘arm’slength’’ test which can potentiallyincrease the permissible interest

Exceptions made for certain financialbusinesses—authorised deposit takersInterest in excess of the prescribed levelis denied as a deduction. However, itis fully deductible if the companysatisfies the arm’s length test.The Australian Tax Office has a well-organised and accessible website, withgood search facilities.


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Germany Limit to deducti- The legislation was substantiallybility of interest revised in 2008(30% of income) Interest deductibility is limited to

30% of taxable income before interest,taxes on income, depreciation andamortisation.

There are exceptions for low interestexpense, and where interest paid to anyone shareholder falls within limits.

Previously Germany had a widelyavailable safe harbour: a debt:equityratio of 1.5 : 1

France Interest limitation A new system was applied fromby ref to third January 2007, applying limitationsparty rates between related parties, and bringing

in the arm’s length measure.

Interest rate limitations :

Arm’s length deduction limited to an average of ratesmeasure for charged by lending institutions, orinterest rate

Debt : equity 1.5 : 1 the interest rate that the debtor

25% interest : ope- company could have obtained from arating income ratio third-party lender and

Debt-based limitations :

overall indebtedness (debt : equityratio), and

Disallowed interest can be carriedforward indefinitely at group level, butwill be reduced annually by 5% fromthe second year after the expense wasincurred. There is no differentiationbetween types of companies.

Companies are considered on a standalone basis.

Certain financial businesses andtransactions are excluded.

Japan 3 : 1 ● Japanese thin capitalisation ruleswere revised in 2006.

● A debt:equity safe harbour ruleapplies to foreign-owned corporations

● The 2006 rules extend this to thirdparties where foreign corporationsguarantee the borrowing

China China introduced thin capitalisation legislation for the first time late in 2008.

Financial 5 : 1 Two safe harbour ratios have been set,one for financial industry enterprises,one for non-financial.

Non-Financial 2 :1 If these ratios are breached, it appearsthat the taxpayer will still have theopportunity to try to demonstrate thatthe transaction is still consistent withthe arm’s length principle.

USA 1.5 : 1 The US ‘‘earnings stripping rules’’currently include a restriction oninterest paid by a corporation to relatedpersons, if the corporation has :

A debt-to-equity ratio exceeding1.5 : 1, and

A net interest expense exceeding 50%of the company’s adjusted taxableincome. This is likely to be tightened,probably to 25%

India and Thin CapitalisationAs of now India does not have any specific Thin

Capitalisation Rules. In one of the leading case on thesubject, in absence of ‘‘thin capitalization rules’’,interest paid to shareholders for loans cannot bedisallowed despite capital-structure tax-planningresorted by the tax payer. This was the decision by theIncome Tax Appellate Tribunal (ITAT) in the case ofBesix kher Dabhol SA v DDIT.

The assessee, a Belgium company, was set up toexecute a project in India and had a PE in India. Theassessee’s share capital of Rs. 38 lakhs was owned bytwo foreign companies (shareholders) in the ratio of60 : 40. The said two shareholders also advanced loansto the assessee aggregating Rs. 94.10 crores in the sameratio in which they held shares in the assessee i.e.60 : 40. The assessee’s debt-equity ratio was 248 : 1.The assessee paid interest of Rs. 5.73 crores on the loansobtained from its shareholders and claimed that as adeduction. The AO disallowed the claim on the groundthat though the moneys were borrowed from theshareholders, in view of the abnormal debt-equityratio, they were to be treated as capital/loan taken fromthe Head Office, and (ii) that as the RBI approvaldid not permit the PE to borrow, the loan was incontravention of law. This was upheld by the CIT (A).On appeal by the assessee, HELD allowed the appeal :

(i) Under Article 7 (1) & 7(3)(b) of the India-BelgiumDTAA, the profits of the assessee as are attributable tothe PE are chargeable to tax in India. In determiningsuch profits, all expenses are allowable subject tolimitations specified in the DTAA and the Indian laws.The only limitation is that notional interest paid by abranch to its HO is not allowable.This limitation doesnot apply as the assessee borrowed from an outsideparty, i.e. its shareholders;

(ii) The argument of the revenue that the abnormaldebt-equity ratio attracts the ‘‘Thin CapitalizationRule’’ and that the ‘‘debt’’ should be characterized as‘‘equity’’ for purposes of considering whether interestis deductible is not acceptable. Several countries havedetailed ‘‘thin capitalization rules’’ (e.g. Belgium).However, there are no such rules in India though the

(contd.)

Country Limitation Comments

(contd.)

(contd.)

Country Limitation Comments


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DTC 2010 has proposed this vide S. 123(1)(f). In theabsence of specific ‘‘thin capitalization’’ rules, it is notopen to the revenue to characterize debt as equity anddisallow the interest (principles in Azadi BachaoAndolan 263 ITR 706 (SC) followed). The domestic lawlimitation of Art. 7(3) refers to the Source Country &not the Residence Country;

(iii) Imposing the ‘‘thin capitalization rules’’ on theassessee when domestic companies are not subject tosuch rules will violate the ‘‘non-discrimination’’provision in Art. 24(5);

(iv) The argument that the finance structure shouldbe treated as a ‘‘colourable device’’ and disregardedis not acceptable because there is no anti-abuseprovision in the DTAA and in the absence of specificlanguage (such as the proposed s. 129(9) of DTC 2010),the DTAA cannot be over-ridden by the Act.

Master Circular issued by RBI under ForeignExchange Management Act, 1999 (FEMA) andRegulations

It would be of interest to note that the latest RBIMaster Circular on External Commercial Borrowings(ECB) stipulates a debt equity ratio of 4 : 1 forborrowings by Indian Entity from ‘‘RecognizedLenders’’ in excess of US $ 5 Million from ‘‘ForeignEquity Holders’’. The Foreign Equity Holders shouldhold a minimum of 25% of the Equity of the eligibleborrower. Further the regulations clarify ‘‘ie.borrowing the proposed ECB not exceeding four timesthe direct foreign equity holding’’. This adds a newdimension to the basic question of Debt Equity ratio.

General Anti-Avoidance Provisions (GAAR)Though the Union Budget 2012-13 proposals do not

contain any direct ‘‘Thin Capitalisation Rules’’, certainnew provisions entitled ‘‘General Anti-AvoidanceRules’’ have been proposed, which, if implemented,can give rise to new dimensions to the issue of ThinCapitalisation concept.

The scope and language of the proposed GAARprovisions under the Union Budget 2012 are verysimilar to the GAAR provisions specified in the DirectTax Code (DTC). It is proposed to empower the taxauthorities with widespread powers to disregard andrecast any tax avoiding transaction and incomeaccruing therefrom. Further, the Finance Bill 2012proposes the introduction of sub-section 2A to Section90 which would enable the provisions of GAAR(proposed to be introduced through Chapter X-A inthe Income-tax Act, 1961) to override the provisionsof the tax treaties signed by India. While the revenueauthorities may be viewing GAAR as a means tochecking tax leakages, one may be tempted to suspectthe intention of the sweeping nature of the provisionas it provides wide discretion to the tax authorities andprovides potential for misuse.

GAAR vs. Treaty provisionsIt has been proposed that the GAAR provisions

would apply to a taxpayer irrespective of the fact thatthe treaty provisions are more beneficial. It may be notedthat a unilateral enactment of a new domestic tax lawwhich is contrary to an existing treaty, without anamendment in treaty could possibly be regarded asviolation of international law and is generally knownas ‘treaty override’.

It may be relevant to note that according to rules oflegislative interpretation, specific legislation overridesgeneral legislation. Therefore, an argument may betaken that change of a domestic law generally, whichcould be the case with GAAR, may not affect the treaty.However, in the absence of an anti-avoidanceprovision under the treaty, the reaction of India's treatypartner countries needs to be observed.

Salient features/provisions of GAARThe Indian tax law has always had specific anti-

avoidance rules to target known arrangements of taxavoidance, whereas GAAR seeks to completely redefinethis concept. GAAR as envisaged under the Finance Bill2012 is a broad set of provisions which seek to tax an‘impermissible avoidance arrangement’ (which may bea step, a part or whole of an arrangement and hereinafterreferred to as ‘Transaction’) whose main purpose is toobtain a tax benefit by :

a. creating rights or obligation which wouldn’t arisebetween persons dealing at arm’s length, or

b. result in the misuse or abuse of the provisionsof the Act in any way, or

c. lacks commercial substance either wholly or inpart, or

d. entered or carried out in a manner which wouldnot be employed for bona fide purposes

While the principal condition for invalidating atransaction might be triggered at the assessment stageitself, the burden to rebut the same shall rest with thetax payer. Further, once the 'tax benefit' test is satisfied,the arrangement also has to satisfy at least one out offour additional tests discussed above.

The tax authorities, upon satisfaction of aforesaidconditions, shall seek to :

a. disregard, combine or recharacterise any step,part or whole of a transaction;

b. treat the transaction as if it had not been entered into; c. disregard any accommodating party or treating

any accommodating party and any other partyas one and the same person;

d. deeming connected persons in relation to eachother as one;

e. reallocating, amongst the parties to thearrangement —● any accrual, or receipt, of a capital or revenue

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● any expenditure, deduction, relief or rebate;or

f. relocating place of residence of a party or locationof a transaction or situs of an asset to a place otherthan provided in the arrangement; and

g. considering or looking through an arrangementby disregarding any corporate structure.

For the above purposes, following re-charac-terization may be done —

● any equity into debt, or vice versa;● any accrual, or receipt, of a capital or revenue

nature; or● any expenditure, deduction, relief or rebate.Meaning of some of the terms used in GAAR1. Accommodating PartyAccommodating party means a party to an

arrangement whose main purpose for direct or indirectparticipation in an arrangement (in whole or in part)is to secure benefits whether directly or indirectly to aperson to whom it may be connected or not.

2. ‘‘An arrangement’’ means● any step in or a part or whole of● any transaction, operation, scheme, agreement

or understanding,● whether enforceable or not, and● includes any of the above involving the

alienation of property.3. ‘‘Tax benefit’’ means

● a reduction, avoidance or deferral of, or anincrease in a refund of tax under the Income TaxAct (‘‘ITA’’ or ‘‘the Act’’).

● a reduction, avoidance or deferral of, or anincrease in a refund of tax for a Tax Treaty.

● a reduction in tax bases including increase in loss.4. ‘‘Arm’s length price’’ means● a price applied or proposed to be applied in a

transaction between persons or enterprises other thanassociated enterprises in uncontrolled, unrelated orindependent conditions.

5. ‘‘Associated Enterprises’’ means as defined inSection 92A of the Act.

6. ‘‘Lacks commercial substance’’A step in, or a part or whole of, an arrangement shall

be deemed to be lacking commercial substance, if —● The substance or effect of the arrangement as a

whole, is inconsistent with, or differs significantly from,the form of its individual steps or a part; or

● it includes, or involves —i. round trip financing without regard to, —(a) whether or not the round tripped amounts can

be traced to funds transferred or received;(b) the time, or sequence, in which round tripped

amounts are transferred or received; or

(c) the means by, or manner in, which roundtripped amounts are transferred or received;

ii. an accommodating or tax indifferent party;iii. any elements that have the effect of offsetting

each other; oriv. a transaction which is conducted through one

or more persons and disguises the nature, location,source, ownership, or control, of the fund.

7. ‘‘Round trip financing’’ includes financing inwhich —

Funds are transferred among the parties to thearrangement in a manner which would :

● result, directly or indirectly, in a tax benefit; or● significantly reduce, offset or eliminate any

business risk incurred by any party to thearrangement.

Some Concerns about GAAR and recommendationsto overcome them

The description and definition as proposed rendersGAAR subjective and open to interpretation. Perhaps,introduction of guiding principles should be evolvedso as to make the same objective, more definite, fair,equitable, meaningful and relevant.

Specifically if one were to refer to the explanation/meaning of ‘‘lacking of commercial substance’’, this onephrase can typically lead to a series of litigations. Withthe shifting of the onus of proof to the taxpayer, it has tobe only hoped that the final outcome of the interpretationdoes not result in ‘Commercial Nonsense’

Though the provisions relating to GAAR are broadlyin line with the internationally accepted standards ofanti-avoidance measures, it may be noted that some ofthe important recommendations of the StandardCommittee on Finance have not been taken into accountwhile introducing the GAAR provisions, such as :

● Suitable provisions may be made to protect theinterest of the tax-payers who have entered intostructures/arrangements under the existing law ingood faith and without intent to evade tax;

● Uncertainties with regard to applicability of taxtreaty provisions to be removed so that India’scredibility as a reliable treaty partner is not affected;

● The proposals should not lead to any fiscaluncertainty or ambiguity;

● It should be ensured that any of the proposals donot pave the way for increased and avoidable litigation.

With respect to thin capitalization, an entirely newconcept of re-characterization of debt into equity orvice versa. The emphasis is on the term ‘‘vice versa’’which means that debt can also be classified into equity.Such reclassification including the circumstances inwhich this could result will be a completely newconcept to which this complex financial world may nothave a ready answer.


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Applicability of Thin Capitalisation Norms fordomestic companies

The budget proposals have introduced a newsection by which specified domestic transactions havebeen brought under the purview of Transfer Pricingregulations. The computation of value of SpecifiedDomestic Transactions should, therefore, be as perArm's Length provisions under Transfer Pricingregulations. The provision would be applicable if thevalue of Specified Domestic transactions in aggregateexceeds 5 Crores.

The Specific Domestic Transactions for thepurposes of application of Transfer Pricing provisionswould be :

(a) Expenses/payment transactions betweenrelated persons as covered under the provisions ofSection 40 A (2) (b);

(b) Transfer of goods/services/business from oneunit/undertaking of the Assessee to another unit/undertaking of the assessee, claiming benefit underSection 80 IA, under Chapter VI A or 10 AA where theprovisions of 80IA are applicable;

The assessees in such cases would be required tomaintain/furnish documentation and obtaincertification of Specified Domestic Transactions.

The other Transfer Pricing provisions pertaining tointernational transactions would also be applicable forSpecified Domestic Transactions.

Section 40A (2)(b) would even cover transactionsof interest payments to related parties andconsequently the provisions contained in the othertransfer pricing regulations including the GAAR andthe thin capitalization rules/test could apply to quasi-equity financing by related parties christened as debt.This is going to be a new challenge for domesticcompanies, most of whom are not even exposed to theconcept of Thin Capitalisation and the prevalent rules.

Challenge before Indian CompaniesIndian companies having international transac-

tions are exposed to international financing pattern andthe global taxation trends. For these companies, theconcept of thin capitalization is going to add a newvariable to the financial and tax structuring.

The greater challenge is, however, going to be facedby pure domestic companies in the SME sector, wherethere is a reasonable amount of related partytransactions much beyond the stipulated the thresholdlevels of Rs. 5 crores which appears to be fairly low.

When there are many SME companies/organi-zations in a group, a great deal of planning would haveto be done to plan and implement the capital structurein such a way that the group goals are achieved withoutfalling into the erring side of the tax net.

Quite a few companies in the SME sector are known

to be facing finance problems and are struggling toobtain debt financing at competitive rates. In suchcases, it is usual for the companies to arrange financefrom related parties (including group companies) inthe form of unsecured loans carrying structuredinterest rates rather than equity to meet the promoter'scontribution requirements for obtaining maximumpossible bank finance. The lending banks treat this‘‘structured debt’’ as ‘‘Quasi-Equity’’ and fit it as‘‘Equity’’ in their assessment for ‘‘Debt-Equity Ratio’’.If this structure is viewed by the tax authorities underthe lens of GAAR and read with the proposed domestictransfer pricing regulations and the interest chargedis below the bank rate, the tax authorities can, underthis situation, impose tax on the differential interest oreven treat this ‘‘structured debt’’ as equity, anddisallow the interest deduction claimed by theborrowing company. All these could lead touncertainties and unpredictable litigations.

There will be widespread ambiguity on what is theideal or safe debt-equity ratio which would beacceptable to the tax authorities. We have seen theconfusion created by the RBI Master circular whilestipulating the debt-equity ratio with respect to ECBfrom foreign equity holders. When we have multipleregulators giving different interpretations andmeanings to otherwise established definitions, theproblem becomes more complex. Further complicatingthis would be the GAAR driven as it would be byrevenue collecting considerations, the emergingconfusion is going to be more and more difficult tocomprehend—particularly to the domestic SME sectorwhich is in dire need of greater flexibility and openness.

There will be a great role for Management Accountantsand other financial consultants in evolving a proper groupstructure and also capital structure for individual entities,apprising them of the regulations and consequences ofdefault simultaneously so that there emerges

(a) good commercial sense not only at the grouplevel, but also at the entity level; and

(b) there is better understanding on the part of thesegroups and entities of the complex level of challengesto be faced in balancing commercial, regulatory andtax considerations; and

(c) the potential for commercial nonsense—whichdisastrous short term opportunistic planning willanyway entail—is reduced. ❐

References1. Moneyterms.co.uk2. www.transferpricing-india.com3. bcasonline.org ‘‘Worldwide Tax Trends—Thin Capitalisa-

tion’’ by Rajendra Nayak and Lubna Kably" CA4. www.taxmann.com5. www.itatonline.org6. http://www.hmrc.gov.uk


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Introduction

The Arm’s Length Principle is the condition thatboth the parties to a transaction are independentand are on equal footing. This type of transaction

is known as an ‘Arm’s Length Transaction’. It isgenerally use in contract law for the arrangement ofan equitable agreement though either the parties mayhave shared interests or they are closely related to eachother to be seen as completely independent. In thepresent global business environment it is observed thatlarge multinational companies have subsidiarycompanies and those companies conduct businesstransactions with one another as if they are not at allpart of the same corporate family. When twocompanies, any way, are connected with each other,the type of business they transact is often referred toas an ‘arm’s length transaction’. It is a deal betweentwo interested associates parties. They show thebehaviour as if they were not related, so that there isno query of a disagreement of attention. The conceptof arm's length deal concerns with the transaction inwhich both the parties behave in their self-attentionand are not issue any force from the other associate.The basic principle behind the arm’s length price isthat though the both the buyer and seller are relatedto a parent concern, the prices extended will stillremain at fair market value. This means that the sellercompany will offer no special in-house discount to thebuyer company though both of them are subsidiariesof a parent company i.e. the subsidiary company willenjoy the same volume of discount that may beextended to any customer with a similar pattern ofvolume purchasing. So, the arm's length price is theprice in which a sister company never expects anydiscount or reduced price that would be extended toother customers. The comparability between thecontrolled and uncontrolled transaction is the keyfactor for determining the arm's length price aninternational transaction.

Arm’s length price essentially conducts two thingsat a time : (i) this form of pricing structure protects the

Arm’s Length Pricing in India

Dr. Sukamal DattaPrincipalNaba Ballygunge Mahavidyalaya (C.U.)Kolkata

financial position of the seller company; and (ii) helpsto prevent the question of taxes arising from suchtransaction. Many countries including India have theirlaws for determining inter-company or arm's lengthprice structures. With the extension of arm's lengthprice, there is no question about conflict of interest ofbuyer and seller. Here the revenue is completelytransparent and there is no hidden motive in thetransaction. According to the internationally acceptedprinciples, any income from international transactionor an outgoing—like expenses or interest from theinternational transaction between associatedcompanies—shall be computed extending an arm’s-length price that would be charged in the transactionif it had been entered into by unrelated parties insimilar conditions. Some companies occasionally tryto manipulate inter-company prices to reduce overalltax burden. On the other hand, tax authorities want toensure that the inter-company price is equivalent toan arm's length price to prevent the loss of tax revenue.

Computation of Arm’s length Price u/s 92C ofIncome Tax Act

The arm’s length price in relation to an internationaltransaction shall be determined by any of the followingmethods, being the most appropriate method :

(a) Comparable Uncontrolled Price Method,(b) Resale Price Method,(c) Cost Plus Method,(d) Profit Split Method,(e) Transactional Net Margin Method, and(f) Such other Method as may be prescribed by the

Board.From the above six methods the most appropriate

method shall be applied for determination of arm’slength price provided that, where more than one priceis determined as the most appropriate method, thearm’s-length price shall be taken to be the arithmeticmean of such prices or at the option of the assessee, aprice which may vary form such arithmetic mean notexceeding five per cent. To make it clear we may


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compute arm’s length price only under ComparableUncontrolled Price Method taking an imaginaryillustration.

Arm’s Length Price under comparable Uncon-trolled Price Method

1. First identify the price charged of paid forproperty transferred or services rendered in acomparable uncontrolled transaction.

2. Then adjust the price derived in first step abovefor differences, if any, which could affect the price inthe open market.

Illustration : X Inc, a French company, and Y Ltd.,an Indian company, are associated enterprises. Y Ltd.manufactures Mobile Phones and sells those to X Incand Z, a company of Bangladesh. During the year, YLtd. supplied 2,00,000 Mobile Phones to X Inc @Rs. 2,500 per unit and 50,000 units to Z @ of Rs. 5,000per unit. The transactions of Y Ltd. with X Inc and Zare comparable subject to the following considerations—(a) The freight and insurance paid by X Inc per unitis Rs.500, (b) Sales to Z are under a free warranty forone year whereas sales to X Inc are without any suchwarranty. The estimated cost of warranty is Rs. 200.(c) Since X Inc's order was huge in volume, quantitydiscount offered Rs. 200 per unit.

Computation of Arm’s Length Price of productsold to X Inc, a French company by Y Ltd.

Particulars Rs. Rs.

Price per unit in a Comparable Uncontrolled 5,000TransactionLess: Adjustment for Differences :a) Freight and Insurance Charges 500b) Estimated Warranty Costs 200c) Discount for Voluminous Purchase 200

900

Arm’s Length Price for Mobile Phone sold to X Inc. 4,100

Computation of Increase of Total Income of Y Ltd.Particulars Rs.

Arm’s length Price per unit 4,100Less : Price at which actually sold to X Inc. 2,500

Increase in Price per unit 1,600

No. of Units sold to X Inc. 2,00,000Therefore, increasing in Total Income of Y Ltd. 32,00,00,000(Rs.1,600 ¥ 200,000)

It is observed in the above illustration that thoughY Ltd sold to X Inc. and associated enterprise at lowerprice but arm's length price would be Rs. 4,100 perunit and Y Ltd's total income would be increased byRs.32 crore and tax on the increased amount would bepaid at appropriate rate in India which, in turn,controlled the erosion at tax revenue in India.

Guidance of Applying Arm’s Length PrincipleThe arm’s length principle is the internationally

accepted standards are adopted by many membercountries of the ‘Organization for EconomicCooperation and Development’ (OCED) as well asnon-member countries. The arm’s length principle isadopted by most of the tax jurisdictions. To complywith this internationally accepted principle, the taxauthority as well as tax paper will find a common basisof deal with related party transactions. This obviouslyreduces the incidence of transfer pricing adjustmentsand also will improve the resolution of transfer pricingdisputes. As a result of which double taxation will bereduced.

The application of arm’s length principle involvesthe identification of comparable situations ortransactions undertaken by the independent partiesagainst which the related party transaction is to bebenchmarked. This is commonly known as‘Comparability Analysis’. It analyses the similaritiesand differences in the conditions and characteristicsin the related party transactions with those of anindependent party transaction. For such price ormargin comparisons are meaningful. All economicallyrelevant characteristics of the situations should becompared and successfully similar to that :

(i) differences (if any) between the situations beingcompared can't materially affect the price or marginbeing compared, or

(ii) adjustment can be made to eliminate the effectof any such differences.

The ultimate objective of comparability analysis isa comprehensive assessment and identification of theareas and the extent of significant similarities anddifferences between the transactions and those to bebenchmarked against.

Legal Provisions in India with regard to Arm'sLength Price

Computation of income from internationaltransaction in India in relation to arm’s length price isgoverned by Income Tax Act, 1961, under Section 92.The Finance Act, 2001, introduced the Transfer PriceRegulation (TPR) in the Income Tax Act, 1961, byenacting New Section 92 to 92F in the Income-tax Act,1961, in substitution of the earlier Section 92. Therefore,TPR are effective from the Assessment year 2002-2003and obviously would be applicable to internationaltransaction w.e.f. 1st April 2001. The new provisionswill be applied for ‘Associated Enterprises’. As per newprovisions, where an Assessing Officer is in the opinionthat the transaction between Associated Enterprisesare not at arm’s length, he can compute profits from


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such transactions at arm’s length price. UnderSection 92 any income from international transactionshall be computed having regard to the arm’s lengthprice.

Meaning of International Transaction describedu/s 92B along with Sections 92, 92C, 92D and 92Ewhere ‘international transaction’ means a transactionbetween two or more associated enterprises either orboth of whom are non-residents, in the nature ofpurchase, sale or lease of tangible or intangibleproperties ... with a benefit, service or facility providedor to be provided to any one or more of suchenterprises. Maintenance and keeping of informationand document by persons entering into internationaltransaction is governed by Section 92D. According tothis section ‘every person who has entered into aninternational transaction shall keep and maintain suchinformation and document in respect thereof, as maybe prescribed … The Assessing Officer or theCommissioner (Appeals) may, in the course of anyproceedings under this Act, require any person whohas entered into an international transaction to furnishany information or document in respect thereof, as maybe prescribed under sub-section (1) within a period ofthirty days form the date of receipt of a notice issuedin this regard. ‘The accountant should furnish a reporton international transaction during the previous yearon or before the specified date in the prescribed fromduly verified and signed by such accountant u/s 92E.

Section 92F gives definition of certain terms‘‘accountant’’, ‘‘arm’s length price’’, ‘‘enterprise’’,‘‘specified date’’ and ‘‘transaction’’. According to thissection "arms length price" means a price which isapplied or proposed to be applied in a transactionbetween persons other that associated enterprises, inuncontrolled conditions.

Penalty in International Transaction

Penalty for failure to keep a maintain informationand document in respect of international transactionmay be imposed vide Section 271AA. Under thissection ‘‘If a person fails to keep and maintain any suchinformation and document as required by sub-section(1) or sub-section (2) of Section 92, the person shallpay, by way of penalty, a sum equal to two per cent ofthe value of each international transaction entered intoby such person’’. Under Section 271BA ‘If any personfails to furnish a report form an accountant as requiredby section 92E, the Assessing Officer may direct thatsuch person shall pay, by way of penalty, a sum of onhundred thousand rupees’. Section 271 G provides 'Ifany person who has entered into an international

transaction fails to furnish any such information ordocument as required by sub-section (3) of Section 92D, the Assessing Officer or the Commissioner(Appeals) may direct that such person shall pay, byway of penalty, a sum equal to 2 per cent of the valueof the international transaction of each such failure’.

The Government has kept sufficient legal penaltymeasures against wrong computation of income frominternational transaction having regard to arm’slength price.

Role of CMAs in Arm’s Length Pricing

In the present scenario of world economy theAccounting Profession is one of the most importantchallenging professions. The role of Cost andManagement Accountants (CMAs) has become moreimportant in corporate level, national level and alsointernational level. With expertise knowledge incosting, finance, taxation and management the CMAsperform a service of works to ensure the company's oremploy's financial security, handling financial mattersand, accordingly, helping to drive the overallmanagement and strategy of the concerned business.A CMA's responsibilities include planning costingsystem and methods, project management, internalaudit, cost audit, fund management, pricing planning,designing and implementing effective managementinformation and control system. On the basis of thosehe may guide the top management providingnecessary information to take right decision in righttime.

In our discussion so far we have observed that arm'slength pricing is a complicated one and breaking thelaw and rules exist in India regarding arm's lengthprice imposes high penalty. We know that there hasbeen increasing awareness among the businessentrepreneurs that the CMAs have vital contributionin the business houses to the attainment of businessobjectives. With expertise knowledge of tax andaccounting along with other branches of managementthe CMAs obviously may help the associatedenterprises in relation to international transactionsassociated with arm’s length price. The CMAs maycompute the arm’s length price using appropriatemethod and save the company from bearing thepenalty which may be imposed by the AssessingOfficer or Commissioner (Appeals). On the other handcomputing profit from international transactions atarm’s length price arrange for paying right amount ofincome tax to the Government. Now-a-days CMAscooperate with the companies by leading from the front—not sitting as backbench advisors. ❐


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Direct Taxes Code Bill, 2010 (the Code), whichwas to take effect from 1st April 2012, is nowofficially postponed for application from 1st

April 2013. Meanwhile many of the drastic provisionshave found their way in the proposals in the FinanceBill, 2012. There is considerable uncertainty as to theincidence of tax on trade and industry consequent onthese proposals, which have been prompted withoutany prior consultation with the profession or tradeand industry.

The only hope of the taxpayer is a report receivedfrom the all-party Standing Committee of Parliamenton Finance on the Code presided by a former FinanceMinister, which has undertaken an elaborate exerciseof discussing provisions in the Code with all the stake-holders and the reaction of the tax administration andhad come out with recommen-dations without anydissent. The report has been made available just beforethe Finance Bill was presented before the Parliamentwithout the Finance Minister having time to considerthese recommendations in respect of those proposalsin the Finance Bill, which have been lifted from theCode.

The suggestion generally made in the light of theprovisions of the Code are applicable even for thenew proposals in the Finance Bill, 2012, especially inmatters of amendments relating to internationaltaxation with over-anxiety on the part of revenue tonullify every argument for liability found untenablein the decision of the Supreme Court of VodafoneInternational Holdings B.V. v. Union of India (2012)341 ITR 1 (SC) and a number of other decisions of theCourts.

It is now not too late to consider the CommitteeReport on the Code in many of the proposal in theFinance Bill based on the Code before it becomes lawor even after, so that the confidence of the investors

Tax Titbits—Finance Bill, 2012— What Next?

S. RajaratnamMA, LLM, FCMAAdvocate & Tax ConsultantChennai

both domestic and foreign on the future of theeconomy is not lost and their after-tax return oninvestments can be ascertained with certainty. Thefavourable climate in recent years should not beendangered by some of the hasty amendments, whichare made worse by making them retrospective.

The Spectre of GAAR

Elaborate provisions under new Chapter X-A readwith Section 144BA known as General Anti-AvoidanceRule (GAAR) propose to empower the AssessingOfficer to ignore ‘‘imper-missible avoidancearrangement’’. He could ignore the corporate form ofthe parties to an arrangement, adopt accrual of incomeat a different place or at a different time. He couldinfer a residential status different from its place ofincorporation or the tax residency certificate from theparties to the Double Tax Avoidance Agreement. Theseand other inferences could be drawn not all based uponevidence, but on the sole ground, that tax is saved.Tax mitigation or saving based on tax costing is treatedby these provisions as tax avoidance on par with taxevasion.

GAAR can be invoked at the instance of theAssessing Officer with the approval of the Commi-ssioner after consultation with an Approving Bodyconsisting of three more Commissioners, so that itis a decision of the tax administration. The StandingCommittee had recommended that it should haveindependent members with technical qualifications.The provisions place the burden of proof on thetaxpayer to show that the transaction is not coveredby the anti-avoidance arrangement. The StandingCommittee requires that the onus should be squarelyplaced on the authorities.

The Finance Bill, 2012 and the Code Bill wouldrequire the domestic law to override the commitments


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under the Double Tax Avoidance Agreement. TheCommittee says that it will affect India’s credibility asa reliable treaty partner. These three aspects of theprovisions relating to anti-avoidance agreement arerequired to be reconsidered by the Finance Ministerin the light of a Committee report consistingof members from all parties including ruling partyand its allies, so that there can be no justificationwhatsoever for carrying the proposals in the FinanceBill without considering the recommen-dations of theCommittee on the Code on the same matters arrivedat after elaborate consultations.

Deeming provisions galore

The Finance Bill, 2012, provides for a number ofdeeming provisions which do not have the characterof income, but the amendments would still considerit as income. There may be justification for some ofthe deeming provisions in present provisions, butthe proposed provisions are violative of acceptedprinciples of law and are not in response to any feltneed, but had been hastily incorporated withoutconsidering either the justification therefor or theirpossible impact.

One of the deeming provisions is to treat theproceeds of sale of software as royalty contrary tothe accepted provision of law in indirect tax cases,that these are goods liable for sales-tax or importduty. It has been recognized as merely sale ofcopyrighted product and not assignment of copy-right in a number of decisions of the Courts even forincome-tax purposes. The proposed amendment toSection 9(1)(vi) would make a nullity of this lawaffecting a business in which India has a lead in theworld market.

The proposal for taxing the income from satellitecommunication to nullify the decision of the Courts isanother deeming provision.

Deeming of share premium of companies in whichpublic are not substantially interested being publicsector and listed companies with reference to fairmarket value of the shares is yet another deemingprovision, which will create problems of valuationapart from absolute lack of logic in taxing thecompany on an income on the value addition to theshares, when the shareholders will be allowed onlythe amount paid for by them in the event of their saleof their shares.

Yet another deeming provision will treat any

restructuring exercise among the group concernseven without any cash implications neutralisingthe precedents of the courts and the rulings of theAuthority for Advance Ruling in more than onecase.

Proposal for adoption of arm’s length price

In the light of the track record of precedents onapplication of arm’s length rule for internationaltransactions in both choice of the rule for valuationand comparables, its extension to domestic transac-tions with related parties is ill-considered. It willtake a heavy toll on the taxpayer in compliance withequally heavy burden on the department inadministering it.

Audit requirements

There has been an upward revision of the limitsfor compulsory maintenance of business andprofession under Section 44AA as well as tax auditrequirement under Section 44AB, besides makingthe presumptive taxation applicable for all busi-nesses under section 44AD with a limit now raisedto Rs. 1 crore. While these are generally welcome,an excellent opportunity is being missed for makingaudit more useful for ascertaining the correctincome.

The new requirements under company law forcosting records and cost audit in some cases formanufacturing industry have not been taken note ofnor are the Cost Accounting Standards issued by theInstitute of Cost and Management Accountants ofIndia. Even the suggestion for certification of stockby the Cost Accountant has been diluted by theStanding Committee by limiting it to cases wherecheck is required by the authorities by way of specialaudit and not to make it obligatory by an omnibusclause. But even this limited recognition in the Codedoes not find a place in the Finance Bill. Sections 44AAand 44AB will be more effective if the expertiseavailable from the costing profession is harnessed forincome-tax purposes.

Conclusion

Many of the proposals in the Finance Bill arerequired to be reviewed or deferred in the light of theStanding Committee Report, since the Parliamentcannot speak in two voices—one through StandingCommittee Report and the other through the FinanceBill. ❐


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It is a fact of Modern Economic Life, since the adventof Globalization and Liberalization from 1990sespecially, that most countries—Developed or

Developing—Socialist or Market-Oriented—have beenwooing investments from all over the world. Thusthere are Capital Exporting Countries and CapitalImporting Countries. The flow of investment isgenerally carried through and by Private Enterprises,even though investments by Government entities arenot unknown. It is natural for the investors to worryabout the safety of their investments and the certaintyof the repatriation of returns from such investmentsto their hands. The economic history of the world isreplete with instances of destruction of investmentsand even imprisonment of the investors by dictatorialregimes. The wave of nationalization of economicresources following extensive decolonization in the1950s and 60s put paid to the fortunes of many awestern investor. Thus, given the historical baggageand the institutional instability behind manygovernment policies it is natural for the investors towant to be assured of the safety and certainty of theirinvestments flows. Since investors at their individuallevel cannot force governments on their own, it hasfallen to the lot of governments everywhere to considernegotiating suitable terms with other countriesregarding investment promotion and protection. Witheven nations competing in the market place of theworld in the new age of Globalization, it has becomeessential to continue to attract and retain investments.As a corollary of this paradigm, governments wereforced to offer terms of protection to investments. Thusmany Bilateral Investment Promotion and ProtectionAgreements (BIPAs for short) were born. Today, thereare said to be around 3,000 such Agreements amongabout 120 countries of the world. India alone hasAgreements with nearly 82 Countries. It is a telling

Coming Home to Roost : Bilateral Investment

Agreements : Coping With Treaty Boomerangs

P. Ravindran

B.Sc., PGDM (Germany), M.L, (PhD)Advocate—Indirect Taxes & IPRs

admission of the state of affairs in the investment junglethat despite such a massive number of bilateralagreements, countries have shied away from agreeingon a multi-lateral framework on investment promotionand protection. The BIPAs have become entrenchedas a significant core of the International InvestmentLaw coupled with the International Convention on theSettlement of Investment Disputes (ICSID), UnitedNations Convention on International Trade Law(UNCITRAL), the World Bank Guidelines On TheTreatment of Foreign Direct Investment (1992) and theWTO-inspired Trade Related Investment Measures(TRIMs).

Many commentators have expressed surprise thatVodafone could actually serve (as reported in the press)a notice of dispute with the Government of India,under the Indo-Dutch Bilateral Investment Promotion& Protection Agreement (BIPA, for short) regardingthe tax liability case arising from their investment inIndia. It is not clear if it is a notice for negotiation orconciliation or arbitration. The commentators have saidvariously that Vodafone lacks privity with theGovernment of India and that such treaties are betweenNations which are not accessible to private companies.Vodafone tasted success in their case against theIncome Tax department in the Supreme Court and theGOI has sought to undo the effect of the judgement bybringing in a retrospective amendment in the tax lawto validate the tax demands and forestall suchjudgments. The power of the Parliament to impose atax with retrospective effect may not be entirelyunencumbered in a legal system based on the conceptsof Rule of law, Due process and Protection againstUnreasonableness. It is doubtful if a change in the lawcould annul a delivered and conclusive judgement ofthe highest court in the land without an express


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provision in the law for negating exactly such ajudgement and whether such a provision would in thisday and age be accepted by the Apex court withoutbeing seen as an interference with the DecisionalIndependence and Integrity of the Apex Judiciary asdistinct from its institutional independence whichalone is guaranteed by rights of tenure and removalonly by impeachment etc. The changed law would ofcourse apply to pending lis, even an appeal, but it maynot be able to overturn and re-open the judgement ofthe top court already given to a party. The Apex courthave held in some cases that they would not be averseto holding down a retrospective taxation if it wasexcessive or unreasonable. Interference with thedecisional independence of the Apex judiciary doesnot, so far, appear to have been mooted as a possibleground of invalidating a retrospective taxation. Thepurpose of this article is not to enter into this debatebut discuss the broad features of the BIPAs thatinvestors would claim under.

The Government of India has the executive powerto reach Treaties, Accords and Agreements with otherNations and Inter-Governmental Organizations. Acurious category of such an area in the realm of ForeignRelations is the agreements to promote and protectinvestments of foreign investors in India. Suchagreements are required by influential governmentson behalf of their investing nationals and companies.India has entered into many such treaties with manynations. The agreements would have variations fromBIPA to BIPA, though broad principles of protectionwill be common. Such agreements are inter-governmental accords but they provide for investorsof one nation investing in the other nation to claimprotection and compensation under the BIPA. ThusBIPAs grant privity to an individual as well as acompany. For example, the India-UK BIPA definesvide Article 1(b) that the ‘‘investment’’ protectedincludes ‘‘asset of every kind … established oracquired…including changes in the form of suchinvestment’’. Article 3(2) assures the investors ‘‘fairand equitable’’ treatment of their investments and thatthe investments ‘‘shall enjoy full protection andsecurity’’. MFN status and National treatment are alsoguaranteed in the BIPA. Article 6 dealing withcompensation for losses allows restitution or adequatecompensation, inter alia, to investments subjected torequisitioning or ‘‘destruction by ‘‘authorities andforces’’ of the state in which such investments were

made when such action was not caused by combat orby the ‘‘necessity of the situation’’. Article 9 of this BIPAallows an investor to settle their disputes with thegovernment by negotiation or failing which byInternational Conciliation under the procedures ofUNCITRAL and further failing which the investors canask for International arbitration. If no agreement forreferral to arbitration is feasible, either state party canrequest the President of the International Court ofJustice for the needful steps to bring about arbitrationin this regard.

Despite the significant number of the BIPAs signedby India, the treaties are not known to have beenjudicially tested. The Dhabol power project case endedin settlement rather than in arbitration from inter-stateintervention.

