1.Back Ground

Facts:

The XYZ Corporation of India Limited ((hereinafter referred as “ABCD” or “querist”), is an Indian state-owned electric utilities company headquartered in Gurugram, India. XYZ transmits about 50% of the total XYZ generated in India on its transmission network.

A. ABCD has following JVs: –

SNo.	Name	Equity Partners	Purpose
1	XYZ Limited	XYZ private limited (49%), Tata Power Ltd. (51%)	Transmission system associated with Tala HEP in Bhutan – Progressively commissioned in Aug’06.
2	XYZ Limited	XYZ (26%), Torrent Power Limited (74%)	Transmission System associated with 1100 MW Sugen generating project at Surat — progressively commissioned in Mar’11.
3	XYZ Limited	XYZ private limited (26%), Jaiprakash Power Ventures Limited (74%)	Transmission system associated with 1000 MW Power Project at Karcham-Wangtoo in HP – progressively commissioned in Apr’12.
4	XYZ Company Limited	XYZ private limited (26%), ONGC Tripura Power Company Limited (26%), Govt. of Tripura (10%), Govt. of Assam (13%), Govt. of Mizoram (10%), Govt. of Manipur (6%), Govt. of Meghalaya (5%) & Govt. of Nagaland (4%)	Transmission system associated with 726.6 MW Gas Based Combined Cycle Power Project at Pallatana in Tripura. – Progressively commissioned in Feb’15.
5	XYZ Company Limited	XYZ private limited (26%), Reliance Infrastructures Limited (74%)	Transmission Lines associated with Parbati-II (800 MW) and Koldam (800 MW) HEPs. – Progressively commissioned in Nov’15.
6	XYZ Limited	XYZ private limited (26%), Teesta Urja Limited (74%)	Transmission System associated with 1200 MW Teesta – III HEP in Sikkim. Section Teesta III- Rangpo (35.5 km) commissioned in Jan’17. Balance section Rangpo-Kishanganj (180km) under implementation.
7	XYZ Pvt. Limited	XYZ private limited (20%), NTPC (20%),  NHPC (20%), DVC (20%) and CPRI (20%)	To create high power short circuit test facility.
8	XYZ Services Ltd	XYZ private limited (4.9%), NTPC (31.7%), PFC (31.7%) and REC (31.7%)	To carry out and promote business related to Energy Efficiency, Energy Conservation and Climate change.
9	XYZ Company Ltd.	XYZ private limited (26%), IL&FS  Energy Development Company Ltd (38%), SatlujJal Vidyut Nigam Ltd (26%) and NEA (10%)	Establishment of Indian Portion of Indo-Nepal Cross Boarder Transmission Line from Muzaffarpur to Sursand. Progressively commissioned in Feb’16.
10	XYZ Company Limited	XYZ private limited (50%), Bihar Power (Holding) Company Limited (50%)	Establishment of Intra-State Transmission system in the State of Bihar.
11	XYZ Private Limited	XYZ private limited (50%), Odisha Power Transmission Corporation Limited (50%)	Establishment of Intra-State Transmission system in the State of Odisha.
12	XYZ Ltd	XYZ private limited (26%), NEA (50%), Financial Institutes of Nepal (14%) and IL&FS Energy Development Company Ltd (10%) (IEDCL)	Establishment of Nepal Portion of Indo-Nepal Cross Boarder Transmission Line from Dhalkebar to Bittamod. Progressively commissioned in Feb’16.
13	XYZ Private Ltd.	XYZ private limited (50%) ,RashtriyaIspat Nigam Ltd (50%)	Establishment of manufacturing of Transmission Line Tower parts plant.

B. ABCD is holding company of following companies: –

1. MNP Transmission Limited
2. MNP OP Private Limited
3. MNP MN Transmission Limited 
4. MNP Unchahar Trans Limited
5. MNP AL-zam Private Limited
6. MNP Sabalpur Transmission Limited
7. MNP RUPALI  ission Limited
8. MNP PAL Trans Limited
9. MNP XYZ Private System Limited
10. MNP – Jeerat Trans Limited
11. ERSS XXI Transmission Limited
12. JR-PR Power Trans ission Limited

Out of the above JVs and subsidiaries, Power Transmission Company Nepal Ltd. (XYZ) is only foreign joint venture/Subsidiaries for the ABCD

Queries:

Rajnish Singh & Co, is requested by Querist to provide legal opinion on following questions: – 

i) Whether ABCDhas to comply with the provisions of Section 286 read with rule 10DA/10DB.

ii) If the answer to the above question is yes, out of the five forms provided in the notification (namely 3CEBA, 3CEBB, 3CEBC, 3CEBD & 3CEBE) which forms would be applicable on ABCD.

