# S. SUKUMAR v. THE SECRETARY, INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA & ORS

- **Citation:** [2018] 2 S.C.R. 442
- **Court:** Supreme Court of India
- **Decided:** 2018-02-23
- **Case number:** Civil Appeal No. 2422 of 2018
- **Bench:** Adarsh Kumar Goel, Uday Umesh Lalit
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/s-sukumar-v-the-secretary-institute-of-chartered-accountants-of-india-ors-32874
- **Pages:** 57

## Headnote

Chartered Accountants Act, 1949: ss.25, 29 - Allegation that
Multi-National Accounting Firms (MAFs) soliciting professional
work in international brand name through registered Indian CA
firms with the same brand name - Illegal operation by MAFs in
India violating s.224 of Companies Act, s.25 and 29 of CA Act,
Foreign Direct Investment policy, Reserve Bank of India Act, Foreign
Exchange Management Act and the Code of Conduct laid down by
ICAI - Writ petition seeking direction to initiate investigation against
MAFs and Indian Chartered Accountancy Firms (ICAFs) having
arrangement with such MAFs for breach of Code of Professional
Conduct under the CA Act and also seeking penal action by way of
cancellation of permission granted to them by ICAI - Held: The
ICAI does not claim to have conducted complete investigation for
want of complete information into the issue whether the Chartered
Accountancy firms by receiving remittances from outside India or
remitting licence fee/network charges outside India have allowed
participation of a company or a foreign entity in the accountancy
business in violation of s.25 of the CA Act and whether use of
common brand name by the network firms is in violation of
reciprocity stipulated under s.29 of the CA Act - The ICAI ought to
have taken the matter to logical end, by drawing adverse inference,
if information was withheld by the concerned groups - - The
Union of India directed the ICAI to constitute an expert panel to
update its enquiry and to look into the question whether and to
what extent the statutory framework to enforce the letter and spirit
of ss.25 and 29 of the CA Act and the statutory Code of Conduct
for the CAs requires revisit so as to appropriately discipline and
regulate MAFs - The Committee may also consider the need for an
appropriate legislation on the pattern of Sarbanes Oxley Act, 2002
and Dodd Frank Wall Street Reform and Consumer Protection Act,
[2018] 2 S.C.R. 442
442
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2010 in US or any other appropriate mechanism for oversight of
profession of the auditors - Question whether on account of conflict
of interest of auditors with consultants, the auditors' profession may
need an exclusive oversight body may be examined - The Committee
may examine the Study Group and the Expert Group Reports - It
may also consider steps for effective enforcement of the provisions
of the FDI policy and the FEMA Regulations.
Chartered Accountants Act, 1949: ss.25, 29 - Auditing - Role
of auditor - Violation of statutory provisions by MAFs - Need for
separate oversight body - Held: Failure of auditors have resulted
into scandals in the past - Absence of adequate oversight mechanism
results in infringing public interest and rule of law which are part
of fundamental rights under Arts.14 and 21 - The issue of separate
oversight body for auditing work and updating existing legal
framework is necessary - Therefore, auditing profession requires
proper oversight and such oversight mechanism needs to be revisited
from time to time.
Chartered Accountants Act, 1949: ss.25, 29 - Illegal
operation by MAFs in India - Lifting of corporate veil - As found
by the Expert Committee in its report, there is a compliance by MAFs
only in form and not in substance, by having got registered
partnership firms with the Indian partners, the real beneficiaries of
transacting the business of chartered accountancy remain the
companies of the foreign entities - The principle of lifting the
corporate veil has to apply when the law is sought to be circumvented
- Protection of public interest being of paramount importance, if
the corporate personality is to be used to evade obligations imposed
by law, the real state of affairs needs to be seen - The same principle
applies while overseeing the compliance of applicable ethics of not
permitting profit sharing or complying with the ceiling limit for the
business which is violated by using the technique of sub contracts
for outsourcing - If the premises are sa

## Text

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SUPREME COURT REPORTS
[2018] 2 S.C.R.
S. SUKUMAR
v.
THE SECRETARY, INSTITUTE OF CHARTERED
ACCOUNTANTS OF INDIA & ORS.
(Civil Appeal No. 2422 of 2018 etc.)
FEBRUARY 23, 2018
[ADARSH KUMAR GOEL AND UDAY UMESH LALIT, JJ.]
