Expert Advisory Committee

3.1 Query:

Foreign Project sites – whether branches under the Companies Act, 1956.

1. A government company undertakes projects in all the fields of telecommunications in India and abroad. For execution of the projects abroad, with the approval of Exchange Control Authorities, the company opens site offices/project offices which are closed on completion of the project. Similarly, for inland projects, wherever considered necessary, the company opens the site offices/project offices to monitor the execution of the projects.

2.The querist has stated that, as per the exchange control requirements, for all projects abroad, the company is required to maintain separate project-wise accounts. On completion of each project, the company is to produce to the Exchange Control Authorities complete accounts of exchange earned and spent and the net repatriation. Accordingly, the company maintains separate project-wise accounts. However, in respect of the projects in countries where, as per local law requirements, original records are to be maintained in those countries, the company maintains the original accounts in that country and parallel accounts are maintained in India on the basis of statements of accounts/floppies received from these projects. For those projects in the other countries where it is not required to maintain the original records in that country, the company brings the original vouchers and statements of account in India and prepares the books of account in India and at the year-end these books of account, parallel/original, as the case may be, are submitted for auditing. Till the year 1990-91, as per the querist, the above said system of maintenance of accounts was being accepted by the statutory auditors as well as the government auditors. Statutory auditors, however, were giving a qualification that they have done the audit on the basis of the photocopies of vouchers etc. The observation of the statutory auditors and the management’s reply to that is as follows:

AUDIT OBSERVATION

“Note No. 8 regarding verification by us of transactions in respect of projects in Saudi Arabia, Oman and Kuwait on the basis of certified photocopies of vouchers, invoices, etc. due to retention abroad of stores records, original vouchers etc.”

MANAGEMENT REPLY

“For projects in Saudi Arabia, Oman and Kuwait, Books of Account, stores records together with original vouchers and invoices are retained at projects sites as per laws of the countries. Transactions concerning these projects are incorporated in the Books of Account in India on the basis of periodical Statements of Accounts received therefrom supported by certified photocopies of vouchers, invoices, etc.

3. The querist has further stated that in the year 1991-92, statutory auditors for the first time raised a query that these projects should be considered as branches of the company for the purposes of the Companies Act. However, as per the querist, the company has several projects and there may be more than one site office in each country. The purpose of these site offices/project offices is the execution of the projects and these are not branches as defined under section 2(a) of the Companies Act, as the company has neither described these project offices as branches nor these establishments (being for limited purpose for execution of a project) are carrying the same or substantially the same activities as being carried on by the company’s head office. Further, as per the querist, these establishments are not engaged in production/processing or manufacture of any article. The statutory auditors were not satisfied with the above and suggested that management’s note be given in the accounts to this effect. Accordingly, the following note is being given in accounts since 1991-92:

“Site offices/project offices in India and abroad are not considered as branches and are treated only as sites. Centralised accounting is followed for these sites, which send periodic statement to H.Q. Necessary provisions/adjustments are made at the H.Q. on the basis of review and policies followed and confirmation obtained from concerned projects, wherever necessary.”

However, not being satisfied with the above views of the management, the auditors qualified their report as unde

“Site offices (including sites abroad not visited by us) not being treated as branches for reasons stated despite Deptt. of Company Affairs advice that site offices are to be treated as branches.”

4.The querist has, however, mentioned that there is no specific Company Law Board advice on the matter that these are branches of the company. As per the querist, it was only with reference to the company’s request to the Company Law Board to allow the company’s auditors to visit these project offices, the Company Law Board had mentioned that the company having appointed local auditors for these offices, no further visit of statutory auditors was considered necessary. The company had replied to the Company Law Board that these were not branches and local auditors had been appointed to comply with the local laws/requirements only. The querist has supplied the correspondence with the Company Law Board in this connection for perusal of the Committee.

5. As per the querist, in the accounting year 1992-93, this matter again came for discussion and the auditors had further given the following qualification in their report:

“Site offices including sites abroad not visited by us not being treated as branches for reasons stated despite Deptt. of Company Affairs’ advice that such site offices were to be treated as branches. Provision of sub-section (3) of Section 209 of the Companies Act, 1956 has not been fully complied with by projects particularly foreign projects/branches where books of account as were necessary to give a true and fair view of the state of affairs of the branches on accrual basis not maintained.”

