S. SUKUMAR versus THE SECRETARY, INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA & ORS. on 23 February 2018

[2018] 2 S.C.R. 442

SUPREME COURT REPORTS

[2018] 2 S.C.R.

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S. SUKUMAR

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THE SECRETARY, INSTITUTE OF CHARTEREDACCOUNTANTS OF INDIA & ORS.

(Civil Appeal No. 2422 of 2018 etc.)

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FEBRUARY 23, 2018

[ADARSH KUMAR GOEL AND UDAY UMESH LALIT, JJ.]

Chartered Accountants Act, 1949: ss.25, 29 – Allegation thatMulti-National Accounting Firms (MAFs) soliciting professionalCwork in international brand name through registered Indian CAfirms with the same brand name – Illegal operation by MAFs inIndia violating s.224 of Companies Act, s.25 and 29 of CA Act,Foreign Direct Investment policy, Reserve Bank of India Act, ForeignExchange Management Act and the Code of Conduct laid down byDICAI – Writ petition seeking direction to initiate investigation againstMAFs and Indian Chartered Accountancy Firms (ICAFs) havingarrangement with such MAFs for breach of Code of ProfessionalConduct under the CA Act and also seeking penal action by way ofcancellation of permission granted to them by ICAI – Held: TheICAI does not claim to have conducted complete investigation forEwant of complete information into the issue whether the CharteredAccountancy firms by receiving remittances from outside India orremitting licence fee/network charges outside India have allowedparticipation of a company or a foreign entity in the accountancybusiness in violation of s.25 of the CA Act and whether use ofFcommon brand name by the network firms is in violation ofreciprocity stipulated under s.29 of the CA Act – The ICAI ought tohave taken the matter to logical end, by drawing adverse inference,if information was withheld by the concerned groups – – TheUnion of India directed the ICAI to constitute an expert panel toupdate its enquiry and to look into the question whether and toGwhat extent the statutory framework to enforce the letter and spiritof ss.25 and 29 of the CA Act and the statutory Code of Conductfor the CAs requires revisit so as to appropriately discipline andregulate MAFs – The Committee may also consider the need for anappropriate legislation on the pattern of Sarbanes Oxley Act, 2002Hand Dodd Frank Wall Street Reform and Consumer Protection Act,

2010 in US or any other appropriate mechanism for oversight ofprofession of the auditors – Question whether on account of conflictof interest of auditors with consultants, the auditors’ profession mayneed an exclusive oversight body may be examined – The Committeemay examine the Study Group and the Expert Group Reports – Itmay also consider steps for effective enforcement of the provisionsof the FDI policy and the FEMA Regulations.

Chartered Accountants Act, 1949: ss.25, 29 – Auditing – Roleof auditor – Violation of statutory provisions by MAFs – Need forseparate oversight body – Held: Failure of auditors have resultedinto scandals in the past – Absence of adequate oversight mechanismresults in infringing public interest and rule of law which are partof fundamental rights under Arts.14 and 21 – The issue of separateoversight body for auditing work and updating existing legalframework is necessary – Therefore, auditing profession requiresproper oversight and such oversight mechanism needs to be revisitedfrom time to time.

Chartered Accountants Act, 1949: ss.25, 29 – Illegaloperation by MAFs in India – Lifting of corporate veil – As foundby the Expert Committee in its report, there is a compliance by MAFsonly in form and not in substance, by having got registeredpartnership firms with the Indian partners, the real beneficiaries oftransacting the business of chartered accountancy remain thecompanies of the foreign entities – The principle of lifting thecorporate veil has to apply when the law is sought to be circumvented– Protection of public interest being of paramount importance, ifthe corporate personality is to be used to evade obligations imposedby law, the real state of affairs needs to be seen – The same principleapplies while overseeing the compliance of applicable ethics of notpermitting profit sharing or complying with the ceiling limit for thebusiness which is violated by using the technique of sub contractsfor outsourcing – If the premises are same, phone number/fax numberis same, brand name is same, the controlling entity is same, humanresources are same, it will be difficult to expect that there is fullcompliance on mere separate registration of a firm – The prohibitionunder s.25 of the CA Act can be held to be defeated.

Administrative law: Expert body – ICAI – Allegation thatmembers of ICAI lending their names to the MAFs who are non- A

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Amembers and enabling them to illegally operate in the field ofChartered Accountancy and sharing fees and profits with them –Held: Being an expert body, ICAI should examine the matter furtherto uphold the law and give a report to concerned authorities forappropriate action – Though the Committee analysed available factsand found that MAFs were involved in violating ethics and law, itBtook hyper technical view that non availability of completeinformation and the groups as such were not amenable to itsdisciplinary jurisdiction in absence of registration – A premierprofessionals body cannot limit its oversight functions ontechnicalities and is expected to play proactive role for upholdingCethics and values of the profession by going into all connected andincidental issues – Thus, a case is made out for examination notonly by ED and further examination by the ICAI but also by theCentral Government having regard to the issues of violation of RBI/FDI policies and the CA Act by secret arrangements – BenamiTransactions – Chartered Accountants Act, 1949 – ss.25, 29.D

Disposing of the appeal and writ petition, the Court HELD: 1. It is an undisputed fact that there are remittancesfrom outside India. The same could be termed as investmenteven though the remittances are claimed to be interest free loansEto partners. The amount could also be for taking over an Indianchartered accountancy firm. Relationship of partnership firms,though having Indian partners, operating under a common brandname from same infrastructure, with foreign entity is not ruledout. It is not possible to rule out violation of FDI policies, FEMARegulations and the CA Act. Thus, appropriate action may haveFto be taken in pending proceedings or initiated at appropriateforum.The investigation so far carried out cannot be held to becomplete in all respects. The investigation by income taxauthorities is only for assessment of income tax. Action by theROC also does not cover the issue raised herein. TheGinvestigation by the ED is said to be still pending, though severalpersons are said to have been examined and documents collected,which are under scrutiny. The said investigation relates to FEMAviolations. The ICAI has initiated action with regard to foreignremittances and is said to have written to the RBI to enquirewhether investigation was conducted by the RBI. However,Haccording to ICAI, its investigation can only be in respect of

members, registered with it, for the misconduct conducted bythem. The ICAI does not claim to have conducted completeinvestigation for want of complete information into the issuewhether the chartered accountancy firms by receiving remittancesfrom outside India or remitting licence fee/network chargesoutside India have allowed participation of a company or a foreignentity in the accountancy business in violation of Section 25 ofthe CA Act and whether use of common brand name by thenetwork firms is in violation of reciprocity stipulated under Section29 of the CA Act. The ICAI should have taken the matter tological end, by drawing adverse inference, if information waswithheld by the concerned groups. [Paras 45-46] [493-E-H; 494-A-C]

2. No doubt, the report of the committee of experts of ICAIdoes not specifically name the MAFs involved, groups A,B,C,Dare mentioned. The ICAI ought to constitute an expert panel toupdate its enquiry. Being an expert body, it should examine thematter further to uphold the law and give a report to concernedauthorities for appropriate action. Though the Committeeanalysed available facts and found that MAFs were involved inviolating ethics and law, it took hyper technical view that nonavailability of complete information and the groups as such werenot amenable to its disciplinary jurisdiction in absence ofregistration. A premier professionals body cannot limit itsoversight functions on technicalities and is expected to playproactive role for upholding ethics and values of the professionby going into all connected and incidental issues. Thus, a case ismade out for examination not only by ED and further examinationby the ICAI but also by the Central Government having regardto the issues of violation of RBI/FDI policies and the CA Act bysecret arrangements. [Paras 47-48] [494-C-F]

3. Profession of auditing is of great importance for theeconomy. Financial statements audited by qualified auditors areacted upon and failures of the auditors have resulted into scandalsin the past. The auditing profession requires proper oversight.Such oversight mechanism needs to be revisited from time totime. Post Enron Anderson Scandal, in the year 2000, SarbanseOxley Act was enacted in U.S. requiring corporate leaders topersonally certify the accuracy of their company’s financials. The A

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AAct also lays down rules for functioning of audit companies with aview to prevent the corporate analysts from benefitting at thecost of public interest. The audit companies were also prohibitedfrom providing non audit services to companies whose auditswere conducted by such auditors. Absence of adequate oversightmechanism has the potential of infringing public interest and ruleBof law which are part of fundamental rights under Articles 14 and21. The auditing business is required to be separated from theconsultancy business to ensure independence of auditors. Theaccounting firms could not be left to self regulate themselves.[Para 49] [494-G-H; 495-A-B]

C4. It is for the policy makers to take a call on the issue ofextent to which globalization could be allowed in a particular fieldand conditions subject to which the same can be allowed.Safeguards in the society and economy of the country in theprocess are of paramount importance. This Court may not involveDitself with the policy making but the policy framework can certainlybe looked at to find out whether safeguards for enforcement offundamental rights have been duly maintained. In the presentcontext, having regard to the statutory framework under the CAAct, current FDI Policy and the RBI Circulars, it may prima facieappear that there is violation of statutory provisions and policyEframework effective enforcement of which has to be ensured.Statutory regulatory provisions intended to advance the objectof law have to be enforced meaningfully. No vested interest canflout the same by manifesting compliance only in form. Compliancehas to be in substance. The law enforcing agencies are expectedFto see the real situation. As found by the Expert Committee inits report, there is a compliance by MAFs only in form and not insubstance, by having got registered partnership firms with theIndian partners, the real beneficiaries of transacting the businessof chartered accountancy remain the companies of the foreign entities. The partnership firms are merely a face to defy the law.GThe principle of lifting the corporate veil has to apply when thelaw is sought to be circumvented. In expanding horizons of modernjurisprudence, it is certainly permissible. Its frontiers areunlimited. The horizon of the doctrine is expanding. While thecompany is a separate entity, the Court has come to recognizeHseveral exceptions to this rule. One exception is where corporate

S. SUKUMAR v. THE SECRETARY, INSTITUTE OFCHARTERED ACCOUNTANTS OF INDIA

personality is used as a cloak for fraud or improper conduct orfor violation of law. Protection of public interest being ofparamount importance, if the corporate personality is to be usedto evade obligations imposed by law, the real state of affairs needsto be seen. The same principle applies while overseeing thecompliance of applicable ethics of not permitting profit sharingor complying with the ceiling limit for the business which isviolated 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, humanresources are same, it will be difficult to expect that there is fullcompliance on mere separate registration of a firm. Theprohibition under Section 25 of the CA Act can be held to bedefeated. It is perhaps for this reason that the network firmsavoided giving the information sought by the Committee. Theissue of separate oversight body for auditing work and updatingexisting legal framework appear to be necessary. The other aspectis of investment in CA firms, in violation of prohibition of FDIpolicy, by using a circuitous route of interest free loans to partners.The fact that the income tax authorities have taken the grantsreceived as revenue receipts and taxed the same as such is notconclusive to hold that the receipt is not an investment which isimpermissible. If investment is not permitted, the policy of lawcannot be defeated by terming such investment as grant for qualitycontrol specially when the grant has been used to acquire achartered accountancy firm. [Paras 50, 51] [495-C-H; 496-A-E]

5. Absence of revisiting and restructuring oversightmechanism may have adverse effect on the existing charteredaccountancy profession as a whole on the one hand and uncheckedauditing bodies can adversely affect the economy of the countryon the other. Moreover, companies doing chartered accountancybusiness will not have personal or individual accountability whichis required. Persons who are the face may be insignificant andreal owners or beneficiary of prohibited activity may go scot free.The Reports of the Study Group and Expert Group show thatenforcement mechanism is not adequate and effective. Thisaspect needs to be looked into by experts in the Government. Itmay consider whether on the pattern of the Sarbanse Oxley Actcorporate leaders be required to personally certify the accuracy AB

