GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME

DECEMBER 2011

MODULE I I I

t0$l THE lNsr lTUTE qF ,c;hd;hl Sbiretaries of India, * p u R t s , r r t

- o r P n o F t s s l o i l A r E x c E | - L E t c E

statutory body under an Act of Parliament

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Santhosh Thomas Thaikkadan

CS Professional Programme

Student

Thrissur - Kerala

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PROFESSIONAL PROGRAMME EXAMINATION

DECEMBER 2011

STRATEGIC MANAGEMENT, ALLIANCES ANDINTERNATIONAL TRADE

Maximum marks: 100Time allowed:3 hours

PAHT A(Answer ANY TWO Questians from this part')

Question 1

Distinguish between any four of the following :

(i)' lnternational strategy' and'transnational strategy''

(ii) 'strategic planning' and 'tactical planning''

(iii) 'lnterna! auditing' and 'statutory auditing''

( i v ) 'Corpora te leve ls t ra tegy 'and 'bus iness leve ls t ra tegy , .

( v ) ' O f f e n s i v e s t r a t e g i e s ' a n d ' d e f e n s i v e s t r a t e g i e s ' ' ( 5 m a r k s e a c h )

Answer 1(aXi)

Difference between International strategy and Transnational strategy

The main points of distrnction between the two include the following:

International strategy : ln the initial stages o{ globalization, a firm may not be in a

position to opt for either-global strategy or multi-domestic strategy for its overseas

business. They adopt int6rnational strategy which involves. creating an international

division and exporting the products through that division to those countries where the

products are needed] At this stage of globalization, a company is really focused on the

domestic market and just exporti;g wnlt is demanded abroad' As the product becomes

successful abroad, the company may set-up manufacturing and marketing facilities with

certain degree of differentiaiion-OaseO on product customization. The key characteristic

of this strategy is that all control is retained at the home office regarding product and

marketing functions. Many multinational corporations have adopted this procedure"

Transnational strategy : Transnational strategy involves adopting a combined

approach of low costs and hrgh local responsiveness stmultaneously by the companles

for their products/services. litegrating these two contradictory approaches is a difficult

proposition and requires innovative ways'

Answer 1(aXii)

Dif ferencebetweenStrategicP|anningandTact ica|P|anning:

The main points of distinction between the two rnclude the following:

(i) strategic planning is carried out at the highest level o{ rnanagement and ls

concerned with decisions in the purview of that level. i-' lowever, tactical planning

is related to lower level of management'

PP-SMAtT-December 2011 z(iit Strategy formulation is a continuous but regular process. Tactics on the other

hand, are determined periodicaily with a fixed time schedure.(ii i) Strategic decisions-making is influenced by personal values of executives while

the subjective vaiues exercise little influence on tacticaldecision-making.(iv) ln strategic formulation the total possible range of alrernatives from which

management must choose is greater than in tact ical planning.

(v) Strategic formulation and implementation managers have to deal with a highdegree of uncertainty and the results of strategic decisions are not

""ritypredictable. On the contrary, the dimension of tactical decisions "r"

ru"hshorter and the risks associated with such decisions can be assessed moreeasi ly.

(vi) Strategic problems are generally unstructured and non-repetitive while tacticalprobiems are structured and often repetitive in nature.(vii) Strategies are intended to last for long periods of time while ractics covers ashorter duration.

(viii) Strategic formulation requires large amounts of information which is derivedfrom the externalenvironment. While tacticaldecision-making requires internaitygenerated data which is of historicalnature.

(ix) Strategy is original in the sense that it is the source for the origin or developmentof tactics, Tactics are formulated within and in pursuit of strategies.

(x) In strategic formulation the number of people involved is less as contrasted withtactical decision-making wherein large number of managers and workers areinvolved.

(xi) The scope of strategies is usually broad and has fewer details than tactics.(xii) l i is usually easier to measure the effectiveness and efficiency of tactics than

of strategies. Result of strategic decisions are evident after a number of yearswhile tactical results are quickly available and can easily be identified withspecific actions.

(xiii) Strategic are formulated from a corporate point of view wnereas tactics aredeveloped primarily from a functional view_point.

Answer 1(a)(iii)

Difference between Internar Auditing and statutory Auditing:

The main points of distinction between the two include the followrng:

(i) Method of appointment and interests seruedInternal auditors are appointed by the management and are part of the managerialfunction. Statutory auditors, on the other hand, are appointed by the shareho'idersunder the statute. Their reports are addressed to ihe shareholders and theirfunction is to add credibility to financial statements and to report on the stewardshioof management.

3 pp-SlvlAlT*December 201 llndependence

Independence is a freedom of action and thought which enabies the auditor tochoose his own methods of operation and evlaluation, and allows compreteobjectivity in reports. The externalaudltor has considerably more independencethan the internal auditor as he is appointed by the shareholclers and thus notdependent on management for directions.Principal areas of interestSince management is concerned with the erperational efficiency and adherenceto policies, the internal auditor wiil devote a considerable portion of his time inreviewing the accounting and operating procedures of the company in order todeterrnine whether established policies are being followed and whether otherimproved procedures could be devised.The external auditor is concerned with the truth and fairness ot the reportspresented to the shareholders and shalltherefore devote the maior por.tion of hist ime on the ver i f icat ion of the account ing for assets, l iabi l i t ies, owner,s equity,revenues and expenses.Nature of WorkIt would be very seldom that either type of auditor would make detaited checksof alltransactions; both the internal and external auditor will rely upon tests andsamples' However, the internal auditor is likely to devote more iime and effort todetailed work than the external auditor.

(v) Scope

The internal audit is in compliance with the procedures laid down by managementand they may differ from one undertaking to another depending upon their needsas also the perceplions of the management. But the scope of activities of thestatutory auditors is determined bv statute.

(vi) Approach

The internal auditors are mainly concerned with ensuring substantial accuracyof records and to report upon specific problems which may be assigned to themby the management. On the other hand the external auditors are concerned withthe truth and fairness of accounts.

(vii) Responsibitity

Internal auditors are responsible only to the management of the organisationwhile external auditors are responsible to membersdhareholders and outsiders,like government.

(viii) Objectives

Internalauditors are the representatives of the management. The external audrtorsare engaged to give an unbiased and impartial report on the financial position ofthe company to the shareholders as well as outsiders.

(ix) QualificationThe qual i f icat ion required for appointment of the internal auditor is determinedby the management and i t is not obl igatory for him to possess qual i f icat ionsprescribed under Section 226 ol the Companies Act, but a statutorv auditormust possess such qualifications.

( i i )

( i i i )

(iv)

PP-S[4AlT-December 2011 4

(x) Ferformance

An internal audit is usually a continuous process and its main object is to makesure that transactions recorded in the books of account have been properlypedormed and duly authorised. An externalaudit may also be continuous, but inthe case of very large undertakings this is not often practicable. Hence, in sucncase external audit is taken up usually at the end of the year when the organisationhas compreted the preparation of the financiar statements.

(xi) Reporting

The internal auditor submits his report to the management while the report of thestatutory auditor is placed before the shareholders of the company.

Answer 1(a)(iv)

Difference between corporate-Level strategy and Business-Level strategyThe main points of distinction between the two include the followino:

Corporate-Level Straiegy

ln an organization_there are basically three levels. The top level of the organizationconsists of Executive Officer of the Company, the Board of Diiectors and AdministrativeOfficers, the responsibility of the top management is to keep the organization healthy.The issue pertaining to business ethics, integrity and socialcommitments etc. are deattwith at this level of strategic decisions. Major f inancial pol icy decisions involvingacquisition, diversification and structural redesigning etc. belong to the category oicorporate level strategy. Corporate level strategies translate to orientation of theshareholders and the society into the forms of strategies for functional or businesslevels. The nature of strategic decision in the corporate leveltends to be value orientedand conceptual. There is also greater risk, cost and profit potential as well as greaterneed for flexibility associated vrrith corporate level strategic activities.

Further, the content of corporate-revel strategy is a set of act ion prans andcorresponding corporate-level goals. By comparison, business strategy focuses onexpected operaiional results of a business unit. However, it also consists of actionplans that relate to goals (at the business level).

Business-Level Strategy

Business or divisional level strategy usually occurs at business unit or product leveland it emphasizes improvement of the competitive position of a company's product orservices in the specific inctustry or market segment served by that business unit. Businessstrategies' most often are concerned with maintaining or increasing market share.

Business level management consists of pr imari ly the business managers ormanagers of strategic business units. The managers at this level translate the generalstatements of direction intent whisked out at corporate level. The corporate values,managerialcapabilities, organizational responsibilities and administrative systems thailink strategic and operational decisional making level at all the levels oi hierarchy,encompassing all business and functional lines of authority in a company are dealt wiihat this level of strategy formulation. Strategic decisions at business tevel should includepolicies involving new product cievelopment, marketing mix, research development,

5 PP-SMAIT-December 201 1

personnel, etc. Thus, the content of business-level strategy is a combination of goalsand act ion plans.

Answer 1(a)(v)

Difference between Offensive Strategies and Defensive Strategies

The main points of distinction between the two include the followino:

Offensive Strategies

Offensive strategies are those strategies which are employed by management toreach goals related to increases in sales or market share, and in some cases, prof itability.It should be pointed out that bringing about an increase in market share alone may notalways satisfy performance expectations. There is some evidence suggesting thatachieving high returns from high market share depends at least partly on some otherconsiderations such as Concentration Postures or Strategies, Market Penetration, MarketDevelopment, Product Development, Horizontal merger, and Niching etc.

Defensive Strategies

Not allstrategies have expansion orientation. Very often the strategist is forced tocontrolthe firm's operations. Except for the rare attempt by a firm's owners to simplifytheir lives by shrinking their business's size, contraction is usually a delensive responseto adversity. There are three basic types of defensive strategies i.e.,: retrenchment,divestment and liquidation. Retrenchment strategy includes those strategies whichattempts to regain control of a faltering business or to prevent it from faltering in the firstplace by temporarily reining in its operations. Divestiture or divestment strategy meansridding the organizat ion or sub-unit usual ly by sel l ing i t . Liquidat ion strategy meansconverting an asset, sub unit or organization to cash.

Question 2

(a) "Knowledge is currently considered as the most important strategic resource."As a Company Secretary, suggest a systematic approach to your companyfor implementing knowledge management programme. fiA marks)

(b) What do you understand by 'risk' and 'return' trade off ? Discuss varioustechniques involved in measurement of risk and return. (10 marks)

Answer2(a)

Knowledge is currently considered as the most important strategic resource, andthe ability to create and apply knowiedge has been a key in establishing a relativelysustainable competitive advantage. lt has been naturally assumed that the enterprisesthat have better knowledge of their customers, products, technologies, markets andlinks between them, and that can apply such knowledge, can achieve better results.Such an opinion further develops a resource-based approach to the enterprise and pushesit towards the 'knowledge approach', which perceives an enterprise as a tool for creating,integrating, storing, sharing and application of knowledge.

Thefollowing Knowledge Management Programme is suggested for implementation:

(1) Defining Knowledge Management Strategy

Knowledge management strategy is defined in advance so that a systematic

PP-SMAIT-December 2011 6

approach is followed. lt requrres the active involvement of top management sothat its commitment and support are ensured. Knowledge Management strategycontains the fol lowing:

(i) What to Share: Diflerent aspects of technical know-how, managerial know-how, competitive intelligence, operational processes, etc. can be shared.

(ii) Why to Share: Knowledge for the sake of knowledge has no relevancerather i t must be used for organizat ional betterment. Knowledgemanagement strategy should specify the way in which the organization willbe benefited through practicing knowledge management.

