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Article by ca. sudha g. bhushan


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Article by CA. Sudha G. Bhushan on thin capitalisation

Article by CA. Sudha G. Bhushan on thin capitalisation

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  • 1. Inside This IssueTheManagement AccountantOfficial Organ of the Institute of Cost Accountants of India established in year 1944 (Foundermember of IFAC, SAFA and CAPA) Volume 47 No. 5 May 2012 C O N T E N T S0507 EDITORIAL Case Study 0554 Sustainable Growth in Indian Jute Industry—An0508 PRESIDENT’S COMMUNIQUE Exploratory Study by Ashim Paul 0558 Diagnosing BSNL As A Business—Performance0512 CHAIRPERSON’S COMMUNIQUE Analysis of A Fully Owned Government Company— A Case Study of Bharat Sanchar Nigam Ltd. Cover Theme by John Thomas & Ramesh Damarla0513 Arm’s Length Price—CMA is India—a Perspective Human Resource Management Dr. Santonu Moitra 0565 Organization Development : An Orientation to0521 International Transfer Pricing : The Current Land- Change Management by Dr. Anand Bansal scape in India by Dr. Sujit Kumar Roy & Pallab Pyne 0569 An empirical study of relationships between relational psychological contract and employees’0528 Thin Capitalisation and Arm‘s Length Pricing attitudes towards OCB factors and its application in by A Sekar & Sudha G Bhushan Indian Industry by Mihir Ajgaonkar, Dr. Utpal Baul & Dr. S. M. Phadke0535 Arm’s Length Pricing in India by Dr. Sukamal Datta Project Management Taxation 0573 Project Management Team Handling Challenges to Multinational Corporation by Dr. Javed Masood0538 Tax Titbits—Finance Bill, 2012—What Next? Banking by S. Rajaratnam 0576 Sustainable Development : Few Aspects in Indian Coming Home to Roost : Bilateral Investment Banking Sector by Pradipta Gangopadhyay0540 Agreements : Coping With Treaty Boomerangs Financial Reporting by P. Ravindran 0579 ‘Crime and Punishment’ : An introspection into two infamous financial reporting frauds across the world0544 Documents for Availing Cenvat Credit—Some by Dr. Arindam Gupta Issues by M. Govindarajan Economic Matters Costing 0588 Black Money : Methods and Means of Controlling at0549 Salient Features and Observations on CARR Origin by D. Venkata Narayana (Pharmaceutical Industry), 2011 Security Analysis by V. R. Kedia & Dipti Kejriwal 0590 Test of Market Efficiency by Dr. M. Appala Raju Budget Analysis 0594 Institute News0552 Is the Union Budget of India (2012-2013) Realistic and Achievable? 0617 Letters to Editor by Dr. Dilip Kumar Datta 0622 Book Review IDEALS THE INSTITUTE STANDS FOR❏ to develop the Cost and Management Accountancy profession ❏ to develop the body of members and properlyequip them for functions ❏ to ensure sound professional ethics ❏ to keep abreast of new developments. The contents of this journal are the copyright of The Institute of Cost Accountants of India, whose permission is necessary for reproduction in whole or in part.The Management Accountant |May 2012 505
  • 2. INSTITUTE UPDATES MISSION STATEMENT “The Institute of Cost Accountants of India PRESIDENT M. Gopalakrishnan Professionals would ethically drive enterprises globally email : by creating value to stakeholders in the socio-econo- VICE PRESIDENT Rakesh Singh mic context through competencies drawn from the email : COUNCIL MEMBERS integration of strategy, management and accounting.” Amit Anand Apte, A. Om Prakash, Aruna Vilas Soman, A.S. Durga Prasad, Dr. Sanjiban Bandyopadhyaya, Hari Krishan Goel, Manas Kumar Thakur, P.V.S. Jagan Mohan Rao, VISION STATEMENT Pramodkumar Vithaldasji Bhattad, Sanjay Gupta, S.R. Bhargave, Suresh Chandra Mohanty, “The Institute of Cost Accountants of India would T.C.A. Srinivasa Prasad GOVERNMENT NOMINEES be the preferred source of resources and professionals A. K. Srivastava, Nandna Munshi Ashish Kumar, G. Sreekumar, K. Govindaraj for the financial leadership of enterprises globally.’’ Senior Director (Research) Chandana Bose Senior Director (Studies) DISCLAIMER R N Pal The views expressed by the authors are personal Director (Technical) J. P. Singh and do not necessarily represent the views and Director (Internal Control & Systems) should not be attributed to the Institute. Arnab Chakraborty Amitava Das The Management Accountant Technical Data Director (Examinations) Periodicity Monthly Director (CAT), (Training & Placement) L. Gurumurthy Language English Overall size — 26.5 cm. x 19.5 cm. Director (Professional Development) J. K. Budhiraja Printed Area — 24 cm. x 17 cm. Screens — up to 130 Director (Continuing Education Programme) D. Chandru Subscription Rs. 600/- (Inland) p.a.Director (Discipline, Administration, Membership & Legal) Single Copy: Rs. 60/- & Joint Secretary Kaushik Banerjee Overseas US $150 for Airmail Director (Finance) US $ 100 for Surface Mail S. R. Saha Concessional Subscription Rates for Registered Director (Administration–Delhi Office & Public Students & Grads of the Institute Relations) Rs. 300/- p.a. S. C. Gupta Single Copy: Rs. 30/- (for Students & Grads) EDITOR Revised Rates for Advertisement Rajendra Bose The Management Accountant Editorial Office & Headquarters Rs. (US $) CMA Bhawan 12, Sudder Street, Kolkata-700 016 Back Cover (colour only) 50,000 2,500 Phone : (033) 2252-1031/34/35, Inside Cover (colour only) 35,000 2,000 Fax : (033) 2252-1602/1492 Ordy.Full page (B/W only) 20,000 1,500 Website : Delhi Office Ordy. Half page (B/W only) 12,000 1,250 CMA Bhawan Ordy. Qrtr. page (B/W only) 7,500 750 3, Institutional Area, Lodi Road The Institute reserves the right to refuse any matter of New Delhi-110003 Phone : (011) 24622156, 24618645, advertisement detrimental to the interest of the Institute. Fax : (011) 24622156, 24631532, 24618645 The decision of the Editor in this regard will be final.506 The Management Accountant |May 2012
  • 3. From the Editor’s Desk The term ‘arm’s length’ has been defined in the Kohlers Dictionary for the Accountants as something done ‘‘on a commercial basis, dealing with or as though dealing with independent, unrelated persons; competitive; straightforward; involving no favouritism or irregularity; as, arms length purchase’’. It is also suggested in the said dictionary that transactions between affiliated companies are not ordinarily regarded as being at arms length even though expressed in terms of market values. The point in particular is that, if two or three divisions or units/ plants of a company enter into commercial transactions, say, intercompany transfer of goods and services, there will be no impact on the profit/loss of the entity even if one division charges another a price which is more or less than their commercial value. So for the entity, it remains a zero sum game. However, if the transaction is between two independent parties and the transaction is entered into for a price less than its commercial value, it impacts the ultimate profit or loss of the entities. It is this relative gain or loss of the business entities which makes arms length pricing a very important aspect of the transfer pricing mechanism. It is very common to find multi-divisional/multi-locational conglomerates which, by their inherent nature, have production and distribution facilities spread across International different states and even countries with varied tax jurisdictions and implications. Decision to host a particular facility in a particular location or country is influenced transfer by the strategic considerations. However, when the goods and services are pricing is one exchanged between two or more divisions of the same enterprise, but located in such area, different tax jurisdictions, the tax authorities will view the supplier of the goods and services as seller and the receiver as buyer, even though the transaction is which essentially between two divisions or units of the same enterprise. This principle, upholds arms known as the arms length principle, is now part of the international consensus length and also the cornerstone of the OECD principles of transfer pricing guidelines for the multinational enterprises around the world. Arms length pricing would not principle, but only help the revenue authorities to get their reasonable share of tax revenues from ends up in a the activities of the multinational entities in their territories, but would also lead to fair international allocation of income. maze of Although the logic of arm’s length pricing appears to be straightforward, but in disputes while reality it requires robust economic analysis and a clear understanding of not only practically the functioning of the market, but also of the subtle factors like the economic divers applying it. and the mechanisms in the market. Behind the theory of arm’s length pricing there is clearly an assumption that there is a free flow of information in the market and the parties involved—the multinational entities and the revenue authorities of the respective tax jurisdiction—are able to gather it whenever needed. Such an assumption, however, is not only naive, but it faces challenge from the theory of efficient market hypothesis, which comes in a strong, semi-strong and weak form. Indeed, the world we live in is better explained, not by such phenomena as perfect market or perfect information, but by the existence of imperfect market where information asymmetry prevails. Parties involved in such a situation can come up with differing interpretations for the same event and get muddled up in disputes. International transfer pricing is one such area, which upholds arms length principle, but ends up in a maze of disputes while practically applying it. Perhaps, this explains why India is locked in tax disputes with several multinational entities involving thousands of crores in tax revenues. Considering the importance of the topic, the timing for deliberations on arm’s length pricing in the pages of the Management Accountant could not be more perfect! I hope that our eminent contributors to this issue of the magazine will enlighten us on the various aspects of the problem and offer food for thoughts for our readers.The Management Accountant |May 2012 507
  • 4. President’s Communique We can see better with open eyes, we can hear better with open ears and we can perform better with open minds —Anonymous Dear Professional Colleagues, The value addition provided by a profession supplements and strengthens the statutory role which it normally plays under the legal framework by the government. As long as this aspect is recognized by the profession, the respect for it increases. Sometimes we get a rare opportunity to present this aspect to the Government during the formulation of the statute, so that the same can be incorporated in an appropriate form in the regulations. Our Institute utilized this opportunity when the new CARR and CAR notifications incorporated the Part III - Performance Reporting to the management, as a part of the report to be M. Gopalakrishnan, President submitted by the Cost Auditor. This key aspect was discussed in the recent interview I gave to the Economic Times, which not only highlighted the value added role played by the CMAs but also touched on the most vital aspect of the ‘‘need for intelligent decisions based on thorough knowledge of the … internal working’’. The new notifications have respected the managements role in developing internal decision systems based on a robust cost and management platform and have mandated the cost auditors to concentrate more on testing the internal cost reporting systems and introduce best practices that are enshrined in Cost Accounting Standards into those systems. This aspect has been recognized by the Cost Audit and Assurance Standard Board, when it has put ‘‘acquiring knowledge of the business process’’ as the first point in the Exposure Draft on CAAS 320. The Government also looks at ethical, economical, efficient and effective operations and safeguarding resources against loss, as the building blocks of the implementation of the various schemes. The CAG’s office has highlighted this as the key aspect in the policy document defining the role played by them in discharging their constitutional functions. While the role of external financial accounting professionals, who are engaged in transaction audits for Government schemes have been predominant so far, our Institute has been constantly representing for a role for the last three aspects i.e. efficient and effective operations and safeguarding resources against loss, which can be done only by CMAs. The Institute has also got the go ahead for conducting training programme for the Govt. officials on this aspect. But let us also admit that this requires tremendous effort in capacity building amongst our practicing professionals, whose number is growing day by day. The Regional Councils and Chapters have to play a major role on this aspect, and I have been also highlighting this aspect during my interactions with them. The technical guidance on this matter is always available from the Institute and the newly formed CEP-2, will also help in conducting the capacity building seminars for the practitioners. I am glad to inform you that the Ministry of Corporate Affairs has formed a Committee to formulate a Policy Document on Corporate Governance under the chairmanship of Shri Adi Godrej, and our Institute has been made a member and I attended the first meeting of the Committee held on 5th April 2012. During the meeting Dr. M. Veerappa Moily, Honourable Union Minister of Corporate Affairs, articulated the Governments view on laying down a policy on Corporate Governance and the background for the creation of the Committee consisting of representatives from industry, professional bodies and other stakeholders to discuss and arrive at a well structured policy on Corporate Governance drawing508 The Management Accountant |May 2012
  • 5. President’s Communiquefrom the experiences of the past and the current thinking the Central Council Members CMA. Dr.Sanjibanon the subject. Bandyopdhayaya and CMA. Manas Kr. Thakur were ableMembers may recall that the Institute has been made a to have detailed interaction with members and chaptermember of the Government Accounting Standards Board, representatives who attended the conference.w.e.f. Jan 2012. The first meeting of the Board was held One of the major initiatives of the Ministry of Corporateon 20th April, 2012 at New Delhi. The activities of the Affairs, the Indian Institute of Corporate Affairs, movedDirectorate of Advanced Studies started off in full swing into their state-of-art new premises at Manesar, whichwith the Board of Advanced Studies holding its first was inaugurated by the Honourable Prime Ministermeeting on 7th April, 2012 followed by the next meeting Dr.Manmohan Singh ji. It was heartening to note theon 20th April 2011. This has accelerated the starting of Prime Minister in his speech highlighting the role ofthe Advanced Courses that have been planned by the professional bodies along with the corporate sector in theInstitute. The details have been given elsewhere in this growth of the Indian economy.message. I was happy to inaugurate the new extended conferenceThe Council meeting held on 31stMarch 2012, also took hall by the Lucknow Chapter on 21st April 2012, alongsome key decisions on holding of conferences. It was with the Vice President. We had very good interactiondecided that the various national conferences will be held with the large number of members present on thein all the four regions so that each region gets an occasion in which the developmental works that canopportunity to hold at least one national event per year. taken up for the profession were discussed.The National Cost Convention, National Practitioners Student’s mattersConvention, National Student’s Convention and the StudiesNational Regional Council and Chapters Convention will To facilitate the student community, the Studiesbe held in each of the four regions. It was also decided Directorate already started a new logistics systemthat each Region will hold one Regional Conference per whereby, the students on the registration day itself willyear in a city as decided by the Regional Council, instead be provided with the requisite study material. Althoughof multitude of Regional Conferences being held in this process has taken off well, I find that many chaptersvarious cities in some Regions. The First Foundation Day are still following the old manual system, in spite of theof the Institute will be held at New Delhi on 19th May continuous communication from the Directorate of2012, which falls on the day on which the Act was passed Studies about implementation of the IEPS system forby the Parliament. student registration. This is putting lot of students intoAs a strong believer in embracing best practice and problems as some of the chapters are accumulating theinstalling systems in all operations of the Institute, sincere applications and completing the registrations in oneeffort is on to install new system driven operations and go in the last minute. I request the Regional Councilshaving standard operating practice in place. A and Chapters to co-operate with the Directorate ofcomprehensive guideline is almost in its final shape. Studies so that the students at large are benefitted by theAs the Institutes operations are expanding, new recruits initiative.are taking place in various departments. I hope that with Examinationthe combinations of the experience of the senior The Examination Directorate is busy in making allexecutives and the enthusiasm of the new blood Institute arrangement for the ensuing June 2012 term ofwill thrive further in the right direction. examination all over India and overseas centers. ThisI am also happy to inform you that myself and Vice time, for further strengthening the process of conduct ofPresident, Shri Rakesh Singh were invited to attend the examination, photo attendance sheet along with photo1st meeting of the reconstituted Quality Review Board admit card will be in place which will streamline theof the Institute, held on 10th April 2012 under the examination process further.Chairmanship of Shri R.S Sharma, Ex-CMD, ONGC. We Technical Directorateassured that the Institute shall provide full support for I am happy to note that the CASB in its 52nd meetingthe efficient and effective functioning of the Board. held on 16th April has cleared the Guidance Note on CAS-Regional Council and Chapter Events 7 on Employee Cost. In addition, the CAASB in its 9thThe meeting organized on 11th April 2012, jointly by meeting held on 17th April has cleared the CAAS-320 onConfederation of Indian Industry and our Institute, was Planning an Audit of Cost Statements and CAAS-340 ona good event showcasing the benefits of institute industry Audit Documentation. Both the drafts are likely to bepartnership. Myself and Vice President accompanied by discussed by the Council in its forthcoming meeting.The Management Accountant |May 2012 509
  • 6. President’s CommuniqueThe Technical Directorate Extension Centres have started Central Government has issued revised version of Formtheir activities in right earnest and the meeting of CFOs 23C and Form 23D with effect from 21st April, 2012. Priorfrom various industries was organised on 25th April, to revised version, the companies who would like to2012 at Chennai. Myself, Vice President, Shri. B. R. appoint same cost auditor for multi products/ units werePrabhakar Chairman, SIRC, Shri J. P. Singh, Director required to file individual Form 23C for each of products(Technical) and Ms. Chandra. V, Advisor (TDEC- under cost audit but new version allows filing of singleChennai) used the meet to trigger Special Interest Group Form 23C if a company wants to appoint one and thefocusing on sector specific issues, which was welcomed same cost auditor for the multi products/ units. Suchby the CFOs present. filing would facilitate cost accountant appointed as costTraining and Placement Directorate auditor for all the products of same "company" to bePlacement counted as one "Company" for the purpose of limit underI am also pleased to inform you that the Campus section 224(1B) of the Companies Act, 1956. Similarly,Placement Programme for December 2011 qualified Form 23D relating to information by cost auditor toCMAs has been successfully completed in all the four Central Government would facilitate the one and sameRegions during the month of April. Corporate like TCS, cost auditor to furnish the information of his/herHCL GENPACT visited our campus for the first time and appointment as cost auditor for the multi products/units.showed lot of interest in hiring our CMAs. PSUs like Coal The revised version of new Forms 23C and 23D alongIndia, ONGC and other Corporate like Wipro, Saint with instructions for filing up these forms are hosted onGobain, Pidilite, CIPLA, Amtek, Accenture, Mukund, the Institute website and MCA21 website.Suzlon and Nestle India visited our campus to find their CEP-I Directoratefuture managers. Some more Banks/Corporate have also I am pleased to inform that well known internationalexpressed their willingness to recruit our qualified CMAs authority on Accounting Standards, Dr. T P Ghosh,in the month of May 2012. The credit for making the entire Professor, IMT Dubai conducted the workshop by theplacement program a success goes to the integrated Institute in order to help the Corporates to update theirapproach adopted by Placement Directorate under the knowledge on the Revised Schedule VI to the Companiesguidance of Chairman-Members in Industry Committee Act 1956. As expected, Dr.Ghosh was able to impart aand the Regional Councils and I compliment them for practical approach to the concept, which has triggeredtheir efforts. the demand for more such workshops in future.Training I request the members to go thru the calendar ofI have already shared the news of the tie up we have Management Development Programmes for the yearmade with Food Corporation of India for engaging cost 2012-13 which has been brought out by the Directoratetrainees. Many more Corporate have expressed their incorporating the new topics and other contemporaryinterest to absorb our Intermediate qualified students as topics for up-dation of the CMA professionals. The sameTrainees. While nearly 500 companies have already is being published in the Journal for the information andbeen compiled for Training our students, many use of our members and others.Corporate giants like MMTC, NBCC, NHPC and Chennai CEP-2 DirectorateMetro Water have recruited Intermediate qualifiedstudents as Trainees in the recent months. Majority of I am happy that the CEP-2 Directorate is planning to bringthe students undergoing Training are enrolled with soon the webinars of some of the technical sessions ofPracticing Cost Accountants. With the scope for practice the eminent faculty members for the benefit of ourexpanding, I am sure more and more students would members and students. The Directorate had discussionsenroll with Practicing Members. As the Industry is with many Government Departments and othernowadays concerned about the employability factor of organizations for organizing exclusive tailor made in-the students of this country, I am sure our students trained house programmes for them during the year Industry and Practicing Members would have a great Membership Directoratefuture. I am glad to inform you that the scheme of BenevolentProfessional Development Directorate Fund is being redesigned for providing more benefit toAs all of you are aware, the Ministry of Corporate Affairs the members of the Fund. For this purpose, the LifeCost Audit Branch vide General Circular No. 15/2011 Membership fee for the Benevolent Fund has been raiseddated 11th April, 2011 changed the procedure for to Rs. 2500/- (one-time payment) from the existing fee ofappointment of cost auditors by the companies. The Rs. 2000/-. For the purpose of obtaining benefit from510 The Management Accountant |May 2012
  • 7. President’s Communiquethe Fund, a member should ensure to pay his up to date met twice in order to finalize and launch two of its initialAssociate/Fellow membership fees to the Institute and courses on :his name should continue to exist in the Register of (I) Business Valuation and Corporate Restructuring,Members of the Institute. I request the members to take andfull advantage of the membership to the Benevolent (II) Treasury and Financial Risk ManagementFund. The above two courses are expected to be launchedJournal Directorate soon and the details on the courses shall also soon beI am happy to share that ‘The Management Accountant’ made available to interested candidates. It has beenjournal has now come with a new professional ‘avataar’ decided that more of such advanced studies courses in—in full colour, thereby fulfilling the wishes of all our the field of cost and management accountancy andmembers. This has improved the external look and get other allied disciplines, that enjoy market demand andup of the journal significantly and is now comparable scope can be launched for our members in the future. Iwith some of the best of the journals in the country. I am glad that best of the minds from academia andcomplement the Chairman and the members of the industry comprising the Advanced Studies Board areJournal Committee for this. The use of ‘map litho’ paper putting their efforts and experience in designing theseof the best quality and superior printing has contributed courses for the benefit of our members and the profession,to a great extent in the beautification process. I am also on the whole.happy to know that the efforts to continually enhance My best wishes to the members and their families forthe qualitative aspect of the journal by inviting practical Budh Purnima and other festivals during the month,articles from corporate managers, industry experts andpracticing members is bearing fruition. As members can Sincerely yours,see that the April 2012 journal has 90% of the coveragefrom the practical point of view. I request all subjectmatter experts in various industries to continue tocontribute to the knowledge base of one and all throughthe official organ of the Institute. CMA M. Gopalakrishnan PresidentAdvanced Studies Directorate The Institute of Cost Accountants of IndiaIn the month of April, the Board of Advanced Studies 1st May 2012The Management Accountant |May 2012 511
  • 8. Chairperson’s Communique interface, these figures would escalate in the days to come. The role of the Committee on Banking & Insurance under the present scenario is very important and the Committee has initiated networking activities with Banks and Insurance companies, in order to open business avenues for the Practicing Members and Aruna Soman facilitate employment avenues for the members and Chairperson, Committee on Banking & Insurance students completing their final examination. Members’ Facilities & Services Representations have been made to Reserve Bank Committee of India, so that our members may partake in providing strategic guidance to ailing companies and to workDear Professional Colleagues, hand in hand with Asset Reconstruction Companies, to improve the climate of recovering bank dues. It gives me immense pleasure to address all of you Representation has also been made to providethrough ‘Management Accountant’ as chairperson of guidance on Risk Based Internal Audit and Concurrentthe Committee of Banking & Insurance. I further feel Audit of Commercial Banks. This will give ourprivileged, to also work as Chairperson of the Members an opportunity to work with them, in view of the fact that the banks may implement improvedCommittee for Members’ Facilities & Services. internal control framework for IT audit procedure. As we all know effective from 1st February, 2012 Representation has also been made to SEBI to includethe name of the institute has changed to the Institute of Cost Accountants as investment advisers, inCost Accountants of India. The Associate and Fellow accordance with its regulation of Investment Advisers.members of the Institute are now entitled to use the The Committee is also in the process of dialogue withacronym ‘ACMA’ and ‘FCMA’ after their names. With the regulators such as SEBI, RBI and IRDA to discernthis, the members have got due recognition and are avenues where the professional members can contribute,entrusted with additional responsibility to preserve and by offering their valuable services in the Stock marketenhance their work profile. The Practicing Members of and Banking and Insurance sector of the country.the Institute can now enter into a Limited Liability In this regard, the Committee has already taken thePartnership (LLP), in accordance with the LLP Act, 2008. initiative of reviving the agreement with ISACA, forThe detailed guidelines in this regard are uploaded on training our members and students, to build capabilitythe Institutes website. I request the professional in carrying out Information Systems Audits incolleagues to visit the Institute’s website regularly, Financial Institutions.which is constantly updated to serve you better. I will fall short in my responsibility if I do not The institute has written to the members to update convey my gratitude to the President of the Institutetheir changed postal addresses, contact numbers and and all my colleagues in the Council, for the confidenceemail addresses, on a regular basis, to enable the they have shown in me, by entrusting me with thisInstitute to communicate with them better and faster. task and for their cooperation and incessant support. II am delighted to inform that in the last six months, also express my deep felt appreciation towards mywe have brought down the response turnaround time team members from the department, for their sustainedof queries generated by the members to a great extent. assistance and back up.We further hope to improvise the assistance in the nearfuture, with the web-based software service, such asonline application for membership, advancement tofellowship, payment of the dues, etc. I am glad to inform you that in the last one year, Aruna Somanwe have added almost 550 practicing members, 1700 Chairperson,associate members and 320 fellow members and with Committee on Banking & Insurancethe growth of the Institute on various fronts, both in Members’ Facilities & Services Committeeterms of academic development and industrial 1st May 2012512 The Management Accountant |May 2012
  • 9. COVER THEME Arm’s Length Price—CMA in India—a Perspective Santonu Moitra M.Com., ACMA, CS, MBA, CIA (IIA) Dy. Manager (F & A), ONGC Ltd.W ith globalisation of business and with vehicle sold in country X. The Tax Authority in country companies operating in different geogra- X will not be effected as the additional profit will be phic and geopolitical areas because of cost, reported at their end, and revenue will gain, but intax marketing efficiencies the Taxation of the country Y the Tax Authorities will be losing Taxtransaction among these different located companies revenue and will not have much profit to tax on theirhas led to the development of Transfer Pricing side of the operation or, even, there may be a loss ifRegulations and determination of Arms Length Prices. the transfer price is set at lower than cost of production.Globalisation is one reason for this interest, the rise of Further, if there is tax rate differential between X andthe multinational corporation is another and with the Y then there can be a considerable gain to the companyfact that more than 60% of world trade takes place also at the cost of Tax revenue.within multinational enterprises, the importance of This example gives the perspective why the transfertransfer pricing becomes clear. pricing regulations are necessary to protect the The present framework for Arms Length Prices was revenue of the countries.triggered mainly by US regulations in 1990 on In Indian context the provisions have been enactedintangible tangible and cost sharing. Today’s with a view to provide a statutory framework whichframework is mainly based on OECD guidelines can lead to computation of reasonable, fair andissued in 2010. The international standard that equitable profit and tax in India so that the profitsOECD Member countries have agreed should be chargeable to tax in India do not get diverted elsewhereused for determining transfer prices for tax purposes by altering the prices charged and paid in intra-is set forth in Article 9 of the OECD Model Tax group transactions leading to erosion of ourConvention as : where ‘‘conditions are made or tax revenues—CIRCULAR NO.12 OF 2001, datedimposed between the two enterprises in their 23.08.2001of CDBT.commercial or financial relations which differ fromthose which would be made between independententerprises, then any profits which would, but for thoseconditions, have accrued to one of the enterprises, but,by reason of those conditions, have not so accrued, maybe included in the profits of that enterprise and taxedaccordingly.’’ A company in X country buys gearboxes from itsown subsidiary in country Y (Y only does business with Taxation–examiningX). The price at which the company in X parent pays Whether TP = ALPits subsidiary—the transfer price—will determine howmuch profit the Y unit reports and how much local tax Circular No. 14/2001 dated 27/11/2001 : Theit pays. If the company in country X pays below normal increasing participation of multinational groups inlocal market prices, or lower than the Cost of economic activities in the country has given rise to newproduction of the unit in country Y,the unit in country and complex issues emerging from transactionsY may appear to be in financial difficulty, even though entered into between two or more enterprisesthe group as a whole shows a decent profit on the belonging to the same multinational group.The Management Accountant |May 2012 513
  • 10. COVER THEME The profits derived by such enterprises carrying on Overview of Indian Regulatory Process forbusiness in India can be controlled by the multinational Transfer Pricing and Arms Length Transactiongroup, by manipulating the prices charged and paid Prior approvalin such intragroup transactions, thereby leading to ▲ ASSESSING ▲ Sec 92CA(1) COMMISSIONERerosion of tax revenues. This gives the rationale for Refers the case OFFICER ▲ ▲Transfer Pricing Regulations. Draft Assessment order as per ALP Determined by TPO Indian transfer pricing regulations are exhaustive in ● DETERMINES ARMS LENGTH PRICEmany respects and are broadly based on the OECD ▲ ● AS PER SEC 92 C For apparentTransfer Pricing Guidelines for Multinational Enterprises mistakes in Draftand Tax Administrations (‘OECD Guidelines’). ▲ Assessment Order TRANSFER NOTICE UNDER SEC 92CA(2) ▲ Legislation introduced effective from April 1, 2001 ▲ PRICING APPEAL ASSESSEE ▲ Sec. 92 to 92F of Income Tax Act, Rule 10A to 10E OFFICER (TPO) REPLY BY ASSESSEE ▲Income Tax Rules, 1962, Circular No 12, Aug 23 2001,Circular No 14, Dec 24 2001, Administrative guidelinesMay 20 2003. ▲ ▲ Dispute Resolution Panel CIT(A) Provisions applicable only if there is aninternational transaction(s) [Section 92B] ‘between’ two ▲▲or more associated enterprises [ Sec. 92A]. ITAT As per Sec. 92B ‘international transaction’’ meansa transaction between two or more associated Transfer Pricing Methodsenterprises, either or both of whom are non-residents, Comparable Uncontrolled Price (CUP)in the nature of purchase, sale or lease of tangible or Where the price charged for goods, services orintangible property, or provision of services, or lending property transferred in a controlled transaction isor borrowing money, or any other transaction having compared to a CUT (comparable uncontrolleda bearing on the profits, income, losses or assets of suchenterprises and shall include a mutual agreement or transaction). The CUT acts as the benchmark forarrangement between two or more associated determining the ALP. It is the most direct way inenterprises for the allocation or apportionment of, or determining the Arms Length Price (ALP) The OECDany contribution to, any cost or expense incurred or to reports prefer this method among all methods if it canbe incurred in connection with a benefit, service or be used and such comparable data is available.facility provided or to be provided to any one or more Adjustments to CUP is allowable by taxationof such enterprises. authorities which include Credit Terms, volume of In the Finance Bill 2012 it is proposed to sales, logistics and other transaction costs etc to arriveretrospectively amend the term ‘international at the ALP.transaction’ to specifically include : The various practical difficulties in applying this ● Guarantees method are that there could be differences between ● Any debt arising during the course of business controlled and uncontrolled transactions in the nature (e.g. credit period on outstanding receivables); of volume of business, geographic market, timing of ● Business reorganisations or restructuring, transactions, product life cycle, intangibles branded irrespective of whether the same has an impact vs generic products etc. Also, accurate information like on current year’s profits, income, losses or assets. quality of products, various terms of transaction etc. Intangible properties including marketing intangibles, is not available in the public domain.human assets, technology related intangibles, etc. Internal CUP This amendment will take effect retrospectively Related party ▲from 1 April 2002 and will apply in relation to FY 2001-02 onwards. manufacturer Deeming provisions [Section 92B(2)] ▲ Unrelated party Transaction between an enterprise and a person(other than an associated enterprise) shall be deemedto be a transaction between two associated enterprises, External CUPif there exists a prior agreement or the terms of such a manufacturer Related party ▲international transaction are in substance determinedbetween one of these entities and the associated Non-related manufacturer Related party ▲enterprise of the other contracting entity514 The Management Accountant |May 2012
  • 11. COVER THEME VVF Limited vs. DCIT—(ITANo. 673 -MUM - 08) : C sells model A to X(a controlled transaction),It was held by the ITAT that the transaction of lending which, in turn, sells them to independent by the assessee by way of interest-free foreign Sales-force Training and warranty risk are borne by Xcurrency loan to its foreign subsidiaries, should be On the other hand, C sells model B to Dcompared with a company lending in foreign currency independent company which sells to independentto unrelated party. It was observed that the ICICI Bank retailers. C trains D’s sales-force and develops traininghad advanced foreign currency loan to the assessee at material for them free of cost, and bears all the costLIBOR plus 3%. This can be taken as an "internal CUP" and bears warranty the credit rating of subsidiary merges with the credit Both Xand D is tax resident of the same countryrating of the Parent. The comparison of interest should Markets of models of machinery A & B are samenot be benchmarked with the Cash Credit @ 14% givento the Assessee. X purchased 1,000 model A from C @1,000/ machine. Resale Price Method X sold the 1,000 model A to a number of The resale price method begins with the price at independent retailers @ 1,100/.which a product that has been purchased from anassociated enterprise is resold to an independent X spent Rs. 14,000 on developing its own trainingenterprise. This price (the resale price) is then reduced material and trained its own sales force on and theby an appropriate gross margin on this price (the warranty costs are Rs. 30,000.‘‘resale price margin’’) representing the amount out For calculation of ALP on transaction between Xof which the reseller would seek to cover its selling and C :and other operating expenses and, in the light of the X selected the transaction between C and D as afunctions performed (taking into account assets used comparable uncontrolled transaction.and risks assumed), make an appropriate profit. What The gross profit margin earned by D from the resaleis left after subtracting the gross margin can be of model B to independent retailers was found to beregarded, after adjustment for other costs associated 10%.with the purchase of the product (e.g. customs duties), Sales to third parties of ¥ (1,000 model A@ 1,100) = 1,100,000as an arms length price for the original transfer ofproperty between the associated enterprises. This Purchases from C 1,000 Model A @ 800) = 800,000method is most useful where it is applied to marketing Gross Profit = 300,000operations. An appropriate resale price margin is easy Functional analysis reflects a number of differencesto determine where the reseller does not add (Training Sales-force and warranty) between thesubstantially to the value of the product. In contrast, it controlled and the selected comparable uncontrolledmay be more difficult to use the resale price method transactions, which materially affect the gross marginto arrive at an arms length price where, before resale, —hence adjustments to the ALP is required.the goods are further processed or incorporated into a Arms length Gross Margin on the basis of sales ofmore complicated product so that their identity is lost Model B machines by C to of D @10% 110000or transformed (e.g. where components are joined Add :together in finished or semi-finished goods). Adjustments for functional and risk differences : Another example where the resale price marginrequires particular care is where the reseller contributes Training costs 14,000substantially to the creation or maintenance of Warranty costs 30,000intangible property associated with the product (e.g. Total adjustments 44,000trademarks or trade names) which are owned by an Adjusted gross profit 154,000associated enterprise. In such cases, the contributionof the goods originally transferred to the value of the Adjusted transfer price of model A from C to Xfinal product cannot be easily evaluated. = X net sales of model A – Adjusted gross profit X is the subsidiary of C, which is a multinational = 1,100,000 – 154,000 = 964,000parent company. Adjusted Arms Length transfer price for sales of C C has two similar models of machinery model A & to X = 964,000/ 1,000 = 964 /model Amodel B. Cost Plus Method Both models are similar in terms of properties, CP method begins with the costs incurred by aconstruction, production processes and functions and supplier of a product or service provided to anare comparable associated enterprise, and a comparable gross mark-The Management Accountant |May 2012 515
  • 12. COVER THEMEup is then added to those costs. This comparable gross NP margin of AE transaction established/mark up is determined by : compared with uncontrolled Transaction NP. Internal Comparable Transaction While CP and RP methods compare gross profit Where the cost plus mark up of the supplier in the margins, TNMM compares net profit margins TNMMcontrolled transaction is determined by the cost plus on a transactional basis and not on a companywidemark-up realized for these items between one party to basis.the controlled transaction and an independent Profit Split Methodenterprise in a comparable uncontrolled transaction, The Profit Split Method seeks to eliminate theor effect on profits of special conditions made or imposed External Comparable Transaction in a controlled transaction by determining the Where the cost plus mark up of the supplier in the division of profits that independent enterprises wouldcontrolled transaction is determined by the cost plus have expected had it undertaken the transaction.mark unrealized between two independent enterprises Steps for the application of the profit split method:none of which is party to the controlled transaction in The first step is to determine the total profit earneda comparable uncontrolled transaction. by the firm from a controlled transaction, not the total The Cost of Production is the starting point for this profits of the group as a whole.method. Comparability of COP is necessary forcomparison. Traditional Financial Accounting Systems This is generally the operating profit, before thedo not capture such cost, neither provides guidelines deduction of interest and taxes.for arriving at such cost leading to different bases being The second step is to split the profit between theadopted by companies. For this Cost Accounting parties based on the relative value of theirStandard (CAS) is the only imperative which gives a contributions to the controlled transactions,firm data base for such analysis .ICAI has issued such considering the functions performed, the assets used,standard and CMAs are best equipped to formulate and the risks (FAR) by each party in the controlledand certify such benchmarking which arise under the transaction, in relation to what independentCP method as a result of accounting practices parties would have received, ie benchmark withinconsistency—where the supplier in the controlled independent transactions and allocate profit on thattransaction treats a particular cost item as an indirect basis.cost (i.e. this cost item is accounted for as part of the The total profit could be allocated using one of thecost of sales), while the supplier in the selected following approaches:comparable uncontrolled transaction treats the samecost item as an operating expense (i.e. this cost item is 1. Contribution Analysis Approach : where thenot subtracted at the gross profit level). In such a case, total operating profit from a controlled transaction isand assuming that the aforementioned accounting divided between the associated enterprises basedpractice difference is the only difference between the upon the relative value of the functions performedtwo transactions, the gross profit in the comparable by each of the associated enterprises participatinguncontrolled transaction tends to be higher than the in the controlled transaction, supplemented asgross profit in the controlled transaction. much as possible by external market data that indicate Transaction Net Margin Method (TNMM) how independent enterprises would have divided profits in similar circumstances. This method was recommended by OECD inresponse to US Comparable Profits method (CPM). 2. Residual Profit Split approach : where theComparing the net profit margin relative to an operating profit of the controlled transactions isappropriate base such as costs, sales or assets realized divided between the associated the taxpayer in a controlled transaction with the This process is carried out in two stages:net profit margin realized by the same taxpayer, or by (a) Each of the parties to the controlled transactionan independent enterprise in a comparable is assigned a return to the basic functions that ituncontrolled transaction, NP margin with Associate performs (e.g. manufacturing or distribution).Enterprise established based on cost incurred sales Ordinarily, this basic return is to be determined byeffected, assets employed, etc. benchmarking to market returns achieved for similar NP margin in uncontrolled transaction is types of transactions by independent enterprises.calculated based on the same criteria. (b) The residual profit remaining after the first stage NP margin in uncontrolled transaction situations division would be allocated among the parties basedis adjusted to factor open market issues. on an analysis as to how this residual would have been516 The Management Accountant |May 2012
  • 13. COVER THEMEdivided between independent enterprises. Indicators seeks to allocate the integrated profits of a transactionof the parties contributions of intangible property on the basis of the actual relative contributions of thecould be particularly useful in this context. parties to the profit in light of what comparable X and Y are two associated enterprises in two independent enterprises would have sought to achievedifferent tax jurisdictions. Both manufacture the same in comparable circumstances. Thus it seeks to establishproduct. Both these companies make expenditure for a more objective measure of each of the parties’ profit.the creation of an intangible asset which both the CAS6 also lists out the same methods for Tangiblecompanies use to promote the product. X and Y Transactions and the appropriate methods forexclusively sell products to third parties. (it is also Intangibles. CAS 6 indicates that, for intangibles, CUPassumed that intangible cost is for the first year and or Resale Price method would be appropriate. Wherethese is no prior expenditure on this intangible). It is transfer of highly valuable intangible is involved profitpresumed that Profit Split is the best applicable based method (Profit split method or Transactional Netmethod. On market analysis of uncontrolled Margin method) is more appropriate.transactions, it is seen that such transactions earn a Sec. 92C of the Income Tax Act stipulatesreturn of 10% of the Cost and that the residual profit Computation of Arms Length Price by applying theshould be split in proportion to X and Y intangible asset ‘most appropriate’ method out ofexpenditure. 1. Comparable Uncontrolled Price (CUP) X Y X+Y 2. Resale Price Method (RPM)Sales 100 300 400 3. Cost Plus Method (CPM)Cost as per CAS14 60 95 155 4. Transaction Net Margin Method (TNMM) 5. Profit Split Method (PSM)Gross Profit 40 205 245 CAS 6 issued by ICAI provides guidelines on theIntangible asset exp 10 40 50 above.Operating profit 30 165 195 As per Income Tax Act, most appropriate methodReturn on similar transaction 12 19 31 referred above shall be applied, for determination ofwith uncontrolled entities arm’s length priceResidual Profit to be split 18 146 164 Options under proviso to Section 92 C (2)Intangible expenditure basis of 32.8 131.2 164 Where more than one price is determined by theResidual Profit Split most appropriate method the ALP shall be taken to beProfit for ALP 44.80 150.20 195.00 the arithmetical mean of such prices.Additional revenue as per ALP 14.80 OR Global Formulary Apportionment Method (GFA) If the variation between the ALP so determined and price at which the international transaction has actually This method is not accepted by OECD countries as been undertaken does not exceed five per cent of thewell as Indian Taxation regulations as a valid method latter, the price at which the international transactionof arriving at ALP. has actually been undertaken shall be deemed to be A global formulary apportionment method the arm’s length price.allocates the global profits on a consolidated basis (Amended by the Finance (No. 2) Act, 2009)among the associated enterprises in different countrieson the basis of a predetermined formula. [Section 92C]. There are three essential steps to apply a global The Finance Bill 2011 had proposed that instead offormulary apportionment method : a variation of 5 percent, the allowable variation would 1. Determining the unit to be taxed in including AE be such percentage as may be notified by Central Government in this behalf. The Finance Bill 2012 has 2. Determining the global profits provided an upper ceiling of 3 percent as the tolerance 3. Establishing the formula to be used to allocate range for determination of the ALP.the global profits of the unit. This formula is to be basedon combination of costs, assets, payroll, and sales. The same shall be effective from 1 April 2013, and shall apply in relation to FY 2012-13 onwards. The GFA allocates the total profits of the groupbetween parties on the basis of an arbitrary Comparability and Benchmarking key to Transferpredetermined formula, based on weighing of relative pricelabor costs, relative capital employed, and/or other The principle of comparability is fundamental inrelative factors. By contrast, the profit split method the determination of arm’s length transfer prices. ThisThe Management Accountant |May 2012 517
  • 14. COVER THEMEis due to the fact that the price or profit of an ➢ Assets (both tangible and intangible) employeduncontrolled transaction is used as a benchmark by each party to that transactionagainst which the price or profit of a controlled ➢ Risks borne by each party to that transaction.transaction is to be evaluated. The comparison 3. Contractual Termsconducted between controlled and uncontrolled Contractual terms play in defining, explicitly ortransactions on the degree of similarity particularly in implicitly, how the responsibilities, risks, and benefitsregard to the characteristics of the property or services are to be divided between the parties in a particulartransferred, and the functions performed in each of transaction.the transactions taking account of the assets used andrisks assumed, is very critical in arriving at the Arms Contractual terms include :Length Price, and adjustments, if any, have to be ➢ Sales or purchase volumecarried out for comparability in arriving at ALP. ➢ Working Capital In a recent case relating to Sapient Corporation ➢ Financing—direct/indirectPvt Ltd the Delhi Bench of ITAT ruled that if loss ➢ Collaterals for transactionsmaking comparables are excluded from comparison, ➢ Contract durationcomparables with superprofits will also have to be ➢ Delivery termsexcluded from comparison. The decision reteriorates ➢ Credit and payment termsthe importance of proper FAR analysis for the purpose ➢ Terms governing the provision of warrantiesof ensuring that functional comparability is the ➢ Terms governing the right to updates, orprimary basis of selection of comparable companies. modifications The OECD Transfer Pricing Guidelines describe ➢ Terms allocating the different risks, such as thethe following as the major factors determining exchange rate risk, inventory risk, etc.comparability : 4. Economic Circumstances 1. Characteristics of Property or Services Economic factors are recommended by the OECD According to the OECD Transfer Pricing Transfer Pricing Guidelines to be considered inGuidelines, the most important characteristics to be measuringexamined in analyzing this factor include, but are not ➢ market comparabilitylimited to, the following : ➢ Geographic location (a) In the case of transfers of tangible property: ➢ Size of the markets ● Physical features of the property ➢ Extent of competition in the markets and the ● Property quality and reliability, and relative competitive positions of the buyers and ● Property availability and volume of supply. sellers ➢ Credit Terms (b) In the case of provision of services: ➢ Availability of substitute goods and services ● The nature and extent of the services. ➢ Levels of supply and demand in the market as (c) In the case of intangible property: a whole and in particular regions ● Form of transaction (e.g. licensing or sale) ➢ government regulation of the market ● Type of intangible (patent, trademark, or ➢ Costs of production, including the costs of land, knowhow) labor, and capital — Duration and degree of protection, and ➢ Transport costs — Anticipated benefits from the use of the ➢ Level of the market (e.g. retail or wholesale) property. ➢ Date and time of transactions 2. Functional Analysis ➢ Business, economic and product cycles; etc. Functional analysis is an analysis of the functions 5. Business Strategiesperformed (taking into account assets used and risks Business strategies must be examined in determiningassumed) by associated enterprises in controlled comparability for transfer pricing purposes.transactions and by independent enterprises in Business strategies would take into account manycomparable uncontrolled transactions. aspects of an enterprise, such as innovation and new Three main aspects in any transaction is analysed in product development, degree of diversification, riskfunctional analysis : aversion, assessment of political changes, input of ➢ Functions undertaken by each party to a existing and planned labour laws, duration of transaction and the economic significance of arrangements, and other factors bearing upon the daily such functions conduct of business. Such business strategies may need518 The Management Accountant |May 2012
