Cost accountants protest against new cost audit draft rules

Cost Accountants (Pune Chapter) on Friday protested outside the Pune Municipal Corporation (PMC) against the new cost audit draft rules published by the Ministry of Corporate affairs. The accountants have demanded an immediate withdrawal of the rules claiming it detrimental to their field.

The recently published draft Cost Records and Cost Audit Rules 2013 severely curtail the scope of the Cost Audit Mechanism—a system put in place in 1965 and expanded steadily with a view to curb profiteering and other malpractices in the corporate sector. The draft rule proposes to exempt much of the private sector from this mechanism, while the focus remains only on government funded companies.

The proposed dilution of Cost Audit Mechanism is regressive in nature and will adversely affect the cost consciousness and cost competitiveness of the Indian industry and will put consumers to a great disadvantage .

Madhuvanti Sathe, Chairman, Pune Chapter of Cost Accountants, said the draft rules if finalised may come into effect from April 1, 2014.

The ministry has sought reactions till December 14. Currently, of the around 15,000 companies, only 600 companies will require cost audit. Most of these would be public sector companies. This will not only affect cost accountants but will also make it difficult for the government to keep prices and inflation under check, added.

Currently, there are around 65,000 cost accountants, of which 25, 000 are in the western region with around 1,500 in Pune.(Indian Express)

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Vodafone India Services Pvt. Ltd (No. 2) vs. UOI (Bombay High Court)

Transfer Pricing: Existence of income is a jurisdictional requirement for the applicability of T. P. provisions. AO must deal with it after giving personal hearing before making reference to TPO. The dept should not treat the assessee as an adversary who has to be taxed, no matter what

The assessee, an Indian company, issued equity shares at the premium of Rs.8591 per share aggregating Rs.246.38 crores to its holding company. Though the transaction was reported as an “international transaction” in Form 3 CEB, the assessee claimed that the transfer pricing provisions did not apply as there was no income arising to it. The AO referred the issue to the TPO without dealing with the preliminary objection. The TPO held that he could not go into the issue whether income had arisen or not because his jurisdiction was limited to determine the ALP. He held that the assessee ought to have charged the NAV of the share (Rs. 53,775) and that the difference between the NAV and the issue price was a deemed loan from the assessee to the holding company for which the assessee ought to have received 13.5% interest. He accordingly computed the adjustment for the shares premium at Rs. 1308 crore and the interest thereon at Rs. 88 crore. The AO passed a draft assessment order u/s 144C(1) in which he held that he was bound u/s 92-CA(4) with the TPO’s determination and could not consider the contention whether the transfer pricing provisions applied. The assessee filed a Writ Petition challenging the jurisdiction of the TPO/AO to make the adjustment. On the merits of the adjustment, the assessee filed objections before the DRP. Before the High Court the assessee argued that (i) it was a precondition before the transfer pricing provisions apply that there has to be income arising to the assessee. As the allotment of shares at a premium does not give rise to income, the transfer pricing provisions do not apply, (ii) there was a breach of natural justice because neither the TPO nor the AO had heard the assessee on, or decided, the fundamental issue as to whether the transfer pricing provisions applied at all, (iii) the DRP does not offer an alternative remedy because the DRP has no power to quash the draft assessment order even if it is satisfied that the same is without jurisdiction & (iv) the DRP cannot take an unbiased view because one of its members is the DIT (TP). HELD by the High Court:

(i) The assessee’s contention that the DRP does not offer an alternative remedy because it does not have the power to quash the assessment order even if it is satisfied that the same is without jurisdiction is not acceptable because in Vodafone 37 taxmann.com 250 it was held that the DRP’s power to confirm would include the power not to confirm and to annul the draft assessment order;

(ii) It is clear from s. 92(1) that there must be income arising/ potentially arising by an international transaction for the application of the transfer pricing provisions. This is a jurisdictional requirement and has to be dealt with by the AO when specifically raised by the assessee before making reference to the AO. Grant of personal hearing before referring the matter to the TPO has to be read into s. 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee (Veer Gems 351 ITR 35 (Guj) disagreed with to the extent it holds that no hearing is required at the stage of reference to the TPO even on jurisdictional issues). If, after the hearing the assessee, the AO holds that there is an international transaction, that would be binding on the TPO;

(iii) The department’s contention, based on CBDT Instruction No.3 dated 20.05.2003, that the action of the AO in referring the international transaction is a mere administrative act is not acceptable. The AO is bound to hear the assessee in respect of jurisdictional issues before making the reference. The failure to do so is an illegality;

(iv) The assessee’s contention that the DRP would not give a fair hearing as one of its members is the DIT (TP) is not acceptable because it overlooks the fact that these are not appeal proceedings but to finalize the draft assessment order. Also, the DIT(TP) who approved the TPO’s order is not on the panel;

(v) The Revenue should keep in mind the sage advice of Nani Palkhivala that the department should not cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of palpable injustice. In this case it would be natural for the assessee to feel harassed as neither the AO nor the TPO gave a hearing or dealt with the preliminary objection. It is hoped that the revenue will be more sensitive to the just demands of the assessee and not treat the assessee as an adversary who has to be taxed, no matter what;

(vi) The DRP should decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. In case the DRP’s decision on the preliminary issue is adverse, the assessee shall be entitled to challenge it in a writ petition if it can show that the DRP’s decision on the preliminary issue is patently illegal notwithstanding the availability of alternate remedy before the ITAT.