2. Analysis

As per section 286 of the Act, a country by country reporting (“CbCR”) is required to be furnished for an international group.  As per section 286(9)(e) of the Act, a group is defined as:

“a group includes a parent entity and all the entities in respect of which, for the reason of ownership or control, a consolidated financial statement for financial reporting purposes, —

(i)            is required to be prepared under any law for the time being in force or the accounting standards of the country or territory of which the parent entity is resident; or

(ii)           would have been required to be prepared had the equity shares of any of the enterprises were listed on a stock exchange in the country or territory of which the parent entity is resident;”

Therefore, a group covers the parent entity and all other constituent entities in respect of which a consolidated financial statement (CFS) is / would be required to be prepared.  Since a CbCR is required for the group, a follow-up question that may arise would be whether all entities included in the CFS also warrant inclusion in the CbCR?  To answer this question, the definition of CFS itself becomes important.  However, before that, since a group covers the parent entity and constituent entities – the definitions of these terms are also relevant to consider.

As per section 286(9)(h) of the Act, a parent entity has been defined to mean:

“a constituent entity, of an international group holding, directly or indirectly, an interest in one or more of the other constituent entities of the international group, such that,—

(i)         it is required to prepare a consolidated financial statement under any law for the time being in force or the accounting standards of the country or territory of which the entity is resident; or

(ii)        it would have been required to prepare a consolidated financial statement had the equity shares of any of the enterprises were listed on a stock exchange,

and, there is no other constituent entity of such group which, due to ownership of any interest, directly or indirectly, in the first mentioned constituent entity, is required to prepare a consolidated financial statement, under the circumstances referred to in clause (i) or clause  (ii), that includes the separate financial statement of the first mentioned constituent entity”

Quite evidently, the fulcrum of the above definition is the requirement to prepare a CFS.

A similar focus on CFS is also evident from the definition of constituent entity, which has been defined in section 286(9)(d) of Act to mean:

“(i) any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or may be so included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange;

(ii) any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or

(iii) any permanent establishment of any separate business entity of the international group included in clause (i) or clause (ii), if such business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting or internal management control purposes.”

From the above definition, it is clear that the determination of an entity as a constituent entity would depend upon its inclusion in the CFS of the group prepared by the parent entity.  However, this definition cannot be interpreted in isolation, i.e., without analyzing the definition of CFS.

Since CFS is pivotal to the definitions of group, parent entity and constituent entity, it becomes important to examine the definition of CFS.  The term ‘consolidated financial statement’ has been defined in section 286(9)(f) of the Act as follows:

“the financial statement of an international group in which the assets, liabilities, income, expenses and cash flows of the parent entity and the constituent entities are presented as those of a single economic entity”

From a combined reading of the above definition of CFS and the definitions of group, parent entity and constituent entity, it is apparent that entities whose assets, liabilities, income, expenses and cash flows are consolidated with the parent entity and presented as those of a ‘single economic entity’ in the CFS will satisfy the definition of a constituent entity and will accordingly need to be reported in the   CbCR.

Clearly, the answers relating to identifying membership of a group lie in the mechanics of consolidation and the CFS itself.

Under the Single Economic Entity (SEE) concept, entities associated with each other by virtue of common control operate as a single economic unit and therefore their CFS should reflect the essence of such an arrangement. The CFS must be prepared as if the entire group of entities constitutes a single entity

The presentation of CFS when viewed from an accounting perspective will have to be understood in light of the prevailing accounting standards (AS-21, 23, and 27, and Ind AS 27, 28 and 111) which govern consolidation of financial statements. In accounting parlance, an entity can be consolidated with a parent either on a line-by-line basis or an equity method basis.

The existence of ‘control’ governs the manner in which consolidation of financial statements is undertaken. This also emanates from the accounting standards (which define the term ‘control’ in different situations):

•           line-by-line (AS-21, 27 and Ind AS 27, 111); or

•           equity method (AS 23, 27 and Ind AS 28, 111)

Quite evidently, under the SEE concept a line-by-line consolidation is followed. A line-by-line consolidation of entities is triggered when the entities are governed by common control (and thus operate as a SEE). Under a line-by-line consolidation, the entity would be combined with its parent on a line-by-line basis by adding together like items of assets, liabilities, income and expenses.