In this Article, I propose to examine the importantfeatures of Bilateral Investment Treaties (BITs) in thelight of the VODAFONE Tax imbroglio, the cancella-tion of 2G licenses of certain Foreign Corporations inIndia and the action of the foreign companies ininvoking treaty protection.

Bilsyrtsl Investment Treaties

These are Inter-Governmental Agreements betweenCapital Exporting and Importing States with a viewto promote and protect the investments of NationalInvestors investing in the State of the party to theInvestment Agreement. These Treaties have a numberof features demarcating the rights of investors and theobligations of the host-states in relation to the investors.Even though countries managed to add variations fromBIPA to BIPA, there are many common principlesfound in such Agreements which are described asfollows :

● The Scope of Application by defining Investorsand Investments promoted and protected.

● Admission of investments.● Standards of Treatment post-entry including

Investment Protection.● Protection against Expropriation and

Destruction of Investments.● Assurance of Fair and Equitable Treatment.● Dispute Settlement Process in the event of a

dispute between a Foreign Investor and the HostState.

Thus, it can be seen that these Treaties focusessentially upon the rights of the Investor and theObligations of the Host State, rather than on the


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Obligations of the Capital Exporting State or indeedthe Obligations of the Investor himself. Now let usexamine each of the above features :

1. Scope and Application : The InvestmentAgreements are normally Bilateral or Regional innature and there has been no Multi-Lateral Conventionin place. The Investors covered include NaturalPersons as well as Legal Entities, generally. ManyModern Agreements rely on Domestic Law to defineNatural Persons. When it comes to Legal Persons, theTreaties seem to use a combination of principles suchas Commercial Domicile, Nationality and the Seatand Control of such Entities by Nationals of the Partyetc. In the light of the increasing using of subsidiariesand foreign companies to manage and controlinvestments in Third States or even in the Home Stateof the original investor, the use of BITs as a legitimatetool in Investment Protection has become contro-versial. Treaty Shopping and abuse of readilyavailable rights are not uncommon. In the case ofTokio Tokeles Vs Ukraine, the International ArbitralTribunal held by majority that a Company owned byUkrainian Investors, but located in Poland, would usethe BITs between the two States to claim InvestmentProtection for its investments in Ukraine. Only theChairman of the Tribunal dissented from the majorityverdict.

2. Investment Profection—Thesalini Test : Asregards the Nature of Investments to be protected,many BITs feature liberal definitions considering aninvestment to be an asset having an economic value.The Treaties are seen to cover investments establishedor acquired in the Host Country. However, manyArbitral Tribunals have concluded that four conditionswould be essential in this regard. The Salini Test,[named after the Award given on 23rd July 2001 inthe case of Salini Construtorri S.p.A. and ItalsTradeS.p.A. Vs Morocco (Jurisdiction of ICSID caseNo.ARB/00/4-Italy / Morocco BIT)] lists the followingin this regard :

● A Contribution of Money or other assets ofeconomic value.

● A certain desirable duration.● An element of risk-taking in such investing.● Contribution to the Host State's Development.

However, such a restrictive, normative definitionis not widely shared and remains controversial, thoughapparently desirable. The Salini Test will be in theservice of India’s interests.

3. Admission or Est Ablishment of Investment : TheTreaties have followed different approaches to Normsof Admission of Investment for Promotion andProtection. The majority approach encourages a liberaladmission policy bestowing Most Favoured Nationstatus (MFN) and National Treatment. Market accessis also assured in certain Treaties.

4. Treatment and Profection : The main principlesin this regard are Most Favoured Nation Treatment,National Treatment with some restrictions. TheNorms include fair and equitable treatment andprotection against expropriation as well as security.The Treaties also guarantee repatriation of investmentproceeds and foreign exchange availability for thesame.

5. Expropriation : Expropriation refers todeprivation by the State of foreign rights to propertyor its enjoyment (Principles of Public InternationalLaw—Brownie). This can take several different formsand the process consists of both direct and indirectexpropriation. The Direct Expropriation can takethe form of confiscation, requisition or Nationalization,all with or without compensation or even withinadequate compensation. On the other hand, IndirectExpropriation can take several forms and is said tooccur when a State subjects foreign property totaxation, regulation or other action that is confiscatoryor that prevents, or unreasonably interferes with, orunduly delays the effective enjoyment of a foreignperson's property or its removal from the Stateterritory. Investment law jurists have classifiedpotential categories of Indirect Expropriationthat would be resulting in international concern asfollows:

● Forced sales of property.● Forced sales of shares.● Indigenization requirements.● State’s management control over the

investment.● Inducing others to physically take over the

property.● Failure to provide protection when there is

interference to the property of the foreigninvestor.

● Administrative Decisions which cancel licensesand permits essential for the foreign businessto function within the State. (foreign 2G licenseholders whose licenses were cancelled might beexpected claim under this ratio)


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● Exorbitant Taxation.

● Expulsion of the foreign investor contrary toInternational Law.

● Acts of harassment such as freezing of bankaccounts, promoting of strikes, lock outs andengineering labour shortages.

The above classification of Indirect Expropriationis not exhaustive. Recently other forms of Govern-ment action that can reduce the value of an investmenthave also been discussed as tantamount toExpropriation and often described as ‘RegulatoryTakings’. In International Law, a differentiation ismade between Lawful and Unlawful Expropriation.Lawful Expropriation involves an obligation to paycompensation, while Unlawful Expropriationengenders an obligation to pay damages for theviolation of legal obligations. There is always a stateof tension between Sovereign Rights to regulate inpublic interest relating to any investment issue andthe International Obligations flowing from suchBilateral Treaties.

6. Assurance of Fair and Equivatable Treatment :Many treaty arbitrations have centered on theguarantee of ‘‘fair and equitable’’ treatment to theinvestments of the investors. Internationally, the fairand equitable treatment principle presupposes thesatisfaction of the following components :

A. Respect for the legitimate expectations of theInvestors.

B. Duty of the Host State to act in a consistentmanner ... free from ambiguity and totallytransparently.

7. The Dispute Settlement : The BIPAS call for‘‘disputes’’ between the investor and the Host state tobe settled through negotiation first and then byInternational Conciliation. If all the recourses fail, theneither party to the dispute can call for Internationalarbitration. The mechanism is under the auspices ofInternational Convention for Settlement of InvestmentDisputes (ICSID).

The ICSID Tribunal in the case of AZURIX VARGENTINA while interpreting the scope of fullprotection of the investments under such treaties has

laid down that the ambit goes far beyond mere physicalprotection of the investments and calls for the Hoststate to assure the stability afforded by a secureinvestment environment. The Indian retrospectiveamendment in the tax law may have to face stiffchallenge under the BIPA if International trends areany indication.

So far, India has not had any arbitral threat inrelation to the BIPAs it has entered into. The onlydanger was from la'ffaire Enron which was settledwithout incurring arbitration.

Conclusion

While protection of investment has become aprerequisite and an inevitable incentive to thepromotion of International Investment needing aset of guarantees which should not be normallyresiled from, Emerging Economies like India fearthe consequential narrowing of their sovereignscope to regulate such investment activities orbaleful consequences of such investing, e.g., in theEnviron-mental Arena. Another case in point is therecent Supreme Court Judgment canceling some122 2G Spectrum Licenses, some of which are heldby foreign investors such as Norway Telecom andSistema of Russia. The affected investors havereportedly invoked protection of their Bilateral BITs.India finds itself painted into a corner by its ownBilateral Treaties. It has so far avoided going forInternational Arbitration regarding disputes under theBilateral Investment Treaties. The Bilateral Treatiesbristle with complex provisions and subtle variations.The starkness of the obligations is also clear.Additionally, India will have to contend with theincreasing rate of interpretations put out by ArbitralTribunals, especially in the developing area of IndirectExpropriation and the scope regarding ‘fair andequitable’ treatment. There may be lessons to learn forIndia from the inevitable heavy bill that the countrymay have to pay for the Bilateral Treaties and theintractable VODAFONE and 2G license cancellationTangles. The solution may lie in canvassing andpromoting a Multi-Lateral Framework on InvestmentPromotion and Protection which plays fair by all thesides. ❐


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Rule 9(1) of CENVAT Credit Rules, 2004,provides that the CENVAT credit shall be takenby the manufacturer or the provider of output

service or input service distributor, as the case maybe, on the basis of any of the following documents :

(a) an invoice;(b) a supplementary invoice;(c) a bill of entry;(d) a certificate issued by an appraiser of customs(e) a challan evidencing payment of service tax, by

the service recipient as the person liable to payservice tax;

(f) an invoice, a bill or challan issued by a providerof input service;

(g) an invoice, bill or challan issued by an inputservice distributor.

InvoiceRule 9(1) (a) provides that an invoice may be issued

by :(i) a manufacturer for clearance of —(I) inputs or capital goods from his factory or depot

or from the premises of the consignment agent of thesaid manufacturer or from any other premises fromwhere the goods are sold by or on behalf of the saidmanufacturer;

(II) Inputs or capital goods as such;(ii) an importer;(iii) an importer from his depot or from the premises

of the consignment agent of the said importer if thesaid depot or the premises, as the case may be, isregistered in terms of the provisions of Central ExciseRules, 2002;

(iv) a first stage dealer or a second stage dealer, asthe case may be, in terms of the provisions of CentralExcise Rules, 2002.

The credit of additional duty of customs leviedunder sub-section (5) of section 3 of the Customs TariffAct, 1975 (51 of 1975) shall not be allowed if the invoice

Documents for Availing Cenvat Credit—Some Issues

M. GovindarajanMA, BL, ACS, ACMA, MBA, PGDCAAccounts Officer, BSNL, ThanjavurTamil Nadu

or the supplementary invoice, as the case may be, bearsan indication to the effect that no credit of the saidadditional duty shall be admissible.

In ‘Flex Engineering Ltd., V. Commissioner ofCentral Excise, Noida-2008 (12) STR 94 (Tri. Del) it washeld that invoices issued by manufacturer to first andsecond hand dealers who further issued invoices toassessee, are alleged to be not proper documents. Asno error/omission/mis-construction has been allegedby the Revenue against assessee no demandsustainable.

In ‘Gail India Ltd., V. Commissioner of CentralExcise, Indore—2008 (11) STR 538 (Tri. Del) it was heldthat credit cannot be denied merely on ground thatinvoices are not authenticated if other particulars areavailable in the invoice and verified by authorities.

Conditions In Regard To Documents to AvailCredit

No CENVAT credit under shall be taken unless allthe particulars as prescribed under the Central ExciseRules, 2002, or the Service Tax Rules, 1994, as the casemay be, are contained in the said document.

If the said document does not contain all theparticulars but contains the details of duty or servicetax payable, description of the goods or taxable service,assessable value, Central Excise or Service Taxregistration number of the person issuing the invoice,as the case may be, name and address of the factory orwarehouse or premises of first or second stage dealersor provider of taxable service, and the DeputyCommissioner of Central Excise or the AssistantCommissioner of Central Excise, as the case may be, issatisfied that the goods or services covered by the saiddocument have been received and accounted for inthe books of the account of the receiver, he may allowthe CENVAT credit.

The CENVAT credit in respect of input or capitalgoods purchased from a first stage dealer or secondstage dealer shall be allowed only if such first stage


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dealer or second stage dealer, as the case may be, hasmaintained records indicating the fact that the inputor capital goods was supplied from the stock on whichduty was paid by the producer of such input or capitalgoods and only an amount of such duty on pro ratabasis has been indicated in the invoice issued by him.

The manufacturer of final products or the providerof output service shall maintain proper records for thereceipt, disposal, consumption and inventory of theinput and capital goods in which the relevantinformation regarding the value, duty paid, CENVATcredit taken and utilized, the person from whom theinput or capital goods have been procured is recordedand the burden of proof regarding the admissibility ofthe CENVAT credit shall lie upon the manufactureror provider of output service taking such credit.

The manufacturer of final products or the providerof output service shall maintain proper records for thereceipt and consumption of the input services in whichthe relevant information regarding the value, tax paid,CENVAT credit taken and utilized, the person fromwhom the input service has been procured is recordedand the burden of proof regarding the admissibility ofthe CENVAT credit shall lie upon the manufactureror provider of output service taking such credit.

The manufacturer of final products shall submitwithin ten days from the close of each month, to theSuperintendent of Central Excise, a monthly return inthe form specified, by notification, by the Board. Wherea manufacturer is availing exemption under anotification based on the value or quantity of clearancesin a financial year, he shall file a quarterly return inthe form specified, by notification, by the Board withinten days after the close of the quarter to which thereturn relates.

A first stage dealer or a second stage dealer, as thecase may be, shall submit within fifteen days from theclose of each quarter of a year, to the Superintendentof Central Excise, a return in the form specified, bynotification, by the Board. The first stage dealer orsecond stage dealer, as the case may be, shall submitthe said return electronically.

The provider of output service availing CENVATcredit shall submit a half yearly return in formspecified, by notification, by the Board to theSuperintendent of Central Excise, by the end of themonth following the particular quarter or half year.

The input service distributor shall furnish a halfyearly return in such form as may be specified, bynotification, by the Board, giving the details of creditreceived and distributed during the said half year, tothe jurisdictional Superintendent of Central Excise, notlater than the last day of the month following the halfyear period.

The provider of output service, availing CENVATcredit or the input service distributor, as the case maybe, may submit a revised return to correct a mistakeor omission within a period of sixty days from the dateof submission of the return, as the case may be.

No Declaration is Required to Avail CreditIn ‘DSM Anti-infectives India Limited V.

Commissioner of Central Excise, Jallandhar’—2011(264) ELT 267 (Tri. Del) the credit amounting toRs. 80,64,129/- of the Additional Customs Duty paidon the goods imported under 11 bills of entry has taken.There is no allegation that bills of entry are not in thename of the appellants or that the inputs in respect ofwhich MODVAT credit has been taken had not beendeclared in the modvat declaration under Rule 57G.The only objection of the Department is that on thebody of the bills of entry, no declaration regardingapplicant's intention to avail MODVAT credit had beenmade as per the provisions of Board’s Circular dated09.12.1986. However, the Tribunal found that there isno provision in the Central Excise Rules pertaining toMODVAT credit that for taking MODVAT credit inrespect of the imported goods, the assessee has to makea declaration on the bills of entry regarding hisintention to avail MODVAT credit. The department'scase is thus without the authority of law and as such,the impugned order denying the MODVAT credit andordering its recovery and imposing penalty on theappellant is not sustainable.

Supplementary InvoiceRule 9 (1)(b) provides that a supplementary invoice

may be issued by a manufacturer or importer of inputsor capital goods in terms of the provisions of CentralExcise Rules, 2002, from his factory or depot or fromthe premises of the consignment agent of the saidmanufacturer or importer or from any other premisesfrom where the goods are sold by, or on behalf of, thesaid manufacturer or importer, in case additionalamount of excise duties or additional duty leviableunder Section 3 of the Customs Tariff Act, has beenpaid, except where the additional amount of dutybecame recoverable from the manufacturer or importerof inputs or capital goods on account of any non-levyor short-levy by reason of fraud, collusion or anywillful misstatement or suppression of facts orcontravention of any provisions of the Excise Act, orof the Customs Act, 1962 (52 of 1962), or the rules madethereunder with intent to evade payment of duty.

Supplementary invoice shall also include challanor any other similar document evidencing payment ofadditional amount of additional duty leviable underSection 3 of the Customs Tariff Act.

Rule 9(1)(bb) provides that a supplementaryinvoice, bill or challan may be issued by a provider of


TAXATION

output service, in terms of the provisions of ServiceTax Rules, 1994, except where the additional amountof tax became recoverable from the provider of serviceon account of non-levy or non-payment or short-levyor short-payment by reason of fraud or collusion orwillful mis-statement or suppression of facts orcontravention of any of the provisions of the FinanceAct or of the rules made there under with the intent toevade payment of service tax.

In ‘Ultra Tech Cements Limited V. Commissionerof Central Excise, Nagpur’—2011 (22) STR 281 (Tri.Mum) the finding of the appellate authority is—‘Theissue involved in this case is whether the assessee iseligible to avail CENVAT credit on the supplementaryinvoices issued by the service providers to him. Theservice providers of the services to the notice appearedto have not paid the service tax on the account ofservices provided by them. This non-payment ofservice tax was subsequently noticed by thedepartment. On being pointed about non-payment ofservice tax the service providers discharged the taxliability and raised supplementary invoices on thenoticee. The credit availed on such supplementaryinvoices is proposed to be disallowed on the groundthat the service provider is not eligible to issue theseinvoices; and also even otherwise such supplementaryinvoices are not specified documents under sub rule1(f) read with sub rule 2 of Rule 9 of CENVAT CreditRules, 2004, and Rule 4(A) of Service Tax Rules, 1994,for availing CENVAT Credit. The Tribunal held thatif the procedural laws are not to be understood in amanner which will deny the rights assured to theparties. Once the assessee is entitled to take credit inrelation to the duty paid on the inputs or capital goodsand this right being not in dispute, merely becausesome infirmity observed in the document on whichthe credit sought to be availed, that cannot be ajustification for denying the credit.

Invoice to Indicate Payment of Service TaxIn ‘Idea Cellular Limited V. Commissioner of

Central Excise, Meerut—I’—2011 (22) 450 (Tri.Del) asregards the service tax credit of Rs. 5,214/- in respectof employee welfare expenses, the Tribunal found thatthe credit has been taken on the basis of the invoice ofM/s Chitra Pal Auto Private Limited and the invoiceindicates supply of audio visual equipment. Invoicedoes not indicate whether the invoice is for service foris for sale of goods. In view of this the Tribunal agreedwith the findings of Commissioner (Appeals) thatCENVAT credit is not availed on the basis of thisinvoice. As regards, the service of outdoor cateringservice i.e., supply of tea and snacks for the staff inrespect of which service tax denied is Rs. 4,163/- Ongoing through the invoices of the service provider it is

seen that the invoices do not indicate the payment ofany service tax and the invoices appear to be just forsupply of food and drinks. In view of this the Tribunalupheld the Commissioner (Appeals)’s findingregarding the denial of credit in respect of this item.

PhotocopiesThe documents on which CENVAT credit is taken

should be the original. If it is not original the samemay not be allowed by the Central Excise authorities.can Photocopies be utilized for availing and utilizingCENVAT credit? For this question we may refer tothe following case laws :

In ‘Commissioner of Central Excise, RaipurV. Vandana Energy & Steel Pvt. Ltd.,’—2008-TMI-2507-CESTAT-ND it was held that credit taken basedon photocopy is inadmissible. Insistence on documentevidencing payment of duty on inputs is not meretechnicality to be complied with for availing credit butmandatory to be followed.

In ‘Deccan Chromates Limited V. Commissioner ofCentral Excise, Hyderabad’—2011 (22) STR 440 (Tri.Bang) the CENVAT credit disallowed and demandedrelates to credit taken on photocopies of duty payingdocuments as well as service tax paid on freightincurred for outward transportation. The appellantsubmitted that he is in possession of originaldocuments which could not be produced before theadjudicating authority and if an opportunity isproduced before the adjudicating authority and if anopportunity is provided the appellant will be in aposition to submit the original documents to justifythe entitlement of CENVAT credit. The Tribunal setaside the impugned order and remanded the matterto the Commissioner for fresh adjudication.

In ‘Commissioner of Central Excise, Kolhapur V.Shah Precicast (P) Limited’—2011 (269) ELT 407 (Tri.Mum) the credit was denied based on provisions ofRule 9(1) © of CENVAT Credit Rules, 2004. Theassessee's submission was that original copy was notavailable and police complaint was lodged. Theassessee made efforts to obtain certified copy fromCommissionerate which was denied. The Tribunal heldthat there is no dispute that goods suffered duty andused in manufacture. Substantial benefit is notdeniable on basis of mere technical violation. Theassessee is entitled to CENVAT credit on the strengthof Xerox copy.

Thus it can be inferred that CENVAT credit couldnot be availed on photocopies of documents. It isallowed only on circumstances where originaldocuments could not be produced before the CentralExcise Authorities which is beyond the control of theassessee.


TAXATION

Procedural LapseIn some cases the CENVAT credit may be

disallowed on procedure lapse. In ‘Commissioner ofCentral Excise, Bangalore—III V. Saturn Industries’—2011 (267) ELT 609 (Kar) the Court held that the benefitwas denied only on the ground of non-compliance withthe rules and coupled with the fact that the deliverynotes is not the satisfactory document. The Board'sCircular No. 441/7/99-CX, dated 23.2.99 has clarifiedthat mere not following the procedure cannot form thebasis for rejecting the assessee’s claim to availMODVAT credit especially when sufficient evidenceabout the duty payment on inputs and usage in themanufacture of excisable goods were available onrecords. The question of law is answered in favor ofthe assessee and against the revenue.

TR-6 ChallanIn ‘Commissioner of Central Excise, Meerut—II V.

Hindustan Coco Cola Beverages (P) Limited’—2011(22) STR 292 (Tri. Del) the respondents availedCENVAT credit of service tax paid during the periodfrom April 2005 to March 2006 based on the TR-6challans under which the respondents themselves paidservice tax as deemed service provider. The OriginalAuthority has held that prior to 16.6.2005 TR-6 challansare not prescribed documents for taking CENVATcredit. The Commissioner (Appeals) set aside theorder of the original authority. The Tribunal held thatgenerally the person who pays the service tax isdifferent from the person who takes the CENVATcredit and therefore credit is being taken based on suchthird party documents. In the present case TR-6 challanhas been used for paying service tax by the respondentsthemselves. There is no dispute about the payment ofservice tax by the respondents and that as recipientsthey are entitled to the credit. There can be no difficultyfor the department in verifying the correctness of thecredit taken as the deemed service provider and theperson who has taken the credit are one and the sameperson.

In ‘Cosmos Casting India Limited V. Commissionerof Central Excise, Raipur’—2011 (23) STR 144 (Tri. Del)the tribunal held that the only question is that TR-6was not specified document for the purpose of takingCENVAT credit. When there is no dispute about therealization of the demand by the exchequer thetechnicalities shall not be a bar to deny credit to theassessee.

Further, the rule provides that a challan evidencingpayment of service tax is considered as a validdocument. Thus TR-6 challan may be utilized as adocument for the purposes of CENVAT credit.

Credit Available Only to Recipient of ServiceIn ‘Khaitan Electricals Limited V. Commissioner of

Central Excise, Kolkata VI’—2011 (21) STR 184 (Tri.Kol) credit was taken based on document on servicereceived by depot. The unit of Jaipur was not registeredas input service distributor and service tax credit isnot available to manufacturing unit at Kolkata,according to the department. The Tribunal held thatthe appellants who availed the credit are not therecipient of the taxable service, the taxable service isreceived by the depot and depot is not registered asan input service distributor. Therefore, the appellantsare not entitled for credit at Kolkata unit which was inrespect of service received by the depot at Jaipur.

CENVAT Credit to GTA ServicesIn ‘Commissioner of Central Excise, Jaipur II V.

Rajasthan Spinning and Weaving Mills Limited’—2011(22) STR 52 (Tri. Del) the Department held that theassessee could not use the CENVAT credit account forpaying service tax on GTA services. The Tribunal heldthat the credit has been taken by the respondents inrespect of the inputs and input service under Rule 3 ofCENVAT Credit Rules, 2004. It is not disputed thatthe respondents were required to pay service tax onGTA services. In the case of GTA, the person requiredto pay service tax may be the supplier of the inputs orthe recipient of input or the service providerthemselves. If the supplier of inputs paid freight andconsequently paid service tax, based on the documentsissued by the said supplier of inputs, the credit on theinputs as well as on the service tax paid would havebeen available to the respondents as recipients. Therecipient has paid the service tax as deemed serviceprovider in terms of Section 68 of the Act were alsothe recipients of GTA services. As both service providerof services and recipient of services, dual role has beenplayed by the respondents and therefore thedocuments based on which the respondents have takencredit has been held to be valid. If the recipients areheld to be service providers, then, in the presentcircumstances they are providers of self service tothemselves. Therefore, the objection of the departmentabout the documents based on which the credit hasbeen taken by the recipients are not valid.

Documents not in the name of AssesseeIn ‘SGS India Private Limited V. Commissioner of

Central Excise, Thane—I’—2011 (270) ELT 115 (Tri.Mumbai) one of the grounds for denying CENVATcredit is that the appellants have availed CENVATcredit on the basis of various bills of entry wherein thename of the importer given as M/s SGS India PrivateLimited, Usha House, 210 Okhla Industrial Estate,Phase III, New Delhi indicating that the inputs coveredby the said Bills of Entry were received at the assessee’sother unit. The Department was of the view that theassessee was not entitled to take the credit on the


TAXATION

strength of the Bills of Entry unless and until its entriesare in the name of the person who is taking the credit.The Tribunal held that the input covered in the Bills ofEntry have been received in the factory of the appellant.The order of denial of credit on the ground of the billsof entry are not in the name of the appellants is notsustainable.

In ‘Millipore India Private Limited V. Commi-ssioner of Central Excise, Bangalore’—2011 (21) STR582 (Tri. Bang) the input service tax credit taken bythe appellant has been denied on the sole ground thatthe invoices against which credit were availed had notbeen addressed to the appellant's manufacturing unitand the procedure for distribution of credit asprescribed in Rule 7 of CENVAT Credit Rules. TheTribunal held that the Revenue has no case that theassessee has taken credit in excess of what was shownon the invoice or that the assessee was engagedexclusively in the manufacture of exempted goods orproduction of exempted service. The appellant hasmade out a prima facie case against the impugneddemand and penalties.

Tampering of DocumentsIn ‘Rajalakshmi Paper Mills Limited V. Commi-

ssioner of Central Excise, Madurai’—2012 (25) STR(Tri. Chennai) the appellants have been denied inputcredit and capital goods credit on the ground that theimpugned goods which were consigned to Unit I ofthe appellants were utilized in Unit II of the appellants

located in the same premises after the appellantsthemselves altering the excise code number on therelevant invoices and also writing Unit II on the saidinvoices. The Tribunal held that the denial of credit isprimarily on the basis of the allegation of tamperingwith the duty paying documents and not on the groundof either non-receipt of the impugned goods in thefactory of the appellants nor on the basis of non-utilization of the same. In view of the fact that theassessee is same even though two separate regionshave been taken for the two units stated to be locatedin the same premises, and that there is no allegation ofeither non-receipt or non-utilization of the impugnedduty-paid good, the Tribunal is of the view that asregards the eligibility to CENVAT credit, a lenient viewshould be taken and the appellant should be allowedto avail the impugned credit.

Conclusion

The provisions of Rule 9 give a clear picture ondocuments on which CENVAT credit may be takenand utilized. The original documents are required forthis purpose. Since the documents are to be submittedto Adjudicating authorities or to be produced at thetime of audit conducted by the Audit wing of CentralExcise department.

The documents on which the credit is taken areto contain the full details as required under theprovisions of Central Excise or Service tax—as the casemay be. ❐

The Management Accountant — July, 2012 will be a special issue on

GREEN AUDIT

Articles, views and opinions on the topic are solicited from readers along with their passportsize photographs to make it a special issue to read and preserve. Those interested may send intheir write-ups by e-mail to [email protected], followed by hard copy to the JournalDepartment, 12, Sudder Street, Kolkata-700 016 to reach by 8th June, 2012.

The Management Accountant — June, 2012 will be a special issue on

‘FDI IN MULTI-BRAND RETAIL’

Articles, views and opinions on the topic are solicited from readers along with their passportsize photographs to make it a special issue to read and preserve. Those interested may send intheir write-ups by e-mail to [email protected], followed by hard copy to the JournalDepartment, 12, Sudder Street, Kolkata-700 016 to reach by 8th May, 2012.


Salient Features and Observations on CARR

(Pharmaceutical Industry), 2011

V. R. Kedia

Practising Cost Accountant, Mumbai

Cost Accounting Records (PharmaceuticalIndustry) Rules, 2011, are in supersession ofCost Accounting Records (Bulk Drugs) Rules,

1974, and Cost Accounting Records (Formulation)Rules, 1988. So, the new Rules have combinedthe Records Rules of Bulk Drugs & FormulationIndustry.

2. Rule 2 — Definitions & Interpretations—SubRule(1) — Definition of ‘Pharmaceutical activities’ hasbeen linked to DPCO, 1995, as well as Chapter 29 & 30of the Central Excise Tariff Act, 1985, and furtherincludes intermediate products and allied productsthereof.

Chapter 29 covers various types of organicchemicals, in addition to Bulk Drugs. Organic &Inorganic Chemicals under Chapters 28, 29, 32 and 39have also now been covered under cost audit orderdated 24/01/12 and, consequently, chemicals—whether for Bulk Drugs or otherwise—are also subjectto automatic Cost Audit under these Rules, in additionto the existing Bulk Drugs.

Sub Rule (o)—The term 'turnover' shall includeturnover from job-work or loan license operations,but exclude Excise Duty, ST, VAT & other taxes &duties (as per CAB general Circular No.68/2011 dated30.11.2011—Para (c)) and also includes ExportIncentives.

3. Rule 3 —Application—Earlier exemption fromthe rules was given to SSI Industry with valuation limitof Plant & Machinery as per IDR Act and turnoverlimit of Rs. 10 crores, which have been deleted now.

Now the applicability of the Rules is based on thefollowing criteria :

● Net Worth exceeding Rs. 5 crores, or● Turnover exceeding Rs. 20 crores, or● Equity or debt securities listed or in the process

of listing on any stock exchange in or outsideIndia.

4. Rule 4 —Maintenance of Records—These Rules

shall be applicable for the financial year commencingon or after the date of this Notification (i.e. 7.12.2011).In effect they will be applicable for most of thecompanies for the financial year 2012-13.

Rule 4(b)—Those companies which are comingunder Records Rules for the first time shallpreserve cost records for 8 financial years, commencingfrom the period starting from the year to which theseRules have become applicable to them (CAB GeneralCircular No. 68/2011 dated 30.11.2011—Para b & FAQ4, Point 4.4 of ICWAI).

5. Rules 5, 6 & 7—Compliance Report—If thecompany is subject to Cost Audit for 100% of itsactivity, or in addition having only trading/serviceactivities, then the requirement of the ComplianceReport is not applicable for such companies. For othercompanies, which are engaged in manufacturing otherproducts, not subject to Cost Audit (in addition toPharmaceutical products which are subject to CostAudit)—in such situations the company is subject tothe requirement of the Compliance Report, as per GSR429 dated 3.6.2011 [The Companies (Cost AccountingRecords) Rules, 2011] or any of the other 5 CostAccounting Records Rules for Regulated Industries.

6. General—In the earlier Rules, Para-wise require-ments of various items, such as materials, salary &wages, service department expenses ... up to technicalinformation were mentioned as per Schedule I/Schedule III, which have been deleted.

The following observations and suggestions aremade keeping in view Note 7 given in the end :

7. Proforma A—Part I—Quantitative Information—After Sr.6, one more Item may be added for 'quantitytransferred to other units and sold to outside parties',if necessary.

Part II Cost Information—After Sr. 13, followingitems may be added, if found necessary—

Sr. 14. Less : Cost of transferred to other units.Sr. 15. Less : Cost of sales to outside parties.Sr. 16. Net cost for self-consumption.

Dipti Kejriwal

Practising Cost Accountant, Mumbai

COSTING


Clarification for—Srs.14 & 15: Quantity should bevalued at cost and not at transfer price or sale price.Difference in value should be transferred to ProfitReconciliation Statement.

8. Proforma B—This proforma is to be filled up forquantitative and technical information only. Thisformat has been rationalized & simplified. Sr.1 to 4are for factory as a whole and not productwise.

Sr.2(c)—‘Under loan licence’, means company hasmanufactured for others under Loan License scheme.

Information for Sr.5 shall be given separately foreach intermediate or Bulk Drug.

Material consumed & process chemicals—Item-wise details may be separately shown covering 80%in value.

9. Proforma B-1—This proforma is to be filled upfor value corresponding to quantitative informationfilled up in Proforma B. Information shall be givenseparately for each intermediate or Bulk Drug.

Part I—Quantitative Information—Sr.1—In case ofnumerous batches with different batch sizes, rangecould be given (e.g 1 to 4MT).

Part II—Cost Information Srs. 1 & 2—Materialconsumed & process chemicals—Item-wise detailsmay be separately shown covering 80% in value.

Sr.5—Direct expenses may also include outside job-work charges paid.

Sr.10—Technical Know-how Fee may also includeRoyalty.

Sr.12—Other Production Overheads should beclassified according to the definition providedin the Cost Accounting Standards. Accordingly,Administration overheads for production wouldalready be considered as a part of productionoverheads and the same would be in line with CAS-4Certificate for Excise Purpose.

Sr. 14—Opening/closing stock in process shouldalso include unpacked stock.

Cost of Production Statement shown in thisProforma is for naked production. The Cost of Packinghas been considered under Proforma C.

10. Proforma C—Information shall be givenseparately for each intermediate or Bulk Drug. Evenwithin the same intermediate or Bulk Drug, separatestatements should be prepared for export sale, domesticsale, sale at DPCO price, and sale to related parties.

Part I, Sr.2 & Part II, Sr.4—Opening & closing stockof unpacked is normally grouped under stock in-process. However, under the present Rules, the Stockhas been shown under three distinct stages—Stock-in-process, Unpacked Stock and Packed Stock.

11. Proforma D—This is newly introduced Proformafor Bulk Drugs or Formulations got manufactured fromoutside (on job charges basis). Information shall be givenseparately for each intermediate, Bulk Drug orFormulation. Further, separate Proforma should beprepared for each Job Manufacturer.

Part I Quantitative information—as per Srs. 1 to 8should be as per records/status with the jobmanufacturer.

Sr. 4—Material consumed means quantity issuedto the shop floor for manufacture.

Part II, Sr.1—It should be corresponding to Part I,Sr. 4 in value for quantity issued to shop floor.

Sr.2—Processing charges—It should be treated asprocessing charges payable corresponding to thequantity received from the processor as per Sr.9.

Sr.7—Packing material cost—It should becorresponding to Part I, Sr. 4, in value for quantityissued to shop floor.

Similar to Proforma C for Bulk Drug & Proforma Gfor Formulation for Statement showing Cost of Sales,Realisation & Margin, there is no prescribed statementfor quantity sold on job charges basis.

Therefore, it is suggested to carry forward thisstatement to Proforma C & Proforma G for Bulk Drug& Formulation, respectively.

12. Proforma E—Additional column should beprovided for Bulk Drugs activity, Formulation activityand Interest.

The line items provided in this Proforma areindicative and has to be modified according tonecessity and accounting structure of the Company.Srs. 36 to 40 have shown certain items which areindicative to show the flow of cost allocation andapportionment and the same may be restructuredaccording to the secondary allocation process requiredfor the company concerned. Separate statement forapportionment of cost of various service cost centersto production cost centers may be prepared—keepingin mind the structure provided in the Proforma.

13. Proforma F—There seems to be drafting errorin this Proforma from columns 11 to 14. It should havebeen packing cost centers (separately for tablet,capsule, syrup etc. — Note 15 below Proforma I).

14. Proforma G—This statement should beseparately prepared for each type & size of pack ofFormulation and, again, separately for ownmanufactured, got manufactured from outside parties(on P to P or LL) and manufactured for others underjob-work arrangement in the factory.

Sr. 5—Batch size—It should be shown in the range,if there is varying batch size for different batches.

COSTING


COSTING

Srs. B & D—Primary packing cost & Srs. J & K—Secondary packing cost—As per normal practice inPharma Industry, they cannot be separately shown.

Sr. D—Packing cost—It should be read as primarypacking conversion cost.

Sr. G—Opening/Closing WIP should be consideredbefore Sr. D.

Sr. K—It should be read as secondary packingconversion cost.

Sr. S-1—It should be read as selling & distributioncost.

Sr. S-2—Sample cost should be included undersales promotion expenses.

Sr. V—It is not understood as to how ‘otherexpenses or income not included in cost' can be shownin product-wise cost statement. It should be consideredas reconciliation item.

15. Proforma H—It is a newly introduced Proforma.Fixed Asset Schedule should be restructured to fill upthis Proforma.

16. Notes—Vide note Nos. 7 & 11, Proforma can bemodified.

Note 8—As per this note, expenses incurred forgetting accreditation from Overseas RegulatoryAuthority shall be charged to products exported onscientific & equitable basis.

Note 16—The impact per unit of abnormal loss hasto be shown separately as per this note. However, asper Generally Accepted Cost Accounting Principles,the cost of abnormal loss is omitted from cost records.So there is no question of calculating and indicatingits impact per unit.

ConclusionIn view of Notes 7 & 11, liberty is given to company

to modify the Proforma. Therefore, it is suggested thatcompany can continue with the existing workingpapers and other formats for cost records which are invogue and can continue to use existing computerprogramme or excel software, based on the existingCost Accounting Records Rules for Bulk Drugs &Formulations. Anyway, from the existing cost records,Para 5—Abridge cost statement (for each productgroup) can be prepared, which is, ultimately, to besubmitted to the Government along with e-filed CostAudit Report. ❐

FOR ATTENTION OF MEMBERS

The fees payable by the members of the Institute have been revised by the Council with effect from 1st April,2012 from the financial year 2012-2013 onwards as follows :

Category of fees Amount Payable

Associate Entrance Fee Rs. 1,000/-

Associate Membership Fee Rs. 800/- p.a.

Fellow Entrance Fee Rs. 1,000/-

Fellow Membership Fee Rs. 1,500/- p.a.

Certificate of Practice Fee Rs. 1,000/- p.a.

The fees payable by the retired members entitled to pay at reduced rate in pursuance of Regulation 7 (4) ofthe Cost and Works Accountants Regulations, 1959 with effect from 1st April, 2012 from the financial year 2012-2013 onwards shall be as follows :

Category of fees Amount (Rs.)

Associate Membership Fee Rs. 200/- p.a.

Fellow Membership Fee Rs. 375/- p.a.


BUDGET ANALYSIS

Budget proposal of any financial year is aprojected statement of sources and applicationsof fund of the government for that year.

One would get a different picture of this year’sbudget, if it is analysed in the way, financial analystsanalyse projected statement of income and expenditureof a company. In order to make the projections realistic,financial analysts do trend analyses and varianceanalyses of historical data to finalize basic assumptionsunderlying the future projections so that the projectionsbecome realistic and achievable.

Adopting the same method, trend analyses of thepast data (2006-07 to 2011-12) shows that the Centre’snet tax revenue (NTR) as percentage of GDP was 10%in 2006-07 which increased to 12% in 2011-12 (meanvalue 11%). Non-tax revenue as percentage of GDP,which was 3% in 2006-07 decreased to 2.4% in 2011-12(mean value 2.70%). Mean value of total revenuereceipt (TRR) during the same period was 13.50% ofGDP, while the mean value of total capital receipt(TCR) during the period was 7.50% of GDP. Mean ratioof TRR and TCR during the reference period was 2.20indicating TCR was about 45% of TRR. Though debtreceipt (DR) as percentage of TCR decreased from 96%(2006-07) to 95% (2011-12), mean value was about 96%.However, DR as percentage of total receipt (TR)increased from 25% (2006-07) to 40% in 2011-12(meanvalue 32%). Compared with GDP, DR increased from4% to 10% during the reference period. This shows thatDR is not only the main source of capital receipt (longterm sources of fund) but also it indicates centre’sincreasing reliance on outside debt. Interest paymentas percentage of revenue expenditure remained atabout 24% from 2008-09 to 2011-12. The same aspercentage of GDP remained constant at about 5%.Such decline does not indicate favourable situation ifone analyses with reference to higher incrementalgrowth rate of revenue expenditure compared to thatof interest payment. Both these features are clearsymptoms of reducing debt servicing capacity (DSC)and Interest servicing capacity (ISC).

Is the Union Budget of India (2012-2013) Realistic

and Achievable?

Dr. Dilip Kumar DattaM. Tech, MBA (Fin), Ph.D., Director &CEO, Sayantan Consultants (P) Ltd.Kolkata

Looking at the behaviour of revenue expenditure(RE), it is observed that during the reference period,RE as percentage of GDP remained at about 22%.

On the other hand, capital expenditure (CE) aspercentage of GDP increased to 3% from 2%, with amean of 2.5%.

