1. Allegations of illegal operation of multinational accounting firms in India via network arrangements in violation of the Chartered Accountants Act, FDI policy, and FEMA. (Para 1 , 2 , 3 , 6 , 9 , 10 , 13 )
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2018 Supreme(SC) 174
SUPREME COURT OF INDIA
ADARSH KUMAR GOEL, UDAY UMESH LALIT, JJ.
S. Sukumar – Appellant
Versus
The Secretary, Institute of Chartered Accountants of India & Ors. – Respondents
Civil Appeal No. 2422 of 2018 (Arising Out of Special Leave Petition (Civil) No. 1808 of 2016)
With
Centre for Public Interest Litigation – Petitioner
Versus
Union of India & Ors. – Respondents
Writ Petition (Civil) No. 991 of 2013
Decided On : 23-02-2018
Important Points
IMPORTANT POINTS
Government of India is required to constitute a three member Committee of experts to look into the question whether and to what extent the statutory framework to enforce the letter and spirit of Sections 25 and 29 of the CA Act and the statutory Code of Conduct for the CAs requires revisit so as to appropriately discipline and regulate MAFs.
An appropriate legislation on the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform and Consumer Protection Act, 2010 in US or any other appropriate mechanism for oversight of profession of the auditors needs to be considered.
The ED is required to complete pending investigations within three months.
Government of India is required to constitute a three member Committee of experts to look into the question whether and to what extent the statutory framework to enforce the letter and spirit of Sections 25 and 29 of the CA Act and the statutory Code of Conduct for the CAs requires revisit so as to appropriately discipline and regulate MAFs.
An appropriate legislation on the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform and Consumer Protection Act, 2010 in US or any other appropriate mechanism for oversight of profession of the auditors needs to be considered.
The ED is required to complete pending investigations within three months.
Subject
Commercial Law - Professional Regulation
Act Referred
CHARTERED ACCOUNTANTS ACT: S.21, S.25, S.29, S.2(2), S.22
CHARTERED ACCOUNTANTS REGULATIONS: Reg.54
COMPANIES ACT: S.224, S.225
FOREIGN EXCHANGE MANAGEMENT ACT: S.47(2)(h)
CHARTERED ACCOUNTANTS REGULATIONS: Reg.54
COMPANIES ACT: S.224, S.225
FOREIGN EXCHANGE MANAGEMENT ACT: S.47(2)(h)
Headnote
(a) Foreign Exchange Management (Investment in Firm or Proprietary concern in India) Regulations, 2000 – Regulation 3 r/w Clause 3.3.2 (III), Circular 2 of 2010 of the Consolidated FDI (CFDI) Policy – Prohibition of investment by a person from outside India to make investment by way of contribution to capital of a firm or a proprietary concern in India without permission of the RBI – Violation of FDI policies, FEMA Regulations and the Chartered Accountants Act, 1949 – Appropriate action need to be taken in pending proceedings or initiated at appropriate forum. (Para 44, 45)
(b) Chartered Accountants Act, 1949 – Sections 25 and 29 – Allegations of chartered accountancy firms receiving remittances from outside India or remitting licence fee/network charges outside India allowing participation of a foreign company or entity – ICAI needs to investigate violation of section 25 – Use of common (foreign) brand name by the network firms in India – Whether violative of reciprocity u/s 29 – ICAI needs to investigate. (Para 46)
(c) Economic Offences – Violations of statutory provisions relating to Accountancy, Foreign exchange etc. – ICAI requited to constitute expert committee to update its enquiry – ED and Central government also required to examine the issue. (Para 47, 48)
(d) Economic offences – Lifting of Corporate veil – MAFs using Indian Partnership Accountancy firms as cloak for evading the law such as profit sharing or outsourcing sub contracts – Separate oversight body for auditing work and updating existing legal framework – Necessary – Section 25, Chartered Accountants Act, 1949. (Para 50)
(2016) 4 SCC 469; (2017) 6 SCC 263 – Relied upon
Facts of the case:
The petition before the High Court sought direction for exercise of power under Section 21 of the Chartered Accountants Act, 1949 to initiate investigation against Multi-National Accounting Firms (MAFs) and Indian Chartered Accountancy Firms (ICAFs) having arrangement with such MAFs for breach of Code of Professional Conduct under the CA Act and also to take penal action by way of cancellation of permission granted to them by the Institute of Chartered Accountants of India (ICAI).
The issue is whether the MAFs are operating in India in violation of law in force in a clandestine manner, and no effective steps are being taken to enforce the said law.
Finding of the Court:
Law relating to MAFs needs to be revisited.
Result: Matter disposed of.
