TaxTMI 
TaxTMI 
2007 (9) TMI 409
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....is specialized in construction of bridges. 4. At this stage, it may be noted that the above Project is to be at the cost of Rs. 26,000 million (Rs. 2,600 crores). The bidders were required to submit RFQ Document by 10-1-2005. Under the PQ Document, M/s. Jean Muller, France was appointed as consultant by MSRDC. Under the PQ Document, the bidders were required to submit financial statements of three financial years subject to the condition that the latest should not be earlier than the financial year ending 31-12-2002. REL/HDEC formed a consortium. As a consortium they were required to comply with clause 7.2-2 which stipulated net cash profit at Rs. 200 crores. The said consortium has been excluded from the second stage of bidding on the ground that it has not fulfilled the said criteria mentioned in clause 7.2-2. The consortium had submitted their RFQ Document on 9-1-2005. The said consortium had submitted three audited accounts for the financial years ending 31-12-2001, 31-12-2002 and 31-12-2003. At this stage it may be noted that the financial year for REL ended on 31st March whereas the financial year for HDEC, Korea ended on 31st December. 5. At this stage, we may quote th....
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.... In the case of financials of subsidiary companies being considered as above, the dividend paid by these subsidiary companies to the parent company will be deducted from the Net Profit of the parent company for the purpose of evaluation. The financial evaluation criteria to be satisfied by a Consortium are detailed below. Criteria To be satisfied Amount by Net worth^1 (as per Lead Member Rs. 2,000 million the latest audited (Holding a minimum (or equivalent balance sheet - not of 26% equity in the foreign currency) earlier than the FY project company) Rs. 10,000 ended December 31, Total Consortium (to million (or 2002) be satisfied together equivalent by the Lead member foreign currency) and those Consortium members committing to hold a minimum of 5% equity in the project company) AND Criteria To be satisfied Amount by Net cash profit^2 Lead Member Rs. 500 million (simple average of (Holding a minimum (or equivalent the audited financial of 26% equity in the foreign curr....
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....igation/arbitration awards against the applicant or any member of the consortium." [Emphasis supplied] 6. Briefly the criteria and conditions were as follows :- "(a )In a consortium, the entity declared as 'lead member' was required, to hold the minimum of 26 per cent of paid-up and subscribed equity capital in the project company until completion of construction. (b )The aggregate of net cash profit and net worth of the consortium was to be considered for evaluation of financial criteria of the consortium. (c )Two criteria were required to be satisfied by the lead member (REL) as also the total consortium (REL/HDEC), namely, net worth and net cash profit. (d )Net worth is defined as total paid-up share capital + reserves - accumulated losses, revaluation of reserves and deferred revenue expenditure only to the extent of it being not written-off. Net worth was to be calculated as per the latest audited balance sheet not earlier than financial year ending 31-12-2002. (e)The leading member (REL) was required to have a net worth of Rs. 200 crores and the total of Consortium (REL/HDEC) was required to have a net worth of Rs. 1,000 crores. At this stage, we may clarify....
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....on Co., Ltd. (the 'Company'). The sufficiency of the procedures is solely the responsibility of the Company. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures that we performed are as follows : We compared the statements of cash flows for years ended December 31, 2001, 2002, 2003 and 2004 prepared by the Company to the accompanying schedule of net income after adjusting expenses and income not in form of cash transaction which the company prepared according to the Pre-Qualification criteria for Mumbai Trans Harbour Link (MTHL) project in India. The financial statements of the company for years ended December 31, 2001, 2002, 2003 and 2004 were audited by us and we expressed an opinion that the financial statements of the Company for years ended December 31, 2001, 2002, 2003 and 2004 were presented fairly, in all material respects, in conformity with accounting standards generally accepted in the Republic of Korea. We audited the statements of cash flows for years ended December 31, 2001, 2002, 2003 and 2004 that under ....
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....bsp; - Provision for retirement and severance benefit 27,009 39,173 32,706 39,541 - Depreciation 49,475 36,221 31,279 27,699 - Stock compensation expense - 89 107 30 - Bad debt expense 183,192 7,357 8,480 - - Other bad debts expense 199,186 - 39,147 171,080 - Interest expense 48,803 23,899 20,683 18,723 - Loss on valuation of foreign currency 107 1,986 3 699 - Loss on disposal of trade note and accounts, receivables 2,770 17,772 10,844 - Loss on valuation of inventories 39,762 20,485 5,364 20,308 - Loss on disposal of Investment securities 42 - 309 43 - Loss on investment securities impairment 61,104 29,900 12,845 2,348 - Loss on disposal of investment in affiliates using equity method - - 1,286 - - Loss on disposal of investment assets 9,120 1,248 - - - Loss on valuation of investment in affiliates using equity method (*) 5,805 - - - &nb....
