Deadline extended for CPE hours

The ICAI has announced that the deadline of Dec 31 to obtain the mandatory 20 CPE hours credit of structured learning for the calendar year has been deferred to Jan 31. The ICAI has also announced 3 topics to enrich the knowledge and enhance the skill set of members. The itinerary is as under

IFRS vs Indian GAAP - Jan 23, CPE credit 6 hours

Direct taxes - Jan 24, CPE credit 6 hours

Raising of financial resources - Jan 25, CPE credit 6 hours

All the three courses are to be held at the JW Marriott, Juhu Mumbai. The individual fees is Rs. 2500 per topic. 

Interested members can contact Dr. M.S.Turan, Additional Director for Delhi registrations by phone at 011-30110536 or by email at ms.turani@icai.in &  Ms. Srabani Kapoor for Mumbai registrations by phone  022-22154935 or by email at kapoor@icai.in

The Sunday excel tip - Camera on Excel

Camera on Excel??? 

The Camera is a tool which many of us are not aware but is extremely useful (for instance i use it a lot to present MIS on excel or charts on PPTs).

As its name implies, Camera takes a snapshot of all or any part of a spreadsheet. The resulting graphic can be copied to other parts of the file and other worksheets; it even can be copied to other applications—for example, Word and Access. 

However—and this is where it gets very interesting—if you copy it to somewhere in your spreadsheet, that graphic is not static, it’s “dynamic”—meaning any and all changes in the original will immediately be reflected in the copy, and the copy will be a graphic—not an Excel formula.

If you’re having trouble imagining this, think of Camera as if it were a live television camera trained on a scene (in this case, a range of cells), and when it’s turned on, it’s as if the camera keeps transmitting that live picture of the range of cells to the place where the Camera graphic was copied. Thus, any changes in the original scene are simultaneously reflected in the copied graphic.

Admittedly, all this sounds awfully complicated, but in fact, it’s a lot easier to do than to explain. To begin, you need to access the Camera function. 

It’s probably not in your default toolbar drop-down menu; you’ll have to customize your toolbar. To do that, click on Tools , Customize and on the Command tab, bringing up the screen above.

Then under Categories , click on Tools , and under Commands , depress the down arrow until you come to Camera , which is adjacent to an icon of a small camera ( ) and drag it to your toolbar.

Now that you have the tool in place, highlight the worksheet, cell or range of cells you want to capture and then click on Camera . The mouse pointer will change to a plus sign. Go to the place where you want the dynamic image to appear and click on where you want the top left-hand corner of the graphic to be. To illustrate I placed the copy in the same worksheet next to the original. The original is in the A column (A1, A2, A3) and I used Camera to copy them to the C and D columns.

Notice the eight little circles around the numbers; they indicate it’s a graphic. If you grab one of the circles, you can enlarge or move the image. And, of course, if you make any changes in the original cells—to the data, the formula or the formatting—they will be reflected immediately in the adjacent graphic

If you have any excel tips to share with our readers, please respond to us by clicking on the email author link at the bottom of the feed.

The Sunday Technology news

Have you taken the Chartered Accountant Readership survey - click here

www.pando.com - Have you ever been unable to e-mail or instant message large files to your clients or co-workers? Visit this site to download Pando, a free software program that lets users send files, videos and audio clips—as large as 1 gigabyte—via e-mail or instant messenger or post them to Web sites. The application supports private and secure transfers from within your existing accounts and is compatible with all major e-mail and IM clients

www.raisecapital.com - RaiseCapital.com is an online community, where entrepreneurs can display their business ideas and capital needs to investors. Whether your venture is a start-up or existing business, RaiseCapital.com is the perfect vehicle for entrepreneurs seeking capital. The service is FREE. RaiseCapital.com makes it possible for individuals and businesses to market their venture at no cost

www.employeeevolution.com - employeeevolution.com  from two Generation Y workers gives managers and HR professionals a firsthand look at the lives of millennial employees—what are their wants and needs in the work force? How do they define work/life balance? How do you successfully recruit them? There are guest columnists and daily articles, such as “Multitasking vs. Time Management” and “10 Ways Generation Y Will Change the Workplace

www.insidesarbanesoxley.com - This blog is dedicated to all things Sarbanes-Oxley and posts the latest news and developments related to the law. The “Books” section features links to buy SOX times that cover the basics, provide tools and offer tips for managers. There is also a list of software for compliance, audit management, risk management, fraud detection and more. There are even options to sign up for RSS feeds or get the latest posts delivered via e-mail