(ii i) How to Share: In this stage the decision about mechanism of knowledgesharing is made. There may be different channels for sharing knowledgesuch as personal face-to-face contact, deputing personnel to the sharingparties, computer networks-internally and externally, etc. depending onthe nature of parties, and the channel chosen.

(iv) Whom to Share: There are different types of people and organizations withwhom knowledge can be shared. They are internal employees at variouslevels, customers and suppliers, shareholders and financiers, researchorganizations, collaborators, etc.

(2) Organizing Knowledge Management Programme:

For this, a knowledge management centre should be established. Besides this,the business should undertake the following steps to implement the knowledgemanagement programme:

(i) Providing Budget for Sharing Knowledge: Knowledge managementprogramme involves cost in the Jorm of out lay on physical faci l i t ies,inforrnation technology, personnel involved, etc. Therefore, a budget shouldbe prepared in advance fo r launch ing the knowledge managementprogramme.

(ii) Communicating the Value of Sharing Knowledge: Betore the knowledge isshared among various constituents, it is essential that they are informedabout the value of knowledge sharing, how it will be useful to them and tothe organization and what processes can be adopted for knowledge sharing.

(iii) Choosing Technology for Sharing Knowledge: Knowledge can be sharedby using a channel which is provided by the technology chosen for thispurpose.

(iv) Selecting Methods of Sharing Knowledge: Knowledge in an organizationcan be shared in the fol lowing forms i .e. , (a) Serial Transfer ; (b) NearTransfer; (c) Far Transfer; (d) Strategic Transfer ; and (e) Expert Transfer:

(v) Measuring of Pertormance: When knowledge sharing methods are put intopractice, their impact should be measured continuously to ascefiain whetherthey are effective in knowledge sharing.

(3) Reinforcementfor Knowledge Management

Reinforcement for knowledge management is necessary to make it a part ol

7 PP-SMAIT-December2O11

organizational processes and practices. lt increases the strength of a newbehaviour and tends to induce repetition of that behaviour. Reinforcement shouldbe provided so long as knowledge sharing does not get imbibed into personnel.In order to provide reinforcement lor knowledge management, the business hasto:

(a) lntroduce New lncentives: Incentives are those objects that are perceivedby people as being important to satisfy their needs, which may be in financialor non-financial forms.

(b) Provide Support Knowledge Sharing: The business should provide supportto employees for sharing knowledge. This facilitates knowledge sharingand employees feel that top management pays attention on them also.

Answer2(b)

Trade Off Between Risk and Return

A fundamental investment concept is the trade-off between risk and return. Thisconcept is based on two realities i.e., investments and investment performance.

First, all investments carry some degree of risk - the reality that one could losesome or allot his money when he buy shares, [ronds, mutualfunds or other investments.Second, not only do different types of investments carry different levels of risk, but themore risk one assume, the greater the investment return one is likely to achieve.

Risk in an organization arises in various fornns, but when one talks about the risk-return trade-off, the primary measure of risk is volatility, or the degree to which aninvestment fluctuates in price. Different asset categories are subject to different levelsof price fluctuations.

?cL

+,oE

Hfiher Rkk

t{tgh Fot*ntlel Raturn

Low Rlsk

Low Return

Standard Deviation {or tirk}

PP-SMAtT-December 2011 IIn short:

- The return earned on investments represents the marginalbenefit of investino.Risk represents the marginalcost of investing.

- A trade-off always arises between expected risk and expected rate of return.It is necessary that individuals and institutions consider the combined influence onexpected future return or benefit as well as-on risk-cost. The i"quir"*"nt that expected

i,;tJ;:J"."fit be commensurate with risk-cost is known as the l,iirk_r"turn

trade-off,, in

Measuremenr of Risk and ReturnRisk rr 'ers

to variability of return from expected investment. A variety of measureshave been used to capture different facets of risk. rne most important ones amonqthem are : Range, standard Deviation anJco-errcient of v"ri"ii"., sensitivity Analysislil""?r#:lf3:$'1,:fiil:l *:l[ii

iecision r,", nnuii,]., vu,," .t ni.x rinriiThe techniques of risk analysis are discusseci.rs under:(i) Range: lt is the simplest measure of dispersion. lt is the difference between itsrwo extreme

"?j:::,1?.-..,rt basicaly indtates t " "0."[t"

measure of variationln return and degree of risk.

(ii) standard Deviation: rt is arso known as root mean square deviation and is arsoa measure of variability and risk. lt refers to tnulqrJr.-rJor o, the mean of thesquares of deviation from mean.(iiD co-efficient of variation: lt represents the ratio of standard deviation to themean' rt is a usefur r"":.uf." of comparing tn" J"grL" ;iu"],",ion from one dataseres to another even if the mean varuLs

"r" jr".1i."it!'o,rt"r"n,

from eachother' In other words the lower is the ratio "t

ri"ro"ro iJ"L,,on to mean return,the better will be the risk_ return trade off,(iv) sensitivity Anatysis:

.rt is a technique whereby the varues of a variabre parameter(inputs) are changed to denote oitterent situations/assumptions and the effectof the changes is measured on the expected varue of the outcome.(v) Break Even Anarysrb: rt indicates the minimum quantity a firm shourd produceand seil at which ross is avoided. This anarysis herps the financiar manager ofthe organization to ensure cost recovery.

(vi) simulation Anatysis: simulation anarys.is helps to generate the informationwhich can o" ,.:li?:?."]^"1?pilg lh,e orobabititv prori[ ot alriterion of merir byrandomly combining values of variables, having a bearing on the chosen criterion.

(vii) Decision Tree Anatysis : rt is a usefur technique where sequentiar decisionmaking in the face of risk is invorved. R_epresenting a decision probrem as aseries of decisions to be taken under cond*ion ot rnrE.t";t.'; present decisiondepends upon the past decision ancJtherr outcome.

9 pp_SMAtT_December2011(viii) vatue at Risk Anarysrb : rt is one of the proven and the most used measures olrisks by financiar institutions. vAR-r""*rres the rikery change in marked tomarket value of a portfolio, at specifiediime ieri"il *iir, certain confidence.(ix) cash Ftow at Risk Anatysrb: lt has been specificaily deveroped for non-financialorganizations with cash flow as variable.

Question 3

Write nobs on any four of the foltowing :(i) Batanced score card (BSC)

(ii) Functional tevet strategies(iii) BCG matrix

(iv) Eusrness process re_engineering (BpR)(v) Risks in globat business

Answer3(i)

Balanced Scorecard (BSC)

(5 marks each)

The'baranced scoreeard (BSc) is a strategic pranning and management system thatis used extensivery in ousiness ail;il;;;y, government, and non_profit organizationsworrdwide to arign business activitLs tJine vision and strategy of the organization.A balanced score card combines financialmeasures which describe the results ofactions already taken with operationai methods on .isorlrsl satisfaction, internalprocesses' and the company's innovation anc improver"niu.iiJities for future financialperformance' The management shourd deverop d""r.

", ooi"liiu" in tin"n"i"r; customer;internalbusiness perspective; ano innovation ano learning areas.

,r""r:Xi."r.n"n":",1i:"recard has evotved,as a simpte performance measurement

i*il',:f ili;ffi3;{^ffi }',{:$1ililx:?,["#":H:'#;il1il'f :ffi ;The baranced scorecard suggests the fotowing four perspectives:(i) Learning and Growth perspective: This perspective incrudan d co rpo rate. cu rtu rar attitudes rerated to both,"o,"ior","i."ffi?fi lulf iJfimprovement' In a knowr"dg;;;;; organization, peopre - the onry repositorvof knowredge - are the main resource. In the'cuirent situation of rapid

:":i1,",j"rff:,:m:;,rX is oecomin-s necessary ror knowreds" ;;,k";; b,i;;(ii) Business Procgls Perspective: This perspective refers to Inrernar businessprocesses' t"1:r,3._"d on this peispective atow the rnanagers to know how

lfl lffJ,?:; rl['; i'ry n i n g,

" ni I; eth e r its p,,oo r"t. a n i se ruices co n ro rm to

(iii) customer perspective: Recent management phirosophy has shown an

PP-SMAIT-December 201 1 1O

increasing real izat ion of the importance of customer focus and customersatisfaction in any bi.rsiness. These are leading indicators, if customers are notsatisfied, they will eventually find other suppliers that will meet their needs.Poor performance from this perspective is thus a leading indicator of futuredecline, even though the current financial picture may look good.

(iv) Financial Perspective: The availability of timely and accurate financial data willalvrays be a priority, and managers will do whatever necessary to provide it. lnfact, often there is more than enough handling and processing of financial data.With the implementation of a corporate database system, it is seen that more otthe processing can be centralized and automated.

Answer3(i i )

Functio" .,rl-Level Strategies

r'lnctional level strategy involves decision-making with respect to specific functionalareas, say, production, marketing, personnel, finance, etc., decisions at the functionallevel and are often described as tacticaldecisions. Functional strategies emphasize ondoing things right. But these decisions are guicierJ by overall strategic considerationsand must be consistent with the frame work of the business strategy. Functional strategyis the approach taken by functional area to achieve corporate and business objectiveiand strategies by maximizing resource productivity. lt is concerned with developing andnurturing a distinct competence to provide a company or business unit with a competitiveadvantage.

In contrast with the other levels of strategy, functional strategies serve as guidelinesfor the employees of each of the firm's sub-divisions. Which ones of these segments orfunctional areas are included in a firm's functional strategy set is itself a hatter ofstrategy. For example, whether to have an R&D department or not in the first place is astrategic decision. Functional goals and action plans are developed for each of thefunctional areas of the firm to guide the behavior of people in a way that would put theother strategies into motion.

Answer3(i i i )

BCG matrix

The Boston Consulting Group developed the growth-share matrix to analyze theproblem of resource deployment among the business units or products of multi-businessfirms. lt is based on product life cycle theory. The business units or products areanalyzed by placing each one in the matrix according to their (1) expected growth rate(vertical axis), measured by anticipated growth rate in sales depends on maturity ofindustry, and (2) relative market share (horizontal axis), measured as the unit's sharedivided by that of its largest competitor. The basic idea behind this model is if a producthas a bigger market share or if the products' market grows faster, it is better for theorganization.

The placing products in BCG matrix provide four categories in the portfolio of anorganization:

Dogs (Low Growth, Low Market Share): Each of businesses or products with lowexpected growth rates and low relative market standing are labeled as ,,dogs', or,,cash

11 PP-SMAIT-December2011traps'" The strategy in this category should consist of cost cutting by divestments,retrenchment, or even liquidation.

Question Marks (High Growth, Low Market Share): Those with high projected growthrates and low market standing, are labeled as 'Question Mark'. The reason is that althouqhthey are operating in markets with expected growth potential, they are ornerwrieexperiencing competitive clisadvantage. This quadrant have worst cash characteristicsof all, because they have high cash demands and generate iow returns because of theirlow market shares. Management can invest cash to correct the marKet weakness so asto take advantage of expected market growth or, if not convinced of their ability tolmprove market share, it can retrench, divest, or liquidate to minimize the cash drain.

Stars (High Growth and High Market): Products or business units which have bothhigh.market standing and high industry groMh potential are labeled as star. They shouldreceive heavy cash investment in order to maintain their market share. Suicessfulresource deployment beyond cash requirements could lead to a superior market sharewhen industry growth potentialfalls off.

Cash Cow (Low Growth and High Market Share): Here a product or business wouldbecome a cash generator. cash cows have a strong markei position in industries thathave matured. These products or businesses can thus be "milked" by investing justenough cash to maintain market standing and applying excess cash inflows to the flrm'sother activities which are growth industries or products.