Trend analysis of revenue deficit (RD) and fiscaldeficit (FD) showed that both these importantindicators of economy increased with reference toGDP; the former increased to 7.6% from 3% of GDP,while the later increased from 4% to 10%. Interestingly,while GDP growth rate (average y-o-y) was about 7%,the same for total expenditure (TE) was about 20%.This is another alarming situation. Rate of increase inincome is less than rate of increase in total expenditure.This leads to more dependence on outside borrowingswhich might impair sovereignty of a country. This,coupled with declining DSC and ISC, are deterringfactors for sustainable growth. That India is leading tosuch a situation is clear from the deteriorating DSCand ISC. Moreover, DSC and ISC shown in the unionbudget appear to have not been calculated in line withthe method adopted by financial analysts. DSC of acountry should be an indicator showing how much ofthe total borrowings and other liabilities a country canpay on demand from TRR. ISC should indicate howmuch of interest payment can be made from interestcollected. DSC should be collected as a ratio betweenTRR and borrowings and other liabilities of that year.ISC is a ratio between amount of interest receipt,dividends and profits to amount of interest paymentsand prepayment premiums in a year. On this basis,DSC decreased from 3.05 to 1.96 and ISC decreasedfrom 0.34 to 0.25 during the reference period.

Now, let us see what is revealed from varianceanalysis. Variance analysis for the reference periodshows interesting features. While receipts showedfavourable variance, expenditures showed adversevariance. Both actual receipts and expenditures weremore by about 5%. Gap between long term sources of


BUDGET ANALYSIS

(RD). This RD, in the language of a financial analyst,is deficit in net working capital (NWC) of an entity.More will be the gap, more would be the deficit infunds required to run the government.

Now, let us look at the Centre’s efficiency ofcollecting interest due on loan given by it. An indexmay be found out to determine the efficiency of thegovernment for this purpose. Amount of interestreceived during a particular year as a percentage ofmean value of total loan outstanding at the beginningand at the end of that year may be considered asefficiency index for interest collection (EIIC). On thisbasis, it is observed that EIIC which was 0.08 during2007-08, declined to 0.03 during 2011-12 showing anunfavourable situation.

Now, let us see what should have been the realisticpicture of the Union Budget (2012-13) on the basis ofunderlying assumptions arising from the results of thetrend and variance analyses given as above. Table 1gives a comparative picture.

It would be revealed from Table 1 that componentsof Union Budget appear to be not realistic andachievable. The main difference lies in the revenuedeficit, fiscal deficit and primary deficit. Amount ofrevenue deficit, fiscal deficit and primary deficit wouldbe much more than projected in the Union Budget.These deficits are likely to be met by borrowing morefrom the markets and by other means, or by curtailingthe expenditure in important sectors, namely,education, health, infrastructure, agriculture etc. Sucha step is not only against the public interest but alsoreduces both debt and interest servicing capacity ofthe government.

Central government should thus pay muchattention to such an important issue while preparingthe budget. ❐

Table 1 : A comparative picture of the UnionBudget (2012-13)

(Rs. in crores)Sl. Components Realistic estimateAmount shownNo. on the basis of in the

trend and Union Budgetvariance analyses

a. Net tax revenue 614633 771071(11% of GDP)

b. Non-tax revenue 150864 164614(2.70% of GDP)

c. Total revenue receipt (TRR) 765497 935685(a + b)

d. Capital receipt (CR) 344474 555241

(45% of TRR)

e. Total receipt = 1109971+55499 1490925[(c+d) + 5% of (c+d)] =1165469

f. Revenue expenditure (RE) 1229265 1286109(22% of GDP)

g. Capital expenditure (CE) 139689 204816(2.5% of GDP)

h. Total expenditure = 1368954+68448 1490925[(f+g) + 5% of (f+g)] =1437402

i. Total interest payment 295024 319759(24% of revenue expenditure)

j. Revenue deficit (c – f) 463768 350424k. Fiscal deficit [(h-(c+Loan 653330 513590

recoveries+Other receipts)]

l. Primary deficit ( k – i) 358306 193831

(Note: On the basis of past trend, GDP will grow at the rate of 7% during2012-13. This means GDP would be Rs. 5587569 crores during thefinancial year 2012-13. Further, in absence of actual data for 2011-12,revised estimate has been considered as nearer to actuals.)Source: http:/indianbudget.nic.in

fund (LTS) and long term application of fund (LTA)widened leading to increasing trend in revenue deficit

Humble Appeal

We invite quality articles from members in industry having relevance to

Cost & Management Accountancy/Finance/Management/Taxation for publication

in the journal for the benefit of our esteemed readers.

Articles, accompanied by coloured photographs of the author(s) can be sent to

[email protected]


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Introduction

Today’s environment-conscious industrial worldputs much more efforts on eco-friendly projectsand concentrates more on production of bio-

degradable products. Jute is one of those products,which is purely of bio-degradable and eco-friendly innature and hence, it has found many uses in recenttimes. Jute is one of the largely cultivated crops in India,and it occupies an important position in Indianagriculture. Jute is popularly known as the ‘GoldenFiber’ for its numerous uses. Traditionally, jute ismainly used as packing materials in the manufacturingindustries like sugar, cement, food grain etc., but withtime many diversified jute products have come intouse and now jute is being increasingly used formanufacturing of many fashionable householdproducts of daily use like mat, bag, fabric, carpet, cloth,curtain etc. Indian Jute Industry is the largest producerof raw jute and jute products in the world. India holdsthe second largest position internationally as regardsexport of jute goods. Jute plays a very important rolein Indian economy. India’s textile industry is mainlydependent on jute. Apart from having huge exportpotential, the jute companies meet domestic needs aswell. The government of India has taken many majorsupportive steps for the protection and growth of thisindustry. It has set up different authorities andlegislative councils for successfully maintainingvarious acts and schemes to protect jute industry fromlosing its existing market. To name a few, the JuteManufactures Development Council (JMDC), CentreResearch Institute for Jute and Allied Fabrics, IndianJute Industries Research Association (IJIRA), IndianJute Mills Association (IJMA) etc. are such efforts madeby the government. The Indian jute sector comprisesof two parts, namely, organized sector andunorganized sector. Organized sector dominates thisindustry in India by contributing maximum in termsof employment generation and production of juteproducts. It has an average annual production of 1.6million metric ton of jute products with 78 jute mills

Sustainable Growth in Indian Jute Industry—An

Exploratory Study

Ashim PaulM.Com., SET, Pursuing Ph.D.Research Scholar, Department ofCommerce, University of Calcutta

and creates employment to near about 4 millionfamilies, whereas the informal or unorganized sectorhas 700 registered units and creates employment to63000 families [Source: http://www.jute.com]. Datacollected from the International Jute Study Group,available at www.jute .org suggest that India takes amajor share in World's jute production by producing1.95 metric ton jute per hectare and occupying anaverage land area of 8,36,000 hectares annually. At thesame time it generates an export quantity of 2, 02,000metric ton jute goods, valuing US$ 246 million eachyear.

Therefore, this paper aims at examining the growthand sustainability of Indian jute industry. Section 2 ofthe paper highlights the present scenario of Indian juteindustry in terms of its production, jute producingstates, number of jute mills etc. Section 3 representsthe future scope and opportunities of jute industry inIndia and examines future sustainability of Indianjute industry. Section 4 discusses the recentdevelopments and regulative measures in theconcerned industry in India and the paper ends withconclusions in Section 5.

Present Scenario of Indian jute IndustryThis section has been compartmentalized into two

parts : (a) discusses the state- wise distribution of jutemills in India and (b) shows state-wise raw juteproduction in India.

(a) State-wise distribution of jute millsThe major jute producing states in India are West

Bengal, Assam, Bihar, Orissa and Andhra Pradesh, butthe Indian jute industry is mainly dependent on WestBengal wherein this industry had begun in 1854 withthe setting up of the jute mill by George Auckland atRishra in Hooghly district. As per the National JuteBoard, India records, there are 80 jute mills in India atpresent, out of which 62 belong to West Bengal, 7belong to Andhra Pradesh, 3 belong to Bihar and UttarPradesh each, and Assam, Orissa, Madhya Pradeshand Tripura have 1 jute mill each. But the crucial fact


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is that, out of these 80 jute mills of India, 11 jute millsare not working, and 31 jute mills are referred as sickby the Board for Industrial and Financial Reconstruc-tion of India (BIFR) [Source: Jute Commissioner,Ministry of Textiles, Government of India]. Thefollowing exhibit (Exhibit 1) will represent the state-wise distribution of jute mills in India more clearly :

Exhibit 1Distribution of Jute Mills in India

State Number of Jute BIFR Cases Mills NotMills Working

West Bengal 62 27 8

Andhra Pradesh 7 1 1

Bihar 3 1 1Uttar Pradesh 3 1 1

Assam 1 — —

Orissa 1 1 —

Madhya Pradesh 1 — —

Tripura 1 — —

(b) State-wise production of jute in IndiaExhibit 2

State-Wise Production of Raw Jute

The above exhibit (Exhibit 2) is based on the figuresof raw jute production in the year 2009-10 and it clearlyshows that West Bengal shares the major portion ofraw jute production in India It indicates that WestBengal itself produces 80% of total raw jute productionof India during 2009-10, whereas Bihar is at secondplace with 10% of total production, followed by Assamand some other states. Experience suggests that thejute industry of West Bengal had flourished in the past,and though it holds the first position as regards rawjute production in India, but for the last few years ithas been facing ups and downs and condition of theother states is also not very satisfactory. The annualper hectare yield of raw jute in Bangladesh and Chinaare 2.32 metric ton and 2.67 metric ton respectively,

while India’s annual yield of raw jute is 1.95 metricton per hectare [Source: International Jute StudyGroup, available at www.jute .org]. If this trend of lowproductivity of raw jute per hectare keeps continuingin India, then it will certainly damage Indian jutemarket. Therefore, the state-wise production of rawjute in India should have to be increased to cope withthe increasing national and international demand forjute products.

Sustainability of Indian Jute IndustryThis section has been compartmentalized into two

parts to depict the growth of Indian jute industry interms of its production of raw jute and export of jutegoods to analyze its future sustainability. Part (a)shows growth of Indian jute industry in terms ofproduction of raw jute and part (b) highlights growthof Indian jute industry as regards its export of jutegoods.

(a) Growth as regards production of raw juteIndia being the largest producer of raw jute has

huge potential for its jute industry. The followingexhibit 3 shows the total production of raw jute in Indiaand its growth rate since 2001-02, as per the datacollected from the Jute Commissioner, Ministry ofTextile, Government of India:

Exhibit 3Production and Growth of Raw Jute

Year Production Growth (000’ Bales) (000’Bales)

2001-02 9000 –1500

2002-03 11000 2000

2003-04 9000 –2000

2004-05 10272.3 1272.3

2005-06 10839.6 567.3

2006-07 11273 433.4

2007-08 11210.5 –62.5

2008-09 10365.3 –845.2

2009-10 11103.9 738.6

From the above exhibit ( Exhibit 3) it is quite clearthat raw jute production in India has witnessed an upand down trend since 2001-02. During the 2000-01,total production of raw jute in India was 10500x1000bales. It has registered a significant increase in the years2002-03, 2004-05 and 2009-10 relative to their respectiveprevious years. However, it showed a nominal increasein 2005-06, 2006-07 and a negative growth in raw juteproduction in 2001-02, 2003-04, 2007-08 and 2008-09.The main reasons for such inconsistent growth in rawjute production in India are insufficiency of adequatecapital, poor quality seeds and scarcity of water. For


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all these reasons, total production of jute in Indiafollows an inconsistent pattern every year, and as aresult, though India occupies a major share in World’sjute production and export, it is far behind theoptimum level that could be achieved, if the problemsof this industry are identified at an early stage andcurative measures are taken. It is, therefore, imperativeto identify the causes of such downsides of the juteindustry in India so that preventive measures can besuggested. However, the following exhibit (Exhibit 4)will show more clearly the inconsistent growth patternof jute production in India through a line chart :

Exhibit 4Trend of Jute Production in India

(b) Growth as regards export of jute goodsIndia holds the second largest position as regards

export of jute goods in the World. The next exhibit(Exhibit 5) shows total volume of export of jute goodsof India in terms of quantity and value from 2000-01to 2010-11. Accordingly, the two subsequent line chartsrepresent the trend of India's export growth as regardsjute goods in terms of its quantity and value since 2000-01 [Source: Jute Commissioner, Ministry of Textile,Government of India].

Exhibit 5Export of Jute Goods in Terms of Quantity and Value

Year Export Growth Export Rs Growth Rs

(000’M.T) (000’M.T) (Cr.) (Cr.)

2000–01 181.4 12.4 646.3 71.8

2001–02 146.1 –35.3 567.5 –78.8

2002–03 229.2 83.1 916.6 349.1

2003–04 310.4 81.2 1051.88 135.28

2004–05 321.8 11.4 1146.9 95.02

2005–06 285.8 –36 1186.24 39.34

2006–07 242.8 –43 1055.16 –131.08

2007–08 204.3 –38.5 1143.57 88.41

2008–09 199.8 –4.5 1216.16 72.59

2009–10 110.5 –89.3 859.46 –356.7

2010–11 199.3 88.8 1363.29 503.83

M.T= Metric Ton and Cr. = Rs in Crore

Exhibit 6Trend of Jute Export from India (Quantity)

Trend of Jute Export from India (Value)

The above exhibit (Exhibit 5) shows that total exportof jute goods from India in terms of quantity has showna decreasing trend from 2005-06 and continued up to2008-09, but during 2009-10 it has slightly improvedover the last year i.e. 2008-09 and in terms of value thepicture is also not very bright. It has seen negativegrowth in the years 2001-02, 2006-07 and in the recentpast i.e. 2009-10. But luckily during the last financialyear 2010-11 it got in to the positive track andregistered a growth in terms of its quantity and valuetogether. On the other hand the trend lines in the aboveexhibit (Exhibit 6) depict the same inconsistentbehaviour of Indian jute industry similar to that of rawjute production in exhibit 4. From the above analysisthe problems of Indian jute industry can be indentifiedand summed up as follows :

● jute industry in India mainly suffers frominadequate supply of capital, raw material,scarcity of water and dearth of skilled labouretc;

● jute mills in India generally follow traditionalmethods for producing jute products whichinvolve high production cost;

● old infrastructures of the jute mills reduce totalproduction of jute goods continuously;

● competition from the other Asian countries likeChina, Bangladesh is increasing rapidly;

● low cost jute products from other Asiancountries are capturing international market;

● lack of proper administration and governancesystem encourages jute mills to attract financialanomalies more quickly;


CASE STUDY

● dearth of proper agricultural strategies andrapid urbanization are putting harm full effectson jute cultivation in India largely;

However, the government of India is trying hardto protect this ancient industry from losing its existingmarket nationally and internationally. It has set up anumber of organizations, legislative councils to protectIndian jute industry from international competition byimproving the standard and quality of the juteproducts and introduced various acts to create socialawareness for encouraging use of jute products. Thenext paragraph will highlight different activities thatare being taken up in India to create an environmentso to give this premier industry a boost to sustain formany years to come.

Steps for Future Sustainability of Indian JuteIndustry

The general objective behind setting up of differentorganizations is to watch and monitor the growth ofthe jute industry in India and take necessary steps forhelping this industry to sustain. Institutes thatgenerally carry on different researches on how toincrease the demand of jute goods by developing newvariety of jute products in India are namely CentreResearch Institute for Jute and Allied Fabrics, IndianJute Industries Research Association (IJIRA), IndianJute Mills Association (IJMA), Jute ManufacturesDevelopment Council (JMDC) etc. The main acts thatcontrol and regulate jute industry in India andencourage use of eco-friendly jute products are JutePackaging Materials Act 1987, Jute Manufacturers CessAct 1983, and National Jute Board Act 2008 etc. In spiteof these organizations and acts, the government ofIndia has introduced some specific orders and rulesfor controlling the market competition and making itcompulsory for some industries to use jute packaging.Some of the orders and rules are Jute and Jute TextilesControl Order 2000, Jute and Jute Textile Control(Amendment) Order 2005, Notification for withdrawalof minimum Order 2006, and Jute ManufacturesDevelopment Council (JMDC) Procedural Rules 1984,Jute Packaging Materials Rules 1987 etc respectively.More specifically, the government with all itsorganizations, acts, orders and rules should look intothe following issues for maintaining a consistentgrowth in the concerned industry to help it sustain incoming years :

● an in depth analysis of the legal provisions andother regulatory measures regarding financialmatters, especially those applicable to the jutemills in India;

● identification of the disclosure and reportingaspects of financial matters in relation to the jutecompanies;

● assessment of the need for diagnosis of financialanomalies, if any in Indian jute industry andproper efforts should also be made to find outthe possibility of its revival;

● measurement of the financial performance,signals and effects of financial anomalies in juteindustry in India;

● eradication of the reasons responsible forinconsistent financial performance of the jutemills in India in recent years, to the extentpossible;

● strategies for judging the financial stability ofthe existing jute mills currently operating inIndia;

● implementation of appropriate packages ofrestructuring and rehabilitation strategies forjute industry;

Conclusions

Jute industry is one of those industries whichdepends largely on the external factors than theinternal issues and hence likely to attract financialanomalies more quickly. If the above identifiedproblems remain unsolved, then these may lead toseveral problems for Indian jute industry like underutilization of capacity, poor surplus generation, declinein net worth etc and ultimately affect its sustainability.Therefore, the sooner these problems are appropriatelyaddressed, the lesser will be the probability for Indianjute industry to lose its sustainability. Indian juteindustry is facing two big challenges in recent timeswhich are high production cost and inadequate supplyof capital. Therefore, new technologies should beintroduced to produce standard jute products at lowcost to capture the growing international market.Besides, supply of raw material should be broughtunder control, labour rate should be held in check, andproper policies are to be framed to maintain asustainable growth. Experience suggests that the juteindustry in India had flourished in the past because ofits favourable environment, availability of labour anddemand of its jute products from national andinternational markets etc. Therefore, chances are stillthere to make Indian jute industry a grand success andfor this purpose some true initiatives as suggestedabove, need to be taken to replace this presentinconsistent growth by a consistent one and hence helpthe industry grow further and sustain for a longerperiod.


CASE STUDY

Stakeholder’s point of view

In looking into firm level financial performance,generally analysis is concerned with two sets ofperformance measures. One based on capital

market valuation of a firm and the other set based onaccounting measures of profitability and financialperformance.

Our method is to approach the issue from astakeholder's point of view. Stakeholders in BSNL are:Government of India, Customers, RegulatoryAgencies, Suppliers and the General Public. Thetraditional way of defining Stakeholders also does notseem to hold valid for BSNL because the objectives ofthe Government (as the only investor) is far beyondthe short-term goals of financial returns of valuemaximization.

With the opening up of the Telecommunicationssector in India, the Consumers as a stakeholderacquires a different meaning, and it becomes the focusof all marketing and innovation of all operators in thesector. The same could be said of the suppliers andthe peripheral equipment vendors. We can then arguethat the most important stakeholders in BSNL are infact its own Employees. Our attempt will then try tofocus on an assessment of the Company’s performancethat views financial performance from the perspectiveof the Employees. At the same time we wish to pointout that it cannot offer a complete perspective becauseemployees have much more at stake than just financialissues before them.

Justification of the TopicIn the era of Globalization, Liberalization and

Privatization the challenges faced by the Public SectorTelecom Operators in India is unique. The challengesare multi faceted related to Marketing, Finance,Human Resources Management etc. The Profits areunder severe pressure. The Telecom Industry hascontributed to the all-round growth of the Economyand there is no gainsaying the contribution of thePublic Sector role. BSNL in the Telecom industry is

Diagnosing BSNL As A Business—Performance Analysis of

A Fully Owned Government Company—A Case Study of

Bharat Sanchar Nigam Ltd.

John ThomasAFS, MA, CISA, MBAChief General Manager, NATFMHyderabad

Ramesh DamarlaM.Com., ACMA, ACS

Junior Accounts Officer, NATFMHyderabad

inevitable as ‘‘coexistence’’ of both private and publicis the spirit of Indian Political Economy. Hence, thecontinued viability of BSNL is of strategic concern forthe government and industry.

Objectives of the StudyThis study has the following objectives :

● To study the significance of profitability byselecting a few important parameters such asOperating Profit (EBIT), Net Profit, Return onInvestment (ROI), Return on Capital Employed(ROCE), EPS, and P/E and some other crucialturnover, liquidity and capital structure ratios.

● To examine the liquidity capacity based on acidtest and current ratio with certain presumptionsapplicable.

● To make an assessment of the critical factorswhich affect the profitability of BSNL.

● To give some suggestions for the betterment ofthe earnings on the basis of findings of the study.

Company Profile The Company took over the business of providing

telecom services and network management throughoutthe country except the metro cities of Delhi andMumbai from Department of Telecom Services andTelecom Operations w.e.f. 01.10.2000 pursuant to anMoU signed between the BSNL and Government ofIndia. BSNL is a Government Company under theSec. 617 of the Companies Act, 1956. The entire sharecapital—both equity and preference—is held by theGovernment of India. Being GoI holding 100% equityshare capital, BSNL is an unlisted company. Its Paid-up value of Equity share capital is Rs.5,000 croresand Rs. 7,500 crores preference share capital.Thevision of the BSNL is to become the largest telecomservice provider in South East Asia. Its Mission is toprovide world class state of art technology telecomservices on demand at affordable price and to provideworld class telecom infrastructure to develop country’seconomy.


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Limitations of the StudyThe following are the limitations of the study :

1. The study covers only 9 years’ period, i.e. 2002-03 to 2010-11, for the financial analysis of theBSNL.

2. The secondary data used in this study have beentaken from published annual reports only.

3. As per the requirement and necessity some datahave been grouped and sub-grouped.

4. For making analysis of financial position ofBSNL, ratio analysis techniques of FinancialManagement.

Research Methodology and Study In this study of sample company named BSNL has

been taken for analysis of financial position in generaland liquidity in specific. Present study is based onsecondary data, i.e. Published annual reports of thecompany. These financial data is classified, tabulatedand edited as per the requirement of the profitabilityanalysis of the company. This study has covered 9years’ data from 2002-03 to 2010-11 for analysis offinancial position of BSNL.

● Operating Profit Ratio● Earning per share● Price Earning Ratio● Dividend Payout Ratio● Return on Investment● Debt-Equity Ratio● Fixed Assets to Net Worth Ratio● Current Assets to Net Worth Ratio● Fixed Assets Turnover Ratio● Working Capital Turnover Ratio● Debtors Turnover Ratio● Creditors Turnover Ratio● Gross Analysis from stakeholders’ point of

view.Hypothesis of the StudyThis study is based on the following hypothesis :

● The earning capacity of the BSNL is similarduring the study period.

● The earning capacity depends on total invest-ment.

● Performance is measured through Profitabilityand turnover ratios.

The financial and liquidity position of BSNL havebeen analyzed by the financial techniques of RatioAnalysis.

The collected data have been analyzed with the helpof the following financial ratios :

● Current Ratio● Liquidity Ratio● Net Profit Ratio

Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 TO 2010-11.

Sl. Financial Ratio / Financial Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 AverageNo.

1 Current Ratio 0.78 1.33 2.65 2.79 3.22 3.34 2.79 1.29 1.20 2.15

2 Liquidity Ratio 0.64 1.21 2.49 2.62 3.08 3.15 2.57 1.17 1.02 1.99

3 Net Profit Ratio % 5.58 17.62 28.22 22.25 19.65 7.91 1.61 –5.69 –21.50 8.404 Operating Profit Ratio % 10.27 26.52 21.95 21.02 20.53 11.70 3.55 –6.86 –22.16 9.61

5 Earnings Per share (Rs.) 2.89 11.95 18.83 15.28 14.03 4.44 1.15 –3.65 –12.77 5.79

6 P.E. Ratio (Say Price Rs.100) 34.60 8.37 5.31 6.54 7.13 22.52 86.96 –27.40 –7.83 15.13

7 Dividend Payout Ratio % 17.31 4.71 11.54 13.14 15.05 49.84 0.00 0.00 0.00 12.408 Return on Investment % 2.58 9.48 13.99 11.07 8.98 3.41 0.65 –2.11 –7.97 4.45

9 Debt-Equity Ratio 0.42 0.27 0.23 0.20 0.16 0.14 0.13 0.11 0.13 0.20

10 Fixed Assets to Net Worth 1.29 1.09 0.91 0.79 0.70 0.65 0.67 0.92 0.96 0.89

11 Current Assets to Net Worth 0.29 0.44 0.53 0.57 0.62 0.66 0.65 0.64 0.33 0.5212 Fixed Assets Turnover Ratio 0.36 0.49 0.54 0.63 0.66 0.66 0.60 0.40 0.39 0.53

13 Working Capital Turnover Ratio –5.81 5.01 2.19 1.64 1.24 1.10 1.12 4.84 –14.17 –0.32

14 Debtors Turnover Ratio 8.79 8.52 5.44 6.38 6.37 6.96 7.59 6.75 4.69 6.83

15 Creditors Turnover Ratio 1.50 2.27 2.48 2.43 2.38 2.19 1.73 0.75 1.35 1.90

1. Current Ratio : It is a measure of general liquidityand is most widely used to make the analysis for shortterm financial position or liquidity of a firm. It iscalculated by dividing the total of the current assetsby total of the current liabilities.

Current ratio may be defined as the relationshipbetween current assets and current liabilities. This ratiois also known as ‘‘working capital ratio’’. It is a measure

Source : Annual reports of BSNL from 2002-03 to 2010-11.


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of general liquidity and is most widely used to makethe analysis for short term financial position orliquidity of a firm. It is calculated by dividing the totalof the current assets by total of the current liabilities.

Current Ratio = Current Assets /Current Liabilities

Current Asstets to Current Liabilities BarDiagram from 2003 to 2011 (Fig. in Lakhs of Rs.)

Source : Compiled from BSNL annual Reports

Stakeholders view : Current ratio should be around1.5 : 1, which means current assets are more than currentliabilities. In case of BSNL its current ratio during thepast 9 years is good and on par with industry standards.The average current ratio of BSNL is 2.15:1. BSNL hasthe ability to manage its current liabilities withoutliquidating any of its long term assets. Looking at theprofitability ratios we can see that there is no immediatepayments crisis developing and the company canconfidently meet its short term obligations.

2. Liquidity Ratio : Liquid ratio is also termed as‘‘Liquidity Ratio’’, ‘‘Acid Test Ratio’’ or ‘‘Quick Ratio’’.It is the ratio of liquid assets to current liabilities.The true liquidity refers to the ability of a firm to payits short term obligations as and when they becomedue.

The two components of liquid ratio (acid test ratioor quick ratio) are liquid assets and liquid liabilities.Liquid assets normally include cash, bank, sundrydebtors, bills receivable and marketable securities ortemporary investments. In other words, they arecurrent assets minus inventories (stock). Inventoriescannot be termed as liquid assets because it cannot beconverted into cash immediately without a loss ofvalue.

Liquid Ratio = (Curent Assettes-Inventories) /Curent Liabilities

Stakeholders’ view : General ideal ratio ofliquidity is 1 : 1, in this regard high liquidityduring the past. In the year 2010-11 the ratio is 1.02 : 1

Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 To 2010-11.Sl. Financial Ratio/FinancialNo. Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average

1 Current Ratio 0.78 1.33 2.65 2.79 3.22 3.34 2.79 1.29 1.20 2.15

and its highly liquid components of current assetshave been more than the illiquid items. This givesconfidence to both the insiders who deal with thecompany on day-to-day basis and the vendors andsuppliers.

3. Net Profit Ratio : Net profit ratio is the ratioof net profit (after taxes) to sales. It is expressedas percentage. The two basic components of thenet profit ratio are the net profit and sales. Thenet profits are obtained after deducting income-tax.

Net Profit ratio is used to measure the overallprofitability and hence it is very useful to proprietors.The ratio is very useful as if the net profit is notsufficient, the firm shall not be able to achieve asatisfactory return on its investment.

This ratio also indicates the firm’s capacity toface adverse economic conditions such as pricecompetition, low demand, etc. Obviously, higher theratio the better is the profitability. But whileinterpreting the ratio it should be kept in mind thatthe performance of profits also be seen in relation toinvestments or capital of the firm and not only inrelation to sales.

Stakeholders view : BSNL is having growthin profitability up to 2004-05 (i.e. 28.22%) andstarted declining from 2005-06 and reached tonegative level by 2010-11. Decline in the total revenuefigure over the past led to negative Profit aftertax. Revenue fall is due to various reasons like fallof voice call charges to near Zero level, unrestrictedentry in to the telecom sector in India, fallinglandline connections, lack of marketing skills torender service to the customers. The average NetProfit of BSNL is 8.4%. The profit position has beenstrongly maintained over the years despite disruptivemarket forces. It is only during the last two years thatit has declined somewhat. It can be seen that the Networth of the company has not been affectedsubstantially due to this, and the long terms averageis good.

which is considered to be ideal ratio of liquidity.However, the average liquidity of the BSNLduring the past is 1.99 : 1 which is consideredhigher liquidity in the industry. Over the years thecompany has built up a strong ethics of liquidity


CASE STUDY

4. Operating Profit Ratio : Operating Profit Ratioshows the percentage of profit earned on every rupeeof revenue earned.

Operating Ratio is calculated as: PBIT/TotalRevenue * 100

Operating costs as a percentage of Revenues2003-2011

Source : Compiled from BSNL Annual Reports

Stakeholders’ view : The relationship between theProfits before Interest, taxes to Total Revenue. Duringthe past 9 years’ period the average operating profit is9.61%. The Operating sales shows gradual increasefrom 2002-03 to 2005-06 and gradual decrease therefrom. During the study period the mean deviationwith respect to Operating sales is even. The Operatingprofit ratio is volatile in most of the years. The highgrowth years were due to the introduction ofmobile services and consumer euphoria that followed.BSNL has been unable to maintain this trajectorybecause of capacity constraints in the emergingsegment. But this appears to be temporary as theTelecom sector itself is fast changing from ‘‘voice todata and beyond’’, where the company with itsconsiderable muscle power in long distance backhaulnetwork infrastructure can foray into Broadbandservices.

5. Earning Per Share : Earnings per share isgenerally considered to be the single mostimportant variable in determining a share’s price. Itis also a major component used to calculate theprice-to-earnings valuation ratio. An importantaspect of EPS that’s often ignored is the capital that


2 Liquidity Ratio 0.64 1.21 2.49 2.62 3.08 3.15 2.57 1.17 1.02 1.99

3 Net Profit Ratio% 5.58 17.62 28.22 22.25 19.65 7.91 1.61 –5.69 –21.50 8.404 Operating Profit Ratio % 10.27 26.52 21.95 21.02 20.53 11.70 3.55 –6.86 –22.16 9.61

is required to generate the earnings (net income)in the calculation. Two companies could generatethe same EPS number, but one could do so withless equity (investment)—that company wouldbe more efficient at using its capital to generate

income and, all other things being equal, wouldbe a ‘‘better’’ company. Investors also need to beaware of earnings manipulation that will affect thequality of the earnings number. It is important not torely on any one financial measure, but to use it inconjunction with statement analysis and othermeasures.

Formula for calculating EPS = Profits availableto Equity Shareholders/No.of Equity Shares.BSNL is having its paid up capital of Rs. 5,000crore divided in 500 crore equity shares of Rs. 10/-each.

Earnings Per share for BSNL 2003-2011(Figures in whole rupees.)

Source : BSNL Annual Reports

Stakeholders’ view : The average Earningsper share in BSNL is Rs. 5.79 during the past 9 yearswhich means the owners are earning not less than 50% of their investment in equity during all theyears so far. This indicates its potential so far andfuture is to be designed accordingly. Governmentsreturns on investment in telecom consists not only ofthe actual financial but also the social anddevelopmental linkages that it involves. Consideredin this perspective the long term returns are good.However, with impeding wave of reforms in this sectorthe shortfalls during the last two years might be atemporary dip.


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6. Price Earning Ratio : Price earnings ratio(P/E ratio) is the ratio between market price perequity share and earning per share. The ratio iscalculated to make an estimate of appreciation inthe value of a share of a company and is widelyused by investors to decide whether or not to buyshares in a particular company. It helps the investor indeciding whether to buy or not to buy the shares of aparticular company at a particular market price.Generally, higher the price earning ratio the better itis. If the P/E ratio falls, the management should lookinto the causes that have resulted into the fall of thisratio.

Price Earnings Ratio = Market price per equityshare/Earnings per share

Price-Earnings Ratio of BSNLfrom 2003-2009

Source : compiled from BSNLAnnual Reports

Stakeholders’ view : In case of BSNL as it is notlisted company the market price per share is assumedas Rs. 100/- per every equity share of Rs.10/- each.The average price earning ratio of BSNL is Rs.15.33. Itmeans that to earn a rupee, 15.33 rupees need to beinvested. Normally it is considered high side by thepotential investors. The authors feel that an issue ESOPto the employees at par at this juncture may besuccessful.

7. Dividend Pay-out Ratio : Dividend pay-outratio is calculated to find the extent to whichearnings per share have been used for paying

dividend and to know what portion of earningshas been retained in the business. It is an importantratio because ploughing back of profits enablesa company to grow and pay more dividends infuture.

Dividend Payout Ratio = Dividend per EquityShare/Earnings per Share

Stakeholders’ view : Dividend payout ratio inthe initial years is high where the earnings of thecompany is good. Since 2008-09 its profits reachedZero level and no dividend is paid till 2010-11. Unlessthe company gets profits in the future the point ofpayment of dividend may not arise. The averagedividend pay out ratio of BSNL is Rs. 12.40. RetainedEarnings are very high percentage of nearly 88% forBSNL, which augurs well for the future of thecompany.

8. Return on investment : It is the ratio of netprofit to shareholder’s investment. It is the relationshipbetween net profit (after interest and tax) and shareholder’s/proprietor’s fund.This ratio establishes theprofitability from the shareholders’ point of view. Theratio is generally calculated in percentage.

Return on shareholder’s investment = Profit afterTax /Equity. Share holder’s fund ¥ 100

Return on Investments in BSNL 2003-2011 (Fig.in Percentage)

Source : calculated from Annual ReportsStakeholders’ view : The return on investment is

highest in the year 2004-05. The return figure is positiveup to 2008-09 later it becomes negative. The averagereturn on investment is 4.45% which is less than theaverage inflation rate of Indian economy during theperiod of study. Here again this ratio might not beadequate to represent the expected returns frominvestments in a public sector company. Socialeconomic factors also need to be given due weight age.


5 Earnings Per share (Rs.) 2.89 11.95 18.83 15.28 14.03 4.44 1.15 –3.65 –12.77 5.796 P.E. Ratio (Say Price s. 100) 10.27 26.52 21.95 21.02 20.53 11.70 3.55 –6.86 –22.16 9.61

7 Dividend Payout Ratio % 17.31 4.71 11.54 13.14 15.05 49.84 0.00 0.00 0.00 12.40

8 Return on Investment% 2.58 9.48 13.99 11.07 8.98 3.41 0.65 –2.11 –7.97 4.45


CASE STUDY

9. Debt-Equity Ratio : Debt-to-Equity ratioindicates the relationship between the external equitiesor outsiders funds and the internal equities orshareholders funds. It is also known as external internalequity ratio. It is determined to ascertain soundness ofthe long term financial policies of the company.

Debt to Equity Ratio = Total Long Term Debts/Total Long Term Funds

9. Debt-Equity Ratio: BSNL 2003-2011Proportion of External Debts to Equity

Shareholders Funds in BSNL for 2003-2011 (Fig. inlakhs. of Rs.)

Source : calculated from Annual ReportsStakeholders’ view : Debt to equity ratio indicates

the proportionate claims of owners and the outsidersagainst the firm’s assets. The purpose is to get an ideaof the cushion available to outsiders on the liquidationof the firm. However, the interpretation of the ratiodepends upon the financial and business policy of thecompany. The owners want to do the business withmaximum of outsider’s funds in order to take lesserrisk of their investment and to increase their earnings(per share) by paying a lower fixed rate of interest tooutsiders. The outsiders (creditors) on the other hand,want that shareholders (owners) should invest and risktheir share of proportionate investments. A ratio of 1:1is usually considered to be satisfactory ratio althoughthere cannot be rule of thumb or standard norm for alltypes of businesses. Theoretically, if the owner'sinterests are greater than that of creditors, the financialposition is highly solvent. In analysis of the long-termfinancial position it enjoys the same importance as thecurrent ratio in the analysis of the short-term financialposition.

In this regard BSNL is having very good ratio as itsdebts to equity on an average is 0.2:1. This appears to

be a good financial management by the companybecause of the volatility in the early years ofcompetition and entry of private players into themarket. A high borrowing level would have beendifficult to service due to the uncertainty in thereturns.

10. Fixed Assets to Net Worth : Fixed assets to networth ratio establishes the relationship between fixedassets and shareholders funds. The purpose of this ratiois to indicate the percentage of the owner's fundsinvested in fixed assets.

Stakeholders’ view : The ratio of fixed assets tonet worth indicates the extent to which shareholder’sfunds are sunk into the fixed assets. Generally, thepurchase of fixed assets should be financed byshareholder’s equity including reserves, surplusesand retained earnings. If the ratio is less than 1, itimplies that owner’s funds are more than fixedassets and a part of the working capital is providedby the shareholders. When the ratio is more thanthe 1, it implies that owner’s funds are not sufficientto finance the fixed assets and the firm has todepend upon outsiders to finance the fixed assets.On an average, BSNL is financing its fixed assets outof its own funds as the ratio is 0.89 and the balanceof own funds to the tune of 0.11 are used forworking capital also. Hence, the stakeholders in thisregard appreciate the composition of financing theassets.

This is a happy situation from the employeepoint of view, because the real assets created bythe company purely out of internal accruals andsurpluses, will bring in considerable appreciationin the market value of these assets. Thereby thecompany will be in a good position to tide overany extreme, though unlikely, situation at a futuredate.

11.Current Assets to Net Worth : Current assetsto net worth ratio establishes the relationshipbetween Current assets and shareholders funds.The purpose of this ratio is to indicate thepercentage of the owner's funds invested in Currentassets.

Stakeholders view : In this regard BSNL is havingits current assets as 52% of its Net worth. Hence thestakeholder is perhaps happy with the optimumcomposition of existing net worth.

Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 To 2010-11.Sl. No. Financial Ratio/Financial Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average

9 Debt-equity Ratio 0.42 0.27 0.23 0.20 0.16 0.14 0.13 0.11 0.13 0.20

10 Fixed Assets to Net Worth 1.29 1.09 0.91 0.79 0.70 0.65 0.67 0.92 0.96 0.89

11 Current assets to Net worth 0.29 0.44 0.53 0.57 0.62 0.66 0.65 0.65 0.33 0.52


CASE STUDY

12. Fixed Assets Turnover Ratio : Fixed assetsturnover ratio is also known as sales to fixed assetsratio. This ratio measures the efficiency and profitearning capacity of the concern. Higher the ratio,greater is the intensive utilization of fixed assets.Lower ratio means under-utilization of fixed assets.The ratio is calculated by using following formula :

Fixed Assets Turnover Ratio = Total Revenue/Total Fixed Assets

Fixed Assets Turnover Ratio BSNL 2003-2011

Source : calculated from Annual ReportsStakeholders’ view : The average Fixed Assets

turnover ratio in BSNL is just 0.53 which means theassets are not used even to the value of 1 time. Theunder-utilization of fixed assets is clear. Themanagement should find ways and means to use theexisting asset base to its fullest value.

13.Working Capital Turnover Ratio : Workingcapital turnover ratio indicates the velocity of theutilization of net working capital. This ratio representsthe number of times the working capital is turned overin the course of year and is calculated as :

Working Capital Turnover Ratio = Cost of Sales /Net Working Capital

Stakeholders view : This ratio is volatile withrespect to BSNL is concerned 2003-04 and 2009-10 it ishaving optimum ratio i.e. 5.01 and 4.84 times,respectively.