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Aof the financial statements. Further, how to prevent corporateanalysts from benefitting from the conflict of interests, how tocheck audit companies from providing non audit services andhow to lay down protocol for auditors. Another law in US ‘Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010’ toensure more transparency and accountability of financialBinstitutions to decrease the risk of investing needs consideration.It sets up an oversight body called the Financial Stability OversightCouncil (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 memberCCommittee of experts to look into the question whetherand to what extent the statutory framework to enforce theletter and spirit of Sections 25 and 29 of the CA Act andthe statutory Code of Conduct for the CAs requires revisitso as to appropriately discipline and regulate MAFs. TheDCommittee may also consider the need for an appropriatelegislation on the pattern of Sarbanes Oxley Act, 2002 andDodd Frank Wall Street Reform and Consumer ProtectionAct, 2010 in US or any other appropriate mechanism foroversight of profession of the auditors. Question whetheron account of conflict of interest of auditors withEconsultants, the auditors’ profession may need anexclusive oversight body may be examined. TheCommittee may examine the Study Group and the ExpertGroup Reports referred to above, apart from any othermaterial. It may also consider steps for effectiveFenforcement of the provisions of the FDI policy and theFEMA Regulations referred to above. It may identify theremedial measures which may then be considered byappropriate authorities. The Committee may call forsuggestions from all concerned. Such Committee may beconstituted within two months. Report of the CommitteeGmay be submitted within three months thereafter. The UOImay take further action after due consideration of suchreport.(ii) The ED may complete the pending investigation withinthree months; H

S. SUKUMAR v. THE SECRETARY, INSTITUTE OFCHARTERED ACCOUNTANTS OF INDIA

(iii) ICAI may further examine all the related issues atappropriate level as far as possible within three monthsand take such further steps as may be considerednecessary. [Para 53] [497-C-H; 498-A]

State of Rajasthan vs. Gotan Lime Stone Khanji UdyogPvt. Ltd. [2016] (1) SCR 216 : (2016) 4 SCC 469; Stateof Karnataka vs. Selvi J. Jayalalitha (2017) 6 SCC 263– referred to CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2422

of 2018

From the Judgment and Order dated 03.08.2015 of the High Courtof 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, SidharthSethi, V. Giri, Kapil Sibal, N. Ganpathy, Ramji Srinivasan, RanaMukherjee, Sr. Advs. Prashant Bhushan, Ms. Neha Rathi, PranavSachdeva, 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, BalenduShekhar, 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, TusharBhardwaj, Sohil Yadav, Siddharth Singla, Ms. Swikriti Singhania, AdityaBhat, Ms. Shristi Singh, Dhruv Sood, Rhythm B., Ms. Bhargavi, MayankPandey, 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 3[rd] August, 2015 of the A

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AHigh Court of Karnataka in Writ Petition No.17959 of 2012. The petitionbefore the High Court sought direction for exercise of power underSection 21 of the Chartered Accountants Act, 1949 (‘CA Act’) to initiateinvestigation against Multi-National Accounting Firms (MAFs) and IndianChartered Accountancy Firms (ICAFs) having arrangement with suchMAFs for breach of Code of Professional Conduct under the CA ActBand also to take penal action by way of cancellation of permission grantedto them by the Institute of Chartered Accountants of India (ICAI). Sincethe issue raised in Writ Petition (Civil) No.991 of 2013 is identical, boththe matters have been heard together. In the Writ Petition, some otherconnected issues have also been raised to which reference will be madeCin due course.

The Issue

2. The issue raised in the appeal arising out of Karnataka HighCourt Judgment and the Writ Petition filed directly in this Court is:Whether the MAFs are operating in India in violation of law in force inDa clandestine manner, and no effective steps are being taken to enforcethe said law. If so, what orders are required to be passed to enforce thesaid law.

The Pleadings

E3. Briefly, the averments in the High Court writ petition are: TheMAFs are illegally operating in India and providing Accounting, Auditing,Book Keeping and Taxation Services. They are operating with the helpof ICAFs illegally. Operations of such entities are, inter alia, in violationof Section 224 of the Companies Act, 1956, Sections 25 and 29 of theCA Act, the Code of Conduct laid down by the ICAI. Reference hasFbeen made to the Report dated 15[th] September, 2003 of Study Group ofthe 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 formalregistration with the ICAI and without being subject to any disciplineGand control. This was in the wake of liberalization policy and signing ofGATT by India. It was noted that the bodies corporate formed formanagement consultancy services were being used as a vehicle forprocuring 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 beHdischarged by animate persons and not in anim bodies.

4. The concerns of various segments of CAs noted by the StudyGroup are :

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4. The concerns of various segments of CAs noted by the StudyGroup are :

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“(a) Sharing fees with non-members;

(b) Networking and consolidation of Indian firms;

(c) Need to review the advertisement aspect; B

(d) Multi disciplinary firms with other professionals; (e)Commercial presence of multi-national accountingfirms; (f)Impact of similarity of names between accountancy firmsand MAFs/Corporates engaged in MSC-Scope forCreform and regulation; (g)Strengthening knowledge base and skills; (h) Facilitating growth of Indian CA firms & Indian CAsinternationality; D

(i) Perspective of the Government, corporate world andregulatory bodies and role of ICAI in shaping the view; (j)Introduction of joint audit system; (k)Recognition of qualifications under Clause (4) of PartI of the First Schedule to the Chartered AccountantsAct, 1949 for the purpose of promoting partnership withany persons other than the CA in practice within Indiaor abroad; E

(l) Review the concept of exclusive areas for the keepingin view the larger public interest involved so as toFinclude internal audit within it; (m) Conditionalities prescribed by certain financialinstitutions/Governmental agencies insistingappointment of select few firms as auditors/concurrentauditors/consultants for their borrowers.”

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5. The Study Group considered whether goal should be to focus on ethics or growth of the profession with Code of Ethics being guidingpoints and not barriers. Further issues were what should be the regulatoryregime; whether networking could be allowed to benefit Indian CAs;whether MAFs may be required to furnish particulars about their H

Aownership, persons responsible and other financial particulars. It wasnoted that the Code of Ethics under First Schedule to the CA Act prohibitssharing of fee with persons other than members of the ICAI. Only costfor obtaining assistance/advice to international affiliates could be given.Indian Firms with International Affiliates (IFIA) may be required toadhere to bench mark in regard to audit procedures, quality standardsBetc. Decision making and real control should be with Indian firms. Numberof audits qua each partner should be fixed. Mentioning of affiliationwith any person not member of ICAI may amount to advertising whichwas not permissible. It could be permitted if entities were registeredwith ICAI. It was also suggested that concept of Multi disciplinaryCfirms was required to be explored for rendering integrated service withsuitable safeguards. Steps to upgrade knowledge were also suggested.However, it was suggested that commercial presence of MAFs shouldnot be allowed de facto or de jure. Reference was made to SurbanesOxley Act, 2002 in USA making a foreign public accounting firm

preparing audit report to be accountable to the Public CompanyDAccounting Oversight Board and the Securities and ExchangeCommission. Thus, MAFs could not be allowed without registrationwith ICAI. Non Indian CAs should not authenticate any financialstatement of any Indian entity. MAFs’ claim to provide audit servicesthrough affiliates amounts to indirect entry in India without requisiteEreciprocity for Indian accountancy firms. It was suggested that evenwhere MAFs affiliate with Indian CA, same brand should not be allowedas in other services. Use of name identical to MAFs was brand buildingexercise 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 managementFconsultancy services, CA services should not be allowed as Code ofEthics for auditors cannot be enforced in this manner. Audit cannot bedone in non professional way. Advertisement and publicity was harmfulto the cause of the profession so that user relies only on real worth ofservices. It is further noted that though the CAs are not allowed toGshare fees or profits with anyone other than a member of the institute,some of the members were lending their names to the MAFs who arenon-members and enabling them to illegally operate in the field ofChartered Accountancy and sharing fees and profits with them. IndianCAs have not been provided reciprocity in the countries to which theMAFs belong as per Section 29 of the CA Act.H

6. Reference has also been made to a report on operations ofMAFs in India dated 29[th] July, 2011 submitted by Expert Group of theICAI (for short Expert Group Report) in the wake of the ‘Satyam Scam’,and decisions of the ICAI laying down the Code of Conduct. The ExpertGroup Report noted that the MAFs are rendering services which arerendered by the CAs in terms of Section 2(2) of the CA Act such asaccountancy, auditing, professional services about matters of accountingprocedure, presentation or certification of financial facts or data. TheMAFs are corporates/juridical persons. They solicit professional workin international brand name. They have registered Indian CA firms withICAI with the same brand names which are their integral part. There isno regulatory regime for their accountability. Thus, the principle ofreciprocity under Section 29 of the CA Act, Section 25 prohibitingcorporates from chartered accountancy practice and Code of Ethicsprohibiting advertisement and fee sharing are flouted. The MAFs alsoviolate FDI policy in the field of accounting, auditing, book keeping,taxation and legal services. Detailed reference to the said report will bemade in the later part of the judgment.

7. The stand of the ICAI in the form of a status report filed beforethe High Court is that 161 out of 171 firms were examined by the HighPowered Committee in pursuance of report of the Expert Group dated29[th] July, 2011 with regard to alleged violations and some of the caseswere referred to the Director (Discipline) for further action. Remaining10 firms were in the process of being examined. Thus, the ICAI hasalready taken action on its part.

8. The High Court observed that in view of the stand of theICAI, no further action was necessary and disposed of the writ petition.

9. In the writ petition filed directly in this Court, apart from theaverments noted above, it has been stated that PricewaterhouseCoopersPrivate Limited (PwCPL) and their network audit firms operating inIndia, apart from other violations, have indulged in violation of ForeignDirect Investment (FDI) policy, Reserve Bank of India Act (RBI)/ForeignExchange Management Act (FEMA) which requires investigation. Firmsoperating under the brand name of PwCPL received huge sums fromabroad in violation of law and applicable policies but the concernedauthorities have failed to take appropriate action. M/s. Pricewater House,Bangalore was the Auditor of the erstwhile Satyam Computer ServicesLimited (Satyam) for more than eight years but failed to discover the A

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Abiggest accounting scandal which came to light only on confession of itsChairman in January, 2009. The said scandal attracted penalty of USDollars 7.5 Million (approx. Rs.38 crores) from the US Regulators apartfrom other sanctions. Since certification by Auditors is of great importancein the matter of payment of subsidies, export incentives, grants, share ofgovernment revenue and taxes, sharing of costs and profits in PPP (PublicBPrivate Partnership) contracts etc., oversight of professionals engagedin such certification has to be as per law of the land. Accordingly, eventhough investigation was sought by the petitioner vide letter dated 1[st]July, 2013, no satisfactory investigation has been done.

10. PwCPL is the brand under which member firms ofCPricewaterhouseCoopers International Limited, U.K. (PwCIL), anEnglish private company provides professional services in respect ofaudit, tax and advisory services. ‘PwC India’ firms are network memberfirms of the PwCIL. There are 10 Audit Firms namely Price Waterhouse(PW), Lovelock and Lewes (LL), Price Waterhouse Bangalore, PriceDWaterhouse & Co. Bangalore, Price Waterhouse & Co. Kolkata, PriceWaterhouse 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 collectivelyreferred to as “PwC India” firms and who operate from various metrosincluding Delhi. Their clients include Government departments, PublicESector organizations, ministries for which huge payments are made tothem. They are engaged in auditing/certifying statutory compliances.They have violated Foreign Direct Investment (FDI) Policy, RBI mastercirculars, FEMA Act and Rules. According to Notification dated May3, 2000, under Section 47(2)(h) of FEMA Act, no person resident outsideFIndia can make investment by way of contribution to the capital of afirm or a proprietary concern or any association of persons in Indiawithout permission of the RBI. In violation of the said provision, PwCIndia entities received Rs.240 crores in Financial Year 2010-2011. TheChairman of PwC India confirmed the receipt of funds from GlobalNetwork. Receipt of Rs.22.90 crores in the Financial Year ended March,G2010 is reflected in the balance sheet and profit and loss account of thePwCPL. Receipt of Rs.7.97 crores is reflected in the balance sheetand 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 takenHfor receipt of these sums in violation of law. A sum of Rs.41 crores was received by Price Waterhouse & Company, Kolkata to acquire anotheraudit firm, Dalal & Shah, Mumbai through a circuitous route by givinginterest free loans to its four partners to enable them to invest the saidamount in Dalal & Shah, Mumbai in violations of the RBI Guidelines,FEMA policy and ICAI Regulations.

11. There is also violation of Companies Act. Insurance premiumhas been paid by three firms of PwC for benefit of other member firmswhich is illegal. Lovelock and Lewes (LL), a member firm of PwCIndia failed to point out the high level of NPAs, in its audit report, resultingin Global Trust Bank (GTB) being forced to merge with Oriental Bankof Commerce in 2004. This happened due to accumulated losses ofGTB. LL was also found guilty of manipulating share prices andfalsification 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 thatfalsification of accounts should be made a non-bailable offence to ensureeffective governance and to avoid potential loss of revenue to the publicexchequer. An independent regulator should be appointed for the auditors.Prayer has been made for investigation into the above allegations againstthe PwCPL and their network Audit Firms operating in India sharing thebrand name of PwC.