Answer 3(iv)

Business Process Re-engineering (BpR)

Business process re-engineering (BpR) is a management approach aimed atimprovements by means of elevating efficiency and effeitiveness of the processeswhich exist within and across organizations. The i<ey to business process re-engtneeringorganizations is to look at their business processes from a clean slate perrp"itiu"

"njdetermine how they can best construct these processes to improve the conduct of theirbusiness' Business process re-engineering can be def ined as the analysis and designof workflows and processes within and between organizations. lt is basically the criticalanalysis and radical redesign of existing busrness processes to achieve breakthrouohimprovements in performance measures. Business process re-engineeri"g ia

"lao k"o;n

as business process redesign, business transformation or business process cnangemethodology. lt is fundamental reconsideration and the radical redesign of organization-alprocess, in order to achieve drastic improvement of current performance in cost, servicesand speed.

Re-engineering strives to break away from the old rules and procedures that developand become ingrained in every organization over the years. The following principles aresuggested for re-engineering:

(i) organise around outcomes, not tasks: Design a person's or a department's jobaround an objective or outcome instead of a single task or series of tasks.

(ii) Capture information once and at the source: Instead of having each unit developits own database and information processing activities, the information can be' put on a network so that all can access it.

PP-SMAIT-December 2011 12(iii) With computer-based information systems, processes can now be re-engineered

so that the people who need the result of the process can do it themselves.(iv) People or departments that produce inlormation can also process it for use

instead of just sending raw data to others in the organization to interpret.(v) With modern information systems, companies can provide flexible service locally

while keeping the actual resources in a centralized location for coordinationpurposes.

Answer3(v)

Risks in Global Business

Global business has sorne additional risks besides the usual business risk whichare of the following types:

(i) Political and Regulatory Risks: Many countries of the world are not politicallystable and transfer of political power does not happen in smooth ways in thesecountries. Therefore, companies doing business in these countries may haverisk in new political regimes. Similarly, many countries have different types ofregulations for doing business. Such regulations may be of quite different natureas compared to those prevailing in the domestic country. Therefore, theregulations of the host countries should be taken into account.

(ii) Cultural and Managerial Risks: Countries differ widely in terms of culturalcharacteristics like customer preferences and tastes, attitudes towards certaintypes of products/services, traditions, values and beliefs, and a host of otherculturalfactors. Therefore, products/services have to be tailored according tosuch requirements. Further, since management practices are culture-bound.the kinds of management practices which are effective in the domestic countrymay not be suitable in foreign countries. Therefore, there is a need for suitablechange in management practices, more particularly related to human resourceaspects.

PART B

(Answer ANY ONE question fron this oart.)

Question 4

(a) Write a detailed note on the restrictive practices being used in the foreigncollaborations and technology transfer agreements. (g marks)

(b) Strategic alliances are important for success of a business. Discusscharacteristics and need for strategic ailiances. (B marks)

(c) Explain how alliance strategy can be integrated into the overall corporatestrategy. (4 marks)

Answer4(a)

The term restrictive,practice signifies non-governmental measures used by thecompanles to strengthen their position in a given market. These practices can hamper

1 3 PP-SMAIT-December 20 1 1or distort international trade, which often coincides with the public interest of the countryconcerned.

Following are some of the restrictive practices being used in the foreign collaborationand technology transfer agreements.

Restrictions after expiration ol Industrial Property Rights or Loss of Secrecy ofTechnical Know-how

Restrictions after Expiration of Arrangemenrs

Restrictions on Research and Development

Non-Competition Clauses- Tying Arrangements

Export Restrictions

Price Fixing- Grant-back provisions

Exclusive Sales and Representation ArrangementsUse of euality Controls

Restrictions on Use of personnel

Restrictions on publicitv

Answer4(b)

strategic alliance has three distinguishing characteristics(D the two or more firms that unite to pursue a set of agreed goals remain independentsubsequent to the formation of an alliance.(i i) the partner f irms share the benefits of the al l iance and control over theperformance of assigned tasks"

(iii) the partner firms contribute on a continuing basis in one or more key strategicareas e.g. technology, products and so forth.Need for strategic alliances

- satisfy customerdemands: customer demands in many markets are changing.For exampre, in office automation, cusromers now prefer a,.systems sorution,,and want to rely on a single company to service allequipment.-

fiil knowledge gaps: Companies that are leaders in their fields can maintainthat position by using ailiances to capture new developments, and keep theirtechnological resource base ahead of the competition.- Make scale economies: Alliances can achieve the scale needed to amortiseinvestments.

- Make scope economies: Ailiances can enrarge dramaticaily the scope of a

Pp-SMAtT_December 2011 i4company's operations' Alliances,focusing on scope hefp counter the ever-shonerproduct cycle of modern technorogy.

_ Jump market barriers: However potent the producerin its "home" markets, tn"t "Lrp"ny

may not marker::.T3ly'r name may bebe s t i n i nre rn ation a r m a,lets n r l*: '.*,'n;ffi : ]:#.";: ffi ,iilii',;fi ff Hli

::"[t#3,.::Xls can leave a oevetopment-focusei'coi p"ny free to concentrate

- speed product introduction:Thenarrowing of the deveropment-to_market readtime has been a cruciar teature of the pisi ;";""d". r" many sectors, the firstcompany to introduce a new product .i.;"v, "

i"i.,,n"n, market position andstands the best chance or reJouping "ort.-n"tor""'rn" ,orp"tition arrives todrive prices down-or before p"l"n, protection expires.

- pre-empt .competitive threats: In industries in which a few rarge prayers

il:fi Hl1il"Tryffii:ffi:*eis,,ome compan ies,,", o.t ro an',ir you can,r beatUse excese rre * o r ̂ Z:?f::iy,', I ff fi JJfl :"J;*"il':#:: i ffi :ff;,

h e res t ru ct u r i n s-

r#fJ*cosrs: participanrs can use ariances to cut the costs of reaving a

Answer4(c)

' .' Alliance strategy must be integrated intl lhe overail corporate strategy and articurateotn tne strategic ptan y],1: tTq",r, ror. _pi"renration. The entireand managing an alliance could be as follows;

I process of developing- Development of the strategic domestic or global plan- Development of the alliance plan- Alliance partner _ search and selection- Development of the implementation plan- Execution of the implementation planThe integration of.the alliance strategy into the overail strategy of the organizaiiondepends on the extent ot trre vis-iJn";ilJt""ro"nv ior-iii" t,ffi: The kind of srrarepicplanning that a company undertat<es artecl rne natuie

"irn"'"iri"""es that a cornpanventers into' rf a company is wirring io ,;"r,;1-"^,?.rq,"lr. strategic pranning, the arianceientered inro as part of rne tong-ierm ;il;;* rikery to oe tnoJe tlat take some time rocome to 'fruition" such as research ano oeveropment partnerships.

Question 5

(a) Write nobs on any two of the fottowing :(i) Foreign direct investment

(ii) Foreign technology agreements(iii) Modes of joint venture.

(5 marks each)

(b)15 pp-SMAtT_Decernber"201

1Dr',scuss the methods of funding investments in overseas jointand wholly owned subsidiaries (WOg.

ventures UV)(10 marks)

Answer S(a)(i)

Foreign Direct Investment

Foreign Direct lnvestment (FDl) ' mea.ns.rnvestment by non-resident ent i ty/personresidenr outside Indja in the capitarot thu tno*n.r :"d;; ; : r j lect to the compriance oiForeign Exchange Management n"t, f g9g, FEM (Transfer o

8il'"?l,.fl:: *n,,tf f i *i;)' nls u iat i o n s 2 000 a n d' o i' ;'"l;u"i :",'#'Jr'I, :Foreign direct in.vestment is freely allowed in alisectors including the services sector,except certain prohibi ted sector and where the exist ing

"nJ not i t i "o sectoral pol icy doesnot permit FDI beyond a cei l ing. FDI can oe oroujr ' t - i " in i"rgn the Automatic RoutelApproval Route' FDI beyoncJ t l . torui t , r i ts pr lor approval of ' the Foreign Investmenr

;t""Iolt" Board (FIPB) or cabinet corrirt"" on Economi. Arrriru (ccEA) as the case

An Indian company receiving investment from outside India for issuing shares/convedible debentures/preferenceihares under the FDI scheme, snouto report the detairsof the amount of considerat ion to the Regionrr ol t i .u #;; ; ;a of the Reserve Banknot later than 30 days from the date ot rlceiot.Answer 5(a)( i i )

Foreign Technology Agreements

with a view to injecting the desired level of technologicaldynamrsm in lndian industryand for pronrot ing an industr ial environment where ine acquisi t ion of lechnologicalcapability receives priority, foreign technology induction is encouraged both throuEh FDrand through foreign technology iollaooratitn agreements.The Government of India has permit, payments for royalty, rumpsum fee for transferof technology and payments for use of trademark/brand-name on rne automatic routeI'e' without any approval of the Gouer^ment of lndia. nrr_sucn payments wrri be sublectto Foreign Exchange Management fCurrent Account rrunrrJ,ons) Rules, 2000 asamended from t ime to t ime.

Answer 5(a)(iii)

Modes of Joint Venture

A joint venture is an associat ion of two or more individuals or busrness enl i i les whocombine and poortheir respect ive expert ise, t inanciar ,"r ; ; ; ; ; ;k i i ls, experiencc, i j i rdknowledge in the furtherance of u b"rii"rr"r project o,. ,no*itot i 'g. -r-her"e ar* rwirfundamentai types of ioint ventur", i."., 'eqrity,loin, Venture nno Cnn,ru"tuar.,ioint VerrlLii.Their c lescr ipt ion is is fol lows:

Erl i ; r ty Joint Venture

The equity joint venture is an arrangement whererry a separate regar err,ry is createdtn accordance with f i 'a aqreemeni of t r ,vo or more par-t ies. The parlres J: 'Jr , : , , , . . r :o

PP-SMAtT-December 2011 16provide money or other resources as their contribution to the assets or other capitar ofthat tegar entity. The enrity is generitty esiabrished

", " ririt"jlabirity company and isdistinct from either of thepar'iie. *r,itripurticipate in rts crJion. The newry createccompany, thus, becomes the owner of the resources contributed by the parties to thJ

i"jllJ;:HffililXlJl5i:, or th;;;L. in turn o""o'". i,J owner or the companyContractual Joint Venture

. The contractualjoint venture agreement can be entered into in situations where theproject involves a narrow task or itimiteo activity or is for "

ririt"o term or where thelaws of the host country do not permit tn" o*ner.nip of property by foreign citizens. Forthe purposes of contractualjoint venture, ihe relationsnlp o"ir"6"n parties is set forth inthe contract or agreement concluded between them.Answer5(b)

Investment in an overseas Joint Venture /whoty owned subsidiary may be fundedout of one or more of the following,ori"";,-- Drawr of foreign exchange from an Authorised Dearer Bank in India:- Capitalization of exports;- Swap of shares:-

3 ll |,.1*TS #ffiil' gilJ,?E S;l,c o m m e rc i a I B o rrow i n s s ( E c Bs )/F o re i s n

- In exchange of American Depository Recerpls/Grobar Depository Receipts issuedin accordance with the scheme ro. ilsu" oiForeign cr*n.v convertibre Bondsan d ordina ry t l:1"^.,t]l i" u gh, Depositorv n"""r"pi ri".i". ; rr sch eme, 1 993,ili"rffi#Jderines

issued there under rrorn'timeJ;i;." by rhe central-

teatances herd in Exchange Earner Foreign currency account of the Indian party;

- utirization of proceeds of foreign currency funds raised through ADR/GDR issues.PART C