14. Debtors’ Turnover Ratio : Debtors’ turnoverratio or accounts receivable turnover ratio indicatesthe velocity of debt collection of a firm. In simplewords, it indicates the number of times averagedebtors (receivable) are turned over during a year.

Debtors’ Turnover Ratio(BSNL 2003-2011)

Source : calculated from Annual Reports

Stakeholders’ view : As per the table abovethe average is 6.83 times (say 7) in a financialyear which is considered good for a company withannual turnover ranging from 30,000 crore to 40,000crore.

15. Creditors Turnover Ratio : This ratio is similarto the debtors’ turnover ratio. It compares creditorswith the total credit purchases. It signifies thecredit period enjoyed by the firm in paying creditors.Accounts payable include both sundry creditorsand bills payable. Same as debtors’ turnover ratio,creditors’ turnover ratio can be calculated in twoforms, creditors’ turnover ratio and average paymentperiod.

Creditors‘ Turnover Ratio = Credit Purchase /Average Trade Creditors

Stakeholders’ view : The average paymentperiod ratio represents the number of days by thefirm to pay its creditors. A high creditors’ turnoverratio or a lower credit period ratio signifies that thecreditors are being paid promptly. This situationenhances the credit- worthiness of the company.However, a very favorable ratio to this effect alsoshows that the business is not taking the fulladvantage of credit facilities allowed by the creditors.When compared to the Debtors’ Turnover Ratio,Creditors’ Turnover Ratio is 3 times lower which canbe positive side of working capital management inBSNL.


Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 To 2010-11.Sl. No. Financial Ratio/Financial Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average

12 Fixed Assets Turnover Ratio 0.36 0.49 0.54 0.63 0.66 0.68 0.60 0.40 0.39 0.53

13 Working Capital Turnover Ratio –5.81 5.01 2.19 1.64 1.24 1.10 1.12 4.84 –14.17 –0.32

14 Debtors’ Turnover Ratio 8.79 8.52 5.44 6.38 6.37 6.96 7.59 6.75 4.69 6.83


HUMAN RESOURCE MANAGEMENT

Organization Development : An Orientation to

Change Management

Dr. Anand BansalAssociate Professor in CommerceGovernment PG CollegeJalesar (Etah) U.P.

Organization development is a systematic, long-term effort and planned approach thatimproves organization’s operation by using

effective and collaborative diagnosis, culture andbehavioral science techniques; it also contributes to thesignificant change in the attitude and behaviour ofpersonnel through self-analysis plan. The theory oforganization development elucidates as an applicationof behavioural science to organizational changes. Itconsists of a wide-range theories, process, andactivities, all of which are designed towards improvingthe organization’s effectiveness. It is a general practicethat organization undergo pertinent changes in theirdevelopment process, as it decides to change itscomplete strategy or the ideology by whichorganization do perform and some modification inprudent practice are needed. In today’s highlyturbulent business environment, change has assumedan inevitable part of life. Organizations that do notattach importance to the need for change do not survivelong. Organizations must change so that they mayremain competitive in today’s globalization’s marketplace. Kanter points out ‘that organizations whicheither fail to understand the need for change or areinept in their ability to deal with change will fade andfall behind, if they survive at all’.

The field of organization development hasoccupied a vital place for improving the effective-ness of organizations and the people involved inthese organizations. Organization developmenthas a rich background of research and practiceregarding change in organizations Organizationdevelopment, as one of the most effective tools ofchange, is used by business house to modify theculture, value and structures of an organizationthat enables organization to face to new markets,technologies and other business challenges withthe development and improvement of organizationalprocesses. So there is acute need for organization

development in Indian set-up. Effective strategic andoperational plans, team and leadership developmentand competitive products or services may come outas a result of a successful organization process. PeterDrucker has rightly said ‘the entrepreneur alwayssearches for changes, respond to it, and exploit it as anopportunity.’ The term organization development isoften used interchangeably with organization design,learning and development and organizationaleffectiveness and business processes re-engineeringand large group interventions are newer develop-ments in this field. A striking feature of organizationdevelopment process is the change agent, which ismostly carried-out by the outside consultants, whohave a different perspective and a biased freethought as regards to organizational feedback. Theorganization development plan can be seen inExhibit-1.

There are variations regarding the definition oforganization development. Richard Beckhard hasdescribed organizational development as an effort (1)planned, (2) organization-wide, and (3) managed fromthe top, to (4) increase organization effectiveness andhealth through (5) planned interventions in theorganization’s ‘processes’, using behavioral scienceknowledge. This stresses the concept of application andtransfer of behavioural science knowledge andpractice, thereby paying more attention to sensitiveissues like leadership, group dynamics andwork design. Neilsen alludes that ‘organizationdevelopment is an attempt to motivate the staffmembers to resume greater responsibility for theirwork’. The rationale behind organization develop-ment is that people are encouraged to findout newways for achieving their own objectives as well asorganizational goals. The field of organizationdevelopment is related to the field of medicine, asorganizations are made up of humans. Organizationtheory and organization behaviour is similar to the


field of anatomy, physiology of human system andpsychology and sociology of human system,respectively.

The level of effectiveness is totally related toorganization’s ability to commensurate itself to fast-growing rapid changes in the sphere of environmentand technology. Warner Burke points outthat organization development is the changes thatwill ‘more fully integrate individual needs withorganizational goals; leads to greater organizationeffectiveness through better utilization of resources,especially human resources; and provide moreinvolvement of organization members in the decisionthat directly affect them and their working conditions.’Machael Beer defines organization development as ‘asystem-wide process of data collection, diagnosis,action, planning, intervention and evaluation aimedat (1) enhancing congruence among organizationalstructures, process, strategy, people and culture;(2) developing new and creative organizationalsolutions; (3) developing the organizational self-renewing capacity.

Exhibit 1Organizational Development Plan

Organizational Development Process

diagnosis, intervention and evaluation—as shownin Exhibit 2.This process entails on the basic factas establishing relationship with key personnel,evaluating systems in the unit, identify approaches,apply approaches and more over evaluating theresults.

Exhibit 2

There is a general belief among the top manage-ment that the process of organization development isinitiated on the event of finding discrepancy in theorganization, which can be classified into three stages :

Organization Development Plans

There are numerous accepted models for ensuringthe success of a change effort. Some of the approacheshave been used by business organizations in regularcourse, but we have not considered them as such.The use of strategic planning is general phenomena,but when it is implemented in a systematic andexplicit manner, it becomes one approach for achange effort. Planned interventions related tothe organization’s processes may enhance organiza-tion’s effectiveness— which is the crucial objective oforganization development. Organization developmentinterventions are strategic plans comprised of specificactivities designed to effect change that is made by anorganization. The study of organization developmentadvocates a number of methods—variety of processes,approaches, techniques and application defined as‘interventions’, training, action research, surveyfeedback, human resource developments are fewexamples of organization development interventionsused by Indian organizations.

Training and Organization Development

Generally, a very simple question is raised ‘Whatdoes it have to do with training’. The overall processof organization comprises three areas of a unit: people,process and planning. While training handles onlypeople component. Training personnel cannot solveevery issue. As Stephen Wehrenberg elaborates inhis personal journal article titled “The ViciousCircle of Training and Organizational Development“that as trainers become more experienced, they beginto see that many of their organizational’ problems

The Measurement Phase

Preferred OperatingCulture

This defines whatmanagement wantsto achieve in way ofbehavioural science

Causal Factors

These are antecedentsof culture. They

are whatmembers look to inorder to determinethe unwritten rules

Actual OperatingCulture

These are thebehaviour

norms operatingthrough theorganization

Recycle

To assess impactof changeinitiatives

and reviewstrategies and actions

The Levers forChange

Changing structures,system,

technologiesand leadership

skills to influencebehavioural norms

Culture ChangeTargets

Execute whatbehavioural

norms need to betargeted to leadmore positive

results

(Source: Human Synergistic (NZ) Ltd. 2010)

Organizational Development Process

Diagnosis Intervention Evaluation

ProcessConsultation

TeamBuilding

SurveyFeedback

TechnicalStructuralActivities

SkillDevelop-

ment

▲

▲ ▲ ▲

▲

▲ ▲ ▲▲ ▲




cannot be resolved simply by training. Trainers seeproblems as part of a total system—problems such aspoor communication, poor quality control, and lowproductivity’. But, at present, training is assumed as aconcrete vehicle for evolving dynamic channel ofinteraction between different participants within theorganization. It raises the conscious to articulatedeficiencies and also creates new ideas for changewhich gives greater enthusiasm for change. That is whytraining can be assigned to be effective organizationdevelopment intervention. A large number of businessorganizations basically use training in a planned wayto make changes. Training in key performance areascontributes to a medium of participation andinvolvement and also provides an opportunity forgreater learning and knowledge of organizationalproblems.

Action Research and Interventions

Apparently, organization development empha-sizes on two activities—action research andinterventions. The theory of action research wasdeveloped by Kurt Lewin and John Collier in the1940s as ‘a process of systematic collecting the data,feeding it back for action, planning and evaluatingresults and interpreting the same’. It conceptualized‘rational social management ’comprised of plan, actionand results of action. Action research is a data basedproblem solving model that requires the steps whichare requisite in the scientific method of inquiry.’W L French identified a standard action research planwhich devises the procedure as identification of keyissue, consultation with change personnel, andcollection of data, facilitate feedback to the executives,determining change objectives and developing thechange plan based on research and implement the planfor change effort.

As the change agent intervenes in the organizationto effect change, action research becomes theintervention component and assumed a facet of actionresearch. There are many interventions addressed totransform behaviour and attitude of the staff in aunit. An action or experiential exercise which isrelated to organization improvement plan in achange process can be identified as interventions.Lewin has mentioned three steps in change process asunfreezing, changing and refreezing—as shown inExhibit 3. These three steps are associated withidentification of dilemma, development of new modelsof behavior, and evaluation of applied model orbehaviour, respectively.

Exhibit 3 System Model of Action Research Process

Organization Development and HumanResource

Organization development is not a new fieldand has always placed more emphasis on people;therefore it has become recently an importantconstituent of human resource. It is distinct fromhuman resource development in the sense that whileprocess of human resource development is concernedwith the development and training of people in theorganization, organization development is entrustedwith the task of development and improvement oforganization process. Organization development doesnot replace human resource but it is based on vitalprocesses of human resource function. There is pre-requisite that effective organization developmentshould also have the whole-hearted support andinvolvement of senior staff members of theorganization for the purpose of implementation oforganization development interventions. Though, thetheory of organization development is based on socialscience and applied behaviour, on the contrary, humancapital theory, performance model are part of humanresource, but the literature on the record substantiatethe fact that these two fields are collaborating andintegrating together.

In 1988, professionals Jelinek and Littererhighlighted the broadened area of organizationdevelopment in the form of team building, groupdecision, building organizational learnings and skillswhich human resource professionals can utilizeinstrategic approach of organization development as awell planed and long-range approach. Cummings andWorley (researchers) also found the fact that goaldetermination based on performance managementreward system, career planning and workforcediversification are direct outcome of organizationdevelopment practices. In fact, in the coming years,the use of human resource professional will emergecritically in relation to organizational change foradopting organization development effectively.

Input Transformation Output

Planning

PreliminaryDiagnosisData GatheringFeedback of ResultsAction Planning

Unfreezing

Action

LearningProcessesAction PlanningAction Steps

Changing

Results

Changes inBehaviourData GatheringManagement

Refreezing

▲ ▲

▲ ▲▲



To conclude, DeKlerk (2007) describes thatemotional ordeal experience, aggression, anxiety,apprehension emerged due to downsizing, mergers,restructuring and outsourcing, can lead to thedeterioration in the production. In India, after trainedat National Training Laboratory at USA, someprofessionals started this technology early in 1960s.First, L & T introduced organization development asa formal and structured plan in middle 1970s.Organization development could not get desiredsuccess in India, as Indian corporate sector—with itssecured and protected philosophy—was hesitant toinitiate changes in prudent practice, but it registeredits presence in academic arena. In post-liberalizationera, there was stimulus to the use of organizationdevelopment technique. Indian Society for AppliedBehaviour Sciences, Indian Society for Individualsand Social Development, Indian Society for Trainingand Development and, moreover, academicinstitutions like IIMs can play a vital role towardsgreater use of this technology. There is an imperativeneed to develop awareness and knowledge regardingthe ‘change processes’ within the organization,which is coordinated by usually external consultantsalong with active participation of all stakeholders.In recent times, the relevance of organizationdevelopment to incorporating changes in modernorganization has become questionable. The need for

reinventing this field is an emerging issue with thesense of deep understanding of human andorganization process. ❐

Bibliography

■ Albrecht, K. Organization Development. EnglewoodCliffs, NJ. Prentice-Hall, 1983.

■ Bennis, W. Organization Development: Its Nature,Origin and Prospects. Reading. Addison-WesleyPublishing Company, 1969.

■ Burke. W. W. Organization Development: A Process ofLearning and Changing. 2nd Ed. Reading. M.A.Addison-Wesley Publishing Company, 1992.

■ Cannon, J. A., and McGee. R. Organization Developmentand Change CIPD Toolkit, London: Chartered Instituteof Personnel Development, 2008.

■ Cummings, T. G., and Worley, C. G. OrganizationDevelopment and Change. 8th Ed. Mason, O. H. SouthWestern Publishing, 2005.

■ French, Wendell L., and Cecil H. Bell. OrganizationalDevelopment: Behavioural Science Interventions forOrganization. 5th Ed. Englewood Cliffs, NJ. Prentice-Hall,1994.

■ Hursey, P and Blanchard, K. H. Management ofOrganizational Behaviour. 6th Ed. Englewood Cliffs, NJ.Prentice Hall, Inc.1993.

■ Ivancevich John M. and Michael T Matteson.Organization Behaviour and Management. 5th Ed. NewYork: McGraw-Hill, 1998.

Conclusion

A study like this—though it cannot fully espousethe Employees’ point of view as it is based only onaccounting figures—throws sufficient light to concludethat the Financial strength which BSNL has built upover the years will stand in good stead during theperiod of transition which it is facing presently. Thepresent situation is more due to the impact of externalenvironmental forces of the sector as a whole and notfully its own making. The stakeholders, as defined atthe beginning of this paper, have reason to believe thatthe company is on sound footing as far as keyparameters of performance is measured and grouped.However, the continued profitability and ability toaccumulate surpluses will depend on the direction

which the company takes—particularly with regardto cost control measures, elimination of wastefuloperating expenses and the strategy changes inproduct mix. A deliberate movement towardsinnovative projects that successfully deliver value totoday’s subscribers—especially applications relatedto Data and E-commerce etc.—will be necessary.Productivity of Capital as measured by return onassets depends on the attitude and culture of theorganization. Employees as stakeholders need toappreciate that—in a highly technical and capitalintensive industry like Telecom—current performanceparameters are a pointer to this basic input thatultimately determines their aspirations as aStakeholder Group. ❐

(contd. from page 564)



Introduction

The growth of the Indian economy is happeningat the rate of 6 to 8% successively for the pastfew years. In today’s competitive world it is

imperative for the organizations to build employeecommitment for higher growth. Motivation influencesthe talent to drive the organization’s growth (Rousseau,D. M. 1990). The employees have also found to displaycertain behaviours by going beyond the normalrequirements of the role/task performance. Thesebehaviours are named as organizational citizenshipbehaviours (OCB) and have been found to be alsocontributing to the organizational growth (Organ1988). The comprehensive definitions for the OCBfactors (dependent variable) are :

1. Altruism (AL) : Discretionary behaviours on partof the employees to help, guide or assist fellowcolleagues or take responsibilities for them.

2. Conscientiousness (CO) : Discretionary beha-viours on part of the employee to take ownership ofhis work and related self-development, set challengingtargets and meeting deadlines, taking decisions basedon self-conscience and observant of the rules andvalues of the organization.

3. Sportsmanship (SM) : Discretionary behaviourson part of the employee to drive oneself to surpassothers’ performance, appreciate others and contributeso that fellow colleagues meet their objectives and pushthem to excel, accepts own mistakes and expressemotions appropriately, be tolerant to organizationalnegativities and accept the organizational changes.

4. Courtesy (CT) : Discretionary behaviours on partof the employee to initiate resolution of issues, buildconsensus and actively contribute to conflict

An empirical study of relationships between

relational psychological contract and employees’ attitudes

towards OCB factors and its application in Indian Industry

Mihir Ajgaonkar

Research Scholar, Birla Instituteof Technology, Mesra, India

Dr. Utpal Baul

Professor, Birla Institute ofTechnology, Mesra, Ranchi

Dr. S. M. Phadke

Management Consultant andOrganizational Psychologist, Pune

resolutions, locating resources/experts for organiza-tional problems, collaborating with others, being awareof the impact of self behaviours on other people andtheir work.

5. Civic Virtue (CV) : Discretionary behaviours onpart of the employee to participate actively into theorganizational affairs and be informed about theorganizational developments, defend its reputation,be vigilant about organizational policies and report anyviolations, take up fellow colleagues' grievances.

In the late eighties and early nineties, Dr. D. M.Rousseau in USA and Dr. David Guest in U.K.conducted research on employee-employer relation-ships that have a bearing on employee involvement inthe organizations. They conceptualized employee-employer relationship much different from the legalcontractual nature. Dr. D. M. Rousseau (1990) hasdefined Psychological contracts (PC) as are beliefsbased on promises implied or expressed regarding anexchange agreement between the employee and theorganization. They are voluntary in nature and believein mutual agreements. At a given time they areincomplete and there are multiple contract makers.They focus on fulfilling commitments and provide amodel for employment relationship. The contract isbased on employees’ sense of fairness, trust and beliefthat commitments are being honoured by theemployer. Morrison and Robinson (1997) have definedPsychological contract as individual perceptionscreated by organizations about what will be exchangedfor each others contributions. To have a psychologicalcontract, a relationship between individual andorganization must exist and individuals must haveexpectations about what he will get from theorganization. When employers meet perceived



obligations of psychological contract, employees aremotivated, willing apply greater effort, seek outcreative solutions, support their leaders and remainwith the organization (Rousseau 1990, Sims 1994,Spindler 1994). When the obligations are unfulfilled,employees lose trust in management, reduce theirlevels of organization commitments and decrease theircontributions (Levinson, Price, Munden, Mandl, Solley1963; Robinson & Rousseau 1994; Sapienza,Korrsgaard, Shneiger 1997). Further research onrelationships of the employees and organizationsdeveloped the concept of relational psychologicalcontract (relational PC).

It indicates that the employee is obligated to remainin employment with the organization and do what isrequired to keep the job going. The employer alsofulfills its obligation by providing stable remuneration,long-term job security and steady career growth.Employee is obligated to be loyal to the organizationand support the objectives, needs and interests of theorganization. The employee should be a dedicated anda loyal corporate citizen. The employer fulfills its partof obligation by ensuring the well-being of theemployee and their families.

As OCB and relational PC were emerging as topicsfor contemporary research in behaviour science, theresearcher felt that it would be significant to examinewhether there was any linkage between the OCB andemployees' beliefs regarding their obligations towardsthe organization as indicated by EE factor—relationalPC. They are :

EE StabilityEE stability states that employee is obligated to

remain with the organization and plan a long-termgrowth. He has to at least contribute as per the basicperformance expectations to retain his job. He has tostrive to do improvements in a way his job has to bedone.

EE LoyaltyEE loyalty refers to the obligation of the employee

to support the organization and serve to its needs andinterests. He would demonstrate his commitment byprotecting organization’s image, taking organization'sconcerns personally and making personal sacrifices forthe organization, if need be.

Responses of 540 employees from executives andmanagement cadre from Indian corporate sector wascollected through a detailed questionnaire (Cronbachalpha =0.7, an acceptable reliability coefficient,(Nunnaly (1978) and Streiner D. L. (1989). They werefrom manufacturing (engineering, textiles and steelforgings), services (BPO, IT, telecom, financial services)and infrastructure (power, transportation, oil & gas).

Statistics related to testing significance of differences(ANOVA ONE WAY) were used for analysis.

The findings on the relationship of OCB with eachof the EE - relational PC factor are :

1.1. EE stabilityStatistical analysis

Table 1.1.1. EE Stability & OCB factors(mean & standard deviation)

EE stability AL CO SM CT CV

Group 1 : High scores 16.851 17.330 17.202 16.436 17.840(n = 94) (2.3324) (2.3019) (2.3627) (2.4824) (2.0016)

Group 2 : Moderate 15.875 16.528 16.220 15.623 16.580scores (n = 369) (2.3913) (2.1149) (2.2258) (2.3652) (2.3498)

Group 3 : Low scores 14.922 15.935 15.818 14.455 15.208(n = 77) (2.5842) (2.7064) (2.1808) (2.6185) (2.7064)

Figure 1.1.1 EE Stability & OCB factors (means)

Table 1.1.2. Anova to compare EE stabilityand OCB factors

OCB DF DF MSS MSS F Pr > FFactor (between (within (between (within value

group) group) group) group)

AL 2 537 79.4204 5.8058 13.68 <.0001

CO 2 537 42.9234 5.0194 8.55 0.0002

SM 2 537 48.0832 5.0351 9.55 <.0001

CT 2 537 83.4753 5.8712 14.22 <.0001

CV 2 537 147.0096 5.5143 26.66 <.0001

ConclusionSince p values < 0.05, at 5% level of significance we

conclude that there are significant differences inpreference for OCB factors (altruism, conscientious-ness, sportsmanship, courtesy, and civic virtue) w.r.t.preference for EE stability.

Interpretations : The employee group with a highEE stability belief has high preferences for all OCBfactors. The highest preference is for civic virtue,followed by conscientiousness and sportsmanship. Thesame preferences are repeated for the group withperceived moderate EE stability. The employees witha high/moderate EE stability feel that they are obliged



to have a long term career with the organizationand plan a long term growth. Hence these employeesare interested in the developments regardingorganization and very active in organizationalaffairs. They have their future entwined with theorganization. They feel that they have an obligationto the organization to put in the desired perfor-mance levels and, hence, strive to take on stretchedtargets, take advantage of the developmentopportunities provided by the organization. Theyare very loyal to the organization, observe its rulesand regulations and take decisions based on theirconscience. As these employees are together inthe organization on the long term basis, they havea good bonding between them. Hence there is ahealthy competition between the peers to exceedperformance targets and also tendency to supportothers so that they meet the objectives. As theseemployees are committed to the organization, theytolerate organizational negativities, welcome changefor the betterment.

The employees, who have a perceived EEstability in the organization, have least preference forcourtesy, followed by altruism and civic virtue.These employees do not have any long term careerplans with the organization. Hence collaboratingwith others to resolve organizational problems andconflicts may not be very high on their agenda. Theymay not be aware of the impact of their behaviours onwork/others. These employees could be focused onbuilding their curriculum vite and may not haveany reasonable level of bonding with fellow colleagues,to offer help, guide or assist and be responsiblefor them. These employees also may like to leave theorganization as they do not feel like having a longcareer with it. Their objective would be to search fora job in the other organization which would bemore in line with their expectations. Therefore theymay not like to expend their energies in organizationalaffairs.

1.2. EE loyalty Statistical Analysis

Table 1.2.1. EE loyalty & OCB factors(mean & standard deviation)

EE stability AL CO SM CT CV

Group 1 : High scores 16.889 17.022 17.156 16.578 17.911(n = 90) (2,5679) (2,4263) (2,1976) (2,5746) (2,1021)

Group 2 : Moderate 15.952 16.734 16.433 15.651 16.648scores (n = 372) (2.2874) (2,0484) (2,1427) (2,3279) (2,2937)

Group 3 : Low scores 14.577 15,359 14,910 14,218 14,885(n = 78) (2.6064) (2,6919) (2,4023) (2,5053) (2,6530)

Figure 1.2.1. EE loyalty & OCB factors (means)

Table 1.1.2. Anova to compare EE loyalty andOCB factors

OCB DF DF MSS MSS F Pr > FFactor (between (within (between (within value

group) group) group) group)

AL 2 537 112,7487 5.6817 19.84 <.0001

CO 2 537 71.3463 4.9135 14.52 <.0001

SM 2 537 111.2430 4,7998 23.18 <.0001

CT 2 537 117.9889 5,7427 20.55 <.0001

CV 2 537 192.5369 5.3447 36.02 <.0001

ConclusionSince p value < 0.05, at 5% level of significance we

conclude that there are significant differences inpreference for OCB factors (altruism, conscientious-ness, sportsmanship, courtesy, and civic virtue) w.r.t.preference for EE loyalty.

Interpretation : The employees who believe in highorganizational loyalty demonstrate their commitmentto the organization, show high preferences for all theOCB factors. The highest preference is for civic virtuefollowed by sportsmanship and conscientiousness. Theemployees may have a strong belief that they need tovery loyal to the organization as they are committedto it, would be interested in keeping informed aboutthe developments relating to the organization—onbusiness front or otherwise. They would like toactively participate in the organizational mattersand may see this as a re-enforcement of their loyalty.These employees are concerned about protectingorganization’s image and defend the same if need be.The loyal employees to the organization would alsostrong bond with other employees who are beingperceived as loyalists. These employees may enjoy aspecial relationship with each other—‘‘the old boy’’network. They would have a healthy competitionbetween each other to move ahead with theirobjectives. They would extend support to others toensure that these people are also managed to achievethe desired performance. They urge the other loyal



subjects to put in their best contributions. The loyalistshave a very strong commitment to the organizationand there is an impression that if the organization hasto succeed then everyone in the organization need tomake sincere efforts to attain the desired performance.The loyalists would welcome change in the organiza-tion, as they are committed to the organization. Hencethe preference for conscientiousness is very closelyfollowing civic virtue and sportsmanship. The desireto take on steep targets, take control of one’sdevelopment, decision making based on self-conscience for organization's betterment and obligationto the rules/processes of the organization once againdemonstrate the commitment and support of theseemployees to the organization.

The employees with the belief of moderateorganizational loyalty as an indicator to theircommitment to the organization show highestpreference to conscientiousness, followed by civicvirtue and sportsmanship. Their preference forconscientiousness may indicate that they feelperformance is one important indicator of theircommitment to the organization. These employeeswould strive to perform better by voluntarily acceptinghigher targets and upgrading their skills on acontinuous basis. They would be committed toorganizational values and always have organization’sbest interest in mind. However, due to theseemployees' belief in organizational loyalty in amoderate manner, they may not have a very highdesire to be alert about organizational developmentsand an urge to participate in the organizational affairsin a very active manner and to make personal sacrificesfor the organization. These employees could be clearlyfocused on delivering what the organization desiresthrough their high performance and thus justify theirexistence within the organization. Therefore they maynot pay high attention to support and push othermembers of the organization to achieve the desiredperformance levels. They would tolerate negativitiesof the organization to an extent and may supportchange if convinced about it. The strong focus onindividual performance may give rise to someprofessional rivalry amongst these employees. Hencethe lower preference to sportsmanship compared toconscientiousness.

The employees with a low perception of EE loyaltyin their organization have indicated the lowestpreference to courtesy followed by altruism. As thecommitment levels of these employees to theorganization are very low, they may not be botheredto resolve organizational issues and conflicts bycoming together and collaborating. As the desire forteamwork is low, these employees would not be

bothered about impact of their behaviour/work onother colleagues in the organization and the downwardpull that may create on organization's performance.At this stage, these employees may also not be veryconcerned about their fellow colleagues and may notoffer any guidance or be responsible for them. ❐

References■ Deloitte Research Study its (2008). Do you know where

your talent is?■ Guest D. E., Conaway N. (1998). Fairness at work and

psychological contract. London: Institute of Personnel &Development.

■ Levinson H., Price C. R., Munden K., Mandl H, Solley C.M. (1963). Men, management & mental health, CambridgeM. A., Harvard University Press.

■ Mckinsey & Co. (2004). Global Survey of BusinessExecutives. New York.

■ Morrison E. W. & Robinson S. L. (1997). When employeesfeel betrayed: How a model of psychological contractviolation develops. Academy Management Review, 22(1), 226 - 256.

■ Nunnaly J.(1978). Psychometric theory, NewYork:McGraw Hill.

■ Organ, D. W. (1988). Organizational citizenshipbehaviour : A good soldier syndrome, Lexington, M.A:Lexington Books.

■ Robinson s. L. & Rousseau D. M. (1994). Violating thepsychological contract: Not the expectation but the norm.Journal of Organization Behaviour, 15, 245 - 259.

■ Rousseau D. M. (1990). New hire perceptions of their ownand their employers’ obligations: A study ofpsychological contracts. Journal of OrganizationalBehaviour, 11, 389 - 400.

■ Rousseau D. M. (1998). ‘The ‘‘problem’’ of thepsychological contract considered’, Journal ofOrganizational Behavior, 19: 665 - 671.

■ Rousseau D M. (2000). PCI technical report, CarnegieMellon University.

■ Sapienza H. J., Korsgaard M. A., Schweiger D. M. (1997).Procedural justices and changes in psychological contract:a longitudinal study of re-engineering planning.Academy of Management Proceedings.

■ Sims R. R. (1994). Human resource management's role inclarifying new psychological contract. Human ResourceManagement, 33 (3), 373 - 382.

■ Spindler G. S. (1994). Psychological contract in theworkplace: A lawyer’s view. Human ResourceManagement, 33(3), 325 - 333.

■ Starnes B. J. (2007). An analysis of psychological contractsof volunteerism and effect of contract: Breach on volunteercontributions to the organization. International Journalof Volunteer Administration, vol. XXIV, no. 3, p 31 - 41.

■ Streiner D. L., Norman GR (1989). Health MeasurementScales : A Practical Guide to Their Development and Use.New York: Oxford University Press, Inc. pages 64-65.


PROJECT MANAGEMENT

Project Management Team Handling Challenges to

Multinational Corporation

Dr. M. Javed MasoodVisiting Professor,Central University of RajasthanKishangarh, Rajasthan

Introduction

Bausch & Lomb Inc. chose to establish a $13million joint venture in India for the purposeof producing and marketing high quality eye

care and optical products in India and adjacentcountries. The Indian market was viewed by Bausch& Lomb as an opportunity to satisfy the demands of alarge emerging middle class population in a countrywhose total population of 1240 million people is thesecond largest in the world.

In recent years, India has been moving toward amore open economy encouraging multinationals toform joint ventures with local firms. To promoteforeign investment, the Indian government hasreduced tariffs on imported raw materials.

This was Bausch & Lomb’s first venture into theIndian subcontinent. Supported by the staff of aprominent eye institute in Hyderabad, and teamedwith Bausch & Lomb eye care professionals, trainingof Indian eye care practitioners (ophthalmologistsand optometrists) began immediately to supportthe development of the soft contact lens businessthere.

It was necessary to overcome major obstacles tocomplete the manufacturing facility. Bureaucraticpaperwork, different management styles, highimport duties, lack of available electric power, water,sewers, and limited communications networkscreated uncommon problems. These issues challengedthe multinational project team in the Indianenvironment.

Bausch & Lomb’s style of management isparticipatory with heavy emphasis on team work.This contrasts with the more autocratic styleprevalent among many Indian firms. “There are cleardemarcations between management and lower level

employees. Discussions via labor unions are common;overtly expressed dissatisfaction is rare”.

While this presentation will describe projectexperiences in India, the lessons learned are applicableto most developing countries. Unlike countries in theformer Soviet Union, India has remained a closedeconomy for decades. This presented severalunknowns to the team requiring mid-course correc-tions during the project. The multinational projectteam was quickly formed, and an Indian architecturaland engineering firm (Tata) was selected. Actualproduction started in June 1992, seventeen monthsafter groundbreaking.

Scope

For project objectives to be met, production neededto start within seventeen months from approval date,and total capital costs needed to be within theapproved $13 million budget. All products producedneeded to meet Bausch & Lomb’s international qualitystandards.

Detailed construction drawings and specificationswere developed by Tata to Bausch &. Lomb’s conceptdrawings and performance specification. A completedetailed work breakdown structure was prepared bythe protean for each product line with plannedconstruction completion dates. Reporting of cost,schedule, and technical performance status occurredmonthly by each product line team member with keyissues and action noted.

Team members were selected by the projectmanager for their expertise and their flexibility towardforeign cultures and their ability to work as part of amultinational team. Once the project team was formed,a successful four-day design conference was held inEurope to finalize technical details impacting thedesign of the 70,000-square-foot manufacturing


PROJECT MANAGEMENT

facility. Fifteen technical representatives from Bausch&. Lomb Inc., the joint venture (Bausch Lomb IndiaLtd.), and Tata participated. Basic facility parameterswere established including all utility capacities,space requirements, and product work flow, plantexpansion strategies, etc.

From this conference came the realization that theproject was under-capitalized. Original assumptionsneeded revision. Equipment originally planned forIndian manufacture now needed to be imported atincreased cost due to lack of Indian manufacturingcapability for specialized equipment. Over $2 millionin new costs were offset by selective reductions inoptional equipment, favorable reductions in duty rates,and by subcontracting one product line (enzymetablets). The Plant capacity plan was met and is capableof initially supporting sales for projected fifth-yearvolumes with designed-in expansion capability doublecapacity in later years.

Time Management

To meet the planned completion targets, a fast-trackapproach was implemented for building construction.The nearly $2 million in additional costs (noted above)for scope changes were required to compensate for thelack of available power, water, and effluent treatmentas well as account for lack of locally availablespecialized equipment.

Importing special-purpose equipment proved to benot only costly in money (100+ percent duty), but alsoin time. In many cases, up to three months wererequired to clear Indian customs. The paperworkneeded to be impeccable—otherwise a long delaycould be expected.

Even though the team experienced customclearance delays as well as delays in commerciallyavailable power for the plant, production still startedseventeen months after groundbreaking. This wasachieved by training at other Bausch & Lomb plantsand by a phased production start-up utilizing importedsemi-finished products.

Quality Management

We learned quickly that it was essential to importhigh precision, sophisticated special purposeequipment. Locally, the state-of-art for most equipmentis 1940s technology. This is especially true in themachine tool sector. Much of our precision equipmentwas imported from Germany, Hong Kong, and UnitedStates.

A key part of this project included designing andbuilding the manufacturing facility to produceproducts to worldwide specifications. The inter-national standard is aimed primarily at preventingand detecting any nonconformity during productionand at implementing systems to prevent recurrence.The government inspections are required annuallyfor the new plant; conformance to local codes andstandards is expected—particularly from multina-tionals.

Legal contracts appear to be less important in Indiathan in the United States. This is due largely to thecumbersome legal system at present. However, specificcontracts were established for the architectural andengineering work and the civil contractor. Fortunately,no major problems arose during the execution of thesecontracts.

Prior to beginning production, each process wasvalidated and each product was subjected to standardproduct qualification testing to ensure that allperformance parameters were met. Once thesevalidations and qualifications were successfullycompleted, a start-up audit was conducted, andapproval was then given from Corporate QualityAssurance to begin production. Quarterly product/process audits are performed for the facility by Bausch& Lomb representatives from the United States andEurope.

Risk Management

Producing a high-quality product in India is arisk in itself. Facility of construction techniques arehighly manual, slow and of poor quality. The onlymajor piece of construction equipment at the sitewas a small concrete mixer. All other tasks wereperformed manually. Over 300 laborers were at siteduring the peak construction period. The jointventure acted as the general contractor, as is thecustom in India. External risks that were unpredictablewere :

● change in government regulations, such as dutyrates, excise taxes, etc.

● unavailability of basic services such as water,electric power, telecommunications, andspecialized vendors

● lack of skilled manpower—particularly in areassuch as computer skills, mechanics, electri-cians, etc.


PROJECT MANAGEMENT

● bureaucratic serendipity-government appro-vals to import equipment took months with theprospect of rejection.

Communication Management

The projects in the international sector were staffedwith a project manager and technical support teambased at its United States headquarters and a jointventure team at site.

Once the project was under way, we learned thatthis would not be adequate for a project of thiscomplexity in a Third-World environment wherechanges occur daily. We then stepped up our on-sitesupport to maximize the number of technical personnelfrom Bausch & Lomb.

No fax communication is available, and local phonecommunications are unreliable. No interna-tionalphone or communication is possible so all must behandled through the office in New Delhi. Courierscarry messages daily from the New Delhi office tothe plant.

In response, the project team members spent up tothree weeks per trip each quarter in India to meet thestart-up schedule. Product line engineers from Bausch& Lomb worked on rotating schedule coverage at theplant site. For each product line there near present wasto respond to immediate needs and to communicatewith other team members via fax or phone from NewDelhi. This worked well and avoided long stays inIndia.

The prize was the satisfaction of a very difficultjob well done by a world-class multinational projectteam.

Factors for Success

● Hold a technical design conference to finalizedesign parameters and identify risks. Detailedengineering work can then begin.

● Select an in-country architectural andengineering firm that understands local cultureand has experience with similar work.

● Select a good joint venture partner who knowslocal market and how to deal with thebureaucracy.

● Organize a competent, well-motivated team andrecognize it for its contributions.

● Pick a good scheduling system that is user-friendly.

● Select a good plant location, and design thefacility logical expansion.

● Get marketing to commit to a sales forecast.While easier said than done, this is critical tocapacity planning.

● Know and test assumptions.

Conclusion

The project was not possible to be successfulwithout using techniques of “Project Management”.With the support of the total project team, the projectcame under budget, despite equipment delays atcustoms and delays in commercially available power.Today this plant manufactures products that meetworldwide quality standards.

The team members were selected by the ProjectManager for their expertise, their flexibility towardforeign cultures, and their ability to work as part of amultinational team.

The management style was quite different from thetypical style in Indian firms—to face a number ofexternal risks were unpredictable. The ProjectManagers are sometimes challenged with majorbureaucratic obstacles and ethical dilemmas for theproject manager without looking for shortcuts.

This project proved that it is possible to producehigh-quality products in India to internationalquality standards. Accomplishing this requiredsignificant training, high-quality equipment, apositive attitude, and support from our Indian jointventure partner. ❐

References■ Edward A. O’Connor, Bausch & Lomb, Inc. PMI Canada

Proceedings, 1994, pp. 377-80■ Craig Head’s International Executive Travel, Darien,

Conn., USA.■ National Information Standards Organization (Z39.

48-1984)■ Library of Congress Cataloging—In-Publication Data■ Industrial Project Management — Case studies,

HD69.P75P28, 1997


BANKING

Introduction

The Indian banking sector has experiencedprogression on various directions in the lastdecade, they have seen much focus on economic

progress and many have taken giant steps in its journeythrough time. The regulators of this sector have madenotable efforts to improve innovation, growth andvalue creation to sustain the havocs of financial crisesin recent past. However, concern at global level is thatmere economic growth and profitability may notaddress environmental liabilities, and we need to takespecial effort to encourage sustainable developmentacross industries.

This sustainable development is nothing but thecontinuity of economic progress for present generationwithout damaging the ecology or destroying theavailable resources for future generation. It is beyondmatters of sheer corporate social responsibility orethical norms. All sectors of the economy, government,NGOs, corporate, citizens and definitely the financialsector have impact, direct or indirect on theenvironment for their activities in society. Thisexploratory study tries to gather some of the effortsmade at international level to address issues ofsustainable development and suggest a model basedon few parameters that banks in India may adapt toassess sustainable growth efforts made by theirprospective borrower clients.

Though a bank’s own activity may be consideredenvironment friendly in terms of emissions andpollutions, but the environmental impact of bank’sexternal activity is enormous and difficult to quantify.Their contribution in financing various types of projectsacross industries cannot be ignored. Globally, firmsand industries are exposed to strict environmentalpolicies and are under the scanner of stringent laws,therefore, it also becomes easier for financialinstitutions, in such countries, to assess and report theircontribution and progress in sustainable development.

The banking sector, especially in India, need totackle sustainable development issue through theactivities of their customers whom they serve. The

Sustainable Development : Few Aspects in

Indian Banking Sector

Pradipta Gangopadhyay

Dy. DirectorInstitute of Cost Accountants of India

concept of ‘‘green banking’’, as mentioned by SahooP. and Nayak B.P. (2008), will not only ensure thegreening of the industries but will also facilitate inimproving the asset quality of banks in future. The roleof banks in assessment of projects for financing andpriority lending purpose would influence customeractivities that encourage ecologically viable industriesand play a critical role to promote environmentallysustainable and socially responsible industrialactivities.