Chartered Accountants Act, 1949: ss.25, 29 - Allegation that
Multi-National Accounting Firms (MAFs) soliciting professional
work in international brand name through registered Indian CA
firms with the same brand name - Illegal operation by MAFs in
India violating s.224 of Companies Act, s.25 and 29 of CA Act,
Foreign Direct Investment policy, Reserve Bank of India Act, Foreign
Exchange Management Act and the Code of Conduct laid down by
ICAI - Writ petition seeking direction to initiate investigation against
MAFs and Indian Chartered Accountancy Firms (ICAFs) having
arrangement with such MAFs for breach of Code of Professional
Conduct under the CA Act and also seeking penal action by way of
cancellation of permission granted to them by ICAI - Held: The
ICAI does not claim to have conducted complete investigation for
want of complete information into the issue whether the Chartered
Accountancy firms by receiving remittances from outside India or
remitting licence fee/network charges outside India have allowed
participation of a company or a foreign entity in the accountancy
business in violation of s.25 of the CA Act and whether use of
common brand name by the network firms is in violation of
reciprocity stipulated under s.29 of the CA Act - The ICAI ought to
have taken the matter to logical end, by drawing adverse inference,
if information was withheld by the concerned groups - - The
Union of India directed the ICAI to constitute an expert panel to
update its enquiry and to look into the question whether and to
what extent the statutory framework to enforce the letter and spirit
of ss.25 and 29 of the CA Act and the statutory Code of Conduct
for the CAs requires revisit so as to appropriately discipline and
regulate MAFs - The Committee may also consider the need for an
appropriate legislation on the pattern of Sarbanes Oxley Act, 2002
and Dodd Frank Wall Street Reform and Consumer Protection Act,
[2018] 2 S.C.R. 442
442
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2010 in US or any other appropriate mechanism for oversight of
profession of the auditors - Question whether on account of conflict
of interest of auditors with consultants, the auditors' profession may
need an exclusive oversight body may be examined - The Committee
may examine the Study Group and the Expert Group Reports - It
may also consider steps for effective enforcement of the provisions
of the FDI policy and the FEMA Regulations.
Chartered Accountants Act, 1949: ss.25, 29 - Auditing - Role
of auditor - Violation of statutory provisions by MAFs - Need for
separate oversight body - Held: Failure of auditors have resulted
into scandals in the past - Absence of adequate oversight mechanism
results in infringing public interest and rule of law which are part
of fundamental rights under Arts.14 and 21 - The issue of separate
oversight body for auditing work and updating existing legal
framework is necessary - Therefore, auditing profession requires
proper oversight and such oversight mechanism needs to be revisited
from time to time.
Chartered Accountants Act, 1949: ss.25, 29 - Illegal
operation by MAFs in India - Lifting of corporate veil - As found
by the Expert Committee in its report, there is a compliance by MAFs
only in form and not in substance, by having got registered
partnership firms with the Indian partners, the real beneficiaries of
transacting the business of chartered accountancy remain the
companies of the foreign entities - The principle of lifting the
corporate veil has to apply when the law is sought to be circumvented
- Protection of public interest being of paramount importance, if
the corporate personality is to be used to evade obligations imposed
by law, the real state of affairs needs to be seen - The same principle
applies while overseeing the compliance of applicable ethics of not
permitting profit sharing or complying with the ceiling limit for the
business which is violated by using the technique of sub contracts
for outsourcing - If the premises are same, phone number/fax number
is same, brand name is same, the controlling entity is same, human
resources are same, it will be difficult to expect that there is full
compliance on mere separate registration of a firm - The prohibition
under s.25 of the CA Act can be held to be defeated.
Administrative law: Expert body - ICAI - Allegation that
members of ICAI lending their names to the MAFs who are nonS. SUKUMAR v. THE SECRETARY, INSTITUTE OF
CHARTERED ACCOUNTANTS OF INDIA
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members and enabling them to illegally operate in the field of
Chartered Accountancy and sharing fees and profits with them -
Held: Being an expert body, ICAI should examine the matter further
to uphold the law and give a report to concerned authorities for
appropriate action - Though the Committee analysed available facts
and found that MAFs were involved in violating ethics and law, it
took hyper technical view that non availability of complete
information and the groups as such were not amenable to its
disciplinary jurisdiction in absence of registration - A premier
professionals body cannot limit its oversight functions on
technicalities and is expected to play proactive role for upholding
ethics and values of the profession by going into all connected and
incidental issues - Thus, a case is made out for examination not
only by ED and further examination by the ICAI but also by the
Central Government having regard to the issues of violation of RBI/
FDI policies and the CA Act by secret arrangements - Benami
Transactions - Chartered Accountants Act, 1949 - ss.25, 29.