(Answer ANy TWO questions from this par:)Question 6

(a) Write a note on WO as an extension of GATT. ft marks)(b) Examine fundamentat principres of mutt,aterar trading system. (4 marks)(c) Discuss basic principtes of GATS. F marks)(d) Discuss obiectives and conventions of wortd lntettectuat property organisation(wrpo). .qq' ' tvP'

$ marks)(e) Discuss obiective.s^1n.d.,fundamentar principres of Association of south EastAsian Nations (ASEAN) .- 'r '-- v' ' 'eovw'att"

,n marks)

Answer 6(a)17 pp*SMAtT_ December201.1

The world rrade organization is not a gjmoie extension of GATI", rather it cornr;reterv:::,::?: lifledecesso"r "il;;;;;;,.u dirrerent ;;;";,"; rhe principar oirei:ences

_ The GATT was a set of rulesro u n d a t i o n, o n rv a s m a r r r r, "",., jo{-?ll?J?,:l -ffi "ffi ?:#,'J" : ?,,ir'J',,?, #;lro estabrish an Internationar-ir.aoe orq"nir"irr,"in'rn* ,940s The vvrc is apermanent institution with its own secrefariat.-

iff 3ig,,J?TjiJ;il::nj*",,ionar basis,, even ir, aner more than rorrywro ctmmitments are fuu ,ro;:,.t;:#il

u* u pern:anent cornmitnrent. l-he* The GATT rules applied to trade in mercharcfise goods. rn addition to goods,

ffffi: covers trade in services and trade-retiiecr aspe"rs of interecrual

- \ A / h i l ^ ^ ^ r -vvrre LiA [T was a murt i iaterar rnstrument, by the 1gg's many new agreer 'entshad been ilg:d."f ?.prurirrt"iJ, ""d

thereforei"r*i,"- - nature. The agreernenrswhich const i tute the wTo aL atmost a ' murt i raterar anci , thus, invorvecommitments for the ent ire membership. _. . , ,s, . , ,s,c

* The wTO dispute setilement system is faster, more auromatic. and thus rnucl,.ress susceptibre 10 nro"ruo"r, iri"an tr^:idGAJT system. The irnprerrenfarionof WTO dispute f indings *if lr fr" oe more easily assureo^Answer 6(b)

The fundamentarprinciples of mult iraterartrading system are as io,ows:- {i{:i,, i:::,H: :i: a:r ;: il g,::l*i i,".,,"1 ::t#l ", " b e, w e e n i,s i r a d i n gan d * s h o u rd n ot disc rim in ut" tEt*""n rrs own

"r, J ;;;;slrT:JrT,y :H,t$::;nat ionals ( they are given,,nat ionai t reatment, ,) ;

- Freer_ with barriers coming down through negotiation;- PredictaO,"

: . foreign companies,. jnvestors and qovernrne*t$ shoulcJ bcrconfident that trade oarriers fincruoing ,urirru,l"""i",.,r, i;ai.rier$ ancJ othermeasures) shourd not be raised arbitrariry; riro;-e o,,J ,or"u'r"riff ratr:s and marker_opentng commitments are , ,bound, irn the , f / fC;

-- More "ompetitly -

by discouraging. "unfair,, ;:ractices such as exporr ::i;bsicJiesand dumping product i , t uuro*".ort to gain rnarket s irar*;* y:;"",:3i:::fi,:::,,:i,:; xx:;,:{:i^i;ill!,li; b,, E vins them more'j,iie ,c,

Answer 6(c)

Basic prir.iciples of GATS are as follows:- Aii ser.v,c{:rs are covered by GATS

F''}P-SMAIT-December 201 1- Most-favoured-nat ion treatment

remp()rary exemptions

1 8

appl ies to al l services, except the one_of

- Nat ional t reatment appl ies in the areas where commitments are made- Transparency in regulat ions

- Regulat ions have to be object ive and reasonable- Internat ional payments: normal ly unrestr icted

Individuar countr ies' commitments: negot iated and bouno- Progressive l iberal izat ion: through further negot iat ions__ Services supplied from one country to another (e.g. internationaltelephone calls),

of f ic ial iy known as , ,cross-border supply ' ,

- consumers or f i rms making use of a service in another country (e.g. tour ism),off ic ial ly known as,,consumption abroad',

- A foreign company sett ing up subsidiar ies or branches to provide services inanother country (e.9. foreign banks sett ing up operat ions in a country), of f ic ial ly"commercial presence"

-- Individuals travel l ing from their own country to supply services in another (e.g.fashion models or consultants), of f ic ial ly , ,presence

of naturat persons,, .

Answer 6(d)

The World Intellectual Property Organization (WIPO) is an internationalorganizationdedicated to ensure that the r ights of creators and owners of intel lectual property areprotected worldwide and that inventors and authors are, thus, recognized and iewardedfor their ingenuity.

WIPO seeks to:

- Harmonize nationar inteilectuar property regisration and procedures.

Provide services for internat ional appl icat ions for industrral property r ights.- Exchange intel lectual property information.

Provide legal and technical assistance to developing and other countr ies.- Faci l i tate the resolut ion of pr ivate intel lectual property disputes.

- - Marshal information technology as a tool for storing, accessing, and using valuableintel lectual property information.

Paris Convention for the protection of lndustrial property

1BB3 marked the birth of the Paris Convention for the Protection of Industrial property,the'first major international treaty designeb to help the people of one country obtainprotection in other countries for their intellectualcreations in the form of industrial propertyr ights, known as: invent ions (patents), t rademarks and industr ialdesigns

19 pp_SMAlT_December201. lBerne convention for the protection af Literary and Arlistic works

In 1886' copvright entered the internat ional arena lv i th the Berne convent ion for tneiii:";':ff:i1",:illilliff[,.H,.,j;ihe aim o*r,lu conul"nrion was to herp nationarspavment for, the use of their creariv" [iF"j';ir":$[J:1i:ixl?il"J;,3::;:::1";513ili;"i1i"ffi":fJ'"'' "'i""i*, 'f"natas; ano orawinil, painrinss, scurptures,Answer6(e)

objectives of the Association of south-East Asian Nations (AsEAN)The ASEAN Declaration sets out thunder:

vv ' iq 'q(rv ' | r DUrr uur rne arms and purposes of the Asscciat ion as

- f

"":ff fi",f,["ri::?riffrtJ:yj^' s oc i a r p ros res s a n d c u rru ra r de ve ro p m e n t i n

s:ffi ?:xi;:*:mn:f*L1ti:,:ll:ffJfj:ffi 1Xr.T3,.:,m:*;;- Io promote regional peace and stability through abiding respect for justice andthe rule of law^in the relationsnip urong countries in th; region and adherenceto the principles of the United t irt,on, Charter.

Fundamentar pr incipres of the Associat ion of south-East Asian Nat ions (ASEAN)ASEAN guided by the fol lowing fundamentat pr inciples:-

sTx1,ff:i,:.1iljNil:i"ff[l"Jce, sovereisntv, equarity, territoriarintesrity,- The r ight of every state to lead i ts nat ionar existence tree from externalinterference, subversion ot, ao"r"ion,- Non-interference in the internal affairs of one another;- Setilement of differences or disputes by peaceful manner:- Renunciation of the threat or use of force; and

Effective cooperation among themsetves.Question 7

(a) Match the fottowing :

(i) First ministeriat conference (t) Doha(ii) Second ministeriat conference @) Seatile

(iii) Third ministeriat conference @) Singapore(iv) Fourth ministerial conference @) Geneva(v) Fifth ministerial conference @) Cancun (t mark each)

PP--SMA|T- December 2011 20(b) Re'nirite the fortowing sentences after firting_in the btank spaces withappropnate word(s)/figure(s) :

(i) UNCTAD srands for _(ii) Theo, of compara,uu u***" *us given by __.

(iii) when value of merchandiserl expori equals the varue of merchandisedimpoft, it is known as(iv) argument dears with the ratio (i.e., ,te prices) aturhich countries excharlge expotl for import.(v) The first reasanably systematic body of thought devoted to internationattrade is called and it emerged in seventeenth andeighteenth century in Europe. (l mark eacn)

''' ?:E:: .u'ith

reasons in brief, whether the foilowing statements are true or

(i) worrd rrade organisation wro) is the onry internationat body dear^gwith the rutes of trade between the nations.(ii) Natiortat treatment principle. says that goods produced in a nationshoL!td be treated equally throutghout tnJ

"orntry.(tii) The dispute settlentent unclerstanding is often seen as one of themost imporlant achievements in the WTO agreement.(iv)

:::::;,!r.,^de asreements are entered into onty between neighbouring

(v) The ministerial conference _ the highest deciston making body ofWTO has to nteet at least once in a year. 1, ,^rX ,^"11(d) Briefry exptain the procedure for anti-dumping invesrgations. (5 marks)Ansrver 7(a)

i , ) Firs l l r l in ister ial Conference = Singapo13(i i ) Se'conci Minrster ial Conference = Geneva

(i ' i ) Third Ministerral Confererce = Seatt te.(iv) For,,i.th lrlinisterjal C)onference =Doha.

(v) Fi f th f l in lster ial Conference = CancunAnswer Z(b)

(i) ur'tcTAD stands for U,nrted_*tr4&Llantererseg__sx__rrcde__arrclDevelopme.-r1t

(ri) Theory of cornparative acJvantage was given by paVid_Efeatda .( i i i ) when value of merchandised export equals the value of merchandisedimport, it is known as Falance_qt-f1ade.

21 pp_SMAtT_December2O11(iv) Terms of Trade argument deals with the ratio (i.e., the pricesf at whichcountries exchange export for import.(v) The fir

,,"0"',".ji,ii"tr9ffi :H l"*";;",j1;rJ' devoted ro inrernationarcentury in Europe.

- rv " v"tsrveu rn seventeenth and eighteenth

AnswerZ(c)(i)

True

The world t::1" 9.'nTization (wTo) is the onry inrernationarbody dearing w'h rhe

rures of trade betwe"n *tiun.. niit. n""* are tne'wio a!*reements, negotiated and;gffii;J, j::j?jf"?l j?:.:ru*l#H;il il::y J"n,,"nts provide th e,esa,AnswerT(c)(ii)

False

principre of nationar treatment says rmported and rocary produced goods shourd beitTfi ;!;n'; i:';il; *i ffiT:']*o;ds ; ;; ;;#l ,;",oca, m a rke, rn e s amecopyrignisanopui"nt.. - :ervices, and to foreign and locar trademarks,AnswerZ(c)(iii)

True

. The Dispute sgttgnlent Understanding (DSu) is often seen as one of the mostrmportant achievements in the woiiJ nu'o"brg"n;",;i"wfr; onr""renr. whire theGATT arso contained provision, ro,'

"o,r]ii"t ,elorution, iib* iis'u contains a number of

rnnovations' In particurar, it is gln-"rJ,iu'1-:i1, oeing superfr to its predecessors rnrerms of the craritv of its provision.