13. To sum up, the case of the petitioners is:

(i) The MAFs violate provisions of Sections 25 and 29 of theCA Act, the Code of Conduct laid down by the ICAI,Companies Act, the FDI Policy as highlighted in report ofthe Study Group of the ICAI dated 15[th] September, 2003and the report of the Expert Group of the ICAI dated 29[th]July, 2011. Regulatory framework was required to be re-visited to cover the gap in the existing regulatory frameworkand challenge on account of operations of MAFs as notedin the said reports. Audit functions were required to beseparated with a separate oversight body.

(ii) PwC Services BV, Netherlands in violation of law, madeinvestment of Rs.41.42 crores through PwC, Kolkata toacquire Dalal & Shah, Mumbai which is an audit firmthrough a circuitous route by giving interest free loans to itspartners allowing them to invest the said amount with Dalal A

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456SUPREME COURT REPORTS

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& Shah, Mumbai. This is clear offence under the BenamiTransactions (Prohibition) Act. It is also an offence underthe FEMA, the Chartered Accountants Act, and RBI MasterCirculars.

(iii) The PwC Services, BV Netherlands remitted Rs.240 croresBto various PwC entities in India for ‘enhancement of skills’.Payment of Income Tax on the said amounts does notlegalise the remittance. The remittance shows that theforeign company has control over Indian Firms and is thusindirectly running chartered accountancy business in Indiaand also getting its return on the said amount.

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(iv) There is falsification of accounts with regard to insurancepremium for a 280 crore policy by PwC firms in India inviolation of Companies Act, 1956.

(v) PwC is responsible for the violations by Satyam scam, failureDof the Global Trust Bank (GTB) and UB Group (KingfisherAirlines) for which action ought to be taken.

(vi) SFIO and CBI have found PwC guilty. Still, the PwC firmshave not been prosecuted and have been awardedGovernment contracts such as GST Suvidha Provider forEGST Network, consultancy contract by the KeralaGovernment for preparing master plan to connect Kochiwith industrial corridor of south India.

14. The prayers of the petitioners on above basis are:

(a) ICAI must take immediate action for deregistration ofFthese firms in terms of their own report of 2011 whichthey had themselves accepted.

(b) These audit firms ought to be prosecuted for offencesunder the Chartered Accountants Act, 1949.

(c) PwC firms ought to be prosecuted under FEMA, 1999Gregarding the payment of Rs.240 crores and Rs.42 croresby the ED.

(d) PwC Kolkata firm and partners need to be prosecutedunder the Benami Transactions (Prohibition) Act.

H(e)Investigation and action on part of ICAI and Ministry

of Corporate Affairs with regard to the falsification ofaccounts and wrong accounting of the insurance policyof Rs.280 crores that was utilized by PwC Bangalorewithout paying any premium.

(f) A CBI investigation into the receipt of Rs.240 crores sothat the real purpose of such receipts is known andnecessary action may be taken.

High Powered Committee Expert Group Report dated 29thJuly,2011

15. In its report dated 29[th] July, 2011 on Operation of MultinationalNetwork Accounting Firms (MAFs) in India, the expert group constitutedby the ICAI examined the issues concerning operation of MAFs in India.The group was constituted in the context of corporate fraud of highmagnitude revealed by the statement of Chairman of Satyam. The ICAIsought curbing of undesirable activities/operations of MAFs. The Ministryheld a meeting with the representatives of the ICAI to identify the issues.Thereafter, the following issues were referred to the Expert Group bythe High Powered Committee of the ICAI:

“(a) Manner in which certain Indian CA firms, hold out topublic that they are actually MAFs in India, the mannerin which assignments are allotted, determination ofnexus/linkage. The representatives of certain IndianCA firms carry two visiting cards one of Indian CA firmand another of a multinational entity. They representthe multinational entity and seek work for Indian CAfirm.

(b) Name used by auditor in/his report – The basic questionwas whether the auditors of M/s. Satyam had correctlymentioned the name of their firm in the audit report.

(c) Terms and conditions and cost payable for use ofinternational brand name – No international firm willallow its name to be used by all and sundry. Thequestion is what is the consideration whether it isdetermined as a percentage of fee or profits and whetherit is within the framework of Chartered Accountants Act,1949, Regulations framed, thereunder Code of Conductand Ethics.

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A(d)Nature of extra benefits accrued to the Indian CA firmshaving foreign affiliation.

(e) How the MAFs placed their foot in India – Long backin a meeting with RBI it was informed that the MAFsentered in India to set up representative offices. NoBdocuments are available as regards the terms andconditions set out while granting them permission tooperate in India. However, the RBI vide its letterNo.Ref.DBS.ARS.No.744/08:91:008 (ICAI)/ 2003-2004dated 23[rd] March, 2004 inter alia, mentioned that “RBIhas not permitted any foreign audit firm to set up officeCor to carry out any activity in India under the currentexchange control regulations.”

(f) Contravention of permission originally granted byGovernment – What was the original permission givenfor these firms to enter into India and subsequentlyDwhether they are adhering to the terms and conditionsof that permission? If contravention was found to takeup with Government/FIPB – for approachingGovernment or FIPB, ICAI must have information as tothe nature of permission given. As already mentioned,Eno documents are available indicating the nature ofpermission granted. What is the current position ofinternational trade in accounting and related services?The opening up of accounting and related services, canbe linked to reciprocal opening up by developedcountries.

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(g) Additional powers required by ICAI to curb themalpractices – If under the existing legislation, ICAIdoes not have enough powers to curb this practice,whether they would need more powers. A separateproposal for amendment of Chartered Accountants Act,G1949 has been sent by the Council to the Governmentseeking additional powers.”

16. It was noted that some of the MAFs are active in India andare rendering services which are provided by CAs without registrationwith the Institute. Certain MAFs are corporate or juridical persons withHsignificant commercial presence in India and are rendering assurance services. They solicit professional work including audit work by includinginternational brand name in their name. With the same brand namescertain Indian CA firms were registered with the ICAI. They hold outto public that they are actually MAFs in India, whereas to the ICAI theyhold out that they are purely Indian CA firms having no relationship withforeign entities. The government, regulators and the ICAI must ensurethat such wrong impression is not permitted. Entities other than CAs inpractice should be prohibited from providing auditing and assuranceservices in absence of their regulation under a law. Indian CAs are notgetting mutual treatment in other countries, while the MAFs continue tooperate in India through the Indian CA firms. Entities having similarname as that of MAFs, which entered through automatic/FIPB route,are rendering Chartered Accountancy services contrary to the policy ofnot permitting Foreign Direct Investment (FDI) in the field of accounting,auditing and book keeping services, taxation services and legal services.The Institute requested the Department of Company Affairs to take thefollowing action:

“(i) for reviewing the existing situation for ensuringreciprocal advantage in favour of the Indian accountingprofession;

(ii) to take appropriate action against MAFs if found to bein violation including cancellation/revoking/withdrawal the permission already granted to suchforeign entities;

(iii) to ensure that the non-compliance of the terms &conditions of the permission granted by the Governmentto such MAFs is dealt with effectively;

(iv) to prohibit the MAFs/consultancy firms which have setup commercial presence either as a corporate entity orotherwise from defying the restrictions in terms of theGovernment policy both in letter & spirit; and

(v) to ensure that the names of the companies which aresame or similar to the names of MAFs should not beallowed to continue to operate in India.”

17. The Institute called for information from the Indian CA firmsperceived to be having international affiliations to examine whether theyare functioning within the framework of CA profession. The exercise A

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Aresulted in finding out 171 names of firms but the said firms were reluctantto submit copies of agreements with foreign entities and their tax returns.Certain CA firms submitted the documents by masking certain portionscontained in their agreements, partnership deeds and assessment orders/income tax returns claiming confidentiality and commercially sensitivenature of the documents. Some of the firms did not give the details.B

18. The group considered network groups as ‘A’ to ‘D’. Withregard to ‘A’, it was observed that the multinational entity had permittedthe participating firms in the network to use the brand name. Therelationship between members and firms and how these are governedfrom the same offices under common management and control was notCdisclosed. The linkage was clear from the data disclosed on the website.Firms received financial grants from non-CA firms contrary to theprohibition for the members of the Institute to receive any part of profitsfrom non-member of the Institute. The networking firms have maderemittances to a multinational entity, sharing their revenue purportedlyDtowards subscription fees, technology cost and administration cost etc.However, the break-ups of costs were not furnished. The cost excludedmarketing, publicity and advertising which was not allowed as per theCA Act. The data was not furnished to support the claim that remittancesare only in respect of such matters and not related to the volume ofbusiness generated through the efforts of the multinational entities. AEtotal and full disclosure was not made in spite of repeated directions.The domain name used by all the firms in the network was identical tothe name of the multinational entity which supports the view that theyhold out that these firms were part of international network. Some ofthe firms operate from the same premises from where their international Faffiliate also operates. They share the same telephone and fax numbers.They share human resources with other firms. Articled Assistants arealso shared without following the restrictions imposed by the ICAI.

19. With regard to group ‘B’, the multinational entity had executedsub-licence agreements with the Indian firms. They stated that they areGnot sharing their fees or profits with any multinational entity butreimbursement of costs relating to certain central facilities and leviesare made annually. The CA firms used name of the international entityin their E-mail IDs. The E-mail ID and the domain name resembled thename of the multinational entity. Thus, in the same manner, as in respectof network ‘A’ the CA firms in network ‘B’ hold out that they are part ofH

the international network. They share same premises, same telephoneand fax number. They made remittances annually to the multinationalentity sharing their revenue with multinational entity which they haveclaimed to be towards reimbursement of cost towards central facilitiesand levies. They do not provide break-up which may show that the costincluded marketing, publicity and advertising.

20. The firms in the Network ‘C’ are also using the MAF’s nameas part of domain name in their E-mail IDs, which is displayed in thevisiting cards of the partners of the firms.

21. Similar was the position with regard to Network ‘D’. Thefirms in Network ‘D’ also used the name of multinational entity as domainname.

22. The Council has prescribed maximum limit for statutory auditand tax audit which a member in practice can undertake in a year. But,by sub-contracting the work to other firms, the firms are undertakingmore than the prescribed work leading to deterioration of quality ofperformance.

23. The member firms are required to refer the work amongthemselves. In respect of some firms, referral fee is payable andreceivable. Agreements also provided for use of name and logo.Payment/receipt of referral fee is prohibited as per code of conductapplicable to CAs.

24. The group noted that firms have names identical to the namesof MAFs operating in India but in absence of complete data, a conclusivefinding could not be recorded as to violation of the CA Act with regardto sharing of fees or profits with non-members, securing business throughsolicitation/publicity. International affiliations with entities which do notfollow the same Code of Ethics as applicable to Indian CA firms vitiatethe level playing field with other Indian CA firms. Control of the IndianCA firm is effectively placed in the hands of non-members/companiesand foreign entities.

25. Some of the observations in the report are:

“4.2 The Council of ICAI has deliberated that some of the MAFsare active in India and are rendering services such as assuranceservices, taxation services, etc. normally provided by CharteredAccountants, without registration with the Institute and, without A

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being subject to any disciplinary and regulatory control on theethical and independent issues. Certain MAFs either as corporateand other juridical persons with the Institute brand name weregiven permission by the other regulators/Government for doingconsultancy business in India. These entities have establishedsignificant commercial presence in India and are renderingassurance services. These private limited companies in certaincases solicit professional work including audits by using theinternational brand name and projecting large experience,infrastructure and international database including turnover,manpower size, technical expertise and experience in othercountries. These private limited companies work under the nameand style/trade name/brand name of well known MAFs and incertain cases also co-brand multinational name with certain IndianCA including by making presentations and organizing mega publicprogrammes. In fact these firms and individuals employ withthem as Directors or partners or in other capacity and hold outto the public that they are MAFs. In view of their well knownbrand and presence internationally the corporate sector, theGovernment and the society at large and sometimes even theregulators carry a wrong impression as if these private limitedcompanies are in fact MAFs and the services being provided bythese private limited companies are actually services beingprovided by such MAFs.

4.3 Certain Indian CA firms and private limited companiesassociated with them hold out to public that they are actuallyMAFs in India whereas to the ICAI/regulators, they hold outthat they are purely Indian CA firms having no relationship withforeign entities.