The aspect of social audit and client assessmentVarious agencies, consortiums and development

institutions across the world have been advocating forenvironmental standards and strategies to evaluateinvestment projects. United Nations EnvironmentProgram and Finance Initiative (UNEPFI) waslaunched in 1990s to promote sustainable developmentwithin the framework of market mechanisms; evenearlier to this, the U.S. Comprehensive EnvironmentalResponse Compensation and Liability Act in the 1980’shas resulted in huge loss to several banks in the US forpolluting the environment from activities of theirclients and made them pay the remediation cost. Inanother case, a global network of civil societyorganizations and individuals came together to createan organization named Bank Track. It tracks theoperations of private financial sector (commercialbanks, investors, insurance companies etc) and itseffect on people and planet. This has contributedremarkably to safeguard policies coveringenvironmental assessment, natural habitats, pestmanagement, child and forced labor issues, andvarious other social causes mostly in the Westernworld.

A summarized report by Sullivan & Cromwell(2003) on the 'Equator Principles—New Environmentaland Social Guidelines for Project Finance Transactions'was made available as practices and policies thatwould be expected to permit banks to provide directloans and meet substantive standards. The principlestherein indicated criteria that include various


BANKING

environmental and social screening procedures thatneed to be followed by a project borrower in order toobtain finance from banks. Some of the banks whohave initially adopted the Equator Principles includeBarclays Bank plc, Royal Bank of Scotland, Citigroupand a few others, though the practical effects of thesepolicies would certainly depend on individual internalpractices existing in these banks.

A global level survey conducted by Mckinsey &Company to explore why and how companies areaddressing sustainability in various industries foundthat many successful companies had considered long-term strategic view of sustainability built into theirthree key value creation areas: Return on Capital,Growth and Risk Management. The report is an eye-opener to several companies functioning in variousindustries as well as the financing institutions thatsupport their projects. The implication for bankinginstitutions who deliberately finance projects aftermaking due Environmental Assessment and followingrigid regulations are manifold Banks could reduce theircredit risk as a result of customers defaulting onconsequence of their uncalculated expenses forcapital investment made in projects which areenvironmentally unviable; they may also reduce theirexposure to legal risks as direct lender liability forecological damages made by its customers who havefinanced their projects; and last but not least, with thegrowing awareness of sustainable development,financing institutions are also prone to loose theirreputation for financing ecologically and ethicallyquestionable projects. Hence for banking institutionsto reduce such risks and maintain good reputation inthe market, sustainable development aspects have tobe positively addressed.

Efforts for Indian Banking SectorIndian banking sector has shown many positive

developments in the last decade by having madenotable efforts to improve regulation in the sector. It isgrowing rapidly, its role and contribution in keepingthe Indian economy stable even during the financialturbulence worldwide, is a matter of appreciation.Some banks have even shown outstanding trackrecords of innovation, growth and value creation overthe years. Many of the Indian banks are pursuingglobal strategies in order to fundamentally upgradeorganizational capability to stay in tune with thechanging market and global growth. However,financing industries that compromise the ethical normsby creating loss of biodiversity, environmental damageand climate change, is definitely not asked for and inthe long run create substandard assets for them. Hencebanks need to assess their borrower clients carefullyto prevent financing hazardous projects that wouldexpose them to credit as well as legal risks with thepassage of time.

In India too, the fear of depletion of naturalresources and degradation of the environment hasattracted attention of several organizations andresearches to make studies that would help insustainable development of the economy. One studyreport named ‘Sustainable Green Banking : The storyof Triodos Bank’, by R.N. Dash (2008), hasdemonstrated how a bank, licensed under the DutchCentral Bank, in small town of Zeist, has successfullysupported sustainable performance of industries in itscountry. The study reveals the unique method oflending process of this bank where apart from analysisof the firms’ data, gathers information from humanrights organizations, multilateral agencies, interna-tional consortiums and such other sources that maybe relevant. Lending portfolio as available in that studymay provide us guidance in regard to social andenvironmental audit procedure; the illustration is asbelow:

Exhibit 1 : For Environment and Social Audit inthe Bank

Sl.No.

1

2

3

4

Segment

Nature andEnvironment

Culture andwelfare

Social Business

Any other areaunder the regu-lation of theGovernment ,Internationaland Nationalc o n s o r t i u m sor other suchbodies.

Share in totallending

Percentage

Percentage

Percentage

Percentage

What it includes

Projects in the field of renewalenergy (wind energy & hydro-electric projects), organicagriculture across the entire valuechain including health, foodshops and environment techno-logy such as recycling companiesand nature conservative projects.

Small loans to artists andorganizations actively involvedin education, healthcare orproviding aid to people withphysical and learning disabilities.All these enterprises have a clearpeople-centered policy.

Loans to traditional business andinnovation enterprises andservices providers with clearsocial goals, including financingof start-up enterprises, fair tradebusinesses and microfinanceinstitutions providing basicfinancial services for people in thedeveloping world.

Suitable criteria

Source: ‘Sustainable Green Banking : The story of Triodos Bank’ byR. N. Dash (2008), suitable modified for this study


BANKING

In a similar fashion, banks in India need to helpbridge the gap between economic growth and theissues of sustainable development for the country.Each bank may have its own policies and practicesfor assessing lending criteria to its prospective clients;but a defined combination of environmental, societal,and governance issues may be set as parametersto assess the projects and accompany the projectanalysis report in addition to the usual and normalindicators. Below is given an indicative model thatmay help in sustainability assessment of thebusiness for financing purpose to the clients’ upcomingproject.

Exhibit 2 : Client Assessment Model

Concluding

Banks have substantial influence on economicgrowth and can play major role in determining thenature of growth both in terms of quality andquantity. Banks can encourage environmentallyresponsible investments by its customers that wouldplay an important role in creating linkage betweeneconomic development and protection of thenature. This would subsequently facilitate inimproving asset quality of many banks in future.Worldwide it has been an issue of concern, of howcommercial banks, being important source of financefor companies and governments, can exert greatinfluence on operations of their clients to controlenvironmental degradation.

The banks could address issues of sustainabledevelopment, governance, accountability, transpa-rency, reporting and risk management need tobecome integral to the interest of all stakeholders.They can make sure that their clients integrateenvironmental, social and governance issues intotheir strategic planning of business model and actunder stringent regulation. This would createtransparency and accountability at their end wouldhelp these companies strengthen their competitiveposition, have long-term strategic view and identifyopportunities of growth that are economically viableand at the same time prevent damage of ourenvironment. ❐

References

■ Dash R.N., (2008), ‘Sustainable Green Banking: The story

of Triodos Bank’

■ Sahoo P., Nayak B. P. (2008), ‘Green Banking in India’,

Indian Economic Journal (IEJ)

■ The Business of Sustainability : McKinsey Global Survey

results, October 2011

■ Sullivan & Cromwell LLP (2003), ‘Equator Principles—

New Environmental and Social Guidelines to Project

Finance Transactions’

■ Nishi Sharma (2011), ‘CSR Practices and CSR Reporting

in Indian Banking Sector’ IJAEBM vol no.1, Issue no.2,

058-066Source : McKinsey Global Survey results, October 2011, suitablymodified for this study.

Sustainability integrated in thefollowing business processes ofthe organization to be assessedbefore financing projects.

Mission and Values, StrategicPlanning, Corporate Culture,Operations, Employee engage-ment, Internal Communications,Budgeting Process, Marketing,Supply Chain Management,External Communication etc.

Reducing energy use in operations

Reducing waste from operations

Managing corporate reputation for sustainability

Responding to regulatory constraints oropportunities

Reducing emissions from operations, andpresence of treatment plants

Managing services/products portfolio tocapture trends in sustainability

Reducing water use in operations

Committing R&D resources to sustainableproducts

Leveraging sustainability of existing productsto reach new customers or markets

Managing impact of products and packagingthrough the value chain

Improving employee retention and/ormotivation related to sustainable activities

Mitigating operational risk related to external forcesAchieving greater market share fromsustainable products

Further breakup for analyzing the credit applications of theprospective clients (these breakups are only indicative and moreand more parameters may be set by banks, and responses notedfor analysis both qualitatively and quantitatively)

Yes considerably

Yes

Yes noticeably

Yes in true sense

Yes

Yes

Yes

Yes significantly

Provisionspresent

Yes

Good HR policies

Provisions made

Yes


FINANCIAL REPORTING

The financial crimes (and frauds) are not lessdangerous than the murders in real life ratherhave been the causes of many real life murders,

known or unknown, and steadily progress disaster inpersonal lives of many. In general, one should agreewith me in two points about the nature of financialcrimes that they can not usually be committed aloneand to commit these crimes people need super-intelligence. Because, in any country of the world thereis an extant system of legislation mainly with theobjective of prevention of crime. Like any otherlegislation, the basic objective of which is to preventthe possible concerned crime in the first instance, andif at all any crime takes place flouting the said law,there should be provisions in the law for punishment.So, there are many people to connive if the law is to beviolated. In spite of that, such crimes and frauds aretaking place, from time to time, and from one countryto the other. Most astonishingly, financial crimes havebeen occurring not only in a country of lenientcompliance system of punishment like India but alsoin the countries having a stringent system of imposingpunishment like the United States. In this context, twoinfamous financial scams, Enron scandal (2001) inU.S.A. and Satyam Computer scam (2009) in India thathave taken place in two ends of the last decade, but intwo different countries, specially having a differentmode of compliance system, are taken up fordiscussion.

Financial reporting scams caused by ‘creativeaccounting’ (though it may be a misnomer) aredistinctly different from the securities market basedscams. Financial scams are far in-depth and take timeto get unfolded because the initial public loss remainsdormant. The time of releasing out the extent ofdamage depends upon the nature of efficiency inconduction of crime.

Enron scandal (2001) in U.S.A. and Satyam scam(2009) in India, when investigated into reveal manysimilarities in conduction of the ‘crime’ as well as in

‘Crime and Punishment’: An introspection into two infamous

financial reporting frauds across the world

Dr. Arindam Gupta*M.Com. PGDFM, FCMA, Ph.D.Professor of CommerceVidyasagar University

respect of the extant legislations before the occurrenceof such crimes in the respective countries. The primeaccused persons in both these scams have also been incontrol of the respective companies before the newsof the scams came into public knowledge. After theEnron debacle, auditing all over the world has comeunder the scanner. The age-old saying that ‘an auditoris a watchdog and not a blood hound’ is being re-examined, if not questioned. Legislation which seeksto lay a greater emphasis on detection and reportingof fraud by auditors has been introduced all over theglobe. Sarbanes Oxley Act (SOX) was introduced inthe United States as a reactive measure in the aftermathof the scam whereas clause 49 was floated as a pro-active measure in India. Yet, the principal reasons asinvestigated into both the countries do not establishthat there was not sufficient law before occurrence ofthese scams. That is why Satyam Computer scam, astitled later as ‘India’s Enron scam’, may have takenplace.

Urging upon the ethical aspect of auditors and otherconcerned persons becomes popular as long timeremedial measure than making the legislation furtherstringent. But, that not being objectively measurable,the present paper suggests to give more importanceon the twin tools of enhanced scrutiny and deterrentpunishment towards minimizing the probability ofscams and their size.

Why These two scams of the two countries beingselected in the study?

It may appear to be a mere coincidence but the twocompanies in the two countries far off from each other,the companies also being far off in their industries ofoperation evolved almost similarly. However, thesetwo companies faced the same sort of events in theprocess of being the leaders in the respective industriesin the said countries. Enron started business as anenergy supplier in 1985. Two years later, Satyam setup shop to provide IT services to the companies


FINANCIAL REPORTING

abroad. By 1996, Enron started trading in energycontracts and by December 2000 claimed that its profitstripled in just two years. Just before its liquidation inlate 2001, Enron was regarded as one of the world’sleading energy companies with over 20,000 employeesand a revenue claim of over $100 billion in 2000. Also,for six years in a row, Enron was “America’s mostinnovative company”. Satyam too had one time nearly53,000 employees and had been the country’s fourthbiggest IT firm. It had also won various innovationaccolades and awards for its corporate governance.Satyam was ranked high by the international mediathat said the IT company was catching up fast withthe big three Indian software exporters, TCS, Infosysand Wipro.

Now, it will be more interesting to see the beforeand aftermath of these scams in these two countries.Because, basically the nature of these two scams issame, which has already been mentioned as a productof creative accounting and earnings management.Enron hid its debts to make growth look impressive.Satyam founder, Ramalinga Raju too inflated cash andbank balances, reported accrued interest that was non-existent, understated liabilities and over-stateddebtors’ position.

There is another motivation behind selection ofthese two particular scams, rather the two countrieswhere these two scams took place. The country, whichbasically houses Enron, is considered to be the leaderof the present-day politically viewed unipolar worldand one of the most economically rich countrieshousing the registered offices of most of the big TNCs.Further, the country is widely considered to be onehaving a very sound legislation. More importantly, thecountry is famous for the meticulous compliance ofthe legislation. Whereas, India, bearing the largestdemocratic political system, housed once the largestnumber of stock exchange-listed companies in theworld and is still being a country with leading numberof listed companies. The country is widely consideredeconomically to be a developing nation. The countrytoo has a much experienced and celebrated set-up ofvarious laws, more akin to her one-time political ruler,the United Kingdom. The corporate laws andgovernance systems are no exception to this. But,compliance of the laws is in general poor; the judiciaryalso suffers from an inherent system-basedsluggishness. The country has also become infamousfor various financial scams in recent past in whichpolitically elected personnel got involved. In most ofthe cases of financial scams in India, especially in theinfamous securities market scam of 1992, veryminimum punishment could ultimately be imposed.

The First White-Collar Crime : Enron scam in theUnited States

In 2001, Enron suffered the largest bankruptcy casein history, after a series of revelations involvingirregular accounting procedures bordering on fraudperpetrated throughout the 1990s involving Enron andits accounting firm Arthur Andersen. The scamsurpasses even the other infamous scams taken placein WorldCom in 2002 and Lehman Brothers in 2008 inthe same country if the amount of fraud and variouslosses are considered. “Judge Lake revealed that thesize of the fraud linked to Skilling’s actionswas considered by the court to be $80 million. …Thousands of jobs and $2 billion of pension funds werelost while the 2001 bankruptcy wiped out $60 billionof Enron’s market value” (The Times, New York,October 24, 2006). Enron filed for bankruptcy onDecember 2, 2001.

As the scandal unraveled, Enron shares droppedfrom over US$90 in the summer of 2000 to just penniesin the early 2002. Enron had been considered a bluechip stock, so this was an unprecedented anddisastrous event in the financial world. Enron’s plungeoccurred after it was revealed that much of its profitsand revenue were the result of deals with specialpurpose entities (limited partnerships which itcontrolled). The result was that many of Enron’s debtsand the losses that it suffered were not reported in itsfinancial statements.

Just four days before Enron disclosed a stunning$618 million loss for the third quarter in 2001-2002, itsfirst public disclosure of its financial woes, workerswho audited the company’s books for ArthurAndersen, received an extraordinary instruction fromone of the company’s lawyers. Congressionalinvestigators tell The Times (New York) that the October12 memo directed workers to destroy all audit material,except for the most basic “work papers”. And that iswhat they did, over a period of several weeks. As aresult, FBI investigators, congressional probers andworkers sued the company. Since the SecuritiesExchange Commission (SEC) is not allowed to acceptaudits from convicted auditors, Andersen was forcedto stop from being given audit assignment in the publiccompanies. Although the conviction was thrown outin 2005 by the Supreme Court, the damage to theAndersen name has prevented it from returning as toits position even on a limited scale. This ultimately ledto the dissolution of Arthur Andersen, which at thetime was one of the world’s top accounting firms.

Enron had created offshore entities and units whichmay be used for planning and avoidance of taxes,


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raising the profitability of a business. This providedownership and management with full freedom ofcurrency movement and the anonymity that allowedthe company to hide losses. These entities made Enronlook more profitable than it actually was. This practicedrove up their stock price to new levels, at which pointthe executives began to work on insider informationand traded millions of dollars worth of Enron stock.The executives and insiders at Enron knew about theoffshore accounts that were hiding losses for thecompany; however, the investors knew nothing of this.Chief Financial Officer, Andrew Fastow led the teamwhich created the off-the-books companies, andmanipulated the deals to provide himself, his family,and his friends with hundreds of millions of dollars inguaranteed revenue, at the expense of Enron and itsstockholders.

Further, under the direction of Enron president andchief operating officer, Jeffrey Skilling, the companyadopted ‘mark to market accounting’, in whichanticipated future profits from any deal were tabulatedas if assuming them real today. Thus, Enron couldrecord gains from what over time might turn out to belosses, as the company’s fiscal health becamesecondary to manipulating its stock price on Wall Streetduring the technology boom. But when a company’ssuccess is measured by agreeable financial statementsemerging from a ‘black box’, a term Skilling himselfadmitted, actual balance sheets prove inconvenient.The Wall Street analyst, Richard Grubman hadcomplained that Enron was the only company thatcould not release a balance sheet along with its earningsstatements. When asked during his trial, Skillingwholeheartedly admitted that ‘industrial dominanceand abuse had been a global problem’. For referencesake, it should be mentioned here that Kenneth Laywas the CEO and chairman of Enron from 1985 untilhis resignation on January 23, 2002, except for a fewmonths in 2000 when he was the Chairman and JeffreySkilling was the CEO.

In August 2000, Enron’s stock price hit its highestvalue of $90. At this point, Enron executives, whopossessed the inside information on the hidden losses,began to sell their stock. At the same time, the generalpublic and Enron’s investors were told to buy the stock.Executives told the investors that the stock wouldcontinue to climb until it reached possibly the $130 to$140 range, while secretly unloading their shares. Asexecutives sold their shares, the price began to drop.As Lay did many times in the history of the companywhenever any small news came in public knowledgewhich might have a negative impact upon the

investment market, he would issue a statement or makean appearance to calm investors and assure them thatEnron was headed in the right direction. This time too,the investors were told to continue buying stock or holdsteady if they already owned Enron because the stockprice would rebound in the near future. By August 15,2001, Enron’s stock price had fallen to $42. Many ofthe investors still trusted Lay and believed that Enronwould rule the market. They continued to buy or holdtheir stock and lost more money every day. As Octoberclosed, the stock had fallen to $15. Many saw this as afurther great opportunity to buy Enron stock becauseof what Lay had been telling them in the media. Theirtrust and optimism proved to be greatly misplaced.

Lay has been accused of selling over $70 millionworth of stock at this time, which he used to repaycash advances on lines of credit. He sold another $20million worth of stock in the open market. Also, Lay’swife, Linda, has been accused of selling 500,000 sharesof Enron stock totaling $1.2 million on November 28,2001. The money earned from this sale did not go tothe family but rather to the charitable organizations,which had already received pledges of contributionsfrom the foundation. Former Enron executive, PaulaRieker has been charged with criminal insider trading.Rieker obtained 18,380 Enron shares for $15.51 a share.She sold that stock for $49.77 a share in July 2001, aweek before the public was told what she already knewabout the $102 million loss.

It is reported that Enron enjoyed considerableinfluence from the start of the Bush Administration.Curtis Hebert Jr., the former chairman of the FederalEnergy Regulatory Commission, told the Times, NewYork that Lay offered to support Hebert’s continuingin that role if Hebert would take a friendlier viewtoward energy deregulation. Hebert declined, and theBush Administration replaced him. Lay and otherEnron officials met six times with officials led by VicePresident Dick Cheney, a former oilman, to craft a newenergy policy. That policy, not surprisingly, wasfriendly to Enron and other energy companies. WhileBush and the Republicans have gained the lion’sshare of attention from Enron and Lay, they get at leasta little cover from the company’s campaigncontributions to prominent Democrats, such as SenateEnergy Committee Chairman, Jeff Bingaman andLouisiana Senator, John Breaux. Enron and its topofficials have hired the well-known Democraticlawyers, Robert Bennett and David Boies.

Shortly after emerging from bankruptcy inNovember 2004, Enron’s new board of directors sued11 financial institutions for helping Lay, Fastow,


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Skilling and others for hiding Enron’s true financialcondition. Among the defendants were Royal Bank ofScotland, Deutsche Bank and Citigroup.[update] Enronwas able to obtain nearly $20 billion dollars todistribute to its creditors as a result of the mega claims’litigation. As of December 2009, some claim andprocess payments are still being distributed.

The Initial Reaction in the United StatesReacting to the Enron scandal, Norman (2004)

argues that new ways of holding senior executivesaccountable in a stakeholder-oriented (multiple-objective) firm must be found. He calls for reducingthe discretion given to the managers in choosingbetween maximization of profit and that of multiplestakeholder benefits. He further alleges that the boardof directors cannot effectively judge whether the topmanagement is doing a good job if it does not have aspecific exclusive measurable target. The standards formeasuring improvement in some areas of stakeholderbenefit are likely to be flexible, if not ambiguous.Therefore, the board has to assume that managementis deeply committed to a corporate social responsibilitymission. That, however, cannot be verified. Moreover,accepting the existence of moral hazard, the corruptionof agents is likely to appear, in which case the programof multiple stakeholder benefits may become not onlyinefficient, but fraudulent.

The practice of co-sourcing, as it is called, of internalaudits gained popularity in the US following the Enronscam. Outsourcing internal audit practice servedseveral purposes for corporate houses, includingenhancing the brand value of the company. Earlier, atthe time of investing in a firm, private equity investorsonly looked at the statutory audit records. Howeveran increasing emphasis is also being given to internalaudit at present.

The Second White-Collar Crime : SatyamComputer scam in India

In an announcement that sent shock waves acrosscorporate India, Chairman of Satyam ComputerServices Ltd., once the third largest software servicescompany in India, B. Ramalinga Raju resigned fromthe board, admitting India Inc.’s biggest fraudamounting US$ 1.44 billion. Soon after, Satyam’sManaging Director and Ramalinga’s brother, B. RamaRaju, too followed suit. In a letter to the board, B.Ramalinga Raju admitted that there were inflated (ornon-existent) cash and bank balances of 50.40 billionINR (the amount reflected in the books being 53. 61billion INR). There was also a receipt of accrued interestamounting to 3.76 billion INR, which was non-existent.

The balance sheet also had an understated liability of12.30 billion INR on account of funds arranged by Raju.The debtors’ position was also overstated to 26.51billion INR (the increase being 4.90 billion INR). Rajuadmitted that the September 2008 results wereoverstated at 27 billion INR with an operating marginof 6.49 billion INR (the actual corresponding figuresbeing 21.12 billion and 0.61 billion INR respectively,resulting in an artificial cash balance of 5.88 billionINR). Raju also admitted that Satyam’s profits wereinflated over several years. He said that what startedas a marginal gap between the actual operating profitand the reported profit attained unmanageabledisproportionate increase as the size of the companygrew and every attempt to eliminate that gap failed.He added, “It was like riding a tiger, not knowing howto get off without being eaten”. The Maytas deal wasthe last attempt to replace the fictitious assets with realones. Analysts indicated that the size of the fraud couldbe much higher, considering that the figure of about80 billion INR was disclosed by the company chairmanhimself.

Raju stated that 12.30 billion INR was arranged forSatyam, not being reflected in its books, just to keepSatyam’s operations running. And, for this, thepromoter had to pledge the promoter’s shares and raisefunds from other sources. Facing the threat of a hostiletakeover by a domestic or overseas company, includingprivate equity firms, Satyam Computer Services’management and some of its institutional investorsstarted exploring the possibility of merger with anothersoftware company.

Raju started an IT company with 20 employees andbagged a multitude of IT projects from the UScompanies. The said company developed rapidly andbecame a true multinational company with thousandsof employees spread over a number of countries. Thelatest Maytas controversy and margin selling of hisshares created a furore in the business circles. SatyamComputers had announced on December 16, 2008 thatit would acquire two group firms – Maytas Propertiesand Maytas Infra for 80 billion INR (about $1.6 billion)as a part of its diversification strategy – a move thatsparked a row over alleged violation of corporategovernance norms. The Satyam Board, including itsfive independent directors, had approved thefounder’s proposal to buy 51 per cent stake in MaytasInfrastructure and 100 per cent stake in MaytasProperties, owned by the family members of B.Ramalinga Raju. The decision of acquisition, however,came under severe criticism from the institutionalshareholders, especially the overseas ones, which


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forced Satyam Computers to reverse its decision toinvest 80 billion INR in the two promoter-ownedcompanies. Four independent directors resignedthereafter, facing criticism for agreeing to a decisionwidely perceived as damaging to the company’sinterests. Its scrip nosedived more than 55 per cent onthe US bourses. The Ministry of Corporate Affairs laterordered a probe into whether the company violatedany corporate governance norms while entering intosuch a deal, involving shareholders’ money.

The company’s share price fell by 21.3 per cent sinceDecember 15, the day before the crisis broke. But, theBombay Stock Exchange benchmark, Sensex crashedon 7th January, 2009 and tumbled over 749 points atnoon to dip below the psychological 10,000-points levelon heavy selling by funds after reports of SatyamComputer Services’ chairman’s resignation ahead ofthe crucial 10th January board meeting. On the samedate, the index-linked Satyam Computer equityplunged by Rs. 139 (or 350 per cent) to Rs. 39.95. Withthe mounting selling pressure, the wide-base NationalStock Exchange’s index, Nifty, dropped by 192 pointsto 2,920.40 at the same time.

The Initial Reaction in India

Terming disclosures of financial wrong-doings atSatyam as an event of “horrifying magnitude”, theIndian stock market regulator, SEBI said just on theday of the news made public that it would take all stepsunder the law for which it has started discussions withgovernment and bourses. “We are in touch withMinistry of Corporate Affairs... we are also indiscussion with them as to what steps need to be takenfrom the perspective of power they have under thelaw and SEBI has under the law,” SEBI Chairman, C.B. Bhave said to a business TV channel. In fact, theMinistry of Corporate Affairs said that the role ofdirectors and auditors at Satyam would be scannedby The Institute of Chartered Accountants of India(ICAI), the apex institute of the professional Auditorsin India and The Institute of Company Secretaries ofIndia (ICSI), the apex body of company Secretaries inIndia (The Economic Times, Jan. 7, 2009).

In early 2009, immediately following the accountingfraud at Satyam, several committees and task forceswere constituted to review corporate governancenorms and practices in India. Some of them issued theirrecommendations late last year. These include a reportby a task force constituted by the Confederation ofIndian Industry (CII) and another by the Institute ofCompany Secretaries of India. Based on these reports/ recommendations, the Ministry of Corporate Affairs,

Government of India issued the Corporate GovernanceVoluntary Guidelines 2009 in December, 2009.

During late April of 2010, another Committee thatwas constituted by Nasscom, the premier trade bodyand the chamber of commerce of the IT-BPO industriesin India, headed by N. R. Narayana Murthy issued itsrecommendations for further strengthening corporategovernance practices in India. At the outset, theappointment of a committee by the IT industry bodyis understandable because the fraud and governancefailures at Satyam put the credibility of the IT-BPOindustry in India at stake. Hence, the recommendationstoo are primarily focused at that industry, although itis intended to be applicable to other industries as well.The recommendations of the committee regardingboard structure, independence of directors, auditcommittee and disclosures to shareholderssubstantially overlap with the ground that has alreadybeen covered by the previous task forces andcommittees. However, a distinctive feature of theNasscom recommendations is that they adopt a moreholistic approach and focus heavily on the protectionof stakeholders in a company such as customers,employees, other partners such as vendors, and evencompetitors. To that extent, they represent a markeddeparture from previous governance reform measuresthat focus almost solely on protection of shareholderinterests.

The Law Existing in the US Before the EnronSCAM

“The preparation of financial statements inconformity with generally accepted accountingprinciples requires management to make estimates andassumptions that affect the reported amounts of assetsand liabilities …. at the date of the financial statementsand the reported amounts of revenues and expensesduring the reporting period. Actual results could differfrom those estimates.” (Enron Annual Report, 2000,p. 36).

The Enron experience reveals a problem at the heartof US accounting - with the FASB’s conceptualframework that encourages and legitimates creativeaccounting. At the centre of the Enron scandal are theUS rules for consolidated accounting, but as theserules define what is and what is not an accountingentity—what is and what is not an ‘asset’ of theparent undertaking—they have profound effect onaccounting for all transactions between undertakings.Enron used these rules to exploit ‘Special PurposeEntities’ (or Vehicles) (SPEs or SPVs), businesses thatit claimed it did not control and should not consolidate


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—to hide losses on its investments, to hide liabilitiesand to generate fictitious profits.

Rob Bryer (2004) argues that Enron’s accountingshows just how deeply the capital market’s view ofvalue as economic value is embedded as the dominantideology of US accounting. This idea underlies theconceptual framework of the FASB and its acolytes inthe British Accounting Standards Board (ASB) and theInternational Accounting Standards Board (IASB). Hefurther argues that this ideology underminesaccounting’s traditional stewardship or accountabilityrole. The lesson drawn for accountants is the profoundweakness of the FASB’s conceptual framework at thecore of which is its definition of an asset as an expectedcash inflow. He also argues that the traditional conceptof conservatism as to the definition of an asset as therecoverable cost of a controlled use-value would haveprevented Enron’s accounting manipulations.

The Law Existing in India Before the SatyamComputer SCAM

Under Section 227 of the Indian Companies Act,the auditor is supposed to report to the beneficiariesof the company i.e. the shareholders in the generalmeeting, about the books and accounts of the company,the balance sheet and profit and loss account on thebasis of their assessment. They have to give theiropinion on the financial position of the company andalso make sure that it has been fairly, truly and honestlydepicted.

As per Section 227 of the Indian Companies Act,the report should also state :

1. That the auditor has obtained all informationand explanations, which are to the best of hisknowledge and belief necessary for his purpose;

2. Whether in his opinion, all the books of accountsand requisite documents necessary for the audithave been furnished by the company;

3. Whether the balance sheet and profit and lossaccount comply with the books of accounts; and

4. Any observation and comments on thefunctioning of the company, especially, whichmay have an adverse effect on the company.

An auditor is thus required to report not merely onthe balance sheet but on the accounts he examines, andhe also has to express his opinion whether the companyhas properly kept all the books as per law and whetherthe balance sheet and profit and loss account are inaccordance with the accounting standards andprocedures prescribed by the ICAI. The report shouldbe complete, concise, clear and unambiguous and theauditor should be careful about the language used, as

the readers of the report are all laymen. Auditor’sopinion can be qualified or unqualified. A qualifiedopinion is an opinion subject to certain reservations.That means that the auditor is unable to satisfy himselfthat the accounts present a true and fair view of thecompany’s financial position.

As per Section 227(4) of the Companies Act, thenature and reasons of qualification should also beclearly stated, instead of merely stating grounds forsuspicion. For the purpose of drawing up the report,the auditor is given the right to inspect and examinethe books and accounts, balance sheets and vouchersor any other requisite documents necessary for thepurpose of the audit. These documents can be accessedby the auditor at all times, irrespective of where theyare kept. The auditor can also ask for any informationand explanation from the officers of the company, andthe officer would be under a duty to furnish theinformation and explanation so needed.

During the course of the audit, the auditor couldcome across situations where he discovers that a senioremployee is defrauding the company or using unfairpractices, then an obligation arises of the auditor toreport what he has discovered to the managementimmediately so that appropriate action can be taken.If the auditor identifies the possible existence of fraudor other irregularities in accounting practices, theauditor should attempt to clarify it or report it. Oncethe fraud is detected, the auditor can investigate itfurther by authentication of original documents, actualtests and location visits, contacting major customersand suppliers, interviewing the personnel and testingthe veracity of computer records. The auditor shouldthen report of this to the director or the management,unless circumstances are such that their involvementis suspected. The possibility of detection is however alot less in such cases. There may be circumstances,where the auditor needs to report to a third partywithout the consent and knowledge of themanagement, when he suspects that the managementmay be involved. The auditor should consider themagnitude of loss that will occur due to the fraud andirregularity and the number of people that will beaffected by it or the possibility of recurrence of thefraud if gone unreported. As a measure of recoverableloss, the court noted that no losses would have beenincurred from the date of discovery if the auditor hadtaken some action to blow the whistle [Sasea FinanceLtd vs. KPMG (2000) 1 BCLC 236 at 241, 242].

Section 233 of the Indian Companies Act imposesa penalty on the auditors for non-compliance of


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Sections 227 and 229 with payment of fine if there iswilful negligence and default. The auditor may haveto compensate the members or shareholders of thecompany who have suffered losses attributable to thenegligence in performance of the auditor’s duties. Theauditor may be held liable for such fraud if there isnegligence in detection of errors that may causeconsequent loss to the company. In order to hold theauditor liable for fraud, the following conditions mustbe satisfied :

1. That the statement signed by the auditor isuntrue and false;

2. That he knew it to be untrue either or did notapply reasonable care and skill;

3. That he intended the report to be relied on byothers; and

4. That the parties on relying upon the reportsuffered loss.

The Indian Companies Act, 1956 imposes aCriminal liability under Section 628 on any person whomakes a false or untrue statement through anydocument like balance sheet, profit and loss account,return, prospectus, intentionally, thereby causing a lossto the people who rely on such documents.

The Punishment Given in The United States

On July 7, 2004, Lay was indicted by a grand juryon 11 counts of securities fraud and related charges.On January 31, 2006, following four and a half yearsof preparation by government prosecutors, Lay’s andSkilling’s trial began in Houston. Lay was found guiltyon May 25, 2006, of 10 counts against him; the judgedismissed the 11th. Because each count carried amaximum 5-year to 10-year sentence, legal experts saidLay could have faced 20 to 30 years in prison. However,he died while vacationing in Snowmass, Colorado onJuly 5, 2006, about three and a half months before hisscheduled October 23 sentencing. Preliminary autopsyreports state that he died of a heart attack caused bycoronary artery disease. As a result of his death, onOctober 17, 2006, the federal district court judge whopresided over the case vacated Lay’s conviction. Therehave been also been theories of conspiracy surroundinghis death.

In one of the biggest corporate frauds of India, theSatyam financial scam’s main accused, its formerChairman, Raju was arrested in January, 2009, and asa routine matter sought medical treatment due tohealth problem. On November 10, 2009, however, Rajusurrendered before a court in Hyderabad after his‘more time’ plea was rejected by the Supreme Court,the apex court in India. Raju and five other accused in

the case decided to surrender before the magistrateafter attending the court proceedings in the morning.This surrender came as a result of a directive of theapex court asking them to surrender.

Union Minister of State for Corporate Affairs, R. P.N. Singh has said that the investigation into SatyamComputer Services Limited is underway to ascertainsiphoning of funds including role of individualdirectors. The scam is being investigated by SeriousFraud Investigation Office (SFIO), in association withCentral Bureau of Investigation (CBI) & EnforcementDirectorate (ED). Replying to a question in theParliament recently, the Minister said disciplinaryproceedings against six Chartered Accountants intothe Satyam Computer Scam is underway by the ICAIand has not reached the stage of award of punishment.He said CBI has issued Letter of Rogatories to sixcountries. Since charge sheets will be filed after gettingthe information from these countries, no time limit canbe indicated. (‘Investigation into Satyam ComputerScam under way’, March 3, 2011, Tax ManagementIndia.com.)

The Punishment Given In IndiaBut, it is a matter of discomfort for Indian

government that the concrete punishment in terms ofimposition of financial penalties if any till now camefrom the United States, not till now from her ownbodies.

US authorities have ordered PwC’s Indian affiliatesto pay $7.5 million in fines for deficiencies in its auditsof Satyam Computer Services. The ruling is the firstpunishment handed down to an audit firm inconnection to India’s largest corporate fraud. The USSecurities and Exchange Commission (SEC) hasordered Price Waterhouse firms pay $6 million in fineswhile the US Public Company Accounting OversightBoard (PCAOB) dished out a penalty of $1.5 millionfor violation in connection to the Satyam audit. In arelated settlement with the SEC, Mahindra Satyam(previously Satyam Computer Services) agreed tosettle fraud charges by paying a $10 million penaltyand undertaking a series of internal reforms.

The PCAOB has settled disciplinary orders againstLovelock & Lewes, Price Waterhouse Bangalore, PriceWaterhouse & Company Bangalore, and PriceWaterhouse & Company Calcutta, known collectivelyas Price Waterhouse (PW) India. Only two of thesefirms were ordered to pay a $1.5 million fine. ThePCAOB investigation found the jointly administeredquality control systems of the five firms failed todetect a general practice in the cash confirmation


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process that was not in accordance with PCAOBstandards. The oversight body said the deficient cashconfirmation procedures contributed to the failure ofPW India to detect the material overstatement ofSatyam’s cash balance. Satyam management usedthese bank confirmations as part of a cover up of itsscheme to inflate the company’s reported cash balanceby $1billion approximately.

As a result, the affiliates will not be able to acceptnew engagements to audit US issuers until anindependent monitor determines PW India has madesignificant progress toward completing the actions.According to the directive, PW India will also not beable to accept new referred US issuer audit work forsix months.

The SEC ordered all five of PwC’s Indian affiliatesto pay a $6 million fine, which it said is for repeatedlyconducting deficient audits of Satyam’s financialstatements and enabling a massive accounting fraudto go undetected for several years. The SEC said itfound audit failures by the affiliates were not limitedto Satyam, but rather symptomatic of a much largerquality control failure throughout PW India.

PW India said while it neither admits nor deniesthe US regulators’ findings, its agreements with boththe PCAOB and the SEC were important steps towardsbuilding upon the efforts it has made over the pasttwo years to enhance its audit quality. The firm alsohopes it can reach an agreed resolution with Indianregulators.

PwC International chairman Dennis Nallydescribed India as a key market for the network andsaid it is committed to working with its colleagues inIndia to build on a successful quality practice.

The Consequent Changes Made In TheLegislation of The Two Countries

After the Enron debacle, auditing all over the worldhas come under the scanner. The age-old saying that‘an auditor is a watchdog and not a blood hound’ isbeing re-examined, if not questioned. Legislationwhich seeks to lay a greater emphasis on detection andreporting of fraud by auditors has been introduced allover the globe.

In the USA, corporate governance is regulated byseveral authorities. Corporations are subject to federallegislation, SEC rules and state laws. The mostcomprehensive reform of corporate governance lawsince the Securities and Exchange Act of 1934 was theSarbanes-Oxley Corporate Reform Act of 2002 (SOA).As Morrison (2004) notes, SOA is not a new code ofcorporate governance, but rather a set of statutory

reforms concerning financial controls, auditing andaccounting. In a nutshell, most of the provisions of SOAconcern the independence of members of the auditcommittee, a ban on auditors performing certain typesof non-audit work, a revision of accounting standardsfor debts of special purpose entities, the disclosure ofoff-balance sheet transactions and the protection of so-called whistle-blowers. According to SOA, the CEOand the CFO must also certify annual reports, and mayface criminal penalties in cases of reckless certification.SOA also prohibits personal loans to directors anddisgorges incentive-based compensations and stocksales profits if accounts are overstated. It also requiressenior financial officers to disclose their corporate codeof ethics. The first requirement demands greateraccountability of top management, as recommendedby stakeholder theorists, while the following two couldbe seen as revisions of the original shareholder model.SOA does not address the problem of independentboard directors, per se. Neither does it regulate equity-based compensation. These issues are however dealtwith in the updated 2002 NYSE Listing Standards.According to which (1) the majority of the board shouldnot have any material relationship with the company;(2) directors must hold meetings without managerspresent; (3) former employees of the company and itsauditor must wait five years before serving on theboard; (4) the audit committee must have soleresponsibility for hiring the audit firm; (5) nominatingand compensation committees must consist entirelyof independent directors; and (6) shareholders mustapprove all share-based compensation.