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Punching PIN must for debit card transactions from December 1

Debit card holders will from Sunday be required to punch in their PIN numbers every time they use the card, a move aimed at minimising frauds.

In June, the Reserve Bank of India had extended the deadline for the implementation of mandatory PIN punching at Point-of-Sales (PoS) and merchant outlets till November 30 following representation of banks.

"Our back-end system is in place and we have made changes in all our PoS and merchant outlets to accept PIN (basically ATM PIN) from tomorrow," said Parag Rao, HDFC Bank 's head card payment products and merchant acquiring service.

"We have around 3 lakh PoS terminals across the country," he said, adding that the bank has informed all its customers through all channels including SMS and mailers.

As part of awareness drive, SBI has in a notice asked its customers not to handover ATM-cum-Debit card to any person.

It also advised the customers that they should not keep any records of the PIN in physical form.

According to a senior official of Canara Bank , the PIN is another layer of security for the debit card.

First, merchants will swipe the cards at a PIN enabled PoS terminal and punch in the transaction amount. That will be followed by customers entering their PINs to complete the transaction.

As for credit cards, this requirement has been made mandatory for international transactions, including on the Internet. In such cases, users will have to replace their existing credit cards with the EMV Chip card and get a PIN.

Increased use of credit and debit cards has led to rise in frauds, especially in the case of lost or stolen cards.

Also, there have been reports of data on cards being compromised and cards skimmed/counterfeited.

To deal with this the Reserve Bank asked banks to comply with all security features such as EMV (Europay, MasterCard and Visa) chip on cards, real time fraud monitoring system, use of PIN, limit on transactions and the like by November 30.

RBI had in September, 2011 issued the guidelines for additional security features with a view to guarding card holders against cyber frauds and other misuse.(Business Today)

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Filing of online return for 2nd quarter of 2013-14 – extension of period thereof.

No.F.7(420)/VAT/Policy/2011/PF/1006-1012                                                              Dated:20/11/2013 

CIRCULAR NO. 26 of 2013-14 

Sub: Filing of online return for 2nd quarter of 2013-14 – extension of period thereof. 

In partial modification to this department’s Circulars No.18, 24 & 25 of 2013-14 on the subject cited above and in exercise of the powers conferred under Rule 49A of the Delhi Value Added Tax Rules,2005, I, Prashant Goyal, Commissioner, Value Added Tax, do hereby extend the last date of online filing of second quarter return for the year 2013-14, in Form DVAT-16 ,DVAT-17 and DVAT-48 along with required annexures, and submission of hard copy along with required enclosures as per schedule given below: 

However, the tax due shall continue to be paid in the usual manner as per the provisions of section 3(4) of the Delhi Value Added Tax Act, 2004. 

(Prashant Goyal) 

Commissioner,VAT 

No.F.7(420)/VAT/Policy/2011/PF /1006-1012 Dated: 20/11/2013 

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Point of taxation [Rule 2(e)] of Service Tax

For the purpose of charging service tax on any service, the incidence of levy is on person rendering of a taxable service which is termed as point of taxation. Usually people have confusion regarding the point in time when a service is deemed to be provided and thereby service tax is to be deposited. Therefore the Rule 2(e) is summarized below:

Where,

*is even if payment might be received after 01.04.2011 but service was provided or billed before the said date will be subject to old rule.

# is that if Invoice is not issued within 14 days of completion of service, then Date of Invoice will be changed to Date of Completion of service

$ is that if Invoice is not issued within 30 days or 45 days in case of banks and financial institutions of completion of service, then Date of Invoice will be changed to Date of Completion of service

Specified Cases:

Reverse Charge Mechanism - Rule 2(1)(d):

Date of Payment, if the payment is received within 6 months. In other cases, the normal rule of taxation will apply.

Export of service:

Date of Payment, if the payment is received within the time limit prescribed by RBI. In other cases, the normal rule of taxation will apply.

Individual/Firms whose aggregate value of taxable service is less than Rs 50 Lakhs in previous year

Date of Payment -  upto taxable service of Rs. 50 Lakhs only.