4.4 It is important for the Government, regulators and the ICAIto ensure that such wrong impression is not permitted and allentities other than Chartered Accountants in practice and CAfirms should be actually prohibited directly or indirectly fromproviding auditing and assurance services, as these are requiredto be regulated in the public interest. The very objective of havingthe profession relating to accountancy under specific Act ofParliament, incorporating therein a strict disciplinary and ethicalcode was to ensure that there is no dilution of the professionalstandards and services are provided in a regulated manner.

4.5 In certain cases, joint venture agreements, MOUs, foreigncollaboration agreements, shareholders agreements, private equityparticipations and side letters are exchanged between partiesmandating appointment auditors as prescribed by internationalparent. In certain cases public sector undertakings, Governmentdepartments/Central and State Governments advertise for variousprofessional services wherein the basic eligibility requirementtends to favour Multinational Network Accounting firms or othercorporate entities. It has also been observed that auditors havebeen replaced by Indian CA firms networked with MultinationalNetwork Accounting firms apparently for no professional reasons.

4.6 The ICAI has been pursuing with the accounting bodies indifferent countries for recognition of its qualification and relaxationfor its members for entry level requirements like appearance incertain papers such as accounting, auditing as well as trainingrequirements giving due credit to the ICAI’s educational andtraining curriculum. In addition, the Indian Chartered Accountantsface various invisible/non-professional barriers like visa,citizenship and residency requirements, procedural impedimentsto provide services in such countries. While the Institute hasbeen pursuing vigorously for recognition of its qualification-forensuring level playing field for Indian Chartered Accountantswhereas the countries concerned are not showing a sense ofseriousness and urgency which these matters deserve. IndianChartered Accountants are not getting a fair, reasonable andmutual treatment which they deserve. Since MAFs, in corporateor other form, are already commercially present and operatingin India on the basis of holding out as MAFs/the Indian CA Firmsand private limited companies may be de jure owned andmanaged to Indian Chartered Accountants, whereas de factothese are fully governed MAFs having headquarters in developedcountries, who are denying a level playing field to Indian CharteredAccountants in their country by the restrictions as explainedherein. As a result the negotiating capacity of India accountingservices favouring the Indian accountants has been significantlyreduced. In fact, this has also adversely affected the bargainingcapacity of the Government of India for Indian accountingprofession under the ongoing negotiations under the WTO/General Agreement of Trade in Services (GATS).

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4.8 However, it has been noticed that the entities having similarname as that of MAFs, which entered through automatic/FIPBroute for rendering management consultancy services (as definedin CPC 865), are transgressing the permission so granted andare rendering taxation services (CPC 863), auditing, accountingand book keeping services (CPC 862) and legal services (CPC861). Instances brought to the notice of the Study Teamconstituted by the Council in April, 1995 and the Study Groupconstituted by the Council in February, 2002 are placed atAnnexure-III. Extracts taken from the website pages of someof the MAFs are given at Annexure-IV.

4.9 It is noted that as per the policy of the Government of India,Foreign Direct Investment (FDI) is not permitted in the field ofaccounting, auditing and book keeping services, taxation servicesand legal services and no commitment had been made by Indiafor opening of such services under the WTO/GATS. However,some entities were not only providing services through their ownestablishment (signifying their commercial presence i.e., Mode-3)in India but also through service providers in India particularlyfor those services like auditing which cannot be rendered bythem under the relevant laws of the country.

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4.16 The 171 firms from whom documents/details were calledfor by and large furnished the documents that were called for.However, certain CA firms have submitted the documents bymasking certain portions contained in their agreements,partnership deeds and assessment orders/income tax returnsclaiming confidentiality and commercially sensitive nature of thedocuments. The financial details were asked with a view toconfirm compliance of these firms with the code of ethics inregard to sharing of fees, inward and outward remittances, natureof expenses, financial dealing with non-members, nature ofpayment, nature of revenue sharing of fees belonging to non-members and to identify activities not permitted within theframework of the Chartered Accountants Act, 1949, other lawsincluding Foreign Exchange Management Act, 1999 and ForeignContribution (Regulation) Act, 1976, Code of Ethics and Conduct.

Masking/omission of certain portions was construed as non-compliance with the directions of the Institute, and such firmswhich had masked certain portions were asked to additionallysubmit copies of their financial statements i.e. Income &Expenditure Account and Balance Sheets or Statement of Affairsincluding tax audit reports for the last 3 years. However, thesefirms, instead of submitting unmasked and complete information,had been questioning the logic/reasoning behind asking such data,which according to the firms are commercially sensitive/confidential. Despite reminders, some of the firms had notsubmitted unmasked/complete details.

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5A.8 Observations :

(i) The multinational entity has granted permission to theparticipating firms in the network to use the brand name. This isnotwithstanding the fact whether the firms have signed theLicense Agreement with the entity or not. The relationshipbetween members and firms how these are governed from sameoffices under common management and control is not disclosed.The data disclosed on the website, however, clearly brings outthe linkage.

(ii) Though some of the participating firms in the Network‘A’ have not signed, the Verein document of Name LicenseAgreement yet while making remittances to the multinationalentity, the revenue of the entire network is taken into account.

(iii) The Verein document makes a mention of SupplementalRegulation but while submitting documents to the Institute thefirms in Network ‘A’ have not submitted a copy thereof.

(iv) The networking firms in Network ‘A’ have receivedfinancial grants from a non-CA firm. A member of the Instituteis prohibited from receiving any part of profits from a non-memberof the Institute. Such an act on the part of a member/firm seemsto be in violation of Item (3) of Part I of the First Schedule to theChartered Accountants Act 1949.

(v) The networking firms in Network ‘A’ have maderemittances to the multinational entity, sharing their revenue with A

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multinational entity, which they have claimed to be towardssubscription fees, technology cost including cost of licenses –obtained for software, budgeted expenses, cost of administrationetc. However, the firms have not provided break-up/computationand whether the cost includes cost towards marketing, publicityand advertising the products and services in India as well asabroad and any other cost which is not allowed as per theChartered Accountants Act, 1949, Regulations framed thereunderand Code of Ethics. The firms in Network ‘A’ have also notfurnished any data in support of their claim that the money remittedby them to the multinational entity is in respect of above mattersonly and that the same in no way relates to the volume of businessgenerated through the efforts of the multinational entity andthrough use of brand name. A total and full disclosure in thisregard has not been made in spite of repeated directions by theHigh Powered Committee/Group on the basis of directions ofthe Council.

(vi) The Verein document lay an obligation on the memberfirms in Network A “to make every reasonable effort to referclients to other member firms”. A member of the Institute isprohibited from securing any professional business by meanswhich are not open to a Chartered Accountant. However, theyare required to follow the networking guidelines of the Institute.Such an act on the part of a member/firm seems to be in violationof Item (S) 1 of Part I of the First Schedule to the CharteredAccountants Act, 1949.

(vii) The networking firms in Network A and all theirpersonnel are using the domain name identical to the name ofthe multinational entity in their email IDs and the same is displayedin their visiting cards. This clearly supports holding out by thesefirms in Network A that they are part of the international NetworkA of MAFs. Some of these firms operate from the same premisesfrom where their international affiliate also operates. They sharethe same telephone and fax nos. thus establishing that they areone and the same. The Indian firms in Network A and MAFsare de facto the same entities providing assurance, managementand related services and as such their operations seem tocircumvent the provisions of the Chartered Accountants Act,

1949 and Regulations framed thereunder. A member of theInstitute is prohibited from disclosing the affiliation with anyinternational entity. In this regard, the Council, at its 172[nd] meetingheld in January, 1995, while agreeing with the recommendationof the then Committee on Ethical Standards and UnjustifiedRemoval of Auditors that the use of expression/words, “InAssociation with ….”, Associates of ……..”, Correspondentsof ……” etc. on the stationery, letter-heads, visiting cards andprofessional documents of the firm of CAs was not permissiblein view of the provisions of Item (7) of Part I of the First Scheduleto the Chartered Accountants Act,1949, decided that it shouldnot be permitted irrespective of whether the name sought to beused is the name of an Indian firm or a foreign firm.

(viii) The networking firms in Network A are sharing theirhuman resources with other firms in the network. However, ithas been possible to ascertain whether the articled assistancesare also being rotated among the firms. It may be mentionedthat articled assistants are assigned to a member, whose obligationis to train them. As such, the articled assistances cannot beallowed to be utilized by any other member. However, to addressthis issue, there exists a provision under Regulation 54 of theChartered Accountants, Regulations, 1988 enabling secondmentof articled assistances with a view to provide the articled assistantsthe opportunity of gaining practical experience in areas wherethe principal may not be in a position to provide the same. Suchsecondment is allowed under the Regulations with certainrestrictions and conditionalities and the same is required to besent to the Institute for records within thirty days from the dateof commencement of training on secondment.

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5B.7 Observations :

(i) The CA firms in Network B and all their personnel are usingthe domain name identical to the name of the multinational entityin their email IDs, and the same is displayed in the visiting cards.This clearly supports holding out by these firms in Network Cthat they are part of the international Network C of MAFs. Someof these firms operate from the same premises from where theirinternational affiliate also operate. They share the same telephone AB

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and fax nos. thus establishing that they are one and the same.The Indian firms in Network B and MAFs are de facto thesame entities providing assurance, management and relatedservices and as such their operations seem to circumvent theprovisions of the Chartered Accountants Act, 1949 andRegulations framed thereunder. A member of the Institute isprohibited from disclosing his affiliation with any internationalentity. In this regard, the Council, at its 172[nd] meeting held inJanuary, 1995, while agreeing with the recommendation of thethen Committee on Ethical Standards and Unjustified Removalof Auditors that the use of expression/words, “In Associationwith ……..”, “Associates of …………..”, Correspondents of…………” etc. on the stationery, letter-heads, visiting cards andprofessional documents of the firm of CAs., was not permissiblein view of the provisions of Item (7) of Part I of the First Scheduleto the Chartered Accountants Act, 1949, decided that it shouldnot be permitted irrespective of whether the name ought to beused is the name of an Indian firm or a foreign firm.

(ii) The CA firms in Network B have made remittances annuallyto the multinational entity sharing their revenue with multinationalentity which they have claimed to be towards reimbursement ofcost towards central facilities and levies. However, the firmshave not provided break-up/computation and whether the costincludes cost towards marketing/publicity and advertising theproducts and services in India as well as abroad and any othercost which is not allowed as per the Chartered Accountants Act,1949, Regulations framed thereunder and the Code of Ethics.The firms in Network B have also not furnished any data insupport of their claim that the money remitted by them to themultinational is in respect of above matters only and that thesame in no way relates to the vote of business generated throughthe efforts of the multinational entity and through use of brandname. A total and full disclosure in this regard has not been madein spite of repeated directions by the High Powered Committee/Group on the basis of directions of the Council.

(iii) The networking firms in Network A are sharing their humanresources with other firms in the network. However, it has notbeen possible to ascertain whether the articled assistants are also being rotated among the firms. It may be mentioned thatarticled assistants are assigned to a member, whose obligation isto train them. As such, the articled assistants cannot be allowedto be utilized by any other member. However, to address thisissue, there exists a provision under Regulation, 1988 enablingsecondment of articled assistants with a view to provide thearticled assistants the opportunity of gaining practical experiencein areas where the principal may not be in a position to providethe same. Such secondment is allowed under the Regulationswith certain restrictions and conditionalities and the same isrequired to be sent to the Institute for records within thirty daysfrom the date of commencement of training on secondment.

(iv) The obligations set out in respect of the CA firms in NetworkB as per the sub-licensee agreement give a clear indication thatthe CA firms are under the management and supervision of anon-CA firm for matters such as admission of partners, merger,purchase of assets, etc.

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5C.4 Observations :

(i) The CA firms in Network C have amounts to the multinationalentity, which they claim to be on account of actual and allocablecost for activities and services provided, however, the firms havenot provided break up/computation and whether the cost includescost towards marketing, publicity and advertising of the productsand services in India as well as abroad and any other cost whichis not allowed as per the Chartered Accountants Act, 1949,Regulations framed thereunder and Code of Ethics. The firms inNetwork C have also not furnished any data in support of theirclaim that the money remitted by them to the multinational entityis in respect of above matters only and that the same in no wayrelates to the volume of business generated through the effortsof the multinational entity and through use of brand name. Atotal and full disclosure in this regard has not been made in spiteof repeated directions by the High Powered Committee/Groupon the basis of directions of the Council.