If you have any interesting websites, pls let us know by clicking on e-mail the author

ICAI issues for new Auditing standards

Have you taken the Chartered Accountant Readership survey - click here

Revised Auditing Standards on Fair Value, Audit Sampling, Related Parties and Opening Balances

The Council of the Institute in its recently concluded meeting has approved four more Standards on Auditing. These SAs relate to important aspects in the audit process such as fair value, audit sampling, analytical procedures and opening balances. These new Standards are more elaborate as they provide ample application guidance on various concepts discussed in the Standards. The Revised Standard on Auditing (SA) 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” provides timely guidance on audit of fair value and accounting estimates in the current times of market uncertainty and liquidity crunch. Accounting estimate is an approximation of a monetary amount in the absence of precise means of measurement. Risk of material misstatement increases significantly since accounting estimate involves the use of judgment by the management. This Standard provides specific guidance to auditor while verifying the valuation of complex financial instruments which are not traded in active and open market and transactions involving the exchange parties without monetary consideration. This Standard is applicable for audits of financial statements for periods beginning on or after April 1, 2009.  Revised SA 530 “Audit Sampling” is also applicable from April 1, 2009 and it guides auditors while using sampling techniques in their audit assignments, and covers both statistical and non-statistical sampling.  SA 510, “Initial Engagements – Opening Balances” and SA 550 “Related Parties” are applicable from April 1, 2010. SA 510 deals with auditor’s responsibility with respect to opening balances when performing initial audit engagements. SA 550 is aimed to strengthen current auditing practice in this area by emphasizing the need for the auditor to understand related party relationships and transactions in order to identify the risks of material misstatement to which these may give rise, and directing the auditor to focus work effort on the assessed risks of material misstatement, including those due to fraud

Matrix Accounting - Fair value accounting leads to naked shorts selling

As part of our matrix accounting series we begin our coverage on the most controversial topic of 2008 - Fair value accounting. With Indian GAAP set to embark on this new accounting standard from next year, we bring to you some of the interesting facets of fair value accounting for financial instruments.

The co-incidence couldn't have been worse for the banking sector, FASB's re-loaded version of fair value accounting FAS 107 in the avtaar of FAS 157, times itself with one of the biggest credit crunches in recent times.

 

The GAAP's (FAS 157) intent was to provide investors with added transparency by forcing companies to mark to market assets and liabilities. On the contrary, many pundits feel that fair value accounting does the exact opposite. Instead of providing investors with a better picture of economic reality, fair-value accounting distorts market realities by leaving too much room for management's discretion and potential abuse.

 

So does FAS 157 lead to naked short selling (NSS) on the markets.....

 

Phase 1 to NSS a booming market- FAS 157 requires companies to mark to market its financial assets at the exit price in an active market. In a booming market with a lot of credit available, valuations of financial instruments head only one way and that is upupup, valuations are better as there are many takers for these instruments ...net result earnings per share & disclosure analysis of companies look and feel better.

 

Phase 2 to NSS - Hungry Investors and credit rating agencies - traditionally relied on making their own fair value assumptions on Companies, now with data being available freely in the financial statements, these become the new norm of valuations..sideeffects - reckless lending, bad investments,inaccurate credit ratings of securitized debt and off late betting heavily on Credit Default Swaps (ask Lay-man ooops Lehman). Fair value assumes that markets have "good information" culled from financial results and credit-rating reports. But if rating agencies and investors get their data from corporate financials — "which are themselves based on prices inflated by a market bubble, the accounting numbers support the bubble.

 

Phase 3 - The bubble gets bigger - As accounting numbers support the bubble, markets instead of relying on prudent valuations and controlling management excess, 'fair' values feed the prices back to the market."

 

Phase 4 - A Sub prime hits you.........Sub prime loans (meant for the lower echelons) hits credit liquidity in the world markets . This hits liquidity in exotic financial instruments meant for the higher echelons of the Corporate world. With lesser liquidity, there are no takers for financial instruments in an active market - as a result fair values suddenly collapse.