Individual/Firms providing services of Architect, CA, CS, ICWAI, Legal Consultancy, Consulting Engineer or Interior Decorator:

            Date of Payment

Associated Enterprises (Holds >=20% Share Capital)

            Date of credit in books or date of payment whichever is earlier

Continuous Supply of Services

The persons falling in continuous supply of service [Rule 2(c)] i.e. services provided where contract is of more than 3 months or prescribed by Central Government will be collecting tax on date of completion of service. Date of Completion of service is the milestone fixed by the provider as to when payment for the service becomes due. For eg, in case of telephone service, date of completion of service will be the date when bill is issued to the subscriber for payment of dues.

Date of Payment [Rule 2A]

Now the date of payment of service tax will be date of payment entry in books or date on which amount is credited in bank account, whichever is earlier. But if there is change in the service tax rate or for the first time tax is imposed and the payment in bank is credited after 4 working days, then date of payment shall be date of credit in bank account only.

Author:

Sagar Gupta

Ph: 09918437886

Email: casgrgupta@gmail.com

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EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952

EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952

Provident Fund scheme was started by few concerns even before the enactment of the act. The government in 1952 framed this act for the benefit and welfare of the employees. This act is applicable to employees drawing pay not more than Rs. 6,500 pm but at the time of registration the same employee pay should not exceed Rs. 5,000. This act deals with:

1.   The Employees’ Provident Fund Schemes, 1952,
2.   The Employees’ Pension Scheme, 1995, and
3.   The Employees’ Deposit linked Insurance Scheme, 1976

Applicability:

a. To every establishment which is a factory engaged in any industry specified in Schedule 1 and in which 20 or more persons are employed, and

b. To any other establishment employing 20 or more persons or class of such establishments which the Central Government by notification on the official gazette specify in this behalf.

Non-Applicability:

a.       Establishment registered under the Co-operative Societies Act, 1912 or under any other law for the time being in state relating to cooperative societies, employing less than 50 person without the aid of power,

b.      Establishment belonging to Central or State Government whose employees are entitled  to the benefit of these provident and pension funds in accordance with any scheme or rule framed by Central or State Government governing such benefits,

c.       Establishment belonging to Provincial or State Act whose employees are entitled  to the benefit of these provident and pension funds in accordance with any act governing such benefits,

If once such establishment falls within this act, then the act will apply to such establishment even if the number of employee falls below 20.

Employees Provident Fund Scheme:

This act has been passed by Central Government. This fund is administered by Central Board which is administered by Board of Trustees.

Employee entitled and required to join Provident Fund:

 Every Employee of the establishment earning salary or wages upto Rs. 6,500, except:

1.       An employee who having been a member withdraws full amount of his accumulations in the fund,

2.       An employee whose pay at the time be is otherwise entitled to become a member of the fund exceeds Rs. 5,000 pm

3.       An apprentice

Where wages or salary consists of Basic Salary or Wages, Dearness Allowances, Cash value of food concessions and retaining allowances.

Contribution:

A.      Employee: 12% of wages though more can be contributed, even upto 100% of wages though employer is not bound by this.

B.      Employer: 12% of wages, where 3.67% goes to provident fund and other 8.33% to pension fund.

Due Date:

Employer is required to pay amount received from employee on or before 15^th of the following month, i.e. contribution of Oct before 15^th November.

Procedure of Application:

Provident fund form is to be filled up along with incorporation documents, MOA, AOA, PAN, Address Proof; etc as before 30 days from the date such act becomes applicable on the establishment.

Withdrawal:

Funds can be withdrawn by filling up Form 19. A employee can withdraw the amount only if he/she don’t get into employment for the 2 month’s period. This requirement of 2 months is not applicable if girl withdraws such amount for her marriage.

Advance:

Advance can be taken on this account for marriages (self, siblings, children, etc), buying a house, major surgical operations, repayment of loans, etc in certain cases, etc which is non refundable in nature.

Transfer:

Provident fund can be transferred in case person goes for another job at another place after filling up relevant Form.

Online Provident Fund facility:

Now online facility of EPF is available. One can see the members detail, correct the information present. DSC of the authorized person is required for online submission of claims. Here,

a.       User name and password is required,

b.      The form here is ‘Transfer Claim Form’, instead of Form 13,

c.       Form can be presented to present or previous employer for scrutiny,

d.      Physical filing is also permissible.

Employees’ Pension Scheme:

Government has introduced this scheme under section 6A, to claim this:

Minimum 10 years contributory service is required, and 

a.       Have attained 58 years of age, or

b.      Retirement, or

c.       Permanent total disablement, or

d.      Children pension, or

e.      Orphan pension.