Similar regulations were passed in other countrieslike Bill 198 or CSOX in Canada, J-SOX in Japan,CLERP 9 in Australia, and LSF in France. In India too,the Department of Company Affairs, then under theMinistry of Finance, appointed a Committeeunder the chairmanship of Naresh Chandra, formerCabinet Secretary to look into Corporate Audit andGovernance in 2001. The Committee submitted itsreport in 2002. The principal regulator, SEBI alreadyhad clause 49 made compulsory beyond the year endedin 2003 for the listed companies incorporating most ofthe recommendations of the K.M. Birla Committee(which was appointed by the SEBI itself in 1999). SEBIconstituted a Committee again on CorporateGovernance under the chairmanship of N. R. NarayanaMurthy in 2003. It also issued a circular in August 2003revising clause 49 of the listing agreement. TheNarayana Murthy Committee then considered anddeliberated on the suggestions and comments on thecircular. Based on the revised recommendations of the


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Committee, provisions of clause 49 of the listingagreement were further revised on 29th October, 2004.Compliance of the revised clause 49 of the listingagreement was made mandatory since 1st January,2006.

The End Note : ‘Satyam—India’s Enron’The genesis of changes for SOX and Clause 49 are

different. SOX was introduced in the United States asa reactive measure in the aftermath of Enron scamwhereas clause 49 was floated as a pro-active measurein India also in the same circumstance. Yet, theprincipal reasons as investigated into both thecountries do not establish that there was not sufficientlaw before occurrence of these scams. Rather, it isworth-mentioning that Enron received top scoresfrom the “corporate governance” groups before itimploded. Its board of directors was 86 percentindependent, and its audit committee consistedentirely of independent directors. The requirementsof Sarbanes-Oxley would have barred only one of sixmembers of its audit committee, a member who was apaid consultant to the company, from serving on it.No one had also alleged about any problem with theEnron’s “internal controls,” the heart of the costs ofSarbanes-Oxley. Enron was really not about internalcontrols; it was about accounting judgments. The bestinternal controls would not guard against badjudgments or misleading statements. That is what anti-fraud laws are for. SEBI also had the master circular inform of clause 49 of the listing agreement in India.Thus, the root of all exercises behind the scams appearsto be very closely related to the deliberate negligenceof the auditors. And in this respect, what the UnitedStates was able to do in the country, India is far behindof doing that. Now, a question may be put forward. Isdeterrent punishment the panacea for all ills? Theanswer may be found in the analysis of one columniston this subject that “it does serve its purpose in raising

the stakes for players abusing the system” (Kabra,2009).

Advocates of strong corporate social responsibilitydemand that top executives should work for the benefitof all stakeholders even if this means reduction of profitand shareholder value. In other words, they see profitas a necessary condition for sustainability of thebusiness, but it should not be more important than theoverall interest of the company which includesinterests of other stakeholders. That is why ‘credible’accounting should replace what is being projected andpractised as ‘creative accounting’. ❐

References■ Berlau, John, 2006, Statement on the Enron Verdict and

Sarbanes-Oxley, CEI, May 26.

■ Banerjee, Ronojoy, 2010, Firms outsource internal audits,The Financial Express, October 30.

■ Daniel Kadlec, 2002, Enron: Who’s Accountable?, TheNew York Times, Sunday, Jan. 13.

■ Kabra, Atim, 2009, Improving Corporate Governance:A Blueprint to Prevent Scams like Satyam’s, January 27.

■ Morrison, J., 2004, Legislating for good corporategovernance: Do we expect too much? The Journal ofCorporate Citizenship, Autumn, Iss. 17, pp. 121–134.Sheffield: Greenleaf Publishing.

■ Mulford, Charles W. and Comiskey, Eugene E., 2002,The Financial Numbers Game—Detecting CreativeAccounting Practices, John Wiley and Sons, Inc.

■ Norman, W., 2004, What can the stakeholder theory learnfrom Enron? Zeitschrift für Wirtschafts – undUnternehmensethik, Vol. 5, Iss. 3, pp. 326–337. Mering:Rainer Hampp Verlag.

■ Gagrani, Harsh and Jhurani, Ritika, Role of auditors inlight of Satyam scam, www.indlaw.com.

■ Umakanth, V., 2010, Nasscom on Corporate Governance, for Indian Corporate Law Blog, May 12.

* All the facts, statements and relevant information relating to two scams are presented onthe basis of publication of the same in secondary sources. The author does not want to takeany credit, if any, for that. However, the author has made an honest attempt in analysis ofthe same.

Corrigendum

In the April 2012 issue of The Management Accountant on page 392 thephotograph of Shri S. Natarajan, the author of the article titled ‘‘Cost AccountingModels for Pricing’’ was wrongly printed. The Editor deeply regrets theunintentional error.


ECONOMIC MATTERS

In the last two years or so, the entire country isdiscussing at length on the amount of illegal/BlackMoney that been slashed away in tax havens by

the politicians, business people and others. It is anundisputed argument that if the entire illegal moneywhich was accumulated by this bunch of people inillegal means could have been used for development,then India would have been at the top of the globaleconomic power hierarchy today.

The systematic loopholes in the political andeconomic system coupled with socio-emotionalweaknesses of the common people has been the majorsource of this black money generation in the country.This evil and economic devil has spread its wings fromParliament of India to the Municipality level. It is ahardcore reality in the country that today the entireelection system and the candidates contesting theelections are driving the democratic process with BlackMoney—either directly or indirectly. This is reallychallenging the real democratic system of thecountry—making it difficult for the ordinary andintellectual class to participate in the system and getelected to law making institutions like Assembly andParliament. As a result of this, only incompetent peoplewith vested interests to make more and more illegaland black money are entering the parliament andassembly; and they are not making any competent andfoolproof law in the country to curb the menace fromgrass routes.

Having seen the means and ways of generatingblackmoney for the last decade, particularly for thelast one year, let us understand how we can completelyavoid this menace in the country. Let us call these stepsas ‘‘Reddy’s Blackout’’ tools :

1. Ban on physical possession of currency : TheGovernment should impose strict restrictions indica-ting that at no point of time an individual should carryphysical currency above Rs. 20,000. This also appliesto the individual’s residence. An individual is notallowed to have physical currency of more than Rs.20,000 at any given point of time.

2. Ban on physical exchange of currency : Any

Black Money : Methods and Means of Controlling at Origin

D. Venkata NarayanaMBA, ACMAFinance ManagerKronos Systems Indian Pvt. Ltd.Bangalore

Transaction involving a monetary value aboveRs. 5,000 should be carried only by the electronicBanking/Cheque payment or though Debit or Creditcard.

3. Linking all economic transactions with PAN :Any economic transaction which is above Rs. 5,000need to be done either through cheque/Electronicpayment/Debit card/Credit card. So all suchtransactions should be allowed to be carried on only ifthe Bank account, Debit card/Credit card are linkedwith the PAN of the accountholder. No person in thecountry will be allowed to transact involving monetaryvalue above Rs. 5,000 if he or she does not have PAN.

4. Imposing limit on the number of BankAccounts : Each and every person can have at themaximum four bank accounts and the same should belinked with PAN. At no point of time the person will beallowed to open a fifth account. So the banker, whileopening the account, can check the details on the accounton income tax website or the Government should allowthe bankers to have a common database similar to thelines of NSDL where the banker can check how manyexisting accounts are linked to a particular PAN beforeallowing to open one more bank account.

5. Integrating Earnings—PAN—IT Return : Acomprehensive step need to be taken by thegovernment , all the person’s spending above Rs. 5,000per transaction in a year are captured with PAN. Alsothe PAN is linked to the person’s income earnings.Subsequently when the person is buying some itemscosting Rs. 50,000/- and above, then also the detailsare captured with PAN. This helps to understand andhave a comprehensive view on the transactions of theperson by the income tax department.

Now let us see what happens if the above five stepsare followed in the economy :

a. Ban on physical possession of currency : Ifstringent laws care passed with punishment like 10years’ imprisonment and with 10 times penalty of themoney recovered if above Rs. 20,000 is found at anytime with a person, then nobody would likely possessthe cash in physical form. Apart from this the


ECONOMIC MATTERS

system itself drives away the need to have physicalrequirement of cash.

b. Ban on physical exchange of currency : Even ifwe have cash and if we know that we cannot use thesame for the purchase of any item valuing beyondRs. 5,000 in cash then we will not try to accumulatephysical cash which is of no use if the conditions areimposed. Moreover, since all the purchases aboveRs.5,000/- can be done only with Debit /Credit cards/Net Banking, all the transactions are accounted andthe persons are held responsible. This step, again, killsthe need or usage of black money generation.

c. Linking all economic transactions with PAN :Currently most of the economic transactions like purchaseof car, purchase of gold, purchase of land, etc are notlinked to PAN. This lacking of integration of thetransactions with PAN coupled with acceptance of cashas a settlement of transaction is really making the trackingor tracing of black money difficult. So banning thephysical currency stock, banning the acceptance ofphysical money above Rs. 5,000 makes it mandatory forany person intending to procure/acquire the asset to usehis legal and accounted money through Bank account/Net Banking/Debit/Credit card.

d. Imposing limit on the number of BankAccounts : Opening bank accounts in numerousnumber and then closing the same after thetransactions/making them dead is one of the simplestand easily followed method of black money generationin India. Most Individuals of economically highworthiness follow this route for the purpose. Imposingrestrictions on the number of bank accounts make itdifficult for involving it with balckmoney generation.

e. Integrating Earnings—PAN—IT Return : NowIncome Tax earnings and returns are not integratingthe PAN completely. Once the integration of earnings,spending and the IT return filed by the person is doneit becomes easier to curb this menace.

If the above steps are followed with full will andspirit, then Indian economy will not see any kind ofblackmoney in future with immediate effect. It is alsoa reality that today crores of rupees of illegal/blackmoney is stashed in the hidden lockers of businessmenand politicians.

Now let us see how the Government should movein order to implement the above scheme :

● Let the Government—if it is serious on curbingblack money—announce that no economic transactionvaluing above Rs. 5,000 each will be permitted witheffect from a specified date….( should be three monthsfrom the current date).

● The three months should be used and allowedfor all the nationals to have bank account and to havethe same integrated with PAN. If any person is havingmore than four bank accounts, then the same shouldbe surrendered within these three months.

● The process to open the Bank Accounts shouldbe made simple and cost effective. Nationalized banksshould initiate steps to open the bank accounts for allcommon men within three months. Although thisseems to be difficult at the outset, it is not so. This isactually a very simple one to accomplish since most ofthe persons in India already has the bank account.

● Once this is done all the payments of the Governmentto the citizens of the country currently paid either assubsidy or as wage payment (pay for work scheme, etc.)should be directly transferred to such account. Then thecorruption at the lower level is eliminated and every persongets what exactly he/she is due.

● More effort should be made to open ATM’s andbank branches in all the Mandals of the country. A 90-day programme should be prepared and the sameshould be implemented with strict guidelines.

● Laws of the country should be amended to ensurethat the people violating the above—like physicalpossession of cash, payment/acceptance of cashbeyond threshold limit—will be punished with inspecified time limits—say maximum 6 months.

Benefits of the above :1. Black money generation is totally suppressed.2. Threat of fake currency generation in the

economy is limited greatly.3. One of the major issues which are having

cascading effect on the Indian Economy for decades isinsufficient income of agriculture. As a result, farmersare committing suicides as the revenue they are gettingis quite insufficient to cover the cost of cultivation. Asa result of this the farmers are not able to pay back theamounts they borrowed for cultivation. On gettinginto the grass route level of this problem, we canidentify the reason as the exploitation by the middle-men who are procuring the agricultural produce atthrowaway prices. So once the farmers are paidthrough electronic transfers/cheques by thesemiddlemen, the government can have a better trackingto fix the prices. Later, when the government canreview the income and expense of these middlemen,the exploitation can be identified and people involvedcan be suitably punished. Over a period of time, thiswill ensure proper and right price for agriculture, andthe middlemen also will not dare to procure atabnormal low price since they are not allowed to havephysical cash and all their income, too is tracked withPAN-linked Bank accounts. This will ultimately leadto healthy farmers, health agricultural produce and,obviously, healthy GDP.

4. Today Government of India is spending croresof rupees on the printing, maintenance and distributionof new currency every year. Once the governmentinitiates the above steps, the need for physical currencyin the country will come down drastically and, as a



SECURITY ANALYSIS

The Efficient Market Hypothesis (EMH) has beenconsented as one of the cornerstones of modernfinancial economics. We first defined the term

‘‘efficient market’’ in financial literature in 1965 as onein which security prices fully reflect all availableinformation. The market is efficient if the reaction ofmarket prices to new information should beinstantaneous and unbiased. Efficient markethypothesis is the idea that information is quickly andefficiently incorporated into asset prices at any pointin time, so that old information cannot be used toforetell future price movements. Consequently, threeversions of EMH being distinguished depends on thelevel of available information.

The weak form EMH stipulates that current assetprices already reflected past price and volumeinformation. The information contained in the pastsequence of prices of a security is fully reflected in thecurrent market price of that security. It is named weakform because the security prices are the most publiclyand easily accessible pieces of information. It impliesthat no one should be able to outperform the marketusing something that ‘‘everybody else knows’’. Yet,there are still numbers of financial researchers whoare studying the past stock price series and tradingvolume data in attempt to generate profit. Thistechnique is so called technical analysis that is assertedby EMH as useless for predicting future price changes.

The semi strong form EMH states that all publiclyavailable information is similarly already incorporatedinto asset prices. In other words, all publicly availableinformation is fully reflected in a security’s currentmarket price. The public information stated not onlypast prices but also data reported in a company’sfinancial statements, company’s announcements,economic factors and others. It also implies that no oneshould be able to outperform the market usingsomething that ‘‘everybody else knows’’. This indicatesthat a company’s financial statements are of no helpin forecasting future price movements and securinghigh investment returns.

Test of Market Efficiency

Dr. M. Appala Raju

Professor & DirectorSCMS—Cochin

The strong form EMH stipulates that privateinformation, or insider information too, is quicklyincorporated by market prices and, therefore, cannotbe used to reap abnormal trading profits. Thus, allinformation, whether public or private, is fullyreflected in a security's current market price. Thatmeans even the company's management (insider) arenot able to make gains from inside information theyhold. They are not able to take the advantages to profitfrom information such as takeover decision which hasbeen made ten minutes ago. The rationale behind tosupport is that the market anticipates, in an un-biased manner, future development, and therefore,information has been incorporated and evaluated intomarket price in much more objective and informativeway than insiders.

The random walk model of asset prices is anextension of the EMH, as are the notions that themarket cannot be consistently beaten, arbitrage isimpossible, and ‘‘free lunches’’ are generallyunavailable. The runs test is a non-parametricstatistical test that checks a randomness hypothesis fora two-valued data sequence. More precisely, it can beused to test the hypothesis that the elements of thesequence are mutually independent.

A ‘‘run’’ of a sequence is a maximal non-emptysegment of the sequence consisting of adjacentequal elements. For example, the sequence ‘‘++++–––+++––++++++––––’’ consists of six runs, three of whichconsist of +s and the others of –s. If +s and –s alternaterandomly, the number of runs in the sequence N forwhich it is given that there are N+ occurrences of +and N– occurrences of – (so N = N+ + N–) is a randomvariable whose conditional distribution—given theobservation of N+ positive runs and N– negative runs—is approximately normal with :● mean

2N+ N– (2N+ N– – N) (m – 1) (m – 2)● variance ms2 = =N2 (N – 1) N– 1

These parameters do not depend on the ‘‘fairness’’


SECURITY ANALYSIS

whereN = (N+) + (N–)N+ = positive runs or number of occurrences of +sN– = negative runs or number of occurrences of –sIf the sample size is unequal and either h1 and h2 is

larger than 20, or if the sample size is equal and largerthan 100, then the test statistic is

where r (test statistic) is the number of runs or averageof the most and fewest runs

Objectives1. To check whether successive price changes are

independent or not during the given time period.2. To check whether Indian capital markets are in

weak form of efficiency, semi-strong form ofefficiency, or strong from of efficiency.

3. To check whether prices get affected by demandand supply to reflect equilibrium position.

4. To prove whether Price change is Random orNot.

HypothesisHo Null Hypothesis : Price change is randomHa Alternate hypothesis : Price change is not

randomHypothesis was tested at 20 percent significance

level at which ‘Z’ value is 1.28Research Methodology

Type of study : EmpiricalSample Design : JudgmentalSample 6 Leading Banks : ICICI, HDFC, CANARA

BOB,AXIS, SBIData Source : Stock market quotationsType of Data : Secondary DataPeriod of Data : JAN. 2005 TO OCT. 2010

Monthly baseResearch Plan

Scope of the studyThe prices of the stocks are taken during calendar

years Jan. 2005-Oct. 2010 spreading over Pre-recession,during Recession, and post-recession period.

Literature ReviewMeredith Beechey, David, Gruen, James, Vickery.

The efficient market hypothesis states that assets pricesin financial market should effect all availableinformation; as a consequence prices should alwaysbe consistent with fundamentals.

of the process generating the elements of the sequencein the sense that +s and –s must have equalprobabilities, but only on the assumption that theelements are independent and identically distributed.If there are too many runs more or less than expected,the hypothesis of statistical independence of theelements may be rejected.

Runs tests can be used to test1. the randomness of a distribution, by taking the

data in the given order and marking with + thedata greater than the median, and with - the dataless than the median (Numbers equalling themedian are omitted).

2. whether a function fits well to a data set, bymarking the data exceeding the function valuewith + and the other data with –. For this use,the runs test, which takes into account the signsbut not the distances, is complementary to thechi-square test, which takes into account thedistances but not the signs.

Run test statistics is a kind of non-parametricstatistical test that checks a randomness hypothesis fora two-valued data sequences. More precisely, run testcan be used to test the hypothesis that the elements ofthe sequence are mutually independent one. A run ofa sequence is defined as a maximal non-empty segmentof the data sequence consisting of adjacent equalelements.

Mathematical FormulaeRun test can be used to perform

● Randomness of a distribution is found by takingthe data in the given form or order and markingwith + the data greater than the median andwith – the data less than the median

● Numbers which equal the median getomitted.

● It checks whether a function fits well to a dataset values, by marking the data exceeding thefunction value with + and the other datawith –. It mainly depends on signs.

● If the number of runs falls outside the intervalof m±1.46s (for this project only), universallyaccepted is m±1.96, then it is reasonable to rejectthe hypothesis and that the curve is a gooddescription of the data.

2(N+) (N–)Mean = + 1N

2N+ N–2N + N– –N (m – 1) (m – 2)Variance s2 = =

(N2) (N – 1) N – 1

z =+ 1

2h1h2r – h1+ h2

(2h1h2(2h1h2– h1 – h2))(h1 + h2)

2 (h1 + h2 – 1)


SECURITY ANALYSIS

The paper discusses the main ideas behind theefficient market hypothesis and provided a guide asto which of its predictions seem to be borne out byempirical evidence and which do not. The evidencesuggests that it cannot explain some important andworrying features of asset market behavior. Investorsinconsistency, transaction cost and unavailableinformation may all be source of market inefficiency,study their impact, as well as the influences of otherconditions, on the development of prices in the primarygoal in the empirical literature.

(2005) Malkiel shows that professional investmentmanagers do not out perform their index benchmarksand provides evidence that, by and large, market pricesdo seem to reflect all available information.

(2006) Toth and Kertesz found evidence of increasingefficiency in N.Y.S.E. by the theoretical and empiricalstudies of the efficient market hypothesis and havemade an important contribution to the understandingof the stock market, and the present state ofunderstanding is far from conclusive.

Are emerging financial markets efficient by SardarM. N. Islam Sethapeng Watanapala-chaikul and ColinClark (2005). Sanford Gross describes a model whichshows that informational efficient price systemsaggregates diverse information perfectly (1980).

Beja (1977) showed that the efficiency of a realmarket is impressible.

Le Roy (1981) and porter showed that stock marketsexhibit excess volatility and they reflect market efficiency.

Lawrence H Summers (1986) argues that manystatistical tests of market efficiency have very low powerin discriminating against plausible forms of inefficiency.

Lo and Mackinley strongly rejected the randomwalk hypothesis for weekly stock returns show positiveauto correlation over short period and negative autocorrelation over longer horizons (1988).

Elroy Dimson and Massoud Mussavian give a briefhistory of market efficiency (1998).

Bernstein criticizes the EMH and Claims that themarginal benefits of investors acting on informationexceed the marginal costs. Malkiel shows thatprofessional investment managers do not outperformtheir index benchmarks and provides evidence that,by and large, market prices do seem to reflect allavailable information (2005).

Blakey looked at some of the causes andconsequences of random price behavior (2006).

Toth and Kertesez found evidence of increasingof efficiency in New York Stock Exchange (2006).

Stileifer publishes inefficient markets; anintroduction to behavioral finance, which questionsthe assumptions of investors’ rationality and perfectarbitrage.

Monthly Stock Prices—6 BANKS

Date ICICI HDFC Canara BOB Axis SBI

Month Close Close Close Close Close ClosePrice Price Price Price Price Price

Jan-05 360.6 564.4 209.15 205.05 206.02 642.08Feb-05 380.75 586.9 218.25 218.05 241.05 714.04Mar-05 393.00 544.25 200.4 218.05 242.05 656.95Apr-05 360.02 537.2 174.95 172.25 230.01 584.08May-05 392.05 540.05 199.55 195.65 239.08 670.07Jun-05 421.55 634.1 210.9 196.03 247.15 681.55Jul-05 536.00 685.5 252.1 257.05 259.09 800.08Aug-05 481.07 640.15 224.6 245.05 250.00 796.65Sep-05 600.35 687.55 231.95 248.95 265.05 938.06Oct-05 497.07 606 201.95 218.85 238.03 838.25Nov-05 537.15 687.55 209.75 230.05 271.04 896.25Dec-05 584.07 707.45 240.55 240.85 286.35 907.45Jan-06 609.15 762.55 249.15 249.75 337.15 886.08Feb-06 615.01 736.05 286.15 223.02 328.35 877.02Mar-06 589.25 773.05 266.09 230.03 356.35 968.05Apr-06 590.25 826.06 254.01 231.05 347.05 913.65May-06 536.05 740.02 229.25 227.05 285.08 831.00Jun-06 487.04 791.15 200.08 198.08 266.75 727.04Jul-06 554.05 795.05 196.65 222.00 297.85 810.05Aug-06 596.05 853.15 221.02 250.06 342.09 930.00Sep-06 699.05 926.00 284.15 288.25 379.02 1028.03Oct-06 776.85 1004.05 294.00 279.05 433.75 1095.05Nov-06 871.45 1118.04 297.75 262.15 474.05 1314.00Dec-06 890.04 1069.75 276.02 239.09 469.05 1245.09Jan-07 940.05 1078.15 241.01 249.85 534.00 1138.05Feb-07 831.09 932.06 210.05 219.75 460.00 1039.15Mar-07 853.01 949.04 194.07 215.04 490.15 992.09Apr-07 865.09 1026.15 217.65 235.95 467.85 1105.25May-07 918.09 1139.75 244.02 275.02 579.55 1352.04Jun-07 955.03 1144.01 269.65 270.25 605.00 1525.03Jul-07 927.05 1198.65 261.75 299.95 626.07 1624.05Aug-07 884.65 1171.03 244.00 267.06 634.01 1599.05Sep-07 1063.15 1439.05 278.02 326.06 764.04 1950.07Oct-07 1257.00 1653.01 292.95 342.35 918.08 2068.15Nov-07 1184.65 1719.00 271.45 381.09 931.25 2300.03Dec-07 1232.04 1727.08 332.05 459.06 967.01 2371.00Jan-08 1145.65 1568.00 289.45 388.09 1110.08 2162.25Feb-08 1090.95 1453.45 278.01 365.75 1018.75 2109.07Mar-08 770.01 1319.95 225.02 283.09 781.15 1598.85Apr-08 879.04 1514.85 237.01 315.15 924.03 1776.35May-08 788.03 1357.85 216.00 270.05 794.05 1443.35Jun-08 630.02 1002.03 178.00 203.25 603.65 1111.45Jul-08 634.85 1095.25 183.75 255.05 653.85 1414.75Aug-08 671.05 1277.25 215.05 284.03 723.03 1403.06Sep-08 534.85 1229.00 188.75 297.55 720.05 1465.65Oct-08 399.35 1023.65 165.25 241.07 562.06 1109.05Nov-08 351.04 920.04 169.05 257.85 406.85 1086.85

(contd.)


SECURITY ANALYSIS

result, it will lead to savings on currency printing,maintenance and distribution.

Mechanism to handle the current balckmoney inthe system

Today, within India, crores of rupees are stashedbelow the underground lockers of politicians,businessmen and others. So the question arises as tohow to handle the cash which is in the system eitherlegally or illegally—within the country if thegovernment decides to move with the above proposals.

It is suggested to follow the below-referredmechanisms for the same :

a. People having legal money : People should begiven a month’s time to deposit the cash in banks, or,maybe, three months. After three months, they should notbe allowed to have a physical cash above Rs. 20,000 withthem. It should be clearly communicated before the policyannouncement that this money so deposited is subject toquestioning and assessment by the concerned authorities.

b. To all individuals who have illegal moneycurrently or those with unexplainable money,government should give an option to deposit themoney in their account after paying a minimum 40%as one-time tax. Only, once the proof of tax payment isprovided, the bank should accept the cash. Once thisis done, then Government also witnesses huge taxationincome which can used for the developmental worksin the country.

So the execution of the above steps will lead tocomplete elimination of black money in the country astoday and also this will stop the black moneygeneration in the country in future. This leaves aquestion as to what happens to the black money whichis already outside the country—once the persons areaware that they cannot bring this money outside thecountry at a later stage without punishment under thelaw, people will regularize the same currently bypaying the proposed 40% one-time tax. ❐


Dec-08 448.35 997.06 187.08 280.45 504.65 1288.25Jan-09 416.03 924.06 180.25 252.55 433.00 1152.02Feb-09 328.01 884.85 165.35 220.04 347.95 1027.01Mar-09 332.06 967.85 165.09 234.55 414.05 1066.55Apr-09 477.75 1100.07 197.55 327.00 555.65 1277.07May-09 740.07 1442.35 283.95 438.03 783.04 1869.01Jun-09 722.00 1491.75 262.45 445.03 833.65 1742.05Jul-09 759.05 1499.06 285.05 436.00 917.07 1814.00Aug-09 749.05 1469.35 266.35 433.35 906.07 1743.05Sep-09 904.08 1642.25 321.75 482.04 981.55 2195.07Oct-09 789.06 1621.03 341.02 509.15 907.09 2191.00Nov-09 864.03 1772.55 396.25 523.35 997.45 2238.15Dec-09 875.07 1700.04 390.75 511.03 988.07 2269.45Jan-10 830.04 1630.85 390.45 575.09 1025.05 2058.00Feb-10 871.85 1704.65 391.95 583.09 1124.85 1975.85Mar-10 952.07 1932.05 410.35 639.25 1169.01 2079.00Apr-10 950.05 1991.06 429.55 691.55 1268.02 2297.95May-10 867.05 1885.04 408.2 710.04 1228.04 2268.35Jun-10 862.00 1914.65 448.85 701.95 1242.95 2302.01Jul-10 904.45 2127.45 478.45 753.05 1345.04 2503.08Aug-10 977.03 2132.45 514.00 804.09 1324.85 2764.85Sep-10 1110.35 2480.08 582.65 872.08 1531.02 3233.02Oct-10 1157.75 2493.65 585.01 903.75 1576.95 3256.35Run test 70 70 70 70 70 70Positve 43 46 39 43 45 40Negative 27 24 31 27 25 30Observed 32 33 29 32 35 35

InterpretationsThe Observed Runs fall between Lower and

Upper Limits for ICICI BANK, HDFC BANK,CANANRA BANK, BOB, AXIS BANK AND SBI. ( ForCANARA BANK, there is small difference, which isnegligible).

µ 34.17142857 32.54285714 35.54285714 34.17142857 33.14285714 35.28571429

15.46626 13.96244 16.79226 15.46626 14.50754 16.53948442 898 264 442 215 536

3.9327 3.737 4.09784 3.933 3.80887 4.066877 66

LIMIt 1.28

Upper Limit 39.20530 37.32575 40.78808 39.20530 38.0182 40.49131

656 129 765 656 939 635

Lower Limit 29.13755 27.75996 30.29762 29.13755 28.26749 30.08011

058 3 663 058 489 222

Observed 32 33 29 32 35 35

ConclusionObserved limit is falling under upper and lower.

So Null Hypothesis is accepted and supports thefindings that Indian capital market is efficient in weakform, i.e. share prices move independently of eachother during successive days. ❐

Date ICICI HDFC Canara BOB Axis SBI

Month Close Close Close Close Close ClosePrice Price Price Price Price Price

m = 2N1N2N1+n2 + 1

(contd.)

2N1N

2 * (2

N1N

2 – N

1 – N

2)(N

1N2)

^ 2 *

(N1 +

N2 –

1)s =


INSTITUTE NEWS

The Institute of CostAccountants of India

Advancement to FellowshipDate of Advancement :1st April 2012

M/25822Shri Uttam Kumar BiswasMCOM, FCMAFinance Manager, MahanadiCoalfields Ltd., HQ, JagrutiVihar, BurlaSambalpur 768 020

M/11007Shri Govind BhimjibhaiVekariaBCOM, FCMASr. Manager (Finance),G.N.F.C. Ltd.,Narmada Nagar 392 015

M/12182Shri S. KrishnanBE, ME(ISE), AMIE, FCMA110, South Chitra Street,Srirangam,Tiruchirapalli 620 006

M/25688Ms. Rachna KakkarMBA, FCMAOriental Apartment, A-10,Sector-IX, Plot No. 50,Rohini, Delhi 110 085

M/16940Shri Sankar SenguptaBCOM(H), MBA(FIN), FCMA98, Kutul Sahi Road, DakshinPara, Near Pancham PallySchool, Barasat 700 124

M/25919Shri Surya Narayan PalaiBCOM(HONS), FCMAAccounts Officer, SalalPower Station, FinanceWing, N H P C Limited,Jyotipuram 182 312

M/20725Shri Vanteru ThirupathyReddyMCOM, FCMA# 1-1-504, Opp : REC PetrolPump, Hanamkonda 506 004

Admission to Membership

M/22357Shri Rajib BoseMCOM, FCMA41/9, Siddhi Nath ChatterjeeRoad, Behala,Kolkata 700 034

M/12461Shri Syed Qamar AhmadBCOM, LLB, FCMACompany Secretary, M/s.THDC India Limited, GangaBhavan, Pragatipuram, ByePass Road, Rishikesh 249 201

M/20337Dr. Barnali ChakladerMCOM, MBA, PHD, FCMAAssociate Professor, Interna-tional Management Institute,B-10, Qutub InstitutionalArea, Tara Crescent,New Delhi 110 016

M/15918Shri Govind Kumar AgrawalBCOM, LLB, FCMARegional Controller (F & A),WIMCO Ltd., C. B. Ganj,Bareilly 243 502

M/23431Shri Ratan Kumar KhatwaniBCOM, MA, FCMAH.N. 5 Shubham Vihar,Near Vinayak Garden,Avanti Vihar,Raipur 492 006

M/23793Shri Anand KumarBCOM(HONS), FCMAA-2/5, Annapurna NagarColony, Veedyapeeth Road,Varanasi 221 002

M/12866Shri Sushil Kumar Sakhuja,MCOM, LLB, ACS, FCMAHouse No. FC-44, Sector F,Shivaji Enclave,New Delhi 110 027

M/14856Shri S. SankarBA, FCMAFlat No. S 2, Ranga ShreeApartment, No. 4, NelsonRoad, Srirangam,Tiruchirapalli 620 006

M/13453Shri Saumitra Kumar RoyBSC(HONS), FCMAFlat No. 316, IInd Floor, OmApartment, Sector 14, Pocket2, Dwarka, New Delhi 110 078

M/12528Shri Din Dayal SharmaMSC, FCMAJP-97, Maurya Enclave,Pitampura, Delhi 110 034

M/21366Shri Jagannath ChakrabortyBCOM(HONS), FCMA118, Regent Place, P.O. RegentPark, Kolkata 700 040

M/8050Shri Raju PurushothamanBSC, FCMAAsst. General Manager -Finance, B.E.M.L. Limited,Belavadi Post, TruckDivision, Mysore Complex,Mysore 570 018

M/7979Shri Chandra Prakash KalraBSC(HONS), FCMA1399, Sector 10A,Gurgaon 122 001

M/5810Shri Sankar Ranjan SanyalMCOM, FCMAB - 5/16, Mangalik Co-op.Housing Society, K M D AHousing Complex, Baghajatin,Kolkata 700 094

M/16168Shri Sandip KunduBCOM(HONS), FCA, FCMA3A/1702, Whispering Palms,Lokhandwala Township,Akurli Road, Kandivili (East),Mumbai 400 101

M/16167Ms. Radha Pyari KunduBCOM(HONS), ACA, FCMA3A / 1702, Whispering Palms,Lokhandwala Township,Akruli Road, Kandivili (East),Mumbai 400 101

M/18612Shri Subir Kumar ThakurBCOM, FCMA,P.O. Hirapur,Burnpur 713 325

M/20244Ms. Anjali Dattatraya KhareBCOM, FCMA26/1292, Sardar Nagar No.2, Sion-Koliwada,Mumbai 400 022

M/24643Shri Sushanta Kumar MohantyMCOM, LLB, FCMAC/o. Shri Narottom Dash,At : Brahmanagar 3rd Lane,Berhampur 760 001

M/7949Shri Gopal PallipuramSrinivasanBCOM(HONS), FCMAManaging Director, InterlinkPetroleum Ltd., H 20,Sector - 27Noida 201 301

M/9451Ms. Arati GangulyBSC, MBA(FIN), FCMAChief Manager (F & A), BurnStandard Co. Ltd., BurnpurWorks, Burnpur 713 325

M/15825Shri Rajib MukhapadhyayBCOM(HONS), FCMARegional Treasurer - AsiaPacific, Alstom Projects IndiaLimited, IHDP Building,Sector 127, Plot No. 7,Noida 201 301

M/10961Shri Abhay RamchandraKulkarniBE(PROD), MMS, ACS,FCMA306, Autumn Hay, NeptuneLiving Point, Near Manga-tram Petrol Pump, Bhandup(W), Mumbai 400 078


INSTITUTE NEWS

M/25934Shri Hemant GuptaBCOM(HONS), FCMAC-4/117, Yamuna Vihar,Delhi 110 053

M/8120Shri Sivaram R.BCOM, ACS, FCMA4, Police CommissionerOffice Road, ‘‘CeebrosPalms’’ - A-7, Egmore,Chennai 600 008

M/23326Shri Sashibhusan GrahacharyaBSC, FCMAMember (Finance), G.R.F.NESCO, Balasore, Viveka-nanda Marg, Balasore 756 001

M/22243Ms. Rashmi SoniMCOM, FCMAFlat No. A001, PrajapatiPark, Plot No No. 14/5,Sector 11, Kopar Khairane,Navi Mumbai 400 709

M/7880Shri Sushil Kumar AgarwalMCOM, MPHIL, FCMAS.K. Agarwal & Associates,E 21-102, Creek View, YogiNagar, Borivli (West),Mumbai 400 091

M/15752Shri Yogendra Suresh AgarwalBCOM, MBA(FIN), FCMA241/6, Triveni, Scheme 6,Road 32A, Nr. PMC Bank,Sion East, Mumbai 400 022

M/17053Shri Harishankar RamratanBajajFCMAH.S. Bajaj & Co., 209, SatyamShivam Shopping Centre,Near Railway Station,Nallasopara (West),Thane 401 203

M/20293Shri Goutam MajiBSC, FCMADy. Manager (F&A), AccountsDepartment, Admin. Bldg.,Oil India Limited,Duliajan 786 602

M/16525Shri Chinmoy PalBCOM(HONS), ACA, FCMAHead - Accounts, Oil IndiaLimited, Duliajan 786 602

M/9694Shri Venkataswar SamudralaMCOM, MBA, FCMAD.G.M. (Finance), NMDCLtd., BIOM, Bacheli Complex,Bacheli 494 553

M/10329Shri Ayyappa SastryBhanidipatyBCOM, FCMAPlot No. 9-148, PandurangaNagar, Erragadda,Hyderabad 500 018

M/10437Shri Bhanumurthy RaoVaranasiMCOM, FCMASr. General Manager (F& A), N.C.C. Ltd., NCCHouse, Madhapur,Hyderabad 500 081

M/15646Shri Suhas ChandraBhattacharyyaBSC, FCMARathtala (Near Bus Stand),Ranaghat 741 201

M/15462Shri Phool ChandraKesharwaniBCOM, FCMAD.G.M. (Commercial),VikramWoollens, (A Unit of GrasimInds. Ltd.), GH-I to IV,Ghironghi, Malanpur 477 117

M/19841Shri Manjeet Singh ChhatwalMCOM, FCMA# 1884, First Floor, Gali No.16, Govindpuri Extn.,Kalkaji, New Delhi 110 019

M/8018Shri Gopal Chandra MitraBSC, LLB, FCMABlock - B-2, Flat No. 13,Marshelin Co-op. Hsg.Society Ltd., E.K.T.P. PhaseII, E.M. Bye Pass,Kolkata 700 107

M/17045Shri K. BalakrishnanBSC, FCMAKrishnaleela, ParambathHouse, Sanskrit College Road,Tripunithura 682 301

M/15044Shri Sujay SenguptaBCOM(HONS), FCA, FCMA131/31, Netaji SubhasChandra Bose Road, RegentPark, Kolkata 700 040

M/24785Shri Sayi C.MCOM, CMA(USA), FCMAFinancial Controller, QatarNational Food SecurityProgramme, P.B. No. 923,O/o. The Heirapparent, Doha

M/15797Shri Vaibhav PrabhakarJoshiBCOM, FCMABlock A - 5, Parijat-Mrugen-dra Co-op. Hsg. Soc. Ltd.,Rokadia Cross Lane, PaiNagar, S V P Road, BorivaliWest, Mumbai 400 092

M/20473Shri Girish KrishnanKuttanappillilMCOM, FCMAKuttanappillil House, Tha-borli, Mookkannur 683 577

M/7752Shri Malay KumarChakrabortyBCOM, FCMAP.O. & Vill: Samabay Pally,Bally 711 205

M/16086Shri Ranjan KumarSrivastavaMSC, FCMAAdditional General Manager(F), Powergrid Corporationof India Ltd., B-9, QutubInstitutional Area, KatwariaSarai, New Delhi 110 016

M/22482Shri Subrata Kumar SwainBCOM, LLB, FCMA519-H, Matha Marga, Tara-sundari Lane, Old Town,Bhubaneswar 751 002

M/16386Shri Sandip BhattacharyyaBCOM(HONS), FCMA58/3, Ballygunge CircularRoad, Flat # D-21, TowerBlock, ‘‘Saptaparni’’,Kolkata 700 019

M/5544Shri Siddhartha MukherjeeMCOM, ACS, FCMA1202, Royal Park, RamprasthaGreens, Sector - 9, Vaishali,Ghaziabad 201 010

M/11481Shri Lekh Raj SharmaMCOM, FCMAAccounts Controller, Nesma& Partners Contracting Co.Ltd., P.O. Box 1498,Al Khobar 31952

M/15620Shri Kedar NathMukhopadhyayBCOM, LLB, FCMA`Venus` - A, Flat No. 304,Gaurav Galaxy, Phase - II,Mira Road, Thane 401 107

M/6875Shri Surya Narayana SarmaKomaragiriMCOM, FCMA216, Rangadhamamu, HMTSatavahana Nagar, Kukat-pally, Hyderabad 500 072

M/4737Shri Mahadevan NagarajanBCOM(HONS), FCMAChief General Manager(Finance) Mahanadi CoalfieldsLtd., Burla, Jagruti Vihar 768 020

M/23929Ms. Mrinmayi SarkerMCOM, FCMA6A, Chitpur Bridge Approach,Bagbazar, Kolkata 700 003

M/11759Shri Shanker ShriramChaudharyBCOM, FCMAFlat No. 4034, Joy Apartments,Sector - 2, Plot - 2, Dwarka,New Delhi 110 075


INSTITUTE NEWS

M/19495Shri Debajit SahaBSC(HONS), ACA, FCMA1K, Manohar Pukur, 2ndLane, Kolkata 700 029

M/16613Smt. Vandana BansalBCOM(HONS), FCMAVandana Bansal & Associates,House No. 939, HousingBoard Colony, Sector 18,Faridabad 121 002

M/22583Shri Sanjay Kumar KashyapMCOM, FCMAS.K. Kashyap & Associates,117/150, `K` Block, GeetaNagar,(Kakadeo),Kanpur 208 025

M/3257Shri Anantharaman RajaramanBCOM(HONS), FCMAH. 65/1, (New No. 9), HBlock, 4th Street, AnnanagarEast, Chennai 600 102


Admission to Associateshipon the Basis of MOU withIMA, USA

Date of Admission :27th March 2012

C/32286Mr. Chandrashekhar VenkataChallaBCOM, MBA, LLB, CMA(USA), ACMAVice-President (Finance), AlFaraa Group, P.O. Box 15915,Al Ain, U.A.E.