Legal Category Hierarchy
- professional regulation
-
corporate law
-
corporate personality
- lifting the corporate veil (Para 50)
-
corporate personality
- financial regulations
Table of Contents
2. Petitioners allege illegal foreign control and profit sharing; respondents contend Indian firms are independent entities paying for global standards and infrastructure. (Para 13 , 29 , 31 , 38 , 39 )
3. Regulatory gaps allow multinational firms to circumvent the CA Act; corporate veil must be lifted to ensure substantive compliance with professional ethics and FDI laws. (Para 44 , 45 , 46 , 47 , 50 , 51 )
4. Corporate personality cannot be used as a cloak to evade statutory obligations or professional ethics; regulatory enforcement must prioritize substance over form. (Para 50 )
5. Direction to constitute an expert committee to review the regulatory framework and for ED and ICAI to complete their respective investigations. (Para 53 )
6. Can a company practice as a Chartered Accountant in India?
No, Section 25 of the Chartered Accountants Act, 1949, explicitly prohibits any company, whether incorporated in India or elsewhere, from practicing as chartered accountants. (Para 43 , 44 )
7. How does the court view the use of corporate structures to bypass professional regulations?
The court held that the principle of lifting the corporate veil applies when corporate personality is used as a cloak for fraud, improper conduct, or violation of law to ensure substantive compliance. (Para 50 )
8. What is the court's view on the independence of auditing services?
The court observed that auditing business should be separated from consultancy business to ensure independence, suggesting the need for an exclusive oversight body similar to the Sarbanes-Oxley Act. (Para 49 , 52 )
9. Are foreign remittances to Indian CA firms always considered legal grants?
Not necessarily; the court noted that remittances claimed as grants for quality control could be termed investments or used to acquire firms, potentially violating FDI policies and FEMA. (Para 45 , 51 )
JUDGMENT :
Adarsh Kumar Goel, J.
1. Leave granted in SLP (Civil) No.1808 of 2016 filed against the order dated 3rd August, 2015 of the High Court of Karnataka in Writ Petition No.17959 of 2012. The petition before the High Court sought direction for exercise of power under Section 21 of the Chartered Accountants Act, 1949 (‘CA Act’) to initiate investigation against Multi-National Accounting Firms (MAFs) and Indian Chartered Accountancy Firms (ICAFs) having arrangement with such MAFs for breach of Code of Professional Conduct under the CA Act and also to take penal action by way of cancellation of permission granted to them by the Institute of Chartered Accountants of India (ICAI). Since the issue raised in Writ Petition (Civil) No.991 of 2013 is identical, both the matters have been heard together. In the Writ Petition, some other connected issues have also been raised to which reference will be made in due course.
The Issue
2. The issue raised in the appeal arising out of Karnataka High Court Judgment and the Writ Petition filed directly in this Court is: Whether the MAFs are operating in India in violation of law in force in a clandestine manner, and no effective steps are being taken to enforce the said law. If so, what orders are required to be passed to enforce the said law.
The Pleadings
3. Briefly, the averments in the High Court writ petition are: The MAFs are illegally operating in India and providing Accounting, Auditing, Book Keeping and Taxation Services. They are operating with the help of ICAFs illegally. Operations of such entities are, inter alia, in violation of Section 224 of the Companies Act, 1956, Sections 25 and 29 of the CA Act, the Code of Conduct laid down by the ICAI. Reference has been made to the Report dated 15th September, 2003 of Study Group of the ICAI on the subject (hereinafter referred to as ‘Study Group Report’). The Study Group was constituted by the Council of the ICAI in July, 1994 to examine attempts of MAFs to operate in India without formal registration with the ICAI and without being subject to any discipline and control. This was in the wake of liberalization policy and signing of GATT by India. It was noted that the bodies corporate formed for management consultancy services were being used as a vehicle for procuring professional work for sister firms of Chartered Accountants (CAs). Members of ICAI were associating with such bodies as Directors, Managers etc. to provide escape route to MAFs. CA functions must be discharged by animate persons and not in anim bodies.
4. The concerns of various segments of CAs noted by the Study Group are :
“(a) Sharing fees with non-members;
(b) Networking and consolidation of Indian firms;
(c) Need to review the advertisement aspect;
(d) Multi disciplinary firms with other professionals;
(e) Commercial presence of multi-national accounting firms;
(f) Impact of similarity of names between accountancy firms and MAFs/Corporates engaged in MSC-Scope for reform and regulation;
(g) Strengthening knowledge base and skills;
(h) Facilitating growth of Indian CA firms & Indian CAs internationality;
(i) Perspective of the Government, corporate world and regulatory bodies and role of ICAI in shaping the view;
(j) Introduction of joint audit system;
(k) Recognition of qualifications under Clause (4) of Part I of the First Schedule to the Chartered Accountants Act, 1949 for the purpose of promoting partnership with any persons other than the CA in practice within India or abroad;
(l) Review the concept of exclusive areas for the keeping in view the larger public interest involved so as to include internal audit within it;
(m) Conditionalities prescribed by certain financial institutions/Governmental agencies insisting appointment of select few firms as auditors/concurrent auditors/consultants for their borrowers.”
5. The Study Group considered whether goal should be to focus on ethics or growth of the profession with Code of Ethics being guiding points and not barriers. Further iss
