Background

On 9th February, 2016 the Ministry of Corporate Affairs has proposed new Companies (Auditor's Report) Order (CARO), 2016. The Ministry had set-up a Committee on 16th September, 2015 to examine and recommend matter for inclusion in the statement to be attached with Auditor’s Report under Section 143(11) of the Companies Act, 2013 (2013 Act) for the financial year 2015-16 onwards.

Section 143(11) of the Companies Act, 2013requires that the auditor’s report of specified class of companies should include a statement on the prescribed matters. As per the section 143 of the Companies Act, 2013, every report of the auditor under this section should contain matters specified under applicable CARO.

The newly proposed CARO, 2016 contains 15 clauses, out of which some clauses have been carried forward from present CARO, 2015. MCA has issued exposure draft of CARO, 2016 for stakeholders’ comments. The draft, if approved, shall be applicable for FY 15-16 onwards.

In comparison to CARO (2015), CARO (2016) proposes few additional reporting requirements and eliminates some of the reporting requirements.

1. Applicability

Every report made by the auditor under Section 143 of the 2013 Act for Financial Year commencing on or after April 1st 2015 would include CARO 2016. There is no difference between CARO, 2016 and CARO, 2015 from the point of view of applicability, except that CARO, 2016 is not applicable on private limited company, not being a subsidiary or holding of a public company, when its:

• Paid up capital and reserves and surplus does not exceed Rs. 1 crore as at balance sheet date; and
• Total borrowings from banks or financial institution at any point of time during financial year does not exceed Rs. 1 crore; and
• Total revenue, including revenue from discontinuing operations, does not exceed Rs. 10 crore.

Other companies not covered under CARO 2016

• Banking company as defined under section 5(c) of the Banking Regulation Act, 1949.
• Insurance company as defined under the Insurance Act, 1938
• Companies incorporated with Charitable objects, that is companies licenses to operate under the Section 8 of 2013 Act.
• One Person Company as defined under section 2(85) of the 2013 Act
• Small company as defined under section 2(85) of the 2013 Act

CARO, 2016 shall not apply to the auditor's report on consolidated financial statements whereas CARO, 2015 is applicable in such case. CARO is applicable to a foreign company as defined under Section 2(42) of the 2013 Act.

2. REPORTING REQUIREMENTS

As compared to CARO 2015, the reporting requirements under the CARO 2016 (draft) have been increased.

.               Additional reporting requirements in CARO, 2016 Fixed Assets

Auditor should report whether title deeds of immovable properties are held in the name of the company. If not, provide details thereof.

Loans and investments

Auditor should report whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered by clause (76) of Section 2 of the Companies Act, 2013. If so whether the terms and conditions of the grant of such loans are not prejudicial to the company's interest.

Auditor should report in respect of loans, investment and guarantees, whether provisions of section 185 and 186 of the Companies Act, 2013have been complied with. If not, details should be provided

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Introduction:

Under the erstwhile positive based taxation scheme, service tax on road transport services was initially introduced in the year 1997 and the levy is on ‘Goods Transport Operators’. Considering the hue and cry from the truck operators across the nation, levy of service tax is withdrawn. Levy of service tax is re-introduced in year 2004 on ‘Goods Transport Agency Services’.Now under the Negative list regime effective from 01.07.2012, all goods transport services are covered under Negative list except the services of ‘Goods Transport Agency’ and Courier Agency

The above mentioned legal developments would certainly indicate that there is no service tax on services of ‘Goods Transport Operator’ services. However recent judicial decisions are contrary to this view on the reasoning that goods transport agency services includes services of truck operators. In this backdrop, an attempt is made to unleash various facets of this controversy.