The amount of monthly pension will vary from member to member. The formula is:

Members Pension = Pensionable Salary*(Pensionable Service + 2)/70

If the contributory service is less than 20 years but more than 10 years, monthly pension required is to be determined as if the member has rendered eligible service of 20 years. The amount so arrived shall be reduced at the rate of 3% for every year by every service by which the eligible service falls short of 20 years, subject to maximum reduction of 25%.

Employees’ Deposit Linked Insurance Scheme:

The act was framed in 1976. This act came into force from 1^st August, 1976.

a.       Applicability: All members of Provident Fund Scheme

b.      Contributions: 1% of total emoluments i.e. basic wages, dearness allowances including cash value of food concessions and retaining allowances.

c.       Administrative Expenses: Employers are required to pay charges to the insurance fund at the rate of 0.01% of the pay of the employee members for meeting various expenses subject to a minimum of Rs. 2/month

d.      Nomination: Members nominated in EPF is also nominated for such fund.

e.      Payment of assurance benefit: In case of death of Employee, an amount equal to average balance in the account of the deceased during the preceding 12 months or period of membership, whichever is less shall be paid to the person eligible.

f.        Exemption from the scheme: If a establishment has a scheme providing greater benefits than this scheme is exempted from this scheme.

Statutory protection is provided to the amount of contribution to provident fund under section 10 from attachment to any Court decree. The act authorizes the appropriate Government to grant exemptions to certain establishments or persons from the operation of all or any of the provisions of the scheme.

Author:

Sagar Gupta

Contact Number: 09918437886

Email: casgrgupta@gmail.com

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FOREX - Practical Aspects

Forex market is open 24 hours a day, 5 and a half days a week when currencies are traded worldwide electronically over the counter. This is called foreign exchange market.

What are the ways of trading forex?

Spot market: Where one party delivers an agreed amount of currency at an agreed rate to other party. Settlement is made in cash after the position is closed. The whole process usually takes 2 days.

Futures market: Unlike spot market, actual currencies are not traded instead contracts of delivering/buying the currency are traded.

Forward market: Contracts are the same as future contracts with some differences.

What is the difference between forward and futures?

Futures	Forward
They are exchange traded contracts.	They are private contracts.
Regulated.	Non-regulated.
Rigid terms and conditions as defined by exchange.	Not rigid terms and conditions.
Clearing houses guarantee the completion of contract.	High chances of default due to absence of any clearing house.
They are settled market-to-market which means that any gain or loss occurred are settled daily with the margin amount.	Settlement occurs at the end of the contract.
Futures are used mostly by speculators so delivery usually never happens as contracts are closed prior to maturity.	Forward are used by hedgers i.e. who want to eliminate or minimize their risk. Delivery usually takes place.

Is it illegal to trade forex in India?

It is illegal to enter into contract with unregulated overseas foreign exchange market which more often make fake promises of higher guaranteed returns. Any person residing in India collecting and remitting such payments outside India is liable to be proceeded for contravention of FEMA, 1999; Know your customer (KYC) and anti-money laundering standards (For more on money laundering, read my other article on money laundering).

The RBI clarified that "a person resident in India may enter into currency futures or currency options on a stock exchange recognized under section 4 of the Securities Contract (Regulation) Act, 1956, to hedge an exposure to risk or otherwise, subject to such terms and conditions as may be set forth in the directions issued by the RBI from time to time".

How to read FOREX quote?

I will give basic definition along with an example. 

USD/INR – Currency on the left is called base currency (always equal to 1 unit) and currency on the right is called quoted/counter currency. Here USD/INR means 1 USD = Rs. 62.720 as mentioned. This is an indirect quote where the domestic currency is the one on the right side (for India). A direct quote would be INR/USD for India as a domestic country.

Bid/Ask – In simple words, bid means the price at which the market will buy currency from you and ask means the price the market will sell the currency to you. Bid price is always smaller than the ask price and the base currency is traded. In the given example, base currency is USD so the quote Bid/Ask: 62.710 / 62.730 means 1 USD can be sold for Rs. 62.710 i.e. at the bid price and can be purchased for Rs. 62.730 i.e. at the ask price in the market.

Spread - Spread is the difference between bid and ask price calculated in Pips i.e. Percentage in points. 1 pip can be 0.001 or 0.0001 unit depending upon the number of decimals. Here, as the currency is quoted up to 3 decimals, 1 pip = 0.001 unit. Spread is 20 Pips in the given example.

Cross currency (EUR/JPY) – When one of the currencies traded is not USD we call it a cross currency quote. In the given example EUR/JPY is the cross currency and bid price of 1 EUR is 135.1800 Japanese yen and ask price is 135.2400 Japanese yen.

What is leverage? How can it affect the risk and rewards in forex?

Leverage is a tool used to multiply risk and rewards. In forex, leverage is a margin percentage of the actual contract provided by broker to the investor. For e.g. – if leverage is 100:1 it means that for trading 100,000 units of currency, one has to deposit only 1000 units of currency i.e. 1% of the actual trading amount.