Disposing of the appeal and writ petition, the Court
HELD: 1. It is an undisputed fact that there are remittances
from outside India. The same could be termed as investment
even though the remittances are claimed to be interest free loans
to partners. The amount could also be for taking over an Indian
chartered accountancy firm. Relationship of partnership firms,
though having Indian partners, operating under a common brand
name from same infrastructure, with foreign entity is not ruled
out. It is not possible to rule out violation of FDI policies, FEMA
Regulations and the CA Act. Thus, appropriate action may have
to be taken in pending proceedings or initiated at appropriate
forum.The investigation so far carried out cannot be held to be
complete in all respects. The investigation by income tax
authorities is only for assessment of income tax. Action by the
ROC also does not cover the issue raised herein. The
investigation by the ED is said to be still pending, though several
persons are said to have been examined and documents collected,
which are under scrutiny. The said investigation relates to FEMA
violations. The ICAI has initiated action with regard to foreign
remittances and is said to have written to the RBI to enquire
whether investigation was conducted by the RBI. However,
according to ICAI, its investigation can only be in respect of
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members, registered with it, for the misconduct conducted by
them. The ICAI does not claim to have conducted complete
investigation for want of complete information into the issue
whether the chartered accountancy firms by receiving remittances
from outside India or remitting licence fee/network charges
outside India have allowed participation of a company or a foreign
entity in the accountancy business in violation of Section 25 of
the CA Act and whether use of common brand name by the
network firms is in violation of reciprocity stipulated under Section
29 of the CA Act. The ICAI should have taken the matter to
logical end, by drawing adverse inference, if information was
withheld by the concerned groups. [Paras 45-46] [493-E-H; 494A-C]
2. No doubt, the report of the committee of experts of ICAI
does not specifically name the MAFs involved, groups A,B,C,D
are mentioned. The ICAI ought to constitute an expert panel to
update its enquiry. Being an expert body, it should examine the
matter further to uphold the law and give a report to concerned
authorities for appropriate action. Though the Committee
analysed available facts and found that MAFs were involved in
violating ethics and law, it took hyper technical view that non
availability of complete information and the groups as such were
not amenable to its disciplinary jurisdiction in absence of
registration. A premier professionals body cannot limit its
oversight functions on technicalities and is expected to play
proactive role for upholding ethics and values of the profession
by going into all connected and incidental issues. Thus, a case is
made out for examination not only by ED and further examination
by the ICAI but also by the Central Government having regard
to the issues of violation of RBI/FDI policies and the CA Act by
secret arrangements. [Paras 47-48] [494-C-F]
3. Profession of auditing is of great importance for the
economy. Financial statements audited by qualified auditors are
acted upon and failures of the auditors have resulted into scandals
in the past. The auditing profession requires proper oversight.
Such oversight mechanism needs to be revisited from time to
time. Post Enron Anderson Scandal, in the year 2000, Sarbanse
Oxley Act was enacted in U.S. requiring corporate leaders to
personally certify the accuracy of their company's financials. The
S. SUKUMAR v. THE SECRETARY, INSTITUTE OF
CHARTERED ACCOUNTANTS OF INDIA
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Act also lays down rules for functioning of audit companies with a
view to prevent the corporate analysts from benefitting at the
cost of public interest. The audit companies were also prohibited
from providing non audit services to companies whose audits
were conducted by such auditors. Absence of adequate oversight
mechanism has the potential of infringing public interest and rule
of law which are part of fundamental rights under Articles 14 and
21. The auditing business is required to be separated from the
consultancy business to ensure independence of auditors. The
accounting firms could not be left to self regulate themselves.
[Para 49] [494-G-H; 495-A-B]
4. It is for the policy makers to take a call on the issue of
extent to which globalization could be allowed in a particular field
and conditions subject to which the same can be allowed.
Safeguards in the society and economy of the country in the
process are of paramount importance. This Court may not involve
itself with the policy making but the policy framework can certainly
be looked at to find out whether safeguards for enforcement of
fundamental rights have been duly maintained. In the present
context, having regard to the statutory framework under the CA
Act, current FDI Policy and the RBI Circulars, it may prima facie
appear that there is violation of statutory provisions and policy
framework effective enforcement of which has to be ensured.
Statutory regulatory provisions intended to advance the object
of law have to be enforced meaningfully. No vested interest can
flout the same by manifesting compliance only in form. Compliance
has to be in substance. The law enforcing agencies are expected
to see the real situation. As found by the Expert Committee in
its report, there is a compliance by MAFs only in form and not in
substance, by having got registered partnership firms with the
Indian partners, the real beneficiaries of transacting the business
of chartered accountancy remain the companies of the foreign
entities. The partnership firms are merely a face to defy the law.
The principle of lifting the corporate veil has to apply when the
law is sought to be circumvented. In expanding horizons of modern
jurisprudence, it is certainly permissible. Its frontiers are
unlimited. The horizon of the doctrine is expanding. While the
company is a separate entity, the Court has come to recognize
several exceptions to this rule. One exception is where corporate
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personality is used as a cloak for fraud or improper conduct or
for violation of law. Protection of public interest being of
paramount importance, if the corporate personality is to be used
to evade obligations imposed by law, the real state of affairs needs
to be seen. The same principle applies while overseeing the
compliance of applicable ethics of not permitting profit sharing
or complying with the ceiling limit for the business which is
violated by using the technique of sub contracts for outsourcing.