  • 15. COVER THEMEto be taken into account when determining the (j) a record of the actual working carried out forcomparability of controlled and uncontrolled determining the arm’s length price, including detailstransactions and enterprises. of the comparable data and financial information used Documentation requirement to be fulfilled by in applying the most appropriate method, andthe company as per Sec. 92D of Income Tax Act and adjustments, if any, which were made to account forRule 10D of Income Tax Rules differences between the international transaction and Documentation requirement to be fulfilled by the the comparable uncontrolled transactions, or betweencompany as per Sec. 92D of Income Tax Act and Rule the enterprises entering into such transactions.10D of Income Tax Rules : (k) the assumptions, policies and price negotiations, (a) a description of the ownership structure of the if any, which have critically affected the determinationassessee enterprise with details of shares or other of the arm’s length price.ownership interest held therein by other enterprises. (l) details of the adjustments, if any, made to (b) a profile of the multinational group of which the transfer prices to align them with arms length pricesassessee enterprise is a part along with the name, address, determined under these rules and consequentlegal status and country of tax residence of each of the adjustment made to the total income for tax comprised in the group with whom (m) any other information, data or document,international transactions have been entered into by the including information or data relating to the associatedassessee, and ownership linkages among them. enterprise, which may be relevant for determination (c) a broad description of the business of the of the arm’s length price.assessee and the industry in which the assessee The above documentation requirements is notoperates, and of the business of the associatedenterprises with whom the assessee has transacted. mandatory where the aggregate value, as recorded in the books of account, of international transactions (d) the nature and terms (including prices) of entered into by the assessee does not exceed one croreinternational transactions entered into with each rupees.associated enterprise, details of property transferredor services provided and the quantum and the value Advance Pricing Agreement (APA) underof each such transaction or class of such transaction. Transfer Pricing Regulations in the Union Budget (e) a description of the functions performed, risks of year 2012-13assumed and assets employed or to be employed by An APA is an agreement between a taxpayer andthe assessee and by the associated enterprises involved at least one tax administration on an appropriatein the international transaction. transfer pricing methodology for a related party (f) a record of the economic and market analyses, transaction. This agreement applies over a fixed periodforecasts, budgets or any other financial estimates of time. Unilateral APA is an agreement between aprepared by the assessee for the business as a whole taxpayer and the tax administration of the countryand for each division or product separately, which may where it is subject to taxation. A bilateral or multilateralhave a bearing on the international transactions APA is between the taxpayer, the tax administrationentered into by the assessee. of the country where it is subject to taxation and one (g) a record of uncontrolled transactions taken into or more foreign tax administrations.account for analysing their comparability with the The introduction of Advance Pricing Agreementinternational transactions entered into, including a (APA) under Transfer Pricing Regulations in the unionrecord of the nature, terms and conditions relating to budget of year 2012-13 is a positive step to reduce theany uncontrolled transaction with third parties which litigation as it will be based on bilateral understandingmay be of relevance to the pricing of the international between two countries wherein it has been proposedtransactions. to be valid for a maximum of consecutive 5 years unless (h) a record of the analysis performed to evaluate there is a change in provisions of the Code having acomparability of uncontrolled transactions with the bearing on the international transaction.relevant international transaction. It is pertinent to note that unilateral APAs are not (i) a description of the methods considered for recognised by a foreign tax authority and, thereby, thedetermining the arms length price in relation to eachinternational transaction or class of transaction, the risk of double taxation would still exist, if the foreignmethod selected as the most appropriate method along tax authority does not agree with the method ofwith explanations as to why such method was so computing the arm’s-length price (ALP).selected, and how such method was applied in each However, in case of bilateral/multilateral APAs,case. all the tax authorities involved in the coveredThe Management Accountant |May 2012 519
  • 16. COVER THEMEtransactions including the Indian and foreign tax attempt to attribute profits to a PE transfer pricingauthorities agree to the ALP of the covered transaction documen-tation should be maintained andand, thereby, the MNCs avoid the burden of double benchmarking should be done in a manner wherebytaxation. the Functions performed, Assets utilised and Risk Introduction of the APA legislation would bring assumed (FAR) of both the foreign entity and Indianabout certainty, clarity of opinion, and other benefits entity are taken into corporate India. The APAs offer better assurance Tax rate differential exists between countries andon transfer pricing methods and are conducive in companies take that into account during their astuteproviding certainty and unanimity of approach. tax planning process. Improper Tax planning vis-a-vis Strategic Implications of setting of Proper Arms tax liability on transfer pricing can lead to marginsLength Price going hayware as companies in these days of intense competition operate in wafer-thin margins only. For any decision of investment the Tax liability ofthe principal outside India and the tax liability of the Role of CMA and ICAI in Transfer Pricingcompany in India needs to factor in the Transfer Pricing ICAI has issued Transfer Pricing Guidelines inregulation in force to avoid future legal tussles and 2002. The Cost Accounting Standards 1-4 issued byalso to protect the profitability envisaged in the ICAI has great relevance is arriving at ALP in Transferviability of the proposals. These needs to be examined Price :in details during assessment of the viability of the CAS No. Title Detailsproject itself along with cost management tools to fine CAS1 Classification of Cost For preparation of Cost Statementstune the tax strategy with the costing of the product CAS2 Capacity Determination For determination of capacityand transfers. CAS3 Overheads For Collection, Allocation, Bombay High Court, in case of SET Satellite Apportionment and Absorption(Singapore) Pte Ltd (218 CTR 452), in line with of overheadsthe Supreme Court decision in Supreme Court CAS3 Overheads To bring uniformity and consis-judgement in case of DIT (Intl Taxation) vs. Morgan (Revised 2011) tency in the principles andStanley and Co Inc (292 ITR 416) has held that if the methods of determining thecorrect arm’s length price is applied and paid, then Overheads with reasonablenothing further would be left to be taxed in the hands accuracyof the foreign enterprise. The Bombay High Court has CAS4 Cost of Production for To determine the assessable valuerestored the CIT(A) order in the taxpayer’s case and Captive Consumption of excisable goods used for captive consumptionheld that in case the agent is remunerated atarm’s length by the foreign principal, the tax liability All the Five methods mandated by Income Tax Act,of the foreign principal (which would arise in case it India, requires as an input detailed cost accountingis regarded to have a PE in India) would stand data/information, especially in respect of adjustmentsextinguished. to be incorporated with respect of controlled and Where the transactions are held to be at arms uncontrolled transactions to make them comparablelength, nothing further can be attributed to the PE, to arrive at the ALP. Financial Accounting system doesprovided that the transfer price takes into account all not capture the data or give the information Product-the risktaking functions of the foreign enterprise. Thus, wise, Cost poolwise,Cost driverwise, Cost centerwiseassessment of PE gets extinguished only if the neither the financial audit checks the veracity of thefollowing two conditions are cumulatively met : same, it concentrates on proper booking of expenditure The associate enterprise has been remunerated on and proper representation in Final Accounts focusedarm’s length basis, and By FAR (Functions performed, on investors.Assets utilised and Risks assumed) analysis of Indian However, the regulatory requirements, speciallyand foreign enterprise. with regards to Transfer Pricing, cannot be met by Nothing more can be attributed to PE liability of Financial Accountants. This requires proper costforeign company in India and may not be extinguished accounting system and the information generatedunless the transfer pricing takes into account the FAR needs validation by conducting Cost Audit by CMAs.analysis of Indian company as well as foreign The Revenue administration as well as the companiescompany. will find such information handy in dealing with This needs to be kept in perspective while arriving Transfer Pricing Arms Length Price of Permanent Establishments in Presently this data is not readily available—India, otherwise the Revenue Department may could (contd. to page 527)520 The Management Accountant |May 2012
  • 17. COVER THEME International Transfer Pricing : The Current Landscape in India Dr. Sujit Kumar Roy Pallab Pyne Associate Professor & Head of the Department of Accountancy Guest Faculty Goenka College of Commerce and Goenka College of Commerce and Business Administration, Kolkata Business Administration, KolkataIntroduction and benefits, the associated risks, the feasibility of available options and legal barriers in the host country,M ultinational corporations (MNCs) are not new phenomenon, but since the World War for example—it oversees a sequence of activities from II (1939-1945), their spectacular rise has procurement of inputs, through manufacturingconsiderably reshaped both the global economy and operations to distribution, sales and after-sales services.the world politics (the political roles played by some In addition, firms undertake activities—such as ITAmerican MNCs in the 1970s may be recalled). With functions or R&D—which support all parts of the valuethe intensifying force of globalization, the influence of chain (UNCTAD 2011).the MNCs in the world economy has further deepened Pricing Conundrumso much that 80% of the world’s industrial production One of the most difficult, and controversial as well,is said to be generated by 1,000 largest MNCs and as areas in the relationship between the MNCs and theirmuch as one third of the total US international trade is overseas subsidiaries has been the pricing issue of theconducted by and within US owned MNCS by means goods, services and technologies used in theof intercompany transactions (Truitt, 2006 : p.161). By production and distribution of cross-border transactionsome recent estimates, MNCs’ production worldwide of goods and services.generated value-added of approximately $16 trillion Indeed, the plethora of literature on the subject hasin 2010, about a quarter of global GDP, while the identified intercompany pricing of goods and servicesforeign affiliates of MNCs accounted for more than 10 as one of the most significant and perplexing issuesper cent of global GDP and one-third of world exports faced by the MNCs (Weekly 1992; O’ Connor, 1997).(UNCTAD, 2011). If we add to this figure the trade Such intercompany pricing is also used as a vehicle tothat takes place between MNCs and other unaffiliated achieve several other objectives such as:firms (which are, more often than not, non-equitymodes of international production by the MNCs), ● Moving funds internationallywhich accounted for $2 trillion in international sales ● Minimizing tariffsin 2010, then MNCs are involved in about two-thirds ● Avoiding exchange control quotasof world trade (UNCTAD, 2011; Wittendorff, 2010 ). ● Minimizing exchange risksNo doubt that these MNCs are the keystone of the ● Increasing share of profits from joint venturesglobal economic edifice and they will surely maintain ● Optimizing managerial incentives andthat position in the global village that the world is now. performance evaluation; andBecause of their unique position and core competencies ● Minimizing taxes.these MNCs are able to coordinate their activities The bare-bones of the aforesaid objectiveswithin a global value chain either through their direct influencing MNC pricing policy, more specificallysupervision and control—leading to cross border FDI referred to as transfer pricing issues’, are well-—or through non-equity mode of production in a discussed in OConnor (1997). For example, O’ Connorcontractual arrangement but nonetheless exercising explains that, if a MNC wants to move fund out of arelative bargaining power over those host-country country, it can charge higher price to its foreignfirms. affiliate, or can do the opposite when the objective is While the ultimate ownership and control to supply fund to the affiliate. Similarly, affiliatesconfiguration of a global value chain is the outcome of wishing to pay lower import duty may follow lowa set of strategic choices by the MNC—the relative costs mark-up policy. If the MNC under-prices the shipmentThe Management Accountant |May 2012 521
  • 18. COVER THEMEof goods to the foreign affiliate, it can effectively offset Treasury of approximately £11.8 billion and global taxthe volume effects of exchange quotas. Exchange rate revenue lost to tax havens exceeded US$255 billion perfluctuation is a zero-sum game in the sense that loss of year (see Wikipedia article on Tax Haven).one party results in gain to the other party by equal There are number of tax havens around the world,measure; but depending on the accounting treatments but the Cayman Islands—a tiny British dependencyand tax laws of the respective party it can have of some 54,000 population in the Caribbean Sea—hasdifferent effect on different party. The profits from a come to the fore in connection with a tax disputejoint venture similarly can be made to vary depending between the Government of India and Vodafoneon the transfer price charged to the affiliates. When International Holdings B.V. The tax dispute, whichfirms are organised as decentralized profit centres, involved intricate chain-holdings of severaltransfer pricing between centres can be a major international and Indian companies, boils down to thedeterminant of corporate performance. right of the Indian Government to tax an overseas Since MNCs and their affiliates are located in transaction between three foreign entities, namely the Vodafone International holdings (resident for taxdifferent tax jurisdictions having different tax rates, purposes in the Netherlands), CGP Investmentstransfer pricing is also influenced by tax considerations (Holdings) Ltd., (a company resident for tax purposes(Feinschreiber and Kent, 2003). Income tax payments in the Cayman Islands) and The Hutchison Groupare significant costs for most MNCs and transactions (Hong Kong-based). In a merger/acquisition type ofbetween affiliated entities are an important part of deal between Vodafone and Hutchison group in thethese income tax exposures (ibid). Cayman Island-based CGP Investments, the In a typical situation, where tax rates are same in underlying assets of one Indian company also gottwo countries, no special advantage accrues to the transferred to Vodafone International. The Govern-MNCs from tax minimization perspective from one ment of India slapped a Rs. 12,000 crores tax notice onmark up policy than the other. But when the tax rates Vodafone, but in a wending course of protracted legalare different, the MNCs are likely to pursue a high battle the Indian Apex Court gave verdict in favourmark up policy in order to shift profits from a higher Vodafone, reversing the earlier judgment of theto a lower tax jurisdiction. Quite logically, in an Bombay High Court favouring the Indian Government.increasingly globalized economy, the decisions of No doubt the judgment of the Supreme Court is ingovernments regarding corporate taxation affect the consonance with the strict interpretation of thedecisions of multinational firms regarding where to language used in the Income-tax Act, 1961, but to getlocate economic activity and where to book profits at the nub of things (which could not have been done(Clausing, 2009). This, in turn, affects the governments, under the existing provisions due to the unforeseenleaving a wide chasm in terms of revenue they get and limitations of legal wordings) the Government haswhat they would have got in a tax-neutral situation. made amendments to the Act retrospectively from 1962, inviting scathing attack from the media as well The problem of lost revenues from taxation is as from the Industry. While the Vodafone issue couldfurther aggravated by the incidences of ‘‘Tax Havens’’, be a topic of healthy academic debate, in the contextwhich, in combination with low rates of taxes of tax haven, the identity and the ‘‘reputation’’ of the(sometimes no tax at all) help the unscrupulous Cayman Islands needs some to avoid taxes by means of various In the recent past this tax haven was the subject ofsubterfuges. These tax havens have in the recent past an investigation by the United States Governmentrisen to the fore of the fiscal policy debate and have Accountability Office (GAO, 2008) entailing thebeen identified as one of the root causes of many of enforcement challenge for the US tax authorities. Thethe shortfalls plaguing the governments of the world. report of the GAO, among several other things,These tax havens had become the major plank of provides some interesting facts about one UglandPresident Clinton’s 1992 presidential campaign as he House—a tiny building owned by Maples and Calder,wanted to ensure that foreign investors pay their fair a law firm and company-services provider that servesshare of US taxes (Kaufman, 1998). A recent study as registered office for the 18,857 entities it created as(Clausing, 2009), which sought to show the of March 2008 on behalf of a largely internationalimplications of tax avoidance on the US economy, clientele. The Report also mentioned that 96 percentrevealed that between 1982 and 2004, income shifting of those entities were exempt companies, exemptincentives in the tax havens cost the U.S. government limited partnerships, and exempt trusts. They wereapproximately 35 percent of corporate income tax prohibited from trading in the Cayman Islands withrevenues, involving an amount in excess of $ 60 billion any persons, firm, or other corporation except inin 2004. According to another source, the 50 largest furtherance of their business that is carried on outsidecompanies in the FTSE 100 were depriving the UK the Cayman Islands. Needless to mention that Cayman522 The Management Accountant |May 2012
  • 19. COVER THEMEIslands and its ilk are the causes of headaches for the treatment of corporate group formations (Wittendorff,governments throughout the world, inviting stricter 2010). Because the arm’s length principle putsenforcement mechanism in the form of transfer price associated and independent enterprises on a moreregulations and General Anti Avoidance Rule (GAAR). equal footing for tax purposes, it should promote the Arm’s length principle for Transfer Pricing growth of international trade and investment and thus lead to fair international income allocation. As globalization continues to make inroad into theglobal economy, the fiscal authorities all over the world Transfer Pricing Techniquesare getting increasingly concerned to get their Although the law relating to transfer pricing islegitimate share of tax revenue from MNC activities different in different countries, they have large degreein their territories. The OECD Guidelines for of similarity with the OECD guidelines, andMultinational Enterprises (OECD, 2008), therefore, irrespective of the minor differences, they all aim atrequired the MNCs to provide the relevant authorities achieving a comparability test for the transactionsthe information necessary for the correct determination between the MNCs and the associated enterprises.of taxes to be assessed in connection with their Indeed, the OECD has reiterated its principles thatoperations and conforming transfer pricing practices when transfer pricing does not reflect market forcesto the arm’s length principle. and the arm’s length principle, the tax liabilities of the associated enterprises and the tax revenues of the host Arm’s length pricing (ALP), which is now an countries could be distorted. Therefore, OECD memberinternational consensus, is a method of stripping the countries have agreed that for tax purposes the profitspossible camouflage embedded in the transfer pricing. of associated enterprises may be adjusted to correctIt is set forth in Article 9 of the OECD Model Tax any such distortions and thereby ensure that the armsConvention as : length principle is satisfied (OECD, 2010: p. 32). Where ‘‘conditions are made or imposed between Accordingly, the OECD has devised a number ofthe two enterprises in their commercial or financial methods for transfer pricing with a view to achievingrelations which differ from those which would be made arms length price. However, it is important to bear inbetween independent enterprises, then any profits mind that the need for the aforesaid adjustments towhich would, but for those conditions, have accrued approximate arm’s length transactions arisesto one of the enterprises, but, by reason of those irrespective of any contractual obligation undertakenconditions, have not so accrued, may be included in by the parties to pay a particular price or of anythe profits of that enterprise and taxed accordingly’’ intention of the parties to minimize tax. Thus, a tax(OECD, 2010). adjustment under the arms length principle would not Simply stated, ALP is the price for the hypothetical affect the underlying contractual obligations fortransaction, which the associated enterprises would non-tax purposes between the associated enterpriseshave agreed if they would have made comparable (ibid : p.31).transactions on the open market rather than the The ‘‘standard’’ transfer pricing methods includecontrolled transaction that was in fact made. The arms the following :length principle involves a valuation of controlled ● Comparable Uncontrolled Price (CUP) Method :transactions where the yardstick is the market The OECD (2010) has defined this method as thattransaction. Transfer pricing, therefore, demands a ‘‘compares the price for property or servicescritical economic analysis to show how transfer price transferred in a controlled transaction to the pricehas been determined and to substantiate that it charged for property or services transferred in acomplies with the arms length principle. It is, in fact, comparable uncontrolled transaction in comparablean exercise in comparability which is at the heart of circumstances’’. CUP, by its very definition,transfer pricing. The question usually revolves around contemplates an observable market price for thethe factors that determine the tested transaction and property and services in question. Therefore, as longhow these can be compared with the independent but as this condition is fulfilled, this is the most direct andequivalent situations observed between arms-length reliable way to apply the arms length principle. Theparties (Zetter et al, 2009). method is commonly used to calculate arms length From the point of view of taxation policy the choice interest rates on intercompany loans.of arms length principle is justified by the fact that it ● Cost-plus Method : This method involvescontributes tax equality and neutrality between the selection of comparable business and calculation of anassociated enterprises and an independent enterprise. appropriate profit as a mark-up on the cost inputs ofThe principles of equality and neutrality are the core the representative firm. According to the OECD, thisvalues of the tax law and constitute the basis for tax method is likely to be most useful where semi-finishedThe Management Accountant |May 2012 523
  • 20. COVER THEMEgoods are sold between associated parties, where rules relating to the ALP are not only different inassociated parties have concluded joint facility different countries, but also the methodologies behindagreements or long-term buy-and-supply arrange- the ALP are not straightforward and, therefore, notments, or where the controlled transaction is the amenable to unique interpretations by the tax payerprovision of services. and the tax collectors. In theory, ALP intends to look ● Resale Price Method : The OECD has defined it to the identical transaction under the sameas a transfer pricing method based on the price at which circumstances between uncontrolled entities. But ina product that has been purchased from an associated reality such identicalness rarely exists. As a practicalenterprise is resold to an independent enterprise. The matter, therefore, the determination of ALP, more oftenresale price is reduced by the resale price margin. What than not, is based on ‘‘comparable transactions’’ underis left after subtracting the resale price margin can be ‘‘comparable conditions’’, making it more of a fact-regarded, after adjustment for other costs associated intensive process and judgmental in nature. In thewith the purchase of the product (e.g. custom duties), process, the difference in perceptions and economicas an arm’s length price of the original transfer of assumptions lead to disputes and harsh transferproperty between the associated enterprises. pricing audits from the aggressive Revenues which are vying with each other to aggrandize its fair share of ● Profit Split Method : This method is mainly ‘‘legitimate tax’’. Countries which are noted for suchapplicable in international transactions involving aggressive transfer pricing policies include, in ordertransfer of unique intangibles or in multiple of rank, Japan, India, China, Canada and the USinternational transactions which are so interrelated that (KPMG, 2011). For instance, at the end of the sixththey cannot be evaluated separately for the purpose cycle of transfer price audit in India, the Income-taxof determining the arms length price of any one Department has made transfer price adjustments totransaction. Under such circumstances the profits split the extent of INR 20,000 crores. If all the six transfermethod identifies the combined profit to be split for price audits conducted since its inception in 2003 arethe associated enterprises from a controlled transaction taken into consideration, the cumulative value of theand then splits those profits between the associated adjustments would be well above INR 50,000 croresenterprises based upon an economically valid basis (PWC, 2011). The worst part of the story is that morethat approximates the division of profits that would than 99 per cent of these cases—that also involvehave been anticipated and reflected in an agreement disputes relating to royalty payments to principals—made at arm’s length. are under litigation. These include some of the top ● Transactional Net Margin Method : As a variant global companies such as Microsoft, Hindalco, Maruti,of the profit split method, this method examines the GE Capital and profit relative to an appropriate base (e.g. costs, The hazardous procedure of ALP also carries withsales, assets) that a taxpayer realizes from a controlled it huge penalties for non-compliance—rangingtransaction. The net profit margin realized by the between 40-50 percent of the tax due in the case ofenterprise or by an unrelated enterprise from a United States; and at least 2 percent of the internationalcomparable uncontrolled transaction or a number of transactions in the case of India. Due to such inherentsuch transactions is also computed and this is taken risk of ALP, in 1991 Apple Computer became the firstinto account to arrive at an arms length price in relation company which entered into an advance pricingto the international transaction with the associatedenterprise. agreements with two tax authorities, the United States and Australia, to determine how its related party ● Unspecified Methods : Apart from the ‘‘standard transactions should be valued for tax purposesmethods’’ described above, the literature on (OConnor, 2011). In the same year, the United Satesinternational transfer pricing has identified a adopted formal advance pricing procedures onmultiplicity of other methods to arrive at arm’s length transfer pricing, which was soon emulated by Japan,price. Such methods attempt to provide information the UK, Canada, Mexico, Australia, Germany, andon the prices or profits that the controlled entities could some Scandinavian countries. Since then both thehave realized by choosing a realistic alternative to the number of countries and the number of companiescontrolled transaction. entering into APA agreements have been rising Advance Pricing Agreements and Safe Harbours steadily. As of now, more than 900 companies have While the concept of arm’s length pricing is well- entered into advance pricing agreements in the Unitedaccepted both by the multinational taxpayers and the States. The corresponding number of advance pricingtaxing authorities around the world, the fact remains agreements in Japan is about 600, 350 in Australia, 250that it is fraught with several practical obstacles. The in China and 150 in Canada (KPMG, 2011). With the524 The Management Accountant |May 2012
  • 21. COVER THEMErising number of transfer pricing disputes and the by the revenue authorities. According to the OECDescalating tax war among the nations, advance pricing (2010: Para 4.94), ‘‘a safe harbour is a statutoryagreements are fast becoming the new order of the provision that applies to a given category of taxpayersinternational transfer pricing regime. and that relieves eligible taxpayers from certain An APA is basically a contractual arrangement with obligations otherwise imposed by the tax code bythe tax administration of one or more countries to substituting exceptional, usually simpler obligations’’.resolve potential tax disputes in an amicable and The positive aspects of safe harbour include certaintycooperative manner. The OECD (2010) has defined the with respect to tax obligations and administrativeterm as ‘‘An arrangement that determines, in advance simplicity. But the most important aspect of safeof controlled transactions, an appropriate set of harbour is of course compliance relief for a designatedcriteria (e.g. method, comparables and appropriate class of taxpayers who may be subjected to, instead of a specific transfer pricing method, a sort ofadjustments thereto, critical assumptions as to future presumptive for the determination of the transfer pricingfor those transactions over a fixed period of time’’. Like APAs, safe harbours are also not without itsAccording to the Internal Revenue Service (USA), flipside; it is arbitrary and it sacrifices accuracy inAPAs are designed to resolve actual or potential reporting arms length price, but this demerit is offsettransfer pricing disputes in a principled, cooperative against the simplicity and compliance relief that themanner, as an alternative to adversarial process. It is a taxpayer is accorded. It also insulates the taxpayerbinding contract between the taxpayer and the tax against the hazards of arduous transfer price audits.administration of one or more countries (unilateral Evolving Landscape of Transfer Pricing in IndiaAPA and multilateral APA) by which the latter agrees At a time when India is being considered anot to seek transfer pricing adjustments for a covered centripetal force of globalization and MNCs aretransaction, provided that the taxpayer follows the making beeline to enter the vast Indian market,agreed transfer pricing method. especially in the lucrative sectors like multi-brand APAs have several advantages over the traditional retailing, the country seems to be caught between thetransfer pricing system. From the taxpayers’ point of devil and the deep blue seas over its transfer pricingview, it eliminates the uncertainty, provided the critical policies. The Vodafone case is not just an isolated issue,conditions are met. In the uncertain world of transfer but the general uncertainty over international taxpricing, it provides certainty to help the tax payer with matters is manifest in the fact that at least INR 30,000a definite tax outcome and liability. As against the crores of tax revenues involving some 1,200 companiespredatory transfer pricing ambience, it promotes a non- are locked in transfer pricing litigations pending beforeadversarial spirit and environment between the courts, income-tax tribunals and tax appealtaxpayers and the tax administration, leading to free commissioners. India now has the dubious distinctionflow of information for mutual benefits. Costly and of having the most international transfer price disputes.time-consuming examinations and litigation of major However, the recent developments in transfer pricingtransfer pricing issues for taxpayers and tax matters are seen as a bellwether of change of Indiasadministrations may also be avoided. ramshackle transfer pricing policy. Bilateral and multilateral APAs substantially Although India’s foray into a systematicreduce or eliminate the possibility of juridical or international transfer pricing policy is traced to theeconomic double or non taxation since all the relevant Finance Bill, 2001, its attempt towards tackling the transfer pricing problems can be traced far back intocountries participate in the process. the Income-tax provisions contained in the Act of 1922. But APA is not without its pitfalls. It is a time- Section 42(2) of the said Act, which corresponded toconsuming process and can take significant amount Section 92 of the Income-tax Act of 1961, dealt withof time and resources as compared to a tax audit. A the provisions relating to computation of income fromunilateral APA may sometimes take 12 to 18 months, transaction with non-residents. In Mazagoan Dock Ltdwhile a bilateral APA may involve more than 24 v. CIT [34 IT 3368], in which two non-resident shippingmonths. Obviously, such an arrangement may not be companies entered into an agreement with a residentsuitable for small organizations and non-repetitive company for providing repair services to the parentnature of transactions. In contrast to APA, which is a bodies free of cost, was held by the Supreme Court totaxpayer-specific arrangement, safe harbour is general be the income of the resident company (See Palkhivalain nature. Designed as a comfort mechanism, safe and Palkhivala, 1990 : pp. 1004-05). Section 92 of theharbours provide for circumstances in which a certain Income-tax Act, 1961 (the old section before it wascategory of taxpayers can follow a simple set of rules replaced by the new Section 92 w.e.f. the assessmentunder which transfer prices are automatically accepted year 2002-03), which was a transmutation of sectionThe Management Accountant |May 2012 525
  • 22. COVER THEME42(2) of the old Act, brought about similar charges to ● Safe Harbour Rules : with retrospective effectthe resident assessee and required the Assessing from the assessment year 2009-10, Finance (No.2) ActOfficer to ‘‘determine the amount of profits which may has inserted Section 92CB to provide for safe harbourreasonably be deemed to have been derived there rules for computing arms length price. The CBDT hasfrom’’. The transfer pricing provisions (if it can be at been empowered to make rules, which are likely toall called by that name at this juncture) under the old roll out anytime soon.provision of the Act was no better than the guessti- ● Dispute Resolution Panel (DRP) : Transfermates of the Income-tax department. However, in line pricing mechanisms, being subjective in nature, arewith the global trend, India made a new beginning with inherently prone to disputation and prolongedits transfer pricing policy when it was carved out of litigations. To instil confidence in the foreign investorsthe OECD guidelines and codified as law by the in India, Finance (No. 2) Act has inserted Section 144CFinance Act, 2001 (effective from the assessment year to provide for alternate dispute resolution panel. As a2002-03). The said Finance Act replaced the old Section result, unlike in the past, when the order passed by92 and in its place inserted a new Chapter X, containingeight sections, into the Income-tax Act 1961(viz. the Transfer Pricing Officer under Section 92CA wasSections 92, 92A, 92B, 92C, 92CA, 92D, 92E and 92F). binding, Section 144C has removed the straightjacketSubsequent developments include some major changes by providing for the DRP.made in the Income-tax Act in 2009 and in 2012. With As collegiums of three Commissioners of income-these developments, India now has more or less tax, the DRP would hear the dispute within a periodcomparable transfer pricing mechanism. of nine months. No tax demands will be raised on the An overview of the Indian transfer pricing taxpayer until the final order is passed by the DRP.mechanism is presented : DRP decisions are final and binding on the revenue authorities. However, if aggrieved, the taxpayer is ● Arm’s length pricing : Effective from theassessment year 2002-03, the sections mentioned in the entitled to appeal before a higher appellate authority.parenthesis above have been added to the Income-tax Important changes made in 2012Act to delineate the arms length pricing system for Finance Bill 2012, which is awaiting passage, hasinternational transactions. Section 92 requires every added further momentum to the transfer pricingassessee to compute income arising from international mechanism in India. The changes made by the Financetransactions with associated parties on the basis of Bill are reflective of the resolve of the government,arms length price. Section 92A defines exhaustively which is besotted with the problems of black moneythe meaning of associated parties, while the meaning and tax avoidance. Important changes made hereof international transactions is defined in Section 92B, include Advance Pricing Agreements (APA) under thewhich covers five types of transactions: loans or newly inserted Sections 92CC and 92CD; and Generaladvances; performance of personal services; use of Anti-avoidance Rule (GAAR) under Section 95. Thesetangible property; transfer of/use of intangible two issues were within the scheme of things in theproperty; and sale/purchase/lease of tangible proposed Direct Taxes Code (DTC), but the teethingproperty. The methods of computation of arms length problems with the DTC still remaining unresolved,price contained in Section 92C are in conformity with they have been included in the current Finance Bill tothe ‘‘standard methods’’ mentioned earlier. TheCentral Board of Direct Taxes (CBDT) has framed pre-pone implementations of these matters. Thedetailed Rules (Rule 10A, 10B and 10C) to define and provisions of APA are more or less in conformity withdetermine arm’s length price under Section 92C. those discussed above; GAAR intends to put a brake on aggressive tax planning by the foreign players as Transfer pricing in India requires an elaborate well as the domestic assessees. Under the provisionssystem of information and record keeping. The of GAAR, the tax administrations in India arerequirements of Section 93D, read with Rule 10D, arestringent enough. Also, an accountant’s report accoutered with wide discretionary powers.detailing the international transactions entered into by Conclusionthe assessee is to be furnished in accordance with the Finance Bill 2012 has made a few more amendmentsrequirements of Section 932E, Rule 10E and Form No. which have far-reaching consequences for the MNCs3CEB. and transfer pricing in India. First, Sections 9 and 195 Important changes made in 2009 have been amended to clarify that business located in International transfer pricing in India is in an India but owned by the foreign enterprises shall beevolutionary stage. Finance Act, 2009, has made the deemed to be situated in India and accordingly, sale offollowing additions to the existing transfer pricing assets of such enterprises shall fall within the ambit ofregulations “ the Indian tax. As a result of retrospective amendments526 The Management Accountant |May 2012
  • 23. COVER THEMEof these sections from 1.4.1962, Vodafone’s purchase of Avoidance and Tax Policy’’, National Tax Journal , Vol.Hutchison’s stake in Vodafone India and Birlas LXIl, No. 4 (December) : 703-25.acquisition of AT&Ts stake in Idea, which were not ■ GAO (2008) : Cayman Islands: Business and Taxtaxable previously, would be taxable in India. Second, Advantages Attract U.S. Persons and Enforcementthe clarification added to Section 9(1) (i) make payment Challenges Exist, U.S. Government Accountabilityfor software acquired from abroad as a royalty. The Office, Washington, DC.implication of this amendment is that foreign companies ■ Kaufman, Nancy H. (1998): ‘Fairness and the Taxationsupplying that software now will come within the of International Income’, Law and Policy in Internationalpurview of transfer pricing. Third, the amendment to Business, (winter), 145-203.Section 40A now empowers the Assessing Officers to ■ KPMG (2011): Global Transfer Pricing Review,decide on taxability of expenditure incurred in the of transactions with the group companies. This ■ OECD (2008): OECD Guidelines for Multinationalwill not only lead to higher taxes for the MNCs, but the Enterprises, OECD Publishing, Paris.wide discretionary powers enjoyed by the Assessing ■ OECD (2010) : OECD Transfer Pricing Guidelines forOfficers will make it a potential weapon against the Multinational Enterprises and Tax Administrations,MNCs. But India is not alone in fleecing the MNCs. OECD Publishing, Paris.China has recently hardened its transfer pricing ■ Palkhivala, N.A and Palkhivala, B.A. (1990): The Lawregulations, resulting in an explosion of transfer pricing and Practice of Income Tax, N.M. Tripathi (P) Ltd.,controversies. The Canadian tax administration has Bombay, (Eighth Edition, Vol. I).asked Merck, a leader in the healthcare industry, to pay ■ PWC (2011): Certainty in the Uncertain World of Transferadditional $660 million in taxes due to transfer price Pricing: White Paper on TPA in India,, while the company has disputed a further india.claim for $550 million. Hasbro, a toymaker, has faced ■ Truitt, Wesley B. (2006): The Corporation, Greenwooda demand from the Mexican authorities for an extra Presses : Westport.$98 million due to transfer price adjustments. In ■ UNCTAD (2011): World Investment Report 2011, UnitedGermany, there is a spate of transfer price audits with Nations, New York/Geneva.adverse consequences for the MNCs. The question in ■ Weekly, James K. (1992): ‘‘Pricing in Foreign Markets:particular is whether transfer pricing is the low hanging Pitfalls and Opportunities’’, Industrial Marketingfruit or not that the revenue-starved governments Management, 21 (2) : 173-79.would bend the branch at their sweet will to grab it. ■ Wittendorff, Jens (2010) Transfer Pricing and the Arm’sThis seems to be the conundrum of international Length Principle in International Tax Law, Kluwer Lawtaxation begging the answer from the experts. ❐ International, Netherlands. ■ Zetter, Martin et al (2009) : ‘‘Transfer Pricing and theReferences New Economics’’, International Tax Review, (Nov), 20(9).■ Clausing, Kimberly A. (2009): ‘‘Multinational Firm Tax [Gale Document Number: GALE|A213239923].(contd. from page 520)the record requirements of the Income Tax Act leaves along with input from Cost Audit Report bringingit to the companies to decide the principle on which out quarterly or half yearly benchmarking reportsit is dealt with, i.e., guidelines, basis of overhead customised for Transfer Pricing itself, making it aallocation, treatment of abnormal costs, treatment of repository of information and will be on help to allcapacity utilization in overheads etc leading to non- future TP transactions. Specialised courses and trainingcomparability of information available. programmes need to be organised to equip CMAs with Standardisation of Principles as started by an objective of developing and updating the transferICAI by issue of CAS needs to adopted by regulators pricing developments have a standardised database for TransferPricing. In spite of all the justifications which come Conclusionnaturally to CMA’s with respect to transfer pricing Transfer Pricing is a globally evolving area and withthe Accountant Report to be filed in Form 3CEB practice and further experience it will further be fine-cannot be done by CMA’s. This needs to be taken up tuned. Transfer pricing is not an exact science. It is aby revenue authorities bringing out the benefits matter of judgment and finding an answer. Thepresenting real life case studies. The revenue willbe having Cost Audit, Cost Accounting records and judgement element is bound to keep uncertainty andfiling return in Form 3 CEB. For Benchmarking further scope for improved analysis. CMA’s have aof similar transaction which it greatly required important role to play to make this more refined,for Transfer Pricing regulations ICAI needs to take up accurate and comparable analysis and the future insuch exercise with Income Tax (TPO) and industry, this area belongs to the CMAs. ❐The Management Accountant |May 2012 527
  • 24. COVER THEME Thin Capitalisation and Arm’s Length Pricing A Sekar Sudha G Bhushan B.Com., Hons, FCA, ACS B.Com., FCMA, ACS, LLB Gen Practising Chartered Accountant, Practising Company Secretary, Mumbai MumbaiCapital Structuring Both own funds and borrowed funds including long-term loans from financial institutions are used byT he most important decision for financial planners in a company is with respect to the most of the large industrial companies. Capital formulation of an ideal capital structure. The structure planning—initially and on continuing basis—capital structure of any company consists of a mix of is of great importance to any company, as it has adebt and equity. How much of the funds should be considerable bearing on its profitability. A wrongthrough equity and how much should be debt is a initial decision in this respect may prove quite costlytypical structuring decision. for the company. While deciding about capital structure, due attention should be paid to objectives Capital structure has to be determined not only at like profitability, solvency and flexibility. The choicethe time a company is promoted, but also later on as it of the amount of debt and other fixed return securitiesrequires funds from time to time. on the one hand and variable income securities, namely The initial capital structure should be designed very equity shares on the other, is made after a comparisoncarefully. The future structure will emerge out of the of the characteristics of each kind of securities andinitial structure. The company will require funds to after careful consideration of internal and externalfinance its activities continuously. Everytime the funds factors related to the companys operations. In realhave to be procured, the pros and cons of various life situations, compromises have to be madesources of finance have to be weighed and the most somewhere on the line between the expectations ofadvantageous source of financing has to be selected companies seeking funds and the expectations of thoseeach time. Thus the capital structure decision is a that supply them. These compromises do not changecontinuous ongoing decision and has to be taken the basic distinctions between debt and equity.whenever a company needs additional finance. Generally, the decision about financing is not of Generally, the factors to be considered whenever a choosing between equity and debt but is of selectingcapital structure decision is taken are : the ideal combination of the two. The decision on debt- equity mix is affected by considerations of suitability, (i) Leverage or Trading on equity risk, income, control and timing. The extent of (ii) Cost of Funds weightage that would be given to these factors will (iii) Cash flow vary from company to company depending on the (iv) Control characteristics of the industry and the particular (v) Flexibility situation of the company. There cannot perhaps be an (vi) Size of the company exact mathematical solution to the decision on capital (vii) Sector to which the company belongs structuring. Human judgement plays an important role (viii) Marketability including efficiency of financial in analysing the various aspects, before a decision on markets appropriate capital structure is reached. (ix) Tax considerations. High Gearing and Low Gearing Capital structure is the composition of various The term ‘‘capital gearing’’ or ‘‘leverage’’ normallysources of long-term finance in the total capitalisation refers to the proportion of relationship between equityof the company. These various sources of long term share capital including reserves and surpluses tofinance can be classified under two broad heads : preference share capital and other fixed interest (a) Own Funds bearing funds or loans. In other words, it is the (b) Borrowed Bunds. proportion between the fixed interest or dividend528 The Management Accountant |May 2012
  • 25. COVER THEMEbearing funds and non fixed interest or dividend capital is made up of a much greater proportion ofbearing funds. Equity share capital includes equity debt than equity, ie. its gearing or leverage, is too high.share capital and all reserves and surpluses items that This is perceived to create problems for two classes ofbelong to shareholders. Fixed interest bearing funds people :includes debentures, preference share capital and other ● consumers and creditors bear the solvency risklong-term loans. of the company, which has to repay the bulk of Capital Gearing can be defined as : ‘‘The mixture its capital with interest; andof debt and equity in a firms capital structure, which ● revenue authorities, who are concerned aboutinfluences variations in shareholders profits in abuse by excessive interest deductions.response to sales and EBIT variations.’’ An entity (which may be part of a group) may be Formula of capital gearing ratio : said to be thinly capitalized when it has excessive debt [Capital Gearing Ratio = Equity Share Capital/ in relation to its arms length borrowing capacity,Fixed Interest Bearing Funds] leading to the possibility of excessive interest deductions. An important parallel consideration is Capital gearing ratio is important to the company whether the rate of interest is one which would haveand the prospective investors. It must be carefully been obtained at arms length rate while comparingplanned as it affects the company’s capacity to from independent lender as a stand-alone entity.maintain a uniform dividend policy during difficulttrading periods. It reveals the suitability of a company’s In international transactions, the typical method ofcapitalization. But what it is suitable gearing tax avoidance employed is the use of a thinlyin a particular case depends upon the facts and capitalized subsidiary that borrows from the parentcircumstances. or an off-shore vehicle, with the lender being in a low tax jurisdiction. Apart from the financial and ‘‘commercial’’considerations, the decision of capitalization is alsogreatly influenced by tax considerations. There may XYZ B.Vbe situations when a company may not have access to ▲debt based on its financial strength, but because of tax Low tax Jurisdiction Lending of Moneyconsiderations may like to show and treat the finance from XYZ to ABC ▲ ▲received from its associated enterprises or relatedparties as its own debt to claim tax deductions. The Interest payment fromtax authorities globally, however, have been quick to ABC to XYZ ▲pounce upon such tax planning exercises. Differentcountries have made different rules to deal with suchhigh gearing ratio. Over a period of time, the taxmen ABC Private Limitedhave been using the term ‘‘Thin Capitalisation’’ to referto what finance professionals refer to as ‘‘High Capital The main purpose of such an exercise is to shiftGearing.’’ profits from the country where profits are made to a While in strictly arms length transactions with tax haven. Many countries have introducedinstitutional or commercial lenders, no problems are withholding taxes on interest payments made by theexpected. What becomes relevant for financial planners thinly capitalized company to counter this shifting ofand taxmen is the financing by promoters and their profits. Thin capitalization rules usually go beyond justassociated enterprises. The problem of capitalization the levels of debt and equity.however becomes relevant to the taxmen when Thin Capitalization rules can apply in situationssecurities are issued in the nature of debt, (which are where :in fact ‘‘quasi equity’’) and finance raised from ● A security is issued, which would not have been‘‘promoters’’ or ‘‘associated enterprises’’ for claiming issued without a special relationship between theinterest deductions as tax benefits with the object of parties ( tax deductions for interest on loans from groupreducing the taxable income. entities are stopped where the borrower would not Thin Capitalization have been able to sustain the debit on its own). We are discussing the concept of Thin ● A loan is made because of a guarantee given toCapitalisation in the background of financing by way the lender by a party related to the borrower.of ‘‘quasi equity’’ by promoters or associated The expression ‘thin capitalisation’ is commonlyenterprises and the taxmens response to this practice. used to describe a situation where the proportion of A company is said to be thinly capitalized when its debt to equity exceeds certain limits. Thin capitalisationThe Management Accountant |May 2012 529
  • 26. COVER THEMElegislation is a tool used by tax authorities to prevent on the excess of the loan over the approved proportionthe apparent leakage of tax revenues as a consequence is automatically disallowed and/or treated as aof the way in which a company is financed. Financing dividend. The ratio may be used as a safe-haven rule.a resident company with debt is considerably more It can be seen that these countries which use the fixedtax efficient than financing with equity. The difference ratio approach usually have specific thin capitalisationin tax treatment is an incentive to provide capital to legislation.the company in the form of debt instead of equity. If The basis of the ‘subjective’ approach is to look atthere are no thin capitalisation rules, it is relatively easy the terms and nature of the contribution and thefor a non-resident to advance funds to a resident circumstances in which the financing has been madecompany in a way that is christened as debt, so that and to decide, in the light of all facts and circumstances,the ‘‘interest payments’’ are straightaway tax whether the real nature of the contribution is debt ordeductible. If controlling shareholders in particular are equity. Some countries using the subjective approachindifferent to the form in which their investment is have specific legislation. Other countries use morestructured are more likely to be guided by tax general rules if these are available, such as general anti-considerations when structuring the legal form of their avoidance legislation, provisions on ‘abuse of law’,investment. provisions on substance over form. The object of Thin Capitalisation Regulations is to There are also countries that apply ‘hidden profitprevent the use of excessive ‘captive’ or ‘in-house’ or distribution’ rules to reclassify interest as dividends.‘friendly’ loans which would be detrimental to the In some of these countries the hidden profitrevenue of home country (where the borrower is distribution rules are applied along with specific rules which limit the deduction of interest on loans fromresident), as the profits to this extent would effectively shareholders. The general principles of transfer pricingbe shifted to the foreign lender, as the interest payments rules may also play a role in this respect.Thewould be tax deductible in the home country. underlying idea is that if the loan exceeds what would Therefore many countries—through Thin have been lent in an arm’s-length situation, the lenderCapitalisation Regulations—ensure that the deductions must be considered to have an interest in thefor interest on debt owed to connected parties, is profitability of the enterprise and the loan, or anyallowable in the home country as a deduction in the amount in excess of the arm’s-length amount, must behands of the borrower, only if within the permissible seen as being designed to procure share in the profits.limits. While financial leverage has, on its own standing, While some countries, like France, have detailedits own value, this is definitely impaired when interest regulations, others, like the UK, do not specify a debtis not deductible either wholly or partially through these to equity ratio, but merely give the right to the InlandThin Capitalisation Regulations. Revenue to challenge the interest deductions keeping Brief Comparative analysis of Thin Capitalisation in view the arm’s-length principle.Rules by different jurisdictions In the following paragraph, a brief overview of A wide variety of methods are used to deal with the approach to Thin Capitailsation Rules inthin capitalisation in various countries. These countries which provide for safe harbor provisions areapproaches range from complex legislation to no given :specific thin capitalisation legislation at all. Country Limitation Comments Within this range four general approaches may be Australia Debt : Equity 3 : 1 In 2002, Australia’s thin capitalisationdistinguished : regime changed substantially, bringing in lengthy and complex legislation. (1) the fixed ratio approach A ‘safe harbour’ debt amount has been (2) the subjective approach introduced, with an alternative ‘‘arm’s (3) application of rules concerning hidden profit length’’ test which can potentially distributions; and increase the permissible interest (4) the ‘no rules’ approach. Exceptions made for certain financial The emphasis on the above factors or combinations of businesses—authorised deposit takersfactors often varies from country to country. Measures Interest in excess of the prescribed leveltaken by countries to limit excessive debt financing by is denied as a deduction. However, it is fully deductible if the companyshareholders are either based on specific legislation or satisfies the arm’s length test.administrative rules or based on evolving practice. The Australian Tax Office has a well- Under the ‘fixed ratio’ approach, if the debtor organised and accessible website, withcompany’s total debt exceeds a certain proportion of good search facilities.its equity capital, the interest on the loan or the interest (contd.)530 The Management Accountant |May 2012