"on*rning proceiuJ ma-trers, and its provisionsff,t:#ilX i#ji,t9,,"

g'.n ;;" t"J'oi,",ui"i" irpL r"i triiln. n"."nry, however,advantage or the sffid

concerning the possibiritibs toi'pJolr countries to take furlAnswerT(c)(iv)

False

_ , In the WTO context, RegionalTrade A<

:::!:$:"""'ffi 1;:* jfl i"'"$ff "*ililhiF:^i'S!:il3:?:"11:,lJ:ffi :::lf Fecilic,oecauselne,wroo'i j*;,,#i:r-+iiiil:::r"f i:ffL;;:ll,#?:",trade tiberal ization witn n esiJn;i ffi ; o'ji""r"n,. (RTAs).AnswerT(c)(v)

False

The wTO is a member driven, consensus based organisation. The major decisionsare taken by members as a whore, "itn",

by ministers or by therr ambassadors or

pp_Sl\4AlT_December 2011 22

,Tff:l:: l:e Ministeriatconference._ the hishest decisicm a r e r s, " o ",-j ;; : ; ilHli,i::" Ij ?H : ; :*#ffi[ T:l [X : :g l.1 H]: j : ;

Answer 7(d)

A c,um'ing invest igat ion can normarly be ini t iated onh-l)jlcatron bv or on be-half of irt' io"rl.r{"",t"j?,:f1l:o:l'u upon receipr of a written,:H;'#;":l'y;.''o""udsexpedro,,lf il,,'1ie'i'i!:.?.J?H:"ilfliTi:[f ff 'Xrnain reason", ;J;#il"

a preliminary finding.ont"ininlir" 0",",,*o information on theprov is ionatDuty

?":f"?3&:J:13#h'Hlil:T:,i,flj1"-1",n'n of dumpins may be imposed by tnejJ, jti;x;,Ln:tkl,1+:i#ilri#J::HHil,T,yfl,:*il?,i1?tnxili#r:Oraf Evidence

tnterested oal11l.wfro participate in the investigations carAuthoritv for an opporrunitv io pi["* the relevant inror,.nit,:o,] :?:li;r, the Desisnated

Final Determinat ion

The frnal c,{eterdetermir iatro

' ' - ' - ' minat ion is normal ly made within 150 days of the date of prel imina^,

Disclosure of Information

* n,.l1i,?,?: 1*,: ff '[ :y# IHT]] j li ,J l"J:iffi ffi

,[? :l J: " es s e n,i a, f ac,s,

Time-l imit for f nvest igat ion process

:j jriiil:iffitJI; arlowed bv the statute fllcolgrusion of invesrisation and submissionoeriotr,"t #;;;"., "J?il,f::JffijH "j

initiaiion oitr.," ,rJu".rigution rhe aboveTerrnination

"urulnu

Designated Authority may suspend or terminate the investigation in the foilowino( , ) i f there is a reor ;e .q t in r ' r i+ i ^^ 4 -^ .^ - , ,

investiqatL;,;:::lilJil"s from the domestic industry at whose instance the( i i ) when there is no suff ic ient evidenc,

( i i i ) in jury is negt igrbte. e of dumping or iniury '

Quest ion B

(a) ln/rite a ncle on he four main in(b) write a note on the duration uno ,"'''u''ons

of European lJnion. (s marks)'evtew of counteruailing duties. (S marks)

23 pp_SMAtT_December2011(c) Discuss rrurr,r,o:::,.:t]t-es a,nd speciat...and differentiat treatment underagreement on subsidies and counteivairing ,"urui"i.'-' (5 marks)(d) Discuss the task of the appefiate body uncler dispute set,ement procedure.

Answer g(a) (5 marks)

The European Union (EU) has four marn institutions namery, the councilof Ministers,the European commission' ftre European pariiameni ""J]il"

erropean court of Justrce.The Counci l of Ministers

The Counci l is the EU,s main decirVrember staies, wnose represen,u,,u"J,lll,.ili{'llt:fili,,xJ:,ffi:i;:"lffil ?iJ:;The council is comprised of ministers riom nationat jovernm-Jnts of each of the member

::i"r:,[il"ets most weeks in arr..uil or Luxem6orrs io i*rio"rate upon regisratron

The European Commission

Commissroners of the EU are chartm p re m e n ti n s ; u" po r icv ". o-r"g r, r "il;{ F#i^ :: ff i:%ffi flr:ffir n: i?:J,il:oooy' the commission' Tne com'mit.rn ro,. consioerattilno o""i.ion by the councrril,il;'tt"*

and the European purr,ar"n, orarts initraiorl'po.u,. for regisration andThe European parliament

The European parriament is the democ:ili:?]ry erected body whose members (MEps)are elected every five years' Parliament scrutinises tne activrtJJs of other EU institutions,8ffitiiffilH:l5U budget,

"no rr,up". and decides new resisration joinry with theThe European Court of Justice

Based in Luxembourg, the court, *hrgh h?: a judge from each member state,adjudicates on a, regar.i.*"r "n,r

ojrputl inuotuing boilmunity ,"*. The court dealsIIT-lll: :"in rypes of actions: ir..orf l"r"rred to it by nationrrnrerpretatron of commun*v raw; "no,.,or" srarted ov J"" oiir.,i

"ffiffiJffii,:l:. "tAnswer 8(b)

," ,A;?Ji:"r;:,;:ily Ll31l"'r," in rorce onry as rong as and to the extent necessaryr o r t h e .;,il;; ;; i"T*H T Effi :,,? lil i! I #,,i;," :ffi? ,J; I #; ll,?":";lprovided that a reasonable periocj "itirlii"r

erapsed since the imposrtron of the definitive;ilil?#l 13r3,{l i jii""J J: H":d. ;*,?", n t",". t" 0 pliiu, "'^,i,. n s u b m i ts ;; ;;;;;, rnrerested oarties,l!u1,,1:u" the right to request the authorities ro examine whethertne continued imposit ion of the ciuty iJ neJu.sary to offset subsidization, whether thernlury wourd be rikery to continue ,:,. iec* if the duiy *"r"-r"uroJ"o or varieo, or both. rf,ffi.:T:1;;;,li.ll..';]1il;ffi,.il,,*:xi;**:ru;,i,",,,i,J,?l",."tervai,ing d,iy ; ;;

Pp-SMAtT_December 2011 24Any definitive countervailing duty shallbe terminated on a date not rater than fiveir""ffi ji:?

Js impos ition, u n lesi in u l rt o,iti". ;;i;;;;;],n ar,"ui"* in itiated bero rebeharro*r,"oonl',l,lJi,l?l,iili_il:o{L:.,lf #n,f:,n*h:lli#*:mthe expiry of the duty wouro oeiir<erv io i""o to continuatiJio-r'r".rrr"nce of subsidizationand injury. The duty may remain i; ;;;." pending tne outcome of such a review.Answer 8(c)

The provisions of -scM agreement for developed countries. ,errornni^^and mernbers jn transformatioi to a marret economy rr" n,ul?r"3?J,ijffJir countries

Developed counii.ies

Members rot, otherwise eligible for speciar and differentiar treatment are arowedthree yea^ from the oate on ilil;#"m the subsioi.r'""0 countervairing Measure(scM)Agreemenl.enters-inlo r"i."i" ph"r" out prohibitel ruorici"r. such subsidies

flfiffi [,"Jffi:,':''^in e0 davs J tn" Lnt'v into iorce oi ,n" wro Asreement ror the

Devetoping countries

The scM Agreement recognizes three categories of deveroprng country Members:reast-develop"d "?ylli". 1"r-o"Cf;),-1a"r0",., d; ;c;; Nltion"r produer (GNp) percapita of ress than g1oo0 per v"ur unJo-tner deveropin;

";r;il" The rower a Member,s:"""f#:3:L"Jif; il:ilJfl:nrifru*i";idi.:ff #ili?"ceives*itn-,",'p"rrto

Members havean eight'year period,o.lfl:",?u, their export subsidies. with respecti?J il 3: [i,X?]'#: i"]i: :1?,1',ff f ki' J,,' J Ji. " 1 5"Ji,, ",. de ve, o p i n s " o,t i,yMembers in transformation to a market economy

Members in transformation to a market economy are given a seven-year period tophase out prohibited subsidies. r["rJ'.ro.idies must, ni*"u"r, nave been notifiedwithin two years of the date of entry inio rorce ot t: w1o Agreement in order to benefirliiil,''l:,, ff : f

,j:?,x'ffi?j $?l,lf::

; ; i,a"n s ro,,m ati o n a rs o re-c e ive p rere re n ti a r t rea tme n rscM Agreement requires that Members.notify alrspecific subsidies, countervairinoduty taws and regurations and

"rr.orni"]iairing actions to the scM committee. J

AnswerS(d)

rf a party fires an appear against the report of the paner, the Appeilate Body sharlreview the issues of lar1a.{d19sseo ov the panerand conrirm oi,ioo,ty its findings. TheDispute setrement eggv losel ;*ro;;.iore^for appointing Apperare Body members.

ffi";lon"tt"te Body membership must be broadry represeniatil!'or memoership of the

The Appe'ate Body determines its own rures of procedure. The proceedings of theAppellate Body are confidentiat. C"p"r,r'"ithe Appellate Body are drafted without the

25 pp_SMAtT_Decemhrer2011

presence of the parties to the dispute and in the light of the informatron provided and thestatements made' Th,e opinions expressed in the Appellate Body report by individualsserving on the Appeilate. Body are anonymous. Tiil date, there have not been anydissent ing opinions and the Rules of Procedure of the Appettate eooy envisage thatmembers of the Appel late Body shal l make every effor i ' to i r t "

r ," i r . decisions byconsensus. where, nevertheless, a decision cannot be arr ived at by consensus, thematter at issue has to be decided by majorrty vote.An Appellate Body report generally composed of an introductron including some

l::.,.i i l asp!.!ts,.a part on the iJsues ralsed in the appear, and the discussion of rheserssues, and the f indings and concrusions ano recommencrat ions.

where a panel or the Appellate Body concludes that a measure is inconsistent witha covered agreement, it must recommend that the Member concerned bring the measureinto conformity with that agreement. In addition to its recommendations, the panel orAopellate Body may suggest ways in which the Member.on""rnlo could implement therecommendations.

Appellate Body.report must be adopted by the DSB and unconditionally acceptedby the partres to the dispute unress the DSB d"ecides ov .on."nrus not to adopt theApoellate Body report within 30 days foilowing its circuration to Members.

ADVANCED TAX LAWS AND PRACTICETime alt ,ved : 3 hours

Maximum marks : 100NOTE : Arr references to sections mentioned in parl_A and paft_c of the Question paper

:i:,,::Z:,X::ff::elax Act, t e6t and retevant AssessmJni vear zor t _12, uniess

part A(Answer ANy TWO euestions from this part)

(a) su' -' success Ltd. wants to acquire an asset costing tl,00,00a. tt hast' L options avai^bte, the first ang ls buying tii- asset by taking a roan:epavabre in five instarments or a0.,000 el;;;;;; tTz inter""t per annum.'J3 ;;;"::,"i", "f"}i!'n:i:?,' ror which,iii"'r'tease rentat charse is

y:[!",{"#,""Ji,7i,";:,8;::f ?:,:n,i,::;,::,:'r:,i,';:,',rjTli::,y e a r l Z S 4 g

piV factor .g0g .826 .7St .6A3 .621Assuming that the payments are made at the end of the year, suggestwhich arternative is better for t:ie company. The ra,te of depreciation istS% while tax rate is 33.22%.

(b) what is the difference between ,(lcmprnar, )^A ,^,..* (10 marks)

Answerl(a)

v"tq'cttoe Petween 'demerger' and 'slump

sale' ? (5 marks)

| - lf asset is taken on leaseParticulars

Question 1

Lease RentTax Saving @ 33.22%Net Cash outf lowPV factor

PV of net cash outflowTotal

l l - l f asset is boughtParticulars

Payment of LoanInterestGross outflow

years

2 3 4 5a a a a

30,000 3O,O0o 3o,0oo 30,0009,966 9,966 9,966 9,966

20,034 2o,og4 2o,og4 20,0340.826 0.751 0.683 0.621

16,548 15,046 13,683 12,441

76,536

years2 3 4 5r a a f ,

20,000 2o,ooa 20,ooo 2o.ooo11,200 8,400 5,600 2,80031,200 21,4oo 25,600 22,800

/ 6

1a

31,00010,29820,702

0.90918 ,818

1a

20,00014,00034,000

PP-ATLP-December201 1

Depreciation @15%Total of Interest &Depreciation

Tax saving @ 3322%Net cash outflow

PV factor

PV of outflow

Total

15,000 12,750 1C,838 9,212 7,830

29,000 23,950 19,238 14,812 10,6309633.8 7956 6391 4921 353124,366 23,244 22,009 20,679 19.2690.909 0.826 0.751 0.683 0.621

22,149 19 ,199 16 ,529 14 ,124 11 ,966

83.967Lease option is better, as the cash outflow is less.