If the premises are same, phone number/fax number is same,
brand name is same, the controlling entity is same, human
resources are same, it will be difficult to expect that there is full
compliance on mere separate registration of a firm. The
prohibition under Section 25 of the CA Act can be held to be
defeated. It is perhaps for this reason that the network firms
avoided giving the information sought by the Committee. The
issue of separate oversight body for auditing work and updating
existing legal framework appear to be necessary. The other aspect
is of investment in CA firms, in violation of prohibition of FDI
policy, by using a circuitous route of interest free loans to partners.
The fact that the income tax authorities have taken the grants
received as revenue receipts and taxed the same as such is not
conclusive to hold that the receipt is not an investment which is
impermissible. If investment is not permitted, the policy of law
cannot be defeated by terming such investment as grant for quality
control specially when the grant has been used to acquire a
chartered accountancy firm. [Paras 50, 51] [495-C-H; 496-A-E]
5. Absence of revisiting and restructuring oversight
mechanism may have adverse effect on the existing chartered
accountancy profession as a whole on the one hand and unchecked
auditing bodies can adversely affect the economy of the country
on the other. Moreover, companies doing chartered accountancy
business will not have personal or individual accountability which
is required. Persons who are the face may be insignificant and
real owners or beneficiary of prohibited activity may go scot free.
The Reports of the Study Group and Expert Group show that
enforcement mechanism is not adequate and effective. This
aspect needs to be looked into by experts in the Government. It
may consider whether on the pattern of the Sarbanse Oxley Act
corporate leaders be required to personally certify the accuracy
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CHARTERED ACCOUNTANTS OF INDIA
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of the financial statements. Further, how to prevent corporate
analysts from benefitting from the conflict of interests, how to
check audit companies from providing non audit services and
how to lay down protocol for auditors. Another law in US 'DoddFrank Wall Street Reform and Consumer Protection Act, 2010' to
ensure more transparency and accountability of financial
institutions to decrease the risk of investing needs consideration.
It sets up an oversight body called the Financial Stability Oversight
Council (FSOC). [Para 52] [496-E-G; 497-A-B]
6. Accordingly, the following directions are issued:
(i) The Union of India may constitute a three member
Committee of experts to look into the question whether
and to what extent the statutory framework to enforce the
letter and spirit of Sections 25 and 29 of the CA Act and
the statutory Code of Conduct for the CAs requires revisit
so as to appropriately discipline and regulate MAFs. The
Committee may also consider the need for an appropriate
legislation on the pattern of Sarbanes Oxley Act, 2002 and
Dodd Frank Wall Street Reform and Consumer Protection
Act, 2010 in US or any other appropriate mechanism for
oversight of profession of the auditors. Question whether
on account of conflict of interest of auditors with
consultants, the auditors' profession may need an
exclusive oversight body may be examined. The
Committee may examine the Study Group and the Expert
Group Reports referred to above, apart from any other
material. It may also consider steps for effective
enforcement of the provisions of the FDI policy and the
FEMA Regulations referred to above. It may identify the
remedial measures which may then be considered by
appropriate authorities. The Committee may call for
suggestions from all concerned. Such Committee may be
constituted within two months. Report of the Committee
may be submitted within three months thereafter. The UOI
may take further action after due consideration of such
report.
(ii) The ED may complete the pending investigation within
three months;
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(iii) ICAI may further examine all the related issues at
appropriate level as far as possible within three months
and take such further steps as may be considered
necessary. [Para 53] [497-C-H; 498-A]
State of Rajasthan vs. Gotan Lime Stone Khanji Udyog
Pvt. Ltd. [2016] (1) SCR 216 : (2016) 4 SCC 469; State
of Karnataka vs. Selvi J. Jayalalitha (2017) 6 SCC 263
- referred to
Case Law Reference
[2016] (1) SCR 216
referred to
Para 50
(2017) 6 SCC 263
referred to
Para 50
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2422
of 2018
From the Judgment and Order dated 03.08.2015 of the High Court
of Karnataka at Bengaluru in Writ Petition No. 17959 of 2012
WITH
W. P. (C) No. 991 of 2013
Ms. Pinky Anand, ASG, Mukul Rohatgi, Sidharth Luthra, Sidharth
Sethi, V. Giri, Kapil Sibal, N. Ganpathy, Ramji Srinivasan, Rana
Mukherjee, Sr. Advs. Prashant Bhushan, Ms. Neha Rathi, Pranav
Sachdeva, R. N. Karanjawala, Ms. Ruby Singh Ahuja, Vishal Gehrana,
Utsav Trivedi, Sahil Monga, Shubham Saigal, Mrs. Manik Karanjawala
(For M/S.Karanjawala & Co.), Kunal Mimani, Dheeraj Nair, C. Mukund,
Pankaj Jain, Ms. Swati Guha Mazumdar, M. B. Elakkumanan, Mohd.