  • 27. COVER THEME(contd.) (contd.)Country Limitation Comments Country Limitation CommentsGermany Limit to deducti- The legislation was substantially USA 1.5 : 1 The US ‘‘earnings stripping rules’’ bility of interest revised in 2008 currently include a restriction on (30% of income) Interest deductibility is limited to interest paid by a corporation to related 30% of taxable income before interest, persons, if the corporation has : taxes on income, depreciation and A debt-to-equity ratio exceeding amortisation. 1.5 : 1, and There are exceptions for low interest A net interest expense exceeding 50% expense, and where interest paid to any of the company’s adjusted taxable one shareholder falls within limits. income. This is likely to be tightened, Previously Germany had a widely probably to 25% available safe harbour: a debt:equity ratio of 1.5 : 1 India and Thin CapitalisationFrance Interest limitation A new system was applied from As of now India does not have any specific Thin by ref to third January 2007, applying limitations Capitalisation Rules. In one of the leading case on the party rates between related parties, and bringing subject, in absence of ‘‘thin capitalization rules’’, in the arm’s length measure. interest paid to shareholders for loans cannot be Interest rate limitations : disallowed despite capital-structure tax-planning Arm’s length deduction limited to an average of rates resorted by the tax payer. This was the decision by the measure for charged by lending institutions, or Income Tax Appellate Tribunal (ITAT) in the case of interest rate Besix kher Dabhol SA v DDIT. Debt : equity 1.5 : 1 the interest rate that the debtor The assessee, a Belgium company, was set up to 25% interest : ope- company could have obtained from a execute a project in India and had a PE in India. The rating income ratio third-party lender and assessee’s share capital of Rs. 38 lakhs was owned by Debt-based limitations : two foreign companies (shareholders) in the ratio of overall indebtedness (debt : equity 60 : 40. The said two shareholders also advanced loans ratio), and to the assessee aggregating Rs. 94.10 crores in the same Disallowed interest can be carried ratio in which they held shares in the assessee i.e. forward indefinitely at group level, but 60 : 40. The assessee’s debt-equity ratio was 248 : 1. will be reduced annually by 5% from The assessee paid interest of Rs. 5.73 crores on the loans the second year after the expense was obtained from its shareholders and claimed that as a incurred. There is no differentiation deduction. The AO disallowed the claim on the ground between types of companies. that though the moneys were borrowed from the Companies are considered on a stand shareholders, in view of the abnormal debt-equity alone basis. ratio, they were to be treated as capital/loan taken from Certain financial businesses and the Head Office, and (ii) that as the RBI approval transactions are excluded. did not permit the PE to borrow, the loan was inJapan 3:1 ● Japanese thin capitalisation rules contravention of law. This was upheld by the CIT (A). were revised in 2006. On appeal by the assessee, HELD allowed the appeal : ● A debt:equity safe harbour rule (i) Under Article 7 (1) & 7(3)(b) of the India-Belgium applies to foreign-owned corporations DTAA, the profits of the assessee as are attributable to ● The 2006 rules extend this to third the PE are chargeable to tax in India. In determining parties where foreign corporations such profits, all expenses are allowable subject to guarantee the borrowing limitations specified in the DTAA and the Indian laws.China China introduced thin capitalisation The only limitation is that notional interest paid by a legislation for the first time late in 2008. branch to its HO is not allowable.This limitation does Financial 5 : 1 Two safe harbour ratios have been set, not apply as the assessee borrowed from an outside one for financial industry enterprises, party, i.e. its shareholders; one for non-financial. (ii) The argument of the revenue that the abnormal Non-Financial 2 :1 If these ratios are breached, it appears debt-equity ratio attracts the ‘‘Thin Capitalization that the taxpayer will still have the Rule’’ and that the ‘‘debt’’ should be characterized as opportunity to try to demonstrate that ‘‘equity’’ for purposes of considering whether interest the transaction is still consistent with is deductible is not acceptable. Several countries have the arm’s length principle. detailed ‘‘thin capitalization rules’’ (e.g. Belgium). (contd.) However, there are no such rules in India though theThe Management Accountant |May 2012 531
  • 28. COVER THEMEDTC 2010 has proposed this vide S. 123(1)(f). In the GAAR vs. Treaty provisionsabsence of specific ‘‘thin capitalization’’ rules, it is not It has been proposed that the GAAR provisionsopen to the revenue to characterize debt as equity and would apply to a taxpayer irrespective of the fact thatdisallow the interest (principles in Azadi Bachao the treaty provisions are more beneficial. It may be notedAndolan 263 ITR 706 (SC) followed). The domestic law that a unilateral enactment of a new domestic tax lawlimitation of Art. 7(3) refers to the Source Country & which is contrary to an existing treaty, without annot the Residence Country; amendment in treaty could possibly be regarded as (iii) Imposing the ‘‘thin capitalization rules’’ on the violation of international law and is generally knownassessee when domestic companies are not subject to as ‘treaty override’.such rules will violate the ‘‘non-discrimination’’ It may be relevant to note that according to rules ofprovision in Art. 24(5); legislative interpretation, specific legislation overrides (iv) The argument that the finance structure should general legislation. Therefore, an argument may bebe treated as a ‘‘colourable device’’ and disregarded taken that change of a domestic law generally, whichis not acceptable because there is no anti-abuse could be the case with GAAR, may not affect the treaty.provision in the DTAA and in the absence of specific However, in the absence of an anti-avoidancelanguage (such as the proposed s. 129(9) of DTC 2010), provision under the treaty, the reaction of Indias treatythe DTAA cannot be over-ridden by the Act. partner countries needs to be observed. Master Circular issued by RBI under Foreign Salient features/provisions of GAARExchange Management Act, 1999 (FEMA) and The Indian tax law has always had specific anti-Regulations avoidance rules to target known arrangements of tax It would be of interest to note that the latest RBI avoidance, whereas GAAR seeks to completely redefineMaster Circular on External Commercial Borrowings this concept. GAAR as envisaged under the Finance Bill(ECB) stipulates a debt equity ratio of 4 : 1 for 2012 is a broad set of provisions which seek to tax anborrowings by Indian Entity from ‘‘Recognized ‘impermissible avoidance arrangement’ (which may beLenders’’ in excess of US $ 5 Million from ‘‘Foreign a step, a part or whole of an arrangement and hereinafterEquity Holders’’. The Foreign Equity Holders should referred to as ‘Transaction’) whose main purpose is tohold a minimum of 25% of the Equity of the eligible obtain a tax benefit by :borrower. Further the regulations clarify ‘‘ie. a. creating rights or obligation which wouldn’t ariseborrowing the proposed ECB not exceeding four times between persons dealing at arm’s length, orthe direct foreign equity holding’’. This adds a new b. result in the misuse or abuse of the provisionsdimension to the basic question of Debt Equity ratio. of the Act in any way, or General Anti-Avoidance Provisions (GAAR) c. lacks commercial substance either wholly or in part, or Though the Union Budget 2012-13 proposals do not d. entered or carried out in a manner which wouldcontain any direct ‘‘Thin Capitalisation Rules’’, certain not be employed for bona fide purposesnew provisions entitled ‘‘General Anti-AvoidanceRules’’ have been proposed, which, if implemented, While the principal condition for invalidating acan give rise to new dimensions to the issue of Thin transaction might be triggered at the assessment stageCapitalisation concept. itself, the burden to rebut the same shall rest with the tax payer. Further, once the tax benefit test is satisfied, The scope and language of the proposed GAAR the arrangement also has to satisfy at least one out ofprovisions under the Union Budget 2012 are very four additional tests discussed above.similar to the GAAR provisions specified in the DirectTax Code (DTC). It is proposed to empower the tax The tax authorities, upon satisfaction of aforesaidauthorities with widespread powers to disregard and conditions, shall seek to :recast any tax avoiding transaction and income a. disregard, combine or recharacterise any step,accruing therefrom. Further, the Finance Bill 2012 part or whole of a transaction;proposes the introduction of sub-section 2A to Section b. treat the transaction as if it had not been entered into;90 which would enable the provisions of GAAR c. disregard any accommodating party or treating(proposed to be introduced through Chapter X-A in any accommodating party and any other partythe Income-tax Act, 1961) to override the provisions as one and the same person;of the tax treaties signed by India. While the revenue d. deeming connected persons in relation to eachauthorities may be viewing GAAR as a means to other as one;checking tax leakages, one may be tempted to suspect e. reallocating, amongst the parties to thethe intention of the sweeping nature of the provision arrangement —as it provides wide discretion to the tax authorities and ● any accrual, or receipt, of a capital or revenueprovides potential for misuse. nature; or532 The Management Accountant |May 2012
  • 29. COVER THEME ● any expenditure, deduction, relief or rebate; (c) the means by, or manner in, which round or tripped amounts are transferred or received; f. relocating place of residence of a party or location ii. an accommodating or tax indifferent party; of a transaction or situs of an asset to a place other iii. any elements that have the effect of offsetting than provided in the arrangement; and each other; or g. considering or looking through an arrangement iv. a transaction which is conducted through one by disregarding any corporate structure. or more persons and disguises the nature, location, For the above purposes, following re-charac- source, ownership, or control, of the fund.terization may be done — 7. ‘‘Round trip financing’’ includes financing in ● any equity into debt, or vice versa; which — ● any accrual, or receipt, of a capital or revenue Funds are transferred among the parties to the nature; or arrangement in a manner which would : ● any expenditure, deduction, relief or rebate. ● result, directly or indirectly, in a tax benefit; or Meaning of some of the terms used in GAAR ● significantly reduce, offset or eliminate any 1. Accommodating Party business risk incurred by any party to the arrangement. Accommodating party means a party to anarrangement whose main purpose for direct or indirect Some Concerns about GAAR and recommendationsparticipation in an arrangement (in whole or in part) to overcome themis to secure benefits whether directly or indirectly to a The description and definition as proposed rendersperson to whom it may be connected or not. GAAR subjective and open to interpretation. Perhaps, 2. ‘‘An arrangement’’ means introduction of guiding principles should be evolved ● any step in or a part or whole of so as to make the same objective, more definite, fair, ● any transaction, operation, scheme, agreement equitable, meaningful and relevant. or understanding, Specifically if one were to refer to the explanation/ ● whether enforceable or not, and meaning of ‘‘lacking of commercial substance’’, this one ● includes any of the above involving the phrase can typically lead to a series of litigations. With alienation of property. the shifting of the onus of proof to the taxpayer, it has to 3. ‘‘Tax benefit’’ means be only hoped that the final outcome of the interpretation ● a reduction, avoidance or deferral of, or an does not result in ‘Commercial Nonsense’ increase in a refund of tax under the Income Tax Though the provisions relating to GAAR are broadly Act (‘‘ITA’’ or ‘‘the Act’’). in line with the internationally accepted standards of ● a reduction, avoidance or deferral of, or an anti-avoidance measures, it may be noted that some of increase in a refund of tax for a Tax Treaty. the important recommendations of the Standard ● a reduction in tax bases including increase in loss. Committee on Finance have not been taken into account 4. ‘‘Arm’s length price’’ means while introducing the GAAR provisions, such as : ● a price applied or proposed to be applied in a ● Suitable provisions may be made to protect thetransaction between persons or enterprises other than interest of the tax-payers who have entered intoassociated enterprises in uncontrolled, unrelated or structures/arrangements under the existing law inindependent conditions. good faith and without intent to evade tax; 5. ‘‘Associated Enterprises’’ means as defined in ● Uncertainties with regard to applicability of taxSection 92A of the Act. treaty provisions to be removed so that India’s 6. ‘‘Lacks commercial substance’’ credibility as a reliable treaty partner is not affected; ● The proposals should not lead to any fiscal A step in, or a part or whole of, an arrangement shallbe deemed to be lacking commercial substance, if — uncertainty or ambiguity; ● It should be ensured that any of the proposals do ● The substance or effect of the arrangement as a not pave the way for increased and avoidable litigation.whole, is inconsistent with, or differs significantly from,the form of its individual steps or a part; or With respect to thin capitalization, an entirely new concept of re-characterization of debt into equity or ● it includes, or involves — vice versa. The emphasis is on the term ‘‘vice versa’’ i. round trip financing without regard to, — which means that debt can also be classified into equity. (a) whether or not the round tripped amounts can Such reclassification including the circumstances in be traced to funds transferred or received; which this could result will be a completely new (b) the time, or sequence, in which round tripped concept to which this complex financial world may not amounts are transferred or received; or have a ready answer.The Management Accountant |May 2012 533
  • 30. COVER THEME Applicability of Thin Capitalisation Norms for to be facing finance problems and are struggling todomestic companies obtain debt financing at competitive rates. In such The budget proposals have introduced a new cases, it is usual for the companies to arrange financesection by which specified domestic transactions have from related parties (including group companies) inbeen brought under the purview of Transfer Pricing the form of unsecured loans carrying structuredregulations. The computation of value of Specified interest rates rather than equity to meet the promotersDomestic Transactions should, therefore, be as per contribution requirements for obtaining maximumArms Length provisions under Transfer Pricing possible bank finance. The lending banks treat thisregulations. The provision would be applicable if the ‘‘structured debt’’ as ‘‘Quasi-Equity’’ and fit it asvalue of Specified Domestic transactions in aggregate ‘‘Equity’’ in their assessment for ‘‘Debt-Equity Ratio’’.exceeds 5 Crores. If this structure is viewed by the tax authorities under the lens of GAAR and read with the proposed domestic The Specific Domestic Transactions for the transfer pricing regulations and the interest chargedpurposes of application of Transfer Pricing provisions is below the bank rate, the tax authorities can, underwould be : this situation, impose tax on the differential interest or (a) Expenses/payment transactions between even treat this ‘‘structured debt’’ as equity, andrelated persons as covered under the provisions of disallow the interest deduction claimed by theSection 40 A (2) (b); borrowing company. All these could lead to (b) Transfer of goods/services/business from one uncertainties and unpredictable litigations.unit/undertaking of the Assessee to another unit/ There will be widespread ambiguity on what is theundertaking of the assessee, claiming benefit under ideal or safe debt-equity ratio which would beSection 80 IA, under Chapter VI A or 10 AA where the acceptable to the tax authorities. We have seen theprovisions of 80IA are applicable; confusion created by the RBI Master circular while The assessees in such cases would be required to stipulating the debt-equity ratio with respect to ECBmaintain/furnish documentation and obtain from foreign equity holders. When we have multiplecertification of Specified Domestic Transactions. regulators giving different interpretations and The other Transfer Pricing provisions pertaining to meanings to otherwise established definitions, theinternational transactions would also be applicable for problem becomes more complex. Further complicatingSpecified Domestic Transactions. this would be the GAAR driven as it would be by revenue collecting considerations, the emerging Section 40A (2)(b) would even cover transactions confusion is going to be more and more difficult toof interest payments to related parties and comprehend—particularly to the domestic SME sectorconsequently the provisions contained in the other which is in dire need of greater flexibility and openness.transfer pricing regulations including the GAAR andthe thin capitalization rules/test could apply to quasi- There will be a great role for Management Accountantsequity financing by related parties christened as debt. and other financial consultants in evolving a proper groupThis is going to be a new challenge for domestic structure and also capital structure for individual entities,companies, most of whom are not even exposed to the apprising them of the regulations and consequences ofconcept of Thin Capitalisation and the prevalent rules. default simultaneously so that there emerges Challenge before Indian Companies (a) good commercial sense not only at the group Indian companies having international transac- level, but also at the entity level; andtions are exposed to international financing pattern and (b) there is better understanding on the part of thesethe global taxation trends. For these companies, the groups and entities of the complex level of challengesconcept of thin capitalization is going to add a new to be faced in balancing commercial, regulatory andvariable to the financial and tax structuring. tax considerations; and The greater challenge is, however, going to be faced (c) the potential for commercial nonsense—whichby pure domestic companies in the SME sector, where disastrous short term opportunistic planning willthere is a reasonable amount of related party anyway entail—is reduced. ❐transactions much beyond the stipulated the threshold Referenceslevels of Rs. 5 crores which appears to be fairly low. 1. When there are many SME companies/organi- 2. www.transferpricing-india.comzations in a group, a great deal of planning would have 3. ‘‘Worldwide Tax Trends—Thin Capitalisa-to be done to plan and implement the capital structure tion’’ by Rajendra Nayak and Lubna Kably" CAin such a way that the group goals are achieved without 4. www.taxmann.comfalling into the erring side of the tax net. 5. Quite a few companies in the SME sector are known 6. The Management Accountant |May 2012
  • 31. COVER THEME Arm’s Length Pricing in India Dr. Sukamal Datta Principal Naba Ballygunge Mahavidyalaya (C.U.) KolkataIntroduction financial position of the seller company; and (ii) helps to prevent the question of taxes arising from suchT he Arm’s Length Principle is the condition that both the parties to a transaction are independent transaction. Many countries including India have their and are on equal footing. This type of transaction laws for determining inter-company or arms lengthis known as an ‘Arm’s Length Transaction’. It is price structures. With the extension of arms lengthgenerally use in contract law for the arrangement of price, there is no question about conflict of interest ofan equitable agreement though either the parties may buyer and seller. Here the revenue is completelyhave shared interests or they are closely related to each transparent and there is no hidden motive in theother to be seen as completely independent. In the transaction. According to the internationally acceptedpresent global business environment it is observed that principles, any income from international transactionlarge multinational companies have subsidiary or an outgoing—like expenses or interest from thecompanies and those companies conduct business international transaction between associatedtransactions with one another as if they are not at all companies—shall be computed extending an arm’s-part of the same corporate family. When two length price that would be charged in the transactioncompanies, any way, are connected with each other, if it had been entered into by unrelated parties inthe type of business they transact is often referred to similar conditions. Some companies occasionally tryas an ‘arm’s length transaction’. It is a deal between to manipulate inter-company prices to reduce overalltwo interested associates parties. They show the tax burden. On the other hand, tax authorities want tobehaviour as if they were not related, so that there is ensure that the inter-company price is equivalent tono query of a disagreement of attention. The concept an arms length price to prevent the loss of tax revenue.of arms length deal concerns with the transaction in Computation of Arm’s length Price u/s 92C ofwhich both the parties behave in their self-attention Income Tax Actand are not issue any force from the other associate. The arm’s length price in relation to an internationalThe basic principle behind the arm’s length price is transaction shall be determined by any of the followingthat though the both the buyer and seller are related methods, being the most appropriate method :to a parent concern, the prices extended will still (a) Comparable Uncontrolled Price Method,remain at fair market value. This means that the sellercompany will offer no special in-house discount to the (b) Resale Price Method,buyer company though both of them are subsidiaries (c) Cost Plus Method,of a parent company i.e. the subsidiary company will (d) Profit Split Method,enjoy the same volume of discount that may be (e) Transactional Net Margin Method, andextended to any customer with a similar pattern of (f) Such other Method as may be prescribed by thevolume purchasing. So, the arms length price is the Board.price in which a sister company never expects any From the above six methods the most appropriatediscount or reduced price that would be extended to method shall be applied for determination of arm’sother customers. The comparability between the length price provided that, where more than one pricecontrolled and uncontrolled transaction is the key is determined as the most appropriate method, thefactor for determining the arms length price an arm’s-length price shall be taken to be the arithmeticinternational transaction. mean of such prices or at the option of the assessee, a Arm’s length price essentially conducts two things price which may vary form such arithmetic mean notat a time : (i) this form of pricing structure protects the exceeding five per cent. To make it clear we mayThe Management Accountant |May 2012 535
  • 32. COVER THEMEcompute arm’s length price only under Comparable Guidance of Applying Arm’s Length PrincipleUncontrolled Price Method taking an imaginary The arm’s length principle is the internationallyillustration. accepted standards are adopted by many member Arm’s Length Price under comparable Uncon- countries of the ‘Organization for Economictrolled Price Method Cooperation and Development’ (OCED) as well as 1. First identify the price charged of paid for non-member countries. The arm’s length principle isproperty transferred or services rendered in a adopted by most of the tax jurisdictions. To complycomparable uncontrolled transaction. with this internationally accepted principle, the tax authority as well as tax paper will find a common basis 2. Then adjust the price derived in first step above of deal with related party transactions. This obviouslyfor differences, if any, which could affect the price in reduces the incidence of transfer pricing adjustmentsthe open market. and also will improve the resolution of transfer pricing Illustration : X Inc, a French company, and Y Ltd., disputes. As a result of which double taxation will bean Indian company, are associated enterprises. Y Ltd. reduced.manufactures Mobile Phones and sells those to X Inc The application of arm’s length principle involvesand Z, a company of Bangladesh. During the year, Y the identification of comparable situations orLtd. supplied 2,00,000 Mobile Phones to X Inc @ transactions undertaken by the independent partiesRs. 2,500 per unit and 50,000 units to Z @ of Rs. 5,000 against which the related party transaction is to beper unit. The transactions of Y Ltd. with X Inc and Z benchmarked. This is commonly known asare comparable subject to the following considerations ‘Comparability Analysis’. It analyses the similarities—(a) The freight and insurance paid by X Inc per unit and differences in the conditions and characteristicsis Rs.500, (b) Sales to Z are under a free warranty for in the related party transactions with those of anone year whereas sales to X Inc are without any such independent party transaction. For such price orwarranty. The estimated cost of warranty is Rs. 200. margin comparisons are meaningful. All economically(c) Since X Incs order was huge in volume, quantity relevant characteristics of the situations should bediscount offered Rs. 200 per unit. compared and successfully similar to that : Computation of Arm’s Length Price of product (i) differences (if any) between the situations beingsold to X Inc, a French company by Y Ltd. compared cant materially affect the price or margin Particulars Rs. Rs. being compared, orPrice per unit in a Comparable Uncontrolled 5,000 (ii) adjustment can be made to eliminate the effectTransaction of any such differences.Less: Adjustment for Differences :a) Freight and Insurance Charges 500 The ultimate objective of comparability analysis isb) Estimated Warranty Costs 200 a comprehensive assessment and identification of thec) Discount for Voluminous Purchase 200 areas and the extent of significant similarities and 900 differences between the transactions and those to beArm’s Length Price for Mobile Phone sold to X Inc. 4,100 benchmarked against. Legal Provisions in India with regard to ArmsComputation of Increase of Total Income of Y Ltd. Length Price Particulars Rs. Computation of income from internationalArm’s length Price per unit 4,100Less : Price at which actually sold to X Inc. 2,500 transaction in India in relation to arm’s length price is governed by Income Tax Act, 1961, under Section 92.Increase in Price per unit 1,600 The Finance Act, 2001, introduced the Transfer PriceNo. of Units sold to X Inc. 2,00,000Therefore, increasing in Total Income of Y Ltd. 32,00,00,000 Regulation (TPR) in the Income Tax Act, 1961, by(Rs.1,600 ¥ 200,000) enacting New Section 92 to 92F in the Income-tax Act, 1961, in substitution of the earlier Section 92. Therefore, It is observed in the above illustration that though TPR are effective from the Assessment year 2002-2003Y Ltd sold to X Inc. and associated enterprise at lower and obviously would be applicable to internationalprice but arms length price would be Rs. 4,100 per transaction w.e.f. 1st April 2001. The new provisionsunit and Y Ltds total income would be increased by will be applied for ‘Associated Enterprises’. As per newRs.32 crore and tax on the increased amount would be provisions, where an Assessing Officer is in the opinionpaid at appropriate rate in India which, in turn, that the transaction between Associated Enterprisescontrolled the erosion at tax revenue in India. are not at arm’s length, he can compute profits from536 The Management Accountant |May 2012
  • 33. COVER THEMEsuch transactions at arm’s length price. Under transaction fails to furnish any such information orSection 92 any income from international transaction document as required by sub-section (3) of Section 92shall be computed having regard to the arm’s length D, the Assessing Officer or the Commissionerprice. (Appeals) may direct that such person shall pay, by Meaning of International Transaction described way of penalty, a sum equal to 2 per cent of the valueu/s 92B along with Sections 92, 92C, 92D and 92E of the international transaction of each such failure’.where ‘international transaction’ means a transaction The Government has kept sufficient legal penaltybetween two or more associated enterprises either or measures against wrong computation of income fromboth of whom are non-residents, in the nature of international transaction having regard to arm’spurchase, sale or lease of tangible or intangible length ... with a benefit, service or facility provided Role of CMAs in Arm’s Length Pricingor to be provided to any one or more of such In the present scenario of world economy theenterprises. Maintenance and keeping of information Accounting Profession is one of the most importantand document by persons entering into international challenging professions. The role of Cost andtransaction is governed by Section 92D. According to Management Accountants (CMAs) has become morethis section ‘every person who has entered into an important in corporate level, national level and alsointernational transaction shall keep and maintain such international level. With expertise knowledge ininformation and document in respect thereof, as may costing, finance, taxation and management the CMAsbe prescribed … The Assessing Officer or the perform a service of works to ensure the companys orCommissioner (Appeals) may, in the course of any employs financial security, handling financial mattersproceedings under this Act, require any person who and, accordingly, helping to drive the overallhas entered into an international transaction to furnish management and strategy of the concerned business.any information or document in respect thereof, as may A CMAs responsibilities include planning costingbe prescribed under sub-section (1) within a period of system and methods, project management, internalthirty days form the date of receipt of a notice issued audit, cost audit, fund management, pricing planning,in this regard. ‘The accountant should furnish a report designing and implementing effective managementon international transaction during the previous year information and control system. On the basis of thoseon or before the specified date in the prescribed from he may guide the top management providingduly verified and signed by such accountant u/s 92E. necessary information to take right decision in right Section 92F gives definition of certain terms time.‘‘accountant’’, ‘‘arm’s length price’’, ‘‘enterprise’’, In our discussion so far we have observed that arms‘‘specified date’’ and ‘‘transaction’’. According to this length pricing is a complicated one and breaking thesection "arms length price" means a price which is law and rules exist in India regarding arms lengthapplied or proposed to be applied in a transaction price imposes high penalty. We know that there hasbetween persons other that associated enterprises, in been increasing awareness among the businessuncontrolled conditions. entrepreneurs that the CMAs have vital contribution Penalty in International Transaction in the business houses to the attainment of business Penalty for failure to keep a maintain information objectives. With expertise knowledge of tax andand document in respect of international transaction accounting along with other branches of managementmay be imposed vide Section 271AA. Under this the CMAs obviously may help the associatedsection ‘‘If a person fails to keep and maintain any such enterprises in relation to international transactionsinformation and document as required by sub-section associated with arm’s length price. The CMAs may(1) or sub-section (2) of Section 92, the person shall compute the arm’s length price using appropriatepay, by way of penalty, a sum equal to two per cent of method and save the company from bearing thethe value of each international transaction entered into penalty which may be imposed by the Assessingby such person’’. Under Section 271BA ‘If any person Officer or Commissioner (Appeals). On the other handfails to furnish a report form an accountant as required computing profit from international transactions atby section 92E, the Assessing Officer may direct that arm’s length price arrange for paying right amount ofsuch person shall pay, by way of penalty, a sum of on income tax to the Government. Now-a-days CMAshundred thousand rupees’. Section 271 G provides If cooperate with the companies by leading from the frontany person who has entered into an international —not sitting as backbench advisors. ❐The Management Accountant |May 2012 537
  • 34. TAXATION Tax Titbits—Finance Bill, 2012— What Next? S. Rajaratnam MA, LLM, FCMA Advocate & Tax Consultant ChennaiD irect Taxes Code Bill, 2010 (the Code), which both domestic and foreign on the future of the was to take effect from 1st April 2012, is now economy is not lost and their after-tax return on officially postponed for application from 1st investments can be ascertained with certainty. TheApril 2013. Meanwhile many of the drastic provisions favourable climate in recent years should not behave found their way in the proposals in the Finance endangered by some of the hasty amendments, whichBill, 2012. There is considerable uncertainty as to the are made worse by making them retrospective.incidence of tax on trade and industry consequent on The Spectre of GAARthese proposals, which have been prompted withoutany prior consultation with the profession or trade Elaborate provisions under new Chapter X-A readand industry. with Section 144BA known as General Anti-Avoidance Rule (GAAR) propose to empower the Assessing The only hope of the taxpayer is a report received Officer to ignore ‘‘imper-missible avoidancefrom the all-party Standing Committee of Parliament arrangement’’. He could ignore the corporate form ofon Finance on the Code presided by a former Finance the parties to an arrangement, adopt accrual of incomeMinister, which has undertaken an elaborate exercise at a different place or at a different time. He couldof discussing provisions in the Code with all the stake- infer a residential status different from its place ofholders and the reaction of the tax administration and incorporation or the tax residency certificate from thehad come out with recommen-dations without any parties to the Double Tax Avoidance Agreement. Thesedissent. The report has been made available just before and other inferences could be drawn not all based uponthe Finance Bill was presented before the Parliament evidence, but on the sole ground, that tax is saved.without the Finance Minister having time to consider Tax mitigation or saving based on tax costing is treatedthese recommendations in respect of those proposalsin the Finance Bill, which have been lifted from the by these provisions as tax avoidance on par with taxCode. evasion. The suggestion generally made in the light of the GAAR can be invoked at the instance of theprovisions of the Code are applicable even for the Assessing Officer with the approval of the Commi-new proposals in the Finance Bill, 2012, especially in ssioner after consultation with an Approving Bodymatters of amendments relating to international consisting of three more Commissioners, so that ittaxation with over-anxiety on the part of revenue to is a decision of the tax administration. The Standingnullify every argument for liability found untenable Committee had recommended that it should havein the decision of the Supreme Court of Vodafone independent members with technical qualifications.International Holdings B.V. v. Union of India (2012) The provisions place the burden of proof on the341 ITR 1 (SC) and a number of other decisions of the taxpayer to show that the transaction is not coveredCourts. by the anti-avoidance arrangement. The Standing Committee requires that the onus should be squarely It is now not too late to consider the Committee placed on the authorities.Report on the Code in many of the proposal in theFinance Bill based on the Code before it becomes law The Finance Bill, 2012 and the Code Bill wouldor even after, so that the confidence of the investors require the domestic law to override the commitments538 The Management Accountant |May 2012
  • 35. TAXATIONunder the Double Tax Avoidance Agreement. The restructuring exercise among the group concernsCommittee says that it will affect India’s credibility as even without any cash implications neutralisinga reliable treaty partner. These three aspects of the the precedents of the courts and the rulings of theprovisions relating to anti-avoidance agreement are Authority for Advance Ruling in more than onerequired to be reconsidered by the Finance Minister the light of a Committee report consisting Proposal for adoption of arm’s length priceof members from all parties including ruling party In the light of the track record of precedents onand its allies, so that there can be no justification application of arm’s length rule for internationalwhatsoever for carrying the proposals in the Finance transactions in both choice of the rule for valuationBill without considering the recommen-dations of the and comparables, its extension to domestic transac-Committee on the Code on the same matters arrived tions with related parties is ill-considered. It willat after elaborate consultations. take a heavy toll on the taxpayer in compliance with Deeming provisions galore equally heavy burden on the department in The Finance Bill, 2012, provides for a number of administering it.deeming provisions which do not have the character Audit requirementsof income, but the amendments would still considerit as income. There may be justification for some of There has been an upward revision of the limitsthe deeming provisions in present provisions, but for compulsory maintenance of business andthe proposed provisions are violative of accepted profession under Section 44AA as well as tax auditprinciples of law and are not in response to any felt requirement under Section 44AB, besides makingneed, but had been hastily incorporated without the presumptive taxation applicable for all busi-considering either the justification therefor or their nesses under section 44AD with a limit now raisedpossible impact. to Rs. 1 crore. While these are generally welcome, an excellent opportunity is being missed for making One of the deeming provisions is to treat the audit more useful for ascertaining the correctproceeds of sale of software as royalty contrary to income.the accepted provision of law in indirect tax cases,that these are goods liable for sales-tax or import The new requirements under company law forduty. It has been recognized as merely sale of costing records and cost audit in some cases forcopyrighted product and not assignment of copy- manufacturing industry have not been taken note ofright in a number of decisions of the Courts even for nor are the Cost Accounting Standards issued by theincome-tax purposes. The proposed amendment to Institute of Cost and Management Accountants ofSection 9(1)(vi) would make a nullity of this law India. Even the suggestion for certification of stockaffecting a business in which India has a lead in the by the Cost Accountant has been diluted by theworld market. Standing Committee by limiting it to cases where The proposal for taxing the income from satellite check is required by the authorities by way of specialcommunication to nullify the decision of the Courts is audit and not to make it obligatory by an omnibusanother deeming provision. clause. But even this limited recognition in the Code does not find a place in the Finance Bill. Sections 44AA Deeming of share premium of companies in which and 44AB will be more effective if the expertisepublic are not substantially interested being public available from the costing profession is harnessed forsector and listed companies with reference to fair income-tax value of the shares is yet another deemingprovision, which will create problems of valuation Conclusionapart from absolute lack of logic in taxing the Many of the proposals in the Finance Bill arecompany on an income on the value addition to the required to be reviewed or deferred in the light of theshares, when the shareholders will be allowed only Standing Committee Report, since the Parliamentthe amount paid for by them in the event of their sale cannot speak in two voices—one through Standingof their shares. Committee Report and the other through the Finance Yet another deeming provision will treat any Bill. ❐The Management Accountant |May 2012 539
  • 36. TAXATION Coming Home to Roost : Bilateral Investment Agreements : Coping With Treaty Boomerangs P. Ravindran B.Sc., PGDM (Germany), M.L, (PhD) Advocate—Indirect Taxes & IPRsI t is a fact of Modern Economic Life, since the advent admission of the state of affairs in the investment jungle of Globalization and Liberalization from 1990s that despite such a massive number of bilateral especially, that most countries—Developed or agreements, countries have shied away from agreeingDeveloping—Socialist or Market-Oriented—have been on a multi-lateral framework on investment promotionwooing investments from all over the world. Thus and protection. The BIPAs have become entrenchedthere are Capital Exporting Countries and Capital as a significant core of the International InvestmentImporting Countries. The flow of investment is Law coupled with the International Convention on thegenerally carried through and by Private Enterprises, Settlement of Investment Disputes (ICSID), Unitedeven though investments by Government entities are Nations Convention on International Trade Lawnot unknown. It is natural for the investors to worry (UNCITRAL), the World Bank Guidelines On Theabout the safety of their investments and the certainty Treatment of Foreign Direct Investment (1992) and theof the repatriation of returns from such investments WTO-inspired Trade Related Investment Measuresto their hands. The economic history of the world is (TRIMs).replete with instances of destruction of investments Many commentators have expressed surprise thatand even imprisonment of the investors by dictatorialregimes. The wave of nationalization of economic Vodafone could actually serve (as reported in the press)resources following extensive decolonization in the a notice of dispute with the Government of India,1950s and 60s put paid to the fortunes of many a under the Indo-Dutch Bilateral Investment Promotionwestern investor. Thus, given the historical baggage & Protection Agreement (BIPA, for short) regardingand the institutional instability behind many the tax liability case arising from their investment ingovernment policies it is natural for the investors to India. It is not clear if it is a notice for negotiation orwant to be assured of the safety and certainty of their conciliation or arbitration. The commentators have saidinvestments flows. Since investors at their individual variously that Vodafone lacks privity with thelevel cannot force governments on their own, it has Government of India and that such treaties are betweenfallen to the lot of governments everywhere to consider Nations which are not accessible to private companies.negotiating suitable terms with other countries Vodafone tasted success in their case against theregarding investment promotion and protection. With Income Tax department in the Supreme Court and theeven nations competing in the market place of the GOI has sought to undo the effect of the judgement byworld in the new age of Globalization, it has become bringing in a retrospective amendment in the tax lawessential to continue to attract and retain investments. to validate the tax demands and forestall suchAs a corollary of this paradigm, governments were judgments. The power of the Parliament to impose aforced to offer terms of protection to investments. Thus tax with retrospective effect may not be entirelymany Bilateral Investment Promotion and Protection unencumbered in a legal system based on the conceptsAgreements (BIPAs for short) were born. Today, there of Rule of law, Due process and Protection againstare said to be around 3,000 such Agreements among Unreasonableness. It is doubtful if a change in the lawabout 120 countries of the world. India alone has could annul a delivered and conclusive judgement ofAgreements with nearly 82 Countries. It is a telling the highest court in the land without an express540 The Management Accountant |May 2012
  • 37. TAXATIONprovision in the law for negating exactly such a made when such action was not caused by combat orjudgement and whether such a provision would in this by the ‘‘necessity of the situation’’. Article 9 of this BIPAday and age be accepted by the Apex court without allows an investor to settle their disputes with thebeing seen as an interference with the Decisional government by negotiation or failing which byIndependence and Integrity of the Apex Judiciary as International Conciliation under the procedures ofdistinct from its institutional independence which UNCITRAL and further failing which the investors canalone is guaranteed by rights of tenure and removal ask for International arbitration. If no agreement foronly by impeachment etc. The changed law would of referral to arbitration is feasible, either state party cancourse apply to pending lis, even an appeal, but it may request the President of the International Court ofnot be able to overturn and re-open the judgement of Justice for the needful steps to bring about arbitrationthe top court already given to a party. The Apex court in this regard.have held in some cases that they would not be averse Despite the significant number of the BIPAs signedto holding down a retrospective taxation if it was by India, the treaties are not known to have beenexcessive or unreasonable. Interference with the judicially tested. The Dhabol power project case endeddecisional independence of the Apex judiciary does in settlement rather than in arbitration from inter-statenot, so far, appear to have been mooted as a possible intervention.ground of invalidating a retrospective taxation. The In this Article, I propose to examine the importantpurpose of this article is not to enter into this debate features of Bilateral Investment Treaties (BITs) in thebut discuss the broad features of the BIPAs that light of the VODAFONE Tax imbroglio, the cancella-investors would claim under. tion of 2G licenses of certain Foreign Corporations in The Government of India has the executive power India and the action of the foreign companies into reach Treaties, Accords and Agreements with other invoking treaty protection.Nations and Inter-Governmental Organizations. A Bilsyrtsl Investment Treatiescurious category of such an area in the realm of ForeignRelations is the agreements to promote and protect These are Inter-Governmental Agreements betweeninvestments of foreign investors in India. Such Capital Exporting and Importing States with a viewagreements are required by influential governments to promote and protect the investments of Nationalon behalf of their investing nationals and companies. Investors investing in the State of the party to theIndia has entered into many such treaties with many Investment Agreement. These Treaties have a numbernations. The agreements would have variations from of features demarcating the rights of investors and theBIPA to BIPA, though broad principles of protection obligations of the host-states in relation to the investors.will be common. Such agreements are inter- Even though countries managed to add variations fromgovernmental accords but they provide for investors BIPA to BIPA, there are many common principlesof one nation investing in the other nation to claim found in such Agreements which are described asprotection and compensation under the BIPA. Thus follows :BIPAs grant privity to an individual as well as a ● The Scope of Application by defining Investorscompany. For example, the India-UK BIPA defines and Investments promoted and protected.vide Article 1(b) that the ‘‘investment’’ protected ● Admission of investments.includes ‘‘asset of every kind … established or ● Standards of Treatment post-entry includingacquired…including changes in the form of such Investment Protection.investment’’. Article 3(2) assures the investors ‘‘fair ● Protection against Expropriation andand equitable’’ treatment of their investments and that Destruction of Investments.the investments ‘‘shall enjoy full protection and ● Assurance of Fair and Equitable’’. MFN status and National treatment are also ● Dispute Settlement Process in the event of aguaranteed in the BIPA. Article 6 dealing with dispute between a Foreign Investor and the Hostcompensation for losses allows restitution or adequate State.compensation, inter alia, to investments subjected to Thus, it can be seen that these Treaties focusrequisitioning or ‘‘destruction by ‘‘authorities and essentially upon the rights of the Investor and theforces’’ of the state in which such investments were Obligations of the Host State, rather than on theThe Management Accountant |May 2012 541
  • 38. TAXATIONObligations of the Capital Exporting State or indeed 3. Admission or Est Ablishment of Investment : Thethe Obligations of the Investor himself. Now let us Treaties have followed different approaches to Normsexamine each of the above features : of Admission of Investment for Promotion and 1. Scope and Application : The Investment Protection. The majority approach encourages a liberalAgreements are normally Bilateral or Regional in admission policy bestowing Most Favoured Nationnature and there has been no Multi-Lateral Convention status (MFN) and National Treatment. Market accessin place. The Investors covered include Natural is also assured in certain Treaties.Persons as well as Legal Entities, generally. Many 4. Treatment and Profection : The main principlesModern Agreements rely on Domestic Law to define in this regard are Most Favoured Nation Treatment,Natural Persons. When it comes to Legal Persons, the National Treatment with some restrictions. TheTreaties seem to use a combination of principles such Norms include fair and equitable treatment andas Commercial Domicile, Nationality and the Seat protection against expropriation as well as security.and Control of such Entities by Nationals of the Party The Treaties also guarantee repatriation of investmentetc. In the light of the increasing using of subsidiaries proceeds and foreign exchange availability for theand foreign companies to manage and control in Third States or even in the Home State 5. Expropriation : Expropriation refers toof the original investor, the use of BITs as a legitimate deprivation by the State of foreign rights to propertytool in Investment Protection has become contro- or its enjoyment (Principles of Public Internationalversial. Treaty Shopping and abuse of readily Law—Brownie). This can take several different formsavailable rights are not uncommon. In the case of and the process consists of both direct and indirectTokio Tokeles Vs Ukraine, the International Arbitral expropriation. The Direct Expropriation can takeTribunal held by majority that a Company owned by the form of confiscation, requisition or Nationalization,Ukrainian Investors, but located in Poland, would use all with or without compensation or even withthe BITs between the two States to claim Investment inadequate compensation. On the other hand, IndirectProtection for its investments in Ukraine. Only the Expropriation can take several forms and is said toChairman of the Tribunal dissented from the majority occur when a State subjects foreign property toverdict. taxation, regulation or other action that is confiscatory 2. Investment Profection—Thesalini Test : As or that prevents, or unreasonably interferes with, orregards the Nature of Investments to be protected, unduly delays the effective enjoyment of a foreignmany BITs feature liberal definitions considering an persons property or its removal from the Stateinvestment to be an asset having an economic value. territory. Investment law jurists have classifiedThe Treaties are seen to cover investments established potential categories of Indirect Expropriationor acquired in the Host Country. However, many that would be resulting in international concern asArbitral Tribunals have concluded that four conditions follows :would be essential in this regard. The Salini Test, ● Forced sales of property.[named after the Award given on 23rd July 2001 in ● Forced sales of shares.the case of Salini Construtorri S.p.A. and ItalsTrade ● Indigenization requirements.S.p.A. Vs Morocco (Jurisdiction of ICSID case ● State’s management control over theNo.ARB/00/4-Italy / Morocco BIT)] lists the following this regard : ● Inducing others to physically take over the ● A Contribution of Money or other assets of property. economic value. ● Failure to provide protection when there is ● A certain desirable duration. interference to the property of the foreign ● An element of risk-taking in such investing. investor. ● Contribution to the Host States Development. ● Administrative Decisions which cancel licenses However, such a restrictive, normative definition and permits essential for the foreign businessis not widely shared and remains controversial, though to function within the State. (foreign 2G licenseapparently desirable. The Salini Test will be in the holders whose licenses were cancelled might beservice of India’s interests. expected claim under this ratio)542 The Management Accountant |May 2012
  • 39. TAXATION ● Exorbitant Taxation. laid down that the ambit goes far beyond mere physical ● Expulsion of the foreign investor contrary to protection of the investments and calls for the Host International Law. state to assure the stability afforded by a secure investment environment. The Indian retrospective ● Acts of harassment such as freezing of bank amendment in the tax law may have to face stiff accounts, promoting of strikes, lock outs and challenge under the BIPA if International trends are engineering labour shortages. any indication. The above classification of Indirect Expropriation So far, India has not had any arbitral threat inis not exhaustive. Recently other forms of Govern- relation to the BIPAs it has entered into. The onlyment action that can reduce the value of an investment danger was from laffaire Enron which was settledhave also been discussed as tantamount to without incurring arbitration.Expropriation and often described as ‘RegulatoryTakings’. In International Law, a differentiation is Conclusionmade between Lawful and Unlawful Expropriation. While protection of investment has become aLawful Expropriation involves an obligation to pay prerequisite and an inevitable incentive to thecompensation, while Unlawful Expropriation promotion of International Investment needing aengenders an obligation to pay damages for the set of guarantees which should not be normallyviolation of legal obligations. There is always a state resiled from, Emerging Economies like India fearof tension between Sovereign Rights to regulate in the consequential narrowing of their sovereignpublic interest relating to any investment issue and scope to regulate such investment activities orthe International Obligations flowing from such baleful consequences of such investing, e.g., in theBilateral Treaties. Environ-mental Arena. Another case in point is the 6. Assurance of Fair and Equivatable Treatment : recent Supreme Court Judgment canceling someMany treaty arbitrations have centered on the 122 2G Spectrum Licenses, some of which are heldguarantee of ‘‘fair and equitable’’ treatment to the by foreign investors such as Norway Telecom andinvestments of the investors. Internationally, the fair Sistema of Russia. The affected investors haveand equitable treatment principle presupposes the reportedly invoked protection of their Bilateral BITs.satisfaction of the following components : India finds itself painted into a corner by its own Bilateral Treaties. It has so far avoided going for A. Respect for the legitimate expectations of the International Arbitration regarding disputes under theInvestors. Bilateral Investment Treaties. The Bilateral Treaties B. Duty of the Host State to act in a consistent bristle with complex provisions and subtle variations.manner ... free from ambiguity and totally The starkness of the obligations is also clear.transparently. Additionally, India will have to contend with the 7. The Dispute Settlement : The BIPAS call for increasing rate of interpretations put out by Arbitral‘‘disputes’’ between the investor and the Host state to Tribunals, especially in the developing area of Indirectbe settled through negotiation first and then by Expropriation and the scope regarding ‘fair andInternational Conciliation. If all the recourses fail, then equitable’ treatment. There may be lessons to learn foreither party to the dispute can call for International India from the inevitable heavy bill that the countryarbitration. The mechanism is under the auspices of may have to pay for the Bilateral Treaties and theInternational Convention for Settlement of Investment intractable VODAFONE and 2G license cancellationDisputes (ICSID). Tangles. The solution may lie in canvassing and The ICSID Tribunal in the case of AZURIX V promoting a Multi-Lateral Framework on InvestmentARGENTINA while interpreting the scope of full Promotion and Protection which plays fair by all theprotection of the investments under such treaties has sides. ❐The Management Accountant |May 2012 543