Answer 1(b)

The Dif ference between srump sare and demerger is as foi lows:1 ' Sect ion 2(19AA) says that a 'demerger ' means a transfer pursuant to a scheme

under sect ions 391-394 of the companies Act, 19s6. The result ing companymust issue, in considerat ion of the demerger, i ts shares to the shareholders oithe demerged company on a proport ionate basis and a slump sale is def ined insect ion 2(42c) to mean the transfer of one or more undertakings as a result ofthe sale for a lump-sum consideration without values being assigned to individualassets and l iabi l i t ies.

2' According to section 45, any profits or gains arising from the transfer of a capitalasset are chargeable to capital gains tax and under Section 47 (vii),the provisionsof Section 45 do not apply to a transfer in a demerger of a capital asset by thedemerged company to a resulting company if the reJulting company is an Indiancompany.

3' Under sect ion 50B, capital gains ar is ing from slump sales are chargeabte totax' The capitalgains from such slum sales are to be calculated by suibtract ingthe net worth of the undertaking that is t ransferred from tnl tump-suriconsiderat ion.

4' l f a transfer is a demerger under the Income tax Act, capital gains l iabi l i ty wouldnot ar ise. l f i t is a slump sale, such l iabi l i ty would ar ise. For the transfer to be a'demerger ' ,

the condit ions mentioned in sect ion 2(1gAA) must be compl iedwith.

Question 2

(a) Hoyal Ltd. commenced operations of the business of a new five star hotetin Mumbai on 1st Aprit, 20r0. The company incurred capitat expenditureot {600 lakh on purchase of tand and tg| takh on construction of buigingduring the period from January,2010 to March,2010 excrusivety for theabove busrness, and capitalised the same in its books of accoint as onlst April, 2010. Furrher, during the previous year 2010-11, it incurred cap1alexpenditure of fl0 crore (out of which $0 takh was for acquisition of land)exclusively for the above business.

27

1f,

q

f,f

a

(

PP-ATLp-December 201 1

Com putatio*11^"*lon a I towa b te u n der section 35AD

compute the dedu.ctign under section.l!..1o rorfhe assessm ent year 201 112, assuming that Royat tta.- ils"'nffitpd ar,nr;"rii,rns specified irsection 35AD and has-not ctai,im:teia'ny deduction unde,r chapter vt_A undethe heading ,C_Deductiorr;; ;;;;'ct of certain-;r;;;r;;,.

@ marks(b) conversion of smait private companie,: ?nd untisted pub,c companies intcrimited riabirrty partnership it &iiit,^fro,,m cao*at'gains tax subject tc':!:l[:\ri:

;e.rtain conditian".""'6i"," nese'contaiinJ as speci,ed in

(c) Discuss tax imptications of dividend decraration and issue of o"r::r:::":,

28

Answer2(a) (3 marks)

for the Assessmen tyear ZOtt-.tZParticutars

Capital expenditure incurred during previous year 2O1O_1 1(excluding expenditure, on acquisition of land) i.e.41,000 takhs - f ,60 lakhCapital expenditure incurred prior to 1 .4.201 Oano capitalized in the books ot accorni a-J on r .+.20r 0

940lakh

95 lakh

1035 takh

Total Deduction available under Section 35AD

section a7(xiiibl has been introduced to facilitate conversion of small private andunristed pubric companies into LLps. on'.onu"r.ion, it srrati not be regarded as aXirffi|",l,Il;HJ#H:: "t rt"v or t"pit"r ;in, tax under se.,ion ad, subject to rurriilmenr

(i) #.ilT[i::J:l3 XXT,,:L Jlf",":l,i:T mmediaterv berore the conversion

Note : Expenditure to,

Answer2(b)

(ii) J[il|ffi::'lr";;:,jj[.",:lJ3Tl^o^*^.^o:-" partners or the LLp in rhe samep ropo rt io n as th e i r s h a re h o ld i n g i,.r in

"-.-# p"u[i.(iir)

);r::i:,il"i11"i:,::",^,11n sna,e in profit and capirarcontriburion in r:anses to the shareholoers: re LLP(iv)

(v)

The aggregate of the profit sharing ratio of the sharehorders of the company inthe.limired liabirity partnership rr,'"i noiiJ'ress than So"h atany time ouring tnJpenod of 5 years from the date of "onu"lion,The totalsares, turnou_er or gross receipts in business of the company shourd

;:::ffi?lf ::l*Jffi ?aiJi",i:::"0,""'ou'u""i;;;;;ilthepreviousNo amount is paid,

."r11", direc'y or indirec'y, to any partner out ot theaccumurated profit standing in the iccountr or tne tirm on ,ri" i"t" conversionfor a period of three years from the date of conversion.

(vi)

29 PP-ATLP-December 201 1

annual CTC of T18,00,000.view the following :

Answer 2(c)

Tax lmpl icat ions of Dividend Declarat ion and issue of Bonus shares:The Domestic Company shall be liable to pay addltional income tax on any amountdeclared, distributed or paid by such company by way of dividend (whether interim orotherwise), whether out of current or accumuiated profits. Such additional income taxsial l be payable @15% plus surcharge @7.5"h plus educat ion cess@2"/" andSHEC@ 1%' Therefore, the dividend receive-d in the hands of shareholders shail be exempt.No tax liability arises on issue of Bonus shares either in the hands of company or inthe hands of shareholders.

Quest ion 3

An employee is going to join your company onPrepare a remuneration ptan for him keeping in(i) He wants to minimise his tax liability within the tegal framework but takehome salary shoutd not be less than tg takh"

(ii) He does not own a house.(iii) He owns a car. But he can take another car from ffie company.(iv) He has two chirdren and one of them is in a boarding schoor.(v) His wife is emptoyed and she gets chitdren education ailowance.(vi) There is rp uniform code in your company. (15 marks)

Answer3

(1) Tax Liability where whole salary is accepted in cash : First, tet,s assumethat the employee gets {18,00,000 as cash and no exempted ailowance anddeduction under section BOC to 80U is available to him. Then his Tax Liabilityshal l be t4,0S,920. This is th . maximum l iabi l i ty on the emptoyee.(2)

Jax liability where salary is divided into perquisites/altowance which arefully exempt : To minimise the tax liability satary rn"ttn" divided into allowances/perquisites which are exempt. on the basis of ihe given facts, the pay packageshall be divided as follows:(i) Emproyee does not own a house: In this case, there are two options. Firstis to give a Rent free furnished house and second is to give House RentAllowance. In the first option, the value of rent free furnished house shall betaxable. And i t wi l l not help him in minimising the tax. In the second opt ion,he can get exemption of HRA as per sect ion 1o(j3A) to the minimum ofactual HRA received or actual rent minus 10"/" of sataiy or 40"/" (in case ofNon-metro cities)/SO% (in case of metro cities) of salary.

In such a situation, its better to pay at least 50% of salary as HRA assumingthat he resides in Delhi and that the amount of actuat rent less 10o/o olsalary is higher than HRA received.

(ii) Owns a Car: As the employee already owns a car so therefore it has no useto give him another car as the valuation ol car is fully taxable. In that casehe can be given conveyance ailowance as Tg00 p.m which is exempt in hishands.

PP--ATL P--Decernber 20 1 1

(iii) children Education Allowance: The employee has two children and j ofwhom is in boarding school. Chi ldren educat ion al lowance is exempt up toRs. '100 pm for two chi ldren. { 300 pm for hostel expenditure maximum oftwo children. Assurning that his wife does not claim tax exempticn for ChildrenEducat ion al lowance. Hence, { 2400 as Chi ldren educat ion al lowance and{3600 as Hostel facr l i ty al lowance can be given and which shal l be exemptin h is hands .

(iv) Uniform Ailowance: As there is no uniform cocle in the company thereforeno al lowance for i t can be given to him.

(v) Medical Reimbursement: An exemption of { 15,000 is provided in the Act.Hence T '15,000 can be given him towards medical reimbursement.

(vi) Gi l l : The company can give him gi f ts in kind upto { 5000, as i t is exemptin the Act.

(vii) Leave Travel concession: Assume that he spencis around { 70,000 ontravel. Therefore he may be al lowed t 1 ,40,000 in aj ternate vear as Leavetravel concession.

(viii) Telephone reimbursement: lt is exempted to the extent the amount rncurredon i t . Assuming that T 1,200 pm is spent by him on telephone expendituretherefore { 14,400 can be given to him toward this expenditure.

(ix) Contribution of Employee & Emptoyers towards provident fund:12./, of theemployee's contr ibut ion is al lowed as deduct ion under the chapter Vl of theAct and 12/" of the employer's contribution is exempt under the head salary.Hence, he may be given 24% of basic pay and dearness allowance towardsthe PF contr ibut ion.

(x) Leave Encashmenf : Leave encashed during the service is fully taxablehowever leave encashed at the t ime of ret i rement is exempt upto minimumof the fol lowing:

(a) Leave encashment actually received(b) 10 month average salary(c) Cash equivalent of unavailed leave calculated on the basis of maximum

30 leave of every year.

(d) ? 3,00,000

Therefore, he may be given 30 days leave salary which may opt at the ti ::eof retirement for getting the exempt;on.

On the basis of above, his salary structure is prepared as follows:

Particulars Salary Structure Taxabte income asper lncome Tax Act

30

Basic Pay 6,14,26ADearness Al lowance (50 % of Basic Pay) 3,07,129HRA 4,60,695Children Education Allowance 2,400Conveyance Allowance 9.600

6,14,2603,07,129ExemptExemptExempt

3 1Flcstel facility AilowanceMedical ReimbursementGift in KindLeave Travel ConcessionTelephone reimbursement12% Cantribution of employee towards pF12'"" Qontribution of employer towards pFLeave Encashment

Total

Gross Total lncomeLess : Deduction under sectron gOC

Tota l lncome

(Rounding off)Income taxEducat ion Cess @2% & SHEC @ 1%

Totattax l iabi t i ty(Rounding off)

He wilr get {1 3,59,4 84 (61 4260 + 307 1 29+ 460695 + 2400+9600+ 3600 + 1 5000 +50000+ 14400 i?990.0

- 132600t", tut" nome sarary. Hi,,u" riabir*y wi, getreduced to t 1,37,600 from { 4,05,b20.-(Note :Alternate answer may be possibte.)

PART B(Answer euestion No. 4 which is compulsory

euestion O "nd ANy TWO of the rest from tnis,pai.)

'' ffl:";:;,most

appropriate answer from the given options in respect or the

(i) which of_ the forowing has not been expressry defined under theCentrat Excise Act, 1g2q _

(a) Broker(b) Goods(c) Curing(d) Factory.

(ii) which of the foltowing scheme is opfi*nal irtder centrat excise(a) DLltv based on tariff vatue(b) Duti" i;ased cn ft?!)

pp_ATlp_December 201 l3,600 Exempt

15,000 Exempt5,000 Exempr

70,000 Exempt14,400 Exempt

1,10,567 1,10,5671 ,10,567 Exempr

76,782 Taxable at the

18,00,000

time olencashment

1 0 , 3 1 , 9 5 6

10,31 ,956

1,00,000

9,31 ,956

9,31 ,960

1,33,588

4,008

1,37,596

1,37 ,600

PP-ATLP-December 201 1

(c) Duty based on transaction value

(d) Duty based on compounded levy.