Legislative Background in Levy of Service Tax on ‘Goods Transport Agency’ Service:

As discussed above, after the levy was withdrawn on the services of truck operators, Government has constituted a Committee(Bharadwaj Committee) to suggest the modalities to levy service tax on goods transport services. The key recommendations of this Committee are reproduced as under;

1. Recommended to levy service tax on services provided by any commercial concern which (is common carrier under the Carriers Act, 1865) books the goods for transportation by road, issues consignment note and provides value added services over and above the mere carriage of the goods be called the goods booking agency.
2. The committee recommended to make it mandatory to these agencies to issue a consignment note to the sender of goods against the receipt of goods for transportation. For this purpose, it is recommended to amend the Carrier Act, 1865. It is also suggested that till such time the said act is amended, the said requirement can be made mandatory under Service Tax laws or by notifications.
3. Any organization/person who possesses the vehicle by virtue of ownership under lease/hire agreement etc and is responsible only for affecting the carriage of goods and is not required to issue consignment note. The truck owner can alternatively be called as truck operator. Normal truck operators who hire their vehicles for transportation are not subject to service tax.
4. As transport sector is unorganized, the committee also recommended implementing reverse charge mechanism keeping the liability to pay service tax to Government either on the consignor or consignee responsible to pay freight.

With these recommendations, service tax is reintroduced in the FY 2004-05 on the services of ‘Goods transport agency’ i.e. those providing services in relation to transport of goods by road and are required to issue consignment note.

Accordingly, the term ‘Goods Transport Agency’ was defined under the erstwhile section 65(50b)— “means any person who provides service in relation to transport of goods and issues consignment note by whatever name called .”

With these legal developments and committee recommendations, it is very clear that the legislative intent is not to tax the services of truck owners whether it is individual truck owners or organizations owning trucks. Otherwise there is no requirement to re-draft/rephrase the legal provisions when the levy is re-introduced in the FY 2004-05. Further, this legislative intent is clearly evident by budget speech of Finance Minister. The relevant extract is reproduced as under;

“149. 58 services have been brought under the net so far. I propose to add some more this year. These are business exhibition services; airport services; services provided by transport booking agents, transport of goods by air; survey and exploration services; opinion poll services; intellectual property services other than copyright; brokers of forward contracts; pandal and shamiana contractors; outdoor caterers; independent TV/radio programme producers; construction services in respect of commercial or industrial constructions; and life insurance services to the extent of risk premium. I may clarify that there is no intention to levy service tax on truck owners or truck operators........................................................ ” (emphasis supplied)

Now under the Negative List regime, Section 66D provides for negative list of services. Entry(P) of this list provides that all services provided by way of transportation of goods by road except the services of a ‘goods transport agency’ or ‘courier agency’. Further the term ‘Goods Transport Agencny’ has been defined under Section 65B(26) by reproducing the same definition as prevailing under section 65(50b) as stated above.

Thus the legal provisions both under erstwhile regime as well as under the negative list regime are same and moot the intention to levy service tax only on services of goods transport agency alone. However, the revenue went on to stretch the meaning of the word ‘goods transport agency’ to include services of truck operators also and accordingly the matter landed before the judicial forums.

Position upheld by Judicial Forums in the initial years of levy:

The judicial forums in the initial years of levy have resorted to the same interpretation considering the committee report and finance minister speech, concluded that services provided by truck owners are not subject to service tax. The following decisions are for reference.

1. Lakshminarayana Mining Co vs. CST, 2009(16)STR691(Tri-Bang)
2. CCE vs. Kanakadurga Agro Oil Products Private Limited, 2009(15)STR399(Tri-Bang)
3. KMB Granites Private Limited vs. CCE,2010(19)STR437(Tri-Bang)

Subsequent Regulatory Legislation ‘The Carriage By Road Act, 2007’ in congruence with above position:

Subsequently, a regulatory legislation ‘The Carriage by Road Act, 2007 was passed by Parliament which

repealed the earlier Carriers Act, 1865. As stated above, the committee recommended to levy service tax

on services of common carriers alone excluding the truck operators. Accordingly, ‘Common Carrier’ is

defined under section 2(a) of the Act as follows;

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

1. Introduction:

Internal audit provides effectiveness of organisation’s internal control system, risk management, governance. Internal audit looks beyond the financial transactions and extends to advisory services, organisation growth, policy matters, work environment and relevant recommendations to the management etc.