  • 40. TAXATION Documents for Availing Cenvat Credit—Some Issues M. Govindarajan MA, BL, ACS, ACMA, MBA, PGDCA Accounts Officer, BSNL, Thanjavur Tamil NaduR ule 9(1) of CENVAT Credit Rules, 2004, or the supplementary invoice, as the case may be, bears provides that the CENVAT credit shall be taken an indication to the effect that no credit of the said by the manufacturer or the provider of output additional duty shall be admissible.service or input service distributor, as the case may In ‘Flex Engineering Ltd., V. Commissioner ofbe, on the basis of any of the following documents : Central Excise, Noida-2008 (12) STR 94 (Tri. Del) it was (a) an invoice; held that invoices issued by manufacturer to first and (b) a supplementary invoice; second hand dealers who further issued invoices to (c) a bill of entry; assessee, are alleged to be not proper documents. As (d) a certificate issued by an appraiser of customs no error/omission/mis-construction has been alleged (e) a challan evidencing payment of service tax, by by the Revenue against assessee no demand the service recipient as the person liable to pay sustainable. service tax; In ‘Gail India Ltd., V. Commissioner of Central (f) an invoice, a bill or challan issued by a provider Excise, Indore—2008 (11) STR 538 (Tri. Del) it was held of input service; that credit cannot be denied merely on ground that (g) an invoice, bill or challan issued by an input invoices are not authenticated if other particulars are service distributor. available in the invoice and verified by authorities. Invoice Conditions In Regard To Documents to Avail Rule 9(1) (a) provides that an invoice may be issued Creditby : No CENVAT credit under shall be taken unless all (i) a manufacturer for clearance of — the particulars as prescribed under the Central Excise Rules, 2002, or the Service Tax Rules, 1994, as the case (I) inputs or capital goods from his factory or depot may be, are contained in the said document.or from the premises of the consignment agent of thesaid manufacturer or from any other premises from If the said document does not contain all thewhere the goods are sold by or on behalf of the said particulars but contains the details of duty or servicemanufacturer; tax payable, description of the goods or taxable service, assessable value, Central Excise or Service Tax (II) Inputs or capital goods as such; registration number of the person issuing the invoice, (ii) an importer; as the case may be, name and address of the factory or (iii) an importer from his depot or from the premises warehouse or premises of first or second stage dealersof the consignment agent of the said importer if the or provider of taxable service, and the Deputysaid depot or the premises, as the case may be, is Commissioner of Central Excise or the Assistantregistered in terms of the provisions of Central Excise Commissioner of Central Excise, as the case may be, isRules, 2002; satisfied that the goods or services covered by the said (iv) a first stage dealer or a second stage dealer, as document have been received and accounted for inthe case may be, in terms of the provisions of Central the books of the account of the receiver, he may allowExcise Rules, 2002. the CENVAT credit. The credit of additional duty of customs levied The CENVAT credit in respect of input or capitalunder sub-section (5) of section 3 of the Customs Tariff goods purchased from a first stage dealer or secondAct, 1975 (51 of 1975) shall not be allowed if the invoice stage dealer shall be allowed only if such first stage544 The Management Accountant |May 2012
  • 41. TAXATIONdealer or second stage dealer, as the case may be, has The provider of output service, availing CENVATmaintained records indicating the fact that the input credit or the input service distributor, as the case mayor capital goods was supplied from the stock on which be, may submit a revised return to correct a mistakeduty was paid by the producer of such input or capital or omission within a period of sixty days from the dategoods and only an amount of such duty on pro rata of submission of the return, as the case may be.basis has been indicated in the invoice issued by him. No Declaration is Required to Avail Credit The manufacturer of final products or the provider In ‘DSM Anti-infectives India Limited V.of output service shall maintain proper records for the Commissioner of Central Excise, Jallandhar’—2011receipt, disposal, consumption and inventory of the (264) ELT 267 (Tri. Del) the credit amounting toinput and capital goods in which the relevant Rs. 80,64,129/- of the Additional Customs Duty paidinformation regarding the value, duty paid, CENVAT on the goods imported under 11 bills of entry has taken and utilized, the person from whom the There is no allegation that bills of entry are not in theinput or capital goods have been procured is recorded name of the appellants or that the inputs in respect ofand the burden of proof regarding the admissibility of which MODVAT credit has been taken had not beenthe CENVAT credit shall lie upon the manufacturer declared in the modvat declaration under Rule 57G.or provider of output service taking such credit. The only objection of the Department is that on the The manufacturer of final products or the provider body of the bills of entry, no declaration regardingof output service shall maintain proper records for the applicants intention to avail MODVAT credit had beenreceipt and consumption of the input services in which made as per the provisions of Board’s Circular datedthe relevant information regarding the value, tax paid, 09.12.1986. However, the Tribunal found that there isCENVAT credit taken and utilized, the person from no provision in the Central Excise Rules pertaining towhom the input service has been procured is recorded MODVAT credit that for taking MODVAT credit inand the burden of proof regarding the admissibility of respect of the imported goods, the assessee has to makethe CENVAT credit shall lie upon the manufacturer a declaration on the bills of entry regarding hisor provider of output service taking such credit. intention to avail MODVAT credit. The departments The manufacturer of final products shall submit case is thus without the authority of law and as such,within ten days from the close of each month, to the the impugned order denying the MODVAT credit andSuperintendent of Central Excise, a monthly return in ordering its recovery and imposing penalty on thethe form specified, by notification, by the Board. Where appellant is not sustainable.a manufacturer is availing exemption under a Supplementary Invoicenotification based on the value or quantity of clearances Rule 9 (1)(b) provides that a supplementary invoicein a financial year, he shall file a quarterly return in may be issued by a manufacturer or importer of inputsthe form specified, by notification, by the Board within or capital goods in terms of the provisions of Centralten days after the close of the quarter to which the Excise Rules, 2002, from his factory or depot or fromreturn relates. the premises of the consignment agent of the said A first stage dealer or a second stage dealer, as the manufacturer or importer or from any other premisescase may be, shall submit within fifteen days from the from where the goods are sold by, or on behalf of, theclose of each quarter of a year, to the Superintendent said manufacturer or importer, in case additionalof Central Excise, a return in the form specified, by amount of excise duties or additional duty leviablenotification, by the Board. The first stage dealer or under Section 3 of the Customs Tariff Act, has beensecond stage dealer, as the case may be, shall submit paid, except where the additional amount of dutythe said return electronically. became recoverable from the manufacturer or importer The provider of output service availing CENVAT of inputs or capital goods on account of any non-levycredit shall submit a half yearly return in form or short-levy by reason of fraud, collusion or anyspecified, by notification, by the Board to the willful misstatement or suppression of facts orSuperintendent of Central Excise, by the end of the contravention of any provisions of the Excise Act, ormonth following the particular quarter or half year. of the Customs Act, 1962 (52 of 1962), or the rules made thereunder with intent to evade payment of duty. The input service distributor shall furnish a halfyearly return in such form as may be specified, by Supplementary invoice shall also include challannotification, by the Board, giving the details of credit or any other similar document evidencing payment ofreceived and distributed during the said half year, to additional amount of additional duty leviable underthe jurisdictional Superintendent of Central Excise, not Section 3 of the Customs Tariff Act.later than the last day of the month following the half Rule 9(1)(bb) provides that a supplementaryyear period. invoice, bill or challan may be issued by a provider ofThe Management Accountant |May 2012 545
  • 42. TAXATIONoutput service, in terms of the provisions of Service seen that the invoices do not indicate the payment ofTax Rules, 1994, except where the additional amount any service tax and the invoices appear to be just forof tax became recoverable from the provider of service supply of food and drinks. In view of this the Tribunalon account of non-levy or non-payment or short-levy upheld the Commissioner (Appeals)’s findingor short-payment by reason of fraud or collusion or regarding the denial of credit in respect of this item.willful mis-statement or suppression of facts or Photocopiescontravention of any of the provisions of the Finance The documents on which CENVAT credit is takenAct or of the rules made there under with the intent to should be the original. If it is not original the sameevade payment of service tax. may not be allowed by the Central Excise authorities. In ‘Ultra Tech Cements Limited V. Commissioner can Photocopies be utilized for availing and utilizingof Central Excise, Nagpur’—2011 (22) STR 281 (Tri. CENVAT credit? For this question we may refer toMum) the finding of the appellate authority is—‘The the following case laws :issue involved in this case is whether the assessee iseligible to avail CENVAT credit on the supplementary In ‘Commissioner of Central Excise, Raipurinvoices issued by the service providers to him. The V. Vandana Energy & Steel Pvt. Ltd.,’—2008-TMI-service providers of the services to the notice appeared 2507-CESTAT-ND it was held that credit taken basedto have not paid the service tax on the account of on photocopy is inadmissible. Insistence on documentservices provided by them. This non-payment of evidencing payment of duty on inputs is not mereservice tax was subsequently noticed by the technicality to be complied with for availing credit butdepartment. On being pointed about non-payment of mandatory to be followed.service tax the service providers discharged the tax In ‘Deccan Chromates Limited V. Commissioner ofliability and raised supplementary invoices on the Central Excise, Hyderabad’—2011 (22) STR 440 (Tri.noticee. The credit availed on such supplementary Bang) the CENVAT credit disallowed and demandedinvoices is proposed to be disallowed on the ground relates to credit taken on photocopies of duty payingthat the service provider is not eligible to issue these documents as well as service tax paid on freightinvoices; and also even otherwise such supplementary incurred for outward transportation. The appellantinvoices are not specified documents under sub rule submitted that he is in possession of original1(f) read with sub rule 2 of Rule 9 of CENVAT Credit documents which could not be produced before theRules, 2004, and Rule 4(A) of Service Tax Rules, 1994, adjudicating authority and if an opportunity isfor availing CENVAT Credit. The Tribunal held that produced before the adjudicating authority and if anif the procedural laws are not to be understood in a opportunity is provided the appellant will be in amanner which will deny the rights assured to the position to submit the original documents to justifyparties. Once the assessee is entitled to take credit in the entitlement of CENVAT credit. The Tribunal setrelation to the duty paid on the inputs or capital goods aside the impugned order and remanded the matterand this right being not in dispute, merely because to the Commissioner for fresh adjudication.some infirmity observed in the document on which In ‘Commissioner of Central Excise, Kolhapur V.the credit sought to be availed, that cannot be a Shah Precicast (P) Limited’—2011 (269) ELT 407 (Tri.justification for denying the credit. Mum) the credit was denied based on provisions of Invoice to Indicate Payment of Service Tax Rule 9(1) © of CENVAT Credit Rules, 2004. The In ‘Idea Cellular Limited V. Commissioner of assessees submission was that original copy was notCentral Excise, Meerut—I’—2011 (22) 450 (Tri.Del) as available and police complaint was lodged. Theregards the service tax credit of Rs. 5,214/- in respect assessee made efforts to obtain certified copy fromof employee welfare expenses, the Tribunal found that Commissionerate which was denied. The Tribunal heldthe credit has been taken on the basis of the invoice of that there is no dispute that goods suffered duty andM/s Chitra Pal Auto Private Limited and the invoice used in manufacture. Substantial benefit is notindicates supply of audio visual equipment. Invoice deniable on basis of mere technical violation. Thedoes not indicate whether the invoice is for service for assessee is entitled to CENVAT credit on the strengthis for sale of goods. In view of this the Tribunal agreed of Xerox copy.with the findings of Commissioner (Appeals) that Thus it can be inferred that CENVAT credit couldCENVAT credit is not availed on the basis of this not be availed on photocopies of documents. It isinvoice. As regards, the service of outdoor catering allowed only on circumstances where originalservice i.e., supply of tea and snacks for the staff in documents could not be produced before the Centralrespect of which service tax denied is Rs. 4,163/- On Excise Authorities which is beyond the control of thegoing through the invoices of the service provider it is assessee.546 The Management Accountant |May 2012
  • 43. TAXATION Procedural Lapse Central Excise, Kolkata VI’—2011 (21) STR 184 (Tri. In some cases the CENVAT credit may be Kol) credit was taken based on document on servicedisallowed on procedure lapse. In ‘Commissioner of received by depot. The unit of Jaipur was not registeredCentral Excise, Bangalore—III V. Saturn Industries’— as input service distributor and service tax credit is2011 (267) ELT 609 (Kar) the Court held that the benefit not available to manufacturing unit at Kolkata,was denied only on the ground of non-compliance with according to the department. The Tribunal held thatthe rules and coupled with the fact that the delivery the appellants who availed the credit are not thenotes is not the satisfactory document. The Boards recipient of the taxable service, the taxable service isCircular No. 441/7/99-CX, dated 23.2.99 has clarified received by the depot and depot is not registered asthat mere not following the procedure cannot form the an input service distributor. Therefore, the appellantsbasis for rejecting the assessee’s claim to avail are not entitled for credit at Kolkata unit which was inMODVAT credit especially when sufficient evidence respect of service received by the depot at Jaipur.about the duty payment on inputs and usage in the CENVAT Credit to GTA Servicesmanufacture of excisable goods were available on In ‘Commissioner of Central Excise, Jaipur II V.records. The question of law is answered in favor of Rajasthan Spinning and Weaving Mills Limited’—2011the assessee and against the revenue. (22) STR 52 (Tri. Del) the Department held that the TR-6 Challan assessee could not use the CENVAT credit account for In ‘Commissioner of Central Excise, Meerut—II V. paying service tax on GTA services. The Tribunal heldHindustan Coco Cola Beverages (P) Limited’—2011 that the credit has been taken by the respondents in(22) STR 292 (Tri. Del) the respondents availed respect of the inputs and input service under Rule 3 ofCENVAT credit of service tax paid during the period CENVAT Credit Rules, 2004. It is not disputed thatfrom April 2005 to March 2006 based on the TR-6 the respondents were required to pay service tax onchallans under which the respondents themselves paid GTA services. In the case of GTA, the person requiredservice tax as deemed service provider. The Original to pay service tax may be the supplier of the inputs orAuthority has held that prior to 16.6.2005 TR-6 challans the recipient of input or the service providerare not prescribed documents for taking CENVAT themselves. If the supplier of inputs paid freight andcredit. The Commissioner (Appeals) set aside the consequently paid service tax, based on the documentsorder of the original authority. The Tribunal held that issued by the said supplier of inputs, the credit on thegenerally the person who pays the service tax is inputs as well as on the service tax paid would havedifferent from the person who takes the CENVAT been available to the respondents as recipients. Thecredit and therefore credit is being taken based on such recipient has paid the service tax as deemed servicethird party documents. In the present case TR-6 challan provider in terms of Section 68 of the Act were alsohas been used for paying service tax by the respondents the recipients of GTA services. As both service providerthemselves. There is no dispute about the payment of of services and recipient of services, dual role has beenservice tax by the respondents and that as recipients played by the respondents and therefore thethey are entitled to the credit. There can be no difficulty documents based on which the respondents have takenfor the department in verifying the correctness of the credit has been held to be valid. If the recipients arecredit taken as the deemed service provider and the held to be service providers, then, in the presentperson who has taken the credit are one and the same circumstances they are providers of self service toperson. themselves. Therefore, the objection of the department In ‘Cosmos Casting India Limited V. Commissioner about the documents based on which the credit hasof Central Excise, Raipur’—2011 (23) STR 144 (Tri. Del) been taken by the recipients are not valid.the tribunal held that the only question is that TR-6 Documents not in the name of Assesseewas not specified document for the purpose of takingCENVAT credit. When there is no dispute about the In ‘SGS India Private Limited V. Commissioner ofrealization of the demand by the exchequer the Central Excise, Thane —I’—2011 (270) ELT 115 (Tri.technicalities shall not be a bar to deny credit to the Mumbai) one of the grounds for denying CENVATassessee. credit is that the appellants have availed CENVAT credit on the basis of various bills of entry wherein the Further, the rule provides that a challan evidencing name of the importer given as M/s SGS India Privatepayment of service tax is considered as a valid Limited, Usha House, 210 Okhla Industrial Estate,document. Thus TR-6 challan may be utilized as a Phase III, New Delhi indicating that the inputs covereddocument for the purposes of CENVAT credit. by the said Bills of Entry were received at the assessee’s Credit Available Only to Recipient of Service other unit. The Department was of the view that the In ‘Khaitan Electricals Limited V. Commissioner of assessee was not entitled to take the credit on theThe Management Accountant |May 2012 547
  • 44. TAXATIONstrength of the Bills of Entry unless and until its entries located in the same premises after the appellantsare in the name of the person who is taking the credit. themselves altering the excise code number on theThe Tribunal held that the input covered in the Bills of relevant invoices and also writing Unit II on the saidEntry have been received in the factory of the appellant. invoices. The Tribunal held that the denial of credit isThe order of denial of credit on the ground of the bills primarily on the basis of the allegation of tamperingof entry are not in the name of the appellants is not with the duty paying documents and not on the groundsustainable. of either non-receipt of the impugned goods in the In ‘Millipore India Private Limited V. Commi- factory of the appellants nor on the basis of non-ssioner of Central Excise, Bangalore’—2011 (21) STR utilization of the same. In view of the fact that the582 (Tri. Bang) the input service tax credit taken by assessee is same even though two separate regionsthe appellant has been denied on the sole ground that have been taken for the two units stated to be locatedthe invoices against which credit were availed had not in the same premises, and that there is no allegation ofbeen addressed to the appellants manufacturing unit either non-receipt or non-utilization of the impugnedand the procedure for distribution of credit as duty-paid good, the Tribunal is of the view that asprescribed in Rule 7 of CENVAT Credit Rules. The regards the eligibility to CENVAT credit, a lenient viewTribunal held that the Revenue has no case that the should be taken and the appellant should be allowedassessee has taken credit in excess of what was shown to avail the impugned credit.on the invoice or that the assessee was engaged Conclusionexclusively in the manufacture of exempted goods or The provisions of Rule 9 give a clear picture onproduction of exempted service. The appellant has documents on which CENVAT credit may be takenmade out a prima facie case against the impugned and utilized. The original documents are required fordemand and penalties. this purpose. Since the documents are to be submitted Tampering of Documents to Adjudicating authorities or to be produced at the In ‘Rajalakshmi Paper Mills Limited V. Commi- time of audit conducted by the Audit wing of Centralssioner of Central Excise, Madurai’—2012 (25) STR Excise department.(Tri. Chennai) the appellants have been denied input The documents on which the credit is taken arecredit and capital goods credit on the ground that the to contain the full details as required under theimpugned goods which were consigned to Unit I of provisions of Central Excise or Service tax—as the casethe appellants were utilized in Unit II of the appellants may be. ❐ The Management Accountant — June, 2012 will be a special issue on ‘FDI IN MULTI-BRAND RETAIL’ Articles, views and opinions on the topic are solicited from readers along with their passport size photographs to make it a special issue to read and preserve. Those interested may send in their write-ups by e-mail to, followed by hard copy to the Journal Department, 12, Sudder Street, Kolkata-700 016 to reach by 8th May, 2012. The Management Accountant — July, 2012 will be a special issue on GREEN AUDIT Articles, views and opinions on the topic are solicited from readers along with their passport size photographs to make it a special issue to read and preserve. Those interested may send in their write-ups by e-mail to, followed by hard copy to the Journal Department, 12, Sudder Street, Kolkata-700 016 to reach by 8th June, 2012.548 The Management Accountant |May 2012
  • 45. COSTING Salient Features and Observations on CARR (Pharmaceutical Industry), 2011 V. R. Kedia Dipti Kejriwal Practising Cost Accountant, Mumbai Practising Cost Accountant, MumbaiC ost Accounting Records (Pharmaceutical shall be applicable for the financial year commencing Industry) Rules, 2011, are in supersession of on or after the date of this Notification (i.e. 7.12.2011). Cost Accounting Records (Bulk Drugs) Rules, In effect they will be applicable for most of the1974, and Cost Accounting Records (Formulation) companies for the financial year 2012-13.Rules, 1988. So, the new Rules have combined Rule 4(b)—Those companies which are comingthe Records Rules of Bulk Drugs & Formulation under Records Rules for the first time shallIndustry. preserve cost records for 8 financial years, commencing 2. Rule 2 — Definitions & Interpretations—Sub from the period starting from the year to which theseRule(1) — Definition of ‘Pharmaceutical activities’ has Rules have become applicable to them (CAB Generalbeen linked to DPCO, 1995, as well as Chapter 29 & 30 Circular No. 68/2011 dated 30.11.2011—Para b & FAQof the Central Excise Tariff Act, 1985, and further 4, Point 4.4 of ICWAI).includes intermediate products and allied products 5. Rules 5, 6 & 7—Compliance Report—If thethereof. company is subject to Cost Audit for 100% of its Chapter 29 covers various types of organic activity, or in addition having only trading/servicechemicals, in addition to Bulk Drugs. Organic & activities, then the requirement of the ComplianceInorganic Chemicals under Chapters 28, 29, 32 and 39 Report is not applicable for such companies. For otherhave also now been covered under cost audit order companies, which are engaged in manufacturing otherdated 24/01/12 and, consequently, chemicals— products, not subject to Cost Audit (in addition towhether for Bulk Drugs or otherwise—are also subject Pharmaceutical products which are subject to Costto automatic Cost Audit under these Rules, in addition Audit)—in such situations the company is subject toto the existing Bulk Drugs. the requirement of the Compliance Report, as per GSR 429 dated 3.6.2011 [The Companies (Cost Accounting Sub Rule (o)—The term turnover shall include Records) Rules, 2011] or any of the other 5 Costturnover from job-work or loan license operations, Accounting Records Rules for Regulated Industries.but exclude Excise Duty, ST, VAT & other taxes & 6. General—In the earlier Rules, Para-wise require-duties (as per CAB general Circular No.68/2011 dated ments of various items, such as materials, salary &30.11.2011—Para (c)) and also includes Export wages, service department expenses ... up to technicalIncentives. information were mentioned as per Schedule I/ 3. Rule 3 —Application—Earlier exemption from Schedule III, which have been deleted.the rules was given to SSI Industry with valuation limit The following observations and suggestions areof Plant & Machinery as per IDR Act and turnover made keeping in view Note 7 given in the end :limit of Rs. 10 crores, which have been deleted now. 7. Proforma A—Part I—Quantitative Information— Now the applicability of the Rules is based on the After Sr.6, one more Item may be added for quantityfollowing criteria : transferred to other units and sold to outside parties, ● Net Worth exceeding Rs. 5 crores, or if necessary. ● Turnover exceeding Rs. 20 crores, or Part II Cost Information—After Sr. 13, following ● Equity or debt securities listed or in the process items may be added, if found necessary— of listing on any stock exchange in or outside Sr. 14. Less : Cost of transferred to other units. India. Sr. 15. Less : Cost of sales to outside parties. 4. Rule 4 —Maintenance of Records—These Rules Sr. 16. Net cost for self-consumption.The Management Accountant |May 2012 549
  • 46. COSTING Clarification for—Srs.14 & 15: Quantity should be 11. Proforma D—This is newly introduced Proformavalued at cost and not at transfer price or sale price. for Bulk Drugs or Formulations got manufactured fromDifference in value should be transferred to Profit outside (on job charges basis). Information shall be givenReconciliation Statement. separately for each intermediate, Bulk Drug or 8. Proforma B—This proforma is to be filled up for Formulation. Further, separate Proforma should bequantitative and technical information only. This prepared for each Job Manufacturer.format has been rationalized & simplified. Sr.1 to 4 Part I Quantitative information—as per Srs. 1 to 8are for factory as a whole and not productwise. should be as per records/status with the job Sr.2(c)—‘Under loan licence’, means company has manufacturer.manufactured for others under Loan License scheme. Sr. 4—Material consumed means quantity issued Information for Sr.5 shall be given separately for to the shop floor for manufacture.each intermediate or Bulk Drug. Part II, Sr.1—It should be corresponding to Part I, Material consumed & process chemicals—Item- Sr. 4 in value for quantity issued to shop floor.wise details may be separately shown covering 80% Sr.2—Processing charges—It should be treated asin value. processing charges payable corresponding to the 9. Proforma B-1—This proforma is to be filled up quantity received from the processor as per Sr.9.for value corresponding to quantitative information Sr.7—Packing material cost—It should befilled up in Proforma B. Information shall be given corresponding to Part I, Sr. 4, in value for quantityseparately for each intermediate or Bulk Drug. issued to shop floor. Part I—Quantitative Information—Sr.1—In case of Similar to Proforma C for Bulk Drug & Proforma Gnumerous batches with different batch sizes, range for Formulation for Statement showing Cost of Sales,could be given (e.g 1 to 4MT). Realisation & Margin, there is no prescribed statement for quantity sold on job charges basis. Part II—Cost Information Srs. 1 & 2—Materialconsumed & process chemicals—Item-wise details Therefore, it is suggested to carry forward thismay be separately shown covering 80% in value. statement to Proforma C & Proforma G for Bulk Drug & Formulation, respectively. Sr.5—Direct expenses may also include outside job-work charges paid. 12. Proforma E—Additional column should be provided for Bulk Drugs activity, Formulation activity Sr.10—Technical Know-how Fee may also include and Interest.Royalty. The line items provided in this Proforma are Sr.12—Other Production Overheads should be indicative and has to be modified according toclassified according to the definition provided necessity and accounting structure of the the Cost Accounting Standards. Accordingly, Srs. 36 to 40 have shown certain items which areAdministration overheads for production would indicative to show the flow of cost allocation andalready be considered as a part of production apportionment and the same may be restructuredoverheads and the same would be in line with CAS-4 according to the secondary allocation process requiredCertificate for Excise Purpose. for the company concerned. Separate statement for Sr. 14—Opening/closing stock in process should apportionment of cost of various service cost centersalso include unpacked stock. to production cost centers may be prepared—keeping Cost of Production Statement shown in this in mind the structure provided in the Proforma.Proforma is for naked production. The Cost of Packing 13. Proforma F—There seems to be drafting errorhas been considered under Proforma C. in this Proforma from columns 11 to 14. It should have 10. Proforma C—Information shall be given been packing cost centers (separately for tablet,separately for each intermediate or Bulk Drug. Even capsule, syrup etc. — Note 15 below Proforma I).within the same intermediate or Bulk Drug, separate 14. Proforma G—This statement should bestatements should be prepared for export sale, domestic separately prepared for each type & size of pack ofsale, sale at DPCO price, and sale to related parties. Formulation and, again, separately for own Part I, Sr.2 & Part II, Sr.4—Opening & closing stock manufactured, got manufactured from outside partiesof unpacked is normally grouped under stock in- (on P to P or LL) and manufactured for others underprocess. However, under the present Rules, the Stock job-work arrangement in the factory.has been shown under three distinct stages—Stock- Sr. 5—Batch size—It should be shown in the range,in-process, Unpacked Stock and Packed Stock. if there is varying batch size for different batches.550 The Management Accountant |May 2012
  • 47. COSTING Srs. B & D—Primary packing cost & Srs. J & K— Note 8—As per this note, expenses incurred forSecondary packing cost—As per normal practice in getting accreditation from Overseas RegulatoryPharma Industry, they cannot be separately shown. Authority shall be charged to products exported on Sr. D—Packing cost—It should be read as primary scientific & equitable basis.packing conversion cost. Note 16—The impact per unit of abnormal loss has Sr. G—Opening/Closing WIP should be considered to be shown separately as per this note. However, asbefore Sr. D. per Generally Accepted Cost Accounting Principles, the cost of abnormal loss is omitted from cost records. Sr. K—It should be read as secondary packing So there is no question of calculating and indicatingconversion cost. its impact per unit. Sr. S-1—It should be read as selling & distribution Conclusioncost. In view of Notes 7 & 11, liberty is given to company Sr. S-2—Sample cost should be included under to modify the Proforma. Therefore, it is suggested thatsales promotion expenses. company can continue with the existing working Sr. V—It is not understood as to how ‘other papers and other formats for cost records which are inexpenses or income not included in cost can be shown vogue and can continue to use existing computerin product-wise cost statement. It should be considered programme or excel software, based on the existingas reconciliation item. Cost Accounting Records Rules for Bulk Drugs & 15. Proforma H—It is a newly introduced Proforma. Formulations. Anyway, from the existing cost records,Fixed Asset Schedule should be restructured to fill up Para 5—Abridge cost statement (for each productthis Proforma. group) can be prepared, which is, ultimately, to be 16. Notes—Vide note Nos. 7 & 11, Proforma can be submitted to the Government along with e-filed Costmodified. Audit Report. ❐FOR ATTENTION OF MEMBERS The fees payable by the members of the Institute have been revised by the Council with effect from 1st April,2012 from the financial year 2012-2013 onwards as follows : Category of fees Amount Payable Associate Entrance Fee Rs. 1,000/- Associate Membership Fee Rs. 800/- p.a. Fellow Entrance Fee Rs. 1,000/- Fellow Membership Fee Rs. 1,500/- p.a. Certificate of Practice Fee Rs. 1,000/- p.a. The fees payable by the retired members entitled to pay at reduced rate in pursuance of Regulation 7 (4) ofthe Cost and Works Accountants Regulations, 1959 with effect from 1st April, 2012 from the financial year 2012-2013 onwards shall be as follows : Category of fees Amount (Rs.) Associate Membership Fee Rs. 200/- p.a. Fellow Membership Fee Rs. 375/- p.a.The Management Accountant |May 2012 551
  • 48. BUDGET ANALYSIS Is the Union Budget of India (2012-2013) Realistic and Achievable? Dr. Dilip Kumar Datta M. Tech, MBA (Fin), Ph.D., Director & CEO, Sayantan Consultants (P) Ltd. KolkataB udget proposal of any financial year is a Looking at the behaviour of revenue expenditure projected statement of sources and applications (RE), it is observed that during the reference period, of fund of the government for that year. RE as percentage of GDP remained at about 22%. One would get a different picture of this year’s On the other hand, capital expenditure (CE) asbudget, if it is analysed in the way, financial analysts percentage of GDP increased to 3% from 2%, with aanalyse projected statement of income and expenditure mean of 2.5%.of a company. In order to make the projections realistic, Trend analysis of revenue deficit (RD) and fiscalfinancial analysts do trend analyses and variance deficit (FD) showed that both these importantanalyses of historical data to finalize basic assumptions indicators of economy increased with reference tounderlying the future projections so that the projections GDP; the former increased to 7.6% from 3% of GDP,become realistic and achievable. while the later increased from 4% to 10%. Interestingly, Adopting the same method, trend analyses of the while GDP growth rate (average y-o-y) was about 7%,past data (2006-07 to 2011-12) shows that the Centre’s the same for total expenditure (TE) was about tax revenue (NTR) as percentage of GDP was 10% This is another alarming situation. Rate of increase inin 2006-07 which increased to 12% in 2011-12 (mean income is less than rate of increase in total expenditure.value 11%). Non-tax revenue as percentage of GDP, This leads to more dependence on outside borrowingswhich was 3% in 2006-07 decreased to 2.4% in 2011-12 which might impair sovereignty of a country. This,(mean value 2.70%). Mean value of total revenue coupled with declining DSC and ISC, are deterringreceipt (TRR) during the same period was 13.50% of factors for sustainable growth. That India is leading toGDP, while the mean value of total capital receipt such a situation is clear from the deteriorating DSC(TCR) during the period was 7.50% of GDP. Mean ratio and ISC. Moreover, DSC and ISC shown in the unionof TRR and TCR during the reference period was 2.20 budget appear to have not been calculated in line withindicating TCR was about 45% of TRR. Though debt the method adopted by financial analysts. DSC of areceipt (DR) as percentage of TCR decreased from 96% country should be an indicator showing how much of(2006-07) to 95% (2011-12), mean value was about 96%. the total borrowings and other liabilities a country canHowever, DR as percentage of total receipt (TR) pay on demand from TRR. ISC should indicate howincreased from 25% (2006-07) to 40% in 2011-12(mean much of interest payment can be made from interestvalue 32%). Compared with GDP, DR increased from collected. DSC should be collected as a ratio between4% to 10% during the reference period. This shows that TRR and borrowings and other liabilities of that year.DR is not only the main source of capital receipt (long ISC is a ratio between amount of interest receipt,term sources of fund) but also it indicates centre’s dividends and profits to amount of interest paymentsincreasing reliance on outside debt. Interest payment and prepayment premiums in a year. On this basis,as percentage of revenue expenditure remained atabout 24% from 2008-09 to 2011-12. The same as DSC decreased from 3.05 to 1.96 and ISC decreasedpercentage of GDP remained constant at about 5%. from 0.34 to 0.25 during the reference period.Such decline does not indicate favourable situation if Now, let us see what is revealed from varianceone analyses with reference to higher incremental analysis. Variance analysis for the reference periodgrowth rate of revenue expenditure compared to that shows interesting features. While receipts showedof interest payment. Both these features are clear favourable variance, expenditures showed adversesymptoms of reducing debt servicing capacity (DSC) variance. Both actual receipts and expenditures wereand Interest servicing capacity (ISC). more by about 5%. Gap between long term sources of552 The Management Accountant |May 2012
  • 49. BUDGET ANALYSIS Table 1 : A comparative picture of the Union (RD). This RD, in the language of a financial analyst,Budget (2012-13) is deficit in net working capital (NWC) of an entity. (Rs. in crores) More will be the gap, more would be the deficit inSl. Components Realistic estimateAmount shown funds required to run the government.No. on the basis of in the Now, let us look at the Centre’s efficiency of trend and Union Budget collecting interest due on loan given by it. An index variance analyses may be found out to determine the efficiency of the a. Net tax revenue 614633 771071 government for this purpose. Amount of interest (11% of GDP) received during a particular year as a percentage of b. Non-tax revenue 150864 164614 mean value of total loan outstanding at the beginning (2.70% of GDP) and at the end of that year may be considered as c. Total revenue receipt (TRR) 765497 935685 efficiency index for interest collection (EIIC). On this (a + b) basis, it is observed that EIIC which was 0.08 during d. Capital receipt (CR) 344474 555241 2007-08, declined to 0.03 during 2011-12 showing an (45% of TRR) unfavourable situation. e. Total receipt = 1109971+55499 1490925 Now, let us see what should have been the realistic [(c+d) + 5% of (c+d)] =1165469 picture of the Union Budget (2012-13) on the basis of f. Revenue expenditure (RE) 1229265 1286109 underlying assumptions arising from the results of the (22% of GDP) trend and variance analyses given as above. Table 1 g. Capital expenditure (CE) 139689 204816 gives a comparative picture. (2.5% of GDP) It would be revealed from Table 1 that components h. Total expenditure = 1368954+68448 1490925 of Union Budget appear to be not realistic and [(f+g) + 5% of (f+g)] =1437402 achievable. The main difference lies in the revenue i. Total interest payment 295024 319759 deficit, fiscal deficit and primary deficit. Amount of (24% of revenue expenditure) revenue deficit, fiscal deficit and primary deficit would j. Revenue deficit (c – f) 463768 350424 be much more than projected in the Union Budget. k. Fiscal deficit [(h-(c+Loan 653330 513590 These deficits are likely to be met by borrowing more recoveries+Other receipts)] from the markets and by other means, or by curtailing l. Primary deficit ( k – i) 358306 193831 the expenditure in important sectors, namely, education, health, infrastructure, agriculture etc. Such(Note: On the basis of past trend, GDP will grow at the rate of 7% during2012-13. This means GDP would be Rs. 5587569 crores during the a step is not only against the public interest but alsofinancial year 2012-13. Further, in absence of actual data for 2011-12, reduces both debt and interest servicing capacity ofrevised estimate has been considered as nearer to actuals.) the government.Source: http:/ Central government should thus pay muchfund (LTS) and long term application of fund (LTA) attention to such an important issue while preparingwidened leading to increasing trend in revenue deficit the budget. ❐ Humble Appeal We invite quality articles from members in industry having relevance to Cost & Management Accountancy/Finance/Management/Taxation for publication in the journal for the benefit of our esteemed readers. Articles, accompanied by coloured photographs of the author(s) can be sent to rnj.rajendra@icwai.orgThe Management Accountant |May 2012 553
  • 50. CASE STUDY Sustainable Growth in Indian Jute Industry—An Exploratory Study Ashim Paul M.Com., SET, Pursuing Ph.D. Research Scholar, Department of Commerce, University of Calcutta Introduction and creates employment to near about 4 million families, whereas the informal or unorganized sectorT oday’s environment-conscious industrial world puts much more efforts on eco-friendly projects has 700 registered units and creates employment to and concentrates more on production of bio- 63000 families [Source:]. Datadegradable products. Jute is one of those products, collected from the International Jute Study Group,which is purely of bio-degradable and eco-friendly in available at www.jute .org suggest that India takes anature and hence, it has found many uses in recent major share in Worlds jute production by producingtimes. Jute is one of the largely cultivated crops in India, 1.95 metric ton jute per hectare and occupying anand it occupies an important position in Indian average land area of 8,36,000 hectares annually. At theagriculture. Jute is popularly known as the ‘Golden same time it generates an export quantity of 2, 02,000Fiber’ for its numerous uses. Traditionally, jute is metric ton jute goods, valuing US$ 246 million eachmainly used as packing materials in the manufacturing like sugar, cement, food grain etc., but with Therefore, this paper aims at examining the growthtime many diversified jute products have come into and sustainability of Indian jute industry. Section 2 ofuse and now jute is being increasingly used for the paper highlights the present scenario of Indian jutemanufacturing of many fashionable household industry in terms of its production, jute producingproducts of daily use like mat, bag, fabric, carpet, cloth, states, number of jute mills etc. Section 3 representscurtain etc. Indian Jute Industry is the largest producer the future scope and opportunities of jute industry inof raw jute and jute products in the world. India holds India and examines future sustainability of Indianthe second largest position internationally as regards jute industry. Section 4 discusses the recentexport of jute goods. Jute plays a very important role developments and regulative measures in thein Indian economy. India’s textile industry is mainly concerned industry in India and the paper ends withdependent on jute. Apart from having huge export conclusions in Section 5.potential, the jute companies meet domestic needs as Present Scenario of Indian jute Industrywell. The government of India has taken many major This section has been compartmentalized into twosupportive steps for the protection and growth of this parts : (a) discusses the state- wise distribution of juteindustry. It has set up different authorities and mills in India and (b) shows state-wise raw jutelegislative councils for successfully maintaining production in India.various acts and schemes to protect jute industry fromlosing its existing market. To name a few, the Jute (a) State-wise distribution of jute millsManufactures Development Council (JMDC), Centre The major jute producing states in India are WestResearch Institute for Jute and Allied Fabrics, Indian Bengal, Assam, Bihar, Orissa and Andhra Pradesh, butJute Industries Research Association (IJIRA), Indian the Indian jute industry is mainly dependent on WestJute Mills Association (IJMA) etc. are such efforts made Bengal wherein this industry had begun in 1854 withby the government. The Indian jute sector comprises the setting up of the jute mill by George Auckland atof two parts, namely, organized sector and Rishra in Hooghly district. As per the National Juteunorganized sector. Organized sector dominates this Board, India records, there are 80 jute mills in India atindustry in India by contributing maximum in terms present, out of which 62 belong to West Bengal, 7of employment generation and production of jute belong to Andhra Pradesh, 3 belong to Bihar and Uttarproducts. It has an average annual production of 1.6 Pradesh each, and Assam, Orissa, Madhya Pradeshmillion metric ton of jute products with 78 jute mills and Tripura have 1 jute mill each. But the crucial fact554 The Management Accountant |May 2012
  • 51. CASE STUDYis that, out of these 80 jute mills of India, 11 jute mills while India’s annual yield of raw jute is 1.95 metricare not working, and 31 jute mills are referred as sick ton per hectare [Source: International Jute Studyby the Board for Industrial and Financial Reconstruc- Group, available at www.jute .org]. If this trend of lowtion of India (BIFR) [Source: Jute Commissioner, productivity of raw jute per hectare keeps continuingMinistry of Textiles, Government of India]. The in India, then it will certainly damage Indian jutefollowing exhibit (Exhibit 1) will represent the state- market. Therefore, the state-wise production of rawwise distribution of jute mills in India more clearly : jute in India should have to be increased to cope with Exhibit 1 the increasing national and international demand for Distribution of Jute Mills in India jute products. State Number of Jute BIFR Cases Mills Not Sustainability of Indian Jute Industry Mills Working This section has been compartmentalized into twoWest Bengal 62 27 8 parts to depict the growth of Indian jute industry inAndhra Pradesh 7 1 1 terms of its production of raw jute and export of juteBihar 3 1 1 goods to analyze its future sustainability. Part (a) shows growth of Indian jute industry in terms ofUttar Pradesh 3 1 1 production of raw jute and part (b) highlights growthAssam 1 — — of Indian jute industry as regards its export of juteOrissa 1 1 — goods.Madhya Pradesh 1 — — (a) Growth as regards production of raw juteTripura 1 — — India being the largest producer of raw jute has (b) State-wise production of jute in India huge potential for its jute industry. The following exhibit 3 shows the total production of raw jute in India Exhibit 2 and its growth rate since 2001-02, as per the data State-Wise Production of Raw Jute collected from the Jute Commissioner, Ministry of Textile, Government of India: Exhibit 3 Production and Growth of Raw Jute Year Production Growth (000’ Bales) (000’Bales) 2001-02 9000 –1500 2002-03 11000 2000 2003-04 9000 –2000 2004-05 10272.3 1272.3 2005-06 10839.6 567.3 2006-07 11273 433.4 2007-08 11210.5 –62.5 The above exhibit (Exhibit 2) is based on the figures 2008-09 10365.3 –845.2of raw jute production in the year 2009-10 and it clearlyshows that West Bengal shares the major portion of 2009-10 11103.9 738.6raw jute production in India It indicates that West From the above exhibit ( Exhibit 3) it is quite clearBengal itself produces 80% of total raw jute production that raw jute production in India has witnessed an upof India during 2009-10, whereas Bihar is at second and down trend since 2001-02. During the 2000-01,place with 10% of total production, followed by Assam total production of raw jute in India was 10500x1000and some other states. Experience suggests that the bales. It has registered a significant increase in the yearsjute industry of West Bengal had flourished in the past, 2002-03, 2004-05 and 2009-10 relative to their respectiveand though it holds the first position as regards raw previous years. However, it showed a nominal increasejute production in India, but for the last few years it in 2005-06, 2006-07 and a negative growth in raw jutehas been facing ups and downs and condition of the production in 2001-02, 2003-04, 2007-08 and 2008-09.other states is also not very satisfactory. The annual The main reasons for such inconsistent growth in rawper hectare yield of raw jute in Bangladesh and China jute production in India are insufficiency of adequateare 2.32 metric ton and 2.67 metric ton respectively, capital, poor quality seeds and scarcity of water. ForThe Management Accountant |May 2012 555
  • 52. CASE STUDYall these reasons, total production of jute in India Exhibit 6follows an inconsistent pattern every year, and as a Trend of Jute Export from India (Quantity)result, though India occupies a major share in World’sjute production and export, it is far behind theoptimum level that could be achieved, if the problemsof this industry are identified at an early stage andcurative measures are taken. It is, therefore, imperativeto identify the causes of such downsides of the juteindustry in India so that preventive measures can besuggested. However, the following exhibit (Exhibit 4)will show more clearly the inconsistent growth patternof jute production in India through a line chart : Trend of Jute Export from India (Value) Exhibit 4 Trend of Jute Production in India The above exhibit (Exhibit 5) shows that total export of jute goods from India in terms of quantity has shown (b) Growth as regards export of jute goods a decreasing trend from 2005-06 and continued up to India holds the second largest position as regards 2008-09, but during 2009-10 it has slightly improvedexport of jute goods in the World. The next exhibit over the last year i.e. 2008-09 and in terms of value the(Exhibit 5) shows total volume of export of jute goods picture is also not very bright. It has seen negativeof India in terms of quantity and value from 2000-01 growth in the years 2001-02, 2006-07 and in the recentto 2010-11. Accordingly, the two subsequent line charts past i.e. 2009-10. But luckily during the last financial year 2010-11 it got in to the positive track andrepresent the trend of Indias export growth as regards registered a growth in terms of its quantity and valuejute goods in terms of its quantity and value since 2000- together. On the other hand the trend lines in the above01 [Source: Jute Commissioner, Ministry of Textile, exhibit (Exhibit 6) depict the same inconsistentGovernment of India]. behaviour of Indian jute industry similar to that of raw Exhibit 5 jute production in exhibit 4. From the above analysisExport of Jute Goods in Terms of Quantity and Value the problems of Indian jute industry can be indentified Year Export Growth Export Rs Growth Rs and summed up as follows : (000’M.T) (000’M.T) (Cr.) (Cr.) ● jute industry in India mainly suffers from inadequate supply of capital, raw material,2000–01 181.4 12.4 646.3 71.8 scarcity of water and dearth of skilled labour2001–02 146.1 –35.3 567.5 –78.8 etc;2002–03 229.2 83.1 916.6 349.1 ● jute mills in India generally follow traditional2003–04 310.4 81.2 1051.88 135.28 methods for producing jute products which2004–05 321.8 11.4 1146.9 95.02 involve high production cost; ● old infrastructures of the jute mills reduce total2005–06 285.8 –36 1186.24 39.34 production of jute goods continuously;2006–07 242.8 –43 1055.16 –131.08 ● competition from the other Asian countries like2007–08 204.3 –38.5 1143.57 88.41 China, Bangladesh is increasing rapidly;2008–09 199.8 –4.5 1216.16 72.59 ● low cost jute products from other Asian countries are capturing international market;2009–10 110.5 –89.3 859.46 –356.7 ● lack of proper administration and governance2010–11 199.3 88.8 1363.29 503.83 system encourages jute mills to attract financialM.T= Metric Ton and Cr. = Rs in Crore anomalies more quickly;556 The Management Accountant |May 2012
  • 53. CASE STUDY ● dearth of proper agricultural strategies and ● identification of the disclosure and reporting rapid urbanization are putting harm full effects aspects of financial matters in relation to the jute on jute cultivation in India largely; companies; However, the government of India is trying hard ● assessment of the need for diagnosis of financialto protect this ancient industry from losing its existing anomalies, if any in Indian jute industry andmarket nationally and internationally. It has set up a proper efforts should also be made to find outnumber of organizations, legislative councils to protect the possibility of its revival;Indian jute industry from international competition by ● measurement of the financial performance,improving the standard and quality of the jute signals and effects of financial anomalies in juteproducts and introduced various acts to create social industry in India;awareness for encouraging use of jute products. The ● eradication of the reasons responsible fornext paragraph will highlight different activities that inconsistent financial performance of the juteare being taken up in India to create an environment mills in India in recent years, to the extentso to give this premier industry a boost to sustain for possible;many years to come. ● strategies for judging the financial stability of the existing jute mills currently operating in Steps for Future Sustainability of Indian Jute India;Industry ● implementation of appropriate packages of The general objective behind setting up of different restructuring and rehabilitation strategies fororganizations is to watch and monitor the growth of jute industry;the jute industry in India and take necessary steps forhelping this industry to sustain. Institutes that Conclusionsgenerally carry on different researches on how to Jute industry is one of those industries whichincrease the demand of jute goods by developing new depends largely on the external factors than thevariety of jute products in India are namely Centre internal issues and hence likely to attract financialResearch Institute for Jute and Allied Fabrics, Indian anomalies more quickly. If the above identifiedJute Industries Research Association (IJIRA), Indian problems remain unsolved, then these may lead toJute Mills Association (IJMA), Jute Manufactures several problems for Indian jute industry like underDevelopment Council (JMDC) etc. The main acts that utilization of capacity, poor surplus generation, declinecontrol and regulate jute industry in India and in net worth etc and ultimately affect its sustainability.encourage use of eco-friendly jute products are Jute Therefore, the sooner these problems are appropriatelyPackaging Materials Act 1987, Jute Manufacturers Cess addressed, the lesser will be the probability for IndianAct 1983, and National Jute Board Act 2008 etc. In spite jute industry to lose its sustainability. Indian juteof these organizations and acts, the government of industry is facing two big challenges in recent timesIndia has introduced some specific orders and rules which are high production cost and inadequate supplyfor controlling the market competition and making it of capital. Therefore, new technologies should becompulsory for some industries to use jute packaging. introduced to produce standard jute products at lowSome of the orders and rules are Jute and Jute Textiles cost to capture the growing international market.Control Order 2000, Jute and Jute Textile Control Besides, supply of raw material should be brought(Amendment) Order 2005, Notification for withdrawal under control, labour rate should be held in check, andof minimum Order 2006, and Jute Manufactures proper policies are to be framed to maintain aDevelopment Council (JMDC) Procedural Rules 1984, sustainable growth. Experience suggests that the juteJute Packaging Materials Rules 1987 etc respectively. industry in India had flourished in the past because ofMore specifically, the government with all its its favourable environment, availability of labour andorganizations, acts, orders and rules should look into demand of its jute products from national andthe following issues for maintaining a consistent international markets etc. Therefore, chances are stillgrowth in the concerned industry to help it sustain in there to make Indian jute industry a grand success andcoming years : for this purpose some true initiatives as suggested ● an in depth analysis of the legal provisions and above, need to be taken to replace this present other regulatory measures regarding financial inconsistent growth by a consistent one and hence help matters, especially those applicable to the jute the industry grow further and sustain for a longer mills in India; period.The Management Accountant |May 2012 557