6. At present, the company maintains cash book, bank book, general ledger and fixed assets register for each project separately at the head office. However, wherever considered necessary, the company also maintains subsidiary ledgers at the head office for advances, sub-contractors etc. The company maintains detailed stores ledgers and measurement books for sub-contractors’ payments at projects. As per local auditors appointed by the company for some countries who are members of international firms of chartered accountants/CPAs, records maintained at projects are adequate to show true and fair view of the operations of the company. The querist has supplied some audit reports for perusal of the Committee.

7.The querist has sought the opinion of the Expert Advisory Committee on following specific queries: -

(a) In view of the nature of the business of the company, whether each project office which has been opened by the company either abroad or in India for project execution is statutorily required to be treated as branch? (It may be mentioned that in some countries the company is having more than 10 to 12 projects). Also, if these offices are declared as branches whether any further records in addition to those stated in para 6 above are required to be maintained at the head office/projects to comply with sub-section (3) of section 209 of the Companies Act, 1956, or the existing records are adequate.

(b) In case the company treats these offices not as branch offices, but only as project/site offices, is there any infringement of any provision of the Companies Act, 1956? If yes, its implications on accounts/audit may kindly be advised.

(c) Can the company treat all the projects in one country under one branch office? Similarly, in India, can projects of one region be treated under one branch? If so, what are the specific requirements which the company is required to fulfill from accounting and company law angle?

(However, as per the querist, so far as the foreign projects are concerned, as per Exchange Control Regulations, the company is required to maintain accounts for each project separately. If the company declares all the projects in the country as projects of one branch after the project-wise compilation perhaps country-wise accounts compilation will also be necessary for company law purposes).

Opinion June 17, 1994

1. The Committee notes sub-section (9) of section 2, and sub-sections (1) to (3) of section 209 of the Companies Act, 1956, which read as follows:

“2(9) ‘Branch office’, in relation to a company means –

(a) any establishment described as a branch by the company; or

(b) any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company; or

but does not include any establishment specified in any order made by the Central Government under section 8.”

“209(1) Every company shall keep at its registered office proper books of account with respect to –

(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place;

(b) all sales and purchases of goods by the company;

(d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account.

Provided that all or any of the books of account aforesaid may be kept at such other place in India as the Board of directors may decide and when the Board of Directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.

(2) Where a company has a branch office, whether in or outside India, the company shall be deemed to have complied with the provisions of sub-section (1), if proper books of account relating to the transactions effected at the branch office are kept at that office and propersummarised returns, made up to dates at intervals of not more than three months, are sent by the branch office to the company at its registered office or the other place referred to in sub-section (1).

(3) For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein, -

(a) if there are not kept such books as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions; and

(b) if such books are not kept on accrual basis and according to the double entry system of accounting.”

2. The Committee is of the view, on the basis of the above, that the site offices opened by the company, for various projects in foreign countries, or in India at places other than the head office of the company, can be described as ‘branch office’ for the purposes of the Companies Act, only when these offices are ‘establishments’ covered under section 2(9) of the Act. The Committee, however, notes that the term ‘establishment’ has not been defined in the Companies Act, 1956. Therefore, in the view of the Committee, for the purposes of the Companies Act, 1956, the term ‘establishment’ has to be construed in the way it is understood in common commercial parlance. In this context, the Committee notes the following constructions of the term ‘establishment’:

“(i) the place where one is permanently fixed for residence or business;” [Webster’s International Dictionary, Volume I]

(ii) ….“an establishment” must have a separate identifiable existence” [Re. Christopher v. Life Insurance Corporation of India, AIR 1958, Bom.451]

3.The Committee is of the view, on the basis of the above, that an outlet of the company can be treated as ‘establishment’ for the purposes of section 2(9) of the Act if it has an element of permanency. Accordingly, in the view of the Committee, site offices opened by the company at its various project sites on a temporary basis, i.e., for the duration of the project can not normally be treated as ‘branches’ of the company.

4.The Committee further notes that companies are required under section 209 of the Companies Act, 1956, to keep proper books of account, i.e., such books as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions. The Committee is of the view that what books are necessary to give a true and fair view of the state of affairs and to explain company’s transactions is a matter of judgement and would depend on the facts and circumstances of each case.

5. On the basis of the above, the Committee is of the following opinion in respect of the issues raised at para 7 of the query:

(a) The site offices opened by the company at its various projects on a temporary basis for the duration of the project are not branches of the company.

(b) In view of Rule 2 of the Advisory Service Rules, the Committee deals with queries relating to accounting and/or auditing principles and allied matters. It does not answer queries involving only interpretation of law. Accordingly, the Committee refrains from expressing its opinion on this issue.

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