The way it affects the risk and rewards is visible. If there is a decline of even a smaller amount say 0.5% then the portfolio will come down by 0.5%*100,000 = 500 units and your half of the margin money is gone and if there is 1% decline in the portfolio, you will lose all your money.

In the other case if the same is appreciated by 1%, you will double your investment from 1000 units to 2000 units of currency.

How can I avoid that much risk?

Risks can be minimized with the help of 2 techniques – stop and limit orders.

Stop orders – It is an order to buy or sell a certain security when its price falls below a certain limit as specified by the investor. For e.g. – if you have currency account worth Rs. 100,000 and you are moving out for holidays so you won’t be able to monitor your account then you can ask your broker to put up a stop limit of Rs. 80,000 so whenever gross price will hit the 80,000 mark, your security will be sold. It is generally used to limit the losses.

Limit orders – It is an order to buy or sell a certain security when its price surpasses a certain limit as specified by the investor. For e.g. – if you have currency worth Rs. 100,000 and you want to maximize your profits then you can impose a limit by telling your broker that whenever the currency’s worth reaches Rs. 120,000 it should be sold. It is generally used to maximize the profits. It is costly than the market order.

Difference between stop and limit orders is that the stop order is used to minimize losses while limit order is used to maximize returns.

Chiranjiv Kumar

Owner of FundsPedia.com

Facebook - https://www.facebook.com/chiranjiv.captor

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Banks violate RBI norms to deny zero-balance A/Cs

MUMBAI: Banks have been found to use the Reserve Bank of India's norms as an excuse to avoid opening zero-balance accounts. In a sting operation conducted by a web portal, an IIT Mumbai professor sought to open a basic bank account in 19 banks without address or identity proof. In all the 19 branches, the professor was shooed away although RBI regulations require banks to open a 'small account' without address or identity proof.

The professor's sting operation seeks to expose how banks use the pretext of 'know your customer' guidelines to turn away business that is unprofitable. Incidentally, these are the same banks which fell victim to a sting operation by a web portal which exposed their willingness to violate the 'know your customer' guidelines to grab business. The professor's experience was that the underprivileged were chased away from bank branches by intimidating them, citing RBI norms and account opening requirements ranging from Rs 500 to Rs 3 lakh. The lenders included public, private and foreign banks.

The surprising part was that even when confronted with RBI regulations, nearly all front office staff were clueless. None were aware that RBI norms do indeed allow customers to open an account with zero balance requirement and ATM card facility merely on the basis of an application form, a photograph and a self-declaration.

Ashish Das from the department of mathematics at IIT Bombay conducted the survey across bank branches as part of a study, titled Banks Violating Prevention of Money-Laundering Act for Excluding the Excluded. The study has now been published by the department and also released in the form of a report.

The notification on the basic savings account facility was issued by RBI on August 2012. RBI norms on its website state that a basic account can be opened with simplified KYC norms. But if simplified norms are used, the account would be treated as a 'small account'. In other words, such accounts will be eligible for a maximum balance of Rs 50,000 and maximum withdrawals cannot exceed Rs 10,000 in a month. Also, these accounts cannot be used for receiving money from abroad. While the limits ensure that these accounts cannot be misused for money laundering, it provides individuals without address proof or identity cards the opportunity to maintain savings with banks and also use ATMs.

But rather than open these accounts, banks are instead pushing underprivileged customers to 'business correspondents', who charge for opening bank accounts. Das's report shows that majority of bank employees are unaware that RBI norms allow a small basic bank account on the basis of a mere application form and declaration that proof of address will be provided within a year.

Even at the head office level, the awareness of account opening requirements appear to be low. Six of the banks covered gave RBI norms as a reason not opening the basic accounts.

RBI has not made it any easier for banks to open small accounts. The requirement for banks to open a 'small account,' without address or identity proof, comes in a directive from the finance ministry notification dated December 16, 2010. The reference to the notification on simplified KYC norms is buried in an annexure to RBI on directions for opening small accounts.(TOI)

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ICWA Admit Card for DECEMBER -2013 Term Examination.

Admit Card for DECEMBER -2013 Term Examination.

Click here to download : http://examicmai.org/wadmit/admit.htm

Instructions : Registration No ( 01121053900) 11 digit format.

Important Announcement :-

Admit Card and other details for Foundation December 2013 Examinations will be hosted on 1st week of December 2013. Probable dates of publication of Inter/Final & Foundation Result are 21st February 2014 & 15th January, 2014. 

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Revenue exempted from disclosing info obtained from Financial Intelligence Unit justifying search operations

Preparation of satisfaction note on information collected from Financial Intelligence Unit to be treated as unpublished document for which privilege under Evidence Act could be validly claimed.