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.... undertaken construction contracts in Iraq. That, large receivables had arisen prior to 1999 on account of war in Iraq. The Iraq contract receivables had nothing whatsoever to do with the three accounting years 2001, 2002 and 2003, therefore, there were no Iraq contract receivables nor was there any write-off as and by way of bad debt in any of the above three accounting years. Further, according to REL/HDEC, HDEC had incurred 'non-cash expenses' amounting to US$ 686.310 million in 2001, US$ 200.753 million in 2002 and US$ 199.084 million in 2003 which did not involve direct cash outflow and, therefore, the said 'non-cash expenses' ought to have been added back to NCP and if so added then the Consortium had NCP of Rs. 2,000 million (Rs. 200 crores) as mentioned in clause 7.2-2. 10. The aforestated contention advanced by the Consortium was rejected by M/s. Jean Muller Consultant of MSRDC in following words :- "In case of 'Provision' for bad debts even though they are just 'Provision' but not a 'write-off', the same is treated as cash expense because once a 'Provision' has been made, the 'write-off' does not get routed through the profit and loss account. Moreover, the 'Provisi....
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.... were not entitled to bid in the second stage of the bidding process. According to the said Consultants, the audited accounts of HDEC for the financial year 31-12-2004 constituted subsequent information (i.e., information supplied after the cut-off date of 10-1-2005) and, therefore, REL/HDEC stood excluded from the second stage of the bidding process. 14. On 22-8-2005, a committee by the name 'Peer Committee' was constituted by MSRDC to review the draft evaluation report submitted by the consultants, M/s. Jean Muller Consortium, relating to pre-qualification of bidders to suggest process of evaluation and to provide recommendations to MSRDC. The said Committee met on 21-9-2005. The consultants M/s. Jean Muller Consortium and M/s. Crisil were both called to give clarifications. The said Committee was headed by Mr. Justice R.J. Kochar, Judge of Bombay High Court (retired), Shri A.K. Banerjee (Technical Member) in NHAI, Mr. R.S. Agarwal, Executive Director of IDBI (retired), Mr. V. Giriraj, Joint Managing Director of MSRDC etc. The Committee noted that pre-qualifications bids were received only from six Applicants, one of them was REL/HDEC. The Committee noted that while Indian com....
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.... extend the validity of their Offer for further six months as they wanted to study the implications arising from the audited accounts submitted by HDEC for the year ending 31-12-2004. MSRDC basically wanted to know as to what would be cash impact of the provision for bad debts in the accounts of HDEC for the year 2001. Accordingly by letter dated 6-10-2005, REL/HDEC extended the validity of their Offer up to 6-4-2006. Ultimately, by letter dated 7-11-2006, MSRDC informed REL/HDEC that they stood disqualified as they had failed to meet the qualification criteria. 16. In the circumstances, REL/HDEC moved the Bombay High Court vide Writ Petition No. 39 of 2007 in which they alleged that a decision to disqualify, taken by MSRDC, was arbitrary, unjustified and contrary to the terms of the tender documents; that REL/HDEC met the financial criteria specified by MSRDC both in terms of the original submission of RFQ document made on 9-1-2005 and further information given to MSRDC; that in the alternative the decision of MSRDC was unjustified and incorrect, particularly when the Consortium had given audited accounts of HDEC for the financial year ending 31-12-2004 and, therefore, on the s....
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....of MSRDC, was not referred to an independent firm of chartered accountants. That, Crisil was rating agency and not chartered accountants. He submitted, in this connection, that it was obvious to MSRDC that Crisil had already taken a position in its first report that REL/HDEC were disqualified and, therefore, fairness and transparency which are important aspects of Article 14 of the Constitution required MSRDC to have placed both the reports of Crisil and the Peer Committee, before any independent firm of chartered accountants. Learned counsel submitted that by not doing so the decision-making process itself stood vitiated. In any event, learned counsel urged that Crisil was wrong if one looks at the audited balance sheets of HDEC for the accounting year ending 31-12-2004. Learned counsel urged that even according to Crisil the provisioning for bad debts was 'non-cash expense', however, according to Crisil, such provisioning could have a cash impact in future years. Learned counsel submitted that the conclusion of Crisil, namely, that such provisioning could have a cash impact in future years was unjustified if one takes into account the audited balance sheet for the year ending 31-....