(iii) Under section 23 of the Customs Act, 1962, duty payable is remittedif imported goods are lost, destroyed or abandoned before -

(a) Goods are examined

(b) Duty has been pa.id

(c) The proper officef has made an order for clearance

(d) Goods are cleared for home consumption.

(iv) A proper tax planning exercise would have to take into considerationthe following aspect(s) under the Customs Act, 1962 -

(a) Classification of goods

(b) Valuation of goods

(c) Exemption notifications

(d) All of the above.

(v) Effective rate of customs duty on baggage is -

(a) 36.05%

(b) 41.2%

(c) s0.e%(d) 51.5%. (l mark each)

(b) Rewrite the following sentences after filling-in the blank spaces withappropriate word(slfigure(s) :

(i) The is not eligible to take credit of special CVD paidon imported goods under section 3(5) of the Customs Tariff Act, 1975.

(i0 Arder of CESTAT relating to can be appealed directlyto the Supreme Court of lndia under section 35L of the Central ExciseAct, 1944.

(iii) lf fuel or lubricating oil is supplied as sfores to foreign going vessel,customs duty paid on the fuel or lubricating oil is

refunded as duty drawback.

(iv) Assessee can apply for settlement in lifetime of

in principles of(1 mark each)

(c) Test the veracity or otherwise of the following assertions :

(i) There can be 'manufacture' even if both inputs and final product fallunder same tariff heading.

(ii) Mere change in tariff does not mean there is 'manufacture'.

(3 marks each)

32

applicant except in respect of some specified cases.

(v) The doctrine of promissory estoppel has its origin

33 pp_ATlp_December20t1(d) can a show-cause notice be issued within a period of five years from therelevant date if the internal audit party fin;it ;,;;;i;e audit of centrat exciserecords of a manufacturer that'cenirat

"*"iiit iuii has been short paid ?Explain.

ft marks)Answer4(a)(i)

(b) Goods

Answer4(a)(ii)

(d) Duty based on rompounded levvAnswer4(a)(iii)

(d) Goods are cleared for home consumptionAnswer4(a)(iv)

(d) Ail of the above

Answer4(a)(v)

(a) 36.05%.

Answer4(b)

(i) The service provider is not erigibre to take credit of speciar cVD paioon imported goods under section 3(5) of the Customs Tariff Act, 1975.(ii) order of CESTAT rerating to Rate. of duty & varuation can be appeareddirecfly to the supreme borrt ot tnoia uioerlffin 351 of the centra.lExcise Act, 1944.

(iii) lf fuer or rubricating oir is suppried as stores to torergn going vesser,ffi;?:"ms

dutv paid on rhe fuer or ruori."ting-oir i, refunded as duty

(iv) Assessee can appry for setflement more than once in rifetime ofapplicant except in respect of some specified cases.(v) The doctrine of promissory estopper has its origin in principres of Equity.

Answer a(cXi)

. Manufacture implies a change, but every change is not manufacture. There must bea transformation; a new anc different article must emerge having a distinctive name,cnaracter or use' once a new commodity having a def]nite ano oistinct commercialidentity in the market is produced and the same has been specified in the Tariff, it isexigible to duty.

There can be manufacture even if both inputs and final product fall under sametariff if a different identiflable commercially known product comes into existenc e - prachitndustries v. CCE(2008) 14 STT 161(SCi, Laminated pa"Xing;i ie1Ltd.,v.CCE(1990)4e ELT s26 (SC).

PP-ATLP-December 201 1

Answer4(c)( i i )

I t is i r relevant whether the new art ic le fal ls into the same tar i f f heading as the dutypaid inputs from which i t is manufactured or belongs io a separate tar i f f heading. Justbecause raw mater ial and f inished product fal l in di f ferent tar i f f headings, i t cannot bepresumed that process of obtaining finished product from such raw materialautomaticallyconstitute manufacture - CCEv. SF l-r'ssues (2005) 186 ELT 385 (SC).

Making tarpaultn made up from tarpaul in sheet by st i tching and putt ing eyelets isnot manufacture even if tariff heading is different - CCEv. Tarpaulin lnternational(2010)296 ELT 481(SC) .

Answer 4(d)

Yes, a show cause notice can be issued within a period of 5 years from the relevantdate i t the internal audit party f inds during the audit that excise duty has been short lypard .

Under sec t ion 11A(5) , where dur ing the course o f any aud i t , inves t iga t ion orrrer i f icat ion, i t is f ound that any duty has not been levied or paid or short- levied or short-paid or erroneously refunded due to fraud, collusion, any willful mis-statement, suppressionof facts, contravention of any of the provisions of this Act or of the rules macle thereunder with intent to evade payment of duty, but the detai ls relat ing to the transact ionsare avai lable in the specif ied record, then in such cases, the Central Excise Off icer shal lwithin a peric;d of five years trom the relevant date, serve a notice on the person chargeablewith the duty requir ing him to show cause why he should not pay the amount speci l ied inthe notice along with interest under section 1 1AA and penalty equivalent to fifty per centof such duty.

Quest ion 5

(a) Solid Shoes Co., a manufacturer of footwear, used to purchase various rawmaterials hke fabrics. rubber, chemicals, solvent, etc., which were mixedtogether.The thin layer of such mixture was sandwiched between two sheets of textilefabric through a calendaring machine. The resultant product'Doubte TexturedRubberized Fabric' (DfRn was cut and stitched as per requirement and wasused as shoe-uppers. At times, DTRF was sent to job-workers for stitchingpurposes. After completing the entire process, lhe vulcanisation of footwearwas rlone and then, it would be available for sale as footwear.

Some of the DTRF was used in the manufacture of canvas shoes. which wereexempt from duty. The department contended that the intermediate productDTRF was a distinct product with specific properties and was used inconsiderable quantities for making rain-coats, holdalls, hand-hags, etc., in theoutside market. Since the DTRF was excisable good and it was used in themanufacture of exempted final product being canvas shoes, therefore DTRFwas liable to excise duty. However, the department ilidn't have sufficient evidenceto prove its marketability.

Examine whether contention of the department is correct by referring to caselaw, if any, in the light of explanation added to section 2(d) of the Central Excise

34

Act, 1944 w.e.f. 1}th Mav,2008. (5 marks)

35 pp_ATlp_December201.l(b) rmproper Ltd. made an unauthorised import of goods, which were rater onconfiscated' Goods were not redeemea oy paying riie under section l2s of thecustoms Act, 1962. rhe assess ee contended ihat once the inported goodswere confiscated and the option to reiease them was not exercised, no dutywas payable' lt placed reliance on section 23 of the said Act which providesthat if the owner of imported goods retinquishes nislnrc b the goods, he sha,not be liable to pay the duty thereon.

Discuss briefly whethertheassessee is bound to pay customs duty with referenceto decided case law, if any. - --"- 'v t'v! vv

$ marksl(c) Exprain rh"!r:y^l"r?tion of phrase_,a mistake apparent from record,as mentionedin section 3sc(2) of the centrat Excise eci, {iir.-"''Answers(a)

^v" t ra+' $ marks)

The facts of the given case are simirar to Bata rndia Ltd. v. ccE(2010) 2s2 ELT492(sc)' The Apex cturt obseru"Jttrui r"re theoreticat porrioitity of the product beingsold is not suff icient but there.horrJ ou.ommerciarcapabir i ty of being sord.The supreme court f urther ruled that the burden to show that the product is capableof being bought or solci is entirely onin.i"uunr", which has faired to prove marketability.Thetefore' 'Double Texiured n,joo"rir.JFabric (DiRrt wa!'riot riabre to excise oury.The above judgement,is in conformity with the explanation to sectron 2(d) of centrartxcise Act, 1944 inserted by the Finante Act, 200b

"..;;;i;; to which capabirity ofbeing boughr and sord for a consid*rution .on.iir-rt"J ililih"r*"ru',,,,n.

Hence' the contention -of the department is not correci and sorid shoes co. is notrequired to pay duty on DTRF.

Answer S(b)

Yes' the assessee is bound to pay customs duty, even if the goods are confiscatedand not redeemed by paying fine.The facts of the case are simirar to poona Heatth seryices v, ccus.2oog (242)E'L'T' 335 (Bom') The High court etucioated the distinction berween section 23 anosection 125' Unde;'section 23, tne persln who imports the goods, surrenders rris titte irfthe goods. By surrendering tiire in tne gooos, th.e person importing the goods or theowner of the goods .:::: to have a riirrt to craim rhe gooJJ on rhe other hand, theorder of confiscation is passed in respe"ct of the person"*no n". claimed to import orexport the goods' lt implies that he craims title or right in the property. The fine undersection 125 is payabre by the person who seeks redemption of the goods. rf the goods

,T:ff[::::[*ff'thev vest in the state. rhe person noweue,., who had importedbetien"'.",*r'""n"ffi $:lrTJ[Yi:'.1?i,;:iffi'$'iH"t"""#,:lmm:i:]jillherefore' operate in two different-situations and.

Sre mutuatti exclusive. Therefore,section 23 cannot be considered for the pripor" of interpreting section 1 1 1.. Section 1 '11 confers the power to confisimoroperrv i'po,iJ

"nd or the o,n",. p,'ou,n'oX'S,:[t.T[H'r:?["1["JJfjrTt A::possession of the goods under section 12s is distinct "nJJiti"r"nt

from the duty ofgoods which are to be imported or exported.

PP-ATLP-December2O11 36

Hence, in case the imported goods are confiscated, and goods are not redeemed b1paying fine, the importer is bound to pay the customs duty.

Answer 5(c)

Tribunal has no powers to review its orders. However, it may pass order for rectifying"a mistake apparent from the records", within six months of passing an order undersection 35C(2) of Central Excise Act, 1944.

In Asst Commr, lT, Rajkotv. Saurashtra Kutch Stock Exchange Ltd.2008 (230)ELT 385 (SC) Supreme Court, while interpreting the phrase "any mistake apparent fromrecord" stated that a patent, manifest and self-evident error which does not requireelaborate disctission of evidence or argument to establish it, can be said to be an errorapparent or the face of the record and can be corrected while exercising certiorari

iurisdictic';. An error apparent on the face of the record means an error which strikes onmere looking and does not need long drawn-out process of reasoning on points wherethere may conceivably be two opinions. Such error should not require any extraneousmatter to show its incorrectness.

The Apex Court further clarified that an error cannot be said to be apparent on theface of the record if one has to travel beyond the records to see whether the judgment iscorrect or not. An error which has to be established by a long drawn process of reasoningon points where there may conceivably be two opinions can hardly be said to be an errorapparent on the face of the record.

Question 6

(a) lJnfair Ltd. sold 100 units manufactured by it for {12,000 per unit. lt had receivedinterest-free advance of {6,00,000 from the buyer for the whole of the year.

Compute fhe assessa ble value of 100 units sold in following independent cases:

(i) The price charged from other buyers is ?11,600 per unit.

(ii) The price charged from other buyers is {12,800 per unit.

(ii| The narmal rate of interest is 12% per annum and the price charged fromother buyers is {12,800 per unit. (6 marks)

(b) From the following information, compute the total amount of customs duty payableby the imporier :

0 Assessable value under customs : {6,00,00a.

(ii) Tariff value notified under section 3(2) of the Central Excise Act, 1944 forpayment of excise duty on like article manufactured in lndia: (5,00,000.