On the other hand, equity method of consolidation is followed where the investor has significant influence but does not have the ability to exercise control, and as such do not interact with each other as a SEE. Under the equity method of consolidation, investment in an entity is initially recognized at cost and adjusted thereafter for the post-investment change in the investor’s share of net assets of the investee. The profit or loss of the investor includes the investors’ share of the profit or loss of the investee. The inter-company transactions are not eliminated.

Accordingly, entities consolidated in CFS under ‘equity method’ will not be covered under CbCR.

            Upon a reading of the definition of CFS, the emphasis seems to be on presentation of assets, liabilities, income, expenses and cash flows of the parent and constituent entities as those of a SEE.

The element of ‘control’, which governs the SEE concept, also governs the manner in which consolidation of financial statements is undertaken, i.e., line-by-line or equity method.  A line-by-line consolidation triggers where the parent entity is able to exercise control over the constituent entity.  On the other hand, equity method is followed where the investor has significant influence but does not have the ability to exercise control, and as such do not interact with each other as a SEE.

In this context, the table below puts forth the types of consolidation prescribed under the accounting standards for typical entity structures and thus forms the basis of the answers to the questions set forth above. 

Entity	Applicable Accounting Standard	Type of consolidation
Subsidiary	AS 21 / Ind AS 27	Line-by-line
Associate	AS 23 / Ind AS 28	Equity method
Joint Venture (proportionate)	AS 27 / Ind AS 111	Line-by-line
Joint Venture	AS 27 / Ind AS 111	Equity method (in specific cases)

If a constituent entity is a joint venture or a joint operation run by two or more partners, then which of the partners will be required to report such a joint venture / operation in its CbCR? Suppose X Ltd, Y Ltd and Z Ltd each holds 33.33% shares in A Ltd

In case a constituent entity is a joint venture or a joint operation, one would need to evaluate the basis adopted for consolidating the results of this entity with that of the respective partners.

In the above example, if X Ltd, Y Ltd and Z Ltd follow a proportionate line-by-line consolidation for reporting ALtd’s results in their respective consolidated financial statements, X Ltd, Y Ltd and Z Ltd, will be required  to report A Ltd in their respective CbCRs to the extent of their respective shares (i.e. 33.3%). A Ltd would be covered by the definition of CFS under section 286(9)(f) of the Income-tax Act, 1961 (the Act).

However, in an event where X Ltd, Y Ltd and Z Ltd use equity method of accounting for reporting ALtd’s results in their respective consolidated financial statements, X Ltd, Y Ltd and Z Ltd would not be required to report A Ltd in their respective CbCRs.

Further, if proportionate line-by-line consolidation is applied, then the pro rata share of ALtd’s total revenue should be taken into account when applying the prescribed threshold for X Ltd, Y Ltd and Z Ltd for the purposes of section 286(7) of the Act. In such a case, even the financial data of A Ltd that is included in the CbCR of X Ltd, Y Ltd, and Z Ltd should represent the corresponding pro-rated amounts.

Types of consolidation prescribed under the Accounting Standards for different entity structures(Subsidiary and Associates),along with comments on their interplay with control