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....ne by reputed international consultants, namely, M/s. Jean Muller which in turn took opinion from Crisil. The entire exercise was carried out by experts and according to the recommendations of Crisil, duly accepted by the consultants, the impugned decision was taken and, therefore, the High Court was right in refusing to intervene under Article 226 to the Constitution. Learned counsel submitted that the failure to satisfy the financial criteria laid down in clause 7.2-2 was the decision of the consultants and not the decision of MSRDC which had merely acted on the basis of evaluation done by the consultants and, therefore, it cannot be said that the impugned decision taken by MSRDC was arbitrary or unjustified. Learned counsel submitted that according to the opinion expressed by the consultants, the financial position of HDEC for the year ending 31-12-2001 was poor and the provisioning made by HDEC for the years 1999, 2000 and 2001 would have future cash impact. This was the view of the experts which MSRDC accepted. That, the entire process was transparent and every aspect was considered. There were detailed discussions during the decision-making process. Queries were raised from t....
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.... the question as to whether there is a cash impact in the current year or future years and if it has cash impact at a future date then it would constitute an item of cash expense, even though in the year of incidence the item may be non-cash expense. Therefore, the impugned decision, namely, that REL/HDEC did not satisfy the financial criteria under clause 7.2-2, was right. Learned counsel lastly submitted that bad debt expenses did not qualify as "amortization" and, therefore, such provision cannot be added back to net profits of HDEC. Learned counsel lastly submitted that in the present case that Consultants of MSRDC had rightly relied on AS 26 under which the terms 'amortization' and 'write-off' are interchangeable and, therefore, provisioning for doubtful debts did not constitute 'amortization' and, therefore, it could not have been added back to the net profits, particularly when the definition of NCP in the tender document defined NCP to mean 'PAT + depreciation + amortization, not in the form of cash transaction'. 22. We find merit in this civil appeal. Standards applied by courts in judicial review must be justified by constitutional principles which govern the proper ex....
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....n such an act or decision would be unconstitutional. 23. In the case of Union of India v. International Trading Co. [2003] 5 SCC 437, the Division Bench of this Court speaking through Pasayat, J. had held:- "14. It is trite law that Article 14 of the Constitution applies also to matters of governmental policy and if the policy or any action of the Government, even in contractual matters, fails to satisfy the test of reasonableness, it would be unconstitutional. 15. While the discretion to change the policy in exercise of the executive power, when not trammelled by any statute or rule is wide enough, what is imperative and implicit in terms of Article 14 is that a change in policy must be made fairly and should not give impression that it was so done arbitrarily or by any ulterior criteria. The wide sweep of Article 14 and the requirement of every State action qualifying for its validity on this touchstone irrespective of the field of activity of the State is an accepted tenet. The basic requirement of Article 14 is fairness in action by the State, and non-arbitrariness in essence and substance is the heart beat of fair play. Actions are amenable, in the panorama of judicia....
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....hat whenever a norm/benchmark is prescribed in the tender process in order to provide certainty that norm/standard should be clear. As stated above 'certainty' is an important aspect of rule of law. In the case of Reliance Airport Developers (P.) Ltd. (supra), the scoring system formed part of the evaluation process. The object of that system was to provide identification of factors, allocation of marks of each of the said factors and giving of marks had different stages. Objectivity was thus provided. 26. One of the points which arise for determination in this case is whether the criteria of objectivity stand satisfied in the present case. 'Profit/net income' and 'cash' are concepts. However, there is a difference. 'Profit' is based on 'value judgment' whereas 'cash' is 'fact-specific'. In the PQ document, 'net cash profit' has been defined to mean - 'PAT + depreciation+ amortization, not arising from cash transaction'. The last five words which have underlined are descriptive. They merely indicate the meaning of 'amortization'. It is not in dispute that depreciation and amortization are 'non-cash expenses'. 27. In the present case, REL/HDEC claims adding back of the non-cas....
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.... account of the debtor. The second method is employed where there are some chances of recovery, howsoever remote they may be. When we talk of writing off we are not concerned with the credit to be given to an account. 'Writing off' means the raising of a debit entry. This can only be to the debit of the profit and loss account. This is the only debit which can possibly be raised as a result of writing off a bad debt." (p. 538) 30. In the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, this Court has brought out succinctly difference between 'provision' and 'reserve' as follows :- "The next question is whether the amount so provided is a provision or a reserve. The distinction between a provision and a reserve is in commercial accountancy fairly well-known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the profit & loss account and the balance sheet. On the other hand reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown....