 

Many banks in the US were complaining that they had no takers for US Govt bonds last quarter... many were wondering as what value they had to ascribe to these bonds... well if you were to follow FAS 157 - record these instruments at exit price.. then zilch should have been the value.

 

Phase 5 - Hungry Investors (this time bears) and credit rating agencies are back at it again....... they value companies on the basis of fair values in the financial statements, bingo ..... the valuations in the financial statements result in lower enterprise value and earnings per share...sideeffects fresh lending and investments gets starved, inaccurate credit ratings are given for healthy companies, securitization pools look bad, and Credit default swap indices go down (ask Lay-man)

 

Phase 6 - Bad rating chase bad values, this circular chain worsens the credit crisis. Bears step in and start naked short selling in Companies....their stocks, debt programmes, securitzation portfolios, Lay-man oops Lehmans' Credit Default Swaps.

 

The crux of this issue is marking assets and liabilites to their exit price in active markets, in times of recession, when there are no active markets, FAS 157 forces companies to mark their assets down, though many of these companies have the stomach to hold onto these investments through the recession.

 

Well i heard certain punters hedging /betting on what will be the next set of fair values, accountants will disclose for their Companies in the coming quarter ...now that's a new derivative under FAS 133 isnt it...wonder IDSA already has it updated.

 

Read all our articles on Matrix accounting by clicking here

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of Iec
ȑhave the stomach to hold onto these investments through the recession.

Well i heard certain punters hedging /betting on what will be the next set of fair values, accountants will disclose for their Companies in the coming quarter ...now that's a new derivative under FAS 133 isnt it...wonder IDSA already has it updated.

Read all our articles on Matrix accounting by clicking here

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Matrix accounting - Goodwill impairment testing; Merry Christmas

Its closing bell for 2008, (whew finally...) and this year in addition to the usual laundry list of closing activities for USGAAP related accounts, there is bound to be an extensive list of activities to be added to the closing checklist on the CFO's calendar.... "Impairment Testing"

Companies are under FAS 142 required to look for factors that may lead to goodwill or other intangible asset impairments at quarter ends but aremandatorily required to examine and assess whether a firms goodwill and intangible assets have been impaired at the year end. This is to be performed regardless of there being a triggering event.

A goodwill write-down is required when the impairment is deemed permanent — or not "recoverable within a reasonable amount of time". In accounting terms, if the stock price stays below carrying value for 60 days it generally means a triggering event. We are in that kind of situation now, in which many companies are experiencing depressed pricing for longer than 60 days, and not seeing much volatility on the upside,

Where there is smoke there is fire, well if plummeting stock and real estate prices weren't enough, significant cash flows have begun to dry up. These will make it a thorny and a rather intriguing time on the excel sheets for financial analysts drawing up their round of cash flows over the next 5 years for impairment analysis testing.

The testing process itself is onerous and can be thorny, as it includes running several valuation models, examining and reworking internal forecasts, gathering and digesting analysts' price targets, reviewing historical pricing, and crunching industry data. Whats more once all this is through on the excel sheets, the same needs to be convinced to the board, thanks to SOX & as well as to the audit firms. Companies may need to plan additional time devoted to this activity.

Assuming after all the testing, there is a permanent impairment and a Company is required to book impairment losses, "USGAAP rules prevent impairment losses to be reversed in the future.

This means that if the year 2008 were to be the worst year for a decade, we will be stuck with these impairment losses sitting in the reserves in the years to come. This can however be overcome, once you either sell the business unit in which the goodwill loss has been booked or the easier way out convert your accounts to IFRS as IASB allows reversal......... 

Well converting to IFRS maybe an easier solution as you can offset your losses by booking DTA (deferred tax assets) on the impairment losses with the hope that these will reverse once you convert to IFRS.......but thats only when you can pass the going concern test in the first place.......blip..zzzbliiipppzzz

Merry Christmas to Goodwill testing (i have time until March 31 as my books close then..)