Facts:

a) The assessee was a leading importer and exporter of bullion, platinum bars and other precious metals;

b) The search and seizure operations under section 132 were carried out against assessee on basis of information received from Financial Intelligence Unit (‘FIU’) that heavy cash amounts were deposited in bank accounts of assessee and its sister concern on a regular basis;

c) The assessee filed writ challenging the search and seizure operations and claimed its right to examine satisfaction note to assail validity and bona fides of search and seizure operation;

d) On other hand, revenue filed an application claiming privilege of unpublished material in public interest under the Evidence Act

The High Court held in favour of revenue as under:

1) It couldn’t be denied that the FIU, reporting directly to the Finance Ministry, was responsible for receiving, processing, analyzing and disseminating information related to suspected financial transactions;

2) It was also responsible for coordinating with and strengthening the efforts of national and international agencies, investigation into it in pursuance of global efforts against money laundering, terrorist financing and related crimes;

3) The preparation of the satisfaction note on such information could be treated as unpublished documents for which the revenue has validly claimed privilege under sections 123 and 124 of the Evidence Act;

4) A large amount of accounted black money is floating in the market which poses a serious threat to the national economy. The Government of India has adopted several methods to discouraging the parallel economy being run by unscrupulous persons;

5) The FIU is engaged in collecting such information against the money laundering, terrorist financing and related crimes. The sources and methods of the organization collecting and processing such sensitive information couldn’t be subjected to public scrutiny to jeopardize the interest of the organization and national interest.

6) Thus, the application filed by the Income-tax department was to be allowed - M.D. OVERSEAS LTD. V. DIRECTOR GENERAL OF INCOME-TAX (2013) 38 taxmann.com 433 (Allahabad)

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Assistance in financial and risk management is a ‘technical service’; FTS under India-US DTAA

Where assessee-company was making use of advice, input, experience and assistance rendered by US based company in its decision making process of financial and risk management, etc., services so rendered would be technical services under India-US DTAA.

Facts:

a) The assessee-company, engaged in providing software development services to the customers in India, claimed deduction of payment made to US based company (‘foreign company’) towards management services rendered by it;

b) In course of assessment, the Assessing Officer opined that the payment made by the assessee to foreign company would come within the ambit of consultancy fees and, therefore, the it was liable to deduct tax on these payments under section 195;

c) Since assessee failed to deduct tax at source, the Assessing Officer disallowed payments made by assessee by invoking provisions of section 40(a)(ia). Further, the CIT (A) confirmed said disallowance. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1) The assessee was making use of the advice, input, experience and assistance rendered by the foreign company in its decision making process of financial and risk management, etc;

2) The foreign company was also giving training to the assessee's employees in making use of the inputs, experience, experimentation, assistance and advice rendered by them for taking a better possible decision in order to achieve the desired objectives;

3) Decision making process is a highly complicated and technical one, unless the assessee gets a technical input and advice from financial and risk management experts it may be difficult to select a right process for the growth of the company;

4) It was not the case of the assessee that in given set of facts/problem, the foreign company gave its solution or advice. The solution or decision was, admittedly, taken by the assessee on the basis of the advice/service rendered by the foreign company;

5) Therefore, the technical knowledge, experience, skill possessed by the foreign company with regard to financial and risk management was made available in the form of advice or service which was used by the assessee in the decision making process not only in management affairs but also in financial matters;

6) Therefore, such service rendered by the foreign company was technical in nature as per India-USA treaty - US TECHNOLOGY RESOURCES (P.) LTD. V. ACIT (2013) 39 taxmann.com 23 (Cochin - Trib.)

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FORENSIC AUDIT - REPORTING PRESPECTIVE

I.     INTRODUCTION

Forensic Auditing covers a broad spectrum of activities, with terminology not strictly defined in regulatory guidance. Generally, the term ‘forensic accounting’ is used to describe the wide range of investigative work which accountants in practice could be asked to perform. The work would normally involve an investigation into the financial affairs of an entity and is often associated with investigations into alleged fraudulent activity.

It refers to the specific procedures carried out in order to produce evidence. Audit techniques are used to identify and to gather evidence to prove, for example, how long the fraud has been carried out, and how it was conducted and concealed by the perpetrators. Evidence may also be gathered to support other issues which would be relevant in the event of a court case. 

II.     ROLE OF FORENSIC AUDITORS

A Forensic Audit is often retained to analyze, interpret, summarize and present complex financial and business - related issues in a manner that is both understandable and properly supported. Forensic Auditors can be engaged in Public Practice or employed by insurance companies, banks, police forces, government agencies and other organizations.

(i)       Criminal Investigations: Practicing forensic auditors could be called upon by the police to assist them in criminal investigations which could either relate to individuals or corporate bodies. The forensic audit would use his/her investigative skills to examine the documentary and other available evidence to give his/her expert opinion on the matter.