Global regulations such as FCPA in US, UK Bribery Act, SOX Act, COSO, Fraud Risk Management (FRM) by RBI and introduction of IFC (Internal Financial Controls) in companies Act,2013 are the few witness stating the seriousness for requirement of Fraud detection mechanism.

There are instances where organisations extricated from frauds and financial hardship due to early detection and corrective measures by the internal audit team. Internal audit facilitates the organisation to take timely decisions and emphasize on proactive environment than reactive, which is vital in the dynamic economy.

2. Objective:

This article aims at illustrating few significant aspects explaining the benefits of internal audit.

3. What is Internal Audit?

According to the Institute of Chartered Accountants of India (ICAI), “Internal audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity's strategic risk management and internal cont rol system.”

According to the Institute of Internal Auditors (IIA), “internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”.

Accordingly, Internal Audit can be broadly understand as management’s independent activity to facilitate the management to -

?         Improve and add value in governance mechanism.

?         Strengthen the strategic risk management and internal control system.

4. Why Internal Audit?

Considering the objectivity of internal audit, it can be viewed as amanagement independent activity to strengthen its own organisation than a statutory requirement. Internal auditors provide the governing body and senior management with comprehensive assurance based on the highest level of independence and objectivity within the organization.

4.1 Major Benefits:

4.1.1 Facilitates strong system to compliance with law:“Ignorantia juris non excusat” means ignorance of law excuses no one. In the present world of business there are so many stringent norms mandated by regulators, further law is being revised continuously, which demands continuous updation. However it might be the difficult for organisational staff, who majorly concentrate on execution of day to day operations. Further, sometimes organisations may not afford as many professionals.

An effective internal audit team with versatile experts can provide organisation a strong system to compliance with the law.

4.1.2 Facilitates informed decisions by the management: in-time quality information helps in quality decisions; internal audit will provide the requisite analysed data to make effective decisions by the management. Instances are there where analysis done by the internal audit team helped management to take vital decisions wrt business expansion such as manufacture of profitable by product, optimisation of ideal resources etc.

4.1.3 Facilitates implementation of effective internal control system: Internal audit examines the policies and procedures of an organisation on a regular basis and ensures the effectiveness of internal control system in force. For instance finding the absence of maker checker control in bills processing will curb processing of fake bills by implementing maker checker control.

4.1.4 Facilitates to strengthen the risk assessment process: Due to increase of complexity in business process new risk factors are emerging. Internal audit plays vital role in evaluating inherent and non inherent risks exist in the business and thereby to mitigate the risk.

4.1.5      Facilitates dedicated review of operations and Fraud detection: with the expansion of business, management oversight dilutes in review of operations which gives ample of opportunities for fraudulent operations. Internal audit with dedicated review of operations will put check to the emerging frauds. Artificial entries in pay roll detected during internal audit will put an end to the fraud in salary payments.

4.1.6_ Facilitates pro activeness than reactive nature: Internal audit facilitates the regular review of operations and through its timely review and information it enables the management to be a proactive than a reactive.

4.1.7 Protect interest of the investors: All investors can’t be a part of management; they may not have insight into all the operations and process. Internal audit plays a vital role in protecting the interest of the investors. An effective audit system will boost up the confidence in the investors about the effective performance of their organisation.

4.2 Requirement under Indian Companies Act 2013 applicable to Companies only:

As per section 138 of Indian Companies Act 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, appointment of internal auditor is mandatory for the following nature of companies.

5. Conclusion:

Effective internal audit is one of the major pillars in the growth of an organisation. Internal Audit is a prerequisite for every emerging organisation in the dynamic business environment. However unless the Internal auditor treated as admonitor and backed by management, effectiveness will be mere fancy. Hence, pervasive perception towards internal auditor is required to be changed and to achieve its objectivity internal audit should be recognised as intramural mechanism of the organisation.