  • 54. CASE STUDYDiagnosing BSNL As A Business—Performance Analysis of A Fully Owned Government Company—A Case Study of Bharat Sanchar Nigam Ltd. John Thomas Ramesh Damarla AFS, MA, CISA, MBA M.Com., ACMA, ACS Chief General Manager, NATFM Junior Accounts Officer, NATFM Hyderabad HyderabadStakeholder’s point of view inevitable as ‘‘coexistence’’ of both private and public is the spirit of Indian Political Economy. Hence, theI n looking into firm level financial performance, generally analysis is concerned with two sets of continued viability of BSNL is of strategic concern for performance measures. One based on capital the government and valuation of a firm and the other set based on Objectives of the Studyaccounting measures of profitability and financial This study has the following objectives :performance. ● To study the significance of profitability by Our method is to approach the issue from a selecting a few important parameters such asstakeholders point of view. Stakeholders in BSNL are: Operating Profit (EBIT), Net Profit, Return onGovernment of India, Customers, Regulatory Investment (ROI), Return on Capital EmployedAgencies, Suppliers and the General Public. The (ROCE), EPS, and P/E and some other crucialtraditional way of defining Stakeholders also does not turnover, liquidity and capital structure ratios.seem to hold valid for BSNL because the objectives ofthe Government (as the only investor) is far beyond ● To examine the liquidity capacity based on acidthe short-term goals of financial returns of value test and current ratio with certain presumptionsmaximization. applicable. With the opening up of the Telecommunications ● To make an assessment of the critical factorssector in India, the Consumers as a stakeholder which affect the profitability of BSNL.acquires a different meaning, and it becomes the focus ● To give some suggestions for the betterment ofof all marketing and innovation of all operators in the the earnings on the basis of findings of the study.sector. The same could be said of the suppliers and Company Profilethe peripheral equipment vendors. We can then argue The Company took over the business of providingthat the most important stakeholders in BSNL are in telecom services and network management throughoutfact its own Employees. Our attempt will then try to the country except the metro cities of Delhi andfocus on an assessment of the Company’s performance Mumbai from Department of Telecom Services andthat views financial performance from the perspective Telecom Operations w.e.f. 01.10.2000 pursuant to anof the Employees. At the same time we wish to point MoU signed between the BSNL and Government ofout that it cannot offer a complete perspective because India. BSNL is a Government Company under theemployees have much more at stake than just financial Sec. 617 of the Companies Act, 1956. The entire shareissues before them. capital—both equity and preference—is held by the Justification of the Topic Government of India. Being GoI holding 100% equity In the era of Globalization, Liberalization and share capital, BSNL is an unlisted company. Its Paid-Privatization the challenges faced by the Public Sector up value of Equity share capital is Rs.5,000 croresTelecom Operators in India is unique. The challenges and Rs. 7,500 crores preference share capital.Theare multi faceted related to Marketing, Finance, vision of the BSNL is to become the largest telecomHuman Resources Management etc. The Profits are service provider in South East Asia. Its Mission is tounder severe pressure. The Telecom Industry has provide world class state of art technology telecomcontributed to the all-round growth of the Economy services on demand at affordable price and to provideand there is no gainsaying the contribution of the world class telecom infrastructure to develop country’sPublic Sector role. BSNL in the Telecom industry is economy.558 The Management Accountant |May 2012
  • 55. CASE STUDY Limitations of the Study ● Operating Profit Ratio The following are the limitations of the study : ● Earning per share 1. The study covers only 9 years’ period, i.e. 2002- ● Price Earning Ratio 03 to 2010-11, for the financial analysis of the ● Dividend Payout Ratio BSNL. ● Return on Investment 2. The secondary data used in this study have been ● Debt-Equity Ratio taken from published annual reports only. ● Fixed Assets to Net Worth Ratio 3. As per the requirement and necessity some data ● Current Assets to Net Worth Ratio have been grouped and sub-grouped. ● Fixed Assets Turnover Ratio ● Working Capital Turnover Ratio 4. For making analysis of financial position of BSNL, ratio analysis techniques of Financial ● Debtors Turnover Ratio Management. ● Creditors Turnover Ratio ● Gross Analysis from stakeholders’ point of Research Methodology and Study view. In this study of sample company named BSNL has Hypothesis of the Studybeen taken for analysis of financial position in generaland liquidity in specific. Present study is based on This study is based on the following hypothesis :secondary data, i.e. Published annual reports of the ● The earning capacity of the BSNL is similarcompany. These financial data is classified, tabulated during the study period.and edited as per the requirement of the profitability ● The earning capacity depends on total invest-analysis of the company. This study has covered 9 ment.years’ data from 2002-03 to 2010-11 for analysis of ● Performance is measured through Profitabilityfinancial position of BSNL. and turnover ratios. Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 TO 2010-11. Sl. Financial Ratio / Financial Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average No. 1 Current Ratio 0.78 1.33 2.65 2.79 3.22 3.34 2.79 1.29 1.20 2.15 2 Liquidity Ratio 0.64 1.21 2.49 2.62 3.08 3.15 2.57 1.17 1.02 1.99 3 Net Profit Ratio % 5.58 17.62 28.22 22.25 19.65 7.91 1.61 –5.69 –21.50 8.40 4 Operating Profit Ratio % 10.27 26.52 21.95 21.02 20.53 11.70 3.55 –6.86 –22.16 9.61 5 Earnings Per share (Rs.) 2.89 11.95 18.83 15.28 14.03 4.44 1.15 –3.65 –12.77 5.79 6 P.E. Ratio (Say Price Rs.100) 34.60 8.37 5.31 6.54 7.13 22.52 86.96 –27.40 –7.83 15.13 7 Dividend Payout Ratio % 17.31 4.71 11.54 13.14 15.05 49.84 0.00 0.00 0.00 12.40 8 Return on Investment % 2.58 9.48 13.99 11.07 8.98 3.41 0.65 –2.11 –7.97 4.45 9 Debt-Equity Ratio 0.42 0.27 0.23 0.20 0.16 0.14 0.13 0.11 0.13 0.20 10 Fixed Assets to Net Worth 1.29 1.09 0.91 0.79 0.70 0.65 0.67 0.92 0.96 0.89 11 Current Assets to Net Worth 0.29 0.44 0.53 0.57 0.62 0.66 0.65 0.64 0.33 0.52 12 Fixed Assets Turnover Ratio 0.36 0.49 0.54 0.63 0.66 0.66 0.60 0.40 0.39 0.53 13 Working Capital Turnover Ratio –5.81 5.01 2.19 1.64 1.24 1.10 1.12 4.84 –14.17 –0.32 14 Debtors Turnover Ratio 8.79 8.52 5.44 6.38 6.37 6.96 7.59 6.75 4.69 6.83 15 Creditors Turnover Ratio 1.50 2.27 2.48 2.43 2.38 2.19 1.73 0.75 1.35 1.90 Source : Annual reports of BSNL from 2002-03 to 2010-11. The financial and liquidity position of BSNL have 1. Current Ratio : It is a measure of general liquiditybeen analyzed by the financial techniques of Ratio and is most widely used to make the analysis for shortAnalysis. term financial position or liquidity of a firm. It is The collected data have been analyzed with the help calculated by dividing the total of the current assetsof the following financial ratios : by total of the current liabilities. ● Current Ratio Current ratio may be defined as the relationship ● Liquidity Ratio between current assets and current liabilities. This ratio ● Net Profit Ratio is also known as ‘‘working capital ratio’’. It is a measureThe Management Accountant |May 2012 559
  • 56. CASE STUDYof general liquidity and is most widely used to make which is considered to be ideal ratio of liquidity.the analysis for short term financial position or However, the average liquidity of the BSNLliquidity of a firm. It is calculated by dividing the total during the past is 1.99 : 1 which is consideredof the current assets by total of the current liabilities. higher liquidity in the industry. Over the years the Current Ratio = Current Assets /Current Liabilities company has built up a strong ethics of liquidity Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 To 2010-11.Sl. Financial Ratio/FinancialNo. Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average1 Current Ratio 0.78 1.33 2.65 2.79 3.22 3.34 2.79 1.29 1.20 2.15 Current Asstets to Current Liabilities Bar and its highly liquid components of current assetsDiagram from 2003 to 2011 (Fig. in Lakhs of Rs.) have been more than the illiquid items. This gives confidence to both the insiders who deal with the company on day-to-day basis and the vendors and suppliers. 3. Net Profit Ratio : Net profit ratio is the ratio of net profit (after taxes) to sales. It is expressed as percentage. The two basic components of the net profit ratio are the net profit and sales. The net profits are obtained after deducting income- Source : Compiled from BSNL annual Reports tax. Stakeholders view : Current ratio should be around Net Profit ratio is used to measure the overall1.5 : 1, which means current assets are more than current profitability and hence it is very useful to proprietors.liabilities. In case of BSNL its current ratio during the The ratio is very useful as if the net profit is notpast 9 years is good and on par with industry standards. sufficient, the firm shall not be able to achieve aThe average current ratio of BSNL is 2.15:1. BSNL has satisfactory return on its investment.the ability to manage its current liabilities without This ratio also indicates the firm’s capacity toliquidating any of its long term assets. Looking at the face adverse economic conditions such as priceprofitability ratios we can see that there is no immediate competition, low demand, etc. Obviously, higher thepayments crisis developing and the company can ratio the better is the profitability. But whileconfidently meet its short term obligations. interpreting the ratio it should be kept in mind that 2. Liquidity Ratio : Liquid ratio is also termed as the performance of profits also be seen in relation to‘‘Liquidity Ratio’’, ‘‘Acid Test Ratio’’ or ‘‘Quick Ratio’’. investments or capital of the firm and not only inIt is the ratio of liquid assets to current liabilities. relation to sales.The true liquidity refers to the ability of a firm to pay Stakeholders view : BSNL is having growthits short term obligations as and when they becomedue. in profitability up to 2004-05 (i.e. 28.22%) and started declining from 2005-06 and reached to The two components of liquid ratio (acid test ratio negative level by 2010-11. Decline in the total revenueor quick ratio) are liquid assets and liquid liabilities. figure over the past led to negative Profit afterLiquid assets normally include cash, bank, sundry tax. Revenue fall is due to various reasons like falldebtors, bills receivable and marketable securities or of voice call charges to near Zero level, unrestrictedtemporary investments. In other words, they are entry in to the telecom sector in India, fallingcurrent assets minus inventories (stock). Inventories landline connections, lack of marketing skills tocannot be termed as liquid assets because it cannot be render service to the customers. The average Netconverted into cash immediately without a loss of Profit of BSNL is 8.4%. The profit position has beenvalue. strongly maintained over the years despite disruptive Liquid Ratio = (Curent Assettes-Inventories) / market forces. It is only during the last two years thatCurent Liabilities it has declined somewhat. It can be seen that the Net Stakeholders’ view : General ideal ratio of worth of the company has not been affectedliquidity is 1 : 1, in this regard high liquidity substantially due to this, and the long terms averageduring the past. In the year 2010-11 the ratio is 1.02 : 1 is good.560 The Management Accountant |May 2012
  • 57. CASE STUDY 4. Operating Profit Ratio : Operating Profit Ratio is required to generate the earnings (net income)shows the percentage of profit earned on every rupee in the calculation. Two companies could generateof revenue earned. the same EPS number, but one could do so with Operating Ratio is calculated as: PBIT/Total less equity (investment)—that company wouldRevenue * 100 be more efficient at using its capital to generate Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 To 2010-11.Sl. Financial Ratio/FinancialNo. Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average2 Liquidity Ratio 0.64 1.21 2.49 2.62 3.08 3.15 2.57 1.17 1.02 1.993 Net Profit Ratio% 5.58 17.62 28.22 22.25 19.65 7.91 1.61 –5.69 –21.50 8.404 Operating Profit Ratio % 10.27 26.52 21.95 21.02 20.53 11.70 3.55 –6.86 –22.16 9.61 Operating costs as a percentage of Revenues income and, all other things being equal, would2003-2011 be a ‘‘better’’ company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures. Formula for calculating EPS = Profits available to Equity Shareholders/No.of Equity Shares. BSNL is having its paid up capital of Rs. 5,000 crore divided in 500 crore equity shares of Rs. 10/- each. Earnings Per share for BSNL 2003-2011 Source : Compiled from BSNL Annual Reports (Figures in whole rupees.) Stakeholders’ view : The relationship between theProfits before Interest, taxes to Total Revenue. Duringthe past 9 years’ period the average operating profit is9.61%. The Operating sales shows gradual increasefrom 2002-03 to 2005-06 and gradual decrease therefrom. During the study period the mean deviationwith respect to Operating sales is even. The Operatingprofit ratio is volatile in most of the years. The highgrowth years were due to the introduction ofmobile services and consumer euphoria that followed.BSNL has been unable to maintain this trajectory Source : BSNL Annual Reportsbecause of capacity constraints in the emerging Stakeholders’ view : The average Earningssegment. But this appears to be temporary as the per share in BSNL is Rs. 5.79 during the past 9 yearsTelecom sector itself is fast changing from ‘‘voice to which means the owners are earning not less thandata and beyond’’, where the company with its 50% of their investment in equity during all theconsiderable muscle power in long distance backhaul years so far. This indicates its potential so far andnetwork infrastructure can foray into Broadband future is to be designed accordingly. Governmentsservices. returns on investment in telecom consists not only of 5. Earning Per Share : Earnings per share is the actual financial but also the social andgenerally considered to be the single most developmental linkages that it involves. Consideredimportant variable in determining a share’s price. It in this perspective the long term returns are also a major component used to calculate the However, with impeding wave of reforms in this sectorprice-to-earnings valuation ratio. An important the shortfalls during the last two years might be aaspect of EPS that’s often ignored is the capital that temporary dip.The Management Accountant |May 2012 561
  • 58. CASE STUDY 6. Price Earning Ratio : Price earnings ratio dividend and to know what portion of earnings(P/E ratio) is the ratio between market price per has been retained in the business. It is an importantequity share and earning per share. The ratio is ratio because ploughing back of profits enablescalculated to make an estimate of appreciation in a company to grow and pay more dividends inthe value of a share of a company and is widely future.used by investors to decide whether or not to buy Dividend Payout Ratio = Dividend per Equityshares in a particular company. It helps the investor in Share/Earnings per Sharedeciding whether to buy or not to buy the shares of aparticular company at a particular market price. Stakeholders’ view : Dividend payout ratio inGenerally, higher the price earning ratio the better it the initial years is high where the earnings of the company is good. Since 2008-09 its profits reachedis. If the P/E ratio falls, the management should look Zero level and no dividend is paid till 2010-11. Unlessinto the causes that have resulted into the fall of this the company gets profits in the future the point ofratio. payment of dividend may not arise. The average Price Earnings Ratio = Market price per equity dividend pay out ratio of BSNL is Rs. 12.40. Retainedshare/Earnings per share Earnings are very high percentage of nearly 88% for BSNL, which augurs well for the future of the Price-Earnings Ratio of BSNL company. from 2003-2009 8. Return on investment : It is the ratio of net profit to shareholder’s investment. It is the relationship between net profit (after interest and tax) and share holder’s/proprietor’s fund.This ratio establishes the profitability from the shareholders’ point of view. The ratio is generally calculated in percentage. Return on shareholder’s investment = Profit after Tax /Equity. Share holder’s fund ¥ 100 Return on Investments in BSNL 2003-2011 (Fig. in Percentage) Source : compiled from BSNL Annual Reports Stakeholders’ view : In case of BSNL as it is notlisted company the market price per share is assumedas Rs. 100/- per every equity share of Rs.10/- each.The average price earning ratio of BSNL is Rs.15.33. Itmeans that to earn a rupee, 15.33 rupees need to be Source : calculated from Annual Reportsinvested. Normally it is considered high side by the Stakeholders’ view : The return on investment ispotential investors. The authors feel that an issue ESOP highest in the year 2004-05. The return figure is positiveto the employees at par at this juncture may be up to 2008-09 later it becomes negative. The average return on investment is 4.45% which is less than thesuccessful. average inflation rate of Indian economy during the period of study. Here again this ratio might not be 7. Dividend Pay-out Ratio : Dividend pay-out adequate to represent the expected returns fromratio is calculated to find the extent to which investments in a public sector company. Socialearnings per share have been used for paying economic factors also need to be given due weight age. Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 To 2010-11.Sl. Financial Ratio/FinancialNo. Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average5 Earnings Per share (Rs.) 2.89 11.95 18.83 15.28 14.03 4.44 1.15 –3.65 –12.77 5.796 P.E. Ratio (Say Price s. 100) 10.27 26.52 21.95 21.02 20.53 11.70 3.55 –6.86 –22.16 9.617 Dividend Payout Ratio % 17.31 4.71 11.54 13.14 15.05 49.84 0.00 0.00 0.00 12.408 Return on Investment% 2.58 9.48 13.99 11.07 8.98 3.41 0.65 –2.11 –7.97 4.45562 The Management Accountant |May 2012
  • 59. CASE STUDY 9. Debt-Equity Ratio : Debt-to-Equity ratio be a good financial management by the companyindicates the relationship between the external equities because of the volatility in the early years ofor outsiders funds and the internal equities or competition and entry of private players into theshareholders funds. It is also known as external internal market. A high borrowing level would have beenequity ratio. It is determined to ascertain soundness of difficult to service due to the uncertainty in thethe long term financial policies of the company. returns. Debt to Equity Ratio = Total Long Term Debts/ 10. Fixed Assets to Net Worth : Fixed assets to netTotal Long Term Funds worth ratio establishes the relationship between fixed 9. Debt-Equity Ratio: BSNL 2003-2011 assets and shareholders funds. The purpose of this ratio Proportion of External Debts to Equity is to indicate the percentage of the owners fundsShareholders Funds in BSNL for 2003-2011 (Fig. in invested in fixed assets.lakhs. of Rs.) Stakeholders’ view : The ratio of fixed assets to net worth indicates the extent to which shareholder’s funds are sunk into the fixed assets. Generally, the purchase of fixed assets should be financed by shareholder’s equity including reserves, surpluses and retained earnings. If the ratio is less than 1, it implies that owner’s funds are more than fixed assets and a part of the working capital is provided by the shareholders. When the ratio is more than the 1, it implies that owner’s funds are not sufficient to finance the fixed assets and the firm has to depend upon outsiders to finance the fixed assets. Source : calculated from Annual Reports On an average, BSNL is financing its fixed assets out Stakeholders’ view : Debt to equity ratio indicates of its own funds as the ratio is 0.89 and the balancethe proportionate claims of owners and the outsiders of own funds to the tune of 0.11 are used foragainst the firm’s assets. The purpose is to get an idea working capital also. Hence, the stakeholders in thisof the cushion available to outsiders on the liquidation regard appreciate the composition of financing theof the firm. However, the interpretation of the ratio assets.depends upon the financial and business policy of the This is a happy situation from the employeecompany. The owners want to do the business with point of view, because the real assets created bymaximum of outsider’s funds in order to take lesser the company purely out of internal accruals andrisk of their investment and to increase their earnings surpluses, will bring in considerable appreciation(per share) by paying a lower fixed rate of interest to in the market value of these assets. Thereby theoutsiders. The outsiders (creditors) on the other hand, company will be in a good position to tide overwant that shareholders (owners) should invest and risk any extreme, though unlikely, situation at a futuretheir share of proportionate investments. A ratio of 1:1 usually considered to be satisfactory ratio although 11.Current Assets to Net Worth : Current assetsthere cannot be rule of thumb or standard norm for all to net worth ratio establishes the relationshiptypes of businesses. Theoretically, if the owners between Current assets and shareholders funds.interests are greater than that of creditors, the financial The purpose of this ratio is to indicate theposition is highly solvent. In analysis of the long-term percentage of the owners funds invested in Currentfinancial position it enjoys the same importance as the assets.current ratio in the analysis of the short-term financial Stakeholders view : In this regard BSNL is havingposition. its current assets as 52% of its Net worth. Hence the In this regard BSNL is having very good ratio as its stakeholder is perhaps happy with the optimumdebts to equity on an average is 0.2:1. This appears to composition of existing net worth. Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 To 2010-11.Sl. No. Financial Ratio/Financial Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average 9 Debt-equity Ratio 0.42 0.27 0.23 0.20 0.16 0.14 0.13 0.11 0.13 0.20 10 Fixed Assets to Net Worth 1.29 1.09 0.91 0.79 0.70 0.65 0.67 0.92 0.96 0.89 11 Current assets to Net worth 0.29 0.44 0.53 0.57 0.62 0.66 0.65 0.65 0.33 0.52The Management Accountant |May 2012 563
  • 60. CASE STUDY 12. Fixed Assets Turnover Ratio : Fixed assets Debtors’ Turnover Ratioturnover ratio is also known as sales to fixed assets (BSNL 2003-2011)ratio. This ratio measures the efficiency and profitearning capacity of the concern. Higher the ratio,greater is the intensive utilization of fixed assets.Lower ratio means under-utilization of fixed assets.The ratio is calculated by using following formula : Fixed Assets Turnover Ratio = Total Revenue/Total Fixed Assets Fixed Assets Turnover Ratio BSNL 2003-2011 Source : calculated from Annual Reports Stakeholders’ view : As per the table above the average is 6.83 times (say 7) in a financial year which is considered good for a company with annual turnover ranging from 30,000 crore to 40,000 crore. 15. Creditors Turnover Ratio : This ratio is similar to the debtors’ turnover ratio. It compares creditors Source : calculated from Annual Reports with the total credit purchases. It signifies the Stakeholders’ view : The average Fixed Assets credit period enjoyed by the firm in paying creditors.turnover ratio in BSNL is just 0.53 which means the Accounts payable include both sundry creditorsassets are not used even to the value of 1 time. The and bills payable. Same as debtors’ turnover ratio,under-utilization of fixed assets is clear. The creditors’ turnover ratio can be calculated in twomanagement should find ways and means to use the forms, creditors’ turnover ratio and average paymentexisting asset base to its fullest value. period. 13.Working Capital Turnover Ratio : Workingcapital turnover ratio indicates the velocity of the Creditors‘ Turnover Ratio = Credit Purchase /utilization of net working capital. This ratio represents Average Trade Creditorsthe number of times the working capital is turned over Stakeholders’ view : The average paymentin the course of year and is calculated as : period ratio represents the number of days by the Working Capital Turnover Ratio = Cost of Sales / firm to pay its creditors. A high creditors’ turnoverNet Working Capital ratio or a lower credit period ratio signifies that the Stakeholders view : This ratio is volatile with creditors are being paid promptly. This situationrespect to BSNL is concerned 2003-04 and 2009-10 it is enhances the credit- worthiness of the company.having optimum ratio i.e. 5.01 and 4.84 times, However, a very favorable ratio to this effect alsorespectively. shows that the business is not taking the full 14. Debtors’ Turnover Ratio : Debtors’ turnover advantage of credit facilities allowed by the creditors.ratio or accounts receivable turnover ratio indicates When compared to the Debtors’ Turnover Ratio,the velocity of debt collection of a firm. In simple Creditors’ Turnover Ratio is 3 times lower which canwords, it indicates the number of times average be positive side of working capital management indebtors (receivable) are turned over during a year. BSNL. Analysis of BSNL Financial Ratios for intra firm comparison from FY 2002-03 To 2010-11.Sl. No. Financial Ratio/Financial Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average 12 Fixed Assets Turnover Ratio 0.36 0.49 0.54 0.63 0.66 0.68 0.60 0.40 0.39 0.53 13 Working Capital Turnover Ratio –5.81 5.01 2.19 1.64 1.24 1.10 1.12 4.84 –14.17 –0.32 14 Debtors’ Turnover Ratio 8.79 8.52 5.44 6.38 6.37 6.96 7.59 6.75 4.69 6.83 (contd. to page 568)564 The Management Accountant |May 2012
  • 61. HUMAN RESOURCE MANAGEMENT Organization Development : An Orientation to Change Management Dr. Anand Bansal Associate Professor in Commerce Government PG College Jalesar (Etah) U.P.O rganization development is a systematic, long- development in Indian set-up. Effective strategic and term effort and planned approach that operational plans, team and leadership development improves organization’s operation by using and competitive products or services may come outeffective and collaborative diagnosis, culture and as a result of a successful organization process. Peterbehavioral science techniques; it also contributes to the Drucker has rightly said ‘the entrepreneur alwayssignificant change in the attitude and behaviour of searches for changes, respond to it, and exploit it as anpersonnel through self-analysis plan. The theory of opportunity.’ The term organization development isorganization development elucidates as an application often used interchangeably with organization design,of behavioural science to organizational changes. It learning and development and organizationalconsists of a wide-range theories, process, and effectiveness and business processes re-engineeringactivities, all of which are designed towards improving and large group interventions are newer develop-the organization’s effectiveness. It is a general practice ments in this field. A striking feature of organizationthat organization undergo pertinent changes in their development process is the change agent, which isdevelopment process, as it decides to change its mostly carried-out by the outside consultants, whocomplete strategy or the ideology by which have a different perspective and a biased freeorganization do perform and some modification in thought as regards to organizational feedback. Theprudent practice are needed. In today’s highly organization development plan can be seen inturbulent business environment, change has assumed inevitable part of life. Organizations that do not There are variations regarding the definition ofattach importance to the need for change do not survive organization development. Richard Beckhard haslong. Organizations must change so that they may described organizational development as an effort (1)remain competitive in today’s globalization’s market planned, (2) organization-wide, and (3) managed fromplace. Kanter points out ‘that organizations which the top, to (4) increase organization effectiveness andeither fail to understand the need for change or are health through (5) planned interventions in theinept in their ability to deal with change will fade and organization’s ‘processes’, using behavioral sciencefall behind, if they survive at all’. knowledge. This stresses the concept of application and The field of organization development has transfer of behavioural science knowledge andoccupied a vital place for improving the effective- practice, thereby paying more attention to sensitiveness of organizations and the people involved in issues like leadership, group dynamics andthese organizations. Organization development work design. Neilsen alludes that ‘organizationhas a rich background of research and practice development is an attempt to motivate the staffregarding change in organizations Organization members to resume greater responsibility for theirdevelopment, as one of the most effective tools of work’. The rationale behind organization develop-change, is used by business house to modify the ment is that people are encouraged to findout newculture, value and structures of an organization ways for achieving their own objectives as well asthat enables organization to face to new markets, organizational goals. The field of organizationtechnologies and other business challenges with development is related to the field of medicine, asthe development and improvement of organizational organizations are made up of humans. Organizationprocesses. So there is acute need for organization theory and organization behaviour is similar to theThe Management Accountant |May 2012 565
  • 62. HUMAN RESOURCE MANAGEMENTfield of anatomy, physiology of human system and diagnosis, intervention and evaluation—as shownpsychology and sociology of human system, in Exhibit 2.This process entails on the basic factrespectively. as establishing relationship with key personnel, evaluating systems in the unit, identify approaches, The level of effectiveness is totally related to apply approaches and more over evaluating theorganization’s ability to commensurate itself to fast- results.growing rapid changes in the sphere of environment Exhibit 2and technology. Warner Burke points outthat organization development is the changes that Organizational Development Processwill ‘more fully integrate individual needs with ▲organizational goals; leads to greater organization ▲ ▲ ▲effectiveness through better utilization of resources, Diagnosis Evaluation Interventionespecially human resources; and provide more ▲involvement of organization members in the decision ▲ ▲ ▲ ▲ ▲that directly affect them and their working conditions.’ Technical SkillMachael Beer defines organization development as ‘a Process Team Survey Structural Develop-system-wide process of data collection, diagnosis, Consultation Building Feedback Activities mentaction, planning, intervention and evaluation aimedat (1) enhancing congruence among organizational Organization Development Plansstructures, process, strategy, people and culture; There are numerous accepted models for ensuring(2) developing new and creative organizational the success of a change effort. Some of the approachessolutions; (3) developing the organizational self- have been used by business organizations in regularrenewing capacity. course, but we have not considered them as such. Exhibit 1 The use of strategic planning is general phenomena, Organizational Development Plan but when it is implemented in a systematic and Organizational Development Process explicit manner, it becomes one approach for a change effort. Planned interventions related toThe Measurement Phase the organization’s processes may enhance organiza- Preferred Operating Causal Factors Actual Operating tion’s effectiveness— which is the crucial objective of Culture Culture organization development. Organization development These are antecedents This defines what of culture. They These are the interventions are strategic plans comprised of specific management wants are what behaviour activities designed to effect change that is made by an to achieve in way of members look to in norms operating organization. The study of organization development behavioural science order to determine through the advocates a number of methods—variety of processes, the unwritten rules organization approaches, techniques and application defined as ‘interventions’, training, action research, survey feedback, human resource developments are few Recycle The Levers for Culture Change examples of organization development interventions Change Targets used by Indian organizations. To assess impact Changing structures, of change system, Execute what Training and Organization Development initiatives technologies behavioural Generally, a very simple question is raised ‘What and review and leadership norms need to be does it have to do with training’. The overall processstrategies and actions skills to influence targeted to lead of organization comprises three areas of a unit: people, behavioural norms more positive process and planning. While training handles only results people component. Training personnel cannot solve(Source: Human Synergistic (NZ) Ltd. 2010) every issue. As Stephen Wehrenberg elaborates in There is a general belief among the top manage- his personal journal article titled “The Viciousment that the process of organization development is Circle of Training and Organizational Developmentinitiated on the event of finding discrepancy in the “that as trainers become more experienced, they beginorganization, which can be classified into three stages : to see that many of their organizational’ problems566 The Management Accountant |May 2012
  • 63. HUMAN RESOURCE MANAGEMENTcannot be resolved simply by training. Trainers see Exhibit 3 System Model of Action Research Processproblems as part of a total system—problems such as Input Transformation Outputpoor communication, poor quality control, and low Planning Action Resultsproductivity’. But, at present, training is assumed as a Preliminary Learning Changes inconcrete vehicle for evolving dynamic channel of Diagnosis Processes Behaviourinteraction between different participants within the Data Gathering Action Planning Data Gathering ▲ ▲organization. It raises the conscious to articulate Feedback of Results Action Steps Managementdeficiencies and also creates new ideas for change Action Planningwhich gives greater enthusiasm for change. That is why Unfreezing Changing Refreezingtraining can be assigned to be effective organization ▲ ▲ ▲development intervention. A large number of businessorganizations basically use training in a planned wayto make changes. Training in key performance areascontributes to a medium of participation and Organization Development and Humaninvolvement and also provides an opportunity for Resourcegreater learning and knowledge of organizational Organization development is not a new fieldproblems. and has always placed more emphasis on people; Action Research and Interventions therefore it has become recently an important constituent of human resource. It is distinct from Apparently, organization development empha- human resource development in the sense that whilesizes on two activities—action research and process of human resource development is concernedinterventions. The theory of action research was with the development and training of people in thedeveloped by Kurt Lewin and John Collier in the organization, organization development is entrusted1940s as ‘a process of systematic collecting the data, with the task of development and improvement offeeding it back for action, planning and evaluating organization process. Organization development doesresults and interpreting the same’. It conceptualized not replace human resource but it is based on vital‘rational social management ’comprised of plan, action processes of human resource function. There is pre-and results of action. Action research is a data based requisite that effective organization developmentproblem solving model that requires the steps which should also have the whole-hearted support andare requisite in the scientific method of inquiry.’ involvement of senior staff members of theW L French identified a standard action research plan organization for the purpose of implementation of organization development interventions. Though, thewhich devises the procedure as identification of key theory of organization development is based on socialissue, consultation with change personnel, and science and applied behaviour, on the contrary, humancollection of data, facilitate feedback to the executives, capital theory, performance model are part of humandetermining change objectives and developing the resource, but the literature on the record substantiatechange plan based on research and implement the plan the fact that these two fields are collaborating andfor change effort. integrating together. As the change agent intervenes in the organization In 1988, professionals Jelinek and Littererto effect change, action research becomes the highlighted the broadened area of organizationintervention component and assumed a facet of action development in the form of team building, groupresearch. There are many interventions addressed to decision, building organizational learnings and skillstransform behaviour and attitude of the staff in a which human resource professionals can utilizeinunit. An action or experiential exercise which is strategic approach of organization development as arelated to organization improvement plan in a well planed and long-range approach. Cummings and Worley (researchers) also found the fact that goalchange process can be identified as interventions. determination based on performance managementLewin has mentioned three steps in change process as reward system, career planning and workforceunfreezing, changing and refreezing—as shown in diversification are direct outcome of organizationExhibit 3. These three steps are associated with development practices. In fact, in the coming years,identification of dilemma, development of new models the use of human resource professional will emergeof behavior, and evaluation of applied model or critically in relation to organizational change forbehaviour, respectively. adopting organization development effectively.The Management Accountant |May 2012 567
  • 64. HUMAN RESOURCE MANAGEMENT To conclude, DeKlerk (2007) describes that reinventing this field is an emerging issue with theemotional ordeal experience, aggression, anxiety, sense of deep understanding of human andapprehension emerged due to downsizing, mergers, organization process. ❐restructuring and outsourcing, can lead to the Bibliographydeterioration in the production. In India, after trained ■ Albrecht, K. Organization Development. Englewoodat National Training Laboratory at USA, some Cliffs, NJ. Prentice-Hall, 1983.professionals started this technology early in 1960s. ■ Bennis, W. Organization Development: Its Nature,First, L & T introduced organization development as Origin and Prospects. Reading. Addison-Wesleya formal and structured plan in middle 1970s. Publishing Company, 1969.Organization development could not get desired ■ Burke. W. W. Organization Development: A Process ofsuccess in India, as Indian corporate sector—with its Learning and Changing. 2nd Ed. Reading. M.A.Addison-secured and protected philosophy—was hesitant to Wesley Publishing Company, 1992.initiate changes in prudent practice, but it registered ■ Cannon, J. A., and McGee. R. Organization Developmentits presence in academic arena. In post-liberalization and Change CIPD Toolkit, London: Chartered Instituteera, there was stimulus to the use of organization of Personnel Development, 2008.development technique. Indian Society for Applied ■ Cummings, T. G., and Worley, C. G. OrganizationBehaviour Sciences, Indian Society for Individuals Development and Change. 8th Ed. Mason, O. H. Southand Social Development, Indian Society for Training Western Publishing, 2005.and Development and, moreover, academic ■ French, Wendell L., and Cecil H. Bell. Organizationalinstitutions like IIMs can play a vital role towards Development: Behavioural Science Interventions forgreater use of this technology. There is an imperative Organization. 5th Ed. Englewood Cliffs, NJ. Prentice-Hall,need to develop awareness and knowledge regarding 1994.the ‘change processes’ within the organization, ■ Hursey, P and Blanchard, K. H. Management ofwhich is coordinated by usually external consultants Organizational Behaviour. 6th Ed. Englewood Cliffs, NJ.along with active participation of all stakeholders. Prentice Hall, Inc.1993.In recent times, the relevance of organization ■ Ivancevich John M. and Michael T Matteson.development to incorporating changes in modern Organization Behaviour and Management. 5th Ed. Neworganization has become questionable. The need for York: McGraw-Hill, 1998.(contd. from page 564) Conclusion which the company takes—particularly with regard A study like this—though it cannot fully espouse to cost control measures, elimination of wastefulthe Employees’ point of view as it is based only on operating expenses and the strategy changes inaccounting figures—throws sufficient light to conclude product mix. A deliberate movement towardsthat the Financial strength which BSNL has built up innovative projects that successfully deliver value toover the years will stand in good stead during the today’s subscribers—especially applications relatedperiod of transition which it is facing presently. The to Data and E-commerce etc.—will be necessary.present situation is more due to the impact of external Productivity of Capital as measured by return onenvironmental forces of the sector as a whole and not assets depends on the attitude and culture of thefully its own making. The stakeholders, as defined at organization. Employees as stakeholders need tothe beginning of this paper, have reason to believe that appreciate that—in a highly technical and capitalthe company is on sound footing as far as key intensive industry like Telecom—current performanceparameters of performance is measured and grouped. parameters are a pointer to this basic input thatHowever, the continued profitability and ability to ultimately determines their aspirations as aaccumulate surpluses will depend on the direction Stakeholder Group. ❐568 The Management Accountant |May 2012
  • 65. HUMAN RESOURCE MANAGEMENT An empirical study of relationships between relational psychological contract and employees’ attitudes towards OCB factors and its application in Indian Industry Mihir Ajgaonkar Dr. Utpal Baul Dr. S. M. Phadke Research Scholar, Birla Institute Professor, Birla Institute of Management Consultant and of Technology, Mesra, India Technology, Mesra, Ranchi Organizational Psychologist, PuneIntroduction resolutions, locating resources/experts for organiza- tional problems, collaborating with others, being awareT he growth of the Indian economy is happening at the rate of 6 to 8% successively for the past of the impact of self behaviours on other people and few years. In today’s competitive world it is their work.imperative for the organizations to build employee 5. Civic Virtue (CV) : Discretionary behaviours oncommitment for higher growth. Motivation influences part of the employee to participate actively into thethe talent to drive the organization’s growth (Rousseau, organizational affairs and be informed about theD. M. 1990). The employees have also found to display organizational developments, defend its reputation,certain behaviours by going beyond the normal be vigilant about organizational policies and report anyrequirements of the role/task performance. These violations, take up fellow colleagues grievances.behaviours are named as organizational citizenship In the late eighties and early nineties, Dr. D. M.behaviours (OCB) and have been found to be also Rousseau in USA and Dr. David Guest in U.K.contributing to the organizational growth (Organ conducted research on employee-employer relation-1988). The comprehensive definitions for the OCB ships that have a bearing on employee involvement infactors (dependent variable) are : the organizations. They conceptualized employee- 1. Altruism (AL) : Discretionary behaviours on part employer relationship much different from the legalof the employees to help, guide or assist fellow contractual nature. Dr. D. M. Rousseau (1990) hascolleagues or take responsibilities for them. defined Psychological contracts (PC) as are beliefs 2. Conscientiousness (CO) : Discretionary beha- based on promises implied or expressed regarding anviours on part of the employee to take ownership of exchange agreement between the employee and thehis work and related self-development, set challenging organization. They are voluntary in nature and believetargets and meeting deadlines, taking decisions based in mutual agreements. At a given time they areon self-conscience and observant of the rules and incomplete and there are multiple contract makers. They focus on fulfilling commitments and provide avalues of the organization. model for employment relationship. The contract is 3. Sportsmanship (SM) : Discretionary behaviours based on employees’ sense of fairness, trust and beliefon part of the employee to drive oneself to surpass that commitments are being honoured by theothers’ performance, appreciate others and contribute employer. Morrison and Robinson (1997) have definedso that fellow colleagues meet their objectives and push Psychological contract as individual perceptionsthem to excel, accepts own mistakes and express created by organizations about what will be exchangedemotions appropriately, be tolerant to organizational for each others contributions. To have a psychologicalnegativities and accept the organizational changes. contract, a relationship between individual and 4. Courtesy (CT) : Discretionary behaviours on part organization must exist and individuals must haveof the employee to initiate resolution of issues, build expectations about what he will get from theconsensus and actively contribute to conflict organization. When employers meet perceivedThe Management Accountant |May 2012 569
  • 66. HUMAN RESOURCE MANAGEMENTobligations of psychological contract, employees are Statistics related to testing significance of differencesmotivated, willing apply greater effort, seek out (ANOVA ONE WAY) were used for analysis.creative solutions, support their leaders and remain The findings on the relationship of OCB with eachwith the organization (Rousseau 1990, Sims 1994, of the EE - relational PC factor are :Spindler 1994). When the obligations are unfulfilled, 1.1. EE stabilityemployees lose trust in management, reduce theirlevels of organization commitments and decrease their Statistical analysiscontributions (Levinson, Price, Munden, Mandl, Solley Table 1.1.1. EE Stability & OCB factors1963; Robinson & Rousseau 1994; Sapienza, (mean & standard deviation)Korrsgaard, Shneiger 1997). Further research on EE stability AL CO SM CT CVrelationships of the employees and organizations Group 1 : High scores 16.851 17.330 17.202 16.436 17.840developed the concept of relational psychological (n = 94) (2.3324) (2.3019) (2.3627) (2.4824) (2.0016)contract (relational PC). Group 2 : Moderate 15.875 16.528 16.220 15.623 16.580 It indicates that the employee is obligated to remain scores (n = 369) (2.3913) (2.1149) (2.2258) (2.3652) (2.3498)in employment with the organization and do what is Group 3 : Low scores 14.922 15.935 15.818 14.455 15.208required to keep the job going. The employer also (n = 77) (2.5842) (2.7064) (2.1808) (2.6185) (2.7064)fulfills its obligation by providing stable remuneration, Figure 1.1.1 EE Stability & OCB factors (means)long-term job security and steady career growth.Employee is obligated to be loyal to the organizationand support the objectives, needs and interests of theorganization. The employee should be a dedicated anda loyal corporate citizen. The employer fulfills its partof obligation by ensuring the well-being of theemployee and their families. As OCB and relational PC were emerging as topicsfor contemporary research in behaviour science, theresearcher felt that it would be significant to examinewhether there was any linkage between the OCB andemployees beliefs regarding their obligations towardsthe organization as indicated by EE factor—relationalPC. They are : Table 1.1.2. Anova to compare EE stability EE Stability and OCB factors OCB DF DF MSS MSS F Pr > F EE stability states that employee is obligated to Factor (between (within (between (within valueremain with the organization and plan a long-term group) group) group) group)growth. He has to at least contribute as per the basic AL 2 537 79.4204 5.8058 13.68 <.0001performance expectations to retain his job. He has to CO 2 537 42.9234 5.0194 8.55 0.0002strive to do improvements in a way his job has to be SM 2 537 48.0832 5.0351 9.55 <.0001done. CT 2 537 83.4753 5.8712 14.22 <.0001 EE Loyalty CV 2 537 147.0096 5.5143 26.66 <.0001 EE loyalty refers to the obligation of the employeeto support the organization and serve to its needs and Conclusioninterests. He would demonstrate his commitment by Since p values < 0.05, at 5% level of significance weprotecting organization’s image, taking organizations conclude that there are significant differences inconcerns personally and making personal sacrifices for preference for OCB factors (altruism, conscientious-the organization, if need be. ness, sportsmanship, courtesy, and civic virtue) w.r.t. Responses of 540 employees from executives and preference for EE cadre from Indian corporate sector was Interpretations : The employee group with a highcollected through a detailed questionnaire (Cronbach EE stability belief has high preferences for all OCBalpha =0.7, an acceptable reliability coefficient, factors. The highest preference is for civic virtue,(Nunnaly (1978) and Streiner D. L. (1989). They were followed by conscientiousness and sportsmanship. Thefrom manufacturing (engineering, textiles and steel same preferences are repeated for the group withforgings), services (BPO, IT, telecom, financial services) perceived moderate EE stability. The employees withand infrastructure (power, transportation, oil & gas). a high/moderate EE stability feel that they are obliged570 The Management Accountant |May 2012
  • 67. HUMAN RESOURCE MANAGEMENTto have a long term career with the organization Figure 1.2.1. EE loyalty & OCB factors (means)and plan a long term growth. Hence these employeesare interested in the developments regardingorganization and very active in organizationalaffairs. They have their future entwined with theorganization. They feel that they have an obligationto the organization to put in the desired perfor-mance levels and, hence, strive to take on stretchedtargets, take advantage of the developmentopportunities provided by the organization. Theyare very loyal to the organization, observe its rulesand regulations and take decisions based on theirconscience. As these employees are together inthe organization on the long term basis, they have Table 1.1.2. Anova to compare EE loyalty anda good bonding between them. Hence there is a OCB factorshealthy competition between the peers to exceed OCB DF DF MSS MSS F Pr > Fperformance targets and also tendency to support Factor (between (within (between (within valueothers so that they meet the objectives. As these group) group) group) group)employees are committed to the organization, they AL 2 537 112,7487 5.6817 19.84 <.0001tolerate organizational negativities, welcome change CO 2 537 71.3463 4.9135 14.52 <.0001for the betterment. SM 2 537 111.2430 4,7998 23.18 <.0001 The employees, who have a perceived EE CT 2 537 117.9889 5,7427 20.55 <.0001stability in the organization, have least preference for CV 2 537 192.5369 5.3447 36.02 <.0001courtesy, followed by altruism and civic virtue.These employees do not have any long term career Conclusionplans with the organization. Hence collaborating Since p value < 0.05, at 5% level of significance wewith others to resolve organizational problems and conclude that there are significant differences inconflicts may not be very high on their agenda. They preference for OCB factors (altruism, conscientious-may not be aware of the impact of their behaviours on ness, sportsmanship, courtesy, and civic virtue) These employees could be focused on preference for EE loyalty.building their curriculum vite and may not have Interpretation : The employees who believe in highany reasonable level of bonding with fellow colleagues, organizational loyalty demonstrate their commitmentto offer help, guide or assist and be responsible to the organization, show high preferences for all thefor them. These employees also may like to leave the OCB factors. The highest preference is for civic virtueorganization as they do not feel like having a long followed by sportsmanship and conscientiousness. Thecareer with it. Their objective would be to search for employees may have a strong belief that they need toa job in the other organization which would be very loyal to the organization as they are committedmore in line with their expectations. Therefore they to it, would be interested in keeping informed aboutmay not like to expend their energies in organizational the developments relating to the organization—onaffairs. business front or otherwise. They would like to actively participate in the organizational matters 1.2. EE loyalty and may see this as a re-enforcement of their loyalty. Statistical Analysis These employees are concerned about protecting Table 1.2.1. EE loyalty & OCB factors organization’s image and defend the same if need be. (mean & standard deviation) The loyal employees to the organization would also EE stability AL CO SM CT CV strong bond with other employees who are being perceived as loyalists. These employees may enjoy aGroup 1 : High scores 16.889 17.022 17.156 16.578 17.911(n = 90) (2,5679) (2,4263) (2,1976) (2,5746) (2,1021) special relationship with each other—‘‘the old boy’’ network. They would have a healthy competitionGroup 2 : Moderate 15.952 16.734 16.433 15.651 16.648 between each other to move ahead with theirscores (n = 372) (2.2874) (2,0484) (2,1427) (2,3279) (2,2937) objectives. They would extend support to others toGroup 3 : Low scores 14.577 15,359 14,910 14,218 14,885 ensure that these people are also managed to achieve(n = 78) (2.6064) (2,6919) (2,4023) (2,5053) (2,6530) the desired performance. They urge the other loyalThe Management Accountant |May 2012 571
  • 68. HUMAN RESOURCE MANAGEMENTsubjects to put in their best contributions. The loyalists bothered about impact of their behaviour/work onhave a very strong commitment to the organization other colleagues in the organization and the downwardand there is an impression that if the organization has pull that may create on organizations succeed then everyone in the organization need to At this stage, these employees may also not be verymake sincere efforts to attain the desired performance. concerned about their fellow colleagues and may notThe loyalists would welcome change in the organiza- offer any guidance or be responsible for them. ❐tion, as they are committed to the organization. Hence Referencesthe preference for conscientiousness is very closely ■ Deloitte Research Study its (2008). Do you know wherefollowing civic virtue and sportsmanship. The desire your talent is?to take on steep targets, take control of one’s ■ Guest D. E., Conaway N. (1998). Fairness at work anddevelopment, decision making based on self- psychological contract. London: Institute of Personnel &conscience for organizations betterment and obligation the rules/processes of the organization once again ■ Levinson H., Price C. R., Munden K., Mandl H, Solley C.demonstrate the commitment and support of these M. (1963). Men, management & mental health, Cambridgeemployees to the organization. M. A., Harvard University Press. The employees with the belief of moderate ■ Mckinsey & Co. (2004). Global Survey of Businessorganizational loyalty as an indicator to their Executives. New York.commitment to the organization show highest ■ Morrison E. W. & Robinson S. L. (1997). When employeespreference to conscientiousness, followed by civic feel betrayed: How a model of psychological contractvirtue and sportsmanship. Their preference for violation develops. Academy Management Review, 22conscientiousness may indicate that they feel (1), 226 - 256.performance is one important indicator of their ■ Nunnaly J.(1978). Psychometric theory, NewYork:commitment to the organization. These employees McGraw Hill.would strive to perform better by voluntarily accepting ■ Organ, D. W. (1988). Organizational citizenshiphigher targets and upgrading their skills on a behaviour : A good soldier syndrome, Lexington, M.A:continuous basis. They would be committed to Lexington Books.organizational values and always have organization’s ■ Robinson s. L. & Rousseau D. M. (1994). Violating thebest interest in mind. However, due to these psychological contract: Not the expectation but the norm.employees belief in organizational loyalty in a Journal of Organization Behaviour, 15, 245 - 259.moderate manner, they may not have a very high ■ Rousseau D. M. (1990). New hire perceptions of their owndesire to be alert about organizational developments and their employers’ obligations: A study ofand an urge to participate in the organizational affairs psychological contracts. Journal of Organizationalin a very active manner and to make personal sacrifices Behaviour, 11, 389 - 400.for the organization. These employees could be clearly ■ Rousseau D. M. (1998). ‘The ‘‘problem’’ of thefocused on delivering what the organization desires psychological contract considered’, Journal ofthrough their high performance and thus justify their Organizational Behavior, 19: 665 - 671.existence within the organization. Therefore they may ■ Rousseau D M. (2000). PCI technical report, Carnegienot pay high attention to support and push other Mellon University.members of the organization to achieve the desired ■ Sapienza H. J., Korsgaard M. A., Schweiger D. M. (1997).performance levels. They would tolerate negativities Procedural justices and changes in psychological contract:of the organization to an extent and may support a longitudinal study of re-engineering planning. Academy of Management Proceedings.change if convinced about it. The strong focus on ■ Sims R. R. (1994). Human resource managements role inindividual performance may give rise to some clarifying new psychological contract. Human Resourceprofessional rivalry amongst these employees. Hence Management, 33 (3), 373 - 382.the lower preference to sportsmanship compared to ■ Spindler G. S. (1994). Psychological contract in theconscientiousness. workplace: A lawyer’s view. Human Resource The employees with a low perception of EE loyalty Management, 33(3), 325 - their organization have indicated the lowest ■ Starnes B. J. (2007). An analysis of psychological contractspreference to courtesy followed by altruism. As the of volunteerism and effect of contract: Breach on volunteercommitment levels of these employees to the contributions to the organization. International Journalorganization are very low, they may not be bothered of Volunteer Administration, vol. XXIV, no. 3, p 31 - resolve organizational issues and conflicts by ■ Streiner D. L., Norman GR (1989). Health Measurementcoming together and collaborating. As the desire for Scales : A Practical Guide to Their Development and Use.teamwork is low, these employees would not be New York: Oxford University Press, Inc. pages 64-65.572 The Management Accountant |May 2012