(ii)     Fraud Investigations: Forensic auditors might be called upon to assist in business investigations which could involve funds tracing, asset identification and recovery, forensic intelligence gathering and due diligence review. The forensic expert undertakes a detailed review of the available documentary evidence and forms his/her opinion based on the information gleaned during the course of that review.

(iii)   Professional Negligence: The forensic accountant might be to investigate whether professional negligence has taken place and to quantify the loss which has resulted from the negligence. A matter such as this could arise between any professional and their client.

(iv)    Expert Witness Cases: Forensic accountants often attend court to testify in civil and criminal court hearings, as expert witnesses. In such cases, they attend to present investigative evidence to the court so as to assist the presiding judge in deciding the outcome of the case.

(v)      Meditation and Arbitration: Some forensic accountants because of their specialist training they would have received in legal mediation and arbitration, have extended their forensic accounting practices to include providing Alternative Dispute Resolution (ADR) services to clients. This service involves the forensic accountant resolving both mediation and arbitration disputes which otherwise would have been expensive and time consuming for individuals or businesses involved in commercial disputes with a third party.

(vi)    Litigation Consultancy: Working with lawyers and their clients engaged in litigation and assisting with evidence, strategy and case preparation.

(vii)  Computer Forensics: Assisting in electronic data recovery and enforcement of IP rights etc.

III.     REPORTING ROLE OF FORENSIC ACCOUNTANTS

There is no mention of Forensic Accountants as well as their reporting mechanism in the Indian statutes so far, but there are various provisions related to Forensic Accountants/Auditors in the statutes. It can be categorized under the following heads:

(1)    INVESTIGATION AND INSPECTION: Forensic Auditors may help the Police, CBI and other investigating authorities in collecting evidences and other investigation purposes. For example section 157 Cr. P. C, 1973; section 17,18 of Prevention of Corruption Act, 1988; section 6 of The Bankers Books Evidence Act, 1891; section 78 of Information Technology Act, 2000; section 209A, 227 of the Companies Act, 1956 require the skills of Forensic Accountants while inspecting any books.

(2)    EXPERT OPINION: Forensic Accountants may see and carefully examine the accounts and balance sheets and use his skills to find out whether there is any fraud committed or any anomaly associated with it by giving his expert opinion. This finds place in for example s.45, s.118 of Indian Evidence Act, 1872; s.293 of Cr.P.C, 1973.

(3)    FORENSIC ACCOUNTING UNDER CARO (The Companies (Auditor’s Report) Order, 2003): It can be categorised under following heads:

(i)        Disposal of Fixed Assets: CARO, 2003 requires the auditor to report to the effect that if a substantial part of fixed assets have been disposed off during the year, whether it has affected the going concern status. In order to carry out the duties, the auditor has to draw a corollary and reference to the section 293 Companies Act, 1956, AS 24 ('Discontinuing Operations') and to SA 570 (Going Concern).

(ii)      Report On Frauds: If any fraud on or by the company has been noticed or reported during the year, following provisions CARO, 2003 are important in this aspect:

·         SA 260 and SA 270 guides the Auditor to obtain a management representation letter as the frauds reported and detected during the year because of the nature of the fraud and the difficulties encountered by the Auditors in detecting material misstatements in the financial statements resulting from fraud.

·         Accordingly, it is enough if the Auditor expresses his opinion on the frauds noticed and reported by the management and not expected to be a detective to approach his work with suspicion.

·         Another major issue under this clause is that it also requires reporting of frauds committed by the Company.

·         The Auditor is left with no clues and is expected to travel beyond the books to search for market information about frauds committed by the Company, which is highly illogical.

(iii)    Transactions with Related Parties: The focus of the primary reporting under this clause is to report whether transactions that need to be entered into a Register in pursuance of section 301 of the Companies Act, 1956 have been so entered. This Clause may be considered as a further step towards the investor's protection. However, the major issue here is that the audit focus has to be shifted/further intensified towards proprietary areas to find out the transactions that need to be entered (a thorough scrutiny of all entries in the books of accounts may be needed); and then to check the Register for actual recording of the same. Mere reliance on the 301 Register is not enough and the Auditor has to scrutinise Form No.24AA (Disclosure of interest by the Directors) to ascertain likely transactions that need to be entered in the 301 Register.

(4)    REPORTING & PRESENTATION

(i)        Usually, the auditee who is undergone with Forensic Audit will expect a report containing the findings of the forensic audit.

(ii)      Report usually include a summary of evidence and a conclusion. If a fraud was found then the amount of loss suffered as a result should be detailed.

(iii)    Also, how the fraud was set up and which controls were circumvented are the additional disclosures along with this reporting strategy.