C/32287Mr. Anees AliMCOM, ACS, CMA(USA),ACMA176, Hitawala Complex,Chamanpura, Lohabazar,Udaipur 313 001

C/32288Mr. Valore Ashok MenonBCOM, CMA(USA), ACMAP.O. Box 5991,Dubai, U.A.E.

C/32289Mr. Vishal Kumar Suvarna,BCOM, CMA(USA), ACMAPhilips Middle East, DubaiKnowledge Village, (Next toCISCO Building), Al Sufouh2, P.B. 7785, Dubai


Admission to Associateshipon the Basis of MOU withIPA, Australia


I/32290Mr. Perry Paul CharlesMIPA, ACMA20, Ryecroft Avenue,Clayhall, Ilford, Essex,England

I/32291Mr. Anto Hilorian CruzMCOM, MBA, MIPA, ACMA4C, M.F. Nagar, Sempakkam,Chennai 600 073


Admission to Fellowship onthe Basis of MOU with IPA,Australia


I/32292Mr. Osman HarunaMCOM, FIPA, FCMADirector of Finance, WenchiMunicipal Assembly, P.O.Box 9, Wenchi, B/A/R,Ghana 233

I/32293Mr. Mohammad Anees KhanMCOM, FIPA, FCMAAhmed Din Street, NearMosque Amir Hamza, DabNo. 2, Pakhwal ChowkMansehra, Pakistan 21300

I/32294Mr. Man Kit N.G.FIPA, FCMARoom 1212, Lai Wing House,Lai On Estate, Shamshuipo,Kowloon, Hong Kong


Admission to Associateship

Date of Admission :1st April 2012

M/32295Ms Sonia DuttaMCOM, ACMAC/o. Rahul Dutta (EM 2255)Emirates Aluminium,A1, Taweelah, Abu Dhabi,U A E., Abu Dhabi 11023

M/32296Shri Rahul DuttaBCOM, ACMASr. Accountant M/s. ModernPlastic Industry LLC., POBOX - 31550, Dubai Invest-ment Park, Jebel Ali,Dubai 31550

M/32297Shri Munagala KrishnaBCOM, ACA, ACMADir - Accounting & Admin.TIBS 3435 Martin FarmRoad, Suwanee GA USAUSA 30024

M/32298Shri Sridipta Kumar NandaMCOM, LLB, ACMAS/o. Binoda Bihari NandaAt / Po. Maniabandha, Dist- Cuttack, Cuttack 754 034

M/32299Shri Nitin TalwarBCOM, ACMAFlat No.19-B Pocket - B-7Mayur Vihar Phase - 3Delhi 110 096

M/32300Shri Abhijeet SinghACMAB/310 - C, New Ashok Nagar,Opp : East End Apartment,New Delhi 110 096

M/32301Shri Gnana Sekaran RBCOM, ACMASAP-CO-Team Lead. Costing,M/s. Mahindra Satyam,KIADB Industrial Area,Electronic City, Phase-2,Bangalore 560 100

M/32302Ms Bhagyalakshmi RameshkumarBCOM, ACMANo. 8, Gandhi Nagar IIStreet, Keelkattalai,Chennai 600 117

M/32303Shri Mayank PathakACMA34, Type - 2, CAD Colony,Near JOR Bagh,New Delhi 110 003

M/32304Shri Syam Kumar PonnuruMCOM, ACMA8 - 20 - 28 / 37, SeeturamNagar - 5th Lane,Guntur 522 001

M/32305Miss Kanan Vishal VoraMCOM, ACMA102, Divya Residency, 4,Gordhan Park Society, B/H.Azad Halwai, Usmanpura,Ahmedabad 380 013

M/32306Shri Prem Chacko SamuelBSC, ACMAChacko Bhavan, Punukka-nnoor, PO - Perumpuzha,Kollam 691 504

M/32307Shri Ganesh Kumar ShawBBA, ACMAOfficer - Finance M/s.Ratnagiri Gas & Power Pvt.Ltd., At/Post - Anjanvel,Tal : Guhagar,Ratnagiri 415 703

M/32308Shri Siddhartha SadhukhanMCOM, ACMA26 H, Hara Mohan GhoshLane, Phoolbagan, Beliaghata,Kolkata 700 085

M/32309Shri Vinod ChandranMBA(FIN), ACMA# 9, Nr. Vidyajyothi School,11th Main, 1st Cross,Vidyajyothi Nagar, Honga-sandra, Begur Main Road,Bangalore 560 068


INSTITUTE NEWS

M/32310Shri Sanjay AhujaBCOM(HONS), LLB, FCS,ACMAAsstt.Gen.Manager & Com-pany Secretary M/s. TourismFinance Corpn. of India Ltd.,IFCI Tower, 61 Nehru Place,New Delhi 110 024

M/32311Ms Vatsalaben PiyushbhaiPanchalMCOM, ACMA24, Ganesh Society, O/S.Shahpur Gate,Ahmedabad 380 004

M/32312Ms Geeta GoelACMAH. No. 16 - 1 - 7, 7/1 & 7/2,Quality Life Style Apart-ments, Flat No. 410, DallaviTheatre Premises, Saidabad,Hyderabad 500 059

M/32313Shri Sushil Kumar R. PatwaMCOM, ACMAFinance Analyst M/s.Accenture Services Pvt. Ltd.,Plant No. 3, Godrej & BoyceComplex, LBS Marg, Vikhroli(W), Mumbai 400 079

M/32314Shri Ravindra Kumar DesuMCOM, ACMAH. No. 4 - 41/2, 1st Floor,Gangaram, Chanda Nagar,Hyderabad 500 050

M/32315Shri R KannanACMAAsstt. Manager, HLL LifecareLtd., Central MarketingOff.No.185, Lingavel Tower,100Ft. By-Pass Road, Vijay-nagar, Velachery,Chennai 600 042

M/32316Shri Sreeram CheemalamarriACMAS/o. C.A.V. Prasad, H. No.10-582A, RamalakshammaSt., Markapuram 523 316

M/32317Shri Santosh SahuMCOM, ACMAS/o. Kumar Sahu At/Po.Gajapati Nagar 7th Lane,Dist - Ganjam,Berhampur 760 010

M/32318Shri Deepak Kumar BurmaBCOM(HONS), ACMAAt / Po. : Rengali (Infront ofBaba Mandir), Dist - Sambal-pur, Sambalpur 768 212

M/32319Shri S. R. AnantharamanBCOM(HONS), ACMAA - 106, Mantri Elegance,Bannerghatta Main Road,Bangalore 560 076

M/32320Shri Sandeep AhujaBCOM(HONS), LLB, FCS,FCA, ACMA23 / 7, Second Floor, OldRajinder Nagar,New Delhi 110 060

M/32321Shri Arjun Anil ApteBCOM, ACMAPlot No. 51, Satyagovind,Shambhu Mahadev Nagar,Near Sahakar Nagar, NewOsmanpura,Aurangabad 431 005

M/32322Shri Mallick Ezaz HossenAlliahemadBCOM, ACMAAssistant Manager, JSWSteel Ltd., Tornagallu,Bellary 583 275

M/32323Ms Neha BhanotBCOM, BED, ACMARZH - 824, Raj Nagar, Part -II, Street No. 13, NearKenedy Public School,Palam Colony,New Delhi 110 045

M/32324Shri Prasath BBA, ACMAS/o. A. Balakrishnan No.60/22, 3rd Cross, ThillaiNagar, Salem 636 001

M/32325Shri K Someswara BabuBCOM, ACMACommercial Manager M/s.NSL Mining Resources IndiaPvt. Ltd., 501, BabukhanMillienium Centre, RajBhavan Road, Somajiguda,Hyderabad

M/32326Shri Uttam KumarChakrabortyBSC(HONS), LLB, ACMASouth Tarapukur, GhoshPara (Ramkrishna Path),PO - Agarpara, Dist - 24Parganas (N),Agarpara 700 109

M/32327Shri Nihar RanjanChowdhuryMCOM, ACMA5 / A, Bijoy Nagar, PO -Naihati, Dist - North 24Parganas, Naihati 743 165

M/32328Shri Kirankumar ChundattuACMAD. No. 20 - 6/7 - 231/1,Ayodyanagar, Ramalin-geswara Pet - 7th Lane,Vijayawada 520 003

M/32329Shri Atmananda DasMCOM, ACMAAt - Hanuman Pada, PO -Talcher Town, Dist - Angul,Talcher 759 107

M/32330Shri Prabhakara RaoGuvvalaMCOM, MBA, ACMAA - 57, FL No. 202, R KArcade, Madhura Nagar,Near Yallanki Foods,Hyderabad 500 038

M/32331Shri Vamsheshwar Rao GunturBCOM, ACS, ACMA1-6-44, Satnam WaheguruBuilding, 1st Floor, Mushee-rabad, Hyderabad 500 020

M/32332Ms Priyanka GuptaMBA, ACMAC-1025, Sector - 49 SainikColony, Near Shiv Mandir,Faridabad 121 001

M/32333Shri Deepak GoyalBCOM, ACMALane No. 4, Samrat VikramColony, Chilkana Road,Saharanpur 247 001

M/32334Shri Ramana GannavarapuMCOM, ACMAPlot No. G - 3, Sri SaiResidency, Aditya Gardens,Pragat Nagar, Kukatpally,Hyderabad 500 090

M/32335Ms Radhika GACMA14 - A, Chennappar Street,Tiruvannamalai 606 601

M/32336Shri Vaibhav GuptaMCOM, ACMAH. No. 1/86, Shastri Colony,Street No. 3, Near Sector - 19,Old Faridabad,Faridabad 121 002

M/32337Shri Syed Faisal HasanBSC, ACMAGroup Accounts & MISManager Unaoil Group, P.O.Box - 124913, Office No.1004-06, Arenco TowerMedia City, Shaikh ZayedRoad, Dubai, U A E, Dubai

M/32338Shri Lahoti Suraj JayantilalMCOM, ACMABagirathi Bunglow, 5/6Kamlaksha Co-op Society,Nasik Road, Nasik 422 101

M/32339Ms. Jayashree Pavan JalwadiBCOM, ACMASr. Executive Costing, M/s.Ador Powertron Ltd.,Ramnagar Complex, PlotNo. 51, D - 11 Block, MIDC -Chinchwad, Pune 411 019


INSTITUTE NEWS

M/32340Ms Amruta Neeraj JoshiMCOM, ACMAPlot No. 33, S. No. 44,Navsahyadri Hsg. Society,Karvenagar, Pune 411 052

M/32341Shri B Suresh KumarBCOM, ACA, ACMA‘‘Srimati Illam’’, No. 4, BalajiNagar, 5th Street, Nanga-nallur, Chennai 600 061

M/32342Shri Sumit KhichaCFA, ACMA23, Khicha Mansion, VinodNagar, Beawar 305 901

M/32343Shri Abishekh KumarBCOM, ACMA354/37, ‘‘Mehta Sadan’’,Near of H. K. Plastic Factory,Lokashah Nagar,Bewar 305 901

M/32344Shri Raghavendra G LBSC, ACMANo. 98, Ganapathi Krupa,12th Main Road, 10th Cross,Raghavendra Block, Srina-gara, Bangalore 560 050

M/32345Shri Thimiri SathiyamurthyMohanBCOM, MBA(FIN), ACMANew No. 38, Old No. 34,Neels Garden, 3rd Street,Sembiam, Perambur,Chennai 600 011

M/32346Shri Mohan Kumar MaharanaBCOM, ACMAA M (F & A) & B F M.,Rashtriya Ispat Nigam Ltd.,3025/8, Shreenidhi Chambers,1st Floor, S B Road, Shivaji-nagar, Opp : Passport Office,Pune 411 016

M/32347Shri Mayank MahendrabhaiMehtaBCOM, ACMA1/12 Ratnam Flats, NearGanesh Lohavid Bhavan,Opp : Parase Flats, Vasna,Ahmedabad 380 007

M/32348Shri Manoj Kumar NayakACMAF 13, Ittina RRV Apartment,RRV Layout, 2nd Cross,Ramamurthy Nagar,Bangalore 560 016

M/32349Shri Kalava PrasadACMAD. No. 67-1-12, DarsivariStreet, Patamata,Vijayawada 520 010

M/32350Shri Rambabu PathakBCOM(HONS), ACMASr. Officer (Finance) EasternCoalfields Ltd., CMDsOffice, Sanctoria (CompanySectt)., Dishergarh 713 333

M/32351Shri Dibyendu PatraACMAFactory Controller, DresserRand India Pvt. Ltd., 187,GIDC Estate, Naroda,Ahmedabad 382 330

M/32352Shri Dilip Kumar PathakBCOM, LLB, ACMAF - 288, Sector - Delta I,Greater Noida 201 308

M/32353Shri Chandrasekhar ParimiMCOM, ACMAFinance Superintendent ITCLtd., C/o. ITC Ltd. ABD -ILtd., P.O. Box No. 317,G. T. Road, Guntur 522 004

M/32354Shri Mitesh IshwarbhaiPrajapatiBCOM, LLB, ACMAV. H. Savaliya & Associates,308, Harsh Avenue, SuttarTaluka Society, Navjivan PressRoad, Ahmedabad 380 014

M/32355Ms. Varsha PurushottampatankarACMA25/B/8, Meghwadi Siddhivi-nayak CHS. Ltd., Mhada,Teachers Colony, Meghwadi,Jogeshwari (E),Mumbai 400 060

M/32356Shri Suresha ChandraSwainACMAC/o. Srila Roy, 350/4, M. G.Road, Kolkata 700 082

M/32357Shri Vinay ShankarBA(HONS), ACMAQr No. B / 1, Sector - 1, Post- Dhurwa, Ranchi 834 004

M/32358Shri Pratap Singh ShekhawatACMAAccounts Officer BharatHeavy Electricals Ltd.,Corporate Finance, IIndFloor, BHEL House, AGVComplex, Siri Fort,New Delhi 110 049

M/32359Shri Pardhu SingumahantiBCOM, ACMAFinance Superintendent ITCLtd., Agri Business Division- ILTD., G.T. Road, Post Box317, Guntur 522 004

M/32360Shri Sathish Chandra B SBSC, ACMANo. 8/4, 1st Floor, RangaRao Road, Shankarapuram,Bangalore 560 004

M/32361Shri Manish SarawgiBCOM(HONS), ACMACosting Executive, TheNaihati Jute Mills Co. Ltd.,PO - Hazinagar, Dist - 24Parganas (N)Hazinagar 743 135

M/32362Ms Sudha Venkata VaradhanBCOM, LLB, ACMACo. Secretary & Dy. Manager-Finance Indian StrategicPetroleum Reserves Ltd.,OIDB Bhawan, 3rd Floor, Plot- 2, Sector - 73,Noida 201 301

M/32363Ms Deepika YerramBCOM, MBA, ACMAH. No. 4 - 7 - 190/1, EssaniaBazar, Beside CommunityHall, Hyderabad 500 027

M/32364Shri Sudeep BhargavaACMAL - 331, IInd Floor, SaritaVihar, Delhi 110 076

M/32365Shri Vikram Singh AdhikariBCOM, ACMA529/495, New Basti, RaheemNagar, Mahanagar,Lucknow 226 001

M/32366Shri Manish Kumar AmbasthaACMAH - 19 - E, Near Sonjay Park,Gali No. 2, Ground Floor,Shakarpur, Delhi 110 092

M/32367Ms Manasi N AroraBCOM, ACMASr. Accountant M/s. Khukh-rain Cold Storage & IceFactory, 182/3, IndustrialArea, Phase - I,Chandigarh 160 002

M/32368Shri Arunava DattaChaudhuryBSC, ACMA24A, Old Ballygunge SecondLane, Kolkata 700 019

M/32369Shri Krishna Nand ChaubeyACMAC/o. Shri Gandhi AshramKhadi Bhandar, H - 42,Connaught Circus,New Delhi 110 001

M/32370Shri Tarit DasBCOM(HONS), MBA, ACMAFinance & Accounts ManagerSri Sankaradeva Ntthralaya,Beltola, Guwahati 781 007

M/32371Shri Maheswara DesaiBSC, ACMAS/o. D Babanna, Gudehothur- Post, Vajrakarur - Mandal,Dist - AnantapurAnantapur 515 832


INSTITUTE NEWS

M/32372Ms Sayli Nitin DeshpandeBCOM, ACMATirupati Housing Society,G-3, Plot No. 8, N - 5, CIDCO,Aurangabad 431 003

M/32373Ms Neelam Jawaharlalji JainACMAC/o. M/s. Vardhan Groupof Companies, FinanceDepartment, 422 CommerceHouse, 140, N M Road,Mumbai 400 023

M/32374Shri Naveen Kumar KBCOM, ACMA# 64, 1st Cross , CholurupallyaMagadi Road,Bangalore 560 023

M/32375Shri Srikanth KammaMCOM, ACMAS/o. Subba Rao, Post - Pala-parru, Mandal - PedanandiPadu, Guntur 522 235

M/32376Shri Javir KhanMCOM, ACMAPlot No. 44, Sector - 32,Gurgaon 122 002

M/32377Shri Ashid KhanACMAC-9, Indupuram, Auranga-bad, Mathura 281 006

M/32378Shri Manoj KumarBCOM, FCA, ACS, ACMAFlat No. 4, The Patel Co-op.Hsg. Society, Sector - 13,Rohini, New Delhi 110 085

M/32379Shri Sanjeev KumarMCOM, ACMAShyam Medical Store, OldCourt Road, Opp : VeternaryHospital, Narnaul, Haryana

M/32380Ms Richa LuthraACMA13/68, Vikas Nagar, Vishar,Lucknow 226 022

M/32381Shri Kushal MalviyaBCOM, ACMASejaro Ka Was, Pindwara,Dist - SirohiPindwara 307 022

M/32382Shri Brijesh ChampaklalmaliBCOM, ACMA8/763, Opp : SBI HanumanChar Rasta, Gopi Pura,Surat 395 001

M/32383Shri Harish MarkanBCOM, ACMAAsstt. Officer M/s. SwarajEngines Limited, Plot No. 2,Industrial Phase - 9, S A SNagar, Mohali 160 062

M/32384Shri Vani Prasad MiriyalaBCOM, CIMA, ACMAD. No. 12 - 52 - 6, H. No. L IG - 181, A.P.H.B. Colony,Tanuku 534 211

M/32385Shri Sharad Kumar MauryaACMA9/29, Bahari ‘‘A’’ SaharaEstates, Jankipuram,Lucknow 226 021

M/32386Shri Siraj Nooruddin MawaniACMAFatima Manzil, H. No. 8-11-4,Ravindra Colony, Katkat GateRoad, Aurangabad 431 001

M/32387Shri Magesh NandakumarBCOM, FCA, ACMAA-3, Third Floor, ‘‘MallesAshirwad Flats, 18/176,Rangarajapuram MainRoad, Kodambakkam,Chennai 600 024

M/32388Shri Kamala Kanta PandaBCOM, ACMAAt - Ranipatna, Bank Colony,Balasore 756 001

M/32389Shri Aloke Kumar PaulBCOM(HONS), ACMAAccountant Cum ManagerTaijaspatra, Kuthi Bazar,Ghatal, Dist - PaschimMedinipur, Ghatal 721 212

M/32390Shri Padubidri VenkatagiriRaoBCOM, ACMAS/o. Bail Seetharama Rao BailHouse, Padubidri 574 111

M/32391Ms Shilpi SaxenaMBA(FIN), ACMAPlot No. 7, Sector I, UnitedCity Colony, Near CapitalConvent, Jankipuram,Lucknow 226 021

M/32392Shri Jitendra SharmaACMAD - 18, House No. 513,Chhattarpur Pahari,New Delhi 110 074

M/32393Shri Surendra KumarSharmaMA, LLB, ACMAB - 223, Sector - 6, ShatabdiNagar, Delhi Road,Meerut 250 103

M/32394Shri Yogendra SinghACMAE - 2/185, Vinay Khand,Gomti Nagar,Lucknow 226 010

M/32395Shri Gurvinder SinghBCOM(HONS), ACA, ACMAHouse No. 95, Sector - 18,Panchkula 134 109

M/32396Shri Amarjeet SinghBCOM, ACMAC - 32, Sector - D, L.D.A.Colony, Kanpur Road,Lucknow 226 012

M/32397Shri Shailendra SinghACMA388/71, Tripti Nagar, Ganesh-pur, Chinhat, Lucknow 227 105

M/32398Shri Rabi Kant ShawBCOM(HONS), ACMA63 / 1A, Hidaram BanerjeeLane, Bowbazar,Kolkata 700 012

M/32399Shri Krishnamohan Tiru-malasettyMCOM, MBA, ACMAD. No. 6/637, Kozzillipet,Machilipatnam 521 001

M/32400Shri Vinod Kumar BapnaBCOM, FCA, ACS, ACMAH - 72 FF, Residency Green,Sector - 46, Opp : UnitechCyber Park, Gurgaon 122 001

M/32401Shri Sinjan BharBCOM, ACMA9/7, Rajendra Nath RoyChoudhury Lane,Kolkata 700 036

M/32402Shri Deepak Girish. GuptaBCOM, ACMA1205/6, Vindhyachal, Neel-kanth Valley, Rajawadi, Ghat-kopar (E), Mumbai 400 077

M/32403Shri Durgadevi GandrapuBCOM, ACMA172/2 RT, Beside Ramalayam,Saidabad Colony,Hyderabad 500 059

M/32404Shri Shamsul KonainACMAG - 60, Delta - II,Greater Noida 201 308

M/32405Shri Sagar Pramod KulkarniMCOM, ACMAN - 51, SF - 4/21/2, UttamNagar, CIDCO, New Nashik,Nasik 422 008


M/32406Shri Biraj KumarBCOM, ACMAHIG No. 273, New HousingColony, Near MP Tower,Adityapur - 1, Dist - Sarai-kela - Kharsawan,Saraikela 831 013

M/32407Shri Sandeep RawatACMAC - 444, Kidwai Nagar East,New Delhi 110 023

M/32408Ms Chetna RawatACMAZ - 103, Sector - 12,Noida 201301

M/32409Shri M SakthivelBCOM, MFM, ACMA18/20 Soorathamman Koil1st Street, Srinivasanagar,New Perungalathur,Chennai 600 063

M/32410Shri Arun SharmaACMA77 Block, House No. 3 B,Sector - 2, Type - 3, Kali BariMarg, New Delhi 110 001

M/32411Ms Meena Niteen VaidyaMCOM, ACMAFlat No. 7, Kshitij Apartments,Lane No. 3, DahanukarColony, Kothrud, Pune 411 038

M/32412Shri Chandra ShekharBiswalMCOM, ACMAAsstt. Manager (F & A) M/s. Vijaynagar Minerals Pvt.Ltd., JSW Mining Office, Nr.Talur Cross, PO - Vidya-nagar, Toranagallu, Dt -Bellary, Vidyanagar 583 275

M/32413Ms BikkeeACMAAccounts Officer M/s.Mecon Ltd., Finance Section,Vivekanand Path, Doranda,Ranchi 834 002

M/32414Shri Thiyagarajan CMCOM, ACMA4/159, Ellai Amman 5thCross Street, Neelangarai,Chennai 600 041

M/32415Shri Vidya Sagar ChennupalliACMAD. No. 7-6-921/2, Venga-larao Nagar 1/1 Road,Guntur 522 001

M/32416Shri LakshminarayanaReddy CBCOM, LLB, ACMA# 226, B2 Wing, GataprabhaBlock, National GamesVillage, Koramangala,Bangalore 560 047

M/32417Ms Aanchal GuptaBCOM, MBA(FIN), ACMAHouse No. 151, Sector - 17,Faridabad 121 002

M/32418Ms GeetaBCOM, ACMA# G - 91, HMT Colony,Pinjore, Panchkula 134 101

M/32419Shri Sanjay Uttam MasurkarACMAB-12, Om Shivshakti CHSL.,River Valley, MadonnaColony Road, Borivli West,Mumbai 400 103

M/32420Shri Haribansa MeherBCOM, LLB, ACMAAsstt. Manager (Finance)Talcher Electrical Division(CESU) At / Po : ChanpalColony, Via - Talcher,Angul 759 104

M/32421Shri Sumit Kumar MishraACMA52/II, Gandhi Sadan,Mandir Marg,New Delhi 110 001

M/32422Shri Nilesh Gopal MundadaBCOM, ACMAFlat No. 12, Kaveri Appart-ment, Opp : Kirloskar OilEngine Ltd., Elephston Road,Nr. Manasi Bag, Bopodi,Pune 411 003

M/32423Shri Ravi Bhushan OjhaACMAPlot No. 163, Flat No. 201 FF,Ghayan Khand - 1, Indira-puram, Ghaziabad 201 012

M/32424Shri Bhavdip JayasukhlalParmarACMA‘‘Geeta’’, Near Shri NilkanthVidhyalaya, Goutam Society,Ravapar Road, Morbi 363 641

M/32425Shri Bishnu PrasannaPattanaikBSC, LLB, ACMAManager - Costing & AuditM/s. Anjan Drugs Pvt. Ltd.,5th Floor, Wing - II, NelsonTower, 117, Nelson Manic-kam Road, Aminjikarai,Chennai 600 029

M/32426Shri Pradip Kumar SwainMCOM, ACMADy. Manager (F & A) M/s.South West Mining Ltd., TalurCross, Torangallu, SandurRoad, PO - Vidyanagar,Bellary 583 275

M/32427Shri Gobinda SahaBCOM, ACMAS/o. Kanai Lal Saha 149/131/80, Rani RashmoniGhat Road, Bijpur, Dist -North 24 ParganasHalisahar 743 134

M/32428Shri Rajendiran SreenivasanMCOM, FCA, ACS, ACMA‘‘Cherunetturi’’ 1931, SouthEnd ‘‘C’’ Road, 9th Block,Jayanagar, Bangalore 560 069

M/32429Shri Kasiraju SivaramarajuACMADharmapuri Village, Post -Ravulacharuvu, Mandal -Dharmavaram,Anantapur 515 672

M/32430Shri Ramasubramanian T. V.BCOM, ACMAPlot No. 1, Chendurpuram IIExtn., Indira Nagar II WestStreet, Kattupakkam,Chennai 600 056

M/32431Shri Amit Kumar AroraMCOM, MA, MBA, ACMAP - 288, Sector - 12, PratapVihar, Ghaziabad 201 009

M/32432Shri Sandip BasakMCOM, ACMA2 B , Brindaban Paul Lane.Kolkata 700 003

M/32433Shri Anand HACMAT. C. 40/615, SreevarahamStreet, Manacaud -PO.,Thiruvananthapuram 695 009

M/32434Shri P KennedyBCOM, MFM, ACMABlock No. 1, F 2, Jain Abhina-van, Murgunagar Extn.,Velacherry, Chennai 600 042

M/32435Shri Sanjay Kumar MishraBCOM(HONS), ACMAC/o. Gobinda ChandraMishra At - Rahadpur, PO -Dehudi Anandapur Via -Dasarathpur, Bhadrak 755 006

M/32436Ms Susmita RoyMCOM, ACMAA - 10/2, Kalindi HousingEstate, Kolkata 700 089

M/32437Shri Gautam MauryaBCOM(HONS), ACMA5, Gora Pado Sarkar Lane,Ultadanga Main Road,Kolkata 700 067

INSTITUTE NEWS


INSTITUTE NEWS

M/32438Shri Pankaj Kumar SinghBCOM, ACMA91 - A, Pocket - A, DilshadGarden, New Delhi 110 095

M/32439Shri Shyamal KumarSahanaMCOM, ACMAC/o. Ajit Sahana Suri OldDangalpara, Near B.Gangulys House, PO - Suri,Dist - BbirbhumSuri 731 101

M/32440Ms Puja SharmaBCOM(HONS), ACMA52/6, VIP Road., ParvatiVihar, Phase - 2, J - 408,Baguiati, Kolkata 700 059

M/32441Shri Anand Kumar ShawBCOM(HONS), ACMA1, Kailash Das Road, PO -Gariffa, Ps - Naihati, Dist -North 24 Parganas,Naihati 743 166

M/32442Shri Pramod Kumar AgrawalBCOM, ACMA71/1J, P. B. Shah Road,Swiss Park, Tollygunge,Kolkata 700 033

M/32443Shri Anil Kumar ArodaBCOM, ACMA203, Vandit Apartment,Bhaikaka Nagar, Thaltej,Ahmedabad 380 059

M/32444Ms Indrani BoralBCOM(HONS), ACMA22, Parasar Road,, 1st Floor,Kolkata 700 029

M/32445Shri Samik ChakrabortyBCOM(HONS), ACMA35 - A, Bagha Jatin Road, PO.Nabagram, DIST. Hooghly,Nabagram 712 246

M/32446Ms Mousumi ChatterjeeBSC, ACMANo. 1, Olanda Court,Ver-mont, Victoria, AustraliaVictoria 3133

M/32447Ms Sanghamitra DasMCOM, ACMA166 Panchanantala Road,Kolkata 700 041

M/32448Ms Mandira DubeyBCOM(HONS), ACMAQrt. No. B 1/5/6, SwatiCompex Phase - II, PO -Hatiberia, Haldia 721657

M/32449Shri Sushil Kumar GuptaMCOM, ACMAL I G - V, A. D. A - II, RamghatRoad, Aligarh 202 001

M/32450Shri Lokesh HBCOM, ACMA# 48, ‘‘Sri Maruthi Krupa’’,5th Cross, Nethravathi Street,Maruthinagar, ChandraLayout, Bangalore 560 072

M/32451Shri Zulfiker IbrahimACMA23/607 E, ThazhuppilHouse, Madhura CompanyRoad, Palluruthy,Kochi 682 006

M/32452Shri Bikram JainBCOM(HONS), ACMA240 - F 2, Muktanand Nagar,Gopalpura Byepass, TonkRoad, Jaipur 302 018

M/32453Shri Bhabani Shankar KhuntiaBCOM, ACMAAT/PO - Byree, PS - Barcha-na, Dist -Jajpur,Jajpur 754 082

M/32454Shri Laxmi Narayan KhatuaMCOM, LLB, ACMAB / 702, Ram Vatika Co-op.Hsg. Soc. Ltd., AnnapurnaEstate, Phase - I, Opp :Indralok Phase - VI,Bhayander - East,Thane 401 107

M/32455Shri Santosh G KalburgiBCOM, ACMA# 201, 2nd Floor, R K PineTree Apartment, 5th Main,Haysala Nagar, RammurthyNagar, T C Palya MainRoad, Bangalore 560 016

M/32456Shri Uday Gajanan PathakMBA, ACMAFinance Coordinator BAIFDevelopment ResearchFoundation, "BAIF Bhavan",Dr. Manibhai Desai Nagar,Mumbai - Bangalore High-way, Warje, Pune 411 058

M/32457Ms S PadmasiniBCOM, ACMAS - 4, Lakshmis Nivass, 18Natesan Colony, Alwarpet,Chennai 600 004

M/32458Shri A. R. RamasubramaniaRajaBCOM, MBA, ACS, ACMA19, Third Street, GokulamColony, P.N.Pudur,Coimbatore 641 041

M/32459Shri Abhishek ChampalalShahBCOM, ACMA261/A, Guruwar Peth, FlatNo. 3, Dhanraj Apartment,2nd Floor, Pune 411 042

M/32460Shri Sukhwinder SinghACMAS/o. Major Singh Vill - UchaGaon, Po : Sidhuwal,Patiala 147 001

M/32461Ms Usha VatsBCOM(HONS), ACMA259 / 12, Jawahar Nagar,(Near Lal Nursing Home),Gurgaon 122 001

M/32462Ms Ria ChowdhuryACMA17, R N Tagore Road, BoseGarden, Agarpara,Kolkata 700 109

M/32463Shri Parasuram BuriMCOM, ACMAD - 11, Ayodhya Nagari Co-op Hsg. Soc., Behind Pune ITPark, Bhau Patil Road,Bopodi, Pune 411 020

M/32464Ms Pooja GargBCOM, ACMAAccounts Officer M/s. B HE L., Integrated OfficeComplex, Lodhi Road, B HE L., Delhi 110 003

M/32465Shri Vivek Sudam JagtapMCOM, ACMASr. Costing Officer M/s.Uttara Foods & Feeds Pvt.Ltd., Uttara House, 2,Wellesly Road Camp,Pune 411 001

M/32466Shri Santosh Kumar KenguvaMCOM, ACMAS/o. K. Laxmi Rao (A.O.)Gandhinagar 3rd Line, PO/DT.- RayagadaRayagada 765 001

M/32467Shri Thinakaran PBSC, ACMABlock - 5, Dev Apartment,No. 83, Srinivasanagar, IIndStreet, Velachery,Chennai 600 042

M/32468Shri Krishan Kumar RajpalBCOM(HONS), ACMA3375, Arya Pura, SubjiMandi, Delhi 110 007


INSTITUTE NEWS

M/32469Shri Sunny ChhabraMCOM, ACMAChhabra Tyre House, MainChoraha Station Road,Kashipur 244 713

M/32470Shri Pratap Kumar JenaBSC, ACMAProprietor Pratap Jena & Co.,C - 293, Sector - 10,Noida 201 301

M/32471Shri Deepak AggarwalACMAA - 11, Satyawati Nagar,Ashok Vihar Phase - 3,Delhi 110 052

M/32472Shri Pulkit ChamariaBCOM, ACMAAgency House, MakumRoad, Near Over Bridge,Tinsukia 786 125

M/32473

Shri Chitta Ranjan Dash

MCOM, ACMA

Asst. Manager (F & A) M/s.

WESCO Ltd., Deogarh

Electrical Division,

Deogarh 768 108

M/32474

Shri Munish Kumar

MCOM, ACMA

House No. 1544, Sarain

Mohalla, Nr. Gurudwara

Singh Sabha,

Pathankot 145 001

M/32475

Shri Sumedh Prakash Lele

BCOM, ACMA

E - 46, ‘‘Suvidya’’ Nr. Todkari

Hospital, Shreechag No. 2,

Alibag, Dist - Raigad,

Raigad 402 201

M/32476Shri Lakshman PurihellaACMA4/1, Ground Floor, Opp :jayarani Enclave, Nr.Amrita Vidyalayam,Nesapakkam, Jay balajinagar Annex,Chennai 600 078

M/32477Ms TamanaBCOM, ACMAD/o. Subhash Chhabra C/o. General Merchants,Chhota Bazar, Thanesar,Kurukshetra 136 118

M/32478Shri Anand RamanlalKarwaBCOM, ACMAFlat No. 7, GodavariApartments, AnantakripaCo-op. Hsg. Society,Paud Road,Pune 411 038

M/32479Ms Gayatri Anil PhalkeMCOM, ACMA‘‘NIRMAL’’ Shree MangalSociety, Near Jog Hospital,Paud Road, Pune 411 038

M/32480Ms Smitha GopalakrishnanBCOM, ACMA‘‘KARTHIKA’’ MaruthurRoad, Post - Cheroor,Thrissur 680 008

M/32481Shri Pritesh GordhanbhaiHiraparaMCOM, ACMAA 4 405, Vrajbhumi Town-ship Sector - 2, Simadagam,Surat 395 006

M/32482Shri Himanshu SekharBarpandaAKA HSB & Associates -Chartered AccountantsShankar Vihar, Beheramal,Jharsuguda 768 203

Members of the Quality Review Board of the Institute ofCost Accountants of India

The Quality Review Board has been reconstituted vide Notification numberG.S.R. 69 (E) dated 6th February 2012. The Board now consists of the followingmembers :

1. Shri R.S. Sharma, Ex-Chairman ONGC—Chairperson

2. Shri Navrang Saini, Regional Director, (Eastern Region), MCA—Member

3. Ms. Nandna Munshi, Principal Director of Commercial Audit & Ex-officioMember, Audit Board I—Member

4. Shri V. Kalyanaraman, Past President, ICAI—Member

5. Shri Kunal Banerjee, Past President, ICAI—Member


INSTITUTE NEWS

FOR ATTENTION OF MEMBERSBenevolent Fund For the Members of The Institute

ObjectiveThe Fund has been created to provide :1. Outright grant of prescribed amount to the member in the event of critical illness of a member of the

Fund.2. Outright grant of prescribed amount to the beneficiary in the event of death of a member of the Fund.3. Financial assistance of prescribed amount repayable in prescribed manner by the members of the Fund in case

of financial distress due to prolonged illness or temporary loss of employment, illness of spouse/dependentchildren of member of the Fund; and education of dependent children of deceased member of the Fund.

Beneficiary means member of the Fund including dependent spouse/dependent children/parents/dependent minor brothers and sisters of the member of the Fund.

Procedure of Life MembershipAn Associate/Fellow Member having paid up-to-date membership fees to the Institute can become a Life

Member of the Fund on application being made in the prescribed application form along with a remittance ofRs. 2500/-, (Rupees Two Thousand Five Hundred only) (one time payment) by cash or by cheque or demanddraft payable at Kolkata drawn on scheduled bank in favour of ICAI Members' Benevolent Fund. In case ofoutstation cheque not payable at Kolkata, applicable bank charges are to be added. The application form canbe collected from the headquarters of the Institute at Kolkata or downloaded from the website of the Institutewww.icai.org. Soft copy of the application form can also be sent on requisition made to e-mail:[email protected] .

For the purpose of obtaining benefit from the Fund, a member should ensure to pay his up-to-date Associate/Fellow membership fees to the Institute and his name should continue to exist in the Register of Members ofthe Institute.

Invitation for Empanelment of Resource PersonsFor Conducting Investors Awareness Programme

Institute of Cost Accountants of India invites Expression of Interest from Cost Accountants, Financial MarketExperts, and Academicians having domain expertise in Financial Markets to act as Resource Person forconducting Investors Awareness Programme jointly organised by the Institute and Ministry of CorporateAffairs, Government of India, across the country. The Resource Persons so retained by the Institute will haveto plan and organise such programmes of two hours duration in towns (other than District Head Quarters andState Capitals). Arranging venue, organizing at least 50 participants and delivering the financial literacy to theparticipants are some of the initiatives expected from the Resource Persons. For this initiative, maximumamount of Rs. 5000.00 (all inclusive) perprogramme will be reimbursed.

Interested Persons can file their expression of interest on-line by visiting Institute's web site www.icwai.org.or can send their detailed profile with a proposal indicating the towns where they could conduct the programmeto the following address :

The Director (CAT)The Institute of Cost and Accountants of IndiaCMA Bhawan4th Floor3- Institutional AreaLodi RoadNew Delhi 110003Email: [email protected]

# those who are already empanelled by the Institute for this purpose need not apply again.


INSTITUTE NEWS

THE INSTITUTE OF COST ACCOUNTANTS OF INDIACERTIFICATE COURSE

ONINTERNATIONAL FINANCIAL REPORTING

STANDARDS (IFRS) & CONVERGED INDIANACCOUNTING STANDARDS

1. Bangalore — 27 June – 1 July, 2012 3. Hyderabad -18-22 July, 20122. Kolkata — 22-26 August, 2012 4. Delhi - 26-30 September, 2012

5. Mumbai — 26-30 December, 2012

Course ObjectiveIndia has taken a big initiative for IFRS Convergence which originally scheduled to be effective from 1st

April, 2011, now deferred by Ministry of Corporate Affairs, Government of India for some more time. Thegovernment has already notified partial converged of Indian Accounting Standards (Ind-AS). The Institute ofCost Accountants Certificate Course offers an excellent opportunity to learn IFRS and converged IndianAccounting Standards through distance learning mode that includes in-depth personal interaction sessionswith expert faculty.