Faris, Bijoy Kumar Jain, H. S. Chandhioke, Prashant Mishra, S. Arthwan,
K. John, Abhay Kumar, Ms. Asha Gopalan Nair, Ranjeet Kumar, Balendu
Shekhar, Ms. Snidha Mehra, Sumit T., Ms. Kirti Dua, Rajesh Ranjan,
Mrs. Anil Katiyar, Mukesh Kumar Maroria, Kamal Shankar, Atul N.,
Ms. Arti Singh, Pramod Dayal, Nikunj Dayal, Ms. Payal Dayal, Tushar
Bhardwaj, Sohil Yadav, Siddharth Singla, Ms. Swikriti Singhania, Aditya
Bhat, Ms. Shristi Singh, Dhruv Sood, Rhythm B., Ms. Bhargavi, Mayank
Pandey, Neelesh Singh Rao, Advs. for the appearing parties.
The Judgment of the Court was delivered by
ADARSH KUMAR GOEL, J. 1. Leave granted in SLP (Civil)
No.1808 of 2016 filed against the order dated 3rd August, 2015 of the
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CHARTERED ACCOUNTANTS OF INDIA
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High Court of Karnataka in Writ Petition No.17959 of 2012. The petition
before the High Court sought direction for exercise of power under
Section 21 of the Chartered Accountants Act, 1949 ('CA Act') to initiate
investigation against Multi-National Accounting Firms (MAFs) and Indian
Chartered Accountancy Firms (ICAFs) having arrangement with such
MAFs for breach of Code of Professional Conduct under the CA Act
and also to take penal action by way of cancellation of permission granted
to them by the Institute of Chartered Accountants of India (ICAI). Since
the issue raised in Writ Petition (Civil) No.991 of 2013 is identical, both
the matters have been heard together. In the Writ Petition, some other
connected issues have also been raised to which reference will be made
in due course.
The Issue
2. The issue raised in the appeal arising out of Karnataka High
Court Judgment and the Writ Petition filed directly in this Court is:
Whether the MAFs are operating in India in violation of law in force in
a clandestine manner, and no effective steps are being taken to enforce
the said law. If so, what orders are required to be passed to enforce the
said law.
The Pleadings
3. Briefly, the averments in the High Court writ petition are: The
MAFs are illegally operating in India and providing Accounting, Auditing,
Book Keeping and Taxation Services. They are operating with the help
of ICAFs illegally. Operations of such entities are, inter alia, in violation
of Section 224 of the Companies Act, 1956, Sections 25 and 29 of the
CA Act, the Code of Conduct laid down by the ICAI. Reference has
been made to the Report dated 15th September, 2003 of Study Group of
the ICAI on the subject (hereinafter referred to as 'Study Group Report').
The Study Group was constituted by the Council of the ICAI in July,
1994 to examine attempts of MAFs to operate in India without formal
registration with the ICAI and without being subject to any discipline
and control. This was in the wake of liberalization policy and signing of
GATT by India. It was noted that the bodies corporate formed for
management consultancy services were being used as a vehicle for
procuring professional work for sister firms of Chartered Accountants
(CAs). Members of ICAI were associating with such bodies as Directors,
Managers etc. to provide escape route to MAFs. CA functions must be
discharged by animate persons and not in anim bodies.
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4. The concerns of various segments of CAs noted by the Study
Group are :
"(a) Sharing fees with non-members;
(b)
Networking and consolidation of Indian firms;
(c)
Need to review the advertisement aspect;
(d)
Multi disciplinary firms with other professionals;
(e)
Commercial presence of multi-national accounting
firms;
(f)
Impact of similarity of names between accountancy firms
and MAFs/Corporates engaged in MSC-Scope for
reform and regulation;
(g)
Strengthening knowledge base and skills;
 (h) Facilitating growth of Indian CA firms & Indian CAs
internationality;
(i)
Perspective of the Government, corporate world and
regulatory bodies and role of ICAI in shaping the view;
(j)
Introduction of joint audit system;
(k)
Recognition of qualifications under Clause (4) of Part
I of the First Schedule to the Chartered Accountants
Act, 1949 for the purpose of promoting partnership with
any persons other than the CA in practice within India
or abroad;
(l)
Review the concept of exclusive areas for the keeping
in view the larger public interest involved so as to
include internal audit within it;
(m) Conditionalities prescribed by certain financial
institutions/Governmental
agencies
insisting
appointment of select few firms as auditors/concurrent
auditors/consultants for their borrowers."