(ii) The firms in Network C have admitted that the globalnetwork identifies broad market opportunities, develops strategies, A

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strengthens network’s internal products and promotesinternational brand. The member firms in India also gain accessto brand and marketing materials developed by their overseasaffiliate. This amounts to indirectly soliciting professional workand securing professional business by means which are not opento a Chartered Accountant.

(iii) The firms in Network C have mentioned that they havejoined the network and formed different firms in different citiesto overcome the limitation on number of partners.

(iv) The network C firms have entered into an agreementfor sharing of resources. Sharing of human resources includesarticled assistants also, as confirmed by one of their then partners,in a statement given by him to the members of the Committee.It may be mentioned that articled assistants are assigned to amember, whose obligation is to train them. As such the articledassistants cannot be allowed to be utilized by any other member.However, to address this issue, there exists a provision underRegulation 54 of the Chartered Accountants Regulations, 1988enabling secondment of articled assistants with a view to providethe articled assistants the opportunity of gaining practicalexperience in areas where the principal may not be in a positionto provide the same. Such secondment is allowed under theRegulations with certain restrictions and conditionalities and thesame is required to be sent to the Institute for records withinthirty days from the date of commencement of training onsecondment.

(v) The firms in the Network C and all its personnel areusing the MAFs name as part of domain name in their emailIDs, which is displayed in the visiting cards of the partners ofthese firms as well as the CA employees. This clearly supportsholding out by these firms in Network C that they are part of theInternational Network C of MAFs. Some of these firms operatefrom the same premises from where their international affiliatealso operates. They share the same telephone and fax nos. thusestablishing that they are one and the same. The Indian firmsand MAFs are de facto the same entities providing assurance/management and related services and as such their operationsseem to circumvent the provisions of the Chartered Accountant

Act, 1949 and Regulations framed thereunder. A member of theInstitute is prohibited from disclosing his affiliation with anyInternational entity. In this regard, the Council, at its 172[nd] meetingheld in January, 1995, while agreeing with the recommendationof then Committee on Ethical Standards and Unjustified Removalof Auditors that the use of expression/words, “In Associationwith ……..”, “Associates of …………”, Correspondents of………” etc. on the stationery, letter-heads, visiting cards andprofessional documents of the firm of CAs, was not permissiblein view of the provisions of Item (7) of Part I of the First Scheduleto the Chartered Accountants Act, 1949, decided that it shouldnot be permitted irrespective of whether the name sought to beused is the name of an Indian firm or a foreign firm.

(vi) As per the Name License Agreement, the CA firm inNetwork C shall be liable for and will indemnify the BusinessTrust against any and availability, loss, damage, cost, legal costand other expenses of any nature suffered, or incurred by theBusiness Trust arising out of any dispute against the BusinessTrust by a third party.

(vii) The service as defined in the agreement with the Trustgranting license for use of name, prescribes the services whichwill be covered by the said Trust and rendered by the CA firm.This includes audit, assurance as well as tax advisory services.

(viii) The letterheads and the visiting cards furnished by thefirm in Network C do not mention anywhere that it is a firm ofChartered Accountants.

5D.6 Observations :

(i) The firms in Network D have a management servicesagreement, technical services agreements, regulations and namelicense agreements with other entities, copies of which have notbeen furnished by the firms.

(ii) The firms in Network D and all their personnel have beenusing the name of multinational entity as domain name in theiremail IDs, which is displayed in the visiting cards used by thepartners of these firms as well as their CA employees. Thisclearly supports holding out by these firms that they are part ofthe international Network D of MAFs. Some of these firms A

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operate from the same premises from where their internationalaffiliate also operates. They share the same telephone and faxnos. thus indicating that they are one and the same. The Indianfirms and MAFs are de facto the same entities providingassurance, management and related services and as such theiroperations seem to circumvent the provisions of the CharteredAccountants Act, 1949 and Regulations framed thereunder. Amember of the Institute is prohibited from disclosing his affiliationwith any international entity. In this regard, the Council at its172[nd] meeting held in January, 1995, while agreeing with therecommendation of the then Committee on Ethical Standardsand Unjustified Removal of Auditors that the use of expression/words, “In Association with ……….”, “Associates of

…………”, Correspondents of ………” etc. on the stationery,letter-heads, visiting cards and professional documents of thefirm of CAs, was not permissible in view of the provisions ofItem (7) of Part I of the First Schedule to the CharteredAccountants Act, 1949, decided that it should not be permittedirrespective of whether the name sought to be used is the nameof an Indian firm or a foreign firm.

(iii) The firms in the Network D have signed an agreementfor sharing of human resources; however, it has not been possibleto ascertain whether the articled assistants are assigned to amember, whose obligation is to train them. As such, the articledassistants cannot be allowed to be utilized by any other member.However, to address this issue/there exists a provision underRegulation 54 of the Chartered Accountants Regulations, 1988enabling secondment assistants with a view to provide the articledassistants the opportunity of gaining practical experience in areaswhere the principal may not be in a position to provide the same.Such secondment is allowed under the Regulations with certainrestrictions and conditionalities and the same is required to besent to the Institute for records within thirty days from the dateof commencement of training on secondment.

(iv) One of the network firms in Network D, though is yet tosign the agreement with the multinational entity, but has alreadybeen operating as part of the multinational entity’s network andcomplies with the obligations.

(v) The amount of remittance made by firms in Network D tothe multinational entity (exceeding Rs.XXXX million in a year)has been disclosed. However, the firms in Network D have notprovided break up computation and whether the cost includescost towards marketing, publicity and advertising the productsand services in India as well as abroad and any other cost whichis not allowed as per the Chartered Accountants Act, 1949,Regulations framed thereunder and Code of Ethics. The firmshave also not furnished any data in support of their claim that themoney remitted by them to the multinational entity is in respectof above matters only and the same in no way relates to thevolume of business generated through the efforts of themultinational entity and through use of brand name. A total andfull disclosure in this regard has not been made in spite of repeateddirections by the High Powered Committee/Group on the basisof directions of the Council.

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6. Findings

6.1 The Committee/Group with a view to ascertain compliancewith the various aspects of Code of Ethics had receiveddocuments/details listed in para 4.13 hereinabove, from 171 firms.Based on information received, it was found absence of affiliationetc. to 135. Of these, nearly firms submitted data in entirety.Other firms submitted most of the data, such as financial that forvarious reasons the number of firms actually 73% of the firmssubmitted the data masking of withholding most of the importantdata, such as financial figures, profit sharing, capital contributionetc. primarily on the grounds of commercial sensitiveness/confidentiality of the data.

6.2In the absence of complete set of documents such ascomplete copy of agreements between some of the Indian CAfirms and their international affiliates/network along withannexures referred thereto, networking agreement, internalregulations, service agreements, statute of international affiliateetc. it was not possible to draw conclusive inference as to violationof the Chartered Accountants Act, 1949 with reference to sharingof fees or profits with non-members, sharing profits of non-members, securing business through means not open to Chartered AB

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Accountants, solicitation, direct or indirect publicity etc. This shallrequire proper examination under the relevant provisions ofSections 21, 22 and Schedules framed thereunder.

6.3Most of these networks are created/established outsideIndia and are functioning under different set of ethical andregulatory guidelines. The India CA firms having internationalaffiliations are subject to regulatory jurisdiction of ICAI and arerequired to follow the Code of Ethics applicable to CharteredAccountants in India. However, due to the dichotomy of otherentities operating in close association with the Indian CA firms,often permitting common brand name/using of logos, coupledwith leveraging on international resources etc., is vitiating thelevel playing field with other Indian CA firms.

6.4Most of these firms have a name license agreement to useInternational brand name. One of the terms of such agreementis that apart from common professional standards etc., the Indianaffiliates shall harmonize their policies etc. with the global policiesof the network. In this manner, matters such as selection andappointment of partners, acquisition of assets, investment in capitaletc. are regulated through the means of such agreements and attime even the representative voting is held by an aligned privatelimited company rather than the CA firms themselves. As aconsequence of this, the control of the Indian CA firms iseffectively placed in the hands of non-members/companiesforeign entities. The desirability of such a practice from the pointof view of independence needs to be examined in the light ofCode of Ethics and Schedules to the Chartered AccountantsAct, 1949 and Sections 21 and 22 thereof.

6.5In respect of some firms with names approved by Institutee.g. “XYZ & Co., Patna”, the partnership deeds sent by the saidfirm revealed that the name of the firm is given as “XYZ &Co.” and not as “XYZ & Co. Patna” which is the name registeredby the Institute. This means that the firm has submitted to theInstitute the partnership deed of a firm by the name “XYZ &Co.”, whereas the partnership deed supposed to have beensubmitted should be that of “XYZ & Co., Patna”. Letters werewritten to such firms requesting them to submit the appropriatepartnership deed. The first have replied that it was an inadvertent mistake on their part and on the part of the Institute which hadapproved a trade/firm name with city name as the suffix.

6.6The firms, M/s WZ, Patna and M/s XYZ & Co. Patna,vide form No.117 sought approval of the Council of the Institutefor the firm name, ‘XYZ, Patna’ and ‘XYZ & Co., Patna’respectively. The subsequent forms 18 filed by the firm, forchange in the constitution, also mention the firm name as such.However, the partners of the firm, while affixing their signatureson the audit reports, mention the name of the firm as ‘XYZ’ and‘XYZ & Co.’ respectively. The audit reports of companies,which were audited by them, have been signed on behalf of ‘M/s XYZ’ and not ‘M/s XYZ Patna’ and by ‘M/s. XYZ & Co.’and not ‘M/s. XYZ & Co. Patna’. It is an accepted fact that M/s XYZ, Patna and M/s XYZ & Co. Patna have carried out auditsof certain companies whose shareholders have appointed M/sXYZ as the auditors. M/s XYZ and M/s XYZ & Co., by allowingthe partners of M/s XYZ, Patna and M/s XYZ & Co. Patnarespectively to audit the accounts of clients have rendered theaudited accounts invalid ab-initio.

6.7It is noted that Item (1) of Part I of the Second Schedule tothe Chartered Accountants Act, 1949, which deals withprofessional misconduct in relation to Chartered Accountants inpractice, mentions that a chartered accountant in practice shallbe deemed to be guilty of professional misconduct, if he disclosesinformation acquired in the course of his professional engagementto any person other than his client so engaging him, without theconsent of his client or otherwise than as required by any lawfor the time being in force. The auditors, by allowing the audit tobe conducted by an unauthorized firm, without the consent ofthe client, which was not appointed as the statutory auditors,may have allowed all information relating to the audit being passedon to the said firm, thus breaching the aforesaid Item, for whichboth the firms which were appointed and the one which carriedout the audit, may be in violation of the Code of Ethics.

6.8In response to Institute’s letter, some firms have furnisheddetails/documents after masking or eliminating certain portionsuch as financial figures, profit sharing ratio, capital contributionetc. The Institute has sent numerous letters to these CA firms ABC

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for providing the information particularly, copies of agreements/contracts they have with their international affiliates/networkswith complete annexures, partnership deed with completeannexures and schedules mentioned therein, assessment ordersand/or tax returns, financial statements i.e. income andexpenditure statement, balance sheet or statement of affairsincluding tax audit reports. As stated earlier, most of the firmshave submitted copies of agreements/contracts, partnershipdeeds, assessment orders or income-tax returns but around 27%of firms have not furnished the information and have masked/blackened/not provided the important information. It may befurther stated that some of the firms instead of complying withthe directions of the Institute, have questioned the logic/reasoningbehind seeking copies of income-tax returns, which according tothem are commercially sensitive/confidential. One group of firmsbelonging to one network has cited two legal opinions that theyhave obtained in this regard and have declined to submit unmaskeddetails.

However, they have sought personal hearing. As mentionedearlier, the Group considered this matter and noted that documentshave been called in pursuance of the directions given by theCouncil and that detailed reasoning for calling of documents hasalso been given to the firms. Hence, the Group felt that it wouldnot be within its powers to override directions of the Council andgrant any concession to certain firms.