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.... of 'cash flow reporting' which also finds place in AS 3. According to the said principle of 'cash flow reporting', when P&L accounts and balance-sheets are prepared on accrual basis, revenues and expenses are recognized on accrual basis, i.e., when the transaction or event occurs. However, timing of cash flow is not reckoned in such system of accounting. Similarly, in cases where accounts are based on accrual system of accounting, recognition of assets and liabilities is not dependent on the actual timing of cash spent on capital expenditure and cash inflow on account of capital receipt. Thus the financial statements prepared on accrual basis do not reflect the timing of the cash flow and amount of cash flow. The object of the cash flow statement is to assess the company's ability to generate the cash flow in future and to assess reasons for difference between 'net profit' and 'net cash flow' from operations. 33. 'Operating cash profit' can be derived by either 'Direct Method' in which cash items of cash inflow are listed like cash received from customers, payment of interest etc. as against cash outflows like payment to supplier, payment for taxes etc., or by 'Indirect Method'....
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....nbsp; Increase in trade creditors 19,200 Increase in outstanding expenses 5,600 Cash inflow from operations 9,07,700 Income-tax paid (4,16,000) 4,91,7000 Cash flow from extraordinary item : Compensation recd. in lawsuit 55,000 Net cash from operating activities 5,46,700 Cash Flows from Investing Activities Purchase of fixed assets (2,00,000) Sale proceeds of investments 1,57,500 Interest recd. on Investments* 21,000 Net cash used ....
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.... why net profit (loss) as reported in the profit and loss account must be converted. As we know that financial statements are generally prepared on accrual basis of accounting which requires that revenues be recorded when earned and the expenses be recorded when incurred. Earned revenues more often include credit sales that have not been collected in cash and expenses incurred that may not have been paid in cash during the accounting period. Thus under accrual basis of accounting net income will not indicate the net cash provided by operating activities or net loss will not indicate the net cash used in operating activities. In order to calculate the net cash provided by (or used in) operating activities, it is necessary to replace revenues and expenses on accrual basis with actual receipts and actual payments in cash. This is done by eliminating the non-cash revenues and non-cash expenses from the given earned revenues and incurred expenses in the profit and loss account. In addition to regular non-cash revenue and non-cash expense items, the profit and loss account is also debited and credited with purely non-cash items which reduce and increase the profits respectively but do no....
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....ating Activities (A)Cash receipts from customers. (B)Cash paid to suppliers and employees. (A-B)Cash generated from operations. Less: Interest and tax. (C)Cash before extraordinary items. Adjust for extraordinary items to get :- (1)Net cash from operations. (2)Net cash from (used on) investing activities. (3)Net cash from (used on) financing activities. (D)Net increase (decrease) in cash and cash equivalents (1+2+3) Opening balance of cash and cash equivalents. Closing balance of cash and cash equivalents. Indirect Method Net Profit as per Profit and Loss Account Adjusted for Provision for tax Provision for doubtful debts Profit (Loss) on sale of fixed assets Depreciation Profit (Loss) on sale of investments Interest expenses Exchange rate effect Dividend income Interest income Leave salary provision (earlier year) Operating profit before working capital change Adjusted for : Trade and other receivable Inventories and other current assets Trade payables and other current liabilities Cash generated from operations Income-tax paid (Net of refunds) The above provides : Cash flow before e....
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....he amortization of (i.e., writing off) goodwill, trademarks, patents copyrights, etc., has the same effect as the depreciation expense. The amount of amortization reduces the profit but does not involve any flow of cash as is evident from the following entry :- Profit and Loss AccountDr. To Goodwill etc. Account There is no change in cash. Thus amount of intangibles so written off must also be added back to the reported net profit (income)'. 12.20 Stage-2 : Adjustments in respect of current assets and current liabilities: The adjustments made in the net profit (income) figure as per profit and loss account as outlined in Stage-I above, gives As Operating Profit before Working Capital Changes. Several other adjustments are made in respect of current (Operating) assets (e.g., debtors, bills receivable, inventories, prepayments etc.) and current (Operating) liabilities (e.g., creditors bills payable, outstanding liabilities etc.) to obtain the final net cash from operating activities. There is an intimate relationship between the revenue and expense items of income statement and current assets and current liabilities items of the balance sheet. Since the income statement i....