  • 69. PROJECT MANAGEMENT Project Management Team Handling Challenges to Multinational Corporation Dr. M. Javed Masood Visiting Professor, Central University of Rajasthan Kishangarh, RajasthanIntroduction employees. Discussions via labor unions are common;B ausch & Lomb Inc. chose to establish a $13 overtly expressed dissatisfaction is rare”. million joint venture in India for the purpose While this presentation will describe project of producing and marketing high quality eye experiences in India, the lessons learned are applicablecare and optical products in India and adjacent to most developing countries. Unlike countries in thecountries. The Indian market was viewed by Bausch former Soviet Union, India has remained a closed& Lomb as an opportunity to satisfy the demands of a economy for decades. This presented severallarge emerging middle class population in a country unknowns to the team requiring mid-course correc-whose total population of 1240 million people is the tions during the project. The multinational projectsecond largest in the world. team was quickly formed, and an Indian architectural In recent years, India has been moving toward a and engineering firm (Tata) was selected. Actualmore open economy encouraging multinationals to production started in June 1992, seventeen monthsform joint ventures with local firms. To promote after groundbreaking.foreign investment, the Indian government has Scopereduced tariffs on imported raw materials. For project objectives to be met, production needed This was Bausch & Lomb’s first venture into the to start within seventeen months from approval date,Indian subcontinent. Supported by the staff of a and total capital costs needed to be within theprominent eye institute in Hyderabad, and teamed approved $13 million budget. All products producedwith Bausch & Lomb eye care professionals, training needed to meet Bausch & Lomb’s international qualityof Indian eye care practitioners (ophthalmologists standards.and optometrists) began immediately to support Detailed construction drawings and specificationsthe development of the soft contact lens business were developed by Tata to Bausch &. Lomb’s conceptthere. drawings and performance specification. A complete It was necessary to overcome major obstacles to detailed work breakdown structure was prepared bycomplete the manufacturing facility. Bureaucratic the protean for each product line with plannedpaperwork, different management styles, high construction completion dates. Reporting of cost,import duties, lack of available electric power, water, schedule, and technical performance status occurredsewers, and limited communications networks monthly by each product line team member with keycreated uncommon problems. These issues challenged issues and action noted.the multinational project team in the Indian Team members were selected by the projectenvironment. manager for their expertise and their flexibility toward Bausch & Lomb’s style of management is foreign cultures and their ability to work as part of aparticipatory with heavy emphasis on team work. multinational team. Once the project team was formed,This contrasts with the more autocratic style a successful four-day design conference was held inprevalent among many Indian firms. “There are clear Europe to finalize technical details impacting thedemarcations between management and lower level design of the 70,000-square-foot manufacturingThe Management Accountant |May 2012 573
  • 70. PROJECT MANAGEMENTfacility. Fifteen technical representatives from Bausch A key part of this project included designing and&. Lomb Inc., the joint venture (Bausch Lomb India building the manufacturing facility to produceLtd.), and Tata participated. Basic facility parameters products to worldwide specifications. The inter-were established including all utility capacities, national standard is aimed primarily at preventingspace requirements, and product work flow, plant and detecting any nonconformity during productionexpansion strategies, etc. and at implementing systems to prevent recurrence. From this conference came the realization that the The government inspections are required annuallyproject was under-capitalized. Original assumptions for the new plant; conformance to local codes andneeded revision. Equipment originally planned for standards is expected—particularly from multina-Indian manufacture now needed to be imported at tionals.increased cost due to lack of Indian manufacturing Legal contracts appear to be less important in Indiacapability for specialized equipment. Over $2 million than in the United States. This is due largely to thein new costs were offset by selective reductions in cumbersome legal system at present. However, specificoptional equipment, favorable reductions in duty rates, contracts were established for the architectural andand by subcontracting one product line (enzyme engineering work and the civil contractor. Fortunately,tablets). The Plant capacity plan was met and is capable no major problems arose during the execution of theseof initially supporting sales for projected fifth-year contracts.volumes with designed-in expansion capability doublecapacity in later years. Prior to beginning production, each process was validated and each product was subjected to standard Time Management product qualification testing to ensure that all To meet the planned completion targets, a fast-track performance parameters were met. Once theseapproach was implemented for building construction. validations and qualifications were successfullyThe nearly $2 million in additional costs (noted above) completed, a start-up audit was conducted, andfor scope changes were required to compensate for the approval was then given from Corporate Qualitylack of available power, water, and effluent treatment Assurance to begin production. Quarterly product/as well as account for lack of locally available process audits are performed for the facility by Bauschspecialized equipment. & Lomb representatives from the United States and Importing special-purpose equipment proved to be Europe.not only costly in money (100+ percent duty), but alsoin time. In many cases, up to three months were Risk Managementrequired to clear Indian customs. The paperwork Producing a high-quality product in India is aneeded to be impeccable—otherwise a long delay risk in itself. Facility of construction techniques arecould be expected. highly manual, slow and of poor quality. The only Even though the team experienced custom major piece of construction equipment at the siteclearance delays as well as delays in commercially was a small concrete mixer. All other tasks wereavailable power for the plant, production still started performed manually. Over 300 laborers were at siteseventeen months after groundbreaking. This was during the peak construction period. The jointachieved by training at other Bausch & Lomb plants venture acted as the general contractor, as is theand by a phased production start-up utilizing imported custom in India. External risks that were unpredictablesemi-finished products. were : Quality Management ● change in government regulations, such as duty We learned quickly that it was essential to import rates, excise taxes, etc.high precision, sophisticated special purpose ● unavailability of basic services such as water,equipment. Locally, the state-of-art for most equipment electric power, telecommunications, andis 1940s technology. This is especially true in the specialized vendorsmachine tool sector. Much of our precision equipment ● lack of skilled manpower—particularly in areaswas imported from Germany, Hong Kong, and United such as computer skills, mechanics, electri-States. cians, etc.574 The Management Accountant |May 2012
  • 71. PROJECT MANAGEMENT ● bureaucratic serendipity-government appro- ● Organize a competent, well-motivated team and vals to import equipment took months with the recognize it for its contributions. prospect of rejection. ● Pick a good scheduling system that is user- Communication Management friendly. ● Select a good plant location, and design the The projects in the international sector were staffed facility logical expansion.with a project manager and technical support team ● Get marketing to commit to a sales forecast.based at its United States headquarters and a joint While easier said than done, this is critical toventure team at site. capacity planning. Once the project was under way, we learned that ● Know and test assumptions.this would not be adequate for a project of this Conclusioncomplexity in a Third-World environment wherechanges occur daily. We then stepped up our on-site The project was not possible to be successfulsupport to maximize the number of technical personnel without using techniques of “Project Management”.from Bausch & Lomb. With the support of the total project team, the project came under budget, despite equipment delays at No fax communication is available, and local phone customs and delays in commercially available power.communications are unreliable. No interna-tional Today this plant manufactures products that meetphone or communication is possible so all must be worldwide quality standards.handled through the office in New Delhi. Courierscarry messages daily from the New Delhi office to The team members were selected by the Projectthe plant. Manager for their expertise, their flexibility toward foreign cultures, and their ability to work as part of a In response, the project team members spent up to multinational team.three weeks per trip each quarter in India to meet thestart-up schedule. Product line engineers from Bausch The management style was quite different from the& Lomb worked on rotating schedule coverage at the typical style in Indian firms—to face a number ofplant site. For each product line there near present was external risks were unpredictable. The Projectto respond to immediate needs and to communicate Managers are sometimes challenged with majorwith other team members via fax or phone from New bureaucratic obstacles and ethical dilemmas for theDelhi. This worked well and avoided long stays in project manager without looking for shortcuts.India. This project proved that it is possible to produce The prize was the satisfaction of a very difficult high-quality products in India to internationaljob well done by a world-class multinational project quality standards. Accomplishing this requiredteam. significant training, high-quality equipment, a positive attitude, and support from our Indian joint Factors for Success venture partner. ❐ ● Hold a technical design conference to finalize References design parameters and identify risks. Detailed ■ Edward A. O’Connor, Bausch & Lomb, Inc. PMI Canada engineering work can then begin. Proceedings, 1994, pp. 377-80 ● Select an in-country architectural and ■ Craig Head’s International Executive Travel, Darien, engineering firm that understands local culture Conn., USA. and has experience with similar work. ■ National Information Standards Organization (Z39. 48-1984) ● Select a good joint venture partner who knows ■ Library of Congress Cataloging—In-Publication Data local market and how to deal with the ■ Industrial Project Management — Case studies, bureaucracy. HD69.P75P28, 1997The Management Accountant |May 2012 575
  • 72. BANKING Sustainable Development : Few Aspects in Indian Banking Sector Pradipta Gangopadhyay Dy. Director Institute of Cost Accountants of IndiaIntroduction concept of ‘‘green banking’’, as mentioned by Sahoo P. and Nayak B.P. (2008), will not only ensure theT he Indian banking sector has experienced progression on various directions in the last greening of the industries but will also facilitate in decade, they have seen much focus on economic improving the asset quality of banks in future. The roleprogress and many have taken giant steps in its journey of banks in assessment of projects for financing andthrough time. The regulators of this sector have made priority lending purpose would influence customernotable efforts to improve innovation, growth and activities that encourage ecologically viable industriesvalue creation to sustain the havocs of financial crises and play a critical role to promote environmentallyin recent past. However, concern at global level is that sustainable and socially responsible industrialmere economic growth and profitability may not activities.address environmental liabilities, and we need to take The aspect of social audit and client assessmentspecial effort to encourage sustainable development Various agencies, consortiums and developmentacross industries. institutions across the world have been advocating for This sustainable development is nothing but the environmental standards and strategies to evaluatecontinuity of economic progress for present generation investment projects. United Nations Environmentwithout damaging the ecology or destroying the Program and Finance Initiative (UNEPFI) wasavailable resources for future generation. It is beyond launched in 1990s to promote sustainable developmentmatters of sheer corporate social responsibility or within the framework of market mechanisms; evenethical norms. All sectors of the economy, government, earlier to this, the U.S. Comprehensive EnvironmentalNGOs, corporate, citizens and definitely the financial Response Compensation and Liability Act in the 1980’ssector have impact, direct or indirect on the has resulted in huge loss to several banks in the US forenvironment for their activities in society. Thisexploratory study tries to gather some of the efforts polluting the environment from activities of theirmade at international level to address issues of clients and made them pay the remediation cost. Insustainable development and suggest a model based another case, a global network of civil societyon few parameters that banks in India may adapt to organizations and individuals came together to createassess sustainable growth efforts made by their an organization named Bank Track. It tracks theprospective borrower clients. operations of private financial sector (commercial banks, investors, insurance companies etc) and its Though a bank’s own activity may be consideredenvironment friendly in terms of emissions and effect on people and planet. This has contributedpollutions, but the environmental impact of bank’s remarkably to safeguard policies coveringexternal activity is enormous and difficult to quantify. environmental assessment, natural habitats, pestTheir contribution in financing various types of projects management, child and forced labor issues, andacross industries cannot be ignored. Globally, firms various other social causes mostly in the Westernand industries are exposed to strict environmental world.policies and are under the scanner of stringent laws, A summarized report by Sullivan & Cromwelltherefore, it also becomes easier for financial (2003) on the Equator Principles—New Environmentalinstitutions, in such countries, to assess and report their and Social Guidelines for Project Finance Transactionscontribution and progress in sustainable development. was made available as practices and policies that The banking sector, especially in India, need to would be expected to permit banks to provide directtackle sustainable development issue through the loans and meet substantive standards. The principlesactivities of their customers whom they serve. The therein indicated criteria that include various576 The Management Accountant |May 2012
  • 73. BANKINGenvironmental and social screening procedures that In India too, the fear of depletion of naturalneed to be followed by a project borrower in order to resources and degradation of the environment hasobtain finance from banks. Some of the banks who attracted attention of several organizations andhave initially adopted the Equator Principles include researches to make studies that would help inBarclays Bank plc, Royal Bank of Scotland, Citigroup sustainable development of the economy. One studyand a few others, though the practical effects of these report named ‘Sustainable Green Banking : The storypolicies would certainly depend on individual internal of Triodos Bank’, by R.N. Dash (2008), haspractices existing in these banks. demonstrated how a bank, licensed under the Dutch A global level survey conducted by Mckinsey & Central Bank, in small town of Zeist, has successfullyCompany to explore why and how companies are supported sustainable performance of industries in itsaddressing sustainability in various industries found country. The study reveals the unique method ofthat many successful companies had considered long- lending process of this bank where apart from analysisterm strategic view of sustainability built into their of the firms’ data, gathers information from humanthree key value creation areas: Return on Capital, rights organizations, multilateral agencies, interna-Growth and Risk Management. The report is an eye- tional consortiums and such other sources that mayopener to several companies functioning in various be relevant. Lending portfolio as available in that studyindustries as well as the financing institutions that may provide us guidance in regard to social andsupport their projects. The implication for banking environmental audit procedure; the illustration is asinstitutions who deliberately finance projects after below:making due Environmental Assessment and followingrigid regulations are manifold Banks could reduce their Exhibit 1 : For Environment and Social Audit incredit risk as a result of customers defaulting on the Bankconsequence of their uncalculated expenses for Sl. Segment What it includes Share in totalcapital investment made in projects which are No. lendingenvironmentally unviable; they may also reduce their 1 Nature and Projects in the field of renewal Percentageexposure to legal risks as direct lender liability for Environment energy (wind energy & hydro-ecological damages made by its customers who have electric projects), organicfinanced their projects; and last but not least, with the agriculture across the entire value chain including health, foodgrowing awareness of sustainable development, shops and environment techno-financing institutions are also prone to loose their logy such as recycling companiesreputation for financing ecologically and ethically and nature conservative projects.questionable projects. Hence for banking institutions 2 Culture and Small loans to artists and Percentageto reduce such risks and maintain good reputation in organizations actively involved welfarethe market, sustainable development aspects have to in education, healthcare orbe positively addressed. providing aid to people with Efforts for Indian Banking Sector physical and learning disabilities. All these enterprises have a clear Indian banking sector has shown many positive people-centered policy.developments in the last decade by having made 3 Social Business Loans to traditional business and Percentagenotable efforts to improve regulation in the sector. It is innovation enterprises and Percentagegrowing rapidly, its role and contribution in keeping services providers with clearthe Indian economy stable even during the financial social goals, including financingturbulence worldwide, is a matter of appreciation. of start-up enterprises, fair tradeSome banks have even shown outstanding track businesses and microfinancerecords of innovation, growth and value creation over institutions providing basicthe years. Many of the Indian banks are pursuing financial services for people in theglobal strategies in order to fundamentally upgrade developing world.organizational capability to stay in tune with the 4 Any other area Suitable criteriachanging market and global growth. However, under the regu-financing industries that compromise the ethical norms lation of theby creating loss of biodiversity, environmental damage Government, Internationaland climate change, is definitely not asked for and in and Nationalthe long run create substandard assets for them. Hence consortiumsbanks need to assess their borrower clients carefully or other suchto prevent financing hazardous projects that would bodies.expose them to credit as well as legal risks with the Source: ‘Sustainable Green Banking : The story of Triodos Bank’ bypassage of time. R. N. Dash (2008), suitable modified for this studyThe Management Accountant |May 2012 577
  • 74. BANKING In a similar fashion, banks in India need to help Concludingbridge the gap between economic growth and the Banks have substantial influence on economicissues of sustainable development for the country.Each bank may have its own policies and practices growth and can play major role in determining thefor assessing lending criteria to its prospective clients; nature of growth both in terms of quality andbut a defined combination of environmental, societal, quantity. Banks can encourage environmentallyand governance issues may be set as parameters responsible investments by its customers that wouldto assess the projects and accompany the project play an important role in creating linkage betweenanalysis report in addition to the usual and normal economic development and protection of theindicators. Below is given an indicative model that nature. This would subsequently facilitate inmay help in sustainability assessment of thebusiness for financing purpose to the clients’ upcoming improving asset quality of many banks in future.project. Worldwide it has been an issue of concern, of how Exhibit 2 : Client Assessment Model commercial banks, being important source of financeSustainability integrated in the Mission and Values, Strategic for companies and governments, can exert greatfollowing business processes of Planning, Corporate Culture, influence on operations of their clients to controlthe organization to be assessed Operations, Employee engage- environmental degradation.before financing projects. ment, Internal Communications, Budgeting Process, Marketing, The banks could address issues of sustainable Supply Chain Management, development, governance, accountability, transpa- External Communication etc. rency, reporting and risk management need toFurther breakup for analyzing the credit applications of the become integral to the interest of all stakeholders.prospective clients (these breakups are only indicative and more They can make sure that their clients integrateand more parameters may be set by banks, and responses notedfor analysis both qualitatively and quantitatively) environmental, social and governance issues into their strategic planning of business model and actReducing energy use in operations Yes considerably under stringent regulation. This would createReducing waste from operations Yes transparency and accountability at their end wouldManaging corporate reputation for sustainability Yes noticeably help these companies strengthen their competitiveResponding to regulatory constraints or Yes in true senseopportunities position, have long-term strategic view and identifyReducing emissions from operations, and Yes opportunities of growth that are economically viablepresence of treatment plants and at the same time prevent damage of ourManaging services/products portfolio to Yes environment. ❐capture trends in sustainabilityReducing water use in operations References YesCommitting R&D resources to sustainable Yes significantly ■ Dash R.N., (2008), ‘Sustainable Green Banking: The storyproducts of Triodos Bank’Leveraging sustainability of existing products Provisions ■ Sahoo P., Nayak B. P. (2008), ‘Green Banking in India’,to reach new customers or markets present Indian Economic Journal (IEJ)Managing impact of products and packaging Yes ■ The Business of Sustainability : McKinsey Global Surveythrough the value chain results, October 2011Improving employee retention and/or Good HR policies ■ Sullivan & Cromwell LLP (2003), ‘Equator Principles—motivation related to sustainable activities New Environmental and Social Guidelines to ProjectMitigating operational risk related to external forces Provisions made Finance Transactions’Achieving greater market share from Yessustainable products ■ Nishi Sharma (2011), ‘CSR Practices and CSR ReportingSource : McKinsey Global Survey results, October 2011, suitably in Indian Banking Sector’ IJAEBM vol no.1, Issue no.2,modified for this study. 058-066578 The Management Accountant |May 2012
  • 75. FINANCIAL REPORTING‘Crime and Punishment’: An introspection into two infamous financial reporting frauds across the world Dr. Arindam Gupta* M.Com. PGDFM, FCMA, Ph.D. Professor of Commerce Vidyasagar UniversityT he financial crimes (and frauds) are not less respect of the extant legislations before the occurrence dangerous than the murders in real life rather of such crimes in the respective countries. The prime have been the causes of many real life murders, accused persons in both these scams have also been inknown or unknown, and steadily progress disaster in control of the respective companies before the newspersonal lives of many. In general, one should agree of the scams came into public knowledge. After thewith me in two points about the nature of financial Enron debacle, auditing all over the world has comecrimes that they can not usually be committed alone under the scanner. The age-old saying that ‘an auditorand to commit these crimes people need super- is a watchdog and not a blood hound’ is being re-intelligence. Because, in any country of the world there examined, if not questioned. Legislation which seeksis an extant system of legislation mainly with the to lay a greater emphasis on detection and reportingobjective of prevention of crime. Like any other of fraud by auditors has been introduced all over thelegislation, the basic objective of which is to prevent globe. Sarbanes Oxley Act (SOX) was introduced inthe possible concerned crime in the first instance, and the United States as a reactive measure in the aftermathif at all any crime takes place flouting the said law, of the scam whereas clause 49 was floated as a pro-there should be provisions in the law for punishment. active measure in India. Yet, the principal reasons asSo, there are many people to connive if the law is to be investigated into both the countries do not establishviolated. In spite of that, such crimes and frauds are that there was not sufficient law before occurrence oftaking place, from time to time, and from one country these scams. That is why Satyam Computer scam, asto the other. Most astonishingly, financial crimes have titled later as ‘India’s Enron scam’, may have takenbeen occurring not only in a country of lenient place.compliance system of punishment like India but alsoin the countries having a stringent system of imposing Urging upon the ethical aspect of auditors and otherpunishment like the United States. In this context, two concerned persons becomes popular as long timeinfamous financial scams, Enron scandal (2001) in remedial measure than making the legislation furtherU.S.A. and Satyam Computer scam (2009) in India that stringent. But, that not being objectively measurable,have taken place in two ends of the last decade, but in the present paper suggests to give more importancetwo different countries, specially having a different on the twin tools of enhanced scrutiny and deterrentmode of compliance system, are taken up for punishment towards minimizing the probability ofdiscussion. scams and their size. Financial reporting scams caused by ‘creative Why These two scams of the two countries beingaccounting’ (though it may be a misnomer) are selected in the study?distinctly different from the securities market based It may appear to be a mere coincidence but the twoscams. Financial scams are far in-depth and take time companies in the two countries far off from each other,to get unfolded because the initial public loss remains the companies also being far off in their industries ofdormant. The time of releasing out the extent of operation evolved almost similarly. However, thesedamage depends upon the nature of efficiency in two companies faced the same sort of events in theconduction of crime. process of being the leaders in the respective industries Enron scandal (2001) in U.S.A. and Satyam scam in the said countries. Enron started business as an(2009) in India, when investigated into reveal many energy supplier in 1985. Two years later, Satyam setsimilarities in conduction of the ‘crime’ as well as in up shop to provide IT services to the companiesThe Management Accountant |May 2012 579
  • 76. FINANCIAL REPORTINGabroad. By 1996, Enron started trading in energy The First White-Collar Crime : Enron scam in thecontracts and by December 2000 claimed that its profits United Statestripled in just two years. Just before its liquidation in In 2001, Enron suffered the largest bankruptcy caselate 2001, Enron was regarded as one of the world’s in history, after a series of revelations involvingleading energy companies with over 20,000 employees irregular accounting procedures bordering on fraudand a revenue claim of over $100 billion in 2000. Also, perpetrated throughout the 1990s involving Enron andfor six years in a row, Enron was “America’s most its accounting firm Arthur Andersen. The scaminnovative company”. Satyam too had one time nearly surpasses even the other infamous scams taken place53,000 employees and had been the country’s fourth in WorldCom in 2002 and Lehman Brothers in 2008 inbiggest IT firm. It had also won various innovation the same country if the amount of fraud and variousaccolades and awards for its corporate governance. losses are considered. “Judge Lake revealed that theSatyam was ranked high by the international media size of the fraud linked to Skilling’s actionsthat said the IT company was catching up fast with was considered by the court to be $80 million. …the big three Indian software exporters, TCS, Infosys Thousands of jobs and $2 billion of pension funds wereand Wipro. lost while the 2001 bankruptcy wiped out $60 billion Now, it will be more interesting to see the before of Enron’s market value” (The Times, New York,and aftermath of these scams in these two countries. October 24, 2006). Enron filed for bankruptcy onBecause, basically the nature of these two scams is December 2, 2001.same, which has already been mentioned as a product As the scandal unraveled, Enron shares droppedof creative accounting and earnings management. from over US$90 in the summer of 2000 to just penniesEnron hid its debts to make growth look impressive. in the early 2002. Enron had been considered a blueSatyam founder, Ramalinga Raju too inflated cash and chip stock, so this was an unprecedented andbank balances, reported accrued interest that was non- disastrous event in the financial world. Enron’s plungeexistent, understated liabilities and over-stated occurred after it was revealed that much of its profitsdebtors’ position. and revenue were the result of deals with special There is another motivation behind selection of purpose entities (limited partnerships which itthese two particular scams, rather the two countries controlled). The result was that many of Enron’s debtswhere these two scams took place. The country, which and the losses that it suffered were not reported in itsbasically houses Enron, is considered to be the leader financial statements.of the present-day politically viewed unipolar world Just four days before Enron disclosed a stunningand one of the most economically rich countries $618 million loss for the third quarter in 2001-2002, itshousing the registered offices of most of the big TNCs. first public disclosure of its financial woes, workersFurther, the country is widely considered to be one who audited the company’s books for Arthurhaving a very sound legislation. More importantly, the Andersen, received an extraordinary instruction fromcountry is famous for the meticulous compliance of one of the company’s lawyers. Congressionalthe legislation. Whereas, India, bearing the largest investigators tell The Times (New York) that the Octoberdemocratic political system, housed once the largest 12 memo directed workers to destroy all audit material,number of stock exchange-listed companies in the except for the most basic “work papers”. And that isworld and is still being a country with leading number what they did, over a period of several weeks. As aof listed companies. The country is widely considered result, FBI investigators, congressional probers andeconomically to be a developing nation. The country workers sued the company. Since the Securitiestoo has a much experienced and celebrated set-up of Exchange Commission (SEC) is not allowed to acceptvarious laws, more akin to her one-time political ruler, audits from convicted auditors, Andersen was forcedthe United Kingdom. The corporate laws and to stop from being given audit assignment in the publicgovernance systems are no exception to this. But,compliance of the laws is in general poor; the judiciary companies. Although the conviction was thrown outalso suffers from an inherent system-based in 2005 by the Supreme Court, the damage to thesluggishness. The country has also become infamous Andersen name has prevented it from returning as tofor various financial scams in recent past in which its position even on a limited scale. This ultimately ledpolitically elected personnel got involved. In most of to the dissolution of Arthur Andersen, which at thethe cases of financial scams in India, especially in the time was one of the world’s top accounting firms.infamous securities market scam of 1992, very Enron had created offshore entities and units whichminimum punishment could ultimately be imposed. may be used for planning and avoidance of taxes,580 The Management Accountant |May 2012
  • 77. FINANCIAL REPORTINGraising the profitability of a business. This provided investment market, he would issue a statement or makeownership and management with full freedom of an appearance to calm investors and assure them thatcurrency movement and the anonymity that allowed Enron was headed in the right direction. This time too,the company to hide losses. These entities made Enron the investors were told to continue buying stock or holdlook more profitable than it actually was. This practice steady if they already owned Enron because the stockdrove up their stock price to new levels, at which point price would rebound in the near future. By August 15,the executives began to work on insider information 2001, Enron’s stock price had fallen to $42. Many ofand traded millions of dollars worth of Enron stock. the investors still trusted Lay and believed that EnronThe executives and insiders at Enron knew about the would rule the market. They continued to buy or holdoffshore accounts that were hiding losses for the their stock and lost more money every day. As Octobercompany; however, the investors knew nothing of this. closed, the stock had fallen to $15. Many saw this as aChief Financial Officer, Andrew Fastow led the team further great opportunity to buy Enron stock becausewhich created the off-the-books companies, and of what Lay had been telling them in the media. Theirmanipulated the deals to provide himself, his family, trust and optimism proved to be greatly misplaced.and his friends with hundreds of millions of dollars in Lay has been accused of selling over $70 millionguaranteed revenue, at the expense of Enron and its worth of stock at this time, which he used to repaystockholders. cash advances on lines of credit. He sold another $20 Further, under the direction of Enron president and million worth of stock in the open market. Also, Lay’schief operating officer, Jeffrey Skilling, the company wife, Linda, has been accused of selling 500,000 sharesadopted ‘mark to market accounting’, in which of Enron stock totaling $1.2 million on November 28,anticipated future profits from any deal were tabulated 2001. The money earned from this sale did not go toas if assuming them real today. Thus, Enron could the family but rather to the charitable organizations,record gains from what over time might turn out to be which had already received pledges of contributionslosses, as the company’s fiscal health became from the foundation. Former Enron executive, Paulasecondary to manipulating its stock price on Wall Street Rieker has been charged with criminal insider trading.during the technology boom. But when a company’s Rieker obtained 18,380 Enron shares for $15.51 a share.success is measured by agreeable financial statements She sold that stock for $49.77 a share in July 2001, aemerging from a ‘black box’, a term Skilling himself week before the public was told what she already knewadmitted, actual balance sheets prove inconvenient. about the $102 million loss.The Wall Street analyst, Richard Grubman had It is reported that Enron enjoyed considerablecomplained that Enron was the only company that influence from the start of the Bush Administration.could not release a balance sheet along with its earnings Curtis Hebert Jr., the former chairman of the Federalstatements. When asked during his trial, Skilling Energy Regulatory Commission, told the Times, Newwholeheartedly admitted that ‘industrial dominance York that Lay offered to support Hebert’s continuingand abuse had been a global problem’. For reference in that role if Hebert would take a friendlier viewsake, it should be mentioned here that Kenneth Lay toward energy deregulation. Hebert declined, and thewas the CEO and chairman of Enron from 1985 until Bush Administration replaced him. Lay and otherhis resignation on January 23, 2002, except for a few Enron officials met six times with officials led by Vicemonths in 2000 when he was the Chairman and Jeffrey President Dick Cheney, a former oilman, to craft a newSkilling was the CEO. energy policy. That policy, not surprisingly, was In August 2000, Enron’s stock price hit its highest friendly to Enron and other energy companies. Whilevalue of $90. At this point, Enron executives, who Bush and the Republicans have gained the lion’spossessed the inside information on the hidden losses, share of attention from Enron and Lay, they get at leastbegan to sell their stock. At the same time, the general a little cover from the company’s campaignpublic and Enron’s investors were told to buy the stock. contributions to prominent Democrats, such as SenateExecutives told the investors that the stock would Energy Committee Chairman, Jeff Bingaman andcontinue to climb until it reached possibly the $130 to Louisiana Senator, John Breaux. Enron and its top$140 range, while secretly unloading their shares. As officials have hired the well-known Democraticexecutives sold their shares, the price began to drop. lawyers, Robert Bennett and David Boies.As Lay did many times in the history of the company Shortly after emerging from bankruptcy inwhenever any small news came in public knowledge November 2004, Enron’s new board of directors suedwhich might have a negative impact upon the 11 financial institutions for helping Lay, Fastow,The Management Accountant |May 2012 581
  • 78. FINANCIAL REPORTINGSkilling and others for hiding Enron’s true financial The balance sheet also had an understated liability ofcondition. Among the defendants were Royal Bank of 12.30 billion INR on account of funds arranged by Raju.Scotland, Deutsche Bank and Citigroup.[update] Enron The debtors’ position was also overstated to 26.51was able to obtain nearly $20 billion dollars to billion INR (the increase being 4.90 billion INR). Rajudistribute to its creditors as a result of the mega claims’ admitted that the September 2008 results werelitigation. As of December 2009, some claim and overstated at 27 billion INR with an operating marginprocess payments are still being distributed. of 6.49 billion INR (the actual corresponding figures The Initial Reaction in the United States being 21.12 billion and 0.61 billion INR respectively, resulting in an artificial cash balance of 5.88 billion Reacting to the Enron scandal, Norman (2004) INR). Raju also admitted that Satyam’s profits wereargues that new ways of holding senior executives inflated over several years. He said that what startedaccountable in a stakeholder-oriented (multiple- as a marginal gap between the actual operating profitobjective) firm must be found. He calls for reducing and the reported profit attained unmanageablethe discretion given to the managers in choosing disproportionate increase as the size of the companybetween maximization of profit and that of multiple grew and every attempt to eliminate that gap failed.stakeholder benefits. He further alleges that the board He added, “It was like riding a tiger, not knowing howof directors cannot effectively judge whether the top to get off without being eaten”. The Maytas deal wasmanagement is doing a good job if it does not have a the last attempt to replace the fictitious assets with realspecific exclusive measurable target. The standards for ones. Analysts indicated that the size of the fraud couldmeasuring improvement in some areas of stakeholder be much higher, considering that the figure of aboutbenefit are likely to be flexible, if not ambiguous. 80 billion INR was disclosed by the company chairmanTherefore, the board has to assume that management deeply committed to a corporate social responsibilitymission. That, however, cannot be verified. Moreover, Raju stated that 12.30 billion INR was arranged foraccepting the existence of moral hazard, the corruption Satyam, not being reflected in its books, just to keepof agents is likely to appear, in which case the program Satyam’s operations running. And, for this, theof multiple stakeholder benefits may become not only promoter had to pledge the promoter’s shares and raiseinefficient, but fraudulent. funds from other sources. Facing the threat of a hostile takeover by a domestic or overseas company, including The practice of co-sourcing, as it is called, of internal private equity firms, Satyam Computer Services’audits gained popularity in the US following the Enron management and some of its institutional investorsscam. Outsourcing internal audit practice served started exploring the possibility of merger with anotherseveral purposes for corporate houses, including software company.enhancing the brand value of the company. Earlier, atthe time of investing in a firm, private equity investors Raju started an IT company with 20 employees andonly looked at the statutory audit records. However bagged a multitude of IT projects from the USan increasing emphasis is also being given to internal companies. The said company developed rapidly andaudit at present. became a true multinational company with thousands of employees spread over a number of countries. The The Second White-Collar Crime : Satyam latest Maytas controversy and margin selling of hisComputer scam in India shares created a furore in the business circles. Satyam In an announcement that sent shock waves across Computers had announced on December 16, 2008 thatcorporate India, Chairman of Satyam Computer it would acquire two group firms – Maytas PropertiesServices Ltd., once the third largest software services and Maytas Infra for 80 billion INR (about $1.6 billion)company in India, B. Ramalinga Raju resigned from as a part of its diversification strategy – a move thatthe board, admitting India Inc.’s biggest fraud sparked a row over alleged violation of corporateamounting US$ 1.44 billion. Soon after, Satyam’s governance norms. The Satyam Board, including itsManaging Director and Ramalinga’s brother, B. Rama five independent directors, had approved theRaju, too followed suit. In a letter to the board, B. founder’s proposal to buy 51 per cent stake in MaytasRamalinga Raju admitted that there were inflated (or Infrastructure and 100 per cent stake in Maytasnon-existent) cash and bank balances of 50.40 billion Properties, owned by the family members of B.INR (the amount reflected in the books being 53. 61 Ramalinga Raju. The decision of acquisition, however,billion INR). There was also a receipt of accrued interest came under severe criticism from the institutionalamounting to 3.76 billion INR, which was non-existent. shareholders, especially the overseas ones, which582 The Management Accountant |May 2012
  • 79. FINANCIAL REPORTINGforced Satyam Computers to reverse its decision to Government of India issued the Corporate Governanceinvest 80 billion INR in the two promoter-owned Voluntary Guidelines 2009 in December, 2009.companies. Four independent directors resigned During late April of 2010, another Committee thatthereafter, facing criticism for agreeing to a decision was constituted by Nasscom, the premier trade bodywidely perceived as damaging to the company’s and the chamber of commerce of the IT-BPO industriesinterests. Its scrip nosedived more than 55 per cent on in India, headed by N. R. Narayana Murthy issued itsthe US bourses. The Ministry of Corporate Affairs later recommendations for further strengthening corporateordered a probe into whether the company violated governance practices in India. At the outset, theany corporate governance norms while entering into appointment of a committee by the IT industry bodysuch a deal, involving shareholders’ money. is understandable because the fraud and governance The company’s share price fell by 21.3 per cent since failures at Satyam put the credibility of the IT-BPODecember 15, the day before the crisis broke. But, the industry in India at stake. Hence, the recommendationsBombay Stock Exchange benchmark, Sensex crashed too are primarily focused at that industry, although iton 7th January, 2009 and tumbled over 749 points at is intended to be applicable to other industries as well.noon to dip below the psychological 10,000-points level The recommendations of the committee regardingon heavy selling by funds after reports of Satyam board structure, independence of directors, auditComputer Services’ chairman’s resignation ahead of committee and disclosures to shareholdersthe crucial 10th January board meeting. On the same substantially overlap with the ground that has alreadydate, the index-linked Satyam Computer equity been covered by the previous task forces andplunged by Rs. 139 (or 350 per cent) to Rs. 39.95. With committees. However, a distinctive feature of thethe mounting selling pressure, the wide-base National Nasscom recommendations is that they adopt a moreStock Exchange’s index, Nifty, dropped by 192 points holistic approach and focus heavily on the protectionto 2,920.40 at the same time. of stakeholders in a company such as customers, The Initial Reaction in India employees, other partners such as vendors, and even competitors. To that extent, they represent a marked Terming disclosures of financial wrong-doings at departure from previous governance reform measuresSatyam as an event of “horrifying magnitude”, the that focus almost solely on protection of shareholderIndian stock market regulator, SEBI said just on the of the news made public that it would take all stepsunder the law for which it has started discussions with The Law Existing in the US Before the Enrongovernment and bourses. “We are in touch with SCAMMinistry of Corporate Affairs... we are also in “The preparation of financial statements indiscussion with them as to what steps need to be taken conformity with generally accepted accountingfrom the perspective of power they have under the principles requires management to make estimates andlaw and SEBI has under the law,” SEBI Chairman, C. assumptions that affect the reported amounts of assetsB. Bhave said to a business TV channel. In fact, the and liabilities …. at the date of the financial statementsMinistry of Corporate Affairs said that the role of and the reported amounts of revenues and expensesdirectors and auditors at Satyam would be scanned during the reporting period. Actual results could differby The Institute of Chartered Accountants of India from those estimates.” (Enron Annual Report, 2000,(ICAI), the apex institute of the professional Auditors p. 36).in India and The Institute of Company Secretaries of The Enron experience reveals a problem at the heartIndia (ICSI), the apex body of company Secretaries in of US accounting - with the FASB’s conceptualIndia (The Economic Times, Jan. 7, 2009). framework that encourages and legitimates creative In early 2009, immediately following the accounting accounting. At the centre of the Enron scandal are thefraud at Satyam, several committees and task forces US rules for consolidated accounting, but as thesewere constituted to review corporate governance rules define what is and what is not an accountingnorms and practices in India. Some of them issued their entity—what is and what is not an ‘asset’ of therecommendations late last year. These include a report parent undertaking—they have profound effect onby a task force constituted by the Confederation of accounting for all transactions between undertakings.Indian Industry (CII) and another by the Institute of Enron used these rules to exploit ‘Special PurposeCompany Secretaries of India. Based on these reports Entities’ (or Vehicles) (SPEs or SPVs), businesses that/ recommendations, the Ministry of Corporate Affairs, it claimed it did not control and should not consolidateThe Management Accountant |May 2012 583
  • 80. FINANCIAL REPORTING—to hide losses on its investments, to hide liabilities the readers of the report are all laymen. Auditor’sand to generate fictitious profits. opinion can be qualified or unqualified. A qualified Rob Bryer (2004) argues that Enron’s accounting opinion is an opinion subject to certain reservations.shows just how deeply the capital market’s view of That means that the auditor is unable to satisfy himselfvalue as economic value is embedded as the dominant that the accounts present a true and fair view of theideology of US accounting. This idea underlies the company’s financial position.conceptual framework of the FASB and its acolytes in As per Section 227(4) of the Companies Act, thethe British Accounting Standards Board (ASB) and the nature and reasons of qualification should also beInternational Accounting Standards Board (IASB). He clearly stated, instead of merely stating grounds forfurther argues that this ideology undermines suspicion. For the purpose of drawing up the report,accounting’s traditional stewardship or accountability the auditor is given the right to inspect and examinerole. The lesson drawn for accountants is the profound the books and accounts, balance sheets and vouchersweakness of the FASB’s conceptual framework at the or any other requisite documents necessary for thecore of which is its definition of an asset as an expected purpose of the audit. These documents can be accessedcash inflow. He also argues that the traditional concept by the auditor at all times, irrespective of where theyof conservatism as to the definition of an asset as the are kept. The auditor can also ask for any informationrecoverable cost of a controlled use-value would have and explanation from the officers of the company, andprevented Enron’s accounting manipulations. the officer would be under a duty to furnish the The Law Existing in India Before the Satyam information and explanation so needed.Computer SCAM During the course of the audit, the auditor could Under Section 227 of the Indian Companies Act, come across situations where he discovers that a seniorthe auditor is supposed to report to the beneficiaries employee is defrauding the company or using unfairof the company i.e. the shareholders in the general practices, then an obligation arises of the auditor tomeeting, about the books and accounts of the company, report what he has discovered to the managementthe balance sheet and profit and loss account on the immediately so that appropriate action can be taken.basis of their assessment. They have to give their If the auditor identifies the possible existence of fraudopinion on the financial position of the company and or other irregularities in accounting practices, thealso make sure that it has been fairly, truly and honestly auditor should attempt to clarify it or report it. Oncedepicted. the fraud is detected, the auditor can investigate it As per Section 227 of the Indian Companies Act, further by authentication of original documents, actualthe report should also state : tests and location visits, contacting major customers and suppliers, interviewing the personnel and testing 1. That the auditor has obtained all information the veracity of computer records. The auditor should and explanations, which are to the best of his knowledge and belief necessary for his purpose; then report of this to the director or the management, 2. Whether in his opinion, all the books of accounts unless circumstances are such that their involvement and requisite documents necessary for the audit is suspected. The possibility of detection is however a have been furnished by the company; lot less in such cases. There may be circumstances, 3. Whether the balance sheet and profit and loss where the auditor needs to report to a third party account comply with the books of accounts; and without the consent and knowledge of the 4. Any observation and comments on the management, when he suspects that the management functioning of the company, especially, which may be involved. The auditor should consider the may have an adverse effect on the company. magnitude of loss that will occur due to the fraud and An auditor is thus required to report not merely on irregularity and the number of people that will bethe balance sheet but on the accounts he examines, and affected by it or the possibility of recurrence of thehe also has to express his opinion whether the company fraud if gone unreported. As a measure of recoverablehas properly kept all the books as per law and whether loss, the court noted that no losses would have beenthe balance sheet and profit and loss account are in incurred from the date of discovery if the auditor hadaccordance with the accounting standards and taken some action to blow the whistle [Sasea Financeprocedures prescribed by the ICAI. The report should Ltd vs. KPMG (2000) 1 BCLC 236 at 241, 242].be complete, concise, clear and unambiguous and the Section 233 of the Indian Companies Act imposesauditor should be careful about the language used, as a penalty on the auditors for non-compliance of584 The Management Accountant |May 2012
  • 81. FINANCIAL REPORTINGSections 227 and 229 with payment of fine if there is the case decided to surrender before the magistratewilful negligence and default. The auditor may have after attending the court proceedings in the compensate the members or shareholders of the This surrender came as a result of a directive of thecompany who have suffered losses attributable to the apex court asking them to surrender.negligence in performance of the auditor’s duties. The Union Minister of State for Corporate Affairs, R. P.auditor may be held liable for such fraud if there is N. Singh has said that the investigation into Satyamnegligence in detection of errors that may cause Computer Services Limited is underway to ascertainconsequent loss to the company. In order to hold the siphoning of funds including role of individualauditor liable for fraud, the following conditions must directors. The scam is being investigated by Seriousbe satisfied : Fraud Investigation Office (SFIO), in association with 1. That the statement signed by the auditor is Central Bureau of Investigation (CBI) & Enforcement untrue and false; Directorate (ED). Replying to a question in the 2. That he knew it to be untrue either or did not Parliament recently, the Minister said disciplinary apply reasonable care and skill; proceedings against six Chartered Accountants into 3. That he intended the report to be relied on by the Satyam Computer Scam is underway by the ICAI others; and and has not reached the stage of award of punishment. 4. That the parties on relying upon the report He said CBI has issued Letter of Rogatories to six suffered loss. countries. Since charge sheets will be filed after getting The Indian Companies Act, 1956 imposes a the information from these countries, no time limit canCriminal liability under Section 628 on any person who be indicated. (‘Investigation into Satyam Computermakes a false or untrue statement through any Scam under way’, March 3, 2011, Tax Managementdocument like balance sheet, profit and loss account,, prospectus, intentionally, thereby causing a loss The Punishment Given In Indiato the people who rely on such documents. But, it is a matter of discomfort for Indian The Punishment Given in The United States government that the concrete punishment in terms of On July 7, 2004, Lay was indicted by a grand jury imposition of financial penalties if any till now cameon 11 counts of securities fraud and related charges. from the United States, not till now from her ownOn January 31, 2006, following four and a half years bodies.of preparation by government prosecutors, Lay’s and US authorities have ordered PwC’s Indian affiliatesSkilling’s trial began in Houston. Lay was found guilty to pay $7.5 million in fines for deficiencies in its auditson May 25, 2006, of 10 counts against him; the judge of Satyam Computer Services. The ruling is the firstdismissed the 11th. Because each count carried a punishment handed down to an audit firm inmaximum 5-year to 10-year sentence, legal experts said connection to India’s largest corporate fraud. The USLay could have faced 20 to 30 years in prison. However, Securities and Exchange Commission (SEC) hashe died while vacationing in Snowmass, Colorado on ordered Price Waterhouse firms pay $6 million in finesJuly 5, 2006, about three and a half months before his while the US Public Company Accounting Oversightscheduled October 23 sentencing. Preliminary autopsy Board (PCAOB) dished out a penalty of $1.5 millionreports state that he died of a heart attack caused by for violation in connection to the Satyam audit. In acoronary artery disease. As a result of his death, on related settlement with the SEC, Mahindra SatyamOctober 17, 2006, the federal district court judge who (previously Satyam Computer Services) agreed topresided over the case vacated Lay’s conviction. There settle fraud charges by paying a $10 million penaltyhave been also been theories of conspiracy surrounding and undertaking a series of internal reforms.his death. The PCAOB has settled disciplinary orders against In one of the biggest corporate frauds of India, the Lovelock & Lewes, Price Waterhouse Bangalore, PriceSatyam financial scam’s main accused, its former Waterhouse & Company Bangalore, and PriceChairman, Raju was arrested in January, 2009, and as Waterhouse & Company Calcutta, known collectivelya routine matter sought medical treatment due to as Price Waterhouse (PW) India. Only two of thesehealth problem. On November 10, 2009, however, Raju firms were ordered to pay a $1.5 million fine. Thesurrendered before a court in Hyderabad after his PCAOB investigation found the jointly administered‘more time’ plea was rejected by the Supreme Court, quality control systems of the five firms failed tothe apex court in India. Raju and five other accused in detect a general practice in the cash confirmationThe Management Accountant |May 2012 585