Establishing a professional internal audit activity should be a governance requirement for all organisations. This is not only important for larger and medium sized organisations but also may be equally important for smaller entities , as they may face equally complex environments with a less formal, robust organisational structure to ensure the effectiveness of its governance and risk management process.

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Action 13 of the action plan on base erosion and profit shifting (BEPS action plan, OECD, 2013) requires the development of “rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNEs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template”.

In response to this requirement, a three-tiered standardised approach to transfer pricing documentation has been developed.

First, the guidance on transfer pricing documentation requires multinational enterprises (mne’s) to provide tax administrations with high-level information regarding their global business operations and transfer pricing policies in a “master file” that is to be available to all relevant tax administrations. A brief checklist of info to be filed/maintained is provided in the later part of the article.

Second, it requires that detailed transactional transfer pricing documentation be provided in a “local file” specific to each country, identifying material related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions. Local files are basically the TP documentations maintained as per the local tax laws (rule 10D currently in India)

Third, large mne’s are required to file a country-by-country report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires mne’s to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires mne’s to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in. This is basically presenting and populating the data in the following tables:

Taken together, these three documents (master file, local file and country-by-country report) will require taxpayers to articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries. This information should make it easier for tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments.

Countries participating in the BEPS project agree that these new reporting provisions, and the transparency they will encourage, will contribute to the objective of understanding, controlling, and tackling BEPS behaviours.

The specific content of the various documents reflects an effort to balance tax administration information needs, concerns about inappropriate use of the information, and the compliance costs and burdens imposed on business. Some countries would strike that balance in a different way by requiring reporting in the country-by-country report of additional transactional data (beyond that available in the master file and local file for transactions of entities operating in their jurisdictions) regarding related party interest payments, royalty payments and especially related party service fees. Countries expressing this view are primarily those from emerging markets (argentina, brazil, people’s republic of china, colombia, india, mexico, south africa, and turkey) who state they need such information to perform risk assessment and who find it challenging to obtain information on the global operations of an mne group headquartered elsewhere. Other countries expressed support for the way in which the balance has been struck in this document. Taking all these views into account, it is mandated that countries participating in the BEPS project will carefully review the implementation of these new standards and will reassess no later than the end of 2020 whether modifications to the content of these reports should be made to require reporting of additional or different data.

Consistent and effective implementation of the transfer pricing documentation standards and in particular of the country-by-country report is essential. Therefore, countries participating in the OECD/G20 BEPS project agreed on the core elements of the implementation of transfer pricing documentation and country-by-country reporting. This agreement calls for the master file and the local file to be delivered by mne’s directly to local tax administrations. Country-by-country reports should be

filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the multilateral convention on mutual administrative assistance in tax matters, bilateral tax treaties or tax information exchange agreements (TIEAs). In limited circumstances, secondary mechanisms, including local filing can be used as a backup.

Threshold limit for applicability: These new country-by-country reporting requirements are to be implemented for fiscal years beginning on or after 1 january 2016 and apply, subject to the 2020 review, to mnes with annual consolidated group revenue equal to or exceeding euro 750 million. It is acknowledged that some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law.

In order to facilitate the implementation of the new reporting standards, an implementation package has been developed consisting of model legislation which could be used by countries to require mnc groups to file the country-by-country report and competent authority agreements that are to be used to facilitate implementation of the exchange of those reports among tax administrations. As a next step, it is intended that an xml schema and a related user guide will be developed with a view to accommodating the electronic exchange of country-by-country reports.

It is recognised that the need for more effective dispute resolution may increase as a result of the enhanced risk assessment capability following the adoption and implementation of a country-by-country reporting requirement. This need has been addressed when designing government-to-government mechanisms to be used to facilitate the automatic exchange of country-by-country reports.

Jurisdictions endeavour to introduce, as necessary, domestic legislation in a timely manner. They are also encouraged to expand the coverage of their international agreements for exchange of information. Mechanisms will be developed to monitor jurisdictions’ compliance with their commitments and to monitor the effectiveness of the filing and dissemination mechanisms. The outcomes of this monitoring will be taken into consideration in the 2020 review.