Entity	Quote	Type ofconsolidation	Inter-play with ‘control’
Subsidiary	Existing Accounting Standard 21	Line-by-line	Parent is able to exercisecontrol and obtain economicbenefits from its activities. Thus a line-by-line consolidation of the accounts is prescribed.
	“A subsidiary is an enterprise that is controlledby another enterprise (known as parent).”
	“Control:
	(a) the ownership, directly or indirectlythrough subsidiary(ies), of more thanone-half of the voting power of anenterprise; or
	(b) control of the composition of the board ofdirectors in the case of a company or ofthe composition of the correspondinggoverning body in case of any otherenterprise so as to obtain economicbenefits from its activities.”
	“In preparing consolidated financialstatements, the financial statements of theparent and its subsidiaries should becombined on a line by line basis by addingtogether like items of assets, liabilities, incomeand expenses.”
	Indian Accounting Standards 27	Line-by-line	Parent is able to exercisecontrol on financial andoperating policies and obtainbenefits from its activities. Thus a line-by-line consolidation of the accounts is prescribed.
	“A subsidiary is an entity, including anunincorporated entity such as partnership,that is controlled by another entity (known asthe parent)”.
	“Control is the power to govern the financialand operating policies of an entity so as toobtain benefits from its activities.”
Associate	Existing Accounting Standard 23	Equity method	Though the investor hassignificant influence, it doesnot have the power tocontrol and as such is notable to obtain economicbenefits from its activities.Hence, absent control,equity method of accounting
	“An associate is an enterprise in which theinvestor has significant influence and which isneither a subsidiary nor a joint venture of theinvestor.”
	“Significant influence is the power toparticipate in the financial and/or operating policy decisions of the investee but not control over those policies.”
	“The equity method is a method of accountingwhereby the investment is initially recorded atcost, identifying any goodwill/capital reservearising at the time of investment. The carryingamount of the investment is adjustedthereafter for the post acquisition change inthe investor’s share of net assets of theinvestee. The consolidated statement of profitand loss reflects the investor’s share of resultsof operations of the investee.”
	Indian Accounting Standards 28	Equity method
	Principles laid down under Ind AS 28 relatingto consolidation procedures and methodologyfor Associates are broadly similar to theprovisions laid down under existingAccounting Standards 23 (given above).

Types of consolidation prescribed under the Accounting Standards for Joint Ventures or Joint Operations, along with comments on their interplay with control

Entity	Quote	Type ofconsolidation	Inter-play with ‘control’
JointVentures	Existing Accounting Standard 27	Line-by-line(proportionate)	Venturer is able to exercisejoint control and obtaineconomic benefits from itsactivities. Thus a line-by-lineconsolidation of theaccounts is prescribed,albeit on a proportionatebasis (to the extent ofventurer’s share).
	“A joint venture is a contractual arrangementwhereby two or more parties undertake aneconomic activity, which is subject to jointcontrol.”
	“Joint control is the contractually agreedsharing of control over an economic activity.”
	“Control is the power to govern the financialand operating policies of an economic activityso as to obtain benefits from it.”
	“A ventureris a party to a joint venture andhas joint control over that joint venture.”
	“Proportionate consolidation is a method ofaccounting and reporting whereby aventurer’s share of each of the assets,liabilities, income and expenses of a jointlycontrolled entity is reported as separate lineitems in the venturer’s financial statements.”
	“The application of proportionate consolidationmeans that the consolidated balance sheet ofthe venturer includes its share of assets that itcontrols jointly and its share of liabilities forwhich it is jointly responsible. Theconsolidated financial statement of profit andloss of the venturer includes its share of theincome and expenses of the jointly controlledentity. Many of the procedures appropriate forthe application of proportionate consolidationare similar to procedures for the consolidationof investments in subsidiaries…”
	Indian Accounting Standards 111	Line-by-line(proportionate)	Venturer is able to exercisejoint control and obtaineconomic benefits from itsactivities. Thus a line-by-lineconsolidation of theaccounts is prescribed,albeit on a proportionate
	Ind AS recognizes that joint arrangement iseither a joint operation or a joint venture. IndAS 111 brings out key differences betweenthe two. The same has not been recognizedunder existing Accounting Standards.
	Joint operation – “A joint arrangementwhereby the parties that have joint control ofthe arrangement have rights to the assets,and obligations for the liabilities, relating to thearrangement:”		basis (to the extent ofventurer’s share).
	Party to joint operations is called Jointoperator. Parties to joint operations share allinterests in the assets and all liabilities andobligations of the Joint operation in a specifiedproportion.
	Joint Venture – “A joint arrangement wherebythe parties that have joint control of thearrangement have rights to the net assets ofthe arrangement.”	Equity method	Absent control, equitymethod of accounting isprescribed as opposed toproportionate line-by-lineconsolidation.
	Parties to joint venture are called JointVenturers. The contractual arrangementestablishes that the assets brought into thearrangement or subsequently acquired by thejoint arrangement are the arrangement’sassets. The parties have no rights in theassets of the arrangement.

3.Conclusion

In accordance with above discussions, we are of the view that: –

i) As per page no 285 of PGCIL-Annual Report 2017-18:-

“Interest in joint ventures are accounted for using the equity method, after initially recognised at cost in the consolidated balance sheet”.

With respect to PTCN, since PGCIL does not report consolidated financial statement as SEE using line by line consolidation, requirement of CbCR as enumerated in section 286 of the Act is not applicable to the company

ii) Since, the question no (i) is negative, question (ii) is not applicable