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When Multinational Accounting Firms are Involved in Indian Scams

The Supreme Court admits that on the face of it, Multinational Accounting Firms have violated Indian Laws.
 Multinational Accounting Firms

Image Courtesy: The Balance

A division bench of the Supreme Court of India headed by Justice A. K. Goel and Justice U. U. Lalit, on February 23 delivered a Judgement where they stated that there is a prima facie case that Multinational Accounting Firms (MAFs) are violating Indian Laws. This should come as a surprise as MAFs fall within the ambit of Mode 3 investments under WTO, a route that the Indian Government has not yet opened up. The petition was a joining of two petitions, a Civil Appeal filed by S. Sukumar against the ICAI and others, and a Writ Petition filed by the Centre for Public Interest Litigation (CPIL) against the Union of India and others.

The question however is; how were MAFs able to enter and do business in India? The answer is through proxies. The Chartered Accountant’s Act (CA Act) requires that all those who undertake the business of accountancy to register themselves with the Institute of Chartered Accountants of India (ICAI). Under FEMA, the FDI guidelines, and the RBI Master Circulars, foreign entities are not permitted to invest in CA firms, as these would fall within Mode 3 investments. Therefore, the MAFs entered into ‘partnership’ agreements with Indian firms registered with the ICAI, whose names bear a striking similarity with their foreign ‘partners’.

The next part is the result of ‘cooking the books’, a practice that accountants are fairly familiar with. The foreign entities, particularly Pricewaterhouse Coopers (PwC) made remittances to their ‘partners’ to the tune of 41.42 crores solely to acquire an India CA firm, Dalal & Shah. These remittances were recorded as ‘interest free loans’ and ‘grants’. Thus, PwC was able to expand its footprint in India. The issue regarding realisation of profits by PwC was tackled in another unique method. The Indian ‘partners’ paid for training, software and other ‘services’ offered by their MAF partner. All of these were recorded as current account transactions, and thus would not fall within the purview of ‘investment’, which requires the capital account to be used. Income Tax was paid on these transactions.

What makes these transactions suspicious is that the Indian CA firms share office premises with their foreign partners. The websites are the same, and the fax and office phone numbers are the same. Even the email ids bear the name of the foreign ‘partner’. The petitioners raised the contention that the Indian partners have presented before the ICAI that they are Indian entities and not related to any MAF. This is not the case in advertising, the Indian firms allude to the experience and years of practice of their partners, the advertisements, as well as the business cards do not distinguish between the foreign entity and the Indian CA firm.

PwC and its partners have been implicated in the Satyam Scam and the failure of Global Trust Bank. The ED investigation in this regard is still pending. The firms involved failed to uncover the accounting irregularities in the Satyam Scam, as well as of the massive NPAs of Global Trust Bank, resulting in its merger with Oriental Bank of Commerce.

The Supreme Court in consideration of these anomalies issued directions to the Union Government, the ED and the ICAI. The Union Government may constitute a committee to review the statutory framework regulating the activities of MAFs. The ED was directed to complete its pending investigation regarding the remittances paid, which are alleged to be investment, within three months, and the ICAI was to investigate all further issues within three months and take any further steps as necessary.

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