Changes expected in Budget 2016:

The Indian government in the upcoming budget in February end would be announcing the changes in the Indian TP regulations to be on par with the global updates in realtion to the BEPS project and CBCR reporting. The Indian counterparts of the global MNE’s should be maintaining the TP documentations (local files) in line with the global reporting’s as part of the CBCR or global TP documentations to avoid inconsistencies. With growing transparency and exchange of information’s it would be a very interesting period to see as to how the litigation statistics would respond.

Some Basic Questions to ponder upon:

1. When is the first year companies will be expected to file?

The latest action 13 report suggests that countries participating in the OECDBEPS project will require groups to file in 201 7 in respect of FY16 results.

2. What will happen if the ultimate parent company is located in a country which has not implemented CBC reporting?

The OECD agreement builds in a response for situations where a company’s parent jurisdiction does not implement (e.g., the parent is in the Cayman Islands), which is direct filing by the company in every country or possibly the substitution of a lower tier entity to serve as the parent for CBC collection and exchange purposes.

3. What does the OECD mean by the term multinational group? Is it true that companies will not need to file if they are part of a privately owned group?

Action 13 refers to multinational enterprises (mnes) though it does not define mnes. Guidelines for multinational enterprises OECD201 1 gives the following description:

“a precise definition of multinational enterprises is not required for the purposes of the guidelines. These enterprises operate in all sectors of the economy. They usually comprise companies or other entities established in more than one country and so linked that they may coordinate their operations in various ways. While one or more of these entities may be able to exercise a significant influence over the activities of others, their degree of autonomy within the enterprise may vary widely from one multinational enterprise to another. Ownership may be private, state or mixed”

The latest implementation guidance provides that smaller and medium size enterprises (smes) with annual consolidated revenue of less than€750 million in the preceding year will not be required to file a CBC report. It states that no special industry exemptions should be provided, no general exemption for investment funds should be provided, and no exemption for non-corporate entities or non-public corporate entities should be provided.

Accordingly, unless a group falls within the sme definitionall groups holding overseas operations that form part of their consolidation will need to file, regardless of ownership structure.

4. Who is the reporting mne? In a large multinational group, it is possible that consolidated accounts are prepared for financial investors at more than one level? For example, group Bis a 65% subsidiary of company A with the remaining 35% of shares being publically held and prepares consolidated financial statements.

Action 13 states that: ”a reporting mne is the ultimate parent entity of an mne group.”. In the case outlined above, in our view, only company A would have to submit the CBC report. The notes on the master file suggest that it would be possible to present the data on a divisional basis where for instance the business divisions operate independently. This courtesy does not seem to be extended to CBC reporting. However, if it would aid understanding and follow up, it might make sense to file addendum CBC reports broken down on divisional lines.

5. What do companies need to consider in terms of preparing for real CBC reporting and master file/ local file?

Simply giving the OECD list of data points to internal audit and asking them to confirm that they can provide the data is likely to result in a rather mechanical result without the tax impact being considered. This is really something that should be done in cooperation between tax and accounting people.

Companies should consider whether they can get all the information e.g., independent subcontractors, or how they would be translating their figures from local to group currency in case they would report on local GAAP..

Consistency should be kept in mind here both in terms of consistency between the CBC report, master file and local file and also that the underlying TP documentation is consistent to "the message" in the CBC report delivered to the tax authorities. The outcome of a risk assessment analysis performed by the tax authorities based on the CBC report might be linked to other actions or information (hybrids/exchange of information - rulings etc).

6. Confidentiality?

Action 13 requires tax authorities to ensure confidentiality of the report be maintained. However, mnes should prepare that certain aspects could become public. In certain countries, there is political agitation to make the documentation public. In the UK, both the labour and conservative party manifestos open the possibility of making the information public. The likelihood is high that questions from tax authorities and ensuing controversy will get media attention.

Master File Details:

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.