(iii) Basic customs duty

Centralexcise duty

SpecialCVD

Education cess

= 107"= 10o/o

= Nil

= as applicable. (6 marks)

(c) Mayank manufactured and exported goods wot"th fl 0,00,000 to Uday of UKon l st January, 201 1 and availed duty drawback of 715,000. Mayank importedthe same goods on 8th Febr,uary, 201 1. What will be the customs duty payable

37by Mayank, if rate of basic customs duty isCVD and specialCVD ?

Answer 6(a)

Computation of Assessable Value of Unfair Ltd.As per the explanation 2 to Rule 6 0f the central Excise Valuation Rules, 2000,where an assessee receives any advance payment from the buyer against derivery ofany excisable goods, no notional interest on such advance shall be added to the valueunless the central Excise officer has evidence to the effect that the advance receiveo

i:::li:;?.Tji:"rlX:l:. of the price tr tne sooos. Hence, the assessabre varue snarl( i ) Assessable value = t12,000 x 100 = {12,00,000

No' notional interest shall be added as advance received nas not influenced thepnce.

( i i ) Assessable value = T( l2,OOO + gOO) x 100 = T12,SO,0OOTB00 shat be added as notionar interest (t12,g00 _ {12,000) as the price chargedis influenced due to the receipt of advance.

( i i i ) Assessabte Vatue = {(12,000 + gOO) x 100 = {12,80,000Rate of interest is irrelevant, however, Rs. 800 shallbe added as notional interest$r;.tj":

- t12,0oo) as the price charged is infruencJ ou" to the receipt of

Answer 6(b)

Computation of TotalCustoms Duty payable

Assessable Value (AV)

Basic Customs Duty (BCD) @ jO%

Addit ional Customs Duty under section 3(1), i .e., CVD@ 10.9% on AV+ BCD ie. {6,60,000EC & SHEC @ 3y" on BCD + CVD ({t ,27,gBO)

Total customs duty payableAnswer 6(c)

PP-ATLp-December20l 110% and goods are exempt from

(3 marks)

T

6,00,000

60,000

67,980

3,839

1 , 3 1 , 8 1 9

As per Not i f icat ion No.94l1gg6 - cus dated 1 6.12.1g96 rf the same goods whichwere exported are re-imported within 3 years and there is no change rn the identity of the

ffi n i:ffi itntg:-"i l];fflo" - ano rei m p o;il ; .,"oil.' 0,'y s h a r b" ;;t;;

*ra,l$: the customs duty payabre by Mr. Mayank on re-import of goods sha, be

PP-ATLP-December 201 1

Question 7

38

Besidesexcisedutyconcessions,whataretheotherpioceduralconcesstonsenioyed by smatt ,,lu'6-ii"tiies ? Exptain briefly' (7 marks)

Discuss briefly the provisions of section 2S(5) of the Customs Act' 1962

regarding conclusion if proceedings.at show-'cu'se notice stage itself ' when

extended period ot timitainn nai been invoked' (5 marks)

Wr i teano teon , re funcJo fexpo r tdu ty ' . l sdoc t r i neo fun jus ten r i chmen tapplicable to it ?

'I'v vr G marks)

AnswerT(a)

Besides excise duty exemptions, the SSI units enjoy many more concesslons ln

terms of Procedures as under:

( i )PaymentofDuty:SSluni ts^ha) /etopayexcisedutyonquar ter lybasisbySthof the follow';;';'"tt"tlby 6th in

""s" of

"-puyn.'"nt)' In month of March' duty

is paYable bY 31st March;

F i t ingofreturn:SS|uni thastosubmitexc isedutyreturnonquar ter |ybasisby1Oth of the f ol lowing quarter'

Registration:Noregistrationuptotheturnoverof{150lakh.on|yadec|arationonce in lifetime on |."u"[ing tnl turnouer of {90 lakh (specified limit)'

Expof tprocedure:ARE. l formneednotbepreparedforSSIuni tswi th turnoverbelow t150 lakh.

CEN4ATCredi t :SSIuni tscanavai Ient i reCENVATCredi toncapi ta lgoodsinthe First Year itself'

OfficiatVrsits : SSI units can be visited bY DePartmentil'9',1t::"" onlv with

specific permission oinssistant commissioner and for specific purpose' They

have to enter retevan,'p"ii""r"ri in visitors' book maintained by the assessee

Audi t :Sma| |unt tsmaybeaudi tedoncein{ iveyears,whi |emediumSS|uni tsmaY be audited once in two Years'

AnswerT(b)

As per section 28(a) of Customs Actj 1-962' where any duty 'has not been levied or

has been short-levieioi Lr.n"ourly ,etunoll oi lnt"t"ti payable has not been ltatd'

parily paid o|, "rron"oJsly

refunded nv..*u=on tf collusion, wilful mis-statement aild

suppression of facts ir.l",irn" proper officer shall serve show-cause notice within iive

years from the relevant date'

Sect ion2B(5)prov idesthat thepersononwhomnot ice isservedmaypaytheduty(in ful or in part)

". ;;;; r.""ot"c nJ^him arong with interest payable thereon under

section 2BAA anO penatty equal to 25% ot tr.ti outy liability, within 30 days of the

receipt of the notice and inform the proper officer of such payment in writing'

| f thepersonhaspaidfu | |amountofdutya|ongwi th in terestandpenal ty@25"/"otduty liabilitY, then:

(i) The proceedings in respect tl ^tl.r:l

person and other persons to whon'l notices

were serveo sliall be deemed to be concluded but'

(a)

(b)

(c)

(ii)

( i i i )

(iv)

(v)

(vi)

(vii)

L

39 PP-ATLP-December2011

(i i ) The prosecut ion proceedings in relat ion to offences fal l ing under sect ion 135,135A and 140 wi l l not be deemed to be concluded and such proceeding may bein itiated/contin ued against him.

However, if the proper officer is of the opinion that the duty with interest and penaltypaid fal ls short of the amount actual ly payable then he shal lcont inue the proceeding byissue of show cause notice in the manner as provided in section 28(1)(a) for the amountwhich fal ls short .

Answer 7(c)

Export duty is charged on very few items, but section 26 of Customs Act makesprovisions for refund of export duty. Export duty is refundable i{:

(i) The goods are returned otherwise than by way of resale;

(ii) Goods are re-imported within one year from the date of re-exportation;

(ii i) An application for refund is made before the expiry of six months f rom the dateon which the proper off icer makes an order for clearance of goods.

Doctrine of unjust enrichment does not apply to refund o{ export duty as this refundis under section 26 of Customs Act, which has not been amended - Section 27(2)(d).

PART C

Question 8

Attempt any five of the following :

(i) What are the factors to be considered in taking decision whether acountry is tax haven or not ?

(i0 Ajit has an undertaking (Ltnit-A) in free trade zone fffZl ^nf :::;::,undertaking (Unit-B) in domestic tariff area QfA). From the followingparticulars, compute the deduction under section 10A for the assessmenty e a r 2 0 1 1 - 1 2 :

Unit-A Unit-B(() ({)

Total turnover 60 lakh 40 lakh

Export turnover (included in above) 40 lakh

Profit earned 21 lakh 12 lakh'

(4 marks)

(iii) Explain in brief the circumstances under section 9(1)(v), (vi) anr| (vii)when interest, royalty and fees for technical seruices (FTS) shaii bedeemed to accrue or arise in lndia. (4 marks)

(iv) Who can seek 'advance rulings' ? (4 marks)

(v) Dr'scuss when an enterprise is taken as 'associated enterprise' undersectian 924. (4 marks)

PP-ATLP-December2011 40

(vi) Dlscuss the salient aspects concerning permanent establishment.(4 marks)

AnswerS(i)

A tax haven is a place where there is no tax on income or it is taxed at low rated oftax structure. The factors to be considered in taking decision whether a country is taxhaven or not are as under:

( i ) There is ni l or nominal normal tax on income;

(ii) There is no system of exchange of information with respect to the tax regime inthe tax heaven country;

(ii i) The regime lacks transparency;

(iv) Limited Regulatory supervision or lack of financialdisclosure to the government.(v) The Government of the country facilitates the establishment of the foreign owned

enterprises without the need for strict compliance of local laws or prohibits suchentities from having any co-mechanical impact on the local economy.

AnswerS(i i )

Deduction under section 10A shall be available on the profits attributable to exports.The Unit B has not exported during the previous year hence no deduction is allowable.The deduction available to Unit A shall be computed on the following basis:

_ Export turnover of undertaking x Profit of the undertakingTotal turnover of undertakino

* 40 lakh= t oo lutn x t21 lakh

= { 1 4 l a k h

{'14 lakh shall be allowed as deduction to Unit A subject to fulfil lment certaincondit ions specif ied in sect ion 10A.

Answer 8(iii)

Under sectiong(1)(v), (vi), (vii) in the following circumstances the Interest, royaltyand fees for technical services (FTS) shall be deemed to accrue or arise in India wheresuch income is:

(a) payable by state or central gevernment;

(b) payable by a resident except where the payment relatable to a business orprofession carried on by him outside India or to any other source of his incomeoutside lndia:

(c) payable by a non-resident, if payment is relatable to a business or professioncarr ied on by him in India or to any other source of his income in India;

As per the explanation to section 9, the interest, royalty and FTS is deemed toaccrue or arise in India, and shall be included in the total income of the Non-residentregardless of whether he has a residence or place of business or business connection inIndia.

PP-ATLP-December201 1Answer 8(iv)

As per Section 245N(b) of the Income Tax Act, the advance ruling under the income-tax act could be sought by :

(a) A non-resident lor a transaction which has been undertaken or is proposed to beundertaken by him; or

(b) A resident for a transaction which has been undertaken or is proposed to beundertaken by him with a non-resident or

(c) A resident falling within any such class or category of persons as the CentralGovernment may, by notification in the Official Gazette specify in this behalf.

These applicants may make an application under sub-section (1) of section 245e.

Answer 8(v)

Associated enterprise [Section 92A(1 )]

"Associated enterprise", in relation to another enterprise, means an enterprise-

(a) which participates, directly or indirectly, or through one or more intermediaries,in the : (i) management, or (ii) control, or (ii i) capital of the other enterprise; or

(b) in respect of which one or more persons who participate, directly or indirecfly, orthrough one or more intermediaries, in its management or control or capital, arethe same persons who participate, directly or indirectly, or through one or moreintermediaries, in the management or control or capital of the other enterprise.

Thus, section 92A(1)(a) provides that if an enterprise participates in the management,capital or control of another enterprise, then, the other enterprise is to be regaided asassociated enterprise of the participating enterprise. Such participation may, however,be direct, indirect or through one or more intermediaries.

Sect ion 92A(1)(b) provides that i f one or more persons part ic ipates in themanagement, capital or control of one enterprise and the same persons also participatesin the management, capital or control of another enterprises, then, both these enterprisesare associated enterprises. In this case also participation may be direct, indirect orthough one or more intermediar ies.

Answer 8(vi)

One of the important terms that occur in al l the Double Taxat ion AvoidanceAgreements is the term 'Permanent Establishment' (PE) which has not been defined inthe lncome Tax Act. However as per the Double Taxation Avoidance Agreements, pEincludes, a wide variety of arrangements i.e. a place of management, a branch, anoffice, a factory, a workshop or a warehouse, a mrne, a quarry, an oilfield etc. lmpositionof tax on a foreign enterprise is done only if it has a PE in the contracting stale. Tax iscomputed by treating the PE as a distinct and independent enterprise. Normally, allthetax treaties contain a definition of PE. PE generally means a fixed place of business. ltincludes a construction site and installation project provided such activities last morethan the specified time.

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