IV.     REPORTING TECHNIQUES OF FORENSIC ACCOUNTING

The conventional accounting and auditing with the help of different accounting tools like ratio technique, cash flow technique, a standard statistical tool examination of evidences are all part of forensic accounting. In cases involving significant amounts of data, the present-day forensic accountant has technology available to obtain or source data, sort and analyze data and even quantify and stratify results through computer audit and various other techniques. Some of the techniques involved in Forensic Accounting to examine and report frauds are:

(i)            BENFORD’S LAW: It is a mathematical tool, and is one of the various ways to determine whether variable under study is a case of unintentional errors (mistakes) or fraud. On detecting any such phenomenon, the variable under study is subjected to a detailed scrutiny.

(ii)          THEORY OF RELATIVE SIZE FACTOR (RSF): It highlights all unusual fluctuations, which may be routed from fraud or genuine errors. RSF is measured as the ratio of the largest number to the second largest number of the given set. Usually, there exist certain limits (e.g. financial) for each entity such as vendor, customer, employee, etc.; these limits may be defined or analyzed from the available data.

(iii)        COMPUTER ASSISTED AUDITING TOOLS (CAATs): CAATs are computer programs that the auditor use as part of the audit procedures to process data of audit significance contained in a client's information systems, without depending on him. CAAT helps auditors to perform various auditing procedures such as:

a)        Testing details of transactions and balances,

b)        Identifying inconsistencies or significant fluctuations,

c)        Testing general as well as application control of computer systems.

d)        Sampling programs to extract data for audit testing, and

e)        Redoing calculations performed by accounting systems.

(iv)         DATA MINING TECHNIQUES: It is a set of assisted techniques designed to automatically mine large volumes of data for new, hidden or unexpected information or patterns. Data mining techniques are categorized in three ways: Discovery, Predictive Modelling and Deviation and Link analysis. In Deviation analysis the norm is found first, and then those items are detected that deviate from the usual within a given threshold. Link discovery has emerged recently for detecting a suspicious pattern.

(v)           RATIO ANALYSIS: Another useful fraud detection technique is the calculation of data analysis ratios for key numeric fields. Like financial ratios that give indications of the financial health of a company, data analysis ratios report on the fraud health by identifying possible symptoms of fraud.

V.     TYPES OF REPORTS

1)        Expert Witness Report

¡  Basis for the expert witness opinions: In combination with work performed, a description of the fundamental principles used completes the requirement to report the basis and reasons for the expert witness’s opinions.

¡  Opinions of the expert witness: The practitioner reports the opinions to be expressed by testimony at the trial.

¡  Data or other information considered: Disclose materials considered by the practitioner in reaching opinions and preparing the expert report. This includes documents and data produced by the parties during the litigation, as well as research and other materials independently prepared by the practitioner.

¡  Exhibits to be used by the expert witness: The expert witness includes exhibits expected to be used during the trial to summarize, support, or explain the expert witness’s opinions.

¡  Qualifications of the expert witness: Describes the expert witness’s scientific, technical, or other specialized knowledge believed to be able to assist the trier of fact to understand the evidence or determine a fact in issue.

2)        Consulting Service Report

¡  A Consulting Service Report provides advice about the facts, issues, and strategy of a matter. The consultant does not testify as an expert witness unless the consultant’s role subsequently changes to that of an expert witness

   A Format Consulting Services Report

I.    INTRODUCTION

§  Why we were retained (example: perform a proof of cash)

§  A statement: Procedures do not constitute an audit

II.  OVERVIEW

§  Brief Company Background

III. PROCEDURES PERFORMED

§   Objectives of Analyses (account for all funds received and disbursed)

§  Scope of Analysis (for period x to y)

IV. OBSERVATIONS (FINDINGS)

§  Certain funds were not properly accounted for (theft of cash)

§  Possible additional work suggested (Internal Control is weak)

§  Scope Limitations (not allowed to see some stuff we want)

V.  EXHIBITS

3)        Fraud Examination Report

Section I. Background

¡  The background section is about two paragraphs very succinctly stating why the fraud examination was conducted.

Section II. Executive Summary

¡  The executive summary is no more than five or six paragraphs.

¡  This summarize what actions you performed during the fraud examination

Section III. Scope

Section IV. Approach

¡  This section gives a brief description of the following items:

¡  Team members

¡   Procedures Individuals interviewed

¡  This section simply answers the five 'Wh' questions of the Audit.

Section V. Findings

¡  This section contains the details of the fraud examination. It will generally consist of several pages.

¡  The information is presented either chronologically or by topic.

Section VI. Summary

Section VII. Recommendations

¡  This section is optional. There may be instances where you wish to discuss remedial measures or specific recommendations in a separate document.

This article has been shared by S. Omkhar. He is CA Final Student.

SRO 0292620

CA Final

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