6.9Section 2(2) of the Chartered Accountants Act, 1949 definesthe term ‘to be in practice’. Pursuant to Section 2(2) above, theCouncil of the Institute has passed a resolution permittingChartered Accountants in practice to render entire range ofmanagement consultancy and other services. The members ofthe Institute are governed by a Code of Ethics which is mandatoryfor every member of the Institute. The services rendered by themultinational entities in India are also to the nature of managementconsultancy (including financial services, valuation, audit andassurance services etc.) and other related services which arecarried on through the medium of private limited companies whichare carried using the internationally known accounting firm’sname. Since these entities employ Chartered Accountants as well as non-Chartered Accountants for discharging variousresponsibilities, a misleading Impression is created that theservices rendered by the private limited companies are in factrendered by a Multinational Accounting Firm. In fact, this is notso as the company rendering such services is neither registeredwith ICAI nor is governed by any ethical code or regulatoryframework.”

26. Accordingly, the recommendations were made to the effectthat the Council should consider action against the firms which had notgiven the full information; consider action against the firms who aresharing revenue with multinational entity/consulting entity in India whichmay include cost of marketing, publicity and advertising as against theethics of CAs; action should be considered against the firms who hadreceived financial grant from the multinational entities in spite of prohibitionagainst the CA firms. A member is not allowed to accept any share,commission or brokerage from a non-member unless such non-memberis a member of a professional body with prescribed qualifications. Furtherrecommendation is that action be taken against the audit firms distributingits work to other firms and allowing them access to all confidentialinformation without the consent of the client; require the CA firms tomaintain necessary data about the remittances made and received onaccount of networking arrangement or sharing of fee; consider actionagainst firms being paid or offered referral fee; it should be mademandatory for all firms who enter into any kind of affiliation/arrangementwith any foreign entity to disclose their international affiliation/arrangementevery year to the Institute; Council should consider action against thefirms using name and logo of international networks; action should alsobe considered for securing professional business by means which arenot open to CAs in India. The Council should also issue public statementthat without specific approval of the Council, by a notification underSection 29(2) of the CA Act, no MAF can directly or indirectly operatein India through any agreement or arrangement with any Indian entity/firm of CAs. No international firm or entity should be permitted to holdout to public that they are operating in India as a MAF as part of theirnetwork. No Indian CA firm should be permitted to pay any part of theirprofit or fee or other receipts to any person other than a member ofICAI or a firm owned by them by way of cost or percentage exceptpayment for specific professional fee. The Council may request theMinistry of Corporate Affairs, Reserve Bank of India and other relevant A

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AMinistries/Departments to take appropriate action so that therecommendations can be implemented to engage the services ofaccounting firms registered with ICAI. Only CAs and CA firms registeredwith ICAI should be permitted to provide audit and assurance services.Wherever MAFs are operating in India, directly or indirectly, they shouldnot engage in any audit and assurance services without ‘No Objection’Band permission from ICAI and RBI. Instructions may be issued thatany joint venture agreement, MOU, foreign collaboration agreement,stakeholders agreement, private equity fund condition, venture capitalfund condition or side letters prescribing for appointment of a specificChartered Accountant or a CA Firm or any other entity are illegal andCagainst public interest.

Stand of the ICAI

Stand of the ICAI

27. ICAI in its response submitted that the function of the institutewas to regulate the profession of chartered accountancy and to takeaction against misconduct of its members under The CharteredDAccountants (Procedure of Investigations of Professional and OtherMisconduct and Conduct of Cases) Rules, 2007. The accountingprofessionals had significant role in the economy of the country. Theeconomy of India had witnessed two major securities scams in 1992 and2001. The CA Act was amended on the recommendation of the JointEParliamentary Committee which enquired into the stock market scamsincluding the high level committee on the ‘Corporate Audit andGovernance’ under the chairmanship of Shri Naresh Chandra whichexamined the Auditor-Company relationship and disciplinary mechanismfor the Auditors. Amendment was proposed by the Council of the Instituteto establish a Disciplinary Directorate headed by Director (Discipline).F

28. In response to the grievance that no action was taken againstPwCPL and their network audit firms in India, the ICAI submitted thatits Disciplinary Directorate had already taken cognizance of theinformation in the Article dated 17[th] January, 2012 in the Times of India“Sundry Income cushions PwC India”. Letter dated 9[th] March, 2012Gwas written to PwC, New Delhi, Chennai, Bangalore, PwC, Kolkata,LL, Kolkata. A letter was also written to RBI. The stand of the PwCfirms, was that news item did not make any reference to their firms andno clarification was necessary. PwC, Kolkata submitted that it wasmember of PwC network of firms around the world (‘PwC Network’).HTo maintain the quality standards of all members, a grant of Rs.65 crores

was given to them by the PricewaterhouseCoopers Services BV duringthe financial year ended 31[st] March, 2011 as an outright, non refundablegrant. The same was included in the “Sundry Income” in their annualaccounts. The stand of LL, Kolkata, was that it was a member of PwCNetwork of Firms around the world. It received grant of Rs.28.97 croresfor maintaining quality standards from PwC Services BV during thefinancial year ended 31[st] March, 2011 as an outright, non-refundablegrant. The Disciplinary Directorate sent a reminder to the RBI and senta letter to the Commissioner of Income Tax, Kolkata and Joint Secretary(Revenue), Ministry of Finance. The Deputy Commissioner of IncomeTax, Kolkata stated that scrutiny proceedings on issue of transfer pricingwere pending for the assessment year 2010-2011 and 2011-2012 inrespect of PwCPL. With regard to the failure of PwC, Bangalore todiscover the scandal of ‘Satyam’, it was stated that the US Regulators,i.e., Securities and Exchange Commission (SEC) and PCAOB had takenaction but in India the proceedings were getting prolonged. As regardsfailure of LL to point out high level of NPAs of GTB, it was submittedthat no formal complaint was filed against PwCPL. The same is notregistered and the Institute could not take any action against them underthe CA Act as amended in 2006 and 2007 Rules. Action was takenagainst the members of LL, Shri S. Gopalakrishnan, Shri P. Rama Krishnaand Shri Manish Agarwal. Action was also taken against Shri Kersi H.Vachha and Shri Amal Ganguli. In 2002-2003 action was taken againstShri Partha Ghosh and Shri D.V.P. Rao of M/s. PwC. PwC Bangalorewere the auditors of ‘Satyam’ for which action was taken against CA S.Gopalakrishnan (For the period 1.4.2000 to 31.3.2007), CA S. Talluri(For the period 1.4.2007 to 30.9.2008), CA Pulavarthi Siva Prasad (forthe period 1.4.2001 to 31.3.2005), CA Chintapatla Ravindernath (for theperiod 1.4.2005 to 30.9.2008). Action was also taken against V. Srinivasu,the then CFO of the Satyam, V.S. Prabhakara Gupta, the then head ofInternal Audit Cell of Satyam. The Joint Director, SFIO filed a complaintdated 3[rd] March, 2009 in respect of DSQ Softwares Limited against CANaresh Kumar Tharad of M/s. N.K. Tharad & Co., CharteredAccountants, Kolkata. It was revealed that company had madepreferential allotment of shares to various entities in a fraudulent manner.

Stand of the Respondent-Firms

29. In its written submissions, Respondent No.5 M/s. DeloitteHaskins & Sells submitted that there is no allegation against it in theSLP. All the partners of Respondent No.5 were Indians and the firm A

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Awas also registered with the ICAI. An expert group was constituted bythe Ministry of Corporate Affairs which gave its report dated January31, 2017 to the effect that Big six firms (MAFs) were not operatingdirectly. Their network partners were rendering audit services. Indiannetwork firms pay global network charges to their parent organizationtowards sharing common global costs of human resources and otherBinfrastructure, technology cost. This is a standard practice acrossjurisdictions. It does not make MAFs subject to the control by the globalparent. MAFs cannot be considered as multinational entities as there isno foreign control through ownership or management. Network partnersare run, controlled and managed by Indian nationals. It was submittedCthe writ petition was not maintainable.

30. Reference has also been made to letter dated 3[rd] July, 2017addressed to the Secretary, Ministry of Corporate Affairs from the PMO,with reference to the said expert group incorporating the conclusions ofthe expert group as follows:

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“a) The accounting and auditing standards and practicesfollowed in India should be aligned to internationalstandards and practices with customization to the extentnecessary.

b)The small size of majority of India audit firms being aEconstraint in facing global competition, consolidationthrough merger and networking of India audit firmsshould be encouraged through policy measures.

c)With audit becoming a multi disciplinary function,formation of multi disciplinary audit firms withFparticipation by professionals from other relevantprofessions should be promoted.

d)It should be ensured that the recommendations ofQuality Review Board conducting technical evaluationsof India audit firms are implemented.

e)If and when audit and assurance are opened to globalGcompetition, the principle of reciprocity should befollowed and the interests of India audit firms shouldbe given due consideration.”

31. The stand of the PwC Network (Respondents 6 to 11) is thatPwC or PW is the brand owned by PwCIL registered under the laws ofH

England limited by guarantee. PwCIL acts as a coordinating companywithin the PwC network and does not provide any business or auditservices. Respondent Nos.6 to 11 are member entities of the PwCNetwork which consists of companies and firms around the world all ofwhich are separate legal entities. PwCIL allows desirous entities tobecome members of the PwC network if they follow global standards toprovide quality services for clients in respect of audit/non audit services.Uniform and consistent delivery is important. PwC network is not aglobal partnership. The network activities are to develop and implementpolicies and initiatives for a common and coordinated approach to maintainquality and standards of service. PwC brand name is based on namelicence agreement to exercise cooperation amongst member firms. Allthe members (in 177 countries) have to pay a licence fees. PwC ServicesBV (Services BV) is incorporated in Netherlands to operationalize globalstandards of services. Services BV coordinates efforts of various firmsacross the globe to develop superior global common standard. ServicesBV does not do any client related work but develop standards. It poolsmoney by charging the network entities a percentage of their revenuewhich is used to meet the expenses to develop standards. Firm ServiceAgreements are signed by network entities. Services BV works on noprofit no loss basis. Network charges are paid by all member entitiesincluding the Indian member entities. The network felt the need ofenhancing the standards and capacity of Indian network entities for whichnon refundable grants were provided. The grants are not in the nature ofinvestment. These are current account transactions and not capitalaccount transactions. For FY 2009-10, the grants were taxed but networkcharges paid to Services BV were disallowed as deduction. For FY2010-11 assessment order has been passed on 29[th] September, 2016against which appeal was pending.

32. The Enforcement Directorate (ED) sought information inrespect of funds received from outside India. In March and August,2016, ED issued summons. In July, 2017, ED again issued summonsunder Section 37 of FEMA seeking details of inward/outward remittances.In August, 2017, the Chief Financial Officer (CFO) was issued summonsby the ED to provide information about the remittances.

33. The Registrar of Companies issued notices to show cause whyprosecution should not be launched against the Directors and CompanySecretary of the PwCPL in January, 2013. Company Law Board allowed AB

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Acompounding of the offences on payment of composition amount ofRs.8,31,000/-.

34. Auditing services are being carried by firms belonging to PwCGroup as follows :

i)Price Waterhouse [FRN-310002E] – 66 Indian PartnersB(Respondent No.7)

ii)Lovelock & Lewes [FRN-301056E] – 66 Indian Partners(Respondent No.8)

iii)Price Waterhouse & Co. [FRN-050032S] – 19 IndianPartners (Respondent No.9)C

iv)Price Waterhouse, Bangalore [FRN-007568S] – 18 IndianPartners (Respondent No.10)

v)Dalal & Shah LLP [FRN-102021W/W100110] – 16 IndianPartners (Respondent NO.11)

35. There are other LLPs which are members of PwC NetworkDin India. All the partners are Indian by nationality and registered withICAI. Directors are not partners. Indian Chartered Accountant memberfirms of PwC Network operate as independent entities.

36. Guidelines of the ICAI dated 27[th] September, 2011 apply to anetwork if the network has common ownership, control or management,Ecommon quality control policies and procedures, common businessstrategy, use of a common brand name or a significant part of professionalresources.

37. The Expert Group Report of the ICAI recommended thefollowing:F

“No person or entity and specially Chartered Accountantscan hold out to public that they are operating in India as oron behalf or in their trade name and in any other manner soas to represent them being part of or authorized by MAFs tooperate on their behalf in India or they are actuallyGrepresenting MAFs or they are MAFs office/representativesin India, except those registered with ICAI in terms of Clause(Hi) as a network, in accordance with network guidelinesas notified by the ICAI from time to time.”

[(Clause 7.12 (v) of the Report at pg.152 of SLP No.1808 ofH2016].”

