3.4 Query: Applicability of sections 211 and 227 of the Companies Act, 1956, to a liaison office of a foreign company.
1. A number of ‘foreign companies’ are having liaison offices in India. Under approval of the Reserve Bank of India, the operations of these offices are restricted exclusively to liaison work and these offices are prohibited from engaging in any trading, commercial or industrial activity. These offices can not earn any income in India and all their expenses (generally, administrative overheads) are to be met out of foreign exchange remitted by their respective head offices from abroad.
2. In accordance with the requirements of section 594(1) of the Companies Act, 1956, these liaison offices are required to prepare a balance sheet and profit and loss account as per the general requirements of the Act. However, under the same section, the Central Government has been empowered to make exceptions and modifications by a notification as to the requirements of preparing a balance sheet and a profit and loss account.
3. On application by a foreign company, the Central Government exempts its liaison offices from the requirements of preparing a balance sheet and profit and loss account and instead directs the company to prepare a ‘Statement of Receipts and Payments’ and a ‘Statement of Assets and Liabilities’ in India. Both these statements are required to be certified by a chartered accountant practising in India.
4. The order of the Government made in this regard does not specify any format for preparation of statement of receipts and payments or the statement of assets and liabilities. Nor any form in which the certificate is to be issued by the chartered accountant has been prescribed. A photocopy of the government order has been submitted by the querist for the perusal of the Committee.
5. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) In the absence of any prescribed format for preparation of the statements referred to above, is it open to the foreign company to follow any format it may like?
(b) Whether, in the preparation of abovesaid statements, it is necessary to take cognizance of the requirements of Schedule VI, Part I and II, to the Companies Act, 1956, to the extent applicable or no specific disclosures are required to be made in terms of Schedule VI, Part I and II, e.g., director’s remuneration, audit fee etc.?
(c) Whether the requirements of section 227 of the Companies Act, 1956, applicable to auditor’s report will apply in certification of statements referred to above? If not, what sort of certificate the chartered accountants should issue in this case?
(d) In case the requirements of section 227 (1) and 227 (2) of the Companies Act, 1956, are applicable, whether the auditors should give report under section 227 (4-A) also. In connection with the requirement of audit report under section 227 (4-A) of the Companies Act, 1956, the querist has drawn the attention of the Committee to para 9 of the Statement on Manufacturing and Other Companies (Auditor’s Report) Order, 1988, issued by the Institute of Chartered Accountants of India, wherein it has been stated that the Order applies to foreign companies as defined in section 591 of the Companies Act, 1956.
Opinion December 8, 1992
“211. Form and contents of balance sheet and profit and loss account. -
(1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance sheet, due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading “Notes” at the end of that part.
…….
(2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto
….” (emphasis supplied).
“594. Accounts of foreign company. – (1) Every foreign company shall, in every calendar year: -
(a) make out a balance sheet and profit and loss account in such form, containing such particulars and including or having annexed or attached thereto such documents (including, in particular documents relating to every subsidiary of the foreign company) as under the provisions of this Act it would, if it had been a company within the meaning of this Act, have been required to make out and lay before the company in general meeting; and
(b) …
Provided that the Central Government may, by notification in the Official Gazette, direct that, in the case of any foreign company or class of foreign company the requirements of clause (a) shall not apply, or shall apply subject to such exceptions and modifications as may be specified in the notification.”
2. The Committee notes from the above that every foreign company is required to prepare a balance sheet and profit and loss account in respect of its Indian business, in accordance with the provisions of section 211 read with Parts I and II of Schedule VI to the Companies Act, 1956. However, the Central Government, in pursuance of powers conferred under proviso to sub-section (1) of section 594, may, by notification, exempt or make exceptions and modifications, as to the requirements of clause (a) of sub-section (1) of section 594.
3. In the given case, the Company Law Board has notified that clause (a) of sub-section (1) of section 594 shall apply to the company under question with certain exceptions and modifications, i.e., preparation of a statement of receipts and payments instead of a profit and loss account and a statement of assets and liabilities instead of a balance sheet. The Committee is of the view that where certain exceptions and modifications are made in the application of certain provisions of a statute, the provisions not excepted and modified would continue to apply. The Committee is, accordingly, of the view that disclosure requirements of parts I and II of Schedule VI to the Companies Act, 1956, with regard to preparation of balance sheet and profit and loss account respectively, would continue to apply in the present case to the extent possible.
4. The Committee also notes section 227(2) of the Companies Act, 1956, which reads as follows:
“2. The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance sheet or profit and loss account, which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and giver a true and fair view –
(i) in the case of the balance sheet, of the state of the company’s affairs as at the end of its financial year; and
(ii) in the case of the profit and loss account, of the profit or loss for its financial year.”
5. The Committee is of the view that section 227 of the Companies Act, 1956, is applicable to foreign companies by virtue of clause (a) of sub-section (1) of section 594 read with clause IV of Department of Company Law Administration’s Notification No. S.R.O 3216, dated October 4, 1957, reproduced hereunder:
“(IV). The balance sheet and profit and loss account of the Indian business of the foreign company in terms of clause (I) shall be audited by such person or persons and in such manner as laid down in the Act……”
6. The Committee further notes para 11 of the ‘Statement on Manufacturing and Other Companies (Auditor’s Report) Order, 1988, issued by the Institute of Chartered Accountants of India, which reads as follows:
“11. The Order applies to every company which is engaged or proposes to engage in one or more of the following activities, namely:
(a) manufacturing, mining or processing;
(b) supplying and rendering services;
(c) trading; and
(d) the business of financing, investments, chit fund, nidhi or mutual benefit societies.”
7. On the basis of the above, the Committee is of the following opinion in respect of the issues raised by the querist in para 5 of the query:
(a) & (b) The Company shall prepare the statement of its receipts and payments and the statement of its assets and liabilities as near to as prescribed under Parts I and II of Schedule VI to the Companies Act, 1956, for balance sheet and profit and loss account respectively, as circumstances admit, making the relevant disclosures.
(c) Yes, the requirements of section 227 of the Companies Act, 1956, will apply to auditors’ report in certification of the statements referred to above, except the contents of report insofar as they relate to the opinion of the auditor regarding true and fair view of the profit or loss of the company for its financial year; instead, the auditor shall give his opinion as to the truth and fairness or receipts and payments of the company during the financial year.
(d) Section 227 (4-A) of the Companies Act, 1956, is applicable only to the companies engaged in such activities as enumerated in para 6 above. Since the liaison office of the foreign company can not engage in any such activity, because of the restrictions imposed by the Reserve Bank of India, section 227(4-A) is not applicable to it. Therefore, the chartered accountant certifying the ‘Statement of receipts and payments’ and ‘Statement of assets and liabilities’ of the company, need not give his report under section 227(4-A) of the Act. _______________________________ |