Click here to view all our posts on Matrix Accounting

Compliance of CPE Credit Hours for the Calender Year 2008

Important Announcement for Members holding Certificate of Practice (COP) with regard to Compliance of CPE hours requirements for the Calendar Year 2008

We would like to inform you that the Council at its 283rd Meeting held on 18th – 20th December 2008 noted the following CPE hours requirements for the members holding Certificate of Practice (COP):

Members holding Certificate of Practice (except those members who are residing abroad and senior members), unless exempted are required to: complete at least 90 CPE credit hours in each rolling three year period starting from the calendar year 2008, of which 60 CPE credit hours should be of structured learning. complete minimum 20 CPE credit hours of structured learning in each year.

The Council advised all the Members holding Certificate of Practice (COP), who have not so far completed the minimum 20 Structured CPE credit hours, to complete the same by 31st December, 2008. In cases, where members holding Certificate of Practice (COP) do not complete the CPE credit hours requirements, the Council decided as follows: "In cases where members do not complete the CPE credit hours as above, the Council has decided that names of such members be not included in any panel that is forwarded by the Institute, on or after 1st January, 2009, to any regulators or other authorities. In the case of a firm, if any partner/paid assistant had not completed the requisite CPE credit hour for the year 2008, the names of such partner/paid assistant will not be included while considering the eligibility criteria and this fact will also be stated in case the firm is otherwise found eligible after excluding name(s) of such partner(s)/paid assistant(s) .  This is for information and compliance of all members concerned." To read other ICAI news click here Now you can invite your friends or colleagues to enable them to get updates and alerts for CA's, just send them this link www.catroops.blogspot.com and ask them to register their email ids

Going concern - are you and your accounting firm awake

A FEW months before XL Leisure Group, Britain’s third-largest tour operator, filed for bankruptcy in September, leaving thousands of holidaymakers stranded, it issued a set of accounts, signed off by its auditors, that gave no hint it was about to go bust. Such experiences haunt auditors as they grapple with year-end accounts in the cruellest economic climate most have ever experienced. “Companies and their auditors have got to get used to the idea that nothing is as it used to be,” comments Will Rainey, a partner at Ernst & Young, one of the big-four accounting firms.

The problem is that year-end accounts are prepared on the basis that a business is a “going concern”, ie, that it will operate for the foreseeable future, or at least 12 months after the reporting period. That judgment is made by the board of directors, and auditors have to agree with it.

The difficulty they face is that most companies fund their operations in part through borrowing, which can stretch from simple overdrafts to huge syndicated loans. Each year, auditors will often seek letters from their clients’ bankers reassuring them that they will renew lending facilities in the ordinary course of business. But this year many banks may well refuse to write those letters because they do not want to commit to new lending. It will lead to some difficult judgment calls on the availability of funding next year, Mr Raineysays.

According to international standards, directors and auditors usually have three options with accounts: they can prepare them on a going-concern basis, which is standard but might expose them to charges of negligence if they are wrong; if they do not believe the business is a going concern, they must prepare the accounts on a break-up basis; or they can express some doubts about the company’s future, but still prepare the accounts on the going-concern basis. (Britain’s Financial Reporting Council has suggested a fourth alternative, that would express “serious doubt” about the ability of the company to continue as a going concern. But auditors say this may add to confusion.)

The temptation this year will be to express some doubts about funding uncertainties, but auditors realise that if they do that too widely, the caveat will become meaningless. Steve Priddy, of the Association of Chartered Certified Accountants, says that the onus will be on directors to be frank about any worries, even when they consider the firm a going concern. But if banks do not want their most creditworthy clients to suffer, they should be a bit bolder, too. After all, many now have the explicit backing of their governments. So they can afford to be a bit more public-spirited in these peculiar times.

Source - the Economist 

The Sunday excel tip

Shortcut to convert dates into numbers and vice versa

Many a times, you would have entered a number in a cell next to a date, excel assumes you are entering another date and converts this number to a date. Here's the shortcut to quickly change the format instead of going through the format cells menu

Press Ctrl+shift+~ this will change the date back to a number

On the other hand if you have entered dates in a cell next to a number and excel converts this into a number just press Ctrl+shift+# to get back the date

Create a bar chart in your cell

Ever wondered how to create a bar chart in you cell without invoking the chart menu. This little trick uses the REPT (repeat) function and the 'pipe' or 'vertical bar' character "|". The REPT function simply repeats a specified character a specified number of times. =REPT(text,times_to_repeat). This effect works best when the cells containing the bar charts use Arial font.