The course aims to help the participants to understand IFRS convergence and thereby enabling them toparticipate in IFRS convergence process

Course CoverageFinancial Statements - Revised Schedule VI Service Concession ArrangementsProperty, Plant and Equipment (PPE) Operating SegmentIntangible Assets Financial InstrumentsLease Accounting Disclosures of Financial InstrumentsInvestment Property Provisions, Contingent Liabilities and contingent AssetNon-Current Assets held for Sale and ConsolidationDiscontinued OperationsRelated Party disclosures Share Based PaymentRevenue Recognition Business CombinationsConstruction Contracts IFRS Conversion

DurationTwo months including five days classroom session with case studies followed by on-line practice and on-

line examination.

For WhomCost Accountants, Chartered Accountants and Company Secretaries, Senior and Middle level executives of

various Public and Private Sector organizations, Banks, financial Institutions, Insurance Companies, Governmentdepartments, Autonomous bodies, Statutory Bodies, Multinationals, etc.; Practicing Cost Accountants, CompanySecretaries and Chartered Accountants, Faculty of Universities, Management Institutions and Autonomousprofessional Institutions, Students pursuing the professional courses and any other person involved in the IFRSprocess.


INSTITUTE NEWS

Methodology● Class room sessions of 40 Hrs. (Wednesday-Sunday from 10.00 AM to 6.00 PM)● Course Material● Large Question Bank with facilities to practice● Online Examination

Course Fee :Rs. 25000/- plus 12.36% service tax per participant. The Fee includes faculty fee, course kit including specialised

course material, hall charges, lunch, tea/coffee and online assignment and Examination charges. (15% discount onthe Fee for the Practicing Members and Students of The Institute of Cost Accountants of India)

The Payment of the Fee is to be made by cheque/DD in favour of ̀ The Institute of Cost Accountants of India'payable at New Delhi along with the application/nomination

Details of ECS Payment : State Bank of India (60321), Andhra Association Building,24-25 Institutional Area,Lodhi Road , New Delhi - 110 003.

Current A/c No. : 30678404793 MICR Code : 110002493 IFSC Code : SBIN0060321

For Registration and Further Details Please ContactCMA D. ChandruDirector (CEP)The Institute of Cost Accountants of IndiaCMA Bhawan, 3 Institutional Area, Lodhi Road, New Delhi - 110 003Phone : (Direct) 011-24643273, 24622156-57-58, 24618645 (M) - 09818601200Tele-Fax : 011-43583642/24622156/24618645E-mail : [email protected], [email protected] : www.mdp.icwai.org, www.icwai.org

Request For Comments

Cost Accounting Standards Board, the standard-setting body of the Institute, had approved therelease of Exposure Draft of Revised Cost Accounting Standard - 2 on Capacity Determination(CAS - 2). The CASB Secretariat issued the same in February 2012 for public comments and a numberof comments were received on the Exposure Draft. In the 52nd meeting of the Board, held on 16thApril 2012, the Board discussed the comments and in the light of the comments, it was decided tomake certain changes in the Exposure Draft. The revised exposure draft is again being hosted onthe website for comments.

The revised Exposure Draft may be modified in light of comments received before being issued asa standard in final form.Please submit your views/comments/suggestions on the proposed revised Exposure Draft,preferably by email, latest by 31st May 2012.

Comments should be addressed to :The Secretary,Cost Accounting Standards Board,CMA Bhawan, 3rd FloorThe Institute of Cost Accountants of India,3, Institutional Area, Lodi RoadNew Delhi - 110003

Emailed responses should be sent to: [email protected] of this revised Exposure Draft may be downloaded from the CASB website at http://www.casbicwai.org


INSTITUTE NEWS

CEP Directorate of the Institutes is Organising Following Programmesduring 23-26 May 2012 at Gangtok

(I) Contracts and their Management

Name of the Programme Contracts and their Management

Course Contents ● Negotiation Skills & Techniques

● Contracts—Concepts and Legal Issues

● Contracts and their Management

● Flaws in Contracts

● Case Studies (Liquidated Damages; Bank Guarantees; Arbitration; ForeignAward)

● CVC Guidelines

Venue (GANGTOK, SIKKIM ) Hotel The Royal Plaza, Upper Syari, Deorali, Gangtok,Sikkim 737 102.

Tel : 91 35922 80232 Fax : 91 35922 81112

Course Director Mr. BS RamaswamyCost Accountant & Former Addl. Secty., Govt. of India (Author of the Book on‘Contracts & their Management’ published by Lexis Nexis Butterworths)

Date 23 - 26 May 2012

Check-in —12.00 Hrs. on 23rd May 2012

Check-out—12.00 Hrs. on 25th May 2012

Participation Fee Rs. 35,000/- plus applicable service tax per participant.(Fee includes course fee, course material, accommodation on single room basis,all meals and visits)(the charge for accompanying Spouse would be Rs. 1,000/- (Rupees onethousand only) for all the three days.

THE CHEQUE/DD to be sent along with nominations in favour of ‘‘TheInstitute of Cost Accountants of India’’ payable at New Delhi.

Details of ECS Payment : State Bank of India (60321), Andhra AssociationBuilding, Institutional Area, Lodi Road, New Delhi 110 003.Current Accont No. : 30678404793MICR CODE : 110002493, IFSC CODE : SBIN0060321

Registration CMA D Chandru

Director (CEP), The Institute of Cost Accountants of India

CMA Bhawan, 3rd Floor, 3 Institutional Area, Lodhi Road, New Delhi 110 003.

Tel : 2464 3273, e-mail : [email protected], [email protected]

Website: www.mdp.icwai.org , www.icwai.org,


INSTITUTE NEWS

(II) Recent Trends in Corporate Reporting including IFRS andRevised Schedule VI

Name of the Programme Recent Trends in Corporate Reporting including IFRS and RevisedSchedule VI

Course Contents ● Presentation of Financial Statements

● Presentation of Balance Sheet

● Presentation of Statement of Profit and Loss

● IFRS and Fair Value Measurement

● Derivatives Accounting

● Development in Insurance Accounting

● Impairment Analysis

● Non-current Assets held for Sale and Discontinued Operations

● Agriculture

● Investment Property

Venue (GANGTOK, SIKKIM ) Hotel The Royal Plaza, Upper Syari, Deorali, Gangtok,Sikkim 737 102.

Tel - 91 35922 80232 Fax : 91 35922 81112

Course Director Dr. TP Ghosh, Professor, IMT Dubai

Date 23 - 26 May 2012

Check-in —12.00 Hrs. on 23rd May 2012

Check-out —12.00 Hrs. on 25th May 2012

Participation Fee Rs. 35,000/- plus applicable service tax per participant.

(Fee includes course fee, course material, accommodation on single room basis,all meals and visits)

(the charge for accompanying Spouse would be Rs. 1,000/- (Rupees onethousand only) for all the three days.

THE CHEQUE/DD to be sent along with nominations in favour of ‘‘TheInstitute of Cost Accountants of India’’ payable at New Delhi.

Details of ECS Payment : State Bank of India (60321), Andhra AssociationBuilding, Institutional Area, Lodi Road, New Delhi 110 003.

Current Accont No. : 30678404793

MICR CODE : 110002493, IFSC CODE : SBIN0060321

Registration CMA D Chandru

Director (CEP), The Institute of Cost Accountants of India

CMA Bhawan, 3rd Floor, 3 Institutional Area, Lodhi Road, New Delhi 110 003.

Tel : 2464 3273, e-mail : [email protected], [email protected]

Website: www.mdp.icwai.org , www.icwai.org,


INSTITUTE NEWS

(A) Conversion of Cost Accountant firms into LLPs

1. All the existing Cost Accountants’ firms who wantto convert themselves into LLPs are required tofollow the provisions of Chapter-X of the LLP Act,2008 read with Second Schedule to the said Actcontaining provisions of conversion from existingfirms into LLP.

2. In terms of Rule 18(2) (xvi) of LLP Rules- 2009, ifthe proposed name of LLP includes the words‘Cost Accountant’ or ‘Cost Accountants’, as thecase may be, as part of the proposed name, thesame shall be referred to ICAI by the Registrar ofLLP and it shall be allowed by the Registrar onlyif the Secretary/Authorized Official of ICAI *approves it.

3. If the proposed name of LLP of Cost Accountantfirm resembles with any other non- CostAccountant entity, as per the naming Guidelinesunder LLP Act and its Rules, the proposed nameof LLP of Cost Accountant firm may include theword ‘Cost Accountant’ or ‘Cost Accountants’, asthe case may be in the name of the LLP itself andthe Registrar LLP may allow the same name,subject to compliance to Rule 18(2) (xvi) of LLPRules as referred above.

4. For the purpose of registration of LLP with ICAIunder Regulation 108 of the Institute of Cost andWorks Accountants Regulations, 1959, the partnersof the firm shall apply, in ICAI Form of Applicationfor Particulars of Offices and Firms, along with thecopy of name registration, received from the

Registrar of LLP and submit the same with theconcerned Office of ICAI. The Form shall containall the details of the offices and other particularsas called for, together with the signatures of allpartners or authorized partner of the proposedLLP.

5. The names of the Cost Accountant firms registeredwith ICAI shall remain reserved for the partners,as one of the options for LLP names, subject to theprovisions of LLP Act & Rules and Regulationsframed there under.

6. The following guidelines relating to seniority andother criteria shall be followed for registration ofLLP with ICAI:

(i) Where two similar or identical or nearlysimilar firm names (whether the partners ofsuch firms are same or not) have applied forregistration to ICAI, under the proposed LLP,only one such firm name who applied firstshall be approved and remaining firm whohas applied with ICAI, whether desires toconvert into LLP or not, will have to changethe firm name.

(ii) The name of the LLP may be like ‘X & Co.LLP’ or ‘X & Associates LLP’ or ‘XYZ LLP’and no other suffix shall be approved andregistered by ICAI.

(iii) The newly converted Cost Accountant LLPregistered with ICAI shall be allowed to workonly in terms of Section 2(2) of the Instituteof Cost and Works Accountants Act, 1959 and

In terms of Council decision dated 22nd January, 2012, the following guidelines for conversion ofCost Accountants firms into LLPs and constitution of separate LLPs by the practising Cost Accountants havebeen finalized. They are applicable for conversion of Cost Accountants’ firms into LLPs or formation of newLLPs, by the members in practice of the Institute of Cost Accountants of India (ICAI) upon coming into forcethe provisions of the Cost and Works Accountants (Amendment) Act, 2011 (i.e. 1st February, 2012),subject to the provisions of the Limited Liability Partnership (LLP) Act, 2008 and Rules & Regulations framedthereunder :

Guidelines For Conversion of Cost Accountants’ Firms(Partnership/Proprietary)

Into Limited Liability Partnerships (LLPS)


for the objects of LLP to be incorporated asper Form-2 and Form 17 of the LLP Rules,2009 or as per the LLP agreement and sameshall be in the nature of Professional Servicesallowed under Section 2(2) of Cost and WorksAccountants Act, 1959. LLP shall be subjectto the same regulations, as if they were apartnership firm. Mere conversion into LLPdoes not give any privileges, which were notearlier with the Cost Accountant firms.

(iv) Inter se seniority among the firms shall begiven to LLP as per the existing policy ofICAI. In other words, LLPs shall carry thesame seniority, as the firm shall otherwisehave under the existing policy of ICAI. Incase of merger of 2 LLPs, same rulesare applicable as to firms merging shallapply.

(v) The non converted firms shall also remain onthe same position of seniority in relation toconverted LLPs, as the converted LLPs shallhave the same inter-se seniority, as the firmshad earlier to conversion.

7. These guidelines of conversion of Cost Accountantfirms into LLP shall also be applicable to theconversion of proprietary firm into LLP, subjectto the provisions of LLP Act & Rules andRegulations framed there under. The conversionof proprietary firm shall be by way of incorporationof new LLPs.

8. The registration number (with minimum 6numbers) of LLP with ICAI, shall be the same FirmRegistration Number (FRN) allotted to the firmbefore the conversion by ICAI, with the RegionalCode like ‘W’ for Western, ‘E’ for Eastern, ‘S’ forSouthern, ‘N’ for Northern.

9. Introduction of LLP, shall not affect the existingregulations in force as regards the name allotmentto Cost Accountant firms.

10. The provisions of the Cost and Works Accoun-tants Act, 1959, the Cost and Works AccountantsRegulations, 1959 and Code of Ethics issued byICAI shall be applicable to all partners jointly &

INSTITUTE NEWS

severally, of the converted Cost Accountant firmsinto LLP.

11. The following Guidelines are subject to theclarification from Ministry of Corporate Affairs(MCA), Government of India, New Delhi:

(i) Wherever the existing partnership firm hasbeen appointed as statutory auditor ofany company, after following the dueprocedure under the Companies Act, 1956 andthe said firm with the same partners isconverted into/has formed LLP, then thesame FRN will continue band the Board ofDirectors of the Company shall take onrecord the conversion/formation of the CostAccountant firms into LLP and the n ew LLPshall be deemed to be the Auditor of the saidcompany, for the said financial year, in termsof Section 58(4) of the LLP Act, 2008.

(ii) Wherever more than one partnership firm,with all the partners, desire to convert/formonly one LLP, then in that case the name andFRN may be selected of only one of suchfirms, for the purpose of registration withICAI and;

(a) The other such firms shall stand dissolved.

(b) Seniority shall be decided as per applicablerules of ICAI.

(c) The Board of Directors of all the Companies,who have appointed all the erstwhile firms asCost auditors, may take a declarationfrom the said LLP, with all the partners of allthe erstwhile firms on record and theappointment as Cost auditors of all theerstwhile firms made under the CompaniesAct, 1956, shall be deemed to be in the nameof the said LLP.

(B) Constitution of separate LLPs

12. All the members of ICAI in practice who want toconstitute a separate LLP are required to followthe provisions of the LLP Act, 2008 read with theRules framed there under.

13. In terms of Rule 18(2) (xvi) of LLP Rules- 2009, ifthe proposed name of LLP includes the words


INSTITUTE NEWS

‘Cost Accountant’ or ‘Cost Accountants’, as thecase may be, as part of the proposed name, thesame shall be referred to ICAI by Registrar of LLPand it shall be allowed by the Registrar only ifthe Secretary/Authorized Official of ICAI *approves it.

14. If the proposed name of LLP of Cost Accountantfirm resembles with any other non-CostAccountant entity, as per the naming Guidelinesunder LLP Act and its Rules, the proposed nameof LLP of Cost Accountant firm may include theword ‘Cost Accountant’ or ‘Cost Accountants’, asthe case may be in the name of the LLP itself andthe Registrar LLP may allow the same name,subject to compliance to Rule 18(2) (xvi) of LLPRules as referred above.

15. For the purpose of registration of LLP with ICAIunder regulation 108 of the Cost and WorksAccountants Regulations, 1959, the partners of thefirm shall apply in the ICAI Form of Applicationfor Particulars of Offices and Firms along with thecopy of name registration, received from theRegistrar of LLP and submit the same with theconcerned Office of the ICAI. This Form shallcontain all details of the offices and otherparticulars as called for together with thesignatures of all partners or authorized partner ofthe proposed LLP.

16. The following guidelines relating to seniority andother criteria shall be followed for registration ofLLP with ICAI:

(i) Where two similar or identical or nearlysimilar firm names (whether the partners ofsuch firms are same or not) have applied forregistration to ICAI, under the proposed LLP,only one such firm name who applied firstshall be approved and remaining firm whohas applied with ICAI, whether desires toconvert into LLP or not, will have to changethe firm name.

(ii) The name of the LLP may be like ‘X & Co.LLP’ or ‘X & Associates LLP’ or ‘XYZ LLP’and no other suffix shall be approved andregistered by ICAI.

(iii) The newly converted Cost Accountant LLPregistered with ICAI shall be allowed to workonly in terms of Section 2(2) of the Institute ofCost and Works Accountants Act, 1959and for the objects of LLP to be incorporatedas per Form-2 and Form 17 of the LLP Rules,2009 or as per the LLP agreement and sameshall be in the nature of ProfessionalServices allowed under Section 2(2) of Costand Works Accountants Act, 1959. LLPshall be subject to the same regulations, as ifthey were a partnership firm. Mere conversioninto LLP does not give any privileges, whichwere not earlier with the Cost Accountantfirms.

(iv) Inter se seniority among the firms shall begiven to LLP as per the existing policy of ICAI.In other words, LLPs shall carry the sameseniority, as the firm shall otherwise haveunder the existing policy of ICAI. In case ofmerger of 2 LLPs, same rules are applicableas to firms merging shall apply.

(v) The non converted firms shall also remain onthe same position of seniority in relation toconverted LLPs, as the converted LLPs shallhave the same inter-se seniority, as the firmshad earlier to conversion.

17. These guidelines of conversion of Cost Accountantfirms into LLP shall also be applicable to theconversion of proprietary firm into LLP subject tothe provisions of LLP Act, Rules and Regulationsframed there under. The conversion of proprietaryfirm shall be by way of incor-poration of newLLPs.

18. The registration number (with minimum 6numbers) of LLP with ICAI, shall be like the FirmRegistration Number being allotted to the firmsby ICAI with the Regional Code like ‘W’ forWestern, ‘E’ for Eastern, ‘S’ for Southern, ‘N’ forNorthern.

19. Introduction of LLP, shall not affect the existingregulations in force as regards Name allotment toCost Accountant firms.


INSTITUTE NEWS

20. The provisions of the Cost and Works AccountantsAct, 1959, the Cost and Works AccountantsRegulations, 1959 and Code of Ethics issued byICAI shall be applicable to all partners jointly andseverally, of the LLP.

21. In case of any dispute in respect of theseguidelines, the same shall be referred to theCouncil of ICAI and the decision of the Councilshall be final and binding on the members of theInstitute.

22. For the purpose of any clarification regarding theapproval and registration of proposed LLP with

ICAI, the requests can be sent at the followingaddress:

Shri Kaushik BanerjeeDirector & Joint SecretaryThe Institute of Cost Accountants of India12, Sudder Street,Kolkata - 700 016.(*Shri Kaushik Banerjee, Director & Joint Secretaryis the Authorized Official of ICAI)

23. These Guidelines shall come into force w.e.f. 1stFebruary, 2012.

For Attention of Members

The Council of the Institute has decided that the members of the Institute shall be permittedto use the letters “CMA” before their names after notification regarding the date of cominginto force of the provisions of the Cost and Works Accountants (Amendment) Act, 2011 ispublished by the Central Government in the Gazette of India, wherein the Associate &Fellow Members are entitled to use the letters “ACMA” & “FCMA” respectively aftertheir names.

For Attention of Members

The provisions of The Cost and Works Accountants (Amendment) Act, 2011 have comeinto force with effect from 1st February, 2012, whereby the name of our Institute has beenchanged from The Institute of Cost and Works Accountants of India to “The Institute ofCost Accountants of India” and the Associate & Fellow Members of the Institute are nowentitled to use the letters “ACMA” & “FCMA” after their names in place of “AICWA” &“FICWA” respectively.

Further, the practising members of our Institute can now enter into a Limited LiabilityPartnership, which has no company as its partner in accordance with the Limited LiabilityPartnership Act, 2008. In this connection, the two notifications published by the CentralGovernment in the Gazette of India dated 13th January, 2012 and 30th January, 2012 areprinted in this journal.

Further details are published in this journal and also uploaded on our

website www.icwai.org .


INSTITUTE NEWS

THE INSTITUTE OF COST ACCOUNTANTS OF INDIA(Statuory Body Under An Act of Parliament)

Examination Time Table & Programme – June 2012

Certificate in Accounting Technicians (CAT)

Day & Date Time Competency Level Part - II

Monday, 11th June 2012 09.30 A.M. to 12.30 P.M. Financial Accounting

Wednesday, 13th June 2012 09.30 A.M. to 12.30 P.M. Applied Statutory Compliance

Examination Fees

INLAND CENTRES Competency Level Part – II ` 730/-

1. Application Forms for CAT Examination can be down loaded from Institute’s website www.icwai.org andfiled online also.

2. Last date of receipt of Examination Application Forms without late fee is 10th April, 2012 and with late feeof `100/- is 20th April, 2012.

3. Examination Fees to be paid through Bank Draft of requisite fees drawn in favour of “The Institute of CostAccountants of India” payable at New Delhi.

4. Students will send their Examination Application Forms along with the fees to Directorate of CAT at “CMABhawan”, 3, Institutional Area, Lodi Road, New Delhi – 110003.

5. Examination Centres : Agartala, Ahmedabad, Akurdi, Allahabad, Alwar (Rajasthan), Asansol, Aurangabad,Bangalore, Baroda, Berhampur(Ganjam), Bhilai, Bhopal, Bhubaneswar, Bilaspur, Bokaro, Calicut,Chandigarh, Chennai, Coimbatore, Cuttack, Dehradun, Delhi, Dhanbad, Durgapur, Ernakulam, Faridabad,Ghaziabad, Guwahati, Hardwar, Howrah, Hyderabad, Indore, Jaipur, Jabalpur, Jalandhar, Jammu,Jamshedpur, Jodhpur, Kalyan, Kannur, Kanpur, Kolhapur, Kolkata, Kota, Kottayam, Lucknow, Ludhiana,Madurai, Mangalore, Mumbai, Mysore, Nagpur, Naihati, Nasik, Nellore, Neyveli, Noida, Palampur (H.P.),Panaji (Goa), Patiala, Patna, Pondicherry, Pune, Rajahmundry, Ranchi, Raigarh(Chattisgarh), Rourkela,Salem, Shillong, Solapur, Srinagar, Surat, Sahajahanpur, Thrissur, Tiruchirapalli, Tirunelveli, Trivandrum,Udaipur, Vapi, Vashi, Vellore, Vijayawada, Vindhyanagar, and Waltair.

6. A candidate who is fulfilling all conditions will only be allowed to appear for examination.

7. Probable date of publication of result: Competency Level Part – II is 22nd August, 2012.

C. BoseSr. Director (Examinations)


INSTITUTE NEWS

Examination — June 2012THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

(Statutory Body Under An Act of Parliament)Examination Time Table & Programme – June 2012

Programme for Syllabus 2008Day, Date & Time Intermediate Final Foundation

09.30 A.M. to 12.30 P.M. 02.00 P.M. to 05.00 P.M. 02.00 P.M. to 05.00 P.M.Monday Financial Accounting Capital Market Analysis

11th June, 2012 & Corporate LawsTuesday Financial Management &

12th June, 2012 International FinanceWednesday Commercial and Industrial Management Accounting–

13th June, 2012 Laws & Auditing Strategic ManagementThursday Applied Direct Taxation Indirect & Direct–

14th June, 2012 Tax ManagementFriday Cost & Management Management Accounting– Organisation and

15th June, 2012 Accounting Enterprise Performance Management FundamentalsManagement

Saturday Advanced Financial Accounting16th June, 2012 Accounting & Reporting

Sunday Operation Management Cost Audit & Economics and Business17th June, 2012 and Information Systems Operational Audit Fundamentals

Monday Applied Indirect Taxation Business Valuation Business Mathematics and18 th June, 2012 Management Statistics Fundamentals

Examination FeesGroup (s) Final Intermediate Foundation Course

Examination Examination ExaminationOne Group (Inland Centres) ` 1250/- ` 1000/- ` 1000/-

(Overseas Centres) US $ 100 US $ 90 US $ 60Two Groups (Inland Centres) ` 2250/- Rs. 1600/-

(Overseas Centres) US $ 100 US $ 90

1. (a) Application Forms for Foundation Course, Intermediate and Final Examinations are available from Institute’s Headquartersat 12, Sudder Street, Kolkata, Regional Councils and Chapters of the Institute on payment of ` 50/- per form. In case of overseascandidates, forms are available at Institute’s Headquarters only on payment of US $ 10 per form.(b) Students can also download the Examination Form from ICAI Website at www.icwai.org. In case of downloaded form ` 50/- should be added extra towards the cost of the form.(c) Students can also submit the form online.

2. Last date for receipt of Examination Application Forms without late fees is 10th April, 2012 and with late fees of ` 300/- is 20thApril, 2012.

3. Examination fees to be paid through Bank Demand Draft of requisite fees drawn in favour of ‘‘The Institute of Cost Accountants ofIndia’’ and payable at Kolkata.

4. Students may submit their Examination Application Forms along with the fees at ICAI, 12 Sudder Street, Kolkata – 700016 orRegional Offices or Chapter Offices. Any query can be sent to Sr. Director (Examination) at H.Q.

5. Finance Act 2011, involving Assessment Year 2012-2013 will be applicable for the subjects Applied Direct Taxation (Intermediate),Applied Indirect Taxation (Intermediate) and Indirect & Direct – Tax Management (Final) for the purpose of June 2012 term ofExamination under Revised Syllabus 2008.

6. Examination Centres: Agartala, Ahmedabad, Akurdi, Allahabad, Asansol, Aurangabad, Bangalore, Baroda, Berhampur(Ganjam), Bhilai,Bhopal, Bhubaneswar, Bilaspur, Bokaro, Calicut, Chandigarh, Chennai, Coimbatore, Cuttack, Dehradun, Delhi, Dhanbad, Durgapur,Ernakulam, Faridabad, Ghaziabad, Guwahati, Hardwar, Howrah, Hyderabad, Indore, Jaipur, Jabbalpur, Jalandhar, Jammu, Jamshedpur,Jodhpur, Kalyan, Kannur, Kanpur, Kolhapur, Kolkata, Kota, Kottayam, Lucknow, Ludhiana, Madurai, Mangalore, Mumbai, Mysore,Nagpur, Naihati, Nasik, Nellore, Neyveli, Noida, Panaji (Goa), Patiala, Patna, Pondicherry, Pune, Rajahmundry, Ranchi, Rourkela, Salem,Shillong, Solapur, Surat, Thrissur, Tiruchirapalli, Tirunelveli, Trivandrum, Udaipur, Vapi, Vashi, Vellore, Vijayawada, Vindhyanagar,Waltair and Overseas Centres at Dubai and Muscat.

7. A candidate who is completing all conditions will only be allowed to appear for examination.8. Probable date of publication of result : Foundation – 2nd August 2012 and Inter & Final – 22nd August 2012.

C. Bose Sr. Director (Examinations)


INSTITUTE NEWS

REGIONS & CHAPTERS NEWS

WIRCNavi Mumbai Chapter of Cost AccountantsOn 6th April 2012, Shri M. Gopalakrishnan, President of the Institutevisited Navi Mumbai Chapter along with Vice President Shri RakeshSingh and Council Members Shri A.S. Durga Prasad, and Smt. ArunaSoman. Shri Vivek Bhalerao, Chairman of the Chapter, Shri G. K. DasSecretary of the Chapter and others greeted the dignitaries.There was an informal exchange of information between thedignitaries and the Chapter representatives. The President gaveupdates about various initiatives of the Institute. Shri Vivek Bhaleraocongratulated the President for some initiatives taken by the ITDirectorate (like IEPS) and the Studies Directorate - sending the studymaterial directly to the students through our Logistics Associate.The meeting concluded with an informal note of thanks. ThePresident's visit rejuvenated the members.Vapi-Daman-Silvassa Chapter of Cost Accountants (VDSCCA)A program was organized on 29th March 2012 to inaugurate VDSCCAand a seminar was held on that day on ‘Cost Management & BudgetChanges’ at Lions Upasana Auditorium, Gunjan, Vapi. The Chapterwas inaugurated by Shri M. Gopalakrishnan, President of the Institutewho also released the souvenir on the occasion. Also present were ShriRakesh Singh, Vice president of the Institute, Shri Vijay P. Joshi,Chairman, WIRC, Shri B.F. Modi, Chairman of the Chapter, Taxationexpert Shri V.S. Datey and other distinguished guests.Shri Rakesh Singh discussed the salient features of the recentprovisions on Cost Audit & Cost Compliance, highlighting thepractical applications. Shri V.S. Datey made a crticial analysis of‘Budget Changes and EA-2000’. There was an open forum wherethe members deliberated and discussed the above provisions.

SIRCHyderabad Chapter of Cost Accountants (HCCA)Coal India Limited has conducted Campus Interviews for fresh GradCMAs at Hyderabad Centre of Excellence, Gachhibowli, Hyderabadon 15th March, 2012. Shri B. Kumar, Associate Advisor of HyderabadCentre of Excellence, Shri K.Ch.A.V.S.N. Murthy, past Chairman-SIRCand A. Vijay Kiran, Chairman-Students Services & Library extendedtheir support in organizing this programme. A total of 32 candidateswere selected out of 37 candidates attended the interviews.Vishakhapatnam Chapter of Cost Accountants (VCCA)VCCA organized a talk on ‘Budget 2012’ at hotel Dasapalla,Vishakapatnam on 25th March 2012. Shri S.S. N. Raju, Special PublicProsecutor, CID was the Chief Guest. Shri A. Chandrasekhar,Partner of SARC & Associates, Shri S. Satyananda Rao, Chairman,VCCA, Shri D. Ramana Murthy, Secretary, VCCA, Shri K. SanyasiRao, RCM of SIRC, Shri V.S.N. Murthy, expert on Direct Taxes,and Shri G. Prabhakar Shastry, expert on Indirect Taxation werethe speakers on the said topic.Shri S.S.N. Raju spoke on the growing importance of the CostAccountants in Indian economy. He spoke about the financialfrauds that are being committed in the corporate sector and therole of Cost accountants in curbing such fraud. Shri A. ChandraSekhar discussed the salient features of the Budget stating that thewelcome features were promises to curb black money and emphasison infrastructure. Shri V.S.N. Murthy, expert on Direct Taxes, andShri G. Prabhakar Shastry, expert on Indirect Taxation highlightedthe provisions and the impact of direct and the indirect taxes.The programme ended with a vote of thanks by Shri U. Prakash,Vice Chairman of the Chapter.

EIRCDurgapur Chapter of Cost Accountants (DCCA)DCCA organized ‘‘Regional Cost Conference -2012’’ on the theme‘‘Inclusive Growth through Industry & Infrastructure’’ on 24th and25th March 2012 at CMERI Auditorium, Durgapur.The Chief Guest was Shri Basudeb Banerjee, IAS, Secretary;Ministry of Commerce & Industries Govt. of West Bengal whoinaugurated the Conference by lighting the ceremonial lamp.In the Inaugural session, Shri M. Gopalakrishnan, President and SriRakesh Singh Vice president of the Institute addressed the audienceby explaining about various activities of the Institute, its membersand the role they can play towards the development of the Indianeconomy through inclusive growth of industry and infrastructure.Shri P. K. Bajaj, CEO, Durgapur Steel Plant, SAIL the Guest of Honour,in his address, emphasized that inclusive growth is a prerequisite tothe development of the industry and economy. Shri Sugata Marjit,Chairman, West Bengal Council of Higher Education, Member, Stateplanning Board, Govt. of West Bengal delivered the keynote address.He emphasized the need for professional approach regarding progressand prosperity of West Bengal through meaningful interactionbetween the Institute and Govt. of West Bengal.Shri Amal Das, Shri Kunal Banerjee and Shri Shyamal Banerjee,past Presidents of the Institute, Dr Sanjiban Bandyopadhyaya, ShriS.C. Mohanty and Shri T.C.A. Srinivasa Prasad, Council Members,Shri Saswata Dasgupta, Chairman, EIRC, and other RCM’s werepresent in the conference.Howrah Chapter of Cost Accountants (HCCA)HCCA organized a discussion on 'Union Budget 2012' on 18thMarch 2012 at the Chapter premises. Eminent Tax practitioner, ShriSanjoy Bhattacharyya, Chartered Accountant was the main speaker.Shri Tapas Kumar Kanrar. Chairman of the Chapter welcomed themembers and conducted the session. Many members from andaround Howrah participated in the discussion.

NIRCNoida Chapter of Cost Accountants (NCCA)NCCA organized a seminar on ‘Union Budget 2012’ on 19th March2012 at NMA House, Noida. The programme was organised jointlyin association with Noida Management Association (NMA) &Noida Chapter of Institute of Company Secretaries of India & IMSNoida. Shri Sunil Tandon, Vice President of NMA welcomed thedelegates and spoke about the need for critical analysis of variousbudget proposals to understand their implications.Leading direct and indirect tax experts were invited as speakersfor detailed analysis of various tax proposals in the Budget. ShriNabin Ballodia, Partner KPMG, one of the four top globalconsulting and audit firms spoke about various direct tax proposals.Shri J.K. Mittal, Advocate and well known expert in the field ofservice tax, spoke about service tax provisions.Shri Lakshmi Narsimhan, Partner of Lakshmikuman & Sridharan,India’s leading indirect tax law firm, presented critical analysis ofexcise and customs provisions.Shri Suraj Prakash Chairman, of the Chapter summed up theproceedings beautifully. A lot of interesting questions were raisedby members and other participants who came from variouscorporate houses like Jaypee group, BHEL, GAIL, IOCL, Kribhco,DMRC and other public and private sector companies. Shri RajivBajaj, Chairman NIRC of ICSI graced the event with his presence.The proceedings of the programme were conducted by Shri RVenkataramanan, Vice Chairman of Noida Chapter.


Dear Sir,

Since couple of months lot of changes have beentaking place in our Journal ‘The ManagementAccountant' with respect to colour printing, qualityimprovement etc. The journal has passed a longJourney since started under the editorship of Late ShriT. S. Grewal an Eminent Accounting Academician ofSouth Asia. I myself started reading this from 1991 andsince then, I missed very few editions. Today I amtrying to recap from my memory to summarize as amember/reader certain points which were longoverdue. I think this will be helpful in increasing theimage of the Institute, members and its Journal.

1. Economic Outlook on particular Industry/Service and a general note on overall economic outlookof the country should always be a part of every month’sedition. Arrangement should be made with Yojana/CMIE/Any Financial Newspaper or thru in-houseworking group of the Institute for this purpose.

2. Prior to publication of industry specific Journalwe should have at least arrangement with respectivedivision of CII /FICCI and Ministry related to thatIndustry. This will help us in giving recognition,intellectual support and patronage for any futureprojects of the respective industry. The PRO of theInstitute should try to get at least some review orcomments of respective bodies of Chambers ofCommerce/Ministry etc in industry specific editions.

3. An interview with CEO /VP of a Market Leaderor a dominant player . Say, an interview of someExecutives from Wal-mart may be taken by in houseteam.

4. Challenges, Scope, Opportunities for CMAs inthat particular Industry and article on industry specificsubject can be invited.

5. Article on new developments in InformationTechnology should be a regular feature. Also, articleson Health/Yoga/Ergonomics/Soft Skills/IT tools likeAccess/Excel/Outlook /ERP/ smart applications andcommands should come regularly on periodic basis.

6. The review on new releases of books onManagement, Economics, Business, Finance should bea regular feature.

7. Online Edition to be changed from PDF to Book

LETTERS TO EDITOR

Reader - nowadays most of our members use Tablets,E-Readers etc . Better to change the PDF version ofonline edition in to an E- Book form.

8. Size of Management accountant should bereduced to make it same as any InternationalManagement Accounting Magazine and repetitiveinformation i.e. chapter information /address/activities etc to be taken care in online edition and maybe published on periodic basis only in paper edition.Photographs on back/front pages to be publishedperiodically. Fonts to be changed to get sleekness sothat publication becomes more attractive.

Have a nice cost effective day!

With Best regards,

Davinder BhatiaCost Management Specialist

484 Savoline Blvd,Milton, Ontario, Canada

L9T7X3647-237-8465, 905-593-2728

Our reply : Thanks for your valuable inputs. We willrevert to you on the same.

Dear Sir,

The article in March 2012 issue on the case studysection titled ‘‘Hindustan Unilever's Cost Aggression’’by Ms Kaberi Bhattacharya is one of the best articlesof the March 2012 issue. It is informative andanalytically excellent.

It exhibits what parameters should be consideredfor preparing the base for good SDSS (StrategicDecision Support System) by the corporate houses.

Thanks for enriching our journal with such anexcellent article

Regards

Prashant Dahivalkar ACMA

M/28526

■ ■ ■ ■ ■ Letters may be edited for brevity


BOOK REVIEW

Cost Accounting discipline requires its students tohave a firm hold on the subject with clarity andunderstanding. One has to be conversant with the

concepts, methods of cost ascertainment, application of themethods in decision-making process and, finally, forinstallation of a cost accounting system. The entire gamutof operations related to Cost Accounting has beencomprehensively covered in the book under review.

Starting with an overview of the subject, the authorshave, in a student-friendly manner, taken up all relatedaspects in a planned way.

The reader gets introduced to the basics, the essentialdifference between cost accounting and other accountingdisciplines—like financial accounting and managementaccounting—and then, progressively, to the various coststhat are available for this accounting discipline.

One interesting feature is that most of the nineteenchapters—that are grouped under three parts—provide agist of the portion covered, related references, practicalexamples with working notes and exercises with solutions—to tone up one’s understanding of the subject.

Material, Labour and Overheads form the three principalcomponents of cost accounting. Their treatment and usagevary—depending on the requirements and their classificationas direct or indirect, fixed, variable or semi-variable. Thereare various processes of cost accounting that come into play,it could be job costing, process costing, unit costing, and soon. The nuances of each process or system of costing have tobe understood for better profit planning and performancemeasurement. It is here that the book scores.

Mention must be made of the chapters that discussinstallation of a costing system, reconciliation andintegration and variance analysis for their lucid presentation.The comfort level of the reader is bound to increase.

The book also deals with the advantages and limitationsof variable costing, its role in profit planning and cost controlmeasures.

Variable costing is required for internal control. Itsusefulness to the management is in carrying out profitplanning exercises in specific situations and cost control ingeneral. Undeniably, variable costing has a vital role to playin situations where fixed costs do not come into the pictureand short term perspectives have to be taken into accountfor decision-making. They have taken up cost accountingtechniques as a tool for profit planning, cost-volume-profitrelationship and budgeting.

As envisaged by the authors, this book willcertainly be useful not only to the students and teachers butalso to all professionals dealing with Cost Accounting.

M. S. VaidyanathanACMA, ACS

Senior Manager, Indian Bank

Cost Accounting

By M Y Khan & P K Jain

Tata McGraw Hill EducationPrivate Ltd.

Fifteenth Reprint 2011Price : Not Indicated A Guide to Cost

Accounting Standards

By Shri Ajay Deep Wadhwa

Modern Law Publications

First Edition, 2011Price : 275.00

Since the first edition of this book there has beenconsiderable and complex study of cost accountingstandards. Where first part of the book deals with the

importance of cost accounting standards, the 2nd part ofthe book deals mainly with various cost accountingstandards. Recent changes and amendments have beenincorporated wherever necessary.

The unique and distinct features of the present editionare outlined hereunder :1. The full text of the cost accounting standards, with

objective, scope, clarifications etc. have been included.2. Practical aspects of each and every cost accounting standards

has been incorporated at the end of each chapter.3. Scope and applicability of cost accounting standards

have been incorporated at appropriate place.4. Relevant sections of Companies Act, 1956 related to

accounts has also been included in the appendix to havea overall concept of the cost accounting standards withthe Companies Act.This book is an unique book so far as cost accounting

standards are concerned. Clear and vivid picture of the CostAudit Report Rules 2011 & Cost Accounting Record Rules2011 have been depicted here. This book provide guidelinesto cost accountants in preparation of uniform cost statements,to make standard approach towards maintenance of costaccounting record rules & understanding cost audit & certainprovisions of company law including other acts like IncomeTax Act, Central Excise, Customs, Sales Tax Act etc.

This book gives the management to follow the standardcost accounting practices & preparation of uniform coststatement in the matter of compliance of statutoryobligations.

This book gives a total picture regarding appointmentof cost auditors by companies. This book will definitely caterto the needs of the students as well as the professionals andwill be a constant guide to the readers and professionals.

Chandrani DuttaB.Sc. (Hons), ACS