  • 82. FINANCIAL REPORTINGprocess that was not in accordance with PCAOB reforms concerning financial controls, auditing andstandards. The oversight body said the deficient cash accounting. In a nutshell, most of the provisions of SOAconfirmation procedures contributed to the failure of concern the independence of members of the auditPW India to detect the material overstatement of committee, a ban on auditors performing certain typesSatyam’s cash balance. Satyam management used of non-audit work, a revision of accounting standardsthese bank confirmations as part of a cover up of its for debts of special purpose entities, the disclosure ofscheme to inflate the company’s reported cash balance off-balance sheet transactions and the protection of so-by $1billion approximately. called whistle-blowers. According to SOA, the CEO As a result, the affiliates will not be able to accept and the CFO must also certify annual reports, and maynew engagements to audit US issuers until an face criminal penalties in cases of reckless certification.independent monitor determines PW India has made SOA also prohibits personal loans to directors andsignificant progress toward completing the actions. disgorges incentive-based compensations and stockAccording to the directive, PW India will also not be sales profits if accounts are overstated. It also requiresable to accept new referred US issuer audit work for senior financial officers to disclose their corporate codesix months. of ethics. The first requirement demands greater The SEC ordered all five of PwC’s Indian affiliates accountability of top management, as recommendedto pay a $6 million fine, which it said is for repeatedly by stakeholder theorists, while the following two couldconducting deficient audits of Satyam’s financial be seen as revisions of the original shareholder model.statements and enabling a massive accounting fraud SOA does not address the problem of independentto go undetected for several years. The SEC said it board directors, per se. Neither does it regulate equity-found audit failures by the affiliates were not limited based compensation. These issues are however dealtto Satyam, but rather symptomatic of a much larger with in the updated 2002 NYSE Listing Standards.quality control failure throughout PW India. According to which (1) the majority of the board should PW India said while it neither admits nor denies not have any material relationship with the company;the US regulators’ findings, its agreements with both (2) directors must hold meetings without managersthe PCAOB and the SEC were important steps towards present; (3) former employees of the company and itsbuilding upon the efforts it has made over the past auditor must wait five years before serving on thetwo years to enhance its audit quality. The firm also board; (4) the audit committee must have solehopes it can reach an agreed resolution with Indian responsibility for hiring the audit firm; (5) nominatingregulators. and compensation committees must consist entirely of independent directors; and (6) shareholders must PwC International chairman Dennis Nally approve all share-based compensation.described India as a key market for the network andsaid it is committed to working with its colleagues in Similar regulations were passed in other countriesIndia to build on a successful quality practice. like Bill 198 or CSOX in Canada, J-SOX in Japan, CLERP 9 in Australia, and LSF in France. In India too, The Consequent Changes Made In The the Department of Company Affairs, then under theLegislation of The Two Countries Ministry of Finance, appointed a Committee After the Enron debacle, auditing all over the world under the chairmanship of Naresh Chandra, formerhas come under the scanner. The age-old saying that Cabinet Secretary to look into Corporate Audit and‘an auditor is a watchdog and not a blood hound’ is Governance in 2001. The Committee submitted itsbeing re-examined, if not questioned. Legislation report in 2002. The principal regulator, SEBI alreadywhich seeks to lay a greater emphasis on detection and had clause 49 made compulsory beyond the year endedreporting of fraud by auditors has been introduced all in 2003 for the listed companies incorporating most ofover the globe. the recommendations of the K.M. Birla Committee In the USA, corporate governance is regulated by (which was appointed by the SEBI itself in 1999). SEBIseveral authorities. Corporations are subject to federal constituted a Committee again on Corporatelegislation, SEC rules and state laws. The most Governance under the chairmanship of N. R. Narayanacomprehensive reform of corporate governance law Murthy in 2003. It also issued a circular in August 2003since the Securities and Exchange Act of 1934 was the revising clause 49 of the listing agreement. TheSarbanes-Oxley Corporate Reform Act of 2002 (SOA). Narayana Murthy Committee then considered andAs Morrison (2004) notes, SOA is not a new code of deliberated on the suggestions and comments on thecorporate governance, but rather a set of statutory circular. Based on the revised recommendations of the586 The Management Accountant |May 2012
  • 83. FINANCIAL REPORTINGCommittee, provisions of clause 49 of the listing the stakes for players abusing the system” (Kabra,agreement were further revised on 29th October, 2004. 2009).Compliance of the revised clause 49 of the listing Advocates of strong corporate social responsibilityagreement was made mandatory since 1st January, demand that top executives should work for the benefit2006. of all stakeholders even if this means reduction of profit The End Note : ‘Satyam—India’s Enron’ and shareholder value. In other words, they see profit The genesis of changes for SOX and Clause 49 are as a necessary condition for sustainability of thedifferent. SOX was introduced in the United States as business, but it should not be more important than thea reactive measure in the aftermath of Enron scam overall interest of the company which includeswhereas clause 49 was floated as a pro-active measure interests of other stakeholders. That is why ‘credible’in India also in the same circumstance. Yet, the accounting should replace what is being projected andprincipal reasons as investigated into both the practised as ‘creative accounting’. ❐countries do not establish that there was not sufficient Referenceslaw before occurrence of these scams. Rather, it is ■ Berlau, John, 2006, Statement on the Enron Verdict andworth-mentioning that Enron received top scores Sarbanes-Oxley, CEI, May 26.from the “corporate governance” groups before itimploded. Its board of directors was 86 percent ■ Banerjee, Ronojoy, 2010, Firms outsource internal audits,independent, and its audit committee consisted The Financial Express, October 30.entirely of independent directors. The requirements ■ Daniel Kadlec, 2002, Enron: Who’s Accountable?, Theof Sarbanes-Oxley would have barred only one of six New York Times, Sunday, Jan. 13.members of its audit committee, a member who was a ■ Kabra, Atim, 2009, Improving Corporate Governance:paid consultant to the company, from serving on it. A Blueprint to Prevent Scams like Satyam’s, January 27.No one had also alleged about any problem with the ■ Morrison, J., 2004, Legislating for good corporateEnron’s “internal controls,” the heart of the costs of governance: Do we expect too much? The Journal ofSarbanes-Oxley. Enron was really not about internal Corporate Citizenship, Autumn, Iss. 17, pp. 121–134.controls; it was about accounting judgments. The best Sheffield: Greenleaf Publishing.internal controls would not guard against bad ■ Mulford, Charles W. and Comiskey, Eugene E., 2002,judgments or misleading statements. That is what anti- The Financial Numbers Game—Detecting Creativefraud laws are for. SEBI also had the master circular in Accounting Practices, John Wiley and Sons, Inc.form of clause 49 of the listing agreement in India.Thus, the root of all exercises behind the scams appears ■ Norman, W., 2004, What can the stakeholder theory learnto be very closely related to the deliberate negligence from Enron? Zeitschrift für Wirtschafts – und Unternehmensethik, Vol. 5, Iss. 3, pp. 326–337. Mering:of the auditors. And in this respect, what the United Rainer Hampp Verlag.States was able to do in the country, India is far behindof doing that. Now, a question may be put forward. Is ■ Gagrani, Harsh and Jhurani, Ritika, Role of auditors indeterrent punishment the panacea for all ills? The light of Satyam scam, may be found in the analysis of one columnist ■ Umakanth, V., 2010, Nasscom on Corporateon this subject that “it does serve its purpose in raising Governance, for Indian Corporate Law Blog, May 12.* All the facts, statements and relevant information relating to two scams are presented onthe basis of publication of the same in secondary sources. The author does not want to takeany credit, if any, for that. However, the author has made an honest attempt in analysis ofthe same. CorrigendumIn the April 2012 issue of The Management Accountant on page 392 thephotograph of Shri S. Natarajan, the author of the article titled ‘‘Cost AccountingModels for Pricing’’ was wrongly printed. The Editor deeply regrets theunintentional error.The Management Accountant |May 2012 587
  • 84. ECONOMIC MATTERSBlack Money : Methods and Means of Controlling at Origin D. Venkata Narayana MBA, ACMA Finance Manager Kronos Systems Indian Pvt. Ltd. BangaloreI n the last two years or so, the entire country is Transaction involving a monetary value above discussing at length on the amount of illegal/Black Rs. 5,000 should be carried only by the electronic Money that been slashed away in tax havens by Banking/Cheque payment or though Debit or Creditthe politicians, business people and others. It is an card.undisputed argument that if the entire illegal money 3. Linking all economic transactions with PAN :which was accumulated by this bunch of people in Any economic transaction which is above Rs. 5,000illegal means could have been used for development, need to be done either through cheque/Electronicthen India would have been at the top of the global payment/Debit card/Credit card. So all sucheconomic power hierarchy today. transactions should be allowed to be carried on only if The systematic loopholes in the political and the Bank account, Debit card/Credit card are linkedeconomic system coupled with socio-emotional with the PAN of the accountholder. No person in theweaknesses of the common people has been the major country will be allowed to transact involving monetarysource of this black money generation in the country. value above Rs. 5,000 if he or she does not have PAN.This evil and economic devil has spread its wings from 4. Imposing limit on the number of BankParliament of India to the Municipality level. It is a Accounts : Each and every person can have at thehardcore reality in the country that today the entire maximum four bank accounts and the same should beelection system and the candidates contesting the linked with PAN. At no point of time the person will beelections are driving the democratic process with Black allowed to open a fifth account. So the banker, whileMoney—either directly or indirectly. This is really opening the account, can check the details on the accountchallenging the real democratic system of the on income tax website or the Government should allowcountry—making it difficult for the ordinary and the bankers to have a common database similar to theintellectual class to participate in the system and get lines of NSDL where the banker can check how manyelected to law making institutions like Assembly and existing accounts are linked to a particular PAN beforeParliament. As a result of this, only incompetent people allowing to open one more bank account.with vested interests to make more and more illegal 5. Integrating Earnings—PAN—IT Return : Aand black money are entering the parliament and comprehensive step need to be taken by theassembly; and they are not making any competent and government , all the person’s spending above Rs. 5,000foolproof law in the country to curb the menace from per transaction in a year are captured with PAN. Alsograss routes. the PAN is linked to the person’s income earnings. Having seen the means and ways of generating Subsequently when the person is buying some itemsblackmoney for the last decade, particularly for the costing Rs. 50,000/- and above, then also the detailslast one year, let us understand how we can completely are captured with PAN. This helps to understand andavoid this menace in the country. Let us call these steps have a comprehensive view on the transactions of theas ‘‘Reddy’s Blackout’’ tools : person by the income tax department. 1. Ban on physical possession of currency : The Now let us see what happens if the above five stepsGovernment should impose strict restrictions indica- are followed in the economy :ting that at no point of time an individual should carry a. Ban on physical possession of currency : Ifphysical currency above Rs. 20,000. This also applies stringent laws care passed with punishment like 10to the individual’s residence. An individual is not years’ imprisonment and with 10 times penalty of theallowed to have physical currency of more than Rs. money recovered if above Rs. 20,000 is found at any20,000 at any given point of time. time with a person, then nobody would likely possess 2. Ban on physical exchange of currency : Any the cash in physical form. Apart from this the588 The Management Accountant |May 2012
  • 85. ECONOMIC MATTERSsystem itself drives away the need to have physical ● The process to open the Bank Accounts shouldrequirement of cash. be made simple and cost effective. Nationalized banks b. Ban on physical exchange of currency : Even if should initiate steps to open the bank accounts for allwe have cash and if we know that we cannot use the common men within three months. Although thissame for the purchase of any item valuing beyond seems to be difficult at the outset, it is not so. This isRs. 5,000 in cash then we will not try to accumulate actually a very simple one to accomplish since most ofphysical cash which is of no use if the conditions are the persons in India already has the bank account.imposed. Moreover, since all the purchases above ● Once this is done all the payments of the GovernmentRs.5,000/- can be done only with Debit /Credit cards/ to the citizens of the country currently paid either asNet Banking, all the transactions are accounted and subsidy or as wage payment (pay for work scheme, etc.)the persons are held responsible. This step, again, kills should be directly transferred to such account. Then thethe need or usage of black money generation. corruption at the lower level is eliminated and every person c. Linking all economic transactions with PAN : gets what exactly he/she is due.Currently most of the economic transactions like purchase ● More effort should be made to open ATM’s andof car, purchase of gold, purchase of land, etc are not bank branches in all the Mandals of the country. A 90-linked to PAN. This lacking of integration of the day programme should be prepared and the sametransactions with PAN coupled with acceptance of cash should be implemented with strict a settlement of transaction is really making the tracking ● Laws of the country should be amended to ensureor tracing of black money difficult. So banning the that the people violating the above—like physicalphysical currency stock, banning the acceptance of possession of cash, payment/acceptance of cashphysical money above Rs. 5,000 makes it mandatory for beyond threshold limit—will be punished with inany person intending to procure/acquire the asset to use specified time limits—say maximum 6 months.his legal and accounted money through Bank account/ Benefits of the above :Net Banking/Debit/Credit card. 1. Black money generation is totally suppressed. d. Imposing limit on the number of Bank 2. Threat of fake currency generation in theAccounts : Opening bank accounts in numerous economy is limited greatly.number and then closing the same after thetransactions/making them dead is one of the simplest 3. One of the major issues which are havingand easily followed method of black money generation cascading effect on the Indian Economy for decades isin India. Most Individuals of economically high insufficient income of agriculture. As a result, farmersworthiness follow this route for the purpose. Imposing are committing suicides as the revenue they are gettingrestrictions on the number of bank accounts make it is quite insufficient to cover the cost of cultivation. As a result of this the farmers are not able to pay back thedifficult for involving it with balckmoney generation. amounts they borrowed for cultivation. On getting e. Integrating Earnings—PAN—IT Return : Now into the grass route level of this problem, we canIncome Tax earnings and returns are not integrating identify the reason as the exploitation by the middle-the PAN completely. Once the integration of earnings, men who are procuring the agricultural produce atspending and the IT return filed by the person is done throwaway prices. So once the farmers are paidit becomes easier to curb this menace. through electronic transfers/cheques by these If the above steps are followed with full will and middlemen, the government can have a better trackingspirit, then Indian economy will not see any kind of to fix the prices. Later, when the government canblackmoney in future with immediate effect. It is also review the income and expense of these middlemen,a reality that today crores of rupees of illegal/black the exploitation can be identified and people involvedmoney is stashed in the hidden lockers of businessmen can be suitably punished. Over a period of time, thisand politicians. will ensure proper and right price for agriculture, and the middlemen also will not dare to procure at Now let us see how the Government should move abnormal low price since they are not allowed to havein order to implement the above scheme : physical cash and all their income, too is tracked with ● Let the Government—if it is serious on curbing PAN-linked Bank accounts. This will ultimately leadblack money—announce that no economic transaction to healthy farmers, health agricultural produce and,valuing above Rs. 5,000 each will be permitted with obviously, healthy GDP.effect from a specified date….( should be three months 4. Today Government of India is spending croresfrom the current date). of rupees on the printing, maintenance and distribution ● The three months should be used and allowed of new currency every year. Once the governmentfor all the nationals to have bank account and to have initiates the above steps, the need for physical currencythe same integrated with PAN. If any person is having in the country will come down drastically and, as amore than four bank accounts, then the same shouldbe surrendered within these three months. (contd. to page 593)The Management Accountant |May 2012 589
  • 86. SECURITY ANALYSIS Test of Market Efficiency Dr. M. Appala Raju Professor & Director SCMS—CochinT he Efficient Market Hypothesis (EMH) has been The strong form EMH stipulates that private consented as one of the cornerstones of modern information, or insider information too, is quickly financial economics. We first defined the term incorporated by market prices and, therefore, cannot‘‘efficient market’’ in financial literature in 1965 as one be used to reap abnormal trading profits. Thus, allin which security prices fully reflect all available information, whether public or private, is fullyinformation. The market is efficient if the reaction of reflected in a securitys current market price. Thatmarket prices to new information should be means even the companys management (insider) areinstantaneous and unbiased. Efficient market not able to make gains from inside information theyhypothesis is the idea that information is quickly and hold. They are not able to take the advantages to profitefficiently incorporated into asset prices at any point from information such as takeover decision which hasin time, so that old information cannot be used to been made ten minutes ago. The rationale behind toforetell future price movements. Consequently, three support is that the market anticipates, in an un-versions of EMH being distinguished depends on the biased manner, future development, and therefore,level of available information. information has been incorporated and evaluated into The weak form EMH stipulates that current asset market price in much more objective and informativeprices already reflected past price and volume way than insiders.information. The information contained in the past The random walk model of asset prices is ansequence of prices of a security is fully reflected in the extension of the EMH, as are the notions that thecurrent market price of that security. It is named weak market cannot be consistently beaten, arbitrage isform because the security prices are the most publicly impossible, and ‘‘free lunches’’ are generallyand easily accessible pieces of information. It implies unavailable. The runs test is a non-parametricthat no one should be able to outperform the market statistical test that checks a randomness hypothesis forusing something that ‘‘everybody else knows’’. Yet, a two-valued data sequence. More precisely, it can bethere are still numbers of financial researchers who used to test the hypothesis that the elements of theare studying the past stock price series and trading sequence are mutually independent.volume data in attempt to generate profit. This A ‘‘run’’ of a sequence is a maximal non-emptytechnique is so called technical analysis that is asserted segment of the sequence consisting of adjacentby EMH as useless for predicting future price changes. equal elements. For example, the sequence ‘‘++++––– The semi strong form EMH states that all publicly +++––++++++––––’’ consists of six runs, three of whichavailable information is similarly already incorporated consist of +s and the others of –s. If +s and –s alternateinto asset prices. In other words, all publicly available randomly, the number of runs in the sequence N forinformation is fully reflected in a security’s current which it is given that there are N+ occurrences of +market price. The public information stated not only and N– occurrences of – (so N = N+ + N–) is a randompast prices but also data reported in a company’s variable whose conditional distribution—given thefinancial statements, company’s announcements, observation of N+ positive runs and N– negative runseconomic factors and others. It also implies that no one —is approximately normal with :should be able to outperform the market using ● meansomething that ‘‘everybody else knows’’. This indicates 2N+ N– (2N+ N– – N) (m – 1) (m – 2)that a company’s financial statements are of no help ● variance ms = 2 =in forecasting future price movements and securing N2 (N – 1) N– 1high investment returns. These parameters do not depend on the ‘‘fairness’’590 The Management Accountant |May 2012
  • 87. SECURITY ANALYSISof the process generating the elements of the sequence wherein the sense that +s and –s must have equal N = (N+) + (N– )probabilities, but only on the assumption that the N+ = positive runs or number of occurrences of +selements are independent and identically distributed. N– = negative runs or number of occurrences of –sIf there are too many runs more or less than expected, If the sample size is unequal and either h1 and h2 isthe hypothesis of statistical independence of the larger than 20, or if the sample size is equal and largerelements may be rejected. than 100, then the test statistic is Runs tests can be used to test 2h1h2 1. the randomness of a distribution, by taking the r– h+h +1 1 2 data in the given order and marking with + the z= data greater than the median, and with - the data (2h1h2(2h1h2– h1 – h2)) less than the median (Numbers equalling the (h1 + h2)2 (h1 + h2 – 1) median are omitted). where r (test statistic) is the number of runs or average 2. whether a function fits well to a data set, by of the most and fewest runs marking the data exceeding the function value Objectives with + and the other data with –. For this use, 1. To check whether successive price changes are the runs test, which takes into account the signs independent or not during the given time period. but not the distances, is complementary to the 2. To check whether Indian capital markets are in chi-square test, which takes into account the weak form of efficiency, semi-strong form of distances but not the signs. efficiency, or strong from of efficiency. Run test statistics is a kind of non-parametric 3. To check whether prices get affected by demandstatistical test that checks a randomness hypothesis for and supply to reflect equilibrium position.a two-valued data sequences. More precisely, run test 4. To prove whether Price change is Random orcan be used to test the hypothesis that the elements of Not.the sequence are mutually independent one. A run of Hypothesisa sequence is defined as a maximal non-empty segment Ho Null Hypothesis : Price change is randomof the data sequence consisting of adjacent equalelements. Ha Alternate hypothesis : Price change is not random Mathematical Formulae Hypothesis was tested at 20 percent significance Run test can be used to perform level at which ‘Z’ value is 1.28 ● Randomness of a distribution is found by taking Research Methodology the data in the given form or order and marking with + the data greater than the median and Type of study : Empirical with – the data less than the median Sample Design : Judgmental ● Numbers which equal the median get Sample 6 Leading Banks : ICICI, HDFC, CANARA omitted. BOB,AXIS, SBI ● It checks whether a function fits well to a data Data Source : Stock market quotations set values, by marking the data exceeding the Type of Data : Secondary Data function value with + and the other data Period of Data : JAN. 2005 TO OCT. 2010 with –. It mainly depends on signs. Monthly base ● If the number of runs falls outside the interval Research Plan of m±1.46s (for this project only), universally Scope of the study accepted is m±1.96, then it is reasonable to reject The prices of the stocks are taken during calendar the hypothesis and that the curve is a good years Jan. 2005-Oct. 2010 spreading over Pre-recession, description of the data. during Recession, and post-recession period. 2(N+) (N–) Literature Review Mean = +1 Meredith Beechey, David, Gruen, James, Vickery. N The efficient market hypothesis states that assets prices 2N+ N–2N + N– –N (m – 1) (m – 2) in financial market should effect all availableVariance s2 = = information; as a consequence prices should always 2 (N ) (N – 1) N–1 be consistent with fundamentals.The Management Accountant |May 2012 591
  • 88. SECURITY ANALYSIS The paper discusses the main ideas behind the Monthly Stock Prices—6 BANKSefficient market hypothesis and provided a guide as Date ICICI HDFC Canara BOB Axis SBIto which of its predictions seem to be borne out byempirical evidence and which do not. The evidence Month Close Close Close Close Close Closesuggests that it cannot explain some important and Price Price Price Price Price Priceworrying features of asset market behavior. Investors Jan-05 360.6 564.4 209.15 205.05 206.02 642.08inconsistency, transaction cost and unavailable Feb-05 380.75 586.9 218.25 218.05 241.05 714.04information may all be source of market inefficiency, Mar-05 393.00 544.25 200.4 218.05 242.05 656.95study their impact, as well as the influences of other Apr-05 360.02 537.2 174.95 172.25 230.01 584.08conditions, on the development of prices in the primary May-05 392.05 540.05 199.55 195.65 239.08 670.07goal in the empirical literature. Jun-05 421.55 634.1 210.9 196.03 247.15 681.55 (2005) Malkiel shows that professional investment Jul-05 536.00 685.5 252.1 257.05 259.09 800.08managers do not out perform their index benchmarks Aug-05 481.07 640.15 224.6 245.05 250.00 796.65and provides evidence that, by and large, market prices Sep-05 600.35 687.55 231.95 248.95 265.05 938.06do seem to reflect all available information. Oct-05 497.07 606 201.95 218.85 238.03 838.25 (2006) Toth and Kertesz found evidence of increasing Nov-05 537.15 687.55 209.75 230.05 271.04 896.25efficiency in N.Y.S.E. by the theoretical and empirical Dec-05 584.07 707.45 240.55 240.85 286.35 907.45studies of the efficient market hypothesis and have Jan-06 609.15 762.55 249.15 249.75 337.15 886.08made an important contribution to the understandingof the stock market, and the present state of Feb-06 615.01 736.05 286.15 223.02 328.35 877.02understanding is far from conclusive. Mar-06 589.25 773.05 266.09 230.03 356.35 968.05 Apr-06 590.25 826.06 254.01 231.05 347.05 913.65 Are emerging financial markets efficient by SardarM. N. Islam Sethapeng Watanapala-chaikul and Colin May-06 536.05 740.02 229.25 227.05 285.08 831.00Clark (2005). Sanford Gross describes a model which Jun-06 487.04 791.15 200.08 198.08 266.75 727.04shows that informational efficient price systems Jul-06 554.05 795.05 196.65 222.00 297.85 810.05aggregates diverse information perfectly (1980). Aug-06 596.05 853.15 221.02 250.06 342.09 930.00 Beja (1977) showed that the efficiency of a real Sep-06 699.05 926.00 284.15 288.25 379.02 1028.03market is impressible. Oct-06 776.85 1004.05 294.00 279.05 433.75 1095.05 Le Roy (1981) and porter showed that stock markets Nov-06 871.45 1118.04 297.75 262.15 474.05 1314.00exhibit excess volatility and they reflect market efficiency. Dec-06 890.04 1069.75 276.02 239.09 469.05 1245.09 Jan-07 940.05 1078.15 241.01 249.85 534.00 1138.05 Lawrence H Summers (1986) argues that manystatistical tests of market efficiency have very low power Feb-07 831.09 932.06 210.05 219.75 460.00 1039.15in discriminating against plausible forms of inefficiency. Mar-07 853.01 949.04 194.07 215.04 490.15 992.09 Lo and Mackinley strongly rejected the random Apr-07 865.09 1026.15 217.65 235.95 467.85 1105.25walk hypothesis for weekly stock returns show positive May-07 918.09 1139.75 244.02 275.02 579.55 1352.04auto correlation over short period and negative auto Jun-07 955.03 1144.01 269.65 270.25 605.00 1525.03correlation over longer horizons (1988). Jul-07 927.05 1198.65 261.75 299.95 626.07 1624.05 Elroy Dimson and Massoud Mussavian give a brief Aug-07 884.65 1171.03 244.00 267.06 634.01 1599.05history of market efficiency (1998). Sep-07 1063.15 1439.05 278.02 326.06 764.04 1950.07 Bernstein criticizes the EMH and Claims that the Oct-07 1257.00 1653.01 292.95 342.35 918.08 2068.15marginal benefits of investors acting on information Nov-07 1184.65 1719.00 271.45 381.09 931.25 2300.03exceed the marginal costs. Malkiel shows that Dec-07 1232.04 1727.08 332.05 459.06 967.01 2371.00professional investment managers do not outperform Jan-08 1145.65 1568.00 289.45 388.09 1110.08 2162.25their index benchmarks and provides evidence that, Feb-08 1090.95 1453.45 278.01 365.75 1018.75 2109.07by and large, market prices do seem to reflect all Mar-08 770.01 1319.95 225.02 283.09 781.15 1598.85available information (2005). Apr-08 879.04 1514.85 237.01 315.15 924.03 1776.35 Blakey looked at some of the causes and May-08 788.03 1357.85 216.00 270.05 794.05 1443.35consequences of random price behavior (2006). Jun-08 630.02 1002.03 178.00 203.25 603.65 1111.45 Toth and Kertesez found evidence of increasing Jul-08 634.85 1095.25 183.75 255.05 653.85 1414.75of efficiency in New York Stock Exchange (2006). Aug-08 671.05 1277.25 215.05 284.03 723.03 1403.06 Stileifer publishes inefficient markets; an Sep-08 534.85 1229.00 188.75 297.55 720.05 1465.65introduction to behavioral finance, which questions Oct-08 399.35 1023.65 165.25 241.07 562.06 1109.05the assumptions of investors’ rationality and perfect Nov-08 351.04 920.04 169.05 257.85 406.85 1086.85arbitrage. (contd.)592 The Management Accountant |May 2012
  • 89. SECURITY ANALYSIS(contd.) InterpretationsDate ICICI HDFC Canara BOB Axis SBI The Observed Runs fall between Lower and Upper Limits for ICICI BANK, HDFC BANK,Month Close Close Close Close Close Close CANANRA BANK, BOB, AXIS BANK AND SBI. ( For Price Price Price Price Price Price CANARA BANK, there is small difference, which isDec-08 448.35 997.06 187.08 280.45 504.65 1288.25 negligible).Jan-09 416.03 924.06 180.25 252.55 433.00 1152.02Feb-09 328.01 884.85 165.35 220.04 347.95 1027.01Mar-09 332.06 967.85 165.09 234.55 414.05 1066.55 µ 34.17142857 32.54285714 35.54285714 34.17142857 33.14285714 35.28571429Apr-09 477.75 1100.07 197.55 327.00 555.65 1277.07May-09 740.07 1442.35 283.95 438.03 783.04 1869.01Jun-09 722.00 1491.75 262.45 445.03 833.65 1742.05 (N1N2)^ 2 * (N1 + N2 – 1) 2N1N2 * (2N1N2 – N1 – N2)Jul-09 759.05 1499.06 285.05 436.00 917.07 1814.00Aug-09 749.05 1469.35 266.35 433.35 906.07 1743.05Sep-09 904.08 1642.25 321.75 482.04 981.55 2195.07 15.46626 13.96244 16.79226 15.46626 14.50754 16.53948Oct-09 789.06 1621.03 341.02 509.15 907.09 2191.00 442 898 264 442 215 536Nov-09 864.03 1772.55 396.25 523.35 997.45 2238.15Dec-09 875.07 1700.04 390.75 511.03 988.07 2269.45 3.9327 3.737 4.09784 3.933 3.80887 4.06687 s=Jan-10 830.04 1630.85 390.45 575.09 1025.05 2058.00 7 66Feb-10 871.85 1704.65 391.95 583.09 1124.85 1975.85 LIMIt 1.28Mar-10 952.07 1932.05 410.35 639.25 1169.01 2079.00 Upper Limit 39.20530 37.32575 40.78808 39.20530 38.0182 40.49131Apr-10 950.05 1991.06 429.55 691.55 1268.02 2297.95May-10 867.05 1885.04 408.2 710.04 1228.04 2268.35 656 129 765 656 939 635Jun-10 862.00 1914.65 448.85 701.95 1242.95 2302.01 Lower Limit 29.13755 27.75996 30.29762 29.13755 28.26749 30.08011Jul-10 904.45 2127.45 478.45 753.05 1345.04 2503.08 058 3 663 058 489 222Aug-10 977.03 2132.45 514.00 804.09 1324.85 2764.85 Observed 32 33 29 32 35 35Sep-10 1110.35 2480.08 582.65 872.08 1531.02 3233.02Oct-10 1157.75 2493.65 585.01 903.75 1576.95 3256.35Run test 70 70 70 70 70 70 ConclusionPositve 43 46 39 43 45 40 Observed limit is falling under upper and lower.Negative 27 24 31 27 25 30 So Null Hypothesis is accepted and supports theObserved 32 33 29 32 35 35 findings that Indian capital market is efficient in weak 2N1N2 form, i.e. share prices move independently of each m= +1 other during successive days. ❐ N1+n2(contd. to page 589)result, it will lead to savings on currency printing, b. To all individuals who have illegal moneymaintenance and distribution. currently or those with unexplainable money, Mechanism to handle the current balckmoney in government should give an option to deposit thethe system money in their account after paying a minimum 40% Today, within India, crores of rupees are stashed as one-time tax. Only, once the proof of tax payment isbelow the underground lockers of politicians, provided, the bank should accept the cash. Once thisbusinessmen and others. So the question arises as to is done, then Government also witnesses huge taxationhow to handle the cash which is in the system either income which can used for the developmental workslegally or illegally—within the country if the in the country.government decides to move with the above proposals. So the execution of the above steps will lead to It is suggested to follow the below-referred complete elimination of black money in the country asmechanisms for the same : today and also this will stop the black money a. People having legal money : People should be generation in the country in future. This leaves agiven a month’s time to deposit the cash in banks, or, question as to what happens to the black money whichmaybe, three months. After three months, they should not is already outside the country—once the persons arebe allowed to have a physical cash above Rs. 20,000 with aware that they cannot bring this money outside thethem. It should be clearly communicated before the policy country at a later stage without punishment under theannouncement that this money so deposited is subject to law, people will regularize the same currently byquestioning and assessment by the concerned authorities. paying the proposed 40% one-time tax. ❐The Management Accountant |May 2012 593
  • 90. INSTITUTE NEWS Admission to MembershipThe Institute of Cost M/22357 M/13453 M/18612Accountants of India Shri Rajib Bose Shri Saumitra Kumar Roy Shri Subir Kumar Thakur MCOM, FCMA BSC(HONS), FCMA BCOM, FCMA,Advancement to Fellowship 41/9, Siddhi Nath Chatterjee Flat No. 316, IInd Floor, Om P.O. Hirapur,Date of Advancement : Road, Behala, Apartment, Sector 14, Pocket Burnpur 713 3251st April 2012 Kolkata 700 034 2, Dwarka, New Delhi 110 078M/25822 M/12461 M/20244 M/12528 Ms. Anjali Dattatraya KhareShri Uttam Kumar Biswas Shri Syed Qamar Ahmad BCOM, LLB, FCMA Shri Din Dayal Sharma BCOM, FCMAMCOM, FCMA Company Secretary, M/s. MSC, FCMA 26/1292, Sardar Nagar No.Finance Manager, Mahanadi THDC India Limited, Ganga JP-97, Maurya Enclave, 2, Sion-Koliwada,Coalfields Ltd., HQ, Jagruti Bhavan, Pragatipuram, Bye Pitampura, Delhi 110 034Vihar, Burla Mumbai 400 022Sambalpur 768 020 Pass Road, Rishikesh 249 201 M/21366 M/20337 M/24643 Shri Jagannath ChakrabortyM/11007 Dr. Barnali Chaklader Shri Sushanta Kumar Mohanty BCOM(HONS), FCMAShri Govind Bhimjibhai MCOM, MBA, PHD, FCMA MCOM, LLB, FCMA 118, Regent Place, P.O. RegentVekaria Associate Professor, Interna- C/o. Shri Narottom Dash, Park, Kolkata 700 040BCOM, FCMA tional Management Institute, At : Brahmanagar 3rd Lane,Sr. Manager (Finance), B-10, Qutub Institutional Berhampur 760 001G.N.F.C. Ltd., M/8050 Area, Tara Crescent, Shri Raju PurushothamanNarmada Nagar 392 015 New Delhi 110 016 M/7949 BSC, FCMA Asst. General Manager - Shri Gopal PallipuramM/12182 M/15918 Finance, B.E.M.L. Limited, SrinivasanShri S. Krishnan Shri Govind Kumar Agrawal Belavadi Post, Truck BCOM(HONS), FCMABE, ME(ISE), AMIE, FCMA BCOM, LLB, FCMA Division, Mysore Complex, Managing Director, Interlink110, South Chitra Street, Regional Controller (F & A),Srirangam, WIMCO Ltd., C. B. Ganj, Mysore 570 018 Petroleum Ltd., H 20,Tiruchirapalli 620 006 Bareilly 243 502 Sector - 27 M/7979 Noida 201 301M/25688 M/23431 Shri Chandra Prakash KalraMs. Rachna Kakkar Shri Ratan Kumar Khatwani BSC(HONS), FCMA M/9451MBA, FCMA BCOM, MA, FCMA 1399, Sector 10A, Ms. Arati GangulyOriental Apartment, A-10, H.N. 5 Shubham Vihar, Gurgaon 122 001 BSC, MBA(FIN), FCMASector-IX, Plot No. 50, Near Vinayak Garden, M/5810 Chief Manager (F & A), BurnRohini, Delhi 110 085 Avanti Vihar, Shri Sankar Ranjan Sanyal Standard Co. Ltd., Burnpur Raipur 492 006M/16940 MCOM, FCMA Works, Burnpur 713 325Shri Sankar Sengupta M/23793 B - 5/16, Mangalik Co-op.BCOM(H), MBA(FIN), FCMA Shri Anand Kumar Housing Society, K M D A M/1582598, Kutul Sahi Road, Dakshin BCOM(HONS), FCMA Housing Complex, Baghajatin, Shri Rajib MukhapadhyayPara, Near Pancham Pally A-2/5, Annapurna Nagar Kolkata 700 094 BCOM(HONS), FCMASchool, Barasat 700 124 Colony, Veedyapeeth Road, Regional Treasurer - Asia Varanasi 221 002 M/16168 Pacific, Alstom Projects IndiaM/25919 M/12866 Shri Sandip Kundu Limited, IHDP Building,Shri Surya Narayan Palai Shri Sushil Kumar Sakhuja, BCOM(HONS), FCA, FCMA Sector 127, Plot No. 7,BCOM(HONS), FCMA MCOM, LLB, ACS, FCMA 3A/1702, Whispering Palms, Noida 201 301Accounts Officer, Salal House No. FC-44, Sector F, Lokhandwala Township,Power Station, Finance Shivaji Enclave, Akurli Road, Kandivili (East), M/10961Wing, N H P C Limited, New Delhi 110 027 Mumbai 400 101 Shri Abhay RamchandraJyotipuram 182 312 M/14856 M/16167 KulkarniM/20725 Shri S. Sankar Ms. Radha Pyari Kundu BE(PROD), MMS, ACS,Shri Vanteru Thirupathy BA, FCMA BCOM(HONS), ACA, FCMA FCMAReddy Flat No. S 2, Ranga Shree 3A / 1702, Whispering Palms, 306, Autumn Hay, NeptuneMCOM, FCMA Apartment, No. 4, Nelson Lokhandwala Township, Living Point, Near Manga-# 1-1-504, Opp : REC Petrol Road, Srirangam, Akruli Road, Kandivili (East), tram Petrol Pump, BhandupPump, Hanamkonda 506 004 Tiruchirapalli 620 006 Mumbai 400 101 (W), Mumbai 400 078594 The Management Accountant |May 2012
  • 91. INSTITUTE NEWSM/25934 M/16525 M/17045 M/16386Shri Hemant Gupta Shri Chinmoy Pal Shri K. Balakrishnan Shri Sandip BhattacharyyaBCOM(HONS), FCMA BCOM(HONS), ACA, FCMA BSC, FCMA BCOM(HONS), FCMAC-4/117, Yamuna Vihar, Head - Accounts, Oil India Krishnaleela, Parambath 58/3, Ballygunge CircularDelhi 110 053 Limited, Duliajan 786 602 House, Sanskrit College Road, Road, Flat # D-21, Tower Tripunithura 682 301 Block, ‘‘Saptaparni’’,M/8120 M/9694 Kolkata 700 019Shri Sivaram R. Shri Venkataswar Samudrala M/15044BCOM, ACS, FCMA MCOM, MBA, FCMA Shri Sujay Sengupta M/55444, Police Commissioner D.G.M. (Finance), NMDC BCOM(HONS), FCA, FCMA Shri Siddhartha MukherjeeOffice Road, ‘‘Ceebros Ltd., BIOM, Bacheli Complex, 131/31, Netaji Subhas MCOM, ACS, FCMAPalms’’ - A-7, Egmore, Bacheli 494 553 Chandra Bose Road, Regent 1202, Royal Park, RamprasthaChennai 600 008 Park, Kolkata 700 040 Greens, Sector - 9, Vaishali, M/10329 Ghaziabad 201 010M/23326 Shri Ayyappa Sastry M/24785Shri Sashibhusan Grahacharya Bhanidipaty Shri Sayi C. MCOM, CMA(USA), FCMA M/11481BSC, FCMA BCOM, FCMA Financial Controller, Qatar Shri Lekh Raj SharmaMember (Finance), G.R.F. Plot No. 9-148, Panduranga National Food Security MCOM, FCMANESCO, Balasore, Viveka- Nagar, Erragadda, Programme, P.B. No. 923, Accounts Controller, Nesmananda Marg, Balasore 756 001 Hyderabad 500 018 O/o. The Heirapparent, Doha & Partners Contracting Co. Ltd., P.O. Box 1498,M/22243 M/10437Ms. Rashmi Soni Shri Bhanumurthy Rao M/15797 Al Khobar 31952MCOM, FCMA Varanasi Shri Vaibhav Prabhakar Joshi M/15620Flat No. A001, Prajapati MCOM, FCMA BCOM, FCMA Shri Kedar NathPark, Plot No No. 14/5, Sr. General Manager (F Block A - 5, Parijat-Mrugen- MukhopadhyaySector 11, Kopar Khairane, & A), N.C.C. Ltd., NCC dra Co-op. Hsg. Soc. Ltd., BCOM, LLB, FCMANavi Mumbai 400 709 House, Madhapur, Rokadia Cross Lane, Pai `Venus` - A, Flat No. 304, Hyderabad 500 081 Nagar, S V P Road, Borivali Gaurav Galaxy, Phase - II,M/7880 West, Mumbai 400 092 Mira Road, Thane 401 107Shri Sushil Kumar Agarwal M/15646MCOM, MPHIL, FCMA Shri Suhas Chandra M/20473S.K. Agarwal & Associates, Bhattacharyya M/6875 Shri Girish KrishnanE 21-102, Creek View, Yogi BSC, FCMA Shri Surya Narayana Sarma KuttanappillilNagar, Borivli (West), Rathtala (Near Bus Stand), Komaragiri MCOM, FCMAMumbai 400 091 Ranaghat 741 201 MCOM, FCMA Kuttanappillil House, Tha- borli, Mookkannur 683 577 216, Rangadhamamu, HMTM/15752 M/15462 Satavahana Nagar, Kukat-Shri Yogendra Suresh Agarwal Shri Phool Chandra M/7752 pally, Hyderabad 500 072BCOM, MBA(FIN), FCMA Kesharwani Shri Malay Kumar241/6, Triveni, Scheme 6, BCOM, FCMA Chakraborty M/4737Road 32A, Nr. PMC Bank, D.G.M. (Commercial),Vikram BCOM, FCMA Shri Mahadevan NagarajanSion East, Mumbai 400 022 Woollens, (A Unit of Grasim P.O. & Vill: Samabay Pally, BCOM(HONS), FCMA Inds. Ltd.), GH-I to IV, Bally 711 205 Chief General ManagerM/17053 Ghironghi, Malanpur 477 117 (Finance) Mahanadi CoalfieldsShri Harishankar Ramratan M/16086 Ltd.,Burla, Jagruti Vihar 768 020Bajaj M/19841 Shri Ranjan KumarFCMA Shri Manjeet Singh Chhatwal SrivastavaH.S. Bajaj & Co., 209, Satyam M/23929 MCOM, FCMA MSC, FCMAShivam Shopping Centre, Ms. Mrinmayi Sarker # 1884, First Floor, Gali No. Additional General ManagerNear Railway Station, MCOM, FCMA 16, Govindpuri Extn., (F), Powergrid CorporationNallasopara (West), Kalkaji, New Delhi 110 019 6A, Chitpur Bridge Approach, of India Ltd., B-9, QutubThane 401 203 Institutional Area, Katwaria Bagbazar, Kolkata 700 003 M/8018 Sarai, New Delhi 110 016M/20293 Shri Gopal Chandra Mitra M/11759Shri Goutam Maji BSC, LLB, FCMA M/22482 Shri Shanker ShriramBSC, FCMA Block - B-2, Flat No. 13, Shri Subrata Kumar Swain ChaudharyDy. Manager (F&A), Accounts Marshelin Co-op. Hsg. BCOM, LLB, FCMA BCOM, FCMADepartment, Admin. Bldg., Society Ltd., E.K.T.P. Phase 519-H, Matha Marga, Tara- Flat No. 4034, Joy Apartments,Oil India Limited, II, E.M. Bye Pass, sundari Lane, Old Town, Sector - 2, Plot - 2, Dwarka,Duliajan 786 602 Kolkata 700 107 Bhubaneswar 751 002 New Delhi 110 075The Management Accountant |May 2012 595
  • 92. INSTITUTE NEWSM/19495 C/32289 The Institute of Cost M/32302Shri Debajit Saha Mr. Vishal Kumar Suvarna, Accountants of India Ms BhagyalakshmiBSC(HONS), ACA, FCMA BCOM, CMA(USA), ACMA Rameshkumar Admission to Associateship BCOM, ACMA1K, Manohar Pukur, 2nd Philips Middle East, DubaiLane, Kolkata 700 029 Knowledge Village, (Next to Date of Admission : No. 8, Gandhi Nagar II CISCO Building), Al Sufouh 1st April 2012 Street, Keelkattalai,M/16613 2, P.B. 7785, Dubai Chennai 600 117Smt. Vandana Bansal M/32295BCOM(HONS), FCMA The Institute of Cost Ms Sonia Dutta M/32303Vandana Bansal & Associates, Accountants of India MCOM, ACMA Shri Mayank PathakHouse No. 939, Housing C/o. Rahul Dutta (EM 2255) ACMA Admission to Associateship Emirates Aluminium, 34, Type - 2, CAD Colony,Board Colony, Sector 18, on the Basis of MOU with A1, Taweelah, Abu Dhabi, Near JOR Bagh,Faridabad 121 002 IPA, Australia U A E., Abu Dhabi 11023 New Delhi 110 003M/22583 Date of Admission :Shri Sanjay Kumar Kashyap 27th March 2012 M/32296 M/32304 Shri Rahul Dutta Shri Syam Kumar PonnuruMCOM, FCMA I/32290 BCOM, ACMA MCOM, ACMAS.K. Kashyap & Associates, Mr. Perry Paul Charles Sr. Accountant M/s. Modern 8 - 20 - 28 / 37, Seeturam117/150, `K` Block, Geeta MIPA, ACMA Plastic Industry LLC., PO Nagar - 5th Lane,Nagar,(Kakadeo), 20, Ryecroft Avenue, BOX - 31550, Dubai Invest- Guntur 522 001Kanpur 208 025 Clayhall, Ilford, Essex, ment Park, Jebel Ali, England Dubai 31550 M/32305M/3257 Miss Kanan Vishal VoraShri Anantharaman Rajaraman M/32297 MCOM, ACMA I/32291BCOM(HONS), FCMA Shri Munagala Krishna 102, Divya Residency, 4, Mr. Anto Hilorian CruzH. 65/1, (New No. 9), H BCOM, ACA, ACMA Gordhan Park Society, B/H. MCOM, MBA, MIPA, ACMABlock, 4th Street, Annanagar Dir - Accounting & Admin. Azad Halwai, Usmanpura, 4C, M.F. Nagar, Sempakkam,East, Chennai 600 102 TIBS 3435 Martin Farm Ahmedabad 380 013 Chennai 600 073 Road, Suwanee GA USAThe Institute of Cost USA 30024 M/32306 The Institute of CostAccountants of India Shri Prem Chacko Samuel Accountants of IndiaAdmission to Associateship M/32298 BSC, ACMAon the Basis of MOU with Admission to Fellowship on Shri Sridipta Kumar Nanda Chacko Bhavan, Punukka-IMA, USA the Basis of MOU with IPA, MCOM, LLB, ACMA nnoor, PO - Perumpuzha, Australia S/o. Binoda Bihari Nanda Kollam 691 504Date of Admission : Date of Admission : At / Po. Maniabandha, Dist27th March 2012 27th March 2012 - Cuttack, Cuttack 754 034 M/32307 Shri Ganesh Kumar ShawC/32286 M/32299 BBA, ACMA I/32292Mr. Chandrashekhar Venkata Shri Nitin Talwar Officer - Finance M/s. Mr. Osman HarunaChalla BCOM, ACMA Ratnagiri Gas & Power Pvt. MCOM, FIPA, FCMABCOM, MBA, LLB, CMA Flat No.19-B Pocket - B-7 Ltd., At/Post - Anjanvel, Director of Finance, Wenchi(USA), ACMA Mayur Vihar Phase - 3 Tal : Guhagar, Municipal Assembly, P.O.Vice-President (Finance), Al Delhi 110 096 Ratnagiri 415 703 Box 9, Wenchi, B/A/R,Faraa Group, P.O. Box 15915, Ghana 233Al Ain, U.A.E. M/32300 M/32308 I/32293 Shri Abhijeet Singh Shri Siddhartha SadhukhanC/32287 Mr. Mohammad Anees Khan ACMA MCOM, ACMAMr. Anees Ali MCOM, FIPA, FCMA B/310 - C, New Ashok Nagar, 26 H, Hara Mohan GhoshMCOM, ACS, CMA(USA), Ahmed Din Street, Near Opp : East End Apartment, Lane, Phoolbagan, Beliaghata,ACMA Mosque Amir Hamza, Dab New Delhi 110 096 Kolkata 700 085176, Hitawala Complex, No. 2, Pakhwal ChowkChamanpura, Lohabazar, Mansehra, Pakistan 21300 M/32301 M/32309Udaipur 313 001 Shri Gnana Sekaran R Shri Vinod Chandran I/32294 BCOM, ACMA MBA(FIN), ACMAC/32288 Mr. Man Kit N.G. SAP-CO-Team Lead. Costing, # 9, Nr. Vidyajyothi School,Mr. Valore Ashok Menon FIPA, FCMA M/s. Mahindra Satyam, 11th Main, 1st Cross,BCOM, CMA(USA), ACMA Room 1212, Lai Wing House, KIADB Industrial Area, Vidyajyothi Nagar, Honga-P.O. Box 5991, Lai On Estate, Shamshuipo, Electronic City, Phase-2, sandra, Begur Main Road,Dubai, U.A.E. Kowloon, Hong Kong Bangalore 560 100 Bangalore 560 068596 The Management Accountant |May 2012
  • 93. INSTITUTE NEWSM/32310 M/32317 M/32325 M/32332Shri Sanjay Ahuja Shri Santosh Sahu Shri K Someswara Babu Ms Priyanka GuptaBCOM(HONS), LLB, FCS, MCOM, ACMA BCOM, ACMA MBA, ACMAACMA S/o. Kumar Sahu At/Po. Commercial Manager M/s. C-1025, Sector - 49 SainikAsstt.Gen.Manager & Com- Gajapati Nagar 7th Lane, NSL Mining Resources India Colony, Near Shiv Mandir,pany Secretary M/s. Tourism Dist - Ganjam, Pvt. Ltd., 501, Babukhan Faridabad 121 001Finance Corpn. of India Ltd., Berhampur 760 010 Millienium Centre, RajIFCI Tower, 61 Nehru Place, Bhavan Road, Somajiguda, M/32333New Delhi 110 024 M/32318 Shri Deepak Goyal Hyderabad Shri Deepak Kumar Burma BCOM, ACMA BCOM(HONS), ACMA Lane No. 4, Samrat VikramM/32311 M/32326 At / Po. : Rengali (Infront of Colony, Chilkana Road,Ms Vatsalaben Piyushbhai Shri Uttam Kumar Baba Mandir), Dist - Sambal- Saharanpur 247 001Panchal pur, Sambalpur 768 212 ChakrabortyMCOM, ACMA BSC(HONS), LLB, ACMA M/3233424, Ganesh Society, O/S. M/32319 South Tarapukur, Ghosh Shri Ramana GannavarapuShahpur Gate, Shri S. R. Anantharaman Para (Ramkrishna Path), MCOM, ACMAAhmedabad 380 004 BCOM(HONS), ACMA PO - Agarpara, Dist - 24 Plot No. G - 3, Sri Sai A - 106, Mantri Elegance, Parganas (N), Residency, Aditya Gardens,M/32312 Bannerghatta Main Road, Agarpara 700 109 Pragat Nagar, Kukatpally,Ms Geeta Goel Bangalore 560 076 Hyderabad 500 090ACMA M/32327H. No. 16 - 1 - 7, 7/1 & 7/2, M/32320 Shri Nihar Ranjan M/32335Quality Life Style Apart- Shri Sandeep Ahuja Chowdhury Ms Radhika Gments, Flat No. 410, Dallavi BCOM(HONS), LLB, FCS, MCOM, ACMA ACMATheatre Premises, Saidabad, FCA, ACMA 5 / A, Bijoy Nagar, PO - 14 - A, Chennappar Street,Hyderabad 500 059 23 / 7, Second Floor, Old Tiruvannamalai 606 601 Naihati, Dist - North 24 Rajinder Nagar, Parganas, Naihati 743 165M/32313 New Delhi 110 060 M/32336Shri Sushil Kumar R. Patwa M/32328 Shri Vaibhav GuptaMCOM, ACMA M/32321 MCOM, ACMA Shri Arjun Anil Apte Shri Kirankumar ChundattuFinance Analyst M/s. H. No. 1/86, Shastri Colony, BCOM, ACMA ACMAAccenture Services Pvt. Ltd., Street No. 3, Near Sector - 19, Plot No. 51, Satyagovind, D. No. 20 - 6/7 - 231/1,Plant No. 3, Godrej & Boyce Old Faridabad, Shambhu Mahadev Nagar, Ayodyanagar, Ramalin-Complex, LBS Marg, Vikhroli Faridabad 121 002 Near Sahakar Nagar, New geswara Pet - 7th Lane,(W), Mumbai 400 079 Osmanpura, Vijayawada 520 003 M/32337 Aurangabad 431 005 Shri Syed Faisal HasanM/32314 M/32329Shri Ravindra Kumar Desu BSC, ACMA M/32322 Shri Atmananda Das Group Accounts & MISMCOM, ACMA Shri Mallick Ezaz Hossen MCOM, ACMA Manager Unaoil Group, P.O.H. No. 4 - 41/2, 1st Floor, Alliahemad At - Hanuman Pada, PO - Box - 124913, Office No.Gangaram, Chanda Nagar, BCOM, ACMA Talcher Town, Dist - Angul, 1004-06, Arenco TowerHyderabad 500 050 Assistant Manager, JSW Talcher 759 107 Media City, Shaikh Zayed Steel Ltd., Tornagallu, Bellary 583 275 Road, Dubai, U A E, DubaiM/32315Shri R Kannan M/32330 M/32323 Shri Prabhakara Rao M/32338ACMA Shri Lahoti Suraj Jayantilal Ms Neha Bhanot GuvvalaAsstt. Manager, HLL Lifecare MCOM, ACMA BCOM, BED, ACMA MCOM, MBA, ACMALtd., Central Marketing Bagirathi Bunglow, 5/6 RZH - 824, Raj Nagar, Part - A - 57, FL No. 202, R KOff.No.185, Lingavel Tower, II, Street No. 13, Near Kamlaksha Co-op Society,100Ft. By-Pass Road, Vijay- Arcade, Madhura Nagar, Kenedy Public School, Nasik Road, Nasik 422 101nagar, Velachery, Near Yallanki Foods, Palam Colony, Hyderabad 500 038Chennai 600 042 New Delhi 110 045 M/32339 Ms. Jayashree Pavan JalwadiM/32316 M/32324 M/32331 BCOM, ACMAShri Sreeram Cheemalamarri Shri Prasath B Shri Vamsheshwar Rao Guntur Sr. Executive Costing, M/s.ACMA BA, ACMA BCOM, ACS, ACMA Ador Powertron Ltd.,S/o. C.A.V. Prasad, H. No. S/o. A. Balakrishnan No. 1-6-44, Satnam Waheguru Ramnagar Complex, Plot10-582A, Ramalakshamma 60/22, 3rd Cross, Thillai Building, 1st Floor, Mushee- No. 51, D - 11 Block, MIDC -St., Markapuram 523 316 Nagar, Salem 636 001 rabad, Hyderabad 500 020 Chinchwad, Pune 411 019The Management Accountant |May 2012 597
  • 94. INSTITUTE NEWSM/32340 M/32348 M/32356 M/32364Ms Amruta Neeraj Joshi Shri Manoj Kumar Nayak Shri Suresha Chandra Shri Sudeep BhargavaMCOM, ACMA ACMA Swain ACMAPlot No. 33, S. No. 44, F 13, Ittina RRV Apartment, ACMA L - 331, IInd Floor, SaritaNavsahyadri Hsg. Society, RRV Layout, 2nd Cross, C/o. Srila Roy, 350/4, M. G. Vihar, Delhi 110 076Karvenagar, Pune 411 052 Ramamurthy Nagar, Road, Kolkata 700 082 Bangalore 560 016 M/32365M/32341 M/32357 Shri Vikram Singh AdhikariShri B Suresh Kumar M/32349 Shri Vinay Shankar BCOM, ACMABCOM, ACA, ACMA Shri Kalava Prasad BA(HONS), ACMA 529/495, New Basti, Raheem‘‘Srimati Illam’’, No. 4, Balaji ACMA Qr No. B / 1, Sector - 1, PostNagar, 5th Street, Nanga- D. No. 67-1-12, Darsivari - Dhurwa, Ranchi 834 004 Nagar, Mahanagar,nallur, Chennai 600 061 Street, Patamata, Lucknow 226 001 Vijayawada 520 010 M/32358M/32342 Shri Pratap Singh Shekhawat M/32366Shri Sumit Khicha M/32350 ACMA Shri Manish Kumar AmbasthaCFA, ACMA Shri Rambabu Pathak Accounts Officer Bharat ACMA23, Khicha Mansion, Vinod BCOM(HONS), ACMA Heavy Electricals Ltd., H - 19 - E, Near Sonjay Park,Nagar, Beawar 305 901 Sr. Officer (Finance) Eastern Corporate Finance, IInd Gali No. 2, Ground Floor, Coalfields Ltd., CMDs Floor, BHEL House, AGV Shakarpur, Delhi 110 092M/32343 Office, Sanctoria (Company Complex, Siri Fort,Shri Abishekh Kumar Sectt)., Dishergarh 713 333 New Delhi 110 049 M/32367BCOM, ACMA Ms Manasi N Arora354/37, ‘‘Mehta Sadan’’, M/32351 M/32359 BCOM, ACMANear of H. K. Plastic Factory, Shri Dibyendu Patra Shri Pardhu Singumahanti Sr. Accountant M/s. Khukh-Lokashah Nagar, ACMA BCOM, ACMA Factory Controller, Dresser rain Cold Storage & IceBewar 305 901 Finance Superintendent ITC Rand India Pvt. Ltd., 187, Factory, 182/3, Industrial Ltd., Agri Business DivisionM/32344 GIDC Estate, Naroda, Area, Phase - I, - ILTD., G.T. Road, Post BoxShri Raghavendra G L Ahmedabad 382 330 Chandigarh 160 002 317, Guntur 522 004BSC, ACMANo. 98, Ganapathi Krupa, M/32352 M/32360 M/3236812th Main Road, 10th Cross, Shri Dilip Kumar Pathak Shri Sathish Chandra B S Shri Arunava DattaRaghavendra Block, Srina- BCOM, LLB, ACMA BSC, ACMA Chaudhurygara, Bangalore 560 050 F - 288, Sector - Delta I, No. 8/4, 1st Floor, Ranga BSC, ACMA Greater Noida 201 308 Rao Road, Shankarapuram, 24A, Old Ballygunge SecondM/32345 M/32353 Bangalore 560 004 Lane, Kolkata 700 019Shri Thimiri SathiyamurthyMohan Shri Chandrasekhar Parimi MCOM, ACMA M/32361 M/32369BCOM, MBA(FIN), ACMA Finance Superintendent ITC Shri Manish Sarawgi Shri Krishna Nand ChaubeyNew No. 38, Old No. 34, Ltd., C/o. ITC Ltd. ABD - BCOM(HONS), ACMA ACMANeels Garden, 3rd Street, ILtd., P.O. Box No. 317, Costing Executive, The C/o. Shri Gandhi AshramSembiam, Perambur, G. T. Road, Guntur 522 004 Naihati Jute Mills Co. Ltd., Khadi Bhandar, H - 42,Chennai 600 011 PO - Hazinagar, Dist - 24 Connaught Circus,M/32346 M/32354 Parganas (N) New Delhi 110 001Shri Mohan Kumar Maharana Shri Mitesh Ishwarbhai Hazinagar 743 135BCOM, ACMA PrajapatiA M (F & A) & B F M., BCOM, LLB, ACMA M/32362 M/32370Rashtriya Ispat Nigam Ltd., V. H. Savaliya & Associates, Ms Sudha Venkata Varadhan Shri Tarit Das3025/8, Shreenidhi Chambers, 308, Harsh Avenue, Suttar BCOM, LLB, ACMA BCOM(HONS), MBA, ACMA1st Floor, S B Road, Shivaji- Taluka Society, Navjivan Press Co. Secretary & Dy. Manager- Finance & Accounts Managernagar, Opp : Passport Office, Road, Ahmedabad 380 014 Finance Indian Strategic Sri Sankaradeva Ntthralaya,Pune 411 016 Petroleum Reserves Ltd., Beltola, Guwahati 781 007 M/32355 OIDB Bhawan, 3rd Floor, PlotM/32347 Ms. Varsha Purushottam - 2, Sector - 73,Noida 201 301 M/32371Shri Mayank Mahendrabhai patankar ACMA M/32363 Shri Maheswara DesaiMehtaBCOM, ACMA 25/B/8, Meghwadi Siddhivi- Ms Deepika Yerram BSC, ACMA1/12 Ratnam Flats, Near nayak CHS. Ltd., Mhada, BCOM, MBA, ACMA S/o. D Babanna, GudehothurGanesh Lohavid Bhavan, Teachers Colony, Meghwadi, H. No. 4 - 7 - 190/1, Essania - Post, Vajrakarur - Mandal,Opp : Parase Flats, Vasna, Jogeshwari (E), Bazar, Beside Community Dist - AnantapurAhmedabad 380 007 Mumbai 400 060 Hall, Hyderabad 500 027 Anantapur 515 832598 The Management Accountant |May 2012