For example, =REPT("|",20) would result in ||||||||||||||||||||

By using a cell reference (B2) for the times to repeat, you can easily create bar charts for the data in your cells.

IAs you might expect, this trick will not work well for large numbers. However, for larger numbers, you could reduce the 'times_to_repeat' value by dividing it by some factor (i.e. 100 or 1000).

Click here to view all our earlier sunday excel tips

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Kidnapped Chartered accountant rescued

This is an article reproduced from the Indian express

In a tactful move, the Mumbai Police with the help of the Nedumbassery Police trapped four youths who had kidnapped a chartered accountant cum businessman from Mumbai, demanding a ransom of Rs 25 lakh , at the Kochi International Airport here on Wednesday.

According to Nedumbassery CI Rajan, a businessman cum Chartered Accountant Aravind Sangway of Mumbai was kidnapped by four persons identified as Ambady Ramesh (29), Ambady Gopikrishnan (30) , both from Kollam, Kazhzatharutty Anandabhavan Radhakrishnan (37) and Khadir (30) of Mumbai four days ago.

Aravind was taken to various places and tortured demanding the ransom .

Aravind contacted his relatives and asked them to pay the amount.

But the relatives sought the help of the Mumbai Police.

The youths instructed the relatives to hand over the amount at the Thiruvananthapuram Airport on Tuesday.

But when the relatives and the Mumbai Police reached the Thiruvananthapuram Airport, they were asked to come to the Kochi Airport and hand over the ransom.

The Mumbai Police immediately alerted the Nedumbassery Police. The police personnel from Mumbai in disguise of the victim’s relatives reached the Kochi Airport by 10.30 am on Wednesday.

Nedumbassery Police overpowered the assailants while handing over the bag containing the amount.

They were handed over to the Mumbai Police after interrogation.

Non audit work - CA's can do them anymore

Reproduction of article from economictimes.indiatimes.com

The government will prevent chartered accountants (CAs) from offering consultancy and advisory services to the companies which hire them for auditing their accounts. This is being done to lend greater credibility to company accounts.

The statutory auditors, who vet the financial accounts of a company, will be restricted from providing their corporate clients services such as investment management, actuarial services and investment banking. 

The proposal forms part of the Companies Bill 2008, currently pending before the Lok Sabha. The move is expected to usher in greater independence in the audit function and infuse greater confidence in the minds of investors on the credibility of financial statements. At present, the statutory auditors are barred from providing accounting and internal audit services for their clients, but are allowed to deliver consultancy and advisory services. 

Under the guidelines proposed in the new legislation, statutory auditors will also be prohibited from providing services like design and implementation of financial information system, investment advisory, rendering of outsourced financial work and management services. 

The initiative assumes significance in the wake of a slowdown in the economy where companies may hire consultancy services from their statutory auditors who may turn a blind eye to discrepancies in financial statements. 

“The proposal seeks to place specific restrictions on the services which a chartered accountant, acting as a statutory auditor, can provide for his client,” says Institute of Chartered Accountants of India president Ved Jain, adding the proposal will help avoid conflict of interests. 

The move may come as a major damper for many practising CAs who have been providing audit as well as consultancy services for their clients. 

According to Ernst and Young India director Rahul Roy, the proposal can lead to a great shakeup within the accounting profession. He, however, agreed that the move is in line with globally followed practices.

Mumbai High Court Remands Vodafone's writ petition

The following is a reproduction of Tax flash edition of Grant Thorton on the Vodafone case

Mumbai High Court Remands Vodafone's writ petition 

The Mumbai High Court Judgment in the Hutch-Vodafone case would most probably turn out to be the most talked about ruling in the history of Indian tax legislation both in terms of the magnitude of the amount involved and the recent thinking of the Indian revenue authorities. The judgment is a remand as the High Court concluded that Vodafone had not exhausted all alternate remedies by stating that there is "prima facie" a tax but also reiterates that Vodafone has not shared any of the critical agreements and since the High Court is required to pronounce more on matters of law than facts – it needs to be remanded back and granted Vodafone an eight week window to file an appeal with the Supreme Court. 