5. The Study Group considered whether goal should be to focus
on ethics or growth of the profession with Code of Ethics being guiding
points and not barriers. Further issues were what should be the regulatory
regime; whether networking could be allowed to benefit Indian CAs;
whether MAFs may be required to furnish particulars about their
S. SUKUMAR v. THE SECY., INSTITUTE OF CHARTERED
ACCOUNTANTS OF INDIA [ADARSH KUMAR GOEL, J.]
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ownership, persons responsible and other financial particulars. It was
noted that the Code of Ethics under First Schedule to the CA Act prohibits
sharing of fee with persons other than members of the ICAI. Only cost
for obtaining assistance/advice to international affiliates could be given.
Indian Firms with International Affiliates (IFIA) may be required to
adhere to bench mark in regard to audit procedures, quality standards
etc. Decision making and real control should be with Indian firms. Number
of audits qua each partner should be fixed. Mentioning of affiliation
with any person not member of ICAI may amount to advertising which
was not permissible. It could be permitted if entities were registered
with ICAI. It was also suggested that concept of Multi disciplinary
firms was required to be explored for rendering integrated service with
suitable safeguards. Steps to upgrade knowledge were also suggested.
However, it was suggested that commercial presence of MAFs should
not be allowed de facto or de jure. Reference was made to Surbanes
Oxley Act, 2002 in USA making a foreign public accounting firm
preparing audit report to be accountable to the Public Company
Accounting Oversight Board and the Securities and Exchange
Commission. Thus, MAFs could not be allowed without registration
with ICAI. Non Indian CAs should not authenticate any financial
statement of any Indian entity. MAFs' claim to provide audit services
through affiliates amounts to indirect entry in India without requisite
reciprocity for Indian accountancy firms. It was suggested that even
where MAFs affiliate with Indian CA, same brand should not be allowed
as in other services. Use of name identical to MAFs was brand building
exercise which gave impression that Indian CA firm was not independent.
Separation of identity was a must. Use of statutory visiting cards etc.
must display separation of identity. Under collective label of management
consultancy services, CA services should not be allowed as Code of
Ethics for auditors cannot be enforced in this manner. Audit cannot be
done in non professional way. Advertisement and publicity was harmful
to the cause of the profession so that user relies only on real worth of
services. It is further noted that though the CAs are not allowed to
share fees or profits with anyone other than a member of the institute,
some of the members were lending their names to the MAFs who are
non-members and enabling them to illegally operate in the field of
Chartered Accountancy and sharing fees and profits with them. Indian
CAs have not been provided reciprocity in the countries to which the
MAFs belong as per Section 29 of the CA Act.
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6. Reference has also been made to a report on operations of
MAFs in India dated 29th July, 2011 submitted by Expert Group of the
ICAI (for short Expert Group Report) in the wake of the 'Satyam Scam',
and decisions of the ICAI laying down the Code of Conduct. The Expert
Group Report noted that the MAFs are rendering services which are
rendered by the CAs in terms of Section 2(2) of the CA Act such as
accountancy, auditing, professional services about matters of accounting
procedure, presentation or certification of financial facts or data. The
MAFs are corporates/juridical persons. They solicit professional work
in international brand name. They have registered Indian CA firms with
ICAI with the same brand names which are their integral part. There is
no regulatory regime for their accountability. Thus, the principle of
reciprocity under Section 29 of the CA Act, Section 25 prohibiting
corporates from chartered accountancy practice and Code of Ethics
prohibiting advertisement and fee sharing are flouted. The MAFs also
violate FDI policy in the field of accounting, auditing, book keeping,
taxation and legal services. Detailed reference to the said report will be
made in the later part of the judgment.
7. The stand of the ICAI in the form of a status report filed before
the High Court is that 161 out of 171 firms were examined by the High
Powered Committee in pursuance of report of the Expert Group dated
29th July, 2011 with regard to alleged violations and some of the cases
were referred to the Director (Discipline) for further action. Remaining
10 firms were in the process of being examined. Thus, the ICAI has
already taken action on its part.
8. The High Court observed that in view of the stand of the
ICAI, no further action was necessary and disposed of the writ petition.
9. In the writ petition filed directly in this Court, apart from the
averments noted above, it has been stated that PricewaterhouseCoopers
Private Limited (PwCPL) and their network audit firms operating in
India, apart from other violations, have indulged in violation of Foreign
Direct Investment (FDI) policy, Reserve Bank of India Act (RBI)/Foreign
Exchange Management Act (FEMA) which requires investigation. Firms
operating under the brand name of PwCPL received huge sums from
abroad in violation of law and applicable policies but the concerned
authorities have failed to take appropriate action. M/s. Pricewater House,
Bangalore was the Auditor of the erstwhile Satyam Computer Services
Limited (Satyam) for more than eight years but failed to discover the
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biggest accounting scandal which came to light only on confession of its
Chairman in January, 2009. The said scandal attracted penalty of US
Dollars 7.5 Million (approx. Rs.38 crores) from the US Regulators apart
from other sanctions. Since certification by Auditors is of great importance
in the matter of payment of subsidies, export incentives, grants, share of
government revenue and taxes, sharing of costs and profits in PPP (Public
Private Partnership) contracts etc., oversight of professionals engaged
in such certification has to be as per law of the land. Accordingly, even
though investigation was sought by the petitioner vide letter dated 1st
July, 2013, no satisfactory investigation has been done.