38. The guidelines allow registration of a network and the PwCfirms have filed their declaration in accordance with the above guidelinesand are registered in India as per Regulations of the ICAI. Merelybecause the PwC audit firms are part of global PwC Network does notby itself violate any applicable law. As regards the grants received inFinancial Years 2008-09, 2009-10 and 2010-11, amounting to Rs.142.9,tax has been paid as per assessment and proceedings are pending. TheNetwork has furnished all the information to the ICAI.

39. Since all the partners are Indians and are registered with ICAI,they are personally accountable to the ICAI for any professionalmisconduct. Services BV does not have any stake in the partnership orprofits of the firms. Thus, there is no violation of Section 25 of the CAAct.

Stand of Central Board of Direct Taxes (CBDT)/ED

40. Stand taken by the CBDT is that on receipt of letter dated 1[st]July, 2013 from the Advocate for the petitioner, investigation wasconducted by the Director General of Income Tax (Investigation) (DGIT)with regard to the income tax implications. It was found that 11 entitiesbelonging to the PwC Group are operating in India. Four entities havereceived grants of Rs.477.64 crores from PwC Services BV during theperiod 2009 to 2013. The grants are of two types – professional capacitybuilding and business expansion. Rs.416.39 crores are offered for taxwhich were taxed for professional capacity building as “sundry income”.The balance was claimed as capital receipt for expansion of business.The Assessing Officer made assessment of tax and proceedings werepending. According to ED, investigation in the matter is pending, thoughnumber of witnesses have been examined.

Stand of the Registrar of Companies (ROC)

41. The stand of the ROC, Kolkata is that prosecution was initiatedagainst the auditors of the Company, who compounded the offences.Certain proceedings are still pending against the auditors of the Company.

Stand of the RBI

42. The stand of the RBI is that it only issues circulars and framesRegulations under the FEMA but does not conduct any investigation forcompliance thereof. Regulation 3 of the Foreign Exchange Management(Investment in Firm or Proprietary concern in India) Regulations, 2000

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Ais that a person resident outside India cannot invest in a firm or proprietaryconcern without permission of the RBI. As per para 3.3.2 of the FDIPolicy, investment without prior approval of the RBI is not permitted.

The statutory provisions

43. Sections 2(2), 25 and 29 of the CA Act are reproducedBbelow:

“2 (2) A member of the Institute shall be deemed “to be inpractice”, when individually or in partnership with charteredaccountants [in practice], he, in consideration of remunerationreceived or to be received— (i) engages himself in the practiceof accountancy; or (ii) offers to perform or performs servicesinvolving the auditing or verification of financial transactions,books, accounts or records, or the preparation, verification orcertification of financial accounting and related statements orholds himself out to the public as an accountant; or (iii) rendersprofessional services or assistance in or about matters of principleor detail relating to accounting procedure or the recording,presentation or certification of financial facts or data; or] (iv)renders such other services as, in the opinion of the Council, areor may be rendered by a chartered accountant [in practice]; andthe words “to be in practice” with their grammatical variationsand cognate expressions shall be construed accordingly. 3Explanation:— An associate or a fellow of the Institute who is asalaried employee of a chartered accountant [in practice] or [afirm, of such chartered accountants] shall, notwithstanding suchemployment, be deemed to be in practice for the limited purposeof the [training of articled [assistants]].

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25. Companies not to engage in accountancy. (1) No company,whether incorporated in India or elsewhere, shall practise aschartered accountants. (2) If any company contravenes theprovisions of sub-section (1), then, without prejudice to any otherproceedings which may be taken against the company, everydirector, manager, secretary and any other officer thereof whois knowingly a party to such contravention shall be punishablewith fine which may extend on first conviction to one thousandrupees, and on any subsequent conviction to five thousand rupees.

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29. Reciprocity. (1) Where any country, specified by the CentralGovernment in this behalf by notification in the official Gazette, H

prevents persons of Indian domicile from becoming members ofany institution similar to the Institute of Chartered Accountantsof India or from practising the profession of accountancy orsubjects them to unfair discrimination in that country, no subjectof any such country shall be entitled to become a member of theInstitute or practise the profession of accountancy in India. (2)Subject to the provisions of sub-section (1), the Council mayprescribe the conditions, if any, subject to which foreignqualifications relating to accountancy shall be recognised for thepurposes of entry in the Register. [29A. Power of CentralGovernment to make rules. (1) The Central Government may,by notification, make rules to carry out the provisions of this Act.(2) In particular and without prejudice to the generality of theforegoing powers, such rules may provide for all or any of thefollowing matters, namely:- (a) the manner of election andnomination in respect of members to the Council under sub-section (2) of section 9; (b) the terms and conditions of serviceof the Presiding Officer and Members of the tribunal, place ofmeetings and allowances to be paid to them under sub-section(3) of section 10B; (c) the procedure of investigation under sub-section (4) of section 21; (d) the procedure while consideringthe cases by the Disciplinary Committee under sub-section (2),and the fixation of allowances of the nominated members undersub-section (4) of section 21B; (e) the allowances and termsand conditions of service of the Chairperson and members ofthe Authority and the manner of meeting expenditure by theCouncil under section 22C; (f) the procedure to be followed bythe Board in its meetings under section 28C; and (g) the termsand conditions of service of the Chairperson and members ofthe Board under sub-section (1) of section 28D.]”

First and Second Schedule of the CA Act :

[THE FIRST SCHEDULE]

[See Sections 21(3), 21A(3) and 22]

PART I

Professional misconduct in relation to charteredaccountants in practice A chartered accountant in practice shall be deemed to be guiltyof professional misconduct, if he —

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(1) allows any person to practice in his name as a charteredaccountant unless such person is also a chartered accountant inpractice and is in partnership with or employed by him;

(2) pays or allows or agrees to pay or allow, directly or indirectly,any share, commission or brokerage in the fees or profits of hisprofessional business, to any person other than a member of theInstitute or a partner or a retired partner or the legalrepresentative of a deceased partner, or a member of any otherprofessional body or with such other persons having suchqualifications as may be prescribed, for the purpose of renderingsuch professional services from time to time in or outside India.

Explanation. - In this item, “partner” includes a person residingoutside India with whom a chartered accountant in practice hasentered into partnership which is not in contravention of item (4)of this Part;

(3) accepts or agrees to accept any part of the profits of theprofessional work of a person who is not a member of the Institute:

Provided that nothing herein contained shall be construed asprohibiting a member from entering into profit sharing or othersimilar arrangements, including receiving any share commissionor brokerage in the fees, with a member of such professionalbody or other person having qualifications, as is referred to initem (2) of this Part;

(4) enters into partnership, in or outside India, with any personother than a chartered accountant in practice or such other personwho is a member of any other professional body having suchqualifications as may be prescribed, including a resident who butfor his residence abroad would be entitled to be registered as amember under clause (v) of sub-section (1) of section 4 or whosequalifications are recognised by the Central Government or theCouncil for the purpose of permitting such partnerships;

(5) secures, either through the services of a person who is notan employee of such chartered accountant or who is not hispartner or by means which are not open to a chartered accountant,any professional business:

Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of items (2), (3)and (4) of this Part;

(6) solicits clients or professional work either directly or indirectlyby circular, advertisement, personal communication or interviewor by any other means:

Provided that nothing herein contained shall be construed aspreventing or prohibiting –

(i) any chartered accountant from applying or requesting for orinviting or securing professional work from another charteredaccountant in practice; or

(ii) a member from responding to tenders or enquiries issued byvarious users of professional services or organisations from timeto time and securing professional work as a consequence;

(7) advertises his professional attainments or services, or usesany designation or expressions other than chartered accountanton professional documents, visiting cards, letter heads or signboards, unless it be a degree of a University established by lawin India or recognised by the Central Government or a titleindicating membership of the Institute of Chartered Accountantsof India or of any other institution that has been recognised bythe Central Government or may be recognised by the Council:

Provided that a member in practice may advertise through awrite up setting out the services provided by him or his firm andparticulars of his firm subject to such guidelines as may be issuedby the Council;

(8) accepts a position as auditor previously held by anotherchartered accountant or a certified auditor who has been issuedcertificate under the Restricted Certificate Rules, 1932 withoutfirst communicating with him in writing;

(9) accepts an appointment as auditor of a company withoutfirst ascertaining from it whether the requirements of section225 of the Companies Act, 1956 9 1 of 1956] in respect of suchappointment have been duly complied with;

(10) charges or offers to charge, accepts or offers to accept inrespect of any professional employment, fees which are based A

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on a percentage of profits or which are contingent upon thefindings, or results of such employment, except as permitted underany regulation made under this Act;

(11) engages in any business or occupation other than theprofession of chartered accountant unless permitted by the Councilso to engage:

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(12) allows a person not being a member of the Institute inpractice, or a member not being his partner to sign on his behalfor on behalf of his firm, any balance-sheet, profit and loss account,report or financial statements.

PART II

DProfessional misconduct in relation to members of theInstitute in service A member of the Institute (other than a member in practice)shall be deemed to be guilty of professional misconduct, if hebeing an employee of any company, firm or person –

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(1) pays or allows or agrees to pay directly or indirectly to anyperson any share in the emoluments of the employmentundertaken by him;

(2) accepts or agrees to accept any part of fees, profits or gainsfrom a lawyer, a chartered accountant or broker engaged bysuch company, firm or person or agent or customer of suchcompany, firm or person by way of commission or gratification.

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PART III

Professional misconduct in relation to members of theGInstitute generally A member of the Institute, whether in practice or not, shall bedeemed to be guilty of professional misconduct, if he –

(1) not being a fellow of the Institute, acts as a fellow of theInstitute; H

(2) does not supply the information called for, or does not complywith the requirements asked for, by the Institute, Council or anyof its Committees, Director (Discipline), Board of Discipline,Disciplinary Committee, Quality Review Board or the AppellateAuthority;

(3) while inviting professional work from another charteredaccountant or while responding to tenders or enquiries or whileadvertising through a write up, or anything as provided for initems (6) and (7) of Part I of this Schedule, gives informationknowing it to be false.

PART IV

Other misconduct in relation to members of the Institutegenerally A member of the Institute, whether in practice or not, shall bedeemed to be guilty of other misconduct, if he—

(1) is held guilty by any civil or criminal court for an offencewhich is punishable with imprisonment for a term not exceedingsix months;

(2) in the opinion of the Council, brings disrepute to the professionor the Institute as a result of his action whether or not related tohis professional work.]

THE SECOND SCHEDULE

[See sections 21(3), 21B(3) and 22 ]

PART I

Professional misconduct in relation to charteredaccountants in practice A chartered accountant in practice shall be deemed to be guiltyof professional misconduct, if he –

(1) discloses information acquired in the course of his professionalengagement to any person other than his client so engaging him,without the consent of his client or otherwise than as required byany law for the time being in force;

(2) certifies or submits in his name, or in the name of his firm, areport of an examination of financial statements unless the A

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examination of such statements and the related records has beenmade by him or by a partner or an employee in his firm or byanother chartered accountant in practice;

(3) permits his name or the name of his firm to be used inconnection with an estimate of earnings contingent upon futureBtransactions in a manner which may lead to the belief that hevouches for the accuracy of the forecast;

(4) expresses his opinion on financial statements of any businessor enterprise in which he, his firm, or a partner in his firm has asubstantial interest; C

(5) fails to disclose a material fact known to him which is notdisclosed in a financial statement, but disclosure of which isnecessary in making such financial statement where he isconcerned with that financial statement in a professional capacity;

(6) fails to report a material misstatement known to him to appearin a financial statement with which he is concerned in aprofessional capacity; D

(7) does not exercise due diligence, or is grossly negligent in theconduct of his professional duties;

(8) fails to obtain sufficient information which is necessary forexpression of an opinion or its exceptions are sufficiently materialto negate the expression of an opinion; E

(9) fails to invite attention to any material departure from thegenerally accepted procedure of audit applicable to thecircumstances; F

(10) fails to keep moneys of his client other than fees orremuneration or money meant to be expended in a separatebanking account or to use such moneys for purposes for whichthey are intended within a reasonable time.

PART II

GProfessional misconduct in relation to members of theInstitute generally A member of the Institute, whether in practice or not, shall bedeemed to be guilty of professional misconduct, if he—

H

(1) contravenes any of the provisions of this Act or the regulationsmade thereunder or any guidelines issued by the Council;

(2) being an employee of any company, firm or person, disclosesconfidential information acquired in the course of his employmentexcept as and when required by any law for the time being inforce or except as permitted by the employer;

(3) includes in any information, statement, return or form to besubmitted to the Institute, Council or any of its Committees,Director (Discipline), Board of Discipline, Disciplinary Committee,Quality Review Board or the Appellate Authority any particularsknowing them to be false;

(4) defalcates or embezzles moneys received in his professionalcapacity.