  

Background 

Hutchison Telecommunications International (Cayman) Holdings Ltd (HTIL), a Cayman Islands-based subsidiary of the Hutchison Group (Hutch) held shares in CGP Investments [Holdings] Limited (CGP), another Cayman Islands-based company. Hutch directly and indirectly owned 67% controlling interest in an Indian entity, Hutch Essar Limited (HEL) through CGP. 

  

Vodafone International Holdings BV (Vodafone), a Netherlands-based Company entered into an agreement with HTIL to acquire CGP from HTIL for USD 11.1 billion in February 2007. Vodafone also applied to the Foreign Investment Promotion Board (FIPB) to seek its approval for acquisition of stock in HEL, which was granted subject to condition that applicable Indian laws, including tax law, would be complied with. Pursuant to the agreement, payments were made by Vodafone to HTIL for acquisition of CGP. With regard to the said transaction, the Indian tax authorities issued a show cause notice to Vodafone asking as to why it should not be treated as an "assessee in default" under Section 201 of the Income-tax Act, 1961 (the Act) for not withholding taxes on its payments to Hutch. Vodafone filed a writ petition challenging the validity of the notice before the Bombay HC. 

  

Vodafone's contention 

Vodafone sought to challenge the show cause notice on the following grounds –   

• The Act provided for circumstances where a person could be deemed to be an assessee in default in the event there was failure to deduct tax out of dividend paid under Section 194[1] of the Act or where a person had deducted tax at source and had failed to deposit the same under section 200 of the Act. In the present case, none of these two provisions were applicable. While the writ petition was pending, the Finance Act 2008 was retrospectively amended to add an explanation to Section 191 and substituted the existing Section 201(1) of the Act. The effect of the 2008 amendment provides that a person failing to deduct tax under Section 195 is liable to be treated as an assessee in default and also liable to penalty. The said amendments were therefore arbitrary, unreasonable and violative of Article 14 of the Constitution.

• Even if the amendments were upheld, provisions of Section 191[2] and 201 had to be harmoniously construed which meant that where a person fails to deduct tax at source under Section 195, he is liable for penalty but is not liable for the tax, which continues to be the primary liability of the assessee i.e. the payee (HTIL in this case).

• Section 195 has no extra territorial operation and the expression 'person' occurring in Section 195 must be read to mean a person, resident or non-resident, having a presence in India. As Vodafone was a non-resident, it had no obligation under Section 195 of the Act to withhold any tax on payments made by it. It was further contended that if Section 195 were to apply to non-residents having no presence in India, it would amount to treating unequals equally by imposing upon them the same compliance obligation as a person resident / having a presence in India. Hence, the same would violate Article 14 of the Constitution of India.

• The amount paid by Vodafone to Hutch is not chargeable under the provisions of the Act, hence there is no liability to deduct income-tax at source. The scope of total income as contemplated by Section 5(2) of the Act does not include capital gains arising out of the transfer of assets situated outside India. Such gains also cannot fall under Section 9 of the Act as income deemed to accrue and arise in India. 

Indian tax authorities' contention 

In reply to Vodafone's contentions above, the Indian tax authorities sought to impress their stand on the following lines - 

 

• The transaction is prima facie chargeable to tax in India. Income on capital gains of HTIL is deemed to have accrued or arisen in India as the asset sought to be transferred were not shares simplicitor but the business / economic interest in India. The authorities relied upon various statements made in public by the officials of Hutch and Vodafone, which indicated that the economic interest in business and assets in India were sought to be transferred. The transaction resulted in the substitution of Vodafone as the Joint Venture partner in HEL in India. The transfer of controlling interest of a company or a group of companies with the attendant management rights constituted an asset in India.
  

• In accordance with the American principle of "effects doctrine", the jurisdiction of the Indian tax authorities in relation to a transaction would have to be viewed with respect to where the effect of the transaction is felt. In the present case, the transaction has the effect on a property in India and involved controlling interest in an Indian company.
  

• The writ petition is not maintainable at the stage of show cause notice and is premature. No adverse order has been passed against Vodafone and only a show cause notice has been issued. All contentions are yet to be examined by the tax authorities. The fixing of liability is a question of facts and law and the tax authorities were yet to arrive at their findings on the facts of the matter.
  