10. PwCPL is the brand under which member firms of
PricewaterhouseCoopers International Limited, U.K. (PwCIL), an
English private company provides professional services in respect of
audit, tax and advisory services. 'PwC India' firms are network member
firms of the PwCIL. There are 10 Audit Firms namely Price Waterhouse
(PW), Lovelock and Lewes (LL), Price Waterhouse Bangalore, Price
Waterhouse & Co. Bangalore, Price Waterhouse & Co. Kolkata, Price
Waterhouse Delhi, Price Waterhouse & Co. Delhi, Price Waterhouse &
Co. Chennai, Dalal & Shah Mumbai and Dalal & Shah Ahmedabad,
besides a private limited company, namely PwCPL, who are collectively
referred to as "PwC India" firms and who operate from various metros
including Delhi. Their clients include Government departments, Public
Sector organizations, ministries for which huge payments are made to
them. They are engaged in auditing/certifying statutory compliances.
They have violated Foreign Direct Investment (FDI) Policy, RBI master
circulars, FEMA Act and Rules. According to Notification dated May
3, 2000, under Section 47(2)(h) of FEMA Act, no person resident outside
India can make investment by way of contribution to the capital of a
firm or a proprietary concern or any association of persons in India
without permission of the RBI. In violation of the said provision, PwC
India entities received Rs.240 crores in Financial Year 2010-2011. The
Chairman of PwC India confirmed the receipt of funds from Global
Network. Receipt of Rs.22.90 crores in the Financial Year ended March,
2010 is reflected in the balance sheet and profit and loss account of the
PwCPL. Receipt of Rs.7.97 crores is reflected in the balance sheet
and profit and loss account of Dalal & Shah, Mumbai. This apart,
approximately Rs.210 crores was received by PwCPL, Price Waterhouse
(PW) and Lovelock and Lewes (LL). However, no action was taken
for receipt of these sums in violation of law. A sum of Rs.41 crores was
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received by Price Waterhouse & Company, Kolkata to acquire another
audit firm, Dalal & Shah, Mumbai through a circuitous route by giving
interest free loans to its four partners to enable them to invest the said
amount in Dalal & Shah, Mumbai in violations of the RBI Guidelines,
FEMA policy and ICAI Regulations.
11. There is also violation of Companies Act. Insurance premium
has been paid by three firms of PwC for benefit of other member firms
which is illegal. Lovelock and Lewes (LL), a member firm of PwC
India failed to point out the high level of NPAs, in its audit report, resulting
in Global Trust Bank (GTB) being forced to merge with Oriental Bank
of Commerce in 2004. This happened due to accumulated losses of
GTB. LL was also found guilty of manipulating share prices and
falsification of accounts by Serious Fraud Investigation Office (SFIO).
PwC has been found guilty of accounting scandals outside India.
12.After making the above averments, the petition suggests that
falsification of accounts should be made a non-bailable offence to ensure
effective governance and to avoid potential loss of revenue to the public
exchequer. An independent regulator should be appointed for the auditors.
Prayer has been made for investigation into the above allegations against
the PwCPL and their network Audit Firms operating in India sharing the
brand name of PwC.
13.To sum up, the case of the petitioners is:
(i)
The MAFs violate provisions of Sections 25 and 29 of the
CA Act, the Code of Conduct laid down by the ICAI,
Companies Act, the FDI Policy as highlighted in report of
the Study Group of the ICAI dated 15th September, 2003
and the report of the Expert Group of the ICAI dated 29th
July, 2011. Regulatory framework was required to be revisited to cover the gap in the existing regulatory framework
and challenge on account of operations of MAFs as noted
in the said reports. Audit functions were required to be
separated with a separate oversight body.
(ii)
PwC Services BV, Netherlands in violation of law, made
investment of Rs.41.42 crores through PwC, Kolkata to
acquire Dalal & Shah, Mumbai which is an audit firm
through a circuitous route by giving interest free loans to its
partners allowing them to invest the said amount with Dalal
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& Shah, Mumbai. This is clear offence under the Benami
Transactions (Prohibition) Act. It is also an offence under
the FEMA, the Chartered Accountants Act, and RBI Master
Circulars.
(iii) The PwC Services, BV Netherlands remitted Rs.240 crores
to various PwC entities in India for 'enhancement of skills'.
Payment of Income Tax on the said amounts does not
legalise the remittance. The remittance shows that the
foreign company has control over Indian Firms and is thus
indirectly running chartered accountancy business in India
and also getting its return on the said amount.