PART III

Other misconduct in relation to members of the Institutegenerally A member of the Institute, whether in practice or not, shall bedeemed to be guilty of other misconduct, if he is held guilty byany civil or criminal court for an offence which is punishablewith imprisonment for a term exceeding six months.

Regulation 3 of the Foreign Exchange Management(Investment in Firm or Proprietory concern in India)Regulations, 2000

“3. Restrictions on investment in a firm or a proprietary concernin India by a person resident outside India Save as otherwise provided in the Act or rules or regulationsmade or directions or orders issued thereunder, no person residentoutside India shall make any investment by way of contributionto the capital of a firm or a proprietary concern or any associationof persons in india; Provided that the Reserve Bank may, on an application made toit, permit a person resident outside India subject to such termsand conditions as may be considered necessary to make aninvestment by way of contribution to the capital of a firm or aproprietary concern or any association of persons in India.”

A

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[2018] 2 S.C.R.

AClause 3.3.2 (III) of the Circular 2 of 2010 of theConsolidated FDI (CFDI) Policy :

“3.3.2 FDI in Partnership Firm / Proprietary Concern:

(iii) Investment by non-residents other than NRIs/PIO: A personresident outside India other than NRIs/PIO may make anBapplication and seek prior approval of Reserve Bank for makinginvestment by way of contribution to the capital of a firm or aproprietorship concern or any association of persons in India.The application will be decided in consultation with theGovernment of India.”

CConsideration of the Issue

44. The above resume of facts and pleadings shows the following:

i)There is a bar under CA Act to practice as CAs for acompany which includes a limited liability commonDpartnership which has company as its partners.

ii)Code of Conduct for the CAs prohibits fee sharing,advertisements but the MAFs by using international brandsand mixing other services with the services to be providedas part of practice of chartered accountancy violate thesaid Code of Conduct for which there is no regulatoryEregime as the MAFs do not register themselves with ICAI.Indian firms using similar brand names are registered withthe ICAI but the real entities being MAFs, ICAI is unableto take requisite action for violation of Code of Ethics bythe MAFs. Thus, revisit of existing legal framework mayFbecome necessary so as to have an oversight mechanismto regulate MAFs on the touchstone of Code of Ethics.

iii)Need for amendment of law to separate regulatory regimefor auditing services on the pattern of Sarbanse Oxley Actenacted in US making a foreign public accounting firmGpreparing audit reports to be accountable to the PublicCompany Accounting. Similar oversight body may need tobe considered in India.

iv)Section 29 of the CA Act provides that if a specified country,prohibits persons of Indian domicile from becomingHmembers of any institution similar to ICAI or practicing the profession of accountancy or subjects them to unfairdiscrimination in that country, no subject of any such countryshall be entitled to become a member of the Institute orpractice the profession of accountancy in India.

v)FDI Policy and the RBI Guidelines framed under the FEMAprohibit the investment by a person outside India to makeinvestment by way of contribution to the capital of a firm ora proprietary concern without permission of the RBI

vi)PwC Services BV Netherlands has made investments inIndian firms. According to the petitioners, the investment isalso intended to acquire an audit firm through a circuitousroute of giving interest free loans and further investmentsare in the form of grants for enhancement of skills. Profitsharing is in the form of licence fees/network charges.According to the network, the partners are all Indianpartners and use of common brand name is only for uniformstandard and giving of grants is for maintaining the saidstandard. There was no investment by an entity outsideIndia. Nor it amounts to profit sharing by the Indianaccountancy firms with an entity outside India.

45. It is an undisputed fact that there are remittances from outsideIndia. The same could be termed as investment even though theremittances are claimed to be interest free loans to partners. The amountcould also be for taking over an Indian chartered accountancy firm.Relationship of partnership firms, though having Indian partners, operatingunder a common brand name from same infrastructure, with foreignentity 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 haveto be taken in pending proceedings or initiated at appropriate forum.

46. The investigation so far carried out cannot be held to becomplete in all respects. The investigation by income tax authorities isonly for assessment of income tax. Action by the ROC also does notcover the issue raised herein. The investigation by the ED is said to bestill pending, though several persons are said to have been examined anddocuments collected, which are under scrutiny. The said investigationrelates to FEMA violations. The ICAI has initiated action with regard toforeign remittances and is said to have written a letter dated 19[th] March,2012 to the RBI to enquire whether investigation was conducted by the A

BCD

E

F

GH

ARBI. However, according to ICAI, its investigation can only be in respectof members, registered with it, for the misconduct conducted by them.The ICAI does not claim to have conducted complete investigation forwant of complete information into the issue whether the charteredaccountancy firms by receiving remittances from outside India orremitting licence fee/network charges outside India have allowedBparticipation of a company or a foreign entity in the accountancy businessin violation of Section 25 of the CA Act and whether use of commonbrand name by the network firms is in violation of reciprocity stipulatedunder Section 29 of the CA Act. The ICAI should have taken the matterto logical end, by drawing adverse inference, if information was withheldCby the concerned groups.

47. No doubt, the report of the committee of experts of ICAIdated 29[th] July, 2011 does not specifically name the MAFs involved,groups A,B,C,D are mentioned. The ICAI ought to constitute an expertpanel to update its enquiry. Being an expert body, it should examine theDmatter further to uphold the law and give a report to concerned authoritiesfor appropriate action. Though the Committee analysed available factsand found that MAFs were involved in violating ethics and law, it tookhyper technical view that non availability of complete information andthe groups as such were not amenable to its disciplinary jurisdiction inabsence of registration. A premier professionals body cannot limit itsEoversight functions on technicalities and is expected to play proactiverole for upholding ethics and values of the profession by going into allconnected and incidental issues.

48. Thus, a case is made out for examination not only by ED andfurther examination by the ICAI but also by the Central GovernmentFhaving regard to the issues of violation of RBI/FDI policies and the CAAct by secret arrangements.

49. It can hardly be disputed that profession of auditing is of greatimportance for the economy. Financial statements audited by qualifiedauditors are acted upon and failures of the auditors have resulted intoGscandals in the past. The auditing profession requires proper oversight.Such oversight mechanism needs to be revisited from time to time. Ithas been pointed out that post Enron Anderson Scandal, in the year2000, Sarbanse Oxley Act was enacted in U.S. requiring corporate leadersto personally certify the accuracy of their company’s financials. The H

Act also lays down rules for functioning of audit companies with a viewto prevent the corporate analysts from benefitting at the cost of publicinterest. The audit companies were also prohibited from providing nonaudit services to companies whose audits were conducted by suchauditors. Needless to say that absence of adequate oversight mechanismhas the potential of infringing public interest and rule of law which arepart of fundamental rights under Articles 14 and 21. It appears necessaryto realise that auditing business is required to be separated from theconsultancy business to ensure independence of auditors. The accountingfirms could not be left to self regulate themselves.

50. While we appreciate that it is for the policy makers to take acall on the issue of extent to which globalization could be allowed in aparticular field and conditions subject to which the same can be allowed.Safeguards in the society and economy of the country in the process areof paramount importance. This Court may not involve itself with thepolicy making but the policy framework can certainly be looked at tofind out whether safeguards for enforcement of fundamental rights havebeen duly maintained. In the present context, having regard to thestatutory framework under the CA Act, current FDI Policy and the RBICirculars, it may prima facie appear that there is violation of statutoryprovisions and policy framework effective enforcement of which has tobe ensured. Statutory regulatory provisions intended to advance theobject of law have to be enforced meaningfully. No vested interest canflout the same by manifesting compliance only in form. Compliance hasto be in substance. The law enforcing agencies are expected to see thereal situation. As found by the Expert Committee in its report, there is acompliance by MAFs only in form and not in substance, by having gotregistered partnership firms with the Indian partners, the real beneficiariesof transacting the business of chartered accountancy remain thecompanies of the foreign entities. The partnership firms are merely aface to defy the law. The principle of lifting the corporate veil has toapply when the law is sought to be circumvented. In expanding horizonsof modern jurisprudence, it is certainly permissible. Its frontiers areunlimited. The horizon of the doctrine is expanding. While the companyis a separate entity, the Court has come to recognize several exceptionsto this rule. One exception is where corporate personality is used as acloak for fraud or improper conduct or for violation of law. Protection ofpublic interest being of paramount importance, if the corporate personality AB

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Ais to be used to evade obligations imposed by law, the real state of affairsneeds to be seen[1]. The same principle applies while overseeing thecompliance of applicable ethics of not permitting profit sharing orcomplying with the ceiling limit for the business which is violated byusing the technique of sub contracts for outsourcing. If the premisesare same, phone number/fax number is same, brand name is same, theBcontrolling entity is same, human resources are same, it will be difficultto expect that there is full compliance on mere separate registration of afirm. The prohibition under Section 25 of the CA Act can be held to bedefeated. It is perhaps for this reason that the network firms avoidedgiving the information sought by the Committee. The issue of separateCoversight body for auditing work and updating existing legal frameworkappear to be necessary.

51. The other aspect is of investment in CA firms, in violation ofprohibition of FDI policy, by using a circuitous route of interest freeloans to partners. The fact that the income tax authorities have takenDthe grants received as revenue receipts and taxed the same as such isnot conclusive to hold that the receipt is not an investment which isimpermissible. If investment is not permitted, the policy of law cannotbe defeated by terming such investment as grant for quality controlspecially when the grant has been used to acquire a chartered accountancyfirm.E

52. Absence of revisiting and restructuring oversight mechanismas discussed above may have adverse effect on the existing charteredaccountancy profession as a whole on the one hand and uncheckedauditing bodies can adversely affect the economy of the country on theother. Moreover, companies doing chartered accountancy business willFnot have personal or individual accountability which is required. Personswho are the face may be insignificant and real owners or beneficiary ofprohibited activity may go scot free. As already noted, the Reports ofthe Study Group and Expert Group show that enforcement mechanismis not adequate and effective. This aspect needs to be looked into byGexperts in the Government. It may consider whether on the pattern ofthe Sarbanse Oxley Act corporate leaders be required to personally certifythe accuracy of the financial statements. Further, how to prevent 1 State of Rajasthan vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. (2016) 4 SCC 469,paras 24 to 28; State of Karnataka vs. Selvi J. Jayalalitha (2017) 6 SCC 263, paras 205to 211H

corporate analysts from benefitting from the conflict of interests, how tocheck audit companies from providing non audit services and how to laydown protocol for auditors. It has also been brought to our notice thatanother law in US ‘Dodd-Frank Wall Street Reform and ConsumerProtection Act, 2010’ to ensure more transparency and accountabilityof financial institutions to decrease the risk of investing needsconsideration. It sets up an oversight body called the Financial StabilityOversight Council (FSOC).

53. Accordingly, we issue the following directions:

(i) The Union of India may constitute a three memberCommittee of experts to look into the question whether andto what extent the statutory framework to enforce the letterand spirit of Sections 25 and 29 of the CA Act and thestatutory Code of Conduct for the CAs requires revisit soas to appropriately discipline and regulate MAFs. TheCommittee may also consider the need for an appropriatelegislation on the pattern of Sarbanes Oxley Act, 2002 andDodd Frank Wall Street Reform and Consumer ProtectionAct, 2010 in US or any other appropriate mechanism foroversight of profession of the auditors. Question whetheron account of conflict of interest of auditors with consultants,the auditors’ profession may need an exclusive oversightbody may be examined. The Committee may examine theStudy Group and the Expert Group Reports referred toabove, apart from any other material. It may also considersteps for effective enforcement of the provisions of theFDI policy and the FEMA Regulations referred to above.It may identify the remedial measures which may then beconsidered by appropriate authorities. The Committee maycall for suggestions from all concerned. Such Committeemay be constituted within two months. Report of theCommittee may be submitted within three months thereafter.The UOI may take further action after due considerationof such report.

(ii) The ED may complete the pending investigation within threemonths; A

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498SUPREME COURT REPORTS[2018] 2 S.C.R.

A(iii) ICAI may further examine all the related issues atappropriate level as far as possible within three months andtake such further steps as may be considered necessary.

The matters stand disposed of accordingly.

B

Devika Gujral Matters disposed of.

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H