• Vodafone had an equally efficacious alternative remedy in as much as any order passed by the assessing officer would be appealable and hence the extra ordinary remedy by way of a writ petition was not maintainable.

• Remedy of writ under Article 226 of the Constitution was discretionary and Vodafone did not deserve that discretion because it had failed to produce primary and original agreement dated February 11, 2007 and certain other prior and subsequent agreements.
  

The true nature of the transaction and the controversies involved could not be appreciated without the aid of the primary transaction documents. The matter involved complex questions, arising out of disputed facts that still remain undisclosed. 

  

Observations of the High Court while dismissing the Writ 

The High Court did not render any definitive conclusion on the chargeability to tax in India. However, it upheld the issuance of show cause notice and dismissed Vodafone's writ petition based on the following observations: 

Validity of the notice and jurisdiction of RevenueThe High Court held that since Vodafone had approached the FIPB before effecting the transfer of shares of CGP, it was within the jurisdiction of the Revenue to proceed against Vodafone and therefore,the notice served was valid. Further, Vodafone was not able to demonstrate that the show cause notice was totally non-est in the eyes of law for absolute want of jurisdiction of the authority to even investigate into the facts. As the issue was a question of facts and law, the Indian tax authorities had the responsibility to investigate the taxability of the issue. Hence, the show cause notice cannot be termed erroneous on its face or not based on any material. Further, the authority to investigate into facts can not be negated by invoking writ jurisdiction of the Courts.

Transfer of Capital Asset in IndiaPrima facie , the transaction amounted to an indirect transfer of controlling interest in HEL, an Indian company, and hence an indirect transfer of capital asset situated in India.  The agreement entered into by Vodafone in February 2007 resulted in the acquisition of the controlling interest in the Indian company and a nexus was clearly established in India, as was evident from the chronology of events relating to the acquisition and the media releases issued while concluding the transaction.

Principle of "Effects Doctrine"Due to the nexus between India and Vodafone, the "Effects Doctrine" as understood in the US can be applied, which upholds that "any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state represents." Indian Supreme Court has also upheld this principle in the past.

Details WithheldSince the agreement between Vodafone and HTIL was not furnished, Vodafone had withheld material information and consequently an adverse inference would have to be drawn. In the absence of the aforementioned agreement and other relevant documents, it was not possible to examine the constitutional validity of the Indian tax law as the nature of the agreement was unascertainable.

Alternative remedies not exploredVodafone could have safeguarded its interest by obtaining appropriate nil / low withholding certificate from the Indian tax authorities; an option which it chose not to exercise. The writ petition to impugn the show cause notice was not maintainable when an alternative statutory remedy was available to Vodafone. 

 

Our comments 

While the High Court agreed with most contentions of the Revenue, it must be noted that it has not held that Vodafone is liable to pay tax or penalties under the Act in respect of the subject transaction. However, its observations could be a cause for concern from the point of view of cross-border mergers and acquisitions that involve underlying Indian assets.  Foreign investors therefore need to consider the tax implications while structuring business forays in India. 

  

The High Court has not made any observation that the structure was primarily put in place for avoiding tax.  In light of this, there may be a view that in the absence of a need to lift the corporate veil, it should not have disregarded CGP's status as a separate legal entity different from HEL. 

  

Though Vodafone challenged the constitutional validity of retrospective amendments to Section 191 and 201 of the Act, the High Court has chosen not to intervene on this matter. Similarly, applicability of withholding tax provisions to non-residents having no presence in India is a debatable issue and also appears not to have been dealt with in the judgment. It seems that the High Court focused more on the question of maintainability of the writ against the show cause notice issued by the Indian tax authorities. 

  

A development that would be worth tracking in the future is whether the tax authorities would use this judgment as a basis for dismantling holding company structures that are put through by non-residents for investing into India which are covered by certain tax treaty benefits. However, based on international experience, any structure which is backed by 'substance' and confirms to the 'Limitations of Benefits' clauses (both implied and explicit) should pass through these tests..

[1] This Section provides for tax deduction at source on dividends, not applicable in the present case.

[2] This Section provides that in the case of income in respect of which the Act does not provide for tax deduction at source and in the case where income-tax has not been deducted in accordance with the provisions of the Act, income-tax shall be payable by the assessee directly.

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