(iv) There is falsification of accounts with regard to insurance
premium for a 280 crore policy by PwC firms in India in
violation of Companies Act, 1956.
(v)
PwC is responsible for the violations by Satyam scam, failure
of the Global Trust Bank (GTB) and UB Group (Kingfisher
Airlines) for which action ought to be taken.
(vi) SFIO and CBI have found PwC guilty. Still, the PwC firms
have not been prosecuted and have been awarded
Government contracts such as GST Suvidha Provider for
GST Network, consultancy contract by the Kerala
Government for preparing master plan to connect Kochi
with industrial corridor of south India.
14. The prayers of the petitioners on above basis are:
(a)
ICAI must take immediate action for deregistration of
these firms in terms of their own report of 2011 which
they had themselves accepted.
(b)
These audit firms ought to be prosecuted for offences
under the Chartered Accountants Act, 1949.
(c)
PwC firms ought to be prosecuted under FEMA, 1999
regarding the payment of Rs.240 crores and Rs.42 crores
by the ED.
(d)
PwC Kolkata firm and partners need to be prosecuted
under the Benami Transactions (Prohibition) Act.
(e)
Investigation and action on part of ICAI and Ministry
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of Corporate Affairs with regard to the falsification of
accounts and wrong accounting of the insurance policy
of Rs.280 crores that was utilized by PwC Bangalore
without paying any premium.
(f)
A CBI investigation into the receipt of Rs.240 crores so
that the real purpose of such receipts is known and
necessary action may be taken.
High Powered Committee Expert Group Report dated 29th July,
2011
15. In its report dated 29th July, 2011 on Operation of Multinational
Network Accounting Firms (MAFs) in India, the expert group constituted
by the ICAI examined the issues concerning operation of MAFs in India.
The group was constituted in the context of corporate fraud of high
magnitude revealed by the statement of Chairman of Satyam. The ICAI
sought curbing of undesirable activities/operations of MAFs. The Ministry
held a meeting with the representatives of the ICAI to identify the issues.
Thereafter, the following issues were referred to the Expert Group by
the High Powered Committee of the ICAI:
"(a) Manner in which certain Indian CA firms, hold out to
public that they are actually MAFs in India, the manner
in which assignments are allotted, determination of
nexus/linkage. The representatives of certain Indian
CA firms carry two visiting cards one of Indian CA firm
and another of a multinational entity. They represent
the multinational entity and seek work for Indian CA
firm.
(b)
Name used by auditor in/his report - The basic question
was whether the auditors of M/s. Satyam had correctly
mentioned the name of their firm in the audit report.
(c)
Terms and conditions and cost payable for use of
international brand name - No international firm will
allow its name to be used by all and sundry. The
question is what is the consideration whether it is
determined as a percentage of fee or profits and whether
it is within the framework of Chartered Accountants Act,
1949, Regulations framed, thereunder Code of Conduct
and Ethics.
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(d)
Nature of extra benefits accrued to the Indian CA firms
having foreign affiliation.
(e)
How the MAFs placed their foot in India - Long back
in a meeting with RBI it was informed that the MAFs
entered in India to set up representative offices. No
documents are available as regards the terms and
conditions set out while granting them permission to
operate in India. However, the RBI vide its letter
No.Ref.DBS.ARS.No.744/08:91:008 (ICAI)/ 2003-2004
dated 23rd March, 2004 inter alia, mentioned that "RBI
has not permitted any foreign audit firm to set up office
or to carry out any activity in India under the current
exchange control regulations."
(f)
Contravention of permission originally granted by
Government - What was the original permission given
for these firms to enter into India and subsequently
whether they are adhering to the terms and conditions
of that permission? If contravention was found to take
up with Government/FIPB - for approaching
Government or FIPB, ICAI must have information as to
the nature of permission given. As already mentioned,
no documents are available indicating the nature of
permission granted. What is the current position of
international trade in accounting and related services?
The opening up of accounting and related services, can
be linked to reciprocal opening up by developed
countries.
(g)
Additional powers required by ICAI to curb the
malpractices - If under the existing legislation, ICAI
does not have enough powers to curb this practice,
whether they would need more powers. A separate
proposal for amendment of Chartered Accountants Act,
1949 has been sent by the Council to the Government
seeking additional powers."
16. It was noted that some of the MAFs are active in India and
are rendering services which are provided by CAs without registration
with the Institute. Certain MAFs are corporate or juridical persons with
significant commercial presence in India and are rendering assurance
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services. They solicit professional work including audit work by including
international brand name in their name. With the same brand names
certain Indian CA firms were registered with the ICAI. They hold out
to public that they are actually MAFs in India, whereas to the ICAI they
hold out that they are purely Indian CA firms having no relationship with
foreign entities.