  • 95. INSTITUTE NEWSM/32372 M/32381 M/32389 M/32397Ms Sayli Nitin Deshpande Shri Kushal Malviya Shri Aloke Kumar Paul Shri Shailendra SinghBCOM, ACMA BCOM, ACMA BCOM(HONS), ACMA ACMATirupati Housing Society, Sejaro Ka Was, Pindwara, Accountant Cum Manager 388/71, Tripti Nagar, Ganesh-G-3, Plot No. 8, N - 5, CIDCO, Dist - Sirohi Taijaspatra, Kuthi Bazar, pur, Chinhat, Lucknow 227 105Aurangabad 431 003 Pindwara 307 022 Ghatal, Dist - Paschim Medinipur, Ghatal 721 212 M/32398M/32373 M/32382 Shri Rabi Kant ShawMs Neelam Jawaharlalji Jain Shri Brijesh Champaklal BCOM(HONS), ACMA M/32390ACMA mali 63 / 1A, Hidaram Banerjee Shri Padubidri VenkatagiriC/o. M/s. Vardhan Group BCOM, ACMA Lane, Bowbazar,of Companies, Finance Rao 8/763, Opp : SBI Hanuman Kolkata 700 012Department, 422 Commerce BCOM, ACMA Char Rasta, Gopi Pura, S/o. Bail Seetharama Rao BailHouse, 140, N M Road, M/32399 Surat 395 001 House, Padubidri 574 111Mumbai 400 023 Shri Krishnamohan Tiru- malasettyM/32374 M/32383 M/32391 MCOM, MBA, ACMAShri Naveen Kumar K Shri Harish Markan Ms Shilpi Saxena D. No. 6/637, Kozzillipet,BCOM, ACMA BCOM, ACMA MBA(FIN), ACMA Machilipatnam 521 001# 64, 1st Cross , Cholurupallya Asstt. Officer M/s. Swaraj Plot No. 7, Sector I, UnitedMagadi Road, Engines Limited, Plot No. 2, City Colony, Near Capital M/32400Bangalore 560 023 Industrial Phase - 9, S A S Convent, Jankipuram, Shri Vinod Kumar Bapna Nagar, Mohali 160 062 Lucknow 226 021 BCOM, FCA, ACS, ACMAM/32375 H - 72 FF, Residency Green,Shri Srikanth Kamma M/32384 Sector - 46, Opp : Unitech M/32392MCOM, ACMA Shri Vani Prasad Miriyala Cyber Park, Gurgaon 122 001 Shri Jitendra SharmaS/o. Subba Rao, Post - Pala- BCOM, CIMA, ACMA ACMAparru, Mandal - Pedanandi D. No. 12 - 52 - 6, H. No. L I M/32401 D - 18, House No. 513,Padu, Guntur 522 235 G - 181, A.P.H.B. Colony, Shri Sinjan Bhar Chhattarpur Pahari, Tanuku 534 211 BCOM, ACMAM/32376 New Delhi 110 074 9/7, Rajendra Nath RoyShri Javir Khan M/32385 Choudhury Lane,MCOM, ACMA M/32393 Shri Sharad Kumar Maurya Kolkata 700 036Plot No. 44, Sector - 32, Shri Surendra Kumar ACMAGurgaon 122 002 Sharma 9/29, Bahari ‘‘A’’ Sahara M/32402 Estates, Jankipuram, MA, LLB, ACMAM/32377 Shri Deepak Girish. Gupta Lucknow 226 021 B - 223, Sector - 6, Shatabdi BCOM, ACMAShri Ashid Khan Nagar, Delhi Road,ACMA 1205/6, Vindhyachal, Neel- M/32386 Meerut 250 103 kanth Valley, Rajawadi, Ghat-C-9, Indupuram, Auranga-bad, Mathura 281 006 Shri Siraj Nooruddin Mawani kopar (E), Mumbai 400 077 ACMA M/32394M/32378 Fatima Manzil, H. No. 8-11-4, Shri Yogendra Singh M/32403Shri Manoj Kumar Ravindra Colony, Katkat Gate ACMA Shri Durgadevi GandrapuBCOM, FCA, ACS, ACMA Road, Aurangabad 431 001 E - 2/185, Vinay Khand, BCOM, ACMAFlat No. 4, The Patel Co-op. Gomti Nagar, 172/2 RT, Beside Ramalayam,Hsg. Society, Sector - 13, M/32387 Lucknow 226 010 Saidabad Colony,Rohini, New Delhi 110 085 Shri Magesh Nandakumar Hyderabad 500 059 BCOM, FCA, ACMA M/32395M/32379 Shri Gurvinder Singh M/32404 A-3, Third Floor, ‘‘MallesShri Sanjeev Kumar BCOM(HONS), ACA, ACMA Shri Shamsul Konain Ashirwad Flats, 18/176,MCOM, ACMA ACMA Rangarajapuram Main House No. 95, Sector - 18,Shyam Medical Store, Old G - 60, Delta - II, Road, Kodambakkam, Panchkula 134 109Court Road, Opp : Veternary Greater Noida 201 308Hospital, Narnaul, Haryana Chennai 600 024 M/32396 M/32405M/32380 M/32388 Shri Amarjeet Singh Shri Sagar Pramod KulkarniMs Richa Luthra Shri Kamala Kanta Panda BCOM, ACMA MCOM, ACMAACMA BCOM, ACMA C - 32, Sector - D, L.D.A. N - 51, SF - 4/21/2, Uttam13/68, Vikas Nagar, Vishar, At - Ranipatna, Bank Colony, Colony, Kanpur Road, Nagar, CIDCO, New Nashik,Lucknow 226 022 Balasore 756 001 Lucknow 226 012 Nasik 422 008The Management Accountant |May 2012 599
  • 96. INSTITUTE NEWSM/32406 M/32414 M/32422 M/32429Shri Biraj Kumar Shri Thiyagarajan C Shri Nilesh Gopal Mundada Shri Kasiraju SivaramarajuBCOM, ACMA MCOM, ACMA BCOM, ACMA ACMAHIG No. 273, New Housing 4/159, Ellai Amman 5th Flat No. 12, Kaveri Appart- Dharmapuri Village, Post -Colony, Near MP Tower, Cross Street, Neelangarai, ment, Opp : Kirloskar Oil Ravulacharuvu, Mandal -Adityapur - 1, Dist - Sarai- Chennai 600 041 Engine Ltd., Elephston Road, Dharmavaram,kela - Kharsawan, Nr. Manasi Bag, Bopodi, Anantapur 515 672Saraikela 831 013 M/32415 Pune 411 003 Shri Vidya Sagar Chennupalli M/32430M/32407 M/32423 Shri Ramasubramanian T. V. ACMAShri Sandeep Rawat Shri Ravi Bhushan Ojha BCOM, ACMA D. No. 7-6-921/2, Venga-ACMA ACMA Plot No. 1, Chendurpuram II larao Nagar 1/1 Road,C - 444, Kidwai Nagar East, Extn., Indira Nagar II West Guntur 522 001 Plot No. 163, Flat No. 201 FF,New Delhi 110 023 Street, Kattupakkam, Ghayan Khand - 1, Indira- Chennai 600 056 M/32416 puram, Ghaziabad 201 012M/32408Ms Chetna Rawat Shri Lakshminarayana M/32431ACMA Reddy C M/32424 Shri Amit Kumar AroraZ - 103, Sector - 12, BCOM, LLB, ACMA Shri Bhavdip Jayasukhlal MCOM, MA, MBA, ACMANoida 201301 # 226, B2 Wing, Gataprabha Parmar P - 288, Sector - 12, Pratap Block, National Games ACMA Vihar, Ghaziabad 201 009M/32409 Village, Koramangala, ‘‘Geeta’’, Near Shri NilkanthShri M Sakthivel Bangalore 560 047 Vidhyalaya, Goutam Society, M/32432BCOM, MFM, ACMA Ravapar Road, Morbi 363 641 Shri Sandip Basak18/20 Soorathamman Koil M/32417 MCOM, ACMA1st Street, Srinivasanagar, Ms Aanchal Gupta M/32425 2 B , Brindaban Paul Lane.New Perungalathur, BCOM, MBA(FIN), ACMA Shri Bishnu Prasanna Kolkata 700 003Chennai 600 063 House No. 151, Sector - 17, Pattanaik Faridabad 121 002 BSC, LLB, ACMA M/32433M/32410 Manager - Costing & Audit Shri Anand HShri Arun Sharma M/32418 M/s. Anjan Drugs Pvt. Ltd., ACMAACMA 5th Floor, Wing - II, Nelson T. C. 40/615, Sreevaraham Ms Geeta77 Block, House No. 3 B, Tower, 117, Nelson Manic- Street, Manacaud -PO., BCOM, ACMASector - 2, Type - 3, Kali Bari kam Road, Aminjikarai, Thiruvananthapuram 695 009 # G - 91, HMT Colony,Marg, New Delhi 110 001 Chennai 600 029 Pinjore, Panchkula 134 101 M/32434M/32411 Shri P Kennedy M/32419 M/32426Ms Meena Niteen Vaidya BCOM, MFM, ACMA Shri Sanjay Uttam Masurkar Shri Pradip Kumar SwainMCOM, ACMA Block No. 1, F 2, Jain Abhina- ACMA MCOM, ACMA van, Murgunagar Extn.,Flat No. 7, Kshitij Apartments, B-12, Om Shivshakti CHSL., Dy. Manager (F & A) M/s. Velacherry, Chennai 600 042Lane No. 3, Dahanukar River Valley, Madonna South West Mining Ltd., TalurColony, Kothrud, Pune 411 038 Colony Road, Borivli West, Cross, Torangallu, Sandur M/32435 Mumbai 400 103 Road, PO - Vidyanagar, Shri Sanjay Kumar MishraM/32412Shri Chandra Shekhar Bellary 583 275 BCOM(HONS), ACMABiswal C/o. Gobinda Chandra M/32420 M/32427 Mishra At - Rahadpur, PO -MCOM, ACMA Shri Haribansa MeherAsstt. Manager (F & A) M/ Shri Gobinda Saha Dehudi Anandapur Via - BCOM, LLB, ACMA BCOM, ACMA Dasarathpur, Bhadrak 755 006s. Vijaynagar Minerals Pvt. Asstt. Manager (Finance)Ltd., JSW Mining Office, Nr. S/o. Kanai Lal Saha 149/ Talcher Electrical Division 131/80, Rani Rashmoni M/32436Talur Cross, PO - Vidya- Ms Susmita Roy (CESU) At / Po : Chanpal Ghat Road, Bijpur, Dist -nagar, Toranagallu, Dt - MCOM, ACMA Colony, Via - Talcher, North 24 ParganasBellary, Vidyanagar 583 275 A - 10/2, Kalindi Housing Angul 759 104 Halisahar 743 134 Estate, Kolkata 700 089M/32413Ms Bikkee M/32421 M/32428 M/32437ACMA Shri Sumit Kumar Mishra Shri Rajendiran Sreenivasan Shri Gautam MauryaAccounts Officer M/s. ACMA MCOM, FCA, ACS, ACMA BCOM(HONS), ACMAMecon Ltd., Finance Section, 52/II, Gandhi Sadan, ‘‘Cherunetturi’’ 1931, South 5, Gora Pado Sarkar Lane,Vivekanand Path, Doranda, Mandir Marg, End ‘‘C’’ Road, 9th Block, Ultadanga Main Road,Ranchi 834 002 New Delhi 110 001 Jayanagar, Bangalore 560 069 Kolkata 700 067600 The Management Accountant |May 2012
  • 97. INSTITUTE NEWSM/32438 M/32446 M/32454 M/32461Shri Pankaj Kumar Singh Ms Mousumi Chatterjee Shri Laxmi Narayan Khatua Ms Usha VatsBCOM, ACMA BSC, ACMA MCOM, LLB, ACMA BCOM(HONS), ACMA91 - A, Pocket - A, Dilshad No. 1, Olanda Court, B / 702, Ram Vatika Co-op. 259 / 12, Jawahar Nagar,Garden, New Delhi 110 095 Ver-mont, Victoria, Australia Hsg. Soc. Ltd., Annapurna (Near Lal Nursing Home), Estate, Phase - I, Opp : Gurgaon 122 001 Victoria 3133M/32439 Indralok Phase - VI,Shri Shyamal Kumar Bhayander - East, M/32462 M/32447 Ms Ria ChowdhurySahana Thane 401 107 Ms Sanghamitra Das ACMAMCOM, ACMA MCOM, ACMA M/32455 17, R N Tagore Road, BoseC/o. Ajit Sahana Suri Old 166 Panchanantala Road, Shri Santosh G Kalburgi Garden, Agarpara,Dangalpara, Near B. Kolkata 700 041 BCOM, ACMA Kolkata 700 109Gangulys House, PO - Suri,Dist - Bbirbhum # 201, 2nd Floor, R K Pine M/32448 Tree Apartment, 5th Main, M/32463Suri 731 101 Shri Parasuram Buri Ms Mandira Dubey Haysala Nagar, Rammurthy BCOM(HONS), ACMA MCOM, ACMAM/32440 Nagar, T C Palya Main Qrt. No. B 1/5/6, Swati D - 11, Ayodhya Nagari Co-Ms Puja Sharma Road, Bangalore 560 016 op Hsg. Soc., Behind Pune ITBCOM(HONS), ACMA Compex Phase - II, PO - Park, Bhau Patil Road,52/6, VIP Road., Parvati Hatiberia, Haldia 721657 M/32456 Bopodi, Pune 411 020Vihar, Phase - 2, J - 408, Shri Uday Gajanan PathakBaguiati, Kolkata 700 059 M/32449 MBA, ACMA M/32464 Shri Sushil Kumar Gupta Finance Coordinator BAIF Ms Pooja Garg MCOM, ACMA Development Research BCOM, ACMAM/32441 L I G - V, A. D. A - II, Ramghat Foundation, "BAIF Bhavan", Accounts Officer M/s. B HShri Anand Kumar Shaw Road, Aligarh 202 001 Dr. Manibhai Desai Nagar, E L., Integrated OfficeBCOM(HONS), ACMA Mumbai - Bangalore High- Complex, Lodhi Road, B H1, Kailash Das Road, PO - way, Warje, Pune 411 058 E L., Delhi 110 003Gariffa, Ps - Naihati, Dist - M/32450North 24 Parganas, Shri Lokesh H M/32457 M/32465Naihati 743 166 BCOM, ACMA Ms S Padmasini Shri Vivek Sudam Jagtap # 48, ‘‘Sri Maruthi Krupa’’, BCOM, ACMA MCOM, ACMAM/32442 5th Cross, Nethravathi Street, S - 4, Lakshmis Nivass, 18 Sr. Costing Officer M/s.Shri Pramod Kumar Agrawal Maruthinagar, Chandra Natesan Colony, Alwarpet, Uttara Foods & Feeds Pvt.BCOM, ACMA Layout, Bangalore 560 072 Chennai 600 004 Ltd., Uttara House, 2,71/1J, P. B. Shah Road, Wellesly Road Camp,Swiss Park, Tollygunge, M/32451 M/32458 Pune 411 001Kolkata 700 033 Shri Zulfiker Ibrahim Shri A. R. Ramasubramania ACMA Raja M/32466M/32443 23/607 E, Thazhuppil BCOM, MBA, ACS, ACMA Shri Santosh Kumar KenguvaShri Anil Kumar Aroda House, Madhura Company 19, Third Street, Gokulam MCOM, ACMABCOM, ACMA Colony, P.N.Pudur, S/o. K. Laxmi Rao (A.O.) Road, Palluruthy,203, Vandit Apartment, Coimbatore 641 041 Gandhinagar 3rd Line, PO/ Kochi 682 006Bhaikaka Nagar, Thaltej, DT.- RayagadaAhmedabad 380 059 M/32459 Rayagada 765 001 M/32452 Shri Bikram Jain Shri Abhishek Champalal M/32467M/32444 Shah BCOM(HONS), ACMA Shri Thinakaran PMs Indrani Boral BCOM, ACMA 240 - F 2, Muktanand Nagar, BSC, ACMABCOM(HONS), ACMA 261/A, Guruwar Peth, Flat Gopalpura Byepass, Tonk Block - 5, Dev Apartment,22, Parasar Road,, 1st Floor, No. 3, Dhanraj Apartment, No. 83, Srinivasanagar, IIndKolkata 700 029 Road, Jaipur 302 018 2nd Floor, Pune 411 042 Street, Velachery, M/32453 Chennai 600 042M/32445 M/32460Shri Samik Chakraborty Shri Bhabani Shankar Khuntia M/32468 Shri Sukhwinder SinghBCOM(HONS), ACMA BCOM, ACMA ACMA Shri Krishan Kumar Rajpal35 - A, Bagha Jatin Road, PO. AT/PO - Byree, PS - Barcha- S/o. Major Singh Vill - Ucha BCOM(HONS), ACMANabagram, DIST. Hooghly, na, Dist -Jajpur, Gaon, Po : Sidhuwal, 3375, Arya Pura, SubjiNabagram 712 246 Jajpur 754 082 Patiala 147 001 Mandi, Delhi 110 007The Management Accountant |May 2012 601
  • 98. INSTITUTE NEWSM/32469 M/32473 M/32476 M/32479Shri Sunny Chhabra Shri Lakshman Purihella Ms Gayatri Anil Phalke Shri Chitta Ranjan DashMCOM, ACMA ACMA MCOM, ACMA MCOM, ACMA ‘‘NIRMAL’’ Shree MangalChhabra Tyre House, Main 4/1, Ground Floor, Opp :Choraha Station Road, Asst. Manager (F & A) M/s. jayarani Enclave, Nr. Society, Near Jog Hospital, WESCO Ltd., Deogarh Paud Road, Pune 411 038Kashipur 244 713 Amrita Vidyalayam, Electrical Division, Nesapakkam, Jay balaji M/32480M/32470 Deogarh 768 108 nagar Annex, Ms Smitha GopalakrishnanShri Pratap Kumar Jena Chennai 600 078 BCOM, ACMABSC, ACMA ‘‘KARTHIKA’’ Maruthur M/32474Proprietor Pratap Jena & Co., M/32477 Road, Post - Cheroor,C - 293, Sector - 10, Shri Munish Kumar Ms Tamana Thrissur 680 008Noida 201 301 MCOM, ACMA BCOM, ACMA House No. 1544, Sarain D/o. Subhash Chhabra C/ M/32481M/32471 Mohalla, Nr. Gurudwara o. General Merchants, Shri Pritesh GordhanbhaiShri Deepak Aggarwal Chhota Bazar, Thanesar, Hirapara Singh Sabha, MCOM, ACMAACMA Kurukshetra 136 118 Pathankot 145 001 A 4 405, Vrajbhumi Town-A - 11, Satyawati Nagar, ship Sector - 2, Simadagam,Ashok Vihar Phase - 3, M/32478 Surat 395 006Delhi 110 052 M/32475 Shri Anand Ramanlal Shri Sumedh Prakash Lele Karwa M/32482M/32472 BCOM, ACMA BCOM, ACMA Shri Himanshu SekharShri Pulkit Chamaria Flat No. 7, Godavari Barpanda E - 46, ‘‘Suvidya’’ Nr. TodkariBCOM, ACMA Apartments, Anantakripa AKA HSB & Associates - Hospital, Shreechag No. 2,Agency House, Makum Co-op. Hsg. Society, Chartered AccountantsRoad, Near Over Bridge, Alibag, Dist - Raigad, Paud Road, Shankar Vihar, Beheramal,Tinsukia 786 125 Raigad 402 201 Pune 411 038 Jharsuguda 768 203 Members of the Quality Review Board of the Institute of Cost Accountants of India The Quality Review Board has been reconstituted vide Notification number G.S.R. 69 (E) dated 6th February 2012. The Board now consists of the following members : 1. Shri R.S. Sharma, Ex-Chairman ONGC—Chairperson 2. Shri Navrang Saini, Regional Director, (Eastern Region), MCA—Member 3. Ms. Nandna Munshi, Principal Director of Commercial Audit & Ex-officio Member, Audit Board I—Member 4. Shri V. Kalyanaraman, Past President, ICAI—Member 5. Shri Kunal Banerjee, Past President, ICAI—Member602 The Management Accountant |May 2012
  • 99. INSTITUTE NEWS FOR ATTENTION OF MEMBERS Benevolent Fund For the Members of The Institute Objective The Fund has been created to provide : 1. Outright grant of prescribed amount to the member in the event of critical illness of a member of the Fund. 2. Outright grant of prescribed amount to the beneficiary in the event of death of a member of the Fund. 3. Financial assistance of prescribed amount repayable in prescribed manner by the members of the Fund in case of financial distress due to prolonged illness or temporary loss of employment, illness of spouse/dependent children of member of the Fund; and education of dependent children of deceased member of the Fund. Beneficiary means member of the Fund including dependent spouse/dependent children/parents/dependent minor brothers and sisters of the member of the Fund. Procedure of Life Membership An Associate/Fellow Member having paid up-to-date membership fees to the Institute can become a LifeMember of the Fund on application being made in the prescribed application form along with a remittance ofRs. 2500/-, (Rupees Two Thousand Five Hundred only) (one time payment) by cash or by cheque or demanddraft payable at Kolkata drawn on scheduled bank in favour of ICAI Members Benevolent Fund. In case ofoutstation cheque not payable at Kolkata, applicable bank charges are to be added. The application form canbe collected from the headquarters of the Institute at Kolkata or downloaded from the website of the Soft copy of the application form can also be sent on requisition made to . For the purpose of obtaining benefit from the Fund, a member should ensure to pay his up-to-date Associate/Fellow membership fees to the Institute and his name should continue to exist in the Register of Members ofthe Institute. Invitation for Empanelment of Resource Persons For Conducting Investors Awareness Programme Institute of Cost Accountants of India invites Expression of Interest from Cost Accountants, Financial MarketExperts, and Academicians having domain expertise in Financial Markets to act as Resource Person forconducting Investors Awareness Programme jointly organised by the Institute and Ministry of CorporateAffairs, Government of India, across the country. The Resource Persons so retained by the Institute will haveto plan and organise such programmes of two hours duration in towns (other than District Head Quarters andState Capitals). Arranging venue, organizing at least 50 participants and delivering the financial literacy to theparticipants are some of the initiatives expected from the Resource Persons. For this initiative, maximumamount of Rs. 5000.00 (all inclusive) perprogramme will be reimbursed. Interested Persons can file their expression of interest on-line by visiting Institutes web site can send their detailed profile with a proposal indicating the towns where they could conduct the programmeto the following address : The Director (CAT) The Institute of Cost and Accountants of India CMA Bhawan 4th Floor 3- Institutional Area Lodi Road New Delhi 110003 Email: # those who are already empanelled by the Institute for this purpose need not apply again.The Management Accountant |May 2012 603
  • 100. INSTITUTE NEWS THE INSTITUTE OF COST ACCOUNTANTS OF INDIA CERTIFICATE COURSE ON INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) & CONVERGED INDIAN ACCOUNTING STANDARDS 1. Bangalore — 27 June – 1 July, 2012 3. Hyderabad -18-22 July, 2012 2. Kolkata — 22-26 August, 2012 4. Delhi - 26-30 September, 2012 5. Mumbai — 26-30 December, 2012 Course Objective India has taken a big initiative for IFRS Convergence which originally scheduled to be effective from 1stApril, 2011, now deferred by Ministry of Corporate Affairs, Government of India for some more time. Thegovernment has already notified partial converged of Indian Accounting Standards (Ind-AS). The Institute ofCost Accountants Certificate Course offers an excellent opportunity to learn IFRS and converged IndianAccounting Standards through distance learning mode that includes in-depth personal interaction sessionswith expert faculty. The course aims to help the participants to understand IFRS convergence and thereby enabling them toparticipate in IFRS convergence process Course Coverage Financial Statements - Revised Schedule VI Service Concession Arrangements Property, Plant and Equipment (PPE) Operating Segment Intangible Assets Financial Instruments Lease Accounting Disclosures of Financial Instruments Investment Property Provisions, Contingent Liabilities and contingent Asset Non-Current Assets held for Sale and Consolidation Discontinued Operations Related Party disclosures Share Based Payment Revenue Recognition Business Combinations Construction Contracts IFRS Conversion Duration Two months including five days classroom session with case studies followed by on-line practice and on-line examination. For Whom Cost Accountants, Chartered Accountants and Company Secretaries, Senior and Middle level executives ofvarious Public and Private Sector organizations, Banks, financial Institutions, Insurance Companies, Governmentdepartments, Autonomous bodies, Statutory Bodies, Multinationals, etc.; Practicing Cost Accountants, CompanySecretaries and Chartered Accountants, Faculty of Universities, Management Institutions and Autonomousprofessional Institutions, Students pursuing the professional courses and any other person involved in the IFRSprocess.604 The Management Accountant |May 2012
  • 101. INSTITUTE NEWS Methodology ● Class room sessions of 40 Hrs. (Wednesday-Sunday from 10.00 AM to 6.00 PM) ● Course Material ● Large Question Bank with facilities to practice ● Online Examination Course Fee : Rs. 25000/- plus 12.36% service tax per participant. The Fee includes faculty fee, course kit including specialisedcourse material, hall charges, lunch, tea/coffee and online assignment and Examination charges. (15% discount onthe Fee for the Practicing Members and Students of The Institute of Cost Accountants of India) The Payment of the Fee is to be made by cheque/DD in favour of `The Institute of Cost Accountants of Indiapayable at New Delhi along with the application/nomination Details of ECS Payment : State Bank of India (60321), Andhra Association Building,24-25 Institutional Area,Lodhi Road , New Delhi - 110 003. Current A/c No. : 30678404793 MICR Code : 110002493 IFSC Code : SBIN0060321For Registration and Further Details Please ContactCMA D. ChandruDirector (CEP)The Institute of Cost Accountants of IndiaCMA Bhawan, 3 Institutional Area, Lodhi Road, New Delhi - 110 003Phone : (Direct) 011-24643273, 24622156-57-58, 24618645 (M) - 09818601200Tele-Fax : 011-43583642/24622156/24618645E-mail :, cep.chandru@icwai.orgWebsite :, Request For CommentsCost Accounting Standards Board, the standard-setting body of the Institute, had approved therelease of Exposure Draft of Revised Cost Accounting Standard - 2 on Capacity Determination(CAS - 2). The CASB Secretariat issued the same in February 2012 for public comments and a numberof comments were received on the Exposure Draft. In the 52nd meeting of the Board, held on 16thApril 2012, the Board discussed the comments and in the light of the comments, it was decided tomake certain changes in the Exposure Draft. The revised exposure draft is again being hosted onthe website for comments.The revised Exposure Draft may be modified in light of comments received before being issued asa standard in final form.Please submit your views/comments/suggestions on the proposed revised Exposure Draft,preferably by email, latest by 31st May 2012.Comments should be addressed to :The Secretary,Cost Accounting Standards Board,CMA Bhawan, 3rd FloorThe Institute of Cost Accountants of India,3, Institutional Area, Lodi RoadNew Delhi - 110003Emailed responses should be sent to: casb@icwai.orgCopies of this revised Exposure Draft may be downloaded from the CASB website at http://www.casbicwai.orgThe Management Accountant |May 2012 605
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  • 104. INSTITUTE NEWS CEP Directorate of the Institutes is Organising Following Programmes during 23-26 May 2012 at Gangtok (I) Contracts and their Management Name of the Programme Contracts and their ManagementCourse Contents ● Negotiation Skills & Techniques ● Contracts—Concepts and Legal Issues ● Contracts and their Management ● Flaws in Contracts ● Case Studies (Liquidated Damages; Bank Guarantees; Arbitration; Foreign Award) ● CVC GuidelinesVenue (GANGTOK, SIKKIM ) Hotel The Royal Plaza, Upper Syari, Deorali, Gangtok, Sikkim 737 102. Tel : 91 35922 80232 Fax : 91 35922 81112Course Director Mr. BS Ramaswamy Cost Accountant & Former Addl. Secty., Govt. of India (Author of the Book on ‘Contracts & their Management’ published by Lexis Nexis Butterworths)Date 23 - 26 May 2012 Check-in —12.00 Hrs. on 23rd May 2012 Check-out—12.00 Hrs. on 25th May 2012Participation Fee Rs. 35,000/- plus applicable service tax per participant. (Fee includes course fee, course material, accommodation on single room basis, all meals and visits) (the charge for accompanying Spouse would be Rs. 1,000/- (Rupees one thousand only) for all the three days. THE CHEQUE/DD to be sent along with nominations in favour of ‘‘The Institute of Cost Accountants of India’’ payable at New Delhi. Details of ECS Payment : State Bank of India (60321), Andhra Association Building, Institutional Area, Lodi Road, New Delhi 110 003. Current Accont No. : 30678404793 MICR CODE : 110002493, IFSC CODE : SBIN0060321Registration CMA D Chandru Director (CEP), The Institute of Cost Accountants of India CMA Bhawan, 3rd Floor, 3 Institutional Area, Lodhi Road, New Delhi 110 003. Tel : 2464 3273, e-mail :, Website: ,,608 The Management Accountant |May 2012
  • 105. INSTITUTE NEWS (II) Recent Trends in Corporate Reporting including IFRS and Revised Schedule VIName of the Programme Recent Trends in Corporate Reporting including IFRS and Revised Schedule VICourse Contents ● Presentation of Financial Statements ● Presentation of Balance Sheet ● Presentation of Statement of Profit and Loss ● IFRS and Fair Value Measurement ● Derivatives Accounting ● Development in Insurance Accounting ● Impairment Analysis ● Non-current Assets held for Sale and Discontinued Operations ● Agriculture ● Investment PropertyVenue (GANGTOK, SIKKIM ) Hotel The Royal Plaza, Upper Syari, Deorali, Gangtok, Sikkim 737 102. Tel - 91 35922 80232 Fax : 91 35922 81112Course Director Dr. TP Ghosh, Professor, IMT DubaiDate 23 - 26 May 2012 Check-in —12.00 Hrs. on 23rd May 2012 Check-out —12.00 Hrs. on 25th May 2012Participation Fee Rs. 35,000/- plus applicable service tax per participant. (Fee includes course fee, course material, accommodation on single room basis, all meals and visits) (the charge for accompanying Spouse would be Rs. 1,000/- (Rupees one thousand only) for all the three days. THE CHEQUE/DD to be sent along with nominations in favour of ‘‘The Institute of Cost Accountants of India’’ payable at New Delhi. Details of ECS Payment : State Bank of India (60321), Andhra Association Building, Institutional Area, Lodi Road, New Delhi 110 003. Current Accont No. : 30678404793 MICR CODE : 110002493, IFSC CODE : SBIN0060321Registration CMA D Chandru Director (CEP), The Institute of Cost Accountants of India CMA Bhawan, 3rd Floor, 3 Institutional Area, Lodhi Road, New Delhi 110 003. Tel : 2464 3273, e-mail :, Website: ,,The Management Accountant |May 2012 609
  • 106. INSTITUTE NEWS Guidelines For Conversion of Cost Accountants’ Firms (Partnership/Proprietary) Into Limited Liability Partnerships (LLPS) In terms of Council decision dated 22nd January, 2012, the following guidelines for conversion ofCost Accountants firms into LLPs and constitution of separate LLPs by the practising Cost Accountants havebeen finalized. They are applicable for conversion of Cost Accountants’ firms into LLPs or formation of newLLPs, by the members in practice of the Institute of Cost Accountants of India (ICAI) upon coming into forcethe provisions of the Cost and Works Accountants (Amendment) Act, 2011 (i.e. 1st February, 2012),subject to the provisions of the Limited Liability Partnership (LLP) Act, 2008 and Rules & Regulations framedthereunder :(A) Conversion of Cost Accountant firms into LLPs Registrar of LLP and submit the same with the1. All the existing Cost Accountants’ firms who want concerned Office of ICAI. The Form shall contain to convert themselves into LLPs are required to all the details of the offices and other particulars follow the provisions of Chapter-X of the LLP Act, as called for, together with the signatures of all 2008 read with Second Schedule to the said Act partners or authorized partner of the proposed containing provisions of conversion from existing LLP. firms into LLP. 5. The names of the Cost Accountant firms registered2. In terms of Rule 18(2) (xvi) of LLP Rules- 2009, if with ICAI shall remain reserved for the partners, the proposed name of LLP includes the words as one of the options for LLP names, subject to the ‘Cost Accountant’ or ‘Cost Accountants’, as the provisions of LLP Act & Rules and Regulations case may be, as part of the proposed name, the framed there under. same shall be referred to ICAI by the Registrar of 6. The following guidelines relating to seniority and LLP and it shall be allowed by the Registrar only other criteria shall be followed for registration of if the Secretary/Authorized Official of ICAI * LLP with ICAI: approves it. (i) Where two similar or identical or nearly3. If the proposed name of LLP of Cost Accountant similar firm names (whether the partners of firm resembles with any other non- Cost such firms are same or not) have applied for Accountant entity, as per the naming Guidelines registration to ICAI, under the proposed LLP, under LLP Act and its Rules, the proposed name only one such firm name who applied first of LLP of Cost Accountant firm may include the shall be approved and remaining firm who word ‘Cost Accountant’ or ‘Cost Accountants’, as has applied with ICAI, whether desires to the case may be in the name of the LLP itself and convert into LLP or not, will have to change the Registrar LLP may allow the same name, the firm name. subject to compliance to Rule 18(2) (xvi) of LLP (ii) The name of the LLP may be like ‘X & Co. Rules as referred above. LLP’ or ‘X & Associates LLP’ or ‘XYZ LLP’4. For the purpose of registration of LLP with ICAI and no other suffix shall be approved and under Regulation 108 of the Institute of Cost and registered by ICAI. Works Accountants Regulations, 1959, the partners (iii) The newly converted Cost Accountant LLP of the firm shall apply, in ICAI Form of Application registered with ICAI shall be allowed to work for Particulars of Offices and Firms, along with the only in terms of Section 2(2) of the Institute copy of name registration, received from the of Cost and Works Accountants Act, 1959 and610 The Management Accountant |May 2012
  • 107. INSTITUTE NEWS for the objects of LLP to be incorporated as severally, of the converted Cost Accountant firms per Form-2 and Form 17 of the LLP Rules, into LLP. 2009 or as per the LLP agreement and same 11. The following Guidelines are subject to the shall be in the nature of Professional Services clarification from Ministry of Corporate Affairs allowed under Section 2(2) of Cost and Works (MCA), Government of India, New Delhi: Accountants Act, 1959. LLP shall be subject (i) Wherever the existing partnership firm has to the same regulations, as if they were a been appointed as statutory auditor of partnership firm. Mere conversion into LLP any company, after following the due does not give any privileges, which were not procedure under the Companies Act, 1956 and earlier with the Cost Accountant firms. the said firm with the same partners is (iv) Inter se seniority among the firms shall be converted into/has formed LLP, then the given to LLP as per the existing policy of same FRN will continue band the Board of ICAI. In other words, LLPs shall carry the Directors of the Company shall take on same seniority, as the firm shall otherwise record the conversion/formation of the Cost have under the existing policy of ICAI. In Accountant firms into LLP and the n ew LLP case of merger of 2 LLPs, same rules shall be deemed to be the Auditor of the said are applicable as to firms merging shall company, for the said financial year, in terms apply. of Section 58(4) of the LLP Act, 2008. (v) The non converted firms shall also remain on (ii) Wherever more than one partnership firm, the same position of seniority in relation to with all the partners, desire to convert/form converted LLPs, as the converted LLPs shall only one LLP, then in that case the name and have the same inter-se seniority, as the firms FRN may be selected of only one of such had earlier to conversion. firms, for the purpose of registration with ICAI and;7. These guidelines of conversion of Cost Accountant firms into LLP shall also be applicable to the (a) The other such firms shall stand dissolved. conversion of proprietary firm into LLP, subject (b) Seniority shall be decided as per applicable to the provisions of LLP Act & Rules and rules of ICAI. Regulations framed there under. The conversion (c) The Board of Directors of all the Companies, of proprietary firm shall be by way of incorporation who have appointed all the erstwhile firms as of new LLPs. Cost auditors, may take a declaration8. The registration number (with minimum 6 from the said LLP, with all the partners of all numbers) of LLP with ICAI, shall be the same Firm the erstwhile firms on record and the Registration Number (FRN) allotted to the firm appointment as Cost auditors of all the before the conversion by ICAI, with the Regional erstwhile firms made under the Companies Code like ‘W’ for Western, ‘E’ for Eastern, ‘S’ for Act, 1956, shall be deemed to be in the name Southern, ‘N’ for Northern. of the said LLP.9. Introduction of LLP, shall not affect the existing (B) Constitution of separate LLPs regulations in force as regards the name allotment 12. All the members of ICAI in practice who want to to Cost Accountant firms. constitute a separate LLP are required to follow10. The provisions of the Cost and Works Accoun- the provisions of the LLP Act, 2008 read with the tants Act, 1959, the Cost and Works Accountants Rules framed there under. Regulations, 1959 and Code of Ethics issued by 13. In terms of Rule 18(2) (xvi) of LLP Rules- 2009, if ICAI shall be applicable to all partners jointly & the proposed name of LLP includes the wordsThe Management Accountant |May 2012 611
  • 108. INSTITUTE NEWS ‘Cost Accountant’ or ‘Cost Accountants’, as the (iii) The newly converted Cost Accountant LLP case may be, as part of the proposed name, the registered with ICAI shall be allowed to work same shall be referred to ICAI by Registrar of LLP only in terms of Section 2(2) of the Institute of and it shall be allowed by the Registrar only if Cost and Works Accountants Act, 1959 the Secretary/Authorized Official of ICAI * and for the objects of LLP to be incorporated approves it. as per Form-2 and Form 17 of the LLP Rules,14. If the proposed name of LLP of Cost Accountant 2009 or as per the LLP agreement and same firm resembles with any other non-Cost shall be in the nature of Professional Accountant entity, as per the naming Guidelines Services allowed under Section 2(2) of Cost under LLP Act and its Rules, the proposed name and Works Accountants Act, 1959. LLP of LLP of Cost Accountant firm may include the shall be subject to the same regulations, as if word ‘Cost Accountant’ or ‘Cost Accountants’, as they were a partnership firm. Mere conversion the case may be in the name of the LLP itself and into LLP does not give any privileges, which the Registrar LLP may allow the same name, were not earlier with the Cost Accountant subject to compliance to Rule 18(2) (xvi) of LLP firms. Rules as referred above. (iv) Inter se seniority among the firms shall be15. For the purpose of registration of LLP with ICAI given to LLP as per the existing policy of ICAI. under regulation 108 of the Cost and Works In other words, LLPs shall carry the same Accountants Regulations, 1959, the partners of the seniority, as the firm shall otherwise have firm shall apply in the ICAI Form of Application under the existing policy of ICAI. In case of for Particulars of Offices and Firms along with the merger of 2 LLPs, same rules are applicable copy of name registration, received from the as to firms merging shall apply. Registrar of LLP and submit the same with the (v) The non converted firms shall also remain on concerned Office of the ICAI. This Form shall the same position of seniority in relation to contain all details of the offices and other converted LLPs, as the converted LLPs shall particulars as called for together with the have the same inter-se seniority, as the firms signatures of all partners or authorized partner of had earlier to conversion. the proposed LLP. 17. These guidelines of conversion of Cost Accountant16. The following guidelines relating to seniority and firms into LLP shall also be applicable to the other criteria shall be followed for registration of conversion of proprietary firm into LLP subject to LLP with ICAI: the provisions of LLP Act, Rules and Regulations (i) Where two similar or identical or nearly framed there under. The conversion of proprietary similar firm names (whether the partners of firm shall be by way of incor-poration of new such firms are same or not) have applied for LLPs. registration to ICAI, under the proposed LLP, 18. The registration number (with minimum 6 only one such firm name who applied first shall be approved and remaining firm who numbers) of LLP with ICAI, shall be like the Firm has applied with ICAI, whether desires to Registration Number being allotted to the firms convert into LLP or not, will have to change by ICAI with the Regional Code like ‘W’ for the firm name. Western, ‘E’ for Eastern, ‘S’ for Southern, ‘N’ for (ii) The name of the LLP may be like ‘X & Co. Northern. LLP’ or ‘X & Associates LLP’ or ‘XYZ LLP’ 19. Introduction of LLP, shall not affect the existing and no other suffix shall be approved and regulations in force as regards Name allotment to registered by ICAI. Cost Accountant firms.612 The Management Accountant |May 2012
  • 109. INSTITUTE NEWS20. The provisions of the Cost and Works Accountants ICAI, the requests can be sent at the following Act, 1959, the Cost and Works Accountants address: Regulations, 1959 and Code of Ethics issued by Shri Kaushik Banerjee ICAI shall be applicable to all partners jointly and Director & Joint Secretary severally, of the LLP. The Institute of Cost Accountants of India21. In case of any dispute in respect of these 12, Sudder Street, guidelines, the same shall be referred to the Kolkata - 700 016. Council of ICAI and the decision of the Council (*Shri Kaushik Banerjee, Director & Joint Secretary shall be final and binding on the members of the is the Authorized Official of ICAI) Institute.22. For the purpose of any clarification regarding the 23. These Guidelines shall come into force w.e.f. 1st approval and registration of proposed LLP with February, 2012. For Attention of Members The provisions of The Cost and Works Accountants (Amendment) Act, 2011 have come into force with effect from 1st February, 2012, whereby the name of our Institute has been changed from The Institute of Cost and Works Accountants of India to “The Institute of Cost Accountants of India” and the Associate & Fellow Members of the Institute are now entitled to use the letters “ACMA” & “FCMA” after their names in place of “AICWA” & “FICWA” respectively. Further, the practising members of our Institute can now enter into a Limited Liability Partnership, which has no company as its partner in accordance with the Limited Liability Partnership Act, 2008. In this connection, the two notifications published by the Central Government in the Gazette of India dated 13th January, 2012 and 30th January, 2012 are printed in this journal. Further details are published in this journal and also uploaded on our website . For Attention of Members The Council of the Institute has decided that the members of the Institute shall be permitted to use the letters “CMA” before their names after notification regarding the date of coming into force of the provisions of the Cost and Works Accountants (Amendment) Act, 2011 is published by the Central Government in the Gazette of India, wherein the Associate & Fellow Members are entitled to use the letters “ACMA” & “FCMA” respectively after their names.The Management Accountant |May 2012 613
  • 110. INSTITUTE NEWS THE INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statuory Body Under An Act of Parliament) Examination Time Table & Programme – June 2012 Certificate in Accounting Technicians (CAT) Day & Date Time Competency Level Part - II Monday, 11th June 2012 09.30 A.M. to 12.30 P.M. Financial Accounting th Wednesday, 13 June 2012 09.30 A.M. to 12.30 P.M. Applied Statutory Compliance Examination Fees INLAND CENTRES Competency Level Part – II ` 730/-1. Application Forms for CAT Examination can be down loaded from Institute’s website and filed online also.2. Last date of receipt of Examination Application Forms without late fee is 10th April, 2012 and with late fee of `100/- is 20th April, 2012.3. Examination Fees to be paid through Bank Draft of requisite fees drawn in favour of “The Institute of Cost Accountants of India” payable at New Delhi.4. Students will send their Examination Application Forms along with the fees to Directorate of CAT at “CMA Bhawan”, 3, Institutional Area, Lodi Road, New Delhi – 110003.5. Examination Centres : Agartala, Ahmedabad, Akurdi, Allahabad, Alwar (Rajasthan), Asansol, Aurangabad, Bangalore, Baroda, Berhampur(Ganjam), Bhilai, Bhopal, Bhubaneswar, Bilaspur, Bokaro, Calicut, Chandigarh, Chennai, Coimbatore, Cuttack, Dehradun, Delhi, Dhanbad, Durgapur, Ernakulam, Faridabad, Ghaziabad, Guwahati, Hardwar, Howrah, Hyderabad, Indore, Jaipur, Jabalpur, Jalandhar, Jammu, Jamshedpur, Jodhpur, Kalyan, Kannur, Kanpur, Kolhapur, Kolkata, Kota, Kottayam, Lucknow, Ludhiana, Madurai, Mangalore, Mumbai, Mysore, Nagpur, Naihati, Nasik, Nellore, Neyveli, Noida, Palampur (H.P.), Panaji (Goa), Patiala, Patna, Pondicherry, Pune, Rajahmundry, Ranchi, Raigarh(Chattisgarh), Rourkela, Salem, Shillong, Solapur, Srinagar, Surat, Sahajahanpur, Thrissur, Tiruchirapalli, Tirunelveli, Trivandrum, Udaipur, Vapi, Vashi, Vellore, Vijayawada, Vindhyanagar, and Waltair.6. A candidate who is fulfilling all conditions will only be allowed to appear for examination.7. Probable date of publication of result: Competency Level Part – II is 22nd August, 2012. C. Bose Sr. Director (Examinations)614 The Management Accountant |May 2012
  • 111. INSTITUTE NEWSExamination — June 2012 THE INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body Under An Act of Parliament) Examination Time Table & Programme – June 2012 Programme for Syllabus 2008 Day, Date & Time Intermediate Final Foundation 09.30 A.M. to 12.30 P.M. 02.00 P.M. to 05.00 P.M. 02.00 P.M. to 05.00 P.M. Monday Financial Accounting Capital Market Analysis 11th June, 2012 & Corporate Laws Tuesday Financial Management & 12th June, 2012 International Finance Wednesday Commercial and Industrial Management Accounting– 13th June, 2012 Laws & Auditing Strategic Management Thursday Applied Direct Taxation Indirect & Direct– 14th June, 2012 Tax Management Friday Cost & Management Management Accounting– Organisation and 15th June, 2012 Accounting Enterprise Performance Management Fundamentals Management Saturday Advanced Financial Accounting 16th June, 2012 Accounting & Reporting Sunday Operation Management Cost Audit & Economics and Business 17th June, 2012 and Information Systems Operational Audit Fundamentals Monday Applied Indirect Taxation Business Valuation Business Mathematics and 18 th June, 2012 Management Statistics Fundamentals Examination Fees Group (s) Final Intermediate Foundation Course Examination Examination Examination One Group (Inland Centres) ` 1250/- ` 1000/- ` 1000/- (Overseas Centres) US $ 100 US $ 90 US $ 60 Two Groups (Inland Centres) ` 2250/- Rs. 1600/- (Overseas Centres) US $ 100 US $ 901. (a) Application Forms for Foundation Course, Intermediate and Final Examinations are available from Institute’s Headquarters at 12, Sudder Street, Kolkata, Regional Councils and Chapters of the Institute on payment of ` 50/- per form. In case of overseas candidates, forms are available at Institute’s Headquarters only on payment of US $ 10 per form. (b) Students can also download the Examination Form from ICAI Website at In case of downloaded form ` 50/ - should be added extra towards the cost of the form. (c) Students can also submit the form online.2. Last datefor receipt of Examination Application Forms without late fees is 10th April, 2012 and with late fees of ` 300/- is 20th April, 2012.3. Examination fees to be paid through Bank Demand Draft of requisite fees drawn in favour of ‘‘The Institute of Cost Accountants of India’’ and payable at Kolkata.4. Students may submit their Examination Application Forms along with the fees at ICAI, 12 Sudder Street, Kolkata – 700016 or Regional Offices or Chapter Offices. Any query can be sent to Sr. Director (Examination) at H.Q.5. Finance Act 2011, involving Assessment Year 2012-2013 will be applicable for the subjects Applied Direct Taxation (Intermediate), Applied Indirect Taxation (Intermediate) and Indirect & Direct – Tax Management (Final) for the purpose of June 2012 term of Examination under Revised Syllabus 2008.6. Examination Centres: Agartala, Ahmedabad, Akurdi, Allahabad, Asansol, Aurangabad, Bangalore, Baroda, Berhampur(Ganjam), Bhilai, Bhopal, Bhubaneswar, Bilaspur, Bokaro, Calicut, Chandigarh, Chennai, Coimbatore, Cuttack, Dehradun, Delhi, Dhanbad, Durgapur, Ernakulam, Faridabad, Ghaziabad, Guwahati, Hardwar, Howrah, Hyderabad, Indore, Jaipur, Jabbalpur, Jalandhar, Jammu, Jamshedpur, Jodhpur, Kalyan, Kannur, Kanpur, Kolhapur, Kolkata, Kota, Kottayam, Lucknow, Ludhiana, Madurai, Mangalore, Mumbai, Mysore, Nagpur, Naihati, Nasik, Nellore, Neyveli, Noida, Panaji (Goa), Patiala, Patna, Pondicherry, Pune, Rajahmundry, Ranchi, Rourkela, Salem, Shillong, Solapur, Surat, Thrissur, Tiruchirapalli, Tirunelveli, Trivandrum, Udaipur, Vapi, Vashi, Vellore, Vijayawada, Vindhyanagar, Waltair and Overseas Centres at Dubai and Muscat.7. A candidate who is completing all conditions will only be allowed to appear for examination.8. Probable date of publication of result : Foundation – 2nd August 2012 and Inter & Final – 22nd August 2012. C. Bose Sr. Director (Examinations)The Management Accountant |May 2012 615
  • 112. INSTITUTE NEWSREGIONS & CHAPTERS NEWS EIRC WIRC Durgapur Chapter of Cost Accountants (DCCA)Navi Mumbai Chapter of Cost Accountants DCCA organized ‘‘Regional Cost Conference -2012’’ on the theme ‘‘Inclusive Growth through Industry & Infrastructure’’ on 24th andOn 6th April 2012, Shri M. Gopalakrishnan, President of the Institute 25th March 2012 at CMERI Auditorium, Durgapur.visited Navi Mumbai Chapter along with Vice President Shri RakeshSingh and Council Members Shri A.S. Durga Prasad, and Smt. Aruna The Chief Guest was Shri Basudeb Banerjee, IAS, Secretary;Soman. Shri Vivek Bhalerao, Chairman of the Chapter, Shri G. K. Das Ministry of Commerce & Industries Govt. of West Bengal whoSecretary of the Chapter and others greeted the dignitaries. inaugurated the Conference by lighting the ceremonial lamp.There was an informal exchange of information between the In the Inaugural session, Shri M. Gopalakrishnan, President and Sridignitaries and the Chapter representatives. The President gave Rakesh Singh Vice president of the Institute addressed the audienceupdates about various initiatives of the Institute. Shri Vivek Bhalerao by explaining about various activities of the Institute, its memberscongratulated the President for some initiatives taken by the IT and the role they can play towards the development of the IndianDirectorate (like IEPS) and the Studies Directorate - sending the study economy through inclusive growth of industry and infrastructure.material directly to the students through our Logistics Associate. Shri P. K. Bajaj, CEO, Durgapur Steel Plant, SAIL the Guest of Honour,The meeting concluded with an informal note of thanks. The in his address, emphasized that inclusive growth is a prerequisite toPresidents visit rejuvenated the members. the development of the industry and economy. Shri Sugata Marjit, Chairman, West Bengal Council of Higher Education, Member, StateVapi-Daman-Silvassa Chapter of Cost Accountants (VDSCCA) planning Board, Govt. of West Bengal delivered the keynote address.A program was organized on 29th March 2012 to inaugurate VDSCCA He emphasized the need for professional approach regarding progressand a seminar was held on that day on ‘Cost Management & Budget and prosperity of West Bengal through meaningful interactionChanges’ at Lions Upasana Auditorium, Gunjan, Vapi. The Chapter between the Institute and Govt. of West Bengal.was inaugurated by Shri M. Gopalakrishnan, President of the Institute Shri Amal Das, Shri Kunal Banerjee and Shri Shyamal Banerjee,who also released the souvenir on the occasion. Also present were Shri past Presidents of the Institute, Dr Sanjiban Bandyopadhyaya, ShriRakesh Singh, Vice president of the Institute, Shri Vijay P. Joshi, S.C. Mohanty and Shri T.C.A. Srinivasa Prasad, Council Members,Chairman, WIRC, Shri B.F. Modi, Chairman of the Chapter, Taxation Shri Saswata Dasgupta, Chairman, EIRC, and other RCM’s wereexpert Shri V.S. Datey and other distinguished guests. present in the conference.Shri Rakesh Singh discussed the salient features of the recent Howrah Chapter of Cost Accountants (HCCA)provisions on Cost Audit & Cost Compliance, highlighting thepractical applications. Shri V.S. Datey made a crticial analysis of HCCA organized a discussion on Union Budget 2012 on 18th‘Budget Changes and EA-2000’. There was an open forum where March 2012 at the Chapter premises. Eminent Tax practitioner, Shrithe members deliberated and discussed the above provisions. Sanjoy Bhattacharyya, Chartered Accountant was the main speaker. Shri Tapas Kumar Kanrar. Chairman of the Chapter welcomed the SIRC members and conducted the session. Many members from andHyderabad Chapter of Cost Accountants (HCCA) around Howrah participated in the discussion.Coal India Limited has conducted Campus Interviews for fresh Grad NIRCCMAs at Hyderabad Centre of Excellence, Gachhibowli, Hyderabad Noida Chapter of Cost Accountants (NCCA)on 15th March, 2012. Shri B. Kumar, Associate Advisor of HyderabadCentre of Excellence, Shri K.Ch.A.V.S.N. Murthy, past Chairman-SIRC NCCA organized a seminar on ‘Union Budget 2012’ on 19th Marchand A. Vijay Kiran, Chairman-Students Services & Library extended 2012 at NMA House, Noida. The programme was organised jointlytheir support in organizing this programme. A total of 32 candidates in association with Noida Management Association (NMA) &were selected out of 37 candidates attended the interviews. Noida Chapter of Institute of Company Secretaries of India & IMSVishakhapatnam Chapter of Cost Accountants (VCCA) Noida. Shri Sunil Tandon, Vice President of NMA welcomed the delegates and spoke about the need for critical analysis of variousVCCA organized a talk on ‘Budget 2012’ at hotel Dasapalla, budget proposals to understand their implications.Vishakapatnam on 25th March 2012. Shri S.S. N. Raju, Special PublicProsecutor, CID was the Chief Guest. Shri A. Chandrasekhar, Leading direct and indirect tax experts were invited as speakersPartner of SARC & Associates, Shri S. Satyananda Rao, Chairman, for detailed analysis of various tax proposals in the Budget. ShriVCCA, Shri D. Ramana Murthy, Secretary, VCCA, Shri K. Sanyasi Nabin Ballodia, Partner KPMG, one of the four top globalRao, RCM of SIRC, Shri V.S.N. Murthy, expert on Direct Taxes, consulting and audit firms spoke about various direct tax proposals.and Shri G. Prabhakar Shastry, expert on Indirect Taxation were Shri J.K. Mittal, Advocate and well known expert in the field ofthe speakers on the said topic. service tax, spoke about service tax provisions.Shri S.S.N. Raju spoke on the growing importance of the Cost Shri Lakshmi Narsimhan, Partner of Lakshmikuman & Sridharan,Accountants in Indian economy. He spoke about the financial India’s leading indirect tax law firm, presented critical analysis offrauds that are being committed in the corporate sector and the excise and customs provisions.role of Cost accountants in curbing such fraud. Shri A. Chandra Shri Suraj Prakash Chairman, of the Chapter summed up theSekhar discussed the salient features of the Budget stating that the proceedings beautifully. A lot of interesting questions were raisedwelcome features were promises to curb black money and emphasis by members and other participants who came from variouson infrastructure. Shri V.S.N. Murthy, expert on Direct Taxes, and corporate houses like Jaypee group, BHEL, GAIL, IOCL, Kribhco,Shri G. Prabhakar Shastry, expert on Indirect Taxation highlighted DMRC and other public and private sector companies. Shri Rajivthe provisions and the impact of direct and the indirect taxes. Bajaj, Chairman NIRC of ICSI graced the event with his presence.The programme ended with a vote of thanks by Shri U. Prakash, The proceedings of the programme were conducted by Shri RVice Chairman of the Chapter. Venkataramanan, Vice Chairman of Noida Chapter.616 The Management Accountant |May 2012
  • 113. LETTERS TO EDITORDear Sir, Reader - nowadays most of our members use Tablets, E-Readers etc . Better to change the PDF version of Since couple of months lot of changes have been online edition in to an E- Book form.taking place in our Journal ‘The Management 8. Size of Management accountant should beAccountant with respect to colour printing, quality reduced to make it same as any Internationalimprovement etc. The journal has passed a long Management Accounting Magazine and repetitiveJourney since started under the editorship of Late Shri information i.e. chapter information /address/T. S. Grewal an Eminent Accounting Academician of activities etc to be taken care in online edition and maySouth Asia. I myself started reading this from 1991 and be published on periodic basis only in paper edition.since then, I missed very few editions. Today I am Photographs on back/front pages to be publishedtrying to recap from my memory to summarize as a periodically. Fonts to be changed to get sleekness somember/reader certain points which were long that publication becomes more attractive.overdue. I think this will be helpful in increasing theimage of the Institute, members and its Journal. Have a nice cost effective day! 1. Economic Outlook on particular Industry/Service and a general note on overall economic outlook With Best regards,of the country should always be a part of every month’s Davinder Bhatiaedition. Arrangement should be made with Yojana/ Cost Management SpecialistCMIE/Any Financial Newspaper or thru in-house 484 Savoline Blvd,working group of the Institute for this purpose. Milton, Ontario, Canada 2. Prior to publication of industry specific Journal L9T7X3we should have at least arrangement with respective 647-237-8465, 905-593-2728division of CII /FICCI and Ministry related to thatIndustry. This will help us in giving recognition, Our reply : Thanks for your valuable inputs. We willintellectual support and patronage for any future revert to you on the same.projects of the respective industry. The PRO of theInstitute should try to get at least some review orcomments of respective bodies of Chambers ofCommerce/Ministry etc in industry specific editions. Dear Sir, 3. An interview with CEO /VP of a Market Leaderor a dominant player . Say, an interview of some The article in March 2012 issue on the case studyExecutives from Wal-mart may be taken by in house section titled ‘‘Hindustan Unilevers Cost Aggression’’team. by Ms Kaberi Bhattacharya is one of the best articles 4. Challenges, Scope, Opportunities for CMAs in of the March 2012 issue. It is informative andthat particular Industry and article on industry specific analytically excellent.subject can be invited. It exhibits what parameters should be considered 5. Article on new developments in Information for preparing the base for good SDSS (StrategicTechnology should be a regular feature. Also, articles Decision Support System) by the corporate houses.on Health/Yoga/Ergonomics/Soft Skills/IT tools like Thanks for enriching our journal with such anAccess/Excel/Outlook /ERP/ smart applications and excellent articlecommands should come regularly on periodic basis. 6. The review on new releases of books on RegardsManagement, Economics, Business, Finance should bea regular feature. Prashant Dahivalkar ACMA 7. Online Edition to be changed from PDF to Book M/28526■ Letters may be edited for brevityThe Management Accountant |May 2012 617
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  • 118. BOOK REVIEW As envisaged by the authors, this book will certainly be useful not only to the students and teachers but Cost Accounting also to all professionals dealing with Cost Accounting. By M Y Khan & P K Jain M. S. Vaidyanathan ACMA, ACS Tata McGraw Hill Education Senior Manager, Indian Bank Private Ltd. Fifteenth Reprint 2011 Price : Not Indicated A Guide to Cost Accounting StandardsC ost Accounting discipline requires its students to have a firm hold on the subject with clarity and By Shri Ajay Deep Wadhwa understanding. One has to be conversant with theconcepts, methods of cost ascertainment, application of the Modern Law Publicationsmethods in decision-making process and, finally, for First Edition, 2011installation of a cost accounting system. The entire gamutof operations related to Cost Accounting has been Price : 275.00comprehensively covered in the book under review. Starting with an overview of the subject, the authors S ince the first edition of this book there has beenhave, in a student-friendly manner, taken up all related considerable and complex study of cost accountingaspects in a planned way. standards. Where first part of the book deals with the The reader gets introduced to the basics, the essential importance of cost accounting standards, the 2nd part ofdifference between cost accounting and other accounting the book deals mainly with various cost accountingdisciplines—like financial accounting and management standards. Recent changes and amendments have beenaccounting—and then, progressively, to the various costs incorporated wherever necessary.that are available for this accounting discipline. The unique and distinct features of the present edition One interesting feature is that most of the nineteen are outlined hereunder :chapters—that are grouped under three parts—provide a 1. The full text of the cost accounting standards, withgist of the portion covered, related references, practical objective, scope, clarifications etc. have been included.examples with working notes and exercises with solutions— 2. Practical aspects of each and every cost accounting standardsto tone up one’s understanding of the subject. has been incorporated at the end of each chapter. 3. Scope and applicability of cost accounting standards Material, Labour and Overheads form the three principal have been incorporated at appropriate place.components of cost accounting. Their treatment and usage 4. Relevant sections of Companies Act, 1956 related tovary—depending on the requirements and their classification accounts has also been included in the appendix to haveas direct or indirect, fixed, variable or semi-variable. There a overall concept of the cost accounting standards withare various processes of cost accounting that come into play, the Companies could be job costing, process costing, unit costing, and soon. The nuances of each process or system of costing have to This book is an unique book so far as cost accountingbe understood for better profit planning and performance standards are concerned. Clear and vivid picture of the Costmeasurement. It is here that the book scores. Audit Report Rules 2011 & Cost Accounting Record Rules 2011 have been depicted here. This book provide guidelines Mention must be made of the chapters that discuss to cost accountants in preparation of uniform cost statements,installation of a costing system, reconciliation and to make standard approach towards maintenance of costintegration and variance analysis for their lucid presentation. accounting record rules & understanding cost audit & certainThe comfort level of the reader is bound to increase. provisions of company law including other acts like Income The book also deals with the advantages and limitations Tax Act, Central Excise, Customs, Sales Tax Act etc.of variable costing, its role in profit planning and cost control This book gives the management to follow the standardmeasures. cost accounting practices & preparation of uniform cost Variable costing is required for internal control. Its statement in the matter of compliance of statutoryusefulness to the management is in carrying out profit obligations.planning exercises in specific situations and cost control in This book gives a total picture regarding appointmentgeneral. Undeniably, variable costing has a vital role to play of cost auditors by companies. This book will definitely caterin situations where fixed costs do not come into the picture to the needs of the students as well as the professionals andand short term perspectives have to be taken into account will be a constant guide to the readers and professionals.for decision-making. They have taken up cost accountingtechniques as a tool for profit planning, cost-volume-profit Chandrani Duttarelationship and budgeting. B.Sc. (Hons), ACS622 The Management Accountant |May 2012
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